IVCA

GUIDE TO ANGEL, VENTURE CAPITAL

AND
PRIVATE EQUITY

INDIAN PRIVATE EQUITY &

VENTURE CAPITAL ASSOCIATION

GUIDE TO ANGEL, VENTURE CAPITAL

AND
PRIVATE EQUITY

CONTENTS
Sources of Equity Financing

Angels

Venture Capital

Corporate Venture Capital

Private Equity

Alignment of Interest

Business Plan

Stages of a Company

10

Investment Criteria

14

Value Addition

21

Exits & Exit Readiness

23

Terms Sheets

25

Sources of Equity Financing For

Entrepreneurs & Start-ups
Angel Investors

Angel investors are typically the earliest equity investments made in start-up
companies. The chief characteristics of Angel investors are :
An Individual investor who provides nancial backing for small start-ups or
entrepreneurs is called an Angel investor.
Angel investors are usually high net worth individuals.
Typically they are themselves successful entrepreneurs who provide early
mentorship to new entrepreneurs.
The capital they provide can be a one-time injection of seed money.
A primary purpose of angel investing is to validate the business model.
Examples of Angel Investors in India: Sunil Kalra, Rajan Anandan, Sachin Bansal,
Zishaan Hayath and others.
Examples of Angel Networks in India: Indian Angel Network, Mumbai Angels,
Hyderabad Angels, Lead Angels.

Venture Capital
Venture capital is long-term stable capital provided to early-stage, high-potential, and
growth start-up companies. Venture capital fundsgenerally invest in novel and scalable
technology or business models in technology industries, such as software engineering,
consumer internet, biotechnology and ot her industries.Venture capital funds usually

require proof of concept prior to their investment. Venture capital funds bring
domain knowledge and expertise.

This is a very important source of funding for start-ups that do not have access
to capital markets.
This form of raising capital is popular among new companies or ventures with
limited operating history, which cannot raise funds by issuing debt.

There are about 100 venture capital funds investing in India.

Examples of venture capital Funds in India : Sequoia Capital, Accel Partners,

Tiger Global, Kalaari Capital, Blume Ventures, IDG ventures, SAIF Partners and
many others.

Venture Capital Investment Process

The process of venture capital follows a typical sequence starting with the identication
of potential investment opportunities which is the sourcing of deals. Deals may be
sourced through trusted sources of the venture capital fund.
This is followed by a process of screening of those opportunities which the fund
manager considers merit further analysis. Then a process of investigation is conducted
called due diligence, during which a detailed background check and the business plan
and model are analysed.
If the fund manager considers the deal as investment worthy, then the opportunity is
presented to an internal investment committee for approval. This is followed by signing
of documents to make the investment.
During the investment holding period, the fund manager monitors the investment and
appoints a domain expert on the Board of the portfolio company. The aim of such
monitoring is to add value to the enterprise. Finally, after a holding period of several
years, the fund manager exits the investment.
See diagram below which summarises the investment process of a venture capital fund.
Private equity funds also follow a similar process.

Corporate Venture Capital

Many large companies in the US and Europe engage in corporate venturing (CV).
An example of CV in India is Intel Capital.
Corporate venture capital investments are usually minority equity investments stakes
in ventures that are managed outside a company's normal operating structures.
This means that long-term strategic partnerships, among other things, do not qualify
as corporate venturing.
For a company engaged in CV, it can be a very valuable growth tool, given the right
strategic conditions, which are:
1. Signicant uncertainty exists about the "winning" technology, distribution or
business model being considered
2. Technology or business models are developing at a pace faster than the
company can keep up with alone
3. There is value in being involved early as opposed to simply waiting for
uncertainty to disappear
4. Investment will present a win-win situation by adding value for both the investor
and the investee (target company)
5. Investment is related to the company's core business in the appropriate manner
The following 5 key operational guidelines, can help companies minimise the most
common organisational difculties :
1. Find the proper balance between strategic and nancial objectives and ensure
that mechanisms are in place to measure both
2. Obtain and maintain full Board commitment over the long term
Ensure effective co-operation between the investee companies, the CV
department and the Business Units of the company
Set up a CV team which can collect both the business knowledge and the
venture capital (VC) knowledge necessary
Recognise and manage the tensions between corporate-based and VC-based
compensation schemes.
1http://www.bain.com/Images/BB_Corporate_venturing.pdf
4

Intel Corporate Venture Capital -An Example of Corporate Venture Capital

Source: BVCA website
In the rush to champion independent venture capital, it can be quickly forgotten that
one of the biggest and most successful tech investors is actually a corporate. With a
track record of more than 20 years and num erous successes to its name, Intel Capital
has been patiently working away as a st alwart of the industry. Since 1991 Intel Capital
has invested well in excess of US$10bn into over 1,200 portfol io companies worldwide,
adding 34 new investments in the rst six months of 2013 alone.
Intel Capitals strategy has always provided it with a hedge against future uncertainly
in an ever-changing business environment, making equity investments of between
US$500,000 to over US$100m in high-growth potential businesses depending on
opportunity and circumstance. Intel follows no st rict pattern with its investments.

It follows general princip les: a single investment team makes decisions; portfolio
companies are encouraged to develop independently; remuneration and nancial
structures follow VC-style disciplines; and Intel Capital does not buy to acquire,
preferring to improve the general business eco system (thereby creating demand for
its core products).
The development and evolution of Intel Capitals model has provided, if not a template,
thena useful guide which other CVC pr ogrammes have tended to follow.

Private Equity
Private Equity funds generally invest at the later and more mature stages of a
company. They can make large infusions of capital depending on the needs of an
enterprise. Private equity funds generally take a lot of operational interest in the
investee companies in order to add value. Capital for private equity funds is raised
from institutional investors and high net wo rth individuals, and can be used to fund

new technologies, expand working capital, make acquisitions, or to strengthen a

balance sheet. Private equity funds. There are about 100 private equity funds in India.
Examples : TVS Capital, KKR, Carlyle, Warburg Pincus,
,
India Value Fund Advisors
and several others.

Alignment of Interest : 'Skin in the Game' 2

The providers of venture capital and private equity capital to funds are known as
limited partners. These include pension funds, insurance companies, sovereign wealth
funds, university endowments and others. The guardians of these funds owe a duty to
their beneciaries i.e. the limited partners, to earn an appropriate rate of return.

One key principle in achieving this rate of return is to ensure that all the parties which
have responsibility for managing or using these funds align their interest to those of the
beneciaries i.e the limited partners.

This is done in many ways two of the most common ones are described here.

Stock Options : All employees of start-ups and other ventures are provided an
incentive for running their businesses to achieve good returns by granting them stock
options. Usually these options are given on a staggered basis over a 4 to 5 year period
to ensure that those who stay with the rm receive the most stock options and the
largest incentives.

Co-investment by the Fund Manager : The fund manager of the venture capital or a
private equity fund, as a steward of LP capital, also needs to be aligned. This is achieved
by the method of co-investment as described in the Carlyle website quoted below.

http://www.catalyst.org.au/documents/What_is_Wealth_For/Catalyst-what-is-wealth-for-FULL.pdf

'The private equity model of value creation has many virtues, but one foundational
aspect is fundamental to this industrys long-term success: alignment of interests.

The goal is to align the interests of fund investors, Carlyle professionals and portfolio
company management so that we all rise or fall together. Since inception through June
30, 2015, Carlyle professionals, Operating Executives and other professionals have
committed more than $7 billion of their own money alongside our fund investors. The
managers of the companies we invest in also commit personal capital to those
investments. When an investment succeeds, all parties benet. When an investment
fails, all parties lose. This is a powerful motivator for Carlyle professionals and portfolio
company management to work in tandem to create value for our investors.'

Fund Raising By Start-ups : Business Plan

Most investors will ask aspiring entrepreneurs to submit a business plan. The plan
should introduce the team, including the founders. It should explain the business model
which is the method by which the enterprise will make money. The business plan should
highlight any disruptive effect the new business model, or the new product, might have
on the existing industry.

The business plan should be distilled into a crisp and compelling 10 to 12 slide
presentation.
The founders should rehearse the pitch several times and anticipate questions for
which they should have answers ready, backed by a convincing logical analysis.
The business plan should contain answers to the following type of questions:
What problem does the companys product or service solve? What niche will
it ll?
What is the companys solution to the problem?
Who are the companys customers, and how will the company market and
sell its products to them?

What is the size of the market for this solution?

What is the business model for the business (how will it make money)?
Who are the competitors and how will the company maintain a competitive
advantage?
How does the company plan to manage its operations as it scales and
grows?
Who will run the company and what makes them qualied to do so?
What are the risks and threats confronting the business and what can be
done to mitigate them?
What are the companys capital and resource requirements?
What are the companys historical and projected nancial statements?
Enterpreneurs can present the market potential in concentric circles as shown below.

The typical components of a business plan are illustrated in the diagram below.

Pre-Revenue Stage : Seed Capital

savings (e.g. from a severance package from the founders prior job) or from

Pre-Revenue Stage : Angel Investor Funding

stock (often it converts to the Series A round of stock). Friends & Family investors

Early, Growth & Expansion Stage :

Venture capital (VC) funding is typically used by companies that are already
distributing / selling their product or service, even though they may not be protable at
the time. If the company is not protable, the venture capital nancing is often used to
offset the negative cash ow. There can be multiple rounds of VC funding stretched
out over several years and each is typically given a letter of the alphabet (A followed by
B followed by C, etc.). For example, Alibaba had about 10 rounds of venture capital
funding between 1999 and their IPO in 2014.

10

The different VC rounds reect different valuations (e.g. if the company is prospering,
the Series B round will value company stock higher than Series A, and then Series C
will have a higher stock price than Series B). If a company is not prospering, it may still
get subsequent Series-rounds of nancing, but the valuation will be lower than the
previous series: this is known as a down round. These rounds may also include
strategic investors: investors who participate in the round who also offer value such
as marketing or technology assistance.

START-UP FINANCING CYCLE

VCs, Acquisitions/Mergers,
Strategic Alliances

Revenue

Angels, FFF,
Seed Capital

IPO

Secondary
Offerings

BREAK EVEN

Mezzanine

Valley of Death

Public Market

3rd
2nd
1st

Time

This graphic is an example of a start-up nancing cycle using traditional funding sources, through an initial public offering (IPO).
(Source: Startup Company Wikipedia,The Free Encyclopedia. Wikimedia Foundation, Inc. 11 March 2009. Web. June 2012
:
< http://en.wikipedia.org/wiki/FileStartup_nancing_cycle.svg>)

Mature Stage :

Mature Stage :

an Initial Public Offeringor IPO. An IPO generally comes at a stage when the

stream, or the number of years it has been in the market.

Investor Type

Stage

12

13

Investment Criteria
Investment Criteria of Angels
Illustrative Investment criteria: The following is an illustrative investment criteria for
Angel Networks. (Investment criteria of the Boston Angel Group)

4. Sales and Marketing

5. Technology & Product

6. Financial Evaluation

7. Exit Strategy

17

Investment Criteria of a Private Equity Fund

Illustrative Investment criteria: The following is an illustrative investment criteria for
private equity fund.4

18

Help with Mergers and Acquisitions Venture Capital funds generally have a clear

systems and processes to increase efciency, lower cost and scale effectively.

VALUE CREATION LEVERS

EXAMPLES

Pricing

Pricing realization
Product mix
Trade promotion

Volume

New products and R&D

New customers, channels and markets
Sales force effectiveness

COGS

Direct procurement
Process efciency
Capacity utilization

Grow Revenues

Increase Prots

Reduce Costs
SG&A
Capital-Efcient
Protable Growth

Reduce Working
Capital
Improve Capital
Efciency
Improve Fixed
Capital

Inventory

Inventory management

Reveivables

Receivables terms and timing

Payables

Payment terms and timing

Project Investments

Source : Booz & Company

22

Indirect procurement
Overhead and support
Outsourcing
Shared services
Organization streamlining
Footprint rationalization

exit readiness. A venture which achieves performance milestones, has good

management practices and organisational systems and procedures is more likely to
be exit-ready when the holding period ends.

They must exit all their investments before the end of the funds life. In contrast a
sovereign wealth fund, or a strategic investor, may have a much longer holding period in
mind.
The common alternative exit methods are described below.
Mergers and Acquisitions : The portfolio company may decide to sell to a
another company in the market. For example the $200 million acquisition of Taxi
for Sure by Ola, presented an exit option for its investors like Blume Venture and
Orios Ventures.

23

Distressed Sale: The portfolio companies may also be sold to another nancial
institution or other companies.

Buybacks : The founders may buyback the investment from the fund.

Exit Op ons

IPO

Founder Buyback

Sell Company

Distribute Cash

Strategic Sale

Financial Sale to
Another Fund
Sale to Employees

24

Term Sheet Provisions

Illustrative terms

Making Monetary Sense: How To Understand Your VC Term Sheet, Shahram Safai & Ronnie Dabbassi
http://www.entrepreneur.com/article/243318

Indian Private Equity & Venture Capital Association

Acknowledgment : Ritu Singh, Mannsi Gupta, Ntasha Berry, Yogesh Arora

www.ivca.in