Customer Reviews

Venture Capital and the Finance of Innovation

5 star:		(8)
4 star:		(1)
3 star:		(0)
2 star:		(2)
1 star:		(0)

 

 

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.

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.

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.

I took a masters course that used this textbook and to be quite honest, I found the book (as the base of the course) to be quite disappointing. I was hoping to learn a significant amount about the VC industry, but this book focused too much on math models in pricing exit strategies--most of which the author even indicates are probably not used in industry.

Going into the course, I wanted to know the following:
1. What exactly (in detail) do VCs do?
2. How does one get into the industry?
3. What are their biggest challenges?
4. What requirements do prospective firms need to know before going in?
5. What are some detailed successes and failures that have occurred and why?
6. Who invests primarily in VCs and why?

and several other questions. This book superficially highlighted only points one and two. Five chapters dealt with pricing exit strategies in more and more complicated examples and several other chapters were on math models and several on statistics as well (24 chapters total). Pricing exit strategies is useless unless the investment is making money. Otherwise, it just becomes a liquidation allocation tool at best.
As someone new to this type of activity, I was easily lost on the math parts. It didn't help that some examples continued on for several pages, were interrupted by other examples, then continued on or that some assumptions were carried from solution to solution without mention of them in the problem's. For example, a 10% cost in a several chapters was assumed to be a part of several questions, but not mentioned in the problem's text which then begged the question "where did this figure come from?" Many of the examples were similar, but just different enough in the wrong areas to confuse them with the continuing, long drawn out problems. At the most difficult point, it took me 2 hours to work through 10 pages.
Another thing I did not like was the use of acronyms. The author resorts to them to save time and space (to his credit he does mention this will happen) which becomes extremely disruptive to the reader since not only does the reader have to remember what they mean, but try to understand what the author is saying and wade through the math.

If you love math, you'll love this book and I think you will find that with most of the other critiques here, the users all seem to love math. If you want to know about the detailed workings of the VC industry and its challenges, this is not the book (or course) you want at all.

I don't doubt the author is highly academically inclined in this area, but the practical realities and use of these models in real life are limited. I also did not like the fact that it appeared that the author had little background in actually working in the VC industry as opposed to looking at it from the outside as an academic and making up models.

If I were to be involved in the VC industry from either an investor, VC, for receiving firm perspective, I would feel highly ill prepared if this were my primary or sole source of initial knowledge.

It is a great book on how to structure deals in the venture capital and R&D financing fields. Both entrepreneurs and venture capitalists would benefit from reading the book since understanding various payoff scenarios would be essential for both groups.

It has been common for entrepreneurs to sell one or two companies before figuring out how to structure their venture capital funding properly. Many entrepreneurs lost millions of dollars selling their first companies and learned from their own mistakes how to structure deals for following companies. This does not have to happen anymore... Now entrepreneurs can read the book, understand payoff diagrams under various deal structures, try to structure deals for financing their companies correctly, and potentially keep millions of dollars for themselves and their teams.

Entrepreneurs could learn from the book, for example, that the addition of an innocent-sounding word "participating" to "convertible preferred stock" in structuring venture capital investments in their companies could cost them millions of dollars down the road when the entrepreneurs sell their companies. The payoffs of "participating convertible preferred stocks" and "convertible preferred stocks" are different. The book clearly explains differences in payoffs among various types of stocks used to structure VC investments and many other features of venture capital investment deals.

Venture capitalists could benefit from using this book as a reference on various ways to structure deals in order to protect their investments in high tech ventures.

If you are involved in building or financing entrepreneurial ventures, this book is for you!

Amazing text book that was ACTUALLY an enjoyable read. The development of ideas and explanations were very helpful for understanding finance and how it adapts to the unique characteristics of the venture capital industry.

How does this book differ from the earlier book of the same name by Metrick (2007)? I have the earlier book and am trying to decide if it is worthwhile to buy this book.

This is hands down the best VC book on the market. Chapters are digestible in a sitting. Not an overly huge, bulky text book. You can throw this in your bag and catch up on the reading every time you have a break. This is used at most of the top B-schools in the US. The examples are good, but there could be a few more examples and practice problems. This book has hard core math, but it also presents it in a way that is easy to understand. A good mix of the qualitative and quantitative aspects of venture capital. I'm a big fan of Metrick. Too bad he left Wharton for Yale.

Professor Metrick is brilliant as a teacher, meticulous as a researcher and entertaining as a comedian. He captures his lucid lecturing style into written form with this book.

It's the closest you can come to attending one of Wharton's most coveted and insightful MBA classes without paying $80,000 and 2 years of lost salary.

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)