Recent Trends in Finance (GSM-687)

PROFESSOR: Manohar Singh

OFFICE: AGSM 307
PHONE: 503-370-6225
OFFICE HOURS: 1.30 PM to 3.30 PM Tuesdays and Thursdays
MEETING HOURS: 6.30 PM to 9.10 PM Tuesdays
MEETING VENUE: Room 301

TEXTS AND COURSE MATERIALS

A. Required Text: The Venture Capital Cycle, 2nd edition, Paul Gompers and
Josh Lerner, MIT Press, 2004, ISBN 0-262-07255-6.
B. A course packet containing a set of case studies and supplemental readings
will be used in this course. The course packet will be made available by
the instructor.
C. An excellent source of information on venture capital and private equity
industry is www.altassets.net. In addition, the official site of the National
Venture Capital Association-- www.nvca.org --provides a wealth of
information on current issues and the trends in the field.

COURSE DESCRIPTION

The course is aimed at providing an overview of the workings of private

equity--including venture capital—organizations and entrepreneurial
ventures. From the perspective of private equity organizations, the course
considers topics like organizing a venture capital partnership and raising
capital; structuring deal flow; evaluating investment opportunities;
valuing, structuring, and negotiating investments; monitoring performance
and governance systems of ventures financed; and exit strategies. From
the perspective of entrepreneurial ventures seeking private funding, the
main emphasis would be on the project valuation, capital budgeting, and
capital raising strategy and management of the relationship with investors.

COURSE OBJECTIVE

The goal of the course is to equip students with conceptual knowledge and
relevant analytical tools for them to be able to make investment decisions
in highly uncertain private equity markets and to structure the terms of
investments within venture capital industry settings. The aim of the course
is for the students to develop an understanding of the issues like, how
private equity funds are raised, structured, and financed; contracting in
private equity markets; valuation of private equity interests; sources of
capital for private companies and entrepreneurial ventures; strategies for
value creation; and venture exit strategies.
CAREER TRACK

The course is aimed at students, who plan to follow career options

involving private equity/venture capital industry, and investment
management or become successful entrepreneurs through start-up of their
own.

COURSE STRUCTURE

The course is structured as a series of 4 modules. Each module contains a

set of readings covering theoretical and conceptual frameworks and one or
more cases exercises. The first module provides “Venture Capitalist’s
Perspective” and examines how private equity funds are raised and their
finances and organizational forms structured, and implications thereof for
the entrepreneurial firms. The second module provides “Entrepreneur’s
Perspective” and examines development of business propositions to seek
private funding and the interactions between private equity investors and
venture capitalists on the one hand and the entrepreneurs they finance on
the other. The third module studies various options and the process
through which venture capitalists exit their investments. The fourth and
final module provides a re-cap of the course and covers special topics
involving study of angel investing, publicly traded investment companies,
international private equity, and trends in the industry.

LEARNING OUTCOMES

At the completion of the course the students will have developed a capability to
accomplish the following;

• Develop a comprehensive analytical framework for planning a business for

capitalization:
o Explain the structure and mechanisms of private equity industry and
markets.
o Evaluate the objectives, motivations, and limitations facing venture
capitalists.
o Quantify value implications of various financing alternatives.
o Conduct financial analysis of private equity transactions from the private
equity investor as well as entrepreneurial perspective.
• Explain how venture capital funds are managed, evaluated, and funded:
o Evaluate portfolio management strategies and understand fund operations.
o Analyze different approaches to fund evaluation by investors.
o Explain the process of fund formation and capital raising.
o Evaluate structure and terms of venture capital limited partnerships.
• Be able to conduct valuation of the business ventures:
o Use venture due diligence process as a guide to planning a venture.
 o Apply various valuation methodologies to privately held companies.
o Conduct comparative evaluation and valuation of business plans and
models.
o Apply well accepted finance concepts like risk-return trade-off, cost of
capital, capital structure, equity risk premium, and CAPM framework to
evaluate project proposals.
• Be able to structure investment transactions:
o To be able to utilize forecasting tools to quantify capital needs.
o Structure and evaluate sequential investment rounds.
o Demonstrate knowledge of the term sheet negotiation process and term
sheet documentation.
o Conceptualize, explain, and evaluate investment instruments and financing
structures.
• From the entrepreneurial perspective be able to negotiate with investors pre- and
post-deal structuring:
o Apply fundamentals of investor compensation in high-risk ventures.
o Identify and resolve conflicting issues in the entrepreneur/investor
relationship.
• Analyze various exit strategies and their implications for investors and
entrepreneurs:
o Identify variety of exit modes -especially IPO process and buyout options.
o Review implications of exit modes and strategies for investors as well as
for entrepreneurs.
• Identify alternative sources of capital, namely, angel financing, small business
investment companies, and alliances.
• Explain the global and domestic trends in, and the role of, corporate venture
capital, especially in comparisons to venture capital limited partnerships.

STUDENT RESPONSIBILITIES

Each student should come to class prepared to discuss the assigned material. I strongly
recommend that the students read the relevant text/material prior to every lecture. I will
expect students to actively participate in the class proceedings. Part of your final
assessment will be based on participation in the class discussions. You should also be
conversant with current venture industry news from The Wall Street Journal as they
relate to course topics and be prepared to discuss them in the class.
I strongly recommend regular attendance in the class. Part of the participation grade will
reflect how regularly a student has been attending the classes.

Academic dishonesty will be dealt with in accordance with the Willamette

University provisions.

Headphone and cell phone use in the classroom is prohibited.

GRADING

1. Midterm Exam (Take Home) 25%

2. Group Presentations (Project-2) 40% (20% Each)
3. Final Exam (Take Home) 25%
4. Class Participation 10%

GRADE DISTRIBUTION (%):

> 90.5 A
87.5 - 90.49 A-
84.5 - 87.49 B+
81.5 - 84.49 B
78.5 - 81.49 B-
70.5 - 78.49 C
<70.49 F
Course Time line:

Class 1-(8/30): Overview of the Course

General Overview of the course:

a. Course objectives
b. Classroom processes
c. Grading scheme
d. Introductions by students

Class 2-(9/6): Functioning of Venture Capital Industry and its Role in the Economy
Readings:
1. “A Note on the Venture Capital Industry”-Kenney
2. “The Economics of the Private Equity Market”- Federal Reserve
3. “Chapter 1: The Venture Capital Cycle” - Text
4. “Venture Impact 2004: Venture Capital Benefits to the U.S.
Economy” – Global Insight

Class 3-(9/13): Raising and Structuring VC Funds-1

Readings:
1. “Chapters 2 and 3: The Venture Capital Cycle” -Text
2. “Note on Private Equity Partnership Agreements,” -Lerner et al
Case:
“JAFCO American Ventures, Inc.: Building a Venture Capital Firm,” -
Kuemmerle et al

Class 4-(9/20): Raising and Structuring VC Funds-2

Readings:
“Chapters 4 and 5: The Venture Capital Cycle” -Text
Case:
“Yale University Investment Office-2003,” -Lerner et al

Class 5-(9/27): Valuation and Investing

Readings:
1. “Note on Valuation in Private Equity Settings,” - Lerner et al
2. “Chapters 7 and 8: The Venture Capital Cycle” -Text

Class 6-(10/4): Venture Capital Investing

Readings:
1. “Note on Private Equity Securities,” -Lerner et al
2. “Chapters 9 and 11: The Venture Capital Cycle” - Text
Case:
“Adams Capital Management: March 2002” -Hardymon et al

Class 7-(10/11): Evaluation of a Business Model and Due Diligence

 Reading:
“A Note on Due Diligence in Venture Capital,” -Tuck School of Business
Cases:
1. “How Venture Capitalists Evaluate Potential Venture
Opportunities,” Roberts et al
2. “Valhalla Partners: Due Diligence,”- Sahlman et al

Class 8-(10/18): Transaction Structuring and Term Sheet Negotiations

Readings:
1. “Anatomy of a Term Sheet: Venture Capital: An Overview of
Trends, Strategies, and Structural Issues,” - Andrew J. Sherman
2. “Note on Anti-dilution Provisions: Typology and a Numerical
Example,”- Kuemmerle et al
Case:
“Term Sheet Negotiations for Trendsetter, Inc.,” Kuemmerle et al

Class 9-(10/25): Contracts, Negotiations, and VC Monitoring

Reading:
1. “Chapters 10: The Venture Capital Cycle” -Text
2. “Venture Capital Contracts: A Survey of the Recent Literature,”
-Andrea Schertler
Case:
“Venture Capital Negotiations: VC vs. Entrepreneur,” -Robinson et al

Class 10-(11/1): Student Project Presentations-1 (Entrepreneurial Perspective)

Class 11-(11/8): Exit Strategies-1

Readings:
1. “Chapters 14 and 15: The Venture Capital Cycle” -Text
2. “A Note on IPO Process,” -Lerner
Case:
“United Parcel Service’s IPO,” - Healey et al

Class 12-(11/15): Exit Strategies-2

Readings:
“Chapters 18 and 19: The Venture Capital Cycle” -Text
Case:
“The Exxel Group: March 2001,” -Lerner et al

Class 13-(11/22): Special Topics-1:

Readings:
“A Note on Corporate Venture Capital,” -Lerner et al
Case:
“Intel 64 Fund,” -Hardymon et al

Class 14-(11/29): Special Topics-2:

 Readings:
“A Note on Angel Investing,” -Roberts et al

Class 15-12/6: Student Project Presentations-2 (VC –Perspective)

Groups Exercises:

The class will be grouped into small teams to conduct role-play exercises. The goal of the
group exercises is for the students to learn to prepare and present business proposition (as
entrepreneur) and to be able to evaluate a business investment opportunity (as VC). All
students will be assigned to either an entrepreneurial team or a venture capital group. In
the first group project, entrepreneurial groups’ students will prepare and defend a
business proposal and term sheet to seek funding from venture capitalist students’ group.
Students in the Venture capitalist groups will critically evaluate that business proposal
and decide on investing in that business. In the second project, the groups will switch
roles so that the students gain dual -- VC and Entrepreneurial -- perspective and skills.

The details of the business scenarios and the logistics of the process will be provided
during the first session.
Description of the Cases Included in the Course

JAFCO American Ventures: Building a Venture Capital Firm: (HBS: 9-899-099)

Description: The case describes the second attempt at entry of JAFCO, a large
Japanese venture capital firm, into the U.S. venture capital market. The U.S.
subsidiary, JAFCO America Ventures, is in the midst of a challenging turnaround.
Going forward, the U.S. subsidiary's leadership needs to make a number of
important decisions regarding investment focus, deal flow generation,
compensation, and cooperation with the Japanese parent company.
Aim: Introduction to venture capital operations, strategy and focus of venture
capital firms, and managing global private equity firms.
Subjects Covered: Asia, Compensation, Entrepreneurial finance,
Entrepreneurship, Foreign investment, Incentives, International business,
International entrepreneurial finance, International finance, International
operations, Japan, Motivation, Venture capital.

Yale University Investments Office: June 2003: (HBS: 9-204-055)

Description: The Yale Investments Office must decide whether to continue to
allocate the bulk of the university's endowment to illiquid investments--hedge
funds, private equity, real estate, and so forth. The case considers the risks and
benefits of a different asset allocation strategy. It highlights the choice between
different subclasses, e.g., between venture capital and leveraged buyout funds.
Aim: To introduce students to asset allocation, as well as, the perspective of
limited partners.
Subjects Covered: Asset allocation, Asset management, Assets, Balance sheets,
Business education, Colleges & universities, Corporate strategy, Entrepreneurial
finance, Finance, Financial accounting, Financial management, Financial strategy,
Higher education, Leveraged buyouts, Mergers & acquisitions, Portfolio
management, Venture capital.

Adams Capital Management: March 2002: (HBS: 9-803-143)

Description: In March 2002, the five partners of Adams Capital Management
(ACM), a venture capital firm investing in information technology
telecommunications with $700 million under management, gathered to discuss
whether they should change their strategy in view of the prolonged downturn in
both the economy and their targeted investment sectors. Since its founding in
1993, ACM had followed a distinct strategy of targeting particular markets of
interest, investing within these, and managing the portfolio companies through a
defined process to liquidity. ACM's first fund had performed extremely well; its
second was looking good; and the third, albeit only a year into its life, it was not
performing as well. ACM is considering three options: investing in companies
producing more fundamental products, hiring more associates or investing in
more markets, or taking bigger positions in companies in its traditional sectors.
Each has its own possibilities and drawbacks.
 Subjects Covered: Assets, Corporate strategy, Entrepreneurial finance,
Entrepreneurship, Finance, Fund raising, Investments, Nonprofit marketing,
Strategic planning, and Venture capital.

How Venture Capitalists Evaluate Potential Venture Opportunities: (HBS

9-805-019)
Description: The case presents interviews with four venture capitalists from
leading Silicon Valley firms about the frameworks they use to evaluate potential
venture opportunities. Questions include: "How do you evaluate potential venture
opportunities?" "How do you evaluate the venture's prospective business model?"
"What due diligence do you conduct?" "What is the process through which
funding decisions are made?" "What financial analyses do you perform?" "What
role does risk play in your evaluation?" and "How do you think about a potential
exit route?" Interviews feature Russell Siegelman, partner at Kleiner Perkins
Caufield & Byers; Sonja Hoel, managing director at Menlo Ventures; Fred Wang,
general partner at Trinity Ventures; and Robert Simon, director at Alta Partners.
Aim: To highlight frameworks that individual capitalists use to evaluate potential
venture opportunities.
Subjects Covered: Accounting, Business models, California Research Center,
Competitive strategy, Entrepreneurial finance, Entrepreneurship, Financial
analysis, Financial management, Risk assessment, Venture capital.

Valhalla Partners: Due Diligence: (HBS-9-805-033)

Description: The case discusses a new approach to the due diligence process
introduced by the Valhalla Partners venture capital firm. It features an extended
excerpt from an internal due diligence report prepared by Valhalla. The report
analyzes Telco Exchange, a startup company in the IT software space. The case
examines the trade-offs involved in the new due diligence process and whether
Valhalla should invest in Telco Exchange.
Aim: To give students real-world insight into the process of due diligence and the
way it is used to manage risk.
Subjects Covered: Assets, Business plans, Communications industry,
Entrepreneurial finance, Entrepreneurship, Finance, Investment management,
Investments, Risk management, Telecommunications, Telecommunications
industry, Venture capital.

Term Sheet Negotiations for Trendsetter, Inc. (HBS: 9-801-358)

Description: The case describes two aspiring entrepreneurs who have just
received offering documents for venture funding (known as term sheets) from two
venture capital firms. With neither of the entrepreneurs having experience in
raising capital, they are wondering how to compare the two proposals and which
one they should choose. They need to make a decision fast. The case contains two
complete term sheets. The term sheets are similar in structure but differ in
important ways. Both term sheets have advantages and disadvantages for the
 entrepreneurs. Choosing one over the other requires a careful analysis as well as a
certain set of assumptions about the growth of Trendsetter, Inc.
Aim: Most entrepreneurs must compare different sources of equity financing at
some point in the course of starting a venture, especially if they seek to raise
venture capital. Term sheets are widely used by venture capitalists and
increasingly by business angels. This case intends to teach students about the
elements and characteristics of term sheets. Also seeks to sharpen students'
understanding of how to compare term sheets and how to select the best term
sheet given the likely evolution of a venture.
Subjects Covered: Assets, Corporate law, Entrepreneurial finance,
Entrepreneurship, Equity financing, Financial instruments, Information
technology, International entrepreneurial finance, International finance, Legal
aspects of business, Securities, Software, Software industry, Venture capital.

Venture Capital Negotiations: VC vs. Entrepreneur: (HBS: 9-800-170)

Description: The case introduces students to the challenging negotiations
between venture capitalists and entrepreneurs. The case explores interests, sources
of negotiating power, barriers to reaching agreement, and common contractual
terms. In addition, it describes how the parties try to reduce information
asymmetries, align incentives, control decision making, and protect financial
downside.
Subjects Covered: Compensation, Entrepreneurial finance, Entrepreneurs,
Entrepreneurship, Incentives, Leadership, Motivation, Negotiations, Power &
influence, Venture capital.

United Parcel Service’s IPO: (HBS: 9-103-015)

Description: The case examines the valuation of United Parcel Service (UPS) at
the time of its IPO in mid-1999. It offers students the opportunity to assess UPS's
current performance relative to its major competitor, Federal Express (FedEx),
and to judge whether that performance is sustainable. Students then make
projections of UPS's future earnings performance, estimate on IPO price, and
assess the reasonableness of their estimate compared to the valuation of FedEx
and best-in-class leaders.
Subjects Covered: Accounting, Entrepreneurial finance, Finance, Financial
analysis, Financial management, IPO, Shipping industry, Transportation industry,
Valuation.

The Exxel Group: March 2001: (HBS: 9-202-053)

Description: The Exxel Group, a leading Latin American buyout fund, faces a
challenge when deciding whether and how to exit its largest investment. The
capital markets are very weak, precluding an initial public offering. Undertaking a
trade sale of the firm, however, proves to be challenging.
Aim: To illustrate the structuring of leveraged buyouts, as well as how private
equity investments can be exited.
Subjects Covered: Corporate strategy, Entrepreneurial finance, Finance,
Financial strategy, Leveraged buyouts, Mergers & acquisitions, Venture capital.
Intel 64 Fund: (HBS: 9-800-351)
Description: Laila Partridge of Intel's Corporate Business Development group
has been charged to create a special investment fund to speed the adoption of new
chip architecture. The last architecture upgrade, from 16 to 32 bits, had needed
almost a decade to become fully adopted. How can this fund speed the adoption
process? How can Laila structure it to avoid the common tension in corporate
venture capital between financial return and strategic goal?
Aim: To explore the mission of corporate venture capital, discuss when corporate
money is well invested, and evaluate whether Intel's new structure will work.
Subjects Covered: Computer industry, Electronics, Entrepreneurial finance, High
technology, Manufacturing industry, Semiconductors, Silicon Valley, Venture
capital.

Angel Investing: (HBS: 9-800-273)

Description: The case introduces angel investing as a concept and discusses
recent developments in the industry. The case focuses on the new generation of
angel investors and the steps taken on both sides of the investing equation to
mitigate the risks inherent in the relationship.
Subjects Covered: Angel financing, Entrepreneurial finance, Entrepreneurship,
General management, Innovation, Venture capital.