ENTREPRENEURSHIP

FINAL EXAM

Entrepreneurship: to build an organization that fulfils human aspirations.

 An entrepreneur perceives an opportunity and creates an organization to pursue
it.
o Destroys the existing economic order by introducing new products and
services, new methods of production, by creating new forms of
organization or by exploiting new raw materials.
o Creates jobs and drive innovation

Start-up: a temporary organization in search of a scalable, repeatable, profitable

business model. It is not a smaller version of a large company.

› New businesses with a very high-growth potential, highly innovative in its

technology or its business model.
Small (new) Business: an independently owned and operated company that is limited
in size and in revenue depending on the industry (store, restaurants, dentist…)

Selection bias: selection of individuals, groups or data for analysis ensuring that the
sample obtained is not representative of the population intended to be analyzed.

› Survivorship bias: when the sample for study only considers the surviving
elements (people, companies…) ignoring those that died, failed or disappear.
o Generalizations based on studies that incurred in these biases can be
misleading.
Benchmarking: learning from successful managers and companies. However, this
sample is not representative of the population we try to understand.
 › Look for winners and losers
If you can answer Yes to
all four questions good
opportunity.

Market feasibility

› Product
o What are you selling?
o Is the need being filled now?
o Advantages/disadvantages of the product?
o How is your product unique/better?
› Customers
o Who is her?
o Will she pay?
o Can you reach her?
› Market
o How big?
o Growing?
o Present/ future competitors?

Financial feasibility

› Funds required
› Investor available? Savings?
› Break-even /burn rate?
› Financial assumptions
o Quality
o Price
o Margins
Most entrepreneurs as Smart
Unfortunate
His actions cause damage to himself, but benefit other
Smart/ intelligent
Her actions create advantages for herself, but also benefits others
Bandit
His actions create advantage for himself, but hurt other
Stupid/fool
He damages others while deriving no gain or incurring a loss

Founding team: general profiles

- marketer/ business developer: get customers and sales
- technical/ designer: turn ideas into products/ services
- experts: domain, specific knowledge of the industry
- finance: getting and caring for money

Boards
Boards help build the ecosystem by finding suitable investors, attracting talent and
providing advise/industry expertise/ contacts.
 Board of directors
o Legal roles and responsibilities
o Compensated: cash/equity
o Required by law
o Some seats reserved for investors
 Board of advisers
o No legal responsibility
o More flexible-easier to create/disband
o Voluntary-cheaper
Types of Directors:
Insider Directors: founders or managers, do not get paid for being in the board.
Investor-Directors: do not get paid, it is part of the agreement with the investment, VC
´s even have formal rules prohibiting their directors from receiving payment.
Independent Directors: brought to the table for their knowledge/contacts… may get
paid between 0.25%-2% equity, vesting over 2-4 years.

Negotiating equity splits at UpDown

Equity negotiations can be emotions and adversarial.
Trade-offs: larger team increase complexity but adds more value
When to negotiate is essential: too early or too late may kill the venture
Reopening negotiations is tricky, but may be inevitable to tackle changing conditions of
venture
Goals and priorities of cofounders may differ
Working together after confrontation is problematic

Post-Money and Pre-Money

Pre-money: the valuation of the
company before the investment
money is put into the company
account
Post-money: the valuation of the company after the investment money is put into the
company account.

Valuation
How much is the company worth.
 Pre-money
 Post-money
o Post-money = PreMoney + New Investment
Dilution
Current shareholders see their stake (%) go down as new investment arrive
 New stake (%) = old stake x PreMoney/PostMoney

Vesting
Employee accrues rights over employer-provided stock incentives. Vesting gives an
employee the right to employer-provided assets (ie.pension funds) over time, which
give the employee an incentive to perform well and remain with the company. The
vesting schedule determines when the employee acquires full ownership of the asset.

· convertible preferred stock: this preference is a liquidation preference, and VC’s use
it to ensure themselves that they will get the first dollars out of the company in a sale or
liquidation. This is relevant in the case of a low-value exit, where there would be
insufficient funds to get the original VC´s investment out. The entrepreneur should not
make money under that scenario, so the investors shares take preference.
· preferred stock: share without voting rights but with a predetermined dividend
payment

Cash is the lifeblood of the venture. Two universal truths:

› More cash is preferred to less cash

› Cash sooner is preferred to cash later
Businesses are engines that convert cash into assets in order to generate more cash. The
shorter the cash collection cycle is, the less cash is tied up in the business (reduced asset
intensity, so it required less financing). In order to optimize cash collection cycle:

› Extend payables
› Shorten receivables
› Minimize inventory
Three factors to determine how much cash a business can generate:
1. Underlying profitability
Value of output relative to value of input
2. Asset intensity
Amount of assets that need to be tied up in the business
3. Pace of growth
Growing fast means more assets required, more expenses… so cash from current
operations may not be enough.
 Fast grow will require a high “burn rate”; a lot of cash will be leaving the
company and that required a lot of cash coming in from revenue or the
company becoming very leveraged ( a lot of debt) or a lot of cash from
investors.
o More debt more risky less room for action to the founder.
o Cash form investors selling ownership and losing freedom of
action.

It is essential to understand the difference between profits and cash flow:

 • Profitable companies can have negative cash flows and risk running out of
money
• Unprofitable companies can have positive cash flows and be on healthy
trajectories
Profit is a gain on the income statement, but…
• Doesn’t accurately reflect the cash inflows and outflows of the company
• Some cash transactions impact cash flow but not profits. Example: loan
repayments, dividends, new investment
Cash flow measures the flow of cash in a given timeframe
• It’s comprised of three elements: operations, investing and financing
• Plan and monitor closely
• What matters is the context – is the company growing, struggling…?

Finding and allocating funds Entrepreneurial finance framework

Types of investors:
 low capital requirements/ low uncertainty
personal credit or bank loans
 low capital requirements/ high uncertainty
angels and VC
 high capital requirements/ low uncertainty
project finance, strategic investors, and banks
 high capital requirements/ high uncertainty
difficult to fund at all, may require public or governmental support
Bootstrapping
Start/ grow a venture minimizing the use of outside capital.

› Using personal savings, operating revenue, retained profits or small loans.

› This strategy avoids dilution
› Lack of capital instills financial discipline.
› Limits rate of growth and forces the venture to reach the next milestone more
slowly.
A line of credit (LOC), is an arrangement between a financial institution, usually a
bank, and a customer that establishes a maximum loan balance that the lender permits
the borrower to access or maintain. The borrower can access funds from the line of
credit at any time, as long as he does not exceed the maximum amount set in the
agreement and as long as he meets any other requirements set by the financial
institution.
Shareholders Agreement
To clarify the terms under which the new investment is made, with provisions to protect
both the founders and current shareholders and new shareholders.
*tag alone: contractual obligations to protect the minority investor
*drag alone: to protect the majority investor
Crowdfunding
Funding in exchange of non-equity items like product samples, early acess…
 Crowdfunding investing: non-accredited investors invest small amounts
in new ventures in exchange for equity.