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Finance for Dummies | Corporate Finance - basic terms | Finance for Beginners - YouTube
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so i will tell you two stories and if
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you listen to these two stories intently
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and do a little bit of further research
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you will be able to demystify a lot of
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things related to finance
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hi everyone so today i have a very very
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interesting video for you
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the video is about finance now finance
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the word itself is very scary and a lot
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of you have written to me that you
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accept you know what
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we don't understand finance or can you
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make a video on covering the basic terms
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on finance
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so i thought that i would shoot a video
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on this topic this is a very very
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interesting topic
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and i'm going to simplify it so i will
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tell you two stories and if you
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listen to these two stories intently and
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do a little bit of further research
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you will be able to demystify a lot of
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things related to finance
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so with that said let's get this video
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started so essentially finance can be
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categorized into wide variety of domains
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but for the purpose of our discussion we
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are going to categorize it into two
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domains
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one is called as corporate finance and
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the second is called as
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personal finance so i'm going to tell
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you one story each across these two
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domains
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so let's start with corporate finance
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first and let me start with the story
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so the story or the exercise is that
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let's imagine that you are starting your
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own venture
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right so congratulations you are an
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entrepreneur and you are starting your
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own venture
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what is the first thing that you need
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you will say that okay we need an idea
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right
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comment what other thing that you would
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need so the second most important thing
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would be that hey i have an idea but i
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need to develop my product or need to
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set up my office or i need to hire my
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first employees
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so what do you need you need money right
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that is the precise thing that you need
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and what are your options
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in terms of getting this money in the
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initial or inception stage
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of your venture so the first option is
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called as fff which means
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friends family and fools right they are
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called as friends family and fools
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because they don't look at your idea
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they just literally give you money right
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for example if you ask your friend
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that hey i have started a venture and we
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have been friends since childhood
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would you want to give me like thousand
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dollars so that i can start my product
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development your friend will say that
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okay you know what i don't even want to
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hear the idea
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i will just give you the money right so
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it's a foolish way of investing but it's
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a very heartfelt way of investing
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so this is called as fff or friends
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family and fool's way of financing
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this is your number one option what is
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your number two option so number two is
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something called as bootstrapping right
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so
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bootstrapping sounds very fancy but
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bootstrapping literally means that
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essentially you have your own savings
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and you put that money into your venture
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for example
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majority of the startups that i have
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built those have been bootstrapped we
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have not
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externally raised funds not because we
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can't but at this stage we don't want to
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and i'll explain you the reason why on
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point number three
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right so the third way in which you can
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raise money is called as equity
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financing now this is where it starts
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getting little bit tricky
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so let me explain what equity financing
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means so imagine that this is your
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company
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right this is like 100 of your company
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right now what you do is that you
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literally
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carve out a piece of this pie right so
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let's imagine this is 25
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of your company and then you sell it off
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to different investors now this could be
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your friends this could be vc funds this
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could be private equity funds
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etc etc but bottom line is that you lose
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a certain part of your company
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and in return what do you get you get
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money right
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now is that the only thing that you lose
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right that you're losing 25
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of your company no that's not the only
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thing you also lose freedom
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right freedom in the sense that for
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example when you are bringing an
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external investor on board
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then he or she would start giving you a
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lot of inputs you have to acknowledge
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that because they are your investors now
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it can be both a good and a bad thing
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because many investors are very
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supportive
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they get along with you really really
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well so it's a
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match made in heaven but if you end up
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on boarding a bad investor they can
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literally derail your entire company
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right so it's a risky proposition but
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that's an equity way of raising money
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for your company
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now what is the next term next term is
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debt way right if there is an equity
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there is always a debt and equity so
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debt means that let's say that you have
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this entire company
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of yours right you say that here i don't
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want to sell any of my company
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sounds very risky i don't want to bring
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external people what can i do
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then the simple thing is that you go and
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take a loan right so loan is called as
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debt so you literally go with your
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company
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to a bank right and then the bank gives
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you the loan
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that hey here is one crew rupee for you
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start your venture
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and you promise the bank that hey i will
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start paying this amount of money from
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this month onwards
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so that is a debt way of financing your
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company so i explained you these four
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terms very very intuitively so always
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ask a question that hey
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what is that imagine yourself starting a
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company and start
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implementing these concepts now of
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course there are like much more nuanced
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understanding to it but we are keeping
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this video for beginners right so i am
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not going to get into more specific
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details here so let us move on to part
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two
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the second part of the story is that let
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us imagine that you have to expand your
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company you started the company you got
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the money
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you poured in that money you developed a
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product that product is doing well but
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you need to literally like
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reach millions and millions of people so
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you are in that expansion
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stage of your company what are your
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options now
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so you would say that i'm looking for a
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seed round of funding this is again a
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finance term that you should be aware of
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so seed round of funding means that hey
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it's up to like two million dollars your
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product is doing well in the market and
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it's making a little bit of money
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but it's not fostering organic growth
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when swiggy and zomatos started out they
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were losing money and up until last year
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they were still losing money
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on every order that they used to deliver
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so what do they need to do they still
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need millions and millions of dollars
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more
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so that part is called as seed money so
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it is usually up to two million dollars
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and usually this is the first round of
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external vc investment that generally
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happens right
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this is the time when equity investments
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come into the picture
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if equity investments are made here
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literally when you are starting out a
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fund
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this is usually done by whom angel
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investors not vc investors right
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so this is called as expansion stage and
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here you usually get a vc fund to pour
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in two million dollars or up to two
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million dollars usually
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in your company this is called as seed
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money because this is where the seed is
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planted for growth
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okay after this as your company starts
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depicting more growth
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and starts getting more revenues and
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profits you move into series funding
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series funding you might have heard of
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the term series a series b series
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all it simply means is that more and
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more vc funds come into your mix
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they start pouring in more money
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sometime it's the same vc
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sometimes there are usually a
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combination of vcs who will pitch in
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with a lot of money so when you hear
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all these terms that a company has
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become a unicorn essentially what is
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happening is that
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a lot of people are pouring money in
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that company it's not as if that their
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balance sheet says that hey here are
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like one billion dollar in your bank
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account no it doesn't work that way
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right so this is the difference between
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seed funding and series funding
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right so now the company has expanded
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congratulations your business is doing
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wonderfully well
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now what you feel is that you know what
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enough with the indian market
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i have already captured it let me now go
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abroad and try to capture the world let
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me become like
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a roman emperor who wants to capture
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everything so what is
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that stage called this this is called as
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massive stage growth right
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and here firms usually execute two types
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of options one is called as issuing
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corporate bonds
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and the second and the most exciting
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part is launching their own ipo
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so let me explain both very very quickly
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so corporate bonds are what
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this is a part of a debt financing again
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you are not losing any control
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or part of your company you are just
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taking more loans but
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these are now issued in a structured way
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by the corporation because your company
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grew right it was a small pair
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it became like a massive massive player
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over time and then
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you get the power to issue bonds in the
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public market
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so you are issuing bonds and these bonds
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are then analyzed by different credit
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rating agencies like crystal and they
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will analyze give ratings to your bonds
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then you can raise public money from
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that bonds or major corporations or
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other organizations can pour in money
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and give you loans right so that's a
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corporate bond type of a thing doesn't
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sound super exciting because ipo sounds
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really exciting
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so let's talk about ipos so ipos are
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called as initial public offering
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now your first question would be that
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hey can they not just keep
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doing this right bring more and more vc
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investors and keep
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growing their company making more money
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no right because
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even investors for example when i invest
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in companies even i would need an exit
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to make money from the investments that
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i have made so in majority of the times
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and this is a controversial statement
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that majority of the times when ipos are
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launched especially for loss making
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companies
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it's done with the intent of giving vc
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investors and exit right so that term is
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called as exit
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so that is one of the primary reasons
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why ipos are launched
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another reason why an ipo is launched is
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to build the brand
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and get visibility for the firm now this
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can be very easily explained if i ask
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you a simple question
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so would you go and work with facebook
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or would you go and work with a very
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high growth startup that you haven't
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heard of
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you most likely are going to work with
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facebook because facebook is a listed
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company
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you keep reading about it there is so
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much scrutiny and facebook has that
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brand right so
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you have this massive brand going for
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you it becomes easy for you to recruit
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better talent
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so these are two primary reasons why
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ipos are launched of course i can make a
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separate video on ipo altogether
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but this was a basic video so i hope
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that you learnt a lot from this
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corporate story
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on the next part of this video i am
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going to tell you a personal finance
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story which will help you understand the
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basics about personal finance
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and i will release that video tomorrow
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