Question

In: Finance

“Every young company or start-up aims at convincing investors from the potential of its basic business...

  1. “Every young company or start-up aims at convincing investors from the potential of its basic business idea…. In the early stages, this might be both, Business Angels and Venture Capitalists, whereas bank financing is not worth considering”. Critically analyse this statement, supporting the discussion with the literature.
  2. Research and discuss how non-tech companies may be different in sources of financing.Include relevant players involved.
  3. Discuss three ways in which the financial performance for technology-oriented ventures can be assessed.

Solutions

Expert Solution

Answer for Point no. 1

Investor angels, or business angels, are people who invest their money in the initial phase of startups, in exchange for a participation in capital. They also usually carry out the role of a mentor and offer their consent and experience to entrepreneurs.

In their initial stages, startups implement all types of financing strategies to push their projects forward. One of them is to call upon a business angel, that is, someone with a large amount of capital who decides to invest in recently-created companies in exchange for a participation in the share capital of the future business.

Ostensibly, the origin of the term investor angel comes from the theatrical and musical world of Broadway, where producers who needed financing for their plays turned to wealthy people from uptown, who went downtown to give a hand financially to these cultural entrepreneurs—as though they were angels.

Venture capital 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.

Though it can be risky for investors who put up funds, the potential for above-average returns is an attractive payoff. For new companies or ventures that have a limited operating history (under two years), venture capital funding is increasingly becoming a popular – even essential – source for raising capital, especially if they lack access to capital markets, bank loans or other debt instruments. The main downside is that the investors usually get equity in the company, and, thus, a say in company decisions.

Securing funds for a startup is one of the toughest challenges an entrepreneur’s faces while starting a new business. With a plethora of funding options available, it is important for the Entrepreneur to understand the pros and cons of each funding methodology, estimate the value of funds required, the application of funds, projected financial position of the business including the returns generated and evolve a strategy – to approach and secure the required funds. With venture capital firms and angel investors enjoying plenty of coverage as a great source of funding for a startup, many Entrepreneurs are unaware that financial institutions and Banks are also an avenue of funding for startups. In fact, Banks are one of the largest funders of startups in India, providing funding to thousand of startups each year. In this article, we cover the types of funding available from banks as loans, along with a host of other questions surrounding bank loans for startup businesses in India

Answer to Point no. 2

Funding gaps in early stage tech or non-tech companies

Being a startup company there are various challenges as well as constrains to raise funding for your company. Early-stage companies with their limited market knowledge or experience only approach Angel Investors, VCs or banks for those initial funding.

Angel Investor funding is suitable for the following types of startups

· Startups with very less or No financial backing

· Startups with no certain track record to prove their ability in executing the designed plan

· Startups in the very nascent stage or are in its primitive stage of development

Relevant Players in funding non Tech Start ups:-

1. Create a Killer Business Plan.

2. Find Important Supporters in the Industry.

3. Crowdsource Online.

4. Reduce Personal Debt

5. Seek Non-Traditional Sources of Funding

Answer to point no. 3

three ways in which the financial performance for technology-oriented ventures can be assessed:-

Liquidity ratios

These measure the amount of liquidity (cash and easily converted assets) that you have to cover your debts, and provide a broad overview of your financial health.

The current ratio measures your company's ability to generate cash to meet your short-term financial commitments. Also called the working capital ratio, it is calculated by dividing your current assets—such as cash, inventory and receivables—by your current liabilities, such as line of credit balance, payables and current portion of long-term debts.

Efficiency ratios

Often measured over a 3- to 5-year period, these give additional insight into areas of your business such as collections, cash flow and operational results.

Inventory turnover looks at how long it takes for inventory to be sold and replaced during the year. It is calculated by dividing total purchases by average inventory in a given period. For most inventory-reliant companies, this can be a make-or-break factor for success. After all, the longer the inventory sits on your shelves, the more it costs.

Assessing your inventory turnover is important because gross profit is earned each time such turnover occurs. This ratio can enable you to see where you might improve your buying practices and inventory management. For example, you could analyze your purchasing patterns as well as your clients to determine ways to minimize the amount of inventory on hand. You might want to turn some of the obsolete inventory into cash by selling it off at a discount to specific clients. This ratio can also help you see if your levels are too low and you're missing out on sales opportunities.

Leverage ratios

These ratios provide an indication of the long-term solvency of a company and to what extent you are using long-term debt to support your business.

Debt-to-equity and debt-to-asset ratios are used by bankers to see how your assets are financed, whether it comes from creditors or your own investments, for example. In general, a bank will consider a lower ratio to be a good indicator of your ability to repay your debts or take on additional debt to support new opportunities.


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