Corporate Finance, 5th Edition

Chapter 40 Setting up a company or financing start-ups

A really big adventure!

All groups were once upon a time start-ups, and some were even set up in such improbable places as a maid’s room (NRJ), a garage (HP) or a university dormitory (Facebook). The most talented of entrepreneurs, the luckiest, the hardest working, with the ability to learn from failures and with vision, will succeed in creating a group that survives, but the vast majority will fail. Fortunately, this fact does not prevent new entrepreneurs, every year, from embarking on this adventure. We’ve written this chapter for them so that they can avoid making bad financial choices that could put their entrepreneurial adventure in danger. As for anyone else who reads it, we hope that we’ll have sown a tiny seed which perhaps one day will grow into something bigger.

Section 40.1 Financial particularities of the company being set up

In our view, there are five:

1. The extreme volatility of capital employed, which means very high risk

Many entrepreneurs¹ who launch businesses have an idea or a product or a service but do not yet have an economic model that would enable them to cover their costs and get a reasonable return on their capital invested. When Larry Page and Sergey Brin developed their algorithms that were to give rise to Google, their aim was to come up with a more efficient search engine than those already in existence. They were not sure that they would succeed and they had no idea of how they could ...