Venture Capital Sourcing - for Indian Market

 

·     India certainly needs a large pool of risk capital both from home and abroad. All this can happen provided there is the right regulatory, legal, tax and institutional environment; there are risk-taking capacities among the budding entrepreneurs; start-ups have access to R&D flowing out of national and state level laboratories; and universities and infrastructure support, such as telecom, technology parks, etc. keep pace.

·        Thus steps are being taken at the level of the Government, Ministry of Information and Technology, and the CSIR for improvement in infrastructure and R&D. Certain NRI organizations are taking initiatives to create a corpus of US$ 150 million to strengthen the infrastructure of IITs. Meanwhile, since March 1999, things have been changing dramatically for the better. The initiatives of the Government of India in formulating policies regarding sweat equity; stock options; tax breaks for venture capital along with overseas listings have all contributed to the enthusiasm amongst investors and entrepreneurs.

·        Nasscom’s vision for India states that it should become one of the top five global locations in the creation of technology ventures, leading to annual investments of over US$ 10 billion by 2008. New ventures should cover all priority areas of growth: value-added IT services, IT-enabled services, software products, and E-businesses. The following chart exemplifies the growth of venture capital and angel investments in India’s I.T. software and services sector (including dotcom companies)

Often people use terminologies Like venture capital Angel funding, equity funding .But not many understand the exact relevance of these terminologies.

a)       Angel Investor: This is an investor who listens to your concept and does funding at the idea level as an individual or a syndicate of individuals. Usually an AI takes 40 to 50 % of the stake/control  in the company and in some cases up to 80% control depending on the infuse of funding requirement and typically the entire risk is  alone on the head of an AI.

b)       Seed Funding :This is an investment that is brought at the stage where a start-up needs to be kick started with pre-operative expenses and putting the concept in place to basically assess the viability of the project or to take it to the next level of funding  to meeting the requirement of the Institutional investment or  VC. Most of the time this funding is usually pooled from friends/relatives and personal  resources and in some particular cases it can be an early VC/Angel  investor

c)       Private Equity Investment: This type of funding is usually done at a mature stage when the organization has already shown a good track record on proven performance and revenues. This can be either an Institutional investor or can be a VC whose focus is advance stage funding from a successful corporate house or a syndicate of investors

d)       Venture Capitalist : Venture capital is different from traditional sources of financing. Venture capitalists finance innovation and ideas, which have a potential for high growth but with inherent uncertainties. This makes it a high-risk, high return investment. These are typical organizations that  fund based on certain internal criteria and also based on their corpus fund they have certain reservations .Like some VCs fund only tech related projects with specific domain .While some invest in only IP related projects. There are different criteria’s for different VC some speak of projects that require funding requirement above $ 10 million only while some look at projects that are even below  $ I million. They usually based on the funding requirement take almost a 50% to 90% equity in the company with complete risk on their side and give overall support in making the project succeed  through their network or connection. In short they build a strong fail proof  eco –system for the project .Today we see very few VCs who come in the early stages and almost most of them prefer advance stage funding . Apart from finance, venture capitalists provide networking, management and marketing support as well. In the broadest sense, venture capital connotes financial as well as human capital. The big focus of venture capital worldwide is, of course, technology 

 

 Venture capitalists invest money in start-ups in exchange for an equity ownership in the company. VCs receive hundreds of pitches from entrepreneurs each year. Here's how to stand out.

Step One

 

Prepare a business plan. VCs will expect you to clearly define the purpose of your business, disclose pertinent financial information (including revenue streams and projections) and provide information on your executive management team.

They prefer the business plan initially to be an executive summary that will provide a brief idea on the project and the gap in the market that the project intends to address.

Step Two

 

Do research on venture funds to find the appropriate fit for your company. Look in for Directories and  Guides to Venture Capital Sources, available in many bookstores and libraries, to see what fields each firm is likely to fund. Some focus on retail and service companies, while others look specifically for technology start-ups

Step Three

 

Get an introduction to the venture capital firm. You'll have a much better chance if you've been personally introduced to the VC rather than blindly sending your business plan. These introductions can be made by executives of companies already being funded by the VC or by lawyers and accountants who work with the firm. Try to contact four to five VCs.

It would always benefit by approaching a referral/professional help/advisor with whom the VCs have a very good working relationship and at the same time the referral would know the preference criteria’s of the VC in order to make the association very pragmatic and workable cutting aside the wastage of time in unwanted details and exercises’ In short the intermediately helps in positioning the pitching which is the key to succeed.

Step Four

Arrange a meeting with the VC. Consider bringing key members of the management team to the meeting.

Spread your plan with more that 4-5 VCs So that one experience and exposure can act as a stepping stone to another and sometimes cushion the entrepreneur from disappointments.

Step Five

Follow up your visit with a thank-you note and additional information.

Step Six

Be persistent and polite.

 

Tips & Warnings

1.Choose your timing carefully. VCs want to see that you've done the basic groundwork and are   ready to springboard to the next level. Spell out what your next big step is and what resources you will need to get there.

2.Think big. Investors want to see that you have a large-scale vision for your company and that you  have plans to grow and expand.

3.Show off your top executive team. VCs want to see a solid management team that is knowledgeable as well as flexible, driven and committed.

4.Acquiring funding is a demanding process - have a thick skin, patience and determination.

5.Be yourself and honest with your intentions and don’t over sell. The VC usually have excellent network and can sometimes come up with shocking data on the entrepreneur as a part of their due diligence process and  the entrepreneur may never realize why he/she was blacklisted or why the investors suddenly went silent

6.Keep your emotions aside with the project and look form the angle of the investor

7.Ponder, Introspect and keep refining the process

8.Most of the time entrepreneurs use this 2 % cliché of giving a very high image of the market size and then saying that even if a 2% penetration of the market would bring wonders. This needs to be  avoided altogether.

9.Accelerating the business without clarity is the worst thing

10.Keep going and you will stumble on something perhaps when you are least expecting it to happen.

In short

3X (Expected Capital) + 3X(Expected Effort)  +  3X(Expected Time)  = ¼ ( Expected Result)

What does the Investor see before making a decision on investing?

1.The identification of gap in the market and how you propose to fill that gap

2.The business model – how far it is viable and practical

3.The implemented value propositions should be greater that the stated proposition – how far the project /Product has been market tested

4.The Financial discipline of the promoter – should be very high when he has money and not when he is running out of money

5.Metrics to fix cash crunch

6.Customer references – they should be swearing by the service/product

7.Ability to quantify the quality and quantity of the business

8.The team/Product/fund requirement/market /timing and the risk factor involved with each of them.

9.Depth of commitment and understanding the business by the promoters

10. The most important thing of the entire activity what is the returns (ROI) and the exit plan

What are points you need to keep in mind when scouting for funding with a VC /Angel Investor

· Make sure you are talking to a legally registered company that has a legitimate corpus fund

· There should be enough referrals that can give credibility to the agency on having successfully funded in the country .If any Indian company check them out in the directory

· Indian monetary system is the second strictest economy next to only USA in the world and The RBI regulations cannot be easily overcome if not approached professionally. You have to make sure that any NRI source of funding or foreign in nature is legally present inside the country .Sometime people dabble with projects even before the funding is in place as VC and create a ring of nemesis to excellent projects. In such cases it’s always good to make sure that you ask for references and seek complete details of the company including its registration no, contact details, full address.

· For an Angel investor always choose a recognized network and talk to an investor who has proven track record of investing or experience in having successfully brought in funding through allied associations or syndication of investors.

· Do not deal with agencies that claim to be investment companies and ask for upfront fees or agents that have connections to big investment out fits. Most of the time such associations result in frustrations and take one, miles away from the original intent. 

· In the name of projects investment one can get caught into money laundering mafias which park ill gotten funds into legitimate business to convert it into clean money and then force the company to close down and report it as loss to wipe out the track record of where the money was written off. These things can kill the spirit of entrepreneurship