is aninnovative business opportunity created by Ranjith Kumaran. Thecompany provides a turnkey customer loyalty program for brands,mobile application developers, and website owners. Ranjith conductedsome focused research before starting his business venture.Communication with various online businesses revealed the market gapsthat existed with regards to an online reward system for customers.Some of these companies include consumer electric stores, apparelvendors, and airlines. could reap enormous profits once itdevelops the capacity to exploit the market niche fully. Furthermore,the majority of online businesses are big brands attracting plenty ofcustomers. Therefore, setting up a loyalty reward program would be intheir best interests.
SeedRound of Financing
seeksto grow into a regional business with a long list of clients.Nevertheless, the business needs funding so as to finance expansion,research, and development. Funding is also required to supportbusiness development activities as the company sources for moreclients. Acquiring funds also helps a business to fulfill itsshort-term obligations such as taxes and employee salaries. However,undertaking a seed round of financing would be ill-advised. Acquiringseed funding would have several disadvantages. For example, Kumaranand Ait Oufkir would need to cede some control of the company to theprospective investor. As co-founders, Kumaran and Oufkir would haveto bear a reduction in shareholding percentage if they accepted seedcapital. Soliciting for seed capital requires a business to shareconfidential information with prospective investors (Preston, 2013).Kumaran and Oufkir run the risk of jeopardizing the uniqueness of theenterprise through sharing private information. Some forms ofconfidential information include business models, organogram, salesand marketing strategy, and revenue forecasts (Preston, 2013).
Differencesbetween Angels and Venture Capital Investors
Kumaran faces aquandary as to whether to us angels or venture capital investors.There are some fundamental differences between angels and venturecapital investors. Angel investors are mostly wealthy individualsthat take a personal interest in the business. They could also befamily members or close friends. In some instances, a group of angelinvestors may pool their resources to provide finance to startups(Preston, 2013). On the other hand, venture capital investors referto a whole firm inclusive of board members and professionalinvestors. While angel investors may or may not offer businessadvice, venture capital investors have an active share in ensuringthe growth of the company (Levin, 2015). Kumaran needs to considerwhether he is willing to receive instructions or if he wants toretain autonomy.
Angel investorsoffer less capital than venture capital investors (Preston, 2013).Kumaran needs to evaluate the capital needs of the firm beforedeciding on the type of investors to use. If the capital requirementsof the company are intensive, then it would be wise to involveventure capital investors. Another difference can be seen in thechoice of investments. Angel investors primarily focus on startups atthe early stages of growth. On the other hand, venture capitalinvestors are motivated by the high growth potential of companies inwhich they choose to invest (Levin, 2015). If Kumaran targets venturecapital investors, then he must consider not only the potential forgrowth but also current profit levels.
Angel investorsdiffer with venture capital investors on the basis of expectations.An angel investor may be willing to wait longer for materializationof profits (Preston, 2013). On the other hand, venture capitalistsrequire an immediate return on their investments. The reason for thisis most venture capital funds usually last for a decade. Once tenyears elapse, the fund is obligated to liquidate all assets andreturn the initial capital and subsequent returns to individualinvestors (Levin, 2015). Therefore, venture capitalists try togenerate as many profits as possible within a short timeframe.Kumaran needs to evaluate the current and anticipated level ofprofits to see whether they can satisfy the demands of potentialventure capitalists.
The time factorcan also be used to grade between angel investors and venture capitalinvestors. In the short-term, using angel investors would be the bestchoice. This is because angel investors are independent and,therefore, make quick decisions. Their investment is motivated bypersonal interest (Preston, 2013). On the other hand, venture capitalinvestors would be the best partner for the long-term. Venturecapital investors conduct due diligence before adding a company totheir investment portfolio. Background checks, market research,revenue analysis, and competitor evaluation are all conducted beforea commitment to invest is given (Levin, 2015). Venture capitalinvestors tether themselves to the business. They acquire oversightauthority through the board and contribute to day-to-day management(Levin, 2015). The deep involvement of venture capital investors isbest for the long-term since they spare no effort to ensure thebusiness attains its potential.
Differencesbetween a Convertible Note and Traditional Financing Instruments
Convertiblenotes have glaring differences with other methods of raising financesuch as equity funding. The notes benefit both the company and theinvestor. Convertible notes ensure the business acquires much-neededcapital without much delay. On the other hand, raising equityinvolves a longer process with significant checks and balances. Forexample, a company must fulfill particular requirements beforelisting their shares in a money market. Conducting an Initial PublicOffer (IPO) requires a company to expose confidential information(Fabozzi, 2015). For this reason, many companies with an urgent needfor financing prefer to use convertible note rather than equityfinancing.
The investor whoundertakes a convertible note enjoys more protection than an equityholder. In the unfortunate event where the company was forced to windup, the investor would be compensated before the equity holder.Nonetheless, the equity holder receives annual dividends when thecompany declares profits. On the other hand, the investor is notentitled to receive his principal investment plus interest when thecompany raises more money. His initial loan is converted into sharesin the business at a discount (Fabozzi, 2015).
Convertibleloans are disadvantageous especially where a short timeframe is setfor the debt to either be paid or converted into equity. Kumaranshould be concerned whether investors offer him either convertiblenotes or equity. For a convertible note, Kumaran would get therequired finance through a cheaper and faster process. He would alsobe able to ensure flexible valuation that creates room for moreinvestors. On the other hand, using equity financing would ensurecertain valuation of .
is amarvelous business opportunity with the amazing potential to makeprofits in an unexplored market. Kumaran needs to capitalize on theopportunity. In this regard, the company needs to expand itsoperations by increasing its facilities. The capital-intensive natureof this task requires Kumaran to solicit for external funds. In theshort-term, angel investors would suffice. However, venturecapitalists are better suited to ensure the long-term success of thebusiness (Levin, 2015). Kumaran also needs to consider the merits ofboth convertible notes and equity financing vis-à-vis the pertinentneeds of the business. In this manner, will be able tofulfill its promising potential.
Fabozzi, F. J. (2015). Capital markets: Institutions, instruments,and risk management. Cambridge, Massachusetts: The MIT Press.
Levin, J. S. (2015). Structuring venture capital, private equity,and entrepreneurial transactions. New York, NY: Wolters Kluwer.
Preston, S. L. (2013). Angel financing for entrepreneurs:Early-stage funding for long-term success. San Francisco, Calif.:Jossey-Bass.