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Outreach Networks: First Venture Round Case Solution


Outreach networks (ORN) was founded in 2007 by Phillip P. Perez, who was also the CEO, and held 75% of the ownership of the company. Before 2007, Mr. Perez had been working for the Qualcomm, Inc. as wireless engineer. During his job, he discovered an unlicensed radio frequency (RF) spectrum that had the energy to extend the wireless signals in much border area than the licensed and provide the internet access to the areas, where there is  no currently access. With this idea in mind, he founded ORN.

OutReach Network started selling wireless networking products, like high performance radios, management tools, and antennas as well. It targeted the population that had no internet access. ORN was diffused in the market due to its entrepreneurial wireless internet service providers (WISPs). Furthermore, Perez also designed a radio card that extended the range of Wi-Fi equipment. By 2008, the company experienced many designed prototype to get better quality of the signals. However, the company’s revenues had grown exponentially from $9 million in 2009 to the $63 million in 2011.

In addition, the company become profitable, and employed around 100 employees. On the other hand, ORN was offered a deal by venture capitalist Everest Partners to invest $30 in the company, against which, they required 30% of the ownership of the firm. However, Perez estimated that 30% of the ownership was quite undervalued, indeed the amount hardly represented 15% of the firm. The reason behind the Everest Partners’ offer was to avail the opportunities in the market, which could not have been availed by ORN alone.



Problem Statement

What is the worth of the Everest Partners’ offer, and does it reflect the true value of the firm, should it be accepted, or renegotiated?


Executive Summary

Mr. Pete Perez founded the outreach networks (ORN) with the idea of the unlicensed radio frequency (RF) Spectrum that had the energy to extend the wireless signals in much broader area that he discovered during his job at Qualcomm Inc. Furthermore, ORN started producing products of entrepreneurial wireless internet service providers (WISPs).

Moreover, the company worked on strengthening the quality of the signals, and it succeeded in the market with its innovations, similarly it reached revenues of $63 million in 2011 from $9 million in 2009. However, the growth in the markets and opportunities could not have been availed alone in market. Thus, Everest Partners offered ORN that they would invest $30 million in the company against which they required 30% of the ownership of the ORN.

On the other hand, Mr.Perez had already predicted that this amount hardly represented the 15% of the firm. Similarly, when calculations were carried, it was a known fact that the company was being undervalued by Everest Partners. However, $30 million were 4% of the actual value of the firm calculated through the capital venture method. On the other hand, it was 7% of the actual value of the firm calculated through the discounted cash flow model, therefore the offer should not be accepted, but should be negotiated.

Value of the firm by capital venture method

The value of the firm by the venture capital method is $711 million. However, the value is being calculated by venture capital method, through calculating the terminal value of the firm. A terminal value gives the long-term value of the firm. Furthermore, the net income of the year 2017 was selected, because it was assumed that after that year 2017, the company would have stable growth in the market.

In addition, the income of the year 2017 was multiplied by the forward P/E ratio. The P/E ratio indicates the amount of the investment where the investor will earn one dollar. An example of this could be that a P/E ratio of 10x would indicate that the investor would earn one dollar on the investment of $10 if he invests in the company. However,  the question arises whether it should return the value of the investment (Firm), if multiplying the P/E ratio with the sustainable net income? Yes it should. Furthermore, the average P/E ratio of the similar companies was selected to go with the valuation.

Moreover, the industry has the high P/E ratio, which indicates that there is more growth in the industry, because it is assumed that what company earns, it invests again, thus pays less dividend, and due to this, P/E ratio remains high. Furthermore, the terminal value is reduced by 25% due to the lack of confidence of investors over the private companies.........................

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