Table of contents

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