FIE457 Entrepreneurial Finance
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
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
- 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
- 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
- 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 is mainly based on cases, supported by lectures and guest speakers.
The course will cover approximately 10 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 and hand in a thorough report about the selected 2 cases (to be selected later). The cases include:
- Snap IPO
- edoc Inc
- Fast Ion Battery
- Entrepreneurial Finance in Finland
Corporate Finance at master level and a basic understanding of Microsoft Office.
Credit reduction due to overlap
Requirements for course approval
Case write-ups: Students are required to work on cases with their team and submit their report on each case before the deadline.
Mandatory Attendance: This is a case-based course and requires active participation by students. Students are expected to attend every class unless the permission has been given to miss a class for a compelling reason.
The course is offered in English. The grade is based on a portfolio consisting of (1) class participation (approximately 36%), (2) two submitted cases (36%), (3) individual final take-home exam (20%), and (4) a peer review (approximately 8%). One grade is given for the entire portfolio. Grading scale A-F.
Class participation is solely based on individual contribution - attending classes, raising insightful questions and making comments. There is no makeup for a missed class.
Cases (36%) are a group effort, and consist of 2 of the cases given during the course, as decided by the course responsible. Group size is 3-4 students.
At the end of the course, students will be asked to evaluate the contribution of their team members. The peer review requires you to make good contributions (e.g., responsible and respectful behavior for your team). Note that I may overrule the peer review if I deem a student to have deviated from such behavior.
All parts of the assessment must be completed in the same semester, and in the semester you attend class.
Since this is a case-based course with several cases reappearing year after year, students can take the course only one time. It is possible to retake the course only if a student fails. As the assessment in this course by its nature cannot be re-examined, the grades awarded may not be appealed.
This course will be closed for registration after the 5th class session.
Grades A - F.
All students are expected to use MS Office.
- Cases will be available to purchase via a course webpage.
- The followings books can be a good reading guide for the topics and discussions to be covered by this course. However, it is not required to purchase the book.
- Entrepreneurial Finance - Strategy, Valuation & Deal structure (by Smith, Smith & Bliss)
- The Oxford Handbook of Entrepreneurial Finance (edited by Douglas Cumming).
- "Valuing young, start-up and growth companies: Estimation issues and valuation challenges" by Prof. Aswath Damodaran at NYU (
). http://people.stern.nyu.edu/adamodar/ http://people.stern.nyu.edu/adamodar/
- ECTS Credits
- Teaching language
Autumn. Offered Autumn 2020.
Please note: Due to the present corona situation, please expect parts of this course description to be changed before the autumn semester starts. Particularly, but not exclusively, this relates to teaching methods, mandatory requirements and assessment.
Associate Professor Kyeong Hun Lee, Department of Finance, NHH