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VENTURE CAPITAL TRAINING
PROGRAM
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3
1200 Cr funding for Oyo
Rooms in one year
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2005
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2015
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STARTUPS
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TOTAL INVESTMENT IN
2015 IN INDIAN STARTUPS
INR 1,23,500Cr
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TOTAL INVESTMENT IN
2017 IN INDIAN STARTUPS
INR 1,36,000Cr
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One startup investment cheque
is signed every 8 hours
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9 out of 10 startups fail in the
first year itself
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US$30MN US$40MN
3 out of 4 funded companies fail
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WHAT KIND OF
BUSINESSES WOULD
YOU LIKE TO INVEST IN?
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1. Team
2. Scalable business model
3. Proof of concept
4. Solid Value Proposition
5. Market Opportunity & Industry
6. High Entry Barrier
7. Strong Monetization Model
8. Potential for Exit
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“DUDE” OF CAPITAL RAISING
Total funding raised :
US$ 2.4 Billion
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Sachin & Binny Bansal – Computer Engineers from IIT,
worked in Amazon
Coined the idea of convenience of shopping while sitting
at home back in 2007
Can service the entire country without constructing a
physical structure
Exibited proof of concept by selling books that didn’t
require touch and feel while buying
Indian retail market: INR 5,00,000 Cr
Indian e-tail market : INR 36,000 Cr
Today Flipkart’s revenues are more than
600016Cr
1. Team - Education from premier institutions, relevant experience
2. Scalable business model – Reach across the country through a
single website
3. Proof of concept – Successfully sold books and gradually entered
electronics, accessories as well as fashion & furniture
4. Solid Value Proposition – Convenience
5. Market Opportunity & Industry – 5 Lakh Cr
6. High Entry Barrier – Early mover – Today has reached a scale that is
extremely difficult to replicate
7. Strong Monetization Model – Commissions from sellers (Marketplace
model)
8. Potential for Exit – IPO / Acquisition
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HOW BIG IS THE
OPPORTUNITY?
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DETERMINING THE SIZE
OF ADDRESSABLE
MARKET IS EXTREMELY
CRITICAL
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TOTAL FOOD MARKET
IN INDIA IS 43,000 CR
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Food Industry
Organized Unorganized
Full Service Quick Service
Kiosks and carts Bars and Lounges
Restaurants Restaurants (QSRs)
Fine dining Take away Take away
• Highest growth segments
Home delivery Home delivery • Maximum footfall
Casual dining
Eat in
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20%
ORGANIZED UNORGANIZED
Market size:
Market size:
INR 8,600 Cr INR 34,400 Cr
Growth rate: Growth rate:
20% 5-6%
80%
QSR forms 35% of
the total organized
market
Unorganized Organized
Total market size: INR 43,000 Cr
QSR
Market size:
INR 3,000 Cr
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TRUCKFIRST RECEIVED 10
MILLION DOLLARS OF FUNDING
FROM SAIF PARTNERS
ONLINE TRUCK LOGISTICS
PLATFORM THAT CONNECTS
TRUCKERS WITH SHIPPERS
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India has 50 lakh trucks
Total truck trips per year – 12 Cr
Average freight cost – INR 30,000
TruckFirst charges 2% of freight cost as fees – INR
600
Total opportunity size – 12Cr trucks x INR 600 =
INR 7,200 Cr
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STAGES IN VENTURE
CAPITAL
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Series D
Lowest Risk
Series C
IPO / Strategic sale
Highest risk
Series B
Seed / Angel Funding
Series A
Growth map of a
venture
Early stage Expansion stage
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Total funding raised : US$ 2.4 1000
1000
Billion
750 700
500
360
250 210
150
1 10 20
0
Seed Series A Series B Series C Series D Series E Series F Series G
Figures in Million
Dollars
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Flipkart Rounds of Funding
Date Investors Deal Value ($MN)
2015 Round 12
Steadview, Tiger Global,
Nov 2014 Round 11 MIH Holdings Ltd, DST, 700
others
Tiger, Sofina
Jul-14 Round 10 Societe,GIC,DSTI,Morgan
1000
Stanley,
Tiger, MIH,Iconiq,
Iconiq, MIH, DST,Accel
IDG
May-14 Round 9 Ventures
210
Morgan Stanley, Dragoneer
Oct-13 Round 8 Investment, Vulcan Capital, 160
Tiger Global
Jul-13 Round 7 Accel, Tiger, Iconiq, MIH 200
Jan-12 Round 6 Iconiq, Tiger, Accel, MIH 150
Nov-10 Round 5 Tiger Global 20
Tiger, Accel, Ashish Gupta,
Nov-09 Round 4 Shekhar Kirani 10.47
Oct-09 Round 3 Accel India Venture Fund 0.79
Shekhar Kirani
Sept-09 Round 2 Hanumanthasetty 0.002
Sept-09 Round 1 28
Ashish Gupta 0.02
Preparation of a business plan and a financial model
Investor Pitching
Initial screening
Detailed business diligence
Investor Committee meeting
Issuance of termsheet & Negotiations
Due-diligence
Negotiations & SHA
Closure
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VALUATION
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IT’S A GAME OF ASSUMPTIONS
WHERE THERE IS NOTHING RIGHT
OR WRONG
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UNDERSTANDING THE
VALUATION IN PUBLIC MARKETS
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TRANSACTION COMPS
METHOD
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Suppose you are evaluating investment in a quick service
restaurant company which sells Lebanese food
The company is currently looking for raising 6Cr
The company has 3 outlets currently and is doing a revenue of 1Cr
Post infusion of 6Cr, the company is expected to make revenues of
7Cr in the next year by opening additional 7 outlets
The promoters are willing to dilute 12% stake in the company
You have to sit on the negotiation table to discuss how much stake
you want from the company for investing 6Cr in the business
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Step 1: Understand the financial
projections
Can the company reach 7Cr next year
Is it practically possible to open 7 additional outlets in this
year
How much time will it take to open each outlet
Is the manpower and backend ready to get this in place
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Step 2: Comparable spread
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Deal Structuring
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CCPS
Preferred instrument provides certain rights, privileges and
preferences to investors
The most important feature that it offers is Liquidation
preference
If the valuation of the company is fixed upfront then the
instrument used to invest is CCPS
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Convertible Structure
Most suitable for first round or angel investment
Valuation is not fixed upfront but is determined by a future
event
Usually includes floors and caps
Instrument used is a CCD
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Example – Convertible Structure
Investment Amount – INR 5Cr
One year forward revenue multiple – 3x
Minimum Dilution – 5%
Maximum Dilution – 10%
FY17 revenue numbers
(actuals)
Revenue 10Cr 16Cr 20Cr 25Cr 30Cr 35Cr 40Cr
Valuation 30Cr 48Cr 60Cr 75Cr 90Cr 105Cr 120Cr
Invest. 5Cr 5Cr 5Cr 5Cr 5Cr 5Cr 5Cr
Dilution 17% 10% 8% 7% 6% 5% 4%
Act. 10% 10% 8% 7% 6% 5% 5%
Dilution
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UNDERSTANDING TERM
SHEET
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Termsheet is a non-binding negotiable
agreement that defines basic terms and
conditions under which an investment
will be made
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Valuation
• Investment Amount
• Pre-money valuation
• Post-money valuation
• % stake
End Use
• Marketing
• Tech development
• Working Capital
• CAPEX etc.
Instrument
• Preference shares
• CCDs
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Shareholding pattern
• Pre-investment
• Post-investment
Person A 50%
Person B 40%
ESOPs 10%
Total 100%
Person A =50%*(1-10%) 45%
Person B =40%*(1-10%) 36%
ESOPs 10%*(1-10%) 9%
Investor 10% 10%
Total 100%
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Exit rights
• Exit to be provided at the end of the 5 years by the
founders in the form of IPO / Secondary sale etc.
• Minimum IRR of 18%
• If Founders cannot provide exit, investor will make
efforts to sell their stake
• In case they find a buyer who is willing to buy additional
stake, the founders will be obliged to sell their portion
(Drag Along right)
• If even the investors cannot find a buyer then the
company / founder should buy the stake at 12% IRR
(Put option)
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Preemption rights
Right to buy proportionate number of shares of any
further issuance of securities to maintain the
shareholding
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ANGEL ROUND
Investment amount INR 2Cr
Stake 20%
Post money valuation INR 10Cr
Promoter shares 10,000
Angel Investor shares 2,500
Total shares 12,500
Share price INR 8,000
Promoter Angel Investor
80% 20%
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SERIES A ROUND
Investment amount INR 12Cr
Stake 20%
Post money valuation INR 60Cr
Promoter shares 10,000
Angel Investor shares 2,500
Series A investor shares 3,125
Total shares 15,625
Share price INR 38,400
Promoter Angel Investor Series A
64% 16% 20%
Angel 1 has the right to purchase additional securities at INR 38,400
per share to increase the stake to up to 20%
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Anti-dilution protection
Protection from dilution when shares are sold at a
price less than the price paid by the earlier investor
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ANGEL 1
Investment amount INR 2Cr
Stake 20%
Post money valuation INR 10Cr
Promoter shares 10,000
Angel Investor shares 2,500
Total shares 12,500
Share price INR 8,000
Promoter Angel Investor
80% 20%
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ANGEL 2
Investment amount INR 1Cr
Stake 20%
Post money valuation INR 5Cr
Promoter shares 10,000
Angel 1 shares 2,500
Angel 2 shares 3,125
Total shares 15,625
Share price INR 3,200
Promoter Angel 1 Angel 2
64% 16% 20%
The company has to issue additional 3750 shares (total
6250 shares) to Angel 1 under anti-dilution protection
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Liquidation clause
• During the event of liquidation the investor should get
their capital back + pro-rata share in the remaining
proceeds
Right of first refusal (ROFR)
• If the promoters wish to sell shares then it must first
offer them to the Investor, the Investor needs to match
the offer to take it forward
Co-sale and tag along right
If the Investors do not exercise their Right of First
Refusal , the Investor can insist that the potential
purchaser buy a portion of their shares at the same terms
offered to the promoters (eg 1:1)
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Closing Date
• The termsheet is valid for 30 days
• The transaction should be closed within 90 days
of signing the termsheet
Conditions Precedent
• Many of the conditions listed would be
procedural in nature pertaining to due-diligence
issues, keeping audited statements ready and so
on
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Reserved Matters
This clause gives the Investor or Investor-appointed-
director a veto over ‘reserved matters’ in the board or
shareholders meeting
Founders Lock-in & Non Compete
• Founder should continue to be employed in the
company till investors exit
• Founder and his / her relatives should not start / invest
in any company with similar / related business
Exclusivity
Post signing the termsheet, the company will stop all
conversations with other investors
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DUE-DILIGENCE
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Information gathering process from business, financial
and legal perspective
Tool to evaluate if its going to be a good deal or a
costly mistake
Tool for negotiation
Exhaustive process
Outsourced
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• Evaluating historical data
• Evaluating market risk
• Evaluating people risk
• Evaluating technology risk
• Evaluating money risk
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Evaluating historical data
• All corporate charter documents
• Minutes of BoD meeting
• Rights to intellectual property or licensed by the company
• Financial and accounting statements
• Material agreements involving real estate & mortgages
• Contracts with dealers, distributors, suppliers, and customers
• Agreements with officers, directors or employees of the company
• Leases, acquisitions, loans and licenses
• Insurance coverage, including documents related to past claims
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Evaluating people risk
• List of all key employees and description of their
present duty
• Salary and bonus plans, stock options, other incentives
and compensation arrangements
• Employment history
• Employee benefit plan, health insurance etc.
• Copies of employee agreements, confidentiality
agreement, non-compete agreements etc.
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Evaluating Technology risk
• Copies of patents and patent applications, trademarks
and trademark applications, and copyrights
• Names of people who created the IP
• Licenses of any form of IP held by or granted by the
company
• Descriptions of pending infringement claims by or
against the company
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Evaluating Money risk
• Sales and cost of good and services, general and administrative
expenses, selling & marketing expenses, fixed assets and
depreciation
• Detailed information and analysis regarding receivables and
payables
• Detailed information and analysis regarding actual and contingent
liabilities
• Detailed information regarding the budgeting process and
forecasts
• Detailed tax information
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OUTPUT OF DD IS A REPORT
WITH RED FLAGS
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SHA & SSA
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Shareholders Agreement (SHA)
Agreement between all shareholders of the company
It includes
• Capital structure
• Uses of proceeds
• Management, board rights
• Anti-dilution
• Exit
• Tag-along
• Information rights
• Non-compete
• Covenants of promoters and company
• Event of Default
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Share Subscription Agreement (SSA)
Details of purchase of securities and is signed between
subscribing shareholder and the company
It includes
• Conditions Precedent to closing
• Representations and Warranties – Undertakings
• Indemnification – Keep the investor indemnified and free
from all liabilities
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EXIT
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Exit strategies
EXIT OPTIONS
Initial Public Strategic Secondary
Offering
Sale Sale
Infusion of funds
Merger / Business Transfer Asset Transfer
Share Transfer Share Transfer by a new
Acquisition
investor
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Value creation at exit
Promoter & Investor decide to sell the company and exit
Current revenues INR 170 Cr Current revenues
Transaction Multiple at the
EV / Sales 4.0x
time of exit
Revenue * (EV / Revenue) =
Valuation 4 * 170 = 680 Cr
EV
Investor stake 20%
Initial investment = 6Cr
Investor stake value 20%*680=136 Cr
(23x returns)
Promoter’s stake 80%
Promoter’s stake value 80%*680=554 Cr
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Coming back to reality
42 Cr 6 Cr 53 Cr
Justdial's Rs 950-crore IPO - a pure offer for sale in which Mani and
investors, including Tiger Global, Sequoia Capital and SAP Ventures, sold
1.75 crore shares - is the largest on Indian bourses this year and one of the
biggest by an Indian Internet company. It was oversubscribed 12 times.
The PE investors earned 850% returns on their investments by selling the
shares in the IPO.
- Economic Times
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Facebook announced the purchase of the mobile messaging
service WhatsApp on 19th Feb 14, in a $19bn deal that represents
the social media company’s biggest acquisition yet
Facebook's acquisition of mobile
messaging service WhatsApp will see
x ; venture capital firm Sequoia Capital,
5 8 the lone investor in the company, walk
s – away with a reported $3.5 billion
(Rs 21,000 crore).
rn 3%
t u 73 Sequoia Capital had invested $60
Re 5 million (Rs 360 Crore) in WhatsApp.
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Number of Users – 450 million
New users per day – more than 1 million
Number of messages shared per day – 50 billion
Number of pictures shared per day – 500 million
Number of Users – 1.3 billion
Number of pictures shared per day – 400 million
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Acquiring 450 million users
It potentially gives so much information to Facebook about
users for possible exploitation
Keep giving users targeted content
Huge opportunity to jump from one thing to other and yet be
within the larger Facebook network
Keeping the competition at bay
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Revenues (US$ million) 450
Employee cost (US$ million)
15
(Assumption 50 employees each earning around USD 250,000 per year)
Hosting Charges (US$ million)
(Hosting charges for Twitter is USD 0.5 while that of Facebook is USD 360
0.6 – we have considered 0.8 for Watsapp)
Marketing charges (US$ million)
0
(Word of mouth)
Other expenses (US$ million)
15
(Electricity, rent, office expenses, other expenses etc)
Net Profit (US$ million) 60
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Trading comparable -
Since companies trading on a stock exchange are valued by
the market in real-time, their valuations are considered fair
value for the sake of similar sized, private acquisitions
Company PE Ratio
Netflix 235
LinkedIn 400
Twitter Loss making till date
Median 317
Net profit of Watsapp (US$ million) 60
Median PE ratio 317
Valuation of Watsapp (US$ million) 19060
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“Pray everyday that your
investment will at least give you
your capital back”
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“At the end of the day its a
tukka…”
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Thank-you
potnis.vikrant@iavc.in
+91 98195 77336
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