PunchTab Inc. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

1. What are the relevant differences between angel investors and VC firms that Kumaran and his team should consider? Who would make the better partner for Punch Tab in the short term? Who would make the better partner in the long term?

Angel investors were typically affluent individuals, who invested a small portion of their personal wealth in companies. They usually invested within their geographical area along with areas of expertise and experience. On the other hand, VC are large structured organizations who invest heavy portion in companies. They also invest outside their geographical region and in companies where they do not have technical expertise.

In the short run, it would be beneficial for the company to consider venture capital but there might be a possibility that the company might face difficulty in availing a venture capital investment because they usually adopt a strategy to invest heavily on the new start-up business with a strong vision of having a good exit.

Further, in order to facilitate the long-term strategy, the organization shall consider to have an angel investor because angel groups are more professional in nature and an approach of higher average investment size clearly determines their investment approach and resembles the traditional venture capital model.

2. What are the key differences in convertible notes and “pried” rounds? What makes those differences relevant? Why would the Punch Tab team care about the difference? What might Kumaran and his team do differently (either on their own, or because they are required to do so) when they preparing for one vs. the other?

Convertible bonds are hybrid in nature, which includes both the contents of equity and liability. The major benefit in convertible bonds are that the interest rate charged on such bonds are comparatively low than other bonds in the market because it provides the chance for bond holders to convert them in either equity or liability. Further, it is also beneficial because the interest charged on the bonds is a deductible expense in calculating taxable profits, which will reduce the tax expense charged on companies. Whereas, in priced bond the founders will depend on the valuation of the company because it is usually based on the market rate for the number of hours worked.

Punch Tab’s team care about the differences because of the differences in nature of the two approaches

Convertible notes can create pressure between entrepreneurs and investors, it is simply because an investor can exit with a lesser deal if they invest in a company that does better than expected and a cofounder can end up in trouble if things don’t go as well as he hoped.

The choice on the availability of the financing option will depend on the type of investors, the nature of the business and how much risk the company is willing to take.

3. As an entrepreneur: What should Kumaran do?

As an entrepreneur, Kumaran is looking for the worthwhile investment opportunities that can facilitate them in achieving the corporate mission of the organization. The entrepreneur has basically three options available. The first option is to include the venture capital in the deal, the second option is to fill the round with angels including one or two super angels and the third option is to wait for few months and raise Series A round bypassing the seed around completely.

At this stage, the entrepreneur may find risky to adopt venture capitals as his strategy. Further, there is a strong reason that the company shall not wait for few months because the company operates an IT business, which is more susceptible to risk of being outdated instantly and there is a strong possibility that the technological concept may be adopted by rivals, which will significantly influence the customer base of the company, so the entrepreneur shall consider to fill the round with angels including one or two super angels. Further, another advantage of the angels is that as they are involved in many deals; hence. it will be beneficial for the organization to obtain day to day support.

Further, in order to attract investors the company can arrange practical presentations where the forecasted sales are presented to potential investors. The assumptions used in forecasting the sales shall be based on reasonable ground because investor’s confidence is dependent on the credibility of assumptions. If assumptions are not reasonable then another assumption can the credibility of management’s competence.....................................

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