The founder may create new venture based on he’s own savings. That is usually entrepreneur’s initial capital.
Friends and family
Friends and family is another source of entrepreneurial finance. It is usually informal and one needs to pay back when he cans. Lending can also be done in a systematic way. For example: promissory notes to pay interest and sell shares to obtain capital.
One may receive finance by a group of individuals. In crowdfunding projects, funds are raised on the internet through small contributions from a large number of people. This combines concepts of crowdsourcing (seeking finance from the crowd) and microfinance (small amounts contributed without collateral). How does it work? New venture creates a pitch, telling what the business is about, what they need the funds for and what the crowd received in return. Four types of crowdfunding include: charity-based, equity-based, lending-based and reward-based.
These are usually private individuals, typically former entrepreneurs who engage in financing geographically close industries that they know. They demand lower ROI (return on investment) and are less financially motivated who want to stay involved because of entrepreneurial process.
People that work for organisations that raise money from large institutional investors (universities, pension funds) are referred to as venture capitalists. Their role is to provide funds and assistance. That is to help to identify key employees, customer and suppliers and assist with operations, strategy formulation and implementation. Venture capital backed companies are more likely to go public. This is because they have strong relationship with investment bankers who underwrite initial offers.
They are demanding in terms of criteria and restrictions. Difficulties to meet criteria relate to requirements such as great deal of growth potential, high growth industry, competitive advantage, experienced management team and plan to go public. Restrictions refer to imposed financial limits such as the need for convertible preferred stock (liquidation of preference share of venture does not succeed), contractual terms (redemption rights to return investment any time), forfeiture provisions (loss of ownership if performance falls below target goals) and ant-dilution provisions (transfer of shares if venture fails to meet target).
Strategic investment in a new company may be pursued because of access to its products and technologies. Access to intellectual property and product development capabilities is something investors look for. Established companies may benefit from marketing and manufacturing capabilities to support and improve their credibility.
Standard commercial loans offer interest on money borrowed. If venture is in line of credit, it can draw up a set amount of money anytime. However, a positive cash flow is a must to be eligible to take up a loan.
Investors may offer loans at certain percentage of value of assets. This is a form of assets as collateral (guarantee) for loan.
Organisations may purchase account receivables at discount (1-2%). Capital is obtained immediately. Entrepreneurs sell account receivables for 98-99% of worth and receive cash.
Government offers special entrepreneurial programs such as Small Business Innovation Research Program where founders are facilitated to pursue their opportunities. Program phases include: feasibility study, development of prototype and moving innovation to the market place.
Baron, R. and Shane, S., 2007. Entrepreneurship: A process perspective. Nelson Education.
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Business plan allows the founder to crystallise business ideas, thinking through the problems that they will face before having to cope with it.
What questions to ask an entrepreneur? Clarify current goals, evaluate strategies for attaining those goals and assess capacity to execute the strategy.
How to find opportunities for business? Follow effectuation process, bring the idea to market with close to zero resources, listen to customers.