the essential handbook for first time capital raising part 1: know your business

© 2013 Intellecap. All rights reservedwww.intellecap.com

Essential Handbook For Raising Capital Part 1: Know Your Business

July, 2013

© 2013 Intellecap. All rights reserved

Startups that Don’t Prepare for Investment Well in Advance Take 2x as Long to Raise Capital

• What is your business?

• What are your growth plans?

• Why do you need capital?

• How much capital & for how long?

• Which instruments you wish to raise the capital with?

• How do you value your business?

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Know your business so well that it shows it is YOURS


How Can you Demonstrate “Understanding of Your Business” to An Investor?

• What is your business?

– Define clear boundaries of your business

– Define the exact market need that you are addressing / intend to address with your product/

service

• What are your growth plans?

– Define clear vision and goals for your enterprise for at least five years

– What does this growth mean for the top-line/ bottom-line?

– How do you intend to achieve this growth?

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All these answers add up to create your business plan

How Do You Plan to Grow Your Business?

• Understand the market need that you are serving

• Define the customer profile you are serving/ wish to serve

• Assess demand-supply scenario of the addressable market

• Make a realistic estimate and define growth of your business in future (atleast for the next 5 yrs.) in terms of

revenues, profits, geography, capacity etc.

• Assess your current capability in terms of resources and identify the gap.

Now, plan all elements of your business to bridge this gap:

What is the kind of infrastructural investment required?

What is the likely manpower required?

How much working capital shall be needed?

What sourcing model shall work? Which suppliers shall work?

What is the right pricing?

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When is Your Business Ready to Receive Capital?"Don't raise a lot of money. Then you'll be on the express train. Take the local train -- it goes slower and there are more places to get off.“

~ Mark Suster, Founder BuildOnline and Coral, Investment Partner at GRP Partners.

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• You have proof that your business is viable and can scale. E.g. pilot, paying customers, signed partnerships etc. Tip: You have a calendar of milestones and can show that you have achieved the first 2-3 goals.

• You have built a team around your startup – your team has expertise in key functional areas like finance, marketing and HR.

Tip: At least one of your team members has past experience/academic background in your sector.

• You are dynamic as a startup and ready to pivot your business model based on customer feedback and market needs.

Tip: You have already refined your model by the time you meet an investor and can show how your model has evolved.

• You are focused as a startup and have one core area of operations. Tip: If your core business needs significant demand creation before it can take off; then you probably need

a hybrid model with grant funding before you think of equity.

• You have realistic forecasts for the next 6 months and a good idea of the next 12. You are raising seed capital to see you through the next 12-18 months now.

Tip: You already know that you will be raising a follow-up round after 18 months at a much higher valuation.


How Will You Use Capital?

• Why do you need capital?– Capital Expenditure

New geography, new product, infrastructure investments

– Working Capital

Launching a new product/ service

– Value Unlocking

Business is well set, want to sell part of your stake and make some money

• How much capital & for how long?– Carry out both a bottom-up as well as a top-down estimation of capital expenditure

– Attach the timeline for which you need funding for each expense head

Bottom-line: Clearly Show how the Investor’s Capital will Increase Revenue/Sales


Example

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Knowing your business

Most VC’s like Equity to be used for:

• Product Development / Business Development

• Team Expansions

• Business Expansion / Growth such as more number of centers, branches

• Intellectual Property acquisitions

Most VC’s don’t like the Equity to be used for:

• Capital Expenditure; specially buying land, machinery etc

• Working Capital

• Increased salaries post investment


How Do You Put a Value to Your Business?

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The space you belong to

• Performance of the sector

• Future outlook of the sector

• Investor friendly structure

• Existence of an ecosystem

• Demand- supply scenario

• Maturity

• …

The status of your company

• Profits

• Scale of operations & Revenues

• Differentiation & Brand value

• Growth & expansion plans

• Corporate Transparency

• …


Key Financial Ratios and Indicators

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Quantitative IndicatorsPerformance

• ROE and ROA

• EBIDTA

• Net Profit Margin

Leverage

• Debt Equity Ratio

• Interest Coverage Ratio

Liquidity

• Current Ratio

• Cash Ratio

Efficiency Ratios

• Revenues per employee

• Receivables turnover ratio

• Asset turnover Ratio

Organizational

• Stage in organizational life cycle

Industry dynamics

• Market share

• Competition

• Geographical diversification

Management

• Promoters

• Governance

• Board/Public Profile/Reputation

• Transparency/Legal Structure

• Risk management

Operational

• How different is your product?

• Relationship with stake holders

• Human Resources

External

• Industry Scenario

Qualitative IndicatorsKnowing your business


Valuation Methods

There are some Standard Business Valuation methods:

1. The Cost Approach (Asset-based Valuation)

– Determines the net cash that would be received if all assets were sold and liabilities paid off. The premise

of the cost approach is that an investor would pay no more to purchase the asset than would be paid to

reproduce the asset

– This method is applied for businesses who have very liquid assets

2. The Income Approach (Discounted Cash Flow Valuation)

– Based on the assumption that a dollar received today is worth more than one received in the future. It

discounts the business's projected earnings to adjust for real growth, inflation and risk

– The main advantage is the indication of fair market value based on the expectations of future company

specific economic performance

3. Market-based Valuation (Multiple Valuation)

– It values the company based on comparison with similar companies in the industry

– Common Multiples used are Price/ earnings, EV/ EBIDTA, Price/ sales etc.

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Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted ~ Albert Einstein


Demystifying Valuation

My business is losing money. So it is not

valuable.

My business is unique, results are great. My

business should command a high

valuation.

The value of my business depends what

it is being used for.

The revenue multiple of my industry is 2. My competitor sold it for

twice the revenue. So I should use the same

multiple.

Once the valuation is done, it will remain

constant for the next few years.

My accountant can do my business valuation. I don’t need experts for it.

My financial statements can say all about my business. What is the need for valuation?

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