Outreach Networks: First Venture Round

Abstract

OutReach Networks is taught in Darden's Entrepreneurial Finance and Private Equity elective. A teaching note for this case is available for instructors as well as an Excel file for student analysis. This introductory case explores the venture capital (VC) and discounted cash flow (DCF) methods of valuing early-stage companies. OutReach Networks is an unusual start-up company in that it was profitable early in its development and did not have to seek VC funding to support its growth. The company has grown quickly and may soon be a candidate for an IPO. In November 2011, an experienced venture capitalist approaches the founder with an offer to invest $30 million in exchange for 30% of the company. While the founder sees some benefit from the VC's experience in preparing the firm for an IPO and the funding enabling it to scale more quickly, he cannot understand how the VC has arrived at this offer. The founder believes the funding should be worth no more than 15% of his firm. Potential reasons for the disagreement over the valuation are (1) differences in the founder's and investor's view of the company's risk, (2) disagreement over the appropriate set of comparable companies, and (3) differences in the methods used to calculate the percentage equity stake. The case is appropriate for use in courses covering entrepreneurial finance or venture capital. Excerpt UVA-F-1683 Rev. Nov. 26, 2012 OUTREACH NETWORKS: FIRST VENTURE ROUND Phillip P. “Pete” Perez, CEO and founder of OutReach Networks, Inc. (ORN), was evaluating an offer in November 2011 that he had recently received from a venture capital (VC) firm. Perez had founded ORN in 2007 and had served as its CEO ever since. Prior to that, he had worked as a wireless engineer at Qualcomm, Inc., where, while researching broadband connectivity and signal strength issues, he had discovered an unlicensed radio frequency (RF) spectrum that could extend wireless signals across a much broader area than the licensed spectrum could. He believed he could design a product that could tap this unlicensed spectrum and provide Internet access to areas that currently had little or no access. With this idea in mind, he had cashed out his Qualcomm options and founded ORN. Currently, he was ORN's largest stockholder and owned 75% of the company. The VC firm, Everest Partners, had a successful track record developing technology companies; it had offered to invest $ 30 million, which would significantly enhance ORN's ability to grow and pursue several promising market opportunities that would otherwise take far longer to develop. While Perez was pleased to have the offer, he was concerned that the valuation offered by the VC firm was too low. Everest Partners had offered $ 30 million in exchange for 30% of the company. He believed that amount of funding should be worth no more than 15% of the company based on its profitability and success without VC funding. The Company . . .