Chapter 23
Raising Equity Capital
I. Chapter Outline
The following chapter outline is correlated to the PowerPoint Lecture Slides. The PowerPoint slides
23.1 Equity Financing for Private Companies (Slide 7)
• Sources of Funding (Slide 8)
– Angel Investors (Slide 9)
– Venture Capital Firms (Slides 9–11)
• Interview with Kevin Laws
• Table 23.1 Most Active U.S. Venture Capital Firms in 2015 (by number of deals
completed) (Slide 12)
• Figure 23.1 Venture Capital Funding in the United States (Slide 13)
– Private Equity Firms (Slide 14)
• Figure 23.2 Global LBO Volume and Number of Deals (Slide 15)
• Table 23.2 Top 10 Private Equity Funds in 2015 (Slide 16)
– Institutional Investors (Slide 17)
– Corporate Investors (Slide 18)
• Venture Capital Investing (Slides 19–26)
– Participation Rights (Slide 33)
– Anti-Dilution Protection (Slide 33)
– Board Membership (Slide 33)
• Example 23.2 (Slides 34–35)
• PowerPoint Alternative Example 23.2 (Slides 36–38)
• Common Mistake Misinterpreting Start-Up Valuations
• Exiting an Investment in a Private Company (Slide 39)
23.2 The Initial Public Offering (Slide 40)
• Advantages and Disadvantages of Going Public (Slides 41–42)
• Table 23.3 Largest U.S. IPOs (Slide 43)
• Types of Offerings (Slides 44–48)
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– Best-Efforts, Firm Commitment, and Auction IPOs (Slides 46-48)
• Example 23.3 Auction IPO Pricing (Slides 49–50)
• PowerPoint Alternative Example 23.3 (Slides 51–53)
• The Mechanics of an IPO (Slides 54–67)
– Underwriters and the Syndicate (Slide 54)
• Example 23.4 Valuing an IPO Using Comparables (Slides 62–63)
• PowerPoint Alternative Example 23.4 (Slides 64–65)
– Pricing the Deal and Managing Risk (Slides 66–71)
23.3 IPO Puzzles (Slides 72–76)
• Underpricing (Slides 72-76)
• Figure 23.4 International Comparison of First-Day IPO Returns (Slide 74)
• Example 23.5 IPO Investors and the Winner’s Curse (Slides 77–78)
• Cyclicality (Slide 79)
• Figure 23.5 Cyclicality of Initial Public Offerings in the United States (Slide 80)
23.4 The Seasoned Equity Offering (Slide 84)
• The Mechanics of an SEO (Slides 85–86)
• Example 23.6 Raising Money with Rights Offers (Slides 87–88)
II. Learning Objectives
23-1 Describe four ways in which a private company can raise outside capital.
23-3 Identify the two main exit strategies used by equity investors in private companies.
23-5 Distinguish between primary and secondary offerings in an IPO.
23-7 Evaluate the role of the underwriter in an IPO.
23-9 Identify ways in which underwriters can mitigate risk during an IPO.
100 Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition
©2017 Pearson Education, Ltd.
23-10 List and discuss four puzzles associated with IPOs.
23-11 Define a seasoned equity offering, describe two ways in which they are brought to market, and
identify the stock price reaction to the announcement of a seasoned equity offering.
III. Chapter Overview
The chapter begins by reminding us that most U.S. companies are sole proprietorships or
partnerships. However, most economic activity (85%) is generated by large corporations. The chapter
discusses how businesses gain access to capital by examining a real company, RealNetworks.
23.1 Equity Financing for Private Companies
This section identifies sources of funding for private companies, including angel investors, venture
capital firms, institutional investors, and corporate investors. Table 23.1 shows top venture capital
firms, and Figure 23.1 shows the amount of investment done by those firms from 1995 through 2015.
A call-out box describes crowdfunding.
23.2 The Initial Public Offering
This section begins with a discussion of the advantages and disadvantages of going public. Next, the
chapter introduces various types of offerings, such as primary versus secondary offerings and best-
23.3 IPO Puzzles
23.6 shows the relative costs of issuing securities.
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23.4 The Seasoned Equity Offering
This section describes the process that companies follow in an SEO. The chapter also examines rights
offers versus cash offers, illustrating rights offerings with Example 23.6.
The authors discuss the stock price reaction to a seasoned offering; this drop can be explained by
adverse selection as discussed in Chapter 16. There are two empirical puzzles that remain
unexplained. First, adverse selection can be mitigated by use of a rights offering. It is unclear why
most U.S. companies do not use that vehicle. Second, there is significant underperformance after an
IV. Spreadsheet Solutions in Excel
The following Problems for Chapter 23 have spreadsheet versions of the problems available: 4, 5, and