300 ENTREPRENEURSHIP
OWdoes the entrepreneur obtain the money to launch the new venture? The
chapter’s opening quote implies that securing investors is an active process. If
the era ever existed when investors beat a path to the door of the entrepreneur
with a better mousetrap, it is gone. The entrepreneur cannot be passive and assume that
financing will follow automatically from a well-designed business plan. Ventures in pur-
suit of financing greatly outnumber the investors and the money needed to launch them.
The best deal will result from an aggressive, confident, and realistic approach.
What is a deal? It is usually much more complicated than a simple “Give me money,
and sometime in the future, I will return it with gain.” A deal consists of the structure
and terms of a transaction between two or more parties.^1 For the entrepreneur, this defi-
nition has important implications. The first is that a deal has a structure. The structure
indicates sets of preferences for risk and reward. These preferences depend on the person-
al characteristics of the bargainers, the current financial situation of the industries
involved, and any pertinent customs and traditions. The second implication is that terms
must be negotiated—terms such as the rights and duties of the parties to the deal, the
timing of certain activities of the financiers and the entrepreneurs, and the constraints and
covenants that establish the rules the parties will follow. These are usually put in writing
so that the investors are assured, insured, and reassured that their money is secure.
The final implication of the definition is that there may be more than two parties to
the deal. It is unusual (and generally not preferred) for an entrepreneur to obtain all the
financing from a single source. This may mean having debt from one source and equity
from another. In fact, there are often layers of debt with different risk/ return character-
istics, as well as distinct layers of equity. A deal is always a team effort, and many posi-
tions are available for the players.
The entrepreneur’s key task is to create value. This means making the whole greater
than the sum of its parts by using the marketing concept of segmentation to raise finan-
cial backing. In essence, the entrepreneur is selling equity in the firm, ensuring cash flow,
and guaranteeing return and repayment. Just as products and services have different
characteristics that appeal to different people, financial instruments in a new venture
financial deal also are differentiated, creating opportunities for market segmentation.
To be successful, the entrepreneur must demonstrate understanding and insight in
three areas.^2 First, the entrepreneur and the top management team must understand
their business. Without a clear understanding of the business and its environment, they
will never be able to reach a consensus with the investors on the fundamentals, let alone
the financing. Entrepreneurs must know their business well enough to understand the
absolute amount of money they need and when they will need it. They must understand
the risks involved and the cause-and-effect factors so that they can explain and defend
their actions to potential investors. They need to understand the nature of the returnsH
caught between worlds, they will become a
bridge between those worlds.”
“I am not an optimist,” declares Margalit.
“I am an entrepreneur.”SOURCE:Adapted from “The Business of Persuasion,
The Economist, July 8, 2006: 60; Ari Shavit, “JVP in the
News,” Haaretz, June 17, 2006. Retrieved from the Web
August 2, 2006. http://www.jvpvc.com/news/20060617-
64618.html, http://www.forbes.comand http://www.jvpvc.com.