Lecture 2 notes - FIRST-STAGE BOOT-STRAPPING Boot-strapping...

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FIRST-STAGE: BOOT-STRAPPING Boot-strapping - The efforts of the entrepreneur to raise capital internally Entrepreneurs want to hold onto the ownership of their businesses for as long as possible. Boot-strapping is reasonable. If reliance on angel or VCs too early, there are various issues that may arise: A large amount of funding may result in unreasonable spending, expansion or squandering The VC is thinking about exiting the investment which is not ideal in the starting of a business Limit the incentives for the entrepreneur to work hard A slower start is often a safer start SECOND-STAGE: ANGEL INVESTOR/SEED CAPITALISTS Professional investors investing with their own funds Often wealthy individuals, with a lot of experience who are usually willing to lend advice SOURCES OF DEBT FINANCE Debt funding is very rare with start-up companies The debt instrument is like an equity instrument because the interest payments would be deferred and there are no real assets to secure the debt. As a result, the moral hazard would be very high since the entrepreneur has no interest in being able to pay back the debt. Further, the bank would also have no upside benefit from
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