ENTREPRENEURIAL DEVELOPMENT

UNIT -5
Finance – meaning
Finance is the process of acquiring capital and making financial decisions for a new business. It
involves the study of resource allocation and value, and the application of financial tools and procedures
to plan, fund, and operate a venture. The primary goal of entrepreneurial finance is to maximize profits
and gain additional funding.
Sources of Finance
Sources of finance are the methods and instruments a business uses to obtain funds for its operations,
growth, and investments. These funds can be used for short-term or long-term purposes.
Types of sources of finance:
Internal Sources: Funds generated within the business, such as by increasing profit, disposing of
surplus inventories, or speeding up collection of receivables.
External Sources: Funds from outside the organisation such as lenders, investors and suppliers.
Some common sources of finance for entrepreneurs include:
• Personal savings: A flexible and debt-free way to fund a business
• Loans from family and friends: A common source of finance for entrepreneurs
• Bank loans: A traditional and commonly used external source of finance
• Equity financing: A way to raise capital by selling the company’s shares to investors
• Venture capital: Private equity funding offered by investors to startups and high-growth
companies
• Public deposits: A traditional source of finance in India, typically accepted for a period of 3
years
• Retained earnings:
• Angel investors:
• Crowdfunding:
• Commercial banks
• Government schemes
Other sources of finance include:
Retained earnings: Companies retain a portion of their earnings and money accumulated through
depreciation charges for future use. Whenever the company wants to replace its existing machinery or
assets, it uses these funds. This forms the internal source of financing for the firm and is readily available
to the firm. This also becomes the most reliable and easily available long term sources of funds for the
company.
Debt capital, Crowdfunding, SME loans, Government assistance, Financial bootstrapping, and
Buyouts.
Venture Capital

• Venture capital refers to the finance provided by venture capitalists, who invest in relatively
new, high growth companies or startups that have a potential to grow and develop into highly
profitable ventures. It has high-risk and high-return characteristics. Therefore, it acts as an
important source of finance for entrepreneurs with new ideas.
• It is basically the money invested by an outside investor to finance a new, growing or troubled
business. The money invested, by capitalists, is in exchange for an equity stake in the business
rather than given as a loan.
Importance of Venture Capital

• It helps new products with modern technology become commercially feasible.

• It promotes export oriented units to earn more foreign exchange.
• It not only provide the financial assistance, but also assist in management, technical and others.
• It strengthens the capital market which not only improves the borrowing concern but also
creates a situation whereby they can raise their own capital through capital market.
• It promotes modern technology through the process where financial institutions encourages
business ventures with new technology.
• Many sick companies get a turn around after getting proper nursing from such Venture Capital
Institutions.
Features of Venture Capital
➢ New Ventures
➢ High-risk investment
➢ High tech projects
➢ Participation in management
➢ Length of Investment
➢ Nature of firms
Advantages of venture capital:
▪ Expansion of company
▪ Expertise joining the company
▪ Better management
▪ No obligation to repay
▪ Value added services
Disadvantages of venture capital:
▪ Complex process
▪ Loss of control
▪ Loss over decisions
▪ No confidentiality
▪ Time taking and uncertain
▪ Long run
Process of venture capital
Pre-seed stage :
Pre seed stage is the time to spend getting the operations off the ground and when it begin to build a
product or service prototype to assess the viability of an idea. During the pre-seed stage, many
entrepreneurs seek out guidance from founders who have had similar experiences. With this advice, can
begin developing a winning business model and a plan for creating a viable company. This is also the
time to hammer out any partnership agreements, copyrights or other legal issues that are central to the
success.
Seed stage:
Seed stage venture capital, where the business is still developing its product idea and business model.
Seed stage investors help startups get off the ground by providing money, strategic advice, and access
to resources. It can develop a business plan, Conduct market research, Hire a team, Develop the product.
Series A stage:
Series A typically is the first round of venture capital financing. A venture funding round is a stage in
which a startup raises capital from investors to grow and scale their business. At this stage, a company
has usually completed its business plan and has a pitch deck emphasizing product-market fit. The
company should Fine-tune your product or service,
i. Expand your workforce,
ii. Conduct additional research needed to support your launch,
iii. Raise the funds needed to execute your plan and attract additional investors.
Series B stage
At the Series B stage, the company is now ready to scale. This stage of venture capital supports actual
product manufacturing, marketing and sales operations. To expand, will likely need a much larger
capital investment than earlier ones. Whereas Series A investors will measure business potential, for
Series B, they’ll want to see actual performance and evidence of a commercially viable product or
service to support future fundraising. Performance metrics give investors confidence that a company
can achieve success on a larger scale.
Series B funding enables to:
i. Grow operations
ii. Meet customer demands
iii. Expand to new markets
iv. Compete more successfully
Series C stage:
When reached the Series C stage, the company on a growth path. A company achieved success, and
incremental funding will help to build new products, reach new markets and even acquire other startups.
It typically requires two to three years to reach this phase on a quick trajectory, and are producing
exponential growth and consistent profitability. To receive Series C and subsequent funding, must have
been well established with a strong customer base. The company also need:
i. Stable revenue stream
ii. History of growth
iii. Desire to expand globally
iv. Mezzanine stage:
Mezzanine stage:
The final stage of VC marks a transition to a liquidity event, either an exit via going public or M&A.
They have reached maturity and now need financing to support major events.
Entering the mezzanine stage — it’s often also called the bridge stage or pre-public stage — means a
full-fledged, viable business. Many of the investors who have helped to reach this level of success will
now likely choose to sell their shares and earn a significant return on their investment.
Exit stage (IPO) :
An IPO, or initial public offering, is the natural progression of funding beyond VCs. It’s the process of
taking a private company public by offering corporate shares on the open market. This can be a very
effective way for a growing startup with proven potential or a long-established company to generate
funds and reward earlier investors, including the founder and team.

Commercial Banks:
A commercial bank is a type of financial institution that provides a wide range of financial services to
individuals, businesses, and governments. Commercial banks are also known as business banks or retail
banks.
Primary Functions:
1. Accepting Deposits: Commercial banks accept deposits from customers, such as savings accounts,
checking accounts, and time deposits.
2. Making Loans: Commercial banks use the deposited funds to make loans to customers, such as
personal loans, mortgages, and business loans.
3. Providing Payment Services: Commercial banks provide payment services, such as checking
accounts, debit cards, and credit cards.
Other Services:
1. Cash Management: Commercial banks offer cash management services, such as account
management, payroll services, and treasury management.
2. Investment Services: Some commercial banks offer investment services, such as brokerage services,
investment advice, and wealth management.
3. Insurance Services: Some commercial banks offer insurance services, such as life insurance, health
insurance, and property insurance.
Types of Commercial Banks:
1. National Banks: National banks are commercial banks that operate across the country, often with
multiple branches.
2. Regional Banks: Regional banks are commercial banks that operate within a specific region or
geographic area.
3. Community Banks: Community banks are small, locally owned commercial banks that serve the
banking needs of a specific community.
Examples of Commercial Banks:
1. JPMorgan Chase
2. Bank of America
3. Wells Fargo
4. Citibank
5. HSBC
Benefits to Entrepreneurs:
1. Access to Capital: Commercial banks provide entrepreneurs with access to capital, helping them to
start or grow their businesses.
2. Flexibility: Banks offer flexible repayment terms, allowing entrepreneurs to manage their cash flows
more effectively.
3. Expertise: Commercial banks have experienced staff who can provide valuable advice and guidance
to entrepreneurs.
Challenges:
1. Collateral Requirements: Commercial banks often require collateral, such as property or equipment,
to secure loans, which can be a challenge for entrepreneurs who lack assets.
2. Interest Rates: Banks charge interest rates on loans, which can increase the cost of borrowing for
entrepreneurs.
3. Regulatory Requirements: Commercial banks are subject to regulatory requirements, which can make
it more difficult for entrepreneurs to access credit.
Government Schemes for entrepreneurs
• MUDRA (Micro Unit Development Refinance Agency)
MUDRA is a public sector financial institution in India. It is a subsidiary of Small Industries
Development Bank of India (SIDBI).
In 2015, Pradhan Mantri MUDRA Yojana (PMMY) scheme was launched to provide loans upto 10
lakhs to the non-corporate, non-farm small and micro enterprises. These loans are classified as MUDRA
loans under PMMY. They are distributed, by Commercial Banks, RRBs, Small Finance Banks,
Cooperative Banks, MFIs and NBFCs. The borrower can approach any of the lending institutions
mentioned above or can apply online through the portal. Under the aegis of PMMY, MUDRA, there are
three products namely “Shishu” (loans upto Rs.50,000), “Kishore” (Loans above Rs.50,001 and upto
Rs.5 lakh) and “Tarun” (loans above Rs.5 lakh upto Rs. 10 lakh). These categories signify the stage of
growth, development and funding needs of the beneficiary micro unit of an entrepreneur.
MUDRA is a refinancing scheme
o Skill Development. Program
o PMEGP
MUDRA Loan is extended to provide income generation and employment creation in Manufacturing,
Services Retail and Agri. Allied Activities. It provides loans at low rates to micro-finance institutions
and non-banking financial institutions which then provide credit to MSMEs. The loans under MUDRA
scheme can be availed only through banks and lending institutions which include:
a) Public Sector Banks
b) Private Sector Banks
c) State operated cooperative banks
d) Rural banks from regional sector
e) Institutions offering micro finance
f) Financial companies other than banks
One can also apply for Mudra Loan online on “Udyamimitra” Portal by registering yourself and your
application shall be viewed by many lenders for credit support.
• PMEGP (Prime Minister’s Employment Generation Programme)
Government of India has introduced a new credit linked subsidy programme called Prime Minister’s
Employment Generation Programme (PMEGP) by merging the two schemes that were in operation,
namely Prime Minister’s Rojgar Yojana (PMRY) and Rural Employment Generation Programme
(REGP) for generation of employment opportunities through establishment of micro enterprises in rural
as well as urban areas. PMEGP will be a central sector scheme to be administered by the Ministry of
Micro, Small and Medium Enterprises (MoMSME). The Scheme will be implemented by Khadi and
village Industries Commission (KVIC), a statutory organization under the administrative control of the
Ministry of MSME as the single nodal agency at the National level. At the State level, the Scheme will
be implemented by State KVIC Directorates, State Khadi and Village Industries Boards (KVIBs) and
District Industries Centres (DICs) through banks.
• UYEGP (Unemployed Youth Employment Generation Programme)
The Micro, Small and Medium Enterprises Department, Government of Tamil Nadu introduced the
scheme “Unemployed Youth Employment Generation Programme” which aims to mitigate the
unemployment problems of socially and economically weaker section of the society, particularly among
the educated and unemployed to become self-employed in their native places itself and to prevent the
mass migration from rural areas to urban areas due to unemployment by setting up Manufacturing /
Service / Business enterprises by availing loan up to the maximum of Rs. 10 lakhs, Rs. 3 lakhs and Rs.
1 lakh respectively with subsidy assistance from the State Government up to 25% of the project cost.
• AIM (Atal Innovation Mission)
AIM is the Government of India’s endeavour to promote a culture of innovation and entrepreneurship,
in technology driven areas. In order to foster curiosity, creativity and imagination right at the school,
Atal Incubation Centres (AICs) are another programme of AIM created to build innovative start-up
businesses as scalable and sustainable enterprises.
• STEP (Support to Training And Employment Programme For Women)
STEP was launched by the Government of India’s Ministry of Women and Child Development to train
women with no access to formal skill training facilities, especially in rural India. The Ministry of Skill
Development & Entrepreneurship and NITI Aayog recently redrafted the Guidelines to reaches out to
all Indian women above 16 years of age To impart skills in several sectors such as agriculture,
horticulture, food processing, handlooms, traditional crafts like embroidery, travel and tourism,
hospitality, computer and IT services.
• TREAD (Trade Related Entrepreneurship Assistance and Development)
To address the critical issues of access to credit among India’s underprivileged women, the TREAD
programme enables credit availability to interested women through non-governmental organizations
(NGOs). As such, women can receive support of registered NGOs in both accessing loan facilities, and
receiving counselling and training opportunities to kick-start proposed enterprises, in order to provide
pathways for women to take up non-farm activities.
• PMKVY (Pradhan Mantri Kaushal Vikas Yojana)
A flagship initiative of the Ministry of Skill Development & Entrepreneurship (MSDE), this is a Skill
Certification initiative that aims to train youth in industry-relevant skills to enhance opportunities for
livelihood creation and employability (Training and Assessment fees are entirely borne by the
Government under this program).
• NATIONAL SKILL DEVELOPMENT MISSION
The seven sub-missions proposed across India are:
i. Institutional Training
ii. Infrastructure
iii. Convergence
iv. Trainers
v. Overseas Employment
vi. Sustainable Livelihoods
vii. Leveraging Public Infrastructure
Business Angels
➢ A Business angel is an independent individual who provides capital for the development of a
business.
➢ The influx of capital can help an idea to develop into a viable company and provide the base to
begin producing the product or service proposed.
➢ This private investor not only provides money, but also generally is interested in becoming
involved in the project by acting as a guide or mentor.
➢ They invest their time as well as provide connections to their larger network in order to help
guide the entrepreneur in the new business venture.
Angel Investors:
Angel investors are easily distinguishable from other types of investors, such as venture capitalists,
through several factors:

• They invest their own money into the project, less than would be invested by a venture
capitalists.
• They make their own decisions concerning investments
• They invest according to the viability of the project, with expectations of future gains
• Their main objectives is to receive a return on their investment.

Role Of An Angel Investor

Angel investors primarily provide capital for startups at early stages in exchange or convertible
debt or equity ownership. Many angel investors invest in companies of the same sectors where
they have the expertise and they help accelerate the growth by providing strategic inputs. As
they often get considerable equity ownership, they also play the role of an active shareholder
in the annual general meetings of the company.

Advantages Of Angel Investors

1. Speed of Approval

Angel funding offers a swift approval process, unencumbered by the bureaucracy and
institutional constraints faced by other funding sources. With fewer layers of decision-makers,
angel investors can quickly navigate through approval and due diligence stages, providing
entrepreneurs with timely access to crucial capital for their ventures.

2. Access to Experience

Access to experience is a key advantage of angel funding. Investors willing to fund a business
often bring valuable industry knowledge and insights. This hands-on experience allows
entrepreneurs to benefit from mentorship, strategic guidance, and practical advice, enhancing
the overall success and growth of their ventures.

3. Personal Involvement

Personal involvement is a distinctive advantage of angel funding. Unlike some other investors,
angel investors are personally vested in the success of the business as they contribute their own
money. This level of engagement motivates them to actively support and advise entrepreneurs,
fostering a collaborative and mutually beneficial relationship for long-term business success.

4. Cash Access

Angel funding provides entrepreneurs with direct and immediate access to cash. Unlike some
funding models that involve staggered disbursements, angel investors often inject a lump sum
of capital into the business. This quick infusion of funds is advantageous for entrepreneurs
seeking rapid growth or addressing urgent financial needs within their ventures.

5. Independence

Independence is a significant advantage of angel funding. Angel investors typically seek

straightforward arrangements, exchanging capital for equity without requiring excessive
control over the business. Unlike venture capital investors, angels are often more ‘hands-off,’
allowing entrepreneurs greater autonomy in decision-making and operational control,
providing a balance between financial support and business independence.

Disadvantages Of Angel Investors

1. Loss of Equity

One notable disadvantage of angel funding is the potential loss of equity for entrepreneurs. In
exchange for the financial support provided by angel investors, entrepreneurs may be required
to relinquish a portion of ownership in their business. This loss of equity can impact decision-
making authority and future profit-sharing, emphasizing the importance of careful negotiation
and consideration during the funding process.

2. Loss of Control

Another drawback of angel funding is the risk of losing some control over the business. While
angel investors may not exert as much influence as venture capitalists, entrepreneurs may still
experience a reduction in decision-making authority. In extreme cases, the investor could even
remove the entrepreneur from a leadership role, highlighting the need for clear terms and
agreements in the funding arrangement.
3. Pressure to Perform

Angel funding comes with the disadvantage of heightened pressure to perform. Since angel
investors invest their own money with the expectation of returns, entrepreneurs can expect
increased scrutiny and a demand for positive business outcomes. This pressure can be a
motivating force, but it also necessitates thorough planning and a commitment to meeting the
investor’s expectations for business growth and success.