[[09-29|25-09-29]]
[[josh_tenanbaum]]
# 📜from entrepreneurial finance lec note
A better way to look at the picture
How important are the various arrows?
Bank Financing
Strategic Alliances
Angel Investing
What is an Entrepreneur? Who becomes one? Why? Why not?
Corporate Venture Capital
This is an enormous market and a great area for future research Wong (2002) was one of the first papers to examine the angel market
Surveyed firms that had gotten angel funding rather than angels themselves Found that they used simple contracts, vague control rights Some evidence that the non-pecuniary benefits were driving their behavior
Lerner, Kerr and Schoar (2013) undertake a systematic look at treatment effects
Angel clubs use scoring algorithms to determine whether a startup gets funded Opens the door to a fuzzy RD design comparing entrepreneurs near the threshold Finds evidence that angels promote entrepreneurial success
higher rate of survival more outside funding
My take: treatment contamination probably causes them to bias their results downwards, away from
Strategic Alliances
This area has received a lot of attention, not all of it aimed at entrepreneurial finance Lerner and Merges (1999)
Show how the allocation of control rights in alliance contracts bears out the predictions of Aghion and Tirole, (QJE, 1994)
Robinson and Stuart (JLE, 2007)
▶
A close reading of alliance contracts shows that they are a lot like VC contracts, but at the project level, instead of the firm level
Robinson and Stuart (JLEO, 2008)
▶
Reputation acts as a control mechanism in contracts, facilitating larger contracting amounts and lower equity stakes, consistent with both GHM-type theories of equity and Baker, Gibbons, Murphy-type relational contracting
Ozmel, Robinson and Stuart (JFE, 2012)
▶
VC funding prompts faster arrival of alliance funding, but alliance funding slows arrival of VC funding. Both speed time to IPO
Conclusions
Entrepreneurial Finance is an emerging field that has been dominated by research in VC/PE because of its obvious and undeniable importance in funding highly innovative organizations|on a “value-weighted" basis, VC is huge.
This is endogenous to a set of “urban myths" that surround new business creation and, more generally, the role of “small businesses" in creating economic growth
On an equally weighted basis, the banking sector plays a much more important role in new business creation.
Here again, confusion surrounding small businesses and young businesses confounds our understanding of the role that the banking sector plays in the new business creation process
The conflation of business and personal balance sheets at business founding has broad ramifications for how we think about a robust model for entrepreneurial finance
---
# day1
[[2025-07-25|25-07-25-04]]
while writing [[투자자의 마음 AI]],
- **Differing Beliefs**: Entrepreneurs often believe the likelihood of a high-value outcome is strong and the risk is low, being "certain that they're going to knock it out of the park". In contrast, the venture capitalist (VC) understands that failure is a common outcome.
- **Enabling Collaboration**: The term sheet is structured to allow for these differing beliefs to coexist. It enables the entrepreneur to maintain their optimistic outlook while allowing the VC to operate with a more cautious, risk-aware perspective, so they can "continue to work fruitfully together".
- **Uniting "Distant Tribes"**: Ultimately, the speaker views the term sheet's role in "bringing people with distant tribes together" as a crucial, and perhaps underappreciated, function of the document.
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Entrepreneurial Finance: Why Modigliani-Miller Breaks Down
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David Robinson - MIT Entrepreneurship Bootcamp Day 1
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🎯 Key Concepts Q&A
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<text x="40" y="160" font-weight="bold" fill="#4b5563">Topic</text>
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<text x="420" y="160" font-weight="bold" fill="#4b5563">Key Insight</text>
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<text x="200" y="190" fill="#374151">Does financing matter?</text>
<text x="420" y="190" fill="#374151">YES - it changes opportunities</text>
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<text x="420" y="260" fill="#374151">Different mean/variance beliefs</text>
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<text x="200" y="295" fill="#374151">How to collaborate?</text>
<text x="420" y="295" fill="#374151">Enable disagreement to coexist</text>
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<text x="40" y="330" fill="#374151">Control Rights</text>
<text x="200" y="330" fill="#374151">Who decides what?</text>
<text x="420" y="330" fill="#374151">Dynamic - shifts over time</text>
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<text x="40" y="365" fill="#374151">PE Impact</text>
<text x="200" y="365" fill="#374151">Strip & flip?</text>
<text x="420" y="365" fill="#374151">No - improves operations</text>
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💡 Core Problem → Solution
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💜 PROBLEM
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Corporate Finance assumes
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FIXED opportunity set:
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• Operations ≠ Financing
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• Capital source irrelevant
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💚 SOLUTION
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Entrepreneurial Finance:
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• Capital affects cash flows
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• Source = production input
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• Feedback loops exist
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⚖️ The Entrepreneur-VC Tradeoff
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<text x="720" y="380" text-anchor="middle" font-weight="bold" fill="#78350f">Entrepreneur View</text>
<text x="720" y="400" text-anchor="middle" fill="#92400e">✓ High mean outcome</text>
<text x="720" y="420" text-anchor="middle" fill="#92400e">✓ Low variance (certain)</text>
<text x="720" y="440" text-anchor="middle" fill="#dc2626">✗ Give up control</text>
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<text x="890" y="410" text-anchor="middle" font-size="20" fill="#78350f">↔</text>
<!-- Right side - VC View -->
<text x="1060" y="380" text-anchor="middle" font-weight="bold" fill="#78350f">VC View</text>
<text x="1060" y="400" text-anchor="middle" fill="#92400e">✓ Portfolio approach</text>
<text x="1060" y="420" text-anchor="middle" fill="#92400e">✓ Add value beyond
lt;/text>
<text x="1060" y="440" text-anchor="middle" fill="#dc2626">✗ Most ventures fail</text>
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🛠️ Action Items for Entrepreneurs
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<text x="70" y="565" font-weight="bold" fill="#374151">Choose investors as co-producers, not just capital</text>
<text x="70" y="585" fill="#6b7280">Why: They affect your opportunity set and operations</text>
<text x="70" y="605" fill="#6b7280">Start: List what you need beyond money</text>
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<text x="70" y="635" font-weight="bold" fill="#374151">Design term sheets for productive disagreement</text>
<text x="70" y="655" fill="#6b7280">Why: You and VCs will never fully align on outlook</text>
<text x="70" y="675" fill="#6b7280">Start: Identify key decision rights you need</text>
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<text x="70" y="705" font-weight="bold" fill="#374151">Plan for dynamic control evolution</text>
<text x="70" y="725" fill="#6b7280">Why: Control should shift as venture matures</text>
<text x="70" y="745" fill="#6b7280">Start: Map control transitions by milestone</text>
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📊 Reading List Classification (MECE)
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<rect x="700" y="660" width="80" height="60" fill="#a855f7"/> <!-- 22% -->
<rect x="800" y="660" width="80" height="60" fill="#10b981"/> <!-- 22% -->
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<text x="740" y="650" font-family="Arial, sans-serif" font-size="14" text-anchor="middle" fill="#374151">🟣 22%</text>
<text x="840" y="650" font-family="Arial, sans-serif" font-size="14" text-anchor="middle" fill="#374151">♻️ 22%</text>
<text x="940" y="610" font-family="Arial, sans-serif" font-size="14" text-anchor="middle" fill="#374151">🟧 44%</text>
<text x="1040" y="680" font-family="Arial, sans-serif" font-size="14" text-anchor="middle" fill="#374151">🔴 11%</text>
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Key Finding: Heavy methods focus (44%) with framework scarcity
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3 Key Takeaways
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1. In entrepreneurship, financing
</text>
<text x="200" y="880" font-family="Arial, sans-serif" font-size="14" text-anchor="middle" fill="#dbeafe">
decisions ARE operating decisions
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2. VCs and entrepreneurs will always
</text>
<text x="600" y="880" font-family="Arial, sans-serif" font-size="14" text-anchor="middle" fill="#dbeafe">
disagree - design for it
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3. Control rights should evolve
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<text x="1000" y="880" font-family="Arial, sans-serif" font-size="14" text-anchor="middle" fill="#dbeafe">
dynamically with venture stage
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# 📝instructions
1. learn from # MANUAL NOTE FROM CLASS (keep them intact in the bottom of this file) notes from the class what impressed the listener from the class
2. extract what instructor emphasized from transcript [[ent bootcamp day1.0_robinson_otter_ai.txt]]
3. classify the # reading list according to adgc criteria defined in [[adgc(bootcamp_readinglist)]]
4. make poster using [[🖼️fig(ent_bootcamp25)]]
# Classified Reading List
## Entrepreneurial Finance through the MECE Lens
🟣A: Papers that identify puzzles, paradoxes, or problems in entrepreneurship
♻️D: Papers that define challenges or establish needs without providing solutions
🟧G: Papers that generate solutions through models, methods, or mechanisms
🔴C: Papers that conceive new theoretical frameworks or paradigms
### 🟣 A: Papers that Identify Anomalies (22%)
_(These reveal puzzling patterns in VC/PE that challenge standard finance theory)_
- **Kaplan, Steven and Antoinette Schoar (2005).** "Private Equity Performance: Returns, Persistence, and Capital Flows" _The Journal of Finance_ 60(4), 1791–1823.
- **The Anomaly**: PE returns show unusual persistence - good funds stay good, bad funds stay bad, violating efficient market expectations. Top quartile funds consistently outperform despite everyone knowing who they are.
- **Davis, Steven et al. (2014).** "Private Equity, Jobs, and Productivity" _American Economic Review_ 104(12), 3956–90.
- **The Paradox**: PE buyouts simultaneously destroy jobs (-3% employment) AND increase productivity (+8%), challenging the simple "strip and flip" narrative while revealing complex reallocation dynamics.
### ♻️ D: Papers that Define Challenges (22%)
_(These frame the unique challenges of entrepreneurial finance without complete solutions)_
- **Metrick, Andrew and Ayako Yasuda (2009).** "The Economics of Private Equity Funds" _Review of Financial Studies_, Vol. 23, 2303–2341.
- **The Challenge Defined**: PE fund economics involve complex fee structures (2% management, 20% carry) that create agency problems between LPs and GPs. Maps the incentive landscape without prescribing optimal contracts.
- **Strebulaev, Ilya et al. (2020).** "How Do Venture Capitalists Make Decisions?" _Journal of Financial Economics_ 135, 169–190.
- **The Need Articulated**: Documents how VCs actually make decisions (team 95%, business model 74%, market 68%) through surveys, establishing the multi-criteria challenge without providing an optimal decision framework.
### 🟧 G: Papers that Generate Solutions (44%)
_(These provide models or methods solving entrepreneurial finance problems)_
- **Sorensen, Morten (2007).** "How Smart is Smart Money: A Two-sided Matching Model of Venture Capital" _Journal of Finance_, 62(6), 488–512.
- **The Solution Model**: Develops a two-sided matching model that separates VC selection effects from treatment effects. Shows 60% of value-add is selection, 40% is treatment, solving the attribution problem.
- **Kortum, Samuel, and Josh Lerner (2000).** "Assessing the Contribution of Venture Capital to Innovation" _RAND Journal of Economics_ 31(4), 674–692.
- **The Identification Method**: Uses industry-level instruments to show VC funding causes innovation (not just correlates). $1 of VC generates 3-4x more patents than $1 of corporate R&D, solving causality challenge.
- **Harris, Robert et al. (2014).** "Private Equity Performance: What Do We Know?" _The Journal of Finance_ 69(5), 1851–1882.
- **The Measurement Solution**: Develops comprehensive methodology using cash-flow data to properly measure PE returns. Shows PE outperformed S&P 500 by 20%+ in 1980s-1990s but converged post-2000.
- **Bernstein, Shai and Albert Sheen (2016).** "The Operational Consequences of Private Equity Buyouts" _The Review of Financial Studies_ 2387–2418.
- **The Empirical Engine**: Uses detailed operational data from restaurants to show PE improves operations (reduce employee turnover, improve customer experience) not just financial engineering.
### 🔴 C: Papers that Conceive New Frameworks (11%)
_(This paper fundamentally reframes how we think about entrepreneurial finance)_
- **Hellmann, Thomas and Manju Puri (2002).** "Venture Capital and the Professionalization of Start-up Firms" _The Journal of Finance_, 57(1), 169–197.
- **The New Paradigm**: Reconceptualizes VC as "professionalization catalyst" not just capital provider. VCs systematically transform startups into professional organizations (hire outside CEOs, implement HR, adopt stock options), fundamentally changing how we understand VC value-add beyond money.
## Classification Summary
### Distribution Analysis
- **2 Anomaly papers (🟣)**: 22% - PE persistence and productivity paradoxes
- **2 Definition papers (♻️)**: 22% - Framing agency and decision challenges
- **4 Generation papers (🟧)**: 44% - Strong methods focus
- **1 Conception paper (🔴)**: 11% - VC as professionalizer
### Key Insights
1. **Methods Dominance**: 44% are 🟧 papers providing solutions - reflects field's maturity in developing rigorous identification strategies
2. **Framework Scarcity**: Only 1 🔴 paper (Hellmann & Puri) - opportunity for more paradigm-shifting work on how entrepreneurial finance differs from corporate finance
3. **Robinson's Theme Alignment**: Papers support his core point that financing and operations intertwine:
- Hellmann & Puri (🔴): VC changes operations fundamentally
- Sorensen (🟧): Matching affects outcomes through selection and treatment
- Bernstein & Sheen (🟧): PE improves actual operations, not just financials
- Davis et al. (🟣): Reveals the job-productivity paradox of PE
4. **Promise Vendor Relevance**:
- VCs/PE as mechanisms to align different Cu/Co perceptions
- Term sheets enable collaboration despite different P beliefs
- Selection vs treatment (Sorensen) maps to F|P vs D|P dynamics
- Performance persistence (Kaplan & Schoar) suggests some funds better at promise assessment
### Research Gaps Revealed
- Need more 🔴 frameworks explaining WHY entrepreneurial finance differs fundamentally
- Room for more 🟣 anomalies - what other puzzles exist in this non-separable world?
- Heavy 🟧 focus (44%) suggests field ready for theoretical integration
### Evangelist Opportunities
- **For Promise Vendor researchers**: Hellmann & Puri (🔴) would be strong evangelists as they understand finance affects operations fundamentally
- **For mechanism designers**: Sorensen (🟧) separates selection/treatment - key for understanding F|P and D|P dynamics
- **For empiricists**: Davis et al. (🟣) reveal productivity paradoxes needing explanation through Promise Vendor lens
-----
# MANUAL NOTE FROM CLASS
DO NOT ERASE
theorize the policy behind entrepreneurship, productize the entrepreneur and social planner's collaboration, evaluating
horhan
shila (startup, breaktrhough)
songil (pivate equity)
angie
immigration and ent. incentive
manufacturing and entry
steve ma (rochester; ent finance)
정원장 (tech dev. lowering entry behav)
gov. intervent
berkely (which firms are )
abdul (berkely internation)
---
modilgliani miller (investment opportunity set): doase
debt
trade property right (resource allocation doesn't affect outcomes)
equity and debt are contingent
⭐️if we agree on discount rate -> market imperfection
Why This is a Problem
The Modigliani Miller Propositions
1 This is the backbone of research in corporate finance.
[What does it say?
I FIX THE INVESTMENT OPPORTUNITY SET.
1 Assume perfect capital markets.
1 Then the value of a project is unrelated to how it is financed.
I (Note that this is a special case of the Coase Theorem)
The original upshot:
I Debt is not "cheaper" than equity.
1 In equilibrium, the risk of the assets determines the cost of capital
1 Adding debt just increases the riskiness of the equity
1 As a result, if capital structure matters, it must be because capital market imperfections matter.
I This has laid out a 75-year, still-ongoing research agenda.
BUT IT ASSUMES THAT THE INVESTMENT OPPORTUNITY SET IS FIXED
OPERATIING AND FINANCING DECISION ARE SEPARABLE
1. who are the ones who agree on discount rate (perfect capital market - market friction - relaxing )
2. does increasing opportunity set usually lowers discount rate? (angie thinks more things happen with fixed period of time)
robinson has written on product market concentration - market power (less risky - absorb market shock)
perfect capital market (can have as much money at that price - bbc i can separate - cash flow and discount them -> can't do that)
human components in capital decision (e.g. when capital )
source of capital augements cash flow
value of project is function of the capital type , cash flows are contingent on capital, then we cannot do standard npv calculation
feedback loop and available capital
⭐️corporate finance tells mayor to go home whereas ent.finance explains inavailabilty of capital as root cause of lack of innovative idea and give chance for capital reallocation
overall rights fall away -> early investor lose control as startup's gets more round
control rights (veto rights of budge, launching new product, ) tilted to vc early in the firm
why vc and founder would reach to different decision (answer: founder and )
poor information mapping and solution of
not only different of information set but also their utility as well -> conception of opportunity set would also differ
dual class share separates control rights and cash flow
anti dilution clause
entrepreneur and vc have different opinion (allow the ppl to disagree to come together)
term sheets allow ENT and INVESTOR who had different mean and sd for success to collaborate
- ENT: thinks the mean outcomes is high and variance is low (knock it out of the park) - lower variance, higher mean,
- INVESTOR : swing (higher variance, low mean)
strategy and finance collaboration
selection and treatment are different is known back tehn (didn't know what VC actually did)
more of your company for the amount of money.
nature of sorting and bargain power of (selection of unobservable - )
ask great question, thoughtful execution, creative in data
distribution of vc is exogenous to distribution of entrepreneur
vc has a fund (10yr) - 12 investments by 5miliion (100milion; 1)
another four goes sideway and kill you slowly; double down and follow on, move out capital out the door - vc have to get the money out the door (2004 - 3,4 years to deploy the capital)
capital you're raising, you're a VC, and I'm an institutional investor, and I like your investment ideas, so I commit capital to your farm. I do not like you a chair. I sign a legal agreement that compels me to provide capital when you call and you would generally have a five year window
fund underinvested, concentration toward the end
performance persistence (vc with strong fund1, fund2)
most favorable nation (extend to every other firms)
QnA with Robinson:
- both the goal utility and information differ for nerdy ent and vc
- want optimism; relative !=absolute optimism; cannot know venture success; term sheet
- ----
robinson mentioned venture sucess is difficult as it inclues knightian sense ->