Dr Sam Goodman Sgoodman@Ggu.Edu/650-364-1151) Senior Adjunct Professor, Department of Finance & Economics Edward S

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Dr Sam Goodman [email protected]/650-364-1151) Senior Adjunct Professor, Department of Finance & Economics Edward S. Ageno School of Business GOLDEN GATE UNIVERSITY Summer Term, 2009 San Jose Campus Mon 6-8:40pm

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

Course Description: This course examines the strategic and financial issues facing high-growth start-ups. Students develop a sophisticated understanding of the tools and techniques employed by successful entrepreneurs in raising start-up, growth, and acquisition capital for their ventures. Students also will explore alternative financing sources, notably venture capital and angel investors. In addition, students will review the exit strategies available to companies, including IPOs and mergers. Topics discussed include: the history and current direction of the venture capital industry, valuation techniques for new ventures and established private firms, raising venture capital and alternative financing, entrepreneurial management issues in capital raising, maintaining control and direction, and harvesting the venture via IPO or merger. Through two short case studies and an individual project, each student will have an opportunity to personalize the learning process by applying the analytical tools of entrepreneurial finance to real cases and by selecting and studying a highly entrepreneurial industry of personal interest. Finally, all of the course material is based on the key underlying premise that it’s important for each student to understand the perspective of both the entrepreneur and the capital provider. 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:

• 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? • Why is a business plan important? What are the key features of a good business plan and how can I evaluate one? • What financing sources, strategies, and mechanisms can I use? • What is the business worth and how do I negotiate what portion to sell? • What is a term sheet and how do I prepare use one? • How do I develop harvest options? • How do I manage rapid growth or a failed attempt to build a company? Sam Goodman FI 318 Course Outline

Course Prerequisites: Students are expected to have completed at least one finance course (equivalent to FI 100, FI 203 or FI 300A) which should provide a basic understanding of the important techniques of financial analysis including risk assessment, 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 be needed. Required Texts and Cases: N ew Venture Creation: Entrepreneurship for the 21 st Century. Jeffry A. Timmons and Stephen Spinelli , 7th ed., McGraw-Hill Irwin Term Sheets & Valuations: A Line by Line Look at the Intricacies of Venture Capital Term Sheets & Valuations. Alex Wilmerding, Aspatore Books, Jan. 2005 ed., (ISBN number 1-58762- 068-5). TixToGo: Financing a Silicon Valley Start-up. Harvard Business School (9-800-376), April 10, 2000. JAFCO America Ventures, Inc.: Building a Venture Capital Firm. Harvard Business School (9-899-099), March 30, 2004. 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 Internet access will generally work fine). Grading Policy: Your grade will be a weighted average of your scores on your participation in the class discussions, the two written cases, the industry case study, and your score on the quiz and final exam. Weights are as follows: Participation in Discussions 10% TixToGo Case Study 20% (due Mar.5) JAFCO America Case Study 20% (due April 19) Industry Case Study 20% (due April 16) Quiz 15% (on Jan 30) Final Exam 15% (on April 16) 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 is accepted but marked down 2% per day late. I always reserve the right to set a final due date.

Unit Summaries:

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Unit 1 May 4 Welcome, Overview, Instructor’s Philosophy, Ground Rules, Overview Unit 2 May 11 Creating, Shaping, Recognizing, Seizing and Screening New Venture Opportunities Unit 3 May 18 Entrepreneurship Unit 4 May 25 New Venture Planning, Entrepreneurial Finance, Quiz Unit 5 June 1 Startup.com Unit 6 June 8 Obtaining Equity Financing Unit 7 June 15 Term Sheets and Valuation Unit 8 June 22 Deal Valuation, Structure, and Negotiation Unit 9 June 29 TixToGo Case Study (TixToGo Case Study Due) Unit 10 July 6 Obtaining Debt Financing Unit 11 July 13 Managing Rapid Growth and a Troubled Company Unit 12 July 20 TBD Unit 13 July 27 Harvesting Unit 14 Aug 3 JAFCO America Case Study (JAFCO America Case Study Due) Unit 15 Aug 10 Individual Research Projects, Exam (Industry Case Study Due) Unit 16 Aug 17 TBD

Each Unit includes a reading assignment, an outline of the important learning points, and important instructions with respect to class participation. Please note that I plan to invite some guest speakers on some nights. The guest speakers will be experts in the specific area that we’re discussing. Those arrangements will be confirmed during the term.

Quiz and Exam: There will be one quiz and one exam. The quiz will take place during Week 4. The exam takes place at the end of the term. The exam will test your understanding of 1) the key underlying principles of entrepreneurship and 2) the market for, process of acquiring, and uses of capital for start-up ventures. The quiz and exam will be open book, open notes, etc. The only limitation imposed by the university in that you are not allowed to use a notebook computer during the exam. Course Navigation: The course is built around 15 Units, most of which are constructed in the same basic way. In effect, there are two tracks. First, each week you will build background, technical and analytical skills through the reading material and our class discussions. Second, you will make progress each week on the individual research and cases, which is where the technical and analytical methods will be applied. You should also follow the news for developments, since each week we’ll probably start the discussion with a recap of the previous week’s news. Instructor’s Biography: Northern California Chapter Member Profiles Sam R. Goodman, Ph.D BMG Associates, Inc. 60 Shearer Drive Ph.:650-364-1151 Atherton, CA 94027 Fax: 650-364-8285

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E-Mail: [email protected] Interim Manager, Financial Advisor, Operating Advisor Works As: Consultant, Crisis Manager, Workout Officer, Bankruptcy Consultant Practice Description: Helping underperforming companies to excel. Emphasis: Multi-industry track record that includes managing difficult turnaround situations, taking companies public, creating strategic plans and arranging corporate financings. Experience in technology, consumer products, distribution, agriculture. Specialty: Family held businesses as well as public companies. Experience: In last 20 years, addressed particular problems with mergers and acquisitions, corporate turnarounds, initial public offerings and corporate financings, serving in various capacities for such companies (clients) as: o Ampex – Chief Financial Officer o Nestle – Chief Financial Officer o General Foods – Manager, Planning & Analysis o W.R. Grace – Executive Vice President o CMX – Chairman, President & CEO o Nutritional Dist. – President o Mayfair Packing – President & CEO o Ace Novelty – Chief Operating Officer o Aileen, Inc. – Vice President, Chief Financial Officer, o VM Labs, Inc. – Director o Solectek, Inc. – Director o Masstor, Inc. – Director, General Manager o GB Data Systems (Gero-Vita) – President

Ph.D 1968; MBA, 1958, New York University; Author of seven well-known books and over 150 articles dealing in above specialties and strategic planning.

Financial Executive Institute; Institute of Management Accountants; American Economic Association; American ARbritration Association, Turnaround Management Association – President, NorCal TMA 1999. Numerous Board positions for public and non-public companies; military awards. TMA Turnaround of the Year – 1993 – 2nd place. Unit Details:1

Unit 1: Welcome, Overview, Instructor’s Philosophy, Ground Rules, Overview (May 4) By the end of this unit, the successful student will:

Read Chapters 1 (pp. 3-23) and 2 (pp. 49-65).

1 Unless otherwise indicated, all page references are to New Venture Creation. The page number in your book may vary slightly depending on the version of the book you’re using.

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Unit 2: Creating, Shaping, Recognizing, Seizing and Screening New Venture Opportunities (May 11) 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; • 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; • Discover how “Brontosaurus Capitalism” has given way to new, upstart firms. • 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. Read 3 and 4.

U nit 3: E ntrepreneurship (May 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, and the Maclean Partners case study at the end of Chapter 9. Be prepared to discuss the case in class. U nit 4: New Venture Planning, E ntrepreneurial Finance, Quiz (May 25) 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 important elements of a good business plan; • Understand the general nature of the new venture financing decision; • Have been exposed to the differences between entrepreneurial finance and corporate finance;

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• Understand the overall process for planning and funding a new venture. Read Chapters 12 U nit 5: Startup.com ( June 1) By the end of this unit, the successful student will see, first hand, how:

• Entrepreneur’s start a business; • Entrepreneurial teams interact; • Entrepreneur’s raise capital; • Entrepreneur’s manage resources; • A startup company grows and fails. We will watch and discuss the movie Startup.com tonight.

U nit 6: O btaining Equity Financing (June 8) 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; • Have explored how venture capital firms work and how they make decisions. Read Chapter 13 and the Midwest Lighting case study at the end of the chapter. Be prepared to discuss the case in class. U nit 7: Term Sheets and Valuation ( June 15) By the end of this unit, the successful student will:

• Understand term sheet elements; • Understand how to examine a term sheet; • Understand the relationship between valuation and a term sheet; • Have explored a sample term sheet. Read and prepare to discuss Term Sheets & Valuations, by Wilmerding.

U nit 8: D eal Valuation, Structure, and Negotiation (June 22) By the end of this unit, the successful student will:

• 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 Chapter 14 and the Forte Ventures case study at the end of the chapter. Be prepared to discuss the case in class.

U nit 9: T ixToGo Case Study (T ixToGo Case Study Due) (June 29)

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We’ll discuss the TixToGo case study (a case about financing options) in detail. Unit 10: Obtaining Debt Financing (July 6) 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. Read Chapter 15 and the Lightwave Technology case study at the end of the chapter. Be prepared to discuss the case in class. U nit 11: M anaging Rapid Growth and a Troubled Company (July 13) 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; • 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 Bank Documents case study at the end of Chapter 16. Be prepared to discuss the EverNet case in class

U nit 12: TBD – ( July 20) U nit 13: Harvesting ( July 27) 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 case study. Be prepared to discuss the Optitech case in class.

U nit 14: JAFCO America Case Study ( JA FCO Case Study Due at the Beginning of Class) (August 3) By the end of this unit, the successful student will:

• Understand the challenges venture capitalist’s face when building a venture capital company (JAFCO). Be prepared to discuss JAFCO America in class. U nit 15: Individual Research Projects, Exam (I ndustry Case Study Due) (Aug 10)

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Your industry case studies are due at the beginning of the session. We’ll discuss each paper, allotting appropriate amounts of time given the number of papers given the amount of time available. The exam will cover all of the material we’ve discussed this term. We can reverse the order of tonight’s program if you prefer to take the exam first.

U nit 16: TBD – ( Aug 17)

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.

General Guidelines for Writing About TixToGo: Financing a Silicon Valley Start-up

Use these questions to help frame your written analysis of TixToGo:

1. Identify and list all of the factors Lu should consider before deciding what to do next. 2. Identify and list all of the financing alternatives available to Lu (you may want to take a quick peek ahead at Chapter 15). 3. Review TixToGo’s recorded financial results and identify strengths, weaknesses and any hidden sources of value.

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4. Review the Projected Financials in Exhibit 6 and comment on key assumptions underlying the projections. 5. Assume Lu found an “Angel” investor willing to fund the company quickly. How much funding should Lu request? Why? From the perspective of the “Angel”, value the company. How would you expect the “Angel’s” valuation to differ from Lu’s? 6. What course of action would you select if you were in Lu’s position?

Please limit the length of the paper to no more than 5 pages.

General Guidelines for Writing About JAFCO America Ventures, Inc.: Building a Venture Capital Firm

Be prepared to discuss the following in class on Aug. 6: 1. Describe the context in which JAFCO operates. 2. Where in Japan do most industrial innovations take place? 3. Where do most innovations take place in the U.S.? 4. What are the characteristics of the venture capital industry in the U.S.? 5. What are the characteristics of the venture capital industry in Japan? 6. What is your assessment of JAFCO and its investment strategy? 7. What was the sequence and what were the objectives of JAFCO’s international expansion? 8. How successful was JAFCO in achieving the objectives identified in Question 7? 9. Why are Hitoshi Imuta and Barry Schiffman qualified to manage JAV better than the previous team? Use these questions to help frame your written analysis of JAFCO: 1. What is your assessment of JAV’s performance to date? What is your assessment of JAV’s USIT 1 fund performance to date? 2. What are JAV’s challenges over the next five years? 3. Would you advise Barry Schiffman and his colleagues to move into seed stage investing? 4. How can JAFCO learn from JAV? 5. How should JAFCO change its incentive system, if at all?

Please limit the length of the paper to no more than 5 pages.