RSSWorksInc- An early stage Investment Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Introduction

The growing popularity of RSS and the positive reviews provided by the analysts seem to indicate the growth potential of this technology. Tom and Island want to take advantage of this opportunity, therefore they have gotten this technology patented. The usage of internet has been increasing as it has increased by 265.6% from 2000-2007 in the world. Therefore, the market is very ripe to earn large profits.

They have to decide on the business model. Options include charging a fee for the premium version of RSS while keeping the standard free. Other option includes inserting the ads into the feed being managed by RSS. The third option includes licensing the product versions to big organizations. The main decision is to decide on the source of the finance for the purpose of expansion of the business.

Literature View

Internally generated funds

In general, “…equity capital is that capital invested in the firm without a specific repayment date, where the supplier of the equity capital is effectively investing in the business” (Ou& Haynes, 2006, p. 156). It can be raised either internally or externally. Internal equity is funds provided by current owners, family, and friends or from the retained earnings within the organization. On the other side, External equity is capital acquired from external channels. For instance, an introduction of new partners(International Journal of Business and Management, 2013).

These funds do not have any costs attached, reducing the cost of capital for any business. This fund is readily available and does not require development of business plans for external finance.As RSS Works Inc is a small business and its in early stage of its life cycle, it will not have sufficient retained earnings to be able to finance its expansion. Moreover, one of the three partners has left the business, thereby reducing the availability of capital. One of the major dis advantages of this source of finance is that if retained earnings were invested, owners would have fewer amount of money to take home in a short-term(International Journal of Business and Management, 2013).

This form of financing is preferred over debt financing for start-up businesses because they usually face shortage of cash, restricting their ability to achieve loans from banks which require collateral for the purpose, a condition unfulfilled. There are two advantages of equity financing(Ou& Haynes, 2006). Firstly, it offers long-term financing with minimum cash outflow in the form of interest. Second, it assists in improving the new business’s credibility by indicating that the firm has the approval of sophisticated financial professionals(International Journal of Business and Management, 2013).

Venture Capital

These are known as financial intermediaries. These investors usually invest in start-up businesses with high potential for growth.(Potter & Porto, 2007). To start with, investments employing venture capital often involve high levels of asymmetry information and uncertainty as well as higher intangible assets (Gompers, 1995). In addition, Hellmann (1998) explained that if a venture capitalist invests a large amount of funds into a business, they force management to keep monitoring the affairs of the business rigorously. Therefore, it is a norm of managers to have regular meetings and spend more time in offices. Finally, venture capital ist scan provide the firm with strategic access to new suppliers and clients as well as strategic partners(International Journal of Business and Management, 2013).

Angel Investors

Angels are wealthy people who possessvast experience of business environment investing in high growth small companies. These individuals usually do not have anyprevious relationship with these businesses (Madill, Haines, & Riding, 2005). Theyinvest money in the form of equity contract(International Journal of Business and Management, 2013).

RSSWorksInc- An early stage Investment Case Solution

These investors are a crucial source of financing for start-ups firms. As perMorrissette(2007), angel investors provide eleven times more investmentas compared to venture capitalists. Shane (2012) collected data from different surveys which showed these investors invest between$12.7 and $36 billion from 2001 to 2003. In Germany, for example, a study by Stedler and Peters (2003)estimated the total capital assets for each business angel in the country at €2.5million to €5 million distributed across a portfolio of between 1 and 5 firms, all start-ups(International Journal of Business and Management, 2013).

Analysis and Interpretation

There are different implications for different source of finance selected by Tom and Islander. The usage of internal source of finance may not be able to fulfill their needs of finance due to the non-availability of sufficient profits. However, this source of finance will keep their control of their company intact. They would not lose their position as the company’s CEOs and may be able to pursue their objectives their own way as they would not be supervised by anyone. With less cost and time-consuming efforts,this source of finance is available with fewer problems. If the present strategy is followed, they are less likely to meet the expectations of customers and the rising competition could create trouble for the business......................

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