1. Why do many new businesses need outside funding? (give two reasons) 2. Explai

Question

1. Why do many new businesses need outside funding? (give two reasons) 2. Explain the difference between equity and debt as sources of funding for startups. Which type of funding (equity or debt) did Chobani prefer and why? 3. Briefly describe what angel investors and venture capitalists are, what kinds of companies they invest in, and what their expectations are. 4. In the end of the article on Chobani, the entrepreneur says that “Eventually we may take Chobani public”. What kind of impact does taking a company public have on the finances of a business? Can you think of a reason why Chobani should not become a public company?

Explanation / Answer

Many new companies are increasingly looking towards outside financing. Two of the most important reasons are as follows:

i. A company may look towards financing from external sources when it is cfacing constant pressure from its competitors in terms of pricing and variety. If a company is looking towards having a huge margin of profits, it may attract competitors who may look to cash in on the market. If this happens, the company is in imminent financial danger. It can hold prices and risk losing customers or it can match competitors’ lower prices and watch its own margins getting lowered. Either way, it is going to suffer lower cash flows and outside capital may be its only option.
ii. It may also look for outside funding when it is the mode of expansion or when it si looking to move into countries beyond its own native boundaries. If a company is at this point, it will most likely have a positive cash-flow business in the market, which puts itself in a good position when approaching investors. Nevertheless, one should have a good answer to investors who will wonder what it will take to compete in those markets.
1. Equity financing refers to issuing of additional shares of common stock to an investor. Actually with more shares being issued to the investor his ownership in the company increases.
Debt financing refers to the borrowing of money to run the business rather than giving up ownership. Debt financing is followed with strict conditions in addition to paying interest and principal at specified dates. Typically failure of paying back the debt will result in severe consequences. Adding too much debt will increase the company's future cost of borrowing money and it adds risk for the company.
Though the money given by TPG Capital is in the form of a loan, it is also receiving certain warrants that may convert to an equity stake if Chobani achieves certain goals like an initial public offering (IPO). So although this is in the form debt financing, it may convert to equity financing if certain performance targets are met by Chobani.
2. Angels are often retired entrepreneurs or executives who want to optimize their experiences and networks and who like to keep abreast of business developments. They typically desire to serve as mentors for the next generation of entrepreneurs.
VCs often invest as a group and are typically willing to invest in higher risk ventures than either angels or private equity firms. This makes them very attractive to a diverse mix of enterprises and to businesses that are too small to raise capital in the public markets. Sp while VCs typically invest in risky ventures or start-ups which are showing a lot of promise, angel investors generally try to pool in their expertise into their businesses.
No matter what type of funding a business is seeking, it must remember that all investors expect to harvest their profits through liquidity events. They should definitely know their investors’ expectations for exit. Usually the term sheet will spell out the details, the milestones one must meet, and the timeframe for meeting them. Based on how a certain company is doing and its vision for its future, the business owner or the entrepreneur and the investors may jointly decide to sell the company to a strategic buyer, which could be another individual or another entity. If the business has raised funding from angels, they may decide to seek additional expansion capital from VCs in a new round of fund raising. The entrepreneur and its investors could also opt to raise equity financing through an initial public offering.
3. One of the primary disadvantages for making a company go public is the need for added disclosure for investors. More importantly, especially for smaller companies, is the cost of complying with regulatory requirements can be very high. Some of the additional costs include the generation of financial reporting documents, audit fees and investor relation departments among others
Public companies also are faced with added pressure of the market which may cause them to focus more on short-term results. The actions of the company's management also become increasingly scrutinized as investors will constantly look for rising profits. This may lead the company to perform somewhat questionable practices in order to boost earnings.
Before deciding whether or not to go public, companies must evaluate all of the potential advantages and disadvantages that will arise. This usually will happen during an underwriting process as the management works with an IB to weigh the pros and cons of an IPO and determine if it is in the best interest of the company.

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