Entrepreneurial Finance

Citation

Ghulam Hussain, J. (2004), "Entrepreneurial Finance", Journal of Small Business and Enterprise Development, Vol. 11 No. 2, pp. 264-265. https://doi.org/10.1108/14626000410537218

Financing entrepreneurs is a prerequisite for the economic prosperity of any economy and this book makes a significant contribution towards understanding the needs and constraints encountered by both lenders and borrowers. This book is a timely contribution to the current debate over financing for entrepreneurial needs. In recent years the role and scope of financing small, medium and large firms has been reappraised. This book is an all‐inclusive and innovative presentation of entrepreneurial finance that bridges the gap between empirical research and traditional approaches, to deal with the various sources of relevant finance. It provides a good overview of a whole range of financial sources, techniques and their application for the established and budding entrepreneurs.

The book covers a wide spectrum of topics and manages to present, in a unified way, all the main themes relating to entrepreneurial finance. The level and depth of coverage is extensive and the authors are successful in meeting their key stated objectives: nurturing the interest of new ventures, empowering students and practitioners to develop in‐depth understanding of theoretical and applied financial issues relating to entrepreneurial activity. The text provides a comprehensive review of the central issues relating to raising finance for the start up stage, financial aspects of strategic and business planning, financial forecasting, valuation, financial design and financial contracting and choices, etc. However, it would be fair to say that the topics considered can be found in many corporate finance books but what distinguishes this book from others is that it shows how traditional techniques can be applied to evaluate financing and investment decisions. The book is divided into seven parts: getting started, financial aspects of strategic and business planning, financial forecasting, valuation, organizational design and financial contracting, financial harvesting and conclusion. It balances two different perspectives on the topic: on the one side it attempts to distinguish the factors which make successful entrepreneurs, how small entrepreneurial finance differs from corporate finance and examines why the study of entrepreneurial finance could lead to better investment and financing decisions: and on the other side it shows how traditional theoretical tools could aid the financial decision‐making process. The authors introduce and explore the relationship between risk return, finance and the entrepreneurial process.

To cater for a wide range of readers, the authors provide a very interesting introduction of entrepreneurial history and how it helped to transform markets and societies. In particular, the concept of risk is best captured through the analogy between “undertaking a venture and launching a rocket” that captures the presence of risk. This is preceded by a very detailed analysis of stages of new venture development and their linkages with the financing sequences.

In the subsequent chapters, the authors provide a review of different sources of finance. The emphasis is on the US rather than European studies, which makes it less relevant to European students, but conveys very well the basic issues that need to be considered when seeking external funding, irrespective of the country of origin. Recent developments in the UK and European context would have enhanced the content of this part of the book. However, alternative sources of finance are concisely written and are accessible to both novice and experienced entrepreneurs, though the concepts are introduced without providing the critique or examining the limitation of the venture capitalist or venture capital for small and medium sized businesses.

In section 2, financial aspects of strategic and business planning, the chapter on the business plan plays a central role for both borrowers and lenders. It is recognised that the business plan provides an embryonic cord that links the identification of opportunity, financing, strategy and implementation – to realise the entrepreneurial entity. It is this thought the process that challenges the entrepreneur to confront real issues, such as cost, short falls and the importance of due diligence and realism. In the subsequent chapter, the authors examine the new venture strategy with the aid of examples and delve into advance level topics that require the reader to have quite detailed understanding of financial issues, product real options, organizational strategy and game theory. Furthermore, the chapter on developing business strategy using simulation is of great value in that it encourages the entrepreneurs to examine “what if” scenarios and consider alternative choices. The major contribution of this section is to draw a distinction between the business plan for new businesses and that of established enterprises, thereby providing a succinct distinction between financial and business problems, and enabling entrepreneurs to identify the appropriate strategies to deal with such issues.

The section on financial forecasting, part 3, is split into two parts: methods and assessment. The first chapter starts with the cash flow cycle and examines the determinants of financial needs, which leads into details of forecasting and illustrates how to build a financial model that summarises the whole purpose of starting‐up a business. The second chapter augments the points discussed in chapter 6, and provides a comprehensive overview of techniques that complements a reader's financial knowledge of enterprise viability. The techniques and models proposed require considerable data that might not be readily available for new enterprises and for existing businesses the exercise may be rather expensive. The sustainable growth model is a static model and requires both data and a number of assumptions to provide any meaningful results, and those may also be too difficult for new entrepreneurs to use.

Part 4, valuation, is challenging for the reader as it presupposes that there exists a considerable knowledge about entrepreneurial finance. However, valuation of existing and new ventures is an area that is scarcely addressed in the traditional books on entrepreneurial finance and this represents a valuable addition to the specialist literature. The authors, using the traditional models of estimation and measures, provide a comprehensive coverage; in particular, the cost of capital estimation methods is thoroughly covered. I suggest that a good understanding of this area can be extremely desirable to both new and established entrepreneurs. At the same time the authors make an attempt to relate the valuation techniques with the entrepreneur's specific needs. The depth and coverage of this part of the book is rather advanced and some entrepreneurs who were not exposed to a finance course may not understand the contents easily or acquire sufficient expertise to make use of such knowledge to evaluate their businesses. Soft information does not lend itself to these techniques, which can render the results less meaningful.

Organisation design plays an important role when determining the risk return relationship and how it impacts upon distribution and control of the business. To address these issues, part 5 considers some of the fundamental topics relating to symmetric information, measure of risk, cost of the project and evaluation of alternative proposals. In this section, the issues relating to agency cost are examined and briefly consider the incentives to minimise the agency cost. In particular, the section on contract choices and returns is explored at quite an advanced level, where the authors link the debate with portfolio theory, the entrepreneur's total wealth and alternative opportunities. According to the authors, this part of the book provides a good coverage of “conceptual framework” for evaluating new ventures but such elaborate models and techniques are more relevant for academic studies rather than of practical use to a new entrepreneur.

Part 6 starts out with a detailed overview of the Venture Capital Market and its role in providing funding for entrepreneurial activity, in particular where risk and returns are above the traditional level. The chapter on financing provides an extensive coverage of alternative financing that would be well received by any budding or established entrepreneur. However, as with the rest of this book, the contents and examples are much more US based and students in Europe may not find such examples easily accessible.

Overall, Janet and Richard Smith have provided a very detailed, well‐referenced and easy to follow textbook for students, entrepreneurs and professionals. The book would also benefit academics and researchers who need to periodically update, broaden and relate traditional techniques to real business application or to widen their awareness of the contemporary theory and practice of entrepreneurial finance.