This course focuses on the venture capital and private equity industry, where private equity is defined as the universe of investments in private (non-publicly traded) vehicles. Within the universe of private equity, the course will focus primarily on venture capital, however, treatment of the structure of the overall PE firm will be covered, in addition to topical coverage of leveraged buyouts and other PE vehicles. We will take the perspective both of the VC and PE firm and of the investor in VC and PE funds. The course follows the private equity “cycle” – the structuring and governance of a fund, how the money is used, valuation techniques for early stage investments, contracting and term sheets, and exit of investments. The course will review economics; finance; tax; securities; corporate and employment considerations; and, finally, custom and usage in the industry, with an emphasis placed on financial contracting and valuation. We will also touch on international aspects of VC and PE.

Word of warning: if you are looking for a course primarily focused on LBOs, this may not be the course for you. We will cover the structure of LBO funds and deals to some extent, but we will not cover valuation in companies with established revenues. The reasoning for this is simple: we have plenty of mainstream finance courses that cover in detail valuation of well-established companies. Rather than duplicating the efforts of those courses, in this course we will focus on taking traditional valuation approaches and learning about the challenges of applying them to early stage ventures without established revenues and cash flows. If you are interested in later stage investing and buyouts, you would be wise to supplement this class with the finance elective courses in Fin Decisions, Corporate Restructuring, and Hedge Funds and Private Equity.

In the investor fund relationship, we will study the issues faced in structuring private equity partnerships and raising funds for them. We will also look at the challenges faced by those investing in these funds. We will focus on the incentives faced by PE partnerships and by the investors in those partnerships, as well as why the incentives and contractual terms take the form they do.

In the fund-portfolio company relationship, we study the role of the PE partnership in choosing, valuing, structuring and managing private equity investments. We will look at particular investments considered or made by VC and LBO partnerships. We finish this section by studying the issues faced by PE partnerships in exiting their investments. We consider why particular methodologies and structures have evolved as they have, as well as possible ways to improve on them.

To wrap up the course, we take an international perspective on the industry, discussing the industry in developing countries and ways in which governments have successfully and unsuccessfully attempted to jumpstart their VC/PE industries.

A strong focus of the course will be on contracts and the economic logic behind them, and how the different parties' incentives play out. Also, please note that VC/PE is a much more interdisciplinary setting than most finance courses, and this will be reflected in the material covered in the course.

The course will utilize cases, lectures, class discussion and guest speakers. Students should anticipate preparing a number of case writeups as well as a final project.


Is there a significant overlap with 446 - Entrepreneurial Finance?

I do not anticipate a significant overlap between the classes. 446 will cover the Venture Capital Industry during one week of the course. 445 spends 10 weeeks exclusively focused on the VC and PE industries, and will go into depth on many issues not covered in 445. We have anticipated these concerns, and the classes are specifically designed not to have a significant overlap.


Optional Related Readings on VC/PE

The Money of Invention, by Paul Gompers and Josh Lerner

Fundamentals of Venture Capital, by Joseph Bartlett

Structuring Venture Capital, Private Equity and Entrepreneurial Transactions, by Jack Levin