What are the basic assumptions of the neo-classical theory?
Perfect market: Equal distribution of information among participants
No transaction costs
Rational individuals maximizing their utility - similar interest among all
Division of financing instruments can at discretion
What does the neo-classical finance theory account for?
Accounts for:
2-sided interaction
Time dimension
Doesn’t account for:
Divergent in interests
Information asymmetry
When is the neo-classical finance theory valid?
Theory is valid for cooperations but not for start-ups
—>The influence of the investor and entreprenuer dynamic is not taken into account
What are the assumptions of the new institutional economic theory?
No existence of a perfect market
Positive transaction costs (incomplete information)
Rational individuals maximizing their utility based in their own interest
Opportunistic Behavior
What does the new institutional economic theory account for?
Divergent of interests
With which Theory can Entrepreneurial Finance be best analyzed?
New institutional economic theory
—>Principal-Agency Theory
Entreprenuerial Finance can be analyzed most realistically using the Principal-Agency Theory due to the special consideration of client/contract or doctor/patient relation
Principal-Agency Theory in entrepreneurial finance
What are typical difficulties in developing a financing strategy?
Customer behaviour is different than expected
Capatalists change their mind
You might need more money
Typical financing development
What do start-ups base their financing strategy on?
Start-ups define their financing strategy based on the total capital required
How is the interest rate determined?
What kind of financing does exist?
External Financing: Bank, business angel
What is the difference between Equity financing and debt financing?
Equity financing:
Capital that belongs to the company and not the investor
investors trade money in return for shares
Debt financing:
The capital belongs to other people and you have to give it back plus interest rates
What is the best kind of financing?
Self-financing (from net income=
What kind of equity financing exists?
—>Equity financing is more realistic than debt financing for most start ups
How is early phase equity financing differentiated?
Early phase equity financing is differentiated into an informal and a formal part
Informal funding: Private individuals who don’t have a fund structure
Formal funding: A fund investing into the start-up
—>When using external equity, everyone involved wants to participate in future profits
What makes the investor-founder relationsship complex?
Investor-founder relationships can be complex due to the seperation of ownership and control
Does ownership equal contol?
There’s a seperation between ownership and control. It not only depends on the number of shares you get, it depends on the provate individual contract you make between capatalists and your company.
What dilema do entrepreneurs of a grwing start-up face?
On the one hand, they have to raise resources to capatalize on the opportunities before them
On the other hand, to attract investors and executives, entreprenuers have to give up control over most decision making
What tradeoff do entrepreneurs face when looking for financing? (Explain the matrix as well)
Financial gain vs. level of entrepreneuer’s control
Framework of financing decision and its financing requirements
Different types of financing options
Family & Friends
Crowdfunding
Business Angel
Venture Capatalist
Strategic Investors
Types of financing in different stages of the start-ups devlopment
What kind of support beyond financial investment can be expected within different stages of the startup?
What kind of additional support can business angels provide beyond a financial investment?
Business angels could for example have extended market knowledge
Helps with the start-ups capabilities
Are banking loans suited for new venture financing?
Banking loans are not suited for new venture financing
Perspective of the entrprenuer: Banks should expand their credit policies since the only additional effort is administrative effort
Perspective of the bank: There are no profit sharing schemes for us if you are successful (no risk premium)
—>The difference of a VC is that they get shares instead of an interest rate
Why are start-ups unlikely to receive funding from banks
To receive funding from banks start-ups have to go through a strict process
This process is based on four criteria and most start-ups can’t meet these criterias
What are the credit conditions of banks?
Financial conditions
Standardized Balance Sheet and Income Statement o avoid window dressing and to enhance comparability
CRF is determined based on automated data
Analysts project firm profability
Market and competition
Probability of industry default
Publication of the banks’ portfolio within the industry
Account management
Missing data imply ineffective account management of the start-up and is evaluated negatively
Management competency
Based on experiences within the firm
—>Company risk factor (CRF)
The funding decision is based on the sustainability of the business and the creditworthiness
Creditworthiness is largely based on available data - past profability will be extrapolated
Why is a good relationsship with local bancs essential?
Possibility for building strong relationsships withkey account manager
Faster processing of funding requests possible
Higher likelihood of receiving short-term funding based on strong relationships and fast processes
—>The only type of financing from a bank you can get as a start-up: is the credit line of your bank account
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