Accessing Venture Capital
There is a surge in the number of
venture funds and the amount of funding available in the last one year.
The rejection ratio is very high, with very few of the proposals going
beyond even the pre-evaluation stage. Choosing a venture capital fund to
match your requirement is a difficult decision. Venture capital funds are
broadly of two kinds - generalists or specialists. It is critical for the
company to access the right type of fund, i.e. who can add value. This
backing is invaluable as focused/ specialized funds open doors, assist
in future rounds and help in strategy. Hence, it is important to choose
the right venture capitalist.
The Business Plan
The first step towards accessing
venture capital funding is the preparation of the business plan. The business
plan should be able to provide information regarding the promoters, amount
of funding needed and the time period for which it is needed and how this
funding is going to be paid back to the VC. To answer the above fundamental
queries of a venture capital firm the business plan is to be structured
with the necessary information.
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BUSINESS PLAN COVERAGE
1. Executive summary
A brief description of the company
and the type of business
A summary of the business nature
A description of the experience
and expertise of the management team
A summary of the product/service
and competition
A summary of financial history
and projections
Funds required and equity offered
to the investors
A description of use of proceeds
The timing of returns on investment
and exit routes offered to the investor
2. Business background
A brief history and nature of
the business
The industry details of the business
involved in
A summary of the future of the
business
3. Product/service
A description of the product or
service
The uniqueness of the product
The present status of the product,
that is a concept, prototype or product ready for market
4. Market analysis
The size of the potential market
and market niche being pursued
A projection of the trends and
future size of the market place
The estimated market share
A description of the competition
The marketing channel
A summary of the potential customers
The possibility of related or
new markets that can be developed
5. Sales and marketing strategy
The specific marketing techniques
planned to be used
The pricing plans and comparisons
with pricing adopted by competitors
The planned sales force and selling
strategies for various accounts and markets
The specific approaches for capitalizing
on each m marketing channel and comparison with other practices
within the industry
Details of advertising and promotional
plans
A description of customer service-which
markets will be covered by direct sales force, which by distributors, representative
or resellers
6. Production/operations
A description of the production
process
Details of the production costs,
including labour force, equipment, technology involved, extent of subcontract
or outsourcing, supplier
7. Management
An organization chart showing
the corporate structure
A summary of the board of directors
and key employees and details of their skills and experience
A list of the remuneration for
all levels of staff
A proposed plan of how to retain
key staff
8. Risk factors
A description of the major problems
and risks relating to the industry, the company and the products market
9. Funds requested
A description of the type of financing,
such as equity only or a combination of equity and loan, and stock options
to the investor
The capital structure and ownership
before and after the financing
10. Return on investment and
exit
Details of the timing and expected
return of the investment
A summary of the exit strategies,
such as initial public offering, sale to a third party or management buyout
11. Use of proceeds
Specify how the capital will be
spent, i.e. what amount of capital will go to which items
12. Financial summaries
A summary of the company’s financial
history and projections of three to five year period
Details of the principal accounting
policies of the company and the major assumptions made about the projections
Appendices
Resumes of key management and
employees
Detailed financial forecast and
assumptions
Market research report
Company literature and brochures
and pictures of the product
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A good business plan shows investors
the quality and depth of a company’s corporate leadership and indicates
management’s ability to reach stated goals. These factors lie at the heart
of the decision of a venture capitalist to invest in the company’s future.
Selection of Venture Capital Fund
After the business plan is completed,
the next step is to select the venture capital fund, which is suitable
to your proposal. The entrepreneur should first ascertain as to the investment
strategy of the VC with regards to the sector in which the VC is interested
as well as the stage at which he chooses to fund the project. Based on
this information the entrepreneur should shortlist the suitable VCs who
match his requirement and then approach them.
Financing from venture capital funds
is available at various stages and different VCs provide funding in some
or all of the stages. The various stages of financing are detailed below.
| Early stage financing |
Seed financing for supporting a concept or idea.
R&D financing for product development.
Start-up capital for initiating the operations and developing prototype.
First stage financing for full-scale production and marketing.
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| Expansion financing |
Second stage financing for working capital and initial
expansion while the company may be operating at a loss
Development financing for major expansion and the company may have
started operating at a profit
Bridge or mezzanine financing for facilitating public issue
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| Acquisition/ buyout
financing |
Acquisition financing for acquiring another firm for further growth
Management buyout financing for enabling operating group to acquire
firm or part of its business
Turnaround financing for turning around a sick unit
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It is normally advisable to approach
more than one venture capital firm simultaneously for funding as there
is a possibility of delay due to the various queries put by the VC. If
the application for funding is finally rejected then approaching another
VC at that point and going through the same process would cause delay.
If the business plan is reviewed by more than one VC this delay can be
avoided as the probability of acceptance will be much higher. The only
problem with the above strategy is the processing fee required by a VC
along with the business plan. If you are applying to more than one VC then
there would be a cost escalation for processing the application. Hence
a cost benefit analysis should be gone into before using the above strategy.
Normally the review of the business
plan would take a maximum of one month and disbursal for the funds to reach
the entrepreneur it would take a minimum of 3 months to a maximum of 6
months.
Once the initial screening and evaluation
is over, it is advisable to have a person with finance background like
a finance consultant to take care of details like negotiating the pricing
and structuring of the deal. Of course alternatively one can involve
a financial consultant right from the beginning particularly when the entrepreneur
does not have a management background.
Introduction
to Venture Capital
Venture Capital
in India
The Venture
Capital Investment Process
Current Scenario
We would look forward to receiving
your feedback and suggestions on this module at services@indiamarkets.com
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