Please read the study guide. Please watch out for Spelling and grammar error. Please use the APA 7th edition. Book Reference:Nec

BUS 8303, Entrepreneurship and Innovative Business Development 1

Course Learning Outcomes for Unit VII Upon completion of this unit, students should be able to:

5. Differentiate innovative business strategies. 5.1 Describe funding strategies. 5.2 Differentiate innovative bootstrapping choices and traditional financing strategies.

6. Evaluate financial implications involved with organizational growth. 6.1 Contrast equity financing and debt financing.

7. Describe legal aspects of business growth.

7.1 Explain how decisions have financial consequences.

Course/Unit Learning Outcomes

Learning Activity

5.1

Unit Lesson Chapter 12 Chapter 13 Article: “How Do Entrepreneurs Obtain Financing? An Evaluation of Available

Options and How They Fit into the Current Entrepreneurial Ecosystem”

Unit VII Case Study

5.2 Unit Lesson Chapter 12 Unit VII Case Study

6.1

Unit Lesson Chapter 12 Chapter 13 Unit VII Case Study

7.1

Unit Lesson Chapter 13 Student Resource: Defining Equity Financing Unit VII Case Study

Required Unit Resources Chapter 12: Bootstrapping and Crowdfunding for Resources Chapter 13: Financing for Startups In order to access the following resources, click the links below. Wright, F. (2017). How do entrepreneurs obtain financing? An evaluation of available options and how they fit

into the current entrepreneurial ecosystem. Journal of Business & Finance Librarianship, 22(3/4), 190–200. https://doi-org.libraryresources.columbiasouthern.edu/10.1080/08963568.2017.1372011

UNIT VII STUDY GUIDE

Venture Growth and Financial Implications

BUS 8303, Entrepreneurship and Innovative Business Development 2

UNIT x STUDY GUIDE

Title

Navigate to the Video and Multimedia area in Student Resources for Chapter 13 of the eTextbook to view the item listed below.

• Defining Equity Financing

Unit Lesson

Funding Choices Bootstrapping is the idea of starting a new venture without funds or looking for approaches that support the resource needs of the new venture with limited funds. Examples of bootstrapping include working out of personal space like a home, apartment, or garage or using resources that are not used to their full capacity by the owner of the resources. An example is using a grade school kitchen on weekends to build a food-related business. Bootstrapping requires creativity in thinking about how to gain access to resources when personal funds are limited. Crowdfunding and crowdsourcing can also provide access to resources. Other than bootstrapping, there are two primary approaches to funding your entrepreneurial venture: debt financing and equity financing.

Debt Financing Debt financing relates to acquiring debt (borrowing money) with a payback timeline established by the lender. This could be a bank loan, a loan from a family member, or some other source of borrowed funds. Debt financing, in most cases, requires an established repayment plan, payment of interest, collateral, and meeting the conditions for receiving the loan. If receiving a loan from a family member, these terms might be more lenient, although it is a good idea to create a formal document to avoid misunderstandings between family members. From an entrepreneurial perspective, there are a few negatives related to debt financing. If borrowing from a financial institution, the bank will want collateral. Since your venture will most likely not have a track record of generating an income and banks have a fiduciary responsibility to protect their depositors’ funds (a bank’s business model is to accept deposits and loan those deposited funds out to other individuals), a bank is risk- averse. This means that if the bank loans the entrepreneur money, the loan is based on traditional terms including treating the entrepreneur as an individual who wants to borrow money, rather than approaching the loan as a loan to the business. The bank will typically not want to become involved in the new venture as the new venture does not have a performance track recourse. Banks prefer low-risk loans and will consider the borrower’s character, credit score, repayment ability, and the quality of the collateral. The repayment plan is based on the entrepreneur’s established income. Many entrepreneurs continue their traditional employment while working on their new venture. This traditional employment and related income position are what the bank will consider regarding your ability to repay the loan. The repayment plan means these repayment funds are not available to invest in your new venture, although the borrowed funds are used in building the new

BUS 8303, Entrepreneurship and Innovative Business Development 3

UNIT x STUDY GUIDE

Title

venture. Taking these regular payments that are owed to the bank out of your monthly cash flow is a financial consequence of the decision to use debt funding; this decision can be a burden to the success of the venture. Another negative is the assignment of the asset as collateral for the loan. Careful consideration is needed to foresee if the collateral could be better used in another manner and contemplate the worst-case scenario that the collateral is reposed in the event of failure to repay the loan. This financial decision's consequence could potentially mean the loss of your home if the home was mortgaged to borrow money to support the entrepreneurial start-up. A third negative financial consequence relates to the payment of interest, as the money paid in interest is also money that cannot be used in starting the venture. If borrowing funds from a family member, collateral and interest might be disregarded, although the family member might require these conditions. Specifically identifying the terms and conditions of the transaction is important. Let’s say the venture is wildly successful, and the family member that loaned you money now says the loan was really an equity investment and now the family member wants an equity share in the profits. This means that the family member wants percent ownership in the new venture rather than the payback of the originally loaned money. Consider if the opposite happens, where the venture is a complete failure, and you want to pay the family member back with monthly payments, but the family member wants repayment at the news that the venture is unsuccessful. In either situation, the financial consequences of these decisions can be daunting. Clearly stating the terms and conditions that both parties agree to is important to avoid family conflict. Another consideration is how other family members understand the transaction. Creating a formal document alleviates tensions within a family and avoids concerns of favoritism or other emotions and interpretations of the transaction.

Equity Financing Equity financing is when someone invests funds into the venture in return for an equity stake in the venture. An equity stake means that the person investing the funds is now part-owner of the venture—the person has an equity stake in the venture. The terms for this arrangement should also be formally established. The negative financial consequences connected with debt financing are removed when using equity financing. There are no collateral, interest, or repayment terms. Instead, the investor receives payment through a return on investment (ROI) either from future equity financing rounds, such as the entry of venture capitalists (VCs), or when payment is received when the venture is sold to another company. VCs step in to fund the venture at larger dollar amounts, generally paying off the original investor based on the valuation of the venture at the time the VCs purchase equity in the venture. The expectation from an angel investor’s perspective is to invest in the venture and realize a significant ROI within a short timeline. A common mistake that new entrepreneurs make is to accept equity funding from the first person who offers money. Instead, taking the time to find the right person can provide greater benefits than the invested dollars. Let’s first explain what an angel investor is, then address the benefits beyond money that angel investors provide to the funded entrepreneur. An equity investor in an entrepreneurial venture is called an angel investor. The name angel investor comes from the world of financing theatrical productions in the 1800s. The cost to produce a theatrical performance was significant and risky as the production could be well received and, therefore, financially successful or poorly received, thus amassing debt. Angel investors were the people who were willing to invest in the production with the hope that the production would be successful, and the angel investor would receive a sizable return on their invested funds. Due to financial risks, traditional lenders were unwilling to loan money to the theatrical group to produce the play. In the entrepreneurial world, the name angel investor represents a wealthy individual who is interested and willing to invest in the entrepreneur and the venture. Angel investors are typically people who have previously acted as an entrepreneur, harvesting their venture for a sizable return, and now have an interest in helping other entrepreneurs. With this previous experience as an entrepreneur, the knowledge gained through the angel investor's experiences becomes a significant resource and benefit to the funded entrepreneur. This is why it is so important for the entrepreneur to take the time to find the right angel investor. Finding an angel investor who has the experience that transfers to the new entrepreneur’s needs provides a plethora of benefits such as making contacts with other people who can provide guidance and support through accessing the angel investor’s network and making better decisions based on the angel investor’s

BUS 8303, Entrepreneurship and Innovative Business Development 4

UNIT x STUDY GUIDE

Title

experience and knowledge. Finding the right angel investor is a bit easier than it was in the past as most communities now have events where entrepreneurs can meet and present their ideas to angel investors. When the venture grows to the point that larger sums of equity funding are needed, that is the point at which venture capitalists become involved in adding larger equity dollar amounts to support the venture’s growth. The angel investor can also guide this process; another example of how an angel investor’s knowledge can be worth more than the invested dollars.

Grant Funding A third possibility is grant funding. Grant funding is neither a debt funding method nor an equity funding method because the grant is not paid back unless the terms of the grant are violated nor is any equity in the venture assigned to the grantor. Grant funding requires searching for an appropriate grant, applying for the grant in a competitive process and, if receiving the grant, complying with the conditions of the grant. Complying with the conditions of the grant means that not only are the conditions of the grant fulfilled correctly but tracking these conditions is also required. The process of searching for an appropriate grant takes time, as does the documentation required as part of the conditions in the grant application and reporting process. Some companies conduct the search for an appropriate grant and provide assistance in completing the application process on a fee-based payment system, a possible option if the venture has components that might fit within a grant-funded situation, especially if the venture is a social benefit-based idea.

Financial Knowledge Understanding basic financial statements is important in managing the new venture, especially the cash flow statement. Cash is king is a common phrase in the entrepreneurial world because if the entrepreneur runs out of cash, no matter how great the potential is for this venture, the potential for success is compromised. Keeping a close eye on the cash position of the venture is essential for the success and viability of the venture. In writing the business plan, financial projections are created to assist in thinking through various decisions. For example, how much of an increase in production costs can the venture sustain, and how would a price increase impact the projected cash flow statement? This is just one example of why understanding the financial statements and related decisions are essential for the success of the venture.

BUS 8303, Entrepreneurship and Innovative Business Development 5

UNIT x STUDY GUIDE

Title

All financial decisions have consequences; some consequences are good, other financial decisions can be challenging to recover from. Considering the consequences of these decisions is well worth the time and should be reviewed before starting the venture. The right financial decisions can result in supporting the successful creation of the entrepreneurial start-up.

Interactive Activity

In order to check your understanding of concepts from this unit, complete the Unit VII Knowledge Check activity. Unit VII Knowledge Check PDF version of the Unit VII Knowledge Check Note: Be sure to maximize your internet browser so that you can view each individual lesson on a full screen, ensuring that all content is made visible. Remember, this is a nongraded activity.

BUS 8303, Entrepreneurship and Innovative Business Development 6

UNIT x STUDY GUIDE

Title

Suggested Unit Resources Supplement A: Financial Statements and Projections for Startups In order to access the following resources, click the links below. The article below provides an overview of innovative approaches for entrepreneurs seeking financial support. Bonini, S., Capizzi, V., & Cumming, D. (2019). Emerging trends in entrepreneurial finance. Venture Capital,

21(2/3), 133–136. https://doi- org.libraryresources.columbiasouthern.edu/10.1080/13691066.2019.1607167

The following article includes information on early-stage finance resources for entrepreneurial ventures including incubators, accelerators, science and technology parks, and other options available to support the entrepreneur’s needs for start-up funds. Bonini, S., & Capizzi, V. (2019). The role of venture capital in the emerging entrepreneurial finance

ecosystem: Future threats and opportunities. Venture Capital, 21(2/3), 137–175. https://doi- org.libraryresources.columbiasouthern.edu/10.1080/13691066.2019.1608697

The following article includes information about online crowdfunding and the most success factors for funded projects through Kickstarter.com. Kromidha, E., & Robson, P. (2016). Social identity and signalling success factors in online crowdfunding.

Entrepreneurship & Regional Development, 28(9/10), 605–629. https://doi- org.libraryresources.columbiasouthern.edu/10.1080/08985626.2016.1198425

Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. In order to access the following resources, click the links below. Utilize the following Chapter 12 Flashcards and Chapter 13 Flashcards to review terminology from the eTextbook.