WEEK 4 (chapter 10)

Question 1

Why is it dangerous for entrepreneurs to delay thinking about raising capital?

Answer 1

Because they often make

1. poor financial decisions due to inexperience
2. over-rely on limited sources
3. don’t know the full range of funding options

Question 2

What is the consequence of approaching fundraising haphazardly?

Answer 2

Running out of money or accepting poor financing deals that could hurt long-term viability

Question 3

Entrepreneurial firms usually need funding early on for 3 main reasons

Answer 3

1. cash flow challenges: as businesses grow, it needs more cash for operations. and there’s often a lag between spending and earning revenue
2. capital investments: Start-ups need money to buy equipment, lease space, or develop infrastructure

At first, these are often leased or shared; over time, owning makes more sense

3. lengthy product development cycles:
   - Especially in tech or health sectors.
   - High upfront costs before generating revenue.
   - Firms may partner to spread the risk and costs

Question 4

What is the burn rate?

Answer 4

The speed at which a firm spends capital before reaching profitability. High burn rate = higher risk of failure.

burn rate belongs to cash flow challenges !

Question 5

burn rate belongs to

Answer 5

cash flow challenges

Question 6

three kinds of personal funding

Answer 6

1. personal funds: Includes both money and sweat equity (time/effort invested)
2. friends and family: loans, gifts or investments
3. bootstrapping: avoids external financing by
   - cost-cutting
   - using creativity/thriftiness
   - leveraging internal resources

Question 7

3 rules for handling family and friends as a personal funding source professionally

Answer 7

1. present the requires formally and respectfully
2. use a promissory note (loan agreement with repayment terms)
3. ask only those legitimately in a position to help

Question 8

sweat equity

Answer 8

The value of the work, time, and energy that founders contribute before the company becomes profitable

Question 9

Why is bootstrapping attractive for early-stage startups?

Answer 9

It allows them to RETAIN CONTROL, AVOID DEBT or EQUITY DILUTION, and build a lean, resilient business using minimal outside capital

Question 10

What are the three key steps in preparing for financing (debt or equity)?

Answer 10

1. Determine how much is needed
2. Choose between debt and equity
3. Develop an engagement strategy

Question 11

Why is it important to determine how much funding is needed before fundraising?

Answer 11

To avoid under- or over-asking. This amount should be clearly defined in the business plan to ensure credibility and precision

Question 12

What is the difference between equity and debt financing?

Answer 12

Equity financing: You sell ownership (shares) in exchange for capital.

➡️ Often leads to a liquidity event, such as selling the company or going public.

Debt financing: You borrow money and repay it later with interest. No ownership is given up.

Question 13

What is a liquidity event, and when does it occur?

Answer 13

A liquidity event is when ownership is converted into cash, like in an acquisition, IPO, or buyback.

Question 14

What is the purpose of an elevator pitch in fundraising?

Answer 14

To deliver a clear, compelling summary of your business in 45 seconds to 2 minutes, explaining the value, vision, and opportunity to potential investors or lenders.

Question 15

What is the main drawback and main benefit of equity funding?

Answer 15

Drawback: You lose part of ownership in your business.

Benefit: You don’t have to repay the funds like a loan — no debt, no interest.

Question 16

what are the sources of equity funding

Answer 16

1. business angels
2. venture capital
3. initial public offering

Question 17

Who are business angels?

Answer 17

Wealthy individuals who invest personal money in early-stage startups.

They often bring expertise and network and ARE NOT PART OF THE FIRM, they invest interdependently

Question 18

are business angles part of the firm

Answer 18

no they are not part of the firm, they invest interdependently

Question 19

What is the yield rate in angel investing?

Answer 19

The percentage of proposals or pitches that actually result in an investment. It reflects how selective angels are.

Question 20

What are venture capital firms and when do they usually invest?

Answer 20

Venture capital (VC) firms invest in high-growth, scalable startups — usually after business angels, when the company is further developed.

Question 21

difference business angels and venture capital

Answer 21

business angels: early stage
venture capital: growing stage

Question 22

how does venture capital work

Answer 22

Venture capital (VC) firms don’t invest their own money. Instead:

• They collect money from Limited Partners (LPs)
  (Think: pension funds, universities, billionaires)
• The VCs who manage the fund are called General Partners (GPs).
  Their job: find great startups to invest in, manage the money, and make a profit for everyone.

Question 23

In a venture capital firm, who are the limited partners and who are the general partners?

Answer 23

• Limited partners: Investors who provide most of the capital
• General partners: Fund managers who select startups, manage the investments, and make decisions

Question 24

What is carry in venture capital?

Answer 24

The profit share (usually 20–25%) that general partners earn if the investment succeeds.

Question 25

three kinds of activities for venture capital 1. follow on funding 2. corporate venture capital 3. due diligence

Answer 25

1. follow on funding: Giving more money to a startup they already invested in, if it’s doing well 2. corporate venture capital: It’s when a big, established company (like Google, Shell, or Pfizer) invests in a startup, just like a venture capital firm would. 3. due diligence: The investigation process: checking if the startup’s claims are true before giving money

Question 26

What is an Initial Public Offering (IPO)?

Answer 26

When a private company sells shares to the public for the first time, becoming a publicly traded company.

Question 27

What are the key steps in launching an IPO?

Answer 27

1. Hire an investment bank 2. Submit a prospectus and a final prospectus to the SEC 3. Go on a road show to promote the shares to institutional investors

Question 28

What is a private placement, and how is it different from an IPO?

Answer 28

In a private placement, a firm sells shares to one or a few large investors privately — no public offering, no SEC road show required.

Question 29

What are the two most common types of debt financing loans for startups?

Answer 29

1. Single-purpose loan: A fixed amount borrowed for a specific use, with a set repayment timeline 2. Line of credit: A flexible borrowing limit — you draw what you need, when you need it

Question 30

What are the advantages of debt financing? ownership and tax

Answer 30

- The entrepreneur keeps full ownership (no equity loss) - Interest payments may be tax-deductible

Question 31

What are the disadvantages of debt financing?

Answer 31

1. Debt must be repaid, regardless of success 2. Risk of losing collateral (e.g., equipment, property) 3. Lenders can impose strict terms or covenants

Question 32

Why are commercial banks not usually a good option for startup loans?

Answer 32

They are risk-averse and often reluctant to lend to early-stage companies without a proven track record or solid collateral

Question 33

What is the SBA 7(A) Loan Guarantee Program?

Answer 33

The most common U.S. government-backed loan for small businesses.

Question 34

What is peer-to-peer lending in startup financing?

Answer 34

Borrowing money through online platforms that connect individual lenders directly with borrowers — usually faster and more flexible than banks

Question 35

What is vendor credit?

Answer 35

When a supplier allows a startup to buy goods/services now and pay later — often within 30 to 90 days. This helps preserve cash flow.

Question 36

What is factoring, and how does it work?

Answer 36

A startup sells its unpaid invoices (accounts receivable) to a third party (a factoring company) at a discount, in exchange for quick cash

Question 37

What is crowdfunding in entrepreneurship?

Answer 37

Raising small amounts of money from many individuals online, typically through platforms like Kickstarter or Seedrs

Question 38

Before 2016, who could participate in equity-based crowdfunding in the U.S.?

Answer 38

Only accredited investors — individuals with high income or net worth

Question 39

What changed in 2016 regarding equity crowdfunding?

Answer 39

It was opened to the general public, allowing anyone to invest in startups online — not just accredited investors

Question 39

What are the two main types of crowdfunding, and how do they differ?

Answer 39

Rewards-based: Supporters get a product or perk in return Equity-based: Contributors become shareholders, owning a portion of the company

Question 40

What is a lease, and why might a startup use one?

Answer 40

Leasing allows a business to rent equipment or space instead of buying it, preserving cash and avoiding large capital outlays

Question 41

What are venture-leasing firms?

Answer 41

Specialized firms that help startups lease equipment or property when they don’t yet qualify for traditional loans

Question 42

What does the SBIR program offer startups?

Answer 42

U.S. government grants (over $2.5B/year) to support technological innovation in small businesses — no repayment required

Question 43

What’s the difference between SBIR and STTR programs?

Answer 43

STTR is similar to SBIR but requires the startup to collaborate with a research institution (like a university or lab)

Question 44

Why should startups be cautious when applying to grant programs?

Answer 44

Some offers are scams pretending to be official — entrepreneurs should always verify the source

Question 45

What are strategic partners in creative financing?

Answer 45

Companies or individuals who fund and collaborate with a startup in return for shared strategic value — like technology access, market reach, or long-term alignment