Georgia Institute of Technology College of Management. Entrepreneurial Finance and Private Equity Syllabus. MGT 6086 Fall 2011 T, Th 12:05-1:25 P.

Transcription

1 Georgia Institute of Technology College of Management Entrepreneurial Finance and Private Equity Syllabus MGT 6086 Fall 2011 T, Th 12:05-1:25 P.M Instructor: Narayanan Jayaraman 406 College of Management "The entrepreneur casts aside his assurance of 40-hour weeks, leaves the safe cover of tenure and security, and charges across the perilous fields of change and opportunity. If he succeeds, his profits will come not from what he takes from his fellow citizens, but from the value they freely place on the gift of his imagination." George Gilder "Good judgment comes from experience. Experience comes from bad judgment." Walter Wriston TOPIC PAGE CAREER FOCUS 2 OBJECTIVE 2 COURSE STRUCTURE AND CONTENTS 2 RECOMMENDED TEXT 5 GRADING SCHEME 6 HONOR CODE 6 CLASS PARTICIPATION 6 GROUP CASES 6 GROUP PROJECT 6 OFFICE HOURS 6 COURSE OUTLINE 7

2 2 Career Focus This course is intended for students who may at some point be interested in pursuing careers in entrepreneurial sector. This group includes students interested in starting a business, buying an existing one, playing a managerial role in a rapidly growing business, provide financial and other resources to entrepreneurial companies, or working in new business development in larger companies. Objective This is a course with two fundamental objectives. The first is to teach current and future managers and entrepreneurs to use financial perspective in the value creation and enhancement process. The second objective is to teach effective entrepreneurial practice from the perspectives of users and suppliers of capital and other stakeholders. Finance is the study of value and resource allocation. The value of any cash stream is influenced by its magnitude, timing, and riskiness. Finance is also concerned with the cost of capital and determining the least expensive source to fund projects. These issues are very critical for start-up and growing firms. The course will focus on financial management within entrepreneurial firms. The course will cover all phases of their life cycle, from the initial idea generation to ultimate harvesting of the venture. Suggested readings, class discussions, case analyses, and guest lectures will aim to increase the participant's understanding of key concepts and issues. Course Structure and Contents Module 1: Identifying Opportunities Here we explore the structural model of entrepreneurship. We use William Sahlman s framework that identifies four critical factors for entrepreneurial ventures: people, opportunity, deal, and context. People An important task is to identify the key players. What is their experience? How does this experience prepare or not prepare for the opportunity that exists? What are the strengths and weaknesses of the people involved in all sides of the transaction? Are there key individuals that the company should add or replace?

3 3 Opportunity The opportunity that arises may be a new product or service, a new method of delivery, or a new production technique that provides a cost advantage. Many questions such as the following need to be answered. What is the nature of the opportunity? Is there a sustainable competitive advantage? Must the opportunity be exploited immediately or is there a possibility to wait? Are there intermediate milestones that can be used to assess the success of the project? Deal Once the people and opportunity pass minimum criteria, a proper deal needs to be structured. The proper deal needs o minimize moral hazard and adverse selection problems. From whom should the firm raise money: wealthy individuals, banks, venture capitalists? What is the proper financing instrument: debt, equity, convertible securities, or a combination? Who bears the downside risk? Context Probably the most difficult part to assess. Some of the issues such as potential competitors, changes in government regulations are hard to predict. One should have a very clear understanding of economic conditions and trends that will influence a particular market. The concept of FIT An understanding of the big picture is very important. How do the above four elements relate to each other? Do the people have the requisite skills and experience to exploit the opportunity? Doe the deal provide proper incentive to all the players? Will the context change the nature of the opportunity? Module 2: Valuation. In this module, we will discuss different valuation techniques. There are several approaches to valuation. The easiest way to value an early-stage firm is to examine the valuation of another early-stage firm. It could be a difficult task given that it is hard to find valuations of privately held firms. The other methods are i) The Net Present Value Method, ii) Adjusted Present Value Method iii) Comparable Firm Analysis, iv) Option analysis, and v) The Venture Capital Method. We will discuss the strengths and weaknesses of the above techniques through several examples.

4 4 Module 3: Financing the Entrepreneurial Firm This section discusses questions such as who are the suppliers of necessary financial resources, what type of deals should be struck with each of these resource suppliers. The other issues addressed are the criteria these sources utilize and evaluate fund raising proposals, and the legal process involved in raising outside risk capital. There are four primary factors that influence the source of funds. Uncertainty exists about whether the research program or new product will succeed. This in turn affects the willingness of outsiders to contribute capital, the desire of suppliers to extend credit among other things. This often times results in the investor staging the capital. Asymmetric information may also affect project-financing decisions. Typically, an entrepreneur will know more about the company s prospects than investors, suppliers, or strategic partners. This may result in an entrepreneur pursuing a risky investment strategy or shirking work. The third factor that influences the source of financing is the nature of the assets. Firms with more tangible assets will find it easier to raise external capital. Lastly, market conditions often play a very important role in terms of the ability of the firm to raise capital. The supply of capital dramatically varies over time. Currently, it is a lot harder for a biotechnology firm to raise capital as compared to an internet firm. The type of financing (i.e. debt, equity, or convertible security) used often times mitigates some of the potential conflicts. Monitoring and evaluation by investors play a critical role in minimizing these conflicts. Some of the techniques used in this regard include having an active and qualified board of directors. The combination of cases and notes used in this course will provide a useful framework understand the above issues. Module 4: Harvesting Harvesting can take several forms. We will explore modes such as initial public offerings (IPOs) and acquisitions. Successful exits by providers of capital are critical to insuring attractive returns for investors and, in turn, to raising additional conflict. But private equity investors concerns about exiting investment can sometimes to lead severe problem for entrepreneurs. We will discuss the pros and cons of going public. We will explore the IPOs of Netscape Communications and Amazon.Com through cases. We will

5 5 also talk about acquisitions as an important mode of harvesting. The ability to find the best buyer and negotiate the best deal terms is important for the entrepreneur. Module 5: Corporate Venturing This final module focuses on the role played by corporations in the venture investing process. At the one end, the corporation invests directly in start-ups, which give them a greater ability to tailor their portfolios to their particular need. At the other end, some large corporations attempt to tap the entrepreneurial sprit within their organizations. They attempt to establish programs that are conducive to creativity and innovation. We use Xerox Technology Ventures case to understand this process. Required Text Course Notes Available for download from t-square HBS Cases (available in the bookstore) How to write a great business plan HBR A note on valuation in private equity settings HBS Recommended Text and Readings Entrepreneurial Finance, Smith, Smith and Bliss, 2011, John Wiley.

6 6 Venture Capital Journal, CFO Magazine, Wall Street Journal, INC., SUCCESS. Grading Scheme Case Analysis 25 % Mid-Term 25% Class Participation 25 % Group Project and Presentation 25 % Honor Code Students are expected to adhere to the Georgia Tech Honor Code. A substantial documentation exists at Please feel free to ask me any clarifications about this issue at any time. Class Participation Class participation grades will be determined on the basis of participation in the class discussion of the cases. You are required to participate in the class. A necessary (but not sufficient) requirement for participation is presence. If you are not in the class, you cannot have participated. I do cold call on individuals. Group Case Write-ups A group can consist of maximum of five students. The cases are listed in the course outline. The list of questions to analyze the case is listed in the outline. The group has to submit a two-page single space write-up (excluding graphs and tables) at the beginning of the class on the day the case is planned to be discussed. There will be a peer evaluation. Group Project A group can consist of maximum of five students. The group has to make presentation of the project during the last week of the course. Projects can include a) Detailed analysis of an entrepreneurial venture focusing on finance issues, b) Detailed discussion of expected financing for an entrepreneurial venture you already may be planning to embark upon, c) Case studies of venture capital fund etc. I need a one-page outline by the fourth week of the course. I expect the written report to be no longer than fifteen pages (excluding the appendices). Please plan for a presentation of about twenty minutes during the last week of classes. Office Hours Physical Office Hours: Tuesdays, Thursdays 2-3 p.m. or by appointment

7 Virtual Office Hours: I will respond to all s once a day at least. 7

8 8 Course Outline CN - Course Notes SS- Entrepreneurial Finance HBS - Harvard Business School Case ***** Write up required Module Date Description Remarks 1 8/23 Introduction CN 2 8/25 Business Plan CN, HBR /30 Outdoor Scenes Inc - Case CN 4 9/1 Financial Perspective and Options CN and HBS /6 Financial Perspective and Options CN 6 9/8 Obtaining Risk Capital Ch 2 SS, CN 7 9/13 Digital Think: Start Up Case***** HBS /15 Methods of Financial Forecasting: Revenues Ch 6 SSB, CN 9 9/20 Methods of Financial Forecasting: Planning Ch 7 SSB, CN 10 9/22 Assessing Financial Needs Ch 8 SSB, CN 11 9/27 Valuation CN and HBS /29 Valuation CN and HBS /4 Valuation CN and HBS /6 Penelope Pocket Phones Case***** HBS /11 Yale University Investments Office: Jun 06 HBS /13 Venture Leasing CN and HBS E /20 Project time No Class 18 10/25 Aberlyn Capital Management Case***** HBS /27 Mid-term Exam Modules 1 through /1 Obtaining Debt Capital CN 21 11/3 Xedia and Silicon Valley Bank (A) HBS /8 GO Corporation Case HBS /10 IPO and Exit Strategies CN 24 11/15 Amazon.Com Case***** HBS /17 Nantucket Nectars - Case HBS /22 The Fojtasek Companies and Heritage HBS Partners Case 27 11/29 Corporate Venturing CN 28 12/1 Intel 64 Fund Case HBS /6 Project Presentations 30 12/8 Project Presentations

9 9 Date: 8/23/2011 Module No: 1 Introduction The objective of this module is to provide a framework for the study of the financial decisions made by the entrepreneurs. The root of most new ventures lies in the creation and recognition of an idea for a new improved product or service, or in better ways of managing or delivering these. The concepts, analytical skills, and entrepreneurial finance perspective are laid out in an overview form. Course Notes. How to Write a Great Business Plan by Sahlman (HBR Jul-Aug 97) =============================================================== = Date: 8/25/2011 Module No: 2 Business Plan The objective of this module is to provide a discussion of business plan. Course Notes. How to Write a Great Business Plan by Sahlman (HBR Jul-Aug 97)

10 10 Date: 8/30/2011 Module No: 3 Outdoor Scenes Inc - Case The case is used to understand and critically evaluate the business plans. Before class, read the cases from the book. Prepare to discuss the following questions. a Outdoor Scenes Inc - Case A) What should JC and John do? B) Would you invest in them? In other words, how will you evaluate the business opportunity and the entrepreneurs as team? C) What will it take to launch and succeed in this business? Course Notes

11 11 Date: 9/1/2011 Module No: 4 Financial Perspective and Options This module is used to bring the financial perspective in understanding value creation. It highlights and provides a structure to think about cash, risk, and value. It also is used to understand basic terminology about options. Course Notes HBS Before class, read the material. =============================================================== = Date: 9/6/2011 Module No: 5 Financial Perspective and Options This module is used to bring the financial perspective in understanding value creation. It highlights and provides a structure to think about cash, risk, and value. It also is used to understand basic terminology about options. Before class, read the material. Course Notes HBS

12 12 Date: 9/8/2011 Module No: 6 Obtaining Risk Capital This module focuses on different sources of risk capital. A detailed discussion about angels, venture capitalists, SBA and SBIC is provided. Before class, read the material. Chapter 2 (SS) and Course Notes

13 13 Date: 9/13/2011 Module No: 7 DigitalThink: Start Up Case This case is used to understand some of the decisions faced by an entrepreneur in the early stages of a new venture. Please give the write-up before the discussion in the class. A) How should Goettner choose a lawyer and an accountant? What deal makes sense between a startup and a service provider like a lawyer? Should Mario Rosati and John Kelm work with DigitalThink? B) What is sensible financing plan for DigitalThink? How much money should the company raise? From whom? On what terms? HBS

14 14 Date: 9/15/2011 Module No: 8 Methods of Financial Forecasting: Revenues This module helps you understand the elements of the cash flow cycle and understand the critical determinants of a firm s financial needs. Before class, read course notes and chapter 6 (SSB). SS and course notes =============================================================== = Module No: 9 Methods of Financial Forecasting: Planning This module helps you understand the elements of the cash flow cycle and understand the critical determinants of a firm s financial needs. Before class, read course notes and chapter 7 (SSB). SS and course notes

15 15 Date: 9/22/2011 Module No: 10 Assessing Financial Needs This module helps you understand the sustainable growth model and application of it to determine the financing requirements for a new venture. Read chapter 8 (SSB) CN and SS

16 16 Date: 9/27/2011 Module No: 11 Valuation Different techniques of valuation are presented. The methods addressed include a) NPV, b)adjusted Present Value, c) Comparable firms, d) Option analysis, e) The Venture Capital Method. Read up on the following handouts. A note on valuation in private equity settings HBS The Venture Capital Method Valuation HBS Course Notes =============================================================== = Date: 9/29/2011 Module No: 12 Valuation Different techniques of valuation are presented. The methods addressed include a) NPV, b)adjusted Present Value, c) Comparable firms, d) Option analysis, e) The Venture Capital Method. Read up on the following handouts. A note on valuation in private equity settings HBS The Venture Capital Method Valuation HBS Course Notes

17 17 Date: 10/4/2011 Module No: 13 Valuation This module is continuation of the previous module and applies the concepts to valuation of a private firm. Read the course notes before the class. A note on valuation in private equity settings HBS The Venture Capital Method Valuation HBS Course Notes

18 18 Date: 10/6/2011 Module No: 14 Valuation Case young firms. This case is used to illustrate the usefulness of option framework to value Please give the write-up before the discussion in the class. A) What is the NPV of Penelope s first generation phone if we ignore the possibility of investing in the second generation project? What valuation methodology would you use to get a value? Does it seem appropriate for the first stage? B) How large does the current expected net present value of the second stage project have to be in order to justify $10 million investment in the first year on the first generation phone project? What happens to the value of opportunity to invest in the second project if the volatility of expected value increases? What does this say about investments in young, high technology companies? Penelope s Personal Pocket Phones Case HBS

19 19 Date: 10/11/2011 Module No: 15 Yale University Investments Office: June 2006 The focus of this case is to understand the objectives and perspectives of institutional investors in private equity funds. 1. How has the Investment Office selected, compensated, and controlled private equity fund managers? What explains the differences between their strategy in private equity with that in other asset classes (e.g., real estate)? 2. How has the Investment Office decided when to make private equity investments? What explains the differences between their strategy in private equity with that in other asset classes (e.g., real estate)? 3. How has the Investment Office made the international private equity investments? What explains the differences between the performance of their international and domestic private equity investments? 4. How is the private equity industry changing? How could Swensen s private equity strategy go wrong? 5. Should David Swensen shift his private equity strategy? HBS and course notes

20 20 Date: 10/13/2011 Module No: 16 Venture Leasing The concept of venture leasing is presented. Before class, read course notes HBS E-147

21 21 Date: 10/20/2011 Module No: 17 Project Time To make progress on your group project. - -

22 22 Date: 10/25/2011 Module No: 18 Aberlyn Capital Management - Case We apply the venture leasing concept to the case. We use the Black- Scholes option pricing model to price the warrants. We also use it to value a patent. Before class, read the case Case write-up due at the beginning of the class. A) How does venture leasing differ from traditional venture capital setting? B) What is Aberlyn s competitive position in the venture leasing industry? What is their strategy? Are the proposed FLIP transactions consistent with their strategy? C) Is the structure of the Aberlyn partnership similar to and different from the more traditional venture partnerships? D) How did Aberlyn calculate how many warrants it should receive? Does the warrant exercise price of $1.45 reflect RhoMed s value? E) What is the real rate of return to Aberlyn? To calculate this, you will need to compute the value of the options using the information above and in the case. Footnote 9 provides two suggestions as to what the current value of Aberlyn is today. F) Does the valuation of the patent transferred to Aberlyn as part of the FLIP, reproduced in exhibit 8, appear reasonable? G) IF RhoMed succeeds in obtaining its FLIP and private placement, it may be able to go public without receiving traditional venture financing. Will venture leasing transactions be able to replace venture capital for a wide variety of firms? HBS

23 23 Date: 10/27/2011 Module No: 19 Mid-Term Exam First seventeen modules including the cases. It will be an open book and open notes exam.

24 24 Date: 11/1/2011 Module No: 20 Obtaining Debt Capital The objective of the module is to discuss different sources of debt financing including trade credit, commercial banks, finance companies, and factoring. Read course notes SS and Course Notes

25 25 Date: 11/3/2011 Module No: 21 Xedia and Silicon Valley Bank (A) - Case The case is used to illustrate the role of banks in financing young, emerging companies is highlighted. A) Why is it so difficult for young, high technology firms to receive bank loans? B) Is the Silicon Valley Bank strategy appropriate for these types of risks? C) Should Xedia be seeking financing from SVB? Does it make sense? What are the risks? D) How would Xedia s venture capital feel about the bridge loan? E) Is the loan to Xedia in the best interest of SVB? F) What is the appropriate interest rate to charge Xedia? Why? G) Should the loan include warrants? Stronger covenants? HBS

26 26 Date: 11/8/2011 Module No: 22 Go Corporation - Case The case is used to illustrate the concepts of valuation. Please give the write-up before the discussion in the class. A) What are the key risks associated with the GO investment? How did John Doerr and his partners address these risks? B) Did Mr. Doerr and Kleiner Perkins add value to GO as an organization? If so, how? How much value had been created at the time of the case (March 1991)? C) What has been Kleiner Perkins s overall approach to private Equity investments? HBS

27 27 Date: 11/10/2011 Module No: 23 IPO and other exit strategies Different exit strategies such as IPOs, acquisitions are discussed. We discuss the typical issues an investment banker brings up in taking a firm public. Before class, read course notes and Ch 16 (SS). SS and course notes

28 28 Date: 11/15/2011 Module No: 24 Amazon.Com - Case The case is used to illustrate the exit strategy Please give the write-up before the discussion in the class. 1. What is the business model for Amazon.com? How does their business model differ from that of Barnes and Noble or Borders? How would you value Amazon.com? 2. Should Amazon.com go public? Why or why not? 3. What are the plausible scenarios for the period leading up to a final pricing meeting, which typically takes place the night before an IPO? How should management respond to these scenarios (e.g., is there a price below which Amazon.com should not go public)? 4. What should Joy Covey, the CFO, do? HBS , HBS

29 29 Date: 11/17/2011 Module No: 25 Nantucket Nectars To examine the exit decision of a firm through a case. Before class, read the case HBS What are the pros and cons of remaining independent? Going public? Selling the company? If management decides to consider selling the company, how should they orchestrate the process? Should they hire an investment banker? How would you identify and deal with prospective buyers? What is Nantucket Nectars worth? To whom? Why? If management decides to sell the business, how should they think about their role after the sale? What should management do?

30 30 Date: 11/22/2011 Module No: 26 The Fojtasek Companies and Heritage Partners Case The case is used to illustrate the issues involved in intergenerational transition at the firm. Leveraged buyout, leveraged recap (do it yourself LBO), and private IPO concepts are discussed. Before class, read the case A) What is the Fojtasek family s problem? B) How does each of the three possibilities that the family is considering-- a buy-out, a leveraged recapitalization, and a Private IPO -- address its needs? What are the key concerns about each transaction? C) How reasonable is the payment for Fojtasek being offered by Heritage? How onerous are the control rights that it is demanding? What would you recommend the Fojtasek family to do? D) How common a problem is the Fojtasek family s dilemma? Does Heritage s Private IPO represent a more general solution to such problems? HBS

31 31 Date: 11/29/2011 Module No: 27 Corporate Venturing To get an understanding of corporate venturing. Read course notes before the class Course notes

32 32 Date: 12/1/2011 Module No: 28 Intel 64 Fund - Case The case is used to illustrate the concepts of corporate venturing Please be ready for the discussion in the class. 1. Should Intel accept Partridge s proposal? Does it satisfy Intel s goals? What are the risks of implementing the proposal? 2. Even though Partridge s group arrived at the structure by incrementally solving individual issues, one could see it as a structure that separates strategic issues from financial investment issues. That is, in the final structure Intel vets investments on strategic issues and Morgan Stanley vets investments on financial return issues. Do you agree? Is this a good solution to the generic corporate venturing tension between strategic imperatives and financial return imperatives? 3. Is this workable operating structure? What will be the pitfalls going forward in making this work on a day-to-day basis? Is the complexity worth it? 4. Is this a good deal for the OEMs? For the end users in the EAF? 5. If you were the CEO of a private company with the choice of several traditional VC capital sources including the Intel 64 fund, would you be inclined o take the money from the fund? 6. As a traditional financial VC, would you want to co-invest with the 64 Fund? What are the issues-distinct from more traditional VCs- of co-investing with the 64 Fund? HBS

33 33 Date: 12/6/2011 and 12/8/2011 Module No: 29 and 30 Group Presentations Presentation of the project. Project Report