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Chapter 6. Milestones and Sources of Fin... > Scope of Financing and the Company's...

Scope of Financing and the Company's Value

Demand—The Company's Capital Needs

In the first stage which most startups undergo, namely, research and development, the company invests in developing the product and usually does not yet invest in the expensive infrastructure required to implement it. At this stage, companies usually generate no revenues (unless revenues are generated by granting licenses to use intellectual property or selling rights for future developments). These companies' operating cash flows are negative, because they incur only expenses.

At the next stage, the company may buy or lease additional equipment to start implementing the results of its R&D. Since the investments in this stage are larger than those made in the first stage, the company's operating cash flow is now even worse. The increasing pace of employee-recruitment is another great contributor to the cash burn rate.


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