Wednesday, January 27, 2010

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.

1 comment:

  1. Thanks for this. I really like what you've posted here and wish you the best of luck with this blog! Entrepreneurial Finance