University of Colorado-Boulder - Leeds School of Business



University of Colorado-Boulder

Leeds School of Business

ESBM 4570 Sanjai Bhagat

Entrepreneurial Finance Office: KOBL S431

Fall 2015 Office Hours: Th (1 pm – 3 pm)

Tu 3:30 pm – 6:15 pm, KOBL 330 sanjai.bhagat@colorado.edu

I. Course Objective

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

• valuation of 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 (Wiley, by J.K. Smith and R.L. Smith, 2003) and Damodaran On Valuation (Second Edition, Wiley, by A. Damodaran, 2006), and scholarly journal articles and working papers.

Lecture notes/overheads and class announcements can be accessed from my home-page:



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

studentoffer quarter

III. Course Outline and Readings

A. Valuation

1. Free corporate valuation app for the iPad:

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

3. Valuation Chapter 1, Introduction to Valuation.

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

4. Valuation Chapter 2, Estimating Discount Rates.

5. Valuation Chapter 3, Estimating Cash Flows.

6. Valuation Chapter 4, Estimating Growth and Terminal Value.

7. Valuation Chapter 6, Firm Value DCF Models.

8. Valuation Chapter 9, Firm and Enterprise Value Multiples.

9. Valuation Chapter 12, The Value of Intangibles.

10. Valuation Chapter 14, The Value of Liquidity.

11. Entrepreneurial Finance Chapters 8, 9, 10, New Venture Valuation.

12. 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

13. A. Schreiner and K. Spremann, “Multiples and their Valuation Accuracy,” Yale University working paper, 2007.

14. J. Liu, D. Nissim, and J. Thomas, “Is Cash Flow King in Valuations?” Financial Analysts Journal 63, Number 2, 2007.

15. H.J.Seppanen, “Financial Statement Information and Evaluation of Newly Listed High-Technology “Nano Caps”” Aalto University (Finland) working paper, 2010.

16. S. Sievers and J. Klobucnik, “Valuing High Technology Growth Firms,” Cologne Graduate school paper, 2012.

B. 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. Bernstein, Shai and Sheen, Albert, The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry (December 8, 2013). Rock Center for Corporate Governance at Stanford University Working Paper No. 156. Available at SSRN:  or

Puche, Benjamin and Braun, Reiner and Achleitner, Ann‐Kristin, International Evidence on Value Creation in Private Equity Transactions (August 29, 2014). Available at SSRN:  or

Schock, Florian, Private Equity Financing of Technology Firms: A Literature Review (September 15, 2013). EBS Business School Research Paper No. 14-06. Available at SSRN:  or

5. Paglia, John and Harjoto, Maretno Agus, 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.

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

C. Financial Contracting

1. Entrepreneurial Finance Chapters 11, 12, 13. VentureCapital-Yearbook

2. VC-update siliconvalley

3. S. N. Kaplan and P. Stromberg, "Venture Capitalists as Principals: Contracting, Screening, and Monitoring," 2001, American Economic Review, v91(2,May), 426-430.

ImpliedReturn SampleCapitalizationTable

4. 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.

5. 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.

6. O. Bengtsson and B. A. Sensoy, “Changing the Nexus: The Evolution and Renegotiation of Venture Capital Contracts,” Ohio State University working paper, 2009.

7. O. Bengtsson and B. A. Sensoy, “Investor Abilities and Financial Contracting: Evidence from Venture Capital,” Ohio State University working paper, 2009.

8. 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.

D. Financing Sources

1. Entrepreneurial Finance Chapter 14.

2. S. Bhagat, “Why Do Venture Capitalists Charge Such High Discount rates?”Journal of Risk Finance, 2014. venture-discount-rates.doc VentureCapital.ppt

3. W. Kerr and R. Nanda, “Financing Innovation,” Harvard University working paper, 2014.

4. E. Scott, P. Shu, and R. Lubynsky, “Are Better Ideas More Likely to Succeed? An Empirical Analysis of Startup Evaluation,” Harvard University working paper, 2015.

5. R. Nanda and M. Rhodes-Kropf, “Investment Cycles and Startup Innovation,” Harvard University working paper, 2011.

6. S. Cohen and Y. Hochberg, “Accelerating Startups: The Seed Accelerator Phenomenon,” MIT working paper, 2014.

7. Fehder, Daniel C. and Hochberg, Yael V., Accelerators and the Regional Supply of Venture Capital Investment MIT working paper, (September 19, 2014).

8. Hochberg, Yael V., C. Serrano, R. Ziedonis, “Patent Collateral, Investor Commitment, and the Market for Venture Lending,” MIT working paper, 2014..

9. N. Dai and V. Ivanov, “Entrepreneurial Optimism, Credit Availability, and Cost of Financing: Evidence from U.S. Small Business,” SEC working paper, 2009.

10. E. Mollick and R. Nanda, “Wisdom or Madness? Comparing Crowds with Expert Evaluation in Funding the Arts,” Harvard University working paper, 2015.

11. E. Mollick and V. Kuppuswamy, “After the Campaign: Outcomes of Crowdfunding,” University of Pennsylvania working paper, 2014.

12. Li, Emma and Martin, J. Spencer, Crowd Sourcing in Capital Formation: An Empirical Investigation University of Melbourne working paper, (August 31, 2014). FIRN Research Paper No. 2517273

13. Hildebrand, Thomas and Puri, Manju and Rocholl, Jörg, Adverse Incentives in Crowdfunding (October 06, 2014). Duke University working paper.

14. S. Carr, “Collective Action and the Financing Innovation: Evidence from Crowdfunding,” University of Virginia working paper, 2013.

15. D. Cumming, G. lebouef, and A. Schwienbacher, “Crowdfunding Models: Keep-It-All vs. All-or-Nothing,” York University working paper, 2015.

16. Ahlers, Gerrit K.C. and Cumming, Douglas J. and Guenther, Christina and Schweizer, Denis, Signaling in Equity Crowdfunding (October 14, 2012). York University.

17. 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.

E. Exit Strategies

1. Entrepreneurial Finance Chapter 16.

2. J.R. Ritter, “Equilibrium in the IPO Market,” Annual Review of Financial Economics 3, 2011. IPO.ppt IPO-US-World March2012-SenateHearings-1 March2012-SenateHearings-2

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

4. 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.

5. Bayar, Onur and Chemmanur, Thomas J., What Drives the Valuation Premium in IPOs versus Acquisitions? An Empirical Analysis (December 21, 2011). Journal of Corporate Finance, Forthcoming.

6. K. Hanley and G. Hoberg, “Litigation Risk, Strategic Disclosure and the Underpricing of Initial Public Offerings,“ Journal of Financial Economics 103, 2012, 235-254.

7. C.F. Foley and R. Greenwood, “Giving Up Control to Pursue Growth: The Evolution of Corporate Ownership After IPO,” 2008, Harvard University working paper.

8. C.W. Smith, Jr., "Investment Banking and the Capital Acquisition Process," Journal of Financial Economics 15, 1986, 3-30. RaisingCapital.ppt

F. Current Topics

1. A. Brooks, “Five Myths About Free Enterprise,” Washington Post, July 13, 2012.

2. S. Bhagat “Yes, Virginia, Austerity Works,”

EuropeanCrisis

3. S. Bhagat and I. Obreja, “Corporate Employment and Cash Flow Uncertainty,” University of Colorado paper, 2012.

4. S. Bhagat and B. Bolton, “Bank Executive Compensation And Capital Requirements Reform” Journal of Corporate Finance, 2014. IBCompensation

5. Lowrey, Ying, “Estimating Entrepreneurial Jobs: Business Creation is Job Creation”, U.S. Small Business Administration, 2010.

6. Audretsch, David and Taylor Aldridge, “University Entrepreneurship and Economic Growth,”Indiana University, 2010.

7. B. Ambrose, L. Cordell, S. Ma, “The Impact of Student Loan Debt on Small Business Formation,” Federal Reserve Bank working paper, 2015.

8. Paige Ouimet and Rebecca Zarutskie, “Who Works for Startups? The Relation between Firm Age, Employee Age, and Growth,” Journal of Financial Economics 112, 2014, 386-407.

9. M. Dambra, L. Field, and M. Gustafson, “The JOBS Act and IPO Volume,” Journal of Financial Economics 115, 2015, 121-143.

10. Kauffman Foundation, “Anatomy of an Entrepreneur,” 2009.

IV. Course Schedule

August 25: Introduction

September 1: Valuation

September 8: Valuation

September 15: Valuation. Term Paper proposal due

September 22: Valuation.

September 29: Valuation.

October 6: Financial Contracting

October 13: Financial Contracting Term Paper (first half) due

October 20: Midterm Exam

October 27: Venture Financing.

November 3: Exit Strategies

November 10: Exit Strategies Term Paper (full) due

November 17: Student Presentations

November 24: Thanksgiving Break.

December 1: Student Presentations

December 8: Student Presentations

December 15: Final Exam (12 noon – 1 pm, KOBL 210)

V. Course Policies

Grading

The grade breakdown is as follows:

Item Weight

A. Class participation and attendance 10%

B. Term Paper (proposal, due: September 15) 5%

C. Term Paper (first half, due: October 13) 15%

D. Midterm Exam (October 20) 20%

E. Term Paper (full, due: November 10) 15%

F. Term Paper (presentation) 15%

G. Final Exam (December 15) 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 September 15, 2015, 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. The proposal should be no more than a page.

C, E. The first half of the term paper is due on October 13, 2015, 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 November 10, 2015.

Student presentations are scheduled for November 17, December 1 and 8, 2015. 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

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 during the semester. The exams will be graded anonymously in the sense that students will not write their names on the exam and at the time I grade the exam I will not know whose exam it is.

Readings

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

Tutorial about creating a Bloomberg account ();

a tutorial about finding specific financial series of interest ();

a tutorial and a handout about the Bloomberg certification () ( ).

Grade distribution:



Guidance to Faculty Regarding Grade Distributions

In May 2011, the faculty of the Leeds School voted to establish the “grading guidelines” shared below.

With this vote, the faculty returns to its preͲ2009 approach of grading guidelines.

These guidelines embody the faculty’s consensus about competition and fairness within, and across, classroom experiences at Leeds. In its discussions and preparations, the faculty relied heavily on norms and customs at topͲtier business schools throughout the U.S.

The following matrix provides guidance on grade distributions either at the course level or aggregated

across multiple, simultaneous sections.

|Course Level |Maximum Average Course Grade |Recommended Distribution |

|1000 and 2000 |2.8 |Not more than 15% AͲ or above |

| | |Not more than 65% BͲ or above |

| | |At least 35% C+ or below |

|3000 |3.0 |Not more than 25% AͲ or above |

| | |Not more than 75% BͲ or above |

| | |At least 25% C+ or below |

|4000 |3.2 |Not more than 35% AͲ or above |

| | |Not more than 85% BͲ or above |

| | |At least 15% C+ or below |

Also, please review ,

,

,

and .

Study Questions for ESBM 4570 (September 29, 2015)

Please note: The Midterm Exam (October 20, 2015) will consist of two questions drawn from these. It is expected that the answer to each question would take about 30 minutes.

1. With the help of a numerical example discuss and explain the underinvestment problem. How could a business avoid this problem? Explain. [underinvestment.doc]

2. Describe the various methods of estimating the cost of equity. Discuss the advantages and disadvantages of the various methods of estimating the cost of equity. [value-1.ppt; slides 45-48, slides 6-7]

3. Describe the stable growth, 2-stage growth, and 3-stage growth models. Discuss when each model is appropriate to use. [value-1.ppt; slides 77-80]

4. Describe and discuss how you would value a company that currently has negative earnings. [value-2.ppt; slides 185-186; example in slides 187-199]

5. What are the advantages and disadvantages of the following valuation techniques: Discounted Cashflow Valuation, Relative Valuation, Real Option Valuation. (Valuation.ppt)

Study Questions for ESBM 4570 (November 16, 2015)

Please note: The Final Exam (December 15, 2015; 12 noon – 1 pm, KOBL 210 ) will consist of two questions drawn from these. It is expected that the answer to each question would take about 30 minutes.

6. Kaplan and Stromberg (2001, 2003) and note that VC contracts have the following features: antidilution rights, automatic conversion, and vesting and non-compete clauses. Describe these contractual features. What is the economic justification for including it in a VC contract? [VC-Contracting.ppt]

7. (a) Bengtsson and Sensoy (2009) note that more experienced VCs are less likely to seek downside protection. What is meant by downside protection in a VC contract? Why do more experienced VCs seek less downside protection?

(b) Why do VCs usually take convertible preferred stock rather than common stock in the companies they invest in?

(c) As a founder in a company you might get angel investment. It is wise to treat angel (and other) investors fairly. How would you ensure the securities the angel investor receives in your company are fairly priced? [VC-Contracting.ppt]

8. Why are initial public offerings underpriced as discussed by Welch and Ritter (2002)? Please be sure to discuss the theories based on

a. asymmetric information (both when the issuer is more informed than the investor, and the investors are more informed than issuer),

b. theories based on symmetric information, and

c. theories focusing on the allocation of IPO shares. [IPO-2011.ppt]

9. (a) Why do venture-capitalists use such high discount rates? [venture-discount-class.doc]

(b) What is the relation between (i) income and an IPO’s value, and (ii) insider ownership and an IPO’s value as discussed by Aggarwal, Bhagat and Rangan (2009). [IPO Valuation.ppt]

10. (a) What are the significant determinants of whether a privately held firm is taken over by a publicly-held firm, versus conducting an IPO as discussed by Poulsen and Stegemoller (2005)?

[IPO-2011.ppt]

(b) What is the link between the existence of a thriving and active stock market, and entrepreneurial activity?



Home > Market Activity > IPOs > Performance

IPO Performance

5 Best/Worst IPO Performers in the day (% Return)

1 Day  30 Days  60 Days  6 Months 

Performance

| | | |(% change) | |

|Company Name (Ticker) |IPO Date |Since IPO |1-Day |30-Day |60-Day |6 Months | |

|CODE REBEL CORP (CDRB) |5/19/2015 |4.2 |217 |556.6 |

|Company Name (Ticker) |IPO Date |Since IPO |1-Day |30-Day |60-Day |6 Months | |

COLUCID PHARMACEUTICALS, INC. (CLCD) |5/6/2015 |-56.2 |-20 |-15.5 |-13.9 |-- |Quote |Chart |News | |BIONDVAX PHARMACEUTICALS LTD.(BVXV) |5/12/2015 |-19.6 |-20.2 |-2 |-7.4 |-- |Quote |Chart |News | |CELYAD S.A. (CYAD) |6/19/2015 |-28.02 |-20.41 |-11.03 |-19.38 |-- |Quote |Chart |News | |SUNRUN INC. (RUN) |8/5/2015 |-44.14 |-23.07 |-17.43 |-24.93 |-- |Quote |Chart |News | |BELLEROPHON THERAPEUTICS, INC.(BLPH) |2/13/2015 |-71.75 |-25.25 |-18.75 |-14 |-72.08 |Quote |Chart |News | |VTV THERAPEUTICS INC. (VTVT) |7/30/2015 |-52.73 |-27.4 |-37.2 |-56.8 |-- |Quote |Chart |News | |CAPNIA, INC. (CAPN) |11/13/2014 |-72.62 |-40.31 |-61.54 |-72.31 |-26.92 |Quote |Chart |News | | ................
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