1.1. Background
In the 1990ies the term New Economy was stated to describe a whole set of forces that started to appear that called for new marketing and business practice. Globalization and Technology are two of several strong forces that play a major role in the reshaping of world economy, and information technology in particular (Friedman, 2005; Mann, 2006). Since Internet’s entry on the world arena, it become possible to combine text, data, sound, and images into bits and transmit from appliance to appliance, and Internet became the “information highway”
conveying the digital information (Friedman, 2005). Much of today’s business is carried over networks connecting people and companies, and the progresses are developing fast.
It has become considerable easy to transfer digital information between people, which also had led to many new business opportunities all over the world. It is comparatively easier to start new technology companies than prior traditional firms, due to very low initial costs, which also have been the case during the last decade (Copeland et al, 2000; ITPS, 2006).
Some of the Internet start-ups or new technology firms have demonstrated extremely good business models and have become really successful (DI, 2007; FT, 2006). However, most of the new ventures never succeed, but many of them survive and make progress (Damodaran, 2001).
Being successful in new technology business, in the sense of getting the company profitable requires, as for all continuous industries sustainable business ideas and very often, profound business plans (Kubr et al, 2005). Many of the Internet ventures witnessed a fatal ending by the Internet shakeout in year 2000, and one of the main reasons was naïve business ideas that did not fulfilled basic requirements for sustainable revenues (Lindstedt, 2001). Another main reason to the Internet hardship in early year 2000 was the irrational investments all over the world (Damodaran, 2001).
A business plan or investment plan comprises several chapters and one of them discusses the exit strategy. The exit strategy describes the long-term plans for the business and presents a realistic plan of how entrepreneurs successfully can exit a project. In the investor perspective exit strategies describes how investors are getting back their investments with substantial return. Ultimately, the most effective exit plans will take into account business, personal, and investor goals.
There are several potential opportunities for successful exits for new technology or Internet firms, which cause a demand for solid analyses of the best opportunities.
1.2. Aim
The aim with this thesis is to serve as an advisory document for a new start-up company in Sweden – an Internet start-up project of Chalmers School of Entrepreneurship (CSE) at Chalmers University of Technology, and serve as a basis for strategic exit discussions within the firm.
The outline of the thesis is to analyze value potential and exit strategies linked to the value relevance of firm’s with no earnings, no history, and no comparables.
The thesis also contains a comparison analysis of two main paradigm approaches in valuing dot.com and Internet industries.
The thesis will finally conclude a strategic exit analysis of the start-up company, with consideration to the valuation approaches.
The outcome, presented in the chapter of “conclusion & recommendations” will result in a strategic operation plan considering exits1 for the new start-up company MindValue. The thesis will contribute to the start-up’s development program.
1.3. Purpose
The purpose with this thesis is to analyze strategies to successful exits for potential start-up companies within the Internet industry. This thesis is made together with MindValue, an Internet start-up project of Chalmers School of Entrepreneurship (CSE), and the thesis’s outline is focused on the prospects of this specific company.
1.3.1 Why a report of exit strategies for start-up companies?
Thinking of exits during the start-up phase might seam paradoxical, but is at the same time highly relevant. Many start-ups in the new technology industry have shown high growth potential all ready in its cradle, but only some of the companies actually succeed (Koller et al, 2000). Being successful in business is influenced by many factors, all from throughout preparations to proficient talent and in some times, pure luck. Preparing the exit strategy already from the infant stage of the company life cycle will reduce unexpected situations in the future, and the actions towards a specific exit can be taken already in an early stage. The
An Exit is the way an investor closes out a specific position, usually by converting it to cash.
problem of valuing a new technology company in its early stage is a continuation of its hurdles of strategic planning, why this link is interesting to analyze. This specific topic seams also rare in financial and strategic literature, why an initial study like this s motivated.
1.4. Delimitations
The thesis will focus primarily on exit strategies for newly start-up companies in the new technology industry, that is Internet firms or e-business firms in its start-up stage. Definitions of the terminology are given in coming chapters. The thesis will not take other industries into consideration for exit strategies, than new technology industries.
I will emphasize two significant mechanisms, Globalization and New Technology, as the main drivers of the New Economy development. This view is shared of several monitors of the world’s political and economical development (McKinsey Global Institute, 2002). There are other factors with impact on the development of the New Economy, but in relation to the Globalization and the New Technology development, they are of less significance for this report (McKinsey Global Institute, 2002). Since the term of New Economy concerns a major part of the world, there are many small factors of the concept to take into consideration, in order to cover a whole picture. Trying to map all causes in this context is too pretentious and will fell too far out from the core issue of this report.
The definitions of business concepts like e-business and e-commerce are taken from three sources (Laudon & Traver, 2003; Kotler et al, 2003; Weill & Vitale, 2001). There is no over-all consensus concerning the definitions of e-business and e-commerce, since the concepts still are in its cradle (Laudon & Traver, 2003). I find the three sources’ definitions presented in this report well suited for the analysis’ purpose, and will not explore these definitions any further.
The definitions if the strategic groups and the web metrics presented are commonly reported in the business press and are frequently mentioned as valuation parameters in analysts’ reports (Trueman et al, 2000). I find these definitions well suited for the report and will not examine other potential web metrics.
The concept of Discounted Cash Flow (DCF) is a common technique of valuing future cash flows (Copeland et al, 2000). I find this technique most adequate for this report, representing the traditional approach of valuation, and will not elaborate other “traditional” techniques.
Other “traditional” valuation models might be more sophisticated than DCF, but also requires
more financial information, which in this case not is available.2 I will only describe the main concept of DCF, and will not elaborate it further for this report, e.g., I will not give examples of different uncertainty scenarios, measuring default risk and estimating default-risk adjusted rates, etc… Also, I will not elaborate the valuing of assets with equity risk or involve
dividends into this report. These concepts are connected to the DCF approach, but will not spread any further light over this report.
The presentation of the specific start-up company, MindValue, will contain a short history brief, a presentation of a problem with solution that MindValue have based its business plan upon. Due to the secrecy of the detailed business plan I will not elaborate and present business models and revenue models any further.
Both before and after the Internet shakeout in 2001, several valuation models and techniques have been presented (Damodaran, 2001). Many of the techniques presented focus on how to avoid as much risk as possible, that is, rational investor behavior (Grinblatt & Titman, 2004).
Focusing on risk management and portfolio investment gives the analysis a statistical approach, which is not the purpose. The risk eliminating techniques are not needed for this report, since the approach of this analysis is focusing on corporate strategy for new start-up companies with the ambition of a successful exit.
I use an online historical exchange converter, valid for the specific year and month of interest, when converting foreign exchange rates (www.oanda.com). The foreign exchanges are
foremost discussed in chapter 11, where examples of acquisitions of other Internet firms are made. Some of the sources of the transactions are presenting the currencies differently, why I am converting domestic currencies into US dollars ($ US).
2 The outline of the report is to analyze value potential and exit strategies linked to the value relevance of firm’s with no earnings, no history, and no comparables.