Harvard Business Publishing Website (noted by HBS in Schedule below).

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1 Finance 757-Entrepreneurial Finance Fall 2012 Phil Greenwood, CPA, PhD Monday 1:00 2:15, 2335 Grainger Contact: office: 5252 Grainger BACKGROUND: This course has the objective of reviewing the financial, control, and investment opportunities faced by rapidly growing companies in entrepreneurial settings. The main objective of study is to consider and select financing vehicles which are appropriate to securing the organizations' money requirements and to understand and analyze the issues in the institutional framework in which those decisions take place. TEXTS and Course Website: Venture Capital, Private Equity and the Financing of Entrepreneurship. Lerner, Leamon, and Hardymon. John Wiley Co ISBN Should be available at UW Bookstore. Cases: o o Harvard Business Publishing Website (noted by HBS in Schedule below). Additional Miscellaneous readings and cases at course website located at by CW on Schedule) ORGANIZATION: The classroom work will be based upon case materials, readings, lecture, and a variety of examples. Initial classes will examine issues in cash flow management and financial benchmarking of entrepreneurial firms. Later, the course will focus on cases emphasizing various sources of financing, including debt, equity and other financing strategies as related to startup and growth firms. REQUIREMENTS: Students should come to class prepared to present their conclusions about the assigned materials. Adequate preparation is assumed. Students are strongly encouraged to work with classmates in developing solutions to these exercises. ASSESSMENT: This class typically has a combination of Graduate and Undergraduate students. Each group will be graded separately. Grading is based on the following proportions: Basis Amount Case Studies Written Analysis (4) 20% Exam 1 20% VCIC Group Presentation/Analysis 20% S-1 Presentations 10% Exam 2 20% Attendance and Participation 10% 1

2 Assignments and Grading Attendance /Participation Attendance in this class is critical to meeting our learning outcomes and objectives. The instructor reserves the right to significantly adjust final course grades due to excessive (more than three during semester) absences of any kind. Participation is an important part of your grade. Expectations are: 1) prepare for class, 2) attend class, and 3) participate in class in a meaningful way. I will be evaluating participation after each class based on the following: Does the student demonstrate that they prepared the readings, cases, and/or other assignments for the evening? This will be one of the main criteria for evaluation of this part of your grade. Do they build on what is being discussed? Are they willing to explore new ideas or new ways of looking at things? Can they argue constructively? Can they integrate information from other sources (other business classes, readings, and life experiences) to enhance our discussion? Quantity of participation should be viewed as a bell shaped curve. That is, too little or too much participation both will have a negative impact on your participation grade for that day. To enhance and encourage discussion, the instructor will utilize many discussion questions throughout the semester with option of cold calling on students. Please be prepared. Case Analysis Students will be expected to analyze cases for classroom presentation. Each case will possess a set of specific questions to guide your analysis. Because this is a case-based course, you will be required to complete FOUR written case analyses for the semester. The material covered in cases is eligible for exams. Grading for the cases will typically follow a general distribution but may be altered due to the relative quality of the completed assignments. S-1 Presentation Project One of the biggest events of an entrepreneurial firm is going public or going through the Initial Public Offering (IPO) process. The IPO market has varied in activity across a variety of industries going public to raise public capital. The prospectus prepared for a public offering, the S-1, is one of the most informative financial reports made available to the investing public. The S-1 Presentation project is a process where your group will select one of the recent S-1 forms to present in class. The only requirements are that the company your group selects must have gone public on the NYSE or NASDAQ within the last 9 months. After selecting the company, obtain a copy of the S-1 (or S-1/Amended form) at or other websites such as Hoovers and present the class the following information: 1. Overview of the company including history, products/services, markets and competition. 2. Overview of the offering - # of Shares, Offering Price, Capital Structure after Offering, and Use of Proceeds. 3. Summary of Financings (Pre-IPO) Firms involved, % Ownership, Types of Financing and # of Rounds (Only Include Investors > 5% Ownership, Pre-Offering), Pricing of various rounds and Amounts per round (usually found in footnotes) 4. Underwriters/Compensation arrangement 5. How d the IPO do at offering? Stock price after offering? 6. Comparable Valuation with Similar public firms present the values, the key multiples (e.g., Price/Earnings, Price/Earnings Growth, Price/Revenue, etc.) conclude as to your firm s value. 2

3 Final Project/Term Sheet Assignment - The Venture Capital Investment Project The final project for this class will be a highly integrated exercise that that applies many of the concepts discussed throughout the semester. On December 4 th, each group will receive two to three new venture business plans that they will be responsible to evaluate and provide a recommendation. Each group will take on the role as a Venture Capital group with the responsibility of evaluating each plan and making a decision to invest in one of the plans/ventures. As part of the process, each group will be responsible for: Specifically: Plans will be distributed on the day mentioned in Schedule below prior to the day of presentation During class, each group will be required to: o Create a Term Sheet for one of the plans that outlines the investment chosen. Any additional analysis can be attached in the form of an appendix. o Create a Powerpoint deck of no greater than 12 slides that outline your choice AS IF YOU WERE to present your choice and the analysis behind it. There will be no in-class presentation, only a Powerpoint deck is due. o Grading will be based 30% on the Powerpoint, 70% on the Term Sheet. Grading: Grades are curved using the following formula: The Average of the top two scores represents 100%. The range of A grades begins at 93% x the average of the top scores. The AB range is 85% to 92% of the top average. The B range is 78% to 84% of the average. BC range is 70% to 77%. C range is 60% to 69%. D range is 50% to 59%. 3

4 TEMPLATE FOR WRITTEN TERM SHEET DELIVERABLE (AVAILABLE IN AN ELECTRONIC VERSION): Top 5 Reasons We are Investing DEAL SNAPSHOT Pre-Money Valuation $ Team s Investment $ + Syndicate Investment (?) $ = Total Series VCIC $ Post-Money Valuation: $ % Ownership by Team % 5. Briefly explain the following. Your Overall Investment Decision: TEAM NAME HERE Investing in: COMPANY NAME HERE Top 5 Reservations Valuation: Expected Return: Due Diligence: Top 5 questions for this entrepreneur COMPANY #2 NAME HERE Top Reasons For Not Investing Brief Explanation: NO INVESTMENT Opportunities and Strengths Due Diligence: Top 5 questions for this entrepreneur ONE PAGE MAXIMUM 4

5 TEMPLATE Evaluation FORM FOR Term Sheet Assignment: TEAM NAME Advice: Score 7 as default for a good but unremarkable performance. Score Feedback to Team Why didn t we get a 10? RIGHT REASONS Reasons to invest? Reasons not to invest? Overall decision? RIGHT TERMS Valuation / Investment Size/Syndication / Board Structure / Option Pool / Liq. Pref. / Anti-Dilution / Dividends / Dates and other terms How well did the team cover what you consider the key issues/questions? How well did the team demonstrate an understanding of the financial requirements of this deal? TOTAL SCORE Out of 40 points Grading will be on a scale similar to exams where the top two groups will be averaged and considered 100% grade. 5

6 DATE SESSION TOPIC ASSIGNMENT 9/5 1 Intro/Course Overview 9/10 2 Introduction to Private Equity and Venture Capital Text: Ch. 1 9/12 3 The Private Equity Cycle Text: Ch. 2, 9, 13 Boom and Bust/Perez Framework Perez Article (website) Risk and Return 9/17 4 Case: Orchid Partners HBS Website People, Positions and Culture Text Ch. 11 9/19 5 Deal Sourcing and Evaluation Text: Ch. 3 Due Diligence Process Early Stage firms 9/24 6 OUTSIDE IMPACT evaluation model Lecture 9/26 7 CASE: Application Technologies Course Website 10/1 8 Flex Day 10/3 9 Do they have a Business Model? The Biz Model Reading, Right Business Model? Course Website 10/8 10 CASE: Study Blue HBS Website 10/10 11 Assessment of Early Stage Firms: Lecture Cash Burn Rate/Time To Cliff VC Modified IRR 10/15 12 Assessment of Business Performance: Lecture Earnings Power, Sustainable Growth, Operating Leverage 10/17 13 Net Balance Position/Cash Conversion Cycle Readings: Jnl of Applied Biz and Econ Pricer, et 10/22 14 Case: Sporting Life Course Website** 10/24 15 EXAM (in class) 10/29 16 Assigning Value Text: Ch. 4 10/31 17 CASE: Eurosky Biz plan Course Website** 11/5 18 Deal Structure Term Sheets Text: Ch 5 11/7 19 Case: Trend Setter HBS Website The Venture Capital Investment Project 6

7 11/12 20 Work on VCIC Project flex day 11/14 21 Turn In Class VCIC Project review the outcomes 11/19 22 After The Money Arrives Text Ch. 6 11/21 23 Flex Day 11/26 24 Case: Onset Ventures HBS Website* 11/28 26 Achieving Liquidity Text: Ch. 7 12/3 27 IPO or NO? The Gilead Case Course Website 12/5 28 S-1 Presentations Presentations 12/10 29 Course Review for Exam In Class 12/12 30 In Class Exam 7

8 Supplemental Readings: 1. "Corporate Finance", Ross, Westerfield, Jaffe, 7th edition, 2005, Irwin. 2. "Fundamentals of Financial Management", Van Horne, Wachowicz, 12th edition, 2005, Prentice Hall 3. "High Tech Start Up", Nesheim, 2000, Simon & Schuster Inc. 4. "Intermediate Accounting", Kieso, Weygandt, 11th edition, 2003, John Wiley & Sons 5. "Principles of Corporate Finance", Brealey & Myers, 7th edition, 2003, McGraw Hill 6. "Security Analysis", Graham & Dodd, classic 1934 edition, 1997, McGraw Hill 7. Structuring Venture Capital, Private Equity and Entrepreneurial Transactions, Levin and Rocap, Wolters and Kluwer, Venture Capital and the Finance of Innovation, Metrick and Yasuda, 2 nd Edition, John Wiley and Co Valuing a Business, 5th Edition: The Analysis and Appraisal of Closely Held Companies, Pratt, McGraw Hill. 11. Venture Deals, First Edition. Brad Feld, Wiley,

9 Case Questions Orchid Partners HBS Website IN a one to two page well written analysis, answer the following questions: 1. Does Orchid Partners meet the criteria for a good business opportunity for you? Why? 2. Is Orchid a good opportunity for Todd? 3. Should the partners close on and start operating the fund even if they haven t met their size target? Application Technologies Course Website - Answer the following: 1. Assume you are running an investment fund that focuses on a variety of industries and have received the business plan for Application Technologies, evaluate the venture opportunity using the OUTSIDE IMPACTS framework. Provide an overall recommendation about your next course of action. Study Blue HBS Website 1. How did the single angel investor and his method of providing funding impact Study Blue s growth in the first two years? 2. Using the Business Model Canvas framework elements, describe the various components in relation to Study Blue. 3. In relation to your canvas, what are the strengths and weaknesses of StudyBlue s business model. If you were an investor looking at Study Blue, how would this impact your decision? CERES HBS Website 1. Using the two most recent year s operating results, evaluate CERES using the following: a. ROE and the Deconstruction of it b. Sustainable Growth Rate c. Net Balance Position and Cash Conversion Cycle d. Altman Z Score private company model 2. Is Ceres financially healthy? What parts of the financial statements worry you? 3. Prepare a brief presentation for a banker forecast out two years, estimate cash flow needs and evaluate the risks the company faces. Eurosky (course website) 1. Evaluate the financial projections of Eurosky strengths and weaknesses. 2. Assume that Eurosky s financials are current. Value the company using a comparable value approach with at least two similar publicly held companies as proxies. Assume a 30% liquidity discount. 3. Develop a valuation using Net Present Value/Discounted Cash Flow, 30% discount rate, an appropriate terminal value at the end of five years. Trendsetter HBS Website 1. Taking the perspective of the entrepreneur, compare and contrast the two term sheets. 9

10 2. What term sheet would you choose why? 3. What terms would you attempt to negotiate with the investors? Onset (HBS website) 1. Onset is raising a new fund, what should they do, based on the issues in the case? 2. Onset has a unique model for investing and managing their investments, how effectively did they follow their model with TallyUp? 3. What should they do regarding TallyUp? Support your recommendation. Gilead (Course Website) 1. Evaluate the pros and cons of Gilead s general financing policy. 2. What should Gilead do (IPO or Mezzanine round)? Why? 10