Strategic Management - Pre-Money Valuation, Private Placement, and Non-Accredited Investors - Case Study Example

Strategic Management - Pre-Money Valuation, Private Placement, and Non-Accredited Investors Question 1 Pre-money valuation is a widely used term in venture capital or private equity industries and explains the valuation of a company or an asset before undertaking any investment. If, for example, a particular investment adds profit to the company, the organization may likely have various different valuations before and after that investment. In other terms, pre-money valuation explains a company’s valuation before actual investment or deciding which one to engage. Post-money, on the other hand, refers to the opposite of pre-money valuation. It describes the existing situation of the company after it acquires outside funds or the latest investments. It includes the latest injection in the company or rather outside financing. It equals the sum of all pre-money valuation and the amount of new equity. Question 2 Private placement is sometimes referred as non-public offering. It entails disposing the securities to selected preferred investors with a mission to raise capital for the company. Some of the investors that private placement targets include big bank, pension funds, mutual funds, and insurance companies. In this type of placement, the security can be accessed easily in the market. Conversely, public offering is issuing stocks and securities of a certain corporation or company to the public. In involves an organization selling equity shares to the public in a quest to raise funds for investment and further business expansion. The major difference between Private placement and public offering is that the latter offers, for example, shares, to the public, and any willing individual can take part. The former focuses on long-term involvement of choice investors. However, for a new company, private placement is better because it allows the company to choose any member of the public whom it deems capable or the individual who has enough funds. The selling of private placement only occurs to accredited investors that are promising to new companies. The new company is also able to receive many unlimited investments from these accredited investors, which it can use to expand. Question 3 Non-accredited investors are those without the "credentials" or those who do not meet the necessary net worth to refer as accredited investors. In other words, they have a net worth of less than one million dollars ($1 million) and earn less than two hundred thousand dollars ($200,000) annually. For a new company, I would not recommend non-accredited investors. This is because these types of investors require a disclosure of private documents of the company such as those used in registered offerings. This endeavor involves many expenses, which will not be compensated even when those non-accredited investors invest in that new company. Therefore, I would not advocate for non-accredited investors to be given chance in investor offering for new companies. Question 4 Crowd funding refers to the act of funding a laid out venture or project by raising contributions from a myriad number of individuals typically using the internet. There are three types of factors fueling crowdfunding. The developers of the project or the one who first came up with the idea, the supporters, and the organizing company. Crowdfunding websites have assisted companies, and people globally capital from members of the public. A good example is a report released by the UK-based "The State of the Crowdfunding Nation,” which showed that in March 2014, at least US$60,000 was raised hourly through worldwide crowd funding undertakings. For new businesses, crowdfunding is a major source of funds and can be very helpful especially to small companies that do not require much funding. It is an easy way of acquiring funds all over the world that can help a business grow and expand. However, there are several types of crowdfunding, which include donation, debt, and equity. Donation crowd funding involves making people believe in a certain project and offer funds, which are non-refundable. Donors expect nothing back when they put in money in the stated project. Equity is a type of crowd funding where there is an exchange of services for equity. Money may be exchanged for shares. I would recommend new businesses first to engage in donation crowd funding before debt crown funding as the latter demands for funds to be returned with interest. Question 5 Zipcar is a United States company specializing in renting car. Additionally, the company is a sub-branch of Avis budget Group, which provides car reservations to the clients. It is the world’s leading and largest car-sharing company with at least 777,000 members and 9,700 automobiles in US, Austria, Spain and the United Kingdom (Hitt, Ireland & Hoskisson, 2013). Members are required to pay either membership or car rental fee. It is a company founded in 2000 by Antje Danielson and Robin chase. The company has not expanded fully, and this provides an opportunity for a ready market for the services it offers. The company is in a mission to expand and operate in European markets for example Spain. Another opportunity presents itself in Zip car's present country, US, where the fuel prices are escalating. Individuals will opt to share cars rather than buy new automobiles with the intention of saving money. As a car rental company, Zipcar generates its revenues from charging client's fee for using a particular leased car in a given period. The company, however, generates some of its income from membership fees (Hitt, Ireland, & Hoskisson, 2013). Question 6 Like any other business, Zipcar is faced with a number of risks and challenges. The factors are categorized as human factors such as accidents in the industry, incompetency of the managers, and problem with the supply of goods. Additionally, the existence of technological factors poses a challenge for the company; this is due to the unforeseen changes in technology. The existence of other automobile rental companies for example Avis and Hertz that have been running for a long period pose a challenge to the company. These companies are capable of accumulating large profits out of Zipcar's topline. There is also the threat of a rise in fuel prices. Although clients will be pushed to request for Zipcar’s services, the company will also experience a considerable reduction in profit margins. Question 7 Using the discount rate of 25% and IRR the question computes the NPV of a projection-based exhibit 5. From the result, the project has a positive NPV, which means that the project is acceptable. Year Cash Inflow Discount Rate 0 $ (25,000.00) 25.0% 1 $ 358,388.00 25.0% 2 $ 1,026,429.00 25.0% 3 $ 1,385,193.00 25.0% 4 $ 1,644,483.00 25.0% 5 $ 1,864,520.00 25.0% Question 8 I selected the Price per earning approach for calculating the value of a company. The price per earning approach, measures the amount, the investors are in a position to pay for each firm’s earning. When the ratio is high, the investors will gain more confidence in the company. . This is a factor potential investors should consider when investing as the demand for Zipcar’s offering is very high. In conclusion, the future for Zipcar is undoubtedly bright. The company offers customer friendly services and runs on a disruptive business model that renders it unique. This is due to its easy accessibility as it nearly has branches throughout United States. The company also allows members to access and use cars when required and when requested. This is flexibility. With time, regardless whether fuel prices rise or not, Zipcar will continue to thrive in the US. Question 9 As a manager with an interest in investing in Zipcar, I would invest in 50% of the company. Zipcar has potential for expansion in many other nations let alone U.S. itself and thus is capable of accumulating many funds worldwide. The nature of fuel prices rising serves also as a blessing in disguise. As explained earlier, this is because many people will likely opt to rent a car or share a car rather than buy a new car, as this will reduce expenditure. This serves as a reason any investor would consider while investing in Zipcar. There has been a trend in the last five years of membership not only increasing, but the organization has been able to retain its members. Increase in member translates to rising in profit levels due to the membership fee paid. This trend shows that the company offers exquisite services to its clients, and people will still be willing to become members References Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2013). Strategic management: Competitiveness & globalization. Mason, OH: South-Western Cengage Learning. Read More