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Scene 2 – The Venture Capitalist
His hard work pays off and the business starts to pick up. At the end of the first two years of operations, the company starts to break even. The promoter is now no longer a rookie business owner, instead he is more knowledgeable about his own business and of course more confident.
Backed by his confidence, the promoter now wants to expand his business by adding 1 more manufacturing unit and few additional retail stores in the city. He chalks out the plan and figures out that the fresh investment needed for his business expansion is INR 7 Crs.
He is now in a better situation when compared to where he was two years ago. The big difference is the fact that his business is generating revenues. Healthy inflow of revenue validates the business and its offerings. He is now in a situation where he can access reasonably savvy investors for investing in his business. Let us assume he meets one such professional investor who agrees to give him 7 Crs for a 14% stake in his company.
The investor who typically invests in such early stage of business is called a
Venture Capitalist (VC) and the money that the business gets at this stage is called Series A funding.
After the company agrees to allot 14% to the VC from the authorized capital the shareholding pattern looks like this:












Note, the balance 36% of shares is still retained within the company and has not been issued.
Now, with the VC’s money coming into the business, a very interesting development has taken place. The VC is valuing the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs. With the initial valuation of 5Crs, there is a 10 fold increase in the company’s valuation. This is what a good business plan, validated by a healthy revenue stream can do to businesses. It works as a perfect recipe for wealth creation.



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