Scene 3 – The Banker
Three more years pass by and the company is phenomenally successful. The company decides to have a retail presence in at least 3 more cities. To back the retail presence across three cities, the company also plans to increase the production capacity and hire more resources. Whenever a company plans such expenditure to improve the overall business, the expenditure is called ‘Capital Expenditure’ or simply ‘CAPEX’.
The management estimates 40Crs towards their capex requirements. How does the company get this money or in other words, how can the company fund its capex requirements?
The company has made some profits over the last few years; a part of the capex requirement can be funded through the profits. This is also called funding through internal accruals
There are few options with the company to raise the required funds for their capex…
- The company can approach another VC and raise another round of VC funding by allotting shares from the authorized capital – this is called Series B funding
- The company can approach a bank and seek a loan. The bank would be happy to tender this loan as the company has been doing fairly well. The loan is also called ‘Debt’
The company decides to exercise all the three options at its disposal to raise the funds for Capex. It ploughs 15Crs from internal accruals, plans a series B – divests 5% equity for a consideration of 10Crs from another VC and raise 15Crs debt from the banker.
Note, with 10Crs coming in for 5%, the valuation of the company now stands at 200 Crs. Of course, this may seem a bit exaggerated, but then the whole purpose of this story is drive across the concept!
The shareholding and valuation look something like this…
| Sl No | Name of Share Holder | No of Shares | %Holding | Valuation |
|---|---|---|---|---|
| 1 | Promoter | 2,000,000 | 40% | 80 Crs |
| 2 | Angel 1 | 250,000 | 05% | 10 Crs |
| 3 | Angel 2 | 250,000 | 05% | 10 Crs |
| 4 | VC Series A | 700,000 | 14% | 28 Crs |
| 5 | VC Series B | 250,000 | 05% | 10 Crs |
Note, the company still has 31% of shares not allotted to shareholders which are now being valued at 62 Crs. Also, I would encourage you to think about the wealth that has been created over the years. This is exactly what happens to entrepreneurs with great business ideas, and with a highly competent management team.
Classic real world examples of such wealth creation stories would be Infosys, Page Industries, Eicher Motors, Titan industries and in the international space one could think of Google, Facebook, Twitter, Whats app etc.
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