'It is an equity-based investment in a growth-oriented small to medium business to enable the investor to accomplish objectives in return for minority shareholding in the business.' This investment has to be carefully evaluated and analysed by an entrepreneur to find out the stage at which he/she requires this investment to assist in. (i) Identify the type of capital discussed in the above lines. (ii) Explain the three stages included in 'Early Stage Financing' if the capital identified in (i) above is required at this stage. 'An affluent individual who provides capital for a business start-up and early stage companies having a high-risk, high-return matrix usually in exchange for convertible debt or ownership equity.' (i) Identify the source to raise finance available to an entrepreneur discussed in the above lines. (ii) State any four features of the source of raising finance discussed in (i) above.

Question

Accepted Answer

(i) The type of capital discussed in the above lines is **Venture Capital**. It is an equity-based investment in a growth-oriented small to medium business to enable the investors to accomplish objectives, in return for minority shareholding in the business or the irrevocable right to acquire.

(ii) The three stages included in **Early Stage Financing** are:

1. **Seed Capital Finance:** It refers to the capital required by an entrepreneur for conducting research at the pre-commercialization stage. During this stage, the entrepreneur has to convince the investor (VC) why his idea/product is worthwhile. The investor will investigate the technical and the economical feasibility of the idea. As the risk element at this stage is very high, an investor (VC) may deny assistance if he does not see any potential in the idea.

2. **Start-up Finance:** If the idea/product/process is qualified for further investigation and/or investment, the process goes to the start-up stage. A business plan is presented by the entrepreneur to the VC firm. A management team is being formed to run the venture. The prototype is being developed and fully tested. In some cases, clients are being attracted for initial sales. The VC firm monitors the feasibility of the product and the capability of the management team from the board of directors.

3. **Second-round Financing:** At this stage, the idea has been transformed into a product and is being produced and sold. The entrepreneur needs assistance from the Venture Capitalist for expansion, modernization, and diversification so that economies of scale and stability could be attained. Larger funds than other early stage financing are required at this time.

(i) The source to raise finance discussed in the second part is **Angel Investor**. An Angel Investor is an affluent individual who provides capital for a business start-up and early stage companies having a high-risk, high-return matrix, usually in exchange for convertible debt or ownership equity.

(ii) Four features of Angel Investors are:

1. **High Net Worth Individuals:** Most angel investors are current or retired executives, business owners, or high net worth individuals who have the knowledge, expertise, and funds that help start-ups match up to industry standards.

2. **High Risk Bearing Capacity:** As angel investors bear extremely high risk and are usually subject to dilution from future investment rounds, they expect a very high return on investment.

3. **Mentoring and Guidance:** Apart from investing funds, most angels provide proactive advice, guidance, industry connections, and mentoring to start-ups in their early days.

4. **Value Creation Objective:** Their objective is to create great companies by providing value creation and simultaneously helping investors realize a high return on investments.