During the month of May, participants of EADA’s International Master in Finance attended the elective Entrepreneurial Finance taught by Dr. Shailendra Kumar Rai. The course was one of 12 electives in three areas (corporate finance, investment banking and FinTech) offered during the strategic specialisations in the third trimester of the Finance programme.
Dr Rai holds a Ph.D. from Banaras Hindu University and he is a General Fellow of the Indian Council of Social Science Research. Prof. Rai has been working with MDI Gurgaon in the area of Accounting and Finance since 2005. Dr Rai has published over five dozen papers, cases and books in various national and international journals especially in the areas of finance, financial institutions, and entrepreneurship. He has also been actively involved in joint research at the national and international level. He was also an awardee of career research for young teacher fellowship from AICTE (the regulator of B-schools in India).
Dr Rai has extensive cross-national experience, having lived and worked in different parts of the world such as George Mason University (U.S.), the Max Plank Institute of Economics (Germany), Jonkoping International Business School (Sweden), Cheng Kung University (Taiwan), ISCTE and the University of Algarve (Portugal), the Louvain School of Management (Belgium), Athens University of Economics and Business (Greece), the Faculty of Economics and Finance Management, Mykolas Romeris University and Vilius Kolegia (Lithuania), the University of Szeged, Faculty of Economics and Business Administration (Hungary), IAE Business School (France), Munich Business School (Germany), the Warsaw School of Economics (Poland), the University of Economics (Prague) and HHL Leipzig Graduate School of Management (Germany). Dr Rai has carried out consulting projects and conducted training for various corporations including SJVNL, Coal India Limited, IFCI, Life Corporation of India, Bharat Electrical Ltd., Jindal Steel Ltd. and Petronet LNG Canara Bank and among many others.
In this interview, Dr Rai talks about the biggest challenges and rewards of financing entrepreneurial ventures.
How is financing entrepreneurial ventures different from financing established companies?
Entrepreneurial finance is completely different from financing established companies, i.e., corporate finance, for a number of reasons.
- First, the players and markets explored in both the subjects are quite different. Entrepreneurial finance is concerned with the decisions confronting CEOs of private companies whereas corporate finance is concerned with the decisions confronting CFOs of listed companies.
- Second, relative to established firms, the suppliers of capital for entrepreneurial financing are very different. In the case of entrepreneurial finance, angel investors, crowdfunding, venture capitalists, incubators/accelerators, consumer financing, and so on are the key sources of money, while existing businesses depend more on bank financing and public markets.
- Third, there are differences in the essence of contracts between capital providers and capital users also. Fourth, while conventional or corporate finance deals with more mature companies, entrepreneurial finance primarily deals with early stage companies, which are characterised by high uncertainty, asymmetric information and in based on large number of intangible assets.
The interests of investors and those of entrepreneurs do not always coincide. How can these interests be reconciled?
That is true. Entrepreneurs must be aware of the criteria used by investors. Investors want to know if the founders have a compelling idea, can put together a solid team, and can show momentum. They should know how to be in the investors ‘sweet spot’. Hitting the sweet spot means entrepreneurs must approach the investors who are financing the firms in the sector in which entrepreneurs want to operate. In addition, they should have the right people on the team, have a compelling vision, and can prove momentum.
Despite the fact that investors prefer proven entrepreneurs, this does not mean that new and inexperienced entrepreneurs will not be financed. It is mainly determined by the proposed company’s plan. If the proposed business requires industry experience, they prefer seasoned entrepreneurs; however, if the proposed business is technology-based, they prefer young and geeky entrepreneurs. As a result, attracting investors requires finding the right investor match, a strong team, and a compelling vision.
What are the most important factors to consider when valuing a new venture?
The inexistence of historical evidence, the lack of comparable businesses, the complexity of estimating uncertainty, and the enormous intangible assets make early-stage company valuation extremely difficult. Though investors use methods such as the venture capital method, scorecard method, and risk factor method to value early stage companies, but investors use their own metrics to value them too.
Their metrics include market size, pin-point severity, solution efficiency, implementation quality, and team. They consider consumer obsession, selling skills, sharpness, recruiting, provocation, and toughness of team members when evaluating the team. Furthermore, investors value the founder’s deeper relationships with other team members.
What are biggest challenges for young companies seeking finance?
Every venture requires funding, and each venture’s financing criteria are unique. Early-stage companies need funds to develop and assemble a team, improve technology, deliver a product or service, and complete their project. Inconsistent cash flow, a lack of spending strategy, a complete absence of conventional funding, and the rise of intangible-based business models, on the other hand, make the situation difficult. As a result, early-stage companies face many hurdles when it comes to raising capital; however, these obstacles can be solved by providing a scalable business model, innovative offerings, a spending strategy, and business networking. As a result, entrepreneurs must hone their fundraising skills, as it is a strategic weapon that will propel their business to great heights.
Many companies would be dependent on intangible assets in the future, and conventional sources of funding will begin to accept intangible-based/no-collateral-based financing. Entrepreneurs of the z generation are extremely intelligent and quick learners, and they can approach an investor with a scalable strategy and unit economics and will hit the sweet spot. Furthermore, the start-up space is rapidly expanding and attracting attention; the start-up ecosystem will mature, and new sources of not only funding but also mentoring entrepreneurs will arise.
What is the most rewarding aspect of working with companies that are just starting out?
Working for an early stage firm provides a unique opportunity that allows an individual to be more creative and innovative. It offers independence, flexibility, and accountability at work, allowing employees to learn and develop in a non-hierarchical setting. As a result, working with a start-up gives you the chance to develop alongside the business and become part of a unique group by making extraordinary contributions.
What skills and/or qualities is it important for an entrepreneur to have?
Investors are looking to see if an entrepreneur has the ability to execute the strategy well, rather than just inventing a new product or service. When the barrier to entry is low, execution becomes even more important. It’s even more important if the concept is revolutionary. As a result, from my perspective, the character, the confidence, the capacity, the connection, and the collaborative attitude of the entrepreneur are important traits.
How do you keep up in a market in which new start-ups are launched daily, and sometimes hourly?
As I previously stated, investors receive thousands of proposals each year, and it is virtually impossible for them to analyse each one. As a result, only a small percentage of proposals receive funding. As a result, entrepreneurs should consider how they can increase their chances of being one of the chosen few. Entrepreneurs must be able to find the sweet spot, assemble the right team, articulate a compelling vision, and demonstrate momentum. These characteristics would assist the company in not only obtaining capital, but also in remaining competitive in today’s hyper-competitive and rapidly evolving global market climate.
How has your professional experience informed what you teach at EADA?
For more than a decade, I’ve been teaching Entrepreneurial Finance in India and abroad. Since then, I’ve been involved in a few promising start-ups on both a national and international scale. I have served as a judge in both national and international start-up funding competitions too. Since 2017, EADA has been giving me the opportunity to engage with ignited minds from all over the world. Many of my EADA students have started their own businesses, entered family businesses, or worked for investment companies.
What is most rewarding part of teaching young professionals about to launch their careers in finance?
Money, I always say, is like blood in the body; without it, nothing exists. As a result, in addition to entrepreneurship, studying finance provides students with a wealth of career opportunities. It also teaches them how to handle their money wisely. We know that a person spends money, saves money, and borrows money in such a manner so that his or her consumption yield him or her greatest satisfaction. As a result, studying finance helps students in maximising the utility of their consumption. It is very rewarding teaching finance to EADA’s bright, young and professional students. Teaching finance is also a way of studying finance because students are well informed, and their questions keep you up to date.
What do you know now that you wish somebody had told you when you started your career?
Though teaching is an art, not a science, the profession has evolved since I began my career. There are a few things I believe I could have been told earlier in my career, such as finalising the topics and projects I wanted to work on as soon as possible so that I could have invested more time and had authority in this field early on. Second, networking is another important area which I should have been told sooner. Academic networking is critical for sharpening your understandings, staying current, and collaborating on science. The third step is to wait for your dream to come true. Don’t be in a rush.