Venture Capital and Entrepreneurial Finance

  • 16-weeks
  • 3 credits
  • Prerequisite: F370 or F304 with a grade of C or better

Covers the private equity and private debt markets that service smaller entrepreneurial firms. Specific topics include: (1) the financial contracting associated with the provision of external finance to a small informationally opaque firm, (2) angel finance and the formal venture capital market, (3) commercial banks and commercial finance companies, and (4) the financial issues associated with a leveraged buyout.

Readings:    Entrepreneurial Finance by Janet Kiholm Smith and Richard L. Smith, John Wiley & Sons, Inc., 2000  (SS        Readings packet (RP)

Grading:      Grading will consist of a written case (30%), a midterm exam (30%) and a final exam (40%).

Readings and Lecture Outline

Part I:  Financing the Entrepreneurial Firm

 An Overview of Entrepreneurial Finance (sessions 1-3)

            Topics:              the small firm balance sheet
                                    sources of small firm finance
                                    the life cycle of small business finance
                                    intermediaries and small firm finance
                                    informational opacity and small firm financial contracting
            Readings:          “The Economics of Financial Contracting” by W. Silber and G. Udell (RP)
                                    Ch 1,2, 14 (SS)

 II.  The Private Equity Market

 An Overview of the Private Equity Market (sessions 4,5)

            Topics:             history of the U.S. private equity market
                                    the U.S. regulatory environment
                                    the private equity market in the U.K., Continental Europe and Asia
                                    market structure
                                    overview of private equity investing
                                    the new venture firm:  the business plan
           Readings:          “The Economics of the Private Equity Market” by G. Fenn, N. Liang and S. Prowse (RP)
                                 Ch 3 (SS)

 Financial Forecasting and Valuation of New Ventures (sessions 6-8)

                        Topics:  financial forecasting
                                    financial statement forecasting
                                    valuation methods
                                    the First Chicago method
                                    the Venture Capital Method
            Readings:          Ch 6-9 (SS)

Venture Capital Investing and Venture Capital Contracting (sessions 9,1)

                        Topics:  obtaining venture financing
                                    asymmetric information
                                    the venture capital contract
                                   staged financing
            Readings:          GO Corporation case (RP)
                                    Ch 11-13, 14.6 (SS)

Harvesting Private Equity (sessions 11-13, 15)

                       Topics:  structure of securities underwriting industry
                                    the underwriting process
                                    the IPO
                                    firm sale (acquisition)
             Readings:          ImmuLogic Pharmaceutical Corporation (A, B-1, B-2, B-3, B-4) (RP)
                                    Ch 16 (SS)

-- Midterm Exam (session 14) --

        Fund Raising in the Private Equity Market: (sessions 16-19)

T                              Topics:  the limited partnership vehicle
                                    the process of fund raising
                                    firm specific issues
                                    the macro environment
            Readings:          Weston Presidio Offshore Capital: Confronting the Fundraising Challenge (RP)
                                    Ch 14 (SS)

III.  The Private Debt Market

        An Overview of Small Business Lending: (session 20)

                                Topics:  financial statement/cash flow lending
                                    relationship lending
                                    credit scoring
                                    asset-based lending
                                    trade credit
            Readings:          Ch 15 (SS)

       Financial Statement/Cash Flow Lending (session 21)

                                 Topics:  lines of credit
                                    term loans
                                    ratio analysis
             Readings:          Ch 15 (SS)

       Asset Based Lending: (sessions 22, 23)

                                Topics:  collateral assessment - accounts receivable eligibility
                                    collateral assessment - inventory advance
                                    daily record
                                    cash collateral account
                                    the “air ball”
             Readings:          ABC Co. case (to be written by G. Udell) (RP)

       Lender-Borrower Negotiation (sessions 24-25)

                                Topics:  negotiating a new loan
                                    understanding the loan officer’s perspective
                                    negotiating in the context of borrower distress
                                    the importance of the lending environment
            Readings:          Transportation Displays Incorporated case (RP)

Part IV:  The Entrepreneurial Alternative:  Buying Your Own Firm

       Financing Small Firm Leveraged Buyouts Using the Private Debt and Equity Markets (session 26-28)

                                Topics:  the role and nature of mezzanine finance
                                    the use of asset based lending in LBOs
                                    deal structure
             Readings:          XYZ Co. case (to written by G. Udell) (RP)

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