Sources of entrepreneurial financing

There are quite many different ways of which an entrepreneur can get finances during the stages of a start up. The art of successful financing lies in answering a series of tricky questions: How much money does the business need? How much money is available? How when and for whom should the money be raised? Of course, a few factors are givens: Some of these factors may be from an investor’s expectations of something in return of investing in the venture, and they will demand a higher return if they perceive a higher risk; the entrepreneur seeks to secure a financing at a lowest possible cost. (Roberts and Stevenson, 1992).

All that being said, understanding both the needs of the business and the needs of the financier will assist entrepreneurs in sorting through the maze of potential financing options, which are; equity capital, private investors, venture capital, public equity markets, debt capital, asset-based financing, internally generated financing, etc.

According to Roberts and Stevenson (1992), it is basically true to say that during any start up, entrepreneurs should secure financing at the lowest possible cost. As depicted by the authors, start-ups are quite risky in the sense that entrepreneurs should more so look for investors who view the business as a less risky venture. Otherwise if venture financiers view the business in a risky way, they would demand a higher return on their invested finances.

The only best way for an entrepreneur to have a good start and gain good ground with his/her business is by having some equity capital in the form of buildings or equipment. Similarly, an entrepreneur should at least have some funds to do initial market studies, research, etc on the business that he/ she is about to invest in. This is very true in the sense that it even makes investors more secure and convinced that although the business may be risky, it is worth investing in following the positive action that may be taken by the entrepreneur. Roberts & Stevenson (1992) reiterate that for any entrepreneur that is willing to start a business with the help of an out-side source of finance, there is need to start with a less amount of money. And that if an entrepreneur may need external funding; higher start-up capital is required for survival.


In accordance to Smith & Smith (2000), the vision, determination and passion that an entrepreneur has for his or her business idea is the single most important factor in making a start-up venture successful. A good idea can be adequately funded and still fail if the entrepreneur gives up too much control of his/ her firm in exchange for funding in the early stages of the company. For these reasons, it is of vital importance that the entrepreneur maintains control of the firm, especially in the first stages of development, in order to grow the firm according to the entrepreneur’s vision. Maintaining the right balance between debt and equity throughout all stages of development is important, because it is impossible to separate equity and control. As a point to note, an entrepreneur’s attempt to hold control in one hand, and the debt and equity in the other hand will hinder growth according to the entrepreneur's vision. The insert entitled "External Financing and the Bell Telephone Company" illustrates this point perfectly. Alexander Graham Bell invented the telephone and founded the company, yet when faced with the decision of selling equity to grow the company more quickly, he relinquished too much control and eventually was left out of the making decision processes of a company he created. In short, Bell, like many greedy entrepreneurs, failed to balance debt, equity and control.

The entrepreneur’s social capital is one of the most important competencies that are required during a start-up. There is need for an entrepreneur to posses a huge amount of personal traits that would add to his/her advantages while looking for private equity capital sources. However, Roberts & Stevenson (1992) opine that although individual finances during a start-up are better suited for an entrepreneur, these same individual financers may create more problems in the business such as interventions, even so withholding to offer more funds in case of any business stumble.

Smith and Smith (2000) relate the launching of a venture to the launching of a rocket in the sense that the key difference of required fuel: from take off, a rocket has enough fuel to carry through all its stages. The venture however needs to be fueled by the previous steps to reach the next step. The following notion hence is tantamount to saying that launching a venture should be evaluated as a chain or a multi-step process, which clearly explains Smith and Smith (2000) milestone approach. According to the authors, there are milestones found in each of the five stages of development common to all new ventures: development of business concept, start-up, early growth, rapid growth and exit. The number of milestones in each phase varies depending on the field of business and the nature of the firm, which has its own fundamentally different features that guide the entrepreneur to employ different options to finance the subsequent steps. This approach is highly logical where by using the milestones approach in a business plan may help persuade the investors to finance the entrepreneur’s business idea. Mapping out a plan with the different steps the firm will take shows a potential investor the entrepreneur's confidence in developing the business.
Related to the above, Roberts & Stevenson (1992) are of the view that the business plan should be adopted for different audiences such as wealthy individuals, venture capitalists, and banks. Different financiers should be presented by different business plans. For the sake of a wealthy individual for example, the business plan should be concise, without detailed business texts/ language. The above steps are meant to protect the entrepreneur against his/ her ideas being hijacked or stolen.


References:

Smith, J. K. & Smith, R. L. (2000). Entrepreneurial Finance (pp. 22-54). New York, NY: John Wiley and sons.

Robertson, M.J & H.H.Stevenson (1992): Alternative Sources of Financing. In W.A. Sahlman, & H.H Stevenson (Eds), The Entrepreneurial Venture (171-179). Boston, MA: Harvard Business School Press.