Honest Tea Harvard Case Solution & Analysis

Honest Tea Case Study Solution

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.

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..............................

 

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