Role of Entrepreneurial Finance in the Entrepreneurial Life Cycle - Term Paper Example

Entrepreneurial financing Table of Contents Section Role of Entrepreneurial Finance in Entrepreneurial Life Cycle 3 Techniques and principles 4 Planning of entrepreneurial financing 5 Valuation of entrepreneurial financing 6 Section 2: Case study: Richard Branson and Virgin group of companies 6 Early years 6 Building up stage 7 Looking at the bigger picture 8 Reference List 10 Section 1: Role of Entrepreneurial Finance in Entrepreneurial Life Cycle Entrepreneurial finance is the manner in which a firm gets set up through different combinations of capital funding. It generally refers to the owners own source of capital. It is seen to play an important role in new and small business organization (Whincop, 2001). Entrepreneurial financing is of different importance at different stages of entrepreneurial life cycle. These have been discussed below. Opportunity recognition and start up This is the primary stage of entrepreneurial business development. At this stage an entrepreneur is required to recognize a suitable opportunity existing in the market and develop understanding in respect of the required finance. At this stage the entrepreneur is required to assess the potential levels of finance required for starting the venture. Accordingly, the entrepreneur is required to understand the type of financing which is suitable for establishment of the business. If the business capital requirements are too massive, then the entrepreneurial contribution alone might not be sufficed. Under such circumstances, the entrepreneur is required to take assistance from external sources of financing as well such as debt from financing institutions. Practical evidences suggest that at the beginning of a business, entrepreneurial finance plays the most important role to acquire assets and to provide a starting push to the business. Usually when the first business stones are set up acquiring finance from banks and investors becomes difficult. Even if finance is acquired, they are of a considerably small share. At this juncture the investments made by the entrepreneur himself play the most important role (Whincop, 2001). Market entry and stabilization Once the business is able to enter the targeted market segment and attract consumers successfully, the entrepreneur may seek different sources of finance so as to be able to expand the business and create better products. At this stage the entrepreneur may also consider bringing in more partners and enhance the capital pool. At this juncture the entrepreneur is required to utilize the resources financed by him and prove his skills and capabilities in the market in an efficient manner. This facilitates in attracting investors and partners and thereby enhances the size of the business. Usually entrepreneurs seek bank financing to meet the needs of the business expansion (Yung, 2009). Maturity and sustainability At this stage the entrepreneur seeks to establish the business firmly in the corporate world. This is done by developing suitable business tie ups and strong financing support. Entrepreneurial finance alone at this stage is considered to be incapable of being able to facilitate the business to expand revenues. Dependency on a wide variety of sources of capital gets developed. Accordingly the entrepreneur is required to take decisions whether to maintain his contribution in the business or withdraw the same up to certain extend so as to support the business through different sources (Wonglimpiyarat, 2009). Techniques and principles Entrepreneurial financing is a diverse concept and covers a variety of financial techniques and principles. Few of such financial tools used by entrepreneurs to meet the capital requirements of a business are as follows. Financial bootstrapping Financial bootstrapping is seen to be the most common approach undertaken by entrepreneurs to prevent investments to flow in from external sources. This technique is usually adopted when the business aims to retain the ownership within the business. Financial bootstrapping includes techniques such as owner’s capital, sweat equity, reduction of accounts payable, joint use of resources, personal debt procurement and subsidy finance. Financial bootstrapping prevents external organizations and individuals to become a part of the organizational structure (Wonglimpiyarat, 2009). External financing External financial is usually undertaken when the entrepreneurs consider enhancing the size of the organization and find it difficult to meet the needs of business growth and development through internal financing alone. As a result they consider acquiring finance from external sources. Such sources of external finances include hedge funds, angel investors, venture capital and crowd funding. Through private equity, the firm may consider bringing in more number of investors and expand the company equity holdings. Such a practice of external financing is often carried out through buyouts. When finance is acquired from external sources, the ownership of the organization gets distributed. Most entrepreneurs prefer not to acquire finance from external sources as it results in losing of their control over the organization. Even when finance is acquired from external sources, entrepreneurs ensure that majority of the share in the net capital is held by them. Business angels A business angel is an investor who invests partly in a business venture. Usually business angels invest in businesses which are at their beginning stage. They are seen to mainly contribute towards developing innovative capabilities and research related needs. In most cases, business angels invest in firms which are at their start up stage. Business angels invest more in firms than venture capitalists. In the early twentieth century, business angels were an important source of capital for businesses. In the current age of globalization, due to the presence of a number of different sources of outside capital, business angels as source of capital is not seen commonly. This type of finance option is only undertaken by entrepreneurs who are engaged in small businesses (Randøy and Goel, 2003). Buyouts Buyouts are an important source of corporate finance. Buyouts are generally an alternative which can be exercised upon private organizations. Public firms are bound be a number of different rules and regulations which makes it difficult to undertake buyouts. In most cases buyouts are performed when firms are under high financial stress. Buyouts include selling off noncore assets, redeveloping asset or product lines and management replacement. Before indulging in buyouts, investors ensure that the firm has a strong asset support and is also supported with adequate goodwill and market reputation. The expectancy of strong cash flows is an important factor to attract firms into buyouts. Buyouts are carried out though both debt and equity financing (Strausz, 2009). Planning of entrepreneurial financing Planning is one of the key aspects in entrepreneurial finance. An entrepreneur’s role in the startup stage of a business and their contributions play a significant role in structuring the basic foundations of a business. Hence entrepreneurs must carefully assess the needs of a business, the required assets and the long term need and accordingly invest. At the very beginning of a business venture most entrepreneurs rely on self finance. However with the passage of time and the growth of business activities, the need for greater finance arises, making entrepreneurs seek external sources of finance. In smaller business organization issuing shares becomes a difficult prospect as a result of which owners rely upon bank and other financial institutions to provide fund. At the start up stage of a business, entrepreneurs are also required to remain dedicated towards acquiring strong resources and competitive advantages which facilitate creating profits for a very long time. Hence, a large amount of finance gets necessitated (Denis, 2004). Valuation of entrepreneurial financing Entrepreneurial financing does not follow any special method of valuation. The valuation techniques are the same as they are in the case of non entrepreneurial businesses. These techniques include discounted and non discounted cash flows and venture capital methods. The venture capital method is more commonly followed. In this method the entrepreneur compares his current investments with the future value of the business and accordingly determines the amount of investments to be made. Internal rate of return is considered to be a suitable venture capital assessment method (Denis, 2004). Section 2: Case study: Richard Branson and Virgin group of companies Starting a business is a creative procedure. It begins with idea development and developing feasibility reports. Entrepreneurs are required to go through a detailed study regarding the idea of business before they actually consider investing in the same. Entrepreneurs who a special talent of being able to raise funds and accumulate adequate finance necessary for developing a business are usually seen to succeed more. Richard Branson, the founder of the Virgin Group of companies is counted amongst the top entrepreneurs of the world. His ability of channelize financial resources and invest in profitable ventures frequently has helped him to reach the pinnacles of success and create a brand image worth 4.9 billion dollars in the corporate world (Hartigan, 2006). Early years Branson from the very beginning of his teenage life possessed a particular acumen of being able to raise funds for charities and local institutions. He also had the talent of being able to convert small investments into profitable returns. These aspects made Branson realize that starting his own business would not be a very difficult task. With the small profit and savings which Branson had accumulated over his early life helped him to begin his own record business. Efficient business tactics and proper utilization of resources and information helped Branson to generate enough revenue. With the profits earned from record business, Branson launched his own record label named “Virgin Records”. Branson was frequently questioned regarding his business tactics whereby he signed bands who were not very popular or were associated in controversial issues. Branson was seen to possess the exceptional talent for being able to use the media and their attention to sell products and earn revenue. Branson mainly relied upon his own financial savings and profits earned from the business to establish Virgin records as a strong business brand. In the year 1984, Branson then decided to form the Virgin Atlantic Airways and had launched the Virgin Mobile in the year 1999 (Barringer, 2008). Building up stage Once Richard Branson had established himself successfully in the market, he began taking risky measures. He was interested into acquiring and financing a number of risky business ventures. While many of the business moves of Branson did not see profitable endings, some of the projects had facilitated him to gain massive popularity and huge revenues. Although the Virgin airlines were set up primarily with the funding provided by Branson, as the business grew it gained the attention of many investors. In the year 1992, the airlines company began facing huge loses and required immediate financial support. To keep the airlines firm afloat, Branson had decided to sell off his record company. This was again considered a highly strategic move. The popularity of the internet and the ease of access to music had reduced consumer purchase of records. Selling off of the Virgin Record Business was mainly a demand of the shareholders of the company. Branson himself was not willing to sell off the record business as it was a part of the virgin industries for a long period. He later entered the music business through the creation of a new business V2 Records. The airline business of Branson was funded through a number of sources which included both equity and debt. Branson was required to allot much time and effort towards convincing his fellow partners at Virgin Records to sell off their stake in the company and invest in Virgin Atlantic (Vroom, 2000). The airlines business of Virgin Group had faced a number of ups and downs. Investors have frequently left the company leaving it on sensitive financial grounds. However, Branson emerged from such circumstances by being able to attain successful deals and attracting new investors. When questioned about how such financial hurdles were overcome, Branson has stated that careful planning and considering all that could have gone wrong was one of the most necessary strategies followed by Branson. In entrepreneurial financing risk is permanent aspect. Branson considered the potential losses from the very beginning of every business venture he stepped into. As a result he always had a plan to prevail over financial issues. Branson was also seen to make use of the profits from other businesses such Virgin Trains and his beverage company Virgin Cola to fund his airlines company. This is a common strategy adopted by most entrepreneurs. Branson was often praised as well as criticize for inter transmission of funds from one Virgin company to the other. Although this benefited the businesses and facilitated overcoming shortage of funds, such moves were highly disapproved by shareholders. Later on it was seen that stakeholders in many of the Virgin group of companies agreed to maintain isolation of funds. Frequent movement of funds had led to stagnation of many Virgin companies and led towards their dependency upon external sources of finance. In order to gain fund from the outside sources, diversification of products and developing proposals for innovative business products and services was necessitated. This had led the Virgin group of companies to have a number of products and services. In the long run due to lack of specialization and strong foundations, many of the new product ventures and companies of the Virgin group was required to be either sold off or liquidated. One such venture was the Virgin Mobile. Branson however tried covering up the sales under the title of re-launch. Virgin Mobile was disintegrated to form the new company Virgin Media. Branson had approximately 30% share in Virgin Mobile, while after the formation of the Virgin Media; he had only 15% share. It is usually seen that when entrepreneurs enter into the disintegration of their companies, their initially held shares would decline considerably. Branson however was ready to forego his share of profits in other firms so as to maintain his ownership and control over Virgin Airlines. Branson’s strategies were always centered on maintaining his focus and control over Virgin airlines. Over the years he has undertaken a number of expansion and financing activities so as to enhance the business opportunities and income of Virgin Airlines (Shavinina, 2006). Looking at the bigger picture Richard Branson’s financing strategies largely centred on focusing upon long term conditions and risks. Branson’s distinctive ability to assess the future market conditions and accordingly invest in different ventures had helped him achieve success. Branson always tried to minimize undertaking external debt for expansion of business. He preferred expanding capital through equity and thereby acquiring more number of partners into the business. Maintaining internal control was seen to be the primary motive for Virgin group of companies. Hence equity issue and buyouts were the primary sources of funding. Branson considered that in entrepreneurship financing. Owners must adequately concentrate upon the long term impacts of different types of investments. Leaping from the music industry to the airlines industry was one of the most important decisions Branson had made. An important aspect entrepreneurs can learn from Branson is that it is essential for business owners to understand that retaining business control in one’s own hand forbids expansion. It is essential for the firm to acquire finance from diversified sources so as to develop new products and grow in size. Entrepreneurial finance should always be focused upon the needs of the consumers rather than the needs of the company. Branson’s success in his entrepreneurial ventures was due to the fact that he understood when and what type of business was suitable to invest in and accordingly restructure his share of capital in the Virgin group of companies. However a crucial issue entrepreneur’s face is that as businesses expand, their existence in the company reduces (Vroom, 2000). Reference List Barringer, B. R., 2008. Entrepreneurship: Successfully launching new ventures. New Delhi: Pearson Education India. Denis, D. J., 2004. Entrepreneurial finance: an overview of the issues and evidence. Journal of Corporate Finance, 10(2), pp. 301-326. Hartigan, P., 2006. Its about people, not profits. Business Strategy Review, 17(4), pp. 42-45. Randøy, T. and Goel, S., 2003. Ownership structure, founder leadership, and performance in Norwegian SMEs: implications for financing entrepreneurial opportunities. Journal of Business Venturing, 18(5), pp. 619-637. Shavinina, L. V., 2006. Micro‐social factors in the development of entrepreneurial giftedness: the case of Richard Branson. High Ability Studies, 17(2), pp. 225-235. Strausz, R., 2009. Entrepreneurial financing, advice, and agency costs. Journal of Economics & Management Strategy, 18(3), pp. 845-870. Vroom, V. H., 2000. Leadership and the decision-making process. Organizational dynamics, 28(4), pp. 82-94. Whincop, M. J., 2001. Bridging the Entrepreneurial Financing Gap: Linking Governance with Regulatory Policy. Surrey: Ashgate. Wonglimpiyarat, J., 2009. Entrepreneurial financing for venture and innovation development. International journal of foresight and innovation policy, 5(4), pp. 234-243. Yung, C., 2009. Entrepreneurial financing and costly due diligence. Financial Review, 44(1), pp. 137-149. 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