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Debt or Equity Financing

Debt financing - Obtaining borrowed funds for the company.
Asset-based financing; requires some asset to be used as a collateral. Borrowed funds plus interest need to be paid back.

Equity financing - Obtaining funds for the company in exchange for ownership.
Does not require collateral. Offers investor some form of ownership position.

Debt or Equity Financing (cont.)

Factors affecting type of financing:
Availability of funds. Assets of the venture. Prevailing interest rates. All financing requires some level of equity; amount will vary by nature and size of venture.

Internal or External Funds

Internally generated funds are most frequently employed; sources include:
Profits. Sale of assets and little-used assets. Working capital reduction. Accounts receivable.

Short-term internal source of funds:

Reducing short-term assets - inventory, cash, and other working-capital items. Extended payment terms from suppliers.

Internal or External Funds (cont.)

Criteria for evaluating external sources of funds:
Length of time the funds are available. Costs involved. Amount of company control lost.

Personal Funds
Least expensive funds in terms of cost and control. Essential in attracting outside funding. Typical sources of personal funds:
Savings. Life insurance. Mortgage on a house or car.

The entrepreneurs level of commitment is reflected in the percentage of total assets that the entrepreneur has committed.

Family and Friends

Likely to invest due to relationship with entrepreneur.
Advantages - Easy to obtain money; more patient than other investors. Disadvantage - Direct input into operations of venture.

A formal agreement must include:

Amount of money involved. Terms of the money. Rights and responsibilities of the investor. Steps to be taken incase business fails.

Commercial Banks
Types of Bank Loans (Asset based)
Accounts receivable loans. Inventory loans. Equipment loans. Real-estate loans.

Cash flow financing (Conventional bank loans)

Installment loans. Straight commercial loans. Long-term loans.

Commercial Banks (cont.)

Bank Lending Decisions
Based on quantifiable information and subjective judgments. Decisions are made according to the five Cs of lendingCharacter, Capacity, Capital, Collateral, and Conditions. Review of past financial statements and future projections. Questions are asked regarding ability to repay the loan.


Venture capital means funds made available for startup firms and small businesses with exceptional growth potential. Venture capital is money provided by professionals who, alongside management, invest in young, rapidly growing companies that have the potential to develop into significant economic contributors.

Venture Capitalists generally:

Finance new and rapidly growing companies

Purchase equity securities

Assist in the development of new products or services

Add value to the company through active participation.

Popular Venture Capital funded Indian firms

The SEBI has defined Venture Capital Fund in its Regulation 1996 as a fund established in the form of a company or trust which raises money through loans, donations, issue of securities or units as the case may be and makes or proposes to make investments in accordance with the regulations.

Long time horizon Lack of liquidity High risk Equity participation Participation in management

It injects long term equity finance which provides a solid capital base for future growth. The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded by business success and the capital gain. The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations.

Advantages (Cont.)
The venture capitalist also has a network of contacts in many areas that can add value to the company. The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth. Venture capitalists are experienced in the process of preparing a company for an initial public offering (IPO) of its shares onto the stock exchanges or overseas stock exchange such as NASDAQ. They can also facilitate a trade sale.

Stages of financing
1. Seed Money: Low level financing needed to prove a new idea. 2. Start-up: Early stage firms that need funding for expenses associated with marketing and product development. 3. First-Round: Early sales and manufacturing funds. 4. Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit .

5. Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable company 6. Fourth-Round: Also called bridge financing, it is intended to finance the "going public" process

Risk in each stage

Financial Stage

Period (Funds locked in years) 7-10

Risk Perception

Activity to be financed

Seed Money


For supporting a concept or idea or R&D for product development

Initializing operations or developing prototypes Start commercials production and marketing

Start Up First Stage

5-9 3-7

Very High High

Financial Stage

Period (Funds locked in years)

Risk Perception

Activity to be financed

Second Stage


Sufficiently high

Expand market and growing working capital need

Third Stage



Market expansion, acquisition & product development for profit making company

Fourth Stage



Facilitating public issue

VC investment process

Deal origination


Due diligence (Evaluation)

Deal structuring

Post investment activity

Exit plan

Methods of Venture Financing

The financing pattern of the deal is the most important element. Following are the various methods of venture financing: Equity Conditional loan Income note Participating debentures Quasi equity

Types of Venture-Capital Firms

Exit route
Initial public offer(IPOs) Trade sale Promoter buy back Acquisition by another company

Valuing Your Company

Factors in Valuation
Nature and history of business. Economic outlook- general and industry. Comparative data. Book (net) value. Future earning capacity. Dividend-paying capacity. Assessment of goodwill/intangibles. Previous sale of stock. Market value of similar companies stock.

Valuing Your Company (cont.)

General Valuation Approaches
Assessment of comparable publicly held companies and the prices of these companies securities. Present value of future cash flow. Replacement value. Book value. Earnings approach. Factor approach. Liquidation value.

Steps in Valuing Your Business and Determining Investors Share


Venture capital funds in India

VCFs in India can be categorized into following five groups:


Those promoted by the Central Government controlled development finance institutions. For example: - ICICI Venture Funds Ltd. - IFCI Venture Capital Funds Ltd (IVCF) - SIDBI Venture Capital Ltd (SVCL)

2) Those promoted by State Government controlled development finance institutions. For example: - Punjab Infotech Venture Fund - Gujarat Venture Finance Ltd (GVFL) - Kerala Venture Capital Fund Pvt Ltd. 3) Those promoted by public banks. For example: - Canbank Venture Capital Fund - SBI Capital Market Ltd

4)Those promoted by private sector companies. For example: - IL&FS Trust Company Ltd - Infinity Venture India Fund 5)Those established as an overseas venture capital fund. For example: - Walden International Investment Group - HSBC Private Equity management Mauritius Ltd

Strategies for Growth

Growth Strategies Based upon Knowledge of Product and/or Market

Growth Strategies
Penetration Strategy
A strategy to grow by encouraging existing customers to buy more of the firms current products. Marketing can be effective in encouraging frequent repeat purchases. Does not involve anything new for the firm. Relies on taking market share from competitors and/or expanding the size of the existing market.

Growth Strategies (cont.)

Market Development Strategies
Strategy to grow by selling the firms existing products to new groups of customers. New geographical market - Selling in new locations. New demographic market - Selling to a different demographic group. New product use - Selling an existing product, which may have a new use, to new groups of buyers.

Growth Strategies (cont.)

Product Development Strategies
A strategy to grow by developing and selling new products to people who are already purchasing the firms existing products. Provides opportunities to capitalize on existing distribution systems and on the corporate reputation the firm has with these customers.

Growth Strategies (cont.)

Diversification Strategies
A strategy to grow by selling a new product to a new market. Backward integration - A step back (up) in the value-added chain toward the raw materials. Forward integration - A step forward (down) in the value-added chain toward the customers. Horizontal integration - Occurs at the same level of the value-added chain but simply involves a different, but complementary, value-added chain.