Cases

Note

In the second part of each class session, we will discuss a real company case study related to the respective lecture topics. Students are supposed to have read (not solved) each case before class. We will briefly clarify questions about the case, then students will work in group sessions on an intial solution of the case (for approximately 1.5 hours) within self-selected teams of up to 5 students. These initial solutions are then (selectively) discussed among all participants. Based on the team solutions and joint discussions, students should then write up individual case solutions to be uploaded to Studip prior to the following week’s class.

If you want to submit a case solution, please upload the pdf file to Stud.IP in the folder named after the case. Please use the following file name and info: lastname_casename.pdf; e.g. ihl_microsoft.pdf. The file itself must contain your full name and immatriculation number.

1) Introduction: Evaluating Venture Opportunities

Case: Hardina Smythe and the Healthcare Investment Conundrum (HBS-9-881-073)

Abstract: Hardina Smythe, a recent MBA graduate, has just joined a top-tier venture capital firm in the difficult environment of late 2010. Her first assignment is to evaluate three different deals and make recommendations to the partners. Each potential investment has strengths and drawbacks for both the firm and Hardina.

Assignment Questions:

1. How should Vine Brook evaluate each of these potential investments? Use the Venture Evaluation Matrix Spreadsheet Tool to structure your evaluation.
2. How can Hardina best position Vine Brook and herself for success? Put yourself in Hardina Smythe’s place and make a PowerPoint presentation that evaluates the three options and recommends one for further due diligence?

2) Financial Planning

Case: Workhorse Inc. (Da Rin, Hellmann, FEF 2020), supplemental Excel worksheet

Abstract: Workhorse Inc., a startup in the solar power industry, has to prepare financial projections to convince investors and acquire funding.

Assignment Questions:

1. Use the the Financial Projections tool
   to complete the financial plan for Workhorse Inc.
2. Assess the financial attractiveness of the venture.
3. Determine the financial need of the venture.
4. Prepare a few slides to pitch the financial plan to investors.

3) Ownership and Returns

Case: Crafting a Founder Agreement at HealthCraft (HBS-9-813-101)

Abstract: HealthCraft’s three founders are about to craft their founding agreement and split the equity among themselves. Uncertainty lingers over each member’s future contributions, though-how is the team to devise a durable and effective split? Ever since consultant Kevin Rumsfeld conceived of the idea for HealthCraft, he had worked resolutely to begin building the company by recruiting a talented colleague to help with marketing and fundraising, and a junior member of one of his project teams to help him build the product. All three had been enthusiastically working on HealthCraft part-time for the last few months, contributing from personal savings to build a prototype. But now the pressure is on to discuss and finalize a founding agreement.

Assignment Questions:

1. What should the founders include in their agreement?
2. How should the founders structure their equity split?
3. Use the FAST to document your final agreement.
4. Give a written summary to explain and justify your final agreement.

4) Valuation Methods

Case: Outreach Networks: First Venture Round” (UV-6569), supplemental Excel worksheet

Abstract: OutReach Networks is an unusual start-up company in that it was profitable early in its development and did not have to seek VC funding to support its growth. The company has grown quickly and may soon be a candidate for an IPO. In November 2011, an experienced venture capitalist approaches the founder with an offer to invest $30 million in exchange for 30% of the company. While the founder sees some benefit from the VC’s experience in preparing the firm for an IPO and the funding enabling it to scale more quickly, he cannot understand how the VC has arrived at this offer.

Assignment Questions:

1. In what way is ORN a typical or atypival startup company to value?
2. What is the value of the firm under the venture capital method?
3. What is the value of the firm under the discounted cash-flow method?
4. Is Everest Partners justified in asking for a 30% equity stake?

5) Early Stage and Venture Capital Investors

Case: PunchTab, Inc. (HBS 9-812-033)

Abstract: PunchTab was a Silicon Valley startup founded in 2011 that was developing an Internet-based turnkey customer loyalty program for website owners, mobile applications developers, and brands. Founder/CEO Ranjith Kumaran must make strategic decisions about how to fund PunchTab’s early operations and growth given the many options available: individual angel investors, super angel funds, incubators, and seed funds inside traditional venture capital firms.

Assignment Questions:

1. What is your evaluation of PunchTab’s business? Is it an attractive investment opportunity?
2. Do you think it makes sense to do a seed round financing? Why or why not?
3. What are the relevant differences between angels and venture capital investors that Ranjith Kumaran should consider when raising money for his venture? Who would be the best partner for him in the short term? Who would be the best partner in the long term?
4. How is a convertible note different from a traditional “priced” financing? Should Kumaran care whether the investors offer him one option or another?
5. What should Kumaran do?

6) Term Sheets

Case: OptiGuard, Inc.: Series A-Round Term Sheet (UV-7287), supplemental Excel worksheet

Abstract: OptiGuard. Inc. is a cybersecurity startup that is attempting raise a first round of venture financing in November 2015. To date, the firm has been unsuccessful in attracting funding from venture capitalists (VCs) and has instead relied on a small seed round from local investors. With funds running short, the startup is again attempting to raise funds from VCs. During this process, it receives a bridge loan from a reputable venture capital firm to tide it over until it can complete a Series A round with the same firm. In November 2015, it receives the terms for a $5 million Series A round. The adequacy of the offer in light of other comparable financing rounds should be evaluated. How will the terms affect the future performance and other aspects of the firm in light of the high likelihood of future financing rounds? Which features of the term sheet have the largest impact on the company’s valuation and control?

Assignment Questions:

1. How attractive is the company to prospective investors?
2. Does the term sheet for the Series A round generally favour the entrepreneur (Mannix) or the VC investor (WVP)? Cite specific terms and features of the contract to support your opinion.
3. Before the Series A round, what is OptiGuard’s postmoney value? After the Series A round, what is the pre- and postmoney value if the offer is accepted as proposed?
4. What are the implications to WVP if another investor offers to provide OptiGuard an additional $7.8 million in equity after the Series A round at a price of $8.00 a share? At $3.00 a share?
5. What are the implications to WVP if it has a participating versus conventional liquidation preference and OptiGuard is sold for $15 million in three years?
6. If you were Mannix, would you accept WVP’s offer as proposed, or attempt to negotiate certain terms of the offer? If you choose to negotiate, what adjustments would you seek to make?

7) Structuring Deals

Case: StreetShares, Inc: Fintech Platform Lending Business (UV-7935), supplemental Excel worksheet

Abstract: In November 2017, John Fruehwirth, managing partner of Rotunda Capital Partners (RCP), was considering the final terms of a Series B offer to StreetShares, Inc. (StreetShares), a fintech platform lending company whose principal business was lending to veteran-owned businesses. StreetShares was cofounded by Mark L. Rockefeller and Mickey Konson-both veterans themselves-in 2013, with the mission to provide better access to credit for veteran-run businesses. Since the financial crisis in 2008, banks had been reducing small-business lending, and the founders believed there were over a million veteran-run businesses that could benefit from better access to small loans and other forms of credit. When Fruehwirth first met the two founders in the spring of 2017, initially he thought the company was too early in its development to satisfy his investment criteria-but he was impressed with the company’s management and mission. His view changed in October 2017, when StreetShares beat out Kabbage and several other online lenders to pilot a program for MILBANK, Inc., a large military affinity-focused bank, to offer small-business loans to its members. If successful, the pilot would significantly accelerate loan growth. But if the pilot failed, it would leave the firm with more expensive channels for growth and raise doubts about its small-loan business. Fruehwirth was contemplating a Series B-round investment of $20 million for 40% of the company’s equity, but needed to determine whether the returns would satisfy his investors, knowing they were highly dependent on the success of the pilot. The case contains RCP’s offering memorandum summarizing the merits of the StreetShares investment and Fruehwirth’s proposed deal terms. Students are asked to qualitatively evaluate the potential benefits and risks of the investment from the perspective of RCP’s investors, and to quantitatively calculate the investment’s returns.

Because the deal is earlier than those RCP usually invests in, Fruehwirth has asked for some protective terms - including, among others, seniority in liquidation over other round investors and a participating-preferred liquidation preference. To correctly calculate RCP’s returns, students must incorporate the deal terms in their analysis.

Assignment Questions:

1. How attractive is StreetShares as an investment opportunity? What are its strenghts and weaknesses?
2. What are some of the challenges online lenders face in competing and gaining share against incumbent banks? How well is StreetShares positioned relative to its competitors?
3. Do the deal terms on page 8 of the case give Fruehwirth adequate rights to protect his interests as a minority investor?
4. Complete the capitalization table for the Series B investment, assuming the deal closes on January 1, 2018.
5. What are the expected IRR and CoC to RCP’s investors before carried interest (i.e., their gross returns)?
6. All things conisidered, would you proceed with the investment in StreetShares?

8) Staged Financing

Case: Fast Ion Battery (HBS 9-815-025), supplemental Excel worksheet

Abstract: A battery company is running out of money and has not met all of its milestones. The year is 2012 and many cleantech investors have decided to pull back. Fast Ion Battery needs a $5 million bridge round, but one of its three investors has refused to continue funding the company. John Davidson, a partner at Ware Street Capital and the lead investor in Fast Ion, must decide whether or not to save the company.

Assignment Questions:

1. What factors (relative benefits and costs) should the investors be considering as they decide whether or not to continue funding Fast Ion Battery in a Bridge round? Given these, should they extend a Bridge round to Fast Ion Battery?
2. Calculate the value of the abandonment option embedded in the Bridge round by mapping out two scenarios in the form of decision trees:
   a. Generate a decision tree where the investors put in $5 million at the first stage and $25 million if the Bridge Round is successful. Assume that the valuation has not improved since the A2 round, but the startup still gets to the projected pre-money valuations in rounds B and C with one year delay if it can successfully deploy the Bridge round capital. If not, assume a valuation of zero. Further assume a discount rate of 20% per annum. What are the implied probabilities that the startup will achieve both B and C rounds of funding?
   b. Use these probabilities in a second decision tree where they put in the full $30 million in an all-or-nothing bet.
   c. Given these assumptions, what is the value of the option to abandon the investment if Fast Ion continues to falter after the Bridge round of funding runs out?
   
3. Suppose that they decide to extend a $5 million Bridge round at $1.50 per share, and that WSC and Franconia Ventures split the investments Bluelock would have made. Further, assume that Fast Ion gets funded and is able to exit in December 2016 at a $350 million valuation. How do the terms related to the warrants and the pay-to-play clause impact the ownership of the VCs who continue to participate. Complete the capitalization tables in the supplementary Excel sheet.
4. Calculate both the IRR and cash-on-cash multiple for each investor. How does implementing “pay-to-play” impact returns. Given these findings, should they implement the pay-to-play clause?

9) Debt Financing

Case: greeNEWit: Financing the Next Level (NA-0401)

Abstract: greeNEWit is an energy audit company in Columbia, Maryland. The firm’s three founders financed their start-up through loans from friends and family and an aggressive use of credit cards. Now the business is established, showing an exponential growth in revenues in a short time. Founder Josh Notes believes there is a billion dollar market available for the tak-ing in the area of smart grid integration. greeNEWit has been able to obtain limited bank financing but may need more to move into nationwide smart grid integration. Possibilities include additional bank loans, angel investors or venture capital, an equity partner, or perhaps generating additional revenues. A good estimate of firm value is needed in order to correctly price the share value. Josh needs to investigate all sources of financing before choosing the right next step for the firm.

Assignment Questions:

1. What are the options greeNEWit has available for generating revenue and what are you the advantages of each option? What recommendations do you have for growing greeNEWit’s business from the options it has available to it?
2. What sources of funding did the co-owners of greeNEWit use in the past? What are some other sources of funding that the partners might want to look at in the future? What are the costs and benefits of each of the new types of financing listed in the case?
3. How should Josh, Zach and John analyse the current financial situation in order to arrive at how to proceed in the future? Does greeNEWit have a strong enough balance sheet and income statement to satisfy a bank’s loan team?
4. How risky is greeNEWit? What beta would you assign to this company? What cost of capital should be used for analysing greeNEWit?
5. Should the partners seek equity financing? Use DCF and multiples analysis to determine fair value for the firm’s equity. This also means that you will need to estimate an industry growth rate and sales forecast for greeNEWit.

10) Corporate Governance

Case: The Uber Board Deliberates: Is Good Governance Worth the Firing of an Entrepreneurial Founder? (CU-243)

Abstract: Uber Technologies, the privately held ride-sharing service and logistics platform, suffered a series of PR crises during 2017. As Uber’s legal and PR turmoil increased, Travis Kalanick, cofounder and longtime CEO, was forced to resign as CEO, while retaining his directorship position on the nine-member board. His June 2017 resignation was meant to calm the uproar, but it instead increased investor uncertainty. In an effort to put the recent past behind the company, the directors of Uber scheduled a board meeting for October 3, 2017, to vote on critical proposals from new CEO Dara Khosrowshahi that were focused essentially on one question: How should Uber be governed now that Kalanick had stepped down as CEO? In this case, students are asked to consider the responsibilities of the Uber board of directors to the company’s investors and shareholders, employees, management, and contractors as the company moves rapidly towards its long-awaited IPO.

Assignment Questions:

1. What is the problem, and is the board or Kalanick responsible?
2. Was Kalanick the right CEO for Uber considering the competitive strategy of the ride-sharing platform?
3. What are the central governance issues for Uber?
4. What is more important to Uber’s success: Khosrowshahi’s governance or Kalanick’s entrepreneurial spirit?

Video-Interview about Uber governance with the newly appointed CEO: https://www.facebook.com/watch/live/?v=10151374791194999&ref=watch_permalink

Comment on Uber govervance redesigned before the IPO: https://www.youtube.com/watch?v=awz2FJ9ua1Y

11) Exits

Case: Glassdoor: The Fundraising Journey (E-673)

Abstract: From his time as a young engineer at Microsoft in 1993, to the challenge of building Glassdoor from the ground up until it reached a valuation of over $1 billion, in 2018, Robert Hohman had come a long way. Now, from his spacious office with a picturesque view of Richardson Bay in Mill Valley, California, Hohman confronted one of the most important decisions of his life. Glassdoor, the company he cofounded in 2007 with Rich Barton and Tim Besse, had grown consistently over the years. It had been fueled by multiple different investors and VC firms, under various circumstances and deal structures. Like most start-up founders, they expected to take the IPO route at some point. Then, in early 2019, when it seemed that the company was finally ready to go public, one of its largest competitors placed an offer that was hard to refuse.

Assignment Questions:

1. Write up an analysis of all pros and cons for both alternatives, IPO vs acquisition.
2. Reflect on the issues discussed in class.
3. Weigh these pros and cons to derive your own recommendation how Hohman should decide.