Term
The success of any new Venture
WILL NOT be measured by...
but WILL be measured by... |
|
Definition
... the success of technology or marketing/sales plan
... the robustness of the financial performance. |
|
|
Term
| Name the differences in Corporate Finance and Entrep. Finance |
|
Definition
Mainly the CFO's have different access to financing:
1. know where to get cash.
2) know when to get cash.
3) know the cost of capital. |
|
|
Term
| What is designing the customer experience? |
|
Definition
| Increasing the quality of the experience that we provide customers and, therefore, moving up the value chain. |
|
|
Term
| What is the purpose of designing and controlling the 'total customer experience'? |
|
Definition
| To move up the value chain and, hopefully, prevent the outsourcing of YOUR 'white-collar' job to . |
|
|
Term
| How do you move up the value chain? |
|
Definition
| By designing and controlling the TOTAL CUSTOMER EXPERIENCE. |
|
|
Term
Name the 3 core principles of financing.
(very high level) |
|
Definition
1. More cash is better than less.
2. Cash sooner is better than cash later.
3. Less risky cash is preferred to more risky cash. |
|
|
Term
| How is the Balance Sheet organized according to RISK? |
|
Definition
| By order of Increasing risk(= increasing cost) from Current Assets -> Fixed Assets -> Current Liabilities -> Equity |
|
|
Term
| What is Rossi's 'first solution' to financing? |
|
Definition
1. collect early (maybe offer incentives)
2. pay late |
|
|
Term
| What are 2 financing options? |
|
Definition
1. Debt Capital
2. Equity Capital |
|
|
Term
| What are 2 bases for Debt Capital? |
|
Definition
|
|
Term
| What is the only reason to consider debt capital? |
|
Definition
|
|
Term
| Name and Describe 3 types of Cash Flow financing. |
|
Definition
1. Short-term debt (30-40 days, seasonal)
2. Line-of-credit financing
3. LTD (10+ years, real estate, buildings, etc) |
|
|
Term
|
Definition
If the cash-flow forecast is sufficient, restrictions for borrowing can be enforced to get more control over risk if limits aren't met.
Covenants could include limits on D/E ratio, cash levels, etc.
Breaking a covenant could mean penalties such as giving up board seats and control of the company. |
|
|
Term
| Describe several types of Asset-Based financing. |
|
Definition
A/R (factoring co's buy A/R)
Inventory (20-50% of value)
Equipment (20-50% of value)
Real Estate
Personal Secured Loans (100% value)
Gov't secured loans
LOC financing |
|
|
Term
|
Definition
| Borrowing against assets (Asset-Based financing). |
|
|
Term
| What is the simplest form of Equity Financing? |
|
Definition
| Bootstrapping, such as delaying/foregoing payroll and doing business out of your home/garage/etc. |
|
|
Term
| Name 2 types of Equity Financing. |
|
Definition
1. Bootstrapping
2. Outside Equity capital. |
|
|
Term
| Name several types of Outside Equity Financing. |
|
Definition
Friends & Family
Angel Investors
VC's
Public Equity Markets
Corporate partnerships |
|
|
Term
| How long is an Angel Investor's expected return on capital? |
|
Definition
|
|
Term
| How long is an VC's expected return on capital? |
|
Definition
|
|
Term
| Why would a corporation be interested in providing equity capital to a new venture? |
|
Definition
| The corp. is interested in access to the venture's IP. |
|
|
Term
| What are several types of Internal Financing? |
|
Definition
1. Retained earnings
2. Credit from suppliers (pay late)
3. A/R (collect early or sell to factoring comp.)
4. Reduce working capital
5. Sale of assets |
|
|
Term
| What kind of event is harvesting? |
|
Definition
|
|
Term
How much money is needed by a new venture? (what point are you trying to reach?) |
|
Definition
| Enough money to reach the tipping point where cash flow turns positive. |
|
|
Term
| Name 4 financing determinants. |
|
Definition
1. How much and when is it needed?
2. Does enterprise have or require assets?
3. Will enterprise experience significant growth in 3-5 years?
4. What is the exit/harvesting strategy? |
|
|
Term
| Describe the curve of the entrepreneur's bargaining power to OOC. |
|
Definition
| Bargaining power decreases to nil as time to OOC (out-of-cash) decreases to present. |
|
|
Term
| What are the implications of Financing choices? |
|
Definition
1. legal, contractual and moral oblig's
2. "Skin in the game" (investing own time/money)
3. Increase entrep's risk (personally finance)
4. Decrease entrep's risk (sell stock)
5. Additional value
6. Control |
|
|
Term
| What is the one truth in Financial Modeling in Venture Financing? |
|
Definition
| It must always be adjusted because Risk is always changing as the enterprise drives through value-changing events. |
|
|
Term
| What are the benefits of financial modeling? |
|
Definition
1. predictive tool
2. analytic tool
3. convey understanding of market and biz model to investors |
|
|
Term
| What is the sole liability of financial modeling? |
|
Definition
| You may convey the wrong message based on your model. |
|
|
Term
| What is the final output of the financial model? |
|
Definition
A pro forma
1. balance sheet.
2. income stmt.
3. SCF |
|
|
Term
| What shows what a company owns(assets) and owes(liabilities) at a single moment? |
|
Definition
The Balance Sheet and is based on
Assets = Liability + Equity |
|
|
Term
| What is Liquidation Value? |
|
Definition
| The total of 'What you owe + Everything else', since everything is listed at cost or lowest marginal value on the Balance Sheet. |
|
|
Term
| What measures a company's revenues vs. all expenses over a specific period of time? |
|
Definition
|
|
Term
| What converts the accrual basis of accounting used to prepare the IS and BS to a cash basis? |
|
Definition
| Statement of Cash Flows -- tells us where the cash went. |
|
|
Term
| Name the 3 activities on the SCF? |
|
Definition
1. operating activities (trans. related to revenues and expenses)
2. investing activities (acquisition/disposal of non-current assets)
3. financing activities (related to issuance/retirement of debt and issuance/re-purchase of stock) |
|
|
Term
| Why is OCF more important than FCF? |
|
Definition
| Free-cash-flow(sum of oper, inv and fin activities) can be positive, but the company can still be losing money. (ie. selling assets, taking loans, issuing stock to boost pos cash flow) |
|
|
Term
| Name 3 primary purposes of financial modeling for a NV. |
|
Definition
1. provide founders/investors with a realistic forecast
2. project the investment needed to reach Pos-CF
3. Provide a basis to indicate the NV's value |
|
|
Term
How can you:
- produce a realistic forecast of the market potential?
- project the cash needed to reach pos. cash flow? |
|
Definition
1. Have a clearly defined M&S strategy.
2. Use market-based, conservative assumptions to forecast revenue
3. Use granular details |
|
|
Term
| How do you create a model that can be the basis for determining the NV's value? |
|
Definition
1. create a month-to-month model
2. underestimate revenue
3. overestimate expenses
4. overestimate cash needs
5. use granular details |
|
|
Term
| Name the steps for creating a ROBUST financial model. |
|
Definition
1. month-to-month 5-year time frame
2. Revenue engine(M&S strategy embedded)
3. Cost engine(biz model embedded)
4. Conservative market assumptions
5. Granular details
6. Output is GAAP |
|
|
Term
Explain the idea of
Risk != Uncertainty |
|
Definition
Risk = probability of future states of the world ARE known.
Uncertainty = prob. of future states are NOT known. |
|
|
Term
Finish the phrase:
"Facts are useless in..." and explain 'asymetric information'. |
|
Definition
"...a world of perception."
- Successful New Ventures ACTUALLY have LOW risk -- regardless of the PERCEIVED risk. |
|
|
Term
| What is the relationship of perceived risk to value? |
|
Definition
Perceived RISK is reciprocal to VALUE.
*The perceived risk of a NV will determine its ability to attract financing. |
|
|
Term
| Name the 3 main sources of NV Risk. |
|
Definition
1. character risk
2. mgmt risk
3. commercialization risk |
|
|
Term
| How can perceived risk of character be mitigated? |
|
Definition
| 1. F&F investment - shows that, at least, people closest to persons have trust in them. |
|
|
Term
| What can be the single most important aspect of a new venture? |
|
Definition
| The quality of the management team - as it relates to Management RISK. |
|
|
Term
| What is meant by Rossi's phrase - 'Investors bet on the management team, not the product.' |
|
Definition
| The quality of the management team may be the most important factor of any new venture. |
|
|
Term
| What makes up a good management team? |
|
Definition
In order:
1. Prior start-up experience !!!
2. Industry knowledge
3. Technological exp.
4. Oper. exp.
5. Fin. exp. |
|
|
Term
| How can the perceived risk of the mgmt team be reduced? |
|
Definition
1. vision
2. ability to implement
3. commitment
4. critical expertise MUST reside with team
5. Advisory board |
|
|
Term
| What risks are both cumulative and serial? |
|
Definition
the 3 types of Commercialization Risk:
1. Development
2. Cust Accpt
3. Mark & Sales |
|
|
Term
| What are the 3 commercialization risks? |
|
Definition
Commercialization Risk:
1. Development
2. Cust Accpt
3. Mark & Sales |
|
|
Term
| Name one way each commercialization risk be reduced? |
|
Definition
Dev risk: prototypes,
Cust accept risk: beta tests,
M&S risk: distribution is critical, avoid evangelism |
|
|
Term
| What impact do commercialization risks have on the business plan? |
|
Definition
Narrative: Development and Customer Accept.
Pro forma: Marketing & Sales |
|
|
Term
| Name two possible reasons if you can't find financing for a new venture. |
|
Definition
1. You have failed to convince others
2. The NV risk is in reality HIGH! |
|
|
Term
| In order to get funding from investors, "uncertainty" in any new venture must be converted to …? |
|
Definition
|
|
Term
| What is the "the net amount at which a willing purchaser would pay a willing seller, neither being under any compulsion to buy and sell and both having reasonable knowledge of all relevant facts." |
|
Definition
|
|
Term
| What are 3 sources of value of a company? |
|
Definition
1. assets
2. income from the biz
3. control of the biz |
|
|
Term
| What are 3 types of Asset-Based Valuation? |
|
Definition
1. Modified Book Value
2. Replacement Value
3. Liquidation Value |
|
|
Term
| How is 'modified book value' calculated? |
|
Definition
| Take the Book Value from the Balance Sheet and adjust to reflect obvious differences between historical cost and current market value (usually P&E or real estate.) |
|
|
Term
| Define Replacement Value. |
|
Definition
| The cost to replace each of the firm's assets. |
|
|
Term
| Define Liquidation Value. |
|
Definition
| The money generated if the firm ended operations and all assets are sold. |
|
|
Term
| What are 3 shortcomings of asset-based valuation? |
|
Definition
1. the BS(historical cost method to determine an asset's value) was never intended to measure market value.
2. fails to recognize the firm is a GROWING CONCERN.
3. fails to value intangibles (ie. goodwill) |
|
|
Term
| Why use the Balance Sheet at all for Asset-Based Valuation if it has shortcomings? |
|
Definition
1. It reflects the basic accounting identity.
2. provides a benchmark - a picture of the firm at a given time.
3. all variables are carried at historical costs or book as opposed to market value (assets at purchase price - accumulated dep. as opposed to replacement cost or market value) |
|
|
Term
| What 4 pieces of info does the BS provide towards valuation? |
|
Definition
1. assets owned by the firm
2. liabilities owed
3. firm's capital structure (how activities are financed)
4. amount of working capital req'd to execute operating strategy |
|
|
Term
|
Definition
WC = Curr Assets - Curr Liabs
= Inv + Cash + AR - Pay
(money needed to run the business) |
|
|
Term
| Name 2 Earnings-Based Valuations. |
|
Definition
1. Capitalization of Earnings(historical)
2. Discounted Future Earnings(projected) |
|
|
Term
| Describe valuation based on Capitalization of Earnings. |
|
Definition
| the value of a biz is equal to the PV of the future earnings(based on historical data) |
|
|
Term
| Describe valuation based on Discounted Future Earnings. |
|
Definition
| the value of a biz is equal to the PV of the projected future earnings. |
|
|
Term
| Name the steps for Capitalization of Earnings valuation. |
|
Definition
1. use recent after tax earning (last 5 years) as basis
2. adjust for non-recurring events
3. use adjusted basis to forecast future earnings
4. apply a discount rate that produces sufficient return based on risk |
|
|
Term
| Name the steps for Discounted Future Earnings valuation. |
|
Definition
1. estimate future earnings
2. select a discount rate to compensate the investor for risk |
|
|
Term
| Name 2 ways to arrive at a discount rate for risk. |
|
Definition
|
|
Term
|
Definition
| The cost of funds or the 'hurdle rate' an investment must exceed to justify the expenditure. |
|
|
Term
|
Definition
The req'd return to justify an investment (or cost of capital)
--based on the opportunity cost concept(what can be earned on comparable investments)
RR = Cost of Capital = Rf + [Rm-Rf]XBeta |
|
|
Term
| Compare Earnings vs. FCF. |
|
Definition
| Since earnings can be manipulated, the present value of free cash flow may be a better measurement of value. |
|
|
Term
| How do you calculate FCF. |
|
Definition
1. OperIncome + Dep and Amort = EBITDA
2. EBITDA - TaxPayments = AfterTax OCF
3. AfterTax OCF - net operating WC - Increase in fixed assets
4. = FCF |
|
|
Term
| What are the shortcomings of Earnings-Based Valuation and a solution? |
|
Definition
1. Difficult to estimate future earnings
2. selection discount rate is subjective
Solution: a hybrid of Asset/Earnings methods |
|
|
Term
| Name 2 hybrid methods of valuation? |
|
Definition
1. Market valuations
2. Comparable valuations |
|
|
Term
| Name 3 ways to perform comparable valuations. |
|
Definition
1. Market price of a publicly traded security for a comparable company.
2. Transaction involving the sale of a comparable company.
3. Compare various financial ratios of the benchmarked company(s) over time
-- P/E ratio
-- Price to book ratio |
|
|
Term
| What are some adjustments that can be made to valuations? |
|
Definition
1. Premium to FMV if sale includes controlling interest in the biz.
2. Reduce FMV for Minority Discount (control adds to value).
3. Reduce FMV for Lack of Marketability Discount (time value of $ concept)
4. Reduce FMV for Liquidation Discount (goodwill is lost) |
|
|
Term
|
Definition
1. Deals with non-financial(or real) investment decisions
2. Real Options fall within 3 categories:
1. invest or continue
2. abandon project
3. change the direction of project |
|
|
Term
| How can Real Options reduce the risk of the investor? |
|
Definition
| By offering staged investments based on goals or value-changing events of the business. |
|
|
Term
What can a NV's value be reduced down to?
(has to do with the biz oppo and the mgmt team) |
|
Definition
| The promise by the mgmt team that the opportunity will generate a future steam of cash. |
|
|
Term
| Why is OCF used to measure the value of a NV? |
|
Definition
1. OCF's reflect how well Revenues are "covering" the Operating Costs ----
or how well the business model is working. |
|
|
Term
| What is one way to know if you've passed the tipping point? |
|
Definition
| If 12 months of continuous positive OCF is realized, then you've passed it. However, after the 12 months of Pos OCF if it dips negative again, go out 6 more months from there and that is your new tipping point. |
|
|
Term
| What is the reason behind finding the tipping point of 12 months of pos. OCF? |
|
Definition
| We are trying to extend the time frame beyond when "commercialization risks" are eliminated from the NV. |
|
|
Term
| What factors are taken into account when determining the rate for discounting OCF? |
|
Definition
1. time value of money (based on 30yr Tbill)
2. normal biz risk (faced by all co's -- market drop, weather, terrorist attack, etc.)
3. a premium for the risk associated with the NV (comm risk, character risk, etc) |
|
|
Term
| When discounting OCF's, what are the problems with finding comparables? |
|
Definition
- may have a unique biz model
- new product in existing market
- new product in new market
- commercialization risks |
|
|
Term
| What risk is left after eliminating commercialization risk when doing a valuation? |
|
Definition
1. Time value of money risk
2. Normal business risk |
|
|
Term
| What is the idea of Discontinuous Risk? |
|
Definition
That risk and value are reciprocal.
That risk is not continuous and can be reduced or eliminated as the NV matures creating more value. |
|
|
Term
| How do Real Options benefit both the investor and entrepreneur? |
|
Definition
Investor -- safer investment.
Entre -- less diluted. |
|
|
Term
| What is the cost of a Real Option? |
|
Definition
FOLLOW UP:
The difference between the company value and ......... |
|
|
Term
| Why is harvesting important? |
|
Definition
1. primary means of rewarding founders & investors
2. provide company with capital for future growth
3. means for founders to direct control of company |
|
|
Term
| Why is a Harvesting Strategy important? |
|
Definition
1. w/o a strategy, you may default to a lifestyle business
2. creates value for the founders and investors
3. keeps the exit options open (maximizes options) |
|
|
Term
| What are the 3 basic Harvesting Options? |
|
Definition
1. Purchase/Acquisition
2. Stock buy-back
3. IPO |
|
|
Term
| Describe the chars, adv/disadv of Purchase/Acquisition. |
|
Definition
Characteristics:
1. critical mass
2. niche market
3. unique market position
Advantages:
1. stock becomes liquid
2. Enterprise is sustainable
Disadvantages:
1. Founders lose control |
|
|
Term
| Describe the chars, adv/disadv of Stock Buy-Back. |
|
Definition
Characteristics:
1. High Margins
2. Critical Mass (self-sustaining)
3. Unique marketing position
Advantages:
1. Investor's stock become liquid
2. Founders retain control
3. Enterprise is sustainable
Disadvantages:
1. Difficult to implement |
|
|
Term
| Describe the chars, adv/disadv of an IPO. |
|
Definition
Characteristics:
1. High growth more important than earnings
2. dominate market segment
3. ubiquitous market position
Advantages:
1. Stock becomes very liquid
2. prestige
Disadvantages:
1. Expensive
2. requires unique management skill set
3. founders lose control |
|
|
Term
| What impact does an IPO have on Marketing Strategy? |
|
Definition
| Market share is more important than margins. |
|
|
Term
| What impact does an IPO have on Financing Strategy? |
|
Definition
1. Appeals to VC firms
2. May require significant investment that reduces founder's equity position |
|
|
Term
|
Definition
| They exist because Entrepreneurial firms are rarely financed by conventional sources. |
|
|
Term
| How do VCs handle risk of new ventures? |
|
Definition
1. Formal due diligence process.
2. Staged financing (Real Options)
3. Syndication (joint VC ventures)
4. Compensation contracts
5. Covenants and restrictions
6. Composition of BOD |
|
|
Term
| Why do co's fail the VC screening process? |
|
Definition
1. mgmt deficiency
2. lack of 'fit'
3. unrealistic demands/expectations
4. too complicated
5. mgmt fails to display 'expertise'
6. due diligence failure (full disclosure)
7. "this is a product, not a company!" |
|
|
Term
| What are the 5 factors that influence VCs decision to invest? |
|
Definition
1. mgmt quality
2. ROI
3. market size
4. Proprietary, unique
5. Potential for growth |
|
|
Term
| What is the main factor influencing a VC's decision not to invest? |
|
Definition
| Main factor: Lack of experienced management team. |
|
|
Term
| Why does private capital exist from angel investors? |
|
Definition
| People want to take part of risky portfolio and invest in even higher risk private equity for potentially greater ROI. |
|
|
Term
| What are the types of Angel Investors and which is considered best? |
|
Definition
1. Guardian Angels (usually has both industry and entrepreneurial experience)
2. Operational Angels (industry exp)
3. Entrepreneur Angels (entre. exp.)
4. Financing Angels (none or little exp) |
|
|
Term
| What are the most common ranges of investment for Angels vs. VCs? |
|
Definition
|
|
Term
| What is the primary difference between Angels vs. VCs? |
|
Definition
| Angels don't have to invest, VCs do. |
|
|
Term
|
Definition
| Lowest cost financing from banks or insurance co's, generally a secured loan on a first priority status by company assets. |
|
|
Term
| Define Subordinated Debt. |
|
Definition
| Higher interest rate than senior debt in exchange for higher risk (paid after senior debt is paid), sometimes packaged with warrants (sweeteners). |
|
|
Term
|
Definition
| Security which can be exchanged for a specified amount of another, related security, at the option of the issuer and/or the holder. |
|
|
Term
| Define a Subscription Warrant. |
|
Definition
| A security that can be converted into or exchanged for a company's stock. |
|
|
Term
|
Definition
| Pays a dividend to the holder and usually includes more rights than common stock (in bankruptcy, considered junior to debt) and can be converted to common stock. |
|
|
Term
|
Definition
| An economic agreement between at least two parties, which involves allocation between parties of: cash flow streams, risk and value. |
|
|
Term
| What are the components of 'the Deal'? |
|
Definition
1. Company valuation
2. Deal structure
3. Deal negotiation |
|
|
Term
| What are the key tenets of 'Deals'? |
|
Definition
1. No deal is perfect.
2. Know your adversary - integrity is paramount
3. A good deal is when everyone wins
4. The devil is in the details |
|
|
Term
| What does the 'Term Sheet' contain? |
|
Definition
1. the amount of the investment
2. the form of the investment
3. the share of the equity represented by the investment
4. the terms and conditions to which you will be asked to agree. |
|
|
Term
What are the key tenets of negotiations?
*** the same as the 'key tenants of deals' |
|
Definition
1. no negotiation is perfect
2. know your adversary - integrity is paramount
3. a good negotiation results when everyone wins
4. the devil is in the details |
|
|
Term
| Describe and provide response to Negotiator type: Bam Bam w/ the ugly stick |
|
Definition
1. freq wins battles
2. sometimes, but seldom wins war
3. a lonely life
Response:
1. no known sure cure for territorial imperative.
2. Treat him as he treats you, play hardball if he starts to play.
3. Stalemate (if you can) |
|
|
Term
| Describe and provide response to Negotiator type: The Great Unprepared |
|
Definition
1. often a 'big-company' guy
2. thinks position and stature are power
3. seldom wins battles or wars
4. remember! the devil is in the details
Response:
1. know your adversary
2. overcome/overwhelm him w/ details
3. win by overcoming |
|
|
Term
| Describe and provide response to Negotiator type: The Scripted "Slick" |
|
Definition
1. thinks he's prepared, but only as good as his script
2. get him to extemporaneous and he's lost
3. freq wins, but only against novice adversaries
Response:
1. Throw him off his message
2. Hardball - invade his territory
3. Softball - nicely crush his plan |
|
|
Term
| Describe and provide response to Negotiator type: The 'nice guy' |
|
Definition
1. opposite of Bam Bam
2. demeanor causes adversary to drop his guard
3. frequently wins, but think about why -- he's prepared!
Response:
1. know your adversary and treat him like one
2. Be prepared |
|
|
Term
| Name 2 key Negotiation realities. |
|
Definition
1. Knowledge is power.
2. The party willing to stalemate has ultimate power. |
|
|
Term
| What are the steps to a Good Deal? |
|
Definition
1. People: separate the people from the problem
2. Interests: focus on interests, not positions
3. Options: generate a variety of possibilities before deciding
4. Criteria: insist that the result be based on some objective standard |
|
|
Term
| Name the 10 Entrepreneurial Deathtraps. |
|
Definition
1. 50-50 partnership
2. 3 musketeers trap
3. single customer over-reliance
4. mousetrap teams
5. pricing strategy
6. insufficient capitalization
7. industry norm conundrum
8. never ready product trap
9. Market research lite
10. Market segmentation lite |
|
|
