FINANCING ENTREPRENEURSHIP VENTURES
j.mas95
2017MGMT3004Seminar51.pptx1
Entrepreneurship
Session 5
Funding for Entrepreneurial Ventures
(Chapter 14 and early part of Chapter 5)
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Louis Geneste
Lecturer
School of Management
Curtin Business School
Tel: 9266-7987
Fax: 9266-7897
E-mail: [email protected]
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By the end of this session, you should be able to:
Identify and distinguish between the main sources of entrepreneurial finance;
Discuss the advantages and disadvantages of debt and equity financing;
Explain how informal (angels) and formal venture capitalists differ from each other;
Explain how venture capitalists assess venture funding proposals;
Explain the role of venture capitalists in financing entrepreneurial ventures.
Session Learning Outcomes
But first
Where does the money for new start-ups usually come from?
What about later as the company grows?
Can you think of some creative ways to raise funds?
Has anyone ever used crowdfunding?
Have you ever tried to raise money from your family?
?
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9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
Instructor:
Class:
The times, they are a-changin’
Funding in the new era is not simply thrown at companies in the hope that one in 10 is wildly successful.
Today, funding goes only to entrepreneurs who thoroughly understand their customers’ requirements and who can ensure the funder from the beginning that every product delivers on its value.
Henrik Moltke, licensed under CC Attribution 2.0 creativecommons.org/licenses/by/2.0/
There was a time when an entrepreneur with a bright idea could just walk into a venture capitalist’s office in Silicon Valley or Shanghai and get a heap of money to develop that idea.
The venture capitalist (VC) would take a slice of the company and the entrepreneur would take the money and make something of it – or not.
Now those days are gone. However, like all change, this situation has created its own opportunity, one that can benefit both the funding community and the start-up venturer.
Funding in the new era will not simply be thrown at companies in the hope that one in 10 is wildly successful.
Today, funding goes only to entrepreneurs who thoroughly understand their customers’ requirements and who can ensure the funder from the beginning that every product delivers on its value.
VC1: Work found at https://www.flickr.com/photos/henrikmoltke/5587199796 / Henrik Moltke / Attribution 2.0 Generic (CC BY 2.0)
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Sources of financial capital
Entrepreneurs have a number of sources of financial capital as their ventures develop.
Notice that the level of risk and the stage of the firm’s development should determine the appropriate source of financing for the entrepreneurial ventures.
‘Successful Angel Investing’, Indiana Venture Center, © 2008.
Studies have investigated the various sources of finance preferred by entrepreneurs.
As illustrated in Figure 14.2, entrepreneurs have a number of sources of financial capital as their ventures develop.
Notice that the level of risk and the stage of the firm’s development should determine the appropriate source of financing for the entrepreneurial ventures.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Sources of Entrepreneurial Capital
Sources of capital:
1. “Bootstrap” and Informal
- personal savings
- family & friends
- working capital
2. Debt
- bank loans
3. Equity
- private and public
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Andy Lamb’s (guest entrepreneur S1-2016) Sources of Finance
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Bootstrapping
‘Highly creative acquisition’.
Using other people’s resources.
Relies on:
networks, trust and cooperation
wise use of existing resources.
No debt / don’t give away equity.
Look for ‘low-hanging fruit’.
Use a copycat idea.
Find quick, break-even, cash-generating products.
Keep growth in check.
Focus on cash for healthy, immediate returns.
Avoid loss-making strategies.
See the dozens of bootstrapping ideas in Chapter 5.
Chris Potter, licensed under CC Attribution 2.0 creativecommons.org/licenses/by/2.0/
Note: Tall boots may have a tab, loop or handle at the top known as a bootstrap, allowing one to use fingers or a boot hook tool to help with pulling the boots on. The saying ‘to pull oneself up by one's bootstraps’ (Wikipedia).
One common pathway trod by many prospective entrepreneurs is bootstrap entrepreneurship.
Bootstrapping is a means of starting a new venture through highly creative acquisition and the use of (sometimes other people's) resources.
Some people say that bootstrapping means starting a new business without financing.
Bootstrapping relies greatly on networks, trust, cooperation and the wise use of existing resources, rather than going into debt or giving away equity.
Point to ‘How to Bootstrap a Business’ on p. 159.
Pathway: Work found at: https://farm9.staticflickr.com/8057/8226451812_e197931e26_o_d.jpg / Cropped / Creator: Chris Potter / Attribution 2.0 Generic (CC BY 2.0)
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9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
Instructor: Class:
Informal investing
Informal investors are often from the 4Fs:
Friends, family, founders and ‘foolhardy investors’
Neighbours, work colleagues and even strangers
Expected returns are affected by altruism
Strangers expect higher returns than parents
Men expect higher returns than women
Older persons expect lower returns than younger
Entrepreneurs expect higher returns than non-entrepreneurs
TaxCredits.net, licensed under CC Attribution 2.0 creativecommons.org/licenses/by/2.0/ text changed and cropped from original
A lot of the start-up capital comes from informal investors, or the 4Fs – friends, family, founders and other ‘foolhardy investors’ (to that we could also add neighbours, work colleagues and even strangers).
Venture capital is simply not on most companies’ radars – ever. In the home of VC, the USA, for example, less than one in 10,000 companies receives classic venture capital.
VC flows only to companies with superstar potential, while informal investment flows to companies in all segments.
GEM found that as many as 4 per cent of adults around the world could be counted as informal investors
What financial return do informal investors expect? GEM found that expected returns are affected by altruism. The closer the relationship between an entrepreneur and an investor, the lower the expected return. In putting money into relatives’ and friends’ businesses, more than 50 per cent expected to lose money or at best break even. It confirms a common piece of advice given to entrepreneurs who are seeking informal investments: make sure that your investors, family and friends in particular, can afford to lose all their investment without having to change their lifestyle!
Jar: Work found at https://www.flickr.com/photos/76657755@N04/7027601297 / Cropped and altered / Creator: Tax Credits (https://creativecommons.org/licenses/by/2.0/)
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Debt versus equity?
Equity financing is best in the early start-up stages.
Use of debt to finance a new venture involves a payback of the funds plus a fee (interest) for the use of the money (for example, to a bank).
Entrepreneurs need both debt financing and equity financing – all at the right time.
Equity financing is best in the early start-up stages, especially during research and development and during product development.
The use of debt to finance a new venture involves a payback of the funds plus a fee (interest) for the use of the money (for example, to a bank).
Equity financing involves the sale of some of the ownership (shares) in the venture.
Debt places a burden of repayment and interest on the entrepreneurs, whereas equity financing forces the entrepreneur to relinquish some degree of control.
Shopping cart: Work found at https://pixabay.com/en/shopping-cart-basket-604007/ Public domain
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Debt financing through banks
Short-term borrowing for working capital.
Long-term debt to finance the purchase of property or equipment.
Banks will ask:
What do you plan to do with the money?
How much do you need?
When do you need it?
How long will you need it for?
How will you repay the loan?
Commercial banks are the major source of debt financing for small business.
Short-term borrowing for working capital. Long-term debt to finance the purchase of property or equipment.
Bank loans are secured by fixed assets (such as your house), receivables (amount owed to you by customers) and inventories in stock or other assets.
Banks will ask:
What do you plan to do with the money? Do not plan to use funds for a high-risk venture. Banks seek the most secure venture possible.
How much do you need? Some entrepreneurs go to their bank with no clear idea of how much money they need. All they know is that they want money.
When do you need it? Never rush to the bank with immediate requests for money with no plan. Such a strategy shows that the entrepreneur is a poor planner and most lenders will not want to get involved.
How long will you need it for? The shorter the period of time the entrepreneur needs the money, the more likely they are to get the loan.
How will you repay the loan? This is the most important question.
Shopping cart: Work found at https://pixabay.com/en/shopping-cart-basket-604007/ Public domain
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Other forms of debt financing
Banks are not the only source of debt financing.
Sometimes a new venturer can obtain long-term financing for a particular piece of equipment from the manufacturer, who will take a portion of the purchase price in the form of a long-term note.
New ventures sometimes can obtain short-term debt financing by negotiating extending credit terms with suppliers.
Other debt-financing sources include trade credit, accounts receivable factoring, finance companies, leasing companies, mutual savings banks, savings and loan associations, and insurance companies.
Table 14.2 provides a summary of these sources, the business types they often finance and their financing terms.
Shopping cart: Work found at https://pixabay.com/en/shopping-cart-basket-604007/ Public domain
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Table 14.1 shows a summary of the differences between equity and debt financing.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Equity financing
What kinds of people or organisations might buy ownership in a new venture and why?
Can you sell shares in your business before you make money?
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9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
Instructor:
Class:
Equity financing
No obligation to repay
But, the entrepreneur gives up part ownership
Equity capital can be raised in two ways:
Public stock offerings, called initial public offering (IPO)
Private placements, which involves private investors purchasing shares or sometimes bonds
Equity financing is money invested in the venture with no legal obligation for entrepreneurs to repay the principal amount or pay interest on it.
The use of equity funding thus requires no repayment in the form of debt.
It does, however, require sharing the ownership and profits with the funding source.
Since no repayment is required, equity capital can be much safer for new ventures than debt financing.
Yet the entrepreneur must consciously decide to give up part of the ownership in return for this funding.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Equity financing
Loan with warrants provide the investor with the right to buy shares at a fixed price at some future date.
Convertible debentures are unsecured loans that can be converted into shares. The conversion price, the interest rate and the provisions of the loan agreement are all areas for negotiation.
Preferred shares are equity that give investors a preferred place among the creditors in the event the venture is dissolved. These shares also pay a dividend and can increase in price, thus giving investors an even greater return.
Common shares are the most basic form of ownership. These shares usually carry the right to vote for the board of directors. If a new venture does well, common-share investors often make a large return on their investment. These shares issues often are sold through public or private offerings.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Public stock offering (by IPO)
‘Initial public offering’ (IPO)
First-ever sale of shares to the public
‘Going public’ or ‘floating’
The IPO market has been a rollercoaster since the late 1990s
Equity capital can be raised through two major sources: public share offerings and private placements.
The term initial public offering (IPO) means a company’s securities are offered for the first time. Going public is a term used to refer to a corporation raising capital through the sale of securities on the public markets. Here are the advantages and disadvantages:
Size of capital amount: Selling securities is one of the fastest ways to raise large sums of capital in a short period.
Liquidity: The public market provides liquidity for owners since they can readily sell their shares.
Value: The marketplace puts a value on the company’s shares, which in turn allows value to be placed on the corporation.
Image: The image of a publicly traded corporation often is stronger in the eyes of suppliers, financiers and customers.
Costs: The expenses involved with a public offering are significantly higher than for other sources of capital.
Disclosure: Detailed disclosures of the company’s affairs must be made public. New-venture firms often prefer to keep such information private.
Requirements: The paperwork involved with government regulations, as well as continuing performance information, drains large amounts of time, energy and money from management.
Shareholder pressure: Management decisions are sometimes short term in nature in order to maintain a good performance record for earnings and dividends to the shareholders.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Private placements
The ideal small-business candidate for private placement is a company looking for growth or expansion funding.
A private placement is suitable when you need an injection of capital to jump to the next level of growth and you have a proven track record of profitability.
Private placement is money invested in a company usually from private investors in the form of shares or sometimes bonds.
The ideal small-business candidate for private placement is a company looking for growth or expansion funding.
A private placement is suitable when you need an injection of capital to jump to the next level of growth and you have a proven track record of profitability.
A private placement memorandum (PPM) is the document that discloses everything the investors need to know to make an informed investment decision about the direct public offering (DPO) being considered. This includes:
the offering structure
the share structure of the company
disclosures about the securities being purchased
company information
information on company operations
risks involved with the investment
management information
use of proceeds
information on certain transactions that could affect the investor and investor suitability data.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Venture capital in the new era
There was a time when an entrepreneur with a bright idea could just walk into a venture capitalist’s office in Silicon Valley or Shanghai and get a heap of money to develop that idea.
Now those days are gone.
But we are still building the same innovative and world-changing products.
Mike Licht NotionsCapital.com, licensed under CC Attribution 2.0 creativecommons.org/licenses/by/2.0/
There was a time when an entrepreneur with a bright idea could just walk into a venture capitalist’s office in Silicon Valley or Shanghai and get a heap of money to develop that idea. The venture capitalist (VC) would take a slice of the company and the entrepreneur would take the money and make something of it – or not.
Now those days are gone. Today, Indian, Chinese and many other diverse entrepreneurs are still flooding to knowledge clusters around the world. They have similar pedigrees and the same fantastic depth and business acumen, but their attitudes differ.
They are willing to live in cramped apartments and work day and night. These guys and gals are happy with $10,000 in funding from individuals rather than $10 million from VC firms.
Meanwhile, they are building the same innovative and world-changing products as their earlier colleagues. In this chapter, we examine the sources of capital available to new ventures, with some insights into the approach required of the entrepreneur.
Work found at https://www.flickr.com/photos/notionscapital/9460888437 / Creator: Mike Licht / (https://creativecommons.org/licenses/by/2.0/)
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Venture capital in the new era
Venture capitalists can provide:
capital for start-ups and expansion
market research and strategy
management consulting functions
contacts with prospective customers and suppliers
assistance in negotiating technical agreements
help in management and accounting controls
help in employee recruitment
help in risk management
guidance with government regulations.
Mike Licht NotionsCapital.com, licensed under CC Attribution 2.0 creativecommons.org/licenses/by/2.0/
Venture capitalists are a valuable and powerful source of equity funding for some (a small minority of) new ventures. These experienced professionals provide a full range of financial services for new or growing ventures, including the following:
capital for start-ups and expansion
market research and strategy for businesses that do not have their own marketing departments
management-consulting functions and management audit and evaluation
contacts with prospective customers, suppliers and other important businesspeople
assistance in negotiating technical agreements
help in establishing management and accounting controls
help in employee recruitment and development of employee agreements
help in risk management and the establishment of an effective insurance program
counselling and guidance in complying with a myriad of government regulations.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Funding stages with VCs
Seed financing provides the initial funds for a business concept to be developed. This may involve additional research, product development and initial marketing to reach out to early-adopter customers. The companies receiving funding at this stage may be in the process of just being incorporated or may have been in operation for a while.
Start-up financing is where product development is completed and the market is trial-tested. Sales are still low and the company needs one year or less of expense money.
Early stage financing is provided to companies that have completed the product development stage and test marketing as well, but require additional financing to expand commercial manufacturing and sales.
Expansion financing is provided when the start-up company is poised to grow rapidly. The business is viable and is reaching break-even point. The funds may be used to increase production capacity, market or product development and/or provide additional working capital.
Late-stage funding refers to the pre-initial public offering investments in a company for strengthening the positioning of the company and gaining endorsements from the top venture capital firms as the company prepares for its listing.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Myths about VC
Venture capital firms want to own control of your company and tell you how to run the business.
Venture capitalists are satisfied with a reasonable return on investments.
Venture capitalists are quick to invest.
Venture capitalists are interested in backing new ideas or high-technology inventions – management is a secondary consideration.
Venture capitalists need only basic summary information before they make an investment.
Andrew McCluskey, licensed under CC Attribution 2.0 creativecommons.org/licenses/by/2.0/
Myth 1: Venture capital firms want to own control of your company and tell you how to run the business. No venture capital firm intentionally sets out to own control of a small business. VCs have no desire to run the business.
Myth 2: Venture capitalists are satisfied with a reasonable return on investments. VCs expect very high, exorbitant, unreasonable returns.
Myth 3: Venture capitalists are quick to invest. It takes a long time to raise venture capital.
Myth 4: Venture capitalists are interested in backing new ideas or high-technology inventions – management is a secondary consideration. VCs back only good management.
Myth 5: Venture capitalists need only basic summary information before they make an investment. A detailed and well-organised business plan is the only way to gain a venture capital investor’s attention and obtain funding.
Doh: Work found at https :// upload.wikimedia.org/wikipedia/commons/e/e1/Doh.jpg / Creator: hobvias sudoneighm / Creative Commons Attribution 2.0 Generic
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Venture capitalists’ objectives
Different objectives from other capital lenders.
Interested in security and return on investment (ROI).
Best advice: delay outside investment as long as possible and to build as much value as you can into your business before you seek VC.
Table 14.3 provides some commonly sought targets.
20–30% ROI would not be considered too high.
Venture capitalists have different objectives from other capital lenders.
They are interested in security and payback.
Most are concerned with return on investment (ROI).
The best advice is to delay outside investment as long as possible and to build as much value as you can into your business before you seek it, because venture capitalists are interested in making a large ROI.
Table 14.3 provides some commonly sought targets.
However, an annual goal of 20 to 30 per cent ROI would not be considered too high, regardless of the risks involved.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Top factors VCs use to evaluate your proposal
Timing of entry
Key success factor stability
Educational capability
Lead time
Competitive rivalry
Entry wedge imitation
Scope
Industry-related competence
See Table 14.4: Factors in venture capitalists’ evaluation process
In addition to the evaluation of product ideas and management strength, numerous criteria are used to evaluate new-venture proposals. Shepherd developed a list of eight critical factors that VCs use in the evaluation of new ventures, as follows:
1. Timing of entry
2. Key success factor stability
3. Educational capability
4. Lead time
5. Competitive rivalry
6. Entry wedge imitation
7. Scope
8. Industry-related competence.
Each factor was defined from the high/low perspective (see Table 14.4 for definitions).
https://pixabay.com/en/checklist-action-check-list-153371/
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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A Summary of ABS Key Findings for Venture Capital 2012-13
(ABS 2014, p. 4 -5)
In 2012-13, 6, 604 potential new investments; 850 further analysed; 76 sponsored = 1.2%
Venture Capital and Later Stage
Private Equity
$19.8b committed
$13.8b drawn down
$6b uncalled
$8.2b invested
231 vehicles
720 investee companies
Direct investment
Pool of funds
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Venture Capital
What do the figures on the previous slide indicate?
Despite the attraction of venture capital to entrepreneurs, few actually access it;
While there is a lot of attention paid to venture capital, it is relatively unimportant to start-up entrepreneurs;
Investment is made in stages, dependent on satisfactory business outcomes.
Business angels
Wealthy people looking for investment opportunities.
Range from passive (backing others’ judgements) through to hands-on.
Angels invest as individuals (often as part of a group) whereas venture capital generally comes via a company
Many wealthy people are looking for investment opportunities. They are referred to as business angels or informal risk capitalists.
Here we distinguish business angels from the 4F informal investors – friends, family, founders and other ‘foolhardy’ investors – which we looked at earlier.
Business angels tend not to have any previous relationship with the entrepreneur and take a more objective approach to determining whether to invest.
Angel investors range from those taking a passive approach (backing others’ judgements) through to hands-on investors providing advice or direct management input to help the business become established.
A key difference between angel and venture investors is that angels tend to invest as individuals (often as part of a group) operating part-time, whereas venture capital generally comes via a company or fund with full-time managers and a board of directors, using formal analysis and investment procedures (see Figure 14.4).
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Types of angel investors
Corporate angels: Typically, senior managers who have been laid off with generous severances.
Entrepreneurial angels: The most prevalent type of investors, most of these individuals own and operate highly successful businesses.
Enthusiast angels: Most enthusiast angels are aged 65 or older, are independently wealthy from success in a business they started, and have abbreviated work schedules. For them, investing is a hobby.
Micro-management angels: Micro-managers are very serious investors. Some of them were born wealthy, but the majority attained wealth through their own efforts.
Professional angels: The term ‘professional’ in this context refers to the investor’s occupation, such as doctor, lawyer and, in rare instances, accountant. Professional angels like to invest in companies that offer a product or service with which they have some experience.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Michelle Fernandez was very pleased with the success of her firm, Fitness Gurus, which catered to organisations wishing to provide their employees with a weekly hourly break out of their busy schedules. Michelle initially funded the business from her own savings. Family members had also pitched in a few thousand dollars to help Michelle on her way to entrepreneurial success. To help her business develop, Michelle also offered her business services to other firms in exchange for expertise such as website development and marketing advice. Once, to help obtain badly needed funds, Michelle sold her accounts receivable to a firm that offered 80% of the amount that was owed to her. Her business credit card also helped make some initial exercise equipment purchases. However, her business would not have grown as quickly as it had if not for the help of a wealthy, retired owner of a global fitness chain who frequently invested in promising young ventures in the fitness industry.
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Read the following case and identify the different sources of funds Michelle used for her business – this is an example of what to expect in the exam
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Example of Angel Financing
View the following You Tube film clip from the UK version of Dragons Den
https :// www.youtube.com/watch?v=6quOgmJ7EiY
http:// www.youtube.com/watch?v=s8d5wxGEGc8
What’s the difference between the two?
What are questions commonly asked by the investors?
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New forms of entrepreneurial capital
Most textbooks stop here, but we carry on!
There’s more to capital-raising than venture capital or bank loans.
Islamic finance
Finding an ‘impact investor’
Micro-credit
Peer-to-peer lending
Crowdfunding
Raising natural capital
Most entrepreneurship textbooks stop here in their discussions about capital needs.
For them, entrepreneurial capital is simply financial capital.
As entrepreneurs move into the new millennium, however, it is important to realise that there is more to capital-raising than venture capital or bank loans.
Yes, there are the creative sides of bootstrapping and the 4Fs, but there are also new modalities of funding that are emerging in our fast-changing world.
Here we cover some amazing topics, from Islamic finance and social lending to micro-credit and natural capital.
They are all part of the mix of entrepreneurial capital.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Islamic finance
Engaging in entrepreneurial endeavours is encouraged and even demanded in the teachings of Islam.
See detail in Chapter 14, pp. 517–19.
About one in four people in the world is Muslim and the study of Muslim entrepreneurship has deepened our knowledge about the cultural aspects of our field.
Engaging in entrepreneurial endeavours is encouraged and even demanded in the teachings of Islam.
Muslim entrepreneurs perceive themselves to be committed Muslims who consider entrepreneurship a religious and economic duty intended to generate halal (lawful) income to meet their financial obligations and to contribute to the falah (wellbeing) of the Muslim ummah (nation) in this life and hereafter.
Muslims are taking advantage of a form of ethical investment with ancient roots but greatly accelerated in the past 20 years in places such as Malaysia and Dubai.
The Koran’s passages are often written using business and trade metaphors. Life is likened to a business venture, where one earns profits to gain entry into heaven – profits meaning faith and good deeds to others.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Impact investing
Impact investing that prevents future market meltdowns and avoids climate change.
Investing in recycling, solar, wind, water and biofuels, greener transportation.
Formerly called socially responsible investing (SRI), sustainable investing or ethical investing.
Centres on the Principles for Responsible Investment (PRI).
Some investors look for ways to make an impact that prevents future market meltdowns and avoids catastrophic climate change.
There could be millions of jobs in recycling, solar, wind, water and biofuels, as well as in energy conservation (homes and buildings) and greener transportation. Investors are looking for companies that pursue a clear sustainability agenda alongside a traditional financial return.
Entering now to centre stage are the impact investors who seek to produce beneficial social outcomes that would not occur but for their investments in social enterprises.
Formerly called socially responsible investing (SRI), sustainable investing or ethical investing.
Fund environmental protection, energy conservation, wind power, conservation of natural resources, advantageous labour conditions, leadership, women at work, improvement of education, and social equality.
SRI movement has centred on the Principles for Responsible Investment (PRI), which provide a framework for incorporating environmental, social and governance (ESG) into investment decision-making and ownership practices.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Micro-credit
Very small loans to entrepreneurs who lack collateral
Informal financial service providers
Member-owned organisations
Non-governmental organisation (NGOs)
Banks servicing ‘pre-banking customers’
Micro-enterprise development programs give very small loans (micro-loans) to aspiring entrepreneurs who lack collateral to offer as security to a bank, who usually are not steadily employed, or who have no credit history.
Helms distinguishes between four types of micro-finance providers:
Informal financial service providers: moneylenders, pawnbrokers, savings collectors and money-guard services can also be costly. Many people lose their money.
Member-owned organisations: self-help groups, credit unions and a variety of hybrid organisations such as financial service associations.
Non-governmental organisation (NGOs): innovative, pioneering banking techniques like solidarity lending, village banking and mobile banking that have overcome barriers to serving poor populations.
Formal financial institutions: commercial banks, state banks, agricultural development banks, savings banks, rural banks and non-bank financial institutions. The banks now see the poor as well as start-up entrepreneurs as valuable ‘pre-banking customers’ who can be cultivated to become more affluent customers.
Instructor: Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
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Peer-to-peer lending
Social lending removes costly intermediaries known as banks.
Bringing pools of borrowers together with individual investors.
Loan of $1000 to a specific borrower is often funded by $25 investments from 40 different lenders.
Social lending sites charge fees of 2–4%
Lending Club is the world’s largest online
marketplace connecting borrowers and investors.
Simon Cunningham, Lendingmemo.com, licensed under CC Attribution 2.0 creativecommons.org/licenses/by/2.0/ cropped from original
Social lending can do away with costly intermediaries known as banks by bringing pools of borrowers together with individual investors.
Peer-to-peer lending (P2P) loans are typically funded by specific individuals lending their own money on a fractional basis at interest to specific borrowers.
For example, a loan of $1000 to a specific borrower is often funded by $25 investments from 40 different lenders.
Social lending sites charge fees for brokering and servicing loans (around 1 per cent from the lender and 2 to 4 per cent from the borrower) and collect penalties for late payments as well. Loan sizes are generally under $25,000. Loan terms are generally three years, and rates range from 9 to 18 per cent. The relatively small loan amounts and the ease with which people can submit their ideas has led many individuals – who otherwise would have avoided pursuing their business venture due to a lack of confidence in their ability to obtain a commercial loan – to view social lending as a low-risk mechanism for getting started.
P2P Lending: Work found at https://www.flickr.com/photos/lendingmemo/9526218147/ / Cropped / Creator: Simon Cunningham (https://creativecommons.org/licenses/by/2.0/)
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
35
Kickstarter $1b+ since 2009.
Entrepreneurs collect funds through the Internet by ‘open invitation’ to finance their projects/ventures.
Usually there is a reward given to the funding community for success.
Crowdfunding
Kickstarter: more than $1 billion pledged since 2009.
Crowdfunding makes it possible for entrepreneurs to collect funds through the Internet by ‘open invitation’ to finance their projects/ventures.
Usually there is a reward to the funding community for success, such as pre-buy or quantity discounts, public recognition, or access to the entrepreneur and the production team.
Instructor:
Class:
9/3/2017
PowerPoints to accompany Frederick, HH. et al. Entrepreneurship: Theory Process Practice (4th Asia-Pacific ed.), Melbourne: Cengage Learning Australia 2016.
36
Example of Crowdfunding
Here’s an example of a crowdfunding business –
Have a look at the Brakeboard option http :// www.kickstarter.com/projects/1130221580/disc-brakes-for-longboard-skateboards?ref=city
https://www.kickstarter.com/projects/rosscurrie/squishy-forts-pillow-fort-construction-kits
Would you be part of this with the rewards on offer? (rewards are at the right hand side of the page)
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Read the following on Oculus Rift and its acquisition by Facebook
http:// www.gamasutra.com/view/news/213983/For_better_or_worse_Your_guide_to_Oculus_internet_arguments.php?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed%3A+GamasutraNews
Do you agree with the author’s arguments?
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End of Presentation
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References:
ABS, 2005, Venture Capital Australia, Australian Bureau of Statistics, AGPS, Canberra.
Frederick, H. H. & D.F. Kurakto. 2010. Entrepreneurship: Theory, process and practice, 2nd Asia-Pacific edition. Melbourne, Australia: Cengage Learning.
Frederick, H. H., D.F. Kurakto & R. M. Hodgetts 2007. Entrepreneurship: Theory, process and practice, 2nd Asia-Pacific edition. Melbourne, Australia: Cengage Learning.
Mariotti, S. 2007, Entrepreneurship: Starting and Operating a Small Business, Pearson Prentice Hall, Upple Saddle River, New Jersey.
Osnabrugge, M. V. & Robinson, R. J. 2000, Matching startup funds with startup companies – the guide for entrepreneurs and individual investors, Jossey-Bass, Boston.
Stemler. A. R. 2013, “The JOBS Act and crowdfunding: Harnessing the power – and money – of the masses” Business Horizons (in press), 1-5.
