Introduction to Corporate Finance

ONLINE CHAPTERS

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

describe how the financing of

entrepreneurial growth companies differs

from the financing techniques used by

more mature, publicly traded corporations

discuss the main types of institutional

venture capital funds in operation today,

and explain how these differ in terms of

organisation, financing and investment

objectives

explain how venture capitalists structure

their investments, and why they use staged

financing and generally use convertible

preferred shares as their investment

vehicle. Review how venture capitalists

price their investments and the principal

methods they use to exit an investment

describe the international markets for

venture capital, particularly those in

Australia, the US, Western Europe,

Canada, Israel, China and Japan.

LO20.1

LO20.2

LO20.3

LO20.4

20 -1 THE CHALLENGES OF FINANCING

ENTREPRENEURIAL GROWTH

COMPANIES

How does entrepreneurial finance differ from ordinary corporate finance? Entrepreneurial growth

companies (EGCs) differ from large, publicly traded companies in four important ways. First, EGCs

often achieve very rapid growth, at times consuming much more cash than they generate. Rapid growth

requires substantial ongoing investments in fixed assets and working capital. Privately owned EGCs

LO20.1

Beginning around 1980, no area of finance

has prospered quite as much as the field of

entrepreneurial finance. Entrepreneurial finance

focuses on the special challenges and problems

associated with the investment in and financing

of risky businesses, typically startups. from the

proliferation of venture capital investors, to the

boom and bust in Internet-related IPOs, the

financial performance of entrepreneurial growth

companies (EGCs), typically high-risk, technology-

based startups, has offered spectacular theatre

during the past 40 years.

In this chapter, we examine the particular

challenges faced by financial managers of EGCs

and the ways that venture capitalists (VCs) help

meet these challenges. The topic is an important

one, even for students who are not aspiring venture

capitalists. Formerly the near-exclusive domain of

small, highly specialised venture capital limited

partnerships, the financing of EGCs now affects

professionals working for mutual funds, pension

funds and even Fortune 500 manufacturing

concerns. Increasingly, large corporations, such

as Microsoft, Pfizer and General Electric, have

internal venture capital units that spend billions

annually to finance, nurture and grow new business

opportunities. By studying how VCs choose and

structure EGC investments, we can learn lessons

that extend well beyond the venture capital

industry.

entrepreneurial finance
Focuses on the special
challenges and problems
associated with the investment
in and financing of risky
businesses, typically startups

entrepreneurial growth
companies (EGCs)
Typically high-risk, technology-
based startups that are
commonly funded by venture
capitalists