COURSE NUMBER: EWMBA295B.1

This course is cross-listed with the MBA Program

COURSE TITLE: Venture Capital and Private Equity

UNITS OF CREDIT: 3 Units

INSTRUCTOR: Jerome S. Engel, C. Sean Foote, Terry Opdendyk

E-MAIL ADDRESS: engel@haas.berkeley.edu, foote@haas.berkeley.edu, terry@onset.com

CLASS WEB PAGE LOCATION: https://bspace.berkeley.edu/portal

MEETING DAY(S)/TIME: Wednesdays, 6:00 – 9:30PM

PREREQUISITE(S): It is strongly recommended that EWMBA295A Entrepreneurship be completed prior to taking this course. If you haven't taken EWMBA295A your background should include business plan development and opportunity assessment.

CLASS FORMAT: The course will be organized in four modules:

Module 1: The Private Equity Cycle - Fundraising
The first module of "Venture Capital and Private Equity" examines how private equity funds are raised and structured. These funds often have complex features, and the legal issues involved are frequently arcane. But the structure of private equity funds has a profound effect on the behavior of venture and buyout investors. Consequently, it is as important for the entrepreneur raising private equity to understand these issues as it is for a partner in a fund. The module will seek not only to understand the features of private equity funds and the actors in the fundraising process, but also to analyze them. We will map out which institutions serve to increase the profits from private equity investments as a whole, and which seem designed mostly to shift profits between the parties.

Module 2: The Private Equity Cycle - Investing
The second module of the course considers the interactions between private equity investors and the entrepreneurs that they finance. These interactions are at the core of what private equity investors do. We will approach these interactions through a two-part framework. We first identify the four critical factors that make it difficult for the types of firms backed by private equity investors to meet their financing needs through traditional mechanisms, such as bank loans. We then consider six classes of financial and organizational responses by private equity investors to these challenges. This module will illustrate these frameworks with examples from a wide variety of industries and private equity transactions, including venture capital, buyouts, build-ups, and venture leasing.

Module 3: The Private Equity Cycle - Exiting
The third module of "Venture Capital and Private Equity" examines the process through which private equity investors exit their investments. Successful exits are critical to insuring attractive returns for investors and, in turn, to raising additional capital. But private equity investors' concerns about exiting investments - and their behavior during the exiting process itself - can sometimes lead to severe problems for entrepreneurs. We will employ an analytic framework very similar to that used in the first module of the course. We will seek to understand which institutional features associated with exiting private equity investments increase the overall amount of profits from private equity investments, and which actions seem to be intended to shift more of the profits to particular parties.

Module 4: Applying the Private Equity Model in Other Settings
The final module reviews many of the key ideas developed in the course. Rather than considering traditional private equity organizations, however, the two cases examine organizations with very different goals. Large corporations, government agencies, and non-profit organizations are increasingly emulating private equity funds. Their goals, however, are quite different: e.g., to more effectively commercialize internal research projects or to revitalize distressed areas. These cases will allow us not only to understand these exciting and challenging initiatives, but also to review the elements that are crucial to the success of traditional venture organizations.

REQUIRED READINGS:
Venture Capital & Private Equity: A Casebook; Fourth edition, Lerner and Hardymon, Harvard Business School, John Wiley& Sons, Inc

The text will be supplemented by other cases and readings, which will be posted to the courses web site.

BASIS FOR FINAL GRADE:

• Class participation and case presentation - 50%
• Valuation problem set - 10%
• Final project - 40%
  
  
  

Final Project: An important component of the course is the final paper. Whether one intends to work for a private equity organization or to accept money from one, careful due diligence is essential. Private equity funds jealously guard their privacy, and distinguishing between top-tier organizations and less reputable concerns is not always easy. The final paper offers an opportunity to become better acquainted with the resources available at the Haas School and elsewhere. An important resource in completing the project will be the VentureSource database of private equity financings, which the firm has generously made available to our class.

The final project will be a group assessment of several investment opportunities, documented by an investment memorandum, including detailed financing proposals [Terms Sheets] where appropriate. Alternative projects will be considered. These may range from traditional papers analyzing trends in private equity markets to case studies of particular investments and funds to draft private placement memorandums for new private equity funds. Group projects, or projects linked to those in other courses, will be considered.

ABSTRACT OF COURSE'S CONTENT AND OBJECTIVES:
Venture capital is core to our Silicon Valley hi-tech economy and our country’s strong growth over the past two decades. U.C. Berkeley is located in the ‘Mother Lode’ of this very special and unique investment category. This course is an advanced offering for those who intend to seek, or manage, venture capital funding. Accordingly it is appropriate for students who aspire to become CEO’s of entrepreneurial ventures or general partners of venture capital firms. The course counts toward the requirements for a Certificate in Entrepreneurship.

The course will make extensive use of case studies and guest lecturers. Industry experts, entrepreneurs, venture capitalists and those who advise them, such as investment bankers and lawyers will be frequent guests. We will make every effort to take advantage of the school’s geographic proximity to Silicon Valley.

Over the past twenty years, there has been a tremendous boom in the venture capital, and more broadly speaking, private equity industry. The pool of U.S. private equity funds - partnerships specializing in venture capital, leveraged buyouts, mezzanine investments, build-ups, and distressed debt - has grown from $5 billion in 1980 to over $250 billion today. Private equity's recent growth has outstripped that of almost every other investment asset class. Yet the last year has seen unparalleled instability and volatility in valuations and funds flows.

While the growth and recent volatility in private equity has been striking, the long-term potential for future development is even more impressive. Despite its growth, the private equity pool today remains relatively small. For every one-dollar of private equity in the portfolio of U.S. institutional investors, there are about $40 of publicly traded equities. The ratios are even more uneven for overseas institutions.

Both the demand for and supply of such capital are likely to expand. First consider the demand for private equity. Many studies suggest that privately held firms continue to face substantial problems in accessing the financing necessary to undertake profitable projects. Meanwhile, corporations are increasingly willing to sell off divisions to private equity investors as part of corporate "refocusings”. The supply of private equity is also likely to continue growing. Within the past two years, numerous pension funds have invested in private equity for the first time. Many experienced investors have also decided to increase their allocations to venture capital and buyout funds. Individual investors, so-called ‘Angels’, have also established increased participation in early round seed investing. Will these trends continue? Even with the recent instability in the financial markets in general, and the private equity markets in particular, these increased allocations will take a number of years to implement. This may provide some cushion to the current downturn.

The private equity industry - both in the United States and internationally - has been quite turbulent. Even before factoring in the recent volatility of the last 12 months, if you had invested in average venture or buyout funds at a pace that tracked the U.S. market between 1980 and 1998, your returns today would be below those from investments in most public equity markets. Due to the illiquidity and risk of private equity, we would expect instead a higher return. These poor returns largely stemmed from funds begun in the 1980s, when a large number of private equity investors raised first funds, and established organizations aggressively expanded. Many of the new funds could not find satisfactory investments, while rapid growth created turmoil at some established organizations. The early 1990s saw far fewer funds raised and rising returns. With the recent growth in private equity fundraising, it is unclear whether the high returns seen in the recent years can be sustained. This cycle of growth and disillusionment has created much instability in the industry. Understanding these patterns - and their impact on investor behavior - are critical whether one intends to work for, receive money from, underwrite the offerings of, or invest in or alongside private equity funds.

INSTRUCTOR BIOS:

Jerome S. Engel

Jerry Engel joined the Haas School of Business at UC Berkeley in 1991 to found the Lester Center for Entrepreneurship and Innovation. He serves as both the Center's Executive Director and the Chair of the Haas School's Entrepreneurship Program, overseeing its curricular and extracurricular activities. He brings over 25 years experience and success in high potential entrepreneurship and venture capital. In addition to his academic position, Jerry is a General Partner at Monitor Venture Partners, a venture capital firm, associated with the Monitor Group, the global strategy consultancy.

Earlier in his career, Jerry was founder and Managing Partner of the Entrepreneurial Services Group at Ernst & Young. Over a 12 year span, Jerry helped many of the Bay Area's leading technology companies emerge into vital enterprises. In 1996 Jerry co-founded Kline Hawkes & Co., a Southern California based venture fund, which provided top decile returns. In 1998 he co-founded AllBusiness.com and served as its Chief Financial Officer, managing its successful sale to NBC in March 2000.

Jerry currently serves on the Boards of Directors of Adaptive Planning, MedAmerica, Jupiter Systems, Kinfo, Electrascan, and the Berkeley Entrepreneurship Laboratory. He serves as Faculty Chair of the UC Berkeley Business Plan Competition, the international Intel+UC Berkeley Technology Entrepreneurship Challenge, and Faculty Co-Chair of the Global Social Venture Competition. He is on the Faculty Advisory Board of the Kauffman Fellows Program, on serves on the Editorial Board of the International Journal of Technoentrepreneurship. He previously served as Faculty Director of the Kauffman Foundation Lifelong Learning for Entrepreneurship Educators Program.

Jerry is a CPA and received his undergraduate degree at Penn State University and his master’s degree at the University of Pennsylvania, Wharton School. Jerry has deep Cal roots as both his sons are graduates of UC Berkeley. Jerry teaches Entrepreneurship and Innovation and Venture Capital and Private Equity in the MBA program at Haas, in addition to executive education at the Haas School’s Center for Executive Development, where he is Faculty Director of the Venture Capital Executive Program and Faculty Co-Director of the Open Innovation and Corporate Entrepreneurship Program.

Sean Foote

Mr. Foote has been a venture capitalist investing in early stage companies for the past 9 years. He is active on the board of directors of Eoplex Technologies, Everyone.net, Integrated Materials Inc., Altierre Corporation and Solaicx. He also serves on the Development Council of Entrepreneurs Foundation, a nonprofit organization that engages high growth companies in corporate citizenship and philanthropic efforts, Silicon Valley Microfinance Network (SVMN), Freedom from Hunger, a nonprofit, international development organization that fights against hunger and poverty, and is founder of Community Promise, an educational focused nonprofit.

Before venture investing, Mr. Foote was a management consultant with Boston Consulting Group, working in a wide range of industries such as telecom, computers, healthcare, banking, and automotive on topics ranging from strategic alliances to Internet strategies. Mr. Foote also worked as a systems engineer for AT&T Bell Laboratories, developing artificial intelligence systems for testing the most complicated telecommunications networks.

Mr. Foote is a lecturer at the University of California's Haas School of Business where he teaches the top ranked venture capital and private equity classes as well as Microfinance. He has also taught classes on entrepreneurship at the University of Michigan's Business School, University of Virginia's Darden School of Business and University of Pennsylvania's Wharton School of Business

Mr. Foote received his undergraduate degree in Electrical Engineering from the University of Missouri Rolla (1988), and his MBA from the University of Virginia's Darden Graduate School of Business (1993), where he received the Shermett Award granted to the top 3% of students.

Terry Opdendyk

Terry Opdendyk has specialized in working with technology based start-ups for more than 30 years. He founded ONSET Ventures, a premier Silicon Valley venture capital firm, in 1984. He is Managing Director and General Partner at ONSET.

Prior to launching the firm, Terry was president of VisiCorp, guiding the software publishing company from inception into an industry leader. Early in his career, Terry worked as a technical manager for Hewlett-Packard as a part of the original group of individuals that started HP’s computer business. He later headed Intel Corporation's microcomputer systems business, microprocessor architecture activities, several international ventures and human resources.

At ONSET Ventures, Terry maintains a broad spectrum of investment interests including software, communications and new drug delivery technologies. He serves on the boards of both public and private companies, such as Adaptive Planning, Arcot, Blue Vector, NetSeer, Sentilla, and Truviso.

One of Terry’s passions is teaching. He works with students each year at the leading business schools, focusing on the fundamentals of building successful businesses. He currently is a Fellow at the Lester Center for Entrepreneurship and Innovation at the Haas School of Business, University of California.

Terry received a B.S. from the Michigan State University Honors College and a M.S. from Stanford University.