260 ENTREPRENEURSHIP
- Accounts receivable: The key variables are payment terms, credit limits, and collec-
tion programs. Customers should be encouraged to pay their bills on time and, if
the discount does not hurt margins, given incentives to pay early.
Across the Venture’s Life Cycle
Will the financial needs of the business change as different challenges arise? Of course.
Entrepreneurs must be able to recognize where their firm is in its life cycle and to spec-
ify the precise uses of these funds. By demonstrating to investors how the financing will
further the venture’s objectives, entrepreneurs significantly increase their chances of clos-
ing the deal.Early-Stage Financing. There are two categories of early-stage financing: seed capital
and start-up financing. Seed capital is the relatively small amount of money needed to
prove that the concept is viable and to finance feasibility studies. Seed capital usually is
used to investigate the possibilities of a business, not to start it. Start-up capital actu-
ally gets the company organized and operational. It puts in place the basics of product
development and the initial marketing effort. Start-up capital is invested in the business
before any significant commercial sales; it is the financing required to achieve these sales.
Start-up capital is also known as first-stage financing. For many businesses, all first-
stage financing comes from bootstrapping—that is from the entrepreneurs themselves.^8
We introduced bootstrapping in Chapter 5 in the context of writing the business plan.
Now we consider it in its financial sense—raising capital from personal sources.
Bootstrapping requires a sure sense of the entrepreneurs’ risk/reward preferences. By
using only their own money, they can keep more of the rewards of a successful venture,
but they also put more of their own assets at risk. These assets frequently include their
homes, their bank accounts, and any retirement accounts. Bootstrappers frequently max
out their credit cards.
It is a mistake to bootstrap without considering the next stage. Entrepreneurs can get
a business started by bootstrapping, but when it starts to grow they need outside capi-
tal. The amount provided by bootstrapping is almost always limited by the modest net
wealth cap of the entrepreneurs and the team. Recycling these dollars as revenue starts
to come in can grow the business only so far. Conserving cash is critical. Investing these
recycled dollars in fixed assets actually shrinks the potential size of the business since
these funds cannot be used for working capital. Eventually a growing business needs to
move to the next stage.Expansion or Development Financing. There are three sequential categories of fi-
nancing in the expansion stage. Second-stage financing is the initial working capital
that supports the first commercial sales. It goes to support receivables, inventory, cash
on hand, supplies, and expenses. At this point, the firm may not have a positive cash
flow. Third-stage financing is used to ramp up volumes to the break-even and positive-
cash-flow levels. It is expansion financing. Throughout the third stage, the business is
still private, a majority of the equity still in the hands of the founding top management
team. Fourth-stage financing, sometimes known as mezzanine financing (because it