ENT FIN 2012 N AMIN

9/19/2012

Why Study Entrepreneurial Finance?

Entrepreneurs Unlikely to be funded unless you can answer questions like:

Entrepreneurial Finance
Instructor: Nauman J. Amin
BE (Mechanical) NED MBA IBA, Karachi Msc Investments (Finance) University of Birmingham, UK namin@iba.edu.pk

How much cash do you need? How much do you think your venture is worth? How can you defend your revenue projections? What do you think you can achieve in the next year?

Investors Unlikely to be successful unless you can assess:

The likelihood that the venture can be successful The cash needs of the venture Reasonable terms for investing
2

Learning Outcomes
Differentiate between corporate and entrepreneurial finance. Spot various sources of Capital for new venture and their suitability at various stages of a venture startup. Valuation & Capital Raising techniques Estimation Cash Flow & Financing Requirements by application of Financial Modeling & forecasting techniques Importance of exit and potential hurdles in Pakistan.

Prerequisites
Comprehend the fundamentals of accounting and finance You have a genuine interest in the topic Willingness to work (reasonably) hard Class Preparedness & Participation

Class Requirements
Must bring Textbook(Handout) and Calculator Encouraged to use Financial Calculator Quizzes would be unannounced; can be from last or coming lecture Active class participation will be rewarded by adjusting the grade upwards when it is on the margin
Less than one mark after adjusting for ve participation Active Class participation Does NOT mean asking random questions or wasting class time.

Grading Plan (Tentative)

Term Exams (mid-term) Final Exam Quizzes (n-1) Assignments Class Participation 40% 35% 10% 10% 5%

Absolute Grading plan In class viewing for Term exams only

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Textbook
Entrepreneurial Finance: Strategy, Valuation, and Deal Structure by Janet Kiholm Smith, Richard L. Smith, and Richard T. Bliss. http://www.sup.org/ent repreneurialfinance/

Recommended Reading
Entrepreneurial Finance 4th Edition, J. Chris Leach & Ronald W. Melicher
Students looking for more quantitative examples relating to Money management during life cycle of a venture

Recommended Reading
Launching New Ventures 6th Edition, Katleen R. Allen
Readable Focuses more on opportunity spotting business plan development Funding requirements

Course Outline
Divided in 03 distinct phases
Introduction & mechanics of Angel Investors & VCs Forecasting & Financing requirements Venture valuation & Exit

Methodology
Introduction to Concepts
Delivery: Through lectures & power point slides

Where Corporate Finance Ends Entrepreneurial Finance Begins

1. Investment and financing decisions are interdependent 2. Entrepreneurs Inability to diversify risk affect investment value 3. Outside investors may be actively involved in a venture 4. Information (and beliefs) of parties are very different 5. Incentives of parties are much different 6. New ventures are portfolios of real options 7. The importance of harvesting to realize a return 8. Maximizing value for the entrepreneur is different from maximizing shareholder value

Application of Concepts
Case studies In class discussion & role playing Assignments

Learning reinforcement
Problems

ENT FIN 2012 N AMIN

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Figure 1.1

Figure 1.2

Types of Entrepreneurship
Replicative versus innovative Opportunity-based versus necessity-based Corporate Venturing Social Venturing

Figure 1.4

Stages of New Venture Development

Stages of New Venture Development
Stages Opportunity Research and Development Start-up Early Growth Rapid Growth Exit

Assignment
Find an interesting product (use internet) Briefly describe the product. As a potential investor, identify 4-5 milestones that you might want to use as bases for staging your investment and evaluating the progress of the venture. Referring to Figure 1.4, identify the stage of development at which each milestone would be appropriate. Submit a hard copy before class starts.

Obtain Seed Financing Assess Opportunity Assess Strategic Alternatives Determine Organizational Structure Determine Organizational Form Prepare Business Plan

Obtain R&D Financing Build Research Team Conduct R&D Activities, e.g.: Secure Patent Develop Prototype Build Website Test Market/Market Research Assess/Update Business Plan Continue to Next Stage Extend Stage/Financing Modify R&D Strategy Abandon All research and development activity that must be completed before revenue generation can commence.

Obtain Start-up Financing Acquire Facilities and Equipment Initiate Production Build Starting Inventory Build Sales and Marketing Team Initiate Revenue Generation Assess/Update Business Plan

Actions

Obtain Early-Growth Financing Work Toward Breakeven Expand Team as Needed Expand Facilities as Needed Assess/Update Business Plan

Obtain Rapid-Growth Financing Work Toward Proven Viability Expand Team as Needed Expand Facilities as Needed Build Track Record for Harvest Assess/Update Business Plan

Obtain Continuing Financing: IPO Acquisition Buy-Out Early Investors Harvest Assess/Update Business Plan

Real Options

Continue to Next Stage Modify Concept Abandon

Continue to Next Stage Modify Production/Financing Modify Marketing/Financing Abandon All activities related to start of production and marketing and initiation of revenue-generating activities.

Continue to Next Stage Extend Stage/Financing Abandon

Continue to Next Stage Extend Stage/Financing

Choose Form of Exit

Description

All activities through preparation of business plan and before incurring significant expense.

All activities during the period before the venture reaches a level of sales sufficient for cash-flow breakeven.

All activities during the period after break-even and before sustainable viability is established.

All activities related to establishing continuing financing and enabling early investors to harvest.