ENTREPRENEURIAL FINANCE

Objectives• To list the various sources of debt finance• To understand the process of securing debt finance• To discuss the importance of collateral security• To tabulate the lending strategies of banks• To discuss the characteristics of venture capital• To understand the structure of venture funds• To list the various roles within a venture fund• To understand how venture capitalists get compensated for their

efforts• To describe a step by step screening process followed by venture

funds while making an investment• To list the elements of a termsheet• To understand the current scenario of VC funding in India

Disadvantages of Equity Finance

• Dilution of shareholding • Increased 3rd party governance • Increased external controls • Increased commitment to stated strategy

Sources of Debt

• State Finance Corporations• NBFC• Banks

Securing Debt

• Drawing up the business plan. • Identifying sources of debt finance. • Presenting the proposal to the bank. • If the manager is considering your

proposal favourably, you will have to go for further talks

• Once the two parties have broadly agreed, details have to be worked out.

Principles of Good Lending

• Purpose• Safety• Profitability• Other considerations

Security

• Collateral– Inside – Outside

• Personal guarantee• Maturity• Covenants• Menu pricing

Lending Strategies

• Financial statements• Relationship lending

– Length of relationship– Breadth of relationship– Degree of trust

• Credit scoring

Venture Capital

Venture capital is characterized by:• Financing of new and potentially high growth companies• Investments primarily in the form of equity participation• Assistance in the early days of the enterprise • Adding value to the company through active

participation, even joining the management on occasions • Willingness to take on higher risk• Expectation of higher rewards• A long-term outlook regarding the investment

Roles in a Venture Fund

• General partner • Investor • Venture partner • Entrepreneur-in-residence • Others

Screening by VCs

• Get rid of scamsters• Major broad concerns• Growth and industry considerations• Monetising value

Important Considerations

• The entrepreneurial team– Personal or individual characteristics – Experience of the individual

• Ease of exit– Via IPO– Sale to PE, etc

The Termsheet

• Amount and terms of investment• Dividend policy• Composition of the board of directors• Reporting • Liquidity (exit) plans• Rights of sale • Warranties• Matters requiring venture capitalist approval

Problems Facing VCs in India • Large established firms with strong growth figures look

like a very attractive proposition. • Investments in public listed firms are giving returns in

excess of 30%, at far lesser perceived risk • Small firms in India are informationally opaque.• Indian entrepreneurs are perceived as lacking in

marketing and management skills. • Indian entrepreneurs are more reluctant to give up

controls than their western counterparts. • VCs face an exit challenge as the capital markets in

India are still shallow • Brand ‘India’ is strong only in some manpower driven

services sectors like IT and ITES.

Sectors Favoured by VCs

• IT and IT-enabled services • Software Products • Wireless and telecom • Banking and financial services• Divestments in public sector units • Media and entertainment • Biotechnology • Pharma and diagnostics• High technology Manufacturing • Retail