The Knot Case Study Analysis

Michael Alvarez

1743333

FIN 6477

1/12/19

The Knot

1. Who are the people? Is it a good team? What are they good at? What are they missing? What would lead you to believe that they will succeed?

1. From the writeup, I would say they’re missing true retail sales experience as well as a general experience in online/coding expertise. I think they do have very strong people on their team, such as Russ Casenhiser, and various people who run the company from a sales and supply chain standpoint, but I feel like Liu needed someone exactly like him to share the burden of that he was doing. Throughout the article, it seemed as though Liu was more of a one man show and maybe he needed to share some of the responsibility with his coworkers more.

1. What is the nature of the opportunity? What is good about the market? What is the nature of the competition? What are the key success factors in the registry business?

1. The opportunity stems from the fact that before them, most of the wedding business was done through either brick-and-mortar retailers or magazines. I think the opportunity to aggregate both experiences into one was a great opportunity for them to find their blue ocean. Furthermore, as the article says, the market itself is recession proof because love, per say, doesn’t have a value and people want to get married.
2. As far as the competition is concerned, I think they really don’t need to worry about it as much as they think because when you have competition it’s easy to see how each one operates, find out what the inconsistencies are, capitalize on them, and create features of their own websites and platforms that trump their competition.
3. The success factors of the registry business is the amount of capital in which the industry generates and also how point and shoot it is. With the registry, the guesswork is all done and it’s just a matter of putting everything together in a way in which they can just help improve on the real-time order filling and registry filling.

1. What is the business model? What are the operating characteristics of the business? Working capital needs? Fixed asset intensity? Scale economies?

1. The business model is simple, they’re functioning to aggregate an already existing enterprise and make it more of a total experience, rather than a shopping one. They function to make it a one-stop-shop for which their users can come for not just dresses, registry, etc, but also to share tips, experiences, and the overall collective experience, with its highs and lows that is getting married.
2. The operating characteristic of the business are such that they function to bring all the individual parts together. Through their site they’re able to not only give results to the users, but also build revenue streams through advertising with their strategic partners and other partners that are in it as another way to drive more traffic to their business. Given the time in which this took place, there was a lot of learning for which we take for granted that they had to learn and also bridge the gaps.
3. As far as the working capital and given the aforementioned part, they probably constantly had to adjust their working capital and fixed asset capacity given the nature of the expanding business in the expanding internet age. Furthermore, I think they experienced positive economies of scale given the futrher specialization that was required at each given level of advancement.

1. What do you think about AOL’s “deal” ? What do you think about The Knot’s Series B offering (Exhibit 2-9)?

1. Given the time of the story, I think their most advantageous partnership was that of AOL, but given the advancement of the internet and the knowledge the internet was going to get bigger, I think they should have tried for a less demanding equity stake in the company. After all, both entities needed each other, and the deal wasn’t as one sided as Liu seemed to think.
2. In regard to the series B offering, I think the company staked themselves a little too short considering their $10 million need for 30.4% means they only valued their company at roughly north of $30 million, which in the growing age, and given the increased competition, was a little short sighted and the amount given for the relative 30.4% convertible preferred was a bit high. As it stood, they were already 55% owners before this deal and if they weren’t careful, could have diluted their ownership even further.
3. Furthermore, they could have made this round of capital a little more specific through seeing capital from people which they could have leveraged their relationships. Many of the examples they used were partnerships they might not necessarily benefit from and I think they could have been a little more specific in this instance.

1. How has The Knot done? What financial and non-financial metrics would you use to gauge?

1. Given their increases in users, ad revenue generation, partnerships, both strategic and for revenue, I think the company has done well. I think the many companies, not only in their inception, but through growth always have negative periods of revenue generation before positive. Additionally, and given how much they were expanding, I think it was perfectly normal for them to be negative. Also, the way in which they were generating their data was also far ahead of its time and they leveraged many of their partnerships well in terms of the data. I think their fresh insight had done them well and all their revolutionary ideas of the gift registry were great. As far as financially, they were doing well to generate revenue from many different streams and as far as non-financial it is easy to see though their growth in users over a short period of time they were setting themselves up for success.

1. Try to dissect the financial statements in Exhibit 2-12 A, B, C, D; What can these tell you about The Knot’s business and performance?

1. While their financials show little gains early on, it seemed that the closer they got to 2001, they better the managed the cash in some areas and the higher the relative amounts got in other areas. Upon a first glance, we can see their revenues seemed to grow, but at the same time, so did their COGS totals in some areas. Given the whole point of business is to reduce COGS, they should have had a better grasp on this and perhaps consulted with outside sources to lower these amounts. However, it’s easy to be critical of a business we don’t run, but overall I think the knot, given the expanding online space, did relatively well in cash management, management of their cash flows and revenues. I think that by trying to decreases COGS, they could have had a better grasp on decreasing risk in financing their company, which could have made the relative equity stake that much less.

1. What are the funding needs? When? What is that money for?

1. The funding needs are to help get them into positive cash flow territory. Given the capital needs from their investing and financing activies, I think the company could have had a better grasp on their because it took all the way until 2001 for them to reach a positive retained earnings balance.
2. Furthermore, I think their cash flow management for the most part was well and they seemed to manage their cash well from their beginning of year to totals to end of year totals. All and all they needed more money to come from their revenues and spend less money for online advertising and this could have come through exchange services that they could have leveraged to get a lower cost in advertising and retail transaction fees.

1. What should David Liu and Carley Roney do?

1. The couple should keep pressing forward and perhaps try to leverage more relationships through ISP’s and other relative data websites in order to try to find partnership whom they can better leverage for capital and experience.

Discussion

• Strategy implies tradeoffs. Most strategies can work in unison with each other. You can’t sell your own product while trying to also say that you’re trying to partner with each other.
• Business model- a description of the elements that show what your business is worth. Who are the customers, how do you generate revenues. Those set of characteristics that in 4 to 5 broad strokes, allow you to define what makes your business unique.

Market

• Defining your market- this way you know your competitors and potential revenue streams
• Articulate market size, market growth, and competitors.
• Market is the people
• Market segment is the specific people of whom you’re targeting

Quantifying

• Don’t be afraid to quantify
• What is the size of the advertising market?

You can either do a bottom up or a top down method, but in order to do either, you have to know what your specific market is. Once you figure out that, you’re able to figure out your market size by looking at the revenues for you and your competitors.

You need to know the size of the sandbox and the size of the pie. You have to start someplace, so we have to reference something.

Market size is a relevant dimension and it causes us to focus more on our market share and competitors.