The Essential Handbook For Raising Capital Part II: How To Approach An Investor

The Essential Handbook For Raising Capital Part II:
How to Approach an Investor
July, 2013
© 2013 Intellecap. All rights reserved

www.intellecap.com

Agenda
Introduction
Session I: Knowing your Business
Session II: Approaching an Investor
Session III: Due Diligence and Negotiation
Session IV: Post Investment Challenges


2

Investor & Investee

• Marriage and equity investing have many things in common – Courting/due diligence
before and adjustment afterwards
• The first step in ensuring that you have a happy relationship with the investor is
choosing the “right” one
• It is possible that you already know a few investors and are comfortable dealing with
them but it is always useful to be systematic


3

Some Basic Background Work Should be Done Before You
Actually Approach an Investor

1. Identify relevant Investors
2. Evaluate & Short list
3. Understand general requirements of the investors
4. Prepare Pitch Book

Now, approach the investor


4

Identifying relevant investors
• Identify the first list of investors on the basis of various parameters like:
– Size of investment
– Sector Focus
– Stage of business
– Country Focus
• Data sources which can help you:
– VC Circle

– GUST
– NENonline
– See links in additional reading
– …


5

The different kinds of investors
Type of Investors

Stage

Investment
amounts

What do they
look for?

What do they bring to the
table?

Where do they get
their money from?

High Net Worth
Individuals (HNWI)

Early
stage

Rs. 0.5-5 cr

• Financial
returns

• Quick decision making
• High risk taking ability

• Personal wealth

Venture Capital
(VC funds)

Typically
early
stage

Rs. 5-100 cr

• Financial
returns
• Scalability and
exit

• Networks and contacts
• Technical Assistance

• HNWI
• Institutional funds

Mainstream PE

Growth
Stage,
Pre-IPO

Rs.30-500 cr

• Financial
returns
• Scalability and
exit

• Commercial rigour
• Ability to take you to the
market

• Pension Funds,
• HNWI
• University
endowments


6

How is an Impact Investor Different?
Focus on Impact
Focus on economically
weaker sections and/ or
backward Geographies

Kinds of models
High risk early stage,
usually nascent
unproven business
models

Rate of return
Slightly lower
hurdle rate of return

Focus on impact has definite implications to
the investment strategy

Due to the stage and nature of the business,
Impact investors usually play an active role in
the operations of the investee company

Return expectation is typically lower than that
of a commercial fund

The average fund size of an Indian Impact
Investor is small; and is usually between USD
20-100 mn


7

Some basic background work should be done before you
actually approach an investor




8

The list identified so far should be brought down to make your
approach more targeted
Evaluate & Shortlist by further evaluation and consideration of:
• Portfolio companies
– Past investments - For eg. If already invested in competition, better to avoid
– Is your business also part of the same value chain? Right target to approach

• Recent exits
– What mode did they choose to exit?
– Tells you a lot about their approach to investment

• Background or experience of the investor team
– Ex-Investment Bankers or Entrepreneurs?
– Does his past experience have synergies with your business?
– Do you want DUMB money or VALUE money?

• Stage of fund
– No. of years and amount left

• Funds’ sources of money
– LPs or HNIs

9





10

What does an investor look for, even before he considers you for
due diligence?
Of Course, Money
RETURN on INVESTMENT

Peace of Mind

LESS OPERATIONAL HANDHOLDING

Less Risk
SMOOTH EXIT

To get all of this, they look at many other factors…

11

Evaluating a Deal

Promoter Evaluation

Business Model
Evaluation

Organizational
Evaluation

Impact Evaluation*

*In case of an Impact focussed Investor


The Super Promoter!

Favourable
entrepreneurial
experience in the
past

Quick
adaptability to
changing
business
environment

Relevant
educational
background

Good and
relevant network

Complete focus
on business

Long term mind
set– whether the
promoter is in
the business for
the long haul

Previous
operational
experience and
understanding of
sector

What Investors
look for in an
entrepreneur

Strong second
level team

Ultimately, what matters most is the chemistry between the Investor and the promoter!

Photo Credit: Flickr User dmeemai

13

Better Still - A Super Promoter Team!

Who is at the Driving Seat?
•

What is the team?
 Experience, background, competence

•

What is their attitude?
 Enthusiasm, vision,…

•

What is the team bandwidth?

 Team size, advisory roles
•

Ownership Structure

•

Distribution of responsibilities


Photo Credit: Flickr User CourtneyTamez

14

Business Model Evaluation

Financial
Attractiveness

Scalability

Possible
Exit Routes

•
•

Market and Industry Study
Analysis of Financial Ratios

Scalability in terms of ease in replicability , infrastructural
requirements, distribution network and supply chain etc.

Available possibilities for an investor to make a remunerative
exit at the end of their investment horizon


Business Model Evaluation: Market Study
Conducting a market study is critical in understanding the financial attractiveness of the product

Need for the product

Demand vs Supply

Competition

Regulatory Overhang

Is there a definite need and ready customer base for the product or does
the demand need to be created?

What is the estimated demand and what is the current supply?

Who are the competitors in the market? How strong are these players?
How well funded are they? Do they have any clear advantages
(networks, patented technology etc.)

What is the regulatory overhang in the sector?
(For Example: all models in the primary education sector are mandated to
function as “not for profit” structures)


Business Model Evaluation - Financial Attractiveness
Balance Sheet
• Is there any excessive
dependence on short term
capital?
• Does the capital structure of
the company suit the nature
of the business?

Profit and Loss
What is the amount of sales per rupee of
investment?
How far can the company go with the
current investment?

• What is the profit that the
business makes per rupee of
sales?
• Will the costs of the business
increase in proportion to the
increase in sales?

Cash Flow

What is the ability of the company to
service debt through operating cash
flow?

• Can cash from operations
support capital expenditure?

• How much time does it take to
translate sales into cash?
• What is the credit period that the
business gets from suppliers?
• What is the capital expenditure
required to grow sales?

Note: Khan Academy has some excellent video tutorials to understand financial management better.
Follow links from additional resources to view.

Business Model Evaluation - Financial Ratios
Balance Sheet
• Current Assets/Current
Liabilities

Profit and Loss
Sales/Assets

• Net Profit/Sales
• Total Contribution/(Total
contribution- Fixed Costs)

• Debt/Equity

Cash Flow
•

Operating Cash flow/
Total Debt

• Free Cash Flow/Operating
Cash flow

•

Receivables/Sales

•

Payables/Costs
Or
Operating Cash Flow/Sales

•

Capital Efficiency and Cash Flow are critical in Early Stage Companies


Business Model Evaluation - Scalability

•

Is the model easily replicable across geographies and customer segments?

•

Does expanding the business require large amounts of investment in terms

of time, money and infrastructure?
 K-12 school model vs online tutorial model
•

Is the supply chain for raw materials and the distribution channel for the
product/ service established/

•

Does the model depend on a long series of regulatory approvals for
expansion?


Business Model Evaluation: Possible Exit Routes

Exit is the primary way in which an investor makes money.
Primary modes of exit for early stage investments, specially in social
enterprises:
• Secondary sale (most common)
• Strategic sale/ Acquisition by other companies
• Promoter buy back
IPO is rare for social enterprises, and you should be careful in
mentioning IPO as an exit strategy during your conversations with
investors.


Organisational Evaluation

• Is a well defined fund utilisation plan in place?

• Does the organisation have a well defined plan of implementation?
 Sourcing
 Distribution
 Manufacturing

 Marketing
• Are the internal processes robust or is there a clear plan for implementation of these
processes?
• Does the organisation have the implementation team in place or does it have a clear
recruitment strategy?


Impact Evaluation
Social Impact

Environmental Impact

• Impact of organization’s activities on its
stakeholders – community, customers,
employees, suppliers

• Impact of organization’s activities on
environment, natural resources, biodiversity

Example:

Example:

• Number of hectares cultivated per farmer

• Energy saved by replacing to new energy
solutions

• Incremental increase in farmers income

• Reduction in charcoal, wood, kerosene, LPG
etc.

• Number of patients visited/ treated
• New caregivers employed
• Number of new schools created/ improved
• Increase in student enrollment
• Number of households with new/ improved
access to electricity

• Water returned to water table
• Reduction in emission of green house gases
• Amount of clean water production
• Reduction in land and air based pollution

Focus of Impact varies by organization, stakeholder, context, geography


Investor shall try to assess key risks attached to your business
and how do you address them
Key risk areas

Risk management

Financial risks

Financial risks

• Credit risk

• Funding strategy

• Liquidity risk

• Cash management

• Market risk

• Asset-Liability Management

Operational risks

Operational risks

• Transaction risk

• Systems and processes

• Fraud risk

• Internal audits and controls

Strategic risks

Strategic risks

• Reputational risk

• Responsible policies

• External environment

• Stakeholder management


23

Approaching an Investor




24

So what’s your story?
• Though the basic components of a pitch book , which are,

Approaching an Investor

– Industry Scenario which your business operates in
– Company overview – Management, Product, Operations, Marketing, Customers, market share etc.
– Current Financials & Future Projections

are necessary, it really depends on how you wish to sell it.

How do you WEAVE these components to tell your STORY?
• Story of similar businesses could be different. It depends on what you want to highlight and
what is your key strength:
– Is it your efficient and experienced management team?
– Is it the growth of the industry/ sector you operate in?
– Do you have an innovative product/ a first mover advantage?
– Do you have very high demand already established?
– …


25

You are ready now to approach the investor

4. Understand specific requirements



26

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