Financing Entrepreneurial Ventures - Essay Example

Financing entrepreneurial ventures Introduction The world over, people have novel ideas of a service or product that wouldchange lives, help a community, or bridge a gap in the market. The most essential aspect, apart from a good management team, is the capital to realizing the delivery of the product or service. Most ideas will start with an individual or a small group of people, who may start small. This means that the individuals will attempt to finance their entrepreneurial venture both from informal and formal sources of finance. This essay examines the financing options available to the entrepreneurs and the steps the entrepreneur should take to determine the kind of financing the business requires. Business finance is a wide area and an exhaustive examination of each is not possible. However, the essay will bring out the disadvantages of each method of financing (Galloway 382). The bias may lie on the start-ups given that the initial stages of the business are the most difficult to finance since the risk is usually highest. There are two broad categories of business finance: debt financing and equity financing. These are ways of sourcing the capital that a business requires either to start operating, continue its day to day operation operating, or to attain a given strategic objective. Debt financing has the characteristic that the business or the entrepreneur has to repay with interest. The debt capital is a liability. Equity financing is the investment of the entrepreneur and other owners into the business (Krulikowski 245). This is risk capital. The distinction between debt and equity is that debt is a "loan" to the business while equity represents the extent to which one "owns" the venture. This leads to the issue of ownership and control of a business venture which complicates many startups. Debt financing maintains ownership while equity financing cedes some percentage ownership of the business venture. This is a significant consideration when choosing the type of financing for the business. Steps To Determine the Type of Financing There is no shortage of investors in the world, but there is a shortage of successful entrepreneurs. However, regardless of the source of financing, the entrepreneur must carefully evaluate the type of financing that the business requires (Krulikowski 267). This will depend on several factors. Firstly, there is a distinction on whether it is a startup or an established business. The size of operations will also determine the financing. The entrepreneur must have a business plan for the particular venture he or she plans to undertake. This means that there should be a description of the product or service that the business is offering. There should be a clear way of protecting the concept in order to realize value of investment. There should be a sustainable market that the product or service is targeting. The next aspect regards finances. There should be an evaluation of the size of the market to determine how much revenue the product can generate. There should also be an evaluation of costs in a realistic manner. There should be a clear estimate of how much finance the venture requires. In order to inspire confidence, the entrepreneur should have a management team that has a good track record and can deliver. The stage of the business or the product life cycle will determine the amount of capital the business requires and the suitable type of financing. The different levels include feasibility, development of prototypes, product launch, and business expansion. This list is not exhaustive but provides insight into differences in business operations (Galloway 382). The entrepreneur should evaluate the strategic benefits of each type of financing. Finally, there should be a clear exit strategy for the financing. The strategies include buy back, takeover, public listing, and offering of forms of securities. This is especially essential for debt financing but may also be attracting to equity financiers (Krulikowski 287). The entrepreneur should consider all the aspects in the foregoing discussion as the initial steps in the quest to finance a business venture. Types of Financing Most startups began as ideas that most people would not consider financing. Even with a detailed business plan, the entrepreneur must begin by putting down his or her own money and time. Therefore, the first source of finance is personal savings and informal loans from friends and family (Galloway 382). This is the seed money that the entrepreneur would use to finance prototype development. This may form equity or debt. In order to start trading, the entrepreneur would attract grants from specialized organizations and loans from bank using personal security. The monies at this point will form equity of the entrepreneur. When trading starts in earnest, the sources of funds of the entrepreneur may not be enough to sustain the business (Galloway 382). The risks are still high but this is where angel investors come in. These are wealthy people who put in significant amount of money into business ventures, usually in an informal arrangement. The money can either be equity or debt. The advantage of Angel investors is that they may provide a network of contacts for further financing or for professional assistance or consultation. These people may want to engage hands on in the business. The disadvantage of this method of financing is that if the business fails, the angel bears considerable loss. When a sufficiently established business requires capital in the range of five to fifteen million dollars, the venture capitalists come into the picture. These individuals or corporations provide finance to the companies in exchange for a share of the capital. There is usually significantly high risk at this stage so that the business cannot secure loans. The obvious advantage is the provision of equity for the business to grow. However, the entrepreneur may lose control of the venture with disastrous consequences such as failure of the business. This is because the passion and vision of the individual may be the key drivers in the whole venture (Galloway 382). Private venture capitalists refer to individual financiers while corporate venture capitalists are corporations that invest professionally. The corporation may be advantageous because one can evaluate the history of their operations. When the company is mature, it can acquire loans from banks, use instruments in the money market, or raise equity in the stock market. These options have advantages and disadvantages. However, these are not obvious because debt or equity have associated benefits depending on the strategic goals of the company. For example, debt usually has tax incentives for the company. Works cited Krulikowski, Anne E. "A Workingmans Paradise": The Evolution Of An Unplanned Suburban Landscape." Winterthur Portfolio 42.4 (2008): 243-285. Literary Reference Center Plus. Web. 9 Feb. 2013. GALLOWAY, J. C. (1980). An analysis of the employee stock ownership plan (esop) financing technique with examples of its use prior to 1977. University of Virginia). ProQuest Dissertations and Theses, , 382-382 p. Retrieved from http://search.proquest.com/docview/303077958?accountid=35812. (303077958). Read More