Financing a New Business to Business Entrepreneurial Venture

Table of Contents1.Introduction12.Financing an Entrepreneurial Venture12.1.Venture Capitalists12.2.Hedge Funds22.3.Private Equity Firms32.4.Alternative Investment Market32.5.Angel investors32.6.Corporate Venture Investing42.7.Crowd Funding53.Choice of Funding Source64.Conclusion7References8

Introduction The establishment of entrepreneurial firms in a country plays a vital role the development of country. The economic activity is accelerated by the establishment of these firms as these firms produce employment opportunities and make an important contribution in GDP of the country. Currently, we intend to start a business to business entrepreneurial firm. We are planning to establish a freight forwarding company. This company will provide mobility solution to business. The company will be operation in UK. Currently, company will focus on some specific sectors but later on we may target the other sectors. Financing an Entrepreneurial Venture The new entrepreneurial ventures face the major issue of financing the business. The access to capital is crucial for the success of entrepreneurial venture. The entrepreneurial ventures are not profitable and they do not have any tangible assets. Therefore, accessing the option of debt financing is possible for them. Therefore, entrepreneurs are required to look at other options for financing the business. Presently, we are focusing here on four funding options for our entrepreneurial venture i.e. Venture capital, angel investors, corporate investors and crowd financing. The former three options are the traditional means of financing and many of the previous entrepreneurial ventures have used these options. Crow financing is relatively new financing option. Currently, we are especially focusing on this option. However, the other financing options are also explained here. The availability of these multiple options for financing gives rise to the question that if the funding source really matters for the entrepreneurial venture. This question is very much similar to the questions raise in the literature of corporate finance by the previous researchers. Many of the previous researchers have focused on evaluating the importance of debt financing for the business. The importance of other funding sources has also been evaluated by the previous studies. The funding sources available to new entrepreneurial firms are being discussed here. Venture CapitalistsVenture capital is a type of equity financing. Entrepreneurial companies contact venture capitalists firms for financing on large scale as these companies provide healthy capital to entrepreneurs who do not have the access to debt from banks and other financing options. The venture capitalist focuses new companies who have growth perspectives. These companies take high risk in quest of higher returns. The investment horizon of these firms is usually longs as compared to other traditional financing options. Therefore, these companies actively monitor the activities of the companies in which they invest (Casmatta, 2000).Venture capitalists play a very active role in the firm in which they make the investment. They provide the mentoring services and strategic advice to these firms. Moreover, these firms help to design the most innovative products that are likely to grab the attention of a large number of market participants. The venture capitalists also help the company to certify its value in the market. They play an active role in governance of the firm. Venture capitalists can be considered as the active investors of the company. An entrepreneurial firm may generate a large amount of capital in short span of time. However, there are some disadvantages associated with the option of venture capitalist financing. The venture capitalists have raised their standards after the dot come bubble and default of many other companies that were financed by the venture capitalists. The account and legal system is also a constraint in securing a venture capitalist deal. The autonomy of the firm is also affected because of the active involvement of venture capitalist all segments of the business. Ownership and decision making is shared with venture capitalist. The decisions like recruitment of staff, salary of employees and formulation of management team cannot be taken independently. The scrutiny of the business by venture capitalist is also a bit strict. Therefore, an entrepreneur may not see it as favourable option if sharing of ownership is undesirable. Hedge Funds Hedge fund is source of funding based on pooled investment. A professional firm having expertise of managing pooled investment administers hedge funds. Such company is usually a limited liability company or limited partnership company. Hedge funds are different from the mutual funds as they are regulated by the regulators. These funds usually make the investment in liquid funds. Only some sophisticated investors can invest in hedge funds and they are not offered to general public. These funds avoid the regulatory oversight. The licensing requirement is bypassed by them as required by other investment companies (Lins et al., 2008). Private Equity Firms A private equity firm operates a collective investment. This investment is used in various equity securities. These firms have a limited partnership. The time period for these partnerships is usually 10 years. Investment professionals raise and manage these funds. These firms make direct investment in private companies. These companies are likely to provide a large amount of capital but the time period is a real issue with this investment. The private equity firms may withdraw their invested amount after a certain period of time (Long & Bryant, 2007). Alternative Investment Market Alternative Investment Market (AIM) is a sub market of LSE (London Stock Exchange). This market allows smaller companies to float shares in the market with lax regulations as compared to the main market. This market was launched on June 19, 1995. The market has helped many of the smaller companies to raise their equities for supporting their growth. However, a new company may face difficulties while getting a good response from the market (Warwick-Ching, 2007). Angel investorsAngel investors are another lucrative source of financing for the entrepreneurs. Angel investors are the individuals who invest their funs in small companies. These individuals invest the seed capital. This capital is required at the early stages of the company. The investment amount is usually small. The public disclosure of transactions made by the angel investors is not required. These angel investors are mostly retired entrepreneurs. The purpose of their investments is not the monetary return only. They are also interested in growth of entrepreneurial culture in the country and economic growth of the country. There is no defined range for the angel investors and it may vary from investor to investor. Angel investments are private transactions that are not subject to any public disclosure. Moreover, there is a lack of institutional infrastructure that supports the market of angel investors (Wong, 2002). There are many advantages associated with angel funding option. As explained earlier, angel investors are former entrepreneurs so they can give management advice to the company and also provide important contact that can be useful in running the business operations. There is not interest payment associated with these funds like funds taken from the banks. The company is not required to make any monthly payments to these investors. The scrutiny by the angel investors stipulates the firm to operate in a disciplined manner. There is no need of any collateral. The new business may make a flexible business agreement with these angel investors. There are some disadvantages as well associated with angel investors. The most important is the amount of capital generated from these angel investors. These investors can only provide a limited amount of capital. Moreover, if company required additional capital at a later stage, it cannot be raised from these investors. The decision making will not be autonomous in case of angel investors as well. Angel investors may ask to hire highly skilled professional to run the business. These professional may demand higher salaries that can increase the cost of company. Moreover, it may become a difficult task for the company to locate these angel investors. Corporate Venture InvestingAn entrepreneur may contact already established corporations for funding. These corporations can finance start up companies in various settings. They can make direct investment through corporate venture funds, independent corporate funds can be used for indirect investment or they can formulate a strategic alliance with the new company. Mostly, these corporations can make strategic alliance with new firms. There are two most prominent reasons for this. There can be structural problems in the plan of new business and conflicts may also arise between the two parties that can affect the performance of the new company. The long term relationship cannot be maintained in case of these two problems (Denis, 2004). The corporate ventures can be useful in terms that capital can be generated quickly. The corporation has its own share in the company so it also contributes towards the success of the business. The corporation is also well aware of the market trends and the experience of market is shared with the new company. Moreover, the association of a big company helps the new entrant to earn a good name in the market. The most prominent disadvantage can be the conflict of interest. The partnership may come to an end in case of such a conflict. The possibility of conflict makes this option most unattractive mean of financing. This conflict may arise in the line of business or in mission alignment. However, the decisions may not be autonomous in this options as well like the previously explained two means of financing. Crowd Funding Crowd funding is relatively a new mean of financing a start up. The funding resources can be pooled from public in this way of financing. The company meet their fundraising target with the help of public. The investment of any amount can be made by an individual member in this mean of financing. Usually, political campaigns and social service campaigns are funded by this type of financing. Sometimes start up business are also financed by this campaign. There are number of participants involved in this type of financing. These participants include the people or organization who have generated the idea of the business, the stakeholders of the projects, the beneficiaries of the project and. A platform is provided by an organization that brings together the initiator of the new business idea and the crowd interested to provide finances. There are four prominent types of crown funding. These types are being explained below: i. Reward Based Crowd Funding: This type of funding is used for various purposes like development of software, scientific research, civic projects, promotion of motion picture and development of inventions etc. ii. Equity Based Crowd Funding: People make collective efforts in this type of crowd funding to support the efforts of people and organizations who have initiated a project by providing them funds in form of equity. iii. Donation Based Crowd Funding: People raise money for their personal matters like finances to cover healthcare costs or to support the social causes. iv. Credit Based Crowd Funding: This type of funding is supported by some lending club. The borrowers submit their application to lending club mentioned their funding requirements. These requirements are matched with the pool of investors who show their willingness to accept the credit terms. Lending clubs are rapidly getting popularity. The crowd funding process is controlled by the inputs of the individuals. These inputs ultimately affect the value of the finances offered by the process. Every individual who is involved in this crowd funding is agent of offering. He/she selects the most appropriate projects and also supports it. The individuals often play the role of donors who are very much oriented towards the provision of social projects. These individuals may also become the shareholders. These individual distribute the information about the projects to which they are supporting within their social networks and communities. The people who provide finances also become a source of marketing of the organization. They discuss the project within their network. They also receive the feedback from the people and convey the same to organization. The project may earn a good reputation in the market (Bell, 2011). Crowd funding is very useful mean of getting finance when the use of traditional financing resources is not possible. The enterprise will be very much autonomous in decision making in this type of financing. The financer will also become the customers of the enterprise, so in this way the enterprise will establish a well market share within a short time. There are some problems associated with crowd funding. If the project fails to meet the defined goals within the stipulated time frame, the reputation of enterprise will be badly hurt. In this situation, the people who were previously acting as a source of marketing will spread the negative word of mouth. The company will be in great trouble in this situation. The excessive focus on a certain group of people for crowd funding will exhaust the donor. The investment decisions are based on emotions in this funding and not necessarily on a logical analysis. Choice of Funding SourceThe decision of choosing an appropriate funding source is very important. The enterprise is required to evaluate the pros and cons of each of funding source before making the selection of appropriate mean of funding. The potential benefits and disadvantages should be thoroughly examined keeping in view the nature of the business and market. Keeping in view the nature of currently propose business i.e. a business to business freight forward company, the venture capital seems to be the most appropriate source of financing. A freight forward company requires a health capital for start up. This amount cannot be generated through angel investors. The option of crowd funding will also not serve the business as it is a purely profit oriented business and no social services are involved in it. Moreover, the corporate venture investing is also being avoided here because of the chances of conflict with the corporation that may result into the closure of newly developed firm. The option of venture capital will not only generate a good amount of capital rapidly, but it will also help the company to penetrate in the market. The venture capital will guide the company to focus on the most beneficial market. The necessary training can also be obtained from venture capital. The knowledge of market is very important in success of every transport business. This knowledge can be obtained more efficiently with the help of venture capital. ConclusionA company may face all of the above financing options but choice of the most appropriate financing source is quite tricky decision for an organization in the face of market uncertainty and various limitations associated with these financing sources. The business should evaluate that what are the financing needs of the company and what will be the implications of various financing resources on the future operations of the business. The cost and benefit analysis should be performed thoroughly.

References Bell, M., 2011. Crowd-sourcing a brand. The Washington Post, 12 March.Casmatta, C., 2000. Financing and advising: optimal financial contracts with venture capitalists. Working Paper. Univesite de Toulouse.Denis, D.J., 2004. Entrepreneurial finance: an overview of the issues and evidence. Journal of Corporate Finance, 10, pp.301-26.Gilson, R. & Schizer, D., 2002. Understanding venture capital structure: a tax explanation for convertible preferred stock. Working Paper. Stanford: Stanford University.Hellman, T. & Puri, M., 2002. Venture capital and the professionalization of start-up firms. Journal of Finance , 57, pp.169-97.Lins, G., Hoeing, K., Rube, P. & Lemke, T., 2008. Hedge Funds and Other Private Funds: Regulation and Compliance. Thomson West.Long, M.S. & Bryant, T.A., 2007. Valuing the Closely Held Firm. New York: Oxford University Press.Warwick-Ching, L., 2007. Advisers walk away from smallest fry. Financial Times, 29 December.Wong, A., 2002. Angel finance: the other venture capital. Working Paper. Chicago: University of Chicago.

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