Various sources of financing entrepreneurship venture

Angel investors, venture capitalists, bank loans, Private & public equity, self financing, research institutes

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) 40 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 
  

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

Typical New Venture Funding Sources 
     
Angel Investors Venture Capitalists Research Institutions SelfSelf-financed Private Equity Public Equity Banks

Angel investors 
An angel investor or angel (also known as a business angel or informal investor) is an investor) affluent individual who provides capital for a business start-up, usually in exchange for startconvertible debt or ownership equity.  A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.

Angel investors 
Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionallyprofessionally-managed fund.  Although typically reflecting the investment judgment of an individual, the actual entity that provides the funding may be a trust, business, limited liability company, investment fund, etc.

Angel investors (who are they?) 
Private High Net Worth Individuals 
Corporate Executives  Entrepreneurs 

Investments are comparatively low  Frequently work in informal Groups  No formal organization ± not in the ³yellow pages´  Usually invest within their area of expertise

Angels Provide 
Source of Funding ± Early Stage Startup / Seed  Expertise 
   Funding Contacts Industry Expertise Technical / General Business Experience Board Members 

Advice

Angels Want 
Strong Management Multi-Skilled Experienced MultiTeam  Hi Performance Growth Companies  A niche, patent, uniqueness  An Exit ± Return On / Of Investment 
IPO  Strategic Buyer  Don¶t want the ³living dead´ 

No Problems  Open Communication ± Exceed Budgets

Venture capitalists 
Venture capital is a means of equity financing for rapidly-growing private companies. Finance rapidlymay be required for the start-up, startdevelopment/expansion or purchase of a company. Venture Capital firms invest funds on a professional basis, often focusing on a limited sector of specialization (eg. IT, infrastructure, health/life sciences, clean technology, etc.).

Venture capitalists 
The goal of venture capital is to build companies so that the shares become liquid (through IPO or acquisition) and provide a rate of return to the investors (in the form of cash or shares) that is consistent with the level of risk taken.

Venture capitalists 
With venture capital financing, the venture capitalist acquires an agreed proportion of the equity of the company in return for the funding. Equity finance offers the significant advantage of having no interest charges. It is "patient" capital that seeks a return through longlongterm capital gain rather than immediate and regular interest payments, as in the case of debt financing. Given the nature of equity financing, venture capital investors are therefore exposed to the risk of the company failing. As a result the venture capitalist must look to invest in companies which have the ability to grow very successfully and provide higher than average returns to compensate for the risk.

Venture capitalists 
When venture capitalists invest in a business they typically require a seat on the company's board of directors. They tend to take a minority share in the company and usually do not take day-today-to-day control. Rather, professional venture capitalists act as mentors and aim to provide support and advice on a range of management, sales and technical issues to assist the company to develop its full potential.

Venture capital has a number of advantages over other forms of finance: 
It injects long term equity finance which provides a solid capital base for future growth.  The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded by business success and the capital gain.  The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations.

VC advantages 
The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners, and if needed co-investments with other coventure capital firms when additional rounds of financing are required.  The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth.

How does the VC industry work 
Venture capital firms typically source the majority of their funding from large investment institutions such as financial institutions, endowments, pension funds and banks. These institutions typically invest in a venture capital fund for a period of up to ten years.  To compensate for the long term commitment and lack of both security and liquidity, venture capitalists invest in either companies with high growth potential where they are able to exit through either an IPO or a merger/acquisition.  Although the venture capitalist may receive some return through dividends, their primary return on investment comes from capital gains when they eventually sell their shares in the company, typically between three to five years after the investment.

What do VCs require? 
  
Superior Businesses Quality and Depth of Management Appropriate Investment Structure Exit Opportunity www.indiavca.org

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

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

SelfSelf-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

SelfSelf-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)

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

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 pre- 

Where does their money come from? 
  

Pension funds Insurance companies Mutual funds University endowment funds

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.)

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.

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)

Banks 
What do they expect to get? 
Their original loan returned  Interest 

Where does their money come from? 
Depositors

Funds often are applied to different purposes
Source Purpose
Basic research, inventions Initial start-up funds startInitial start-up funds startJust after start-up startLongerLonger-term growth of an established company Capital investment requirements of an established company, exit for VCs Financing for most operating needs

Research Institutions SelfSelf-Financed Angel Investors Venture Capitalists Private Equity Public Equity Banks