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Finanzas > Entrepreneurial Finance > Flashcards

Entrepreneurial Finance Flashcards

1
Q

Funding sources for Entrepreneurial Finance

A
  • Friends and Family
  • Crowdfunding
  • Incubators/Accelerators
  • Business Angels
  • Venture Capital
  • Private Equity
    *Government Founding
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2
Q

What is bootstrapping

A

Money from the 3 F’s

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3
Q

On what’s based the financial planning?

A

assumptions, forecasts and estimations. Also historical financial info.

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4
Q

What are Venture valuations based on?

A

the “present value of future cash flows”.

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5
Q

three main financial statements:

A
  1. The Balance Sheet = Statement of Financial Position
  2. The Income Statement
  3. The Statement of Cash Flows
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6
Q

Indicates the financial condition or position of a business at a given date

A

balance sheet

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7
Q

Liquidity

A

Liquidity is a business’s ability to meet its current obligations to others by having &
maintaining enough cash or equivalent

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8
Q

Free Cash Flow

A

is cash available for distribution to investors after the firm pays for new
investments or additions to working capital

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9
Q

How do we find out the future growth rate of the company’s sales (revenues)?

A

from industry research, consultations with analysts and BAs and VCs, analysis of
the economy and the firm’s competitors

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10
Q

how we measuare risk?

A

By the variance volatility / standard deviation. The variation around the average.

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11
Q

What is systematic risk?

A

is the risk that affects all firms and cannot be diversified.

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12
Q

what is Beta?

A

The sensitivity to systematic risk.
How sensitive the underlying revenues and cash flows of a company are to general economic conditions.

1 neutral. Less than 1 lower sensitivity. Higher than 1 more risky than the market.

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13
Q

What is CAPM?

A

Capital Asset Pricing Model (CAPM) is a practical way to estimate the return.
Because The cost of capital = the expected return of investments with the same beta.

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14
Q

Why beta differs from volatility?

A

Because Volatility =total risk (systematic plus unsystematic risk), while beta measures only systematic risk (market risk).

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15
Q

What is market capitalization?

A

The total market value of a firm’s outstanding shares. Shares x price.

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16
Q

How we estimate the debt cost of capital?

A

We can estimated with CAPM using the estimates of Beta of bond indices by rating category (AAA, B, C)

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17
Q

What is the Industry asset betas for?

A

To measure the sensitivity of return on assets within a specific industry.

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18
Q

What is Asset beta or Unlevered Beta?

A

Is a reflection of the systematic risk of the industry. A measure of the risk of a company’s operations without considering the impact of its capital structure.

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19
Q

What the pure play method?

A

Using a comparable publicly traded company’s beta and adjusting it for financial leverage differences. (A company with similar business risk)

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20
Q

How to make a private firm estimation with comparable companies betas?

A

1.Unlevered (asset beta formula) the beta of the comparable companies.
2. We leverage the asset beta to arrive an estimate of the equity beta of our company. (Same formula but clear for B.E.) with our company data.
3. We use that beta to calculate the CAPM (r.E.)
4. If the cost of debt is given in spread points we add the risk free to it to calculate r.D.
5. We use this data to calculate the WACC.

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21
Q

What is the formula to unlever the betas?

A

B asset, where B.E is the current leveraged Beta.

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22
Q

What is financial distress?

A

When a firm has difficulty meeting its debt obligations

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23
Q

What is the average direct costs of bankruptcy?

A

3-4% of the pre/bankruptcy market value of the total assets

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24
Q

What is the potencial loss due to financial distress?

A

10 to 20% of firm value

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25
Q

What is the trade off theory ?

A

The firm picks it capital structure by trading off the benefits of the tax shield from debt, against the costs of financial distress.
V.L. = V.U. + PV(tax shield) x PV(financial distress costs)

States that firms should increase their leverage unit, until it reaches the level for which the firm value is maximized

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26
Q

Types of investors

A

Business angels
Private equity
Venture capital
Hybrids
Investment Bankers

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27
Q

Types of Hybrids types of investors

A

Crowdfunding
Crowdlending
Micro funds
Syndicates
SPACs
New publicly trading PEs

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28
Q

What are the life cycle stages

A

Development / seed
Startup
Survival
Rapid growth
Maturity

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29
Q

What type of financing a Seed / development stage company would be seeking?

A

Bootstrapping/3f’s
Crowdfunding campaign
Incubator / accelerator (also non profit)
(Maybe Business angels)

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30
Q

What type of financing a Startup stage company would be seeking?

A

Business Angels
Venture Capital
(IPO 1/10 companies)

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31
Q

What type of financing a Growth stage company would be seeking?

A

Generated cash
Second or third round of Venture Capital

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32
Q

What type of financing a maturity stage company would be seeking?

A

Private equity
IPO

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33
Q

What is crowdfunding ?

A

Is a cooperate financing instrument in which many individuals support projects with usually small financial contributions.

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34
Q

What is Entrepreneurial Finance?

A

The study and application of financial tools, techniques and principles for planning, organizing, operating and financing a new venture, during its entire lifecycle.

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35
Q

What are the responsibilities of a financial manager of an entrepreneurial venture?

A
  1. Financial planning and forecasting
  2. Raising capital
    3.Managing cash Flow
  3. Financial reporting and analysis
  4. Budgeting and cost control
  5. Valuation and investment decisions
  6. Risk management
  7. Communication with stakeholders
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36
Q

Why is it difficult for young ventures to be financing by banks?

A
  1. Entrepreneurs have to meet potential backers to convince them of the project’s viability
  2. Lack of credit history
  3. Lack of track record
  4. Insufficient collateral
  5. High risk and uncertainty
  6. Cash flow constraints
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37
Q

What is easier for a young venture crowdfunding or a bank loan?

A

Crowdfunding maybe easier due to lower entry barrier, larger pool of potential backers, marketing and validation, flexibility in founding, speed of access.

38
Q

Explain the mechanism of crowdfunding.

A
  1. Idea presentation (to the platform, detail description of the project, goals, target, timeline, benefits or rewards.)
  2. Campaign launch (Goes live n the platform, with videos, images to attract and inform)
  3. Promotion ad engagement (through social media, email marketing, press releases. Engaging and updating)
  4. Fundraising (campaign runs for a period, and backers pledge money. If it meets the goal with in the timeframe the money goes to the project if not it’s paid back to the “investors”.
39
Q

Types of crowdfunding

A
  1. Crowd donation
    Donations based, charity community / social projects…
  2. Crowdfunding
    Reward based (product or service related to the project)
  3. Crowd investing
    Equity based (receive equity or shares, ROI)
  4. Crowd lending
    Debt-based (re paid + interests, like traditional loans but online).
40
Q

Are bank loans and crowdfunding complementary?

A

Yes, bank loans can be used for growth and expansion, as the business angels said, sometimes you need to be patient for your project to be selected, so when the firm is a bit more established it could help financing the venture, diversifying the sources of capital.

41
Q

What is venture capital?

A

High risk investment in early stages of companies/ startups.
Equity capital invested for a specific time to receive a financial return.

42
Q

How does a VC work?

A
  1. Fundraising
  2. Investment
  3. Value Addition / company growth
  4. Exit
  5. Returns
  6. Re-investment
43
Q

What it due diligence in a venture investing context?

A

Is the process of verifying the viability of a business plan. All actions to gain info about the quality of a potential investment.

  1. Identifying opportunities
  2. Initial screening (evaluation criteria and pitch meetings)
  3. Analysis and reference check (COMPANY DATA, RECORDS, OWNERSHIP, FINANCIAL DATA)
    - strategic, technical, marketing, sales, legal,environmental, HR, external, and orgnizational due diligence.
  4. Negotiation
44
Q

How is the fundraising process for a VC?

A
  1. Initial fund formation
    -VC formed by GPs who raise capital from investors. As a LP
  2. Fundraising stages
    - The GPS pitches to the investors, and then they commit the capital to the GPS
    3.Capital deployment (give the capital to startups)
45
Q

How VCs make money?

A
  1. Investment return, carried interest (20%)
    - Exit strategies (ipos, merge, acquisition, sale of their equity)
  2. Management Fees
    - annual fee t cover operations (2%)
46
Q

What are the VCs screening criteria?

A
  1. VENTURE CAPITAL FIRM REQUIREMENTS
  2. CHARACTERISTICS OF THE PROPOSAL
  3. CHARACTERISTICS OF THE ENTREPRENEUR / TEAM
  4. NATURE OF THE INDUSTRY
  5. STRATEGY OF THE PROPOSED BUSINESS
47
Q

Financial instruments

A

Common stock
Preferred stock
Hybrids financial instruments (convertible & warrant bonds)
Silent partnerships

48
Q

The 5 C’s of credit analysis

A

Capacity of repay
Capital - own money
Collateral - assets or guaranties
Conditions - purpose
Character - you

49
Q

Unicorn

A

Startup
Over $1 billion
No publicly traded

50
Q

What is preset value?

A

A ventures value today, of all future cash flows discounted to the present at the investor’s required rate of return

51
Q

What is IRR?

A

The internal rate of return indicates effective interest rate on the capital invested or the discount rate at which an investment’s NPV is 0.

52
Q

IRR as a decision tool

A

IRR > i Accept
IRR < i Reject
IRR = I Don’t bother

For financing options its the opposite

53
Q

Problems applying IRR

A
  • IRR is strongly determined by the time structure of cash flows
  • IRR implicitly assumes that the whole commitment until COF & CIF can be invested at the IRR.
  • The calculations of IRR have no unique solution or solution at all.
54
Q

What is capital budget?

A

Investments that a company plans to undertake

Budgeting, the process is used to analyze the investments and decide which one to accept

55
Q

What are incremental earnings?

A

The amount by which the firm’s earnings are expected to to change as a result of the investment decision

56
Q

What is Free Cash Flow?

A

The incremental effect of a project on a firm’s available cash

FREE CASH FLOW= unlevered net income+depreciation - capital expenses - increase in NWC

Unlevered net income= (revenues -costs -depreciation) x (1-T)

57
Q

What is NWC?

A

NET WORKING CAPITAL = current assets - current liabilities.

= cash+inventory+receivables-payables)

58
Q

What are Capital Expenditures?

A

Are the actual cash outflows when an asset is purchased.

59
Q

What are the commonly used valuation methods?

A
  1. DCF - Discounted cash flows
  2. Comparable company analysis
  3. Precedent Transaction analysis
  4. Leveraged buyout analysis
60
Q

In the DCF what is the problem with the Terminal Value?

A
  1. Is based on subjective assumptions
  2. Is highly sensitive to the discount (uses the WACC) and growth rate
  3. The TV is often account for the majority of the value
61
Q

What is the terminal value?

A

The terminal value is a crucial component of the DCF valuation, capturing the value beyond the forecast period.

62
Q

Explain the differences between the Enterprise Value and the Equity Value of a
Firm.

A

Equity value reflects the value attributable to the shareholders.
Uses as discount factor the Cost of equity.

Enterprise Value reflects the company’s total value from the perspective of both equity and debt holders. Uses as discount facto the WACC.

63
Q

What is the problem using the comparable company method?

A

-It’s affected by short term market forces
-Could be difficult to select best comparables
-Requires adjustments
-Availability of good quality short term forecasts
- Static analysis
- Based n assumptions

64
Q

What is the problem with the precedent transaction analysis valuation method?

A
  • Public data on past transactions can be limited and misleading
  • Precedent transactions are rarely directly comparable
  • Not all aspects of a transaction can be captured in multiple or premium valuation
  • Market conditions at the time of transaction can have substantial influence
65
Q

What does the precedent transaction analysis valuation method do?

A

Is valuation based on historic valuations for comparable assets. Based on similar metrics as the C.C.
Includes control premium

66
Q

Explain the dilution effects in staged financing.

A

The ownership dilution since every round more investors take a percentage of the company’s ownership. This leads to a control dilution as well. The value of individual shareholders stake may increase even if there is dilution. (Example of a piece of a bigger pizza).

67
Q

What is the pre-money value?

A

Is a market value negotiated between present shareholders and new investors. Based on the growth potential that new investors see.

Equity market value before the issue, based on te new issue price/share.

Present value of the venture before the new money investment.

68
Q

New money

A

Total value of the new shares issued at a given round

69
Q

Post money value

A

Equity market value after the issue

70
Q

What is the VC valuation method ?

A

Estimates the value by projecting only a terminal flow to investors at the exit event.

Cash return at exit time discounted at the investors target return vs cash investment today divided by the venture’s present value.

= % of ownership to be sold in order to provide the investor’s target return.

71
Q

CAP TABLE

A

Capitalization Tables, is a spreadsheet of who owns the company and what they have paid.

It includes number and price of securities, successive rounds and ownership stakes.

72
Q

What is LBO

A

Leveraged buyout is an outright sale to managers, where a purchase price of a firm is financed largely with debt financial capital.

Somebody buys a company using large debt.

73
Q

What is a MBO

A

Management buyout is an outright sale to managers, a special type of LBO, where the firm’s top management continues to run the firm and has substantial equity position in the reorganized firm.

The managers decide to buy the company or big part of it, possibly aso with debt.

74
Q

What is ESOP

A

EMPLOYEE STOCK OWNERSHIP PLAN, is an outright sale to employees. The ESOP uses the gains from the sale of debt to purchase equity, employees gain an ownership stake in the company.

Give shares to employees, for motivation and retention, and tax benefits.

75
Q

Systematic liquidation

A

The venture liquidated by distributing the cash flows to the owners.

76
Q

What are the disadvantages of the systematic liquidation?

A

• Liquidation proceeds are treated as ordinary income (vs. capital gains)
• Difficulty for the entrepreneur to maintain focus on a dying venture
• The value of the venture may decline more rapidly when competitors respond to the venture’s lack of investment

77
Q

Why buyers give a premium during a M&A?

A

Because of large synergies like, cost reduction (eliminating redundant resources) and revenue enhancement. 70% overestimate the synergies.

78
Q

Who Gets the Value Added from a Takeover?

A

The target shareholders

79
Q

Free rider problem in takeovers

A

Situation when shareholders of the target company benefit from the improvements and value added by the acquiring company without actively participating in the takeover process. This problem can make it challenging for the acquiring company to gain full control at a reasonable cost. The free rider problem can make it difficult for the acquirer to obtain a controlling interest if too many shareholders hold out, expecting further value appreciation.

80
Q

What is the most used delisting from IPO exit?

A

M&A

81
Q

Why is cashing out during an IPO considering as an advantage but at the same time also as a disadvantage?

A

it is a bad signal to investors when an entrepreneur sells her own shares, because lost of confidence, perceived overvaluation, commitment concern, or negative market perceptions. But it still might make sense for some to cash out some of their wealth, because liquidity, reward for risk.

82
Q

What s an underwriter?

A

Is te one finding and making the connection with the future investors for the IPO, the company choose their underwrite(s).

83
Q

How much time does an IPO take?

A

In average 1.5 years

84
Q

What is more expensive equity or debt?

A

Equity

85
Q

What is SEO in finance?

A

Seasoned equity offering. Or Secondary Equity Offer. Is a public offering of additional shares by a company that has already gone through an IPO. This means that the company is already publicly traded, and the SEO is a way for it to raise additional capital from the equity markets. (Through new shares or shareholders selling shares).

With SEO we know the price with IPO we don’t have history of the price.

86
Q

How much does underwriters get?

A

7 to 10%

87
Q

What is the money left on the table?

A

Underpricing, refers to the potential money that a company could have raised if the shares were priced higher.

88
Q

What are SPACs

A

Special Purpose Acquisition Companies, companies with no commercial operations made strictly to raise capital through IPO to buy another company, typically within 2 years. An alternative to IPOs. Like the Jay C, example, the sponsor takes 20% of shares and the rest is sold to other investors at the IPO for normally $10. They usually contain a warrant in case no company is found or vote against the merger.

89
Q

What are the differences between M&A and SPACs?

A

M&A involves companies combining for strategic growth or synergy, while SPACs are shell companies formed to raise capital through IPOs specifically to acquire private companies and take them public. M&A entails negotiation, due diligence, and regulatory approvals for merging operations, whereas SPACs bypass the traditional IPO process, seeking a private company acquisition within a limited timeframe.

90
Q

What is the SPAC process?

A
  1. IPO: SPAC raises funds through an IPO and the proceeds are held in a trust account.
  2. Search for Target: SPAC has a limited time frame (typically 18-24 months) to identify and acquire a target company.
  3. Business Combination: If a target is found, a merger or acquisition takes place, and the target company becomes publicly traded through the SPAC.
  4. Redemption Option: Investors have the option to redeem their shares for a pro-rata share of the trust account if they do not approve of the acquisition.

Finanzas (2 decks)

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