Business finance/entrepreneurial finance summary complete 17/20

Samenvatting : Entrepreneurial Finance
Lecture 1
1. Access to Finance

- Financial constraints/credit rationing?
- Models of credit rationing
o Adverse selection (Stiglitz & Weiss, 1981; American Economic Review)
o Moral hazard (Holmström & Tirole, 1997; Quarterly Journal of Economics)
- Implications of financial constraints

2. Introduction to entrepreneurial finance

- What is entrepreneurial finance?
o Three fundamental principles
- Why is it challenging?
o Entrepreneurial perspective
o Investor perspective
- Why is it important?
o Entrepreneurial perspective
o Investor perspective
o Broader economic & societal perspective
o Drivers of long-term growth
o Which companies create jobs?
o Some Data on EF: survival rates
- How can we understand it?
o The FIRE Framework
 Fit
 Invest
 Ride (-> staged financing)
 Exit
o The FUEL Framework
 Fundamental structure
 Underlying motivation
 Expertise & networks
 Logic & style

3. Evaluating Business Opportunities

- The VENTURE EVALUATION MATRIX (VEM)
- How Entrepreneurs can use the VEM?
- How Investors can use the VEM
- Nobel Insights: Signaling your Venture

4. Quiz


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,Lecture 2
1. Why financial planning?

- To predict (amount and timing)
- To negotiate
- To choose
- To avoid surprises

- 2 horizons :
o Medium / long term
 Growth management
 Inventories
 Customer credit
 Supplier credit
 Scaling & liquidity
o Short term
 Working capital management
 WCR > WC -> ST loans
 Inventories
 Customer credit
 Supplier credit
 Cash management

2. The Financial plan

- Two key questions
o How financially attractive is the venture?
o What financial resources does the venture need?
- Role of financial projections
o Financial Projections: project the financial future
o 1. Financial Projections ⇒ 2. Financial Plan (2 key questions) ⇒ 3. Business Plan
- Financial projections as a mirror
o Force entrepreneurs to reflect on their business model
o Reflect the business plan
o Reflect entrepreneurs’ approach
- Limitations -> through nature of entrepreneurial process
o Always inaccurate
o Quickly outdated
o Always (too) optimistic
- The structure of financial projections
o Income Statement (IS): business model & profitability
o Balance Sheet (BS): size, asset base structure, financing
o Cash Flow Statement (CF): cash changes from IS and BS
- Sources of information
o Primary data research


2

, o Secondary data research
o Experience of similar companies
o Own past performance, when available
- How to build financial projections : process
o 1. Define a timeline
 Milestones (Gantt chart)
 Horizon
o 2. Estimate the revenues of the company
 Unit
 Price
 Net average price
 Price distribution
 Quantity
 Top-down revenue projections
 Bottom-up revenue projections
 Combining Top-Down & Bottom-Up
o 3. Estimate the costs of the company
 Bottom-up
 Top-down
o 4. Build the financial model
 Income statement
 Balance Sheet
 Cash Flows Statement
 Testing Financial Projections
 Scenario analysis
 Sensitivity analysis
o 5. Formulate the financial plan
 1. How financially attractive is the venture?
 2. What financial resources does the venture need?
- Pitching the financial plan
o Two key questions need to be answered
o Key points need to be covered
- Behavioral Biases
o Framing
o Sunk cost fallacy
o Over-optimism
o Nudging

3. Ownership and Returns

- The Meaning of Ownership
o Determining ownership stakes
o Valuing the company
- Mechanics of Ownership & Valuation
o Implied valuation


3

, o Pre-money valuation
o Post-money valuation
- Notation
- Price & number of shares
- The Stock Options Pool
o Stock compensations
o Stock options
o Dilution
- The Capitalization Table
o 1. the number of shares owned
o 2. the amount invested
o 3. the ownership fraction
- Ownership Dilution Over Multiple Rounds
o Dilution
o Exercise!!
- Investor Returns
o Realized returns
o Expected returns
- Risk & Return
- Three Measures of Return
o The Net Present Value (NPV)
o The Internal Rate of Return (IRR)
o Cash on cash multiple (CCM)
- Notation: Time Value of Money
- Comparing the Return Measures
- Valuation and Returns
o Insight 1 :
o Insight 2 :
o Insight 3 :
o Insight 4 :
o Insight 5 :
o Insight 6 :
- Economic Determinants of Valuation
o The opportunity itself
o The market context
o Deal competition
o Investor quality
- Founder Agreements
o Who are the founders?
o Compensations
o Obligations and rights
o Ownership allocation
o Contingencies
- Determinants of Founder Ownership

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