Traction Ventures – Part A

Abstract:

John Beck, CEO of LightSpeed Computers, is seeking $10 million in “Venture Capital” financing to get his company off the ground after its initial seed funding. Presented in three parts, John faces a number of challengarios, starting with the request from a prestigious Silicon Valley Vc to hold off on closing a financing deal for four weeks to give him time to conduct due diligence. John later receives term sheet from other, smaller VCs and must decide whether to move forward or stand by his original commitment. Later, he must choose between two attractive but economically different deals.

It seems the case presents several business and ethical dilemmas and intellectual debate.

Business decision Vs. Ethical decision:

Business decision issues:

Does it make sense to make special exceptions for the right investor?

How much information to provide investors and how to best sequence the process of raising funds?

Ethical Decision issues:

The CEO must choose between risking the loss of a funding commitment and reneging his promise to strategic investor to provide him sufficient time to conduct due diligence.

1. Should John tell Traction which other VCs are looking at the deal?

Pro: Create a sense of a hot deal and

inevitability Maybe Traction can provide some good

leads Con:

They all talk to each other This helps them to syndicate What is the upside of doing this? What if you get a turn down – will it

contaminate Traction’s opinion?

2. If he tells Traction all of the VCs who are looking, will they syndicate? Can he prevent it?

I have seen it both ways, i.e. depending upon the syndicating VC’s perception of risk-reward of the deal and how hungry are they and if it makes business sense for them.

Seldom it makes a prestige or ego issue.

3. The next Phase discusses the strategy behind staging VC firms:

a) Go to top tier;

b) Go all at once

c) Start at the bottom

d) Go a few at a time

Decision tree

Bancorp Syndicate

Commitment to

Traction

Wait

Traction Invests

Traction does not invest

Don’t wait +Financed Company

+employees

+Investors

- Broke word- Community reputation- Burned bridges with Traction

-unable to finance company

-Employees

- Investors

0/+Kept word

+/- Community reputation

- Burned bridges w Bancorp

+ Financed company

+employees

Investor

Kept word ; Community Reputation

-Burned bridges with Bancorp

Go to top tier:

o Pluses – They are the best for the long termo Minuses – If they turn you down you may be

tainted -many of them will play if they lead.

Go all at once:

o Pluses – no sequencing problem- No turn downs to distract others

o Minuses – May look shopped

Start at the Bottom:

o Pluses – Can do a few throw-away without a lot of exposure- Easier to get access to lower tier firms

o Minuses –What if they offer a term sheet – could you have done better?

Go a few at a time:

oPluses – Can practice the pitch and may be get some quite turn-downs without impairing the deal.

oMinuses – Might take longer- May run into sequencing problems, a

la Traction

Should John make the commitment to wait?

Pro:o Traction won’t do any work without

commitmentoNo money raised so faroUncertain when it will close

- If goes long enough, then no issueoPrestigious firm

- Help in many ways- Big brand name

ConoWill you really waitoDo you want them to drive the

deal priceoWhat if you wait and they do not

do the deal

- Will others get nervous

VOTE:

Agree to wait for traction:

Proceed without traction:

Part B

I. Do you delay Bancorp to allow Traction to complete their due diligence?

Pros:oMeet your commitment to traction

(do not want to alienate them in the future)

o Show other investor your integrityoProtect your personal reputation

Cons:o It is a sweet deal (Good valuation

and you can take $14 million if you want and you probably want)

oWhat if 9/11 happensoWhat if another investor pulls outo The deal has a time bomb – What if

you wait for Traction and they do not do the deal?

oWill others get nervous and thus the deal could be contaminated

o Should not you just “take the money off the table” without delay?

II. Review John Beck’s other commitments: 30 Employee First round investors to consider Fiduciary responsibility as CEO For all parties, you are the “Steward” of this

company Not taking the money may be fatal – How do

you explain this?

Did you make a mistake in making the first commitment and if so, how do you resolve it?

Vote:

Close the Bancorp Ventures deal

Wait for weeks for Traction