Using the Venture Capital Game to Teach Topics in Finance

The Venture Capital (VC) Game is a web-based, discrete-event simulator of a market for a single product. Students are divided into teams. In some assignments all the teams are entrepreneurs. In other assignments, some teams will be entrepreneurs and the rest will be venture capitalists. The objective of the game is to finish with the highest equity valuation. The entrepreneur teams compete against each other in either a single market or in separate markets and raise money by selling equity to Friends and Family and, if there are any, to venture capital teams. An entrepreneur’s market share is determined using a formula that is known to the teams. The formula is a function of the team’s cumulative R&D expenditures, previous day’s marketing expenditures, fraction of equity owned by employees (excluding founders), the “reputation” score of the most reputable venture capitalist that owns equity in the entrepreneur, and the previous day’s market share. Entrepreneurs spend money on R&D, marketing, and operations. Each venture capitalist starts with a pre-determined amount of cash that they can invest in their reputation directly or invest in entrepreneur teams. The VC Game includes an industry journal and an e-mail function that allows teams to communicate with each other. E-mail would be used, for example, to solicit offers for investment and to set the terms of an investment. The game administrator (typically the professor or a TA) can monitor all the teams and e-mails. The VC Game also generates balance sheets, income statements, and cash flow statements for each entrepreneur. VCs can also view the financial statements of the entrepreneurs in which they have invested. The game from the students’ perspective is described further in the “VC Game: Overview” note.