Institute of Innovation in Technology & Management, New Delhi

(Affiliated to GGSIP University)

Unit 2 ED- PROMOTION OF A VENTURE


Programme: BBA Semester: VI Paper Code: BBA 306 Academic Year: 2016-17
 Date of commencement of classes: 23rd July’ 2007

Unit II lectures:-12
Promotion of a Venture: Opportunities analysis; external environmental analysis
economic, social and technological; competitive factors; legal requirements of
establishment of a new unit and rising of funds; Venture capital sources and
documentation required.

 OPPORTUNITY ANALYSIS

 Every business plan should include market analysis. This is one of the first and
most important reasons to do a business plan.
 Example 1: the market of a local movie theater or restaurant includes not just
the people who regularly go there but everybody who lives within driving
distance.
 Example 2: The market for a landscaping business includes all the homes and
commercial properties within a logical reach.
 Example 3: The market for downloadable e-books over the internet includes
everyone connected to the web. The market for personal computers includes
homes, schools, businesses, and government organizations.

1. GETTING THE INFORMATION

 The information sources that will help you conduct a market analysis are
different for every business plan.
 For example, you might need local information you can get from your local
chamber of commerce, a government website, the Department of Commerce
and others.
 Information can be sourced from government statistics, telephone directories,
catalogs, industry association statistical compilations, real estate information
and density maps.

2. SEGMENTATION
 Divide your target market into useful slices or segments.
 For Example, a computer manufacturing company that targeted such market
segments as homes, small offices, businesses, educational organizations, and
government.
 Dividing the market into these segments helped the company address the more
specific market needs, media, pricing patterns and decision criteria in each of
their different market segments.

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3. Market Size and Growth
 You need to be able to measure and quantify your market.
 For example, if local homeowners are part of your target market, then you
should be able to count them. You need to know whether you have 500 people
in your market, or 200,000, or 2 billion.
 Be able to show what the total market is for your business. When it comes to
market growth, you need to think about percentage change as a market
forecast.
4. Market Trends
 You need to understand what's going on with your market.
 What marketing trends and fashions do you see having an influence on your
market segments?
 For example, If you're selling cars, is there a trend that shows people
responding to higher gasoline prices or more environmental concerns?
 How does the increase in TV recorder equipment affect your market?

 ENVIRONMENTAL ANALYSIS

 Environmental analysis is the process of monitoring the economic and non

economic environment to determine the opportunities for and threats to a
enterprise.
 Business leaders can control aspects of the internal environment that can
positively or negatively affect a company's operating and financial results.
For example, leaders shape their company's culture, establish the company's
organizational structure and create policies that guide employee behavior.
 The greatest challenge to business success may be a consequence of the
external environment over which a company has little, if any, control. To
address these challenges, business leaders conduct an environmental analysis
and develop policies and processes that adapt company operations and
products to this environment.

 EXTERNAL ENVIRONMENT

 The organisational environment consists of a general environment and an

operating environment.
 The general environment (Macro environment) consists of the economic,
political, cultural, technological, natural, demographic and international
environments in which a company operates.
 The operating environment (Micro Environment) consists of a company's
suppliers, customers, market intermediaries who link the company to its
customers, competitors and the public.

 PURPOSE OF ENVIRONMENTAL ANALYSIS

 Successful businesses adapt their internal environment -- including human and

financial resources, policies, technologies and operations -- to the external
environment.

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 The company performs an environmental analysis to identify the potential
influence of particular aspects of the general and operating environments on
business operations.
 This analysis identifies the opportunities and threats in a business
environment in terms of a company's strengths and weaknesses.
 For example, a company may consider the impact of operating in a communist
country and the threats posed by government-controlled resources.

 MICRO VS MACRO ENVIRONMENT

Basis for
Micro (Internal) Environment Macro (External) Environment
Comparison

Micro environment is defined as Macro environment refers to the general

Meaning the nearby environment, under environment, that can affect the working
which the firm operates. of all business enterprises.

Alternatively known
Internal Environment External Environment
as

COSMIC, i.e. Competitors, PESTLE, i.e. Population &

Organization itself, Suppliers, Demographic, Economic, Socio-
Elements
Market, Intermediaries and Cultural, Technological, Legal &
Customers. Political and Environmental.

Nature of elements Specific General

Are these factors

Yes No
controllable?

Influence Directly and Regularly Indirectly and Distantly

 DEFINITION OF MICRO (INTERNAL) ENVIRONMENT

 Micro environment refers to the environment which is in direct contact with

the business organization and can affect the routine activities of
business straight away.
 It is associated with a small area in which the firm functions. It is also known
by the name Internal Environment or Task Environment.
 Micro environment is a collection of all the forces that are close to the firm.
Its elements include suppliers, competitors, marketing intermediaries,
customers and the firm itself.

 Suppliers are the ones who provide inputs to the business like raw material,
equipment and so on.
 Competitors are the rivals, that compete with the firm in the market and
resources as well.

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  Marketing intermediaries may include wholesalers, distributors and
retailers that make a link between the firm and the customers.
 Customers / Consumers are the one who purchases the goods for their own
consumption. They are considered as the king of business.
 The firm itself, is an aggregate of a number of elements like owners like
shareholders or investors, employees and the board of directors.

 DEFINITION OF MACRO (EXTERNAL) ENVIRONMENT

 The general environment within the economy that influences the

working, performance, decision making and strategy of all business
groups at the same time is known as Macro Environment. It is dynamic in
nature, therefore it keep on changing.
 It constitutes those outside forces that are not under the control of the
firm but have a powerful impact on the firm’s functioning.

It includes the following:

 Political factors
 Economic factors
 Social factors
 Technological factors
 Legal factors
 Environmental factor

1. P for Political factors

 The political factors take the country’s current political situation. It also reads
the global political condition’s effect on the country and business.
 When conducting this step, ask questions like “What kind of government
leadership is impacting decisions of the firm?” Some political factors that you
can study are:

 Government policies
 Taxes laws and tariff
 Stability of government
 Entry mode regulations

2. E for Economic factors

Economic factors involve all the determinants of the economy and its state.
These are factors that can conclude the direction in which the economy might
move. Some economic factors affecting your business are:

 The inflation rate

 The interest rate
 Disposable income of buyers
 Credit accessibility
 Unemployment rates
 The monetary or fiscal policies

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  The foreign exchange rate

3. S for Social factors

Countries vary from each other. Every country has a distinctive mindset. These
attitudes have an impact on the businesses. The social factors might ultimately
affect the sales of products and services. Some of the social factors you should
study are:

 The cultural implications

 The social lifestyles
 Educational levels
 Distribution of Wealth
 demographic trends such as birth rates, aging, and migration patterns
 attitudes towards healthy lifestyles, organic foods, the environment, and so
forth

4. T for Technological factors

Technology is advancing continuously. The advancement is greatly influencing

businesses. Performing environmental analysis on these factors will help you stay
up to date with the changes. Firms should integrate when needed. Technological
factors will help you know how the consumers react to various trends. Firms can
use these factors for their benefit:

 New discoveries
 Rate of technological obsolescence
 Rate of technological advances
 Innovative technological platforms

5. L for Legal factors

Legislative changes take place from time to time. Many of these changes affect the
business environment. Some legal factors :

 Product regulations
 Employment regulations
 Competitive regulations
 Patent infringements
 Health and safety regulations
6. Natural/ Physical ( E for Environmental factors)
The location influences business trades. Changes in climatic changes can affect the
trade. The consumer reactions to particular offering can also be an issue. Some
environmental factors are:
 Geographical location
 The climate and weather
 Waste disposal laws
 Energy consumption regulation
 People’s attitude towards the environment

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 SOURCES OF INFORMATION FOR MARKET OPPORTUNITY
ANALYSIS (MOAS)
1. Published Sources
 Periodicals and newspapers
 Trade association reports
 Standardized information service reports
 Government documents
 Company reports
2. Personal observation
 Of customers
 Of competitors
 Of macro environmental influences
3. Interviews with experts
 Managers of suppliers
 Managers of trade companies
 Managers of trade associations
 Consultants
 Salespersons
4. Primary marketing research
 Cross-sectional surveys
 Longitudinal panels
 Experiments

 GREAT IDEAS
1. Kid-Friendly Apps
Kids are your future customers so gaining their loyalty now isn’t a bad idea.
According to Common Sense Media, three-quarters of kids have access to a mobile
device. This spells a big business opportunity for anyone who can create products
or design apps just for kids. And, if they also happen to be educational or promote
good health, you’ll win their parents over, too.

2. Recycling pickup
Most homeowners have pick-up bins for standard recyclables like paper, glass
and plastic, but they often don't make the effort to properly recycle electronics
and batteries, which can be extremely harmful to the environment when left in
landfills. Offer to pick up all the e-waste that's been collecting in their garages
— old televisions, broken laptops, defunct cellphones — and bring them to
your local electronic recycling facility.

3. Software trainer
If you're proficient in a highly specialized software, you can get paid to pass your
knowledge on to amateurs and professionals looking to expand their skill sets.
Schedule small group workshops or private sessions, and charge by the hour for
a full tutorial of the program.

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4. Healthcare Consulting
As an independent healthcare consultant, you can offer management and data
analysis for organizations like hospitals, labs and therapist offices to help
implement solutions to improve efficiency and/or save money.

5. Food Truck
Study by Intuit and Emergent Research predicted that revenue from the food truck
industry will reach $2.7 billion by 2017. A truck is a much less expensive
investment than a brick-and-mortar restaurant and, according to Mobi Munch
founder Josh Tang, the failure rate for food trucks is just 10 to 20 percent (as
opposed to 60 to 90 percent for restaurants).

6. Freelancing
Companies are increasingly turning to freelance and contract workers to fill the
skill gaps in their staff. According to Freelancer.com, which lists more than a
million freelance projects on its site, the most in-demand freelance services are:
data entry, academic writing, Excel projects, data processing, Web search and
Facebook-based jobs. Hourly rates start at $30 an hour and stretch into the
hundreds.

7. Mobile consulting
If your company can provide affordable mobile solutions to businesses that need
them you'll find mobile consulting a rich business opportunity. According to
Jamie Turner, founder of a company called "The 60-Second Marketer," there
will be ongoing need for mobile assistance.

"Research from the 60-Second Marketer indicates that there are more people on
the planet who own a mobile device than who own a toothbrush," Your prospects
are in mobile right now."

8. Translator
Cross-cultural communication is creating a growing need for translators, The
hiring of interpreters and translators is projected to grow 46 percent from 2012 to
2022, much faster than the average for all occupations.
This translates into a big business opportunity for entrepreneurs who can bring
foreign-language speakers together with businesses in need.

9. Employee-monitoring services
Employees are increasingly mobile. In fact, it is estimated there will be 1.3
billion mobile workers by 2015. So how are employers supposed to keep track of
what their workers are doing? A company that could provide employee-
monitoring services, as well as some additional outsourced human resources
functions, would be in great demand right now.

10. Traveling salon

One such service, a mobile salon that travels to customers' residences to do their
hair or nails, has nothing but growth potential. There will be a growing need for

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these mobile services that help keep boomers looking good without requiring them
to make a trip to the salon.

11. Smartphone repair: Smartphone-repair services are starting to crop up around

the country, but for now, this market is wide open. Here’s an example of one
entrepreneur who has started a successful chain of Pennsylvania-based smartphone
repair stores called iDropped.

 HOW TO CREATE A BUSINESS PLAN STEP BY STEP

 A business plan is a road map that helps navigate a company to success. It

describes all aspects of your business, including history, products, services,
marketing and finance.
 The plan indicates that a qualified management team exists.

1. Create a mission statement about why your business exists. For example:
“Develop Internet-based software that provides easy project management.”
2. Define a vision of what your business wants to become. For example: “To
become a respected software vendor that possesses 60 percent of the market for
project management software.”
3. Define the market that your business will serve. Include the business outlook
for your industry, what customer needs are addressed and a profile of targeted
customers. For example: “Customers are project managers who manage
multiple projects at construction businesses.”
4. Describe products and services, including their pricing. Include what makes
the products and services competitive.
5. Describe the company’s legal and management structures. Explain how
business activities are accomplished. Indicate what permits and licenses your
business maintains. Include biographies of key managers.
6. Define marketing strategy, including pricing and promotion. Include
customer groups whose needs are met by your products and services.
7. Provide a balance sheet, which is a snapshot of the company’s value. For
an existing business, this should cover the past three years.
8. Provide an income statement, which indicates the profit or loss over a
period. For an existing: business, cover the past three years.
9. Provide a cash flow statement, which indicates revenue, expenses and
available cash. These are projected amounts if the plan is for a startup
business. For an existing business, provide amounts for the past 12 months.
Actual and projected amounts are used to project working capital.
10. Provide each principal’s personal financial statement and prior year’s federal
tax return if your business is applying for financing.
11. Append miscellaneous information that helps define your company.
Include marketing materials, contracts and key employee resumes, for
instance.
12. Write an executive summary that defines what your business does and
why. This becomes the first section in the plan.

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 COMPARISON CHART- MISSION VS VISION
Mission Statement Vision Statement

A Mission statement talks about HOW you A Vision statement outlines

will get to where you want to be. Defines WHERE you want to be.
1.
the purpose and primary objectives related Communicates both the purpose
to your customer needs and team values. and values of your business.

It answers the question, “What do we do? It answers the question, “Where do

2.
What makes us different?” we aim to be?”

A mission statement talks about the present A vision statement talks about your
3.
leading to its future. future.

 COMPETITIVE ANALYSIS:

 Method of understanding the market forces and how they influence products
and services marketed by entrepreneurs.
 The Five Forces Model was devised by Professor Michael Porter. The model is
a framework for analysing the nature of competition within an industry.

Every market or industry is different. Take any selection of industries and you
should be able to find differences between them in terms of:

 Size (e.g. sales revenue, volumes, numbers of customers)

 Structure (e.g. the number of brands and competitors)
 Distribution channels (how the product gets from producer to final
consumer)
 Customer needs and wants (the basis of marketing segmentation)
 Growth (the rate of growth and which businesses are growing faster or
slower than the market)
 Product life cycle (the stage of the life cycle for the industry as a whole and
for products and brands within it)
 Alternatives for the consumer (e.g. substitute products)

The result of the above differences is that industries vary in terms of how much
profit they make. To take two examples:

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Why do airlines make so little profit (and such big losses)? There are several
factors, including:

 Very intensive competitor rivalry – mainly on price

 Low barriers to entry – lots of new airlines who want to set up
 Suppliers of aircraft & equipment are powerful – can charge high margins
 Customers have lots of substitute options – e.g. rail, car
 High fixed costs – airline losses rise significantly if revenues fall only slightly
since it costs roughly the same to fly half-empty planes as full ones

By contrast, why are profits so high in the soft drinks market? The answer is
mainly that:

 Customers and suppliers have little power – Pepsi has many millions of
individual consumers, and thousands of retail distributors none of whom has
much influence over the business
 There is high brand awareness & loyalty = less consumer desire for substitutes
 High barriers to entry – how do you enter a market dominated by Coca-Cola
and Pepsi?

Porter's Model on Industry Rivalry - the Five Forces.

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Porter identified five factors that act together to determine the nature of
competition within an industry. These are the:

 Threat of new entrants to a market

 Bargaining power of suppliers
 Bargaining power of customers ("buyers")
 Threat of substitute products
 Degree of competitive rivalry

He identified that high or low industry profits (e.g. soft drinks v airlines) are
associated with the following characteristics:

1. Threat of New Entrants

 If new entrants move into an industry they will gain market share & rivalry
will intensify
 The position of existing firms is stronger if there are barriers to entering the
market
 If barriers to entry are low then the threat of new entrants will be high, and
vice versa
 Barriers to entry are, therefore, very important in determining the threat of new
entrants. An industry can have one or more barriers. The following are
common examples of successful barriers:

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What makes an industry easy or difficult to enter? The following table helps
summarise the issues you should consider:

2. Bargaining Power of Suppliers

 If a firm's suppliers have bargaining power they will:

a) Exercise that power

b) Sell their products at a higher price
c) Squeeze industry profits

 If the supplier forces up the price paid for inputs, profits will be reduced. It
follows that the more powerful the customer (buyer), the lower the price
that can be achieved by buying from them.
 Suppliers find themselves in a powerful position when:

a) There are only a few large suppliers

b) The resource they supply is scarce
c) The cost of switching to an alternative supplier is high
d) The product is easy to distinguish and loyal customers are reluctant to
switch
e) The supplier can threaten to integrate vertically
f) The customer is small and unimportant
g) There are no or few substitute resources available

Just how much power the supplier has is determined by factors such as:

3. Bargaining Power of Customers

a) Powerful customers are able to exert pressure to drive down prices, or increase
the required quality for the same price, and therefore reduce profits in an
industry.
b) A great example in the UK currently is the dominant grocery supermarkets
which exert great power over supplier firms.
c) Several factors determine the bargaining power of customers, including:

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Customers tend to enjoy strong bargaining power when:

 There are only a few of them

 The customer purchases a significant proportion of output of an industry
 They possess a credible backward integration threat – that is they threaten to
buy the producing firm or its rivals
 They can choose from a wide range of supply firms
 They find it easy and inexpensive to switch to alternative suppliers

4. Threat of Substitute Products

 A substitute product can be regarded as something that meets the same need
 Substitute products are produced in a different industry –but crucially satisfy
the same customer need. If there are many credible substitutes to a firm's
product, they will limit the price that can be charged and will reduce industry
profits.
The extent of the threat depends upon

 The extent to which the price and performance of the substitute can match the
industry's product
 The willingness of customers to switch
 Customer loyalty and switching costs

If there is a threat from a rival product the firm will have to improve the
performance of their products by reducing costs and therefore prices and by
differentiation.

5. Overall Degree of Competitive Rivalry

If there is intense rivalry in an industry, it will encourage businesses to engage in

 Price wars (competitive price reductions),

 Investment in innovation & new products
 Intensive promotion (sales promotion and higher spending on advertising)

All these activities are likely to increase costs and lower profits. Several factors
determine the degree of competitive rivalry; the main ones are:

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 STEPS TO FOLLOW WHEN PERFORMING ANALYSIS
A company may follow three basic steps when performing an industry analysis,

1. Gather information on each force

During the first step, the company should gather information about their
industry using the five forces as a guide for classifying this information.
2. Analyze results and display in a diagram
After substantial information has been gathered, a team may sit down and
analyze how each of the identified factors affect the industry. Every industry
will have different factors affecting it differently. This makes it vital to not
compare across industries or use another industry’s data.
3. Formulate Strategy based on conclusions
The analysis of factors affecting the industry can now be translated into specific
strategies to further the interests of the company.

Navigating the Model Development: Before, During and After

It is beneficial for a company working on a Porter’s five forces analysis to
maintain an analytical frame of mind before the process begins, during the process
and after everything has been completed. Some aspects to keep in mind are:

Before

 Understand the goals of the analysis and expectations from it

 Understand the scope of the analysis and who are the potential
beneficiaries
 Allow open and honest brainstorming session regarding these questions.

During

 Keep a focus on the future

 Do not focus on what could’ve been done better in the past, but focus on
future improvements

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  Analyze positives and negatives
 Be open to new ideas and possibilities

After

 Identify lessons learnt and how they can be used in the future
 Document positives and negatives. Identify best practices
 Understand whether the analysis had the required impact
 Follow up on implementation plans
 Record information from the analysis to be used in future decisions

 LEGAL REQUIREMENTS OF ESTABLISHING A NEW

ENTREPRISE/ STAGES IN THE FORMATION OF A COMPANY

1. Promotion Stage
2. Incorporation Stage
3. Capital subscription (Capital raising stage)
4. Commencement of business Stage

1. Promotion Stage
 According to Gerstenberg, “Promotion means discovery of business
opportunities and the subsequent organization of funds, property and managerial
ability into a business concern (unit) for the purpose of making profits therefrom.
 The person who undertakes all these activities is a promotor.

2. Incorporation Stage / Legal Requirements of incorporation of a Company

The following documents are required to be filed with the Registrar of Companies
for the incorporation of a joint stock company:
1. Memorandum of Association
2. Articles of Associations
3. List of Directors
4. Written consent of Directors
5. Notice of registered office
6. Statutory Declaration
7. Payment of Stamp Duty & Registration Fee
8. Obtaining Certificate of Incorporation

Memorandum of Association
 It contains the name of the company, place of Registered office, objects
(objectives) of the company, the liability of members, the amount of its
authorized capital etc.
 It is foundation on which the structure of the company is built.
Articles of Associations
It contains the rules and regulations for the internal management of the company.

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Certificate of Incorporation
 It is issued by the Registrar of Companies when all formalities concerned with
the registration of a company have been fulfilled.
 After obtaining this certificate, the company acquires a separate legal status.

3. Capital subscription (Capital raising stage)

A public company can raise the required funds from public by means of issue of
shares and debentures. For doing this, it has to issue prospectus and undergo
various other formalities. Steps are required for raising funds from public:
a) SEBI Approval for Raising Capital
 SEBI (Securities and Exchange Board of India) which is the capital market
regulatory authority in our country has issued guidelines for disclosure of
information and investor protection.
 Company inviting funds from general public must make adequate disclosure of
all relevant information and must not conceal any material information from
potential investors.
b) Prior approval from SEBI is required for raising funds from public
Filing of prospectus
 A copy of the prospectus or statement in lieu of prospectus is to be filed with
the Registrar of companies.
 A prospectus is an invitation to the public to apply for shares or debentures of
the company or to make deposits in the company.
 Initially investors make up their minds about investment in a company on the
basis of the information contained in this document
c) Appointment of Bankers, Brokers and Underwriters
 Raising funds from public is a complex task. The application money is to be
received by the bankers of the company.
 The brokers try to sell the shares by distributing the forms and encouraging the
public to apply for the shares.
 If the company is not reasonably assured of a good public response to the issue,
it may appoint underwriters to the issue.
 Underwriters undertake to buy the shares if these are not subscribed by the
public.
 They receive a commission for underwriting the issue. Appointment of
underwriters is not necessary.

d) Minimum Subscription
 In order to prevent companies from commencing business with inadequate
resources, it has been provided that the company must receive applications for
a certain minimum number of shares before going ahead with the allotment of
shares.
 According to the Companies Act, this is called the ‘minimum subscription.’

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 The limit of minimum subscription is 90% of the size of the issue. Thus, if
applications received for the shares are for an amount less than 90% of the
issue size, the allotment cannot be made and application money received must
be returned to the applicants.
e) Application to stock exchange
 An application is made to at least one stock exchange for permission to deal in
its shares or debentures.
 If such permission is not granted before the expiry of ten weeks from the date
of closure of subscription list, the allotment shall become void and all money
received from the applicants will have to be returned to them within eight days.
f) Allotment of shares
 In case the number of shares allotted is less than the number applied for; or
where no shares are allotted to the applicant, the excess application money, if
any, is to be returned to applicants or adjusted towards allotment money due
from them.
Allotment letters are issued to all the successful allotees
4. Commencement of business Stage
 A private company can commence business immediately after incorporation,
but a public company having share capital has to comply with some more
formalities before it can commence business.
 First, it must complete all formalities concerned with raising of capital.
 Second, it should allot shares and apply to the registrar of Companies for the
issue of certificate of commencement of business.

 VENTURE CAPITAL

 Morris, defines venture capital as 'providing seed, start-up and first stage
financing' and also 'funding the expansion of companies that have already
demonstrated their business potential but do not yet have access to the public
securities market or to credit oriented institutional funding sources.

 Venture capital is an investment in the form of equity, quasi-equity and

sometimes debt -, made in new or untried concepts, promoted by a technically
or professionally qualified entrepreneur.
 Venture capital means risk capital. The risk envisaged may be very high may
be so high as to result in total loss or very less so as to result in high gains
 Venture capital has developed as a result of the need to provide non-
conventional, risky finance to new ventures based on innovative
entrepreneurship.

 FEATURES OF VENTURE CAPITAL

 Dedicated pool of capital

 Long-time horizon
 High risk

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 High-tech
 Equity participation and capital gains
 Participation in management

 ADVANTAGES OF VENTURE CAPITAL

 They can provide large sum of equity finance

 Able to bring wealth and expertise to your company
 Easier to secure future funding from other sources
 The business is not obligated to repay the money

 SOURCES OF VENTURE CAPITAL

1. Equity: All VCFs in India provide equity but generally their contribution does
not exceed 49 percent of the total equity capital. Thus, the effective control and
majority ownership of the firm remains with the entrepreneur. They buy shares of
an enterprise with an intention to ultimately sell them off to make capital gains.

2. Conditional Loan: It is repayable in the form of a royalty after the venture is

able to generate sales. No interest is paid on such loans. In India, VCFs charge
royalty ranging between 2 to 15 percent; actual rate depends on other factors of the
venture such as gestation period, cost-flow patterns, riskiness and other factors of
the enterprise.

Royalty Financing: The concept of "royalty financing" has been around for a long
time. Basically, the idea is this: Someone lends you money (in this case,
$100,000), but instead of a fixed interest rate, you agree to pay the lender a
percentage of your gross sales (not net profits) each month — 2 percent to 6
percent is customary.

3. Income Note: It is a hybrid security which combines the features of both

conventional loan and conditional loan. The entrepreneur has to pay both interest
and royalty on sales, but at substantially low rates.

4. Quasi-Equity: A category of debt taken on by a company that has some traits of

equity, such as having flexible repayment options or being unsecured. Examples of
quasi-equity include mezzanine debt and subordinated debt.

5. Participating debentures: Entrepreneurs may be provided finance in the form

of participating debentures which carry the features of no interest for a specified
initial period followed by low interest for next round of period when sales and
profit generate at low levels and finally high interest for the remaining period of
retaining the money, as the concern has the ability to compensate now for the
initial benefit awaited of by it.

6. Initial public offer(IPOs): Initial public offering is the process by which a

private company can go public by sale of its stocks to general public. It could be a

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new, young company or an old company which decides to be listed on an exchange
and hence goes public.

7. Trade Sale
A trade sale is a common way of exit to a trade buyer, refers to the sale of a
company in its early stages. This allows the management to withdraw from the
business and may open up the prospect of collaboration on larger projects. It
normally entails the disposal of a company's shares or assets and even liabilities, in
whole or in part.

8. Promoter buy back: Many a times promoter wishes to buy back shares from
investors at a price greater than the market price. No promoter would like to see
the prices of the share falling and hence, the promoter may buy back, to shore up
the share prices.

9. Acquisition by another company : A corporate action in which a company

buys most, if not all, of the target company's ownership stakes in order to assume
control of the target firm.

 DOCUMENTS FOR RAISING VENTURE CAPITAL

 Subscription Agreement - usually contain details of the investment round,

including number and class of shares subscribed for, payment terms,
milestones and representations and warranties about the condition of the
company.
 Shareholders' or Investors' Rights Agreement - will usually contain investor
protections, including consent rights, rights to board representation and non-
compete restrictions.
 Term Sheet: A term sheet is a non-binding agreement setting forth the basic
terms and conditions under which an investment will be made. Once the parties
involved reach an agreement on the details laid out in the term sheet, a binding
agreement or contract that conforms to the term sheet details is then drawn up.
 Management Rights Letter: Venture funds often request a management rights
letter when investing in a company. The management rights typically include
the ability to attend, advise and consult with management of the company,
attend board meetings and inspect the company’s books and records.

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