Questions and Answers of Entrepreneurial Finance

Describe the process of estimating the appropriate risk-free rate for estimating a DCF discount rate. Where can data be found for estimating the risk-free rate?
Describe the process of estimating the appropriate market risk premium.Where can data be found for estimating the market risk premium?
Describe the various methods of computing beta in the CEQ approach.
Is relative valuation a useful approach for estimating the value of new ventures? Why or why not? Under what circumstances would you be confident using relative valuation?
What are the quantitative criticisms of the VC Method? In spite of its shortcomings, why is this valuation approach still popular?
For social networking ventures, what kinds of indicators do you think might be useful at early stages to help assess the value of an opportunity?
What are the key differences between financing entrepreneurial and established companies?
Entrepreneurship involves resource gathering, uncertainty, and experimentation. How does this affect the investors?
What steps are needed to show that entrepreneurial finance is beneficial to the economy at large?
What are the main challenges that entrepreneurs and investors face at the four steps of the funding cycle, as described in the FIRE framework?
What is the purpose of staged financing?
What can and can't we learn from successful start-ups like Pandora's Box and Spotify?
What are the main types of investors that fund entrepreneurial ventures?
Why does the identity of investors matter to the entrepreneurs?
What are the most important differences between VCs and angel investors?
What are the respective roles of conceptual frameworks and practical experience for mastering entrepreneurial finance?
Why do investors evaluate business opportunities?
What can entrepreneurs do to discover a good fit between a customer need and a proposed solution?
What options do start-ups have when competing with established corporations?
Why would investors evaluate the founder's team, their networks, and their organization?
What is the difference between evaluating the attractiveness of an opportunity using a micro perspective, a macro perspective, or a dynamic perspective?
What are the three types of competitive advantages start-ups can hope to build? How are they related to risk?
Why do entrepreneurs need a business plan?
What makes some signals in a business plan more credible than others?
What are the main challenges for investors when performing due diligence?
Why is the Venture Evaluation Matrix on its own not enough to make final investment decisions?
What is the purpose of a financial plan? How do financial projections contribute to that?
What is the difference between financial statements and financial projections? What are they needed for?
What factors affect the appropriate choice of a timeline and milestones?
What are the relative strengths of top-down versus bottom-up revenue projections?
What are the most important costs that need to be considered in a new venture?
What is working capital? How does it affect the financial projections of start-ups?
What are the relative roles of the projected income statement, balance sheet, and cash flow statement?
How can one use financial projections to assess the financial attractiveness of a venture?
How does one find the total and current amount of funding needed by a start-up?
What information should be conveyed to investors when pitching the financial plan?
What is the relationship between investment, valuation, and ownership? What fundamental economic exchange is at play?
What is the difference between pre-money and post-money valuation? How do stock options affect this difference?
What is the role of the original number of founder shares? What happens if you double this number?
Why do founder stakes get diluted over time? What factors predict dilution?
What are the strengths and limitations of the following three return measures: net present value (NPV), cash-on-cash multiple (CCM), and internal rate of return (IRR)?
Both the entrepreneur and investor prefer higher exit values. The entrepreneur also prefers higher valuations, but the investor prefers lower valuations. Why?
What economic forces affect valuations?
Why would an entrepreneur accept a lower valuation from a higher quality investor?
What are the pros and cons for splitting equity equally among all founders?
What factors determine the allocation of shares within a founder team?
Why should entrepreneurs use a model to perform valuations? What about investors?
What are the main differences between the Venture Capital Method and the Discounted Cash Flow Method?
What assumptions are required to perform a Venture Capital Method valuation with multiple rounds?
Where does the required data for the Venture Capital Method come from?
Why does the Venture Capital Method use very high discount rates?
What is a terminal value? When is it credible?
What are the main pitfalls of using Investment Comparables?
What criteria should be used to choose an exit multiple?
What are the strengths and limitations of scenario analysis?
How is the PROFEX method related to the Venture Capital Method?
What is the role of the term sheet?
Why are term sheets said to be incomplete? What are the implications?
What are the advantages and disadvantages of using contingent terms?
What is the difference between convertible preferred shares and participating preferred shares?
Why do preferred shares automatically convert in case of an IPO?
What restrictions can be placed on founder stock, and why?
How do companies structure employee stock option plans?
What factors affect the trade-off between valuation and terms?
Why do certain seed investors prefer convertible notes?
Why are convertible notes said to be "unpriced?"
How can entrepreneurs best prepare for their fundraising pitch?
How do investors develop proprietary deal flow?
What are the most important criteria for assessing the fit between an entrepreneur and an investor?
Why do investors often syndicate their deals? When do they invest alone?
What are the responsibilities of a lead investor?
What affects the zone of possible agreements for an entrepreneur and an investor?
What are the challenges of closing a deal? Why do some companies have two closings?
What are the pros and cons of soliciting an investment from a competing syndicate?
Why is trust needed when investors and entrepreneurs can write detailed term sheets?
What does it mean to take a long-term perspective with respect to structuring a deal?
What kind of companies seek investor involvement, and when?
What kind of investors want to get actively involved with their companies, and why?
How can voting rights deviate from the "one-share one-vote" baseline?
What are some typical board structures in start-ups? How do they change over time?
Who controls the board of directors? What is the role of independent directors?
How can entrepreneurs exercise informal control without formal control?
By which means can investors add value to their companies?
With what business aspects are investors most likely to get involved?
What is the effect on performance of replacing a company founder with an outside CEO?
What constitutes a good fit between the support needs of a company and the support capabilities of the investors?
What are the pros and cons for investors to stage their financial commitments?
What is the option value of abandonment? How can one estimate it?
When might investors use tranched as opposed to staged financing?
When do inside investors prefer higher over lower valuations?
What determines the seniority of the preferred terms across different financing rounds?
What is the intent behind anti-dilution clauses? Who benefits most from the full-ratchet clause?
What does “pay-to-play” mean?
What financial, managerial, and legal challenges are commonplace in down rounds?
What aspects enter into the formulation of an investor’s dynamic investment strategy?
How should entrepreneurs manage their valuation profile across stages?
What are the main components of a debt contract? What alternative structures exist?
What is collateral? What assets are suitable for collateral?
The Modigliani-Miller theorem claims that debt and equity are equally costly. Is this true in reality?
Why do most banks hesitate to lend to start-ups?

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