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Lecture 9

FINA601 Lecture Notes - Lecture 9: Corporate Finance, Market Capitalization, Reputation Capital

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Week 9 Lecture 9 Chapter 20: Raising Capital
Venture Capital (VC) Market (20.1)
Venture capital refers to such type of equity capital which is invested in the starting stage or
in expansion stage of a firm. This type of investment is known as very risky type of
investment but due to very high potential of growth venture capital investors take such high
risky investment decisions.
As we know that in the starting stage of any business, firm face problem of finance that is
why firm offer very high returns but due to high chances of failure very few bold & risk taker
investors make investment in such start-ups and expansion plans that is why these investors
are known as venture capital investor.
Generally do not want to own the investment forever
Taking the investment public.
Selling the investment to another company.
Stages of Financing in VC Market
1. Seed-Money Stage: Prove a concept or develop a product.
This refers to the financing for the ideas for new development of product & service. In
other words we can say whenever a businessman contact potential investors for
getting finance on the basis of their new innovative ideas so that further business
activities can be carried out. Hence it is initial stage of requirement of finance.
2. Start-Up: Marketing and product development expenditure.
In this stage businessman contact potential investors with a solid plan for getting
finance so that some advertising and marketing work can be done to attract potential
customers. Although no sale of goods & services is made in this stage but some
more market research can be done with the help of finance.

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3. First-Round Financing: Additional money to begin sales and manufacturing
This stage refers to the launch of product & service of the company. So for launching
its products and services a company contact potential investors for getting finance.
Thus we can say under this stage finance is raised for actual manufacturing.
4. Second-Round Financing: To sustain early firm which is still losing money
In this stage a company focus on selling more and more in the market so that sale
quantum can be increased hence due to this additional capital is required and some
more working capital will be needed. Apart from this due to competitors some extra
expenditures on advertising will be required, so for meeting this financial requirement
company contact potential investors.
5. Third-Round Financing: For firm which is breaking even and considering to expand
This stage is known as expansionary & maturity of previous stage. As we know that
after finishing second stage a company face some new challenges hence company
will focus on cost efficiency so that overall costs can be reduced and some more
additional advantages can be taken in compare to competitors. Hence company will
required some finance.
6. Fourth-Round Financing: For firm which is about to go public within half a year
This is known as final and last stage and after reaching to this stage a company get
full-fledged status so company will focus on mergers, acquisitions and IPOs, so that
problem of tough competition can be faced efficiently. Hence in this stage most of the
venture capital investors start ending their relationship with the company by selling
their shares in the market and gets their rewards as a returns.

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Some Venture Capital Realities
Although there is a large venture capital market, the truth is that access to venture
capital is very limited
Venture capitalists rely heavily on informal networks of lawyers, accountants,
bankers, and other venture capitalists to help identify potential investments. As a
result, personal contacts are important in gaining access to the venture capital
market; it is very much an “introduction” market
Another simple fact about venture capital is that it is quite expensive. In a typical
deal, the venture capitalist will demand (and get) 40 percent or more of the equity in
the company
Venture capitalists frequently hold voting preferred stock, giving them various
priorities in the event the company is sold or liquidated. The venture capitalist will
typically demand (and get) several seats on the company’s board of directors and-
may even appoint one or more members of senior management.
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