Entrepreneurial Finance

by Leach, J. Chris; Melicher, Ronald W.

• ISBN13: 9780324289237
• ISBN10: 0324289235
• Edition: 2nd
• Format: Hardcover
• Copyright: 2005-04-11
• Publisher: South-Western College Pub

Summary

This book applies tools and techniques of corporate finance to the entrepreneurial venture. It closely follows a ?life-cycle of the firm? approach, and does so in a very accessible and student-friendly way. The text introduces the theories, knowledge, and financial tools needed by an entrepreneur in starting, building, and finally harvesting a successful venture. The book focuses on sound financial management practices, how and where to obtain the financial capital necessary to run and grow the venture, and how and when to interact with the financial institutions and regulatory agencies central to financing ventures as they grow and ultimately look for liquidity for their investors.

Table of Contents

Preface	x
Part 1 Background and Environment
Introduction and Overview
Entrepreneurship Fundamentals	4	(3)
Sources of Entrepreneurial Opportunities	7	(3)
The Internet Economy and E-Commerce	10	(1)
Principles of Entrepreneurial Finance	11	(6)
Role of Entrepreneurial Finance	17	(1)
The Successful Venture Life Cycle	18	(3)
Financing Through the Venture Life Cycle	21	(5)
Life Cycle Approach for Teaching Entrepreneurial Finance	26	(14)
Summary	29	(11)
From the Idea to the Business Plan
To Be Successful, You Must Have a Sound Business Model	40	(2)
Learn from the Best Practices of Successful Entrepreneurial Ventures	42	(3)
Time-to-Market and Other Timing Implications	45	(1)
Screening Venture Opportunities	46	(15)
Applying the Vos Indicator™: An Example	61	(4)
Key Elements of a Business Plan	65	(18)
Summary	72	(11)
Part 2 Organizing and Operating the Venture
Organizing and Financing a New Venture
Progressing Through the Venture Life Cycle	83	(1)
Forms of Business Organization	83	(10)
Choosing the Form of Organization: Tax and Other Considerations	93	(4)
Intellectual Property	97	(7)
Seed and Startup Financing Sources	104	(15)
Summary	110	(9)
Measuring Financial Performance
Business Assets, Liabilities, and Owners' Equity	119	(3)
Sales, Expenses, and Profits	122	(2)
Internal Operating Schedules	124	(4)
Statement of Cash Flows	128	(2)
Operating Breakeven Analyses	130	(18)
Summary	139	(9)
Evaluating Financial Performance
Using Financial Ratios	148	(2)
Cash Burn Rates and Liquidity Ratios	150	(5)
Conversion Period Ratios	155	(5)
Leverage Ratios	160	(5)
Profitability and Efficiency Ratios	165	(5)
Industry Comparable Ratio Analysis	170	(2)
A Hitchhiker's Guide to Financial Analysis	172	(14)
Summary	174	(12)
Part 3 Planning for the Future
Financial Planning: Short Term and Long Term
Financial Planning Throughout the Venture's Life Cycle	186	(1)
Surviving in the Short Run	187	(2)
Short-Term Cash-Planning Tools	189	(5)
Projected Monthly Financial Statements	194	(2)
Cash Planning from a Projected Monthly Balance Sheet	196	(1)
Beyond Survival: Systematic Forecasting	197	(7)
Estimating Sustainable Sales Growth Rates	204	(3)
Estimating Additional Financing Needed to Support Growth	207	(4)
Percent-of-Sales Projected Financial Statements	211	(16)
Summary	218	(9)
Types and Costs of Financial Capital
Implicit and Explicit Financial Capital Costs	227	(1)
Financial Markets	227	(2)
Determining the Cost of Debt Capital	229	(8)
What Is Investment Risk?	237	(6)
Estimating the Cost of Equity Capital	243	(5)
Weighted Average Cost of Capital	248	(12)
Summary	251	(9)
Securities Law Fundamentals
Review of Sources of Venture Financing	260	(1)
Overview of Federal and State Securities Laws	261	(3)
Overview of Some Key Terms of the Securities Act of 1933	264	(3)
Registration of Securities Under the Securities Act of 1933	267	(3)
Security Exemptions from Registration Under the 1933 Act	270	(2)
Transaction Exemptions from Registration Under the 1933 Act	272	(2)
Sec's Regulation D: Safe-Harbor Exemptions	274	(15)
Other Forms of Registration Exemptions	289	(1)
Partial and Full Registration Breaks for Small Business	290	(14)
Summary	292	(12)
Part 4 Creating and Recognizing Venture Value
The Creation and Calibration of Value
What Is a Venture Worth?	304	(3)
Basic Mechanics of Valuation: Mixing Vision and Reality	307	(6)
Calculating the Cash Flow for Valuing Venture Equity	313	(2)
Equity Valuation Cash Flows Versus Accounting Cash Flows	315	(3)
Equity Valuation: The Maximum Dividend Method	318	(5)
Equity Valuation: The Pseudo Dividend Method	323	(4)
Equity Valuation: The Delayed Dividend Approximation	327	(25)
Summary	333	(19)
Venture Capital Valuation Methods
Asset and Liability Valuation: A Key to VC Shortcuts	352	(1)
Venture Capital Shortcuts on the Equity Method	353	(3)
A Comparison to the Delayed Dividend Method	356	(1)
Earnings Multipliers and Discounted Dividends	357	(2)
Adjusting the VC Shortcut for Multiple Rounds	359	(1)
Adjusting the VC Shortcut for Incentive Ownership	360	(2)
Adjusting the VC Shortcut for Payments to Senior Security Holders	362	(2)
Scenario Methods	364	(26)
Summary	370	(20)
Part 5 Structuring Financing for the Growing Venture
Security Structure and Enterprise Value
Common Stock (Common Equity)	390	(1)
Preferred Stock (Preferred Equity)	391	(6)
Convertible Debt	397	(1)
Warrants and Options	398	(6)
Other Concerns About Security Design	404	(1)
Valuing Ventures with Complex Capital Structures	405	(20)
Summary	416	(9)
Professional Venture Capital
Historical Characterization of Professional Venture Capital	425	(4)
Professional Venture Investing Cycle: Overview	429	(1)
Determining (Next) Fund Objectives and Policies	430	(1)
Organizing the New Fund	431	(3)
Soliciting Investments in the New Fund	434	(2)
Obtaining Commitments for a Series of Capital Calls	436	(1)
Conducting Due Diligence and Actively Investing	436	(8)
Arranging Harvest or Liquidation	444	(1)
Distributing Cash and Securities Proceeds	444	(5)
Summary	445	(4)
Other Financing Alternatives
Facilitators, Consultants, and Intermediaries	449	(1)
Commercial and Venture Bank Lending	450	(2)
Understanding Why You May Not Get Debt Financing	452	(2)
Credit Cards	454	(1)
Small Business Administration Programs	455	(15)
Other Government Financing Programs	470	(8)
Receivables Lending and Factoring	478	(1)
Debt, Debt Substitutes, and Direct Offerings	479	(9)
Summary	481	(7)
Part 6 Exit and Turnaround Strategies
Harvesting the Business Venture Investment
Venture Operating and Financial Decisions Revisited	488	(1)
Planning an Exit Strategy	489	(1)
Systematic Liquidation	490	(1)
Outright Sale	491	(8)
Going Public	499	(19)
Summary	510	(8)
Financial Distress: Turnaround Opportunity or Liquidation
Venture Operating and Financing Overview	518	(1)
What Is Financial Distress?	519	(4)
Resolving Financial Distress	523	(8)
Private Workouts and Liquidations	531	(2)
Federal Bankruptcy Law	533	(18)
Summary	544	(7)
Part 7 Capstone Cases
Case 1 Coral Systems, Inc.	551	(28)
Case 2 Spatial Technology, Inc	579	(25)
Glossary	604	(9)
Index	613