New Venture Financing

(Entrepreneurial Finance)

M.L. Teklehaimanot (Ph.D., M.Sc., BA)

Individuating Values of a New Venture starting Entrepreneur:
 A Third-eye (visionary):
 Wisdom, imagination, creative, inspired
 Passion and purpose:
 Inclination to Meaningful life, solution-oriented and value creation
 Proactiveness:
 Self-initiation, anticipation, exploration, ability to recognize opportunity
 Willingness (Risk-taking):
 Willingness to take-risk, solicit solutions and making bold decisions
 Commitment/resilience:
 Adherence to one’s vision, taking responsibility and pushing boundaries
 Improvement and adaptability:
 Be humble, learn from experience, and engage in continuous growth
 Accountability:
 I eat it whether it is a Goat (celebrate success) or Black-cat (accept failure)
 This course provides students an understanding of new venture financing
(commonly know as entrepreneurial finance) and private equity, especially
venture capital. The course will address financing and strategic issues faced
usually by entrepreneurs in the early stage of a firm. Financial methods will be
used to determine how much money may and should be raised and from what
source, and how the funding should be structured. Specific topics include:
overview of entrepreneurship and new venture businesses, sources and
considerations of venture financing, valuation of venture financing to make
better strategic choices, business plans, and the economics of venture deals that
underlie new venture finance (term sheets, structuring, negotiation), and exit
strategies (initial public offerings, merger, others). A basic background in
accounting and investments is expected in pursue of knowledge in new venture
financing. The evaluation in this course will include individual and group
(project) assignments, Mid-term exam, and final examination.
Ch-1: Introduction to Entrepreneurship and New Venture Business
 Forms of business structures
 Entrepreneurship and the Entrepreneurial mind
 The Entrepreneurial process
 The Opportunity: Seeking, Screening, Seizing and Nurturing
 Screening New venture opportunities
 Stages of New venture development

Ch-2: Financing New Ventures: Sources, Considerations, Choices

 The New Venture business plan
 Sources of New venture financing
 Sequence of New venture financing
 Considerations in New venture financing
 Choices of financing
Ch-3: New Venture Valuation
 New venture (start-ups) valuation

 Entrepreneurial value Vs Corporate finance value

 Determinants of venture value

 Challenges in New venture valuation

 New venture valuation methods

Ch-4: The Deal: Venture capital Negotiation and Structuring

 Introduction: what is a deal in New venture financing?

 The venture capital deal term sheet

 Structuring venture capital deal

 Negotiating venture capital investment deal

Ch-5: Managing Expanding and Growing Ventures
 Dimensions of growth
 Managing start-up stage
 Managing Early and Late growth venture
 New venture expansion/growth strategies
 Venture growth enablers

Ch-6: Exit Strategies

 Harvesting the venture investment
 What is exit in venture investing?
 Reasons for exiting
 Planning an exit
 Designing exiting strategies
How do we learn about this course?

Integrate

What I
know What you
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What the literature and experts have

 Chapter – 1

Introduction to Entrepreneurship and New

Venture Business
Introduction
Why study Entrepreneurship (New Venture) financing?
 While our needs have no limit, we are constrained by limited resources to
pursue our daily needs, lives and chase our dreams.
 In one or another way, unless we become creative and innovative in deploying
the limited resources in a value creating approach, prioritize our needs and
activities, mobilize and integrate resources, our resources are scarce to satisfy
every need, to pursue one’s dream, or achieve development.
 As individuals face with trade-offs, they take a venture approach to address the
economic questions: Scarcity, Opportunity, Trade-off, and Choice.
 A Venture entails undertake a risky or daring course of action (or journey). It
takes an entrepreneurial mindset to venture a business.
 In business, a venture is a new business or business activity that entrepreneurs
initiate to obtain a potentially high return but by assuming a corresponding
risk.
Forms of business structures
 A Business is a key driver for any economy initiated by an entrepreneur who
generates ideas from problems, gaps or opportunities in the market environment.

 Before establishing a business, an entrepreneur determines the structure format

of his/her business, which can take one of the following forms.
a) Sole Proprietorship
 A sole proprietorship is the simplest and most common structure available for a
business.
 It is an unincorporated business owned and operated by one individual with no
distinction between the business and the entrepreneur (the owner). The owner is
entitled to all profits and is responsible for all his/her business’s debts, losses,
and liabilities.
Advantage: Easy start-up (to form), one level of taxation
Disadvantage: Unlimited personal liability, limited access to resources, not tax
breaks benefits
b) Partnership
 A general partnership is formed by two or more individuals. Like the sole
proprietorship, the partners are not separate from the business.
 Each partner contributes to all aspects of the business, including money,
property, labor, or skill. In return, each partner shares in the profits and losses of
the business.
 A partnership agreement should be created that states the duties of each
partner, proportional share of each partner, who makes the final decision, and
how profit and losses will apportioned, exit strategy, etc.
 General partners have full operational control of a business and unlimited
liability, in the business sense.
Advantage: Relatively easy to establish, one level of taxation
Disadvantage: No tax breaks for company benefits, liable for debts incurred by
each partner.
 A Limited partnership is more complex than general partnerships. Limited
partnerships allow partners to have limited liability as well as limited input
with management decisions. These limits depend on the extent of each partner’s
investment percentage.
 Limited partners have less/limited liability and do not take part in day-to-day
business operations.
Advantage: Limited risk to some partners, possibility of one level taxation
Disadvantage: liable for debts incurred by partners, no tax breaks for company
benefits
c) Limited Liability Company (LLC)
 A limited liability company is a hybrid-type of legal structure that provides the
limited liability features (partners have limited personal liability due to negligence,
malpractice, and conduct of partners not under immediate and direct control of a
partner) of a corporation and the tax efficiencies and operational flexibility of a
partnership.
 A limited liability company is a separate legal entity like a corporation; thus
has the right to buy, sue and be sued.
 Unlike shareholders in a corporation, LLCs are not taxed as a separate business
entity. Instead, all profits and losses are "passed through" the business to each
member of the LLC
d) Cooperative
 A cooperative is a business or organization owned and operated for the benefit
of those using its services. Profits and earnings generated by the cooperative are
distributed among the members, also known as user-owners.
 Typically, an elected board of directors and officers manage the cooperative
while regular members have voting power to control the direction of the
cooperative. Members can become part of the cooperative by purchasing shares,
though the amount of shares they hold does not affect the weight of their vote.
 Cooperatives are common in the agriculture, retailing, finance industries.
 A taxation regulation on cooperatives varies from country to country; for
instance, Cooperatives in Ethiopia in general are not subjected either to
income or profit tax. But individual members pay income tax from their
dividends to the government.
e) Corporation
 A corporation is a separate legal entity similar to an individual. Articles of
incorporation are required to be filed with the state.
 The name of the business is followed by the word “incorporated” or “inc.” to
indicate that it is a corporation. Annual shareholders meetings are required.
 A corporation is able to buy and sell property, sue and be sued, and protect its
owners from liability.
 The owners, called shareholders, are individuals who own shares of the
corporation’s stock. Corporations have perpetuity because if an owner,
shareholder, dies, the business does not cease to exist.
Advantages: Owners liability limited to amount invested, perpetuity of business,
ability to buy and sell assets, ability to raise capital through selling stocks,
business is own legal entity
Disadvantages: More difficult to start than proprietorships and partnerships, two
tax levels (taxed as profits, and dividends to shareholders)
 Forms of Entrepreneurial Businesses
 Entrepreneurs are found in all types of industries (agriculture, agro-processing,
textile, leather, mental, medicine, environment, etc) and every business has
been initiated by someone who possessed an entrepreneurial mindset. Some
entrepreneurs prefer to keep their businesses small and manageable while
others strive to expand and grow their operations into bigger companies.
 The most common types of entrepreneurs and the types of businesses they start
are the following:
 Small business entrepreneur:
 Small business entrepreneurs are those who start and run a business by
themselves or with the help of a handful of employees. They are the most
common type of entrepreneurs, found mostly in local markets.
 Innovative entrepreneur:
 An innovative entrepreneur is someone who identifies a problem and seeks to
solve it by using techniques they have developed. They look for new ways to
approach a problem, and find workable solutions that make it easier for a
process to be carried out.
 Scalable new (high-growth potential) ventures:
 A scalable startup entrepreneur expects their business idea will take off quickly
and needs the capacity to expand in response to demand. The entrepreneur has
to be agile, flexible, and capable of foresight to know when to add more of what
they need to keep customers satisfied.
 Social entrepreneur:
 This type of entrepreneurs imagine business models to serve the greater good.
They seek to help people overcome their struggles, and find ways to make a
community a better place to live.
 Large company entrepreneur:
 Large company entrepreneurs work for a corporation and use their
entrepreneurial capacity to exploit growth opportunities from outside and within
the business.
Entrepreneurship and the Entrepreneurial mind
 The word entrepreneur derives from the French words entre, meaning
“between,” and prendre, meaning “to take.” The word was originally used to
describe people who “take on the risk” between buyers and sellers or who
“undertake” a task such as starting a new venture.
 Investors and entrepreneurs differ from each other. An investor is a person
who puts money into something in order to make a profit or get an advantage.
Whereas an entrepreneur identifies opportunities, creates business ideas,
assembles and then integrates all the resources needed—the money, the people,
the business model, the strategy, and the risk-bearing ability—to transform the
invention into a viable new business.
 An entrepreneur is an individual who creates a new business, bearing most of
the risks and enjoying most of the rewards.
 Entrepreneurship is defined as the process by which individuals pursue
opportunities without regard to resources they currently control for the purpose
of exploiting future goods and services.
 Entrepreneurship is the creation or extraction of economic value by an
entrepreneur who, by risk and initiative, attempts to make profits. It is the art of
translating an idea into a business.
 In essence, an entrepreneur’s behavior is trying to identify opportunities and
putting useful ideas, that typically require creativity, drive, and a willingness to
take risks, into practice.
Kibret Abebe was a trained anesthetist working at the city’s largest public
hospital. Nearly every day, car accident victims were rushed in. He aw
victims would be bleeding tremendously and not breathing, and taken
from the scene of the accident without any professional support. This
triggered him to risk his job, see an opportunity to create a new type of
business, an entrepreneurial business venture, the Tebita Ambulance .
 An entrepreneur is someone who has a mindset that enables him/her to think
outside the box, has a willingness to take on risks, and easily steps into a
leadership role.
 Entrepreneurial business ventures are typically proactive innovators and are
not averse to taking calculated risks. In contrast, conservative firms take
more of a “wait and see” posture, and are risk averse.
 Peter Drucker (1985) brands entrepreneurs as individuals who “create
something new, something different; they change or transform values”, and
entrepreneurship as the pursuit of opportunities to combine and redeploy
resources, without regard to current ownership or control of the resources.
 Entrepreneurs have a risk-taking mindset with a vision, innovative skills and
exploitation of deploying available resources to start up a high-growth potential
venture.
 The key is that an entrepreneur is not constrained by current control of
resources.
 An individual with an entrepreneurial mindset does the following:
i) Perceive an opportunity to create value by redeploying society’s resources;
ii) Devise a strategy for marshaling/assembling control of the necessary resources;
iii)Implement a plan of action to bring about the change; and
iv)Harvest the rewards that accrue from the innovation.
 Why Do people become entrepreneurs?
1) To pursue and realize their own ideas/vision
2) To seek resilient and future-oriented solution
3) To become their own boss
4) To realize financial rewards
Characteristics of successful entrepreneurs
 Despite many have attempted to establish new and entrepreneurial ventures, a
lot of them did not succeed but only those who possess the following
entrepreneurial qualities.
 Vision
 Innovation cannot happen without vision, the ability to not only recognize
opportunity and connect dots, but also the competence to question why a
solution does not exist to a problem. Successful entrepreneurs have the ability
to frame the future before it happens and to cast a vision of an improved
condition before others recognize it.
 Passion
 Entrepreneurs are passionate and mission-focused. They have an innate ability to lead
from the heart and possess an unshakeable sense of purpose. Without passion, most
people are not able to weather the storm of rejection and short-term failures.
 Resilience (tenacity)
 What is certain with entrepreneurship is failure. Many failures cause many people to
simply walk away (quit) from the idea. However, resilient entrepreneurs are able to
sidestep failure and move in a different direction. The most successful entrepreneurs
employ resilient strategies to overcome adversities and thrive.
 Adaptability
 Entrepreneurs must be adaptable to fit in the highly dynamic world where conditions,
economic and otherwise, change very rapidly and generally beyond our control.
 Execution intelligence
 The ability to fashion a solid idea into a viable business is a key characteristic of
successful entrepreneurs. Commonly, this ability is thought of as execution
intelligence.


The Entrepreneurial process
 Entrepreneurship is a way of thinking, reasoning, and acting that is opportunity
obsessed, holistic in approach, and leadership balanced for the purpose of value
creation and capture.
 Entrepreneurship results in the creation, enhancement, realization, and renewal
of value, not just for owners, but for all participants and stakeholders. At the
heart of the process is the creation and/or recognition of opportunities, followed
by the will and initiative to seize these opportunities.
 Entrepreneurship requires a willingness to take risks, both personal and financial
but in a very calculated approach in order to constantly shift the odds of success,
balancing the risk with the potential reward.
 When starting a new business, there is an entrepreneurial process that is often
followed to identify, evaluate, and develop an opportunity (an entrepreneurial
idea) by overcoming the forces that resist the creation of something new.
 The entrepreneurial process has four distinct phases:
i) Identification and evaluation of the opportunity (the entrepreneurial idea
generation and evaluation),
ii) Development of the business plan (Planning),
iii)Determination and mobilization of the required resources, and
iv)Launching the enterprise, harvesting, and managing growth.
 The Opportunity: Seeking (recognizing), Screening,
Seizing and Nurturing
 In the complex maze of business, seeking, recognizing, screening, and seizing
opportunities is a defining factor for successful entrepreneurs.
 The entrepreneurial mindset transforms mere possibilities into tangible results
through nurturing the opportunities, and devising and implementing effective
strategies.
 Opportunity-seeking is the pursuit of new possibilities that can lead to
significant growth or improvement. It involves observing the environment,
understanding economic and market trends, and identifying gaps that can be
exploited profitably.
 Screening: once potential opportunities are identified, screening comes into
play, which is evaluating these opportunities based on their technical,
economical, political, social, environmental and technological feasibility and
potential benefits.
 In screening opportunities, entrepreneurs use criteria, such as market size,
resource requirements, competitive landscape, and personal capacity to deal with
entry and exit barriers.
 Seizing the opportunity as a final step involves implementing a strategy to
exploit the opportunity effectively and efficiently.
 The decision-making and leadership capacity of the entrepreneur plays a pivotal
role in opportunity seizing. Innovative and leader entrepreneurs provide the
vision, inspire the team, make tough decisions, and ensure the efficient
execution of plans. Their ability to communicate, motivate, and manage
resources is instrumental in successfully seizing opportunities.
 Once opportunities are seized, they have to be Nurtured. Nurturing in business
is building smooth and profitable relationships with prospects. It is caring for,
listening to and translating the needs of customers into valuable offerings that
the customers become willing and able to purchase the offerings.
 Those entrepreneurs who seize and nurture opportunities encourage innovation,
embrace risk-taking, and are responsible for all their decisions and actions.
 They persistently work to expand, grow and harvest their businesses.
Screening New venture opportunities
 New ventures are mostly established as small businesses.
 Small businesses differ in size, in growth potential, in organizational structure,
and often in culture.
 Within a small business category, New Venture refers to the establishment and
development of a business or project with a fresh vision, purpose, and high-
potential for growth. It involves an assumption of risk and creation of an
enterprise that introduces innovative products, services, or business models into
the market.
 Establishing a New venture as core of the entrepreneurial process, it is key to
recognize and screen an entrepreneurial opportunity (attractive, growth
potential and profitable opportunity).
 Entrepreneurs could come across with multitude of opportunities, but they don’t
have time and other resources to engage in and manage all. Hence, they have
to screen them to choose the most economically attractive and timely
opportunity that creates value both for prospective customers and for
the entrepreneur (Win-win).
 Time is the most valuable asset and also most scarce resource for any
entrepreneur. It is a reality that No entrepreneur will never have
enough time to pursue all the business ideas s/he can come up with. The
entrepreneur’s paradox is that s/he must find and make time for the good
ones. Complicating this paradox is that ‘s/he do not have a strategy until
s/he is saying no to lots of potential opportunities ’. Estimates show that
only about 10% of potential opportunities generate acceptable levels of
sustainable income for the founder(s).
 Following the opportunity recognition either through outside-in (entrepreneurs
looking for needs in the marketplace and then determine how to use their own
capabilities to pursue those opportunities) or inside-out analysis (evaluating)
their capabilities and then identify new products or services they might be able
to offer to the market), it is a must to screen and focus on the most promising
one(s).
 To do the screening, entrepreneurs should undergo a complete and in-depth
feasibility analysis to determine whether the idea the entrepreneur has selected
is viable and merits the investment of time and money that will be necessary to
launch it.
 As the quality of the final evaluation will be only as good as the reliability of the
information used, new venture business ideas screening requires adequate
background research and informed estimations for the final decision to be
based on trustworthy facts and reasonable judgments.
 The New venture business idea screening should account for the following
factors:
 Strength of the business idea: The best business ideas will meet a definite
market need, create value for end users, and offer products or services that
customers favor and find easy to use. They also will have no fatal flaws.
 Targeted market and customers: Businesses are more likely to thrive if they
focus on a sizeable market that is easy to identify, growing rapidly, and
composed of customers with high levels of purchasing power that they are very
willing to use.
 Industry and competitive advantage: The most favorable industries for
startups have few or no competitors, are growing quickly (to allow room for
new entrants), present few or no barriers and would allow startups establish and
sustain a competitive advantage.
 Capability of founder(s): In a best-case scenario, the founder(s) will have
industry-related experience, skills, and networks, as well as a great passion for
and a good fit with the new business.
 Capital requirements and venture performance: An entrepreneur will fare
best when the venture needs little capital to launch, its anticipated profit
potential is great, and similar enterprises perform very well.
Stages of New venture development
 The general business (product) lifecycle.
 Business enterprises go through varied stages of development: they come into
existence; they may undergo stages of rapid growth, slow growth, or stagnation;
and they may fail.
 The following figure depicts a more generalized stages of new venture
development from inception of the opportunity through its development and
eventual harvesting, the stage where the investors and maybe the entrepreneur
can successfully unwind their positions.
Reading materials/books
 Spinelli, S., Ensign, P. C., & Adams, R. J. (2014). New
venture creation. McGraw-Hill Ryerson.
 Timmons, J. A., Spinelli, S., & Tan, Y. (2004). New venture
creation: Entrepreneurship for the 21st century. New
York: McGraw-Hill/Irwin.

 Leach, J. C., & Melicher, R. W. (2020). Entrepreneurial

finance. Cengage Learning.

 Levin, Jack S. Structuring Venture Capital, Private

Equity, and Entrepreneurial Transactions. Aspen
Publishers, 2009. ISBN: 9780735581609.
 Any other related material