Dr. William H. Moore, Jr. Craig Gordon Assistant Professor, Finance Senior Managing Director [email protected] Frontside Research LLC 415-442-6573 Entrepreneur

Edward S. Ageno School of Business GOLDEN GATE UNIVERSITY Fall Term, 2008 San Francisco Campus Thursday 4:00 PM

FI 318 – VENTURE CAPITAL & START-UP FINANCING Preliminary Course Outline

Course Description

This course is designed to provide each student with a comprehensive overview of the entrepreneur and the entrepreneurial process with an emphasis on financial decision-making. Specifically, students will explore these basic questions: what is a start-up, who gets start-up financing and who provides it, what types of start-ups do capital markets finance and why, what are the expectations of entrepreneurs and investors in the financing process, how do entrepreneurs and investors work together to create mutually beneficial financing strategies, how are start-up’s valued and why valuation is an important step in the start-up financing process, and what strategies can be employed to harvest the value of the start-up once it has matured. Additional topics to be touched on include ethics, managing failing ventures, franchising, the Internet as a new venture vehicle and business planning.

During the first few weeks of the trimester, students will explore the nature of the entrepreneur, the entrepreneurial process and a number of related “background” topics. The business planning process will also be discussed during the first few weeks. This material provides an excellent framework for the finance specific material that is the focus of the balance of the trimester.

During the balance of the trimester, students will focus on the financing objective. Topics to be explored include obtaining capital (debt and equity), valuing the venture, structuring and negotiating a financing deal, managing rapid growth and a troubled and harvesting the successful new venture.

Through short case studies (written mini-assignments) and an individual project, each student will have an opportunity to personalize the learning process by applying key analytical tools of finance and by selecting and studying a highly entrepreneurial industry of personal interest.

Finally, all of the course material is based on this key underlying premise: it’s important for each student to understand the perspective of both the entrepreneur and the entity providing capital. To that end, in this class each student will develop a balanced and complete understanding of both perspectives. Course Objectives

Upon successful completion of this course, each student will have good appreciation for the following:

• Why is entrepreneurial activity important to the economic well being of a country? • What does it take to be a successful entrepreneur? • How does the role of an entrepreneur change as the firm grows? • How can you distinguish between a good opportunity and a good idea? • What are the key factors that drive continuous growth? • How do I marshal the resources necessary to start and grow the business? Why are teams important? • What are the critical tasks and hurdles is seizing an opportunity and building the business? • How much money do I need to start the business and when, where, and how can I get it on acceptable terms? • What financing sources, strategies, and mechanisms can I use? • Why is a business plan important? What are the key features of a good business plan? • How can I evaluate the quality of a business plan? • How do I identify customers for whom I must create or add value to achieve a positive cash flow and to develop harvest options? • What is the business worth and how do I negotiate what portion to sell? • What are some of the issues, problems, and ethical dilemmas I need to anticipate, prepare for, and respond to?

Course Prerequisites

Students are expected to have completed at least one finance course (equivalent to FI 100, FI 203, FI 300 or FI 300A) which should provide a basic understanding of the important techniques of financial analysis including risk assessment, calculating rates of return, cash flow analysis, the cost of capital, capital structure, and valuation. Reasonable math skills (algebra is fine) and an understanding of accounting concepts (primarily the structure of an income statement, a cash flow statement and the balance sheet) will also be very helpful. A financial calculator will also be needed.

2 FI 318 – Venture Capital & Start-Up Financing San Francisco Campus Fall 2008 September 4, 2008 – December 18, 2008 Required Texts

N ew Venture Creation: Entrepreneurship for the 21 st Ce ntury. Jeffry A. Timmons and Stephen Spinelli , 7th ed., McGraw-Hill Irwin (order from the GGU Bookstore, Amazon or an alternative book supplier.)

Term Sheets & Valuations: A Line by Line Look at the Intricacies of Term Sheets & Valuations. Alex Wilmerding, Aspatore Books, Inc., 2006 ed., (ISBN number 1-58762-068-5).

The Wall Street Journal and/or other business newspapers/periodicals. You will need access to either the print or online version of popular business newspapers and journals. Internet access will also be helpful. (There is no need to purchase subscriptions … non-subscriber access will generally work fine).

Course Schedule, Topics and Instructors

Unit Week Topic Instructors Due Unit 1 Sept. 4 Welcome, Overview, Instructor’s Bill Moore Philosophy, and Ground Rules; Craig Gordon The Entrepreneurial Mind for an Entrepreneurial Society Unit 2 Sept. 11 New Venture Opportunities Bill Moore Craig Gordon Unit 3 Sept 18 The Founder and Team Bill Moore Craig Gordon Unit 4 Sept. 25 Entrepreneurial Finance v. Corporate Bill Moore Short mini- Finance; Financing Cycle assignment #1 Unit 5 Oct. 2 Deal Structure; Deal Valuation Bill Moore Unit 6 Oct. 9 Capital Structure Planning Bill Moore Unit 7 Oct. 16 Structure of Venture Capital; Guest Speaker (VC) Investor Agreements Bill Moore/Craig Gordon Unit 8 Oct. 23 Midterm Exam Proctor Unit 9 Oct. 30 Investment Timing; Bill Moore Equity Term Sheets Unit 10 Nov. 6 Self-study week – No class meeting Unit 11 Nov. 13 Negotiating a Financing Deal Bill Moore Draft of individual industry case study Unit 12 Nov. 20 Obtaining Debt Capital; Bill Moore Debt Term Sheets Ryan McCalley, Atel Capital Unit 13 Nov. 27 Thanksgiving – No Class Unit 14 Dec. 4 Managing Rapid Growth; Bill Moore Managing a Troubled Company Debbie Richard, Fisher Lynch Capiatl Unit 15 Dec. 11 Harvesting Bill Moore Short mini- Guest Speaker (CFO assignment #2 that’s done an IPO) Unit 16 Dec. 18 Startup.com (movie); Final Exam Bill Moore Final industry case (Take Home) Craig Gordon study; Final due Dec. 22, 2008

3 FI 318 – Venture Capital & Start-Up Financing San Francisco Campus Fall 2008 September 4, 2008 – December 18, 2008 Grading Policy

Your grade will be a weighted average of your scores on the written mini-assignments, your participation in the discussions, your scores on the midterm and the final and an industry case study. Weights will be as follows:

Participation in Discussions 5% (In class) 2 Written Mini-assignments 10% (5% each) Written Case Summaries 10% (Due at beginning of class on assigned dates) Midterm Exam 20% Industry Case Study Draft 5% Final 20% Final Exam 30%

Grades will be based solely on your performance on these activities and I’ll use a standard system to assign grades:

90-100% A 80-89% B 70-79% C 60-69% D < 60% F

I’ll also assign +/-‘s based on the position of your scores within these ranges.

Late work may be accepted. If it is, it will be marked down 2% per day late. Written Case Summaries will not be accepted late.

Exams

There will be two exams. The Midterm Exam will test your understanding of the key underlying principles of entrepreneurship that help make the material in the second half of the course relevant. The Final Exam will cover only the material covered after the Midterm Exam and it will focus on testing for an understanding of the market for and process of acquiring capital for start-up ventures. Both exams will be open book, open notes, calculators, etc. Using laptop computers will not be permitted during exams.

4 FI 318 – Venture Capital & Start-Up Financing San Francisco Campus Fall 2008 September 4, 2008 – December 18, 2008 Instructors

Please note: Questions concerning course content, attendance, assignments and grades must be directed to Bill.

Bill Moore

Bill is an Assistant Professor, Finance, Ageno School of Business, Department of Finance & Economics. He also serves as a director of a $1 billion California based chartered credit union, is an advisor to several European based energy investors, and provides strategic, financial, operating, and investment advice to Innovationsgruppe AG, a Liechtenstein based Internet and technology private investment fund. He serves on the investment committees of both funds.

Previously, Bill was a partner in NetBusiness Consulting AG, Chief Financial Officer of io- market AG, and Chief Operating Officer of iWorks Capital and Development AG, for whom he set up the European arm of an e-commerce incubator managing all aspects of the operation near Zug, Switzerland. Before this, he was Chief Financial Officer and Treasurer of PG&E Energy Trading, the $9 billion commodities trading subsidiary of PG&E Corporation where he was responsible for gas and power accounting, financial planning, treasury, risk management, credit, and financial reporting. Bill also held positions in corporate finance, risk management, marketing, human resources, operations, customer services, and credit and collections for PG&E Corporation and its utility subsidiary.

Bill received his BA in Economics from California State University, Chico and an MBA in Management and MS in Corporate Finance from Golden Gate University in San Francisco, California. He is a graduate of Duke University’s Fuqua School of Management Program for Manager Development. Bill is a lecturer in finance and entrepreneurship at various universities in Switzerland, Liechtenstein, and Estonia and he holds a Doctor of Business Administration from the University of St. Gallen (Switzerland) where he studied financial market influences on innovation in the renewable energy technology sector with an emphasis on energy technology IPOs.

Craig Gordon

Craig Gordon is Senior Managing Director of FRONTSIDE Research LLC. Craig Gordon founded Off The Record Research LLC (OTR) in 1995. OTR has established an international network of more than 150 reporters who generate ongoing marketplace research on companies and industries for more than 200 buy-side clients. He developed the concept of unbiased marketplace research during his 11 years as director of Grassroots Research at RCM Capital Management LLC. Prior, Craig worked at Ketchum Advertising and taught at the University of California at Berkeley and Golden Gate University. Craig holds a master's degree in public and private management from and a bachelor of science degree from Lehigh University. Craig is an entrepreneur.

5 FI 318 – Venture Capital & Start-Up Financing San Francisco Campus Fall 2008 September 4, 2008 – December 18, 2008 Detailed Course Schedule

Unit 1: Welcome, Overview, Instructor’s Philosophy, Ground Rules; The Entrepreneurial Mind for an Entrepreneurial Society (Sept. 4)

By the end of this unit, the successful student will:

• Have a clear understanding of the way in which the course is structured, the learning objectives and how the learning objectives will be achieved; • Understand the instructor’s teaching philosophy; • Understand the ground rules for taking this course; • Understand some of the general theoretical background underlying the course material; • Discover how “Brontosaurus Capitalism” has given way to new, upstart firms. Read Chapters 1 and 2.

U nit 2: N ew Venture Opportunities (Sept. 11) By the end of this unit, the successful student will:

• Have a good understanding of the concept of “entrepreneurship”, the entrepreneurial process and the importance of small firms as a source of economic growth and wealth creation; • Understand the difference between an idea and an opportunity; • Know why it is important to focus first and foremost on a good assessment of the opportunity; • Know how to evaluate the opportunity using criteria; • Understand the importance of knowing which investors will be most interested in the venture during different stages of development; • Understand the importance of seizing an opportunity when the “window” opens; • Begin to understand the sources of information available to help plan a new venture • Understand how to use helpful guidelines to screen new venture opportunities • Understand the important elements of a good business plan. Read Chapters 3, 4, 5, and 6.

U nit 3: The Founder and Team ( Sept. 18) By the end of this unit, the successful student will:

• Understand the characteristics, tendencies, and traits of entrepreneurs; • Understand concepts for doing a personal entrepreneurial assessment; • Understand how an entrepreneur can also be a manager; • Understand the stages of growth through which a successful venture transitions; • Understand the skills needed to manage the startup process, survive and grow a new venture; • Understand the need for strong teams in building new ventures, the characteristics that good entrepreneurial teams exhibit, and the pitfalls in forming the teams; • Understand how the attitudes and orientation of entrepreneurs with respect to leading and managing teams can shape new ventures; • Have explored the issue of how to slice up the equity pie. Read Chapters 7, 8, and 9. 6 FI 318 – Venture Capital & Start-Up Financing San Francisco Campus Fall 2008 September 4, 2008 – December 18, 2008 U nit 4: E ntrepreneurial Finance v. Corporate Finance, Financing Cycle (Sept. 25) ( Short Mini- Assignment #1 Due) By the end of this unit, the successful student will:

• Understand how a successful entrepreneur thinks about resources; • Have identified the full array of resource possibilities; • Understand the basic expectations of new venture planning with respect to financial forecasts; • Understand the general nature of the new venture financing decision; • Have been exposed to the differences between entrepreneurial finance and corporate finance; • Understand the overall process for planning and funding a new venture. Read Chapters 10, 11, and 12.

U nit 5: D eal Structure; Deal Valuation (Oct. 2) By the end of this unit, the successful student will:

• Understand how capital markets for new ventures work; • Understand where capital for new ventures comes from; • Have considered how to find, contact and negotiate with equity investors. • Understand how new ventures are valued; • Understand how equity interests are allocated between investors and entrepreneurs; • Have studied deal structures; • Understand the characteristics of a good deal. Read Chapters 13 and 14.

U nit 6: C apital Structure Planning (Oct. 9)

By the end of this unit, the successful student will:

• Understand the capital structure planning process for startup companies; • Understand how a financing plan plays out over time; • Understand common financing problems encountered by startup businesses; • See examples of issues commonly encountered by startup investors; • Understand the practical implications of alternative valuation methods typically used by venture capitalists and entrepreneurs; • Understand how the timing of an IPO affects rates of return; • Understand the practical implication of preferences that may be given to some investors; • Understand how valuation trends can affect the character of each financing step; • Understand the relationship between ownership interests and ownership value; • Understand the relationship between the stage of investing, risk, and the actual rate of return (IRR) earned on the investment.

Read the Capital Structure Planning Example and Note (download from CyberCampus).

U nit 7: S tructure of Venture Capital; Investor Agreements ( Oct. 16)

By the end of this unit, the successful student will: 7 FI 318 – Venture Capital & Start-Up Financing San Francisco Campus Fall 2008 September 4, 2008 – December 18, 2008 • Have explored how venture capital firms work and how they make decisions.

Unit 8: Midterm Exam (Oct. 23)

U nit 9: I nvestment Timing; Equity Term Sheets (Oct. 30)

By the end of this unit, the successful student will:

• Understand why investors and entrepreneurs stage investments; • Understand equity term sheet elements; • Understand how to examine as equity term sheet; • Understand the relationship between valuation and an equity term sheet; • Have explored a sample equity term sheet.

Read Term Sheets & Valuations, by Wilmerding, and the sample Equity Term Sheet.

U nit 10: Self-Study Week ( Nov. 6)

U nit 11: N egotiating a Financing Deal (Nov. 13) ( Draft of Individual Industry Case Study Due) The class will break into teams of entrepreneurs and venture capitalists. A start-up proposal will be valued and deal terms prepared by each team. A meeting will be held between entrepreneurs and venture capitalists to negotiate a seed round of financing. No preparation is needed for this exercise. Unit 12: Obtaining Debt Capital; Debt Term Sheets (Nov. 20)

By the end of this unit, the successful student will:

• Understand the differences between equity and debt as a source of startup capital; • Understand the sources of debt financing and how to obtain it; • Understand how the lender thinks about the loan and how to negotiate terms; • Have identified the pitfalls of debt financing; • Understand debt term sheet elements; • Understand how to examine a debt term sheet.

Read Chapter 15 and the Hindman & Company case study.

Be prepared to discuss Hindman in class (case summary due at the beginning of class).

Unit 13: Thanksgiving – No Class (Nov. 27)

Unit 14: Managing Rapid Growth; Managing a Troubled Company (Dec. 4)

By the end of this unit, the successful student will:

• Understand the organizational implications of high growth in startups; • Understand the challenges created when startups achieve high growth; • Understand the leadership implications of high growth; • Be familiar with some of the characteristics of high growth that may signal impending problems; 8 FI 318 – Venture Capital & Start-Up Financing San Francisco Campus Fall 2008 September 4, 2008 – December 18, 2008 • Understand the practical implications of managing a start-up business that has failed; • Understand how to conserve and salvage value in a failed start-up; • Understand who the primary stakeholders are in a failure situation and how their interests can be managed, salvaged and protected. Read Chapters 16 and 18 and the Bridge Capital Investors, Inc. case study (posted in CyberCampus). Be prepared to discuss the Bridge Capital case in class (case summary due at the beginning of class).

U nit 15: H arvesting ( Dec. 11) ( Short Mini-Assignment #2 Due)

By the end of this unit, the successful student will:

• Understand the most common alternatives available to harvest the value of the start-up; • Understand the role of the key players in the harvesting process; • Understand how each harvesting strategy works; • Understand the primary factors that influence the choice of a harvesting strategy.

Read Chapter 19 and the Jiffy Lube International, Inc. case study (posted in CyberCampus). Be prepared to discuss the Jiffy Lube case in class (case summary due at the beginning of class).

U nit 16: startup.com; Final Exam (Dec. 18) ( Final I ndustry Case Study Due)

We will watch and discuss a movie called startup.com. Here are a couple of editorials from amazon.com just to give you an idea of what the movie is all about.

“From amazon.com … Directors Chris Hegedus (The War Room) and couldn't have imagined the drama that awaited when they began documenting the creation of the pioneering e- commerce site govWorks.com. For over a year they followed the company, the brainchild of childhood- friends-turned-business-partners software geek and doting single dad Tom Herman, and ambitious young business-school-grad-turned-company-CEO Kaleil Isaza Tuzman. During the rise of the Internet investment frenzy and the subsequent crash of the dot-economy, the cameras remain keyed into the human dynamic: the lifestyle compromises, the personal sacrifices, and the clash of philosophies and personalities that ultimately tear boyhood buddies Tom and Kaleil apart...almost. Startup.com's portrait of the cutthroat nature of American business culture and the choices one makes (or doesn't) to succeed poses the one question most documentaries ignore: Is it worth it? --Sean Axmaker”

“From The New Yorker … A fascinating cinéma-vérité documentary account of how two very young men-Kaleil Isaza Tuzman, a Goldman, Sachs employee, and Tom Herman, a techie-started an Internet company in New York, burned through sixty million dollars, lost their way, and got swallowed up by another company, all within eighteen months. The filmmakers Jehane Noujaim and Chris Hegedus nosed their way into meetings and arguments and drove around with the two men as they aired their desires and fears. Tuzman is burly and handsome, with an easy, ready way about him; Herman, who keeps growing and shaving a dark beard, is high-minded and tends to be diffident about the fate of the enterprise itself. The two men emerge from the fiasco without any money but with their friendship intact. The movie's account of their dealings with one another is painfully funny and very intimate, perhaps too much so: it would have been useful to have more detail about how the business actually worked and why it went wrong. -David Denby … Copyright © 2006 The New Yorker”

The take-home final exam will also be handed out during the last class.

9 FI 318 – Venture Capital & Start-Up Financing San Francisco Campus Fall 2008 September 4, 2008 – December 18, 2008 General Guidelines for Writing the Case Summaries

The two written mini-assignments count 10 percent (5 percent each) toward your grade. Complete this assignment by selecting one case study from Chapters 2-9 and the second one from Chapters 10-19 (list below):

Chapter 2: Roxanne Quimby Chapter 3: Kurt and John Bauer Chapter 4: Securities Online, Inc. Chapter 5: Burt’s Bees Chapter 6: Newland Medical Technologies Chapter 7: Jim Poss Chapter 8: Maclean Palmer Chapter 9: Wayne Postoak ------Chapter 11: Mike Bellobuono Chapter 12: Midwest Lighting, Inc. Chapter 13: Forte Ventures Chapter 14: Paul J. Tobin Chapter 15: Bank Documents Chapter 16: EverNet Corporation Chapter 18: Lightwave Technology, Inc. Chapter 19: Boston Communications Group, Inc.

Please work individually. For each case, write a 3-4 page paper providing your analysis including answers to the questions accompanying the case [Note: the questions may be in a different place in each case. Sometimes they’re listed at the beginning, sometimes they’re in the body and sometimes they may be at the end. Ask me if it’s not clear]. Put a short, focused overview in one or two paragraphs at the beginning. Don’t waist a lot of space telling me what is in the case. Assume that I already know that. I’m looking for logical conclusions/recommendations supported by quantitative analysis. Add no more than one page of spreadsheet support if the case calls for it. You get the idea … these papers should be short, focused and to the point. Mini-assignment #1 (drawn from Chapters 2-9) is due no later than September 25 and mini-assignment #2 (drawn from Chapters 10-19) no later than December 11. They must be either E-mailed to me before class or handed to me at the beginning of class. Late papers will be marked down 2% for every day they’re late.

10 FI 318 – Venture Capital & Start-Up Financing San Francisco Campus Fall 2008 September 4, 2008 – December 18, 2008 General Guidelines for Writing the Industry Case Study

During the term, each of you will follow an industry with respect to venture capital and start-up financing activity for purposes of developing an appreciation for the following:

1. How important is the industry as a recipient of venture capital (i.e., how much venture capital flows into the industry relative to all capital flowing into start-ups). 2. Is the industry particularly active now? Why or why not? 3. What has been the venture capital industry’s recent experience with the industry? 4. Which venture capital firms tend to finance the industry? 5. What are some of the recent standout start-up success stories in the industry? 6. Are there any horror stories about the industry (e.g., significant capital invested but no success stories)? 7. Does the industry create a pipeline for IPOs? 8. Is there a specific geographical concentration of start-ups in the industry or are they dispersed? 9. What rates of return have investors received for investments in the industry? 10. What are the specific characteristics of the industry that make it an attractive recipient of start-up financing? Your ongoing research will eventually end up in the form of a short written paper, so keep good notes. I want you to do the research in an area that’s of interest to you. I’ve outlined some suggested industries to follow below as food for thought. The paper that you write should provide a summary of the industry, its importance as a recipient of venture capital (or more generally start-up financing), the current state of funding in the industry, trends, etc. Use the list above as a detailed guideline as to what I want you to write about. With respect to industries you might want to follow, here are some suggestions: semiconductors, pharmaceuticals, software, biotechnology, telecommunications, medical instruments, healthcare, energy, and environment. You’re free to select from this list or, as implied above, propose an alternative. The only requirement is that the industry must have a reasonable amount of anticipated venture capital activity or you won’t have any news to monitor. I am also open to the possibility of doing the case study on venture capital activity in specific countries, rather just one industry. There is no specified format for the paper. However, it is best to limit the length of the paper to no more than 5 pages.

11 FI 318 – Venture Capital & Start-Up Financing San Francisco Campus Fall 2008 September 4, 2008 – December 18, 2008