various sources of financing ent venture

8/8/2019 Various Sources of Financing Ent Venture

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Various sources ofVarious sources of

financingfinancingentrepreneurshipentrepreneurship

ventureventure

Angel investors, venture capitalists, bank loans,Angel investors, venture capitalists, bank loans,Private & public equity, self financing, researchPrivate & public equity, self financing, researchinstitutesinstitutes


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How to Approach InvestorsHow to Approach Investors

Research potential investorsResearch potential investors

Only approach appropriate investorsOnly approach appropriate investors

Prepare a very good Business PlanPrepare a very good Business Plan

Prepare and rehearse a very good presentation (no setPrepare and rehearse a very good presentation (no setstandard: 30 seconds / 40standard: 30 seconds / 40--45 mins)45 mins)

Be clear about what you need (how much, when, whatBe clear about what you need (how much, when, whatfor) and have some idea about what youre prepared tofor) and have some idea about what youre prepared to

offer (% of equity)offer (% of equity) Progress your venture as much as you can on yourProgress your venture as much as you can on your

own before approaching investorsown before approaching investors


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How to Approach InvestorsHow to Approach Investors

Ask potential investors about their investmentAsk potential investors about their investment

style and expectationsstyle and expectations

Spend time with investors other investeeSpend time with investors other investeepartners / companiespartners / companies

Negotiate hardNegotiate hard

Ensure your interests are aligned with those ofEnsure your interests are aligned with those of

your investor. Agree a written business planyour investor. Agree a written business plan

Hire professional helpHire professional help


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Typical New VentureTypical New Venture

Funding SourcesFunding Sources Angel InvestorsAngel Investors

Venture CapitalistsVenture Capitalists

Research InstitutionsResearch Institutions

SelfSelf--financedfinanced

Private EquityPrivate Equity

Public EquityPublic Equity

BanksBanks


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Angel investorsAngel investors

AnAn angel investorangel investorororangelangel (also known as a(also known as a

business angelbusiness angel ororinformal investorinformal investor) is an) is an

affluent individual who provides capital for aaffluent individual who provides capital for abusiness startbusiness start--up, usually in exchange forup, usually in exchange for

convertible debt or ownership equity.convertible debt or ownership equity.

A small but increasing number of angelA small but increasing number of angel

investors organize themselves intoinvestors organize themselves into angelangelgroupsgroups ororangel networksangel networks to share researchto share research

and pool their investment capital.and pool their investment capital.


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Angel investorsAngel investors

Angels typically invest their own funds,Angels typically invest their own funds,unlike venture capitalists, who manageunlike venture capitalists, who manage

the pooled money of others in athe pooled money of others in aprofessionallyprofessionally--managed fund.managed fund.

Although typically reflecting theAlthough typically reflecting theinvestment judgment of an individual, theinvestment judgment of an individual, the

actual entity that provides the fundingactual entity that provides the fundingmay be a trust, business, limited liabilitymay be a trust, business, limited liabilitycompany, investment fund, etc.company, investment fund, etc.


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Angel investorsAngel investors (who are

they?) Private High Net Worth IndividualsPrivate High Net Worth Individuals

Corporate ExecutivesCorporate Executives

EntrepreneursEntrepreneurs

Investments are comparatively lowInvestments are comparatively low

Frequently work in informal GroupsFrequently work in informal Groups

No formal organizationNo formal organization not in the yellownot in the yellowpagespages

Usually invest within their area of expertiseUsually invest within their area of expertise


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Angels Provide

Source of FundingSource of Funding Early Stage StartupEarly Stage Startup/ Seed/ Seed

ExpertiseExpertise Funding ContactsFunding Contacts

Industry ExpertiseIndustry Expertise

Technical / General Business ExperienceTechnical / General Business Experience

Board MembersBoard Members

AdviceAdvice


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Angels Want

Strong Management MultiStrong Management Multi--Skilled ExperiencedSkilled ExperiencedTeam

Hi Performance Growth CompaniesHi Performance Growth Companies

A niche, patent, uniquenessA niche, patent, uniqueness

An ExitAn Exit Return On / Of InvestmentReturn On / Of Investment IPOIPO

Strategic BuyerStrategic Buyer

Dont want the living deadDont want the living dead No ProblemsNo Problems

Open CommunicationOpen Communication Exceed BudgetsExceed Budgets


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Venture capitalistsVenture capitalists

Venture capital is a means of equity financingVenture capital is a means of equity financing

for rapidlyfor rapidly--growing private companies. Financegrowing private companies. Finance

may be required for the startmay be required for the start--up,up,development/expansion or purchase of adevelopment/expansion or purchase of a

company. Venture Capital firms invest funds oncompany. Venture Capital firms invest funds on

a professional basis, often focusing on aa professional basis, often focusing on a

limited sector of specialization (eg. IT,limited sector of specialization (eg. IT,infrastructure, health/life sciences, cleaninfrastructure, health/life sciences, clean

technology, etc.).technology, etc.).


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The goal of venture capital is to buildThe goal of venture capital is to build

companies so that the shares becomecompanies so that the shares become

liquid (through IPO or acquisition) andliquid (through IPO or acquisition) andprovide a rate of return to the investorsprovide a rate of return to the investors

(in the form of cash or shares) that is(in the form of cash or shares) that is

consistent with the level of risk taken.consistent with the level of risk taken.


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With venture capital financing, the venture capitalistWith venture capital financing, the venture capitalistacquires an agreed proportion of the equity of theacquires an agreed proportion of the equity of thecompany in return for the funding. Equity finance offerscompany in return for the funding. Equity finance offers

the significant advantage of having no interest charges.the significant advantage of having no interest charges.It is "patient" capital that seeks a return through longIt is "patient" capital that seeks a return through long--term capital gain rather than immediate and regularterm capital gain rather than immediate and regularinterest payments, as in the case of debt financing.interest payments, as in the case of debt financing.Given the nature of equity financing, venture capitalGiven the nature of equity financing, venture capitalinvestors are therefore exposed to the risk of theinvestors are therefore exposed to the risk of the

company failing. As a result the venture capitalist mustcompany failing. As a result the venture capitalist mustlook to invest in companies which have the ability tolook to invest in companies which have the ability togrow very successfully and provide higher thangrow very successfully and provide higher thanaverage returns to compensate for the risk.average returns to compensate for the risk.


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When venture capitalists invest in a businessWhen venture capitalists invest in a business

they typically require a seat on the company'sthey typically require a seat on the company's

board of directors. They tend to take a minorityboard of directors. They tend to take a minorityshare in the company and usually do not takeshare in the company and usually do not take

dayday--toto--day control. Rather, professionalday control. Rather, professional

venture capitalists act as mentors and aim toventure capitalists act as mentors and aim to

provide support and advice on a range ofprovide support and advice on a range ofmanagement, sales and technical issues tomanagement, sales and technical issues to

assist the company to develop its full potential.assist the company to develop its full potential.


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Venture capital has aVenture capital has a

number of advantages overnumber of advantages over

other forms of finance:other forms of finance: It injects long term equity finance whichIt injects long term equity finance which

provides a solid capital base for future growth.provides a solid capital base for future growth.

The venture capitalist is a business partner,The venture capitalist is a business partner,sharing both the risks and rewards. Venturesharing both the risks and rewards. Venturecapitalists are rewarded by business successcapitalists are rewarded by business successand the capital gain.and the capital gain.

The venture capitalist is able to provideThe venture capitalist is able to providepractical advice and assistance to the companypractical advice and assistance to the companybased on past experience with otherbased on past experience with othercompanies which were in similar situations.companies which were in similar situations.


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VC advantagesVC advantages

The venture capitalist also has a network ofThe venture capitalist also has a network ofcontacts in many areas that can add value tocontacts in many areas that can add value tothe company, such as in recruiting keythe company, such as in recruiting key

personnel, providing contacts in internationalpersonnel, providing contacts in internationalmarkets, introductions to strategic partners,markets, introductions to strategic partners,and if needed coand if needed co--investments with otherinvestments with otherventure capital firms when additional rounds ofventure capital firms when additional rounds offinancing are required.financing are required.

The venture capitalist may be capable ofThe venture capitalist may be capable ofproviding additional rounds of funding should itproviding additional rounds of funding should itbe required to finance growth.be required to finance growth.


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How does the VC industryHow does the VC industry

workwork Venture capital firms typically source the majority ofVenture capital firms typically source the majority of

their funding from large investment institutions such astheir funding from large investment institutions such asfinancial institutions, endowments, pension funds andfinancial institutions, endowments, pension funds andbanks. These institutions typically invest in a venturebanks. These institutions typically invest in a venturecapital fund for a period of up to ten years.capital fund for a period of up to ten years.

To compensate for the long term commitment and lackTo compensate for the long term commitment and lackof both security and liquidity, venture capitalists investof both security and liquidity, venture capitalists investin either companies with high growth potential wherein either companies with high growth potential wherethey are able to exit through either an IPO or athey are able to exit through either an IPO or amerger/acquisition.merger/acquisition.

Although the venture capitalist may receive someAlthough the venture capitalist may receive somereturn through dividends, their primary return onreturn through dividends, their primary return oninvestment comes from capital gains when theyinvestment comes from capital gains when theyeventually sell their shares in the company, typicallyeventually sell their shares in the company, typicallybetween three to five years after the investment.between three to five years after the investment.


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What do VCs require?What do VCs require?

Superior BusinessesSuperior Businesses

Quality and Depth of ManagementQuality and Depth of Management

Appropriate Investment StructureAppropriate Investment Structure

Exit OpportunityExit Opportunity

www.indiavca.orgwww.indiavca.org


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Who are they?Who are they?

UniversitiesUniversities

Private laboratoriesPrivate laboratories

Government agenciesGovernment agencies

What drives their investment decision?What drives their investment decision?

The desire to enhance the body ofThe desire to enhance the body ofknowledge in a specific area of interestknowledge in a specific area of interest

through researchthrough research


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What do they expect to get?What do they expect to get? The intellectual property that results from theThe intellectual property that results from the

researchresearch PatentsPatents

Rights in property or process, even if not patentedRights in property or process, even if not patented

Where does their money come from?Where does their money come from? Endowments (sometimes with spending conditions)Endowments (sometimes with spending conditions)

GrantsGrants General funding from governmentGeneral funding from government

Student tuitionStudent tuition


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From where?From where?

FamilyFamily

FriendsFriends The entrepreneurThe entrepreneur


Based on a belief in, or relationship with, theBased on a belief in, or relationship with, theentrepreneurentrepreneur

Based on a belief that the idea is at leastBased on a belief that the idea is at leastfeasiblefeasible


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What do they expect to get?What do they expect to get?

Their original investment returnedTheir original investment returned

Maybe interestMaybe interest

Less often equityLess often equity

Where does their money come from?Where does their money come from?

Usually funded from personal savings orUsually funded from personal savings ornew borrowings (mortgage on real estate)new borrowings (mortgage on real estate)


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Private Equity InvestorsPrivate Equity Investors


Professionally managed investment vehiclesProfessionally managed investment vehicles

Can be in the form of a limited partnership,Can be in the form of a limited partnership,also mutual fundsalso mutual funds


Track record of the businessTrack record of the businessA belief that market conditions allow forA belief that market conditions allow for

expansion of the businessexpansion of the business


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Private Equity InvestorsPrivate Equity Investors


EquityEquity

Significant return on investment (up to 30% CAR)Significant return on investment (up to 30% CAR)

May or may not seek a preMay or may not seek a pre--defined exitdefined exit


Pension fundsPension funds

Insurance companiesInsurance companies

Mutual fundsMutual funds

University endowment fundsUniversity endowment funds


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Public Equity InvestorsPublic Equity Investors

Who are they?Who are they? Retail investorsRetail investors

IndividualsIndividuals

Institutional investorsInstitutional investors Pension funds, mutual funds, corporationsPension funds, mutual funds, corporations

What drives their investment decision?What drives their investment decision? Retail investorsRetail investors

Emotion, hot tips, their own analysisEmotion, hot tips, their own analysis

Institutional investorsInstitutional investors Investment policy (hurdle rates, sector & countryInvestment policy (hurdle rates, sector & country

allocations, etc.)allocations, etc.)


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Public Equity InvestorsPublic Equity Investors


SharesShares

Usually no role in management of the businessUsually no role in management of the business Return on investment (??% CAR)Return on investment (??% CAR)


Retail investorsRetail investors

Personal savings or borrowings (mortgage on real estate,Personal savings or borrowings (mortgage on real estate,or margin on brokerage account)or margin on brokerage account)

Institutional investorsInstitutional investors

Pension contributions, insurance premiums, etc.Pension contributions, insurance premiums, etc.


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BanksBanks


Lending institutionsLending institutions


The creditworthiness of the borrowerThe creditworthiness of the borrower

Ability of the business to service the loan (makeAbility of the business to service the loan (make

payments of interest & principal)payments of interest & principal) Collateral (can be supplied by a third party)Collateral (can be supplied by a third party)


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BanksBanks


Their original loan returnedTheir original loan returned

InterestInterest


DepositorsDepositors


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Funds often are applied toFunds often are applied to

different purposesdifferent purposesSourceSource PurposePurposeResearch InstitutionsResearch Institutions Basic research, inventionsBasic research, inventions

SelfSelf--FinancedFinanced Initial startInitial start--up fundsup funds

Angel InvestorsAngel Investors Initial startInitial start--up fundsup funds

Venture CapitalistsVenture Capitalists Just after startJust after start--upup

Private EquityPrivate Equity LongerLonger--term growth of an establishedterm growth of an established

companycompany

Public EquityPublic Equity Capital investment requirements of anCapital investment requirements of anestablished company, exit for VCsestablished company, exit for VCs

BanksBanks Financing for most operating needsFinancing for most operating needs

various sources of financing ent venture

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