Question

Identify and explain the FOUR requirements differentiators (factors) which make financial decision making for a new business (start-up) somewhat different than for an established entity.

Which differentiator is most critical to venture success?

Answer 1

FOUR requirements differentiators (factors) which make financial decision making for a new business (start-up) somewhat different than for an established entity.

1. Valuation: It is very difficult to forecast cash flows for a new startup. For a well-established entity in comparison to a new startup is easy to forecast the cash flows from the past trends of the company.
2. Funding: An established company may not struggle to raise fund for a new project because they have been the market for a long period of time, there is a variety of funding option available for them. For example, an established company may finance a new project through raising equity from the market. Investors have more trust in an established entity. Whereas new startups struggle to raise fund because they lack the trust of the investors.

3.Risk: Risk factor is considered high in new startups. An established entity a have a large customer base which ensures a good revenue stream for the future. A new business startup struggles to create a sound customer base for their product. This makes a new venture riskier.

4.Cost of capital: A high-risk factor attached to a new business which makes the cost of capital high. A money lender charges a high price for a risky asset. Cost of capital for an established entity is low in comparison to a new startup.

Which differentiator is most critical to venture a success?

Risk management is a key factor for the success of a new venture. A new venture faces both market risk and financial risk. A new venture should focus on managing both market risk and financial risk.