Intro to Entrepreneurial Finance

Question 1

What are the fundamental principles of entrepreneurial finance?

Answer 1

Three fundamental principles:
a. Gathering and recombining resources (J. Schumpeter)
Entrepreneurs just recombine resources,
convince resources owners to provide them, allows to acquire other resources (human capital, physical resources, legal, time).

b. Uncertainty (F. Knight) & Hayek
Risk != Uncertainty
Uncertainty you do not have information about range of possible outcomes nor the probabilities.

c. Experimentation (J. March)
Entrepreneurship consists of experimentation.
‘Exploration’ by entrepreneurial companies
Vs
‘exploitation’ by established companies
Organizational structure matters in the ability to pivot based on market feedback.

How do we encourage experimentation? Flexible workplace.

Question 2

Why is entrepreneurial finance important?

Answer 2

Entrepreneur perspective:
Money is a key resource
money is not green! Individual choice of investor matters.

Investor perspective:
Search for returns, portfolio diversification, or strategic objectives
Pass on knowledge and expertise

Economic and societal perspective:
Market driven selection system
Create jobs, innovation, and economic growth

Question 3

Why is entrepreneurial finance challenging?

Answer 3

Entrepreneur perspective:

• Getting funded is hard
• Difficult to reach out

Investors prospective:

• Swamped with proposals, how to filter properly
• Long and costly investment process to get their money back

Question 4

How does VC contribute to economic growth?

Answer 4

Bob Solow - Once capital and labor are fully employed, the key driver is technological process.

Insights from studies:

• VC funded start-ups have higher TFP than without
• VC generates more innovative output than corporate R&D
• Increase in local VC, increase in start-up rate, aggregate income

Job creation: young firms make a very significant contribution to net job creation (gazelles) != small firms

Question 5

What is the FIRE framework and why is it useful?

Answer 5

It represents the entrepreneur’s journey.
Composed of:
1. Fit.
search and select investor and vice versa

2. Invest.
   Money for ownership
3. Ride.
   uncertain path forward.
   Governance.
   Staged financing
4. Exit. moment of exit and reception of the ROI.

Question 6

What is the FUEL framework and why is it useful?

Answer 6

It is a framework to characterise the investor. Money is not green in entrepreneurial finance.

1. Fundamental Structure. Who is the investor?
   VC/Angel/FFF/CVC…etc.
   It matters because of the structure of investments.
   VC investing LPs money vs Angels
2. Underlying motivation. Why does the he invest?
   Financial gain, social good, relationships/obligation, strategic?
   The motivation influences risk tolerance and patience.
3. Expertise and Network. What does he contribute?
   Own expertise knowledge/skills.
   Financial industry networks for next investments.
4. Logic and Style. How does he operate and take decisions?
   Investment portfolio strategy, governance, involvement with the company.
   Must be a good match for entrepreneur.

Question 7

What is entrepreneurial finance?

Answer 7

Finance to young, innovative and growth oriented companies.

Corporate Finance + Entrepreneurship