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Square Inc Financing a Unicorn Case Solution
In 2009, Square Inc. was established as a supplier of hardware and software that enables small companies to accept credit card payments. A firm founded on the principles of affordability, accessibility, speed, and convenience was Square Inc., which provided free mobile card readers to be used in combination with their free mobile platform to provide small businesses additional payment alternatives. According to the specifics, Square Inc. created a free software program called Square Inc. Register as well as a free hardware device called Square Reader that enabled Square Inc. to make use of standard point-of-sale systems Square Inc. made money by charging 2.75 percent of credit card transactions a set charge. Aimed for artists, farmers' market sellers, and freelancers who wished to accept credit card payments without incurring high setup fees or costly pricing, Square Reader was launched in September of 2012. The pricing competitiveness of its competitors, on the other hand, was threatening to undermine this company's fundamental business strategy (Simonson, 2017).
Following questions are answered in this case study solution
How are venture capital private equity funds structured? How are private equity firms compensated? Why may Khosla Ventures be motivated to push for Square to seek an exit?
What characteristics do the firms in case Exhibit 2 have in common? Do you agree with Marc Andreesen’s thoughts regarding unicorn valuation levels?
What would the capitalization table look like after the series E issuance? What is the post-money valuation?
What returns would each class of investors realize if Square exited through an IPO (rather than through a sale) at valuations of $3 billion, $6 billion, or $9 billion?
How would the returns change under $3 billion, $6 billion, or $9 billion valuations, if the series E securities did not have the IPO ratchet? Do you recommend investing in the series E preferred round?
Case Analysis for Square Inc Financing a Unicorn
1. How are venture capital private equity funds structured? How are private equity firms compensated? Why may Khosla Ventures be motivated to push for Square to seek an exit?
When a company seeks investment, venture capital or private equity investors are brought in to give the funds needed to propel that company forward. The company seeking funding takes on the role of the general partner and is in charge of the company's management and day-to-day operations. Limited partners are the investors who provide venture money, and they include high-net-worth individuals as well as financial institutions like banks and insurance companies. In return for a small share of the company's stock, the limited partners invest the necessary funds. As a result of the company's status as a startup with promising investment potential, limited partners are often motivated to participate in the venture capital infusion. In venture capital and private equity instances, biotechnology and communication technology are the most common fields. The venture capital agreement stipulates a profit-sharing mechanism for private equity companies and their limited partners. Carried interests and management fees are used to pay for the remuneration. The limited partners pay a proportion of the value of the assets under the general partners' control. The annual management fee paid by the limited partners typically ranges from 1% to 3% of the asset's value, depending on the firm's size. The management fees are intended to cover the continuing costs of running the company and investing strategy, such as staff salaries and investment consultant fees. Carry interest, a percentage of the investment earnings produced with the limited partners' cash, is another kind of remuneration for private equity companies. When earnings exceed a certain proportion of investment each year, for example, the general partner's percentage stake is established. That's why it's so important for the private equity firm's management, therefore, that they exceed the profit % set for them. Due to its huge profit margins, Khosla Ventures may be enticed to urge Square to depart the company.
2. What characteristics do the firms in case Exhibit 2 have in common? Do you agree with Marc Andreesen’s thoughts regarding unicorn valuation levels?
The value of each of the companies shown in Exhibit 2 increased as a direct result of the investment. The post-money values of the organizations that fall under this group of those that are sponsored by venture capital provide high valuations, which place the firm at the pinnacle of the investment pedestals. I agree with Marc Andreessen that the concerns of investors who believed that the high valuation of unicorns was comparable to the dot-com bubble of the years 2000-2002 were unwarranted. Because technology businesses have the ability to completely transform industrialization on a global scale, it is helpful to conceive of software as if it were eating the earth. As a direct consequence of this, the post-money value of the unicorns is given credence. The post-investment values suggest that the unicorns have a significant amount of growth potential as a result of the technology-based companies they operate, which helps to explain their very high valuations.
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