15.
431:
Entrepreneurial Finance
Spring 2002
Antoinette Schoar
1
Sloan School of Management MIT
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
120 100
$ billion
80
60
40
20
0
1980
1985
1990
1995
2000
Investment
Fundraising
Data Source: Venture Economics
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 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
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
10
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
11
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 youre 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
12
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
13
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!
14
Final Exam
60% of your grade Case based Take home exam I grade the exams, not T.A.
15
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
16
Scheduling: Guests
John Chory (Hale and Dorr)
Thursday, April 4th
Alan Spoon (Polaris Venture Partners)
Tuesday, April 9th
17
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
18
Unprecedented Flow of Funds into
Start-up Companies
120 100
$ billion
80
60
40
20
0
1980
1985
1990
1995
2000
Investment
Fundraising
Data Source: Venture Economics
19
World wide rise in New Venture Financing
Fund Flows into Companies - Europe 1989-1999
30000
EUR in billions
30000 25000 20000 15000 10000 5000 0
25000 20000 15000 10000 5000 0
19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99
New Funds Raised
Investments
Year
Data Source: European Venture Capital Association
20
Unprecedented Number of IPOs
VC backed IPOs
300 250 200 150 100 50 0
VC backed IPOs
8 19
8 19
8 19
8 19
8 19
9 19
9 19
9 19
9 19
9 19
0 20
Data Source: SDC
21
But there are Differences ...
IRR (%) For US Venture Capital Firms 1992-1998
150 100 50
Max imum IRR Median IRR
0 92
-50
93
94
95
96
97
98
Minimum IRR
-100 -150
Year
Data Source: Venture Economics
22
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
23
Small Firms are Increasing in
Importance in the Economy
US Small Business Firms 1988 - 1998
6 300 250 200 150 100 50 0 88 89 90 91 92 93 94 95 96 97 98
5.8 5.6 5.4 5.2
5
$ in million
in million
# of Start-up Firms Tax Revenues
4.8 4.6 4.4 Year
24
Data Source: U.S. Census Bureau
But Uncertainty is High
Business Turnover 1990 - 1998
700000 600000 500000 400000 300000 200000 100000 0
90 91 92 93 94 Year 95 96 97 98
Firm Terminat ion
Firm Birth
25
Data Source: U.S. Census Bureau
