Startup Finance – CA Final SFM Study Material is designed strictly as per the latest syllabus and exam pattern.
Startup Finance – CA Final SFM Study Material
Question 1.
Explain Startup India Initiative. [RTP Nov. 2018] [4 Marks]
Answer:
Startup India scheme was initiated by the Government of India on 16th of January, 2016. Startup means an entity, incorporated or registered in India with the following features:
(a) It is incorporated not prior to five years.
(b) The annual turnover does not exceed Rs. 25 crore in any preceding financial year and
(c) It must be working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
A Startup shall be eligible for tax benefits only after it has obtained certification from the Inter Ministerial Board, setup for such purpose. For ‘Startup Entity Status’, it must be ensured that it is not formed by splitting up, or reconstruction, of a business already in existence.
Ceases to be Startup: An entity ceases to be a Startup Entity, in the following cases:
- The turnover for the previous financial years has exceeded Rs. 25 crore or
- The entity has completed 5 years from the date ot incorporation/registration.
Question 2.
Explain the concept of Boots trapping and describe the various methods of bootstrapping used by startups. [RTP May 2018]
Answer:
An individual is said to be boot strapping when he or she attempts to promote and build a company from personal finances or from the operating revenues of the new company. A common mistake made by most of the people is that they make unnecessary expenses towards marketing, offices and equipment they cannot really afford. So, it is true that more money at the inception of a business leads to complacency and wasteful expenditure. On the other hand, investment by startups from their own savings leads to cautious approach. It curbs wasteful expenditures and enable the promoter to be on their toes all the time.
The following are the various methods of boots trapping used by start up firms:
1. Trade Credit: When a person is starting his business, suppliers are reluctant to give trade credit. They will insist on payment of their goods supplied either by cash or by credit card. However, a way out in this situation is to prepare a well-crafted financial plan. The next step is to pay a visit to the supplier’s office. If the business organization is small, the owner can be directly contacted. On the other hand, if it is a big firm, the Chief Financial Officer can be contacted and convinced about the financial plan.
2. Factoring: This is a financing method where accounts receivable of a business organization is sold to a commercial finance company to raise capital. The factor then got hold of the accounts receivable of a business organization and assumes the task of collecting the receivables as well as doing what would’ve been the paperwork. Factoring can be performed on a non-notification basis. It means customers may not be told that their accounts have been sold.
3. Leasing: Another popular method of boots trapping is to take the equipment on lease rather than purchasing it. It will reduce the capital cost and also help lessee (person who take the asset on lease) to claim tax exemption. So, it is better to a take a photocopy machine, an automobile or a van on lease to avoid paying out lump sum money which is not at all feasible for a startup organization.
Question 3.
Explain various stages of Venture Capital Funding. [Mock Test Aug. 2018] [4 Marks]
Answer:
The following are the various stages of Venture Capital Funding:
1. Early Stage Financing : This stage covers the following:
(a) Seed Stage Financing: It is provided to research, assess and develop an initial concept before it has reached the startup.
(b) Startup Stage: In initial stage, there is a need for product development and initial marketing. The startup stage is for financing these activities.
(c) First Stage Financing: This financing is for full-fledged manufacturing, operational and sales activities.
2. Expansion Financing: It includes the following three stages:
(a) Second Stage Financing: It is for financing working capital needs and support high account receivables and inventories.
(b) Third Stage Financing: It is also known as “Mezzanine Financing”. It is needed for growth and expansion of a company whose sales volume is increasing and has achieved break-even or is trading profitably.
(c) Fourth Stage Financing: It is also called as “Bridge Financing”. It is raised when a company plans to go public within a short period of time, usually one year. It is intended to finance the going public process.
Question 4.
Explain the advantages of bringing venture capital in the company. [May 2018] [4 Marks]
Answer:
The following are the advantages of bringing Venture Capital in the company:
- It injects long-term equity finance which provides a solid capital base for future growth.
- The venture capitalist is a business partner, sharing both the risks and rewards.
- The venture capitalist provides management, technical, marketing and strategic support from its network of other venture capitalist, portfolio firms and business relationships.
- The venture capitalist also has a network of contacts in many areas that can add value to the company.
- The venture capitalists are expert in fund management.
- The venture capitalist can provide further rounds of funding should it be required to finance growth.
- Venture capitalists are experienced in the process of preparing a company for an initial public offering (IPO) of its shares onto the stock exchanges or overseas stock exchange such as NASDAQ.
- They can also facilitate a trade sale.