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.
