COURSE NO: MBA295B.1

Cross-listed with EWMBA

COURSE TITLE: Venture Capital and Private Equity

UNITS OF CREDIT: 3

INSTRUCTOR: Jerome S. Engel, Sean Foote

E-MAIL ADDRESS: engel@haas.berkeley.edu

CLASS WEB PAGE LOCATION (HTTP URL):

MEETING DAY(S)/TIME: Wednesday, 4:00-7:00 PM

PREREQUISITE(S): Students are strongly encouraged to have completed Entrepreneurship [MBA 295A] and Corporate Finance (MBA231), or have comparable work experience.

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; volume two

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 VentureOne 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.

These patterns are even more dramatic overseas. Recent rates of growth in foreign private equity markets have outstripped the United States by a wide margin. In many European nations, for instance, the size of the private equity funds raised has increased by 40% or more annually over a number of recent years. At the same time, the size of foreign private equity pool remains far below the United States. This suggests considerable possibilities for future growth. The disparity can be illustrated by comparing the ratio of the private equity pool to the size of the economy. In 1995, this ratio was 8.7 times higher in the United States than in Asia, and 8.0 times higher in the United States than in continental Europe. 

At the same time, 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. 

BIOGRAPHICAL SKETCH:

Jerome Engel has been involved with the formation and growth of entrepreneurial ventures for over twenty-five years. Over this extended period he has earned a reputation as an entrepreneur, educator and advisor. Active in academe, venture capital, business consulting and community affairs, his current positions include:

Executive Director, THE LESTER CENTER FOR ENTREPRENEURSHIP AND INNOVATION, University of California at Berkeley, 1991 - present. As founding Executive Director, responsible for the creation of an institution that coordinates all of the university's activities in the areas of entrepreneurship and innovation.

Adjunct Professor, Walter A. Haas School of Business, Entrepreneurship, New Venture Finance, Venture Capital & Private Equity. Instructs in both the School’s MBA and Executive Education curricula.

Board of Directors or Advisors of a number of private high potential early stage companies and venture capital firms.

Industrial Advisory Board, LAWRENCE BERKELEY NATIONAL LABORATORY. Advise senior management on privatization and commercialization strategies related to emerging technologies.

Entrepreneur-in-Residence, Ewing Marion Kauffman Foundation. Faculty Director of the Centers’ Lifelong Learning for Entrepreneurship Educators Program

Previous Business Management and Principal Investor experience:

From 1979 through 1990 Mr. Engel was the San Francisco Bay Area Director of Entrepreneurial Services for Ernst & Young. Promoted to Partner in 1982, Mr. Engel specialized in consulting on capital formation, corporate strategy and management organization of entrepreneurial ventures, with an emphasis in software and biotechnology. In 1990 Mr. Engel was appointed Ernst & Young's National Director of Capital Resources, where he directed the firms efforts in raising capital for its emerging business clients nationwide. From 1992-1995 Mr. Engel served as a member of the Board of Directors of Maxis Corporation, and oversaw the company's financing activities, which included venture capital and a successful initial public offering. Between 1995 and 1998, Mr. Engel was a founding general partner in Kline Hawkes & Co., and its respective venture funds: Kline Hawkes California and Kline Hawkes California SBIC LP. Founded in 1995, the funds raised combined capital of $112 million from a group of investors led by CalPERS. The funds invested in start-up, middle market and expansion-stage enterprises with a focus on technology, including software, information systems and communications. During his tenure as a general partner with Kline Hawkes, Mr. Engel lead investments in eight technology and health care enterprises, representing a total investment of approximately $29 million. To date these investments have yielded proceeds in excess of $86 million. Mr. Engel left the firm in 1998, to pursue other investment and entrepreneurial opportunities and continue his commitment to the Lester Center and the University. These ventures have included notable successes including co-founding AllBusiness.com (which returned over 13x to its Series A investors) and angel investment and Advisory Board support of LeapFrog Enterprises (which returned over 40x to its Series A investors).

In addition to Mr. Engel’s current positions, he has served on the Boards of a number of emerging companies including MicroNet Technology [acquired by Ampex], Transoft Inc., a rapidly growing provider of FiberChannel Network Attached Storage [NAS} solutions [acquired by HP], and Centric Software, a leader in 3-D visualization and virtual product prototyping. During his career, Mr. Engel has helped a number of entrepreneurial firms go public, including AutoDesk and Fair Isaac Companies. But most important in Mr. Engel’s career has been his endeavors for the last thirteen years at the University of California, Berkeley, where his efforts have contributed to the creation of one the of the country’s foremost entrepreneurship programs.

Mr. Engel received his formal education at Penn State University and the University of Pennsylvania, Wharton School. He lives with his wife in San Rafael, California. Their two children are undergraduates at the University of California, Berkeley.