1. Introducing the TrackerTime Case

 
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Modeling startup investments

16 lessons , 3 exercises , 1 exam

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Overview

In this lesson, we are introduced to TrackerTime. A fast-growing startup seeking a $20m investment from the Ventura Venture Capitalist firm. We also learn about the economics of venture capital investment and how it differs from previous models we have viewed.

Lesson Notes

Characteristics of Venture Capital Investment in Startups

- Typically purchase a minority stake (10-20%) in the startup

- Founders tend to remain in charge of the startup

- Cash is typically used to invest in R&D and Sales

- Startup will most likely have little or no profits

 

Transcript

Welcome to our course on modeling startup investments. The model built in this course will differ from previous models primarily because the investor will not be owning all of the target's shares. Instead, the investor will be purchasing a minority stake, maybe 10 to 20 percent of the outstanding shares. This is a common transaction when investing in fast growing startups where the capital raised from investors is typically used to invest in R and D and sales. The types of investors that take a minority stake in fast growing startups are called venture capitalists. Now let's meet the company which is called TrackerTime. TrackerTime was founded by Mary Hernandez, an experienced entrepreneur who started the business in 2012. The product itself is a software product that helps companies and individuals track their time on their PC.

The company has already raised money from a seed investor who has taken a 15% stake for $4.5 million.

TrackerTime is now considering an investment from a venture capitalist called Ventura. Ventura is a well known venture capital firm and the partner, Peter Chang, has worked with Mary in the past. Peter is an experienced software as a service investor and he's seeking to invest $20 million in any new investment. The stake he is seeking in a business is between 10 and 20 percent and he needs to return at least five times his original investment, often called the money on money multiple. As you can imagine, this is quite a different approach to the private equity firms we saw in previous models who typically aim for around 2.5 to three times of money on money multiple. The reason for this difference is due to risk appetite. Ventura is more than happy to lose money on a couple of investments if it means that one to two of their portfolio provides huge returns. Private equity firms, on the other hand, don't want to lose money on any deals, and as a result will not take as much risk. This dynamic and the approach to risk is worth bearing in mind as we go through this case. In the case I'm going to analyze the proposal from three perspectives, SeedCo, who were the initial angel investor in the business, Ventura, the venture capitalist pondering a new investment, and of course, the company founder. We would also be introducing some new modeling concepts in this course which I'll talk through in the next lesson.