Financing Cycle: Source: By Kmuehmel - Own work by uploader, derived from Startup_financing_cycle.JPG by Kompere, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=6206260 (This financing diagram illustrates how start-up companies are typically financed. First, the new firm seeks out "seed capital" and funding from "angel investors" and accelerators. Then, if the firm can survive through the "valley of death"–the period where the firm is trying to develop on a "shoestring" budget–the firm can seek venture capital financing.) Financing needs of any business depend on the stage through which the business is undergoing. Stage 1. Seed Funding/capital stage-(First Stage /Startup stage / Stage of financing during valley of Death) Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a start-up company in exchange for an equity stake or convertible note stake in the company. The term seed suggests that this is a very early investment, meant to support the business until it can generate cash of its own, or until it is ready for further investments. Seed money options include : • friends and family funding, • angel funding, • Government Schemes/Grants • bootstrapping and • crowdfunding. (*Explanations in the next lecture.) Seed funding can be raised online using equity crowdfunding platforms such as SeedInvest, Seedrs and Angels Den. Investors make their decision whether to fund a project based on the perceived strength of the idea and the capabilities, skills and history of the founders. Second Stage of financing life cycle (Early stage / Growth Stage) To generate funds during this stage, equity financing through following ways is arranged by the businesses: • venture capital, • private equity • Strategic Alliances like: o Joint venture o Mergers and Acquistion Seed capital can be distinguished from venture capital in that venture capital investments tend to come from institutional investors, involve significantly more money, are arm's length transactions, and involve much greater complexity in the contracts and corporate structure accompanying the investment. Seed funding involves a higher risk than normal venture capital funding since the investor does not see any existing projects to evaluate for funding. Hence, the investments made are usually lower (in the tens of thousands to the hundreds of thousands of dollars range) as against normal venture capital investment (in the hundreds of thousands to the millions of dollars range), for similar levels of stake in the company. Venture capital financing is a type of funding by venture capital. It is private equity capital that can be provided at various stages or funding rounds. Common funding rounds include early- stage seed funding in high-potential, growth companies (startup companies) and growth funding (also referred to as series A). Funding is provided in the interest of generating a return on investment or ROI through an eventual exit such as a merger and acquisition, (also referred to as M&A), or Initial public offering, (commonly known as an IPO) of the company. Third Stage of Financing Life cycle – Later stage / Expansion Stage / Pre-Public Stage of funding/ Bridge Stage/ Expansion Stage / Mezzanine Stage : During this, business has attained break-even levels and has overcome the testing times. Now, the entrepreneur wants to retain control and therefore the option of debt financing is resorted at this stage. Debt financing o Term loans: Given for medium to long term period of time. o Banks and other financial institutions o NBFCs o Loans from government/ Financial Institutions. o Loans for working capital o Bank overdraft facility o Short term loans Fourth Stage Financing -Public offering Stage / Secondary Market Stage: Last stage where business has grown to a high level and need funds for its future projects. Sources of finance are : o Initial Public Offering (IPO) o Follow on Public Offer (FPO) o Right Issue of Share (Note: Students have to add to these notes from the books and other reference material also. ) .