Business families like Tata, Birla and Ambani are a reflection of the immense wealth in India. It has taken decades for these families to acquire so much wealth. In recent years, we have seen that young entrepreneurs create assets worth several crores of rupees through startups in just a few years. In most cases, entrepreneurs become owners of crores even before their companies make profits. How do young entrepreneurs running startups own crores of rupees in such a short time? What is their secret formula?
There is some hurdle in the journey of a startup to gain economic strength. We are giving information about these stops one by one.
First stop (Part 1)
Everything starts with an idea. The better the idea, the easier it will be to take it forward. Though the idea with which entrepreneurs start requires major changes over time, the initial idea is of the most importance.
When a person has a business idea and wishes to do business, then that person shares this idea with people close to him. These close people are the initial supporters of this business. These people provide initial investment and other support to work on this idea. This assistance also has technical and managerial support to take the project forward.
To make the company better from the earliest times, a company is formed and it is registered legally. This company can be a partnership company or a limited company. Company Limited is usually registered to get better format and managerial setup. There are laws of company registration in various countries. Companies are registered in India under the Companies Act 2013. Shares are given as per the partnership in the company after registration. After registration, the company adds a private limited or a suffix. That is the inc. Is known as
The shareholding ratio fixed at the time of registration of the company matters a lot. If the initial investor in the company has invested Rs 10 lakh, and apart from that investor, the company has two promoters. These two promoters have retained 60 percent shares of the company and have decided to give 40 percent shares to the investor for their 10 lakh investment, in which case the actual valuation of the company will be Rs 25 lakh and 40 held by the two promoters. The value of percentage shares will be 1.5 million. This first investment is called seed-funding. In such first phase, without investing any money, the promoters value their shares up to 15 lakhs. This calculation will vary from case to case and usually this value is in many crores of time.
Second stop (Part 2)
The seed funding received at the first stage is used for the initial business development. This initial time varies from company to company, but usually it can be from 4 to 24 months. In this time promoters improve their company’s services and products. During this time products and services are also sold in small quantities and an initial customer base is prepared. At this time, an effort is made to create an enthusiasm in the minds of the users for this project. Also, preparations are made to launch this product or service on a large scale. Now further costs are required to move forward. At the time of seed funding, the promoters’ acquaintances invest small amounts of money, but now large amounts are required. This is called Series ‘A’ funding. Promoters contact venture funds and angel investors for this round. Venture funds are companies that collect investment from others and invest in startup projects. Angel investors are investors who have previously earned money from their startup or have worked in a large company. The amount given by them is large and the business gets the benefit of their experience and contacts. The company’s capital is increased to bring in new investment. The company can raise capital as per its requirement.
Apart from seed funding, the valuation of shares in a Series A round is determined by pre-money and post-money valuations. While promoters insist on higher pre-money valuations, on the other hand, investors insist on higher post-money valuations. At this time, if the company’s pre-money valuation is fixed at 1 crore and new investors are going to invest 400 million, then they will get 40 percent shares. After this round, the value of the promoter’s shares will be 60 lakhs and the investor who invests in the seed round will become 40 lakhs. In this way, after the second stop, the valuation of the company promoters has reached 60 lakhs and they have not made any investment for this.
Further rounds funding can be taken on the lines of Series ‘A’ and these rounds will be called B, C, D rounds. After every round the valuation of the company and the shares of the company increases.
Third stop (Part 3)
As the company progresses, so does the interest of more people in the company. Promoters have the option to sell all their shares and leave the company. In this way, selling shares is called exit and this has happened in many big companies. But usually investors want promoters to be present in the company. Many times, investors take a long time to exit promoters.
Promoters can sell their shares to a large company or to an ordinary public through an IPO. The process of getting an IPO is much longer and requires listing on a registered stock exchange. But after this process, the company’s shares are available for purchase and sale on the stock exchange. The shares of the company after the IPO have a public value which is reflected in the index of the stock exchange. This varies according to the demand and availability of value shares. Generally, this value is based on the economic performance of the company as investors want to buy shares of a company that makes good profits.
After this third stop, the shares of the promoters are worth many times more than the seed round. And in this way promoters make several crores of rupees in a few years only on the basis of their ideas and managerial capabilities, without investing much money.
You can give suggestions or questions in the comment box below and do share the post