Tài chính doanh nghiệp - Chapter 1: Introduction and overview

Chapter 1INTRODUCTION AND OVERVIEW 1© 2012 South-Western Cengage LearningENTREPRENEURIAL FINANCE Leach & MelicherChapter 1: Learning ObjectivesCharacterize the entrepreneurial processDescribe entrepreneurship and some characteristics of entrepreneursIndicate three megatrends providing waves of entrepreneurial opportunitiesList and describe the seven principles of entrepreneurial financeDiscuss entrepreneurial finance and the role of the financial managerDescribe the various stages of a successful venture’s life cycleIdentify, by life cycle, the relevant types of financing and investorsUnderstand the life cycle approach used in the textbook2The Entrepreneurial ProcessProcess:Developing opportunitiesGathering resourcesManaging and building operationsGoal:Creating value3The Entrepreneurial Process4Entrepreneurship Fundamentals Entrepreneurship: process of changing ideas into commercial opportunities and creating valueEntrepreneur: individual who thinks, reasons, and acts to convert ideas into commercial opportunities and to create value5Definition & Explanation of EntrepreneurDefinition:An individual who, rather than working as an employee, runs a small business and assumes all the risk and reward of a given business venture, idea, or good or service offered for sale. The entrepreneur is commonly seen as a business leader and innovator of new ideas and business processes.6ConExplanation:Entrepreneurs play a key role in any economy. These are the people who have the skills and initiative necessary to take good new ideas to market and make the right decisions to make the idea profitable. The reward for the risks taken is the potential economic profits the entrepreneur could earn.Source:  Examples of Today’s InnovationDuring the past century, entrepreneurial firms’ innovations included personal computers, heart pacemakers, optical scanners, soft contact lenses, and double-knit fabric.8Entrepreneurial Traits or Characteristics A successful entrepreneurSees and seizes a commercial opportunityTends to be doggedly optimistic (perhaps even to a fault)Plans to obtain the physical, financial, and human resources needed for the venture to succeed9Non-Entrepreneurial Traits or Characteristics Success is unlikely if you“are seldom able to see an opportunity, until it ceases to be one” (Mark Twain)“view the glass as being half empty instead of half-full” (unknown)are paralyzed by a fear of failure10Opportunities Exist but Not Without RisksOpportunities:New U.S. business formations in the millions annuallyFirms with less than 500 employeesrepresent over 99 percent of all employersaccount for about one-half of the annual gross private domestic product11Opportunities Exist but Not Without RisksRisks:Annual employer firm births (~659,093 in 2005-07) terminations (~578,793 in 2005-07) Note, however, that bankruptcies are only a fraction (~29,073) of terminations - terminations not all “bad”For new firms, a representative study (Headd) found(a) one-third of new employer firms endure More expected rewardHow much more? Market-determined!20E-Finance Principle #3While Accounting is the Language of Business, Cash is the CurrencyTwo important reasons to employ accountingTracking and accountability for actions takenQuantifying different visions of the futureBut, remember cash flow is a new venture’s lifeblood“Get enough accounting to see through the accruals to the cash account”Cash burn: gap between cash being spent and that being collected Cash build: excess of cash receipts over cash distributions21E-Finance Principle #4New Venture Financing Involves Search, Negotiation, and PrivacyPublic Financial Markets (Market Efficiency): standard contracts traded on organized exchangesPrivate Financial Markets: customized contracts bought and infrequently sold in inefficient private negotiations22E-Finance Principle #5A Venture’s Financial Objective is to Increase ValueMany objectives including personal onesBut, the unifying financial objective is to increase valuerather than price, margin or salesrather than profit, return or net worth(Market) Value derives from the ability to generate cash to pay capital providers for their capital 23E-Finance Principle #6It is Dangerous to Assume that People Act Against Their Own Self-InterestAligning incentives (investors, founders, employees, spouses, etc.) is criticalAs situations change, incentives diverge and renegotiation is importantOwner-manager conflicts: differences between a manager’s self-interest and that of the owners who hired him/herOwner-debtholder agency conflict: divergence of the owners’ and lenders’ self-interests as the firm gets close to bankruptcy24E-Finance Principle #7Venture Character and Reputation Can be Assets or LiabilitiesVentures have character that can be different from the individuals who founded or manage itMany entrepreneurs state that high ethical standards are one of a venture’s most important assets and are critical to long-term success and valueVentures can - and do - make meaningful societal contributionsMany successful entrepreneurs are financially and personally involved in charitable endeavors25Role of Entrepreneurial FinanceEntrepreneurial Financeapplication and adaptation of financial tools and techniques to the planning, funding, operation, and valuation of an entrepreneurial venturefocuses on the financial management of a venture as it moves through its life cycle, beginning with its development stage & continuing through to when the entrepreneur exists or harvests the venture26Successful Venture Life CycleVenture Life Cycle: stages of a successful venture’s life from development through various stages of revenue growth)Development Stage: period involving the progression from an idea to a promising business opportunityStartup Stage: period when the venture is organized, developed, and an initial revenue model is put in place27Successful Venture Life CycleSurvival Stage: period when revenues start to grow and help pay some, but typically not all, of the expensesRapid-Growth Stage: period of very rapid revenue and cash flow growthMaturity Stage: period when the growth of revenue and cash flow continues but at a much slower rate than in the rapid-growth stage 28Successful Venture Life Cycle29Life Cycle Aspects of the E-Process & Value Creation30Financing Through the Successful Venture Life CycleDevelopment Stage Developing opportunities and seed financingStartup Stage Gathering resources and startup financingSurvival StageGathering resources, managing and building operations and first-round financingRapid-Growth StageManaging and building operations and second-round mezzanine, & liquidity stage financingEarly Maturity Stage Managing and building operations and obtaining bank loans, issuing bonds, & issuing stock31Life Cycle Approach: Venture Operating & Financial Decisions32Con33Selected Financing DefinitionsSeed Financing: funds needed to determine whether the idea can be converted into a viable business opportunityStartup Financing: funds needed to take the venture from having established a viable business opportunity to initial production and sales34Selected Financing DefinitionsVenture Capital: early-stage financial capital often involving substantial risk of total lossVenture Capitalists: individuals who join in formal, organized firms to raise and distribute venture capital to new and fast-growing venturesBusiness Angels: wealthy individuals operating as informal or private investors who provide venture financing for small businessesInvestment Banker: individual working for an investment bank who advises and assists corporations in their security financing decisions and regarding mergers and acquisitions35Selected Financing DefinitionsFirst Round Financing: equity funds provided during the survival stage to cover the cash shortfall when expenses and investments exceed revenuesSecond Round Financing: financing for ventures in their rapid-growth stage to support investments in working capitalMezzanine Financing: funds for plant expansion, marketing expenditures, working capital, and product or service improvements36Selected Financing DefinitionsBridge Financing: temporary financing needed to keep the venture afloat until the next offeringInitial Public Offering (IPO): a corporation’s first sale of common stock to the investing publicSeasoned Securities Offering: the offering of securities by a firm that has previously offered the same or substantially similar securities37Thanks38