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ENTREPRENEURIALFINANCE
Rajeev Roy
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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
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