Session 5: Entrepreneurial Finance

Question 1

Debt

Answer 1

• Usually comes from banks (but also: from customers, suppliers, employees)
• Debt is given for a set time period

Question 2

Equity

Answer 2

• Private equity: usually comes from entrepreneur(s), her friends, business angels, venture capitalists
• Public equity: often comes from anonymous stockholders (equity is traded on the stock market)
• Money is given for an ownership share in the company (which can be sold); money is given for an unlimited time period

Question 3

Phases of entrepreneurial financing

Answer 3

• Seed
• Start up
• Expansion
• Later Stage

Question 4

principal–agent problem

Answer 4

The principal–agent problem or agency dilemma treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent, such as the problem of potential moral hazard.

Question 5

Moral hazard in a principal-agent relationship

Answer 5

Moral hazard arises because the agent does not take the full consequences and responsibilities of her actions, and therefore has a tendency to act differently than she otherwise would, leaving the principal to hold to hold some responsibility for the consequences of her actions.

Question 6

Solutions:

Answer 6

monitoring, bonding, screening

Question 7

Venture capital firms

Answer 7

VC firms act as mediators between investors and start-ups, collecting and investing funds into risky but promising new ventures.

Question 8

Venture capital

Answer 8

For innovative start-ups with high growth potential (and higher risk),
venture capital increasingly plays an important role.

Question 9

Crowdfunding

Answer 9

Crowdfunding is a form of financing via an open call over the Internet (with or without an intermediary) to obtain financial resources for a project or a company. Crowdfunding transactions involve a large number of individual investors (the “Crowd”) (with or without compensation for their participation).

Question 10

Crowdfunding – Characteristic forms

Answer 10

• Spenden Modell
• Belohnungs Modell
• Ausleih Modell
• EK Modell

Question 11

Definition of equity-based crowdfunding

Answer 11

Equity-based crowdfunding is the collection of financial resources over the Internet from a large number of investors who mostly contribute relatively small amounts of money to support (startup) companies with the right to participate in future profits of the firm.

Question 12

Advantages of equity-based crowdfunding

Answer 12

• Fast, informal, flexible form of financing

- Feedback of the market

Question 13

Disadvantages for project initiators

Answer 13

• Relatively high costs (5-10% of the funding volume as compensation for the platform)
• Creating transparency over the business idea / company

Question 14

Paper: Mollick The dynamics of crowdfunding: An exploratory study.

Answer 14

It suggests that personal networks and underlying project quality are associated with the success of crowdfunding efforts, and that geography is related to both the type of projects proposed and successful fundraising.