Conventional v/s Modern Instruments of Business Funding

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Business growth today is all about collaboration ……..

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Collaborate in Capital Markets to grow exponentially !

Private Equity / Venture Capital = Funding against equity

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Private Equity / Venture Capital = Funding against equity

‘Past performance’ v/s ‘Future promise’

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Debt v/s Equity

Future promise v/s Past performance - Equity v/s Debt

Equity – sharing financial interest in the

business

Debt – a loan from a bank / financing

institution / individual

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Equity – the most expensive form of funding?

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Business stages & sources of funding

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Business stages & sources of funding

Stage of

Business

Market Validation

Customer Acquisition

No / Low Revenues

Cash burn

Growth challenges

Capex

R&D on business idea

Bank Loans

Debt markets

IPO

Mezzanine Capital

Business stages & Sources of funding

Expansion StageSeed Stage Early Stage Growth Stage

Operational challenges

Expansion / Scale-up

Consolidation

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Time / Revenue

Family & Friends

Angels

Incubators

Debt markets

Private EquityVenture Capital

Angel Investors

• Typically HNIs / Entrepreneurs

• Invest in very early stage – R&D on business ideas, prototype

development, market research, pre-revenue

• “Angel Funds” – coming together of angel investors e.g Mumbai Angels.

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Band of Angels

• Typically look at :

• Domain knowledge

• Entrepreneurship qualities

Venture Financing

• Invest in start- up stage companies – to support a business plan, pre-

break-even stage

• Started as a concept at Silicon Valley

• Active VCs in India – IDG, Cannan Partners, Nexus Capital

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• Typically look at :

• Management team

• IPR / Business idea

• Scalable market for product / services

• Consumer traction / revenues

Private Equity

• Typically later-stage investments

• Internationally – majorly represented by Buyouts

• In India – typically growth stage investments and PIPEs ( Private

Investments in Public Equity )

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• Some active PE funds in India – ICICI Ventures, Warburg

Pincus, Barings, Carlyle, IDFC etc.

• Typically look at :

• Operating leverage – opportunity to further scale-up business

• Financial leverage – improving capital structure

“Venture Debt “ – an oxymoron?

• Typically coupon-bearing debentures / preference shares

convertible into equity, FCCBs

• Might be secured – similar to bank debt

• Advantage – limits dilution

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• Interest payments – periodic / bullet

• Some structures may cause cash flow issues if not converted

into equity as seen recently ( e.g Wockhardt)

IPOs

• Raising capital from public equity markets – broad-basing the

investor base

• SEBI (ICDR) Regulations specify eligibility criteria for IPOs ( such

as track record of dividends, tangible assets, net-worth) – non-

complying entities have to follow Book-Building route

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complying entities have to follow Book-Building route

• Specified allotment under Book-building IPOs:

– QIBs – 50%

– Non-institutional investors - 15%

– Retail investors – 35%

• Long –drawn & expensive process

• Listing involves significant regulatory compliance, pre & post

What to consider when selecting source of funding?

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What to consider when selecting source of funding?

Selecting the Source of Funding: Parameters

• Growth Prospects and Profit Margins of the Business

• Evaluation: How much money does my business plan require?

• Capital Structure of the Company

• Evaluation: Can I avoid Distress Costs, especially in bad economic

scenario?

• Cost of the Type of Finance being considered

• Evaluation: Today, is Debt significantly cheaper than Equity?

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• Evaluation: Today, is Debt significantly cheaper than Equity?

• Visualized Dilution of Stake

• Evaluation: How much Stake am I comfortable to part with?

• Need for the Deal/ Funding / Expertise

• Evaluation: How much will the Deal / Funding/ Expertise help me?

• Sometimes, Expertise can take you leaps ahead (Eg. Private Treaty)

• The Power of NOW

• Evaluation: What are the reasons that necessitate taking (a type of)

funding Today?

Co-creation of value

Handholding through value

unlocking – IPO / Strategic

M&A

Growth Stage

Late Stage Value

Unlocking

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MIS

Team

Relationships / Network

Strategic inputs

Corporate Governance

Contribution

of a PE / VC

partner

Early Stage

Value

Creation

The Financing Decision

• Pecking Order Theory

• Companies should choose to raise fund in the order:

• Trade-Off Theory

• There is an advantage to financing with debt (namely, the tax benefit of debts) and

that there is a cost of financing with debt (the bankruptcy costs of debt)

Internal Funds

Debt

Equity

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that there is a cost of financing with debt (the bankruptcy costs of debt)

• Market Timing Hypothesis

• First order determinant of a corporation's capital structure, that is, the fractions of

debt and equity in their liabilities, is the relative mis-pricing of these instruments at

the time the firm needs to finance investment

These form the theoretical basis.

In reality, the practice is mixed, but is impacted by arguments of the theories.

Why Dilute?

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Why Dilute?

Why dilute – the Golden Rules

Limitations on internal accruals / FFFsLimitations on internal accruals / FFFs

Debt funding expensive / not possible Debt funding expensive / not possible

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Debt funding expensive / not possible Debt funding expensive / not possible

Equity participation offers strategic value beyond cash Equity participation offers strategic value beyond cash

A perspective on M&A

• Organic v/s Inorganic growth

• Exit & Liquidity

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“Funding Brand Building / Visibility”

233/16/2010

“Funding Brand Building / Visibility”

Over 5 years of existence

Over 250 investments

Largest PE fund in terms of deal numbers

243/16/2010

“Physical” business

v/s

“Mind” business

&

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&

“Value creation”

Times Private TreatiesA portfolio of over 250 investee companies

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Thank You

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Thank You

Rajesh Sharma

AVP – Times Private Treaties

Bennett Coleman & Co.Ltd.

E-mail : rajesh.sharma3@timesgroup.com