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Product Description
This useful guide walks venture capitalists through the principles of finance and the financial models that underlie venture capital decisions. It presents a new unified treatment of investment decision making and mark–to–market valuation. The discussions of risk–return and cost–of–capital calculations have been updated with the latest information. The most current industry data is included to demonstrate large changes in venture capital investments since 1999. The coverage of the real–options methodology has also been streamlined and includes new connections to venture capital valuation. In addition, venture capitalists will find revised information on the reality–check valuation model to allow for greater flexibility in growth assumptions.
From the Back Cover
THE FINANCIAL PRINCIPLES EVERY VENTURE CAPITALIST NEEDS TO MASTER
In Venture Capital and the Finance of Innovation, Second Edition, future and current venture capitalists will find a useful guide to the principles of finance and the financial models that underlie venture capital decisions. Assuming no knowledge beyond concepts discovered in first–year MBA courses, the book will familiarize you with:
- The relationships between risk and return in venture capital.
- Total Valuation–the data and methods used to value a high–growth company.
- Partial Valuation–how to visualize and evaluate the special features of VC transactions such as convertible preferred stock, participating preferred stock, payment–in–kind dividends, and liquidation preferences.
New to the Second Edition:
- NEW Rankings of the best venture capitalists.
- NEW web–based model (VCVtools.com) allowing easy visualization and valuation so multiple term sheets in a start–up.
- Discussion of challenges facing venture capital in the second decade of the 21st century.
Inside This Book
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11 reviews
20 of 20 people found the following review helpful
Best book of its kind
25 Jan 2007
Format:Hardcover
Metrick's book clearly and concisely illustrates the finance behind venture capital. Accessibly written, this book is the kind of book you would use to teach yourself how to apply the tools of finance to VC. I found it especially useful in understanding the different structures VCs use and in understanding the impact of additional financing on the valuation of a prior investor's shares. The examples in the book are well done and walk the reader through the numbers in a way that is easy to follow and illuminates the ideas articulated in the text.
This book is for anyone who wants to:
- understand how to apply finance to VC
- understand the different structures VCs use to protect their interests (this book is especially for entrepreneurs who want to understand the financial terms of a VC's offer)
- learn how to apply option pricing theory and Monte Carlo simulation to make financially informed decisions about R&D, etc.
You don't need a background in finance to get value out of this book (although it is helpful to be quantitatively inclined). It's written clearly enough and the math is simple enough that anyone with a working knowledge of algebra should be ok.
This book is NOT for people who want a book on how to be a VC, or how to evaluate a management team or business idea. While the book definitely has practical implications, in reality VCs probably don't actually use very many of the financial models in the book because they haven't bothered to build them. After reading this book, you'll be able to understand these models and, if you're good with Excel, build them yourself.
All in all, whoever buys this book will come away with the vocabulary and financial frameworks necessary to have an intelligent conversation with a VC. It's by far the best book of its kind.
This book is for anyone who wants to:
- understand how to apply finance to VC
- understand the different structures VCs use to protect their interests (this book is especially for entrepreneurs who want to understand the financial terms of a VC's offer)
- learn how to apply option pricing theory and Monte Carlo simulation to make financially informed decisions about R&D, etc.
You don't need a background in finance to get value out of this book (although it is helpful to be quantitatively inclined). It's written clearly enough and the math is simple enough that anyone with a working knowledge of algebra should be ok.
This book is NOT for people who want a book on how to be a VC, or how to evaluate a management team or business idea. While the book definitely has practical implications, in reality VCs probably don't actually use very many of the financial models in the book because they haven't bothered to build them. After reading this book, you'll be able to understand these models and, if you're good with Excel, build them yourself.
All in all, whoever buys this book will come away with the vocabulary and financial frameworks necessary to have an intelligent conversation with a VC. It's by far the best book of its kind.
15 of 17 people found the following review helpful
A Mostly Academic Text
27 Dec 2007
Format:Hardcover|Amazon Verified Purchase
Clearly, the Finance of Innovation was a major undertaking for professor Metrick. It is filled with useful facts that have some practicality and a great deal more academic thought. Yet, as he mentions early in the text, VCs use few of the methods outlined. Specifically, the heavy reliance on option theory is overly complicated and not useful for the practitioner. More importantly, however, is that it is somewhat misguided to focus on the randomness of liquidation events. Venture investments are very different from public equity investments as venture investors seek to actively direct their portfolio companies to the most favorable outcomes.
Throughout the book, Metrick reverts to Black-Scholes option valuation to demonstrate how a venture investment could resemble a call option. While this technique could possibly be useful for biotech investments where FDA approvals and clinical trial outcomes are unknown at the time of the investment, it doesn't make logical sense for most VC or private equity investments. In many cases, a company could be made more attractive to acquirers (and hence more valuable) merely by the stamp of approval realized by an initial celebrity VC investment. This would be the first of a number of actions undertaken by the general partners of the fund to impact the investment's valuation.
In reality, what limited partners are paying for when they agree to give general partners 20% of the carry is their expertise in facilitating the strategic direction of portfolio companies, ability to identify and recruit management, and use of their contacts for business development and, ultimately, the best liquidation outcome. These are decidedly not random events.
Given the somewhat academic nature of the book, it is ideally suited for a textbook. It is indeed well written with very few typographical errors. I would suggest the first third of the book for those interested in an introduction to the field of venture capital and the remaining two thirds for those learn more academic theory that may be relevant to certain venture capital investments.
Throughout the book, Metrick reverts to Black-Scholes option valuation to demonstrate how a venture investment could resemble a call option. While this technique could possibly be useful for biotech investments where FDA approvals and clinical trial outcomes are unknown at the time of the investment, it doesn't make logical sense for most VC or private equity investments. In many cases, a company could be made more attractive to acquirers (and hence more valuable) merely by the stamp of approval realized by an initial celebrity VC investment. This would be the first of a number of actions undertaken by the general partners of the fund to impact the investment's valuation.
In reality, what limited partners are paying for when they agree to give general partners 20% of the carry is their expertise in facilitating the strategic direction of portfolio companies, ability to identify and recruit management, and use of their contacts for business development and, ultimately, the best liquidation outcome. These are decidedly not random events.
Given the somewhat academic nature of the book, it is ideally suited for a textbook. It is indeed well written with very few typographical errors. I would suggest the first third of the book for those interested in an introduction to the field of venture capital and the remaining two thirds for those learn more academic theory that may be relevant to certain venture capital investments.
6 of 6 people found the following review helpful
Must buy and extremely useful for anyone in VC, R&D and Strategy
27 Jan 2007
Format:Hardcover
That's a great book that gives a comprehensive overview of all finance aspects that are related to VC, R&D and innovation. It has a useful and effective framework of how to think of innovation in a methodical way. After working as a strategy consultant for a couple of years I thought that with the knowledge I gained from this book I will be far more effective: more effective in analysing alternatives and assesing them and more effective in communicating it to my clients. The balance between theory and practical application of finance is exactly what I was looking for.
If you are intrested in VC in general, the first part of it will provide you with a comprehensive overview of the VC industry.
If you are intrested in VC in general, the first part of it will provide you with a comprehensive overview of the VC industry.
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