Page 233 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes Early Stage Financing

This stage includes the following:
1. Seed Capital and R&D Projects: Venture capitalists are more often interested in providing
seed finance i. e. making provision of very small amounts for finance needed to turn into
a business. Research and development activities are required to be undertaken before a
product is to be launched. External finance is often required by the entrepreneur during
the development of the product. The financial risk increases progressively as the research
phase moves into the development phase, where a sample of the product is tested before
it is finally commercialised "venture capitalists/firms/funds are always ready to undertake
risks and make investments in such R & D projects promising higher returns in future.

2. Start Ups: The most risky aspect of venture capital is the launch of a new business after the
research and development activities are over. At this stage, the entrepreneur and his
products or services are as yet untried. The finance required usually falls short of his own
resources. Start-ups may include new industries/businesses set up by the experienced
persons in the area in which they have knowledge. Others may result from the research
bodies or large corporations, where a venture capitalist joins with an industrially
experienced or corporate partner. Still other start-ups occur when a new company with
inadequate financial resources to commercialise new technology is promoted by an existing
company.
3. Second Round Financing: It refers to the stage when product has already been launched in
the market but has not earned enough profits to attract new investors. Additional funds
are needed at this stage to meet the growing needs of business. Venture Capital Institutions
(VCIs) provide larger funds at this stage than at other early stage financing in the form of
debt. The time scale of investment is usually three to seven years.

Later Stage Financing

Those established businesses which require additional financial support but cannot raise capital
through public issue approach venture capital funds for financing expansion, buyouts and
turnarounds or for development capital.
1. Development Capital: It refers to the financing of an enterprise which has overcome the
highly risky stage and have recorded profits but cannot go public, thus needs financial
support. Funds are needed for the purchase of new equipment/plant, expansion of
marketing and distributing facilities, launching of product into new regions and so on.
The time scale of investment is usually one to three years and falls in medium risk category.
2. Expansion Finance: Venture capitalists perceive low risk in ventures requiring finance for
expansion purposes either by growth implying bigger factory, large warehouse, new
factories, new products or new markets or through purchase of exiting businesses. The
time frame of investment is usually from one to three years. It represents the last round of
financing before a planned exit.

3. Buy Outs: It refers to the transfer of management control by creating a separate business
by separating it from their existing owners. It may be of two types.
(a) Management Buyouts (MBOs): In Management Buyouts (MBOs) venture capital
institutions provide funds to enable the current operating management/ investors
to acquire an existing product line/business. They represent an important part of
the activity of VCIs.

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