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GRADUATE SCHOOL OF BUSINESS Winter Quarter 2014 Stanford University S354.2

Entrepreneurship and Venture Capital

John W. Glynn and Peter Ziebelman

Course Outline and Study Questions

Class 1: Tuesday, January 7

Guest: John Taylor, Vice President, The National Venture Capital Association

Readings: Entrepreneurship and Venture Capital

Introductory Memorandum and Course Description

“Why the Lean Start-up Changes Everything,” by Steve Blank, Harvard Business

Review, May 2013

“Some Conceptual Underpinnings Which May Be Helpful in

Preparing Case Studies”

“Private Equity Glossary”

"How to Choose and Approach a Venture Capitalist," by G. J. Tankersley, Jr.

"Venture Capitalists: Deciphering Their Language"

"How Venture Capital Works," by Bob Zider, Harvard Business Review,

November, 1998, #98611

“The Composite Venture Capitalist,” by John Glynn

“What Venture Trends Can Tell You,” by William Meehan, Harvard Business

Review, July 2003, #F 0307D

NVCA 2013 Annual Yearbook

www.nvca.org/2013Yearbook

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Class 2: Thursday, January 9

Case: Note on Angel Financing, GSB E-440 dated 08/23/2012

Guest: Mike Maples, Managing Partner, Floodgate

Readings: http://www.flagcapital.com/media/3861/insights_2011_january_-

_the_super_angel_phenomenon.pdf

http://www.xconomy.com/san-francisco/2011/06/09/how-mike-maples-and-ann-

miura-ko-are-opening-the-floodgates-on-early-stage-tech-entrepreneurship/

http://www.xconomy.com/san-francisco/2011/06/13/mike-maples-and-ann-miura-

ko-on-the-limits-of-incubators-the-right-fund-size-and-the-true-meaning-of-pivot/

“So, You Want To Be An Angel Investor?” Wall Street Journal, December 2,

2013 by Sara Needleman

"A Perspective on Entrepreneurship," by Howard H. Stevenson , Harvard

Business School, #9-384-131 dated 04/13/2006

“Angel Investing By The Numbers,” Sim Simeonov, PEHub

http://www.pehub.com/75795/angel-investing-by-the-numbers/

“VCs and Super Angels: The War for the Entrepreneur”,

Techcrunch, 08/15/2010

http://techcrunch.com/2010/08/15/venture-capital-super-angel-war-entrepreneur/

“Super Angels versus Venture Man”, The Brenner Group

http://banner.thebrennergroup.com/2010/12/17/super-angel-versus-venture-man/

Study Questions:

1. What is angel investing? Is it a hobby? A vocation? A business? Describe the

nature of the angel relationship with the entrepreneur. What can you expect from

becoming an angel? Describe the ‘reward’ system for angels.

2. How does angel investing compare with traditional venture capital? How does the

VC industry influence angel investing? What value can angels contribute to VCs?

What value can VCs contribute to angels?

3. What is the profile of the emerging class of investment professionals (known as

super-angels or micro VCs)? What are the competitive advantages and disadvantages

that these groups have over angels or traditional VCs?

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Class 3: Tuesday, January 14

Case: The Founders Fund, GSB E-309 dated 08/04/2008

Guest: Beth Benjamin

Readings: “The Pricing of a Venture Capital Investment,” by Jane K. Morris in Pratt’s

Guide to Venture Capital Sources, pp 55 – 61

“Seed Financing Survey 2012,” by Fenwick & West

http://www.mondaq.com/unitedstates/x/230246/Venture+Capital/Seed+Finance+

Survey+2012

“Can Founders Scale?” by Beth Benjamin and Charles O’Reilly

Study Questions:

1. Evaluate the pros and cons of the Founders Fund’s approach to venture capital. What

are the critical strengths and weaknesses of their strategy?

2. Do you agree with FF’s assessment of the drawbacks afflicting traditional venture

capital firms? Why or why not? Will FF be “disruptive” to the venture capital

industry? Why or why not?

3. Assume that you are a Founders Fund partner. Prepare to deliver a one-minute

“elevator pitch” on the Founders Fund for the potential limited partner that you have

just walked in to see.

Class 4: Thursday, January 16

Case: Western Technology Investment, GSB E-217, dated 02/07/2006

Guest: Maurice Werdeger

Readings: Venture Leasing: A Form of Venture Lending, GSB E-147 dated 01/14/2003

"Screening and Analyzing Business Plans," by Suzanne Hooper King of

New Enterprise Associates

"The Art vs. the Science of Venturing," by Brian Dovey of Domain Associates

Study Questions:

1. How does venture leasing differ from traditional venture capital firms? How are they

similar?

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2. Evaluate Westech’s competitive position with regards to other venture lessors, banks,

finance companies and venture capitalists?

3. What are the pros and cons of a “generic” venture leasing transaction with

Quinstreet? Should Westech lend funds to Quinstreet?

4. Regardless of your answer above, assume that Westech will lend funds to Quinstreet.

How much should Westech lend? In what form(s) should the loan(s) be? What

should Westech’s IRR be for the non-warrant portion of the loan(s)? Propose the

other terms and conditions for the loan(s). Most specifically, collateral, warrant

coverage, term, payment schedule, and essential restrictions or conditions.

Class 5: Tuesday, January 21

Note: Your Business Idea Summary is due on CourseWork by noon today. For more

detailed information please see CourseWork under “Assignments.”

Case: Startup Capital Ventures, GSB E-247, dated 02/02/2007

Guest: John Dean, Managing General Partner, Startup Capital Ventures

Study Questions:

1. Assess the venture capital market in China in 2008. Is it becoming a more or less

attractive market for investors? What does a VC firm need to consider as it enters a

foreign market such as China?

2. Should StartUp Capital Ventures (SCV) continue investing in China? If so, what

strategy should Danny Lui employ to compete in the market today?

3. Evaluate Danny Lui and John Dean’s current responsibilities to the SCV fund and to

the two Zero2IPO funds. How should Danny and John partition their time so that it

matches deal flow amongst the three funds? Would you recommend any changes in

their respective roles? Why or why not?

4. Examine the dynamics of the Limited Partner exerting pressure on Danny and John.

What should you say in response to the concern regarding mission drift? How should

you update your LLPs on China’s investment climate?

Class 6: Thursday, January 23

Case: Corporate Venture Capital Vignettes, GSB E-131 dated 07/02/2002

Guest: Nancy Kamei, formerly of Intel Capital

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Readings: "Can Big Companies Become Successful Venture Capitalists?"

McKinsey Quarterly, 1998-2

“Do Corporate Venture Capitalists Add value to Start-Up Firms? Evidence from

IPOs and Acquisitions of VC-Backed Companies,” Financial Management,

Spring 2010

Study Questions:

1. How do corporate VCs differ from financial VCs? What advantages, if any, do

corporate VCs have over financial VCs? What disadvantages do they have relative to

financial VCs?

2. Compare and contrast the venture investing activities at Intel, Microsoft, and

Xerox with respect to strategy, structure, recruiting and incentives, investment

evaluation process, and measures of success. Be sure to consider the following

questions in your analysis:

a. What are the real drivers of the investment effort? How closely linked are these

efforts to the corporate strategy?

b. What is the relationship between the venture group and the parent company?

c. Who runs the venture group? How are these people recruited, compensated and

retained?

d. What is the focus of the evaluation process? Who is involved?

3. Why do you think that Xerox ultimately terminated XTV, given that it appeared to be

a successful entity with an extremely high IRR?

4. As Ron Flores, how would you go about establishing a corporate VC group at

AllTech? What do you think are the traits of a successful corporate VC group? What

are some of the tradeoffs you must consider?

Class 7: Tuesday, January 28

Case: Case & SQs to be distributed

Guest: Kittu Kolluri, NEA General Partner

Class 8: Thursday, January 30

Case: “Feedback at FiberTower”

“Building a Feedback Positive Organization”

Guest: Scott Brady, Sloan ‘00, CEO, Slice.com

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Study Questions:

1. Whose responsibility is it to hire new employees for the start up? CEO? Angels or

Venture Capitalists? Other board members? HR vice president? Recruiters? How

do these groups assist the hiring process?

2. Describe the hiring process during the early days at FiberTower. Could this hiring

process work in a current start up?

3. Describe the management feedback process at FiberTower. Is there a role for the

investor (who is also a board member) in this feedback process? How does the

investor (board member) receive feedback on their role?

Class 9: Tuesday, February 4

Note: Your “First 3 Slides” presentation is due on CourseWork by noon today. This

class will extend until 6:30 pm to allow for all teams to present their 3 slides. For more

detailed information please see CourseWork under “Assignments.”

Case: A Day in the Life of a Venture Capitalist, GSB E-444 dated 09/05/2012

Study Questions:

1. Describe the various roles or activities where a VC will spend his/her time. If you are

a partner in a venture firm (in the 3rd year of your latest fund), describe the relative

portion of your time spent on these activities.

2. Characterize the ‘investment funnel’ for a venture capitalist. How many

entrepreneurs does he/she need to meet to produce a completed investment?

3. You are on 6 boards. You have an opportunity to spend significant time researching

and courting a 7th investment that could be very profitable. At the same time, one of

the CEOs of your portfolio companies has just told you they will be well short of this

year’s forecast and he needs your advice. You need to investigate to see if this is a

market issue, a product issue, a VP of sales issue or perhaps a CEO issue. Since you

are time is limited, where do you choose to spend your time?

Class 10: Thursday, February 6 (NO CLASS)

Class 11: Tuesday, February 11 (Women in VC)

Case: Case & SQs to be distributed

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Guests: Rebecca Lynn - Morgenthaler Ventures

Sharon Wienbar - Scale VP

Patricia Nakache - Trinity Ventures

Readings: “Stocks Perform Better if Women Are on Company Boards,” by Heather

Perlberg. http://www.bloomberg.com/news/2012-07-31/women-as-directors-

beat-men-only-boards-in-company-stock-return.html

“Women make better corporate leaders than men, study finds,” by Stuart Pfeifer.

http://articles.latimes.com/2013/mar/27/business/la-fi-mo-women-make-better-

corporate-leaders-than-men-study-finds-20130327

“Women Take Charge,” by Liz Bolshaw. Venture Capital Journal, July 2010.

http://gender.stanford.edu/women-entrepreneurs-0

Study Questions:

1. What is the percentage of women investors in venture capital and what are some

factors that contribute to this low percentage? Do you expect the low rates of women

venture capitalists to increase or decrease in the coming years?

2. Does the low rate of women investors in venture capital result in lower rates of

funding for women entrepreneurs?

3. How did Patricia Nakache become a venture capitalist and what are work-life balance

questions that women venture capitalists face that men often do not have to confront?

4. How does Sharon Wienbar and Scale Venture Partners recruit for associates and

executives in their portfolio companies and how might that help or hurt with finding

women candidates?

Class 12: Thursday, February 13

Case: Cadence Vs. Avant!, GSB E-61(A) dated 06/02/2003

Guest: Peter Chen

The (B) case will be distributed in class and there will be time to read and

discuss it.

Readings: “Introduction to Patent Law,” by Fenwick & West

http://www.fenwick.com/publications/pages/legal-faq-introduction-to-patent-

law.aspx

“A Patent Portfolio Development Strategy for Start-up Companies,” by Fenwick

& West

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http://www.fenwick.com/fenwickdocuments/patent_portfolio_dev.pdf

Study Questions:

1. What forces are shaping the EDA industry? How have these forces contributed to the

current legal showdown?

2. Put yourself in Joe Costello’s position. How could you have better protected your

company’s intellectual property? How should you proceed with the current situation?

3. Put yourself in Gerald Hsu’s position. How could you have better developed the

requisite intellectual property while protecting Avant! from legal problems? How

should you respond to the latest Cadence lawsuit?

4. Put yourself in the position of a venture capitalist Avant! board member. What are

your responsibilities relating to intellectual property development? What should you

do now?

5. In the (B) case, who are the winners?

Class 13: Tuesday, February 18

Case: Case to be distributed

Guests: David Hornik and Nick Sturiale

Readings: “Venture capital’s new golden age,” by John Backus and Todd Hixon,

Contributors, CCN Money

http://finance.fortune.cnn.com/2012/05/21/venture-capitals-new-golden-age/

“The VC Shakeout”

http://hbr.org/2010/07/the-vc-shakeout/ar/1

“It Ain’t Broke: The Past, Present, and Future of Venture Capital”

http://www.people.hbs.edu/jlerner/KaplanLerner.JACF.pdf

Bill Gurley, Benchmark Capital, http://www.pehub.com/170133/bill-gurley-lps-

you-blowing-it/

Study Questions:

1. What are the differences between venture capital investing in enterprise startups

versus consumer startups?

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2. What is it about David Hornik that made Splunk founders more comfortable with him

after increasingly diligence?

3. Describe the Splunk technology and how do you size up the market opportunity it is

addressing?

4. You are a Splunk founder. How do you decide who to raise venture capital from and

how important to you is company valuation versus having the right venture firm and

board member?

5. As a Splunk founder, what factors do you weigh as you think about selling the

company versus an IPO and building for the future?

Class 14: Thursday, February 20

Case: Case & SQs to be distributed

Guest: Emerick Woods, CEO, Talari Networks

Class 15: Tuesday, February 25

Case: Social Finance (SoFi), GSB, October 2011. Additional information will be posted

on CourseWork.

Guest: Mike Cagney, Sloan 2011, SoFi Co-founder and CEO

Study Questions:

1. As a venture capitalist evaluating SoFi, what are the key viability issues that you are

concerned about? Please rank them in order of importance.

2. Take a look at www.Sofi.com to understand their rate of expansion. Are they

expanding quickly enough? Or too quickly?

3. Should SoFi use its investment capital to fund loans? Why or why not?

4. How could SoFi take advantage of community features connecting students and

alumni?

Class 16: Thursday, February 27

Case: Peter Levine, GSB E-166 dated 04/01/2004

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Study Questions:

1. Evaluate the career choice for Peter to become a venture capitalist versus pursuing a

CEO or COO opportunity in a smaller technology company. How transferable are his

operating skills and management background to the venture business? Are different

skills required for success in the venture capital business?

2. Based on Peter’s background, do you think he is better suited for a career in venture

capital or as a senior manager in a technology company? If he chooses venture

capital, would you guess he is a long-term player in the venture field?

3. Evaluate Peter’s decision-making process. What, if anything, should he have done

differently? What advice would you give him in reaching a final decision about his

career choice?

4. If you were in Peter’s position, what kind of balance would you seek between family

and the demands of work and the Silicon Valley culture? Is it possible, in your mind,

to accomplish this balance? If so, how do you achieve it?

Class 17: Tuesday, March 4

Case: Retail Sports Incorporated, GBS E-65 dated February 1999

Readings: “Welcome to the Unicorn Club: Learning from Billion-Dollar Startups,” by

Aileen Lee, TechCrunch, November 2, 2013

Study Questions:

One of the most challenging tasks for a venture capitalist is dealing with chief executives and/or

founders who can no longer handle their responsibilities effectively and grow with the company.

These are very tough personal and professional issues. We like to put them off in time and hope

they go away. My own experience is that with the benefit of hindsight, we wished that we had

acted earlier. I have some general and specific questions for you to consider in preparing this

case. First, the general questions:

1. Venture capitalists and vulture capitalists are not synonyms. Venture capitalists have

important responsibilities to management, shareholders, employees, customers and

creditors in a company. Keep these responsibilities in mind as you review each of the

vignettes in this case.

2. The concept of “failure is OK” is a key part of the culture of a successful company.

What is failure and what does the acceptance of failure mean to an entrepreneurial

founder/manager and a venture capitalist? Failure is real but real failure is when you

turn a win into a loss. What is the half-life for any CEO of a young company?

In addition to these thoughts, please prepare the following specific questions for the Retail Sports

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case:

1. Compare and contrast the three scenarios (e.g., participants, company conditions,

time period, board composition). Are there any characteristics or trends which would

indicate the likelihood of transitioning the CEO?

2. Evaluate Almond’s options. If you were his advisor, which option would you

suggest? Explain your reasoning and outline a set of implementation steps for him.

3. Evaluate Miller’s negotiation approach with Asher. Should the Board of Directors

agree to Asher’s vesting demands? Why or why not? What impact does this decision

have on the company?

4. Should Coleman remove himself as Chief Executive Officer? If so, when and how?

Class 18: Thursday, March 6

NOTE: Your Business Model Canvas is due on CourseWork by noon. For more detailed

information please see CourseWork under “assignments”.

Case: Case & SQs to be distributed

Guest: Craig Dauchy, Cooley LLP

Readings: Note on Private Equity Partnership Agreements, HBS 9-294-084 dated

04/20/2011

“Legal Resource Guide for Start-up Entrepreneurs,” by Fenwick & West

http://www.jdsupra.com/legalnews/legal-resource-guide-for-startup-entrepr-

31997/

“Explanation of Certain Terms Used in Venture Financing Terms Survey,” by

Fenwick & West

http://www.fenwick.com/publications/pages/explanation-of-certain-terms-used-

in-venture-financing-terms-survey.aspx

Class 19: Tuesday, March 11

Presentation Day to VC panel

Note: Your investor presentation is due on CourseWork by noon today. This class

may extend until 7:30 pm to allow for all teams to present their slides. A light dinner will

be served. For more detailed information please see CourseWork under “Assignments.”

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Class 20: Thursday, March 13

Summary Day

Readings: Ewing Marion Kaufmann Foundation Report dated May 12, 2012, “We have met

the enemy . . . and he is us.” http://www.kauffman.org/uploadedFiles/vc-enemy-

is-us-report.pdf

“Myths About Venture Capitalists,” by Diane Mulcahy, Harvard Business

Review, May 2013

“Fenwick & West’s Silicon Valley Venture Capital Survey for Third Quarter of

2013”

http://www.fenwick.com/publications/pages/silicon-valley-venture-survey-third-

quarter-2013.aspx