Entrepreneurs can turn to a variety of sources to finance their startups or fund expansion of their businesses. Common sources of business capital include personal savings and loans from various sources, including friends and relatives, financial institutions such as banks or credit unions, commercial finance companies, and the Small Business Administration and other government agencies.
"Entrepreneurship and New Venture Creation" Gale Business: Entrepreneurship,, Gale, 2020. Originally published in Encyclopedia of Management, 8th ed., Gale, 2019.
Entrepreneurship is the process of identifying opportunities, marshalling the resources needed to take advantage of the opportunities, and creating a new venture for the purposes of providing needed products or services to customers and achieving a profit. The word “entrepreneurship” is taken from the French word entreprendre, which means “to undertake.” A person who engages in entrepreneurship is called an entrepreneur.
Entrepreneurship occurs all over the world, but it is a particular characteristic of free-market economies. Countries with the highest rates of entrepreneurship include the United States, Canada, Israel, Italy, and Great Britain. However, countries with developing economies are increasingly turning to grassroots entrepreneurial efforts as a way to create economic opportunities and ensure economic survival. In some low-income or high-unemployment locations, individuals are pushed to adopt entrepreneurship to survive financially. Where no other economic options and jobs are available, some people opt for entrepreneurship, or self-employment, as a means to generate income.
Entrepreneurship involves considerable risk, as the failure rate for new ventures is high. Thus, to be successful, an entrepreneur must be able to tolerate and even thrive under conditions of risk and uncertainty. Successful entrepreneurship also requires innovativeness and creativity, as well as self-confidence, high levels of energy, and a strong need for achievement. Entrepreneurship also requires optimism as well as realism so that entrepreneurs can cope with the many demands and pressures of creating a new business. In the twenty-first century, interest in entrepreneurship is at an all-time high. Most colleges and universities offer courses or even entire programs of study in entrepreneurship.
The process of entrepreneurship is complex and requires the aspiring entrepreneur to make many decisions. It begins with recognizing an opportunity and applying creativity to exploit the opportunity. An entrepreneur must engage in strategic thinking and identify a competitive advantage that will set his or her small business apart and provide customers a unique reason to patronize the business.
The outcome of this strategic thinking should be a business plan, which is a written statement that provides a comprehensive blueprint for the new venture. Although every business plan should reflect the unique characteristics of the entrepreneur and the proposed new business, there are common elements that exist in most business plans. Typically, a business plan includes some or all of the following components:
The executive summary provides a concise one- to two-page overview of the entire business plan. The description of the product or service should identify the key features and benefits of the product or service. The business strategy is the most detailed part of the business plan. Here, the plan provides the entrepreneur's vision and what he or she sees as the mission of the new venture. This section must also lay out key strategies in the areas of operations, marketing, and finance. The forecasted financial statements should include monthly or quarterly projected cash budgets, income statements, balance sheets, and capital expenditures. The loan or investment proposal should identify the type of financing required and a plan for repayment.
Entrepreneurship is an important, if not the most important, component of a successful market-based economy. It can create jobs, lessen unemployment, and increase standards of living. Free economies require individuals who are willing to take risks by creating, organizing, and successfully running new businesses. Most entrepreneurs operate in the area of small business, and many such businesses are family-owned. These are the engines of economic growth. According to the Family Owned Business Institute of Grand Valley State University, family-owned businesses employ nearly 98 million people and account for more than half of the nation's gross domestic product. Thus, much emphasis is placed on public policies that will encourage entrepreneurial activity and nurture and sustain new ventures, small businesses, and family-owned businesses.
Because entrepreneurship is so important to economies, many national and local groups exist to encourage new businesses and entrepreneurs. Most local chambers of commerce, for example, have special programs and resources available for entrepreneurs setting up new businesses. A number of competitions, including the Opportunity Funding Corporation's Venture Challenge and the Moot Corp Competition, have been developed to give entrepreneurs the ability and resources to develop a new company. These competitions allow entrepreneurs to compete for funding, marketing, and other resources.
Once the business plan has been formed, the entrepreneur must find investors, form a business structure both legally and economically, and bring together employees with the necessary skills and tenacity to run a successful business around a common goal. These steps, especially those requiring financial backing, can be difficult. Writing for Inc. magazine in 2017, Peter Economy discussed some of these difficulties and a few of the common misconceptions among those trying to start businesses.
First, entrepreneurship is a discipline that must be learned and developed. Natural enthusiasm and boldness can help but are not enough in and of themselves. A large amount of start-up capital can also help but is not required to launch a successful business. Economy noted that, according to data gathered by Inc., there is no relationship between the amount of start-up capital and the ultimate success of a business. Economy also debunked the myth that successful entrepreneurs must start when they are young, noting that more older adults are self-employed than younger adults, and the myth that entrepreneurs are always money-focused, pointing out that most seem to strive for personal independence instead.
In terms of start-up capital, it does not take a large amount of money to begin a business. The average amount is about $25,000, and successful entrepreneurs will have the skills necessary to run a company with a low amount of funding. Some of the tricks include paying beginning employees on commission, renting premises for the first couple of years, and offering conditional benefits. There are rarely large investors willing to fund starter businesses, unless they are promising computer or science companies. Most investors are not million-dollar venture capitalists, and good entrepreneurs know how to work with limited resources.
Other entrepreneurs are hesitant to begin their businesses with debt, afraid that it will impede success. Actually, most entrepreneurial businesses are financed primarily by debt. Conventional wisdom also insists that entrepreneurs search for loans among their friends, families, interested investors, and government entities, using banks only as a last resort. Banks, however, are the most common provider of loans toward entrepreneurial activities, and they are often willing to consider promising business plans.
Entrepreneurial opportunities often can hinge on brief—even chance—proposals to investors, venture capitalists, and banks. These short proposals have become so useful and widespread that they are referred to as “elevator pitches,” the name drawn from a scenario in which an entrepreneur encounters a high-ranking business executive or capitalist in an elevator and has only the time both are in the elevator to make the pitch and win the necessary investment.
The elevator pitch has become so important that entire books and courses have been dedicated to it. There are also a number of academic and entrepreneurial competitions dedicated to the elevator pitch. For example, the annual Purdue Elevator Pitch Competition awards $1,000 to competitors who create and deliver the best two-minute elevator pitch, while the annual Peak Pitch gives entrepreneurs a chance to network with their elevator pitches. Some reality television shows, such as the United Kingdom's Dragon's Den and Shark Tank in the United States, award entrepreneurs who can most effectively deliver a short pitch of their idea.
While participating in a pitch competition may seem like a game-show-like distraction for busy start-up entrepreneurs, such events provide a number of important opportunities, even to entrepreneurs who do not win. First, they offer the chance of exposure to multiple investors at once. Even contestants who lose the competition may prove memorable to investors in one way or another. An investor may admire a contestant's talent and enthusiasm, for example, but find fault with details of the pitched business plan. In such a situation, the investor may be willing, or even eager, to hear another pitch from the same individual in the future.
In addition to fostering connections with potential investors, pitch competitions can facilitate personal networking among start-up entrepreneurs and help establish relationships with future collaborators and resources. Finally, most pitch competitions of any size are covered by industry media and sometimes even mainstream press. In addition to the competition winners, participants who generate “buzz” may attract investors from outside the competition who have been intrigued by the coverage.
There are many tips and general principles entrepreneurs may find useful in creating an elevator pitch. It is a good idea, for instance, to begin by giving a statistic or another arresting fact concerning the pertinent industry, introducing the problem or general situation immediately. Technical or scientific language in any form should be avoided in the pitch; even though it may impress, the use of unfamiliar terms ultimately confuses and bores an investor. Contacts can also be used in elevator pitches to catch attention, whether it be the dropping of a significant name or previous work experience at a prestigious company.
Experts also recommend keeping elevator pitches brief, with the Purdue competition's two minutes as the ballpark maximum length. Pitches should also be passionate but not too passionate. Shouting and overly dramatic language should be avoided. It is also a good idea to end a pitch with a call to action, making it clear what the pitcher wants to happen next, even if it is simply an offer to take questions. Ending a pitch with a direct solicitation for investment, however, is usually considered bad form. It is more appropriate to request a longer meeting at the potential investor's convenience. The most important thing is that the entrepreneur feels comfortable and excited giving the pitch under any circumstances.
Angel investors and venture capitalists (VCs) are two other sources of funding for start-up businesses. Both angels and VCs invest in entrepreneurial firms in exchange for an equity share in the business. An angel is a high-net-worth individual who invests his or her own capital in a company, whereas a venture capitalist manages a fund of pooled money from other sources (such as pension funds and insurance companies).
Angel investors tend to inject start-up capital into a company's seed round of investment, whereas VCs generally invest in later-stage companies. For example, Ron Conway (1951–)—a well-known angel investor and the founder of the company Angel Investors LP—made initial investments from his personal funds in companies such as Ask Jeeves and Google. Such angel investors come from all over the world. Loic Le Meur (1972–) is a well-known French angel investor who also started the firm LeWeb, which connects venture capitalists and angel investors with start-ups through events held in Paris and through an annual contest for European technology start-ups. Typically, VCs invest $5 million or more in a financing round, and angels invest amounts in the $5,000 to $100,000 range.
Angel investors frequently are former entrepreneurs who have retired on profit they earned from starting up successful businesses. Angels tend to seek active involvement in the companies they fund. Angel investments are usually high risk because many are lost when start-up companies fail. By some estimates, as many as 75 percent of investor-backed start-ups go out of business within a few years.
When a number of private investors wish to pool their resources to invest collectively in companies, angel groups are formed. These groups meet to review proposals from businesses seeking funding and conduct “due diligence” to decide whether to invest in a firm. As of 2018 there were more than 200 U.S.-based angel investment groups in the Angel Capital Association, representing approximately half of the total number of such groups in the United States.
Start-up entrepreneurs in search of angel investors have a number of options, beginning with simply networking at industry events where such individuals are likely to gather. For a more structured, directed approach, there are a number of online platforms dedicated to connecting entrepreneurs and angels. These include www.gust.com and www.usangelinvestors.com. There are also a number of angel investment networking events and conventions held each year operated by organizations such as Startup Grind and the Angel Capital Association.
For those who have gained the opportunity to pitch to a potential angel investor, entrepreneur and business consultant Murray Newlands recommends the following strategies:
Venture capital refers to money that is invested in a company during the early stages of its development. Such funds may come from wealthy individuals, government-backed small business investment companies, or professionally managed venture capital firms. Because investing in an unproven business venture is highly speculative, venture capitalists generally target companies they believe offer significant potential for growth and, therefore, an opportunity to earn a high rate of return in a relatively short time.
In exchange for providing capital, as well as a source of management assistance and industry contacts for growing firms, the investors usually require a percentage of equity ownership in the company, some measure of control over its strategic direction, and payment of assorted fees. Like other sources of equity financing, venture capital offers both advantages and disadvantages. The main advantage is that the business is not obligated to repay the money. For a start-up company, this frees up important cash flow that might otherwise be needed to service debt. The involvement of high-profile investors may also help increase the credibility of a new business. The main disadvantage to venture capital financing is that the investors become part-owners of the business and thus gain a say in business decisions. The company's founders face a dilution of their ownership positions and a possible loss of autonomy or control.
Even for business owners willing to make the trade-off, venture capital is scarce and often difficult to obtain. Venture capitalists tend to be highly selective in choosing investments. Some will only consider investments in specific technologies, industries, or geographic areas. In fact, larger venture capital firms typically reject more than 90 percent of the requests for funding they receive. Conversely, venture capitalists can be a great alternative for start-up companies that represent too significant of a risk for banks and other more traditional lending institutions. Capitalists who are willing to take greater risks can be handsomely rewarded for their faith and financial investment and often do well in rapidly growing sectors such as technology, communications, and health care.
Firms often evaluate requests thoroughly, and at considerable expense, before selecting a few that closely match an investor's areas of expertise and offer the best earnings potential. As a result, private equity financing is more likely to be an option for existing businesses with a solid track record and good prospects for future growth than for start-up companies that pose a much greater risk. It is a particularly good choice for fast-growing companies that have few tangible assets to use financing as collateral for loans.
For a business owner, the process of obtaining venture capital begins with a formal proposal. The most important element of this proposal is a detailed business plan describing the company's goals and strategies on a timeline. The proposal should also include recent financial statements, projections of future growth, a brief history of the company, biographies of key managers and executives, the amount of capital requested, and a description of how the funds will be used. Experts recommend that companies seeking equity financing evaluate several venture capital firms before entering into a deal. Managers should also hire professionals to help them understand the terms of the agreement before signing to avoid giving away too much control.
On receiving a proposal of interest, a venture capital firm usually follows up with a thorough investigation of the company's investment potential. This process might include analyzing financial statements; interviewing employees, customers, and suppliers; and meeting with the management team. If the venture capital firm remains interested following the evaluation phase, it usually responds with a proposal of its own, known as a term sheet. The term sheet acts as a blueprint for the investment deal, with provisions covering such issues as the valuation of the investment, voting rights, and liquidation options.
The final terms are decided through negotiations between the business managers and the venture capital firm, generally through the legal counsel of both parties. One of the most important factors in the negotiation process is agreeing on the valuation of the business, which determines the amount of equity in the company that is required in exchange for the venture capital. (A business with a low valuation must provide a high percentage of equity, and vice versa.) As a general rule, venture capital firms seek to control between 30 and 40 percent of equity in the companies in which they invest. This amount allows the venture capital firm to exercise influence without assuming control or eliminating the management team's incentive to grow the business. The venture capital firm usually hopes to achieve a return of three to five times the original investment within five years, by selling its equity either to the company's management and executives or on the public stock markets.
Overall, venture capital can provide a valuable source of financing for growing businesses. Many analysts suggest that the nature of venture capitalism is cyclical—that it experiences waves of popularity in varied industries and with businesses of various sizes before becoming problematic for both lenders and recipients who both eventually retreat, causing traditional lending channels to again become the popular choice. This cycle repeats throughout good and bad economic times, giving companies in need of a lender an option regardless of the financial climate.
Because of the risks associated with venture capital, experts generally suggest that it be viewed as one of a number of potential sources of financing and be used in combination with debt financing whenever possible. The availability of venture capital shifts frequently in response to stimuli such as new technologies and developing market forces. The tech bubble of 1999–2000, for example, spiked both the total amount of venture capital raised as well as the total number of venture firms, only to see both numbers bottom out within two years due to the bursting of the bubble and the early twenty-first century. An even deeper recession, which arrived in 2008, saw skittish investors again sharply reducing their activities before slowly climbing back to pre-recession levels of investment.
Some businesses have found that they would rather depend on a select number of venture capitalists with stake in the company than a large pool of investors. Keeping the company private and using venture funding allows for greater control of company finances. The buffer venture capital provides also allows for a useful transition period between original business owners and the more systemic, widespread ownership of a corporation.
Crowdfunding is another potential source of start-up capital for entrepreneurs. In this funding model, the entrepreneur or business convinces a large number of investors to each donate or invest a small amount, anywhere from $10 to $100 to $1,000. If the crowdfunding effort can attract hundreds, or thousands, of donors, the entrepreneur can assemble as much seed money as he or she might through angel investors. Crowdfunding is generally facilitated by digital platforms, such as Indiegogo, Kickstarter, and GoFundMe, which are dedicated to the practice. While crowdfunding is often used by nonprofits or charitable causes, most platforms also allow or even encourage entrepreneurial fundraising.
The federal JOBS Act of 2012 officially made it legal for start-up companies to issue securities via crowdfunding, but this aspect of the bill did not go into full legal force until 2016. Under the provisions of the act, crowdfunding investors are limited as to how much they can invest, according to a formula based on income and net worth. Crowdfunding equity investment must also be conducted through registered broker-dealers or funding portals and not directly with the company itself. Crowdfunding seems likely to continue gathering steam as a funding resource for entrepreneurs. In 2016 equity raised worldwide via crowdfunding exceeded that raised through venture funding. Indeed, the World Bank forecasted that worldwide crowdfunding investments will exceed $90 billion by 2025.
Experts recommend a number of general strategies for entrepreneurs who wish to fully exploit the potential of crowdfunding. First, do not rely on a relatively impersonal online platform to do the work. Reach out to friends, family, and other potential investors personally and try to establish a solid investor base before the online campaign begins. It is also a good idea to incentivize participation, particularly early participation, with perks such as product discounts or membership in VIP club with ongoing benefits. Finally, if at all possible, post a convincing product or service demonstration video. Videos consisting only of passionate sales pitches are all too common and much less convincing.
Start-up entrepreneurs may also wish to consider taking advantage of the relatively new resources known as incubators and accelerators. These are organizations that assist new enterprises both monetarily and with guidance and practical assistance. Incubators generally work with entrepreneurs who are at the “idea” stage, helping them to construct a viable business plan. They are often sponsored by economic development organizations and are less focused on immediate financial growth for their client businesses. In fact, 93 percent of incubators are operated by small nonprofits, although large companies such as Samsung have also begun to launch their own programs. Incubators typically operate in a “business camp”-like environment, in which multiple start-ups relocate to a shared space in a central geographic area and work through the program together. Incubators usually do not invest directly in their participant companies.
Accelerators deal with existing, though young, companies. They typically make equity investments in client enterprises and are often operated by venture capital firms, corporations, and other independent entities. While traditional venture capital practices give investors some degree of influence over a company's direction, the accelerator model intensifies direct interaction and influence between the two sides. Such programs usually provide entrepreneurs with mentorship programs and specialized business training.
In addition to the various levels of enterprise they target, accelerators and incubators differ in several other key ways. Incubator programs usually have an open time frame and generally last until the company has made significant progress—up to two years in some cases. Accelerators typically limit their programs to a few months, often building up to a round of pitches to new investors. Because the pressure to recoup a return on capital invested is much stronger with accelerators, they tend to be more selective about the enterprises they take onboard. Leading accelerators such as Y Combinator and Techstars accept approximately 2 percent to 10 percent of those who apply.
One development that has allowed more individuals to embrace entrepreneurship is related to the growing trend of microbusinesses. Unlike traditional small businesses (fewer than 99 employees), microbusinesses have only a few employees, with many such businesses hiring only one or two people. In part due to the rise of online work, many individuals have been able to enter entrepreneurship by developing online ventures with very low overhead. In many cases, individuals who operate a microbusiness also have a regular full-time or part-time job in addition to their entrepreneurial venture.
International entrepreneurship (IE) refers to the practice of using technology and insight to develop an overseas company by highlighting a need in foreign nations that the entrepreneur can fulfill. Foreign markets have particular resources that an entrepreneur can capitalize on, making use of differing cultures, financial regulations, economies, and desires to create a successful global business. Foreign markets, however, also pose entrepreneurial challenges. Entrepreneurial conditions are poor in many countries, including those that can benefit greatly from new enterprises. Cultural as well as language difference must also be overcome.
Most international entrepreneurship is conducted by well-established companies that have sufficient funds or backers to attempt expanding into foreign markets. Fortunately, more investors are becoming willing to support a global endeavor, especially if a company has clear plans to fill a specific niche in international business. Like local entrepreneurship, international business-building is a matter of opportunities and design.
Once a new element is introduced into a foreign market, there is a period of adaption that takes place in increments. An international market might at first be unwilling to admit a new entrepreneurial business, requiring more time for trial and acceptance of products or services. The number of other businesses trying to sell the same new ideas and the type of international market being entered will also affect the trial period for the entrepreneurial endeavor.
While some entrepreneurs may still envision brick-and-mortar locations for their enterprises, the opportunities for starting, and growing, an online business are expanding at a rapid clip. According to the U.S. Commerce Department, U.S. consumers paid more than $450 million for online retail purchases in 2017, a 16 percent increase over the previous year. Nearly half of retail sales growth from the same year came from online purchases.
Much of the rapid growth of online retail sales has been attributed to the proliferation of smart phone and tablet ownership. It is now easier than ever before for consumers to make impulse purchases from devices that are always at their fingertips and always connected to their bank accounts. While a few retail segments still demand a brick-and-mortar location, particularly luxury or boutique retailing, retail entrepreneurs should carefully evaluate whether a storefront is truly necessary to their business model. Entrepreneurs outside the retail sector must also decide how much of their business requires “real-world” facilities and how much could be conducted online.
One of the most appealing aspects of online entrepreneurship is cost. Chris Gerbig, owner of fashion brand Pink Lilly, explained to Kayleigh Moore for Inc. magazine, “I started a $30 million business out of my living room for a couple hundred dollars. A home office is free, an e-commerce website can be obtained for less than $50 a month, a Facebook page is free, and most people already have a computer. The only initial expense is a small amount of inventory. Once that sells, you can use incoming revenue to fund your future inventory purchases.”
There are also drawbacks associated with such ease of access, however. Many new online entrepreneurs are inexperienced, undereducated, or underprepared and soon see their budding enterprises die on the vine. Scoring initial success can also inspire overconfidence. Experts caution that one of the major reasons online start-ups eventually crumble is that they generate a burst of revenue quickly and the owners then spend the money on sharply scaling up the business. When this does not result in accompanying sales gains, the company can no longer pay its bills.
Social entrepreneurship, like international entrepreneurship, has risen in popularity in the early twenty-first century. It involves developing unique ideas, usually from a business standpoint, to solve social problems. Often social entrepreneurs can create practices that revolutionize industries and create successful companies, but the goal is always social welfare. Social entrepreneurs tend to judge success in terms of “social value” rather than the income generated by a business. They look for ways in which their society needs aid or needs a particular problem solved, then work to solve the problem in the same way a traditional entrepreneur does. A social entrepreneur deals with social potential and seeks to create lasting change for the better.
Social entrepreneurship is generally inspired by the notion that the capitalist ethic can be a powerful means of combatting a variety of social ills. In short, if people can make money by improving the world, they will do so. Specifically, social entrepreneurs often work to ameliorate poverty by fostering local entrepreneurship and economic growth. In a 2012 speech at Georgetown University, the rock singer Bono, a leading cultural advocate for social entrepreneurship explained, “Aid is just a stopgap. Commerce, entrepreneurial capitalism, takes more people out of poverty than aid.”
Examples of social entrepreneurship abound. Medical practices centering on helping patients achieve responsibility for their own health and treatment by teaching them about their ailments is a successful form of entrepreneurship begun in World War II by doctors such as Byrnes Shouldice. Even investment funds like Massachusetts-based Root Capital, which provides loans to small businesses in impoverished parts of Africa and Latin America, combine social responsibility with an entrepreneurial ethic. Community programs designed to bring out talents in at-risk youth or help senior citizens become more independent function in the same way.
When considering a social enterprise, an entrepreneur must first decide what sort of business to create—nonprofit or for-profit. Nonprofit businesses find it easier to focus on the social endeavor, attract the right-minded employees, and effectively market their purpose without sounding pretentious. Nonprofit organizations also receive more donations, especially from taxpayers who can write off the donation. For-profit businesses, on the other hand, can often make a better profit, raise more money through investors and stockholders who are willing to keep the business focused on its social goals, and create more opportunity for growth than nonprofit organizations. Which type of business to construct is one of the first questions a social entrepreneur should ask when sitting down to outline a plan.
There are also a variety of business models a social enterprise can adapt. These include the entrepreneur support model, in which the enterprise offers training and support services to at-risk or target entrepreneurs; the market intermediary model, in which the enterprise helps bring the goods of smaller entrepreneurs, including farmers, to market; and the cooperative model, a fee-based, member-owned organization that provides specialized services or benefits to its members. Credit unions follow this latter model. Also common is the service subsidization model, in which a portion of the proceeds from a business are used to fund a social cause or program.
As a way of life, entrepreneurship has several advantages. It offers individuals the chance to be their own boss and to enjoy an independent lifestyle. It provides individuals the opportunity to develop and grow a new business that makes an impact on their community. And, of course, successful new ventures offer the tantalizing prospect of unlimited profit potential. However, as a lifestyle, entrepreneurship also has its downside. It requires a tremendous amount of personal commitment and long work hours, particularly in the early stages of new business start-up. Uncertainty of income and the potential for financial loss are also potential negatives.
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Debt financing involves a company selling notes, bonds, or bills to investors or lenders in order to raise money for the business. Debt financing also includes traditional bank loans or lines of credit. In debt financing, the investors who purchase the bills, bonds, or notes are a company's creditors, and they are repaid with interest for their initial investment. Debt financing is often compared to equity financing, another common way for companies to raise funds. Equity financing takes the form of money obtained from investors in exchange for an ownership share in the business. Initially, such funds may come from friends and family members of the business owner, wealthy “angel” investors, or venture capital firms. Equity financing can also involve selling stock, either in the form of an initial public offering or simply issuing additional shares.
COPYRIGHT 2019 Gale, a Cengage Company
Angel investors are wealthy individuals who provide capital to help entrepreneurs and small businesses succeed. They are known as “angels” because they often invest in risky, unproven business ventures for which other sources of funds, such as bank loans and formal venture capital, are not available. New start-up companies often turn to the private equity market for seed money because the formal equity market is reluctant to fund risky undertakings. In addition to their willingness to invest in a start-up, angel investors may bring other assets to the partnership. They are often a source of encouragement, they may be mentors in how best to guide a new business through the start-up phase, and they are often willing to do this while staying out of the day-to-day management of the business. These individuals want to invest in up-and-coming new companies not only to earn money, but also to provide a resource that would have been helpful to them in the early stages of their own businesses. In many cases, the investors sit on the boards of the companies they fund and provide valuable, firsthand management advice.
COPYRIGHT 2017 Gale, a Cengage Company
The U.S. Small Business Administration (SBA) is a major source of financing for small businesses in the United States. This federal agency was created by Congress in 1953 to provide small business with similar access to bank loans that larger, more established businesses enjoyed. Despite common confusion, the SBA does not make loans directly to businesses; instead, it connects small businesses with loans through financial institutions working with the SBA. Because the SBA guarantees at least a large proportion of each of these loans, a lender's risk is reduced and more entrepreneurs can get their businesses up and running. In addition to serving as loan guarantor, the SBA provides management and technical assistance to participating businesses. The SBA's various loan programs have provided needed funding for thousands of small enterprises that were unable to secure loans from lending institutions on their own.
COPYRIGHT 2017 Gale, a Cengage Company
Crowdfunding is a method for raising money online from the general public (i.e., “the crowd”). A successful campaign convinces a large pool of individuals to each play a small part in reaching a funding goal by financially supporting endeavors that appeal to them. Website portals provide platforms at which almost anyone can plea for funds for charities, personal causes, creative projects, and business ventures. Entrepreneurs and small-business owners can use crowdfunding to raise capital for start-ups, product launches, expansions, and other purposes.
COPYRIGHT 2017 Gale, a Cengage Company