Question

‘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.

1. Identify the type of capital discussed in the above lines.
2. Explain the three stages included in ‘Early Stage Financing’ if the capital identified in (i) above is required at this stage.

Answer 1

1. Venture cash is the type of cash that was talked about above. It’s an investment in small and medium-sized businesses with a lot of room to grow in exchange for a small stake in the company.
2. The three stages included in Early Stage Financing, where venture capital is required, are:
   1. Seed Capital: The initial capital used to study the market, develop the product, and demonstrate the idea’s viability. The amount is usually small and used to assess whether the business idea is feasible.
   2. Start-up Capital: The second stage, also known as the start-up stage, occurs when the idea, product, or process is sufficiently strong to warrant further development and funding. To the VC company, the entrepreneur gives them a business plan. A team is being assembled to run the business. A person from the VC groups will sit on the board of directors if the company has one.
   3. Second-round financing: At this stage, we assume the idea has been turned into a product being manufactured and sold. To gain market share from competitors, this is the first time they’ll be meeting the rest of the market, or rivals. At this point, the entrepreneur needs help from a venture capitalist to grow, update, and diversify the business so it can achieve economies of scale and greater security.