Management > Finance > Early Stage Capital

Early Stage Capital posted by duggu on 12/7/2007

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Courseware/Lectures

Test/Tutorials

Course Highlights

This course features descriptions of the entrepreneurial field work students complete, including a term sheet and background information for a fictitious company that students will pitch to venture capitalists.

Course Description

15.391 examines the elements of raising early stage capital, focusing on start-up ventures and the early stages of company development. This course also prepares entrepreneurs to make the best use of outside advisors, and to negotiate effective long-term relationships with funding sources. Working in teams, students interact with venture capitalists and other professionals throughout the semester.

Disclaimer: The web sites for this course and the materials they offer are provided for educational use only. They are not a substitute for the advice of an attorney and no attorney-client relationship is created by using them. All materials are provided "as-is", without any express or implied warranties.

Syllabus

Description

How much money can you raise at this difficult time? When should you raise it and from whom? What are the market standards and practices in structuring VC deals? How will your company be valued? These are key questions that face all entrepreneurs, and often have to be answered with insufficient data. This course aims to prepare you for these decisions, both as an entrepreneur and as a potential venture capitalist.

15.391 examines the elements of raising early stage capital, focusing on start-up ventures and the early stages of company development. Emphasizing how the rules have returned to traditional standards in the post-bubble world, we will look at how to negotiate venture capital investments effectively in a very difficult funding environment.

The course consists of two primary components: live case studies and negotiation exercises. Using live interactions with leading figures in the venture finance community, most of the class sessions will analyze fundamental issues of the venture-capital investment process, with a particular focus on demystifying the legalities and jargon of the term sheet.

During the course, students will work in teams to apply the principles in practical negotiations. In two rounds of simulations, the teams will travel to the offices of practicing lawyers and venture capitalists, and attempt to structure the best deal for their businesses. These exercises are designed to both help understanding of the venture capital process, and to foster relationships that can help students as they develop businesses.

Course Requirements

Regular Class Attendance

Participation in class will account for one-third of the grade. Students should be prepared to discuss the case in each class session. There will be friendly cold calling -- these are not clapping for credit war stories but rather live case studies in which participation is critical. Homework problems are preparation for the live cases and will be considered as another component of the class participation grade.

Attendance at every class is expected. Please talk to the professor if you need to miss a class.

Simulations and Team Exercises

This will account for two-thirds of the grade. Grading will primarily reward the process of the exercises, including effectiveness of teamwork and thoroughness of preparation, rather than any particular result achieved.

Students will work in teams (typically three or four people) on three discrete projects: these are described in detail on the projects page.

Find a lawyer
Lawyer strategy round
VC negotiation round

Note

To accommodate the professional participants' schedule, the simulation rounds take place during the week, usually in the evening. You must be able to allocate ~2½ hours (including travel time) on two separate evenings.

Very Important

There will also be an intra-team evaluation at the end of the course (team members get to say who did the work).

Other Important Points

Guests will frequently agree to stay for coffee or an early beer after class to speak informally with a small group of students. The TA will be in charge of coordinating logistics. Please take advantage of these interactions.
Please bring a face card on the first day of class.
Auditors are welcome to the class sessions, as long as they do the readings and are willing to participate in discussions. Priority in seating will be given to those on the waitlist. Only registered students can take part in the simulation rounds.

As this is an H2 (second half of term) only course, with heavy team interaction, it is strongly requested that students planning to drop the course do so before negotiation exercises commence. Please be fair to your colleagues.

Calendar

SES #	TOPICS	KEY DATES
1	Introductory Class: Logistics
Between 1 and 3		Find a lawyer
2	Term Sheets 101	Teams must be formed by end of class Teams must sign up for lawyer and VC rounds by tonight
3	Successfully Raising Money from VCs	"Find a Lawyer" conclusions due, at start of class
Between 3 and 7		Lawyer strategy sessions
4	Seed Financing: Strategy for Getting to a Term Sheet
5	Sector Focus: Biotech
6	Angel Financing: 2 Approaches
7	Compare and Contrast Lawyer Rounds Update on Deal Trends
Between 7 and 11		Venture capitalist negotiation sessions
8	VC Negotiation: What Matters, What Works, What Doesn't
9	Sector Focus: Raising First Round Money in Biotech
10	Going Global: Raising First Round Money for International Ventures
11	Conclusions	Intra-team evaluation

Further Reading:

In addition to the readings listed below, all students should keep up with news related to the course:

Everyone must subscribe to and read through VentureWire Alert on a daily basis for the duration of the course. It's free.
As well, everyone must read the hardcopy of the business section of The Boston Globe on a daily basis for the duration of the course (boston.com provides incomplete coverage of business articles.) Regardless of your opinion of the quality of the Globe's journalism, every VC in Boston reads it and you need to, too. (I assume you read the Journal and FT.)

SES #	TOPICS	READINGS	STUDY QUESTIONS
1	Introductory Class: Logistics	It is essential that all students thoroughly read prior to the first class: 1. Syllabus 2. Find a Lawyer Document 3. Lawyer Simulation Round Document 4. VC Simulation Round Document
2	Term Sheets 101	1. Testa, Hurwitz and Thibeault, LLP's "user friendly" term sheet. 2. Trends in Legal Terms in Venture Financings in the San Francisco Bay Area (Second Quarter 2003). Fenwick & West LLP, 2003. Available at the web site of Fenwick & West LLP. 3. Explanation of Certain Terms Used in Venture Financing Terms Survey. Fenwick & West LLP, 2003. Available at the web site of Fenwick & West LLP.
3	Successfully Raising Money from VCs	Explore EXIT41's web site; business plan extracts and press release about funding to be distributed in session 2. Additionally, the following readings will not be explicitly discussed in class, but are important reference materials for class and simulation purposes: 1. Gworek, Jonathan D. "The Low Down on Start-Ups." Waltham, MA: Morse, Barnes-Brown & Pendleton, P.C. 2000. Available at the web site of Morse, Barnes-Brown & Pendleton, P.C. 2. Miller, Jr., Edwin L., Peter N. Barnes-Brown, and Jeffrey P. Steele. "Venture Capital Financings of Technology Companies." Waltham, MA: Morse, Barnes-Brown & Pendleton, P.C. 2002. Available at the web site of Morse, Barnes-Brown & Pendleton, P.C. 3. Trends in multiple liquation preferences: Henig, Peter. "Fair Game: Extortion-Style Funding Dies an Early (and Timely) Death." Red Herring, 6 September 2002. Available at Red Herring.	1. How can you raise investment capital in this difficult funding environment? 2. What are venture capitalists looking for today? How can an entrepreneur convince potential investors? 3. What are the key issues to think about in successfully negotiating a term sheet?
4	Seed Financing: Strategy for Getting to a Term Sheet		1. What does an entrepreneur need to do before even trying for a formal term sheet? 2. Who are the sources of seed financing and what are they looking for? 3. What are the advantages and disadvantages of pursuing seed money?
5	Sector Focus: Biotech	Weisman, Robert. "Post Peak: Q3 Venture Funding Levels Off." The Boston Globe, 10 November 2003, C1. Available at the web site of The Boston Globe. Kerber, Ross. "Biotech Winners Show Investors Big Potential." The Boston Globe, 10 November 2003, C1. Available at the web Site of The Boston Globe. GenPath Pharmaceuticals, Inc. "Company Profile." 2003. Available at the web site of GenPath Pharmaceuticals, Inc.	1. How does raising money for a biotech firm differ from high tech? 2. What priorities should first time biotech entrepreneurs set in approaching A round funding negotiations? 3. What should biotech entrepreneurs look for in their VCs, in today's environment?
6	Angel Financing: 2 Approaches	Ewing Marion Kauffman Foundation. "Business Angel Investing Groups Growing in North America." October 2002. Available at the web site of the Kauffman Foundation.	1. What are the primary advantages and disadvantages of seeking angel financing in 2003? 2. What are the priority considerations for entrepreneurs contemplating angel investors 3. How do later round VCs view angel investors? 4. How does angel investment differ from conventional first round funding, from a term sheet perspective?
7	Compare and Contrast Lawyer Rounds; Update on Deal Trends
8	VC Negotiation: What Matters, What Works, What Doesn't	Review web site of Kodiak Venture Partners and related links.	1. With experience as both a successful entrepreneur and investor, how do you think strategically about VC negotiations? 2. What provisions in the term sheet do you consider most critical? Why? 3. What cues, verbal and nonverbal, do you look for or watch out for in your negotiations with entrepreneurs? 4. How do you balance pure valuation against the so-called non-financial provisions in term sheet negotiations?
9	Sector Focus: Raising First Round Money in Biotech	Review web site of Oxford Bioscience Partners, Oxford term sheet template.	1. What is different about raising capital for biotech? 2. How are these differences reflected in the term sheets initially offered in this industry? 3. What can you reasonably expect to achieve in a biotech-related term sheet? 4. Tuan Ha-Ngoc, the CEO for GenPath, has been a guest in our class. Oxford just invested in their last $40M round. How did you as the VC approach the financing negotiations?
10	Going Global: Raising First Round Money for International Ventures	Thoroughly review the web site of 3i and links related to international investment.	1. What are the primary pitfalls -- economic, cultural, legal and otherwise -- that derail entrepreneurs seeking early stage international VC investment, and how can they best be avoided? 2. How does the evaluation process for new ventures differ in VC firms that invest internationally? 3. From a term sheet perspective, what are the unique considerations involved in negotiating such an investment?
11	Conclusions	Review the most important materials from previous classes.	1. What have you learned from this course (distinguish between class sessions and the negotiation simulations)? 2. What were the most serious mistakes you made in our negotiations? 3. What potential issues among team members are you now more aware of?