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New VentureSources of Finance
Patent in New Ventures
Presented By:
Praneet Raj
Mukesh SinghAmit Shukla
vivek jain
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New Ventures
-An undertaking that is dangerous, daring, or of
uncertain outcome.
Framework of the New Ventures
Individuals are people involved in starting a new
organization;
Organization is the kind of firm that is started;
Environment is the situation surrounding and
influencing the new organization;
New venture process is the actions undertaken by
the individuals to start the venture.
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Starting a New Venture
New Idea Capital
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The hardest part of starting a business israising the money to get going.
The entrepreneur might have a great idea and
clear idea of how to turn it into a successfulbusiness.
However, if sufficient finance cant be raised,
it is unlikely that the business will get off theground.
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Raising finance for start-up requires careful
planning. The entrepreneur needs to decide:
How much finance is required?
When and how long the finance is needed for?
What security (if any) can be provided?
Whether the entrepreneur is prepared to give up
some control (ownership) of the start-up in returnfor investment?
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The finance needs of a start-up should takeaccount of these key areas:
Set-up costs (the costs that are incurred before the
business starts to trade) Starting investment in capacity (the fixed assets that
the business needs before it can begin to trade)
Working capital (the stocks needed by the businesse.g. r raw materials + allowance for amounts that willbe owed by customers once sales begin)
Growth and development (e.g. extra investment incapacity)
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Sources of finance
Finance sources may be internal or external, butthey may also be short, medium or long term:
Short Term: Finance the business for up to 1year.
Medium Term: Finance the business for up to
5 years Long term: Finance the business for more than
5 years.
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Choosing a source of finance
Legal Structure PLCs and LTDs can sell
shares, Sole Traders and Partnerships cannot
The use of the finance large expensive
machinery will require a long term source,
paying off an outstanding account will only
require a short term source
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Choosing a source of finance
The amount required The larger the sum,the less likely the owners are to be able toraise the money internally. However, lenders
often want to see that the borrower is alsotaking a risk so may be a combination.
Profit levels The higher the profits the moremoney to use from internally. A firm with lowprofits (which needs the money the most!)will find external sources hard to find.
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Choosing a source of finance
Level of Risk A risky enterprise will find itharder to raise capital, although venturecapital may be available. May have to rely on
personal sources. Views of the owners May be reluctant to
lose control of a firm, especially a family firmand thus reject shares and venture capital.However, some may welcome the advice aventure capitalist can give.
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Internal Sources of Finance and
Growth
Organic growth growth generated throughthe development and expansion of thebusiness itself. Can be achieved through:
Generating increasing sales increasingrevenue to impact on overall profit levels
Use of retained profit used to reinvest in the
business Sale of assets can be a double edged sword
reduces capacity?
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External Sources of Finance
Long Term may be paid back after many
years or not at all!
Short Term used to cover fluctuations in
cash flow
Inorganic Growth growth generated by
acquisition
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SOURCES OF
FINANCE
SPONTANEOUS
SOURCES
NEGOTIATED
SOURCES.
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Spontaneous finance: Finance which naturallyarises in the course of business is called asspontaneous financing.Trade creditors, credit from employees, creditfrom suppliers of services etc are the examples ofspontaneous financing.
Negotiated financing: Financing which has to benegotiated with lenders, say commercial banks,financial institutions, general public are called asnegotiated financing.14
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Short term sources of finance
Short term financing is essential to providecapital deficit businesses funds for short term
period of a year or less. These funds are usually
for businesses to run their day-today operations
including payment of wages to employees,
inventory ordering and supplies .
These are the main short term sources of finance:-
Bank overdraft , trade credit , credit card , and
short term bank loans etc.
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Public deposit
Business firm are raising short-term finance from
their member , directors and the general public.
Bills discounting
The commercial banks advance to the borrower bydiscounting his bill.
Short-term loansThe bankers makes a lump-sum payment to the
borrower or credit his deposit account with the
money advanced..16
EXAMPLE OF LONG TERM AND SHORT TERM
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EXAMPLE OF LONG TERM AND SHORT TERM
FINANCE :-
STANDARD CHARTED BANK MAHINDRA FINANCE
1.Equity Capital= 58% Equity Capital=42%
2.Internal Accruals (Reserve &
Surplus)= 24%
Internal Accruals (Reserve &
Surplus)= 12%
3.Debentures (Bond)= 20% Debentures (Bond)= 33%
4.Term Loans (Long Term)= 8% Term Loans (Long & Short Term)=
13%
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External sources
Loan capital
This can take several forms, but the most
common are a bank loan or bank overdraft.
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Bank Loan
A bank loan provides a longer-term kind of financefor a start-up, with the bank stating the fixedperiod over which the loan is provided (e.g. 5years), the rate of interest and the timing and
amount of repayments. The bank will usually require that the start-up
provide some security for the loan, although thissecurity normally comes in the form of personal
guarantees provided by the entrepreneur. Bank loans are good for financing investment in
fixed assets and are generally at a lower rate ofinterest than a bank overdraft.
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Bank Overdraft
A bank overdraft is a more short-term kind of financewhich is also widely used by start-ups and smallbusinesses.
An overdraft is really a loan facility the bank lets thebusiness owe it money when the bank balance goesbelow zero, in return for charging a high rate of interest.
As a result, an overdraft is a flexible source of finance, inthe sense that it is only used when needed.
Bank overdrafts are excellent for helping a business handleseasonal fluctuations in cash flow or when the businessruns into short-term cash flow problems (e.g. a majorcustomer fails to pay on time).
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But friends and family are still the best source forboth loans and equity deals.
They are typically less stringent regarding thecredit and their expected return on investment.
One caveat: structure the deal with the samelegal rigor you would with anyone else or it maycreate problems down the road when you lookfor additional financing.
Prepare a business plan and formal documents--you'll both feel better, and it's good practice forlater.
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Business Angels
Business angels are the other main kind of external investor in a start-up company.
Business angels are professional investors who typically invest 10k -750k.
They prefer to invest in businesses with high growth prospects.
Angels tend to have made their money by setting up and selling theirown business in other words they have proven entrepreneurialexpertise.
In addition to their money, Angels often make their own skills,experience and contacts available to the company.
Getting the backing of an Angel can be a significant advantage to astart-up, although the entrepreneur needs to accept a loss of controlover the business.
Angels range from professionals, such as doctors and lawyers, tosuccessful entrepreneurs.
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Venture Capital
We also see Venture Capital mentioned as a source of finance
for start-ups.But venture capital is a specific kind of shareinvestment that is made by funds managed by professional
investors.
Venture capitalists rarely invest in genuine start-ups or small
businesses (their minimum investment is usually over 1m,often much more).
They prefer to invest in businesses which have established
themselves. Another term you may here is private equity
this is just another term for venture capital.
A start-up is much more likely to receive
investment from a business angel than a
venture capitalist.
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Private Lenders
Private lending represents a viable alternative
when the bank says "no".
Private lenders look for the same information
and will conduct similar due diligence as the
banks.
But they typically specialized in an industry
and are more willing to take on higher-risk
loans if they see the potential.
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Internal SourcesPERSONAL SOURCES
Savings and other nest-eggs An entrepreneur will often invest personal cash balances
into a start-up.
This is a cheap form of finance and it is readily available.
Often the decision to start a business is prompted by achange in the personal circumstances of the entrepreneure.g. redundancy or an inheritance.
Investing personal savings maximises the control theentrepreneur keeps over the business.
It is also a strong signal of commitment to outside investorsor providers of finance.
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Re-mortgaging is the most popular way of raisingloan-related capital for a start-up. The way thisworks is simple.
The entrepreneur takes out a second or largermortgage on a private property and then investssome or all of this money into the business.
The use of mortgaging like this provides access torelatively low-cost finance, although the risk is
that, if the business fails, then the property willbe lost too. .
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Credit cards
This is a surprisingly popular way of financing a start-up. Infact, the use of credit cards is the most common source offinance amongst small businesses.
Credit cards are a great tool for cash flow management,assuming you use them just for that and not for long-termfinancing.
Keep one or two cards with no balance on it and pay it offevery month to give yourself a 30 to 60 day float with nointerest.
And the low introductory rates on some cards make themsome of the cheapest money around. Managed well,they're extremely effective; managed poorly, they'reextremely expensive.
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Retained profits
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Share capital invested by the founder
The founding entrepreneur (/s) may decide to
invest in the share capital of a company, founded
for the purpose of forming the start-up. This is a common method of financing a start-up.
The founder provides all the share capital of the
company, retaining 100% control over thebusiness.
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Patents
Value of Patents in
Venture CapitalInvestment
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Why Patent
There are an estimated 600,000 new
companies founded each year, and many with
aspirations to be the next Google.
These young tech-centric companies are really
new ventures that often have new ideas and
no way to demonstrate their worth to
investors.
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To become one of the great technological andbusiness success stories, it takes more than just agreat idea and hard work.
It takes the ability to create a compelling value
proposition to customers and investors alike. Patents can be an important part of that value
proposition, especially to investors.
There are few things more persuasive for acompany that has a few great ideas than to showpotential investors tangible proof of the newventures intellectual prowess.
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Investors are faced with considerable uncertainty andtherefore rely on patents as signals when trying toassess the prospects of potential portfolio companies.
VCs pay attention to patent quality, financing those
ventures faster which later turn out to have high-quality patents. Patent oppositions increase thelikelihood of receiving VC, but ultimate grant decisionsdo not spur VC financing, presumably because they areanticipated.
The process of patenting generates signals which helpto overcome the liabilities of newness faced by newventures.