15: Financings

Thursday, May 13, 2010
Summary: What is the value of "staged financings" for both entrepreneurs and venture capitalists? The Hirschtick (SolidWorks) case illustrates a classic first-round venture capital deal and highlights career paths both in technology entrepreneurship and venture capital.

Quote of the Day: "The key to a leader's impact is sincerity. Before he can inspire with emotion he must be swayed by it himself. Before he can move their tears his own must flow. To convince them he must himself believe." ~ Winston Churchill

Guests (Click for Bios)
Chi-Hua Chien, KPCB

Study Questions (Policy on Study Questions)
  1. Is this a high potential opportunity? If so, why? Does Jon have a compelling vision? What is your assessment about Jon (including his background) and his team?
  2. Jon has asked you for advice in September 1994 regarding the first-round financing. He's heard that you have taken a course like ours -- he feels your counsel would be most helpful to him. In general, what factors should he consider when deciding on the proposed venture capital deal?
  3. Assume the VC’s pay a share price of $1. Furthermore, assume that the 15% post-money employee pool is created by joint agreement between Jon and the VCs by issuing an additional 1.05 million shares (equal to 15% of 7 million shares). Therefore, the $1 share price already takes into account dilution from employee pool. This brings the total number of issued shares to 8.05 shares post-money if Jon takes all $4.5 million right now. The post-money valuation of the proposed financing at the end of the case is now $8.05 million. Given that, what is the percentage of the company that the VCs own in September 1994? Assume the company achieves a net income of $3.33 million (accounting for taxes) in the fourth year after this financing, it does not have to raise any additional funds during that period, and it compares favorably to other growth companies with price earnings (frequently called PE) ratios of 30. This implies a firm value or market capitalization of $100 million.
    • What is the percentage of SolidWorks that the VCs own in Sept. 1994?
    • What does the income and PE ratio imply as a firm valuation in year 4?
    • In four years, what is the value of the VC's ownership at that time?
    • Moreover, what is the return for the VCs on their original investment in SolidWorks? You can express the return in terms of IRR (e.g., an annual 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?
  4. 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 more sense for Jon and perhaps even the VCs?

Team Case Analysis
(Policy on Case Analyses.) - Group B only submits
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.

Required Readings (Policy on Required Readings.)
    • Case: SolidWorks (called Jon Hirschtick's New Venture) Dorf and Byers textbook, Appendix B
    • Technology Ventures (Byers, Dorf, and Nelson): Ch 15.2-15.3 (Highlights)
Watch the following short video clips: