1. PE & VC
Embracing the New Normal
School of Business and Management CHRIST
III Annual Financial Services Symposium
July 2020
Anjana Vivek
2. At the start
Kinds of Investors
Due Diligence Review
Investment Process
Valuation
In Summary
Agenda
2 2
3. At the Start
Take time out to think/reflect…
• WHAT are the strengths that the entrepreneurs
bring to this business
• WHAT are the constraints they have to either
– Address or
– Accept (and work keeping this in mind)
3
4. At the Start
Do take time out to think/reflect…
• Are they looking for funding, now or later?
• Can they bootstrap if you do not get funded?
• Can they generate revenue if you do not get
funded?
• What are the kinds of Funding options available
today for business?
• What are the alternate equity investment (plus)
options? VC/ PE/ Incubation?
4
5. At the start
Kinds of Investors
Due Diligence Review
Investment Process
Valuation
In Summary
Agenda
5 5
6. Stages of business
• Idea / Seed
• R&D / Pilot / Proof of Concept
• Commercialization / Scale up
• Early Stage
• Growth / Later Stage / Expansion
• Turnaround
• Acquisition, Inorganic expansion
• … etc.
• Funding Strategy & Investor Selection
depends on Stage
• Valuation & Valuation Multiples are connected
to stage
7. Different Investors: Different Mandates
• HNIs, informal and formal angel groups
• Seed Funds
• Venture Capital
• Private Equity
• Banks exploring innovative ways to fund SMEs
• Strategic Investors
• Corporate Funds; (Family) Business Groups, Indian & Global
– Directly and/or through a special division or subsidiary
– For employees alone or open to public
– As intellectual and/or financial capital with other facilities
• Government supported funds
• Impact Investors
• Incubators
• Accelerators
• Co-Creators
• Crowd funding
• Online funding platforms
7
Which
One
Could be
the
…
Right
Fit
for
the
Venture?
8. What Investors Look for
• INVESTOR FIT: Mandate and Fund Philosophy,
stage of investment cycle, other portfolio companies
• Team: Education, experience, multi-disciplinary, co-
founder team cohesiveness
• Past track, of team members both in and before this
venture, of business
• Idea/Business growth and history thus far, ability for
growth and sustainability
• Competitive scenario
• Risks
• Financial plan and funding strategy
AND IN A POST COVID-19 WORLD: RESILIENCE
9. Business Plan
• An output based on business model and
strategy, expected to evolve over time
• To be forward looking, based on past
knowledge of promoters and their work
experience in the existing or new venture
• Assumptions to be tested to see if they will be
valid for execution, i.e. to demonstrate this is not
a business plan on paper alone
• Risks to be factored in plan
• Multiple scenarios are looked at
– revenues expected are discounted
– costs and expected cash flows are factored
– sensitivity to key parameters are checked
10. Trends: ‘to trigger thinking’
POST COVID-19
• Time for Due diligence is increasing, as virtual meetings
replace physical ones, negotiations take more time
• Many investors prefer to focus on follow-on investment in
existing portfolio companies; hence VC funding for
entrepreneurs first round is impacted
• Entrepreneurs are being more than ever carefully
scrutinized for their capability, strength and resilience
• Strategic investment, tie-ups and deals are increasing as
ventures are consolidating, pivoting and closing down
business models that are not viable post the pandemic.
• Financial models are carefully scrutinized for utilization,
with a high focus on costs and operational efficiency
11. Trends: ‘to trigger thinking’
POST COVID-19
• Industries have been impacted, some negatively
(airlines, co-working), and some positively (online
education, telemedicine). This has impacted the way
investors are reviewing businesses and business models
• As more work gets done remotely, attention is being paid
to how organizations are managing the change, in
operations, in sales and marketing, in handling people
and managing fall outs due to stress and lack of face to
face discussions and more
• Some investors are waiting for better times and going
slow, others are ready to invest. Entrepreneurs therefore
need to do a due diligence before deciding which
investor to approach
12. Caselet: You are an investee
• Zyco Fund has a life Cycle of 10 years, this is a
fund with overseas investors
• In year 7 of the fund, Zyco has offered 1 million
USD for a 15% stake in Amaze Co., in
Bangalore
• The promoters of Amaze also have another offer
from Indo, an Indian Fund; they are offering
Rs.10 crores for 20 % stake in the company
• What are the key deal aspects the Amaze
founders should consider
12
13. Caselet – Debrief - Illustrative
• Promoters should make an effort to understand the
mandates of potential investors and their reasons
for investing
• The impact of an international investor vs an Indian
investor need to be thought through with due care
• The value add and brand accretion or depletion due
to an potential investor need to be factored, it is not
only about money and equity stake percentage
• The clauses and fine print in the contract need to be
checked in detail
13
14. Caselet – Debrief - Illustrative
• Founders should think through possible scenarios
over the next 3-5 years, assuming the company
does as well as projected and also assuming a
scenario where projections are not met
• Valuation today and valuation expected tomorrow,
both have a role to play in decision making
• Valuations expected in 3-5 years, depend on
assumptions made. These need to be thought
through carefully from multiple angles, operations,
finance, team, competitive landscape and more
14
15. Caselet: You are an investor
• GR Fund is a fund of alumni of GR Institution
• The Fund invests directly and sometimes the alumni may also
invest in individual capacity
• Blyitz, a for profit company, which is working on a BOP
(Bottom of the Pyramid) model has got a commitment from an
Angel Fund (AF)
• AF tells Blyitz that they will put in money along with another
co-investor, so Blyitz approaches GR Fund
• Another HNI Fund managed by a professional also hears of
this deal and asks for information
• How will you evaluate the investment proposal from Blyitz if
you are a Fund Manager for GR Fund? What if you are the
HNI Fund Manager, will your approach be different?
15
16. Caselet – Debrief - Illustrative
• Each Investor and Fund Manager will approach it
from his or her fund mandate and how the
investment and disinvestment from this company will
fit into this
• Internal aspects, such as stage in the Fund Life
Cycle, current portfolio on hand, etc. will also play a
key role in evaluation
• If multiple fund managers are involved, the
differences and similarities in the mandates of the
funds will need to be assessed
• There needs to be collective discussion as to who
will lead the deal, do the due diligence and play an
active role post the funding. One or more of the
Funds may be involved in these aspects and more
16
17. At the start
Kinds of Investors
Due Diligence Review
Investment Process
Valuation
In Summary
Agenda
17 17
18. What a project must have
• TEAM with Execution Capability & Resilience
• Huge Addressable Market which can lead to
rapid growth, i.e. this implies:
– Total addressable market is really high
– Company/team has potential to address this market
– Company/team has ambition to address this market
– Company/team has the capability to Execute to
achieve high growth
– Risks are articulated
– .. Etc
19. Due diligence reviews (DDR)
Investment decision is based on DDR, some
illustrative reviews are below. Some aspects of these
may be done in-house by the investor, others may be
out-sourced to experts and professionals:
• People
• Business
• Market
• Technology
• Accounting
• Tax
• Legal
• HR
• Other..
20. An Illustrative Sales Quality Review..
• Quality impacts Valuation Multiple
• Illustrative indicative parameters, for DDR
– Sales Quantity
– Quality of revenue - in terms of
product/service/vertical/location etc.
– Average revenue per employee
– Number of customers, number of high value customers
– New customers added
– Customers lost
– Pipeline customers
• Customer acquisition strategy
20
21. Value Creation Review
• Investment should have potential for value
creation not value depletion; i.e. beyond
– Top line (revenues)
– Bottom line (profits) and
– Cash flow
• To understand financial and non-financial
aspects of business and investment into
business and impact on growth and survival
21
22. Due Diligence Example
E-commerce based special vertical
• Forecast was not reflecting expected reality
– Expenses uniform across optimistic to pessimistic scenarios
– Few expenses were static across several months/years
– 31st March 20X0 were in1 city; 1st April 1 20X1 to YE in 4
cities; 1st April 20X2 in 8 cities… i.e. sudden jumps; not
reflective of stage by stage expansion of business
• Recommendation: Management advised to
recast numbers to reflect reality of running
business and not just create an excel sheet
23. Due Diligence Example
Service aggregator(Service also listed on digital platform)
• Revenue/profitability review prior to 2nd tranche release
– Revenue was accounted on receipt, including annuity
– Costing exercise showed gross profit was low for all lines of
business, other than one, with a few loss making. This could
be due to low scale of business; needed further examination
with scenario analysis for growth
– Working capital constraints lead to acceptance of low
profit/loss activities with cash advance, against higher profit
jobs where cash would come in later in the delivery cycle
• Recommendation: Management advised to look into
revenue recognition, undertake costing exercise and to
relook at pricing strategy. Forecasts to be resubmitted
based on revised plan before 2nd tranche could be
released
24. Due Diligence Example
Example of forecast reflecting possibilities
• Pipeline for next year detailed out with customer
segmentation and probability of conversion based on
past record
• Domain knowledge and expertise demonstrated on
questioning, for example in food business about
customers eating habits etc.
• Recommendation: Prima facie this looked as if the
management had done their homework and that they
had domain knowledge. A technology product review
was recommended before getting into valuation and
negotiation
25. At the start
Kinds of Investors
Due Diligence Review
Investment Process
Valuation
In Summary
Agenda
25 25
26. VC investment & exit
Initial
Meetings
Prelimnary
Project
Review by
Venture
Capitalist
Term Sheet
Signed by
Venture
Capitalist &
Promoters
Due
Diligence
Review of
Project
Venture
Capitalist
with Funds
Promoters
with
Project
Legal
Documents
/Agreement
Signed
Investment
made by
Venture
Capitalist
in Project
Mentoring
&
Monitoring
of Project
Divestment
& Exit
from
Project
Promoters
Venture
Capitalist
27. At the start
Kinds of Investors
Due Diligence Review
Investment Process
Valuation
In Summary
Agenda
27 27
28. Valuation
• Based on
– Tangibles and intangibles
– Data and assumptions
– Subjectivity and objectivity
• Many methods of computation including but not
limited to
– Multiples of revenue, earning, user base etc
– Cash flow based, discounted
– Cost based
• Factor statutory, accounting, and tax implications
28
29. Valuation
• Identify valuation methods and drivers in your
industry
– Number of customers?
– Revenue?
– GMV?
– Number of unique views?
– Average revenue per customer?
– Profitability?
– Cash Flow generated?
– Combination of above?
– Other?
• Team
• Stakeholders associated – advisors, investors etc.
29
30. Valuation
• At the start value is mostly intangible, look at
how this can be made tangible..
• For eg. service – through content, follow up
calls, showcasing feedback, etc.
• Can you think of how one can can demo value in
a business? How can one improve the value
perception?
30
31. Valuation: Examples of Value Demonstrated
• Association with credible organisations, individuals
(incubation, acceleration etc..)
• Reputed persons on advisory board
• Marquee/discerning customers
• Feedback/testimonials from reputed persons or
persons in well established roles
• Ability to charge premium pricing
• Ability to address a huge market – i.e. ecommerce
companies, value without profits
31
32. 32
Valuation : Startup Examples
Some angel investors/ Incubators/ Accelerators, set a
pre-decided equity percentage, illustrative example:
• Range between 7.5%-10% of company equity,
for Rs.25 lakhs investment
• 25%-30% of the company, for the first amount
of investment, which could vary between 50
lakhs to 2 crores
• 75% discount to valuation at next round by
investor
NOTE: Regulatory aspects and Tax MUST be factored In
by entrepreneur before accepting any terms.
33. 33
Valuation : Startup Examples
Names/data changed to maintain confidentiality..
Mentoring:
• 1. Edtech Co. 1 year old – Terms: month one meeting (half
day), Focus on growth strategy and advisory services for
leadership team: 2% equity
• 2. Food tech idea stage – Terms: month 2 meetings (2 hour),
mentoring on growth strategy, funding strategy and help in
fund raising: 5% equity plus 1 % success fee of funds raised
• Statutory and tax issues to be addressed while equity is given
Incubation by Tech company:
• 3. Idea stage: (i) Rs.50 lakhs was committed for 1st year, to be
drawn on need basis (ii) Admin/accounting etc. support to be
provided (iii) basic sustenance monthly fee of Rs.25,000 per
month agreed to for each of 2 founders: 48% equity with Tech
Company and balance equally by two founders
34. 34
Valuation: Startup Examples
4. Investment in media/entertainment company in 2014!
(numbers changed to maintain confidentiality)
• HewS closed $10 million valuation from InvestorA
• Reading press reports, Investor 2 wanted to participate and
asked the promoters to suggest a valuation
• HewS Team and InvestorA decided at random: 20% increase
in 1 week, leading to valuation of $12 million;
• On flight as InvestorA travelled to meet Investor2, he decided
he would not just be a messenger, he would value add, so he
decided to up valuation to $18 m
• During negotiations, Investor2 gave final offer of $15 m
• Thus in about 10 days the company valuation went up by 50%,
from $10 m to $15 m
• Founders ended up with more money than they had planned
for and had to think of ways to spend this!
35. 35
Valuation: Startup Examples
Names/data changed to maintain confidentiality..
Service business: Value add measures:
• 5. Two year co. – Rebranded, reclassified domain, pre-funding;
on advise that revenue multiple would go up from 3 to 5.
• 6. Three year co. – Changed business model to increasing
outsourcing of some service delivery aspects. Cost of inputs
increased, gross margins reduced, however operational
efficiency increased, net profit margins increased and valuation
multiples; i.e. revenue and PBT multiples increased.
Investor negotiation:
• 7. Early stage idea: Jim had high technical knowledge, limited
financial knowledge. Investor Z convinced Jim that he could
partner and grow the company to high value in 3 years and
negotiated for half the business. Jim got into this without
understanding how shares could get further diluted in later
rounds of funding. At the end, Jim was left with less than 10% of
the company he started, however valuation was high.
36. At the start
Kinds of Investors
Due Diligence Review
Investment Process
Valuation
In Summary
Agenda
36 36
37. In Summary: Caution
• Entrepreneurs must demonstrate long term survival
capability and build a Financial Model that captures
elements of the business model
• Parties involved must look out for concern issues, hidden
agendas; must evaluate on value-based parameters
including but not limited to fund source, governance,
ethics and reputation
• One needs to keep an eye on the law, tax and statutory
regulations; these also impact valuation and deal
negotiation
• ..Think, do due diligence (whether investor or
entrepreneur).. And then proceed
38. For more …
• https://www.slideshare.net/anjanavivek
• https://www.linkedin.com/in/anjanavivek/
Thank you