Session 11: February 12, 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:
• Vinod Khosla (KPCB) - Cycles of Fear and Greed
• Randy Komisar (KPCB) - Success in Venture Capital Firms
• Brook Byers (KPCB) - Size of VC Firms
• Randy Adams (AuctionDrop) - Work with the Right VC
• Fern Mandelbaum (Monitor Venture Partners) - Making Connections

Study Questions (Policy on Study Questions.)

1. Is this a high potential opportunity? If so, why? Does Jon have a compelling vision? What is your assessment about Jon (including his background) and his team?
2. Jon has asked you for advice in September, 1994 regarding the first-round financing. He's heard that you've become an E145 student -- he feels your counsel would be most helpful to him! In general, what factors should he consider when deciding on the proposed venture capital deal?
3. 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?

4. 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?

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.

 

Team Effectiveness Summary (Policy on Case Analyses.)

Please submit the team effectiveness exercise results from the last session to the appropriate homework list by 9AM. Use the standard header format with "Team Effectiveness" as the name of the assignment.