In the previous post we had discussed about the side business that the management team of Hyskool was considering for that extra flow of cash. Good, but we also had seen the need to raise huge amount of working capital. Basically, it is for buying buses, miscellaneous expenses, hiring and training drivers, and paying off the wages for drivers, helpers and other staff till the revenue starts flowing in from the business. As you can understand, this is not a small amount.
When you were a kid, the first person that comes to your mind when you are in need of some money to buy something is your dad / mom. When you grow up, when your wallet is empty and the pay day is far, the first thing that comes to your mind to buy something is your good old Credit Card! When you are out of luck and need some urgent petty cash, you’ll be ready to sell off your Guitar. Similarly, when you are planning to buy a car or need money for your wedding arrangements, you approach a financial institution like a bank. If you are planning to build a house, you’ll mortgage your land or some other asset.
Organizations are no different. They are a mix of human beings like you and me. If an organization like Hyskool needs money upfront to start a side business or open a new branch, they need to approach someone outside.
There are mainly two ways of raising finance:
Debt Financing: As the name suggests, debt financing makes you indebted to someone. Sounds vague? Well, it is! One way of raising finance through debt is the simplest way, approaching banks. Banks earn money by being in the business of lending. Of course, before lending they look through the entire concepts and history of the company. Hyskool, with it’s unique business model and a strong management is a preferable candidate for a loan disbursement. However, considering the requirement of a really huge working capital and working on an entirely new idea to start a side business may make many managers skeptic. Nonetheless, the high interest rate and highly budgeted and supervised funding may make the management of Hyskool feel uneasy.
One more or a more preferable way of raising finance through debt is by issuing Bonds or Debentures. If Hyskool wants to go the Bond way (not the James Bond way…lol), it issues Bonds in the market. You can consider a Bond as a legal promissory note / document that entitles or assures the holder of the Bond a specific amount of money at specific date(s). As an example, let’s assume that Hyskool management decided to raise the capital through Bonds. It will contact an expert in Bond market (Consultant company). The consultant will quote the cost of issue that includes consultation charges, legal fees, charges for printing the bonds (now available online as well) etc. Once reaching an agreement with them, the process of issue starts. The consultant company will take care of all the legal hurdles like approaching and attaining permissions for authorities and other market regulators. Then, the Bonds will be available in market for sale for, say, Rs. 50000 or Rs. 100000. Individual investors can buy a couple of them depending on their investment capital as a long term instrument. Institutional investors like Mutual Fund, Hedge Fund and Insurance Companies also will be willing to buy them in large amounts.
You might be wondering what these investors will get in return for investing their hard earned (or otherwise lol) money to purchase Hyskool Bonds. Well, just like a loan from the bank entitles the banker to receive interest on the amount lent, these investors are assured interest on the Bond rate called ‘Coupon’. It will specially be in vogue during Inflation when country’s interest rate falls below the Coupon rate. Since the rate of return is similar to a fixed deposit and not as glamorous as stock market rates, it is not used as a growth instrument (in simple words, it is not considered as an investment to become rich overnight 
). Nevertheless, it is always considered as a safe instrument as the risk of losing your money lies only if a company like Hyskool goes bankrupt. Even in case of bankruptcy, as per the regulations, Bond owners get their money before the stock holders.
Bonds are mainly of two types. Secured and unsecured. Both of them are further divided into Convertible and Non-convertible bonds. Convertible bonds are the ones which can be converted into Stock when required. Non-convertible, as you can guess, cannot be converted – no matter what. Secured Bonds are the ones where in the company pledges some of their assets like buildings, vacant lands or factory units. Unsecured Bonds, also known as Debentures are issued without any security and hence have higher Interest rate. In India, the Bonds issued by the Government of India or the State Governments and their respective department are called Bonds while the ones issued by Public Sector Enterprises or Private companies are called Debentures.
In the next section, we’ll discuss the option to raise finance through Equity.
After creating a brand value for itself in the educational market, the management of Hyskool decides that they can run a parallel business. It will be in the same market so that they can use their already established brand name while playing a master stroke to diminish any competition, if any.
All the schools these days have school buses running, carrying school children. Not only are they a way to earn some extra bucks for the school, it is also a way to market their brand name among their potential customers – parents. That’s why you see all flashy colors and banners.
Although the school buses bring in tangible and intangible benefits, there are a little costs involved in procurement and maintenance of the buses. This is where Hyskool decides to play a role.
Hyskool will buy buses and lease them to the schools for either an annual fee or a monthly commission on the fares collected depending on the area of operation and the number of students available. Hyskool will take care of procurement of the buses, state laws and charges on plying them, paying wages to the bus driver and helper, fuel and miscellaneous maintenance charges. The school management will get free marketing on the buses and also the bus fare, less the commission. Of course, Hyskool management has to ensure that the commission / monthly fee will be a bit more than the charges so that tiny amounts of profits from various school add up to a monthly bulk profit. Like I said, a side business.
Now, one main challenge that the management of the Hyskool has is, procurement of the buses. It requires a huge capital. This initial amount, although huge but less risky, can be raised through two means. Debt or Equity. In my next section, I’ll explain the different ways of raising money for working capital. I’d also like to take this opportunity to thank each and everyone of you (excluding spammers though… lol) who placed a comment on my previous post letting me know that there exists someone apart from me who is interested in reading this post.
For me to explain or for that matter, you to understand things in a better way an analogy is required. Although it is possible to provide different analogies to explain different concepts, I feel that following one standard example will give the required flow. I always used to dream about starting a company that uses information as it’s core process. Since this concept requires a lot of dedication, huge working capital and a set of hard-working people in the work force, I couldn’t start it (or never took the trouble to start it). This concept works as a perfect analogy as I had practically thought of implementing whenever I have excess amount of money (that of course will be somewhere in the future)!
Background
The name of the organization is HySkool.com. The name is derived from ‘Hyderabad School’. Later, if the operations are scaled and are extended in multiple cities, the name would still be valid (becomes “High School”). The era we live is called the Information Age and those who possess information will be able to strike gold. The concept here is to build a very huge database of all the schools, including those present in lanes and by-lanes (yes, a really huge database and a mammoth job). This database includes all the information including the number of students and their cumulative marks; number of teachers, their qualifications, tenure etc., and other statistics like availability of playground, recognition, miscellaneous facilities like library, vocational labs etc. End users will be then able to compare different schools. The USP here will be the index (points) that is derived from the above mentioned conditions / facilities. This index will be used to provide ratings to school as an independent authority.
Revenue Model
Every business needs to have some source of revenue or it won’t be called as business. In case of HySkool.com, there are multiple sources of income. The first one being advertisement revenue. People love free stuff. They’ll flock towards the place where they get free information on something that they are desperately looking for and are ready to spend on it. Since every parent here wants their child to have the best quality education even if they themselves are starving, their search would generate huge volume that can be converted in to ad revenue. Next, an equivalent, but less lucrative method is Sponsored Search. Just like Google offers Sponsored search (on searching for a school at so and so location, the sponsored school’s name appears first in the sponsored section). But these two are not sustainable as the traffic is generated only during the admission times.
The core of the business lies in it’s Application & Service model. For that, a brand name has to exist. Once the word is in the air, the Marketing team will approach well funded schools offering the following in exchange for a token fee:
Future Model
Apart from these, in the back of my mind, there is another potential. A Social Networking (SN) section where in, upon admission, a profile is created for the students including their photo and everything that is offered in sites like Orkut and Facebook. They’ll be provided with an e-mail address with domain different from HySkool.com (example WorldNet.com, Netizen.com or Onliner.com). This will be a breeding ground for SN subscriptions. Students can interact with their classmates, schoolmates, students from other schools or in future, if it is expanded to other cities like Bangalore, Delhi or for that matter Pretoria, they’ll be able to interact with them. Once they grow up, they wouldn’t not like to use ‘HySkool’ as their e-mail or SN site. This is where the usage of a different domain name comes in to picture.
A few months back, Forbes magazine had listed Mark Zuckerberg as one of the top Billionaires of the world. His dedicated team is working on different business models. Facebook is sitting on data of 70 million users and is looking out for the next big thing that can convert this information in to sustainable business. I am eagerly waiting for that big thing as, in twenty years, HySkool will have enough data to implement that next big thing!
Ground Reality
I dream a lot and this is one such dream and that’s the reality – it’s just a dream (frankly speaking, I am a good planner but a bad implementer. So, I am working hard to earn enough money so that I can hire someone who can implement my dreams ). Coming back to the motive, this is the analogy that you need to keep in mind as we go ahead with our lessons.
In our next chapter, I’ll introduce you with different situations that lead our introduction with the Stock Market.