Topic 7 - Entrepreneurial Finance PDF

Topic 7: Entrepreneurial Finance – Focuses on the financial management of new ventures – Comprise of capital structure, funding sources & financial planning necessary for startups and established business to thrive – All these concepts is significant for making informed f...

Topic 7: Entrepreneurial Finance – Focuses on the financial management of new ventures – Comprise of capital structure, funding sources & financial planning necessary for startups and established business to thrive – All these concepts is significant for making informed funding decisions and securing necessary resources for growth Stages of Entrepreneurial Funding (important for entrepreneurs to align their funding strategies with their company’s lifecycle and specific needs). Seed (First step for startups - building a strong network and crafting a compelling pitch are critical for attracting initial investment & laying a solid foundation for future growth) – Personal savings – Small investments from fam & friends (F&F) – Crowdfunding – Incubators – Angel investors – Early-stage investor in a startup that provides initial seed money for startup businesses, usually in exchange for ownership equity in the company 3 – Entrepreneurs and founders will find angel investors among their family and friends. – One-time infusion of seed money, or they may provide regular injections of cash designed to bring a product to market. – Aren’t providing loans but putting money into an idea they like, with the expectation of a reward only if and when the business takes off.. Early (Demonstrating market traction & a solid business model can significantly enhance 2 chances of securing funding during this crucial phase) – Angel investors or funds – Venture capitalists or private equity – Accelerators – Strategic partnerships. Growth (Companies seek larger investments to scale operations. A well-defined growth strategy & clear financial projections are vital for attracting these types of investors & ensuring sustainable development) – Self-sustaining – Bank loans – Private equity sale – Initial public offering (IPO) – First time that a private company sells shares of its stock to the public on a stock exchange 1 – The company has transitioned from private to public ownership, which is why an IPO is often referred to as "going public." – An opportunity for a company to raise significant capital—to help it fund new growth, for example, or pay off debt – Allows private investors, like founders, angel investors, and family members, to cash out, often realizing gains on their investment Funding Strategies – Enhance financial opportunities & facilitate business growth – Crucial for navigating the complex landscape of entrepreneurial finance as entrepreneurs face numerous challenges in capital acquisition Traditional Funding Sources (require extensive documentation & a strong business plan. Understanding the requirements & expectations of these sources is critical for securing funding) – Bank loans – Money is given to another party in exchange for repayment of the loan principal amount plus interest. – Lenders will consider a prospective borrower's income, credit score, and debt levels before deciding to offer them a loan – Venture capital – A form of private equity (firm that establish a fund and use it to buy multiple businesses with the goal of selling each one within a few years at a profit/target underperforming business and after purchasing the company, use their management expertise to improve profitability) and a type of financing for startup companies and small businesses with long-term growth potential. – Comes from investors, investment banks, and financial institutions – Angel investors – Early-stage investor in a startup that provides initial seed money for startup businesses, usually in exchange for ownership equity in the company – Entrepreneurs and founders will find angel investors among their family and friends. – One-time infusion of seed money, or they may provide regular injections of cash designed to bring a product to market. – Aren’t providing loans but putting money into an idea they like, with the expectation of a reward only if and when the business takes off. – Crowdfunding – Popular alternative for raising capital (small amounts of money) from a large number of investors to finance a new business venture – Platforms like “Kickstarter,” “Indiegogo” & “GoFundMe” allow entrepreneurs to pitch their ideas to the public – Leverages the wide reach of social media and crowdfunding websites to connect investors and entrepreneurs, potentially increasing entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives, and venture capitalists. – Grants & Competitions – To support innovative startups – Funds don’t require repayment (hence an attractive option for entrepreneurs) – Competition can be fierce so applicants must be well-crafted to stand out – Bootstrapping – Entrepreneur starts a company with little capital – Founding and running a company using money other than outside money like using only personal finances or operating revenues generated from the new business to fund operations – Allows entrepreneurs to maintain more control & equity but it can increase personal finance strain – Requires careful budgeting & strategic planning – Peer-to-Peer (P2P) Lending – Allows individuals to obtain loans directly from other individuals, without going through a bank or other financial institution – P2P lenders are individual investors who typically want a better return on their cash savings than they would earn with a bank account or money market fund – P2P borrowers seek an alternative to traditional banks or a lower interest rate than they could get at one – P2P lending platforms also impose fees on borrowers or lenders and sometimes both – P2P lending websites connect individual borrowers directly to individual lenders. Each platform sets its own rates and term  – Offers lower rates & more flexible terms compared to traditional banks – Entrepreneurs must assess the risks & benefits before pursuing this option – Impact Investing – Making investments to help generate beneficial social & environmental effects alongside generating financial returns/gains – Investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact – Entrepreneurs with a mission-driven approach can attract investors who prioritise sustainable & ethical practices – This strategy enhances brand loyalty & market reach – Strategic Partnerships – Forming strategic partnerships can provide access to additional resources, expertise & funding opportunities – Collaborating with established companies or organisations can enhance credibility & open doors to new markers & customer bases – Mutually beneficial business relationship that can help your business grow at reduced costs – Are usually non-competing businesses and often share both the risks and rewards of the decisions of both companies – The goal of a strategic partnership is to create value for each company by offering information, services and other resources that the other company otherwise either has no access to or could only access through a financial exchange – Offer each company involved the chance to reduce expenses and increase business – A company that either offers services you can use within your own company or that you can offer to your customers and clients while offering your own services to their customers – Incubators & Accelerators – Offer entrepreneurs mentorship, resources & funding in exchange for equity – These programs can significantly enhance a startup’s chance of success by providing structured support & access to a network of investors – Incubators allow entrepreneurs to nurture their ideas and convert them into fully functional business models over an unlimited period. On the other hand, accelerator programs have a fixed duration, usually three to six months, to ensure rapid growth and scaling Navigating Regulatory Challenges – Entrepreneurs must be aware of the regulatory landscape that affects funding options – Compliance with laws and regulations is crucial to avoid legal issues – Staying informed about changes in policies can help navigate potential challenges – Complexities and difficulties organizations face when navigating legal and compliance frameworks set by governing bodies. These issues often arise due to frequent changes in regulations, differing rules across jurisdictions, and the need for constant updates to policies and practices