MBM 662 – NEW VENTURE FINANCING

QUESTION BANK

UNIT 1
Q1. What is meant by the term ‘New Venture Financing’. Explain its need in today’s times.

Dha

Q2. What are the possible avenues where an business household can look upon venture
financing company for finance?

1. Angel Financing
Angel investors are typically individuals who invest in startup or early-stage companies in
exchange for an equity ownership interest. Angel investing in startups has been accelerating,
and high-profile success stories like Uber, WhatsApp, and Facebook have spurred angel
investors to make multiple bets with the hopes of getting outsized returns.

2. Crowdfunding
“Crowdfunding” is the practice of raising funding through multiple funders, often via popular
crowdfunding websites.

Crowdfunding gives startup entrepreneurs the opportunity to raise startup funding for their
business, and can help a company promote its products or services. Setting up a
crowdfunding campaign is not very difficult. You set up a profile on a crowdfunding site,
describing your company and its business, and the amount of money you are trying to raise.
People who are interested in what you are trying to do can donate to your campaign,
typically in exchange for some kind of reward for their donation (one of your products or
services, a discount based on how much donated, or some other perk), or for some form of
equity or profit share in your business.

3. Venture Capital
Startups seeking financing often turn to venture capital (VC) firms. These firms can provide
capital; strategic assistance; introductions to potential customers, partners, and employees;
and much more.

Venture capital financings are not easy to obtain. Venture capitalists typically want to invest
in startups that are pursuing big opportunities with high growth potential, and that have
already shown some traction; for example, they have a working product prototype, early
customer adoption, etc.

4.Loan from Banks & NBFCs

Banks and Non-Banking Financing Companies(NBFCs) grant loans and become business
leaders and not owners, unlike VCs and angels. These loans so procured can be used for
various business needs like:

Purchase of inventory and equipment

Operating capital (working capital)
Fund requirement for expansion etc
However, there are several drawbacks of this funding option. The interest on loan has to be
paid periodically irrespective of how your business is faring. The bankers ask for substantial
collateral and you need to prove a good credit record along with fulfillment of other T&C*

Q3. Write a brief note on evolution of Venture Financing?

▪ In 1983, the first analysis was reported on risk capital in India. It indicated that new
companies often face barriers while entering into the capital market and also for
raising equity finance which weakens their future expansion and growth. It also
indicated that on the whole, there is a need to assess the equity cult by ensuring
competitive return on equity investment. This all came out as institutional
inadequacies and resulted in the evolution of Venture Financing.
▪ In India, IFCO was the first institution to initiate the idea of Venture Financing when
it established the Risk Capital Foundation in 1975. It provided the seed capital to all
small and risky projects. However, the concept of Venture Financing got its
recognition for the first time in the budget for the year 1986-87.

Q4. What are the features of Venture Finan

cing? Explain its importance in business world.

Features Of Venture Finacing

High Risk
The first feature of venture capital we can identify is that it is a high-risk activity. As pointed
out earlier venture capital in its modern form invests in start up companies. These are
usually companies which have a new idea or technology and are determined to build a
business around it. venture capital is a very risky business and there are successes and
failures in venture capital-funded start ups. It is estimated that as many as 25% to 30% of
venture capital-funded firms fail.

Lack Of Liquidity.
Venture capitalists buy into start ups as small companies. What this means is there are very
few ways to recoup their investment namely the start up succeeding and going public,
dividends which growth companies rarely pay and someone else buying their investment
out. This lack of liquidity is another important feature of venture capital. The venture
capitalist cannot easily divest if things are looking bad for the start up. They and their money
are tied to the start up. We will see how this venture feature capital feature leads to the
existence of another venture capital feature which is participation in management.

Long Term Horizon.

Another important venture capital feature is the time horizon involved in venture capital
funding. Start ups take a lot of time to scale and grow to a size where they can either
publicly float their shares become attractive enough for someone to buy out the initial
venture capital investors. Many start ups go through multiple funding rounds before they
reach maturity. In each round, more investors are brought into the organisation. In the
meanwhile, these investors will hold on to their equity until their defined exit arrives, more
on this later. Venture capital features a long time horizon before investors can recoup their
investment.

Equity Participation And Capital Gains

Venture capitalists participate in start ups by buying equity in the start up, this means they
become part owners. While venture capital features no liquidity for the investment and
hence a long term horizon when making venture capital investments, venture capitalists do
accrue capital gains in their investments. As the start up grows the valuation grows too,
hence the venture capitalist’s investment grows in value. As more investors come on board
and as the company grows this is capital gain to the investor..

Innovative Projects.
Venture capital features a bias toward innovative projects. Venture capitalists tend to back
start ups that have new and innovative ideas. The allure of dominating new exciting markets
is one of the major reasons behind this focus on new and innovative ideas.

Management Participation
As a condition of investment venture capital features venture capitalists participating in
company management or reserving the right to participate in management appointments.
Venture capitalists do take on a considerable risk of failure and one of the trade-offs is a
desire to make the sure the start up is managed in the best possible way. They may
participate directly or have a choice of who should be appointed to critical positions such as
chief financial officer or operations manager. This venture capital feature doesn’t guarantee
success but certainly eases the conscience of venture capitalists while giving the start up the
best chance of success.

Defined Exit
The final venture capital feature we will identify is a defined exit. Venture capitalists tend to
be clear from the day they invest in a start up how they will exit the company. This may be
through disposing of the investment on the open market when the company goes public,
share buy-back arrangement or other means. It is commonly held that venture capitalists
while long term in outlook are interested in the capital gain their investment makes in the
growth phase of a start up. While it is possible venture capitalists are not particularly
interested in remaining invested in a company indefinitely.

There are many venture capital features that make it unique from general equity investment
in businesses. Each feature shows how the terms in venture capital agreements have
evolved into the type of venture capital arrangements we have in the modern business
world
Importance of Venture Capital financing in business world.
● It helps new products with modern technology become commercially feasible.
● It promotes export oriented units to earn more foreign exchange.
● It not only provide the financial institution but also assist in management, technical
and others.
● It strengthens the capital market which not only improves the borrowing concern but
also creates a situation whereby they can raise their own capital through capital
market.
● It promotes modern technology through the process where financial institutions
encourage business ventures with new technology.
● Many sick companies get a turn around after getting proper nursing from such
Venture Capital institutions.

Q5. What are the aims and objectives of a Venture Financing Company. Explain its role for a
budding entrepreneur.

AIM : A Venture Financing company is always looking for a high rate of return. The earlier
your company is in its business cycle, the higher that rate will have to be to compensate the
venture capitalist for his or her risk. This means that the company must be positioned for
rapid growth, in terms of both management and product.

Objectives of Venture Capital in India

● It allows for the working together of capitalists and startups/businesses closely and
for the promoting of entrepreneurs to focus on making more and more ideas.

● It creates an environment suitable for knowledge and technology-based enterprises.

● It helps to boost scientific, technology and knowledge-based ideas into a powerful
engine of economic growth and wealth creation in a suitable manner.
● It aims to play a catalytic role to India on the world map as a success story.
● Initiating Process Of Venture Capital Financing

Venture capital Financing has a very crucial role in entrepreneurship development in any
area (or country).

VCs primarily provide following to help entrepreneurs -

● Availability of capital - The most important but not the only contribution. Capital
provides life to the enterprise and its functioning.
● Mentorship - provides guidance and mentorship to entrepreneurs basis his past
experiences. It really helps usually when company wants to change its course or pivot
to new model.
● Industry connects - Figure out synergies and help entrepreneurs to grow their
business and hire team
● Support for future rounds - VCs can also help for future rounds of fundings
Q6. What are the advantages of getting a finance from new venture financing company for
the businessman/ entrepreneur?

▪ No Collateral required – If you have a business plan along with the business
model and profitability then investors or venture capitalists invest in your project
without any collateral.

▪ No repayment period – Unlike debt financing, you need not pay any fixed monthly
or yearly payments to make it happen. This enables a company to manage funds
efficiently for expansion of business or purchase of machinery to boost production.

▪ More cash on hand – You have more cash on hand and no loan burden. So, you as
the company can declare a dividend to the shareholders in accordance with the
profitability of the company.

▪ Long term planning – Since the investors do not expect the immediate return on
their investment, you can manage the funds efficiently which will yield better
returns in the near future.

Value Added Services: Venture Capitalists provide HR Consultants, who are

specialist in hiring the best staff for your business. This helps in avoiding to hire the
wrong person. It also offers a number of other such services such as mentoring,
alliances and also facilitates the exit.

▪ Better Management: It’s not always that being an entrepreneur one is also a good
business manager. However, since Venture Capitalists hold a percentage of equity
in the business. They will have the power to say in the management of the business.
So if one is not good at managing the business, this is a significant benefit.

▪ Expertise joining the company: Venture capitalists provide valuable expertise,

advice and industry connections. These experts have deep knowledge of specific
market standards and they can help you avoid your business from many downsides
that are usually associated with startups.

▪ Expansion of Company: Venture capital provides large funding that a company

needs to expand its business. It has the ability for company expansion that would
not be possible through bank loans or other methods.

Q7. What are the limitations of a new venture financing company. Also explain how an
entrepreneur can overcome them for his business plan.

Loss of Control
When funding your company or startup with venture capital, you will transfer a portion of
control to the investor. What this means is that you will no longer hold 100% of the
decision-making power. Of course, if you have committed to an investor that does not share
your vision and values, then this can quickly become a problem. Indeed, if you have opted to
sell over 50% of the company shares to a single VC, then you will no longer retain majority
control, and their decision will take precedence. To avoid this, you should always remember
that the best financial offer may not always be the best offer per se; selecting a VC that is on
your wavelength is far more critical than who offers you the biggest cheque.

Monetary-Only Interests
By their very definition, VCs will only provide capital if the company is likely to provide a
desirable return on investment. Therefore, it’s fair to say that, in most cases, profitability is
the top priority, particularly if they are keen to see a quick return so that they can re-invest
in other projects. In such cases, you may be better off seeking the services of an angel
investor, or other external investors who are motivated by social, philanthropic or ethical
reasons.

Potential Harm to Reputation

As previously mentioned, doing your research before pursuing any deal is essential. After all,
the decision to allow another entity control over your company can make or break your
company’s mission statement, so be sure to look into other companies that your target VC
firm has invested in first. How are those companies performing? Have they experienced
significant and consistent growth? Are they innovative in their offerings and operations? If
you don’t like what you see, or if a particular pattern keeps emerging, then it might be best
to look elsewhere, particularly if you have a precise vision for your company.

Lack of Attention
After signing a financing agreement with a VC, management of the company will become
more complicated, as it multiplies the amount of input for decision making by the number of
stakeholders. Instead of being able to make business calls single-handedly, any major
decision will need to be discussed and approved by stakeholders, resulting in potential
conflict as well as a more bloated decision process.

Creating a scalable business model

Whether you are hoping to expand a small business with a loan or going for a round of
venture capital, you will need a scalable business model. Investors in particular want to fund
only scalable or ready to scale businesses. Your business model must show the potential to
increase the revenue with minimal expenditure in the coming months or years.

Your business idea itself needs to be scalable

This means being able to increase profits without increasing costs at an equal (or higher)
rate. Sure, it should be unique. But without scalability, it is less likely to be investable.

Usually, scalable business models have higher profit margin and lower infrastructure and
marketing investment. While expanding, your business model needs to remain aligned with
the company’s core offerings.

In other words, if your business model is likely to result in the overextension of time, money,
and resources, investors will be hesitant to welcome you with open arms.
Q8. What are the practices and procedure of venture financing in India?

Stages of venture capital financing

Venture capital financing is quite helpful to
nurture and grow a start-up into a profitable
venture. Here are the different stages of venture
capital financing.

Seed Stage
As the term suggests the start-up will grow by
making use of the capital invested by angel
investors or venture capitalists. In this stage, an
investor investigates the business plan and the
potential of the product or service to succeed in
the future, which is to be delivered by the
entrepreneur.

Start-up Stage
If the idea/product has the potential to cater or solve any problem then the entrepreneur
needs to submit the business plan along with,

In-depth analysis of revenue model i.e. how the company generates revenue,
Current competition in the peer industry or sector,
Details of the management i.e. CEO, CIO, Director of the company and their work experience
apart from educational qualification,
Size and potential of the desired market.
After analysis of the above-mentioned points venture, capitalists decide whether they are
going to invest. At this stage, the risk factor is quite high because there is an inherent risk of
losing the invested capital if the business does not succeed. The money invested by the
venture capitalists will be used for the development of product or services and marketing
strategies.

Early-stage/First stage
This stage is also known as the emerging stage. The capital received from the venture
capitalists goes into manufacturing products or delivering services by setting up an office to
capture the market shares from the competitors in the industry. Venture capitalists have a
close eye on the management to know the capacity of the management and how they can
tackle the competition from the peer companies. In this stage, the capital is invested to grow
inventory to increase sales.

The Expansion stage/Second stage/Third stage

In this stage, the capital is provided for marketing and promotion of the product, expansion,
and acquisition to keep up with the demand of the product. Venture capitalists funding in
the emerging stage is largely used for market expansion by setting up a new factory or
acquisition of factory and product diversification.

Venture capitalists intend to invest in this stage since the chances of failure in the emerging
stage are quite low. Apart from this venture capitalists have an option to analyze the past
performance data i.e. sales, profit, etc., management team, and audited financial data of
previous years.

The Exit Stage/ IPO stage

This is the last stage of the venture capital financing process. At this stage, the company
gains a certain amount of market share. In this stage, the companies give the venture
capitalists an opportunity to book the profit for the risk they have taken, and exit from the
company by selling their share/stake when the company announces initial public offering.
The fund raised from Initial Public Offering can be used for,
● Mergers and acquisitions.

● Reduction of price and other strategies to drive out peer competitors.

● Introduction of products or services to attract new customers and markets.
UNIT 2

Q9. Financing a new venture is risky business. Comment and explain with suitable example.

Q10. Discuss the characteristics of a firm which is involved in financing a new venture.

1. Venture capital is essentially financing of new ventures through equity participation.

However, such investment may also take the form of long-term loan, purchase of options or
convertible securities. The main objective underlying investment in equities is to earn capital
gains there on subsequently when the enterprise becomes profitable.

2. Venture capital makes long-term investment in highly potential ventures of technical

savvy entrepreneurs whose returns may be available after a long period, say 5-10 years.

3. Venture capital does not confine to supply of equity capital but also supply of skills for
fostering the growth and development of enterprises. Venture capitalists ensure active
participation in the management which is the entrepreneur’s business and provide their
marketing, technology, planning and management expertise to the firm.

4. Venture capital financing involves high risk return spectrum. Some of the ventures may
yield very high returns to more than Compensates for heavy losses on others which may also
have earning prospects

Q11 Explain various types and sources of financing available for a start-up business.

1.Intellectual curiosity
As an investor, you never know what pitch is coming through your door next. As such,
effective VCs need to be constantly clued in about emerging technologies and product
trends, which requires constant learning. The best VCs are both broad and deep in their
knowledge bases and are open to new ideas, and ways of thinking. The level of intellectual
curiosity an individual has in my experience has been a key indicator of whether they will
initially enjoy doing VC and be any good at it.
If all you’ve been is an expert and founder of a company in one particular field, it increases
the chance of missed opportunities you may see and be comfortable with.

2. Dynamic thinking
Great VCs are always thinking ten steps down the road, which can split into a variety of
paths, and are able to be hyper-focused on business value and potential strengths,
regardless of how ‘out there’ the pitch is. Many of today’s unicorns started off as a
completely different product or service, so seeing various potential successful outcomes,
and backing founders who can also think dynamically about their business to produce a
successful pivot at a later stage is essential.
One of the interview questions I use to test this characteristic is ‘tell me ten or more things
you can do with a brick?’ Potentially great VCs will have a lot of fun with this game, while
those who get stressed might not be a great fit.

3. High degree of stamina

Being a VC is draining. Many people enjoy pretending to be a shark on Shark Tank from their
couch, but could you actually meet 5–10 startups a day and still be excited about your job?
Regardless of whether it is your first or last pitch of the day, VCs need to stay focused and be
able to differentiate between misleading ‘shiny objects’ and the true ‘diamonds in the
rough’. Just because you have seen five bad blockchain pitches doesn’t mean the next one
might not be a winner.
I have had lots of success in the retail subscription box space because I have seen so many
pitches in that space and learned through osmosis. Great VCs are able to look past a boring
pitch to find the real potential.

4. Networking abilities
Are you constantly networking both in the investment and startup communities and
corporate industries? Your network is your toolbox, and the most powerful VCs know that by
leveraging their networks correctly, they can create a network effect which can be used not
only for deal sourcing but also to support their portfolio companies.
Being able to source proprietary deal flow through your network is probably the number
one differentiator in top VCs, and is what keeps top VCs at the top with an unfair
competitive advantage. Even if an individual investor that works at a top VC isn’t all that
great compared to an average VC investor, they outperform because of their access to top
quality and quantity of deal flow.

5. Calculated risk-taking

Being able to take calculated risks is an art form. The best VCs are constantly assessing risk vs
reward to get the biggest return across a portfolio of companies.
VCs need to develop key metrics and qualities they look for which allow them to quickly
highlight potential outperformers. Over time this will develop into a strong gut muscle for
when things feel right, but being able to do this without taking on too much risk means
being extremely clear on what metrics or qualities are important to you as an investor. To do
this effectively, VCs also have to have a good understanding of different markets and
consumer trends to reduce market sizing and timing risks.

6. Open-mindedness
VCs need to be open to finding good ideas that initially look like bad ideas.
Sometimes entrepreneurs have unlocked a secret about a market that other people haven’t
uncovered, so it’s important to have an open mind when considering pitches. That said, it is
still important to support logic with facts — so you must be able to think outside the box
without getting carried away in the moment or with a shiny object.

7. Willingness to get involved

Companies are looking for VCs who offer more than just capital. They want people who are
willing to get involved and get their hands dirty. This could be helping the company meet
business goals, find new talent or customers, or giving your two cents worth about the best
direction to take the company.
In the past, I have become the interim CFO of portfolio companies in stormy waters, and
have a ‘black book’ of more than 1,000+ industry contacts which I open up to my portfolio
companies to help them accelerate growth. Your experience and network are equally as
valuable as your checkbook.

8. Conviction
Great VCs never say maybe, instead they find a balance between gut-based decisions and
methodical/data-oriented decisions, which allows them to choose between two options:
pass or invest.
This is especially important if you are the lead investor on a round, because if you can’t make
a decision quick, another fund may beat you to drafting a term sheet. If you are a co-investor
then you may have more time as a round is coming together, but if a round is towards the
end of being completed, you have to be able to move quickly too.

Q12 What are the methods used by venture capitalists to finance a new venture?

Methods of Venture Capital Financing

Various methods of venture capital financing are as discussed in points given below: –

Equity Financing
Equity financing is a fund-raising method used by start-up companies who are in need of a
large amount of capital, having a robust business plan and better chances of high potential
future growth. These firms are new to the market with irregular income in the beginning
phase due to which they are not able to give timely returns to investors. Under such
conditions, the equity financing method proves to be the most beneficial method for
start-up businesses. Companies raise funds from investors and in return provide them a
stake in their business. The overall contribution of investors is not more than 49% such that
they do not have voting rights. Entrepreneurs have full power to make critical decisions and
run the business venture.

Debentures
The debenture is another common method used by start-up firms for acquiring the required
amount of funds. It denotes a guarantee given by the company to fund providers for
repayment of their money once the security gets matured. The company issues a debt paper
to investors which act as an acknowledgment slip in order to raise funds for a specific time
period. The interest is paid by the firm on debentures on distinct rates which varies as per
the phase of their operations: –

Before business commencement phase- Nil

After business commencement phase- Low interest rate
Phase after a particular level of operations- High interest rate
Conditional Loans
Conditional loans are different from bank loans which do not carry any fixed rate of interest
nor any pre-determined schedule of payment. Here, under these types of loans, the
entrepreneur pays the lender in the form of royalty once the venture starts generating
revenue. There is no payment of interest on the loan amount to the lender. The royalty rate
may be in the range of 2% to 15% which varies due to factors such as external risks,
gestation period, and patterns of cash flow.

Conventional Loans
Conventional loans are unlike conditional loans, where the entrepreneurs are required to
pay interest to lenders. During the initial days, the interest paid is at a lower rate which
increases with the rise in profit earned by the venture. Also, in addition to interest paid on
borrowed capital, a royalty is also paid by an entrepreneur in accordance with profit/sales.

Income Notes
Income notes are a hybrid form of financing available for business ventures. It combines the
features of both conditional loans and traditional loans from banks or NBFCs. The
entrepreneur pays interest and is required to repay the principal amount within the
predetermined period of time. The royalty amount is also paid by the entrepreneur on sales
volume or profit.

Q13 Venture Capitalist have power to influence the decision making of companies.
Comment with suitable example.

Venture Capitalist make decisions across eight areas: deal sourcing, investment selection,
valuation, deal structure, post-investment value-added, exits, internal firm organization, and
relationships with limited partners. In selecting investments, VCs see the management team
as more important than business-related characteristics such as product or technology. They
also attribute more of the likelihood of ultimate investment success or failure to the team
than to the business. While deal sourcing, deal selection, and post-investment value-added
all contribute to value creation,
Q14 Explain with example the process of funding a new venture.

THE FUNDING PROCESS: Approaching a Venture Capital for funding as a Company

Venture Capital Process
The venture capital funding process typically involves four phases in the company’s
development:

1. Idea generation
2. Start-up
3. Ramp up
4. Exit

● Step 1: Idea generation and submission of the Business Plan

The initial step in approaching a Venture Capital is to submit a business plan. The plan
should include the below points:

There should be an executive summary of the business proposal

Description of the opportunity and the market potential and size
Review on the existing and expected competitive scenario
Detailed financial projections
Details of the management of the company
There is detailed analysis done of the submitted plan, by the Venture Capital to decide
whether to take up the project or no.

● Step 2: Introductory Meeting

Once the preliminary study is done by the VC and they find the project as per their
preferences, there is a one-to-one meeting that is called for discussing the project in detail.
After the meeting the VC finally decides whether or not to move forward to the due
diligence stage of the process.

● Step 3: Due Diligence

The due diligence phase varies depending upon the nature of the business proposal. This
process involves solving of queries related to customer references, product and business
strategy evaluations, management interviews, and other such exchanges of information
during this time period.

● Step 4: Term Sheets and Funding

If the due diligence phase is satisfactory, the VC offers a term sheet, which is a non-binding
document explaining the basic terms and conditions of the investment agreement. The term
sheet is generally negotiable and must be agreed upon by all parties, after which on
completion of legal documents and legal due diligence, funds are made available

Types of Venture Capital funding

The various types of venture capital are classified as per their applications at various
stages of a business. The three principal types of venture capital are early stage
financing, expansion financing and acquisition/buyout financing.
 The venture capital funding procedure gets complete in six stages of financing
corresponding to the periods of a company’s development

1. Seed money: Low level financing for proving and fructifying a new idea
2. Start-up: New firms needing funds for expenses related with marketingand product
development
3. First-Round: Manufacturing and early sales funding
4. Second-Round: Operational capital given for early stage companies which are selling
products, but not returning a profit
5. Third-Round: Also known as Mezzanine financing, this is the money for expanding a
newly beneficial company
6. Fourth-Round: Also calledbridge financing, 4th round is proposed for financing the
"going public" proces

Q15 Write short note on

● Due Diligence:
Due diligence is an investigation, audit, or review performed to confirm facts or details of a
matter under consideration. In the financial world, due diligence requires an examination of
financial records before entering into a proposed transaction with another party.

Due diligence is a systematic way to analyze and mitigate risk from a business or investment
decision.An individual investor can conduct due diligence on any stock using readily available
public information.
The same due diligence strategy will work on many other types of investments.
Due diligence involves examining a company's numbers, comparing the numbers over time,
and benchmarking them against competitors.Due diligence is applied in many other
contexts, for example, conducting a background check on a potential employee or reading
product reviews.

● IPO
An initial public offering (IPO) refers to the process of offering shares of a private corporation
to the public in a new stock issuance. An IPO allows a company to raise capital from public
investors. The transition from a private to a public company can be an important time for
private investors to fully realize gains from their investment as it typically includes a share
premium for current private investors. Meanwhile, it also allows public investors to
participate in the offering
An IPO can be seen as an exit strategy for the company’s founders and early investors,
realizing the full profit from their private investment.

● Equity Financing

Equity financing is the process of raising capital through the sale of shares. Companies raise
money because they might have a short-term need to pay bills or have a long-term goal and
require funds to invest in their growth. By selling shares, a company is effectively selling
ownership in their company in return for cash
 Equity financing comes from many sources: for example, an entrepreneur's friends and
family, investors, or an initial public offering (IPO). An IPO is a process that private companies
undergo to offer shares of their business to the public in a new stock issuance. Public share
issuance allows a company to raise capital from public investors. Industry giants, such as
Google and Meta (formerly Facebook), raised billions in capital through IPOs.

Q16 What are the advantages and difficulties of self-financing a new venture?

Advantage: Your Funds, Your Success, Your Profit

In comparison to taking out installment loans and loaning contracts, securing your business
using your funds ensures almost one-hundred percent of sales and investment coming back
directly to you.

Since you are not affiliated with any bank or financial institution to cover the costs, you will
reap the rewards of your sales, revenues, and investments after a few years or so. Of course,
you have to plan carefully and work hard to minimize losing cash and keeping a consistent
cash flow.

Advantage: Total Control, Run The Business Your Way

Arguably one of the best parts of self-financing is that you get to lead your business your
way. Total control of a business is often a privilege for aspirants who can start their concepts
through self-financing.

It means there will be no investors to convince in choosing business routes, no banks to limit
your control over money, and no payments to catch on to keep your business credit in check.
This capacity of total control allows you to paint a business in the way you see it, and as for
the cash flows, you can tweak out your sales and marketing to control the flow of returns.

Advantage: Total Control of Business Expansion

Similar to the point above. Expanding a business is often a difficult hurdle for business
owners if affiliated with a venture capitalist or bank. Business expansions take a lot of
funding and requirements to get another franchise in another location.

But if you’re self-financing, there’s no need to seek approval from any institution or any
investor. If you have the means, the papers, and the human resources, expanding your
business will be easier and faster.

Disadvantage: Limited Resources

Self-financed aspirants are only limited to the allocated funds they have—the reason why
some businessmen opt-out of self-financing is because they lack personal savings to kickstart
a venture.
Self-financing a business means supplying your business with ongoing funding until it
becomes self-sufficient and able to attract regular clients, which could take a long time.
Remember that self-financing is expensive, and it causes you to make some lifestyle changes
to fuel your goal.

Disadvantage: Risk of Bankruptcy

Money is your bloodline in your business. And self-financing has a limited supply before it
stops keeping your business alive. Many failed business owners have dried out their pockets
in hopes of keeping their business operating and looking for a break to jumpstart their cash
flow.

Most aspirants who contract loans for their businesses don’t have to go through this. They
may not have total control, but they would at least not go bankrupt and dry out their funds.

Disadvantage: Not Enough Money To Cover Production Costs

Most self-financing owners use their funds to cover production costs of a specific service or
product, then have it returned when their clients pay up. So what happens if a particular
order is too big for the business owner?

It forces them to take loans; more oversized orders mean more growth opportunities,
especially for small business owners who rely on consistent purchases to thrive. So if you
can’t cover this kind of cost, you will miss out on big profits.

Disadvantage: Repercussions will be borne by the Owner Alone

When a self-financed business closes down, the owner is responsible for paying the financial
obligations, such as rent and salary, and other legal fees involved in the closure.

It’s extremely dangerous; not only are your funds exhausted, but you also have to spend
more to compensate employees and other fees.

Q17 Comment on the growth of venture capital financing in India during last decade.

Venture Capital in India was known since nineties era. It is now that it has successfully
emerged for all the business firms that take up risky projects and have high growth
prospects as well. Venture Capital in India is provided as risk capital in the forms of shares,
seed capital and other similar means.

In 1988, ICICI emerge as a venture capital provider with unit trust of India. And now, there
are a number of venture capital institutes in India. Financial banks like ICICI have stepped
into this and have their own venture capital subsidiaries. Apart from Indian investors,
international companies too have settled in India as a financial institute providing
investments to large business firms. It is because of foreign investors that financial markets
have developed in India on a large scale. Introduction of western financial philosophies, tight
contracts, focus on profitable projects and active involvement in finance was contributed by
foreign investors only.

The financial investment process has evolved a lot with time in India. Earlier there were only
commercial banks and some financial institutes but now with venture capital investment
institutes, India has grown a lot. Business forms now focus on expansion because they can
get financial support with venture capital. The scale and quality of the business enterprises
have increased in India now. With international competition, there have been a number of
growth oriented business firms that have invested in venture capital. All the business firms
that deal in information technology, manufacturing products as well as providing
contemporary services can opt for venture capital investment in India.

Q18 Write short note

∆Crowdfunding:

● Crowdfunding is a financing method that involves funding a project with relatively modest
contributions from a large group of individuals, rather than seeking substantial sums from a
small number of investors. The funding campaign and transactions are typically conducted
online through dedicated crowdfunding sites, often in conjunction with social networking
sites. Depending on the project, campaign contributors may be essentially making donations,
investing for a potential future return on investment (ROI), or prepaying for a product or
service.

Similarly to crowdsourcing, the concept from which it developed, crowdfunding's success

relies upon the ability to canvass a sufficiently large group of potential contributors. The idea
is the same as that behind many fundraising campaigns: convincing enough people to
contribute to reach a target figure.

Crowdfunding sites are sometimes referred to as platforms because they provide a venue for
all aspects of a campaign, such as creation of the public interface, campaign and project
tracking, a payment mechanism and disbursement of funds.

∆ Angel Investors:

● An angel investor is a wealthy individual who provides funding for a startup, often in
exchange for an ownership stake in the company. Typically, angels, as they are known, will
invest somewhere between $25,000-500,000 to help a company get started. In many cases,
angels are the last option for startups that don’t qualify for bank financing and may be too
small to interest a venture capital (VC) firm.

Unlike VCs, however, which demand aggressive revenue growth quickly, angels are more
concerned with the commitment and passion of the founders and the larger market
opportunity that they have identified. While angels don’t want to lose their money, they
aren’t typically as focused on making a quick buck as VCs are.

∆Private Equity:
● Private equity is an alternative investment class and consists of capital that is not listed on a
public exchange. Private equity is composed of funds and investors that directly invest in
private companies, or that engage in buyouts of public companies, resulting in the delisting
of public equity. Institutional and retail investors provide the capital for private equity, and
the capital can be utilized to fund new technology, make acquisitions, expand working
capital, and to bolster and solidify a balance sheet.
 A private equity fund has Limited Partners (LP), who typically own 99 percent of shares in a
fund and have limited liability, and General Partners (GP), who own 1 percent of shares and
have full liability. The latter are also responsible for executing and operating the investment.
Private equity is an alternative form of private financing, away from public markets, in which
funds and investors directly invest in companies or engage in buyouts of such companies.
Private equity firms make money by charging management and performance fees from
investors in a fund.Among the advantages of private equity are easy access to alternate
forms of capital for entrepreneurs and company founders and less stress of quarterly
performance. Those advantages are offset by the fact that private equity valuations are not
set by market forces.Private equity can take on various forms, from complex leveraged
buyouts to venture capital.

∆Venture capital

Venture capital (VC) is a form of private equity and a type of financing that investors provide to
startup companies and small businesses that are believed to have long-term growth potential.
Venture capital generally comes from well-off investors, investment banks, and any other financial
institutions. However, it does not always take a monetary form; it can also be provided in the form of
technical or managerial expertise. Venture capital is typically allocated to small companies with
exceptional growth potential, or to companies that have grown quickly and appear poised to
continue to expand.

*Features*

It is a long-term investment and made in companies which have high growth potential. The provision
of venture capital will bring rapid growth for the business. ... Not much of technology is involved in
venture capital, it involves financing mainly small and medium size firms, which are in their early
stages.