Aspiring Entrepreneurs Need to Nail the Details, says Anderson's Abe

An experienced technology entrepreneur before he joined the UCLA-Anderson faculty, George Abe makes sure students' "big ideas" don't languish in limbo by teaching them the rubber to the road aspects of launching companies and obtaining financing. I asked him about the details aspiring student entrepreneurs (and other would-be founders as well) need to get right in order to get their fledgling enterprises off the ground.

BNET: What elements of the entrepreneurial process do you cover in your course?

Abe: I break up the start-up process--particularly for high tech companies--into four steps. The first is Concept Development--a lot of students have concepts. The next is Feasibility, which is a really a trade-off of risk and reward, particularly looking at risk mitigation. The third step is the Business Plan. After you have a plan, you start on the Implementation, the fourth step. In my course, we take on everything from concept development through feasibility. The topics are opportunity recognition, forms of entity, fundraising, term sheets, intellectual property management, governance and a hodge-podge of other things.

BNET: Of all the areas you list, what is the place where students fall short with their current base of knowledge--where do they have to learn the most?

Abe: Term sheets. Even a lot of faculty don't know about term sheets! It's very simple: I take two term sheets and spend up to three hours each going through them. We go line by line through a six-page term sheet. What are the liquidation preferences? What is "participating preferred"? Who is going to be on the board of directors? What do these protective covenants mean?

I think most inexperienced entrepreneurs probably expect too much participation on the board. They don't understand that in a large sense they are going to be ceding quite a bit of control to angel investors and to venture capital investors. I go through the nuances of how board and subcommittees of board are put together. Students are surprised of the operations of the compensation committee and the audit committee. In many cases, start-up companies don't need these committees, but when you get to series B and C, things get more interesting. We look at those types of term sheets as well. We deal with issues that address later stage companies--anti-dilution provisions--how series A investors get along with the later rounds, etc.

BNET: What are the issues students need to understand more about with the later stages of the start-up process?

Abe: The economic interests of an entrepreneur in a down-round [when an investor puts in money at a lower firm valuation than previous investors] and how anti-dilution provisions work. They need to understand weighted average anti-dilution. Before you sign term sheets, you need to understand how the money works in all different scenarios of financing. Many entrepreneurs and even many investors, frankly, don't understand these types of provisions. It's a big black hole. When I teach my course, I tell my students, "It's a language course. I'm not here to make entrepreneurs out of you, I'm here to teach you what bankers, lawyers and accountants mean when they say certain words." It's not a behavioral course that will make you an entrepreneur if that's not your mindset. It's not a class about creating a business idea, it's about the legal and financial language of launching businesses.

We'll hear more from Professor Abe about the current environment for entrepreneurs next week.