What is Entrepreneurial Finance?
Entrepreneurial finance is an academic field that studies how entrepreneurs generate wealth and how those profits are allocated. Entrepreneurial finance theory is a field developed out of the theories of business and accounting. The subject of entrepreneurship is complex and very dynamic. It encompasses many related fields like law and business, marketing, and management. Entrepreneurial finance basically is the study of financial resource allocation and value, applied to entrepreneurship.
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Why study Entrepreneurial Finance?
Entrepreneurial finance entrepreneurs look at the past, present and future success of ventures. They ask questions like: What makes a good company? How do investors make money off of my startup? How do I get my potential clients to give me their hard earned money? And what are the possible risks involved in my new venture?
How do finance entrepreneurs learn about these important questions?
Many aspiring finance entrepreneurs start by interning in banks and other lending institutions. They network with a limited number of successful finance investors and learn how they make money. Once in a while, they find themselves needing to raise funding for some reason or another. While many investors focus on returns and quarterly profits, there are others who are more interested in funding your new company on an equity basis.
Equity is simply capital that is raised from private individuals, institutions or corporations.
Equity brings entrepreneurs together with investors who are willing to finance their businesses. When you finance your own venture, you become an owner of the company. Most commonly, venture capital funds are used for expansion, but there are also some high-end angel investors who focus on growing companies strictly for the purpose of buying and selling them.
As a result, it’s often necessary for entrepreneurs to obtain venture capital before they can launch their own company. The most effective way to do this is to secure a small-to-medium loan from an individual, venture capital or bank. There are also several opportunities for angel investors, who are usually wealthy individuals who provide small amounts of capital to startups in exchange for promises to provide future capital. Angel investors can be a great source of finance for early-stage companies.
Another popular option for securing startup money is to work with local or national firms.
These firms generally have relationships with established banks and financial institutions that can provide the financing an entrepreneur needs when they are just starting out. The downside of working with these financing sources is that they typically take a percentage of each company they finance, which limits entrepreneurs’ ability to raise a significant amount of venture capital. Additionally, most firms require entrepreneurs to meet a minimum amount of revenue before they will provide any type of venture capital.
So which is better – working with an angel investor or a company?
The answer largely depends on the type of entrepreneur and their preferred method of raising capital. Many entrepreneurs prefer to raise funds through an angel investor because they can typically provide the highest level of personal risk (i.e., the risk of losing your investment) while also providing the highest level of return (the amount of return received minus the initial investment). As you can see, entrepreneurs often prefer to work with private funding sources when they need additional funds to expand their business.
In the end, entrepreneurs must weigh the risks associated with working with angel investors as well as the potential benefits they could reap if they were to raise a traditional financing round from a bank or other traditional lending source. Regardless of which financing source is chosen, entrepreneurs should always remember that they are partners in their own business and that they will need to perform due diligence in order to ensure that they are making the best decision for their business. To find the best angel investor, they should research investment groups and consult with knowledgeable sources in order to determine if an investment in an emerging company would be a good choice.