Private Equity

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Here We are providing you basic details about VC/PE fund.
These are very important points, which must be considered by an entrepreneur before going for a VC/PE fund.

What is Private Equity / Venture Capital (PE / VC)?
PE / VC refers to capital provided to privately owned companies in return for shares or ownership in the company. Based on when this capital is raised, PE / VC is also referred to as Seed capital, Series A, Series B, Series C, Growth or Buyout capital. Seed capital, on one extreme of this spectrum, is an investment made at the earliest stage (business plan only) and buyout, at the other end, refers to the majority ownership of a more mature stage company by a PE Fund.

Is my firm at the right stage for a PE investment?
PE / VC can be raised at various stages of a company’s life cycle, as described earlier. However, since PE / VC is also the most expensive form of capital (compared to other sources of capital like say, debt or borrowings from friends/family), one must raise capital when there is a clear plan to use the proceeds and generate substantial returns on that capital.

What is the investment time horizon?
It depends on investor and agreement signed between you and him. Generally a VC stay invested for a period of 2 to 7 years.

Will I lose control of my business?
No. As growth capital investors, A VC typically seeks to purchase a minority stake in a company. Investors that own less than 50% do not control the business but will require certain information and governance rights while they remain invested.

How time consuming is periodic reporting and business reviews with Investors?
This depends on the preparedness of the company in handling quarterly and annual reporting and monthly MIS reviews. you must start behaving like a company that is already a publicly listed company.

What kind of value-add can I expect?
Value-add is typically in two areas
a) Business – which includes aspects like new business development, senior level hiring, business planning, better governance and
b) Financial – which includes areas like Fund raising and M&A. Private Equity firms differ in their relative emphasis, ability and preparedness in these areas of value-add.

Will the PE firm help me go public?
Yes, infact that is what a VC sees in your b-plan while investing in your company.
There must be a excellent exit-plan in your summary.

How should I think about valuation?
The price an investor pays or valuation is arrived at by mutual discussion. It takes into account the past performance of the company, the future potential of the business as well as the capital and other value-add that the investor will bring to the company.

What type of PE fund is right for me? What should I think about while selecting a Fund?
Selecting the right PE fund is as important to you as it is for a PE fund to choose the right company. Think of this as a 3 -7 year partnership and, as in most business partnerships, pay close attention to the people you will work with, the value the investor can add to your business and whether they have a demonstrable track record of being good, trust worthy, value-added partners Certain PE funds are known for specialized skills, sector knowledge or fund strategies that lend themselves better to certain situations – do take this into consideration while you choose the Fund

Is it better to contact Funds directly, or should one go through an investment banker?
The decision to raise private equity is an important decision for a company. Choosing the right partner is critical as you will be working with the PE Fund for a period of 3 -7 years. Investment bankers and smaller intermediaries play an important role in helping you prepare for such a step and in putting together the collaterals required to engage meaningfully with a PE fund. Investment banks also help you meet multiple PE funds and that might help in price discovery. However, dealing with fewer or one PE fund is often a more efficient and focused process that allows for faster closure, greater comfort and a more exhaustive discussion on all aspects of the partnership without any external pressure of a process.

What are the typical rights that a PE fund asks for?
Since a PE firm provides capital on behalf of its investors, it must negotiate certain special rights given its fiduciary responsibilities. These rights typically relate to corporate governance and reporting, special voting rights, rights relating to fund raising and/or exit scenarios, restriction on transfer of shares, anti-dilution etc.

How important are the legal contracts that we enter into? Will I need a lawyer?
Legal contracts are very important and we would encourage you to hire a competent and reputed law firm to help you understand the various covenants, rights, terms and obligations of the partnership.

Related Article: VC Money Is Not A Curse- Telling about the various deep points about VC money.It’s a guest article written by Mr. Avlesh Singh, Founder(WebEngage) URL- http://techaloo.com/vc-money-is-not-a-curse-guest-article/

Source:http://www.gajacapital.com/private_equity.aspx

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Mohit Bansal(23) is B.Tech in Electronics and Communication Engineering from Indian School of Mines, Dhanbad, India. He has interest in business and entrepreneurship and has published couple of research articles. He is also associated with various NGOs. He is with Techaloo when it was just in concept stage. The Techaloo site was not existing even then. Currently Mohit is working with Mu Sigma as a Business Analyst Profile.

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