Question: You are currently the owner of an enterprise that you developed as a start-up

16 Mar 2023,11:16 AM

 

You are currently the owner of an enterprise that you developed as a start-up. You own 80% of the firm’s equity and four external investors own a further 20% of the business. The business you have developed provides a technology based invoicing system for small businesses. This is currently earning positive profits. You have plans to scale up the business so that a period of high growth can begin during its third year of business. The external investors are friends and family members that have no finance expertise. You have called a meeting with the external investors to outline your funding plans. The four external investors have strong opinions and each have suggested different types of investors  you should target for funding.   

In a short report outline briefly the various  different sources of funding that might be available to the enterprise identifying their strengths and weaknesses for the business.

The additional funding is required to be in place by the end of its third year. Critically evaluate the factors that should be considered when deciding which type of funding source to target and assume you will present the arguments to the external investors at your meeting. The report will provide the basis of your discussions. Ensure you choose one source that is your preferred funding source and explain why to the external investors.

Briefing  Information

When answering the question you need to provide an overview of the relevant funding sources and evaluate the benefits and drawbacks that could arise. Proof of these arguments can be provided by either drawing on specific examples or by using academic empirical evidence to substantiate your argument. The extent to which your arguments are convincing will determine how successful you have been in answering the question. Good answers will show engagement with both the concepts and the academic readings.

 

Readings

Asel, P.,   Dennis Park and S. Ramakrishna Velamuri (2015), Creating Values through Corporate Venture Capital Programs: The Choice between Internal and External Fund Structures. The Journal of Private Equity.

Barclays, (2016) Venture Capital in the UK, https://www.barclayscorporate.com/content/dam/barclayscorporate-com/documents/insights/industry-expertise/venture-capital-in-the-uk.pdf

 

Bhaumik, S.K . and S. Fraser, M. Wright, (2015), What do we know about entrepreneurial finance and its relation to growth, International Small Business Review.

 

 

Brandon Gaillie, 16 Pros and Cons of Angel Investors,

https://brandongaille.com/16-pros-and-cons-of-angel-investors/

 

Business.com, Weighing the Pros and Cons of Angel Investing for Your Business. (2018)

https://www.business.com/articles/pros-and-cons-of-angel-investors/

 

Burchrdt, J. and U. Hommel,, D. Kamuriwo and D. Billitteri,  (2016), Venture Capital Contracting in Theory and Practise, https://www.city.ac.uk/__data/assets/pdf_file/0006/355371/venture-capital-contracting.pdf

 

BVCA, (2010), A guide to Private Equity https://www.bvca.co.uk/Portals/0/library/Files/Website%20files/2012_0001_guide_to_private_equity.pdf

 

Chemmanur, T.J.,  Elena Loutskina and Xuan Tian, (2013), Corporate Venture Capital, Value Creation, and Innovation,  Review of Financial Studies, Available using JSTOR.

Coleman, S. (2005) Free and Costly Trade Credit, Journal of Entrepreneurial Finance. 

https://www.researchgate.net/publication/267842704_The_Importance_Of_Angel_Investors_In_Financing_The_Growth_Of_Small_And_Medium_Sized_Enterprises

 

I Colombo, M., and S. Murtinu, (2017), Venture Capital Investments in Europe and Portfolio Firms' Economic Performance: Independent versus Corporate Investors, Journal of Economics and Management Strategy.

 

Dibrova, A., (2015) Business Angel Investors, Risks and Opportunities,

https://core.ac.uk/download/pdf/82676621.pdf

 

Drover W., Lowell Busenitz, Sharon Matusik ,David Townsend, Anglin Texas ,Gary Dushnitsky. (2017),

A Review and Roadmap of Entrepreneurial Equity Financing Research: Venture Capital, Corporate Venture Capital, Angel Investment, Crowdfunding and Accelerators, Equity Finance Review. https://core.ac.uk/download/pdf/82897437.pdf

 

 

Dutta, S. and  T. Folta , (2016) A Comparison of the Effect of Angels and Venture Capitalists on Innovation and Value Creation, Journal of Business venturing. http://www.law.northwestern.edu/research-faculty/clbe/events/innovation/documents/Dutta_angel_VC.pdf

 

 

Hellman, T., and Manju Puri, (2002) Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence. Journal of Finance.

 

Hill, S., Internal corporate venturing; A review of five decades of literature., Cass Business School Working Paper, https://openaccess.city.ac.uk/id/eprint/19339/1/Internal%20corporate%20venturing%20A%20review%20of%20%28almost%29%20five%20decades%20of%20literature.pdf

Ivanov , V., and Fei Xie (2010),  Do Corporate Venture Capitalists Add Value to Start-Up Firms? evidence from IPOs and Acquisitions of VC-Backed Companies, Financial Management .

 

Kerr, W and  R. Nanda (2009) Financing Constraints and Entrepreneurship, Harvard Business School Working Paper.10-013

https://www.hbs.edu/faculty/Publication%20Files/10-013_10253923-5a0e-41e9-85df-e21c75b6c76c.pdf

 

Kerr, W and  R. Nanda, (2014), Financing Innovation , Harvard Business School Working Paper, 15-034

https://dash.harvard.edu/bitstream/handle/1/13479074/15-034.pdf?sequence=1

 

 

 Lerner, J.,  and Ramana Nanda (2020), Venture Capital's Role in Financing Innovation, The Journal of Economic Perspectives , Available from JSTOR.

Mishra, C.S.,  and David H. Gobeli, (2000), Strategic Value of Corporate Venture Capital Programs, The Journal of Private Equity.

 

My Consultant, The Benefits of Investing in Private Equity.(2016),

https://www.jana.com.au/sites/default/files/insights/downloads/MyConsultant%20March%202016.pdf

 

 

Fletcher, D. (2019). PE Distribution Waterfalls and their Impact on Client Returns. [online] Icapitalnetwork.com. Available at:

https://www.icapitalnetwork.com/insights/private-equity/pe-distribution-waterfalls-and-their-impact-on-client-returns/

 

Glücksman, S.,  (2020), Entrepreneurial experiences from venture capital funding: exploring two-sided information asymmetry,  Venture Capital An International Journal of Entrepreneurial Finance

https://www.tandfonline.com/doi/pdf/10.1080/13691066.2020.1827502

 

Hellman, T., and Manju Puri, (2002) Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence. Journal of Finance.

 

Mulcahy, D. 2014 Harvard Business Review. (2014). Venture Capitalists Get Paid Well to Lose Money. [online] Available at: https://hbr.org/2014/08/venture-capitalists-get-paid-well-to-lose-money [Accessed 20 Feb. 2022].

Prowse, S. (1998). Angel investors and the market for angel investments. Journal of Banking & Finance, 22(6), 785–792. https://doi.org/10.1016/S0378-4266(98)00044-2

Inderst, R., and H. Mueller, (2009), Early-stage financing and firm growth in new industries, Journal of Financial Economics.

 

Jihye Jeong , Juhee Kim , Hanei Son  and Dae-il Nam , (2020), The Role of Venture Capital Investment in Startups’ Sustainable Growth and Performance: Focusing on Absorptive Capacity and Venture Capitalists’ Reputation . Sustainability.

file:///C:/Users/chellepl/Downloads/sustainability-12-03447-v2.pdf

 

Sanyal, P. and C. Mann, (2017), The Financial Structure of Startup Firms, The Role of Assets Information and Entrepreneur Characteristics, Federal Reserve Bank of Boston, Working Paper  10-17

 

 

Suggested Answer

Detail of the tasks that students are expected to complete as part of the assignment remit.

When answering the question you need to provide an overview of the relevant funding sources and evaluate the benefits and drawbacks that could arise. Proof of these arguments can be provided by either drawing on specific examples or by using academic empirical evidence to substantiate  arguments. The extent to which  arguments are convincing will determine how successful the assignment has been in answering the question. Good answers will show they have engaged with both the concepts and the academic references.

 

It is anticipated that the following issues will be discussed

 

Point in the life-cycle of the business that the funding is sought- weighing up the realistic sources of finance available given the life-cycle.

 

Benefits of an outside investor in terms of fast tracking the business growth, expertise etc and the corresponding need to develop an exit plan.

 

Appropriateness of the concept for different investors – discussion of business specialism and search for appropriate investor within this business domain.

 

Consideration of whether future funding will be necessary and how to convince an investor that the business is to be successful, use of milestones and other ways of reducing asymmetry and the impact they might have on the business plans and projections.

Consideration of post investment success – can use empirical studies to evaluate these effects.

 

Different strategic objectives of funding investor and how the impact on the performance of the underlying investment. 

 

The negotiation and the loss of equity share and impact on entrepreneur value and the .

consideration of  the use of debt and the financial restraints this might imply on the entrepreneurs actions.