Slide 1
Venture Capital Investing
Overview of the Course
And
Overview of Private Equity
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 2
Agenda
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Introductions
Administrative stuff
What is this course all about?
What are you going to learn?
What are we going to do in class?
What are the rules of engagement?
Overview of private equity
Next class…
70-397 Venture Capital Investing
Fall 2002
© William C. Hulley
Slide 3
Andrew W. Hannah
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Current Status: CEO, PolyTronics, Inc.
Past positions:
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Senior Managing Director: Internet Venture Works (2000 –
2001)
CFO: STORM, LLC (1999 – 2000)
CFO: Internet Securities (1995 – 1999)
SR. Manager: Deloitte & Touche (1987 – 1995)
Education
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MBA: Finance and Marketing – Katz (University of
Pittsburgh)
BS: Accounting – (Pennsylvania State University)
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 4
A Jump Off the Deep End
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Internet Securities, Inc. (1995 – 1999)
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The Bloomberg of emerging markets
Being ahead of the curve creates buzz
Being ahead of the curve has its problems
Financing History:
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70-397 Venture Capital Investing
Series B:
Series C:
Series D:
Sub Debt:
SVB Financing:
Series E (Euro$):
Sale of Company:
$ 300,000
$ 4,800,000
$ 7,000,000
$ 1,500,000
$ 1,750,000
$11,000,000
$47,000,000
Fall 2002
© Andrew W. Hannah
Slide 5
Why Take on Microsoft?
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STORM (1999 – 2000)
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Favorable diligence does not always equal success
Speed is life
Microsoft is king
Remember who you are
Financing History:
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70-397 Venture Capital Investing
Series B:
SVB Financing:
$5,000,000
$750,000
Fall 2002
© Andrew W. Hannah
Slide 6
Timing Matters
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Internet Venture Works (2000 –
2001)
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The concept works
The model doesn’t
Pulling out of the spiral
Its not your money
Financing History
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70-397 Venture Capital Investing
Series B:
VentureBank:
$15,500,000
$ 1,000,000
Fall 2002
© Andrew W. Hannah
Slide 7
What Made the Difference?
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Internet Securities
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STORM
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We could change the world
Boot strap
“We” are going to be rich
Prudent exuberance
Internet Venture Works
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Riches come before the work
Spend first, justify later
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 8
Your Experience With:
Investments
Angel Investing Venture Capital
Class Work
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2
Work
Experience
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Your Hard
Earned Dollars
12
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0
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah
Slide 9
Administrative Stuff
My Contact Information
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e-mail
phone
cell
office
hours
ahannah@andrew.cmu.edu (preferred)
412 268 8832
412.977.7778 (Only if important)
231F, Center for Entrepreneurship, GSIA
Tuesdays, 5:15pm to 6:15pm, by appt
My Administrative Assistant is Ann Grekila
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e-mail
phone
office
70-397 Venture Capital Investing
ag19@andrew.cmu.edu
412.268.3704
231, Center for Entrepreneurship, GSIA
Fall 2002
© Andrew W. Hannah and William C. Hulley
Slide 10
What is this Course All About?
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Making private equity investments
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Building a portfolio of such deals
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Finding deals
Evaluating their relative merits
Estimating their ultimate value
Determining an overall investment strategy
Developing tools and processes to implement that strategy
Managing the deals that are made as a result of it
The context in which investments are made
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Capital markets and competition - their effect on risk and return
Investor circumstances – how context colors decision making
70-397 Venture Capital Investing
Fall 2002
© William C. Hulley
Slide 11
What Will You Learn?
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The investment process and lifecycle
The venture and angel equity market
The language of private equity
Performing diligence
Developing a valuation analysis
Decoding deal contract terms and structure
Most importantly, you will understand how investors develop,
present, make and defend private equity investment decisions.
70-397 Venture Capital Investing
Fall 2002
© William C. Hulley
Slide 12
What are We Going to Do in Class?
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Develop a foundation of the definitions, theory and basic tools
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Apply, through cases and in-class projects, tools and process
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How do I develop deal sources? What is competitive diligence?
Present project work for critical review
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What is diligence? How is pre-money valuation determined?
Diligence presentations, comparative analysis of companies
Meet real-world practitioners
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What matters in deal structure? How is valuation determined?
For the most part, you will learn theory by lecture and doing the
assignments and come to understand its practical application
through in-class exercises, cases, discussions and panels.
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah and William C. Hulley
Slide 13
The Rules of Engagement
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Read the syllabus, assignments and project information
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If you don’t understand something, ask
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Believe it or not, I might not have stated something clearly!
Be prepared to be judged by real-world rules
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Expectations, grading, due dates, format are all there
Hints for success are usually there, too
Be on time: 6:30 to 9:00
Be able to present and participate at all times
Good grades are the result of
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Doing the work requested – reading, assignments and projects
Demonstrating interest – original thought, advance preparation
Demonstrating care – accuracy, attention to detail
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah and William C. Hulley
Slide 14
How Will You Be Graded
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20%:
20%:
10%:
25%:
25%:
70-397 Venture Capital Investing
Sum of the weekly assignments
Class preparation and participation
Midterm project write up and presentation
Final project write up
Final project presentation
Fall 2002
© Andrew W. Hannah
Slide 15
Overview of Private Equity
Who Invests in Private Equity
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An Introduction to the Venture Investor
70-397 Venture Capital Investing
Fall 2002
© William C. Hulley
Slide 16
Sources of Entrepreneurial Equity
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Self Financing – credit cards, savings, personal debt
Vendor Financing – inventory, payables, receivables
Bank Financing – revolvers, balance sheet, lines of credit
Family and Friends – loans, common stock, partnerships
Public Sector – SBIR, SBA, DARPA, BFTC, PTIA
Venture Investors (VIs)
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Angels – high net worth individuals and families
Venture Capitalists – professional investment fund managers
Corporate Capitalists – strategic investment fund managers
70-397 Venture Capital Investing
Fall 2002
© William C. Hulley
Slide 17
Focus: Venture Investors (VIs)
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Angel Investors
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Venture Capitalists
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Are paid to generate above-market returns
Typically invest with a particular stage, market, return in mind
Corporate Capitalists
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Have made money doing something else
Typically invest close to home and expertise
Are paid to generate returns and corporate synergy
Typically have a very narrow industry or technology focus
All three have common characteristics
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Build portfolios of deals over a long period of time
Have established and use clear selection criteria
Have developed a process for sourcing, evaluating and valuing
Are subject to market pressures that affect their perception of risk/return
70-397 Venture Capital Investing
Fall 2002
© William C. Hulley
Slide 18
Who are These People?
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Angel Investors
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Typically invest $10,000 to $250,000
Make as many as one hundred times as many investments as VCs
Are much more likely to invest in seed and early stage deals
Are much more likely to syndicate or share deals with others
Venture Capitalists
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Typically invest $1MM to $10MM
Are much more likely to invest in early to late stage deals
Are much less likely to syndicate (Until recently)
In 1999 There were approximately 600 firms in the United States
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70-397 Venture Capital Investing
About 3800 investment professionals
With $134B under management
Making approximately 7000 new or follow-on investments
Fall 2002
© Andrew W. Hannah and William C. Hulley
Slide 19
What Do VIs Think About?
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Sourcing
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Evaluating
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how do I negotiate terms, valuation, control?
Supporting
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who owns what? who control what?
Negotiating
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what’s it worth?
Structuring
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what makes a good deal good?
Valuing
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how do I find quality opportunities?
what do I commit besides money?
Harvesting
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how do I make money?
70-397 Venture Capital Investing
Fall 2002
© William C. Hulley
Slide 20
Next… Questions We Might Ask
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Are venture and angel investors different?
Does portfolio theory matter?
How do investors decide what kinds of deals to do?
How do investors gather information?
How do investors make investment decisions?
How are valuation, contract terms and expectations related?
How are valuation, terms and competition related?
What happens after you write the check?
70-397 Venture Capital Investing
Fall 2002
© William C. Hulley
Slide 21
For The Next Class
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WA pp 1 – 27
Info Card A: Summarize an interesting article
about venture capital
70-397 Venture Capital Investing
Fall 2002
© Andrew W. Hannah