Entrepreneurial Finance

FIE457 Entrepreneurial Finance

Autumn 2021

  • 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

    • 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

    Teaching is a cased-based online course, supported by lectures (guest speakers may join online as well).

    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 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 on a term project (or a case), which is selected by the instructor.

  • Restricted access

    To facilitate active discussions, the course limits the maximum number of enrolled students to 60 .

  • 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

  • Requirements for course approval

    Mandatory Attendance: This is a case-based online course and requires active participation by students. Attendance requires students to (1) stay stably connected to Zoom, (2) have their webcam "on", and (3) have their microphone "ready" to answer or comment during the entire class. Students are expected to attend every class 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 on the Canvas course webpage. The quizzes must be done individually and cannot be re-taken.

    Group project: Students are required to work on a group assignment. Students will have to investigate a selected case (i.e., a real business), submit a written paper, and make a presentation. The selection of a case must be approved by the instructor.

    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 course is offered in English. The grade is based on a portfolio consisting of in-class quizzes (15%), in-class participation (35%), and group project (50%). One grade is given for the entire portfolio. Grading scale A-F.

    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 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)
    3. "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/).

Overview

ECTS Credits
7.5
Teaching language
English
Semester

Autumn. Offered Autumn 2021.

Course responsible

Associate Professor Kyeong Hun Lee, Department of Finance, NHH.