The IPO Markets (Part 1) – Varsity by Zerodha

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• The investor who typically invests in such an early stage of business is called a Venture Capitalist (VC), and the money that the business gets at this stage is called Series A funding.

• The company decides on Series C funding. They cannot approach a typical VC because VC funding is usually small and runs into a few crores. This is when a Private Equity (PE) investor comes into the picture. Think about the PE as a big brother of a VC

• So let us imagine that the promoter (entrepreneur) and the angels raise INR 5 Crore in capital. This initial money the business gets to kick start operations is called ‘The Seed Fund.’ Sometimes, it is also called a ‘Friend & Family round.’

• The company can approach another VC and raise another round of VC funding by allotting shares; if they do, it’s called series B funding.

• be funded through the profits. This is also called funding through internal accruals.

• Let us assume that the entrepreneur pools some of his money and convinces two good friends to invest in his business. These two friends invest in the business based on their trust in their friends. The two friends in this context are referred to as the Angel investors. Please note that angel money is not a loan but an investment in the business.

• It is important to note that the seed fund will not sit in the entrepreneur’s bank account but the company’s bank account.

• The entrepreneur’s hard work pays off, and the business generates a steady revenue stream.

• Instead, he is more knowledgeable about the business and, of course, more confident.

• Whenever a company plans such expenditure to improve the overall business, the expenditure is called ‘Capital Expenditure’ or simply ‘CAPEX’.

• The company has made some profits over the last few years; a part of the CAPEX requirement can be funded through the profits. This is also called funding through internal accruals. The company can approach another VC and raise another round of VC funding by allotting shares; if they do, it’s called series B funding. The company can approach a bank for a loan. The bank would be happy to tender this loan as the company has been doing fairly well. The loan is also called ‘Debt.’

• Also, I would encourage you to think about the wealth created over the years. This is exactly what happens to entrepreneurs with great business ideas and a highly competent management team.

• VCs tend to cut smaller cheques, while PE typically invests large amounts. VC invests in early-stage businesses and takes a much higher risk than PE. PEs invest at a mature stage and take on lesser risk compared to a VC PEs, upon investment, also take up a board seat in the company and oversee the company’s functioning.

• Fund Capex from internal accruals Raise Series D from another PE fund Raise debt from bankers Float a bond (this is another form of raising debt) File for an Initial Public Offer (IPO) A combination of all the above

• Series A

• CAPEX

• The company does not want to raise money through debt because of the interest rate burden, also called the finance charges, bites into the company’s profits.

• PEs, upon investment, also take up a board seat in the company and oversee the company’s functioning.

• Face value is simply a denominator to indicate how much one share is originally worth. Face value is also called the notional value of a share.

• The valuation of a company signifies how much the company is valued by considering the company’s assets, liabilities, and future growth prospects.