INTERNAL S O U R C E S OF FUNDS

There are three sources of funding within your business – profits, customers and suppliers.
Profits
Profit management and distribution is the first internal funding source. When a business makes a profit, the owners
have two choices. They can either take the money out of the business or leave it in the business. Money taken out
reduces the capital or equity of the business. However, if the owner chooses to leave the profits in the business, the
capital increases and can be used to finance the expansion of the business. Even more important, in inflationary
times, these retained profits can be used to offset the increased replacement costs of both current and fixed assets.
Profits are like the interest on a savings account. If you take the interest out of your savings account every year, the
balance of the account will grow only if you add more money. However, if you leave the interest in the account, then it
starts to compound and your account balance grows faster.
As an internal source of finance, assets and liability management must also be carefully watched. If an item is stock
is a slow mover, you may wish to sell it at a discount and stop ordering it. You might also consider selling some of
your fixed assets in favour of a less costly alternative in order to generate cash. For example, it might be cheaper to
reimburse your employees for the use of their personal cars rather than buy or lease vehicles for the business.
For an example of liabaility management see details under the heading “Suppliers Credit”.
Customers
You can raise money from your customers by expediting your collections from them. If you can get money moving
into your business faster, you will have more available for your needs. For instance, if your customers pay you
quickly, you will have the cash necessary to take advantage of cash or quantity discounts. These discounts can
reduce the cost of your merchandise and thereby increase your profits.
You can increase customer collections in two ways. Firstly, you can encourage partial payments on long term projects where
appropriate. Secondly, you can put an aggressive credit collection policy into effect. This should reduce the number of bad
debts that you might acquire as well as encourage your customers to pay their debts quickly. Both of these methods will
increase your cash flow.
Suppliers’ credit
This is an excellent source of low –or no-cost money. Suppliers may be willing to extend interest- free credit on
purchases of goods or services to well established customers. This means that you may be able to order, obtain
delivery, and sell an item before you have to pay for it. This is the same as an interest free loan. To keep this source
available to you, however, it is essential that you build and safeguard your relationships with your suppliers carefully.
Summary
The risk involved in using internal sources is normally very low. However, you must be alert to do some dangers. For
example, you need to be careful that you do not alienate your customers with an overly aggressive credit policy. Also,
you should not convert to cash those that are productive and necessary for the effective operation of your business.
Your stock has to be broad enough to3

Financial ManagementAssi gnment

satisfy normal customer demand. Internal sources thus give maximum flexibility, as long as they
are used carefully.
Finally, it should be noted that the availability of internal funds depends on circumstances and you may need to
supplement with external funds. However, the firm that makes full use of its internal funds by carefully managing all of
its assets and controlling its costs will find that it is much more attractive to external sources of funds. This should
make it easier to raise money when it is needed.
EXTERNAL SOURCES OF FUNDS
Equity
Equity is one of the two external funding sources available to you. Equity funds are those generated by the invested
capital of a firm. The best source of start-up funds is equity and if you do not have the funds available personally, you
should look to other sources such as partners, co- members in a close corporation, or co-shareholders in a private
company. Of course, if you want to “go it alone” or cannot find willing investors, you may need to resort to borrowing
(debt).
Remember, however, that you will encourage financial backing from outsiders if you show that you are making an
adequate financial contribution yourself. One of the causes of applications for finance being rejected is the failure by
the owners of the business to make an adequate personal capital contribution. Your potential financial backer may
regard this as lack of commitment.
Borrowing (debt)
The prospects of a small business depend almost entirely on the ability, energy and character of the person in
charge. Whoever supplies the business with debt finance is in fact risking his capital on the accuracy of his
judgement of the personal capacity of the owner of the business.
Thus, however good the small business manager may be, only those who have had the opportunity to become
closely acquainted with him are likely to have the necessary confidence to entrust him with their money.
The amount of cash required by you is likely to be raised in direct proportion to your finacier’s willingness to invest
based on his assessment of your training, experience, expertise, etc. Every financier will have his own individual
approach to the client, but if one takes the average bank manager as an example, one thing is certain: the banker
regards his relationship with his client as a partnership and, like all good partners, he is trying to be as difficult as
possible or to make the maximum amount of money out of his customer.
The banker knows that success is dependant upon the success of his client and the building of a long term
relationship between the bank and the client and the building of a long term relationship between the bank and the
client. With this in mind, the relationship with your banker should be one of complete honesty. Always keep your bank
manager informed – if things are going wrong, tell him; if things are going right, also tell him! In this way both parties
will be better equipped to make progress into the future.
4

Financial ManagementAssi gnment

SHORT –TERM SOURCES OF DEBT FINANCE
The most common forms are:
Bank overdraft
This is probably the most available and appropriate source of short-term borrowings. Subsequently to negotiation, the
bank allows the borrower to overdraw his account up to a specified limit, which is reviewed on a regular basis,
normally annually. This gives the entrepreneur the flexibility of altering his financing requirements from day to day
according to his cash flow.
With overdrafts, interest is calculated on the daily outstanding balance. This means that no interest is paid on any
unutilized portion of the facility. Interest rates charged fluctuate with the prime rate and this facility is generally used
for financing increases in working capital. However, it is also useful when bridging finance is required where a gap
exists between a long-term debt and the long- term source of finance becoming available. It is important to realize
that bank overdrafts are repayable on demand.
Factoring
Factoring is a term referring to the raising of funds by the sale or assign-ment of book debts to a third person i.e. a
factor. The sale is normally with recourse to the “seller” for uncollectable debts. It may include all or some of the debts
sold. The system may require the debtor to pay direct to the factor or via the original creditor as an agent for the
factor, and completes the transaction as agent of the factor. This latter method has the advantage of maintaining the
confidentiality of the arrangement between the seller and the factoring house.
Factoring is a very convenient method of financing shortages in working capital and is frequently an attractive
proposition to a new business faced with a substantial growth in sales which need to be financed. However, one
needs to ensure that gross income margins generated by these sales can satisfactory absorb the costs of the
factoring procedure.
An additional advantage of factoring accrues to the seller by the possible savings in staff and paperwork associated
with maintaining accounts and monitoring debtors. Furthermore, cash is received immediately and the seller is not
obliged to include a discount for prompt payment. Most banks have factoring divisions.
Shippers finance
A shipper (or customer) is a financial institution which provides finance and a host of other services
to its clients.Today, the functions of the confirming houses take the following basic forms:
•
Providing working capital:The confirmer provides facilities to clients, to create additional
working capital and enable the client to finance his stock and receivables.
Sophisticated forms of finance are provided which can briefly be summarized into three broad
categories:
•
An overseas purchase facility.
•
A local purchase facility.
•
The discounting of customers’ bills.
•

Providing services:The confirmer attends to the physical handling of the goods and the documentation relative
thereto, and provides specialized services in order to expedite receipt and reduce the cost of imports into South
Africa.
•

Providing backing, assistancr and financial expertise:The confirmer backs and assists the client with the technical and
credit expertise that the confirming house’s management possesses, thereby increasing profitability and thus helping
companies to grow from small to large organizations.

MEDIUM-TERM SOURCES OF DEBT FINANCE

In financial language, ‘medium-term’ can be thought of as constituting a broad and ill-defined border between short-
term and long-term. As a result, this type of finance has a variety of applications such as financing additional working
capital, acquisition of fixed assets, etc.
Medium-term loans
A common form of finance is the “medium-term loan” which normally provides finance for up to five years and in
accordance with a strict set of conditions outlined in a term loan letter of offer by the financial institution and accepted
by the client.
Generally the lender will require security for the loan and seek to entrench the safety of the loan by imposing certain
restrictions on the borrower, such as maximum permissible equity to debt and working capital ratios, and limitations
on the sale or pledge of assets and payment of dividends.
Term loans are normally tailored to meet the particular cash flow requirements of a business. They
are used for the finance of both current assets and fixed assets.
Instalment sale
Previously known as Hire Purchase, the most common application is to finance the acquisition of vehicles or
equipment. In terms of the regulations in the Credit Agreements Act, a deposit is normally required and, depending
on the acquisition, the period for payment is fixed. The goods purchased are registered in the owner’s name and are
always taken as prime security for the debt.
Leasing
Leasing is a method of reducing capital funding requirements. Instead of acquiring finance to purchase fixed assets,
the process is cut short by obtaining the use but not ownership of the required assets in return for a periodic lease
payment.
Leasing, based on the principle that income is earned from the use of an asset, not the ownership,

provides the following advantages:

Cash resources may be released for more profitable trading and for the provision of working capital.

Maintenance costs are reduced to a minimum by immediate replacement with new equipment at the
end of the lease period.
Plant and equipment are financed over a period directly related to their productive capacity and
useful life.
Budgeting is simplified, as the monthly cash flows are known, as is the date when the equipment
must be replaced.
Rental payments are deducted in full for tax purposes. These payments are a charge against
profits before tax, whereas Instalment sale payments are paid out of income after tax.
6

Financial ManagementAssi gnment

LONG-TERM SOURCES OF FINANCE
Long-term debt finance
Into this category fall building societies and insurance companies. Insurance company policy holders can, under
certain conditions, borrow money against the surrender value of their policies and this may be one way of raising
capital for the new venture of your choice. Building societies, on the other hand, may be open to entertaining your
proposal for long-term loan against the security of your private residence. These funds could then be injected into
your business.
Participation bonds
Bond finance for up to 20 years can be arranged for the erection of commercial/industrial property or against
commercial/industrial premises owned by you. No capital (i.e. interest only) is repaid for the first five years. Thereafter
the loan is repaid in annual instalments. For bond purposes the value of the property is based on its revenue-
producing potential and not on the replacement or intrinsic value of the property.
The long-term sources of finances can be raised from the following sources:
•
Share capital or Equity Share.
•
Preference shares.
•
Retained earnings.
•
Debentures/Bonds of different types.
•
Loans from financial institutions.
•
Loan from State Financial Corporation.
•
Loans from commercial banks.
•
Venture capital funding.
•
Asset securitisation.
•
International
Conclusion
As you negotiate for your financial needs, remember that self-confidence and realisms will play an important part in
your negotiating ability with financiers. Success or failure of your plans will ultimately rest with you.
Finally, bear in mind that financial institutions are eager to put their money into enterprises which
point to successful growth. Capitalize on this to your long-term benefit

Share capital
From Wikipedia, the free encyclopedia
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Share capital or issued capital (UK English) or capital stock (US English)[1] refers to the
portion of a company's equity that has been obtained (or will be obtained) by trading stock to a
shareholder for cash or an equivalent item of capital value. For example, a company can set aside
share capital, to exchange for computer servers instead of directly purchasing the servers from
existing equity.

Share capital usually comprises the nominal values of all shares issued, less those repurchased by
the company. It includes both common stock (ordinary shares) and preferred stock (preference
shares). If the market value of shares is greater than the their nominal value (value at par), the
shares are said to be at a premium (called share premium, additional paid-in capital or paid-in
capital in excess of par).

The paid-up capital does not speak about the shares.

Types of Share Capital

 Authorised Share Capital is also referred to, at times, as registered capital. This is the
total of the share capital which a limited company is allowed (authorized) to issue to its
shareholders.
 Issued Share Capital is the total of the share capital issued to shareholders.
 Called up Share Capital is the total amount of issued capital for which the shareholders
are required to pay.
 Paid up Share Capital is the amount of share capital paid by the shareholders.
 Subscribed Capital is the portion of the issued capital, which has been subscribed by all
the investors including the pu

Meaning: Preference shares are those shares which are given preference as regards to payment of

dividend and repayment of capital. Preference shareholders are given preference over equity

shareholders as in the case of winding up of the company, their capital is paid back first and then the

equity shareholders are paid. Preference shareholders cannot exercise their voting rights on all the

matters. They can vote only on the matters affecting their own interest.
Features of Preference Shares:

 Return on investment: Preference shares are given preference to get a return on investment

i.e. dividend. they are paid dividend first out of the profits made by a company.

 Return of capital: These shareholders are paid their capital first in case of winding up of the

company.

 Fixed dividend:Preference shares have a fixed rate of dividend and that is the reason they

are called fixed income securities. Whether the company has low or high profits, they are

entitled only to a fixed rate of dividend.

 Non-participation in prosperity: On account of fixed dividends, these shares do not have

any change to share in the prosperity of the company's business. (except in case of

participating preference shares.)

 Non-participation in management: Preference shareholders do not participate in the

management of the company's affairs.

In accounting, retained earnings refers to the portion of net income which is retained by the
corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a
loss, then that loss is retained and called variously retained losses, accumulated losses or
accumulated deficit. Retained earnings and losses are cumulative from year to year with losses
offsetting earnings.

Retained earnings are reported in the shareholders' equity section of the balance sheet.
Companies with net accumulated losses may refer to negative shareholders' equity as a
shareholders' deficit. A complete report of the retained earnings or retained losses is presented in
the Statement of Retained Earnings or Statement of Retained Losses.

Stockholders' equity
When total assets are greater than total liabilities, stockholders have a positive equity (positive
book value). Conversely, when total liabilities are greater than total assets, stockholders have a
negative stockholders' equity (negative book value) — also sometimes called stockholders'
deficit. A stockholders' deficit does not mean that stockholders owe money to the corporation as
they own only its net assets and are not accountable for its liabilities. It means that the value of
the assets of the company must rise above its liabilities before the stockholders hold positive
equity value in the company. Liabilities that exceed assets is the classic definition of bankruptcy.

Dividends
The decision of whether a firm should retain net income or have it paid out as dividends depends
on several factors including, but not limited to the:

 Tax treatment of dividends; and

 Funds required for reinvestment in the corporation (called retention).

Debenture
In law, a debenture is a document that either creates a debt or acknowledges it. In corporate
finance, the term is used for a medium- to long-term debt instrument used by large companies to
borrow money. In some countries the term is used interchangeably with bond, loan stock or
note.

Debentures are generally freely transferable by the debenture holder. Debenture holders have no
rights to vote in the company's general meetings of shareholders, but they may have separate
meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to
them is a charge against profit in the company's financial statements.

Convertibility
There are two types of debentures:

1. Convertible debentures, which are convertible bonds or bonds that can be converted
into equity shares of the issuing company after a predetermined period of time.
"Convertibility" is a feature that corporations may add to the bonds they issue to make
them more attractive to buyers. In other words, it is a special feature that a corporate bond
may carry. As a result of the advantage a buyer gets from the ability to convert;
convertible bonds typically have lower interest rates than non-convertible corporate
bonds.
2. Non-convertible debentures, which are simply regular debentures, cannot be converted
into equity shares of the liable company. They are debentures without the convertibility
feature attached to them. As a result, they usually carry higher interest rates than their
convertible counterparts.

Small business loans are loans that help people to start a business or to put funds into a
business that needs money in a certain stage of development. Small business loans are
probably the easiest kind of loans to avail. Entrepreneurs in need of money do not have to worry
at all, as hundreds of financial institutions offer loans for small businesses ranging from 10,000
USD to even 50,000 USD.
3. The Internet and its globalization have tremendously helped in reaching out to more people
across the world, especially those in need of money for their businesses.
4. Anyone who needs money will naturally approach their banks first. At banks there may be a
lot of paperwork involved, and needs a lot of preparation before approaching the manager at
the bank.
5. Small business loans will require a full financial plan complete with cash projection charts
that the banks can evaluate when approached. Most banks will take the business as a security.
While a lot of banks encourage new customers dealing with small businesses, some may
insist on a credit history.
6. A financial institution that is not a bank will also give small business loans with good
offers. Depending on the amount and credit history of the applicant, they may not take any
security against the money. Such institutions are as professional as banks, and may approve
loans within 48 hours of application. They charge a reasonable annual interest rate of 9
percent.
7. Most institutions charge a loan fee that will be deducted at the time of disbursement.
Applicants must ensure that they do have any faulty repayment history that may include high
fees for late payments. People who have filed for bankruptcy will not be considered for loans.
Banks that issue small business loans may insist that the entrepreneur should have owned
the business for at least two to three years before approving his application.
8. Institutions that give small business loans will have professional business loan consultants
who look over the project proposal of the applicant and probably guide them by offering a
better approach if required. Applicants need not fear that banks may ask for any of their
assets as collateral. Collateral taken will be the asset created out of the bank’s funds.
9. Most financial institutions that lend small business loans encourage any kind of business
that is obviously ethical in nature. People can also apply for loans if they want to buy out a
small business. The applicant will have to show cash projections and convince the bank that
he can turn in a profit in a certain period of time.
10. Loans for small business organizations are such as professional services, manufacturing
units, restaurants and other industries are available. In most countries, the government
grants loans especially to women who want to begin their own enterprise. They encourage
women to be more independent and also allow them to help in the growth of the country’s
economy. Other than government grants, there are also private organizations exclusively for
women, that lend money for their business.
11. Applicants need not worry about guarantors either. The business they run is taken as the
guarantee by the bank. Entrepreneurs will also be advised about the industry they are
foraying into. A smart entrepreneur will get the help of a financial analyst to help him compare
loans and institutions, and which one offers the best services and interest rates before
applying for his loan.

 
  
 
 
 

Commercial bank

A commercial bank (or business bank) is a type of financial institution and intermediary. It is a
bank that provides transactional, savings, and money market accounts and that accepts time
deposits.[1]

After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks
engage only in banking activities, whereas investment banks were limited to capital market
activities. As the two no longer have to be under separate ownership under U.S. law, some use
the term "commercial bank" to refer to a bank or a division of a bank primarily dealing with
deposits and loans from corporations or large businesses. In some other jurisdictions, the strict
separation of investment and commercial banking never applied. Commercial banking may also
be seen as distinct from retail banking, which involves the provision of financial services direct
to consumers. Many banks offer both commercial and retail banking services.

Origin of the word

The name bank derives from the Italian word banco "desk/bench", used during the Renaissance
by Florentine bankers, who used to make their transactions above a desk covered by a green
tablecloth.[2] However, traces of banking activity can be found even in ancient times.

In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders
would set up their stalls in the middle of enclosed courtyards called macella on a long bench
called a bancu, from which the words banco and bank are derived. As a moneychanger, the
merchant at the bancu did not so much invest money as merely convert the foreign currency into
the only legal tender in Rome- that of the Imperial Mint.[3]

The role of commercial banks

Commercial banks engage in the following activities:

 processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other

means
 issuing bank drafts and bank cheques
  accepting money on term deposit
 lending money by overdraft, installment loan, or other means
 providing documentary and standby letter of credit, guarantees, performance bonds, securities
underwriting commitments and other forms of off balance sheet exposures
 safekeeping of documents and other items in safe deposit boxes
 sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar
financial products as a “financial supermarket”
 cash management and treasury services
 merchant banking and private equity financing
 traditionally, large commercial banks also underwrite bonds, and make markets in currency,
interest rates, and credit-related securities, but today large commercial banks usually have an
investment bank arm that is involved in the mentioned activities.

Venture capital financing

Venture capital financing is a type of financing by venture capital: the type of private equity
capital is provided as seed funding to early-stage, high-potential, growth companies and more
often after the seed funding round as growth funding round (also referred as series A round) in
the interest of generating a return through an eventual realization event such as an IPO or trade
sale of the company.

To start a new startup company or to bring a new product to the market, the venture may need to
attract financial funding. There are several categories of financing possibilities. If it is a small
venture, then perhaps the venture can rely on family funding, loans from friends, personal bank
loans or crowd funding.

For more ambitious projects, some companies need more than what mentioned above, some
ventures have access to rare funding resources called Angel investors. These are private investors
who are using their own capital to finance a ventures’ need. The Harvard report [1] by William R.
Kerr, Josh Lerner, and Antoinette Schoar tables evidence that angel-funded startup companies
are less likely to fail than companies that rely on other forms of initial financing. Apart from
these investors, there are also venture capitalist firms (VC-firms) who are specialized in
financing new ventures against a lucrative return.

When a venture approaches the last one, the venture is going to do more than negotiating about
the financial terms. Apart from the financial resources these firms are offering; the VC-firm also
provides potential expertise the venture is lacking, such as legal or marketing knowledge. This is
also known as Smart Money.

Venture Capital Financing Process

As written in the previous paragraph, there are several ways to attract funding. However in
general, the venture capital financing process can be distinguished into five stages;

1. The Seed stage

 2. The Start-up stage
3. The Second stage
4. The Third stage
5. The Bridge/Pre-public stage

Of course the stages can be extended by as many stages as the VC-firm thinks it should be
needed, which is done in practice all the time. This is done when the venture did not perform as
the VC-firm expected. This is generally caused by bad management or because the market
collapsed or a bit of both (see: Dot com boom). The next paragraphs will go into more details
about each stage.

The following schematics shown here are called the process data models. All activities that find
place in the venture capital financing process are displayed at the left side of the model. Each
box stands for a stage of the process and each stage has a number of activities. At the right side,
there are concepts. Concepts are visible products/data gathered at each activity. This diagram is
according to the modeling technique founded by Professor Sjaak Brinkkemper of the University
of Utrecht in the Netherlands.

The Seed Stage

This is where the seed funding takes place. It is considered as the setup stage where a person or a
venture approaches an angel investor or an investor in a VC-firm for funding for their
idea/product. During this stage, the person or venture has to convince the investor why the
idea/product is worthwhile. The investor will investigate into the technical and the economical
feasibility (Feasibility Study) of the idea. In some cases, there is some sort of prototype of the
idea/product that is not fully developed or tested.

If the idea is not feasible at this stage, and the investor does not see any potential in the
idea/product, the investor will not consider financing the idea. However if the idea/product is not
directly feasible, but part of the idea is worth for more investigation, the investor may invest
some time and money in it for further investigation.

Example

A Dutch venture named High 5 Business Solution V.O.F. wants to develop a portal which allows
companies to order lunch. To open this portal, the venture needs some financial resources, they
also need marketeers and market researchers to investigate whether there is a market for their
idea. To attract these financial and non-financial resources, the executives of the venture decide
to approach ABN AMRO Bank to see if the bank is interested in their idea.

After a few meetings, the executives are successful in convincing the bank to take a look in the
feasibility of the idea. ABN AMRO decides to put a few experts for investigation. After two
weeks time, the bank decides to invest. They come to an agreement of investigate a small amount
of money into the venture. The bank also decides to provide a small team of marketeers and
market researchers and a supervisor. This is done to help the venture with the realisation of their
idea and to monitor the activities in the venture.

Risk

At this stage, the risk of losing the investment is tremendously high, because there are so many
uncertain factors. From research, we know that the risk of losing the investment for the VC-firm
is around the 66.2% and the causation of major risk by stage of development is 72%. These
percentages are based on the research done by Ruhnka, J.C. and Young, J.E.

The Start-up Stage

If the idea/product/process is qualified for further investigation and/or investment, the process
will go to the second stage; this is also called the start-up stage. At this point many exciting
things happen. A business plan is presented by the attendant of the venture to the VC-firm. A
management team is being formed to run the venture. If the company has a board of directors, a
person from the VC-firms will take seats at the board of directors.

While the organisation is being set up, the idea/product gets its form. The prototype is being
developed and fully tested. In some cases, clients are being attracted for initial sales. The
management-team establishes a feasible production line to produce the product. The VC-firm
monitors the feasibility of the product and the capability of the management-team from the
Board of directors.

To prove that the assumptions of the investors are correct about the investment, the VC-firm
wants to see result of market research to see whether the market size is big enough, if there are
enough consumers to buy their product. They also want to create a realistic forecast of the
investment needed to push the venture into the next stage. If at this stage, the VC-firm is not
satisfied about the progress or result from market research, the VC-firm may stop their funding
and the venture will have to search for another investor(s). When the cause relies on handling of
the management in charge, they will recommend replacing (parts of) the management team.

Example

Now the venture has attracted an investor, the venture need to satisfy the investor for further
investment. To do that, the venture needs to provide the investor a clear business plan how to
realise their idea and how the venture is planning to earn back the investment that is put into the
venture, of course with a lucrative return.
Together with the market researchers, provided by the investor, the venture has to determine how
big the market is in their region. They have to find out who are the potential clients and if the
market is big enough to realise the idea.

From market research, the venture comes to know that there are enough potential clients for their
portal site. But there are no providers of lunches yet. To convince these providers, the venture
decided to do interviews with providers and try to convince them to join.

With this knowledge, the venture can finish their business plan and determine a pretty good
forecast of the revenue, the cost of developing and maintaining the site and the profit the venture
will earn in the following five years.

After reading the business plan and consulting the person who monitors the venture activities,
the investor decides that the idea is worth for further development.

Risk

At this stage, the risk of losing the investment is shrinking, because the uncertainty is becoming
clearer. The risk of losing the investment for the VC-firm is dropped to 53.0%, but the causation
of major risk by stage of development becomes higher, which is 75.8%. This can be explained by
the fact because the prototype was not fully developed and tested at the seed stage. And the VC-
firm has underestimated the risk involved. Or it could be that the product and the purpose of the
product have been changed during the development.

The Second Stage

At this stage, we presume that the idea has been transformed into a product and is being produced and
sold. This is the first encounter with the rest of the market, the competitors. The venture is trying to
squeeze between the rest and it tries to get some market share from the competitors. This is one of the
main goals at this stage. Another important point is the cost. The venture is trying to minimize their
losses in order to reach the break-even.

The management-team has to handle very decisively. The VC-firm monitors the management
capability of the team. This consists of how the management-team manages the development
process of the product and how they react to competition.

If at this stage the management-team is proven their capability of standing hold against the
competition, the VC-firm will probably give a go for the next stage. However, if the management
team lacks in managing the company or does not succeed in competing with the competitors, the
VC-firm may suggest for restructuring of the management team and extend the stage by redoing
the stage again. In case the venture is doing tremendously bad whether it is caused by the
management team or from competition, the venture will cut the funding.

Example
The portal site needs to be developed. (If possible, the development should be taken place in
house. If not, the venture needs to find a reliable designer to develop the site.) Developing the
site in house is not possible; the venture does not have this knowledge in house. The venture
decides to consult this with the investor. After a few meetings, the investor decides to provide the
venture a small team of web-designers. The investor also has given the venture a deadline when
the portal should be operational. The deadline is in 3 months.

In the meantime, the venture needs to produce a client-portfolio, who will provide their menu at
the launch of the portal site. The venture also needs to come to an agreement how these providers
are being promoted at the portal site and against what price.

After 3 months, the investor requests the status of development. Unfortunately for the venture,
the development did not go as planned. The venture did not make the deadline. According to the
one who is monitoring the activities, this is caused by the lack of decisiveness by the venture and
the lack of skills of the designers.

The investor decides to cut back their financial investment after a long meeting. The venture is
given another 3 months to come up with an operational portal site. Three designers are being
replaced by a new designer and a consultant is attracted to support the executives’ decisions. If
the venture does not make this deadline in time, they have to find another investor.

Luckily for the venture, with the come of the new designer and the consultant, the venture
succeeds in making the deadline. They even have 2 weeks left before the second deadline ends.

Risk

At this stage, the risk of losing the investment still drops, because the venture is capable to
estimate the risk. The risk of losing the investment for the VC-firm drops from 53.0% to 33.7%,
and the causation of major risk by stage of development also drops at this stage, from 75.8% to
53.0%. This can be explained by the fact that there is not much developing going on at this stage.
The venture is concentrated in promoting and selling the product. That is why the risk decreases.
[3]

The Third Stage

This stage is seen as the expansion/maturity phase of the previous stage. The venture tries to expand
the market share they gained in the previous stage. This can be done by selling more amount of the
product and having a good marketing campaign. Also, the venture will have to see whether it is possible
to cut down their production cost or restructure the internal process. This can become more visible by
doing a SWOT analysis. It is used to figure out the strength, weakness, opportunity and the threat the
venture is facing and how to deal with it.

Except that the venture is expanding, the venture also starts to investigate follow-up products and
services. In some cases, the venture also investigates how to expand the life-cycle of the existing
product/service.
At this stage the VC-firm monitors the objectives already mentioned in the second stage and also
the new objective mentioned at this stage. The VC-firm will evaluate if the management-team
has made the expected reduction cost. They also want to know how the venture competes against
the competitors. The new developed follow-up product will be evaluated to see if there is any
potential.

Example

Finally the portal site is operational. The portal is getting more orders from the working class
every day. To keep this going, the venture needs to promote their portal site. The venture decides
to advertise by distributing flyers at each office in their region to attract new clients.

In the meanwhile, a small team is being assembled for sales, which will be responsible for
getting new lunchrooms/bakeries, any eating-places in other cities/region to join the portal site.
This way the venture also works on expanding their market.

Because of the delay at the previous stage, the venture did not fulfil the expected target. From a
new forecast, requested by the investor, the venture expects to fulfil the target in the next quarter
or the next half year. This is caused by external issues the venture does not have control of it.
The venture has already suggested to stabilise the existing market the venture already owns and
to decrease the promotion by 20% of what the venture is spending at the moment. This is
approved by the investor.

Risk

At this stage, the risk of losing the investment for the VC-firm drops with 13.6% to 20.1%, and
the causation of major risk by stage of development drops almost by half from 53.0% to 37.0%.
However at this stage it happens often that new follow-up products are being developed. The risk
of losing the investment is still decreasing. This may because the venture rely its income on the
existing product. That is why the percentage continuous drop.[4]The Bridge/Pre-public Stage In
general this stage is the last stage of the venture capital financing process. The main goal of this
stage is to achieve an exit vehicle for the investors and for the venture to go public. At this stage
the venture achieves a certain amount of the market share. This gives the venture some
opportunities like for example:

 Hostile take over

 Merger with other companies;
 Keeping away new competitors from approaching the market;
 Eliminate competitors.

Internally, the venture has to reposition the product and see where the product is positioned and
if it is possible to attract new Market segmentation. This is also the phase to introduce the
follow-up product/services to attract new clients and markets.

As we already mentioned, this is the final stage of the process. But most of the time, there will be
an additional continuation stage involved between the third stage and the Bridge/pre-public
stage. However there are limited circumstances known where investors made a very successful
initial market impact might be able to move from the third stage directly to the exit stage. Most
of the time the venture fails to achieves some of the important benchmarks the VC-firms aimed.

Example

Now the site is running smoothly, the venture is thinking about taking over the competitors’
website happen.nl. The site is promoting restaurants and is also doing business in online ordering
food. This proposal is being protested by the investor, because it may cost a lot of the ventures’
capital. The investor suggests a merge instead.

To settle down their differences, the venture requested an external party to investigate into the
case. The result of the investigation was a take-over. After reading the investigation, the investor
agrees to it and happen.nl is being taken over by the venture. With the take-over of a competitor,
the venture has expanded its’ services.

Seeing the ventures’ result, the investor comes to the conclusion that the venture still have not
reach the target that was expected, but seeing how the business is progressing, the investor
decides to extend its’ investment for another year.

Risk

At this final stage, the risk of losing the investment still exists. However, compared with the
numbers mentioned at the seed-stage it is far lower. The risk of losing the investment the final
stage is a little higher at 20.9%. This is caused by the number of times the VC-firms may want to
expand the financing cycle, not to mention that the VC-firm is faced with a dilemma of whether
to continuously invest or not. The causation of major risk by this stage of development is 33%.
This is caused by the follow-up product that is introduced.[5]

At Last
As mentioned in the first paragraph, a VC-firm is not only about funding and lucrative returns,
but it offers also the non-funding issues like knowledge as well as for internal as for external
issues. Also what we see here the further the process goes, the less risk of losing investment the
VC-firm is risking.

Stage at which investment made Risk of loss Causation of major risk by stage of development

The Seed-stage 66.2% 72.0%

The Start-up Stage 53.0% 75.8%

The Second Stage 33.7% 53.0%

The Third Stage 20.1% 37.0%

The Bridge/Pre-public Stage 20.9% 33.0%

Securitization
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For Securitization in International relations, see Securitization (international relations).

Securitization is the financial practice of pooling various types of contractual debt such as
residential mortgages, commercial mortgages, auto loans or credit card debt obligations and
selling said debt as bonds, pass-through securities, or Collateralized mortgage obligation
(CMOs), to various investors. The principal and interest on the debt, underlying the security, is
paid back to the various investors regularly. Securities backed by mortgage receivables are called
mortgage-backed securities, while those backed by other types of receivables are asset-backed
securities. The so-called lower risk of securitised instruments attracts a greater number of
investors seeking to benefit in the process of taking many individual assets and repackaging them
as Collateralized debt obligation.

With the claimed high degree of predictability in large groups and assumed predictability,
investors usually prefer taking on risk, as a herd, rather than the total exposure inherent in direct
investment in individual assets. Unlike general corporate debt, the credit quality of securitised
debt is non-stationary due to changes in volatility that are time- and structure-dependent. If the
transaction is properly structured and the pool performs as expected, the credit risk of all
tranches of structured debt improves; if improperly structured, the affected tranches will
experience dramatic credit deterioration and loss.[1]

Securitization has evolved from its tentative beginnings in the late 1970s to a vital funding
source with an estimated outstanding of $10.24 trillion in the United States and $2.25 trillion in
Europe as of the 2nd quarter of 2008. In 2007, ABS issuance amounted to $3,455 billion in the
US and $652 billion in Europe.[2] WBS (Whole Business Securitization) arrangements first
appeared in the United Kingdom in the 1990s, and became common in various Commonwealth
legal systems where senior creditors of an insolvent business effectively gain the right to control
the company.[3]