Introduction to Entrepreneurial Finance This chapter presents an overview of the structure and material that will be covered in Entrepreneurial Finance. In addition to presenting the outline and themes of the course, this chapter provides resources from both the popular media and the academic litera- ture to use as reference material. The listing of books, magazines, and articles, while not exhaustive, covers a broad range of topies in entrepreneurial finance at various tech nical levels, ‘When looking through the description, many of you may have asked, “What is en- trepreneurial finance?” The best way to understand it is to define the individual terms. Finance is the easier of the terms to define. It isthe study of value and resource alloca- iseentral to any working definition of finance. The value of any cash stream is influenced by its magnitude, timing, avd riskiness, Finance is also concemed with the cost of capital and determining the least expensive source of funds for an investment project. ‘This issue is especially important for start-up and growing firms that may face intemal nancial constraints and have different costs of debt and equity capital Entrepreneurship has had many definitions over the past two and one half ce turies sinee Richard Cantillon first used the term in the early eighteenth century: Son hhave focused on the risk bearing nature of entrepreneurship, while others have focused fon the innovations that entrepreneurs ereate. Both are important elements of what en- trepreneurs do, but neither is entrepreneurship. Entrepreneurship focuses on a way of thinking, mnanaging a career, business, or anything else, While most of us associate en- trepreneurship with small, start-up companies, large firms can also be “entreprenew ial.” The important clement of entreprencurship is the relentless pursuit of opport nity without regard to resources currently controlled.! Professor Paul Gompers prepared this noe a dhe bass for class discussion rather than to ilstrate either ‘effective or nelleetve handling ofan acministrative station, Copyright © 1987 by the Prosdent and Fellows of Harvard College. To onder copes or request permission to reproduce materials, call 800-515-7685, write Harvard Business Schaal Publishing, Boston, MA 02163, ‘or goto hutp/twwcibsp harvard. No part ofthis publication may be epee, More in retrieval system, used ina spreadsheet o photocopying recording oF thensise—withoat the permission of Harvard Business Schon nen any form o by any means—electronic, mechanical, * Howard H. Stevenson and Willan A. Sablman, “The Importance of Entreprenoursip,” Entrepreneur ship, Intrapreneursip. and Venture Capital, Rober D. Hisrih, ed (Lexington, MA: Lexington Books, 1985),2 © Chapter I: Introduction to Entreprencurial Finance Entrepreneurial Finance will focus on finaneial management within entreprencur- ial firms. Most of these will be young firms, although some are more established. The course will examine these firms at all phases of their life cycle, from the initial idea gen- ‘ration to the ultimate harvesting of the venture. ‘The course will cover firms in a di- verse set of industries, including high technology, low technology, and service. A sig- nificant proportion of the eases will focus on non-U.S. ventures Financial management in entrepreneurial firms entails understanding both sides of the balance sheet. Consequently, we will look at issues related to both sides as well. The first section of the course will explore how to evaluate entrepreneurial business oppor- tunities. The skills necessary to make good investment decisions include developing a framework of analysis for business opportunities. The process also entails reinforcing and enhancing valuation skills. With these tools, you will be able to qualitativ quantitatively assess markets and opportunities, ‘The second section of the course examines how entrepreneurial investments are fi nanced, An emphasis will be placed on understanding financial institutions and deal terms. The course then continues with an examination of harvesting. Unless an entre- preneur plans for the future realization on investment, he or she could get left holding the bag with little value having been created, We conclude the course by examining how entrepreneurial firms that have sueceeded need to continually reinvent and rei Vigorate th This transition to the second prod- uct or opportunity is often the most difficult time for the entrepreneurial enterprise. Finally, we will make use of notes throughout the course. These notes provide back- ground information about industry facts and figures. They are meant to be references that you can use often, both during the course and as you start your venture. selves in order to remain success MODULE 1: INVESTMENT ANALYSIS Sources of Value The first module explores the structural model of entrepreneurship. We will use it as a framework for evaluation. The behavioral model defines entrepreneurship as the pu suit of opportunity without regard to resources currently controlled. The four stages of entrepreneurship include: identifying opportunities: acquiring the finaneial, profes- sional, and productive resources to exploit the opportunity: implementing a plan of ac- tion; and harvesting the rewards." Entrepreneurship should not, however, be seen as a linear process. Teue entrepreneurship involves any or all the elements at any one par- ticular time and should be viewed as a constantly repeating eycl William Sahlman developed a framework that identifies four critical suecess fae: tors for entrepreneurial ventures: people, opportunity, deal, and context. The eases in this course are selected to highlight how these various factors influence success and failure for firms in various industries. Each element is dynamic and can change aver time, and the entrepreneur must constantly reevaluate the four factors th cal to entreprencurial value creation, Three questions can help center your analysis as you go forward: are criti. at 0 go right? wat cam go wrong? a. © Wiliam A. Sahiman,“Enteepreneurial Finance,” Harvard Business Schl Case, 288-004 (1987). aid.People Opportunity Deal Context Module 1: Investment Analysis * 3 What actions can be taken to increase the probability that things will go right or nize the chances that things will go wrong? ‘An important task in each ease isto identify the key players. What is their experience? How does this experience prepare or not prepare them for the opportunity that exists? What are the strengths and weaknesses of the people involved on all sides of the trans- action? Are there key individuals that the company should add or replace? ‘The opportunity that arises may be a new product or service, a new method of deli ery, oF a new production technique that provides a cost advantage. The entrepreneur ‘must answer snany questions before he or she commits to the venture, What is the na- ture of the opportunity? Is there a sustainable competitive advantage, or isthe idea eas- ily replicated? Must the opportunity be exploited immediately, or is there the possibil: ity of delaying investment until further information is available? Are there intermediate milestones that can be used to assess the suecess of the project? Once the people and opportunity pass a litmus test, a proper deal must be structured, ‘Throwing money at good projeets and good people will not guarantee success. Incen: tives and contingencies are important considerations. The proper deal structure c: minimize moral hazard and adverse selection problems. From whom should the firm raise money: wealthy individuals (angels), banks, venture capitalists? What is the proper financing instrument: debt, equity, convertible securities, or a combination? Is a “no- compete” clause important? Can the deal create stakeholders that increase the proba- bility of success? Who bears the downside (upside) risk? ‘Often the most difficult part of the analysis is identifying contextual issues that are rel- evant to the success or failure of the project. Potential competitors may not be easily identified but will always be waiting to enter potentially profitable markets, The gov rent is important because regulation ns ean aid or harm the firm's profitability. The entrepreneur must attempt to forecast what policies the govern night pursue in response to political pressure, The opening of markets and the collapse of foreign regimes may be important in creating a favorable environment for new ideas. Economic conditions and trends will also influence a particular market and should be analyzed and understood, The Concept of “FIT” While most of the analysis may be divided into these four areas, i is important to un. derstand the big picture. In other words, how do the four elements relate to each other: Do the people have the requisite skills and experience to exploit the opportunity? Does the deal provide the proper incentive to all players given the necessity of their input and the level of their skills? Will the context change the nature of the opportunity?4+ Chapter I: sroduction to Entrepreneurial Finance VALUATION The second module of the course will address valuation techniques. Value is one of the fundamental concepts of finance and should be familiar to you from other coursework ‘To make proper investinent decisions, itis always necessary to undertake a valuation. Stating that the uncertainty is too great to “value” a given project or company misses the point. Uncertainty affects the distribution of possible values, not the ability to undertake a valuation. Valuation in finance is a way to ask the right questions and understand what important assumptions determine the ultimate value. In fact, if the range of potential ‘outcomes is quite high, that is, there is high uncertainty, a thorough valuation can give information about when to invest, when to discontinue a project, or when to investigate further. The sole purpose of valuation is not the production of a single number. ‘The first set of valuation problems are discounted cash flow valuation models, Al though we discuss various discounted cash flow models, under the right assumptions they should all give similar answers, The most important lesson is to fully understand the assumptions made in the process. We analyze discounted cash flow models in the case of both mature leveraged buyout situations and young, start-up ventures. The anal ysis emphasizes the strengths and weaknesses of such models. In fact, for many young firms, simple discounted cash flow models ean give misleading values. ‘The shortcomings of standard discounted cash flow models often stem from the ‘to account for real option value, Many projects have embedded optionality. A proj- a small investment today to allow for information gathering and a pos acquisition of more information is a real option. The ability to halt a project ereates an option to abandon. The payoff curve is similar to a eall option where the only downside is the price of the option, but the upside is substantial. The entrepreneur who does not understand the value of these options may make improper investment decisions Entrepreneurial Finance will also examine real options in entrepreneurial firms. We will discuss their importance in the decisions of young, emerging companies. The course will develop tractable methods to deal with real option value and use it in the planning and structuring of investments. MODULE 2: FINANCING THE ENTREPRENEURIAL FIRM the entrepreneur identifies an investment opportunity, a financing strategy needs to be outlined. The opportunity may be a new firm, a new project, an expansion of a plant, or even the hiring of new employees. Any of these types of investments presents particular financing problems. An entreprencur who eannot raise the required resources will not succeed, A firm needs cash to survive. Discussion will identify financial institutions and players that actively provide: re- sources to entrepreneurial firms. We will also examine the nature of contracting be- tween investors and entrepreneurial firms. Understanding the terms and conditions of financing is important for all entrepreneurs to determine payoffs and incentives. Simi larly terms and conditions determine who controls the firm under various eireumstances. Control rights such as board membership, information rights, covenants, and restrie- tions are often employed in the financing of entrepreneurial firms. Careful crafting of the financing document often increases the likelihood of suecess. Various factors drive finns to seek capital from a multitude of capital providers. Four primary factors that ence the source of funds can be identifiedModule 2: Financing the Entrepreneurial Firm # 5 ‘The Four Factors Uncertainty is a measure of the array of potential outcomes for a company or project. The greater the uncertainty, the wider the dispersion of potential outcomes. By their very nature, young companies are associated with significant levels of uncer certainty may exist about whether the research program or new product will succeed, Uncertainty may also exist about the response of rival firms to the introduction o| product. High uncertainty means that investors and entrepreneurs cannot confidently predict how the firm will perform, what investment opportunities the company will identify, or what resources the firm will require. Uncertainty affects the willingness of investors to contribute capital, the desire of suppliers to extend credit, and the decisions of a firm’s manager. If managers are risk averse, it may be difficult to induce them to make the right decisions. Conversely, ifen= trepreneurs are overoptimisic, then investors want to curtail various actions. Uncer- tainty and the revelation of new information also affect the timing of investment. Should an investor contribute all the capital at the beginning, or should he stage the invest- iment through time? Investors need to know how information-gathering activities can address these concems and when to undertake them. Asymmetric information is distinet from uncertainty. Beeause of her day-to-day in- volvement with the firm, an entrepreneur knows more about her company’s prospects than investors, suppliers, or strategie partners. Similarly, investors may know more about their resources or ability to add value than the entrepreneur. Various problems develop in settings where asymmetric information is prevalent. Moral hazard can result when the entrepreneur takes potentially detrimental actions that investors cannot observe, For example, the entrepreneur may undertake a riskier strategy than initially suggested iy not work as hard as the investor expects. The entrepreneur might also invest in projects that build up her reputation at the investors’ expense. Asymmetric information ean also lead to adverse selection problems when the en- trepreneur knows more about the project or his abilities than investors do, Investors ‘may find it difficult to distinguish between competent entrepreneurs and incompetent ‘ones. Without the ability to sereen out unacceptable projects and entrepreneurs, vestors are unable to make efficient and appropriate decisions. ‘The third factor dynamically affecting a firm’s corporate and financial strategy is the nature of its assets. Firms that have tangible assets—for example ings, land, or physical inventory—may find financing easier to obtain or may be able to obtain more favorable terms. The ability to abscond with the firm’s source of value is more difficult when it relies on physical assets. When the most important assets are in. tangible, such as trade secrets, raising outside financing is often more challenging. ‘Market conditions also play a key role in shaping a firms evolution. The supply of capital from public and private investors and the price at which this capital is available y vary dramatically. These changes may be a response to regulatory ediets or shifts, estors’ perceptions of future profitability. Similarly, the nature of product markets the intensity of competition or in the nature of may vary dramatically due to shifts the customers. The ability of young companies to grow rapidly and respond swiftly to the chang- ing competitive environment isa key source of competitive advantage, but also a ma- {or problem for those who provide resources to these firms. The key characteristies of the firm—uncertainty, asymmetric information, the nature of its assets, and market conditions—will change dramatically over time, Because the firm may be different in the future, investors and entrepreneurs need to be able to anticipate change6 © Chapter I: Introduction to Entrepreneurial Finance ‘The combination of case studies and notes in this course develops recommenda- tions for optimal capital raising and ownership structures in entrepreneurial firms, The materials demonstrate that careful erafting of financing strategies and contracts can al- leviate many potential roadblocks. For instance, the best source of capital is not always obvious. Each souree may be appropriate for a firm at different points in its life. The factors identified above play a ertical role in determining the optimal decision In addition, the form of financing (e.g, debt, equity, or convertible security) plays a critical role in reducing potential confliets. Financing can be simple debt or equity, ‘or may involve hybrid securities like convertible preferred equity or convertible debt. ‘These nancial structures can potentially sercen out overconfident or underqualified entrepreneurs because they have very different payoffs for the entrepreneur in good and bad outcomes. The structure and timing of financing ean also reduce the impact of uncertainty on future returns. Another important clement is the division of the profits between entrepreneurs and investors. Compensation contracts can be written that align the incentives of man ‘agers and investors. Incentive compensation can be in the form of eash, stock, or op- tions, Performance can be tied to several measures and compared to various bench- marks. Carefully designed incentive schemes can avert destructive behavior, Firms can also alter the nature of their assets and thus obtain greater financial flex- ibility. Patents, trademarks, and copyrights are all mechanisms to protect firm assets Understanding the advantages and limitations of various forms of intellectual property protection, and coordinating financial and intellectual property strategies are essential to ensuring a young firm’s growth, Firms ean also affect the nature of their assets through strategic decisions, such as encouraging the creation of a set of “locked-in” users who rely on its products ‘Monitoring and evaluation are also critical elements of the relationship betwee ‘entrepreneurs and investors. Both parties must ensure that proper actions are taken and that appropriate progress is being made. Critical control mechanisins—for exa ple, active and qualified boards of directors, the right to approve important decisions, and the ability to fire and recruit key managers—need to be effectively allocated in any ip between an entrepreneur and investors. By examining theory and evidence, this course makes both descriptive and preseriptive comments on the effective use of ‘monitoring, evaluation, and control relatio MODULE 3: HARVESTING THE ENTREPRENEURIAL VENTURE Every entrepreneur needs to consider harvesting at some point, Harvesting « many forms. Successfully planning for harvesting ofthe entrepreneurial venture is er ical to maximizing the value of your input. We will explore various mhodes of harvesting like initial public offerings (IPOs) and acquisitions. The emphasis ison assessing whether the entrepreneurial firm is “ready” for harvesting, In addition, we will emphasize the structural, legal, and dynamic issues of various modes of harvest. “The public markets are a significant source of capital for emerging companies. For many firms, accessing the public market is just the next phase of their dynamie eapital process, For others, it represents the beginning of the ability to receive the fruits of their labors. We explore the various motivations for “going public” and the advantages and disadvantages of being a public company. Structural and legal issues will be dis- cussed. In addition, we explore the impact that the eyclical nature of the initial publi offering market has on firms access to capital. The role of various intermediaries will be examined, and the motivations of various parties discussed,Books on Entrepreneurship Venture Capital and Small Business © 7 ‘The course then covers acquisitions, Most firms will never be large enough for the public market and will therefore need to find one specific buyer. The ability to find the best buyer and negotiate the best deal terms for the entrepreneur is eritical. We e1 phasize the role of bargaining and auctions in the context of aequisitions. The motiva- tions of buyers and sellers must be understood to ensure the conclusion of a suecess- ful deal MODULE 4: RENEWAL IN THE ENTREPRENEURIAL ENTERPRISE In the final module of the course, we discuss the importance of future opportunities in the sustainability of the entrepreneurial firm. If an entrepreneurial firm refuses to in- novate and find new opportunities, it will fade away. The true entrepreneur continues to search for new opportunities, strives to find the right investors, implements the next project, and harvests his or her efforts. We exau initial project and is thinking of pursuing new opportunities. The issues revolve around whether the company should invest in a new project? Will it be a distraction? How should the new program be financed and structured? Does the company have any comparable advantage in this area? The cases will emphasize the difficulties that many young firms face. Being short-run focused yields quick results; being long-run focused ‘may ensure the viability of the company for many years. ‘a firm that has been successful in CONCLUSION Entrepreneurial Finance is a course that examines the issues confronting entrepre- neurial firms at all stages of their existence. The course presents various frameworks and builds new skills needed to identify important business ideas, raise and structure financing, and ultimately harvest the project. The knowledge and skills leaned are valuable for all students, whether they find a job in an ¢ rial enterprise, work in a traditional firm, oF start a company of their own, SELECTED BIBLIOGRAPHY “The books and articles listed below are only for reference. They are not required reading and are not in the ease packet BOOKS ON ENTREPRENEURSHIP, VENTURE CAPITAL, AND SMALL BUSINESS Acs, ZOLTAN AND Davi AUDRETSCH, 1901, Innovation and Small Finns, MIT Press, Cambride, Acs, ZOLTAN aN Davin AUDRETSCH, 1993, Small Firms and Entrepreneurship, Cambridge Us versity Press, New York, BARTLETT, Josern, 1988, Venture Capital Lave, Business Strategies, and Investment Planning, John Wiley and Sons, New York, Binctt, Davin, 1987, Job Creation in America: How Our Smallest Companies Put the Most Peo: ple to Work, Free Press, New York Bowron, James, 1992, Venture Japan, Probus Publishing Co., Chicago, BRANDT, SteMiN, 1986, Entrepreneurship in Established Companies, Dow Jones-nwin, Home- ‘wood, TL. A.8 © Chapter I: Introduction to Entrepreneurial Finance Bychave, WILLIAM AND JEFFRY TimMoNs, 1982, Venture Capital atthe Crassroads, Hanvard Busi- ness School Press, Boston, Duwcken, Penn, 1985, Innovation and Entrepreneurship, Harper and Row, New York MELISSA AND Joax-MARIEE Moss, 1992, The Chicago Entrepreneurs Sourcebook Enterprise Dearhom, Chicago. Jonens, PAUL AND Jos LERNER, 1999, The Venture Capital Cyele, MIT Press, Boston, Gompens, Pavt aNb Jost LenNen, 2001, The Money of Insention: How Venture Capital Creates New Wealth, Harvard Business School Press, Boston Hisnich, ROBERT AND MICHAEL PETES, 1989, Entrepreneurship: Starting and Managing, New Enterprise, BPI-Inwin, Homewood, IL. Kaxten, Rosaern, 1983, The Change Masters: Innocation and Entrepreneurship in the Amer= ‘can Corporation, Simwon and Schuster, New York. Kanen, Rosasern, 1989, When Giants Lean to Dance, Simon and Schuster, New York K40, Joun, 1989, Entrepreneurship. Creatiity. and Organization, Prentice Hall, Englewood Cif, NJ Kent, CALMIN, 1984, The Environment for Entrepreneurship, D.C. Heath and Co, L Kunze, Roser, 1990, Nothing Ventured, HarperCollins, New York [Lipvens, ARTIIUK AND GEORGE RYAN, 1984, Ventures Guide to Incesting in Private Gompantes, Dow Jones-Invin, Homewood, IL. PasTt, STANLEY AND JANE MOAR, annual, Prat’s Guide ¢o Venture Capital Sources, Venture Economies, Needham, MA Rossta, Roser, 1988, Entrepreneurial Finance, Lord Publishing, Natick, MA. SEXTON, DONALD AND JOIN KASANDS, 1991, The State of the Art of Entrepreneurship, PWS-Kent, Boston SHEPSKY, LUOYD, 1995, Entrepreneurs Are Made, Not Born STEVENSON, HOWARD, MICHAEL ROHERTS, AND LIVING GnoUSBECK, 1988, Netw Business Ventures ‘and the Entrepreneur, Richard D. Irvin, Homewood, IL. won, MA, Black Enterprise Buyouts Eabeprenest European Venture Capit Journal ine Journal of Business Venturing Journal of Small Business Finance Journal of Private Eguity Latin American Pica Eyity Analyst Private Equity Analyst Red Herring Success Venture Capital Jounal Wind Articles from Academic Journals and Working Papers AKERLOF, GronGe, 1970, The market for “lemons”: Qualitative uncertainty and the market mech: anism, Quarterly Journal of Economics $4, 488-500. Bay, Clits, CHRIS MUSCARELLA, JOLIN Peavy, AND MICHAEL VETSUYPENS, The role of venture capital in the ereation of public companies: evidence from the going:gning publie prove Journal of Financial Economies 27, 447-4 BERGER, ALLEN, ANTHONY SAUNDERS, J. SCALISE, aND Guts UDett, 1997, The effects of bank ‘mergers ancl aequistions on small business lending, New York University working paper.Books on Entrepreneurship Venture Capital and Small Business # 9 BeNGER, ALLEN AND Ge UpELL, 1995, Relationship lending and lines of exedst in small firm finance, Journal of Business 65, 351-381 Bencen, ALLEN AND Gur UpeLt, 186, Universal banking and the fatuee of small busi Ing. in A. Saunders and I. Walters, eds, Financial System Desian: The Case for Universal Banke ing, Inwin Publishing, Homewood, IL Bnav, ALON aND PAUL Gomes, 1997, Myth or reality? The long-run underperformance of ini tial public offerings: Evidence from venture and nonventure-backed companies, Forthcom ing in Journal of Finance. Bycnave, WILLIAM AND M. Ste1N, 1989, A time to buy and a time to sella study of 77 venture epital investments in companies that went public, Frontiers of Entrepreneurship Research, 1989, CCaKrex, RICHARD AND STEVEN ManasTesn, 1990, Initial public offerings and underwriter rep tation, Joumal of Finance 45, 1045-1067 Dison, Dovc, 1988, Reputation acusition 828-882, Fazean, Sreve, R. Guen Hunsanp, Nb B. PETERSEN, 1988, Investment and finance reeonsid- ered, Brookings Papers on Economic Activity, V41-195, Gowers, Pavt, 1994, The rise of venture capital, Business and Economie History 28, 1-24, Gowers, Pavt, 1995, Optimal investment, monitoring, and the staging of venture capital, Jour- nal of Finance 50, 1461-1489. December 1995, Reprinted in Michael Wright and Ken Rob- bie, editors, Venture Capital (ntervational Library of Management) (Aldershot: Dartmouth Publishing, 1997) Gowrens, PAUL, 1996, Grandstanding in the venture capital industry, Jounal of Financial Eeo- nomics 43, 133, Gowtrens, Pavt, 1997, Ownership and control in entrepreneurial firms: An examination of eon: vertible securities in venture capita, Harvard Business School working paper. Gowens, Pavt, 1998, Resource allocation, incentives, and control: The importance of venture ‘pital in financing entrepreneurial firms in Entreprencurship, SMBs, and the Macroeconamy. Cambridge University Press, New York owen, Pavt, 1997, Venture capital growing pains: Should the market diet? Journal of Bank- ‘ng and Finance 22, 1089-1104, Gompens, PAUL aN Jost LenVER, 1996, The use of covenants: An empirical analysis of venture partnership agreements, Journal of Law and Economics 39, 463-498, IMPEKS, PaUL AND Josie Lixnen, 1997, Risk and reward in private equity investments: The challenge of performance assessment, Jounal of Private Equity 1, 5-2 Gowen, Pau AND Jostt LERNER, 1997, Venture capitalists and the ercation of public compa nies, Journal of Private Equity 1, 15-3 Gowens, PAUL AND Josit LERNER, 2000, Money chasing deals? The impact of fund inflows on private equity valuations, Journal of Financial Economics 55, 281-395, Gourens, PAUL AND JosH LERNER, 1998, Reputation and conflict of interest in the isuanee of public securities: Evidence from venture capital. Joumal of Law andl Economics 52, 1-28. Gowtrins, PAUL AND JosH Lenven, 1998, What drives venture capital fundraising? Fortheoming in the Brookings Proceedings on Microeconomic Activity, Gonstax, MICHAEL AND WILLIAM SsHitatan, 1989, What do venture capitalists do?, Journal of Busines Venturing 4, 133-147, GrweNwaLD, Bruce, Joseen STIGLITZ, AND ANDREW WEtss, 1984, Information imperfections in the capital market and macroeconomic fluctuations, American Economie Review Papers and Proceedings 74, 194-198 Hanus, Microw aNb Arun Ravi, 1989, The design of securities, Journal of Financial Economics 24, 255-287, Hants, Mitrow AND AWTUR Ravi, 1990, Financial contracting theory, University of Chicago working paper. HaKt, OuNER, 1991, Theories of optimal capital structure: prineipal-agent perspective, Har vard University working paper ss lend debt markets, Jounal of Political Eeonomy 97,10 + Chapter 1: Introduction to Entrepreneurial Finance Hive, Ouvex AND BeNcT Hotatsrnom, 1987, The theory of contracts, in T. Bewly (ed), Ad- tances in Economic Theory, Fifth World Congress, Cambridge, Cambridge University Press Hiss; OLIVER aN JoutN Moone, 1990, Property rights and the nature ofthe firm, Joumal of Po- Lica! Economy 98, L119-1158. Hise, OLavek aND Jonny Moone, 1989, Default and renegotiation: a dynamic model of debt, Har- vvard University working paper. Hive, OLIVER AND JON MOORE, 1994, A theory of debt based on the inaliensbilty of hua capital, Quarterly Journal of Economies, 841-880. HEnMlaLiN, BENJAMIN AND MICHAEL WEISHACIE, 1988, The determinants of board composition, Rand Journal of Economies 19, 589-606, Hotatsrios, BENG AND BicaKri-1-Costa, 1986, Managerial incentives and eapital management, ‘Quarterly Journal of Economies, 839-60 Hosin, T, ANU Kastvar, asp Davtb SCHARFSTEIN, 1991, Corporate structure, liquidity, and i vestiment, Quarterly Journal of Economics 106, 33-60, Jaws, Cumustoren, 1987, Some evidence on the uniqueness of bank loans: A. comparison of bank borrowing, private placements, and public offerings, Journal of Financial Economies 19, Jawes, CliustorHEK AND Peecy Wem, 1990, Borrowing relationships, intermediation, and the ‘cost of issuing public securities, Journal of Financial Economics 28, 149-17 JENSEN, MICHAEL, 1986, Ageney cost of free cash flow, corporate finance and takeovers, AER Pa- pers and Proceedings 76, 323-829. JENSEN, MICHAEL, 1989, Eclipse of the public corporation, Harvard Business Review 5, 61-74 JENSEN, MICHAEL AND WILLIAM MECKLING, 1976, Theory ofthe firm: managerial hehavior, agency ‘ots, an capital structure, Jounal of Financial Economies 3, 305-360. Lene, Jostt, 1994, The syndication of venture capital investments, Financial Management 23 (utaron), Lune, Jost, 50, 301-318, Lune, Jost, 1994, Venture capitalists and the decision to go public, Journal of Financial Eeo- nomics 95, 293-316. -MEGCINSON, WILLIAM AND KATHLEEN WEIS, 196, lic offerings, Journal of Finance 48, 8 MopIGLIANI, FRANCO AND MERTON MiLten, 1958, The cost of eapital, corporation finance, and the theory of investment, American Economic Review 48, 261-297. MuscARELLA, Cuts AND Micha. VETSUYPENS, 1989, Initial public offerings and information asymmetry, SMU working paper. -Mvens, Sriwanr, 1984, The capital structure puzzle, Journal of Finance 99, 575-5 ‘Mens, Sriwanr AND N, MajLu, 1984, Corporate financing and investment decisions when firms have information that investors do not have, Jounal of Financial Economics 13, 187-221. PacaNo, Manco, F. PANETTA, AND LUIGI ZINCALES, 1997, Why do firms go public? An empirt- cal analysis, University of Chicago working paper. PareL, Jat, RICHARD ZeCKHAUSER, AND D, HENDRICKS, 1991, The rationality stragele: Iustra tions from financial markets, Ameriean Economie Review 81, 232-296, Penison, Mirciitt. ND Racuu Rajan, 1994, The benefits of lending relationships: Evidence from sina business data, Journal of Finance 98, 3-37. PETERSON, MITCHELL AND Ractu Rajan, 1985, The benefits of finm-creditor relationships: A study of stall Quarterly Journal of Economies 110, 407-443. PLUMMER, J. 1987, QED report on Venture capital analysis, Palo Alto, QED Rescarch Ryan, RAGHU, 1992, A theory of fluctuations in bank credit poly, mimeo. irri, Jay, 1984, The “hot issue” market of 1980, Journal of Business 57, 215-241 Rernin, Jay, 1987, The cost of going public, Journal of Financial Economies, 959-281 Rerren, Jay, 1901, The long ran performance of initial public offerings, Journal of Finance 46, 328, 1995, Vi ure capital and the over It of privately-held firms, Journal of Finance ‘capitalist certification in initial pubBooks on Entrepreneurship Venture Capital and Small Business * 11 SaMLwaN, Witte, 1990, The structure and governance of vent nal of Financial Economies 27, 413-524, Saenesza, Hann, 1992, When do venture ea 837 Scrnwanz, J., 1991, The future of the venture capital industry, Journal of Business Venturing 6, 80-92. SMIGLITZ, JOSEPIT AND ANDneW Weiss, 1981, Credit rationing in markets with incomplete infor: ‘mation, American Economie Review 71, 398-408, SmicLiTz, JoseeH AND ANDKEW Weiss, 1983, Incentive effects of terminations: Applications to the credit and labor markets, American Economie Review 73, 919-927. ‘Tuacktay, JOHN, The institutionalization of venture capital, Institutional Ineestor, August 1983, 73-16, ‘Trin, Stteiunan Ax R. Wesstts, 1988, The determinants of capital structure choice, Jour: nal of Finance 43, 1-19, ‘Townsenp, Ronenr, 1979, Optimal contracts and competitive markets with costly state verifica tion, Journal of Economic Theory 21, 265-293, Weraet, WiLtiast, 1987, The informal venture capital market, Journal of Business Venturing 2 200-314. WILLIAMSON, OLIVER, 1988, Corporate finance and corporate governance, Journal of Finance 43, 501 capital on tations, Jour- talsts add value, Journal of Business Venturing 7,