Question

Suppose there is a startup Alpha founded last year in a very promising industry with a lot of growth opportunities. (1) This year Alpha considers raising more funds for expanding its business and innovations, it could either choose to raise funds by issuing equities to some venture capitals or choose to issue some debts. Which way do you think is a better choice? Why? (2) Suppose this year Alpha also earns considerable profit, what are the two ways to deal with the profit? Which way is better in this case, and why?

Answer 1

1. it can be seen that the Alpha is trying to innovate itself and it is a startup company and it is trying to expand itself then I Would still be trying to to take the help of a venture capitalist and acquire a higher amount of money than going for the debt capital, because debt capital will be having a risk of insolvency and financial distress, because this company is trying to innovate and there is a risk associated and hence debt capital is not appropriate and I will be still selecting venture capital.

2. When the company has made the profit, it will mean that it can either distriy the profit as dividend to existing shareholders who are private and reward them with additional cash or compensation but it can also have a choice of reinvesting profits back into the business in case of further growth so the company can either distribute the profits or it can reinvested cash back into the business.