Department of Finance Subject Outline 333-308 Finance for New Ventures Semester 1, 2003 http://finance.ecom.unimelb.edu.au/TestingArea/CS/current_student.cfm?content=333308.cfm & http://webraft.its.unimelb.edu.au/cgi-bin/portal

Subject Description The course covers si sues associated with financing entrepreneurial ventures, and the valuation and investment issues associated with new ventures. Major topics include investment analysis, financing the new venture, harvesting, and renewal in the entrepreneurial firm. The course covers entrepreneurial finance, venture capital and general principles of investing in high (biotechnology, information technology, ebusiness) and low technology. Lecturer Dr André Gygax, Room 213, Office Hours: Friday 2.00-4.00 pm Phone: 8344 3537, email: [email protected] Class Times and Venues Wednesday: 2:15pm - 4:15pm Wood Teleteaching Theatre

333-308, Semester 1, 2003 Tutorials DAY Tuesday Tuesday Tuesday Thursday Friday Friday

TIME 10:00am - 11:00am 11:00am - 12:00pm 12:00pm - 1:00pm 9:00am - 10:00am 10:00am - 11:00am 11:00am - 12:00pm

VENUE Ec & Co-G05 Tute 5 Ec & Co-G06 Tute 6 Ec & Co-G06 Tute 6 Ec & Co-G04 Tute 4 Ec & Co-G05 Tute 5 Ec & Co-G06 Tute 6

Students are expected to attend a tutorial, one hour in duration, each week (commencing in the second week). Students are to enrol in tutorials via the ALLOC8 system. Please note that tutorial solutions will only be available in tutorials. The names of the staff member allocated to each tutorial will be advised when available.

Subject Objectives On successful completion of this subject students should be able to: •

Gain an understanding of the issues confronting entrepreneurial firms;

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Explain the products and services offered by venture capitalists;

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Explain the major risks faced by entrepreneurs and venture capitalists;

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Develop a framework of analysis for business opportunities;

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Develop advanced valuation skills;

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Solve case studies.

Assessments The two projects are group assignments that should be analysed in teams of three students. Assessment 1 Assessment 2 Assessment 3

Assignment 1 Assignment 2 End of semester exam

Friday, March 21, 3.00 pm Friday, May 2, 3.00 pm

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15% 15% 70%

333-308, Semester 1, 2003

Policy on Calculators in Examinations Any calculator that can be programmed and/or that can display a graph and/or that has a full alphabetic keyboard will not be permitted in any examination in this subject. The department website contains further information on complying and non-complying calculators. It is the responsibility of each student to ensure that the calculator they take into an examination complies with this rule. If any student in an examination is found in possession of a non-complying calculator, the calculator will be confiscated for the period of the examination. Note that it is not sufficient merely to switch off a calculator’s programming capacity. In addition, the student will be in breach of university regulations governing examinations, the penalties for which may include: • exclusion from the university, either permanently or temporarily; • imposition of a fine; • deprivation of credit for the subject or for a component of assessment of the subject; • termination of enrolment.

Plagiarism Plagiarism Plagiarism is the presentation by a student of an assignment which has in fact been copied in whole or in part from another student’s work, or from any other source (eg published books or periodicals), without due acknowledgment in the text. Collusion Collusion is the presentation by a student of an assignment as his or her own which is in fact the result in whole or part of unauthorised collaboration with another person or persons. All students must sign a declaration for each assignment that it is their own work and does not involve plagiarism or collusion. For further information, please see the plagiarism site on the TLU website: http://www.ecom.unimelb.edu.au/tluwww

Standardisation Policy The final mark for this subject may be adjusted in accordance with the Faculty’s standardisation guidelines. The Faculty’s policy on assessment on undergraduate subjects can be found at: http://www.ecom.unimelb.edu.au/current/assessment.html

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333-308, Semester 1, 2003 Prescribed Text Gompers, Paul A., and William Sahlman, 2002, Entrepreneurial Finance – A Case Book (New York: John Wiley). [UniM ECO 658.15224 GOMP].

Supplementary References Some of the following sources are referred to on particular topics. Even where not specifically referenced they provide a valuable alternative source. Dollinger, Marc J., 2002, Entrepreneurship: strategies and resources, third edition (Upper Saddle River, NJ: Prentice Hall). [UniM ECO 658.421 DOLL]. Gompers, Paul A., and Josh Lerner, 1999, The venture capital cycle (Cambridge, Mass.; London: MIT Press). [UniM ECO 332.04150973 GOMP]. Gompers, Paul A., and Josh Lerner, 2001, The money of invention: how venture capital creates new wealth (Boston: Harvard Business School Press). [MBS 658.15224 GOMP]. Leach, J. Chris, and Ronald W. Melicher, 2003, Entrepreneurial finance (Mason, Ohio: Thomson/South-Western). [UniM ECO 658.15 LEAC]. Lerner, Josh, and G. Felda Hardymon, 2002, Venture capital and private equity: a casebook, second edition (New York: John Wiley). [MBS 332.04150973 LERN]. Sautet, Frédéric E., 2000, An entrepreneurial theory of the firm (London: Routledge). [UniM ECO 338.5 SAUT]. Smith, Richard L., and Janet Kilholm Smith, 2000, Entrepreneurial finance (New York: John Wiley). [UniM ECO 658.15224 SMIT]. Vesper, Karl H., 1993, New venture mechanics (Englewood Cliffs, N.J.: Prentice Hall). [UniM ECO 658.11 VESP].

Class Notes, Problem Sets, Assignments, Reading Lists A workbook is available at the University Bookshop and on closed reserve in the Baillieu library. All class notes, problem sets, assignments and reading lists will be available from the subject web page.

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333-308, Semester 1, 2003 Lecture Outline Date Lecturer

Topic

5/3

AG

Notes & Case Preview Module 1: Investment Analysis Introduction to Finance for Note: Introduction to New Ventures Entrepreneurial Finance Case: The Knot

12/3

AG

Sources of Value

19/3

AG

26/3

AG

Understanding Financial Statements and Pro Forma Models Purchasing Firms, Buyouts, and Valuation

2/4

AG

9/4

AG

16/4

AG

30/4

AG

7/5

AG

14/5

AG

21/5

AG

28/5

AG

Note: Some Thoughts on Business Plans Case: Cachet Technologies Case: Fenchel Lampshade Company

Note: A Note on Valuation in Entrepreneurial Ventures Case: Digital Everywhere,Inc. Real Options Note: Capital Projects as Real Options: An Introduction Case: Penelope’s Personal Pocket Phones Module 2: Financing the Entrepreneurial Firm Venture Capital: Note: A Note on Private Equity Securities Case: edocs, Inc. (A) Angel Financing, Venture Notes: Leasing, and Franchising 1) A Note on Angel Financing 2) Note on the Venture Leasing Industry 3) A Note on Franchising Case: Honest Tea Banks, Licensing/Strategic Notes: Alliance, and Government 1) A Note on Strategic Alliances Financing 2) A Note on Government Sources of Financing for Small Business Case: Xedia and Silicon Valley Bank Module 3: Harvesting the Entrepreneurial Venture Initial Public Offerings Note: A Note on the Initial Public (IPOs) Offering Process Case: Amazon.com – Going Public Acquisitions Case: Nantucket Nectars Module 4: Renewal in the Entrepreneurial Enterprise Renewal in the Case: Dell Ventures Entrepreneurial Firm Australian Venture Capital Act – An outlook

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333-308, Semester 1, 2003 Administration • Students must activate their University of Melbourne email account. You can redirect your email to your preferred email account. •

Students are responsible for familiarising themselves with the University of Melbourne guidelines for both assessed work and conduct.

Assistance The Faculty Teaching and Learning Unit, 2nd floor Babel building, provides individual assistance with written work and with learning skills. Contact Dr Carol Johnston on 8344 9699 [email protected] or Anna Jones on 83449700 [email protected]. You can also see their website: http://www.ecom.unimelb.edu.au/tluwww

Special Examinations • There are no supplementary examinations in units taught by this Faculty, but the examiners may require candidates to be present for further written or oral tests to be held before the publication of results. Candidates are warned that only very short notice of these tests can be given and it is important that they can be reached at the address held by the University. •

The Department of Finance endeavours to give students a week's notice of their eligibility to sit a special test. However, where an exam has been held late in the examination period or where there is a heavy marking load, it may be possible to give only 48 hours notice. If a student fails to sit a special exam (for whatever reason) they should not expect to be offered another exam.

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Special consideration may be granted for a variety of reasons. Applications must be lodged with the Faculty Office on the official form no later than three days after the relevant examination. Further details relating to special consideration appear in your Student Diary. Please note that applications for special consideration do not automatically entitle a student to the right to sit a special exam.

Student Responsibilities The University is obliged to ensure that the information students need to plan their courses is accurate, timely and generally available. Much of this information is provided through this University Handbook, the Student Diary which is provided upon enrolment, and the Student Information System. In turn, students have responsibilities that include the following: • to be well informed about courses and course requirements; • to plan a course which satisfies course requirements; • to attend all set classes; • to be aware of rights and obligations – see the Student Diary for the most comprehensive coverage; • to abide by the University's rules and regulations.

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333-308, Semester 1, 2003

Lecture 1 Readings Leach, Chris J., and Ronald W. Melicher, 2003, Entrepreneurial Finance (Mason, Ohio: Thomson/South-Western). Chapter 1: Introduction and overview.

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333-308, Semester 1, 2003

Lecture 2 Readings Calvin, Robert J., 2002, Entrepreneurial management (New York, London: McGrawHill). Chapter 1: Writing a business plan or a strategic plan. Dollinger, Marc J., 2002, Entrepreneurship: strategies and resources, third edition (Upper Saddle River, NJ: Prentice Hall). Chapter 5: The business plan.

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333-308, Semester 1, 2003

Lecture 3 Readings Smith, Richard L., and Janet Kiholm Smith, 2000, Entrepreneurial finance (New York: Wiley). Chapter 6: Methods of financial forecasting.

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333-308, Semester 1, 2003

Lecture 4 Readings Leach, Chris J., and Ronald W. Melicher, 2003, Entrepreneurial Finance (Mason, Ohio: Thomson/South-Western). Chapter 10: Venture capital valuation methods.

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333-308, Semester 1, 2003

Lecture 5 Readings Trigeorgis, Lenos, 1995, Real options: an overview, in Real options in capital investment: models, strategies, and applications, edited by Lenos Trigeorgis (Westport, CT: Praeger Publishers). Willner, Ram, 1995, Valuing start- up venture growth options, in Real options in capital investment: models, strategies, and applications, edited by Lenos Trigeorgis (Westport, CT: Praeger Publishers).

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333-308, Semester 1, 2003

Lecture 6 Readings Fuerst, Oren, and Uri Geiger, 2003, From concept to Wall Street (Upper Saddle River, NJ: Financial Times Prentice Hall). Chapter 10: Venture capital funds. Gompers, Paul, A., 1999, Resource allocation, incentives and control: the importance of venture capital in financing entrepreneurial firms, in Entrepreneurship, small and medium-sized enterprises and the macroeconomy, edited by Zoltan J. Acs, Bo Carlsson, and Charlie Karlsson (Cambridge: Cambridge University Press). Hellmann, Thomas, and Manju Puri, 2002, On the fundamental role of venture capital, Federal Reserve Bank of Atlanta Economic Review, fourth quarter, 23-27. Hellmann, Thomas, and Manju Puri, 2002, Venture capital and the professionalization of start-up firms: empirical evidence, Journal of Finance 57(1), 169-197. Sahlman, William A., 1990, The structure and governance of venture-capital organizations, Journal of Financial Economics 27, 473-521.

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333-308, Semester 1, 2003

Lecture 7 Readings Harmon, Steve, 2001, Zero gravity 2.0: launching technology companies in a tougher venture capital world (Princeton: Bloomberg Press). Chapter 10: Angels among us. Hellmann, Thomas, and Manju Puri, 2000, The interaction between product market and financing strategy, Review of Financial Studies 13(4), 959-984. Lambing, Peggy, and Charles Kuehl, 1997, Entrepreneurship (Upper Saddle River, NJ: Prentice-Hall). Chapter 10: Franchising. Mason, Colin M., and Richard T. Harrison, 2002, Is it worth it? The rates of return from informal venture capital investments, Journal of Business Venturing 17, 211-236.

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333-308, Semester 1, 2003

Lecture 8 Readings Afuah, Allan, 1998, Innovation management: strategies, implementation, and profits (New York, Oxford: Oxford University Press). Chapter 15: Role of national governments in innovation. Beck, Thorsten, and Ross Levine, 2002, Industry growth and capital allocation: does having a market- or bank-based system matter? Journal of Financial Economics 64, 147-180. Hellmann, Thomas, 1997, Venture capital: a challenge for commercial banks, Journal of Private Equity, Fall. Vesper, Karl H., 1993, New venture mechanics (Englewood Cliffs, NJ: Prentice-Hall). Chapter 5: Inside equity capital.

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333-308, Semester 1, 2003

Lecture 9 Readings Lerner, Joshua, 1994, Venture capitalists and the decision to go public, Journal of Financial Economics 35 (3), 293-316. Jenkinson, Tim, and Alexander Ljungqvist, 2001, Going public: the theory and evidence on how companies raise equity finance. New York, Oxford: Oxford University Press. Chapter 2: Stylized facts. Ritter, Jay R., and Ivo Welch, 2002, A review of IPO activity, pricing, and allocations, Journal of Finance 57 (4), pp. 1795-1828.

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333-308, Semester 1, 2003

Lecture 10 Readings Gompers, Paul A., 1995, Optimal investment, monitoring, and staging of venture capital, Journal of Finance 50 (5), 1461-1489. Kensinger, John W., John D. Martin, and J. William Petty, 2000, Harvesting value from entrepreneurial success, Journal of Applied Corporate Finance 12 (4), pp. 81-93.

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333-308, Semester 1, 2003

Lecture 11 Readings Audretsch, David B., 1995, Innovation, growth and survival, International Journal of Industrial Organization 13, 441-457. Holtz- Eakin, Douglas, David Joulfaian, and Harvey S. Rosen, 1994, Sticking it out: entrepreneurial survival and liquidity constraints, Journal of Political Economy 102 (1), 53-75.

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333-308, Semester 1, 2003

Lecture 12 Readings Ferris AO, W.D., 2001, Australia chooses: venture capital and a future Australia, Australian Journal of Management 26, Special issue, 45-64. Taxation Laws Amendment (Venture Capital) Act 2002, Commonwealth Act No. 136, 2002 Venture Capital Act 2002, Commonwealth Act No. 137, 2002

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