University of Colorado-Boulder

Leeds School of Business

ESBM 4570Sanjai Bhagat

Entrepreneurial FinanceOffice: KOBL S431

Spring 2017Office Hours: Th (1 pm – 3 pm)

T 3:30 pm – 6:15 pm, KOBL S125

I.Course Objective

The objective of the course is to provide the student with a state-of-the-art understanding of

  • valuationof small and mid-cap public and private firms, and
  • the economics of contracts as it applies to entrepreneurship and new venture finance.

The course will cover the following topics: finance and the entrepreneur; project and business valuation; creating value through financial contracting (staging of financing); financing sources (venture capital, other); and exit strategies (initial public offering, other).

II.Course Materials

Course materials consist of Entrepreneurial Finance (Stanford University Press, by J.K. Smith and R.L. Smith and R.T. Bliss, 2011) andDamodaran On Valuation (Second Edition, Wiley Online, by A. Damodaran, 2015), (

and scholarly journal articles and working papers.

Lecture notes/overheads can be accessed from my home-page:

Please check your email frequently for emails from me regarding updates to class lectures, recent relevant articles in the financial media, and class announcements.

Articles from the Wall Street Journal will be used to motivate some of the class discussion.

III.Course Outline and Readings

  1. Valuation
  1. A. Damodaran, “Valuation Approaches and Metrics,” 2005, Foundations and Trends in Finance.
  2. Valuation Chapter 1, Introduction to Valuation.

[ “Books & Support” “DamodaranOn Valuation (Second Edition)” “Website for book”]

  1. Valuation Chapter 2, Estimating Discount Rates.
  2. Valuation Chapter 3, Estimating Cash Flows.
  3. Valuation Chapter 4, Estimating Growth and Terminal Value.
  4. Valuation Chapter 6, Firm Value DCF Models.
  5. Valuation Chapter 9, Firm and Enterprise Value Multiples.
  6. Valuation Chapter 12, The Value of Intangibles.
  7. Valuation Chapter 14, The Value of Liquidity.
  8. Entrepreneurial FinanceChapters 8, 9, 10, New Venture Valuation.
  1. S. Bhagat, "Real Options in the Telecommunications Industry," in Real Options: The New

Investment Theory and its Implications for Telecommunications Economics (1999), Kluwer Academic Publishers, Boston, MA. Options Real Options

  1. L. Courteau, J.L. Kao and T. O’Keefe, “Gains to Valuation Accuracy of Direct Valuation Over Industry Multiplier Approaches,” 2003, University of Alberta working paper. [ValuationAccuracy.pdf]
  1. A. Schreiner and K. Spremann, “Multiples and their Valuation Accuracy,” Yale University working paper, 2007.
  1. J. Liu, D. Nissim, and J. Thomas, “Is Cash Flow King in Valuations?”Financial Analysts Journal 63, Number 2, 2007.
  1. H.J.Seppanen, “Financial Statement Information and Evaluation of Newly Listed High-Technology “Nano Caps”” Aalto University (Finland) working paper, 2010.
  1. S. Sievers and J. Klobucnik, “Valuing High Technology Growth Firms,” Journal of Business Economics, December 2013, Volume 83, Issue 9, pp 947–984.

Marc Goedhart, Tim Koller, and David Wessels. February 2016.

  1. Private Equity

1. S. N. Kaplan and P. Stromberg, “Leveraged Buyouts and Private Equity, NBER paper, 2008.

2. Steven J. Davis , John Haltiwanger , Ron S. Jarmin , Josh Lerner and Javier Miranda, “Private Equity and Employment,” US Census Bureau Center for Economic Studies Paper No. CES-WP-08-07R, 2014. Private Equity

3. Paul Gompers, Steven N. Kaplan and Vladimir Mukharlyamov, “What Do Private Equity Firms Do?” 2014, Harvard University working paper.

4. Paglia, John and Harjoto, MaretnoAgus, The Effects of Private Equity and Venture Capital on Sales and Employment Growth in Small and Medium Sized Businesses (June 5, 2014). Journal of Banking and Finance, Vol. 47, pp. 177-197, 2014.

5. J. Haltiwanger, R. Jarmin, J. Miranda, “Who Creates Jobs?” Review of Economics and Statistics 95, May 2013, 347-361.

  1. Financial Contracting
  1. Entrepreneurial Finance Chapters 11, 12, 13. VentureCapital-Yearbook
  2. VC-update siliconvalley
  1. S. N. Kaplan and P. Stromberg, "Venture Capitalists as Principals: Contracting, Screening, and Monitoring," 2001, American Economic Review 91(2 May), 426-430.

ImpliedReturnSampleCapitalizationTable

  1. S.N. Kaplan and Per Stromberg. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," Review of Economic Studies, 2003, v70(2,Apr), 281-315.
  1. S. N. Kaplan, B. A. Sensoy, and P. Stromberg, “Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies,” Journal of Finance 64, 2009, 75-115.
  1. O. Bengtsson and B. A. Sensoy, “Changing the Nexus: The Evolution and Renegotiation of Venture Capital Contracts,” Journal of Financial and Quantitative Analysis / Volume 50 / Issue 03 / June 2015, pp 349-375.

DOI:

  1. O. Bengtsson and B. A. Sensoy, “Investor Abilities and Financial Contracting: Evidence from Venture Capital,” Journal of Financial Intermediation 20, 477-502, 2011.
  1. Brian Broughmana and Jesse Fried, “Renegotiation of cash flow rights in the sale of VC-backed firms,” Journal of Financial Economics 95, Issue 3, March 2010, Pages 384-399.
  1. Bernstein, Shai and Giroud, Xavier and Townsend, Richard R., The Impact of Venture Capital Monitoring (April 16, 2014). Journal of Finance, Forthcoming. Available at SSRN: or
  1. Gornall, Will and Strebulaev, Ilya A., The Economic Impact of Venture Capital: Evidence from Public Companies, (November 1, 2015). Stanford University Graduate School of Business Research Paper No. 15-55. Available at SSRN: or
  1. Gompers, Paul A. and Gornall, Will and Kaplan, Steven N. and Strebulaev, Ilya A., How Do Venture Capitalists Make Decisions? (June 27, 2016). Harvard Business School. Available at SSRN:
  1. Scott, Erin L. and Shu, Pian and Lubynsky, Roman, Are 'Better' Ideas More Likely to Succeed? An Empirical Analysis of Startup Evaluation (July 2015). Harvard Business School Technology & Operations Mgt. Unit Working Paper No. 16-013. Available at SSRN: or
  1. Hochberg, Yael V. and Serrano, Carlos J. and Ziedonis, Rosemarie Ham, Patent Collateral, Investor Commitment, and the Market for Venture Lending (October 7, 2014), Rice University. Available at SSRN: or
  1. Financing Sources
  1. Entrepreneurial Finance Chapter 14.
  1. S. Bhagat, “Why Do Venture Capitalists Charge Such High Discount rates?”Journal of Risk Finance, 2014. venture-discount-rates.doc VentureCapital.ppt
  1. R. Nanda and M. Rhodes-Kropf, “Investment Cycles and Startup Innovation,” Harvard University working paper, 2011.
  1. Kerr, William R. and Nanda, Ramana, Financing Innovation (November 5, 2014). Harvard Business School Entrepreneurial Management Working Paper No. 15-034. Available at SSRN: or
  1. S. Cohen and Y. Hochberg, “Accelerating Startups: The Seed Accelerator Phenomenon,” MIT working paper, 2014.
  1. Fehder, Daniel C. and Hochberg, Yael V., Accelerators and the Regional Supply of Venture Capital InvestmentMIT working paper, (September 19, 2014).
  1. Hallen, Benjamin L. and Bingham, Christopher and Cohen, Susan, Do Accelerators Accelerate? The Role of Indirect Learning in New Venture Development (January 19, 2016). University of Washington. Available at SSRN:
  1. Bernthal, Brad, Investment Accelerators (August 11, 2015). University of Colorado Boulder, 2015. Available at SSRN: or
  1. Bliemel, Martin J. and Flores, Ricardo G., Defining and Differentiating Accelerators: Insights from the Australian Context (August 7, 2015). UNSW Business School Research Paper No. 2016MGMT01. Available at SSRN: or
  1. Yu, Sandy, The Impact of Accelerators on High-Technology Ventures (December 1, 2014). University of California Berkeley. Available at SSRN:
  1. Hochberg, Yael V., Alexander Ljungqvist and Yang Lu, “Networking as a Barrier to Entry and the Competitive Supply of Venture Capital,” Journal of Finance, 2010, v65 (June), 829-859.
  1. Hildebrand, Thomas and Puri, Manju and Rocholl, Jörg, Adverse Incentives in Crowdfunding (October 06, 2014). Duke University working paper.
  1. Ahlers, Gerrit K.C. and Cumming, Douglas J. and Guenther, Christina and Schweizer, Denis, Signaling in Equity Crowdfunding (October 14, 2012). York University.
  1. Mollick, Ethan R., The Dynamics of Crowdfunding: An Exploratory Study (June 26, 2013). Journal of Business Venturing, Volume 29, Issue 1, January 2014, Pages 1–16.
  1. Mollick, Ethan R., Delivery Rates on Kickstarter (December 4, 2015). University of Pennsylvania - Wharton School. Available at SSRN:
  1. Mollick, Ethan R. and Kuppuswamy, Venkat, After the Campaign: Outcomes of Crowdfunding (January 9, 2014). UNC Kenan-Flagler Research Paper No. 2376997. Available at SSRN: or
  1. Mollick, Ethan R. and Nanda, Ramana, Wisdom or Madness? Comparing Crowds with Expert Evaluation in Funding the Arts (August 26, 2015). Management Science, Forthcoming; Harvard Business School Working Paper No. 14-116. Available at SSRN: or
  1. Hornuf, Lars and Schwienbacher, Armin, Crowdinvesting – Angel Investing for the Masses? (October 8, 2014). Handbook of Research on Venture Capital: Volume 3. Business Angels, Forthcoming. Available at SSRN:
  1. Ahlers, Gerrit K.C. and Cumming, Douglas J. and Guenther, Christina and Schweizer, Denis, Signaling in Equity Crowdfunding (December 2, 2013). York University. Available at SSRN: or
  1. Belleflamme, Paul and Lambert, Thomas, Crowdfunding: Some Empirical Findings and Microeconomic Underpinnings (August 30, 2014). UniversitéCatholique de Louvain. Available at SSRN: or
  1. Agrawal, Ajay and Catalini, Christian and Goldfarb, Avi, Are Syndicates the Killer App of Equity Crowdfunding? (February 25, 2015). MIT Sloan Research Paper No. 5126-15; Rotman School of Management Working Paper No. 2569988. Available at SSRN: or
  1. Belleflamme, Paul and Omrani, Nessrine and Peitz, Martin, The Economics of Crowdfunding Platforms (March 20, 2015). UniversitéCatholique de Louvain. Available at SSRN: or
  1. Lambrecht, Anja and Goldfarb, Avi and Bonatti, Alessandro and Ghose, Anindya and Goldstein, Daniel G. and Lewis, Randall A. and Rao, Anita and Sahni, Navdeep S. and Yao, Song, How Do Firms Make Money Selling Digital Goods Online? (March 6, 2014). London Business School. Available at SSRN: or
  1. Bernstein, Shai and Korteweg, Arthur G. and Laws, Kevin, Attracting Early Stage Investors: Evidence from a Randomized Field Experiment (August 27, 2015). Journal of Finance, Forthcoming; Rock Center for Corporate Governance at Stanford University Working Paper No. 185; Stanford University Graduate School of Business Research Paper No. 14-17. Available at SSRN: or
  1. Caytas, Joanna Diane, Crowdfunding Venture Capital in Europe (October 1, 2015). Columbia Journal of European Law: Preliminary Reference, Forthcoming. Available at SSRN:
  1. O'Connor, Sean M., Crowdfunding's Impact on Start-Up IP Strategy (December 12, 2013). George Mason Law Review, Forthcoming; University of Washington School of Law Research Paper No. 2013-34. Available at SSRN:
  1. Exit Strategies
  1. Entrepreneurial Finance Chapter 16.
  1. J.R. Ritter, “Equilibrium in the IPO Market,” Annual Review of Financial Economics 3, 2011.IPO.ppt

IPO-US-World March2012-SenateHearings-1March2012-SenateHearings-2

  1. R. Aggarwal, S. Bhagat and S. Rangan, “Impact of Fundamentals on IPO Valuation,” Financial Management, 2009, 253-284. IPO Valuation.ppt

IPO Valuation International

  1. C. S. Armstrong, A. Davila, G. Foster, and J.R.M. Hand, “Market-to-revenue multiples in public and private markets,” Australian Journal of Management 36, 15-57, 2011.
  1. Michelle Lowry, Roni Michaely and Ekaterina Volkova, “Initial Public Offerings: A synthesis of the literature and directions for future research,” March 2017.
  1. UgurCelikyurta, , MerihSevilirb, 1, and Anil Shivdasani , “Going public to acquire? The acquisition motive in IPOs ,” Journal of Financial Economics 96, Issue 3, June 2010, Pages 345-363.
  1. C.W. Smith, Jr., "Investment Banking and the Capital Acquisition Process," Journal of Financial Economics 15, 1986, 3-30. RaisingCapital.ppt
  1. Current Topics
  1. R. Ball, “The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?” Journal of Applied Corporate Finance, Volume 21, Issue 4, pages 8–16, Fall 2009.
  1. A. Brooks, “Five Myths About Free Enterprise,” Washington Post, July 13, 2012.
  1. K. Hassett and A. Mathur, “The Cure for Wage Stagnation” Wall Street Journal, August 14, 2016

“Taxes and Wages” American Enterprise Institute, June 2006.

  1. S. Bhagat,

EuropeanCrisis

  1. S. Bhagat and I. Obreja, “Corporate Employment and Cash Flow Uncertainty,” University of Colorado paper, 2015.
  1. S. Bhagat and B. Bolton, “Bank Executive Compensation And Capital Requirements Reform” Journal of Corporate Finance, 2014. IBCompensation
  1. Audretsch, David and Taylor Aldridge, “University Entrepreneurship and Economic Growth,”Indiana University, 2010.
  1. Kerr, William, Josh Lerner and Antoinette Schoar, “The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis,” Harvard University, 2010.
  1. Paige Ouimet and Rebecca Zarutskie, “Who Works for Startups? The Relation between Firm Age, Employee Age, and Growth,” Duke University working paper, October 1, 2011.
  1. Kauffman Foundation, “Anatomy of an Entrepreneur,” 2009.

Tech-Governance

IV.Course Schedule

January 17 Introduction

January 24Valuation

January 31ValuationProposal due

February 7Valuation

February 14Valuation

February 21Financial Contracting

February 28 Financial Contracting

March 7Financial Contracting Paper first-half due

March 14Venture FinancingMidterm Exam

March 21Venture Financing

March 28Spring Break

April 4Crowdfunding

April 11Exit Strategies

April 18Exit StrategiesPaper due

April 25Student Pitches

May 2Student Pitches

May 11Final Exam(1:30 pm – 2:30 pm)

V.Course Policies

Grading

The grade breakdown is as follows:

ItemWeight

A.Class participation and attendance10%

B.Term Paper (proposal, due: January 31)5%

C. Term Paper (first half, due: March 7)15%

D.Midterm Exam (March 14) 20%

E.Term Paper (full, due: April 18) 20%

F.Term Paper (pitch)10%

G.Final Exam 20%

A.Class participation is critical to the success of this course. Student questions and comments are expected and welcome. Attendance will be taken at random (unannounced).Students are requested to place their name-cards in front of their desk at all times during class.

The class will be conducted in a professional manner: Students and the instructor are expected to be prepared for each class, and behave professionally in the class.

B.Proposals for the term paper are due on January 31, 2017, before the start of class. The proposal should answer the following two questions:

  • What will the paper be about?
  • Why is this topic interesting and important?

You should also include a list of at least four academic papers or book chapters that you intend to read as background for your paper. References should be cited properly: author(s) name(s), title of paper, journal name and volume, journal page numbers, year of publication; for unpublished papers: the web-link, author(s) name(s), title of paper, and university affiliation of the authors should be noted. The proposal should be no more than a page.

C, E. The first half of the term paper is due on March 7, 2017, before the start of class. The term paper draft should be at least ten pages long, and include the following:

  • What is the paper about?
  • Why is this interesting and important to study/read?
  • A critical survey of the literature.
  • Outline of the original analysis that would be of interest to somebody in the real world: an investment banker, venture capitalist, or entrepreneur.
  • References that includes at least four academic papers or book chapters.

The full term paper is due on April 18, 2017.

Student (elevator) pitchesare scheduled for April 25 and May 2, 2017. The paper can be on any topic that will be covered in the course. The paper should include a critical survey of the literature and some original analysis that would be of interest to somebody in the real world: an investment banker, venture capitalist, or entrepreneur. The paper (including exhibits) should be between 20 and 25, double-spaced pages (twelve-point font, one-inch margin all-around).

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On your paper please note the following:

On my honor, as a University of Colorado at Boulder student, I have neither given nor received unauthorized assistance on this paper.

A Note on Academic Honesty & Plagiarism: The development of the Internet has provided students with historically unparalleled opportunities for conducting research swiftly and comprehensively. The availability of these materials does not, however, release the student from appropriately citing sources where appropriate; or applying standard rules associated with avoiding plagiarism. Please see

F. 4 minutes to 5 minutes elevator pitch should cover the following:

  • Topic
  • Why is this topic of interest to somebody in the real world: an investment banker, venture capitalist, or entrepreneur.
  • Your analysis (briefly).
  • Your conclusions.

Please observe the following during your elevator pitch

No overheads (you will not have access to an overhead in an elevator or a lunch meeting).

Please place your name card on the podium when you are presenting.

Guidelines for the Term Paper

Suggested order for the sections:

Cover Page

Paper Title, Student Names, Course, Date

Executive Summary

No more than one page. The most important part of your paper! Briefly explain what the paper is about, why this is an interesting and important topic, and your main findings/conclusions. Consider an entrepreneur, investment banker, investor, or venture capitalist as your primary reader of this page.

Introduction

What is the paper about?

Motivation: Why is this interesting and important to study/read?

Overview of the paper.

(Main Body)

Please consider using sub-sections to better organize your paper, and improve its readability.

Please check the transition between paragraphs.

(Footnotes on same page.)

Summary and Conclusions

Exhibits (Tables, Graphs, etc.)

Captions and legends in the exhibits should make them self-explanatory. Cite data sources.

References

______

Check for grammar and spelling.

All arguments/assertions should be supported using:

logical constructs, and/or

theoretical considerations (cite references), and/or

previous empirical evidence (cite references).

Paper should be revised by you at least four times over a period no less than a week.

D and G.The exams will consist of essay-type questions, and will be closed-book, closed-notes, and in-class. The exams will be based on study questions that will be handed out at least a week before the exam.

Readings

  • We will not be covering all the readings in class. I will indicate in class the readings I will be covering in detail. The readings above would be relevant if you decide to write your term paper on the particular topic.
  • You are advised to read the “critical portions” of the assigned readings for a particular class before that class.
  • The critical portions of a reading include the abstract, introduction, summary/conclusions of the paper.
  • You might wish to read the main body of the paper after we have discussed it in class.

Bloomberg data

  • The Bloomberg terminals in Room E-370 have a wealth of financial data.
  • Some of this can be used for the valuation part of your term paper.
  • Having a competency with the Bloomberg terminal and related data makes you very attractive to future employers.
  • Please go to

Grade distribution:

GuidancetoFacultyRegardingGradeDistributions

InMay2011,thefacultyoftheLeedsSchoolvotedtoestablishthe“gradingguidelines”sharedbelow.

Withthisvote,thefacultyreturnstoitspreͲ2009approachofgradingguidelines.

Theseguidelinesembodythefaculty’sconsensusaboutcompetitionandfairnesswithin,andacross,classroomexperiencesatLeeds.Initsdiscussionsandpreparations,thefacultyreliedheavilyonnormsandcustomsattopͲtierbusinessschoolsthroughouttheU.S.

Thefollowingmatrixprovidesguidanceongradedistributionseitheratthecourseleveloraggregated

acrossmultiple,simultaneoussections.

CourseLevel / MaximumAverageCourseGrade / RecommendedDistribution
1000and2000 / 2.8 / Notmorethan15%AͲorabove
Notmorethan65%BͲ orabove
Atleast35%C+orbelow
3000 / 3.0 / Notmorethan25%AͲorabove
Notmorethan75%BͲ orabove
Atleast25%C+orbelow
4000 / 3.2 / Notmorethan35%AͲorabove
Notmorethan85%BͲ orabove
Atleast15%C+orbelow

Also, please review