Class 1 Lecture

70-397 Venture Capital Investing Fall 2002

Slide 1

Venture Capital Investing

Overview of the CourseAnd

Overview of Private Equity

© Andrew W. Hannah


Slide 2

Agenda

• Introductions• Administrative stuff• What is this course all about?• What are you going to learn?• What are we going to do in class?• What are the rules of engagement?• Overview of private equity• Next class…

© William C. Hulley


Slide 3

Andrew W. Hannah

• Current Status: CEO, PolyTronics, Inc.• Past positions:

• Senior Managing Director: Internet Venture Works (2000 – 2001)

• CFO: STORM, LLC (1999 – 2000)• CFO: Internet Securities (1995 – 1999)• SR. Manager: Deloitte & Touche (1987 – 1995)

• Education• MBA: Finance and Marketing – Katz (University of

Pittsburgh)• BS: Accounting – (Pennsylvania State University)

© Andrew W. Hannah


Slide 4

A Jump Off the Deep End

• Internet Securities, Inc. (1995 – 1999)• The Bloomberg of emerging markets• Being ahead of the curve creates buzz• Being ahead of the curve has its problems• Financing History:

• Series B: $ 300,000 • Series C: $ 4,800,000 • Series D: $ 7,000,000 • Sub Debt: $ 1,500,000 • SVB Financing: $ 1,750,000 • Series E (Euro$): $11,000,000 • Sale of Company:$47,000,000

© Andrew W. Hannah


Slide 5

Why Take on Microsoft?

• STORM (1999 – 2000)• Favorable diligence does not always equal

success• Speed is life• Microsoft is king• Remember who you are• Financing History:

• Series B: $5,000,000 • SVB Financing: $750,000

© Andrew W. Hannah


Slide 6

Timing Matters

• Internet Venture Works (2000 – 2001)• The concept works• The model doesn’t• Pulling out of the spiral• Its not your money• Financing History

• Series B: $15,500,000 • VentureBank: $ 1,000,000

© Andrew W. Hannah


Slide 7

What Made the Difference?

• Internet Securities• We could change the world• Boot strap

• STORM• “We” are going to be rich• Prudent exuberance

• Internet Venture Works• Riches come before the work• Spend first, justify later

© Andrew W. Hannah


Slide 8

Your Experience With:

Investments Angel Investing

Venture Capital

Class Work 3 0 2

Work Experience

6 1 2

Your Hard Earned Dollars

12 2 0

© Andrew W. Hannah


Slide 9

Administrative Stuff

My Contact Information

• e-mail [email protected] (preferred)• phone 412 268 8832• cell 412.977.7778 (Only if important)• office 231F, Center for Entrepreneurship, GSIA• hours Tuesdays, 5:15pm to 6:15pm, by appt

My Administrative Assistant is Ann Grekila

• e-mail [email protected]• phone 412.268.3704• office 231, Center for Entrepreneurship, GSIA

© Andrew W. Hannah and William C. Hulley


Slide 10

What is this Course All About?

• Making private equity investments• Finding deals• Evaluating their relative merits• Estimating their ultimate value

• Building a portfolio of such deals• Determining an overall investment strategy• Developing tools and processes to implement that strategy• Managing the deals that are made as a result of it

• The context in which investments are made• Capital markets and competition - their effect on risk and

return• Investor circumstances – how context colors decision

making



Slide 11

What Will You Learn?

• The investment process and lifecycle• The venture and angel equity market• The language of private equity• Performing diligence• Developing a valuation analysis• Decoding deal contract terms and structure

Most importantly, you will understand how investors develop, present, make and defend private equity

investment decisions.



Slide 12

What are We Going to Do in Class?

• Develop a foundation of the definitions, theory and basic tools • What is diligence? How is pre-money valuation determined?

• Apply, through cases and in-class projects, tools and process• How do I develop deal sources? What is competitive

diligence?• Present project work for critical review

• Diligence presentations, comparative analysis of companies• Meet real-world practitioners

• What matters in deal structure? How is valuation determined?

For the most part, you will learn theory by lecture and doing the assignments and come to understand its

practical application through in-class exercises, cases, discussions and panels.



Slide 13

The Rules of Engagement

• Read the syllabus, assignments and project information• Expectations, grading, due dates, format are all there• Hints for success are usually there, too

• If you don’t understand something, ask• Believe it or not, I might not have stated something clearly!

• Be prepared to be judged by real-world rules• Be on time: 6:30 to 9:00• Be able to present and participate at all times

• Good grades are the result of• Doing the work requested – reading, assignments and

projects• Demonstrating interest – original thought, advance

preparation• Demonstrating care – accuracy, attention to detail



Slide 14

How Will You Be Graded

• 20%: Sum of the weekly assignments• 20%: Class preparation and participation• 10%: Midterm project write up and

presentation• 25%: Final project write up• 25%: Final project presentation

© Andrew W. Hannah


Slide 15

Overview of Private Equity

Who Invests in Private Equityand

An Introduction to the Venture Investor



Slide 16

Sources of Entrepreneurial Equity

• Self Financing – credit cards, savings, personal debt• Vendor Financing – inventory, payables, receivables• Bank Financing – revolvers, balance sheet, lines of credit• Family and Friends – loans, common stock, partnerships• Public Sector – SBIR, SBA, DARPA, BFTC, PTIA• Venture Investors (VIs)

• Angels – high net worth individuals and families• Venture Capitalists – professional investment fund managers• Corporate Capitalists – strategic investment fund managers



Slide 17

Focus: Venture Investors (VIs)

• Angel Investors• Have made money doing something else• Typically invest close to home and expertise

• Venture Capitalists• Are paid to generate above-market returns• Typically invest with a particular stage, market, return in mind

• Corporate Capitalists• Are paid to generate returns and corporate synergy• Typically have a very narrow industry or technology focus

• All three have common characteristics• Build portfolios of deals over a long period of time• Have established and use clear selection criteria• Have developed a process for sourcing, evaluating and valuing• Are subject to market pressures that affect their perception of

risk/return



Slide 18

Who are These People?

• Angel Investors• Typically invest $10,000 to $250,000• Make as many as one hundred times as many investments as

VCs• Are much more likely to invest in seed and early stage deals• Are much more likely to syndicate or share deals with others

• Venture Capitalists• Typically invest $1MM to $10MM• Are much more likely to invest in early to late stage deals• Are much less likely to syndicate (Until recently)• In 1999 There were approximately 600 firms in the United

States• About 3800 investment professionals• With $134B under management• Making approximately 7000 new or follow-on investments



Slide 19

What Do VIs Think About?

• Sourcing• how do I find quality opportunities?

• Evaluating• what makes a good deal good?

• Valuing• what’s it worth?

• Structuring • who owns what? who control what?

• Negotiating• how do I negotiate terms, valuation, control?

• Supporting• what do I commit besides money?

• Harvesting • how do I make money?



Slide 20

Next… Questions We Might Ask

• Are venture and angel investors different?• Does portfolio theory matter?• How do investors decide what kinds of deals to do?• How do investors gather information?• How do investors make investment decisions?• How are valuation, contract terms and expectations

related?• How are valuation, terms and competition related?• What happens after you write the check?



Slide 21

For The Next Class

• WA pp 1 – 27• Info Card A: Summarize an interesting

article about venture capital

© Andrew W. Hannah

Documents

Class 1 Lecture