What is Entrepreneurial Finance and how does it Relate to Effectuation?

Summary

This 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

00:00

💼 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.

05:01

🤔 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.

10:02

🎰 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.

Keywords

💡Entrepreneurship

Entrepreneurship is a concept central to the video's theme, referring to the process of discovering, creating, or pursuing opportunities. It's not universally defined, but it often involves the creation of a new organization with the potential for profit. In the script, the speaker emphasizes that there's no single 'right' definition, suggesting that it's a fluid and evolving concept. The script also ties entrepreneurship to the discussion of entrepreneurial finance, indicating that the video will explore the financial aspects of starting and growing new ventures.

💡Opportunity

Opportunity is a key concept in entrepreneurship, as it represents the potential for gain or success that an entrepreneur seeks to exploit. The video script discusses the relationship between entrepreneurship and opportunity, suggesting that entrepreneurship could be about discovering or creating such opportunities. It's used to illustrate the dynamic nature of entrepreneurship, where the identification and exploitation of opportunities are crucial for success.

💡Finance

Finance, as discussed in the video, is broadly about managing money. It encompasses personal finance, corporate finance, and, most relevant to the video, entrepreneurial finance. The script distinguishes between these forms by explaining that while personal finance might involve balancing a checkbook, corporate finance involves decisions about a company's assets and funding, and entrepreneurial finance is more about the unique financial challenges faced by new ventures.

💡Public Funding

Public funding, as mentioned in the script, refers to the process where an entrepreneurial venture raises capital by selling shares on a stock exchange, making it accessible to the public. This is contrasted with private funding, which is the focus of the majority of the course. Public funding is a way for established companies to acquire additional funds and is an example of the different funding strategies discussed in the context of entrepreneurial finance.

💡Private Funding

Private funding is a key aspect of entrepreneurial finance discussed in the video. It involves raising money from sources like venture capitalists, angel investors, friends, family, and fools. The script emphasizes that this form of funding is more common and challenging than public funding, as it often requires convincing private investors to support a new and unproven venture.

💡Risk

Risk in the context of the video refers to the potential for loss or damage in the face of uncertainty. The script contrasts risk with uncertainty, explaining that risk can be calculated and managed based on historical data and probabilities. For example, an established company can assess the risk of a new investment based on past performance, which is a concept more aligned with corporate finance than entrepreneurial finance.

💡Uncertainty

Uncertainty is a core concept in the video, representing a situation where the outcome is unknown or unpredictable. Unlike risk, uncertainty does not allow for the calculation of probabilities based on past data. The script uses examples like starting a company in a new industry or a post-communist economy to illustrate the challenges of making decisions under uncertainty, which is a key aspect of entrepreneurial finance.

💡Effectuation

Effectuation is a concept from Sarasvathy's work mentioned in the script, contrasting with causation. It's a logic used by entrepreneurs to make decisions under uncertainty. The script refers to Sarasvathy's four questions as a way to understand entrepreneurial finance better, suggesting that if one's questions relate to her framework, then they are likely dealing with entrepreneurial finance.

💡Corporate Finance

Corporate finance is distinguished from entrepreneurial finance in the video. It involves managing the financial decisions of an established corporation, such as investment in assets and acquisition of funds. The script uses the example of a corporation deciding whether to buy a factory or issue stocks to illustrate the more predictable nature of corporate finance decisions compared to the uncertainties faced in entrepreneurial finance.

💡Angel Investors

Angel investors are individuals who provide capital for start-ups, often in exchange for ownership equity or convertible debt. The script mentions angel investors as one of the sources of private funding for entrepreneurial ventures, highlighting their importance in the early stages of a company's life cycle where traditional funding might be harder to secure.

💡Venture Capitalists

Venture capitalists are professionals who invest in start-ups and small, but potentially high-growth, companies. In the script, they are listed as a source of private funding, indicating their role in providing the necessary capital for entrepreneurial ventures that are looking to scale up and grow their businesses.

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