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Sources of Funds
1. Source of Funds
Where will the money come from?
How will we “harvest” the
opportunity?
Contributed by:
Ed Rubesch
Lecturer, Thammasat Business
School, Thammasat University, Thailand
2. How to Approach Investors
Research potential investors
Only approach appropriate investors
Prepare a very good Business Plan
Prepare and rehearse a very good presentation
(no set standard: 30 seconds / 40-45 mins)
Be clear about what you need (how
much, when, what for) and have some idea
about what you’re prepared to offer (% of
equity)
Progress your venture as much as you can on
your own before approaching investors
3. How to Approach Investors
Ask potential investors about their investment
style and expectations
Spend time with investor’s other investee
partners / companies
Negotiate hard
Ensure your interests are aligned with those of
your investor. Agree a written business plan
Hire professional help
4. Investment Opportunity in Thailand
Investors looking at all stages and sizes of
companies
Lots of money looking to invest in Thailand
Deals are few and far between
problems with investors capabilities
(e.g., access / protection)
problems with investee capabilities
(e.g., accountability / transparency)
Everything takes a (very) long time
Exits unclear
5. Typical New Venture Funding
Sources
Who are they?
What drives their investment decision?
What do they expect to get?
Where does their money come from?
6. Typical New Venture Funding
Sources
Research Institutions
Self-financed
Angel Investors
Venture Capitalists
Private Equity
Public Equity
Banks
7. Research Institutions
Who are they?
Universities
Private laboratories
Government agencies
What drives their investment decision?
The desire to enhance the body of knowledge
in a specific area of interest through research
8. Research Institutions
What do they expect to get?
The intellectual property that results from the research
Patents
Rights in property or process, even if not patented
Where does their money come from?
Endowments (sometimes with spending conditions)
Grants
General funding from government
Student tuition
9. Self-financed
From where?
Family
Friends
The entrepreneur
What drives their investment decision?
Based on a belief in, or relationship with, the
entrepreneur
Based on a belief that the idea is at least feasible
10. Self-financed
What do they expect to get?
Their original investment returned
Maybe interest
Less often equity
Where does their money come from?
Usually funded from personal savings or new
borrowings (mortgage on real estate)
11. Angel Investors
Who are they?
Wealthy individuals
Often successful entrepreneurs
What drives their investment decision?
A belief that the entrepreneur has done her
homework
A belief that the idea holds great upside
potential
12. Angel Investors
What do they expect to get?
Equity
A large return on their investment (> 30%
CAR)
Where does their money come from?
Usually funded from personal savings
13. Professional Investors
They Include: Venture Capitalists, Private
Equity, Public Equity, Banks
What are they looking for (maturity):
Significant shareholder value growth (“$”) for
expansion capital or reliable cash earnings
Consideration of:
transparency, honesty, creativity, responsibility, ac
countability, teamwork, etc.
Appropriate industry, investment size, stage of
company development – can vary depending on
risk tolerance and desired ROI.
14. Desirable Investment Opportunities
Demonstrable need for
business, product, service and defensible
market position
Track record of execution capability
Clearly defined business plan
Appropriate equity participation
Board representation, perhaps
appointment of CFO
Visible exit strategy
15. Desirable Investment Opportunities
When companies want to:
purchase new plant and equipment to expand
capacity
purchase new plant and equipment to enter
new business line
acquire competitor, customer or supplier
raise new working capital
16. Desirable Investment Opportunities
When owners want/need to:
sell non-core/underperforming assets
raise capital for new investments
raise capital to restructure
18. Pros and Cons
Advantages:
allows companies to access situations
otherwise closed to “high risk” investments
someone to share the risk
ensures better analytical discipline
access to investor’s network of
financiers, customers, suppliers advisers
19. Pros and Cons
Disadvantages:
high cost of funding if successful
partial loss of control
extra reporting requirements
20. Venture Capital Investors
Who are they?
Professionally managed investment vehicles
Usually in the form of a limited partnership
What drives their investment decision?
A belief that the entrepreneur is very capable
Management team
Business model
A belief that the idea and market conditions allow for
significant revenue and profit growth
21. Venture Capital Investors
What do they expect to get?
Equity
Significant return on investment (~ 30% CAR)
A clearly pre-defined exit for 5 – 7 years later
Where does their money come from?
Pension funds
Wealthy individuals
22. What is a Venture Capitalist?
Investment fund for private equity
Such as large pension funds that have long-term investment
horizons
Typically a VC fund lasts 10-12 years, before it is closed out
Looking for larger returns than offered by world-wide
stock and bond markets
Require fast growth
Require large market opportunities
Rewards must outweigh risks
VCs may reject 99% of all proposals.
23. What is a Venture Capitalist?
General George Doriot
Founded American Research & Development in 1946
Key investment principles:
1. New technology, new marketing concepts, and new product
application possibilities.
2. A significant, although not necessarily controlling, participation
by the investors in the company’s management.
3. Investment in ventures staffed by people of outstanding
competence and integrity.
4. Products or processes which have passed through at least the
early prototype stage and are adequately protected by
patents, copyrights, or trade secrets.
5. Situations which show promise to mature within a few years to
the point of an initial public offering or a sale of the entire
company.
24. American Research & Development
Company invested in over 100 positions during
the 1960s.
Interestingly, almost all of the Company’s
returns came from two successful investments:
Digital Equipment Corporation
High Voltage Engineering
25. Think Big – Venture Capital
Why do VC’s look for big opportunities to offset large
risk.
40% will fail.
30% will become “living dead.”
30% will become successes.
Most important: The failures almost always happen more quickly
than the success!
VC determine their exit strategy before they invest:
Public offering
Sale to a strategic partner
26. What Do VCs Offer?
Investment money from pension funds or
university endowments
Suitable management or technical expertise
Help finding strategic partners or customers
Strategy planning
In return: a large percentage of ownership, plus
seats on the board
27. Can VC happen in Thailand
Review the articles from Done Deals…
What situations are similar to Thailand?
What situations are different?
What would need to happen:
Government policy
Thai culture
Technical capability
Other?
28. Private Equity Investors
Who are they?
Professionally managed investment vehicles
Can be in the form of a limited
partnership, also mutual funds
What drives their investment decision?
Track record of the business
A belief that market conditions allow for
expansion of the business
29. Private Equity Investors
What do they expect to get?
Equity
Significant return on investment (up to 30% CAR)
May or may not seek a pre-defined exit
Where does their money come from?
Pension funds
Insurance companies
Mutual funds
University endowment funds
30. Public Equity Investors
Who are they?
Retail investors
Individuals
Institutional investors
Pension funds, mutual funds, corporations
What drives their investment decision?
Retail investors
Emotion, hot tips, their own analysis
Institutional investors
Investment policy (hurdle rates, sector & country
allocations, etc.)
31. Public Equity Investors
What do they expect to get?
Shares
Usually no role in management of the business
Return on investment (??% CAR)
Where does their money come from?
Retail investors
Personal savings or borrowings (mortgage on real estate, or
margin on brokerage account)
Institutional investors
Pension contributions, insurance premiums, etc.
32. Banks
Who are they?
Lending institutions
What drives their investment decision?
The creditworthiness of the borrower
Ability of the business to service the loan (make
payments of interest & principal)
Collateral (can be supplied by a third party)
33. Banks
What do they expect to get?
Their original loan returned
Interest
Where does their money come from?
Depositors
34. Funds often are applied to
different purposes
Source Purpose
Research Institutions Basic research, inventions
Self-Financed Initial start-up funds
Angel Investors Initial start-up funds
Venture Capitalists Just after start-up
Private Equity Longer-term growth of an established
company
Public Equity Capital investment requirements of an
established company, exit for VCs
Banks Financing for most operating needs