Entrepreneurial Finance
Chapter 1: Introduction to finance for entrepreneurs
Small business administration (SBA): established by the federal government (US) to provide
financial assistance to small businesses.
Section 1.1: The entrepreneurial process
Entrepreneurial process: developing opportunities, gathering resources, and managing and building
operations with the goal of creating value.
See figure 1.1 on page 5
Spend time to examine the feasibility of an idea, screen the possible venture opportunities, analyse the
related competitive environment, develop a sound business model, and prepare a convincing business plan
Then, gather the psychical assets, intellectual property, human resources, and financial capital. -
Organizing formally and legally provides the opportunity for building consensus for the new venture’s
boundaries of authority and basic ethical framework.
Lastly, an effective business model must generate revenues to cover operating costs in the foreseeable
future. Eventually, also enough cash flow to cover planned expansion and reinvestment.
Section 1.2: Entrepreneurship fundamentals
Successful entrepreneurs recognize and develop viable business opportunities, have confidence in the
market potential for their new products, and are committed to running the race.
Who is an entrepreneur?
There is no blueprint for the ideal entrepreneur and no screening device to test for the entrepreneurial
gene.
Basic definitions
Entrepreneurship: process of changing idea into commercial opportunities and creating value
Entrepreneur: individual who thinks, reasons, and acts to convert ideas into commercial opportunities
and to create value
Entrepreneurial traits or characteristics
Three to consider as important beyond generalization:
Recognizing and seizing commercial opportunities (often before others recognize the potential)
Being doggedly optimistic
Not being consumed with the present entirely, their optimism is conditional
Opportunities exist but not without risk
Firms with fewer than 500 employees represent more than 99 per cent of employers and employ
approximately one half of the private workforce.
A governmental study suggest that one of the fastest growing opportunities for small businesses are in the
restaurant industry, medical and dental laboratories, residential care industry, credit reporting, child
daycare services, and equipment leasing.
The return-risk principle applies also to entrepreneurship
Nearly half of business failures are due to economic factors such as inadequate saes, insufficient profits,
or industry weakness. Of the remainder, almost 40% per cent cite financial causes, such as excessive debt
and insufficient financial capital. Other reasons include insufficient managerial experience, business
conflicts, family problems, fraud and disasters
Section 1.2: Sources of entrepreneurship opportunities
Entrepreneurial opportunities: ideas with potential to create value through different or new,
repackaged, or repositioned products, markets, processes, or services.
Megatrends: large societal, demographic, or technological trends or changes that are slow in forming
but, once in place, continue for many years.
Fads: non predictable, having short lives, and do not involve macro changes
See figure 1.2 for five megatrend opportunities, though they can come in an almost unlimited amount of
sources
, Societal changes
John Naisbitt argued that successful new technologies would center on the human response to
information.
Demographic shifts associated with the baby boom generation
Increasingly information oriented society
Social, economic and legal changes may occur within pervasive trends.
Social changes are reflected in important changes in preferences about clothing styles, food, travel and
leisure, housing etc.
Economic shifts like the rise of two career families, higher disposable incomes or changing saving
patterns also suggest entrepreneurial opportunities.
Changes in our legal environment can introduce important economic opportunities by eliminating
existing barriers to entry.
Demographic changes
Aging of the baby boom generation
They will continue to spend and are relatively wealthy
Technological changes
May be the most important source of entrepreneurial opportunities
Genesis in the mid to late 1950 to early 1960s
Perhaps the most important invention in shuttling from an industrial society to an information society
was the computer chip
The most significant innovation in the global commerce since the merchant ship is the Internet.
When the internet’s ability to provide nearly instant worldwide communication was combined with rapid
transfer of graphic images, the internet became the infrastructure for the Word Wide Web.
E-commerce: the use of electronic means to conduct business online.
Attention continues to shift from the age old strategy of owning and controlling natural resources
(tangibles) to a strategy of owning and controlling information (intangibles)
Much of the efficiency gains are in the form of consumer surplus for the consumers in e-commerce
Margins are way smaller with the Internet
Emerging economies and global changes
One of the most notable changes in recent years is the emergence of substantial demand in emerging
economies including those of the BRIC countries.
Also, the rise in industrial output has increased the demand for raw materials, energy and industrial
goods
Maturation and global slowdown have diminished the focus on the above
Recent focus on CIVETS: Columbia, Indonesia, Vietnam, Egypt, Turkey, and South Africa
In a global economy, growth opportunities shift over time
Prospects, challenges and opportunities from PWC:
Global average growth will be just over 3% from 2011 to 2050
China will be the largest economy by 2017 in purchasing power parity (PPP) and by 2027 in market
exchange rate (MER) terms
India will be number three by 2050
Brazil will be number four by 2050; overtaking Japan
Russia will overtake Germany as the largest European economy by 2020 (PPP) and 2035 (MER)
Mexico and Indonesia may exceed the UK and France by 2050, with Turkey exceeding Italy
Vietnam, Malaysia, and Nigeria have great promise and Poland may outpace Western Europe
Crises and bubbles
Stock prices of Internet of ‘tech’ firms rose much faster than those firm’s abilities to generate earnings
and cash flows the dot.com bubble burst in 2000
Economic recession began mid-2008 ’perfect financial storm’
2008: Economic Stabilization Act, which provided funds to the US treasury to purchase troubled
financial assets held by institutions
2009: American Recovery and Reinvestment Act (ARRA), provided for tax incentives, appropriations and
increased government spending in an effort to stimulate economic expansion.
Renewable energy benefitted during the economy
Chapter 1: Introduction to finance for entrepreneurs
Small business administration (SBA): established by the federal government (US) to provide
financial assistance to small businesses.
Section 1.1: The entrepreneurial process
Entrepreneurial process: developing opportunities, gathering resources, and managing and building
operations with the goal of creating value.
See figure 1.1 on page 5
Spend time to examine the feasibility of an idea, screen the possible venture opportunities, analyse the
related competitive environment, develop a sound business model, and prepare a convincing business plan
Then, gather the psychical assets, intellectual property, human resources, and financial capital. -
Organizing formally and legally provides the opportunity for building consensus for the new venture’s
boundaries of authority and basic ethical framework.
Lastly, an effective business model must generate revenues to cover operating costs in the foreseeable
future. Eventually, also enough cash flow to cover planned expansion and reinvestment.
Section 1.2: Entrepreneurship fundamentals
Successful entrepreneurs recognize and develop viable business opportunities, have confidence in the
market potential for their new products, and are committed to running the race.
Who is an entrepreneur?
There is no blueprint for the ideal entrepreneur and no screening device to test for the entrepreneurial
gene.
Basic definitions
Entrepreneurship: process of changing idea into commercial opportunities and creating value
Entrepreneur: individual who thinks, reasons, and acts to convert ideas into commercial opportunities
and to create value
Entrepreneurial traits or characteristics
Three to consider as important beyond generalization:
Recognizing and seizing commercial opportunities (often before others recognize the potential)
Being doggedly optimistic
Not being consumed with the present entirely, their optimism is conditional
Opportunities exist but not without risk
Firms with fewer than 500 employees represent more than 99 per cent of employers and employ
approximately one half of the private workforce.
A governmental study suggest that one of the fastest growing opportunities for small businesses are in the
restaurant industry, medical and dental laboratories, residential care industry, credit reporting, child
daycare services, and equipment leasing.
The return-risk principle applies also to entrepreneurship
Nearly half of business failures are due to economic factors such as inadequate saes, insufficient profits,
or industry weakness. Of the remainder, almost 40% per cent cite financial causes, such as excessive debt
and insufficient financial capital. Other reasons include insufficient managerial experience, business
conflicts, family problems, fraud and disasters
Section 1.2: Sources of entrepreneurship opportunities
Entrepreneurial opportunities: ideas with potential to create value through different or new,
repackaged, or repositioned products, markets, processes, or services.
Megatrends: large societal, demographic, or technological trends or changes that are slow in forming
but, once in place, continue for many years.
Fads: non predictable, having short lives, and do not involve macro changes
See figure 1.2 for five megatrend opportunities, though they can come in an almost unlimited amount of
sources
, Societal changes
John Naisbitt argued that successful new technologies would center on the human response to
information.
Demographic shifts associated with the baby boom generation
Increasingly information oriented society
Social, economic and legal changes may occur within pervasive trends.
Social changes are reflected in important changes in preferences about clothing styles, food, travel and
leisure, housing etc.
Economic shifts like the rise of two career families, higher disposable incomes or changing saving
patterns also suggest entrepreneurial opportunities.
Changes in our legal environment can introduce important economic opportunities by eliminating
existing barriers to entry.
Demographic changes
Aging of the baby boom generation
They will continue to spend and are relatively wealthy
Technological changes
May be the most important source of entrepreneurial opportunities
Genesis in the mid to late 1950 to early 1960s
Perhaps the most important invention in shuttling from an industrial society to an information society
was the computer chip
The most significant innovation in the global commerce since the merchant ship is the Internet.
When the internet’s ability to provide nearly instant worldwide communication was combined with rapid
transfer of graphic images, the internet became the infrastructure for the Word Wide Web.
E-commerce: the use of electronic means to conduct business online.
Attention continues to shift from the age old strategy of owning and controlling natural resources
(tangibles) to a strategy of owning and controlling information (intangibles)
Much of the efficiency gains are in the form of consumer surplus for the consumers in e-commerce
Margins are way smaller with the Internet
Emerging economies and global changes
One of the most notable changes in recent years is the emergence of substantial demand in emerging
economies including those of the BRIC countries.
Also, the rise in industrial output has increased the demand for raw materials, energy and industrial
goods
Maturation and global slowdown have diminished the focus on the above
Recent focus on CIVETS: Columbia, Indonesia, Vietnam, Egypt, Turkey, and South Africa
In a global economy, growth opportunities shift over time
Prospects, challenges and opportunities from PWC:
Global average growth will be just over 3% from 2011 to 2050
China will be the largest economy by 2017 in purchasing power parity (PPP) and by 2027 in market
exchange rate (MER) terms
India will be number three by 2050
Brazil will be number four by 2050; overtaking Japan
Russia will overtake Germany as the largest European economy by 2020 (PPP) and 2035 (MER)
Mexico and Indonesia may exceed the UK and France by 2050, with Turkey exceeding Italy
Vietnam, Malaysia, and Nigeria have great promise and Poland may outpace Western Europe
Crises and bubbles
Stock prices of Internet of ‘tech’ firms rose much faster than those firm’s abilities to generate earnings
and cash flows the dot.com bubble burst in 2000
Economic recession began mid-2008 ’perfect financial storm’
2008: Economic Stabilization Act, which provided funds to the US treasury to purchase troubled
financial assets held by institutions
2009: American Recovery and Reinvestment Act (ARRA), provided for tax incentives, appropriations and
increased government spending in an effort to stimulate economic expansion.
Renewable energy benefitted during the economy
