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Assess the value of venture capital as an external method of finance for Pura Cosmetics. - Edexcel - A-Level Business - Question 1 - 2022 - Paper 2
Question 1
Assess the value of venture capital as an external method of finance for Pura Cosmetics.
Worked Solution & Example Answer:Assess the value of venture capital as an external method of finance for Pura Cosmetics. - Edexcel - A-Level Business - Question 1 - 2022 - Paper 2
Step 1
Pura Cosmetics is a new business, so Rose Dyson may struggle to obtain finance from banks, who may consider the business a high risk.
Answer
Pura Cosmetics, being a startup, may not have an established credit history or collateral, making it challenging to secure traditional bank loans. This risk assessment by banks can limit Rose Dyson’s options for obtaining necessary funds.
Step 2
Rose Dyson lacks experience and may benefit from the advice of Deborah Meadon.
Answer
As a relatively inexperienced entrepreneur, Rose Dyson could greatly benefit from the mentorship and strategic advice of experienced venture capitalists, like Deborah Meadon. This guidance can help navigate the complexities of running a business effectively.
Step 3
Since Pura Cosmetics intends to expand rapidly, it may need additional finance and expertise, which the source of venture capital could provide.
Answer
The planned expansion requires significant financial investment. Venture capital not only brings financial support but also expertise and networks that can facilitate rapid growth, enabling Pura Cosmetics to capitalize on market opportunities.
Step 4
Rose Dyson will have to give up some control in running the business in exchange for funding.
Answer
Accepting venture capital often requires giving up a portion of equity in the business. This dilution of ownership may lead to reduced control for Rose Dyson, which could impact the strategic direction of Pura Cosmetics.
Step 5
Rose Dyson will have to give a share of the profits to the venture capitalist, which may reduce retained profits and restrict future growth.
Answer
Sharing profits with venture capitalists can decrease the amount of retained earnings available for reinvestment into the business, potentially limiting growth and expansion initiatives in the future.
Step 6
There is the potential for disagreements between Rose Dyson and the venture capitalist regarding how to run the business due to the ownership and therefore control of Pura Cosmetics.
Answer
Conflicting priorities and visions for business operations can arise, leading to friction between Rose Dyson and the venture capitalist which may affect decision-making and overall business performance.
Step 7
A venture capitalist may provide the capital and guidance to enable the business to continue to expand successfully, which may not be available through other sources.
Answer
This access to capital, coupled with expert advisory support, can assist Pura Cosmetics in navigating challenges and leveraging opportunities that would otherwise be inaccessible without such backing.
Step 8
Rose Dyson has developed the business on her own and may be able to finance the business sufficiently through retained profits, rather than from a venture capitalist.
Answer
If Pura Cosmetics generates enough revenue, utilizing retained profits can maintain control for Rose Dyson, allowing for organic growth without the drawbacks associated with sharing equity and profits with external investors.