UNDERSTANDING EQUITY;

VENTURE CAPITAL/PE
Dalhia Mani, NSRCEL

Slides by Saras Saraswati, Darden; Slides by Stefano Caselli, Bocconi,

Sildes by G.Sabarinathan,IIMB.
PRIVATE EQUITY(PE)
PE is a source of financing: It is an
alternative to other sources of liquidity (such as a
loan or an initial public offering (IPO)) for the
company receiving the financing.
PE is an investment made by a financial
institution: Private Equity Investor (PEI) is the
equity of a non listed company (i.e. not a public
company).
THE DIFFERENCE BETWEEN PE AND
INVESTING IN A PUBLIC COMPANY
VENTURE CAPITAL (VC)
VC is a very specific case of PE.
It is the investment in the very early stages of a
companys life.
THE TAXONOMY OF PE CLUSTERS
VENTURE CAPITAL AS INTERMEDIATION

-Dollars
-Monitoring
Investment Interest -Consulting
FUND $$$$$$$$ VC FUNDS INVESTEE
INVESTORS FIRMS
Returns Capital Appreciation
PRIVATE EQUITY MARKET : PARTICIPANTS
AND FLOWS

Pension Funds
Endowments -Dollars
-Monitoring
Foundations Dollars -Consulting
Financial LP Interest VC Fund New Ventures
Institutions Returns
Returns
HNI / F
Non-fin corps
Other Investors
VENTURE CAPITAL AS INTERMEDIATION
Network Benefit
Certification Benefit

Knowledge Benefit

Financial Benefit

-Dollars
-Monitoring
FUND LP Interest -Consulting
INVESTORS $$$$$$$$ INVESTEE
VC FUNDS
Capital Appreciation FIRMS
Returns

Limited Life Discipline

Reducing Search & Information Costs
Managing Uncertainty and Risk

Mitigating
Moral Hazard

Agency Conflict
Information Asymmetry
 VC INVESTMENT PROCESS OVERVIEW
Exit

Post-Funding

Contracting
Effort

Valuation

Deal Structuring

Deal Evaluation /
Due Diligence

Deal Screening

Deal Sourcing

Launching, selling and closing Time

 VC INVESTMENT PROCESS OVERVIEW
Exit Options: Exit
Trade Sale
Buy back Post-Funding
IPO
Sale to another PE
Contracting
Write off

Valuation

Deal Structuring
Effort

Post Financing

Deal Evaluation /
Due Diligence

Deal Screening Deal Evaluation

Deal Sourcing Pre Evaluation

Launching, selling
and closing Fundraising
Time
WHAT IS VALUATION?
Valuation is the process of determining how
much to pay to invest in a company.
It is the endpoint as well as the process.

Determine the Determining Make an offer to gain

percentage of total worth of desired percentage
shares (s)he the company of shares
wants
METHODS OF VALUATION
Comparables
Net Present Value
COMPARABLES
Valuation is done by examining the values known
to have been placed on like companies in like
transactions.
Identifying Comparable Valuations: 3 Methods
1. Using Publically Traded Companies.
2. By looking at the prices paid for related private
companies when they are acquired by another company.
3. By looking at recent similar venture investments.
MULTIPLES
MULTIPLES
Using comparables to assess the enterprise value
of New Wine Co.
DISCOUNTED CASH FLOW METHOD
Key elements are:
Cash flows

Terminal values

Discount rates

Enterprise Value Formula:

 Weighted Average Cost of Capital (WACC)= Cost
of Debt + Cost of Equity
The cost of equity capital is calculated through
the Capital Asset Pricing Model (CAPM) formula:
Use a combination of DCF and Comparables and of course negotiation
Startup ecosystem*
Dalhia Mani, NSRCEL

*Data from Traxcn and iSpirit

 Indian Startup ecosystem at
a glance
3rd largest number of technology startups in the world after the U.S.
and U.K.*
The Fastest growing ecosystem: 270% increase in the number of
startups in the last 6 years, and growing.

*Source: Thought Arbitrage Research Institute (2015)

Source: World Economic Forum
report
 Funded, unfunded, acquired:
U.S., China, France, India, and
Israel tech comparison
Chart Title
10000

9000

8000 2006
2007
7000
2008
6000 2009

5000 2010
2011
4000
2012
3000
2013
2000 2014

1000 2015
2016
0
2017
Funded Unfunded Acquired Funded Unfunded Acquired Funded Unfunded Acquired Funded Unfunded Acquired Funded Unfunded Acquired
U.S China France India Israel
*Data source: Traxcn dataset: note that coverage in France, China and Israel is limited compared to coverage in U.S.
 Startup landscape by City

Mostly concentrated in
Startup hubs in India Bangalore (36%), Delhi
5000 (20%), Pune (15%) and
4500 Mumbai (9%).
4000 4442
3500
Bangalore strong in B2C
3000 Relatively weak in B2B
2500
2000 2468
HQ of Top 30 companies
1500 1851 8
1000 6
1111 7 7
500 987 864 617 4 5
0 2 3 2 2 1 1 1 1
0

Source: iSPIRT
 India Technology Product VC/PE Investment Deal
Value ($m)

India Technology Product VC/PE Investment

Deal Volume

Source: iSPIRT
 India Technology Product Deal Volume M&A

Source: iSPIRT
 M&A: Cashing out

Source: iSPIRT
Source: iSPIRT
IPOs?

In 2016, 180 startups exited through M&A while four

exited through IPO (CB Insights, Aug 2017)
Fewer due to weakness of stock market. Increasing. In
2017, 10 IPOs (example, Career Launcher IIMB grads)
What is Equity?
Why is equity important to
understand?

Most high-growth ventures grow through equity

partnerships. That means equity deals get structured
and restructured in a variety of ways as the venture
evolves into a stable corporation- whether public or
private
Why is equity important to
understand?

At the same time, most new ventures fail NOT due to

bad management, slow market uptake or lack of
cash, but because relationships between founding
partners and other equity partners become conflicted
and impossible to repair (Sarasvati 2011)
Why is equity important to
understand?

Hence the paradox of equity. You need to share

equity to build an enduring high-growth venture. But
sharing equity without understanding how increases
the probability of the venture breaking up and failing
Equity

What is equity?
Control/ Decision Rights
Compensation/ Incentives
Profit Sharing
Ownership
Equity

What is equity?
Control/ Decision Rights
Compensation/ Incentives
Profit Sharing
Ownership
Equity

What is equity?
Control/ Decision Rights
Compensation/ Incentives
Profit Sharing
Ownership
Equity

What is equity?
Control/ Decision Rights
Compensation/ Incentives
Profit Sharing
Ownership
What is ownership?
Residual risk and rewards
Joker in the pack
Equity is an instrument that deals with the uncertainties of
ownership
 Finally
Irrespective of how you split equity, the leader should run the
partnership as though everyone is equal and has real emotional
ownership in the firm as a whole.
Negotiate all three details (compensation, decision rights and profit
sharing) plus equity very carefully and choose a leader i.e. dont set
it up as an equal partnership. But if you are the leader, run the
partnership as though everyone is an equal partner.