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1) Entrepreneurs who establish and go on to create new ventures must classify types of financing that are in sync with the development stages that the eventually grow through in its life cycle. While exploring an opportunity phase of a new plan a firm does not experience significant operating costs, but during further stages of venture development, financing is crucial.

During the research and development phase, the firm will need major levels of investment as R&D for innovation of new products, this can be very expensive.

In this stage, bootstrap financing techniques may prove productive. An interesting example of this type of financing involves the entrepreneur himself/herself having to put up his/her own resources and funds (also known as skin in the game). Furthermore, the entrepreneur may receive funds from their respective families and friends.

During the Start- up stage of a new endeavor, significant efforts are aimed towards initiating a marketing strategy and launching production of the company’s offering. Even though at this stage the company is ready to launch and is experiencing its first revenues, is not profitable. As a result, outside investors (angels, venture capitalists) are required to help support the firm’s operating costs and expenses. An angel investment would serve as they are generally in smaller quantities and can also be presented in accordance with milestones which are established and agreed upon by investors as well as the entrepreneur.

During the early-growth stage of the new venture, the business plan has proved successful so far having launched successfully. The firm must now expand its operations by recruiting new employees and developing a marketing plan. As a result, a source of financing in this round could be forthcoming private equity investors and/ or via asset-based lending. Asset-based lending occurs when a substantial loan is provided to the firm in exchange for an asset.

During the rapid-growth stage of the new venture, the firm has now reached and crossed the breakeven point but is not yet sustainable. If the business is

one of high-risk one but has potential for rapid growth, a method of financing is an investment by a venture capital. The entrepreneur will receive the infusion of funds needed as well as receive assistance from the VC (the general partner) in adding significant value to the company.

During the final equity stage, financing that is undertaken is usually by the means of an exit strategy such as an initial public offering, the acquisition of the new project by an established firm or a management buyout. This empowers early investors to receive a return on their investment.

2) A venture capital fund is an investment fund which is structured vis-à-vis a limited partnership. They are investment fund that manage money from investors seeking private equity stakes in startup and small- and medium-size enterprises with strong growth potential. Numerous partners and one general partner constitute a venture capital fund.

The limited partners provides almost all the financing and funds. Whereas the general partner is responsible for managing the investment fund through various efforts. These firms target companies that have great potential, with high risk and high reward.

During the capital development process of a start-up, the venture capital fund is usually a means to raise capital during the rapid-growth stage of the venture. They will offer financial backing to a new company to ensure that it continues to grow and expand in value.

A venture capital fund adds value to the business in several ways. First and foremost is the fact that VC’s or general partners usually work inside an industry which they know about or are familiar with. They identify value drivers i.e., prioritizing the allocation of resources within the firm. They also establish milestones for the firm i.e., product testing, first competitive reaction, first redirection and bellwether sale. The VC also adds value by formulating a strategic plan to assess each step in the growth of the firm. The VC also ensures that there is a professional mindset infused in the business by identifying and hiring management members or personnel to sit on the Board. The VC contributes to a business by providing it with essential industry contacts and more importantly, providing them with sources for later financing. Finally, the VC ensures that they monitor trends and developments within the competitive environment inside which the firm operates.

3) The cost of capitals refers to the expenses and funds used for supporting a business.

However with regards to new ventures, the cost of capital refers to the method by which financing was undertaken. For example, suppose a company was self- financed during its initial stages by means of obtaining a loan from a commercial bank, the cost of capital would simply be the interest rates and risk premiums that the financial establishment would demand.

4) Rapid growth influences the manner by which an entrepreneur will make sacrifices while considering financing options. For example, if the product market strategy has caused this rapid growth due to the quality of the product offerings and its high price level, this essentially means the venture is in need of a larger organization and thus this impacts organizational strategy. As the organization expands in order to meet the demands of the rapid growth it experiences, it is likely it will require outside investment, hence impacting financial strategy. Thus, it can be observed that there is an interdependency between all of these three strategies (product market, organizational and financial).

An example of a new venture that realized the interdependency between the three of these strategies is Honda. By focusing on a high-volume and low product-price marketing methodology, Honda was able to take advantage of trade credit on the components it purchased and this allowed the firm to attain numerous efficiencies and reductions in price, thereby allowing it to acquire a larger market share.

5) Forecasting revenue is the logical starting point for preparing a new ventures’ financial statements as the primary objective is to estimate the business’ cash flows. By the use of a forecast of future revenue, an entrepreneur is able to work backwards through a decision tree model in this case, to gauge the cash flows from decisions and efforts that are taken prior to it and thereby establish

if additional financing is required to support the new endeavor. Forecasting revenue is also the logical starting point for preparing a new venture’s cash flow statement, income statement and the balance sheet of the firm.

6) The income statement details the manner in which the liabilities and assets of the firm were used in a given accounting period. The cash flow statement reveals the inflows and outflows of cash. The balance sheet is a financial statement which lists the firm’s assets, liabilities as well as shareholder equity. For a new venture that needs to project cash flows, they will first formulate a balance sheet and income statement to establish the pro forma statement of cash flows. These statements are used together by the entrepreneur to forecast the process used to calculate the free cash flow of a company.

7) To calculate the cash flow of a new venture, the entrepreneur must first create and have access to the income statement, the balance sheet and the cash flow statement. Cash flow is used to determine financing necessities and also serves to estimate valuation. In order to calculate the cash flow, the entrepreneur must first determine the net cash flow from operating activities. After this the entrepreneur must figure out the net cash flow from financing efforts (either by debt or equity financing) and this can be found in the income statement. Lastly, the entrepreneur must figure out the net cash flow from investing activities. Apart from this approach, there are other methods to calculate cash flows. EBIT or EBITDA (Earnings before interest, taxes, depreciation and amortization) are nontraditional tools to estimate the cash flow of a firm.

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