When Ann Whithey realized that consumers did not like the orange color of popcorn, she started a business to produce and sell white popcorn. She later decided to expand into other "smart foods" and obtained the necessary financing from external investors, called venture capitalists.

In 1989, Ann decided to sell her firm and start another business that would focus on natural, organic foods. Ann initially established her business as a sole proprietorship. She focuses her time on being creative rather than on the day-to-day operations of the business and does not go to sales meetings. The small size of Annie's Homegrown allows for considerable flexibility and enabled the company to get new products to market quickly.

At the same time, because of the company's small size, creditors ask Ann herself to personally guarantee repayment of the loans when the company obtains financing. Because of the popularity of the products, Annie's Homegrown expanded substantially. It went public in 1996, allowing individual investors to invest in the firm, and providing Annie's with funds to support its growth.

Questions

1. What are the costs and benefits if Ann Whithey decided to keep her business small rather than expand into a very large business?

2. What kinds of conditions might lead Ann to expand her business by raising equity capital?

3. Why might Ann prefer to obtain funds by borrowing rather than than through issuing stock?

4. When Ann needed funding in the earlier years of her business, she relied heavily on borrowed funds. In 1996, her firm raised funds through the issuance of stock to the public. Why do you think that Ann was able to more easily raise funds through her stock offering in 1996 than if she attempted that financing strategy in the earlier years of her business?

5. Do you think Ann would benefit from franchising her business?