2.5.Exit_Strategy 2.2_Business_Formation___Funding_Options 2.3_Business_Funding_Options 2.4.Stakeholders
The different funding options that are available for an enterprise at the different venture stages of its lifespan. Is an exit strategy always needed, and what are those possible exit strategies?
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1. Exit Strategy1
In this last section of Topic 2 we will gain a general overview of an exit strategy. After
having looked at the various funding options for your enterprise, we also must think of
what is the best exit strategy for you – either as an investor or as an entrepreneur;
considering that you may be wearing two hats – and what that means for the investor
or the enterprise.
What Is an Exit Strategy?
So what is an exit strategy and why is it important?
An exit strategy is a contingency plan that is executed by an investor, trader, venture
capitalist, or business owner to liquidate a position in a financial asset or dispose
of tangible business assets once predetermined criteria for either has been met or
exceeded.
An exit strategy may be executed to exit a non-performing investment or close an
unprofitable business. In this case, the purpose of the exit strategy is to limit losses.
An exit strategy may also be executed when an investment or business venture has
met its profit objective. For instance, an angel investor in a startup company may plan
an exit strategy through an initial public offering (IPO). This means that we will issue
shares and offer them in an exchange, typically the London Stock Exchange, New
York Stock exchange or similar. What it means is, that the company is no longer
private but the peoples (public) will own shares of your company. Can you think of
famous publicly listed companies? – Tesla, Apple, Microsoft, Facebook etc. are
famous publicly listed companies which started in a garage in the backyard of a
garden!
Other reasons for executing an exit strategy may include a significant change in
market conditions due to a catastrophic event; legal reasons, such as estate planning,
liability lawsuits or a divorce; or for the simple reason that a business owner/investor
is retiring and wants to cash out.
Business exit strategies should not be confused with trading exit strategies used in
securities markets.
1 https://www.investopedia.com/terms/e/exitstrategy.asp
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KEY TAKEAWAYS
• An exit strategy, broadly, is a conscious plan to dispose of an investment in a
business venture or financial asset.
• Business exit strategies include IPOs, acquisitions, or buy-outs but may also
include strategic default or bankruptcy to exit a failing company.
• Trading exit strategies focus on stop-loss efforts to prevent downside losses
and take-profit orders to cash out of winning trades.
Understanding Exit Strategies
An effective exit strategy should be planned for every positive and negative
contingency regardless of the type of investment, trade, or business venture. This
planning should be an integral part of determining the risk associated with the
investment, trade, or business venture.
A business exit strategy is an entrepreneur’s strategic plan to sell their ownership in
a company to investors or another company. An exit strategy gives a business owner
a way to reduce or liquidate their stake in a business and, if the business is
successful, make a substantial profit.
If the business is not successful, an exit strategy (or “exit plan”) enables the
entrepreneur to limit losses. An exit strategy may also be used by an investor such
as a venture capitalist to prepare for a cash-out of an investment.
For traders and investors, exit strategies and other money management techniques
can greatly enhance their trading by eliminating emotion and reducing risk. Before
entering a trade, an investor is advised to set a point at which they will sell for a
loss and a point at which they will sell for a gain.
Money management is one of the most important (and least understood) aspects of
trading. Many traders, for instance, enter a trade without an exit strategy and are
often more likely to take premature profits or, worse, run losses. Traders should
understand the exits that are available to them and create an exit strategy that will
minimize losses and lock in profits.
Exit Strategies for a Business Venture
In the case of a startup business, successful entrepreneurs plan for a comprehensive
exit strategy in case business operations do not meet predetermined milestones.
If cash flow draws down to a point where business operations are no longer
sustainable and an external capital infusion is no longer feasible to maintain
operations, a planned termination of operations and a liquidation of all assets are
sometimes the best options to limit any further losses.
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Most venture capitalists insist that a carefully planned exit strategy be included in a
business plan before committing any capital. Business owners or investors may also
choose to exit if a lucrative offer for the business is tendered by another party.
Ideally, an entrepreneur will develop an exit strategy in their initial business plan
before launching the business. The choice of exit plan will influence business
development decisions. Common types of exit strategies include initial public
offerings (IPO), strategic acquisitions, and management buy-outs (MBO). An MBO
means that the existing management buys-out the shareholders and continues to run
the company privately and either finances the takeover from their own personal
wealth, through bank loans or by bringing in another cornerstone investor which can
be a private individual, a foundation or a Venture Capital or Private Equity Fund.
The difference between a Private Equity Fund and a Public Equity Fund is that the
private equity fund is an asset manager that manages private money whereas a public
equity fund is an asset manager that manages public money (typically from
governments) that invests into private firms. Famous Public Equity Funds are the
Qatar Investment Fund who invests in all sorts of businesses and Industries such as
car, luxury brands and even Football Clubs.
The exit strategy that an entrepreneur chooses depends on many factors such as
how much control or involvement the entrepreneur wants to retain in the business,
whether they want the company to continue to be operated in the same way, or if
they are willing to see it change going forward. The entrepreneur will want to be paid
a fair price for their ownership share.
A strategic acquisition, for example, will relieve the founder of their ownership
responsibilities, but will also mean giving up control. IPOs are often considered the
ultimate exit strategy since they are associated with prestige and high payoffs.
Contrastingly, bankruptcy is seen as the least desirable way to exit a business.
A key aspect of an exit strategy is business valuation, and there are specialists that
can help business owners (and buyers) examine a company’s financials to determine
a fair value. There are also transition managers whose role is to assist sellers with
their business exit strategies.
Exit Strategies for a Trade
When trading securities, whether for long-term investments or intraday trades, it is
imperative that exit strategies for both the profit and loss sides of a trade be planned
and diligently executed. All exit trades should be placed immediately after a position
is taken. For a trade that meets its profit target, it could immediately be liquidated or
a trailing stop could be employed in an attempt to extract more profit.
Under no circumstances should a winning trade be allowed to become a losing trade.
For losing trades, an investor should predetermine an acceptable loss amount and
adhere to a protective stop-loss.
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In the context of trading, exit strategies are extremely important because they assist
traders in overcoming emotion when trading. When a trade reaches its target price,
many traders become greedy and hesitate to exit for the sake of gaining more profit,
which ultimately turns winning trades into losing trades. When losing trades reach
their stop-loss, fear creeps in, and traders hesitate to exit losing trades causing even
greater losses.
There are two ways to exit a trade: by taking a loss or by making a gain. Traders use
the terms take-profit and stop-loss orders to refer to the type of exit being made.
Sometimes these terms are abbreviated as “T/P” and “S/L” by traders.
Stop-losses, or stops, are orders placed with a broker to sell equities automatically
at a certain point or price. When this point is reached, the stop-loss will immediately
be converted into a market order to sell. These can help minimize losses if the market
moves quickly against an investor.
2. Exit options for startups and investors2
Startup acquisitions
The main exit strategy for startups is to sell the company to a bigger one for a profit.
The same goes for investors.
The buyer takes over the startup using cash or stock as a compensation, and key
executives and employees from the startup often stay at the company for a period of
time in order to be able to cash out and vest their stock. Exits provide capital to startup
investors, which can then return the money to their limited partners (in the case of
Venture Capitalists) or to the investors themselves (in the case of business angels).
Startup acquisitions are much more frequent in the US than in Europe, but lately
there’s been a significant surge in the number of European acquisitions.
A different type of acquisition that is very common in Silicon Valley
is acquihires (acquisition + hiring). In this case the buyer is not so much interested
in the product as it is in the team, the talent. Acquihires often lead to the closure of
the products and services that have been acquired and employees end up
being transferred to a company usually receive significant hiring bonuses.
Acquihires tend to happen at an earlier stage in comparison to big startup
acquisitions, which means that they often provide less capital to business angels and
Venture Capitalists.
2 https://startupxplore.com/en/blog/exit-strategies-for-startups-and-investors/
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Let’s float in the stock market: IPO as an exit strategy
As we’ve mentioned before, there comes a time for mature and established
technology companies where raising more capital from VCs or private equity firms is
no longer an option. So, what comes next? An IPO.
As explained in the earlier part of this paper, IPO stands for ‘initial public offering’ and
it basically means that a company starts floating on a stock market, selling a
significant number of their shares in the process to institutional and non-institutional
investors. These large companies are that VCs dream of, as they often provide large
sums of capital to all parts involved (founders, early employees and investors).
For a long time the NASDAQ and Wall Street have been the main markets for
European startups looking to IPO. However, in recent times companies such
as eDreams Odigeo, Zalando, or Rocket Internet have chosen the Madrid, Frankfurt
or London stock exchanges to go public.
An interested trend in the startup world when it comes to going public is that more
and more companies are taking longer to IPO. This is a consequence of the high
amount of capital available in the startup market from Venture Capitalists, private
equity firms and other investment institutions.
Mergers & Acquisitions
Also commonly known as M&As, these transactions usually imply a merging with a
similar and larger company. This type of exit is often chosen by big companies that
are looking for complimentary skills in the market, and buying a smaller startup is a
better way to develop a product than creating it in-house.
M&As are less common than IPOs and straight acquisitions; in the first half of 2014
there were only 4 mergers and acquisitions in Europe.
Not selling a startup: milking the cow
In the same way that not every startup needs to raise money from VCs and business
angels (bootstrapping is a viable alternative), not every startup needs to sell itself to
a bigger company to provide a return to founders, employees and investors.
Companies that are able to establish a solid business model and scale might choose
to stay independent and reinvest the profits in the company. Part of those profits can
also be distributed amongst investors as a dividend, providing liquidity to outside
partners while avoiding the public markets and the obligations that come with it.
3. The big question: when is the right time to exit?
This is a question that i soften asked at conferences and private meetings between
investors and startups. When should I sell my company, When is the right time to look
for buyers? As an Investor, when should I start looking for a return on my investment?
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And the truth is that there is no universal answer for all of the above. Startups want
to sell for as much money as possible (so do investors) and buyers want to spend as
little as possible, so both parties need to find a balance. Common sense says that for
startups to maximize their selling price they should look for an exit when their growth
rates are high instead of when they’re very profitable.
However, as Business Insider recently explained “lower-valued startups take less
time to scale and less VC money to fuel, which means founders will likely own higher
percentages of their companies when they sell”. This implies that these founders
might be better off selling for €20 million when they own a big chunk of the startup
instead of waiting for a €200 million price tag, as by then they might only own a small
percentage of the stock.
Each entrepreneur and investor should consider the circumstances of their ventures
and make a decision based on that. There’s no secret formula, but what’s for certain
is that entrepreneurs and investors, sooner or later, will look for an exit.
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Vision, Mission, Values
In this overview we are going to spend some time to dive into the
Vision, Mission, Values statement of a firm, and discuss why it is
important for an organization.
1 Definition
The vision, mission, and values statements form the foundation for
all activities in an organization. The vision statement describes what
the organization will become in the future. It is a broad and
inspirational statement intended to engender support from
stakeholders. A declaration that informs the customers and staff of
a business about the firm’s top priorities and what its core beliefs
are. Companies often use a value statement to help them identify
with and connect to targeted consumers, as well as to remind
employees about its priorities and goals (WebFinance In, 2020)
2. 7 Steps to Writing a Vision, Mission and Values Statement1
How do you actually build a vision, mission and values statement as
an organization and what are the key drivers that the entrepreneur
must observe?
Here is a guideline:
1. Gather Board Level Leadership
If you don’t have a formal board, pull together an advisory team.
If you are a small business, pull in anyone who has helped you get
you to where you are in an advisory capacity.
Writing a vision, mission, and values statement should be an
exercise that is done at the board level – with some senior-level
employees.
1 https://thethrivingsmallbusiness.com/how-to-write-a-vision-mission-values-statement/
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This can be done in a retreat setting such as a conference room of
a hotel or the back room of a restaurant. The goal is to create an
environment that is insulated from distractions and interruptions.
2. Identify an Objective Facilitator
If the organization has strong leadership, there may be someone at
the board level who can facilitate the visioning session.
Whether the facilitator is a member of the staff or is contracted
through a third party, the facilitators’ role is to help drive the
process without influencing the content.
An experienced facilitator will know how to do this.
3. Dream As a Group
A visioning session is a time for dreaming.
Work with flip charts to get the creative juices going and provide
colorful visuals that help spark thoughts and ideas.
Divide into groups of 3-4 people, provide each group with a flip
chart, and have them discuss and answer the following questions:
Note: There should be simultaneous groups going on at the same
time if there is more than one group.
• Who are we?
• What do we want this organization to look like in 5, 10 years?
• Where do we want to be 1, 5, 10 years down the road?
• Create a headline for a newspaper about the organization ten
• years from now. What would it say?
This exercise should take 20-30 minutes.
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4. Share Ideas
After 30 minutes, ask all groups to share the thoughts and ideas
they came up with.
Use the larger group to pick the best thoughts and ideas from each
of the smaller groups.
Write the collective thoughts and words on a new flipchart.
Ask all participants to add, subtract, and formalize the sentence
structure of the statement.
5. Examine the Statement
After the group drafts a couple of sentences, read them out loud to
the entire group again.
Next, test the sentences to see if the entire group agrees that the
statement is reflective of the organization and describes an ideal
future state.
Make sure the statement is descriptive enough and is measurable
to determine progress toward the vision.
6. Clarify the Mission
After the vision statement is written, go through a similar exercise
to define the organization’s mission.
Remember a mission statement describes “why” the organization
exists.
Vision and mission statements should be used for decision making
so, it should reflect the importance of what the business is trying to
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accomplish.
Break into small groups again and spend another 20-30 minutes
brainstorming words that describe why the organization exists.
Once all the groups have their ideas down, ask them to present to
all of the other groups.
Using a flipchart, combine all of the ideas and as a group, try to
create a short phrase that is descriptive of why the organization
exists.
The phrase will get moulded by the group and after it is in a final
state, read it out loud one last time, so the entire group agrees that
it is reflective of why the organization exists.
7. Define Organizational Values
Once a vision and mission statement is drafted, break into groups
once again and allow another 20 minutes or so to come up with a
list of values.
These will become the shared values that the organization
operates by.
As the groups come up with their lists, ask them again to present
their ideas to the larger group and then combine and agree to one
list.
The final list should ideally be 5-10 words and should be easy for
people to simply memorize.
You did it! Now have it printed and displayed in your business so
your customers and employees can see what you are trying to
accomplish and what your priorities are!
Many organizations don’t have a defined vision, mission, and
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values statement because they don’t know how to do it, and the
process scares them.
However, if you can get the right people in the room, and have a
trained facilitator, it can be done in a few short hours.
Has your organization come up with a Vision, Mission, and Values
statement?
3. The importance of a Vision and Mission statement2
Strategic planning is a key function of an organization’s
management that helps to set priorities, allocate resources, and
ensure that everyone is working towards common goals and
objectives. However, for strategic planning to be effective, there are
two important tools that are needed – a vision and a mission
statement. These serve as a guide for creating objectives and goals
in the organization, thus providing a roadmap that is to be followed
by everyone.
Unfortunately, despite the importance of vision and mission
statements, many organizations do not have them. In other cases,
2 https://www.linkedin.com/pulse/importance-vision-mission-statements-norja-vanderelst
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the two statements are lumped together as one or used
interchangeably despite their distinctive differences. This creates a
confusion in the organization that makes it harder to achieve the set
objectives and goals.
Both the vision and mission statements play an important role in the
organization. Below is a look at these roles:
1. The vision and mission statements define the purpose of the
organization and instil a sense of belonging and identity to the
employees. This motivates them to work harder in order to
achieve success.
2. The mission statement acts as a “North Star”, where it
provides the direction that is to be followed by the organization
while the vision statement provides the goal (or the destination)
to be reached by following this direction.
3. The vision and mission statements help to properly align the
resources of an organization towards achieving a successful
future.
4. The mission statement provides the organization with a clear
and effective guide for making decisions, while the vision
statement ensures that all the decision made are properly
aligned with what the organization hopes to achieve.
5. The vision and mission statements provide a focal point that
helps to align everyone with the organization, thus ensuring
that everyone is working towards a single purpose. This helps
to increase efficiency and productivity in the organization.
The vision and mission statements are important tools of strategic
planning, and thus they help to shape the strategy that will be used
by an organization to achieve the desired future.
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Conclusion
The mission and vision statements are very important, and they can
best be described as a compass and destination of the organization
respectively. Therefore, every organization should develop clear
vision and mission statements, as not doing so would be like going
on a journey without knowing the direction you are to follow or the
destination.
4. Role Played by Mission and Vision3
Organization mission and vision are critical elements of a company’s
organizational strategy and serves as the foundation for the
establishment of company objectives.
Mission and vision statements play critical roles, such as −
• They provide unanimity of purpose to organizations and
spell out the context in which the organization operates.
• They communicate the purpose of the organization to
stakeholders.
• They specify the direction in which the organization must
move to realize the goals in the vision and mission
statements.
• They provide the employees with a sense of belonging and
identity.
3
https://www.tutorialspoint.com/management_principles/management_principles_mission_vision_values.htm
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5.Values
Every organization has a set of values. Sometimes they are written
down and sometimes not. Written values help an organization define
its culture and belief. Organizations that believe and pledge to a
common set of values are united while dealing with issues internal
or external.
An organization’s values can be defined as the moral guide for its
business practices.
5.1 Core Values
Every company, big or small, has its core values which forms the
basis over which the members of a company make decisions, plan
strategies, and interact with each other and their stakeholders. Core
values reflect the core behaviors or guiding principles that guide the
actions of employees as they execute plans to achieve the mission
and vision.
• Core values reflect what is important to the organization and
its members.
• Core values are intrinsic – they come from leaders inside of the
company.
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• Core values are not necessarily dependent on the type of
company or industry and may vary widely, even among
organizations that do similar types of work.
For many companies, adherence to their core values is a goal, not a
reality.
It is often said that companies that abandon their core values may
not perform as well as those that adhere to them.
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In this overview we are going to discuss what are the funding options
for the different type of businesses and enterprises:
1. Start up Funding1
According to a recent study, over 94% of new businesses fail during
first year of operation. Lack of funding turns to be one of the
common reasons. Money is the bloodline of any business. The long
painstaking yet exciting journey from the idea to revenue generating
business needs a fuel named capital. That’s why, at almost every
stage of the business, entrepreneurs find themselves asking – How
do I finance my startup?
Now, when would you require funding depends largely on the nature
and type of the business. But once you have realized the need
for fund raising, below are some of the different sources of finance
available.
Here is a comprehensive guide that lists 10 funding options for
startups that will help you raise capital for your business. Some of
these funding options are for Indian business, however, similar
alternatives are available in different countries.
1) Bootstrapping your startup business:
Self-funding, also known as bootstrapping, is an effective way of
startup financing, specially when you are just starting your business.
First-time entrepreneurs often have trouble getting funding without
first showing some traction and a plan for potential success. You
can invest from your own savings or can get your family and friends
to contribute. This will be easy to raise due to less
formalities/compliances, plus less costs of raising. In most
situations, family and friends are flexible with the interest rate.
Self-funding or bootstrapping should be considered as a first
funding option because of its advantages. When you have your own
money, you are tied to business. On a later stage, investors consider
1 https://www.profitbooks.net/funding-options-to-raise-startup-capital-for-your-business/
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this as a good point. But this is suitable only if the initial requirement
is small. Some businesses need money right from the day-1 and for
such businesses, bootstrapping may not be a good option.
Bootstrapping is also about stretching resources – both financial
and otherwise – as far as they can.
2) Crowdfunding As A Funding Option:
Crowdfunding is one of the newer ways of funding a startup that has
been gaining lot of popularity lately. It’s like taking a loan, pre-order,
contribution or investments from more than one person at the same
time.
This is how crowdfunding works – An entrepreneur will put up a
detailed description of his business on a crowdfunding platform. He
will mention the goals of his business, plans for making a profit, how
much funding he needs and for what reasons, etc. and then
consumers can read about the business and give money if they like
the idea. Those giving money will make online pledges with the
promise of pre-buying the product or giving a donation. Anyone can
contribute money toward helping a business that they really believe
in.
Why you should consider Crowdfunding as a funding option for your
business:
The best thing about crowd funding is that it can also
generate interest and hence helps in marketing the product
alongside financing. It is also a boon if you are not sue if there will
be any demand for the product you are working on. This process
can cut out professional investors and brokers by putting funding in
the hands of common people. It also might attract venture-capital
investment down the line if a company has a particularly successful
campaign.
Also keep in mind that crowdfunding is a competitive place to earn
funding, so unless your business is absolutely rock solid and can
gain the attention of the average consumers through just a
description and some images online, you may not find crowdfunding
to work for you in the end.
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Some of the popular crowdfunding sites
are Indiegogo, Wishberry, Ketto, Fundlined, Catapooolt,
Kickstarter, RocketHub, Dreamfunded, Onevest and GoFundMe
3) Get Angel Investment In Your Startup:
Angel investors are individuals with surplus cash and a keen interest
to invest in upcoming startups. They also work in groups of
networks to collectively screen the proposals before investing. They
can also offer mentoring or advice alongside capital.
Angel investors have helped to start up many prominent companies,
including Google, Yahoo and Alibaba. This alternative form of
investing generally occurs in a company’s early stages of growth,
with investors expecting a upto 30% equity. They prefer to take
more risks in investment for higher returns.
Angel Investment as a funding option has its shortcomings too.
Angel investors invest lesser amounts than venture capitalists
(covered in next point).
4) Get Venture Capital For Your Business:
This is where you make the big bets. Venture capitals are
professionally managed funds who invest in companies that have
huge potential. They usually invest in a business against equity and
exit when there is an IPO or an acquisition. VCs provide expertise,
mentorship and acts as a litmus test of where the organisation is
going, evaluating the business from the sustainability and scalability
point of view.
A venture capital investment may be appropriate for small
businesses that are beyond the startup phase and already
generating revenues. Fast-growth companies like Flipkart, Uber, etc
with an exit strategy already in place can gain up to tens of millions
of dollars that can be used to invest, network and grow their
company quickly.
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However, there are a few downsides to Venture Capitalists as a
funding option. VCs have a short leash when it comes to company
loyalty and often look to recover their investment within a three- to
five-year time window. If you have a product that is taking longer
than that to get to market, then venture-capital investors may not be
very interested in you.
They typically look for larger opportunities that are a little bit more
stable, companies having a strong team of people and a good
traction. You also have to be flexible with your business and
sometimes give up a little bit more control, so if you’re not interested
in too much mentorship or compromise, this might not be your best
option.
Some of the well known Venture Capitalists are – Nexus Venture
Partners, Helion Ventures, Kalaari Capital, Accel Partners, Blume
Ventures, Canaan, Sequoia Capital and Bessemer Ventures.
5) Get Funding From Business Incubators & Accelerators:
Early stage businesses can consider Incubator and Accelerator
programs as a funding option. Found in almost every major city,
these programs assist hundreds of startup businesses every year.
Though used interchangeably, there are few
fundamental differences between the two terms. Incubators are like
a parent to to a child, who nurture the business providing shelter
tools and training and network to a business. Accelerators so
more or less the same thing, but an incubator helps/assists/nurtures
a business to walk, while accelerator helps to run/take a giant leap.
These programs normally run for 4-8 months and require time
commitment from the business owners. You will also be able to
make good connections with mentors, investors and other fellow
startups using this platform.
In US, companies like Dropbox and Airbnb started with an
accelerator – Y Combinator.
6) Raise Funds By Winning Contests:
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An increase in the number of contests has tremendously helped to
maximize the opportunities for fund raising. It encourages
entrepreneurs with business ideas to set up their own businesses.
In such competitions, you either have to build a product or prepare
a business plan.
Winning these competitions can also get you some media coverage.
We, at ProfitBooks benefitted a lot when we were regional finalists
in Microsoft BizSparks in 2013 and won Hot100 Startup Award in
2014.
You need to make your project stand out in order to improve your
success in these contests. You can either present your idea in
person or pitch it through a business plan. It should be
comprehensive enough to convince anyone that your idea is worth
investing in.
Some of the popular startups contests in India are NASSCOM’s
10000 startups, Microsoft BizSparks, Conquest, NextBigIdea
Contest, and Lets Ignite. Check out the latest startup programs &
contests in your area.
7) Raise Money Through Bank Loans:
Normally, banks is the first place that entrepreneurs go when
thinking about funding.
The bank provides two kinds of financing for businesses. One is
working capital loan, and other is funding. Working Capital loan is
the loan required to run one complete cycle of revenue generating
operations, and the limit is usually decided by hypothecating stocks
and debtors. Funding from bank would involve the usual process of
sharing the business plan and the valuation details, along with the
project report, based on which the loan is sanctioned.
Almost every bank offers SME finance through various programs.
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In US, sites like Kabbage can help you get working capital loan
online in minutes. Unlike traditional lenders, Kabbage approve small
business loans by looking at real-life data, not just a credit score.
8) Get Business Loans From Microfinance Providers or
NBFCs
What do you do when you can’t qualify for a bank loan? There is still
an option. Microfinance is basically access of financial services to
those who would not have access to conventional banking services.
It is increasingly becoming popular for those whose requirements
are limited and credit ratings not favoured by bank.
Similarly, NBFCs are Non Banking Financial Corporations are
corporations that provide Banking services without meeting legal
requirement/definition of a bank.
Check MicroFinance Institute Network for more details. Here is a list
of top MicroFinance companies in India.
9) Govt Programs That Offer Startup Capital:
In US, there is a small business lending fund and a dedicated portal
for Government grants available for local businesses.
If you comply with the eligibility criteria, Government grants as a
funding option could be one of the best. You just need to make
yourself aware of the various Government initiatives.
10) Quick Ways To Raise Money For Your Business
There are few more ways to raise funds for your business. However,
these might not work for everyone. Still, check them out if you need
quick funds.
Product Pre-sale: Selling your products before they launch is an
often-overlooked and highly effective way to raise the money
needed for financing your business. Remember how Apple &
Samsung start pre-orders of their products well ahead of the official
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launch? Its a great way to improve cashflow and prepare yourself
for the consumer demand.
Selling Assets: This might sound like a tough step to take but it can
help you meet your short term fund requirements. Once you
overcome the crisis situation, you can again buy back the assets.
Credit Cards: Business credit cards are among the most readily
available ways to finance a startup and can be a quick way to get
instant money. If you are a new business and don’t have a tons of
expenses, you can use a credit card and keep paying the minimum
payment. However, keep in mind that the interest rates and costs on
the cards can build very quickly, and carrying that debt can be
detrimental to a business owner’s credit.
Also read about Invoice Discounting. Its a good way to manage
your cash flow in short term.
Conclusion & Next Steps:
If you want to grow really fast, you probably need outside sources
of capital. If you bootstrap and remain without external funding for
too long, you may be unable to take advantage of market
opportunities.
2. Funding Options for SMEs in the UK2
Great business ideas are essential to getting your SME off the
ground. However, what can keep your company from doing so is the
lack of funding and sustainable business finance. How you
determine the correct method of finance is critical to the longevity of
your brand. Similarly, you must consider your chances of success in
obtaining the funding. This article will outline a range of finance
options for SMEs in the UK, and the crucial advantages and
disadvantages of doing so
Whether you are a startup or SME, you will require finance at some
point. However, there are several factors to consider about the range
of SME funding options:
• How much funding is required?
2 https://www.businessrescueexpert.co.uk/guide-to-funding-options-for-smes-in-the-uk/
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• Current revenue or forecast for a new business
• Are you happy to use personal assets as security?
• Do you have ownership of the business property?
• Are you willing to sell shares?
With that in mind, we’ll discuss the SME finance options below. It’s
also important to note that, while traditional banks are still the
predominant source of finance, smaller businesses are using a range
of alternative methods to gain funding. According to the Small
Business Finance Markets 2017/18, peer-to-peer lending increased
by a staggering 51%, among others.
Government grants
Government business funding is available for SMEs. However,
obtaining a government grant is a competitive process. Typically,
the government grants focus on particular business themes or
purposes:
• Innovation
• Technology
• Energy
• Training
There are also regional grants that support growth and provide small
business funding. For instance, your location may improve your
eligibility for government business funding. While it can be
challenging obtaining the finance, you do not have to pay the money
back.
If the above business purposes do not relate to your company, the
government also offers support through tax schemes and capital
allowances, reducing tax liabilities.
Venture capital funding
Venture capital is a form of investment at an early-stage for a
business, with great growth potential. Unlike private equity –
generally investing in a more mature company – venture capital
funding involves investing in a new business, with many not yet
making a profit. Aside from the SME funding, obtaining venture
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capital can also provide valuable expertise and guidance within the
specific industry. Similarly, you will have additional resources and
connections. However, you must consider that you may lose some
control in your business, as the investors will likely want to become
involved in the company objectives. Likewise, depending on their
stake, you could lose management control.
Working capital loan
Working capital is crucial for all businesses – small or large. Without
working capital, you cannot purchase stock, pay staff wages or
undertake any other essential activities. When it comes to SME
finance, working capital loans can meet everyday costs. The
specialised loan, unlike larger business loans, is short-term and
intended to cover a cash flow issue, or growth. Similar to the above
options, there are advantages and disadvantages to a working
capital loan. You will have the cash available to deal with any cash
flow issues, and can spend it on the assets you would like. You will
also keep ownership of the company. However, you will have to
repay the loan and, generally, within a much shorter time period to
that of a business loan. There is also the chance of a high level of
interest, so you must consider all factors.
Invoice finance
If your SME is struggling to obtain a business loan, invoice finance
may be a suitable alternative. This procedure can be a relatively
quick way of accessing funds, using your invoices as assets. There
are two types of invoice financing: invoice factoring and invoice
discounting. There are differences between both, regarding sales
and who is responsible for collecting payment. With invoice
discounting, you retain control. On the other hand, invoice factoring
involves a factoring company collecting payments. After you raise a
customer’s invoice, the finance company will afford your company
between 75-90% of the invoice value. While invoice financing does
free up time in chasing late payments, you will lose profits on any
invoices managed this way.
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Asset finance
Asset finance is an SME funding option, referring to a type of finance
used by companies to buy necessary equipment and stock etc. In
the case of startup businesses, cash is often tight and asset finance
allows you to gain the tools for growth, without paying large, upfront
costs. You can spread the cost of the asset over a longer period,
regularly paying a charge. However, you cannot claim capital
allowances on leased or hired asset if the lease period is less than
five years. You may even end up paying more for the asset over a
longer period.
Crowdfunding
Today, there are multiple websites helping to raise SME funding for
relatively low cost businesses. Crowdfunding has experienced a
boom, due to the likes of Kickstarter, and is an SME finance option.
Crowdfunding enables you to set a target fund, over a period of time.
However, it could prove difficult to obtain the small business funding
without a unique idea, persuasive pitch and long-term plans for
growth.
Peer-to-peer lending
As mentioned above, peer-to-peer lending has experienced a
growth of 51% in the past year. Similar to crowdfunding, peer-to-
peer lending connects your business with corporates and individuals
that want to lend. As the bank has been cut out of the equation,
borrowers often receive lower interest rates. However, those
individuals or companies are investing in your SME, thus may
become heavily involved in the future.
As you can see and compare, many of the financing options for
Start-up and SME’s are similar. Of course, the more advanced your
business is (vintage stage) the more options your enterprise has to
access finance.
I would like to spend a few words on another way of finance which
was also mentioned in one of the videos that you watched in Topic
2 e.g. Impact Investing. This was mentioned in the context of the
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Benefit Corporation or B-Corp and is worth mentioning because it is
a novel way of funding enterprises whereby the profitability is not
the primary driver but the mission, vision and values of the company
are more prominently around social and environmental impact
alongside economic returns.
3. Impact Investing3
Impact investments are investments made with the intention to
generate positive, measurable social and environmental impact
alongside a financial return. Impact investments can be made in
both emerging and developed markets, and target a range of returns
from below market to market rate, depending on investors’ strategic
goals.
The growing impact investment market provides capital to address
the world’s most pressing challenges in sectors such as sustainable
agriculture, renewable energy, conservation, microfinance, and
affordable and accessible basic services including housing,
healthcare, and education.
Why impact investing?
Impact investing challenges the long-held views that social and
environmental issues should be addressed only by philanthropic
donations, and that market investments should focus exclusively on
achieving financial returns.
The impact investing market offers diverse and viable opportunities
for investors to advance social and environmental solutions through
investments that also produce financial returns.
Many types of investors are entering the growing impact investing
market. Here are a few common investor motivations:
• Banks, pension funds, financial advisors, and wealth
managers can provide client investment opportunities to
both individuals and institutions with an interest in general or
specific social and/or environmental causes.
3 https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing
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• Institutional and family foundations can leverage
significantly greater assets to advance their core social
and/or environmental goals, while maintaining or growing their
overall endowment.
• Government investors and development finance
institutions can provide proof of financial viability for
private-sector investors while targeting specific social and
environmental goals.
Who is making impact investments?
Impact investment has attracted a wide variety of investors, both
individual and institutional.
• Fund Managers
• Development finance institutions
• Diversified financial institutions/banks
• Private foundations
• Pension funds and insurance companies
• Family Offices
• Individual investors
• NGOs
• Religious institutions
Characteristics of impact investing
• INTENTIONALITY An investor’s intention to have a positive
social or environmental impact through investments is
essential to impact investing.
• INVESTMENT WITH RETURN EXPECTATIONS Impact
investments are expected to generate a financial return on
capital or, at minimum, a return of capital.
• RANGE OF RETURN EXPECTATIONS AND ASSET
CLASSES Impact investments target financial returns that
range from below market (sometimes called concessionary)
to risk-adjusted market rate, and can be made across asset
classes, including but not limited to cash equivalents, fixed
income, venture capital, and private equity.
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• IMPACT MEASUREMENT A hallmark of impact investing is
the commitment of the investor to measure and report the
social and environmental performance and progress of
underlying investments, ensuring transparency and
accountability while informing the practice of impact
investing and building the field.
• Investors’ approaches to impact measurement will vary
based on their objectives and capacities, and the choice of
what to measure usually reflects investor goals and,
consequently, investor intention. In general, components of
impact measurement best practices for impact investing
include:
• Establishing and stating social and environmental
objectives to relevant stakeholders
• Setting performance metrics/targets related to these
objectives using standardized metrics wherever possible
• Monitoring and managing the performance of investees
against these targets
• Reporting on social and environmental performance to
relevant stakeholders
As you can see, there are several different funding options available
for an enterprise and you must find the best way to raise finance
what is best for your venture and serves the purpose of the
organization.
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STAKEHOLDER ANALYSIS
In this excerpt we are going to reflect on and dive deeper into the stakeholder
analysis. You will need this document for the completion of this work activity as well
as for your final project work to complete Topic 2.
What Is a Stakeholder? 1
A stakeholder is a party that has an interest in a company and can either affect or be
affected by the business. The primary stakeholders in a typical corporation are
its investors, employees, customers and suppliers. However, the modern theory of
the idea goes beyond this original notion to include additional stakeholders such as
a community, government or trade association.
Understanding Stakeholder
Stakeholders can be internal or external. Internal stakeholders are people whose
interest in a company comes through a direct relationship, such as employment,
ownership or investment. External stakeholders are those people who do not directly
work with a company but are affected in some way by the actions and outcomes of
said business. Suppliers, creditors and public groups are all considered external
stakeholders.
Example of an Internal Stakeholder
Investors are a common type of internal stakeholder and are greatly impacted by the
outcome of a business. If, for example, a venture capital firm decides to invest $5
million into a technology startup in return for 10% equity and significant influence, the
firm becomes an internal stakeholder of the startup. The return of the company’s
investment hinges on the success, or failure, of the startup, meaning it has a vested
interest.
An Example of an External Stakeholder
External stakeholders are a little harder to identify, seeing as they do not have a direct
relationship with the company. Instead, an external stakeholder is normally a person
or organization affected by the operations of the business. When a company goes
over the allowable limit of carbon emissions, for example, the town in which the
company is located is considered an external stakeholder because it is affected by
the increased pollution.
Conversely, external stakeholders may also sometimes have a direct effect on a
company but are not directly tied to it. The government, for example, is an external
stakeholder. When it makes policy changes on carbon emissions, continuing from
above, the decision affects the operations of any business with increased levels of
carbon.
Problems With Stakeholders
1 https://www.investopedia.com/terms/s/stakeholder.asp
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A common problem that arises with having numerous stakeholders in an enterprise
is their various self interests may not all be aligned. In fact, they may be in direct
conflict. The primary goal of a corporation, for example, from the viewpoint of its
shareholders, is to maximize profits and enhance shareholder value. Since labor
costs are a critical input cost for most companies, a company may seek to keep these
costs under tight control. This might have the effect of making another important
group of stakeholders, its employees, unhappy. The most efficient companies
successfully manage the self-interests and expectations of their stakeholders.
Stakeholders vs. Shareholders
Stakeholders are bound to a company with some type of vested interest, usually for
a longer term and for reasons of greater need. A shareholder, meanwhile, has a
financial interest, but a shareholder can sell a stock and buy different stock or keep
the proceeds in cash; they do not have a long-term need for the company and can
get out at any time.
For example, if a company is performing poorly financially, the vendors in that
company’s supply chain might suffer if the company no longer uses their services.
Similarly, employees of the company, who are stakeholders and rely on it for income,
might lose their jobs. However, shareholders of the company can sell their stock and
limit their losses.
Difference Between Internal and External Stakeholders2
Business exists in a large environment and many factors affect the business directly
and indirectly. Every organization has its stakeholders, irrespective of its size, nature,
structure and purpose. The stakeholders can be any person or entity, who influence
and can be influenced by the company’s activities. In a business environment,
stakeholders are classified into two categories, Internal Stakeholders, and External
Stakeholders. Internal stakeholders refer to the individuals and parties, within the
organization.
On the other hand, external stakeholders represent outside parties, which affect or
get affected by, the business activities.
Due to the complexity of the business environment, it is very difficult to identify that
which factor is considered as the internal or external stakeholder. So, here in this
article, we are presenting you the differences between internal and external
stakeholders.
2 https://keydifferences.com/difference-between-internal-and-external-stakeholders.html
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Comparison Chart
BASIS FOR
COMPARISON INTERNAL STAKEHOLDERS EXTERNAL STAKEHOLDERS
Meaning The individual and parties that
are the part of the organization is
known as Internal Stakeholders.
The parties or groups that are not a part
of the organization, but gets affected by
its activities is known as External
Stakeholders.
Nature of impact Direct Indirect
Who are they? They serve the organization. They get influenced by the
organization’s work.
Employed by the
entity
Yes No
Responsibility of the
company towards
them
Primary Secondary
Includes Employees, Owners, Board of
Directors, Managers, Investors
etc.
Suppliers, Customers, Creditors,
Clients, Intermediaries, Competitors,
Society, Government etc.
Definition of Internal Stakeholders
Internal Stakeholders are those parties, individual or group that participates in the
management of the company. They can influence and can be influenced by the
success or failure of the entity because they have vested interest in the
organisation. Primary Stakeholders is the second name of the Internal stakeholders.
Internal Stakeholders are dedicated to providing services to the company. They are
highly affected by the decisions, performance, profitability and other activities of the
company. In the absence of internal stakeholders, the organisation will not be able
to survive in the long run. That is why they have a great impact on the company.
Further, they are the ones who know all the secrets and internal matters of the
entity. The following are the list of internal stakeholders:
• Employees: Employees are the group of people who work for the company,
for remuneration.
• Owners: The individual or group who owns the organisation. They can be
partners, shareholders, etc.
• Board of Directors: They are the group of individuals who governs the
incorporated entity. They are elected by the members of the company at the
AGM (Annual General Meeting).
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• Managers: The person who manages the entire department is known as
Manager. For example Sale Manager, General Manager, etc.
• Investors: The individual or group who invest their money in the organisation
are investors.
Definition of External Stakeholders
External Stakeholders are those interested parties, who are not a part of the
management, but they indirectly affected by the work of the company. They are the
outside parties which form part of the business environment. They are also known
as Secondary Stakeholders. They are the users of financial information of the
company, in order to know about its performance, profitability, and liquidity.
External Stakeholders, do not participate in the day to day activities of the entity,
but the actions of the company influence them. They deal with the company
externally. They have no idea about the internal matters of the company. Given
below is the list of external stakeholders:
• Suppliers: They provide inputs to the organisation like raw material,
equipment, etc.
• Customers: They are considered the king of business because they are the
one who is going to consume the product.
• Creditors: They are the individual, bank or financial institution who provides
funds to the organisation.
• Clients: They are the parties, to whom the company deals and provides its
services.
• Intermediaries: They are the marketing channels that create a link between
the company and customers like the wholesaler, distributors, retailer, etc.
• Competitors: They are the rivals who compete with the organisation for
resources and the market as well.
• Society: A firm has its responsibility towards society as well because the
enterprise uses its valuable resources.
• Government: A firm is guided and controlled by government rules and
regulations like it has to pay taxes and duties that are levied on the business.
Conclusion
Every enterprise operates in an environment, and there are some factors in that
environment. The company has to deal with those factors and fulfil the responsibilities
towards them like it is the responsibility of the company to pay fair wages to the
workers and should not discriminate between employees. Similarly, it is the duty of
the company to pay money to suppliers, deliver goods to customers, pay taxes to
local authorities on time. They are the readers of the financial statement of the
company so the company should provide a true and fair view of its financial statement
along with transparency in their accounts. The trade union is a combination of both
internal and external stakeholders.
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27
CHALLENGES TO LEADERSHIP – STAKEHOLDER MAP
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The Porter model is a traditional value chain approach developed by Michael Porter. This
model divides business operations into primary and secondary activities. Primary activities
encompass logistics, operations, marketing and sales; while infrastructure, human
resources, technology and procurement are considered secondary activities.
There are also newer approaches to mapping value chains, such as the World Economic
Forum’s, which is based on the model used by Henry Ford in automobile manufacturing.
Here, the use of a value chain enables better use of limited natural resources and attempts
to reduce negative environmental effects.
3.3 Stakeholders
Contemporary leaders will face challenges from various stakeholders, both internally and
externally. To mitigate these challenges, it is necessary for a high impact leader to be
aware of the roles that various external stakeholders play in their organisation, and to
understand the effects that the actions of these stakeholders have on the organisation’s
operations. Figure 2 illustrates the distinction between internal and external stakeholders.
Figure 2: Internal vs external stakeholders.
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Table 1 details the gaps that leaders will need to bridge to effectively communicate with
external stakeholders.
Table 1: Challenges of external stakeholders. (Source: O’Neill, 2016)
Challenge Description
Language “Different terminology to describe
company performance and different
indicators to measure this performance”
Time frame “Companies are pressured by investors to
report on short-term results while often
needing to focus on issues that play out
over the medium to long term”
Expertise “Inadequate levels of mutual
comprehension and technical capacity”
Relationships “Lack of strong internal relationships
impacts relationships with external
stakeholders”
Resources “Not enough time or other resources are
dedicated to communicating with
investors”
3.4 Competitors
Competitors can often pose a challenge to leadership, but many organisations are finding
ways to turn competitors into “co-opetition” (co-operative competition) or collaborators,
thereby turning a challenge into an opportunity. The aim of co-opetition is to enable
organisations to work together for mutual benefit, rather than having a single organisation
dominate the market.
For instance, in the technology sector, co-opetition helps mitigate the losses associated
with technology, which rapidly becomes outdated. One particularly successful example of
co-opetition is the 2004 Sony-Samsung joint venture, which saw two major competitors
working together to develop LCD panels for flat-screen TVs. Instead of the typical win-lose
situation, such collaborations allow both parties to succeed, which benefits the consumers.
Another example of co-opetition linked to technology is the Sustainable Smartphone
Working Group. In 2016, as part of its 2030 Initiative for Sustainable Consumption and
Production, Transform Together launched its Sustainable Smartphone Working Group.
This initiative includes representatives from civil society, organisations, progressive
businesses and governments working together to solve a common challenge: improving
the environmental and social impact of smartphones.
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