Raising Entrepreneurial Capital

stockholders who are personally shielded from debts or obligations related

to the business. The C-Corporation is the most costly form to create and

maintain, but if high growth dictates external capital or high levels of

earning retention, it may be the only appropriate form. A variation of the

C-Corporation is the Closely Held Corporation, which has a small number

of shareholders, ranging from 30 to 50, no ready market for the corpor-

ation’s stock, and active participation by the majority of shareholders in the

management of the corporation.

A primary inhibitor of business success is lack of start-up capital. Finan-

cing comes from two basic sources: debt and ownership equity.

Debt is money that is borrowed and that must be repaid on some prede-

termined schedule, with interest; normally a lender does not receive an y

ownership interest in the business. Borrowing money at the very start of a

new business will create an additional and regular cash requirement to make

the debt payments.

Equity represents the exchange of funding for partial ownership of the

company; such funds represent money invested in the firm without any re-

quirement of date or form of repayment. Even though equity capital does not

burden a new business with loan repayments and interest charges, it reduces

the venture team’s control and their share of proceeds from the business.

Most start-ups suffer from undercapitali zation. Many experts estimate

that it takes two to three times the amount of capital estimated by entrepre-

neurs to reach profitability. Entrepreneurs, and their financial backers as

well, try to run the start-up business on a shoestring. In doing this, they run

the risk of running short of cash and then having to raise more capital.

Raising capital the second or third time for a company that has not met its

projections is more difficult than raising the full amount needed at the

beginning, as difficult as that is.

Another important cause of business failure is poor management. Entre-

preneurs are often specialists in one functional but important aspect of

the start-up business. They often lack management, leadership, business,

financial, marketing, or human resource skills and knowledge. Unfortu-

nately, the technical or functional expert ise is seldom sufficient to sustain

the business.

DISCUSSION QUESTIONS

1. How can the organizational form chosen for a business affect strategic

options for the company down the road?

2. Think about the differences between an entrepreneur and the founder of a

lifestyle business. Are they very different? Where do you see yourself?

36 Introduction—In the Beginning