Select all that apply. bootstrapping provides which of the following to entrepreneurs?

Chapter 12: Bootstrapping and Crowdfunding for Resources

1. What is bootstrapping? a. The “3Fs” for financial assistance
2. Friends, family, and fools ii. Very few entrepreneurs manage to get formal funding for their new ventures, especially in the early stages iii. Almost 8,500 new companies in the United States received formal equity investment in 2018. Considering that an average of 627, businesses are started every year, the likelihood of a new business getting formal investment is very, very small b. Bootstrapping: the process of building or starting a business with no outside investment, funding, or support i. Starting really small and lifting yourself by your own efforts ii. It means applying the 8 principles of entrepreneurship:
3. Identify your desired impact on the world
4. Start with the means at hand
5. Describe the idea today
6. Calculate affordable loss
7. Take small action
8. Network and enroll others in your journey
9. Build on what you learn
10. Reflect and be honest with yourself c. Practice of entrepreneurship: enables in thinking creatively about starting a business d. Bootstrapping or external financing i. Procuring resources without long-term external financing ii. New businesses: hard time finding investors iii. The entrepreneur who bootstraps needs to be clear about product and goals iv. Although it is more difficult to acquire funding from more formal channels such as venture capital firms or angel investors, there are some real benefits to the formal route:
11. You get the money you need, you gain advice and guidance from people who are more experienced, and you will get contacts and connections e. The bootstrapped startup i. The shoestring norm: by spending the time to build up the business piece by piece, you are more likely to generate a larger customer base as well as a steady stream of income ii. Financing: could be from cash from your savings, your salary, carefully use certain credit cards, or take equity out of your home

iii. Sweat equity: a non-monetary investment that increases the value or ownership interest created by the investment of hard work for no compensation f. t/f: it is usually easier to find venture capital or angel investors than it is to bootstrap i. False g. What reason did Mailchimp founder Ben Chestnut give for choosing to bootstrap? i. A. he was repeatedly turned down by potential investors ii. B. he thought that if he accepted outside funding he would lose focus iii. C. he wanted to retain complete control of the business iv. D. he never felt that any potential investor really understood small business

1. A h. Lakeishia and her partner have never started a business and are not wealthy, but they have an innovative idea that may revolutionize recycling printer toner cartridges. What source of funding is the most likely to procure in the early stages of their startup? i. A. a government grant ii. B. a bank loan iii. C. an “angel” investor iv. D. bootstrapping

2. D i. ___ is the increase in value or ownership created by someone as a result of hard work i. A. venture capital ii. B. crowdsourcing iii. C. sweat equity iv. D. marketing

3. C j. Select all that apply: Bryanne Leeming bootstrapped Unruly Studios by using which of the following? i. A. Kickstarter ii. B. winning startup competitions iii. C. private equity iv. D. angel investors

4. A and B

5. Bootstrapping strategies a. Involves being creative and using resources to get started b. The focus should be on the amount of cash you have at your disposal c. Be mindful of the cash flow: to keep your business afloat

6. B, C, and D e. t/f: crowdsourcing can be a crucial resource for obtaining information for your startup i. True f. t/f: crowdsourcing can provide a cost-saving alternative to hiring traditional creative talent for a new enterprise i. True

7. Crowdfunding startups and entrepreneurship a. Crowdfunding: raised resources from all types of businesses i. A democratized method of raising money for upcoming entrepreneurs ii. Approximately $34 billion was raised globally through crowdfunding in 2017, with North America and Europe dominating the industry iii. According to the 2012 American Dream Composite Index, crowdfunding backers tend to be between the ages of 24 and 35, are more likely to be men, and have an income of more than $100,000 per year b. Types of crowdfunding sites i. US-based Kickstarter is the most well-known crowdfunding site

8. Charges processing fees and a percentage of funds collected

9. Backers receive some reward for contributing

10. Alternative to Kickstarter: indiegogo, the largest global fundraising site c. Equity crowdfunding: a form of crowdfunding that gives backers the opportunity to become shareholders in a company i. Gives investors the opportunity in exchange for ownership or the promise of future returns d. Select all the apply: according to the American Dream Composite Index (2012), crowdfunding backers tend to be which of the following? i. A. women ii. B. men iii. C. people who have an income of over $100, iv. D. between the ages of 36 and 50

11. B and C e. t/f: crowdfunding is generally reserved as a fundraising mechanism for large (over $50,000) projects i. False f. What is the most established crowdfunding site? i. A. Patreon ii. B. GoFundMe iii. C. Kickstarter iv. D. Indiegogo

1. C

g. Select all that apply: which of the following are among the basic rules at Kickstarter? i. A. projects can’t fundraise for charity ii. B. projects must offer financial incentives to backers iii. C. projects must be honest and clearly presented iv. D. projects must create something to share with others

1. A, C, and D h. t/f: crowdfunding seems to have peaked in late 2017. i. False
2. The four contexts for crowdfunding a. Patronage model: a crowdfunding model where backers do not expect any direct return for their donation or investment i. Financial support given by backers without any expectation
3. Patreon gives patrons the options to fund illustrators, authors, podcasters, musicians, and other independent creators b. Lending model: a crowdfunding model where funds are offered as loans with the expectation that the money will be repaid i. Reimbursement can be in different ways ii. Backers may waive off loans also in some instances c. Reward-based crowdfunding: a crowdfunding model that rewards backers for supporting a project i. Entrepreneurs often give unique offerings d. The investor model: a crowdfunding model that gives backers an equity stake in the business in return for their funding i. Backers can buy shares in the company or get a share of future profits e. The advantages of crowdfunding for global entrepreneurs i. Saves money on marketing ii. Builds relationships with customers iii. Committed customers: spread the word iv. Make new contacts f. If a backer gives financial support without expecting any direct return, they are following a(n) ___ model. i. A. investor ii. B. patronage iii. C. reward-based iv. D. lending
4. B g. t/f: in the lending model, it is understood that the money will be repaid, sometimes with interest

i. The income statement: a financial report that measures the financial performance of your business on a monthly or annual basis 1. Subtracts the COGS and expenses from the total revenue a. Operating expenses: the expenditures that the company makes to generate income i. It reflects depreciation and amortization 1. Depreciation is referred to as a “noncash” expense a. Replacement is needed in the long term b. Operating profit: the amount left over from revenue once all costs and expenses are subtracted c. Interest expense: the extent of the company’s debt burden as well as representing any interest owed on borrowed money 2. Net income: income left after all costs, expenses, and taxes have been paid a. The balance sheet and cash flow statements need to be analyzed for an accurate picture 3. Backlog: orders that have been received but not delivered to the customer ii. The balance sheet: a financial report that shows what the company owes and owns, including the shareholders’ stake, at a particular point in time

1. Shows assets, liabilities, and shareholder equity
2. Current assets: cash and other assets, such as inventory, accounts receivable, and prepaid expenses that can be converted into cash within a year a. Accounts receivable: money owed to the company for goods or services provided and billed to a customer b. Prepaid expenses: payments the company has already made for services not yet received
3. Fixed assets: property, plant, and equipment
4. Other types of assets: a. Goodwill: price paid for an asset in excess of its book value b. Intangible assets: the value of patents, software programs, copyrights, trademarks, franchises, brand names, or assets that cannot be physically touched c. Long term investments: assets that are more than 1 year old and are carried on the balance sheet at cost or book

value with no appreciation 5. Liabilities and shareholder equity a. Liabilities: economic obligations of the company, such as money it owes to lenders, suppliers, and employees b. Current liabilities: bills that must be paid within 1 year of the date of the balance sheet c. Accounts payable: money owed by a business to its suppliers d. Accrued expenses: costs incurred by the company for which no payment has been made, such as wages and taxes e. Short-term debt: the portion of long-term debt that must be paid within a year, such as bank loans f. Long-term debt: an obligation for debt that is due to be repaid in more than 12 months g. Shareholder equity: the money that has been invested in the business plus the cumulative net profits and losses the company has generated i. Retained earnings: the cumulative amount of profit retained by the company and not paid out in the form of dividends to owners ii. Capital stock: the original amount the owners paid into the company plus any additional paid- in capital to purchase stock in the company iii. The cash flow statement: a financial report that details the inflows and outflows of cash for a company over a set period of time

1. Tracks the movement of cash into and out of the company a. Includes loans, sales, interest, and shares b. Only cash transactions affect cash flow
2. Cash flow statements: cash generated from operations
3. Net income vs. cash flow a. Net income: determined by accounting principles b. Cash flow: deals only with the actual cash transactions b. What is a financial report that measures the financial performance of your business on a monthly or annual basis? i. A. balance sheet ii. B. cash flow statement iii. C. backlog iv. D. income statement
4. D c. T/F: the sale of stock is not included in the cash flow statement

on the ___ i. A. owner’s equity statement ii. B. current assets iii. C. income statement iv. D. balance sheet

1. D
2. The journey of cash: the cash conversion cycle a. Used to buy materials then made into products b. Products in inventory are sold c. The company collects cash for the selling price, hopefully at a profit d. The cash conversion cycle (CCC): the number of days cash is tied up in production and sales i. CCC = DSO + DOI - DPO e. The journey: leaving the company to the point of return i. Days sales outstanding (DSO): measures the number of days that it takes to collect on accounts receivable
3. If you do business in cash, this is zero
4. DSO = average accounts receivable / revenue per day a. Average accounts receivable = (beginning accounts receivable + ending accounts receivable)/ b. Revenue per day = revenue / 365 ii. Days of inventory (DOI): measure of the average number of days it takes to sell the entire inventory of a company
5. DOI = (average inventory) / COGS per day a. Average inventory = (beginning inventory + ending inventory)/ b. COGS per day = COGS/ iii. Days payable outstanding (DPO): measure of the number of days it takes you to pay your bills
6. DPO = average accounts payable / COGS per day a. Average accounts payable = (beginning accounts payable + ending accounts payable)/ b. COGS per day = COGS/ f. To calculate CCC, include: i. Income statement: beginning and ending inventory ii. Revenue and COGS: beginning and ending accounts receivable iii. Balance sheet: beginning and ending accounts payable g. Working capital must support company growth h. Suppose you are making men’s shirts and selling them through a retail channel. The DOI is 80 days. You purchase enough cotton material to make a shirt. This purchase creates an obligation for the shirt maker to pay (accounts

payable) for this material in 30 days (DPO). The raw material arrives (inventory) and the manufacturing process begins. i. At the end of 80 days, the completed shirt is sold to the retailer (DOI). The retailer now has an obligation to pay the shirt maker (accounts receivable) and takes 40 days to pay for the completed shirt. This means that from the time cash left the shirt maker 30 days after the purchase of raw material, it took 90 days for cash to make its way back to the shirt maker. In this case the formula would be: 1. CCC = DSO + DOI - DPO 2. = 80 + 40 - 30 3. = 90 i. The number of days a company’s cash is tied up in production is the ___ cycle i. A. cash collection ii. B. cash conversion iii. C. revenue conversion iv. D. sales collection

1. B j. To calculate average accounts payable, the company ___ i. A. adds beginning receivables to sales and subtracts accounts payable ii. B. takes total sales and divides by 2 iii. C. divides the cost of goods sold by 365 iv. D. adds beginning and ending accounts payable and then divides by 2
2. D k. What is the measure of the average number of days it takes to sell the entire inventory of a company? i. A. DPP ii. B. CCC iii. C. DOI iv. D. DSO
3. C l. T/F: a profitable company will have a cash conversion cycle of fewer than three weeks i. False
4. Building pro forma financial statements a. Make projections and build pro forma statements i. They give an idea of the actual statement ii. Should contain three scenarios of financial forecast: manipulate revenue and cost drivers iii. Strategically compelling and operationally achievable, and they must

ii. B. first-person iii. C. early-stage iv. D. secondary

1. A
2. Building assumptions: operating policies and other key assumptions a. Operating policies affect the speed of cash flow back into the company i. Purchasing policy: the price and timing of raw materials, and other goods and services necessary to build, sell, and support products ii. Pricing policy: how pricing will be determined for your products and services iii. Compensation policy: the level of compensation and benefits for each type of position in the business iv. Credit policy: the process and timing in which obligations to pay for products and services sold will be billed and collected v. Payables policy: the process and timing in which obligations to pay for goods and services received by the business will be paid vi. Inventory policy: the level of various types of inventory (eg. raw materials, work in process, finished goods) maintained and the speed with which inventory moves from the business to the customer b. What is the policy which manages the price and timing of raw materials and other goods and services necessary to build, sell, and support products? i. A. inventory ii. B. purchasing iii. C. pricing iv. D. compensation
3. B c. T/F: the payables policy deals with the process of timing of paying for goods and services bought by the business i. True d. T/F: operating policies can greatly affect the speed at which cash makes its journey back to the company i. True e. What is the policy dealing with the process and timing in which obligations to pay for products and services sold will be billed and collected? i. A. operating ii. B. debit iii. C. credit iv. D. fixed assets
4. C f. What is the policy to decide the level of pay and benefits for each type of position in the business?

i. A. pricing ii. B. cash on hand iii. C. purchasing iv. D. compensation

1. D

Chapter 13: Financing for Startups

1. What is equity financing? a. Equity financing: sales of shares of stock in exchange for cash i. It gives entrepreneurs capital, which are financial resources to run the business including producing and selling the productq b. Secure a better deal with investors at a later stage c. Competition: driving force for investment d. Splitting the ownership pie i. Investment to enhances growth: pie becomes bigger ii. Dividing the pie after investment can cripple a startup team iii. A common example of four students working on a venture in an entrepreneurship course.
2. They split equity four ways and each gets 25%/ the even incorporate the business. The class ends and one student really takes the idea forward and the other three are slackers, yet they all want to keep their 25% stake in the company.
3. What do you do? Legally, they may have a right to that 25%, but it’s not really the right thing.
4. New entrepreneurs make two mistakes: the first is to divide the pie before you build the company. This is quite common, and often founders often wind up where my hapless student did. The other mistake is dividing up the pie after you build the company, which often leads to internal battles that can cripple a startup team. e. Stages of equity financing i. Seed-stage financing: small or modest amounts of capital or money paid to entrepreneurs to prove a concept ii. Startup financing: money provided to entrepreneurs to enable them to implement their idea by funding product research and development iii. Early-stage financing: larger amounts of funds for companies that have a team in place and a product or service piloted, but as yet show little or no revenue iv. Second or later stage financing v. Third or mezzanine stage of financing through IPOs (initial public offering)

i. A. early-stage ii. B. equity stage iii. C. seed-stage iv. D. startup

1. C
2. The basics of valuation a. Before entrepreneurs seek equity investment, they must know the value of their company b. Fundraising: investors will expect to see an approximate valuation in your business c. How can entrepreneurs value their companies? i. Use available tools to assess their company’s worth ii. Typically entrepreneurs value their companies based on the firm’s potential in their chosen market
3. The easiest way to do this is to check out similar companies operating in the same industry to see how they are being valued d. How do investors value startups? i. Investors fund startups for different reasons:
4. Know the criteria to attract investors a. Inventors will want to know your experience and your team’s past successes b. They will want to see how many people use your product or service
5. Have a distribution channel a. Distribution is so important that PayPal co founder Peter Thiel believes that “poor distribution - not product - is the number one cause of failure”
6. Negotiate to decide on a valuation a. It often takes quite a bit of negotiation before entrepreneurs and investors agree on what they both consider a fair valuation of the company ii. Pre-money value: the company’s value before it receives outside investment iii. Post-money value: the company’s value after it receives a round of financing e. The age of the unicorn i. Unicorn: tech startup that has received a $1 billion valuation, as determined by private or public investment
7. Rare, but becoming common a. There is a less than 1% chance of startups becoming one

after raising venture capital 2. There are 35 unicorn companies in the United States f. Convertible debt:a short-term loan that can be turned into equity when future financing in acquired i. The middle ground between debt and equity financing

1. The initial debt converts to shares of stock ii. Benefits and advantages:
2. Valuation becomes easier a. You don’t have to spend lots of time trying to figure out how much your company is worth to establish a stock share price
3. Investors may be entitled to a discount a. This can provide an incentive for your investors to commit
4. Entrepreneur will remain the majority stockholder a. There will be no interference from the lenders - depending on the terms, they will have no control, no voting rights, nor any say over how you run your company iii. Cautions and disadvantage:
5. Early lenders and risk a. Early lenders may not want to take the risk of having their money tied up until the debt is converted into equity b. They may also be wary of losing money if the conversion event doesn’t happen g. Why do Shark Tank investors talk about pre-money valuation? i. A. it brings in other investors ii. B. it gives them the amount the company is worth iii. C. it shows the entrepreneur how to value the company iv. D. it helps them decide how much ownership to take with their offer
6. D h. Typically entrepreneurs value their companies based upon ___ i. A. competition sales ii. B. early sales iii. C. potential in chosen market iv. D. consultants; valuations
7. C i. Why is it essential for an entrepreneur to know the value of a company prior to seeing investors? i. A. to know how much equity to give up

experience, they are in a great position to advise and mentor entrepreneurs 2. Corporate angels: individuals who are usually former business executives, often from big multinationals, looking to use their savings or current income to invest a. Although they primarily seek profit, many corporate angels want to play a larger part in the company, often seeking a paid position in the venture b. Corporate angels can often can become frustrated with working in a small company with limited resources i. Corporate angels may be very controlling 3. Professional angels: doctors, lawyers, dentists, accountants, consultants, etc. who use their savings and income to invest in entrepreneurial ventures a. Most silent investors, but some may wish to be taken on by the company as paid advisors 4. Enthusiast angels: independently wealthy retired or semi-retired entrepreneurs or executives who often invest their personal capital in startups as a hobby a. Tend to invest in several different companies and rarely take a role in active management 5. Micromanagement angels: entrepreneurs who have achieved success in their own companies and want to be involved in the ventures they invest in a. Many demand dictatorship or a position on the board of advisors and expect regular updates on the running of the company ii. Angel groups

1. Angels pool funds to invest in a venture to work together a. Meet regularly to hear pitches, and ask the entrepreneurs questions b. Spread all over the country and specialize in specific areas
2. Research suggests that women are better investors than men a. In 2017 , almost ¼ angel-backed companies were led by women
3. Angel investors get you over the hurdle that is referred to as the “valley of death,” that stage when there is no steady stream of revenue and the company may be burning through cash e. t/f: one reason an angel may reject a pitch is for geographical reasons i. True

f. What population continues to be underrepresented by angel groups? i. A. older entrepreneurs ii. B. millennials iii. C. women iv. D. minorities

1. D g. This ___ angel investor is often from a big multinational and typically wants a paid position in the venture. i. A. anonymous ii. B. family iii. C. entrepreneurial iv. D. corporate
2. D
3. Venture capitalists a. Professional money managers i. Look for opportunities for return on their investments ii. Typically, these venture capital money managers form a venture capital limited partnership fund that earns money through ownership of equity in different companies iii. The fund goes through a 10 year cycle before it dissolves and the assets are distributed to each of the partners iv. Look for ventures that have received seed funding v. Not impossible for startups to receive venture capital b. A brief history of venture capital i. Trace its roots back to the early 20th century ii. The ARD (American Research and Development) is mostly recognized for its enormously successful investment in DEC (Digital Equipment Company) in 1957 when its initial investment of $70,000 was valued at more than $355 million when DEC went public in 1968
4. ARD was created in 1946 by cofounder and Harvard Business School professor General Georgia F. Doriot (considered the father of venture capital) iii. The Small Business Investment Act of 1958 furthered the progress of the venture capital industry, as it officially allowed small-business investment companies (SBICs) to finance entrepreneurial ventures seeking startup capital iv. The dotcom bubble
5. Blinded by the race to find the “next best thing,” investors poured money into startup internet companies without giving too much thought to how these companies would turn a profit, if ever