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Jon Hirschtick is seeking first-round
venture funding for his startup, Solidworks. We examine the tradeoffs
between single and multi-staged financing for both the investors,
founders and other major stakeholders. How does each method affect
the numbers and the team?
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Relevant
Texbook Chapters
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Discussion
Questions
- Is this a high potential opportunity? Does Jon have a compelling
vision? Assess the team.
- What factors should Jon consider when deciding on the proposed
venture capital deal?
- Should Jon go for one round of financing or multiple rounds?
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Spreadsheet
Exercise
- 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. 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 $2.5 million in the fourth year after this financing, it does not have to raise any additional funds, and it compares favorably to other growth companies with price earnings (frequently called PE) ratios of 40.
- 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?
- 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.
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Teaching
Note: Valuation of High Technology Ventures
A short teaching note on the art of valuing companies. The
main purpose of valuation analysis is to identify and understand
critical assumptions affecting value, develop realistic ranges
of value based on these assumptions, and understand the way
in which the value of the business is shared to satisfy all
parties involved. |
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Main
Case Study: John Hirschtick's New Venture - Solidworks
This case follows Jon through his new venture, Solidworks,
a computer aided drafting company, Jon must decide whether
Solidworks needs all the money upfront in a single round of
capital or if the company should take the money in stages
in order to obtain more favorable terms from the investors.
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Heidi
Roizen: Small and large funds
Roizen talks about performance and limited partners in venture
capital. Smaller funds on the most part are suffering. Large
funds success depends on what has your past performance been?
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Heidi
Roizen: What numbers do VC's look at?
What are the numbers that VCs look for when they invest? In
the VC business most things fail therefore the successes have
to be BIG. Often you hear 10X, i.e. you should see 10 times
your capital coming back. It is also dollars in, dollars out,
IRR. Mobius fund today has an IRR of 90%. The more time you
can play with the money and the bigger it grows, as a GP you
get back the money and the LP can invest the money somewhere
else. You will almost never hear a VC use IRR. |
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Vinod
Khosla: Cycles of Fear and Greed
We will see the cycle of too much money again some time in
the next 5 years. Investors only have two emotions: fear and
greed. And they bounce between the walls of fear and greed.
We are now in a fear cycle, and everyone grows conservative
that they don't want to invest in anything. A few things will
squeak by, and sure enough, it will begin a trend towards
a greed cycle. |
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