INTERINVESTCORP_AI VCs Hedge Funds and Private Equity Investo
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Transcript of INTERINVESTCORP_AI VCs Hedge Funds and Private Equity Investo
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Angel Investors,Venture Capitalists,Hedge Funds and
Private EquityInvestors
February 09 2011
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Economics of Investment
Certain economic agents (individuals, householdsand corporations) have excess of income over theirconsumption (because of their plan to defer
consumption). Certain other agents need more money than they
have (temporarily).
Intermediaries exist who bring together the above
two types for economic gains (commissions,brokerage).
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HNWI
Households
Corporates
Angels
Banks
Mutual Funds
PensionFunds
Insurance Cos
Hedge Funds
VentureCapitalFunds
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Angels
Hedge Funds
Banks
Mutual Funds
Pension Funds
Insurance Cos
VC Funds
Fixed Income
Securities
Forex
Commodities
Startups &PrivateEquity
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Nature of these investors
Unconventional
Make highly risky investments
Deal with difficult Asset Pricing and Valuation
Are free of regulatory issues
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Target Companies
Startups
Early stage companies Private companies in the scale-up phase
Pre IPO financing rounds
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Sources of Finance
Equity (common stock, preferred stock)
Loans: long term, short term
Lease finance
Inter corporate deposits
Bank cash credit and overdraft limits Debentures
Fixed deposits
Grants from government agencies Supplier credit and deferred payments
Credit cards
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Modes of Acquisition
Primary market: public issue, rights issue(flotation costs)
Secondary market (listing costs)
Private placement (individual orinstitution)
Banks and mutual funds
Pension funds, insurance companies Debenture issue
Fixed deposits
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How to compare various sources ?
Holding period (Duration)
Repayment terms
Interest rate
Other strings attached
Pledges and collaterals
Finance marketing costs and lead time
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Net Present Value (NPV) of an Investment
Horizon of interest: Typically 4 5 years
Expected future cash flows: Dividends, interests
Residual value at the end of horizon: Marketprice
Risk-free rate of return: Government bonds
Risk premium: Investor dependent
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Example: Angel Investment
Three to five year horizon
No dividend / interest
IPO Price is the residual value
Risk-free rate of return: 5 % (Bonds, Treasury bills)
Risk premium: 20-40% (Early stage investment)
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NPV of an Asset (Stock, Bond)
Discounted Cash Flow Analysis
NPV = CF1 / (1.0 + r) + CF2 / (1.0 + r)2
+ CF3 / (1.0+r)3
+ RV / (1.0 + r) 3
r = Expected rate of return
CF i = Cash flow at the end of ith year
RV = Residual value of the asset
Discounting is the reverse of compounding
Where
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Funds Requirements
Idea / Concept: USD 10K
Prototype: USD 50K
Product development: USD 0.5M 2M
Organization building: USD 8M-10M
Scale up: USD 50M
IPO: Initial Public Offer
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Sources of Funds
Idea / Concept: Personal savings
Prototype: Loan from friends and relatives
Incubation: Angel / Early stage fund
Organization building: VC, first round
Scale up: Second round / growth/ scale upfunds
IPO: Investment bankers, underwriters
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Cost of Equity
Angels would expect higher rate ofreturns than VCs
Typical VC expectations is 40-50%compounded annual return
Risk-return curve: New ventureincreasingly reduces its risk as it goesthrough stages
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ANGEL INVESTORS
High Net Worth Individuals
Successful serial entrepreneurs (alsoparallel entrepreneurs)
Good knowledge of technology andbusiness acumen
Have country-specific preferences (NRI,NRC)
Hunt in packs
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Peculiarities of Angel Investment
Quick decision-making
Low level of funds
One-two days a week of commitment after allthey are putting their own money on the table!!
Uncle-nephew relationship
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VENTURE CAPITAL FIRMS
VCs look for private equity for youngcompanies
Mezzanine VC firms
Scale-up VC firms Technology / Space specific
Biotechnology
Networking
Chips and hardware
E Commerce
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Structure of a VC Firm
General partners 3-5 (themselves successful entrepreneurs):put about 2-3% of the corpus
Limited partners (Pension funds, Retirement plans): Put 97%corpus
Corpus = Fund, typically ranges between USD 50M to 2B
Management fee is about 2-3 % per year
Funds about 5-30 new companies per year
Employs junior managers for due diligence(associates) After IPO/Acquisition, general partners keep 20% of gains,limited partners get Principal+80%
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VC Firms Annual Throughput
10,000 qualified business plans
1000 meetings
400 company visits
25 new investments
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Role of the VC in the Portfolio Company
Negotiate aggressive terms
Select strong co-investor
Help in constituting the Board of Directors
Assist in Recruitment
Market validation
Strategic relationships
Pursue liquidity aggressively
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Valuation: Bargaining Point
Causes of mismatch
Asymmetry of information
Ego Greed
Factors that drive the valuation
Technology, ESOP rates, management
Orders in hand, scalability, brand strength
Patents and copyrights
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Difficulties in Valuing Start-upCompanies
Immediate earnings are negative
No past history
No comparable companies
No market prices
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VC Fund Raising Process
Introduction (phone call, e-mail, referral)
Submit business plan / executive summary
Presentation
Company visit Due diligence (management reference checks,
customer calls, market analysis)
More meeting(s)
Term sheet
Legal / Closing
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Innovations in Financing Terms
Third party collaterals
SIDBI
USA Small Business Administration
Flexible, milestone-based equityconversion options and release of funds intranches
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Worldwide Kleiner Perkins
Sequoia Capital
Battery Ventures
Newbridge
Chrysalis Capital
Acer Technology Ventures
Westbridge Capital
Technology Capital Investors
Andreessen Horowitz
Greylock Partners
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HEDGE FUNDS
Hottest and most talked about in the businesspress
Started by ex-Wall Streeters
Quantum Fund : George Soros
LTCM: Long Term Capital Management (MyronScholes and Robert Merton, 1997 EconomicsNobel)
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Hedge Funds: Privileges and Promises
Not scrutinized by SEC Ask for long term commitment from
investors : 6 months to 2 years
Take simultaneous positions in securities,commodities, Forex and Bond markets
Global (Transnational operations)
Promise absolute return irrespective ofmarket trends and movements
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Hedge Fund Strategies
Fixed Income Arbitrage Equity market-neutral statistical arbitrage
Convertible Arbitrage
Merger Arbitrage Distressed securities
Event-driven strategies
Macro investors: EIC Analysis Sector-specific positioning
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PRIVATE EQUITY INVESTMENT
Large, profitable private limited or deemed
public companies who need finance but dontwant to do an IPO
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Some Deals
Company Investor Investment
USD mill
Approx
Valuation
Progeon Citigroup 20 100
Glenmark
Pharma
CDC Capital 10.3 74
TV Today ICICI Ventures, GE
Capital
1.5 25
Patni Computers General Atlantic
Partners, GE Capital
108 530
Strand Genomics Westbridge Capital
Partners
4.6 9.5
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INTERINVESTCORP LLC
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]