R&r Business Case Study
Essay by Miguel Rueda • March 20, 2017 • Case Study • 8,314 Words (34 Pages) • 2,864 Views
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R&R Case
by Cenan123 | studymode.com
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Entrepreneurial Finance 2013 - Case Assignment Questions
R&R R&R case brings up major themes that we will see over and over again in this course. This case also differs significantly from most of the other case you will read in this course as it provides a full story of an entrepreneurial venture. In most other cases in this course, the entrepreneur is faced with a decision/dilemma at the time of case. In these cases I will ask you to put yourself in the entrepreneur’s shoes and come up with a course of action that you would undertake if you were in the same situation. Turning back to the R&R case, clearly Bob Reiss appears to be a successful entrepreneur but it is worth digging for factors that may explain why he was successful. The individual write-up assignment is geared towards making you aware of how I expect you to prepare for cases. The assignment questions are broadly classified in to two types. 1. “Putting the facts together” type of questions. These types of questions rely largely on your ability to read the case and to be able to assemble related facts that are scattered throughout the case. These questions do have a “Right” or “Wrong” answer as they are simple facts from the case. I will rarely assign such questions after this write-up. However, I am assigning them for this first assignment to show you how I expect you to prepare for the second type of questions which is described below. 2. “What, why, when and how should some action be taken?” While these types of questions do not have clear “Right” or “Wrong” answer – I do have a mental framework of “Right” or “Wrong” approach to answering such questions. First, since the course is designed to focus on the entrepreneur, you should come to class every day prepared to think and acts like the entrepreneur in the case. You will need to present the analysis that leads you to make a particular decision and to explain the plan you have for implementing your decision. Your goal should be to persuade
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your classmates that this is the appropriate plan and decision for the situation at hand. Entrepreneurs have a bias to take action, and this course is intended to help you develop this attitude. However action without any basis is not a rewarding strategy in this course. Yes, many successful entrepreneurs claim to have no vision or analysis when they started out. However, there are countless others who wish they had been more thoughtful and deliberate when they took the entrepreneurial road. Remember if you run across the Beltway and make it to the other side it does not make the crossing any less risky! ASSIGNMENT QUESTIONS FOR R&R “Putting the facts together” questions: You will need to the following exercise to be able to answer some of the questions. Read the case and circle the following four types of items (you may choose different colors for each type): a. Dates or Time references (e.g. Page 1 line 1 “It was, summer of 1983…”) b. Money and quantity numbers (e.g. Page 1 para 3“…building sales of $12,000,000…”) c. Name of any individual (e.g. Page 1 line 1 “Bob Reiss observed with interest…”) d. Any term/jargon you do not know/ do not understand/ are unsure about
Question 1: Please draw a time line for how the board game opportunity evolved - from summer of 1983 when Bob first perceived it till he finally exited. The time line should list major milestones especially when the Bob secured key resources (e.g. suppliers, customers, capital etc.). See below for a schematic. You can (and probably should) hand-draw this.
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Summer 1983 Bob notices Success of trivial Pursuit in Canada
NOTE: Question 1 will help you visualize what happened when. It also forces you to think about which events are important enough to merit a mention on the time line and why?
Question 2: Draw a circle in the middle of the page and write “BOB REISS” inside the circle. Go back to your marked up copy of the case and write the names of all the individuals/organizations mentioned in the case that you consider played an important role in shaping Bob’s decisions. Write their names around Bob. Draw a line connecting Bob to each individual and on the line write a brief reason for the connection. See below for a schematic. You can (and probably should) hand- draw this figure. Sam Kaplan
TV Guide Friend and Investor
Provide License
Bob Reiss th
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NOTE: Question 2 is designed to help you visualize who are the key individuals or organizations linked to the main actor in the case and nature of their relationship. The main actor is typically faced with major decision(s)/ issues. This exercise helps you see how all the individuals/organizations you map on this figure are “connected” to the main actor. It also forces you to think about which individuals are important enough to merit a mention on this figure and why? Frequently you would need to understand the motives, agenda and incentives of these individuals when you recommend a course of action or try to find explanation for the choices they make. Question 3: Create a two column table. Go back to your marked-up copy of the case and write down a list of terms/jargon that you are unfamiliar with in the first column. In the second column guess what that term may mean. Does not matter how little confidence you have in your guess – you must guess! See below for a schematic. Term/Jargon that I am unfamiliar with ï‚· Billing Terms to retailers (pg. 2, middle of paragraph 2) ï‚· ï‚· ï‚· ï‚· My guess of what it means ï‚· Conditions attached to a sale? ï‚· ï‚· ï‚· ï‚·
NOTE: Question 3 is designed to help you catalog terms/jargon that you are unsure about. This list provides an excellent source for asking questions in the class session. If you find yourself struggling to participate in class discussions, this list can provide excellent openings for you to join the conversation. For example, if the class discussion is happening around how to get access to retailers you can ask “Why are the billing terms of retailers so important?”
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Transitioning to “What, why, when and how should some action be taken?” type of questions Question 4: What factors created an opportunity for Bob Reiss and the "TV Guide Game?" Question 5: What were the risks and obstacles faced by Bob Reiss and other participants in the enterprise? Question 6: What actions did Bob Reiss take that led to the success of the "TV Guide Game?"
NOTE: Question 4, 5, and 6 are still fact based questions but they are more than simple restating of facts. These questions require an exercise in connecting different pieces of information AND interpreting the combination. Question 7: How successful was Bob Reiss? I want to see numbers - use the data provided in the case to create an approximate income statement for this venture both on aggregate basis and on per unit basis. What was the “contribution” (sales minus variable costs) per unit? NOTE: Question 7 is the “quantitative analysis” question. Typically this type of question requires you to employ quantitative frameworks (e.g. margin analysis, discounted cash flow techniques etc.) to get a better understanding of the issue. Please note that these are NOT text book problems disguised as cases – frequently you have to infer or assume key inputs needed for analysis from the text and tone of the case. You have to understand which pieces of analysis are based on more certain information and which are based on assumptions. You should get a good sense for how your analysis and any decision based on that analysis may change if some critical piece of information turns out to be different from what you
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originally assumed. In most cases this type of analysis will form the core of your arguments for choosing a particular course of action. You should be able to explain why you made (or did not make) a particular choice based on your analysis, case facts and background readings. Key is that you CAN NOT simply assert what you believe must be done – you MUST DEMONSTARTE the logic and the analysis that allows you to state your choice of action.
Question 8: Would this approach have worked for Parker Brothers or Milton Bradley? (Again try to back your arguments with numbers) NOTE: Question 8 is a “what if” type of question. This type of question is aimed at developing your ability to see the same issue from multiple perspectives. This shift in perspective can yield powerful insights both about the observed behavior as well as likely future actions.
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Vermeer Technology (A) Pease reread the note "Perspectives on Entrepreneurship" before reading the case. Address the following questions in preparing for the case discussion 1. What decisions did Charles Ferguson make, and what actions did he take, from late 1993 through January 1995 to build an enterprise that attracted an offer from a group of venture capital firms to invest $4 million for 51% of the company? 2. As Charles Ferguson, would you agree to the proposed deal? 3. In January 1995, what can go right and what can go wrong for Vermeer? As Charles Ferguson, what would you do to seize the opportunities and mitigate the risks? After reading the case you should read the article title “True Finance” which is excerpted from Charles Ferguson’s book. It will help you appreciate the case nuances greatly. This article is also available under the newly created Documents\Class Sessions folder on Blackboard.
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Vine.es Business Plan For our next class on Jan 17th (Thursday) you are required to read a number of articles. The first article you should read is the note titled “Some Thoughts on Business Plans”. After reading this note please read the Business Plan for “Vin.es”. This company was started a couple of years ago by two Georgetown alums Dan Leahy and Ben McKean. See a story of their launch by clicking on http://www.businessinsider.com/village-vines-2010-4 PLEASE DO NOT CIRCULATE THIS DOCUMENT AS THE INFORMATION CONTAINED IS CONFIDENTIAL. Dan Leahy will be our guest for this session and will be coming down from New York to talk to talk about his experience. The business model of the firm has evolved over the last two years since it was first conceived by Dan and Ben. Please focus on the details provided in the business plan at the time Dan and Ben were trying to launch the venture. (The company changed its name to Savored.com and it is operating in Washington DC. If possible I urge you to sign up on the savored.com site and use it to book a restaurant meal before our class so you may know first-hand how the company operates.) PLEASE BE READY TO PROVIDE AN ANSWER AND RATIONALE FOR YOUR ANSWER TO THE FOLLOWING QUESTIONS ABOUT VILLAGE VINES/SAVORED:
1. The note titled “Some Thoughts on Business Plans” describes the People, Opportunity, Context and Deal (POCD) framework to evaluate new ventures. How would you characterize the People, Opportunity, Context and Deal characteristics for the venture Ben and Dan co-founded? 2. Who is the audience for the Vine.es business plan, what are their needs, how well does the plan meet those needs? 3. According to the business plan how much cash will the venture require before becoming cash flow positive? What activities are likely to drive the “use” of cash (who will be paid by the company for what)? How does the
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plan propose to “generate” cash (Who is expected to pay to the company for what)? 4. At the time of writing of this Business Plan (August 2009) what can go wrong for Vin.es? What can go right? How can Ben and Dan reduce the possibility of things going wrong? 5. What are the most attractive features of Vine.es business model? What features are the most problematic? What are the key drivers of the economics of the business being proposed?
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Digital Everywhere For our next class we will be discussing the Digital Everywhere case (All cases and readings are now available for purchase at the new HBSP course link: https://cb.hbsp.harvard.edu/cbmp/access/17437415 . Pease read the two short notes on WACC calculation and DCF valuation BEFORE reading the case. Address the following questions in your write-up: 1. Assume that the Weighted Average Cost of Capital (WACC) is 15% - Use the Ex 1 Pro Forma projections to estimate the DCF value of Digital Everywhere. Assume that the terminal growth rate of 5%. Make sure that you show your Free Cash Flow for each year clearly. (I have posted an Excel file that has the exhibits from the case) 2. Based on Exhibit 2 estimate the Unlevered Beta (some time referred to as Asset Beta) for Digital Everywhere (I am assuming that levering and unlevering of betas was covered in your basic Finance course. Most standard Text Books cover this as well.) 3. Assume that Digital Everywhere will NOT be taking on any debt, current risk free rate is 6% and expected market risk premium is 7.5%. Use CAPM to estimate the WACC of Digital Everywhere 4. Based on P/E ratios for peer firms prevailing at the end of 1997- what would be your estimate of Digital Everywhere’s value at the end of 2003. 5. BONUS QUESTION (NO NEED TO INCLUDE IN YOUR WRITE UP): How will your valuation change (assuming WACC of 15%) if Digital Everywhere were to take on the debt as described at the bottom of page 1 of the case
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SeverVault A key feature of new ventures is their ability to grow at explosive rates – this growth generates unique financing challenges. Our case for discussion “ServerVault” provides an excellent starting point for exploring these challenges. Pease use the Excel spreadsheet posted on Blackboard to do your analysis. Address the following questions in your write-up: 1. (CREATE THIS WORKSHEET BUT DO NOT SUBMIT IT) Please prepare a forecast of ServerVault’s statement of cash flows for the 30 months beginning with July 2000 and ending in December 2012. Note that the case exhibit 4 gives you the statement of cash flows for the past six months. Case exhibit 5 gives the forecasts of facilities and servers. You can assume that each server costs $3,000 while each facility would cost $5.5 million to build. For your forecast you can let the model accumulate negative cash balances. 2. Based on your analysis from question 1 – by which month (Fume Date) will ServerVault run out of cash? What is the average “burn rate” per month over the next 12, 24 and 36 months? 3. Create a Cash flow Diagram showing cumulative cash flow against time. What is the minimum amount of funding that ServerVault will need to meet the projections outlined in exhibit 5. 4. Using your forecast model from question 1, please determine the following: a. Assume that outside investors will invest $ 5 million – by which month will ServerVault run out of cash? What is the fume date if the investment is $15 million instead of $ 5 million? b. What operating assumptions are the “key drivers” of ServerVault’s “burn Rate” 5.On what issue should Patrick Sweeney and Jim Zinn especially focus in managing the growth of their firm.
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Tire City Day 1 & Day 2 Our case for discussion in next class is “Tire City”. This case provides you with an opportunity for carrying out historical performance analysis and basic financial statement forecasting primarily using the “Percent of sales” approach. Building the pro forma future financial statement would allow you to estimate the need for future funds (or generation of excess cash). You would also be able to build Free Cash Flow (FCF) Statement from the forecasted Income Statement and the Balance Sheet. Since FCF projections are key inputs for DCF valuation this case solidifies the foundations for mechanics needed to do a DCF valuation. I have posted a spread sheet that contains the exhibit from the case and you may use that spread sheet to finish the analysis described below. However, I urge you to do the 1996 forecast using paper, pencil and calculator rather the excel file. I find that building a forecast this way gives you great confidence and it is fairly easy to transfer the calculations to the excel file. Address the following questions for your write-up: For Day 1 1. Evaluate Tire City’s historical performance. Feel free to employ various ratio analyses that you may have learnt in your pervious Finance and Accounting courses (for a quick refresher you can read the first few pages of the note “Thoughtful Forecaster”, available at https://www.zionsbank.com/pdfs/biz_resources_book-6.pdf ). What is your interpretation of Tire City’s performance till date? How has Tire City managed to finance it growth in revenues of $16.2 million in 1993 to $23.5 million in 1995? What was the cash conversion cycle for Tire City in 1993, 1994 and 1995? You would need to estimate the DSO, DSI and DPO ratios to estimate the CCC( If you are interested you can read a couple of nice short articles on CCC at http://www.inc.com/encyclopedia/cash-conversion-cycle.html and http://www.forbes.com/sites/ycharts/2012/03/10/the-cashconversion-cycle/ .)
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2. Prepare a 2 year forecast of the Income Statement and Balance Sheet using the step-by-step process outlined below. We will follow the “Percent of Sales” methodology and we will assume that the relationship between operating items and the sale will stay at the 1995 level. Step 1- Calculate the percent of sales ratio for relevant line items in income statement and balance sheet for 1995 by dividing the line item by the 1995 sales. Thus, dividing 1995 cost of sales ($13,612) by 1995 sales of $23,505 yields 0.579. Thus, cost of sales were 57.9% of the total sales. Repeat this for all line items in income statement and balance sheet where it makes sense. For example, it is reasonable to assume that cost of sales to total sales ratio will remain stable. Interest expense on the other hand is driven by total debt rather than level of sales. Step 2 – Build out the Income Statement for 1996. First forecast the 1996 Sales – the case mentions that the sales are expected to grow by 20%. Keep building out the income statement by forecasting all entries that can be forecast as percent of sales. Note that Depreciation, Interest Expenses, Income tax and Dividends will need a different approach then percentage of sales. For depreciation, the case provides information about depreciation for existing assets as well as how to estimate the additional depreciation for the warehouse for 1996 (and 1997). You can use these values for depreciation line. While we ordinarily wouldn’t forecast depreciation levels directly, given the information in the case, this is the best way to do it. There is no information given about interest expenses and income tax. Assume the cost of debt (hence interest rate on borrowings) is 10%. Since you know the 1995 debt level you can forecast the 1996 interest expense by simply multiplying the 1995 total debt by 10% interest rate. Similarly we will use the 1995 income tax to profit before tax ratio (43.7%) to estimate the tax rate. Assume it remains the same for 1996. Use the 1995 dividend payout ratio (defined as dividends divided by net income) to estimate dividends for 1996. This should complete your income statement for 1996.
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Step 3- Now forecast the balance sheet for 1996. Assume the company considers working cash levels to be 3% of the projected sales for the year. Use the percent of sales method to forecast accounts receivable, accounts payable, and accrued expenses as these line items are likely to move in line with sales. Note that for 1996 case provides explicit level of inventories so use that. You are also provided an explicit estimate of cash flow for expenditure on new warehouse which should help you predict the 1996 Net Plant & Equipment number. Remember that we can get capital expenditures as: (Capex)t = (Net PP&E)t - (Net PP&E)t-1 + (Depreciation)t Rearranging this to solve for Net PP&E in year t gives you the way to determine the 1996 Net PP&E number. Estimation of depreciation would have been done in Income statement forecast already. Also remember: (Retained Earnings)t =(Retained Earnings)t−1 + (Net Income)t – (Dividends)t Step 4 - You next need to forecast the financing line items in the model (debt and common stock). For common stock, we will assume that the firm neither issues nor repurchases stock so it remains at the same level as the prior year. For short-term and long-term debt, you need to remember that each year; some of the long-term debt is going to be paid off. The amount of longterm debt that will be paid in a particular year becomes shortterm debt for that year (don’t forget that the amount of longterm debt on the balance sheet would need to adjust for this as well). This should complete you balance sheet. Step 5: After doing this, it is likely the case (almost assuredly) that your balance sheet does not balance. If you have more assets than liabilities, the firm requires more outside financing. If you have more liabilities than assets, the firm will have an abundance of cash. Create an extra line item - one for excess cash (on the asset side) or new debt (on the liability side ) which will serve as the “plug” to balance the balance sheet. (Note that in doing this, it implicitly assumes that all future external financial requirements would be met by issuing new debt).
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Now you should have the 1996 Balance Sheet, and it should balance. Step 6: If you have done this exercise by hand – you should recreate this in Excel using formulas – the formula for the plug line will be a bit tricky but try not to hard code any number. Once you get the 1996 financial statements it is pretty easy to create the 1997 statements - wherever it makes sense just copy the formulas to generate the forecast Income Statement and Balance Sheet for 1997 (Be careful about Inventory, depreciation and Gross Plant & Equipment which need to be forecast explicitly.) 3. Using your set of pro forma forecasts, assess the future financial health of Tire City as of end of 1997. a. How much funding should Tire City request from the bank? b. What are the Free Cash Flow in 1996 and 1997? c. What is the cash conversion cycle in 1996 and in 1997. Will Tire City be in a stronger or weaker financial condition two years from now? The forecast you just created will be referred to as the base case. The following sensitivity analysis will be based off this Base Case. For Day 2 4. Please start from the Base Case and explore the effect of each of the following on the Funds Required : a. Instead of the Base Case scenarios of inventory levels going down 1,625,000, the Days Sales Inventory (DSI) ratio remains at the same level as it was in 1995 what is the total funds required. b. If Tire City wants to reduce its Days Payables Outstanding (DPO) to 10 days. This would allow Tire city to get 2% discount from its suppliers. How would the funding needs change compared to the base case scenario?
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c. Tire City depreciated 10% (instead of 5%) of the warehouse’s total cost in 1997. 5. Suppose the proposed terms of the bank loan included a covenant (a contractual obligation that binds a borrower to specific actions or outcomes as a condition for extending a loan – See the Note on Bank Loans for more details) that read as follows: “The company must maintain net operating working capital (defined for purposes of this loan as accounts receivable plus inventories minus accounts payable) of at least $4 million. For purposes of this covenant, operating net working capital will be measures at the END of each fiscal year” Is Tire City likely to be able to satisfy this covenant in both 1996 and 1997? 6. As a lender, would you be willing to loan Tire City the funds needed to expand the warehouse facilities and finance its growth? Why or Why not?
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Working Capital Simulation: Managing Growth In our class on Tuesday we will discuss the Working Capital Simulation. The simulation is now available for playing between now and 9:00 AM on Tuesday. I will use the results from you play to debrief the learning objectives - we may rerun the simulation again in the class so bring your laptops.
I do not require a write-up given the short notice but I do want you to address the following questions in getting ready for the class session: Before playing the Simulation 1. What are the fundamental operating characteristics of Sunflower Nutraceuticals? How are they reflected in the company's financial performance as reflected in the financial statements available in the Prepare section of the simulation? 2. What are the strategic and financial implications of the three alternative vehicles Teresita Alvarez has surfaced for financing the company's working capital needs in the future? Which do you feel is the best option for allowing Sunflower Nutraceuticals to fulfill its potential? After answering the two questions above – launch the simulation but focus on Phase 1 only for Question 3 3. Review the choices available in the simulation’s first phase and consider which of the financing options you will elect. Why? 4. Complete the three phases of the simulation. Please make note of your selections and rationale for accepting or declining various decisions.
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Dropbox: It Just Works In the next class we will be starting a new mini module on “Business Models”. Please read the blog posts (part 1 through part 6) of Professor Tom Eisenmann’s blog available at http://platformsandnetworks.blogspot.com/2011/07/business-modelanalysis-part-1-key.html Also read the note on “Hypothesis-Driven Entrepreneurship: The Lean Startup” before reading Dropbox case. In your write-up please address the following questions: 1. Dropbox is late mover in a crowded space. What opportunity did Houston see? Specifically, what are the key elements of Dropbox’s current business model? 2. Is Dropbox profitable as of June 2010? (In 2010, an entry-level software engineer in Silicon Valley earned $80-120 K, adding the cost of office space etc. you can assume that total cost of a full time employee is $150K) Are you optimistic about its prospects? How does your estimate of Dropbox’s current profitability influence your evaluation of the venture’s prospects? 3. When he applied to Y-Combinator (see case Exhibit 2) what hypotheses did Houston hold about key elements of Dropbox’s business model? As of June 2010, which of these hypotheses have been confirmed, and which have been discarded? What is your assessment of the approach Houston used to test hypotheses? Did he waste time/resources or make notable mistakes? Can you imagine better ways to test key hypotheses? 4. Imagine that at the same time Dropbox was founded, Google decided to target the opportunity that Houston had identified. How would Google’s approach to pursuing “G-Drive” have differed from the approach that Dropbox’s team followed?
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5. What should Houston do about the decision posed at the end of the case, i.e. creating a separate version for small and medium –sized business (SMB) customers? What process should he use to make this decision?
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NetFlix.com Inc Day 1 & Day 2. You can make the following assumptions in answering the study questions. PLEASE BE PREPARED TO DISCUSS HOW YOU ESTIMATED THE VALUE OF A “NEW” SUBSCRIBER. 1. Case mentions that at the end of March 2000 Netflix had 120,000 paying customers. Assume that there are another 35,000 Trial customers at that point yielding a total subscriber base of 155,000 at the end of March 2000. You can also assume that NetFlix had 110,000 total (paying and trial) subscribers at the end of December 1999. 2. The original S-1 filing mentions that Netflix was shipping 800,000 discs per month. (The filing is available at http://www.sec.gov/Archives/edgar/data/1065280/000101287000-002191.txt ) 3. You can assume a discount rate of 20% PER YEAR 4. DVDs purchased for subscribers who drop out can partially offset the needs of replacement new subscriber. In other words NetFlix has the ability to replace the customers that drop off by new customers. Keep in mind that some of the “new releases” for the customer who drop off after a month will become “old releases” for replacement customers. 5. For the subscribers who are still with the firm after 6 months the expected life with NetFlix is 5 years. 6. Assume all new subscribers are being signed up for the $19.95 per month (you can round it up to $20 to make calculations clean) 7. Assume that Netflix would add 420,000 NEW subscribers in 2000. Going forward the number of NEW subscribers will grow at 50% per year for the following 4 years. Thus, in 2001 Netflix will add 630,00 New subscribers (420,000 x1.50). Beyond 2004 the growth in “New” subscribers will be 3% per year in perpetuity. 8. While the subscriber model takes the cost of revenue and customer acquisition costs (the line item “Sales and Marketing”) into account. The overhead costs of General and Administrative as well as Product Development costs are not accounted for. Assume these would grow at a 3% rate per year in perpetuity. You can ignore the “Stock-based
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compensation” expense as these are non-cash (i.e. NetFlix does not spend actual cash but issues new stock/options to its employees) Study Questions for NetFlix Case DAY 1 1. Can you establish the basis for $17.55 cost per disc mentioned on page 4. 2. Construct a monthly subscriber model for NetFlix that can be used to forecast the expected cash flows for a new subscriber over the next five years. What is the value of a new subscriber? Based on your analysis, should Netflix be acquiring new subscribers? DAY 2 3. Use the assumptions about the subscriber growth and overhead cost growth (assumptions 7 and 8) and your calculation of expected subscriber value model to estimate the value of NetFlix.com as of December 1999? For your base case assume that NetFlix does not change its business model. To simplify your analysis do this on annual basis rather than monthly basis. a. What changes if any would you suggest be made to its existing business model? b. What are the value implications of these changes? 4. Using the base case scenario (no change to its existing business model) create a cash flow diagram. Again, to simplify your analysis do this on annual basis rather than monthly basis. You can make additional simplifying assumption that all cash flows during the year occurs at the end of the year. a. How much funding does NetFlix needs if it does not change its business model b. When would NetFlix reach its peak funding needs c. How many years will it take for Netflix to become Cash Flow Positive d. What changes to the Business Model would you recommend? What are the implications for the cash flow to Net Flix?
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ZipCar Day 1 & Day 2 It is critical that you (re) read the "Note on Business Models Analysis for the Entrepreneur" BEFORE attempting the ZipCar Case homework assignment. The reading on Business Models provides excellent example of using the "Fishbone" template to analyze revenue and cost structure. Review the “Fish Bone” framework described in your reading titled "Note on Business Models Analysis for the Entrepreneur". The reading on Business Models provides excellent example of using "Fishbone" template to analyze revenue and cost structure. Please use this technique to sketch out a "Fishbone" business model for ZipCar based on their updated model (Ex 5).The only assignment you need to hand out is this completed FishBone Diagram based on Exhibit 5. The economic model should be driven by "per member" unit of analysis. Convert all metrics in to per month basis as we would eventually create a similar Fish Bone diagram for the “Actual performance” data provided in Ex 8b which is for the month of September 2000. Focus on the Year 1 forecast. You should take the first year numbers and convert them into monthly numbers. Work out the per member, per month contribution (direct revenue minus direct costs per member). Focus on figuring out the key drivers of revenues as well as costs. To help seed the idea think about how the total contribution depends on contribution per member times average number of members. Now you can expand each of the two components further e.g. Contribution is revenue minus costs, each of which can be further decomposed. PLEASE BRING YOUR FISHBONE DIAGRAM TO CLASS FOR SUBMISSION. IF YOU CAN NOT ATTEND PLEASE HAVE A CLASS MATE SUBMIT IT FOR YOU. While I want your submission to be neat I do not want you to spend a lot of time trying to draw boxes in powerpoint. A clean hand drawn fishbone diagram is good enough!
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The Fishbone assignment described above should help in preparing you for discussing these study questions (No need to submit write-up of these questions) 1. Think about the business model of Zipcar that Robin Chase has created. That is what are the sources of revenue and what are sources of costs (Variable and fixed). Ex 3 describes the business plan as envisaged in Dec 1999. Focus on year 1 - Can you “back engineer” the Revenue and Variable costs. In other words what is the “recipe” (e.g. number of members, various types of revenue per member etc.) that is being used to estimate the Dollar amount of sales and variable cost? Please work out the rationale for all the line items for revenue and variable costs. 2. Since the application fee is one-time fee and will never occur again, remove the $11,000 from revenue projections to focus on revenue items that will keep recurring. Work out the average contribution PER MEMBER for year 1 in the original plan (exhibit 3) and revised plan (exhibit 5). Also estimate the number of members needed to breakeven (i.e. to cover the fixed costs under both plans). What change in assumptions has contributed to the change in expected contribution per member/Break even membership level? Do you agree with the change in assumptions? Why or why not
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ZipCar Day 2 For this session we will focus on the “actual performance” experienced by Zip Car as outlined in Ex. 8b. We will use the template of the Fishbone for Ex 5 to develop similar diagram for Actual monthly performance. This should allow us not only to compare the $ 90.26 per member monthly contribution that we derived based on the Ex 5 projections to the actual monthly contribution realized in the month of September but also to compare the individual “bones” of the fish bone to understand what factors drove the difference between “plan” and “reality”. This analysis should provide insights into what actions Chase can take to further refine the Business Model. 1. Assignment Question 1: Create a fishbone diagram of actual contribution realized for the month of September 2000. Keep in mind that while in Ex 5 assumptions about membership levels, utilization and usage were driving the projected revenue and costs, in Ex 8b we are getting actual monthly revenue and actual usage which can allow us to back out the corresponding levels of usage, price and utilization actually achieved. For example we know the actual “member days” and “car days” for September. We have actual hours of usage which can be used to estimate the actual utilization. 2. Assignment Question 2: Exhibit 8b shows that while the “usage” was 3,223 hours for the month, the “billed” hours were only 2,287. Some of you can guess that Chase never foresaw the extensive “day trip” usage that actually materialized. Since the Ex 8b provides detailed decomposition of revenues and usage (which drives costs) across “Daily Use” and “Hourly Use” type of trips, Draw a fish bone diagram that shows the “per trip” contribution for these two
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ONSET VENTURES ONSET ventures articulates the concept of “active investing” that is the single most important distinction between capital provided by VC versus capital from other sources such as Banks or Public debt and equity markets. Please prepare your answers to the following questions 1. How would you compare ONSET to a more traditional source of capital such as a Bank? (Would TallyUp care if the money came from a bank instead of a VC?) 2. Where does ONSET gets its money from?, Why is ONSET raising another fund when they still have $22 million left to invest from an earlier fund? 3. What do ONSET’s partners do? How do ONSET’s partners make a living? 4. What size should the new fund be? What is the rationale for your recommendation? 5. ONSET initially invested $750,000 in TallyUp and an additional $250,000 after hiring of CEO. Why did ONSET split the financing in two stages/rounds? Why not invest the entire amount upfront?
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TrendSetter 1. Assume that escrow shares described in Alpha Term sheet are never issued (i.e. Trendsetter is able to achieve $500,000 sales in Fiscal Year 2000). Now draw up the cap table if Trendsetter accepts Alpha term sheet. Draw up another cap table if Trendsetter accepts Mega term sheet instead. What fraction of the company is owned by the VCs under two scenarios? 2. Estimate the pay-off to the VCs and to the founders /employees for the following potential “liquidation” values of Trendsetter for both deals. Basically fill in the blanks in the table below: Term Sheet Alpha Term Sheet Mega Trendsetter is Liquidation Liquidted for ($ Liquidation Million) VC Owner/Employees VC Owner/Employees 5.00 7.50 10.00 20.00 25.00 30.00 35.00 40.00 60.00 100.00 200.00 240.00 500.00
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PunchTab 1. What is your evaluation of PunchTab’s business? Is it an attractive investment opportunity? Do you think DermaCare will be successful? Why or why not? 2. Do you think it makes sense to do a seed round of 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 longterm? 4. How is a convertible note different froma traditional “priced” financing? Should Kumaran care whether the investors offer him one option or another? (Please read the “Convertible Notes in Angel Financing” to respond to this question) 5. What should Kumaran do?
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Parenting Magazine The case describes a set of decisions confronting Robin Wolaner, who is negotiating with representatives of Time, Inc. about investing in a project to launch a new magazine called Parenting. The negotiations have reached an impasse. On page 27 of the case, in item F-1 of Exhibit 7, you can assume the $xxx amount offered by Time Inc. was $35 million. Study Questions: 1. How do you assess the potential venture that Wolaner has identified? What are the underlying economics of her business model? 2. How much money does Wolaner need? From whom should the capital be raised? 3. Is the proposed deal with Time, Inc. reasonable? From whose perspective? What changes, if any, should be made to the deal? 4. Why is Time, Inc. interested in this joint venture? 5. What should Wolaner do? There is also a homework assignment as described below: There is a supporting Spread Sheet which includes the exhibits of Financial Projections and a worksheet titled "Comparable". Please do a simple DCF valuation of the Parenting Magazine business venture under the following two scenarios 1. GOOD SCENARIO: Financial Projections Described in Exhibit 6 are realized - i.e. all forecasted numbers are achieved. 2. LOW SCENARIO: Wolaner is only able to achieve 50% of the revenue projected in Ex 6 - you would need to assess which expenses are variable and would thus be 50% lower due to lower revenues and which of the expenses are fixed and would not change regardless of the level of revenues. For example editorial expenses are likely to be
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fixed regardless of how many or how few magazines are sold or how much advertising is generated. For the above analysis make following assumptions: 1. Discount Rate (WACC) of 10% for both scenarios (You are welcome to derive the WACC using the information provided in the “Comparables”work sheet of Parenting.xlsx 2. Long Term growth rate of Free Cash Flow (FCC) beyond Year 1991 of 5% in the good scenario and 3% in the low scenario 3. Assume that there is no investment needed in Fixed Assets or Net Working Capital - i.e. Operating Cash Flow as reported in Exhibit 6 equals FCF. The company would pay 35% in taxes - to keep calculations simple - assume that you would pay 35% of Operating CASH Flow as taxes IF the cash flow is positive. If the Operating Cash Flow is negative the company would NOT pay any taxes. (These assumptions should greatly simplify your analysis as there is no need to carry forward accumulated losses and simplifies the need to work out CASH taxes. ) Perform some additional analysis on how you would assess Time's offer if you believe there is 20% chance of Good Scenario, 30% chance of low Scenario and 50% chance of venture becoming a failure in which case Time Warner would lose its entire $5 million investment.
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YIELDEX Yieldex Founder, Doug Cosman, is faced with the decision to sell his young software start-up for $4 million or to hire a CEO (Tom Shields) and pursue Series A venture capital financing. His angel investors and CEO candidate Tom Shields believe he should reject the offer and focus on building the company into a bigger enterprise. Cosman is attracted to the financial rewards offered by the potential acquirer. The case provides an opportunity discuss a trade-off that many entrepreneur face "Build the company" or "Cash Out". Please carry out the analysis outlined in Question 1 below and address the other questions as well. Study Questions 1. If you were advising Doug Cosman, would you recommend that he accept the offer from Turn to acquire Yieldex? Why or why not? In responding to this, you may wish to consider scenarios for the evolution of the company. For instance, a relatively rosy scenario would be that: a. Yieldex completes a Series A along the lines proposed in the case at a share price of $.50. b. It completes a Series B at 2-times the amount of the A round at 2times the share price. c. It completes a Series C at 2-times the amount of the B round at 1.5-times the share price of the Series B. d. The company exits at whatever value you assume, in whatever time frame you wish to assume, with whatever probability you deem reasonable. e. Of course, you could repeat this exercise under more and less optimistic scenarios. 2. Assuming Cosman rejects the Turn offer, what deal should he strike with Tom Shields? What is fair? Does Shields deserve 50% of the equity? Should he be considered a co-founder? Why or why not? 3. If you do not like the deal in the case, what alternative would you propose? 4. Who should Cosman turn to for assistance in making these decisions?
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Carlton Polish Study Questions There will be an excel file with the exhibits of the case. Please use it for your analysis. YOU ARE REQUIRED TO BRING IN A HARD COPY OF YOUR ANALYSIS FOR QUESTIONS 1 and 2 to CLASS. Assume you are doing this analysis on the March 31, 1983 (There is cryptic typo on top of page 9 saying “REV. NOVEMBER 22, 1996” – Ignore this comment) 1. Assume that the tax rate is 52%, please estimate the Unlevered Beta (also referred to as Asset Beta) for Carlton Polish based on comparable peer companies described in Exhibit 2. Assume that market risk premium (expected excess return on market portfolio over and above the risk free return) is 7.50%. What is the Unlevered cost of capital (using the Unlevered Beta that you estimated) for Carlton Polish in early 1983? 2. Since the capital structure of Carlton Polish is likely to change substantially over the projected period shown in Ex 4 (1983-1987), it is easier to carry out a valuation using the Capital Cash Flow (CCF) methodology for doing the DCF valuation. CCF methodology requires you to use the "unlevered cost of capital" as the discount rate. Assume that unlevered cost of capital for Carlton Polish is 14.5%. You still need to estimate the Free Cash Flow (FCF ) as we have covered in the class but you use the unlevered cost of capital instead of WACC to discount the FCFs. The second piece in CCF valuation requires you to estimate the tax shields due to debt – each year take the projected total interest expense and multiply it by the tax rate (0.52) the resulting amount is the tax shield. Again use the unlevered cost of capital to discount these tax shields back. For FCFs assume a terminal growth rate of 5% beyond 1987. For tax shields assume there will be 0% growth after 1987. The enterprise value is simply the sun of Present value of FCF and present Value of Tax shields using the 14.5% discount rate. Please use the projections
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provided in Ex 4 to estimate both ENTRPRISE VALUE and EQUITY VALUE of Carlton Polish. PLEASE BRING YOUR ANSWER TO THE ABOVE QUESTION TO CLASS. I WILL COLLECT THESE. Study questions 1. What should Charlie Carlton do? (This questions is best addressed by your valuation of Carlton Polish) 2. Use your strategy course frameworks (e.g. Porter's Five Forces) to evaluate the cleaning products (chemicals) industry that Carlton Polish operates in. Is it an attractive industry? Why or Why not? 3. In your basic Finance and Accounting courses you would have learnt about ratio analysis to evaluate firm performance. Ex 3 provides 7 years of historical financial information. Use your ratio analysis to assess how well Carlton Polish has done? Does this match your assessment of industry in the prior question? 4. Would you finance the buyout if you were the bank? Why or why not? 5. If you were the banker, what terms would you require on the loan?
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Spyder Active Sports There will be an excel file with some of the exhibits of the case. Please use it for your analysis. 1. How, if at all, does the value of Spyder depend upon its ownership structure? What are the (other) primary determinants of value? 2. Prepare estimates of value based on DCF and the trading and transaction multiples presented in the case. How well do these estimates reflect the considerations you believe to be most pertinent? For DCF valuation assume a base case scenario of WACC of 13.5%, Terminal growth rate of 3% beyond the projection years described in Ex 5. 3. Compare the alternative transactions described on the last page of the case. Which one would you choose if you were David Jacobs? Which one would you choose if you were a general partner in CHB Capital Partners? Who else is affected by this choice and how?
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SAIF 2004 Please read the “Note on IPO process” as it would help you greatly in analyzing the two cases. I will also be posting a Fortune magazine story on Microsoft’s IPO in 1985 – while not required it is a fun article to read. Study questions for the SAIF 2004 ï‚· How does VC in China differ from, say, Silicon Valley? What aspects of the Shanda transaction and due diligence feel unique to China? ï‚· Given Shanda’s performance, was the company well-priced? If usage had plateaued at 500,000 peak concurrent users, would you still think so (refer to Exhibit 9)? ï‚· Why has the investment banker demanded that the offering price be cut? How far would you be willing to cut the offering price to complete the offering (refer to Ex.11 an 12)?
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Nantucket Nectars The case and a supporting Excel file will be posted on Blackboard. Also posted are the study questions which I am listing below. Exhibit 13 provides DCF valuation calculations. Instead of trying to back engineer those numbers I would like you to do your own DCF valuation with the following assumptions for a base case Valuations 1. Discount rate of 15% for unlevered cash flows
2. Use the Ex 13 Cash Flow Forecast – to keep life simple ignore interest tax shields 3. Use a terminal growth rate of 4% after 2002
You should also try to estimate the value for Nantucket Nectars based on Multiples provided in the case. Study Questions 1. What are the key relationships that have helped Tom and Tom build this business to date? 2. What relationships do they need to develop in order to continue to thrive in this business? 3. What are the pros and cons of remaining independent? going public? selling the company? 4. If management decides to sell the business, how should they think about their role after the sale? 5. What should management do? 6. As an advisor to Tom and Tom, what do you propose is the minimum bid they should accept?
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