Entrepreneurial

Finance (FM476)
Professors:

Juanita Daniel
Gonzalez-Uribe Paravisini
Introduction
The pursuit of opportunity
A definition of
without regard to resources
currently controlled Entrepreneurship
Howard Stevenson (1975)
 An “Opportunity”

Delivers value to customers

and earns sustainable profits

 Customer value proposition

Entrepreneurship
Technology and operations
entails choices management
on how to create
value and deliver Go-to-market plan
profits
Cash flows and profits
Let’s look at one
such opportunity…
Raising new
venture finance
• When?
• How much?
• From whom?
• Under what terms?
• What are the longer-term
implications?
 Some IPOs in 2021

Bumble Roblox Rent the Runway Freshworks Warby Parker

Category Social Networking Entertainment E-Commerce SaaS E-commerce
Description Woman-first dating On-line gaming and Design apparel and Customer Designer eyewear
communication accessory rental engagement with social mission
Founded 2014 2004 2009 2010 2010

Last venture funding before IPO Venture round Series H Venture round Series H Series G
Date Mar-20 Jan-21 Jun-20 Nov-19 Aug-20
Raised (US$ million) ? 520 5 150 254
Pre-Money Valuation (US$B) ? 29 ? 3.4 2.9

IPO Date February March October September September

IPO valuation (US$B) 8.2 30 1.7 10.1 6

Source: Crunchbase
Is entrepreneurial finance special?
• Extremely skewed return distributions combined with huge
uncertainty
• Less information on which to make decisions
• Initially low profits and high growth, so focus on cash (and cash flow)
much more important
• Availability and source of financing has much stronger effect on
product market strategy
• Customer for whom you have to prove your product/service may be
very different from the mainstream
 Mechanics
and Content
Course Requirements
• No prior finance knowledge (catch up on basic concepts)
• Work with highly uncertain and ambiguous information
• Open to discuss whether your assumptions are reasonable
• In-class group work (must participate in the on-line lectures)
• Out-of-class individual/group/team work
Content Overview
• Introduction and course mechanics (week 1)
• Business Plans (weeks 1 and 2)
• Multi-stage financing (week 3)
• Deal Structure (week 4)
• Seed financing (week 5)
-------------------------
• VC method (week 7)
• Negotiation (week 8)
• Non-equity financing + “other” (week 9)
• Pitching (week 10)
• Due diligence and wrap-up (week 11)
 Entrepreneurial Finance

Standard LSE course

Learning Approach
• In-class activities
• Lectures
• Case discussion
• Group exercises
• Business plan pitches and feedback

• Activities outside the classroom

• Produce reports
• Original business plan
• Moodle Student Forum
Learning Approach
• On-line class activities
• Lectures
• Case discussion
• Group exercises
• Business plan pitches and feedback

• Activities outside the classroom

• Produce memos/reports
• Original business plan
• Moodle Students Forum

• Additional support
• Office hours (send us an email and we will arrange a time)
Continuous Assessment
• Individual (20%)
Strava memo, Lovepop memo, problem set, lecture attendance/participation
• Group (30%)
Memos: Uber, Strava, Fast Ion, Endeca
• Team Business Plan Exercise (30%)
Team and idea, business plan sketch, pitch deck

• Peer Evaluations (20%)

Business plan pitch, group/team work contribution

Nature, scope, and requirements of each assessment will be discussed in detail in

class and posted on Moodle
 Weekly Planner
Week Topic Required Reading Report Due Due: Business Plan
1 Introduction
2 Business plans Coupa Uber (Group)
3 Multi-Stage Financing VCF Strava (Individual) Submit members
4 Deal Structure Fast Ion
5 Seed Financing Lovepop Fast Ion (Group) Business ideas
6
7 Financing Growth BionX Lovepop (Individual) Business plan sketch
8 Negotiation Endeca Problem Set (Individual)
9 Non-equity + “other” (Snap ?) Endeca (Group)
10 Pitches Pitch and deck
11 Due diligence Follow-up report (Group)
 Weekly Planner
Week Topic Required Reading Report Due Due: Business Plan
1 Introduction
2 Business plans Coupa FundamentalUberconcepts/ideas
(Group) and their
3 Multi-Stage Financing VCF applications:Strava (Individual) Submit members
4 Deal Structure Fast Ion
5 Seed Financing Lovepop
• Fast Ion (Group)
People, Opportunity, Context Business ideas
6 • Cash flows
7 Financing Growth BionX• Capitalization tables
Lovepop (Individual) Business plan sketch
8 Negotiation •
Endeca Terms Problem Set (Individual)
9 Non-equity, IPO, other Snap • Non-priced financing
Endeca (Group)
10 Pitches • Venture capital method Pitch and deck
11 Due diligence Follow-up report (Group)
 Weekly Planner
Week Topic Required Reading Report Due Due: Business Plan
1 Introduction
You put
2
these ideas in Coupa
Business plans
practice: Uber (Group)
3 Multi-Stage Financing VCF Strava (Individual) Submit members
4• Negotiate terms of a deal
Deal Structure Fast Ion
5• Pitch your
Seed business planLovepop
Financing Fast Ion (Group) Business ideas
6• Evaluate business plans as an investor
7 Financing Growth BionX Lovepop (Individual) Business plan sketch
8 Negotiation Endeca Problem Set (Individual)
9 Non-equity, IPO, other Snap Endeca (Group)
10 Pitches Pitch and deck
11 Due diligence Follow-up report (Group)
 Weekly Planner
Week Topic Required Reading Report Due Due: Business Plan
1 Introduction
2 Business plans Coupa Uber (Group)
3 Multi-Stage Financing VCF Strava (Individual) Submit members
4 Deal Structure Fast Ion
5 Seed Financing Lovepop Fast Ion (Group) Business ideas
6
Develop, research and pitch
7 Financing Growth BionX Lovepop (Individual) Business plan sketch
your own business plan
8 Negotiation Endeca Problem Set (Individual)
9 Non-equity, IPO, other Snap Endeca (Group)
10 Pitches Pitch and deck
11 Pitch Follow-ups Follow-up report (Group)
Your team will:
• Come up with a business
idea
• Real, or made-up but Business Plan
plausible
• Elaborate a business plan
Exercise
and presentation deck
• Pitch it
Business Plan Teams
• Same team throughout the term
• You will be responsible for forming the teams
• Rules (guidelines):
1. Five members
2. At most three members from MScs offered by same department (MSc Finance and MSc
Finance and Private Equity count as the same MSc)
3. Team members must be from the same section

• Suggestion
If no team member has accounting/finance/economics background, try to have least one
member of an MSc that has “finance” in the name

Assignment: form teams by the end of next week (submit before lecture 3)
 Weekly Planner
Week Topic Required Reading Report Due Due: Business Plan
1 Introduction
2 Business plans Coupa Uber (Group)
3 Multi-Stage Financing VCF Strava (Individual) Submit members
4 Deal Structure Fast Ion
5 Seed Financing Lovepop Fast Ion (Group) Business ideas
6
7 Financing Growth BionX Lovepop (Individual) Business plan sketch
8 Negotiation
Give/receive
Endeca
feedback onProblem Set (Individual)
9
businessSnap
Non-equity, IPO, other
plan Endeca (Group)
10 Pitches Pitch and deck
11 Due diligence Follow-up report (Group)
You will flip roles and
evaluate pitches as an
investor:
• Due diligence Business Plan
• Investment
recommendation Exercise
• Follow-up Q and A session
with the entrepreneurs
 Weekly Planner
Week Topic Required Reading Report Due Due: Business Plan
1 Introduction
2 Business plans Coupa Uber (Group)
3 Multi-Stage Financing VCF Strava (Individual) Submit members
4 Deal Structure Fast Ion
5 Seed Financing Lovepop Fast Ion (Group) Business ideas
Continuous
6
assessment
7 Financing Growth BionX Lovepop (Individual) Business plan sketch
8 Negotiation Endeca Problem Set (Individual)
9 Non-equity, IPO, other Snap Endeca (Group)
10 Pitches Pitch and deck
11 Due diligence Follow-up report (Group)
Catching up
Recommended readings from free on-line book by UCLA professor Ivo Welch
(I can recommend excellent paid alternatives):

http://book.ivo-welch.info/read/

• Before lecture 2 read:

Section 14.1: “From Financial Statements to Economic Cash Flows”
• Before lecture 3 read:
• Section 4.2: “The Internal Rate of Return”
• Before lecture 7 read:
• Section 2.5: “Present Value, Discounting, and Capital Budgeting”
• Section 15.2: “Comparables and Net Present Value”
Take turns to introduce
yourselves by answering:
• MSc?
Ice-breaking
• Where are you from?
• Favorite phone app?
exercise
• First thing you did (or plan (20 minutes)
to do) when lockdown’s
over?
Business Plans
The questions
A business plan must provide answers to the following questions:
• Who are the people involved? What have they done in the past that would
lead one to believe that they will be successful in the future? Who is missing
from the team and how will they be attracted?
PEOPLE
• What is the nature of the opportunity? How will the company make money?
How is the opportunity likely to evolve? Can entry barriers be built and
maintained?
OPPORTUNITY
• What contextual factors will affect the venture? What contextual changes are
likely to occur, and how can management respond to those changes?
CONTEXT
 People &
Resources
New Hires
Exits
Structure
External resources

Attract or abandon
internal/external Opportunity Appropriate incentives
People
Opportunity
costs
human resources Employment contracts
needed to exploit the (vesting, etc.)
evolving opportunity Context

Context
Change rules of game Partnerships
External technology
Insurance/Hedging

Flexibility,
experimentation
Robustness
(Deal)
Opportunity Deal
Find scale economies Capital raised
Network effects Investor roles
Build barriers to entry Employee deals
Real option mgt. Options to abandon, Customer “deal”
accelerate, modify
Access to new resources
The People
• Who are the founders?
• What have they accomplished in the past?
• What directly relevant experience do they have for the opportunity they are pursuing?
• What skills do they have?
• Whom do they know and who knows them?
• What is their reputation?
• How realistic are they?
• Can they adapt as circumstances warrant?
• Who else needs to be on the team? Are the founders prepared to recruit high quality people?
• How will the team respond to adversity?
• Can they make the inevitable hard choices that have to be made?
• What are their motivations?
• How committed are they to this venture?
• How will the members of the team will work together?
• What are the possible consequences if one or more of the team members leaves?
The Opportunity (1)
Overall market
• Is the total market for the venture’s product or service large and/or rapidly growing?
• Is the industry one that is now or can become structurally attractive? (network effects,
externalities)

Specific product/service
• Who is the customer?
• How does the customer make decisions?
• To what degree is the product or service a compelling purchase for the customer?
• How will the product or service be priced?
• How will the venture reach the identified customer segments?
• How much does it cost (time and resources) to acquire a customer?
• How much does it cost to produce and deliver the product or service?
• How much does it cost to support a customer?
• How easy is it to retain a customer?
The Opportunity (1)
Overall market
• Is the total market for the venture’s product or service large and/or rapidly growing?
• Is the industry one that is now or can become structurally attractive? (network effects,
externalities)

Specific product/service
• Who is the customer?
• How does the customer make decisions?
• To what degree is the product or service a compelling purchase for the customer?
• How will the product or service be priced?
• How will the venture reach the identified customer segments?
• How much does it cost (time and resources) to acquire a customer?
• How much does it cost to produce and deliver the product or service?
• How much does it cost to support a customer?
• How easy is it to retain a customer?
The Opportunity (2)
Cash flows
• When do you have to buy resources (supplies, people, etc.)?
• When do you have to pay for them?
• How long does it take to acquire a customer?
• How long before the customer sends you a check?
• How much capital equipment is required to support a dollar of sales?

Competition
• Who are the current competitors?
• What resources do they control? What are their strengths and weaknesses?
• How will they respond to our decision to enter the business?
• How can we respond to their response?
• Who else might be able to observe and exploit the same opportunity?
• Are there ways to co-opt potential or actual competitors by forming alliances?
 Cumulative
Cumulative Cash Flow in $

Date of First Cash Flow Positive

0 Time Cash Flows

Date of Cash Breakeven

Maximum Financing Needs

Burn Rate
The Opportunity (2)
Cash flows
• When do you have to buy resources (supplies, people, etc.)?
• When do you have to pay for them?
• How long does it take to acquire a customer?
• How long before the customer sends you a check?
• How much capital equipment is required to support a dollar of sales?

Competition
• Who are the current competitors?
• What resources do they control? What are their strengths and weaknesses?
• How will they respond to our decision to enter the business?
• How can we respond to their response?
• Who else might be able to observe and exploit the same opportunity?
• Are there ways to co-opt potential or actual competitors by forming alliances?
Context
• How do the level of economic activity, inflation, exchange rates, and interest rates
affect the opportunity?
• How is the industry where the new venture operate regulated?
• How does regulation affect the top and bottom line of the business? How does it
affect entry and competition?
• What can management do in the event the context worsens?
• Are there ways in which management can affect context in a positive way?
Groups of five:
• Analyze UberCab’s 2008
business plan using the
POC framework In-class exercise
• No information on the
people, so focus on
Opportunity and Context
POC(D) Framework: Comments
• Dynamic components of any entrepreneurial venture

• All likely to change over time as a company goes from identification of

opportunity to harvest
• Important to ask: What can go wrong? What can go right? How do we manage the
risk-reward ratio to the advantage of the venture?

• Used to establish degree to which the people, the opportunity, the deal,
and the context together influence the potential for success
• “To what degree does the opportunity make sense, given the people involved, the
context and the deals struck?”
Assignment for next week
Write-up: continuation of the in-class activity
• Same groups (remember to provide the candidate number for all members in
the report)
• Answer every question you can for UberCab’s 2008 business plan with the
information in the pitch
• One (at most two) line answer to each question that can be answered
• One write-up per group, but all students upload individually

Upload to Moodle before the beginning of next on-line lecture

Objectives of first assignment
1. Content: familiarize yourselves with a tool used to formulate
business plans.
2. Ice-breaking: get to know people that you might want to team up
with for the business plan.
3. Course dynamics: get used to debating your ideas with classmates
to come up with a consensus answer (not always easy when there
are no right answers)
4. Mechanics: learn deadlines, how to upload, etc.