Polski v669sem

Financing Entrepreneurship: What Matters?: 

Financing Entrepreneurship: What Matters? Margaret Polski, Ph.D. Workshop in Political Theory & Policy Analysis Indiana University 4/3/00

Business Finance Life Cycle: 

Business Finance Life Cycle Introduction Low sales, high investment, low ROTA IPO at end of introduction phase Growth Increasing sales, high investment, increasing ROTA Maturity High sales, low investment, maximum ROTA Decline Decreasing sales, no investment, decreasing ROTA

Slide3: 

Introduction Growth Maturity Decline Business Finance Life Cycle

Financial Infrastructure: 

Financial Infrastructure Business finance implies the existence of an enforceable set of institutional arrangements Institutions (rules) create incentives for using particular mechanisms to solve problems related to: Information Time inconsistency Adverse selection Hazard

Finance Strategies: 

Finance Strategies Beg Borrow Loans and other forms of credit Bonds Steal Share risk, rewards, control Equity Sweat Cash Cooperative/Communal

Policy Considerations: 

Policy Considerations Social dilemma: allocate surplus funds to those who have funds deficits. Efficiency and equity matter. Costs of coordination nontrivial Heterogeneous types Asymmetric resources Three types of coordination mechanisms Markets: public/private Intermediation Hybrid

Types of Small Business Finance: 

Types of Small Business Finance Internal Insider (equity, loans, other credit) Angel External Trade credit Bank loans Venture capital private government Public equity or debt

Small Business Finance: U.S.Source: Berger & Udell (1998): 

Small Business Finance: U.S. Source: Berger & Udell (1998) Small business finance in general Equity 50% Owner 31% Other members of startup team 13% Angel 4% VC 2% Debt 50% Financial institutions 27% Nonfinancial institutions/government 18% Individuals 6% Introduction phase: Principal owner provides 70% of finance

Slide9: 

Introduction Growth Maturity Decline Business Finance Life Cycle: Source of Finance Owner Angel Incubator R& D Seed funds VC IPO Retained Earnings Debt Equity Payout Dividends

Early Stage Investments in 1995Compiled:Gompers & Lerner, 1999; WDR 1997. Millions of 1997 dollars: Gross/PerCapita.: 

Early Stage Investments in 1995 Compiled:Gompers & Lerner, 1999; WDR 1997. Millions of 1997 dollars: Gross/PerCapita. U.S. 3,374 12.8 Israel 550 91.6 Canada 182 6.0 Germany 116 1.4 Netherlands 100 6.7 Italy 60 1.0 Australia 54 3.0 U.K. 36 .6 France 35 .6 Spain 24 .6 Japan 11 .08

U.S.: VC DisbursementsCompiled: Gompers & Lerner, 1999. Millions of 1997 dollars 1965-1996: 

U.S.: VC Disbursements Compiled: Gompers & Lerner, 1999. Millions of 1997 dollars 1965-1996 Total 1965-1996: $35,187 80% ($28,258) disbursed to 4 industries: Office/computing machines $8,997 Communication/electronic equip. $8,321 Drugs $6,422 Prof/Scientific instruments $4,518

Discussion Questions: 

Discussion Questions Most new ventures fail. Who should provide new venture finance and what are the implications of each alternative? E.g. Owners Banks or other institutional investors Government Private capital markets Public capital markets

Discussion Questionscont’d: 

Discussion Questions cont’d In the U.S. data, what appears to be the relationship between net worth and the supply of new venture finance? Who gets VC? Implications for growth? Contrast with industrial policy or other forms of targeting firms for growth. In view of above, who are potential entrepreneurs?

Discussion Questionscont’d: 

Discussion Questions cont’d Different businesses have different finance needs in introduction phase. What are the implications of this? Given the nature of entrepreneurship, how willing is a typical entrepreneur to relinquish control? What are the institutional implications of the need to exit from a failing company? An equity stake? A debt contract?