Venturing forward

9/11/2009 - The global economy is in recession, and the competition for jobs in private equity and venture capital is tougher than ever.

But that's not discouraging students at the Kellogg School from planning careers in the field and taking advantage of every available opportunity to gain practical experience before graduation.

The school offers a full slate of popular private equity and venture capital (PEVC) courses. Meanwhile, the campus is buzzing with PEVC conferences and speakers, and students are eager to tap the expertise of industry veterans who regularly offer hands-on training and vital networking opportunities.

The school's commitment to enhanced instruction in this fast-evolving field takes a long-term view. When the capital markets recover from the global downturn, the PEVC arena is likely to offer some of the most exciting career opportunities available, seeding emerging sectors such as alternative energy, biofuels and cyber-security.

"Enthusiasm is still high," says Derrick K. Collins, a clinical assistant professor of finance who teaches the entry-level Kellogg course Venture Capital and Private Equity Investing. Collins is also a general partner with the Chicago-based venture capital firm Polestar Capital Partners LP. "Most of the students understand the industry is cyclical. The best thing to do is prepare so you're ready when the industry returns."

Sparked by demand from alumni and students, Kellogg undertook plans four years ago to develop a more focused approach to courses spanning the broad spectrum of private equity investing. Top priority was given to experiential learning courses that could help students build the extensive network needed to gain a competitive edge in a realm where career opportunities are seldom advertised.

The result is a host of basic and advanced electives that provide students access to a wide professional network and working knowledge of everything from the nuts and bolts of corporate capital structures to board politics and the management of distressed assets. Investment professionals say this training sets Kellogg students apart, particularly now that the industry has become increasingly selective in the face of tightening credit markets and shrinking liquidity.

"It really crystallizes the academic piece that's been taught — how does it work in the real world?" says Promod Haque '83, managing partner with Norwest Venture Partners, a longstanding technology-focused global venture capital firm based in San Francisco.

Haque was one of more than 25 panelists participating in the Kellogg School's 2009 Private Equity and Venture Capital Conference in February, which drew a crowd of more than 350 students, alumni, faculty and industry professionals. Speakers tackled topics ranging from the overall state of private equity investing to opportunities in clean technology and post-investment strategies.

"It's no longer just theoretical classes where you learn a lot of business models," says Haque. He noted the recent development of courses in "hard-knocks" subjects, such as techniques for investing in family-run businesses. "This is real-life stuff that goes on every day."

Besides the bread-and-butter financial modeling skills required for a career in private equity and venture capital, today's coursework includes Managing Turnarounds, The Human Element of Private Equity, Business Law for Entrepreneurs, and Wall Street, Hedge Funds and Private Equity.

Students with an interest in a PEVC career path typically undertake a lab component with field internships at firms where they test their real-world mettle. They also participate in annual treks to select cities where they canvas a host of investment houses to get a taste for diverse philosophies, including the large private equity firms focused on later-stage deals and VCs that target higher-risk start-ups.

"We're doing our best not only to prepare them with the kinds of tools they're going to need to get into the industry, but to give them as much hands-on experience and interaction with practitioners as we can so they are able to get jobs," says Yael V. Hochberg, an assistant professor of finance and one of the architects of the curriculum changes.

"Knowing people, getting your foot in the door, and connecting to the network are huge parts of what opens up opportunities," she says.

A former entrepreneur who earned her stripes at a string of technology start-ups, Hochberg focuses on the venture-capital side of the private equity equation, preparing students to evaluate potential investments in early-stage companies.

Her advanced elective, Case Studies in Venture Investment and Management, emphasizes the pattern-recognition skills she says are critical for venture capitalists weighing the merits of a deal.

Drawing on their broader Kellogg training in marketing, finance and management, students in this class review 10 start-up companies over the course of the quarter, using an open-debate forum that Hochberg likens to a venture firm's investment committee. Venture capitalists appear regularly to explain their investment rationale for buying or passing on each of these opportunities.

"Every week they see a different way of evaluating an investment — strategy, marketing, sales and finance — you name it, they've got to think about it," says Hochberg, noting that the evening session often runs well over its three-hour allotted time slot.

The venture capital and buyout lab components, which Kellogg has offered for two years through its retooled Heizer Center for Entrepreneurial Studies, are among the school's most sought-after classes. These courses pair students with investment firms in the Chicago area and, increasingly, around the country. Students typically spend one to three days per week on-site, working on research, financial modeling and related activities. At the end of the quarter, each student submits a report based on the experience.

"To have that kind of high-level exposure to someone who is so experienced in the industry is something that I think is unique to the curriculum at Kellogg," says Kenny Shum '10, a 28-year-old former analyst with the private equity firm Riverside Company. In June, Shum was doing lab work at Chicago-based Geneva Glen Capital, a one-man buyout shop focused on lower-tier, middle-market companies.

Participants in the buyout lab have landed stints at some 15 local private equity firms ranging from established players to small boutiques, including Madison Dearborn Partners, Sterling Partners, Waud Capital Partners, LaSalle Capital Group and Silver Oak Services Partners. Meanwhile, aspiring VCs have been placed at Draper Fisher Jurvetson, MK Capital, Sterling Ventures and BioVentures Investors, among others.

Though most student candidates come to the table with a background in private equity or investment banking, some are selected strictly on the basis of their potential, says Clinical Professor of Finance David Stowell, who oversees the buyout side.

"(The firms) are looking for students who have strong modeling skills, who have an investment aptitude, who have a really good understanding of the capital structure of companies and capital markets," says Stowell, a former investment banker with JP Morgan, UBS and Goldman Sachs.

"Students who are interested in this area should get as much experience as they can," he adds. "It is difficult to get these jobs; it does require a lot of effort."

As valuations throughout the M&A markets have fallen and the volume of deals has decreased, investment firms are holding on to their portfolio assets longer, attempting to maximize profits through better operational performance.

Industry professionals with a balanced skill set that goes beyond number-crunching will be in greater demand, according to David Chen '84. "Exits are going to be very tough to come by and the field is now characterized by hands-on building of value in these portfolio companies," says Chen, founder of Equilibrium Capital Group LLC, an investment firm focused on early-stage ventures in the area of sustainability.

"The premium in the investment world swings from financial engineering toward operations," he says. "We're looking for a lot of practical experience."

To be sure, flexibility and street smarts are valued now more than ever, according to practitioners such as Heather Smith Thorne '06, vice president with Chicago-based Thoma Bravo LLC, a middle-market private equity firm with roughly $2.5 billion under management. The firm is focused on fragmented industries ripe for consolidation such as software and financial services.

"Instead of talking about taking them private or talking to them about buying the entire company, (deals) are more centered around providing capital for that company to go out and make an acquisition," says Smith Thorne. "There are more creative or alternative investment ideas being discussed."

The Kellogg School's comprehensive approach ensures that students will come away with the broad-based skills needed to strategize in the changing PEVC market, says Jason Robinson '10. The 35-year-old engineer with advanced degrees in physical chemistry plans to pursue a career with an early-stage venture capital fund after graduation. He believes his Kellogg experience will round out his education, which until now has tilted heavily toward the hard sciences.

"Nothing is really taught in a silo at Kellogg," says Robinson. "The breadth (of the curriculum) was what I was impressed with."

And there is another trend working in the Kellogg School's favor. Industry watchers say that the geographic landscape of PEVC investing is set to shift progressively away from its long-standing concentration on the coasts. This will be helped by the federal government's push for reduced dependence on foreign oil through clean technology, sparking growth in sectors that are best nurtured in regions with related industrial expertise.

"I call it almost the democratization of venture capital — there are going to be pockets around the country that have experts already in place in specific areas," says Mark G. Heesen, president of the National Venture Capital Association, the trade group that represents some 450 venture firms throughout the country.

"In the Upper Midwest, people understand battery technology; a lot of these people have come out of the auto industry," he says. "I think this is going to become a strong area for that particular part of the clean tech equation."

Whatever the future holds, gaining hands-on expertise in a field where only a limited number of professionals control billions worth of annual investments is sure to boost the prospects of worthy Kellogg candidates.

"I think this kind of curriculum is really paramount for preparing students for this type of work," says Tod Francis '83, managing director of Menlo Park, Calif.-based Shasta Ventures, an early-stage venture capital firm targeting technology start-ups. Shasta recently added 2006 Kellogg graduate Evan Liang to its team.

"The net result is it allows students to hit the ground running," says Francis. "They already know how the business works."