INTRODUCTION TO FINANCE FOR ENTREPRENEURS

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CHAPTER 1

INTRODUCTION TO FINANCE FOR ENTREPRENEURS

True-False Questions

• Entrepreneurs provide the financing to individuals who think, reason,

and act to convert ideas into commercial opportunities and create opportunities.

• Entrepreneurship is the process of changing ideas into commercial

opportunities and creating value.

• An entrepreneur is an individual who thinks, reasons, and acts to

convert ideas into commercial opportunities and to create value.

• Mark Twain once said, “I was always able to see an opportunity before

it became one.”

• Small businesses, those with less than 500 employees, represent over 99

percent of all employers, and account for about one-half of the gross domestic product in the United States.

• Small and growing enterprises are critical to the U.S. economy; small

firms provide 20 to 30 percent of net new jobs.

• Small high-technology firms are responsible for twice as many product

innovations per employee and obtain more patents per sales dollar than large high-technology firms.

• Phillips and Kirchhoff, using Dun & Bradstreet data, found that 24

percent of new firms were still in existence after two years of operation.

• Nearly half of business failures are due to economic factors such as

inadequate sales, insufficient profits, and industry weakness.

• Although the risks associated with starting a new entrepreneurial

venture are large, there is always room for one more success.

• Studies by Phillips and Kirchhoff, and by Headd, found that about

38%-40% of new firms survived six years of operation.

• One study of Inc. magazine’s 500 high-growth firms suggests that

about 88 percent of founders feel their firms’ successes are due to (Entrepreneurial Finance, 6e Chris Leach, Ronald Melicher ) (Test Bank all Chapters) 1 / 4

Chapter 1: Introduction to Finance for Entrepreneurs 2

extraordinary ideas, while the remaining 12 percent feel their firms’ successes are due to exceptional execution of ordinary ideas.

• “Fads” are large societal, demographic, or technological trends or

changes that are slow in forming but once in place continue for many years.

• “Fads” are not predictable, have short lives, and do not involve macro

changes.

• Three major megatrends discussed in Chapter 1 include: societal trends

or changes, demographic trends or changes, and technological trends or changes.

• In 1982, Harry Dent identified several major or megatrends shaping

U.S. society and the world.

• The so-called “baby boom” generation applies to people born in the

United States during the 1946-1964 time period.

• Perhaps the most important invention shuttling us from an industrial

society to an information society is the computer chip.

• Environmental commerce, or e-commerce, involves the use of

electronic means to conduct business online.

• The Office of Advocacy of the U.S. Small Business Administration

documents that “employer firm births” have exceeded 700,000 annually in recent years.

• Reasonable estimates place nonemployer (e.g., single person or small

family) business started each year at less than 100,000.

• Bill Gates once said: “I was seldom able to see an opportunity, until it

ceased to be one.”

• A study by Phillips and Kirchhoff using Dun & Bradstreet data found

that about three-fourths of new firms were still in existence after two years of operation.

• Studies by Phillips and Kirchhoff, and by Headd, found that one-half

of new firms or new employers were still in existence after four years of operation.

• Nine principles of entrepreneurial finance are identified and explored in

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Chapter 1: Introduction to Finance for Entrepreneurs 3

• The “time value of money” is an important component of the rent one

pays for using someone else’s financial capital.

• A venture’s financial objective is to survive.

• Private financial markets are a place where standardized contracts or

securities are traded on organized security exchanges with restrictions on how they can be transferred.

• Free cash flow is the net income forecast to be available to the venture’s

owners over time.

• Free cash flows are adjusted for risk and the time value of money when

used to calculate the value of a venture.

• Free cash exists when cash exceeds that which is needed to operate, pay

creditors, and invest in assets.

• Free cash is all the cash available to cover operating expenses.

• Owner-manager (agency) conflicts are differences between manager’s

self-interest and that of the owners who hired the manager.

• The owner-debtholder conflict is the divergence of the owners’ and

lenders’ self-interest as the firm gets close to going “public.”

• The financial objective of increasing value is inconsistent with

developing positive character and reputation.

• Entrepreneurial finance is the application and adaptation of financial

tools and techniques to the planning, funding, operations, and valuation of an entrepreneurial venture.

• Financial distress occurs when cash flow is insufficient to meet current

debt obligations.

• The second stage in a successful venture’s life cycle is the startup stage.

• The rapid growth stage directly follows the startup stage.

• Early-stage ventures include firms in their development, startup, or

survival live cycle stages.

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Chapter 1: Introduction to Finance for Entrepreneurs 4

• Business angels are wealthy individuals acting as informal or private

investors, who provide venture financing for small businesses.

• Mezzanine financing is temporary financing needed to keep the venture

afloat until the next offering.

• “Crises and bubbles” and “emerging economies and global change” are

considered to be sources of entrepreneurial opportunities.

• In Chapter I five mega-trend categories are identified as sources of

entrepreneurial opportunities.

• Entrepreneurial opportunities can occur only when there are societal

changes in the world.

• One principal of entrepreneurial finance is “risk and expected reward

go hand in hand.

• While cash is the language of business, accounting is the currency.

• Venture character and reputation can be assets or liabilities.

• Disruptive innovation is an innovation that creates a new market or

network that disrupts and displaces an existing market or network.

• The “sharing economy” refers to the cross-referencing of innovations

for record-keeping purposes.

Multiple-Choice Questions

• Successful entrepreneurs exhibit which of the following traits?
• recognize and seize commercial opportunities
• economic pessimism
• tend to be doggedly optimistic
• both a and b
• both a and c

• While one must be careful to avoid too many generalizations about

entrepreneurial traits or characteristics, which one of the following characteristics would not normally be associated with successful entrepreneurs?

• being able to see and seize a commercial opportunity
• planning for the venture’s future
• only being able to see an opportunity after it ceases to be one
• being optimistic about the venture’s success
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