1.

Anna Manokha, 1500

2. Axel Haas, 25.10.2017 “Minor entrepreneurship”.
3. The lecture covered three major topics: venture financing; venture capital;
crowdfunding.
There are a lot of sources of start-up finance: own savings, profits from the firm, family
and friends, bank credit (banks are usually not likely to give credits for start-up companies,
because of the high risk), government money (in Germany government want to spend more
money on start-up because of global development), public equity or IPO, money from
business angels and venture capital.
There several distinctions between debt and equity in venture capital:
• Generally, originates from banks (yet in addition: from clients, providers, workers)
• Debt is given for a set time
• Return for money, business person does
• Intermittent interest instalments
• Interest instalment are normally settled and arranged ex stake. For example, interest
rates in Germany are 2%-3% up to 10%.
• Too much obligation can prompt insolvency
• In the event of insolvency/bankruptcy obligation holder has favoured rights over value
over equity holders.
Equity:
• Private equity: ordinarily originates from entrepreneur(s), her companions, business
heavenly attendants, financial speculators
• Public equity: regularly originates from unknown investors (value is exchanged on the
share trading system)
• Money is given for a possession share in the organization (which can be sold); cash is
given for a boundless time period as a by-product of cash, business visionary pays out profits
which are most certainly not settled and not arranged ex-risk
• In case of bankruptcy, value holders are more often among the last to be served
Venture capital as a method of financing is rapidly growing in Europe and around the
world: for example, Uber was financed by venture capital, as well as German company
Zalando.
The lecture also covered stages of entrepreneurial financing.
Early stage is characterised by seed and start-up sub-stages. Seed is all about product
conceptualising, market research and basic research of idea. Start-up is the formation of the
company and product development. At this stage there is marketing concept and active phase
of investor finding. At both of this stages, entrepreneurs are active resources finders:
family/friends, crowd financing, incubators (mostly seed stage), public sources and venture
capital. After the second stage goes expansion stage which is product manufacturing and
market entry growth financing. At these 3 stages we can already see the expected returns on
production: is it profit, loss or a break even point where revenues equal expenses.
The later stages are bridging and MBO/MBI. Bridge is a preparation to the next stage or
alternatively a sale to an industrial investor. MBO/MBI is a takeover by current managed MBO
or external managed MBO. This stage is characterised by debt financing, capital markets and
private equity.
Within these processes arises the principal-agent problem which is a dilemma off
understanding information which is incomplete or no similar when the principal hires an
agent. The example was the conflict of interest of the investee and investor: the owner of
start-up wants the fast release of the product and idea, using the investor’s resources while
investor wants risk free investment with fast and high returns. The moral hazard in such issue
arises when the agent doesn’t not take the consequences in full after the actions and has a
tendency to act differently than one otherwise would, leaving this responsibility to the
principle. This happens in case the entrepreneur doesn’t fully own the venture. As an example
the agent chooses a very risky product development strategy where the risk of bankruptcy is
very high.
As was already mentioned, the differentiation is in goals and asymmetric information.
Both of them are interested in same thing but from the different perspective:
dividends/interest payable; ownership share/repayments of loan. The goals of entrepreneur
are financial: earning money and non-financial like develop a product, self-esteem,
independent work.
The goals for equity holders are equity: high returns, dividends, value of ownership
increase; debt: repayment of loans and interest instalments.
There are various solutions to the problem:
1. Monitoring – investor or equity holder has to observe and control actions of
entrepreneur and monitor the actions that have to be in the best interest of the shareholders.
(annual reports, supervisory board, investor meetings).
2. Bonding – make the entrepreneur to work in the interests of investors. (annual
bonuses, stock option payments).
3. Screening – trying to avoid the ex ante problem by screening the venture and
entrepreneur. (investigation of business plan, entrepreneur of entrepreneur).
Financing innovations in venture – to make it research intensive is alternative to the
standard financing approach. Web 2.0 start up with financing a bakery. Innovative ventures
as a result of innovative financing have complex products and project, depend on intangible
assets like patents and goodwill, require high expertise knowledge. However, they are cost
demanding and have to work in very uncertain and dynamic environment.
Another topic that was covered in the lecture was about venture capital firms. Venture
capital firms act like mediators between investors and start-ups by collecting and further
investing funds in risky but promising new ventures. There is a sequence of step-by-step
process: Investors (banks, individuals, insurance companies etc.) à VC firms that raise funds
from investors that are ready to take calculated risk, select opportunities for investment, build
a portfolio, provide advice, financial growth for start-ups. The goal of VC is trade with high
returns à start-ups. Entrepreneurs give ideas towards venture capitalists, VC gives IPOs
towards investment bankers which is involved in stock in public market and corporations.
That gives the return of money that goes the same way back towards the entrepreneurs. Its
important for entrepreneurs to understand that the start-up should be innovative and has a
growth potential. Innovative start-ups in connection to venture capital have characteristics
of: equity, free of debt, VC shares the risks with entrepreneurs; 5-10 years until exit; no
periodic dividend or interest payments, comes up with support in management.
VC evaluates the start-up through stages:
• Incoming business plan (100% of applicants)
• Screening (20% of start-ups don’t enter this stage due to the poor planning)
• Initial screening (70-40 % of applicants)
• Second screening (70-40 % of applicants)
• Personal contact (20 % of applicants)
• Due diligence (10 % of applicants)
• Negotiations (5-7 % of applicants)
• Deal (1-4 % of applicants)
The typical deals for VC are preferred-equity ownership which means that in case of
bankruptcy VC’s share is given the preference among other shareholders; blocking rights –
voting rights, anti-dilution clauses – protection of VC in case the financing appears at lower
values, upside provisions – buy further shares at predetermined price in case the company
goes well.
Despite that, VC plays a minor role in funding innovations, as corporations and
government are more interested in it and fund it themselves. The usual request of VC is the
return of more than 20% of investment.
After reviewing the venture capital, the lecture gave explanations and examples on
crowdfunding. It is a form of financing through the open call in the internet to obtain
financial resources for a project/company. The main involver is the crowd itself with or
without the compensation for their participation. The common examples are Pebble and
Stromberg. In total, in 2012 firms acquired capital by crowdfunding models valuing 2,716
billion USD.
There are a lot of involved parties in Crowdfunding transactions. First is capital seeker
who is a project initiator. Through the application capital seeker becomes involved with
Intermediary and intermediary offers through WWW to the capital provider.
Communication between the capital seeker and capital provider goes through Trustee.
There are several distinct forms of crowdfunding:
1. Donation model – for charitable, cultural, political or economical ideas and purposes.
Has no compensation.
2. Reward model – sponsoring model (support for groups including immaterial
rewards) and pre-selling model (support with early delivery of product).
3. Lending model – granting micro loans without intermediaries. Done by banks.
4. Equity model – buying shares of the company. Is included in crowdinvesting.
5. Mixed model – combining two or more of models in one (participation loans, reward
model etc.). Is included in crowdinvesting.
Equity-based crowdfunding is a collection of financial aids over the Internet from vast
amount of investors, that can contribute rather small amounts to support the idea of a
start-up. They obtain rights to participate in future decisions and development of the firm.
Comparing to venture financing, crowdfunding is usually done on pre-seed/seed and
start-up stages of development, along with friends and family funds.
There are advantages and disadvantages of equity-based crowdfunding.
Advantages are:
• Fast, informal and flexible form of financing
• Helps at first stages
• Increasing awareness of new product
• Getting a feedback from the market you want to emerge in
• Multiplier effect
• Support by active investors
• Not many formal obligations
Disadvantages:
• Creating transparency of idea
• High cost off compensation for the platform 5-10%
• High quality and complex preparation of presentation. Not similar to the “elevator
speech”, the concept of telling all about the business in the person standing with you in the
elevator while you’re going from 1 to 16 floor.
• Word-of-mouth risk
• Payback for investors
• Legal situation is high uncertainty
To compare with the rest of the world, in Germany the equity-based crowdfunding
market is increasing since 2011 (0.45 million euro). In Q2 2014, it raised up to 28 million euro.
On the graph presented by the lecturer, the measurements of millions euro were taken
quarterly and it would be still raising drastically.
4. I liked the lecture very much, it was very informative. A lot of information was based
on personal experience in a sphere of investment and venture capitals. I liked the examples
and the actual connection between theory and practise like the venture capital firms and their
investors: ACCEL partners invested in Facebook and Groupon; Venrock invested in Apple, Intel
and AppNexus. KPCB – in Amazon, Google, Citrix and AOL. Wellington partners – in Alando,
Ciao.com. There was also example on diversification of the portfolio for the sake of
minimisation the risk of investments of Wellington Partners: it consisted of life sciences
(Quanta, Glo, sapiens etc.) and technology correlated firms (Zipo, Qype, Tru, Goom etc.).
5. It is a very important lecture material to those who plan to start their own business,
who have the ideas that are worth making a reality. Its very important to understand where
and on which terms start-up can get a funding, what are investors looking at, what is the
market place looking at. As I’m getting a degree in accounting and finance it is an interesting
topic for me in term of investing and diversification of risk. Its very crucial to understand how
to finance start-ups you see the potential in and what to look at while giving the value to the
company.
6. I would like to hear from the lecturer the ways the Ukrainian start-ups could seek
financing from government, business angels and venture capital.