Chapter 1
INTRODUCTION AND OVERVIEW
FOCUS
The purpose of this first chapter is to present an overview of what entrepreneurial finance
is about. In doing so we hope to convey to you the importance of understanding and
applying entrepreneurial finance methods and tools to help ensure an entrepreneurial
venture is successful. We present a life cycle approach to the teaching of entrepreneurial
finance where we cover venture operating and financial decisions faced by the
entrepreneur as a venture progresses from an idea through to harvesting the venture.
LEARNING OBJECTIVES
1. Characterize the entrepreneurial process
2. Describe entrepreneurship and some characteristics of entrepreneurs
3. Indicate three megatrends providing waves of entrepreneurial opportunities
4. List and describe the seven principles of entrepreneurial finance
5. Discuss entrepreneurial finance and the role of the financial manager
6. Describe the various stages of a successful venture’s life cycle
7. Identify, by life cycle stage, the relevant types of financing and investors
8. Understand the life cycle approach used in this book
CHAPTER OUTLINE
,1.1 THE ENTREPRENEURIAL PROCESS
1.2 ENTREPRENEURSHIP FUNDAMENTALS
A. Who is an Entrepreneur?
B. Basic Definitions
C. Entrepreneurial Traits or Characteristics
D. Opportunities Exist But Not Without Risks
1.3 SOURCES OF ENTREPRENEURIAL OPPORTUNITIES
A. Societal Changes
B. Demographic Changes
C. Technological Changes
D. Crises and “Bubbles”
1.4 PRINCIPLES OF ENTREPRENEURIAL FINANCE
A. Real, Human, and Financial Capital must be Rented from Owners
B. Risk and Expected Reward go Hand in Hand
C. While Accounting is the Language of Business, Cash is the Currency
D. New Venture Financing Involves Search, Negotiation, and Privacy
E. A Venture’s Financial Objective is to Increase Value
F. It is Dangerous to Assume that People Act Against Their Own Self-Interests
G. Venture Character and Reputation can be Assets or Liabilities
1.5 ROLE OF ENTREPRENEURIAL FINANCE
1.6 THE SUCCESSFUL VENTURE LIFE CYCLE
A. Development Stage
B. Startup Stage
C. Survival Stage
D. Rapid-Growth Stage
E. Early-Maturity Stage
, F. Life Cycle Stages and the Entrepreneurial Process
1.7 FINANCING THROUGH THE VENTURE LIFE CYCLE
A. Seed Financing
B. Startup Financing
C. First-Round Financing
D. Second-Round Financing
E. Mezzanine Financing
F. Liquidity-Stage Financing
G. Seasoned Financing
1.8 LIFE CYCLE APPROACH FOR TEACHING ENTREPRENEURIAL FINANCE
SUMMARY
DISCUSSION QUESTIONS AND ANSWERS
1. What is the entrepreneurial process?
The entrepreneurial process comprises: developing opportunities, gathering resources, and
managing and building operations with the goal of creating value.
2. What is entrepreneurship? What are some basic characteristics of entrepreneurs?
Entrepreneurship is the process of changing ideas into commercial opportunities and creating
value. While there is no prototypical entrepreneur, many are good at recognizing commercial
opportunities, tend to be optimistic, and envision a plan for the future.
3. Why do businesses close or cease operating? What are the primary reasons why businesses fail?
Nearly one-half of businesses that fail do so because of economic factors including inadequate
sales, insufficient profits, and industry weakness. Many of the economic factors are directly tied
, to financing concerns (e.g., insufficient profits for investors). Almost 40 percent of business
failures not citing economic factors cite specifically financial causes like excessive debt and
insufficient financial capital. The remaining cited reasons for failure include a lack of business
and managerial experience, business conflicts, family problems, fraud, and disasters. Many
businesses close and fail due to financial trouble which is mostly related to lack of sales and
unsatisfactory profits.
4. What are three megatrend sources or categories for finding entrepreneurial opportunities?
They are: (1) societal changes, (2) demographic changes, and (3) technological changes
5. What asset and financial bubbles have occurred recently? How can bubbles and financial crises
lead to entrepreneurial opportunities?
The “dot.com” or Internet bubble burst in 2000. An economic recession that began in 2001 was
exacerbated by the 9/11 terrorist attack. The housing asset bubble, fueled by sub-prime
mortgages offered to borrowers who could not afford them, burst in 2006. By the second half of
2008, a “perfect financial storm” erupted and possible financial collapse became a reality.
Alternative and renewable energy, accompanied by project credit subsidies, production and
investment tax credits, and loan guarantees benefited as a result of the recent financial crisis.
These developments and other efforts to stimulate economic activity provided many new
entrepreneurial opportunities.
6. What is e-commerce? Why are the Internet economy and e-commerce here to stay?
E-commerce involves the use of electronic means to conduct business online. Activities include
marketing and selling online and electronic retailing.
The internet economy and e-commerce are here to stay. We will never do business the same
way we did before the Internet and the Web. Many business plans were funded with the belief
that part of the benefit could be captured by sellers (producers and retailers). However, we
now know that the Web so effectively facilitates price competition that it is hard for suppliers
and retailers to protect margins. E-commerce may not deliver the margins once conjectured,
but the Internet is still one of the most radical innovations in our lifetime.
INTRODUCTION AND OVERVIEW
FOCUS
The purpose of this first chapter is to present an overview of what entrepreneurial finance
is about. In doing so we hope to convey to you the importance of understanding and
applying entrepreneurial finance methods and tools to help ensure an entrepreneurial
venture is successful. We present a life cycle approach to the teaching of entrepreneurial
finance where we cover venture operating and financial decisions faced by the
entrepreneur as a venture progresses from an idea through to harvesting the venture.
LEARNING OBJECTIVES
1. Characterize the entrepreneurial process
2. Describe entrepreneurship and some characteristics of entrepreneurs
3. Indicate three megatrends providing waves of entrepreneurial opportunities
4. List and describe the seven principles of entrepreneurial finance
5. Discuss entrepreneurial finance and the role of the financial manager
6. Describe the various stages of a successful venture’s life cycle
7. Identify, by life cycle stage, the relevant types of financing and investors
8. Understand the life cycle approach used in this book
CHAPTER OUTLINE
,1.1 THE ENTREPRENEURIAL PROCESS
1.2 ENTREPRENEURSHIP FUNDAMENTALS
A. Who is an Entrepreneur?
B. Basic Definitions
C. Entrepreneurial Traits or Characteristics
D. Opportunities Exist But Not Without Risks
1.3 SOURCES OF ENTREPRENEURIAL OPPORTUNITIES
A. Societal Changes
B. Demographic Changes
C. Technological Changes
D. Crises and “Bubbles”
1.4 PRINCIPLES OF ENTREPRENEURIAL FINANCE
A. Real, Human, and Financial Capital must be Rented from Owners
B. Risk and Expected Reward go Hand in Hand
C. While Accounting is the Language of Business, Cash is the Currency
D. New Venture Financing Involves Search, Negotiation, and Privacy
E. A Venture’s Financial Objective is to Increase Value
F. It is Dangerous to Assume that People Act Against Their Own Self-Interests
G. Venture Character and Reputation can be Assets or Liabilities
1.5 ROLE OF ENTREPRENEURIAL FINANCE
1.6 THE SUCCESSFUL VENTURE LIFE CYCLE
A. Development Stage
B. Startup Stage
C. Survival Stage
D. Rapid-Growth Stage
E. Early-Maturity Stage
, F. Life Cycle Stages and the Entrepreneurial Process
1.7 FINANCING THROUGH THE VENTURE LIFE CYCLE
A. Seed Financing
B. Startup Financing
C. First-Round Financing
D. Second-Round Financing
E. Mezzanine Financing
F. Liquidity-Stage Financing
G. Seasoned Financing
1.8 LIFE CYCLE APPROACH FOR TEACHING ENTREPRENEURIAL FINANCE
SUMMARY
DISCUSSION QUESTIONS AND ANSWERS
1. What is the entrepreneurial process?
The entrepreneurial process comprises: developing opportunities, gathering resources, and
managing and building operations with the goal of creating value.
2. What is entrepreneurship? What are some basic characteristics of entrepreneurs?
Entrepreneurship is the process of changing ideas into commercial opportunities and creating
value. While there is no prototypical entrepreneur, many are good at recognizing commercial
opportunities, tend to be optimistic, and envision a plan for the future.
3. Why do businesses close or cease operating? What are the primary reasons why businesses fail?
Nearly one-half of businesses that fail do so because of economic factors including inadequate
sales, insufficient profits, and industry weakness. Many of the economic factors are directly tied
, to financing concerns (e.g., insufficient profits for investors). Almost 40 percent of business
failures not citing economic factors cite specifically financial causes like excessive debt and
insufficient financial capital. The remaining cited reasons for failure include a lack of business
and managerial experience, business conflicts, family problems, fraud, and disasters. Many
businesses close and fail due to financial trouble which is mostly related to lack of sales and
unsatisfactory profits.
4. What are three megatrend sources or categories for finding entrepreneurial opportunities?
They are: (1) societal changes, (2) demographic changes, and (3) technological changes
5. What asset and financial bubbles have occurred recently? How can bubbles and financial crises
lead to entrepreneurial opportunities?
The “dot.com” or Internet bubble burst in 2000. An economic recession that began in 2001 was
exacerbated by the 9/11 terrorist attack. The housing asset bubble, fueled by sub-prime
mortgages offered to borrowers who could not afford them, burst in 2006. By the second half of
2008, a “perfect financial storm” erupted and possible financial collapse became a reality.
Alternative and renewable energy, accompanied by project credit subsidies, production and
investment tax credits, and loan guarantees benefited as a result of the recent financial crisis.
These developments and other efforts to stimulate economic activity provided many new
entrepreneurial opportunities.
6. What is e-commerce? Why are the Internet economy and e-commerce here to stay?
E-commerce involves the use of electronic means to conduct business online. Activities include
marketing and selling online and electronic retailing.
The internet economy and e-commerce are here to stay. We will never do business the same
way we did before the Internet and the Web. Many business plans were funded with the belief
that part of the benefit could be captured by sellers (producers and retailers). However, we
now know that the Web so effectively facilitates price competition that it is hard for suppliers
and retailers to protect margins. E-commerce may not deliver the margins once conjectured,
but the Internet is still one of the most radical innovations in our lifetime.
