- Page 2: This page intentionally left blank
- Page 6: This page intentionally left blank
- Page 10: EDITOR Lacey Vitetta PROJECT EDITOR
- Page 14: vi BRIEF CONTENTS PART III PARTIAL
- Page 18: viii PREFACE TO 2 ND EDITION—A RE
- Page 22: x PREFACE TO 2 ND EDITION—A READE
- Page 28: ACKNOWLEDGMENTS This book would not
- Page 32: For Susie, David, and Amy AM For Ga
- Page 36: CONTENTS PART I VC BASICS CHAPTER 1
- Page 40: PART II TOTAL VALUATION CHAPTER 7 T
- Page 44: PART III PARTIAL VALUATION CHAPTER
- Page 48: 19.2 Two Touchstones 345 19.2.1 Dru
- Page 52: PARTI VC BASICS 1
- Page 56: CHAPTER1 THE VC INDUSTRY IN THIS CH
- Page 60: 1.1 WHAT IS VENTURE CAPITAL? 5 Char
- Page 64: EXHIBIT 1-2 PRIVATE EQUITY AND HEDG
- Page 68: 1.2 WHAT DO VENTURE CAPITALISTS DO?
- Page 72: countries, with the United States s
- Page 76:
1.3 THE HISTORY OF VENTURE CAPITAL
- Page 80:
late-stage. A more complete descrip
- Page 84:
EXHIBIT 1-6 VC INVESTMENT BY STAGE
- Page 88:
EXHIBIT 1-8 REGIONAL DISTRIBUTION O
- Page 92:
CHAPTER2 VC PLAYERS THIS CHAPTER in
- Page 96:
EXHIBIT 2-1 EARLYBIRD VENTURES TIME
- Page 100:
2.1 FIRMS AND FUNDS 25 raised in mo
- Page 104:
EXHIBIT 2-3 VC COMPENSATION (IN $ T
- Page 108:
2.2 THE LIMITED PARTNERS 29 explain
- Page 112:
Our next example uses a more comple
- Page 116:
2.3 VC PARTNERSHIP AGREEMENTS 33 ne
- Page 120:
2.3 VC PARTNERSHIP AGREEMENTS 35 Th
- Page 124:
the LPs are entitled to all the exi
- Page 128:
EXHIBIT 2-6 RESTRICTIVE COVENANTS F
- Page 132:
of particular concern around the ti
- Page 136:
2.2 (This is a little bit tricky.)
- Page 140:
pursuant to the distribution formul
- Page 144:
Because we will often be interested
- Page 148:
EXHIBIT 3-3 SAND HILL INDEX s VERSU
- Page 152:
EXHIBIT 3-4 CA INDEX s VERSUS NASDA
- Page 156:
net return of 12.8 2 4.0 5 8.8 perc
- Page 160:
3.2 FUND RETURNS 55 clearly returne
- Page 164:
Problem Compute the IRR, value mult
- Page 168:
EXAMPLE 3.3 XYZ Partners is raising
- Page 172:
3.2 FUND RETURNS 61 number for fund
- Page 176:
KEY TERMS Periodic return Compound
- Page 180:
CHAPTER4 THE COST OF CAPITAL FOR VC
- Page 184:
4.1 THE CAPITAL ASSET PRICING MODEL
- Page 188:
Problem Use Equations (4.1) and (4.
- Page 192:
One islander hits upon a solution:
- Page 196:
4.2 BETA AND THE BANANA BIRDS 73 wo
- Page 200:
have investors flocking to the asse
- Page 204:
(http://finance.yahoo.com). The lon
- Page 208:
SUMMARY 79 EXHIBIT 4-6 PASTOR-STAMB
- Page 212:
4.2 True, False, or Uncertain: Earl
- Page 216:
CHAPTER5 THE BEST VCs IN THIS CHAPT
- Page 220:
EXHIBIT 5-1 RETURNS AND INVESTMENT
- Page 224:
A few comments on the criteria used
- Page 228:
ased on the performance from the 19
- Page 232:
KPCB has recently made big bets in
- Page 236:
5.2 THE BEST VCs: A SUBJECTIVE LIST
- Page 240:
5.3 VC VALUE ADDED AND THE MONITORI
- Page 244:
5.3 VC VALUE ADDED AND THE MONITORI
- Page 248:
CHAPTER6 VC AROUND THE WORLD THE MO
- Page 252:
EXHIBIT 6-2 THE GLOBAL DISTRIBUTION
- Page 256:
6.1 THE GLOBAL DISTRIBUTION OF VC I
- Page 260:
EXHIBIT 6-4 TIME TO START A BUSINES
- Page 264:
EXHIBIT 6-5 INDEX OF PROTECTIONS AG
- Page 268:
EXHIBIT 6-6 SOVEREIGN SPREAD OF DOL
- Page 272:
the fraction of entrepreneurs in Ne
- Page 276:
investment, Telco would like to kno
- Page 280:
6.2 THE COST OF CAPITAL FOR INTERNA
- Page 284:
6.2 THE COST OF CAPITAL FOR INTERNA
- Page 288:
Solution We can see in the betas.xl
- Page 292:
PARTII TOTAL VALUATION 121
- Page 296:
CHAPTER7 THE ANALYSIS OF VC INVESTM
- Page 300:
EXHIBIT 7-1 PORTFOLIO COMPANY STATU
- Page 304:
7.1 VC INVESTMENTS: THE HISTORICAL
- Page 308:
EXHIBIT 7-5 PORTFOLIO COMPANY STATU
- Page 312:
7.1 VC INVESTMENTS: THE HISTORICAL
- Page 316:
7.1 VC INVESTMENTS: THE HISTORICAL
- Page 320:
EXHIBIT 7-11 10-YEAR AVERAGE VC FIN
- Page 324:
7.2 THE INVESTMENT PROCESS 137 othe
- Page 328:
7.2 THE INVESTMENT PROCESS 139 Both
- Page 332:
treat due diligence in detail. 10 I
- Page 336:
principle, channel analysis should
- Page 340:
KEY TERMS Screening Term sheet Due
- Page 344:
This chapter contains a good deal o
- Page 348:
The real-options analysis of Chapte
- Page 352:
8.2 THE CHARTER The Charter, also k
- Page 356:
8.2.1 Dividends In public companies
- Page 360:
A Preferred shall be redeemable fro
- Page 364:
Non-Competition and Non-Solicitatio
- Page 368:
quarterly, or monthly increments, u
- Page 372:
8.4.2 Founders’ Stock The buyback
- Page 376:
CHAPTER9 PREFERRED STOCK IN THE UNI
- Page 380:
EXHIBIT 9-2 EXIT DIAGRAM FOR CP CP
- Page 384:
Structures IV and V have mandatory
- Page 388:
EXHIBIT 9-5 EXIT DIAGRAM FOR RP + C
- Page 392:
EXHIBIT 9-9 EXIT DIAGRAM FOR THE SE
- Page 396:
EXHIBIT 9-12 EXIT PROCEEDS UNDER AL
- Page 400:
9.2 ANTIDILUTION PROVISIONS 175 Pro
- Page 404:
KEY TERMS Conversion condition, Con
- Page 408:
about the reduction to the proposed
- Page 412:
10.1 THE VC METHOD: INTRODUCTION 18
- Page 416:
for all first-round investments was
- Page 420:
our estimate of the exit valuation.
- Page 424:
Conceptually, it is straightforward
- Page 428:
EXHIBIT 10-2 VC METHOD SPREADSHEET
- Page 432:
Step 4: For this example, we assume
- Page 436:
EXERCISES 193 (a) Suppose that each
- Page 440:
CHAPTER11 DCF ANALYSIS OF GROWTH CO
- Page 444:
figure out how long rapid growth wi
- Page 448:
To do this, we abstract from the ac
- Page 452:
the acquisition of assets from othe
- Page 456:
EXHIBIT 11-5 NI AND CF CALCULATIONS
- Page 460:
GV 5 ð1 2 g=RÞ E=ðr 2 gÞ: ð11:
- Page 464:
matching the firm’s revenue growt
- Page 468:
EXHIBIT 11-8 REALITY-CHECK DCF MODE
- Page 472:
EXHIBIT 11-9 REALITY-CHECK DCF FOR
- Page 476:
Earnings 5 Net Income Net investmen
- Page 480:
12.1 INTRODUCTION TO COMPARABLES AN
- Page 484:
(not bondholders), the P/E numerato
- Page 488:
12.2 CHOOSING COMPARABLE COMPANIES
- Page 492:
have about $50M in revenue, 150 emp
- Page 496:
EXHIBIT 12-5 VALUATION MULTIPLES 12
- Page 500:
12.3 USING COMPARABLE COMPANIES TO
- Page 504:
KEY TERMS Comparables analysis 5 mu
- Page 508:
PARTIII PARTIAL VALUATION 229
- Page 512:
CHAPTER13 OPTION PRICING PART III P
- Page 516:
13.1 EUROPEAN OPTIONS 233 Exhibit 1
- Page 520:
EXHIBIT 13-3 BOND VALUES ON GOOD DA
- Page 524:
13.2 PRICING OPTIONS USING A REPLIC
- Page 528:
The Black-Scholes formula may look
- Page 532:
is zero. An unbiased approximation
- Page 536:
same Black-Scholes formula to price
- Page 540:
Problem What is the value of the RE
- Page 544:
Problem What is the exit equation c
- Page 548:
investments. Although the assumptio
- Page 552:
EXHIBIT 13-13 SURVIVAL PLOT FOR RE
- Page 556:
In Section 14.3, we show how to ext
- Page 560:
EXHIBIT 14-1 EXIT DIAGRAM FOR THE S
- Page 564:
14.3 EXCESS LIQUIDATION PREFERENCES
- Page 568:
Reality Check: The preceding analys
- Page 572:
EXHIBIT 14-6 SENSITIVITY ANALYSIS F
- Page 576:
14.6 CP WITH EXCESS LIQUIDATION PRE
- Page 580:
EXAMPLE 14.6 Suppose EBV is conside
- Page 584:
EXHIBIT 14-11 EXIT DIAGRAM FOR SERI
- Page 588:
EXHIBIT 14-13 EXIT DIAGRAM FOR SERI
- Page 592:
14.3 Suppose EBV is considering a $
- Page 596:
Problems (a) What is the LP valuati
- Page 600:
A comparison of Equations (15.5) an
- Page 604:
15.2 A CONVERSION SHORTCUT 15.2 A C
- Page 608:
Next, we estimate partial valuation
- Page 612:
EXHIBIT 15-5 EXIT DIAGRAM FOR SERIE
- Page 616:
15.4 DIVIDENDS IN LATER ROUNDS 283
- Page 620:
Series A RVPSðTÞ 5 ð1 1 0:12TAÞ
- Page 624:
Series C conversion condition : 1=3
- Page 628:
valuations considered in Exhibit 15
- Page 632:
for a finite threshold. To solve fo
- Page 636:
proceeds. At W 5 90, this share wou
- Page 640:
The (voluntary) conversion conditio
- Page 644:
(d) Plot the LP valuation for both
- Page 648:
EXHIBIT 16-7 LP VALUATION AND COST
- Page 652:
Series D cap point 5 WDðcapÞ 5 $1
- Page 656:
We can read this diagram as Partial
- Page 660:
CHAPTER17 IMPLIED VALUATION IN CHAP
- Page 664:
EXHIBIT 17-1 VALUE DIVISION AFTER S
- Page 668:
(c) The GP valuation is GP valuatio
- Page 672:
EXHIBIT 17-5 VALUE DIVISION AFTER S
- Page 676:
EXHIBIT 17-6 EXIT DIAGRAM FOR SERIE
- Page 680:
the value of the RP component, and
- Page 684:
We can read this diagram as The LP
- Page 688:
EXERCISES EXERCISES 319 17.1 True,
- Page 692:
proceeds to be given to management.
- Page 696:
We can read this diagram as Partial
- Page 700:
EXHIBIT 18-4 EXIT DIAGRAM FOR MANAG
- Page 704:
(b) To compute the breakeven valuat
- Page 708:
EXHIBIT 18-8 EXIT DIAGRAM FOR THE S
- Page 712:
So far, these are exactly the same
- Page 716:
EXHIBIT 18-10 EXIT DIAGRAM FOR THE
- Page 720:
EXERCISES 335 18.2 We use the same
- Page 724:
PARTIV THE FINANCE OF INNOVATION 33
- Page 728:
CHAPTER19 R&D FINANCE RESEARCH AND
- Page 732:
EXHIBIT 19-2 R&D SHARE OF GDP, MOST
- Page 736:
EXHIBIT 19-4 R&D EXPENDITURE BY SOU
- Page 740:
more than $5B in R&D are “transpo
- Page 744:
the FDA relies heavily on advisory
- Page 748:
EXHIBIT 19-8 FUEL CELL PROJECT Proj
- Page 752:
EXHIBIT 19-9 R&D EXPENDITURE AND CO
- Page 756:
19.3 HOW IS R&D FINANCED? 353 far a
- Page 760:
Exhibits 19-7 and 19-8, summarize t
- Page 764:
CHAPTER20 MONTE CARLO SIMULATION IN
- Page 768:
analyst generates random numbers an
- Page 772:
EXHIBIT 20-3 EVENT TREE WITH THREE
- Page 776:
point x, which can be written as th
- Page 780:
anch represents the maximum of the
- Page 784:
is 5 E 2 $1B f(E). Then, the expect
- Page 788:
EXHIBIT 20-12 LOG-NORMAL PDF 0.5 0.
- Page 792:
EXHIBIT 20-15 MONTE CARLO SIMULATIO
- Page 796:
20.3 SIMULATION WITH MULTIPLE SOURC
- Page 800:
375 EXHIBIT 20-19 DCF MODEL FOR NEW
- Page 804:
of development. (Note that this pro
- Page 808:
21.1 DECISION TREES When a decision
- Page 812:
compute the expected value at Node
- Page 816:
EXAMPLE 21.1 (Fuelco) Fuelco is con
- Page 820:
EXHIBIT 21-5 FUELCO’S DECISION TR
- Page 824:
Denoting shares of the binary optio
- Page 828:
EXHIBIT 21-7 FUELCO’S DECISION TR
- Page 832:
EXHIBIT 21-8 FUELCO’S DECISION TR
- Page 836:
where V(β) is given by Equation (2
- Page 840:
21.5 DRUGCO, REVISITED In this sect
- Page 844:
397 EXHIBIT 21-12 DCF MODEL FOR NEW
- Page 848:
(a) Draw the decision tree for Semi
- Page 852:
EXHIBIT 22-1 CALL OPTION IN A DECIS
- Page 856:
subperiod, we allow only two possib
- Page 860:
22.1 THE BLACK-SCHOLES EQUATION, RE
- Page 864:
EXHIBIT 22-5 JOE’S PROBLEM, BASE
- Page 868:
22.2 MULTIPLE STRIKE PRICES AND EAR
- Page 872:
EXHIBIT 22-9 EXCERPTS FROM TREES FO
- Page 876:
In Exhibit 22-11, we show the optio
- Page 880:
value. Thus, if Fuelco delays the p
- Page 884:
EXHIBIT 22-14 EXCERPTS FROM TREES F
- Page 888:
CHAPTER23 GAME THEORY R&D DECISIONS
- Page 892:
EXHIBIT 23-2 PRISONER’S DILEMMA,
- Page 896:
As in the prisoner’s dilemma game
- Page 900:
EXAMPLE 23.2 Drugco and Pharmco pro
- Page 904:
EXHIBIT 23-8 ODDS-AND-EVENS GAME, N
- Page 908:
Problems (a) Draw the extensive for
- Page 912:
Thus far in the book, we have perfo
- Page 916:
EXHIBIT 23-12 STANDARDS GAME, NORMA
- Page 920:
EXHIBIT 23-14 ENTRY GAME, NORMAL FO
- Page 924:
EXHIBIT 23-16 ENTRY GAME, WITH COMM
- Page 928:
competitor can just come along and
- Page 932:
EXHIBIT 23-19 PROJECT C, STEP 2, WE
- Page 936:
ugly head: both Fuelco and Cellco w
- Page 940:
CHAPTER24 R&D VALUATION IN THIS CHA
- Page 944:
EXHIBIT 24-1 SCHEMATIC FOR THE FULL
- Page 948:
449 EXHIBIT 24-4 DCF MODEL, DEAL 1
- Page 952:
EXHIBIT 24-5 BIGCO NPV AS OF PHASE
- Page 956:
24.1 DRUG DEVELOPMENT 453 (c) To ev
- Page 960:
EXHIBIT 24-9 DRUGCO ZERO-PROFIT CUR
- Page 964:
Problems (a) Draw the decision tree
- Page 968:
EXHIBIT 24-12 FUELCO’S DECISION T
- Page 972:
EXHIBIT 24-14 FUELCO’S DECISION T
- Page 976:
EXHIBIT 24-17 NODE 12, EXPANDED 12
- Page 980:
can reap great rewards, it is dange
- Page 984:
TERM SHEET FOR SERIES A PREFERRED S
- Page 988:
APPENDIX A SAMPLE TERM SHEET 469 Li
- Page 992:
APPENDIX A SAMPLE TERM SHEET 471 of
- Page 996:
APPENDIX A SAMPLE TERM SHEET 473 su
- Page 1000:
[regarding technology ownership, co
- Page 1004:
Lock-up: Investors shall agree in c
- Page 1008:
Non-Competition and Non-Solicitatio
- Page 1012:
holding greater than [1]% of Compan
- Page 1016:
Company breaches this no-shop oblig
- Page 1020:
in Chapters 13. We describe below h
- Page 1024:
APPENDIXC GUIDE TO CRYSTAL BALL s C
- Page 1028:
EXHIBIT C-2 SPREADSHEET SETUP FOR C
- Page 1032:
APPENDIX C GUIDE TO CRYSTAL BALL EX
- Page 1036:
EXHIBIT C-6 RUN PREFERENCES WINDOW
- Page 1040:
EXHIBIT C-8 SPREADSHEET SETUP FOR C
- Page 1044:
APPENDIX C GUIDE TO CRYSTAL BALL EX
- Page 1048:
APPENDIX C GUIDE TO CRYSTAL BALL EX
- Page 1052:
501 EXHIBIT C-13 SPREADSHEET SETUP
- Page 1056:
EXHIBIT C-14 STATISTICAL OUTCOME FO
- Page 1060:
“exercises” are given without s
- Page 1064:
507 EXHIBIT C-19 SPREADSHEET SETUP
- Page 1068:
APPENDIX C GUIDE TO CRYSTAL BALL s
- Page 1072:
REFERENCES 511 EXHIBIT C-24 OUTCOME
- Page 1076:
GLOSSARY 513 Adjusted conversion pr
- Page 1080:
GLOSSARY 515 then general partners
- Page 1084:
GLOSSARY 517 Discount rate: The rat
- Page 1088:
GLOSSARY 519 Expiration diagram: On
- Page 1092:
GLOSSARY 521 Hedge funds: Hedge fun
- Page 1096:
GLOSSARY 523 exclusive (only the li
- Page 1100:
GLOSSARY 525 Mixed-strategy NE: A N
- Page 1104:
GLOSSARY 527 Periodic return: The r
- Page 1108:
GLOSSARY 529 Rapid-growth period: I
- Page 1112:
GLOSSARY 531 Rule 144A: A Securitie
- Page 1116:
GLOSSARY 533 Tagalong: (5 Take-me-a
- Page 1120:
INDEX Abnormal returns, 68, 512 neg
- Page 1124:
EV/Revenue, 216 Price/Book, 217 Pri
- Page 1128:
Exercise price, 518 Exit diagram, 1
- Page 1132:
Implied valuation, 305 319, 521. Se
- Page 1136:
LP cost, 186 LP valuation, 186 Moni
- Page 1140:
Private Equity Performance Monitor,
- Page 1144:
Series C investment, 278 282 exit d
- Page 1148:
spreadsheet, 189 standard VC method