Preface of Textbook
About the Textbook
About the Authors
Book Website at McGraw-Hill
DVD Contents
Stanford 1e Book Website
McGraw-Hill 1e Book Website
Book Contents
Table of Contents
Venture Opportunity, Concept and Strategy
Venture Formation and Planning
Functional Planning of the Venture
Financing and Building the Venture
  Business Plans (App. A)
  Case Studies (App. B)
Online Sources (App. C)
Sample Syllabus
Course Overview
Calendar of Sessions
Entrepreneurial Perspective
Idea or Opportunity
Gathering Resources
Managing Ventures
Entrepreneurship and You
Additional Resources
Schools Using This Textbook
Authors Blog

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?


Relevant Texbook Chapters


Discussion Questions

  1. Is this a high potential opportunity? Does Jon have a compelling vision? Assess the team.
  2. What factors should Jon consider when deciding on the proposed venture capital deal?
  3. Should Jon go for one round of financing or multiple rounds?

Spreadsheet Exercise

  1. 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?
  2. 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?
  3. 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?
  4. 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.
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.
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.
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?
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.
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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