parents become involved effectively in their students’ success.
Education is a knowledge-driven sector, and it is a growing market with schools competing to improve education. In that competition, CEON's software enables better education process management for schools.
Abhay began his startup by borrowing money from his family. He ran his business at the lowest possible cost. He paid salaries out of borrowed money and got Rs. 1 lakh (USD $2,000) from his very first client. With the help of this funding, Abhay was able to double his client base and convinced GVFL, a venture capital firm, to invest additional money up to Rs. 3 crores (USD $600,000).
Today, with this software, parents are able to see whether their children have missed classes, how many questions they asked in class, whether they are showing more interest in sports than classes, and if there is a parent-teacher meeting at school. It allows personalized tools for assessment of a student with instant feedback to parents about their child's performance in school.
CEON Solutions now has two more products available—an NGO resource planning solution and police inventory management software—and is looking to expand its client base.
Abhay thinks that of the 1.2 million schools in India, at least 10% would benefit from his software. Even though CEON is creating this new market, its growth is difficult to predict. CEON's approach to use minimum resources, dedicated manpower, a research-oriented business structure, and direct marketing to quality schools is a key factor for its success.
The entrepreneurial landscape is rapidly changing. Fast-growing companies take longer to go public, secondary venture capital markets are flourishing, and new financing options such as crowdfunding are emerging. We are facing a new era in capital strategy. Private money has never been so abundant and is creating opportunity for innovation and faster company growth. In short, entrepreneurs and investors are facing both exciting and challenging times (Savitz, 2011).
However, after listening to hundreds of entrepreneurs pitching their ideas to attract funding for their business concept, we have come to understand that a large majority of entrepreneurs lack an in-depth understanding of financial management. Entrepreneurs make a wide variety of mistakes when trying to apply financial concepts to their nascent businesses. They attach an unjustified certainty to the valuation numbers that they generate and, as a result, irritate potential investors; they fail to understand the uncertainty that is inherent in the financial projections they make for their firms and, as a result, do not capture the full range of potential outcomes with respect to future revenue and cash flow needs; they think of financial ratios as being mere statements of numeric comparison rather than insights into management's style and capability, and when they do this, they lose the opportunity to use the ratio analysis to hold management accountable for its actions; and finally, they fail to appreciate that in an environment of uncertainty (as distinguished from mere statistical risk), the application of financial principles needs to be made in concert with a hefty dose of skill and judgment.
Our belief that financial principles are not given enough attention by entrepreneurs is what motivated us to write this book. Our objective is to provide entrepreneurs from all backgrounds and industries with a practical guide on how to use a better understanding of financial principles to raise capital, manage the firm, and negotiate effectively with investors or buyers. This book is targeted at both entrepreneurs and investors seeking to improve the financial lens through which they view a venture.
Before we explore in detail the financial aspects of entrepreneurship, we will briefly introduce the entrepreneurship field through a global lens.
Chart 1.1 presents a schematic representation of the material covered in this chapter.
Need for Entrepreneurial Finance
One of the most difficult aspects of starting and growing a business as occurred for CEON is finding initial capital to start a company as well as capital to grow the business further. In obtaining initial financing, the entrepreneur needs to consider the source of external funds as well as the type provided. Any external funds for the venture (those funds not personally provided by the entrepreneur) will be in the form of debt or equity. The initial source of funds almost always comes from individuals—family and friends or private individual investors often called angels. These sources provide over 80% of the funds for startups in most every country and are the key to bringing innovation to the market. Family and friends invest due to their relationship with and belief in the entrepreneur and are the most common source of financing at startup. This knowledge and familiarity help overcome part of the uncertainty and risk felt by other individual investors. Usually, this is a small amount of capital reflecting the capital needed for most new ventures. Private investors other than family and friends also provide this capital. As a part of the informal risk capital market, these individuals (business angels) play a very important role in the economy of every country by providing the capital needed to take innovation to the market through the creation of a new venture, which affects the gross domestic product and employment of the country.
Chart 1.1 Schematic of Chapter 1
The capital provided by family and friends and other individual investors can be in the form of debt or equity, the two general types of financing available. Debt financing involves an interest-bearing instrument usually in the form of a loan, which carries the obligation to pay back the total amount of funds borrowed and a fee (the interest rate) for using these funds. Often, some form of collateral or asset, such as a car, house, machine, or land, is required.
Equity financing, the more common of the two, does not require this collateral, as the family, friend, or other individual invests in the entrepreneur and new venture and obtains an ownership position in the venture. The individual then shares on a pro rata basis in the profits and disposition of any assets, including the sale of the entire venture. The entrepreneurial financing need for the venture is often met by employing a combination of debt and equity financing.
Types of Entrepreneurs
The Global Entrepreneurship Monitor (GEM) identified three main types of entrepreneurs: (1) nascent entrepreneurs, (2) new entrepreneurs, and (3) established entrepreneurs (Acs, Arenius, Hay, & Minniti, 2005; Autio, 2007).
Nascent entrepreneurs are individuals between 18 and 64 years old who do not have a firm yet but are in the process of starting one. These individuals have been committing time and resources to founding a new venture over the past months and expect to become active owner-managers in the short term. They have assessed the opportunity and have already taken steps toward the creation of the startup company but have not yet paid salaries to anyone for more than 3 months. This means they might have already written their business plan or did marketing research and are serious about founding a new venture.
It is common to find nascent entrepreneurs at universities, and over the years, we have met plenty of them. They usually start developing a project or idea during their student years, with many building a successful business either before or after graduation. There are several famous examples of individuals who were nascent entrepreneurs at universities, such as Mark Zuckerberg, who launched Facebook from his dormitory room back in 2004 and today is among the 30 richest people in the world.
New entrepreneurs are individuals between 18 and 64 years old and are owner-managers currently managing a
