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Phil Ferneau D'84, T'96, Managing Director, Borealis Ventures
Devin Mathews T'00, Senior Associate, Great Hill Partners
Ernie Parizeau D'79, T'84, Managing Partner, Norwest Venture Partners
Jonathan Perl T'97, Kauffman Fellow, Boulder Ventures

Visit Date: October 21, 2002
Class Topic: Best Practices

Center for Private Equity and Entrepreneurship: All of you went to Tuck and went on to have careers in private equity. How is the landscape different today than it was when you were students?

Parizeau: Well, the knowledge that MBA students have about private equity finance is tremendous now compared to what it was then. They know more now than I did after two years in the business. There was no private curriculum at that time, so I am very impressed by what I have seen here today.

Ferneau: A simulation exercise is terrific because, while you can teach the mechanics of private equity finance in the classroom, the challenge is to give students the opportunity to respond to the more complicated scenarios that emerge in real-life deal-making. The VIC is still an artificial construct, but it's better than anything else out there in business education.

Center for Private Equity and Entrepreneurship: Private equity is often called an "apprentice career"—one where students learn best through exposure to and mentoring by real firms and executives. That's why the VIC uses real companies seeking real funding; it forces the students to justify their decisions to practitioners who are faced with similar situations on a regular basis.

Ferneau: They get to have the experience of "pulling the trigger," as it were. That's a good gut-check lesson to learn early on.

Perl: In 1996, when we put the private equity course together, I remember discussing the idea with LPs and GPs who lamented the lack of private equity knowledge among Tuck grads compared to grads from other business schools. They were thrilled we were developing the course. The industry is much less opaque now than it was before because of courses like this.

Parizeau: One subtle aspect that comes out in the VIC exercise is the fact that students realize that they need to be able to sell the various business plans to their investing partners—above and beyond doing the basic analytical work of evaluating the companies for themselves.

Mathews: I hope the exercise helps Tuck students see that there is less magic to this business than lots of people think. Personally, I have more nerve than brains and have gotten a long way just by being nice to people and keeping myself well informed on the issues they care about. If you're going to a meeting in Denver, you'd better make sure you've read up on how the Broncos are doing before you get off the plane! (General laughter.)

Parizeau: I was surprised at how many of the groups made multiple investment choices. In other words, many of them didn't just pick one company in which to invest capital.

Ferneau: You could see them weighing the relative risks of taking one big bet or spreading the money around, thinking "Gosh, what if I'm wrong? I'll be working at the 7-11!" And there's something to that logic: There are no second acts for failed venture capitalists.

Center for Private Equity and Entrepreneurship: Where do entrepreneurs fall down when they are writing business plans?

Mathews: It's extremely important to make clear how a product or service creates value. Unfortunately, a lot of entrepreneurs answer that question by saying, "Growth, growth and more growth!" But the most compelling companies always have a more nuanced answer that is focused on the product or service itself.

Perl: ROI analysis from the customer perspective is very impressive. In other words, entrepreneurs should be able to answer the question "What kind of return is the customer going to get from this product or service?"

Parizeau: This is basically a pattern-recognition business. We are all trying to spot things that have worked in the past. For me, one of those things is listening skills. When evaluating entrepreneurs, their listening skills are a proxy for their general intelligence and for their ability to process and respond to new information.

Center for Private Equity and Entrepreneurship: Beyond the business plan, where do deals break down? What term sheets issues do entrepreneurs get too hung up on?

Parizeau: Deals often blow up over intellectual shading. For example, our due diligence will reveal something that doesn't quite line up with the conversation we've been having with the company. So we'll ask about it. Usually the company in question hasn't lied outright, but they really haven't fulfilled the spirit of full disclosure. That erodes my confidence. Entrepreneurs need to be willing to tell you the bad stuff even if you aren't smart or lucky enough to ask them exactly the right question to reveal it.

Center for Private Equity and Entrepreneurship: The private equity market is contracting right now. How might the VIC prepare Tuck grads for this tough new environment?

Ferneau: Actually, we can do a better job of teaching private equity finance in a bad market. In 1996-97, students weren't as interested in learning about the finer points since nearly everything got taken up by the IPO market, regardless of quality. Now, there is almost an excessive fear of making investments; students want to know how to make their deals bulletproof. The VIC allows them to strike a balance between mindless optimism and being overly self-protective. Students will be better prepared coming out of this exercise today than they would have been five years ago.

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