Skip to ContentGo to accessibility pageKeyboard shortcuts menu
OpenStax Logo
Organizational Behavior

19.4 New Venture Financing

Organizational Behavior19.4 New Venture Financing
Menu
Table of contents
  1. Preface
  2. 1 Management and Organizational Behavior
    1. Introduction
    2. 1.1 The Nature of Work
    3. 1.2 The Changing Workplace
    4. 1.3 The Nature of Management
    5. 1.4 A Model of Organizational Behavior and Management
    6. Key Terms
    7. Summary of Learning Outcomes
    8. Chapter Review Questions
    9. Critical Thinking Case
  3. 2 Individual and Cultural Differences
    1. Introduction
    2. 2.1 Individual and Cultural Factors in Employee Performance
    3. 2.2 Employee Abilities and Skills
    4. 2.3 Personality: An Introduction
    5. 2.4 Personality and Work Behavior
    6. 2.5 Personality and Organization: A Basic Conflict?
    7. 2.6 Personal Values and Ethics
    8. 2.7 Cultural Differences
    9. Key Terms
    10. Summary of Learning Outcomes
    11. Chapter Review Questions
    12. Management Skills Application Exercises
    13. Managerial Decision Exercises
    14. Critical Thinking Case
  4. 3 Perception and Job Attitudes
    1. Introduction
    2. 3.1 The Perceptual Process
    3. 3.2 Barriers to Accurate Social Perception
    4. 3.3 Attributions: Interpreting the Causes of Behavior
    5. 3.4 Attitudes and Behavior
    6. 3.5 Work-Related Attitudes
    7. Key Terms
    8. Summary of Learning Outcomes
    9. Chapter Review Questions
    10. Management Skills Application Exercises
    11. Managerial Decision Exercises
    12. Critical Thinking Case
  5. 4 Learning and Reinforcement
    1. Introduction
    2. 4.1 Basic Models of Learning
    3. 4.2 Reinforcement and Behavioral Change
    4. 4.3 Behavior Modification in Organizations
    5. 4.4 Behavioral Self-Management
    6. Key Terms
    7. Summary of Learning Outcomes
    8. Chapter Review Questions
    9. Management Skills Application Exercises
    10. Managerial Decision Exercises
    11. Critical Thinking Case
  6. 5 Diversity in Organizations
    1. Introduction
    2. 5.1 An Introduction to Workplace Diversity
    3. 5.2 Diversity and the Workforce
    4. 5.3 Diversity and Its Impact on Companies
    5. 5.4 Challenges of Diversity
    6. 5.5 Key Diversity Theories
    7. 5.6 Benefits and Challenges of Workplace Diversity
    8. 5.7 Recommendations for Managing Diversity
    9. Key Terms
    10. Summary of Learning Outcomes
    11. Chapter Review Questions
    12. Management Skills Application Exercises
    13. Managerial Decision Exercises
    14. Critical Thinking Case
  7. 6 Perception and Managerial Decision Making
    1. Introduction
    2. 6.1 Overview of Managerial Decision-Making
    3. 6.2 How the Brain Processes Information to Make Decisions: Reflective and Reactive Systems
    4. 6.3 Programmed and Nonprogrammed Decisions
    5. 6.4 Barriers to Effective Decision-Making
    6. 6.5 Improving the Quality of Decision-Making
    7. 6.6 Group Decision-Making
    8. Key Terms
    9. Summary of Learning Outcomes
    10. Chapter Review Questions
    11. Management Skills Application Exercises
    12. Managerial Decision Exercises
    13. Critical Thinking Case
  8. 7 Work Motivation for Performance
    1. Introduction
    2. 7.1 Motivation: Direction and Intensity
    3. 7.2 Content Theories of Motivation
    4. 7.3 Process Theories of Motivation
    5. 7.4 Recent Research on Motivation Theories
    6. Key Terms
    7. Summary of Learning Outcomes
    8. Chapter Review Questions
    9. Management Skills Application Exercises
    10. Managerial Decision Exercises
    11. Critical Thinking Case
  9. 8 Performance Appraisal and Rewards
    1. Introduction
    2. 8.1 Performance Appraisal Systems
    3. 8.2 Techniques of Performance Appraisal
    4. 8.3 Feedback
    5. 8.4 Reward Systems in Organizations
    6. 8.5 Individual and Group Incentive Plans
    7. Key Terms
    8. Summary of Learning Outcomes
    9. Chapter Review Questions
    10. Management Skills Application Exercises
    11. Managerial Decision Exercises
    12. Critical Thinking Case
  10. 9 Group and Intergroup Relations
    1. Introduction
    2. 9.1 Work Groups: Basic Considerations
    3. 9.2 Work Group Structure
    4. 9.3 Managing Effective Work Groups
    5. 9.4 Intergroup Behavior and Performance
    6. Key Terms
    7. Summary of Learning Outcomes
    8. Chapter Review Questions
    9. Management Skills Application Exercises
    10. Managerial Decision Exercises
    11. Critical Thinking Case
  11. 10 Understanding and Managing Work Teams
    1. Introduction
    2. 10.1 Teamwork in the Workplace
    3. 10.2 Team Development Over Time
    4. 10.3 Things to Consider When Managing Teams
    5. 10.4 Opportunities and Challenges to Team Building
    6. 10.5 Team Diversity
    7. 10.6 Multicultural Teams
    8. Key Terms
    9. Summary of Learning Outcomes
    10. Chapter Review Questions
    11. Management Skills Application Exercises
    12. Managerial Decision Exercises
    13. Critical Thinking Case
  12. 11 Communication
    1. Introduction
    2. 11.1 The Process of Managerial Communication
    3. 11.2 Types of Communications in Organizations
    4. 11.3 Factors Affecting Communications and the Roles of Managers
    5. 11.4 Managerial Communication and Corporate Reputation
    6. 11.5 The Major Channels of Management Communication Are Talking, Listening, Reading, and Writing
    7. Key Terms
    8. Summary of Learning Outcomes
    9. Chapter Review Questions
    10. Management Skills Application Exercises
    11. Managerial Decision Exercises
    12. Critical Thinking Case
  13. 12 Leadership
    1. Introduction
    2. 12.1 The Nature of Leadership
    3. 12.2 The Leadership Process
    4. 12.3 Leader Emergence
    5. 12.4 The Trait Approach to Leadership
    6. 12.5 Behavioral Approaches to Leadership
    7. 12.6 Situational (Contingency) Approaches to Leadership
    8. 12.7 Substitutes for and Neutralizers of Leadership
    9. 12.8 Transformational, Visionary, and Charismatic Leadership
    10. 12.9 Leadership Needs in the 21st Century
    11. Key Terms
    12. Summary of Learning Outcomes
    13. Chapter Review Questions
    14. Management Skills Application Exercises
    15. Managerial Decision Exercises
    16. Critical Thinking Case
  14. 13 Organizational Power and Politics
    1. Introduction
    2. 13.1 Power in Interpersonal Relations
    3. 13.2 Uses of Power
    4. 13.3 Political Behavior in Organizations
    5. 13.4 Limiting the Influence of Political Behavior
    6. Key Terms
    7. Summary of Learning Outcomes
    8. Chapter Review Questions
    9. Management Skills Application Exercises
    10. Managerial Decision Exercises
    11. Critical Thinking Case
  15. 14 Conflict and Negotiations
    1. Introduction
    2. 14.1 Conflict in Organizations: Basic Considerations
    3. 14.2 Causes of Conflict in Organizations
    4. 14.3 Resolving Conflict in Organizations
    5. 14.4 Negotiation Behavior
    6. Key Terms
    7. Summary of Learning Outcomes
    8. Chapter Review Questions
    9. Management Skills Application Exercises
    10. Managerial Decision Exercises
    11. Critical Thinking Case
  16. 15 External and Internal Organizational Environments and Corporate Culture
    1. Introduction
    2. 15.1 The Organization's External Environment
    3. 15.2 External Environments and Industries
    4. 15.3 Organizational Designs and Structures
    5. 15.4 The Internal Organization and External Environments
    6. 15.5 Corporate Cultures
    7. 15.6 Organizing for Change in the 21st Century
    8. Key Terms
    9. Summary of Learning Outcomes
    10. Chapter Review Questions
    11. Management Skills Application Exercises
    12. Managerial Decision Exercises
    13. Critical Thinking Case
  17. 16 Organizational Structure and Change
    1. Introduction
    2. 16.1 Organizational Structures and Design
    3. 16.2 Organizational Change
    4. 16.3 Managing Change
    5. Key Terms
    6. Summary of Learning Outcomes
    7. Chapter Review Questions
    8. Management Skills Application Exercises
    9. Managerial Decision Exercises
    10. Critical Thinking Case
  18. 17 Human Resource Management
    1. Introduction
    2. 17.1 An Introduction to Human Resource Management
    3. 17.2 Human Resource Management and Compliance
    4. 17.3 Performance Management
    5. 17.4 Influencing Employee Performance and Motivation
    6. 17.5 Building an Organization for the Future
    7. 17.6 Talent Development and Succession Planning
    8. Key Terms
    9. Summary of Learning Outcomes
    10. Chapter Review Questions
    11. Management Skills Application Exercises
    12. Managerial Decision Exercises
    13. Critical Thinking Case
  19. 18 Stress and Well Being
    1. Introduction
    2. 18.1 Problems of Work Adjustment
    3. 18.2 Organizational Influences on Stress
    4. 18.3 Buffering Effects of Work related Stress
    5. 18.4 Coping with Work related Stress
    6. Key Terms
    7. Summary of Learning Outcomes
    8. Chapter Review Questions
    9. Management Skills Application Exercises
    10. Critical Thinking Case
  20. 19 Entrepreneurship
    1. Introduction
    2. 19.1 Overview of Entrepreneurship
    3. 19.2 Characteristics of Successful Entrepreneurs
    4. 19.3 Business Model Canvas
    5. 19.4 New Venture Financing
    6. 19.5 Design Thinking
    7. 19.6 Optimal Support for Entrepreneurship
    8. Key Terms
    9. Summary of Learning Outcomes
    10. Chapter Review Questions
    11. Management Skills Application Exercises
    12. Managerial Decision Exercises
    13. Critical Thinking Case
  21. A | Scientific Method in Organizational Research
  22. B | Scoring Keys for Self-Assessment Exercises
  23. References
  24. Index
  1. How do entrepreneurs finance their new business ideas?

Many entrepreneurs don’t start a business because they believe that starting a venture will require substantial sums of funding, and they personally do not possess these reserves. The most common means of starting new ventures is by bootstrapping—that is, attempting to found and build a company from personal finances or from the operating revenues of the new company. This term comes from the expression “pull yourself up by your bootstraps” (the fingerholds on boots). Bootstrapping can complement traditional finance sources, helping entrepreneurs to reduce their reliance on them or eliminate these sources entirely. Table 19.3 depicts seven bootstrapping strategies.

Bootstrapping Strategies
Strategy Example
  1. Stick to a business domain you know and love.
 Two recent Florida Atlantic University alumni transformed their love of surfing and the ocean into 4ocean, which sells bracelets and other products. The sales pay local fishermen to clean up plastic and trash in waterways.
  1. Find team members to work for equity rather than cash.
 In 2005, Sean Parker, founding president of Facebook, asked artist David Choe to take stock instead of cash for painting the Facebook office walls. That stock was eventually worth $200 million.
  1. Build a plan around your budget rather than your wishes.
 Cam Ross started Celise, a biodegradable goods supplier, in college. Strapped for financing, Cameron planned around his available budget, which depended on current sales and wins in business plan competitions.
  1. Defer your urge to have office space until you have customers.
 In July 2014, Amazon founder Jeff Bezos started the company from the garage of a home he rented in Bellevue, Washington.
  1. Ask for advances on royalties and vendor-deferred payments.
 In the music industry, many songwriters have sought advances against future royalties from their songs.
  1. Negotiate inventory management with suppliers and distributors.
 Pet food delivery start-up Petcircle is one of Australia’s fastest-growing companies. They attribute their early success to bootstrapping via managing supplier terms carefully.
  1. Choose a business model to optimize your revenue flow and timing.
 Chicago-based restaurant Alinea creates themes and sells out seats month in advance, allowing them to buy in bulk with cash from customers. As payments are upfront and all sales are final, revenue is fixed prior to delivering the meals. This business model eliminates many of the downsides of traditional restaurants’ business models.
Source: Adapted from Martin Zwilling,“7 Ways to Bootstrap Your Business,” Entrepreneur Magazine, December 25, 2015, https://www.entrepreneur.com/article/254217; https://business.fau.edu/centers/adams-center/ace-success-stories/ ; Lucy England, “The artist who painted Facebook's 1st office took stock instead of cash — and now he is worth $200 million,” Business Insider, June 9, 2015, https://www.businessinsider.com/graffiti-artist-painted-facebooks-first-office-now-worth-200-million-2015-6; Todd Bishop, “Amazon at 20 years: From garage startup to global technology powerhouse,” GeekWire, July 9, 2014, https://www.geekwire.com/2014/amazon-20-years-garage-startup-global-powerhouse/.
Table 19.3 (Attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Types of Capital

There are two main types of capital for entrepreneurs. Entrepreneurs can access debt capital, which is borrowed money that must be repaid at some agreed-upon future date (e.g., from banks, credit cards, or finance companies), and equity capital, which is the owner’s investment in the company and does not have a specific date for repayment (e.g., angel investors, venture capital).

Debt financing is available to most entrepreneurs and can involve loans of various lengths. Short-term loans typically require repayment in less than 1 year and are often credit-created or bank loans. Immediate-term loans must be repaid in between 1 and 10 years, usually in periods. They are useful for small and moderate-sized companies. Long-term loans last over 10 years. Businesses must be operating for a long period of time to be approved for these loans to show stability and reliability to repay their debt. Equity capital does not require a business to promise to repay any debt. Equity capital is an investment in the business, frequently from selling common stock.

Sources of Capital

Entrepreneurs can utilize capital from several sources. The most common type of capital is personal savings. By using personal savings, the venture eliminates the expectation of repayment on a loan, and the entrepreneur does not face as much financial backlash when profits do not meet expectations. Friends and relatives can often be a fast way to gain capital. However, financial issues may create tension in these relationships. Angel investors are individual investors or groups of experienced investors who provide venture financing from their own funds. Venture capital is financing obtained from venture capitalists, investment firms that specialize in financing small, high-growth companies and receive an ownership interest and a voice in management in return for their investment. Internal funds are retained earnings within a firm that can be reinvested into the business.

Banks offer many types of loan services, including lines of credit, straight commercial loans, term loans, accounts-receivable loans, warehouse-receipt loans, and collateral loans. A line of credit is an informal agreement between the bank and the borrower (the business). Straight commercial loans are based on the borrower’s financial statements and are typically made for 30–90 days. Term loans mature in 1 to 10 years. Accounts-receivable loans are made against a borrower’s receivables, and once collected, the bank is repaid. Warehouse-receipt loans use inventory as collateral for a loan, and as the inventory is sold, the loan is paid off. Collateral loans use real estate mortgages, life insurance policies, stocks, and bonds as security to ensure loan repayment.

Crowdfunding is the process of raising new venture funds from a large “crowd” audience, typically virtually from the Internet. Crowdfunding is rapidly becoming a popular way to fund new ventures, with over $1.04 billion in 2018 for U.S. businesses alone. Crowdfunding comes in three main forms: (1) reward-based, in which backers receive an early version of the product or another reward, (2) equity, through which individual investors receive a company share, and (3) debt, which allows the backer to earn interest. The world’s largest crowdfunding platform is Kickstarter, which has received over $4 billion in pledges from 15.5 million backers for 25,700 projects.8 The average crowdfunding campaign raises $8189; however, some companies raise millions of dollars. Typically, each crowdfunding project sets a goal for a specific time period, and entrepreneurs publish web pages to depict their product services.

Catching the Entrepreneurial Spirit

Making a Heavenly Deal

You need financing for your start-up business. How do you get angels interested in investing in your business venture?

  • Show them something they understand, ideally a business from an industry they’ve been associated with.
  • Know your business details: potential investors want to know about annual sales, gross profit, profit margin, and expenses.
  • Be able to describe your business—what it does and who it sells to—in less than a minute. Limit PowerPoint presentations to 10 slides.
  • Angels can always leave their money in the bank or invest in another promising ventures, so an investment is often in a sector that interests them. Timing is also important—knowing when to reach out to an angel can make a huge difference.
  • Present a competent management team with a strong, experienced leader who can explain the business and answer questions from potential investors with specifics, and can quickly earn potential investors’ trust and respect.
  • Angels prefer something they can bring added value to and may want to be involved with your company—for example, with a seat on your board of directors.
  • Emphasize the likely exits for investors and know who the competition is, why your solution is better, and how you are going to gain market share with an infusion of cash.

Sources: Guy Kawasaki, “The Art of Raising Angel Capital,” https://guykawasaki.com, accessed February 2, 2018; Murray Newlands, “How to Raise an Angel Funding Round,” Forbes, https://www.forbes.com, March 16, 2017; Melinda Emerson, “5 Tips for Attracting Angel Investors,” Small Business Trends, https://smallbiztrends.com, July 26, 2016; Nicole Fallon, “5 Tips for Attracting Angel Investors,” Business News Daily, https://www.businessnewsdaily.com, January 2, 2014; Stacy Zhao, “9 Tips for Winning over Angels,” Inc., https://www.inc.com, June 15, 2005; Rhonda Abrams, “What Does It Take to Impress an Angel Investor?” Inc., https://www.inc.com, March 29, 2001.

Concept Check

  1. What sources of capital are available to entrepreneurs?
  2. What are the associated risks for various sources of capital?
PreviousNext
Order a print copy

As an Amazon Associate we earn from qualifying purchases.

Citation/Attribution

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution License and you must attribute OpenStax.

Attribution information
  • If you are redistributing all or part of this book in a print format, then you must include on every physical page the following attribution:
    Access for free at https://openstax.org/books/organizational-behavior/pages/1-introduction
  • If you are redistributing all or part of this book in a digital format, then you must include on every digital page view the following attribution:
    Access for free at https://openstax.org/books/organizational-behavior/pages/1-introduction
Citation information

© Dec 12, 2022 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.