Entrepreneurial Finance

Entrepreneurial finance is defined as making financial decisions based on the capital collected for a new venture or a startup. It is the study of value and resource allocation. The main aim is to allocate funds judiciously and acknowledge the value of the same.

Need for financing

Every startup requires different types of finance. Depending on the industry and objective of the organization, a startup may have different requirements of money. Even startups from the same industry can have different requirements for money.?

Many investors consider factors such as the company's competition, political risk, size of the market, prospects, the strength of your team, and other factors before investing in your business. The major reasons a startup may require financing are as follows:??

-Finance Expansions to Production Capacity :?

The consequences of not having enough capital can be dire for businesses looking to grow and expand. Hence enterprises opt for external funding to incorporate new technology and purchase assets like innovative machinery to upgrade their facilities.?

-To Enter New Markets :?

With growth and expansion, it’s inevitable that businesses want to enter a niche market or target a new clientele base. The initiative to explore fresh avenues involves in-depth research, well-rounded marketing strategies, promotional campaigns, and recruitment of skilled and talented staff.?

-Research and Development :

Research and development involves incorporating new technologies, developing unique products and services, or enhancing the existing ones. This measure is used extensively by companies to explore new opportunities, penetrate fresh markets, and attract a skilled workforce to stay ahead of the curve. However, R&D programs are expensive and require large capital investment.

The two main sources of entrepreneurial finance are equity and debt financing. A few of them include business angels, assistance from the government, commercial bank loans, financial bootstrapping, and buyouts.?

1. Financial bootstrapping

It is focused on maintaining customer relations and employee retainment rate. It includes sweat equity, owner financing, joint utilization, minimization of accounts payable, delaying payment, minimization of inventory, subsidy finance etc.

2. Buyouts?

It is “the acquisition of a controlling interest in a company”. They can affect a company’s ownership. Selling off non-core assets, refocusing on the mission of the company, streamlining processes, freshening product lines and replacing existing management might thus serve as vital parts of the buyout drive. Business angels are professional investors who invest either a small part or their entire wealth for growth of companies.?

3. Venture Capital

Under Venture Capital, the financial investor participates in the new business in exchange for strategic advice and cash. Venture capitalists are thus on the lookout for companies having high growth potential, top-performing management teams and low leverage capacity.

A few venture capitalists and their funded startups are Accel partners and Babyoye, Flipkart and Myntra, Blume ventures and Printo, Carbon Clean solutions and Exotel, IDG ventures and yatra.com, ozone media and firstcry, etc.

There are also upcoming and new sources of entrepreneurial finance which may help the businesses get funds more easily and efficiently. Below is a brief introduction to some of them:

1. Accelerators and Incubators

?The objective of accelerators and incubators is to assist the ventures with advice, access for network, shared resources, and mentorship to grow. Most of the time, they also offer physical space along with financial resources.

2. Crowdfunding?

In crowdfunding, the concept of the product is presented on a platform with the business plan. It is intended for the audience and the public wherein money is raised from them.

3. Corporate venture capital?

These are venture capital investments by established companies in startups or growth companies. Instead of purchasing the entire startup, they take a major stake in these young firms and help them develop the market.

4. IP based investment funds

These investment funds invest in Intellectual Properties. They primarily look into patents. When they invest in intellectual property, they can monetize it and use those funds to grow their venture.

Conclusion

There have been drastic changes in the market regarding entrepreneurial finance in recent years. Different new players enter the market for financing new ventures. It is observed that very few businessmen obtain financing from an outsider – This is when the assets are large or when a startup has a very high growth potential and an exit plan to attract angel investors and different venture capitalists. Personal collaterals and credits are very important whenever financing is required for a startup. There are a variety of financing options available to new entrepreneurs. The best option for you will depend on your business needs and your financial situation. Be sure to research all of your options before deciding on a loan.?