Please describe various sources of financing available to establish a hi-tech, s
ID: 2709477 • Letter: P
Question
Please describe various sources of financing available to establish a hi-tech, start-up company. It is estimated that the company needs at least $10 million over a period of three years, by which time it expects to generate positive cash flow. Outline the possible funding sources at the "seed stage", "pilot phase (first round", and the "scale-up" phase. Describe the kind of organizational structure suitable for the start-up company. Also explain how the investors are expected to recoup their investment.
Explanation / Answer
Answer:
Sources of financing available to establish a new business are:
At seed stage:
1. Personal money: When borrowing takes place to start a new business our own money is also required to invest in the start up.
2. Venture capital: It is the money given by the venture capitalist (specialized in financing promising businesses) to any start up for their financing. This is the money given to any riskier business for the sake of equity position.
3. Angels: They give money to the start up and tend to remain low profile. Generally they acquire management position in the board of directors.
4. Business Incubators: Business incubators (or "accelerators") generally focus on the high-tech sector by providing support for new businesses in various stages of development. However, there are also local economic development incubators, which are focused on areas such as job creation, revitalization and hosting and sharing services.
At pilot or first round stage:
1. Venture capitalist: Venture capitalist would give money for this round along with the managerial expertise.
2. Private equity is one of the best source of financing at this stage as at this stage as per the promise of the business money can be given to your business for making prototypes and for making initial progress related to product development.
3. Loan from banks: This is one of the option open to an entrepreneur to tap funds available from the banks.
At scale up phase funds would be available from:
1. Private equity funds: Here the sizable money is provided by these funds for the expansion of the business.
2. Venture capitalist
3. Initial public offering: It is one of the best ways to get funds now. It is meant for the business which is already making a mark in the industry and wants to expand into new horizons.
Organization structure of a start up:
Organizational structure of the startup is simple to understand. In the board of management along with the entrepreneur you will always find the venture capitalist or the agent of private equity group just to make sure that they have a say in the business.
The investors can recoup their investments in two ways:
1. Selling their shares back to the entrepreneur
2. Selling their stake to some other private equity fund.
3. Selling their share in initial public offering.