New Market Venture Capital by jay94919


More Info
									                                       Venture Capital

Instructor: Mr. Larry Rothenberg
Office: Rm. 628 (or Rm. 215 -EEE office)
Class Meets: M/W 5:30-6:50
Phone: (315) 345-4720
Room: SOM 001
Office Hours: M/W 7:00 - 8:00 Fall 2004 • Pre-requisites

This is a jointly listed undergraduate and graduate course, and is available for both finance
and EEE credit. It is being jointly offered by the Entrepreneurship and Emerging Enterprises
Program and the Finance Depart ment. Students should have had an introductory course in
finance at the undergraduate or graduate level or receive instructor permission to enroll.
Inquiries regarding qualifications to take the course should be director to the EEE Program
at 443-3164.

Course Overvie w Entrepreneurship is the "pursuit of opportunity without regard to
resources currently controlled". This definition implies that successful entrepreneurs are
able to utilize resources that they do not personally own or control. They must go b eyond
opportunity recognition and the creation of great business concepts and find creative
methods for acquiring a variety of resources. Especially critical is their ability to find money
for venture start-up and then to obtain money for ongoing venture growth.

This course will focus on financing issues facing the entrepreneur. We will study the tools
and methods used in determining how much money a venture actually needs in order to be
viable. Further, we will explore tools and approaches used when selling an idea to potential
investors. Attention will be devoted to the different types of financing alternatives available
to new and early stage ventures. The venture capital market will be investigated in detail.
In addition, we will explore issues involved in negotiating deals and in formulating deal
structures. Students will be encouraged to understand financing issues and options from the
vantage points both of the entrepreneur and the investor.

Course Objectives: The course is designed to accomplish a number of objectives over the
next fifteen weeks. Upon completion of the course, you should be able to:

• Appreciate the critical role financing plays in new venture creation and the successful
growth of emerging companies.

• Understand how to determine the amount of money an entrepreneur requires to
successfully start a new venture.

• Construct, read and draw practical insights from the financial statements of an
entrepreneurial venture, and especially the cash flow statement.

• Appreciate the importance of bootstrapping and guerrilla approaches to financing a start
up venture.

• Recognize the multiple sources of financing available to the entrepreneur together with
the characteristics of each source, and the factors they weigh most heavily in inves t ment
• Associate the appropriate sources of financing w ith the characteristics of a venture and an

• Calculate the value of a venture and appreciate the many roles valuation plays in the
creation and growth of an entrepreneurial venture.

• Formulate a deal structure for a start-up venture and grasp the multiple variables that
can be introduced when structuring a deal.

• Understand key tactics and approaches to negotiation when attempting to structure a
deal for a new venture.

• Recognize the value and potential problems with joint ventures as a means of financing
new ventures and developing new products.

• Texts (Required):   Entrepreneurial Finance , Leach and Melicher, Thomson 2003.

Stude nt Assessment/Evaluation: Class Participation 20% Presentation and w rite up*
20% Midterm Examination 20% F inal Examination 40% ____ 100% * Group presentation
with the aim of obtaining financing including. Each group will make a presentation to the
type of investor of their choice. Each group must produce:

   1. 3 page description of the business (summary only - allowances will be made for
        assumptions in the business plan to allow for a focus on financing issues).
   2.   Cash Flow Projections going out 3 years
   3.   PowerPoint presentation to be given to a funding source of your choice including
        valuation analysis
   4.   Proposed Term Sheet
   5.   Analysis of why this funding source was chosen.

• Attendance Policy: Attendance is required. It is not an option. You are allowed two
unexcused absences. If you miss more than two times, you w ill forfeit one letter grade
(10%) in the course.

Participation Policy: You are expected to come to class prepared, and play an active in
the discussions that take place during class periods. This means reading all assignments and
preparing all cases in advance. The issue is the quality of your contribution more than the
quantity. Participation/contribution includes asking questions, answering questions,
agreeing or disagreeing with points made by the instructor or your peers, i nsights provided
regarding the assigned cases, examples that you bring into class from your own life
experiences that relate to issues we are discussing, and so forth.

Teaching/Learning Style: The course will involve a lecture and discussion format with
extensive interaction between students and the instructor. The teaching style will mix core
content with practical applications. Students will be challenged to grasp a concept or idea,
relate it to other concepts, and then apply it in real-world entrepreneurial contexts.

• Academic Integrity All work in this course must be your own individual effort. Where you
have a team assignment, the submitted or presented work must be solely that of the team
members. Violations of this rule will be considered academic dishonesty and will be referred
to the Academic Disciplinary Committee. The School of Management has adopted an
Academic Integrity Policy emphasizing that honesty, integrity and respect for others are
fundamental expectations in our School. The Policy requires all students who take SOM
courses to certify in writing that they have read, understand, and agree to comply with the
Academic Integrity Policy.

SOM students should already have completed a certification statement. All non-SOM
students enrolled in this course, including SOM minors, are also required to complete a
certification statement available in the Undergraduate Office or the MBA Office. Completed
statements are kept on file. The complete text of the SOM's Academic Integrity Policy can
be found on the web at ml.

Other Interesting/Helpful Resources (also see the EEE Program website) Inc. Magazine
Entrepreneur Magazine Fast Company Magazine Journal of Business Venturing Entrepreneurship Theory and Practice
Journal of Small Business Management Journal of Developmental

Some se lected books: M. Van Osnabrugge and R. Robinson, Angel Investing W. Bygrave,
The Portable MBA in Entrepreneurship Jeffry A. Timmons, New Venture Creation J. Lerner,
Venture Capital and Private Equity: A Casebook J. Camp, Venture Capital Due Diligence: A
Guide to Making Smart Investment Choices P.A. Gompers and J. Lerner, The Venture Capital
Cycle J.S. Levin, Structuring Venture Capital, Pr ivate Equity and Entrepreneurial
Transactions A. Wilmerding, Term Sheets and Valuations: An Inside Look at the Intricacies
of Venture Capital R. Hoagland, Funding and Financial Execution for Early-Stage Companies
B. Hill, Attracting Capital from Angels: How Their Money and Experience Can Help You Build
a Successful Company

Course Structure and Reading Assignments: (please note that we may at times move
at a slower or faster pace depending upon class circumstances, student questions, and
comprehension) KEY: EF = Smith and Smith text G = Gladstone text All cases a re in
the case pac ket purchased at the Orange Bookstore Wee k One August 25: Course
Intro - Distribute syllabus, discuss course format and grading procedure. What makes
entrepreneurial finance different from other kinds of finance?

August 27: What are the stages of development and what types of financing come into
play in each stage? Overview of likely types of financing at each life cycle stage. Reading :
EF pages 19 - 32.

Wee k Two Sept. 3: Financing Tools - Introduction to cash flow - How to put together and
read a cash flow statement. Reading : EF Pages 113 - 128, 135-160.

Wee k Three Sept. 8/10: More on cash flow. How to use the cash flow statements and
other planning tools to understand the financing needs of the business. Forecasting sales
and revenues. Readings : EF Chapter 7 Cases: PC Build and Michael Healey Case

Wee k Four Sept 15/17: The business plan and getting started - Understanding the value
of the business plan as a planning tool and as a sales tool in obtaining financing. Discussion
of the semester project. Readings : EF Chapter 2 and 3

Wee k 5 Sept 22/24: Bootstrap Analysis - Finding financing everyw here. Financing can be
found in every part of the business. How to look for financing your cash flow statement by
understanding items such as deferred salaries, stock options, commissioned sales, business
incubators, credit with suppliers, etc. Readings : Guerrilla Financing Reading Case: Belkin

Wee k 6 Sept 29/Oct 1: Valuation Analysis - How is a new venture valued? How do you
know how much to give-up for an investment? Readings : EF Chapter 9 Case: Commercial

Wee k 7 Octobe r 8: Financing Options - Overview of financing alternatives. Review and
compare the most common types of financing available to a new venture, and discuss why
each type of financing is appropriate for a given stage of a new venture. How do the unique
circumstances of a new venture and the market conditions affect the decision of what kind
of financing to look for? Readings : EF Chapter 13

Wee k 8 Octobe r 13: Mid semester review class.

October 15: Mid-term exam

Wee k 9 Octobe r 20-22: Equity Structure in a new venture. Review the types of equity
involved in a new venture, how to calculate the affect of future rounds of financing on
equity structure, value of stock options and warrants. Readings : EF Chapter 11 Case: Three
Fish Solutions

Wee k 10 October 27-29: Venture Capital - Overview of the venture capital industry. How
are VC firms organized, what are the steps an entrepreneur goes through in trying to get
venture capital, common terms of a VC Agreement. Readings : EF Chapter 12 Case: Onset
Ventures, JAFCO America Ventures

Wee k 11 Novembe r 3-5: Venture Capital - Details of the Venture Capital Cycle. Examine
examples of venture capital funded companies. Cases: Neverfail Computing Go Corporation
Fogdog Guest Speaker

Wee k 12 Novembe r 10-12 : Exit Strategies - How to anticipate an exit strategy. How to
prepare for IPO/selling of a company. Reading : EF Chapter 15 Case: Diamond Technical

Wee k 13 Novembe r 17-19: Practical Considerations - Dealing with brokers, lawyers,
closing a deal. Deal structure and deal negotiations. How to deal with financial distress. EF
Chapter 14 Cases: Solidworks Jon Hirschtick's New Venture

Wee k 14 Novembe r 24: Venture Capital - Current Trends in Venture Financing - Open
discussion of the current trends in the new venture financing area. Special attention will be
given to the dot-com bubble, why it happened, what are the long and short -term
consequences for the venture financing industry. Each student is responsible for bringing
one article and summarizing the article to the class.

Wee ks 15 December 1-3: Group presentations

Final Examination Sche duled: TBA (exams begin December 8)

Lecture Notes -Wee k 1/ Lecture 1
Hand out Syllabus Go over office hours and how to contact me Grading Procedures • In-
class - will be called on to answer questio ns about readings • Mid-term - short answer and
essay • Group presentation - presentation to a potential funding source based on existing
business plan. • Final What I am looking for • Understand key terms • Understand how
financing of a new venture is affected by time, future rounds of financing and changing
conditions • Understand the need for creativity in financial planning and the acquisition of
financing Differences Between NVF and Traditional Financing of an existing business • High
rate of failure • Require high rate of return • Assets • Existing ventures have assets to
borrow against • Bank Loans at commercial rates • NV usually can only offer the
entrepreneurs house • Income Stream in existing business • This can assure traditional
creditors • Can attach receivables • Technology issues • Success of a new venture often
dependant on unproven tech • Requires expertise on part of investor, limit ing pool of
investors • Potential for large rewards • Lowers labor costs • Managerial involvement of
outsiders • Investors are involved in BOD • Often require even more input into company
direction • Can have ability to take-over company to safeguard invest ment •
Information/Communication • Need to sell an idea to an investor not just communicate rate
of return • Limited to people who can understand the idea • Often even a subset of tech
investors • Puts premium on creativity and deep knowledge of investor community • Value
of options • High level of uncertainty puts high premium on valuing numerous options and
constantly reevaluating them • Business plans require focus on alternatives • Harvesting •
Liquidity must be planned since no open market for stock and usually there is insufficient
free cash flow to pay dividends or interest • Liquidity event is often tied to management,
creating potential conflicts with investors • Conflicts • Management and investors are two
classes of shareholders with potentially conflicting interests • When to sell •
Salaries/benefits • Risky growth plans v. safe plans • When to replace top management to
prepare for growth/sale/IPO • When to replace loyal underlings who are under performing
• Family issues

To top