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vi Contents

1.7 Financing Through the Venture Life Cycle 27

Seed Financing 28
Startup Financing 28
First-Round Financing 29
Second-Round Financing 30
Mezzanine Financing 30
Liquidity-Stage Financing 30
Seasoned Financing 31
1.8 Life Cycle Approach for Teaching Entrepreneurial Finance 32
Summary 35

CHAPTER 2
Developing the Business Idea 41
2.1 Process for Identifying Business Opportunities 43
2.2 To Be Successful, You Must Have a Sound Business Model 44
Component 1: The Business Model Must Generate Revenues 45
Component 2: The Business Model Must Make Profits 45
Component 3: The Business Model Must Produce Free Cash Flows 46
2.3 Learn from the Best Practices of Successful Entrepreneurial Ventures 47
Best Marketing Practices 47
Best Financial Practices 48
Best Management Practices 49
Best Production or Operations Practices Are Also Important 49
2.4 Time-to-Market and Other Timing Implications 50
2.5 Initial “Litmus Test” for Evaluating the Business Feasibility of an Idea 51
2.6 Screening Venture Opportunities 53
An Interview with the Founder (Entrepreneur) and Management Team:
Qualitative Screening 54
Scoring a Prospective New Venture: Quantitative Screening 58
Industry/Market Considerations 61
Pricing/Profitability Considerations 63
Financial/Harvest Considerations 65
Management Team Considerations 67
Opportunity Screening Caveats 68
2.7 Key Elements of a Business Plan 69
Cover Page, Confidentiality Statement, and Table of Contents 70
Executive Summary 71
Business Description 72
Marketing Plan and Strategy 72
Operations and Support 72

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 Contents vii

Management Team 73
Financial Plans and Projections 73
Risks and Opportunities 74
Business Plan Appendix 75
Summary 76
Appendix A Applying the VOS Indicator™: An Example 82

PART 2
ORGANIZING AND OPERATING THE VENTURE 87

CHAPTER 3
Organizing and Financing a New Venture 89
3.1 Progressing Through the Venture Life Cycle 91
3.2 Forms of Business Organization 91
Proprietorships 94
General and Limited Partnerships 95
Corporations 98
Limited Liability Companies 101
3.3 Choosing the form of Organization: Tax and Other Considerations 102
3.4 Intellectual Property 105
Protecting Valuable Intangible Assets 106
What Kinds of Intellectual Property Can Be Protected? 106
Other Methods for Protecting Intellectual Property Rights 113
3.5 Seed, Startup, and First-Round Financing Sources 115
Financial Bootstrapping 118
Business Angel Funding 119
First-Round Financing Opportunities 122
Summary 123

CHAPTER 4
Preparing and Using Financial Statements 129
4.1 Obtaining and Recording the Resources Necessary to Start
and Build a New Venture 131
4.2 Business Assets, Liabilities, and Owners’ Equity 132
Balance Sheet Assets 134
Liabilities and Owners’ Equity 135
4.3 Sales, Expenses, and Profits 136
4.4 Internal Operating Schedules 138
4.5 Statement of Cash Flows 142

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viii Contents

4.6 Operating Breakeven Analyses 144

Survival Breakeven 144
Identifying Breakeven Drivers in Revenue Projections 149
Summary 151
Appendix A NOPAT Breakeven: Revenues Needed to Cover Total Operating Costs 158

CHAPTER 5
Evaluating Operating and Financial Performance 161
5.1 Users of Operating and Financial Performance Measures by Life Cycle Stage 163
5.2 Using Financial Ratios 164
5.3 Cash Burn Rates and Liquidity Ratios 167
Measuring Venture Cash Burn and Build Amounts and Rates 167
Beyond Burn: Traditional Measures of Liquidity 169
Interpreting Cash-Related and Liquidity-Related Trends 170
5.4 Leverage Ratios 172
Measuring Financial Leverage 172
Interpreting Changes in Financial Leverage 175
5.5 Profitability and Efficiency Ratios 176
Income Statement Measures of Profitability 176
Efficiency and Return Measures 178
Interpreting Changes in Profitability and Efficiency 180
5.6 Industry Comparable Ratio Analysis 181
5.7 A Hitchhiker’s Guide to Financial Analysis 182
Summary 185

PART 3
PLANNING FOR THE FUTURE 195

CHAPTER 6
Managing Cash Flow 197
6.1 Financial Planning throughout the Venture’s Life Cycle 198
6.2 Surviving in the Short Run 200
6.3 Short-Term Cash-Planning Tools 202
6.4 Projected Monthly Financial Statements 207
6.5 Cash Planning from a Projected Monthly Balance Sheet 209
6.6 Conversion Period Ratios 210
Measuring Conversion Times 212
Interpreting Changes in Conversion Times 215
Summary 217

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 Contents ix

CHAPTER 7
Types and Costs of Financial Capital 227
7.1 Implicit and Explicit Financial Capital Costs 229
7.2 Financial Markets 229
7.3 Determining the Cost of Debt Capital 231
Determinants of Market Interest Rates 233
Risk-Free Interest Rate 234
Default Risk Premium 235
Liquidity and Maturity Risk Premiums 238
A Word on Venture Debt Capital 240
7.4 What Is Investment Risk? 241
Measuring Risk as Dispersion around an Average 241
Historical Return versus Risk Relationships 244
7.5 Estimating the Cost of Equity Capital 247
Cost of Equity Capital for Public Corporations 248
Cost of Equity Capital for Private Ventures 250
Sources and Costs of Venture Equity Capital 252
7.6 Weighted Average Cost of Capital 254
A Life Cycle–Based WACC Example 255
Summary 256
Appendix A Using WACC to Complete the Calibration of EVA 264

CHAPTER 8
Securities Law Considerations when Obtaining Venture Financing 267
8.1 Review of Sources of External Venture Financing 269
8.2 Overview of Federal and State Securities Laws 271
Securities Act of 1933 272
Securities Exchange Act of 1934 272
Investment Company Act of 1940 273
Investment Advisers Act of 1940 273
Jumpstart Our Business Startups Act of 2012 274
State Securities Regulations: “Blue-Sky” Laws 275
8.3 Process for Determining Whether Securities Must Be Registered 276
Offer and Sale Terms 276
What is a Security? 277
8.4 Registration of Securities Under the Securities Act of 1933 278
8.5 Security Exemptions from Registration Under the 1933 Act 282
8.6 Transaction Exemptions from Registration Under the 1933 Act 284
Private Offering Exemption 284
Accredited Investor Exemption 286

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x Contents

8.7 SEC’s Regulation D: Safe-Harbor Exemptions 287

Rule 504: Exemption for Limited Offerings and Sales of Securities Not Exceeding
$1 Million 288
Rule 505: Exemption for Limited Offers and Sales of Securities Not Exceeding
$5 Million 290
Rule 506: Exemption for Limited Offers and Sales Without Regard to Dollar Amount
of Offering 291
8.8 Regulation A Security Exemption 292
8.9 JOBS Act Innovations 293
Summary 293
Appendix A Schedule A 297
Appendix B Selected SEC Regulation D Materials 302
Appendix C Other Forms of Registration Exemptions and Breaks 314

PART 4
CREATING AND RECOGNIZING VENTURE VALUE 317

CHAPTER 9
Projecting Financial Statements 319
9.1 Long-Term Financial Planning Throughout the Venture’s Life Cycle 321
9.2 Beyond Survival: Systematic Forecasting 322
Forecasting Sales for Seasoned Firms 322
Forecasting Sales for Early-Stage Ventures 325
9.3 Estimating Sustainable Sales Growth Rates 329
9.4 Estimating Additional Financing Needed to Support Growth 332
The Basic Additional Funds Needed Equation 333
Impact of Different Growth Rates on AFN 336
Estimating the AFN for Multiple Years 336
9.5 Percent-of-Sales Projected Financial Statements 337
Forecasting Sales 338
Projecting the Income Statement 339
Projecting the Balance Sheet 340
Forecasting the Statement of Cash Flows 342
Financing Cost Implications Associated with the Need for Additional Funds 343
Summary 344

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 Contents xi

CHAPTER 10
Valuing Early-Stage Ventures 351
10.1 What is a Venture Worth? 352
Does the Past Matter? 353
Looking to the Future 353
Vested Interests in Value: Investor and Entrepreneur 354
10.2 Basic Mechanics of Valuation: Mixing Vision and Reality 356
Present Value Concept 356
If You’re Not Using Estimates, You’re Not Doing a Valuation 358
Divide and Conquer with Discounted Cash Flow 359
10.3 Required versus Surplus Cash 362
10.4 Developing the Projected Financial Statements for a DCF Valuation 364
10.5 Just-In-Time Equity Valuation: Pseudo Dividends 369
10.6 Accounting versus Equity Valuation Cash Flow 376
Origins of Accounting Cash Flows 376
From Accounting to Equity Valuation Cash Flows 377
Summary 381

CHAPTER 11
Venture Capital Valuation Methods 399
11.1 Brief Review of Basic Cash Flow-Based Equity Valuations 401
11.2 Basic Venture Capital Valuation Method 403
Using Present Values 406
Using Future Values 406
11.3 Earnings Multipliers and Discounted Dividends 407
11.4 Adjusting VCSCs for Multiple Rounds 409
First Round 410
Second Round 410
11.5 Adjusting VCSCs for Incentive Ownership 411
First Round 412
Second Round 412
Incentive Ownership Round 412
11.6 Adjusting VCSCs for Payments to Senior Security Holders 413
11.7 Introducing Scenarios to VCSCs 414
Utopian Approach 415
Mean Approach 416
Summary 421

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xii Contents

PART 5
STRUCTURING FINANCING FOR THE GROWING VENTURE 445

CHAPTER 12
Professional Venture Capital 447
12.1 Historical Characterization of Professional Venture Capital 449
12.2 Professional Venture Investing Cycle: Overview 453
12.3 Determining (Next) Fund Objectives and Policies 454
12.4 Organizing the New Fund 455
12.5 Soliciting Investments in the New Fund 458
12.6 Obtaining Commitments for a Series of Capital Calls 459
12.7 Conducting Due Diligence and Actively Investing 460
12.8 Arranging Harvest or Liquidation 468
12.9 Distributing Cash and Securities Proceeds 468
Summary 469

CHAPTER 13
Other Financing Alternatives 473
13.1 Business Incubators, Seed Accelerators, and Intermediaries 475
Business Incubators and Seed Accelerators 475
Intermediaries, Facilitators, and Consultants 476
13.2 Business Crowdsourcing and Crowdfunding 477
13.3 Commercial and Venture Bank Lending 478
13.4 Understanding Why You May Not Get Debt Financing 481
13.5 Credit Cards 483
13.6 Foreign Investor Funding Sources 484
13.7 Small Business Administration Programs 485
Overview of What the SBA Does for Small Businesses 485
Selected SBA Loan and Operating Specifics 487
13.8 Other Government Financing Programs 492
13.9 Factoring, Receivables Lending, and Customer Funding 493
13.10 Debt, Debt Substitutes, and Direct Offerings 495
Vendor Financing: Accounts Payable and Trade Notes 495
Mortgage Lending 495
Traditional and Venture Leasing 495
Direct Public Offers 496
Summary 497
Appendix A Summary of Colorado Business Financial Assistance Options 500

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 Contents xiii

CHAPTER 14
Security Structures and Determining Enterprise Values 505
14.1 Common Stock or Common Equity 507
14.2 Preferred Stock or Preferred Equity 507
Selected Characteristics 508
Convertible Preferreds 509
Conversion Value Protection 511
Conversion Protection Clauses 512
14.3 Convertible Debt 514
14.4 Warrants and Options 516
14.5 Other Concerns about Security Design 521
14.6 Valuing Ventures with Complex Capital Structures: The Enterprise Method 522
Summary 529

PART 6
EXIT AND TURNAROUND STRATEGIES 541

CHAPTER 15
Harvesting the Business Venture Investment 543
15.1 Venture Operating and Financial Decisions Revisited 545
15.2 Planning an Exit Strategy 546
15.3 Valuing the Equity or Valuing the Enterprise 548
Relative Valuation Methods 548
Dividing the Venture Valuation Pie 550
15.4 Systematic Liquidation 551
15.5 Outright Sale 552
Family Members 552
Managers 553
Employees 557
Outside Buyers 558
15.6 Going Public 560
Investment Banking 560
Some Additional Definitions 563
Other Costs in Issuing Securities 565
Post-IPO Trading 565
Contemplating and Preparing for the IPO Process 567
Summary 572

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xiv Contents

CHAPTER 16
Financially Troubled Ventures: Turnaround Opportunities? 579
16.1 Venture Operating and Financing Overview 581
16.2 The Troubled Venture and Financial Distress 582
Balance Sheet Insolvency 583
Cash Flow Insolvency 584
Temporary versus Permanent Cash Flow Problems 585
16.3 Resolving Financial Distress Situations 586
Operations Restructuring 588
Asset Restructuring 591
Financial Restructuring 594
16.4 Private Workouts and Liquidations 594
Private Workouts 595
Private Liquidations 596
Venture Example: Jeremy’s MicroBatch Ice Creams, Inc. 596
16.5 Federal Bankruptcy Law 597
Bankruptcy Reorganizations 598
Reasons for Legal Reorganizations 598
Legal Reorganization Process 600
Bankruptcy Liquidations 603
Summary 608

PART 7
CAPSTONE CASES 615

CASE 1
Eco-Products, Inc. 617

CASE 2
Spatial Technology, Inc. 649

Glossary 675
Index 684

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Preface

The 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 signifi-
cantly 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 finan-
cial 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 entrepre-
neurs 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 ven-
ture’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 accom-
modate necessary operating costs. The need to measure and adjust investment in
working capital and property, plant, and equipment is evident. The process of

xv
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xvi Preface

anticipating and accommodating costs and asset investments begins with the analysis
of historical financial experience and then projects future financial positions using pro-
jected 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.
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 financ-
ing 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 regulat-
ing financial relationships between the venture, investors, and financial institu-
tions 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 anal-
ysis 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 entrepre-
neur 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:
▶ Brainstorming and Screening: 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.
▶ 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

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 Preface xvii

on long-term projections incorporating future financing needs and estab-

lishing a basis for creating value over time.
▶ Raising External Funds: Chapter 8 (Securities Law Considerations When
Obtaining Venture Financing) treatment of securities law introduces read-
ers to the restrictions and warnings for the growing venture seeking exter-
nal financing.
▶ Venture Diagnostics and Valuation: Chapter 10 (Valuing Early-Stage
Ventures) presents our versions of traditional valuation techniques impor-
tant to internal and external perceptions of a venture’s financial health.
While the material is traditional, our treatment provides a unifying ap-
proach to projecting financial statements, extracting pseudo-dividends, and
assessing a venture’s value.
▶ Venture Capital Valuation Methods: Chapter 11 (Venture Capital Valua-
tion Methods) introduces representative multi-stage venture capital valua-
tion 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.
▶ 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 pol-
icies to distributing cash and securities proceeds to investors.
▶ 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.
▶ Turnaround Opportunities: Chapter 16 (Financially Troubled Ventures:
Turnaround Opportunities?) introduces important aspects of financial dis-
tress 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 individu-
ally 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 abbrevi-
ated mini-semester course or compressed executive MBA, we recommend concen-
trating on the text and using our capstone cases as focal points for integrating the
venture financing perspective.

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xviii Preface

We have also used this text for semester-long upper division (junior/senior-level)
undergraduate courses for finance and non-finance business majors. Most academic
business programs require students to take basic background courses in both ac-
counting 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 intel-
lectual challenge and require relatively sophisticated spreadsheet skills. The sixth edi-
tion of this textbook has been written to support two different approaches to the
undergraduate entrepreneurial finance course. The more rigorous approach chal-
lenges 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 be
omitted or covered in a descriptive (no modeling or calculations) manner. For appli-
cation, while the included capstone cases synthesize a great deal of the text’s mate-
rial, 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 mate-
rials 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

Sixth Edition
Overall changes to content and organization include:
▶ We refreshed the “From the Headlines” and replaced four of them with
new stories.
▶ We added one or more discussion questions at the end of each chapter.
▶ 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.
▶ We updated personal and corporate income tax information and discussed
recent patent legislation.
▶ We updated our treatment of the JOBS Act and crowdfunding to reflect
clarifications in released rules.
▶ We added new material on business incubators and seed accelerators.
▶ We added a discussion on business crowdsourcing and crowdfunding,
including rewards-based and equity crowdfunding.
▶ We refreshed the terminology covered in the venture investing world,
including “unicorns,” and clarified the role of “convertible notes” as
opposed to other types of “convertible debt.”

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 Preface xix

Supplements
INSTRUCTORS MANUAL WITH TEST BANK
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 Test Bank
includes true/false and multiple choice questions, as well as short answer test pro-
blems. Both the Instructor’s Manual and Test Bank are available on the text
Web site for instructors 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.

EXCEL SOLUTIONS
Excel Solutions to end-of-chapter problems requiring Excel are provided for instruc-
tors on the text Web site.

TEXT WEB SITE

The text Web site at www.cengagebrain.com 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 Ven-
ture Capital Association of Colorado who opened their professional lives and ven-
ture 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 Instruc-
tor’s Manual for earlier editions.
We recognize the moral support of the Deming Center for Entrepreneurship (Bob
Deming, and directors Dale Meyer, Denis Nock, Kathy Simon, Steve Lawrence, and
Paul Jerde). We thank the Coleman Foundation for research support for the Coral
Systems, Inc., and Spatial Technology, Inc., cases 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 Learn-
ing, including Michael Mercier, our original acquisitions editor who believed in our
book enough to publish it; Mike Reynolds, Senior Product Manager; Production
Project Manager Rajachitra Suresh; and Ted Knight at the J.L. Hahn Consulting
Group. We also thank Martha Leach for research assistance behind the “From the
Headlines” stories and for proofreading a complete version of this sixth edition.
We thank Andre Gygax, Hardjo Koerniadi, and Cody Engle who provided several
important corrections to previous materials.

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xx Preface

For their patience and insights offered during the process, we thank our
colleagues who reviewed materials for this sixth 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
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 six editions, we offer our
sincere thanks.
J. Chris Leach
Ronald W. Melicher

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
About the Authors

J. Chris Leach is Professor of Finance and the Robert H. and Beverly A. Deming
Professor in Entrepreneurship at the Leeds School of Business, University of Color-
ado 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 experi-
ence includes courses for undergraduates, MBAs, Ph.D. students, and executives.
He has been recognized as Graduate Professor of the Year and has received multi-
ple 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 Quan-
titative 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 Dem-
ing Center Venture Fund and a member of the Deming Center Board of Directors.
MBA teams Chris has advised have qualified for nine international championships of
the Venture Capital Investment Competition.
Ronald W. Melicher is Professor Emeritus of Finance in the Leeds School of Busi-
ness 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 non-credit 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.

xxi
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
xxii About the Authors

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 Finan-
cial and Quantitative Analysis, and Financial Management. He is the co-author of
Introduction to Finance: Markets, Investments, and Financial Management, Fifteenth
Edition (John Wiley & Sons, 2014).

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
 The Entrepreneurial
Environment
CHAPTER 1
1
PART

Introduction to Finance for Entrepreneurs

CHAPTER 2
Developing the Business Idea
Source: Juliann/Shutterstock.com

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
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