OUTREACH NETWORKS: FIRST VENTURE ROUND Case Solution
It was determined that Pete Perez (the President of Outreach networks) was confused whether to accept or reject the offer by one of the most successful venture capitalist firms in the world (Everest Partners) because such offer seemed unacceptable in terms of less investment proposal over 30% of ownership. It was identified through the calculations performed by ORN that only 15% of ownership would be preferable for $30 million shares. Therefore, with all these concerns, it is concluded that if the company would accept an offer from Everest partners, then the venture capitalist would undervalue the firm and would acquire most of the stakes as compared to the actual scenario.
This case illustrates the importance of utilizing the business activity into different parts of the world where Outreach Networks was involved in a similar scenario. The company started its operations in 2007; it was started by Pete Perez, who had vast experience in the networking field and was involved in developing ideas and product innovation during his career.
During his proposed idea to expand the range of Wi-Fi services during the late 2007, it has been determined that he invented a radio card in the early 2008, which allowed to increase the range of the networks and attract the new users to consider the services for a long-term. This service had fully been implemented in 2009 and showed high sales volume in the next year.
With all these innovations, the company is still considering expanding the operations by applying the same process however, it lacks resources and funds. Therefore, it shows that additional needs of funds would be able to accomplish this process and would increase the company’s sales as well as profit margins. Moreover, Perez thought it would be easy for him to design a new product with modest supplies in the markets because if an aggressive supplies of the products would be considered, then it can be said that more order would lead the company to produce more products. Such limitations hindered the ability to expand the size of the business.
Thus, under this case, Perez arranged several conferences of how the emerging players in the IT industry still face challenges to increase the size of business operations. First of all, they know that this industry requires heavy investments to increase and develop the products and services. On the other hand, they identified the power of different monopolistic players, which would not allow the new entrants to participate in quality and price wars.
According to the recent survey, a reduction in the annual networking equipment costs lowered the barriers to entry in which every player would enter in the particular market and take advantage to provide better services than others. Therefore, this was the best option for ORN to enter into an emerging market and expand the innovative products and services in order to take competitive position in the market however, the situation was not favorable due to the fact that it lacked the required funds to operate aggressively in the market.
In order to fulfil the situation, Everest Partners made an offer to increase the funds and to take advantage so as to achieve the overall objective. For that, the offer includes investing $30 million in ORN and to take 30% ownership of the business operations. It was, however, an attractive offer for Perez because he analyzed that the needed funds would definitely fulfill all the requirements accordingly. However, he identified that the internal performance and the company’s expected value would generate only 15% ownership for them due to the fact that Everest Partners undervalued the company’s stock.
Therefore, with all these concerns, it seems that such an offer might increase the company’s reputation and size of operation however, it includes the threat of additional ownership by Everest Partners. Hence, it is concluded that the first venture round is not considered to be perfect for the company due to the reason of applying the undervaluation of ORN. Moreover, from the historical record, it shows that the first venture round only required an average of $5 million of investment for the new players, who were converted from private to publicly limited company. Moreover, the offer of $30 million was very high however ,it consisted less percentage of owners as compared to the 30% of ownership.
With the industry’s perspective, the company has sustained its position in America, Europe as well as Asia. However, it was still struggling to get the market share in the regions where it operated. Therefore, in order to determine the industry situation in these markets, the PESTLE analysis allows to capture the industry situation where the company operated. Thus, under different factors of the model, it has been determined that ORN would be identified as its strength to operate in the market.....................................
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