Strava case memos
Hyung Jun Kim (20213933)
The Strava case talks about the story of Michael Horvath (Harvard ’88) and Mark Gainey (Harvard ’90)
who launched two ventures together and facing dilemma whether to take Series A investment from
venture capitalists.
After their co-founding of Kana Communications, an enterprise software company to address the
problem of customer e-mail, Horvath and Gainey’s new interest hovered around delivering social
motivation for athletes. As a growing number of devices – like heart rate monitors – start to produce
and track GPS data, they could start pursuing their long-yearned dream of providing a platform
that allows athletes to compare performance data with each other. Soon after building the team in
2007, they launched their service in web and reached the first 1000 users in 2009.
In the second half of the year 2010, Strava had the fastest growth in product cycling activities and
started looking for ways to expand their boundaries from cycling to running market, and web to
mobile platform. Strava’s growth rate of 20% per month in subscribers is expected to continue till
2015 at progressively lower monthly growth rates. The new running business is anticipated to grow
at the monthly rate of 30 percent in 2011, which in further year it will subsequently go down to
lower growth rates. They also have two recent uncertainties before entering new market; First, the
company is not sure about the mobile product’s impact on future conversion rate. Second, it is
difficult to say how the conversion rate would work in running market.
To continue building the business, Horvath and Gainey are looking to raise 1$ million in an angel
round. However, Sigma Partners, a venture capitalist (VC), offers a deal nearly three times as large
as what they’ve looked for. Although the deal consists of the fund that could free the company
from financial restriction in the longer run, there are good reasons Horvath and Gainey to turn
down the offer.
First, it would be a surprise for them as they first sought for an angel investment, not a VC. Angel
investors are affluent individuals who invest their own money into startup ventures, whereas venture
capital investors are employed by a risk capital company – sourcing and investing other people’s
money. Since venture capitalists is responsible for the profitability of the fund with time limit, the
founders’ original goal and direction of the business can be interfered.
Horvath and Gainey were envisioning to build the ‘best social network for athletes. The whole
success of social network depends on customer acquisition and the size of user group. In the tension
between revenue and user growth, the founders’ initiatives may be affected by that of venture
capitalists’ after dilution, which is expected to go up as high as 40%(Exhibit 2).
Additionally, the fact that investment amount Sigma proposed is nearly three times as large as what
Strava had set out originally could be a sign for Horvath and Gainey to reconsider about their
potential. This may be a sign that the VC highly values the future potential of the company and
gain more dominance in the early stage. The valuation received from Sigma reflected the early stage
and large amount of uncertainty with respect to the speed of customer acquisition at that time. If
there are angel investors who would readily back the venture, it is a good idea to get fund only as
needed this time and reconvene with the VC with better terms.
The case raises a question about the right timing and terms to negotiate with the VC. It will require
many complicated calculations before signing a contract, but it is too early for Strava to
unnecessarily dilute the portion of the share suggested by Sigma Partners. In my opinion, it is not
the right time for Strava to be with VC this time.
*Please suggest one discussion question relevant to this case that you would like to discuss with
your classmates during class.
- factors founders must consider before choosing their VC
*Please create two (2) True/False Questions (with answers separately noted) relevant to the previous
session’s class discussion that would be easy to answer if a student was paying attention in class
but difficult to answer if a student was not paying attention or was absent.
- The lifespan of an investment in Korea is getting longer
True. It’s adapting to the Silicon Valley model.
- If LP needs to pull their money now, VC fund inevitably fails.
False. They can sell their share in ‘secondary market’ to others during the fund’s lifecycle.