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mastering entrepreneurship > finance > Flashcards

finance Flashcards

1
Q

different stages of finance

A

seed

concept

funding research and planning

prototype

start-up

initial sales

developed prototype

early stage

moving to full-scale production

expansion

becoming an established company

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2
Q

financing of start-ups

common sources of equity and debt funding

A

95% family and friends

5% business angels

0.5% venture capitalists

equity

FFF

personal funds

business angels

venture capital

IPO

debt

credit card/personal loans

FFF

commercial banks

convertible loans

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3
Q

personal investment

A

may be required to show investment. only invest what you can afford to lose

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4
Q

advantages and disadvantages of personal investment

A

advantages

maintains equity

no interest rate (ignoring opportunity cost)

no one to pay back

clarity/scope

no one interfering

disadvantages

personal responsibility

pressure

may be more risk adverse

no buffer

rose-tinted glasses

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5
Q

grant money

A

given for a specific purpose and given under strict conditions

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6
Q

advantages and disadvantages of grant money

A

advantages

‘free money’

generally doesn’t have to be repaid

multiple sources

sometimes comes with advice as well as money

eg. in april 2012, santander awarded £100000 to 3 social enterprises in london and access to mentoring from the bank

disadvantages

‘there is no such thing as a free lunch’

opportunity cost (cost of raising money is time and focus)

costs of reporting back

matching often required

timing can be slow

fit project to their criteria

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7
Q

equity

A

share is a right to the ownership of the future profits of the business and can’t be repaid without court sanction. current value is future capital gain and dividends

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8
Q

50% + 1 share

A

management control. right to appoint directors

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9
Q

75% + 1 share

A

financial control. right to change the company’s constitution

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10
Q

true cost of equity

A

give up a portion of the business

give up future value of that share

convince someone of that value (investors want high return - at least 15%)

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11
Q

advantages and disadvantages of equity

A

advantages

permanent capital. no need to repay

equity holders can’t force winding up unless they own over 75%

more equity you have, the greater the capacity to raise debt

shared risk

disadvantages

dilutes your own share

more equity you give, more control you lose

not tax efficient

difficult

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12
Q

DEFINITION debt

A

loan from a bank or bankholders of which the original amount must be paid back, carries interest and ranks ahead of equity in bankruptcy

secured - tied to an asset that is considered collateral

unsecured - lenders don’t have rights to any collateral for debts

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13
Q

advantages and disadvantages of debt

A

advantages

cheap now

temporary whereas equity is permanent

pay regularly and lender has no say in business

interest is tax deductible

lower risk for investors

disadvantages

very hard to get now

must pay back as a priority (interest and capital)

default can cause bankruptcy

banks may insist on personal guarantees

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14
Q

convertible debt

A

if company fails, gets repaid. if company succeeds, gets converted to equity

lower interest rates

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15
Q

ways of increasing cashflow

A

borrow against own creditors

borrow from customers

invoice factoring/discounting

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16
Q

assets

A

can be remortgaged to provide funds

17
Q

DEFINITION angels

A

high-net worth individuals, often self-made millionaires, speculating in early-stage ventures. they often share the vision of the company and invest four times as much.

they are increasingly forming networks

18
Q

raising angel capital

A

know your field and network

understand motivations

keep message simple

choose one who can add value to your company

19
Q

venture capital (early stage)

private equity (late stage)

A

organised as funds

funds are raised from pension funds, rich individuals and stock market

lack of large early stage funds in the UK (VC gap)

offer more than money

  • leverage with other companies
  • network of valuable contacts
  • experience

seeking exceptional returns

assume each investment will fail

  • maximise marginal protection
  • require performance (eliminate losers before investing)
  • look at exit strategy

‘lemons ripen before plums’ got to look into the future

20
Q

attractive VC opportunity

A

scalability

potential to be a market leader in high growth industry with few competitors (£50 million+)

committed and competent management team

sustainable competitive advantage (profitable, repeatable, expandable, predictable, defensible)

sound business plan with plausible cashflows

reasonable valuation of existing company

viable exit strategy

21
Q

reasons for having a viable exit strategy

A

provides basis for entry value calculations

provides liquidity for the fund

gives track record so fund can be evaluated

mechanism for investor and entrepreneur to get rich

22
Q

exit strategy options

A

trade sale

refinancing

raise more debt and repay original equity holders through dividend

management buy in (MBI)

another team with another private equity group

management buy out (MBO)

current management financed by another private equity firm

flotation/initial public offering (IPO)

offers shares on the stock exchange

involuntary exit

23
Q

crowdfunding

A

becoming increasingly popular

debt of equity

legally complicated and administratively difficult

24
Q

startup financial cycle

A
25
Q

types of valuation

A

financial

opportunity cost and risk/reward are critical

strategic

secure additional value over that available to financial

26
Q

DEFINITION discounted cash flow (DCF)

A

value a company by looking at how much cash it throws off in the future. time value of money means you can’t just add money from different years. you need a discount rate

27
Q

DEFINITION discount rate

A

debt:equity

28
Q

DEFINITON net present value (NPV)

A

mathematical concept used to measure viability of an investment project. it’s the difference between the present value of the future revenues of the project and the present value of its future costs

29
Q

ways to valuate a company

A

discounted cash flow (DCF)

multiples

identify similar companies for which there is direct measure of market value. determine ratio between company valye and some measure of financial performance

asset valuation

30
Q

DEFINITION working capital

A

capital used to support a firm’s normal operations and is defined as current assets minus current liabilities

31
Q

DEFINITION bootstrapping

A

launching a start-up with modest funds from the entrepreneurial team and FFF

modest business plan

quick routes to breakeven and positive cashflow

ways to bootstrap

second jobs

sweat equity

mortgage

personal investment

mastering entrepreneurship (10 decks)

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