Understanding Finance: From Startups to Expansion

There are two stories, and if you listen to these two stories intently and do a little bit of further research, you will be able to demystify a lot of things related to finance.
**Introduction to Finance and its Domains**
So essentially, finance can be categorized into a wide variety of domains, but for the purpose of our discussion, we are going to categorize it into two domains: one is called corporate finance, and the second is called personal finance. So, I’m going to tell you one story each across these two domains. Let’s start with corporate finance first, and let me start with the story.
**Starting Your Venture: Financial Considerations**
The story or the exercise is that let’s imagine that you are starting your own venture, right? So, congratulations, you are an entrepreneur, and you are starting your own venture. What is the first thing that you need? You will say that okay, we need an idea, right? Comment what other thing that you would need. So, the second most important thing would be that hey, I have an idea but I need to develop my product or need to set up my office, or I need to hire my first employees. So, what do you need? You need money, right? That is the precise thing that you need. And what are your options in terms of getting this money in the initial or inception stage of your venture?
**Funding Options for Startups**
So, the first option is called FFF, which means friends, family, and fools, right? They are called friends, family, and fools because they don’t look at your idea, they just literally give you money, right? For example, if you ask your friend that hey, I have started a venture and we have been friends since childhood, would you want to give me like a thousand dollars so that I can start my product development? Your friend will say that okay, you know what, I don’t even want to hear the idea, I will just give you the money, right? So, it’s a foolish way of investing but it’s a very heartfelt way of investing. So, this is called FFF or friends, family, and fools’ way of financing. This is your number one option. What is your number two option? So number two is something called bootstrapping, right?
**Growing Your Company: Seed Funding and Series Funding**
Bootstrapping sounds very fancy but bootstrapping literally means that essentially you have your own savings and you put that money into your venture. For example, the majority of the startups that I have built, those have been bootstrapped. We have not externally raised funds, not because we can’t but at this stage, we don’t want to, and I’ll explain to you the reason why on point number three, right?
So, the third way in which you can raise money is called equity financing. Now, this is where it starts getting a little bit tricky. So, let me explain what equity financing means. Imagine that this is your company, right? This is like 100% of your company right now. What you do is that you literally carve out a piece of this pie, right? So, let’s imagine this is 25% of your company and then you sell it off to different investors. Now, this could be your friends, this could be VC funds, this could be private equity funds, etc., etc. But bottom line is that you lose a certain part of your company and in return what do you get? You get money, right?
**Moving Beyond: Massive Stage Growth**
Now is that the only thing that you lose, right, that you’re losing 25% of your company? No, that’s not the only thing. You also lose freedom, right? Freedom in the sense that for example, when you are bringing an external investor on board then he or she would start giving you a lot of inputs. You have to acknowledge that because they are your investors now. It can be both a good and a bad thing because many investors are very supportive, they get along with you really, really well so it’s a match made in heaven but if you end up onboarding a bad investor they can literally derail your entire company, right? So, it’s a risky proposition but that’s an equity way of raising money for your company. Now what is the next term? The next term is debt way, right? If there is an equity there is always a debt and equity.
**Financial Tools for Expansion: Corporate Bonds and IPOs**
So, debt means that let’s say that you have this entire company of yours, right? You say that here I don’t want to sell any of my company sounds very risky, I don’t want to bring external people what can I do then? The simple thing is that you go and take a loan, right? So, loan is called as debt. So, you literally go with your company to a bank, right? And then the bank gives you the loan that hey here is one crore rupee for you start your venture and you promise the bank that hey I will start paying this amount of money from this month onwards. So, that is a debt way of financing your company. So, I explained you these four terms very, very intuitively so always ask a question that hey what is that imagine yourself starting a company and start implementing these concepts. Now of course there are like much more nuanced understanding to it but we are keeping this video for beginners, right? So, I am not going to get into more specific details here.
Seed funding
So, let us move on to part two. The second part of the story is that let us imagine that you have to expand your company. You started the company, you got the money, you poured in that money, you developed a product, that product is doing well but you need to literally reach millions and millions of people. So, you are in that expansion stage of your company. What are your options now?
So, you would say that I’m looking for a seed round of funding. This is again a finance term that you should be aware of. Seed round of funding means that hey it’s up to like two million dollars, your product is doing well in the market and it’s making a little bit of money but it’s not fostering organic growth. When Swiggy and Zomato started out, they were losing money and up until last year they were still losing money on every order that they used to deliver. So, what do they need to do? They still need millions and millions of dollars more so that part is called as seed money. It is usually up to two million dollars and usually this is the first round of external VC investment that generally happens, right? This is the time when equity investments come into the picture. If equity investments are made here, literally when you are starting out a fund this is usually done by whom? Angel investors not VC investors, right? So, this is called as expansion stage and
here you usually get a VC fund to pour in two million dollars or up to two million dollars usually in your company. This is called as seed money because this is where the seed is planted for growth.
Debt Financing
Okay, after this as your company starts depicting more growth and starts getting more revenues and profits you move into series funding. Series funding you might have heard of the term series A, series B, series all it simply means is that more and more VC funds come into your mix they start pouring in more money sometimes it’s the same VC sometimes there are usually a combination of VCs who will pitch in with a lot of money. So, when you hear all these terms that a company has become a unicorn essentially what is happening is that a lot of people are pouring money in that company it’s not as if that their balance sheet says that hey here are like one billion dollars in your bank account no it doesn’t work that way right? So, this is the difference between seed funding and series funding, right?
So, now the company has expanded congratulations your business is doing wonderfully well now what you feel is that you know what enough with the Indian market I have already captured it let me now go abroad and try to capture the world let me become like a Roman emperor who wants to capture everything. So, what is that stage called? This this is called as massive stage growth, right? And here firms usually execute two types of options one is called as issuing corporate bonds and the second and the most exciting part is launching their own IPO. So, let me explain both very, very quickly.
So, corporate bonds are what? This is a part of a debt financing again you are not losing any control or part of your company you are just taking more loans but these are now issued in a structured way by the corporation because your company grew right? It was a small player it became like a massive, massive player over time and then you get the power to issue bonds in the public market. So, you are issuing bonds and these bonds are then analyzed by different credit rating agencies like Crisil and they will analyze give ratings to your bonds then you can raise public money from that bonds or major corporations or other organizations can pour in money and give you loans, right? So that’s a corporate bond type of a thing. Doesn’t sound super exciting because IPO sounds really exciting so let’s talk about IPOs.
So, IPOs are called as initial public offering. Now your first question would be that hey can they not just keep doing this right bring more and more VC investors and keep growing their company making more money no right? Because even investors for example when I invest in companies even I would need an exit to make money from the investments that I have made.
Conclusion
So, in the majority of the times and this is a controversial statement that majority of the times when IPOs are launched especially for loss-making companies it’s done with the intent of giving VC investors an exit, right? So that term is called as exit. So that is one of the primary reasons why IPOs are launched another reason why an IPO is launched is to build the brand and get visibility for the firm. Now this can be very easily explained if I ask you a simple question. So would you go and work with Facebook or would you go and work with a very high growth startup that you haven’t heard of you most likely are going to work with Facebook because Facebook is a listed company you keep reading about it there is so much scrutiny and Facebook has that brand right? So you have this massive brand going for you it becomes easy for you to recruit better talent.
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