Faculty
Professor Philip J. Ferneau
Objectives
Course Scope
Private equity investing is often referred to as an “apprenticeship” business, in which best practice cannot be reduced to textbook formulas and skill is developed only over time through first-hand experience. There is much truth to this characterization.
While there is no substitute for hands-on private equity experience, the FSPE course is designed to give you a head-start by bringing together the academic concepts and “real world” practice of private equity investing in a combination of case discussion, classroom exercises, guest speakers, and term projects. The classroom format emphasizes active discussion among all course participants – think seminar, not lecture. The projects are designed to provide first-hand exposure to private equity practitioners and the practical challenges they encounter.
Please note that the course title uses the term “private equity” in its general sense, not the more specific sense of only later-stage investing. To the contrary, most of the readings and situations discussed in class will focus on early-stage venture capital investing. Thus, the course is particularly targeted at students interested in advancing their understanding of venture capital investing or raising venture capital for an entrepreneurial venture. That said, certain of the concepts covered will be generally relevant to late-stage/buyout investing and term projects can be tailored accordingly. Every year, a number of the students taking the course are more interested in late-stage private equity careers and they are able to pursue term projects in line with such interests.
The course does not require any experience in private equity or financial skills beyond those taught in the first-year curriculum and the Private Equity Finance (“PEF”) elective. Because the PEF course in past years was offered in the Fall term, most students enrolling in FSPE had already taken PEF. Accordingly, I typically have approached the FSPE course as an advanced seminar for students with a career interest in the industry, rather than as an introductory course. With PEF and FSPE being offered simultaneously this term, I realize that many of you will be learning basic private equity vocabulary and concepts for the first time. I will try to calibrate the course content accordingly and will offer an optional “introduction to venture capital” review session early in the term to help with this learning curve.
Course Structure
The course will include class discussions and presentations, guest speakers, and term project work. As a seminar, the material changes significantly from year to year, based on evolving industry developments, feedback from students in prior years, and my ongoing efforts to find better ways to expose you to the practical complexities and challenges of private equity investing. The dramatic developments that have roiled the financial markets this past year present a plethora of challenges for the private equity industry. I will try to adjust the course to draw what lessons we may from the historic “teachable moment” that we are experiencing.
The course this year is again divided roughly into two parts. The first part (classes 1-4) focuses on selecting early stage investment opportunities, particularly deal screening, initial analysis, and due diligence. This module has developed over the years as the foundation for many of the term projects. The goal is to help you understand both the importance of having a framework for selecting investment opportunities, and the challenges of applying such frameworks in practice.
The second part (classes 5-9) turns the focus to guest speakers and term projects. The guest speakers will represent a range of private equity investing experience, and their class sessions will be driven by your questions. Again, think fireside chat, not lecture.
An important element of the course, running through both halves, will be in-class discussion of "vignettes" – 1-2 page mini-cases that I have developed to highlight a variety of real-world challenges that private equity investors encounter all too often. These vignettes do not require advance preparation, but instead force you to assess a critical situation quickly and respond in real-time, sometimes by role-playing. These situations highlight the “shades-of-gray” associated with investing in people (not just business plans), having to make decisions with limited and imperfect information, working with co-investors who may have different self-interests, and the sometimes-competing (or unclear) interests of entrepreneur, private equity investor, and the investor’s limited partners.
FSPE places a premium on both your individual initiative and collective collaboration. The goal is an active learning community, in which we all freely ask questions and share insights, opinions, and resources that we may run across. Your class participation grade will reflect your contributions both in and out of class.
Requirements
Your individual and collective learning will depend on how much effort each of you puts into the early exercises, class participation, and your term project. For the projects to succeed, it is vital for each student and team to exercise proactive initiative and to fulfill assigned responsibilities on time.
The course requirements include both individual and team components carrying the indicated weight towards your final grade:
Term projects will generally fall into one of three areas: detailed due diligence and analysis for one or more “live” deals; proactive analysis of investment opportunities in a particular sector or locale; or research and analysis for a “best practice” research initiative. I will outline these project options in more detail in the first two classes and then expect you to organize teams and select a project no later than Class 4 (Jan. 27th).
Materials
Course Materials
For reasons of confidentiality, pedagogy, current events, and admittedly last-minute changes, most materials will be distributed as we progress throughout the term, rather than in an up-front course packet. These materials will consist of not just required readings and exercise materials, but also a range of additional optional materials relating to the course content.
The total volume of material that I will make available to you may seem overwhelming. However, much of the material is offered more as a supplemental resource for those who wish to dig deeper than as required reading for your detailed preparation. I will try to help you prioritize your reading, but one critical skill for private equity investing is being able to digest prodigious volumes of material efficiently. So, I encourage you at least to skim even those materials that aren’t required reading.
You may also find it useful to consult the Private Equity Glossary that the Center for Private Equity & Entrepreneurship has developed and posted on its web site at:
http://mba.tuck.dartmouth.edu/pecenter/resources/glossary.html.
The Center also maintains a list of useful links for additional resources on the private equity industry at: http://mba.tuck.dartmouth.edu/pecenter/resources/useful_links.html.
I also have listed at the end of this syllabus a number of books (and a film) on the venture capital industry that you may find it useful.
Finally, I would encourage you to track VC/PE industry news on a routine basis through such daily outlets as www.pehub.com and VentureWire Professional (available through Feldberg).
Course WebSite
The course website is available through your Tuckstreams homepage (kerberos required).
SUPPLEMENTAL READINGS
You may find the following items useful for additional background on the venture capital industry and early-stage investing. Unless noted, all items are on reserve at Feldberg Library and or available for purchase from Amazon.com, etc.
Besides the titles below, there are a number of useful references on the legal complexities of structuring private equity investments and the federal and state laws and regulations that govern them. If you need to dig deeper in these areas, let me know.The Angel Investor’s Handbook: How to Profit from Early-Stage Investing by Gerald Benjamin and Joel Margulis (Bloomberg, 2001)
Decent introduction and manual for angel investing; less sophisticated than Winning Angels (below)
Confessions of a Venture Capitalist:Inside the High-Stakes World of Start-up Financing by Ruthann Quindlen Warner Books, 2000)
Somewhere between pithy and breezy, this is a loosely organized set of lessons from a VC at a well-regarded firm; useful advice and anecdotes are mixed in with more forgettable filler; written more for entrepreneurs than MBA’s seeking to enter the industry.
Done Deals by Udayan Gupta (HBS Press, 2000
Compilation of interviews and summary bios of 35 venture capitalists; useful insight into how the industry has changed over time and the personalities of many respected industry leaders; some passages & comments seem dated (before tech stock bubble burst).eBoys: The True Story of the Six Tall Men Who Backed eBay, Webvan and Other Billion Dollar Startups by Randall E. Stross
Surprisingly candid profile of Benchmark, one of the highest-flying VC firms during the Internet Bubble; a fascinating look at the venture capitalists, entrepreneurs, IPOs, and egos behind some prominent successes and failures.
Greylock: An Adventure Capital Story
by William Elfers(Greylock Management Corporation, 1995) Out of print
A self-published memoir of one of the early and still prominent venture capital firms; offers a detailed inside look at the firm’s history, people, and investments.
The Money of Invention:
How Venture Capital Creates New Wealth
by Paul Gompers and Josh Lerner
(HBS Press, 2001)
Good mix of venture capital theory and practice, with a particular macro focus on how the industry has evolved over time; comparable to an extended Harvard Business Review article.
Risk and Reward: Venture Capital and the Making of America’s Great Industries
By Thomas Doerflinger and Jack Rivkin
(Random House, 1987)
Historical look at the role of “venture capital” in helping to build the railroad, steel, telephone, automobile, computer and biotechnology industries. Written well before the Internet boom and the explosive growth of the VC industry, it makes a good case that those who ignore history are doomed to repeat it. Much 1980s-era hand-wringing over the USA losing ground to Asian competitors.
Startup.com
Directed by Jehane Noujaim and Chris Hegedus (2001), available on DVD
Film documentary that covers Internet startup govWorks.com from its initial dot-com euphoria to its dot-bomb demise. A good “scared-straight” drama for entrepreneurs and investors alike.
The VC Way: Investment Secrets from the Wizards of Venture Capital by Jeffrey Zygmont
(Perseus, 2001)
A bit awe-struck, but still interesting quick read about how venture capitalists think and act; ample vignettes and quotes from well-regarded VCs.
Winning Angels,
by David Amis and Howard Stevenson
(FT-Prentice Hall, 2001)
Very good, tactically oriented primer on angel investing with numerous comments from experienced angel investors; many lessons that apply generally to all seed/early-stage investing, including institutional VC.
Attendance
The class will meet once a week, on Tuesdays, from 4:45-8:00 p.m. (except class 1 which will meet on Wed. Jan. 7th and class 3 on Wed. Jan. 21st). We will usually take a 15-minute break part-way through, hence the 8:00 p.m. ending time. I have found that this arrangement allows for more in-depth discussion and maximizes our scheduling flexibility for term project work both in and out of class. Meeting just once a week does, however, heighten the importance of attending each session.
If you feel you need to miss a particular class, you are responsible for clearing your absence with me in advance and may be required to prepare a special assignment to make up for your absence. An unexcused absence will adversely affect the class participation portion of your grade.
Laptop Policy
Laptops, Blackberries, and other devices that distract your attention from our classroom discussion should not be used during class unless specifically authorized. The slides used in class discussions and guest presentations will be available in the course folder by the day after each class.
Honor Code
Your work in this course is, of course, subject to Tuck’s Honor Code. I believe the Honor Code’s application to this course’s class and project participation is straightforward.
Grading
Business Plan Screening Exercise 5%
(due Class 2 - individual)
Venture Investment Exercise 10%
(due Class 4 – individual & assigned pairs)
Term Project 35%
(due Class 9 – individual or team)
Term projects will generally fall into one of three areas: detailed due diligence and analysis for one or more “live” deals; proactive analysis of investment opportunities in a particular sector or locale; or research and analysis for a “best practice” research initiative. I will outline these project options in more detail in the first two classes and then expect you to organize teams and select a project no later than Class 4 (Jan. 27th).
Students may develop their own term projects if they wish, but are not required to do. Students often select from a variety of project opportunities that I develop and make available to them. To the extent possible, I will try to work with you to create a term project opportunity that matches your personal interests. A list of illustrative past projects will be posted in the course folderr. Team sizes for the term projects will vary according to each project’s scope, the total course enrollment and student preferences. You generally may organize your own term project teams.
Please note that class participation will have the most significant impact on your grade. As with other Tuck courses, the quality of your input matters more than the quantity. My goal is to maximize the opportunities for all students to participate actively in a “learning community” in which we learn from each other, both in and out of the classroom. Thoughtful interaction with guest speakers or bringing an interesting article to our attention is just as important as answering my questions in case discussions. Evaluating the quality of participation is inherently subjective, so to augment my perceptions, I also will solicit input from the class to identify which of your classmates have contributed most constructively to your learning during the term.
Note: because the increased enrollment this year may make it challenging for all students to participate as much in class as we’ve enjoyed in some past years with smaller enrollments, I may include one or more additional small exercises under the “class participation” grading category.
Class Preparation and Participation 50%
(whole term - individual)
Schedule
Session 1
Course Introduction; Private Equity Value Chain; Challenges Facing the Industry; Investment Strategy, Screening, and Diligence; Term Projects Overview; Vignette Discussion (“Pandora’s Box”)
Prepare “Adams Capital Management: Fund IV” (HBS case in course packet). Study this case as an example of how one particular venture firm tries to evaluate investment opportunities in a disciplined manner. Be prepared to discuss the following questions in class:
What do you think about ACM’s “market first” investment policy and focus on “discontinuities?” Does it work? Why or why not?
What do you think about ACM’s “structured navigation” approach to managing portfolio investments?
How does ACM’s investment and portfolio approach affect the firm’s internal operations?
If you were a potential ACM investor, would you commit to Adams Capital Fund IV? Why or why not?
Optional:
(Optional) Review the web site of a venture capital firm of your choosing (besides Adams Capital Managenment) to gain a sense of its investment strategy, criteria, and processes. Compare and contrast its approach to ACM. Which do you find more compelling and why? You can find links to the web sites for hundreds of VC firms at http://www.nvca.org/members.html.
Optional:
(Optional) Review these recent commentaries and assess what they have to say on the challenges currently facing the venture capital industry. What are the implications of these challenges for the industry overall? How should existing venture firms address them?
- “National Venture Capital Association 2009 Venture Capital Predictions” (NVCA, Dec. 17, 2008). Press release available online at http://www.nvca.org/pdf/09PredixRelease.pdf; PDF presentation of results available in course folder.
Optional:
Sequoia Capital "RIP Good Times" presentation for portfolio company CEOs (Oct. 7, 2008), available online in numerous locations, including http://venturebeat.com/2008/10/10/the-sequoia-rip-good-times-presentation-get-your-copy-here/ or in the course folder.
Optional:
"Venture Capital’s Coming Collapse," by Rebecca Buckman (Forbes, Jan. 12, 2009), available online at http://www.forbes.com/technology/forbes/2009/0112/066.html.
"Venture Scene Survived, Didn't Thrive" by Pui-Wing Tam (Wall Street Journal, Jan. 2, 2009), available online at http://online.wsj.com/article/SB123085850074147895.html.
Session 2
Deal Screening & Due Diligence; Vignette Discussion
(“Duo Diligence”)
Complete Deal Screening Exercise
(individual assignment – materials to be distributed after Class 1)
Optional: “How Venture Capitalists Evaluate Potential Investment Opportunities” (HBS case 9-805-019); will be included with the Deal Screening Exercise materials (above).
Optional: Winning Angels, pp. 73-142 (On Reserve; see Supplemental Reading list below).
Optional: Kawasaki, “Top 10 Lies of Entrepreneurs” (On Reserve).
Optional Review Session on Private Equity Investing and the PE Industry
Rosenwald Classroom - 8:15pm - 9:30pm
Optional: I will offer a basic review and Q&A session after the regularly scheduled class for any students who are not taking the Private Equity Finance course or otherwise have a basic knowledge of the PE industry. Attendance is entirely optional and I won’t be disappointed if no one chooses to stay for it.
Note: interested students from the Introduction to Entrepreneurship course have also been invited to attend this session.
Session 3
EZAmuse Venture Negotiation : Vignette Discussion
(“Changed Circumstances”)
Read EZAmuse Negotiation Background (A) and assigned background information. (distributed to mailboxes 1/15)
You will be divided into teams, with each member playing one of three roles. Detailed instructions posted in course folder.
Optional: "Documents of a Deal" slides and related materials regarding term sheets and other venture investment documents (posted in course folder).
Session 4
Venture Investment Analysis Exercise; Vignette Discussion
(“Founder’s Equity”)
Prepare: Venture Investment Analysis exercise
(Materials to be distributed in Class 2)
Prepare: “Valhalla Partners Due Diligence” (HBS case 9-805-033; will be distributed)
Session 5
Venture Investment Analysis Exercise; Vignette Discussion
(“To Close or Not to Close”)
Prepare: Venture Investment Analysis Exercise
(Assignment to be distributed in Classes 2 and 3)
Session 6
Lessons From a VC Career; Vignette Discussion
Session 7
Perspective of a Current VC; Vignette Discussion
Dennis Jaffe and Pascal Levensohn, “After the Term Sheet:
How Venture Boards Influence the Success or Failure of
Technology Companies” (to be posted in course folder)
Session 8
Perspective of a Limited Partner; Vignette Discussion (
Session 9
Term Project Presentations
Note: This class session will require running overtime.
Please be prepared to stay as late as 9:00 p.m.
