Venture Capital and Private Equity: A Course Overview (2001 Update)

Over the past fifteen years, there has been a tremendous boom in the private equity industry. The pool of U.S. private equity funds (partnerships specializing in venture capital, leveraged buyouts, mezzanine investments, build-ups, and distressed debt) has grown from $5 billion in 1980 to nearly $300 billion at the beginning of 2001. This growth was particularly pronounced in the final years of the 20th century. This document describes a course exploring this industry, "Venture Capital and Private Equity." This course was introduced by the author at Harvard Business School in the 1993-1994 academic year. In recent years, this course has been one of the five largest elective courses at the Harvard Business School. The cases in this course have also been used in a variety of other settings, including an annual executive education course on private equity and in entrepreneurship and private equity courses at a variety of other major business schools. Three primary pedagogical objectives motivate the design and structure of the course. First, and most fundamentally, the course seeks to deepen students' understanding of corporate finance. This course differs from some academic programs in entrepreneurship, which emphasize the uniqueness of private equity finance and the limited applicability of academic theory. By way of contrast, this course emphasizes the relevance of the intellectual frameworks used to analyze corporate finance problems (incomplete contracting theory, agency problems, etc.) for the private equity industry. Wherever possible, the links to other finance courses are emphasized. Thus, one goal is to review and apply the key concepts and tools of corporate finance in an environment that the students perceive as very interesting. Second, the course seeks to build familiarity with the key institutional features of the private equity industry. Whether discussing fund structures, potential investments, or returns, participants in the private equity industry often describe phenomena in language that is somewhat different from other financial investors. Understanding the key frameworks employed by private equity investors, and relating them to traditional finance practice, is thus an important goal. Among the critical issues that students gain appreciation is the process of career management in the private equity industry. Finally, a crucial objective is to build an appreciation of the valuation process in the private equity setting. Valuation issues are often the subject of contentious disputes. Industry practice, reflecting private equity's early state of evolution relative to many other financial sectors, can often appear to the outside observer as sloppy and not standardized. Skill in analyzing value is likely to be an increasingly important competitive skill in the private equity industry. This course consequently introduces a wide array of valuation methodologies. These include approaches commonly seen in practice (e.g., the use of comparables and the "venture capital" method) as well as those less frequently employed but likely to be useful nonetheless (the use of Monte Carlo simulations and option pricing techniques). The course emphasizes not only the mechanisms employed, but also how to clearly communicate the strengths and limitations of each approach.