Entrepreneurship,Innovation and Finance :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Entrepreneurship,Innovation and Finance Prof.Laura Bottazzi
Prof. Filippo Ippolito
Course Overview:The World of Entrepreneurial Finance :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Course Overview:The World of Entrepreneurial Finance Large increase in supply of and demand for venture capital/private equity
Record amounts raised in every year 1995-2000
Even with drop in fundraising in 2001 it is about what it was in 1998 and 17x the level in 1990
Likely to continue at relatively high rates , .i.e. probably not just boom part of cycle.
Does this reflect a structural shif in the way new businesses/projects are organized and financed?
Unprecedented Flow of Funds into Start-up Companies :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Unprecedented Flow of Funds into Start-up Companies
What is Special About Entrepreneurial Finance? :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION What is Special About Entrepreneurial Finance? Valuing New Ventures
Large uncertainties
Massive option values
Financing new ventures
Large financing needs
Severe information problems
Severe agency problems
These issues are common to all new “projects”, but here we focus on how investors and entrepreneurs deal with them
Course Perspectives and Goals :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Course Perspectives and Goals Understand the broader issues of investing in entrepreneurial ventures
Understand the more detailed issues of how to evaluate and finance entrepreneurial investmetns
Course Overview :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Course Overview Module 1:
Theory and measurement
Qualitative and Quantitative analyses
Course Overview :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Course Overview Module 2: Venture Capital Funds
Structure of partnership compensation
Structure of partnership covenants
Partnership strategies
Corporate Venture Capital Funds
International Venture Capital Funds
Course Overview :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Course Overview Module 3: Structuring Investments/Financing
Terms of the initial investment/financing
Understanding deal terms
Evaluating deal terms
Negotiating deal terms
Follow-on investments
Later stage deals
Exiting Time for Entrepreneurship :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Exiting Time for Entrepreneurship Large increase in supply and demand for private equity
Massive inflows of funds into VC partnerships
Record number of firms in the industry
Huge opportunities
New technologies
Regulatory changes
Organizational changes
Unprecedented Flow of Funds into Start-up Companies :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Unprecedented Flow of Funds into Start-up Companies
World Wide rise in New Venture Financing :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION World Wide rise in New Venture Financing
Unprecedented number of IPOs :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Unprecedented number of IPOs
But there are differences... :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION But there are differences...
Why is entrepreneurship important? :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Why is entrepreneurship important? Central to Growth and Job Creation
Small companies earn 50% of GDP
Small companies provide 50% of jobs in US
Important for knowledge creation
Young firms patent “groundbreaking” innovations
Entrepreneurs have higher upward mobility
Small Firms are increasing in importance in the Economy :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Small Firms are increasing in importance in the Economy
But Uncertainty is High :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION But Uncertainty is High
Overview of Private Equity Markets :Overview of Private Equity Markets Corporate Pension Fund
Public Pension Funds
Endowments
Foundations
Bank holding companies
Wealthy Families and individuals
Insurance Companies
Investment banks
Non financial corporations
Other investors Limited Partnership
Managed by independent partnership organizations
Managed by affiliates of financial corporations Other Intermediaries
Small Business Investment Companies (SBICs)
Publicly traded investment companies New Ventures
Early stage
Later stage Middle-market private companies
Expansion
Capital expenditure
Acquisitios
Change in capital structure
Financial restructuring
Financial distress
Change in ownership
Retirment of owner
Corporate spinoffs Public companies
Management of leveraged buyouts
Financial distress
Special situations Dollars Limited partnership investment Dollars Equity claims on intermediary Dollars monitoring consulting Private equity securities Direct investments
(Includes direct investments by both BHIC and SBICs and venture capital subsidiaries of nonfinancial companies Private equity securities Dollars Investment advisors or investors
Evaluate limited partnershps
Manage “funds of funds” Placement agents for partnerships
Locate limited partnerships Placement agents for issuers
Advice issuers
Locate equity investors INVESTORS INTERMEDIARIES ISSUERS
Limited Partnerships :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Limited Partnerships 80% of investments in the organized private equity market flowed through intermediaries in 1995. These intermediaries help address:
Sorting problems in selecting investments
Incentive problems – monitoring managers
Limited partnerships raise and invest pools of capital from investors
These pools of capital are invested in a portfolio of investments
Partnership managers receive a management fee (percentage of committed capital) and a percentage of the profits
Typical life of a limited partnership :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Typical life of a limited partnership
Rules for investment :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Rules for investment
Venture Capital investment process :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Venture Capital investment process
Leading Technology Venture Firms as of December 2002 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Leading Technology Venture Firms as of December 2002
Buyout market development :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Buyout market development
Buyout Funds :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Buyout Funds
Investors in private equity :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Investors in private equity
Investors in private equity: LP Capital Commitments to VC Funds :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Investors in private equity: LP Capital Commitments to VC Funds
Investors in private equity: LP Capital Commitments to Buyouts/Other Non-Venture Funds :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Investors in private equity: LP Capital Commitments to Buyouts/Other Non-Venture Funds
European Private Equity raised by Investor Class in 2001 (millions) :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION European Private Equity raised by Investor Class in 2001 (millions)
Correlations between Venture Capital Returns and Returns to traditional Fund assets :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Correlations between Venture Capital Returns and Returns to traditional Fund assets
Largest Buyout transactions in 2002 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Largest Buyout transactions in 2002
Percentage Invested by stage in US (1996-2000) :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Percentage Invested by stage in US (1996-2000)
Stage distribution of investment bt percentage amount invested for Europe in 2001 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Stage distribution of investment bt percentage amount invested for Europe in 2001
Agents and Advisors :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Agents and Advisors
Agents and Advisors :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Agents and Advisors Agents for Portfolio Firms:
Help raise capital from limited partnerships
Provide search and evaluation and negotiation services
Mainly investment and commercial banks
Rates of Return on Private Equity Investments :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Rates of Return on Private Equity Investments Rates of returns on Venture Capital Vs. Nasdaq: Q3/86- Q4/02
Venture Capital, Buyout, and US Public Stock and Corporate Bond Returns:1983 to 2002 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Venture Capital, Buyout, and US Public Stock and Corporate Bond Returns:1983 to 2002
Pooled IRR Net to Investors as of December 31, 2002All Funds formed from 1969 to 2002 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Pooled IRR Net to Investors as of December 31, 2002All Funds formed from 1969 to 2002
Development of the organized Private Equity Market :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Development of the organized Private Equity Market
Development of the organized Private Equity Market :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Development of the organized Private Equity Market
Development of the organized Private Equity Market :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Development of the organized Private Equity Market
Development of the organized Private Equity Market :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Development of the organized Private Equity Market
Development of the organized Private Equity Market :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Development of the organized Private Equity Market
Development of the organized Private Equity Market :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Development of the organized Private Equity Market
Development of the organized Private Equity MarketNo. Billion Dollar Funds raised globally :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Development of the organized Private Equity MarketNo. Billion Dollar Funds raised globally
Development of the Organized Private Equity Market US Private Equity Overhang (Uninvested Capital) :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Development of the Organized Private Equity Market US Private Equity Overhang (Uninvested Capital)
Development of the Organized Private Equity Market: Europe from 1989 to Q3 2002 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Development of the Organized Private Equity Market: Europe from 1989 to Q3 2002
Private Equity Investment as a Percentage of GDP in 2001 :8204 ENTREPRENEURSHIP, FINANCE AND INNOVATION Private Equity Investment as a Percentage of GDP in 2001