Financing New Venture (EP60010)

Financing New Venture
(EP60010)
1
The Entrepreneurial Process
⚫ Developing Opportunities
⚫ Gathering Resources
⚫ Managing and Building Operations
Each of the components contribute to creating

overall value……
2
Entrepreneurship Fundamentals
⚫ Entrepreneurship:
process of changing ideas into commercial opportunities and
creating value
⚫ Why business fails?

• Inadequate sales
• Insufficient profits
• Industry weakness
3
⚫ Then…..
• Excessive Debt
• Insufficient financial capital
Others…
• lack of business and managerial experience,
• business conflicts,
• family problems,
• fraud, and
• disasters
4
Entrepreneurial Traits for
Success
⚫ Commercial Vision
⚫ Optimism…. An unrelenting drive to succeed
⚫ Ability to build and engage a management
team
⚫ Grasp of the risks involved
⚫ Willingness to plan for the future
5
Sources of Entrepreneurial
Opportunities
⚫ Social Changes
• Clothing style
• Food
• Travel
• Leisure
• Housing
⚫ Economic shifts
• Rise of two-career families
• Higher disposable income
• Changing savings patterns
6
⚫ Legal Changes
• Deregulation in Banking
• Transportation
• Telecommunication
⚫ Demographic changes
⚫ Technological Changes -shuttling from an industrial
society to information society
• Internet
• E-mail
• Remote access
• Large file transfer
• Instant messaging
7
• E-commerce: age-old strategy of owning and controlling natural
resources (tangibles) to a a strategy of owning and controlling information
(intangibles)
⚫ Emerging Economies and Global Changes

• BRICS
• CIVETS
⚫ Crises and Bubbles
• Dot.com bubble in 2000
• 9/11 terrorist attack on United States
• 2007-09 financial “bubbles”
• COVID 19 in 2019
8
E-Finance Principle #1
Real, Human, and Financial Capital Must be Rented
from Owners
• Money has owners and therefore costs

• Time value
• Risk
• Expect to provide a return or the venture will not
survive in a market economy
9
Risk and Expected Reward Go Hand in Hand
• Time value is not the only cost when using others’ funds
• More risk => More expected reward
• How much more? Market-determined!
10
While Accounting is the Language of
Business, Cash is the Currency
• Two important reasons to employ accounting
• Tracking and accountability for actions taken
• Quantifying different visions of the future
• But, remember cash flow is a new venture’s lifeblood
• “Get enough accounting to see through the accruals to the
cash account”
• Cash burn: gap between cash being spent and that being
collected
• Cash build: excess of cash receipts over cash distributions
11
New Venture Financing Involves Search,
Negotiation, and Privacy
• Public Financial Markets:
• standard contracts traded on organized exchanges;
• publicly traded prices are good indicators of true values;
• efficient and liquid market
• Private Financial Markets:

• Inefficient market
• Illiquid market
• Long investing horizons
12
A Venture’s Financial Objective is to Increase Value
• Many objectives including personal ones

• But, the unifying financial objective is to increase value
• rather than price, margin or sales
• rather than profit, return or net worth
• (Market) Value derives from the ability to generate cash
to pay capital providers for their capital
13
It is Dangerous to Assume that People Act Against
Their Own Self-Interest
• Aligning incentives (investors, founders, employees, spouses,

etc.) is critical
• As situations change, incentives diverge and renegotiation is
important
• Owner-manager conflicts: differences between a manager’s
self-interest and that of the owners who hired him/her
• Owner-debtholder agency conflict: divergence of the owners’
and lenders’ self-interests
14
Venture Character and Reputation Can be Assets
or Liabilities
• Ventures have character that can be different from the

individuals who founded or manage it
• Many entrepreneurs state that high ethical standards are one
of a venture’s most important assets and are critical to long-
term success and value
• Ventures can - and do - make meaningful societal contributions
• Many successful entrepreneurs are financially and personally
involved in charitable endeavors
15
Financial goal of the
entrepreneurial venture
⚫ to maximize the value of the venture to its
owner(s).
⚫ major components of estimating value are

• projected free cash flow and
• its risk (including the timing and realized amount).
16
Role of Entrepreneurial Finance
⚫ Entrepreneurial Finance
• application and adaptation of financial tools and techniques
to the planning, funding, operation, and valuation of an
entrepreneurial venture
• focuses on the financial management that involves record

keeping, financial planning, the management of operations
and assets, the acquiring of new assets and the financing of
those assets necessary to grow the venture over its lifetime.
17
Successful Venture Life Cycle
⚫ Venture Life Cycle:

stages of a successful venture’s life from
development through various stages of revenue
growth)
• Development Stage:
period involving the progression from an idea to a promising
business opportunity
• Startup Stage:
period when the venture is organized, developed, and an initial
revenue model is put in place
18
Successful Venture Life Cycle
• 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
continues but at a much slower rate than in the rapid-
growth stage
19
20

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Financing New Venture

⚫ Managing and Building Operations

Each of the components contribute to creating

⚫ Why business fails?

⚫ Emerging Economies and Global Changes

• Money has owners and therefore costs

• Private Financial Markets:

• Many objectives including personal ones

• Aligning incentives (investors, founders, employees, spouses,

• Ventures have character that can be different from the

⚫ major components of estimating value are

• focuses on the financial management that involves record

⚫ Venture Life Cycle:

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