Question

‘It is an equity-based investment in a growth-oriented small to medium business to enable the investor to accomplish objectives in return for minority shareholding in the business.’ This investment has to be carefully evaluated and analysed by an entrepreneur to find out the stage at which he/she requires this investment to assist in.
(i) Identify the type of capital discussed in the above lines.
(ii) Explain the three stages included in ‘Early Stage Financing’ if the capital identified in (i) above is required at this stage.

Hint:

Venture Capital = High-risk equity funding in startups; Early stage includes seed, start-up, and first-stage capital for business growth.

Answer 1

(i) Type of Capital:
The type of capital discussed is Venture Capital.

(ii) Three stages included in ‘Early Stage Financing’:

• Seed Capital: This is the initial stage of venture capital financing. It is used for activities such as product development, market research, and business plan formulation. It is provided to entrepreneurs to transform an idea into a viable business plan.
• Start-up Capital: This stage includes financing for product development and initial marketing. The firm may already have a prototype or pilot project, and this funding helps to begin production and sales activities.
• First Stage Capital: This is provided when the company has started commercial production and sales but is not yet profitable. The funds are used to cover initial operating expenses, marketing, and working capital needs to grow the business.