The Lee Kong Chian School of Business

Academic Year 2009 /10

FNCE 656 PRIVATE EQUITY & VENTURE CAPITAL

Instructor Name: Professor Winston Koh
Title: Professor of Economics
Tel: 6828-0853
Email: winstonkoh@smu.edu.sg
Office: SOE/SOSS Building, #05-033

COURSE DESCRIPTION

This elective course explores topics and issues in private equity and venture capital investing. The
level of entrepreneurial activity in an economy is an important determinant of its long-term growth
potential. Besides the availability of a large talent pool and a conducive business environment, the
access to venture capital and other types of entrepreneurial financing is a crucial factor in stimulating
high-growth entrepreneurial activity.

We will cover the principles of entrepreneurial financing, from the perspective of an entrepreneur
looking to build his venture, as well as from the perspective of venture capitalist looking to invest in
promising startups. Investment principles as well as valuation models such as discounted cash flow
models, P/E multiples, and alternative-pricing models will be covered. The different types of
valuation models such as discounted cash flow models, P/E multiples, and alternative-pricing models
will be discussed. We will also discuss the different forms of exit strategies, including initial public
offering, trade sales and buyouts.

LEARNING OBJECTIVES

The learning objectives of this course are as follows:

• Analyze and apply the principles of investment in venture capital and buyouts.
• Evaluate the differences in investing in venture capital and private equity and the potential risks
and returns.
• Analyze the rationale for investing in venture capital and private equity: diversification, control,
and return enhancement.
• Evaluate the different stages of venture capital investing, the investment process for a typical
venture investment, and the qualities that a venture capital firm looks for in a potential
investment.
• Analyze the compensation structure in venture capital firm; specifically, carried interest and
management fee.
• Analyze the key components of a termsheet, steps in due diligence and the importance of
ratchet provision and confidentiality clauses in investment agreements.
• Evaluate the key factors affecting the performance of venture capital investments and how the
risk/return tradeoff of investing in later-stage firms, compared with early-stage startups.
• Analyze the pros and cons of using the venture capital method in determining the valuation of
companies. strategies and assessment methods.

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ASSESSMENT METHODS

Class Participation 15% (Throughout the course)

Case Presentation and Discussion 25% (Please refer to class schedule)
Exam 60%
Total 100%

Academic Integrity

All work presented in this class must be students’ own work, and not copied without appropriate
citation from any source, including the Internet. Presenting of copied work not the student’s own
will result in disciplinary action, which may include award of zero marks for the assignment or a fail
grade for the class. This policy applies to all work submitted, either through oral presentation, or
written work, including outlines, briefings, group projects, self-evaluations, etc. Students are
encouraged to consult the lecturers if they have questions concerning the meaning of plagiarism or
whether a particular use of sources constitutes plagiarism.

INSTRUCTIONAL METHODS AND EXPECTATIONS

Readings, cases and notes will be given. Each session will kick off with an introduction to the topic,
based on the presentation notes provided. It would then be followed by case discussions. Groups
are assigned to read each case, and prepare presentations to the class. Students are expected to
participate actively in class. Groups will be assigned to read each case, and prepare presentations to
the class. There are some guiding questions to aid the discussion, but each group should feel free to
raise additional questions on the assigned case for discussion with the class.

Class Participation
Participation is a central part of the learning process for you and your classmates. When you
contribute, you help others learn. Your participation mark reflects your contribution to your
classmates learning. This includes attendance, full preparation prior to class including reading
assigned materials and active participation in class discussions and group activities.

Case Presentation
The objective of the case presentation is to give each group an opportunity to work on a topic
related to the course, and to present the findings in class. There are some guiding questions to aid
the discussion, but each group should feel free to raise additional questions on the assigned case for
discussion with the class. The presentation should be about 30 minutes.

Written Examination
There will be a written, open-book quiz at the end of the course. It will be a 2.5 hour paper. You
are expected to follow the school’s examination policy. Among other things, you need to bring your
own calculator(s) to the exams; you are not allowed to share calculator(s) with one another; you
also need to silence your cell phone and keep it away from the desk during the entire duration of
the exams.

RECOMMENDED TEXT AND READINGS

Readings, cases and notes will be given.

The following textbooks are general references for the course.

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Entrepreneurial Finance

• Janet Kiholm Smith, Richard L. Smith, Entrepreneurial Finance, Second Edition, Wiley & Sons.

Private Equity and Venture Capital

• Rick Lake and Ronald A. Lake, Private Equity and Venture Capital: A Practical Guidle for
Investors and Practitioners, Euromoney Books

• Josh Lerner and Felda Hardymon, Venture Capital and Private Equity: A Casebook, Volume
2, Wiley.

• David Gladstone and Laura Gladstone, Venture Capital Investing, Prentice Hall.

Buyouts

• Stuart Gilson, Creating Value Through Corporate Restructuring, Wiley & Sons.

• Patrick A. Gaughan, Mergers, Acquisitions, and Corporate Restructurings, 3rd Edition Wiley
& Sons.

Case readings will be made available in a course pack

WEEKLY SCHEDULE

Session Date Topic

1. 8 Sep 2009 Overview of the Private Equity Industry

2. 11 Sep 2009 Principles of Investing in Venture Capital
3. 12 Sep 2009 Ratchet Protection and Real Options
4. 15 Sep 2009 Financial Forecasting: The Use of Simulation
5. 19 Sep 2009 Sustainable Growth Model
6. 22 Sep 2009 Valuation: The Diversified Investor
7. 26 Sep 2009 Valuation: Full versus Partial Commitment
8. 27 Sep 2009 Buyouts
9. 4 Oct 2009 Test

Cases will be presented from Sessions 5 to Session 8.