If we humans don’t have anything to give or to serve humanity with, the least and powerful we can do is to spread authentic knowledge among others. This article may be not 100% correct but still is reliable to understand basic in brief.
So let’s start 🙂
When we startup, we need funds. Two ways are there. Either Loan or fundraising. Fundraising has also a different variant. First, skip loan and let’s talk about fundraising. With fundraising, we will only discuss Investors fund.
Now it has two types.
A) Angel Investor.
B) Venture Capitalist.
Who are angel investors?
Angel investors are big businessmen, CEO’s of big companies. They give fund to our startups. With the fund, they also provide know-how of our business, loopholes in our business model, improvisation of your business model and along with investments the bonus part.
But VC’s are different people. They will give investment but they won’t provide the know-how of your business. VC in itself is a company you can say which takes money from big businessmen and invest in your startup. So if your startup makes a profit, they also grow with profit without any mental pressure. We can take this as an example, as like share market brokers. ( sorry, kinda low example I found to compare).
Now, you go to investors, tell them about your company valuation and ask for a fund. For ex. Your company valuation is Rs. 10cr. And I want to give my 10% stake to you. Means you are taking Rs.10cr.
After this, within few days you get two options :
- Angel Investor
VC say they will give Rs. 40 lacs on 8cr valuation.
Angel says they will give Rs. 60 lacs for 6cr valuation.
So, if we see according to the offers, VC’s offer is far better than Angel. But we know that Angel helps us in know-how and they also use their networks. They will help us in making big plays of the market and VC is giving good money. Now, what we are doing, we are taking both the offers and will be negotiating with Angel, that my company’s valuation is 8cr. Now we get 1cr and our 10% stake gets diluted. Now we only have 90% stake.
With this Rs. 1cr we are doing business and spent all without making a profit. Here comes the 2nd round of investment, and we go to the investors and tell the valuation 10 times higher. Now our pitch will be for rs.100 cr valuation. Again we dilute 10% for 10cr. And we have to dilute it from our own personal remaining stake. Because before investing the investor’s sign an agreement known as SHAREHOLDER AGREEMENT.
In this agreement, there is a clause which states that if you are investing in a company your share will not get diluted. So, if we are taking 2nd round of investment, we have to dilute our own personal stake. Now, our business grows a little and there is a need to expand to different states of the country, and for this, we are going for the 3rd round of investment. In this round we will say our company valuation is Rs.500 Cr. (any figure but high value) From now, our balance sheet starts showing the profit, this is unlike last two investment, where we took investment but unable to make the profit. As now our company started making the profit, we took the smart way of the buyout, where we show the value of our company as Rs. 2000 Cr. and we sell all our remaining stake in our negotiable amount. Big companies agree with this move but they too are quite clever. They know as we are the best person who knows every angle of this business and this industry as you will leave then may the business will fall again. So they give a certain amount of money in the form of shares and make you associated with the company.
Even if not this option, there is another medium too, we know as IPO. where you list your company shares in stock market and your investors are general public 🙂
Hope I am able to out some light on this, not the best one I know.
Keep sharing, keep smiling 🙂