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Scharfstein, David, and Antoinette Schoar, 15.431 Entrepreneurial Finance, Spring 2002. (Massachusetts Institute of Technology: MIT OpenCourseWare), (Accessed 11 Jul, 2010). License: Creative Commons BY-NC-SA

Entrepreneurial Finance

Spring 2002

Graph sharply increases as it approaches the year 2000, topping 100 billion dollars.

Graph showing the unprecedented flow of funds into start-up companies. (Graph by Prof. Antoinette Schoar. Data courtesy of Venture Economics.)

Course Highlights

Because entrepreneurial finance is such a new area of academic inquiry, there are no textbooks from which to distill all the information. That makes the lecture notes and case study questions available for this course even more valuable tools to help learn this subject.

Course Description

This class examines the elements of entrepreneurial finance, focusing on technology-based start-up ventures, and the early stages of company development. It addresses key questions which challenge all entrepreneurs: how much money can and should be raised; when should it be raised and from whom; what is a reasonable valuation of the company; and how funding should be structured. The subject aims to prepare students for these decisions, both as entrepreneurs and venture capitalists.


Required Material

A packet of cases.

Optional Material

Levin, Jack S. Structuring Venture Capital, Private Equity, and Entrepreneurial Transactions. Little, Brown and Company, 2000.

Hull, John C. Option, Futures & Other Derivatives. Prentice-Hall Inc., 2000.

Course Overview

This course will use a combination of case discussions and lectures to study entrepreneurial finance. The course is targeted to budding entrepreneurs and venture capitalists. There are five main areas of focus.

  1. Business Evaluation and Valuation: Here we will give you some tools to valuate early stage business opportunity. We will also review the standard tools of valuation applied to start-up situations and introduce the venture capital method and the real options approach to valuation.

  2. Financing: In this module, we will highlight the main ways that entrepreneurs are financed and analyze the role of financial contracts in addressing information and incentive problems in uncertain environments.

  3. Venture Capital Funds: We will look at the structure of venture capital funds and their fund raising process. This module will include issues of corporate venture capital and private equity funds in emerging market economies.

  4. Employment: Here we will study the issues of attracting and compensating employees in start-ups.

  5. Exit: How should founders exit? Should they sell to another company, take it public, or continue independently as a private company?


The course requires the concepts and skills developed in 15.402, Corporate Finance. It is a pre-requisite. Some knowledge of option pricing will also be needed in a few instances. Because we will be linking financial concepts to other business concepts your broad MBA training will also come in handy.

This course also places a strong emphasis on presentation and discussion skills. It will be important for you to explain your positions or arguments to each other and to try to argue for the implementation of your recommendations.


This course is designed to be a challenging and time-consuming. You should expect to prepare an average of one case per week. Each case will come with guideline questions. Students are required to submit a two-page memorandum on the cases. Students can (but are not required to) work in teams of no more than four. Only one memorandum need be handed in for a given group. You have the option of not handing in four cases during the semester.

The memorandums should be typed and double-spaced. They should be written as if you were presenting it to your business partners (be they your fellow entrepreneurs or investors). The two-page limit is for text only. You may attach as many numerical calculations as you wish. Memoranda will not be accepted after the class has met. Grading of the memoranda will be on the bases of check marks. The grades on these memorandums tend to help on the margins, moving students up or down half a grade.

Class attendance is critical to the learning process. Because this is such a new area of academic inquiry, there are no textbooks from which to distill all the critical information. The learning will come from struggling together to come to a better understanding of the key issues in the case. Also because this is a new course, your input is particularly valued as we learn together. Please bring your name cards so that I get to know you.

Finally, during the class we will provide students with access to Venture One's Venture Source database. To get an account you have to sign up with my assistant. For a number of cases I will ask you to conduct up to date due diligence relying on recent valuations and transactions from Venture Source to benchmark deals. It is an important part of the learning experience that you get familiar with information sources that are available in the industry.


Grading will be based on class participation (30%), the short memoranda (10%) and a final examination (60%). The final exam will be a take-home exam and will be handed out on the last day of class and will be due the following day.


1 Introduction and Overview of Entrepreneurial Finance
Business Valuation
2 Technical Data Corporation
3 Valuation 1: DCF and the Venture Capital Method
4 Horizon Corporation
5 Valuation 2: Real Option Valuation
6 Genset
Deal Structure
8 Deal Structure 1
9 Walnut Venture Associates
10 Deal Structure 2
11 Centex Telemanagement, Inc.
12 Apex Investment Partners (A)
13 Xedia and Silicon Valley Bank
14 John Chory (Hale and Dorr)
15 Alan Spoon (Polaris Venture Partners)
16 Metapath Software
Venture Capital Funds
17 Accel Partners
18 Spectrum Equity Investors
19 Xerox Technology Ventures
20 The Exxel Group
21 Sara's Options
22 Gerald Weiss' Stock Options
23 Lecture on Initial Public Offerings
24 Grand Junction
25 Review and Final Exam Distribution   Tell A Friend