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FINANCING

THE NEW
VENTURE
By Team -7
Agenda

 An overview
 Debt or Equity Financing
 Internal or External Funds
 Funding from Banks and Financial institutions,
 Governmental and Developmental Sources,
 Private Placement,
 Types of Investors,
 Private Offerings,
 Bootstrap Financing,
 Venture Capital , Nature of Venture Capital, Approaching,
presenting and obtaining the funds,
 FDI

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An overview
Three Core principles of entrepreneurial finance

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Critical Financing Issues

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Financial strategy frame
work
Opportunity

Source and deal Business


Finance strategy Structure strategy
Degree of strategic freedom
Time to OOC Debt Marketing
Time to close Equity Operation
Future alternatives other Finance
Risk/reward Value creation
Personal concern

Financial
Requirements
Driven by:
Burn rate
Operation needs
Working capital
Asset requirement
And sales
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Debt Financing

 Interest –bearing instrument


 Indirectly related to sales & profits
 Some assets to be used as collateral
 Pay back the amount with interest
 Two types of debt financing
- Short term (less than 1 year)
- Used to provide WC to finance inventory , account
receivables, or operation of business
- Long term
- Purchase assets such as Machinery, land ,building etc. .

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Equity Financing

 No collateral required & offers ownership position to investor


 Investor Shares profit & loss on Pro rata basis
 Depending on availability of funds, the assets & interest rate- investor
will decide.
 Amount of equity depend on nature & size of venture
 Equity provides basis for Debt financing.

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Internal funds

 Most frequently employed funds


 Sources: profits, sale of assets, reduction in WC, receivables, selling
little used assets.
 Extended payment terms from suppliers.
 Collecting bills quickly
 Avoid this policy for mass merchandisers

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External funds

 External source are evaluated on 3 basis


- Length of time the funds are available
- The costs involved
- Amount of company control lost
 Sources :
- Self , family & friends, banks, small business
administrative loans, R&D limited partnership,
Govt grants etc. . . . . .

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PERSONAL FUNDS

 Not only these are the least expensive funds in terms of cost & control,
but they are absolutely essential in attracting outside funding.
 The outside providers of capital feel that the entrepreneur may not be
sufficiently committed to the venture, if he/she doesn’t have money
invested.
 The invested amount by the entrepreneur may be negligible but
valuable here to outside providers.
 It is the money which makes outside investors feel comfortable with here
commitment level.

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FUNDS FROM
FAMILY AND FRIENDS
 Family and friends are the next most common source of capital for a new
venture.
 This helps overcome one portion of uncertainty felt by impersonal
investors.
 There are both positive and negative aspects.
 Negative side: even though being a small amount if its in the form of
equity financing, then which may have a negative effect on employees
sales and profit.
 Positive side: Family and friends are not problem investors and in fact
more patient than other investors in desiring the a return their
investment.

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IN ORDER TO AVOID PROBLEMS BY
THE FAMILY AND FRIENDS’S
INVESTMENT
 If the family and friends are treated the same as any investor, potential
future conflicts can be avoided.
 Any loans should specify the rate of interest and proposed repayment
schedule of interest and principal.
 A formal agreement like rights and responsibilities of the investors and
what happens if the business fails, must all be agreed upon and written
down.
 Finally the entrepreneur should carefully consider the impact of the
investment on the family member or friend before it is accepted.

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INDIAN VENTURE CAPITAL
ASSOCIATION
 It is a member based national organization promotes the industry within
India and outside, encourages the investment in high growth companies.
IVCA members comprise venture capital firms, institutional investors,
banks, incubators, angel groups, corporate advisors, accountants,
lawyers, govt. bodies, academic institutions and other service providers
to the venture capital.
 Members represent most of the active venture capital and private equity
firms in India. These firms provide capital for seed ventures early stage
companies, etc.

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Type of Loan

Commercial Banks

Account Receivable Loans

 Inventory Loans

 Real Estate Loans

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Cont…

Straight Loans

 Long Term Loans

 Character Loans

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PRIVATE PLACEMENTS/PRIVATE
OFFERINGS
 It means rising of capital via private rather than public placement. since
the private placement is offered to a few, select individuals, the
placement does not have to be registered with the Securities and
Exchange Commission.
 In many cases detailed financial information is not disclosed and the
need for prospectus is waived.
 Investors involved in private placements are usually large banks, mutual
funds, insurance companies, and pension funds.

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Types of investors

An investor usually takes an equity position in the company, can influence


the nature of the business to some extent , and even may be involved to
some degree of the business operation.
 The investors may be classified into three types
1.The investors who want to be actively involved in the business
operations
2.Those who desire at least an advisory role in the direction and operation
of the venture and want to share its profits.
3.Others are more passive in nature , desiring no active involvement in the
venture at all.

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Regulation D

 Regulation D contains
1.Broad provisions designed to simplify the private offerings,
2.General definitions of what constitutes a private offering,
3.Specific operating rules –Rule504,Rule505,and Rule506..

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Research and development limited
partnerships

Money given to a firm for developing a technology that involves a tax


shelter.

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3 Important Components of any R & D Limited
Partnership

 The Contract
 The Sponsoring company
 The Limited Partnership

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Small business administration loans

 When the entrepreneur is unable to secure a regular


commercial bank loan, an alternative is a SBA Guaranty
Loan.

 In this loan, SBA guarantees 80% of the amount loaned to


the entrepreneur’s business will be repaid by the SBA if the
company cannot make payment.

 Both long and short term loans can be guaranteed by the


SBA.

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SMALL ADMINISTRATION LOANS IN
INDIA

 State Bank of India has been playing a vital role in the


development of small scale industries since 1956.

 The Bank has financed over 8 lakhs SSI units in the country. It has
55 specialised SSI branches, 99 branches in industrial estates and
more than 400 branches with SIB divisions.

 The Bank finances for Small Business activities which are of


special significance to a large number of people.

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Various schemes of SBI for small and medium enterprises
SMEs are as follows:

 Traders Easy Loan Scheme


 SSI Loans
 Business Current Accounts
 Open Term Loan
 Retail Trade
 Doctor Plus
 Dental Doctor Plus
 SBI Shoppe
 Cyber Plus
 SME Credit Plus

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 Small Business Credit Card
 SME Petro Credit
 Dal Mill Plus
 Paryatan Plus
 Transport Plus
 Transport Operations
 Auto Clean
 Eicher Motor Limited (EML)
 Auto Loan
 Charter for SSI
 Artisan Credit Card
 Rice Mills Plus
 School Plus
 Swarojgar Credit Card
 Flexi Loan

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BOOTSTRAP FINANCING

Definition: To finance your company's startup and growth with the assistance of
or input from others.
Bootstrapping is one of most effective and inexpensive ways to ensure a
business' positive cash flow. Bootstrapping means less money has to be
borrowed and interest costs are reduced.
This becomes important when capital from debt & equity financing is
more expensive.

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NECESSITY FOR BOOTSTRAPING

In addition to the monitory costs, outside capital has other costs as well
like.,
Outside capital usually takes between 3 & 6 months to raise outside
capital.
Outside capital often decreases a firm’s drive for sales & profits.
The availability of capital increases the impulse to spend.
Outside capital can decrease the company’s flexibility.
Outside capital may cause more disruption & problems in the venture
than was present without it.

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Venture Capital

Is a type of private equity capital typically provided for early-stage, high-
potential, growth companies in the interest of generating a return .

 A venture capitalist is a person or investment firm that makes venture


investments, and these venture capitalists are expected to bring managerial and
technical expertise as well as capital to their investments.

 A venture capital fund refers to a pooled investment vehicle that primarily


invests the financial capital of third-party investors in enterprises that are too
risky for the standard capital market or bank loans.
 George Doriot, is the "father of venture capitalism“.

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Structure of Venture Capital Firms

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Over view of VC

Before World War II, venture capital investments (originally known as "development
capital") were primarily the domain of wealthy individuals and families.
ARDC is credited with the first major venture capital success story when its 1957
investment of $70,000 in Digital Equipment Corporation (DEC) would be valued at over
$355 million after the company's initial public offering in 1968.
The public successes of the venture capital industry in the 1970s and early 1980s.

The growth of the industry was hampered by sharply declining returns and certain
venture firms began posting losses for the first time.

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Cont…

Professor Andrew Metrick refers to first 15 years of the modern venture capital
industry beginning in 1980 as the "pre-boom period" in anticipation of the
boom that would begin in 1995 and last through the bursting of the Internet
Bubble in 2000.
As a percentage of GDP, venture investment was 0.058% percent in 1994,
peaked at 1.087% (nearly 19x the 1994 level) in 2000 and ranged from 0.164%
to 0.182 % in 2003 and 2004.

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VENTURE CAPITAL PROCESS

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Risk and Return Criteria

Highest Acquisitions Lowest


Risk & Leveraged Risk
Developmen
Early t Financing Buyouts
Stage

50% 40% 30%


ROI ROI ROI
Highest Lowest
Return Return
Expected Expected
Late Stage in Investments:- lower risks, faster returns, less managerial assistance and
fewer deals to be evaluated.
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Three General Criteria before commit to the
Venture
 A STRONG MGT TEAM consists of individuals with solid experience &
backgrounds, a strong commitment to the co., capabilities in their specific areas
of expertise the ability to meet challenges and the flexibility to scramble wherever
necessary.
 THE PRODUCT/MKT OPPORTUNITY MUST BE UNIQUE, having a differential
advantage in a growing market. Securing a unique niche is essential since the
product or service must be able to compete & grow during the investment period.
 BUSINESS OPPORTUNITY MUST HAVE A SIGNIFICANT CAPITAL APPRECIATION

The venture capitalist typically expects a 40 to 60 percent return on investment in


most investment situations.

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Four Stages
 PRELIMINARY SCREENING

Starts with the receipt of Business Plan by the venture capitalist. Determines if the deal or
similar deals have been seen previously. Then, determines if the proposal fits his or her
long-term needs in developing a portfolio balance. Investigates the economy of the
industry and evaluates weather he or she has the appropriate knowledge and ability to
invest in that industry. Reviews weather the deal can deliver the ROI required. The
credentials and capability of the mgt team are evaluated to determine if they can carry out
the plan presented.
 AGREEMENT ON PRINCIPAL TERMS

The venture capitalist wants a basic understanding of the process before making the major
commitment of the time and effort involved in the formal due diligence process.

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Stages Con…
 DETAILED REVIEW AND DUE DILIGENCE

It is the longest stage, involving anywhere from one to three months. There is a
detailed review of the company’s history, the business plan, the resumes of the
individuals, their financial history, and target customers. The upside potential
and downside risk are assessed; and there is a thorough evaluation of the
markets, industry, finances, suppliers, customers and mgt.
 FINAL APPROVAL

A comprehensive, internal investment memorandum is prepared. This document


reviews the venture capitalist’s findings and details the investment terms and
conditions of the investment transaction. This information is used to prepare the
formal legal documents that both the entrepreneur and venture capitalist will
sign to finalize the deal.

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Locating Venture Capitalists
An entrepreneur should carefully research the names and addresses of
prospective venture-capital firms that might have an interest in the particular
investment opportunity. There are also regional and national venture capital
associations. For a nominal fee or none at all, these associations will frequently
send the entrepreneur a directory that lists their members, the types of business
their members invest in, and any investment restrictions. Whenever possible, the
entrepreneur should be introduced to the venture capitalist. Bankers,
accountants, lawyers, and professors are good sources for introductions.

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HOW TO APPROACH A
VENTURE CAPITALIST

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How to Approach a Venture Capitalist

 Approaching a venture capital firm is a difficult and complex task.

 There are many ways to go about approaching an investor for venture


capital funds. Some are good, some are bad, and some are just
downright ugly!
 Venture capitalists deal with hundreds of potential clients, and reject
the majority of them

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Instructions

 Make professional contact with the venture capital firm.

 Know your product inside and out.

 Develop an airtight business plan.

 Find the right kind of venture capital firm.

 After making initial contact with the right firm, send an executive
summary

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A few basic rules

Do your homework.

Be Concise.

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Here's how NOT to solicit investors

Mass Emails

Hype

Trade shows

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Summary

 Investors are people too and they have busy


schedules. Do your homework and be concise
when reaching out to them. Avoid such tactics as
mass emails and hyped up language in your
messages. It will go a long way in improving your
odds.

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FDI
 FDI or Foreign Direct Investment is any form of investment that earns interest in
enterprises which function outside of the domestic territory of the investor.

 FDIs require a business relationship between a parent company and its foreign
subsidiary.

 The foreign direct investor may acquire 10% or more of the voting power of an
enterprise in an economy through any of the following methods

 Foreign Direct Investment (FDI) equity inflows in the country have increased
from US $ 5.5 billion in 2005-06 to US $ 27.31 billion in the year 2008-09.

 despite the economic slowdown, showing a percentage growth of 11% over the
previous financial year.

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Methods of Foreign Direct Investments
 by incorporating a wholly owned subsidiary or company
 by acquiring shares in an associated enterprise
 through a merger or an acquisition of an unrelated enterprise
 participating in an equity joint venture with another investor or
enterprise
Policy Initiatives
 To strengthen higher overseas investment into cash-broke micro
and small enterprises (MSEs), the government has liberalized
the FDI norms for the sector replacing the current 24 per cent
ceiling on foreign holding with the sectoral caps. These
industries will now be guided like other large enterprises as far
as FDI is concerned.

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Conclusion

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THANK
YOU
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