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ENTREPRENEURIAL FINANCE:

ENTREPRENEURIAL FINANCE Rajeev Roy

Venture capital:

Entrepreneurial Finance by Rajeev Roy Venture capital Long term equity finance Investing as opposed to banks who lend Looking for high gains Accepting high risks Can be involved in management of the invested firm Venture capital investment is illiquid

Structure of VCs :

Entrepreneurial Finance by Rajeev Roy Structure of VCs Mostly funds Charge about 2% + success fee Also companies Limited partnerships expected soon Prevalence of banks Revenue implications

VC : Advantages :

Entrepreneurial Finance by Rajeev Roy VC : Advantages No fixed expense of debt servicing Financial flexibility Sharing of risk Value added investing Attracting talent Networking with service providers/suppliers Accessing markets Enhanced credibility with lenders

VC : Disadvantages:

Entrepreneurial Finance by Rajeev Roy VC : Disadvantages Dilution of shareholding Increased 3 rd party governance Increased controls Increased commitment to stated strategy

Types of VC:

Entrepreneurial Finance by Rajeev Roy Types of VC Early stage financing Seed capital or pre-start up or R&D Start up financing Second round financing Later stage financing Expansion Replacement Turnaround

Valuation excersise:

Entrepreneurial Finance by Rajeev Roy Valuation excersise Get rid of scamsters Hygiene factors – beware of things that can shut down a business Growth & industry considerations Due diligence Physical evaluation Calling in the experts Monetise value

Agreement particulars:

Entrepreneurial Finance by Rajeev Roy Agreement particulars Amount and terms of investment. Dividend policy. Composition of the board of directors. Reporting - management reports, monthly accounts, annual budgets. Liquidity (exit) plans. Rights of sale Warranties. Matters requiring venture capitalist approval

Problems:

Entrepreneurial Finance by Rajeev Roy Problems Locating players Concerns regarding exchange of info Larger companies look equally attractive with lesser risk Even listed securities are giving great returns

India centric problems:

Entrepreneurial Finance by Rajeev Roy India centric problems Indian VC not yet a popular asset class among institutional investors Exit challenges Shallow markets Little M & A activity Brand India, not strong beyond services

The road ahead:

Entrepreneurial Finance by Rajeev Roy The road ahead Placement agents (Venture Partners) Trade meets Syndication Getting a larger team / new perspective Spreading risk Eg July systems (wireless content) got $10m from 6 VCs

Some VCs in India:

Entrepreneurial Finance by Rajeev Roy Some VCs in India Jumpstartup – investing Draper Fisher – sector specific Charles River Ventures Sequoia Capital Westbridge – too big? ChrysCapital – certainly too big

Others:

Entrepreneurial Finance by Rajeev Roy Others Banks ICICI UTI SIDBI Canara bank Corporates Intel Motorola Nokia cisco

PowerPoint Presentation:

Entrepreneurial Finance by Rajeev Roy Average fund size $50 mil Total deals per annum – 100+ Mostly expansion – few seed or early stage

Lending strategy of banks:

Entrepreneurial Finance by Rajeev Roy Lending strategy of banks Business plan Financial statement Profile of promoter Asset base Gross Net Credit scoring

How Banks cover risks:

Entrepreneurial Finance by Rajeev Roy How Banks cover risks Collateral Internal incl. a/c receivable External Personal guarantees Debt covenants Short maturity debt

Managing banks:

Entrepreneurial Finance by Rajeev Roy Managing banks Complete paperwork in time Submit financial statements as scheduled Route all transactions through bank Ask for extras – free drafts, alerts, etc Exude confidence and well being Transmit good news Be proactive about inspections

SMERA:

Entrepreneurial Finance by Rajeev Roy SMERA Specifically for SMEs Joint initiative of: SIDBI D & B CIBIL Other banks Office currently only in Mumbai

Rating process:

Entrepreneurial Finance by Rajeev Roy Rating process SME contacts SMERA Questionnaire is filled Documents are submitted Site visit by SMERA representative Rating is announced 15 days after all documents are received

PowerPoint Presentation:

Entrepreneurial Finance by Rajeev Roy

Fee Structure:

Entrepreneurial Finance by Rajeev Roy Fee Structure Below 1Cr 7500 Upto 5 Cr 25000 Upto 20 Cr 37000 Above 20 Cr 50000

Cash is king:

Entrepreneurial Finance by Rajeev Roy Cash is king Can result form unplanned success Is usually due to lack of planning or tardiness in collections Dissatisfaction among suppliers Higher costs Lower quality Dissatisfied (worried) employees High bad debts – migration of customers

Collection strategies:

Entrepreneurial Finance by Rajeev Roy Collection strategies Investigate new customers Supply against written orders Sign on a legal contract Maintain close contact with customers Get and repeat positive feedback Send invoice ASAP Contact before sending invoice ( to check particulars)

Collection strategies:

Entrepreneurial Finance by Rajeev Roy Collection strategies Keep a close watch on customer’s fortunes Immediately contact on any delayed payment Be firm – its your own money Allow a customer to graduate in his credit ratings with you

Break-even analysis:

Entrepreneurial Finance by Rajeev Roy Break-even analysis Identify fixed and variable costs Explore possibilities of changing fixed into variable costs And vice-versa Can be expressed in terms of Capacity utilisation Sales revenue

Application of BEA:

Entrepreneurial Finance by Rajeev Roy Application of BEA Helps in taking investment decisions Profit optimisation planning Helps in pricing decision Can be modified to calculate profitability at various levels of capacity utilisation / sales

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