conventional vs modern instruments of business funding
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Conventional v/s Modern Instruments of Business Funding
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Business growth today is all about collaboration ……..
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Collaborate in Capital Markets to grow exponentially !
Private Equity / Venture Capital = Funding against equity
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Private Equity / Venture Capital = Funding against equity
‘Past performance’ v/s ‘Future promise’
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Debt v/s Equity
Future promise v/s Past performance - Equity v/s Debt
Equity – sharing financial interest in the
business
Debt – a loan from a bank / financing
institution / individual
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Equity – the most expensive form of funding?
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Building businesses in the modern Economy
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Business stages & sources of funding
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Business stages & sources of funding
Stage of
Business
Market Validation
Customer Acquisition
No / Low Revenues
Cash burn
Growth challenges
Capex
R&D on business idea
Bank Loans
Debt markets
IPO
Mezzanine Capital
Business stages & Sources of funding
Expansion StageSeed Stage Early Stage Growth Stage
Operational challenges
Expansion / Scale-up
Consolidation
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Time / Revenue
Family & Friends
Angels
Incubators
Debt markets
Private EquityVenture Capital
Angel Investors
• Typically HNIs / Entrepreneurs
• Invest in very early stage – R&D on business ideas, prototype
development, market research, pre-revenue
• “Angel Funds” – coming together of angel investors e.g Mumbai Angels.
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Band of Angels
• Typically look at :
• Domain knowledge
• Entrepreneurship qualities
Venture Financing
• Invest in start- up stage companies – to support a business plan, pre-
break-even stage
• Started as a concept at Silicon Valley
• Active VCs in India – IDG, Cannan Partners, Nexus Capital
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• Typically look at :
• Management team
• IPR / Business idea
• Scalable market for product / services
• Consumer traction / revenues
Private Equity
• Typically later-stage investments
• Internationally – majorly represented by Buyouts
• In India – typically growth stage investments and PIPEs ( Private
Investments in Public Equity )
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• Some active PE funds in India – ICICI Ventures, Warburg
Pincus, Barings, Carlyle, IDFC etc.
• Typically look at :
• Operating leverage – opportunity to further scale-up business
• Financial leverage – improving capital structure
“Venture Debt “ – an oxymoron?
• Typically coupon-bearing debentures / preference shares
convertible into equity, FCCBs
• Might be secured – similar to bank debt
• Advantage – limits dilution
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• Interest payments – periodic / bullet
• Some structures may cause cash flow issues if not converted
into equity as seen recently ( e.g Wockhardt)
IPOs
• Raising capital from public equity markets – broad-basing the
investor base
• SEBI (ICDR) Regulations specify eligibility criteria for IPOs ( such
as track record of dividends, tangible assets, net-worth) – non-
complying entities have to follow Book-Building route
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complying entities have to follow Book-Building route
• Specified allotment under Book-building IPOs:
– QIBs – 50%
– Non-institutional investors - 15%
– Retail investors – 35%
• Long –drawn & expensive process
• Listing involves significant regulatory compliance, pre & post
What to consider when selecting source of funding?
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What to consider when selecting source of funding?
Selecting the Source of Funding: Parameters
• Growth Prospects and Profit Margins of the Business
• Evaluation: How much money does my business plan require?
• Capital Structure of the Company
• Evaluation: Can I avoid Distress Costs, especially in bad economic
scenario?
• Cost of the Type of Finance being considered
• Evaluation: Today, is Debt significantly cheaper than Equity?
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• Evaluation: Today, is Debt significantly cheaper than Equity?
• Visualized Dilution of Stake
• Evaluation: How much Stake am I comfortable to part with?
• Need for the Deal/ Funding / Expertise
• Evaluation: How much will the Deal / Funding/ Expertise help me?
• Sometimes, Expertise can take you leaps ahead (Eg. Private Treaty)
• The Power of NOW
• Evaluation: What are the reasons that necessitate taking (a type of)
funding Today?
Co-creation of value
Handholding through value
unlocking – IPO / Strategic
M&A
Growth Stage
Late Stage Value
Unlocking
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MIS
Team
Relationships / Network
Strategic inputs
Corporate Governance
Contribution
of a PE / VC
partner
Early Stage
Value
Creation
The Financing Decision
• Pecking Order Theory
• Companies should choose to raise fund in the order:
• Trade-Off Theory
• There is an advantage to financing with debt (namely, the tax benefit of debts) and
that there is a cost of financing with debt (the bankruptcy costs of debt)
Internal Funds
Debt
Equity
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that there is a cost of financing with debt (the bankruptcy costs of debt)
• Market Timing Hypothesis
• First order determinant of a corporation's capital structure, that is, the fractions of
debt and equity in their liabilities, is the relative mis-pricing of these instruments at
the time the firm needs to finance investment
These form the theoretical basis.
In reality, the practice is mixed, but is impacted by arguments of the theories.
Why Dilute?
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Why Dilute?
Why dilute – the Golden Rules
Limitations on internal accruals / FFFsLimitations on internal accruals / FFFs
Debt funding expensive / not possible Debt funding expensive / not possible
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Debt funding expensive / not possible Debt funding expensive / not possible
Equity participation offers strategic value beyond cash Equity participation offers strategic value beyond cash
A perspective on M&A
• Organic v/s Inorganic growth
• Exit & Liquidity
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Building businesses in the modern Economy
223/16/2010
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“Funding Brand Building / Visibility”
233/16/2010
“Funding Brand Building / Visibility”
Over 5 years of existence
Over 250 investments
Largest PE fund in terms of deal numbers
243/16/2010
“Physical” business
v/s
“Mind” business
&
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&
“Value creation”
Times Private TreatiesA portfolio of over 250 investee companies
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Thank You
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Thank You
Rajesh Sharma
AVP – Times Private Treaties
Bennett Coleman & Co.Ltd.
E-mail : rajesh.sharma3@timesgroup.com
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