Financial management of the new venture to be successful asks for application of integral approach to financial strategy with product- market and organizational strategy.  

• Financial strategy defines the type and timing of financing and strategic financial decision  should be focused on such area as how much money we need from external  resources, what will be our target capital structure, when and at which extent (staging)  we need to  bring cash to the company .
• Product-market strategy  takes into consideration the targeted sales grofth rate, product price, product quality etc.
• Organizational strategy is focus on definition of the horizontal and vertical boundaries of the firm and decision making process within organization etc.
• Product-market, organizational and financial decision need to be viewed simultaneously.

Financial resources are blood of the new venture and established company. They play very important role in the whole process of new venture development.  There are different sources of new venture financing and their right choice is critical for new venture future.

1. 1. Sources of new venture financing

    There are the following main categories of sources of new venture financing:

. bootstrap financing,    . venture leasing               . factoring                     . initial public offering (IPO)

. angel investors,           . corporate venturing       .  franchising                 . private placement

. venture capital,            . government programs,   . mezzanine capital   

       . asset-based lenders,    . trade credit                        . debt

Bootstrap financing (self, friends and family sources) is term for financing that does not depend on an investor´s  assessment of the merits of the opportunity or on the value of the assets of the venture. This includes personal savings, credit/personal loans, loans from family and friends and equity investment from family and friends.

Angel investors  often provide seed capital to develop an idea to the point where formal outside financing become feasible . They usually invest over horizons of 5-10 years. They are interested in investing fairly small amount of money in early-stage venture and  often bring significant industry experience and are interested in active involvement.

Venture capital  funds are organized as limited partnerships and limited partners provide most of the capital. General partner is responsible for managing the fund, including investment selection, working with entrepreneurs, and harvesting the investments. Venture capital funds are focused on equity investment in high-risk ventures with large potential return.

Asset- based lenders ,  or “secured lenders”, provide debt capital to businesses that have assets that can serve as collateral. They rely on the ability to liquidate business assets for debt servicing if necessary. In this type of products may belong project financing in banking, too.

      Venture leasing is special case of leasing. An entrepreneur who requires tangible assets can lease, rather than purchase them.  These tangible assets are inevitable for operation of the venture. The lessor´s return may be tied to the financial venture´s performance. In some countries also tax advantages in comparison to ownership are important.

      Corporate venturing means implementation an in-house venture program.  This program can be internally or externally managed. Corporate venturing can be more occurred in companies that depend on innovation to sustain competitive advantage and keep good ideas from loosing them (internally managed companies).  Externally managed corporate venture may seek only financial returns or strategic investments.

      Government programs are created by governments in many countries. These programs are usually run through specially established governmental institutions.

       Trade credit or vendor financing arises whenever a business makes a purchase from a supplier that offers payment terms. These terms are usually industry specific. They are very important source of financing in emerging countries where is a shortage of risk capital.

       Factoring  is providing financing to venture through selling receivables to factor. Factor is a specialist who buys accounts receivable. This purchase of receivable can be with and without recourse. There are three elements of this transaction: advance  (70-90% of face value of receivables), reserve (part which is held back if with recourse), fees (2-6% for handling, lending and risk).

       Franchising enables a business concept to grow rapidly by using capital from franchisees. Franchisor establishes a business format and offers franchising opportunities to prospective franchisees.

      Mezzanine capital is used at the stage when company has achieved positive net income. It has a form of subordinated debt or preferred equity and hybrid of senior debt and common equity. These instruments are provided mainly by venture capital firms or other private equity funds.

      Debt financing is offered by commercial banks to ventures which at high growth stage with stable cash flow. There are two reasons to choose this instrument: a/ interest is tax deductible item and b/ debt holders usually don´t vote.

     Initial public offering (IPO) is first sale of equity to public investors. IPOs provide a very small fraction of overall new venture funding at the later stage of development. It is way of venture capitalist exit. Company raises capital by selling registered equity shares to the public via a formal offering process.

      Private placement of equity and debt is done through private placement market. It is done through selling of debt or equity securities to a small number of investors by means other than public offering.

1. 2. Financing & stages of new venture development

There are five stages that are typical for new venture development: development, start-up, early-growth, rapid-growth, exit.  Venture financing is customized according to these development stages.

During the development stage, the venture generates no revenues and both net income and cash flow are negative.  At this stage the entrepreneurs has not yet begun to invest in the infrastructure needed to initiate production and sale of the product.

 At very early stage mostly internal, family and friends sources of financing are applied.  These are different bootstrap techniques, like drawing down saving accounts, taking out second mortgages, using the credit lines of the credit cards etc., which are used at the very early stage.

 As the development progress the other sources of financing like family members, friends, angels investors, banks, venture capitalists etc. are applied. The first external source of financing is called seed  financing which are small money that should support exploration of business concept and in technology ventures this means initial funds for R&D.

Start-up stage of development starts when the firm begins to acquire the facilities, equipment and employees required to produce product. It is stage when start-up financing covers activities from later R&D to starting sale. Financing at this stage is provided when a concept appears to be worth pursuing, team is created and most of the risks related to development have been resolved.

During early growth revenue is probably growing, however, net income and cash flow available to investors are negative. Cash flow available to investors exceeds net income thanks to depreciation.

Rapid growth is closely related to early growth as many times these stages are overlapped. Net revenues are growing at an increasing rate.  But this development requires to find financing that inevitable for rapid growth mainly at working capital and fixed assets. Early and rapid growths are related to later-stage financing. Mezzanine, bridge and bank financing are frequently used at growth stages of development.

During exit stage the venture´s cash flow available to the investor is positive. As venture´s returns to debt and equity is achievable without further increasing of financing it is time to harvest and realize the returns on their investments.

Start-up management team/owner-manager  is responsible also on  getting operational resources and using them efficiently and effectively in order to achieve set up goals. They have to ask the following key questions:

. What operating resources are needed?

. Where they will come from?

. How they will be used?

. How their usage will be controlled and monitor?

The most important operating resources are: premises, equipment and technology, materials, process, systems, legal and insurance.

However, the first question related to operation is: where business should be located? Location of the business is significantly influenced by type of business.

Premises are one of the significant legal and financial burden of the new business. Making right decision on them requires to look at them from the following perspectives:

. building features (size of offices, operational parts, etc.)

. available facilities and services (e.g. reception, lifts, meeting rooms…),

. physical environment (lighting, washrooms, air conditioning, layout – open spaces etc.),

. exterior of the building.

There are the following options for choosing right premises and each of them has its pros and cons:

. home ,

. co-working/incubation centres,

. flexible  or traditional lease,

. buying property.

Materials and equipment

Purchased materials can be either goods to be sold or consumable items, that support the business.

Good management of these resources must be focused on:

. ensuring on permanent availability of materials including just-in time option,

. costs aspect – reduction costs at any time.

Equipment belongs to the key resources that should be correctly managed. It consists of:

. production machinery and equipment,

. communication equipment (ICT),

. office or retail furniture,

. systems equipment (hardware, software, cash register etc.).

. personal equipment  (cars, mobiles, etc.).

Insurance  has main purpose is to minimize impact of different type of operational or business risks coming from supply, production, administration processes. 

Insurances are either obligatory (employers liability, third party vehicle insurance, specified insurance) or discretionary ( fire, theft and other disaster, engineering breakdown, loss of profits, public and product liability, professiondal indemnity, legal costs insurance, personal insurance etc.).

Business processes and information and communications technology. Computerized business processes which use information and communication technology started to be very important factors of efficiency and productivity of small business companies, too. They usually cover such areas as accounting and finance, personnel administration, sales orders, CRM, marketing, internal communications etc. The other important activity belonging to this area is building a website which is also one success factor for start-up business.

Human resource management belongs to key functions of start-up as people are key resources for them. Owners/ managers play very important role in this process as usually this type of companies don´t have enough resources to hire professional HR manager. The most important HR areas which also must be in line with country laws and regulations are:

. recruitment  according to recruitment theory there are several formal stages to ensure the selection of the right person for right job:

• A job description,
•  A person specification (qualifications, experience, skills and characteristics)
• A campaign to advertise the vacancy,
• A shortlisting and interviewing process.

  However, in small companies apply the less structural process of recruitment.

. training is in small companies big issue as there are not sufficient resources for external training, but to increase productivity and efficiency are important.

. teams and teaming in organization create value through entrepreneurial behaviour and decision making process. If company´s strategy is rapid growth, then it has to create also management team that would take role of owner/manager in this process. Issue of external team member in team is also important to resolve.

. contractual arrangements – written statement of conditions of employment,

. administration and payment statutory maternity and statutory sic days,

. dismissal -  give written  warnings and reasons,

. minimum wage legislation etc.