Assignment3solutions (1)
.pdf
School
University of British Columbia**We aren't endorsed by this school
Course
COMM 387
Subject
Communications
Date
Dec 17, 2024
Pages
4
Uploaded by BrigadierCloverTurkey27
COMM/COMR/COEC 387Entrepreneurial Finance and Private EquityAssignment 3 - SolutionsThis assignemnt, spredsheets, data, video content and the artwork such as slides and visualsthat accompany it, are the exclusive copyright of Professor Jan Bena and may only be usedby students enrolled in courses COMM & COMR & COEC 387 in Term 1 of Winter Session2024 at the Sauder School of Business and Vancouver School of Economics, the Universityof British Columbia.Unauthorized or commercial use of any portion of this problem set including uploading ofthis content to non-University of British Columbia servers is expressly prohibited.©2024 Jan Bena, may not be reproduced without permission.1
Problem 1.The founders of “DubiousLedger” expect to be able to sell the company for$100 million in 7 years. The founders currently have 1 million shares and they want to keep50% of ownership of the company till the exit. Venture funds have a target annual compoundrate of return of 45% on venture investments like DubiousLedger.1.Is it feasible for DubiousLedger to raise$15 million from venture funds in one roundtoday, such that the founders keep at least 50% of ownership at the time of exit? What isthe maximum amount DubiousLedger can raise today so that the founders keep exactly 50%of ownership?POST=V(1+r)t=$100,000,000(1+45%)7= $7,420,343F=IPOST=$15,000,000$7,420,343= 202.15%Raising$15 million in one round is not feasible because 202.15%>100%.Imax=POST·(1−50%) = $7,420,343·(1−50%) = $3,710,172The maximum amount of money the founders can raise in one round is$3,710,172.2.Suppose DubiousLedger decides to raise money in two rounds.DubiousLedger thinksthat it will raise$5 million from venture funds 3 years from now. In this case, what is themaximum amount of money DubiousLedger can raise from venture funds now, still assumingthat the founders want to keep 50% of ownership at the time of exit?POST2=V(1+r)t2=$100,000,000(1+45%)4= $22,621,843PRE2=POST2−I2= $22,621,843−$5,000,000 = $17,621,843F2=I2POST2=$5,000,000$22,621,843= 22.10%POST1=PRE2(1+r)t1=$17,621,843(1+45%)3= $5,780,259The founders want to retain 50% of ownership after second around of financing.There-fore:Fmin·(1−F2) = 50%Fmin=50%1−F2=50%1−22.10%= 64.19%The minimum stake founders should retain after first round financing is 64.19%.There-fore, the maximum stake venture funds can get in the first round is 100%−64.19%, whichis 35.81%. Therefore:I1max=POST1·35.81% = $5,780,259·35.81% = $2,070,088The maximum amount of money venture funds will provide given the maximum stake theyare offered in the first round is $2,070,088.2
Problem 2.Let’s assume you source an opportunity to invest in ‘Raincouver AI’ (fic-tional company).Please refer to the attached financial model in spreadsheet “Assign-ment3Raincouver AI Model.xlsx” to answer the following questions:Caveat: there may be other ways to answer Problem 2; below answer keys are suggested so-lutions. We mainly want to learn about your thought process and logic.1. What is your point of view towards the current market being extravagant on AI technolo-gies?Guidance: Summarize your answer in less than 200 words.No correct answer; full mark as long as it’s a thoughtful and fact-based answer.2. What key SaaS metrics would you evaluate when deciding whether to invest in ‘Raincou-ver.ai’?Guidance: Identify four to six metrics and provide rationale for your choice.Summarizeyour rationale in less than 200 words.SaaS metrics that are applicable and available to evaluate ‘Raincouver.ai’:•ARR growth•Sales efficiency•Growth margin•COGS3. How would you describe the company’s performance (e.g., top quartile/average/bottomquartile)vs. SaaS benchmark (please provide source)? Why?Guidance: Benchmark the main metrics against industry standard. If you would like to referto industry reports or benchmark database in addition to what we discussed in the classroom,please indicate sources. An effective and brief summary of the findings is expected.Metric #1 on ARR growth – whether Net New ARR is growing quarterly•For Raincouver.ai, Net New ARR doesn’t showcase consistent growth for FY2022E,FY2023E, and FY2024E, including a major decrease in the near-term Q1-22E (-30%).•FY2022E and FY2023E Net New ARR is mainly around the 10% - 35% range, withFY2024E falling to (and under) 10%.•During the past quarters (Q3 and Q4-21A), it did reach a 75% and 158% increase,respectively.I’m curious to learn what happened during these two quarters and ifthere are any actions/strategies that can create repeatable growth momentum.Metric #2 on sales efficiency – new revenue being added for the current quarter VS sales &marketing expense from last quarter3
•Typically, a top-quartile benchmark for a SaaS company is around or higher than a 1:1ratio – meaning for every$1 spent on sales & marketing, more than$1 is generated inrevenue. In other words, this is the cost to get customers/revenues.•In the Scale Studio dataset of 1,000+ growth-stage SaaS and cloud businesses, thelong-term median Sales Efficiency hoovers around 0.7.•During FY2021, Raincouver.ai has been overspending to acquire customers; this ratioranges from 0.55 - 0.85. I’d rank them under the average/bottom quartile. The 2022and 2023 projections indicate a ratio mainly in the 0.7-0.8 range.Despite Raincou-ver.ai’s 2024 projection indicating a ratio slightly over 1, I’d suggest discounting thisbecause both the market & the company can change significantly from now to 2024.1Other financial metrics (growth margin and COGS)•Growth margin – typical SaaS benchmark 70% to 85%2. During 2021 - 2022, Rain-couver.ai is at bottom quartile (60% - 71% during 2021 - 2022 and 71% - 76% during2023 - 2024; based on benchmarking with 100+ companies at e.Ventures3, median andtop quartile for growth margin is 74% and 78%, respectively.•COGS – typical SaaS benchmark 10% - 20%4Raincouver.ai ranges from 25% - 39%from 2021 - 2023, bottom quartile compared to typical SaaS benchmark.•Cash on hand / burn / runway – not available at this point; a must-to-have data pointfor the next steps. Typically for SaaS companies, a new financing round can last 1.5-2years.4. Would you invest in ‘Raincouver.ai’ based on this data? Why?Guidance: Summarize your rationale in less than 400 words.Based on the above metrics and analysis (without considering other qualitative & quan-titative metrics), I’d describe Raincouver.ai’s performance in thebottom quartile. Thereare also a few green flags indicated by Raincouver.ai’s financial model. For example, theirrevenue has constantly been growing. In addition, it seems they have made some progresson expansion & upsell – contributing a total of 30% - 40% new ARR. However, these pos-itive scores wouldn’t outweigh the poor performance (bottom quartile) after benchmarkingRaincouver.ai’s performance with industry SaaS standards.If an investment recommendation has to be presented at this stage with limited informa-tion from the excel document, I’d recommend a‘no’ or ‘not now’.If more info can beacquired from Raincouver.ai, including both qualitative (inc. speaking with Raincouver.ai’sleadership team) & quantitative data, I’d suggest‘to keep in touch’because its FY2024Efinancial projection indicates a stronger financial performance.1Source: Measuring and benchmarking the four vital signs of SaaS published on TechCrunch.2Source: Impact of Gross Margin on SaaS Valuations by Software Equity Group.3Source: SaaS Financial Benchmarking by e.ventures.4Source: Cost of Goods Sold (COGS) for SaaS Business By Open View Partner (Boston-based SaaS VC).4