Inhoud
1. Session 1: Entrepreneurial finance vs corporate finance & stages of venture development ......... 2
1.1. Setting the stage...................................................................................................................... 2
1.2. Entrepreneurial finance versus corporate finance .................................................................. 3
1.3. Stages of venture development ............................................................................................... 5
1.4. Sources of financing................................................................................................................. 8
2. Session 2: Sources of financing ..................................................................................................... 10
2.1. Bootstrapping ........................................................................................................................ 10
2.2. Friends, Family and Fools (3F’s)............................................................................................. 10
2.3. Incubator and Accelerator ..................................................................................................... 10
2.4. Crowdfunding ........................................................................................................................ 11
2.5. business angels ...................................................................................................................... 14
2.6. Venture capital ...................................................................................................................... 16
2.7. Banks ..................................................................................................................................... 21
2.8. Strategic partners .................................................................................................................. 22
2.9. Government measures .......................................................................................................... 22
2.10. IPO ..................................................................................................................................... 22
2.11. Differences between sourcing and financing .................................................................... 22
2.12. Main elements to evaluate when asking for financing ..................................................... 22
3. Session 3: Financial planning ......................................................................................................... 25
3.1. Revenue forecast ................................................................................................................... 27
3.2. P&L statement ....................................................................................................................... 28
3.3. Cash flow statement .............................................................................................................. 28
3.4. Balance sheet ........................................................................................................................ 31
4. Session 4: Exercises financial planning .......................................................................................... 33
5. Session 5: Valuing entrepeneurial companies .............................................................................. 33
5.1. Discounted cash flow (DCF) method...................................................................................... 35
5.2. Risk-adjusted DCF method..................................................................................................... 37
5.3. Multiples ................................................................................................................................ 39
5.4. Venture capital method ......................................................................................................... 41
6. Session 6: Exercises Valuation ....................................................................................................... 48
7. Session 7: Deal structures ............................................................................................................. 48
7.1. Investment Staging ................................................................................................................ 48
7.2. Term sheet ............................................................................................................................. 51
7.3. Value adding and monitoring ................................................................................................ 65
, 7.4. Exit ......................................................................................................................................... 65
8. Session 8: Exercises deal structures .............................................................................................. 68
9. Extra chapters in the book ............................................................................................................ 68
Chapter 18: the future of entrepreneurial finance ............................................................................ 68
Chapter 10: monitoring tactics and key metrics................................................................................ 70
Chapter 11: Corporate governance ................................................................................................... 74
Entrepreneurial Finance (2019-2020)
1. Session 1: Entrepreneurial finance vs corporate finance & stages
of venture development
1.1. Setting the stage
- Unicorn = company with a value of more than 1 billion dollars
- Entrepeneurship relates to the discovery of an opportunity and the steps that need to be
taken to make it a reality
- Entrepreneurial finance
o Valuing and financing unquoted entrepreneurial companies
▪ Finance: relates to obtaining money, to investing money and to
understanding the cost and the best use of money
o Making deals
o Financial decision making by entrepreneurs who are undertaking new ventures <->
Corporate finance: financial decision making by managers of public companies
- What is an entrepreneur
o Howard Stevenson: “Someone who pursues opportunities with no regard to
resources currently controlled”
- Three defining characteristics
o Opportunity recognition / creation
o Uncertainty
o Limited resources
- Entrepreneurs make it happen through business
o Points of change that necessitate a valuation process followed by a refinancing
process
▪ Starting
▪ Building
▪ Buying
▪ Selling
- Valuation is a very important skill
- Structuring the deal – the toolkit
,1.2. Entrepreneurial finance versus corporate finance
- In corporate finance, there are two major topics: investing and financing
o Financing: where do you get the money needed to invest in or to run your business?
o Investing refers to the assets of the company and financing to its liabilities and equity
- Differences
o Corporate Finance
▪ Focuses on existing businesses and the challenges they face to grow in order
to deliver a healthy return to their investors. Their goal is to increase
shareholder value
▪ Investing → Assets
▪ Financing → Liabilities and equity
o Entrepreneurial Finance
▪ Relates to an entrepeneur’s first challenge to acquire the funding to be able
to test whether there is an actual opportunity that can be made into a
business
▪ “The art and science of investing and financing entrepreneurial ventures”
- Why is an entrepreneurial finance different from “traditional” corporate finance?
o Assumptions of traditional models don’t hold
▪ Agency problems
• Investor = principal
• Entrepreneur = agent
▪ Adverse selection problem
• Will the best entrepreneurs seek outside finance? Or is external
finance considered as “last resort”?
▪ Moral hazard problem post-investment
• Will entrepreneurs work in the best interest of investors?
o Information problems
, ▪ Information on the opportunity is incomplete and uncertain to Es
(entrepreneurs) and OIs (investors)
▪ Outside investors lack information on
• Value of idea: Risk of appropriation of intellectual property & ideas
by OIs
• Skills and efforts of entrepreneur
▪ Even with the same information, Es and OIs may interpret information
differently; different views of the future
• Driven by huge uncertainty
o Uncertainty leads to different views of the future
▪ Uncertain whether technology would work
▪ Uncertainty with respect to demand
▪ Uncertainty with respect to price
▪ Uncertainty with respect to patent application
o Suppose, as the entrepreneur of a prospective new venture, that you find you are
much more optimistic about the future prospects for the venture than is the outside
investor whom you are trying to convince to invest in the project. Can you think of
any ways to structure the financing that would make the outside investor more
comfortable?
▪ Notes:
• You try to find out what the prefered situation is of the investor
• You want to convince your investor to come aboard
• You can use your financing needs, you see in a lot of companies that
they do a lot of product development but they also do consulting.
Because it can be relevant to get money into the business
o Assumptions of traditional models don’t hold
▪ CAPM cost of equity, e.g.
• Ke= rF+ β(rM–rF)
▪ In entrepreneurial companies CAPM does not work!
• Ke= rF+ β(rM–rF)
+ No diversification
+ Illiquidity
+ Transaction costs
• Notes: Transaction costs: when you are in the board of directors you
will not get paid for it, but when you are in an entrepeneurial firm
you also want to get something so for example you want to get a
lower price for the shares so that when you sell your shares you get
more money.
o Addressing agency problems
▪ Reduce information asymmetry
• Pre-investment screening and due diligence
• Post-investment monitoring
▪ Align goals of E’s and OI’s
• E’s are expected to show real commitment because they invest their
own savings
• E’s are shareholders: bear risk and upside potential
- Conclusion
, o Investment and financing decisions are interrelated
o Value of entrepreneurial company is different for different types of investors
o Complex contracts
Important ↑
1.3. Stages of venture development
- Different stages
o Seed stage
▪ Begins with the idea for developing a new product or service
o Start-up stage
▪ It will remain in the startup stage until it reaches break-even, which is the
stage at which the startup is able to cover all its costs
▪ At this stage, the company is still consuming cash, as its income is not yet
sufficient to cover its expenses
▪ The most suitable source of financing will be business angels or venture
capitalists
, • If the business requires less than €1 million, a syndicate of business
angels might be willing to provide the financing. If a larger sum is
required, then venture capital will be the most likely route, with the
investor investing in the venture.
o Growth stage
▪ Starts once the company has reached break-even and is becoming profitable
▪ Most of the cash generated will go to finance growth
▪ Now banks may come into play, as the company will, most likely, meet the
credit control requirements of traditional financial institutions
o Maturity stage
▪ Begins once the growth of the market or the company stabilizes at normal
rates
▪ There are different types of financing available according to the size and
timing of the new venture’s financial needs, as well as the milestones
achieved
▪ First to invest anything is typically the entrepreneur
▪ Although not directly providing capital, this source enables the entrepreneur
to speed-up the development process
o Venture capital
▪ Refers to professionals that invest large amounts of capital in high-ris-high-
return early-stage ventures. The ventures reimburses the VC by giving it a
significant minority stake
▪ Venture debt and asset-based lending are forms of loans available to
enrepreneurs in the start-up phase. The difference between the two is the
availability of assets in the venture, while the latter requires assets as
security for the loan, the former is especially developed for venture capital
backed ventures lacking assets and a steady cash flow for a more traditional
form of debt financing.
- Different steps in financing process
o Determine how much and when financing is required
o Choose type of financing needed
o Choose source of financing
o Structure the deal
o Harvest the investment
- How much money do you need?
o More is better <-> less is more perspectives
o Insights form inc. 500 companies
▪ Companies started with < $1,000 as likely to be profitable as those starting
with > $100K
▪ Companies with > $100K seed capital employed on average 150 people and
had $21M in revenue; < $1,000 seed capital had 56 employees and $13M in
sales
- Arguments for raising as much money as possible
o Excess cash is a cushion against unexpected setbacks.
o Excess cash affords flexibility to pursue unexpected opportunities.
o Excess cash makes obtaining credit from lenders and suppliers easier.
o Excess cash is comforting for the entrepreneur and key employees.
o → Behavioral theory of the firm
, o Notes:
▪ During the rainy days, slack resources allow to hang in there (slack resources
= excess resources, so what’s more than needed for the basic operations of
the firm)
▪ It helps you to experiment, to innovate
- Arguments for raising as little money as possible
o Limited cash limits the loss if the venture fails.
o Limited cash disciplines the entrepreneur to focus on the objective.
o Limited cash promotes developing cash-management skills.
o Limited cash preserves ownership for the entrepreneur.
o → Agency theory and Resource constraints theory
o Notes
▪ Leads to more creativity
- Example
o Different teams are struggling with the same innovation problem but have different
financial resource endowments.
The big challenge in jet engines was and is to solve a performance dilemma: the
more powerful the engine, the hotter it gets, and the more frequent are failures due
to material fatigue.
At the end of World War II, several American teams under General Electric and
several German teams under BMW and Heinkel were competing against each other
in the race to resolve this dilemma. The stakes in this race were high, given that all
parties recognized jet propulsion as the next ‘winning weapon’ in the skies.
The American team had a virtual blank check for buying whatever costly raw
materials it needed to create the most heat- resistant alloys. By contrast, the
German engineers were denied access to state-of-the-art heat resistant alloys due to
funding problems and post-war disruptions of international trade. They simply could
not procure the required materials and had to make do with what was available.
The resource-constrained German team eventually resolved the performance
dilemma in a simple way: by focusing on developing more efficient ways of cooling
their poorer alloys, rather than developing more heat-resistant alloys. The resulting
‘bypass’ technology (in which the rotor blades and other engine parts most exposed
to high temperatures were hollowed out so that air could flow through them,
thereby cooling them off) was in fact an analogy of the cooling system in piston
engines, and is still used to this day.
- Optimal level of financial slack
