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BAEP 559 Spring 20131

BAEP 559: Investing in New Ventures

SyllabusSpring 2013Professor: Bob Holmen

Office: Lloyd Greif Center for Entrepreneurial Studies

Office Tel: (949) 500-0669 (cell)

E-mail: [email protected]@marshall.usc.edu

Lecture Class

Monday 6:309:30 pm Room: JKP-104

Office HoursMondays 3:005:00 pm in the Lloyd Greif Center (basement of Bridge Hall);

other times are available by appointment.

Introduction and Course Objective

BAEP 559 focuses on the entrepreneurial skill set applied to finding and selecting new ventureinvestment opportunities. The course is taught from the point of view of the business plan reader:the decision makers who must decide which course of action to take and under what circumstances.

The course focuses on finding and selecting from alternative investments, structuring theinvestment, adding value as a non-executive manager, and realizing the value of the investment.

Whether you desire to be a Founding Principle, Venture Capitalist or an OrganizationalEntrepreneur, the issues of creation of the new enterprise are complex and require the integration of

various skills and the adoption of them to each individual case.

This is a discussion, exercise and case-based course. The assessment and critiquing of businessproposals, along with proposed structural solutions constitute a large measure of the classsactivities.

To accomplish its goals, the course is divided into the following four major themes:

searching for and selecting opportunities;

structuring a relationship and the investment;

creating value within the company; and

guiding the company to liquidity.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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Grading Summary:

Assignment Points % of Grade

PROJECT #1: Competitive Market Analysis 250 25%

PROJECT #2: Valuation Exercise 250 25%

CONCLUDING PROJECT: Investment Analysis and Justification 400 40%

CLASS PARTICIPATION 100 10%

TOTAL 400 100%

Final grades represent how you perform in the class relative to other students. Your grade will notbe based on a mandated target, but on your performance. Historically, the average grade for this

class is about a 3.5.

ASSIGNMENTS AND GRADING DETAIL

There are three major projects to be completed during the semester. The projects may be done on a

team basis with four students per team. No dispute arising within teams will be resolved by thefaculty unless there is a predated written agreement signed by all members of the team that clearlycovers the points at issue.

This class is highly structured but will change if the faculty discerns that students or conditions

indicate the need to change. Student desires and backgrounds are considered. Special projectsare encouraged, upon approval. Your expectations are important!

PROJECTS

The Projects are explained in the Class Sessions detail below. When the project is listed in ALLCAPITALS that is the date when it is due.

CLASS PARTICIPATION

The Entrepreneur Program is a real life experience and as such expects real world professionals.

The motto is treat each other as you would a customer. Therefore, tardiness and absenceswithout notice are not acceptable. If you have a customer meeting, you will be on time. If youcannot be, you will call well in advance. Similar etiquette is required in this program and class.

Attendance at all class sessions is critical to learning. A class attendance form may be handed out

at the beginning of each class which requires your personal-consistent-full-signature; initialing theclass attendance form is not acceptable. Signing the class attendance form is necessary because of

University policies and the need to have a record of class attendance. Students are responsible forsigning this form at the beginning of class. Any student who signs the name of another student onthe class attendance form will receive an "F" for the course.

Participation is evaluated in a number of ways.

It is expected that each student will study the assigned reading material in advance of eachclass meeting and will be prepared to discuss that material, including drawing on their previouscourse work and experiences.

Instructors may cold call students during the class to discuss this material in class.

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Instructors may evaluate student participation during class and generate contemporaneousnotes about the quality of each students contribution.

Instructors may ask students to return note cards for a class that ask each student to offerevidence of the quality and impact of their class participation contribution.

Students may also be asked to provide a self-evaluation of their participation contribution forthe entire semester.

All of these methods are likely to be used to generate a profile of the quality of participation.

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MARSHALL GUIDELINES

Retention and Return of Graded Coursework

All graded Projects will be returned to the students. Any Projects returned to students that remainunclaimed for four weeks after the end of the semester are subject to being discarded.

Technology Policy

Students may use laptops and the Internet during class only for contemporaneous class purposes;i.e. note taking, review of course materials and research of points during class discussions. Use ofother personal communication devices, such as cell phones, is considered unprofessional and is not

permitted during academic or professional sessions. Please silence all such communicationdevices. Videotaping faculty lectures is not permitted, due to copyright infringement regulations.Audiotaping may be permitted if approved by the professor. Use of any recorded material isreserved exclusively for USC Marshall students.

Statement for Students with DisabilitiesAny student requesting academic accommodations based on a disability is required to register withDisability Services and Programs (DSP) each semester. A letter of verification for approvedaccommodations can be obtained from DSP. Please be sure the letter is delivered to me (or to TA)

as early in the semester as possible. DSP is located in STU 301 and is open 8:30 a.m.5:00 p.m.,Monday through Friday. The phone number for DSP is (213) 740-0776.

Statement on Academic IntegrityUSC seeks to maintain an optimal learning environment. General principles of academic honestyinclude the concept of respect for the intellectual property of others, the expectation that individual

work will be submitted unless otherwise allowed by an instructor, and the obligations both to

protect ones own academic work from misuse by others as well as to avoid using anothers workas ones own. All students are expected to understand and abide by these principles. SCampus, theStudent Guidebook, contains the Student Conduct Code in Section 11.00, while the recommendedsanctions are located in Appendix A.http://www.usc.edu/dept/publications/SCAMPUS/gov/

Students will be referred to the Office of Student Judicial Affairs and Community Standards forfurther review, should there be any suspicion of academic dishonesty. The Review process can befound at: http://www.usc.edu/student-affairs/SJACS/ Failure to adhere to the academic conductstandards set forth by these guidelines and our programs will not be tolerated by the USC Marshall

community and can lead to dismissal.

Emergency Preparedness/Course Continuity

In case of emergency, and travel to campus is difficult, USC executive leadership will announce anelectronic way for instructors to teach students in their residence halls or homes using a

combination of Blackboard, teleconferencing, and other technologies.

Assignment Submission Policy

Assignments must be turned in on the due date at the beginning of the class session that day (6:30

pm) electronically via e-mail to the instructor or by uploading the assignment to Blackboard. Anyassignment turned in late, even if by only a few minutes, will receive a grade deduction of 10% of
http://www.usc.edu/dept/publications/SCAMPUS/gov/http://www.usc.edu/dept/publications/SCAMPUS/gov/http://www.usc.edu/dept/publications/SCAMPUS/gov/http://www.usc.edu/student-affairs/SJACS/http://www.usc.edu/student-affairs/SJACS/http://www.usc.edu/student-affairs/SJACS/http://www.usc.edu/dept/publications/SCAMPUS/gov/

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the points for each week (or portion of a week) that it is late. If your internet breaks down on thedue date, you must deliver a hard copy at the beginning of class on that day. If you are unable to

attend class on that day, make arrangements for it to be delivered to the classroom or to my box bythe start of class. Late or not, however, you must complete all required assignments to pass this

course.

Evaluation of Your Work

You may regard each of your submissions as an exam in which you apply what youve learnedaccording to the assignment. I will do my best to make my expectations for the various assignmentsclear and to evaluate them as fairly and objectively as I can. If, however, you feel that an error hasoccurred in the grading of any assignment, you may, within one week of the date the assignment is

returned to you, write me a memo in which you request that I re-evaluate the assignment. Attachthe original assignment to the memo, and explain fully and carefully why you think the assignment

should be re-graded. Be aware that the re-evaluation process can result in three types of gradeadjustments: positive, none, or negative.

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COURSE READINGS/CLASS SESSIONS

Course materials will be accessed from multiple sources. The Course Reader is available from theHarvard Business School Publishing website.

https://cb.hbsp.harvard.edu/cbmp/access/16972290

Other course material is available from publicly-accessible Internet sites as specified below or viaBlackboard posts. None of the materials will be available from the bookstore.

The following discussion schedule is subject to modification based on our class needs. Much like acompanys business model, I view this schedule as a living, continually changing document. Asthe needs, direction and objectives of the class evolve, the schedule will evolve as well.

Topic, Projects and Readings

Week 11/14/2013

Topic: Course Overview & Venture Capital Framework

In this class session, we will start with introductions plus discuss the course syllabus,assignments and expectations for this class. Following that, we will provide an

overview of venture capital as a framework for the class. We will discuss types ofventure funds, venture fund structure and model, historical data on venture funds, andthe investor and limited partner landscape. We will also begin to introduce some of the

terms of art and financing structures common to venture capital.

Projects: PICTURE QUESTIONNAIRES DUE. Forms will be emailed and are

available on Blackboard.

Readings: National Venture Capital Association 2012 Yearbook (we will use this as aresource for data throughout the course):http://www.nvca.org/index.php?option=com_content&view=article&id=25

7&Itemid=103

Week 21/21/2013

No ClassMLK Day

Week 31/28/2013

Topic: Deal Flow; Defining the Evaluation Process

This class session will first focus on a venture funds deal flow: the process of

unearthing investment opportunities that may be appropriate based on a venture fundsinvestment criteria.

Once opportunities are identified, the next step is defining the evaluation process. Wewill focus on the process that venture capitalists undertake prior to making an

investment. What information is needed to reach an investment decision? What is therelative importance of each piece of information? We will also consider the different

diligence and different criteria that apply depending on the industry, stage and otherunique characteristics of the opportunity.

Finally, well walk through a recent venture capital case study: Dropbox. This caseraises many issues that well be analyzing for the remainder of the semester.

Readings:How Venture Capitalists Evaluate Potential Venture Opportunities

(805019)Dropbox: It Just Works(811065)
https://cb.hbsp.harvard.edu/cbmp/access/16972290https://cb.hbsp.harvard.edu/cbmp/access/16972290http://www.nvca.org/index.php?option=com_content&view=article&id=257&Itemid=103http://www.nvca.org/index.php?option=com_content&view=article&id=257&Itemid=103http://www.nvca.org/index.php?option=com_content&view=article&id=257&Itemid=103http://www.nvca.org/index.php?option=com_content&view=article&id=257&Itemid=103http://www.nvca.org/index.php?option=com_content&view=article&id=257&Itemid=103https://cb.hbsp.harvard.edu/cbmp/access/16972290

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Week 4

2/4/2013Topic: Market Opportunity

In the first half of this class session, we will receive a presentation from the first of our

four prospective companies, one of which will form the basis for your InvestmentAnalysis and Justification Project due at the end of the semester.

In the second half of the class, we will focus on analyzing the market opportunity. To

many, the size of the market defines opportunity, but does opportunity equal success?We will discuss what investors in new ventures seek and what entrepreneurs face.

Project:

We will also discuss the Market Research Project that is due in Week 9. During weeks

4, 5, 7 & 8 we will have received presentations from four start-up companies. You willwork in teams of four. Each team will choose one of the companies to perform a

Competitive Market Analysis on their select company. In a paper not to exceed 1,500words and 3 Power Point slides, each student group will be expected to indicate the

principle drivers for the companys market (or markets), the underlying economics,principle challenges and relative competitive position in the market, and likely

winners and why.

Readings:Entrepreneurial Marketing (803036)More thoughts on Market Sizing (marissacampise.posterous.com/sizing-the-new-market)

Week 52/11/2013

Topic: Business Model Analysis

In the first half of this class session, we will receive a presentation from the second of

our four prospective companies for your Investment Analysis and Justification Project.

In the second half of the class, we will focus on analyzing the business model. The

business model should define the resources necessary to generated a product or service

that transfers value to the customer and creates profits for the firm. The underlying logicmust match with the firms strategy for differentiation. We will develop a frameworkfor analysis by looking at a variety of business model situations.

Readings: Note on Business Model Analysis for the Entrepreneur (802048)

Steve Blank on Business Plans vs. Business Models:http://steveblank.com/2010/04/08/no-plan-survives-first-contact-with-

customers-%E2%80%93-business-plans-versus-business-models/ Tom Eisenmann on Platforms and Networks:http://platformsandnetworks.blogspot.com/2011/07/business-model-

analysis-part-1-key.html

Week 62/18/2013

No ClassPresidents Day
http://steveblank.com/2010/04/08/no-plan-survives-first-contact-with-customers-%E2%80%93-business-plans-versus-business-models/http://steveblank.com/2010/04/08/no-plan-survives-first-contact-with-customers-%E2%80%93-business-plans-versus-business-models/http://steveblank.com/2010/04/08/no-plan-survives-first-contact-with-customers-%E2%80%93-business-plans-versus-business-models/http://platformsandnetworks.blogspot.com/2011/07/business-model-analysis-part-1-key.htmlhttp://platformsandnetworks.blogspot.com/2011/07/business-model-analysis-part-1-key.htmlhttp://platformsandnetworks.blogspot.com/2011/07/business-model-analysis-part-1-key.htmlhttp://platformsandnetworks.blogspot.com/2011/07/business-model-analysis-part-1-key.htmlhttp://platformsandnetworks.blogspot.com/2011/07/business-model-analysis-part-1-key.htmlhttp://steveblank.com/2010/04/08/no-plan-survives-first-contact-with-customers-%E2%80%93-business-plans-versus-business-models/http://steveblank.com/2010/04/08/no-plan-survives-first-contact-with-customers-%E2%80%93-business-plans-versus-business-models/

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Week 7

2/25/2013Topic: Teams and Management

In the first half of this class session, we will receive a presentation from the third of our

four prospective companies for your Investment Analysis and Justification Project.

The second half of this class is one of the true keys to successful investing. As thecommon phrase goes, we bet on the jockey, not the horse. What are the characteristics

of a companys leadership and team that an inventor should look for? How does aninvestor figure out what characteristics the leadership and team actually possess? Whodo investors back, and why?

Readings: What Makes an Effective Executive (R0406C)Evaluating the CEO (R0810B)

Why Entrepreneurs Dont Scale (R0212J)

Week 83/4/2013

Topic: Market Research Project

In the first half of this class session, we will receive a presentation from the last of ourfour prospective companies for your Investment Analysis and Justification Project.

The second half of class will be used for group discussion and research to prepare theCompetitive Market Analysis that is due in the next class period.

Readings: Performing Industry Research (207069)

Week 9

3/11/2013Topic: Valuation

During the first half of this session, each group will present their Competitive Market

Analysis. We will then discuss the group research reports, comparing insights amongthe different groups in the class.

In the second half of the class, we will focus on valuation. Valuation and the valuation

process capture an inordinate amount of the founders, management and investors timeand emotional energy, yet for highly successful companies (which is the ultimate goalof venture investing), the valuation at any point in time is less relevant. We will bereviewing the process, the mathematics, the economic significances and the practical

realities of determining a valuation for a company.

Project: COMPETIVE MARKET ANALYSIS DUEGrade Value 250 points

Readings: Note on Valuation of Venture Capital Deals (Case E95)

Week 103/18/2013

No ClassSpring Break

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Week 11

3/25/2013Topic: Terms & Conditions

The terms and conditions of the deal represent the culmination of the due diligence and

investment analysis of the deal, encompassing the past, present and future of thecompany at a moment in time. The terms and conditions define the legal

responsibilities of the constituents, the economic relationship between the parties andthe rights of each person in the equation.

In the first half of this class session, we will spend time analyzing typical terms andconditions of a venture backed project, including the reasons for each term and the pro-

investor, pro-founder and pro-team variations of those terms.

In the second half of class, we will analyze case studies from recent projects, following

how the terms and conditions of the deal anticipated, or failed to anticipate, and in manycases influenced, subsequent business development.

Project: We will also spend time discussing the Valuation Exercise due Week 13

Readings: Term Sheets:

Y Combinatorhttp://ycombinator.com/seriesaa.htmlThe Founders Institutehttp://www.founderinstitute.com/posts/69

Week 12

4/1/2013Topic: Managing the Investment

Venture capitalists spent months or sometimes years researching markets, analyzing

business models, investigating teams and conducting due diligence before pulling thetrigger on a single investment.

The first half of this class will focus on the year following the investment, starting withthe honeymoon period after the investment is made, to the aha! moments as you learn

things are better or worse than you had determined in diligence, to that point in everydeal where a VC congratulates himself on an investment well chosen or looks back with

regret on why he ever got involved!

The second half of the class will focus on the troubled investment, including the

expected and unexpected reasons for growing problems, and the team, customer,investment partner and financing issues that arise in these companies. Ultimately, wemust decide whether to support a portfolio company or walk away.

Readings: Good Money After Bad? (R0703A)

Washout: The Founders Tale and the Investors Tale (311078)
http://ycombinator.com/seriesaa.htmlhttp://ycombinator.com/seriesaa.htmlhttp://www.founderinstitute.com/posts/69http://www.founderinstitute.com/posts/69http://www.founderinstitute.com/posts/69http://www.founderinstitute.com/posts/69http://ycombinator.com/seriesaa.html

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Week 13

4/8/2013Topic: Managing the Growth and Exiting the Investment

After focusing on the negative last week, this class is all about success. Well look at

managing the growth of a company, including considerations of organic growth, newmarkets, geographic expansion, growth vs. profitability and related financing

considerations. Well also focus on the exit. While the target for venture-backedcompanies historically has been an IPO, the most common exit is a sale or merger.

What are the requirements and considerations of each of the avenues for exiting? Howdoes the likelihood of each kind of exit influence your decision making?

Well spend the second half of class talking about one of the biggest venture-backedcompanies in recent history: Facebook. This is a fascinating company that toucheseveryone. What will its future bring?

Project: VALUATION EXERCISE DUE (based on Spiffy Term, Inc.)

Grade Value 250 points.

Readings:Facebook (808128)

Week 14

4/15/2013

Topic: Managing the Investment Firm

Investment firms are small or medium sized businesses unto themselves, with all the

founder, business model, management team, market, etc. issues that face any business.In this class, we will discuss the operational and management structure of investmentfunds, and the issues that these businesses must contend with that can ultimately impact

its investing pace, strategy and ability. Ultimately, the best run investment firms have acompetitive advantage in the investment market.

We will also explore the different roles available within investment funds, includingrequired work and educational experience, compensation, advancement and other

matters pertaining to building a career within the venture capital industry.

Readings: NoneWeek 15

4/22/2013Topic: Legal and Ethical Aspects of Venture Capital; International

Considerations

As transactions get more complex with more constituents having stakes in the outcome,and as Federal and State governments continually add new regulations and rules, the

legal and ethical issues involved in venture capital have multiplied. Throughout thiscourse, we will have touched on these issues; in this class, we will analyze the issues indepth, including agency issues, capital management, minority shareholder rights,

conflicts of interest, insider trading, corporate opportunities, and audit issues.

In the second part of the class, we will focus on the global marketplace and international

considerations for entrepreneurs, venture-backed companies and investors.

Readings:Legal Aspects of Entrepreneurship (802161)Its Time to Make Management a True Profession (R0810D)

The Global Entrepreneur (R0812J)

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Week 16

4/29/2013Topic: Presentation of Case Analyses

Each team will present their investment analysis and justification to the class, followed

by discussion of common points and differences among the analyses.

Project: INVESTMENT ANALYSIS AND JUSTIFICATION DUEGrade Value 400 points

Documents

BAE 559