Stock Market Basics Chapter 2. How does the Business work? And where does the funding come from?

 

Hi everyone, 

Today we'll learn how businesses work, and how to set up a business, and how to get fundings for a project.

In the previous chapter, we talked about what is the stock market is and who should invest in it. Today we'll talk about the origin of a business, and how to build it.

We'll talk about Angel Investors, Venture capitalists, what they do, who are they? and other stuff.

I'll be using a small anthology to make the explanation a lot easier.

So here we go.

So to understand the funding aspect of a business, you need to break it into multiple levels, there are many ways a business can get funding and we'll go into that.

Angel Investors.

Now imagine this, there's a guy named, Thomas, who has an idea to build great AI learning programs for Dyslexic kids and believes he can take it to the world and change the world, but he needs money to work on that.

So he tries to convince his two friends, Michael and Rohit to invest in his business in return for a certain percentage of the equity of  Thomas' business. 

Now, Rohit and Michael at first are reluctant but then they are convinced that this might become a thing so both of them invest in this AI learning program. 

These two are Angel Investors.

Angel Investors are those who invest in a business while it's in its pre-revenue stage. This kind of funding is called "The Seed Fund"

Seed Funds are the funds received by a business in its pre-revenue stage. this helps kickstart the business.

 Venture Capitalist.

Now, it's been a long time, and Thomas's business is now stable and his AI learning program is helping the Dyslexic kids of his town, and most importantly, it is generating revenue.

Now, Thomas wants to expand the business, but for that he needs funding. But unlike last time, things have changed, people are buying his products and he is generating revenue, it is a lot easier at least, easier than before to get investors to invest in his business.

So he goes to professional investors and tries to convince them to invest in his business, now these investors check the revenue and examine his products and decide to invest as they see the potential in Thomas' business.

These Investors are called "Venture Capitalist"(VC) or "Venture Capital Investors"(VCI)

VCs usually invest in a business when it's in its early stage and had started generating revenue. Thi Kind of Fundings are called "Series 'A' Funding"

Series 'A' Funding is funding received by businesses in their early stage when it starts generating revenue. This helps them expand their business.

The Capex.

Now, it's been a long time since Michael and Rahul invested in Thomas' business, now his business is settled, successful, and profitable.

Thomas wants to expand the territory and increase the production capacity and buy more resources.

Whenever a Company plans for such expenditure that has last longing impact on the company's overall business, it is called, "Capital Expenditure."(CapEx)

Now to raise the required funds, Thomas has three options.

OPTION A:-  Funding Through Internal Accruals.

Thomas can fund part of his CAPEX by the profit his business has made. 

OPTION B:- Series "B" Funding.

The second thing, Thomas can do is approach another Venture Capitalist to invest in his company, by raising a round of VC allotment shares.

OPTION C:- Debt/Loan

The last option Thomas has is to get a loan for his business through the bank.

Private Equity Investors.

Now, Thomas wants large funding for his company, but he can't take a loan from a bank due to its high-interest rates.

He can do another VC allotment because VC funding is usually small, and only helps in the short run.

So, Thomas decides to allot another authorized capital, "Series C Funding." for private equity investors.

Private Equity Investors invest in large amounts for a certain percentage of equity.

THE IPO

Now, Thomas, realized he needs huge funding for the CAPEX of his company, which can't be raised through PE investors or VC, and nor does he want to take another loan.

So he decides to file for an IPO, which is short for "INITIAL PUBLIC OFFERING."

As you might have guessed, when a company offers its share to the public, for the first time, it's called IPO.

And that's the end of the chapter.

We'll be talking about the IPO in more detail in the next chapter. Also, I'll be uploading the first chapter of Huge Small World this Sunday, so stay tuned for that.

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