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What is equity? What is debt?



What is equity? What is debt? Describe the positive and negative attributes of each.

A new business launching out requires funds. Equity and debt capital are two sources of funds. Equity is the personal investment the owner or owners have put in the business. It is the money contributed by the investor or investors towards the launching or expanding of a business. Sources of equity include personal savings, partners, family members and friends, venture capital companies, corporations, and sale of shares to the public through initial public offerings.

Positive attributes of equity capital

  • Equity does not attract interest as loans do. There is no requirement for equity to generate interest for shareholders.
  • It can be sourced from many sources
  • There is no obligation to repay money acquired through equity financing.
  • It relieves an entrepreneur from absorbing all the losses in the company alone since both profits and losses are proportionately shared.

Negative attributes of equity capital

  • An entrepreneur must give up a part of his/her ownership in the company to outside investors in order to get equity funding.
  • An entrepreneur must share the company’s profits proportionately with the outside investors who have put their money in the company.
  • An entrepreneur must involve all shareholders in decision making especially big decisions that affect operations or cash flow.

What is equity? What is debt?

Debt refers to borrowed funds that are used to launch or expand a business. Sources of debt include commercial banks, asset based lenders equipment suppliers, and multilateral lenders.

Positive attributes of debt capital

  • Sources of debt funding are numerous
  • Funders have no control over the management and decision making of the company
  • Interest payable to lenders is attract tax which is deducted
  • Debt capital makes it easy to forecast any financial expense since loan together with interest repayments are constant and do not undergo fluctuations.

Negative attributes of debt capital

  • Debt capital attracts interest, which increases the total amount to be repaid.
  • Debt capital is a liability to the company is captured as thus in a company’s balance sheet.
  • Can be difficult to secure because lenders may require evidence of a stable cash flow or a low debt to equity ratio.
  • Debt can attract high interest rates hence making it expensive especially for small companies that do not have the financial muscle to service large debts.
  1. b) What is crowdfunding? How has it changed entrepreneurship and innovation?

Crowdfunding is the engaging of many people to co-fund startup ventures or projects. Funding for a business can be provided thousands, hundreds, or even tens of individual investors, institutional investors, and their proxies.

Crowdfunding has removed the hurdle of getting funds from the entrepreneurial journey because entrepreneurs with a strong and innovative business idea can easily attract funding at the click of a button.  Entrepreneurship is not defined by accessibility to funds but by the viability of a business idea because if an idea is viable it stands a high chance of attracting funding. Most of crowdfunding is now done online as the world becomes tech savvy. Furthermore, crowdfunding enables entrepreneurs to cats their funding net wider and reach a more capital partners. On the flipside, crowdfunding gives investors a wide array of options in the form potential investment opportunities.

Q2. Create a business model canvas for Patagonia. Which parts of their canvas are truly innovative and why? Is this model repeatable and sustainable? What does this teach us about entrepreneurship?

Business model canvas for Patagonia

  1. Customer segments

Clothes for Mountain climbers, skiers, snowboarders, surfers, fly fishers, mountain bikers and trail runners.

  1. Value propositions

The company has build the best product (clothing) that is functional, repairable, and, foremost, durable. The company is making products that last for generations or are recyclable.

  1. Channels-what is equity? What is debt?

Channels used are not mentioned. We can speculate that the company reaches its customer segments through social media platforms that have become very important for product marketing.

  1. Customer relationships

Patagonia is invested in creating communities of alpinists. The company was started by a band of surfers and climbers who promoted a minimalist style.

  1. Revenue stream

Revenue streams are not mentioned in the case

  1. Key resources

Distribution channels are essential in Patagonia’s business. This is through stocking of Patagonia’s clothing products in retail stores, malls among others that they can reach the target markets. Maintaining healthy customer relationships is essential to the success of the business.

  1. Key activities

Making tools for alpinists like clothes for climbers, snowboarders, surfers, and mountain bikers.

  1. Key partnerships

Grassroots organizations all over the globe who help the company in its agenda of protecting and conserving the environment.

  1. Cost structure-what is equity? What is debt?

Not all the costs are mentioned. However, most important costs inherent in Patagonia’s business are sourcing for raw materials, distribution, and labor. Clothing industry is labor-intensive and labor carries higher costs.

The part of Patagonia’s canvas which is truly innovative is ‘key partnerships’ part. This is because Patagonia’s corporate social responsibility helps to market the company and attract new customer segments. Furthermore, it enhances its brand. It is sustainable because of the company’s focus on creating recyclable products. This teaches us that entrepreneurship is a journey and it thrives in the presence of dependable partners.

Q4. How I Built This (Cathy Hughes).

The podcast, How I Built This, with Cathy Hughes details the making of an entrepreneur. Cathy Hughes, a third generation entrepreneur had worked since childhood and this helped her develop a strong work ethic that came in handy in her adulthood.

One lesson Cathy’s teaches us is that entrepreneurs must be passionate of their dreams or harbor strong desire to excel in their business idea. Since childhood, Cathy was fascinated with radio and this desire propelled her to success later in her career.

Acquiring experience is very important for entrepreneurs. Cathy worked in the family business in her pre-teen and teenage years. She later worked at a campus radio station and later moved to Washington to work in yet another radio station. The many years of working different jobs including volunteering helped Cathy to acquire essential experience to her career.

Third, entrepreneurship requires hardwork and commitment to your goal even in the face of tough challenges. Cathy faced severe financing challenges because she has to raise $1000, 000 dollars yet she had only $10,000 dollars. She was rejected 32 times by lenders but this did not deter her. She kept looking for financiers until she met one who advanced her the money she used to purchase the first radio station. Her hardwork and religious commitment to her goal finally paid off after years of struggling.

Fourth, entrepreneurs should not be blinded by little success but should think big and aim to achieve big goals. After finding a foothold, Cathy went into an expansion spree and this culminated in her taking her business public so that it could compete favorably with more established entities.

Q5. Who is the most successful entrepreneur in the US economy today? Use concepts from our course to support your answer. Remember to define how you are measuring success.

Jeff Bezos is the most successful entrepreneur in the US economy today. This is because he has been successful at building the largest electronic commerce company in the world. Just 24 years after starting Amazon as an online site that sold only books, Bezos’ networthy has grown tremendously and he is currently ranked as the richest person in the world.

Innovation is a good measure of success. Bezos’ Amazon is an exceedingly innovative company and this is what has made it register great success. Bezos’ has championed the innovation culture at Amazon. A good example of an innovative product championed by Bezos is the Echo. This voice command device sold more than 22 million units in 2017 signifying the success of the innovative culture.

Bezos has created high quality customer service that has played a role in the growth of Amazon’s business. Commitment to outstanding customer service and pursuit to be a customer-centric company has paid great dividends to Bezos.What is equity? What is debt?

Furthermore, Bezos has purposed diversification as key driver of Amazon’s business. The company has diversified in a wide range of products numbering thousands. Also, Bezos has a winning mentality and this has helped grow the company from a small online bookstore to a gigantic e-commerce company. And the results are there to show. From middle class existence, Bezos is now a dollar billionaire and the richest person on the planet.What is equity? What is debt?