SR

(147) Resource Mobilisation | Chapter 6 | EP | One Shot

Chapter 6: Resource Mobilization

  • Central theme: Understanding funding sources for entrepreneurs.

  • Importance of finance in business operations.

Importance of Finance

  • Finance is critical for running a business, considered the lifeblood of any enterprise.

  • Two main types of financial requirements:

    • Fixed Capital Requirements: Needed to set up a new business.

    • Working Capital Requirements: Needed for normal operational expenses.

Sources of Finance

  • An entrepreneur has two main sources of finance:

    • Internal Sources: Funds generated within the business.

      • Examples: Retained earnings, equity shares.

    • External Sources: Funds borrowed from outside the business.

      • Examples: Debentures, loans from banks, public deposits.

Capital Market

  • Defined as a network facilitating the transfer of funds from those who have excess to those who need it.

  • Money Market: Deals with short-term funds (up to 1 year).

  • Capital Market: Deals with medium to long-term funds.

Types of Capital Markets

  • Primary Market: Involves new issues of securities; companies sell directly to public investors.

  • Secondary Market: Involves trading of previously issued securities among investors without the company’s involvement.

Importance of Capital Market

  • Mobilizes resources on a national scale.

  • Facilitates economic growth through supporting business expansions.

  • Provides effective allocation of funds and encourages industrialization.

Methods of Raising Capital in Primary Market

  1. Public Issue: Direct fundraising from the public through issuing shares or bonds.

    • Advantages include gaining access to capital markets and enhancing valuation opportunities.

    • Disadvantages include accountability to shareholders and necessity for regular profits and compliance with regulations.

  2. Rights Issue: Issuing shares to existing shareholders first, allowing them the first right to purchase additional shares in proportion to their current ownership.

  3. Private Placement: Direct sale of shares to a select group of investors, such as institutional investors, without public offering.

  4. Offer to Employees: Offering shares to employees to create a sense of ownership and boost motivation.

IPO (Initial Public Offering)

  • While not in the latest syllabus, understanding IPOs is beneficial for foundational knowledge.

  • Involves various steps for transitioning private companies to public entities.

Angel Investors

  • Individuals providing capital for small startups, usually in exchange for convertible debt or ownership equity.

  • Help early-stage companies at critical points when other forms of financing may be unavailable.

  • Noted for providing guidance, mentorship, and industry connections along with funding.

Venture Capital

  • Fund provided by firms to startups with high potential for growth.

  • Shares in the business are offered in exchange for investment; these firms remain involved in the company's development.

  • Venture capital focuses on high-risk, growth-oriented startups and provides long-term investment.

Criteria for Venture Capital Investment

  • Selective in investment choices; often only invest in 1 out of 400 opportunities.

  • Evaluates innovative technology, business models, growth potential, and management capabilities.

  • Typically looks for exit strategies within 3-7 years.