Entrepreneurship

Chapter 9 ENTREPRENEURIAL FINANCE AND ACCOUNTING

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Chapter Outline
• 9.1 Overview of Entrepreneurial Finance and Accounting Strategies
• 9.2 Special Funding Strategies
• 9.4 Developing Startup Financial Statements and Projections
9.1 Overview of Entrepreneurial Finance
• First, you must determine the basic requirements for starting the business.
• What kinds of equipment will you need?
• How much labor and what type of skills?
• What facilities or locations would you require to make this business a reality?
• Second, how much do these items cost? If you do not possess an amount of money equal to
the total anticipated cost, you will need to determine how to fund the excess amount.
INITIAL CAPITAL INVESTMENT
9.1 Entrepreneurial Funding across the Company Lifecycle

Funding strategies can change across

different phases of the company
lifecycle.

From inception through successful

operations, a business’s funding grows
generally through three stages:
9.1 Entrepreneurial Funding across the Company Lifecycle

Seed-stage:
A seed-stage company is the earliest
point in its lifecycle.
It is based on a founder’s idea for a
new product or service.
Typically, ventures at this stage are
not yet generating revenue, and the
founders haven’t yet converted their
idea into a saleable product.
The personal savings of the founder,
plus perhaps a few small
investments from family members,
usually constitute the initial funding
of companies at the seed stage.
Angel investors are wealthy, private
individuals seeking investment
options with a greater potential
return.
9.1 Entrepreneurial Funding across the Company Lifecycle

An early stage company has

begun development of its
product. It may be a technical
proof of concept that still
requires adjustments before it
is customer ready.
At this stage, the company’s
investors may now include a
few outsider investors,
including venture capitalists.

A venture capitalist is an
individual or investment firm
that specializes in funding
early stage companies.
9.1 Entrepreneurial Funding across the Company Lifecycle

Companies in the mature stage

have reached commercial
viability. They are operating in
the manner described in the
business plan
An expansion at this level may
result in doubling the size of
the business. To access this
amount of capital, mature
companies may consider selling
a portion of the company,
either to a private equity group
or through an IPO.
An initial public offering (IPO)
occurs the first time a company
offers ownership shares for
sale on a public stock exchange,
such as the New York Stock
Exchange
9.2 Special Funding Strategies
• 9.2 Special Funding Strategies
• Identify funding strategies used by charitable organizations
• Describe financing opportunities available to startups
• Define bootstrapping
• Describe the advantages and disadvantages of bootstrapping
9.2 Special Funding Strategies
We now examine funding strategies
attractive to many startups that do not
require going into debt or exchanging
ownership of the business for financial
support (debt and equity financing).
9.2 Special Funding Strategies
Crowdfunding involves collecting small sums of
money from a large number of people. The people
who contribute money are typically referred to as
backers because they are backing the project or
supporting the business idea.
Dozens of crowdfunding portals
exist: • biz2credit
• WeFunder • SeedInvest
• SeedInvest • Kickstarter
• Kickstarter • Crowdcube
• Crowdcube

Types of crowdfunding:
• Donation.
• Debt. the money pledged by backers is a loan and must be repaid
with interest by a certain deadline.
• Reward. This is when donors receive something in return for their
donations. they may receive a T-shirt, the product or service – often
at a discounted rate.
• Equity. to give away a portion of their business in exchange for
funding
 9.2 Special Funding Strategies
Bartering is a system of exchanging goods or services
for other goods or services instead of for money.

Shanti, a website designer who wants to start a
business.
She may want to have her business formally
incorporated or may require other legal help, such
as
review of standard contracts.
Hiring a lawyer outright for these services can be
Whether the lawyer has just started his own business
or has been established for several years, he may need
a
website created or have an old website redesigned
and updated. This website overhaul could prove costly
for
the lawyer.
9.2 Special Funding Strategies
Competitions
Many organizations hold entrepreneurial finance
contests provide financial awards to the winners.
These prize funds can be used as seed money to start
a new venture.

A great example is the Interamerican Development Bank (IADB

) that established, in 2013, a program called WeXchange within
its innovation laboratory, IADB Lab (BID Lab).
This program seeks to unleash the growth potential of Latin
American and Caribbean female entrepreneurs by expanding
their network, providing access to mentors and investors, and
offering participation in their Pitch Competition.

https://bidlab.org/en
9.2 Special Funding Strategies
Pre-order
Consider the launch of a new book or video
game. Retail stores will often solicit pre-orders,
which are advance purchases of the product.
Customers pay for the desired item before they
even have access.

Example, You can choose to purchase either before construction

starts or during construction.
9.2 Special Funding Strategies
Bootstrapping
It describes a funding strategy that seeks to optimize use
of personal funds and other creative strategies (such as
bartering) to minimize cash outflows

Examples of Bootstrapping Methods:

• Buying used instead of new equipment
• Obtaining payments in advance from customers
• Buying items cheaply but prudently via options such as
eBay
• Minimizing personal expenses
• Sharing office space or employees with other businesses
9.4 Developing Startup Financial Statements and Projections
• 9.4 Developing Startup Financial Statements and Projections
• Understand the three primary financial statements: balance sheet, income
statement, and statement of cash flows
• Understand how financial projections are made and how to use the run rate
and the burn rate
• Understand how to create a break-even analysis
Balaced Sheet and Income Statement

This is Hometown Pizzeria’s balance sheet. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)
Cash Flows

This is Hometown Pizzeria’s statement of cash flows. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0
license)
Projections and Break-Even Analysis