Entrepreneurial Finance is not about capital raising

I'm teaching Entrepreneurial Finance in the Rollins College MBA program this term. The obvious approach to this class is to focus on different means of obtaining capital. But that is not what Entrepreneurial Finance is about. Let's refer to Entrepreneurial Finance as EntFin to shorten this blog. EntFin is about mobilizing resources to take advantage of an opportunity identified by an entrepreneurial company.

For a product, the basic resources to take advantage of the opportunity are marketing and sales resources, working capital and capital equipment. One way to obtain these resources is to raise capital and buy them. But, there are many other ways to mobilize these resources. Since it is usually very hard to raise capital, entrepreneurial companies must be very creative in getting others to provide these resources.

As an example, a start-up company making widgets that use a new technology that has been patented can license others to use the technology to make the widgets relying on the licensees to find the marketing and sales resources, the working capital needed and the capital equipment necessary. Or, the company could make only the component of the widget that uses the company's proprietary technology and sell the component to OEMs who make the widget. The OEMs have to find the marketing and sales resources, the working capital and the major capital equipment to make the widgets (the company may have to purchase some capital equipment to make the components and must acquire the working capital to fund a small inventory and accounts receivable from the OEM).

Or, the company could joint venture with a large company interested in making the widgets by contributing the company's technology to the venture for a share of the profits. The joint venture partner would provide the marketing and sales resources, the working capital and the capital equipment to make the widgets. There are other ways to use other peoples money to provide the necessary resources to take advantage of the opportunity.

So, EntFin is the study of ways to mobilize resources, not just ways of raising capital. Each of these ways have advantages and disadvantages and some of the ways may not be doable. My goal in teaching EntFin is to open the eyes of the students to ways of mobilizing resources that includes, but is not limited to, raising capital.

Is an entrepreneur who failed an "advanced entrepreneur?"

We all know the saying, "We learn from our mistakes." Most people claim they learn more from mistakes than they do from successes. I don't believe this is true. Instead, I believe this is usually a way for a person to "psych" him or herself up after making a mistake that is very costly. Too often, an entrepreneur who started a business that failed blames the failure on outside circumstances or forces, not on mistakes made by the entrepreneur.

On the other hand, most entrepreneurs who have a successful business can readily state the decisions or actions taken by the entrepreneur that caused the success. An entrepreneur who has the courage to face up to mistakes made that caused a failure is likely to be a success the next time around.

For this reason, knowledgeable investors appreciate an entrepreneur who admits mistakes he or she made in the past and states clearly what was learned from these mistakes. Further, an entrepreneur who suffered through a business failure and has the courage to try again is my kind of entrepreneur. This entrepreneur is an "advanced entrepreneur" just as much as one who succeeded the first time.

Are entrepreneurs really risk takers?

I've often said that, in my experience, entrepreneurs are not risk takers. Instead, they don't know most of the risks they are taking. There is a disconnect between the risks that experienced entrepreneurs, looking back on their careers, realize they took versus the risks that new entrepreneurs think they are taking. Why is this?

First, newbie entrepreneurs don't know what they don't know. When I ask a new entrepreneur to list the risks he or she is taking while in the start-up mode, the entrepreneur is often hard pressed to list more than two or three risks. This list is not even close to the kind and number of risks the entrepreneur is taking. This explains the frequent comment experienced entrepreneurs make that, "If I really knew what I was getting into, I probably would not have started my company."

Even when I or others point out risks that the entrepreneur is taking, the entrepreneur usually denies the existence of the risks or assumes the risks can be easily managed. It takes courage to admit that there are major risks that are being taken and that some of the risks, if they come true, may cause the business to fail.

I often remind my students that no one "knows what they don't know." If an entrepreneur knows what he or she doesn't know, then the entrepreneur can research the matters and come up with answers. But, when they don't know what they don't know, they are operating blindly and will usually be surprised by challenges that jump up and threaten the survival of their businesses.

Most entrepreneurs don't know the risks they are taking. The best way to know is to ask questions of those who have "been there, done that."