enfi-2 financing entrepreneurial opportunities

Prof. Heinrich LiechtensteinProf. email: [email protected]: E-301 Phone: 4216Assistant : Sònia GarciaOffice: E-303 Phone: 4367

Prof. Christoph ZottProf. email: [email protected]

Barcelona Elective 2012-2013 Office: B-408 Phone: 40965th Term MBA-II Assistant : Silvia Munné1 credit Office: B-403 Phone: 4548

ENFI-2FINANCING ENTREPRENEURIAL

OPPORTUNITIES

1. Purpose

This course is intended to give students an understanding of the entrepreneurial finance process. It covers the full range of venture capital / private equity financing activities, focusing on a variety of deals – start-ups, growth investments and buyouts – from both the entrepreneur’s and the investor’s point of view. Class discussions will cover a broad range of challenges, from assessing investment opportunities to structuring financings, from dealing with entrepreneurial business issues to ultimately realizing value from one's investment. There are four underlying themes that run throughout the course: How to assess a venture capital / private equity investment opportunity, How to value an unquoted (privately-held) company, How financing transactions are structured, and How investors exit from unquoted investments.Intermingled with these themes in the course are a wide variety of issues and challenges that must also be addressed in financing an unquoted company.

2. Teaching Approach & Case Preparation

Despite a proliferation of publications, it is difficult to find a single comprehensive source on the subject of entrepreneurial finance, partly because any given deal can involve so many variations on each issue and because there are often no clear answers to many issues. Indeed, it is this inherent ambiguity that makes the area frustrating for some people.The best way to learn about entrepreneurial finance is to be involved in lots of deals, learning from each and building upon your




experience in addressing the variety of issues involved in each deal. This course is designed to serve as the beginning of that experience. You will be exposed to as many deals as possible, requiring you to analyze each situation, identify the key issues, and think through the possibilities and pitfalls of alternative approaches to various financing issues. The course is centered around case discussions, from both the entrepreneur's and the financier's point of view, with papers to be written on several different cases. There will also be guest speakers who have been involved in entrepreneurial finance situations.One caution: This is not a course where you can learn by simply skimming the case before class and then picking up a few useful points from the class discussion. You will only learn about entrepreneurial finance if you struggle with the issues and do the relevant calculations beforehand to reach your own conclusions and then build on that experience through the class discussion.

3. Readings

Most of the assigned readings relate to subjects being addressed in the cases for the relevant sessions. There is a brief description for each reading to give you an idea of what the note contains. Though some of the notes are a bit old and contain outdated examples and statistics, they describe principles, which are still valid today and provide useful practical information.

4. Written Assignments

Papers based on selected cases are listed on the "Written Assignments" pages in this course outline. It is important that you read carefully “Written Assignments” at the end of this course outline and then follow the instructions on those pages, as these are not traditional case write-ups.These papers are designed to give you more experience in addressing financing issues that are inherently ambiguous. Typically this means that there is no single "right answer," so you must think through all the issues carefully to reach and then defend your conclusions. Papers will be assessed on (i) your identification and




analysis of the key issues, (ii) the quality of your insights regarding those issues, (iii) your explanation of how and why you reached your conclusions, and (iv) your ability to convey your points clearly & concisely. Don't assume that your exhibits are self-explanatory – explain your approach, major assumptions and conclusions in the text.The exhibits for the relevant cases are available on the Global Campus. Note: By registering for this course, each student promises not to seek information on the Internet or elsewhere about the companies featured in the cases.A hard copy of the assignment must be submitted before the start of class on the day the case is being discussed. Each submission must be your own individual work.




5. Class Participation

Quality class participation counts very highly in this course. You should prepare each case thoroughly, including all relevant calculations and deal structures, and be prepared to initiate class discussion and defend your conclusions. Please display your name card at every session.

6. Assessment

Student grades will be based 60% on the written assignments and 40% on quality (not quantity) of classroom discussion.

7. Resources

There has been an explosion of publications and online sources of information on the venture capital / private equity industry. Four books that we would highlight are: Raising Venture Capital for the Serious Entrepreneur by

Dermot Berkery (McGraw-Hill) Venture Capital Handbook by David Gladstone (Financial

Times Prentice Hall) Mastering the VC Game by Jeffrey Bussgang (Portfolio) Getting Between the Balance Sheets by David Frodsham

and Heinrich Liechtenstein (Palgrave).

You may also find the following resources helpful:

Selected trade Associations: Many of the world’s venture capital and private equity trade

associations are listed on this site: http://www.mycapital.com/companies/venturecapitalassociation_national.php.

European Private Equity & Venture Capital Association (www.evca.eu). The EVCA Yearbook and the EVCA Directory, both on reserve in the Library, provide investment data & descriptions of venture capital / private equity firms in each country.

British Private Equity & Venture Capital Association (www.bvca.co.uk). The BVCA Directory of Members, on reserve

http://www.bvca.co.uk/

http://www.evca.eu/

http://www.mycapital.com/companies/venturecapitalassociation_national.php

http://www.mycapital.com/companies/venturecapitalassociation_national.php




in the Library, provides descriptions of UK venture capital / private equity firms.

National Venture Capital Association (www.nvca.org). The NVCA Yearbook provides information on the US market; the NVCA Membership Directory provides descriptions of US venture capital / private equity firms.

Australian Private Equity & Venture Capital Association (www.avcal.com.au).

High Tech Industry Association (Israel Venture Association) (www.iva.co.il).

Asociación Española de Entidades de Capital Riesgo (www.ascri.org).

Latin American Venture Capital Association (www.lavca.org). Indian Private Equity & Venture Capital Association

(www.indiavca.org). China Venture Capital Association (www.cvca.com.hk). African Venture Capital Association (www.avcanet.com). Gulf Venture Capital Association (www.gulfvca.org). Emerging Markets Private Equity Association (www.empea.net)

Selected industry periodicals & associated online services: Asia Private Equity Review (www.asiape.com) Asian Venture Capital Journal (www.asianfn.com). Private Equity (www.privateequity.com) Private Equity Online (www.peimedia.com). Real Deals Europe (www.realdeals.eu.com). The Deal (www.thedeal.com) Tornado Insider (www.tornado-insider.com) Unquote UK (www.unquote.com). Venture Capital Journal (www.vcjnews.com). Financial Times – “Funds Management” section & periodic

industry reports. Wall Street Journal – periodic reports on venture capital.

IESE Global CampusAll links mentioned above are activated on the IESE Global Campus.All relevant case exhibits in Excel are posted on the IESE Global Campus.

http://www.vcjnews.com/

http://www.unquote.com/

http://www.thedeal.com/

http://www.realdeals.eu.com/

http://www.peimedia.com/

http://www.privateequity.com/

http://www.asianfn.com/

http://www.asiape.com/

http://www.empea.net/

http://www.gulfvca.org/

http://www.avcanet.com/

http://www.cvca.com.hk/

http://www.indiavca.org/

http://www.lavca.org/

http://www.ascri.org/

http://www.iva.co.il/

http://www.avcal.com.au/

http://www.nvca.org/




8. Class schedule

Session

Title of session and material(s)

1

11. Februa

ry

What makes a good new business opportunity?

Focus: The purpose of this session is to determine a way to make a quick, early assessment of new business ideas.

Case: Nova Capital

Issues: What criteria do you use to assess a new business opportunity? Why?

Are the criteria the same for the entrepreneur and the investor?

Assess each business idea and decide which venture you like best.

What is the most important factor that makes you choose this venture?

Reading: New Venture Financing, HBS[Good discussion of financing alternatives, even if some statistics old.]

2

12. Februa

ry

Valuing private companies

Focus: Every venture capital and private equity deal involves determining the value of the company. It is one of the most important – and most difficult – tasks an investor (and an entrepreneur) faces, and one needs to be skilled in using the various methods for valuing a company. You will need to apply these valuation techniques the course.

Case: Stratitek B.V.; GeneRisk.com

Issues: Which valuation method is best to use to determine the value of Stratitek? Why?

Which method is best for valuing Generisk.com? Why? What is the value of Stratitek and the value of

Generisk.com? Be prepared to defend your valuation methods and your

conclusions.

Reading: Valuing Privately-Owned Companies: Valuation Techniques, LBS[An excellent and important note – one that you should




read and re-read.]




3

18. Februa

ry

Financing valuations

Focus: Venture capitalists often employ a somewhat different valuation method for start-ups and early-stage companies. It is critical to understand how this method works as well as the limitations of this approach.

Case: None (we'll do exercises in class, so please bring a calculator)

Issues: Established valuation methods and their limitations Valuation methods used for venture capital investments

Reading: The Venture Capital Method (IESE)[This note discusses a very important valuation method, widely used by venture capitalists and equally important for entrepreneurs to understand.]

4

19. Februa

ry

Financing instrumentsFocus: In order to understand a financing for a private company, it

is essential to be familiar with the various financing instruments that one can use. You will need to understand how these instruments work and interact with valuation for all subsequent sessions.

Case: The Venture Capital Method - Valuation Problem Set

Issues: Different forms of equity: common shares, preferred shares

Structuring a deal

Reading: Financing Instruments (LBS)[This important note focuses on theory in the first seven pages, then on more practical information in the ensuing pages, using UK financing instruments as the basis for discussion. This is a note that you should study carefully.]




5

25. Februa

ry

Due DiligenceFocus: Investors have to assess risk as well as structure deals in a

sensible way. These two tasks are the focus of this session.Case: Deep Sea World (A)

Issues: What are the pluses and minuses of this business idea? How risky do you think this deal would be? How would you structure the financing for Deep Sea

World? How would your structure satisfy each of the parties?

Reading: An Approach to Structuring Venture Investments, IESE[Good practical insights into the use of specific financing instruments.]

6

26. Februa

ry

Review of early-stage deal issuesCase: To be handed out

Issues: -

Reading: Strategy vs. Tactics from a Venture Capitalist, HBR[Timeless advice from a legendary venture capitalist on what to look for in a new venture.]




7

04. March

Follow-on investmentsFocus: It is not automatic that an existing investor will make

follow-on investments in a given company. How an investor assesses such investment situations is critical to the success of any investor (as well as to that of the entrepreneur!).

Case: Nationwide Databases & Lists (NDL)

Issues: Is this a good business idea? Why / why not? Why is the company having such difficulties? What do you think about how the founders have been

treated in each funding round? If you were to invest more in NDL, what conditions /

changes would you require?

Reading: The Horse Race between Capital & Opportunity, NVCA[Venture capitalists who become enthralled with the euphoria of returns would be wise to heed the lessons of this note.]

8

05. March

Follow-financingsFocus: In this session we will review financing instruments and

start-up valuations.Case: Aster Capital & the Secureq Deal

Issues: Is Secureq’s business a good business? Why / why not? How well does Sequreq fit with Aster’s investment

strategy? Why / why not? What do you think of the way the company has been

financed? What options does Aster have now, and what should

Jean-Marc do?

Reading: Some Thoughts on Business Plans, HBS[While the focus is on business plans, this excellent note contains many wise insights about venture capital financings and investors.]




9

11. March

Angel investors.

Focus: “Business angel” investors who are investing their own capital often approach opportunities differently from venture capitalists who are managing outside funds. This session will address some of these differences.

Case: The Industrialization of Global Internet Startups: The Klaus Hommels Model

Issues: Analyze the differences of an Angel Investor, a Venture capital and the Klaus Hommels approach. What are the advantages of each and which would you prefer as an entrepreneur?

What do you recommend Klaus to do in the point’s described in the case: which countries, which model, how to incentives management, how to reduce complexity etc.?

Reading: Best Practices of Angel Investing: Tactics and Strategies of the Winners, IESE[Insights into the way business angel investors approach deals.]

10

12. March

Financing termsFocus: This case goes into detail about the terms of a financing

offer. Entrepreneurs as well as investors need to understand what such terms mean and the effects they can have on the development of the business and the ultimate value of each party’s shareholdings.

Case: Nordic Technologies AB

Issues: Is the offer from Pan-Euopean a good offer? Why / why not?

Is the valuation implied by the offer good for management? Why/why not?

Assess the terms of the offer. How might they affect the company?

As Anders Ferm, how would you feel about the financing proposal?

Reading: Shareholder Agreements, LBS[This note addresses important legal issues that investors and entrepreneurs must understand.]

NOTE: This last session marks the end of our discussion of start-ups




and early-stage ventures, as we now turn our attention to buyouts. Accordingly, you will need to adjust your thinking, as some of the approaches to valuation and deal structure that we have been using thus far are less relevant with buyouts, where a different approach is used.




11

18. March

Search fund MBIsFocus: A well-established process in the US, the funded search is a

way for MBA graduate to run his/her own business; but it is not an easy route, as this case illustrates. We will examine what is necessary to make this approach work.

Case: Sea Breeze Capital

Issues: What are the problems with this concept? What are the risks for an investor in Marc’s fund? For

Marc? Should Marc try to do one of these deals? Why / why not? What are the economics for Marc in each deal?

Reading: Note on Search Funds (Tuck)[A good introduction to the funded search concept.]

12

19. March

Buyout processFocus: The majority of private equity deals done in Europe involve

some type of buyout. This session introduces the factors that must be considered in managing the buyout process and structuring a buyout financing.

Case: Burn Stewart & Co.

Issues: What makes Burn Stewart a good or poor opportunity? What price would you be willing to pay for the company?

Why? How would you structure the financing? How would you determine if it is a reasonable deal for

the investor?

Reading: The Manager’s Guide to Buy-Outs (BDO)[A useful step-by-step guide to buyouts.]




13

02. April

LBO modelsFocus: Structuring a buyout financing involves a variety of factors

and moving parts, all of which must be tied down and incorporated in a financing package that works for both the investor(s) and management, as seen in this case.

Case: Alessandro Mueller

Issues: What makes Alessandro Mueller a good or poor opportunity?

What price would you be willing to pay for the company? Why?

How would you structure the financing? How would you determine if it is a reasonable deal for

the investor?

Reading: LBOs for Smaller Companies (HBR)[Despite its age, this note provides useful information on buyouts.]

14

03. April

Buyouts and bank debtFocus: One of the questions often asked about private equity firms

is whether they actually add value to a company. This session will address this question.

Case: Star Parks (A)

Issues: What were the key factors that affected the price that Palamon could pay?

What issues had to be addressed before Palamon could commit to the price?

Look at the way the deal was structured to achieve everyone’s objectives.

Is now the time to consider selling? Why / why not?

Reading: Balance Between Debt & Added Value (FT/Tuck)[Sound discussion of the use of debt financing in buyouts.]




15

08. April

Buyouts in developing marketsFocus: Investing in a developing private equity market presents a

range of challenges for the investor. This session will examine some of these issues.

Case: Ducati & Texas Pacific Group

Issues: What is the nature of this opportunity? Could the Ducati brand be expanded beyond

motorcycles? Why/why not? What is the value of Ducati at the time of the deal? Should Abel Halpern walk away from this deal? Why/why

not?

Reading: Assessing Non-US Markets for Private Equity Investments, IESE[This note provides a useful framework for examining the private industry in countries around the world.]

NOTE: This last session marks the end of our discussion of buyouts and of “doing” deals of all types. In the next session we will look at how the venture capital / private equity business works. Then in the final sessions we will focus on how investors and entrepreneurs realize value from their investments in private companies.

16

09. April

The venture capital / private equity businessFocus: Running a venture capital or private equity firm involves a

lot of strategic decisions, which we will examine in this session.

Case: Southern Cross Latin America Private Equity Fund

Issues: What does a venture capitalist actually do? How does a venture capitalist make money for

him/herself? What challenges do the Southern Cross team face

investing in Latin America? What has been the key to their success?

Reading: A Note on Private Equity Partnership Agreements, HBS[This note provides a good description of how a venture capital partnership works, though some of the specific data have changed ove time.]




17

15. April

Exiting via a trade saleFocus: The most common way investors exit investments in

private companies is via trade sales. This session will examine the process involved in selling a company through a trade sale.

Case: Pizza Express (A)

Issues: How did Peter Boizot get into the situation he now faces? What stands out in the sale memorandum? What is Pizza Express worth? Why? How would you go about trying to get buyers to pay

more for the company?

Reading: Packaging your Business for Sale, HBR[This note contains solid principles about preparing to sell a company.]

18

16. April

Exiting via a trade sale – IICase: To be handed out – Reserve time to prepare this case!

Issues: To be handed out

Reading: The Company Sale Process, HBS[A good description of the trade sale process, despite its focus on US tax issues.]




19

22. April

Exiting via an IPOFocus: An IPO is a way for entrepreneurs to retain management

control of their company while helping their investors and themselves achieve a return on their investment. This session will explore the IPO process.

Case: Xeikon S.A. (A)

Issues: Should Xeikon go public now? Why / why not? How should Xeikon’s management choose an investment

bank? What approach(es) would you use to determine the IPO

value of Xeikon? Why? What do you think the IPO valuation of Xeikon should be?

Why?

Reading: A Note on the Initial Public Offering Process, HBS[A good description of the IPO process.]

20

23. April

Exiting via an IPO – IICase: To be handed out – Reserve time to prepare this case!

Issues: To be handed out

Reading: Second Thoughts on Going Public, HBR[Dated but wise.]




9. Written assignments

Each student is required to prepare 2 slides, 1 individual paper, and 1 group paper: Slides must be 1 page only; Papers must be no more than 2 pages of text, with supporting

exhibits attached. A hard copy of the written assignment must be submitted before the start of class on the day the case is being discussed.

PLEASE NOTE that these assignments are not traditional case write-ups and are not based on the questions listed for the class session; rather, you must address the questions asked below. In the papers be sure to defend your approach, major assumptions and conclusions in the text. Show the math for your calculations in the exhibits, but do not assume that your exhibits are self-explanatory – use the text to explain what you did and why. The exhibits for these cases are available on the Global Campus.

Slide 1: Choose 1 Stratitek or GeneRisk.com: Study the reading for this session.

Then choose one of these two cases and prepare a slide showing your calculation(s) of the value of the business.

The Venture Capital Method - Valuation Problem Set: Details to be announced in class.

Slide 2: Choose 1 Aster Capital & the Secureq Deal: Study the note Early-Stage

Companies & Financing Valuations: The Venture Capital Method. Then prepare a slide showing the pre- & post-financing valuations for the financing rounds in November 2004 and October 2007. Include enough data so that it is clear how you determined the valuations, and show what the change in valuation was from 2004 to 2007.

Nordic Technologies AB: Re-read the note “Early-Stage Companies & Financing Valuations: The Venture Capital Method” (IESE). Then prepare a table showing the shareholdings and the pre- and post-financing valuations for the financings for Nordic Technologies, including the proposed financing from Pan-European Investors. Include enough data so that it is clear how you determined the valuations.




Individual paper – Choose 1 Burn Stewart: Devise a structure for financing the buyout of

Burn Stewart. Make sure you include enough funds to complete the transaction, and be clear about the sources of funds, allocation of funds to specific financing instruments, and the resulting ownership percentages for each party. [Base your structure on the assumption that Hillman’s price is £6 million.] Defend your assumptions and conclusions, including your justification for the ownership percentages for both management and the venture capitalist.

Ducati & Texas Pacific Group: Take the position of Abel Halpern and write a report to David Bonderman after the meeting on July 21, 1996. As this is your first deal, you want to make sure that you “guarantee” the 35% IRR required by your US partners; therefore, you want to make sure you mitigate the main risks (as described in the case). Explain how the proposed deal structure accomplishes this; then recommend and defend your valuation for the deal, including a thorough analysis of the net working capital (or necessary funds for operations, “NFO”).

Pizza Express (A): Matthew Allen has just hired your group as an advisor. Write a memorandum to Allen and Peter Boizot, explaining what price you expect Peter will get for Pizza Express. Be specific about the price for 100% of the equity (taking into account how the existing bank debt will be handled). Describe your valuation method(s) and defend your conclusion (do not just cite a range).

Group paper:Case of second of April (Alessandro Mueller): Students will work in teams (teams to be assigned) to build an MBO model and develop a financing structure for a buyout.Each team must submit:

1. One paper that explains your key assumptions, describes the major decisions that you had to make, defends your final financing structure, and shows acceptable projected returns for all parties. The text must not exceed two pages, but you should attach Exhibits 4a and 4b (Cockpits) showing the results.

2. One Excel file containing your solution in Exhibit 3a (Model) and in Exhibits 4a and 4b (Cockpits). If you want to use instruments or terms which are not yet integrated in the




model you are more than welcome to do it but please make sure to adjust Exhibits 4a and 4b accordingly, so that they contain all relevant information. If you apply changes please indicate ADJUSTED in cell E1.

3. One two-sided Power Point presentation (Exhibits 4a and 4b) to be presented in the class. The slides should show the final financing structure for the buyout, how much cash is required to fund the deal, the sources of that cash, all of the financing instruments used with the allocations of capital in each instrument for each party, and the resulting ownership for each party.

Please use reasonable terms for the deal. Equity value for the deal (Exhibit 3a, Cell E10) has to be at least €3,750m.To enjoy a free Easter break, please send all material (paper, Excel sheet and slides) before March 20, 10h, by email to [email protected].




10. Professor’s biography and photograph

Heinrich Liechtenstein Associate Professor of Financial Management

Doctor of Business and Economic Sciences, University of ViennaMaster in Business Administration, IESE, University of NavarraDegree in Business and Economic Sciences, Universidad Autónoma de GrazCertified European Financial AnalystE-mail: [email protected]

Biography:Professor Liechtenstein holds a Ph.D. in Managerial Science and Applied Economics from The Economics School of Vienna, Austria, a Master’s degree in Business Administration from IESE Business School, and a BSc in Business Economics from the University of Graz. Professor Liechtenstein specializes in entrepreneurial finance, management of wealth and governance of entrepreneurial families. He is co-author on several publications on private equity. His ongoing research in this field focuses on operational value creation in private equity, impact investing and governance of entrepreneurial families.Professor Liechtenstein lectures in the MBA and Executive Programs. As a consultant he collaborated with leading families and financial institutions and serves on the board of family controlled foundations. Prior to his academic career, Professor Liechtenstein was engaged in the family owned Liechtenstein Global Trust (LGT) dealing with ultra high net worth individuals. He also advised families within the Boston Consulting Group and established and sold two successful businesses.

Areas of interest: Entrepreneurial finance, private equity and Impact Investing




Owners/Investors strategy and family governance




Christoph Zott Professor of Entrepreneurship

PhD, Commerce and Business Administration, University of British Columbia,

Canada Diplom-Wirtschaftsingenieur, Technische Universität Karlsruhe, GermanyDEA, Génie Industriel, Institut National Polytechnique de Grenoble, FranceE-mail: [email protected]

Biography:Christoph ('Chris') Zott is professor in the Department of Entrepreneurship. His current research centers on resource management in entrepreneurial firms, including areas such as the design of business models that combine the resources of entrepreneurial firms with those of suppliers, customers, and partners; the acquisition and mobilization of resources through entrepreneurs' symbolic management and affective influence actions; and the deployment of resources through dynamic capabilities. Prof. Zott has published on these topics in the Administrative Science Quarterly, the Journal of Business Venturing, Organization Science, and the Strategic Management Journal, as well as in other research outlets and books. He is a member of the editorial boards of the Academy of Management Review, and the Journal of Business Venturing, as well as an associate editor for Management Science. He also serves as a member of the Business Policy and Strategy Executive Committee of the Academy of Management.Prof. Zott teaches courses on entrepreneurship and private equity at MBA, EMBA and Executive Education levels. He also consults for growth ventures, as well as larger firms interested in entrepreneurial leadership. He holds graduate degrees with distinction in industrial engineering from Universität Karlsruhe (Germany) and Institut National Polytechnique de Grenoble (France).He received his Ph.D. in commerce and business administration from the University of British Columbia (Canada).




Areas of interest: Creation of New Businesses and Organizations Design and Implementation of New Business Models Management of Value-Creating Resources and Capabilities Venture Capital and Private Equity

enfi-2 financing entrepreneurial opportunities

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