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Title / Author: Entrepreneurship Management/Anand Dhutraj Page No. 1
NLDIMSR
Entrepreneurship Management
Prof. Anand Dhutraj
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Agenda
• Financial support and options to start business
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Financial Management (1 of 2)
• Financial Management
• Financial management deals with two things: raising money and managing
a company’s finances in a way that achieves the highest rate of return.
• Steps:
• Tracking financial progress through preparing, analyzing, and
maintaining past financial statements.
• Forecasting future income and expenses by preparing pro forma (or
projected) financial statements.
• Getting financial support for entrepreneurial venture.
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Financial Management (2 of 2)
The financial management of a firm deals with questions such as the following on an ongoing basis:
• How are we doing? Are we making or losing money?
• How much cash do we have on hand?
• Do we have enough cash to meet our short-term obligations?
• How efficiently are we utilizing our assets?
• How do our growth and net profits compare to those of our industry peers?
• Where will the funds we need for capital improvements come from?
• Are there ways we can partner with other firms to share risk and reduce the amount of cash we
need?
• Overall, are we in good shape financially?
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Financial Objectives of a Firm (1 of 3)
Primary Financial Objectives of Entrepreneurial Firms
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Financial Objectives of a Firm (2 of 3)
• Profitability
• Is the ability to earn a profit.
• Many start-ups are not profitable during their first one to three years while they
are training employees and building their brands.
• However, a firm must become profitable to remain viable and provide a return to
its owners.
• Liquidity
• Is a company’s ability to meet its short-term financial obligations.
• Even if a firm is profitable, it is often a challenge to keep enough money in the
bank to meet its routine obligations in a timely manner.
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Financial Objectives of a Firm (3 of 3)
• Efficiency
• Is how productively a firm utilizes its assets relative to its revenue and its
profits.
• Southwest Airlines, for example, uses its assets very productively. Its
turnaround time, or the time its airplanes sit on the ground while they are
being unloaded and reloaded, is the lowest in the airline industry.
• Stability
• Is the strength and vigor of the firm’s overall financial posture.
• For a firm to be stable, it must not only earn a profit and remain liquid but
also keep its debt in check.
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The Process of Financial Management (1 of 4)
• Importance of Financial Statements
• To assess whether its financial objectives are being met, firms rely heavily on
analysis of financial statements.
• A financial statement is a written report that quantitatively describes a firm’s
financial health.
• The income statement, the balance sheet, and the statement of cash flows are
the financial statements entrepreneurs use most commonly.
• Forecasts
• Are an estimate of a firm’s future income and expenses, based on past
performance, its current circumstances, and its future plans.
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The Process of Financial Management (2 of 4)
• Forecasts (continued)
• New ventures typically base their forecasts on an estimate of sales and then on
industry averages or the experiences of similar start-ups regarding the cost of
goods sold and other expenses.
• Budgets
• Are itemized forecasts of a company’s income, expenses, and capital needs and
are also an important tool for financial planning and control.
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The Process of Financial Management (3 of 4)
• Financial Ratios
• Depict relationships between items on a firm’s financial statements.
• An analysis of its financial ratios helps a firm determine whether it is meeting its
financial objectives and how it stacks up against industry peers.
• Importance of Financial Management
• Many experienced entrepreneurs stress the importance of keeping on top of the
financial management of the firm.
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The Process of Financial Management (4 of 4)
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The Importance of Getting Financing or Funding
• The Nature of the Funding and Financing Process
• Few people deal with the process of raising investment capital until they
need to raise capital for their own firm.
• As a result, many entrepreneurs go about the task of raising capital
haphazardly because they lack experience in this area.
• Why Most New Ventures Need Funding
• There are three reasons most new ventures need to raise money during
their early life.
• The three reasons are shown on the following slide.
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Why Most New Ventures Need Financing or
Funding
Three Reasons Start-Ups Need Funding
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Alternatives for Raising Money for a New Venture
• Personal Funds
• Debt Financing
• Equity Capital
• Creative Sources
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Sources of Personal Financing (1 of 2)
• Personal Funds
• The vast majority of founders contribute personal funds, along with
sweat equity, to their ventures.
• Sweat equity represents the value of the time and effort that a
founder puts into a new venture.
• Friends and Family
• Friends and family are the second source of funds for many new
ventures.
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Sources of Personal Financing (2 of 2)
• Bootstrapping
• A third source of seed money for a new venture is referred to as
bootstrapping.
• Bootstrapping is finding ways to avoid the need for external financing or
funding through creativity, ingenuity, thriftiness, cost cutting, or any
means necessary.
• Many entrepreneurs bootstrap out of necessity.
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Examples of Bootstrapping Methods (1 of 2)
• Buy used instead of new equipment.
• Coordinate purchases with other businesses.
• Lease equipment rather than buying.
• Obtain payments in advance from customers.
• Minimize personal expenses.
• Avoid unnecessary expenses, such as lavish office space or furniture.
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Examples of Bootstrapping Methods (2 of 2)
• Buy items cheaply, but prudently, through discount outlets or online auctions
such as eBay, rather than at full-price stores.
• Share office space or employees with other businesses.
• Hire interns.
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Preparing to Raise Debt or Equity Financing (1 of 3)
Preparation for Debt or Equity Financing
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Preparing to Raise Debt or Equity Financing (2 of 3)
Two Most Common Alternatives
Equity Funding Debt Financing
Means exchanging partial Is getting a loan.
ownership in a firm, usually in
the form of stock, for funding.
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Preparing to Raise Debt or Equity Financing (3 of 3)
Table 10.2 Matching an Entrepreneurial Venture’s Characteristics with the
Appropriate Form of Financing or Funding
Characteristics of the Venture Appropriate Source of Financing or Funding
The business has high risk with an uncertain return: Personal funds, friends, family, and other forms of
Weak cash flow bootstrapping
High leverage
Low-to-moderate growth
Unproven management
The business has low risk with a more predictable return: Debt financing
Strong cash flow
Low leverage
Audited financials
Good management
Healthy balance sheet
The business offers a high return: Equity
Unique business idea
High growth
Niche market
Proven management
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Preparing an Elevator Speech (1 of 2)
Purpose
• An elevator speech is a brief, carefully constructed statement that outlines the
merits of a business opportunity.
• There are many occasions when a carefully constructed elevator speech might
come in handy.
• Most elevator speeches are around 60 seconds long.
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Preparing an Elevator Speech (2 of 2)
Table 10.3 Guidelines for Preparing an Elevator Speech
Describe the opportunity or problem that
Step 1 20 seconds
needs to be solved.
Describe how your product meets the
Step 2 20 seconds
opportunity or solves the problem.
Step 3 Describe your qualifications. 10 seconds
Step 4 Describe your market. 10 seconds
Total blank 60 seconds
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Sources of Equity Funding
• Business Angels
• Venture Capital
• Initial Public Offerings
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Business Angels (1 of 4)
• Are individuals who invest their personal capital directly in start-ups.
• The prototypical business angel is about 50 years old, has high income and
wealth, is well educated, has succeeded as an entrepreneur, and invests in
companies that are in the region where he or she lives.
• Angel investors generally invest between $10,000 and $500,000 in a single
company and are looking for companies that have the potential to grow
30 to 40 percent per year before they are acquired or go public.
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Business Angels (2 of 4)
• Many well-known companies, including Apple and Google, received their
initial investment from one or more angel investors.
• The number of angel investors in the United States, which is estimated to
be around 304,900, has increased dramatically over the past decade.
• Many angels are motivated by more than financial returns: they enjoy the
process of mentoring a new start-up.
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Business Angels (3 of 4)
• Most angel investors remain fairly anonymous and are matched up with
entrepreneurs via referrals.
• To find a business angel, an entrepreneur should discreetly work his/her
network of acquaintances to see if anyone can make an appropriate
introduction.
• An advantage that college students have in regard to finding business
angels is that many judge college or university-sponsored business plan
or business model competitions.
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Business Angels (4 of 4)
• There are organized groups of business angels.
• These groups typically consist of 10 to 150 angel investors in a local area that
meet regularly to listen to business plan presentations.
• An example of an angel group is the Central Texas Angel Network (CTAN)
located in Austin, TX.
• It is a relatively large angel group, with 165 angel investors with expertise in
multiple sectors.
• The process the network follows to vet investment opportunities is explained
on its Web site.
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Venture Capital (1 of 6)
• Venture capital is money that is invested by venture capital firms in start-ups and small
businesses with exceptional growth potential.
• A distinct difference between angel investors and venture capital firms is that angels
tend to invest earlier in the life of a company, whereas venture capitalists come in later.
• The majority of venture capital money goes to follow-on funding for businesses that
were originally funding by angel investors, government programs, or by some other
means.
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Venture Capital (2 of 6)
• Venture capital firms are limited partnerships of money managers who raise money in
“funds” to invest in start-ups and growing firms.
• The funds, or pools of money, are raised from high-net-worth individuals, pension plans,
university endowments, foreign investors, and similar sources.
• The investors who invest in venture capital funds are called limited partners. The
venture capitalists are called general partners.
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Venture Capital (3 of 6)
• Because in the past venture capitalists have funded high-profile successes such as Google,
Facebook, Snap, and Twitter, the industry receives a great deal of attention.
• In fact, venture capitalists fund less than 1 percent of new firms.
• Many entrepreneurs become discouraged when they are repeatedly rejected for venture
capital funding, even though they may have an excellent business plan.
• Venture capitalists are looking for the “home run.” The result is that they do not fund the
majority of the business plans they receive and review.
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Venture Capital (4 of 6)
• Still, for firms that qualify, venture capital is a viable alternative to equity funding.
• An advantage to obtaining this funding is that venture capitalists are extremely well-
connected in the business world and can offer a firm considerable assistance beyond
funding.
• An important part of obtaining venture capital funding is going through the due diligence
process, which refers to the process of investigating the merits of a potential venture
and verifying the key claims made in the business plan.
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Venture Capital (5 of 6)
• Firms that prove to be suitable for venture capital funding should conduct
their own due diligence to make sure they end up with a venture capital firm
that is a good fit.
• They should ask the following questions before accepting funds from a
particular venture capital firm.
• Do the venture capitalists have experience in our industry?
• Do they take a highly active or passive management role?
• Are the personalities on both sides of the table compatible?
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Venture Capital (6 of 6)
• They should ask the following questions before accepting funds from a
particular venture capital firm (continued):
• Does the firm have deep enough pockets or sufficient contacts within
the venture capital industry to provide follow-on rounds of financing?
• Is the firm negotiating in good faith in regard to the percentage of our
firm they want in exchange for their investment?
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Initial Public Offering (1 of 2)
• An initial public offering (IPO) is a company’s first sale of stock to the public. When a
company goes public, its stock is traded on one of the major stock exchanges.
• Most entrepreneurial firms that go public trade on the NASDAQ, which is weighted
heavily toward technology, biotech, and small-company stocks.
• An IPO is an important milestone for a firm. Typically, a firm is not able to go public until
it has demonstrated that it is viable and has a bright future.
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Initial Public Offering (2 of 2)
Reasons that Motivate Firms to Go Public
Reason 1 Reason 2
Is a way to raise equity capital Raises a firm’s public profile, making
to fund current and future it easier to attract high-quality
operations. customers and business partners.
Reason 3 Reason 4
Is a liquidity event that Creates a form of currency that
provides a means for a can be used to grow the company
company’s investors to recoup via acquisitions.
their investments.
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Sources of Debt Financing
• Commercial Banks
• Others
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Commercial Banks (1 of 2)
• Historically, commercial banks have not been viewed as a practical source of
financing for start-up firms.
• This sentiment is not a knock against banks; it is just that banks are risk
averse, and financing start-ups is a risky business.
• Banks are interested in firms that have a strong cash flow, low
leverage, audited financials, good management, and a healthy balance
sheet.
• Although many new ventures have good management, few have the
other characteristics, at least initially.
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Commercial Banks (2 of 2)
• The good news is that despite these historical precedents, some
banks are starting to engage start-up entrepreneurs.
• When it comes to start-ups, some banks are rethinking their lending
standards and are beginning to focus on cash flow and the strength
of the management team rather than on collateral and the strength
of the balance sheet.
• Entrepreneurs should follow developments in this area closely.
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Other Sources of Debt Financing (1 of 3)
• Online Lenders
• There is a group of online lenders, including OnDeck, Kabbage, and
BlueVine that provide loans to businesses.
• Depending on the company, loans are available from $2,000 to $2 million.
• Interest rates are normally higher than charged by a commercial bank, so
it is advisable to check the terms carefully.
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Other Sources of Debt Financing (2 of 3)
• Peer-to-Peer Lenders
• Peer-to-peer lenders underwrite borrowers but don’t fund the loans directly.
• Instead, they act as intermediaries between borrowers and individuals or
borrowers and institutional investors.
• Funding Circle and Lending Club are examples of peer-to-peer lenders.
• The thing to watch when considering peer-to-peer loans is the annual
percentage rate, which in many cases is high.
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Other Sources of Debt Financing (3 of 3)
• Vendor Credit
• Also known as trade credit, is when a vendor extends credit to a
business in order to allow the business to buy its products and/or
services up front but defer payment until later.
• Factoring
• Is a financial transaction whereby a business sells its accounts
receivable to a third party, called a factor, at a discount in exchange
for cash.
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Creative Sources of Financing or Funding
• Crowdfunding
• Leasing
• Grant Programs
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Crowdfunding (1 of 2)
• Crowdfunding is the practice of funding a project or new venture by raising
monetary contributions from a large number of people (the “crowd”) typically
via the Internet.
• Two Types of Crowdfunding Programs
• Rewards-based crowdfunding allows entrepreneurs to raise money in
exchange for some type of amenity or reward.
• Kickstarter and Indiegogo are the most popular rewards-based
crowdfunding sites.
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Crowdfunding (2 of 2)
• Equity-based crowdfunding helps businesses raise money by
tapping individuals and investors who provide funding in exchange
for equity in the business.
• The catalyst for the advent of equity-based crowdfunding was the
JOBS Act, which was passed in April 2012.
• Four of the most popular equity-based crowdfunding sites are
MicroVentures, Fundable, Crowdfunder, and CircleUp.
• Equity-based crowdfunding is gaining momentum. Over $85 million
has been invested through MicroVentures since 2009.
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Leasing (1 of 2)
• A lease is a written agreement in which the owner of a piece of property allows
an individual or business to use the property for a specified period of time in
exchange for payments.
• The major advantage of leasing is that it enables a company to acquire the use
of assets with very little or no down payment.
• Leases for facilities and leases for equipment are the two most common types
of leases that entrepreneurial ventures undertake.
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Leasing (2 of 2)
• Most leases involve a modest down payment and monthly payments during
the duration of the lease.
• At the end of an equipment lease, the new venture typically has the option to
stop using the equipment, purchase it for fair market value, or renew the
lease.
• Leasing is almost always more expensive than paying cash for an item, so most
entrepreneurs think of leasing as an alternative to equity or debt financing.
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Grant Programs
• Private Grants
• There are a limited number of grant programs available to entrepreneurs.
• Getting grants takes a little detective work.
• Granting agencies are low key, and must be sought out.
• Government Grants
• SIDBI Fund of Funds Scheme
• Startup India Seed Fund Scheme
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Strategic Partners
• Strategic partners are another source of capital for new ventures.
• Many partnerships are formed to share the costs of product or service
development, to gain access to particular resources, or to facilitate speed to
market.
• Strategic partnerships that capture these types of benefits can help new ventures
lessen their need for funding or financing.
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Thank you!
Title / Author: Entrepreneurship Management/Anand Page No. 51
Dhutraj
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