Ch.6 Getting financing or funding Flashcards
BUS304 (16 cards)
Why do most new ventures need financing or funding?
To cover operational costs, support growth, and ensure sustainability
Three main reasons include: initial capital requirements, ongoing operational expenses, and expansion opportunities.
What are three sources for raising money for a new venture?
- Personal Funds
- Family and Friends
- Debt Financing
- Equity Capital
- Creative Sources
Define ‘Personal Funds’.
An individual’s money in a checking account, savings account, cash-on-hand, and other monetary assets
Personal funds can also include assets like stocks or bonds owned by the individual.
What is ‘Bootstrapping’?
Finding ways to avoid the need for external financing through creativity, ingenuity, thriftiness, or cost cutting
Entrepreneurs often bootstrap out of necessity.
Give two examples of Bootstrapping.
- Buy used instead of new equipment
- Minimize personal expenses
What does Equity Funding mean?
Exchanging partial ownership in a firm for funding, usually in the form of stock
Equity financing iswhen you raise money by selling shares in your business, either to your existing shareholders or to a new investor. This doesn’t mean you must surrender control of your business, as your investor can take a minority stake.
Investors gain voting rights and a say in company decisions depending on the type of shares they hold.
What is Debt Financing?
Getting a loan to fund business operations
List two key characteristics of Equity Capital.
Ownership:
When a company raises equity capital, it sells ownership shares (equity) to investors.
Investors who purchase these shares become part-owners of the company, gaining voting rights and a say in important company decisions, depending on the type of shares they hold.
No Repayment Obligation:
Unlike debt capital, equity capital does not need to be repaid. Investors make money when the company pays dividends or when they sell their shares at a profit.
Who are Business Angels?
Individuals who invest their personal capital directly and early in start-ups
They often offer mentorship and industry connections +financial backing.
The prototypical business angel is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and invests in companies that are in the region where he or she lives.
What distinguishes Business Angels from Venture Capitalists?
Business Angels invest their own money, while Venture Capitalists manage institutional funds
What is Venture Capital?
Money invested by venture capital firms in start-ups and small businesses with exceptional growth potential
VCs help businesses by providing capital and analytical expertise.
List two sources of Venture Capital.
- Venture Capital Firms
- Corporate Venture Capital
What is an Initial Public Offering (IPO)?
A company’s first sale of stock to the public
An IPO allows a company’s stock to be traded on major stock exchanges.
What is typically required for a firm to go public?
The firm must demonstrate viability and a promising future
What Venture Capital (VC) Firms Do?
Fundraising:
VC firms raise money from Limited Partners (LPs) — these can include:
Institutional investors (e.g., pension funds, endowments)
High-net-worth individuals
Family offices
Creating a Fund:
The money collected is pooled into a venture fund, which the VC firm manages.
Investing:
The firm then uses this fund to invest in startups or early-stage companies that have high growth potential.
Ownership and Returns:
In exchange for their investment, the VC firm takes equity (ownership) in the startup.
If the startup succeeds (e.g., gets acquired or goes public), the VC firm earns a return on investment, which is then shared:
The VC firm earns a portion (through management fees and carried interest).
The LPs get back their investment plus a share of the profits.
So to sum up:
Yes, a venture capital firm gathers money from different investors (LPs), manages that money, invests it into startups, and if all goes well, shares the returns with both the LPs and itself.
Let me know if you’d like a diagram or breakdown of the flow!
IPO?
“A private company offers its shares to the public for the first time”:
This is the definition of an IPO.
It marks the transition from a private to a public company.
- “Usually a major milestone for a company”:
IPOs are huge events in a company’s life.
It often means the company has grown enough to attract public investors.
It can bring reputation, access to capital, and liquidity.
- “Shares are listed on a stock exchange”:
This means the company’s shares can now be bought and sold by anyone on platforms like the New York Stock Exchange (NYSE) or NASDAQ.
This gives the company visibility and access to more investors.
- “Raises significant capital for the company and provides an exit for early investors”:
Companies raise a lot of money through IPOs.
Early investors (like venture capital firms or founders) can sell their shares (called “exiting”) and realize gains from their early investment.
🎯 What the slide is teaching you:
What an IPO is and why it matters.
That it’s a key stage in the life of a startup or growth company.
That it benefits both the company (capital) and its investors (liquidity/exit).
