Funding - Grow Your Business Seminar

Funding Ideas

Grow your Business Seminar Franchise India

Bangalore, 21st December 2013

Anjana Vivek

[email protected]

VentureBean Consulting Private Limited

LOOKING AHEAD …In 5 years:

• How do you picture your self as a business, do you think of being the best in your city, in the country, innovative, great employer.. OR ??

• Where do you think you could be; what do you believe you could achieve, for eg. in terms of– Financials: Revenue, Profits, Value– Number of Employees, Number of Offices etc.– Lines of business/products/service– Kinds of customers / categories– etc..

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TO TRIGGER THINKING

• Are you confident that you can achieve.. i.e do you have faith in yourself and the power of your dreams?

• If there is faith and determination; you Can achieve

• The successful entrepreneurs are those Believe they can … And … Execute and Execute

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AT THE START

• What are you willing to let go to reach your goals– Ownership dilution – i.e. sale of stake/shares – Revenue share– Profit share– Decision making, i.e. permitting others to take decisions

as the leadership team grows to beyond initial founders/family members

• 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?

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AT THE START

• 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

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TO TRIGGER THINKING

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?

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WHICH INVESTOR WILL BE RIGHT FOR ME?

• As there are different categories of customers: retail, business, youth, men, women etc.. There are different categories of investors

• Which investor will be the right/best/optimum fit for you?

..Next slide… Illustrative categories of investors

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KINDS OF INVESTORS• Angel Funds• HNIs• Venture Capital / Private Equity• Strategic Investors (Corporates)• Other Corporates• Social Investors• Others…

• 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

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BEYOND FUNDING …

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 …

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Before Getting the Funding - THINK

• 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 be able to manage with less money from outside, or even manage for some more time without funding

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FUNDING• 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)

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WHAT PRIVATE EQUITY INVESTORS WANT

• 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

• 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?

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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– Industry, Lines of business– Intellectual property– Brand perception– Competitive advantage

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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

• Where are you getting more revenue; which streams of income are more profitable

• 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

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EG. VALUE CREATION: Revenue/Customers

POINTS TO CONSIDER • Attention is to be paid to revenue & cost matching: In

Zang Pvt. Ltd., revenue was in one time period, costs in another, i.e. costs were incorrectly linked to revenues; The decisions taken due to flawed analysis, led to value depletion and cash flow reduction

• 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

• 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

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VALUE CREATION

• Look at areas of your business and business model to see how value can be created

Scenario 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

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PRACTICAL POINTS• 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

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PRACTICAL POINTS• 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

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VALUATION

• Valuation is based on – intangibles – tangibles and – perceptions of future growth

• Valuation can be computed in multiple ways, some commonly used methods are:– multiples of revenue; profit, EBIDTA etc.– multiples of key drivers, eg.user base, capacity – cash flow based

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VALUATION• Different persons can value the same business

differently because they may – use different methods of valuation – use variations of the methods – have different inputs in the methods

• Thus, valuation perceptions can vary, and there can be divergent views on valuation

• Deals can sometimes be structured in such a way that the differences in valuation perception are factored, e.g. linking valuation to performance

• Valuation is also the outcome of negotiations, so it is important to identify one’s bargaining power in relation to the deal issues

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IN SUMMARY• Articulate your Vision and Growth Plan• Think through your Funding Strategy• Select a Potential Investor with Due Care• Plan for Fund Raising Time Lines • Have an optimistic one 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…

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ADDITIONAL RESOURCES

• Class notes on Valuation, Preparing a Business Plan and more at:

• www.slideshare.net/anjanavivek

• Curated/Edited content from CEOs, academicians; business updates and more at the VentureBean Knowledge Hub at:

• http://www.linkedin.com/company/venturebean-consulting-private-limited

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http://www.slideshare.net/anjanavivek

http://www.linkedin.com/company/venturebean-consulting-private-limited

http://www.linkedin.com/company/venturebean-consulting-private-limited


Thank You!

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Funding - Grow Your Business Seminar

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