15.431: Entrepreneurial Finance · The World of Entrepreneurial ... Entrepreneurs have Higher...
Transcript of 15.431: Entrepreneurial Finance · The World of Entrepreneurial ... Entrepreneurs have Higher...
Course Overview: The World of Entrepreneurial
Finance
� Large increase in supply of and demand for venture
capital/private equity.
– Record amounts raised in every year 1995-2000.
– Even with drop in fundraising in 2001 it is about what it was
in 1998 and 17x the level in 1990.
– Likely to continue at relatively high rates, i.e. probably not
just boom part of cycle.
� Does this reflect a structural shift in the way new
businesses/projects are organized and financed?
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$ b
illi
on
Unprecedented Flow of Funds into
Start-up Companies
120
100
80
60
40
20
0
1980 1985 1990 1995 2000
Investment Fundraising
Data Source: Venture Economics
3
What Is Special About Entrepreneurial Finance?
� Valuing New Ventures– Large uncertainties
– Massive option values
� Financing new ventures: – Large financing needs
– Severe information problems
– Severe agency problems
� These issues are common to all new “projects,” but
here we focus on how investors and entrepreneurs
deal with them.
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Course Perspectives and Goals
� Understand the broader issues of investing in
entrepreneurial ventures
� Understand the more detailed issues of how to
evaluate and finance entrepreneurial investments
� Apply tools developed in 15.401 and 15.402, and go
beyond them:
– Issues here are more complex
– Finance most important in birth and death of firms
� Study interaction of finance and strategy
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Course Perspectives and Goals
� Ultimately our goal is to give you some of the
tools you need to:
– Start a company and finance it
– Be a venture capitalist or private equity partner
– Invest in private equity partnerships
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Course Overview
� Module 1: Business Valuation
– Framework for qualitative and quantitative
evaluation of new business opportunities
» DCF Method
» Venture Capital Method
» Real Options Method
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Course Overview
� Module 2: Structuring Investments/Financing– Terms of the initial investment/financing
» Understanding deal terms
» Evaluating deal terms
» Negotiating deal terms
– Follow-on investments
– Later Stage Deals
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Course Overview
� Module 3: Venture Capital Funds– Structure of partnership compensation
» Structure of partnership covenants
» Partnership strategies
– Corporate Venture Capital Funds
– International Venture Capital Funds
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Course Overview
� Module 4: Employment Issues
– Joining start-ups
– Valuing alternative compensation plans
� Module 5: Exit
– IPO
– Sale
– Liquidation
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Course Mechanics
� Cases (16), Lectures (6), Guests (2)
� Guideline questions for each case available
– Work in study groups of no more than 4
– Expect to grope around
» Not meant to be easy, but you'll learn more
» Do not use outside sources (library, web) to find out what
happened
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Memos
� Memos are 10% of grade
� Hand in memos for 12 out of 16 cases. Must do first
case, Technical Data Corporation
� Be ready to discuss cases even if you’re not handing
in memo
� Memos should answer two questions: – What is going on?
– What would you do?
� Write to major decision-maker
� Up to two pages of text – Attach exhibits / calculations
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Class Participation
� 30% of final grade
– Individual
– Based on quality and quantity
– Good chance for to practice in low-risk
environment
– Isn't class participation grade subjective?
» Not after 20 cases
» TA will be taking notes in class
– Mid-term participation grades
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Class Participation Process
� You know the basic rules� Listen to others and build
– Try not to change the subject
� Ask questions – Sometimes whole class is lost
� I may cold call
� Please don't come late!
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This Course Is Not For Everyone
� Requires Tolerance for Ambiguity:– Entrepreneurial ventures involve massive
uncertainty
– Not always a formula or “right answer”– Please do not take the course if you are looking
for cookbook answers
� Requires Work: – One Case/Memo Per Week
– Class Attendance
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Scheduling: Guests
� John Chory (Hale and Dorr)– Thursday, April 4th
� Alan Spoon (Polaris Venture Partners)
– Tuesday, April 9th
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Exciting Time for Entrepreneurship
� Large increase in supply and demand for
private equity
– Massive inflows of funds in to VC partnerships
– Record number of firms in the industry
� Huge opportunities
– New technologies
– Regulatory changes
– Organizational changes
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$ b
illi
on
Unprecedented Flow of Funds into
Start-up Companies
120
100
80
60
40
20
0
1980 1985 1990 1995 2000
Investment Fundraising
Data Source: Venture Economics
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20
World wide rise in New Venture
Financing
0
5000
10000
15000
20000
25000
30000
1989
1990
1991
1992
1993
1994
19
95
1996
19
97
1998
1999
0
5000
10000
15000
20000
25000
30000
Fund Flows into Companies - Europe 1989-1999
Year
EU
R i
n b
illi
on
s
New Funds Raised
Investments
Data Source: European Venture Capital Association
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Unprecedented Number of IPOs
0
50
100
150
200
250
300
1980
19
82
1984
19
86
1988
19
90
1992
19
94
1996
19
98
2000
VC backed IPOs
VC backed IPOs
Data Source: SDC
But there are Differences ...
-150
-100
0
50
100
150
92 93 94 95 96 97 98
%
i
(%)
Mini
IRR For US Venture Capital Firms 1992-1998
-50
Year
Max mum IRR
Median IRR
mum IRR
Data Source: Venture Economics22
Why is Entrepreneurship Important?
� Central to Growth and Job Creation– Small companies earn 50% of GDP
– Small companies provide 50% of jobs in the US
� Important for Knowledge Creation
– Young firms patent “groundbreaking” innovations
� Entrepreneurs have Higher Upward Mobility
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Small Firms are Increasing in Importance in the Economy
5
6
88 89 92 93 94 97 98
0
50
100
150
200
250
300
i
90 91 95 96
US Small Business Firms 1988 - 1998
4.4
4.6
4.8
5.2
5.4
5.6
5.8
Year
in m
illi
on
$ i
n m
illi
on
# of Start-up F rms
Tax Revenues
Data Source: U.S. Census Bureau 24