ENTREPRENEURIAL FINANCE
2019-2020
, PART I
FUNDING SOURCES
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,1. INTRODUCTION TO ENTREPRENEURIAL FINANCE
WHAT IS ENTREPRENEURIAL FINANCE?
The art and science of investing and financing entrepreneurial ventures.
Typically, entrepreneurial finance involves mainly private funding, as opposed to public funding, when
we are talking about corporate finance.
DIFFERENCES AND SIMILARITIES BETWEEN CORPORATE FINANCE AND
ENTREPRENEURIAL FINANCE
Corporate finance focuses on existing businesses and the challenges they face to grow in order to
deliver a healthy return to their investors. The underlying goal is to increase shareholder value.
Entrepreneurial finance relates to an entrepreneur’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 – a real one, that has
the potential to become financially sustainable.
Differences between corporate finance and entrepreneurial finance:
1. Corporate finance
Ø You have historical information (financial information) that will help you to forecast
the future.
Ø We assume that projects or investments will have a positive net present value (NPV)
– if not, they will not be implemented by senior management.
2. Entrepreneurial finance
Ø You do not have historical information.
Ø Losses are part of the game, since in the early years most of the money is ploughed
into investments and expenses that, hopefully, at some point in the future, will
translate into positive cash flows.
TOPIC ENTREPRENEURIAL FINANCE CORPORATE FINANCE
• Banks
Funding sources • Friends and family • Capital Markets
• Crowdfunding
• Incubators/accelerators
• Business angels
• Venture Capital
• Private equity
• Standard due diligence
Funding process • Deal sourcing and • Financial plan
screening • Colleteral to back loan
• Financial plan
• Valuation
• Term sheet
• Capital budgeting
Growth • Monitoring & key metrics • Mergers & acquisitions
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, • Corporate Governance • Private Equity
• Protecting knowledge • Initial public offering (IPO)
• Private Equity
• Dividends
Harvesting • Exiting (selling) Initial
public offering (IPO)
STAGES OF VENTURE DEVELOPMENT
Entrepreneurial finance is not only relevant at the starting point of a new company. It covers the
different stages that the venture will go through if it is successful in its endeavours.
SEED STAGE
Ø Begins with the idea for developing a new product or service
Ø In most cases: company not yet established
Ø Identify opportunities
Ø Produce prototype, test to validate and reach the market
Ø From idea to first customer (sales)
Ø First financing sources: 3F’s (friends, family and fools)
Ø From few months to many years
START-UP STAGE
Ø Company is selling its products or services and has its first customers
Ø Income < expenses (consuming cash)
Ø Improving the product or service
Ø Being efficient and scaling up
Ø Growing the customer base
Ø From sales to break-even (profit)
GROWTH STAGE
Ø Company has reached break-even and is becoming profitable
Ø Company is no more losing money!
Ø Launching new lines or entering new markets
Ø New initiatives might be losing money but core business is profitable
MATURITY STAGE
Ø Company’s growth slows down
Ø Not many new initiatives for high growth
Ø Market and competition have reached maturity
Ø Risk of new disruptive players
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,SOURCES OF FINANCING BY VENTURE DEVELOPMENT PHASE
SEED STAGE
Ø Entrepreneurs: funding comes from own savings account
Ø Family and friends: beneficial because not required to issue equity
Ø Business incubator: speed-up the development process through peer entrepreneur contact
and obtaining valuable external contacts
START-UP STAGE
Ø Accelerator
Ø Crowd-funding
Ø Angel investors: successful entrepreneurs that have money, time and experience and enjoy
actively supporting new ventures with all of this
Ø Government programmes: grants, subsidies, tax benefits or loans
Ø Corporate strategic partnership: get access to a corporate network and build credibility
Ø Venture Capital (VC): professionals that invest large amounts of capital in high-risk-high-
return early-stage ventures
Both accelerators and angel investors require the venture to give out part of its equity as
compensation.
GROWTH STAGE
Ø Trade credit: a vendor loan, typically without interest but coming at the expense of foregoing
a discount on the face-value of foregoing a discount that would be obtained when paying
earlier
Ø Factoring: selling accounts receivable to a factoring company for a time
Ø Mezzanine capital: a hybrid form of debt and equity funding used by ventures that have built
an established reputation and track record of positive cash flows
MATURITY STAGE
Ø Private equity: provides very large amounts of capital into ventures in return for a controlling
stake and involves itself actively in the operations and streamlining of the venture
Ø Public debt: refers to ventures attracting debt from public markets by issuing bonds
Ø Initial Public Offering (IPO): refers to the first time that a (formerly private) stock is offered to
the public. At the time of the IPO, lots of capital is raised for the company and after the IPO
the equity of the company is freely tradeable.
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,2. EARLY SOURCES OF FUNDING: INCUBATORS,
ACCELERATORS AND CROWDFUNDING
DEFINITION AND ORIGINATION OF THE EARY FUNDING SOURCES
In the early 2000’s, three new sources of early funding were introduced, helping entrepreneurs to
develop credible positions and providing investors with more reliable indicators of success at an early
stage.
PRE-MARKET FUNDING (“BOOTSTRAPPING” / “THE TRIPPLE F”)
Ø A funding source that is not provided in the market and that is used by an entrepreneur before
investigating early sources of funding.
Ø Describes the activity of obtaining capital from one’s own savings, personal loans and from
close relatives.
Ø This form of capital doesn’t give away ownership in the company: retain complete control of
the venture!
Ø Generates only small amounts of money
Ø The triple F: Family – Friends – Fools
DEFINITION OF THE EARLY MARKET SOURCES
Incubator: an organization that provides startups with a shared operation space and also provides
young businesses with networking opportunities mentoring resources and access to shared
equipment. Incubators are the only one that supports the search for funding as of the start of the seed
phase. (support)
Accelerator: an organization that offers startups support services and funding opportunities, in intense
programmes lasting several months that include mentorship, office space and access to capital and
investment in return for startupp equity. (support)
Crowdfunding: an emerging alternative form of financing that connects those who can give, lend or
invest with those who need financing for a specific project. (source)
Later-stage accelerator: This accelerator may be used in a later stage of venture development. It
applies in the case of a revenue-generating company that, for whatever reason, is not attaining the
levels of growth that had been envisioned. It assesses the main cause(s) for underperformance and
addresses that in a time-bound programme.
Incubators and accelerators have a support orientation and are primarily focused internally. Their
primary orientation is on the development of the venture itself and they support that development
with various tools, templates and networks. By optimizing the processes internally, investors are
attracted and market success attained.
Crowdfunding has a source orientation and is primarily directed towards the (external) user/buyer and
is used to generate market proof for the venture.
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,DISTINCT DIFFERENCES
INCUBATOR ACCELERATOR
Specialization Horizontal Vertical(s) / Theme(s)
Target Individuals Teams
Entrance Restricted Open
Support Organic growth Boost growth
Programme None Generic
Duration Months – Years – No limit 3-6 months
Financial contribution None – Small amount Larger amount (€10 – up)
Compensation None – Small fee (e.g. rent) Equity stake (5-10%)
KEY DRIVERS IN DEVELOPMENT
Entrepreneurship is recognized as a key determinant to ensure economic growth, innovation and job
creation. Policymakers therefore promote entrpreneurship and actively facilitate it.
INCUBATORS
Ø Provide the earliest type of formal support that entrepreneurs can typically access
Ø Their differentiating trait is that they support ventures very early on in the process of
developing their business idea
FORMS
Ø Incubators guide the entrepreneur through the early development phases, e.g. assessing the
opportunity, researching the potential and building the business plan
Ø Purpose: support the entrepreneur in the starting process of its business
Ø Incubators attached to corporates focus on initiatives that produce innovative offerings and
expand the corporate’s existing business
Ø Most basic form: a physical location (meeting point for entrepreneurs) that provides a general
infrastructure and network for its participants
PROCESS
Ø Most incubators have restricted membership, requiring the entrepreneur to be part of a
certain institute or company
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, Ø The incubator is the location (unless virtual) for infrastructure and support, and is dedicated
to networking and to limiting distractions for the entrepreneurs
Ø A mentor will be appointed to the entrepreneurs, to support their experience
Ø The incubator’s network and invited experts are another factor driving the success of the
incubator (well-known entrepreneurs or business leaders give presentations to inspire the
participants)
BENEFITS AND CONCERNS
Benefits:
Ø The success of an incubator in nurturing new ventures is determined for a large part by the
quality of its mentors
Ø A strong network of peer participants, alumni, partners and experts is an important factor in
the success of the incubator, as well as the extent to which the incubator actively maintains
contact with the local network
Ø The key benefit of an incubator for aspiring entrepreneurs is the process of learning about
entrepreneurship in a confined environment, as well as having access to the network of the
incubator
Concerns:
Ø An incubator needs to be more than just a meeting point; having no fixed programme raises
questions about the likely progress and dedication of the entrepreneurs
Ø Mentors do not always act without self-interest: they want to share their experience to
support entrepreneurs, but they also see it as a means for them to get involved in new and
promising ventures
Ø Attitude entrepreneur: once admitted to the incubator, the urgency of proving their venture
may be lessened, having reached their first milestone
ACCELERATORS
While incubators “incubate” ventures, fostering innovation in preparation for a market launch,
accelerators “accelerate” ventures, speeding up innovation and their market potential. Both are early
sources of support for funding, as they focus on supporting the creation of startups.
FORMS
Ø Accelerators typically have a physical location
Ø The application process is open (¹ incubator), as long as their interests fit in with the theme(s)
of the accelerator
Ø Targeted at teams
Ø Accelerators come into play in seed phase and extend into the startup phase
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