is your business funding ready

Is Your Business Funding Ready

Toozio Insight - Expert TalkHyatt, Bangalore

19th February 2014

Anjana Vivek

[email protected]

VentureBean Consulting Private Limited

At the start

Kinds of Investors

Investee Perspectives

Investor Perspectives

Value Creation and Valuation

Practical Points to factor in

In Summary

Agenda

2 2


3

YOU

Your Business Today&

Where you Want to go

The Starting Points


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WHY ??

Why do you want funding


These companies want equity funding

WHY?• One is not eligible for debt funding and thinks that

equity is the only option for growth

• One wants it for R&D and capital investment and has calculated that the existing money in the bank will be exhausted in 3 months

• One has a severe cash crunch and working capital management issues and hence believes that taking money from a VC would solve this problem

• One wants to expand from 3 retail outlets in Bangalore to multiple outlets across South India

• One wants to buy a US Company

• If you are seeking funding; please list 2-3 key reasons for this

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Funding Options Available

• Debt: Collateral based, Cash flow from business should comfortably cover repayment of interest and principal

• There are multiple alternate equity investment options: VC/ PE/ Incubation/Acceleration, which are detailed in the next few slides

• This session is focused on equity funding along with emerging funding options; with some contrasts between debt and VC/PE and emerging funding options being highlighted

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At the start

Kinds of Investors





In Summary

Agenda

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Investors: Equity (Linked)

• Venture Capital• Private Equity• Strategic Investors• Corporate Funds• Impact Investors• Social Ventures• Angel Funds• Seed Funds• 3 Fs• HNIs

• Incubators• Accelerators• .. And ??

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Contributors

• Corporates

• Banks and FIs

• FIIs

• Family Business Groups

• HNIs

• Combination / others

• Crowd sourcing platforms ?

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Investor Investment Horizon

• This varies across investor category

• Debt : The key focus is performance over the

period of the loan

• VC/PE/Other Structured Funds including but not

limited to Impact Funds etc.: depends on the

Fund Life

• HNIs/Angel/Seed etc.: May or may not have a

defined horizon

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At the start

Kinds of Investors





In Summary

Agenda

11 11


If you are looking for funding

• What is your funding strategy?

• Debt, equity or mix?

• Are you in a position to repay debt with interest? Do you have collateral?

• Will you be able to generate returns expected by an equity investor? How?

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Back to the Basics & Your Drawing Board

In 5 years:

• Top Level: How do you picture your business …– Quantitative: In terms of turnover, profits, numbers, data etc.

??

– Qualitative: As best in country, innovative, great employer??

• In more detail: What do you believe could be achieved, for eg. in terms of …– Financials: Revenue, Profits, Cash Flow,

– Value

– Number of Employees, Number of Offices etc.

– Lines of business/products/service

– Kinds of customers / categories

– etc..

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In 5 years:

• Top Level: How do you picture your business …

• In more detail: What do you believe could be achieved, for eg. in terms of …

• To Trigger Thinking * Please attempt to answer the above questions. It is OK if you have no answers or are unclear about the way in which you need to proceed, this is a starting point, not a decision point

* Home work for you post the session

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• What are you willing to let go to reach your goals

– Equity share i.e. ownership dilution

– Revenue share

– Profit share

– Decision making, i.e. permitting others to take

decisions as the leadership team grows to beyond

initial founders/family members

– What else

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What do you have to give up

• If you are willing to let go of ownership, i.e if you are willing to allow investors to fund your business growth, what percentage of ownership are you willing to let go?

• Does the possible valuation of your business match this percentage that you are willing to let go?

• To Trigger Thinking:– * Please attempt to think about what you are willing to let go;

your thoughts on the above this will determine the way you Negotiate and impact Deal Terms

– Some of these may well become Deal Issues or Post Deal Issues, so do think through with care


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From your perspective as a business

• Which category of investor(s) will be the

right/best/optimum fit for you?

• Which specific investor in that category will be

the right/best/optimum fit for you?

• Investigate, check the investors out and then

approach them in a planned manner

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Funding and More …

What would you like from these investors

• Funding at a Valuation that You think is appropriate

• Networks and connections .. To potential customers, suppliers, advisors, employers, next level of investors .. and more..

• Brand Value Addition – market perception of your company goes up when a marquee investor funds the growth

• And … ??

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At the start

Kinds of Investors





In Summary

Agenda

19 19


A Moment Please: Before Fund Raising

Think of the Investor as a Customer

• What does this Customer want from you?

• Why does this Customer choose you instead of

going to competition?

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• Why will an investor in equity – PE/VC/Angel be interested in your company?

• How will you stand out from the clutter– The number of companies that get funded are a small

percentage..

– In India, less than 1% of the companies that seek PE/VC/Angel funding get this

– Some even say 1 in 500 companies that seek VC funding get it

• How can you work out a deal that is meaningful to both You and the Potential Investor

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What an Equity Investor Looks For

• An increase in the value of the investment over a period of time, for example– 3 times in 3 years

– 5 times in 5 years

– For an illustration of exits, valuation and returns across categories of investors please check http://www.slideshare.net/anjanavivek/valuation-and-funding-case-study

• Just because a business is profitable, does not mean it is of interest to a VC

• In fact many PE investors put Crores of Rupees in loss making companies

• Can you think of any examples of well known, VC funded, loss making companies in India?

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http://www.slideshare.net/anjanavivek/valuation-and-funding-case-study











An Investor Perspective

• What will an investor look for in your company– ?? Revenue

– ?? Profit

– ?? Value

• It depends on – The stage of your business: idea/growth/turnaround..

– The industry, the team, the business environment

– The investor category and the mandate/needs of the fund (as applicable)

– Your growth plans and action plans

– The investor perception and reading of you and your ability to grow and scale and Execute

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At the start

Kinds of Investors





In Summary

Agenda

24 24


Value Indicators• How will you demonstrate that your business has the

potential to grow and create value, so that an investor can get the required financial returns?

• Some possible indicators– Key team, Board of Directors, Advisory Board

– Customer quantity and quality (Marquee customers, repeat business etc.)

– Industry, Lines of business, sales verticals

– Intellectual property

– Brand perception

– Competitive advantage

• To Trigger Thinking * Please attempt to think of the possible value indicators in your company


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Eg. Value Creation: Revenue/Customers

• Review revenue categories/streams month on month for

this financial year. Which streams of revenue give you

less than 1-2% of your revenue, less than 5% .. Do you

want to continue to these lines, if yes, why? For strategic

reason, to penetrate a market .. ??

• What are direct costs for each revenue stream, what are

the indirect costs, how are you allocating indirect costs?

• Compare the % of sales from different categories,

customer lines, and the associated costs

• Cash flow is also to be considered, as a profitable

revenue stream may not give immediate cash flow. Cash

flow and profits are to be factored in

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Value Creation

• Where are you getting more revenue; which streams of

income are more profitable

• All customers may not be giving revenue: Illustrative

Example: An online social media platform has one set of

non-paying customers, who need to be serviced well in

order that paying customers also visit the platform

• This exercise, done with due care, will help understand

which category of customers are creating more value for

you now, and where you may like to go in future

• Similarly look at other areas of your business and

business model. Where do you see value being created,

how?

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Valuation

• Based on– Tangibles and intangibles

– Data and assumptions

– Subjectivity and objectivity

– Future growth perceptions

• Many methods of computation including but not limited to– multiples of revenue; profit, EBIDTA etc.

– multiples of key drivers, eg.user base, capacity

– cash flow based, discounted

• Factor statutory, accounting, and tax implications

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Valuation

Driven by

• Markets including flavor of season, competitive scenario, team

at helm etc. ,

• Deal issues: deal breaker and deal maker issues

• Due diligence findings, both the number of issues flagged off as

well as the seriousness and materiality of these issues

• Percentage of stake offered

• The ability and skills brought to the negotiation table as also the

bargaining power of the persons on the two sides of this table

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Valuation

• Therefore, there can be divergent views on valuation, with the same business showing varying values when– Different methods of valuation are employed

– Variations of the methods are used

– Different inputs are used in the methods, i.e when assumptions made differ

– Growth is perceived differently based on who is viewing this

• Sometimes it is assumed that this is a mathematical and number driven exercise and hence is scientific; yes there is a logic to valuation, it can be a rigorous mathematical exercise; however the underlying assumptions and the rationale for doing a deal dominate over the mathematics. Hence Valuation is Both a Science and an Art

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Valuation

• Deals can sometimes be structured to

accommodate valuation perceptions; by linking

to future performance etc. But this is not

preferred by all

• For more on valuation: detailed notes are at

http://www.slideshare.net/anjanavivek/valuation-

basics (from the popular set of the TOP 4%

viewed on SlideShare in 2013)

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http://www.slideshare.net/anjanavivek/valuation-basics




At the start

Kinds of Investors





In Summary

Agenda

32 32


Practical Perspectives

• Funding takes time, it may take anywhere between 6-12 months (sometimes even more) to get money into your company, from the time you start the process

• Funding takes Energy and the Bandwidth of the Key Team.. Be prepared that to invest time in this in addition to running your business operations

• After all this, there is no guarantee that you can raise Private Equity or VC money

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Practical Perspectives

• Funding takes money away, you need to pay for

Due Diligence, Legal and related fees

• Some of these are sunk fees, i.e. if the deal

does not materialize and you do not get money

from an investor, you would have still incurred

these costs

• Factor in the legal and tax matters when fund

raising, in addition to valuation and pricing

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• Is this the right time to get investment into the business or should you wait for some time… for example, if you get better customer traction, you can get improved valuation

• Have you looked at business models which can help you better manage cash flow, for example your cost structures may be modified to improve cash flow and improve the working capital situation, you may then a) be able to manage with less money from outside, or b) even manage for some more time without funding

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Plan B

• What are the alternate plans if you do not get funding

• Relook at the business model, financial plan and funding strategy

• Perhaps you can grow the business to the next stage and create value for yourself in the process .. .. and then approach an investor

• Perhaps you can approach another investor or category of investor .. This has to be done with thought and care

• You may like to relook at your funding plan and strategy

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At the start

Kinds of Investors





In Summary

Agenda

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In Summary• Articulate your Vision and Growth Plan, What

do You want

• Think through your Funding Strategy

• Select a Potential Investor with Due Care

• Plan for Fund Raising Time Lines, factor in

regulatory aspects

• Have an optimistic and a back up plan

• It is Not All About Funding.. all companies that

get funded do not succeed.. all companies

that do not get funded do not fail; Do not get

disheartened if Fund Raising looks difficult

GOOD LUCK in your Business…38


In Summary

• Thank you for the patient hearing

• Delighted to invite you to view/follow the link below for periodic insights, class notes & more, from thought leaders, academicians and others at the VentureBean Consulting Knowledge Hub:

http://www.linkedin.com/company/venturebean-consulting-private-limited

www.slideshare.net/anjanavivek

• Contact for more information and inputs: [email protected]

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http://www.slideshare.net/anjanavivek


Thank You!

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