The modern capital structure was formed in 1958 by F. Modigliani and M. Miller, they were important contributors of capital structure in corporate finance. They proposed irrelevance theorem which means that it does not matter how the companies finance their capital. The main sources of companies that finance their capital is by issuing debt or equity. The debt can be obtained from Banks and equity is when the capital is raised by issuing shares or selling the stake of the company. The irrelevance theorem focused on the capital structure without tax, when there is tax it does matter on how the company finance their capital, which was published in 1963.
Why capital structure is very important for investors?
Every company pays tax which reduces the profit therefore companies would rather finance their capital by debt because debt is tax deductible and dividend payments are not. The investors should be aware of the capital structure of companies because it can be vital information on giving signals.
Signals by Capital Structure
In conclusion on the ideal capital structure of company is always depends on the managers of the company. Increasing debt can increase the risk of company being bankrupt due to redirection in ability to payback their debt. To much of equity can also signal that the manager might not be motivated and instead they might use too much of the companies money for their personal use. They might also try to increase their equity by investing too much in new projects. It is best for the investors to learn corporate finance to understand how the corporate finance can increase or reduce the value of the company.
Dynamic Impact of Venture Capitalist on Financial Capital of Start-Ups
Venture Capital (VC) is one of the way to finance the initial part of a business in return for equity. The venture capital companies invest in variate of ideas but mostly in technology because after the company becomes establish and when the big value is created the venture capitalists will have exit plan through Initial Public Offering (IPO) or trade sale. Usually the venture capital companies help to invest for up to 6 years and then list it on financial market for IPO to have large capital gain to pay of the shareholder with return. The venture capitalist have been the backbones of many great companies but there are also problems regarding the equity when the VC wants to exit.
Dynamic Impact of Venture Capitalist on Human Resources of Start-Ups
Start-ups tends to grow fast and becomes large establish company with complex issues, that requires talented employees. The human resources becomes one of the issues of start-up companies, the technological start-up companies requires specific skilled employees. The venture capital companies are experienced in providing support with human capital to the start-up. The VCs will not only provide but they will also provide support with human capital.
Dynamic Impact of Venture Capitalist on Sales and Marketing of Start-Ups
The start-up companies needs to reach curtain goal in terms of sales before it can be considered as established company to be listed as public in Financial Market. The entrepreneurs with ideas might only have technological background and they might not have the skills with marketing and sales, which is why it is essential that they have skilled manager to achieve the targeted goals. The Venture Capitalist provides support in terms of appointing Managers with great skills in sales and marketing. The managers with essential marketing skills that has critical, analytical and outside the box thinking to achieve the targeted goals of stat up company. The venture capitalist support with sales and marketing to achieve the goals faster to make their gains from the company when it is time to exit with IPO or Trade Sales.
Dynamic impact of Venture Capitalist on Internal Organization of Start-ups
As the start up company grows it becomes complex and it requires organizational planning, the company needs to start putting all the things together in organized ways by creating departments and allocating the manpower accordingly. The company needs to make plans in terms of allocating departments for production, sale and marketing, Research and Development, human research department and board of directors. The entrepreneurs with the initial idea might not be the CEO of the company even that he owns up to half of the company's equity. There are some cases where the entrepreneurs might not be able to adopt to the CEO position to manage complex and establish company to add value. The venture capitalist and entrepreneurs might come to an agreement to appoint the CEO to add value to the company. Some people are just born to be a leader.
Dumb money is an investment that does not make a return. In business and in finance the dumb money is one of the biggest issue why investors lose their investments. When companies look for investors to invest in their company, then investors trust these investments but in the end the company fails and as well as the investments are lost. In corporate finance there is Venture Capital companies that invest in businesses, VCs can help entrepreneurs with great idea to make their dreams to come true. VCs also needs investors to invest in their Venture Capital company, if the normal investor invest in VC company then they might also invest an investment that does not make return. There are other factors when the company has too much money that they invest in wrong investment therefore it reduces the value of the company and these also one of the types of dumb money. There are 3 ways you can detect dumb money.
Demand for transparency
Best ways to demand for transparency is by asking questions before you make your investments. The important questions are:
Detection of dumb investment by Venture Capitalists
There are great entrepreneurs that knows how to build and fund the businesses, these entrepreneurs can convince the investment companies to invest in almost anything. The Venture Capital companies usually detect bad investment but even for them it is hard sometimes. One of the tactics used by entrepreneurs is that they wait for more than half a year before they start blowing the money. Waiting builds trust from VCs and then they get the 2nd payment from VC companies, usually it take long before entrepreneurs get the money. Venture Capitalist can usually detect this when the entrepreneurs present their proposal and during the interview by also asking the right questions. The VCs also wait before their invest in the business ideas of entrepreneurs until they see the response of other Venture Capitalist.
Dumb money in established companies
In corporate finance there is one of the complex issue but I will try to make it as simple as possible to explain it. The investors and shareholders do not want the company to have too much money which is called free cash but some call it dumb money. When established companies have too much extra money then they want to make investments which could be a bad investments. These usually can be detected by knowing the type of business and also the type of CEO or managers. The CEO with high ambitions are usually not favorable by the investors because they make too many investments that could lead to failure which will heart the value of the company. Always know the CEO of the company you want to invest.
The person who holds the money has the power, it is the most important thing every investors should know. As soon as you let that money go then you transfer the power to other party. It is best to invest in investment that you know it will make a return in as short period of time as possible. The economy is always uncertain therefore sooner you make your return the better it is for you.