ONSET VENTURES CASE ENTM 241 - Professor Tarek Kettaneh
Michel Abdelmassih 201300231 Joe Akiki 201300408 Michael Srour 2014004
1. There are currently 4 partners in the firm, and the firm seeks out deals only in the 4 first years of the fund’s life because they anticipate to close out the fund 10 years after they raised it. a. If they increase the number of partners from 4 to 6, provided they can find people competent enough, each one can take on one deal per year with an average value of $5.8 million in order to invest all the $140 million in 4 years if they decide to raise them (140,000,000/4 = 35,000,000 and 35,000,000/6 = 5,833,333). This is an increase of only 16% on the current value of the average deal, and should thus not be that hard to achieve. b. They can also take on 2 extra deals per year, with each of the 4 partners working on one deal, and half of one of the 2 extra deals. That way, they would invest $30 million per year, which amounts to $120 million over the 4 years. If they chose this option, they should however raise only $120 million and not $140 million. c. Finally, if they want to keep the same number of partners and deals per partners, they can take on deals of a bigger size, for example 25% bigger. In that case, they would be investing in an average deal size of $6.25 million, and $100 million overall over the 4 years (6,250,000*4 = 25,000,000 and 25,000,000*4 = 100,000,000). They should raise $100 million in this case. However, if they chose to raise more than the current $80 million currently required, they shouldn’t desperately seek out whatever deals just so they can invest all their money. They should keep in line with their investment philosophies, most importantly to invest in companies where they have a local presence, and in deals that are “under the radar” so they don’t get caught up in a valuation competition with competitors.
2. Onset do not invest a bigger amount in each deal because they require a 2.5x step up from seed to first round, a 2.0x step up from the first to second round, and a 1.5x step up from second to third round. It would be significantly harder to achieve these target returns if the company invests a bigger amount than they usually do in the seed round, as the target company would then be overvalued, and it would be hard for it to grow enough for Onset to achieve their desired returns. In addition, subsequent investors in the next rounds wouldn’t be as enticed to invest if they don’t see that the company grew at an attractive rate, and it would thus be harder to get people on board to invest in those rounds.
1 | Page
3. a- Assuming the shares are now at 1.5$. (from the hint at the end) $3.5M shares / $1.5=2,330,000 shares issued at the second round. The value of the company just before they issue those new shares is: $2,625,000(value at the beginning) after the $1M investment. At the time the dollar was worth $1. Hence there were 2.625M shares x $1.5(step up in value) = $3,937,500. This is the value pre the second investment. Adding the $3.5M to the value of the company just before issuing the shares: $3.5M + $3.937M= $7,437,000 (7,437,000/2,625,000 =2.833x > 2.5x) Therefore its valued more than 2.5x the initial value. b- Onset old share: 1M shares Onset new shares bought: 2,330,000 / 2 = 1,165,000 shares Total Shares owned by ONSET: 1M + 1.165 M = 2.165 M shares c-New VC shares: 20% x 2,330,000 = 466,000 shares New VC paid: 20% x $3.5M = $700,000 SO they own: 700000/7,437,000 =0.0941= 9.41% of the company
4. ONSET as a VC firm should aim to have a lower valuation for the companies while purchasing them. While purchasing (the initial investment) there are 2 main reasons for wanting a low valuation: -
-
To begin with when the valuation is low, then the VC would get a bigger part of the pie of the company: i.e. in this case onset was willing to get 38% for their $1.0M, on the other hand the valuation been lower than $1.625M, say $1.0M, then for the $1.0M ONSET would get 50% of the shares. And had the valuation been $2.0M then the $1.0M would have been equivalent to 33% of the company Furthermore ONSET would like to have a low valuation on the first round, because it would help them when they reach the second round of investment. When other companies would like to come and invest they are expecting to see a substantial growth. I.e. if we consider that the original value of the company was lower than $2.6M postinvestment, say $2.0M. On the second round of investment other VC firms value our company for $4.0M. They would prefer to invest in a
2 | Page
company that has seen a bigger growth: from $2.0M it grew a 100%. From $2.6M it grew by 53%. So other VC would prefer investing in a company that has seen a 100% growth instead 53%. But they should keep in mind that a very low valuation might not be attractive to Tally up. They might want to take another offer from other VC firms. When it comes to the second round of investors it might vary: -
-
For the second round of investment ONSET would like to have a bigger valuation, because first of all it would be attractive for other VC to see a nice growth And if the valuation is bigger ONSET would not be diluted from the new investors. I.e. if the new valuation is $4.0M and the second round would raise $3.5M, then the new shares released are now worth 46%, i.e. we will be diluted by 64%. If the new valuation is bigger say $8.0M, then the new shares for $3.5M are worth 30% and ONSET would diluted by 70%. Hence for the second round aims for a higher valuation.
For the initial investment they aim for a low valuation. For the second round of investment they would prefer to have a high valuation.
3 | Page
