8/8/2019 Angel, VC, PE
1/20
Angel Investors, VCs, Hedge
Funds and Private Equity
Investors
8/8/2019 Angel, VC, PE
2/20
Economics of Investment
Certain economic agents (individuals, households
and corporations) have excess of income over their
consumption (because of their plan to defer
consumption).Certain other agents need more money than they
have (temporarily).
Intermediaries exist who bring together the above
two types for economic gains (commissions,
brokerage).
8/8/2019 Angel, VC, PE
3/20
HNWI
Households
Corporates
Angels
Banks
Mutual Funds
PensionFunds
Insurance Cos
Venture
Capital
Funds
8/8/2019 Angel, VC, PE
4/20
Nature of these investors
Unconventional
Make highly risky investments
Deal with difficult Asset Pricing and Valuation
Are free of regulatory issues
8/8/2019 Angel, VC, PE
5/20
Target Companies
Startups
Early stage companies
Private companies in the scale-up phase
Pre IPO financing rounds
8/8/2019 Angel, VC, PE
6/20
Sources of Finance
Equity (common stock, preferred stock) Loans: long term, short term
Lease finance
Inter corporate deposits
Bank cash credit and overdraft limits
Debentures
Fixed deposits
Grants from government agencies Supplier credit and deferred payments
Credit cards
8/8/2019 Angel, VC, PE
7/20
Modes of Acquisition
Primary market:public issue, rights issue
(flotation costs)
Secondary market (listing costs)
Private placement (individual or institution)
Banks and mutual funds
Pension funds, insurance companies Debenture issue
Fixed deposits
8/8/2019 Angel, VC, PE
8/20
How to compare various sources ?
Holding period (Duration)
Repayment terms
Interest rate
Other strings attached
Pledges and collaterals
Finance marketing costs and lead time
8/8/2019 Angel, VC, PE
9/20
Angel Investors
High Net Worth Individuals
Successful serial entrepreneurs (also
parallel entrepreneurs) Good knowledge of technology and
business acumen
Have country-specific preferences (NRI,
NRC)
8/8/2019 Angel, VC, PE
10/20
Examples
James Clark (SGI to Netscape)
Prakash Bhalerao (Alopa Networks)
Kanwal Rekhi (Exodus Communications)
K.Chandrasekhar, B.V. Jagdeesh
Sabeer Bhatia (Hotmail Arzoo Navinmail)
Rakesh Mathur (Junglee to Purple Yogi) Suhas Patil (Cirrus Logic)
8/8/2019 Angel, VC, PE
11/20
Peculiarities of Angel Investment
Quick decision-making
Low level of funds
One-two days a week of commitment after all
they are putting their own money on the table!!
Uncle-nephew relationship
8/8/2019 Angel, VC, PE
12/20
Venture Capital Firms
VCs look for private equity for youngcompanies
Mezzanine VC firms
Scale-up VC firms Technology / Space specific
Biotechnology
Networking
Chips and hardware
E Commerce
8/8/2019 Angel, VC, PE
13/20
Structure of a VC Firm
General partners 3-5 (themselves successful entrepreneurs):
put about 2-3% of the corpus
Limited partners (Pension funds, Retirement plans): Put
97% corpus
Corpus = Fund, typically ranges between USD 50M to 2B
Management fee is about 2-3 % per year
Funds about 5-30 new companies per year
Employs junior managers for due diligence(associates) After IPO/Acquisition, general partners keep 20% of gains,
limited partners get Principal+80%
8/8/2019 Angel, VC, PE
14/20
VC Firms Annual Throughput
10,000 qualified business plans
1000 meetings
400 company visits
25 new investments
8/8/2019 Angel, VC, PE
15/20
Role of the VC in the Portfolio Company
Negotiate aggressive terms
Select strong co-investor
Help in constituting the Board of Directors
Assist in Recruitment
Market validation
Strategic relationships
Pursue liquidity aggressively
8/8/2019 Angel, VC, PE
16/20
Valuation: Bargaining Point Causes of mismatch
Asymmetry of information
Ego Greed
Factors that drive the valuation
Technology, ESOP rates, management
Orders in hand, scalability, brand strength
Patents and copyrights
8/8/2019 Angel, VC, PE
17/20
Difficulties in Valuing Start-up
Companies
Immediate earnings are negative
No past history
No comparable companies
No market prices
8/8/2019 Angel, VC, PE
18/20
VC Fund Raising Process
Introduction (phone call, e-mail, referral)
Submit business plan / executive summary
Presentation
Company visit
Due diligence (management reference checks,customer calls, market analysis)
More meeting(s)
Term sheet
Legal / Closing
8/8/2019 Angel, VC, PE
19/20
Private Equity Investment
Large, profitable private limited or deemed
public companies who need finance but dont
want to do an IPO
Examples: Patni Computers, Persistent
Systems Limited
Deal is usually in tens of crores
8/8/2019 Angel, VC, PE
20/20
Some deals in the last 6 months
Company Investor InvestmentUSD mill
ApproxValuation
Progeon Citigroup 20 100
Glenmark
Pharma
CDC Capital 10.3 74
TV Today ICICI Ventures, GE
Capital
1.5 25
Patni Computers General Atlantic
Partners, GE Capital
108 530
Strand Genomics Westbridge Capital
Partners
4.6 9.5
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