Unit 6 | Resource MobiliSation | Class 12

Finance

MEANING OF FINANCE: ‘Finance’ refers to funds or monetary resources needed by individuals, business houses, and the government

It’s one of the most important prerequisites to start an enterprise.

Need of finance (Encourage BAKED Market investigation)

Right from the very beginning i.e., conceiving an idea: finance is required to:

Encourage management to make progress and create value.
Be enough to meet unexpected/unplanned business expenses
Acquire fixed assets
Keep men and machines at work
Expand, diversify, improve and grow.
Develop product
Make market investigations

Conclusion: Finance is the elixir that assists in the formation of new businesses and allows businesses to take advantage of opportunities to grow and expand.
The most critical elements for survival in business: ‘Production’, ‘Marketing’, and Financing’,are deemed as the most important factors for any business survival, rates
“Financing” as the first because nothing can be done without money.
Thus, the most critical element for business success is ‘Finance’.

Q: Before doing anything, an entrepreneur should clearly answer the three questions. What are they

Ans: Before doing anything, an entrepreneur should clearly answer the following three questions:

1) How much money is required?
2) Where will money come from?
3) When does the money need to be available?

Sources of finance:

Sources could broadly be classified into 2 major categories.
1) Internal sources
2) External sources
Basis of the difference between different sources of finance:
We are even aware that not all of them are equally appropriate to all enterprises at all times as these different sources carry very different:
(i) Obligations ·(ii) Responsibilities ·(iii) Opportunities
Sources of Internal funds:
The type of funds most frequently employed is internally generated funds, coming from several sources as follows:
(a) Past savings, help from family members
(b) Retained profits
(c) Sale of assets
(d) Squeezing (reducing) working capital
(e) Chasing up debtors or delaying payments to creditors
(f) Sales of little-used assets
(g) Procuring assets on rental basis/ lease rather than buying
(h) Sale of redundant assets
(i) Reducing short-term assets viz. inventory, cash etc
External source of Finance: Internal sources referred to as the owner’s own money, is also known as ‘equity’. Particularly in the case of small entrepreneurs the owner’s money is very small. Therefore, an overwhelming portion of money is arranged from external sources. Optimal financing of profitable new investment opportunities is a key issue for all entrepreneurs today.

It includes those sources of finance that are raised from outside the business. The various external sources are:

(i) Debentures and bonds
(ii) Loan from a financial institution
(iii) Loan from a commercial bank
(iv) Public deposits
(v) Trade credit
(vi) Inter-corporate deposits

Mushrooming Sources of finance/ Sources of supply for long-term funds

Additional funds are “all-time requirement”. Nowadays, a common growing practice is where the entrepreneur gives up part of his/her ownership in the enterprise and in return receive money to develop business. Thus, here we discuss some mushrooming sources available to an entrepreneur to raise finance:
a) Capital markets
b) Angel investors
c) Venture capital
d) Specialized financial institutions
Capital markets:
“Financial Intermediation“: The role of transferring financial resources from the surplus units to the deficit units.
Surplus Units: At times, we have people who have money that they don’t want to spend rather save for future use
Deficit Units: On the other hand, some people want to spend money to undertake some economic activities but don’t have the required amount of finance.
Meaning: A capital market may be defined as an organized mechanism meant for effective and smooth transfer of money capital or financial resources from the investors to the entrepreneurs. Here, productive capital is raised and made available for industrial purposes. Funds are raised in this market through both debt and equity.
Players in the capital market: The major players in the capital market are
Individual investors b. Stock Exchange c. Financial Institutions
Securities and Exchange board of India (SEBI) etc.
Categories of Capital Market in India: The capital markets are broadly classified in India into the follow broad categories: (i) Organised Sector (ii) Unorganised Sector
(i) Organised Sector::
Individual investors b. Corporate investors c. Institutional investors
Government bodies e. Semi-Governmental agencies f. International financial agencies
(ii) Un-organized sector:
Indigenous bankers b. Money lenders c. Finance Brokers
Non-regulated banking finance institutions like chit funds or Nidhis etc
The capital market can be classified as:
(i) Primary market
(ii) Secondary market
Importance of capital market: (MES)
Capital market is the most important source of raising finance for the entrepreneurs as this market can:
a) Mobilize the financial resources on a nation-wide scale.
b) Secure the required foreign capital and know-how to promote economic growth at a faster rate.
c) Ensure the most effective allocation of the mobilized financial resources by directing the same either to such projects which are capable of the highest yield or to the underdeveloped priority areas where there is an urgent need to promote balanced and diversified industrialization.
i) Primary market (new issues market):
Meaning: Primary market is basically to facilitate transfer of resources from the savers to the entrepreneurs seeking funds for:
a) Setting new enterprises
b) Expanding
c) Diversifying
The ‘new issues’ may be issued by:
1) New companies – also called initial issues.
2) Old companies – also called further issues.
Initial issues
Meaning of Initial Issue: When for the first time, entrepreneur for the purpose of obtaining capital funds decides to issue securities to the public. Such issues of securities” are referred as “new money issues“ or “ Initial issue”.
Methods of floatation of new issue/ Methods of raising capital from Primary Capital
Public issue
Rights issue
Private placement
Offer to the employees
Public issue / Going public
Meaning: Public Issue involves raising of funds directly from the public through the issue of prospectus. It s the most popular method of raising finance. Then company becomes Public company.
This method requires compliance to various statutory laws relating to prospectus drafting, listing, agreements etc.
Advantages / Benefits of Public Issue:

1) Access to capital: (GRAD)/ Uses of capital raised for variety of purposes,: The first and foremost advantage that an entrepreneur stands to gain by going public is access to capital. In addition, the capital does not have to be repaid and does not involve an interest charge, The only reward the IPO investors seek is an appreciation of their investment and possibly dividends.

Entrepreneur can use the capital raised for a variety of purposes including:

(1) Growth and expansion,
(2) Retiring existing debt,
(3) Acquisition capital
(4) Corporate marketing and Development
2) Other advantages of Public issue (HIRAL- BCPL)
(i) Higher valuations: Public companies are typically valued more than private companies.
(ii) Incentives: Stock options and stock incentives can be very helpful in attracting employees.
(iii) Reduced business requirements: While an underwritten initial public offering requires significant earnings, the lack of earnings does not keep a private company from going public.
(iv) Acquisitions and Mergers: Public stock of a company can be used for businesses to grow through acquisitions.
(v) Liquidity: A public company provides liquidity for management, minority shareholders, and investors.
(vi) Benchmark trading price: The trading price of a public company’s stock serves as a benchmark of the offer price of other securities.
(vii) Capital formation: Raising capital later is typically easier because of the extra liquidity for the investors.
(viii) Prestige: Added prestige and visibility with customers, suppliers, as well as the financial community.
(ix) Less dilution: There is less dilution of ownership control compared to an IPO.

Drawbacks / Disadvantages of Public Issue: (BINORS)

Company Become more vulnerable to an unwelcome takeover
Public issue Increases accountability of company to public shareholders
Company Needs to maintain dividend and profit growth trends
Company needs to Observe and adhere strictly to the rules and regulations by governing bodies. Increasing costs in complying with higher level of reporting requirements
Company Relinquishes/ looses some control of the company following the public offering
Company Suffers a loss of privacy as a result of media interest .

Important points to be considered while taking decision regarding public issue:

As the owner of major shareholder of a private company, it is important to outweigh the benefits and costs of listing in the light of the plans and goals that have been set by the entrepreneur.
Discussions with lawyers, independent accountants and other professional advisors will also provide better considerations.
Overall, going public is a complex decision that requires careful consideration and planning. Entrepreneurs should examine their current and future capital needs, and be aware of how an IPO will affect the availability of future financing.

IPO’S (INITIAL PUBLIC OFFER)

Meaning of IPOs: A company proposing to raise resources by a public issue should first select the type of securities i.e. share and/or debentures to be issued by it. The decision regarding the issue of shares to be made at par or premium should be decided keeping in view the SEBI guidelines.

The whole process of issue of shares can be divided into two parts:
Pre issue activities, and
Post issue activities

Difference between Pre issue activities and Post issue activities

Pre issue activities	Post issue activities
All activities beginning with the planning of capital issues, till the opening of the subscription list are pre issue activities	All activities subsequent to the opening of the subscription list may be called post issue activities.

Steps involved in public issue of shares:

1. Compliance with the SEBI guidelines Before making any issue of capital, it is to be ensured that the proposed issue complies with the provision of the SEBI guideline for disclosure and investor protection with regards to Pricing of issue, promoters, contribution, lock in period, reservation, etc
Holding of general meeting : If it is required by the Articles of Association, that consent of shareholder is to be obtained, then meeting of the shareholder will be called.
Intimation to stock exchange :A copy of the Memorandum and Articles of Association of the company is to be sent to the Stock Exchanges where the shares are to be listed, for approval.
Appointment A company, which issues shares, has to appoint one or more Merchant Bankers, who act as Lead managers to the public issues. The company may, also appoint, registrars, underwriter, brokers etc.
(Merchant banks conduct underwriting, loan services, financial advising, and fundraising servicesfor large corporations and high net worth individuals. They do not provide services for the general public like checking accounts.)
Drafting of prospectus :Apart from the notice of offer to issue shares to public, prospectus should also disclose: · Justification of Premium, if called.
Net Assets value (NAV) (Net asset value,” or “NAV,” of an investment company is the company’s total assets minus its total liabilities. For example, if an investment company has securities and other assets worth $100 million and has liabilities of $10 million, the investment company’s NAV will be $90 million.)
High and Low price of the shares of the company for the last two years.
A clause that company shall refund the entire application money if minimum subscription is not received.
A statement by the lead managers that in their opinion the assets of the underwriters are adequate to meet their obligations
Approval of prospectus : The draft prospectus along with the application from the issue of shares should be approved by the solicitors/legal advisors/stock exchange [where application has been made seeking permission for shares to be draft in] of the company to ensure that it contains all disclosures and information as required by various statues, rules, notification, etc.
Approval of board of directors : After the concerned parties/agencies have approved the draft prospectus and the application form, the board of directors of the company should approve the final draft, before filling the Registrar of companies.
Registration of prospectus with ROC: Before the prospectus is issued to the public it must be filed with the registrar of companies, duly signed thereon by every director or proposed director of the company. The prospectus must be registered with ROC within 3 months of vetting of SEBI.
Application to stock exchange to list shares : Before filling prospectus with the registrar of companies, the company should submit on application to the stock exchange(s) for enlistment of securities offered to the public by the said issue. The fact that an application has/have been made to the stock exchange must be stated in the prospectus.
Printing and distribution of prospectus and application forms : After receipt of acknowledgement card from the SEBI and the intimation from Registrar of Companies regarding registration of prospectus, the company should take steps to issue the prospectus within 90 days of it’s registration with ROC. For this compliance, requisite steps for printing and distribution amongst banker, underwriter public etc. should be made.
Announcements and advertisement : Announcement regarding the proposed issue should be made at least ten (10) days before the subscription list opens. No advertisement should include Brand Names for the issue except the normal commercial name of the company or commercial brand names of the company or commercial brand names of it’s products already in use.
Subscription list : As stipulated by SEBI guidelines the subscription list for public issue is to be kept open for atleast three working days and for a total period of not exceeding ten working days, which is to be disclosed in prospectus as well.
Separate bank account : A SEPARATE Bank account is opened for the purpose of collecting the proceeds of the issue. Further, the date of opening and closing of the subscription list should be intimated to all the collecting and controlling branches of the bank with whom the company has entered into an agreement for the collection of application forms.
Minimum subscription As per the SEBI guidelines, if the company does not receive 90% of the issue amount from the public subscription including development from underwriters within 120 days from the date of the issue, the amount of subscription received is required to be refunded to the applications. In case of disputed development also, subscription is required to be refunded if 90% of the issued amount plus accepted. Development from underwriters if any is not received within 120 days of the issue of prospectus, all the money received from the applicants for shares is required to be repaid forthwith without interest and if any such money is not so repaid in the next 10 days (after the expiry of 120 days), the directors of the company are jointly and severally liable to repay that money, with interest from the expiry of the 130 days. The company should refund the amount within 10 weeks of the closing of the subscription list and pay interest, if refunds are delayed by more than 8 days after this period.
Allotment of shares : A return of allotment in form No. 2 of The Companies (central government’s) General Rules and Form, 1956 should be filed with registrar of companies within 30 days of the date of allotment along with the fees payable, as prescribed in schedule X of the Act. In case, the issue is over-subscribed, the basis of allotment has to be decided in consultation with the stock exchange authorities as per the guidelines laid down by the stock exchange.
Over subscription : The over-subscribed amount after the finalization of allotment, should be refunded to the applicants within 10 weeks of the closure of subscription list. If the money is not so refunded, the company is liable to refund the money with interest as specified from the expiry of the 8 days after 10 weeks of the closure of subscription list.
Compliance report : As stipulated by SEBI guidelines within 45 days of the closure of issue, a report in the prescribed form along with a compliance certificates from statutory auditor/practicing charted accountant or by a company secretary in practice is to be forwarded to SEBI by the lead managers.
Rights issue
Rights issue is a method of raising additional finance from existing shareholders by offering securities to them on pro-rata basis i.e. giving them a right to a certain number of shares in proportion to the shares they are holding. Normally, through a circular, rights issues are proposed to the existing shareholders and in case they are not willing to subscribe, they can renounce the same in favour of another person. Advantage of Right issue: This method of issuing securities is considered to be inexpensive as it does not require any brokers, agents, underwriters, prospectus or enlistment, etc.

Pro rata: Pro-rata right is a legal term that describes the right, but not the obligation, that can be given to an investor to maintain their initial level of percentage ownership in a company during subsequent rounds of financing.

Private placement
Private placement means the direct sale by a company of its securities to a limited number of sophisticated investors. Entrepreneurs, herein, raise funds by selling the issues mainly to the institutional investors like:
i) Unit Trust of India ii) Life Insurance Corporation of India iii) General Insurance Corporation of India iv) Army Group Insurance v) State Level Financial Corporations, etc.
Advantage of Private placement: Entrepreneurs from both public limited and private limited sector, bank heavily upon raising funds through the issue of varied financial instruments under this segment as at times they do not wish to disclose information to the open market.
Offer to employees:
Stock options or offering shares to the employees has gained much popularity in many countries of the world. This method enables employees to become shareholders and share the profits of the company, leading to:
Advantages ofthe offer to employees:
a) Higher efficiency
b) Low labour turnover
c) Better industrial locations
d) Low flotation cost
e) Wider/higher generation of funds.

ii) Secondary market: (learn only meaning)

Meaning: the secondary capital market, which is also known as old securities market or stock exchange deals with buying and selling of old securities i.e. the market securities issued earlier are sold by existing investors in this market, thus paving way for the entrepreneurs that if they offer high returns to market, investors will remain inclined to invest therein.
The secondary market enhances the marketability of securities and thereby provides liquidity to investments.
Difference between Primary Market and Secondary Market

Basis	Primary Market	Secondary Market
Meaning	Deals with the trading of newly issued securities .	It deals with already issued securities
Role of issuing company	The issuing company plays an active role as shares are sold directly to public	The company has no role to play as securities are traded between investors only
Determination of price	Prices are determined by the company	Prices are determined by the market forces of demand and supply

Q: Describe the stages of business development funding.

Ans: Early-stage financing
Seed capital : Relatively small amount to prove concepts and finance feasibility studies. This funding generally covers only the costs of creating a proposal.
Start-up : Product development and initial marketing, but with no commercial sales yet: funding to actually get company operations started.
Expansion or development financing
Second stage: Working capital for initial growth phase, but no clear profitability or cash flow yet.
Third stage
Major expansion for company with rapid sales growth, at breakeven or positive profit levels but still private company.
Fourth stage
Bridge financing to prepare company for public offering.
Acquisitions and leveraged buyout financing
Traditional acquisitions : Assuming ownership and control of another company
Leveraged buyouts (LBOs) Management of a company acquiring control by buying out the present owners.
A leveraged buyout is one company’s acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company.
Going private Some of the owners/managers of a company buying all the outstanding stock, making the company privately held again.

Angel Investors:

Meaning: Business angel or informal investor or an angel investor, is an affluent individual who provides capital for a business start-up and early stage companies having a high-risk, high-return matrix usually in exchange for convertible debt or ownership equity.
FFF (Friends, family , Fools) : The job of an angel investor is invaluable. They fill the gap in start-up or early stage financing between “friends and family”, by providing seed funding and formal venture capital. Humorously, they were once given the acronym FFF – i.e. FRIENDS, FAMILY AND FOOLS. Although it is usually difficult to raise more than a few thousands from friends and family, even the venture capitalist are least interested to make investments. Thus, angel investments is a common second round of financing for high-growth start-ups or early stage companies.

Features of angel investors:(HERRP)

1) High net worth: Most angel investors are current or retired executives, business owners or high net worth individuals who have the knowledge, expertise, and funds that help start-ups match up to industry standards.
2) Experience and mentoring: They have a sharp inclination to keep abreast of current developments in a particular business arena, mentoring another generation of entrepreneurs by making use of their vast experience
3) Risk involvement: As angel investors bear extremely high risk and are usually subject to dilution from future investment rounds. They expect a very high return on investment.
4) Return on investment: Their objective is to create great companies by providing value creation, and simultaneously helping investors realize a high return on investments.
5) Proactive advice: Apart from investing funds, most angels provide proactive advice, guidance, industry connections and mentoring start-ups in its early days.
Venture capital
Meaning: Venture capital is an equity based investment in a growth-oriented small to medium business to enable the investors to accomplish objectives, in return for minority shareholding in the business or the irrevocable right to acquire.
Development of entrepreneurship demands combination of three following factors:

(i) Innovative ideas

(ii) Competency in project preparation an implementation

(iii)Project financing

the proposals involving new or substantially new or relatively untried technology put forward by professionally or technically qualified persons involving high risk factors may fail to attract investments from public, thus, resulting in their death even before they could be tried.

Why venture capitalists invest money?

Venture capital is a way in which investors support entrepreneurial talent with finance and business skills

to exploit market opportunities and
obtain long-term capital gains.

Q How Venture capital is a tool for economic development?

Venture capital has been used as a tool for economic development in a variety of developing regions. In many of these regions, with less developed financial sectors, venture capital plays a role in facilitating access to finance for small and medium enterprises (SMEs), which in most cases would not quality for receiving bank loans.

Features of venture – capital (DCSRBLE

Introduction:/ Uses of venture capital: Venture capital can best be characterized as a long-term investment discipline, usually occurring over a five-year period that helps in the creation of:

a) early-stage companies,
b) the expansion and revitalization of existing businesses, and
c) the financing of leveraged buyouts of existing divisions of major or privately owned enterprises.

1) It is basically equity finance in relatively new companies.

2) It is long-term investment in growth-oriented small or medium firms.

3) Venture capitalist not only provide capital but also business skills to investee firms.

4) It involves high risk-return spectrum.

5) It is a subset of private equity.

6) The venture capital institutions have a continuous involvement in the business after making the investment.

7) Such institutions disinvest the holdings either to the promoters or in the market.

Why it is said that “A venture capitalists investments are illiquid”. Give reason.

Venture capitalists invest in high-risk, high-growth, yet to mature companies having high returns in the future. Their funding goes when the company is about to be started. It takes a huge amount of time before the value of the investment reaches the desired levels. In addition the entrepreneurs are usually not yet experienced. Due to these reasons it takes lot of time for the investment to reach the desired growth levels. In addition there is risk of the enterprise not becoming successful and subsequently losing their investment. Due to these reasons, the venture capitalists investments are illiquid in other words their investments cannot easily/quickly converted into cash.

Why are Venture capitalists typically very selective in deciding while doing the investment?

Venture capitalists will prefer to invest in only selected ventures due to the following reasons.

The ventures into which they’re going to invest are early-stage, high risk, growth-up companies started by the entrepreneurs who might have been lacking the necessary experience. b. The ventures are usually employing new or relatively new technologies which have not yet proven their potential to be successful.
The ventures in which they’re going to invest are in still developing regions. As they’re investing their money they will be very cautious and they won’t proceed if there is more probability of failure.

Funding

Distinguish between venture capital and loan/debt

Obtaining venture capital is substantially different from raising debt or a loan from a lender.

Venture Capital	Loan/debt
A venture capital is invested in exchange for an equity stake in the business.	Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business.

Why are Venture capitalists typically very selective in deciding while doing the investment?

Venture capitalists will prefer to invest in only selected ventures due to the following reasons.

The ventures into which they’re going to invest are early-stage, high risk, growth-up companies started by the entrepreneurs who might have been lacking the necessary experience.
The ventures are usually employing new or relatively new technologies which have not yet proven their potential to be successful.
The ventures in which they’re going to invest are in still developing regions. As they’re investing their money they will be very cautious and they won’t proceed if there is more probability of failure.

When can an entrepreneur seek venture capital financing?

Entrepreneurs will go for raising venture capital funds under the following conditions.

When the venture under consideration is in the start-up stage, high risk oriented.
When the venture involves the use of new or upcoming technologies which is not yet successfully implemented by others.
When the business is such that it fails to attract funds from the investors
When the entrepreneurs are looking for partners/mentors who have good business skills and also can provide capital for their start-ups.
Seed capital requirements to develop a prototype.
When the entrepreneurs are in need of start-up finance.

Investment criteria by venture capitalist

Because of the strict requirements venture capitalists have for potential investments, entrepreneurs should seek funding from this source after a careful evaluation. Venture capitalists are typically very selective in deciding what to invest in and as a rule of thumb:

They may invest in one in four hundred opportunities presented to it,
Looks for the extremely rare, yet sought after qualities, such as :

a) innovative technology,
b) potential for rapid growth,
c) a well-developed business model
d) an impressive management team.

3) Looks for an “exit” in the time frame of typically 3-7 years.

4) Is inclined towards ventures with exceptionally high growth potential.

Conclusion: Thus, entrepreneurs are expected to carry out detailed due diligence prior to seeking venture capital as a source of financing. As venture capitalists investments are illiquid, requiring extended time frame to harvest, an entrepreneur should carefully evaluate and analyse, the stage which he/she would require venture capitalist to assist in.

When to seek venture capital finance:

Entrepreneurs can typically seek venture capital to assist at any of the following four stages in the company’s development.

1) Early stage financing This stage includes:

(a) Seed capital

(b) Pre-start up and start up

a) Seed capital finance: It refers to the capital required by an entrepreneur for conducting research at precommercialization stage.

During this stage, the entrepreneur has to convince the investor (VC) why his idea/product is worthwhile.
The investor will investigate into the technical and the economical feasibility of the idea.

In some cases, there is some sort of prototype of the idea/product that is not fully developed or tested. As the risk element at this stage is very high, investor (VC) may deny to assist if he does not see any potential in the idea. Entrepreneur’s ability, technological skills and competencies are required to match with the market opportunities so as to successfully convince about product/idea’s feasibility to the venture capitalist.

b) Start up finance: If the idea/product/process is qualified for further investigation and/or investment, the process will go to the second stage: this is also called the start-up stage. A business plan is presented by the entrepreneur to the VC firm.

A management team is being formed to run the venture.
If the company has a board of directors, a person from the VC firms will take seats at the board of directors. While the organisation is being set up, the idea/product gets its form.
The prototype is being developed and fully tested. In some cases, clients are being attracted for initial sales.
The management-team establishes a feasible production line to produce the product. The VC firm monitors the feasibility of the product and the capability of the management-team from the board of directors.

c) Second-round financing:

This is the first encounter with the rest of the market, the competitors and attempt is to squeeze in the market and get some market share from the competitors.
The entrepreneur, at this stage, needs assistance from the Venture Capitalist for expansion, modernization, diversification so that the economies of scale and stability could be attained.
As this time, larger funds than the other early stage financing are required, entrepreneur should be extra careful because only if he and his management team is able to prove their capability of standing against the competition, only then is the VC firm interested in financing.

2) Last stage financing /bridge /pre-public stage In general, this is the last stage of the venture capital financing process.

The main goal of this stage is for the venture to go public so that investors can exit the venture with a profit commensurate with the risk they have taken.
At this stage, the venture achieves a certain amount of market share. This gives the venture some opportunities for example:
Merger with other companies
Keeping new competitors away from the market
Eliminate competitors
Development capital
The entrepreneur must examine the product’s market position and, if possible, reposition it to attract new Market segmentation.
He/she should introduce the follow-up product/ services to attract new client and markets, for only that is the way to create interest for VC firms seeks to get their assistance further.

Entrepreneurs to watch out for confidentiality:

Unlike public companies, information regarding an entrepreneur’s business is typically confidential and proprietary.
As part of the due diligence process, most venture capitalists will require significant detail with respect to a company’s business plan.
Entrepreneurs must remain vigilant about sharing information with venture capitalists that are investors in their competitors.
Most venture capitalists treat information confidentially, but as a matter of business practice, they do not typically enter into non–disclosure agreements because of the potential liability issues those agreements entail.
Entrepreneurs are typically well-advised to protect truly proprietary intellectual property. E.g. Copyrights, Patents etc.

Conclusion: Mainly due to the increasing deregulation and the emergence of technocrat entrepreneurs, this source of financing which has so far not taken deep roots in India, is having enormous scope for progress.

Distinguish between angel investors and venture capitalists

Angel Investors	Venture Capitalists
1. A rich individual who invests own money	A company invests other person’s money
2. Mostly they are retired executives, business owners or high net worth individuals.	It is equity finance in relatively new companies.
3. It provides high risk, high return on investment.	It is a long term investment in growth oriented small or medium firms.
4. Their objective is to create great companies by providing value creation. And helping investors realise a high return on investment.	It involves a high risk return spectrum.
5. They provide funds, proactive advice, guidance, industry connections and mentoring start ups.	They provide capital, business skills to investee firms.
6. They mentor entrepreneurs by making use of their experience.	It is a subset of private equity
7. Usually not active in the day to day management.	They have continuous involvement in the business after making the investment.

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