Entrepreneurship Finance & Venture Capital (19CI35833)
||Ma.Teresa Corrales Verdugo
||Economía, Finanzas y Contabilidad
Basic knowledge in finance and in valuation.
Course Learning Objectives
The objective of this course is to understand the practices and analyse the challenges facing entrepreneurs when looking for finance, in seed or start-up stages, when growing their venture, or when managers decide to buy a business to became owners to manage an existing company
The course will cover various topics. Firstly, it will analyse how to obtain financing, alternative sources of financing, and their characteristics. Among these sources are business angels, venture capital and other capital, both public and private. Furthermore, the course will present the challenge of valuing a business and reaching an agreement on price, and exchanging a percentage of the venture for cash. Time will also be devoted to the important task of structuring deals, negotiating key clauses, and solving conflicting situations, both from the point of view of the entrepreneur and investor.
All these topics will help us to work in detail with financial plans, valuations, and contracts (especially the shareholders' agreement), and, finally, to think about harvesting, or selling the venture, in order to enable our investor group, and of course the founders, to exit and get a nice return.
The content covers three objectives, and is divided into three interconnected modules:
- Module 1: Introduction to entrepreneurial finance . The objective of this module is to understand the complete process for obtaining external finance, possible alternatives, and the relationship between entrepreneurs and investors. Emphasis is placed on understanding two types of investors: business angels and venture capitalists. From there, the course analyses the business plan from the investor perspective, and the complex task of preparing a detailed financial plan. Understanding the venture's financial needs, and how to cover them, is key for the survival and growth of a company.
- Module 2: Valuation of start-ups and return for investors . In the second module we will review the classical valuation methodologies before moving to the venture capital approach to valuing companies, a method designed to value start-ups. Understanding pre-money, post-money valuation, or carried interest, in the different rounds of financing, will be fundamental when the entrepreneur is approached by investors. Finally, we will look at returns from the perspective of the investor, both in terms of the times they multiply their money, and in terms of the internal rate of return (IRR).
Module 3: Entrepreneurship by acquiring a company. The term sheet. The exit . This module will deal with how to structure an investment - with a special focus on a key document: the term sheet. An understanding of the implications of the main clauses of the term sheet is essential for any entrepreneur.
IWe will also focus on more mature businesses and how to become an entrepreneur without starting your own business, for example, by acquiring the firm you work for (management buyout, MBO), or by participating in a search fund. We will analyse how leveraged buyouts (LBOs) work, both from a financial perspective and from an incentive perspective. We will study in depth two types of entrepreneurship, by acquisition, that are very attractive to young graduates: buy & build and search funds.
To close the investment cycle, in the final session we will reflect on harvesting, from the entrepreneur perspective and from the perspective of the other affected stakeholders, such as key employees, as well as equity investors who are expecting a profitable exit. The different exit strategies will be analysed to gain an understanding of the pros and cons of each option. Valuation is not always the only variable to consider when selling a business and other issues will be taken into account.
1. Module 1: Introduction to entrepreneurial finance The objective of this module is to understand the complete process for obtaining external financing, possible alternatives and the relationship between entrepreneurs and investors. Special time will go to understand two types of investors: business angels and venture capitalists. From there the course will move to the analysis of the business plan from the investors' perspective, and to the complex task of preparing a detailed financial plan. Understanding the venture's financial needs, and how to cover them, is key for the survival and growth of the company.
2. Module 2: Valuation of start-ups and deal structuring In the second module we will review the classical valuation methodologies before moving to the venture capital approach to valuing companies, a method designed to value start-ups. Understanding pre-money, post-money valuation or carried interest, in the different rounds of financing, will be fundamental when the entrepreneur is approached by investors. The module will get to deal with structuring an investment - with a special focus in a key document: the term sheet. Understanding the implications of the main clauses in the term sheet will be a need for any entrepreneur. We will also review other key contracts involved in an equity transaction.
3. Module 3: Leverage buy-outs, management buy-outs, other deals and the exit The last module will have a focus on more mature businesses and how to become an entrepreneur without starting your own business, for example acquiring the firm your work for (management buy out) or by participating in a search fund. We will analyse how leverage buy-outs work, both from a financial perspective and from an incentive perspective. The option of becoming the owner of the business where you work, through an MBO, with a financial sponsor, will be reviewed. Then we will examine more innovative ways of entrepreneurship, such as buy & built deals or search funds. In the last session we will think about harvesting, from the entrepreneur perspective and from other stakeholders affected, such as key employees and the equity investors, which are expecting a profitable exit. The different exit strategies will be analysed, trying to get a sense of pros and cons of each option. Valuation is not always the only variable to consider when selling a business and other issues involved in the sale will be taken into account.
Classes have a strong focus on practical content, and will combine discussion of cases, illustration of key theoretical concepts and presentations.
Guess speakers, with experience in the different areas covered, both entrepreneurs and investors or advisors involved in the deals, will allow participants to acquire knowledge first hand.
Participants will be divided in groups. The purpose of this assignment is to analyze a new venture, or an existing project in current development and to present it to in potential investors (assume they are VCs) in order to get the money to finance it. The idea is to describe the opportunity and the value proposition, to explain the business model and the assessment of the money needed for the financing round, how the money will be used, what type of investors are sought, what is the expected return for investors. etc.
Assume you are being hired by the entrepreneurs, as an expert, to help them out in their next round of financing. In other words, you are working on behalf of the new venture with the goal of securing the next round of financing.
Ideally, you should pick an existing startup (or a project within an existing firm that could develop into a spinoff) in which you have access to actual data. Alternatively, you can develop your own project.
The individual test will allow you to show you have gained the main learnings from the course.
The final grade will be based on class participation, the grade of all group assignments, and the individual test grade.
Class participation: 30%
Group assignments (peer adjusted): 40%
Individual test: 30%
Grading class participation is necessarily subjective. However,we will try to make it as objective as possible'. Some of the criteria for evaluating effective class participation include:
1 Is the participant prepared? Do comments show evidence of case analysis? Do comments add to an understanding of the situation? Does the participant go beyond simple repetition of case facts? Do comments show an understanding of theories, concepts, and frameworks presented in class or reading materials?
2 Is the participant a good listener? Are the points made relevant to the discussion? Are they linked to the comments of others? Is the participant willing to interact with other class members?
3 Is the participant an effective communicator? Are concepts presented in a concise and convincing way?
The group assignment grade will be the weighted average of: class group assignments (20%); mid-term (30%); and final group assignment (50%). Each participant will have an adjusted grade, based on the results of peer valuation. This means that members of the same group may receive very different final grades.
All assigned readings are included in the "readings" booklet. Some recommended books for those interested in going deeper in the subject are:
- Alemany & Andreoli (2018), :"Entrepreneurial Finance: The Art and Science of Growing Ventures?, Cambridge University Press
- Ante, S. (2008) "Creative Capital: George Doriot and the Birth of Venture Capital" - HBS Press
- Bartlett & P. Economy (2002) "Raising Capital for Dummies"- Wiley Publishing
- Benjamin, G. & Margulis, J. (2001) "The Angel Investor's Handbook: How to Profit from Early-Stage Investing" - Vision Book
- Bussgang, J. (2010) "Mastering the VC Game" - Portfolio Penguin
- Bygrave, W., Hay, M. & Peeters, J. (1999) "The Venture Capital Handbook" Prentice Hall
- Campbell, K. (2003) "Smarter Ventures" - Prentice Hall
- Cendrowski, H., Martin, J., Petro, L. & Wadecki, A. (2008) "Private Equity: History, Governance and Operations" - Wiley
- Cumming, D & Johan, S. (2009) "Venture Capital and Private Equity Contracting" - Academic Press
- Draper, W. & Schmidt, E. (2011) "The Startup Game: Inside the Partnership between Venture Capitalists and Entrepreneurs" - Palgrave Macmillan
- Feld, B. et al (2011) "Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalists" - Wiley
- Gompers, P. & Lerner, J. (2002) "Entrepreneurial Finance" - Wiley
- Gompers, P. & Lerner, J. (2001) "The Money of Invention" - Harvard Business School Press
- Gupta, U. (2000) "Done Deals" - Harvard Business School Press
- Kocis, J., Bachman J., Long A. & Nickels, C. (2009) "Inside Private Equity" - Wiley
- Lawton, K & Marom, D. (2013) "The Crowdfunding Revolution" - McGrawHill
- Lutoff-Carroll, C., Pirnes, A. & Withers LLP (2009) "From Innovation to Cash Flows" - Wiley
- Manigart, S. & Meuleman, M. (2004) "Financing Entrepreneurial Companies" - Larcier
- Perkins, T. (2007) "Valley Boy" - Gotham Books
- Sahlman, W., Stevenson, H, Roberts, M. & Bhidé, A. (1999) "The Entrepreneurial Venture" - 2nd Edition - Harvard Business School Press
- Smith J. & Smith R. (2004) "Entrepreneurial Finance" 2nd Edition - Wiley
- Schertler, A. (2006) "The Venture Capital Industry in Europe" - Palgrave Macmillan
- Timmons, J., Spinelli, S. & Zacharakis, A. (2004) "How to Raise Capital: Techniques and Strategies for Financing and Valuing Your Small Business" - McGraw Hill
- Wilmerding, A. (2006) "Term Sheets and Valuations" - Aspatore Books
Timetable and sections
||Ma.Teresa Corrales Verdugo
||Economía, Finanzas y Contabilidad