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Entrepreneurial+Finance+
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Trinity!Term!2015!
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Individual+assignment+–+Valuation+of+AccZ+
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You! are! working! for! Stamford! Capital! Partners,! a! leading! Venture! Capital! firm! based! in! West!
London.!Your!boss,!Jose!Arrogantio,!has!asked!you!to!prepare!an!investment!case!for!AccZ,!who!
have!pitched!for!money.!!
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Having! been! intrigued! by! the! business! plan,! Jose! is! thinking! of! inviting! John! Terry! and! Eden!
Hazard,! the! coLfounders! of! AccZ,! to! pitch! their! idea.! They! have! developed! an! accounting!
programme! for! the! selfLemployed! and! small! businesses.! Traditional! accounting! packages! can!
feel!overwhelming!and!overLcomplicated!for!small!businesses,!with!all!sorts!of!functionality!that!
will!never!be!used.!And!they!are!expensive.!Consequently,!many!small!businesses!tend!to!use!
spreadsheets!for!keeping!their!accounts,!even!though!these!are!not!well!suited!to!producing!tax!
accounts,! live! cashLflow! positions,! payrolls! etc.! ! AccZ! have! developed! an! accounting! package!
focused!directly!on!the!needs!of!small!businesses!and!have!received!rave!reviews!during!their!
beta! testing.! Their! software! runs! on! all! operating! systems! (including! iOS! and! Android)! and! so!
can! be! used! on! computers,! tablets! and! phones.! They! want! £3m! to! develop! the! product! and!
launch!their!first!commercial!version.!!
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John,! who! is! 28! years! old,! has! strong! software! development! skills,! and! previously! coLfounded!
another!FinTech!startup!focused!on!reducing!the!cost!of!foreign!exchange!transactions!(which!
had! previously! been! dominated! by! banks! and! large! financial! networks! such! as! Visa! and!
Mastercard).! This! was! a! modest! success:! the! company! had! good! technology! and! some! loyal!
users,! but! did! not! become! one! of! the! market! leaders.! The! company! was! sold! to! a! competitor!
after!4!years,!and!John!left!the!company!at!this!stage!and!sold!his!equity.!He!has!invested!£200K!
in!developing!AccZ!to!this!point.!Eden!is!a!friend!of!John!from!their!days!at!Chelsea!University.!
He! is! 30,! a! trained! accountant,! and! was! until! recently! a! senior! product! manager! at! a! longL
established!accounting!software!company.!This!is!his!first!startLup,!but!he!brings!strong!domainL
knowledge! and! customer! acquisition! skills.! He! has! invested! £100K! in! the! venture,! which! has!
taken!his!entire!savings.!They!have!put!together!a!small!team!of!developers!and!the!next!stage!
is!to!build!out!sales!and!marketing,!once!the!product!goes!live.!
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Given!the!enthusiastic!response!to!the!beta!version!of!AccZ,!John!and!Eden!intend!to!launch!the!
full!commercial!version!in!2015!Q4.!The!business!model!is!SaaS!–!Software!as!a!Service!–!and!
they! are! going! to! have! simple! monthly! subscriptions! of! £20! a! month! for! sole! traders,! £30! for!
partnerships! and! £40! for! limited! companies.! These! different! levels! will! have! varying!
functionality.!For!example,!the!sole!trader!version!will!integrate!with!personal!tax!assessment!
software,! whereas! the! limited! company! version! will! produce! corporation! tax! reporting.! They!
intend!to!create!a!superb!user!experience!not!only!via!their!attractive!and!wellLtested!software,!
but! also! by! keeping! customer! support! inLhouse! and! closely! integrated! with! the! development!
team.!
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At! this! point! the! John! owns! 2/3! of! the! company! and! Eden! owns! 1/3.! They! have! not! yet!
established!an!option!pool!for!current!or!future!employees!–!although!they!have!promised!this!
to!the!existing!small!team.!In!addition,!they!also!raised!£150K!in!May!2014!through!a!convertible!
note.!This!accrues!interest!at!1%!(compound)!per!month,!and!will!convert!into!equity!at!the!next!
financing!round,!subject!to!a!valuation!cap!of!£3m.!
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AccZ! has! produced! summary! financial! projections! (see! table! below)! and! is! seeking! an!
investment!of!£3m.!The!founders!have!limited!ability!to!provide!any!additional!funding,!but!are!
prepared!to!work!for!belowLmarket!salaries!of!only!£50K!each!during!the!first!2!years.!Both!John!
and!Eden!understand!that!Stamford!Capital!Partners!will!be!seeking!to!exit!the!investment!by!
the!end!of!2019.!If!the!deal!goes!ahead,!both!sides!are!aiming!for!a!closing!date!of!1!July!2015.!
The!entrepreneurs!are,!however,!rather!obsessed!about!not!losing!control!of!the!company,!and!
so!will!not!consider!a!deal!where!they!give!away!more!than!50%!of!the!equity.!
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Your!boss!wants!you!to!advise!on!whether!a!deal!could!be!structured!that!would!work!for!all!
parties.!He!thinks!the!projections!for!the!venture!are!reasonable.!He!likes!the!fact!that!SaaS!can!
produce!stable!cashflows,!and!that!such!businesses!can!scale!impressively.!But!he!has!been!an!
investor! for! long! enough! to! know! that! the! risks! are! high,! that! building! market! share! takes!
considerable!investment,!and!that!there!are!other!options!for!small!businesses.!!
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You!have!to!produce!a!report!for!Jose.!His!time!is!valuable,!and!he!only!wants!to!invite!AccZ!in!
for! a! pitch! if! there! is! a! chance! that! Stamford! Capital! Partners! could! make! decent! returns.! He!
likes!clear,!succinct!Powerpoint!presentations,!and!has!a!rule!that!they!should!never!exceed!25!
slides.!He!likes!there!to!be!a!summary!at!the!start,!telling!him!what!the!answer!is,!before!getting!
into!the!detailed!analysis.!He!also!likes!to!be!able!to!follow!the!various!steps,!calculations!and!
logic!of!the!argument.!And!he!has!a!strict!format!for!all!such!investment!cases:!
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1. Summary!recommendation!
2. Valuation,!and!discussion!of!how!the!investment!would!be!structured/staged!
3. Summary!term!sheet,!annotated!to!explain!why!the!terms!are!important!
4. A!clear!capitalization!table!showing!ownership!through!to!exit.!
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Jose!generally!favours!the!VC!method!of!valuation!for!this!type!of!earlyLstage!venture,!although!
he! encourages! you! to! challenge! and! discuss! the! pros! and! cons! of! any! valuation! method! you!
employ.!And!he!always!likes!to!consider!options!regarding!staged!investment.!Finally,!Jose!likes!
to!have!the!key!assumptions,!uncertainties,!and!sensitivities!made!clear.!Thankfully,!unlike!some!
other! partners! at! Stamford! Capital! Partners! who! set! assignments! at! short! notice,! Franco! has!
given!you!a!reasonable!time!to!complete!the!task.!!
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Outline!financial!projections!are!given!below.!
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AccZ+–+summary+financial+projections+(calendar+years)+
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£+‘000+ 2015+ 2016+ 2017+ 2018+ 2019+
Revenue+ 50! 500! 2100! 6000! 10500!
Cost+of+sales+ 20! 180! !850! 1100! !1500!
+ 30! 320! 1250! 4900! !9000!
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Administrative+expenses+ !350!! !800! !3200! 4700! 5800!
Net!profit!(loss)!before!tax! (320)! (480)! (1950)! 200! 3200!
Tax! !!!30! !!!50! !!200! !(15)! (350)!
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Net+profit+(loss)+after+tax+ (290)+ (430)+ (1750)+ 185+ 2850+
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Memo:!change!in!net!working!capital! 50! 120! 220! 250! 200!
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Notes:!
1. It! is! conventional! for! SaaS! companies! to! include! the! following! expenses! in! the! cost! of!
sales:! hosting! of! the! application,! costs! of! onLboarding! clients,! support! and! account!
management,!credit!card!fees!and!any!partner!commissions.!
2. Administrative! expenses! include! sales! and! marketing,! product! development,! facilities!
and!general!admin!support!

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