SOLUTIONV MANUALV FOR
EntrepreneurialVFinance,V7thVEditionVJ.VChrisVLeachV(Author),V
RonaldVW.VMelicherV(Author)
ChapterV1-
16VWithVCasesVProductsV&SpatialVTechVChapterV1
INTRODUCTIONVTOVFINANCEVFORVENTREPRENEURSVFO
CUS
TheVpurposeVofVthisVfirstVchapterVisVtoVpresentVanVoverviewVofVwhatVentrepreneurialVfinanc
eVisVabout.V InVdoingVsoVweVhopeVtoVconveyVtoVyouVtheVimportanceVofVunderstandingVandV
applyingVentrepreneurialVfinanceVmethodsVandVtoolsVtoVhelpVensureVanVentrepreneurialVventu
reVisVsuccessful.VWeVpresentVaVlifeVcycleVapproachVtoVtheVteachingVofVentrepreneurialVfinan
ceVwhereVweVcoverVventureVoperatingVandVfinancialVdecisionsVfacedVbyVtheVentrepreneurVas
VaVventureVprogressesVfromVanVideaVthroughVtoVharvestingVtheVventure.
LEARNINGVOBJECTIVES
LOV1.1:VCharacterizeVtheVentrepreneurialVprocess.
LOV1.2:VDescribeVentrepreneurshipVandVsomeVcharacteristicsVofVentrepreneurs.
LOV1.3:VIndicateVseveralVmegatrendsVprovidingVwavesVofVentrepreneurialVopportuni
ties.VLOV1.4:VListVandVdescribeVtheVsevenVprinciplesVofVentrepreneurialVfinance.
LOV1.5:VDiscussVentrepreneurialVfinanceVandVtheVroleVofVtheVfinancialVman
ager.VLOV1.6:VDescribeVtheVvariousVstagesVofVaVsuccessfulVventure‘sVlifeVc
ycle.
LOV1.7:VIdentify,VbyVlifeVcycleVstage,VtheVrelevantVtypesVofVfinancingVandVinv
estors.VLOV1.8:VUnderstandVtheVlifeVcycleVapproachVusedVinVthisVbook.
CHAPTERVOUTLINE
1.1 THEVENTREPRENEURIALVPROCESS
1.2 ENTREPRENEURSHIPVFUNDAMENTALS
A. WhoVisVanVEntrepreneur?
B. BasicVDefinitions
C. EntrepreneurialVTraitsVorVCharacteristics
D. OpportunitiesVExistVButVNotVWithoutVRisks
1.3 SOURCESVOFVENTREPRENEURIALVOPPORTUNITIES
A. SocietalVChanges
B. DemographicVChanges
C. TechnologicalVChanges
D. EmergingVEconomiesVandVGlobalVChanges
E. CrisesVandV―Bubbles‖
F. DisruptiveVInnovation
1
,2 ChapterV6:VManagingVCashVFl
ow
1.4 PRINCIPLESVOFVENTREPRENEURIALVFINANCE
A. Real,VHuman,VandVFinancialVCapitalVmustVbeVRentedVfromVOwnersV(PrincipleV#1)
B. RiskVandVExpectedVRewardVgoVHandVinVHandV(PrincipleV#2)
C. WhileVAccountingVisVtheVLanguageVofVBusiness,VCashVisVtheVCurrencyV(PrincipleV#3
)
D. NewVVentureVFinancingVInvolvesVSearch,VNegotiation,VandVPrivacyV(PrincipleV#4)
E. AVVenture‘sVFinancialVObjectiveVisVtoVIncreaseVValueV(PrincipleV#5)
F. ItVisVDangerousVtoVAssumeVthatVPeopleVActVAgainstVTheirVOwnVSelf-
InterestsV(PrincipleV#6)
G. VentureVCharacterVandVReputationVcanVbeVAssetsVorVLiabilitiesV(PrincipleV#7)
1.5 ROLEVOFVENTREPRENEURIALVFINANCE
1.6 THEVSUCCESSFULVVENTUREVLIFEVCYCLE
A. DevelopmentVStage
B. StartupVStage
C. SurvivalVStage
D. Rapid-GrowthVStage
E. Early-MaturityVStage
F. LifeVCycleVStagesVandVtheVEntrepreneurialVProcess
1.7 FINANCINGVTHROUGHVTHEVVENTUREVLIFEVCYCLE
A. SeedVFinancing
B. StartupVFinancing
C. First-RoundVFinancing
D. Second-RoundVFinancing
E. MezzanineVFinancing
F. Liquidity-StageVFinancing
G. SeasonedVFinancing
1.8 LIFEVCYCLEVAPPROACHVFORVTEACHINGVENTREPRENEURIALVFINAN
CEVSUMMARY
DISCUSSIONVQUESTIONSVANDVANSWERS
1. WhatVisVtheVentrepreneurialVprocess?
TheVentrepreneurialVprocessVcomprises:VdevelopingVopportunities,VgatheringVresources,VandV
managingVandVbuildingVoperationsVwithVtheVgoalVofVcreatingVvalue.
2. WhatVisVentrepreneurship?V WhatVareVsomeVbasicVcharacteristicsVofVentrepreneurs?
EntrepreneurshipVisVtheVprocessVofVchangingVideasVintoVcommercialVopportunitiesVandVcr
eatingVvalue.V WhileVthereVisVnoVprototypicalVentrepreneur,VmanyVareVgoodVatVrecognizi
ngVcommercialVopportunities,VtendVtoVbeVoptimistic,VandVenvisionVaVplanVforVtheVfuture.
3. WhyVdoVbusinessesVcloseVorVceaseVoperating?V WhatVareVtheVprimaryVreasonsVwhyVbusin
essesVfail?
, ChapterV6:VManagingVCashVFl 3
ow
NearlyVone-
halfVofVbusinessesVthatVfailVdoVsoVbecauseVofVeconomicVfactorsVincludingVinadequateVsal
es,VinsufficientVprofits,VandVindustryVweakness.VManyVofVtheVeconomicVfactorsVareVdirec
tlyVtiedVtoVfinancingVconcernsV(e.g.,VinsufficientVprofitsVforVinvestors).V AlmostV40Vperce
ntVofVbusinessVfailuresVnotVcitingVeconomicVfactorsVciteVspecificallyVfinancialVcausesVlik
eVexcessiveVdebtVandVinsufficientVfinancialVcapital.V TheVremainingVcitedVreasonsVforVfail
ureVincludeVaVlackVofVbusinessVandVmanagerialVexperience,VbusinessVconflicts,VfamilyVpr
oblems,Vfraud,VandVdisasters.V ManyVbusinessesVcloseVandVfailVdueVtoVfinancialVtroubleV
whichVisVmostlyVrelatedVtoVlackVofVsalesVandVunsatisfactoryVprofits.
4. WhatVareVfiveVmegatrendVsourcesVorVcategoriesVforVfindingVentrepreneurialVopportunities?
WeVidentifyVfiveVmegatrendVcategories.V TheyVare:V(1)VsocietalVchanges,V(2)Vdemogr
aphicVchanges,V(3)VtechnologicalVchanges,V(4)VemergingVeconomiesVandVglobalVchan
ges,VandV(5)VcrisesVandVbubbles.
UnderVsocietalVchangesVweVdiscussVtheVgigVeconomyVandVtheVsharingVeconomy.V TheVgi
gVeconomyVisVwhereVindividualsVacceptVshort-
termVjobVassignmentsVorV―gigs‖VinsteadVofVhavingVfull-
timeVemployment.V TheVsharingVeconomyVisVwhereVindividualsVshareVtheirVassets,VsuchV
asVhomes,Vvehicles,VandVpersonalVtime,VwithVothersVtoVprovideVaVnewVwayVforVdistribut
ingVgoodsVandVservices.
5. WhatVassetVandVfinancialVbubblesVhaveVoccurredVrecently?V HowVcanVbubblesVandVfina
ncialVcrisesVleadVtoVentrepreneurialVopportunities?
TheV―dot.com‖VorVInternetVbubbleVburstVinV2000.V AnVeconomicVrecessionVthatVbeganVi
nV2001VwasVexacerbatedVbyVtheV9/11VterroristVattack.V TheVhousingVassetVbubble,Vfuele
dVbyVsub-
primeVmortgagesVofferedVtoVborrowersVwhoVcouldVnotVaffordVthem,VburstVinV2006.V By
VtheVsecondVhalfVofV2008,VaV―perfectVfinancialVstorm‖VeruptedVandVpossibleVfinancialV
collapseVbecameVaVreality.
AlternativeVandVrenewableVenergy,VaccompaniedVbyVprojectVcreditVsubsidies,VproductionVand
VinvestmentVtaxVcredits,VandVloanVguaranteesVbenefitedVasVaVresultVofVtheVrecentVfinancialVcr
isis.VTheseVdevelopmentsVandVotherVeffortsVtoVstimulateVeconomicVactivityVprovidedVmanyV
newVentrepreneurialVopportunities.
6. WhatVisVe-commerce?V WhyVareVtheVInternetVeconomyVandVe-commerceVhereVtoVstay?
E-
commerceVinvolvesVtheVuseVofVelectronicVmeansVtoVconductVbusinessVonline.V Activi
tiesVincludeVmarketingVandVsellingVonlineVandVelectronicVretailing.
TheVinternetVeconomyVandVe-
commerceVareVhereVtoVstay.V WeVwillVneverVdoVbusinessVtheVsameVwayVweVdidVbeforeVt
heVInternetVandVtheVWeb.V ManyVbusinessVplansVwereVfundedVwithVtheVbeliefVthatVpartV
ofVtheVbenefitVcouldVbeVcapturedVbyVsellersV(producersVandVretailers).
However,VweVnowVknowVthatVtheVWebVsoVeffectivelyVfacilitatesVpriceVcompetitionVthatV
itVisVhardVforVsuppliersVandVretailersVtoVprotectVmargins.V E-
commerceVmayVnotVdeliverVtheVmarginsVonceVconjectured,VbutVtheVInternetVisVstillVoneV
, 4 ChapterV6:VManagingVCashVFl
ow
ofVtheVmostVradicalVinnovationsVinVourVlifetime.
EntrepreneurialVFinance,V7thVEditionVJ.VChrisVLeachV(Author),V
RonaldVW.VMelicherV(Author)
ChapterV1-
16VWithVCasesVProductsV&SpatialVTechVChapterV1
INTRODUCTIONVTOVFINANCEVFORVENTREPRENEURSVFO
CUS
TheVpurposeVofVthisVfirstVchapterVisVtoVpresentVanVoverviewVofVwhatVentrepreneurialVfinanc
eVisVabout.V InVdoingVsoVweVhopeVtoVconveyVtoVyouVtheVimportanceVofVunderstandingVandV
applyingVentrepreneurialVfinanceVmethodsVandVtoolsVtoVhelpVensureVanVentrepreneurialVventu
reVisVsuccessful.VWeVpresentVaVlifeVcycleVapproachVtoVtheVteachingVofVentrepreneurialVfinan
ceVwhereVweVcoverVventureVoperatingVandVfinancialVdecisionsVfacedVbyVtheVentrepreneurVas
VaVventureVprogressesVfromVanVideaVthroughVtoVharvestingVtheVventure.
LEARNINGVOBJECTIVES
LOV1.1:VCharacterizeVtheVentrepreneurialVprocess.
LOV1.2:VDescribeVentrepreneurshipVandVsomeVcharacteristicsVofVentrepreneurs.
LOV1.3:VIndicateVseveralVmegatrendsVprovidingVwavesVofVentrepreneurialVopportuni
ties.VLOV1.4:VListVandVdescribeVtheVsevenVprinciplesVofVentrepreneurialVfinance.
LOV1.5:VDiscussVentrepreneurialVfinanceVandVtheVroleVofVtheVfinancialVman
ager.VLOV1.6:VDescribeVtheVvariousVstagesVofVaVsuccessfulVventure‘sVlifeVc
ycle.
LOV1.7:VIdentify,VbyVlifeVcycleVstage,VtheVrelevantVtypesVofVfinancingVandVinv
estors.VLOV1.8:VUnderstandVtheVlifeVcycleVapproachVusedVinVthisVbook.
CHAPTERVOUTLINE
1.1 THEVENTREPRENEURIALVPROCESS
1.2 ENTREPRENEURSHIPVFUNDAMENTALS
A. WhoVisVanVEntrepreneur?
B. BasicVDefinitions
C. EntrepreneurialVTraitsVorVCharacteristics
D. OpportunitiesVExistVButVNotVWithoutVRisks
1.3 SOURCESVOFVENTREPRENEURIALVOPPORTUNITIES
A. SocietalVChanges
B. DemographicVChanges
C. TechnologicalVChanges
D. EmergingVEconomiesVandVGlobalVChanges
E. CrisesVandV―Bubbles‖
F. DisruptiveVInnovation
1
,2 ChapterV6:VManagingVCashVFl
ow
1.4 PRINCIPLESVOFVENTREPRENEURIALVFINANCE
A. Real,VHuman,VandVFinancialVCapitalVmustVbeVRentedVfromVOwnersV(PrincipleV#1)
B. RiskVandVExpectedVRewardVgoVHandVinVHandV(PrincipleV#2)
C. WhileVAccountingVisVtheVLanguageVofVBusiness,VCashVisVtheVCurrencyV(PrincipleV#3
)
D. NewVVentureVFinancingVInvolvesVSearch,VNegotiation,VandVPrivacyV(PrincipleV#4)
E. AVVenture‘sVFinancialVObjectiveVisVtoVIncreaseVValueV(PrincipleV#5)
F. ItVisVDangerousVtoVAssumeVthatVPeopleVActVAgainstVTheirVOwnVSelf-
InterestsV(PrincipleV#6)
G. VentureVCharacterVandVReputationVcanVbeVAssetsVorVLiabilitiesV(PrincipleV#7)
1.5 ROLEVOFVENTREPRENEURIALVFINANCE
1.6 THEVSUCCESSFULVVENTUREVLIFEVCYCLE
A. DevelopmentVStage
B. StartupVStage
C. SurvivalVStage
D. Rapid-GrowthVStage
E. Early-MaturityVStage
F. LifeVCycleVStagesVandVtheVEntrepreneurialVProcess
1.7 FINANCINGVTHROUGHVTHEVVENTUREVLIFEVCYCLE
A. SeedVFinancing
B. StartupVFinancing
C. First-RoundVFinancing
D. Second-RoundVFinancing
E. MezzanineVFinancing
F. Liquidity-StageVFinancing
G. SeasonedVFinancing
1.8 LIFEVCYCLEVAPPROACHVFORVTEACHINGVENTREPRENEURIALVFINAN
CEVSUMMARY
DISCUSSIONVQUESTIONSVANDVANSWERS
1. WhatVisVtheVentrepreneurialVprocess?
TheVentrepreneurialVprocessVcomprises:VdevelopingVopportunities,VgatheringVresources,VandV
managingVandVbuildingVoperationsVwithVtheVgoalVofVcreatingVvalue.
2. WhatVisVentrepreneurship?V WhatVareVsomeVbasicVcharacteristicsVofVentrepreneurs?
EntrepreneurshipVisVtheVprocessVofVchangingVideasVintoVcommercialVopportunitiesVandVcr
eatingVvalue.V WhileVthereVisVnoVprototypicalVentrepreneur,VmanyVareVgoodVatVrecognizi
ngVcommercialVopportunities,VtendVtoVbeVoptimistic,VandVenvisionVaVplanVforVtheVfuture.
3. WhyVdoVbusinessesVcloseVorVceaseVoperating?V WhatVareVtheVprimaryVreasonsVwhyVbusin
essesVfail?
, ChapterV6:VManagingVCashVFl 3
ow
NearlyVone-
halfVofVbusinessesVthatVfailVdoVsoVbecauseVofVeconomicVfactorsVincludingVinadequateVsal
es,VinsufficientVprofits,VandVindustryVweakness.VManyVofVtheVeconomicVfactorsVareVdirec
tlyVtiedVtoVfinancingVconcernsV(e.g.,VinsufficientVprofitsVforVinvestors).V AlmostV40Vperce
ntVofVbusinessVfailuresVnotVcitingVeconomicVfactorsVciteVspecificallyVfinancialVcausesVlik
eVexcessiveVdebtVandVinsufficientVfinancialVcapital.V TheVremainingVcitedVreasonsVforVfail
ureVincludeVaVlackVofVbusinessVandVmanagerialVexperience,VbusinessVconflicts,VfamilyVpr
oblems,Vfraud,VandVdisasters.V ManyVbusinessesVcloseVandVfailVdueVtoVfinancialVtroubleV
whichVisVmostlyVrelatedVtoVlackVofVsalesVandVunsatisfactoryVprofits.
4. WhatVareVfiveVmegatrendVsourcesVorVcategoriesVforVfindingVentrepreneurialVopportunities?
WeVidentifyVfiveVmegatrendVcategories.V TheyVare:V(1)VsocietalVchanges,V(2)Vdemogr
aphicVchanges,V(3)VtechnologicalVchanges,V(4)VemergingVeconomiesVandVglobalVchan
ges,VandV(5)VcrisesVandVbubbles.
UnderVsocietalVchangesVweVdiscussVtheVgigVeconomyVandVtheVsharingVeconomy.V TheVgi
gVeconomyVisVwhereVindividualsVacceptVshort-
termVjobVassignmentsVorV―gigs‖VinsteadVofVhavingVfull-
timeVemployment.V TheVsharingVeconomyVisVwhereVindividualsVshareVtheirVassets,VsuchV
asVhomes,Vvehicles,VandVpersonalVtime,VwithVothersVtoVprovideVaVnewVwayVforVdistribut
ingVgoodsVandVservices.
5. WhatVassetVandVfinancialVbubblesVhaveVoccurredVrecently?V HowVcanVbubblesVandVfina
ncialVcrisesVleadVtoVentrepreneurialVopportunities?
TheV―dot.com‖VorVInternetVbubbleVburstVinV2000.V AnVeconomicVrecessionVthatVbeganVi
nV2001VwasVexacerbatedVbyVtheV9/11VterroristVattack.V TheVhousingVassetVbubble,Vfuele
dVbyVsub-
primeVmortgagesVofferedVtoVborrowersVwhoVcouldVnotVaffordVthem,VburstVinV2006.V By
VtheVsecondVhalfVofV2008,VaV―perfectVfinancialVstorm‖VeruptedVandVpossibleVfinancialV
collapseVbecameVaVreality.
AlternativeVandVrenewableVenergy,VaccompaniedVbyVprojectVcreditVsubsidies,VproductionVand
VinvestmentVtaxVcredits,VandVloanVguaranteesVbenefitedVasVaVresultVofVtheVrecentVfinancialVcr
isis.VTheseVdevelopmentsVandVotherVeffortsVtoVstimulateVeconomicVactivityVprovidedVmanyV
newVentrepreneurialVopportunities.
6. WhatVisVe-commerce?V WhyVareVtheVInternetVeconomyVandVe-commerceVhereVtoVstay?
E-
commerceVinvolvesVtheVuseVofVelectronicVmeansVtoVconductVbusinessVonline.V Activi
tiesVincludeVmarketingVandVsellingVonlineVandVelectronicVretailing.
TheVinternetVeconomyVandVe-
commerceVareVhereVtoVstay.V WeVwillVneverVdoVbusinessVtheVsameVwayVweVdidVbeforeVt
heVInternetVandVtheVWeb.V ManyVbusinessVplansVwereVfundedVwithVtheVbeliefVthatVpartV
ofVtheVbenefitVcouldVbeVcapturedVbyVsellersV(producersVandVretailers).
However,VweVnowVknowVthatVtheVWebVsoVeffectivelyVfacilitatesVpriceVcompetitionVthatV
itVisVhardVforVsuppliersVandVretailersVtoVprotectVmargins.V E-
commerceVmayVnotVdeliverVtheVmarginsVonceVconjectured,VbutVtheVInternetVisVstillVoneV
, 4 ChapterV6:VManagingVCashVFl
ow
ofVtheVmostVradicalVinnovationsVinVourVlifetime.
