Fundamentals of Entrepreneurial Finance

Chapter 1 : Introduction to Entrepreneurial Finance 1.1 What is entrepreneurial finance? 1.2 Why is entrepreneurial finance challenging? 1.3 Why is entrepreneurial finance important? 1.4 Key facts about entrepreneurial finance 1.5 The entrepreneurial financing process 1.5.1 The need for frameworks 1.5.2 The FIRE framework 1.5.3 FIRE in practice 1.6 Who are the investors? 1.6.1 Main types of investors 1.6.2 The FUEL framework Summary Review questions Chapter 2: Evaluating Venture Opportunities 2.1 Assessing Opportunities 2.1.1 The Venture Evaluation Matrix 2.1.2 The WorkHorse case study 2.2 Explaining the Venture Evaluation Matrix 2.2.1 Need 2.2.2 Solution 2.2.3 Team 2.2.4 Market 2.2.5 Competition 2.2.6 Network 2.2.7 Sales 2.2.8 Production 2.2.9 Organization 2.3 Drawing conclusions from the Venture Evaluation Matrix 2.3.1 Three perspectives on attractiveness 2.3.2 Three competitive advantages 2.3.3 Assessing risk 2.3.4 Interactions across cells 2.4 How entrepreneurs use the Venture Evaluation Matrix 2.4.1 The entrepreneur's decision 2.4.2 Writing a business plan 2.5 How investors use the Venture Evaluation Matrix 2.5.1 The Venture Evaluation Matrix spreadsheet tool 2.5.2 Investor due diligence 2.5.3 The investor's decision Summary Review questions Chapter 3: The Financial Plan 3.1 The purpose of the financial plan 3.2 Financial projections 3.2.1 The three reflections 3.2.2 The structure of financial projections 3.2.3 Sources of information 3.2.4 Developing financial projections 3.3 Defining a timeline with milestones 3.4 Estimating revenues 3.4.1 The top-down approach 3.4.2 The bottom-up approach 3.4.3 Combining approaches 3.5 Estimating costs 3.5.1 Terminology 3.5.2 Costs of goods sold 3.5.3 Operating expenses 3.5.4 Capital expenditures 3.6 Pro forma financial statements 3.6.1 The structure of financial statements 3.6.2 Interpreting financial projections 3.6.3 Income versus cash flows 3.6.4 Testing financial projections 3.6.5 Simplifications 3.7 Formulating the financial plan 3.7.1 The attractiveness of the venture 3.7.2 Financing needs 3.7.3 Pitching the financial plan Summary Review questions Chapter 4: Ownership and Returns 4.1 The mechanics of ownership and valuation 4.1.1 Pre-money and post-money valuation 4.1.2 Price and number of shares 4.1.3 Stock options 4.1.4 The capitalization table 4.1.5 Dilution with multiple rounds 4.2 Investor returns 4.2.1 Risk and return 4.2.2 Three measures of return 4.2.3 Comparing return measures 4.2.4 Returns with multiple rounds 4.3 The determinants of valuation and returns 4.3.1 The relationship between valuation and returns 4.3.2 The economic determinants of valuation 4.4 The determinants of founder ownership 4.4.1 Founder agreements 4.4.2 Principles for internal allocation 4.4.3 The FAST Tool Summary Review questions Chapter 5: Valuation Methods 5.1 The valuation of entrepreneurial companies 5.1.1 The purpose of performing a valuation 5.1.2 The challenges of performing a valuation 5.2 The Venture Capital method 5.2.1 Valuation with a single investment round 5.2.2 Valuation with multiple investment rounds 5.2.3 Estimating the inputs 5.2.4 Model variants 5.3 The Discounted Cash Flow method 5.3.1 The mechanics of the DCF method 5.3.2 Estimating the inputs 5.4 Methods of Comparables 5.4.1 The Investment Comparables method 5.4.2 The Exit Comparables method 5.5 Modelling uncertainty 5.5.1 Scenario analysis and simulations 5.5.2 PROFEX 5.6 The choice of valuation model Summary Review questions Chapter 6: Term Sheets 6.1 Term sheet fundamentals 6.1.1 The role of term sheets 6.1.2 Contingent contracting and milestones 6.1.3 Overview of terms 6.2 Cash flow rights 6.2.1 Convertible preferred stock 6.2.2 Participating preferred stock 6.2.3 Reasons for using preferred stock 6.3 Compensation 6.3.1 Founder employment agreements 6.3.2 Employee stock option plans 6.4 An overview of other terms 6.4.1 Control rights 6.4.2 Future fundraising 6.4.3 Investor liquidity 6.4.4 Additional clauses 6.5 Valuation versus terms 6.6 Convertible notes 6.6.1 How convertible notes work 6.6.2 Valuation caps Summary Review questions Chapter 7: Structuring Deals 7.1 The art of structuring deals 7.2 The fundraising process 7.2.1 Preparing the fundraising campaign 7.2.2 Executing the fundraising campaign 7.2.3 Valuing an idea 7.3 Finding a match 7.3.1 Investor deal sourcing 7.3.2 Investor screening 7.3.3 The MATCH tool 7.4 Syndication 7.4.1 Reasons to syndicate 7.4.2 The structure of syndicates 7.5 Deal Negotiations 7.5.1 Bargaining theory 7.5.2 Negotiation analysis 7.5.3 Closing the deal 7.5.4 Deal negotiations with investor competition 7.6 Living with the deal 7.6.1 The importance of trust 7.6.2 A long-term perspective Summary Review questions Chapter 8: Corporate Governance 8.1 The need for corporate governance 8.1.1 Why companies need investor involvement 8.1.2 Why investors oversee their companies 8.2 Corporate governance structures 8.2.1 Voting rights 8.2.2 Board of Directors 8.2.3 Informal control 8.3 Investor value-adding 8.3.1 Picking versus making winners 8.3.2 How investors add value 8.3.3 Where investors add value 8.3.4 The question of replacing managers 8.3.5 Assessing value-adding fit Summary Review questions Chapter 9: Staged Financing 9.1 The rationale for staged financing 9.2 Structuring staged financing deals 9.2.1 Staged investments and ownership 9.2.2 The option value of staging 9.2.3 Tranching 9.2.4 Old versus new investors 9.3 Term sheets for staging 9.3.1 The liquidation stack 9.3.2 Anti-dilution rights 9.3.3 Additional rights 9.4 Managing financial difficulties 9.4.1 Down rounds 9.4.2 Turnarounds 9.5 Dynamic strategies 9.5.1 Dynamic investment strategies 9.5.2 Dynamic valuation profiles Summary Review questions Chapter 10: Debt Financing 10.1 Fundamentals of debt 10.1.1 What is debt? 10.1.2 The structure of debt contracts 10.2 Debt versus equity 10.2.1 The fallacy that debt is cheaper than equity 10.2.2 Comparing debt and equity 10.3 Why banks don't lend to startups 10.4 Alternative types of debt 10.4.1 Personal loans and credit cards 10.4.2 Trade credit 10.4.3 Discounting and factoring 10.4.4 Venture leasing 10.4.5 Venture debt 10.5 Valuation with debt 10.5.1 Enterprise versus equity value 10.5.2 Adjusting valuation methods for debt Summary Review questions Chapter 11: Exit 11.1 The importance of exiting investments 11.1.1 Reasons for exit 11.1.2 The four main types of exit 11.1.3 The exit decision 11.1.4 The timing of exit 11.2 Initial Public Offerings 11.2.1 Benefits and costs 11.2.2 Preparing for an IPO 11.2.3 Pricing the IPO 11.2.4 Structuring the IPO 11.2.5 After the IPO 11.3 Acquisitions 11.3.1 Strategic motives 11.3.2 Preparing for an acquisition 11.3.3 Structuring an acquisition 11.3.4 After the acquisition 11.4 Sale to financial buyers 11.4.1 Buyouts 11.4.2 Secondary sales 11.5 Closing down the company 11.6 Determinants of the exit decision 11.6.1 Market forces 11.6.2 Economic fundamentals 11.6.3 Internal company dynamics Summary Review questions Chapter 12: Venture Capital 12.1 The venture capital model 12.2 Institutional investors (LPs) 12.2.1 Portfolio allocation choices 12.2.2 Building a VC portfolio 12.3 Limited Partnership Agreements 12.3.1 Fund structure 12.3.2 Fund rules 12.3.3 GP compensation 12.3.4 GP incentives 12.4 VC firms (GPs) 12.4.1 Internal structure 12.4.2 Fundraising 12.4.3 Networks 12.4.4 Alternatives to the partnership model 12.5 Investment strategies 12.5.1 The investment strategy 12.5.2 Investment strategy styles 12.5.3 Implementing the investment strategy 12.5.4 An example 12.6 Risk and return in VC 12.6.1 Gross returns to the VC fund 12.6.2 Net returns to limited partners 12.6.3 Assessing VC fund performance Summary Chapter 13: Early-Stage Investors 13.1 Founders, family, and friends 13.1.1 Reasons for investing 13.1.2 How family and friends invest 13.2 Angel investors 13.2.1 Different types of angel investors 13.2.2 How angels invest 13.3 Corporate investors 13.3.1 The motivation of corporate investors 13.3.2 The structure of corporate investors 13.3.3 How corporates invest 13.4 Crowdfunding 13.4.1 The structure of crowdfunding platforms 13.4.2 Motivations in crowdfunding 13.4.3 Crowdfunding campaigns 13.4.4 Returns from crowdfunding 13.5 Initial Coin Offerings 13.5.1 The Blockchain and cryptocurrencies 13.5.2 The structure of Initial Coin Offerings 13.5.3 The current debate about Initial Coin Offerings 13.6 Further investor types 13.6.1 Accelerators and incubators 13.6.2 Technology transfer funds 13.6.3 Social impact venture investors 13.7 Comparing early stage investors Summary Review questions Chapter 14: Ecosystems 14.1 Entrepreneurial ecosystems 14.1.1 Ecosystem structure 14.1.2 Overview of leading ecosystems 14.2 How do entrepreneurial ecosystem work? 14.2.1 Interactions within the talent pool 14.2.2 Interactions with investors 14.2.3 Interactions with supporting parties 14.3 The role of government 14.3.1 Should the government support entrepreneurial ecosystems? 14.3.2 Government funding 14.3.3 Tax credits 14.3.4 Capital markets 14.3.5 Framework conditions 14.3.6 Demand side policies 14.4 Global ecosystems 14.4.1 The global movement of capital 14.4.2 The global movement of talent Summary Review questions Bibliography Index