Entrepreneurial strategy

Question 1

Market Cap

Answer 1

Represents the total value or size of a publicly trade company in the stock market. Market cap = stock price * total outstanding stocks

Question 2

ROA

Answer 2

Return on assets. How well a company uses its assets to generate earnings.

Question 3

EBIT

Answer 3

a company’s operating performance before taxes and interests. EBIT = revenue – operating expenses

Question 4

Moral Hazard

Answer 4

Increased risk taking of a company, when they are protected from the negative consequences of their actions. Insurance example. “More likely to take risk, because protected if something goes wrong”

Question 5

Market pull

Answer 5

Differentiation strategy in entrepreneurship. Focus on what’s going on in the market and responding to opportunities driven by customer or market demand.

Question 6

Strategy (in entrepreneurship)

Answer 6

A plan of how to reach you goals, overcome competitors & create advantage , VRIO

Question 7

Entrepreneurship (as defined in this course)

Answer 7

Finding/discovering opportunities in either an already existing market or creating something completely new and take advantage of that. Trying to achieve scope and trying to outcompete competitors

Question 8

John’s 3 options/the options in the entrepreneurial cycle when it comes to moving forward with a growing firm

Answer 8

1) Maintain status quo – hope for no introduction to new technology by competitors. Hire key talents. Diversify
2) Get creative with major brands – strike a deal that helps leverage on the brand and bargaining power of major brands
3) Sell the company – manage to get a high valuation and exit

Question 9

Angel investors

Answer 9

Typically individuals that invest in the seed-phase or in early start-ups. Angel investors are often willing to take on higher levels of risk because they are investing in very early-stage companies. They understand that many startups fail, but they hope to find a few that become highly successful.

Question 10

Venture Capitalists

Answer 10

Invest in more established companies, that are looking to scale rapidly

Question 11

Asset intensity

Answer 11

Asset Intensity = Total Assets / Revenue. How many dollars of assets are needed to generate one dollar of revenue. Just as important as profitability.

Question 12

What is pace of growth driven by?

Answer 12

The economies of this business. Time-sensitive competitive pressures. The personal ambitions and goals of the entrepreneur. The economic objectives of early investors.

Question 13

Bootstrapping

Answer 13

An entrepreneur starts a company with little capital. Relying on money other than outside investments. Attempt to found & build a company from personal investments or operating revenues from the new company.

Question 14

Raising capital

Answer 14

Receive funds to foster growth. Drawing from the experience, knowledge and network of partners.

Question 15

Venture Capital (VC)

Answer 15

firms/funds investing in multiple ventures on behalf of clients or on their own. High risk, high return.

Question 16

Debt

Answer 16

Loans with a fixed repayment schedule, “ceiling”/”floor” clearly specified

Question 17

Convertible debt

Answer 17

borrowing money like a loan. But if it becomes a big success, it can be turned into equity (loans) – a way for startups to get the money without knowing exactly how much their business is worth yet

Question 18

Equity financing

Answer 18

Selling a portion of your business in exchange for capital. There is no repayment and you share the risk. But you give up a portion of ownership in your business and can experience loss of control.

Question 19

Informations economics theory

Answer 19

Deals with how information is created, distributed and utilized in economic activities. Relevant for entrepreneurs as they often operate in environments with imperfect information - risk and return as a function of asymmetric information.

Question 20

Agency theory

Answer 20

Focuses on the relationship between two parties – the principal and the agent. When raising capital through venture capital or equity financing – investors becomes agents

Question 21

Information Asymmetry

Answer 21

When one party (fx the agent) has more info than the other part.

Question 22

IPO exit

Answer 22

Becomes a publicly traded company by issuing shares. Then here, the investors realize a substantial return on their investment.

Question 23

Secondary sale

Answer 23

When VCs sell their ownership stake to another investor

Question 24

Adverse selection

Answer 24

One party has more information than the other, so the other party has advantage in terms of knowing more

Question 25

CVC’s

Answer 25

Investors that are independent companies or subsidairies of their parent company.

Question 26

Convertible notes

Answer 26

Short-term debt that converts into equity. Owner of company: “I’ll pay your $X back someday, but if my company becomes really popular, you can choose to get a part of the business instead of getting your money back. How much you get depends on how much money the company makes in the future.”

Question 27

Due diligence

Answer 27

The research process. Used to assess potential investments. Examining the financial statements, mgmt. team and the market

Question 28

Why is convertible notes good for the founder?

Answer 28

Raise money faster and cheaper in an early state. Flexible in terms of setting the valuation of the firm – avoid assigning a valuation in an early stage. Quicker than equity financing, as you should not set a price per share.

Question 29

Convertible notes with no cap, but discount

Answer 29

= Discount on shares rewards the investors for the risk they took. Example: instead of buying shares at 20$ they get a 20% discount = 16$/share. The angel receives for 100.000$ 6250 shares. A new investor would only be able to buy 5000 shares.

Question 30

Convertible notes with cap, but no discount

Answer 30

The “cap” in convertible notes with a cap is a predetermined valuation limit that acts as a maximum price at which the convertible notes can be converted into equity when a future equity financing round occurs. Example: a cap at $10 mio. Pre-money evaluation $15 mio at $20/share. Price per share for the investor will be (10/15)*20 = 13,33$. So the investor receives 7502 shares for 100.000$, instead of 5000 shares like a new investor (100000/20).

Question 31

Why do firms go public?

Answer 31

Potential advantages: the need to raise capial, achieve liquidity. Also signalling to the public that you are stable and dependent.

Question 32

Disadvantages in going public?

Answer 32

Greater pressure, less managerial flexibility, dilution of ownership & control

Question 33

What is stocks traded over the counter (OTC)?

Answer 33

Does not occur on a centralized exchange (NYSE or NASDAQ). But is traded directly between buyer & seller. Less regulation, but can make it riskier.

Question 34

Penny stocks

Answer 34

Low-priced and speculative stocks

Question 35

Market Markers

Answer 35

Financial institutions/individuals who facilitate OTC trading. Help matching buyer and seller.

Question 36

What does the underwriter do? (IPO)

Answer 36

Perform due diligence, determine offer size, prepare marketing material & regulatory filings.

Question 37

M&A

Answer 37

Mergers & Acquisition. A business strategy, where one company acquires another company or combines with it to a larger entity. Can include various types of transactions including mergers, acquisitions, take overs etc.

Question 38

What is an entrepreneurial firm?

Answer 38

Innovation, growth-oriented, risk-taking, ownership and control

Question 39

What isn’t an entrepreneurial firm?

Answer 39

Franchise, non-profit organization, consulting