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Creating Risk Capital: A Royalty Fund Solution to the Ownership and Financing of Enterprise

Book Description

Private enterprises are essential to a nation's economy and society - yet without finance, or risk capital, they may never get off the ground. Lack of risk capital on suitable terms thus frustrates entrepreneurial ambition, and checks economic growth. And, just as damaging, the search for finance can lead companies and businesses into unsuitable funding arrangements - such as bank loans or equity deals with external investors - that burden them with excessive debt or limit the ability of managers to run the business. This book proposes a fresh solution to the search for risk capital that should suit enterprise and investor alike. Ian Whalley begins by describing the rich inheritance of private enterprises and the financial systems which support them in major market economies. He looks at some serious problems which afflict many enterprises when they seek funding through conventional methods: from small and medium-size firms to major companies, providers of public services and diverse enterprises such as mutual and non-profit organisations. A common theme emerges - enterprises of all types struggle to obtain risk capital without taking on debt or compromising effective management control. The capital is necessary but the drawbacks are potentially fatal. The book shows how the dual functions of equity - risk capital and ownership capital - can be separated and thus how risk finance can be raised without affecting the ownership or control of a company, and without traditional borrowing. The model for achieving this is royalty funding, a system grounded in the proven and familiar practice of licensing. Under this system enterprises pay for the invested risk capital by means of royalties on the sales revenues they achieve, rather than become debtors or partners to those who provide the funds. Royalty funding will benefit both those who own and manage enterprises and also the investors who receive a contractually committed return whilst maintaining the security of asset ownership in the event of a failure of the enterprise. Whalley explains how royalty funding could be put into practice for a range of different enterprises, and draws some broad conclusions about the impact that royalty funding could have if used to finance business in the future. Offering a compelling alternative that complements current financial models this is an essential read for anyone involved in establishing, running or investing in successful enterprises, as well as policymakers and academics.

Table of Contents

  1. Cover
  2. Publishing details
  3. Acknowledgments
  4. Preface
    1. What this book covers
    2. Who this book is for
    3. How this book is organised
    4. Terminology
  5. Introduction
    1. Background
      1. National Research Development Corporation
    2. A wider opportunity
    3. A current perspective
      1. The financial crisis of 2007-2009
    4. Some basic facts
    5. Philosophy and ideology
    6. Risk
    1. 1. Enterprise and its Origins
      1. The enterprise
      2. Key factors in the origins of enterprise
    2. 2. Ownership, Control and Governance
      1. The importance of ownership
      2. The main forms of ownership
      3. Factors that determine the form of ownership
      4. The models of enterprise governance
      5. The prevailing models of governance
    3. 3. Capital and Credit Systems
      1. The substance of capital
      2. Forms of capital
      3. Sources of capital
    4. 4. Risk Capital
      1. Definition
      2. Purpose of risk capital
      3. Forms of risk capital
      4. Specific sources of risk capital
      5. Broader aspects of risk capital
    5. 5. Aspects of Capital Structures
      1. Equity and debt
      2. Choosing the mix of equity and debt financing
      3. Approaches to capital structures
    1. 6. Private Enterprises and the Equity Gap
      1. Small and medium-size enterprises
      2. Financing
      3. The start-up
      4. Is there really an equity gap?
      5. The proprietorship gap
      6. Conclusion
    2. 7. Major Public Companies and Governance
      1. A chequered history
      2. Corporate governance
      3. Conclusion
    3. 8. Public Service Enterprises and Legitimacy
      1. Nationalisation and public ownership
      2. Privatisation
      3. Conclusion
    4. 9. Diverse Enterprises and Capital
      1. A major role
      2. Start-ups and entrepreneurs
      3. Institutional arrangements
      4. Financing
      5. Conclusions
    5. 10. Seeking a Solution
      1. Private enterprises
      2. Major public companies
      3. Public service enterprises
      4. Diverse enterprises
      5. A common theme
      6. The dual function of equity
      7. Conclusions
    1. 11. Introducing the Royalty Fund
      1. Existing approaches
      2. The royalty funding approach
      3. The specification for a new system
      4. The basic system
    2. 12. Royalty Fund Building Blocks
      1. Licensing 1
      2. Franchising 2
      3. Turnover leasing
      4. Asset management
      5. Consignment of stock
      6. Other arrangements
    3. 13. Creating a Royalty Fund
      1. The royalty fund
      2. The equity generator
      3. The royalty funder
    4. 14. Operating a Royalty Fund
      1. The royalty funder
      2. The users
      3. Royalty funding in the market-place
    5. 15. The Royalty Fund Experience
      1. Solutions
      2. Private enterprises and the equity gap
      3. Major public companies
      4. Public service enterprises
      5. Enterprises under diverse forms of ownership
      6. Conclusion
  9. Bibliography
    1. Articles
    2. Books
    3. Websites