Capital Infusion In Your Venture.
BUSINESS DESIGN
Own Capital
When you are starting your venture you need resources to get the venture activities going. If you are a first time entrepreneur, you will have limited resources available. In a venture there are two primary inputs - labour and capital. Initially the labour comes in the form of your labour. You may have to work on various parts of your venture yourself.
Capital may come from he savings in your bank account. If you have enough savings in bank account, and you may not need to borrow initially, you own 100% of the profits and losses of the venture.
A simple example can be taken from the concept of a lemonade stand. In order to sell lemonades from a lemonade stand. You need to invest some money initially to buy lemonade stand, lemons, cups, something to store ice, cleaning material and many more things associated with the venture activities. You may need to hire someone to help you on the stand and pay them wages for their labour. Thus, before you make a single sale, you are going to incur costs on creating infrastructure and conditions for selling the lemonades. COSTS ALWAYS COME FIRST.
Outside Capital
In case you do not have enough money in your bank account, you may borrow some money from your parents, siblings, friends or other relatives. If you borrow this money in the form of a loan, but you may have to return it later on with an interest. This comes under debt. If you offer them a share in the company, this will form a part of equity capital.
Stages of Business and Outside Capital
In very early stages of any business venture, the activities are usually supported by entrepreneur's own pocket. The savings in bank account, the earnings from some other revenue source are used up in buying initial infrastructure and paying any salaries, rents etc. The idea is to staying small and maintaining total autonomy towards bringing a tangible shape to your vision before your are absolutely sure that you can take an outsized bet on what you are trying to achieve from venture. Unless you are a seasoned entrepreneur and have. some history of proving your potential in realising your vision in another field of work, people from outside are not going to give you any capital from their pockets. It only when you have a proven system, one will agree to put money in your business.
Once the unit economics model is figured out for a venture and gross margins modelling is done backed by actual revenue flows, one can go into to market for bringing in outside capital for the venture to be able to bring scale to the business.
A lot of people from outside of your venture ecosystem will ask for the size of revenues. In our opinion, observing the size of revenue matters less than understanding the unit economics model. any investor who asks intelligent questions on unit economics, gross margins, and contribution margins is a relatively more intelligent investor than someones who opens up the question trail with revenue size and goes on to judge the venture on revenue alone and changes their tone in further discussion.
In entrepreneurial ventures, a negative contribution margin model remains almost the same at a highest levels of scale. If you burning 1 dollar in things like performance marketing to bring in an 80 cents of revenue, you will continue to burn money at scale as well.
Forms Of Capital
In any venture, the capital can come
in two primary forms:
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Equity
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Debt
EQUITY gives the investing party a share in the profit and loss of a company, which means that however, when they invest in the company, they may not get back the exact amount directly, but if the company makes profits in the future, they may be able to get a share out of it. When you start your own entrepreneurial venture as a founder, you have 100% of equity. As your business progresses, you can sell the share ownership of your company to some investor who may be willing to put money in the company. This share ownership is usually determined by the value that the company is going to create on an ongoing concern basis. This means that the inherent assumption lies here on the continuity of the company to eternity.
Whereas DEBT usually comes in the form of an amount, that you have to return eventually, along with some interest payment. Interest payment can be governed on a floating-rate basis, which means that it can be variable over time, or it can be on a fixed-interest-payment basis as well.
There are more investment methods through which money can come into a company, but these are intermediary modes. At the end of the day, equity and debt are the two primary modes in which the company is going to sit on the balance sheet of a company on a long-term basis.
One of the modes is preference shares, which gives an investor an option to convert the debt into the future equity of the company. Preference share is going to be discussed in detail in the section related to instruments of investments in conjunction with the concept of real options
Preliminary Note
Every venture requires some form of capital in its bank to be able to fund the entrepreneurial activities and create value. Capital come from various sources but are two primary forms in which your company gets funded - Equity and Debt and any combination of these two.
Source of capital can be your own savings, money made from some other businesses, loan from bank, loans from some non-banking financial firms, loans from your relatives or friends, equity capital from firms that primarily work in the fields of buying shares in a company and eventually selling those shares (equity funding).
While mechanics of debt and equity capitals or easy to understand from mathematical calculations point of view, a lot of value realisations come from relationships, patience, greed, anxiety, and decision making related factors in such structures.