India has been one of the most attractive and evolving investment destinations for private equity/venture capital funding for quite a long time and the growth of start-ups in India has been multifold in the last 10 years. A lot of startups in India have entered in the industry either by charting into a completely new territory/market or through gaps in existing markets or product lines.
However, the ongoing Covid-19 pandemic has put a halt on the funding/investment plans of the prospective investors and also the growth prospect of the companies. Having said so, this time should be utilised by the companies to prepare themselves to raise funding soon after the current situation and global economy start showing signs of improvement.
In this article, we have touched upon few important points which the companies can prepare themselves at this point of time so that they are ready to be funded.
A. KNOWING THE VALUATION AND THE MONEY REQUIRED TO BE RAISED:
It is very important to strategize, think through and gauge the requirement of funds by a company. For this purpose, it is important to analyze as to how the existing amount raised by a company has been utilised. Further, evaluations in terms of market potential of the product/service, valuation offered by the investor and evaluation of the current risk involved in the venture could be few factors which would be helpful in determining the amount which is required to be raised and the same should be in sync with the business requirements of a company.
B. APPOINTMENT OF INVESTMENT BANKER AND LEGAL COUNSELS:
It is important that the company is prepared with whatever it can prepare itself for in advance and the paper work is done so that as and when the opportunity knocks the door then the company is prepared with everything possible at its end and no time is lost in looking for professionals who would represent the company whenever the fund raising happens. Getting ready in advance would also be helpful for the company as it would be able to explore between available options and choose its representatives well in advance. Further, it should be decided by the company whether it needs to appoint an investment banker who could help the company in preparation of pitch document and finalisation of the business plan.
C. GETTING THE PITCH DOCUMENT READY:
Any investor who intends to put in money would first want to understand the vision, mission and growth prospects of a company. It is important that each detail is mentioned in the pitch document and is adequately brain stormed and thought through so that the investor believes in the product and growth prospects of the company. The current situation has brought lot of uncertainties and turmoil in the global economy and therefore it is more important that the pitch document is reworked and re-strategized such that it takes into its purview practical challenges that would be encountered by a company going forward in the coming years.
D. GETTING PREPARED FOR AN EXTERNAL DILIGENCE:
This is the best time for companies to get their tax and legal compliances checked and put them in order. As everyone is aware, that any investor putting in monies into a company would first get a financial and legal diligence done and in the event that there are lot of red flags in terms of legal compliances, then not only will that delay the closing of a deal but will also have an adverse impact on the valuation of a company. The company should, therefore, get a vendor due diligence done to identify the gaps in the compliances and take necessary steps to rectify the compliances. It is really helpful when an external diligence is done by an prospective investor as it reduces the time of the investor to get the diligence done and also the costs of the company as the investor may not again do a detailed diligence and rather only get a limited diligence done on the company.
E. IMPLEMENTATION OF ESOP:
The company should take necessary steps to create and implement an employee stock option plan so that cap table of the company includes the ESOP pool and it also gives a sense of confidence to the investors that the dilution required in the cap table due to issuance of options has already been taken care. In our experience we have usually observed that the investors require the companies to implement the stock option plan as a condition precedent to closing and therefore if this is already taken care beforehand then the same saves some time at the time of closing of the transaction.
F. GETTING THE INTELLECTUAL PROPERTY REGISTERED:
Though under Indian laws it is not absolutely necessary to get the trademarks/logos registered, however, as a best practice and for added weightage it is important that necessary application is filed for registration of the IPs, if any, that have been developed as part of the business. This should be done as early as possible as the time period from the date of making the application and getting the final registration for the IPs in itself take a considerable period of time. We have in our experience observed that as part of the conditions precedent to closing, the investor usually insists on filing an application for registration of the IPs related to the business.
G. STRENGHNING OF INTERNAL CONTROLS AND BUILDING A STRONG TEAM:
This time is a particularly trying time for start-ups as the businesses and revenues are not consistent, however the fixed costs are recurring. However, this time should, as much as possible be utilised on matters which are particularly neglected during regular business movements. It is important that the company builds very strong internal controls so that when an investor is coming in and when it witnesses a robust internal control systems within the organisation, it gives him to lot of confidence to put its monies into such a company. Also, it is equally important that there is a strong execution team as it is ultimately on how the employees and founders of a company vision and run the company and that is what decides the future growth of a company.
Authors: Prashant Jain, Co-Founder & Partner; Anita Dugar, Senior Associate.
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Updated as on April 20, 2020
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