What is Entrepreneurial Finance and how does it Relate to Effectuation?
Summary
TLDRThis video delves into the concept of entrepreneurial finance, distinguishing it from corporate finance. It emphasizes the relationship between entrepreneurship and opportunity, often linked to creating or exploiting new ventures. The script discusses the nuances of finance, ranging from personal to corporate, and highlights the focus on securing public versus private funding. Key points include managing money for new or non-existent organizations, valuing firms in emerging industries, and the critical difference between risk and uncertainty in decision-making. The video uses the example of the 'gotcha card' game to illustrate the entrepreneurial approach to uncertainty, where stacking the deck in one's favor is a strategic move.
Takeaways
- 😀 Entrepreneurship is often linked to opportunity, whether it's discovering or creating it, but there's no universally agreed-upon definition.
- 💼 Finance generally involves managing money, which can range from personal finance to corporate finance, focusing on asset investment and acquiring additional funds.
- 🚀 Entrepreneurial finance combines elements of entrepreneurship and finance, with a particular focus on securing public or private funding.
- 💹 Public funding typically involves trading stocks on a stock exchange, while private funding sources can include venture capitalists, angel investors, friends, family, and fools.
- 🤔 The course emphasizes private funding, which is the majority of the content, and how to raise money from various private sources.
- 📊 Sarasvathy's four questions from her 'causation versus effectuation' article are referenced as a tool to differentiate entrepreneurial finance from corporate finance.
- 🏢 Entrepreneurial finance deals with unique challenges like pricing choices for non-existent firms, hiring for a contingent organization, and valuing firms in new or non-existent industries.
- 🌐 It also explores broader economic transitions, such as creating a capitalist economy in a formerly communist country or envisioning a post-capitalist economy.
- ⚖️ The script distinguishes between risk, which can be calculated with data, and uncertainty, where the rules of the game are unknown, a key aspect of entrepreneurial finance.
- 🎰 An example of dealing with uncertainty is provided through a personal anecdote about 'gotcha cards', illustrating how an entrepreneur might stack the deck in their favor.
Q & A
What is the relationship between entrepreneurship and opportunity according to the video?
-The video suggests that entrepreneurship is often related to the discovery, creation, or pursuit of opportunities, although there is no universally agreed upon definition.
Why is there no universally accepted definition of entrepreneurship?
-The video implies that the concept of entrepreneurship is complex and multifaceted, which makes it difficult to pin down a single definition that everyone agrees upon.
What does the term 'finance' generally refer to in the context of the video?
-In the video, 'finance' is broadly defined as the management of money, which can range from personal finance to corporate finance.
How does entrepreneurial finance differ from corporate finance?
-Entrepreneurial finance focuses on the unique challenges of startups and new ventures, especially regarding public versus private funding, while corporate finance deals with established firms and their investment and funding strategies.
What are the two main facets of corporate finance discussed in the video?
-The video mentions that corporate finance looks at how a company invests its assets and how it acquires additional funds.
What is the difference between public and private funding in entrepreneurial finance?
-Public funding involves trading stocks on a stock exchange, while private funding refers to raising money from sources like venture capitalists, angel investors, friends, family, and fools.
What are the four questions Sarasvathy's article poses that differentiate entrepreneurial finance from corporate finance?
-The questions are: 1) How do we make pricing choices for firms and industries that do not exist? 2) How do you hire individuals for a non-existent or contingent organization? 3) How do you value firms in a new or non-existent industry? 4) How do we create a capitalist economy in a formerly communist one or what does a post-capitalist economy look like?
What is the difference between risk and uncertainty as it pertains to finance?
-Risk involves making decisions based on known probabilities and historical data, whereas uncertainty means not even knowing the rules of the game or having no historical data to base decisions on.
Why is entrepreneurial finance particularly concerned with uncertainty?
-Entrepreneurial finance is concerned with uncertainty because new ventures often lack historical data and must navigate unknown markets and customer behaviors.
How does the video's anecdote about 'gotcha cards' illustrate the concept of uncertainty in entrepreneurial finance?
-The 'gotcha cards' story shows how the speaker, facing uncertainty, took control by stacking the deck in his favor, which is a common approach in entrepreneurial finance when dealing with unknowns.
Outlines
💼 Introduction to Entrepreneurial Finance
The paragraph introduces the topic of entrepreneurial finance by first discussing the concept of entrepreneurship. It mentions that there is no universally agreed-upon definition but suggests that it often involves the discovery or creation of opportunities. The paragraph then transitions into the broader topic of finance, which is about managing money. It distinguishes between personal finance and corporate finance, the latter of which is more relevant to the discussion. Corporate finance involves decisions about how a company invests its assets and how it acquires additional funds. The paragraph concludes by pointing out that entrepreneurial finance combines elements of entrepreneurship and finance, with a particular focus on raising funds, especially from private sources like venture capitalists and angel investors. It also references Sarasvathy's four questions from her article 'Causation vs. Effectuation' as a way to differentiate entrepreneurial finance from corporate finance.
🤔 The Challenges of Entrepreneurial Finance
This paragraph delves into the unique challenges faced in entrepreneurial finance, particularly when dealing with new or non-existent industries. It poses questions about how to price products in industries that do not yet exist, how to hire and pay individuals for organizations that are not yet established, and how to value firms in new industries. The paragraph also touches on the broader economic questions, such as creating a capitalist economy in a formerly communist country or envisioning what a post-capitalist economy might look like. These questions highlight the uncertainty and the need for innovative approaches that are characteristic of entrepreneurial finance, as opposed to the risk assessment and data-driven strategies often found in corporate finance.
🎰 Embracing Uncertainty in Entrepreneurial Finance
The final paragraph contrasts the concepts of risk and uncertainty in the context of finance. It uses the example of an established corporation making data-informed decisions about investments as a representation of risk, where historical data can guide predictions. In contrast, uncertainty is characterized by a lack of historical data or knowledge about the market, making it difficult to predict outcomes. The paragraph shares a personal anecdote about the speaker's experience with a 'gotcha card' game in school, illustrating how uncertainty can be managed by 'stacking the deck' in one's favor. This anecdote serves to explain how entrepreneurs in uncertain situations might take control of their circumstances, aligning with the principles of entrepreneurial finance.
Mindmap
Keywords
💡Entrepreneurship
💡Opportunity
💡Finance
💡Public Funding
💡Private Funding
💡Risk
💡Uncertainty
💡Effectuation
💡Corporate Finance
💡Angel Investors
💡Venture Capitalists
Highlights
Entrepreneurship is often linked to the discovery or creation of opportunities, but there's no universally agreed upon definition.
Entrepreneurial finance is a blend of entrepreneurship and finance, with a focus on the creation of new organizations.
Finance typically involves managing money, which can range from personal finance to corporate finance.
Corporate finance deals with how firms invest assets and acquire additional funds, such as through equity or loans.
Entrepreneurial finance emphasizes the distinction between public funding, like stock exchanges, and private funding.
Private funding is the main focus of the course and includes raising money from venture capitalists, angel investors, and personal networks.
Sarasvathy's four questions from her causation versus effectuation article are referenced as a guide for entrepreneurial finance.
Entrepreneurial finance deals with unique challenges like pricing choices for non-existent industries.
Hiring and paying individuals for a non-existent or contingent organization is a key issue in entrepreneurial finance.
Valuing firms in new or non-existent industries is a significant challenge addressed in entrepreneurial finance.
The concept of creating a capitalist economy in a formerly communist one is explored as part of entrepreneurial finance.
Entrepreneurial finance is differentiated from corporate finance by looking at risk versus uncertainty.
Risk involves making decisions based on data and probabilities, while uncertainty means not knowing the rules of the game.
Uncertainty in entrepreneurial finance is about controlling the future rather than calculating risk.
A personal anecdote about 'gotcha cards' illustrates the concept of dealing with uncertainty in entrepreneurial finance.
The video concludes with a call to action for viewers to consider examples of risk versus uncertainty in their own lives.
Transcripts
welcome back so now we're going to talk
about
what is entrepreneurial finance we got a
lot of moving pieces here
so first of all let's talk about what is
entrepreneurship
now those of you that have been
following my channel or have taken my
classes previously probably have a
pretty good idea of this answer already
right there's no universally agreed upon
definition of entrepreneurship but we
normally say that there is some sort of
relationship between entrepreneurship
and opportunity it could be that
entrepreneurship is the process of
discovering opportunities
entrepreneurship is the process of
creating opportunities so that objective
versus subjective debate
entrepreneurship is the pursuit of
opportunity the exploitation
of opportunity it goes on and on there's
no universally
um agreed upon definition of
entrepreneurship and in fact if you hear
someone who says
i've got the right definition you've got
the wrong one
run from that person that person has no
idea what they're talking about stay
away from that person
okay there's no universal agreed upon
definition but again
there's some sort of relationship we
normally think of especially with
this discussion of entrepreneurial
finance it would probably have something
to do
with the creation of a new organization
of
some kind that might make money but
again that's not a universal definition
i'm just trying to guide you through
some of the things that we'll be talking
about in this particular course
then we look at what is finance again
that's another big term
and it usually has something to do with
managing
money okay broadly speaking
now that can mean personal finance you
know like
how do you balance your checkbook how
much money do you spend on groceries
versus how much goes into your
retirement
right that's one form of finance now the
one that you've probably been taking if
you're a business major is corporate
finance
and that looks at two distinct facets
one is how does a firm or a company
invest its assets right it's got some
money does it buy a factory
does it pay people does it buy bonds you
know what is that company doing with the
money that it has
okay and
how does it acquire additional funds so
is the corporation selling equity i.e
selling shares in the stock market is it
getting loans
and how do you manage the try to get
those assets versus liabilities to kind
of equal out
okay and this you know story of pursuit
of acquiring money
so entrepreneurial finance kind of
blends these two concepts
and there is a particular emphasis on
getting public funding
versus private funding so public funding
means
that an entrepreneurial venture is
trading stocks usually on a stock
exchange
and then private funding which will
consist of the majority of this course
is how do you raise money from for
example venture capitalists
angel investors friends family and fools
etc etc
okay that's the majority of this course
is on the private funding piece
now that's really really vague and i bet
you some of you are confused right well
what does that even mean okay
so i referred you to sarasvathy's
four questions that she gives in her
causation versus the effectuation
article
and again you can find that on aom
it's a it's in the academy management
journal there's an academy management
review
2001. however i have two video i have a
video and a playlist on this channel
devoted exclusive to sarasvati's article
if you like the number
but if you're thinking hey is
entrepreneurial finance versus corporate
finance for me
right then look at sarah's vathey's four
questions
and if any of these questions kind of
sorta relate to what you're trying to do
chances are entrepreneurial finance is
it
so how do we make pricing choices
for firms and industries that do not
exist
right you know they talk about next-gen
wireless technologies
well how much looks like my camera's a
little crooked there i'm sure that's
driving some of you nuts that are
watching this so i'll just fix that
so how much would something like for
the next gen you know they have the 4g
the 5g now they're doing the next
generation cell cellular networks
how much would the products in the next
gen industry cost
who knows right corporate finance
couldn't answer that so that might be an
entrepreneurial finance question
how do you hire individuals
for a non-existent or contingent
organization in other words your company
doesn't exist yet how do you hire people
for that and how do you figure out how
much to pay them
or what we call a contingent
organization so let's say you're looking
at being a software development company
and you need at least 20 employees to
get off the ground if you have 19
employees you don't get off the ground
the firm fails
you need that minimum of 20 and so
that's what we call it a contingent
organization
you don't even get started unless you
have a certain number of resources
manpower etc
could also mean that you need to raise a
certain amount of money before you even
get started
how do you value firms in a new or
non-existent industry
so let's think about something that
doesn't exist right now
although those of you watching this
video uh 10 years later may laugh
because it'll exist but let's think
about like holograms
and real virtual reality not like the
weird stuff that's really not
working right now but you know like
holograms well how do you value a
company
that's going to make holograms when the
industry of
holograms doesn't even exist yet
and here's my favorite one how do we
create a capitalist economy in a
formerly
communist one or what does a
post-capitalist economy look like
okay so a communist economy so for
example
i don't think anybody could ever really
predict what russia was going to look
like in the 1990s or let's say
you know with cuba opening up or china
opening up
or vietnam which is continuing to open
up you know what would a capitalist
economy look like in one of these
former communities or north korea what
if they become capitalist all of a
sudden what's that going to look like
how do you value the firms in that kind
of an economy
and a post-capitalist account what's
post-capitalist account
well those of you who have reached
shootpadre he always says like there's
going to be a day
when people are not like you know
greedily pursuing wealth
and people will engage in other kinds of
pursuits or endeavors and activities and
it won't be all about money money money
i've always thought that a lot of
european countries
are almost like post capitalists because
they're very socialist
they have a different set of values it
seems to be more about living life than
it is just kind of that pursuit of money
that might be a good example of a
post-capitalist economy
so another way to help differentiate and
i've got another video which we're going
to talk all about
entrepreneur finance versus corporate
finance but another way to help you
differentiate the two
corporate finance and entrepreneurial
finance is looking at the concepts of
risk
versus uncertainty okay
so when you're looking at corporate
finance chances are you've got a large
data sheet behind
you that's going to help you make an
informed decision so you can say all
right
um let's say you're on let's say you're
even a beginning entrepreneur like a
really small time prosaic entrepreneur
and you say you know what i have two
choices
i want to be an uber driver in my spare
time i have two choices
i can buy like a prius
right for my um uber
stuff and a prius is good because you
know i can charge
the uber x and you know the prius has
good gas mileage and you know
i can do some calculations based on you
know similar uh vehicles in my area what
they're doing
and so maybe that's one choice right um
i could buy a used car like a used
hyundai
sonata right and you know i'd calculate
the fuel costs a little bit differently
and this might be my profit rate
or i could buy like a really fancy
mercedes and i could get like the um
the uber luxury service right and maybe
i can make this amount of money
because i've got this data or i even buy
like a tesla like i really spend a lot
of money i buy the tesla
and that's going to be a vehicle that's
you know going to have no fuel
charges because i'm using the electric
and i get the luxury service again for
uber and blah blah blah blah so i can
make those decisions
that's risk okay alternatively
for those of you that remember like your
probability classes in like pre-algebra
algebra
you think about the marble the marble
game you got red marbles and blue
marbles in a jar
and you've got to stick your hand in
there and you know maybe there's 10 blue
marbles and 10 red barbells so you know
the chance of getting a red marble
versus a blue marble is a 50 50 chance
and so if you get paid to every time you
take out a blue marble or penalize every
time you take a red marble
you know you can evaluate risk right
especially if you know like the three
people in front of you they've been
drawing red marbles and maybe you know
that the chance is going to be a little
bit higher that you're getting a blue
marble for example so
this is corporate fine this is a
corporate finance problem by the same
token
an established firm an established
corporation can say
look we've got all this data if we take
our money and we invest in a brand new
factory a brand new location a brand new
piece of equipment
a brand new employee we can probably get
a decent idea of what the return will be
now previous performance is not always
an indicator of future performance
but at least it gives you some sort of a
gauge and therefore with enough research
you can calculate your risk somewhat
effectively
uncertainty is quite different okay
uncertainty is not like risk
uncertainty means you don't even know
what the rules of the game will be
right so all right i have got this brand
new
idea for a company and
it might make a million dollars a day or
you might lose a million dollars going
into that industry
and i don't have any real way of telling
you because there is no previous
history of this firm i have no idea how
the customers are going to
interact with it i don't know anything
no clue
and these four questions are good
examples of questions embracing
uncertainty okay if you're dealing with
uncertainty probably entrepreneurial
finance is going to be right for you
okay if you want to use the probability
game from
you know algebra pre-algebra whatever um
you know
you've got a bunch of marbles in a jar
you don't know how many marbles are in
the jar
so every time you draw it could be 10
marble 10 red marbles 50 blue marbles
vice versa you don't you don't have any
idea
right so when you're dealing with
uncertainty
right instead of trying to calculate
risk you try to control the future
so maybe you start stacking your own
marbles in the jar right to get the odds
okay you know i always laugh one example
of you know the marble stacking thing
when i was in
third grade i think and you know i guess
maybe because i'm a scholar of
entrepreneurship i have kind of a little
bit of a trollish personality
fascinating my personality i guess you
could say and um i was always bad
maybe i still am but that's not the
point um
i had my third grade teacher and she
gave these little things she called them
gotcha cards
you know when you you got caught being
good she gave you a thing for you know
being good
and you write your name on the back and
then what you do is you put them in this
jar and every friday
she'd mix up the jar and then she'd pull
it out and if your name was on it
you know you got a piece of candy or a
toy or
something of this nature right well you
know there were other kids that were
like goody two shoes
and they always got like lots of gotcha
cards and i never got any
i mean i got a few but you know they
might get 15 20 or 30 in a week
right i might get five or six and so i
never had any chance of winning
right well i didn't really know how many
they were gonna get but i knew they got
way more than i did so this is
uncertainty in action right
so i knew i was never going to win right
now and i didn't exactly know
what i needed to do or how many cards i
needed gotcha cards i needed to actually
win the game
so kind of like an entrepreneurial
finance perspective what i did
is instead of turning in the gotcha
cards every week like i was supposed to
i started hiding them at my desk you
know and i
i saved up like 40 or 50 one week and it
was like way more than all the other
kids i was i was certain
so i started dropping them all in and
the teacher kind of saw like because she
knew
i was never good so she didn't know why
like i got all these gotcha cards and
then there was another little boy in my
class too
um i had gotten some highlighters uh
somehow or another
and i sold some of the highlighters to
him for some of his gotcha cards
completely not what the gotcha card game
was meant for right
um so i started you know i bought some
of his gotcha cards
so i got like another 25 uh from selling
highlighters and stuff to him too
and because he was a good student and i
wasn't and so i had so many gotcha cards
and i remember the teacher
was so mad so every time she put the
put her hand in and she go oh there's
duncan you've already got your toy
because you've got to get one toy per
per week or you know what uh whatever
with toy or a piece of candy per week
and so and then she just keep drawing my
name
over and over and over and this was
uncertainty right i i didn't
you know the most efficient way to have
done it was if i had new risk i knew
exactly how many
you know other gotcha cards were in
there i would have put like exactly the
right numbers so that i felt comfortable
that i would win at least once but see i
didn't have a clue
so i stuffed in as many of these gotcha
cards
you know as i possibly could so that i
knew that i would at least win once now
i actually wound up winning a bike
because she used to do i think she would
give out like five or ten prizes a week
um and she drew my name and i think by
the 20th time she got really mad
because she just kept drawing him and so
this was uncertainty in action i didn't
know so i stuffed i
stacked the deck in my favor okay
uncertainty in action
and so if you're an uncertainty kind of
person then again you're probably
looking at entrepreneurial finance
you're probably an entrepreneur too
right you want to stack the deck in your
favor
just like i did with my little gotcha
card scheme i hope that example helps
my teacher miss jenkins if you're out
there i still remember and by the way
those of you are wondering
what happened she made a rule that you
couldn't do that anymore
um but guess what because you know
typical effectuation
fashion i kind of learned okay maybe
stacking in like 75 to 50 to 75 gotcha
cards in a week was too much
but i could still kind of save them and
so like every third week i put them in
and and she was suspicious but she
couldn't exactly prove it right
it wasn't so blatant i might win two or
three times when she knew she wasn't
giving out cards but she wasn't quite
sure enough it could have been random
chance
because she was also abiding by the
uncertainty principle
i hope that example helps as always give
me a like a thumbs up
make sure you hit that subscribe button
and here's a question for you all
can you all give me some examples of
risk versus uncertainty
in your own lives be curious to hear
your feedback
i'll see you in the next video
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