Classical and Modern Literature and Theories in Entrepreneurial Finance


Entrepreneurial finance evaluates the value and the resources that are allocated to new business ventures. It mainly focuses on the developing stages of a business and addresses the major challenges that face entrepreneurs and ventures that begin on a technology base. On the product and production, process entrepreneurs are usually the ones responsible for technological innovations. This responsibility is what drives international trade and economic transformation, this means that entrepreneurs are very important in the society as they establish new forms of organizations and implement new types of business methods. Literatures and economic theories must therefore comprehend and more so keep up with entrepreneurs’ critical developments by first comprehending their basic contributions to the economy (Allison et al, 2004). Comprehending these fundamentals is crucial as it frees the entrepreneurs through the formulation of economic policies that do not restrict them. The research topic of this paper how classical and modern literature and theories affect entrepreneurs and distinguish the effects both have to the entrepreneur, firm and the economy (Dushnitysky&Lenox,2006).

Background information on Modern and Classical literature on Entrepreneurial Finance

In the neoclassical period one of the theories was the traditional pecking order theory that was first developed by author Myer in 1984 and it was founded based on asymmetric information issues. This classical theory suggests that most entrepreneurs and firms prefer internal sourcing of funds to give them security and if needs be for an external financial sourcing then debt is what is preferred as it happens to be the least risky external sourcing of funds to the entrepreneur and the firm. This classical theory expounds on the various observable patterns in corporate finance and they include the inclination of firms not to issue stock and their selection to hold huge cash reserves and other forms of financial slack. This theory has however being abandoned by most firms that have access of capital markets as they disagree with the fact that equity is the least desirable financial source for their firms and in fact propose that any developing firm should use retained profits followed by equity and lastly long term debt as their financial sources.In modern literature, entrepreneurship is defined as the process through which previously absent goods and services are made present or come to existence for the public to meet their need (Foo, Wong &Ong, 2005).


Theories in Classical and Modern Literature on Entrepreneurial Finance

The general equilibrium theory of the neoclassical period, markets and firms are given externally and most organizations in this case are usually explained by their technology in terms of production. Markets operate in good location, in the best time and cost less. The neoclassic framework short falls is mainly due to the fact that entrepreneurs have no economic functions and the more acute clarification of the nonappearance of the entrepreneur is that in typicaleconomics the theory is generally composed of equilibrium models in which, organizationally, nothing is changing. There are two main reasons as to why in this classical theory an entrepreneur plays no role in the economy one of the reasons is that an entrepreneur needs not to establish firms since firms in this theory are given exogenously. Secondly, since markets exist in standard models an entrepreneur has no choice other than to play a small role in this period. Furthermore, markets achieve a balance by means of the imperceptible auctioneer, so that firms are not needed to establish or manage markets. Classical theories and literatures indicate that entrepreneurs serve no particular purpose mostly because the firms and organizations are usually restricted to products and production. The organizations in this case are what makes the market and incidentally are made absent in the economic courses(Aernoudt,2005).


The Cantillion theory of this period did not view the entrepreneur as a production factor as such, but an agent that takes on risk and thereby equilibrates supply and demand in the economy. This role resembles that of the optimizing residual claimant for example the business owner who rents labor and capital from workers and landowners in a world of uncertain demand or production.Cantillon, a researcher saw the entrepreneur as accountable for all interchange and circulation in the economy. As different to wage laborers and land proprietors who both receive a certain or fixed income and rent, the entrepreneur to him earns an uncertain profit Cantillons entrepreneur is an individual that equilibrates supply and demand in the economy and in this function bears risk or uncertainty(Shane & Delmar, 2004).


Most of the literature in this period was stuck in the statically world of equilibrium where the assessment of the most favorable economic opportunities where key. To the entrepreneur the payoff from the risk-bearing role is not profits, but rather laborer wage that accrued, the function of an entrepreneur and that of a capitalist in the theories and literatures are separated. The early neo-classical economist, Alfred Marshall, in his ‘Principles of economy’ devoted attention to the entrepreneur. In addition to the risk bearing and administration aspects stressed by Say and Cantillon, Marshall presented an revolutionizing function of the entrepreneur by accentuating that the entrepreneur incessantly seeks opportunities to lessen costs (Hasbullah, 2008).

In modern literature, entrepreneurship is defined as the process through which previously absent goods and services are made present or come to existence for the public to meet their need. According to previous literature, entrepreurship comes to existence when enterprising individuals come to contact with opportunities. The forward-looking individual is alert to opportunities and grabs the ones that come their way in form of business ideas for the foundation of future business endeavors (Foo, Wong &Ong, 2005). Even through the internal qualities of the ideas are essential, the focus is on the external features of the ideas. Individuals have many ideas and even through a significant number of them might be good, only a few get support and become commercialized (Amit, Glosten& Muller, 2008).

According to a school of business ventures, a scholar argues that ventures should be planned well before the marketing activities are undertaken. Inadequate planning could result in poor development in the ventures. Given the constraints of entrepreneurship, researchers argue that planning for a business before an owner ventures to marketing activities demonstrates reality in business to customer relations and with other stakeholders (Shane & Delmar, 2004). Secondly, other scholars argue that improper planning of activities could result in failure, which justifies adequate prior planning. A forward-looking business owner should therefore have their plan in place, know their market and the time constrains they would encounter on the way due to market demand. Organizational management if therefore key in planning for a business venture(Hasbullah, 2008).


One of the greatest areas of weakness in organizational management practice is in the human dimension. There always seems to be minimal understanding of interaction between the managers and the employees. When a conflict arises, a significant number of individuals would agree that it was because of communication problems. According to Schamotta and Media the right way of communication makes all the difference if an individual expects the message to be acted upon and understood (Northouse, 2010). However, the management can best improve communication with its employees, especially with regard to complex issues through meetings, face-to-face or writing. Communication of complex issues through staff meetings is a good tool because it focuses attention and employees are compelled to listen (Aernoudt,2005).

Impact of Classical and Modern Literature on Business Industry

In the business industry, external support of ideas is important as it determines the growth potential of a business because the owners require huge support in terms of resources that include information, space and capital. However, convincing the outside individuals to be involved in the venture may be difficult regardless of the merits of the venture. One has to convince potential stakeholders about the viability of the business idea or the venture in order for them to become interested in becoming party to the endeavor (Food, Wong & On, 2005). In this regard, the modern literature on the theories of entrepreneurial finance focuses on the way the idea is packaged despite the famous image of the sole business owner and his or her highly successful venture. For an enterprise to be successful in its presentation to potential financiers, they must show good organizational structure that is founded on a strong team (Hasbullah, 2008).

The impact is positive and it can be maximized through improved organizational structure that may be regarded as the framework of the institute that provides a foundation within its functions. This framework is a relevant aspect in the regulation of information processing capabilities and demands in operations (Griffin & Moorhead, 2010). The arrangement within an establishment is believed to affect the behavior of members. In this regard, the behavior of members translates to their overall performance within the organization. Leadership is a widely accepted vital factor that influences the failure or success of an institution (Hasbullah, 2008). The principle role of a manager is to encourage followers to achieve a common goal (Northouse, 2010). Potential for exceptional performance and productivity may be referred back to the kind of leadership in an organization. High performing employees provide extraordinary services to the people they serve (Amit, Glosten& Muller, 2008).

The long-run performance of an organization is affected by all the managerial actions and decisions, which is referred to as strategic management (Foo, Wong &Ong, 2005). This process has fundamental aspects that include; environmental scanning, strategy formulation, strategy implementation, and lastly, evaluation and control. The procedure emphasizes on examining and evaluating of opportunities, threats, strengths and weaknesses with regard to a corporation (Northouse, 2010). This process can be summarized in five stages that include; external analysis, internal analysis, formulation of strategy, strategy execution and strategic control.

Future Directions

The future direction on entrepreneurial finance in the next 3 to 5 years requires real entrepreneurs not to consider all money as the same. For an entrepreneur considering the sources of their finance, which in this case is an internal source they have to take into, account various criteria to do so and to ensure that their ventures become a successful and profitable development (Arthurs &Busenitz, 2006). This criterion has to match the risk involved and the type of money involved. Debt in this case especially for a startup venture is hardly best source of finance as it is usually secured on assets. The more uncertainty and the longer the exit period the higher the increase in the collateral needed. The anticipated reward in this case increases with an increase in the ventures risk. However, the higher the anticipated rewarded and return required, the cost of the venture still is the control and the more the information a venture capitalist seeks about the business or the organization (Allison et al, 2004).

A business plan in any organization is crucial before the engagement of any marketing strategies by a firm or an organization. In the classical period a business plan not only interfered with the efforts of an entrepreneur but also constrained him in terms of time to undertake certain activities such as promotion and marketing of products (Carter et al., 1996). Other disadvantage according to researchers during this period is that a business plan also that it gives a harmful illusion to the entrepreneur that he has control over information which in most of the cases turned out to be untrue for example on the number of already achieved clients. Lastly, it gives the entrepreneur the high possibilities of making decision errors in estimating certain things such as the clients’ needs and their purchasing power(Amit, Glosten& Muller, 2008).

Researchers during this period believed that carrying out a business plan before getting involved in promotion and marketing activities were actually a hindrance for the development and establishment of new ventures. Given time restrictions, other researchers have said that business planning prevents entrepreneurs from getting involved in marketing activities that validate the authenticity of a new business to clients and other investors. Others have claimed that the risks of improper and inaccurate marketing activities are too minimal to justify prior planning. Others claim that entrepreneurs do not have to plan first as their intuition about their market is usually right and lastly there are others who claim that time limitations and uncertainty makes the whole process ineffective in serving the demands of the market (Carter et al., 1996).

An individual that intends to venture into business should have a viable business plan that will direct the reader of their intention in the proposed venture. In this case, writing a business plan is essential. It should entail the intended goods and services that the individual intends to present to the existing or new market (Shane & Delmar, 2004). The plan would also serve as an avenue to receive feedback from the potential customers and a framework for evaluation of the venture. For instance, the plan could be used to develop a hiring scheme of new employees and on the other hand use feedback to change the entire hiring model. The plan would therefore enable the entrepreneur to have accurate information about the relationship between the customer feedback and the personnel hired in their company (Griffin & Moorhead, 2010). Business models would therefore be easily changed as informed by the consumer feedback.

Strategic financial management is essential to any organization. The approach entails allotment of scarce resources to known strategies in competing opportunities and applying necessary actions to monitor the improvement of the selected opportunities, to achieve the set objectives. The scope of financial management of an organization may be categorized into two broad classes of decision-making (Northouse, 2010). The first decision is made with regard to the company assets and the most relevant mixes and levels of the assets. The second decision involves establishing how the investments will be financed, and the optimal mix and level of financing requirements for the assets( Dushnitsky& Lenox,2006).

Strategic management in corporations provides guidelines of actions by defining objectives, formulating plans and policies defined to achieve the set objectives, and lastly, allocating relevant resources to execute the plans. The concept has certain key aspects that guide the process (Griffin & Moorhead, 2010). They include; external analysis, internal analysis, formulation of strategy, strategy execution and strategic control. Strategic management is a diverse fields that drawing up a variety of theoretical frameworks in an attempt to explain the different perspectives of the concept.


Impact of Classical and Modern Literature on Entrepreneurial Finance

In classical literature, there is the involvement of entrepreneurial capabilities, which is the capability to identify a completely new opportunity and in order to pursue a new opportunity one has to develop the needed resource base. The entrepreneurial capabilities as compared to the current dynamic capabilities when positioned with the opportunity they are primarily linear. This means that decision makers pinpoint the opportunity and start building the resource base that they deduce is necessary for the given opportunity. This feature in the classical period however fall short in that the aspirations are usually not the key motivators for change as compared to the dynamic capabilities. Entrepreneurial capabilities are also not primarily recursive in that they do not associate knowledge regarding the organization’s performance against its desired level of performance in the product market along with the search for new strategic inputs and recombination that would permit the organization to meet its performance expectations (Amit, Glosten& Muller, 2008). In the classical period therefore entrepreneurial capabilities where therefore uniquely linked with total new opportunities. When a new opportunity is brought forth to a new company according to classical literature the decision makers flexibility increases thus creating the resource base to allow the pursuit of the recognized opportunity (Arthurs &Busenitz, 2006).

The problem with entrepreneurial capabilities established in the classical period is that an organization or a company with a resource base that is established has a higher chance of having in-built rigidities. These in-built rigidities arise because of the combination of stock of capabilities. This is usually in relation to the quest of a previous opportunity. These rigidities, which are path reliant on and occur over time, change the forthcoming search of the organization and inhibit future entrepreneurial capabilities. Due to this reason, it is correct to say that in spite the nature of the contribution of entrepreneurs to the economy their importance has not been identified according to the neoclassical period literature and theory. Since knowledge is depends on a path and shapes the lens and search patterns in the business, managers attentiveness for identifying new opportunities will decrease in harmony with organizational experience. Moreover, the range of likelihoods that managers consider becomes much more limited once the organization has developed an established resource base. Therefore, as an entrepreneurial endeavor progresses, the need for dynamic capabilities becomes obvious as organizational changes to its resource base and changes in the wider environment come into play (Carter et al., 1996).

This section focuses on the effectiveness of the team and the external evaluation of the business environment around which the potential venture is founded (Shane & Delmar, 2004). The team that an entrepreneur puts together will determine the quality of the business plan and the idea as well. Their characteristics therefore shape the entire business model. One of the most essential qualities of a team is the experience of the individuals in various sectors of business. The team size also determines their effectiveness and ability to deliver positive results(Hasbullah, 2008). Larger teams may have more resources in terms of expertise, information and skills compared to smaller groups. In this regard, higher scale of growth may be found in the larger groups compared to the smaller ones. Business relations are important in every team for a business venture to successful(Shane & Delmar, 2004).


Modern development in business relations and human resource management has shifted employee and management bargaining power from the level of the firm to the state authority. This has grown to the level of interest in how employment relations are conducted, not just by the specialized managers, who is conventionally known to deal with employment issues, but across authority as a whole(Griffin & Moorhead, 2010). There is a growing concern for employers to emphasize on achieving harmony between business goals and employment practices(Arthurs &Busenitz, 2006).


Employment relations refer to the communication between managers and their workers during their course of working together(Northouse, 2010).Work or occupation is important to human life because it determines what one does in their daily lives and it keeps our minds occupied. Occupation provides a platform of interaction with other people and to some extent; it becomes a source of identity. It also contributes to civilization since it improves an individuals’ access to materials necessary for life(Hasbullah, 2008). Generally, the employment relations system describes how a company intends to prevent or resolve conflicts that arise at work. The purpose of an employee relation structure is to increase staff motivation and satisfaction, which will determine their level of productivity and overall success of the firm(Arthurs &Busenitz, 2006).



Successful employment relations are critical in the workplace, whether at recruitment, during the course of work or at the point of separation. The staff, managers, employee representatives are all key actors in this relationship(Griffin & Moorhead, 2010). The employment allocation, structure and management are therefore of importance in the corporate world. The management of these elements, inform a lot about the society’s views and values.

Managers to attain goals can no longer rely on to hierarchical position (Shane & Delmar, 2004). To get optimum results from subordinates, managers should encourage a spirit of cooperation and involvement, high morale and readiness to work by applying desirable leadership styles. According to Cheng, Chang and Lai, poor relationship between the managers and their subordinates undermine the quality of service(Hasbullah, 2008). The choice of organization structure and leadership behavior, influences the internal environment in terms of performance and consequently perceived service quality.



The modern and classical literature on the theories of entrepreneurial finance agrees on issues concerning the structure of organization and the team around which the venture is built on. According to both viewpoints, for business venture to be considered viable, the business owner should have a plan that explains the ideas of the venture in the most convincing way if they intend to have an outsider collaborating in their venture. In this regard, the kind of presentation speaks a lot about the intended venture, the team behind it and the business owner.


Allinson, C., Chell, E., Hayes, J., 2000. Intuition and entrepreneurial behavior.Eur. J. Work Organ. Psychol. 9(1), 31–43.

Amit, R., Glosten, L., & Muller, E., (2008). Does venture capital foster the most promising entrepreneurial firm.California Management Review. Spring90, Vol. 32 Issue 3, p102-111. 10p.

Arthurs, J. D., &Busenitz, L. W. (2006). Dynamic capabilities and venture performance: The effects of venture capitalists. Journal Of Business Venturing, 21(2), 195-215. doi:10.1016/j.jbusvent.2005.04.004

Carter, N., Gartner, W., Reynolds, P., 1996.Exploring start-up event sequences. J. Bus. Venturing 11, 151–166.

Foo, M., Wong, P. &Ong, A. (2005). Do others think you have a viable business idea? Team diversity and judges’ evaluation of ideas in a business plan competition. Journal of Business Venturing 20 (2005) 385 – 402

Griffin, W. & Moorhead, G. (2010). Organizational behavior: Managing people and organizations. Australia: South-Western/Cengage Learning.

Hasbullah, B. (2008). The relationship between leadership behaviour and organizational commitment: A study in the co-operative societies in Peninsular Malaysia, Unpublished MBA dissertation Submitted to University of Malaya.

Northouse, G. (2010). Leadership: Theory and practice (5th edition).Thousand Oaks, CA: Sage.

Say, J. B. 2001. A Treatise on Political Economy, trans. Clement Biddle. Philadelphia: Lippincott, Grambo& Co.

Shane, S. & Delmar, F. (2004).Planning for the market: business planning before marketing and the continuation of organizing efforts.Journal of Business Venturing 19 (2004) 767 – 785

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