Hotmail Case Study
1. Brief Case Summary In August of 1995 Javasoft was founded by Sabeer Bhatia and Jack Smith. Their first round of financing was from DFJ in 1996. Hotmail was officially launched on 7/6/1996. The Second round of financing was provided by DFJ in August of 1996. The third round of financing by Menlo Ventures and DFJ was completed in August of 1996. The fourth round of financing by Menlo Ventures and DFJ was in December of 1996. The fifth round and exit round of financing was in December of 1997.
In the first round, Hotmail raised in total of $315,000: $300,000 from DFJ and $15,000 from Rex Smith.
DFJ got 15% for its investment, so the valuation was $2,000,000
Concerns for entrepreneur teams from …show more content…
In the best case, Hotmail can raise fund at $2 per share, which is good for previous investors. If milestones are set too high to achieve, the investor will not appreciate the entrepreneurs’ valuation and may not invest into the company. Moreover, like Hotmail case, in the final round, entrepreneur values the company at $125 million, but the external investors' value is far lower than the amount. In this situation, Hotmail is very hard to find any investors agreed on this price.
There are some advantages and disadvantages because of the contingency clause that was included in the 3rd round of financing. Both from an entrepreneur's perspective and the investment team.
The advantages from the investment teams perspective is that they have the a Series D preferred Stock that will be invested at $2.00 as share. The investment team has provided the incentive to reach or exceed the the number of subscribers at 500,000. If Hotmail can reach that number then the investment team will provide more capital for this round of financing.
The advantages from the entrepreneurs is that they have a guaranteed round of financing if they hit at least 300,000 subscribers. They are anticipating much more, however they have a round of investment that they should easily be able to hit.
The disadvantages for the entrepreneurs was the contingency clause that stipulated advertising