Best investment platform in india-Falcon Invoice Discounting
Attracting Private Equity
1. How to become attractive to a PE firm?
Presentation
13th March 2010
Neelesh, Hundekari
2. Agenda
Need for PE funding & the funding process
Different perspectives
Critical success factors
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 2
3. The business model of each new venture shows a
significant upfront need of capital
Cumulative Net
35
Cash Flow
25
Initial Cash Positive Cash Flow
Deposit of founders Net Cash Flow
15 Operative
Break-Even
5
-5
-15
Negative Cash Flow Total
-25
Financing Need
-35
-45
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
1. Year 2. Year 3. Year 4. Year
Example. Typical Cash Flow Curve of a Start-up
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 3
4. Over the time a start-up goes through several stages of
financing to satisfy its capital needs
The Stages of financing of start ups
Early Development/ Exit / IPO Expansion
financing Expansion financing and buyouts
Fuelling the
Bringing a Funding
expansion Creating
concept mature
of the liquidity
to reality growth
business
Seed Second stage Initial Public Investments in the
Offering business or new
Start-up Mezzanine/third businesses
stage Private sale of
interest
First stage Bridge solution/ Acquisitions
restructuring Sales/merger
providing cash, Buyouts
liquid stocks or
better liquidity Turn-around
potential
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 4
5. The new venture can tap into a range of different financing
options – however, venture capital is the most important one
Bringing a concept to reality Development financing Closing the gap
First Second Bridge
Mezzanine/
stage stage solution/
Seed Start up Third stage
(1st VC (2nd VC Restructur
(3rd VC round)
round) round) ing
Sales/
Friends & Family
Substance
Business Angels
Incubators
Venture Capitalist
Industry Partner
Banks (Debt Financing)
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 5
6. One can become attractive to a PE only if one understands
what is the VCs perspective and what can one do about it
Deep and detailed
understanding of the
application process
Efficient
Mutual
and
dependence successful
fundraising
Careful and thorough
preparation for the needs
and expectations of the VC
A start up should get to know VCs and the funding process well
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 6
7. The Venture Capital Process is a rigorous process
– often driven by the venture capitalist
The Venture Capital Process
Adapt Specify
Present Supply
Prepare BP and service Nego-
Start-up VC Round initiate
BP & infor-
require- tiation
Perspective Company mation
Contact ment
Executive Business Business Infor-
Summary Plan Model mation
NDA Term-Sheet Contract
Venture Conver- Nego- Manage-
Exit
sation, Due tiation ment of
Capitalist Screening Valuation divest-
Interview diligence con- invest-
ment
Perspective Visits tracting ment
Completion
Date
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 7
8. A VC‘s business is to wisely invest the investor‘s money
and to benefit from management fees and carried interest
The VC Motivation
Investors
Idenfity and invest
selectively in growth
companies in certain
Investments$$ $$ Profits industries which
promise a high multiple
Management Manage and control the
fee Harvesting the investments
portfolio companies in
$$ $$ • Stock market order to grow
Management- VC- • Industry Player investment
Company funds • Financial
$$ $$
Investor Receive management
fee to cover day-to-day
Carried Equity supply operational cost
Interest Harvest the investment
$$ $$ $$ by exiting either
through IPO or trade
Selection, sale
Consulting Portfolio Direct investment and
Companies capital gains back to
Controlling, investors
Realising
Keep part of the capital
gains (carried interest)
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 8
9. In the whole process, there are some inherent conflicts
between the entrepreneurs and the investor.
The Start-up Perspective The Venture Capitalist Perspective
Keep as many shares as Adequate share on stocks
possible
Certain influence on major
No second decision maker decision
Total freedom in terms of If feasible no further capital
future capital increases extensions
Highest possible evaluation of Conflict Realistic or fair evaluation of
the start-up the company value
As much time as possible for Concrete and strict timeline
return of investment for the payback
Realise a personnel business Generate return of
idea investment
The conflicts cannot be solved but only be weakened !
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 9
10. The start-up should follow a structured process to enhance
their chances of attracting investment
Start-up perspective
Specify
Prepare Adapt BP and Present Supply
service Negotiation
VC Round initiate Contact BP & Company information
requirement
Work out Talk to Develop a
Prepare the Contact
requirements existing detailed
material generation
and needs investors action plan
Avoid Has to define Ask existing Structure your Contacts to
unprofessional what kind of investors for venture capital Venture Capitalist
appearance and VC it requires. additional capital approach can be generated
interruptions Must evaluate first Dedicate a person in multiple ways.
The preparation of und explore Include existing to drive the VC Competition
the necessary potential investors in the process intensity with
materials is investors as capital raising Develop a other start-ups
essential well process structured Support for the
Executive Industry Leverage the old approach to first Steps
summary expertise investors contact the VCs Establish
Business Plan Reputation
network and Test the sales pitch personnel contact
and reputation and involve the
Presentation Speed of process
references Clarify any open whole team
Business model
Commitment
equity or share Define fall-back
Personnel agreements options if the VC
Financial prior to VC
Resumes... process does not
backbone… round work A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 10
11. Likewise the VC tries to pick the winners from the losers
who will maximise their returns
VC perspective
Manage-
Due Nego-
Screening Interview Valuation ment of Exit
diligence tiation
investment
Screening of Generates a Prior to An in-depth VC enters Main issues The
documents is first personal defining a due into detailed Active existence of
the 1st step in contact with term sheet a diligence is negotiations. participation possible exit
an evaluation the start-up company carried out Only 2% of in the options is a
team valuation is supervisory key decision
Only 25% of Assessment the board
the applicants Main issues prepared as applicants criteria
Market Constant
get through a basis for sign the deal
already
Get to know Management coaching
discussion before an
Main issues the people Team Main issues
Main issues Leverage of investment
Management Business Competition Interest rate VC‘s contact is made.
team– model Consistency in debt network
Product Possibility
background, Clarifying and Integrity
offering Number, type, Leverge of
experience, expectation of Biz Plan Trade Sale to
and mix of synergies
motivation… Implementati Industry
Figure out Risk and stock and between
on Investor
Business idea mismatches time span of debts portfolio
and investment Financial companies IPO
Market Clarifying
commitment Cash Legal of the same
attractiveness expectations Divestment
VC
for additional to other VC
General fit to
services…
VC-Company Management
Buy-out
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 11
12. Agenda
Need for PE funding & the funding process
Different perspectives
Critical success factors
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 12
13. There are several critical success factors which go into a
successful deal
Critical Success Factors Key questions for a VC
People Is the industry attractive?
Technology competences Does the target have a robust
presence in an attractive
Market opportunity industry?
Continuous and promising cash-flow Are the forecasts sensible?
Manageable need for capital Can the numbers be trusted?
Benchmarks Are there any legal skeletons?
Exit possibility Will we be able to influence
performance?
Location protection
Are there exit options to realize
the value?
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 13
14. Key questions for a VC(1/4)
Key questions for a VC Sub issues
Market size
Is the industry attractive?
Growth potential
Industry structure
Competitive Intensity
Cost structures and profit potential
Competitive landscape
Does the target have a robust
presence in an attractive Market share
industry?
Strategy and business model
Differentiating capabilities
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 14
15. Key questions for a VC(2/4)
Key questions for a VC Sub issues
Current financial performance relative to
Are the forecasts sensible?
benchmarks
Operating metrics relative to benchmarks
Robustness of the assumptions made in the
business plan
Accepted standards of propriety
Can the numbers be trusted?
No surprises
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 15
16. Key questions for a VC(3/4)
Key questions for a VC Sub issues
Have all legal procedures been followed (e.g.
Are there any legal skeletons?
Last capital increase)?
Are there any hidden legal obligations ?
Will we(VC) be able to influence Start-up’s openness to offer a board seat
performance?
Willingness to look at a VC for management
advice
Management expertise that the VC can bring
to bear
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 16
17. Key questions for a VC(4/4)
Key questions for a VC Sub issues(Options)
Trade Sale to Industry Investor
Are there exit options to realize
the value?
IPO (mainly at new market)
Divestment to other VC
(in subsequential VC round)
Management Buy-out
A.T. Kearney 78/03.2010/Franchise Private Equity Conclave 17