Questions and Answers of Entrepreneurial Finance 7th

Describe the process of valuing the entrepreneur’s ownership interest in a two-stage investment. Refer to Tables 13.10 and 13.13.Data from table 13.10Data from table 13.13 Market potential
How might you respond to an entrepreneur who says, “There is no reason for me to undertake a valuation of my business. Everyone knows the investors determine what a venture is worth”?
Can the approaches discussed in this chapter be used in emerging economies? What adjustments, if any, would you recommend?
Why might it not be a good idea for the entrepreneur to rely on the investor’s valuation in deciding whether to pursue a potential venture?
How does underdiversification affect the entrepreneur’s opportunity cost of capital for investing time and money in a new venture?
Why, all else equal, would you expect a wealthier entrepreneur to value a new venture opportunity more highly than an entrepreneur who is less wealthy?
Why, all else equal, are new venture opportunities worth less to entrepreneurs than to well-diversified investors?
While underdiversification implies lower valuation, entrepreneurs often see ventures as being more valuable than do investors. Why might the entrepreneur value an opportunity more highly?
What is meant by “human capital”? How might you estimate the value of an individual’s human capital?
What is meant by the human capital investment in a venture? How do salary in alternative employment, salary in the venture, and the ability to resume alternative employment if the venture fails
How, all else equal, does the difference between the total risk and the market risk of a new venture opportunity affect the relative values of the opportunity to an underdiversified entrepreneur and
What factors increase the likelihood of corporate venturing as opposed to a stand-alone pursuit of an opportunity by an entrepreneur? Why?
What, in the context of this chapter, is meant by the entrepreneur’s “commitment to the venture”?
In what sense is proportional sharing of ownership in a venture of a given size analogous to an entrepreneur independently pursuing a perfectly scalable venture?
Why, all else equal, would shifting nonmarket risk to a well-diversified investor increase the value of an opportunity?
Why, all else equal, would an entrepreneur do better by selling most of the equity in a new venture to a well-diversified investor than by retaining most of the equity?
If entrepreneurs discount the future cash flows of a venture at a higher rate than do diversified investors, why do entrepreneurs generally hold substantial equity interests in their ventures, and
What are some ways in which new venture deal structures can be designed to help signal the entrepreneur’s true beliefs to an investor and/ or better align the incentives of the entrepreneur with
In the context of the VC method, describe how to address dilution to correctly determine the amount of ownership an investor would require for a staged investment.Refer to Tables 13.1 and 13.2.data
How does staging of new venture investments create value for the entrepreneur? What about for the investor?
What is the likely impact of staging on the level of risk facing the entrepreneur?
Why might an investor in an early financing round want to anticipate the need for additional financing rounds even in cases where the entrepreneur and investor agree on the terms for investing?
Explain how an entrepreneur can use staging of investment to both signal the entrepreneur’s beliefs and better align the entrepreneur’s incentives with the interest of investors.
Why is simulation preferred over scenario analysis for valuing real options embedded in new ventures?
Describe the ideal “trigger” for modeling the value of an embedded real option.
How can you model the impact on value of the personal guarantee given by entrepreneurs when thy raise new venture debt?
How can the entrepreneur use debt terms to signal confidence in the venture?
Discuss how you would expect the financing choices of the following firms to differ, and explain the reasons for the differences.(a) An early-stage R&D venture, compared to an established venture
What are the advantages and disadvantages of the following financing choices?(a) A strategic partner(b) Factoring of accounts receivable(c) Venture capital(d) Franchising(e) Postponing payment of
How do the following considerations affect the choice of financing?(a) Expected growth is high, but growth prospects are highly uncertain.(b) Venture reputation is important to customers and
How can advice from an outside investor affect the value of the venture? What types of ventures will benefit most from outside investor advice?
What considerations enter into the financing decisions of ventures that are facing financial distress?
Why are real options likely to be important to the new venture development process?
Why is it important to have a clear objective in mind when planning an entrepreneurial venture?
How is the financing of social (not-for-profit) ventures different from the financing of for-profit ventures?
Why does organizational form affect the choice of financing?
Identify the basic US securities laws that affect the issuance and exchange of securities. Which is more relevant for new ventures and why? What is the rationale for these laws?
What are the basic informational problems facing an entrepreneur when trying to raise money from an investor? How are these problems reflected in the deal between the parties?
Explain the various information and incentive issues that arise in negotiations between(a) entrepreneurs and VC firms and(b) VC firms and investors.
How are the issues identified in your answer to Question 6 resolved with the contracts that we observe in practice?DATA FROM QUESTION 6Explain the various information and incentive issues that arise
Explain the risk allocation issues that arise in negotiations between (a) entrepreneurs and VC firms and (b) VC firms and investors. How are these issues resolved with the contracts that we observe
Could Henry Ford have successfully pursued his mass production strategy for automobiles if he had not simultaneously selected an innovative financing strategy? Why or why not?
Why did Ford’s cost-oriented product-market strategy work well in the beginning but eventually fail?
Identify each of the six steps of the simulation process used to evaluate a strategic alternative for the restaurant example.
Why is uncertainty about development critical to many new ventures?
Explain the cash flow cycle in Figure 7.1. Give particular attention to categorizing each cash flow shown as operating, investing, or financing. Why are these distinctions important to a new venture?
What accounts are most important when forecasting a new venture’s balance sheet? Which of these lend themselves to using yardsticks and which are better estimated based on fundamental analysis?