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FEED Resource Recovery Case Solution
Many large organizations nowadays have entered the avenue of using green energy as their source of power generation. This shift to sustainable fuel has largely been credited to campaigns by media and government officials specially the former vice president, Al Gore. Also, companies are now trying to shift to alternative energy sources because of the consistent rises in oil and gas prices. Shane Eten, a promising young entrepreneur, is trying to find business opportunities in the clean tech industry. His focus is on producing bio gas from solid waste through a decentralized unit located where the waste is produced.
Following questions are answered in this case study solution:
What is Feed’s most likely source of competition in the short and longer term?
Why are the venture capitalists interested in this business?
If you were a venture capitalist would you invest now? What questions are on your mind?
What exit strategies do you believe will be feasible for feed?
Should Ryan and Shane approach family and friends? What issues are there when seeking such investments?
Are there are any other sources of capital available? What are they and how do they get it?
FEED Resource Recovery Case Analysis
1. What is Feed’s most likely source of competition in the short and longer term?
Whenever a business is setup, there is competition from other businesses. FEED Resource Recovery (Feed) also has to face completion from many sources. In the short run, the main competitor of Feed is Waste Management, which is a well established company for producing clean energy and has around $ 13 billion revenue every year. Most of organizations looking for green energy may prefer the services of an already recognized company rather than Feed. Feed also faces competition from other waste conversion providers such as Blue Fire Ethanol Inc, which produces ethanol from waste materials. The target market of Feed might go for these alternative waste conversion providers rather than the yet to be established Feed Resource Recovery.
The clean tech sector has immense potential to grow, and as soon as the already set up companies show growth in operations and profitability, many new players will try to enter the industry in the long run, and create fierce competition among each other. Many large companies such as Waste Management may also try to enter into the bio gas generation as soon as it starts showing potential for growth over time.
2. Why are the venture capitalists interested in this business?
Clean energy sector has immense potential for growth and profitability. This has caused venture capitalist to take an interest in this sector. The potential has caused Clean Tech Investment to grow at an explosive rate in 2006 and 2007. This sector is new and has not been tapped into by many investors. The demand for sustainable sources of energy has also risen these past years due to the rising trend in prices of oil and gas produced from unsustainable and environmental unfriendly fossil fuels.
Many large organizations have pledged to shift to clean energy owing to the fact that the general public is now aware of the hazardous effects of unsustainable energy generation from fossil fuels. Wal-Mart, the largest chain of super stores in the United States have promised to shift to green technology after been largely criticized for their pollution control strategies. They have set up solar power in 22 of its super stores and plan to introduce them in the rest, as well. When this kind of gigantic organizations pledges to use clean energy, the clean tech industry’s potential grows, and investor’s interests in investing in this industry grow. The investment has mostly been in solar projects, followed by alternative energy, which includes nuclear, wind and geothermal.
Pollution and recycling related sector in the clean tech industry has not been explored extensively, and only 11% of the total investment in this industry goes to pollution and recycling. Feed also desires to enter this market with a moderate investment instead of a large initial sum for establishing the company. Venture capitalists like the idea of a small investment amount which has high returns and has a lot of growth potential as suggested by the forecasted financials of Feed. The revues will go up from $320,000 in year 1 to $ 24.35 million in year 5. The operations of Feed will start to generate positive Net Earnings after year 2 and grow to $3.52 million in year 5. These financials along with the impressive business plan created by Shane Eten have interested many venture capitalists.
3. If you were a venture capitalist would you invest now? What questions are on your mind?
If I were a venture capitalist, before investing rashly in the sector that has potential. I shall look for answers to several questions. The most fundamental question is that how much return on investment I will get. If it is large enough to take the risk, only then I will think about investing into the business. The other factors effecting the decision to invest included that, Is the prototype ready for its soft launch phase to gauge the performance of the business, if the launch is significant, then the investment may produce beneficial results. Getting customers before the launch is another factor which venture capitalists look at before investing into any business. If Feed manages to get customers who are willing to buy the product, then I might also be willing to invest in it owing to the fact that the product’s sales are already guaranteed, along with my returns.
4. What exit strategies do you believe will be feasible for feed?
Shane Eten’s plan of Feed Resource Recovery is through anaerobic digester, which is a decentralized unit which decomposes the waste materials, and produces bio gas and fertilizer. He had taken his idea to several business plan competition and received several accolades. Those competitions brought a lot of interest for Feed, and many venture capitalists were interested in the idea. However, it is suggested for any business to pre-plan it’s exit strategies so that it might be able to get out of business in a planned way rather than being surprised.
The best exit strategy for Feed would be to sell of its technology to the highest bidder. In order for Feed to function, there is not a huge amount of capital requirement. The nature of the green energy conversion plant is decentralized, and once the prototype is build, Feed has the option to either expand exponentially or grow steadily.
The other exit strategy for feed in case the business plan does not even make it to the prototype phase or is not feasible would be to sell off the technology and plan to a buyer who is willing to start his own business or expand the horizon of its business if it’s a substantially large company.
The exit strategy, which most of the companies prefer and Feed should also look into, is IPO’s. They offer the chance to expand the business by issuing shares and dilute the share of the original owners. This way, when ever Shane decides to leave the business, he can simply sell off his shares and exit the business leaving the running of the company. This option is, however, feasible only if Feed manages to grow into a large company as IPO’s cost a substantial amount and there are other hidden costs involved.
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