Jahangirnagar University

Department/Institute: Institute of Business Administration (IBA-JU)

BBA 2nd Year 2nd Semester Final Examination-2020

Assignment for Final Examination

Course No.# FIN 202

Course Title# Financial Management

Name of the Student: Yasir Arafat

Class Roll No. # 1959

Examination Roll No. # 192490

Registration No. # 20193550219

Academic Session # 2018 - 2019

Total number of written pages in the assignment #8

Date of Submission: 20th September, 2021

Instructions:
1. Don’t copy from other’s assignment. Copying from others will be punished
severely.

2. The student must submit the assignment online (Google

classroom/email/google form etc.) as the course-teacher prescribes.

3. You must use your name# your EXAM ID only for naming your submitted
file.
Contents
Startup and Financing:.................................................................................................................................3
Startup:....................................................................................................................................................3
Financing:................................................................................................................................................3
Startup Financing Scenario in Bangladesh...................................................................................................3
Startup Equity Financing: How is it done?...................................................................................................5
Alternative forms of Startup Financing:.......................................................................................................7
Debt/Bond:..............................................................................................................................................7
Leasing:....................................................................................................................................................8
Risk Assessment of Startup Financing:........................................................................................................8
References...................................................................................................................................................8
Startup Financing & Lifecycle
Startup and Financing:

Startup: What is it? Is it what the ignorant define as a business that brings fresh
new concept to the market? Or, is it what the academics consider it to be a
temporary organization that strives to find a new business model? Let’s say,
Neither! Why? If you’re familiar with the concept of Business Life Cycle, then a
startup is a business that is in its early stages, meaning that it has only recently
begun its journey. It can be any sort of business, whether or not it has new
business models and innovation. And, like any other business, startups also have
financing needs. Now, let us define Financing.

Financing: In layman’s term, financing is how businesses invest capital in

purchasing assets. Assets can be both long term and short term. Short term assets
are more concerned with the working capital requirements to finance day to day
operations, whereas long term assets are to support day to day operations. Now,
the question arises, how is financing done? Generally, there are two ways to do it:
Debt financing and Equity Financing. Debt financing is when a business takes a loan
to purchase the said assets. It can be further described by 3 features: 1) Debt has
a Principal amount, which the business is borrowing, 2) Interest is to be paid on
debt, 3) Debt has a maturity, meaning that the business has to payoff the principal
amount and interest incurred on the loan. And, when a business or individual
investor purchases a stake in another company and provides capital in exchange for
ownership of shares, this is referred to as equity financing. When someone says
they have equity in a business, they indicate they are co-owners of the business,
and when the business makes a profit or a loss, they share the proportionate
amount of that profit and loss. Now that we've defined both startup and financing,
here is a quick look at the history of Bangladesh's startup financing ecosystem.

Startup Financing Scenario in Bangladesh

The startup concept gained traction in Bangladesh in the mid-2010s, shortly after
Ayman Sadiq started his 10 Minutes School journey. From then on, the country
witnessed an uptake of entrepreneurs and startup ventures, breathing new life to
innovation and empowered youths of this nation. Throughout the years, there have
been many new interesting startups and business concepts, and while some have
managed to survive, others perished. Survival of startups is largely dependent on
the availability of funds, among other issues such as feasibility, market demand,
timing and execution, etc. However, in this assignment, we will not be focusing on
what it takes for a startup to survive, but rather on the financing prospects of a

startup. According to Light Castle Partners, from 2017 to 2021, so far, total
investments in startups stands to US 361.9 million. In 2021 alone, 37 local startups
have been successful in raising cumulative US 125.7 million, the most since 2018.
(US 102.9 million). However, when compared to global startup investment, US
125.7 million is only 2.8 percent of total funding. Industry wise, Fintech startups
has the largest share of funds, 59.8%, followed by Logistics and Mobility, 22.1%,
and Healthcare, 7.2%. Nagad, Praava Health, Paperfly, ShopUp, and Chaldal are
among the pioneers in developing the country's startup scene.
Startup Equity Financing: How is it done?

Previously, we established the concepts of Debt financing and Equity financing. But,
which mode of financing does entrepreneurs prefer the most? And, this is the
central theme of our assignment, “Startup Financing & Lifecycle”.

More or less, most startups start off with investing own capitals followed by Equity
investments by friends & family, angel investors, venture capital firms, and others.
Debt financing, in this case, is very rare for this stage of business. Debt financing
requires a timely payment of interest on top of principal amount, and since most
startups do not even breakeven for a decade or so, debt financing is not so popular
among entrepreneurs. Now, equity investments for startups comes in many forms:
Pre-seed, Seed, Series A, Series B, and lastly, Series C. After a series of private
equity investments, startups then turn to the public, and file for an IPO. In
between, there are a lot of steps. Let’s see what those are.

1) Before startups begin raising capitals, they need to form a legal structure that
defines the form of business, be it partnership, corporation, limited liability
company, or others. Whether or not the startup has a specified business model, it
must first establish a legal identity before engaging in any form of economic
activity. Depending on the form of business, registration costs for incorporating the
business depends on the authorized capital for the company. It typically starts
anywhere from ten thousand to a few hundred thousand BDT. The costs include
name verification, stamp purchase, filing documentation with RJSC, obtaining trade
license, tax identification number, legal fees, and other costs related to acquiring
relevant licenses.

2) Now comes the part where the startup needs to develop its offering. This is the
pre-seed stage or the idea stage, meaning that the startup has no furnished
product yet. It’s still figuring out what its offering can be, what its offering should
be. Many incubators and grants provide pre-seed funding for startups, but in most
cases, they do not take any equity in the business. It’s a mean to help the startup
take off from the idea stage and better understand the market before raising a
proper investment. Pre-seed investments can also be made by the entrepreneurs
themselves or by friends and family. Crowd-sourcing platforms are also excellent
resources for such early-stage startups.

3) The seed stage is the first official capital investment round for the startup. The
startup is still figuring out itself, but now it has a primary product offering. In the
seed stage, capital is raised in exchange of equity in the business. This round also
defines the pre-money evaluation of the company. For example, I offered 40,000
shares of my startup out of a total of 100,000 shares to raise 400,000 BDT in seed
funding from an incubator, yielding in a per-share price of 10 BDT. Assuming that I
have no other co-founders, I own the rest 60,000 shares, i.e., 60% equity, and my
startup is evaluated at 1,000,000 BDT. This is the pre-money evaluation or the
current evaluation.

4) Next step, is to scale the business. Thus, calls for Series A, Series B, and Series
C funding. Series A is the first big round of Investment, which is funded by angel
investors and venture capital firms. Venture capital firms raise funds from other
investors and invest it in post-seed stage startups. Angel Investors are experience
entrepreneurs and professionals who invest their own money into startups. Having
an angel investor in the board of directors is often regarded smart money, because
they bring a lot of network, opportunity, and experience to the table. If angels and
venture capital firms see potential in a startup, they start talking evaluation. There
are two sorts of evaluation, as previously stated: pre-money evaluation and post-
money evaluation. The pre-money value is the startup's present worth, and the
post-money valuation is the pre-money valuation plus the investment the startup is
seeking. VCs and Angels will press for pre-money evaluation because they want to
gain more equity for their money, but entrepreneurs will fight for post-money
evaluation because the value of the firm will be maximized at post-money
evaluation. Note that the more fund entrepreneurs raise in a startup, the more they
dilute their share in the business. In accordance with the prior example, I and an
incubator were the 100% shareholders in my startup, with me owning 60% and the
incubator owning 40%. Now, I am seeking an investment of 2,500,000 BDT and I
am willing to give up 30% equity in the startup. I get an offer in the table from an
angel investor, and it perfectly aligns with my term. The angel investor now owns
30% equity in the business and I along with the incubator own rest 70%. My
personal ownership in the startup will stand to 42% (.60*.70*100%). Although, I
have the majority share in the business, my previous equity of 70% got diluted
down to 42%. Dilution of shareholders values is inevitable, unless the Shareholder’s
agreement has an anti-dilution clause. However, note that my 42 percent interest
in the company, is now worth the equivalent of 60,000 shares, that I owned
previously. Meaning that the new investor did not get a slice of the previously
issued 100,000 shares, rather provided with new shares. Thus, total shares issued
so far are 142,857 (60,000 shares /42%), and the new price per share stands to
58.33 BDT (2,500,000 BDT/ 42,857 new shares). Total post money evaluation of
the startup is now BDT 8,332,857, increasing by 8.3x. From series A, startups go
through two more or several other series of funding, Series D, E, and F, before
going public. Going public, is the exit strategy for most shareholders. Currently, the
majority of startup funding in Bangladesh is in Series B, which totals US $81.2
million, followed by Series A, which totals US 23.3 million, and Series C, which
totals US $10 million.
5) The last stage of private equity financing is called the exit strategy. From here,
the startup moves on to public equity financing. Startups file for an IPO, and
investors plans to sell their shares in the stock market. If the per share price of the
stock is too high, then a stock split takes place, favoring for increasing the total
number of shares and reducing per share price. Now, startups can offer preferred
share, common share, or both. Preferred shareholders are guaranteed dividend
payments, but not the same is applicable for common shareholders.

Alternative forms of Startup Financing:

Debt/Bond: To stop shareholders equity from diluting, bond/debt financing is a

viable option. Term loans are the best options for startups that are beginning to
generate profits. Short term loans however are riskier than long term loans. These
are called private debt. The interest rate on term loans can be either fixed or
variable, however the terms of term loans are much more flexible than issuing
corporate bonds. Zero-coupon bonds are another viable option of debt financing for
startups. With Zero coupon bonds, there are no periodic interest payments,
however these bonds are sold at discount and a lump-sump of cash is provided at
maturity. Nagad recently issued BDT 500 crore Zero coupon bond.

Leasing: Leasing is another alternate form of financing. Instead of purchasing

assets, startups can lease its assets. However, leasing can only contribute to
financing long term assets such as building and equipment. It can not make up for
the working capital financing that most startups need.

Risk Assessment of Startup Financing:

For a startup investor, be it equity or debt, there are no mechanisms to measure
the risks associated with such early-stage startups. Most startups do not even make
it far the seed round. A common reason for such failure is the better mouse trap.
Startups invest too much in technology too soon, without thoroughly researching
the market and determining whether the innovation has a product market fit.
Nonetheless, risks are a part of business, and success cannot be attained without
taking risks.

References
Bond Street. (2015, October 14). Understanding Debt vs. Equity Financing with Bond Street. Retrieved
from YouTube: https://www.youtube.com/watch?v=cg9RgzYzrK8

Nathan Relief. (2021, May 31). Series A, B, C Funding: How It Works. Retrieved from Investopedia:
https://www.investopedia.com/articles/personal-finance/102015/series-b-c-funding-what-it-all-
means-and-how-it-works.asp

The Rest of US. (2016, June 2). Startup Funding Explained: Everything You Need to Know. Retrieved from
YouTube: https://www.youtube.com/watch?v=677ZtSMr4-4&t=102