Invest or take a venture capital ethical dilemma Harvard Case Solution & Analysis

Problem identification:

Which option the directors should choose either to invest $1.5 million in SunClean Company to acquire only 25% stake without taking controlling authority or to own a new company by exercising Levine’s Product Idea without his discretion?

Issues:

SunClean Company is currently going through a rough time and is facing liquidity problems even though it has the unique product idea of filtering solar-powered pool. Upon analyzing the situation by one of the Directors of KTN Capital Mr. Nance came to know that it was due to the rude behavior of Mr. Levine with his customers as well as employees which reduced the revenues and increased production costs for them.

Moreover, upon analyzing the company’s performance in second phase, it was discovered that SunClean has two major issues. One is related to weak protection of its product through patents and another is related with usage of effective technology for filtration.
Invest or take a venture capital ethical dilemma Harvard Case Solution & Analysis

Strategy of SunClean:

Strategy of the company was to exercise focused differentiation strategy by targeting the niche market with its unique kind of product which is not yet introduced by any other competitor and it has not been copied yet.So, they have a chance to charge a market skimming price i.e. around $799 for filtering the pool but it’s marketing strategy was very poor as it showed the customers as if they were charging a very low price for their service.

They were receiving government rebates and they were focusing on funding through bootstrapping either by utilizing their retained earnings or personal finances which reduced the chance of venture capital investment in their portfolio.

Company has been successful in the beginning and received awards as well by utilizing its savings of $250,000 but slowly its revenues started declining and was facing liquidity problems due to poor marketing strategies.

Strategy of KTN Capital:

This company has been successful in investing in innovative kind of investment opportunities and had the strategy of providing higher return in a very short span of time. Ithad the strategy to invest 60 million Australian dollars which will generate more than $50 million return but itfailed to do so and itunder-utilized funds of around AU$30 million due to the conflict between the directors and their different investment approaches and investment criteria.

Strategy consists of 5 individual criteria which need to be met all together. It consists of the strongly protected product with a product lifecycle of 5 years and company should be having growth potential in value of greater than 50 million dollars and the investment from the company can be exited within a time frame of around 5 to 7 years.

Analysis of Investment Offers:

Mr.Nance decided to invest in SunClean Company after analyzing its unique idea of product and its growth potential of earnings which was inflated at the time of 1st offer for acquisition which consisted of related high number of units to be sold which was not the case due to the poor performance of company.Due to this Mr. Nance prepared a pro-forma income statement of the company to have a better valuation figure so that it provides a true and fair view of the company’s profitability.

Number of units were inflated by around 2000% or 20times higher than the projected value by only showing the manipulated figures for its investors which werecorrected to a relatively fair value by Mr. Nance. It was discussed and agreed by all the directors that KTN capital should acquire 25% stake in SunClean by paying 3 installments of $0.5million each which will be a relatively fair value considering its projected earnings of around $24.4 million annually...............

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