Book structure

The book aims at providing a comprehensive framework for understanding how entrepreneurs and investors look for and select each other, meet, negotiate, and live through fundraising, which often involves repeated rounds.

The book starts with an introduction in Chapter 1, which includes the FIRE framework for understanding the fundraising process and the FUEL framework for understanding how investors behave.

 Chapters 2 to Chapter 11 cover the fundraising process, from the initial contacts between entrepreneurs and investors all the way to the time when investors exit the company and get their financial returns.

Chapters 12 to Chapter 14 cover the main types of investors, and how entrepreneurs, investors, and other parties interact with each other within an entrepreneurial ecosystem.

In Chapter 1 we explain the FIRE framework for understanding the fundraising process and the FUEL framework for understanding how investors behave. 

In Chapter 2 we explain how investors evaluate opportunities. We introduce the Venture Evaluation Matrix, a framework for analyzing the business fundamentals of entrepreneurial companies. This framework guides entrepreneurs on how to pitch their businesses, and investors on how to evaluate a venture’s appeal and risks.

In Chapter 3 we discuss how entrepreneurs craft financial plans. This includes generating financial projections that address two key questions: (i) how financially attractive is the business opportunity? and (ii) how much money does it need, and when?

In Chapter 4 we explain the relationship between investment amounts, ownership fractions, and valuation. In addition, we examine various measures of investor returns. We also discuss the economic determinants of ownership and returns and take a look at how founders can agree on the internal split of ownership shares.

In Chapter 5 we review the main valuation methods used in entrepreneurial finance. We introduce the widely used venture capital method and compare it to several alternatives, including the standard discounted cash flow method, as well as other more advanced methods that explicitly model uncertainty.

In Chapter 6 we examine the contracts between entrepreneurs and investors. We analyze the main clauses used in a term sheet, their rationale, and their implications for entrepreneurs and investors. We explain how different financial securities implement different cash flow rights. We also examine convertible notes, which are increasingly used for very early stage deals. The chapter also explores founders’ compensation.

In Chapter 7 we study how entrepreneurs and investors structure deals. We first identify the challenges of finding a good match. We then consider how investors involve their peers in syndication. The chapter examines how the negotiation evolves from initial meetings to closing a deal. A bargaining framework it used to explain how deals are closed. Special emphasis is given to the important role of trust.

In Chapter 8 we explore how investors get actively engaged with their companies. We explain why companies need active investor involvement.  And how investors’ control rights and their role on the board of directors contribute to good governance. We also show the importance of informal control and discuss how corporate governance takes place in practice.

In Chapter 9 we examine the staged financing process, where companies receive equity financing over several rounds. We explain how staging allows investors to reap the option value of waiting. In later rounds old and new investors play different roles. We examine how term sheet provisions regulate the resulting conflicts.

In Chapter 10 we examine how debt financing can be used by entrepreneurial companies. We explain why banks rarely finance entrepreneurs. We then explain which other forms of debt financing can be used by entrepreneurial companies.

In Chapter 11 we look at exit, the final stage of the investment process. The more profitable routes of exit are initial public offerings (IPOs) and acquisitions. We also review sales to financial buyers and buybacks and discuss what happens when companies fail. We explain the economic interests of the various parties involved in the exit transaction, the process by which exit decisions are made, and the consequences for entrepreneur, investor, and the company itself.

In Chapter 12 we examine the structure and operations of VC firms. We consider why and how institutional investors put money into VC funds. We then examine the internal organization of VC firms and the challenges of devising and implementing an investment strategy and of managing a portfolio of investments. The chapter also studies different measures of investment returns.

In Chapter 13 we look at several early stage investors. We start with founders, families and friends, and then consider angel investors, and the ways they organize themselves into networks and funds. We then examine corporate investors, focusing on their strategic motives, crowdfunding, and Initial Coin Offerings (ICOs). We finally explain the role of seed investors: accelerators, technology transfer funds, and social impact investors.

In Chapter 14 we take an ecosystem perspective, asking how the various actors of the entrepreneurial environment interact with each other. We examine how ecosystems work and what factors contribute to their success. We then explain the various ways governments try to support entrepreneurial ecosystems, and the hurdles they face. Finally, we take a global perspective and look at how capital and talent move across borders.