High Mountain Technologies Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

High Mountain Technologies Case Study Solution

Case Outline

Honest Tea was a three-year-old start up in the fast growing ready to drink market with its future sights set on increasing distribution and brand awareness. However, in order to expand distribution, the company needed financing. The company had a number of options to finance the distribution of the company operations. Such as the company has received a $ 5 million investment offer from West Coast venture capital firm however, Goldman and Nalebuff, the owners, were concerned of the implications of such investment on control, mission and culture of the company. The company also had other several options to raise the financing such as the owners can raise the money from angel investors. The market potential of the company was very large however; it needed to be decided which investor made sense. Until now, the company had raised financing which had been driven through ease of access and out of necessity however, now was the time to craft a plan to raise the proposed financing.

Problem Statement

The problem faced by Goldman and Nale buff is that which course of action or which investor base they are recommended to approach to meet the financing needs of the company.

Analysis

The analysis of the case has been performed by analyzing the current and future performance of Honest Tea and studying the past financing and the current financing purpose of the company. Lastly, analysis of the proposed financing has been performed.

Performance of Honest Tea

The performance of the company is good even though the company has recorded losses since its initiation. Since, the launch in 1998 the company has experienced tremendous growth each year. The revenue of the company has increased by 349% between 1998 and 1999 as shown in the exhibit 9 in the case. Other key performance metrics and ratios are shown in exhibit 1 in the appendices. The company took the advantage of the market opportunity to create a new beverage category, which made the competition irrelevant in the industry.

The company had a great management team, which had the capability of growing the company at international and national level. The company had also invested a lot in research and development and marketing activities in 1999, which is evident by net loss and is a sign of a growing company. The first milestone, which I would use to gauge performance in the next financing round, is to increase the sales by 295% according to exhibit 11 projections to start generating profits in 3^rd and 4^th quarter. Second milestone would be to hire a national sales force and expand the distribution channel.

Success in Future for Honest Tea

The first thing, which Honest Tea needs to do, is to increase sales and reduce the operating expenses so that the costs are covered. A national sales force should be hired then. Successful raising of the financing would also be an important factor for success of Honest Tea in future. Apart from this, they should continue doing what they are doing and make a beverage product, which is genuine in its natural taste. The company should also focus on organic bottled tea, which is its objective. The company needs to avoid costs by sticking to individual investors and maintain the control of the company. They should diversify also in non-tea products such as lemonade to capitalize on their skills and culture so that they remain successful in future also.

Financing Needs and its Purpose

Seth Goldman had estimated that a capital infusion of $2 million would carry the company to profitability. There are number of things for which the company needs financing but most important is distribution expansion to increase sales. The company would need money for a number of purposes such as to hire new national sales force, launch new Supermarkets and purchase merchandising materials and marketing the products. The expenses are higher than gross profits of the company but the gap is reducing which shows that more financing would be needed to cover the losses. We have calculated the estimated financing to sustain the sales level as shown in exhibit 2 in appendices. It shows that financing of around $4 to $ 6 million would be required in 2001.

Financing in the Past & Structuring

The founder’s money at the time of the startup was $ 300,000 and the management successfully gathered $ 271,500 from externally sources after the initial launch. The first investors were the family and friends of the company because they wanted to retain the control. After the launch, the company was entering into a new market so the investor risk was high therefore, the owners structured the financing in a new way by including warrants and a number of investors invested in the company. During first round, Nalebuff raised $ 1.2 million with pre money valuation of $ 4 million. Then in second round in 2000, the company successfully raised $ 1 million. The basic structure focused on raising financing from individual and small investors to avoid any external interference.

Analysis of Proposed Financing & Valuation

For the current round, management cannot depend on small investors and they should primarily raise financing through angel investors because in that way they would retain more control of the company and gain real board of directors. On other hand, if they cannot find right investors in a short period then the company will have to go ahead with venture capital firm’s investor and they would surely demand a significant stake of the company.

High Mountain Technologies Harvard Case Solution & Analysis

The current proposed valuation of Goldman is on the higher side and it does not makes sense. The four comparable firms are shown in exhibit 3 in the appendices. Clearly Canadian and Triarc are not doing well and Sartoga and National both have same PS and PE ratios. The average ratios for these two have been computed as shown in exhibit 3. The projected earnings in 2002 are $ 1105,100. The value of company is negative but in 2002 it would be around $ 7.6 million. Similarly, based on PS the valuation would be $ 2.5 million in 2002. These are much less than post money valuation of $ 15 million. The VC firm had offered investment of $ 5million with pre money valuation of $ 5 to $ 7 million, which gives a post money valuation of $ 10 to $ 12 million, which is also on higher side looking at the projected financials. Similar is the case with DCF valuation as shown in exhibit 4 in appendices.

Recommendation

The valuation formula shown in exhibit 12 is oversimplified. The company is recommended to take a higher financing of around $ 4 to $ 6 billion and the first choice should be angel investors, however, if the company does not get the investors quickly then it should raise the financing through strategic investors such as the VC firm.