Entrepreneurial Economics

7/27/2019 Entrepreneurial Economics

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Entrepreneurial Economics

Dimple Pandey


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Entrepreneurial Economics is the study of the entrepreneurand

entrepreneurship within the economy

What are the characteristics of an entrepreneurial economy?

High levels of innovation combined with high level of entrepreneurship

resulting in the creation of new ventures as well as new sectors and industries.
http://en.wikipedia.org/wiki/Entrepreneurhttp://en.wikipedia.org/wiki/Entrepreneur


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Who is an Entrepreneur?

Person who starts his own, new and small business with chances of profit orloss.

An individual who bears the risk of operating business in the face of uncertaintyabout the future conditions.


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Characteristics of successful entrepreneur Risk taker Interest and vision Relevant skills and expertise Investment

Passion Organization and Delegation Motivation to succeed Famous entrepreneurs Bill Gates- By linking his microsoft software to IBMs first PCs , he dominated

the industry

He developed a two-prong strategy of expanding the market while maintaining astrong hold on competitors


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Michael Dell- created a new model for PC sales

Cutting out the retail middleman and custom building computers to suit buyers

needs put Dell at the front of the class of PC makers

Tom Anderson and Chris DeWolfe

Founders of MySpace.com

Registering 160,000 people per day with no marketing

There are over 200 million accounts

Harland Sanders- KFC-Opened Sanders Court & Caf in the front room of a

gas station

He began franchising in 1952


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Role of entrepreneur in economy

New product in market

Money circulation

Creation of employment

Better standard of living

New ideas bring huge changes Develop new market

Mobilize capital resources

New technology

Discover new source of material


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How to be a successful entrepreneur

Self confident and optimistic

Able to take calculated risk

Respond positively to changes

Flexible and able to adapt

Knowledgeable of markets Able to get along well with others

Independent minded

Creative

Responsive to suggestions

Take initiatives


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Several factors determine the possibility of forming a new company.

The government must provide the infrastructure to help a new venture.

The entrepreneur must have the necessary background.

The market must be large enough and the entrepreneur must have the marketing

know-how to put it all together.

Financial resources must be available.


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The Nature and Development of Entrepreneurship

It involves four aspects:

The creation process

The devotion of time and efforts

The assumption of risks

Rewards of independence, satisfaction, money


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Advantages of Entrepreneurship

To an Individual

Self Employment

Employment for near & dear

Prolonged career for next generations

Freedom to use own ideas - Innovation and creativity

Unlimited income / higher retained income

Independence

Satisfaction


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To the Nation

Provides larger employment

Results in wider distribution of wealth

Mobilizes local resources, skills and savings

Accelerates the pace of economic development Stimulates innovation & efficiency


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Factors favouring Entrepreneurship

Growth of education- science, technology & management

Developed infrastructure facilities

Financial assistance

Training facilities

Protective and promotional policies Globalization


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Performance emerges from the combination of knowledge, skills and attitude

Competency is developed


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Skills of an entrepreneur

Initiative Taking actions that go beyond job requirements or demands of the situation. Doing things on own before being asked for or being forced by the events. Taking actions to start the business and expand into new areas, products and

services. Seeing & acting on opportunities

Looking for and taking actions to seize opportunities Seeing and acting on opportunities for business development or for personal

growth. Seeing unusual opportunities Seizing opportunities, need, procuring and mobilizing necessary resources.


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Persistence Taking repeated actions to overcome obstacles that get in the way of

achieving goals Taking actions in the face of obstacles. Ensuring all efforts to solve a problem or barrier.

Information seeking Taking action s on own to help reach objectives. Personally undertaking a research or analysis to find out answers to some

problem. Seeking information to clarify what is needed. Using networks to obtain information.


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Concern for high quality of work

Doing things that meet or beat existing standard of excellence.

Stating a desire to produce work of high quality

Comparing work favorably to that of others.

Making all out efforts to ensure the quality of product or services.


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Work commitment

Placing highest priority for getting a job completed.

Taking all the effort to complete a job.

Accepting responsibilities for failures.

Expressing utmost concern for the customers Readiness to work at any level to get work done.


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Efficiency Orientation Constantly looking for ways to do things faster or with fewer resources or at

a lesser cost. Using business tools to increase personal or professional efficiency. Expressing concern for assessing cost versus reward of some

improvements, changes or action.

Systematic Planning Developing and using logical steps to reach goals. Breaking a large task into several sub tasks. Developing plans after duly anticipating obstacles. Evaluating alternatives on merits and demerits.


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Problem Solving Identifying and applying new ideas to reach the goals. Identifying the root cause of the problem. Developing strategies in the light of objectives, resources, and constraints. Generating new ideas or innovative solutions.

Self Confidence Having a strong belief in own abilities. Sticking with own judgment in the face of opposition or early lack of

success. Doing something for which chances of success are not very fair.


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Persuasion Persuading others successfully Selling someone an idea, product or service. Making someone agree to provide resources Convincing with confidence, competence and respect.

Use of Influence Strategies Using a variety of strategies to influence others successfully Developing professional and business contacts. Using influential people to get own things done. Carefully limiting the information to be given to others Using others authority and resources, but remaining ethical


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Assertiveness Confronting problems and issues with other directly Speaking politely but firmly. Telling others clearly what they have to do Reprimanding those who fail to perform as expected however close they

may be. Monitoring

Ensuring smooth progress of project or work. Personally supervising all aspects of the work to its completion. Developing a system of supervision and monitoring.


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Concern for others welfare

Having a concern and taking actions to improve others welfare.

Responding positively to employees specific needs.

Having a concern for the welfare of employees, their families and society at

large


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Factors Influencing Entrepreneurship

Individual

Economic

Environment

Socio-cultural

factors

Support

Systems

PoliticalEnvironment

LegalEnvironment

TechnologicalEnvironment


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Political & Governmental Environment

Global

Trade Barriers Trade Agreements

Tariffs & Duties Political Risks

National

Taxation Regulations

Protections (Patents) Govt. spending

State Govt.

Taxation State Laws Licensing /Approvals

Incentives

Local Issues

Taxations Zoning Cost of Living

Lifestyle


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Environmental Analysis

Scanning to detect change (identify key elements and their characteristics)

Monitoring to track development (that affect the survival and profitability of the

new business)

Forecasting to project the future (such as level of prices, inflation, interest rates,

availability of funds, market share, market growth, etc.

Assessing to interpret data (what does it all mean to the entrepreneur?)


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Entrepreneurship and Economic Development

Entrepreneurs set up Enterprises

Entrepreneurs combines resources, put their time and efforts and produce goodsor services

What they contribute productivity, output, value addition, income andemployment

Entrepreneurship is a Low Cost Strategy. Entrepreneurs perform the crucialrole themselves

The spirit of Entrepreneurship Drive, achieving higher goals, creativity,innovative attitude.

A dynamic society emerges and the spirit spreads like a chain reaction.


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The Invention Process

Market Need

Technology

observation

Need Analysis Parameter

Identification

Creative

Synthesis

Realization

Invention,

which

meets the

need


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Entrepreneurship and Management Students

Enterprises in protected economy can be mismanaged.

Enterprises in competitive environment are essentially to be managed.

A Management Graduate is a person trained to manage an enterprise. Naturally, he willdeliver the best results.

A Management Graduate should not be just a Job Seeker. He can and should take the

role of Job Provider.

An Entrepreneur has to be a Manager.

But a Manager need not be an Entrepreneur


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Entrepreneurial Decision Process

Pull Factors Perception of Advantages Spotting an Opportunity Government Policies Motivation from Biographies or

Success Stories Influenced by Culture, Community,

Family Background, Teachers,Peers, etc.

Push Factors Job Dissatisfaction Relocation Lay-off Retirement

Boredom


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THE FUTURE OF ENTREPRENEURSHIP

Entrepreneurship is currently being embraced by educational institutions,

governments, societies and corporations.

Schools are increasing their emphasis on entrepreneurship in terms of courses

and academic

Governments have also promoted the growth of entrepreneurship-tax incentives

Some state governments are developing strategies for fostering entrepreneurial

activity.


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1.1. Economic Environment:Economic Environment:

Capital:Capital: is one of the most important factor of productionfor the establishment of an enterprise. Increase in capitalinvestment in viable projects results in increase in profitswhich help in accelerating the process of capital formation.Entrepreneurship activity too gets a boost with the easy

availability of funds for investment.

tors Affecting Entrepreneurial Growt


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Labor: Easy availability of right type of workers also effect

entrepreneurship. The quality rather than quantity of labor

influences the emergence and growth of entrepreneurship.

Raw Materials: it is one of the basic ingredient required for

production. Shortage of raw material can adversely affect

entrepreneurial environment. Without adequate supply of

raw materials no industry can function properly and

emergence of entrepreneurship to is adversely affected.


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Market: The role and importance of market and marketing

is very important for the growth of entrepreneurship. In

modern competitive world no entrepreneur can think of

surviving in the absence of latest knowledge about marketand various marketing techniques.


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2. Social Environment:2. Social Environment:

Strongly affect the entrepreneurial behavior, which contribute

to entrepreneurial growth. The social setting in which the

people grow, shapes their basic beliefs, values and norms. Thesocial factors can be

Family Background Joint Family can Provide Family

Resources to Invest and Expand Family Business.

Friends and Relatives, Religion, Social status


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3.3. Compelling FactorCompelling Factor Many a times, it is a compulsion rather than willingness which forces one to

become entrepreneur whether he succeeds or fails. Strong desire to do something independent Government incentives.

To make use of their technical and professional skill Manufacturing experience Business experience Technical know how

Excess funds lying idle can also encourage one to become entrepreneur. Responsibility of maintenance of large families, shortage of funds



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4.4. Cultural FactorCultural Factor

Tangible man made objects like furniture .

Intangible concept like laws, morals knowledge.

Values and behavior accepted within the society.

5.5. Facilitating FactorFacilitating Factor

Elders are resistant to permit young entrepreneur.

Parents should encourage the young entrepreneur

The success stories of entrepreneurs can be incorporated in the curriculum.



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6.6. Psychological FactorPsychological Factor

Achievement motivation means a drive to overcome challenges.

It is a personality characteristics which is a major determinant ofentrepreneurship development.

Average level of achievement motivation existing in a society ensures a

relatively high amount of entrepreneurship in the society. People with low achievement motivation work for money or other such

incentive. People with high achievement motivation work for status, prefer personal

responsibility for decision, take moderate risk and possess interest inconcrete knowledge of the result.

The trait of need for achievement can be developed through various trainingprograms.



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7.7. Attitude of Government:Attitude of Government:

Government all over the world can play a very important role in the emergenceof entrepreneurship. Positive actions by the government can facilitate growth ofentrepreneurship whereas negative actions can adversely influence

entrepreneurial emergence & growth. It is the govt. which regulates businessactivities.

Govt. policies are going to influence all the decisions of the entrepreneursregarding what to produce, how much to produce, of what quality toproduce where to produce and for whom to produce.

The entrepreneurs are to operate within the concessions and limits set by

the govt. It is in the interest of the potential entrepreneur to thoroughly scanthe govt. policies before taking decisions with regard to setting up hisenterprise.



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Government should maintain a proper distribution of economic power

between private and public sector.

They Encourage the tempo of industrialization by spreading

entrepreneurship to every city, town or village.

They should disseminate the entrepreneurial talent concentrated in a few

dominant communities to a large number of people of varied social and

economic groups.

Several institutes should be established to encourage the entrepreneurship.



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8.8. Education and Technical Know HowEducation and Technical Know How

Education, entrepreneurship and development are interrelated. Education helps

in the development of capabilities of individuals which facilitates the emergence

and growth of entrepreneurship

In the modern competitive world to survive the entrepreneurs have to keep aneye over the technological advances taking place around. These technological

development provide opportunities for the entrepreneurs to develop and produce

new product.



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9.9. Financial Assistance from Institutional SourcesFinancial Assistance from Institutional Sources

Liberal financial assistance from institution certainly boosts moral of young

entrepreneurs.

For seeking the assistance it is necessary for the entrepreneurs to have

some financial base and the institutions and banks also provide facilities

in the form of finance, consultancy, purchase of land, availability of fixed

assets on hire-purchase installment.

The government grant finance to the entrepreneur on concessional basis at the

low rate of interest

Various types of subsidies, concessions and facilities are given to attract

entrepreneurs in backward area.



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10.10. Accommodation in Industrial EstateAccommodation in Industrial Estate

The industrial estate are meant to provide wide variety of facilities to theentrepreneur. Including common production and testing facilities.

The provision of industrial estates has helped

Create new employment opportunity Disperse industry outside the concentrated cities Relocate the existing units operating in congested areas Raise the efficiency of small units through common facilities.



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11.11. Encourage from Large BusinessEncourage from Large Business

Reservation policy initiated by the government prohibits the large houses to

compete with the small.

12.12. Machinery on Hire-purchaseMachinery on Hire-purchase

Entrepreneurs are supplied machinery through liberalized terms and condition



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Creation of Employment OpportunityCreation ofEmployment Opportunity

Unemployment is one of the most important problems

confronting developing and underdevelopment countries

Entrepreneurs by setting up their own units enabling

themselves to get self employment.

With the setting up of more and more units by

entrepreneurs both on small and large scale, numerousjob opportunities are created for others.

Importance of Entrepreneurship inImportance of Entrepreneurship in

The Process Of EconomicThe Process Of Economic

DevelopmentDevelopment


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DevelopmentDevelopment Capital FormationCapital Formation Entrepreneurs as an organizer of factors of production

employs his own as well as borrowed resources for the

setting up of his enterprise. Entrepreneur mobilizes idle saving of the public and put

them to productive use. In this way he helps in capital

formation which is so essential for the industrial and

economic development of a country.


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DevelopmentDevelopment Balanced Regional DevelopmentBalanced Regional Development Small scale units can be set up in industrially backward

and remote areas with limited financial resources.

Use of Local ResourcesUse of Local Resources In the absence of any initiative local resources are likely

to remain unutilized.

Proper use of those resources can result in the progress or

development of the area and that too at lower cost.

f hi i


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DevelopmentDevelopment Improvement in Per Capita IncomeImprovement in Per Capita Income More enterprises will lead to more production, employment and

generation of wealth in the form of goods and services.

It will result in the increase in the overall productivity and per capita

income in the country.

Improvement in The Standard of LivingImprovement in The Standard of Living Entrepreneurs by adapting latest innovations helps in the production

of wide variety of goods and services.

By making efficient use of the resources they start producing more of

better quality and that too at lower costs which ensures easy

availability of better quality products at lower prices to the consumer

and results in the improvement in the standard of living of the

people.

I f E hi i


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DevelopmentDevelopment Economic IndependenceEconomic Independence

Entrepreneurs develop substitute goods being imported and

thus prevent over-dependence on foreign countries and at the

same time help in saving of previous foreign exchange. Through sale of their surplus products in foreign market

entrepreneurs enable a country to earn foreign exchange.

Export promotion and import substitution thus help in

promoting economic independence of the economy.

f hi iI t f E t hi i


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DevelopmentDevelopment Preventing Industrial SlumsPreventing Industrial Slums Dispersal of industries can help in the overcoming the problem

of industrial slums which results in over burdening of civicamenities.

Reducing Social TensionReducing Social Tension Unemployment amongst the young and educated people is

emerging as the major cause of social unrest.

Entrepreneurship Development can help in channeling thetalent of this section of society in the right direction by

providing proper guidance, training and assistance for settingup their enterprise.

I f E hi iI t f E t hi i


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DevelopmentDevelopment Facilitating Overall DevelopmentFacilitating Overall Development An entrepreneur acts as a catalytic agent for change which

results in chain reaction.

With the setting up of an enterprise the process ofindustrialization is set in motion.

This unit will generate demand for various types of inputsrequired by it and there will be so many other units which willrequire the output of this unit. This leads to more and more

unit there. Entrepreneurs, thus create an environment of enthusiasm and

convey a sense of purpose.


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Why do people engage in entrepreneurship and commit large parts of their

personal wealth to their business, despite comparably low returns and high risk

They hold highly undiversified asset portfolios,

entrepreneurs are less risk-averse than the rest of the population

Nonpecuniary benefits of entrepreneurship, such as being independent in the

workplace, also contribute to an explanation of entrepreneurial behavior private equity premium puzzle, denotes the observation that returns to private

business equity are low in spite of the high risk associated with it


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Private equity premium puzzle

An phenomenon that describes the anomalously higher historical real returns of

stocks over government bonds.

The equity premium, which is defined as equity returns less bond returns, has

been about 6% on average for the past century.

It is supposed to reflect the relative risk of stocks compared to "risk-free"

government bonds Investors are being rewarded very well for holding equity compared to

government bonds.


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Their results indicate that the average returns to private equity are not higher

than the returns to the public market equity index.

Why, then, do entrepreneurs invest so much in the equity of a single private

firm, which is likely to be much riskier than investing in the public equity

index?

private equity premium puzzle, is a question mark?


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The classical public equity premium puzzle in contrast, is concerned with the

much higher returns to public equity stocks in comparison to safe government

bonds.

High degree of risk aversion could explain why people invest in safe bonds at

all, given the spread in the returns.

This makes even more puzzling the observation that entrepreneurs take on evenlarger risks in private equity without, on average, earning higher returns than on

the public equity market.


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why people become entrepreneurs despite facing restrictions in risk

diversification.

These may be nonpecuniary benefits of control, such as being your own boss,


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Advantages of Social Entrepreneurship

Provides unrestricted earned income

Allows for financial self-sufficiency

Provides a better understanding of community needs

Offers more freedom to respond to community needs

Allows for increased and better use of financial resources

Enhances coordination between staff and board

Enhances credibility with other funders, clients, and caregivers

Sharpens organizational focus

Increases community impact

Improves research, planning, and marketing skills

Expands your most effective services

Stops or transfers weak or duplicative services

Adds new services that meet emerging or growing needs

Promotes continuous learning and improvement


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Business Environment

Supportive policies- Fiscal and monetary policies, which are essential to provide

a basis for a stable macroeconomic environment.

Structural policies that determine the overall economic framework in which the

business sector operates, such as those affecting labour markets, tax design,

competition, financial markets and bankruptcy laws.

Role models must be also presented in order to give entrepreneurs an idea of therewards and benefits of enterprise creation and reduce the stigma of failure.


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Why should we have some knowledge about barriers to entrepreneurship?

An understanding of the inhibiting factors or barriers will help prospective

entrepreneurs to develop a strategy to overcome them.

A systematic study of the barriers will lead to a proper understanding of the

fields or areas in which they occur.

Once the barriers are clearly identified, the society, government and othersupporting agencies can develop effective programmes to tackle the issues to

create a conducive entrepreneurial climate.

An insight into the barriers will lead to insight into the entrepreneurs

personality that is so essential in the process of entrepreneurship.


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examples of barriers arising out of social environment?

In some societies, the business is considered as a profession of lower hierarchy.

Business people are considered inferior to office-goes, engineers, doctors etc.

Such a social response to entrepreneurs can be a big hurdle in developing and

nurturing entrepreneurs.

Social factors such as insistence on conformity

an excessive protective attitude among children during their formative years

discouragement to mobility

will all thwart the following essential values of entrepreneurship.

creativity innovative spirit

sense of adventure.


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how can the economic environment create barriers for an entrepreneur?

The capital for setting up the new venture is not accessible for the entrepreneur

Non-availability of labour at reasonable cost.

If the labour market is unreliable and is fraught with undescipline and

selfishness, it will also become a barrier for entrepreneurship.

Shortfall in the availability of raw materials in the desired quality and quantity.

Inadequate infrastructure to transport the raw material to the factory.

Non-availability of easy access to the market for the finished goods.


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Do you think there are cultural barriers to entrepreneurship in our society?

This is evident from the fact that the cultural values in our society are bound by

conventionalism

status-quo

rituals

strong cultural taboos etc.

All these may curb the entrepreneurial spirit.


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The political environment can work against the interest of entrepreneurs in the

following ways

A political environment that is characterised by instability and insecurity will

discourage entrepreneurs.

Political policies can retard the growth of entrepreneurial ventures in a country.

Excessive interference in the form of controls, delays etc. from the governmentcan discourage prospective entrepreneurs.


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Personal barriers to entrepreneurship.

Motivational : Once the venture starts functioning, the obstacles faced in the

initial stages can make the entrepreneurs to lose their commitment and

consequently their level of motivation dips.

Perceptional : Certain perception barriers can hamper the progress of the

entrepreneur. Lack of a clear vision and misunderstanding can result in faultyperception. If the entrepreneur demands everything to be clear and well-defined

in order to develop a perception, it will lead to disappointment. As

entrepreneurs world is basically disorderly and ambiguous, the people who

excessively depend on order will find it a barrier to entrepreneurship.


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Starting a new business

Evaluating new business opportunities

Selection of an industry

Initial prospects study

Product marketing concept

Decision to proceed

Feasibility study

Project evaluation

Starting a new business

Location

Infrastructure

Industrial estate

Telecommunication

Transport


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Water

Machinery

Raw materials

Finance

Marketing

Project


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The Life Cycle of the Company


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Feasibility Analysis: Key Questions


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Five Forces Analysis


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Venture Finance

How is the capital structure determined

How much equity and debt

The mix (or proportion) of a firms permanent long-term financing representedThe mix (or proportion) of a firms permanent long-term financing represented

by debt, preferred stock, and common stock equity.by debt, preferred stock, and common stock equity.

Self funding

The Firms Capital Structure


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p

Capital structure is one of the most complex areas of financial decision making due to

its interrelationship with other financial decision variables.

Poor capital structure decisions can result in a high cost of capital, thereby lowering

project NPVs and making them more unacceptable.

Effective decisions can lower the cost of capital, resulting in higher NPVs and more

acceptable projects, thereby increasing the value of the firm.


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Capital Structure

Firm must decide how to raise long term funds Capital structure decision

The capital structure decision is one of the most important strategic decisions

faced by a firm

Can have large affect on the overall value of the firm

Direct impact on health of the firm and viability

Capital Structure


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Capital Structure

Many aspects to the decision:

How much debt and how much equity?

Equity preferred stock or common stock?

Maturity of debt long term versus short term?

Structure of debt bank debt vs. bonds, secured vs. debentures, use ofconvertible bonds, et cetera

What currency should debt be denominated in?

If capital structure is to be changed, how to accomplish it?

Other aspects


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Here, we will concentrate on the most basic question:

Debt versus equity how much of each? How much should the firm borrow?

Is there an optimal capital structure?

Assumption: The goal of the financial manager is to maximize the value of thefirm.

Makes capital structure decision in order to help accomplish this.

Types of Capital


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Types of Capital

F t Aff ti C it l St t


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Factors Affecting Capital Structure-

Factors Affecting Capital Structure- which of type of fund- equity or debt Risk and Return Analysis Debt fixed obligation to pay interest, Equity will affect control ability of the

management Cost Factor- Debt is cheaper as returns fixed and also tax deductible. Floatation

cost is also less.

Time Factor- During boom and prosperity company can issue equity shares,during days of depression firm can go for debt capital Flexibility Factors

Wh S M V t S lf F d d?


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Why are So Many Ventures Self-Funded?

Many new ventures are initially funded by the entrepreneur, because:

No intellectual property rights or licenses to give them a competitiveadvantage

Many lack a significant track record of success

Many ventures have not fully defined themselves in the marketplace, whichmakes investment risky.

Investors see new ventures as too risky

Fi i f E t i


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Financing of Enterprise

Need for financial planning- Finance is the life blood of enterprise Financial planning is a financial forecast made for the enterprise in the

beginning itself

How much money is needed

Where will money come from

When does the money need to be available Estimation of money needed

Adequate money to pay the purchase considerations

Sufficient capital at disposal to support business operations up to 3 initial

months of the enterprise

Enough provision should be made to meet unexpected business expenses. These three amounts will constitute the total money needed to start the

enterprise

Financial Objectives of a Firm


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8-79

Primary Financial Objectives of Entrepreneurial Firms




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8-80


Profitability Is the ability to earn a profit.

Many start-ups are not profitable during their first one to three years

while they are training employees and building their brands.

However, a firm must become profitable to remain viable and provide a

return to its owners. Liquidity

Is a companys ability to meet its short-term financial obligations.

Even if a firm is profitable, it is often a challenge to keep enough

money in the bank to meet its routine obligations in a timely manner.



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8-81


Efficiency Is how productively a firm utilizes its assets relative to its revenue and its

profits.

Southwest Airlines, for example, uses its assets very productively. Its

turnaround time, or the time its airplanes sit on the ground while they

are being unloaded and reloaded, is the lowest in the airline industry. Stability

Is the strength and vigor of the firms overall financial posture.

For a firm to be stable, it must not only earn a profit and remain liquid

but also keep its debt in check.

Factors Affecting Financing


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Factors Affecting Financing

There are four basic factors that determine how a firm is financed:

(1) the firms economic potential

(2) the size and maturity of the company

(3) the nature of the firms assets

(4) the personal preference of the owners as they consider the tradeoffs

between debt and equity

An entrepreneurial firm that has high growth potential has many more possible

sources of financing than does a firm that provides a good lifestyle for the

owner but nothing in the way of attractive returns to investors.

The size and maturity of a company have a direct bearing on the types of

financing that are available.

Tangible assets serve as great collateral when a business is requesting a bank

loan; intangible assets have little value as collateral.

Debt and Equity Financing


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Debt and Equity Financing

Choosing between debt and equity financing involves tradeoffs with regard topotential profitability, financial risk, and voting control.

Borrowing money rather than issuing common stock (ownership equity) creates

the potential for higher rates of return to the owners and allows the owners to

retain voting control of the company, but it also exposes the owners to greater

financial risk.

Issuing common stock rather than borrowing money results in lower potential

rates of return to the owners and the loss of some voting control, but it does

reduce their financial risk.


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Internal sources- Owners own money-Equity External sources

On the basis of extent of performance

Fixed capital

Working capital

On the basis of period of use

Long-term capital

Short-term capital

How Do Entrepreneurs Raise Money?


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How Do Entrepreneurs Raise Money?

Sweat Equity Friends, Family

Banks

Savings, 2nd Mortgage, etc.

Angels

Venture Capitalists

Lender (Banks) Expectations


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Lender (Banks) Expectations

Good Business Track Record Ability to Repay

Staying Power

Community impact

Collateral

< 100% funds

Angel Investor Expectations


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Angel Investor Expectations

Return Ego

Involvement

VC Investor Expectations


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VC Investor Expectations

Clear understanding of the business: Competitive Advantage- what is the value proposition

Huge Market- do you understand it.

Strong Management Team

Strong Marketing and Sales Plan

Some Skin in the Game

Exit Strategy

Return


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What Does a VC Do?

Organizes Partnership

Raises Capital

Receives Management Fee

Creates Deal Flow in Focus Area: Stage of Company Size of Deal Business Area Geography

Performs Due Diligence

Syndicates Deals

What Does a VC Do?


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Invests, but is not just a financial intermediary: Supplements Management Team Sits on Board Arranges Exit and Liquidation Creates Wealth for:

Workers

Investors Entrepreneur Society


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What Does a VC Look for in an Investment Opportunity?

Management, Management, Management Full time Committed & enthusiastic Skilled Willing to listen

Clear, Concise Executive Summary Written Business Plan with Financials

Feasible Business Model

Knowledge & understanding of Industry, Market, Competition


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What Does a VC Look for in an Investment Opportunity?

Proprietary Intellectual Property Realistic Time Frame/Milestones

Revenues Via Business Model

Clean Balance Sheet

Uses of Funding

VC Exit Strategy

Raising Money is as Much of a Strategy as the Business Is


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g y gy

Raising money is a process Prepare Sales documents- Plan & Presentation Must pursue multiple simultaneous paths to finance Start looking before you need it its a long process, network is critical

Identify right partners Industry focus Investment phase segment Product

Valuation depends on selling the opportunity

Key Elements for Presentations to Investors:


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y

Need a Formal Business Plan, but also

Concise Executive Summary

Complete, Realistic Financials

Know the business

Barriers to Entry

Competitive Analysis

Strong Management Team

Scalability

Business Plan Content


95/150

Executive Summary Company Description

Product/Services Description

Industry Overview

Market Analysis

Competitors/Customer

Marketing and Sales Plans

Development Operations

Management/Personnel

Financial Summary

Financials

Offering

Appendices

Key area- Competitive Analysis


96/150

y p y

Clearly understood value proposition

Knowledge of industry

Realistic analysis of potential market

Ability to protect intellectual property/patents

Customer references

Key area- Strong Management Team


97/150

y g g

Experience Entrepreneurial Industry

Advisors Board of Directors

Board of Advisors Professional service providers Lawyers Accountants Consultants

Key area- Exit Strategy


98/150

Key area Exit Strategy

Venture companies are not lifestyle companies Know your exit before you enter

Exits change with the marketplace

Advisors and board are critical

Company structure can help or hinder

No exit strategy = no venture money

Stages in venture capital


99/150

Seed Money: Low level financing needed to prove a new idea. Start-up: Early stage firms that need funding for expenses associated with

marketing and product development.

First-Round: Early sales and manufacturing funds.

Second-Round: Working capital for early stage companies that are selling

product, but not yet turning a profit. Third-Round: Also called Mezzanine financing, this is expansion money for a

newly profitable company

Fourth-Round: Also called bridge financing, it is intended to finance the "going

public process

Advantages of venture capital


100/150

Economy Oriented- Helps in industrialization of the country

Helps in the technological development of the country

Generates employment

Helps in developing entrepreneurial skills

Investor oriented-

Benefit to the investor is that they are invited to invest only after company starts

earning profit, so the risk is less and healthy growth of capital market is

entrusted.

Profit to venture capital companies. Helps them to employ their idle funds into productive avenues.


101/150

Entrepreneur oriented- Finance -The venture capitalist injects long-term equity finance, which provides

a solid capital base for future growth.

Business Partner -The venture capitalist is a business partner, sharing the risks

and rewards.

Mentoring

Alliances -The venture capitalist also has a network of contacts in many areas

that can add value to the company

Facilitation of Exit -The venture capitalist is experienced in the process ofpreparing a company for an initial public offering (IPO) and facilitating in trade

sales.

Bank Loans


102/150

Bankers primarily make business loans in one of three forms: lines of credit,term loans, and mortgages.

In making a loan decision, a banker always considers the five Cs of credit:

(1) the borrowers character

(2) the borrowers capacity to repay the loan (3) the capitalbeing invested in the venture by the borrower

(4) the conditions of the industry and economy

(5) the collateralavailable to secure the loan


103/150

Obtaining a bank loan requires cultivation of a banker and personal selling,including a presentation that addresses:

(1) how much money is needed

(2) what the venture is going to do with the money

(3) when the money is needed

(4) when and how the money will be paid back

Other detailed financial information might be requested, including three years of

the firms historical financial statements, the firms pro forma financial

statements, and personal financial statements showing the borrowers net worth

and estimated annual income.


104/150

An entrepreneur should carefully evaluate available banks before choosing one,basing the decision on factors such as the banks location, the extent of services

provided, and the banks lending policies.

In negotiating a bank loan, the owner must consider the accompanying terms,

which typically include the interest rate, the loan maturity date, the repayment

schedule, and the loan covenants.

Business Relationship Financing


105/150

Business suppliers can offer trade credit (accounts payable), which is the sourceof short-term funds most widely used by small firms.

Suppliers also offer equipment loans and leases, which allow small businesses

to use equipment purchased on an installment basis.

Asset-based lending is financing secured by working-capital assets, such as

accounts receivable and inventory.

Private Equity Financing


106/150

Business angels are private individuals, generally having moderate to significantbusiness experience, who invest in others entrepreneurial ventures.

Formal venture capitalists are groups of individuals who form limited

partnerships for the purpose of raising capital from large institutional investors

Government Loan Programs


107/150

The federal government helps new businesses get started through the programsand agencies of the Small Business Administration (SBA), which include:

Loan Guaranty Program

small business investment companies (SBICs)

the Small Business Innovative Research (SBIR) Program

State and local governments finance new businesses in varying manners, though

programs are generally geared to augmenting other sources of funding.

Community-based financial institutions are lenders that use funds from federal,

state, and private sources to serve low-income communities and small

companies that otherwise would have little or no access to startup funding.

Other Sources of Financing


108/150

Large companies may finance smaller businesses when it is in their self-interestto have a close relationship with the smaller company.

Stock sales, in the form of either private placements or public sales, may

provide a few high-potential ventures with equity capital.

Sources of finance


109/150

Internal sources- equity, deposits, loans, retention of profits External sources- Borrowings from relatives, from banks, credit facilities from

commercial banks, term loans from FI, venture capitalists

Optimum capital structure

Mix of debt and equity which will maximise the market value of a company

Minimum cost and the maximum yields Adopted capital structure should be flexible enough to fulfil the future

requirements of the capital as and when needed

Use of debts should be within the repaying capacity of the enterprise

Capital structure should not be a control diluting one

Factors determining capital structure


110/150

Nature of business Size of the enterprise

Trading on equity

Cash flows

Purpose of financing

Provision for future


111/150

Term loans Short term loans

Long term loans- for acquiring fixed assets

Sources of term loans

Issue of shares

Issue of debentures Loans from financial institutions

Loans from commercial banks

Public deposits

Retention of profits

Difference between shares and debentures

Key Differences

Separation of Investment and Financing Decision


112/150

Separation of Investment and Financing Decision

How is entrepreneurial finance different from corporate finance?

In Corporate:

Financing decisions are often made after investment decisions

Financing decisions often made independently of wishes of firm owners

Money raised is allocated among many projects

OPPOSITE IS TRUE FOR MOST

ENTREPRENEURIAL ENTITIES

Key Differences

Non diversification of Risk


113/150

Non-diversification of Risk

Diversification More Difficult Owner often cannot diversify away from the firm; too much personal assets tied

into the firm

Firm may have only a few projects, so risk of each cannot be diversified

successfully

Key Differences

Managerial Involvement by Outsiders


114/150

g y

Entrepreneurial entity investors are active protect their own investments by staying knowledgeable about the firm act as advisors to the firm provide safety net recommend professional service providers

Key Differences

Necessity to Sell the Idea to Outsiders


115/150

y

Corporations use signaling to surreptitiously give information to the market toentice new investors dividend decisions, stock issues or repurchases, pre-announcement earnings

statements

Entrepreneurs have to take potential investors into their confidence no hidden agendas

Key Differences

Incentive and Contract Issues


116/150

Corporate entityalign interests of management with interests of owners managerial stock options and performance bonuses

debt covenants pit creditors against management and owners

Entrepreneurial entityowner IS the manager

outside investors will demand protective contracts and active managerial role

owners will want to maintain control of the firms equity More flexibility for mutually beneficial contracts

Importance of self-interest


117/150

Owner goals usually a mix: financial and non-financial

Become a large public firm Achieve independence

Increase # locations Survive financially

Current family support Live particular life style

Future family support Employ family members

Increase value of the business forfuture sale

Get off welfare or avoidunemployment

Provide inheritance for children Render a needed service

Be part of challenging or creativeventure

Key Differences

Exit Strategies Needed


118/150

g

Corporate Entity Owners investors have market liquidity

can sell out whenever they choose

Entrepreneurial Entity Owners

no liquidity to sell out

have to create liquidity events

Youve Cleared the Hurdles Youve Won the Race What Now?


119/150

youve got to make the transition from entrepreneur to CEO facing personalchallenges

To meet these challenges, the entrepreneur must simultaneously:

Extend his time horizon (from today and next week, to months and years in the

future)

Change predominate behavior patterns from doing and deciding, to delegating

and managing, to leading and inspiring Shift his focus from the internal and operational aspects of the company to the

external and strategic elements of the broader competitive environment

What is Leadership?


120/150

The entrepreneur must make a successful transition to the role of CEO become a

leader! What is leadership?

The most admired leaders havestrong beliefs about matters of principlean unwavering commitment to a clear set of valuespassionate about theircauses.

Leadership is a relationship between those who aspire to leadand those who

choose to follow Leaders mobilize others to get extraordinary things done in organizations

[they] create a climate in which people turn challenging opportunities intoremarkable successes

The Life Cycle of an Entrepreneurial Firm


121/150

TIMETIME

SALES

SALES

Period of TransitionPeriod of TransitionStrategy, product positioning,Strategy, product positioning,

marketing, resources, managementmarketing, resources, management

team, infrastructure, managementteam, infrastructure, management

systems, culture, leadership roles,systems, culture, leadership roles,

risk managementrisk management

StartupStartup

Product, InitialProduct, Initial

CustomersCustomers

Sustained and Profitable GrowthSustained and Profitable Growth

Expansion, diversification, new productExpansion, diversification, new product

developmentdevelopment

MaturityMaturity

The Corner:The Corner:a criticala critical

turning pointturning point

3 yrs 5yrs3 yrs 5yrs

$50M$50M

Leadership Roles in the Life Cycle of the Firm


122/150

TIMETIME

SALES

SALES

Initial GrowthInitial Growth

Direction SetterDirection Setter

Drive Sales &Drive Sales &

Market ShareMarket Share

StartupStartup

Doer/Decision MakerDoer/Decision Maker

Markets & ProductsMarkets & Products

Rapid GrowthRapid Growth

Lead the MarketLead the Market

Team Builder: Acquire,Team Builder: Acquire,

Integrate & AlignIntegrate & Align

ResourcesResources

Continuous GrowthContinuous Growth

Organizational BuilderOrganizational Builder

Strategic InnovatorStrategic Innovator

Chief of cultureChief of culture

The Challenges of Growth


123/150

Classic Entrepreneurial StrengthsVisionary and pioneeringAlways searching for new

opportunities and challengesPassionate and energeticDriven to achieveHigh standards of excellence

Creative, innovativeProactive, future-focusedSmart, capable, decisiveSense of urgencyConfident risk-takerProblem solver

Determined to create wealth and makea difference

In order to succeed, the entrepreneur mustalso learn to:Plan, balancing short-term and long-term

goals of all constituenciesCommunicate to produce alignmentBuild a team and facilitate their working

as a team

Resolve conflictsUnderstand that people and culture areyour key assets

Learn from every success and failure youhave, and from mentors and othersuccessful entrepreneurs

Startup Stage


124/150

Company Goals

Understand your personal goals and objectives Figure out product and concept that customers want to buy Identify initial customers and build relationships Develop limited organizational capabilities

Leaders Role Doer/Decision-maker

Clearly in charge; making all of thedecisions

Rest of the organization reports

to one leader

TIMETIME

SALES

SALES

Key Questions: Is it Right for You?


125/150

For entrepreneurs, setting a direction involvespersonalas well as business choices.

He suggests that entrepreneurs must continually ask themselves what business theywantto be in and what capabilities they would like to develop.

Developing a strategy consistent with the entrepreneurs personal strengths andobjectives is critically important.

Setting the Direction: Personal Goals


126/150

Before they can set goals for a business, entrepreneurs must be explicit about their

personal goals: Why do they want to launch their new venture?

Achieve independence? Control my own destiny? Serve others?

What are your financial objectives? Quick profits? Build a sustainable enterprise to pass on to my children?

What is the end game? Do you have an exit strategy? Only when entrepreneurs are clear about what they want from their businesses does

it make sense to ask three key questions:

What kind of enterprise do I need to build?

What risks and sacrifices does such an enterprise demand?

Can I accept the risks and sacrifices?

Initial Growth Stage


127/150

Company Goals Set the direction (articulate a strategy) Launch differentiated product (competitive advantage) Capture market share Grow revenues

Leaders Role Delegator/direction-setter Monitor progress Ultimate decision-maker for major decisions

TIMETIME

SALES

SALES



128/150

Key Challenges Articulate and reinforce your vision for the company Understand your personal goals for the long term Use scarce resources creatively Watch critical performance indicators, especially financial ones. Integrate input from stakeholders with your own perspective Hire multitalented people whose values match yours Use mentors



129/150

Personal Changes in Leadership Role

Focus, focus, focus Manage proactively, not reactively Begin delegating responsibility, establish systems and structure with clearly

defined roles, responsibilities Stop making all the decisions, solving all the problems, answering all the

questions

Trust others and hold them accountable for results Start planning for the future instead of reacting Share the credit and limelight with others Spend more time working on the big picture

Rapid Growth Stage


130/150

Company Goals

Gain significant market share Become a market leader and ward off competitors Build infrastructure and team for aggressive growth Hire and integrate a lot of new people

Leaders Role

Team Builder Coach Planner Communicator

TIMETIME

SALES

SALES

Rapid Growth Stage


131/150

Key Challenges

Hire people who are smarter than you to fill gaps in functional expertise Define new roles/responsibilities build a management team that works

together Lead team to create a strategic market-focused vision and plan for growth Create processes to align employees with companys vision and culture Develop a meaningful communication process

Be a champion for the customer Listen to and consider the views of all constituencies

Rapid Growth Stage


132/150

Personal Changes in Leadership Role Use the companys plan to focus and track its efforts Shift your focus from doing work to managing and coaching others Stop being the ultimate decision-maker develop a consensus-oriented

decision-making style Learn to facilitate effective teamwork Encourage all ideas to be heard in a healthy debate Stop tolerating organizational misfits Admit you dont have all the answers focus on unleashing the creativity of

others Be a champion for effective, efficient processes

Continuous Growth


133/150

Company Goals

Dominate the industry Expand to new markets and grow new niches in current markets Move from products to solutions Brand the company and its people as thought leaders

Leaders Role

Change catalyst Organization builder Strategic innovator Chief of culture

TIMETIME

SALES

SALES

Continuous Growth


134/150

Key Challenges

Recognize the need for fundamental change and proactively lead the discoveryand implementation of a strategic plan for dramatic new growth

Develop the executive team so that each member becomes a company leader;empower the team to run day-to-day operations while you focus only onstrategic issues

Find and develop high-level partnerships and relationships to leverage for

growth Institutionalize the culture and values, and ensure that reward and recognition

programs are effectively aligned


135/150

Caitlin & Matthews: Leadership Roles in the Life Cycle of the Firm


136/150

TIMETIME

SALES

SALES

Initial GrowthInitial Growth

Direction SetterDirection Setter

Drive Sales &Drive Sales &

Market ShareMarket Share

StartupStartup

Doer/Decision MakerDoer/Decision Maker

Markets & ProductsMarkets & Products

Rapid GrowthRapid Growth

Lead the MarketLead the Market

Team Builder: Acquire,Team Builder: Acquire,

Integrate & AlignIntegrate & Align

ResourcesResources

Continuous GrowthContinuous Growth

Organizational BuilderOrganizational Builder

Strategic InnovatorStrategic Innovator

Chief of cultureChief of culture

Building a Management Team


137/150

Building a management team is critical to the survival of the enterprise: it

requires careful planning, a clear understanding of both organizational andpersonal objectives, a willingness to accept help and criticism, the confidence

to give up control, and an abundance of personal humility.

The skills, aptitudes and motivations required to launch a new venture are very

different from those required to lead and manage a rapidly growing firm in a

competitive market environment

Making that transition is frequently the toughest challenge for a young

entrepreneur!

Letting Go


138/150

The development of CEO-level managerial and leadership skills requires experience,mentoring and practice that frequently spans decades of personal growth

It is asking a great deal of a young entrepreneur, focused on overcoming technical,marketing and financial challenges to simultaneously acquire the full portfolio of

managerial and leadership skills necessary to ensure the success of his venture as thechallenges shift from early growth to operational effectiveness, market leadershipand a successful exit.

It is frequently essential for the entrepreneur to recognize his limitations and turn

over the reins to an experienced manager, in order to ensure the ultimate success ofthe venture he has nurtured from inception.

Internal driving factors


139/150

organization of machinery and equipment, technological capacity,

organizational culture,

management systems,

financial management

employee morale.

External driving factors


140/150

Competition (what are they doing?) Customer behavior (needs, wants, and desires)

Industry out look (local, national, global)

Demographics (the change populations, there density, etc.)

Economy (are we peaking, or moving negatively)

Political movements and/or interference Social environment

Technological changes

General environmental changes

Government interference (laws, regulations, policies, ect.)

Preparing for Change


141/150

Provide a compelling reason for change Make aims and tangible results of change clear

Make information on changes freely available

Get commitment from management

Do as much as possible, as quickly as possible dont change piecemeal

Address cultural components of change Consult staff on process of change

People orientated actions for Change


142/150

1.Create sense of urgency

2. Brief people on effect of changes

3. Help people deal with change

4. Keep people informed about changes as they progress

5. Break changes down into small parts

6. Empower staff top make changes themselves

7. Demonstrate commitment to change from the top until project is complete

Yukl (2002)


143/150

Public policy


144/150

How do government policies and regulation affect entrepreneurship?

What can governments do to affect the level of entrepreneurship

Government policy and regulatory framework


145/150

Recognition and promotion of early-stage investments

Angel investing: An angel investor is an individual who invests his own money

directly in a seed stage venture in which there is no family connection

Early-stage venture capital investing: Investments in an early stage ventureby an entity which is registered with the appropriate financial regulatory

authority

Impact investing: Investments in businesses and social ventures with the

intention to generate measurable social and environmental impact alongside a

financial return

Impact investing is based on the conviction that such investments play a crucial

role in addressing social and environmental challenges.

Strategic policy areas


146/150

Fuelling entrepreneurial mindsets Helping entrepreneurs handle risk

Gearing entrepreneurs for growth and competitiveness

Improving the flow of finance

Creating a more SME friendly regulatory and administrative framework


147/150


148/150

Ease exits for investors: Policy framework for easier exits will encourage earlystage investments by Angels and others:

i. Provide appropriate fiscal incentive on capital gains to Angels and other early

stage investors.

ii. Simplify IPO requirements including permitting overseas listing without

requirement of domestic listing and exclusion of such investors from lock in

provisions.

iii. Enable preferential treatment of such investment in liquidation

Establish expeditious procedures for closing of businesses:


149/150

Permitting pension funds, insurance funds and provident funds to invest a smallpart of their corpus in early-stage venture funds could significantly improve

capital flows.

Special incentives such as tax credits could be provided to HNIs, corporates and

institutions that invest in early stage venture funds and to angel investors.

Banks must also be encouraged to invest in early-stage venture capital funds by

treating such investments as priority sector funding Expand the lender base by incentivizing banks to offer SIDBI-like schemes to

early stage ventures. Banks to create capacity and capability for lending to such

ventures.

The media TV, print and online should disseminate entrepreneurial success

stories to inspire and encourage entrepreneurship. Creating an online portal that provides comprehensive information to a new

entrepreneur is highly valuable


150/150

Entrepreneurship is found to be closely linked to equitable economicdevelopment.

This leads to improvement in living standards and increase in level of happiness

and satisfaction, leading to social harmony and reduction in crime.

Government and regulators must have a mindset that prioritizes

entrepreneurship as a national goal and aim to become service providers to

emerging businesses.

Entrepreneurial Economics

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