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In 200 words or more how does a person evaluate finance as it relates to entrepreneurship.

In 200 words or more how does a person evaluate finance as it relates to entrepreneurship.

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Expert Solution

person evaluate finance as it relates to entrepreneurship:-

Entrepreneurial growth companies differ from large, publicly traded firms in four important ways. First, EGCs often achieve compound annual growth rates of 50 percent or more in sales and assets. Though it is somewhat counterintuitive, companies growing that rapidly usually consume more cash than they generate because growth requires ongoing investments in fixed assets and working capital. In fact, there is an old saying that the leading causes of death for young firms are (1) not enough customers and (2) too many customers. Too many customers or very rapid growth can lead to bankruptcy if firms do not have adequate financing in place. Privately owned EGCs almost always plan to convert to public ownership, either through an initial public offering (IPO) or by selling out to a larger firm. Once they become publicly traded, EGCs tend to rely on external equity funding much more than do older, larger firms. In other words, EGCs grow rapidly and consume a great deal of cash, much of which they must obtain externally. Second, the most valuable assets of many of these firms are often patents and other (intangible) intellectual property rights, which we know are inherently difficult to finance externally. This poses a huge challenge for EGC financial managers. Third, many entrepreneurial growth companies seek to commercialize highly promising but untested technologies, and this inevitably increases both the risk of failure and the potential payoff from success. Fourth, EGCs must attract, motivate, compensate, and retain highly skilled technical and entrepreneurial talent in a way that minimizes claims on the firm’s current cash flow, which is often severely constrained. Because of their extremely rapid growth in assets, EGCs must rely much more heavily on external equity financing than other companies. Although most technology- and knowledge-based companies also finance growth with equity, mature firms can meet their funding needs by reinvesting profits. Further, because most EGCs are privately held, they lack access to public stock markets and must rely instead on private equity financing. Private equity generally means either investments by current owners or funding by professional venture capitalists.


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