1. Brief Case Summary
In August of 1995 Javasoft was founded by Sabeer Bhatia and Jack Smith. Their first round of financing was from DFJ in 1996. Hotmail was officially launched on 7/6/1996. The Second round of financing was provided by DFJ in August of 1996. The third round of financing by Menlo Ventures and DFJ was completed in August of 1996. The fourth round of financing by Menlo Ventures and DFJ was in December of 1996. The fifth round and exit round of financing was in December of 1997.
In the first round, Hotmail raised in total of $315,000: $300,000 from DFJ and $15,000 from Rex Smith.
DFJ got 15% for its investment, so the valuation was ...view middle of the document...
Hotmail failed to reach its pre-set milestone.
Milestones are important to external investor to assess whether the company has met some important targets, to justify the value of the price to investors. If there is no milestone, external investors could not decide when they should invest, how much they should invest, and whether is worth of investing.
Milestones help company to decide the types of exit options and the value of exit. If there is no milestone, the entrepreneurs cannot know when the best time to exit is, what exit method is best for them and whether they can reach the destination. In the Hotmail case, even though Hotmail failed to reach its revenue target, its number of subscribers has reached 10 million, which is good for Hotmail to search for good exit option. In the fifth round, although Hotmail has negative net income (412,055) and negative cash flow (308,677), it still attracts many exit options. And, finally, Hotmail was sold to Microsoft at price $400 million, which is much contributed from that Hotmail has reached many milestones before and Microsoft believes it can achieve more value enhanced milestones in the future.
If the settled milestones are attractive to investors, the company can raise additional investment capital at a good price. If these milestones are not valued by investor, it won’t raise new funds, or it will raise new funds only at a punitive price.Like Hotmail case, in round four, Hotmail raised fund, but pay more shares to the investors. $1.25 per share is lower than the agreement before. However, if Hotmail can achieve its contingency clause mentioned in third round, the company can raise same amount of money , but it only pay much small amount of shares. In the best case, Hotmail can raise fund at $2 per share, which is good for previous investors.
If milestones are set too high to achieve, the investor will not appreciate the entrepreneurs’ valuation and may not invest into the company. Moreover, like Hotmail case, in the final round, entrepreneur values the company at $125 million, but the external investors' value is far lower than the amount. In this situation, Hotmail is very hard to find any investors agreed on this price.
There are some advantages and disadvantages because of the contingency clause that was included in the 3rd round of financing. Both from an entrepreneur's perspective and the investment team.
The advantages from the investment teams perspective is that they have the a Series D preferred Stock that will be invested at $2.00 as share. The investment team has provided the incentive to reach or exceed the the number of subscribers at 500,000. If Hotmail can reach that number then the investment team will provide more capital for this round of financing.
The advantages from the entrepreneurs is that they have a guaranteed round of financing if they hit at least 300,000 subscribers. They are anticipating much more, however they have a...