Venture Capital and the Finance of Innovation: DCF for growth companies

Some years ago I bought a great book: Venture Capital and the Finance of Innovation (first edition). I found it searching in the Wharton website. At that time the author, Andrew Metrick, was teaching there, now he moved to Yale. In 2010 a second edition has been released.

The book is divided in 4 parts: Part I describes the relation between risk and return; Part II describes the valuation of high-growth companies; Part III is the analysis of capital structure; and Part IV describes the relation between strategy and finance. The author target is a reader interested in VC and intellectually curious about finance. In fact the book uses the VC market as playground to explore all the big ideas in finance (e.g.: risk and return, valuation). If you are interested in the financial details of VC deals, you should buy this book. Some interesting comments about the book are provided by Brad Feld in his blog Ask the VC.

If you are interested in knowing these topics in more detail, I have written some notes regarding an example where the author provides a framework for the DCF (discounted cash flow) valuation of growth companies (this is a detailed excel and this are some notes related to the DCF model applied to a semiconductor company). The model can be used to calculate the exit value of a company, or in case of a quoted company to compare the valuation with the market value of the company. In the model the author assumes that a growth company evolve through 3 stages: Venture Period (VP), Rapid-Growth Period (RGP), and Stable-Growth Period (SGP). The VP (3-7 years ) goes from first VC round to IPO, the RGP (3-10 years) goes from IPO to stable revenue growth, SGP is the phase where the company has a constant revenue growth rate (g).

Using this assumption and a limited number of variables obtained from the specific case, and from industry statistics we can estimate the cash flows of a growth company. Following the power point file and excel templates from the Wiley website.

Which is your preferred book about VC finance dynamics?

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