Entrepreneurship Study Material - Semester 3 BA PDF

Entrepreneurship STUDY MATERIAL Semester III BA Edition: 2024 #44/4, District Fund Road, Behind Big Bazaar, Jayanagar 9th Block, Bengaluru, Karnatak...

Entrepreneurship STUDY MATERIAL Semester III BA Edition: 2024 #44/4, District Fund Road, Behind Big Bazaar, Jayanagar 9th Block, Bengaluru, Karnataka 560069  Module-3 Module -3 Legal Forms of business-Single ownership firms Partnership firms- Joint Stock Company Cooperative Enterprise Public sector Enterprises- expansion and diversification strategies Mergers and acquisitions Franchising. Intellectual Property- Patents- Copyrights- Trademarks, Licensing Sources of Capital Personal Fund Bank Loan, Venture Capital Funding Angel Investors-Crowd funding Private Circulation only  Module-3 Business Models Legal Forms of business The legal form a firm chooses to operate under is an important decision with implications for how a firm structures its resources and assets. Several legal forms of business are available to executives. Each involves a different approach to dealing with profits and losses Sole proprietorship / Single owner business There are variosu forms of business. A sole proprietorship is a firm that is owned by one person. From a legal perspective, the firm and its owner are considered one and the same. On the plus side, this means that all profits are the property of the owner (after taxes are paid, of course). On the minus side, however, the owner is personally responsible for the firm’s losses and debts. This presents a tremendous risk. If a sole proprietor is on the losing end of a significant lawsuit, for example, the owner could find his personal assets forfeited. Most sole proprietorships are small and many have no employees. In most towns, for example, there are a number of self-employed repair people, plumbers, and electricians who work alone on home repair jobs. Also, many sole proprietors run their businesses from their homes to avoid expenses associated with operating an office. Features of Sole Proprietorship The main features of a Sole Proprietorship are as follows: Legal Formalities – No legal formalities are required to either commence or to shut down a sole proprietorship. But the owner must have a special license or certificate to run the business for specific occupations. For example, a sole proprietor planning to start a pharmacy must have a pharmacist’s degree. Unlimited Liability – The sole proprietor is liable for the success or failure of their financial transactions. In case the proprietor takes a loan and fails to repay it, the creditors can attach the business owner’s property to recover the loans. Risk and reward – A sole proprietor has complete ownership over the profits or losses from their firm’s operations. Control – The rights and responsibilities of a sole proprietorship lies solely with its owner. No other person can interfere in the business activities of a sole proprietor without prior permission. Separate Entities – The owner and their business are separate entities in most forms of business organisations except sole proprietors. The entity has no identity without the proprietor since that person carries out the day-to-day activities of the business. Continuity of business – The existence of a business is related to its owner. Events like death, insolvency, imprisonment, terminal illness, etc., of the sole proprietor can adversely affect the business or force it to shut down permanently. If there is a legal heir or beneficiary to the sole proprietor, that person can run the entity if the proprietor cannot continue. Private Circulation only  Module-3 Advantages and disadvantages of Sole Proprietorship There are several benefits as well as limitations of running a sole proprietorship. We will discuss some of those points below: Advantages – Swift decisions – A sole proprietor has complete responsibility in terms of making business decisions. It results in faster decision-making for the business as there is no need to consult multiple parties for every minor issue. Confidentiality – A sole proprietor can keep all business-related information to themselves as the business’s only decision-maker. The law does not bind them to make the accounts of a sole proprietorship public. Profit-sharing – A sole proprietor has complete ownership of profits arising from business operations. They are not obligated to share profits with anyone else. Fulfilment – Since a sole proprietor is responsible for both risks and rewards of their business, even a minor success can give a greater feeling of pride and satisfaction than other business forms. Disadvantages – Lack of Resources – It is challenging to raise vast amounts of capital in a sole proprietorship compared to a partnership or company. This form of business runs mainly on personal savings and borrowings made by its owner. Lack of adequate finances can become an obstacle in growing the business. Dependence on owner – The owner and their business are a singular entity in a sole proprietorship. While this has several advantages, the continuity of this form of business depends solely on the owner’s well being. In case of death, insolvency, imprisonment, etc., it can shut down if there is no successor or heir to continue the business. Unlimited Liability – If the proprietor cannot pay debts arising out of business from its assets, his/her personal property is also at stake. This results in sole traders taking zero or very minimal risks to ensure the survival of the business. Management – The proprietor has to perform most or all the activities related to the business like purchase, client relationships, sales, marketing, accounting, etc. They may employ others to help in business operations, but limited finances may prevent the owner from getting full- time staff and give them attractive remuneration. As such, the proprietor may have to carry out all activities without much assistance from others. Partnership firm In a partnership, two or more partners share ownership of a firm. A partnership is similar to a sole proprietorship in that the partners are the only beneficiaries of the firm’s profits, but they are also responsible for any losses and debts. Partnerships can be especially attractive if each person’s expertise complements the others. For example, an accountant who specializes in preparing individual tax returns and another who has mastered business taxes might choose Private Circulation only  Module-3 to join forces to offer customers a more complete set of tax services than either could offer alone. From a practical standpoint, a partnership allows a person to take time off without closing down the business temporarily. Sander & Lawrence is a partnership of two home builders in Tallahassee, Florida. When Lawrence suffered a serious injury a few years ago, Sander was able to take over supervising his projects and see them through to completion. Had Lawrence been a sole proprietor, his customers would have suffered greatly. However, a person who chooses to be part of a partnership rather than operating alone as a sole proprietor also takes on some risk; your partner could make bad decisions that end up costing you a lot of money. Thus developing trust and confidence in one’s partner is very important. A partnership is a kind of business where a formal agreement between two or more people is made who agree to be the co-owners, distribute responsibilities for running an organization and share the income or losses that the business generates. In India, all the aspects and functions of the partnership are administered under ‘The Indian Partnership Act 1932’. This specific law explains that partnership is an association between two or more individuals or parties who have accepted to share the profits generated from the business under the supervision of all the members or behalf of other members. Advantages of Partnership The advantages of Partnership are as follows: 1. Easy to Form and Close: The partnership business, like the sole proprietorship, can be formed immediately and without any legal stipulations. It is not essential to register the company. A simple agreement, either oral or written is all that is required to form a partnership company. A partnership is a contractual arrangement between two or more people to manage a business. As a result, it is quite simple to form. The legal requirements for formation are limited. on the other hand, the registration of a partnership is desirable, but not required. It’s the same in the case of closure, as it is also an easy task. 2. Better Decision Making: The firm is owned by the partners. Each of them has an equal right to participate in corporate management. In the event of a disagreement, they can sit down together to work out the issues. Because all partners are involved in decision-making, there is less room for reckless and hasty decisions. Because there are several owners in a partnership, all partners are involved in decision-making. Typically, partners from various specialist fields are brought together to complement one another. For example, if there are three partners, one may be a specialist in production, another in finance, and the third one in marketing. 3. Availability of Funds: In comparison to a sole proprietorship, it could be possible to pool more resources when two or more partners work together to establish a partnership firm. The partners may invest more money, more time, and more effort into the company. As we know, a sole proprietorship experiences financial constraints due to its restricted resources. Due to this fact, the partnership firm now has more than one source of funding to solve this issue effectively. Additionally, it also boosts the company’s capacity to borrow money because the risk of loss is shared among numerous partners rather than just one. Private Circulation only  Module-3 Banking institutions also see less danger in granting credit to partnerships than to sole proprietorships. 4. Risk Sharing: Each partner contributes to the firm’s losses in accordance with their agreed-upon profit-sharing percentages. As a result, the loss share for each partner will be lower than it would be for a proprietorship. The chance of losing money or defaulting can be greatly reduced because all profits and losses are shared among the partners. All of the partners in a partnership firm share the business risks. For example, if there are three partners and the company incurs a loss of Rs.12,000 over a specific time period, all partners may split it, with each partner bearing just a Rs. 4,000 burden. 5. Secrecy: Since businesses are not compelled to publish their financial statements or submit any reports to the government, secrecy regarding their activities can be easily maintained. This allows it to keep its operations and policies secret. Disadvantages of Partnership The disadvantages of Partnership are as follows: 1. Unlimited Liability: The partners are completely responsible for the firm’s debt, both jointly and individually. They can thus divide the liability among themselves or demand that each individual pay for all of the obligations, even any covered by personal property. The parties’ liability in a partnership business is unlimited. Similar to a sole proprietorship, if a partnership is unable to pay its debts, the personal assets of the partners may be in danger. Partners are jointly and separately accountable, and their liability is unlimited. For those partners who have more personal money, it might prove to be a significant disadvantage. If the other partners are unable to pay the loan, they will be responsible for paying it all back. 2. Limited Resources: The number of partners is restricted, and as a result, the capital they provide is also limited. There are restrictions on adding partners, so there won’t ever be enough funds to support a big firm. Partnership businesses thus have difficulties with business expansion. 3. Possibility of Conflicts between Partners: Every partner in a partnership business has an equal right to take part in management. Additionally, each partner has the right to present any matter to management at any moment with their thoughts and opinions. Due to this, there is sometimes a possibility of conflicts and disagreements among individuals, which may frequently result in the closure of the business. 4. Lack of Continuity: The partnership ends when one partner passes away or leaves. So, there is uncertainty in the continuity of the business. A partnership is an unstable type of organisation since it can collapse due to the death, retirement, or insolvency of any partner. The surviving partners, though, may reach new agreements and carry on the business. 5. Lack of Public Confidence: A partnership firm is an entirely private type of organisation. Government neither controls nor regulates it. Public trust in such types of businesses is generally low, as they are not required to publish their financial reports or make other related information public. As a result, it is challenging for the public to determine the genuine financial situation of a partnership business, which lowers public trust in partnerships. Private Circulation only  Module-3 Features of partnership Business Following are the few features of a partnership: Agreement between Partners: It is an association of two or more individuals, and a partnership arises from an agreement or a contract. The agreement (accord) becomes the basis of the association between the partners. Such an agreement is in the written form. An oral agreement is evenhandedly legitimate. In order to avoid controversies, it is always good, if the partners have a copy of the written agreement. 2. Two or More Persons: In order to manifest a partnership, there should be at least two (2) persons possessing a common goal. To put it in other words, the minimal number of partners in an enterprise can be two (2). However, there is a constraint on their maximum number of people. 3. Sharing of Profit: Another significant component of the partnership is, the accord between partners has to share gains and losses of a trading concern. However, the definition held in the Partnership Act elucidates – partnership as an association between people who have consented to share the gains of a business, the sharing of loss is implicit. Hence, sharing of gains and losses is vital. 4.Business Motive: It is important for a firm to carry some kind of business and should have a profit gaining motive. 5. Mutual Business: The partners are the owners as well as the agent of their firm. Any act performed by one partner can affect other partners and the firm. It can be concluded that this point acts as a test of partnership for all the partners. 6. Unlimited Liability: Every partner in a partnership has unlimited liability Joint stock company A joint-stock company is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares (certificates of ownership). Shareholders are able to transfer their shares to others without any effects to the continued existence of the company. In modern-day corporate law, the existence of a joint-stock company is often synonymous with incorporation (possession of legal personality separate from shareholders) and limited liability (shareholders are liable for the company's debts only to the value of the money they have invested in the company). Therefore, joint-stock companies are commonly known as corporations or limited companies. Private Circulation only  Module-3 The simplest way to describe a joint stock company is that it is a business organisation that is owned jointly by all its shareholders. All the shareholders own a certain amount of stock in the company, which is represented by their shares. Professor Haney defines it as “a voluntary association of persons for profit, having the capital divided into some transferable shares, and the ownership of such shares is the condition of membership of the company.” Studying the features of a joint stock company will clarify its structure. Features of a Joint Stock Company 1] Artificial Legal Person A company is a legal entity that has been created by the statues of law. Like a natural person, it can do certain things, like own property in its name, enter into a contract, borrow and lend money, sue or be sued, etc. It has also been granted certain rights by the law which it enjoys through its board of directors. However, not all laws/rights/duties apply to a company. It exists only in the law and not in any physical form. So we call it an artificial legal person. 2] Separate Legal Entity Unlike a proprietorship or partnership, the legal identity of a company and its members are separate. As soon as the joint stock company is incorporated it has its own distinct legal identity. So a member of the company is not liable for the company. And similarly, the company will not depend on any of its members for any business activities. 3] Incorporation For a company to be recognized as a separate legal entity and for it to come into existence, it has to be incorporated. Not registering a joint stock company is not an option. Without incorporation, a company simply does not exist. 4] Perpetual Succession The joint stock company is born out of the law, so the only way for the company to end is by the functioning of law. So the life of a company is in no way related to the life of its members. Members or shareholders of a company keep changing, but this does not affect the company’s life. 5] Limited Liability This is one of the major points of difference between a company and a sole proprietorship and partnership. The liability of the shareholders of a company is limited. The personal assets of a member cannot be liquidated to repay the debts of a company. A shareholders liability is limited to the amount of unpaid share capital. If his shares are fully paid then he has no liability. The amount of debt has no bearing on this. Only the companies assets can be sold off to repay its own debt. The members cannot be made to pay up. Private Circulation only  Module-3 6] Common Seal A company is an artificial person. So its day-to-day functions are conducted by the board of directors. So when a company enters any contract or signs an agreement, the approval is indicated via a common seal. A common seal is engraved seal with the company’s name on it. So no document is legally binding on the company until and unless it has a common seal along with the signatures of the directors. 7] Transferability of Shares In a joint stock company, the ownership is divided into transferable units known as shares. In case of a public company the shares can be transferred freely, there are almost no restrictions. And in a public company, there are some restrictions, but the transfer cannot be prohibited. Advantages of a Joint Stock Company One of the biggest drawing factors of a joint stock company is the limited liability of its members. their liability is only limited up to the unpaid amount on their shares. Since their personal wealth is safe, they are encouraged to invest in joint stock companies The shares of a company are transferable. Also, in the case of a listed public company they can also be sold in the market and be converted to cash. This ease of ownership is an added benefit. Perpetual succession is another advantage of a joint stock company. The death/retirement/insanity/etc does affect the life of a company. The only liquidation under the Companies Act will shut down a company. A company hires a board of directors to run all the activities. Very proficient, talented people are elected to the board and this results in effective and efficient management. Also, a company usually has large resources and this allows them to hire the best talent and professionals. Disadvantages of a Joint Stock Company One disadvantage of a joint stock company is the complex and lengthy procedure for its formation. This can take up to several weeks and is a costly affair as well. According to the Companies Act, 2013 all public companies have to provide their financial records and other related documents to the registrar. These documents are then public documents, which any member of the public can access. This leads to a complete lack of secrecy for the company. And even during its day to day functioning a company has to follow a numerous number of laws, regulations, notifications, etc. It not only takes up time but also reduces the freedom of a company Private Circulation only  Module-3 A company has many stakeholders like the shareholders, the promoters, the board of directors, the employees. the debenture holders etc. All these stakeholders look out for their benefit and it often leads to a conflict of interest. Cooperative societies Cooperatives are businesses owned by “member-owners”. Co-ops are democratically controlled by their member-owners, and unlike a traditional business each member gets a voice in how the business is run. Services or goods provided by the co-op benefit and serve the member owners. Contrary to popular belief coops are not non-profits, and do aim earn profits. Earnings generated by the cooperative benefit the member-owners. The word “cooperative” means to work together and cooperate with each other, similarly, in a cooperative society, a group of people forms a voluntary association to benefit the members and work for the betterment of society, especially for the weaker sections. According to “The Cooperative Societies Act 1912”, – Cooperative organization is “a society which has its objective for the promotion of economic interests of its members in accordance with cooperative principles. Advantages of Cooperative Society 1. Easy to Form: There are no big formalities for the formation of a Cooperative Society. Moreover, it is voluntary, so there is no compulsion to any organization person or business associate to form, and join any cooperative society. A minimum of ten members can start a cooperative society, and there’s no limit to the maximum number of members in a cooperative society. 2. Limited Liability: The risk factor of members is limited to the extent of capital brought by them in the cooperative society. In case of insolvency or dissolution, the personal assets of the members are not liable for repayment of debts, which makes the members of a cooperative society feel safe and protects their economic interests. 3. Stability: As the cooperative society holds the position of a separate legal entity, it is not affected by the death, retirement, or admission of any member. A cooperative society is not much affected by its members as they have to work on the basis of the rules and regulations provided in the act. Even though members have a voting right in choosing the managing committee member, it does not have much effect on the working of the business. 4. Equality in Voting Right: Each member in a cooperative society has one vote to elect the member of the managing committee, as it follows the principle of ‘ONE MAN ONE VOTE’. Every member has an equal voting right, no matter whether they have contributed less or huge capital to the business. Having a say in the matters of the business also puts a great emphasis on them. Besides, a cooperative society is a democratic association, which means that it treats everyone the same irrespective of their caste, gender, or creed. Private Circulation only  Module-3 5. Support from the Government: As a cooperative society works majorly for the benefit of poor and weaker sections of the society, it gets great support from the government in the form of low taxes, subsidies, loans with low rates of interest, etc. Disadvantages of Cooperative Society 1. Conflict and Disputes: As the members of a cooperative society belong to different cultural and social aspects their thinking varies, which leads to a greater possibility of conflicts. Members try to make personal gains and keep aside the service motive, which hampers the working of a cooperative society. In other words, the difference in personal motive and social motive of the members of the society results in conflicts among them affecting the overall business. 2. Lack of Privacy: As there are different members in a cooperative society, it is difficult to maintain a level of secrecy. Every decision is taken in a meeting with an open discussion, which makes it difficult to maintain confidentiality about the operations of the business. Besides, a cooperative society has an obligation to disclose the decisions of the meeting under the Societies Act (7). 3. Lack of Efficiency: It is difficult for the cooperative society to earn and make a profit on a large scale because it works for welfare motives. The amount of profit earned by the society is not sufficient to appoint skilled and experienced members for proper management. Even if any of the members agree to give honorary services to the cooperative societies, they do not have sufficient means to handle it well. 4. Government Control: When a cooperative society grows and develops into a big unit, then the government would interfere in its operations. The cooperative society has to comply with rules and regulations related to auditing of accounts, profit, etc., which affects the freedom of operations. 5. Limited Resources: Each member brings limited capital and expects a higher return, which is difficult for a cooperative society to provide at an early stage. Moreover, it is formed for the welfare of society and its members; therefore, the profit motive is ignored to some extent. Public sector enterprises Public Sector Enterprises are an essential part of the Indian economy. These consist of public services and enterprises that benefit all India’s citizens. The public sector enterprises are businesses owned and controlled by the government. The government either wholly or partially owns the enterprises. These enterprises help the government participate in the economic activities of the country. The Central or the state governments can manage public Sector Undertakings. When managed by the state government, it is known as the Central Public Sector undertaking. However, when owned and operated by a state, it is known as the state-level public sector undertakings. Private Circulation only  Module-3 Advantages of a public corporation Affordability. The company provides essential public services to citizens at an affordable price. The company aims to serve the public, not solely for the sake of profit. Operation continuity. Public corporations continue to operate with government support even if they are at a loss. The government will maintain it because it provides considerable social benefits to the public. Government support. The company is not too bothered about raising funds because it has strong funding support from the government. Likewise, the company provides the privilege to operate, so it does not face competitive pressures. Disadvantages of a public corporation Inefficiency. Not facing competitive pressures, there is no reason for the company to operate more efficiently. In addition, companies also do not strictly pursue profit targets, making them less concerned about efficiency. That contrasts with private companies, where they have to operate more efficiently to maximize profits. Intervention. The government has a significant influence on business decisions. And political reasons also complicate operations and reduce independence in conducting business. For example, some politicians may use them to pursue popularity in a particular area. Waste of money. Because the pressure to be more efficient is low, the company is likely to consume more costs. As a result, it could cost a large government budget to subsidize them. In addition, corrupt practices within the company also increase costs. Classification of Public Sector Enterprises In the PSU’s there are three main sectors, which are: Departmental Undertakings: These are organised, financed and controlled by the government. The department is under the control of a minister from the Parliament. Some examples of departmental undertaking are the Indian Railways and Indian Post. Non-Departmental Undertakings: These are government companies and subsidiaries of the government. Additionally, these refer to statutory companies set up under special enactments of the Parliament and State Legislature. A few examples of non-departmental undertakings are Oil and Gas Corporations and Road Transport Corporations. Financial Institutions: These are enterprises like commercial banks, investment banks and brokerage firms. Examples of financial institutions are the State Bank of India and Unit Trust of India. Objectives of Public Sector Enterprises The main objective of the public sector enterprise is to help the benefit of the citizens. However, besides that, there are other objectives of a public sector enterprise, like: It helps in creating an industrial base in the country. Private Circulation only  Module-3 PSU’s help in generating a better quality of employment. They develop the basic foundation in the country. Public Sector Enterprises helps in providing resources to the government. They help reduce inequalities and accelerate the country’s economic growth and development. Role of Public Sector Enterprises The public sector enterprises play a significant role in the upliftment of the country’s economic conditions. Here are some of how the public sector enterprises play a role in the economy: Capital Formation: The Public Sector has been one of the biggest reasons for the generation of capital in the Indian economy. A large amount of the money generated in the economy is because of the public sector. Employment Opportunities: The Public Sector has brought about a significant change in the employment sector of the economy. It provides the citizens with many employment opportunities in various sectors of the economy. These opportunities help in the upliftment of the citizens and the economy. Development of Regions: Public Sector Undertakings majorly consist of factories and plants that can boost the different regions’ socio-economic development. The inhabitants of the parts benefit from the establishment of these. PSUs. They benefit in ways like facilities like electricity, water supply and township. Problems in The Public Sector Enterprises While the PSU aims to help in the development of the country. It is not a sector that doesn’t face problems. Hence, here are the issues which the Public Sector Enterprises face: Inappropriate and Wrong Investment decisions Incorrect Pricing Policies Excessive Overhead Costs Obsolete Technology Overstaffing Trade Unions Lack of Accountability Reforms in the Public Sector Enterprises The Indian government has many reforms regarding the Public Sector. These reforms help develop the public sector as they bring changes in the industry. Here are some of the reforms of the Public Sector: New Industrial Policy, 1991 Private Circulation only  Module-3 Voluntary Retirement Scheme, 1988 Administered Price Mechanism The Policy of Navratnas: PSUs are the best in the economy: they were given autonomy to perform better and increase efficiency The policy of Miniratnas: These are PSUs making profits continuously for three years The policy of Maharatnas: These are PSU’s which should have been a Navratna, listed on the stock exchange in India, and should have a global presence Diversification strategy Diversification strategy is a method of expansion or growth followed by businesses. It involves launching a new product or product line, usually in a new market. It helps businesses to identify new opportunities, boost profits, increase sales revenue and expand market share. The strategy also gives them leverage over their competitors. The corporate diversification strategy or product diversification is a prominent approach followed by large- scale businesses. However, diversifying products is usually risky and requires extensive market research and analysis. There are three main types of product diversification – concentric, horizontal, and conglomerate, based on the scope and approach undertaken. Types The three main diversification strategies are based on the approach undertaken – concentric, horizontal, and conglomerate diversification. Concentric diversification This method introduces closely related products to the existing market. That is, similar products are added to the current product line. Such a type of diversification brings the focus of a business to a center point, thus concentric. For example, an automobile company adds a solar-powered car to its eco-friendly auto line. Horizontal diversification Diversifying a product horizontally means introducing new but unrelated offerings to the company’s product mix. Horizontal diversification can also be adapted to launch complementary goods. For instance, a clothing company launching its footwear line. Conglomerate diversification A business focuses on a completely different product line in this strategy. Hence, this can be extremely risky. The company broadens its scope and targets a different market. The Disney diversification strategy is a suitable example here. Advantages of Diversification 1. Helps to mitigate risks within the core business Private Circulation only  Module-3 As mentioned earlier, one of the main advantages of diversification is that it helps to mitigate risks within the core business. This is because by expanding into other markets and industries, companies are less likely to be impacted negatively by problems within their core business. For example, if there was an economic recession in the country where a company’s main operations were based, then this would likely have a negative impact on their sales and profits. However, if that company had also expanded into other countries where the economy was not impacted by the recession, then this would help to offset any losses made in their core market. 2. Increases opportunities for growth Another advantage of diversification is that it increases opportunities for growth. This is because when a company expands into new markets and industries, they are effectively opening up new channels through which they can generate sales and profits. This can help a company to reach its long-term growth objectives quicker than if it had only focused on its core business. 3. Makes financial sense From a financial perspective, diversification can also make sense for companies as it can help them to use their resources more efficiently. For example, if a company has spare capacity in its factories or office space, then rather than leaving this unused, they could put it to good use by expanding into new markets and using this spare capacity to produce products or services for these new markets. This would help the company to generate additional revenue without incurring any significant extra costs. 4. Reduces dependence on one market or customer Another advantage of diversification is that it reduces dependence on one market or customer group. This is often seen as being beneficial as it makes a company less vulnerable should there be any problems with its main market or customer group (e.g. if they experience financial difficulties and are unable to buy from the company). By having a more diversified customer base, companies are able to reduce this risk and protect themselves against such problems occurring in the future. 5. Provides tax benefits Finally, another potential advantage of diversification is that it can provide tax benefits for companies. This is because when companies expand into new markets, they may be able to take advantage of different tax regimes which could result in them paying less tax overall. This could provide a significant boost to the company’s profits and help to improve its financial position over time. Private Circulation only  Module-3 Disadvantages of Diversification 1. Can be expensive One of the main disadvantages of diversification is that it can be expensive for companies to pursue this strategy effectively. This is because expanding into new markets often requires significant investment in areas such as marketing and product development in order to make sure that products/services are successfully launched in these new markets. Furthermore, acquiring businesses in other industries can also be costly (e.g. if a company wants to buy an existing business rather than setting up their own operations from scratch). These costs can often outweigh any potential benefits which might be generated from pursuing this strategy and so it’s important for companies to carefully consider whether or not diversification makes financial sense for them before proceeding with this option. 2.There’s no guarantee of success Another key disadvantage of diversification is that there’s no guarantee of success regardless of how much effort or money is invested by a company. This is because even with careful planning and execution, there’s always a risk that things could go wrong (e.g. The new product might not be successful in the market). Also, even if everything goes according to plan, there’s no guarantee that the overall strategy will be successful as results could take many years to materialize. For example, a company might not see any significant increase in sales/profits until several years after launching its operations in a new market/industry. This delay could cause problems for companies who need quick results in order to meet their financial obligations (Paying back loans). 3. Can lead to managerial stretch Another common problem associated with diversification is managerial stretch. This occurs when managers are required to oversee too many different businesses at once and as a result,t hey are unable to spread themselves too thinly and end up doing a poor job running each individual operation. This often leads to businesses underperforming and ultimately, can jeopardize the future success of the entire organization. Reasons for Diversification 1) Increasing Profits The most popular reason for diversification is to increase profits. By entering into new markets and industries, firms can expand their customer base and therefore increase revenue. Private Circulation only  Module-3 Additionally, by selling new products to current customers, businesses can cross-sell and upsell; which again leads to an increase in revenue. It has been proven that businesses who have diversified have increased their overall profitability. 2) Reducing Risk Another reason businesses choose to diversify is to spread risk. By having interests in multiple markets and industries, firms are less likely to be negatively affected should one market or industry experience tough times. This strategy allows companies to buffer against any potential risks associated with operating in just one market. Additionally, should one area of the business falter, the other areas can often still prosper; limiting the negative effects on the firm as a whole. 3) Competitive Edge Another reason for diversification is to achieve a competitive edge over competitors. When done correctly, diversification can allow firms to tap into new markets and industries first; giving them the first-mover advantage. This can often lead to increased market share and greater profits as customers flock to the company because it offers something unique that others don’t. Additionally, by having a presence in multiple markets, companies can use one area of the business as a springboard to enter another, using the knowledge, they have already acquired to give them an advantage over those who haven’t diversified Expansion strategy An expansion strategy is the business's approach to attaining this growth, such as expanding a customer base, offering more products, improving profit margins, growing brand presence, or obtaining more online or brick-and-mortar commerce locations. A business or a company follows the expansion strategy when it wants to achieve a certain high growth level compared to the previous performance. When a company plans to achieve a certain growth level, it employs methods like increasing its business operations to target a more significant customer market and technological tools. Businesses and companies use different methods and techniques to stabilize their earnings. It’s also one of their goals is to grow their business and become more prosperous. They call it expansion. Today, we’ll discuss business expansion strategy and its different types in detail with examples. What is an Expansion Strategy? A business or a company follows the expansion strategy when it wants to achieve a certain high growth level compared to the previous performance. When a company plans to achieve Private Circulation only  Module-3 a certain growth level, it employs methods like increasing its business operations to target a more significant customer market and technological tools. The goal and reason behind the business expansion strategies may vary from business to business. It could be increasing the social benefits, increasing the market share, achieving economies of scale, prestige, and higher profit. Only those businesses follow the expansion strategy whose managers and supervisors are ambitious. They’re willing to take risks and grow. Types of Strategies with Examples Here are the five types of expansion strategies that businesses and companies use, and they’re as follows; Expansion through Concentration Expansion through concentration is the grand level strategy, and it requires an investment of a plethora of capital and resources in a specific product line. It’s to satisfy the needs of the target market with the specific verified technology. In other words, when a business or a company invests its capital and resources into one or more product lines and businesses, the purpose is to satisfy the needs and wishes of customers. However, businesses and companies employ concentration strategy by any of the following methods; Product Development. Here you launch some new products in the existing market to increase the product line of your business. Market Development. You expand your market and attract more customers by using the existing and current product line. Market Penetration Strategy. The focus of your business is on the current market by using the existing product line. Businesses and companies utilize concentration strategy because they’re already familiar with the field and product niche. They don’t have to make any structural changes in the company. It is because they already know their business. The reason the concentration strategy is risky is due to the over-dependence on one industry. If the country’s economy falls, it would drastically impact your business. Some businesses have made a plethora of investments in one sector. Any latest technological development would make their product obsolete. Expansion through Diversification Through diversification, expansion is when a company changes its business type by either entering into the new market or launching the new product. Businesses and companies follow the diversification strategy during the economic recession period Private Circulation only  Module-3 The purpose of a business diversification strategy is to recover the company’s losses by making a profit from the other business. The economy and market have affected its profit and earnings. The diversification strategy has two main types; Conglomerate Diversification. When a company expands into other businesses regardless of their relevancy or irrelevancy to its core niche, we call it conglomerate diversification. In other words, conglomerate diversification is when a company acquires other business or product/service (relevant or irrelevant) to increase its product/service portfolio. Concentric Diversification. Concentric diversification is when a company acquires a product/service closely relevant to its core product/service range. For instance, a shoe production factory acquires a leather company to increase its sales and customer market share. Example Google has diversified its business into various businesses like Android, Chrome, Google Map, Google Earth, Adsense, Gmail, YouTube, etc. Expansion through Integration Through integration, expansion is when you combine/join various current operations of the company without changing the target customer market. Businesses and companies use a value chain system for integration. The value chain is the process of related activities that a company performs, from the raw material’s procurement to the finished good. The company increases or decreases the number of steps in the value chain system and develops the product to satisfy customers’ needs. The expansion through integration has two main types; Horizontal Integration. Horizontal integration is when a company overpowers the competitor by offering the same products/services and marketing strategy. For instance, a pharmaceutical company overcomes the competitor brand by providing similar products. Forward Integration. Forward integration when a company opens up its brand retail stores and directly approaches the final customers and offers them the product/service. For instance, the outlets of Apple, Samsung, Huawei, etc. Backward Integration. Backward integration is when a company goes back to produce its raw material for its finished products/services. For instance, a shoe factory also makes the leather, raw material, for its final products. Expansion through Cooperation Private Circulation only  Module-3 When a company agrees with the competitor brand to perform business operations together and compete with each other simultaneously. The expansion through cooperation has the following types, and they’re as follows; Strategic Alliance. The strategic alliance is when two or more businesses integrate to execute their business operations coactively and work independently to achieve their individual goal. The purpose of the strategic partnership is to exploit any of the companies’ human resources, technology, and expertise. Joint Venture. A joint venture is when two or more companies plan to execute their business operations jointly. The purpose of the joint venture is to utilize the strengths of the two companies. Businesses and companies go on a joint venture to achieve a particular task or goal. Takeover. A takeover is when one company buys the other company and becomes responsible for the operations of both. Merger. A merger is when two or more companies integrate where one company buys the other’s assets for cash. Both companies get dissolved and form the new company. The acquisition is the buyer company, and the merger is the acquired-company. Expansion through Internationalization Expansion through internationalization is when a company goes beyond the country’s national border and market. The reason for internationalization is when the company has utilized all the opportunities in the domestic market. Now the brand expands into the global market to exploit opportunities in the international market. Businesses and companies perform the following strategies for expansion through internationalization; Global Strategy. Global strategy is when a company follows the low-cost approach and offers its product/service to a particular foreign market where lower-cost is available. The company provides the same low cost manufactured product to the rest of the world. Multi-domestic Strategy. A multi-domestic strategy is when a company provides a customized product/service relevant to the foreign market conditions. It’s a costly strategy because of its research and development cost, market, and manufacturing costs by following the local markets’ needs in different countries. International Strategy. International strategy is when a company offers its product/service to those markets where they don’t have access to it. It requires strict controls over the operations in the other countries and offering them the same standard product. Transnational Strategy. A transnational strategy when a company follows the global system and multi-domestic process at the same time. Here the company offers customized and low- cost products/services to the local market by following their environmental conditions. In other words, the company provides the standard product/service aligned with the local norms of the country. Private Circulation only  Module-3 Mergers & Acquisition The terms "mergers" and "acquisitions" are often used interchangeably, but they differ in meaning. In an acquisition, one company purchases another outright. A merger is the combination of two firms, which subsequently form a new legal entity under the banner of one corporate name. Objectives of M&A The objectives of mergers and acquisitions include expanding the economy, increasing market capitalization, valuations, and demand and supply. Everything from management to philosophy to company policies falls under these objectives. Acquirers may actively seek out undervalued targets, as they may have more accurate expectations of the future value of the target firm, resulting in profitable undervalued target purchases. The main objectives of mergers and acquisitions include revenue maximization. A loss- making company that merges with a profit-making company can achieve growth, while the acquiring company gains access to the customer base, products, and services used by the loss- making company. Mergers and acquisitions provide security, as the dual efforts of both companies result in backup or security for one another. This adds to the security of the company to deal with the market at large. Mergers and acquisitions also result in customer recognition. The loss-making company’s reputation is protected, and its customer base moves to the newly formed merged company, ultimately resulting in customer recognition. Additionally, mergers and acquisitions provide opportunities for diversification and tax benefits. Tax benefits are enjoyed when a loss- making company is merged or acquired by a profit-making company, reducing the tax burden. Mergers and acquisitions also help to eliminate competition in the market, which can prove beneficial for the economic growth of the country as a whole. This allows companies to keep their prices high and supply a variety of goods and services. Finally, the combination of two companies creates a synergy effect, resulting in operational and management synergies that establish an efficient new working company Types of Mergers Horizontal merger A merger between companies that are in direct competition with each other in terms of product lines and markets Vertical merger A merger between companies that are along the same supply chain (e.g., a retail company in the auto parts industry merges with a company that supplies raw materials for auto parts.) Market-extension merger A merger between companies in different markets that sell similar products or services Private Circulation only  Module-3 Product-extension merger A merger between companies in the same markets that sell different but related products or services Conglomerate merger A merger between companies in unrelated business activities (e.g., a clothing company buys a software company) Types of Acquisition Horizontal Acquisition A horizontal acquisition occurs when one company acquires another company that operates in the same business. In some cases, these acquisitions involve competitors that serve the same customer base. However, a horizontal acquisition can also involve non-competitors. The benefits of a horizontal acquisition include potential increases in a company’s customer base and market share, as well as opportunities to expand into new markets. Vertical Acquisition A vertical acquisition is when one company acquires another company that operates at a different position in the supply chain. The acquirer may be higher up in the chain, or it may be lower on the chain. Vertical acquisitions can introduce new income streams, lower production costs, and streamline operations. Conglomerate Acquisition A conglomerate acquisition occurs when the acquiring and target companies operate in unrelated industries or engage in unrelated activities (such as when a widget manufacturer is acquired by a non-related company). The main reason for a conglomerate acquisition is diversification. If one product or service is struggling, there are hopefully others that are performing well, providing stability for the company. Congeneric Acquisition A congeneric acquisition is when the acquiring company and the acquired company offer different products or services but sell to the same customers. This type of acquisition helps a company increase market share and expand its product lines. Difference between Acquisitions and Mergers: ACQUISITIONS MERGERS Meaning An acquisition is a cycle A merger is a cycle wherein wherein one organisation more than one assumes or takes over the organisation’s approach functions as one. Private Circulation only  Module-3 responsibility for another organisation. No new shares are issued in New shares are issued in Issuance of Shares case of acquisitions. case of mergers. The choice of acquisitions is A merged business entity is probably not shared, or of settled upon by common mutual consent in nature; in assent and mutual consent of the event that the acquiring the involved organisations. Mutual Consent and organisation assumes control Rather it is a planned and Decisions over one more venture friendly one. without the acquired company’s assent, it is named an unfriendly takeover or hostile takeover. The obtained or acquired The merged business entity organisation, for the most works under another name part, works under the name or a new name. of the parent organisation. Company’s Name Sometimes, nonetheless, the previous company can hold its original name, assuming the parent organisation permits it. The acquiring organisation The merged companies are is independently stronger in of similar stature, Stature, by Comparison terms of financial capability operations, size, and scale of than the acquired business. business. The acquired company has Power or Authority over the no say in terms of power or There is harmony when it Other authority by the acquiring comes to merged companies. company. Merging of Glaxo Wellcome Examples Tata Motors acquisition of and SmithKline Beecham to Jaguar Land Rover GlaxoSmithKline Franchising Franchising is an arrangement where franchisor (one party) grants or licenses some rights and authorities to franchisee (another party). Franchising is a well-known marketing strategy for business expansion. A contractual agreement takes place between Franchisor and Franchisee. Franchisor authorizes franchisee to sell their products, goods, services and give rights to use their trademark and brand name. And these franchisee acts like a dealer. Private Circulation only  Module-3 In return, the franchisee pays a one-time fee or commission to franchisor and some share of revenue. Some advantages to franchisees are they do not have to spend money on training employees, they get to learn about business techniques. Examples of Franchising in India McDonald’s Dominos KFC Pizza Hut Subway Characteristics Some of the main features of franchising in business are as follows: Two Parties: This method involves the franchisor and the franchisee. Both of them sign a written agreement. Exclusive Right: The franchisor grants the franchisee the right to use their brand name, trademarks, and techniques under specific guidelines. Assistance: The franchisor supports the franchisee in critical areas like marketing, technology, recordkeeping, staff training, etc. Policies: Franchisees must operate the business according to the policies designed by the franchisor. The former gives an undertaking not to engage in any competing business. Moreover, per the terms of the agreement between the two parties, the franchisee must not disclose any confidential information regarding the business. Limited Period: Franchisees can use the franchisor’s brand name, trademarks, and techniques for a period mentioned in the agreement, for example, seven years. Upon the expiry of the contract, both parties may agree to renew the contract. Payments: The franchisee pays an initial fee to the franchisor to acquire the license. In addition, the former pays royalty fees to the latter. Types The following are the most common types of franchising relationships: Product Franchises In the case of these agreements, the franchisee has the right to use the franchisor’s brand name, products, trademarks, etc. Manufacturers allow third-party operators to market and distribute their products via this contract. Moreover, they control the way the retailers carry out the distribution. In return, the franchisee pays the franchisor an initial fee and royalties. Business Format Franchises Business format franchises involve following a particular business format and the best processes and practices associated with it. The franchisor expands its operations by providing Private Circulation only  Module-3 its well-established business concept or format. It guides the franchisee on how to launch and operate the business. Manufacturing Franchise In this arrangement, the franchisor gives the franchisee (a manufacturer) the right to produce goods under its trademark and brand name. This type of agreement is common among food and beverage companies. Intellectual Property Rights Intellectual property rights (IPR) refers to the legal rights given to the inventor or creator to protect his invention or creation for a certain period of time. These legal rights confer an exclusive right to the inventor/creator or his assignee to fully utilize his invention/creation for a given period of time. Patent A patent is an exclusive right granted for an invention. Generally speaking, a patent provides the patent owner with the right to decide how - or whether - the invention can be used by others. In exchange for this right, the patent owner makes technical information about the invention publicly available in the published patent document. Copy rights Copyright is a legal term used to describe the rights that creators have over their literary and artistic works. Works covered by copyright range from books, music, paintings, sculpture and films, to computer programs, databases, advertisements, maps and technical drawings. Trademark A trademark is a sign capable of distinguishing the goods or services of one enterprise from those of other enterprises. Trademarks date back to ancient times when artisans used to put their signature or "mark" on their products. Industrial design An industrial design constitutes the ornamental or aesthetic aspect of an article. A design may consist of three-dimensional features, such as the shape or surface of an article, or of two- dimensional features, such as patterns, lines or color. Geographical indications Geographical indications and appellations of origin are signs used on goods that have a specific geographical origin and possess qualities, a reputation or characteristics that are essentially attributable to that place of origin. Most commonly, a geographical indication includes the name of the place of origin of the goods. Trade secrets Trade secrets are IP rights on confidential information which may be sold or licensed. The unauthorized acquisition, use or disclosure of such secret information in a manner contrary to Private Circulation only  Module-3 honest commercial practices by others is regarded as an unfair practice and a violation of the trade secret protection. Examples of intellectual property rights include: Patents Domain names Industrial design Confidential information Inventions Moral rights Database rights Works of authorship Service marks Logos Trademarks Design rights Business or trade names Commercial secrets Computer software What are Some Examples of Violations of Intellectual Property? The significant violations of intellectual property consist of infringement, counterfeiting, and misappropriation of trade secrets. Violations of intellectual property include: Creating a logo or name meant to confuse buyers into thinking they’re buying the original brand Recording video or music without authorization or copying copyrighted materials (yes, even on a photocopier, for private use) Copying another person’s patent and marketing it as a new patent Manufacturing patented goods without a license to do so Sources of capital One major source is the savings of the owners of private businesses, and the undistributed profits of companies. A second major source is borrowing, either by selling bonds or borrowing from banks and other financial intermediaries. A further source of capital is selling equity shares. Private Circulation only  Module-3 Personal Fund Personal funds means earned income and unearned income retained by an individual after satisfying his or her obligations such as rent, individual-specific expenses, or medical co-payments; satisfying state requirements including patient liability and/or monthly premiums for services funded by a home and community-based services waiver; and satisfying federal requirements including adherence to income restrictions necessary to maintain medicaid eligibility. Basically this refers to any funds that you borrow, receive or have as an individual in your own name and not under the business. An individual may decide to self-fund their own start-up using their savings, and on the positive side, it means that there isn't any additional cost involved. Bank loan A sum of money borrowed by a customer or business from a bank, often for a specific purpose Venture capital funding Venture capital funds(VCFs) are investment instruments through which individuals can park their money in newly-formed start-ups as well as small and medium-sized companies. These are types of investment funds that primarily target firms that have the potential to deliver high returns. Nonetheless, investing in these companies also involves considerable risk. VCFs are somewhat similar to mutual funds – these constitute a pool of money collected from several investors. Here investors can refer to individuals with high net worth, companies, or even other funds. Instead of an asset management company, a VCF is managed by a venture capital firm. What Does a Venture Capital Firm Do? A venture capital firm identifies investment areas that can generate lucrative returns. It not only acts as the fund manager but also as an investor. Generally, a venture capital firm will also invest its own money as a form of commitment and assurance to its clients. In lieu of investment, a venture capital firm may seek a chair amongst the directors at the company, and offer expertise and intelligence for better management. Types of Venture Capital Funds Pros and Cons of VCFs Pros One of the primary advantages of venture capital funds is that the company does have to repay the investment sum. Private Circulation only  Module-3 Even if the company fails, entrepreneurs are not in any way obligated to repay the invested fund, which is usually severely problematic in the case of bank loans. Venture capital firms have a widespread network, which can help a start-up get the much- needed marketing and promotion that can eventually help to establish itself. VCFs can help a company to expand quickly and exponentially. This may not be the case in any other type of funding. Not only investment but VCFs bring years of expertise to the table. This proves crucial in human resource management, financial management, and business decisions, which young entrepreneurs may lack. Cons Venture capital firms have to assess whether investing in a company will be feasible and can help to generate favourable returns. This can take a prolonged time, which can delay funding. By investing in a company, venture funds take part in a business’ decision making. Venture capital firms also hold a chair on the board. Due to the ever-growing number of start-ups, securing a VCF may be challenging. Types of Venture Capital Funds Venture Capital Funds are classified on the basis of their utilisation at different stages of a business. The 3 main types are early stage financing, expansion financing, and acquisition/buyout financing. Early stage financing There are 3 sub-categories in early stage financing. These are seed financing, startup financing, and first stage financing. Seed financing is a small sum given to the entrepreneur to serve the purpose of qualifying for a startup loan. Startup financing is when the companies receive funds to complete the development of its services and products. When companies need capital to begin the business activities in full swing, they need first stage financing. Expansion financing Expansion financing is classified into second stage financing, bridge financing, and third stage financing. The second stage and third stage financing are given to companies so that they can start their expansion process in a major way. Bridge financing is offered to companies in the form of monetary support when they employ Initial Public Offerings (IPO) as a principal business strategy. Private Circulation only  Module-3 Acquisition or buyout financing Acquisition finance and leveraged buyout financing are the categories falling under acquisition or buyout financing. When a company needs funds to acquire another company or parts of a company, acquisition financing comes to aid. Leveraged buyout financing is required when a management group of a company wishes to acquire another company's particular product Features of Venture Capital Funds The main focus of VCFs is on early-stage investment but sometimes, it can also involve expansion-stage financing. Often, equity stakes of the enterprises company make further advancements. Sometimes the VCFs also help in developing new products/services and acquire latest technologies that will help the company to improve efficiency. The biggest advantage that VCFs offer is the networking opportunities. With influential and wealthy investors promoting the company, it will in no time, achieve stellar growth. VCFs hold the authority to influence the decisions of the enterprises they are investing in. To mitigate the risks involved in funding new projects, VCFs invest in a variety of young startups with a belief that at least one firm will achieve massive growth and reward them with a large payout or companies that are funded by the VCFs are purchased by the VCFs. Angel investor An angel investor is a wealthy person who invests his or her own money in a company— usually a start-up—that is in the early stages of development. Angel investors expect to take ownership positions in the companies they support because their capital is unsecured—they have no claim on the company's assets. Why Look for an Angel? An entrepreneur may seek an angel investor over more conventional financing. The terms tend to be more favorable and, in fact, the angel investor doesn't expect to get the money back unless the idea succeeds. They often seek an equity stake and a seat on the board. Angel investors focus on helping startups take their first steps rather than getting a favorable return on a loan. Angel investors have also been called informal investors, angel funders, private investors, seed investors, or business angels. They seek prospects through online crowdfunding platforms or join networks that pool capital for greater impact. Private Circulation only  Module-3 Origins of Angel Investors The term angel investor originated in the Broadway theatrical world, where plays were often financed by wealthy individuals rather than formal lenders and payments were due only when and if the production was a success. The term "angel investor" was first used by the University of New Hampshire's William Wetzel, founder of the Center for Venture Research. Wetzel completed a study on how entrepreneurs gathered capital.2 These days, Silicon Valley is the center of the angel investor's world, and the ideas being financed are related to the internet, software, or artificial intelligence. Who Can Be an Angel Investor? Angel investors have a genuine interest in innovation and a desire to be involved. Many have been entrepreneurs in the past. Anyone who has the money and the desire to provide funding for startups can be an angel investor. They are welcomed by cash-hungry entrepreneurs who can't get conventional bank loans or don't want the burden of big debt until their ideas take off What's the Difference Between an Angel Investor and a Venture Capitalist? Venture capitalists deploy vast sums of cash pooled from many investors. They have big money to spend and they tend to spend it only on existing businesses that they think have an opportunity to turn a substantially bigger profit. For example, they might buy a moribund retail chain with the goal of revitalizing it over the next two years. Angel investors are a different breed. They are individuals who are looking to put their own money into good ideas at their earliest stages of becoming successful businesses. They are committing their own money in hopes of making a good idea a reality. Functions of angel investor Angel investors typically provide capital for business start-ups in exchange for convertible debt or ownership equity. As such, they are usually considered to be higher risk/higher return investors than traditional investors. However, angel investors are often credited with playing a critical role in the development of many successful businesses. Some of the benefits of working with an angel investor include their accessibility and personal connection to the project. They may also provide valuable mentorship and advice, as well as introductions to their networks. Crowd funding Crowdfunding is a way to raise funds for a specific cause or project by asking a large number of people to donate money, usually in small amounts, and usually during a relatively short period of time, such as a few months. Crowdfunding is done online, often with social networks, which make it easy for supporters to share a cause or project cause with their social networks. Private Circulation only  Module-3 Organizations, businesses, and individuals alike can use crowdfunding for any type of project, for example: charitable cause; creative project; business startup; school tuition; or personal expenses. There are 2 main models or types of crowdfunding: Donation-based funding, where donors contribute to a total amount for a new project. Often promised return is the product or service that will be developed with the revenue brought in by the crowdfunding campaign. For charitable projects whose ultimate beneficiary is not the donor, there may be some other perk or reward for funders. Investment crowdfunding, where businesses seeking capital sell ownership stakes online in the form of equity or debt. In this model, individuals who fund become owners or shareholders and have a potential for financial return, unlike in the donation model. What are the benefits of crowdfunding for startups? Crowdfunding is an innovative way for startups to raise the funds they need to launch or grow their businesses. And by turning to the crowd for funding, startups can reap a variety of additional benefits beyond the acquisition of funds. The rise of the internet and social media has made it easier than ever to reach a large audience of potential investors and backers, each contributing a small amount towards a funding target. This approach not only makes the investment process more accessible, but it also provides several distinct advantages to startups. Here are some of the key advantages: Access to capital Crowdfunding provides startups with access to capital that they might not have been able to secure from traditional funding sources, such as banks or venture capitalists. Market validation By presenting your idea to the public, you can gauge their interest and see if your product is something that people would actually want. A successful crowdfunding campaign can demonstrate there is demand for your product or service and act as a proof of concept for other investors and stakeholders. Audience building A crowdfunding campaign allows you to reach a large number of people, helping you create awareness and build an audience. Those who contribute to your campaign are likely to become your most passionate customers and vocal advocates. Feedback and insights Through the process of crowdfunding, you can receive feedback on your product or service before it officially launches. Backers can provide valuable insights and suggestions for improvements. Private Circulation only  Module-3 Less risk Compared to traditional funding methods, crowdfunding can be less risky. You’re not giving up equity or taking on debt; instead, you’re exchanging your product or service for funding. Publicity and marketing A successful crowdfunding campaign can lead to significant publicity, through social media shares and likes and traditional media coverage. Partnership and networking opportunities Crowdfunding campaigns often catch the eye of industry leaders, potential partners, and even other funding sources. This visibility can lead to strategic partnerships and further investment opportunities Types of crowdfunding There are four main types of crowdfunding that startups can choose from, each with unique advantages and specific use cases it’s more suited to supporting. Here’s an overview of what startups need to know: Reward-based crowdfunding With reward-based crowdfunding, backers contribute funds to your startup in exchange for a “reward,” usually a product or service your company offers. This model is typically used by startups that are launching a new product or service and need funding for development or production. Examples of reward-based crowdfunding platforms include Kickstarter and Indiegogo. Reward-based crowdfunding is a popular method for raising funds, especially for creative projects or new product launches. Below are some of the key pros and cons. Pros of reward-based crowdfunding: No equity sacrificed: Unlike equity-based crowdfunding, reward-based crowdfunding doesn’t involve giving up ownership in your company. Market validation: Reward-based crowdfunding allows you to assess market interest in your product or service. If your campaign succeeds, it’s a good sign that there’s a market for what you’re selling. Pre-sales and marketing: Crowdfunding campaigns can also act as a pre-sale of the product, generating publicity and providing an initial customer base. Community building: Crowdfunding platforms provide a way to communicate and engage with backers. This can help build a community of supporters who might help spread the word about your product or service. Private Circulation only  Module-3 Cons of reward-based crowdfunding: All-or-nothing funding: Many crowdfunding platforms operate on an all-or-nothing basis, which means if you don’t hit your funding goal, you don’t receive any money. This isn’t always true, but it’s not uncommon. Fulfilling rewards: It’s important to deliver on promised rewards, which could be more time-consuming or costly than anticipated. Not fulfilling rewards can lead to reputation damage or even give supporters grounds to ask for their funds back. Unpredictable success: Not all campaigns succeed, even if your idea is good. Success can depend on many factors, including the quality of the campaign, timing, and sheer luck. A startup might invest considerable time launching a campaign only to have it fall flat. Additionally, an unsuccessful campaign might erroneously give founders the impression that their business idea isn’t viable or that there isn’t strong market demand. Public exposure: Your idea is shared publicly, which could lead to someone else copying it. You need to balance the need for publicity with the risk of revealing too much. Fees: Crowdfunding platforms typically charge a percentage of the funds raised as a fee, and there could be additional processing fees. Equity-based crowdfunding With equity-based crowdfunding, backers receive shares of your company in return for their investment. This form of crowdfunding is used most often by startups with high growth potential, as it allows them to raise larger amounts of money in exchange for a stake in their company’s future profits. SeedInvest and CircleUp are popular platforms for equity-based crowdfunding. Pros of equity-based crowdfunding: Larger amounts of capital: Since investors are purchasing a stake in the future success of the company, they may be willing to contribute larger amounts than in reward-based crowdfunding. This can allow startups to raise significant funds. Long-term investor relationships: Unlike reward-based crowdfunding, where the relationship typically ends once the reward is delivered, equity crowdfunding can result in long-term relationships with investors who have a vested interest in the ongoing success of the company. Access to expertise and networks: Investors often bring their own expertise, experience, and networks, which can be valuable resources for early-stage companies. Cons of equity-based crowdfunding: Loss of ownership: By offering equity in your company, you are giving away a portion of your ownership, which might mean sharing control and decision-making. Private Circulation only  Module-3 Regulatory complexity: Equity-based crowdfunding is subject to more complex laws and regulations than other forms of crowdfunding. This may require legal counsel and can result in substantial legal costs. Increased reporting requirements: Companies with many shareholders often have to provide regular updates and financial reports to their investors. This can be time-consuming and require additional administrative resources. Pressure for returns: Unlike reward-based crowdfunding, where backers are happy to receive the product or service, equity investors seek a financial return on their investment. This can increase the pressure on the company to perform and provide returns. Potential for dilution: If you raise more equity funding in the future, the percentage of the company owned by earlier investors (including crowdfunding investors) may be diluted. This can lead to dissatisfaction among investors if not handled correctly. Debt-based crowdfunding Also known as “peer-to-peer lending” or “P2P lending,” debt-based crowdfunding is similar to a traditional loan. Instead of getting a loan from a bank, you’re getting a loan from a crowd of investors. The startup agrees to pay back the loan with interest over a specified period of time. LendingClub and Prosper are well-known platforms for debt-based crowdfunding. Pros of debt-based crowdfunding: Retention of ownership: Unlike equity crowdfunding, with debt-based crowdfunding you don’t have to give up any ownership stake in your company. Once the loan is repaid, your obligation to your investors ends. Faster process: The process for securing a loan through debt-based crowdfunding can be faster than through traditional banks. The qualification requirements may also be less strict. Fixed repayment schedule: You’ll have a fixed repayment schedule, which can be easier to plan for than the unpredictable nature of equity investments. Potentially lower costs: Depending on the interest rate you secure and the length of your loan, debt-based crowdfunding can sometimes be a cheaper form of finance than equity- based crowdfunding or other types of loans. Cons of debt-based crowdfunding: Obligation to repay: Unlike other forms of crowdfunding, the money you raise through debt-based crowdfunding must be paid back with interest. This is a fixed expense you’ll need to plan for, regardless of how well your business is doing. Interest costs: The cost of the loan includes not just the principal amount you borrow, but also the interest you’ll pay over the life of the loan. Risk to credit score: If you’re unable to make your loan repayments, your credit score may be affected, which can impact your ability to secure financing in the future. Private Circulation only  Module-3 Secured loans risk: Some debt-based crowdfunding might require collateral or a personal guarantee. If the loan isn’t repaid, you risk losing the assets you’ve pledged as collateral. Donation-based crowdfunding This model is commonly used by nonprofits, social entrepreneurs, and startups where the “return on investment” is not financial, but a social good or some form of community benefit. Backers donate money to the project because they believe in the cause, not because they’re expecting a financial return. GoFundMe is a well-known platform for donation-based crowdfunding. Pros of donation-based crowdfunding: No repayment or equity exchange: Backers donate the money to your project or cause, so you don’t have to worry about repaying a loan or giving up a share of your business. Support for social causes: Donation-based crowdfunding is particularly effective for projects or causes that have a social, charitable, or community focus. People are often willing to donate money to support causes they care about. Community engagement: This form of crowdfunding can be a good way to build a community of supporters who are emotionally invested in your project or cause. Cons of donation-based crowdfunding: Limited appeal: Donation-based campaigns often rely on the emotional appeal of the project or cause, which might limit their appeal to a wider audience. These campaigns may be less successful for commercial projects. Lack of guaranteed funding: As with other forms of crowdfunding, there’s no guarantee you’ll reach your funding goal. And on some platforms, if you don’t reach your goal, you won’t receive any funds. Public exposure: As with other forms of crowdfunding, your idea is public, which could lead to someone else replicating it. Platform fees: While the money you raise doesn’t have to be paid back, most platforms charge a fee based on the amount of money you raise Private Circulation only MODULE - 4 157 158 Entrepreneurship MODULE - 4 159 160 Entrepreneurship MODULE - 4 161 162 Entrepreneurship MODULE - 4 163 164 Entrepreneurship MODULE - 4 165 166 Entrepreneurship MODULE - 4 167 168 Entrepreneurship MODULE - 4 169 170 Entrepreneurship MODULE - 4 171 172 Entrepreneurship MODULE - 4 173 174 Entrepreneurship MODULE - 4 175 176 Entrepreneurship MODULE - 4 177 178 Entrepreneurship MODULE - 4 179 180 Entrepreneurship MODULE - 4 181 182 Entrepreneurship MODULE - 4 183 184 Entrepreneurship MODULE - 4 185 186 Entrepreneurship MODULE - 4 187 188 Entrepreneurship MODULE - 4 189 190 Entrepreneurship MODULE - 4 191 192 Entrepreneurship MODULE - 4 193 194 Entrepreneurship MODULE - 4 195 196 Entrepreneurship MODULE - 4 197 198 Entrepreneurship MODULE - 4 199 MODULE - 5 201 202 Entrepreneurship MODULE - 5 203 204 Entrepreneurship MODULE - 5 205 206 Entrepreneurship MODULE - 5 207 208 Entrepreneurship MODULE - 5 209 210 Entrepreneurship MODULE - 5 211 212 Entrepreneurship MODULE - 5 213 214 Entrepreneurship MODULE - 5 215 216 Entrepreneurship MODULE - 5 217 218 Entrepreneurship MODULE - 5 219 220 Entrepreneurship MODULE - 5 221 222 Entrepreneurship MODULE - 5 223 224 Entrepreneurship MODULE - 5 225 226 Entrepreneurship MODULE - 5 227 228 Entrepreneurship MODULE - 5 229 230 Entrepreneurship