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Sources of Finance for Startups and Growing Businesses

Learn about the different sources of finance available to startups and growing businesses, including internal funds, debt, and new equity. Understand the benefits of each type of finance and the pecking order theory. Explore a case study of 7Tin, a virtual reality media and incubator in China.

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Sources of Finance for Startups and Growing Businesses

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  1. 7TIN（青亭网） Sources of Finance

  2. Learning Objectives • Explain the sources and availability of finance to a startup or growing business. • Analyze the benefits of different types of finance and list the priority order to finance.

  3. Internal Funds What are the Different Categories of Finance? Debt New Equity

  4. Discussion Questions • What do you think the benefits of the different types of financing are? • Which one do you think is best and why?

  5. Pecking Order Theory • Pecking order theory starts with asymmetric information as managers know more about their companies prospects, risks and value than outside investors. • Companies prioritize their sources of financing • First preferring internal financing • Then debt • Lastly raising equity as a “last resort” • Asymmetric information favours the issue of debt over equity as the issue of debt signals the boards confidence that an investment is profitable and that the current stock price is undervalued (were stock price over-valued, the issue of equity would be favoured). • The issue of equity would signal a lack of confidence in the board and that they feel the share price is overvalued. An issue of equity would therefore lead to a drop in share price. Frank and Goyal, 2003.

  6. Case Study: 7Tin • Devoted to virtual reality (VR) and augmented reality (AR) industry, 7Tin is a virtual reality media in China and an incubator for VR AR startups. • 7Tin reports the latest news and analysis about VR AR industry, companies and entrepreneurs; integrates industry resources, connect technologies and provide marketing services for enterprises under incubation in the 7Tin incubator.

  7. Case Study: 7Tin In their own words: • Financing may be the start-up's most important ability. In Europe there are more venture capitalists. In China there are not so many venture capitalists, investment is based on trust; many decisions are based on your past experience and the recognition of your past friendship. • I personally think that it is more important to raise the most money in the shortest possible time. Because what happens today is very clear, but you don’t know what will happen in the future. • As a serial entrepreneur for many projects, I think I will prepare at least an 18 month financial safety net. I think this is a very important time boundary.

  8. Pre-video Discussion • Can you predict what category or categories of finance 7Tin use? • Why do 7TIN keep the 18-month safety periods? • What kind of investors are suitable for 7Tin? • What’s the difference between finance for a start-up, compared to a mature company?

  9. Video • show video • http://v.youku.com/v_show/id_XMTY2NjY3NzE2MA==.html

  10. Case Study Discussion Questions • Why was 7Tin financed the way it was and why might that decision have been made? • Discuss whether Pecking Order Theory is still relevant today, in the light of high tech firms and firms who want to be global from inception etc. • In what situations might Pecking Order Theory not be still relevant today?

  11. References • Brealey, R.A., Myers, S.C., Allen, F. (2008). Principles of Corporate Finance. McGraw-Hill/Irwin, New York. • Myers, S.C., Majluf, N.S. (1984). Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics,13 (2): 187–221.  • Frank, M.Z. and Goyal, V.K., 2003. Testing the pecking order theory of capital structure. Journal of financial economics, 67(2), pp.217-248.

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