Prof. Thomas J. Chemmanur

Office: Fulton Hall 336

Phone: (617) 552 3980

E-mail: chemmanu@bc.edu

Syllabus: Click here

Session 1 (Jan 20, 2016): Introduction and overview of Entrepreneurial Finance

(i) What is entrepreneurial finance and how it is different from corporate finance

(ii) Valuation: Review of conceptual issues. Discussion of two valuation methodologies: Discounted Cash Flow (DCF) and Valuation using Comparable Multiples

(iii) Performance of alternative valuation techniques

Review: Chapter 1 (LM); Chapters 11 and 12 (MY)

Reading: Gompers, P. A., “A Note on Valuation in Entrepreneurial Ventures.”

CASE DISCUSSION (no write-up needed): Atlantic Corporation.

Please download these three valuation examples: Examples

Lecture Slides on Introduction

Lecture Slides on Valuation

Problem Set I

Link: Securities and Exchange Commission Website

Link: Advanced Video: Robert Shiller Nobel Prize Lecture on Stock Valuation

Session 2 (Jan 27, 2016): Venture Capital Financing I

(i) The role of the venture capitalist and the private placement market in the early stages of financing a company

(ii) Differences between venture capital and other forms of private equity. Risk and return of private equity investments

(iii) Valuation of entrepreneurial firms using the Venture capital method

(iv) Alternatives to Venture Capital: Angel Financing and Crowd Funding

(v) Financial contracting, and the incentive effects of alternative venture capital contracts: Structuring a venture capital financing deal

(vi) A rationale for why venture capital deals often involve warrants and convertible securities

Review: Chapters 1, 2, 7 and 10 (MY); Chapters 10 and 11 (LM)

Reading: Sahlman, W. A., “Risk and Reward in Venture Capital.”

Reading: Lerner, J., and J. Willinge. “Note on Valuation in Private Equity Settings.”

Reading (Advanced): Chemmanur, T., K. Krishnan, and D. K. Nandy, “How Does Venture Capital Financing Improve Efficiency in Private Firms? A Look Beneath the Surface”, Review of Financial Studies, 2014. (Course Webpage)

Reading (Advanced): Mollick, E., “The dynamics of crowdfunding: an exploratory study”, Journal of Business Venturing, 2014. (Course webpage)

Reading: Smart Investors Foolish Choices

Reading: How Good are Private Equity Returns?

Lecture Slides on Venture Capital Financing Volume I

Lecture Slides on Venture Capital Financing Volume II

Problem Set II

Session 3 (Feb 3, 2016): First Half: Venture Capital Financing II: CASE DISCUSSION AND WRITE-UP: Digital Everywhere.

Second Half: Venture Capital Deal Structures I: Financial Securities and Term Sheets.

(i) Securities used in venture capital financing of new ventures

(ii) Structuring a venture capital term sheet for financing an entrepreneurial venture

Review: Chapters 8, 9 (MY); Chapter 13 (LM).

Reading: Wasserman, N., F. Nazeeri, and K. Anderson: A “Rich-vs.-King Approach to Term Sheet Negotiations.”

Reading: Hardymon, F., and J. Lerner, “Note on Private Equity Securities.”

Anatomy of a Term Sheet (PDF file)

More Term Sheet Explanations (PDF file)

Book Recommendation (Word file)

Lecture Slides on Private Equity Securities Volume I

Problem Set VII

Session 4 (Feb 10, 2016): Venture Capital Deal Structures II

(i) Securities used in venture capital financing of new ventures

(ii) Structuring a venture capital term sheet for financing an entrepreneurial venture

Lecture Slides on Private Equity Securities and Termsheets Volume II

Problem Set VII

Session 5 (Feb 17, 2016): First Half: CASE DISCUSSION AND WRITE-UP: edocs, Inc.

NVCA Termsheet

Second Half: How venture capitalists evaluate potential venture opportunities. How to Develop a Successful Business Plan.

Review: Chapters 2 and 3 (LM).

Reading: Roberts, M. J., and l. Barley, “How venture capitalists evaluate potential venture opportunities.”

Reading: Sahlman, W., “How to write a great business plan.”

Reading (Advanced): Kaplan, S. N., B. A., Sensory, 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, 2009.

Center for Business Plans

Lecture Slides on Venture Opportunity Screening

Session 6 (Feb 24, 2016): First Half: CASE DISCUSSION AND WRITE-UP: The Knot

Second Half: Evaluating Financial Performance

(i) Financial Statement Analysis and Ratio Analysis

Review: Chapters 4 and 5 (LM)

Lecture Slides on Buiness Plan

Assignment 2, 3, 4 and 5

Session 7 (March 2, 2016): Evaluating Financial Performance

(i) Financial Statement Analysis and Ratio Analysis

Review: Chapter 4, 5, and 6.6 (LM)

Lecture Slides on Financial Evaluation and Anlaysis Volume I (Revised Version)

Lecture Slides on Financial Evaluation and Anlaysis Volume II (Revised Version)

Assignments 2, 3, 4 and 5

Session 8 (Mar 16, 2016): Financial Planning and Forecasting for Entrepreneurial Ventures

(i) Short-term and long-term financial planning

(ii) Projecting financial statements.

Review: Chapters 6 and 9 (LM)

Lecture Slides on Short Term and Long Term Financial Planning

Lecture Slides on an Example Problem on Short Term Financial Planning

Assignments 1, 6 and 7

Session 9 (Mar 30, 2016): First Half: CASE DISCUSSION AND WRITE-UP: Clarkson Lumber Company

Second Half: Option Pricing

(i) Introduction to Option Pricing and the Binomial Model

(ii) Review of option pricing with the Black-Scholes formula

Review: Chapter 13 (MY)

Lecture Slides on Introduction to Option Pricing

Topic Note 7 on Derivative Securities

Topic Note 8 on Option Pricing Using Black-Scholes Formula

Normal Distribution Table Option Value Table

Problem Set V

Session 10 (April 6, 2016): Applications of option pricing to project and firm valuation: Real Options

(i) The option to delay undertaking a project

(ii) The option to expand a business in scale and to enter new markets

(iii) Valuing a new venture using the real options methodology

(iv) Using the real-option methodology to develop long-run financial strategy

Preliminary Proposal for the Final Course Project Due.

Review: Chapters 13 and 21 (MY)

Reading: Luehrman, T. A., “Investment Opportunities as Real Options: Getting Started on the Numbers”

Reading: Copeland, T. E., and Keenan, P. T., “How much is flexibility worth?”

Advanced Reading (Not Required for Exam): Luehrman, T.A., “Real Options Exercises.”

Problem Set VI

Lecture Slides on Real Options in Entrepreneurial Finance Vol I

Lecture Slides on Real Options in Entrepreneurial Finance Vol II

Link: RENAISSANCE CAPITAL - THE IPO EXPERTS - IPO CALENDAR AND PROFILES

Session 12 (Apr 20, 2016): First Half: Guest Lectures: Mark Bernfeld, Angel Investor and Raj Rajkumar, Venture Capitalist.

Second Half: Initial Public Offerings I

(i) Why go public? The costs vs. benefits of going public

(ii) Theories of IPO pricing

(iii) The role of the underwriter in an IPO: The importance of underwriter reputation.

Reading: Ritter, J. R. and I. Welch, “A Review of IPO Activity, Pricing, and Allocations”, Journal of Finance, 2002.

Reading: Loughran, Ritter, and Rydqvist, “Initial Public Offerings: International Insights”, Pacific-Basin Finance Journal, 1994

Reading: Kim, M., and J. R. Ritter, “Valuing IPOs”, Journal of Financial Economics, 1999.

Reading (Advanced): Chemmanur, T., “The pricing of initial public offerings: A dynamic model with information production”, Journal of Finance, 1993.

Lecture Slides on IPO Volume I: The IPO Process

Lecture Slides on Valuing IPOs

Session 13 (Apr 27, 2016): Initial Public Offerings II

First Half: CASE DISCUSSION AND WRITE-UP: Netscape’s Initial Public Offering.

Second Half: IPOs

(i) Discussion of IPOs and acquisitions

(ii) Recent developments in IPOs

(iii) The relationship between management quality and IPOs

(iv) The long-term (post-IPO) performance of newly public firms

Reading: Ritter, J. R., 1999, “The Long-Run Performance of IPOs”, Journal of Finance

Reading (Advanced): Chemmanur, T., J. He, S. He, and D. Nandy, 2018, "Product Market Characteristics and the Choice Between IPOs and Acquisitions", Journal of Financial and Quantitative Analysis

Reading (Advanced): Chemmanur, T. J., and O. Bayar, 2011, “IPOs versus Acquisitions and the Valuation Premium Puzzle: A Theory of Exit Choice by Entrepreneurs and Venture Capitalists”, Journal of Financial and Quantitative Analysis.

Reading (Advanced): Chemmanur, T. J., and I. Paeglis, 2005, "Management Quality, Certification, and Initial Public Offerings", Journal of Financial Economics.

Reading (Advanced): Chemmanur, T. J., G. Hu, and J. Huang, 2010, "The Role of Institutional Investors in IPOs", Review of Financial Studies.

Reading (Advanced): Chemmanur, T. J., and P. Fulghieri, 1999, "A Theory of the Going-Public Decision", Review of Financial Studies.

Lecture Slides on IPO Volume II: Market Players and Evidence

Lecture Slides on IPO Volume III: Long Run IPO Performance, the Going Public Decison, and the Role of Institutional Investors in IPOs

Session 14 (May 4, 2016): Final Project Due (Final exam day)