Summary Entrepreneurial finance
Chapter 1 – Introduction and overview
The entrepreneurial process compromises:
- developing opportunities developing business plan
- gathering resources physical assets, intellectual property, human resources and financial
capital. Formally, legally, strategy, basic ethical framework.
- managing and building operations an effective business model must generate revenues to
cover operating costs in the future. Cash flow needed for a growing venture.
All with the goal of creating value in an economic, legal and social environment.
Entrepreneurship = the process of changing ideas into commercial opportunities and creating value.
Entrepreneur = an individual who thinks, reasons and acts to convert ideas into commercial
opportunities and to create value. An entrepreneur’s mission is to find economic opportunities, convert
them into valuable products and services, and have their worth recognized in the marketplace.
Characteristics entrepreneur:
- are recognizing and seize commercial opportunities
- are doggedly optimistic
- are not consumed entirely with the present. Their optimism is conditional.
Percentage of survive four years of operations (of ventures): 47%
What are some of the major reasons why small businesses fail?
- Economic factors: inadequate sales, insufficient profits, industry weakness
- Excessive debt and insufficient financial capital
- Other reasons: family problems, business conflicts, insufficient managerial experience
Entrepreneurial opportunities = ideas that have the potential to create value through, new, repackaged
or repositioned products, markets, processes or service.
- Megatrends large societal, demographic or technological trends or changes that are slow in
forming but, once in place, continue for many years. Three megatrend categories:
o Societal trends or changes: important changes in preferences about clothing styles,
food, travel and leisure, housing – anticipation: opportunity
o Demographic trends or changes: aging of the baby-boom generation, understanding
demographic shifts-business opportunities
o Technologic trends or changes: most important source of entrepreneurial
opportunities. E-commerce = the use of electronic means to conduct business online.
o Crisis and ‘bubbles’: internet bubble burst in 2000, economic crisis began in 2001
exacerbated by the 9/11 terrorist attack, bursting of the housing assets in 2006,
recession in 2008
- Fads (rage) not predictable, have short lives and do not involve macro changes
What innovations drove our move from an industrial society to an information society? invention of
the computer chip (backbone of all modern computing, telecommunication), internet, world-wide-
web, applications of internet (e-mail, remote access, file transfer, messaging, cell phone..)
7 principles of entrepreneurial finance:
, 1. Real human and financial capital must be rented from owners; you have to compensate the
owner for the loss of its use otherwise.
Time value of money = an important component of the rent one pays for using someone else’s
financial capital. If you rent the money, it cannot be rented to others, and you must expect to
compensate the money’s owner for that loss.
2. Risk and expected reward go hand in hand
The time value of money is not only the costs involved in renting someone’s capital. The total cost is
higher; the rent is risky.
3. While accounting is the language of business, cash is the currency
Accounting for entrepreneurial firms has two goals:
To provide for checks, balances, integrity and accountability in tracking a firm’s conduct
To quantify the future in a recognizable dialect of the official language
However, financial crises are usually are about one balance sheet account: cash. Measures that focus
on what is happening to cash therefore supplemented to traditional accounting measures.
4. New venture financing involves search, negotiation and privacy
Public financial market = where standardized contracts or securities are traded on organized securities
exchanges.
Private financial market = where customized contracts or securities are negotiated, created and held
with restrictions on how they can be transferred
5. A venture’s financial objective is to increase value
Profit must turn into free cash in order to be available to provide a return to a venture’s owner.
Free cash = the cash exceeding that which is needed to operate, pay creditors and invest in the assets.
Free cash flow = the change in free cash over time.
When we line up free cash flows and adjust them for risk and the time value of money, we get the best
proxy for common owner sentiment regarding a venture’s prospect.
6. It is dangerous to assume that people act against their own self-interests
Increasing value is the owner’s primary financial objective.
Owner-manager conflict: differences between manager’s self-interest and that of the
owners who hired him.
Owner-debt holder conflict: divergence between owners’ self-interest and of lenders (as
the firm approaches bankruptcy)
7. Venture character and reputation can be assets or liabilities
Character is important, because a negative character is difficult/impossible to hide; customers,
employees etc. can be expected to engage in substantially different behavior when doing business
with ventures having a weak or negative character.
Entrepreneurial finance = the application and adaptation of financial tools, techniques, and principles
to the planning, funding, operations and valuation of an entrepreneurial venture. Focus on the venture
as it moves through the entrepreneurial process.
Financial distress = when cash flow is insufficient to meet current liability obligations.
Financial management (-er) in an entrepreneurial venture involves record keeping, financial planning,
monitoring the venture’s use of assets, and arranging for any necessary financing.
Venture’s lifecycle:
Development stage – Startup stage – survival stage – rapid-growh stage – early-maturity stage
Early-stage ventures = are new or very young firms with limited operating history; they are in
development, startup or survival life cycle stage.
Seasoned firms = have produced successful operating histories and are in their rapid-growth or
maturity life cycle stages.
Chapter 1 – Introduction and overview
The entrepreneurial process compromises:
- developing opportunities developing business plan
- gathering resources physical assets, intellectual property, human resources and financial
capital. Formally, legally, strategy, basic ethical framework.
- managing and building operations an effective business model must generate revenues to
cover operating costs in the future. Cash flow needed for a growing venture.
All with the goal of creating value in an economic, legal and social environment.
Entrepreneurship = the process of changing ideas into commercial opportunities and creating value.
Entrepreneur = an individual who thinks, reasons and acts to convert ideas into commercial
opportunities and to create value. An entrepreneur’s mission is to find economic opportunities, convert
them into valuable products and services, and have their worth recognized in the marketplace.
Characteristics entrepreneur:
- are recognizing and seize commercial opportunities
- are doggedly optimistic
- are not consumed entirely with the present. Their optimism is conditional.
Percentage of survive four years of operations (of ventures): 47%
What are some of the major reasons why small businesses fail?
- Economic factors: inadequate sales, insufficient profits, industry weakness
- Excessive debt and insufficient financial capital
- Other reasons: family problems, business conflicts, insufficient managerial experience
Entrepreneurial opportunities = ideas that have the potential to create value through, new, repackaged
or repositioned products, markets, processes or service.
- Megatrends large societal, demographic or technological trends or changes that are slow in
forming but, once in place, continue for many years. Three megatrend categories:
o Societal trends or changes: important changes in preferences about clothing styles,
food, travel and leisure, housing – anticipation: opportunity
o Demographic trends or changes: aging of the baby-boom generation, understanding
demographic shifts-business opportunities
o Technologic trends or changes: most important source of entrepreneurial
opportunities. E-commerce = the use of electronic means to conduct business online.
o Crisis and ‘bubbles’: internet bubble burst in 2000, economic crisis began in 2001
exacerbated by the 9/11 terrorist attack, bursting of the housing assets in 2006,
recession in 2008
- Fads (rage) not predictable, have short lives and do not involve macro changes
What innovations drove our move from an industrial society to an information society? invention of
the computer chip (backbone of all modern computing, telecommunication), internet, world-wide-
web, applications of internet (e-mail, remote access, file transfer, messaging, cell phone..)
7 principles of entrepreneurial finance:
, 1. Real human and financial capital must be rented from owners; you have to compensate the
owner for the loss of its use otherwise.
Time value of money = an important component of the rent one pays for using someone else’s
financial capital. If you rent the money, it cannot be rented to others, and you must expect to
compensate the money’s owner for that loss.
2. Risk and expected reward go hand in hand
The time value of money is not only the costs involved in renting someone’s capital. The total cost is
higher; the rent is risky.
3. While accounting is the language of business, cash is the currency
Accounting for entrepreneurial firms has two goals:
To provide for checks, balances, integrity and accountability in tracking a firm’s conduct
To quantify the future in a recognizable dialect of the official language
However, financial crises are usually are about one balance sheet account: cash. Measures that focus
on what is happening to cash therefore supplemented to traditional accounting measures.
4. New venture financing involves search, negotiation and privacy
Public financial market = where standardized contracts or securities are traded on organized securities
exchanges.
Private financial market = where customized contracts or securities are negotiated, created and held
with restrictions on how they can be transferred
5. A venture’s financial objective is to increase value
Profit must turn into free cash in order to be available to provide a return to a venture’s owner.
Free cash = the cash exceeding that which is needed to operate, pay creditors and invest in the assets.
Free cash flow = the change in free cash over time.
When we line up free cash flows and adjust them for risk and the time value of money, we get the best
proxy for common owner sentiment regarding a venture’s prospect.
6. It is dangerous to assume that people act against their own self-interests
Increasing value is the owner’s primary financial objective.
Owner-manager conflict: differences between manager’s self-interest and that of the
owners who hired him.
Owner-debt holder conflict: divergence between owners’ self-interest and of lenders (as
the firm approaches bankruptcy)
7. Venture character and reputation can be assets or liabilities
Character is important, because a negative character is difficult/impossible to hide; customers,
employees etc. can be expected to engage in substantially different behavior when doing business
with ventures having a weak or negative character.
Entrepreneurial finance = the application and adaptation of financial tools, techniques, and principles
to the planning, funding, operations and valuation of an entrepreneurial venture. Focus on the venture
as it moves through the entrepreneurial process.
Financial distress = when cash flow is insufficient to meet current liability obligations.
Financial management (-er) in an entrepreneurial venture involves record keeping, financial planning,
monitoring the venture’s use of assets, and arranging for any necessary financing.
Venture’s lifecycle:
Development stage – Startup stage – survival stage – rapid-growh stage – early-maturity stage
Early-stage ventures = are new or very young firms with limited operating history; they are in
development, startup or survival life cycle stage.
Seasoned firms = have produced successful operating histories and are in their rapid-growth or
maturity life cycle stages.
