Entrepreneurship

I.) Answer The Following Questions

1.) Many successful private investors and entrepreneurs are of the belief that it is just as bad to start out with too much money, as it is too little. This is due to a number of reasons. In general (statistically) 29% of start-ups have stated that management’s inability to manage money and how it is spent as a reason for failure. Thus, it can be inferred that (within the start-up environment) having an excess of cash can be harmful to the operations and activities of a business since it may inhibit the development of necessary know-how/enterprise knowledge.

Firstly, having too much money does not come free of cost to the entrepreneur. The price that the venture must incur ultimately manifests itself in the dilution of stock in the company. Essentially, the more money that the firm acquires, the more shares it is relinquishing. For a new venture enterprise, an entrepreneur sacrificing the holdings in the company in order to accrue too much cash is simply not advisable. This is because a start-up must focus it efforts on innovation that adds value to the firm and its offerings. Such innovation is often only possible when resources are not abundant i.e., too much money and instead must be used carefully. With too much money, a mindset of complacency develops and teams would take decisions too quickly without concern of the consequences of their actions. An example of why starting out with too much money is just as bad as it is too little can be seen in companies that develop poor decision making skills due to the fact that they believe failed decisions can simply be rectified by injecting more money into the decision making process. Examples of bad decisions that follow as a result of starting out with too much money can take place in the form of firms scaling up too quickly. This occurred with a company that started with too much capital (Pano Logic, 2006). Its founder Nils Bunger said that having too much money raised expectations of the board on the company and it eventually ran into numerous problems while trying to deal with them. Furthermore, the entire process of thoughtful validating and testing so as to pave the path for growth can be compromised.

2.) There are a myriad of criteria that bankers look at when examining a loan application. Angel investors also have a set of criterion that they refer to when looking at a business plan. Both these scenarios have similarities in their approach, but there are also stark differences.

When a banker looks at a loan application, his or her primary focus is to examine the cash flow of the company in order to determine whether or not the debtor will be able to pay back the loan in the future. Thus, a banker typically adopts a short-term outlook while looking at a loan application. On the other hand, an angel investor (when looking at a business plan) will look for the level of return he or she can potentially generate on the capital he or she invests. Angel investors adopt a long-term outlook and their primary concern is not related to immediate cash flow of the company.

When a banker looks at a loan application, he or she starts by examining the balance sheet of the company to gauge whether the business has assets that it can provide to serve as collateral in the event that it defaults on the loan. For the banker, it is essential that they receive the principal plus interest. The angel investor looks at the business plan differently by focusing and looking for potential for growth in the future.

Bankers are concerned with the ability of their loan applicants to pay in the short-run/to pay interest/to pay partial amounts of the interest when looking at loan applications. Angel investors instead seek feasible business plans that detail clearly the investment amounts that the entrepreneur seeks and the projected returns for the investors in the long run.

3.) The valuation of a company is determined through a number of standard techniques. The most pragmatic and theoretical approaches include but are not limited to the discounted cash flow analysis, the asset-based approach, the market approach and the income approach. On the other hand, the realistic approach to determining the value of a company can be assessed by looking at the business idea and the intangible elements involved in its operations and activities.

In theory, when an acquisition or merger is being planned, companies use valuation techniques. The discounted cash flow analysis works by looking at the net present value of cash that it has the potential to generate. This involves forecasting future cash flows and making key assumptions. The asset-based approach looks at the fair-market value of a venture’s total assets while adjusting its total liabilities. In theory, this approach essentially factors in the costs of creating the business from scratch. The market approach is another method that theoretically values a company by looking at comparable/similar organizations and relies on data from the market place to determine the worth of a business. Finally, the income approach factors in the core competencies of a business that help it generate revenues as a means of theoretically valuing the worth of the company.

4.) Debt financing has a number of advantages and disadvantages. The advantages include but are not limited to the fact that an entrepreneur need not dilute his or her holdings in the company because debt financing does not involve sacrificing equity against debt and the promoter can thus keep his or her share. Furthermore, debt financing usually involves a lower interest rate than financing vis-à-vis angel money and/or venture capital. A key disadvantage in this method of financing is that if the business is unable to repay the debt, it can be liquidated because the creditors have a right to assets of the venture. Another disadvantage that arises from this method of financing is the negative impact on credit ratings since each loan is noted on it.

Utilizing angel investors’ money is another method of financing. An advantage of this approach is that angel investors are typically more friendly and approachable than venture capitalists and bankers. A disadvantage of using angel money is that these types of investors can typically only offer monetary assistance and are unable to provide strategic direction to the company. On the other hand, venture capital has the pro of being able to provide strategic direction to the firm in addition to monetary funding. This is because members of VC funds often have expertise and know-how of a number of businesses and industries and they can offer their valuable insight to the firm. However, a con of using venture capital is that it can also take away the flexibility of the entrepreneur/the business since in most cases a venture capitalist will join the board of the business and dictate how activities and operations must be conducted. Another con is that venture capital is likely more expensive than angel money because they are institutional investors. Thus, negotiations on pricing may be more complex and more dilutive than utilizing angel money for the new venture enterprise.

5.) When selecting a board, outside investors, consultant and the like, there are a number of important criteria that must be factored in. These include but are not limited to the ability and willingness of the persons to provide strategic direction, their respective expertise in the areas of the business and whether their personas are in sync with the overarching goals of the company.

The reason the willingness and ability of the persons to provide strategic direction is an important criterion is because this provides the business with employees that are able to usher in alliance opportunities with other companies while simultaneously fostering an environment wherein the company is able to grow and evolve. Consultants and investors should be selected on the basis of their expertise in the areas of the business because it is key that only those with extensive knowledge of the enterprise be involved in its operations so that operations are effective and efficient. Selecting a board and investors etc. that are aligned to the strategic direction of the company, but also act independently is one of the most important criterions because these people will tell the company when it is engaged in the wrong activities and operations.