Finance - Bottazzi Lecture 1

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Information about Finance - Bottazzi Lecture 1
Education

Published on May 11, 2008

Author: untellectualism

Source: authorstream.com

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

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