Startup Company Financing Model – From Seed Capital to Angel Investors to Venture Capital
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Seed capital/Seed round/Seed funding
Say, 3 people decide to start a business in biotechnology. They do so by incorporating a company limited by shares. They provide the initial capital. They are the only three shareholders. They are the founders of the company. The initial capital they provide is known as seed capital. The process of such injection of capital is known as a seed round or seed funding. The amount of money involved is usually relatively small – e.g., around US$10,000 or less. The money is primarily used to cover preliminary expenses such as market research and product development.
Small and medium business though do not figure in the stock markets which takes away the opportunity of being financed by individuals and they are of course less competitive in comparison to other companies who do figure in those lists. They have fewer options of financing and can only depend only on themselves to make the profit to stay afloat. They depend of the property and assets that the owner can use to finance the business or use as guarantees when requesting a short or long term loan from a financial institution. It is under this context that we introduce the concept of venture capital.
We can talk about three great problems that small and medium businesses have when starting and that hinders their financial development. It dependency cycle if you will. For small business it is hard to get a loan from a bank, and because the bank does not trust their capacity to pay they establish high interest rates for them which puts them at a disadvantage against their competitors. For all of these reasons they cannot provide as competitive prices as the other businesses. Again, the only option for them is a financing structure like venture capital.
Venture capital is a way to capitalize on small and medium businesses, so that their development is vital for the regeneration of the industrial fabric of the country.
Venture capital funding is an instrument aimed primarily at small and medium enterprises, through which a company specializing in investment or not (investment company) capital injection in a small or medium enterprises (receiving company) in a minority and a relatively short space of time.
If you prefer, we can understand venture capital as a financial formula that provides resources to businesses, mainly small and medium, in the form of permanent long-term funds or with the same risk that funds contributed by the employer as they usually have no warranty or special benefit. It is important to seek the appropriate balance between the percentage of ownership and control of the company and participation in making use of various financial instruments.
Resource Author Francisco R. Higueras
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