2. How would you have financed the company that has
brought this product to the market?
3. Nearing the end of your planning efforts
• How much resources will you plan require?
o How do you know?
• Understanding of your primary assumptions
• What will drive sales and diffusion?
• How will you orchestrate operations?
• Cash conversion cycle
• Resource needs
• What can you do to test the realism of the resulting resource
needs?
o Feedback from corporate sponsor, professional investors/
financiers
o Evaluate options to reduce capital expenditures / optimize
cash flows
3
4. Realistic resource requirements
• Obtaining capital:
o Theory
• projects with postive NPV will get financed
o Reality
• Projects that match [comparative] credibility with [comparative]
reward may get funded
• Projects that promise extraordinary growth (large, growing market)
may get funded
• “The potential to change the world”
• Investors actually prefer investment proposals that minimize
expenditures (without compromising speed and/or quality of execution)
o Do not try to raise capital that you do not need
• External capital is costly!
• May impede your strategic flexibility
4
8. Your roles
8
Entrepreneur Investor Banker
How much do you
need?
Why do you need it?
What do you offer in
return?
What do you require?
Why do you require
this?
What can you provide
in return?
What do you require?
Why do you require
this?
What can you provide
in return?
10. Entrepreneurial finance
• Start-up
o Personal funds
• Median start-up capital was $10.000
• Growth
o Bank-loans
o Retained earnings
• Only 20% obtained external investment
10
11. 11
Bhidé, A. 1992. Bootstrap Finance: The Art of Start-Ups. Harvard Business Review, 70(6): 109-118.
12. How to do that?
• What could you do with your plain if it would fail to get
funded?
o Could it be done with less funds?
• If so, then why not considered to do that in the first place . . .
• Different business model and/or revenue model
• Different approach to obtaining required resources
12
13. If you fail to get funded?
• New ventures may plan for funding, seek funding, fail and
then:
o (1) they may do nothing;
o (2) they may engage in more or less random behavior;
o (3) they may invoke previously acquired routines;
o (4) they may engage in design or planning;
o (5) they may execute a prior plan that preceded execution;
and
o (6) they may improvise.
13
16. Improvisation
• “implies not only a temporal convergence, but also a
substantive convergence of action creation (design or
composition) and implementation (execution)”
• Can be
o Strategic: shaping the course of the venture
o Tactical: dealing with operational challenges
• “For many entrepreneurs, the reality of the business
emerged from the process of playing pretend while giving
accounts in search of legitimacy among resource providers.”
• Improvisation and resource mobilisation:
o “founders both relied heavily on pre-existing network
contacts for business development [after founding].”
16
Baker, T., Miner, A. S., & Eesley, D. T. 2003. Improvising firms: bricolage, account giving and improvisational
competencies in the founding process. Research Policy, 32(2): 255-276.
17. Improvisation and venture development
• Tech “start-ups showed strong improvisational competencies
in technical problem-solving and creative customization of
technical products. [. . .]
• They made up the solutions as they went along, through
real-time interaction with their clients. [. . .]
• This improvisational competency seemed to make it less
likely that firms run by scientists would develop
competencies at “productizing” their solutions:
o designing and executing them as general purpose
solutions valuable to more than just the client or customer
who made the initial request for customization.”
17
20. Bricolage
• “Making do with current resources, and creating new forms
and order from tools and materials at hand”
o May coincide with improvisation or with planning
• Improvise an outcome with the means at hand
• Make a plan work (there is no plan B)
• Leverage whom you know, what you can, and what you have
o What could you gain by obtaining (access to) required
resources through your social network?
• Speed
• Costs
• legitimacy
• Success
20
21. Network as resource
• One of the strategies entrepreneurs can use to “bootstrap
their venture”
o Bootstrapping occurs whenever “the need for resources is
secured without there [first] being a financial transaction”
• Your [teams’] network could be a good starting point to
bootstrap your resource needs
21
Winborg, J., & Landstrom, H. 2001. Financial bootstrapping in small businesses: Examining small business
managers' resource acquisition behaviors. Journal of Business Venturing, 16(3): 235.
22. How would you have bootstrapped the company that has
brought this product to the market?
24. Venture capitalists are a good place to
go for start-up money:
• Not unless you start a computer or biotech company.
– Computer hardware and software, semiconductors,
communication, and biotechnology account for 81 percent of all
venture capital dollars, and seventy-two percent of the
companies that got VC money over the past fifteen or so years.
• (US based) VCs only fund about 3,000 companies per
year and only about one quarter of those companies are
in the seed or start-up stage.
• In fact, the odds that a start-up company will get VC
money are about 1 in 4000.
24Shane, S. A. 2008. The illusions of entrepreneurship : the costly myths that entrepreneurs, investors, and policy makers live by. New Haven: Yale University Press.
25. It takes a lot of money to finance a new
business:
• Not true.
• The typical start-up only requires about $25,000 to get
going.
• The successful entrepreneurs who don’t believe the myth
design their businesses to work with little cash.
– They borrow instead of paying for things.
– They rent instead of buy.
– And they turn fixed costs into variable costs by, say, paying people
commissions instead of salaries.
25Shane, S. A. 2008. The illusions of entrepreneurship : the costly myths that entrepreneurs, investors, and policy makers live by. New Haven: Yale University Press.
26. Start-ups can’t be financed with debt:
• Actually, debt is more common than equity.
• According to the Federal Reserve’s Survey of Small
Business Finances, fifty-three percent of the financing of
companies that are two years old or younger comes from
debt and only forty-seven percent comes from equity.
• So a lot of entrepreneurs out there are using debt rather
than equity to fund their companies.
26Shane, S. A. 2008. The illusions of entrepreneurship : the costly myths that entrepreneurs, investors, and policy makers live by. New Haven: Yale University Press.
27. Banks don’t lend money to start-ups.
• This is another myth.
– Again, the Federal Reserve data shows that banks account for
sixteen percent of all the financing provided to companies that are
two years old or younger.
– While sixteen percent might not seem that high, it is three percent
higher than the amount of money provided by the next highest
source – trade creditors – and is higher than a bunch of other
sources that everyone talks about going to: friends and family,
business angels, venture capitalists, strategic investors, and
government agencies.
27Shane, S. A. 2008. The illusions of entrepreneurship : the costly myths that entrepreneurs, investors, and policy makers live by. New Haven: Yale University Press.
28. Mobilising resources
• Own funds are usually insufficient
• unless of course your name is Paris Hilton
28
29.
30.
31.
32.
33. Mobilising resources
• Outside financing is hard to obtain
– You might just be unlucky . . .
• Financing is more costly than internal sources
– Why dilute if you do not need to
33
34. • Most of you may have to bootstrap,
• all of you should want to bootstrap
35. Bootstrapping
35
• finding creative ways to avoid the need for external
financing through
– reducing overall cost of operation,
– improving cash flow, or
– using financial sources internal to the company.
• bootstrappers show differences in their orientation
toward resource acquisition, representing different
aspects of:
– an internal mode of resource acquisition;
– a social mode of resource acquisition; and
– a quasi-market mode of resource acquisition.
• bootstrappers face problems in achieving market
solutions to the need for resources
Ebben, J., & Johnson, A. 2006. Bootstrapping in small firms: An empirical analysis of change over time. Journal of Business Venturing,
21(6): 851-865.
Winborg, J., & Landstrom, H. 2001. Financial bootstrapping in small businesses: Examining small business managers' resource acquisition
behaviors. Journal of Business Venturing, 16(3): 235.
36. margin, are active in the hotel/restaurant sector, and experience a need for additional
finance. Taken together, the situation facing these businesses—high uncertainty per-
TABLE 4 Characteristics of Bootstrappers
Cluster Bootstrapping Used Characteristics
Delaying bootstrapper Delaying payments (factor 4) Low profit margin
Minimizing stock (factor 5) Mature/immature businesses
Need for additional finance
No long-term bank finance
Private owner-financed bootstrapper Owner financing (factor 1) Low profit margin
Immature businesses
Need for additional finance
No long-term bank finance
Minimizing bootstrapper Minimizing accounts Low profit margin
receivable (factor 2) Expanding/mature businesses
Minimizing stock (factor 5) No need for additional finance
Long-term bank finance
Relationship-oriented bootstrapper Joint utilization (factor 3) High profit margin
Mature businesses
No need for additional finance
Long-term bank finance
Subsidy-oriented bootstrapper Subsidy finance (factor 6) Low profit margin
Expanding businesses
Need for additional finance
Long-term bank finance
Winborg, J., & Landstrom, H. 2001. Financial bootstrapping in small businesses: Examining small
business managers' resource acquisition behaviors. Journal of Business Venturing, 16(3): 235.
37. Reasons to bootstrap
• Market imperfection
• Information Asymmetry
• Cheaper:
– pecking order model of finance, which states that it is more
desirable for firms to look to internal methods of finance before
seeking outside debt and equity
– small, high-growth firms generally followed the pecking order in
financing firm needs.
• Bootstrapping to be a vital part of small firm finance,
finding that as many as 80–95% of small firms utilise
some form of bootstrapping
• Studies also indicate that the resource acquisition
behaviour changes as the business develops
37
38. Six bootstrapping tactics:
• (1) owner-provided financing and resources,
• (2) accounts receivable management methods,
• (3) sharing or borrowing of resources from other firms,
• (4) delaying payments,
• (5) minimisation of resources invested in stock through
formal routines, and
• (6) use of government subsidies
38
39. Why firms bootstrap
• According to resource dependency theory:
– When firms are faced with situations in which they have little
leverage in obtaining necessary resources, they respond by acting
in a strategic manner that decreases their dependence on others
(i.e. Banks and investors) for those resources.
– As small (or young) firms develop, dependencies will change as
they gain leverage with outside parties and obtain legitimacy with
their operations. This is consistent with the liability of newness
perspective
– new firms will be more at the mercy of outside parties than more
established firms.
–
39
40. Customer-related
Offer discounts on upfront payments 2.20 2.18 145 0
Obtain advance payments 2.24 2.21 145 0
Use methods that speed up invoicing 2.45 2.74 144 3
Use interest on overdue payments 1.58 1.68 143 2
Cease business with late payers 2.42 2.63 143 2
Choose customers who pay quickly 2.28 2.32 145 0
All customer-related methods 2.20 2.30 143 2
Delaying payments
Negotiate payment conditions 2.79 2.82 145 0
Deliberately delay payments 2.10 1.92 145 2
Use bartering for goods and services 2.21 2.00 144 3
Lease equipment instead of buying 2.27 2.07 145 2
Buy used instead of new equipment 3.09 2.26 145 7
All delaying-payments methods 2.49 2.22 144 5
Owner-related
Withhold founder’s salary 2.88 2.06 145 6
Use founder’s personal credit card 2.82 2.31 145 4
Obtain capital from founder’s salary
at another business
2.00 1.46 144 5
Obtain loans from family and friends 2.01 1.45 145 6
All owner-related methods 2.43 1.82 144 8
Joint-utilization
Borrow equipment from other businesses 1.81 1.59 145 3
Hire temporary employees 2.39 2.26 144 1
Share business space with another firm 1.82 1.62 145 1
Share employees with another firm 1.58 1.46 141 1
Share equipment with another firm 1.63 1.42 141 2
Bootstrapping
Methods
41. Your take away:
• “In the education on [NVC], there is a strong focus on
financial market solutions, and a great deal of attention is
being paid in education and in counselling on how to
approach institutional financiers such as banks and
venture capitalists.
• [ . . . ] this strong focus may be questionable.
• Besides market solutions, resources needed in small
businesses can in many situations be secured using so-
called financial bootstrapping methods, with reference to
both internally and socially oriented resource acquisition
strategies”.
41
42. If venture capital seems
so trivial then why is it
treated so prominently?
42
43.
44. Inc 500 Startups:
80% self financed
Median start-up capital = €10.000
Under 5% raised VC funding
44
Bhidé, A. 2000. The origin and evolution of new businesses. New York: Oxford University Press.
45. When is venture capital needed?
45
• Massive amounts of money needed to turn idea
(invention) into product
• When time is costly (patent expiration after 20 years)
• When the market needs to be educated (marketing)
• To finance growth
• To buy-out founders, initial backers
46. Investors in entrepreneurial ventures
46
source of funding, at the other end of the spec-
trum, are banks as providers of capital in the form
of loans. However, banks do not wish to assume
the high levels of risk associated with equity in-
vesting in entrepreneurial ventures. In between
these two extremes (i.e., an entrepreneur’s own
raise funds from various parties (primarily institu-
tional investors) who function as limited partners,
in an investment pool referred to as a venture
capital fund. In order to maintain limited liability,
limited partners are not directly involved in spe-
cific investment decisions. The VC therefore
Table 1
Characteristics of VC Providers
Professional Venture
Capitalist (VC) Business Angel (BA)
Corporate Venture Capitalist
(CVC)
Source of funds ● Investing funds of outside
limited partners
● Investing their own money ● Investing corporate funds
Legal form ● General partnership ● Private individual ● Subsidiary of a large firm
Typical size of investment ● $2–10M ● $50–100K ● $2–20M
Financing stages ● All stages ● Seed & Startup ● All stages, later preferred
Geographic proximity Preferences ● Close proximity is
preferred
● Very close proximity is preferred ● Proximity less important
Motive for the investment ● Equity growth only ● Equity growth and personal ● Strategic and equity growth
Investment criteria ● Growth prospects ● Growth and mentoring prospects ● Strategic value and ’fit’
● Great management
Finding investors ● Easy to find ● Hard to find ● Few but easy to find
Reaching agreement ● Lengthy and extensive
due diligence
● Relatively quick to reach
agreement when ’fit’
● Hard to meet ’fit’ requirements
Reporting requirements ● Regularly timed reporting
requirements
● Varies by individual ● Regularly timed reporting
requirements
● Financially focused ● Generally light ● Strategically focused
Involvement level Method ● Moderate ● Low to extremely high, informal ● Low to moderate
● Board membership direct
or through syndicate
● Informal or board
Exit planning Method ● Planned ● Often unplanned ● Often unplanned
● IPO/trade sale ● Trade sale ● Acquisition/trade sale/IPO
47. Issues Related to VC Investing by Venture Stage
Seed Financing Start-up Financing Expansion Financing Buy-out Financing
Characteristics of the venture ● 1–2 entrepreneurs ● Management team in place ● Marketing has been started ● Established company
● Undeveloped technology and
business concept
● Product ready for marketing ● Venture is ready to start growing
and expanding
● Business plan is not validated ● A pilot and other information
about the product are available
Main purpose of the funding ● Enabling research and
development
● Establishing the marketing and
sales activities
● Launching full scale marketing
activities
● MBO
● Developing business concept ● LBO
● Delisting
Typical venture capital
investor
● Business angel (BA) ● VC ● VC ● VC
● Sometimes corporate
venture capitalist (CVC)
● CVC ● CVC
● Sometimes BA
Main expertise or benefit
beyond money provided
by the venture capitalists
● Structure, discipline,
sounding board and attraction
of additional (external)
funding (BA, VC, CVC)
● Marketing experience, recruiting
help, contacts, help with follow-on
financing (VC)
● Marketing experience, recruiting
help, contacts, help with follow-on
financing, help to plan and execute
the exit (VC)
● Legal and other expertise how
to execute a buy-out deal (VC)
● Insights how to establish the
venture’s legal form (VC)
● Technological insights, test
marketing and piloting possibilities
(CVC)
● Technological insights, test
marketing and piloting possibilities
(CVC)
● Technological insights (CVC) ● Reputation benefits (VC, CVC) ● Reputation benefits (VC, CVC)
Major trouble spots of
venture capital funding
from entrepreneurs’
point of view
● Time consuming to locate,
negotiate and close the deal
● Time consuming to locate,
negotiate and close the deal
● Time consuming to locate,
negotiate and close the deal
● Time consuming to locate,
negotiate and close the deal,
● Involvement (e.g. reporting
requirements and governance)
with a VC requires a lot of time
● Involvement (e.g. reporting
requirements and governance)
with a VC requires a lot of time
● Involvement (e.g. reporting
requirements and governance)
with a VC requires a lot of time
● Involvement (e.g. reporting
requirements and governance)
with a VC requires a lot of time
● Early stage company does
not have very much to back up
the valuation of the venture
and the valuation might be
very low
● CVC might want to direct the
strategy of the venture
● CVC might want to direct the
strategy of the venture
48.
49. Manigart, S., Wright, M., Robbie, K., Desbrieres, P., & Waele, K. D. 1997. Venture capitalists' appraisal of investment projects: An empirical European study. Entrepreneurship Theory and Practice, 21(4): 29.
50.
51.
52. Your take away:
• Do NOT talk about venture capital in your business plan,
you may want/need to talk about angel investment.
• Show that you understand at what stage your capital
needs could be matched with new sources of capital
– VC may be needed to grow, also discuss what to do if such
investment cannot be attracted (or at too high a cost)
• More important to know what resources are needed,
than to believe you will be able to finance those with debt
or equity.
– Only shy away from bootstrapping if it would limit value creation
(e.g. by slowing the venture down).
– Do not show naivety . . . by talking about obtaining VC
52
53. Nearing the end of your planning efforts
• How much resources will you plan require?
o How do you know?
• Understanding of your primary assumptions
• What will drive sales and diffusion?
• How will you orchestrate operations?
• Cash conversion cycle
• Resource needs
• What can you do to test the realism of the resulting resource
needs?
o Feedback from corporate sponsor, professional investors/
financiers
o Evaluate options to reduce capital expenditures / optimize
cash flows
53
54. Aggregating your insights
• The financial chapter of a business plan reflects your
understanding of the future business
o Market insight and operational insight translate into cash
flow projections, provide sufficiently detailed projections in
your business plan
o These projections can help you appreciate the implications
of bootstrapping efforts
o Cash flow projections translate into an appraisal of the
value promise of the propsed business
• A proper valuation helps to quickly appraise business opportunities
• ANYONE in the team should contribute to, and
understand the project’s valuation
54
55. Next week
• All teams present
• Presentations should focus on venture design & operations, yet
they should incorporate how your understanding of both venture
design and operations translate in financing needs and value
creation.
• You may want to start the presentation with your project’s NPV and
subsequently explain how your venture will be able to create that
value
o Show you understand the
• Relative strengths of competing products
• Customer preferences towards your product
• Business modeling options and choices
• Venture design choices
• Operational details of the proposed venture
• Cash flow implications and financing needs55
57. 26-2
• 6 best will present
• Candidates will be announced that evening
• External panel of judges
• Presentation should reflect the quality of your business
planning effort
• Please invite your mentor (NVC) or business coach (NBD)
57
