Posted: June 22nd, 2009 | Author: Chim | Filed under: Education, Finance, Private Equity, Venture Capital | Tags: Business plan, Case study, Education, Entrepreneurs, Entrepreneurship, Finance, Free, Interesting, Math, Private Equity, Startups, Valuation, Venture Capital | 1 Comment »
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My last post from the Entrepreneurial Finance course is here.
Today, I want to share my summary of the Horizon Communications Corporation (A) case study.
This document basically shows the industry background of telecommunication in the 90’s. Basically, it highlights the Telecommunications Act of 1996 and how it changed the market.
With the Act, there was a new market opportunity for companies to provide transmission facility to customers. Basically, there was an opportunity for new companies to serve as a hub connecting a telecommunication facility for big clients to other local telecom providers and to long distance providers.
Along the case, it explains the who the founders are, what the Horizon’s operating strategy is and what the product and service are.
The case presents a serious of challenging questions to the Horizon’s management. It wants to students to think what amount of financing should they ask for and which venture capital firms they should approach.
Again, this case presents challenging questions for VCs and entrepreneurs.
Assignment from MIT OpenCourseWare:
Horizon Communications
1.Would you have started this company? Would you invest in this company? Why or why not? What do you think of the economics of the idea? Of the management team? How does this investment differ from that in Technical Data Corp.
2.What pre-money value would you place on the company? I.e., what value should the Horizon team place on the company when they try to raise money? How much money should they attempt to raise?
3.How should Horizon approach their fundraising process? Should Horizon go to a venture capital firm or to family and friends? If Horizon decides to go to a venture capital firm, which firm or firms should they target?
4.Can a venture capitalist add value to the Horizon team? How?
Assume:
. Horizon’s marginal tax rate is 36%
. Expected inflation is 3%.
Read the Case Study: Horizon Communications Corporation (A)
Horizon Communications
1.
Would you have started this company? Would you invest in this company? Why or why not? What do you think of the economics of the idea? Of the management team? How does this investment differ from that in Technical Data Corp.
2.
What pre-money value would you place on the company? I.e., what value should the Horizon team place on the company when they try to raise money? How much money should they attempt to raise?
3.
How should Horizon approach their fundraising process? Should Horizon go to a venture capital firm or to family and friends? If Horizon decides to go to a venture capital firm, which firm or firms should they target?
4.
Can a venture capitalist add value to the Horizon team? How?
Assume:
. Horizon’s marginal tax rate is 36%
. Expected inflation is 3%.
Please, add your answers in the comment section below!
Posted: June 21st, 2009 | Author: Chim | Filed under: Education, Finance, Private Equity, Venture Capital | Tags: Business plan, Case study, Education, Entrepreneurs, Entrepreneurship, Finance, Free, Interesting, Math, Private Equity, Startups, Valuation, Venture Capital | 1 Comment »
Invest - from Flickr
I’ve started studying the Entrepreneurial Finance at MIT OpenCourseWare by myself a month ago. I wrote my first post about the first case study here (Technical Data Corporation Business Plan).
Until now, I think the selection of the case studies are awesome. It presents many cases where the student is put in the position of a venture capitalist and an entrepreneur. For instance, you have to learn how to valuate a business and decide if you want to invest in a specific company. Plus, you must provide your analysis to decide what you want to do next.
Today, I’m want to present my summary and my recommendations about the Centex Telemanagement, Inc. case study.
Centex Telemanagement, Inc.
- The case starts with the story of Sierra Ventures and its found Peter Wendell. Then, it talks about how Wendell met with Jeffrey Drazan. Drazan was a VC associate hired by Wendell. In this part of the case, it gave me a very interesting vision of how VC hires an associate to work with. Wendell wanted to invest in the telecommunication industry after the break-up of AT&T’s monopoly and he wanted to find a person with experience in telecommunication industry. Luckly, Drazan, who was in that industry, wanted to go to the VC industry. They had the chance to meet each other and the relationship developed.
- Later, it shows quickly the Centex Telemanagement formation, but the focus is how Drazan found and brought this opportunity to Wendell. Drazan worked with the Centex Telemanagement by acting as the CFO of the company. However, Centex and Sierra hadn’t formed any formal and legal relationship yet. Drazan was supporting the financial projections and planning the growth of the company. Everyone was expecting the Sierra would make an investment to Centex. When they were almost closing the details of the investment, the Sierra founders decided not to continue to the plan. Drazan was shocked because he dedicated an amount of effort to the company and it would ruined all his efforts. However, after some negotiation, they closed the deal in a staged/milestone-oriented approach to the deal.
- To get higher valuation, Centex would need to achieve some milestone, such as hiring the CEO and some other people in the senior management and also Centex would need to achieve an X amount of revenue by a deadline.
Assignment from MIT OpenCourseWare:
Centex Questions:
1. Sierra Ventures and Centex:
-Describe the deal structure:
-What role does Series C Preferred play?
-What value does right of first offer have?
-What valuation is Sierra offering to Centex? How can Sierra justify this valuation?
2. Private (initial) investors:
-How much dilution do the initial investors experience?
-How much dilution would the initial investors have experienced, if they had anti-dilution protection on their initial investment of $499,999? (Full ratchet? Weighted ratchet?)
Assume that by May 1985 the private placement offering has raised the full $499,999 for Centex at $2.25 per share
Centex Questions:
1. Sierra Ventures and Centex:
-Describe the deal structure:
-What role does Series C Preferred play?
-What value does right of first offer have?
-What valuation is Sierra offering to Centex? How can Sierra justify this valuation?
2. Private (initial) investors:
-How much dilution do the initial investors experience?
-How much dilution would the initial investors have experienced, if they had anti-dilution protection on their initial investment of $499,999? (Full ratchet? Weighted ratchet?)
Assume that by May 1985 the private placement offering has raised the full $499,999 for Centex at $2.25 per share
Read the Case Study: Centex Telemanagement, Inc. – 286059p2
Please, add your answers in the comment section!
Posted: May 28th, 2009 | Author: Chim | Filed under: Education, Finance, Private Equity, Venture Capital | Tags: Business plan, Case study, Education, Entrepreneurs, Entrepreneurship, Finance, Free, Interesting, Math, Private Equity, Startups, Valuation, Venture Capital | 2 Comments »
The Technical Data Corporation Business Plan is the first case study from the Entrepreneurial Finance course from MIT OpenCourseWare. It is a business plan prepared by Jeffrey P. Parker in late 1980.
The case describes that Technical Data wants to raise $100,000 before the end of 1980 in the form of 20 Units. Each Unit would have 50 shares of common stock offered at $10 per share and a promissory note (debt) of $4500.
Technical Data Corporation: Business Plan
You can read the case study here: http://utopia.duth.gr/~gk7844/moustakis/M1-2007-08/business_plan_example_1.pdf
Then, in this lecture, there are some questions regarding about this case from the open course. I answered them in bold.
Technical Data Corporation: Business Plan The case contains excerpts from a business plan prepared in late 1980.
The entrepreneur, Jeff Parker, proposes to start a company that will supply information to professional investors in the bond market. Among the issues you might address are the following:
1. Should Parker enter the business?
Parker is asking for $100,000 to start up the company. He will create a business based on an existing market of Telerate customer. If he secures, as he stated, the deal of promotion to Telerate’s customer, he is able to attract customer to his financial product and earn a stable source of revenue through the monthly subscription of the service. So, he should enter the business.
2. Would you invest in this deal?
He structure his deal in a promissory note and a few shares of his company. This type of structure is not ideal for a venture capitalist nor private equity partner. First, there is no incentive of high payoff in the $4500 from promissory note even if the interest rate is 15%. Second, the percentage of ownership is small, thus the active investors do not have a great say in the company. Lastly, the company’s grow depends on the Telerate customer base, so there is not a huge or exponential growth rate for the business in the future.
3. How has the deal been structured? Why? (Note that Parker is selling equity for 10% of the company in the units. The two directors with 1.5% each are buying 3 units each.)
The deal is structured in this way:
- 20 Unit
- Each unit having $ 5000 in value
- $ 5000 X 20 = $ 100,000
Each Unit:
- 50 shares of common stock at $ 10 / share
- promissory note of $4500
This is a great exercice. The next case I’m studying is the Horizon Communications Corporation (A), this one is much harder.
Posted: May 27th, 2009 | Author: Chim | Filed under: Education, Finance, Private Equity, Venture Capital | Tags: Case study, Education, Entrepreneurs, Entrepreneurship, Finance, Free, Interesting, Math, Private Equity, Valuation, Venture Capital | No Comments »
15.431 Entrepreneurial Finance
There is an amazing course for people seeking to work in the private equity, venture capital industry and entrepreneurship. The Entrepreneurial Finance is an open course that focus on the finance of start-up ventures.
It addresses some of the important questions such as:
- how much money can and should be raised
- when should it be raised and from whom
- what is a reasonable valuation of the company
- how funding should be structured.
I am self-studying this course and it is great to read case studies that make me aware of the issues that I will be facing in the VC/PE industry.
You can read more about this open course here: http://ocw.mit.edu/OcwWeb/Sloan-School-of-Management/15-431Entrepreneurial-FinanceSpring2002/CourseHome/index.htm
