DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT

Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082

Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

Module 3 – Managing and Growing New Venture

Preparing for the New Venture Launch

Introduction:

Venture Capital is a growing business in the area of industrial financing in India. To make the
innovative technology of the entrepreneur a successful business venture, support in the form
of financial assistance is more essential. This has necessitated the setting up of venture capital
financing division by companies.

The financial institutions devise schemes such as seed capital scheme (initial amount of
money an entrepreneur uses to start a business), Risk capital fund etc., to help new
entrepreneurs. However, to extend financial assistance they follow the criteria such as safety,
security, liquidity and not potentiality.

Meaning Of New Venture:

New Venture or startups refers to a company in the first stages of operations. Startups are
founded by one or more entrepreneurs who want to develop a product or service for which
they believe there is demand.

New ventures, or entrepreneurial ventures, are broadly defined as those firms that are in their
early stages of development and growth. Often they are in the process of bringing their initial
products or services to the market and of developing their customer base.

Steps For New Venture Start-Ups

The following are the steps involved in setting up a new business.

i) Scanning for Opportunities:

The first step involved in starting up a business is to look out for various business
opportunities. For scanning the opportunities an entrepreneur uses his personal observations,
contacts, official reports, published documents, surveys, etc. He carefully analyses each
opportunity and works out how he can use them to create goods and services. He analyses the
situations based on several factors such as market size, where to procure goods from, at what
price to sell, probable competitors, etc. Opportunities are scanned not only at the
domestic/national front but also at the international front.

ii) Deciding on the Product/Idea:

Scanning of opportunities helps in identifying the broad segment or market for the business.
The next step is to zero in on a particular product or service in the selected market segment .
For instance, suppose an entrepreneur decides to set up a venture in the fast-food market. He
must decide the products or combination of products that he would supply.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

iii) Analysis of Feasibility:

Once the product or service is chosen it becomes important for the entrepreneur to check
whether the idea is practically possible or not. The entrepreneur needs to find this out, on the
basis of different parameters such as whether the technology to be used is available, whether
the product will derive profits, is the idea financially feasible and whether the good will face
any legal restrictions.

iv) Appraisal by Funding Agencies: To set up the business, an entrepreneur requires funds.
For receiving the required funds, the entrepreneur discusses the business plan and the
feasibility reports with the financial agencies. The financial institutions provide the funds
only when they are convinced about the plan and its feasibility. Sometimes the financial
institutions require the entrepreneur to fill a proforma detailing about the plan.

v) Resource Mobilisation:

After the appraisal is received from funding institutions, the entrepreneur starts identifying
and collecting the resources that are needed for the commencement of the project. The
resources required comprise of raw materials, technology, human resources, machines, etc.
The entrepreneur tries to obtain the resources at the minimum possible cost.

vi) Project Launch:

Next, the entrepreneur proceeds with the commencement of the project. That is, he
undertakes activities such as establishing the factory premises, purchasing equipment’s,
collecting the inputs for production, etc. Thereby, he establishes the enterprise.

vii) Adoption and Management of Growth:

The role of an entrepreneur does not end with the establishment of enterprise. He performs
various other day-to-day functions such as organising goods and services, ensuring
production, keeping an eye on competition etc. Thus, he needs to manage the business and
continuously strive for better growth and development.

Why New Ventures Fail?

There are a number of reasons for failure of a new venture, which are discussed below:

1. Lack of Experienced Management: One of the main problems faced by new enterprises
is that the management team is usually very new to this role. The entrepreneur and his/her top
management usually have no prior record of being in charge of the fortunes of a whole
company.

2. Few Trained or Experienced Manpower: Shortage of skilled and experienced manpower

is faced by new ventures, which represent a riskier job opportunity, most people prefer to
work with a well-established organization employing hundreds of employees and having
a stable track record.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

3. Poor Financial Management:

Operational issues keep an entrepreneur busy and as a result, financial management is likely
to get neglected. Often, the entrepreneur may find the technicalities of accounting and finance
intimidating and avoid looking deep into it. Common errors in financial management can be
bad receivables management, unproductive investments, and poor budgeting decisions.

4. Rapid Growth:
Sudden unplanned growth is not always a desirable situation. Higher growth will mean
greater stress on production facilities, manpower, and marketing channels. Sometimes, these
will not be designed to cater to the rise in volumes and might need further capital
investments. It will lead to a stage of continuous fire-fighting and ultimately, many things
may not keep pace with the growth. Most commonly, the organization may run out of money.

5. Lack of Business Linkages:

Existing working relationships with vendors, customers, and others is a huge advantage to
established businesses. A new venture will have to forge new relationships and work hard at
strengthening them before coming to an equal footing with the entrenched players. Such
business linkages help in smooth conduct of business and are invaluable at times of distress.

6. Weak Marketing Efforts

Entrepreneurial firms are very reluctant to spend on marketing efforts. Investing in a
marketing campaign is not going to give you assured returns and the link between the
marketing expenditure and the sales is not very easy to establish. An investment of Rs. X in
raw material will give you a very tangible Y kg of output but a similar investment of Rs. X in
a newspaper insert will not give you a sale of Y units, which you can demonstratively tie into
the newspaper insert

7. Lack of Information:
Even in this era of free-flowing information, the quality of information available to large
corporations is far superior to that available to new small entrepreneurial ventures: There is a
cost to information and small ventures may not be able to invest so much in getting the high-
quality information. For example, before entering a new market, the new venture may send
some salespersons to interview some customers, shopkeepers, and wholesalers, On the other
hand, the large corporation may engage the services of a market-research firm and carry out a
thorough investigation of the potential and the problems of the new market.

8. Incorrect Pricing:
An entrepreneur does not pull the pricing out of thin air, but it may not be very rigorously
thought-out either. The price is most likely close to that of the competition and takes care of
costs leaving a modest or seemingly generous margin. There are many sophisticated pricing
policies a new venture can adopt, taking into account its cost structure, nature of demand, and
extent of competition. The entrepreneur can introduce new innovative pricing systems too.
For example, Deccan Airways revolutionized airline pricing in India by introducing low-
priced seats and yield management techniques are being used by low-cost earners in Europe
and the USA.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

9. Improper Inventory Control:

Improper inventory control can lead to myriad problems. Production can be halted due to
insufficient inventory, whereas excess inventory can lead to wastages and damages. In case
of perishable goods, high inventory can lead to expiration of stock. In high-tech industries or
industries influenced by fads, goods become obsolete very soon. Inflated valuation of
inventory can give a very wrong picture of the financial position of the firm.

10. Short-term Outlook:

A number of small new ventures face huge problems on a regular basis. In the early days of a
firm, these problems can threaten the very existence of the venture. In such circumstances,
the management and employees of the venture focus on surviving the immediate crisis and
the long-term vision and strategy of the firm are soon forgotten. If this continues for long, the
danger is that long-term plans are discarded as impractical or irrelevant. Ultimately, the firm
acquires a shape very different from what was originally envisaged by the entrepreneur.

EARLY MANAGEMENT DECISIONS

CREATING AWARENESS OF THE NEW VENTURE

In the early stages, the entrepreneur should focus on developing awareness of the products
offered.

Publicity
Publicity is free advertising provided by a media outlet. Many local media encourage
entrepreneurs to participate in their programs. The entrepreneur can increase the opportunity
for getting exposure by preparing news release and sending it to as many media sources as
possible. For radio or TV, the entrepreneur should identify programs that may encourage
local entrepreneurs to participate. Free publicity can only introduce the company. Advertising
can be focused on specific customers.

Internet Advertising
The Internet is an excellent medium to create awareness and to effectively support early
launch strategies.
Creating a website is the most important first stage. The website should indicate: Background
of the company. Its products, officers, address, telephone and fax numbers. Contact names for
potential sales. Direct sales from the website may also be available. Significant advertising is
needed to create interest and awareness of the existence of the website. It is important to
change the content of the website as necessary. The entrepreneur may also consider using a
banner ad, small rectangular ads similar to billboard ads that appear on browser websites.

Trade Shows
Every industry has a trade or professional association that sponsors annual trade shows.
Although creating a booth can be very expensive, trade shows are where hundreds of
thousands of people observe or identify trends in their industry. There is strong evidence to
indicate that the cost per sale from a trade show is significantly less than the cost per sale
from a personal sales call.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

Selecting an Advertising Agency

Advertising agencies can provide many promotional services. The advertising agency is an
independent business organization composed of creative and business people who develop,
prepare, and place advertising in media for its customers. The agency can provide assistance
in marketing research. It is important to determine whether the agency can fulfill all of the
needs of the new venture. A checklist of items that the entrepreneur may consider in
evaluating an agency is useful. The agency should support the marketing program and assist
the entrepreneur in getting the product effectively launched.

Hiring Experts
If the entrepreneur has no expertise in financial analysis, marketing research, or promotion,
he or she should hire outside experts. There are accountants, financial experts, and
advertising agencies that cater to new ventures.

MANAGING EARLY GROWTH OF THE NEW VENTURE

Venture management is a business management practice that focuses on being both
innovative and challenging in the realm of introducing what could be a completely new
product or entering a promising newly emerging market it is possible that the product or
service already exists, but through venture management efforts, it can be rebranded or
updated with new innovative features to respond on new requirements and opportunities. This
practice can be applied to any type of industry, big or small from a small mom and pop
operation to a steel conglomerate.

1. Market Focus
What makes a venture succeed is the ability to identify emerging attractive markets and to
seize on unmet, unserved customer needs. Successful business is ruled not by the founders'
decisions, but by the marketplace. And the marketplace, in turn, is ruled by "fears and
passions. People will only buy what they want to buy, or are afraid not to buy. And these
"fears and passions change every day. The analysis of the market potential and search for the
right fit separates the inventor from the entrepreneur. The entrepreneur must do market
research, and develop an effective marketing, advertising and selling strategy.

2. Management Focus
It's impossible to grow a successful business as a one-person operation Sooner or later, the
responsibility must be shared with one or more partners.
Thomas Alva Edison, an inventive genius who took out more than 1000 patents, started
several great companies. However, every one of them collapsed once it got to middle size,
and was saved only by booting Edison himself out and replacing him with professional
management.

An entrepreneur cannot achieve success with a Class A idea and Class B management.
Turning a great idea into a great business requires professional managers and market experts.
In case an entrepreneur cannot afford top management, he would need to build his
management team from within, developing their own management skills.

The core team should be picked very carefully because its business and interpersonal style
becomes the foundation of the company's culture and grows the value system. They should
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

have an impressive track record, skills, and depth of experience in the areas most important to
the sustainable competitive advantage of the company.

When building your management team, remember also that top-quality people often emerge
from bankruptcies Prior bankruptcy, experience is valuable - failure has its rewards. It is
often better to hire a leader who has learnt from mistakes than it is to hire someone who was
just lucky.

3. Strategic Focus
There are several types of strategies followed by successful companies. A careful study in
this area will help in sorting out the kind of enterprise strategy that could be used best
Strengths-Weaknesses-Opportunities- Threats (SWOT) analysis is to be carried out to define
company's sustainable -competitive advantage areas and develop an appropriate business
strategy to capitalize on it.

Strengths and weaknesses of the venture's major competitors need also to be assessed.
Having that exercise completed, the entrepreneur must position the company and its first
products against its prime competitors. Positioning is very hard work, and may need to call
for help from a start-up. consultant, a marketing expert, or an experienced business executive.
The strategic thinking, vision, and business strategy development exercise need to be
supported by a set of analytical techniques.

4. Financial Focus
Many ventures fail because they fail to understand capital requirements of their growing
business. The focus must be on cash flow and start preparing for the next stage of venture
financing well in advance.

NEW VENTURE EXPANSION STRATEGIES AND ISSUES

Expanding a new venture can be a daunting task, but it can also be one of the most rewarding.
However, it's important to have a solid strategy in place to ensure a successful expansion.
Some of the key strategies and issues to consider when expanding new venture are:

1. Conduct Market Research

Before expanding, research the target market to ensure there is demand for the
product/service. Look at trends, competitors, and consumer behavior to determine the
feasibility of expansion.

2. Develop a Clear Business Plan

Create a detailed plan outlining the expansion strategy, including objectives, budget, timeline,
and marketing strategy. This will help ensure that all stakeholders are on the same page and
working towards the same goals.

3. Identify the Right Funding Sources

Determine the amount of capital required for expansion and explore various funding options
such as venture capitalists, angel investors, bank loans, crowd funding, or other sources.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

4. Build a Strong Team

Hire and train new staff or develop existing employees to support the expansion. Ensure that
team members have the necessary skills and experience to execute the plan effectively.

5. Leverage Technology
Implement new technologies and tools to streamline processes, efficiency, and enhance the
customer experience. This can include improve automation, software, cloud computing, or
other innovations.

6. Expand Product or Service Offerings

Diversify the product or service offerings to appeal to a broader customer base. This can
involve developing new products or services, improving existing offerings, or entering new
markets.

7. Establish Partnerships and Alliances

Forge partnerships with complementary businesses to expand the customer base and tap into
new markets. This can include strategic alliances, joint ventures, or other types of
partnerships.

8. Develop a Strong Brand Image

Build a strong brand image to attract and retain customers, This can involve branding efforts
such as advertising, social media, public relations, and other marketing initiatives.

9. Monitor Performance and Adjust Strategies

Track performance metrics and adjust strategies as needed to ensure success. This can
involve monitoring sales, customer feedback, and other indicators of success.

10. Foster a Culture of Innovation

Encourage a culture of innovation and experimentation within the organization to continually
improve products, services, and processes. This can involve providing training, rewards, and
other incentives for innovation.

Key Issues to Consider While Venture Expansion Financial Planning

Expanding your venture can be expensive, and it's important to have a solid financial plan in
place before you begin. This should include projected expenses, cash flow projections, and a
realistic budget.

Human Resources
Expanding your venture will likely require additional human resources, whether it's hiring
new employees or retaining existing staff. It's important to consider how the expansion will
affect your existing team and what additional skills and resources you'll need to successfully
expand.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

Legal and Regulatory Compliance

Expanding your venture may require compliance with new legal and regulatory requirements.
It's important to understand the legal and regulatory landscape in the new market and to
ensure that you are aware with all relevant laws and regulations

ESTIMATING THE FINANCIAL NEEDS OF A NEW VENTURE

An entrepreneur must estimate how much starting capital he will have and the amount of
revenue he will be able to generate each month during the start-up period. To calculate the
latter, research must be done on potential market and industry averages to come up with
realistic numbers.

Following steps must be considered to determine new business financial needs:

a) Calculate the One-Time Expenses

These are expenses that will only occur at the beginning of opening of new business. They
may include professional and legal expenses for registering or incorporating the company;
long-term assets like machinery, real estate, or a vehicle; consulting services; web design;
office equipment and supplies; permit fees and license; advertising; market search; mileage,
and training.

b) Determine the Recurring Costs

These are expenses that we have to pay again and again, generally on a weekly, monthly, or
bi-weekly basis. They include costs of wages, insurance, and utilities, professional fees, etc.

c) Ascertain whether Costs are Variables, or Fixed

Variables costs are those that will change over time, such as insurance, packaging shipping
and wages. Fixed expenses are those that won't change. Administrative costs or costs of
utilities are good examples of fixed costs. If you want to keep the information organised, then
consider creating a spreadsheet using excel in a way that can be viewed in many ways (line
graph, bar graph, etc.)

d) Create a Business Balance Sheet

It is advisable to consider writing balance sheets if a small business is about to be launched. It
should include equity, liability, and assets. Each of these categories will assist in keeping
track of your finances and make it simpler for paying bills.
Equity = Assets (Current assets + fixed assets) - liabilities (current liabilities + non-current
liabilities)

e) Develop a Business Cash Flow Analysis

Nothing is more important in a business than cash flow. Cash flow measures funds coming
into (inflow) and flowing out (outflow) of business. This is broken down into financing
activities, investment activities, and operational activities. The analysis will aid to know
when the business break even so that the entrepreneur can start expanding the company or
reinvesting.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

Types of Business Financing Available/ Sources of Personal Finance

a) Family and Friends

Most new entrepreneurs depend on working capital from friends and family - sometimes
referred to as love money. Friends and family often do not mind waiting to be paid back until
operating profits begin rolling in, however, it can be hard to mix personal relationships with
business.

b) Personal Investment
Many start-ups need some personal investment by the owner either personal assets\valuables
used as collateral to secure funding or cash.

c) Debt Funding
Lenders provide various types of debt funding, including lines of credit and term loans. Some
lenders provide loans particularly designed for a new venture, which comes with flexible
payback terms.

d) Grants & Subsidies

Some businesses may be eligible qualified for government grants and subsidies to assist with
start-up expenses.

e) Equity Financing
Equity financing typically comes from other companies or primary investors. They will inject
venture with funds, in exchange for part-ownership of the new company. Equity investors can
help decrease personal risk, However, they will want to interfere or rather change some
aspects of the company model.

PREPARATION OF A FINANCIAL PLAN

Financial planning involves the following steps: The four important steps involved in the
preparation of financial plan of a firm. The steps are:

1. Determination of Long-Term and Short-Term Financial Objectives

2. Formulation of Financial Policies
3. Developing Financial Procedures
4. Reviewing Financial Plan.

Step 1: Determination of Long-Term and Short-Term Financial

Objectives
First step in the scheme of financial planning is the establishment of financial objectives for
the corporation. They serve as guide-posts to the finance manager in determining financial
policies and laying down procedures. In modern dynamic business world, it is advisable for a
business enterprise to establish long-term as well as short-term objectives.

The long-term financial objective of a firm is maximization of wealth of the owners which is
accomplished by making use of capital in such a way as to increase the productivity of the
remaining factors of production over the long run.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

In the pursuit of long-term objective of wealth maximization, the firm should set short-term
objectives of maximizing profits while minimizing risk. Finance manager should seek
courses of action that avoid unnecessary risks. Minimization of risk implies achieving of
liquidity.

To ensure maximum returns and to minimize risks, it is necessary to ensure constant

monitoring of funds flow in and out of the firm. The financial reporting system must be
designed to provide timely and accurate picture of the firm's operations.

Step 2: Formulation of Financial Policies

Formulation of financial policies constitutes the second step in financial planning process,
financial policies serve as guide-posts to all those associated with acquisition, allocation and
control of funds of the firm. Those policies can be categorized as follows:
a. Policies regarding quantum of funds to be required to accomplish the goal.
b. Policies regarding pattern of capitalization.
c. Policies regarding selection of sources of funds.
d. Policies regarding controlling powers of suppliers of funds.
e. Policies regarding allocation of funds as between cash and cash equivalents.
f. Policies regarding allocation of funds as between different kinds of inventories.
g. Policies with respect to credit and collection activities.
h. Policies with respect to allocation of income.

In formulating financial policies, a finance manager is required to forecast the figure in his
endeavour to predict the variability of the factors which have their bearing upon the policies.
Forecasting is, therefore, an integral part of financial planning.

Step 3: Developing Financial Procedures

So as to implement financial policies the firm must lay down detailed procedures. This will,
besides making the employees understand what they are supposed to do, simplify the
administrative process, assure coordination of activities, improve the quality of performance,
assure consistency of action, increase the efficiency of work performed and improve the
control process.

Step 4: Reviewing Financial Plan

The management must revise the firm's short-term objectives, policies and procedures in the
light of changed economic and business situations. Financial plan devoid of flexibility may
prove deleterious to the firm. Reviewing of financing plan is a continuous process.

SOURCES OF FINANCE FOR START-UPS

Sources of finance for business are equity, debt, debentures, retained earnings, term loans,
working capital loans, letter of credit, venture funding etc. These sources of funds are used in
different situations. They are classified based on time period, ownership and control and their
source of generation.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

1. Equity Financing
Equity financing means exchanging a portion of the ownership of the business for a financial
investment in the business. The ownership stake resulting from an equity investment allows
the investor to share in the company's profit. Equity involves a permanent investment in a
company and is not repaid by the company at a later date.
An equity stake in a company can be in the form of membership units, as in the case of a
limited liability company or in the form of common or preferred stock as in a corporation.
Companies may establish different classes of stock to control voting rights among
shareholders, similarly, companies may use different types of preferred stock.

a. LIFE INSURANCE POLICIES: A standard feature of many life insurance policies is the
owner's ability to borrow against the cash value of the policy.
This does not include term insurance because it has no cash value. The money can be used for
business needs. It takes about two years for a policy to accumulate sufficient cash value for
borrowing. Most of the cash value of the policy may be borrowed. value of the equity in a
home. If a home is paid for, it can be used to generate funds from the entire value of that
home. If the home has an

b. HOME EQUITY LOANS:

A home equity loan is a loan backed by the existing mortgage, it can provide funds on the
difference between the value of the house and unpaid mortgage amount.

c. FRIENDS AND RELATIVES:

Founders of a start-up business may look to private financing sources such as parents or
friends. It may be in the form of equity financing in which the friend or relative receives an
ownership interest in the business.

d. VENTURE CAPITAL: Venture capital is a privately raise external equity capital and
used to fund entrepreneurs of early-stage firms with attractive growth prospects. They
provide capital to young businesses in exchange for an ownership share of the business.
Venture capital firms usually don't want to participate in the initial financing of a business
unless the company has management with a proven track record. They also prefer businesses
that have a competitive advantage or a strong value proposition in the form of a patent, a
proven demand for the product or a very special idea. Examples: Sequoia Capital, Accel
Partners. Blume Ventures etc.,

Salient features of VC's:

i. Venture capitalists provide seed capital for new and rapid potential companies growth
potential companies.
ii. Venture capitalists are inclined to assume high degree of risk, in expectation of earning
high rate of return.
iii. VC's usually hold equity shares or quasi-equity shares which enable them share risk and
reward of the investee firm.
iv. VC's actively work with the companies' and add value to the growth of the firm.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

Stages of Venture Capital Investment

a. Seed Financing is an investment made very early in the development of business cycle.
b. Start-ups relate to those firms exhibiting few, if any, commercial sales but in which
product development and market research are complete.
c. First Stage Financing occurs when the firm has begun commercial production but
requires additional financing to materially increase production.
d. Second Stage Financing relates to additional expansion of both productive capacity and
markets.
e. Mezzanine Financing is investment intended to provide further expansion or to bridge
working capital and market expansion needs prior to a public offering of stock or prior to a
buyout.

Types of Venture Capitalists

a. Generalist: Those who invest in various industry sectors or various geographic locations,
or various states of a company's life are known as "Generalist". This category of venture
capitalists is interested in any business ideas with highly prospective success.

b. Specialists: Those who invest in one or two industries or sectors or many seek to invest in
only a localized geographic area are known as "Specialist. Specialists help companies in the
acquisition, turnaround or recapitalization of public and private companies that represent
favourable investment opportunities.

(v) ANGEL INVESTORS: Angel investors are typically affluent high net worth individuals
who have spare cash available and looking for investment in a new or on-going small
business venture, providing capital for start-up or expansion under favourable terms.
Their objective may be more than just focusing on economic returns.
Although angel investors often have somewhat of a mission focus, they are still interested in
profitability and security for their investment.
Angel investors may be interested in the economic development of a specific geographic area
in which they are located. They focus on earlier stage financing and smaller financing
amounts than venture capitalists,

Classification of Angel Investors

1. Affiliated:
An affiliated angel is someone who has some sort of contact with us our business but is not
necessarily related to or acquainted with. Approaching affiliated angels is simply a matter of
calling to make an appointment

a. Professionals: Professional like doctors, dentists, a lawyer usually have discretionary

income available to invest in outside projects, and if they're not interested, they may be able
to recommend a colleague.

b. Business Associates: These are the people we come in contact with during normal course
of a business day.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

i. Suppliers/Vendors: The owners of companies who is also a supplier of inventory

as an investment may have a vital interest in star-ups company's success and make
excellent angels in the form of better payment terms or cheaper prices. Suppliers
might even use their credit to help us get a loan.
ii. Customers: These are especially good contacts if they use your product or
service to make or sell their own goods.
iii. Employees: some of the key employees might be sitting on unused equity in their
homes that could make excellent collateral for a business loan to business. There's
no greater incentive to an employee than to share ownership in the company for
which he or she works.

iv. Competitors: If a competitor is doing business in another part of a country and doesn't
infringe on our territory, he or she may be an empathetic investor and may share not only
capital, but information as well.

II. Non-Affiliated:
A non-affiliate angel has no connection with either us or our business. The non-affiliated
angel category includes:

i. Professionals: This group can include lawyers, accountants, consultants and brokers whom
we don't know personally or do business with

ii. Middle Managers: Angels in middle management positions start investing in small
businesses for two major reasons either they're bored with their jobs and are looking for
outside interest, or they're nearing retirement or fear they're being phased out.

iii.Entrepreneurs: These angels are (or have been) successful in their own businesses and
like investing in other entrepreneurial ventures. Entrepreneurs who are familiar with our
industry make excellent investors.

(vi) GOVERNMENT GRANTS:

Central and state governments often have financial assistance in the form of grants and/or tax
credits for start-up or expanding businesses. With several schemes, initiatives, and programs
in place to provide incentives for business development, the Indian government has launched
a few schemes to help startups get the funding they need.
Some of the schemes include:

a. ATAL Innovation Mission (AIM)

The government of India established the Atal Innovation Mission in 2015 to promote
innovation development and research in India. The Department of Science and Technology
undertakes AIM, with startup funding allocations made by the Government of India. The
objective is to provide a platform for interaction between Academia, Industries, and
Government to create synergies and provide financial support in order to commercialize their
ideas.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

b. Pradhan Mantri Mudra Yojana (PMMY)

Launched in April 2015, the Pradhan Mantri Mudra Yojana is a startup funding scheme
aimed at easing access to credit for micro and small enterprises in India. The PMMY is an
initiative of the Government to support and finance entrepreneurial ventures which have the
potential to create employment and increase incomes for more Indians. These loans are
categorized into Shishu, Kishore and Tarun for different sections of borrowers and for
different types of businesses;
1. Shishu - Covering loans up to 250,000.
2. Kishore Covering loans above 250,000 and up to 5 lakhs.
3. Tarun - Covering loans above 5 lakh and up to 10 lakhs.

c. Startup India Seed Fund (SISF)

SISF aims at providing financial assistance to startups for proof of concept, prototype
development, product trials, market-entry, and commercialization. This will make it easier for
new startups to compete with giant companies in India and create an ideal ecosystem for new
businesses and investments. This will ensure that start-ups face no difficulty in establishing
their enterprise, thereby positively impacting the employment scenario across the country.

d. Venture Capital Assistance (VCA)

Small Farmer's Agri-Business Consortium (SFAC) launched the Venture Capital Assistance
(VCA) scheme that provides an interest-free loan to qualifying projects to meet the shortfall
in the capital requirement for projects that have the potential of becoming successful
ventures.

e. Credit Guarantee Trust Fund for Micro and Small Enterprises(CGT-MSE)

The Credit Guarantee Trust Fund for Micro and Small Enterprises (CGT-MSE) is one of
India's largest startup funding schemes. This scheme was set up to provide business loans to
micro-level businesses, small-scale businesses, and startups with no security.

Under this scheme, the eligible MSES can obtain a maximum amount of up to Rs. 1 crore
through the Ministry of MSME and Small Industries Development Bank of India (SIDBI).
Primarily meant for manufacturing units, this loan can be availed in the form of working
capital or a term loan.

f. Credit Linked Capital Subsidy (CLCS)

The Indian Government started the Credit Linked Capital Subsidy Scheme (CLCS) to help
upgrade technology and productivity among MSMES and make them more globally
competitive.
Under the CLCS scheme, upfront cash support is provided to the small-scale industries for
the purchase of new plant/equipment on self-conducive basis or for hiring services of
consultants to upgrade technology or improve the productivity of the plant.

g. New Generation Innovation & Entrepreneurship Development (NewGen - IEDC)

To support and promote the spirit of entrepreneurship among the youth in our country, the
government of India launched the New Generation Innovation and Entrepreneurship
Development Scheme This scheme seeks to breathe a new life into the economy, creating
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

jobs, wealth, and considerable economic activity in the country. The idea behind this scheme
is to resolve many of the challenges which are faced at the initial stages of a start-up.

h. Multiplier Grants Scheme (MGS)

Multiplier Grant Scheme (MGS) aims to promote collaborative research and development
between industry and academia. Under this scheme, if the industry supports the research and
development of products that can be commercialized at the institutional level, the government
shall provide financial support which will be up to twice the amount provided by the industry.
The financial support under the scheme is limited to a maximum of 12 crores per project and
the duration of each project could considerably be less than 2 years.

(vii) INITIAL PUBLIC OFFERINGS:

Initial Public Offering (IPO) refers to the process of offering shares of a private corporation
to the public in a new stock issuance for the first time. An IPO allows a company to raise
equity capital from public investors.

IPO is the selling of securities to the public in the primary market. A primary market deals
with new securities being issued for the first time. After listing on the stock exchange, the
company becomes a publicly-traded company and the shares of the firm can be traded freely
in the open market.

The company which issues shares to the public is referred to as the issuer.
There are two common types of IPO.

i. Fixed Price Offering

Fixed Price IPO can be referred to as the issue price that some companies set for the initial
sale of their shares.

ii. Book Building Offering

In the case of book building, the company initiating an IPO offers a 20% price band on the
stocks to the investors. The interested investors bid on the shares before the final price is
decided.

(viii) WARRANTS: Warrants are a contract that gives the right, but not the duty, to buy or
sell a security-most usually, equity-before expiry at a certain amount. The price at which the
underlying security may be bought or sold is called the exercise price or the strike price.

Warrants giving the right to buy a security are referred to as call warrants; those giving the
right to sell a security are known as put warrants.

Warrants are a special type of instrument used for long-term financing. They are useful for
start-up companies to encourage investment by minimizing downside risk while providing
upside potential.
For example: Warrants can be issued to management in a start-up company as part of the
reimbursement package.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

(ix) PERSONAL SAVINGS: The first place to look for money is our own savings or equity.
Personal resources can include profit-sharing or early retirement funds, real estate equity
loans or cash value insurance policies.

(x) COMMERCIAL BANKS: A commercial bank is a financial intermediary that provides

liquidity by bridging sources of capital from depositors and creating credit that can be
extended to borrowers. Functions of a commercial bank include deposit acceptance, credit
creation, treasury and payments, and other agency and advisory services.
Business banks and commercial banks jointly serve small and medium enterprises (SMEs).
Clients may be segmented by size and complexity.

FORMS OF BUSINESS ORGANISATION

SOLE PROPRIETORSHIP
 Sole proprietorship or individual entrepreneurship is a business concern owned and
operated by one person.
 The sole proprietor is a person who carries on business exclusively by and for
himself. He alone contributes the capital and skills and is solely responsible for the
results of the enterprise.
 In fact sole proprietor is the supreme judge of all matters pertaining to his business
subject only to the general laws of the land and to such special legislation as may
affect his particular business.

The salient features of the proprietorship are as follows:

i. Single ownership
ii. One man control
iii. Undivided risk
iv. Unlimited liability
v. No separate entity of the business
vi. No Government regulations.

Advantages:

(a) Simplicity -It is very easy to establish and dissolve a sole proprietorship. No documents
are required and no legal, formalities are involved. Any person competent to enter into a
contract can start it. However, in some cases, i.e., of a chemist shop, a municipal license has
to be obtained. You can start business from your own home.

(b) Quick Decisions - The entrepreneur need not consult anybody in deciding his business
affairs. Therefore, he can take on the spot decisions to exploit opportunities from time to
time. He is his own boss.

(c) High Secrecy - The proprietor has not to publish his accounts and the business secrets are
known to him alone. Maintenance of secrets guards him from competitors.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

(d) Direct Motivation - There is a direct relationship between efforts and rewards. Nobody
shares the profits of business. Therefore, the entrepreneur has sufficient incentive to work
hard.

(e) Personal Touch - The proprietor can maintain personal contacts with his employees and
clients. Such contacts help in the growth of the enterprise,

(f) Flexibility- In the absence of Government control, there is complete freedom of action.
There is no scope for difference of opinion and no problem of co-ordination.

Disadvantages:

(a) Limited Funds - A proprietor can raise limited financial resources. As a result, the size of
business remains small. There is limited scope for growth and expansion. Economies of scale
are not available.

(b) Limited Skills - Proprietorship is a one man show and one man cannot be an expert in all
areas (production, marketing, financing, personnel etc.) of business. There is no scope for
specialisation and the decisions may not be balanced.

(c) Unlimited Liability - The liability of the proprietor is unlimited. In case of loss his
private assets can also be used to pay off creditors. This discourages expansion of the
enterprise.

(d) Uncertain Life - The life of proprietorship depends upon the life of the owner. The
enterprise may die premature death due to the incapacity or death of the proprietor. The
proprietor has a low status and can be lonely.

Sole proprietorship is suitable in the following cases:

i Where small amount of capital is required e.g., sweet shops, bakery, newsstand, etc.

ii.Where quick decisions are very important, e.g., share brokers, bullion dealers, etc.

iii.Where limited risk is involved, e.g, automobile repair shop, confectionery, small retail
store, etc.
iv.Where personal attention to individual tastes and fashions of customers is required, e.g.,
beauty parlour, tailoring shops, lawyers, painters, etc.
v.Where the demand is local, seasonal or temporary, eg., retail trade, laundry, fruit sellers,
etc.
vi. Where fashions change quickly, c.g., artistic furniture, etc.
vii.Where the operation is simple and does not require skilled management.

Thus, sole proprietorship is a common form of organisation in retail trade, professional firms,
household and personal services. This form of organization is quite popular in our country. It
accounts for the largest number of business establishments in India, in spite of its limitations.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

PARTNERSHIP

As a business enterprise expands beyond the capacity of a single person, a group of persons
have to join hands together and supply the necessary capital and skills. Partnership firm thus
grew out of the limitations of one man business. Need to arrange more capital, provide better
skills and avail of specialisation led to the growth to partnership form of organisation.

According to Section 4 of the Partnership Act, 1932 Partnership is "the relation between
persons who have agreed to share the profits of a business carried on by all or anyone of them
acting for all".

In other words, a partnership is an agreement among two or more persons to carry on jointly a
lawful business and to share the profits arising there from Persons who enter into such
agreement are known individually as 'partners' and collectively as 'firm.

Characteristics of Partnership:

i. Association of two or more persons - maximum 10 in banking business and 20 in non-

banking business.
ii. Contractual relationship-written or oral agreement among the partners.
iii.Existence of a lawful business
iv. Sharing of profits and losses
v.Mutual agency among partners
vi.No separate legal entity of the firm
vii Unlimited liability
viii. Restriction on transfer of interest
ix.Utmost good faith.

Formation of Partnership:
A partnership firm can be formed through an agreement among two or more persons. The
agreement may be oral or in writing.
But it is desirable that all terms and conditions of partnership are put in writing so as to avoid
any misunderstanding and disputes among the partners. Such a written agreement among
partners is known as Partnership Deed.
It must be signed by all the partners and should be properly stamped. It can be altered with
the mutual consent of all the partners.

A partnership deed usually contains the following details:

i. Name of the firm.
ii.Names and address of all the partners.
iii.Nature of the firm's business.
iv.Date of the agreement.
v.Principal place of the firm's business.
vi. Duration of partnership, if any
vii. Amount of capital contributed by each partner.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

viii.The proportion in which the profits and losses are to be shared.

ix.Loans and advances by partners and interest payable on them.
X. Amount of withdrawal allowed to each partner and the rate of interest.
xi. Amount of salary or commission payable to any partner.
xii. The duties, powers and obligations of all the partners.
xiii.Maintenance of accounts and audit.
xiv. Mode of valuation of goodwill on admission, retirement or death of a partner.
xv.Procedure for dissolution of the firm and settlement of accounts.
xvi. Arbitration for settlement of disputes among the partners.
xvii.Arrangements in case a partner becomes insolvent.
xviii. Any other clause(s) which may be found necessary in particular kind of business.

Registration of Firms:
The Partnership Act, 1932 provides for the registration of firms with the Registrar of Firms
appointed by the Government. The registration of a partnership firm is not compulsory. But
an unregistered firm suffers from certain disabilities. Therefore, registration of a partnership
is desirable.

Procedure for Registration:

A partnership firm can be registered at any time by filing a statement in the prescribed form.
The form should be duly signed by all the partners. It should be sent to the Registrar of Firms
along with the prescribed fee.

Merits of Partnership:
The partnership form of business ownership enjoys the following advantages:

1. Ease of Formation:
A partnership is easy to form as no cumbersome legal formalities are involved. An agreement
is necessary and the procedure for registration is very simple. Similarly, a partnership can be
dissolved easily at any time without undergoing legal formalities. Registration of the firm is
not essential and the partnership agreement need not essentially be in writing

2. Larger Financial Resources:

As a number of persons or partners contribute to the capital of the firm, it is possible to
collect larger financial resources than is possible in sole proprietorship. Creditworthiness of
the firm is also higher because every partner is personally and jointly liable for the debts of
the business. There is greater scope for expansion or growth of business.

3. Specialisation and Balanced Approach:

The partnership form enables the pooling of abilities and judgment of several persons.
Combined abilities and judgment result in more efficient management of the business.
Partners with complementary skills may be chosen to avail of the benefits of specialisation.
Judicious choice of partners with diversified skills ensures balanced decisions. Partners meet
and discuss the problems of business frequently so that decisions can be taken quickly.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

4. Flexibility of Operations:
Though not as versatile as proprietorship, a partnership firm enjoys sufficient flexibility in its
day-to-day operations. The nature and place of business can be changed whenever the
partners desire. The agreement can be altered and new partners can be admitted whenever
necessary. Partnership is free from statutory control by the Government except the general
law of the land.

5. Protection of Minority Interest:

No basic changes in the rights and obligations of partners can be made without the
unanimous consent of all the partners. In case a partner feels dissatisfied, he can easily retire
from or he may apply for the dissolution of partnership.

6. Personal Incentive and Direct Supervision:

There is no divorce between ownership and management. Partners share in the profits and
losses of the firm and there is motivation to improve the efficiency of the business. Personal
control by the partners increases the possibility of success. Unlimited liability encourages
caution and care on the part of partners. Fear of unlimited liability discourages reckless and
hasty action and motivates the partners to put in their best efforts.

7. Capacity for Survival:

The survival capacity of the partnership firm is higher than that of sole proprietorship. The
partnership firm can continue after the death or insolvency of a partner if the remaining
partners so desire. Risk of loss is diffused among two or more persons. In case one line of
business is not successful, the firm may undertake another line of business to compensate its
losses.

8. Better Human and Public Relations:

Due to number of representatives (partners) of the firm, it is possible to develop personal
touch with employees, customers, government and the general public. Healthy relations with
the public help to enhance the goodwill of the firm and pave the way for steady progress of
the business.

9. Business Secrecy:
It is not compulsory for a partnership firm to publish and file its accounts and reports.
Important secrets of business remain confined to the partners and are unknown to the outside
world.

Demerits of Partnership:

1. Unlimited Liability:
Every partner is jointly and severally liable for the entire debts of the firm. He has to suffer
not only for his own mistakes but also for the lapses and dishonesty of other partners. This
may curb entrepreneurial spirit as partners may hesitate to venture into new lines of business
for fear of losses. Private property of partners is not safe against the risks of business.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

2. Limited Resources:
The amount of financial resources in partnership is limited to the contributions made by the
partners. The number of partners cannot exceed 10 in banking business and 20 in other types
of business. Therefore, partnership form of ownership is not suited to undertake business
involving huge investment of capital.

3. Risk of Implied Agency:

The acts of a partner are binding on the firm as well as on other partners. An incompetent or
dishonest partner may bring disaster for all due to his acts of commission or omission. That is
why the saying is that choosing a business partner is as important as choosing a partner in
life.

4. Lack of Harmony:
The success of partnership depends upon mutual understanding and cooperation among the
partners. Continued disagreement and bickering among the partners may paralyse the
business or may result in its untimely death. Lack of a central authority may affect the
efficiency of the firm. Decisions may get delayed.

5. Lack of Continuity:
A partnership comes to an end with the retirement, incapacity, insolvency and death of a
partner. The firm may be carried on by the remaining partners by admitting new partners. But
it is not always possible to replace a partner enjoying trust and confidence of all. Therefore,
the life of a partnership firm is uncertain, though it has longer life than sole proprietorship.

6. Non-Transferability of Interest:
No partner can transfer his share in the firm to an outsider without the unanimous consent of
all the partners. This makes investment in a partnership firm non-liquid and fixed. An
individual's capital is blocked.

7. Public Distrust:
A partnership firm lacks the confidence of public because it is not subject to detailed rules
and regulations Lack of publicity of its affairs undermines public confidence in the firm.

The foregoing description reveals that partnership form of organisation in appropriate for
medium-sized business that requires limited capital, pooling of skills and judgment and
moderate risks, like small scale industries. wholesale and retail trade, and small service
concerns like transport. agencies, real estate brokers, professional firms like chartered
accountants. doctor's clinics or nursing homes, attorneys, etc.

LIMITED LIABILITY PARTNERSHIP

According to the Limited Liability Partnership Act, 2008, an LLP is a body corporate
formed and incorporated under this Act. It is a legal entity separate from that of its
members.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

Features:
i. An LLP must be registered under the LLP Act 2008.
ii. It is a body corporate having a separate entity of its own.
iii. It has perpetual succession. Any change in its members does not affect its existence, rights
and liabilities.
iv. Any individual or a body corporate can be a partner in an LLP.
V. Every LLP must have at least two partners.
vi. There must be at least two designated partners and one of them must be a resident in India.
vii. An LLP must maintain proper books of accounts as per the double entry system.
viii. An LLP must file with the Registrar a Statement of Account and solvency along with its
annual return in the prescribed form.

Merits:

a. An LLP enjoys stability as changes in partners do not affect its existence.

b. The liability of an LLP and its partners in Limited.
c. A body corporate and a foreigner can be partners in an LLP.
d. An LLP can raise, large amount of funds as there is no restriction on the number of
members and risk involved is limited.

Demerits:

a. Time and money are involved in the formation and registration of an LLP.
b. There is less flexibility of operations because an LLP has to comply with certain legal
formalities.
c. There is lack of business secrecy as an LLP has to file the prescribed documents with the
Registrar. Its accounts are open to the public for inspection.

The LLP gives an entrepreneur the twin benefits of limited liability and a flexible internal
structure. It is also free from dividend distribution tax and minimum alternate tax.

JOINT STOCK COMPANIES

With the growing needs of modern business, collection of vast financial and managerial
resources became necessary. Proprietorship and partnership forms of ownership failed to
meet these needs due to their limitations, e.g.. unlimited liability, lack of continuity and
limited resources.

The company form of business organisation was evolved to overcome these limitations. Joint
Stock Company has become the dominant form of ownership for large scale enterprises
because it enables collection of vast financial and managerial resources with provision for
limited liability and continuity of operations.

A joint stock company is an incorporated and voluntary association of individuals with

a distinctive name, perpetual succession, limited liability and common seal, and usually
having a joint capital divided into transferable shares of a fixed value.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

Merits of Company Organisation:

The company form of business ownership has become very popular in modern business on
account of its several advantages:

1. Limited Liability:
Shareholders of a company are liable only to the extent of the face value of shares held by
them. Their private property cannot be attached to pay the debts of the company. Thus, the
risk is limited and known. This encourages people to invest their money in corporate
securities and, therefore, contributes to the growth of the company form of ownership.

2. Large Financial Resources:

Company form of ownership enables the collection of huge financial resources. The capital of
a company is divided into shares of small denominations so that people with small means can
also buy them. Benefits of limited liability and transferability of shares attract investors.
Different types of securities may be issued to attract various types of investors. There - is no
limit on the number of members in a public company.

3. Continuity:
A company enjoys uninterrupted business life. As a body corporate, it continues to exist even
if all its members die or desert it. On account of its stable nature, a company is best suited for
such types of business which require long periods of time to mature and develop.

4. Transferability of Shares:
A member of a public limited company can freely transfer his shares without the consent of
other members. Shares of public companies are generally listed on a stock exchange so that
people can easily buy and sell them. Facility of transfer of shares makes investment in
company liquid and encourages investment of public savings into the corporate sector.

5. Professional Management:
Due to its large financial resources and continuity, a company can avail of the services of
expert professional managers. Employment of professional managers having managerial
skills and little financial stake results in higher efficiency and more adventurous
management. Benefits of specialisation and bold management can be secured.

6. Scope for Growth and Expansion:

There is considerable scope for the expansion of business in a company On account of its vast
financial and managerial resources and limited liability, company form has immense potential
for growth. With continuous expansion and growth, a company can reap various economies
of large scale operations, which help to improve efficiency and reduce costs.

7. Public Confidence:
A public company enjoys the confidence of public because its activities are regulated by the
government under the Companies Act Its affairs are known to public through publication of
accounts and reports. It can always keep itself in tune with the needs and aspirations of
people through continuous research and development.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

8. Diffused Risk:
The risk of loss in a company is spread over a large number of members. Therefore, the risk
of an individual investor is reduced

9. Social Benefits:
The company organisation helps to mobilise sayings of the community and invest them in
industry. It facilitates the growth of financial institutions and provides employment to a large
number of persons. It provides huge revenues to the Government through direct and indirect
taxes.

Demerits of Company:

A company suffers from the following limitations:

1. Difficulty of Formation:
It is very difficult and expensive to form a company. A number of documents have to be
prepared and filed with the Registrar of Companies. Services of experts are required to
prepare these documents. It is very time-consuming and inconvenient to obtain approvals and
sanctions from different authorities for the establishment of a company. The time and cost
involved in fulfilling legal formalities discourage many people from adopting the company
form of ownership. It is also difficult to wind up a company.

2. Excessive Government Control:

A company is subject to elaborate statutory regulations in its day-to-day operations. It has to
submit periodical reports. Audit and publication of accounts is obligatory. The objects and
capital of the company can be changed only after fulfilling the prescribed legal formalities.
These rules and regulations reduce the efficiency and flexibility of operations. A lot of
precious time, effort and money have to be spent in complying with the innumerable legal
formalities and irksome statutory regulations.

3. Lack of Motivation and Personal Touch:

There is divorce between ownership and management in a large public company. The affairs
of the company are managed by the professional and salaried managers who do not have
personal involvement and stake in the company. Absentee ownership and impersonal
management result in lack of initiative and responsibility. Incentive for hard work and
efficiency is low Personal contact with employees and customers is not possible.

4. Oligarchic Management:
In theory the management of a company is supposed to be democratic but in actual practice
company becomes an oligarchy (rule by a few). A company is managed by a small number of
people who are able to perpetuate their reign year after year due to lack of interest,
information and unity on the part of shareholders. The interests of small and minority
shareholders are not well protected. They never get representation on the Board of Directors
and feel oppressed.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

5. Delay in Decisions:
Too many levels of management in a company result in red-tape and bureaucracy. A lot of
time is wasted in calling and holding meetings and in passing resolutions. It becomes difficult
to take quick decisions and prompt action with the consequence that business opportunities
may be lost.

6. Conflict of Interests:
Company is the only form of business where in a permanent conflict of interests may exist. In
proprietorship there is no scope for conflict and in a partnership continuous conflict results in
dissolution of the firm. But in a company conflict may continue between shareholders and
board of directors or between shareholders and creditors or between management and
workers.

7. Frauds in Promotion and Management:

There is a possibility that unscrupulous promoters may float a company to dupe innocent and
ignorant investors. They may collect huge sums of money and, later on, misappropriate the
money for their personal benefit. The case of South Sea Bubble Company is the leading
example of such malpractices by promoters.

Moreover, the directors of a company may manipulate the prices of the company's shares and
debentures on the stock exchange on the basis of inside information and accounting
manipulations. This may result in reckless speculation in shares and even a sound company
may be put into financial difficulties.

8. Lack of Secrecy:
Under the Companies Act, a company is required to disclose and publish a variety of
information on its working. Widespread publicity of affairs makes it almost impossible for
the company to retain its business secrets. The accounts of a public company are open for
inspection to public.

9. Social Evils:
Giant companies may give rise to monopolies, concentration of economic power in a few
hands, interference in the political system, lack of industrial peace, etc.

Suitability:

Despite its drawbacks, the company form of organisation has become very popular,
particularly for large business concerns. This is because its merits far outweigh the demerits.
Many of the drawbacks of a company are mainly due to the weaknesses of the people who
promote and manage companies and not because of the company system as such. The
company organisation has made it possible to accumulate large amounts of capital required
for large scale operations.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

Due to its unique characteristics, the company form of ownership is ideally suited to the
following types of business:

i. Heavy or basic industries like ship-building, coach-making factory, engineering

firms, etc., requiring huge investment of capital.
ii. Large scale operations are very crucial because of economies of scale,
departmental stores, chain stores and enterprises engaged in the construction of
bridges, dams, multistoried buildings, etc.
iii. The line of business involves great uncertainty or heavy risk, e.g.. shipping and
airline concerns.
iv. The law makes the company organisation obligatory, e.g., banking business can
be run only in the form of company.
v. The owners of the business want to enjoy limited liability.

COOPERATIVES

A cooperative organisation is an association of persons, usually of limited means, who

have voluntarily joined together to achieve a common economic end through the
formation of a democratically controlled organisation, making equitable distributions to
the capital required, and accepting a fair share of risk and benefits of the undertaking.

Characteristic features of a cooperative organisation as a form of business organisation:

1. Voluntary Association:
A cooperative society is a voluntary association of persons and not of capital. Any person
can join a cooperative society of his free will and can leave it at any time. When he
leaves, he can withdraw his capital from the society. He cannot transfer his share to
another person.

2. Spirit of Cooperation:
The spirit of cooperation works under the motto, each for all and all for cach. This means that
every member of a cooperative organisation shall work in the general interest of the
organisation as a whole and not for his self-interest. Under cooperation, service is of supreme
importance and self- interest is of secondary importance.

3. Democratic Management:
An individual member is considered not as a capitalist but as a human being and under
cooperation, economic equality is fully ensured by a general rule-one man one vote. Whether
one contributes 50 rupees or 100 rupees as share capital, all enjoy equal rights and equal
duties. A person having only one share can even become the president of cooperative society.

4. Capital:
Capital of a cooperative society is raised from members through share capital Cooperatives
are formed by relatively poorer sections of society. share capital is usually very limited. Since
it is a part of govt. policy to encourage cooperatives, a cooperative society can increase its
capital by taking loans from the State and Central Cooperative Banks:
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

5. Fixed Return on Capital:

In a cooperative organisation, we do not have the dividend hunting element. In a consumers'
cooperative store, return on capital is fixed and it is usually not more than 12 p.c per annum.
The surplus profits are distributed in the form of bonus but it is directly connected with the
amount of purchases by the member in one year.

6. Cash Sale
In a cooperative organisation "cash and carry system" is a universal feature. In the absence of
adequate capital, grant of credit is not possible. Cash sales also avoided risk of loss due to
bad debts and it could also encourage the habit of thrift among the members.

7. Moral Emphasis:
A cooperative organisation generally originates in the poorer section of population; hence
more emphasis is laid on the development of moral character of the individual member. The
absence of capital is compensated by honesty, integrity and loyalty. Under cooperation,
honesty is regarded as the best security. Thus, cooperation prepares a band of honest and
selfless workers for the good of humanity.

Types of Cooperatives

Cooperatives Societies are of six types.

1. Consumer Cooperatives are formed by people who want to buy goods of daily use.
2. Producer Cooperatives are formed to protect small producers from exploitation
3. Marketing Cooperatives are formed to protect produces from exploitation by middlemen
when they market their products.
4. Housing Cooperatives are formed to provide housing facility to its members.
5. Credit Cooperatives provide credit to the needy ones and
6. Farming Cooperatives are formed to carry on work jointly and share the returns.

Advantages of Cooperative Form of Business:

A cooperative organisation usually commands the following advantages:

1. Cost saving:
The voluntary service rendered by members themselves reduces the operating cost to a great
extent. Consequently, the managerial cost is practically nil in most cases, Middleman's profit
is also very low as the consumer members control their own supplies.

2. Avoidance of wastes:
There is no danger of speculation due to mis-matching of demand and supply and losses
arising there-from. Since de-mand and supply are well- matched, excess production and
accumulation of unnecessary stocks can be avoided. These result in smaller working capital
requirement, lower risk and ensuring high liquidity.
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

3. Fiscal concessions:
It enjoys various advantages associated with tax exemptions, financial assistance, lower
stamp and registration fees largely due to its social character. State control gives it a sense of
stability and enables it to hold its operation in check.

4. Economy:
Overhead expenses including marketing costs virtually do not exist. This very fact enables
cooperative societies to act as a cheap source of supply of certain essential commodities.

5. Development of human value:

Emphasis on moral character and development of personal qualities in cooperatives make
them ideal organisations for the development of human value. It imparts moral and educative
values to the everyday life of members and fosters a sense of fellow feeling among them, an
essential pre- requisite for better living.

6. Democratic management:
Cooperative societies also boast for democratic management, thereby reducing inequalities
and carrying on a sense of welfare for all its members. This, in its turn, enables such societies
to achieve a pragmatic compromise between radical communism and extreme capitalism.

7. Consumer protection:
Co-operative forms of organisations are suitable both for poor people as also the backward
classes. This very fact provides them an opportunity to satisfy their own needs and wants, and
protect them from the exploitation of traders, speculators and black-marketers.

Disadvantages of Cooperative Form of Business:

Although enjoying so many advantages, the cooperative form of organisation like all other
forms has certain limitations or draw-backs.
These are the following:

1. Lack of efficiency:
On account of lack of business experience and managerial skills among the members, the
business of a co-operative is not conducted efficiently. It is handicapped by the fact that there
is often need to seek help from experts.
Such help is needed for two reasons:
(a) Limited means and
(b) Social character (ie., promoting the welfare of members).

2. Personal gain:
Cooperative organisations live on the spirit of cooperation which unfortunately gets diluted
with the passage of time and members are often found to indulge in activities promoting their
personal gains behind the veil of such societies. Common interest gradually recedes in the
background and individual interest takes its place.

3. Lack of funds:
Cooperative societies also suffer from lack of funds and capital raising
 DAYANANDA SAGAR ACADEMY OF TECHNOLOGY & MANAGEMENT
Opp. Art of Living, Udayapura, Kanakapura Road, Bangalore- 560082
Affiliated to Visvesvaraya Technological University, Belagavi and Approved by AICTE, New Delhi
Department of Management Studies

ability as enjoyed by big business houses.

This is attributable to a number of factors such as:
i. Non-transferability of shares.
ii. Limits to dividends.
iii. Limits to the number of shareholdings, and above all
iv. Non-profit seeking objective.

These factors count a lot at the end inasmuch as investors are interested in maximising their
own gain.

4. High cost:
Moreover, most cooperative organisations operate on a very small scale. They also adopt
labour-intensive technique of production. So they cannot enjoy economies of scale and
reduce cost even in the long run' Moreover, due to lack of managerial expertise they cannot
introduce mod-ern methods) of cost reduction and cost control.

5. Internal rivalries:
internal rivalries and factions often transform such organisations into a debating body instead
of a united, joint and cohesive front which forms the very basis of cooperation.

6. Lack of incentives:
Furthermore, the complete absence of monetary motivation also acts as a constraint or the
growth of cooperatives in the long run. So, the society gradually becomes a system devoid of
financial incentives in-acting. lifeless and lethargic. All these acts as a growth-retarding
factor and make a cooperative society a static entity. Moreover, the limited size of the market
for the products of cooperatives creates inefficiency and keeps production cost high.