Project Report On

“ENTREPRENEURIAL FINANCING”

Bachelor of Management Studies

Semester V Submitted

In Partial Fulfillment of the Requirements

For the Award of Degree of

Bachelor of Management Studies

By

Isha Thole

Roll Number 66

HSNC’s

Kishinchand Chellaram College of Commerce

124, Dinshaw Vacha Road, Churchgate, Mumbai-400020

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 DECLARATION

I, Isha Thole the student of T.Y.B.M.S. Semester V (2017- 2018) hereby declare that I
have completed the project on Entrepreneurial financing. The information submitted
is true and original to the best of my knowledge.

(Signature of Student)

Isha Thole

Rollno 66

HSNC’s

Kishinchand Chellaram College of Commerce

124, Dinshaw Vacha Road, Churchgate, Mumbai-400020

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 CERTIFICATE

This is to certify that Miss Isha Thole, Roll Number: 66 of Third Year B.M.S.Semester V
(2017- 2018) has successfully completed the project on Entrepreneurial Financing under
the guidance of Professor Tanzila Khan.

Course Coordinator Principal

Professor Ritika Pathak Mrs Hemlata Bagla

Project Guide Professor

Tanzila Khan

External Examiner

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 ACKNOWLEDGEMENT

I would be failing in my duty if I do not acknowledge the numerous people who have
helped me in the completion of this research paper.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do
this project.

I would like to thank my Principal, Mrs. Hemlata Bagla for providing the necessary
facilities required for completion of this project.

I take this opportunity to thank our Coordinator Professor Ritika Pathak, for her moral
support and guidance.

I would also like to express my sincere gratitude towards my project guide

Professor Tanzila Khan whose guidance and care made the project
successful.

I would like to thank my College Library, for having provided various reference
books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my Parents and Peers who supported
me throughout my project.

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 TABLE OF CONTENT

CHAPTER TITLE PAGE

NUMBER
1 1.1 Introduction 9
1.2 Entrepreneurial Finance 10
1.3 Entrepreneur 11
1.4 Entrepreneurship 11
1.5 Enterprise 11
1.6 Financing an Enterprise 12
1.7 Objective 13

2 2.1 Research Methodology 14

2.2 Research Design 15
2.3 Hypothesis 16

3 3.1 Planning for Finance 17

3.2 Raising Finance 20
3.3 Managing Finance of an 38
Entrepreneurial Venture
3.4 Valuation of an 49
Enterprise
3.5 Funding Contracts 52

4 4.1 Data Analysis 53

5 5.1 Findings 67
5.2 Interpretations 69

6 6.1 Recommendations 71

7 7.1 Swot Analysis 72

8 8.1 Limitations of the Study 76

9 9.1 Conclusion 77

Annexture 78

Bibliography 81

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 EXECUTIVE SUMMARY

Entrepreneurial finance is a detailed study of financial aspects applied to a venture and

highlights the special considerations when planning the financial needs of new and
existing ventures.
Entrepreneurial finance as a field of entrepreneurship is gradually beginning to align itself
along the same lines as existing fields such as strategy, marketing, and general finance.

Today, along with traditional sources of finance such as bank various alternative sources
of finance have developed over time. Some of the alternative sources include venture
capital, angel investors and crowd funding. However, it is important to note, though there
are multiple options available, an entrepreneur yet faces serious issues in raising finance
sometimes owing to their own inabilities and sometimes as a reason of the challenges the
financial community poses. This research, thus, aims to study such weaknesses and
challenges, the entrepreneurs face when raising external finance.

To meet the objectives of the research, a survey was performed. The main purpose of the
survey was to understand how and when finance is obtained by resource owners, to
highlight the challenges faced in obtaining finance, and to assess the future finance needs
of new and existing entrepreneurs.

Our major findings detail that entrepreneurs consider access to finance, the most
challenging problem faced by their business. They prefer using internal funds over
external funds at the initial stages as the internal finance is easily accessible in
comparison to external finance. However, most of the entrepreneurs recognised the need
to acquire both internal and external finance in future, to fund business operations and
growth opportunities. So, it is inevitable that investors recognise and meet such financial
needs of entrepreneurs.

In spite of its challenges, entrepreneurial finance has huge scope, in a country like India.
.

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 LITERATURE OVERVIEW

If research is a story then the existing literature is a means to identify where we are in
the story currently. So, to continue the story of gaining new insights in the field of
entrepreneurial finance with a fresh perspective, it only makes sense to discuss existing
literature. For this purpose I have reviewed surveys, books and dissertations, published
globally, that are relevant to entrepreneurial finance.

1. Among such relevant research papers is the study conducted by Ajagbawa O. Henry
on Entrepreneurship, Financial and Economic Development in 2014 which he
describes finance, as one of the greatest challenges to entrepreneurship. He states
that finding and managing finance is a serious issue for entrepreneurs.

2. His study is in line with the the research undertaken by Carpenter & Petersen in 2002
which states financial resource constraints are often the main reason in slowing
down the growth of entrepreneurial ventures. The findings are relevant to our goal of
understanding the challenges in obtaining finance.

3. So, why do entrepreneurial ventures encounter such constraints in raising financing?

Hall, answers this questions in his research in 2002 as he explains about the intensive
innovation projects which are characterized by high uncertainty and information
asymmetries, which make it difficult for external investors to evaluate their future
prospects.

4. In addition, high-tech entrepreneurial ventures are also short of tangible assets that
can be pledged as collaterals state Carpenter & Petersen in their research on
entrepreneurial finance. Consequently, their access to traditional sources of
financing such as borrowing is limited as explained by Berger & Udell in 1998.

5. Such problems of raising external financing evolve during the life cycle of
entrepreneurial ventures from a business opportunity till exit. Depending on the stage
of entrepreneurial venture the sources of financing also varies outlines Smith in his
study in 2011.

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6. A study by National Knowledge Commission of Government of India concluded that
there is a widely held perception among entrepreneurs that it is very difficult to get
bank loans at the start-up stage while becoming comparatively easier at the growth
stage.

7. In view of sources of finance, Venture Capital industry has received an extensive

attention in the last 30 years. Several studies examine the hypothesis that venture
capitalists play an active role in the companies in which they invest. William R. Kerr
Josh, Lerner and Antoinette Schoar, from Harvard Business School in their research-
The Consequences of Entrepreneurial Finance in 2010, took a look at this question.
Their findings concluded that investors do affect the success and growth of new
ventures.

8. According to another report on venture capitalists by Price Water House Coopers,

the size of venture capital investment grew from 8$b in 1995 to around 27 $b in 2012
due to investments in information technology known as bubble period.

9. Preqin’s latest statistics show that Indian venture capital fundraising, deals and
exits all hit record levels in 2014 and 2015 was well on track to exceed the
amounts seen last year. The steep upward curve in activity is an indication of the
country’s rapidly developing venture capital industry.

10. In contrast to the large volume of academic research on the role of venture
capitalists, comparatively little work has been done on angel investors. According to
Fenn- 1997, angel investors typically invest seed capital, that is, capital required by
firms at a very early stage of their development.

The existing literature though rich, yet depicts the limited efforts at producing sound data
on entrepreneurial finance from a business owners perspective. Generally, a large number
of studies are based on venture capitalists and their expectations. Little attention is given to
the concerns of entrepreneurs when raising finance. This paper therefore, attempts to
provide a fresh perspective in addressing how finance by small to medium enterprises is
raised and the challenges faced in accessing such finance.

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 CHAPTER 1
10.1 INTRODUCTION

There was an era of literature, an epoch of industrialization, an extension of technology

but now is the time of entrepreneurship. Never before had this entrepreneurial spirit been
as strong as it is today. The 2000s can undeniably be synonymous with the original
entrepreneurship generation.

This unprecedented growth in entrepreneurial spirit can be witnessed across all industries,
including retail, real estate, manufacturing, technology and several other industries.
Moreover, it can also be witnessed from students, to working professionals who often quit
their affluent jobs to pursue their entrepreneurial dream. This entrepreneurial dream is a
process of creating something from nothing and nurturing the already created. The activity
to create something from nothing and flourishing the existing is the essence of
entrepreneurship. All this when assembled together leads us to a whole new world.

In this new world, in order to run a successful enterprise, a new venture or an existing
venture requires more than the ability and capacity to innovate, develop, recruit, inspire,
and strategise. It requires the skill to be able to speak in the language of commerce, the
language of finance.

In a complex and ever changing world as today’s, establishing and operating a business
is not as easy. Owning a business requires a lot. There are numerous requirements to
starting, maintaining and growing a business today. It requires skillful management of
diverse functions including purchasing, human resource, marketing, production and so on
but the past quarter century has accentuated on the importance of finance generally, and
no area has prospered as much as the field of entrepreneurial finance.

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 10.1ENTREPRENEURIAL FINANCE

Money is one of the major concerns of any individual. So it is only obvious that money is
also one of the major concerns of any entrepreneur. Entrepreneurs repeatedly complain
that raising capital is their greatest challenge as there seemingly is never enough money
and the fund-raising process is complex and time consuming. Also, they find it extremely
tough, to raise capital, be it debt or equity, for start-ups, expansions of existing
businesses, or acquisitions. They argue the process is elaborate and typically takes
several years and multiple rounds.

According to various reports of business owners, the functional area they specified as
being the one in which they had the weakest skill was the area of finance and financial
management involving accounting, bookkeeping, the raising of capital, and the daily
management of cash flow. Owing to these complexities, these business owners also
indicated that their major time was spent on finance- related activities. These various
finance related activities can be clubbed together to be termed as Entrepreneurial finance.

SO WHAT IS ENTREPRENEURIAL FINANCE?

Entrepreneurial finance is described as the study of resource allocation, applied to new and
existing ventures. It focuses and addresses key questions which challenge all
entrepreneurs. It solves uncertainties regarding various financial aspects such as how
much money can and should be raised, when should it be raised and from whom, what is a
reasonable valuation of the startup, and how should funding contracts and exit decisions
be structured.

To illustrate with an example, let us consider the founding and funding process of Google.
Initially, college friends Sergey Brin and Larry Page exhausted their credit cards to buy the
terabytes of storage that they needed to start Google. Next, they raised $100,000 from
Andy Bechtolsheim, one of the founders of Sun Microsystems, and another $900,000 from
their network of family, friends, and acquaintances. Subsequently, Google raised $24
million from two venture capital firms and
$1.67 billion from its initial public offer.

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To sum up, the goal of entrepreneurial finance is to help entrepreneurs make better
investment and financing decisions in entrepreneurial settings. To the average
entrepreneur, entrepreneurial finance means simply "finding money”. However, it doesn’t
end there, as entrepreneurs of new and existing ventures not only need to know how to
raise finance but also to manage the finance at different stages of its life cycle. Therefore,
it covers all stages of the venture's life cycle from startup to exit.

10.2ENTREPRENEUR

An entrepreneur is an individual who, rather than working as an employee, runs a small

business and assumes all the risks and rewards 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.

Entrepreneurs play a key role in any economy. These are the people who have the skills
and initiative necessary to take new ideas to market and to make the right decisions that
lead to profitability. The reward for taking the risk is the potential gain and economic
profits the entrepreneur could earn.

10.3ENTREPRENEURSHIP

Entrepreneurship has traditionally been defined as the process of designing, launching and
running a new business, which typically begins as a small business, such as a startup
company, offering a product, process or service for sale or hire.

10.4ENTERPRISE

In general, it is a business endeavour where the primary motive is

profit.

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 10.5 FINANCING AN ENTERPRISE

Financing an enterprise refers to the acquisition of financing which is particularly

challenging, and many entrepreneurs overcome this obstacle by bootstrapping.
Bootstrapping refers to financing a business using methods such as owner funding,
providing sweat equity. While some entrepreneurs are lone actors, others work with
additional founders, armed with greater access to capital and other resources. In these
situations, businesses may acquire financing from venture capitalists, angel investors,
hedge funds, crowdsourcing or through more traditional sources such as bank loans.

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 1.7 OBJECTIVES

• The study is conducted with a basis objective of understanding the fund raising
process of a new or existing small to medium ventures.

• The main aim of this research is to understand the various finance alternatives
available to a business owner.

• To analyse the awareness of such avenues among business owners.

• To examine the ease with which such sources of finance are available and accessible.

• To analyse the challenges faced in obtaining external finance.

• To determine the current and future preferences of entrepreneurs when obtaining finance.

• To study the basic expectations of business owners from potential investors.

• To investigate how and when finance is raised.

• To understand different concepts related to raising and managing the finance of an enterprise.

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 CHAPTER 2
2.1 RESEARCH METHODOLOGY

Research methodology is a highly critical component that allows a researcher to conduct a

systematic study. To conduct this study in a systematic manner certain research methods
were employed. Keeping the objectives in mind, relevant quantitative and qualitative data was
obtained, later used to draw inferences, through both secondary and primary sources.

5.1.1 SECONDARY SOURCES

At initial stages of the research, secondary methods were employed to obtain the necessary
qualitative data. Sources such as published books, research papers and internet were actively
used to understand the concepts relevant to financing of a venture. The main purpose of
secondary tools was to comprehend the multiple avenues of finance available today.

5.1.2 PRIMARY SOURCES

Primary techniques were as important in achieving the objectives of this research. They
played a major role in collecting first hand data. To conduct primary investigation, a survey
was performed which allowed collection of fresh data. Data collection techniques other than
the one’s mentioned above were beyond the range of this project.

This research encompassed a survey which was targeted towards entrepreneurs. The

term entrepreneur here, included not only new owners, who start companies from

scratch but also existing entrepreneurs operating in any industry.

The main purpose of the survey was to understand how finance is obtained by resource

owners, to highlight the challenges typically faced in obtaining finance, and to assess the

future finance needs of new and existing entrepreneurs.

Thus, both secondary and primary tools were employed. Secondary tools assisted in gathering

qualitative data. However, primary data played a major role in collecting first hand data from

which majority of inferences and conclusions were drawn.

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 2.2 RESEARCH DESIGN

5.2.1 SAMPLING

Sampling is the process of selecting units from a population of interest so that by studying the

sample we may fairly generalise our results back to the population from which they were

chosen.

A. POPULATION WAS DEFINED:

A population of people who are entrepreneurs, whether new or existing were identified.

Entrepreneurs were from a range of industries. People who were not entrepreneurs did not fall

into this category and were excluded from this research.

B. SAMPLE SIZE:

A sample size of 100 members was ascertained for survey from the defined population.

C. SAMPLING FRAME:

Survey was conducted for entrepreneurs based with in the the city of Mumbai and Navi

Mumbai. Cities other than Mumbai and Navi Mumbai were out of the sampling frame.

D. SAMPLING METHOD:

A random sampling technique was used. So, each individual in the sampling frame of interest

had an equal likelihood of selection.

E. SELECTION OF SAMPLE:

In this step, the members of interest were selected and the sampling plan was implemented.

Members from the defined sampling frame were selected through the random sampling

method.

F. SURVEY:

The selected sample was then asked to fill a survey. The questionnaire is attached at the end

of the research paper.

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 2.3 HYPOTHESIS

• Entrepreneurs utilise more internal finance than external finance at the seed
stage as the accessibility to external finance is low.

• Entrepreneurs with more knowledge of financial aspects are more likely to raise
alternative finance.

• For an enterprise competition is a more serious problem than gaining access to finance.

• External finance is raised more from friends and family as compared to bank.

• Entrepreneurs in future will prefer equity finance more than debt finance because of
emerging modern sources of equity finance.

• Funds from angel investors is easier to access than bank lending.

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 CHAPTER 3
3.1 PLANNING FOR FINANCE

Before raising any amount of finance, it is important to plan first. An effective planning can
be done through an informative business plan that will take an entrepreneur where he
wants to reach.

3.1.1 THE BUSINESS PLAN

Starting a new business or growing an already established one requires careful planning.
An entrepreneur is faced with the challenge of making decisions in an ever-changing
business environment that is affected by external factors. An entrepreneur can be better
prepared against such factors only by means of effective planning. The emergence of new
competitors, technological advances, and changes in the macroeconomic and regulatory
environments are just a few of the external factors which an entrepreneur needs to deal
with.

In order to build a successful and sustainable business, entrepreneurs must be forward-

looking and determine what lies ahead for their company, what their future objectives and
strategies are, and how they plan to achieve their goals and manage their risks. This is
done through a business plan, which, unfortunately gets little importance.

Most small business owners have the plan in their head, but only a few think through some
of the details such as financing, competition and the strategic plan as a whole. Essentially,
the business plan is the evidence that the entrepreneur believes in proper preparation that
would prevent poor performance. For the entrepreneur, the business plan is crucial as it
serves a dual purpose. First, it is used as an internal document to help define a company’s
strategies and objectives. Secondly, an entrepreneur must have and present the business
plan to a potential investor when raising capital. Therefore, a business plan is very
important from financing viewpoint. It should be noted that business plans are not always
capital-raising documents. However, they should be well articulated to not only help an
entrepreneur keep his business on track, but also make it easier for him to raise capital.

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3.1.1 WHAT DOES A BUSINESS PLAN INCLUDE?

A business plan is detailed document that focuses on different areas of a business such
as marketing, management, operations, competition analysis and more as shown in the
diagram above but for our research the focus is on the financial aspects of a business
plan- the fundraising plan.

3.1.1 FUNDRAISING PLAN

Projecting the future is challenging, but it must be done. Debt and equity investors know
that financial projections that are for three to five years into the future are guess
estimates. Reasonable guesses only can be made as no one can predict the future.

Entrepreneurs should develop pro forma financial statements for all new entrepreneurial
opportunities, including either a start-up or an existing company. Any pro forma should
have figures for at least three years and three scenarios- a best-case, worst-case, and
most-likely-case scenario. If only one scenario is provided, it will lead to an assumption that
the scenario presented is the best case as most people always put their best, not their
worst.The historical performance of a company drives the financial projections for the
future of that company. When there are no historical data, financial projections for a start-
up can be determined through industry analysis, market demand derived from market
research or own estimates.

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3.1.1 CHECKLIST OF FINANCIAL INFORMATION

To allow investors to better understand the information presented in this section of a

business plan, it is best to first provide a summary of financial data and then present the
detailed financial tables. Financial data should include:

1. Historical financial statements for three to five years inclusive of Cash flow statement,
Income statement and Balance sheet.

2. Financial projections should be provided under best, worst, and most likely scenarios,

where each scenario is based upon a set of assumptions. For example, the worst case

scenario may assume no growth from Year 1 to Year 2, the best-case may assume 5

percent growth, and the most likely case may assume a 2 percent growth rate. A summary

of the assumptions should also be provided.

3. Detail description of banking relationships for business accounts and payroll.

4. The terms and rates of loans and their amortisation period.

5. The proposed financing plan, including:

• The amount being requested.

• Sources and uses of funds.

• Payback and collateral.

• Proposed strategy for the liquidation of investors positions.

6. Financing plan for the immediate term, short term, and long term.

7. Working capital needs.

8. Line of credit.

9. Cash flow from operations.

Thus, a business plan better be compelling if a venture hopes to receive funding.

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 3.2 RAISING FINANCE

Whether you've been in business one week or five years, you are going to need capital
continually. Therefore, an infusion of money is always welcomed by any entrepreneur.
However, raising capital can be a challenging and an elaborate process as there are many
factors to be considered right from the stage of your business to understanding type of
funding required, the amount of funding required, the costs involved in getting that funding
and so on. Thus, its rightly pointed by many entrepreneurs that choosing a path to raise
money can be overwhelming.

3.2.1 WHOM TO RAISE FINANCE FROM?

VALUE-ADDED INVESTORS

Successful high-growth entrepreneurs know not only that it is important to raise the
proper amount of capital at the best terms, but that it is even more important to raise it
from the right investors.

There is an old saying in entrepreneurial finance: whom you raise money from is more
important than the amount or the cost. The idea is to raise capital from “value-added”
investors.

Value added investors are people who provide you with value in addition to their
financial investment. For example, value- added investors may give the company
validity and credibility because of their upstanding reputation. Value-added investors
also include those who help entrepreneurs acquire new customers, employees, or
additional capital.
A great example of an entrepreneur who understands the importance of value-added
investors is the founder of eBay, who accepted capital from the famous venture capital
firm Benchmark. Ironically, eBay did not really need the money. It has always been
profitable.

It took $5 million from Benchmark for two reasons. The first was that it felt that
Benchmark’s great reputation would give eBay credibility. The second was that it wanted
Benchmark, which had extensive experience in the public markets, to help eBay make an
IPO. And this is how, eBay benefitted from its value added investors.

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3.2.1 AMOUNT OF FINANCE TO BE RAISED?

When going out to fund-raise, an entrepreneur needs to decide on the following three
essential aspects:

• How much capital is needed.

• The amount of capital to be raised should be enough to fund the milestones an

entrepreneur believes are necessary to reach a significant point in the value of the
business

• To build buffer for the inevitable mistake in either estimations or execution.

A detailed plan and budget should yield answers to the three critical questions needed to
determine the funding required:

• What resources- people, equipment, services etc. are needed to deliver the milestones?

• How much time, given those resources, is needed to deliver the milestones?

• How much capital is needed to fund those resources for that period of time?

Once an entrepreneur answers to these questions, he should have a reasonably specific

capital need figured out, and should be precise about raising that amount of money- no
more, no less.

3.2.1 WHEN TO RAISE FINANCE?

Every business can always use more cash. Ideally, that cash will come from profits, but
there will be times when you need to turn to financing routes to increase your available
capital.However, such capital is expensive. So capital should be raised at times when the
benefits to raising capital will outweigh the costs. Following are the times when capital
should be raised:

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• When there are numerous growth opportunities available and an entrepreneur wishes
to explore such opportunities, the capital should be raised.

• When the cost of financing is right. However, a business owner should never raise
more capital just to take advantage of low costs, but it absolutely deserves to be a
factor in their decision.

• Sometimes, a company's mix of debt and equity is not ideal for your current priorities.
So capital should be raised when capital structure is suboptimal.

• When you need to buy time to cover losses. A bridge loan, or a secondary investor,
can give you enough money to keep operating until your business is profitable.

• When an entrepreneur needs help to ease the complexities mounting their head, it
might make sense to seek out investors who can help guide you through the many
complexities that running a company entails.

3.2.1 STAGES OF RAISING FINANCE

A. PRE SEED STAGE

A small amount of capital is raised by an entrepreneur for a potentially profitable

business opportunity that still has to be developed and proven. The funded work
may involve product development, but it rarely involves initial marketing.

B. SEED STAGE

Financing is raised by newly formed companies for use in completing product

development and in initial marketing. These companies may be in the process of being
organised or may have been in business a short time. In either case, products have yet
to be sold commercially.

Generally, such businesses have assembled key management, have prepared their initial
business plan, and have conducted at least initial market studies.

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C. EARLY STAGE

Early stage financing is obtained by companies that have expended their initial capital and
now require funds to initiate commercial manufacturing and sales.

D. SECOND STAGE

Working capital is raised for the expansion of a company which is producing and shipping
products and which needs to support growing accounts receivable and inventories.
Although the company clearly has made progress, it may not yet be showing a profit at this
stage.

E. THIRD STAGE

Funds are sourced for the major expansion of a company which has increasing sales
volume and which is breaking even or which has achieved initial profitability. Funds are
utilised for further plant expansion, marketing, and working capital or for development of an
improved product, a new technology, or an expanded product line.

F. BRIDGE FINANCE/LATER STAGE

At this point, the firm is mature and profitable, also often still expanding. Financing is
raised for a company expected to go public within six months to a year. Often bridge
financing is structured so that it can be repaid from the proceeds of a public offering.

Bridge financing also can involve restructuring of major stockholder positions through
secondary transactions. This is done if there are early investors who want to reduce or
liquidate their positions.

This also might be done following a management change so that the ownership
of former management can be purchased prior to the company's going public.

3.2.1 METHOD TO OBTAIN FUNDING

Finance can be raised either through series of funding or through obtaining all the
funding at time. The advantages and disadvantages of both are explained below.

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A. OBTAIN SERIES OF FUNDING

ADVANTAGES

• It keeps the entrepreneur disciplined and minimises wasting money.

• The entrepreneur is paying only for current expenses.

• The new series of capital comes in at a higher valuation, allowing less equity to be
surrendered.

DISADVANTAGES

• There is no certainly that more capital will be available in the future.

• Resources must be allocated to securing additional funding. .

B. OBTAIN ALL FUNDING AT ONE TIME

ADVANTAGES

• There is no need to allocate resources to raise future funding.

• It avoids the risk of capital not being available in the future.

DISADVANTAGES

• Forecasts may be wrong as a result of incoming cash flows occurring earlier than Year
4, requiring less up-front capital. Additionally, in the case of an equity capital
investment, too much

equity is surrendered, or in the case of a debt capital investment, interest on

unnecessary capital will be paid.

• Receiving too much capital at one time spoils the inexperienced entrepreneur and
could lead to unnecessary waste of the capital.

• Invested capital comes in at a lower valuation.

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3.2.1 VARIOUS SOURCES OF FINANCE

The source of capital that gets the most media attention is venture capital funds. But in
reality there are more options available to the entrepreneur along with venture capital.
The objective of this research is to highlight such sources.

According to the 2006 Global Entrepreneurship Monitor report on financing, eliminating

venture capital would not make a perceptible difference in entrepreneurial activity overall
because fewer than 1 in 10,000 new ventures has venture capital in hand at the outset,
and fewer than 1 in 1,000 businesses ever has venture capital at any time during its
existence. Therefore, it becomes inevitable to look at alternative sources of financing.

SOURCES OF FINANCE
DEBT FINANCE EQUITY FINANCE
• Family Friends • Personal Savings
• Angel Investors • Friends and Family
• Foundations • Angel Investors
• Government • Private Placements
• Banks • Private Equity Firms
• Community Banks • International Private Equity
• Community Development • Venture Capital
Financial Institutions • Corporate Venture Capital
• Non Bank Financial Institutions • Initial Public Offering
• Person to Person Lending • Direct Public Offering
• Factors • Small Business Investment Companies
• Customer Financing • Financial Bootstrapping
• Supplier Financing • Crowd Funding
• Purchase Order Financing
• Credit Cards

Today's market places are full of opportunities that allow an entrepreneur to take their
destiny into their own hands, and with various financing options available an entrepreneur
can definitely hope to realise his or her entrepreneurial dream.

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 3.2.1.1 DEBT FINANCING

Debt is money provided in exchange for the owner’s word, sometimes backed up by
tangible assets as collateral as well as the personal guarantees of the owner, that the
original investment plus a predetermined fixed or variable interest rate will be repaid in its
entirety over a set period of time.

1. TYPES OF DEBT FINANCING

There are basically four types of debt:

• SENIOR:

Senior debt holders have top priority over all other debt and equity providers. The senior
holders are the secured creditors, who have an agreement that they are to be paid before
any other creditors.

• SUBORDINATED/SUB DEBT:

Sub debt, also referred to as mezzanine debt, is subordinated to senior debt but ranks
higher than equity financing. Both types of debt are used for financing working capital,
capital expenditures, and acquisitions. Mezzanine financing usually occurs after senior
lenders exhaust their lending capabilities. Mezzanine debt is typically more expensive
than senior debt. Mezzanine and senior debt, in addition to equity, constitute a
company’s capital structure, which describes how the company finances itself.

• SHORT TERM:

Short-term debt is that which is due within the next 12 months. Short term debt comes
in two forms- revolver debt, which is used for working capital, and current maturity of
long-term debt. This debt typically has a higher cost than does long-term debt. Short-
term debt is usually used to buy inventory and to fund day to day operating needs.

• LONG TERM:

Debt that is amortised over a period longer than 12 months is considered long-term
debt. It can be senior or mezzanine. It is found in the balance sheet in the long-term
liabilities section. Loans for real estate and equipment are usually multiyear, long- term
debt obligations.
26
2. ADVANTAGES OF DEBT FINANCING

• The entrepreneur retains complete ownership.

• The cost of capital is low.

• Loan payments are predictable.

• There is a 5 to 7 year payback period.

• It can involve value added lenders.

• It provides tax benefits.

3. DISADVANTAGES OF DEBT FINANCING

• Personal guarantees are required.

• The lender can force the business into bankruptcy.

• Amounts may be limited to value of the company’s assets.

• Payments are due regardless of the company’s profits.

4. SOURCES OF DEBT FINANCING

The major sources of debt financing are explained below. Let’s review these sources in
detail.

A. FAMILY AND FRIENDS

The benefit of raising capital from this source is multifold. Raising money is easier and
faster because the lenders are providing the capital for emotional rather than business
reasons. That was the case with Jeff Bezos’s first outside lenders, who were his
parents.

Another benefit, is that if repayments cannot be made, these lenders may be more
conciliatory than institutional lenders

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B. ANGEL INVESTORS

Angel investors are typically wealthy individuals who invest in companies. They are
different from family and friends as they usually do not know or have a relationship with
the entrepreneur prior to the investment.

They are sophisticated investors who thoroughly understand the risk of the investment and
are comfortably able to absorb a complete loss of their investment. Angel investors are
typically former entrepreneurs who focus on industries in which they have experience.
Examples of companies that received angel investing are the Ford Motor Company and
Amazon.

C. FOUNDATIONS

Another interesting source of capital for entrepreneurs is philanthropic organisations,

such as the Ford Foundation, the MacArthur Foundation and so on. Historically, these
organisations have provided grants and loans only to not-for-profit entities.

But since the beginning of the 1990s, they have broadened their loan activity to include
for-profit companies that provide a social good. Eligible companies are those that
explicitly state their intention to improve society by doing such things as employing former
convicts, building homes in economically deprived areas and so on.

D. GOVERNMENT

Local, state, and government agencies have programs for providing loans to
entrepreneurs. These programs are typically part of a municipality’s economic
development or commerce department.Some government loans are attractive because
they offer below market rates. They are provided to companies that are geographically
located in the municipal area, that can prove their ability to repay, and just as importantly,
that will use the money to retain existing jobs or create new jobs.

E. BANKS
Banks are a traditional means of sourcing finance. Traditional secured loans, like those
offered by banks, are one form of debt financing. Such loans are typically paid back in
monthly installments and require a personal guarantee on the part of the borrower.31

28
Historically, banks have not been viewed as great friends to entrepreneurs. The reason is
that most are asset backed lenders that determine the loan amount using a strict formula,
due to which start- ups can never get loans, and companies are limited to the amount
mandated by the formula regardless of the true amount needed.

F. COMMUNITY BANKS

Unlike the large banks, community banks have usually been seen as a friend to the
entrepreneur. The biggest difference is that local and regional banks will more readily
agree to customise loans to fit entrepreneurs needs. These are typically small
independent banks that specialise in certain types of targeted lending.

G. COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS

CDFIs primarily provide loan financing to businesses that are generally unbankable by
traditional industry standards. They are typically community development loan funds,
banks, credit unions, and community development venture funds. The pricing on these
loans is a bit higher to reflect the additional risk, from 0.5 to 3.0 percent above normal
loan rates.

CDFIs can be useful for starting up or growing a business when bank financing is not an
option and your returns are not high enough to attract the interest of angel investors or
venture capital firms.
CDFIs typically fund businesses in economically depressed or rural
areas.

H. NON BANK FINANCIAL INSTITUTIONS

Many non bank financial institutions also provide long term debt financing to
entrepreneurs. Their loans can be used for working capital, business acquisitions,
equipment and machinery.

I. PERSON TO PERSON LENDING

For prospective entrepreneurs who have had difficulty qualifying for traditional commercial
or loan products because of poor credit ratings or an unproven track record, an
increasingly popular alternative for start-up capital is person to person lending.

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5. DEBT FINANCING FOR WORKING CAPITAL

The interval between a company’s payment and receipt of cash must be financed. The
money for this is called working capital. Most entrepreneurs find access to working capital
their greatest problem. The procurement, maintenance, and management of working
capital seem to be some of the most common and challenging tasks facing entrepreneurs.
Therefore, let’s devote a little more time to the subject.

Very few companies are able to finance their working capital needs internally. Therefore,
external financing in the form of debt or equity is inevitable. How much working capital is
ideal? Skip Grandt, a commercial lender with 20 years of experience, says that a
company should have net working capital levels at 3 to 6 times its annual fixed costs. In
addition to the aforementioned sources, here are sources of debt financing specifically
for working capital.

A. FACTORS

Factoring firms, or factors, are asset-based lenders. The asset that they use for collateral
is a company’s accounts receivable. By way of example, a company sells its accounts
receivable, at a discount, to a factor. This allows the company to get immediate cash for
the products or services rendered. Factoring is one of the oldest financial tools as it dates
back to the Mesopotamians.

B. CUSTOMER FINANCING

The idea that a customer could be a provider of debt may seem odd, but it is indeed
possible and has happened many times. Customers are willing to provide capital to
suppliers who provide them with a high quality or unique product that they may not be able
to buy somewhere else. This financing can be a direct loan or a down payment on a future
order.

But raising capital from a customer has a few drawbacks that should be considered first.
One is that an entrepreneur may risk losing customers. Another is that, as an investor,
customer could get access to key information about company operations and may use it
to become an entrepreneur’s competitor.

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C. SUPPLIER FINANCING

Suppliers are automatically financiers if they give their customers credit. The simplest way
for entrepreneurs to improve their supplier financing is by delaying the payment of their
bills. This is called “involuntary extended supplier financing.”

But sometimes a supplier will graciously agree to extend its invoice terms to help a
customer finance a large order that, in turn, helps the supplier sell more goods.

D. PURCHASE ORDER FINANCING

Although they may seem alike, factoring and purchase order financing are two different
things. The first provides financing after the order has been produced and shipped. The
latter provides capital at a much earlier stage when the order has been received.

There are many businesses that have orders that they cannot fill because they cannot buy
inventory. This working capital is used to pay for the inventory needed to fill an order. It is a
great resource for companies that are growing fast but do not have the capital to buy
additional inventory to maintain their growth.

E. CREDIT CARDS

The final source of debt working capital is from credit cards. The abuse of credit cards can
be one of the entrepreneur’s easiest and quickest ways to go out of business.

Entrepreneurs have embraced credit card use for several reasons. First and foremost,
credit cards are very easy to get. Small businesses that don’t qualify for bank loans also
look to credit cards to finance their growth. The final reason is that if they are used
methodically and strategically, credit cards can provide inexpensive capital.

It works like this. Each month, the entrepreneur pays for various business related
expenses on a credit card. 15 days later the credit card statement is sent in the post and
the balance is paid by the business within the credit free period. The effect is that the
business gets access to a free credit period of around 30-45 days.

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 3.2.1.2 EQUITY FINANCING

Equity finance is the money provided in exchange for ownership in the company. The
equity investor receives a percentage of ownership that ideally appreciates as the
company grows.

The investor may also receive a portion of the company’s annual profits, called dividends,
based on the ownership percentage.

Before deciding to pursue equity financing, the entrepreneur must know the positive and
negative aspects of this capital.

1. ADVANTAGES OF EQUITY FINANCING

• No personal guarantees are required.

• No collateral is required.

• No regular cash payments are required.

• There can be value added investors.

• Equity investors cannot force a business into bankruptcy.

• On average, companies with equity financing grow faster.

• Entrepreneurs can learn and gain from partners.

2. DISADVANTAGES OF EQUITY FINANCING

• Dividends are not deductible.

• The entrepreneur has new partners.

• It is typically very expensive.

• The entrepreneur can be replaced.

• It can lead to some tension and even conflict.

• Loss of control.

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3. SOURCES OF EQUITY CAPITAL

Many of the sources of debt finance can also provide equity finance. Therefore, for those
common sources, the earlier explanation applies here too. The sources of equity capital
are explained below.

A. PERSONAL SAVINGS

When an entrepreneur start his own business, he has to put some of his own money into
it. He may have saved this money over the years. If he does not invest any of his own
money, he will find it difficult to raise money. An entrepreneur often uses his own money
to finance the company. This is especially true in the early stages of a start-up. The
primary reason for this is that banks and other institutional debt providers do not supply
start-up capital because it is too risky. The entrepreneur’s equity stake that comes from
his hard work in starting and growing the company, not his monetary contribution. This is
called sweat equity.

B. FRIENDS AND FAMILY

Equity investments are not usually accompanied by personal guarantees from the
entrepreneur. However, such assurances may be required of the entrepreneur when he
receives capital from friends and family in order to maintain the relationship if the business
fails. Start-up capital is virtually impossible to obtain except through friends and family.

C. ANGEL INVESTORS

Wealthy individuals usually like to invest in the form of equity because they want to
share in the potential growth of the company’s valuation. There is presently and has
always been a dearth of capital for the earliest stages of entrepreneurship- the seed or
start-up stage.

Angel investors have done an excellent job of providing capital for this stage. In
exchange, they expect high returns, similar to what venture capitalists get. Since they
are investing at the earliest stage, they usually also get a large ownership in the
company because the valuation is so low.

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D. PRIVATE EQUITY FIRMS

Many of the sources of equity financing that have been discussed up to this point are from
individuals. But there is an entire industry filled with “institutional” investors. These are
firms that are in the business of providing equity capital to entrepreneurs, with the
expectation of high returns.

This industry is commonly known as the venture capital industry. But venture capital is
merely one aspect of private equity. A private equity firm is an investment manager that
makes investments in the private equity of operating companies through a variety of
loosely affiliated investment strategies including leveraged buyout, venture capital, and
growth capital.

The phrase private equity comes from the facts that money is being exchanged for equity
in the company and that it is a private deal between the two parties investor and
entrepreneur. For the most part, all the terms of the deal are dependent on what the two
parties agree to. This is in contrast to public equity financing, which occurs when the
company raises money through an initial public offering.

E. INTERNATIONAL PRIVATE EQUITY

Over the last decade, private equity has exploded around the globe. While North America
still represents 41 percent of all private equity, other regions are catching up and fund
raising is increasing around the world.

F. VENTURE CAPITAL

Venture capital is a type of private equity, a form of financing that is provided by firms or
funds to small, early-stage, emerging firms that are deemed to have high growth potential,
or which have demonstrated high growth. Venture capital firms or funds invest in these
early-stage companies in exchange for equity- an ownership stake in the companies they
invest in.

Venture capitalists take on the risk of financing risky start-ups in the hopes that some of
the firms they support will become successful. The start-ups are usually based on an
innovative technology or business model and they are usually from the high technology
industries, such as information technology, social media or biotechnology.

34
The typical venture capital investment occurs after an initial "seed funding" round. The first
round of institutional venture capital to fund growth is called the Series A round. Venture
capitalists provide this financing in the interest of generating a return through an eventual
"exit" event, such as the company selling shares to the public for the first time in an Initial
Public Offering- IPO or doing a merger and acquisition, also known as a "trade sale” of the
company.

Nexus Venture Partner, Access Partner, Blume Ventures, Tata Capital Private Equity, ICICI
Venture Funds ltd are some of the example of venture capitalists in India.

G. CORPORATE VENTURE CAPITAL

Corporate venture capital- CVC is the investment of corporate funds directly in external
startup companies. CVC is defined by the Business Dictionary as the practice where a
large firm takes an equity stake in a small but innovative or specialist firm, to which it may
also provide management and marketing expertise; the objective is to gain a specific
competitive advantage. Most importantly, CVC is not synonymous with venture capital,
rather, it is a specific subset of venture capital. Traditional venture capitalists love it when
their portfolio companies receive financing from corporate venture capitalists. The primary
reason is that the latter are value added investors. In fact, three of the most successful
venture capital firms- Accel Partners, Kleiner Perkins Caufield & Byers (KPCB), and
Battery Ventures- have wholeheartedly endorsed the use of corporate funds.

H. INITIAL PUBLIC OFFERING

Initial public offering is a process through which entrepreneurs raise equity capital by
selling their company’s stock to the public market. This process of stock to institutions and
individuals is called an initial public offering and the result is a company that is “publicly
owned.”For many entrepreneurs, taking a company public is the ultimate statement of
entrepreneurial success. However, timing is everything with an IPO issue. The first initial
public offering in India's insurance sector, which opened on September 19, which was
also the largest since Coal India's stake sale in 2010. A large drawback to going public is
that the current owners of the privately held corporation lose a part of their ownership.

35
I. DIRECT PUBLIC OFFERINGS

Through direct public offerings businesses can directly raise finance from the public
without going through the expensive and time consuming IPO process described earlier.
In a DPO, shares are usually sold without an underwriter, and the investors do not need to
go through the sophisticated investor requirements.

J. SMALL BUSINESS INVESTMENT COMPANIES

These are privately owned investment companies that supply small businesses with
financing in both the equity and debt arenas. They provide a viable alternative to venture
capital firms for many small enterprises seeking startup capital.

Barclays Capital: This investment company, being a part of the Barclays Bank Plc, is
mainly aimed at meeting the requirements of the corporates as well as the small and
medium enterprise in the Indian Republic. Apart from that, they even serve those Indian
companies who wish to have a global growth.

K. FINANCIAL BOOTSTRAPPING

Financial bootstrapping covers those methods that avoid the use of financial resources of
external investors. It may have risks for the founders but allows more freedom to develop
the venture.
Different types of financial bootstrapping include owner financing, sweat equity,
minimisation of accounts payable, joint utilisation, minimisation of inventory, delaying
payment, subsidy finance and personal debt.

L. CROWD FUNDING

Crowd funding is the practice of funding a project or venture by raising many small
amounts of money from a large number of people, typically via the Internet. In 2015, it was
estimated that worldwide over US$34 billion was raised this way. Equity-based
crowdfunding allows contributors to become part-owners of your company by trading
capital for equity shares. As equity owners, contributors receive a financial return on their
investment and ultimately receive a share of the profits in the form of a dividend or
distribution.

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 3.2.1.3 OTHER SOURCES OF FINANCE

A. INCUBATORS

A startup incubator is a collaborative program designed to help new startups succeed.

Incubators help entrepreneurs solve some of the problems commonly associated with
running a startup by providing workspace, seed funding, mentoring, and training. The sole
purpose of a startup incubator is to help entrepreneurs grow their business.

Startup incubators are usually non-profit organisations, which are usually run by both
public and private entities. Incubators are often associated with universities, and some
business schools allow their students and alumni to take part in these programs. There
are several other incubators, however, that are formed by governments, civic groups,
startup organisations or successful entrepreneurs.

B. BUYOUTS

A buyout is the purchase of a company's shares in which the acquiring party gains
controlling interest of the targeted firm. A leveraged buyout is accomplished by borrowed
money or by issuing more stock. Buyout strategies are often seen as a fast way for a
company to grow because it allows the acquiring firm to align itself with other companies
that have a competitive advantage.

C. HEDGE FUNDS

Hedge funds are alternative investments using pooled funds that may use a number of
different strategies in order to earn active return, for their investors. Hedge funds may be
aggressively managed or make use of derivatives and leverage in both domestic and
international markets with the goal of generating high returns either in an absolute sense or
over a specified market benchmark. Because hedge funds may have low correlations with
a traditional portfolio of stocks and bonds, allocating an exposure to hedge funds can be a
good diversifier.

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 3.3 MANAGING FINANCE OF AN ENTREPRENEURIAL VENTURE

Ambition and enthusiasm are important characteristics of business owners. But so is the
ability to make rational financial decisions based on facts. And so is the ability to manage
funds especially because many entrepreneurs use their life’s savings to make the leap
into independence. This new feeling of freedom from employment can be exhilarating.

But with this control and freedom also comes the responsibility. The responsibility to
make decisions. Some of those decisions will be good. Others won’t. At such a time a
good financial management system, will play an important role in not only describing how
business is doing financially, but also explaining why. And with such information at hand
an entrepreneur will be in place to make improved decisions of the operation of their
business.

Its true money is the answer to a number of problems faced by a venture, but if not
respected and managed well, it can lead to even more disastrous problems. Therefore,
effective financial management can be a critical tool to building your vision into a reality.

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3.3.1 FINANCIAL STATEMENTS

As stated earlier, one of the most important sections of the business plan is the one that
details the firm’s financial statements. Therefore, the discussion in this section is an
overview regarding key financial statements.

The objective is to understand the purpose of the different statements, their components,
and their significance to entrepreneurs who are not actually financial managers. This is the
final step before making financial statement analysis, which will be in focus later. Financial
statements are important because they provide valuable information. In this research, we
will focus on three financial statements: the income statement, the balance sheet, and the
statement of cash flows.

Each of these statements, in one way or another, describes a company’s financial health.
For example, the income statement describes a company’s profitability. It is a
measurement of the company’s financial performance over time. On the other hand, the
balance sheet describes the financial condition of a company at a particular time. Does it
own more than it owes? Can it remain in business?

A. INCOME STATEMENT

The income statement, also known as the profit and loss statement, is a scoreboard for a
business and is usually prepared in accordance with generally accepted accounting
principles. It records the flow of resources over time usually a month, quarter, or year. It
shows the revenues achieved by a company during that particular period and the
expenses associated with generating these revenues.

The difference between a company’s total revenues and total expenses is its net income.
When the revenues are greater than the costs, the company has earned a profit. When the
costs are greater than the revenues gained, the company has incurred a loss.

Revenue - Expenses = Net Income

Revenues may include receipts from sale of products and services, returns on
investments, such as interest earned on a company’s securities, including stocks and
bonds, franchising fees paid by franchisees, rental property income. Expenses may
include cost of good sold, operating expenses, financing expenses, tax expenses, etc.

39
B. BALANCE SHEET

The balance sheet is a financial snapshot of a company’s assets, liabilities, and

stockholder’s equity at a particular time. Bankers have historically relied on analysis of
ratios of various assets and liabilities on the balance sheet to determine a company’s
credit worthiness and solvency position.

1. ASSETS

A company’s assets on the balance sheet are separated into current and long-term
categories.

• CURRENT ASSETS

Current assets are those items that can be converted into cash within one year, including
a company’s cash balance, accounts receivable, inventory, marketable securities, and
prepaid expenses.

• LONG TERM ASSETS

Long-term assets, tangible and intangible, are the remaining assets. They are recorded
at their original cost, not their present market value, minus the accumulated depreciation
from each year’s depreciation expense. The assets that fall into this category include
buildings, land, equipment, furnaces, automobiles, trucks, and lighting fixtures.

2. LIABILITIES

The other components of the balance sheet belongs to the liabilities and shareholders
equity sections. A company’s liabilities consist of the amounts owed by the company to
creditors, secured and unsecured. The liabilities section of the balance sheet, is divided
into current and long- term.

• CURRENT LIABILITIES

Current liabilities are those that must be paid within 12 months. Included in this category
is the current portion of any principal payments due on loans for which the company is
responsible and accounts payable, which is very simply money owed to suppliers.

40
• LONG TERM LIABILITIES

Long-term liabilities are all of the company’s other obligations. For example, if the company
has a mortgage, the total balance due on that mortgage minus the current portion would be
reflected in the long-term liabilities category.

3. STOCKHOLDER’S EQUITY

Stockholders’ equity is the difference between total assets and total liabilities. It is the net
worth of the company, including the stock issued by the company and the accumulated
earnings that the company has retained each year. The retained earnings are an
accumulation of the profits from the income statement. It is to be noted that the company’s
net worth is not necessarily the company’s value or what it would sell for.

C. CASH FLOW STATEMENT

The statement of cash flows uses information from the two other financial statements, the
balance sheet and the income statement, to develop a statement that explains changes in
cash flows resulting from operations, investing, and financing activities.

The cash flow ledger provides a summary of the increases (inflows) and decreases
(outflows) in actual cash over a period of time. It provides important information primarily
to the entrepreneur, but also possibly to investors and creditors (such as banks), about
the balance of the cash account, enabling them to assess a company’s ability to meet its
debt payments when they come due.

Sample Cash Flow Calculation :

Cash on hand at the beginning of the month + Monthly cash received from customer
payments + Cash flows resulting from operations, investing, and financing activities etc =
Total cash - Monthly cash disbursements for fixed and variable costs = Cash available at
the end of the month
The successful entrepreneurs are those who know their company’s actual cash position on
any given day. Therefore, it is recommended that entrepreneurs, especially the
inexperienced and those in the early stages of their ventures, review the cash flow ledger
at least weekly. By doing this kind of review and projection on a regular basis, the
entrepreneur can schedule payments to suppliers to match the expected cash receipts.

41
This planner allows an entrepreneur to be proactive, as all entrepreneurs should be, with
regard to the money owed to different suppliers. Thus, the cash flow ledger and planner
are simple and very useful tools that the entrepreneur should use to manage cash flow
successfully and run their business as smooth as possible.

3.3.2 FINANCIAL STATEMENT ANALYSIS

When it comes to finance, it is common to hear entrepreneurs say, that they do not know
any thing about finance, because they were never good with numbers. Financial
information is typically used by business managers and investors. It is not necessary for
the entrepreneur to be able to personally develop financial statements. However, an
entrepreneur must learn and use financial statement analysis. Financial statement
analysis should not be considered a brain surgery. In fact, everyone should understand it,
no matter how distasteful or uncomfortable it might be. Finance is like medicine. No one
likes it because it usually tastes awful, but everyone knows that it is good for them.

A. PROACTIVE ANALYSIS

From the earlier points it is obvious that entrepreneurs must engage in proactive analysis
of their financial statements to better manage their company and influence the business
decisions of the company’s managers, as well as attract capital from investors and
creditors. Financial statements must be used as tangible management tools, not simply as
reporting documents. The entrepreneur who cannot do this will have a much more difficult
time growing the company and raising capital. Therefore to be a successful business
owner proactive analysis should be done at regular times.

B. INCOME STATEMENT ANALYSIS

In terms of financial analysis, all items, including expenses and the three margins- gross,
operating, and net profit are analysed in terms of percentage of revenues. For instance if
the gross profit is 50 and the revenue 150, then the gross profit margin can be calculated
as follows :

Gross profit Margin = Gross Profit/Sales Revenue = 50/150 = 0.33 *100 = 33%

Therefore the gross profit ratio is 33 percentage. In a similar manner, other income
statement ratios and margins can be calculated as a percentage of sales revenue.

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C. RATIO ANALYSIS

A ratio analysis, using two or more financial statements, may be undertaken for several
reasons. Entrepreneurs, along with bankers, creditors, and stockholders, use ratio
analysis to objectively appraise the financial condition of a company and to identify its
vulnerabilities and strengths. Ratio analysis is probably the most important financial tool
that the entrepreneur can use to proactively operate a company.

KEY RATIOS
RATIO DESCRIPTION FORMULA
Profitability Ratio Measures the net profit Net Profit Margin = Net
margin the company is profit/ sales
achieving on sales.
Liquidity Ratio Measure a company’s ability Current Ratio = Current
to meet its short-term assets/ current liabilities
payments.
Quick Ratio = (Current
assets – inventory and other
illiquid assets)/current
Leverage Ratio Evaluate a company’s liabilities
Debt/Equity Ratio = Total
capital structure and long- liabilities/ stockholders
term potential solvency. equity
Cash Ratio Measure a company’s cash Cash Flow Cycle =
position. (Receivables
inventory)/COGS

Cash Flow Debt

Valuation Ratios
Operating Ratio
Coverage Ratio =
Measure returns to EBITDA/(interest
Price/Earnings (P/E)
investors. principal dueof
ratio = Price on debt)
stock/earnings per share
Focus on the use of Days Payable = Accounts
assets and the payable/(COGS/365)
performance of
management. Collection Ratio = Accounts
receivable/ (revenues/365)

Inventory Turns = COGS/

average inventory
outstanding

Days Inventory Carried

=
Inventory/(COGS/365)

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A company’s ratios cannot be examined in a vacuum, that is, by looking at only one year
for one company. The greatest benefit of historical and present day ratios is derived from
internal and external measurements. Internal analysis will show if there are any trends
within a company across time.

The entrepreneur should also do an external comparison of the company’s ratios against
those of the industry. This comparison should be against both the industry’s averages and
the best and worst performers within the industry. This will allow the entrepreneur to assess
the company’s operations, financial condition against comparable companies.

D. BREAKEVEN ANALYSIS

The analysis of financial statements should also be used to determine a company’s

breakeven point. Successful entrepreneurs know how many meals, or hours of service
they have to sell or provide, respectively, before they can take any real cash out of the
company.

Breakeven point is calculated as follows:

Fixed expenses/ gross margin = Total breakeven

sales Total breakeven sales/ unit price = Number of

units to sell

E. MEASURING GROWTH

When measuring the growth of a company, the entrepreneur should be sure to do it

completely. Many people use compounded annual growth rate analysis when measuring
growth.

In addition to CAGR, another means is simple growth. In finance, both terms are typically
used to discuss the rate of growth of money over a certain period of time.

Simple interest is the rate of growth relative to only the initial investment or original
revenues. This base number is the present value. Future value is the sum of the initial
investment and the amount earned from the interest.
Simple growth rate = Growth/ initial investment * time

44
The concept of compounding is commonly used by financial institutions such as banks. It
is popular among professionals including consultants and commercial and investment
bankers. It simply shows the interest rate, compounded annually, that must be achieved to
grow a company from revenues in Year 1 to revenues in a future year.

F. REVENUE ANALYSIS

The analysis of a company’s historical annual revenue includes answers to the following
questions: What are the sales growth rates for the past few years? What is the trend in
sales growth? Not only should you be concerned about whether or not revenues are
increasing, but you should also ask whether the increase is consistent with the industry
standards.

G. GROSS MARGINS

One of the initial financial ratios that business financiers examine when reviewing the
income statement is the gross margin.

A good gross margin, is relative and depends on the industry in which a company
operates. In general, gross margins of 35 percent and above are considered to be very
good.

H. NET MARGINS

In general, net margins of 5 percent or better are considered very good. Privately owned
companies want to minimise taxes, and therefore they reduce operating income, which in
turn reduces their net income. The point being made is that the net income is usually a
manipulated number that understates the company’s true financial performance.

A few exceptions might be companies that are preparing to go public or be sold. These
companies may want to look as financially strong as possible. A publicly owned company
aggressively seeks positive net margins, as high as possible, because the net margin
affects the stock price.

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3.3.3 MANAGEMENT OF CASH FLOW

Nothing is as important to a business as positive cash flow. Without cash, an

entrepreneur will not be able to buy inventory or equipment, make payroll, pay bills or
repay debt. Cash is necessary not only to keep a business going, but also to grow the
business. Seth Godin the founder of Yoyodyne, an online marketing company notes that
happiness for a business owner boils down to one simple thing: positive cash flow.

A. TYPES OF CASH FLOW

A Business’s cash flow is commonly referred to as EBITDA which is an acronym for

earnings before interest, taxes, depreciation, and amortisation. EBITDA is the cash
available to service debt, that is, make principal and interest payments, pay taxes, buy
capital equipment, and return profits to shareholders after paying all operating expenses.

It should be noted that a company’s true cash position includes the adding back of
depreciation and amortisation. While these two items can be expensed on an income
statement, they are non cash expenditures. Their presence on an income statement helps
the company’s cash flow by reducing its taxable profits. This practice of adding back
depreciation and amortisation is the reason why a company with negative net earnings on
its income statement can still have a positive cash flow.

B. CASH FLOW FORECASTS

Preparing a cash flow forecast allows an entrepreneur to determine a business’s financing

needs. If an entrepreneur finds that the business has a forecasted cash shortage as a
result of rapid growth, then it might be necessary to raise external money to meet the
company’s financial needs.

A good cash flow forecast will allow the entrepreneur to determine the exact amount of
cash needed and also when it is needed. The following steps should be taken to make
that determination:

• Prepare a 3- to 5-year that is monthly or annual cash flow projection.

• To make the projection, use free cash flow plus debt obligations- interest and principal
payments which is called net cash flow.

46
• Choose the largest cumulative negative cash flow number- the capital needed.

Cash Flow forecasts will help you answer the question when should you get the cash?

There are two response to this question. The first is that you should get only what you

need from year to year, or a “series of funding.” The second is that you should get the

maximum that you will need at once, also “known as one time funding.”

C. CASH FLOW LEDGERS

The cash flow ledger provides important information about the balance of the cash
account, enabling the entrepreneur to assess the company’s ability to fund its operations
and also meet debt payments as they come due. It indicates, on a transaction basis, all
cash received and disbursed during a month’s period.

Successful entrepreneurs are those who know their company’s actual cash position on
any given day. Therefore, it is recommended that the entrepreneur, especially the
inexperienced and those in the early stages of their ventures, review their cash flow
ledger at least weekly.

D. CASH FLOW MANAGEMENT

Cash flow management can be as simple as preserving future cash by not spending as

much today. Cash flow management can also involve making somewhat complicated

decisions about delaying payments to a supplier in order to use cash resources to

temporarily increase production. Or it can involve making decisions about borrowing or

using factoring companies to generate cash quickly to meet short term cash shortages.

E. SOURCES OF CASH INFLOW

Accounts receivable, cash payments received, other income that is income from
investments, borrowing and so on.

F. CASH OUTFLOW

Payroll Utilities- heat, electricity, telephone, and so on, loan payments- interest plus
principal, rent, insurance- health, property, and so on, taxes etc.

47
G. KEY CASH FLOW GOALS

The goal of good cash management is obvious: to have enough cash on hand when you
need it. The major goal of prudent cash flow management is to ensure there is enough
cash on hand to meet the demands for cash at any given time. This is done by getting
cash not only from operations, that is, managing cash inflows, including accounts
receivable and disciplined spending that is, managing accounts payable but also through
the use of external capital such as borrowing.

While this may appear to be a simple concept, in reality it is a process that even
the most experienced financial officers and executives find difficult to carry out
successfully.

H. WORKING CAPITAL

The procurement, maintenance, and management of working capital seem to be some of

the most common and challenging tasks facing entrepreneurs. As was stated earlier in
this chapter, the interval between a company’s payment and receipt of cash must be
financed. The money for this is called working capital, which consists of funds invested in
all current assets, including inventory, accounts receivable and cash.

Gross working capital is used to finance only the company’s current

assets.

Net working capital, which is a measurement of a company’s solvency, is current assets

minus current liabilities.

The goal is to have positive net working capital. The greater the net working capital, the
stronger the company’s cash position relative to its ability to service its other expenses,
including long-term debt.

I. FINDING CASH

Entrepreneurs have to frequently raise external financing from debt and/or equity
investors. Most of the time, after reviewing the financial statements, one can find that they
do not need outside capital. They simply need to reduce their inventory and/or accounts
receivable levels. That’s right. Cash is often readily available to entrepreneurs who carry
excessive amounts of these two assets.
48
 3.4 VALUATION OF AN ENTERPRISE

Before investing in a startup, the first question investors ask is- what is the company’s
worth? This is one question often asked when looking for money. Valuation of a company
is often one of the first points of contention that must be negotiated between investors and
entrepreneurs.
Entrepreneurs want the value to be as high as possible and investors want a value low
enough so that they own a reasonable portion of the company for the amount they
invest.

Valuation is very tricky and can never be done in a vacuum. Entrepreneurs must learn the
methods used to value companies and become comfortable with the ambiguity of
valuation. The true value of a company, be it a start-up or a mature business, is
established in the marketplace.

Very simply, a company’s ultimate value is the price agreed to by the seller and the buyer.
This fact can be traced back to the first century BC, when Publilius Syrus stated,
“Everything is worth what its purchaser will pay for it.”

Despite the fact that business valuation is not an exact science, entrepreneurs should
determine a value for their company at least once a year. It is not brain surgery. In fact, it
can be rather simple, and almost everyone can do it.

3.4.1 WHY VALUE A COMPANY?

There are numerous reasons why an entrepreneur should know the value of her business.
Firstly, if the entrepreneur does not determine the value of his company, then someone
else will, and the entrepreneur will not be happy with the result. Other reasons include to
determine a sale price for the company, to determine how much equity to give up for
partnership agreements and to determine how much equity to give up for investor capital.
Some of the reasons for performing an annual valuation of a company.

3.4.1 VALUATION METHODS

Financial planning helps to determine the value of a venture and serves as an important
marketing tool towards prospective investors. There are numerous ways to value a
company, and seemingly, almost no two people do it the same way.
49
Methods may differ from industry to industry, as well as from appraiser to appraiser. It is
important to know that there is no single valuation methodology that is superior to all the
others, each has its own benefits and limitations. But ultimately, most business appraisers
prefer and use one method over another. Typically, the commitment to one method comes
after experimenting with several methods and determining which consistently provides the
valuation that the person is most comfortable with.

Valuation methods basically fall into three categories: asset- based, cash flow
capitalisation and multiples. In the world of entrepreneurship, if there is a most popular
and commonly used valuation category, it is multiples, and within this category, the most
popular method is the multiple of cash flow. The venture capital method is equally popular
for valuing startups.

1. MULTIPLES

A. MULTIPLES OF CASH FLOW

The cash flow of a company represents the funds available to meet both its debt
obligations and its equity payments. These funds can be used to make interest and/or
principal payments on debt, and also to provide dividend payments, share repurchases,
and reinvestments in the company. One way of valuing a company is by determining the
level of cash available to undertake these activities.
This level of cash is determined by calculating earnings before interest, taxes,
depreciation, and amortisation- EBITDA. In this valuation methodology, EBITDA is
multiplied by a specified figure, the multiplier to determine the value of the company. In
general, a multiplier of between 3 and 10 is used.
However, buyer’s market or seller’s market, sales growth, industry growth potential,
variability in a company’s earnings, and exit options available to investors are all factors
that affect the level of the multiplier used in valuation. The multiple is not static, but
evergreen. It can change for a myriad of reasons.

B. MULTIPLES OF FREE CASH FLOW

Finally, for companies requiring major investments in new equipment in order to sustain
growth, it is common to use a multiple of the company’s free cash flow instead of just
EBITDA. This is a more conservative cash description that yields a lower valuation.

50
Manufacturing companies are usually valued based on a multiple of FCF. On the other
hand, media companies such as television stations are usually valued based on a multiple
of EBITDA.

C. MULTIPLES OF SALES

This multiple is one of the more widely used valuation methods. Sales growth prospects
and investor optimism play a major role in determining the level of the multiple to be used,
and different industries use different multiples. In the food industry, businesses generally
sell for 1 to 2 times revenue, but sales growth prospects can have an impact on raising or
lowering the multiplier.

D. MULTIPLE OF UNIQUE MONTHLY VISITORS

This valuation method has surfaced primarily in the internet space. In 2005, News
Corporation purchased MySpace for $580 million, or $2.93 per unique monthly visitor. The
next year, Google purchased YouTube for $1.65 billion, or $4 per unique monthly visitor.
Additionally, in 2008, NBC Universal agreed to buy the Weather Channel for $3.5 billion.
At the time of purchase, the Weather Channel’s web site had 37 million unique monthly
visitors. This purchase price translates into a price of $9.40 per unique monthly visitor.

E. P/E RATIO METHOD

The P/E ratio model is commonly used when valuing publicly owned companies. The P/E
ratio is the multiplier used with the company’s after-tax earnings to determine its value. It
is calculated by dividing the company’s stock price per share by the earnings per share
(EPS).

F. MULTIPLE OF GROSS MARGIN

As a rule of thumb, the multiple of gross margins should be no higher than 2. Therefore, a
company with revenues of $50 million and gross margin of 30 percent has a value of $30
million.

2. ASSET VALUATION

In the past, the value of a company’s assets had a great significance in determining the
company’s overall valuation. Today, most companies do not have many tangible assets.
51
Most assets are produced overseas in low wage paying countries like China, India, and
Taiwan. The result is that over time, the value of a company is dependent less on its assets
than on its cash flow.
Asset value tends to be most meaningful in cases in which financially troubled companies
are being sold. In that case, the negotiation for the value begins at the depreciated value of
its assets.

3. CAPITALISATION OF CASH FLOWS

A. FREE CASH FLOW METHOD

The most complicated and involved valuation model is the free cash flow model, also
known as the discounted cash flow or capitalisation of cash flow model. It is a model that
relies on projections filled with assumptions, because there are so many unknown
variables. Therefore, it is the model most commonly used to value high-risk start-ups.

Simply stated, free cash flow is the portion of a company’s operating cash flow that is
available for distribution to the providers of debt that is, interest and principal payments
and equity that is, dividend payments and repurchase of stock capital. This is the cash
that is available after the operating taxes, working capital needs, and capital expenditures
have been deducted.

4. VENTURE CAPITAL METHOD

To determine the future value of a start-up, a venture capital investor is guided by the
question: What percentage of the portfolio company should I have at exit to guarantee
that I get the return committed with my investors? It calculates valuation based on
expected rates of return at exit.

5. BERKUS METHOD

It attributes a range of values to the progress startup entrepreneurs have

made in their commercialization activities.

52
 CHAPTER 4
4.1 DATA ANALYSIS

1. As an entrepreneur do you fully understand the financial aspects of your enterprise?

Yes, complelety. Somewhat. No, not at all.

No, not at all.

13.0%

Yes, complelety.
38.0%

Somewhat.
49.0%

Understanding of Financial Aspects of the

Enterprise.

Our findings indicate that 49% of the total respondents do not fully understand the financial
aspects related to their enterprise. However, 38% respondents do understand the financial
aspects of their enterprise completely and 13% of the respondents said they do not
understand the financial aspects of their business at all.

53
 2. Which of the sources of finance available to an enterprise are you aware of?

Venture Capital Angel Investors Initial Public Offers Bank

Lending Crowd Funding Retained Earnings
90

86

67.5
% of Respondents

45
46 44
40

30
28
22.5

Sources of Finance

Awareness for Sources of Finance.

Out of the total respondents, 86% entrepreneurs were aware of bank lending. 46% were
aware of initial public offers, followed by 44% that were aware of retained earnings. Our
findings also indicate that 40% respondents out of the total respondents were aware of
venture capital. A 30% of the total sample size was aware of angel investors as a finance
avenue. The least awareness among entrepreneurs was about crowd funding as a source
of finance.

54
 3. What according to you are the most pressing problem faced by your enterprise
from the following?

Problems Faced.

Competiton 51

Access to Finance 54

Regulations 21

Finding Customers 29

High Cost Of Operations 25

Any Other 1

0 15 30 45 60
% of Respondents

54% of the respondents find access to finance as the most pressing problem faced.
Competition was the second most serious problem with 51% responses. Finding
customers was the next serious challenge faced by entrepreneurs with 29% responses
while 25% of the respondents find high cost of operations as a serious issue. Another 21%
respondents find regulations as their most serious issue. Lastly, 1% of the respondents
sighted other problems.

55
4. How was the finance obtained by you to start your venture?

External Finance such as Bank Loan, Angel Investors, Venture

Capital etc. Internal Finance such as Personal Funds.
Both.

10%

42%

48%

Finance Obtained to Fund the Venture.

Most Business owners, that is 48% of the total respondents raised finance through internal
sources such as their own funds to fund their enterprise. Out of the total respondents 10%
of the respondents raised external finance through friends and family. 42% of the
respondents employed both sources of finance- internal and external to fund their venture
at the initial stages.

56
5. Has your venture ever raised external finance?

Respon % of Respondents
se

Yes 55

No 45

55% respondents have raised external finance at some point in time, whereas 45% have
not raised any external finance at all.

6. If yes, when was it raised the first time?

First time the external finance was raised.

60 55.4

45
% of Respondents

35.7

30

15 8.9
0
0
< 2 years 2-5 years > 5 years
Number of Years

55.4% of the entrepreneurs need finance within 2 years of starting the venture. 35.7% of
entrepreneurs need finance with in 2 to 5 years of starting their operations and 8.9% of
the entrepreneurs required external finance after 5 years of starting their business
activities.

57
7. If yes, what was the source of external finance?

Family and Friends Bank Loan Venture Capital Angel

Investors Any Other Source

1.7
10.3% %
20.7%

6.9%

60.4%

Source of External Finance.

60.4% of the total respondents have raised external finance through bank loans. 20.7%
have raised finance through family and friends while 10.3 % entrepreneurs have raised it
through angel investors. Only a 6.9% of the entrepreneurs have raised it through venture
capital. Another 1.7% raised finance through other sources such as crowd funding.

58
8. What according to you are some of the limitations in sourcing external finance?

Limitations in External Finance.

Limitation % of Respondents

High Cost of Finance 79

Time Consuming 30

Complex Procedures 31

No Limitations 2

Any Other 3

We have made a finding that 79% entrepreneurs find high cost of finance as the most
serious challenge in raising external finance. 31% of the respondents find complex
procedures as serious issue while 30% find the process of raising finance time consuming
time. 3% respondents sighted other reasons and only a 2% find no challenges in racing
external finance.

59
9. Has your enterprise ever been rejected external finance?

Rejection Rate

Yes, 9.
Completely. 4

40
Partly
.

31.8
Unacceptable
Terms

18.
8
Recieved Full
Funding.

0 10 20 30 40
% of Respondents

When it comes to receiving funds, 40% of the respondents received the funding partly that
is they didn’t receive the entire funding amount. 31.8% received finance with
unacceptable terms and conditions. 18.8% entrepreneurs received full funding while 9.4%
received no funding at all, that is their funding was rejected entirely.

60
10. Do you agree that investors should play a major role in the enterprise they invest in,
from the viewpoint of providing guidance, control and direction?

Strongly Agree Agree Neutral Disagree Strongly Disagree

5.0%2.0% 7.0%

19.0%

67.0%

View on Value Added Investors.

7% of the respondents strongly agree that investors should play a guiding role. 67% of the
respondents agree with the fact that investors should play a guiding role while 19% of the
respondents have a neutral view on this. Another 5% disagree and the remaining
respondents that is 2% completely disagree with the believe that investors should play a
guiding role in the enterprise they invest in.

61
11. Which method of funding do you prefer more?

Funding Method Preferred

44
43

33

29
28
% of Respondents

22

11

0
Series of Funding One Time Funding Both
Method

43% of business owners preference one time

funding. 28% of respondents prefer series of
funding.
29% prefer both as shown in the chart above.

62
 12. Rank the qualities that you look for in a potential investor on a scale of 1 to 4.

Ranks Allotted
4
4

3
3

2
Ranks

1
1

0
Value Added Investors A Good Deal High Success Rate Investment Strategy

Qualities

Value added investors was rated rank 1 as the most required quality in investors as 41
entrepreneurs voted for it to be at the first position. 2nd rank was allotted to the need to
have a good deal as it received maximum responses for 2nd position with 42 responses.
At 3 was the high success rate with 47 responses voting it at 3rd position and lastly with
53 responses voting investment strategy at 4, it was ranked at 4.

63
 13. Rank the following sources of external finance on the basis of accessibility on a scale of 1 to
6.

Rank 1 Rank 2 Rank 3 Rank 4 Rank 5 Rank 6

100 2 2
23 5 4 44
4 37
6 12
16
4
14 25
75 18 21

45
No of Responses

18
15 34
16 16
50

12 18
41 12

15
25 8
26 15 14
11
17

10 11
9
0
Venture Capital Bank Loans Angel Investors FamilyFriends IPO Government
Sources of Finance

41 respondents voted finance from family/friends at rank 1 as the most easily accessible.
With 45 responses voting bank loans at 2nd position, bank lending secured a 2nd rank.
For Rank 3 angel investors received the highest responses, that is 34 responses. Venture
Capital ranked at 4th position. Government sources ranked 5 with 37 respondents voting
it 5th position. IPO ranked 6 with 44 respondents voting for it at 6th position.

64
14. In future, which finance alternative would you prefer?

Future Preference for Finance

70 67

52.5
% of Respondents

35

22

17.5
11

0
External Finance Internal Finance Both
Source of Finance

In this regard, the findings made are such- 67% of the respondents recognised the need to
have both internal and external finance in the future. 22% identified the need for external
finance in future while 11% would prefer internal sources of finance in future.

%%

Both
37.6

65
15. If external, which type of external finance would you seek more?

Equity Finance Debt Finance Both

Type of finance preferred in future.

In future, respondents who will prefer debt finance is 38.7% and

respondents who will prefer equity finance is 23.7% of the total
respondents. The remaining 37.6% of the respondents will prefer
both equity and debt source of finance.

66
 CHAPTER 5
5.1 FINDINGS

• Most of the entrepreneurs, that is, 63% of the total respondents are from the age
group 18 to 30. Another 22% of the total respondents are entrepreneurs from the age
group 30 to 40. The remaining 15% of the total respondents are entrepreneurs from
the age group 40 to 60.

• 80% respondents are male entrepreneurs while the remaining 20% are female
entrepreneurs. Overall, the general trends among entrepreneurs do not show
significant variation according to gender.

• Only 38% of the total respondents understand each financial aspect related to their
enterprise. Remaining entrepreneurs either have some or no knowledge of the
financial angles of their business. Entrepreneurs with more knowledge of financial
aspects of their enterprise are more likely to raise alternative finance, which is in line
with our hypothesis.

• Most of the entrepreneurs are aware of bank lending, initial public offers and retained
earnings as a source of finance. Entrepreneurs reflected low awareness of the relatively
new avenues of financing.

• Contrary to our hypothesis, access to finance is the most challenging issue faced by
entrepreneurs and not competition. However, competition is closely followed by
competition.

• Majority of the entrepreneurs were self financed at the startup stage due to low
accessibility to external finance as also stated in our hypothesis.

• 55% of the total entrepreneurs have raised external finance, however 45% of
the total entrepreneurs have not raised any external finance.Out of the total
respondents that have raised external finance, more than half of the total

67
 respondents have raised external funding within two years of starting the
business.

Contrary to our hypothesis entrepreneurs raise external finance more from banks than
friends and family. Finance from friends and family is second, closely followed by angel
investors and only a 6.9% raised external finance through venture capital.

• An interesting finding is that out of the total entrepreneurs that have raised external
finance only a 19% of them did receive full funding. Remaining entrepreneurs either
received funding partly, funding with unacceptable terms and conditions or no funding at
all.

• 80% of the respondents find high cost of finance as the most serious drawback of
raising external finance. This finding emphasises the challenges in obtaining external
finance.

• Majority of the entrepreneurs agree that investors should provide value to the
enterprise in addition to the finance.

• In context of the method of funding, most of the entrepreneurs prefer one time funding
over series of funding.

• Entrepreneurs rank value adding investors as the highest quality they seek in their
investors, followed by other qualities such as providing a fair deal and success rate
of the investors.

• Entrepreneurs find the traditional methods of finance such as family and friends, bank
more easily accessible and convenient than the relatively newer methods of financing
such as angel investors, venture capital etc. This differs from our hypothesis which
states angel investors are easily accessible than bank lending.

• Entrepreneurs in future will prefer securing finance through both internal and external
sources of finance. As opposed to our hypothesis, among the external sources of
finance entrepreneurs will prefer debt finance over equity finance.

68
 5.2 INTERPRETATIONS

From the data analysed and the findings following interpretations can be made.

• Majority of the respondents are entrepreneurs from the younger age group with less
entrepreneurial experience in comparison to entrepreneurs from older age groups.
Hence the younger entrepreneurs are not fully quipped with financial aspects of their
enterprise. However, respondents in older age groups have either some or complete
knowledge.

• Contrary to our hypothesis, access to finance is the most pressing issue for an
enterprise. The study includes young entrepreneurs with small to medium size
enterprises. So it can be inferred that due to small scale of operations such
entrepreneurs may find it difficult to access and raise finance.

• Due to lack of knowledge of finance in general among entrepreneurs, there is

also lack of awareness among them about alternate sources of financing.

• To meet the startup needs, majority of the entrepreneurs were self financed at the
startup stage. They din’t have any external source funding them. So we can say that
either obtaining seed capital from external sources is a challenging task or this could
be a reflection of greater confidence among new and young entrepreneurs in their
own abilities.

• Majority of the entrepreneurs obtained finance with in two years of starting the
business, therefore, we can interpret that enterprises have more requirement for early
stage growth capital.

• There is also some percentage of entrepreneurs that have raised no external finance at
all. We can infer that this may either be owing to lack of knowledge of external sources
of finance or confidence in own abilities.

69
• The biggest challenge before entrepreneurs in raising finance is the high cost of
capital. Though there are multiple alternatives, the cost to obtain finance is still high.
Therefore we can infer that this might be the reason why many small to medium size
enterprises have yet not raised any external finance at all.

• The challenges and difficulties in obtaining external finance can be also understood
from our finding which indicates that only a 9.4% of the entrepreneurs received
complete funding.

• Small to medium size enterprises expect value in addition to the finance provided as
such value added investors can guide new and existing entrepreneurs. Entrepreneurs
face the need to have value added investors backing them especially at the early stages.
Therefore, financing institutions should look to play a wider role by supporting the
enterprise they invest in.

• Respondents prefer debt finance over equity finance. However, many entrepreneurs
prefer both debt and equity finance. Therefore, innovative debt models that combine
both- debt and equity will be the future requirement of entrepreneurs.

• Entrepreneurs prefer one time funding over series of funding.

• From the accessibility viewpoint entrepreneurs find finance available from family and
friends most easily accessible. So we can infer that entrepreneurs want to obtain finance
that is available, if not as easily as finance from family and friends, is still an improved
version of today in terms of cost, procedures, convenience and availability.

• Majority of the entrepreneurs identified the need to raise both internal and external
finance in future to run and grow their business. So venture capital and other financing
institutions should look at minimising challenges in raising external finance to and satisfy
the need for entrepreneurs.

70
 CHAPTER 6
6.1 RECOMMENDATIONS

• To overcome the challenges in obtaining finance an enabling business environment

should be encouraged that will ensure simplified regulatory processes, improving
delivery time, meeting information needs and improving corporate governance norms
for entrepreneurial ventures.

• To satisfy funding requirements of startups innovative finance models should be

explored. Venture Debt is a novel idea that is worth exploring. Venture Debt
combines traditional debt options with venture capital, allowing a lender the option
of converting debt into equity.

• The research findings also suggest that it is essential to move beyond a few
traditional methods such family/friends, bank, informal angel investors and promote
more incentive schemes to encourage seed capital funding.

• Our findings also conclude that a combination of novel debt and equity models will
spur early stage finance for first generation entrepreneurs in the foreseeable future.

• In future, there is also scope for Initial Public Offerings to improve. The absence of
equity markets for listing and trading of small-cap companies means that the options
for raising capital are limited. A stock exchange that is specifically designed for smaller
companies will provide significant advantages. From the company’s point of view, it will
ensure visibility, help in accessing additional capital.

• Both primary and secondary data indicate how entrepreneurs find finance a brain
surgery. So finally, the findings also suggest how entrepreneurs can improve their fund
raising abilities with improved financial knowledge, increased awareness of the
market, avoiding complex business plans and asymmetric information, better
transparency and lastly to have a broader outlook towards new and alternative
sources of entrepreneurial finance.

71
 CHAPTER 7
7.1 SWOT ANALYSIS

SWOT analysis is an elaborate process that identifies the strengths, weaknesses,

opportunities and threats of a business organisation, a business idea, a business project
etc. In a business context, the SWOT analysis enables organisations to identify both
internal and external influences, that can help a company face its greatest challenges and
find its most promising new markets.

From a research viewpoint, swot analysis allows a researcher to identify strengths,

weaknesses, opportunities and threats of the research subject. There are four factors to
be considered in a swot analysis- the strengths, weaknesses, opportunities and threats

7.1.1 SWOT ANALYSIS OF ENTREPRENEURIAL FINANCE

STRENGTHS WEAKNESSES

• High cost of obtaining finance.

• Helps preserve own resources.
• Efficient running of a business.
• Lack of awareness in entrepreneurs.
• Entrepreneurs view it as a burden.
• Skepticism towards business plans.
• Affects cash flow.
• Uncertainty.

OPPORTUNITIES THREATS

• Growth. • Added scrutiny.

• Competitive position. • Loss of ownership.
• Economies of scale. • Lack of control.

72
7.1.1 STRENGTHS

HELPS PRESERVE OWN RESOURCES

External funding allows an entrepreneur to use internal financial resources for other
purposes.

EFFICIENT RUNNING OF A BUSINESS

Adequate amount of finance at any point ensures smooth running of all the operations of a
business.

7.1.1 WEAKNESSES.

HIGH COST OF OBTAINING FINANCE

Debt financing has associated interest payments and equity financing can mean fewer
future profits that are kept within the company as investors and shareholders claim profits
or dividends.

LACK OF AWARENESS IN ENTREPRENEURS

Large number of entrepreneurs are not comfortable with the financials of their business
and are not aware of alternate sources of finance.

ENTREPRENEURS VIEW IT AS A BURDEN

External funding sources require a return on their investment. Banks will add interest to a
business loan, and investors will ask for a rate of return. Interest adds to the overall cost
of the investment and can make your external funding more of a financial burden than
you had originally planned.

SCEPTICISM TOWARDS THE BUSINESS AND FINANCIAL PLANS

At the time of providing finance, potential investors may be sceptic towards the business
and financial plans which might restrict the finance available to new and existing ventures.

73
AFFECTS CASH FLOW

Cash flow can be greatly affected by external financing. Payments for principal
and interest and dividends can limit a company's ability to invest in expansion and research.

UNCERTAINTY

Uncertainty of business ideas, plans and current market conditions of various financial
and product markets that can change overnight, all affect a venture’s current value and its
potential profitability. These limit investors willingness to invest capital.

7.1.1 OPPORTUNITIES

GROWTH

Part of the reason organisations use external funding is because it allows them to finance
growth projects and profitable opportunities, the company could not fund on its own.

COMPETITIVE POSITION

A business often needs to spend money on various items, such as new technology or
product research, to remain competitive. External financing can help with these costs.

ECONOMIES OF SCALE

Larger enterprises are more efficient in the market. External sources of finance therefore
make an enterprise grow larger to a point where it can adequately compete with other
firms in the market.

74
7.1.1 THREATS

ADDED SCRUTINY

Before obtaining outside financing, an entrepreneur must provide a long list of information
to potential investors and lenders. If they give the money, these parties might also require
businesses to periodically provide financial statements so they can monitor their
investment. Information about company that was previously kept to a few will be open for
review by outside parties.

LOSS OF OWNERSHIP

Some sources of external financing, such as investors and shareholders, require an

entrepreneur to give up a portion of the ownership in company in exchange for the
funding. A venture may get that large influx of cash it needs to launch that new product,
but part of the financing agreement is that the investor is allowed to vote on company
decisions.

LOSS OF CONTROL

Debt based external financing normally means control of a company is secure. If a default
were to take place, legal proceedings may force a loss of control if a judge appoints
someone to oversee operations.

Equity based financing almost always means a loss of control. Shareholders or other
investors usually will have a vote or representation at annual meetings and can influence
many corporate decisions. Proxy voting fights or attempts at hostile takeovers are two
potential types of control loss.

A company that relies too heavily on external financing may find itself being manipulated
by outsiders. This loss of control is difficult to regain.Venture capitalists will often gain an
overwhelmingly significant say in what happens in the business and will almost certainly
guarantee it to themselves through contract.

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 CHAPTER 8
8.1 LIMITATIONS OF THE STUDY
Although the research achieved its objective, the study had certain limitations that
need to be highlighted as well. Following are the limitation of this research paper:

• GEOGRAPHICAL LIMITATIONS1

One major limitation of this research paper is the limited geographical reach. The survey
was conducted only in the region of Mumbai and Navi Mumbai. It did not consider other
cities in India which are also considered as the entrepreneurial hub of the country. So the
findings of the research may not provide a true representation of the entire population.

• SMALL SAMPLE SIZE

The target audience included a sample size of only a 100 respondents which may not
be adequate enough to provide a fair representation of the entire population concerned.

• INADEQUATE RESEARCH METHODOLOGY

In terms of research methodology, only a survey was employed to collect primary data,
which may not be sufficient to independently validate our findings. In future interviews,
focus groups, case study methods should be employed to obtain more comprehensive
data.

• DIFFICULTY IN GAINING ACCESS

There were difficulties faced in finding the right respondents for the survey due to lack of
personal contact with the entrepreneurs.

• INSUFFICIENT LITERATURE

There is lack of literature available on entrepreneurial finance from an entrepreneur’s

viewpoint. So this provides scope for further studies in the field of entrepreneurial finance
that look to assess various aspects in entrepreneurial finance, that are still uncovered.

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 CHAPTER 9
9.1 CONCLUSION

I have concluded that capital is constrained, and investors are more skeptical. There is
definitely lack of awareness among small and medium entrepreneurs of the various
sources of finance. Also, access to finance is not as easy, in fact, is one of the biggest
limiting factors in achieving significantly higher levels of entrepreneurial growth. Even if
finance is available, it is available at high costs. Due to lack of access to finance and the
challenges in obtaining that finance, many entrepreneurs rely on their own fund or funds
from family and friends which limits a venture’s ability to access greater opportunities.

In a country like India, where entrepreneurship is at a stage where it is leaving no stone

unturned in making a significant and visible impact in India’s growth and development
story. It is important we understand the challenges that mount this development of
entrepreneurship. Therefore, its important that the the financial community should come
together to overcome such limiting factors.

• Banks must consider entrepreneurship as a major business opportunity.

• Explore innovative options such as venture debt, soft loans etc for start-ups.

• Realise the enormous potential for greater involvement of angels and VCs at the seed stage.

• Actively assist entrepreneurs to develop multiple skills necessary for scaling up.

• Increase awareness on the activities of angel, venture capital financing

through greater involvement with educational and research institutions,
incubation centres etc.

• Entrepreneurs too need to improve their financial and business skills to get more funding.

In today’s time the methods to obtain finance are manifold. It’s true each has its own
weaknesses but at the same time each one offers countless opportunities as well. All that
is needed is greater participation from the financial community and increased awareness
among entrepreneurs about current market conditions, to contribute to the growth of
entrepreneurial finance and make it popular like never before.

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 ANNEXTURE

NAME:

AGE:

• 18 to 30
• 30 to 40
• 40 to 60
• 60 and above

GENDER:

• Male
• Female

BUSINESS OWNED:

TYPE OF BUSINESS OWNED:

• Sole Proprietor
• Partnership
• Private limited company
• Public limited company
• Any Other, please mention.

1. As an entrepreneur, do you fully understand the financial aspects of your enterprise?

• Yes, completely.
• Somewhat.
• No, not at all.

2. Which of the sources of finance available to an enterprise are you aware of?

• Venture Capital.
• Angel Investors.
• Initial Public Offers.
• Bank Lending.
• Crowd Funding.
• Retained Earnings.

3. What according to you are the most pressing problem faced by your enterprise
from the following?

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• Competition.
• Access to finance.
• Regulations.
• High costs of operations.
• Finding customers.
• Any other, please mention.

4. How was the finance obtained by you to start your venture?

• External Finance such as bank loan, angel investors, venture capital etc.
• Internal Finance such as personal funds.
• Both.

5. Has your venture ever raised external finance?

• Yes.
• No.

6. If yes, when was it raised the first time?

• Within 2 years of starting the business.

• Within 2 to 5 years of starting the business.
• After 5 years of starting the business.

7. If yes, what was the source of external finance?

• Family and Friends.

• Bank Loan.
• Venture capital.
• Angel Investors.
• Any Other Source, please mention.

8. What according to you are some of the limitations in sourcing external finance?

• High Cost of finance.

• Time Consuming.
• Complex procedures.
• No limitations.
• Any other reason, please specify.

9. Has your enterprise ever been rejected external finance?

• Yes, completely.
• Partly.
• Received with unacceptable terms and conditions.
• No, received all the financing.

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10. Do you agree that investors should play a major role in the enterprise they invest in,
from the viewpoint of providing guidance, control and direction?

• Strongly Agree.
• Agree.
• Neutral.
• Disagree.
• Strongly Disagree.

11. Which method of funding do you prefer more?

• Series of funding.
• One time funding.
• Both.

12. Rank the qualities that you look for in a potential investor, on scale of 1 to 4.

• Value Added Investors.

• A good deal.
• High success rate of the investors.
• Investment strategy.

13. Rank the following sources of external finance on the basis of accessibility on a scale of 1 to
6.

• Venture Capital
• Bank Loans
• Angel Investors
• Family and Friends
• Government Sources
• Initial Public Offers

14. In future, which finance alternative would you prefer?

• External such as loan, venture capital, angel investor etc.

• Internal such as personal funds, retained earnings etc.
• Both

15. If external, which type of external finance would you seek more?

• Equity finance
• Debt finance
• Both

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 BIBLIOGRAPHY

• The Oxford Handbook of Business History (2008)- By Geoffrey Jones, Jonathan Zeitlin.

• Entrepreneurial Finance- Finance and Business Strategies for the Serious

Entrepreneur- Second Edition by Steven Riggers (2009).

• Entrepreneurship at a Glance (2012) by OECD- Organization for Economic

Cooperation and Development.

• Entrepreneurial Finance, 4th Edition (2014) by J. Chris Leach, Ronald W. Melicher.

• Enterprise Note Series- World Bank (2010).

• Survey on the Access to Finance of SMEs (2009).

• Journal of Corporate Finance- Entrepreneurial finance: An Overview of the Issues and

Evidence by David J. Denis (2004).

• Entrepreneurship in India- National Knowledge commission by Amman Jyoti Goswami,

Namita Dalmai, Megha Pradhan (2008).

• Three essays in Entrepreneurial Finance- The role of Business Model, Intellectual

Property Right and Inter- Organisational Ties (2013).

• The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis by William

R. Kerr, Josh Lerner and Antoinette Scholar (2008).

• Venture Capital in India by Preqin (2015).

• New Approaches to SME Financing and Entrepreneurship- Broadening the Range of

Instruments by Lucia Cusmano (2015)- OECD Centre for Entrepreneurship, SMEs and
Local Development.

• Entrepreneurial Finance and Venture Capital (2006).

• www.entrepreneur.com

• www. forbes.com

• www.investopedia.com

• www.1000ventures.com

• www.marsdd.com

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