Building an Investment Case

Abstract

This report presents the results of the author's summer internship with Powerhouse Ventures Ltd. It is structured in two sections.The first describes the main theory and methodologies relevant to the practical assessment of ventures from a venture capital perspective. It goes into some detail, to demonstrate both the validity of the analysis that follows and the domain knowledge acquired by the student during the project.The second presents an analysis of the investment opportunity presented by Fibre-gen, identifying several areas of concern. It then outlines a similar potential venture that addresses these concerns and may represent an attractive opportunity for powerHouse.The report concludes with a series of recommendations for consideration by powerHouse, and a statement of the value gained by the student during the course of the project.In acknowledgement of the fact that this report considers a real, privately-held venture, a number of details have been redacted in this public release. Wherever this has occurred it has been indicated in the document. 17/02/2014Building an investment case. Version 3.0Page iii Executive summaryThis project aimed to provide the student with experience in the venture capital industry and to assess an investment opportunity presented by Fibre-gen. This report summarises the project and is comprised of two sections: the first discusses the nature of venture capital, to demonstrate the domain knowledge gained by the student, while the second presents a summary of the Fibre-gen analysis. Venture capitalVenture capital can be described using the concept of expectation outcomes to illustrate the two activities at its core: developing an accurate understanding of the potential pay-off and inherent risk in venture opportunities. The most significant of these risks is the market risk -the risk that insufficient customers find the venture's value proposition compelling enough to pay for. ValuationThere is no universally accepted analytical method for valuing early-stage companies. A number of different valuation approaches are discussed, but each is fundamentally limited by the assumptions forced upon them by the high uncertainty surrounding early-stage ventures. The powerHouse WayThe Outcome Driven Innovation, Disruptive Innovation and Lean Startup methodologies constitute "The powerHouse Way". These are intended to systematically reduce market risk and are at the heart of the work performed in this project.Outcome Driven Innovation is built upon the following steps:1. Identifying what job consumers are looking to achieve in a given situation. 2. Defining consumers' needs as the outcomes that determine the successful execution of that job -these are the metrics by which consumers measure a product's performance and hence determine its value. 3. Uncovering market opportunities by discovering where consumers are struggling to get a job done, or one where they are under-or over-served on key performance metrics. 4. Using this information to construct a product that better addresse...