Do you want to start a business? Then you need to know about the funding stages in business. This article will explain how the funding environment evolves in business.
To understand this concept let me explain you as a story.
Let us consider our fictional character name is Deepak. He completed his graduate and thinking to start his own business.
Finally one day he decides to start a pizza business. But unfortunately, he does not have enough money to start his business.
As he is new to the entrepreneur’s world investors will not be ready to invest till he proves himself.
The only option that he has is to ask his family & friends to invest in his business.
Finally, two of his friends accepted to invest in his business. They are called as Angel Investors.
His two friends gave him 20 lakhs for his business. Therefore he received first funding. It is known as Seed Funding.
The amount given by Angel investors will not go to Deepak’s personal account instead it goes to the company’s bank account. This amount is called as Share capital.
To entitle the ownership in the company a share certificate is issued among the 3 investors.
Right now the company’s value is 20 Lakhs. It is called as company’s valuation.
After 1 year:
Deepak’s business is really doing well. He is getting good profits from his business. So he decided to open one more pizza store in his city.
Instead of taking money out from his pockets he luckily got an investor who agreed to invest in his new pizza store. This investor is called as Venture Capitalist.
And the funding provided by Venture Capitalist is called Series A funding.
Deepak got 30 lakhs from Series A funding. He opened one more pizza store in his city.
After 2 years:
Deepak’s pizza store has become popular in the city and at the same time, he is earning decent profits.
Now Deepak wants to start a number of stores in his city. But he needs more delivery people and bikes and other extra expenditure. This expenditure is called Capital Expenditure(CAPEX).
Now Deepak has 3 options to raise funds
- He can use the profits that he made during the last two years. This is called funding through internal accruals.
- He can also go to Venture Capitalist for funding. This type of funding is called Series B funding.
- Else he can go to the bank and ask for a loan. This loan is called Debit.
Finally, Deepak chooses Series B funding.
After 3 years:
Now the effort that has put by Deepak has brought him huge profits and notoriety for his brand in his city. Now he wants to expand his business to more cities. Therefore he requires a huge amount to expand.
Now he needs to raise funds. So he goes for Series C funding. He can’t go to Venture Capitalist because a Venture capitalist cannot provide such huge amount.
So here comes Private Equity (PE) investors. They are highly qualified investors and can invest a large amount.
So Deepak got Series C funding from Private Equity investors.
After 4 years:
Now Deepak’s company has progressed well in terms of both revenue and profits. Therefore he thought to expand it to international wide. Therefore he requires 200 crores. So at this stage, he can raise funding by
- Funds from Internal accruals.
- Series D funding by Private Equity.
- From Bank.
- File for an Initial Public Offer (IPO)
Deepak can choose all options or he can choose anyone. Let us consider that he thought to go for Initial Public Offer (IPO).
If a company has filed for IPO then general public can buy shares in that company. That is the reason why we do share marketing. We buy the shares of the company and raise the funds.
|Venture Capitalist Series A|
|Venture Capitalist Series B|
|Private Equity Series C|
This is how the funding environment evolves in business. Hope you understood.
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