FSU Investment Strategy And Concerns for Early Stage Company Questions
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- You are a partner at LSVC, a late-stage venture capital fund. A friend of yours at ESVC, an early-stage fund, has been raving about “GottaHave!” for months. ESVC led the $10,000,000.00 series A round for 25% of the company two years ago. She has invited you to lead the latest round. They are offering 10% equity for $50,000,000.00, of which ESVC and other early investors will contribute 20%. “GottaHave!” makes smart glasses that connect to devices and allow users to see and communicate in virtual meetings without having to look at a phone or computer screen. The company has been growing rapidly and is in talks with major corporations for purchase agreements. Although none have materialized yet, they have two letters of intent conditioned on scaling production. You tried the “GottaHave!” glasses and found them useful but a little clunky, you have been using them for all your virtual meetings over the last month and believe there is real potential in the company. Some friends at major investment banks advised that the company would need four large corporate clients to have a successful IPO. The company needs a large infusion of cash now to scale production for corporate clients before large competitors jump into the market. After talking with your partners, you decide to invest. You heard a rumor that THC, a large tech hardware company, was willing to offer between $400-$500 mil to acquire “GottaHave!” but have not been able to verify this. Your internal analysis and channel checks give a 45% chance of acquisition by a large tech firm (Microsoft, Cisco, Dell, Google, etc.), 30% chance of successful IPO, 20% chance of needing to raise additional capital, and 5% chance of failure
- a. What type of structure and terms would you ask for? Why?
b. Would you try to bring in other late-stage funds, or do the $40 mil alone? Why? - c. What are your concerns for your investment? How do you hedge these?
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