Lecture 1: Introduction Flashcards
Entrepreneurial Finance
Focuses on financial management of venture as it moves through its lifecycle.
How is finance combined w/ entrepreneurship?
Finance = Study of value and resource allocation
Entrepreneurship
Entrepreneurship = Relentless pursuit of opportunity without regard to resource currently controlled
What is the subjects difference to corporate finance?
1) Deal w/ financial decision making of entrepreneurs rather than managers of big corporations
2) Evaluates investments and financing decision in new ventures
3) Active investors
4) Incentive problems addressed by contracts and monitoring
5) Risk difficult to diversify
6) Monetizing investments important and hard
What is the importance of EF?
1) New high tech businesses major part of economic development
2) New high tech businesses become large multinational corporations
3) VC / PE is profitable
What are the traits of entrepreneurs?
1) Seizes commercial opportunity
2) Optimist
3) Plans to obtained physical, financial resources for venture to succeed
4) Clear focus on how strategic choices and implementation decisions affects rewards
5) Risk aversion
How to entrepreneurs behave like parents?
The entrepreneurial process follows the social cycle of dating, commitment, and the bearing and raising of children
This can possibly explain some of the less rational aspects of entrepreneurship:
- Cognitive biases that minimizes risk (love is blind)
- Persistence despite poor results (a parent never gives up)
- Extreme devotion to the business often entailing self-sacrifice
- Problems of founder success on (separation anxiety)
- Overcontrolling founders (parents)
What increases the likelihood of becoming an entrepreneur?
The likelihood of gestation activity is a positive function of:
- years of education (business class)
- years of work experience
- previous start-up experience
- parents, close friends or neighbours in business
- encouragement of friends and family
What are the differences between the Self-Employed and Entrepreneurs?
Self-employed:
- Do not have particular personality traits, compared to salaried workers
- Work less hours than salaried workers
- Earn less than salaried workers
Entrepreneurs:
Engage in activities demanding a high degree of non-routine cognitive skills, such as (a) creativity and generalized problem-solving, and (b) complex interpersonal communications such as persuading, selling, and managing others
- Earn significantly more than salaried employees
- Work significantly more hours than salaried employees
What are two pre-labour market traits that are most powerfully associated with entrepreneurship?
Smartness and illicitness
How does diversity look like in entrepreneurs?
Between 1990 and 2016 in the US:
- Women account for less than 10% of VC-backed entrepreneurs
- Hispanics account for around 2%
- African Americans account less than 1%
- White Males account for 72%
A similar lack of diversity can be found among Venture Capitalists:
- 91.2% of VC partners are men
- 80% of VC irms never hired a female investor
- 86% of VC partners are Whites
- 11% are Asians
What is the beginning of a venture?
Entrepreneurs typically start to finance the company themselves (personal savings, credit cards, bank loans, second mortgage)
After that, the initial funds usually come from FFF:
Family Friends Fools
But going forward, the entrepreneurs need to attract resources from outside funding for further development
What are examples of external sources of funding?
- Angel inancing provided by high-net-worth individuals (typically successful entrepreneurs)
- Accellerators and incubators
- Venture capital provided by venture capitalists
- Bank or corporate venturing (e.g. ABN Amro, KPN)
- Crowdfunding
- Fintech P2P lending
- Asset-based lenders (e.g. secured bank loans)
- Mezzanine lenders (subordinated debt with warrants)
- Private placements
- Public equity (initial public offering) and bonds
What firms seek external funding?
Firms with greater capital expenditures/profits/growth orientation are more likely to seek finance and apply for more external finance
Firms in industries with larger competitors are less likely to obtain all of their desired outside capital
Banks are less likely to finance new startups completely, while venture capital funds are more likely to finance innovative and growth orientated firms
Overall, firms seeking capital are able to secure their requisite financing from at least one of the many different available sources.
Why VC?
Venture capital spurs technological innovation and new business creation
Kortum and Lerner (2000) ind that the amount of venture capital activity in an industry significantly increases its rate of patenting.
Hellman and Puri (2000) find that the presence of a venture capitalist is associated with a significant reduction in the time taken to bring a product to market
Decker et al. (2014) show that new business creation is in turn important for job creation and economic growth. Disproportionally for high growth startups
