Case Study 1: Devium’s Dash
Read through the case study and build the following models:
– A cost-of-goods-sold (COGS) model. This can be constructed as a simple table that adds up all the components of the product and tells you how much the product costs to make. Where there is an item in the case study that is a major cost spread across multiple units (say, a tooling cost) you may assume that the unit cost contribution is based on 10,000 units.
– There is market sizing information in the case study. Build a cash flow model assuming that the product achieves a 0.5% market penetration in year 1 and grows by 50% per year for 5 years. Your cash flow model should be a six year model that assumes the first year is spent building the product (i.e. negative cash flow) and then the following 5 years are “selling” years.
– Using a 10% discount factor, calculate the present day value of your cash flow model. Don’t forget to include the “negative” cash flows of the first year in your model.
Q1: Given the manufacturing approach and the resulting COGS, does this seem like a viable business opportunity to you?
Q2: What do you feel are the top 5 business risks. This can cover IP, financing, manufacturing, whatever you think.
Q3: The case study discusses a number of different financing strategies. Which do you think is the best fit for this product/business opportunity and why? You should draw on your answers in Q1 and Q2.
Case Study 2: Fish Whisperer
This is a case study that really explores the different phases of growth of a business. You will use your cash forecasting and valuation analysis skills to try to make some recommendations as to how to manage each phase in the growth of the Business.
Year 1 – Initial Startup
Q4: What is the biggest problem Conner is facing in his first year of business?
Q5: Suggest – with numerical evidence – what quanta of financing would help Connor solve his problem.
Year 2 – Getting an “Angel” Investor
Q6: Based on the cash flow (profits) articulated, calculate the NPV of the business. You should be sure and calculate the initial investment capital that Connor used (i.e. reminder – NPV incorporates the initial investment as well). Connor really wanted $125k but instead took a smaller amount – was this wise? Based on your analysis of the future value of the business, discuss whether Connor was being overly sensitive about valuation or not.
Q7: Connor’s business depends on highly customized solutions – what is the challenge wit this? What seems to be the issue with this approach at this stage in the business’ life cycle? Is there a better way based on your understanding of market segmentation (analysis at the end of the case study)?
Year 3 – Intellectual Property
Q8: IP is a big part of this year. Given what you know about IP, articulate and defend your opinion about the “strength” and/or risks of Connor’s patent at face value. What’s special about the US jurisdiction that enables Connor to file a patent this late in the game?
Q9: Give three reasons, based on your understanding of the formation of limited liability companies (assume that a “Delaware” company is the same as what you were taught by Jonathan Barlow in class) why Connor put the IP in a separate company, especially at this very contentious time in the company’s life?
Year 4 – What the Heck to do Next?
Q10: You’re Connor’s business advisor – help him to decide what he should do. He obviously is a bit tired of being “hands on” with the business but the decision, for the purpose of analysis, should be driven by the numbers.
This is a pretty open-ended question but I am looking for evidence of application of the skills you have learned in class. If you think he should hire a manager, discuss the likely implications of handing over the reins to someone else. If you think he should sell the business, use the NPV/DCF analysis to justify what you think it’s worth. If you think the royalty model is the way to go (assume a 1% royalty on sales) help Connor to at least understand how much money he is leaving on the table.
