Venture Capital

Part A – Baby Shack
Bruce is an entrepreneur who founded Baby Shack, an online retailer of baby products such as nappies and baby food, in early 2013. On Baby Shack’s website customers can choose from a large range of products from a variety of manufacturers. The company has a distribution centre in Adelaide, South Australia from where it ships goods to customers across Australia via a third party courier network. Last month the company generated $13,000 revenue and made a loss.
You are working for Cockatoo Capital, an Australian VC firm, and you have been approached by Bruce who is seeking series A VC funding. Until now Bruce has invested $100,000 in the business from family and friends.
1. What would be the most appropriate valuation methodology to use to value a company like Baby Shack and why? [10 points]
2. Bruce is prepared to offer 12,000 shares in Baby Shack for $1.8 million in VC funding. There are currently 16,000 shares on issue. Calculate the pre-money valuation and post-money valuation of the company. What percentage ownership will Cockatoo Capital gain in the company? [10 points]
3. Since the business started, Bruce has found customer adoption to be quite slow. Bruce believes that one of the reasons for this is because many people do not yet know that Baby Shack exists. He is confident that once people become aware of the “outstanding offering” of Baby Shack, business will pick up. Has the business reached product / market fit? What should Bruce’s priorities be at this stage of the company’s development and why? [10 points]
4. This is Bruce’s first startup venture since leaving a well-paid position as product manager at a leading nappy company. Although he has no prior experience with online startups, he has employed a skilled software developer as head of technology and a qualified financial controller to run the company’s accounts. Is this a good founder and team for Cockatoo Capital to invest alongside? Why or why not? Are there any vital skills missing in the team? [10 points]
5. Comparable businesses have been sold on a valuation of 2.5x annual revenue. How much annual revenue will Baby Shack need to generate in order to give Cockatoo Capital a 5x return on its investment? [5 points]
6. Overall, is Baby Shack an attractive investment for Cockatoo Capital? [5 points]

Part B – DealMax
Consider the Australian company DealMax (www.dealmax.com.au).
1. Briefly describe the market in which DealMax is operating. Do you think this is an attractive market to be in? Why or why not? [10 points]
2. What value proposition does DealMax offer to its customers? [10 points]
3. One of DealMax’s key competitors is Mozo (www.mozo.com.au). How do the business models of DealMax and Mozo differ? Which business model do you think is superior? Give reasons for your view. [10 points]
4. Can the market in which DealMax operates be considered to be a “winner-takes-all” market? Why or why not? [10 points]
5. Do you think DealMax would be an attractive company for an acquirer to purchase in a trade sale? Name some companies (at least 2) that you think could be potential acquirers of DealMax, along with the rationale for each acquirer. [10 points]

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