Spot-fire: Managing a Multinational Start-up Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Spot-fire: Managing a Multinational Start-up Case Solution

If we look at the growth of the headcount, then it could be seen that the marketing headcount is the area, which is expected to grow significantly with an average growth of 111% over the estimated period of 1998 to 2000. Except the management headcount, all other headcount numbers, including the people in administration, sales, customer service and development would be growing rapidly over the course of the business. Furthermore, the company is looking forward to introduce new products in the market, so that it could increase its customer base and meet the objectives of the large scale. Also, the company would require external funds to develop its internal infrastructure. Therefore, based on the needs; the required external financing under the second round should be around $6 million to $ 8 million.

Terms and Condensation

The company had given a considerable piece of equity of around 46% to the Innovations Kapital in its first round of financing. This is so, because the company’s management did not have many alternatives to avail at that time. On the other hand, the management also believes in the skills of Innovations Kapital in building the Swedish Ventures. However, now the company’s management is not willing to give up equity in return for the required financing. Nonetheless, stock options have also been set aside for the second round of financing, which are equal to the value of 20% of the company’s equity. Therefore, Spot-fire could approach the VCs to discuss the second round of the financing.

The terms of the second round of financing could be discussed with the Sweden based Innovations Kapital and Atlas Venture, following which the company’s management could form an affiliate with the DLJ’s venture capital, in order to make the second round of financing of about $6 million to $ 8 million, successful. The terms should emphasize over the stock options and a seat on the board of the company, but none of the equity should be provided to the venture capital investors.

The financing that is expected to be raised by the company under the second round would be used by the company’s management to support its expansion strategy on a global scale. The company would not just be expanding into the vertical industries but also in the pharmaceutical market. This is so, because most of the pharmaceutical companies in the international market are using the Spotfire’s bioinformatics software.Therefore, now the company’s objective is to broaden and deepen that relationship with the companies, so that it could meet all the needs of the pharmaceuticals industry by supporting their decision support systems.

What is the valuation of the Company? This isn't required but a quick Discounted Cash Flow analysis would be helpful based upon the info provided in the case?

The valuation of the company has been performed on the basis of two method, which are: discounted cash flow method and the multiple comparable method. In order to calculate the value of the company based on the discounted cash flow method; two important assumptions have been made, which are: cost of capital and the company’s terminal growth rate. Looking at the financing needs of the company in the future as well as on the company’s past performance based on the common size income statement and the cash flow growth; the weighted average cost of capital for the company has been estimated to be around 10%, and the terminal growth rate, assuming that the second round of financing becomes successful, is estimated to be around 2%.

First of all, the company’s free cash flow has been calculated by taking the net income for the estimated years and adding it back the non-cash expenses, i.e. the depreciation for each of the year. Moreover, the company’s investment in the incremental capital expenditure and the increment working capital have been deducted for the company. Based on the discount rate of 10%; the value of Spotfire is calculated to be around 64.4 million.

The second method of valuation that has been adopted, is the comparable multiple approach method for the companies in the software industry. Data for three comparable companies have been provided in the exhibit 10, and based on that information; the market value over sales multiples have been calculated for these three companies, which are: Sterling Software, Parametric Technology and Award Software Inc. Then the average of the three multiples has been calculated, which is around 6.55 times. This average market value over sales multiple,is then divided with the 1997’s actual sales of Spot-fire, to calculate the company’s value, which is calculated to be around $ 116 million. Therefore, in this way, we get the upper range and the lower range of the company’s valuation...................

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Spot-fire: Managing a Multinational Start-up Harvard Case Solution & Analysis