Transcript Raising venture Capital

Entrepreneurship
Venkatesh Sridhar
Who is the guy?
Why are you here?
What is Entrepreneurship
What is Entrepreneurship
What is Entrepreneurship
Entrepreneur
…to be an Entrepreneur
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India Shining
No Boundaries
Opportunities for ALL
Abundant Resources
Easier to Market
Self Actualization
Control your own destiny
Learn from Mistakes
Adrenaline Rush
The Sky is limit..less
…to NOT be an Entrepreneur
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Inconsistent income
Risk of Failure
Difficulty in attracting investment
Cult Leadership is DIFFICULT
Losing your identity
Guerilla Marketing, Accounting, etc
Financial Management
Lack of Benefits, Perks, etc
Negative Feedback
Dream…
My Childhood Dreams
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Play Cricket for India
Beat Prakash Padukone’s record
Own a Mac
First Car to be a BMW
Be the CEO of an IT company
Be richer than Bill Gates
Be India’s PM
Difficulty of success
Difficulty of success
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Business Plan
Sales
Poor Operational planning
Money
Poor Management
Lack of Exp. & Know.
Lack of Focus + Commitment
Poor Customer Service
Inadequate HR Management
Not taking professional advice - CAs,
Lawyers, etc
What is VC?
• private capital (equity)
• early-stage, high-potential, growth
companies
• generate a return through an eventual
realization event such as an IPO or trade
sale of the company.
Who is a VC?
• person or investment firm
• Former entrepreneur or Fin guy
• Types of VC:
• Angel
• VC
• PE Investor
• At early stage startup – Angel
• Later stages of growth – VC
• Last stage – PE Investor
How does the VC Industry work?
• Sources of Capital:
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Professional Venture Capital Firms raise money
from Insurance Companies, Educational
Endowments, Pension Funds and Wealthy
Individuals.
These organizations have an investment
portfolio which they allocate to various asset
classes such as stocks (equities), bonds, real
estate etc.
One of the assets classes is called “Alternative
Investments”- venture capital is such an
investment. Perhaps 5% to 10% of the
portfolio might be allocated to Alternative
Investments.
The portfolio owners seek to obtain high
returns from these more risky Alternative
Investments
VC Industry Overview
• Successful Entrepreneurs, HNIs
• Investment Firms
• Venture Capital Fund either industry/sector
specific
General
Partners
Limited
Partners
Venture
Capital
Fund
What do VC’s do?
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Source
Fund
Mentor
Manage
Why should I go to a VC?
• You want Rs. 10 Lakhs to start
business:
• Borrow from friends & family
• Borrow from banks
• Borrow from VCs
What do I need to do to attract a VC
Things you need to showcase
• First an understanding of whether a
particular VC invests in the sector
• A sound sensible b-plan with sensible
PRO projections
• Realistic valuations
• Right Attitude
• Respect for OPM
So, How does a business get
funded?
Idea…
Consult & Validate
Identify
Vision
Build a team
Money, Money, Money…
NO… But I might say yes
•10 Slides
•20 Minutes
•Yes, No, Maybe?
What does a VC look for?
Revenues + Awesome Team =
What Should I be careful about?
98% Rejection:
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Exaggeration
Poor articulation of revenue generation
Under estimation of resources
Over estimation of demand
Common Pitfalls
• Raise too much or too little capital
• Focus, Focus and FOCUS
• Not deciding on valuation pre-money
(value of organization before
investment)
• Not Identifying exit strategies for VC
• Not reading term sheets carefully
So, how do I go about it?
Depends on stage
Angel
• Early
Stage
• No
Customers
No
Revenue
VC
• Some
Customers
Some
Revenue
• Zero or No
Profits
PE
Stable with
profits
Structuring Angel Investment
• Decide on valuation pre-money – art not
science
• Carefully analyze amount to raise – less is
easier
• Identify milestones to achieve to create
shareholder value for next round
• Rule of thumb - $500k-$1M gets 1/3 of
company
• Usually in convertible preferred stock
Structuring (continued)
• Don’t overprice deal – it will come back
to haunt you
• Summarize terms in term sheet
• Use offering memo, term sheet and
business plan to sell the deal
• Many possible terms in deal – but
structure it to sell.
• Angels don’t make counter-offers
Most difficult part is finding enough
investors
• Can’t advertise
• Can’t send out mailing to large number of
strangers
• Can’t use Internet to advertise or solicit investors
• Usually can’t get a reputable securities dealer to
sell the deal
• Must rely on referrals to get to enough
prospective investors
• Rule of thumb – one in ten will invest
YOUR MISSION - Creative
leverage
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Customer prepayments
Supplier extended terms
Customer funded product development
Subcontract manufacturing
Avoid capital expenditures
Preserve cash for marketing
PERSISTENCE IS KEY!
• Persistence beyond belief
• Harder than selling insurance
• 9 no’s for every one yes
Assume you have raised
$1,000,000 and made progress
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May now qualify for Venture Capital
Assuming prototype and beta testing
Exciting, growth market
Early revenues
management team
Raising $1M to $5M from VC
firms
• Usually only source for this size
financing
• Too small for public offering
• Too large for individuals
The process of raising venture
capital
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Decide Company is candidate
Prepare even better business plan
Get introductions to VC firms
Get one VC firm to be lead
Process (continued)
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Due diligence by the lead VC firm
Proposed letter of intent
Many issues to negotiate
Usually takes a minimum of 90 days
What to Expect
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Convertible preferred stock
Convertible notes
Notes with stock purchase warrants
Board representation
What to Expect (continued)
• Veto power over major corporate
actions
• Shareholder agreement
• Limits on executive compensation
• stock options to key employees
• financial reporting
Raising Capital from Individuals
or VC Firms is Legally Intensive
• Securities laws - federal and state
• Structure can be complex
• Many issues - need experienced
counsel
• Expensive
Corporate Cleanup Is Usually
Required
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Stockholder disputes
Shareholder agreements
Contractual problems
Stock option problems
Shareholder loans
VC’s Bring More Than Money
to the Table
• Access to potential customers,
suppliers, financial institutions
• Instill discipline in the organization,
painful but good
• Good strategic sense
• Understanding of future financing
opportunities
How to Negotiate the VC
Financing
• Separate seminar
• Get experienced advice
• Most entrepreneurs only do this
once or twice
• Experienced lawyers do it weekly
Questions, Comments, Feedback