Walnut – RBS Case Analysis Harvard Case Solution & Analysis


Evaluate the potential investment in RBS qualitatively and quantitatively from Walnut’s point of view. As a Walnut investor, what critical issues do you see as requiring more investigation / due diligence? (25%)

            The leader of the investment, Ralph B. Wagner has so far considered the opportunity to invest in RBS as a good opportunity and it is also a right decision to make an investment in such a promising company which has shown considerable growth over the past years. However, first of all the owners of the Walnut VC firm need to realize that this angel group has a capping policy for making any investments in the companies, which must be in the range of $ 250,000 to $ 1000,000 and that too in a single round of financing.

            On the other hand, the RBS group has shown very high profit margins and solid revenues over the past years by operating in the middle market of the software industries. The company has also always avoided the competition that has been coming from Oracle, SAP etc. However, there are many issues and relevant risks associated with this investment opportunity, which need to be considered by the management of Walnut Venture Associates before they decide to invest in this opportunity.

            First of all, the owners of Walnut need to determine how the $2000, 000 investment would be spent by the RBS group. The growth rate of the company has been 65% over the past years;however, more investigation is needed to determine the growth of the sales over the next five years as shown by the sales projections of the company from 1998 to 2002. All the factors needed to be evaluated which according to RBS would be the core differentiating factor this forcing the customers to switch to RBS.

            In order to determine the assumptions underlying the competition facing the company, questions need to be asked regarding the barriers of entry for the competition. Overall, the state of this industry is good currently as seen by the Porter’s model generated in the appendix. The risks facing RBS are low in this industry and the competition is also not likely to impact the company right now. Furthermore, the case does not provide information regarding the control that Walnuts is seeking or wants to seek from this investment opportunity.

            This needs to be determined from a due diligence, which should also incorporate a more detailed due diligence for the exit options of RBS. Acquisition has been chosen as the company’s exit option however; it is again questionable that why at this point of time the option of IPO is out of question and why RBS is not going for this option as an exit strategy based upon the current valuation of the company. Along with this, the company did not have a VP sales, controller and little marketing staff.

            The valuation of RBS was also another issue and Bob has been looking for a pre-money valuation of about $ 8 to $ 10 million and based upon this value range, Walnut and the other investors were likely to hold up to 1/3rd of the company only. However, the owners of RBS were expecting for a valuation of $ 60m in 5 years’ time, which was also questionable given the revenues that had been projected over the period of next 3 years.All the financial aspects of the deal need to be evaluated and a due diligence needs to be conducted in detail by Walnut to proceed with this opportunity.

Walnut – RBS Case Analysis Case Solution


What is a reasonable valuation for RBS in June 1998? (25%)

            The valuation of RBS group has been performed in the excel spreadsheet based upon the discounted cash flow method and the post money and the pre money valuation of the company has been calculated. A set of assumptions has been used in valuing the company based upon the projections for the next 6 years. The sixth year is the year of exit and the investment horizon for Walnut, if it invests would be 5 years.

                The sales projections have been provided for a period of 3 years and based on that the sales growth rate is very high and crosses a 100% sales growth rate. However, looking at the emerging competition in the software market and the need for the required excessive financing of $ 2000,000, a moderate sales growth rate assumption has been used of about 5%. ...........................

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