34101 - Entrepreneurial Finance and Private Equity

REQUIRED MATERIAL

A coursepack of cases + readings, available at the Bookstore.

OPTIONAL MATERIAL

Metrick, Venture Capital and the Financing of Innovation John Wiley, 2006.
Levin, Structuring Venture Capital, Aspen Publisher, 2006

COURSE OVERVIEW

This course will use the case method to study entrepreneurial finance and, more broadly, private equity finance. The course is motivated by increases in both the supply of and demand for private equity. On the supply side, the amount of private equity under management -- by partnerships investing in venture capital, leveraged buyouts, distressed companies, real estate, etc. -- has increased from under $5 billion in 1980 to over $200 now. Private equity funding is likely to continue to be robust in the near future as pension funds and other institutions continue to diversify their portfolios. On the demand side, an increasing number of MBAs and others are interested in managing their own businesses. The supply and demand for funds are also growing outside of the U.S., albeit although they begin from a much smaller base.
The primary objective of the course is to provide an understanding of the concepts and institutions involved in entrepreneurial finance and private equity markets. To do this, I have purposely designed the course to be broad and comprehensive. We will explore private equity from a number of perspectives, beginning with the entrepreneur / issuer, moving to the private equity partnership, and finishing with investors in private equity partnerships.
Organization:
The first case of the course -- Yale University Investments Office -- provides an introduction to the different classes of private equity and to the concerns faced by investors in private equity partnerships. The remainder of the course is divided roughly into three sections: (1) Issuers / users of private equity; (2) The role of the private equity partnership; and (3) Investments in and fundraising by Private Equity Partnerships.
In issuers / users of private equity, we will study the issues faced by individual entrepreneurs and managers. The focus in the cases in this section is on evaluating the qualitative attractiveness of the opportunity -- whether a start-up or buyout -- and then placing a quantitative value on the opportunity.
In intermediaries / private equity partnerships, we continue to study issuers of private equity, but we also focus on the role of the private equity partnership. In particular, we study the role of the private equity partnership in choosing, valuing, structuring, and managing private equity investments. In this section, we will look at particular investments made by venture capitalist partnerships and leveraged buyout partnerships. We finish this section of the course by studying the issues faced by entrepreneurs and private equity partnerships in exiting or cashing in their investments.
More generally, this section of the course will consider why particular methodologies and structures have evolved in the way they have, as well as possible ways to improve on them.
The final section of the course -- investments in private equity partnerships -- studies the issues faced in structuring private equity partnerships and in raising funds for them. In this section, we focus on the incentives faced by private equity partnerships and by investors in those partnerships. We also will try to understand why the incentives and contractual terms take the form they do.
Requirements:
The course requires and applies some of the concepts and techniques learned in Business 35000 and 35200 to the case situations. Because the course assumes knowledge of these courses from the start, they are strict prerequisite. One or two cases will require some familiarity with the techniques or concepts of option pricing.
This course also places a strong emphasis on presentation and discussion skills. It will be important to explain your positions or arguments to each other and to try to argue for the implementation of your recommendations.

COURSE PROCEDURES

This course is designed to be a time-consuming and challenging course. Unless you have the time to prepare two cases per week, I strongly recommend not taking the course.
For each case, I will assign study questions concerning the case. For most of the class period, we will consider these questions and the material in the case. This includes the first meeting. You are allowed and encouraged, but not required to meet in groups outside of class to discuss and analyze the cases. In the past, students have found that these groups complement class discussion well.
Each student will submit a one to two-page memorandum of analysis and recommendations at the beginning of each case discussion. If you are working in a group, I will accept one memorandum from the group and count it for all students in the group. If you choose to do this, the group cannot exceed 3 students.
Each memorandum should be typed and double-spaced using a normal font (Times New Roman or Calibri) and 10-12 pt font size. Write these as if you were writing a recommendation to the major decision-maker in the case. Exhibits, graphs, etc. may be added in addition to the two-page limit. You may attach as many numerical calculations as you wish. Memoranda will not be accepted after the class has met. A memorandum will be given credit if it is handed in and no credit if it is not. Initially, therefore, I will not grade them. However, I will use the memoranda to determine final grades for those students who are on the border of an A or B, the border of a B or C, or the border of a C, D, or F.
First class assignment:
For the first class meeting, students should prepare both the Yale Investment Office case and the Technical Business Data Plan in the course packet. For each case students (including those who are considering registering for the course) should use the detailed questions given in the course packet to organize their thoughts and put together a one-two pages memorandum that summarizes the analysis. If you are thinking of adding the course, you must attend the first week.
The readings and articles that I have assigned and will handout are largely non-technical in nature and summarize the findings of academic research. These articles are meant to serve as background material to help you analyze the cases. They should not necessarily be cited in the case discussion. You should argue as if you are in a funding meeting rather than in a doctoral seminar. The process of arriving at the answer is as important as getting the answer.
Because of the nature of this course (and its grading criteria), it is extremely important that you attend every class, arrive on time and be prepared to participate. To help me out, you should bring your name cards to each class. I may not remember who said what without those cards.
In the past, students have asked me to hand out my case analysis after the class has discussed the case. I will not do this, because there are usually no absolute right answers. The best cases are deliberately written to be ambiguous. While there are no right answers, there are good arguments and bad arguments. This course is designed to help you learn to distinguish between sensible and senseless arguments. Handing out my analyses would reduce the ambiguity in the cases and partially defeat the purpose of doing cases. Handouts also tend to circulate, which is a problem when I teach the case in another quarter. If you are uncomfortable with ambiguity, do not take this class.

GRADING

Grading will be based on class participation, the short memoranda and a final examination. Students cannot take this course pass/fail.
Class participation:
Class participation will count for 40% of the final grade. I will judge your performance based both on the quality and the quantity of your comments. Because so much of the learning in this course occurs in the classroom, it is very important that you attend every class. Low class participation combined with several absences can lead to a failing grade. For those of you who think that 40% is high, remember that in the post-Chicago Booth, real world, more like 100% of your "grade" is based on how you communicate with your colleagues. This class may be the last low-risk environment for second-year students to work on their communication skills.
If you are uncomfortable with such a heavy weight on participation, do not take this class.
Memoranda:
The memoranda will count for 10% of the final grade. The memoranda will have greater importance for those students on the A / B, B / C, or C / D / F borders.

IMPORTANT: If you are unable to come to class and turn in memoranda, email them to erika.morey@chicagobooth.edu prior to your section’s class time. DO NOT email them to me.
Final:
The final examination will count for 50% of the final grade. The final examination will be an individual, take home case analysis. You will have approximately one week to work on the case.
Standard of Conduct:
Students in my class are required to adhere to the standards of conduct in the Chicago Booth Honor Code and the Chicago Booth Standards of Scholarship. I also require students to sign the following Chicago Booth Honor Code pledge on every examination: "I pledge my honor that I have not violated the Chicago Booth Honor Code during this examination”

SPREADSHEETS

For most of the cases in the course, I have created an EXCEL worksheet. Each worksheet contains one or more of the exhibits in the case. This will make it easier for you to spend time on the analysis, rather than punching in numbers. The worksheets are available in the restricted teaching materials section of my web page that is linked below. You will be required to log-in using your Chicago Booth user name and password.

Course Spreadsheets - Restricted