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Entrepreneurial
Finance
7e
J. Chris Leach
University of Colorado at Boulder
Ronald W. Melicher
University of Colorado at Boulder
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
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Printed in the United States of America

Print Number: 01 Print Year: 2020
Dedication
To my wife Martha, our great joys Laura and John, and the life we share
J. CHRIS LEACH
In memory of my parents, William and Lorraine, and to my wife, Sharon, and our
children, Michelle, Sean, and Thor
RONALD W. MELICHER
Brief Contents
PART 1
THE ENTREPRENEURIAL ENVIRONMENT 1
CHAPTER 1 Introduction to Finance for Entrepreneurs 3
CHAPTER 2 Developing the Business Idea 41
PART 2
ORGANIZING AND OPERATING THE VENTURE 85
CHAPTER 3 Organizing and Financing a New Venture 87
CHAPTER 4 Preparing and Using Financial Statements 127
CHAPTER 5 Evaluating Operating and Financial Performance 159
PART 3
PLANNING FOR THE FUTURE 191
CHAPTER 6 Managing Cash Flow 193
CHAPTER 7 Types and Costs of Financial Capital 221
CHAPTER 8 Securities Law Considerations When Obtaining Venture Financing 261
PART 4
CREATING AND RECOGNIZING VENTURE VALUE 329
CHAPTER 9 Projecting Financial Statements 331
CHAPTER 10 Valuing Early-Stage Ventures 361
CHAPTER 11 Venture Capital Valuation Methods 409
PART 5
STRUCTURING FINANCING FOR THE GROWING VENTURE 455
CHAPTER 12 Professional Venture Capital 457
CHAPTER 13 Other Financing Alternatives 483
CHAPTER 14 Security Structures and Determining Enterprise Values 507
PART 6
EXIT AND TURNAROUND STRATEGIES 543
CHAPTER 15 Harvesting the Business Venture Investment 545
CHAPTER 16 Financially Troubled Ventures: Turnaround Opportunities? 581
PART 7
CAPSTONE CASES 615
CASE 1 Eco-Products, Inc. 617
CASE 2 Spatial Technology, Inc. 647
Glossary 673
Index 681
iv
Contents
Preface xi First-Round Financing 28
About the Authors xvii Second-Round Financing 28
Mezzanine Financing 29
PART 1 Liquidity-Stage Financing 29
Seasoned Financing 30
The Entrepreneurial 1.8 Life Cycle Approach for Teaching Entrepreneurial
Environment 1 Finance 30
CHAPTER 1 Summary 34
Introduction to Finance for Entrepreneurs 3 CHAPTER 2
1.1 The Entrepreneurial Process 5 Developing the Business Idea 41
1.2 Entrepreneurship Fundamentals 6 2.1 Process for Identifying Business Opportunities 43
Who is an Entrepreneur? 6 2.2 To be Successful, You Must Have a Sound Business
Basic Definitions 7 Model 44
Entrepreneurial Traits or Characteristics 7 Component 1: The Business Model Must
Opportunities Exist but Not Without Risks 8 Generate Revenues 45
1.3 Sources of Entrepreneurial Opportunities 9 Component 2: The Business Model Must
Societal Changes 9 Make Profits 45
Demographic Changes 12 Component 3: The Business Model Must Produce
Technological Changes 12 Free Cash Flows 46
Emerging Economies and Global Changes 13 2.3 Learn from the Best Practices of Successful
Crises and “Bubbles” 14 Entrepreneurial Ventures 47
Disruptive Innovation 15 Best Marketing Practices 47
1.4 Principles of Entrepreneurial Finance 15 Best Financial Practices 48
Real, Human, and Financial Capital Must be Rented Best Management Practices 49
from Owners (Principle #1) 16 Best Production or Operations Practices are also
Risk and Expected Reward Go Hand in Hand Important 49
(Principle #2) 16 2.4 Time-to-Market and Other Timing Implications 49
While Accounting is the Language of Business, Cash 2.5 Initial “Litmus Test” for Evaluating the Business
is the Currency (Principle #3) 17 Feasibility of an Idea 51
New Venture Financing Involves Search, 2.6 Screening Venture Opportunities 53
Negotiation, and Privacy (Principle #4) 17 An Interview With the Founder (Entrepreneur) and
A Venture’s Financial Objective is to Increase Value Management Team: Qualitative Screening 54
(Principle #5) 18 Scoring a Prospective New Venture:
It is Dangerous to Assume that People Act Against Quantitative Screening 58
their Own Self-Interests (Principle #6) 19 Industry/Market Considerations 61
Venture Character and Reputation Can be Assets or Pricing/Profitability Considerations 62
Liabilities (Principle #7) 20 Financial/Harvest Considerations 65
1.5 Role of Entrepreneurial Finance 21 Management Team Considerations 67
1.6 The Successful Venture Life Cycle 23 Opportunity Screening Caveats 67
Development Stage 24 2.7 Key Elements of a Business Plan 69
Startup Stage 24 Cover Page, Confidentiality Statement,
Survival Stage 24 and Table of Contents 69
Rapid-Growth Stage 24 Executive Summary 71
Early-Maturity Stage 25 Business Description 71
Life Cycle Stages and the Entrepreneurial Process 25 Marketing Plan and Strategy 71
1.7 Financing Through the Venture Life Cycle 26 Operations and Support 71
Seed Financing 27 Management Team 72
Startup Financing 27 Financial Plans and Projections 72
v
vi Contents
Risks and Opportunities 73 Appendix A NOPAT Breakeven: Revenues Needed

Business Plan Appendix 75 to Cover Total Operating Costs 156
Summary 75
Appendix A Applying the VOS Indicator™: An CHAPTER 5
Example 81 Evaluating Operating and Financial
Performance 159
5.1 Users of Operating and Financial Performance
PART 2 Measures by Life Cycle Stage 161
Organizing and Operating the 5.2 Using Financial Ratios 162
Venture 85 5.3 Cash Burn Rates and Liquidity Ratios 165
Measuring Venture Cash Burn and Build Amounts
CHAPTER 3 and Rates 165
Organizing and Financing a New Venture 87 Beyond Burn: Traditional Measures of Liquidity 167
3.1 Progressing Through the Venture Life Cycle 89 Interpreting Cash-Related and Liquidity-Related
3.2 Forms of Business Organization 89 Trends 168
Proprietorships 92 5.4 Leverage Ratios 170
General and Limited Partnerships 93 Measuring Financial Leverage 170
Corporations 97 Interpreting Changes in Financial Leverage 172
Limited Liability Companies 99 5.5 Profitability and Efficiency Ratios 173
3.3 Choosing the Form of Organization: Tax and Other Income Statement Measures of Profitability 173
Considerations 100 Efficiency and Return Measures 175
3.4 Intellectual Property 104 Interpreting Changes in Profitability
Protecting Valuable Intangible Assets 104 and Efficiency 177
What Kinds of Intellectual Property Can be 5.6 Industry Comparable Ratio Analysis 178
Protected? 104 5.7 A Hitchhiker’s Guide to Financial Analysis 179
Copyrights 111 Summary 182
Other Methods for Protecting Intellectual Property
Rights 111
Employment Contracts 112
PART 3
3.5 Seed, Startup, and First-Round
Planning for the Future 191
Financing Sources 113 CHAPTER 6
Financial Bootstrapping 114 Managing Cash Flow 193
Business Angel Funding 117 6.1 Financial Planning throughout the Venture’s Life
First-Round Financing Opportunities 119 Cycle 194
Summary 120 6.2 Surviving in the Short Run 196
CHAPTER 4 6.3 Short-Term Cash-Planning Tools 198
6.4 Projected Monthly Financial Statements 202
Preparing and Using Financial Statements 127
6.5 Cash Planning from a Projected Monthly Balance
4.1 Obtaining and Recording the Resources Necessary
Sheet 205
to Start and Build a New Venture 129
6.6 Conversion Period Ratios 206
4.2 Business Assets, Liabilities, and Owners’
Equity 130 Measuring Conversion Times 206
Balance Sheet Assets 132 Interpreting Changes in Conversion Times 210
Liabilities and Owners’ Equity 133 Summary 212
4.3 Sales, Expenses, and Profits 134 CHAPTER 7
4.4 Internal Operating Schedules 136 Types and Costs of Financial Capital 221
4.5 Statement of Cash Flows 140 7.1 Implicit and Explicit Financial Capital Costs 223
4.6 Operating Breakeven Analyses 142 7.2 Financial Markets 223
Survival Breakeven 142 7.3 Determining the Cost of Debt Capital 225
Identifying Breakeven Drivers in Revenue Determinants of Market Interest Rates 227
Projections 147
Risk-Free Interest Rate 227
Summary 149
Contents vii
Default Risk Premium 228 Appendix B Selected SEC Regulation D
Liquidity and Maturity Risk Premiums 231 Materials 299
A Word on Venture Debt Capital 234
7.4 What is Investment Risk? 234 Appendix C Other Forms of Registration
Measuring Risk as Dispersion Around an Exemptions and Breaks 326
Average 234
Historical Return Versus Risk Relationships 238
7.5 Estimating the Cost of Equity Capital 240
Cost of Equity Capital for Public Corporations 241
Cost of Equity Capital for Private Ventures 243
PART 4
Sources and Costs of Venture Equity Capital 245
Creating and Recognizing
7.6 Weighted Average Cost of Capital 247 Venture Value 329
A Life Cycle–Based Wacc Example 248 CHAPTER 9
Summary 250
Projecting Financial Statements 331
Appendix A Using WACC to Complete the 9.1 Long-Term Financial Planning Throughout the
Calibration of EVA 258 Venture’s Life Cycle 332
9.2 Beyond Survival: Systematic Forecasting 334
Forecasting Sales for Seasoned Firms 334
CHAPTER 8
Forecasting Sales for Early-Stage Ventures 336
Securities Law Considerations When Obtaining
9.3 Estimating Sustainable Sales Growth Rates 340
Venture Financing 261 9.4 Estimating Additional Financing Needed to Support
8.1 Review of Sources of External Venture Growth 344
Financing 263
The Basic Additional Funds Needed Equation 345
8.2 Overview of Federal and State Securities Laws 265
Impact of Different Growth Rates on Afn 347
Securities Act of 1933 266
Estimating the Afn for Multiple Years 348
Securities Exchange Act of 1934 266
9.5 Percent-of-Sales Projected Financial
Investment Company Act of 1940 267 Statements 349
Investment Advisers Act of 1940 267 Forecasting Sales 349
Jumpstart Our Business Startups Act of 2012 268 Projecting the Income Statement 350
State Securities Regulations: “Blue-Sky” Laws 269 Projecting the Balance Sheet 351
8.3 Process for Determining Whether Securities Must be Forecasting the Statement of Cash Flows 353
Registered 270
Financing Cost Implications Associated with the
Offer and Sale Terms 270 Need for Additional Funds 354
What is a Security? 271 Summary 355
8.4 Registration of Securities Under the Securities Act of
1933 272
CHAPTER 10
8.5 Security Exemptions from Registration Under the
1933 Act 276 Valuing Early-Stage Ventures 361
8.6 Transaction Exemptions from Registration Under 10.1 What is a Venture Worth? 363
the 1933 Act 278 Does the Past Matter? 363
Private Offering Exemption 278 Looking to the Future 364
Accredited Investor Exemption 280 Vested Interests in Value: Investor and
8.7 SEC’s Regulation D: Safe-Harbor Exemptions 281 Entrepreneur 364
Rule 504: Exemption for Limited Offerings and Sales 10.2 Basic Mechanics of Valuation: Mixing Vision and
of Securities not Exceeding $5 Million 282 Reality 366
Rule 506: Exemption for Limited Offers and Sales Present Value Concept 366
Without Regard to Dollar Amount of Offering 283 If You’re not Using Estimates, You’re not Doing a
8.8 Regulation a Security Exemption 289 Valuation 367
8.9 JOBS Act Innovations 290 Divide and Conquer with Discounted Cash
Flow 369
Summary 290
10.3 Required versus Surplus Cash 372
Appendix A Schedule A (Securities Act of 1933, as 10.4 Developing the Projected Financial Statements for a
Amended) 294 DCF Valuation 374
viii Contents
10.5 Just-In-Time Equity Valuation: Pseudo 12.9 Distributing Cash and Securities Proceeds 478
Dividends 378
Summary 479
10.6 Accounting versus Equity Valuation Cash Flow 385
Origins of Accounting Cash Flows 385 CHAPTER 13
From Accounting to Equity Valuation Cash Other Financing Alternatives 483
Flows 386 13.1 Business Incubators, Seed Accelerators, and
Summary 390 Intermediaries 485
CHAPTER 11 Business Incubators and Seed Accelerators 485
Intermediaries, Facilitators, and Consultants 486
Venture Capital Valuation Methods 409
13.2 Business Crowdsourcing and Crowdfunding 487
11.1 Brief Review of Basic Cash Flow-Based Equity
Valuations 411 13.3 Commercial and Venture Bank Lending 488
11.2 Basic Venture Capital Valuation Method 413 13.4 Understanding Why You May not Get Debt
Financing 491
Using Present Values 416
13.5 Credit Cards 493
Using Future Values 416
13.6 Foreign Investor Funding Sources 494
11.3 Earnings Multipliers and Discounted Dividends 417
13.7 Small Business Administration Programs 494
11.4 Adjusting VCSCs for Multiple Rounds 419
Overview of What the Sba does for Small
First Round 420
Businesses 495
Second Round 420
Selected Sba Loan and Operating Specifics 496
11.5 Adjusting VCSCs for Incentive Ownership 421
13.8 Other Government Financing Programs 497
First Round 422
13.9 Factoring, Receivables Lending, and Customer
Second Round 422
Funding 498
Incentive Ownership Round 422
13.10 Debt, Debt Substitutes, and Direct Offerings 500
11.6 Adjusting VCSCs for Payments to Senior Security
Vendor Financing: Accounts Payable and Trade
Holders 423
Notes 500
11.7 Introducing Scenarios to VCSCs 424
Mortgage Lending 500
Utopian Approach 425
Traditional and Venture Leasing 500
Mean Approach 426
Direct Public Offers 501
Summary 431
Summary 502
Appendix A Summary of Colorado Business
PART 5
Financial Assistance Options 505
Structuring Financing for the
Growing Venture 455
CHAPTER 14
CHAPTER 12 Security Structures and Determining Enterprise
Professional Venture Capital 457 Values 507
12.1 Historical Characterization of Professional Venture 14.1 Common Stock or Common Equity 509
Capital 459
14.2 Preferred Stock or Preferred Equity 510
12.2 Professional Venture Investing Cycle: Overview 463
Selected Characteristics 510
12.3 Determining (Next) Fund Objectives and
Convertible Preferreds 511
Policies 464
Conversion Value Protection 513
12.4 Organizing the New Fund 465
Conversion Protection Clauses 514
12.5 Soliciting Investments in the New Fund 468
Conversion Price Formula (CPF) 514
12.6 Obtaining Commitments for a Series of Capital
Market Price Formula (MPF) 514
Calls 469
14.3 Convertible Debt 516
12.7 Conducting Due Diligence and Actively
Investing 470 14.4 Warrants and Options 517
12.8 Arranging Harvest or Liquidation 477 14.5 Other Concerns About Security Design 523
Contents ix
14.6 Valuing Ventures with Complex Capital Structures: Cash Flow Insolvency 586
The Enterprise Method 524 Temporary versus Permanent Cash Flow
Summary 531 Problems 587
16.3 Resolving Financial Distress Situations 588
PART 6 Operations Restructuring 590
Asset Restructuring 593
Exit and Turnaround Strategies 543
Financial Restructuring 595
CHAPTER 15 16.4 Private Workouts and Liquidations 596
Harvesting the Business Venture Investment 545 Private Workouts 596
15.1 Venture Operating and Financial Decisions Private Liquidations 597
Revisited 547 Venture Example: Jeremy’s Microbatch Ice Creams,
15.2 Planning an Exit Strategy 548 Inc. 598
15.3 Valuing the Equity or Valuing the Enterprise 550 16.5 Federal Bankruptcy Law 598
Relative Valuation Methods 550 Bankruptcy Reorganizations 599
Dividing the Venture Valuation Pie 551 Reasons for Legal Reorganizations 600
15.4 Systematic Liquidation 553 Legal Reorganization Process 602
15.5 Outright Sale 554 Bankruptcy Liquidations 605
Family Members 554 Summary 609
Managers 555
Employees 558 PART 7
Outside Buyers 559 CAPSTONE CASES 615
15.6 Going Public 561
Investment Banking 561 CASE 1
Some Additional Definitions 564 Eco-Products, Inc. 617
Other Costs in Issuing Securities 565
CASE 2
Post-Ipo Trading 566
Spatial Technology, Inc. 647
Contemplating and Preparing for the Ipo
Process 569 Glossary 673
Summary 574
Index 681
CHAPTER 16
Financially Troubled Ventures: Turnaround
Opportunities? 581
16.1 Venture Operating and Financing Overview 583
16.2 The Troubled Venture and Financial Distress 584
Balance Sheet Insolvency 585
Preface
T
he life of an entrepreneur is exciting and dynamic. The challenge of envisioning
a new product or service, infecting others with entrepreneurial zeal, and
bringing a product to market can be one of the great learning experiences in
life. All ventures require financing—taking investors’ money today and expecting to
return a significantly larger amount in the future. Typically, the return comes from the
venture’s public offering, sale, or merger. In the interim, the venture must manage its
financial resources, communicate effectively with investors and partners, and create
the harvest value expected by investors.
Textbook Motivation
The purpose of the textbook is to introduce financial thinking, tools, and techniques
adapted to the realm of entrepreneurship. We believe that, while much of traditional
financial analysis may not be ideally suited to the venture context, there is great value
in applying venture adaptations.
This entrepreneurial finance text introduces the theories, knowledge, and financial
tools an entrepreneur needs to start, build, and harvest a successful venture. Sound
financial management practices are essential to a venture’s operation. The successful
entrepreneur must know how and where to obtain the financing necessary to launch
and develop the venture. Eventually, that same successful entrepreneur must know
how and when to interact with financial institutions and regulatory agencies to take the
venture to its potential and provide a return and liquidity for the venture’s investors.
The Life Cycle Approach

We incorporate a life cycle approach to the material in this text. Successful ventures typically
begin with an initial development stage where the entrepreneurial team generates ideas
and assesses the associated business opportunities. Most entrepreneurs realize that a
business plan can greatly improve the chance that an idea will become a commercially viable
product or service. Startup stage ventures focus on the formulation of a business model
and plan. As marketing and selling products and services begins, survival stage ventures
often refocus or restructure. Rapid-growth stage ventures increase their momentum, and
begin to demonstrate value creation. Early-maturity stage ventures typically look for ways
to harvest the value created and provide a return to their investors.
Each stage in the life cycle requires a specific understanding of the financial
management tools and techniques, potential investors and their mindset, and
the financial institutions supporting that venture stage. During the early stages
of a venture’s life, cash management tools and survival planning are the dominant
forms of financial analysis. Cash burn rates are very high and additional sources of
financing are usually limited, making it critical for the successful venture to project and
accommodate necessary operating costs. The need to measure and adjust investment
in working capital and property, plant, and equipment is evident. The process of
anticipating and accommodating costs and asset investments begins with the analysis
of historical financial experience and then projects future financial positions using
projected financial statements or their proxies. Successful ventures emerging from their
survival stages can concentrate more on value creation and calibration. Consequently,
our financial management emphases for this stage are valuation tools and techniques.
xi
xii Preface
Equally important as sound financial management practices is the need for

the entrepreneur to understand the types and sources of financial capital and
the related investment processes. During the development stage, seed financing
usually comes from the entrepreneur’s personal assets and possibly from family and
friends. Business angels and venture capitalists are important financing sources during
the startup stage. First-round financing from business operations, venture capitalists,
suppliers, customers, and commercial banks may be initiated during the survival stage.
The rapid growth stage involves second-round, mezzanine, and liquidity stage financing
from business operations, suppliers, customers, commercial banks, and investment
bankers. Once a venture enters its early-maturity stage, seasoned financing replaces
venture financing. Seasoned financing takes the form of cash flow from business
operations, bank loans, and stocks and bonds issued with the assistance of investment
bankers or others. Our approach is to introduce the types and sources of financial
capital that become available as we progress through a successful venture’s life cycle.
The successful entrepreneur must understand the legal environment regulating
financial relationships between the venture, investors, and financial institutions
including venture capital funds and investment banks. We cover the basic securities
laws and regulatory agencies, particularly the Securities and Exchange Commission
(SEC), relevant to the entrepreneur when considering how to obtain financial capital at
each stage.
To summarize, we take a comprehensive three-pronged stage-sensitive
approach to entrepreneurial finance. Our coverage of entrepreneurship-adapted
financial analysis and pertinent institutional details provides a relevant financial analysis
base for the entrepreneur in each of the various stages as he or she develops the idea,
brings it to market, grows the venture’s value, and ultimately provides an exit for venture
investors. We identify and explain the types and sources of financing available during
the various stages and introduce the legal and regulatory environment the entrepreneur
must consider when seeking financing throughout the venture’s life cycle.
Distinctive Features
This text considers a successful firm as it progresses through various maturity stages.
Specific examples of stage-relevant skills and techniques we introduce include:
cc Brainstorming and Screening: Chapter 1 (The Entrepreneurial Environment)
describes several megatrends that may represent sources of entrepreneurial
opportunities. Chapter 2 (Developing the Business Idea) introduces qualitative and
quantitative venture screening devices.
Chapter 3’s (Organizing and Financing a New Venture) treatment of intellectual
property issues demonstrates important issues and concepts for the earliest stage
ventures.
cc Projecting Financial Statements: Chapter 6 (Managing Cash Flow) focuses on the
importance of maintaining adequate cash flow in the short run. Cash is “king.” Chapter
9 (Projecting Financial Statements) focuses on long-term projections incorporating
future financing needs and establishing a basis for creating value over time.
cc Raising External Funds: Chapter 8 (Securities Law Considerations When Obtaining
Venture Financing) treatment of securities law introduces readers to the restrictions
and warnings for the growing venture seeking external financing.
cc Venture Diagnostics and Valuation: Chapter 10 (Valuing Early-Stage Ventures)
presents our versions of traditional valuation techniques important to internal and
external perceptions of a venture’s financial health. While the material is traditional,
Preface xiii
our treatment provides a unifying approach to projecting financial statements,
extracting pseudo-dividends, and assessing a venture’s value.
cc Venture Capital Valuation Methods: Chapter 11 (Venture Capital Valuation
Methods) introduces representative multi-stage venture capital valuation methods
and interprets them relative to more traditional procedures. It provides a unified
example of traditional pre-money and post-money valuations and the shortcuts
employed by many venture capitalists.
cc Professional VCs: Chapter 12 (Professional Venture Capital) explores the historical
development of venture capital and describes the professional venture investing
cycle from determining the next fund objectives and policies to distributing cash
and securities proceeds to investors.
cc Harvest: Chapter 15 (Harvesting the Business Venture Investment) considers a wide
range of venture harvest strategies including private sales (to outsiders, insiders, and
family), transfers of assets, buyouts, and initial public offerings.
cc Turnaround Opportunities: Chapter 16 (Financially Troubled Ventures: Turnaround
Opportunities?) introduces important aspects of financial distress and alternative
restructuring approaches (operations, asset, and financial) to rescue a struggling
venture.
Intended Audience and Use

The material contained in this text has been used successfully at the upper division
(junior/senior) undergraduate, MBA, and executive MBA levels. For MBAs, the
course can easily be conducted in two ways. In the first, what we term the life cycle
approach, we recommend the addition of illustrative cases, each at different life cycle
stages. Recently, entrepreneurial finance cases have been available individually from
the usual providers and in collected form in entrepreneurial case books. The second,
or what we term the venture capital approach, emphasizes the money management
aspects of financing entrepreneurial ventures. For this approach, we recommend
supplementing the text treatments with venture capital cases (available individually
or in collected case books) and journal articles covering private equity (venture
capital) and initial public offerings (investment banking). For an abbreviated mini-
semester course or compressed executive MBA, we recommend concentrating on
the text and using our capstone cases as focal points for integrating the venture
financing perspective.
We have also used this text for semester-long upper division (junior/senior-
level) undergraduate courses for finance and nonfinance business majors. Most
academic business programs require students to take basic background courses in
both accounting and finance prior to upper division courses such as entrepreneurial
finance. Chapters 10, 11, and 14 present a rigorous and conceptually advanced
approach to financial valuation. Our experience is that these chapters provide the
greatest intellectual challenge and require relatively sophisticated spreadsheet skills.
The seventh edition of this textbook was written to support two different approaches
to the undergraduate entrepreneurial finance course. The more rigorous approach
challenges undergraduate students by covering all 16 chapters including all valuation
materials and has a decision-making focus. An alternative approach is to teach
a more descriptive or conceptual course. For those preferring this latter approach,
we recommend that Chapters 10 and 11 from Part 4 and Chapter 14 from Part 5
xiv Preface
be omitted or covered in a descriptive (no modeling or calculations) manner. For

application, while the included capstone cases synthesize a great deal of the text’s
material, some instructors find it useful to have students prepare short cases in lieu of,
or prior to, these capstones.
Regarding the accounting and basic finance background material in Chapters 4
and 5, we provide it for student and instructor convenience when the material has not
been covered in prerequisite courses or in instances when a review of the materials
is warranted. The remainder of the text can be used without explicit coverage of
this review material. Additionally, for some adopters, it may be advantageous to alter
the sequencing and coverage of the securities law and investment banking material,
depending on student backgrounds and other course offerings.
Pedagogical Enhancements in the

Seventh Edition
Overall changes to content and organization include:
cc We refreshed the “From the Headlines” and replaced four of them with new stories.
cc We rewrote the learning objectives presented at the beginning of each chapter so
there now is one learning objective for each major section in each chapter.
cc We continue to provide pedagogical guidance for each exercise/problem at the end
of each chapter by providing a brief italicized description of the content or focus of
the exercise or problem.
cc We added material on “gig economy” and “sharing economy” societal changes that
continue to evolve.
cc We updated personal and corporate income tax information to reflect passage of
the Tax Cuts and Jobs Act of 2017, which provided for a substantial reduction in
the corporate income tax rate.
cc We updated our treatment of the Jumpstart Our Business Startups ( JOBS) Act of
2012 as it relates to small offering registration exemptions from SEC registration
requirements both in general and when using crowdfunding to raise money.
cc We updated material showing annual venture capital investment amounts to reflect
the substantial increases in recent years.
cc We added a discussion on ventures possibly using a “direct listing” method rather
than a traditional initial public offering (IPO) to go public.
Supplements
INSTRUCTORS MANUAL
Written by the text authors, the Instructor’s Manual includes short answers to end-of-
chapter questions and answers to end-of-chapter problems. The authors also include
answers to the assignments at the end of the two capstone cases. The Instructor’s Manual
is available on the text Web site for instructor use only.
POWERPOINT LECTURE SLIDES

Created by the text authors, the PowerPoint slides present a point-by-point lecture
outline, including graphics and equations, for instructors to use in the classroom. They
are available on the text Web site for instructors only.
Preface xv
Cognero™ Testing Software

Cengage Learning Testing Powered by Cognero™ is a flexible, online system that
allows you to author, edit, and manage test bank content from multiple Cengage
Learning solutions, create multiple test versions in an instant, and deliver tests from
your LMS, your classroom, or wherever you want. Written by the text authors, the Test
Bank includes true/false and multiple choice questions.
EXCEL SOLUTIONS
Excel Solutions to end-of-chapter problems requiring Excel are provided for instructors
on the text Web site.
TEXT WEB SITE

The text Web site at www.cengage.com/finance/leach/entrepreneurial/7e provides
access to these supplements.
ACKNOWLEDGMENTS
During the several years we spent developing and delivering this material, we benefited
from interactions with colleagues, students, entrepreneurs, and venture capitalists.
We thank the numerous sections of students who became the sounding board for
our presentation of this material. We also thank the members of the Venture Capital
Association of Colorado who opened their professional lives and venture capital
conferences to our students. Additionally, we have benefited from detailed valuable
comments and input by Craig Wright and Michael Meresman. Clinton Talmo and Robert
Donchez contributed to the preparation of the Instructor’s Manual for earlier editions.
We recognize the moral support of the Deming Center for Entrepreneurship (Bob
Deming, and former directors Dale Meyer, Denis Nock, Kathy Simon, Steve Lawrence,
and Paul Jerde). We thank the Coleman Foundation for research support for the Spatial
Technology, Inc., case and the Educational Legacy Fund for research support for the
Eco-Products, Inc., case.
We recognize the valuable contributions of our editorial staff at Cengage Learning.
Michael Mercier was our original acquisitions editor and Mike Reynolds served as
senior editor on several of our prior editions. For the seventh edition, we recognize
Aaron Arnsparger, Senior Product Manager; and Content Manager, Renee Schnee.
We also thank Martha Leach for research assistance behind the “From the Headlines”
stories and for proofreading complete versions of earlier editions. We thank Andre
Gygax, Hardjo Koerniadi, and Cody Engle who provided several important corrections
to previous materials.
For their patience and insights offered during the process, we thank our colleagues
who reviewed materials for this seventh edition or earlier editions of the text:
Brian Adams, University of Portland
M.J. Alhabeeb, University of Massachusetts
Olufunmilayo Arewa, Northwestern University
David Choi, Loyola Marymount University
Susan Coleman, University of Hartford
David Culpepper, Millsaps College
John Farlin, Ohio Dominican
David Hartman, Central Connecticut State University
William C. Hudson, St. Cloud State University
Narayanan Jayaraman, Georgia Tech
xvi Preface
Jeffrey June, Miami University

Miranda Lam, Salem State College
Michael S. Long, Rutgers University
Michael Owens, University of Tennessee Chattanooga
Robert Patterson, Westminster College
Charles B. Ruscher, University of Arizona
Steven R. Scheff, Florida Gulf Coast University
Gregory Stoller, Boston College
Srinivasan Sundaram, Ball State University
Michael Williams, University of Denver
Finally, to our families for their patience through seven editions, we offer our sincere
thanks.
J. Chris Leach
Ronald W. Melicher
About the Authors
J. Chris Leach is Professor of Finance, the W.W. Reynolds Capital Market Program
Chair and formerly Robert H. and Beverly A. Deming Professor in Entrepreneurship at
the Leeds School of Business, University of Colorado at Boulder. He received a finance
Ph.D. from Cornell University, began his teaching career at the Wharton School and
has been a visiting professor at Carnegie Mellon, the Indian School of Business, and
the Stockholm Institute for Financial Research (at the Stockholm School of Economics).
His teaching experience includes courses for undergraduates, MBAs, Ph.D. students,
and executives. He has been recognized as Graduate Professor of the Year and has
received multiple awards for MBA Teaching Excellence. His research on a variety of
topics has been published in The Review of Financial Studies, Journal of Financial
and Quantitative Analysis, Journal of Business, Journal of Accounting, Auditing and
Finance, Review of Economic Dynamics, and Journal of Money, Credit and Banking,
among other journals.
Chris’s business background includes various startups dating back to his early
teens in the 1970s. During his transition to the University of Colorado, he was the
chairman of a New Mexico startup and later, as an investor and advisor, participated
in a late 1990s Silicon Valley startup that subsequently merged into a public company.
His consulting activities include business and strategic planning advising, valuation,
and deal structure for early stage and small businesses. He is a faculty advisor for the
Deming Center Venture Fund. MBA teams Chris has advised have qualified for twelve
international championships of the Venture Capital Investment Competition.
Ronald W. Melicher is Professor Emeritus of Finance in the Leeds School of
Business at the University of Colorado at Boulder. He earned his undergraduate, MBA,
and doctoral degrees from Washington University in St. Louis, Missouri. While at the
University of Colorado, he received several distinguished teaching awards and was
designated as a university-wide President’s Teaching Scholar. He also has held the
William H. Baugh Distinguished Scholar faculty position, served three multi-year terms
as Chair of the Finance Division, served as the Faculty Director of the Boulder Campus
MBA Program, and twice was the Academic Chair of the three-campus Executive MBA
Program. Ron is a former president of the Financial Management Association.
Ron has taught entrepreneurial finance at both the MBA and undergraduate levels,
corporate finance and financial strategy in the MBA and Executive MBA programs,
and investment banking to undergraduate students. While on sabbatical leave from
the University of Colorado, Ron taught at the INSEAD Graduate School of Business in
Fontainebleau, France and at the University of Zurich in Zurich, Switzerland. He has
delivered numerous university-offered executive education noncredit courses and has
taught in-house finance education materials for IBM and other firms. He has given
expert witness testimony on cost of capital in regulatory proceedings and provided
consulting expertise in the areas of financial management and firm valuation.
Ron’s research interests focus on mergers and acquisitions, corporate restructurings,
and the financing and valuation of early-stage firms. His previous research has been
published in major finance journals including the Journal of Finance, Journal of
Financial and Quantitative Analysis, and Financial Management. He is the co-author of
Introduction to Finance: Markets, Investments, and Financial Management, Seventeenth
Edition (John Wiley & Sons, 2020).
xvii
1
Chapter 2 Developing the Business Idea 1
The Entrepreneurial
Environment PA R T
tandaV/Shutterstock.com
CHAPTER 1
Introduction to Finance for Entrepreneurs 3
CHAPTER 2
Developing the Business Idea 41
Introduction
to Finance for
Entrepreneurs
1
CHAPTER
FIRST THOUGHTS
Only those individuals with entrepreneurial experience can say, “Been there, done
that!” With aspiring entrepreneurs in mind, we start at the beginning and consider how
entrepreneurial finance relates to the other aspects and challenges of launching a new
venture. Our goal is to equip you with the terms, tools, and techniques that can help
turn a business idea into a successful venture.
LOOKING AHEAD
Chapter 2 focuses on the transformation of an idea into a business opportunity and
the more formal representation of that opportunity as a business plan. Most successful
ideas are grounded in sound business models. We present qualitative and quantitative
screening exercises that can help determine an idea’s commercial viability. We provide
a brief discussion of a business plan’s key elements.
CHAPTER LEARNING OBJECTIVES

This chapter presents an overview of entrepreneurial finance. We hope to convey the
potential benefit of embracing standard entrepreneurial finance methods and tech-
niques. We consider an entrepreneur’s operating and financial decisions at each stage,
as the venture progresses from idea to harvest. After completing this chapter, you will
be able to:
LO 1.1 Characterize the entrepreneurial process.
LO 1.2 Describe entrepreneurship and some characteristics of entrepreneurs.
LO 1.3 Indicate several megatrends providing waves of entrepreneurial opportunities.
LO 1.4 List and describe the seven principles of entrepreneurial finance.
LO 1.5 Discuss entrepreneurial finance and the role of the financial manager.
LO 1.6 Describe the various stages of a successful venture’s life cycle.
LO 1.7 Identify, by life cycle stage, the relevant types of financing and investors.
LO 1.8 Understand the life cycle approach used in this book.
4 Chapter 1 Introduction to Finance for Entrepreneurs
FROM THE HEADLINES

Get a Grip on PopSockets LLC
It isn’t uncommon for an annoyance $12,000 but ended up raising $18,591 PopSockets’ avoidance of institutional
to be the genesis of a new venture. in funding. In return for a $25 pledge, venture capital has been noted by the
David Barnett was frustrated by orga- participants would be sent a PopSockets startup community.10 Ranked in 2018 at
nizing and storing his iPhone’s corded case “as soon as they are manufactured— #2 on the Inc. 5000 list of fastest-growing
earbuds. 1 Bluetooth headphones, first late February/early March (PopSockets companies in America,11 and on track to
introduced in 2000,2 would have elimi- will retail for $34.99).”5 However, Barnett having manufactured 70 million prod-
nated Barnett’s cord storage challenges lost his house to a summer 2012 fire, the ucts by the end of that year,12 it is little
but not those of storing wireless ear- upside of which was that he could fund wonder that PopSockets is rumored to be
buds. Rather than focusing on the the venture with the insurance proceeds considering a 2019 IPO.13
coming wireless r evolution or other for the belongings he lost in that fire.6 He 6 https://www.forbes.com/sites
high-tech approaches to address his also was fueled by “acquaintances” who /amitchowdhry/2018/02/14/popsockets
annoyance, Barnett pursued a low-tech invested about $500,000.7 Despite facing /#49c64f5346a9, accessed on 6/19/2019
solution. From his initial p
rototype of serious production delays, Barnett ended 7 Ibid.
wrapping an earbud cord around glued up processing refund requests for only 8 https://www.npr.org/sections/alltechconsidered
stacks of buttons on the back of his about 40 of his 500 Kickstarter backers.8 /2012/09/03/160505449/when-a-kickstarter
iPhone to 3D computer-aided-d esigns Starting in 2014, PopSockets sold 30,000 -campaign-fails-does-anyone-get-their-money
-back, accessed on 6/19/2019.
and 60 prototypes, the collapsible units in the first year with $240,000 in
9 https://www.peak6.com/strategic-capital/,
accordion-based PopSockets nob/han- revenue. Crunchbase lists an unspeci- accessed on 6/19/2019.
dle (https://www.popsockets.com/) fied amount of additional investment
10 https://www.forbes.com/sites
rapidly evolved into a retail sensation.3 by Peak6, a “self-funded” investor,9 but /amitchowdhry/2018/02/14/popsockets
In the process, its original intended /#49c64f5346a9 and https://www.inc.com
use as an organizer for earbud cords /brian-de-haaff/6-companies-on-inc-5000
1 https://www.forbes.com/sites/amitchow- -list-that-defy-what-you-think-of-high
became only one example of PopSock- dhry/2018/02/14/popsockets/#49c64f5346a9, -growth-companies.html, both accessed on
ets’ significant cell phone handling and accessed on 6/19/2019. 6/19/2019.
safety advantages.4 Indeed, many users 2 https://www.sutori.com/story/the-history-of 11 https://www.inc.com/guadalupe
of a single PopSockets nob/handle -bluetooth-headphones--N6tTxcaHeCN9Yu -gonzalez/2018-inc5000-top-companies
GsFXqs52jh, accessed on 6/19/2019.
for the back of their cell phones don’t .html, accessed on 6/19/2019.
even know the multiknob cord-storage 3 https://www.forbes.com/sites/amitchowdhry 12 https://www.forbes.com/sites/amitchowdhry
/2018/02/14/popsockets/#49c64f5346a9, /2018/02/14/popsockets/#49c64f5346a9,
heritage. accessed on 6/19/2019. accessed on 6/19/2019.
Barnett founded PopSockets while 4 https://www.kickstarter.com/projects 13 https://www.bloomberg.com/news/articles
he was a philosophy professor at the /1250439912/popsockets-iphone-case-it-pops /2019-02-08/philosophy-professor-preps
University of Colorado Boulder. An early -props-kicks-and-cli, accessed on 6/19/2019. -popsocket-ipo-after-plastic-epiphany,
2012 Kickstarter campaign set a goal of 5 Ibid. accessed on 6/19/2019.
I
t is estimated that more than one million new businesses are started in the United
States each year. The Bureau of Labor Statistics of the U.S. Department of Labor
estimates the “number of business establishments less than 1 year old” to have aver-
aged over 600,000 in recent years.1 Reasonable estimates place nonemployer (e.g.,
single person or small family) businesses started each year, which are not included in
the Bureau of Labor Statistics data, at an even larger number.2 In addition to these for-
mally organized startups, countless commercial ideas are entertained and abandoned
without the benefit of a formal organization. The incredible magnitude of potential
entrepreneurial opportunities is a clear reflection of the commercial energy fostered by
a market economy. We believe that the time spent on this book’s treatment of financial
tools and techniques may be one of the more important investments you make.
1 See Business Employment Dynamics at https://www.bls.gov/bdm/.

2 The U.S. Small Business Administration estimates that “Four in five businesses are nonemployers” (https://www.sba.gov/sites
/default/files/advocacy/Nonemployer-Fact-Sheet.pdf, accessed on 6/25/2019).
Another random document with
no related content on Scribd:
As it was less than an hour since we had left the camp, it was
quite impossible that he could have been tired, and as for his
blisters, when examined they proved to consist of a single small
“brister” on his instep, which, as we were travelling over smooth
sand and he, like all the rest of us, was walking barefoot, could not
have caused him the slightest inconvenience.
I pointed this out to him and told him that if he stayed behind and
left the caravan he would be certain to die of thirst.
“Never mind,” he replied heroically. “Never mind. I will stay behind
and die. I cannot walk any more. I am tired. You go on, sir, and save
yourselves. I will stay here and die in the desert.”
We had had many scenes of this kind with Khalil, and the bedawin
never failed to enjoy them thoroughly.
“What is he saying?” asked Qway.
I translated as well as I could.
“Malaysh” (“it’s of no consequence”), replied Qway calmly. “Let
him stay behind and die if he wants to. Whack the camels, Abd er
Rahman, and let’s go. We can’t wait. We are in the desert, and short
of water.”
“I shall die,” sobbed Khalil.
“Malaysh,” repeated Qway, without even troubling to look back at
him.
I felt much inclined to tickle the aggravating brute up with my
kurbaj, but it was against my principles to beat a native, so we went
on and left him sitting alone in the desert.
“My wife will be a widow,” screamed Khalil after us—though how
he expected that contingency to appeal to our sympathies was not
quite clear. Musa shouted back some ribald remarks about the lady
in question, and the caravan proceeded cheerfully—not to say
uproariously—upon its way.
After we had gone some distance our road dipped down to a
lower level, and we lost sight of Khalil for a while. I looked back just
before we got out of sight, and saw him sitting exactly where we had
left him. We travelled a considerable distance before a rise in the
ground over which our road ran enabled us to see him again. On
looking back through my glasses, I could just distinguish him sitting
still where we had left him. I quite expected that by the time we had
gone a few hundred yards—or at any rate as soon as we were out of
sight—that Khalil would have got up and followed us. But the fellahin
of Egypt are a queer-tempered race, who when they cannot get
exactly what they want, will sometimes fall into a fit of suicidal sulks
that is rather difficult to deal with. As Khalil appeared to have got into
this sulky frame of mind I began to fear that he really intended to
carry out his threat and to stay where he was until he either died of
thirst, or had been so far left behind by the caravan that he would be
unable to rejoin us, which would have led to the same result.
Qway, when I asked him how long it would take for us to reach the
oasis, was most positive in saying that it would be all that we could
do to get across the dunes before sunset the next day. The sand
belt, though easy enough to cross in daylight, when we could see
where we were going, would have presented a very serious obstacle
in the dark. With the possibility of another day of scorching simum or,
worse still, a violent sandstorm in our teeth, before we reached
Dakhla, a delay that would cause us to camp the next night on the
wrong side of the dunes, and so entail another twelve hours in the
desert before reaching water, might have had very serious
consequences.
“If we don’t cross the sand to-morrow,” said Qway impressively,
“we may not reach Mut at all. Look at the camels. Look at our tanks.
They are nearly empty. We must go on. We can’t wait.”
I couldn’t risk sacrificing the whole caravan for the sake of one
malingerer; so I told Abd er Rahman to whack up the camels, and
we left the “delicutly nurchered” Khalil to die in the desert.
Soon afterwards we lost sight of him altogether. We had started
early in the morning and we went on throughout the day, with hardly
a halt, till eight o’clock at night, when we were compelled to stop in
order to rest the camels. We saw nothing more of Khalil and gave
him up for lost. To give him a last chance we lighted a big fire and
then composed ourselves to sleep as well as we could, on a wholly
insufficient allowance of water.
Towards morning Khalil staggered into the camp amid the jeers
and curses of the men, croaked a request for water and, having
drunk, flung himself down to sleep, too dead beat even to eat.
That little episode cured Khalil of malingering, and he gave no
further trouble on our journey to Mut. It just shows what a little tact
will do in dealing with a native. Many brutal fellows would have
beaten the poor man!
The next day luckily proved fairly cool, and we made better
progress than we expected. We consequently struck the dune belt
just after noon and, as we seemed to have found a low part of it, by
Qway’s advice I decided to tackle it at that point.
But in coming to this decision I had overlooked a most important
factor in the situation—the light. Curious as it may seem, dunes are
sometimes almost as difficult to cross in the blazing sunshine at
noon as they are in the dark. The intense glare at this time of day
makes the almost white sand of which they are composed most
painful to look at, and the total absence of any shade prevents their
shape being seen and makes even the ripples practically invisible.
In consequence of this state of affairs, Qway, while riding ahead of
the caravan to show the way, blundered without seeing where he
was going, off the flat top of a dune on to the steep face below, was
thrown, and he and his hagin only just escaped rolling down to the
bottom, a fall of some thirty feet. After that, until we reached the
farther side of the belt, he remained on foot, dragging his hagin
behind him. Once across the dunes the rest of the journey was easy
enough.
The news of affairs in Europe that we heard in Dakhla on our
return was simply heartbreaking. The revolution in Turkey that had
promised to be rather a big thing, had fizzled out entirely. The Sultan
Abdul Hamid—“Abdul the Damned”—it is true had been deposed;
but his brother, Mohammed V, had been made ruler in his stead, and
was firmly seated on the rickety Turkish throne. The disturbance had
quieted down in Turkey; there was no chance of there being a
republic, and so the threatened invasion of Egypt by the Senussi,
was not in the least likely to come off.
All the same, we felt fairly pleased with ourselves, for we had
been for eighteen days in the desert away from water, with only
seven camels, in the most trying time of the year, and had got back
again without losing a single beast. But anyone who feels inclined to
repeat this picnic is advised to take enough water and suitable food.
The Gubary road by which we travelled to Kharga followed the
foot of the cliff that forms the southern boundary of the plateau upon
which ’Ain Amur lies. It was very featureless and uninteresting. But
though it contained no natural features of any importance, the
bedawin have a number of landmarks along it to which they have
given names and by which they divide the road up into various
stages. It is curious to see how the necessity for naming places
arises as soon as a district becomes frequented.
These little landmarks are often shown in maps in a very
misleading way. One of those on the Gubary road is known as Bu el
Agul. There is another Bu el Agul, or Abu el Agul, as it is sometimes
called, on the Derb et Tawil, or “long road,” that runs from the Nile
Valley, near Assiut, across the desert to Dakhla Oasis. I have often
seen this place marked on maps in an atlas, the name being printed
in the same type as that used for big mountains, or villages in the
Nile Valley, and there was nothing whatever in the way in which it
was shown on these maps to indicate its unimportance.
Now Bu el Agul is only a grave—what is more, it is not even a real
grave, it is a bogus one. The commonest form of a native nickname
is to christen a man the father of the thing for which he is best known
among them. I was myself at one time known as “Abu Zerzura,” the
“Father of Zerzura,” because I was supposed to be looking for that
oasis, and later on as “Abu Ramal,” “the father of sand,” because I
spent so much time among the dunes.
Bu el Agul means the “father of hobbles.” One of the greatest
risks that an inexperienced Arab runs, when travelling alone in the
desert, is that of allowing his camel to break loose and escape
during the night. Then, unless he be near a well, having no beast to
carry his water-skin, his fate is probably sealed. Many lives have
been lost in this way.
With tragedies of this description constantly before their minds,
the desert guides, as a reminder to their less experienced brethren
to secure their beasts properly at night, have made an imitation
grave about half-way along each of the desert roads. This grave is
supposed to represent the last resting-place of the “father of
hobbles,” who has lost his life owing to his not having tied up his
camel securely at night. It is the custom of every traveller, who uses
the road, to throw on to the “grave” as he passes it, a worn-out
hobble or water-skin, or part of a broken water vessel, with the result
that in time a considerable pile accumulates.
It was the end of June by the time we reached Kharga again.
Anyone attempting to work in the desert at any distance away from
water after March is severely handicapped by the high temperature. I
had already experienced nearly three months of these conditions,
and the prospect of doing any good in the desert during the
remainder of the hot weather was so remote that I returned to
England for the remainder of the summer.
CHAPTER XII
M Y first season’s work in the desert had been sufficiently

successful to warrant a second attempt, as I had carried out
one of the objects on my programme by managing to cross the
dune-field; so I determined to follow it up by another journey. The
main piece of work that I planned for my second year was to push as
far as possible along the old road to the south-west of Dakhla, that
we had already followed for about one hundred and fifty miles.
Before starting I heard rumours of a place that had not previously
been reported called Owanat, that lay upon this road and was
apparently the first point to which it went. But I was able to gather
little information on the subject. I could not even hear whether it was
inhabited or deserted. I was not even sure whether water was to be
found there.
The journey to this place seemed likely to be of great length
before water could be reached, and as the ultimate destination of the
road was quite uncertain, and nothing was known of the part into
which it led, the possibility of getting into an actively hostile district
had to be considered, and arrangements to be made to make sure of
our retreat into Egypt, in the event of our camels being taken from us
and our finding it necessary to make the return journey on foot.
The distance we should have to travel from Dakhla Oasis, along
the road, before we found water or reached an oasis could not, I
imagined, be more than fifteen days’ journey at the most. I hoped, if
we managed to cover this distance and no other difficulties arose,
that we should be able to push on still farther, and eventually get
right across the desert into the French Sudan, where the authorities
had been warned to look out for me and to give me any assistance
they could.
This old road from its size had at one time evidently been one of
the main caravan routes across the desert. The Senussi, it was
known, paid considerable attention to the improvement of the desert
roads, and, from what the natives told me, under their able
management, Kufara Oasis had become a focus to which most of
the caravan routes of this part of the desert converged.
This road must always have been a difficult one, owing to the long
waterless stretch that had to be crossed before the first oasis could
be reached. So it seemed likely that it had been abandoned in
consequence of another road to Kufara having been made easier by
sinking of new wells.
My main object in this journey was to see if this route was still
usable for caravans or, if not, whether it could not be made so by
means of new wells, or by improving the road at difficult points.
A road running up from Wanjunga to Dakhla Oasis would have cut
right across all the caravan routes, leading up to Kufara from the
Bedayat country and the Eastern Sudan, and so might have diverted
into Egypt a great deal of the traffic then going to Kufara and Tripoli.
In addition some of the trade carried by the great north and south
road, from the Central Sudan through Tikeru to Kufara, might also
have been brought into Dakhla by reopening this old route. As the
railway from the Nile Valley into Kharga could easily have been
extended into Dakhla, that oasis might have supplanted Kufara as
the main caravan centre of the Libyan Desert, and a comparatively
large entrepôt trade might have been developed there, the
merchandise being distributed by means of the railway into Egypt.
The total value of the goods carried across this district by caravan
is not great; but still the trade is of sufficient importance to make it
worth while to attempt to secure it, especially as, if that were done, it
would give a considerable hold over the inaccessible tribes of the
interior, and at the same time be a severe blow to the Senussi, who
for some time had threatened to become rather a nuisance.
To meet the requirements of the long fifteen days’ journey to
Owanat from Dakhla, or rather of our return in the event of our
having to beat a hurried retreat on foot, I had thirty small tanks made
of galvanised iron. These were placed in wooden boxes, a couple
being in each box, and packed round with straw to keep the water
cool and prevent them from shaking about in their cases.
Each pair of tanks contained enough water for the men and
myself for one day, with a slight margin over to allow for
contingencies. During the journey, one of these boxes could be left
at the end of every day’s march, with sufficient food to carry us on to
the next depot, in the event of our finding it necessary to retrace our
steps. With a pair of tanks in each box, I felt as certain as it was
possible to be that, even if one of them should leak and lose the
whole of its contents, there would still be sufficient water in the
second tank to last us till we reached the next depot. Even if all our
zemzemias and gurbas had been lost, these tanks, even when full,
were of a weight that could easily have been carried by a man during
the day’s march. When empty they could be thrown away.
I went up to Assiut to get together a caravan for the journey,
engaged a brother of Abd er Rahman’s, named Ibrahim, and also
secured Dahab for the journey. Qway and Abd er Rahman joined me
in Assiut, putting up at a picturesque old khan in the native town, and
thus our party became complete. The attempts I had made to find a
guide who knew the parts of the desert beyond the Senussi border
had again proved fruitless.
I hesitated at first to take Ibrahim into the desert partly because—
like many young Sudanese—I found him rather a handful, who
required a good deal of licking into shape, but chiefly because he
had not had much experience with camels, owing to his having acted
for some time as a domestic servant in Kharga Oasis. What finally
decided me to take him was one of those small straws that so often
tell one the way of the wind when dealing with natives.
Once, while loading a camel, preparatory to moving camp, the
baggage began to slip off his back and Ibrahim, as is usual with
bedawin in the circumstances, immediately invoked the aid of his
patron saint by singing out, “Ya! Sidi Abd es Salem.”
The saint that a native calls upon in these cases is nearly always
the one that founded the dervish Order to which he belongs, and this
Abd es Salem ben Mashish—to give him his full name—was the
founder of the Mashishia dervishes and is perhaps still better known
to Moslems as the religious instructor of Sheykh Shadhly, one of the
most famous of all Mohammedan divines.
OLD KHAN IN ASSIUT.
The cardinal principle of the Mashishia is to abstain entirely from

politics—a most useful character to have in a servant when going
into the country of the Senussi. The same principle was adopted by
the Shadhlia order and nearly all its numerous branches, and also by
a set of dervishes which split from the Mashishia, that is known as
the Madania—the old Madania, not the new Madania, which is of a
very different character.
Ibrahim’s brother, Abd er Rahman, used to invoke Abd el Qader el
Jilany, the founder of the great Qadria order of dervishes, the
followers of which, as a rule, are about the least fanatical of
Moslems.
Qway, though he made great protestations of keenness, I soon
found to be obstructing my preparations, and he developed signs of
dishonesty that I had not noticed in him before. What was worse, I
found him secretly communicating with a member of the Senussi
zawia in Qasr Dakhla, who, for some unexplained reason, had come
to Assiut, and who seemed to be in frequent communication with
him. This all pointed to some underhand dealing with the Senussi,
who, until they were brought to their senses by being well beaten in
the great war, always opposed any attempt to enter their country—
usually by tampering with a traveller’s guides.
I concluded that I had better keep a closer watch upon the
conduct of my guide than I had done before.
Having finished all arrangements in Assiut and dispatched the
caravan by road to Kharga, I set out myself by train.
At Qara Station on the Western Oasis line, I found Nimr, Sheykh
Suleyman’s brother. He brought up to me a jet black Sudani, about
six feet three in height, who was so excessively lightly built that he
could hardly have weighed more than eight stone. He answered to
the name of “Abdullah abu Reesha”—“Abdulla the father of
feathers,” a nickname given to him on account of his extreme
thinness. He had, however, the reputation of being one of the best
guides in the desert, and was always in request whenever a caravan
went down to collect natron from Bir Natrun, where there was always
a very fair chance of a scrap with the Bedayat. Nimr suggested that I
should take him as a guide, and appeared to be greatly disappointed
when I told him I had already engaged Qway. I promised, however,
to bear him in mind, and, if I wanted another guide at any time, to
write and ask Sheykh Suleyman to send him.
Nimr told me the rather unwelcome news that the bedawin, who
had been pasturing their camels in Dakhla Oasis, were all scuttling
back again with their beasts to the safety of the Nile Valley, as there
was a report that a famous hashish runner and brigand, known as
’Abdul ’Ati, was coming in to raid the oasis. As I had counted on
being able to hire some camels off these Arabs in the oasis, to
supplement my own caravan when starting off on our fifteen days’
journey, this threatened raid was rather a nuisance and seemed
likely somewhat to upset my plans.
This ’Abdul ’Ati was a well-known character in the desert, and if
half the reports concerning him were true, he must have been a most
formidable personage. He was rather badly wanted by the Frontier
Guard (Camel Corps), as one of his principal occupations was that of
smuggling hashish (Indian hemp), at which he had proved himself
most successful. When business of this kind was slack, he
occasionally indulged in a little brigandage, presumably just to keep
his hand in.
Ibrahim, had the usual admiration for an outlaw common to youths
of his age all over the world, and ’Abdul ’Ati was his idol, and he was
a born hero-worshipper. He declared that he was a dead shot, and
owned a rifle that carried two hours’ journey of a caravan, i.e. about
five miles, and that he had no fear of anyone—not even of the Camel
Corps.
When next I heard of ’Abdul ’Ati, he was very busy in Tripoli
fighting against the Italians, and apparently making very good
indeed. The Camel Corps shot him eventually.
My caravan reached Kharga a day or two after my arrival, having
come across the desert from Assiut by a road that enters the oasis at
its northern end.
In Kharga I met Sheykh Suleyman, and, as I was camped not far
from his tent, rode over and spent an evening with him. Qway, of
course, accompanied me in hopes of a free meal, but was most
frigidly received by the sheykh, who treated him in the most
contemptuous manner. We had supper, consisting of bread and
treacle and hard boiled eggs, followed by coffee and cigarettes. After
which we sat for a time and talked.
“You had better take me as a guide instead of Qway,” suddenly
suggested Sheykh Suleyman.
Qway looked quickly up, evidently greatly annoyed, and the social
atmosphere became distinctly electric.
I explained that I could not well do that as I had found Qway an
excellent guide the year before, and had already signed an
agreement to take him on again for the season. Qway rather hotly
added some expostulation that I could not quite catch; but the gist of
it apparently was that Sheykh Suleyman was not quite playing the
game.
The sheykh laughed. “Maleysh” (never mind), he said, “if you want
another guide, write me a letter, and I will send Abdulla abu Reesha.
He’s a good man—better than Qway.”
Qway commenced a heated reply, only to be laughed at by
Sheykh Suleyman. As the interview threatened to become distinctly
stormy, I took the earliest opportunity of returning to camp.
The sheykh insisted on providing my breakfast the next morning.
Qway, for once, effaced himself, while breakfast and the subsequent
tea were in progress. He seemed to have seen as much of Sheykh
Suleyman as he wanted for the moment.
We got off at about ten in the morning, and after a short march
pitched our camp early in the day at Qasr Lebakha, a small square
mud-built keep on a stone foundation, having circular towers at the
four corners, all in a fairly good state of preservation. The walls at
the top of the tower were built double, with a kind of parapet walk
round the top, which may originally have been a mural passage of
which the roof had fallen in.
From Qasr Lebakha we went on to ’Ain Um Debadib. Our road lay
almost due west, parallel to the cliff of the plateau on our right, and
turned out to be anything but a good one, being both hilly and very
heavy going owing to the drift sand. The camels, too, gave a lot of
trouble.
The caravan, as a whole, turned out to be the worst I ever owned.
There was, however, one exception. He was an enormously powerful
brute from the Sudan, that it seemed almost impossible to
overburden. The proverbial “last straw” that would have broken that
camel’s back could not, I believe, have been grown. But like other
powerful camels, he was always trying to bite the other beasts and
was a confirmed “man-eater.”
’Ain Um Debadib is a considerably larger place than Qasr
Lebakha. At the time of my visit it was inhabited by two men and
their families, natives of Kharga village, to which they occasionally
returned, leaving this little oasis to look after itself. Like Qasr
Lebakha, the place was originally defended by a castle, also
apparently of Roman date. An old road runs north-west from ’Ain Um
Debadib, which leads over the cliff to the north of the oasis by what
appears from below to be a difficult pass. I intended at some later
date to come back and try to find this place; but unfortunately the
opportunity did not occur. The Spaniards have a proverb to the effect
that hell is not only paved with good intentions, but is also roofed
with lost opportunities, and probably, in omitting to find out what lay
beyond that cliff, I added a slate to the infernal regions, for I think it
extremely likely that a depression lay on the other side of it
containing the well of ’Ain Hamur—not to be confused with ’Ain Amur
—or possibly a place called ’Ain Embarres.
CHAPTER XIII
W E reached Dakhla Oasis on 23rd January, and stayed for a day

in the scrub-covered area, through which the road runs before
entering the inhabited portion of the oasis, on the chance of getting a
shot at gazelle. While camped here the ’omda of Tenida, the nearest
village, who was notorious throughout the oasis for his meanness,
sent down over night a ghaffir (night watchman) after dark, to spy out
who we were, and, having made sure of our identity, carefully got
himself out of the way, in order to avoid having to invite us in to a
meal, according to the hospitable custom of the oasis!
As gazelle-hunting, owing to some confounded bedawin, who
were camping in the neighbourhood and wandering all over the
place, seemed likely to prove a waste of energy, I moved on the
following day to the village of Belat.
Very little barley is grown in the oasis beyond that required for the
use of the inhabitants; but as I heard that the ’omda had a large
store of it that he had been unsuccessfully trying to sell, I
endeavoured to buy some off him.
But unfortunately he “followed the Skeykh,” and Qway continuing
his obstructive tactics of Assiut, secretly got hold of him, with the
result that, when I approached him on the subject, the ’omda
declared that there was not a grain left in the village—“not one.”
A distinctly stormy scene followed, which ended in the ’omda
caving in and producing about a quarter of a ton of the absent grain,
which I bought off him at an exorbitant price.
After this I gave him a thorough good dressing down, and then
graciously forgave him and we drowned our enmity in the usual tea. I
was not altogether dissatisfied with the transaction, for I felt that I
had read the ’omda a lesson that he would not forget for some time.
In this, however, as events turned out, I was to be grievously
disappointed—my troubles with regard to the camels’ fodder had
only just begun.
On our arrival in Mut, I went at once to the post office for letters,
and finding that the upper story of the place was vacant, arranged to
rent it during my stay in the oasis. It proved to be far better quarters
than the old gloomy, scorpion-haunted store, and I found no reason
to regret the change.
UPPER FLOOR OF POST OFFICE.
The man who tended the garden of the post office was quite a
local celebrity. He was no other than the blind drummer who
officiated in the band, when there was a wedding in the district. He
was also the town crier, and I frequently met him in the streets,
where, after beating a roll on his drum to attract attention, he would
call out the news that he was engaged to spread.
Curiously, considering that he was totally blind, he had the
reputation of being the best grower of vegetables in the
neighbourhood, and his services as gardener were in great request
in consequence. He was passionately fond of flowers, and was
almost invariably seen with a rose, or a sprig of fruit blossom in his
hand, which, as he made his way about the streets, he continually
smelt. Once, when I happened to meet him, the supply of flowers
must have run short, for he was inhaling, with evident gusto, the
delicious perfume of an onion!
His sense of locality must have been wonderful, for he made his
way about the streets almost as easily as though in full possession
of perfect eyesight. Plants of all kinds seemed to be an obsession
with him. He would squat down by the side of a bed of young
vegetables he had planted, feel for the plants by running his hands
rapidly over the soil, and, having found one, would tenderly finger it
to see how it was growing. He would in this way rapidly examine
each individual plant in the bed, and occasionally comment on the
growth of some particular plant since he had last handled it. The loss
of his eyesight had evidently greatly quickened his other faculties, for
he could find any plant he wished without difficulty, and seemed to
have a perfect recollection of the state in which he had last left them,
never, I was told, making any mistake in their identity. The gratified
smile that lighted up his blind, patient face, when his charges were
doing well was quite pathetic.
While staying in the post office my camels were accommodated
about a hundred yards away, in an open space under the lea of the
high mud-built wall that surrounds the town, close to where a break
had been made in it to allow free passage to the cultivation beyond.
The choice of this site for the camping ground of the camels turned
out to be unfortunate, for the locality was haunted. A man, it was
said, had been killed near there while felling a tree, and his ghost—
or as some said a ghul—frequently appeared there.
A night or two after our arrival, Ibrahim, who was sleeping there
alone with the camels, came up to my room, just as I was getting into
bed, and announced that he was not a bit afraid—and he did not
seem in the least perturbed—but an afrit kept throwing clods of earth
at the camels, which prevented them from sleeping, so he thought
he had better come and tell me about it.
The clods came from over the wall, and several times he had
rushed round the corner, through the gap, to try and see the afrit who
was throwing them, but he had been unable to do so, so he wanted
me to come down and attend to him.
BLIND TOWN CRIER, MUT.
It is not often that one gets the chance of interviewing a real

ghost, so taking a candle and my revolver, I went down to the camel
yard. Ibrahim showed me a pile of clods that had been thrown that
he had collected—there must at least have been a dozen of them—
and showed me the direction from which they had come.
It certainly was rather uncanny. On the other side of the wall was
a flat open space, and there was nowhere within stone’s throw
where any human being could possibly have hidden. I waited for
some time to see if any more clods would be thrown; but as none
came, I told Ibrahim in a loud voice to shoot any afrit he saw and
gave him my revolver, and then in a lower tone told him that he was
on no account to shoot at all, but that if anyone came he might
threaten to do so.
Ibrahim was perfectly satisfied. It was not so much the possession
of the revolver that reassured him as the fact that it was made of
iron, and afrits, as of course is well known, are afraid of iron!
No more clods were thrown that night; but they began again on
the following evening, and still Ibrahim was unable to see the culprit.
The thing was becoming a nuisance and it had to be stopped. It was
of no use going to the native officials; they would have been just as
ready to believe in the afrit or ghul yarn as any of the natives of the
oasis, so I decided to tackle the question myself.
Dahab, carrying a pot of whitewash and a brush, and I, with a
sextant and the nautical almanac, repaired to the scene of the
haunting in the afternoon. I wrote “Solomon” and “iron” in Arabic on
the wall, drew two human eyes squinting diabolically, a little devil and
the diagram of the configuration of Jupiter’s Satellites, taken from the
nautical almanac—an extremely cabalistic-looking design. I then
waved the sextant about and finally touched each of the marks I had
drawn on the wall with it in turn.
By this time a small crowd had collected, and were watching the
proceedings with considerable interest. A six-inch sextant, fitted with
Reeve’s artificial horizon, is as awe-inspiring an instrument as any
magician could show.
I told Dahab to explain to the crowd that I had just put a tulsim
(talisman) on the wall, and that if it were an afrit that had been
throwing the clods, the words, “Solomon” and “iron,” acting in
conjunction with Jupiter’s Satellites, would certainly do for him
completely. But if it were a human being who had been throwing the
clods, the little devil and the eyes would get to work upon him at
once.
The devil I explained was a particularly malignant little English imp
that I had under my control, and if anyone threw any more clods at
my camels, I had so arranged things, that the devil in the form of this
tiny little black imp would crawl up his nostrils while he slept, and
would stick the forked end of his tail into his brain and keep waggling
it about, causing him the greatest suffering, until in a few years’ time
he went mad. Then it would stamp with red-hot feet on the backs of
his eyeballs till they fell out; after which the culprit would die in
horrible agony.
Dahab, on the way back, said he thought my tulsim looked a very
good one, but he did not at all believe in the afrit theory.
“Afrit,” he said in his funny English. “Never. Ibrahim he very fine
man and women in Dakhla all bad, very bad, like pitch. One women
he want speak Ibrahim.” This was very likely the size of it.
But I laid the ghost anyway. No more clods were thrown at my
camels.

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1 See Business Employment Dynamics at https://www.bls.gov/bdm/.

M Y first season’s work in the desert had been sufficiently

OLD KHAN IN ASSIUT.

The cardinal principle of the Mashishia is to abstain entirely from

W E reached Dakhla Oasis on 23rd January, and stayed for a day

UPPER FLOOR OF POST OFFICE.

It is not often that one gets the chance of interviewing a real

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