Financing the New Venture
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Transcript of Financing the New Venture
FINANCING THE NEW VENTURE By Team -7
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Agenda
An overviewDebt or Equity Financing Internal or External FundsFunding from Banks and Financial institutions,Governmental and Developmental Sources, Private Placement, Types of Investors, Private Offerings, Bootstrap Financing, Venture Capital , Nature of Venture Capital, Approaching, presenting and obtaining the funds,
FDI
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An overview
Three Core principles of entrepreneurial finance
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Critical Financing Issues
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Financial strategy frame work
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Opportunity
Business strategy
Marketing OperationFinanceValue creation
Source and deal Structure
Debt Equityother
Finance strategyDegree of strategic freedomTime to OOCTime to closeFuture alternativesRisk/rewardPersonal concern
Financial RequirementsDriven by:Burn rateOperation needsWorking capitalAsset requirementAnd sales
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Debt Financing
Interest –bearing instrument Indirectly related to sales & profits Some assets to be used as collateral Pay back the amount with interest Two types of debt financing
- Short term (less than 1 year)- Used to provide WC to finance inventory , account
receivables, or operation of business
- Long term - Purchase assets such as Machinery, land ,building etc. .
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Equity Financing
No collateral required & offers ownership position to investor Investor Shares profit & loss on Pro rata basis Depending on availability of funds, the assets & interest rate- investor
will decide. Amount of equity depend on nature & size of venture Equity provides basis for Debt financing.
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Internal funds
Most frequently employed funds Sources: profits, sale of assets, reduction in WC, receivables, selling
little used assets. Extended payment terms from suppliers. Collecting bills quickly Avoid this policy for mass merchandisers
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External funds
External source are evaluated on 3 basis
- Length of time the funds are available- The costs involved- Amount of company control lost
Sources :
- Self , family & friends, banks, small business administrative loans, R&D limited partnership, Govt grants etc. . . . . .
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PERSONAL FUNDS
Not only these are the least expensive funds in terms of cost & control,
but they are absolutely essential in attracting outside funding.
The outside providers of capital feel that the entrepreneur may not be
sufficiently committed to the venture, if he/she doesn’t have money
invested.
The invested amount by the entrepreneur may be negligible but
valuable here to outside providers.
It is the money which makes outside investors feel comfortable with here
commitment level.
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FUNDS FROM FAMILY AND FRIENDS
Family and friends are the next most common source of capital for a new venture.
This helps overcome one portion of uncertainty felt by impersonal investors.
There are both positive and negative aspects. Negative side: even though being a small amount if its in the form of
equity financing, then which may have a negative effect on employees sales and profit.
Positive side: Family and friends are not problem investors and in fact more patient than other investors in desiring the a return their investment.
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IN ORDER TO AVOID PROBLEMS BY THE FAMILY AND FRIENDS’S INVESTMENT If the family and friends are treated the same as any investor, potential
future conflicts can be avoided. Any loans should specify the rate of interest and proposed repayment
schedule of interest and principal. A formal agreement like rights and responsibilities of the investors and
what happens if the business fails, must all be agreed upon and written down.
Finally the entrepreneur should carefully consider the impact of the investment on the family member or friend before it is accepted.
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INDIAN VENTURE CAPITAL ASSOCIATION
It is a member based national organization promotes the industry within India and outside, encourages the investment in high growth companies. IVCA members comprise venture capital firms, institutional investors, banks, incubators, angel groups, corporate advisors, accountants, lawyers, govt. bodies, academic institutions and other service providers to the venture capital.
Members represent most of the active venture capital and private equity firms in India. These firms provide capital for seed ventures early stage companies, etc.
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Type of Loan
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Commercial Banks
Account Receivable Loans
Inventory Loans
Real Estate Loans
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Cont…
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Straight Loans
Long Term Loans
Character Loans
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PRIVATE PLACEMENTS/PRIVATE OFFERINGS
It means rising of capital via private rather than public placement. since the private placement is offered to a few, select individuals, the placement does not have to be registered with the Securities and Exchange Commission.
In many cases detailed financial information is not disclosed and the need for prospectus is waived.
Investors involved in private placements are usually large banks, mutual funds, insurance companies, and pension funds.
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Types of investors
An investor usually takes an equity position in the company, can influence the nature of the business to some extent , and even may be involved to some degree of the business operation.
The investors may be classified into three types
1.The investors who want to be actively involved in the business operations
2.Those who desire at least an advisory role in the direction and operation of the venture and want to share its profits.
3.Others are more passive in nature , desiring no active involvement in the venture at all.
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Regulation D
Regulation D contains
1.Broad provisions designed to simplify the private offerings,
2.General definitions of what constitutes a private offering,
3.Specific operating rules –Rule504,Rule505,and Rule506..
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Research and development limited partnerships
Money given to a firm for developing a technology that involves a tax shelter.
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3 Important Components of any R & D Limited Partnership
The Contract The Sponsoring company The Limited Partnership
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Small business administration loans
When the entrepreneur is unable to secure a regular commercial bank loan, an alternative is a SBA Guaranty Loan.
In this loan, SBA guarantees 80% of the amount loaned to the entrepreneur’s business will be repaid by the SBA if the company cannot make payment.
Both long and short term loans can be guaranteed by the SBA.
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SMALL ADMINISTRATION LOANS IN INDIA
State Bank of India has been playing a vital role in the development of small scale industries since 1956.
The Bank has financed over 8 lakhs SSI units in the country. It has 55 specialised SSI branches, 99 branches in industrial estates and more than 400 branches with SIB divisions.
The Bank finances for Small Business activities which are of special significance to a large number of people.
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Various schemes of SBI for small and medium enterprises SMEs are as follows:
Traders Easy Loan SchemeSSI LoansBusiness Current AccountsOpen Term Loan Retail TradeDoctor PlusDental Doctor PlusSBI ShoppeCyber PlusSME Credit Plus
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Small Business Credit Card SME Petro Credit Dal Mill Plus Paryatan Plus Transport Plus Transport Operations Auto Clean Eicher Motor Limited (EML) Auto Loan Charter for SSI Artisan Credit Card Rice Mills Plus School Plus Swarojgar Credit Card Flexi Loan
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BOOTSTRAP FINANCING
Definition: To finance your company's startup and growth with the assistance of or input from others.
Bootstrapping is one of most effective and inexpensive ways to ensure a business' positive cash flow. Bootstrapping means less money has to be borrowed and interest costs are reduced.
This becomes important when capital from debt & equity financing is more expensive.
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NECESSITY FOR BOOTSTRAPING
In addition to the monitory costs, outside capital has other costs as well like.,
Outside capital usually takes between 3 & 6 months to raise outside capital.
Outside capital often decreases a firm’s drive for sales & profits.The availability of capital increases the impulse to spend.Outside capital can decrease the company’s flexibility.Outside capital may cause more disruption & problems in the venture
than was present without it.
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Venture Capital
Is a type of private equity capital typically provided for early-stage, high-potential, growth companies in the interest of generating a return .
A venture capitalist is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments.
A venture capital fund refers to a pooled investment vehicle that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital market or bank loans.
George Doriot, is the "father of venture capitalism“.
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Structure of Venture Capital Firms
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Over view of VC
Before World War II, venture capital investments (originally known as
"development capital") were primarily the domain of wealthy individuals and
families.
ARDC is credited with the first major venture capital success story when its
1957 investment of $70,000 in Digital Equipment Corporation (DEC) would be
valued at over $355 million after the company's initial public offering in 1968.
The public successes of the venture capital industry in the 1970s and early
1980s.
The growth of the industry was hampered by sharply declining returns and
certain venture firms began posting losses for the first time.
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Cont…
Professor Andrew Metrick refers to first 15 years of the modern venture capital
industry beginning in 1980 as the "pre-boom period" in anticipation of the
boom that would begin in 1995 and last through the bursting of the Internet
Bubble in 2000.
As a percentage of GDP, venture investment was 0.058% percent in 1994,
peaked at 1.087% (nearly 19x the 1994 level) in 2000 and ranged from 0.164%
to 0.182 % in 2003 and 2004.
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VENTURE CAPITAL PROCESS
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Risk and Return Criteria
Late Stage in Investments:- lower risks, faster returns, less managerial assistance and fewer deals to be evaluated.
Highest Risk
Lowest Risk
Highest Return
Expected
Lowest Return
Expected
Early Stage
Development Financing
Acquisitions & Leveraged
Buyouts
50% ROI
40% ROI
30% ROI
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Three General Criteria before commit to the Venture
A STRONG MGT TEAM consists of individuals with solid experience &
backgrounds, a strong commitment to the co., capabilities in their specific areas
of expertise the ability to meet challenges and the flexibility to scramble wherever
necessary.
THE PRODUCT/MKT OPPORTUNITY MUST BE UNIQUE, having a differential
advantage in a growing market. Securing a unique niche is essential since the
product or service must be able to compete & grow during the investment period.
BUSINESS OPPORTUNITY MUST HAVE A SIGNIFICANT CAPITAL APPRECIATION
The venture capitalist typically expects a 40 to 60 percent return on investment in
most investment situations.
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Four Stages
PRELIMINARY SCREENING
Starts with the receipt of Business Plan by the venture capitalist. Determines if
the deal or similar deals have been seen previously. Then, determines if the
proposal fits his or her long-term needs in developing a portfolio balance.
Investigates the economy of the industry and evaluates weather he or she has
the appropriate knowledge and ability to invest in that industry. Reviews
weather the deal can deliver the ROI required. The credentials and capability of
the mgt team are evaluated to determine if they can carry out the plan presented.
AGREEMENT ON PRINCIPAL TERMS
The venture capitalist wants a basic understanding of the process before making
the major commitment of the time and effort involved in the formal due
diligence process.
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Stages Con…
DETAILED REVIEW AND DUE DILIGENCE
It is the longest stage, involving anywhere from one to three months. There is a
detailed review of the company’s history, the business plan, the resumes of the
individuals, their financial history, and target customers. The upside potential
and downside risk are assessed; and there is a thorough evaluation of the
markets, industry, finances, suppliers, customers and mgt. FINAL APPROVAL
A comprehensive, internal investment memorandum is prepared. This document
reviews the venture capitalist’s findings and details the investment terms and
conditions of the investment transaction. This information is used to prepare the
formal legal documents that both the entrepreneur and venture capitalist will
sign to finalize the deal.
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Locating Venture Capitalists
An entrepreneur should carefully research the names and addresses of
prospective venture-capital firms that might have an interest in the particular
investment opportunity. There are also regional and national venture capital
associations. For a nominal fee or none at all, these associations will frequently
send the entrepreneur a directory that lists their members, the types of business
their members invest in, and any investment restrictions. Whenever possible, the
entrepreneur should be introduced to the venture capitalist. Bankers,
accountants, lawyers, and professors are good sources for introductions.
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HOW TO APPROACH A VENTURE CAPITALIST
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How to Approach a Venture Capitalist
Approaching a venture capital firm is a difficult and complex task.
There are many ways to go about approaching an investor for venture
capital funds. Some are good, some are bad, and some are just
downright ugly!
Venture capitalists deal with hundreds of potential clients, and reject
the majority of them
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Instructions
Make professional contact with the venture capital firm.
Know your product inside and out.
Develop an airtight business plan.
Find the right kind of venture capital firm.
After making initial contact with the right firm, send an executive
summary
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A few basic rules
Do your homework.
Be Concise.
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Here's how NOT to solicit investors
Mass Emails
Hype
Trade shows
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Summary
Investors are people too and they have busy
schedules. Do your homework and be concise
when reaching out to them. Avoid such tactics as
mass emails and hyped up language in your
messages. It will go a long way in improving your
odds.
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FDI FDI or Foreign Direct Investment is any form of investment that
earns interest in enterprises which function outside of the domestic territory of the investor.
FDIs require a business relationship between a parent company and its foreign subsidiary.
The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods
Foreign Direct Investment (FDI) equity inflows in the country have increased from US $ 5.5 billion in 2005-06 to US $ 27.31 billion in the year 2008-09.
despite the economic slowdown, showing a percentage growth of 11% over the previous financial year.
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Methods of Foreign Direct Investments by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or
enterprise Policy Initiatives To strengthen higher overseas investment into cash-broke
micro and small enterprises (MSEs), the government has liberalized the FDI norms for the sector replacing the current 24 per cent ceiling on foreign holding with the sectoral caps. These industries will now be guided like other large enterprises as far as FDI is concerned.
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Conclusion
?
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THANK YOU