Entrepreneurial Finance (2020)
Session 1: Introduction (+ Chapter 1: Introduction to Entrepreneurial Finance) 3
1. Setting the stage 3
2. Entrepreneurial Finance vs Corporate Finance 4
3. Stages of Venture Development 5
Session 2: Sources of financing (+ Chapter 2: Early Sources of Funding) 7
1. Bootstrapping (type of FFF-funding) 7
2. Friends, family & Fools (3F’s, FFF) 7
3. Incubator and Accelerator (support) 7
4. Crowdfunding (source) 8
5. Business Angels (BA) (+ Chapter 3: Early Sources of Funding: BA) 10
6. Venture Capital (+ Chapter 4: VC, Private Equity and Corporate Venture Capital) 14
7. Banks 18
8. Strategic Partners 19
9. Government Measures 19
10. IPO 19
11. Difference between sources of financing 19
12. Main elements to evaluate when asking for finance 20
13. Start-up Financing Cycle 21
Chapter 6: Deal Sourcing and Screening 22
1. Review of the Principal-Agent Problem 22
2. Remedies for the Principal-Agent Problem: Pre-contractual 22
3. Remedies for the Principal-Agent Problem: Post-contractual 23
4. Understanding the Ways VCs Generate Investment Opportunities 23
5. Investment Strategy 23
Session 3: Financial Planning (+ Chapter 7: Preparing Financial Plan: Forecasting) 24
1. Importance of Financial Planning for Entrepreneurs 24
2. CF, Profits and the Balance Sheet: Putting It All Together 24
3. Steps in the Development of a Start-Up’s Financial Plan 24
4. Use of The Financial Plan 27
Session 4: Exercises Financial Planning (see BlackBoard) 27
Session 5: Valuing Entrepreneurial Companies (+ Chapter 8) 28
1. Pre-money vs post-money valuation 28
2. Valuation Methods 29
3. Dilution Effect Due to Additional Rounds of Financing 35
1
, 4. Convertible Notes 35
Session 6: Exercises Valuation: see BlackBoard 35
Session 7: Deal Structures (+ Chapter 9: Term Sheet and Negotiating w Investors) 36
1. Investment Staging/Staging of Financing 36
2. Term Sheet 38
3. Most important issues included in term sheet or negotiation: 39
4. Value Adding and Monitoring 44
5. Exit: See chapter 17 44
Session 8: Exercises Deal Structures see BlackBoard 45
Chapter 17: Harvesting: the Exit 45
1. Importance of Exit Markets 45
2. Timing Exits 45
3. Exit Route Choices 46
4. IPOs in Detail 47
5. Recent developments: Changing Exit Markets 48
Chapter 10: Monitoring Tactics and Key Metrics 49
1. Business Planning as the Starting Point for All Monitoring and Reporting 49
2. Reporting Practices in European Startups 49
3. Key Metrics 50
4. Towards a Dynamic Understanding of KPIs 51
Chapter 11: Corporate Governance 51
1. Defining Corporate Governance and Cornerstones for Analysis 51
2. Board Structure 52
3. Formal and Informal Rules 53
4. Governance Dynamics 54
5. Leveraging Ownership 54
6. Standards and Harmonization 55
7. Benefits of Corporate Governance 55
Chapter 18: The Future of Entrepreneurial Finance 55
1. Key Drivers Shaping the Past 55
2. Technology 56
3. Market Events 56
4. Regulation 56
5. Development of Funding Sources 57
6. Development of Funding and Growing Processes and Harvesting 57
Session 9: Sven De Cleyn - imec: Investing in startups as a fund manager 58
2
,Session 1: Introduction (+ Chapter 1: Introduction to Entrepreneurial Finance)
1. Setting the stage
Entrepreneurial finance:
▪ Valuing and financing unquoted entrepreneurial companies
▪ Making deals
▪ Financial decision making by entrepreneurs who are undertaking new ventures
vs Corporate finance: financial decision making by managers of public companies
90 % of ‘financing for business’ is debt, still this course focuses on equity and valuation?
Defining entrepreneur(ship):
“An entrepreneur is someone who exercises business judgement in the face of uncertainty”
“Entrepreneurship is characterized by the existence of new combinations causing discontinuity… The
process of creative destruction…”
“The ability to discover new ways of dealing with known problems or new combinations of given
knowledge”
“Someone who pursues opportunities with no regard to resources currently controlled”
➔ No real profile, but more like shared characteristics of entrepreneurs
Three defining characteristics:
▪ Opportunity recognition/creation
▪ Uncertainty
▪ Limited resources
Entrepreneurship relates to the discovery of an opportunity and the steps that need to be taken to
make it a reality. It is not just applied to the creation of new businesses, but they are, in most cases,
its main focus. Entrepreneurs need resources to start; key resource is money -> finance
Finance relates to obtaining money, to investing money and to understanding the cost and the best
use of money.
Entrepreneurs make it happen through business: starting, building, buying, selling
➔ points of change that necessitate a valuation process followed by a refinancing process
Valuation is a key skill as it is necessary to: raise equity, raise debt, satisfy vendor, satisfy purchaser,
get deal done, get rich <-> or go bust
Structuring the deal – the toolkit:
Goal of this course:
➔ Different financing options
➔ Valuation and structuring issues when assessing, entering and exiting deals
➔ Identify critical factors when doing entrepreneurship for real
3
,2. Entrepreneurial Finance vs Corporate Finance
Corporate Finance (CF):
➢ Investing (deciding where to invest budget in) -> Assets
➢ Financing (where to get the money, basics of accounting) -> Liabilities and equity
Entrepreneurial Finance (EF):
‘The art and science of investing and financing entrepreneurial ventures’
Private funding: EF <-> Public funding: CF
2.1 Differences EF and CF
CF: focus on existing businesses and the challenges they face to grow in order to deliver a healthy
return to their investors -> increase shareholder value
Already value in business and key question is how to increase this value
EF: 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; challenge starts way before the generation of value
Assumptions of traditional models don’t hold in EF
Agency problems:
Investor = principal Entrepreneur = agent
But they don’t have the same goals, nor the same information
Averse 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?
Information problems:
▪ Information on the opportunity is incomplete and uncertain to Es and OIs
▪ Outside investors (OIs) 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; uncertainty leads to different views of the future
▪ In CF, you already have historical (financial) information -> help to forecast the future
Addressing agency problems:
▪ Reduce information asymmetry
➢ Pre-investment screening and due diligence
➢ Post-investment monitoring
▪ Align goals of Es and OIs
➢ Es are expected to show real commitment: Invest their own savings
➢ Es are shareholders: bear risk and upside potential
CF theories: based on important assumption that investors are rational
This means that they will estimate the risk of each investment opportunity and either choose the
option with the lower risk given the same expected return or the one with the higher return given the
same level of risk.
4
, CAPM (cost of equity) does not work in entrepreneurial companies!
Ke= rF+ β(rM–rF)
+ No diversification
+ Illiquidity
+ Transaction costs
▪ the level of risk and the expected return that the investor requires for each specific new venture is
very difficult to estimate
▪ In fact, rationality is mixed with passion, a bit of fun and a lot of uncertainty in entrepreneurial
finance
2.2 Conclusion
1. Investment and financing decisions are interrelated
2. Value of entrepreneurial company is different for different types of investors
3. Complex contracts
Key characteristics EF vs CF:
3. Stages of Venture Development
Different stages:
1) Seed stage: Begins with the idea for developing a new product or service
2) Start-up stage: It will remain in the start-up stage until it reaches break-even, which is the stage at
which the start-up is able to cover all its costs
5
Session 1: Introduction (+ Chapter 1: Introduction to Entrepreneurial Finance) 3
1. Setting the stage 3
2. Entrepreneurial Finance vs Corporate Finance 4
3. Stages of Venture Development 5
Session 2: Sources of financing (+ Chapter 2: Early Sources of Funding) 7
1. Bootstrapping (type of FFF-funding) 7
2. Friends, family & Fools (3F’s, FFF) 7
3. Incubator and Accelerator (support) 7
4. Crowdfunding (source) 8
5. Business Angels (BA) (+ Chapter 3: Early Sources of Funding: BA) 10
6. Venture Capital (+ Chapter 4: VC, Private Equity and Corporate Venture Capital) 14
7. Banks 18
8. Strategic Partners 19
9. Government Measures 19
10. IPO 19
11. Difference between sources of financing 19
12. Main elements to evaluate when asking for finance 20
13. Start-up Financing Cycle 21
Chapter 6: Deal Sourcing and Screening 22
1. Review of the Principal-Agent Problem 22
2. Remedies for the Principal-Agent Problem: Pre-contractual 22
3. Remedies for the Principal-Agent Problem: Post-contractual 23
4. Understanding the Ways VCs Generate Investment Opportunities 23
5. Investment Strategy 23
Session 3: Financial Planning (+ Chapter 7: Preparing Financial Plan: Forecasting) 24
1. Importance of Financial Planning for Entrepreneurs 24
2. CF, Profits and the Balance Sheet: Putting It All Together 24
3. Steps in the Development of a Start-Up’s Financial Plan 24
4. Use of The Financial Plan 27
Session 4: Exercises Financial Planning (see BlackBoard) 27
Session 5: Valuing Entrepreneurial Companies (+ Chapter 8) 28
1. Pre-money vs post-money valuation 28
2. Valuation Methods 29
3. Dilution Effect Due to Additional Rounds of Financing 35
1
, 4. Convertible Notes 35
Session 6: Exercises Valuation: see BlackBoard 35
Session 7: Deal Structures (+ Chapter 9: Term Sheet and Negotiating w Investors) 36
1. Investment Staging/Staging of Financing 36
2. Term Sheet 38
3. Most important issues included in term sheet or negotiation: 39
4. Value Adding and Monitoring 44
5. Exit: See chapter 17 44
Session 8: Exercises Deal Structures see BlackBoard 45
Chapter 17: Harvesting: the Exit 45
1. Importance of Exit Markets 45
2. Timing Exits 45
3. Exit Route Choices 46
4. IPOs in Detail 47
5. Recent developments: Changing Exit Markets 48
Chapter 10: Monitoring Tactics and Key Metrics 49
1. Business Planning as the Starting Point for All Monitoring and Reporting 49
2. Reporting Practices in European Startups 49
3. Key Metrics 50
4. Towards a Dynamic Understanding of KPIs 51
Chapter 11: Corporate Governance 51
1. Defining Corporate Governance and Cornerstones for Analysis 51
2. Board Structure 52
3. Formal and Informal Rules 53
4. Governance Dynamics 54
5. Leveraging Ownership 54
6. Standards and Harmonization 55
7. Benefits of Corporate Governance 55
Chapter 18: The Future of Entrepreneurial Finance 55
1. Key Drivers Shaping the Past 55
2. Technology 56
3. Market Events 56
4. Regulation 56
5. Development of Funding Sources 57
6. Development of Funding and Growing Processes and Harvesting 57
Session 9: Sven De Cleyn - imec: Investing in startups as a fund manager 58
2
,Session 1: Introduction (+ Chapter 1: Introduction to Entrepreneurial Finance)
1. Setting the stage
Entrepreneurial finance:
▪ Valuing and financing unquoted entrepreneurial companies
▪ Making deals
▪ Financial decision making by entrepreneurs who are undertaking new ventures
vs Corporate finance: financial decision making by managers of public companies
90 % of ‘financing for business’ is debt, still this course focuses on equity and valuation?
Defining entrepreneur(ship):
“An entrepreneur is someone who exercises business judgement in the face of uncertainty”
“Entrepreneurship is characterized by the existence of new combinations causing discontinuity… The
process of creative destruction…”
“The ability to discover new ways of dealing with known problems or new combinations of given
knowledge”
“Someone who pursues opportunities with no regard to resources currently controlled”
➔ No real profile, but more like shared characteristics of entrepreneurs
Three defining characteristics:
▪ Opportunity recognition/creation
▪ Uncertainty
▪ Limited resources
Entrepreneurship relates to the discovery of an opportunity and the steps that need to be taken to
make it a reality. It is not just applied to the creation of new businesses, but they are, in most cases,
its main focus. Entrepreneurs need resources to start; key resource is money -> finance
Finance relates to obtaining money, to investing money and to understanding the cost and the best
use of money.
Entrepreneurs make it happen through business: starting, building, buying, selling
➔ points of change that necessitate a valuation process followed by a refinancing process
Valuation is a key skill as it is necessary to: raise equity, raise debt, satisfy vendor, satisfy purchaser,
get deal done, get rich <-> or go bust
Structuring the deal – the toolkit:
Goal of this course:
➔ Different financing options
➔ Valuation and structuring issues when assessing, entering and exiting deals
➔ Identify critical factors when doing entrepreneurship for real
3
,2. Entrepreneurial Finance vs Corporate Finance
Corporate Finance (CF):
➢ Investing (deciding where to invest budget in) -> Assets
➢ Financing (where to get the money, basics of accounting) -> Liabilities and equity
Entrepreneurial Finance (EF):
‘The art and science of investing and financing entrepreneurial ventures’
Private funding: EF <-> Public funding: CF
2.1 Differences EF and CF
CF: focus on existing businesses and the challenges they face to grow in order to deliver a healthy
return to their investors -> increase shareholder value
Already value in business and key question is how to increase this value
EF: 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; challenge starts way before the generation of value
Assumptions of traditional models don’t hold in EF
Agency problems:
Investor = principal Entrepreneur = agent
But they don’t have the same goals, nor the same information
Averse 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?
Information problems:
▪ Information on the opportunity is incomplete and uncertain to Es and OIs
▪ Outside investors (OIs) 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; uncertainty leads to different views of the future
▪ In CF, you already have historical (financial) information -> help to forecast the future
Addressing agency problems:
▪ Reduce information asymmetry
➢ Pre-investment screening and due diligence
➢ Post-investment monitoring
▪ Align goals of Es and OIs
➢ Es are expected to show real commitment: Invest their own savings
➢ Es are shareholders: bear risk and upside potential
CF theories: based on important assumption that investors are rational
This means that they will estimate the risk of each investment opportunity and either choose the
option with the lower risk given the same expected return or the one with the higher return given the
same level of risk.
4
, CAPM (cost of equity) does not work in entrepreneurial companies!
Ke= rF+ β(rM–rF)
+ No diversification
+ Illiquidity
+ Transaction costs
▪ the level of risk and the expected return that the investor requires for each specific new venture is
very difficult to estimate
▪ In fact, rationality is mixed with passion, a bit of fun and a lot of uncertainty in entrepreneurial
finance
2.2 Conclusion
1. Investment and financing decisions are interrelated
2. Value of entrepreneurial company is different for different types of investors
3. Complex contracts
Key characteristics EF vs CF:
3. Stages of Venture Development
Different stages:
1) Seed stage: Begins with the idea for developing a new product or service
2) Start-up stage: It will remain in the start-up stage until it reaches break-even, which is the stage at
which the start-up is able to cover all its costs
5
