5 Raising Finance.ppt

L5: Raising FinanceL5: Raising Finance

EC10: Commercialisation & EC10: Commercialisation & InnovationInnovation

How to build structures and deliver How to build structures and deliver results for stakeholders.results for stakeholders.

5. Raising Finance5. Raising FinanceL1: Team L1: Team

BuildingBuilding 22

Raising Finance OutlineRaising Finance Outline

Seeking Venture CapitalSeeking Venture Capital Financial SupportFinancial Support Due DiligenceDue Diligence Venture Finance StrategiesVenture Finance Strategies

1. 1. Seeking Venture CapitalSeeking Venture Capital

EC10 Innovation & EC10 Innovation & CommercialisationCommercialisation

5. Raising Finance5. Raising Finance 44

The Route to CommercialisationThe Route to Commercialisation

Idea Research

Development

Source Scottish Enterprise - Commercialisation 1997

Testing

Prototype

ActiveSales

MarketPenetration

IntoToMarketMarket Identification


Seeking Venture Capital (1)Seeking Venture Capital (1)

Target a Venture Capital PartnerTarget a Venture Capital Partner– Does the VC team have experience with this sort of technology Does the VC team have experience with this sort of technology

applications?applications?– Do they take an active or passive role in the management of the Do they take an active or passive role in the management of the

new venture?new venture?– Are there competition technologies in the portfolio?Are there competition technologies in the portfolio?– Are the personalities on both sides of the table compatible?Are the personalities on both sides of the table compatible?– Does the VC firm has syndication ties with other institutions for Does the VC firm has syndication ties with other institutions for

additional funding rounds?additional funding rounds?– Can they provide access to supporting technologies, supply Can they provide access to supporting technologies, supply

chains and customer groups?chains and customer groups?

After PricewaterhouseCoopers


Seeking Venture CapitalSeeking Venture Capital

Write the PlanWrite the Plan– Is the management team capable of growing the business rapidly and Is the management team capable of growing the business rapidly and

successfully?successfully?– Have they done it before?Have they done it before?– Is the technology fully developed?Is the technology fully developed?– Is the product unique, and what value does it create so that buyers will Is the product unique, and what value does it create so that buyers will

want to purchase the product or service?want to purchase the product or service?– Is the market potential large enough?Is the market potential large enough?– Does the team understand how to penetrate the market?Does the team understand how to penetrate the market?– Do significant barriers to entry exist?Do significant barriers to entry exist?– How much money is required and how will it be utilized?How much money is required and how will it be utilized?– What exit strategies are possible?What exit strategies are possible?

Prepare for NegotiationsPrepare for NegotiationsPrepare & Adjust FinancialsPrepare & Adjust Financials


Based on research by Lewis Branscomb and colleagues – quoted from Harrison 2004

Sequential Model development and funding


Based on Branscomb – Harrison, Edinburgh Uni, Inaugural Lecture 2004

2. Financial Support 2. Financial Support


Types of FinanceTypes of Finance

Short termShort term– overdraftoverdraft– short term loansshort term loans– trade credittrade credit– hire purchasehire purchase– leasingleasing– factoringfactoring– invoice discountinginvoice discounting– credit cards (company credit cards (company

and/or personal) and/or personal)

Long termLong term– initial equityinitial equity– retained profitsretained profits– long term loanslong term loans– external equityexternal equity– business angel business angel

fundingfunding– venture capitalventure capital


Stages of Sources of Finance Stages of Sources of Finance (adapted

from Weston & Brigham, 1979)

Personal funds + overdraft + trade credit + (possibly grant, short term loans, leasing/hp, factoring)

Retained funds + long term loans (debt) External equity (e.g. floatation (IPO),

venture capital) Decline (only internal funds)

Consider balance between short and long term sources at different stages…..

Evidence suggests many SMEs never get beyond stage 1.


Internal FinanceInternal Finance

Includes issued share capital, retained Includes issued share capital, retained profitsprofits

Long term : no redemption (does not have Long term : no redemption (does not have to be paid back)to be paid back)

Dependent on (could be constrained by) Dependent on (could be constrained by) – wealth of owner managerswealth of owner managers– profitability of firmprofitability of firm

Young firms (and young owner managers) Young firms (and young owner managers) are more likely to face an internal equity are more likely to face an internal equity constraintconstraint


External EquityExternal Equity Includes new shares issued privately (e.g. Includes new shares issued privately (e.g.

founding team) or publicly (e.g. Initial Public founding team) or publicly (e.g. Initial Public Offering (IPO)Offering (IPO)

Is long term with no redemption and from firm’s Is long term with no redemption and from firm’s point of view less risk of liquidation than debtpoint of view less risk of liquidation than debt

Initial flotation and ongoing costs of compliance Initial flotation and ongoing costs of compliance can be high so IPO not suitable for smaller can be high so IPO not suitable for smaller amountsamounts

In 1931, the MacMillan Committee identified an In 1931, the MacMillan Committee identified an equity gap for firms seeking less than £200,000 equity gap for firms seeking less than £200,000 (equivalent today = £4m) (equivalent today = £4m)

Evidence suggests an aversion to external equity Evidence suggests an aversion to external equity by entrepreneurs who would rather constrain the by entrepreneurs who would rather constrain the growth of the firm than lose any control growth of the firm than lose any control


Business Angels (Informal VC)Business Angels (Informal VC)

Individuals who invest in particular firmsIndividuals who invest in particular firms Smaller amounts than formal VC (£10k - £100k)Smaller amounts than formal VC (£10k - £100k) More if invest as syndicate (e.g. £2million)More if invest as syndicate (e.g. £2million) Source of advice/ expertiseSource of advice/ expertise May require involvement e.g. seat on boardMay require involvement e.g. seat on board For firm, finding an angel is difficultFor firm, finding an angel is difficult

– Need to find high net worth individualsNeed to find high net worth individuals– Matching may be through intermediaryMatching may be through intermediary

e.g. bank or business angel networke.g. bank or business angel network High return required so only high growth firmsHigh return required so only high growth firms


External EquityExternal Equity All forms of external equity require current All forms of external equity require current

owners to give up part of the ownership owners to give up part of the ownership and control of the firm, which many owner and control of the firm, which many owner managers are averse to - the firm is their managers are averse to - the firm is their babybaby

External equity is permanent finance: External equity is permanent finance: gives stabilitygives stability

Costs inevitably lead to minimum Costs inevitably lead to minimum thresholdsthresholds

Providers require high returns which only Providers require high returns which only very high growth SMEs can achieve very high growth SMEs can achieve


Debt FinanceDebt Finance The major source of external finance for all firms Includes bank debt (overdrafts, short and long

term loans) and negotiable debt (e.g. bonds, convertibles)

Amounts required by SMEs too small for negotiable debt (issue costs)

Evidence shows SMEs rely heavily on short term bank debt. For example: Overdrafts – Gives flexibility but risk of not being able to renew– Long term assets should be financed with long term

sources of finance. Evidence suggests SMEs use overdrafts and trade credit for long term assets e.g. plant /machinery


Asset Based FinanceAsset Based Finance

Includes hire purchase, leasing, Includes hire purchase, leasing, factoringfactoring

Finance is for a specific asset e.g. Finance is for a specific asset e.g. van, office equipment, debtors van, office equipment, debtors

Widely available to all sizes of firms Widely available to all sizes of firms and frequently used by SMEsand frequently used by SMEs

Security provided by asset mitigates Security provided by asset mitigates problems in risk assessment of SMEproblems in risk assessment of SME


Trade CreditTrade Credit Trade credit is a very expensive form of finance if Trade credit is a very expensive form of finance if

SMEs are foregoing early payment discounts.SMEs are foregoing early payment discounts. Paying late can put a strain on relationships with Paying late can put a strain on relationships with

supplierssuppliers– Suppliers are in effect financing their customers’ Suppliers are in effect financing their customers’

operationsoperations– Chasing outstanding debt is time-consuming and Chasing outstanding debt is time-consuming and

expensiveexpensive– Uncertainty inherent in late payment makes it difficult to Uncertainty inherent in late payment makes it difficult to

plan cash flowsplan cash flows And yet 84% of small firms pay lateAnd yet 84% of small firms pay late The majority say that it is a necessary part of The majority say that it is a necessary part of

managing cash flowmanaging cash flow

5. Raising Finance 19

OR

Questions

Consider whether the high use of short term sources of finance is because SMEs cannot get any other type of finance (because they are at the mercy of bigger players i.e. finance providers) or do they choose/prefer to juggle short term sources?

Is it reasonable to assume technology businesses will behave differently from (say) family business?

3. Due Diligence3. Due Diligence

Failure and the opportunities that Failure and the opportunities that enen20202020sue.sue.


Assessing the TeamAssessing the Team

Is the management team capable of growing the business Is the management team capable of growing the business rapidly and successfully?rapidly and successfully?

Have they done it before?Have they done it before? Is the technology fully developed?Is the technology fully developed? Is the product unique, and what value does it create so that Is the product unique, and what value does it create so that

buyers will want to purchase the product or service?buyers will want to purchase the product or service? Is the market potential large enough?Is the market potential large enough? Does the team understand how to penetrate the market?Does the team understand how to penetrate the market? Do significant barriers to entry exist?Do significant barriers to entry exist? How much money is required and how will it be utilized?How much money is required and how will it be utilized? What exit strategies are possible?What exit strategies are possible?


Business ValuationsBusiness Valuations

Stage 1: Stage 1: – Ventures have no product revenues to date and little or no expense Ventures have no product revenues to date and little or no expense

history, usually indicating an incomplete team with an idea, plan, history, usually indicating an incomplete team with an idea, plan, and possibly some initial product development.and possibly some initial product development.

Stage 2: Stage 2: – Ventures still have no product revenues, but some expense history, Ventures still have no product revenues, but some expense history,

product development is underway.product development is underway. Stage 3 Stage 3

– Ventures show product revenues, but they are still operating at a Ventures show product revenues, but they are still operating at a loss.loss.

Stage 4Stage 4– Companies have product revenues and are operating profitably.Companies have product revenues and are operating profitably.


Why Businesses FailWhy Businesses Fail

Management ControlsManagement Controls– AccountsAccounts– StockStock– LiabilitiesLiabilities

FundingFunding– OverheadsOverheads– BorrowingsBorrowings– Credit-controlCredit-control

Market ConditionsMarket Conditions– CompetitionCompetition– Market TrendsMarket Trends

SellingSelling ManagementManagement

– StaffStaff– EquipmentEquipment– Warranties & LiabilitiesWarranties & Liabilities


Types of FailureTypes of Failure

Cessation harvesting succession change of identify

Living Dead Disposal

Throwing in Towel Buy-outs, But-ins

Withdrawal of BackersWithdrawal of Backers– BanksBanks– Private InvestorsPrivate Investors– Trade creditors Trade creditors

Legal Legal – Take-overTake-over– ReconstructionReconstruction– MergersMergers

Involuntary Discontinuance of Business.


Exit RoutesExit Routes

Maturity

Growth Reversal

GrowthReinforcements

GenerateResources

MobiliseResources

Accessto resources

Assets Accumulation

Time

Merger

Steady- State

Closure

Merger

Merger

Steady- State

Steady- State

Closure

Closure

Understanding Enterprise, p6.3, Bridge,O’Neill & Cromie, Macmillan, 1998

Closure


Emerging IndustriesEmerging Industries

Newly formed or reformed industries, created by Newly formed or reformed industries, created by technology innovations, shifts in relative cost technology innovations, shifts in relative cost relationships, emergence of new consumer needs or relationships, emergence of new consumer needs or economic and social changes.economic and social changes.– The rules are that there are no rules. The Environment:The rules are that there are no rules. The Environment:– Technological uncertainty, strategic uncertainty, initial high costs Technological uncertainty, strategic uncertainty, initial high costs

but steep cost reductionbut steep cost reduction– Adoption rates Buyers of emerging technology are Adoption rates Buyers of emerging technology are

inexperienced. inexperienced. – Need to induce substitution, inform about functions and Need to induce substitution, inform about functions and

overcome perceived risks.overcome perceived risks.– Short time planning horizonsShort time planning horizons

Porter, Competitive Strategy, Collier Macmillan Publishers, 1980, pp237 -253


Planning Problems For Early EntrantsPlanning Problems For Early Entrants

– Inability to secure supply lines & maintain qualityInability to secure supply lines & maintain quality– Escalation of material prices & labour costsEscalation of material prices & labour costs– Absence of infrastructure – channel, servicing, Absence of infrastructure – channel, servicing,

complementary productscomplementary products– Absence of standardisation and regulatory frameworkAbsence of standardisation and regulatory framework– Perceived likelihood of obsolescePerceived likelihood of obsolesce– Image credibility with Financial CommunityImage credibility with Financial Community– Response of (entrenched) companiesResponse of (entrenched) companies– Cost of FailureCost of Failure– Introduction of incentives to switch costsIntroduction of incentives to switch costs

Porter


Strategic Opportunities for New Strategic Opportunities for New EntrantsEntrants

Shaping Industry StructuresShaping Industry Structures Managing ExternalitiesManaging Externalities Changing Role of Suppliers & Changing Role of Suppliers &

ChannelsChannels Changing the mobility/transferability Changing the mobility/transferability

barriersbarriers Timing EntryTiming Entry


Recovery PositionsRecovery Positions

Non-recoverableNon-recoverable– Technology or cost advantages have been lost.Technology or cost advantages have been lost.

RetrenchmentRetrenchment– retrenchment strategy is successfully implemented but retrenchment strategy is successfully implemented but

cannot be sustained in the longer term. cannot be sustained in the longer term.

Sustained Survival Sustained Survival – the turnaround is achieved and the business is able to the turnaround is achieved and the business is able to

protect its existing position in the market. protect its existing position in the market.

Sustained RecoverySustained RecoverySlatter (1984)


Recovery or RetrenchmentRecovery or Retrenchment Galvanisation Galvanisation

– Team recognise they are no longer able to manage the situation. Team recognise they are no longer able to manage the situation. – Management changes required for the business to survive and thrive.Management changes required for the business to survive and thrive.– Business will be required to raise extra financial resources from external Business will be required to raise extra financial resources from external

sources and this may result in a change of ownership and moving control sources and this may result in a change of ownership and moving control away founding entrepreneurs.away founding entrepreneurs.

Simplification Simplification – clear focus of direction is defined and resources are allocated and targeted clear focus of direction is defined and resources are allocated and targeted

to build a strong and sustainable core business.to build a strong and sustainable core business. Competency BuildingCompetency Building

– The business then builds new competencies and competitive advantages The business then builds new competencies and competitive advantages into its business model. In a recovery situation there will be pressure on into its business model. In a recovery situation there will be pressure on resources that are available and this is likely to create internal challenges.resources that are available and this is likely to create internal challenges.

LeaverageLeaverage– New Team buys in competencies and diversifies into new products, New Team buys in competencies and diversifies into new products,

services, markets and opportunities.services, markets and opportunities.


DisinvestmentDisinvestment

Alternative to organisational changes and the financial Alternative to organisational changes and the financial changes. changes.

Business focuses on its core profitable business.Business focuses on its core profitable business. It discards new ventures, subsidiaries and/or sites. It discards new ventures, subsidiaries and/or sites. Technologies or assets sold off to raise money that can be Technologies or assets sold off to raise money that can be

reinvested into strategies to strengthen the core business. reinvested into strategies to strengthen the core business. Disinvestment strategies divide between those that are Disinvestment strategies divide between those that are

internal to the organisation, such as the closure of a plant, internal to the organisation, such as the closure of a plant, and external, such as sale of the business. and external, such as sale of the business.

Not usually part of a long-term strategy but reaction to Not usually part of a long-term strategy but reaction to trading conditions or cash-flow crisis. trading conditions or cash-flow crisis.

Disinvestment decisions are less well thought through in Disinvestment decisions are less well thought through in terms of their long term impact of the business. terms of their long term impact of the business.

Thompson, J, 2002

4. Venture Finance 4. Venture Finance StrategiesStrategies


Access to FinanceAccess to Finance

According to the Bank of England According to the Bank of England (Finance for Small Firms 1999), 39% of (Finance for Small Firms 1999), 39% of SMEs are financed through (internal) SMEs are financed through (internal) debt funding. debt funding.

This indicates that smaller firms are This indicates that smaller firms are either adverse to external borrowing or either adverse to external borrowing or else they are excluded. else they are excluded.

This is the “funding gap”.This is the “funding gap”.


TrajectoriesTrajectories

BootstrappingBootstrapping founders, friends & family (the "3Fs" founders, friends & family (the "3Fs"

business angelsbusiness angels venture capital (VC)venture capital (VC) initial public offering (IPO) or mergers & initial public offering (IPO) or mergers &

acquisitions (M&A)acquisitions (M&A)


Venture CapitalVenture Capital

Long term equity financeLong term equity finance VC firm manages fund which is invested in VC firm manages fund which is invested in

portfolio of other companiesportfolio of other companies Usually £500,000 minimum, average Usually £500,000 minimum, average

investment = £3.5m (1999) investment = £3.5m (1999) Rigorous assessment of proposal and Rigorous assessment of proposal and

monitoring of investmentmonitoring of investment High return required so usually only high High return required so usually only high

growth (and high risk) SMEsgrowth (and high risk) SMEs


Venture CapitalVenture Capital

Typically only 1 in 40 proposals is fundedTypically only 1 in 40 proposals is funded VC may insist on appointing a non-executive VC may insist on appointing a non-executive

directordirector VC redeems investment at exit e.g. by IPO VC redeems investment at exit e.g. by IPO

or trade saleor trade sale


Raising Equity PlanRaising Equity Plan

Purpose and ObjectivesPurpose and Objectives Proposed FinancingProposed Financing

the amount of money needed from the beginning to the maturity of the project the amount of money needed from the beginning to the maturity of the project proposed, how the proceeds will be used, how you plan to structure the proposed, how the proceeds will be used, how you plan to structure the financing, and why the amount designated is required.financing, and why the amount designated is required.

Market-place Market-place a description of the market segment the firm controls or plans to get, the a description of the market segment the firm controls or plans to get, the

competition, the characteristics of the market, and marketing plan (with costs) competition, the characteristics of the market, and marketing plan (with costs) for getting or holding the market segment being targeted..for getting or holding the market segment being targeted..

History of the FirmHistory of the Firm a summary of significant financial and organisational milestones, a summary of significant financial and organisational milestones,

description of employees and employee relations, explanations of banking description of employees and employee relations, explanations of banking relationships, recounting of major services or products the firm has relationships, recounting of major services or products the firm has offered during its existence.offered during its existence.

Product or Service Product or Service a full description of the product, process or service offered by the firm and the a full description of the product, process or service offered by the firm and the

costs associated with it in detail.costs associated with it in detail.


Raising EquityRaising Equity

Financial Statements Financial Statements for the past year and pro forma projections (balance sheets, income for the past year and pro forma projections (balance sheets, income

statements, and cash flows) for the next 3-5 years, showing the effect if the statements, and cash flows) for the next 3-5 years, showing the effect if the project is undertaken and if the financing is secured.project is undertaken and if the financing is secured.

Should include analysis of key variables affecting financial performance, Should include analysis of key variables affecting financial performance, showing what could happen if the projected level of revenue is not attained.)showing what could happen if the projected level of revenue is not attained.)

Capitalisation Capitalisation a list of shareholders, how much is invested to date, and equity/debt.a list of shareholders, how much is invested to date, and equity/debt.

Biographical SketchesBiographical Sketches the work histories and qualifications of key owners/employees.the work histories and qualifications of key owners/employees.

Principal Suppliers, partners and CustomersPrincipal Suppliers, partners and Customers Problems Anticipated and Other Pertinent Information Problems Anticipated and Other Pertinent Information

a candid discussion of any contingent liabilities, pending litigation, tax or a candid discussion of any contingent liabilities, pending litigation, tax or patent difficulties, and any other contingencies that might affect the project.patent difficulties, and any other contingencies that might affect the project.

Advantages Advantages a discussion of what's special about product, service, marketing plans or a discussion of what's special about product, service, marketing plans or

channels that gives the project unique leverage.channels that gives the project unique leverage.


Types of Entrepreneurs Types of Entrepreneurs

Studies have revealed that different types of entrepreneurs Studies have revealed that different types of entrepreneurs exist (exist (Smith, 1967; Westhead, 1990, 1995; Birley and Westhead, 1994; Woo Smith, 1967; Westhead, 1990, 1995; Birley and Westhead, 1994; Woo et al., 1991).et al., 1991). Nascent entrepreneursNascent entrepreneurs: individuals considering the : individuals considering the

establishment of a new business.establishment of a new business. Novice entrepreneursNovice entrepreneurs: individuals with no prior business : individuals with no prior business

ownership experience as a business founder, an inheritor or a ownership experience as a business founder, an inheritor or a purchaser of a business.purchaser of a business.

Habitual entrepreneursHabitual entrepreneurs: individuals with prior business : individuals with prior business ownership experience.ownership experience.

Serial entrepreneursSerial entrepreneurs: individuals who have sold / closed their : individuals who have sold / closed their original business but at a later date have inherited, established original business but at a later date have inherited, established and / or purchased another business.and / or purchased another business.

Portfolio entrepreneursPortfolio entrepreneurs: individuals who have retained their : individuals who have retained their original business but at a later date have inherited, established original business but at a later date have inherited, established and / or purchased another business.and / or purchased another business.


Habitual EntrepreneursHabitual Entrepreneurs

No accepted definition (Starr and Bygrave, 1991).No accepted definition (Starr and Bygrave, 1991). A wider definition of 'habitual' founders was used by Birley and A wider definition of 'habitual' founders was used by Birley and

Westhead (1993, p.40) who suggested:Westhead (1993, p.40) who suggested: "...'habitual' founders had established at least one other business prior to "...'habitual' founders had established at least one other business prior to

the start-up of the current new independent venture". the start-up of the current new independent venture". Hall (1995) divided habitual entrepreneurs into Hall (1995) divided habitual entrepreneurs into serialserial and and portfolioportfolio

entrepreneurs. entrepreneurs. Westhead and Wright (1998a) have claimed that Westhead and Wright (1998a) have claimed that habitual entrepreneurshabitual entrepreneurs

are individuals who have established, inherited and / or purchased more are individuals who have established, inherited and / or purchased more than one business. than one business.

They suggested that They suggested that serial entrepreneursserial entrepreneurs have sold / closed their original have sold / closed their original business but at a later date have inherited, established and / or business but at a later date have inherited, established and / or purchased another business. purchased another business.

In the United States, it is widely reported that many In the United States, it is widely reported that many entrepreneurs have established / owned several businesses entrepreneurs have established / owned several businesses before they established / owned a successful business before they established / owned a successful business (Ronstadt, 1982).(Ronstadt, 1982).


Portfolio & Novice Portfolio & Novice EntrepreneursEntrepreneurs

PPortfolio entrepreneursortfolio entrepreneurs Individuals who own two or more businesses at the same Individuals who own two or more businesses at the same

time. Entrepreneurs building a portfolio of ventures may time. Entrepreneurs building a portfolio of ventures may dispose of some of them over time thus introducing a serial dispose of some of them over time thus introducing a serial element to their behaviour. Westhead and Wright (1998a) element to their behaviour. Westhead and Wright (1998a)

Rather than becoming involved in further ventures as Rather than becoming involved in further ventures as controlling owners, individuals use wealth from initial ventures controlling owners, individuals use wealth from initial ventures to acquire minority stakes in ventures controlled by other to acquire minority stakes in ventures controlled by other entrepreneurs (business angel) entrepreneurs (business angel) (Scott and Rosa, 1996b).(Scott and Rosa, 1996b).

Novice entrepreneursNovice entrepreneurs individuals who own one business and have no prior business individuals who own one business and have no prior business

ownership experience as a business founder, an inheritor or a ownership experience as a business founder, an inheritor or a purchaser of a business. purchaser of a business. Westhead and Wright (1998a)Westhead and Wright (1998a)

Novice Founders in this novice category may themselves at a Novice Founders in this novice category may themselves at a later date become serial or portfolio founders (Hall, 1995).later date become serial or portfolio founders (Hall, 1995).


Type of Ownership Change

Habitual Entrepreneurship/ Angel Activity Involving Existing Firms

Habitual Entrepreneurship/ Angel Investment Involving New Firms

Ownership change

Serial MBO/MBI Serial Start-up

Partial ownership change

Second round Angel Investment

Serial/Portfolio Angel Investment

No ownership change

Habitual Corporate Entrepreneurship

Portfolio Start-ups

Source: Westhead and Wright (1998a).

Habitual Entrepreneurs & Habitual Entrepreneurs & AngelsAngels


The Firm as the Unit of Policy The Firm as the Unit of Policy SupportSupport

Business support agencies provide financial, Business support agencies provide financial, managerial and technical support and managerial and technical support and assistance towards assistance towards new and existing new and existing businessesbusinesses rather than rather than entrepreneurs.entrepreneurs.

These agencies have encouraged individuals These agencies have encouraged individuals to make the transition from being nascent to make the transition from being nascent entrepreneurs (Carter et al., 1996), that is in entrepreneurs (Carter et al., 1996), that is in the position of considering starting a business, the position of considering starting a business, to actually establishing new businesses to actually establishing new businesses (Reynolds, 1997). (Reynolds, 1997).


Influence of Financial Influence of Financial InstitutionsInstitutions

Financial institutions and professional advisers Financial institutions and professional advisers view some types of customers as more view some types of customers as more ‘risky’‘risky’ than others. than others.

Financial institutions and professional advisers Financial institutions and professional advisers may be prepared to provide may be prepared to provide additional additional advantageadvantage to customers (i.e., habitual to customers (i.e., habitual entrepreneurs) who have a proven track record entrepreneurs) who have a proven track record of success. of success.

Financial institutions and professional advisers Financial institutions and professional advisers require additional information surrounding the require additional information surrounding the assetsassets and and liabilitiesliabilities associated with prior associated with prior business ownership experience.business ownership experience.


Financing VenturesFinancing Ventures

A Habitual entrepreneur’s background and can A Habitual entrepreneur’s background and can have a profound influence on the types of have a profound influence on the types of finance used during the launch period of finance used during the launch period of surveyed businesses. surveyed businesses.

Habitual entrepreneurs, if previously Habitual entrepreneurs, if previously successful, may be expected to have greater successful, may be expected to have greater access to funds than novice entrepreneurs. access to funds than novice entrepreneurs.

Funds from private business sales may be Funds from private business sales may be used by serial (and portfolio) founders to invest used by serial (and portfolio) founders to invest in subsequent ventures. in subsequent ventures.


Funding Serial Funding Serial EntrepreneursEntrepreneurs

Serial entrepreneurs who have successfully exited from Serial entrepreneurs who have successfully exited from their initial venture may generate funds to use personal their initial venture may generate funds to use personal resources to finance their subsequent venture(s). resources to finance their subsequent venture(s).

Serial founders who have relinquished their equity Serial founders who have relinquished their equity stakes in previously owned businesses have no trading stakes in previously owned businesses have no trading partners to leverage-up. partners to leverage-up.

If serial entrepreneurs are not successful in their first If serial entrepreneurs are not successful in their first venture, they may be able to raise funds, as venture venture, they may be able to raise funds, as venture capitalists seek evidence of an ability to succeed the capitalists seek evidence of an ability to succeed the next time around and not just previous experience per se next time around and not just previous experience per se (Wright et al., 1997b). (Wright et al., 1997b).

To achieve ownership of a larger business, serial To achieve ownership of a larger business, serial entrepreneurs may purchase or buy into rather than entrepreneurs may purchase or buy into rather than establish their second venture.establish their second venture.


Funding Portfolio Funding Portfolio EntrepreneursEntrepreneurs

Portfolio founders who have not exited from their Portfolio founders who have not exited from their earlier venture(s) may be able to lever up resources earlier venture(s) may be able to lever up resources from the existing business and may make use of from the existing business and may make use of finance from existing customers and suppliers. finance from existing customers and suppliers. Further, they may be able to lever up funds for a Further, they may be able to lever up funds for a portfolio business from venture capitalists who (in the portfolio business from venture capitalists who (in the UK at least) appear to be reluctant to fund completely UK at least) appear to be reluctant to fund completely new start-ups (Murray, 1995). new start-ups (Murray, 1995).

Habitual entrepreneurs may also have developed more Habitual entrepreneurs may also have developed more sophisticated skills in searching for finance.sophisticated skills in searching for finance.

The sources of start-up financed used by novice, The sources of start-up financed used by novice, portfolio and serial entrepreneurs with surveyed portfolio and serial entrepreneurs with surveyed businesses, located in rural areas in Great Britain, businesses, located in rural areas in Great Britain, were explored by Westhead and Wright (1998b). were explored by Westhead and Wright (1998b).

Suggested Reading

• Freel, M, 2003, Entrepreneurship and Small Firms, Sources of Finance, McGraw Hill, Chp 5-6, p115 - 165

5 Raising Finance.ppt

Economy & Finance

Transcript of 5 Raising Finance.ppt