1. Identify and model new business opportunities
New ventures are characterized by high risk and uncertainty as well as massive growth potential. Due to lack of historical financial data and difficulty of finding comparable firms, one should be cautious when applying traditional valuation methods (e.g., DCF) to new ventures. We discuss alternative valuation approaches to assess new business plans or opportunities.
- Discounted Cash Flows (DCF) valuation framework
- WACC vs. APV
- Venture Capital (VC) method
- Real options approach
- Decision trees vs. Black-Scholes model
2. Make deals - structure financing for new business opportunities
Entrepreneurs may have multiple funding sources, each of which leads to a different allocation of value and control of their business. We discuss relative benefits and costs of alternative funding sources. For instance, we consider convertible preferred stock and its value implications for both entrepreneurs and investors. We also discuss devices to deal with potential conflict of interest between entrepreneur and investor, such as staged financing, liquidation rights, and anti-dilution clauses.
- Dynamic allocation of value and control between entrepreneurs and investors
- Angel investor, venture capitalist, corporate venture investment, and others
- Financing strategy and product market strategy
- Potential conflicts of interest between entrepreneurs and investors
- Within-venture conflicts of interest among entrepreneurs
- Term sheet
- Convertible (participating) preferred stock
- Staged financing
- Liquidation rights
- Employee incentive plans
3. Harvest success
We consider exit strategies to make profits. Several exit options, such as IPOs and acquisitions, will be discussed.
- Initial Public Offering (IPO)
- IPO underpricing
- Hot vs. cold IPO market
- Deal negotiation