Introduction
Back in the day, young people who wanted to pursue the career in business claimed that the main problem was that nobody listened to their ideas. Modern business environment learned the lesson and today there are a lot of different investors with opportunities for start-up companies. However, today the problem is that many of those investors want not only to benefit correspondently from their investment but also to take over the main share of the company. What happened in the case of Jacqui Rosshandler’s Jacquii LLC is a perfect example of how the amount of investment does not equate to the amount of work that was out into creating the company.
Other potential sources of investment
Given the fact that Rosshandler’s company would not survive without investment, she had three possible choices. First and obvious one was to accept Shorin’s offer but, in this case, she would lose control over the company. To protect her ownership, she also could either take a bank loan to base her business on it or to engage her own assets, which is an equity-led model of entrepreneurship. Although, today there are also additional opportunities for small business and start-ups to find the investment on the optimal terms other than looking for an investor through the network of contacts. There are special social networks, such as the CrunchBase and many others (Alexy et al. 842).
Advantages and disadvantages of using debt and equity capital
Forbes and Warnock suggest that in cases when the enterprise is connected with economic risks, like Jacquii LLC, there is a possibility of ‘debt-led stop’ (17). Another observation that shows disadvantages of debt capital is that there are more unpaid accruals (Eckles, Halek and Zhang 861). And for a small business run by Rosshandler, it creates additional complications.
The use of equity capital is more typical for the small business; however, the cost of equity capital may correlate with the decreasing in firm size (Botosan 347). However, the problem with the equity capital is exactly presented in the situation with the Rosshandler’s company. Its circulation and revenue are enough for small business but with such a business model it is hard to find enough revenue to invest into the company’s growth.
How Jacquii LLC could have avoided capital flow
Small business and large enterprises function differently on many levels, their management differs as quantitatively as it does qualitatively (LeCornu et al. 1). Rosshandler started her enterprise from the perspective of a small business model. This is the reason why it is so challenging to encourage its growth. It already functions as a small enterprise on the institutional level. To avoid the cash flow, when entering the bigger scale of the business, Rosshandler should have a look for venture capital investor at the earlier stages of her company’s growth if she was initially oriented on such model (Hochberg, Ljungqvist and Lu 278).
Conclusion: Should Jacqui Rosslandler accept the investment from Arthur Shorin?
In this case, Rosshandler came to the point when she would need to find an investment somewhere in any case. Therefore, the only question for her is whether Shorin’s investment offer is good enough. There is always an opportunity to find out about the possibility of bank loan and its terms or search for investment offers on networks. However, when none of those, which is most likely, is better Arthur Shorin’s offer, she should accept it.
Works Cited
Alexy, Oliver T. et al. ‘Social Capital Of Venture Capitalists And Start-Up Funding’. Small Business Economy 39.4 (2011): 835-851. Print.
Botosan, Christine A. ‘Disclosure Level And The Cost Of Equity Capital’. The Accounting Review 72.3 (1997): 323-249. Print.
Eckles, David L., Martin Halek, and Rongrong Zhang. ‘Information Risk And The Cost Of Capital’. Journal Risk and Insurance 81.4 (2013): 861-882. Print.
Forbes, Kristin J., and Francis E. Warnock. ‘Debt- And Equity-Led Capital Flow Episodes’. The National Bureau of Economic Research, 2012. Web.
Hochberg, Yael V., Alexander Ljungqvist, and Yang Lu. ‘Whom You Know Matters: Venture Capital Networks And Investment Performance’. The Journal of Finance 62.1 (2007): 251-301. Web.
LeCornu, Mark R., et al. “The small enterprise financial objective function.”Journal of Small Business Management 34.3 (1996): 1. Web.