In the upcoming chapters, we will gain an understanding of why companies choose to go public and the financial principles that go along with this decision.
Origin of Business:
To gain insight into why companies decide to go public, let us unravel the story of a typical business. We will create a narrative in several parts that explores businesses and their funding environment progress and what leads them to list on the public market.
Part 1- The Angel Investor
Let us begin our story. Visualise a devoted entrepreneur with an ambitious business concept – to produce fashionable, organically produced cotton t-shirts. The designs are one-of-a-kind, reasonably priced and excellent quality cotton. This individual is sure the venture will be a success and is eager to launch the enterprise.
It’s expected that securing funds will be a challenge for the entrepreneur. Without a background in business, it’s unlikely to be able to secure any serious investors. Therefore, it is likely that he will take monetary help from his friends and family.
Assuming the entrepreneur invests some of his own money and successfully persuades two friends to back his company, we can refer to these people as angel investors. Remember, this is not a loan but instead an investment in the enterprise.
Let us suppose the promoter (entrepreneur) and the angels are able to procure INR 7 Crore in capital. This money provided at startup is known as ‘The Seed Fund’ or ‘Friend & Family Round’. It is important to remember this fund should be in the company’s bank account, not the entrepreneur’s.
Angel funding does not always have to be from people you know; certain professional angel investors can put their money into enterprises they deem strong.
In return for the original seed investment, three shareholders (the promoter plus two angels) will receive share certificates entitling them to certain ownership. The company’s only asset is cash and that is what determines its value – 7 Crs. Some could suggest that the company’s idea adds potential worth, so this valuation may not totally reflect its true value; however, let’s leave that aside for now.
Issuing shares is quite straightforward; the organisation assigns a monetary value to each share, which in this case is Rs.10. Accordingly, for the Rs.7 crore of share capital, there would be 70 lakh individual shares at that price. This number changes depending on what ‘Face Value’ (FV) the company decides to assign – if that amount is Rs. 5, the quantity of shares will increase and so on.
Backed by the seed fund, the entrepreneur embarks on their business venture. Carefully putting together a team and processes to ensure high-quality production, they establish a small manufacturing unit and retail store for their t-shirts.