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20192703 - Western Technology Investment - A6G9

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1. Introduction
In this case, we are asked to evaluate from both a strategic and financial standpoint a venture
debt offering between Western Technology Investment (WTI) and a start-up, Juvo. Venture
debt (VD) is a new instrument that lengthens runway for startups enabling them to hit key
milestones before raising their next rounds of funding. From the perspective of the venture
firm, VD can be advantageous because the debt provides a constant income stream while
limiting the downside risk, while warrant and add-on financing options provide the firm with
substantial upside potential if the startup is successful.
Juvo is a San Francisco based startup focused on providing loans on prepaid mobile phone
plans to customers in developing markets. This business model has several positive impacts.
First, it improves the partner mobile networks’ revenues by as much as 14%, but more
importantly allows Juvo to begin creating a credit risk profile on customers that otherwise
don’t have credit history. This enables Juvo to then offer add-on loans such as small
business or personal loans at appropriate market prices.
After raising its Series A, Juvo is looking for a loan to extend its runway by about six
months to make further progress on their business plan before raising a Series B. The offer
WTI is weighing consists of three parts: $3mm loan for 3 years at 12% interest, warrants,
and a Series B investment option. WTI needs to properly balance making an appropriate
return for their partners given the level of risk without overly burdening and risking the
viability of the startup.
2. Main assumptions considered
2.1. Numerical values
In the analysis it was considered the same values presented in the case:
Loan





Loan amount: $3 million
Loan term: 3 years
Interest-only period: 6 months for each of the loan tranches
Interest rate:12%
Draw-down date: $1.5 million on March 31, 2016 and $1.5 million on before September
30, 2016
− Considered that Juvo closed the loan at March 31, 2016
− Considered that the cash from the loan entered Juvo’s accounts at the beginning of April
2016 and October 2016 (as it can be seen in Exhibit 8)
− Considered that the first interest payment of each loan tranche happened in the end of
April 2016 and October 2016 (as it can be seen in Exhibit 8)
 Warrant coverage: 6% commitment at close (March 2016) with additional 6% earned pro
rata upon usage of the line (a total of 12%)
− 3% at April 2016 relative to the $1.5 million of the loan that enter Juvo’s accounts
− 3% at October 2016 relative to the $1.5 million of the loan that enter Juvo’s accounts
 Next-round investment option: $500,000 (series B round)
Series B Round:
 Amount raised: $15 million
− At 3 $/share
− 5,000,000 shares
 Premoney valuation: $60 million
− At 3$/share (initially the shares were at 1 $/share as it can be seen in Exhibit 7)
− 20,000,000 shares
 Timing: March 30, 2017
Series C Round:
 Amount raised: $30 million
− At 8 $/share
− 3,750,000 shares
 Premoney valuation: $200 million
− At 8 $/share
− 25,000,000 shares
 Timing: September 30, 2018
Exit:
 Valuation: $500 million
− At 17.39 $/share
− 28,750,000 shares
 Timing: September 30, 2020
2.2. Other assumptions
Other important assumptions considered during the case were the following:
 Value of Juvo’s equity increases linearly between the datapoints provided (e.g, premoney
valuation at series B round)
 The warrant is not exercised until maturity: If Juvo dies or enters in self-sustaining mode
before September 30, 2020, WTI won’t exercise its warrant option since it cannot liquidate
its position (assuming no entity wants to buy part of a failing/ dying startup); however, if
it did so WTI could access part of Juvo’s assets such as the intangible assets
 We believe the warrant exercise will not necessarily be dilutive because there is a reserve
of 4mm shares of common stock as “options available for grant” from which the firm can
grant without diluting
3. Potential scenarios under analysis
Four potential outcomes/ scenarios were considered for WTI:
A) Juvo manages to exit successfully: i) Juvo repays the totality of interest and principal;
ii) WTI activates its option to invest at series B round; iii) WTI exercises the warrant
B) Juvo dies/ self-sustains itself before exiting: i) Juvo repays the totality of interest and
principal; ii) WTI activates its option to invest at series B round; iii) WTI doesn’t exercise
the warrant
C) Juvo dies/ self-sustains itself before series C round: i) Juvo repays the loan’s interest
and principal until September 30, 2018 (series C round date); ii) WTI activates its option
to invest at series B round; iii) WTI doesn’t exercise the warrant
D) Juvo dies/ self-sustains itself before series B round: i) Juvo repays the loan’s interest
and principal until March 30, 2017 (series B round date); ii) WTI doesn’t activate its
option to invest at series B round (since it does not see any potential in it); iii) WTI doesn’t
exercise the warrant
For the sake of simplicity, no outcome/ scenario was considered where Juvo gets a M&A exit
before series rounds B or C. If that would happen WTI could exercise its warrant or liquidate
its stake in the company (if WTI invested in Juvo’s equity during round B) previously to the
expected exit at September 30, 2020, potentially making a profit on it.
Additionally, the probability of each considered scenario occurring was calculated based on
the information provided in Exhibit 6, which was summarized in the next figure:
A main assumption considered for the calculation of the “Success” probability in each stage
was that it added both the probability of going through the round and the probability of
suffering a M&A exit (as shown in Exhibit 6) since it was considered that companies that go
through M&A exits could also successfully go through the investment round (if not suffering
an M&A).
Finally, the probabilities of each scenario were calculated as follows (adding up 100%):
A) Juvo manages to exit successfully: 15% (71% x 52% x 41%)
B) Juvo dies/ self-sustains itself before exiting: 22% (71% x 52% x 59%)
C) Juvo dies/ self-sustains itself before series C round: 34% (71% x 48%)
D) Juvo dies/ self-sustains itself before series B round: 29%
4. Scenarios main indicators
The main indicators of each scenario can be analyzed below for the main events considered:
Loan cash-flows (cumulative)
Investment Option cash-flows (cumulative)
Warrant potential cash-in
Scenario A total cash-flow (cumulative)
Scenario B total cash-flow (cumulative)
Scenario C total cash-flow (cumulative)
Scenario D total cash-flow (cumulative)
Loan closing (Mar, 2016) Series B (Mar, 2017) Series C (Sep, 2018) Exit (Sep, 2020)
-1 500 000 €
-2 471 268 €
-378 876 €
667 320 €
0€
-500 000 €
-500 000 €
2 398 551 €
0€
0€
0€
40 347 826 €
-$1 500 000
-$2 971 268
-$878 876
$43 413 697
-$1 500 000
-$2 971 268
-$878 876
$667 320
-$1 500 000
-$2 971 268
-$878 876
$0
-$1 500 000
-$2 971 268
$0
$0
IRR
101%
3%
-21%
-98%
 The cash-flows values presented are cumulative at each point of time identified: The values
at grey are the cumulative values of the cash-flows used to calculate the potential IRR of
each scenario
 The detailed cash-flows for each month can be analyzed in the Appendix
 Only for Scenario A was considered that both the equity position that WTI had on Juvo and
the warrant were liquidated with Juvo’s M&A exit (at the other scenarios WTI is not able
to sell its positions since Juvo dies)
 Assumed that both the warrant value and the equity position inside Juve after investing in
Series B Round increase proportionally with the increased company valuation (ending
respectively at 40,347,826$ and 2,898,551$)
5. What we need to believe for Scenario A to be a reality
5.1. Management capabilities & company projections
Patrick Lee of WTI has worked closely with Steve Polsky and is confident in his
management experience. Further, Juvo had superior cash flow properties relative to many
fintech competitors because it leverages the balance sheets of its partner mobile networks
when extending loans making the company even more attractive. According to its own
forecast income statement, Juvo’s revenues are expected to grow about 22x from 2016 to
2020 with the anticipation of turning cashflow positive in 2019 showing overall
improvements in cash management. However, Juvo is not without risks. Its technology is not
fully developed, it has not secured customers through long-term contracts, and there is no
certainty about when it will be able to gain scale. No early stage startup is without risk, but
balancing these, Juvo appears to have a bright future ahead of itself.
5.2. Market growth potential
The proliferation of smartphones and thirst for financing in the developing market will fuel
Juvo’s growth for years to come. Juvo fills an existing need in the market by providing
financing in developing countries. They currently face no major competition and are able to
claim first mover advantage as they scale.
There is significant upside growth potential of the smartphone market as consumers catch up
to developed markets. By 2020, smartphones are projected to grow to 63% adoption with
further room for growth based on trends observed in developed markets. As developing
markets enter the middle class, they will be seeking financing to fund consumption and
investment. Juvo will be uniquely positioned by having created proprietary and sole credit
models that it will then be able to sell to or partner with banks and other financing
institutions.
5.3. D/E ratios
WTI aims to limit debt to equity ratios to 33%. Juvo does not have any outstanding debt, so
the $3mm injection will limit the D/E ratio to 15% when using Series A valuation, well
below the threshold. Additionally, the loan will provide Juvo with about six months of
runway, in line with WTI goals, giving it time to reach Series B. Finally, the debt issued by
WTI is considered senior, so if anyone else provides financing, it will not be more senior to
the $3mm injection in question.
6. Scenario B
In Scenario B, Juvo dies or becomes self-sustaining before WTI has an opportunity to cash
out. In this situation, the estimated IRR is a positive 3% given that WTI will be able to
recuperate the loan they extended to Juvo without realizing any of the upside of the warrants
or shares they purchased in Series B.
7. What if scenarios C or D happen
In scenarios C and D, which are relatively probable, Juvo is dead/ self-sustaining early on in
the funnel. In these cases, the investment does not make sense for WTI given the negative
returns. However, the severity of the cases is partially mitigated by the fact that WTI has
debt seniority; it is the first funder to get paid by Juvo in case of bankruptcy. At the same
time, WTI would be in a tough position as its interests as a sole debtholder would be
conflicting with interests of shareholders. At that point, debtholders and shareholders would
have different appetites for risky projects.
8. Conclusion
We believe that the proposed offer is a good investment for WTI and the firm should go
forward for two reasons. First, it does not unduly burden the startup, Juvo, and second, it
provides appropriate upside potential to WTI should the startup be successful. Debt in this
case will be limited to 15% of equity, well within WTI’s guidelines, and the debt payments
are not overly onerous on Juvo particularly since they enjoy interest-only periods for the first
six months. Given the revenue growth projections for 2018-2020, servicing the debt should
not be a major issue for Juvo.
Provided Juvo survives to exit, WTI stands to make significant upside of 101% IRR from
the combination of income streams. The interest rate of 12% is slightly below the benchmark
for the industry (Prime + 9-12%), but WTI chose instead to have more upside on the warrant
side of the deal with 12%.
In our second scenario, they will also turn a positive IRR. It is only if Juvo dies before Series
C that the return is negative. There is an outstanding question about what assets might be
available to cover the loan in case of bankruptcy since the technology is not fully developed
and a balance sheet was not available for analysis. Still, this modeling is slightly
conservative because WTI has proven its willingness to renegotiate the terms of the
financing in case of distress rather than calling in debt and forcing bankruptcy. As a result,
about 90% of portfolio companies have made money for WTI. We chose to use this
conservative approach to illustrate the upside potential that is possible through the exercise
of subsequent round participation and warrant exercise.
APPENDIX
Period
Date (end of)
Loan
Positive loan cash-flows (interest + principal)
Negative loan cas-flows
Option for next round investment
Equity value of the firm
Number of shares
Value per share
Warrant value
A) Exits successfully
B) Dead/ self-sustaining after round C
C) Dead/ self-sustaining after round B
D) Dead/ self-sustaining before round B
0
1
2
3
4
5
6
7
8
9
10
11
12
mar/16
abr/16
mai/16
jun/16
jul/16
ago/16
set/16
out/16
nov/16
dez/16
jan/17
fev/17
mar/17
-$1 500 000
$15 000
$15 000
$15 000
$15 000
$15 000 -$1 485 000
$73 122
$73 122
$73 122
$73 122
$73 122
$73 122
$0
$15 000
$15 000
$15 000
$15 000
$15 000
$15 000
$73 122
$73 122
$73 122
$73 122
$73 122
$73 122
-$1 500 000
$0
$0
$0
$0
$0 -$1 500 000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0 -$500 000
$20 000 000 $23 076 923 $26 153 846 $29 230 769 $32 307 692 $35 384 615 $38 461 538 $41 538 462 $44 615 385 $47 692 308 $50 769 231 $53 846 154 $56 923 077
20 000 000 20 000 000 20 000 000 20 000 000 20 000 000 20 000 000 20 000 000 20 000 000 20 000 000 20 000 000 20 000 000 20 000 000 20 000 000
$1.00
$1.15
$1.31
$1.46
$1.62
$1.77
$1.92
$2.08
$2.23
$2.38
$2.54
$2.69
$2.85
$1 200 000 $1 984 615 $2 249 231 $2 513 846 $2 778 462 $3 043 077 $3 307 692 $4 818 462 $5 175 385 $5 532 308 $5 889 231 $6 246 154 $6 603 077
-1 500 000
$15 000
$15 000
$15 000
$15 000
$15 000 -$1 485 000
$73 122
$73 122
$73 122
$73 122
$73 122 -$426 878
-1 500 000
$15 000
$15 000
$15 000
$15 000
$15 000 -$1 485 000
$73 122
$73 122
$73 122
$73 122
$73 122 -$426 878
-1 500 000
$15 000
$15 000
$15 000
$15 000
$15 000 -$1 485 000
$73 122
$73 122
$73 122
$73 122
$73 122 -$426 878
-1 500 000
$15 000
$15 000
$15 000
$15 000
$15 000 -$1 485 000
$73 122
$73 122
$73 122
$73 122
$73 122
$73 122
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
abr/17
mai/17
jun/17
jul/17
ago/17
set/17
out/17
nov/17
dez/17
jan/18
fev/18
mar/18
abr/18
mai/18
jun/18
jul/18
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$75 000 000 $81 944 444 $88 888 889 $95 833 333 $102 777 778 $109 722 222 $116 666 667 $123 611 111 $130 555 556 $137 500 000 $144 444 444 $151 388 889 $158 333 333 $165 277 778 $172 222 222 $179 166 667
25 000 000 25 000 000 25 000 000 25 000 000 25 000 000 25 000 000 25 000 000 25 000 000 25 000 000 25 000 000 25 000 000 25 000 000 25 000 000 25 000 000 25 000 000 25 000 000
$3.00
$3.28
$3.56
$3.83
$4.11
$4.39
$4.67
$4.94
$5.22
$5.50
$5.78
$6.06
$6.33
$6.61
$6.89
$7.17
$6 960 000 $7 604 444 $8 248 889 $8 893 333 $9 537 778 $10 182 222 $10 826 667 $11 471 111 $12 115 556 $12 760 000 $13 404 444 $14 048 889 $14 693 333 $15 337 778 $15 982 222 $16 626 667
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
ago/18
set/18
out/18
nov/18
dez/18
jan/19
fev/19
mar/19
abr/19
mai/19
jun/19
jul/19
ago/19
set/19
out/19
nov/19
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$58 122
$58 122
$58 122
$58 122
$58 122
$58 122
$0
$0
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$58 122
$58 122
$58 122
$58 122
$58 122
$58 122
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$186 111 111 $193 055 556 $230 000 000 $241 739 130 $253 478 261 $265 217 391 $276 956 522 $288 695 652 $300 434 783 $312 173 913 $323 913 043 $335 652 174 $347 391 304 $359 130 435 $370 869 565 $382 608 696
25 000 000 25 000 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000
$7.44
$7.72
$8.00
$8.41
$8.82
$9.22
$9.63
$10.04
$10.45
$10.86
$11.27
$11.67
$12.08
$12.49
$12.90
$13.31
$17 271 111 $17 915 556 $18 560 000 $19 507 297 $20 454 594 $21 401 890 $22 349 187 $23 296 484 $24 243 781 $25 191 078 $26 138 374 $27 085 671 $28 032 968 $28 980 265 $29 927 561 $30 874 858
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$58 122
$58 122
$58 122
$58 122
$58 122
$58 122
$0
$0
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$116 244
$58 122
$58 122
$58 122
$58 122
$58 122
$58 122
$0
$0
$116 244
$116 244
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
45
46
47
48
49
50
51
52
53
54
dez/19
jan/20
fev/20
mar/20
abr/20
mai/20
jun/20
jul/20
ago/20
set/20
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0 $2 898 551
$394 347 826 $406 086 957 $417 826 087 $429 565 217 $441 304 348 $453 043 478 $464 782 609 $476 521 739 $488 260 870 $500 000 000
28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000 28 750 000
$13.72
$14.12
$14.53
$14.94
$15.35
$15.76
$16.17
$16.57
$16.98
$17.39
$31 822 155 $32 769 452 $33 716 749 $34 664 045 $35 611 342 $36 558 639 $37 505 936 $38 453 233 $39 400 529 $40 347 826
$0
$0
$0
$0
$0
$0
$0
$0
$0 $40 347 826
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
IRR
101%
3%
-21%
-98%
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