role of chartered accountans in venture capital and angel investing function prepared by: anuj shah

ROLE OF CHARTERED ACCOUNTANS IN

VENTURE CAPITAL AND

ANGEL INVESTING FUNCTION

Prepared By:

Anuj Shah

Brief about PPT

Brief detail about Content of Presentation

1. Brief About Venture Capital

2. Investment stages in Venture Capital

3. Investment Process Under Venture Capital Finance

4. Development of Venture Capital In India

5. Drafting of Business Plan

6. Drafting of Term Sheet

7. Few Question Usually asked by VC or Investors

“Necessity is mother of Invention”

Mr Farhad

(Electronic and Communication Engineer)

Has went to remote Place for his Project Work

Could not able to get regular frequancy of mobile network

Thus facing problem catering the clients

Thus started thinking to solve the problem on his own

After doing research for a long time

He found out a chip which can capture remote signal and thus can enhance mobile network connectivity

This Just an idea

For implementing this idea Mr Farhad needs to manufacture the chip

For manufacturing chip he requires fund, which he don’t have

So he approached Banker

Bankers has asked for

past trend, credit record, collateral security, and Explanation w.r.t. Repayment of funds

Mr Farhad Could not justify thus banker rejected the proposal

Then he approch Mr Jain local Chartered Accountant

Mr Jain Guided him to prepare business plan and project report

These papers were presented before Mr Thakkar and ABC Venture Capital Fund

ABC Venture Capital Fund shown interest to fund the venture

With condition of 60% equity and more than 50% directors on Board

Mr Farhad Got money to manufacture and has sold chips to mobile companies

Now Mr farhad’s Company is making profit and going for IPO where ABC Venture Capital Ltd will sale entire stake at 30 times of what

they have invested

What is Venture Capital

Venture capital is Capital/Money provided by investors to the boost up the Venture/ concept/idea of the entrepreneur which is a startup firms and small businesses with perceived long-term growth potential but not having any asset to get bank finance or not having past track record or having limited operating history to justify the venture revenue.

High risk – High return

IDEA

PEOPLE

MONEY

STRARAGIC INVESTMEN

T

Role of Venture Capitalist

Venture Capitalists generally:

Finance new and rapidly growing companies for longer time horizon

Purchase equity/securities

Assist in the development of new products or services

Deploy professional for giving proper inputs to venture

Add value to the company through active participation

What is Venture Capital

How Venture Capital Fund Functions

The SEBI has defined Venture Capital Fund in its Regulation 1996 as ‘a fund established in the form of a company or trust which raises money through loans, donations, issue of securities or units as the case may be and makes or proposes to make investments in accordance with the regulations’.

What is Angle Investor

Engel Investor are the investor who invest their own fund to the venture

Usually Low amount of investment compared to VCF

Usually do not prefers to be on the board May introduce to some VCs to dilute investment

or expand business Very active on investment and working very hard

for venture Expects high returns as they invest at the

conception stage SUPER ANGELS

Benefits of VC to Entrepreneur It injects long term equity finance which provides

a solid capital base for future growth.

The venture capitalist is a business partner, sharing both the risks and rewards.

The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations

The venture capitalist also has a network of contacts in many areas that can add value to the company.

Benefits of VC to Entrepreneur

The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth.

They can help in defining proper marketing , operational and financial strategy for success of the company.

Venture capitalists are experienced in the process of preparing a company for an initial public offering (IPO) of its shares onto the stock exchanges or overseas stock exchanges.

They can also facilitate a trade sale.

Investment Stages

Investment stages

1. Seed Money:

Low level financing needed to prove a new idea.

2. Early stage investment/start up investment/Angel Investment:

Idea needs to be developed into product and needs to be marketed to get commercial orders.

3. First-Round:

Product and Marketing chain has establish but funds required for manufacturing of first commercial deal

4. Second-Round:

Working capital for early stage companies that are selling product, but not yet turning a profit .

Investment stages

1. . Third-Round:

Also called Mezzanine financing, this is expansion money for a newly profitable company

6. Fourth-Round/mazzanine:

Also called bridge financing, it is intended to finance the "going public" process

Investment stages

Financial Stage

Period (Funds locked in

years)

Risk Perception

Activity to be financed

Seed Money 7-10 ExtremeFor supporting a concept or

idea or R&D for product

development

Start Up 5-9 Very HighInitializing

operations or developing prototypes

First Stage 3-7 HighStart

commercials production and

marketing

Investment stages

Financial Stage

Period (Funds locked in

years)

Risk Perception

Activity to be financed

Second Stage 3-5 Sufficiently highExpand market

and growing working capital

need

Third Stage 1-3 Medium

Market expansion,

acquisition & product

development for profit making

company

Fourth Stage/mazanine

1-3 Low Facilitating public issue

Investment stages

Gestation Inception Prototype Roll out Growth Expansion Maturity

Product Stage Idea Concept Prototype Launch Scaling up DiversificationContinuous innovation

Funding Stage Pre-seed Seed Seed First stage Second stageThird stage,

Bridge financing

Asset-based financing

VC Investment Process

Pitching/Origination of

Deal

Screening

Due diligence (Evaluation)

Deal structuring

Post investment activity

Exit plan

Opportunity introduction/ Pitching To get the opportunity of getting funds the entrepreneur has to pitch/

approach the investor and introduce the concept/idea of the venture. He has to make a presentation with the team before the intended angels

or VCs. Present business plan

Concept/idea of Venture Executive summary Product Mile stones Cash flow Brief about management, production, finance, marketing strategy

(only 5% business plans are read beyond executive summary, 10% passes initial screening, out of this 10% proposal goes for due diligence and funding)( success ration is 0.05%)

Don’t get depressed if your idea is rejected at the time of pitching (keep exploring apportunitities)

Screening and due diligence

Who are the person behind the company? Founding Members, Key Management, Board members, Advisors

What is the Vision of Company About Concept/ Product/ Technology based on which Entrepreneur will do business Competitiveness of Product/ services

What is customer need and how the product is satisfying that need? Why your solution is better then the competitors? Or why people will approach for your

product? Whether technology is having long term competitive advantage?

Business Plan or marketing, operational plans are implementable? What is strategy to pitch the product into the market Through what channel or vertical will be used to sell the product Modalities to built momentum and building capacity to cater the momentum

What is revenue model of the company? Pricing of Product- test affordability of product Financial Projection – Test achievable or not? (Cost as well as revenue) (break even) Assumptions driving financials – Test proper or not?

Mode of Venture Financing The financing pattern of the deal is the most important element.

Following are the various methods of venture financing: Issue of Shares

Equity shares( Round – satisfaction of condition – additional funding) Preference shares- Convertible preference shares – Restriction Preference shares – Non Convertible, Redeemable, irredeemable preference

shares Generally do not exceed 49% of total equity Overall control remains with entrepreneur Beneficail to both-

For Entreprenure- No burden of payment of interest or other charges For VC- Can get High return for taking risk

VC earns CG at the time of disposal of shares

Conditional loan Payout to VC will start once conditions are satisfied Payment generally begins once firm started making sales or started making

operating profits Roayalty charges / management fees once sales starts- 2 to 15% of sales High Interest rate post sales or other conditions satisfaction- 20 to 25% PA

Mode of Venture Financing Debenture or Quasi Equity or Debt Instrument (fixed interest rate irrespective of operations of

company) Secured debentures, Unsecured Debentures(Companies Act

restriction post 1-4-2014) Convertible & Non convertible debentures- Debt equity swap Convertible-Debentures Redeemable at a Premium: Put

Option- entitle to sell bond to issuer(buy back or sale to promoter) at premium after certain lock in period

Participating debentures No interest at specified Lower Rate of interest when sales and profit generates High rate of interest at growth stage

Quasi Equity- Is loan without interest or lower rate of interest with no condition attached to it

Mode of Venture Financing

Income note Combination between conventional loan and conditional loan To pay both interest and royalty but at comparatively lower rate

Other Mode of finance Cumulative convertible preference shares( Restriction Companies

act) Shares with differential voting right Equity shares, Preference shares, Debentures with call & put

option Call Option to Holder- VC (Conversion by holder, buying additional

shares or sale shares) and put options to entrepreneur (buy back at certain price, Early

redemption with premium)

Post Investment activities-Monitoring

Appoint a person/ persons to Monitor- day to day activity Reporting and analyzing the progress that venture is doing Will examine whether venture is doing well if not then what

should be the steps to be taken to come to the desired growth in the company

Hire skilled manpower or professionals to Suggest operational and stratagic decisions for the success of the venture

Renegotiate the term if requried with the enterprenure Infuse further equity if required Make decision for exit

Time of exit from the firm’s capital is almost never predetermined, but depends on the development of the company.

In successful cases, divestments take place when the company has reached the level of expected development and the value of the company.

Initial public offer(IPOs) Trade sale- Sale of stake to strategic or financial investors Promoters buy back Pre-determined price or independent

valuation of shares as on the date of buyback Acquisition by another company (M&A)

Venture Capital Funds in India

In early 70's when Govt of India appointed a committee laid by Late Shri R. S.Bhatt to find out the ways to meet financing for funding start-up companies based on absolutely new innovative technologies.

Such companies either did not get any financial support or the funding was inadequate which resulted into their early mortality.

The committee recommended starting of Venture Capital industry in India.

In mid 80's three all India financial institutions viz IDBI, ICICI, IFCI started investing into the equity of small technological companies.


In Nov 1988, Govt of India decided to institutionalize Venture Capital Industry and announce guidelines in the parliament.

Controller of Capital issues(CCI) implemented these guidelines known as CCI for VC.

These guidelines were very restrictive and following a very narrow definition of VC. They required Venture Capital to be invested in companies based on innovative technologies started by first generation entrepreneur. This made VC investment highly risky and unattractive.Nonetheless many private initiatives were taken. At the same time World Bank selected 6 institutions to start VC investment in India. This included TDICICI (ICICI), GVFL, Canbank Venture Capital Fund, APIDC, RCTC (now known as IFCI Venture Capital Funds Ltd.) and ILF (now known as Pathfinder).

Venture Capital Funds in IndiaIn 1995, Govt of India permitted Foreign Finance companies to make investments in India and many foreign VC private equity firms entered India. In 1996, government announced guidelines to regulate the VC industry. Though there were many shortcomings these guidelines were the starting point.

In 1997, IT boom in India made VC industry more significant. Due to symbiotic relationship between VC and IT industry, VC got more prominence as a major source of funding for the rapidly growing IT industry. Indian VC's which were so far investing in all the sectors changed their focus to IT and telecom industry.

The recession during 1999 - 2001 took the wind out of VC industry. Most of the VC either closed down or wound-up their operations. Almost all of them changed their focus to existing successful firms for their growth and expansion. VC firms also got engaged into funding buyouts, privatisation and restructuring.

Post recession 2011 onward online retail boom has made the sector once again hot. Flipkart, snapdeal, Ola, Hosing.com is example of the same.

Venture Capital Funds in IndiaVCFs in India can be categorized into following five groups:

1)Those promoted by the Central Government controlled development finance institutions. For example:

- ICICI Venture Funds Ltd. - IFCI Venture Capital Funds Ltd (IVCF) - SIDBI Venture Capital Ltd (SVCL) 2) Those promoted by State Government controlled

development finance institutions.For example:

- Punjab Infotech Venture Fund - Gujarat Venture Finance Ltd (GVFL) - Kerala Venture Capital Fund Pvt Ltd.


3) Those promoted by public banks.For example:

- Canbank Venture Capital Fund - SBI Capital Market Ltd ( now into PE)

4)Those promoted by private sectorcompanies.For example:

- IL&FS Trust Company Ltd- Aditya Birla Venture Capital

5)Those established as an overseas venture capital fund.For example:

-Sequoia Capital - Blume Ventures

- Helion Venture Partners- Accel Partners- Nexus Venture Partners

Brief about some VC firms and funds managed by them

SIDBI VENTURE AS MAINLY FOUR FUNDS WHICH ARE OPERATING TODAY

Samridhi Fund (SF)

Focus on Environment, Social and Governance matters.

Corpus: 450 crore

Target sectors is MSME

Water & Sanitation, Affordable Healthcare ,Agriculture &Allied services Clean Energy, Financial Inclusion (Includeing MFI’s), Education ,Skill Building, etc. In the area of 8 defined states

India Opportunities Fund (IOF)IOF is a sector agnostic fund focused mainly on growth capital needs of India’s growing and unlisted MSMEs operating in emerging sectors such as light engineering, clean-tech, agro-based industries, logistics, infrastructure, educational services, IT/ITES etc. IOF will also invest in early as well as late stage companies selectively.

Sidbi VC fund detailsSME Growth Fund

Object is same as mentioned in Indian Opportunity fund-fucused on SME-High growth business.

Initial Corpus : 500 Cr

But all investments are freesed and now looking to the divestment.

However opportunities will be raised once portfolio will be divested and reinvested in new businesses/ventures.

National Venture Fund For Software and IT Industry (NFSIT)

SIDBI has contributed 500 million.,Ministry of Information Technology, Government of India 300 million. And 200 million by IDBI.

launched in 1999 by Shri Atal Behari Vajpayee

The fund is almost fully divested.

IFCI VC Fund

IFCI VENTURE AS MAINLY FOUR FUNDS WHICH ARE OPERATING TODAY

Green India Venture Fund India Enterprise Development Fund Venture Capital Fund For Scheduled Caste India Automotive Components

Manufacturers Fund

Rajastan Venture Capital Fund

RAJASTHAN VENTURE CAPITAL FUND (RVCF) a professionally managed and privately held company supported by 15 investors including Rajasthan State Industrial Development and Investment Corporation (RIICO) and Small Industries Development Bank of India (SIDBI) as lead investors.

RVCF FUND-1 (MADE EXIT IN 9 OUT OF 10 INVESTMENTS) RVCF II SME Tech Fund ( INVESTMENTS ARE GETTING

MATURED) PLANNING TO LAUNCH NEW FUND WHICH IS HAVING CORPUS

OF 150 CRORE

Investing for growth capital for new and existing non listed companies in the Information Technology, Bio-Technology, Retail, Auto, Agri-Tech, Health Care, Tourism, Entertainment, Logistics, Packaging and other Technology driven projects.

Also invest in second round

Recent Development

On 23rd Jan 2015- mint reported that

- Telegana Govt begun constuction of Technology Incubator for start up in the capital Hydrabad

- Planning to invest in the infrastructure for start up – 200 crores

- 300000 sq ft construction with hi tech infrastructure

- also tied up with IIIT-H and Nalsar univercity to IPR and other training

- Planning to create fund of 600 cores with other VC funds

Revolution has been started- Other state will also launch the same scheme later on

VC deals 2014 Sequoia Capital – 25 deals in 2014

Most active amongst all VC

Sequoia invested in firms like:

In the tech space Fashionandyou, Zomato, Olacabs, Knowlarity, Capillary, ZoomCar,

Druva Software, Octro, Tinyowl, Grofers and Akosha in the tech space.

In the non-tech field it backed names like Koye Pharma and Indigo Paints

part-exited from local business classifieds firm JustDial. It scored over 30x on its original investment in 2009.

VC deals 2014

Blume Ventures - 19 deals

Size of investment is relatively smaller compared to other fund

The companies it invested last year include

TaxiForSure, VoxPopClothing, Zopper, HashCube, Instamojo, Railyatri and Covacsis.

Other follow-on investments

Exit in Spunk Media Pvt Ltd sold to San Fransisco-based mobile payments company Boku

VC deals 2014

Helion Venture Partners – 19 deals

Very aggressive in the year 2014

The companies it invested last year include

TaxiForSure, Housing, Yepme, BigBasket, Indiahomes, Pubmatic and Jivox

In Non Tach Industry

Shubham Housing Finance, ID Fresh Foods and Dentys (A dental chain ).

Role of Chartered AccountantChartered Accountant can provide their services in following areas1. Act as mediator for angel financing function/ VC

– Help in coming to the amicable deal for benefit of both the parties

2. Helps in preparation of1. Business Plan2. Cash Flow forcast3. Giving financial presentation and explaining revenue model at the time

of pitching the proposal before VC and Engle Investors

3. Suggesting suitable structure for finance in accordance with prevailing law in India( FEMA, SEBI, Company Law etc)

4. Negotiation with VC – for valuation

5. Drafting of term sheet6. For VC- they can do Due diligence and valuation

Preparation of Business Plan

Business plan is the most important document which VC or Angel investor will focus thus care should be taken at the time of drafting of business plan. Chartered Accountant has major role in defining and preparing business plan on behalf of the client.

What should be there in the business Plan?

- Those conceret information about the venture based on what the investor will invest in the venture.

- Should answer WHAT, WHY AND HOW of investors

- Each and every information is important and can generate discussion further


Cover Sheet Executive Summary Table of Contents

1) Statement of Purpose

2) Company History/ Details about Venture

3) Business Description

4) Products and Services


5) Market Analysis

a. Customers

b. Competition

c. Marketing Strategy

6) Management

7) Operations

8) Financial Plan

9) Appendices


Cover PageCover Page Identity information

The words “Business Plan” business name Company logo Address Telephone number Fax Number Email Address Web Address (URL)

Submission date Purpose Should look attractive


Executive SummaryExecutive Summary

Most important part of Business Plan 30-second test Concise explanation

Venture objectives Market prospects Financial forecasts Sources and uses

SHOULD BE WRITTEN LAST TO AVOID MISMATCH


Table of ContentsTable of Contents

Include page numbers List of headings

Major Subsections

Same font!


Statement of PurposeStatement of Purpose

The business plan’s objectives - purpose of taking fund or approaching VC

DESCRIBE WHAT VENTURE WHANTS TO CREATE AND HOW THE FUNDS WILL BE UTILISED TO ATTAIN THE PURPOSE

Should outline purpose of financing arrangement requested How much fund is actually needed How the fund will be utilized What asset will be generated in the Venture How investment will be beneficial to business What returns are expected out of it Tenure for which company will be under growth phase How financing will be structured


Company HistoryCompany History Basic product currently dealing into Names of principals and brief background on each Legalities: business type, Venture legal format Company location Number of employees as on date Probable or existing Customer highlights Your niche and unique qualities/ technology which will drive

growth Strategic alliances ( for product or services or technology)


Business DescriptionBusiness Description Mission Statement – Operational and financial Basic product or service description (present and future) New, takeover, expansion, franchise General strategy plan to drive business Business Modal Planned strategic alliances Company milestones as on date and after 3 years

(business formation, opening date, hiring employees, launching product, begin Operation ,Achieving revenue levels/ growth)


Products and ServicesProducts and Services

Detailed description of products or services Current stage of development of product: in-process,

prototypes, samples Patents or trademarks, legal contracts, licensing

agreements, regulations, certifications Uniqueness - How product is different then other product Competitive advantage of product “The Brochure Section”- Attahchment


Market AnalysisMarket Analysis Industry analysis Customers: individual, business entity Competition Marketing Strategy Cite Sources from where information is taken or trend details is

taken

Industry Analysis Industry in India- information, trends Local industry information, trends Social, economic, legal, technological issues in Industry Justify Opportunity for the product


Market AnalysisMarket Analysis Customer Analysis

Individual customer demographics Location, age, gender, occupation Ethnic group, lifestyle, education, income

Business customer demographics Sector, location, structure Sales level, distribution classification, number of employees


Market AnalysisMarket Analysis Competition

Who are the competitors – If you say no competition then be ready for grilling

Why your company/product/services are superior Similar and dissimilar SWOT (strengths, weaknesses, opportunities, threats) Advertising- as a tool to reduce competition- Eye on the future ( Currently no competitor, but can be competitor

at future date) Competitive grid and explanation (Pricing comparison, product

comparison, customer comparison)


Market AnalysisMarket Analysis

Marketing Strategy How Venture will Obtain a good share of the entire

marketplace Product: sellable aspects (uniqueness, Age factor,

Location factor, brand image, Utility) Pricing: Initial phase low pricing- creation of habit- then

increase Placement – timing – right market Promotion – Mouth publicity- paper- media- Internet-

road show- event


ManagementManagement

Job descriptions of the decision makers “I do everything!”- Never tell the same Compensation, benefits – ESOPS- Dilution of Equity Contribution and background as leverage to perform Advisory board


Production/ OperationsProduction/ Operations Location of Plant or Operational store or website Facilities needs for Production – Water, electricity, server,

security system etc. Space planning for operation considering further

expansion Manpower needed for Production or sub contracting

(Stagewise) Logistics arrangement Environmental and other issues Licenses availed and to be applied for doing business Purchasing policy, quality control program, inventory

control system, production cost breakdown


Financial PlanFinancial Plan Should define initial start up cost What is Cost Post start up and when the funds are required Estimate of capital expenses with supporting Estimate of working capital requirement under the phase manner Fund Required at what point of time Way of funding- Equity, debt or Income note or Subsidy or Govt.

Grant Factoring way of funding and it’s cost during working out

estimated financial pojection Expected Cash flow Break Even years ROI working


AppendicesAppendices Supplemental materials

Resumes of management team Past financials if available Interim income statement and balance sheet Copies of potential contracts Financial Projections Brochure of the product Prototype description details Details about technology with more specification Schedule of implementation Letters of reference

Summary

planning

Term Sheet

Term sheet plays important role in venture capital finance Term sheet is a major document which describes broader

terms and conditions which are finalised at the end of negotiation

Term sheet can be called as MOU or Letter of Intent Term should not be non binding to creat relevence TS gives clarity of terms and operation and intention of

both Formal Agreements executed post term sheet depending

up on method of funding ( for equity- share holders agreement, share purchase agreement etc )

Should keep it confidencial before formal agreement executed

Term Sheet

Points to be considered while drafting term sheet Purpose of term sheet Amount and Type of Investment Amount of Investment

Amount of investment based on period Amount of investment based on condition

Type of security issue against investment Equity shares – should classify class of shares if differential voting rights are given Preference shares Share warrant Debenture Or combination of above

Security mechanisms- Guarantee, pledge of shares mortgage of asset

Milestones- on whose achiement VC will fund further or right to call and put excercises

Term Sheet

Investors rights Conversion Right – for mandatory conversion –trigger of event

descr. Anti dilution Right- Clause is added to secure that company will

not issue new shares at price lower then price at which share issued to investors. If issuing at discount then current investor should be approached first.

Redemption/ Repurchase Right- Term sheet should indicate at what time redemption or repurchase can be exercise.

Right upon Liquidation and dividend Right of voting and Board representation- differential voting

right- 1 share holder has 2 vote in AGM- event when differential voting right will be effective?

Right of first refusal/co-sale- Right to acquire new shares Right to get information

Term Sheet

Other General Points to be covered Right of IPR- who will hold in case venture not materialised Non Competition agreement Agreement for taking over employees Representation and Warranties Default- whether grace period should allow or not ?

Consequences of default Conditions to closing – conditions to be fulfilled before closing

final agreement ( like statutory approval, financial audit, due- diligence report by expert , pre clinical report in Parma company etc)

Signature and parties

Thank You

role of chartered accountans in venture capital and angel investing function prepared by: anuj shah

Documents

capital venture capital

capital slide

venture capital finance

development of venture

venture conceptidea

venture revenue

idea mr farhad

active participation