BAEP 559: Investing in New Ventures Syllabus Spring 2013 Professor: Office: Office Tel: E-mail: Bob Holmen

n Lloyd Greif Center for Entrepreneurial Studies (949) 500-0669 (cell) bholmen@miramarvp.com holmen@marshall.usc.edu

Lecture Class Monday Office Hours Mondays

6:30 9:30 pm Room: JKP-104 3:00 5:00 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 venture investment 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 the investment, 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 Organizational Entrepreneur, 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 business proposals, along with proposed structural solutions constitute a large measure of the classs activities. 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.

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Learning Objectives In this course, you will develop your conceptual and practical knowledge of new venture investment and management. Specifically, you will: 1. develop an understanding of the different investment opportunities; 2. become familiar with the economics of investment; 3. develop an understanding of business models and how they evolve to meet realities of the marketplace; 4. gain knowledge of the internal process of the investment activity, how they interplay and the financial consequences, and 5. expand your awareness of the funding process. In addition, this course also provides an opportunity for you to develop and improve your personal capabilities, including the following: 1. Analytical skills: thinking, problem solving, and decision-making: analyze and critically evaluate alternative courses of action; find and use resources to answer your questions, and form conclusions and recommendations and support them with logic and evidence. 2. Oral and written communication skills including your ability to: deliver oral presentations to a large audience; ask questions and present viewpoints in discussions, and write well-structured, clear, and concise documents. 3. Skills in managing work load include: improving your ability to plan and structure tasks; and learning to better manage your time. To achieve these objectives, a combination of methods will be used in the course, including lectures, case studies, individual projects, student presentations, and guest lectures. Required Materials The Course Reader is available from the Harvard Business School Publishing website:
https://cb.hbsp.harvard.edu/cbmp/access/16972290

(it is not available from the Campus Bookstore) Additional assigned reading is available on publicly-available Internet sites. Prerequisites: None Course Notes: Copies of lecture slides and other class information are available through your Blackboard account.

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Grading Summary: Assignment PROJECT #1: Competitive Market Analysis PROJECT #2: Valuation Exercise CONCLUDING PROJECT: Investment Analysis and Justification CLASS PARTICIPATION TOTAL Points 250 250 400 100 400 % of Grade 25% 25% 40% 10% 100%

Final grades represent how you perform in the class relative to other students. Your grade will not be 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 the faculty unless there is a predated written agreement signed by all members of the team that clearly covers 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 projects are encouraged, upon approval. Your expectations are important! PROJECTS The Projects are explained in the Class Sessions detail below. When the project is listed in ALL CAPITALS 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 absences without notice are not acceptable. If you have a customer meeting, you will be on time. If you cannot 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 the class 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 for signing this form at the beginning of class. Any student who signs the name of another student on the 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 each class meeting and will be prepared to discuss that material, including drawing on their previous course work and experiences. Instructors may cold call students during the class to discuss this material in class. 3 Spring 2013

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Instructors may evaluate student participation during class and generate contemporaneous notes about the quality of each students contribution. Instructors may ask students to return note cards for a class that ask each student to offer evidence of the quality and impact of their class participation contribution. Students may also be asked to provide a self-evaluation of their participation contribution for the 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 remain unclaimed 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 of other personal communication devices, such as cell phones, is considered unprofessional and is not permitted during academic or professional sessions. Please silence all such communication devices. 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 is reserved exclusively for USC Marshall students. Statement for Students with Disabilities Any student requesting academic accommodations based on a disability is required to register with Disability Services and Programs (DSP) each semester. A letter of verification for approved accommodations 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 Integrity USC seeks to maintain an optimal learning environment. General principles of academic honesty include 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 work as ones own. All students are expected to understand and abide by these principles. SCampus, the Student Guidebook, contains the Student Conduct Code in Section 11.00, while the recommended sanctions 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 for further review, should there be any suspicion of academic dishonesty. The Review process can be found at: http://www.usc.edu/student-affairs/SJACS/ Failure to adhere to the academic conduct standards 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 an electronic 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. Any assignment turned in late, even if by only a few minutes, will receive a grade deduction of 10% of BAEP 559 5 Spring 2013

the points for each week (or portion of a week) that it is late. If your internet breaks down on the due 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 by the 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 learned according to the assignment. I will do my best to make my expectations for the various assignments clear and to evaluate them as fairly and objectively as I can. If, however, you feel that an error has occurred 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. Attach the 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 grade adjustments: 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 the Harvard 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 via Blackboard 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 a companys business model, I view this schedule as a living, continually changing document. As the needs, direction and objectives of the class evolve, the schedule will evolve as well. Topic, Projects and Readings 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 of venture funds, venture fund structure and model, historical data on venture funds, and the 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.

Week 1 1/14/2013

Week 2 1/21/2013 Week 3 1/28/2013

Readings: National Venture Capital Association 2012 Yearbook (we will use this as a resource for data throughout the course): http://www.nvca.org/index.php?option=com_content&view=article&id=25 7&Itemid=103 No Class MLK Day 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 funds investment criteria. Once opportunities are identified, the next step is defining the evaluation process. We will focus on the process that venture capitalists undertake prior to making an investment. What information is needed to reach an investment decision? What is the relative importance of each piece of information? We will also consider the different diligence and different criteria that apply depending on the industry, stage and other unique characteristics of the opportunity. Finally, well walk through a recent venture capital case study: Dropbox. This case raises 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)

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Week 4 2/4/2013

Topic: 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 Investment Analysis 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 will work 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 1,500 words 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-thenew-market) 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 logic must match with the firms strategy for differentiation. We will develop a framework for 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-withcustomers-%E2%80%93-business-plans-versus-business-models/ Tom Eisenmann on Platforms and Networks: http://platformsandnetworks.blogspot.com/2011/07/business-modelanalysis-part-1-key.html

Week 5 2/11/2013

Week 6 2/18/2013

No Class Presidents Day

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Week 7 2/25/2013

Topic: 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 the common 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 an investor figure out what characteristics the leadership and team actually possess? Who do investors back, and why? Readings: What Makes an Effective Executive (R0406C) Evaluating the CEO (R0810B) Why Entrepreneurs Dont Scale (R0212J) Topic: Market Research Project In the first half of this class session, we will receive a presentation from the last of our four prospective companies for your Investment Analysis and Justification Project. The second half of class will be used for group discussion and research to prepare the Competitive Market Analysis that is due in the next class period. Readings: Performing Industry Research (207069)

Week 8 3/4/2013

Week 9 3/11/2013

Topic:

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 among the 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 time and emotional energy, yet for highly successful companies (which is the ultimate goal of venture investing), the valuation at any point in time is less relevant. We will be reviewing the process, the mathematics, the economic significances and the practical realities of determining a valuation for a company. Project: COMPETIVE MARKET ANALYSIS DUE Grade Value 250 points

Week 10 3/18/2013

Readings: Note on Valuation of Venture Capital Deals (Case E95) No Class Spring Break

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Week 11 3/25/2013

Topic:

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 the company at a moment in time. The terms and conditions define the legal responsibilities of the constituents, the economic relationship between the parties and the rights of each person in the equation. In the first half of this class session, we will spend time analyzing typical terms and conditions of a venture backed project, including the reasons for each term and the proinvestor, 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 many cases influenced, subsequent business development. Project: We will also spend time discussing the Valuation Exercise due Week 13

Week 12 4/1/2013

Readings: Term Sheets: Y Combinator http://ycombinator.com/seriesaa.html The Founders Institute http://www.founderinstitute.com/posts/69 Topic: Managing the Investment Venture capitalists spent months or sometimes years researching markets, analyzing business models, investigating teams and conducting due diligence before pulling the trigger on a single investment. The first half of this class will focus on the year following the investment, starting with the 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 every deal 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, we must 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)

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Week 13 4/8/2013

Topic:

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, new markets, geographic expansion, growth vs. profitability and related financing considerations. Well also focus on the exit. While the target for venture-backed companies 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? How does 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-backed companies in recent history: Facebook. This is a fascinating company that touches everyone. What will its future bring? Project: VALUATION EXERCISE DUE (based on Spiffy Term, Inc.) Grade Value 250 points.

Week 14 4/15/2013

Readings: Facebook (808128) 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 investment funds, 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 a competitive advantage in the investment market. We will also explore the different roles available within investment funds, including required work and educational experience, compensation, advancement and other matters pertaining to building a career within the venture capital industry. Readings: None Topic: 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 this course, we will have touched on these issues; in this class, we will analyze the issues in depth, 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)

Week 15 4/22/2013

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Week 16 4/29/2013

Topic:

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 DUE Grade Value 400 points

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