Question

Discuss this statement: "The application of financial theory to new venturing has uniquely defining characteristics that differentiates it from classical corporate finance." What makes this statement true? What are the defining characteristics?

Answer 1

This statement is true because application of financial theory to new venturing mainly deals with providing funds or raising funds for early stage and emerging companies. For an early stage and an emerging company the quantum of risk is high and as such the modus operandi in this case is different from that of a classical corporate finance model. Classical corporate finance deals with various investment and financial decisions and the primary aim is at the maximization of shareholder’s value through financial planning that takes place both on the short term as well as long term basis. On the other hand application of financial theory to new venturing mainly aims at balancing the risk return equation and to ensure sustainability of the business venture.

The defining characteristics differ in both cases. For application of financial theory to new venturing the defining characteristic is “risk” while in case of classical corporate finance the defining characteristic is “value”. In case of application of financial theory to new venturing the objective is risk optimization while in case of classical corporate finance the objective is maximization of value.