2. Objectives
• To list the various sources of debt finance
• To understand the process of securing debt finance
• To discuss the importance of collateral security
• To tabulate the lending strategies of banks
• To discuss the characteristics of venture capital
• To understand the structure of venture funds
• To list the various roles within a venture fund
• To understand how venture capitalists get compensated for their
efforts
• To describe a step by step screening process followed by venture
funds while making an investment
• To list the elements of a termsheet
• To understand the current scenario of VC funding in India
3. Disadvantages of Equity Finance
• Dilution of shareholding
• Increased 3rd party governance
• Increased external controls
• Increased commitment to stated strategy
5. Securing Debt
• Drawing up the business plan.
• Identifying sources of debt finance.
• Presenting the proposal to the bank.
• If the manager is considering your
proposal favourably, you will have to go
for further talks
• Once the two parties have broadly
agreed, details have to be worked out.
6. Principles of Good Lending
• Purpose
• Safety
• Profitability
• Other considerations
7. Security
• Collateral
– Inside
– Outside
• Personal guarantee
• Maturity
• Covenants
• Menu pricing
8. Lending Strategies
• Financial statements
• Relationship lending
– Length of relationship
– Breadth of relationship
– Degree of trust
• Credit scoring
9. Venture Capital
Venture capital is characterized by:
• Financing of new and potentially high growth companies
• Investments primarily in the form of equity participation
• Assistance in the early days of the enterprise
• Adding value to the company through active
participation, even joining the management on occasions
• Willingness to take on higher risk
• Expectation of higher rewards
• A long-term outlook regarding the investment
10. Roles in a Venture Fund
• General partner
• Investor
• Venture partner
• Entrepreneur-in-residence
• Others
11. Screening by VCs
• Get rid of scamsters
• Major broad concerns
• Growth and industry considerations
• Monetising value
12. Important Considerations
• The entrepreneurial team
– Personal or individual characteristics
– Experience of the individual
• Ease of exit
– Via IPO
– Sale to PE, etc
13. The Termsheet
• Amount and terms of investment
• Dividend policy
• Composition of the board of directors
• Reporting
• Liquidity (exit) plans
• Rights of sale
• Warranties
• Matters requiring venture capitalist approval
14. Problems Facing VCs in India
• Large established firms with strong growth figures look
like a very attractive proposition.
• Investments in public listed firms are giving returns in
excess of 30%, at far lesser perceived risk
• Small firms in India are informationally opaque.
• Indian entrepreneurs are perceived as lacking in
marketing and management skills.
• Indian entrepreneurs are more reluctant to give up
controls than their western counterparts.
• VCs face an exit challenge as the capital markets in
India are still shallow
• Brand ‘India’ is strong only in some manpower driven
services sectors like IT and ITES.
15. Sectors Favoured by VCs
• IT and IT-enabled services
• Software Products
• Wireless and telecom
• Banking and financial services
• Divestments in public sector units
• Media and entertainment
• Biotechnology
• Pharma and diagnostics
• High technology Manufacturing
• Retail
