entrepreneurial finance 24065

8/3/2019 Entrepreneurial Finance 24065

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ENTREPRENEURIALFINANCE

Rajeev Roy


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Entrepreneurial Finance by Rajeev Roy

Venture capital

Long term equity finance

Investing as opposed to banks who lend

Looking for high gains

Accepting high risks

Can be involved in management of theinvested firm

Venture capital investment is illiquid


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Structure of VCs

Mostly funds

Charge about 2% + success fee

Also companies Limited partnerships expected soon

Prevalence of banks

Revenue implications


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VC : Advantages

No fixed expense of debt servicing

Financial flexibility

Sharing of risk Value added investing

Attracting talent

Networking with service providers/suppliers Accessing markets

Enhanced credibility with lenders


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VC : Disadvantages

Dilution of shareholding

Increased 3rd party governance

Increased controls

Increased commitment to stated strategy


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Types of VC

Early stage financing

Seed capital or pre-start up or R&D

Start up financing Second round financing

Later stage financing

Expansion Replacement

Turnaround


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Valuation excersise

1. Get rid of scamsters

2. Hygiene factors beware of things that

can shut down a business3. Growth & industry considerations

4. Due diligence

1. Physical evaluation2. Calling in the experts

5. Monetise value


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Agreement particulars

Amount and terms of investment.

Dividend policy.

Composition of the board of directors. Reporting - management reports, monthly

accounts, annual budgets.

Liquidity (exit) plans.

Rights of sale Warranties.

Matters requiring venture capitalist approval


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Problems

Locating players

Concerns regarding exchange of info

Larger companies look equally attractivewith lesser risk

Even listed securities are giving great

returns


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India centric problems

Indian VC not yet a popular asset classamong institutional investors

Exit challenges Shallow markets

Little M & A activity

Brand India, not strong beyond services


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The road ahead

Placement agents (Venture Partners)

Trade meets

Syndication Getting a larger team / new perspective

Spreading risk

Eg July systems (wireless content) got $10mfrom 6 VCs


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Some VCs in India

Jumpstartup investing

Draper Fisher sector specific

Charles River Ventures

Sequoia Capital

Westbridge too big?

ChrysCapital certainly too big


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Others

Banks ICICI

UTI

SIDBI

Canara bank

Corporates Intel

Motorola

Nokia

cisco


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Average fund size $50 mil

Total deals per annum 100+

Mostly expansion few seed or earlystage


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Lending strategy of banks

Business plan

Financial statement

Profile of promoter

Asset base

Gross

Net

Credit scoring


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How Banks cover risks

Collateral

Internal incl. a/c receivable

External

Personal guarantees

Debt covenants

Short maturity debt


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Managing banks

Complete paperwork in time

Submit financial statements as scheduled

Route all transactions through bank

Ask for extras free drafts, alerts, etc

Exude confidence and well being

Transmit good news

Be proactive about inspections


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SMERA

Specifically for SMEs

Joint initiative of:

SIDBI

D & B

CIBIL

Other banks

Office currently only in Mumbai


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Rating process

SME contacts SMERA

Questionnaire is filled

Documents are submitted

Site visit by SMERA representative

Rating is announced 15 days after alldocuments are received


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Fee Structure

Below 1Cr 7500

Upto 5 Cr 25000

Upto 20 Cr 37000

Above 20 Cr 50000


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Cash is king

Can result form unplanned success

Is usually due to lack of planning or

tardiness in collections Dissatisfaction among suppliers

Higher costs

Lower quality

Dissatisfied (worried) employees

High bad debts migration of customers


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Collection strategies

Investigate new customers

Supply against written orders

Sign on a legal contract Maintain close contact with customers

Get and repeat positive feedback

Send invoice ASAP Contact before sending invoice ( to check

particulars)


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Collection strategies

Keep a close watch on customers fortunes

Immediately contact on any delayed

payment Be firm its your own money

Allow a customer to graduate in his credit

ratings with you


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Break-even analysis

Identify fixed and variable costs

Explore possibilities of changing fixed into

variable costs And vice-versa

Can be expressed in terms of

Capacity utilisation

Sales revenue


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Application of BEA

Helps in taking investment decisions

Profit optimisation planning

Helps in pricing decision

Can be modified to calculate profitability atvarious levels of capacity utilisation / sales