Entrepreneurial Finance Updated 2024

A successful entrepreneur: - -sees and seizes a commercial opportunity -tends to be optimistic -plans to obtain physical, financial and human resources needed for venture to succeed Principles of Entr Finance: #1 - real, human and financial capital must be rented from owners -the time value of is an importnat component of the rent one pays for using someone elses financial capital -when you rent the money, it cant be rented to others, and you must expect to compensate the money owner for that loss Principle #2 - Risk and Expected reward go hand in hand -higher the risk, the higher the interest rate (cost of borrowing), provides higher reward for the lender (pay-day-loans) Principle #3 - while accounting is the language of business, cash is the currency -entrepreneurs need to be able to quantify certain aspects of their ventures future and translate them into approprriate financial statements -entrepreneurs underestimate cash needed and overestimate revenue generated Principle #4 - new venture financing involves search, negotiation and privacy -find investors, negotiate price/return, and keep it private Principle #5 - a ventures financial objective is to increase value -value can be financial, social and environmental -how does your venture add value? Free Cash: - the cash exceeding that which is needed to operate, pay creditors and invest in the assests Free Cash Flow: - is the change in free cash over time Principle #6 - it is dangerous to assume that people act against their own self interest -aligning incentives (investors, founders, employees and spouses) is critical -when situations change, incentives diverage and renegotiation is important Principle #7 - venture character and reputation can be an asset or liability -high ethical standards -ventures can have character that can be different from the individuals who founded or manage it -many entrepreneurs are involved in charitable endeavors Entrepreneurial Finance: - is the application and adaptation of financial tools, techniques, and principles to the planning, funding, operations and valuation of an entrepreneurial venture Development stage - period involving the progression from an idea to a promisng business opportunity startup stage - period when the venture is organized, developed, and an initial revenue model is put in place survival stage - period when revenues start to grow and help pay some, but typically not all, of the expenses rapid growth stage - period of very rapid revenue and cash flow growth maturity stage - period when the growth of revenue and cash flow continue but at a much slower rate than in the rapid-growth stage Seed Financing: during development stage - -funds needed to determine whether the idea can be converted into a viable business opportunity -primary source of funds at the development stage are the entrepreneurs own assets -family and friends Start- up financing: - funds neede to take the venture from having established a viable business opportunity to initial production and sales -directed at firms that have a solid managment team, business plan and are generating revenues Venture Capital: - early stage financial capital often involving risk of total loss Venture Capitalists: - individuals who join in formal, organized firms to raise and distribute venture capital to new and fast growing ventures Business Angels: - wealthy individuals operating as formal or private investors who provide venture financing for small business Ex: Ron of Jerry Investment Banker: - individual working for an investment bank who advises and assists corporations in their security financing decisions and regarding mergers and acquisitions First round financing: - equity funds provided during the survival stage to cover the cash shortfall when expenses and investments exceed revenues Trade credit: - financing provided by suppliers in the form of delayed payments due to purchases made by the venture Second Round Financing: - financing for ventures in their rapid-growth stage to support investment in working capital Mezzanine Financing: - riskier debt -right to convert to owner ship -hybrid debt/equity Bridge Financing: - temporary financing needed to keep the venture afloat until the next offering Initial Public Offering (IPO): - a corporations first sale of common stock to the investing public Seasoned Securities Offering: - -occurs during ventures maturity stage the offering of securites by a firm that has previously offered the same or substaintially smaller securities -can be obtained by the form of a loan, new issues of bonds and stocks Components of a sounds business model - -generate revenues (have customers and sell them something) -make profits (have revenues that exceed the expenses of generating those revenues) -produce free cash flows (must generate cahs inflows that exceed net working capital and expenditures) Best Pracices: Marketing - -deliver high quality products or services that are considered to be the best -offer products or services that command higher prices and margins -develop efficient distribution channels and superior service support Best Practices Financial: - -prepare detailed monthly financial plans for the next year and annual financial palns for the next 5 years -anticipate and obtain multiple rounds of financing as the venture grows -manage firms assets, financial resources and operating performance -plan an exit strategy Best Practices: managment - -assemble a managment team with industry and market knowledge -employ decision making style that is collaborative -find managers that support entrepreneurial endeavors -assemble board of directors balanced in terms of internal and external members