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Entrepreneurial Venture: Financing Options - Golfgamez (B)

Analyzing Financing Options

The case essentially involves analyzing and summarizing financing options available to this entrepreneurial venture. To ensure some consistency with your submissions, I have provided a spreadsheet template for you to complete. The layout of the spreadsheet follows the order in the case so it should be fairly intuitive.

Option 1 is Debt,

Option 2 is Equity,

Option 3 is Accelerator,

and so on. i have attached both the case study and the excel spreadsheet.

Professor Derrick Neufeld wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised cedain names and other identifying information to protect confidentiality. Richard lvey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact lvey Publishing, Richard lvey School of Business Foundation.

Golfgamez could be funded with debt. Between his savings, retirement account and remortgaging the  equity in his condo, MacTavish was somewhat surprised to find that he could quickly pull together $180,000 to loan to the business. Moreover, his parents had offered to co-sign a bank loan for up 
to $240,000. However, MacTavish was troubled by both of these approaches. First, making a personal loan would  wipe out his net worth. This he would be willing to do, except that it would preclude him from  quitting his job in order to focus on the new start-up (i.e., if he gave up his banking job and  started working on Golfgamez full time, he would have to immediately start drawing a salary, which  could create an overwhelming financial burden on the new company). Second, he was uncomfortable  with his parents co-signing for a bank loan. They were now in their mid-fifties, comfortable but by  no means wealthy, and they had been planning to retire from their careers in the next few years.  While their deep faith in his business acumen was encouraging, he did not want to do anything to  put their financial future in jeopardy.

Equity financing possibilities were intriguing and seemed to come down to three options. First, a group of family and friends (MacTavish's brother, a college buddy and a good friend from the bank)  had proposed to provide $300,000 in funding in return for a 30 per cent stake (i.e., $100,000 each,  for 10 per cent each of common shares). Second, a retired executive that whom MacTavish had  recently met and golfed with a few times had floated an informal offer of $250,000 for a 20 percent stake, with a 10 per cent royalty repayment from income (i.e., until the principal was fully repaid).

Debt Funding

MacTavish's former business school who had formed an angel investing group had expressed interest  in funding the venture; they would offer up to $150,000 for a 10 per cent stake, with a 20 per cent  royalty from income to repay the principal. Again, important questions lurked behind each of these options for MacTavish. What did each of the  offers say about the implied valuation of the company? Should he get into a business relationship  with family members and friends, or would this risk damaging important relationships? On the flip  side, was it safe to tie himself to someone like the retired executive, who was a relative unknown?  (On reflection, MacTavish recalled that the fellow had a tendency to not count all his strokes on the golf course and that he seemed easily irritated by other players.) Plus, of course, selling off  a chunk of his business was unsettling, while paying a 10 or 20 per cent royalty could  significantly reduce early stage cash flow.

Accelerator funding options had become increasingly popular in recent years. For example, Y Combinator was described by Wired Magazine as “the tech world's most prestigious program for  budding digital entrepreneurs.”' Candidates accepted into this program typically received $14,000  in seed funding in exchange for a 6 per cent equity stake, along with an $80,000 loan that was  structured as a convertible bond (i.e., to be converted into common stock at a later date).  Entrepreneurs had to locate their start-ups near the Y Combinator headquarters in Silicon Valley, California to receive mentorship and so they could benefit from engaging with the larger community.  Once off the ground, introductions would be brokered with serious equity investors; assuming a  positive outcome and based on other start-up deals, MacTavish guessed that this would likely lead  to an additional $500,000 in funding, for an equity stake of 30 per cent. Some very successful  start-ups, such as Dropbox, scribd, reddit, Airbnb and Posterous, had received Y Combinator  funding. And, there were many other accelerator programs, such as Techstars and 500Startups in the  United States and MaRS, Mercury and Velocity in Canada.

MacTavish liked the idea of engaging with an accelerator such as Y Combinator as a means of  focusing and intensively building a quick “head of steam” for the venture, as well as gaining  access to a qualified group of serious investors. On the other hand, he seemed to have ready access  to some serious investors (without trying all that hard)   and giving up a 6 per cent stake in  return for $14,000 seemed very expensive.

Another possible source of capital might be available in the form of crowdfunding, a term that “describes the collective effort of individuals who network and pool their money, usually via the  Internet, to support efforts initiated by other people or organizations.”' Sites  and had popularized the concept in recent years. A review of statistics posted on the  Kickstarter website revealed that for technology projects seeking more than $100,000, the ultimate success rate was 4.2 per cent (i.e., over 95 per cent failed to meet the predefined funding hurdle, and so no dollars were collected).

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