16: Palm Financing

As we wrap-up our module on venture capital, it is important to consider financing alternatives to the acquisition and IPO exits we have discussed. Review this interesting article by the founder and CEO of Buffer: "We Spent $3.3M Buying Out Investors: Why and How We Did It." Consider how this reinforces the principles of bootstrapping, venture funding, entrepreneur & investor objectives, and company growth that we have read about and discussed.

Read Henry Chesbrough’s “The Era of Open Innovation” from MIT Sloan Management Review which is posted in the Readings folder in Canvas Files. As you read this article, consider the following study questions:

• From the perspective of a high-tech entrepreneur, what are the implications of this article in terms of opportunities to be seized?
• How does the Open Innovation model affect the source of innovative ideas and the commercialization of innovative products by both startup ventures and established corporations?
• How might the Open Innovation model affect a startup company’s choice of operational strategy as discussed in our earlier reading, “Innovating for Cash?”
• Why is the Open Innovation model more relevant to the high-tech economy in the United States today than it was during most of the 20th century?

Read the “Palm Computing, Inc. 1995: Financing Challenges” case (HBS #9-898-090). Think about how you would answer the following study questions during your analysis of the case:

• Jeff Hawkins and Donna Dubinsky are faced with four financing options. Which of the options should they choose?

• What is your primary reason for choosing this option?

• What are the pros and cons of these options and what criteria did you use to evaluate them?

• What do you see as the major drawbacks to your choice?

• What would the cap table look like for the various options? To help you, I am including a table summarizing Palm’s first three rounds of funding:

  Palm Financing -- Ownership and Dilution
  	Valuation	Hawkins & Management	Merrill-Pickard	Sutter Hill	Tandy	Newtek Ventures	Credit Lyonnaise	ABC Ventures
  Round 1 (Jan 1992)
  New investment	$ 1,300,000	$ -	$ 500,000	$ 500,000	$ 300,000
  % Ownership		60.0%	15.4%	15.4%	9.2%
  Value	$ 3,250,000	$ 1,950,000	$ 500,000	$ 500,000	$ 300,000
  Round 2 (Sep 1992)
  New investment	$ 3,000,000		$ 750,000	$ 750,000	$ -	$1,500,000
  Total investment			$ 1,250,000	$1,250,000	$ 300,000	$1,500,000
  % Ownership		48.0%	17.3%	17.3%	7.4%	10.0%
  Value	$15,000,000	$ 7,200,000	$ 2,596,154	$2,596,154	$1,107,692	$1,500,000
  Round 3 (Jan 1994)
  New investment	$ 3,000,000						$3,000,000
  Total investment			$ 1,250,000	$1,250,000	$ 300,000	$1,500,000	$3,000,000
  % Ownership		43.2%	15.6%	15.6%	6.6%	9.0%	10.0%
  Value	$30,000,000	$ 12,960,000	$ 4,673,077	$4,673,077	$1,993,846	$2,700,000	$3,000,000

• Each existing investor had different objectives in making their investment in Palm, and each seeks different financial and strategic returns on investment. How might the different investors vary in their evaluation of and preference for the four financing options?

Be prepared to discuss these readings and other important elements of the case in class.

DUE:

Following the guidelines in the Case Method Overview (posted in Canvas Files), write a concise 2-page essay addressing the question:

Jeff Hawkins and Donna Dubinsky are faced with four financing options. Which of the options should they choose? Discuss the criteria you used to evaluate the options and the primary reason for your recommendation.

Submit your essay via Canvas prior to class. This essay must be your own work subject to the University’s Code of Academic Integrity.

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