THE WEATHERHEAD SCHOOL OF MANAGEMENT



THE WEATHERHEAD SCHOOL OF MANAGEMENT

Department of MAREKTING AND POLICY STUDIES

ENTP 310: Entrepreneurial Finance - Fall 2002

Peter B. Lewis Building – Room 02

Prof. David L. Deeds

Office: 238 Peter B. Lewis Building Office Hours: By Appointment

Phone: (216) 368-6008 Secretary: Teresa Kabat – 368-2076

E-Mail: dxd52@po.cwru.edu E-mail: tmk4@po.cwru.edu

Texts: The Entrepreneurial Venture – 2nd Edition edited by Sahlman, Stevenson, Roberts & Bhide

CWRU Note

Course Objectives

The objective of this course is to introduce students to the issues of financial management and capital formation in new ventures. The course will address issues of estimation of cash requirements, development of pro-forma financial plans, cash flow management, firm and project valuation, and the process and tools used in raising debt and equity financing.

Grading

Class Participation 30%

Case Write-Up #1 10%

Case Write-up #2 15%

Case Write-up #3 25%

Final Exam 20%

100%

Class Participation (30%):

Class participation is the key to a successful course. Case analysis makes it imperative that you are familiar with the details of the readings and that you have invested a significant amount of thought into diagnosing and solving the problems presented in the case. By the time you get to class you should have a clear idea of the problems facing the company in the case and a potential solution to the problem. During class you will be expected to be able to clearly present and defend your ideas, as you would during any business meeting. You should be prepared to back your arguments up with facts from the case and from quantitative analysis of the case. In addition, if called upon you should be prepared to assume the role of any individual in the case.

Successful case discussions depend less on the volume of comments than on the quality of comments. To this end frequency of contribution will be weighed significantly less than the quality of the contribution. A quality contribution expands the discussion by bringing a new insight or new information to the discussion. In addition, a quality contribution can be defended and supported by evidence from the case. A quality contribution is not a simple opinion, restatement of facts from the case, or re-wording an argument already presented by the professor or another student. I will ask you to evaluate you participation during the semester and I will also provide you with my evaluation of your participation during the semester.

Individual Case Analyses (50%)

Each student will write three case analyses. The first will be worth 10% of the grade. The second will be worth 15 % of the grade. The Third will be worth 25% of the grade. The case should be in the form of a business memo to the CEO of the particular company. CEO's are busy people so be concise and avoid reiterating the facts of the case. I am interested only in clear analysis of the situation and well reasoned recommendations. Case assignments must be handed in by the beginning of the class session in which the case being analyzed is being discussed. No late papers will be accepted.

A good write-up will include and analysis of the current situation, one or more proposed solutions and a recommended course of action. The write-up should not exceed ten pages in length, excluding exhibits.

Final Exam (20%)

The Final Exam will be handed out the last day of class and due in my office 12/13. The final is an individual assignment and students are expected to work independently.

The Case Method: Why We Rely on Discussion Learning

Approximately two-thirds of our class time will be spent discussing business cases. Why do we rely on the case method so extensively? The case-study method brings a “real world” approach to business education in at least three important ways. First, case discussions generate a dynamic process of vigorous questioning and responding, examination and debate among students and discussion leader. Because entrepreneurial finance is often characterized by ambiguity, complexity or uncertainty, this course is more about asking the right questions than it is about knowing the right answers. Rather than simply lecture about the current state of “best practices,” we recognize that theories change over time while reasoning skills survive. The case method helps students to refine their skills as insightful questioners, rather than just good answer-finders. After all, it’s the journey more than the destination that matters. In addition, discussion learning requires all students to participate actively in the learning experience. Your degree is about more than just acquiring a tool box of analytical skills. It is also about developing the ability to contribute to group learning so that we expand the boundaries of everyone’s learning. Just as in entrepreneurship, there is no formula that you can follow for every case. Nevertheless, over the course of the semester, students gradually build on the combination of theory and analysis, judgment and experience to develop for themselves the ideas that the teacher seeks to communicate. While the case method requires a high level of student commitment, it also causes students to personally engage the problem and “own” the solution, so that the case method is inherently a student-oriented process. Walter Wriston has said, “Good judgment comes from experience. Experience comes from bad judgment.” As in the “real world,” the case method replicates the trial-and-error experience of seasoned managers, thereby deepening judgment. It also does so in the low risk environment of the classroom where career casualties are not at stake.

Second, the case method trains students to think as administrators (rather than as scholars), so that they: (1) see a problem looking for solutions rather than a concept looking for applications, (2) focus on defining and prioritizing a maize of tangled problems and determining which one(s) to attack with the limited time available, (3) appreciate differing agendas and points of view, and (4) take action, not just report findings.

Third, by linking analysis with individual action taking, the case method encourages moral awareness by requiring students to take a stand. The give-and-take of case discussion often brings to the surface subtle ethical dilemmas that might otherwise be missed. The case method helps students learn to assess and embrace the tradeoffs among different stakeholders’ interests. The case method requires students to use all of their knowledge, skills and experience to respond in real time to the questions raised in class and to effectively communicate their ideas to their classmates and help to lead them to a greater shared understanding of the problem at hand. Thus, the students become the teachers.

In sum, we teach with case studies because the method embodies important values of professional education. The case method is not simply a technique; it is a rich philosophy about judgment, analysis, action and learning. (Adapted from an article by Robert F. Bruner).

While our applications will emphasize exercise of judgment, by no means is this course “theory free.” We will learn to break down complex problems into manageable analytical issues to which we can apply a rigorous set of theoretical tools. Most of these analytical approaches in our will be covered in the required readings prior to each case. These readings have been carefully selected to convey often complex topics in a concise, understandable manner. In general, I have emphasized managerially relevant readings and spared you the pain of reading pointy-headed, scholarly-type articles. Since these readings articulate much of the theoretical content of the course, they will be crucial to your comprehension of our course concepts. It is extremely important that you read, study (and preferably discuss with each other) this material when assigned so that you will be able to apply it to our case discussions.

The key requirement of this course is that you THINK. This course requires that you synthesize material that you have learned in prior classes in your business education in conjunction with new concepts we will introduce. I will ask that you add a dose of common sense and filter these ideas through your own experiences and “world view.” We will reach consensus on some issues, yet many among you will have differing interpretations as we proceed through the course. This is the nature of strategy and policy

Individual Assignments

During the semester there will be several problem sets, computer assignments and brief papers assigned. These will be due on the day assigned. Late assignments will not be accepted. The assignments and the due dates are listed on the schedule.

Final Exam

The exams will be given in class. They will be a combination of short essays and problems. Students will need to bring a calculator to class on exam days. No make up exams will be given except under extreme conditions.

Schedule

|Date |Topics |Readings & Cases |

|8/27 |Introduction to The Course | |

|8/29 |Opportunity Recognition |S&S Ch. 1 & 4 |

|9/3 |Financial Management For Entrepreneurs |S&S Ch. 3 & 14 |

|9/5 |Forecasting Financial Statements |CWRU Note |

| | |Ch2: Financial Ratio Analysis |

| | |Ch3: Forecasting Financial Statement |

| | |Ch4: Projecting Cash Flows |

|9/10 |Forecasting Financial Statements |No Reading – In Class Exercise |

|9/12 |Forecasting Financial Statements |Assignment #1: Pro Forma Financials |

|9/17 |Business Plans & Deals |S&S Ch. 9 & 10 |

|9/19 | |CWRU Note Case: Heather Evans |

|9/24 | |CWRU Note Case: Heather Evans |

|9/26 |Seed Capital |S&S Ch. 12 & 13 |

|10/1 |Seed Capital |CWRU Note Case: Interzine Productions Inc. |

| | |Case Write-up #1 Due |

|10/3 |Seed Capital |CWRU Note Case: Interzine Productions Inc. |

|10/8 |Valuation |CWRU Note: Valuation as a source of insight |

| | | |

| | |CWRU Note: A note on valuation in private equity settings |

|10/10 |Valuation |CWRU Note A note on free cash flow models |

| | |Assignment #2: Valuation Exercise |

|10/15 |Valuation |CWRU Note Case: Chemdex |

|10/17 |Valuation |CWRU Note Case: Chemdex, continued |

|10/24 |Fall Break – No Class | |

|10/26 |Business Angels |Hand-Out – Freer, Grinde & Sohl – “The Early Stage Financing of High-Tech |

| | |Entrepreneurs” |

| | |CWRU Note: The Band of Angels |

|10/29 |Business Angels |CWRU Note: The Band of Angels, continued |

|10/31 |Venture Capital |S&S Ch. 15 & 16 |

|11/5 |Venture Capital |S&S Ch. 18 & 19 |

|11/7 |Venture Capital |CWRU Note Case: Crystal Dynamics |

| | |Case Write-up #2 Due |

|11/12 |Venture Capital |CWRU Note case: Crystal Dynamics, continued |

|11/14 |Going Public |S&S Ch. 23 |

|11/19 |Going Public |CWRU Note: So You Want to Go public |

| | |CWRU Note: Preparing a Company for an Initial Public Offering |

|11/21 |Going Public |CWRU Note Case: Teleswitch |

| | |Case Write-up #3 Due |

|11/26 |Going Public |CWRU Note Case: Teleswitch, continued |

|11/28 |Thanksgiving Break | |

|12/4 | |S&S 11 & 26 |

|12/6 | |CWRU Note Case: Peter Jepsen |

|12/13 | | |

Study Questions for Cases

1. Heather Evans

A. What are the strengths & weaknesses of Heather Evans Business Plan?

B. Which Investors should she pursue?

C. What’s Heather Evans worth?

D. What would your key concerns be as a potential investor?

2. Interzine Productions

A. What methods of ‘Bootstrapping’ did Henley employ?

B. What were the benefits of the AOL deal? Was it a good deal for Interzine?

C. What have been the keys to Interzine’s early success?

D. Where should Henley turn to for his next round of financing?

3. Chemdex

A. How much money does Perry need to raise?

B. Who should be raise it from?

C. What’s Chemdex worth?

D. Does the business model make sense?

4. The Band of Angels

A. How does ‘The Band of Angels’ work?

B. What do these Angels offer to entrepreneurs?

C. What should Walter of Austin James do?

D. Should Jones of Clearvox take the Angels money?

5. Crystal Dynamics, Inc.

A. How long until CDI is out of cash?

B. Why was CDI attractive to Kleiner, Perkins?

C. Use the VC Valuation process to determine CDI’s value

D. Assume that the VC’s in vested $1 million in round #1 and $1.7 million in round #2. What’s the ownership structure of CDI if they get the Movie Deal? If the VC’s have to invest $5 million additional? What if Zelnick raises $10 million at $4 per share?

E. What should Zelnick do?

6. TeleSwitch

A. Evaluate Teleswitch’s decision to go public, their choice of underwriter and their management of the IPO process to date.

B. Assess the valuation approach used by each of the perspective underwriters. What value would you have put on Teleswitch in November 1996?

C. What should Goodman do at this juncture with respect to the choice of an underwriter and the company’s financing options?

7. Peter Jepsen

A. What critical errors has Jepsen made?

B. If you were a board member how would you evaluate Jepsen’s performance to date?

C. What should Jepsen do about Armstrong?

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