30186 - VENTURE AND DEVELOPMENT CAPITAL
Course taught in English
Go to class group/s: 31
Class 31: CLAUDIO ZARA
This course is also a quantitative course but it does not focus on either mathematical derivations or complicated statistical analysis. It does require some basics in mathematics and statistics for finance. Financial Mathematics, Accounting, and Corporate Finance are advisable prerequisites for Bocconi students. For Exchange students, having attended similar courses is warmly suggested. You should have reasonable knowledge of the basics in financial mathematics such as the time value of money, annuities and perpetuities; the basics in statistics such as mean/standard deviation, variance/covariance and probabilities; the basics in accounting such as being able to read information contained in balance sheets, income statements and cash flow statements; the basics in corporate finance, such as CAPM and cost of capital.
VC industry is increasingly gaining relevance both in the field of venture financing and as an asset class inside investors’ portfolios. For example, in the US venture capital companies invested US$ 33.2 billion (from seed to expansion stages) in 3,685 deals (source: NVCA) in 2016 and they raised around $ 28.2 billion of new commitment for investment purposes. In 2016 European venture capital firms invested € 14 billion in 2.827 companies and they raised € 10.3 billion of new funds for investment purposes; in terms of divestments, in Europe VC industry sold 2.568 companies obtaining 8.3 billion in cash (source: InvestEurope). Students who attend this course learn what the features and the issues affecting venture and development capital’s activity are. The mission of this course is to develop an in-depth knowledge of the VC industry in order to let students be able to carry out an investment analysis in a proper way, taking into consideration all the specific terms and features that affect a VC deal. Moreover, students who attend the course are able to enter in touch with a real VC deal, to embrace both the investor’s and the investee’s perspectives and to put in practice the know how learnt during the course.
The course is split in two parts.
- The first part is focused on the financial features of VC target companies, the VC industry characteristics and the management of VC companies.
- The second part devotes attention to carry out a comprehensive analysis of an investment opportunity from the VC company’s point of view.
- What is Venture and Development Capital (VC) and why it exists.
- Why are VC target firms special? Why and when are they not able to raise capital in the debt market?
- Which are the solutions offered by venture capitalists to the firm’s financial needs. The relationships between the entrepreneur (the firm) and the outside investor (the VC company).
- Venture and Development Capital: industry overview.
- How to invest: legal framework, strategies and investment vehicles.
- Investor categories who place funds in the VC industry (financial institutions and pension funds, family offices, corporations, government and local authorities, informal investors).
- The fintech phenomenon: crowdfunding and ICO.
- How to regulate the relationship between general and limited partners ring fenced in investment schemes: disclosure and accountability; incentives schemes; how to share returns between parties.
- Investment criteria and investment styles (round financing, milestones, venture debt, portfolio leverage and exit way).
- How to read and analyse a business plan. Business models and revenue forecast.
- Investment valuation: valuation criteria, relevant cash flow and cost of capital measures.
- Investment valuation: valuation model, explicit and implicit values.
- How to put valuation model in practice.
- Investment decision process: terms of the deal, share price, expected IRR and investment recommendation.
- Explain how the fundamental financial theories work, or don’t work, inside the venture capital industry.
- Dig deeper on venture capital as an asset class and motivation to investment.
- Recognize which are the target companies venture capitalists wish to invest in.
- Explain investment schemes and management of the investor.
- Read the financial forecast inside the venture's business plan and indicate what VC looks for.
- Know and apply topics affecting new venture valuation for fully diversified financial investors.
- Describe the investment decision process in the eyes of the risk-return combination.
- Evaluate and organize the financial requirements and fund raising process for starting and developing a venture.
- Consider and analyze the structure and behaviour of the venture capital industry and players.
- Apply relevant criteria and models used in the VC industry for screening opportunities effectively.
- Assess a business plan and carry out its screening (including information needed to carry out a feasibility study of a business opportunity, how to look for them, how to structure the study in a written format).
- Consider and analyze the investment policies, the assessment criteria and the IRR objectives for fully diversified financial investors, such as venture capital investors.
- Successfully sustain a job/internship assessment in the field of VC industry.
- (Only for attending students) carry out a financial analysis inside a group of peers, manage the relations inside the group and present the outputs to a community of professionals.
- Face-to-face lectures
- Exercises (exercises, database, software etc.)
- Case studies /Incidents (traditional, online)
- Group assignments
- Exercises: in the first part of the course some numerical analysis support the explanation of key concepts and applications, such as business life cycle, investment scheme economics and return sharing, portfolio analysis. In the second part of the course the investment analysis are supported by several spreadsheets that are applied for both understanding the theoretical framework and putting in practice the valuation and decision taking models.
- Case studies/Incidents: the course is fully supported by the analysis of a pivotal case study in order to show examples referred to the main contents of the course. Moreover, in the first part of the course a bunch of case studies allow to discuss and put in practice some key features affecting the VC industry.
- Group Assignment: students who join the group assignment have the opportunity to enter in touch with a real target firm and carry out a real financial analysis, in the eyes of a VC company, starting from the business plan provided by the entrepreneur. The assignment offers the opportunity to put in practice the know how learnt during the course and it is the ideal complementary activity to lectures attendance. Group members work together for the final goal and they are able to contribute to each single task also in relation to their individual background. The assignment also allows students to develop soft skills such as problem solving, time management, present in front of an audience and write a report in a given format. The enrolment of the assignment is limited to a given number of students.
|Continuous assessment||Partial exams||General exam|
For attending students, the assessment process is divided in three parts.
- Written exam (a combination between multiple choice questions and a short essay, weight 50%). Assessment criteria: ability to describe and critically review all the topics covered inside the syllabus (closed-ended question part); ability to argue and critically review complex topics inside the syllabus as well as practice main criteria for the investment selection and decision processes (open-ended question part).
- Group assignment, split in two parts (weight 40%). Assessment criteria: the assignment outputs refer to both written reports (a partial report and a final-term report) and pitch presentations of the reports (a partial and a final-term presentations). The assessment of the presentations relies also on soft skills such as the quality of the slide show, the ability to argue. The assessment of the reports refers more on the ability to put in practice the know how learnt during the course and the consistency of the analysis carried out.
- Class attendance and participation (weight 10%). Assessment criteria: ability to actively participate in discussions; ability to generate original contributions and ideas; ability to present short topics to the peers.
For students who either do not joint the assignment or do not attend the lectures there is a written exam at the end of the course (a mix between multiple choice and open questions). Assessment criteria: ability to describe and critically review all the topics covered inside the syllabus (closed-ended question part); ability to argue and critically review complex topics inside the syllabus as well as practice main criteria for the investment selection and decision processes (open-ended question part).
- Textbook: J.K. SMITH, R.L. SMITH, R.T. BLISS, Entrepreneurial Finance. Strategy, Valuation and Deal Structure, Stanford University Press, 2011 (Chapter 1, 2, 3, 6, 7, 9, 10, 16).
- Slides, excel files, cases and other material are distributed through the course e-learning web site.