Entrepreneurial Finance
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Transcript of Entrepreneurial Finance
ENTREPRENEURIAL FINANCE
Rajeev Roy
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 the invested firm
• Venture capital investment is illiquid
Entrepreneurial Finance by Rajeev Roy
Structure of VCs
• Mostly funds– Charge about 2% + success fee
• Also companies
• Limited partnerships expected soon
• Prevalence of banks– Revenue implications
Entrepreneurial Finance by Rajeev Roy
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
Entrepreneurial Finance by Rajeev Roy
VC : Disadvantages
• Dilution of shareholding
• Increased 3rd party governance
• Increased controls
• Increased commitment to stated strategy
Entrepreneurial Finance by Rajeev Roy
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
Entrepreneurial Finance by Rajeev Roy
Valuation excersise
1. Get rid of scamsters2. Hygiene factors – beware of things that
can shut down a business3. Growth & industry considerations4. Due diligence
1. Physical evaluation2. Calling in the experts
5. Monetise value
Entrepreneurial Finance by Rajeev Roy
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
Entrepreneurial Finance by Rajeev Roy
Problems
• Locating players
• Concerns regarding exchange of info
• Larger companies look equally attractive with lesser risk
• Even listed securities are giving great returns
Entrepreneurial Finance by Rajeev Roy
India centric problems
• Indian VC not yet a popular asset class among institutional investors
• Exit challenges– Shallow markets– Little M & A activity
• Brand India, not strong beyond services
Entrepreneurial Finance by Rajeev Roy
The road ahead
• Placement agents (Venture Partners)
• Trade meets
• Syndication– Getting a larger team / new perspective– Spreading risk
Eg July systems (wireless content) got $10m from 6 VCs
Entrepreneurial Finance by Rajeev Roy
Some VCs in India
• Jumpstartup – investing
• Draper Fisher – sector specific
• Charles River Ventures
• Sequoia Capital
• Westbridge – too big?
• ChrysCapital – certainly too big
Entrepreneurial Finance by Rajeev Roy
Others
• Banks– ICICI– UTI– SIDBI– Canara bank
• Corporates– Intel– Motorola– Nokia– cisco
Entrepreneurial Finance by Rajeev Roy
• Average fund size $50 mil
• Total deals per annum – 100+
• Mostly expansion – few seed or early stage
Entrepreneurial Finance by Rajeev Roy
Lending strategy of banks
• Business plan
• Financial statement
• Profile of promoter
• Asset base– Gross – Net
• Credit scoring
Entrepreneurial Finance by Rajeev Roy
How Banks cover risks
• Collateral– Internal incl. a/c receivable– External
• Personal guarantees
• Debt covenants
• Short maturity debt
Entrepreneurial Finance by Rajeev Roy
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
Entrepreneurial Finance by Rajeev Roy
SMERA
• Specifically for SMEs
• Joint initiative of:– SIDBI– D & B– CIBIL– Other banks
• Office currently only in Mumbai
Entrepreneurial Finance by Rajeev Roy
Rating process
• SME contacts SMERA
• Questionnaire is filled
• Documents are submitted
• Site visit by SMERA representative
• Rating is announced 15 days after all documents are received
Entrepreneurial Finance by Rajeev Roy
Entrepreneurial Finance by Rajeev Roy
Fee Structure
• Below 1Cr 7500
• Upto 5 Cr 25000
• Upto 20 Cr 37000
• Above 20 Cr 50000
Entrepreneurial Finance by Rajeev Roy
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
Entrepreneurial Finance by Rajeev Roy
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)
Entrepreneurial Finance by Rajeev Roy
Collection strategies
• Keep a close watch on customer’s fortunes
• Immediately contact on any delayed payment
• Be firm – its your own money
• Allow a customer to graduate in his credit ratings with you
Entrepreneurial Finance by Rajeev Roy
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
Entrepreneurial Finance by Rajeev Roy
Application of BEA
• Helps in taking investment decisions
• Profit optimisation planning
• Helps in pricing decision
• Can be modified to calculate profitability at various levels of capacity utilisation / sales