Gammagraphics Case Study

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  • A very good evening to everyone, we’re team 5 and my name is WeiZheng.With me I have Boon Tat, Wenting, Wang Jing and Mishra.Within the next 10 mins, we will be presenting to you a short case study presentation on GammaGraphics and its financing option analysis.
  • Just a quick highlight of today’s presentation.
  • If you had read the case study, and for the benefit of those who have not, GammaGraphics was founded by 2 people,Of which one of them is currently in this class with us – Dr Mike.The other co-founder is Dr Hank.The 2 of them first met at an MIT-Standford networking function in 1981.Both had PhDs and Mike further went on to get his MBA at Standford and works as a Business Development mGrWhile Hank consulting work wiring software to emulate IBM mainframes.With a recession coming , both of they became motivated to form a start-upEach of them contributed $5K to the initial capitalization.The aim of the company is to provide graphics conference workstations to technical people working at various locations.Basically how this works is allow visual communications through graphics with a separate microphone for engineering meetingsUnfortunately, most of the initial funding has been used up by Mike for travel across the country to meet with potential customers
  • Now, before we get into the various possible financing options, lets take a look at what their overall goal is:They wanted to achieve a annual sale turnover of 10 million with a profit margin of 10% salesThey also wanted to sell the company for a price earning ratio of 20 times.Working out the maths – this would mean the value of the company at the point of sales is 20million.They would then )hopefully)sell the company and get 3 million each to secure their future.Now, what are the various financing options available to them?
  • Thank you weizheng for the brief introduction on Gammagraphic background. In order for the company to get started, Hank and Mic need funding as soon as possible. Gammagraphic had plan for the 2 rounds of funding to ensure the company able to move on. Gammagraphic had consider 3 option for the 1strds funding. option 1. Family and friend in another term bootstrapping or the 2nd option which is the angle investor and lastly the Venture Capitalists well known VC. My team mate and I will further discuss on the benefit and limitation of each options in the 1st round financing, and also the impact on the 2ndrds financing in respect with the decision made earlier.
  • Gammagraphic is considering VC for the 2nd financing. Based on the 4 million dollar pre money valuation, VC is forseen to invest 50% which is another 4 million dollar to make up a total of 8 million post money valuatio.Based on the 3 yearAnnual compound return rate, which denoted as “r”. The return rate is 35.7%. In most cases, VC will expect a norminal rate of 35% return.Based on the 2 yearAnnual compound return rate, which denoted as “r”. The return rate is 58.11%. In most cases, VC will expect a norminal rate of 35% return.
  • 1St option was to go for family and fren, but only expected not more than 100k of available funding. They had also estimated that with this amount of funding, they would be able to build three pairs of prototypes and fund their expenses like traveling and rental for about six months maximum.Family and fren will be rather convincing to seek for funding as they are supportive and rarely negotiate deal valuations.1st round , pre money valuation is 1.9 million, post money valuation is 2 millionIn 2nd round financing, which expecting from VC. 2nd round, pre money valuation is 4 million and expecting VC to pump in 50% which is another 4million, makeing Post money valuation to reach 8 millions.<click>So Hank and Mic expecting to sell the company off after 3 years the most and expecting 20 million in total value. After distributing all return to Family, fren and VC, Mick and Hank are expecting a 4.75 millions each in return. I will pass the 2nd option to my teammate, WenTing.
  • Thank you Boon Tat. Continuing our Analysis on second option, seeking funds from a group of angel investors. Judging from the name “angel”, they seem to be very helpful and generous. But based on some references, angel investors are still looking for opportunities with minimum return rate requirement at 25%. So funding from angel investors could be a bit more difficult than family and friends option. Based on Gammagraphics estimation, total 0.5 million could be raised. As shown in the pie chart, red represents Hank and Mike. Blue represent angel investors. Hank and Mike takes 75% of the share after 1st round of financing. This investment is expected to sustain the business for one year or so. Besides, angel investors might provide special business connections to boost company growth. Since angel investors have experience with technology start-ups, they could also provide advices to Hank and Mike. Assuming Gammagraphics has survived and attract second round of VC investment to grow business further. After 2-3 years, when the company value reaches 20million, Hand and Mike will receive 3.75 million each if they successfully sell the company.I will pass on to my teammate Wang Jing to continue on option 3 VC funding.
  • Common Fund Raising Target: $500kmight carry the company for a year Acceptable Pre-money valuation: $1.5 millionPost-money valuation = $ 2 millionHank and Mike take 75%Angel takes 25%If only one round of funding is performed to reach the exit condition, Hand and Mike can receive $7.5 million Each

Transcript

  • 1. MT5880C Disruptive Technology and Value Innovation Team 5
  • 2. Scope Introduction Financing Options (1st Round) Financing Options (2nd Round) Analysis Conclusion 2
  • 3. Introduction Dr. Partnership Dr. Hank Michael Magnuski Lutz Formed early 1982 Initial capitalization ($5K each) Graphics teleconferencing Funds used up by mid-1982 3
  • 4. Goal To achieve:  Sales turnover $10 million/year  Profit margin 10% of sales Sell for P/E 20x Company valuation at $20 million Get 3 million each 4
  • 5. 1st Round FinancingOptions Option 1:  Family & Friends Option 2:  Angel Investors Option 3:  Venture Capitalists (VCs) 5
  • 6. 2nd Round Financing VC 50%Pre-money valuation Post-money valuation $4 million $8 million Annual compound return rate (r) $20 million = $ 8 million x (1 + r) n n = 3, r = 35.7% > 35%  n = 2, r = 58.1% > 35%  6
  • 7. Option 1 - Family andFriends st After 1 Round st1 Round $1.9m 6 months at most Supportive $0.1m After 2nd Round 2-3 years later2nd Round - VC $4.75 million each $10m $9.5m $4m $3.8mLegend : Hank & Family & VCs $0.2m Mike Friends $0.5m 7
  • 8. Option 2 – AngelInvestors st After 1 st Round1 Round 1 year or so $1.5m Business connection $0.5m Professional advice After 2nd Round 2-3 years later2nd Round - VC $3.75 million each $7.5m $10m $3m $4m $1m $2.5mLegend : Hank & Angel VCs Mike Investors 8
  • 9. Option 3 – VentureCapitalistsst After 1 Round st1 Round 1.5 – 2 years $1m $1m No track record Diluted ownership After 2nd Round 2-3 years later2nd Round - VC $5m $2.5 million each $10m $2m $4m $2m $5mLegend : Hank & 1st 2nd Mike VCs VCs 9
  • 10. Decision Individual % founder Pros and Cons Gains shareFriends & • 100K will sustainfamily $4.75m 47.5% startup for 6 months onlyAngel Why AngelInvestors $3.75m 37.5% investors??VC • Less % $2.5m 25.0% ownership • Difficult to obtain 10
  • 11. Conclusion/KeyTakeaways Take angel investors funding Good business connection Helpful advice/mentorship Upon company sale  $3.75 million each for Hank & Mike 11