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Report on

Venture Capital

Date: 20th August, 2016

Course: Financial Institutions
Submitted to: Sir Sharique Ayubi
Submitted by: Muhammad Moeenuddin (15632)


The failure rate can be quite high. anywhere from 20 percent to 90 percent of portfolio companies may fail to return on the VC’s investment. Detailed financial projections 5. or insurance company that makes investments on behalf clients of the parent company or outside investors. 4. Venture capital is an important source of funding for start-up and other companies that have a limited operating history and don’t have access to capital markets. In any case. investment bank. experience and expertise to fund and nurture companies that will yield a substantial return on the VC’s investment. and the investor hopes the investment will yield a better-than-average return.WHAT IS VENTURE CAPITAL? Venture capital is money provided by an outside investor to finance a new. your plan should include: 1. Not all VC investments pay off. Most VCs are limited partnerships that have a fund of pooled investment capital with which to invest in a number of companies. VCs may be a small group of investors or an affiliate or subsidiary of a large commercial bank. On the other hand. They vary in size from firms that manage just a few million dollars worth of investments to much larger VCs that may have billions of dollars invested in companies all over the world. 3. the VC aims to use its business knowledge. growing. The venture capitalist provides the funding knowing that there’s a significant risk associated with the company’s future profits and cash flow. A description of the opportunity and market size. or troubled business. A venture capital firm (VC) typically looks for new and small businesses with a perceived long-term growth potential that will result in a large payout for investors. . A venture capitalist is not necessarily just one wealthy financier. a fund can offer returns of 300 to 1. Resumes of your management team. generally within three to seven years. A review of the competitive landscape and solutions. if a VC does well. At minimum. Capital is invested in exchange for an equity stake in the business rather than given as a loan. THE FUNDING PROCESS Step 1: Business Plan Submission The first step in approaching a VC is to submit a business plan. and in fact. 2.000 percent. A capitalization table.

totwo hour meeting to discuss the opportunity in more detail. The term sheet is generally negotiable and must be agreed upon by all parties. and you should expect multiple phone calls. C. Some 0. product and business strategy evaluations and other such exchanges of information during this time period. After this meeting. late stage and pre-IPO funding. less than five percent will be invited to meet with the VC’s partners. and less than one percent will be offered a term sheet. Of those. If possible. respond quickly and effectively. emails. Follow up with the VC to check the status of your proposal and to find out if there’s additional information you could be providing that might help the VC with its decision.3 percent of those submitting a business plan will ultimately obtain VC funding. This is a non-binding document that spells out the basic terms and conditions of the investment agreement. Keep in mind that most VCs receive an average of 200 business plans each month. If you are asked for further information. it will discuss your opportunity internally and decide whether or not to proceed. a mutual fit is still seen. and D rounds. A VC may specialize in . Step 4: Term Sheets and Funding If the due diligence phase is satisfactory. after which you should expect a wait of roughly three to four weeks for completion of legal documents and legal due diligence before funds are made available. the VC will offer you a term sheet. The final rounds include mezzanine. TYPES OF FUNDING The first professional investor to a deal at the start-up stage is referred to as the Series A investor. depending on the number of business plans under review at any given time.Once the VC has received your plan. This part of the process can take up to three weeks. after this phone conversation. you’ll be asked to visit with the VC for a one. management interviews. The process may last from three weeks to three months. the VC will determine whether or not to move forward to the due diligence stage of the process. Step 3: Due Diligence The due diligence phase will vary depending upon the nature of your business proposal. always try to get a face-to-face meeting with the VC. Step 2: Introductory Conversation/Meeting If your firm has the potential to fit with the VC’s investment preferences. Just two percent will reach the due diligence phase. you will be contacted in order to discuss your business in more depth. If. This investment is followed by middle and later stage funding – the Series B.Don’t be passive about your submission. customer references.

Late Stage Capital. At this stage. You may be looking for funds to increase capacity. a management team is in place. NON-DISCLOSURE AGREEMENTS (NDAs) It’s not advisable to ask a VC for a non-disclosure agreement. improve your productivity. typically a 10 times multiple return in four to seven years. 4. or increase your company’s efficiency. Early Stage Capital. or may offer funding for all stages of the business life cycle. or increase working capital. You should seek out VCs that specialize in later stage investing. your company would have a sample product available with at least one principal working full-time. Investment capital may be used to create a sample product. Few VCs fund at this stage and the amount invested would probably be small. and finalizing of the product or service for introduction to the marketplace. you’ve gotten your company off the ground. It follows that the VC will expect a higher return for investing at this early stage. 2. Even if you think your ideas are proprietary. At this stage. Seed Capital.provide just one of these series of funding. your company has achieved impressive sales and revenue and you have a second level of management in place. additional market research. Expansion Capital. The earlier a VC invests. Funding at this stage is also rare. ramp up marketing. Your company is well established. they may be just similar enough to another entrepreneur’s that the VC takes on the added risk of legal action against it . you would be seeking seed capital. and may even risk stopping your potential VC deal in its tracks. Startup Capital. and sales are increasing. the greater are the inherent risks and the longer is the time period until the VC’s exit. It’s important to know the preferences of the VC you’re approaching. It tends to cover recruitment of other key management. VC funding could help you increase sales to the break-even point. fund market research. 5. Funding at this stage may help you enter new markets or increase your marketing efforts. and to clearly articulate what type of funding you’re seeking: 1. 3. If you’re just starting out and have no product or organized company yet. Venture capitalists may review hundreds or thousands of business plans in any given year. A key factor for the VC will be risk versus return. and now you are looking to a VC to help take your business to the next level of growth. At this stage. Two to three years into your venture. A later stage VC may be seeking a two to four times multiple return within two years. or cover administrative set-up costs.

There’s no single 7 determinant for a successful portfolio company. the return on investment and the terms that dictate that return. the VC takes into account your management team. yielding a significant return on the VC’s investment in a relatively short period of time. The pertinent negotiations will revolve around these two issues. TERM SHEET A term sheet is a document that sets out the basic terms and conditions under which the VC will invest in your company. no doubt. revenue-generating manner? . Is there a clearly defined market for the company’s product or service? Does the company’s product or service meet an identifiable need in that industry? Does the company have a reasonable plan to meet the identified need in an efficient. The term sheet is generally non-binding and is used as a template. your company’s market and competitive advantage in the marketplace. along with further due diligence. WHAT DO VCs LOOK FOR? Venture capitalists look for businesses that have the potential to grow quickly to a significant size. Note the difference between pre-money valuation – the valuation of your company before a VC invests in it. You will. The first is the economics of the deal. be particularly concerned with the valuation of your company set forth in the term sheet. to draw up more detailed legal documents. Also. A target company for a VC is one that may be capable of becoming a large market leader in its industry due to some new industry opportunity and competitive advantage. VCs are not just interested in start-ups. The second is control.e. meaning how the VC will be able to exercise control over your company’s decisions. To arrive at this figure. Does the company have a product or service that can be reproduced efficiently to generate revenue? b) Identifiable market. In negotiating your term sheet. Work completed in the due diligence phase of the funding process is used to draft this document. but a VC tends to focus on the following factors: a) Commercially viable.just by signing your NDA. The various factors that go into a valuation are determined during the due diligence phase. keep in mind that there are two central issues for the VC. and your earning potential. and post-money valuation – the pre-money valuation plus the contemplated investment amount. for the VC. Your company’s current size is less important than its future aspirations and growth potential. i. accepting NDAs adds the administrative burden of having to keep track of which NDA covers what entrepreneur’s ideas.

c) Strong management. while still others may invest at the end of the business cycle. A lot may also depend on the relationship between you and the VC. More typically. a VC will also consider factors such as results of past operations. VCs may be generalists that invest in a variety of industries and locations. In fact. and what are those companies’ strengths and weaknesses? Like a banker. turnarounds. Types of Funding). VCs are very selective in choosing new companies to invest in. a VC is a part owner rather than a creditor. They’re most interested in businesses with high growth potential that will allow them to successfully exit with a higher than average return in a time frame of roughly three to 10 years. Being in the same general location as a portfolio company allows the VC to better assist with business operations such as marketing. future earnings projections and conditions. they specialize in a particular industry. Keep in mind that venture capital is not an option for all new businesses. Has the company hit upon an idea that’s truly unique to the industry. rather than interest income. But unlike a banker. and understanding. You can often gain insight into a VC’s investment preferences by reviewing its website. and the ability to propel a business to a significant level of growth? Does the team consider best practices of those that have gone before them? d) Sustainable competitive advantage.’ While some may invest small amounts of “seed” capital for very early ventures. Does the company’s leadership inspire confidence? Do they have the vision. amount of funds needed and their intended use. VCs also typically have a geographic preference. or recapitalizations. Given the rigorous . the firm will have you meet with every one of its individual partners to determine whether there’s a consensus on how the company will be co- managed. so your company may not qualify. seven-year time period. many focus on early or expansion funding (see section III. Not all VCs invest in ‘start-ups. depending on the type of investment. Don’t underestimate the value of mutual respect. to make sure you’re targeting the right potential partner for your business needs. one that has significant barriers to entry that will inhibit others from encroaching upon its market? Has the company considered economic and technological change that may affect the business model? Who are the company’s potential competitors. and financing. teamwork. personnel. A common rule of thumb is that a VC looks for a return of three to five times its investment in a five. so it’s looking for potential long-term capital. How to approach? It’s important to do your homework before approaching a VC for funding. In addition to industry preferences. expertise. specializing in buyouts. Make sure your company falls within the VC’s target industry before you make your pitch – a VC that’s focused on biotechnology start-ups will not consider your request for later-stage funding for expansion of your semiconductor firm.

biotechnology. and the company is positioned for future growth. called a recapitalization. convertibles. options. Most companies are sold through a merger or acquisition event before an IPO can occur. the management team gains equity incentives. For instance.) in a portfolio company in three to seven years. experience or expertise to make a significant contribution to your company. This could be a vendor. customer. The younger generations who have taken over these businesses and who have received best education from the local and foreign educational institutes have been able to . but typically has a specific reason for investing in your company – make sure you know the reason behind the investment. warrants. it may not be wise to give a Board position to an angel investor who does not necessarily have the time. While an IPO may be the most visible and glamorous form of exit. One such alternative is an angel investor – a term for an investor that takes you under its wing and lifts you up to the next level of growth. it’s not the most common. typically hundreds of thousands of dollars rather than millions. Pakistan Scenario The growth in the economy of Pakistan in the last few years has created a new generation of entrepreneurs. etc. The VC exchanges its equity for cash.expectations. the VC receives stock or cash from the event. There are some excellent alternatives to venture capital that you should also explore in your search for funding sources. A strategic investor often has deeper pockets than an angel investor. who might be interested in investing in your company. and life sciences. For that amount of capital. Angel investors typically do not have deep pockets so the average investment tends to be smaller than that of a VC. VC EXIT STRATEGY The exit strategy is the VC’s way of cashing out on its investment in a portfolio company. If the portfolio company is bought out or merges with another company. most venture funding goes to companies in rapidly expanding industries such as technology. ideally through an initial public offering (IPO) 8 of the company. or other business partner with whom you’re currently working. A VC often hopes to sell its equity (stock. The company becomes liquid through the sale of its stock to the public and the VC sells its stock to reap its return. proceed with caution if you’re considering giving up some control over your company. Another alternative may be the reorganization of a portfolio company’s debt and equity mixture. You might also consider a strategic investor partner in place of a VC investment.

printing. soundness of business and collateral requirement. the venture capital/private equity industry is small. VENTURE CAPITAL INDUSTRY IN PAKISTAN Pakistani entrepreneurs are more inclined towards starting and investing in traditional businesses. insurance. There have been many channels and modes of finance available for private sector in all sectors. they start businesses with relatively low risk and low return but with sound cash flows. term loans. travel operators. BMA Capital from UAE’s Abraaj Capital (Cupola Group). the main options of finance for starting or expanding their business by private sector have been: 1. BMA Capital. education. working capital finance etc on basis of client history. and Jehangir Siddiqui have set up venture capital firms. SOURCE OF FUNDING FOR PRIVATE SECTOR IN PAKISTAN One of the most important supporting elements for the economic development of any country is the easy access to finance. while Jehangir Siddiqui and AMZ group are investing in IT projects. SWOT analysis .positively affect their businesses by changing the mindset and bringing latest business strategies. Jehangir Siddiqui has received financing from International Finance Corporation (IFC). telecom. tourism and allied services. Banking. BMA Capital is focusing on real estate. Angel investors: Investors providing capital for start-up or expansion and looking for high returns. Consequently. courier/cargo services. This growth has resulted in new class of entrepreneurs because many of these business opportunities did not exist just a decade back. Currently. Personal equity: Inherited wealth or savings made during career is used to start business 2. AMZ Group. services sector contribute 52% to the economy of Pakistan. Some of the local brokerage houses such as AKD Securities. and AKD Securities from PakKuwait Investment Company. 3. Bank loans: Banks provide project financing. Currently. health services. 4. consultancy and other sectors have contributed in the growth of services sector. for example. In Pakistan. Some of these firms specialize in one sector only. IT. as they are risk averse. leasing. Family and friends equity: Family and friends provide funding to start and expand the business on interest free basis and/or profit sharing basis.

Microsoft Innovation Center Pakistan Startups Incubation is a unique program designed to promote innovation.Strengths:  Better economic growth in last 6 years  Growth and consolidation of banking sector  Better spending on higher education Weaknesses:  Lack of entrepreneurship  Shortage of skilled human resource  Lack of innovation and R&D among enterprises  Limited knowledge based sectors  Risky investment and few exit opportunities Opportunities:  Increase in foreign direct investment •  Young entrepreneurs willing to share the success •  Growth potential in many sectors of economy Threats:  Law and order situation  Political Instability  Country Image Perception STARTUP INCUBATORS AND ACCELERATORS IN PAKISTAN NO. The main idea behind the program is to facilitate transformation of high-potential software startups into successful . INCUBATOR/ACCELERATOR CITY DESCRIPTION 1 Microsoft Innovation Center Lahore.

The Social Innovation Lab's Punjab incubator. 'The Hatchery' is Pakistan’s only social enterprise incubator geared to the needs of passionate. The digital incubator selects startups from their network partners.NO. 2 Social Innovation Lab Lahore. and help the selected startups get access to market. Founder Institute offers a four- Karachi month part-time program for new and early-stage entrepreneurs that helps them develop their business ideas and form a company. social innovators. big on ideas but lacking in the means and experience necessary to realize their vision. payment . rural development and inclusive marketing with the latest insights on sustainable business practices. who are usually other incubators. Among the key requirements for graduation is the creation of a fully operational company by the end of the four-month program. which combines humanistic perspectives on poverty alleviation. Velocity is Telenor Pakistan's Punjab initiative. 3 The Founder Institute Islamabad. distribution. INCUBATOR/ACCELERATOR CITY DESCRIPTION businesses. They use an indigenized curriculum and 4- month mentorship program. 4 Telenor Velocity Islamabad.

5 Revolt Peshawar. It is Pakistan's largest tech incubator. a strong community of Karachi angel investors and a team of 35+ local mentors ready to provide consultancy. after which incubatees remain a part of NEST I/O as "External Incubatees" for up to 12 months. Peshawar2. Revolt is an intensive 3-months Khyber training program with a Pakhtunkhwa curriculum specially designed for up and coming startup founders to help them take their ideas to the next level. Sindh Represented by P@SHA and supported by Google For Entrepreneurs and Samsung. An accelerator with an annual Islamabad and program. 8 Invest2Innovate Lahore. INCUBATOR/ACCELERATOR CITY DESCRIPTION gateways is the parent organization of this startup training program. Plan9 is a government-backed Punjab incubator that was started by the Punjab Information Technology Board. 6 Plan9 Lahore. training and executive leadership development.NO. 7 The Nest I/O Karachi. . The Nest I/O is a technology incubator with a direct incubation process of 4 months.0.

networking and consultancy services in Islamabad. monthly stipend and access to investors.NO. Describing itself as "the nation’s Entrepreneurship Punjab most comprehensive experiential development platform for entrepreneurs". INCUBATOR/ACCELERATOR CITY DESCRIPTION 9 LUMS Center for Lahore. the TIC became the first technology incubator of Pakistan in 2005. Serendipity is an accelerator Punjab offering funding support. 11 Serendipity Islamabad. 12 The Incubator Topi. 10 PlanX Lahore. After the success of Plan9. the Punjab PITB began Pakistan's largest technology accelerator. internet and computer facilities along with technical assistance and mentoring for final year students and fresh graduates. utilities. It aims to provide entrepreneurs and teams the required office facilities for maximizing their abilities and . 13 Technology Incubation Center. It is responsible for advancing mid- stage startups. LCE is an equity- based incubator offering a co- working space at LUMS. An initiative of the National NUST Punjab University of Sciences and Technology. Khyber Ghulam Ishaq Khan Institute's Pakhtunkhwa "The Incubator" focuses on providing office space. Islamabad.

learn from mentors. 17 SMEDA Lahore. small and medium. They provide education. on-the- job training. advisory services and seed money to entrepreneurs. INCUBATOR/ACCELERATOR CITY DESCRIPTION sustainability.NO. 16 Peracha Organization Karachi. financial services and training services to facilitate the development of small and medium . and network with and present their ideas to angel investors. 14 Arpatech Hatchery Lahore & Arpatech is one of the leading Karachi technology services companies in Pakistan and The Hatchery is their internal incubator. 15 CED IBA Karachi. Punjab The Small and Medium Enterprises Development Authority is an institution of the Government of Pakistan that provides technical services. Sindh The AMAN Center for Entrepreneurial Development (AMAN-CED) at IBA aims to support in the creation of new business. Startups benefit heavily from the Arpatech Technology Venture group and the strong associations the company has with venture and private equity groups in the US and Europe. Sindh Peracha Organization provides a three-month program to enable startups to explore fundraising.

19 BIC COMSATS Islamabad. logistics. A project of COMSATS Institute Punjab of Information Technology. mentoring. NSPIRE has a 5- month incubation period.NO. meeting rooms. INCUBATOR/ACCELERATOR CITY DESCRIPTION businesses in over 10 cities. along with incubation facilities. legal advice. Incubatees gain access to NetSol's latest IT facilities. office space. marketing and financial issues. the Business Incubation Centre was established to provide help with legal. 20 NSPIRE Lahore. training. Entrepreneurship and Equity Development (SEED) is an enterprise development organization and the SEED Incubation Centre facilitates innovative individuals with reasonably priced office space. mentorship from highly credible mentors and dedicated working space of maximum 4 persons (per team). A fairly new incubator started by Punjab one of Pakistan's leading technology companies NetSol Technologies. internet connectivity and consultancy. 18 SEED Incubation Center Karachi. start-up capital and also introduces them to potential investors. Sindh Social. .

strong R&D facilities. RECOMMENDATIONS . educated entrepreneurs with different attitude will accept venture capital. examine your goals. availability of business and technology incubators. whether that be a VC. So. There are similarities on many issues between current venture capital industry in Pakistan and venture capital industry of India in mid 1990s. tax incentives for VC companies as well as investors. mature financial sector. and be honest about those goals with your prospective investors. strategic investor. where companies are built to sell for better returns.CONCLUSION Before you approach a VC for funding. and also the business dynamics of the country. documentation and business history. easy registration and operating regulatory framework. Currently.’ come to the table prepared. and active involvement of private sector to timely identify right kind of opportunities. There is certainly room for venture capital because access to formal credit is linked with collateral. which govern these companies. the economy of Pakistan is much better compared with 6-7 years back and there are many positive factors. This is the requirement of the time for both public and private sector to learn from the mistakes and successes of Indian venture capital industry. both on the VCs you’re targeting and on your own business needs. The main factors for success of venture capital industry in any economy are: better physical and telecom infrastructure. and keep your presentation brief and to the point. How much capital do you need? Do you want passive or active investors? Are you looking to ramp up your marketing efforts? Grow your management team? Does your Board of Directors need more seasoned expertise? Answering these questions for yourself will help you decide whom to approach for investment capital. Venture capital companies should also make efforts to understand the cultural attitude of Pakistani entrepreneurs and SMEs. or other. which can help in growing the current infancy stage venture capital industry. There is tendency of business secrecy and wish of control over the company among the Pakistani entrepreneurs. better law and order situation along with direct and indirect support from government. new wave of young. easy exit options and human resource to understand the dynamics of business operations and attitude of the companies. Know your ultimate business objectives. unlike U.S or other developed countries. entrepreneurship culture. If you choose the VC path. And always do your homework. ‘Do the math. make your best effort to get an entrée into your target VCs through a trusted referral. better supply of qualified and experienced human resource in IT and other technologies related sectors. angel investor. Converting dreams into reality will also require political stability.

particularly engineering universities. like allowing limited partnership firms for establishing venture capital firms.  Government needs to launch special programs to attract Pakistani expatriates particularly working in IT related sectors of U. These expatriates Pakistanis should be given incentive like easy and low cost provision of office space.  Research facilities and research culture should be strengthened in education institutes.  Entrepreneurship culture should be promoted among the young graduates and entrepreneurship subjects to be introduced in professional colleges and engineering universities. this will be beneficial for banking sector in the shape of more credit requirement and other banking services. tax incentives and other support services. In the long term. .S and other countries to invest in technology related projects. better telecom infrastructure.  Regulations for registration and operation of venture capital companies should be simplified. Government needs to create more technology innovation centers and business incubators and create linkages of these centers with industry.  Banks and other financial institutions should be encouraged to invest in venture capital companies by providing tax related incentives. financial institutions and other support services organizations.