In order to fulfill the purpose of the master thesis, an analysis that covers practically all prerequisites and conditions concerning exit strategies of Internet start-up companies, is required. It has been necessary to divide the report in several chapters, as well as different blocks, that describes different areas, which all have impact of the final conclusion. The areas describes and elaborated in the report are supported by theoretical models and theories from prior studies and researches.
The organization and the disposal of the work is an assemblage of three blocks, which content are related to different stages in the analysis. First a block of general information, needed to be familiar with definitions and the main outline of the economical and technological
development, is presented. Second, an analysis and discussion of the content from the first block, related to the specific firm of interest, MindValue, an Internet start-up project in Sweden, will be conducted, and finally, the third block will generate a conclusion together with recommendations.
The first block will contain background information and the foundation to the new technology industry. I will give a brief of the term of new economy and how this concept is related to the industry of today. Since the report is discussing strategies and outcomes from Internet firms, possessing knowledge of the forces that are present in the global economy today will facilitate the analysis. The outline of this thesis, analyzing valuation and exit strategies for start-up firms in the new technology industry, is a proactive reaction in a highly competitive environment like the new technology industry, already in a planning stage. The new technology industry differs from traditional industries, because of its fast pace, fast
development and volatile nature (Brown & Eisenhardt, 1998). Proactive analysis of a firm’s resources and capabilities is based on the theory of the Resource Based View, which will be further elaborated in chapter 3.
The concept of new economy is very close to the emerging new technology industries (Kotler, 2003). The first block therefore also contains facts of the Internet industry and why it differs from traditional industries, concerning corporate strategy. After describing the new
economy’s and new technology’s impact on the traditional corporate culture in broad outline, I will describe the specific new technology firm of the report, MindValue. The details of the specific firm of the report, belongs to the block of general information that will give the report a body to relate analyzed information to. The theories presented in block 2 and 3 of this report will be applied onto MindValues strategy plan, concerning exit strategies.
The second block contains chapters of valuing new technology firms, and a brief of the new economy concept. High price valued firms are always targets for acquisitions, due to
opportunities of high ROIC, Rate on Invested Capital (Damodaran, 2001). Acquisition is also a desirable exit opportunity for many start-up firms, since the operation is often connected with large amounts of economical benefits for the entrepreneurs of the start-up. One of the purposes of the thesis is to identify value drivers of a new technology firm, in order to put the specific firm, MindValue, in a more advantageous position than other industry competitors.
Identifying the value drivers, the report will try to give answer to the first question of issue:
1. “What can a start-up firm do in order to become valuable, in terms of attractive investment object?” and “What operations are value related from the approach of an investing or purchasing firm?”
When analyzing new technology firms, which operate in a fast growing and volatile industry, there are several feasible alternatives for an exit (interviews, 2006). The exit alternatives are valued differently depending on the firm’s activities (interviews, 2006). The analysis will try to clarify the most important alternative in a valuable exit perspective, both for investors and for entrepreneurs.
A new start-up firm with ambition of a future acquisition has to clarify the exit strategy already in an early stage, that is, the start-up stage, in order to effectively manage adequate operations (Kubr et al, 2005). The approach to design a corporate strategy based on the firm’s external environment, is linked to the Market Based View of corporate strategy. The Market Based View is based on the outlook of the external environment as a factor that influences a specific company’s proceedings (Porter, 1980). The concept will be further elaborated in chapter 3. The Market Based Approach is a theory basically used to design marketing
strategies (Porter, 1980). The concept of the Market Based Approach has some significance of the design of a competitive strategy for the specific firm, MindValue, but the focus of
designing a corporate strategy will incline a greater part of the Resource Based View, since that approach is taken fast pace and a volatile nature to consideration, in contrast to the Market Based View.
Opposite to traditional industries, the new technology industry typically faces the different stages of its life cycle much earlier and faster, which requires planning of its whole life cycle already at an early stage (Damodaran, 2001; Kubr et al, 2005).
Since the life cycle of a new technology start-up might be very short, the initial operations of the firm will reflect the outcome significantly.
The statement is an attempt to a “hypothesis” or statement that I will “test” in the report. It is not a real hypothesis test, since the authentic dittos are tested under more controlled
circumstances.
The great complexity and uncertainty of the industry, due to fast pace, fast development and its volatile nature, have given birth to divided opinions of what really drives value of the Internet firms (Damodaran, 2001). I will elaborate two main paradigms that are distinguished in the valuation of firms, as an extension of the first question of issue – identifying the value drivers. The extension will give rise to the analysis’ second question for this report, that is:
2. In which way, and how, will MindValue, the specific new technology firm, be valued
The two paradigms has been questioned and discussed frequently after the Internet shakeout in 2001, which will substantiate the second question of issue (Damodaran, 2001; DI, 2007;
Cooke, 2006; FT, 2006; Interviews, 2006). The operations of the Internet users are valued differently, depending on companies’ profiles and business approaches, and the models and praxis used to determine a firm’s value (Damodaran, 2001). The second question aims to identify the main paradigms of Internet firm valuation and elaborate its attitude, as well as investigate and distinguish the differences in valuation of advertising, e-commerce, e-services, etc…
Business models like online gaming as poker and casino related sites, which are typical examples of activities on Internet that are strictly transactional – the site users strictly visits these sites to bet and transact money, which might raise the turnaround of the Internet company more than an Internet companies with different business models. This statement is interesting to elaborate for this report why an examination of the following statement will be made:
Specific transactional activities will be higher valued, than activities that only count visits and unique users.
Close connected to the valuation models and paradigms of Internet firms are the arising synergies connected to new technology industry. The synergies of this analysis are defined as those external benefits that arise from the main operations. The synergies explain some of the rhetoric from the valuation models that have great implication on the answers to the main questions of issue to this report.
The gained resources derived from synergies have shown to be an important reason to an acquisition (DI, 2007). This means that specific benefits of acquiring a specific company, like distribution channels, new technology, or new competence, carries great weights towards other main activities of the acquired firm (DI, 2007). After identifying the value drivers of a new technology firm, and elaborate how a specific firm can be valued, I will give an example of actors that might be interested in an acquisition of a new technology firm. This will give birth to the third question of this report:
3. Which companies are potential buyers for MindValue, the specific new technology firm (who are the players)?
The question will generate a market structure in order to analyze potential purchasers, by following a pattern of acquisitions from the acquiring firms. The question will generate an example of potential companies of different markets that might be interested in purchasing activities. The structure aims to illustrate a diversity of parties attracted to acquire new technology ventures, which derives from contemporary financial press and media (DI, 2007;
FT, 2006). From the third question of this report the relevance of following statement will be further examined: The market structure of the potential buyers of a new technology firm is divided, that is, it is not only direct competitors or firms in the same market sector that are interested in acquisitions of new technology firms.
The third block of the report is a presentation of groups of interest, which will gather the players at the market into different groups, in order to examine possible exit opportunities.
Finally in the third block, I will conclude the analysis and present possible exit strategies to MindValue. The report will present a structured picture in an area of strategy that is complex and have highly divided opinions.
The outline of the report, figure 2.1, is designed to represent the steps of the analysis. The first part covers the theory and models the report is based on together with general information, the second part is the analysis and discussion block and the third part is the concluding part of the report.
No. Chapters
4 3 2 1
Problem Analysis
Method Theory Introduction Block 1
6
7
8 5
Traditional valuation
Possible exits of MV
Conclusion Structure Analysis
Synergies MindValue - MV Non-Financial Valuation
The New Economy Valuing dot.coms Block 2
12 10
11 Block 3 9
13
Figure 2.1. Organization and disposal of the work