Angel Investors, VCs, Hedge

Funds and Private Equity

Investors
 Economics of Investment

 Certain economic agents (individuals, households

and corporations) have excess of income over their
consumption (because of their plan to defer
consumption).
 Certain other agents need more money than they
have (temporarily).
 Intermediaries exist who bring together the above
two types for economic gains (commissions,
brokerage).
 HNWI Angels

Households

Banks Venture
Capital
Mutual Funds
Funds
Corporates
Pension
Funds
Insurance Cos
 Nature of these investors

• Unconventional

• Make highly risky investments

• Deal with difficult Asset Pricing and Valuation

• Are free of regulatory issues

 Target Companies

• Startups
• Early stage companies
• Private companies in the scale-up phase
• Pre IPO financing rounds
 Sources of Finance
• Equity (common stock, preferred stock)
• Loans: long term, short term
• Lease finance
• Inter corporate deposits
• Bank cash credit and overdraft limits
• Debentures
• Fixed deposits
• Grants from government agencies
• Supplier credit and deferred payments
• Credit cards
 Modes of Acquisition

• Primary market:public issue, rights issue

(flotation costs)
• Secondary market (listing costs)
• Private placement (individual or institution)
• Banks and mutual funds
• Pension funds, insurance companies
• Debenture issue
• Fixed deposits
How to compare various sources ?
• Holding period (Duration)

• Repayment terms

• Interest rate

• Other strings attached

• Pledges and collaterals

• Finance marketing costs and lead time

 Angel Investors

• High Net Worth Individuals

• Successful serial entrepreneurs (also
parallel entrepreneurs)
• Good knowledge of technology and
business acumen
• Have country-specific preferences (NRI,
NRC)
 Examples…
• James Clark (SGI to Netscape)
• Prakash Bhalerao (Alopa Networks)
• Kanwal Rekhi (Exodus Communications)
• K.Chandrasekhar, B.V. Jagdeesh
• Sabeer Bhatia (Hotmail Arzoo Navinmail)
• Rakesh Mathur (Junglee to Purple Yogi)
• Suhas Patil (Cirrus Logic)
 Peculiarities of Angel Investment
• Quick decision-making

• Low level of funds

• One-two days a week of commitment – after all

they are putting their own money on the table!!

• Uncle-nephew relationship
 Venture Capital Firms

• VCs look for private equity for young

companies
• Mezzanine VC firms
• Scale-up VC firms
• Technology / “Space” specific
 Biotechnology
 Networking
 Chips and hardware
 E Commerce
 Structure of a VC Firm
• General partners 3-5 (themselves successful entrepreneurs):
put about 2-3% of the corpus
• Limited partners (Pension funds, Retirement plans): Put
97% corpus
• Corpus = Fund, typically ranges between USD 50M to 2B
• Management fee is about 2-3 % per year
• Funds about 5-30 new companies per year
• Employs junior managers for due diligence(associates)
• After IPO/Acquisition, general partners keep 20% of gains,
limited partners get Principal+80%
 VC Firm’s Annual Throughput

• 10,000 qualified business plans

• 1000 meetings

• 400 company visits

• 25 new investments
Role of the VC in the Portfolio Company

• Negotiate aggressive terms

• Select strong co-investor
• Help in constituting the Board of Directors
• Assist in
 Recruitment
 Market validation
 Strategic relationships

• Pursue liquidity aggressively

 Valuation: Bargaining Point
• Causes of mismatch
 Asymmetry of information
 Ego
 Greed
• Factors that drive the valuation
– Technology, ESOP rates, management
– Orders in hand, scalability, brand strength
– Patents and copyrights
 Difficulties in Valuing Start-up
Companies

• Immediate earnings are negative

• No past history

• No comparable companies

• No market prices
 VC Fund Raising Process
• Introduction (phone call, e-mail, referral)
• Submit business plan / executive summary
• Presentation
• Company visit
• Due diligence (management reference checks,
customer calls, market analysis)
• More meeting(s)
• Term sheet
• Legal / Closing
 Private Equity Investment

• Large, profitable private limited or deemed

public companies who need finance but don’t
want to do an IPO

• Examples: Patni Computers, Persistent

Systems Limited

• Deal is usually in tens of crores

 Some deals in the last 6 months
Company Investor Investment Approx
USD mill Valuation
Progeon Citigroup 20 100

Glenmark CDC Capital 10.3 74

Pharma
TV Today ICICI Ventures, GE 1.5 25
Capital
Patni Computers General Atlantic 108 530
Partners, GE Capital
Strand Genomics Westbridge Capital 4.6 9.5
Partners