1. Sources of Financing For Entrepreneurs
A. “Financing New Ventures, No Longer Just About Money”
(Summary) One of the major roadblocks would-be entrepreneurs encounter when starting a new business is raising money. The current economic climate has made it even more formidable so much so that some would-be entrepreneurs had simply given up because of their inability to raise the money they think they need. This situation is partly due to the misconception that entrepreneurial finance, viewed as “knowing how to identify, develop, and implement the appropriate financial strategies needed to create and operate a new venture or significantly expand an existing enterprise”, is entirely on cash basis. However, this view does not consider “how entrepreneurs might obtain what their business needs without having to use scarce cash resources.” To overcome the difficulty of acquiring cash funding, entrepreneurs must therefore start thinking of what specific items they need the cash for and seek ways of obtaining them without using cash. This requires thinking in terms of win-win activities, which in turn allows the entrepreneur to “fundamentally change the nature of the value proposition that exists between him or her and the parties with whom he or she interacts.” The entrepreneur must figure out and be able to offer what the other party needs. In today's collaborative business environment, among the so-called relationship currencies that entrepreneurs can bring to or take from the table instead of cash are as follows: 1) customers, 2) products and services, 3) skills and competencies, 4) validation, 5) technology, and 6) intellectual property or proprietary know-how. An “interesting dimension of non-cash relationship currencies is that they exist on three levels: 1) information about, 2) access to, or 3) actual currency”. That is, it is not only the actual currency (e.g. customers) that has value but also information about and access to the currency. An entrepreneur, therefore, needs to look at his or her relationships, and examines the currencies these relationships offer while thinking about what is needed to build his or her business. One important thing to note here is that relationship currencies are based on relationships and building relationships takes a lot of the work (to build trust with another other party). It means “delivering the value promised time and again”. Implicit in putting in place win-win value propositions is the recognition and understanding that value can be realized through the exchange of non-cash relationship currencies. It is therefore essential that an entrepreneur find creative ways to “parlay non-cash relationship currencies into what he need to achieve goals”.
(Reaction) The article provides an interesting view on entrepreneurial financing and the creative ways of obtaining it. For sure, many entrepreneurs already practice what the article suggests. But the main insight behind the article is on being consciously aware of the so-called relationship currencies and on how to systematically identify and utilize them.
B. “Entrepreneurial Financing”
(Summary) Obtaining money for an entrepreneurial company can be seen as a sale. The entrepreneur buys money from investors with equity or “a piece of the action of the potential growth” of his company. As in all sales the key is determining the right price and closing the sale. To do that the entrepreneur must pitch and market his company to the potential investors. This means having a business plan that details not only how much the business is expected to make but also how much money the business will need, when is it needed and whether it would be debt or equity. To identify the type of investors the entrepreneur might want to seek, it is helpful to understand the stages of entrepreneurial development. The stages are: 1) seed or concept, 2) start-up, 3) first, 4) second, 5) third and 6) harvest. At the seed or concept stage, funds are mostly from friends and family and/or from the entrepreneur himself (i.e. personal assets like savings). At the start-up stage, traditional venture capital firms may already show interest (especially with a top-rated management in place and a demonstrated marketability) but more commonly, funding at this stage comes from private placements, government sources and grants (including those from foundations). It is at the first stage that venture capital firms prefer to enter. It is also at this stage where financing can usually be obtained from banks and leasing companies. Financing can also be sought through R&D and strategic partnerships (with potential customers, suppliers and manufacturers). At the second stage, “more sophisticated and second-round venture capital financing comes into play”. Institutional investors and larger companies “looking for product distribution opportunities” also usually enter at this stage. There may also be additional strategic partners and venture leasing companies that may be interested in financing the business at this stage. At the third stage, “the company may need to obtain "bridge" or "mezzanine" financing to carry increased accounts receivable and inventory prior to harvest” from similar sources as in the previous stage. At the harvest stage, the company has the option to go public, be acquired or sell out to cash-rich companies. Throughout the stages, the entrepreneur has two types of financing to choose from: debt or equity. Debt is money borrowed secured by collateral (such as an asset). Equity is capital infusion in exchange for part-ownership. Debt is easier to arrange but implies firm obligations and affects cashflow negatively (due to interest payments) but unlike equity does not dilute ownership. It is suggested that entrepreneur use a combination of both. Among the different sources of financing are as follows: 1) personal (savings, credit cards, sale of assets), 2) family and friends (personal investments, debt or equity), 3) employees, 4) angels (private investors seeking high-returns), 5) venture capital and institutional investors, 6) investment and merchant bankers (provide unique investment structures and leads for strategic partnerships), 7) banks, 8) strategic partnerships, 9) commercial finance companies, and 10) government sources.
(Reaction) The perspective that obtaining money to start a business is just another sale supports the interesting position that an entrepreneur with a good business idea and a sound business plan should have no problem obtaining financing. After all, a salesman with a valuable product should have no trouble finding willing and even eager customers.
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