Is your business funding ready

Is Your Business Funding Ready
Toozio Insight - Expert Talk
Hyatt, Bangalore
19th February 2014
Anjana Vivek
anjana@venturebean.com

Agenda
At the start
Kinds of Investors
Investee Perspectives
Investor Perspectives
Value Creation and Valuation
Practical Points to factor in
In Summary
VentureBean Consulting Private Limited

2

2

The Starting Points
YOU
Your Business Today
&
Where you Want to go

3

Why do you want funding

WHY ??

4

These companies want equity funding

WHY?
• One is not eligible for debt funding and thinks that
equity is the only option for growth
• One wants it for R&D and capital investment and
has calculated that the existing money in the bank
will be exhausted in 3 months
• One has a severe cash crunch and working capital
management issues and hence believes that
taking money from a VC would solve this problem
• One wants to expand from 3 retail outlets in
Bangalore to multiple outlets across South India
• One wants to buy a US Company
• If you are seeking funding; please list 2-3 key
reasons for this

5

Funding Options Available
• Debt: Collateral based, Cash flow from business
should comfortably cover repayment of interest
and principal
• There are multiple alternate equity investment
options: VC/ PE/ Incubation/Acceleration, which
are detailed in the next few slides
• This session is focused on equity funding along
with emerging funding options; with some
contrasts between debt and VC/PE and
emerging funding options being highlighted

6

Agenda
At the start
Kinds of Investors
In Summary

7

7

Investors: Equity (Linked)
•
•
•
•
•
•
•
•
•
•

Venture Capital
Private Equity
Strategic Investors
Corporate Funds
Impact Investors
Social Ventures
Angel Funds
Seed Funds
3 Fs
HNIs

• Incubators
• Accelerators
• .. And ??

8

Contributors
•
•
•
•
•
•

Corporates
Banks and FIs
FIIs
Family Business Groups
HNIs
Combination / others

• Crowd sourcing platforms ?


9

Investor Investment Horizon
• This varies across investor category
• Debt : The key focus is performance over the
period of the loan
• VC/PE/Other Structured Funds including but not
limited to Impact Funds etc.: depends on the
Fund Life

• HNIs/Angel/Seed etc.: May or may not have a
defined horizon

10

Agenda
At the start
Kinds of Investors
In Summary

11

11

If you are looking for funding
• What is your funding strategy?
• Debt, equity or mix?
• Are you in a position to repay debt with
interest? Do you have collateral?
• Will you be able to generate returns expected
by an equity investor? How?


12

Back to the Basics & Your Drawing Board
In 5 years:
• Top Level: How do you picture your business …
– Quantitative: In terms of turnover, profits, numbers, data etc.
??
– Qualitative: As best in country, innovative, great employer
??

• In more detail: What do you believe could be
achieved, for eg. in terms of …
–
–
–
–
–
–

Financials: Revenue, Profits, Cash Flow,
Value
Number of Employees, Number of Offices etc.
Lines of business/products/service
Kinds of customers / categories
etc..


13

In 5 years:
• Top Level: How do you picture your business …
• In more detail: What do you believe could be
achieved, for eg. in terms of …
• To Trigger Thinking
* Please attempt to answer the above questions. It is OK
if you have no answers or are unclear about the way in
which you need to proceed, this is a starting point, not a
decision point
* Home work for you post the session

14

• What are you willing to let go to reach your goals
–
–
–
–

Equity share i.e. ownership dilution
Revenue share
Profit share
Decision making, i.e. permitting others to take
decisions as the leadership team grows to beyond
initial founders/family members
– What else


15

What do you have to give up
• If you are willing to let go of ownership, i.e if you are
willing to allow investors to fund your business growth,
what percentage of ownership are you willing to let go?
• Does the possible valuation of your business match this
percentage that you are willing to let go?
• To Trigger Thinking:
– * Please attempt to think about what you are willing to let go;
your thoughts on the above this will determine the way you
Negotiate and impact Deal Terms
– Some of these may well become Deal Issues or Post Deal
Issues, so do think through with care


16

From your perspective as a business
• Which category of investor(s) will be the
right/best/optimum fit for you?
• Which specific investor in that category will be
the right/best/optimum fit for you?
• Investigate, check the investors out and then
approach them in a planned manner


17

Funding and More …
What would you like from these investors

• Funding at a Valuation that You think is appropriate
• Networks and connections .. To potential customers,
suppliers, advisors, employers, next level of
investors .. and more..
• Brand Value Addition – market perception of your
company goes up when a marquee investor funds
the growth
• And … ??

18

Agenda
At the start
Kinds of Investors
In Summary

19

19

A Moment Please: Before Fund Raising
Think of the Investor as a Customer

• What does this Customer want from you?
• Why does this Customer choose you instead of
going to competition?


20

• Why will an investor in equity – PE/VC/Angel be
interested in your company?
• How will you stand out from the clutter
– The number of companies that get funded are a small
percentage..
– In India, less than 1% of the companies that seek
PE/VC/Angel funding get this
– Some even say 1 in 500 companies that seek VC funding
get it

• How can you work out a deal that is meaningful to
both You and the Potential Investor

21

What an Equity Investor Looks For
• An increase in the value of the investment over a period of
time, for example
– 3 times in 3 years
– 5 times in 5 years
– For an illustration of exits, valuation and returns across
categories of investors please check
http://www.slideshare.net/anjanavivek/valuation-and-funding-casestudy

• Just because a business is profitable, does not mean it is of
interest to a VC
• In fact many PE investors put Crores of Rupees in loss
making companies
• Can you think of any examples of well known, VC
funded, loss making companies in India?

22

An Investor Perspective
• What will an investor look for in your company
– ?? Revenue
– ?? Profit
– ?? Value

• It depends on
– The stage of your business: idea/growth/turnaround..
– The industry, the team, the business environment
– The investor category and the mandate/needs of the
fund (as applicable)
– Your growth plans and action plans
– The investor perception and reading of you and
your ability to grow and scale and Execute

23

Agenda
At the start
Kinds of Investors
In Summary

24

24

Value Indicators
• How will you demonstrate that your business has the
potential to grow and create value, so that an investor
can get the required financial returns?

• Some possible indicators
– Key team, Board of Directors, Advisory Board
– Customer quantity and quality (Marquee customers, repeat
business etc.)
– Industry, Lines of business, sales verticals
– Intellectual property
– Brand perception
– Competitive advantage

• To Trigger Thinking
* Please attempt to think of the possible value indicators in your
company

25

Eg. Value Creation: Revenue/Customers
• Review revenue categories/streams month on month for
this financial year. Which streams of revenue give you
less than 1-2% of your revenue, less than 5% .. Do you
want to continue to these lines, if yes, why? For strategic
reason, to penetrate a market .. ??
• What are direct costs for each revenue stream, what are
the indirect costs, how are you allocating indirect costs?
• Compare the % of sales from different categories,
customer lines, and the associated costs
• Cash flow is also to be considered, as a profitable
revenue stream may not give immediate cash flow. Cash
flow and profits are to be factored in


26

Value Creation
• Where are you getting more revenue; which streams of
income are more profitable
• All customers may not be giving revenue: Illustrative
Example: An online social media platform has one set of
non-paying customers, who need to be serviced well in
order that paying customers also visit the platform
• This exercise, done with due care, will help understand
which category of customers are creating more value for
you now, and where you may like to go in future
• Similarly look at other areas of your business and
business model. Where do you see value being created,
how?


27

Valuation
• Based on
–
–
–
–

Tangibles and intangibles
Data and assumptions
Subjectivity and objectivity
Future growth perceptions

• Many methods of computation including but not
limited to
– multiples of revenue; profit, EBIDTA etc.
– multiples of key drivers, eg.user base, capacity
– cash flow based, discounted

• Factor statutory, accounting, and tax implications

28

Valuation
Driven by
• Markets including flavor of season, competitive scenario, team
at helm etc. ,
• Deal issues: deal breaker and deal maker issues

• Due diligence findings, both the number of issues flagged off as
well as the seriousness and materiality of these issues
• Percentage of stake offered
• The ability and skills brought to the negotiation table as also the
bargaining power of the persons on the two sides of this table

29

Valuation
• Therefore, there can be divergent views on
valuation, with the same business showing varying
values when
– Different methods of valuation are employed
– Variations of the methods are used
– Different inputs are used in the methods, i.e when
assumptions made differ
– Growth is perceived differently based on who is viewing this

• Sometimes it is assumed that this is a mathematical
and number driven exercise and hence is scientific;
yes there is a logic to valuation, it can be a rigorous
mathematical exercise; however the underlying
assumptions and the rationale for doing a deal
dominate over the mathematics. Hence Valuation is
Both a Science and an Art

30

Valuation
• Deals can sometimes be structured to
accommodate valuation perceptions; by linking
to future performance etc. But this is not
preferred by all
• For more on valuation: detailed notes are at
http://www.slideshare.net/anjanavivek/valuationbasics (from the popular set of the TOP 4%
viewed on SlideShare in 2013)


31

Agenda
At the start
Kinds of Investors
In Summary

32

32

Practical Perspectives
• Funding takes time, it may take anywhere
between 6-12 months (sometimes even more) to
get money into your company, from the time you
start the process
• Funding takes Energy and the Bandwidth of the
Key Team.. Be prepared that to invest time in
this in addition to running your business
operations
• After all this, there is no guarantee that you can
raise Private Equity or VC money

33

Practical Perspectives
• Funding takes money away, you need to pay for
Due Diligence, Legal and related fees
• Some of these are sunk fees, i.e. if the deal
does not materialize and you do not get money
from an investor, you would have still incurred
these costs
• Factor in the legal and tax matters when fund
raising, in addition to valuation and pricing


34

• Is this the right time to get investment into the
business or should you wait for some time… for
example, if you get better customer traction, you
can get improved valuation
• Have you looked at business models which can
help you better manage cash flow, for example
your cost structures may be modified to improve
cash flow and improve the working capital
situation, you may then a) be able to manage
with less money from outside, or b) even
manage for some more time without funding

35

Plan B
• What are the alternate plans if you do not get
funding
• Relook at the business model, financial plan and
funding strategy
• Perhaps you can grow the business to the next
stage and create value for yourself in the process ..
.. and then approach an investor
• Perhaps you can approach another investor or
category of investor .. This has to be done with
thought and care
• You may like to relook at your funding plan and
strategy

36

Agenda
At the start
Kinds of Investors
In Summary

37

37

In Summary
• Articulate your Vision and Growth Plan, What
do You want
• Think through your Funding Strategy
• Select a Potential Investor with Due Care
• Plan for Fund Raising Time Lines, factor in
regulatory aspects
• Have an optimistic and a back up plan
• It is Not All About Funding.. all companies that
get funded do not succeed.. all companies
that do not get funded do not fail; Do not get
disheartened if Fund Raising looks difficult
GOOD LUCK in your Business…

38

In Summary
• Thank you for the patient hearing
• Delighted to invite you to view/follow the link below
for periodic insights, class notes & more, from
thought leaders, academicians and others at the
VentureBean Consulting Knowledge Hub:
http://www.linkedin.com/company/venturebeanconsulting-private-limited
www.slideshare.net/anjanavivek
• Contact for more information and inputs:
beanie@venturebean.com

39

Thank You!


40

Is your business funding ready

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