Entrepreneurial Finance: Strategy, Valuation, and Deal Structure
Chapter 11. Underdiversification and the Entrepreneur’s Perspective on Value
Learning Objectives
After reading this chapter you will be able to:
• Understand why the entrepreneur’s limited ability to diversify affects an entrepreneur’s cost of capital
• Recognize that an entrepreneur’s cost of capital depends on the fraction of risk capital that is committed to the venture
· Determine how to value an entrepreneur’s partial commitment to a venture
• Increase the value of an opportunity by designing a financial contract that shifts risk to diversified investors
• Value new ventures that generate cash flows in several periods
• Estimate the statistical parameters for determining an entrepreneur’s cost of capital
• Understand how the difference between total risk and nondiversifiable risk affects the diversified investor’s cost of capital advantage