Entrepreneurial Finance - Introduction and Overview of Entrepreneurial Finance

Entrepreneurial Finance 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? Unprecedented Flow of Funds into Start-up Companies 120 $ billion 100 80 60 40 20 0 1980 1985 1990 Investment 1995 Fundraising Data Source: Venture Economics 2000 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. 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 Study interaction of finance and strategy 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 Course Overview „ Module 1: Business Valuation – Framework for qualitative and quantitative evaluation of new business opportunities » DCF Method » Venture Capital Method » Real Options Method 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 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 Course Overview „ Module 4: Employment Issues – Joining start-ups – Valuing alternative compensation plans „ Module 5: Exit – IPO – Sale – Liquidation 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 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 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 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! Final Exam „ „ „ „ 60% of your grade Case based Take home exam I grade the exams, not T.A. 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 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 Unprecedented Flow of Funds into Start-up Companies 120 $ billion 100 80 60 40 20 0 1980 1985 1990 Investment 1995 Fundraising Data Source: Venture Economics 2000 World wide rise in New Venture Financing 30000 30000 25000 25000 20000 20000 15000 15000 10000 10000 5000 5000 0 0 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 EUR in billions Fund Flows into Companies - Europe 1989-1999 Year Data Source: European Venture Capital Association New Funds Raised Investments Unprecedented Number of IPOs VC backed IPOs 300 250 200 150 VC backed IPOs 100 50 0 8 19 0 8 19 2 8 19 4 8 19 6 8 19 8 9 19 0 9 19 2 9 19 4 9 19 Data Source: SDC 6 9 19 8 0 20 0 But there are Differences ... IRR (%) For US Venture Capital Firms 1992-1998 150 100 % 50 Max imum IRR Median IRR 0 92 93 94 95 96 97 -50 -100 -150 Year Data Source: Venture Economics 98 Minimum IRR 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 Small Firms are Increasing in Importance in the Economy US Small Business Firms 1988 - 1998 6 300 5.8 250 200 5.4 150 5.2 5 100 4.8 50 4.6 0 4.4 88 89 90 91 92 93 94 95 96 97 98 Year Data Source: U.S. Census Bureau $ in million in million 5.6 # of Start-up Firms Tax Revenues But Uncertainty is High Business Turnover 1990 - 1998 700000 600000 500000 400000 Firm Terminat ion 300000 Firm Birth 200000 100000 0 90 91 92 93 94 95 96 Year Data Source: U.S. Census Bureau 97 98