ENTREPRENEURIAL FINANCE PDF
PDF | On Oct 4, , Chris Egbu and others published Entrepreneurial Finance. PDF | The increasingly large role played by financial intermediaries, such as venture capitalists and angels, in nurturing entrepreneurial firms and in promoting. List of Illustrations xvii. Abbreviations xxiii. Preface xxvii. Why Study Entrepreneurial Finance? xxviii. What Makes Entrepreneurial Finance Different from.
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How does entrepreneurial finance differ from “ordinary” finance? .. loading from the NVCA website, yazik.info This table. identifying financial constraints in different entrepreneurial finance markets. role of entrepreneurial cognition in financing/investment decisions (Wright and. 1, Introduction and overview of entrepreneurial finance. 2, DermaCare. Business Valuation. 3, Discounted cash flow (DCF) and the venture capital method, (PDF).
In addition to this, there are also corporate venture capitalists Corporate venture capital that strongly focus on strategic benefits.
This may include refocusing the mission of the company, selling off non-core assets, freshening product lines, streamlining processes and replacing existing management. Companies with steady, large cash flows, established brands and moderated growth are typical targets of downloadouts. There are several variations of downloadouts: Leveraged downloadout LBO : a combination of debt and equity financing. The intention is to unlock hidden value through the addition of substantial amounts of debt to the balance sheet of the company.
Recaps: re-leveraging of a company that has repaid much of its LBO debt. Major Entrepreneurial Financial Planning[ edit ] Importance[ edit ] Financial planning allows entrepreneurs to estimate the quantity and the timing of money needed to start their venture and keep it running. The key questions for an Entrepreneur are: Is it worthy to invest time and money in this business?
What is the cash burn rate? How to minimize dilution by external investors? Scenario analysis and contingency plan? In contrast to established companies, the start-up CFO takes a more strategic role and focuses on milestones with given cash resources, changes in valuation depending on their fulfilment, risks of not meeting milestones and potential outcomes and alternative strategies.
Determination of the Financial Need of a Start-up[ edit ] The first step in raising capital is to understand how much capital you need to raise. Successful businesses anticipate their future cash needs, make plans and execute capital acquisition strategies well before they find themselves in a cash crunch.
Three axioms guide start-up fund raising: As businesses grow, they often go through several rounds or stages of financing. These rounds are targeted to specific phases of the company's growth and require different strategies and types of investors.
Raising capital is an ongoing issue for every venture. Capital acquisition takes time and needs to be planned accordingly. Four critical determinants of the financial need of a venture are generally distinguished: Determination of projected sales, their growth and the profitability level Calculation of start-up costs one-time costs Estimation of recurring costs Projection of working capital inventory, credit and payment policies.
This determines the cash needed to maintain the day-to-day business Typically, venture capitalists are part of a fund. Their average size in Europe includes five investment professionals and two supports. They generate income through management fees on average 2.
Valuation in Entrepreneurial Finance[ edit ] Financial planning also helps to determine the value of a venture and serves as an important marketing tool towards prospective investors.
Traditional valuation techniques based on accounting, discounting cash flows Discounted cash flow , DCF or multiples do not reflect the specific characteristics of a start-up. Instead, the venture capital method, the First Chicago or the fundamental methods are usually applied.
Venture capital method[ edit ] To determine the future value of a start-up, a venture capital investor is guided by the question: What percentage of the portfolio company should I have at exit to guarantee that I get the IRR committed with my investors?
The valuation of the future company can be broken down into four steps: Determination of company's value at exit Requested fraction percentage of the VC at exit? Number of shares to be bought in the current round of financing to get the desired percentage of the company Estimation of maximum price per share willing to pay in current round of financing Usually there is more than one round of financing.
The funding can come in both debt and equity, and the goal is to achieve a reasonable financial return while also delivering social impact. The latter is what it distinguishes from traditional venture capital financing focusing on simple financial return. University-managed or university-based funds have recently been launched, mainly to support ideas from university faculty, staff, and alumni. As far as early-stage technology developed in labs is not close to the market, universities need to fund research internally.
These funds are important for getting the technology ready to hand it over to a development partner from the private sector. Venture debt lenders or funds are specialized financial institutions at the intersection of venture capital and traditional debt.
They provide loans to start-ups, but unlike traditional bank, financing do not require securities or positive cash flows from start-ups. Internationally, there is little relation between institutional factors such as legal conditions and venture debt returns Cumming and Fleming ; Cumming et al. However, returns to venture debt funds are closely related to firm-specific proxies for borrower risk Cumming and Fleming Also, returns are significantly affected by market conditions such as the VIX index, and whether or not the debt issue is a primary or secondary issuance Cumming et al.
Following the introduction of the new players in entrepreneurial financing, we now try to understand the underlying factors that lead to their emergence. We distinguish between supply-side and demand-side factors.
As a reaction to the financial crisis, the regulation of financial institutions has intensified with a strong focus on banks. Examples of these regulations include Basel II and III, which increase the minimum capital requirements that a bank has to hold dependent on the riskiness of the loans it has given out. To comply with these intensified regulations, banks had to introduce various risk measures that make small firm financing more complex and expensive.
As a result, start-ups and small firms with uncertain and risky business models have little chances to obtain bank financing for their ventures. The financial crisis was followed by a severe economic crisis in several EU member states and the USA.
As a reaction to the economic crisis, the central banks cut interest rates to stimulate economic activity. The low interest rates also had an effect on investors. They made investments in government and corporate bonds less attractive and have led investors to seek other investment opportunities. This has benefitted, among others, venture capital funds, incubators or crowdfunding providers in their fund raising efforts.
This, in turn, increased the chances for innovative, high-risk ventures to receive risk capital. The tough economic climate and the negative experiences with the dotcom bubble in the year have led to a decrease in initial public offerings IPOs.
This collapse along with the negative experiences made by investors has brought the market for IPOs down and created difficulties for risk or venture capital providers to exit their investments. The reduced exit possibilities make it more difficult for risk capital providers like VC funds to collect funds and invest them into start-ups Block and Sandner In general, it is well established that countries with stronger regulations enable entrepreneurship and entrepreneurial finance, as regulation can lower the cost of entry and ensure contractual certainty.
However, in some cases, the comparative dearth of regulatory enforcement can also positively affect the presence of start-ups. For example, the absence of enforcement of banking regulations has enabled a comparative growth of financial technology FinTech start-ups in countries without a major financial center Cumming and Schwienbacher Partially, due to increased regulation on traditional stock markets, off-exchange transactions have been attracting increasingly larger trading volumes.
Initially, dark or blind pools emerged informally in formal stock exchanges, which would take large download and sell orders in certain shares and match them, after the close of trading.
Later, investment banks and independent operators, such as Liquidnet, started matching orders internally, avoiding transaction fees to stock exchanges. New exchange platforms that trade pre-IPO shares or, in general, shares of private firms , such as SecondMarket, the main platform for trading pre-IPO shares of Facebook, or SharesPost, provide alternative venues to investors and employees for cashing out. Traditional stock markets now offer cheaper possibilities to raise public equity capital.
Meoli et al. Carpentier et al. Technology has enabled the emergence of some new players. Consider, for example, the case of reward-based crowdfunding, peer-to-peer lending, or invoice crowdfunding platforms. These players or financing instruments were only made available by technologies such as the Internet and new ways of communication via social media.
As a separate but related matter, FinTech start-ups are currently raising large sums of money, which might have a tremendous influence on entrepreneurial finance.
Virtual currencies like Bitcoin and their associated technologies notably distributed ledgers based on blockchain can change the business models of existing players in entrepreneurial finance and push the new players even further. These technologies provide new ways to assess risk and treat financial information, allow for easier participation of non-professional investors in entrepreneurial financing, provide greater liquidity, and reduce monitoring costs of investors, but can also lead to higher contagion risk due to greater connectedness through securitization.
The creation of functioning markets of entrepreneurial finance has become a priority for many governments around the world and has led to many policy initiatives. Another area of start-up policy concerns subsidized debt financing via state-owned banks and loan guarantee schemes or state subsidies for start-ups and high-growth firms. Such policy initiatives reduce either the costs of a particular financing instrument or provide direct funding to new ventures through state subsidies.
Next to supply-side factors, there also exist demand-side factors related to the demands of start-ups, founders, and the business models and markets in which they operate. Consider, for example, Facebook or Google as examples of firms operating in highly concentrated and quasi-monopolistic winner-take-all markets. Start-ups in such markets with business models building on network externalities need to grow fast in order to establish standards and create lock-in situations for customers.
This, however, drives up cash-burn rates and the amount of funding needed in early stages of the venture cycle. The high importance of network externalities increases the value of social networks. Entrepreneurial finance institutions such as venture capital firms or business angels, which can provide network access, gain in importance and can offer start-ups important non-financial resources next to funding. In winner-take-all markets, it is important to be fast and engage with the customer at an early stage.
Some forms of crowdfunding like reward-based crowdfunding allow for such early customer contact. It is also a way to test a product with customers and enable a form of customer co-creation. Insofar, crowdfunding reflects a general trend toward more open and flexible innovation processes. Incumbents and established firms fear being disrupted through innovative technologies and start-ups.
That is why they are more open to cooperate and invest in start-ups via instruments such as corporate venture capital and corporate incubators. This, in turn, also has an influence on the supply of entrepreneurial finance see Section 3. Another product market-related factor is the growth of the knowledge economy together with a high importance of IP such as patents, trademarks, and design rights.
As firms tend to patent more, IP-based financing instruments such as patent-based investment funds become available and can be an option for IP-based start-ups and growth ventures to fund their operations. Moreover, patents can be used as collateral to obtain debt funding from banks and other financial institutions Fischer and Ringler Financial intermediation has been a subject of considerable study in the finance literature.
On the one hand, financial intermediaries are meant to reduce information problems and help to meet demand and supply of capital; on the other hand, their activity is obviously costly and may introduce agency conflicts. Financial innovation and disintermediation may have the potential to countervail some aspects of sub-optimal principal-agent problems in conventional financial intermediation.
More broadly, the value of intermediation is now questioned as innovations allow to by-pass intermediaries so that the participants at the end of the supply and demand chain i. For instance, the development of online platforms has created new opportunities for entrepreneurs to raise seed capital and for non-professional investors to disintermediate their investments.
By easing the manner in which demand for capital meets supply, recent financial innovations are expected to improve the efficiency of financial markets. As noted by the Financial Stability Board FSB , intermediating credit through non-bank channels can have important advantages and contributes to the financing of the real economy, but such channels can also become a source of systemic risk, especially when they are structured to perform bank-like functions and when their interconnectedness with the regular banking system is strong.
The goal of the special issue is to increase our understanding of recent trends in entrepreneurial finance. It has a strong focus on crowdfunding 5 out of 10 papers , which is a result of a recent explosion of empirical research in this area. We will now briefly introduce the main content of the special issue papers and create a link to our discussion of new players and instruments.
First, half of the papers in this special issue study crowdfunding. The theoretical paper by Hornuf and Schwienbacher is about regulation and equity crowdfunding. Coherently, in many jurisdictions, securities regulation offers exemptions to prospectus and registration requirements. The paper shows that the optimal regulation depends on the availability of alternative early-stage financing such as venture capital and angel finance. Polzin et al. This paper shows that in-crowd investors rely more on information about the project creator than out-crowd investors.
Out-crowd investors do not seem to attach more importance to information about the project itself than in-crowd investors. Mohammadi and Shafi introduce the gender issue in entrepreneurial finance. They investigate whether there are gender-related differences in the behavior of crowdfunding investors in Sweden.
They find that female investors are less likely to bid in campaigns from younger teams and in high-tech projects, consistent with a greater risk-aversion of female versus male investors. The geographical aspects of crowdfunding are studied by Guenther et al.
The former presents evidence of the influence of geographic distance among home country retail, accredited, and overseas investors and venture location in an equity crowdfunding context. Geographic distance is indeed negatively correlated with investment probability for all home country investors, while overseas investors are not sensitive to distance.
Giudici et al. Accordingly, they document that the altruism of people residing in the area contributes to an increased likelihood of success of reward-based campaigns in Italy. The strength of this effect depends on the level of social capital in the area. Three manuscripts of the special issue focus on the provision of external equity finance to entrepreneurial firms. Takahashi examines affiliation ties and underwriter selection in Japanese IPOs.
He finds that the presence of board members in the IPO-firms who have worked at a specific bank or its parent company increases the probability of choosing the bank as the lead underwriter. This effect is economically larger than that of lending relationships and remains even if the issuer has no lending and shareholding relationships with the underwriter.
Levratto et al. They are able to do so by using a dataset of French angel-backed companies, which are compared to two control groups, one randomly selected and another one consisting of similar enterprises. They only found a positive influence of BAs on the performance of firms when using the random sample as a comparison group.
Standaert and Manigart focus their attention on the effect of GVC financing on employment in portfolio companies.
Using a sample of companies that benefited from the ARKimedes fund-of-fund in Flanders, they find that companies backed by hybrid independent VC funds show greater employment growth than those backed by hybrid captive or hybrid GVC funds. The last two papers in this special issue deal with debt.
New players in entrepreneurial finance and why they are there
Mietzner et al. Using a German dataset in the period from to , they show that rating agencies can create rating inflation by issuing overly favorable ratings. This creates an opportunity for lower-quality firms to compete for funding. In this environment, high-quality firms have an incentive to use mini-bond underpricing to signal their quality. The positive effect of this program is stronger for smaller firms, or for those operating in high-technology sectors, which suffer more acutely from information asymmetries, and negligible for firms that already received support from other government-supported institutions.
Table of Contents
To summarize, the markets for entrepreneurial finance have changed rapidly over the last years. Scholarly research in entrepreneurial financing appears biased toward certain players and financing instruments such as VC and, more recently, crowdfunding and has neglected others.
Examples of neglected new players in entrepreneurial financing are debt venture funds, angel networks, and family offices. Another neglected area in entrepreneurial finance research is the interplay or interaction between the new players or instruments and the established forms of entrepreneurial financing such as VC or BA financing.
Start-ups seeking financing often use several financing instruments simultaneously Moritz et al. Most existing entrepreneurial finance research focuses on single financing instruments such as VC or bank financing and does not take a holistic approach where financing instruments are regarded as complements rather than substitutes. For example, it would be intriguing to understand how a new form of financing such as crowdfunding can be used simultaneously with established forms of venture financing such as bank financing or VC.
Research about financing instruments also misses a longitudinal perspective. We know little how using one instrument influences the likelihood to obtain another instrument later on. It is important to understand path dependencies in the process of entrepreneurial financing, e. From a practical perspective, we lack information about whether the new players and their financing instruments are reducing the early stage funding gap in the financing of innovative ventures or whether they merely replace or crowd out existing later-stage financing instruments.
A financing gap exists with new technologies that have not proven their commercial applications or usefulness. We do not know much whether and to what degree the new players and their financing instruments help to close this gap.
See Kraemer-Eis et al. For example, in , 3. From this perspective, Guerini and Quas is an interesting exception. Skip to main content Skip to sections.
Advertisement Hide. Download PDF. New players in entrepreneurial finance and why they are there. Open Access. First Online: Overall, the emergence of the new players and their variety of investment goals and investment approaches has made entrepreneurial financing a complex and difficult process. Table 1 provides an overview of the new players and compares them along the four dimensions 1 debt or equity, 2 investment goal, 3 investment approach, and 4 investment target.
Table 1 An overview and comparison of new players in entrepreneurial finance. Ahlers, G. Signaling in equity crowdfunding. Theory and Practice, 39 4 , — Google Scholar. Alvarez-Garrido, E.
Comparing biotech ventures backed by corporate and independent VCs. Strategic Management Journal, 37 5 , — CrossRef Google Scholar. Bertoni, F. Does governmental venture capital spur invention and innovation? Evidence from young European biotech companies.
Research Policy, 44 4 , — Block, J. What is the effect of the financial crisis on venture capital financing? Empirical evidence from US Internet start-ups.
The Schumpeterian entrepreneur: Industry and Innovation. Brown, J. Finance and growth at the firm level: Carpenter, R. Is the growth of small firms constrained by internal finance? The Review of Economics and Statistics, 84 , — Carpentier, C. The value of capital market regulation: IPOs versus reverse mergers. Journal of Empirical Legal Studies, 9 1 , 56— Cholakova, M. Entrepreneurship Theory and Practice, 39 1 , — Colombo, M. Swimming with sharks in Europe: Strategic Management Journal, 37 11 , — When does reward-based crowdfunding help firms obtain external financing?
SSRN working paper. Internal social capital and the attraction of early contributions in crowdfunding. Entrepreneurship Theory and Practice, 39 1 , 75— Governmental venture capital for innovative young firms. Journal of Technology Transfer, 41 1 , 10— Cosh, A. Outside entrepreneurial capital. Economic Journal, , — Croce, A. Journal of Small Business Management.
Debt investments in private firms: Journal of Fixed Income, Summer, , — Fintech venture capital. Private debt: De Rassenfosse, G. Venture debt financing: Strategic Entrepreneurship Journal, 10 , — European Commission. Financial Stability Board.Scholarly evidence indicates that this is a sound decision.
The Problem[ edit ] Depending on the industry and aspirations of the entrepreneur s they may need to attract money to fully commercialize their concepts. To comply with these intensified regulations, banks had to introduce various risk measures that make small firm financing more complex and expensive. However, CVCs are less autonomous relative to limited partnership VCs, and this lack of autono-my has led to programs being scaled back and canceled among some organizations at different points in time when strategic objectives or staff change.
Chart 4. Following this introduction and comparison of new players, we discuss the underlying factors or reasons explaining their emergence. Industry and Innovation. The company did not take him seriously and rejected his idea; this decision turned out to be one of the greatest intrapraneurial blunders in history. Family offices usually provide equity, have primarily financial goals, and are considered long-term investors.
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