FIE457 Entrepreneurial Finance

• Topics

  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

  • Sales, acquisitions

  - Deal negotiation

• Learning outcome

  Students will obtain a broad, up-to-date understanding in financing new business plans. Students will be able to apply quantitative tools to real business opportunities. Students will understand the incentives and motivation of both demand (entrepreneur) and supply (investor) sides of financing. In particular, students will:

  Knowledge - The candidate will be able to

  • Gain advanced knowledge on different funding sources and deal structures (e.g., the term sheet and convertible preferred stock), and their valuation effects.
  • Have a critical understanding of conflicts of interest between entrepreneurs and financiers, and demonstrate how to use various contractual solutions to them.
  • Obtain a thorough view on the issues in liquidating businesses, such as initial public offerings, sales, and acquisitions.

  Skills - The candidate will be able to

  • Identify and/or structure value-creating entrepreneurial opportunities.
  • Apply various quantitative models and critically evaluate new business plans.
  • Develop contractual arrangements among participants (e.g., entrepreneurs, investors, employees, etc) that minimize potential risks and maximize business outcomes during the early stage of business.

  General competence - The candidate will be able to

  • Create a new venture team in which interests of participating entrepreneurs are well-aligned.
  • Gain competence and confidence to work in a team environment to effectively manage a work load of high ambiguity and high uncertainty.
  • Gain confidence in applying their analysis to future, real business opportunities, and creating real value.

• Teaching

  Teaching is a cased-based in-person course, supported by lectures.

  Quizzes will help reinforce students’ knowledge on essential elements for valuation models. The quizzes must be done during the class hours and cannot be retaken.

  The course will cover approximately 8-9 cases. At the beginning of the semester, students will form a team of three to four students. Students are expected to work within the team. For two cases which are to be selected by the instructor, students have to hand in a report including valuation applications and sound interpretation of the results.

• Recommended prerequisites

  Previous knowledge and experience in investment (including financial derivatives) is recommended.

• Required prerequisites

  Students taking this course are required to have taken a master-level course in Corporate Finance (FIE402) or equivalent courses at other institutions.

• Credit reduction due to overlap

  None

• Compulsory Activity

  Mandatory Attendance: This is a case-based course and requires active participation by students. Students are expected to attend every class in-person unless the permission has been given to miss a class for a compelling reason (at least 24 hours in advance with documentation).

  Quizzes: Students are required to complete multiple "in-class" quizzes. The quizzes must be done individually and cannot be re-taken.

  Cases: For two cases selected by the instructor, students are required to submit reports. Students will have to investigate firms in selected cases, apply valuation methods, submit a written paper, and make a presentation.

  Given the nature of case studies, students are not allowed to retake the course unless a student fails.

  This course will be closed for registration after the 3rd class session.

• Assessment

  The class is graded as a portfolio of work. Portfolio assessment pre-supposes that the student's development along the way is included in the assessment. The grade is based on a portfolio assessment of in-class quizzes, in-class participation, and cases. The final grade is based on the whole portfolio as a unified whole. Students will also submit a reflection note that summarizes their learning and development.

  All parts of the assessment must be completed in the same semester you attend class.

  This course will be closed for registration after the 3rd class session.

• Grading Scale

  A - F.

• Computer tools

  The ability to use spreadsheets of data will suffice.

• Literature

  1. "Cases" will be available for students to purchase via a course webpage.
  2. The following "book" is strongly recommended (not required) as a good guide for the topics and discussions to be covered by this course.
     • Entrepreneurial Finance - Strategy, Valuation & Deal structure (by Smith, Smith & Bliss)