Session 13:
November 3, 2008
Financing
Quote of
the Day
"The key to a leader's
impact is sincerity. Before
he can inspire with emotion he must be swayed by it himself.
Before he
can move their tears his own must flow. To convince them he must
himself
believe." ~ Winston Churchill
Summary
What is the true value
of venture capital? The
Hirschtick (SolidWorks) case illustrates a classic first-round venture
capital
deal and highlights career paths both in technology entrepreneurship
and
venture capital.
Required
Readings (Policy
on Required Readings.)
- Readings
from the Textbooks:
- Technology Ventures (Dorf and Byers): Ch 8 Independent Versus
Corporate Ventures, Ch 20 Leading a New Technology Venture to Success (Highlights: 8.1, 20.1, 20.4)
- Case:
- John Hirschtick’s New
Venture (Technology Ventures 2e p. 589)
- Watch the
following short video clips:
- Review these
Web links:
- Generic Interesting
Startup Blogs:
Study
Questions (Policy
on Study Questions.)
- Is this a high potential opportunity?
If so, why? Does Jon have a compelling vision? What is your assessment
about Jon and his team?
- Jon has asked you for advice in
September of 1994 regarding the first-round financing. What factors
should he consider when deciding on the proposed venture capital deal?
- Assume the VC’s
pay a share price of $1. Furthermore, assume that the 15% post-money
employee pool is created by issuing an additional 1.05 million shares. (Note:
$1 share price already takes into account dilution from 15% employee
pool.) This brings the total number of issued shares to 8.05
shares post-money (if Jon takes all $4.5 million right now). Therefore:
- What is the post-money valuation of
the proposed financing?
- What percentage of the company will
the VCs own in September, 1994?
Assume the company
achieves a net income of $3.33 million
(accounting for taxes) in the fourth year after this financing, it does
not
have to raise any additional funds during that period, and it compares
favorably to other growth companies with price earnings (frequently
called PE)
ratios of 30.
- In four years, what is the value of
the VC's ownership?
- Furthermore, what is the return for
the VCs on their investment in SolidWorks? You can express the return
in terms of IRR (e.g., an internal rate of return of 50%) or by a
number that represents how many "times" their investment has multiplied
(e.g., 10X equals ten times their money).
- Is this reasonable in your opinion
for all concerned?
- More than just running the numbers,
Jon has specifically asked your "common sense" advice regarding other
ways to structure SolidWorks' financing plans for the coming years. In
other words, is there an alternative to raising all $4.5 million right
now that makes better sense?
- Note: The economics in this case are
challenging. We want you to see what you
can do based on:
- The assigned readings and videos
- Past experience that your team
brings from other courses or jobs.
- Materials on valuation that you
can find in the library, or on the web, at websites such as http://www.thefunded.com/
- Other classmates outside your
team.
- Attorneys, entrepreneurs, public
accountants, your mentors, or anyone else who can teach you what you
need to
know.
- Because this assignment is
particularly challenging, it is OK for teams to get advice and help
from other people, AS LONG AS YOU CITE YOUR SOURCES in footnotes to
your case analysis! VCs often share information when they are looking
at investment opportunities. Entrepreneurs
are also beginning to share information and teach one another the
ropes, through web sites like http://www.thefunded.com/ It is OK to get help, but cite your sources!
- We will have a session on the evening
of November 23, to help teams learn more about how to do financial
analysis. However, in life an entrepreneur
often has to learn how to do things on your own, and we wanted you to
experience that exquisite tension in preparing the SolidWorks case.
Team
Case Analysis (Policy
on Case Analyses.)
Regarding the proposed
$4.5 million investment from the
venture capitalist, what would you advise Jon to do (single round,
multiple
rounds, other)? Please provide a spreadsheet with your calculations
with your
answer. Base your advice on the assumptions given in the study
questions.
