FINANCING ENTREPRENEURIAL VENTURES

INTRODUCTION

Starting a new venture requires funding for different activities. New

ventures need financing for different purposes like licensing, professional
fees, purchasing machinery and equipments, advertising and promotional
expenses, working capital financing and other reasons. When new
ventures start off, they do not generate enough income to be able to pay for
the up-front costs. Without sufficient funding, many brilliant ideas have met
stumbling blocks and come to a sad end despite holding great potential.
Therefore, this session is very important to understand as it shed some
light on start-up costs, and alternative funding sources available to finance
new ventures.

OBJECTIVES

1. To explain the concept of Financing new venture

2. To explain the sources of financing ventures
3. To make you understand the internal sources of financing
4. To make you understand external sources of financing
5. To analyze the appropriate sources of financing for entrepreneurs.

REQUIREMENTS OF ENTEPRENERIAL FINANCE

Entrepreneurial financing refers to the different sources of funding available for

entrepreneurial or early-stage ventures. Entrepreneurs need finance for different
purposes of operations which includes purchasing machines and equipments,
buying office space or land, furniture, fixures, licencing fees and permits,
 maintaining inventory, professional fees, advertising expenses, working capital,
for meeting unanticipated expenses and so on. The estimation of this expenses
is very important task for an entrepreneur.

(No need to put this figure in slide)

Sources of Financing

Lets focus upon the sources of financing for starting new entrepreneurial
venture. The entrepreneur can bring money through two types of sources.
Internal sources of sources as well as external sources of finance. LET’S
TRY TO UNDERSTAND IN DETAIL.

Internal Sources of Funding - Internal sources of funding means the

funding within the entrepreneurial capacity. If The entrepreneur
brings finance from within his or her own sources rather than
borrowed from outside, it is referred as internal sources of financing.
It includes :
1. Founder, Family and Friends
2. Bootstrapping
3. Business alliances

1 -Founder, Family and Friends

Entrepreneur can start business by bringing money from personal savings,
as well as funds received from family and friends. The longer the
entrepreneur is able to survive on personal funds and hard work that is his
sweat equity and internally generated funds the lower the cost of external
risk capital the more sovereignty the entrepreneur has. Thus, if any
entrepreneur has funds of his or her own, than it is better for the enterprise.

2- Bootstrapping
Friends, this is the second important internal source of financing. In this
highlycreative acquisition, use of resources is done without raising capital
from traditional sources or borrowing money from a bank. This prevents the
entrepreneur from using different forms of financing and it leads to greater
awareness of financial risk as well as other forms of potential risks. There is
a high reliability on: internally generated retained earnings, credit cards,
home mortgages, and customer advances. Safer side of bootstrapping are
waiting as long as possible to seek capital financing permits, getting
financing at better terms and retaining more ownership share, greater
authority and overall control, the entrepreneur spends time and resources
on growing the firm, rather than courting investors, and the entrepreneurs
avoids problems associated with raising too much money. One of the
limitation of bootstrapping are that it may not generate enough money to
grow the firm at the desired rate, the firm competing poorly against its
financially endowed competitors, there is limited potential grasp on sales,
market share, and overall competitive position, and it offers only limited
support for high-growth prospects.

3- Business Alliances
Business alliances comprises of forming cooperative agreements with
another firm to generate revenues and mitigate costs. Reasons for forming
a business alliance are: market infiltrations, accelerate time to market,
utilize sales and marketing channels, geographic extension, access to
customer lists, build product credibility, inadequate resources to go alone,
customer requests, product development, economies of scale, teaming up
against competing, gain business experience, joint bidding on projects, and
other. Thus alliance partners are found by active search based on industry
knowledge, professional associations, industry networks and contacts,
attorneys, trade shows, accountants, bankers, friends, investment forums,
and other. Effective business alliances can be very beneficial to a startup or
early stage firm with inadequate resources to do it alone,but these alliances
do not always make sense once the firm has grown, is healthy, and
reaches autonomy.

External Sources of Funding

There are many sources of funding available for entrepreneurial ventures.

These alternatives can be generally grouped into two major sources of
finance which are debt financing and equity financing.
Debt Financing - Debt financing refers to the financing through debt from
the public. The company raises money through public on a specified rate of
interest with a fixed maturity. For ex. Company want to raise Rs. 50,00,000
at 10 percent interest rate , it will have to announce the amount, the interest
rate and the number of years in which the company would like to return the
amount. So on the very first day when the company issues debenture or
bonds company declares like 10% Debetures for Rs. 50,00,000 for 5 years.
Which means that company want to raise 50,00,.000 in total from general
public for 5 years and will pay 10 percent interest upto 5 years to the public.

Thus,

 Debt financing is financing that must be paid back with interest.

 It is stated as a liability in a company’s balance sheet.
 Debt have specific dates by which it must be repaid
 Interest must be paid regardless of operating results
 Creditors can have prior claims on assets
 Creditors are not owners and can not impose control on the management


 Debt financing is the suitable form for the company which is not interested
to give the ownership rights in the hands of many. The public will be
creditors in this case and upon the maturity they will get the invested
principal amount back. The only thing that the company has to keep in
mind that irrespective of company having profit or loss, owner need to
 manager for interest payable each year. If requires , it has to borrow
through loan also. Thus debt financing is advised for the firms and
entrepreneurs who feel that there would be regular income in their
company. The sectors which is having regular operating cycle and that too
shorter operating cycle for ex. Dairy business, FMCG, Pharmaceuticals etc.
having regular operating cycle should go for debt financing.
 Debt financing can be taken in different forms which includes :
o Bank loans
o Government and debt financing
o Finance companies
o Others

Lets try to understand each in detail .

Bank Loans- The commercial banking system is always relied upon as a

source of credit for small businesses. Short-term loan such as commercial
loans and line of credit, and longer term loans such as instalment loans are
examples of bank loans. When giving out loans, banks tend to rely upon
provisions for instance, whether there is a market for the business, the
value of the collateral, the credit record of the applicant, the ability of the
business to repay the loan, the knowledge and capability of the business
owner or manager, and of course the macro factors such as the general
economic situation of the country.

Government Financing Programmes The government has a variety of

financing programmes for small businesses. The range of financial
assistance rendered aims to help SMEs improve their workforce, develop
products or technology, promote their product or services and restructure
their debts.

Finance CompaniesOwner may raise finance through finance companies.

Commercial finance companies are an alternative source of debt financing
when loan applications of new ventures are rejected by commercial banks.
Finance companies are primarily interested in financing high risk business
ventures and tend to charge higher interest rates as compared to
commercial banks.

Other Sources of Debt Financing There are several other options for
debt financing which are not very popular. However, they may also be
considered in times of need. For example, there are asset based lenders
who are willing to provide loans to entrepreneurs with a condition that idle
assets such as inventory or accounts receivables to be pledged as
collaterals. Trade credit is another option with which entrepreneurs can
extend their credit in the form of delayed payment. Entrepreneurs can also
turn to insurance companies, stock brokerage houses, or credit unions for
loans.

Now lets understand Equity financing

Equity financing is obtained through investment made by investors in
exchange for ownership. Unlike debt financing, it does not have to be paid
back with interest. Instead, investors receive dividends based on the
company’s performance. Equity capital is also referred to as risk capital
because the investors bear the risk of losing their investment if the
business fails..

Lets say company wants to raise funds of Rs. 40,00,000 through equity.
Company would need to give advertise, bring awareness to the general
public, raise the money through appointing underwriters (if needed), do
share allotment and allocation as per requirements and go for raising
capital.

The inverstors once they invest the amount in any number. They become
the owner of the company upto the extent of their investments.

 The equity share holders have right to participate in the decision

making of the company. Here when they issue the equity, the
company raises equity for life time and it is assumed that the
business is never ending process thus there is no maturity date
offered while raising the equity, in case the investor want to get out of
the company investment he or she can simply sell the shares and the
transfer of shares will be done in the name of any other person .
 In this form of financing, you have to pay divided to the shareholders.
This dividend payments depends upon firms performance. If the
company has profit, company will declare the dividend. If the
company suffers from losses, company may not declare it for any
year or years.
  Thirdly, the shareholders as are owners of the company can not claim
over the assets until the debt is paid to creditors.
 Importantly unlike the debt financing, here the shareholders have
right to vote in the internal matters of the company. Shareholders are
owners and thus can influence the firmsmanagement .

Thus, if owner has not a problem of giving rights in the hands of many , this
form of financing is best suitable as each shareholder is owner there is no
burden of debt on the head of the owners.

Other forms of financing

Beyond equity and debt there are some other forms of financing too.
Which includes :

1- Angel Investor
These are extra ordinary successful business people who invest their own
money. The term "angel" comes from the practice in the early 1900's of
wealthy businessmen contributing in Broadway productions.
An angel investor or angel is an affluent individual who invests capital into a
business start-up, usually in exchange for ownership capital. Angels
typically invest in technologies innovation or in business in the areas that
are known to them or that are of their interest. They are long haul investors
and usually expect to receive a return within 5 to 7 years. The agreement
is done between the owner and the angel investors in advance with regards
to the ownership and profit-sharing terms. Thus, it is widely known form of
financing now a days.

2- Venture Capital
These are the financial intermediaries that take the investors capital and
invest it directly into portfolio companies. Their main objective is to make a
profit by selling the stake and shares in the company in the medium terms.
They expect profitability higher than the market to compensate for the
ascended risk of investing in young ventures and startups.
A venture capital firm invests only in private companies and they take an
active role in monitoring and helping the companies in their portfolio
management. Their investment is utilized to finance the internal growth of
companies and their main goal is to maximize its financial return by exiting
investments through sale or IPO. Venture Capital activities are: investing,
monitoring, and exiting.
The person who is providing venture capital is termed as venture capitalist
and this is stage financing form. The risk of financing is very high on the
other hand return expected is also very high.

3- Corporate Investors
Corporate investors are often seen by small firms as an exit opportunity,
rather than a funding source. By acquiring small companies, corporate
investors compliment their product or service offerings, and small firms use
this new influx of strategic funding to further expand operating areas. An
example is Microsoft’s take over to Hotmail for $425 million. Corporate
venturing prevents the small firms from allying with the competitors or from
competing directly with the corporate sponsor. Many entrepreneurs
nowadays are starting ventures with the sole objective of being bought out
by a large non-financial organization which in later part can handle every
aspect.

4- Banks
Long term loans from banks is another source of finance. Even at the time
of day to day management firms also take short terms loans from the bank.
Normally banks prefer to limit their risk by lending to firms that offer some
form of collateral. It is important source of external financing for small firms
once they are established. Reasons banks shy-away from early stage firms
are: they lack a track record of reliable information on the entrepreneurs,
they have too much debt outstanding, they have volatile profit and cash
flow measures. Also that banks are at the lowest risk when it comes to
capital investment risk. Banks would try to understand the character,
capacity, collateral , financial positing, reputation of owner, past track
record with bank and business and than only after assessing its
performance, bank would give the credit to the owner. The rate of interest
is fixed in nature in this form of financing.

CONCLUSION

Now let me conclude the session, friends we have understood various form
of financing the entrepreneurial ventures. An entrepreneur with him brings
investment, innovation, employment, development. Financing venture and
starting venture is like cultivating a better future for upcoming
generations.On the other side Entrepreneurs should financially be able to
discriminate between investor types, do not take just the first offer, but
rather the most appropriate for the firm. For investors the risk and failure
rates associated with start-up firms are extremely high and investors seek
commensurable return for which they are sanguine.There are many
sources of funding as we have seen in the session. Any source of funding
can be selected by an entrepreneur but he need to analyse each source of
financing from the perspective of nature of business, requirements of
business, earning capacity and operating cycle, time period for which
money is required, risk associated with each option, preferences of
investors in the market and so on. Thus, for starting venture and raising
finance, entrepreneur need to understand and decide source of finance and
follow the exercise for raising it because ultimately he has to return that
money to the investors on time . Friends , I hope by now you are clear with
financing entrepreneurial ventures and would be able to use this
fundamentals either as a future business man or entrepreneur or investors.
I hope you enjoyed learning from this session.
Thank you