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Class Introduction

This document provides an introduction to a class on entrepreneurial finance. It discusses key differences between entrepreneurial finance and corporate finance, including that investment and financing decisions are interdependent for startups. The objectives are to learn how to evaluate new venture opportunities, structure investment deals, assess cash needs, and make financing choices. Some overarching lessons from corporate finance are also presented, but the document notes where entrepreneurial finance differs due to unique factors like information asymmetries, incentive structures, and the importance of harvesting returns.

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anshul singhal
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12 views

Class Introduction

This document provides an introduction to a class on entrepreneurial finance. It discusses key differences between entrepreneurial finance and corporate finance, including that investment and financing decisions are interdependent for startups. The objectives are to learn how to evaluate new venture opportunities, structure investment deals, assess cash needs, and make financing choices. Some overarching lessons from corporate finance are also presented, but the document notes where entrepreneurial finance differs due to unique factors like information asymmetries, incentive structures, and the importance of harvesting returns.

Uploaded by

anshul singhal
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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CLASS INTRODUCTION

Material from ENTREPRENEURIAL FINANCE: STRATEGY, VALUATION, AND DEAL STRUCTURE, by Janet Kiholm Smith, Richard L. Smith, and Richard T. Bliss, © by Stanford University, all rights
reserved. Instructors may make copies of PowerPoint Presentation contained herein for classroom distribution only. Any further reproduction, distribution, or use of this material, in any way or
by any means, is strictly prohibited without the prior written permission of the publisher.
What is Entrepreneurial Finance?

• Financial aspects of entrepreneurship and


investing in entrepreneurial ventures
• Designed to improve investment and financing
decisions in entrepreneurial settings
• All stages covered—start-up to harvest
• Structuring deals and incentives
• Evaluating strategic choices
• Financial modeling

2
Why Study Entrepreneurial Finance?
• Entrepreneurs – Unlikely to be funded unless you
can answer questions like:
– How much cash do you need?
– How much do you think your venture is worth?
– How can you defend your revenue projections?
– What do you think you can achieve in the next year?
• Investors (VCs, angels, corporate VCs) – Unlikely
to be successful unless you can assess:
– The likelihood that the venture can be successful
– The cash needs of the venture
– Reasonable terms for investing

3
Learning Objectives
• How new venture finance and corporate finance differ.
• Which financing choices are feasible and why.
• Tailoring the business plan to its purpose.
• How real options relate decision trees to important milestones.
• How milestones and real options relate to strategy and the value of
an opportunity.
• The basics of financial modeling and assessing the cash needs of a
venture.
• Value new venture opportunities using standard valuation methods.
• How to exploit the reasons for differences in perceived value in
designing more valuable and more robust investment agreements.
• Why harvesting is the essential focus of the investment decision.
• Why entrepreneurship has been difficult for other countries to
emulate.
4
Over-arching Lessons
from Corporate Finance
1. Present value
2. Opportunity cost of capital
3. Market efficiency
4. The “Law of one price”
5. Portfolio theory
6. Capital structure irrelevance
7. Separation of financing and investment decisions
8. Value additivity

5
Where Corporate Finance Ends –
Entrepreneurial Finance Begins
• Investment and financing decisions are
interdependent
• Ability to diversify risk affects investment value
• Outside investors may be actively involved in a
venture
• Information (and beliefs) of parties are very different
• Incentives of parties are much different
• New ventures are portfolios of real options
• The importance of harvesting to realize a return
• Maximizing value for the entrepreneur is different
from maximizing shareholder value
6
Some Caveats

• Investment value is not the only factor an


entrepreneur or investor can consider
• The CAPM-based valuation models we use do not
fully describe how investors view risk
• Risk and expected return can be estimated, not
measured with precision
• Not every new venture investment or financing
decision should be carefully modeled and evaluated
• Neither party should try to capture all of the value of
an opportunity

7
What You Can Find on the Website

• End-of chapter questions and problems


• Interactive cases, including spreadsheets where useful
• Technical appendices
– Reviews of basic statistics, time value, and option basics
– Business plans and using integrated financial statements
• All figures from the book
– Excel figures are downloadable as spreadsheets
– Excel templates can be modified for other uses
• Venture.SIM simulation software can be downloaded
– Includes a short tutorial that also covers some basic Excel
• Glossary of entrepreneurial finance terms
• A list of useful websites
8

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