February 2010 Archives

Entrepreneurship and the Venture Capital Process is a new class geared toward students with a focus in Finance or Entrepreneurship. The course connects students with local entrepreneurs, VCs, Angels and other industry experts. The class is unique in that it creates deal flow for the Deming Center Venture Fund; a student run fund that has recently been reinstated through the efforts of MBA 2010 candidates, Rob Delwo and Michael Euperio.

This semester the class will be sourcing deals, conducting due diligence and making recommendations to the fund advisers as to potential investments. Whether looking at a post-MBA future in the capital markets or as an entrepreneur, the class offers students the ability to work through the fund raising process and apply analytical skills attained throughout the MBA program.

The class boasts amazing guest speakers - a few of whom have already included: Chris Wand formerly of Mobius and Foundry Group, Lisa Reeves of Vista Ventures, Ken Fugate of Square 1 Bank and Jack Tankersly from Meritage. Last week, David Cohen spoke to the group about his experience in angel investing and his role in Techstars, a local incubator that has recently expanded to Boston and Seattle.

Students of the class are now engaged in sourcing deals by looking at local startup companies. As well, students engage in weekly discussion about various components of the venture capital process. I've included the following blog post from Rob Delwo, MBA Candidate 2010, to illustrate sample class discussion topics:

What makes a good deal/investment?

A "good deal" can come in various forms. A good deal a la Warren Buffet is an investment in a company that is undervalued, ie. the potential future earnings of the company are greater than the current stock price. Venture Capital (VC) and early stage investing follow this same premise; however the analysis that Mr. Buffet undertakes is much different than that of a VC or Angel. The reason for the difference is attributed to the large amount of asymmetric information regarding the early-stage company's future earning potential. An early stage investor has no public comps, and questionable financial projections which make a numerical analysis difficult (some say worthless). Therefore, a VC valuation will consist of a large amount of qualitative analysis. Foundry group VC, Jason Mendelson recently wrote a great blog titled "What's the Value of My Startup", which explains how he goes through the due diligence process.

Jason's blog is extremely valuable and I will most definitely use his process to guide any due diligence I do in the future. However, I would like to take a step back and look at the process from further out. I was recently talking to Jim Booth, Zetta Sun's VP of Business Development, about investment criteria. His theory was to group Management and Technology against Market, with Market trumping all. Actually several others feel this way too: Russell Siegelman, partner at Kleiner Perkins was quoted saying "the most important requirement is a large market opportunity in a fast-growing sector...this means the market potential has to be at least $500mm - or more." Further, Sonja Hoel, managing director of Menlo Ventures said "It's all about the market; this includes market growth, market size, competition, and customer adoption rates." As you can see market is extremely important, but I'm not trying to prove the management team and the technology are irrelevant, quite the contrary. The point I'm trying to make is that if the market isn't large enough or isn't growing fast enough, then the investment is not going to generate a good return. The market analysis is simply the first item on a long check list, and if you can't check this box with confidence then it's best to move on to the next investment opportunity.

In my opinion the second check is management team; this includes industry experience, honesty, passion, and previous achievements. In addition to these attributes an entrepreneur must be able to pass the "Beer Test", aka do you want to have a beer with this person? If the answer is no, walk away. Early-stage investing is a partnership, if you don't like the management team the investment will never work.

Technology/idea and the business model are also important but not as important as one may think. The entrepreneur's ability to explain their idea and describe how he/she is going execute is a reflection of their attention to detail and their understanding of what it will take to become successful. Chances are idea #1 isn't going to work, and the entrepreneur is going to end up executing on idea #2 or #3. Idea, plan of execution and financial projections are simply a way for an investor to evaluate the management team.

1. Roberts, Michael. Barley, Lauren. How Venture Capitalists Evaluate Potential Venture Opportunities. Harvard Business School. December 1, 2004.
2. ibid
3. Gladstone, David. Gladstone, Laura. Venture Capital Investing, The Complete Handbook for Investing in Private Business for Outstanding Profits. Financial Times, Prentice Hall. 2004
4. Medelson, Jason. Silicon Flatirons Information Session. 2008.

Now that we are in our fifth week back at school, I think it's fair to start looking at the similarities and differences between the semesters.  The semesters are very different indeed and deserve a bit of discussion.

Pace:

First semester started out fast and never slowed down.  A friend of mine jokingly called orientation "code for school."  And it was.  Statistics class, case studies, professor introductions; there was a lot going on before school officially started. Actually, our first case study for accounting was due the first day of class!  Luckily one of my teammates saw it posted online and we held an emergency Sunday night meeting to do the Kansas City Zephyrs case. This pace continues and you don't get much free time.

Second semester starts out much more tolerably. No assignments due the first day of class, and our first assignment for my electives was a one-page biography on who you are, what you do, and why you're interested in the class. Right now content has picked up and it's again very very busy, but not the break-neck pace of first semester. This semester has much more self-directed intensity and it's more on your terms.

Extracurricular Activities:

First semester I didn't have time or motivation to do much outside of school.  Mountain biking a few times was great and Thursday Night Out (TNO) was pretty awesome, but there was no way I could work a job and I had to miss events that I would normally attend like the Boulder/Denver New Tech Meetup (BDNT) and the GreenTech Meetup.

Second Semester there is more time to do activities outside of the classroom. I'm working on a market assessment project for a nanotechnology used in mechanical liquid filtration. I'm also competing in the CU New Venture Challenge (NVC), which is a business plan contest with weekly education and workshop session. Our team is bringing a Kava Bar to Boulder.  We're also trying to raise money for a big InterLink event in April; so we have been presenting to funding councils. There is no way I could have done these things first semester.

Class Discussions:

First semester certainly had some good class discussions, especially Marketing. But most classes were full of lectures and had fewer questions / discussions. This might be because there was just so much content that everyone was just trying to breathe and didn't have wind left to state and defend his or her personal position.

Second semester is a lot more dynamic. We have more discussions in class about the assigned readings that do not require mediation from the professor. People jump in because they are truly interested in what's being discussed. Also, the cohort knows each other and can interact more effectively in class without oversight from the professor.

Teams:

First Semester is all about the team. You spend a LOT of time working together, so it's pretty important that you get along, or at lease set a framework to function.  My team spent 15-20 hours together in an average week, and it definitely climbed up really high right before big projects were due. "Live together, die alone" was our motto. We did everything together, and I think because of that we got a lot out of the program. A big part of the learning process was figuring out how to work in your assigned team, manage schedules, etc. Also, you're tested individually, so you'd better understand everything your team is working on.

Some teams split up tasks to "divide and conquer." That totally worked too, and the teams that did this had more free time to maintain life. This works if your team is diverse and everyone wants to focus on specific topics, but it can be tough on the team dynamic if you end up with a bad grade based on something your teammate did without your involvement.

Even if your team doesn't entirely get along, you have to figure out a way to make it work. There was a team in my class who didn't get along and never found a functional framework. The result was that half of the team did not continue with the program after winter break. This is exceptionally rare, but the threat does exist.

Second Semester there is generally less teamwork, but that depends a lot on your electives. The teams you work in for electives are self selected, and you actually get to choose groups for a few core class projects too.  All in all, I'm spending 5 to 7 hours a week in a team, but I expect that will pick up as deliverables come due in a few weeks.

Bottom Line:

I'm happy to have made it though first semester with only flesh wounds. Now it's getting to the fun part and I'm really enjoying school again.