Fina 241 - onset Ventures

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CASE 3 – ONSET VENTURES

FINA 241 – Spring 2017

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1. At the current stage, there are 4 partners in the firm, and the firm is seeking deals only in the 4 coming years of the fund’s life. That is because they expect that the fund will be closed out after 10 years from raising it.

a. Playing on the number of partners: if they increased the number of partners to 6 (making sure they are competent enough), each one can assure one deal per year with an average of $ 5.8 M in order to invest all the $ 140 M in 4 years if they decide to raise them. This is clarified as follows (140,000,000/4 = 35,000,000 & 35,000,000/6 =~ 5,800,000). So, this is an increase in 16% in the current value of the average deal, and therefore, should not be difficult to accomplish.

b. Playing on the deals per partner: Another way to complete this investment is by taking two extra deals per year with each of the 4 partners working on 1 deal and half of one of the 2 extra deals. By doing so, they are investing $ 30 M per year, i.e. $ 120 M over the 4 years. However, with this option, they need to raise only $ 120 M and not $ 140 M.

c. Playing on amount of money per deal: The last way to do it is by keeping the same number of partners and deals per partners, but taking deals of bigger size. For example, they can take deals 25% bigger. In this case, they would be investing in an average deal of $ 6.25 M, in addition to $ 100 M overall over the 4 years (6,250,000 * 4 = 25,000,000 $ and 25,000,000 * 4 = 100,000,000 $). Therefore, also in this case, they only need to raise $ 100 M and not $ 140 M.

As currently no more than $ 80 M is required, Onset does not need to desperately seek whatever deals to invest their whole amount of money. Instead, they should focus on their investment philosophy in which they focus on investing in companies where they have a local presence and in “under-the-radar” deals for the purpose of avoiding valuation war with the competitors.

2. The reason why Onset does not invest in bigger amounts in each deal is that there is a 2.5 times step up from seed to the 1st round, a 2 times set up from the 1st to the 2nd round, and a 1.5 times set up from 2nd to 3rd round. Thus, if they invest in bigger amounts, it would be much harder to achieve these target returns than if they do in the seed round. That is because the target company would then be overvalued, and it would be difficult for it to grow enough for Onset to achieve its goals. Furthermore, new investors will not be attracted to invest if they don’t see that the company grew at an attractive rate, and therefore, they may lose potential investors whom it will be harder to get them to invest in those rounds.