Venture Capital and the Finance of Innovation [Hardcover]

Andrew Metrick (Author)

Book Description

ISBN-10: 0470074280 | ISBN-13: 978-0470074282 | Publication Date: September 22, 2006 | Edition: 1

While Venture Capital is not the golden egg that it was a decade ago, there is compelling evidence that the best Venture Capitalist's consistently beat the odds and deliver value to their inventors. This book uncovers the basic financial models that drive Venture Capital decisions and in the process deepen the readers understanding of the financial principles underpinning these models.

Beginning with a comprehensive guide to understanding Venture Capital, Metrick uses this background to present an understanding of the application of Valuation. Included are comprehensive coverage and understanding of Total Valuation, Partial Valuation, and the Finance of Innovation.

Editorial Reviews

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

See all Editorial Reviews

Product Details

• Hardcover: 592 pages
• Publisher: Wiley; 1 edition (September 22, 2006)
• Language: English
• ISBN-10: 0470074280
• ISBN-13: 978-0470074282
• Product Dimensions: 6.4 x 1 x 9.2 inches
• Shipping Weight: 1.6 pounds (View shipping rates and policies)
• Average Customer Review: 4.4 out of 5 stars  See all reviews (11 customer reviews)
• Amazon Best Sellers Rank: #516,268 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

20 of 20 people found the following review helpful:

5.0 out of 5 stars Best book of its kind, January 24, 2007

By 

M. Wu (Pasadena, CA) - See all my reviews
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This review is from: Venture Capital and the Finance of Innovation (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.

15 of 17 people found the following review helpful:

4.0 out of 5 stars A Mostly Academic Text, December 27, 2007

By 

P. Scott Pope "Scott Pope" (Chicago, IL) - See all my reviews
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This review is from: Venture Capital and the Finance of Innovation (Hardcover)

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.

6 of 6 people found the following review helpful:

5.0 out of 5 stars Must buy and extremely useful for anyone in VC, R&D and Strategy, January 27, 2007

By 

Y. Zeevi (US) - See all my reviews
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This review is from: Venture Capital and the Finance of Innovation (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.