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vi Contents
Risks and Opportunities 73 Appendix A NOPAT Breakeven: Revenues Needed

Business Plan Appendix 75 to Cover Total Operating Costs 156
Summary 75
Appendix A Applying the VOS Indicator™: An CHAPTER 5
Example 81 Evaluating Operating and Financial
Performance 159
5.1 Users of Operating and Financial Performance
PART 2 Measures by Life Cycle Stage 161
Organizing and Operating the 5.2 Using Financial Ratios 162
Venture 85 5.3 Cash Burn Rates and Liquidity Ratios 165
Measuring Venture Cash Burn and Build Amounts
CHAPTER 3 and Rates 165
Organizing and Financing a New Venture 87 Beyond Burn: Traditional Measures of Liquidity 167
3.1 Progressing Through the Venture Life Cycle 89 Interpreting Cash-Related and Liquidity-Related
3.2 Forms of Business Organization 89 Trends 168
Proprietorships 92 5.4 Leverage Ratios 170
General and Limited Partnerships 93 Measuring Financial Leverage 170
Corporations 97 Interpreting Changes in Financial Leverage 172
Limited Liability Companies 99 5.5 Profitability and Efficiency Ratios 173
3.3 Choosing the Form of Organization: Tax and Other Income Statement Measures of Profitability 173
Considerations 100 Efficiency and Return Measures 175
3.4 Intellectual Property 104 Interpreting Changes in Profitability
Protecting Valuable Intangible Assets 104 and Efficiency 177
What Kinds of Intellectual Property Can be 5.6 Industry Comparable Ratio Analysis 178
Protected? 104 5.7 A Hitchhiker’s Guide to Financial Analysis 179
Copyrights 111 Summary 182
Other Methods for Protecting Intellectual Property
Rights 111
Employment Contracts 112
PART 3
3.5 Seed, Startup, and First-Round
Planning for the Future 191
Financing Sources 113 CHAPTER 6
Financial Bootstrapping 114 Managing Cash Flow 193
Business Angel Funding 117 6.1 Financial Planning throughout the Venture’s Life
First-Round Financing Opportunities 119 Cycle 194
Summary 120 6.2 Surviving in the Short Run 196
CHAPTER 4 6.3 Short-Term Cash-Planning Tools 198
6.4 Projected Monthly Financial Statements 202
Preparing and Using Financial Statements 127
6.5 Cash Planning from a Projected Monthly Balance
4.1 Obtaining and Recording the Resources Necessary
Sheet 205
to Start and Build a New Venture 129
6.6 Conversion Period Ratios 206
4.2 Business Assets, Liabilities, and Owners’
Equity 130 Measuring Conversion Times 206
Balance Sheet Assets 132 Interpreting Changes in Conversion Times 210
Liabilities and Owners’ Equity 133 Summary 212
4.3 Sales, Expenses, and Profits 134 CHAPTER 7
4.4 Internal Operating Schedules 136 Types and Costs of Financial Capital 221
4.5 Statement of Cash Flows 140 7.1 Implicit and Explicit Financial Capital Costs 223
4.6 Operating Breakeven Analyses 142 7.2 Financial Markets 223
Survival Breakeven 142 7.3 Determining the Cost of Debt Capital 225
Identifying Breakeven Drivers in Revenue Determinants of Market Interest Rates 227
Projections 147
Risk-Free Interest Rate 227
Summary 149
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Contents vii
Default Risk Premium 228 Appendix B Selected SEC Regulation D
Liquidity and Maturity Risk Premiums 231 Materials 299
A Word on Venture Debt Capital 234
7.4 What is Investment Risk? 234 Appendix C Other Forms of Registration
Measuring Risk as Dispersion Around an Exemptions and Breaks 326
Average 234
Historical Return Versus Risk Relationships 238
7.5 Estimating the Cost of Equity Capital 240
Cost of Equity Capital for Public Corporations 241
Cost of Equity Capital for Private Ventures 243
PART 4
Sources and Costs of Venture Equity Capital 245
Creating and Recognizing
7.6 Weighted Average Cost of Capital 247 Venture Value 329
A Life Cycle–Based Wacc Example 248 CHAPTER 9
Summary 250
Projecting Financial Statements 331
Appendix A Using WACC to Complete the 9.1 Long-Term Financial Planning Throughout the
Calibration of EVA 258 Venture’s Life Cycle 332
9.2 Beyond Survival: Systematic Forecasting 334
Forecasting Sales for Seasoned Firms 334
CHAPTER 8
Forecasting Sales for Early-Stage Ventures 336
Securities Law Considerations When Obtaining
9.3 Estimating Sustainable Sales Growth Rates 340
Venture Financing 261 9.4 Estimating Additional Financing Needed to Support
8.1 Review of Sources of External Venture Growth 344
Financing 263
The Basic Additional Funds Needed Equation 345
8.2 Overview of Federal and State Securities Laws 265
Impact of Different Growth Rates on Afn 347
Securities Act of 1933 266
Estimating the Afn for Multiple Years 348
Securities Exchange Act of 1934 266
9.5 Percent-of-Sales Projected Financial
Investment Company Act of 1940 267 Statements 349
Investment Advisers Act of 1940 267 Forecasting Sales 349
Jumpstart Our Business Startups Act of 2012 268 Projecting the Income Statement 350
State Securities Regulations: “Blue-Sky” Laws 269 Projecting the Balance Sheet 351
8.3 Process for Determining Whether Securities Must be Forecasting the Statement of Cash Flows 353
Registered 270
Financing Cost Implications Associated with the
Offer and Sale Terms 270 Need for Additional Funds 354
What is a Security? 271 Summary 355
8.4 Registration of Securities Under the Securities Act of
1933 272
CHAPTER 10
8.5 Security Exemptions from Registration Under the
1933 Act 276 Valuing Early-Stage Ventures 361
8.6 Transaction Exemptions from Registration Under 10.1 What is a Venture Worth? 363
the 1933 Act 278 Does the Past Matter? 363
Private Offering Exemption 278 Looking to the Future 364
Accredited Investor Exemption 280 Vested Interests in Value: Investor and
8.7 SEC’s Regulation D: Safe-Harbor Exemptions 281 Entrepreneur 364
Rule 504: Exemption for Limited Offerings and Sales 10.2 Basic Mechanics of Valuation: Mixing Vision and
of Securities not Exceeding $5 Million 282 Reality 366
Rule 506: Exemption for Limited Offers and Sales Present Value Concept 366
Without Regard to Dollar Amount of Offering 283 If You’re not Using Estimates, You’re not Doing a
8.8 Regulation a Security Exemption 289 Valuation 367
8.9 JOBS Act Innovations 290 Divide and Conquer with Discounted Cash
Flow 369
Summary 290
10.3 Required versus Surplus Cash 372
Appendix A Schedule A (Securities Act of 1933, as 10.4 Developing the Projected Financial Statements for a
Amended) 294 DCF Valuation 374
viii Contents
10.5 Just-In-Time Equity Valuation: Pseudo 12.9 Distributing Cash and Securities Proceeds 478
Dividends 378
Summary 479
10.6 Accounting versus Equity Valuation Cash Flow 385
Origins of Accounting Cash Flows 385 CHAPTER 13
From Accounting to Equity Valuation Cash Other Financing Alternatives 483
Flows 386 13.1 Business Incubators, Seed Accelerators, and
Summary 390 Intermediaries 485
CHAPTER 11 Business Incubators and Seed Accelerators 485
Intermediaries, Facilitators, and Consultants 486
Venture Capital Valuation Methods 409
13.2 Business Crowdsourcing and Crowdfunding 487
11.1 Brief Review of Basic Cash Flow-Based Equity
Valuations 411 13.3 Commercial and Venture Bank Lending 488
11.2 Basic Venture Capital Valuation Method 413 13.4 Understanding Why You May not Get Debt
Financing 491
Using Present Values 416
13.5 Credit Cards 493
Using Future Values 416
13.6 Foreign Investor Funding Sources 494
11.3 Earnings Multipliers and Discounted Dividends 417
13.7 Small Business Administration Programs 494
11.4 Adjusting VCSCs for Multiple Rounds 419
Overview of What the Sba does for Small
First Round 420
Businesses 495
Second Round 420
Selected Sba Loan and Operating Specifics 496
11.5 Adjusting VCSCs for Incentive Ownership 421
13.8 Other Government Financing Programs 497
First Round 422
13.9 Factoring, Receivables Lending, and Customer
Second Round 422
Funding 498
Incentive Ownership Round 422
13.10 Debt, Debt Substitutes, and Direct Offerings 500
11.6 Adjusting VCSCs for Payments to Senior Security
Vendor Financing: Accounts Payable and Trade
Holders 423
Notes 500
11.7 Introducing Scenarios to VCSCs 424
Mortgage Lending 500
Utopian Approach 425
Traditional and Venture Leasing 500
Mean Approach 426
Direct Public Offers 501
Summary 431
Summary 502
Appendix A Summary of Colorado Business
PART 5
Financial Assistance Options 505
Structuring Financing for the
Growing Venture 455
CHAPTER 14
CHAPTER 12 Security Structures and Determining Enterprise
Professional Venture Capital 457 Values 507
12.1 Historical Characterization of Professional Venture 14.1 Common Stock or Common Equity 509
Capital 459
14.2 Preferred Stock or Preferred Equity 510
12.2 Professional Venture Investing Cycle: Overview 463
Selected Characteristics 510
12.3 Determining (Next) Fund Objectives and
Convertible Preferreds 511
Policies 464
Conversion Value Protection 513
12.4 Organizing the New Fund 465
Conversion Protection Clauses 514
12.5 Soliciting Investments in the New Fund 468
Conversion Price Formula (CPF) 514
12.6 Obtaining Commitments for a Series of Capital
Market Price Formula (MPF) 514
Calls 469
14.3 Convertible Debt 516
12.7 Conducting Due Diligence and Actively
Investing 470 14.4 Warrants and Options 517
12.8 Arranging Harvest or Liquidation 477 14.5 Other Concerns About Security Design 523
Contents ix
14.6 Valuing Ventures with Complex Capital Structures: Cash Flow Insolvency 586
The Enterprise Method 524 Temporary versus Permanent Cash Flow
Summary 531 Problems 587
16.3 Resolving Financial Distress Situations 588
PART 6 Operations Restructuring 590
Asset Restructuring 593
Exit and Turnaround Strategies 543
Financial Restructuring 595
CHAPTER 15 16.4 Private Workouts and Liquidations 596
Harvesting the Business Venture Investment 545 Private Workouts 596
15.1 Venture Operating and Financial Decisions Private Liquidations 597
Revisited 547 Venture Example: Jeremy’s Microbatch Ice Creams,
15.2 Planning an Exit Strategy 548 Inc. 598
15.3 Valuing the Equity or Valuing the Enterprise 550 16.5 Federal Bankruptcy Law 598
Relative Valuation Methods 550 Bankruptcy Reorganizations 599
Dividing the Venture Valuation Pie 551 Reasons for Legal Reorganizations 600
15.4 Systematic Liquidation 553 Legal Reorganization Process 602
15.5 Outright Sale 554 Bankruptcy Liquidations 605
Family Members 554 Summary 609
Managers 555
Employees 558 PART 7
Outside Buyers 559 CAPSTONE CASES 615
15.6 Going Public 561
Investment Banking 561 CASE 1
Some Additional Definitions 564 Eco-Products, Inc. 617
Other Costs in Issuing Securities 565
CASE 2
Post-Ipo Trading 566
Spatial Technology, Inc. 647
Contemplating and Preparing for the Ipo
Process 569 Glossary 673
Summary 574
Index 681
CHAPTER 16
Financially Troubled Ventures: Turnaround
Opportunities? 581
16.1 Venture Operating and Financing Overview 583
16.2 The Troubled Venture and Financial Distress 584
Balance Sheet Insolvency 585
Preface
T
he life of an entrepreneur is exciting and dynamic. The challenge of envisioning
a new product or service, infecting others with entrepreneurial zeal, and
bringing a product to market can be one of the great learning experiences in
life. All ventures require financing—taking investors’ money today and expecting to
return a significantly larger amount in the future. Typically, the return comes from the
venture’s public offering, sale, or merger. In the interim, the venture must manage its
financial resources, communicate effectively with investors and partners, and create
the harvest value expected by investors.
Textbook Motivation
The purpose of the textbook is to introduce financial thinking, tools, and techniques
adapted to the realm of entrepreneurship. We believe that, while much of traditional
financial analysis may not be ideally suited to the venture context, there is great value
in applying venture adaptations.
This entrepreneurial finance text introduces the theories, knowledge, and financial
tools an entrepreneur needs to start, build, and harvest a successful venture. Sound
financial management practices are essential to a venture’s operation. The successful
entrepreneur must know how and where to obtain the financing necessary to launch
and develop the venture. Eventually, that same successful entrepreneur must know
how and when to interact with financial institutions and regulatory agencies to take the
venture to its potential and provide a return and liquidity for the venture’s investors.
The Life Cycle Approach

We incorporate a life cycle approach to the material in this text. Successful ventures typically
begin with an initial development stage where the entrepreneurial team generates ideas
and assesses the associated business opportunities. Most entrepreneurs realize that a
business plan can greatly improve the chance that an idea will become a commercially viable
product or service. Startup stage ventures focus on the formulation of a business model
and plan. As marketing and selling products and services begins, survival stage ventures
often refocus or restructure. Rapid-growth stage ventures increase their momentum, and
begin to demonstrate value creation. Early-maturity stage ventures typically look for ways
to harvest the value created and provide a return to their investors.
Each stage in the life cycle requires a specific understanding of the financial
management tools and techniques, potential investors and their mindset, and
the financial institutions supporting that venture stage. During the early stages
of a venture’s life, cash management tools and survival planning are the dominant
forms of financial analysis. Cash burn rates are very high and additional sources of
financing are usually limited, making it critical for the successful venture to project and
accommodate necessary operating costs. The need to measure and adjust investment
in working capital and property, plant, and equipment is evident. The process of
anticipating and accommodating costs and asset investments begins with the analysis
of historical financial experience and then projects future financial positions using
projected financial statements or their proxies. Successful ventures emerging from their
survival stages can concentrate more on value creation and calibration. Consequently,
our financial management emphases for this stage are valuation tools and techniques.
xi
xii Preface
Equally important as sound financial management practices is the need for

the entrepreneur to understand the types and sources of financial capital and
the related investment processes. During the development stage, seed financing
usually comes from the entrepreneur’s personal assets and possibly from family and
friends. Business angels and venture capitalists are important financing sources during
the startup stage. First-round financing from business operations, venture capitalists,
suppliers, customers, and commercial banks may be initiated during the survival stage.
The rapid growth stage involves second-round, mezzanine, and liquidity stage financing
from business operations, suppliers, customers, commercial banks, and investment
bankers. Once a venture enters its early-maturity stage, seasoned financing replaces
venture financing. Seasoned financing takes the form of cash flow from business
operations, bank loans, and stocks and bonds issued with the assistance of investment
bankers or others. Our approach is to introduce the types and sources of financial
capital that become available as we progress through a successful venture’s life cycle.
The successful entrepreneur must understand the legal environment regulating
financial relationships between the venture, investors, and financial institutions
including venture capital funds and investment banks. We cover the basic securities
laws and regulatory agencies, particularly the Securities and Exchange Commission
(SEC), relevant to the entrepreneur when considering how to obtain financial capital at
each stage.
To summarize, we take a comprehensive three-pronged stage-sensitive
approach to entrepreneurial finance. Our coverage of entrepreneurship-adapted
financial analysis and pertinent institutional details provides a relevant financial analysis
base for the entrepreneur in each of the various stages as he or she develops the idea,
brings it to market, grows the venture’s value, and ultimately provides an exit for venture
investors. We identify and explain the types and sources of financing available during
the various stages and introduce the legal and regulatory environment the entrepreneur
must consider when seeking financing throughout the venture’s life cycle.
Distinctive Features
This text considers a successful firm as it progresses through various maturity stages.
Specific examples of stage-relevant skills and techniques we introduce include:
cc Brainstorming and Screening: Chapter 1 (The Entrepreneurial Environment)
describes several megatrends that may represent sources of entrepreneurial
opportunities. Chapter 2 (Developing the Business Idea) introduces qualitative and
quantitative venture screening devices.
Chapter 3’s (Organizing and Financing a New Venture) treatment of intellectual
property issues demonstrates important issues and concepts for the earliest stage
ventures.
cc Projecting Financial Statements: Chapter 6 (Managing Cash Flow) focuses on the
importance of maintaining adequate cash flow in the short run. Cash is “king.” Chapter
9 (Projecting Financial Statements) focuses on long-term projections incorporating
future financing needs and establishing a basis for creating value over time.
cc Raising External Funds: Chapter 8 (Securities Law Considerations When Obtaining
Venture Financing) treatment of securities law introduces readers to the restrictions
and warnings for the growing venture seeking external financing.
cc Venture Diagnostics and Valuation: Chapter 10 (Valuing Early-Stage Ventures)
presents our versions of traditional valuation techniques important to internal and
external perceptions of a venture’s financial health. While the material is traditional,
Preface xiii
our treatment provides a unifying approach to projecting financial statements,
extracting pseudo-dividends, and assessing a venture’s value.
cc Venture Capital Valuation Methods: Chapter 11 (Venture Capital Valuation
Methods) introduces representative multi-stage venture capital valuation methods
and interprets them relative to more traditional procedures. It provides a unified
example of traditional pre-money and post-money valuations and the shortcuts
employed by many venture capitalists.
cc Professional VCs: Chapter 12 (Professional Venture Capital) explores the historical
development of venture capital and describes the professional venture investing
cycle from determining the next fund objectives and policies to distributing cash
and securities proceeds to investors.
cc Harvest: Chapter 15 (Harvesting the Business Venture Investment) considers a wide
range of venture harvest strategies including private sales (to outsiders, insiders, and
family), transfers of assets, buyouts, and initial public offerings.
cc Turnaround Opportunities: Chapter 16 (Financially Troubled Ventures: Turnaround
Opportunities?) introduces important aspects of financial distress and alternative
restructuring approaches (operations, asset, and financial) to rescue a struggling
venture.
Intended Audience and Use

The material contained in this text has been used successfully at the upper division
(junior/senior) undergraduate, MBA, and executive MBA levels. For MBAs, the
course can easily be conducted in two ways. In the first, what we term the life cycle
approach, we recommend the addition of illustrative cases, each at different life cycle
stages. Recently, entrepreneurial finance cases have been available individually from
the usual providers and in collected form in entrepreneurial case books. The second,
or what we term the venture capital approach, emphasizes the money management
aspects of financing entrepreneurial ventures. For this approach, we recommend
supplementing the text treatments with venture capital cases (available individually
or in collected case books) and journal articles covering private equity (venture
capital) and initial public offerings (investment banking). For an abbreviated mini-
semester course or compressed executive MBA, we recommend concentrating on
the text and using our capstone cases as focal points for integrating the venture
financing perspective.
We have also used this text for semester-long upper division (junior/senior-
level) undergraduate courses for finance and nonfinance business majors. Most
academic business programs require students to take basic background courses in
both accounting and finance prior to upper division courses such as entrepreneurial
finance. Chapters 10, 11, and 14 present a rigorous and conceptually advanced
approach to financial valuation. Our experience is that these chapters provide the
greatest intellectual challenge and require relatively sophisticated spreadsheet skills.
The seventh edition of this textbook was written to support two different approaches
to the undergraduate entrepreneurial finance course. The more rigorous approach
challenges undergraduate students by covering all 16 chapters including all valuation
materials and has a decision-making focus. An alternative approach is to teach
a more descriptive or conceptual course. For those preferring this latter approach,
we recommend that Chapters 10 and 11 from Part 4 and Chapter 14 from Part 5
xiv Preface
be omitted or covered in a descriptive (no modeling or calculations) manner. For

application, while the included capstone cases synthesize a great deal of the text’s
material, some instructors find it useful to have students prepare short cases in lieu of,
or prior to, these capstones.
Regarding the accounting and basic finance background material in Chapters 4
and 5, we provide it for student and instructor convenience when the material has not
been covered in prerequisite courses or in instances when a review of the materials
is warranted. The remainder of the text can be used without explicit coverage of
this review material. Additionally, for some adopters, it may be advantageous to alter
the sequencing and coverage of the securities law and investment banking material,
depending on student backgrounds and other course offerings.
Pedagogical Enhancements in the

Seventh Edition
Overall changes to content and organization include:
cc We refreshed the “From the Headlines” and replaced four of them with new stories.
cc We rewrote the learning objectives presented at the beginning of each chapter so
there now is one learning objective for each major section in each chapter.
cc We continue to provide pedagogical guidance for each exercise/problem at the end
of each chapter by providing a brief italicized description of the content or focus of
the exercise or problem.
cc We added material on “gig economy” and “sharing economy” societal changes that
continue to evolve.
cc We updated personal and corporate income tax information to reflect passage of
the Tax Cuts and Jobs Act of 2017, which provided for a substantial reduction in
the corporate income tax rate.
cc We updated our treatment of the Jumpstart Our Business Startups ( JOBS) Act of
2012 as it relates to small offering registration exemptions from SEC registration
requirements both in general and when using crowdfunding to raise money.
cc We updated material showing annual venture capital investment amounts to reflect
the substantial increases in recent years.
cc We added a discussion on ventures possibly using a “direct listing” method rather
than a traditional initial public offering (IPO) to go public.
Supplements
INSTRUCTORS MANUAL
Written by the text authors, the Instructor’s Manual includes short answers to end-of-
chapter questions and answers to end-of-chapter problems. The authors also include
answers to the assignments at the end of the two capstone cases. The Instructor’s Manual
is available on the text Web site for instructor use only.
POWERPOINT LECTURE SLIDES

Created by the text authors, the PowerPoint slides present a point-by-point lecture
outline, including graphics and equations, for instructors to use in the classroom. They
are available on the text Web site for instructors only.
Preface xv
Cognero™ Testing Software

Cengage Learning Testing Powered by Cognero™ is a flexible, online system that
allows you to author, edit, and manage test bank content from multiple Cengage
Learning solutions, create multiple test versions in an instant, and deliver tests from
your LMS, your classroom, or wherever you want. Written by the text authors, the Test
Bank includes true/false and multiple choice questions.
EXCEL SOLUTIONS
Excel Solutions to end-of-chapter problems requiring Excel are provided for instructors
on the text Web site.
TEXT WEB SITE

The text Web site at www.cengage.com/finance/leach/entrepreneurial/7e provides
access to these supplements.
ACKNOWLEDGMENTS
During the several years we spent developing and delivering this material, we benefited
from interactions with colleagues, students, entrepreneurs, and venture capitalists.
We thank the numerous sections of students who became the sounding board for
our presentation of this material. We also thank the members of the Venture Capital
Association of Colorado who opened their professional lives and venture capital
conferences to our students. Additionally, we have benefited from detailed valuable
comments and input by Craig Wright and Michael Meresman. Clinton Talmo and Robert
Donchez contributed to the preparation of the Instructor’s Manual for earlier editions.
We recognize the moral support of the Deming Center for Entrepreneurship (Bob
Deming, and former directors Dale Meyer, Denis Nock, Kathy Simon, Steve Lawrence,
and Paul Jerde). We thank the Coleman Foundation for research support for the Spatial
Technology, Inc., case and the Educational Legacy Fund for research support for the
Eco-Products, Inc., case.
We recognize the valuable contributions of our editorial staff at Cengage Learning.
Michael Mercier was our original acquisitions editor and Mike Reynolds served as
senior editor on several of our prior editions. For the seventh edition, we recognize
Aaron Arnsparger, Senior Product Manager; and Content Manager, Renee Schnee.
We also thank Martha Leach for research assistance behind the “From the Headlines”
stories and for proofreading complete versions of earlier editions. We thank Andre
Gygax, Hardjo Koerniadi, and Cody Engle who provided several important corrections
to previous materials.
For their patience and insights offered during the process, we thank our colleagues
who reviewed materials for this seventh edition or earlier editions of the text:
Brian Adams, University of Portland
M.J. Alhabeeb, University of Massachusetts
Olufunmilayo Arewa, Northwestern University
David Choi, Loyola Marymount University
Susan Coleman, University of Hartford
David Culpepper, Millsaps College
John Farlin, Ohio Dominican
David Hartman, Central Connecticut State University
William C. Hudson, St. Cloud State University
Narayanan Jayaraman, Georgia Tech
xvi Preface
Jeffrey June, Miami University

Miranda Lam, Salem State College
Michael S. Long, Rutgers University
Michael Owens, University of Tennessee Chattanooga
Robert Patterson, Westminster College
Charles B. Ruscher, University of Arizona
Steven R. Scheff, Florida Gulf Coast University
Gregory Stoller, Boston College
Srinivasan Sundaram, Ball State University
Michael Williams, University of Denver
Finally, to our families for their patience through seven editions, we offer our sincere
thanks.
J. Chris Leach
Ronald W. Melicher
About the Authors
J. Chris Leach is Professor of Finance, the W.W. Reynolds Capital Market Program
Chair and formerly Robert H. and Beverly A. Deming Professor in Entrepreneurship at
the Leeds School of Business, University of Colorado at Boulder. He received a finance
Ph.D. from Cornell University, began his teaching career at the Wharton School and
has been a visiting professor at Carnegie Mellon, the Indian School of Business, and
the Stockholm Institute for Financial Research (at the Stockholm School of Economics).
His teaching experience includes courses for undergraduates, MBAs, Ph.D. students,
and executives. He has been recognized as Graduate Professor of the Year and has
received multiple awards for MBA Teaching Excellence. His research on a variety of
topics has been published in The Review of Financial Studies, Journal of Financial
and Quantitative Analysis, Journal of Business, Journal of Accounting, Auditing and
Finance, Review of Economic Dynamics, and Journal of Money, Credit and Banking,
among other journals.
Chris’s business background includes various startups dating back to his early
teens in the 1970s. During his transition to the University of Colorado, he was the
chairman of a New Mexico startup and later, as an investor and advisor, participated
in a late 1990s Silicon Valley startup that subsequently merged into a public company.
His consulting activities include business and strategic planning advising, valuation,
and deal structure for early stage and small businesses. He is a faculty advisor for the
Deming Center Venture Fund. MBA teams Chris has advised have qualified for twelve
international championships of the Venture Capital Investment Competition.
Ronald W. Melicher is Professor Emeritus of Finance in the Leeds School of
Business at the University of Colorado at Boulder. He earned his undergraduate, MBA,
and doctoral degrees from Washington University in St. Louis, Missouri. While at the
University of Colorado, he received several distinguished teaching awards and was
designated as a university-wide President’s Teaching Scholar. He also has held the
William H. Baugh Distinguished Scholar faculty position, served three multi-year terms
as Chair of the Finance Division, served as the Faculty Director of the Boulder Campus
MBA Program, and twice was the Academic Chair of the three-campus Executive MBA
Program. Ron is a former president of the Financial Management Association.
Ron has taught entrepreneurial finance at both the MBA and undergraduate levels,
corporate finance and financial strategy in the MBA and Executive MBA programs,
and investment banking to undergraduate students. While on sabbatical leave from
the University of Colorado, Ron taught at the INSEAD Graduate School of Business in
Fontainebleau, France and at the University of Zurich in Zurich, Switzerland. He has
delivered numerous university-offered executive education noncredit courses and has
taught in-house finance education materials for IBM and other firms. He has given
expert witness testimony on cost of capital in regulatory proceedings and provided
consulting expertise in the areas of financial management and firm valuation.
Ron’s research interests focus on mergers and acquisitions, corporate restructurings,
and the financing and valuation of early-stage firms. His previous research has been
published in major finance journals including the Journal of Finance, Journal of
Financial and Quantitative Analysis, and Financial Management. He is the co-author of
Introduction to Finance: Markets, Investments, and Financial Management, Seventeenth
Edition (John Wiley & Sons, 2020).
xvii
1
Chapter 2 Developing the Business Idea 1
The Entrepreneurial
Environment PA R T
tandaV/Shutterstock.com
CHAPTER 1
Introduction to Finance for Entrepreneurs 3
CHAPTER 2
Developing the Business Idea 41
Introduction
to Finance for
Entrepreneurs
1
CHAPTER
FIRST THOUGHTS
Only those individuals with entrepreneurial experience can say, “Been there, done
that!” With aspiring entrepreneurs in mind, we start at the beginning and consider how
entrepreneurial finance relates to the other aspects and challenges of launching a new
venture. Our goal is to equip you with the terms, tools, and techniques that can help
turn a business idea into a successful venture.
LOOKING AHEAD
Chapter 2 focuses on the transformation of an idea into a business opportunity and
the more formal representation of that opportunity as a business plan. Most successful
ideas are grounded in sound business models. We present qualitative and quantitative
screening exercises that can help determine an idea’s commercial viability. We provide
a brief discussion of a business plan’s key elements.
CHAPTER LEARNING OBJECTIVES

This chapter presents an overview of entrepreneurial finance. We hope to convey the
potential benefit of embracing standard entrepreneurial finance methods and tech-
niques. We consider an entrepreneur’s operating and financial decisions at each stage,
as the venture progresses from idea to harvest. After completing this chapter, you will
be able to:
LO 1.1 Characterize the entrepreneurial process.
LO 1.2 Describe entrepreneurship and some characteristics of entrepreneurs.
LO 1.3 Indicate several megatrends providing waves of entrepreneurial opportunities.
LO 1.4 List and describe the seven principles of entrepreneurial finance.
LO 1.5 Discuss entrepreneurial finance and the role of the financial manager.
LO 1.6 Describe the various stages of a successful venture’s life cycle.
LO 1.7 Identify, by life cycle stage, the relevant types of financing and investors.
LO 1.8 Understand the life cycle approach used in this book.
4 Chapter 1 Introduction to Finance for Entrepreneurs
FROM THE HEADLINES

Get a Grip on PopSockets LLC
It isn’t uncommon for an annoyance $12,000 but ended up raising $18,591 PopSockets’ avoidance of institutional
to be the genesis of a new venture. in funding. In return for a $25 pledge, venture capital has been noted by the
David Barnett was frustrated by orga- participants would be sent a PopSockets startup community.10 Ranked in 2018 at
nizing and storing his iPhone’s corded case “as soon as they are manufactured— #2 on the Inc. 5000 list of fastest-growing
earbuds. 1 Bluetooth headphones, first late February/early March (PopSockets companies in America,11 and on track to
introduced in 2000,2 would have elimi- will retail for $34.99).”5 However, Barnett having manufactured 70 million prod-
nated Barnett’s cord storage challenges lost his house to a summer 2012 fire, the ucts by the end of that year,12 it is little
but not those of storing wireless ear- upside of which was that he could fund wonder that PopSockets is rumored to be
buds. Rather than focusing on the the venture with the insurance proceeds considering a 2019 IPO.13
coming wireless r evolution or other for the belongings he lost in that fire.6 He 6 https://www.forbes.com/sites
high-tech approaches to address his also was fueled by “acquaintances” who /amitchowdhry/2018/02/14/popsockets
annoyance, Barnett pursued a low-tech invested about $500,000.7 Despite facing /#49c64f5346a9, accessed on 6/19/2019
solution. From his initial p
rototype of serious production delays, Barnett ended 7 Ibid.
wrapping an earbud cord around glued up processing refund requests for only 8 https://www.npr.org/sections/alltechconsidered
stacks of buttons on the back of his about 40 of his 500 Kickstarter backers.8 /2012/09/03/160505449/when-a-kickstarter
iPhone to 3D computer-aided-d esigns Starting in 2014, PopSockets sold 30,000 -campaign-fails-does-anyone-get-their-money
-back, accessed on 6/19/2019.
and 60 prototypes, the collapsible units in the first year with $240,000 in
9 https://www.peak6.com/strategic-capital/,
accordion-based PopSockets nob/han- revenue. Crunchbase lists an unspeci- accessed on 6/19/2019.
dle (https://www.popsockets.com/) fied amount of additional investment
10 https://www.forbes.com/sites
rapidly evolved into a retail sensation.3 by Peak6, a “self-funded” investor,9 but /amitchowdhry/2018/02/14/popsockets
In the process, its original intended /#49c64f5346a9 and https://www.inc.com
use as an organizer for earbud cords /brian-de-haaff/6-companies-on-inc-5000
1 https://www.forbes.com/sites/amitchow- -list-that-defy-what-you-think-of-high
became only one example of PopSock- dhry/2018/02/14/popsockets/#49c64f5346a9, -growth-companies.html, both accessed on
ets’ significant cell phone handling and accessed on 6/19/2019. 6/19/2019.
safety advantages.4 Indeed, many users 2 https://www.sutori.com/story/the-history-of 11 https://www.inc.com/guadalupe
of a single PopSockets nob/handle -bluetooth-headphones--N6tTxcaHeCN9Yu -gonzalez/2018-inc5000-top-companies
GsFXqs52jh, accessed on 6/19/2019.
for the back of their cell phones don’t .html, accessed on 6/19/2019.
even know the multiknob cord-storage 3 https://www.forbes.com/sites/amitchowdhry 12 https://www.forbes.com/sites/amitchowdhry
/2018/02/14/popsockets/#49c64f5346a9, /2018/02/14/popsockets/#49c64f5346a9,
heritage. accessed on 6/19/2019. accessed on 6/19/2019.
Barnett founded PopSockets while 4 https://www.kickstarter.com/projects 13 https://www.bloomberg.com/news/articles
he was a philosophy professor at the /1250439912/popsockets-iphone-case-it-pops /2019-02-08/philosophy-professor-preps
University of Colorado Boulder. An early -props-kicks-and-cli, accessed on 6/19/2019. -popsocket-ipo-after-plastic-epiphany,
2012 Kickstarter campaign set a goal of 5 Ibid. accessed on 6/19/2019.
I
t is estimated that more than one million new businesses are started in the United
States each year. The Bureau of Labor Statistics of the U.S. Department of Labor
estimates the “number of business establishments less than 1 year old” to have aver-
aged over 600,000 in recent years.1 Reasonable estimates place nonemployer (e.g.,
single person or small family) businesses started each year, which are not included in
the Bureau of Labor Statistics data, at an even larger number.2 In addition to these for-
mally organized startups, countless commercial ideas are entertained and abandoned
without the benefit of a formal organization. The incredible magnitude of potential
entrepreneurial opportunities is a clear reflection of the commercial energy fostered by
a market economy. We believe that the time spent on this book’s treatment of financial
tools and techniques may be one of the more important investments you make.
1 See Business Employment Dynamics at https://www.bls.gov/bdm/.

2 The U.S. Small Business Administration estimates that “Four in five businesses are nonemployers” (https://www.sba.gov/sites
/default/files/advocacy/Nonemployer-Fact-Sheet.pdf, accessed on 6/25/2019).
Chapter 1 Introduction to Finance for Entrepreneurs 5
SECTION 1.1
THE ENTREPRENEURIAL PROCESS

The entrepreneurial process involves developing opportunities, gathering resources, entrepreneurial
and managing and building operations, all with the goal of creating value. Figure 1.1 process
provides a graphical depiction of this process. Many entrepreneurship students have developing
formulated ideas for possible new products and services. However, prior to committing opportunities,
significant time and resources to launching a new venture, it can really pay to take the gathering resources,
time and effort to examine the feasibility of an idea, screen it as a possible venture and managing and
building operations
opportunity, analyze the related competitive environment, develop a sound business
with the goal of
model, and prepare a convincing business plan. creating value
The second aspect of a successful entrepreneurial process involves gathering the
physical assets, intellectual property, human resources, and financial capital neces-
sary to move from opportunity to entrepreneurial venture. The venture should orga-
nize formally and legally, the process of which also provides an opportunity for
founders to build consensus for the new venture’s boundaries of authority and basic
ethical framework. Every startup needs “seed” financing and must have a strategy for
acquiring it.
The third piece of the entrepreneurial process is managing and building the ven-
ture’s operations. An effective business model must generate revenues to cover oper-
ating costs in the foreseeable future. Eventually, a growing venture will also need to
provide enough cash flow to cover planned expansion and reinvestment. Additional
financing rounds, possibly including those available through public securities offer-
ings, may be necessary for growth in later years.
FIGURE 1.1 The Entrepreneurial Process
Economic, Legal, and Social Environment
Developing
Opportunities
Creating
Value
Managing and Gathering
Building Resources
Operations
Another random document with
no related content on Scribd:
A little later we see these growing humanitarian feelings reflected
in the imperial legislation. Hadrian took away from masters the
ancient right willfully to kill their slaves; and Antoninus Pius made the
killing of a slave, sine causa, murder. The edicts of other emperors
effected further mitigations of the law, so that the slave code of the
later pagan Empire is characterized by a humaneness of spirit that
places it in strong contrast with the callousness of the code of earlier
times.
Additional evidence of the increased humanity of the age is
580
afforded by the numerous manumissions of slaves. The motives
that prompted such action were undoubtedly mixed, one self-
regarding motive being the ambition to have a great retinue of
581
clients; but the dominant motive is unquestionably to be sought in
the growing humanity of the age.
It is noteworthy that the greatest alleviations of slavery were
effected before the influence of Christianity was felt. The Christian
emperors added almost nothing to the laws of the pagan Empire
ameliorating the lot of the slave, and the Christian bishops in general
fell behind Seneca in advocacy of the cause of the bondsman. The
emphasis laid by the Church upon a future life where the poor and
the oppressed of this world should receive compensation for their
wrongs and sufferings here, caused the Christian teachers to regard
582
earthly rank and outer conditions of life as of little moment.
Ethics of the While considering the steady expansion of the

persecution of
the Christians
moral sympathies and the growth of humanitarian
by the pagan sentiment in the pagan Empire, we are confronted by
emperors the startling fact that the best of the emperors, those
most closely identified with the legislation embodying the new spirit
of humanity and justice, were among the most severe and persistent
persecutors of the Christians.
This apparent moral paradox is the same as will again confront us
in the medieval age in connection with the Inquisition and the cruel
persecution of heretics and dissenters by a Church which was based
on the principle of universal love, and which exalted to the highest
place in its ideal of goodness the qualities of gentleness and pity.
The paradox in each case is, however, such only in seeming. The
persecution of Christians by pagans, and of heretics by Christians,
was practically the inevitable issue of certain ideas and beliefs which
became the premises of moral conclusions. In neither case does the
583
act of the persecutor necessarily imply moral turpitude. The
persecution of the Christians by the pagan emperors sprang in the
main from the belief—in connection with the idea of corporate
responsibility—that the welfare of the state was bound up with the
584
careful observance of the rites of the temple. It was thought that
the neglect of the temple service by any single member of the
community awakened the resentment of the gods toward all the
members alike. If the Tiber overflowed its banks, the people were
ready to believe that the calamity had been brought upon the city by
the neglect of the new sect to offer the customary sacrifices to the
gods, and the cry arose, “The Christians to the lions!” In a word, the
refusal of the Christians to participate in the common worship was
looked upon as a crime, as a species of treason against the state,
585
and was punished as such.
Stoic teachings As we are now approaching the time when a new

Christian in tone
and sentiment
moral ideal, that of Christianity, is to displace the old
classical ideal of character, it will be both instructive
and interesting to note to what degree this ideal which was passing
away had, in theory if not in practice, under the varied influences to
which it had been subjected through the centuries, become
586
assimilated to this new ideal of excellence.
The nobility of forgiveness was taught by many of the pagan
philosophers with Christian insistence. Cicero regarded repentance
as perhaps sufficient to stay the hand of chastisement, and declares
that nothing is more laudable than clemency and willingness to
587
forgive. Marcus Aurelius would repress even the first risings of
resentment for injury: “When one is trying to do thee harm, continue
to be of a kind disposition toward him, gently admonish him, and
calmly correct his error, saying, ‘Not so, my child; we are constituted
by nature for something else; I shall certainly not be injured, but thou
art injuring thyself, my child,’—and show him by gentle tact and by
588
general principles that this is so.”
589
And again: “It is royal to do good and to be abused” ; “be gentle
590
toward those who try to hinder or otherwise trouble thee.” “The
best way of avenging thyself is not to become like [the
591
wrongdoer].” Epictetus quotes with approval Pittacus, one of the
Seven Wise Men, in these words: “Forgiveness is better than
revenge, for forgiveness is the sign of a gentle nature, but revenge
592
the sign of a savage nature.”
Purity and sincerity of thought is inculcated by Marcus Aurelius. “A
man should,” he says, “accustom himself to think of those things only
about which if one should suddenly ask, What hast thou now in thy
thought? with perfect openness thou mightest immediately answer,
This or that; so that from thy word it should be plain that everything
593
in thee is simple and benevolent.”
Seneca taught that adversity has moral uses: “God does not
pamper the good man; he puts him to the test to prove him, he
594
hardens him, and thus prepares him for himself.” Trust in
Providence and resignation is inculcated by Marcus Aurelius in many
passages in which he teaches that one should accept with all his
soul everything which happens to him as his portion assigned by
God. He trusts in Him who governs; he says to the universe, “I love
595
as thou lovest.” He accepts death with perfect resignation
whether it be extinction, or birth into another life: “To go away from
among men is not a thing to be afraid of, for the gods, if there be
596
gods, will not involve thee in evil.” But death may be extinction. If
so, well; for “if it ought to have been otherwise, the gods would have
597
ordered it so.”
Strangely Christian in tone are the reflections of Marcus Aurelius
on the transitoriness of earthly life: “What belongs to the soul is a
598
dream and vapor, and life is a warfare and a stranger’s sojourn.”
The duty of godlikeness is enjoined by Epictetus: “He who seeks
to please the gods must labor as far as in him lies to resemble them.
He must be faithful as God is faithful, free as He is free, beneficent
599
as He is beneficent, magnanimous as He is magnanimous.”
Marcus Aurelius sums up the duty of man in love to his fellows and
600
in following God; and Plutarch declares that “man can enjoy no
greater blessing from God than to attain to virtue by the earnest
601
imitation of the noblest qualities of the divine nature.”
Some But while in many of the teachings of the leaders of

divergences
between Roman
moral thought in the later Roman Empire, as shown by
and Christian the above quotations, we find a near approach to
ethics Christian ethics, or a perfect accordance therewith,
still it is a fact that must not be overlooked or minimized that in other
of their teachings in which they represented more truly the popular
conceptions of right and wrong, they as conspicuously diverged from
the Christian ideal.
We have heard some of the moralists, particularly the Stoic
Marcus Aurelius, condemning the spirit of revenge and extolling
forgiveness as a virtue; but in general the Stoics as well as the
followers of other schools had not advanced beyond the common
conscience of the time in regard to the permissibility and even duty
of returning injury for injury. Cicero unequivocally approved the
602
taking of revenge for injuries received; only the person injured
603
should avenge himself equitably and humanely. Again he says
that justice requires that no one should do harm to another, “unless
604
in requital of some injury received.” Even the gentle Plutarch, who
may be regarded as representing the composite ideal of character
which was forming in the first century of the Empire through the
union of Greek and Roman ethical ideas and feelings, declares it to
be a virtue to make one’s self disagreeable to one’s enemies.
Tyrannicide, which in general is condemned by the modern
conscience, was given by the Roman moralist, as by the Greek
teachers, a place among the greatest of the virtues. Cicero deems it
a meritorious act to slay a tyrant on the ground that he is but a
605
“ferocious beast in the guise of a man,” and declares that of all
illustrious deeds the Roman people regard tyrannicide the most
606 607
laudable. Consistently he extols the killing of the Gracchi.
Pity or compassion for suffering, which is assigned such a high
place in the Christian type of character, was regarded by the Roman
moralists as a weakness, even a vice; not but that they extolled
clemency in the ruler, but they distinguished between this sentiment
and that of pity. Seneca declared pity to be a vice incident to weak
minds. “The wise man,” he said, “will dry the tears of others but will
not add his to theirs. He will not pity those in distress, but will relieve
608
and aid them.”
Suicide, which to the modern conscience appears a censurable
act, was by most of the Roman moralists regarded with unqualified
609
approval, provided the person committing the act had a strong
motive for doing so. Epictetus said, “The door is open”; but added
610
this admonition, “Do not depart without a reason.” But almost any
circumstance which made life hard or a burden would justify the act;
“The house is smoky, and I quit it,” calmly remarks the Stoic Emperor
611
Aurelius. Seneca says, “The eternal law has decreed nothing
better than this, that life should have but one entrance and many
612
exits.” He thinks the gods must have looked on with great joy
when Cato, with the world fallen into Cæsar’s power, drove the
sword into his own breast. That in his view was “a glorious and
memorable departure.” By such an act a man raises himself to the
613
level of the gods.
Suicide was at its height in the early Empire. This is to be
explained by the teachings of the Stoics—among whom suicides
614
were numerous —and the unbearable tyranny of the imperial
régime. Not till Christianity came with its teachings regarding the
sacredness of human life and the duty of resignation was there any
essential change in the general attitude of the ancient world toward
615
the act of self-destruction.
The The composite Greco-Roman ideal, in which

Stoicism had united the best elements of the Greek
insufficiency of
Stoicism as a
moral guide forand the Roman type of character, while it did serve as
the masses a guide to the moral strivings of select souls, was
wholly unfitted to give support to the moral life of the
masses or to awaken in them moral enthusiasm. There were in
Stoicism two serious defects which made it impossible for it to
become the guide and rule of life for the multitude. First, it was too
intellectually exalted and cold to make appeal to the common
people. The Stoics, in the suppression of the feelings and emotions,
616
—“they made solitude in the heart and called it peace,” —cut
themselves off from all sympathy with the masses, with whom feeling
is ever the larger part of life. Second, Stoicism failed to give due
place to the religious sentiment. Belief in the ancestral Roman gods
had, it is true, been undermined, but the religious feeling of awe and
mystery in the presence of the Unseen was deeper and more
universal than ever before. Man, in the fine phrase of Sabatier, is
incurably religious.
The ideal of character which shall appeal to the masses must be
an ideal whose requirements make full recognition of the rightful
claims of human affections and of the religious instinct of mankind.
The mystical and religious East contributes to the ideal created by
the interaction of the Greek and the Roman spirit those elements
which neither of the classical cultures could supply.
The Orient From the first century of our era, Rome was in
contributes new
close contact with the Orient, as long before she had
been in contact with Greece. And just as the Greek
elements to the
moral life of the
West spirit had profoundly influenced the moral ideal of
Rome, so now was the spirit of the Orient to effect
even greater changes in her ancestral standard of character.
As philosophy mediated between Rome and Greece, so did
religion mediate between Rome and the Orient. It was through the
religions or cults of Egypt, Persia, and Judea that the ethical forces
of the ancient cultures of the East were brought to bear on Roman
life and thought and conduct. In the present connection we shall
speak only of the influences which went forth from Egypt and Persia,
and point out in what way they gave an added impulse to that ethical
movement going on in the Roman world which finally culminated in
the triumph of the creed and moral ideal of Judea.
The contribution And first we note the relation to this ethical

of Egypt; the
evolution of the worship of Isis and Serapis, the chief
worship of Isis
imported and modified cults of the ancient civilization
of the Valley of the Nile. In this worship religion and morality were
joined in a way practically unknown to the priestly colleges of Rome.
“The Egyptian,” says Lecky, “... bowed low before the divine
presence. He veiled his eyes, he humbled his reason, he
represented the introduction of a new element into the moral life of
617
Europe, the spirit of religious reverence and awe.”
Forming an important part of the body of ideas which constituted
the basis of this religious feeling, was the doctrine of a life after
death. This was a doctrine which was common to all the Oriental
religions with which we have here to do,—the Isiac, the Mithraic, and
the Christian,—but a doctrine which, aside from the initiates of the
Orphic, the Eleusinian, and like Mysteries, was practically new to the
classical world. It was this doctrine which helped greatly to secure for
these religions or cults such wide acceptance in the Roman world,—
for the Roman world, old, worn, and weary, was yearning for
assurance of another and better life,—and which largely explains the
618
moral influence they exerted upon the nations of the West.
For more than five hundred years the worship of Isis particularly
found ardent devotees in the West. The general effect of the cult
upon its followers was to cause the active, heroic qualities in the old
Roman ideal of character to be overshadowed by the passive
contemplative virtues, and to impart a religious, ritual character to
the moral code. Expiatory and purification rites formed a large part of
619
the duties of the worshiper of the Egyptian goddess.
The contribution The influence of Egypt upon the religious-ethical life

of Persia:
Mithraism
of the West was reënforced by a like influence from
620
Persia, which came through the cult of Mithra. This
worship came into Europe by the way of Asia Minor. Its missionaries
were seemingly Oriental recruits in the Roman legions. It came
bearing many accretions gathered in its passage through the west
Asian lands, and yet with all the characteristics which marked the old
Persian religion as a religion of combat and strenuousness, of moral
621
striving and moral achievement. During the last three centuries of
the Empire the cult spread widely in the Western lands, taking deep
root especially in the frontier regions of the Danube and the Rhine,
and in the remote province of Britain.
This incoming of Mithraism had special significance for the reason
that Mithra, as the god of light, was invested with certain moral
qualities symbolized by his physical attributes. He was the god of
truth and purity. It was this moral element in the cult, in connection
with its doctrine of a future life,—the promise and hope of which was
dependent upon purification, inward as well as ceremonial, from all
earthly stains and impurities,—which in a measure met and satisfied
the yearnings of the age, and which, in the great religious and ethical
propaganda that marked the later centuries of the Roman Empire,
rendered the religion of Mithra the most formidable rival of
Christianity in its great competition with the various Oriental religions
622
and cults for supremacy in the hearts and consciences of men.
Relation of the
Egyptian and
Persian But the pagan priest no more than the pagan
propaganda to
that of philosopher could effect the moral renovation of
Christianity ancient society. Like the moral propaganda carried on
by Cynic, Stoic, and Neoplatonist missionaries and
preachers, these efforts of paganism to effect its own moral
regeneration failed, perhaps because these pagan cults lacked what
Christianity possessed—“the dynamic of a great personality.” Yet
these efforts were not without influence upon the ethical
development of the Western nations. In two ways the Egyptian and
Persian propaganda was a preparation for the moral revolution
effected by Christianity: first, it helped to give morality a religious
basis, which it did not have in classical antiquity; and second, it
taught men to seek in deity and not in themselves the pattern of
623
moral excellence. Thus did Egypt and Persia, through the
mediation of religion, contribute important ethical elements to Greco-
Roman civilization, and thereby help to give a fresh impulse and a
new trend to the moral evolution of the Western world.
CHAPTER XII
THE ETHICS OF DOCTRINAL CHRISTIANITY:
AN IDEAL OF RIGHT BELIEF
Ethical import of The establishment of Christianity, in its Greco-

the Judaic form, as the favored religion of the Roman
Christianization
Empire by the edict of the Emperor Constantine is
of Rome
rightly regarded as one of the most important events
not only in the history of the Empire but also in that of the Western
world. What made this act, or rather the religious revolution it
registered, of such transcendent importance was the fact that the
ascendancy of the new religion meant the ascendancy of a new
moral ideal; for Christianity, unlike Stoicism, did not merely act upon
the old classical ideal of excellence to modify and remold it, but
superseded it by another made up largely of a wholly different set of
virtues.
It was this new ethical element thus introduced into Greco-Roman
civilization which was the most dynamic of the forces active in the
transformation of the ancient into the medieval world. The new ideal
re-created ethically the Roman world and made Europe for a
thousand years and more—until the Renaissance of the fifteenth
century called forth again the ethical thought and feeling of classical
antiquity—in moral conviction and striving an extension of Asia.
A prerequisite to an intelligent study of the history of this new
moral ideal is a knowledge of the beliefs and theological doctrines
out of which it arose; for this ideal has through the centuries followed
the fortune of these beliefs and teachings. In the immediately
following pages we shall indicate what were some of the most
influential of these ideas and doctrines.
I. Religious Ideas and Theological Dogmas
molding the Ideal
The doctrine of Among the doctrines of Christian theology freighted

a moral law heavily with ethical consequences was that of a moral
supernaturally
revealed law supernaturally promulgated. This was essentially
an Oriental conception, a heritage of Christianity from
the Hebrew past, and a conception quite alien in general to the
manner of thinking of the Greeks and Romans, with whom morality,
as we have seen, was a civic and secular and human thing, an
expression of man’s essential nature, that is, an outcome of the
human reason and conscience.
This doctrine exercised an immense influence upon the moral
evolution in the Western world. First, it displaced naturalism with
supernaturalism in ethics. The whole history of morals records no
revolution more momentous than this. Second, it made rigid large
sections of the moral code and thus tended to impart for an historical
epoch a certain immobility to the religious-ethical side of European
civilization.
The teaching of Another idea found in this body of religious

the unity of God
and of his
doctrines, an idea rich in ethical consequences, was
universal the conception of God as one and as the Universal
fatherhood Father. We have seen that the great defect in primitive
morality was the limited range of the moral feelings. The circle of
moral obligation was bounded by the clan, the tribe, the city. This
resulted in large part from the notion that each kin group had an
origin and ancestry different from that of every other. One group
thought themselves to be the offspring of Zeus; another proclaimed
themselves to be the descendants of Heracles; and still another
believed themselves to be the children of Mars. So long as this view
of men’s origin and descent prevailed there could arise no
conception of their spiritual relationship and ethical oneness. Tacitus
merely expressed the common opinion of the ancient world when he
declared absurd the doctrine that all men are brothers.
But from the doctrine of the common fatherhood of God there
arises naturally the conception of the essential brotherhood of men.
624
The apostle’s declaration, “We are the offspring of God,” —
phrasing the teachings of the Master in terms understood by the men
to whom he spoke,—announced the opening of a new era in the
moral development of the race. The proclamation of this practically
625
new thought meant, at once in ethical theory and sooner or later
in actual practice, the widening of the narrow class and race circle of
moral obligation to include all tribes and peoples.
The doctrine of Greco-Roman morality was influenced but slightly

a future life of
rewards and
by a belief in a life after death. The vision of the other
punishments world was in general too indistinct for it to exert any
626
decided influence upon the conduct of men. The
conception of Hades, though it did undergo with the lapse of time a
process of moralization, was never so far ethicalized as to have a
positive moral value.
But by Christianity the other world was lifted into such prominence
as it had had in the life and thought of no people of antiquity except
the Egyptians, and immortality was declared to be the destiny of
every human soul. With the classical peoples it was the city which
had been conceived as eternal. This transference of immortality from
627
the city to the individual had vast import for morality. What
contributed to render it of such ethical importance was the fact that
the after life was conceived as a life of rewards and punishments. A
heaven of ineffable and everlasting bliss and a hell of unutterable
and everlasting torment were laid open to the eyes of men, and
became the tremendous sanctions of the new moral code
promulgated by Christianity. It would be difficult to exaggerate the
influence of this teaching upon the moral life of the European
peoples, especially during the medieval centuries of faith. To make
this life transitory, vain, and worthless, and life in another world the
only real life, is to cause the transvaluation of all moral values, and to
change fundamentally conceptions of what is rational and right in
conduct.
Springing naturally from the foregoing conceptions
The teaching of of man’s origin and eternal destiny is the Christian
the sanctity of doctrine of the sanctity of human life. In no respect do
human life Christian teachings contrast more sharply with pagan
conceptions than in this regard. In the Greco-Roman view value did
not attach to man as man. To the Greek way of thinking it was the
Greek freeman alone who possessed the full capacity for virtue and
the rights of manhood. In the common Roman view only the Roman
citizen was regarded as dowered with the full faculties and rights of a
human being. The slave was looked upon and treated as belonging
to an inferior order of existence.
The Christian doctrine of man’s divine sonship and of his eternal
destiny gave infinite worth to every human life, and, investing man as
man with an inviolable sanctity, worked effectively in widening the
range of the moral sympathies and in bringing within the scope of the
moral law all classes and conditions of men. It checked infanticide,
which in the pre-Christian world had been very generally practiced
without the least moral scruple; it suppressed the gladiatorial games
in which the lives of men were placed on a level with those of the
wild beasts with which they fought; it helped to make suicide, which
the Romans looked upon as a noble mode of departure from life, a
crime; and contributed to mitigate the lot of the slave and finally to
help lift him into freedom.
The dogma of The view of man’s moral nature taught by the

the fall of man
Founder of Christianity was simple and natural. It is
and hereditary
guilt embodied in the parable of the prodigal son. Man may
go wrong, but he has ever the capacity, and, when he
comes to himself, the desire, to return to the right way.
In direct opposition to this view of man’s nature and deepest
preferences as being essentially good, we find elaborated in early
Christian theology the dogma that the first man, though created
upright, fell through disobedience and transmitted to all his
descendants a nature wholly evil and a total incapacity for doing
good or even desiring the good. And not only was man thus attainted
by the primal disobedience, but all nature became accursed.
This dogma of the fall of man is one of the most influential
conceptions in the moral domain ever entertained by the human
mind. It was the germ from which was developed the larger part of
628
Christian theological ethics. For out of the dogma of ancestral sin
and total depravity sprang naturally and logically the doctrines of the
atonement, imputed righteousness, and salvation through faith. The
moral history of the Christian centuries we shall find to be largely the
history of the influence of this doctrine upon men’s conceptions of
their religious obligations and duties. As with the passage of time
and the incoming of evolutionary science the belief in this teaching
decays, we shall find men’s idea of what constitutes duty in the
religious sphere undergoing a great change, and shall see acts,
observances, and states of mind once regarded as supremely
virtuous and indispensable to salvation now looked upon as morally
indifferent or even positively wrong.
The doctrine of Christianity inherited from Judaism the belief in the

the sacredness
of the Sabbath
sacred character of the Sabbath day. This belief
created one of the most important of the religious
duties of the Christian. It determined how one seventh of all his time
should be spent. The history of the observance of this Sabbath as
holy time, and the changed moral value attached to such observance
as times and beliefs have changed, forms a chapter of the greatest
suggestiveness to the student of the evolution of morals, since this
chapter epitomizes and repeats the entire history of ceremonial or
ritual morality.
The personality But far more influential than all these inherited
of the Prophet of
629 Jewish beliefs and doctrines of speculative theology in
Nazareth
molding the moral ideal of Christianity, in all that
renders it superior to the moral ideals of the other great religions of
the world, as well as in all that it possesses of permanent ethical
value for humanity, has been the simple appealing story of the words
630
and deeds of the Prophet of Nazareth. Those elements of the
ideal which are based on speculative theological doctrines have
changed as these doctrines have changed with the world’s advance
in general intelligence and with the deepening and clarifying of the
moral consciousness of men; while those elements derived from that
wonderful personality, from that life of unbounded tenderness and
love and self-forgetting service, have been given an ever higher and
more dominant place in the world’s ideal of goodness. In the
eloquent words of the historian Lecky: “It was reserved for
Christianity to present to the world an ideal character, which through
all the changes of eighteen centuries has inspired the hearts of men
with an impassioned love; has shown itself capable of acting on all
ages, nations, temperaments, and conditions; has been not only the
highest pattern of virtue but the strongest incentive to its practice;
and has exercised so deep an influence that it may be truly said that
the simple record of three short years of active life has done more to
regenerate and to soften mankind than all the disquisitions of
philosophers and the exhortations of moralists. This has indeed been
631
the well-spring of whatever is best and purest in Christian life.”
II. The Moral Ideal
Orthodoxy, or Before the end of the third century, under the

correct religious influence largely of the speculative Greek spirit, what
opinion, the
indispensable was to be essentially the historical creed of the
saving virtue
632 Church had been practically formulated and the
633
corresponding moral code brought into existence.
In the creation of this standard of goodness which was to give
guidance for an epoch to the moral life of the European peoples, it
was the theological doctrine of the moral value of faith, which came
practically to be defined as “the acceptance of the dogma of the
Trinity and the main articles of the creed,” that determined the
634
precedence and subordination of virtues and duties. Correct
belief was made an indispensable virtue. Without this there could be
635
no salvation. On the other hand, unbelief, doubt, error, even
honest error, in religious matters was declared to be in the highest
degree sinful. This conception that belief is a virtue and doubt a sin
was destined, since it imperils freedom of thought, to have
momentous and sinister consequences for the intellectual and moral
history of Europe.
The virtue of Just as the theological dogma of the ethical value

charity or love
of religious opinions has made correct belief
theoretically the saving virtue in Church ethics, so has the
personality of Jesus, his teachings and his self-sacrificing life as
mirrored in the gospel records, made love and service of others, in
multitudes of souls, practically the supreme and controlling motive of
life. It was the emphasis placed by primitive Christianity on this
virtue, and the persuasion to its practice afforded by the example of
the Master, that for the first two centuries of the new era—until the
emphasis became changed from right living to right opinion—lent to
the moral life in the Christian communities of the Empire such
sincerity, purity, and elevation as have marked no other period in the
history of the Church.
But orthodox theology has never allowed that charity, though
combined with perfect uprightness of life and expressed in noblest
acts of self-abnegating service of humanity, is a saving virtue unless
associated with correctness of religious belief and the outgrowth of it.
This opposition in the bosom of the Church itself between theological
and natural morality has created a great dualism in the moral history
of all the Christian centuries, like the dualism in ancient Hebrew
history caused by the opposition between the morality of ritualism
and the morality of prophetism.
The body of Alongside the primary Christian virtue, whether this

secondary
virtues
be regarded as correct belief or as charity, were
grouped a cluster of secondary virtues, such as
humility, meekness, gentleness, compassion for weakness,
resignation, and renunciation of the world. What is especially
noteworthy respecting this body of moral qualities making up the
Christian ideal of excellence is that all these were virtues which in
general were undervalued or held in positive disesteem by the
636
Greeks and Romans. Indeed it was made a matter of reproach to
the early Christians by the pagan opponents of Christianity, that its
virtues were all servile virtues—the virtues of the slave.
It was undoubtedly this character of the new ideal which caused
it, in the primal age of Christianity, to make such strong appeal to the
common people, to the despised and lowly, to the broken and
humble in spirit, in the aristocratically graded society of the ancient
world.
Creation of The Christian ideal of excellence has fulfilled itself

specific types
through
in many ways; that is, different types have arisen
through the shifting in rank of the virtues constituting
modifications of
the ideal, through the incorporation of pagan
the general ideal
elements, through racial influence, and through the reaction upon the
ideal of the changing intellectual, political, and economic
environment.
Generally these specific forms of the ideal have been created by
an exaggerated enthusiasm for one or another particular virtue of the
standard, which has caused this special virtue so to overshadow all
the others, save the indispensable one of correct belief, as to bring
into existence a distinctive Christian type. Thus through the
exaltation of the virtue of chastity there arose in the early Church the
ascetic type of excellence, which for several centuries inspired
unbounded moral enthusiasm and drew away into the desert and
into the seclusion of the cloister great multitudes of both men and
women; later, through the reaction upon the Church of the pagan
and barbarian world it had nominally converted, and through the
incorporation into the ideal of a number of heathen virtues, there
came into existence a composite type of character—a combination
of the virtues of the saint and the virtues of the hero—known as the
chivalric ideal, which colored the events of European history from the
ninth to the fourteenth century; and still later, through the
suppression of some of the distinctive virtues of the Roman Catholic
type of excellence and a fresh emphasis laid upon others, there was
created the Protestant type of moral character, which has given a
special cast to the theological morality of a large section of modern
Christendom.
Limitations and That we may better be prepared to follow

defects of the
ideal
intelligently the various phases of the moral history of
the Christian centuries, to the tracing of which the
remaining chapters of this volume will be devoted, there is need that
to the brief description we have now given of the chief virtues making
up the ideal which was to give guidance to the moral life of the
European peoples, we add a word concerning its limitations and
defects, since these negative qualities of the ideal have exercised an
influence scarcely less decisive than its positive qualities in making
the history of the Christian world what it has been—a history, on the
whole, of inspiring moral progress, yet a history of moral losses as
well as of moral gains.
The first limitation of the ideal which we notice is its practical
exclusion of those civic, patriotic duties and virtues which had been
so highly esteemed by both the Greeks and the Romans. Man was
henceforth to be the citizen of no earthly city, but of a heavenly city
whose builder and maker is God. We can easily understand how this
new conception of life, which transferred all its chief interests to
another world, which substituted the Church—symbolized in
accordance with the modes of thought of the time as “the city of
God”—for the ancient city state as the object of moral enthusiasm
and self-devotion, should leave no place for those civic, military, and
heroic virtues that had constituted the very soul of the morality of
classical antiquity.
A second limitation of the ideal is its neglect of the intellectual
virtues, which by the Greeks had been assigned such a high place in
637
their ethical standard. The slighting of this important domain of
ethics by Christian theology arose naturally from its exaltation of faith
above reason, and from its assumption that in the revealed word the
Church was already in possession of all knowledge really essential
638
to man’s welfare and salvation.
But the chief defect of the ideal, the lamentable historical
consequences of which we shall witness later, is, as we have already
pointed out, in its making the acceptance of all the articles of a given
creed an indispensable virtue. In assigning orthodox belief this place
in the ideal of moral goodness, theological ethics has marred
Christian morality by fostering the faults of intolerance and
intellectual insincerity. This dogma inspired in the Church, as soon
as it became powerful, a persecuting spirit, and made Christianity for
centuries something altogether alien to its real genius and spirit—
one of the most intolerant of the world’s religions. At the same time
this dogma, by making religious unbelief and nonconformity a sin so
heinous as to be worthy of death by the most exquisite torture, and
of everlasting punishment in the hereafter, discouraged intellectual
veracity and open-mindedness, and fostered the vice of insincere
conformity, which, more than any other fault, has marred Church
morality from the end of the early age of the martyrs to the present
day.
Conclusion In the following pages we shall follow the fortunes

of this ethical ideal through medieval and modern times. We shall
trace the modifying influence upon it of the different and changing
elements of the civilization of which it has formed a part, and shall
note the reaction of the ideal, in its successive types, upon the
history of the passing centuries.
CHAPTER XIII
MORAL HISTORY OF THE AGE OF
CHRISTIAN ASCETICISM
I. Conceptions of Life and Historical

Circumstances that produced the Ascetic
Ideal
General Before the close of the third century the

fostering causesdevelopment in the Christian communities of the East
of asceticism
of asceticism, the germs of which were immanent from
the first in Christianity, had given a remarkable trend to the moral
movement inaugurated by the new religion. We shall gain a
sympathetic understanding of this phase of Christian ethics only as
we bear in mind the conceptions of life and of the world, and the
historical conditions which in general tend to foster the development
of the ascetic ideal of goodness.
Asceticism, a definitive characteristic of which is renunciation of
the world and all earthly pleasures, springs from various roots.
Sometimes it grows out of a dualistic world philosophy, which,
holding matter to be an evil creation and “the corruptible body a load
upon the soul,” teaches the meritoriousness of the suppression, in
the interest of the spirit, of all bodily impulses and appetites.
Sometimes it arises from inequitable and oppressive conditions of
society, which have made life for the enslaved and impoverished
masses so joyless and wretched as to create an inappeasable
yearning for deliverance from its intolerable burdens.

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Risks and Opportunities 73 Appendix A NOPAT Breakeven: Revenues Needed

The Life Cycle Approach

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CHAPTER LEARNING OBJECTIVES

FROM THE HEADLINES

1 See Business Employment Dynamics at https://www.bls.gov/bdm/.

THE ENTREPRENEURIAL PROCESS

FIGURE 1.1 The Entrepreneurial Process

Economic, Legal, and Social Environment

Ethics of the While considering the steady expansion of the

Stoic teachings As we are now approaching the time when a new

Some But while in many of the teachings of the leaders of

The The composite Greco-Roman ideal, in which

The contribution And first we note the relation to this ethical

The contribution The influence of Egypt upon the religious-ethical life

Ethical import of The establishment of Christianity, in its Greco-

The doctrine of Among the doctrines of Christian theology freighted

The teaching of Another idea found in this body of religious

The doctrine of Greco-Roman morality was influenced but slightly

The dogma of The view of man’s moral nature taught by the

The doctrine of Christianity inherited from Judaism the belief in the

II. The Moral Ideal

Orthodoxy, or Before the end of the third century, under the

The virtue of Just as the theological dogma of the ethical value

The body of Alongside the primary Christian virtue, whether this

Creation of The Christian ideal of excellence has fulfilled itself

Limitations and That we may better be prepared to follow

Conclusion In the following pages we shall follow the fortunes

I. Conceptions of Life and Historical

General Before the close of the third century the

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