New Venture Finance Essay
As it required thorough analysis on where are we going to put our capital, it had been a tough task for us to identify which among the companies are we going to be with as we also trying to figure out the worth of start-ups given that as there will be a lot of changes in the market condition and so as the valuations and It brought us down to three choices: Vinfolio, Glacier Bay Inc. and Skyfire. We preferred to be venture capitalists, using money and brain to get into the game, known as Vita Coco Ventures L. P and as a group, we had Five Million Dollars for funding our business.
We target five to seven years of continuous profitability as we also expect that by then, we will be leaving the venture. It will be great to be with the company who already established grasp in the market. Vinfolio deserved to be part of the choices for their ingenious, flawless and elaborate execution of servicing their online client. Their specialty is wine and they stand out among other online wine stores proven with their shares considerable as the largest in the market.
We can have this compared with eBay
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Their targets are the enthusiasts of wine so we are taking them into consideration seeing a huge potential in it. With the same track as eBay, we are looking forward to see this company take the pace as what eBay had which now has diversity in global marketplace. We can also take a look at unique yet promising business like Glacier Bay Inc. who offers air conditioning unit for trucks that can maintain low consumption of energy. We know that the product has no huge market but they tend to expand their market once they produce units for regular cars.
Their main advantage will be the technology of minimizing energy consumption in air conditioning which many clients can be guaranteed of having savings. Market for regular cars is relatively much larger which promised a big leap for future development. As we look into the depth of the venture, we realized some irregularities. We first discussed percentage ownership where they showed us that $26. 450 projection of post money valuation and relative to that amount, our $5 million will just accumulate 18. 9% of the ownership.
With the EBITDA being multiplied by 5, apparently, it is overvalued since 4 should be more reasonable as multiplier. We also had problems with the term sheets with Glacier Bay Inc which made it hard for us to finalize the deal. When it comes to liquidation preference, they do not pursue a course of action midway between extremes instead, they want favorable return to a particular series of the company’s stock. We also want to gain more security in term sheet’s redemption section. It is also good to invest in a company that is involved in telecommunication.
It has broad potential of profitability with parallel risks especially now that competitions are inevitable. Skyfire caught our interest with their pitch about their product of advanced and well designed system for software upgrading that made cellular function like personal computer when it comes to internet browsing. This company seems promising since they are in a mainstream industry that has the ability to grow exponentially in no time as we examine the pace of improvement in the industry of technology.
We always try to settle the deal in a way that it will be favorable for investors when it comes to redemption paragraphs and liquidation preference. With Skyfire, it brought us down agreeing to have middle of the road preferences and have the share of ownership 20% for a $25 million post evaluation. We used this to give us advantage by having employees share with the vision of company’s success as they are involved in taking fraction of the stocks.
Since we agree in the preference as negotiated by the founders of Skyfire, we added pool of stocks to let key employees have the share and with this idea, they will be able to be more productive with their job since, as the company acquired greater profits, each of them will benefit proportional to it. We settle with Skyfire and invested $5 million as we were able to finalize the term sheet with all of our terms met and agreed. Venture capitalism had already been a system in the financial industry for ages and it shows the need to rely on substantial resources like funds and capital to operate the business.
Thus, it requires in depth analysis for risks to be able to have continuous growth with this system (Gompers, P. A. et al. 7-8). Venture capitalists will no doubt find this discipline as a showcase of hardship and challenging opportunities. The risks itself is a huge factor since you need to fund with your own money which means it required in depth analysis in which you are going to invest. It also important to see the fairness of the transactions and deals since, there could be instances that you will be taken advantage of.
Negotiation is the key and you will find it hard at the start as what we experienced with Vinfolio but this is a skill you are required to master and we can consider venture capitalism as a journey for us to polish this skill. Term sheet should be highly analyzed since it will be our objective basis for any growth and accomplishment that we are going to get. We settled with Skyfire even if the other two are equally promising. The ability to look forward to mutual benefits between the companies and the investors will guarantee good returns in the future. Reference Gompers, P. A. et al. the Venture Capital Cycle. MA: MIT Press, 2004.