START-UP FINANCINGManagement Accounting – 1

Group 9

Section D

OVERVIEWWhat is a Start-up?

What are Start-up Costs?

Types of Start-up Costs

WHAT IS A START-UP?

A start-up is a business in the form of a company, a partnership or a transient organization designed to search for a repeatable and scalable business model

These companies, generally newly created, are in a phase of development and research for markets

WHAT ARE START-UP COSTS?

Start-up costs are the costs incurred by a business before it starts making any income

Why understand start-up costs?Understanding the start-up costs, specific to the venture, is important for determining: Financing requirements of the start-up Break-even point: along with plan of action

and estimated time for achieving it Managing cash flows of the business

TYPES OF START-UP COSTS (1/2)

Expenses Costs involved in preparing to open a business May include things like research, mileage costs

involved in researching a location, advertising, training, wages, and any fees paid to professionals or consultants such as a lawyer or accountant

Capital Expenditures One-time costs incurred to purchase assets such

as property, vehicles, etc These are met from the fixed capital

investments available to the firm for purchasing assets for long term use and income generation

TYPES OF START-UP COSTS (2/2) Working Capital Expenditures

Expenses incurred by the firm for day-to-day basis operation of the firm

May include payment to suppliers for inventory, purchase of office supplies, utilities like electricity, telephone, etc.

These are met from the working capital investments available to the firm

STAGES OF START-UP FINANCINGPre-Seed/ Start-up Phase

Seed Capital

First Round – Series A

Subsequent Rounds – Series B, C and D

PRE-SEED/ START-UP PHASE

This is the initial capital used to start a business

Sources: Own resources/ Bootstrap Friends, Family and Founders (FFF) Loans Delay of payments

Advantage: Operational control and 100% equity remains in the hands of the owner

Disadvantage: Lack of resources and capital, limited growth potential

SEED CAPITAL

Start-up is in the early phase of execution Product in prototype phase Sources:

Friends, Family and Founders (FFF) Angel Investors or Informal Investors

FIRST ROUND

First financial round a.k.a. ‘Series A Financing’ is the first round of financing for a new business venture after seed capital. This is generally the first time company ownership is offered to external investors in the form of preferred stock.

Start-up has gained traction and may be making revenue

Sources: Angel Investors Venture Capitalists Bank Loans

SUBSEQUENT ROUNDS

Subsequent financial rounds a.k.a. ‘Series B, C and D Financing’ are the rounds that lead towards the Initial Public Offering (IPO)

Sources: Venture Capitalists Bank Loans

START-UP FINANCING CYCLE

WHEN TO RAISE?

SOURCES OF START-UP FINANCINGAngel Investors/ Business Angels

Venture Capitalists

Bank Loans

ANGEL INVESTORS/ BUSINESS ANGEL (BA) A person or a group that provides financial backing for

small start-ups. The capital they provide can be a one-time injection of seed money or ongoing support. They usually fund using their own money.

Pros Cons

BAs are free to make investment decisions quickly

Takes longer to find a suitable angel investor

No need for collateral, i.e. personal assets

Giving up a share of your business

Access to BA’s sector knowledge and contacts

Less structural support as compared to an investing company

Access to BA’s mentoring or management skills

Scale - Usually an upper limit of investment (INR 1 Crore)

No repayments or interest

VENTURE CAPITALISTS (VC) An investment fund that manages money from investors

seeking private equity stakes in start-up, and small and medium-size enterprises with strong growth potential. These investments are generally characterized as high-risk/high-return opportunities.

Pros Cons

No repayment schedule – as it is not a loan

Risk of confidentiality – VC’s do not sign non-disclosure agreement

Provide knowledge - through in-house consultants & professionals

Interference in decision-making and power to veto decisions

Provide assistance with management of the business

Risk of losing control over ‘your own business’ – due to high equity stake of VC

Provide HR consultants to assist with recruitment of staff

Not suitable for longer term business plans (>3-5 years)

Very less unscrupulous VC’s Release of funds in stages

Easy to locate

BANK LOANS Unlike BA’s and VC’s, bank loans are a non-profit

sharing source of financing. They lend money at a pre-decided rate of interest and with a fixed repayment schedule.

Pros Cons

Convenient and accessible Lengthy application process

Multiple loan options Cumbersome

Non-profit sharing Preference given to running, existing businesses

Lower rate of interest Long list of prerequisites to qualify for loan

Tax benefits Risk of losing collateral

Entire amount not granted

QUESTIONS ??