TiE Institute Series III rd of VI June 24, 2006

1. TiE Institute SeriesIIIrd of VI June 24, 2006 Financing your enterprise

2. TiE Institute Knowledge Series2006 Developing informed entrepreneurs through. . . Experience Training Interaction Exercise

3. Agenda • Approaching Finance . . . (pre-lunch) • In the Business Plan • Ashwin Rathi – Deloitte Haskins & Sells • Moderated by … Shantanu Surpure, Economic Laws Practice (ELP) • In the Enterprise • Dr. Anand Patkar – Management Consultant & Trainer • Prof. Kanu Doshi, Dean – Finance, Welingkar Institute • Moderated by Ashok Jani, Chair TiE-Institute • Funding Options . . . (post-lunch) • Private Equity • Angel Investing – Sasha Mirchandani, Imercius Technologies • Growth Stage Funding – Vipul Mankad, President, SIDBI Venture • Seed Funding & Moderated by … Mahesh Murthy, Pinstorm Technologies • Debt Funding • Sanjay Shirole – AGM, ICICI Bank • Prakash Kumar – DGM, SIDBI

4. Approaching Finance . . . In the Business Plan Presented by Ashwin Rathi Deloitte Haskins & Sells Moderated by . . . Shantanu Surpure Economic Laws Practice (ELP)

5. Contents • Business Plan • Funding options • Debt • Equity

6. Business Plan A business plan is a summary of how a business owner, manager, or entrepreneur intends to organize an entrepreneurial endeavor and implement activities necessary and sufficient for the venture to succeed. It is a written explanation of the company's business model.

7. Business Plan • Business plans are used internally for management and planning and are also used to convince outsiders such as banks or venture capitalists to invest money into a venture. • Business plans are noted for often quickly becoming out of date. One common belief within business circles is that the actual plan may have little value, but what is more important is the process of planning, through which the manager gains a greater understanding of the business and of the options available.

8. Business Plan • A business plan can be seen as a collection of sub-plans including a marketing plan, financial plan, production plan, and human resource plan. • Specialized sections such as product research and development, legal strategies, marketing research, or inter-company collaborations, are added to deal with unique features or characteristics of the business or its markets

9. Business Plan – Typical Format • Executive summary - explains the basic business model, gives rationale for the strategy • Background • gives short history of company (unless it is a new company) • provides background details such as • age of company, number of employees, annual sales figures, location of facilities, form of ownership • background of key personnel including – owners, senior management

10. Business Plan – Typical Format • Marketing • the macroenvironment • the competitive environment • the industry • the customer priorities • product strategy • pricing strategy • promotion strategy • distribution strategy

11. Business Plan – Typical Format • Production and manufacturing • describe all processes • production facility requirements - size, layout, capacity, location • inventory requirements - raw materials inventory, finished goods inventory, warehouse space requirements • equipment requirements • supply chain requirements • fixed cost allocation

12. Business Plan – Typical Format • Finance • source of funds • existing loans and liabilities • assumptions • projected sales, costs, profitability • cash flow statement • break even analysis • ratios – ROI, CR, TOL/TNW, DE, DSCR etc. • sensitivity analysis

13. Business Plan – Break even analysis • Analysis of the behaviour of revenues & cost in relation to volume to determine • The level of activity at which revenues and costs are equal (break-even point), and • How profit varies with volume • BEA is based on following assumptions • Cost classification – Fixed & Variable • Constancy of unit selling price • Stability of product mix • No change in inventory

14. Business Plan - Break even analysis • Break-even Quantity = (F + I) / (P – V); where • F = Fixed operating costs • I = Interest cost • P = Unit selling price • V = Unit variable cost • Break-even Sales in Rupees = (F + I) / (1- V/P) • Cash break Even = Depreciation is reduced from the Fixed Operating cost, thereby reducing the break-even point

15. Business Plan – Ratios • Return on Investments (RoI) • ROI = NOPAT / Investments; where • NOPAT = net operating profit after taxes • Investments = Owned capital + Long term borrowed capital • Current Ratio (CR) = Current Assets / Current Liabilities • Total Outside Liabilities / Tangible Net Worth = (TOL/TNW); where • TOL = Long Term Loans + Short Term Loans + Current Liabilities; and • TNW = Owned funds – Miscellaneous expenditure

16. Business Plan – Ratios • Debt equity ratio (DE) shows the relative contributions of creditors and owners. • Debt consists of all debt, short-term as well as long-term • Equity consists of net worth plus preference capital • Debt Service Coverage Ratio = Σ PATi + DEPi + INTi Σ INTi + LRIi • PAT = profit after tax • DEP= depreciation • INT = interest on long term loan • LR = loan repayment installment • i = period of the loan

17. Business Plan – Sensitivity Analysis • A technique of risk analysis which studies the responsiveness of a criterion of merit like net present value or internal rate of return, DSCR, etc. to variations in underlying factors like selling price, quantity sold, operating costs, etc. • Scenarios are generated wrt the base case: • Sales reduced by x% • Operating costs up by x% • Mix of above two

18. Business Plan – Typical Format • Human resources • assign responsibilities • training required • skills required • union issues • compensation • skills availability • new hiring

19. Business Plan – Typical Format • SWOT Analysis • Strengths • Weakness • Opportunities • Threats

20. In a nutshell……… What is a Business Plan? • Sets out your company’s plans • Shows how those plans can be achieved • Demonstrates that the planned outcome meets the requirements of the reader

21. In a nutshell……… What purpose does a Business Plan serve? • External use • Fund raising application • Internal use • Own management • Parent Co.

22. In a nutshell……… What do readers want to see? • Grants • Banks • how much do you want to borrow? • what do you want the money for? • when will you be able to repay the borrowing? • will you be able to pay the interest? • could your company survive a setback in its plans? • what security, if required is available for the lending? • Venture Capital & Development Capital • a substantial return • they usually want an exit route

23. In a nutshell……… What does Venture Capitalist examine • The track record of • The Company • The management • The market • The forecasts • Are they achievable? • What can go wrong? • The critical factor • Management • How will the investors make an adequate return?

24. Practical Hints • Who should write the Business Plan? - Management • How long should it be? – as short as possible • Planning the Plan • Understand what information should be included in the Business Plan • Decide on the section headings for your plan and prepare an index • Decide who is to co-ordinate and write the plan • Agree who is to provide the necessary information- management or advisers • Gather information for each topic and jot down the ideas • Organize the information logically • Start writing • Challenge the assumptions • Expect revisions • Business plans are not written, they are re-written

25. Practical Hints • Do not use Jargon • Do not repeat yourself • Support your claims • Worried about Confidentiality • Do not be selective • A Second Opinion • First Appearances Count • Four Dos and one Don’t • Do provide and index • Do provide a summary • Do number each copy • Do show who the business plan is submitted by • Do not produce too many copies

26. Approaching Finance – Flow cart Submission to select investors Feedback Preparation of Business Plan 10 10 10 30 days Identification Project / Implementation Negotiation Conclusion 10 5 Term Sheet Agreement Due Diligence 10 15

27. Funding options

28. Debt Financing • Long term • Term Loans – Institutions, Banks • Deferred payment guarantees • For fixed assets • Working capital • Fund Based – Current assets less current liabilities • Non-fund based – bank guarantees, letter of credit • For working capital

29. Equity Funding - Venture Capital • Venture Capital - Financing for new businesses. In other words, money provided by investors to start-up firms and small businesses with perceived, long-term growth potential. This is a very important source of funding for start-ups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns • Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This form of raising capital is popular among new companies, or ventures, with limited operating history, who cannot raise funds through a debt issue. The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity.

30. Equity Funding - Venture Capital • Angel Investor - A financial backer providing venture capital funds for small start-ups or entrepreneurs • Typically, angel investors are friends or family members. • Seed Capital - The initial equity capital used to start a new venture or business • This initial amount is usually quite small because the venture is still in the idea or conceptual stage. Also, there's a high risk that the venture will fail.

31. Initiating process of approaching VC • Business & Strategic Planning • Well written business plan • Effective networking • Professional advisors • Narrowing the field • To be noticed amongst ‘000 of proposals • Investment preference of the VC

32. Meeting with Venture Capitalists • Have a dress rehearsal • Have a mentor • Have a detailed game plan • Have your team available to meet the venture capitalist • Have passion but not rose-coloured glasses • Have a way to demonstrate your personal commitment to the project • Have an open and honest exchange of information • Have a big market and a big upside • Have an understanding of what really motivates the venture capitalist’s decision • Have an exit strategy

33. Term Sheet • A non-binding agreement setting forth the basic terms and conditions under which an investment will be made. • Term sheets are templates that are used to develop more detailed legal documents

34. Term Sheet • Issuer • Investors/amount of investment • Type of security • Number of shares • Founders • Price per share • Capitalization of the company • Rights, preferences, privileges • dividend provisions • liquidation preference • conversion • Anti-dilution provisions • voting rights • protective provisions • Information and registration rights • Information rights • Demand rights • Piggy back registration • Registration expenses • Other registration provisions • Board representation • Use of proceeds • Employment relationships • Drag-along rights • Right of first refusal • Tag along rights

35. Term Sheet • Confidential information and inventions assignment agreement • The stock purchase agreement • Redemption • Voting agreement • Conditions of closing • Completion of due diligence to the satisfaction of the Investors in their sole discretion • Execution by the company of a Stock Purchase Agreement and related agreements satisfactory to the investors in their sole discretion • Compliance by the company with applicable securities laws • Opinion of counsel to the Company rendered to the investors in form and substance satisfactory to the investors • Other material conditions, to be discussed • Such other conditions as are customary for transactions of this type • Execution by the founders of a Voting Agreement

36. Term Sheet • Expenses • Finders • Closing • Expiration of proposal • Confidentiality • Counsel to the investors • Counsel to the company

37. Concerns - Company • Loss of management controls • Dilution of personal stock • Repurchase of your personal stock in the event of employment termination, retirement or resignation • Additional financing • Security interests being taken in key assets of the company • Future capital requirements and dilution of the founder’s ownership and • Intangible and indirect benefits of venture capitalist participation, such as access to key industry contacts and future rounds of capital

38. Concerns - VC • Your company's current and projected valuation • Level of risk associated with this investment • The fund’s investment objectives and criteria • Projected levels of return on investment • Liquidity of investment, security interests and exit strategies in the event of business distress or failure (“Downside Protection”) • Protection of the firm’s ability to participate in future rounds if company meets or exceeds projections (“Upside Protection”) • Influence and control over management strategy and decision making • Registration rights in the event of a public offering and • Rights of first refusal to provide future financing

39. Concerns - both • Retention of key members of the management team ( and recruitment of any key missing links) • Resolution of any conflicts among the syndicate of investors (especially where there is a lead investor representing several venture capital firms) • Financial strength of the company post -investment • Tax ramifications of the proposed investment

40. Due Diligence In finance, due diligence may refer to the process of research and analysis that takes place in advance of an investment, takeover, or business partnership. The potential investor generally uses in-house resources or hires a consulting firm that specializes in due diligence and corporate investigations to investigate the background and principals of the target company.

41. Due Diligence A due diligence assignment generally includes reviewing press and listing filings, checking for regulatory and licensing problems, identifying liens and judgments, and uncovering civil and criminal litigation matters. Sophisticated investigators will also search for conflicts of interest, insider trading and press and public records that identify problems that may have occurred under the principal's "watch."

42. Due Diligence The investigative results may be prepared in a "due diligence report" that the investor uses to understand risks involved in the investment. In addition to identifying risks and implications of an investment, due diligence may include data on a company's solvency and assets. The due diligence process is covered by confidentiality undertakings and supported by warranties.

43. Building the Cross-Border Enterprise – Analysis and Comparison of the Legal Issues of Venture Capital Investing in the US and India Shantanu Surpure Partner, Economic Laws Practice TiE Institute, Mumbai, June 24, 2006 ELP Venture Capital and Private Equity Practice

44. ELP Venture Capital and Private Equity Practice • Certain Fundamentals are Universal in Venture Investing • Product or Service • Market • Management Team • Ability to Execute Business Plan • Due Diligence • “One Hour Rule” has been broken • New Ecosystems • New Rules, New Structures, End to End Solutions

45. ELP Venture Capital and Private Equity Practice Compare Legal Structures and Documents between Silicon Valley and India • Incorporation in the US • California or Delaware, Secretary of State, Department or Division of Corporations • More than 60% of Fortune 500 companies incorporate in Delaware • Can incorporate in a day or even hour, open until 9pm, accept faxed signatures, one shareholder, one director, no minimum capital, board meetings by telephone, must qualify as a foreign corporation • Entity Selection – LLCs – hybrid between a partnership (flow through tax) and a corporation (limited liability) • S corporation, taxed as a partnership • C corporation, generally preferred, can create different classes of shares, par value is typically $0.0001 per share • Do not need to be a US citizen or a Delaware resident, appoint agent for service of process • Incorporation in India • Registrar of Companies, not critical which state, Company Law (Companies Act) is a Central subject unlike the US where the Delaware General Corporation Law and California Corporations Code are state subjects • No LLCs, no LLPs, incorporate as a private company, Section 3(1) iii of Companies Act • Takes up to three weeks, forms in triplicate, require two shareholders and two directors, minimum capitalization of Rs. 1 lakh, no telephone board meetings, par value is typically Rs. 10 per share

46. ELP Venture Capital and Private Equity Practice • Equity Instruments in the US • Common and Preferred Stock • Common Stock – typically founder’s stock • Preferred Stock – liquidation preference (sale of the Company is a liquidation event), anti-dilution measures, redemption rights, participating preferred, dividend, conversion into Common upon certain events, protective provisions, separate voting as a class • Morris v. American Public Utilities, 14 Del. Ch. 136, 122A. 696 (1923) and Rice & Hutchins, Inc. v. Triplex Shoe Co., 16 Del. Ch. 298, 147A 317 (1929) – Unless a preferred stock is denied a right to vote in the Certificate of Incorporation, it has such a right • Equity Instruments in India • Equity shares, Companies Act amendment in 2000 allows for voting rights, s86 of Companies Act, differential rights as to dividend, voting, etc., enshrine these rights in the Articles of Association; • Preference shares – quasi debt instrument, limited or no voting rights, instrument often used is convertible preference shares

47. Q&A

48. Approaching Finance . . . In the Enterprise Presented by Dr. Anand Patkar Management Consultant & Trainer Moderated by . . . Prof. Kanu Doshi, Dean – Finance Welingkar’s Institute

50. PURPOSE OF THE BUSINESS • Converting Resources to Results….. RESULTS > RESOURCES • Value Addition • Creation Of Wealth