Dollinger index

48 ENTREPRENEURSHIP

Limitations of Financial Resources

Why do entrepreneurs think that financial resources are notthe most important measure

of their success? To shed light on this subject, we will examine financial resources accord-

ing to the four attributes of resources.

Are Financial Resources Valuable? No doubt about it. Valuable resources enable a firm

to lower its costs, increase its revenue, and produce its product or service. Without

financial resources—that is, money—no firm can get very far. Start-up incurs real fi-

nancial costs, even for micro and home-based businesses. The axiom that you have to

spend money to make money is true, and the entrepreneur who cannot acquire any

financial resources may find that his or her dream never becomes a reality.

Are Financial Resources Rare? Sometimes yes and sometimes no. At various times in

the business cycle, credit crunches deter banks and other lending institutions from mak-

ing loans and extending credit. (However, because banks do not often finance pure

start-ups, this rarity applies to going concerns.) Similarly, the economic climate that

governs initial public offerings (the IPO market) sometimes favors new issues (when

the stock market is high and climbing) and at other times discounts new issues heavi-

ly (when the market is low and falling). For firms that must spend money before

collecting receipts, financial resources are rarer than for firms who can collect receipts

and deposits before expenses are paid. Overall, however, financial resources are not

rare. It is estimated that each year as much as $6 billion is available through formal

investors and an additional $60 billion through informal investors, or “angels.” These

funds do not include the money invested by the entrepreneur and the top-management

team.^36

Are Financial Resources Hard to Copy? No. One person’s money looks and spends

the same as another’s. Financial resources lead to competitive advantage in trading mar-

kets for large transactions only.^37 For example, the leveraged buyout of RJR Nabisco

required about $25 billion in financing. Only a few organizations had the connections

and were capable of securing that much money: Shearson-American Express; Kohlberg,

Kravis, and Roberts; and Forstmann Little. In such a situation, the absolute size of the

financial resource is an advantage. Most deals, however, are settled at amounts below

$25 billion, and on a strictly financial basis, money is a perfect copy of itself.^38

Are Financial Resources Nonsubstitutable with Common

Resources?

Once again, the technical answer is no. A few entrepreneurs succeed on the basis of

sweat equity, and nothing is more common than sweat. This means that most entrepre-

neurs start very small, on little capital other than their own hard work and efforts. This

is called bootstrapping. Through frugality, efficient operations, and reinvestment, they are

able to grow their businesses. Eventually, they can cross the threshold that makes them

attractive to investors. Under certain circumstances, hard work substitutes for outside

financing. Another alternative is a relationship with another firm. Strategic alliances can