Entrepreneurial FinanceSemester:4AClass:MBA

Instructor:Dr. Salman KhanEmail:salman.khan@lums.edu.pk

Room #4-08Telephone:(042)35608220

Office Hours:TBDSecretary/TAHassan Haider

COURSE OVERVIEW

Entrepreneurial Finance is designed to help managers make better investment and financing decisions in entrepreneurial settings. The course covers all stages of the process, from startup to harvest. Approximately one-third of the cases concern technology-based businesses, though the emphasis is on gaining insights into entrepreneurial management, not technology per se. The course focuses more attention on deal structuring and incentives. There is a module on emerging trends in entrepreneurial finance, covering the financing of clean tech startups well as the rising importance of Angel investors.

Though the course is called Entrepreneurial Finance, the course differs in philosophy and style from a course like First Year Finance which is designed to focus on the numbers and the analytical techniques for gaining insight. Entrepreneurial Finance integrates people into the equation by taking into account their capabilities, their incentives, and the cognitive biases they bring to decision making. Students should not take the course as a remedial finance course. The course will go into greater depth than possible in the First Year with respect to structuring multi-staged financings, understanding business models, and valuing entrepreneurial ventures.

The course is aimed primarily at students who may be involved in an entrepreneurial venture at some point in their careers whether in a large organization, a turnaround, a management buyout or a startup. The course will also be useful for future private equity decision makers. The course has been divided into following modules:

1. Issues and alternative business venture financing options2. Venture Capitalists Principles and Due Diligence3. Startup valuation4. Structuring Deals5. Splitting Equity and Compensation

LEARNING OUTCOMES

The students will be able

[LO-1] To identify and evaluate the issues and alternative business venture financing options [LO-2] To learn and understand the venture capitalists principles and due diligence process[LO-3] To demonstrate the mathematics of startup valuation[LO-4] To structure a deal [LO-4] To split equity and assess compensation related issues.

MBA PROGRAM LEARNING GOALS & OBJECTIVES

1. Leadership and teamwork: Students will be able to assume leadership roles, perform leadership tasks responsibly, and work effectively in teams.2. Functional, integrative and strategic abilities: Students will demonstrate understanding of the functional and strategic aspects of business and management, be able to integrate across functional areas, and develop feasible strategies and action plans.3. Critical thinking and decision making: Students will be able to identify key problems, collect and use information critically, and generate viable alternatives and solutions.4. Global perspective and flexibility: Students will demonstrate understanding of global and multi-cultural perspectives within the local context and be able to work effectively in multi-cultural settings.5. Social, ethical, economic and environmental responsibility: Students will be able to understand the broader ramifications of their decisions and assess the impact of economic, ethical, environmental factors on the policies, strategies and operations of the organization. 6. Effective communication: Students will be able to communicate clearly and persuasively in writing and verbally, in ways appropriate for a variety of objectives and audiences.7. Entrepreneurialism and innovativeness: Students will be able to create, identify, assess, shape and act on opportunities in a variety of contexts and organizations.8. Managing pressures, complexities and uncertainties: Students will be able to manage pressures and resource constraints, and think, decide and act in complex and ambiguous situations.

Indicate below how the course learning objectives specifically relate to any program learning goals and objectives.

Program Learning Goals and ObjectivesCourse Learning ObjectivesCourse Assessment Item

Goal 1 Leadership and Teamwork

Goal 2 Functional, integrative and strategic abilities [LO-1, LO-2, LO-3, LO-4, LO-5]Class ParticipationQuizzes/AssignmentsFinal Exam

Goal 3 Critical Thinking Decision making capabilitiesThe students will be able to advance their critical thinking and decision making capabilities. Class ParticipationFinal Exam

Goal 4 Global perspective and flexibilityThe students will demonstrate evaluating and decision-making in a global multi-cultural setting. Class ParticipationFinal Exam

Goal 5 Social, Ethical, Economical and Environmental ResponsibilityThe course will help students to distinguish their decisions given social and ethical issues. Class Participation

Goal 6 Communication competency

Goal 7 Entrepreneurialism and innovativeness

Goal 8 Managing pressures, complexities and UncertaintiesThe students will be able to take position on various issues given the information uncertainties and defend it.Class ParticipationFinal Exam

COURSE ASSESSMENT/GRADES

1) Class Participation 35%2) Assignment / Quizzes 25% 3) Final Exams 40%

1) Class Participation The class participation will be graded according to following rules:The scale is -2,-1,0, 1, 2, 3, 4-2 or -1: Attitude problems, cause class disturbance, absences 0: No participation , unprepared, causes distraction (making irrelevant point without properly listening the question or earlier comment), left the class for a limited time0-1: Participation with relevant data, methodology or formulation i.e., case or background note related facts.1-2: Analytical participation with good reasoning using case facts2-3: Analytical participation with ideas built on others ideas/opinions3-4: Analytical participation with new insights developed from others ideas/opinions

2) In Class Exercises / QuizzesIn Class Exercises: The students will be given the exercise sheet during or at the end of the session. These will be short exercises and should be completed within the specified time.

Quizzes: The class will have minimum four surprise quizzes during the course. The quizzes will be non MCQ format. The quizzes will be graded based on the criteria i.e., subject knowledge (definition, criteria, transaction, some important terms etc.) and quality assessment (clarity, comprehension, organization of material, persuasiveness, well developed argument etc).

3) Final ExamsThe students will receive a case and an answer booklet with pre-specified three to four questions for written analysis. The space for answering the question will be pre-allocated in the booklet. The exam will test the students functional knowledge (i.e., subject), critical thinking and decision making capabilities, communication competency, innovativeness and the students ability to managing time pressure. The exam will be closed book, A4 size pre written formula sheet (both sides) will be allowed along with calculators.

CLASS-MANAGEMENT POLICY

Please consult MBA handbook for attendance, timelines and norms of professional conduct.

COURSE REQUIREMENTS

Pre-requisite: Financial Management Other Requirements: Basic understanding of economic and financial concepts and issues, concepts related to time value of money. Strong analytical capabilities with research and Communication skills.

RECOMMENDATION FOR FURTHER EDUCATION

Identification of additional courses or sources of knowledge and practice for greater and in-depth understanding and proficiency.

RECOMMENDED TEXTBOOKS/SUPPLEMENTARY READINGS ( if Applicable)

-A course pack consisting of all the reading material will be provided to the participants.

- Entrepreneurial Finance: Strategy, Valuation, and Deal Structure, Janet Kiholm Smith, Richard L. Smith,Richard T. Bliss, Stanford University Press.

REQUIREMENTS (FOR PCO OFFICE)

Midterm Exam:No

Final Exam:YesExam Format: Case Analysis (3 to 4 Questions to be answered)Closed Book/ Closed Notes, One A4 Cheat sheet allowed.

Double Session:No

Joint Session (combined of two sections):No

Simulation:No

Video Recording:No

IT Lab sessionsNo

Additional session or review sessionNo

Course Cap (applicable for elective courses)Standard Cap in an Elective Course is 50No

Any other requirement (e.g. laptop/computer etc.):No

OTHER REQUIREMENTS

Session No.Topic:TITLE OF CASEREADING MATERIALLEARNING OBJECTIVESThe Student will be able to

Module 1- (Introduction to Venture Financing)

Session 1Basics of venture capital financingNew Venture Financing, HBS Note (13 Pages)Describes the various financing alternatives available to new ventures.

Session 2Issues in funding potential startupsNeverfail Computing, BABSON case (22 Pages)Understand what constitutes a high-potential company that attracts professional venture capital. Also, to discuss the deficiencies of an "imperfect" high-potential start-up.

Module 2-(Venture Capitalists Principles and Due Diligence)

Session 3Theoretical venture analyticsWalnut Venture Associates (A): RBS Group Investment Memorandum, HBS Case (32 Pages)Analyze new ventures and due diligence; more specifically, to analyze which issues/assumptions are critical, and how they can be resolved.

Session 4Venture risk management-IValhalla Partners Due Diligence, HBS Case (20 Pages)Gain real-world insight into the process of due diligence and the way it is used to manage risk.

Session 5Venture risk management-IIOnset Ventures, HBS Case (30 Pages)Explore the activities required to successfully manage a venture-capital firm and the principles of investing.

Module 3-(Valuing a Startup)

Session 6Startup valuationFunding New Ventures: Valuation, Financing and Capitalization Tables, HBS note (5 Pages)Explain the concept of implied valuation i.e., the valuation that can be inferred from a financing event--and how such valuations and financings are represented in a "cap" or capitalization table for a new venture.

Session 7Issues in venture valuationA Note on Valuation of Venture Capital Deals, HBS Note (13 Pages)Learn some fundamental issues of valuation in venture capital deals. The topics discussed are not necessarily limited to venture capital-backed companies, but they frequently surface in entrepreneurial companies financed either by venture capitalists or other private equity investors.

Module 4 -(Understanding deal structuring)

Session 8Understanding deal structuring Deal Structure and Deal Terms, HBS note (8 Pages)Describe the general principles of crafting financial deals around the provision of capital to entrepreneurial ventures. Discusses in more detail some of the specific aspects of venture capital term sheets.

Session 9Venture analyticsSpiffyTerm, Inc.: January 2000, Stanford case (12 Pages)Recognize the term sheets commonly used in venture capital deals.

Session 10Investment strategyCar Wash Partners Inc., HBS case (26 Pages)Discuss the investment strategy and deal structuring.

Session 11Issues in venture deal structuringEndeca Technologies (A), HBS case (22 Pages)Learn the nuances of financing deals, the importance of keeping your options open, and the fact that sometimes, due to no fault of the company, market realities can impose onerous terms.

Module 5 (Splitting Equity and Compensation)

Session 12Equity breakup analysis NanoGene Technologies, Inc., HBS Case (11 Pages)Describe a company during the start-up phase and focuses on the founders' decisions regarding splitting the equity and compensation. Also considers establishing policies and practices that will set the tone for the company as it grows.

Session 13Complete venture capital scenarioSports in Your Pocket (A), HBS case (11 Pages)Address several issues dealing with entrepreneurship, including identification of opportunities, valuation and, most important, partnership splits among founding partners.

Session 14Complete venture capital scenarioSaras Options, HBS case (8 Pages)Understand stock option valuation.

Statistical Summary

Number of Cases10

Number of Readings4

Total Number of Pages in Course Material233