The Peter F. Drucker and Masatoshi Ito Graduate School of Management
Claremont Graduate University
MGT 724: Entrepreneurial Finance
Instructor: Luann Bangsund, Ph.D.
Email Address: luann_bangsund@kgi.edu
Phone:
909-607-0182
Date/Time of class:
Tuesdays, 7:00pm to 10:00pm
Office Hours: By appointment with professor
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COURSE OBJECTIVES:
This course addresses the challenges faced by entrepreneurs as they seek financing for new ventures.
Most finance classes offered by business schools focus on firms in the later stage of a firm’s life cycle
when growth, profitability and cash flow are stable and predictable. Unlike the mature firms that have the
extensive capital markets available to them for financing, the financial performance of startup companies
is generally unpredictable. As a result, the sources and the nature of financing available to these young
firms are significantly different from those of established firms. As a young firm moves through the new
venture life cycle, the sources of financing changes. We will examine the types of financing available
during each of the stages.
In addition to identifying financing sources available to new ventures, we will address methods of
valuation used by venture capitalists and other investors when considering investing in early stage firms.
Investors in new ventures need to apply different methods of valuation than those used for established
firms because at the time of their initial investments, the new venture has not produced positive cash flow
(or, perhaps, has not yet even generated any sales) and therefore the traditional methods of valuation do
not apply. We will address how these alternative valuation methods compare and/or contrast with the
valuation methods used by established firms.
During the early stages of a new venture’s development, the entrepreneur is faced with negotiating the
deal terms of the financing with the investors. These terms include the cost of the financing and the
percentage of ownership given to the investors. We will examine how these terms change as the firm
grows and consider the value of the terms from both the entrepreneur’s and the investor’s perspective.
Finally, we will examine the alternatives for investors to realize a return on their investment through
“harvesting” of the investment. Many entrepreneurs are making a lifestyle choice when they start their
own business and therefore plan to continue to own the business indefinitely. Most venture capitalists,
however, are investing with a relatively short time-period in mind. As a result, entrepreneurs need to
address how the venture capitalists will be able to exit the investment within five to ten years from the
initial investments. We will examine several alternative exit strategies and the impact of each strategy
on the entrepreneur and the investors.
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The Peter F. Drucker and Masatoshi Ito Graduate School of Management
Claremont Graduate University
COURSE FORMAT:
The course is taught using the case method. Each class session will be for three hours, in which the first
half of the class is a case discussion based on the material covered in the lecture of the prior week. The
case discussion will also draw from content covered in the assigned readings for the week. Discussion
questions for each case will be provided to guide the discussion; however, students should make
themselves familiar with any and all information found in the case (including the financial exhibits) in
preparation for the class discussion.
REQUIRED READINGS:
Luecke, Richard, Entrepreneurs’ Toolkit: Tools and Techniques to Launch and Grow Your New Business
(Harvard Business Essentials), Harvard Business School Press, December 2004 (ISBN: 978-1591394365)
A packet of readings and a book of cases, both available at the bookstore
GRADING:
The course is highly participatory and students are expected to contribute significantly to the learning
experience through the class discussions. Just showing up does not count toward participation – active
and contributive discussion is required.
Because class participation represents a large percentage of grading, more than one absence will
have a negative impact on a student’s grade.
Grading will be determined as follows:
Final case write-up
Participation
Percentage of course grade
45%
55%
ACADEMIC DISHONESTY:
The case method requires that each student come fully prepared and ready to participate in each class.
Coming to class unprepared and relying on your fellow students to carry the conversation is a form of
academic dishonesty. It is not different that copying another student’s homework and submitting it as
your own.
There will be a take-home case due at the end of the semester. Each student must prepare the write-up
of the assigned case working independently.
LEARNING OBJECTIVES:
Students who successfully finish the class should be able to:
1. Identify various sources of financing available to young, high-growth companies
2. Explain the difference between the different sources of financing and when each source
of financing is appropriate
3. Determine a value for a firm using the following valuation methodologies
a. Discounted Cashflow
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The Peter F. Drucker and Masatoshi Ito Graduate School of Management
Claremont Graduate University
b. Relative Value Method (multiples)
c. Venture Capital Method
4. Explain the difference between the various valuation methods and when each method is
appropriate
5. Analyze a term sheet for a new venture financing
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The Peter F. Drucker and Masatoshi Ito Graduate School of Management
Claremont Graduate University
Entrepreneurial Finance
Date
Topic
Introduction to Entrepreneurial Finance
Week 1
Evaluating Opportunities:
Read: Toolkit, Chapters 1-5
Case: NSK Technologies
Sources of Venture Financing
Week 2
Strategic Partnerships and Alliances
Read: Toolkit, Chapter 6; Appendix A
Case: The Knot
Week 3
Angel and VC Financing
Read: Toolkit, Chapter 7
Case: Honest Tea
Week 4
Bank Financing
Case: Xedia and Silicon Valley Bank
Valuation
Week 5
Read: A Note on Valuation in Entrepreneurial Ventures
Case: Digital Everywhere
Deal Structure
Deal terms and term sheets
Read: 1) The Early Stage Term Sheet and
2) Deal Structure and Deal Terms
Week 6
Case: Term Sheet Negotiations for Trendsetter
Harvesting
Week 7
Exits
Read: Toolkit, Chapter 8 and 11
Case: Right Now Technologies
Finals Week
Final case write-up due
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The Peter F. Drucker and Masatoshi Ito Graduate School of Management
Claremont Graduate University
Discussions Questions for NSK SoftwareTechnologies case
1. Where did the idea for NSK come from?
2. Is there market potential for this product? Is this the right time to start this business?
3. Are these guys the right ones to pull it off? What are their backgrounds? What skills do they
lack?
4. Is Israel the right place? Does Israel support entrepreneurial activity?
5. Who should they approach for financing? Is $125,000 enough?
Discussion Questions for The Knot case
1. Does this management team have the skills and capabilities to lead “The Knot” forward
from this point? Who is missing from the team?
1. What is good about this market? (Be careful: You first need to accurately define the market
they are in) Who are the competitors?
2. What is The Knot’s relationship with AOL? Was this a good deal for them?
3. What are the funding needs? How much money do they need? What is the money for?
4. Who should finance The Knot? What kind of investor (angel, VC, strategic partner)? Why?
Discussion Questions for Xedia and Silicon Valley Bank case:
1. What need did the founders of Silicon Valley Bank (SVB) identify, which provided the
opportunity for the founding of the bank? Has the bank been successful?
2. What is SVB’s strategy? Is it viable?
3. What business is Xedia in? How has it changed over time? Why did it change?
4. How has Xedia done financially? In terms of income? Cash flow?
5. What have been the sources of financing used by Xedia’s management up to the time of the
case?
6. What is driving Xedia’s current need for financing? How do you think Xedia’s current
investors will feel about a bridge loan from SVB?
7. Is Xedia a good credit risk? If not, should SVB make the loan anyway? Why?
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The Peter F. Drucker and Masatoshi Ito Graduate School of Management
Claremont Graduate University
Discussion Questions for Honest Tea Case:
1. How is Honest Tea doing? What milestones would you utilize to measure their
performance?
2. What do they need to do now to be successful in the future?
3. How much financing does the company need and for what purpose?
4. How have they financed the business up until this point?
5. From the investors’ viewpoint, do you like the approach they have taken? Why or why not?
6. Should the founders accept the offer from the venture capital firm?
Discussion Questions for Digital Everywhere
A comment: This case provides an opportunity to apply different valuation methods to a set of
projections. The valuation methods are described in the assigned supplemental readings.
1. Calculate the cash flows for each year using the cash flow definition from “A Note on
Valuation in Entrepreneurial Ventures.” (Note: You don’t have depreciation but by using the
change in Net Fixed Assets in place “capital expenditures” (defined as change in gross fixed
assets), your cash flow will be correct).
2. How much cash does Jerome need to get his business started? How much in the first year?
How much in the second year?
3. How does Jerome plan to finance the growth? Be specific by looking closely at the balance
sheet.
4. Use the “venture capital” method to value Digital Everywhere in year 6. (Hint: You will be
multiplying year 6 net income by a PE ratio. To figure out what PE to use, look at the
information provided about comparable companies).
5. Based on your valuation from above, determine the percentage of ownership the VC firm
needs if they invest $3 million into the business and require a 60% IRR. (Hint: How much
does the $3 million investment need to be worth in year 6?).
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The Peter F. Drucker and Masatoshi Ito Graduate School of Management
Claremont Graduate University
Discussion questions for RightNow Technologies
1. Evaluate the progress of the company and its situation in 2003.
2. What are the advantages and disadvantages of each of the options being considered by Greg
Gianforte? Selling to the large software company? Going public? Continuing with the
current ownership?
3. As a venture capital investor in the case, what is the lowest price at which you would agree
to sell? As Gianforte, what is the minimum price?
4. Based on the data in the case, what is a fair value for RightNow? If the company hits its
forecasts, what will it be worth in the future?
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