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)
 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
 Self-financed
 Private Equity
 Public Equity
 Banks
Angel investors
 An angel investor or angel (also known as a
business angel or informal investor) is an
affluent individual who provides capital for a
business start-up, usually in exchange for
convertible 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
professionally-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 “yellow
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
Team
 Hi Performance Growth Companies
 A niche, patent, uniqueness
 An Exit – Return On / Of Investment
 IPO
 Strategic Buyer
 Don’t want the “living dead”
 No Problems
 Open Communication – Exceed Budgets
Venture capitalists
 Venture capital is a means of equity financing
for rapidly-growing private companies. Finance
may be required for the start-up,
development/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 long-
term 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-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
venture 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
Self-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
Self-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
 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
Research Institutions Basic research, inventions

Self-Financed Initial start-up funds

Angel Investors Initial start-up funds

Venture Capitalists Just after start-up

Private Equity Longer-term growth of an established

company
Public Equity Capital investment requirements of an
established company, exit for VCs

Banks Financing for most operating needs