Is your business funding ready

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

2. 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

3. The Starting Points YOU Your Business Today & Where you Want to go 3 VentureBean Consulting Private Limited

4. Why do you want funding WHY ?? 4 VentureBean Consulting Private Limited

5. 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 VentureBean Consulting Private Limited 5

6. 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 VentureBean Consulting Private Limited 6

8. 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 ?? VentureBean Consulting Private Limited 8

9. Contributors • • • • • • Corporates Banks and FIs FIIs Family Business Groups HNIs Combination / others • Crowd sourcing platforms ? VentureBean Consulting Private Limited 9

10. 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 VentureBean Consulting Private Limited 10

12. 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? VentureBean Consulting Private Limited 12

13. 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.. VentureBean Consulting Private Limited 13

14. Back to the Basics & Your Drawing Board 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 VentureBean Consulting Private Limited 14

15. Back to the Basics & Your Drawing Board • 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 VentureBean Consulting Private Limited 15

16. 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 * Home work for you post the session VentureBean Consulting Private Limited 16

17. 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 VentureBean Consulting Private Limited 17

18. 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 … ?? VentureBean Consulting Private Limited 18

20. 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? VentureBean Consulting Private Limited 20

21. A Moment Please: Before Fund Raising • 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 VentureBean Consulting Private Limited 21

22. 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? VentureBean Consulting Private Limited 22

23. 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 VentureBean Consulting Private Limited 23

25. 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 * Home work for you post the session VentureBean Consulting Private Limited 25

26. 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 VentureBean Consulting Private Limited 26

27. 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? VentureBean Consulting Private Limited 27

28. 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 VentureBean Consulting Private Limited 28

29. 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 VentureBean Consulting Private Limited 29

30. 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 VentureBean Consulting Private Limited 30

31. 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) VentureBean Consulting Private Limited 31

33. 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 VentureBean Consulting Private Limited 33

34. 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 VentureBean Consulting Private Limited 34

35. A Moment Please: Before Fund Raising • 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 VentureBean Consulting Private Limited 35

36. 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 VentureBean Consulting Private Limited 36

38. 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… VentureBean Consulting Private Limited 38

39. 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 VentureBean Consulting Private Limited 39

40. Thank You! VentureBean Consulting Private Limited 40

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