Venture Capitalists Invest $5 Million in Vinfolio for its Online Wine Specialty Service

As Venture Capitalists, our group had $5 million to invest among various companies that were categorized in different industries. After the entrepreneur pitches, our group, Vita Coco Ventures L. P had trouble narrowing down which companies we wanted to invest in and how much of our fund would be allocated in each company. Our major concern was to invest in a venture with the greatest potential of growth, which could maximize our profit during our exit within five to seven years. By the end of the pitches we narrowed down our list to three companies, which are Vinfolio, Glacier Bay Inc.

and Skyfire. We also came to an agreement amongst ourselves to place our full fund in one company because breaking down the $5 million was only going to give us a smaller ownership amongst the different companies that we had an opportunity to invest in. Analyzing what Vinfolio had to offer, our group determined that their online wine specialty service was very exquisite. We also did some research and discovered that their company had the largest market share among the few online specialty wine stores.

Similar to the online marketplace eBay, which is known as one of the largest successes in Internet history, Vinfolio offers a service specifically for people who purchase top quality wine. At first, we attempted to compare Vinfolio’s growth to eBay. We decided that because Vinfolio was specifically targeting wine enthusiast, they would definitely have a client base smaller than what eBay had during their growth. Also, we kept into consideration that eBay can interact with clients globally, while Vinfolio cannot work with some countries due to different rules and regulations on alcohol imports.

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Another conflict we encountered was that Vinfolio had a post money valuation of over $70 million, our group was very discouraged to invest in a company that will give us less than 10% ownership in return. We also asked Vinfolio’s representatives after the pitch a few questions concerning flexibility on how much ownership they were willing to give up, but they were fixated on the numbers they presented during their pitch. From that point, we decided to keep Vinfolio in consideration, but we were seeking better opportunities. Another company we saw potential in was Glacier Bay Inc.

The industry they specialized in was unique but did not have a large market. Their company’s main product, which they displayed in their pitch, was a low energy air conditioning unit for trucks. What interested us further in the company was their future development plans. According to Glacier Bay’s representatives, the company was developing low energy air conditioning units for regular cars as well, which is a huge market. During the negotiations, we came across discrepancies with the percentage ownership, liquidation preference, and the redemption.

Glacier Bay Inc. projected a post money valuation of $26. 450 million dollars, which we believed was overvalued because they multiplied their EBITDA by 5, instead of a more reasonable multiplier of 4. Our $5 million investment would only secure us 18. 9% ownership of company if we agreed on their post money valuation of $26. 450 million. We also disagreed on the liquidation preference and redemption paragraphs of the term sheet. Glacier Bay Inc. was seeking a company favorable liquidation preference and would not come to agreement for middle of the road preference.

In the redemption section of the term sheet, we wanted the investor favorable paragraph to ensure that Glacier Bay Inc. does not become a company that only seeks to give its founders and management a salary, but Glacier Bay Inc. was insisting on the middle of the road paragraph. Because of the numerous disagreements, we never came to finalizing the term sheet. The third company we were interested in after the pitches was SkyFire. The product they had to offer was a mobile software upgrade that allows mobile phones to be as efficient as desktop computers when it comes to browsing the Internet.

We were interested in SkyFire because we felt that if we invested in that company, it would have great potential for growth. The product they had to offer was unique and was part of the exponentially growing technological industry. As entrepreneurs, the founders of SkyFire were very compromising when it came to negotiating the term sheet. Our share of ownership was 20% for a $25 million post valuation. During our negotiations of the liquidation preference and redemption paragraphs, we wanted at least one of these two paragraphs to be investor favorable but we ended up agreeing on a middle of the road preference.

In return for agreeing to a middle of the road preference, we were able to add an employee pool of stocks so we can give key employees a chance to own some part of the company. We believe that if the key employees own part of the company, they will work more efficiently to develop their products knowing that they would have greater incentive when the company grows. Out of the three companies, SkyFire agreed to our terms for our $5 million investment and we were able to finalize and sign the term sheet. During negotiations, playing the role of a venture capitalist was much more challenging than an entrepreneur’s role.

Because entrepreneurs were being approached by many venture capitalists, the wide range of choices for the term sheet was an advantage to them. As investors, not only did we have to persuade the entrepreneur to agree to our terms, but also, we had to take into consideration that the entrepreneur could pick another venture capitalist’s terms that were more company favorable than what we had to offer. From our first failed negotiation with Vinfolio, our group started understanding that negotiating is a progressive skill.

We advanced from negotiating on general ownership percentages to finally negotiating the different parts of the term sheet to make our investment a win-win situation for both parties. By the time we were negotiating with Glacier Bay Inc. and SkyFire, we understood that going into the technicalities of the term sheet, such as what we did with the liquidation preference, redemption, and employee matters, could change an entrepreneur’s opinion toward how beneficial our investment and ownership in their company would be.

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