Republic of the Philippines

CAVITE STATE UNIVERSITY

Imus Campus
Cavite Civic Center Palico IV, Imus, Cavite
 (046) 471-66-07 / (046) 471-67-70/ (046) 686-2349
www.cvsu.edu.ph

FAMILY ENTERPRISE
MANAGEMENT
Part 4

REVIEWER FOR FINAL EXAM

CRISTAL, BABY KHAREN A.

SOURCES OF FINANCE & VENTURE
FINANCE
 Many small firms certain sources of finance are not
available due to entry barriers.
 Innovative products and business models are the
foundations of a promising startup. However, you’ll also
need a steady flow of funds, especially in the early
stages, to turn those ideas into reality.
 Funding is crucial for improving technology, hiring the
right people, and launching a comprehensive marketing
strategy to get a foothold in the market. However,
sourcing enough money to start your new venture can be
difficult.
 4 Startup Funding
Challenges and How to
Overcome Them
CHALLENGE#1
1. Creating a scalable business model
 Whether you are hoping to expand a small business
with a loan or going for a round of venture capital,
you will need a scalable business model. Investors in
particular want to fund only scalable or ready to
scale businesses. Your business model must show the
potential to increase the revenue with minimal
expenditure in the coming months or years.
HOW TO OVERCOME#1
1. Your business idea itself needs to be scalable
 This means being able to increase profits without increasing costs at
an equal (or higher) rate. Sure, it should be unique. But without
scalability, it is less likely to be investable.
2. Build a business model that works; don’t rely on using your
competitor’s model
 Your business model should support your growth goals. Staying
competitive might require you to approach from a different angle.
3. Try to outsource non-strategic aspects of your business to
minimize expenses
 For example, for a restaurant, having a stylish interior is a strategic
aspect of your business. However, having an in-house accountant
may not be the best use of funds.
CHALLENGE#2
2. Determining how much money to ask for
 Whetheryou are asking angel investors to fund
your expansion or seeking a bank loan, you must
know how much money you need. Most people
would say you should raise as much money as you
can. However, in many cases, more isn’t always
better.
HOW TO OVERCOME#2
1. Write a business plan
 It is not possible to chalk out how you are going to spend the money without having a business plan.
In fact, most investors (and zero banks) will fund your venture without a complete business plan.
2. Be specific and concrete
 When investors pay you, they expect to see how you plan to spend their money. They will expect you
to spend the funds to grow your business to its next milestone.
3. Demonstrate that your company has positive cash flow
 Calculate how much money you will need to for the necessary production, training, hiring,
marketing, and automation to create a viable financial model. Figure out where your cash flow
bottoms out and add appropriate buffer accordingly. Make sure your funding request is in-line with
your financial projections.
4. More investment isn’t always better
 More funding can equate to increased pressure to scale up your business quickly. Although it can be
helpful for healthy growth, sometimes it can prove detrimental—companies that have received huge
amounts of investment fail every day because they couldn’t manage the rapid expansion.
 The bottom line is to ask for the amount of money your business needs and can handle.
CHALLENGE#3
3. Finding the right funding option
 Asmentioned in the beginning, many new startup
funding options are available today. To increase
your chances of getting the funds, you need to
choose the most suitable funding alternative.
Sometimes, you may also need to use more than
one option to fund your startup.
HOW TO OVERCOME#3
1. Bootstrapping or self-funding
 The best (and the cheapest) option for funding your business is using your own savings
or borrow from your family and friends. Flexible investment terms and quick
availability makes it an attractive funding source.
 Your own savings and income
 Family and friends
 Credit cards
2. Bank loans
 A bank loan is also a reliable funding option for a small business or startup. You may
also be able to apply for government-subsidized bank loans or soft loans.
3. Angel investors
 Angel investors may offer more flexible investment terms compared to the venture
capital firms. They tend to invest large sums of money (but no more than $1 million) in
exchange for equity in the startup.
HOW TO OVERCOME#3
4. Venture capital
 Venture capitalists are similar to angel investors. However, they tend to invest upwards of $2
million. Being professional investors, they can provide guidance in growing your business, they’ll also
probably be interested in having a say in how your business operates.
 Most VC firms will rarely invest in small businesses such as coffee shops, bars, and proprietary stores
because they’re not built on business models that are designed for rapid growth and huge expansion.
But, if your coffee brand is trying to expand into a super chain like Starbucks, for example, they
might be keenly interested in investing.
5. Crowdfunding
 Crowdfunding can help you to reach a broad group of potential investors and possibly generate
publicity for your startup. However, crowdfunding campaigns require a significant amount of time
and planning, and your ability to achieve funding often rests on whether you already have a wide
network that you can access to ask for support. Plus, some platforms mandate that if your campaign
fails to raise the target amount, you don’t receive any funding at all.
 To succeed, you must keep your make your campaign visible, measurable, and understandable.
Having a well-established network of friends and professional contacts can increase the chances of a
successful campaign.
CHALLENGE#4
4. Spending wisely once you’re funded
 Stick to your plan
 Ifyou took investment, you’re accountable to your
investors to do what you said you would do with
their funds and to be transparent if you’re
thinking of changing course.
HOW TO OVERCOME#4
1. Spend wisely on tech
 If you haven’t assessed your technology needs already, you need to do it before spending
the funds.
 Find out what type of software and hardware upgrades are available for your business and
choose the most affordable yet feature-rich options. Technology spending should always
focus on future marketing and branding successes.
2. Keep your investors in the loop
 Chances are you decided to seek outside investment, your contract requires you to give
investors their proper return in due time. However, showing them that their money is
being put to good use will help forge a bond of trust.
3. Parting words
 Funding your startup or business idea is a tough nut to crack. Whether you are approaching
a venture capital firm or trying your luck on a crowdfunding site, you will come across
multiple hurdles while in search of funds.
Raising Capital

 Raisingcapital to launch or
expand a business is a challenge.
 Many entrepreneurs are caught in
the “credit crunch.”

Chapter 13: Sources of Funds 14

 The “Secrets” to Successful Financing

1. Choosing the right sources of capital is a decision that

will influence a company for a lifetime.
2. The money is out there; the key is knowing where to
look.
3. Raising money takes time and effort.
4. Creativity counts. Entrepreneurs have to be as creative
in their searches for capital as they are in developing
their business ideas.

Chapter 13: Sources of Funds 15

The “Secrets” to Successful Financing

5. The World Wide Web puts at entrepreneur’s fingertips

vast resources of information that can lead to
financing.
6. Be thoroughly prepared before approaching lenders and
investors.
7. Entrepreneurs should not underestimate the
importance of making sure that the “chemistry” among
themselves, their companies, and their funding sources
is a good one.
Chapter 13: Sources of Funds 16
 Layered Financing

 Entrepreneurs must cast a wide net to

capture the financing they need to
launch their businesses.
 Layering – piecing together capital
from multiple sources.

Chapter 13: Sources of Funds 17

 Three Types of Capital

Capital is any form of wealth employed to produce more

wealth for a firm.
 Fixed - used to purchase the permanent or fixed
assets of the business (e.g., buildings, land,
equipment, and others).
 Working - used to support the small company's
normal short-term operations (e.g., buy inventory,
pay bills, wages, or salaries, and others).
 Growth - used to help the small business expand or
change its primary direction.
Chapter 13: Sources of Funds 18
 Equity Capital

 Represents the personal investment of the

owner(s) in the business.
 Is called risk capital because investors assume the
risk of losing their money if the business fails.
 Does not have to be repaid with interest like a loan
does.
 Means that an entrepreneur must give up some
ownership in the company to outside investors.

Chapter 13: Sources of Funds 19

 Debt Capital

 Must be repaid with interest.

 Is carried as a liability on the company’s
balance sheet.
 Can be just as difficult to secure as
equity financing, even though sources of
debt financing are more numerous.
 Can be expensive, especially for small
companies, because of the risk/return
tradeoff.
Chapter 13: Sources of Funds 20
Six Most Common Reasons Bankers
Reject Small Business Loans
1. “Our bank doesn’t make small business loans.”
Cure: Before applying for a loan, research banks
to find out which ones seek the type of loan you
need.
2. “I don’t know enough about you or your
business.”
Cure: Develop a detailed business plan to present
to the banker.
Chapter 13: Sources of Funds 21
Six Most Common Reasons Bankers
Reject Small Business Loans (continued)

3. “You haven’t told me why you need the money.”

Cure: Your business plan should explain how
much money you need and how you plan to use
it.
4. “Your numbers don’t support your loan request.”
Cure: Include a cash flow forecast in your
business plan.
Chapter 13: Sources of Funds 22
Six Most Common Reasons Bankers
Reject Small Business Loans
5. “You don’t have enough collateral.”
Cure: Be prepared to pledge your company’s assets
– and perhaps your personal assets – as collateral
for the loan.
6. “Your business does not support the loan on its
own.”
Cure: Be prepared to provide a personal guarantee
on the loan.
Chapter 13: Sources of Funds 23
 Issues for entrepreneurs and small firms

Finance gaps:
Finance gaps arise because of mismatches between
supply and demand. The existence of finance gap will
arise because demand from small firms is greater than the
willingness of financial institutions to supply the finance
at current market conditions. For finance such as bank
loans, these gaps may be termed credit rationing.
 When does a business need finance?
What is finance?
Money used to purchase things the business
needs or want.
What is a source of finance?
It is a method of getting hold of the money
you need. Most of the time you have to pay it
back and it can be expensive.
When might a business need finance?
1. When it is starting – 2. When it needs to 3. When it wants to
up. buy equipment or expand the business.
premises.
ISSUES IN BUSINESS START-UP
The business start-up process can be broken
down into a number of stages:

1. the formulation of the idea;

2. opportunity recognition;
3. pre-start planning and preparation including
pilot testing;
4. entry into entrepreneurship;
5. launch and subsequent development.
IDEA FORMULATION
The formation of business ideas will be affected by a
nascent entrepreneur’s past experience, training, education
and skill development. This accumulation of knowledge, skills
and experience is termed human capital, a concept used
particularly in the context of labour markets by economists
following pioneering work of Gary Becker. Formulation of
business ideas may be influenced by work experience, by
individual training and recognition that a particular product or
process ‘could be done better’. The entrepreneurs in this case
developed an innovative new product after identifying a
problem and realizing that they could provide a better
solution. The majority of new business ventures are known to
be in sectors or industries where the new business owners have
had previous experience.
 For younger entrepreneurs, who will have limited human
capital, it can be argued that education can have an
important role in providing a conducive environment for idea
formulation. It has been suggested that younger
entrepreneurs (below 30) are under-represented in
entrepreneurship because of limited personal capital and
limited access to finance. The limited experience (or human
capital) that potential entrepreneurs in this age range can
draw upon will limit the scope of opportunities for developing
ideas. Youth, however, can also be an advantage. Young
entrepreneurs may be more willing to test different ideas and
bring a different perspective to trading opportunities. Idea
formulation here will be affected by educational experience
and early training. It is arguable that education should
provide scenarios that encourage creativity, lateral thinking
and problem-solving.
OPPORTUNITY RECOGNITION
Converting an idea into a business opportunity is the key
element of the process of business creation. Moving from the
idea stage to the exploitation of the opportunity requires many
elements to be in place. The economic environment has to be
conducive, the culture must be appropriate for risk-taking and
the nascent entrepreneur must have the confidence to take an
idea suggested by opportunities through to fulfilment.
Opportunities are generated by change. Change may be
political, economic, social, demographic or technical. For
example, economic change may be characterized by a period of
economic growth and expanding demand, which may create
opportunities for new business ideas that take advantage of
increased affluence, leisure time and spending power of the
population.
 Cultural attitudes to risk and failure can also
impinge at this stage. Other developments to
provide more role models and ‘surface’
examples of underrepresented groups have also
been made in the UK, for instance with
successful black female entrepreneurs. Role
models remove one of the stumbling blocks in
the process of new business creation – they help
to identify with success and encourage the next
step of developing the business idea and
identifying the right opportunity.
PRE-START PLANNING AND PREPARATION
A further combination of factors will be important to the
eventual success of new business creation. Among the most
important are research, obtaining information (to determine entry
strategy) and raising sufficient finance. For obvious reasons, little
research has been done on new business ventures that
subsequently fail, but it is commonly asserted that one of the
main reasons for the noted high failure rates of such new ventures
is under-capitalization.
The length and time of the search activity will depend on the
opportunity and the characteristics of the new venture. If formal
venture capital is required, raising such finance may take some
time because of due diligence procedures (12 months), as well as
research and preparation. However, for certain businesses, such as
Internet startups, such time periods may be compressed into a
matter of weeks or even days.
 Preparation means finding the right management team with
complementary skills. Evidence on team starts suggests that they
have advantages over individual entrepreneurs because of the
match of skills brought together within the team. However, the
evidence is far from conclusive. Oakey concluded that, with new
technology small firms, the best performers were those with a
single founder. Teams starts have been the focus of policy ‘best
practice’, but it must be remembered that it is important to get
the right ‘mix’ of skills in the proposed entrepreneurial team.
Involving a friend who has been privy to the development of a new
business idea may not work unless each person involved is able to
bring knowledge or skill that is required in the business. Our
research with entrepreneurs that had appointed non-executive
directors demonstrated that the matching process was crucial to
the success of the relationship and impact on the growth and
performance of the firm.
ENTRY AND LAUNCH
Timing of entry is important. While advantages exist to first
movers, moving too early can result in insufficient customers to
make heavy investment worth. Developing the entry strategy is an
important part of the launch of the new business; attention will
need to be paid to marketing, a factor that is sometimes
neglected by a technology based entrepreneur. The important
relationship between marketing and entrepreneurship has been
noted by a number of writers, but the concept of the development
of the idea and formulating strategies has been explored only by a
few writers. The issue of developing entry and early stage strategy
is illustrated with a number of cases in this book and, later in this
chapter, we also suggest an alternative paradigm for high
technology-based firms based on some of our case study evidence.
 The role of serendipity is often an underplayed factor in the
business creation process. To the casual observer, the entrepreneurial
and marketing strategies developed in the case study firms may
appear to contain a strong element of chance, yet precursor
developments can be highly important as preparation for exploitation
of the business opportunity. With high technology-based cases, non-
high technology development beforehand, in different cases, was an
important preparation for the development of entrepreneurial and
marketing strategies concerned with the technology-based ventures.
The role of serendipity has scarcely been acknowledged, let alone
researched, in entrepreneurial development and strategies, yet our
evidence demonstrates that chance is only one element; the
entrepreneur must be prepared to exploit opportunities, recognize
and take advantage of them. The role of the non-technology phase of
development lies in learning with customers, and with suppliers and
with bank managers, and in gaining general business experience.
POST-ENTRY DEVELOPMENT
Early stage development is a crucial phase for the novice
entrepreneur. The entrepreneur is naive and must learn quickly
to understand customers, suppliers, cash flow and dealing with
other stakeholders in the new business, which may include the
bank manager or other financiers. For businesses in a team
start, it is only the post-entry stage which leads to the testing
of relationships between individuals, confirmation of their role
and the value that each of them can bring. One of the most
important issues that a new business faces is credibility. Being
new, especially if markets are competitive, means that
customers have to take quality on trust, that suppliers will be
unwilling to give trade credit and that banks will unwilling to
extend significant credit facilities.
 One strategy that can overcome this lack of credibility is
to include an experienced entrepreneur as a part-time
director in early stage development. From our research with
small companies that employed nonexecutive directors, we
isolated a sub-sample of start-up companies only; in this
subsample the most important reason for employing a non-
executive director was to achieve credibility. Alternatively,
the use of an experienced entrepreneur as a mentor may
also lead to introductions to key customers, to achieving
credibility with suppliers, and to bringing invaluable
experience that overcomes the relative naivety of the start-
up entrepreneur. A discussion of the value of mentoring
support is given later in this chapter.
In addition to achieving credibility, the establishment
of early stage networks can be important in the
development of new ventures. Part of the reason for
bringing in experienced entrepreneurs will be to
access their extensive networks of contacts. Where
this is not possible, new entrepreneurs need to
establish their own network of contacts that may help
them to break into new markets during the crucial
early stage development of the new business. There is
now an extensive literature on networks; as an
example, Shaw has provided evidence of the
importance of networks in a competitive sector.
 God bless…

You ROCKS! 

-Ma’am Baby