Saraf Foods Case
1. What do you think of the way the investment was structured? Did GVFL function as a
true VC firm or were they acting more like a bank? Could GVFL and Mr Saraf have done
things differently with regards to financing the venture?
Ans) Following is the breakup of fund invested:
Total INR 15.7M = (GVFL (equity)INR 2.5+ GVFL(income note) INR 7.5 M +state Govt subsidy INR3M+ Promoter INR 2.7M)
GVFL invested almost equal amounts as promoter and also provided additional financing in income notes. But instead of going for income note financing GVFL and promoter could have gone for more equity financing with equal investment. This would reduce the cash outflow in terms of interest expense which would have reduced fixed cost further. This would have enabled project show positive returns in much faster pace and would have helped to finance its further expansion.
2. What is there in the company that is of any value? How would you go about valuing the company?
Ans) Company has been showing increasing sales volume except in the year 1998-99 in which it was struck by raw material crisis. So company would have created a brand value among buyers. The projected future cash flows can be considered as a tool for valuing the company. Project cash flows with expected sales for at least 7-10 years and value company based on it. Asset value of company equipments can also be considered for valuation.
3. Looking back, was this a potential VC investment to begin with?
Ans) The Company did a detailed study of buyer side market as explained in the case. But it seems that company did not do a proper study on supplier side issues including Government regulations, potential fluctuations in supply of raw materials due to climate related issues etc. This resulted in understatement of the risk associated with the project. The company did not had any control over supply of raw materials including the quality ( Use of pesticides and restricted materials). In India production of vegetables and fruits is considered to be highly cyclical with a period of high yield followed by a period of low output. The stability of Indian agricultural sector is minimal so it is very difficult for a small company like Saraf food products to handle all the issues related with supply chain.
The project could have been implemented with large corporation with previous experience in Agro industry and handling supply side issues in the agri business. It seems from the case that both venture capitalist and promoter was not experienced enough to handle widely risky supply issues of the business. May be if the promoter had partnered with someone with experience in Agro business or at least brought some expertise from outside to handle