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2. To discuss the various financing alternatives available to the firm at various stages of
venture development
3. To rationale for staging in ventures
6.1 Introduction:
Venture development involves various aspects from concept development to product
commercialization, expansion till fully developed. The venture development is divided into
eight stages in terms of development activities and financing alternatives available the firms
at every stage. This is very important to understand the risks involved and distinct financing
alternatives available in the progress of venture development to obtain adequate external
finance for long term and continual basis as per need arising thereof.
6.2 Stages of venture development
The venture development can be broadly classified into eight stages. The eight stages of
venture development and financing alternatives are discussed below:
6.2.1 Stage 1: Seed financing
This is the first stage of venture development wherein entrepreneurs develop the concept of
new business, formulating the vision for the new firm. The initial ground work has to be
done which may involve building small prototype of the product, detailed descriptions of the
service/product, preparation of business of plan and explore the actual market potential for
the product/service. In this seed stage Entrepreneurs expend a great deal of time but a
relatively lesser amount of money to explore the prospects of commercialization and
development of the concept. It usually involves 6 months to 1year of typical time duration in
this stage.
Finance is essential to pay the entrepreneurs at least the modest living wage, to provide office
space, equipment, assistants and so on. The two most common sources of seed stage
financing are bootstrapping and angel financiers.
6.2.1.1 Bootstrapping
In bootstrapping, Entrepreneurs tap their available personal savings and personal borrowings,
from friends, relatives or business associates, may also include customer advances or
extended payment lending from vendors. Bootstrapping is a broadly used and effective
means of financing a venture.
6.2.1.2 Angel Financing
A risk averse wealthy individual, who often possess some entrepreneurial experience
interested to invest in small companies which have high growth potential are the angel
investors. They are often interested in financing these firms in the early stages of
development. Angel network is informal.
6.2.2 Stage 2: Start- up
The results of development of the concept, explore its potential ability of the business plan
and its prospects, ensues the start-up stage.
In this stage, the management team is assembled to develop a more detailed plan, prototype
is tested and Product or service development takes place, and also marketing is done to test
the market potential. The typical time duration of this stage is one to two years
Development of this stage essentially requires an additional committed capital for actual
testing of the concept developed.
Finance at this stage is extended by angel investors, venture capitalists. Venture incubators of
corporation or universities are also extending support for the firms development at this
stage.
and products/ services are actually manufactured/ rendered and shipped in commercial
quantities. However the firm remains in the non profitable at the end of this stage.
Angel investors usually wishes to cash out at this end or may be interested in contributing
additional finance. Venture capitalists may also interested in investing at this stage. The
initial properties purchased may be able to secure bank financing.
Ventures which reach this stage would have reduced the risk significantly and have become
fairly stable. However, capital infusion might be necessary to finance continuing expansion.
The firms would prefer debt financing as the entrepreneurs and all other equity investors
prefer to limit dilution.
Remaining private and replacing short term investors with long term investors
Being acquired or
Going public
6.2.8.1 Remaining private and replacing short term investors with long term investors:
A developed firm chooses to remain private however the short term investors are cashed out
and replaced by long term investors by issuing long term additional securities to long term
investors.
6.3 The summary of various stages of venture development, its activities, risk
perception, alternative finances and type of securities at each stage
Stage
development
1.Seed
of Development
of venture
Perception of Sources
risk
Concept
Extreme
development;
basic
of Securities
financing
typically
Bootstrap;
issued
Personal loans;
angels
common stock
Angels,
Notes
business
plan;
prototypes;
explore market
2.Start up
potential
Detailed
business
Very high
plan;
with
Initializing
operations
or
corporation,
convertible
university,
preferred
developing test
stock;
prototypes;
partnership
finalize
interest;
product/service
common stock
3.Early
lines
Start
Development
commercial
production and
Government
High
Angels,
marketing
Guaranteed
Notes
with warrants;
convertible
preferred
stock;
partnership
interest;
4.Expansion
Develop
Sufficiently
common stock
Venture capital, Guaranteed
marketing
high
Government,
bonds, secured
bank
debt,
strategy
&
expand
convertible
production
bonds,
capital; working
convertible
capital
preferred
needs
emerge
stock, common
Medium
stock
Venture capital, secured
5.Profitable/Cash
Expand
debt,
poor
production
capacity;
earnings
bonds,
working capital
convertible
needs grow
preferred
stock, common
6.Rapid growth
stock
Venture capital, Subordinate
refined
convertible
bonds;
convertible
preferred
stock; common
7.Bridge/Mezzanin
Marketing
R&D
& Medium
stock
to Venture capital, Subordinate
high
convertible
bonds;
convertible
preferred
stock; common
stock
8.Harvest
3. The level of risk involved: each stage has its own level of risk involved, however
when the company moves up in chain of stages the level of risk involved will also be
reduced substantially.
4. The quantum of capital required : the development stage can predict the quantum
of capital required, and also the purpose of capital requirement.
5. Time frame for exit: the development stage also portrays the length of investment to
made, time frame for exit. The later stages has lesser time frame for exit however the
early stages will have lengthy investment lock in period.
6.5 List of Few Venture capital funds in India divided by stage of Venture capital
funding profile
STAGE OF INVESTMENT
Seed stage
Early stage
Seed fund
Ratan Tata ventures
Accel India
Sequoia capital
Tiger global
IDG ventures
Canaan Partners
Helion Ventures
Kalaari Capital
Nexus Ventures
SAIF
Sequoia Capital India
Ventureast
PE Investors
Aquarius
Abraaj Group
Avigo Capital
Bessemer
Gaja Capital
Headland Capital
IFC
IFCI Ventures
Lighthouse Funds
Mayfield
management teams, targeting large,and growing markets through innovative and disruptive
business models, are ideal partners for Kalaari.
Question:
1. What is the strategy of Kalaari capital in venture capital investments ?
2. What do you think are the strenghs of Kalaari capital?
3. What do you think as rationale for their choice of funding early stage? Does the
expertise help the development of business at this stage?
6.7 NOTES
6.8 SUMMARY
development, Expansion, Profitable but cash poor, Rapid growth toward liquidity point,
Bridge stage, Harvest.The various financing alternatives are bootstrapping, angel investors,
venture capital, cooperation, university, bank, retaining earnings, private equity.
The
rationale of staging of ventures helps the firm to recognize the state of development of the
business, activities engaged at the specific stage, the level of risk involved, the quantum of
capital required, time frame for exit.
6.9 KEY WORDS
Venture development
Staging
Seed stage
Mezzanine
Angels
Bootstrapping
Liquidity
Cash poor
Risk
6.10
6.11
REFERENCES
Joseph P. Ogden, Frank C. Jen, Philip F. OConnor, Advance Corporate Finance, Policies and
Strategies, 2003 edition, published by Pearson Education Pte Ltd, Indian branch.
Handbook on venture capital, published by Venture Intelligence, retrieved from google.