Venture Capital and the Finance of Innovation
3. Edition April 2021
496 Pages, Softcover
Wiley & Sons Ltd
An invaluable resource for current and aspiring technology investors, Venture Capital and the Finance of Innovation provides an in-depth understanding of the tools and models needed to succeed in this competitive and highly fluid business environment. Building on a comprehensive introduction to fundamental financial and investment principles, the text guides the reader toward a robust skill set using enterprise valuation and preferred stock valuation models, risk and reward, strategic finance, and other concepts central to any venture capital and growth equity investment.
Two features of the book stand out from other sources on the subject. First, it pays special attention to the enterprise valuation methodology for high-growth companies. What drives the value of a company that has little physical assets, losing money now but has a small chance of achieving great success in several years? How do you create estimates for sales, profit and return on capital when little data is available? The book answers these questions using a discounted cash flow model that is tailor-made for technology companies (DCF.xlsx downloadable from the instructor website), and the comparables model. Second, it highlights the most valuation-relevant feature of VC term sheets, namely the use of convertible preferred stock. The book shows the reader how to use a user-friendly and automated valuation model of VC preferred stock (available at www.vcvtools.com) to value various types of preferred stock and to visualize how term sheets split the values of the firm between entrepreneurs and VCs.
Accessible, comprehensive, and assuming only basic knowledge of venture capital, this text offers essential guidance for successful VC and growth equity investing in any market.
CHAPTER 1 THE VC INDUSTRY 3
CHAPTER 2 VC PLAYERS 21
CHAPTER 3 VC RETURNS 46
CHAPTER 4 THE COST OF CAPITAL FOR VC 65
CHAPTER 5 THE BEST VCs 83
CHAPTER 6 VC AROUND THE WORLD 99
PART II TOTAL VALUATION
CHAPTER 7 THE ANALYSIS OF VC INVESTMENTS 123
CHAPTER 8 TERM SHEETS 146
CHAPTER 9 PREFERRED STOCK 163
CHAPTER 10 THE VC METHOD 178
CHAPTER 11 DCF ANALYSIS OF GROWTH COMPANIES 195
CHAPTER 12 COMPARABLES ANALYSIS 214
PART III PARTIAL VALUATION
CHAPTER 13 OPTION PRICING 231
CHAPTER 14 THE VALUATION OF PREFERRED STOCK 252
CHAPTER 15 LATER-ROUND INVESTMENTS 272
CHAPTER 16 PARTICIPATING CONVERTIBLE PREFERRED STOCK 290
CHAPTER 17 IMPLIED VALUATION 305
CHAPTER 18 COMPLEX STRUCTURES 320
PART IV THE FINANCE OF INNOVATION
CHAPTER 19 R&D FINANCE 339
CHAPTER 20 MONTE CARLO SIMULATION 357
CHAPTER 21 REAL OPTIONS 378
CHAPTER 22 BINOMIAL TREES 400
CHAPTER 23 GAME THEORY 419
CHAPTER 24 R&D VALUATION 445
APPENDIX A SAMPLE TERM SHEET 466
APPENDIX B THE VCFI SPREADSHEETS 484
APPENDIX C GUIDE TO CRYSTAL BALLs 487
GLOSSARY 512INDEX 535
"Metrick and Yasuda continue to provide the most comprehensive reference for venture capital. Their treatment of valuation, contracts, and returns is both rigorous and accessible. Every student of the industry should have this book on their shelves."--Paul Gompers, Eugene Holman Professor of Business Administration, Harvard Business School
"A new and improved version of my go to book for students, GPs and LPs to learn and understand the fundamentals and nuances of VC investing."--Steven N. Kaplan, Neubauer Family Professor of Entrepreneurship and Finance, University of Chicago Booth School of Business
"If you want to understand the venture capital industry, this is the book."-Jay R. Ritter, Joseph B. Cordell Eminent Scholar, Warrington College of Business, University of Florida
