funds for innovation
TRANSCRIPT
Angel investors
• angels provide capital and frequently valuable guidance and strategic assistance.
• The ideal angel is someone who is a generation ahead of the entrepreneur in creating value in the industry.
• Angels are sometimes said to invest 'emotional money,' while venture capitalists are said to invest 'logical money'.
To capture angels attention :
• An in-depth understanding of the market in which they're competing.
• A product or service that can be differentiated from the crowd.
• A concept that is very "scalable" (one that can be rapidly expanded).
VENTURE CAPITAL FUND (VCF)
• Venture capitalist or a venture capital company can be defined as a financial institution, which joins the entrepreneurs as a co-promoter, in a project and shares the risks and rewards of an enterprise.
• startup financing sequence starts with the entrepreneurs (inventors) putting their own available funding into a shoestring operation. Next, an angel investor may be convinced to contribute funding. Thereafter comes venture capital.
VC
• expects the enterprise to have a very high growth rate
• provides management and business skills to the enterprise
• expects medium to long-term gains and
• does not expect any collateral to cover the capital provided
Advantages of venture capital
• Finance
• Business Partner
• Mentoring
• Alliances
• Facilitation of Exit
STAGES IN VENTURE FUNDING
• Seed Stage
• Early Stage -not yet sold their product commercially
• Expansion/Development Stage -a period of rapid growth and the company will usually require several rounds of capital injection as it achieves the milestones set in the business plan.
VC APPRAISAL PROCESS
• Preparation of Info-Memo-business plan, market estimate ,resumes
• Letter of Intent – after Due Diligence , Broad subscription terms
• Investment Valuation -Details like board seats, veto powers, requirements for additional investment, vesting schedules, salaries. Also financial structure
VALUATION OF A START-UP
• Step-up ratio- credit for the initiative and non-monetary investment (15=2*5+5)(7)
• burn rate -the rate at which a company goes through its cash (43 =7X4+15)(22)
• 2nd round(91 =22X3+25)(47)
• IPO (194=47X2+100)(147)
RISKS IN VC
• A change in industry growth vis. assumptions• A change in competitive pricing vis.
assumptions• Difficulties in achieving product development
schedule• Difficulties in obtaining parts and raw materials• A change in market structure (e.g. a new
entrant or a new technology)• A change in the availability of appropriately
priced and trained labour
Promoter Risk
• Integrity / honesty of the entrepreneur / promoter
• First generation entrepreneur• Lack of experience in related field• Lack of contacts with resource persons• Lack of experience about• - market• - technology
Product Risk
• Development stage of product
• Product life cycle
• Risk of reverse engineering
• Manufacturing complexities
• Number of constituent technologies
Technological Risk
• Availability of superior technology• Unpredictable technology development• Technology life cycle• Investment requirement for assimilation• Lack of organisational capability to assimilate• Source of technology / Goodwill of supplier• Level of technology (high or low)
Market Risk
• New users; uncertainty in market acceptance• Market growth rate• Competitors • Substitute products• Potential entrants• Huge marketing expenditure• Unorganised sector• No assured market
Financial Risk
• Capital market situation (e.g. lack of exit opportunities)
• Current leverage ratio not in par with industry average
• Growth prospect of the company• Foreign exchange risk• Problem with working capital; Liquidity problem• Expected rate of return• Lack of understanding of standard financial
procedures
Implementation / Operational Risk
• Manufacturing complexities• Capability of producer / organisation• Manufacturing set up• Commitment from manufacturing• Unavailability of skilled work-force• Maintenance problem• Lack of contacts with resource persons• Problem in arranging additional fund
Organisational Risk
• Motivation of employees
• Employee turnover
• Dependence on few workers
Strategy Risk
• Loosing competitiveness
• Unrelated diversification
Environmental Risk
• Changes in Government policy
• Lack of understanding about regulations
• Pollution / hazard
• Availability of raw material
• Legal barriers - piracy / patent etc.
HOW TO IMPRESS A VENTURE CAPITALIST
VC Fundamentals-• The venture capital firm get paid first. Whether by
means of a liquidity event or the liquidation of the company in the event of failure, the VC firm will get paid first.
• Participation in the upside of the venture. The VC will benefit from the appreciation in value of the venture over and above the original investment.
• Control over critical events. VC will want to have decision rights in matters that vitally affect the business, such as the decision to do an IPO.
• Creation of a path to liquidity. There must be a way for the VC to cash out of the venture.
Other factors
• Winning Team
• Financials -Hockey Stick Appoach
requires an investment of 20 L over a 3 year period. VC expects a return of 5 times . PAT-30L.P/E-10
VC share= 20X5/ 30X10= 100/300= 33.3 %