Product Description

The Financial Principles Every Venture Capitalist Needs To Master

In Andrew Metrick’s Venture Capital and the Finance of Innovation, 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 covered in first-year MBA course, the book will familiarize you with:

• The relationship between risk and return in venture capital
• Historical statistics on the performance of venture capital investments
• Total Valuation - the data and methods used to value a high-growth company
• Partial Valuation – how to analyze the special features of VC transactions such as convertible preferred stock, participating preferred stock, payment-in-kind dividends, and liquidation preferences
• A framework for modeling investment in "research and development"
• The relationship between strategy and finance
• Cutting-edge techniques such as Monte-Carlo analysis, real options, binomial trees, and game theory

About the Author:

Andrew Metrick is an Associate Professor of Finance at the Wharton School of the University of Pennsylvania, where he teaches Venture Capital and the Finance of Innovation. Dr. Metrick received a BA in Economics and Mathematics from Yale and a Ph.D. in Economics from Harvard. Dr. Metrick has received numerous teaching awards and distinctions, including recognition by BusinessWeek as one of the best teachers at Wharton.

"This book is an excellent bridge between finance theory and venture capital practice. Metrick presents cutting-edge financial tools, creatively apllied to venture capital and R&D investing. It is destined to become the required reading for all students and practitioners in the field."
—Paul A. Gompers, Eugene Holman Professor of Business Administration & Director of Research, Harvard Business School

"Despite the increasing importance of the venture capital industry, until now there was no reference that could provide practitioners with a specialized grounding in finance. With clear explanations and practical models, Metrick’s book can fill this gap. I enthusiastically recommend this book to all venture capitalists."
—Ted Schlein, Partner, Kleiner Perkins Caufield & Byers

"Investors in young, fast-growing companies have a new way to calculate their value without regard to the prices of other companies’ stocks. This is an important advance, because most other appraisal methods for start-ups are based on relative valuation, which – as we saw at the top of the Internet bubble – grossly overvalues a new company when comparable companies in the same industry are also overvalued."
—Mark Hulbert, The New York Times, Dec. 31, 2006

Product Details

• Amazon Sales Rank: #65040 in Books
• Published on: 2006-09-22
• Original language: English
• Number of items: 1
• Binding: Hardcover
• 592 pages

Review
"Despite the increasing importance of the venture capital industry, until now there was no reference that could provide practitioners with a specialized grounding in finance. With clear explanations and practical models, Metrick's book can fill this gap. I enthusiastically recommend this book to all venture capitalists."
—Ted Schlein, Partner, Kleiner Perkins Caufied & Byers

From the Back Cover
The Financial Principles Every Venture Capitalist Needs To Master

In Andrew Metrick’s Venture Capital and the Finance of Innovation, 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 covered in first-year MBA course, the book will familiarize you with:

• The relationship between risk and return in venture capital
• Historical statistics on the performance of venture capital investments
• Total Valuation - the data and methods used to value a high-growth company
• Partial Valuation – how to analyze the special features of VC transactions such as convertible preferred stock, participating preferred stock, payment-in-kind dividends, and liquidation preferences
• A framework for modeling investment in "research and development"
• The relationship between strategy and finance
• Cutting-edge techniques such as Monte-Carlo analysis, real options, binomial trees, and game theory

About the Author:

Andrew Metrick is an Associate Professor of Finance at the Wharton School of the University of Pennsylvania, where he teaches Venture Capital and the Finance of Innovation. Dr. Metrick received a BA in Economics and Mathematics from Yale and a Ph.D. in Economics from Harvard. Dr. Metrick has received numerous teaching awards and distinctions, including recognition by BusinessWeek as one of the best teachers at Wharton.

"This book is an excellent bridge between finance theory and venture capital practice. Metrick presents cutting-edge financial tools, creatively apllied to venture capital and R&D investing. It is destined to become the required reading for all students and practitioners in the field."
—Paul A. Gompers, Eugene Holman Professor of Business Administration & Director of Research, Harvard Business School

"Despite the increasing importance of the venture capital industry, until now there was no reference that could provide practitioners with a specialized grounding in finance. With clear explanations and practical models, Metrick’s book can fill this gap. I enthusiastically recommend this book to all venture capitalists."
—Ted Schlein, Partner, Kleiner Perkins Caufield & Byers

"Investors in young, fast-growing companies have a new way to calculate their value without regard to the prices of other companies’ stocks. This is an important advance, because most other appraisal methods for start-ups are based on relative valuation, which – as we saw at the top of the Internet bubble – grossly overvalues a new company when comparable companies in the same industry are also overvalued."
—Mark Hulbert, The New York Times, Dec. 31, 2006

About the Author
Andrew Metrick is an Associate Professor of Finance at the Wharton School of the University of Pennsylvania, where he teaches Venture Capital and the Finance of Innovation. Dr. Metrick received a BA in Economics and Mathematics from Yale and a Ph.D. in Economics from Harvard. Dr. Metrick has received numerous teaching awards and distinctions, including recognition by BusinessWeek as one of the best teachers at Wharton.

Customer Reviews

A Mostly Academic Text
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.

Best Book in its Class
After reading through this book and the financial models, I have to say that this is the best book in its class.

Dr. Metrick did a fantastic job.

I recommend this book to anyone interested in the mechanics of the venture capital industry.

An amazing book
The book is very comprehensive and covers a lot of venture capital finance. It clarifies a lot of concepts and applies them very creatively to Venture Capital. A good book to learn about the VC industry and in general finance (as VC finance uses the concepts very effectively)