Sitting in Judgment: Business plan contests are old hat. UNC has come up with a competition that rewards VC investment acumen. We go behind the scenes to see what it’s all about. –

Eight teams from among the nation’s best business schools recently traveled to the University of North Carolina in Chapel Hill, to compete in the Venture Capital Investment Competition (VCIC).

Unlike the mess of business plan contests that have sprung up throughout America, VCIC is designed to judge investment acumen and VC market knowledge, not one’s ability to design the quickest widget.

I was among the 14 judges and one of just two who is not a practicing investor. (The other was Eric Ly, founder of social networking company LinkedIn). With the permission of VCIC organizers, I kept a running diary of the event to find out how venture capitalists think.

Thursday, April 7

T.F. Greene Airport (Providence, R.I.),

4:30 p.m.

Let me begin by being blunt: I’m not exactly sure what I’m getting myself into.

I was asked to serve as a judge for the VCIC National Finals after a few UNC MBA candidates were turned on to my daily email column by veteran VCIC judge Don Nelson (chief business officer of SV Life Sciences). At the time, I was already planning to visit my father in Chapel Hill, so it seemed like a good excuse to let my corporate credit card handle the airfare. I also figured VCJ readers might appreciate a behind-the-scenes look at how the winners are selected in a major business plan competition. I wrote something to that effect in one of my columns.

“The VCIC is not a business plan competition,” screamed one of more than three-dozen emails that took issue with my statement. “It is an investment competition!”

Indeed, I did some actual research and learned that the VCIC involves competing teams from top MBA programs acting as VC partnerships, complete with a variety of real investment opportunities, associated business plans, entrepreneurial elevator pitches and due diligence Q&A sessions. Teams have one evening to select the companies that deserve support and present the judges with executive summaries and term sheets by 11 a.m. the next morning. After we’ve had a chance to evaluate their decisions, each team makes a formal presentation. At each stage-entrepreneur Q&A, written deliverables and verbal presentation-judges score each team. The winning team receives a check for $10,000, minus whatever is spent on Saturday night’s bar bill.

The participating teams are the best of the best, having gotten to this point by placing first or second in one of four regional events. Moreover, certain schools actually held inter-school preliminaries to determine who would be sent to a regional event. The final eight teams come from U.C. Berkley, the University of Chicago, the University of Colorado, Harvard, MIT, the University of Texas, the University of North Carolina and the University of Pennsylvania (a.k.a. Wharton).

Airplane, 6:15 p.m.

The judges were sent five business plans yesterday afternoon, so I figured to look through them while on the plane. Of course, I didn’t quite realize that I’d be on a 35-seater next to someone who must weigh a deuce and a half (interesting fact: passengers can request seatbelt extensions). Anyway, I’ve persevered enough to learn a bit about each company. In order to maintain confidentiality, they will be heretofore referred to as Medical Device Co., Drug Discovery Co., Semiconductor Co., Switch Co. and Gaming Platform Co.

I’ve been asked to pay particular attention to Gaming Platform Co., as myself and two other judges will stay with its CEO during each of his eight “VC firm” meetings. The basic plan is to create a gaming emulator, whereby people can test Java-based desktop and mobile games before buying them. Its immediate revenue stream would involve private label partnerships with game developers, whereby Gaming Platform Co. would take a 10% cut of each sale. It also has secondary and tertiary phases which cannot yet be published.

My immediate reaction is that this could have high ROI potential, particularly given its Series A funding request of just $3 million. At the same time, however, there must be competitors either already in the market or on their way. Some important questions tomorrow will be about barriers to entry, and also about a fairly sluggish application download rate since the emulator was launched last month. The biggest question, however, is about the company’s belief that it will be acquired within 12 to 24 months. Not the type of entrepreneurs to whom I’d necessarily be comfortable committing millions of dollars.

Father’s House, 9:30 p.m.

I try to download the gaming emulator without success. (I later learn that my laptop is missing a required Java player.)

Friday, April 8

UNC Chapel Hill’s Kenan-Flagler School

of Business, 1:15 p.m.

The entrepreneurs are giving their 10-minute elevator pitches, after which we’ll break out for the entrepreneur meetings. Nothing terribly interesting right now, except that the Medical Device Co. CEO hasn’t actually explained what his device does, nor even shown a picture of it. Isn’t that standard operating procedure when asking for venture capital? All he’s said is that it’s designed to treat sleep apnea better than the current CPAP apparatus.

3 p.m.

We’ve seen two teams question the Gaming Platform Co. CEO, and I’m pretty disappointed. Ditto for my fellow judges-Eric Ly of LinkedIn and Yi Sun of Garnett & Helfrich Capital. The first team’s questions were somewhat disjointed, with just two of the five members asking questions. Moreover, they didn’t seem to blink when the CEO revealed that the company’s founder shares his 66% ownership stake with his wife, even though she only performs some light clerical duties. I would later learn that she also has indicated a reticence to ever giving up her board seat, but the first team didn’t ask the obvious: “What if they get a divorce?”

The second team is more organized, but gets bogged down in market adoption questions, without enough attention to the technology or management structure. The third team’s Q&A was mediocre.

During a break, Yi Sun asks the entrepreneur about the most commonly asked question that neither team asked. The answer: How easy is it for a Google or Yahoo to replicate the company’s technology (i.e., low barrier to entry). Also, none of the teams indicates that its members have downloaded the platform or has at least tried to.

3:40 p.m.

The next team has downloaded the platform and asks the “barriers to entry” question. It’s thorough (save for not asking about that pesky founder’s wife issue). The judges all agree that we have a leader. We also agree that chocolate chip cookies would be helpful.

5:30 p.m.

After a rocky start, we’ve gotten a high level of business savvy from all teams but one (pointless obsession with advertising revenue, which is a very minor part of the business plan). The entrepreneur seems exhausted and also unaware that he is supposed to rank each team for a special “Entrepreneur’s Prize.” He chooses the only two teams to have acknowledged downloading the platform, and gives his third spot to one that he felt asked all the right questions.

Everyone shakes hands and moves on to a judges and entrepreneurs mixer. After a couple beers, it becomes obvious that none of the judges are thrilled with any of the business plans. It turns out that judge Dave Rosen, a general partner with Sevin Rosen Funds, had actually passed on the Semiconductor Co. a few weeks earlier.

Carolina Inn, 6:30 p.m.

Fancy dinner, which I agree to keep off the record. This promise becomes more important with each successive drink. Glad I’m not a VCIC competitor, since they only have until tomorrow morning at 11 a.m. to deliver executive summaries and corresponding term sheets.

Saturday, April 9

UNC, 9 a.m.

We’re about to spend the next two hours debating the five potential portfolio companies, in order to get a common framework for evaluating each team’s investment decisions. I know that I’m too loquacious to sit quiet for that long, which leads to concerns over whether or not I’m just minutes away from making a fool of myself.

9:30 a.m.

The first company we discuss is the Drug Discovery Co., and a number of folks point out that its business plan is too capital-intensive and unfocused. Specifically, it wants to be a drug discovery/drug instrument/drug services company. I suggest that perhaps it should move toward services, since that’s where its closest-and most likely-revenue stream lies.

Don Nelson of SV Life Sciences says investing in a pharmaceutical services company would just help “keep the lights on,” because such companies don’t have much growth potential. Doug Fambrough of Oxford Bioscience concurs, at which point I begin wishing I could keep my fool mouth shut.

10 a.m.

My mouth opens again, but this time it blurts out that nifty piece of info about the Gaming Platform Co. founder’s wife (i.e. in case of divorce?). This one is well received, and I thank god for small favors. In general, the barriers to entry seem too low to invest in this company, and there are concerns that the second phase of its business plan is too expensive, if do-able at all. The only hopeful note involves the company’s planned meeting next week with a major developer of Java-based games, but certainly there will be no investment until at least one agreement is signed.

The more interesting conversation involves the Medical Device Co., which apparently maintained its refusal to disclose product details during its entrepreneur meetings. One team even reminded the entrepreneur that he had (fictionally) signed an NDA, but he apparently was reticent to spill any beans until his pending patents are approved sometime this summer.

The judges all agree that the Medical Device Co. is targeting a growing and underserved market, but none could justify investing in a company without first seeing any of its intellectual property. Our consensus is that teams should provide a letter of interest while the company secures some angel funding and gets its patents.

10:45 a.m.

We’ve now analyzed each potential portfolio company and created “Judge’s Opinions” forms that the teams will receive once the competition is over. The consensus is that a VC firm should avoid investing in any of the companies, including the Semiconductor Co. (better candidate for a loan than for VC, particularly since the founder doesn’t want to cede his control position) and the Switching Co. (best of the bunch with existing product and revenue, but no real prospects for VC-type returns). Steve Rakes of Southeast Interactive Technology Funds boldly suggests that any offer should boldly include a 3X liquidity preference.

The problem with our consensus is that it is highly unlikely that any team would be gutsy enough to not submit a term sheet. Moreover, the VCIC guidelines suggest that teams pick two investments, although it isn’t mandatory. Only the most dealflow-starved firms, of course, invest in two of every five deals, but the guidelines also suggest that each team has only committed 5% of a $150 million seed- and early stage fund raised early last year. In other words, they are under some pretty serious limited partner pressure to either fish or cut bait.

11 a.m.

The deliverables arrive. The biggest surprise is that one team opts to invest only in the Medical Device Co. with the undisclosed device. I say to nobody in particular that the pool of viable teams has been whittled down from eight to seven.

Three of the teams choose to invest in just one opportunity, while the others each pick two. Leading the picks is the Switching Co. with four selections, followed by the Semiconductor Co. and Drug Discovery Co., each of which receives three term sheets.

Bringing up the rear are the Medical Device Co. with two selections, and the Gaming Platform Co. with just one. Even though I wouldn’t invest in the Gaming Platform Co., I feel some sadness since it’s the one I know best. Moreover, I had expected most teams to pick it, as its technology was the easiest to understand.

Noon

One hour until I need to finish reading all of the executive summaries and term sheets, let alone comment on them or fill out my judging sheet. (There are separate sheets for the entrepreneurs’ meeting, deliverables and upcoming Q&A.) I’m nowhere near halfway done, but have committed to not grabbing one of those boxed lunches until my stack is significantly smaller.

12:20 p.m.

Two quick term sheet notes: First, the team that picked the Mobile Gaming Platform was the one I chided yesterday for not picking up on the problem with the founder’s wife. The team nailed it in the term sheet, however, insisting that all 66% be put in the founder’s name. Also, the team that only picked the Medical Device Co. is offering just a conditional Series A term sheet that would become effective in six months. For the deal to take effect, the company would need to secure angel funding, develop a prototype and, of course, disclose all relevant IP to the VC partnership.

12:45 p.m.

I catch my second wind and blow threw the last couple. (Big mistake about lunch, though, as I lost out on the “Tar Heel” sandwiches and got stuck with flaccid roast beef.) Conversation turns to figuring out which team is from which school, as they’ve been operating under aliases so that judges won’t be favored to pick their alma matters. It’s suggested that next year’s VCIC should have a prize for which judge is able to correctly match up the most teams to their schools of origin.

12:55 p.m.

We decide that each Q&A session will start with Don Nelson asking a softball question about exit strategies. After that the gloves are off.

2 p.m.

It’s the halfway mark of the Q&A sessions, and most of the teams have performed how I expected them to after watching yesterday’s LP meetings and this morning’s deliverables.

The most notable moment is when Chris Wand of Mobius Venture Capital asks a team if it had been “smoking crack” before giving the Drug Discovery Co. a $12.2 million pre-money valuation.

Another interesting question comes from Barry Gonder of Grove Street Advisors. He asks each team that invested in the Switching Co. (which is several years old and profitable) the following question: “You are a seed- and early-stage fund. How are the limited partners going to react when they see you investing in a later-stage company?” Certain teams seem ready for this, but others looked like stage actors who have forgotten their lines.

The toughest moment comes when I one of the teams investing in the Semiconductor Co.: “The founder has said that he will insist on maintaining a control position, but your term sheet knocks him down to around 40% in the Series A. How will you convince him to take the deal?” Unfortunately, time runs out just and the team can’t respond.

3:30 p.m.

I’m getting a reputation for those last-minute questions, the most recent of which is whether the Switching Co. has any commercial applications (its product is designed for Naval use). Even though it was after the bell, a member of the team responds affirmatively. He’s wrong but at least looks confident.

It’s clear that each judge really wants these students to do well. Oxford Bioscience’s Fambrough, for example, tries steering a Drug Discovery Co. proponent toward the idea that an exit would only be possible after reworking the entire business plan.

“Outside of an IPO or acquisition, would there be a third way?” he asks. “Maybe some sort of strategic partnership…” the team member replies. Oh well, he tried.

Also deserving credit is Howard Steyn of Bain Capital Ventures, who keeps insisting on better explanations for the deals teams didn’t pick.

3:50 p.m.

The Q&A is over. The last team didn’t seem to know that CombinatoRx recently postponed its IPO, which was problematic since the team used CombinatoRx as an allegory for why the Drug Discovery Co. could go public. All in all, most teams acquit themselves quite well, which should make the next 15 minutes of actual judging fairly difficult. We’re asked to list only our Top 3 on judging forms, but are supposed to list them 1 to 10 on the judging sheets that get handed back to the teams.

4 p.m.

I rank my favorite team from yesterday as No. 1. Not only were they great on their feet, but I feel that their valuations are most reflective of actual VC practice-$2.75 million pre-money for the Switching Co. and $1.5 million pre-money for the Medical Device Co. (also with IP disclosure conditions).

As we wait for the tally, we learn which teams belong to which schools. A couple people gasp in disappointment, after realizing that their alma matters performed poorly.

4:02 p.m.

To my extreme surprise the Medical Device-only team comes in First Place overall. (Six of the eight received at least one First Place vote.) Immediately, a debate erupts, with certain judges saying that it is a bad decision, given the spirit of the VCIC.

“They didn’t even really make an investment, just promised to make one if the company gets angel funding and has a good product,” argues Daphne Dufresne of Parish Capital Advisors.

On the one hand, I agree with Daphne, and say so. Many of these teams clearly felt pressured to invest in two companies due to the VCIC guidelines, and likely would have been more conservative in real life scenarios. On the other, it is hard to escape the fact that the winning team’s decision most closely reflected the pre-Q&A consensus of the judges. As such, they were the most professional VCs at the VCIC.

No matter how you slice it, some teams are going to feel cheated. I would have. Nonetheless, it’s time to go upstairs, have a few drinks, announce the winners and hand out the giant checks. The top team is from U.C. Berkley, while MIT’s team takes second and the group from the University of Chicago comes in third. The University of Texas’ team gets the “Entrepreneur’s Prize,” which was voted on by the presenting companies a day earlier.

Father’s House, 6:30 p.m.

I left UNC about an hour ago, after announcing the winners and participating in a feedback session with three of the teams. Two of those teams had placed, and were understandably excited. The other-from Wharton-seemed intently interested in what Doug Fambrough and I had to say about the judging process and the VC market in general. It reminded me that the VCIC is more of an educational experience than a contest, with most of these MBA candidates soon to look back at $10,000 prizes as insignificant income supplements. It also provided me with extraordinary insight into the VC deal-making process, although I’ll probably still have serious need for $10,000 in a couple years.

I strongly recommend VCIC participation to any VCs, entrepreneurs or MBA candidates who have a couple of days to spend at either the Regional Events or the Finals at UNC. Not just a unique experience, but a remarkable one as well.

The Judges

Daphne Dufresne

Parish Capital Advisors

Doug Fambrough

Oxford Bioscience Partners

Barry Gonder

Grove Street Advisors

Don Herzog

Bluegrass Growth Fund

Eric Ly

LinkedIn

Dave McLean

Sevin Rosen Funds

Don Nelson

SV Life Sciences

Dan Primack

Venture Capital Journal

Steve Rakes

Southeast Interactive Technology Funds

Bob Smelick

Headland Ventures

Bill Starling

Synecor LLC

Howard Steyn

Bain Capital Ventures

Yi Sun

Garnett & Helfrich Capital

Chris Wand

Mobius Venture Capital

The Competitors

University of Californiaat Berkeley

Alex Jeffers

Camille Landis

Manuel Rodriguez

Josh Scott

Daniel Yoo

University of Colorado

Blair Brown

Erik Kreider

Brock Middleton

Brian Morrow

Jeff Sieracki

University of Chicago

Pat Basu

Ori Eyal

Holbrook Forusz

Justin Marcucci

Peter Shannon

Harvard University

Manish Goyal

Dayna Balcome Grayson

Natalia Mlotok

Olena Stadnyuk

Denis Vasiliev

Massachusetts Institute of Technology

Ian Blakely

Leif Lundaas

Mohan Kumaramangalam

Jeremy Macdonald

Adam Tomasi

University of North Carolina

Ken Achenbach

Gretchen Dunnaway

Dave Lamore

Ben Redding

Jimmy Rosen

University of Pennsylvania

(Wharton)

Michael Kopelman

Nathanial McNamara

Mark Mitchell

Dimple Sahni

Christian Selchau-Hansen

University of Texas

David Kuhlken

Denton Newham

John Reed

Marc Scheinrock

Spencer Swayze

Email: Daniel.Primack@Thomson.com