Course Syllabus
ENTR 926
Private Equity – The Human Element
Winter 2015
William P. Sutter, Jr.
Office: Room 513
Hours: Tuesdays and Thursdays by appointment
E-mail: w-sutter@kellogg.northwestern.edu
Mobile: 312-315-9716
Course Overview
This is an advanced course about asset management that will focus on the many social and personal issues facing the institutional investor. Individual psychology and group behavior both play a critical role in determining the ultimate success or failure of any venture, yet the human element is often mismanaged or overlooked in favor of financial analysis and market studies. People, including both entrepreneurs and investors, do not always act in predictable or even rational fashion. Students will learn to understand and influence relationships in the private equity arena, with an emphasis on real world behavior based on actual experience over the course of my career.
This course is designed for second-year students who are seriously considering a career in the private equity business or who desire a deeper understanding of the investor/entrepreneur relationship. It builds upon the fundamental skills of deal analysis, valuation and negotiation that are taught with a quantitative emphasis in other private equity or venture capital courses offered at Kellogg. The first half of the course covers interactions that take place before an investment is completed: fund-raising, negotiation, and interpersonal due diligence. The latter portion examines the relationship between the investor and the management team after the initial financing – the role of the board of directors in corporate governance, performance evaluation and accountability, motivation and compensation, and standards of ethical behavior.
The course employs the case method of instruction as a means to place interpersonal issues into a meaningful context. Rather than develop a typical case analysis, students will focus on the interaction of the players involved. Students will also engage in role-playing exercises to explore different approaches to resolving conflict or motivating behavior. Several guest speakers will share their experiences and insights throughout the quarter as well.
Attendance
With only ten class sessions and an emphasis on participation, attendance is simply mandatory. Missing class is a lost opportunity to learn, as the material and course format do not provide for catch-up work. If you are unable to attend a class due to an emergency or unavoidable conflict, please contact me via e-mail to explain your absence.
Due to the length of the class and its late schedule, our collective experience depends on vigorous participation from everyone. Because the course centers on human relations, each student should be able to contribute to discussion from his/her unique perspective. To keep the energy level high, drinks will be permitted in the classroom, but no food – please arrange to have a snack or early dinner before class begins.
Grading
Grades will be primarily based upon class participation and the final exam. There also will be written assignments for certain classes. Specific weightings are as follows:
30% Class contribution
35% Written assignments and mid-term exam
35% Final exam
The final will be a take-home exam in a case format. The case will be available at the start of class on March 10. Please submit completed exams by 5:00 p.m. on Tuesday, March 17.
Course Pack
Cases:
“Orchid Partners: A Venture Capital Start-up,” Myra Hart and Kristin Lieb, Harvard Business School, April 21, 2004.
“Beechwood Spouts (A),” William Sahlman and Andrew Janower, Harvard Business School, revised July 9, 2009.
“Project ‘Dial-Tone’,” Andrew Janower, Harvard Business School, revised August 8, 1997.
“Anasazi Exclusive Salon Products, Inc.,” William Sahlman, Harvard Business School, January 13, 2003.
Article:
“Note on Hiring,” Neel Bhatia, Jim Ellis, J.P. Flaum, and Arar Han, Stanford Graduate School of Business, September 29, 2011.
Required Reading Books
Influence – Science and Practice; Robert Cialdini.
The author presents a broad overview of six principles for influencing others to achieve personal objectives in any arena. The book serves as a reference text on social psychology that cites many classic studies and discusses concepts that will be applied to the fund management setting throughout this course.
Start With No; Jim Camp.
This book serves as a retort to the Win-Win theory of negotiation. Camp lays out numerous principles to his approach, along with practical tactics to employ in a variety of negotiations.
Thinking, Fast And Slow; Daniel Kahneman.
In this modern classic on behavioral psychology, Nobel Prize winner Kahneman explores how the mind works through two competing systems: intuitive and emotional vs. deliberate and logical. Recommendations follow to improve decision-making despite the human traps of economic irrationality.
Required Reading Articles On Blackboard
“Establish Trust and Rapport,” Sales Training International, 2013.
“Keeping LPs Happy,” Jack DiFranco, Grant Thornton White Paper, 2011.
“Down and Dirty Due Diligence,” The Journal of Private Equity, Spring 1998.
“Down and Dirty Due Diligence, Part II,” The Journal of Private Equity, Summer 2001.
“Evaluating Truthfulness and Detecting Deception,” David Matsumoto et al., FBI Law Enforcement Bulletin, June 2011.
“Why Mergers Fail,” Corporate Board Member (“CBM”), Summer 2000.
“The New Funding Landscape,” Paul Graham, paulgraham.com, October 2010.
“Students Build Search Funds to Be Entrepreneurs,” Delece Smith-Barrow, U.S. News & World Report, May 27, 2014.
“Search Funds 2013 – Selected Observations,” Stanford Center for Entrepreneurial Studies, June 20, 2014.
“Negotiating Deal Terms,” John Sabl. unpublished, 2014.
“Will West Ever Meet East?” Sarah Reed, Business Law Today, May/June 2002.
“After the Term Sheet,” Dennis Jaffe and Pascal Levensohn, November 2003.
“Troublemakers,” John DiConsiglio, BoardSource, October 2004.
“Board Diversity: Let’s Make It Personal,” Robert Kueppers, NACD Directorship, May 2013.
“Why Diversity Can Backfire on Company Boards,” Jean-Francois Manzoni, Paul Strebel and Jean-Louis Barsoux, Wall Street Journal, January 25, 2010.
“Staffing to Win,” Jack Denton, unpublished, 1996.
“Selecting For Success,” George Watts, unpublished.
“Does Your CEO Compensation Plan Provide the Right Incentives?” David Larcker and Brian Tayan, McKinsey Quarterly, April 2012.
“How Do You Criticize a CEO?” CBM, December 2005.
“When Should You Overrule the CEO?” CBM, November 2002.
“Between Reality and the Mirage,” David Carey, The Deal, September 14, 2009.
“The Road to Personal Accountability,” Ann Bernard, September 22, 2010.
Recommended Reading Articles On Blackboard
Private Equity Principles – Version 2.0, Institutional Limited Partners Association, January 2011.
“We Have Met the Enemy…And He Is Us,” Kauffman Foundation, May 2012.
“Founding Blackstone,” David Carey and John Morris, The Deal, September 2010.
“Not Enough Women in Venture Capital Boardrooms,” Scott Kirsner, Boston Globe, July 13, 2014.
“Local Heroes,” Matt Miller, The Deal, February 2012.
“Venture Capital’s New Bad Boys,” Connie Guglielimo, Forbes, May 21, 2012.
“Venture Capitalist Sounds Alarm on Startup Investing,” Yoree Koh and Rolfe Winkler, Wall Street Journal, September 14, 2014.
“Private Equity’s Surprisingly Good Track Record of Cutting Back on Corporate Jets,” Ray Fisman, Slate.com, May 14, 2012.
“A Primer on Search Funds,” Stanford Business School, 2009.
“VCs and Super Angels,” Michael Arrington, TechCrunch, August 15, 2010.
“Inside the Boardroom: The Party Is Over!” Geoff Colvin, Fortune, May 20, 2013.
“Successful CEOs of Private Equity Funded Ventures,” Leslie Pratch and Jordan Jacobowitz, Journal of Private Equity, Summer 2004.
“Which CEO Characteristics and Abilities Matter?” Steven Kaplan, Mark Klebanov and Morten Sorenson, University of Chicago Graduate School of Business, July 2008.
“Today’s CFO,” Ankur Agrawal, John Goldie and Bill Huyett, McKinsey Quarterly, January 2013.
“Peer Pressure: Inflating Executive Pay,” Gtretchen Morgenson, New York Times, November 26, 2006.
“Differing Perceptions of New Venture Failure,” Andrew Zacharakis, Dale Meyer and Julio Castro, Journal of Small Business Management, July 1999.
“Trust and Biased Memory of Transgressions,” Eli Finkel et al., Journal of Personality and Social Psychology, April 2013.
“Been There, Done That,” Rich Karlgaard, Forbes, September 6, 1999.
“A Leadership Primer,” Colin Powell, Management Review, December 1996.
“Can Money Buy You Happiness?” Andrew Blackman, Wall St. Journal, November 10, 2014.
Recommended Reading Books
Made To Stick; Chip Heath and Dan Heath.
The ability to effectively and persuasively communicate ideas is a critical component of leadership. The authors offer six ways to deliver messages that enhance understanding and drive action.
You Can Negotiate Anything; Herb Cohen.
Cohen’s first book provides a good general synopsis of the negotiating process and the variables that affect the outcome. While examples are drawn from outside the world of private equity, the underlying lessons can be applied creatively to situations confronting investors every day.
Winning Through Intimidation; Robert Ringer.
This classic offers a light-hearted yet eye-opening tale of the author’s rise to success as he encounters, and employs, creative negotiating techniques.
Class Schedule
Before the first class, please review your notes and course material from any prior private equity course that you have taken. There is only a light reading assignment for the first week so that you will have time to thoroughly refresh your memory. Again, students in this class already must possess strong analytical skills and extensive knowledge of the private equity industry; we will use these each week, but not learn them here.
Most weeks there will be a case assignment for classroom discussion. Please prepare a character-oriented analysis of the case with well-organized notes – these will not be turned in, but they should provide you with the basis for meaningful participation during class.
Week 1 – Tuesday, January 6
- Course Overview
- Partnership Structure
- Fundraising
- Limited Partner Relations
Reading: Influence, Chapter 1
“Establish Trust and Rapport”
“Keeping LPs Happy” pages 7-16
Recommended: Private Equity Principles – Version 2.0
“We Have Met the Enemy…and He Is Us”
“Founding Blackstone”
“Not Enough Women in Venture Capital Boardrooms”
“Local Heroes”
Case: Orchid Partners: A Venture Capital Start-up
Prepare to discuss the study questions on Blackboard
Week 2 – Tuesday, January 13
- Investments – Venture Capital
- Interpersonal Due Diligence
Reading: Influence, chapters 2 and 5-6
“Down and Dirty Due Diligence” Parts I & II
“Evaluating Truthfulness and Detecting Deception”
Recommended: “Venture Capital’s New Bad Boys”
“Venture Capitalist Sounds Alarm on Startup Investing”
Watch Video: Bill Reichert, “Top Ten Lies” (time 0:00-26:30)
Case: Beechwood Spouts (A)
Assignment: Outline your human element due diligence issues
Due 1:30 p.m. Tuesday, January 13
Week 3 – Tuesday, January 20
- Investments – Private Equity
- Mergers and Acquisitions, Consolidations, Roll-ups
- Sale Process
Guest Speaker: TBA
Reading: Influence, chapters 3-4 and 7
“Why Mergers Fail”
Recommended: “Private Equity’s Surprisingly Good Track Record”
Case: Project ‘Dial-Tone”
Assignment: Write a memo recommending Hellman’s action
Due 1:30 p.m. Tuesday, January 20
Week 4 – Tuesday, January 27
- Legal Documentation
- Negotiation
Guest Speaker: John Sabl (Partner, Sidley Austin)
Reading: Start With No, chapters 1-5
“Negotiating Deal Terms”
“Will West Ever Meet East?”
Week 5 – Tuesday, February 3
- Angel Investors
- Search Funds
- Mid-term Exam
Guest Speaker: Matt Littell (CEO, Progressive Bronze Products)
Reading: Start With No, chapters 6-14
“The New Funding Landscape”
“Students Build Search Funds to be Entrepreneurs”
“Search Funds 2013 – Selected Observations”
Recommended: “A Primer on Search Funds”
"VCs and Super Angels”
Week 6 – Tuesday, February 10
- Corporate Governance
- Interpersonal Board Dynamics
- Follow-on Investments
Reading: “After the Term Sheet”
“Troublemakers”
“Board Diversity: Let’s Make It Personal”
“Why Diversity Can Backfire on Company Boards”
Recommended: “Inside the Boardroom: The Party Is Over!”
Case: Anasazi Exclusive Salon Products, Inc.
Assignment: Write a memo analyzing another round of investment
Due 1:30 p.m. Tuesday, February 10
Week 7 – Tuesday, February 17
- Personality and Performance
- Management Selection
- Evaluative Interviewing Techniques
- Corporate Alignment and Culture
Guest Speaker: George Watts, Ph.D. (President, AST Management)
Reading: “Note on Hiring”
“Staffing to Win”
“Selecting for Success”
Recommended: “Successful CEOs of Private Equity Funded Ventures”
“Which CEO Characteristics and Abilities Matter?” pages 1-6, 25-27
“Today’s CFO”
Assignment: Complete evaluative interview exercise (not graded)
Due 1:30 p.m. Tuesday, February 17
Week 8 – Tuesday, February 24
- Motivation and Compensation
- Performance Evaluation
- Change in the Management Team
- Failing Investments and Turnarounds
Reading: Thinking, Fast and Slow, parts I-II
“Does Your CEO Compensation Plan Provide the Right Incentives?”
“How Do You Criticize a CEO?”
“When Should You Overrule the CEO?”
Recommended: “Peer Pressure: Inflating Executive Pay”
“Differing Perceptions of New Venture Failure”
Week 9 – Tuesday, March 3
- Investor Behavior
- Ethics
Reading: Thinking, Fast and Slow, part III
“Between Reality and the Mirage”
Recommended: “Trust and Biased Memory of Transgressions”
“Been There, Done That”
Assignment: Complete ethics questionnaire (not graded)
Due 5:00 p.m. Monday, March 3
Week 10 – Tuesday, March 10
- Final Exam Instructions and Tips
- Personal Effectiveness and Leadership
- Fund Manager Compensation and Lifestyle
- Course Wrap-up
Reading: Thinking, Fast and Slow, part IV
“The Road to Personal Accountability”
Recommended: “A Leadership Primer”
“Can Money Buy You Happiness?”
Finals Week – Tuesday, March 17
Assignment: Complete final exam case
Due 5:00 p.m. Tuesday, March 17
Course Summary:
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