Fact Pattern Global Corporate Strategy
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
You, as one of the four co-founders of Mi-Fi, brainstormed the idea for Mi-Fi during your time
at Sloan. The catalyst was really a series of events organized by the MIT $100K back in the
fall of 2009. One of you had developed the high-bandwidth, durable, sensor technology in an
electrical engineering lab while an undergraduate student. After a workout at the local gym,
you struck up a conversation with the proprietor, who took interest in your research to see if it
could improve on the expensive monitoring system he had been eyeing in the fitness journals.
The existing solution was costly because sensors could not be reused. Given the high costs, he
imagined that the cost of the sensor would have to be passed to the customer, but worried that
the adoption rate would be slow at its current price point. The idea fired your imagination but
you realized you would have to build out a team to take on the project. As you cast about for
complementary skills to your own, you brought the idea to a 100K event where you realized 3
of your Sloan classmates had a similar passion for physical fitness and personal electronics
with highly relevant previous experience. In addition to you all being Boston area-based, you
have all spent time over the years working in and around the digital media and fitness
industries. Each of you has real entrepreneurial drive and a passion to build something on your
own. Among the four of you, you have the strong backgrounds in operations, sales,
programming, internet, and hardware development to get a new venture going. With a great
deal of entrepreneurial enthusiasm balanced with industry vision and experience, you began
building a plan for a company to take this challenge on. And thus, while still pursuing your
MBAs, you all started working part-time out of one of your basements in the spring of 2009.
Returning to the original pain that had surfaced this potential business opportunity in the first
place, you approached and soon landed that Boston gym as your first customer. Your
company’s solution, BodySense, proved to be 90% less expensive for them to implement and
more inter-compatible than comparable sensor technology. Additionally, the FitAnalytics
software was far ahead of the remedial analytics software available in current packages. Sales
to local gyms rocketed as positive word-of-mouth spread about the effectiveness of the product.
After graduating with your MBAs in May of 2010, you attracted 9 additional fitness centers in
affluent areas along the beltway. You were generating enough service revenue that your young
team of 4 moved to a tidy subleased office in Waltham. It was at this point that the part-time,
“on the side” startup became a full time job .You filed provisional patent applications to begin
the process of protecting BodySense and FitAnalytics intellectual property. A Change in Health
Benefits Incentives One night over a couple of beers at Characters in late December 2009, a
CNN segment on the healthcare bill recently passed by President Obama caught your attention.
The healthcare bill included an amendment to allow companies to reward employees for
demonstrating healthy behaviors. Steve Burd, CEO of the nationwide grocery chain, Safeway,
from which the aforementioned amendment owes its namesake, devised an unconventional
benefits plan in which lower insurance premiums were given to people who maintained healthy
blood-pressure, cholesterol levels, and frequent exercise. Safeway representatives also claimed
that the company’s healthcare costs rose only 2% from 2005-2009, compared to 40% for other
companies during the same period. Building on the success of the program, Burd advocated for
legislation changes and launched Safeway Health, a subsidiary that designs similar wellness
plans for other companies. You and your partners pondered how companies were able to
monitor whether their employees were actually following through with their claims of exercise
and realizing healthier lifestyles. Without a method to validate that employees were actually
exercising or living healthier lifestyles, employees could enjoy the benefits of lower premiums
while creating greater actuarial risk for the benefit plan. Conversely, others may have
undertaken an exercise regimen but may have shown no change on the conventional metrics
used to measure wellness. Some form of a premium reduction could be given to reward those
who stuck to their exercise regiments and lived healthier lifestyles despite missing the marks
on traditional metrics. You and your colleagues believe that the data aggregated on the
FitAnalytics platform could be used by company health plans to monitor and reward those
employees who made changes to live a healthier lifestyle. A New Potential Market and Product
Line The healthcare benefits market was over $21B in the US with the majority of insurers
facing high informational asymmetries between the customer and the insurer. The healthcare
informatics space was also nascent with few players providing any reliable solutions to measure
people’s physical fitness, or incentivize people to pursue healthier lifestyles. At this juncture,
you begin to rethink your distribution model in order to reach the masses of the population who
most need the incentives to exercise. Subscribers of gym memberships are a self-selected group
of 40M in the US that is already conscious of their health. In this model, those who aren’t
currently enrolled in gyms or health clubs are not reached. Instead, you target distribution of
the product to companies with incentivized corporate wellness plans like the one implemented
at Safeway, and companies with more progressive management seen to likely implement such
a program. Here you can reach an entire cross section of the population, both currently fit and
non-fit. Mi-Fi’s solution can provide the analytics to company plan operators to validate
changes in member’s exercise habits and lifestyle. Additionally, it can incentivize people who
otherwise wouldn’t have exercised to make changes. Against this backdrop, you all recognized
there might be a terrific business opportunity in solving this bigger problem; the entire business
vision took an immediate turn. With a strong consensus among the founders to refocus the
company on the healthcare benefits market, you completed the latest upgrades to your
technology and platform, and decided to pursue HealthAnalytics, the healthcare benefits
version of the product by late March 2010. With the new focus, Mi-Fi suddenly had the
potential to be a much bigger player in a much bigger market, with much better prospects. With
luck, you signed your 10th paying BodySense customer before the Summer of 2010. While the
volume of Fitness Center solutions subscriptions had climbed 10x during the year and
continued to pay the bills and grow the business, you expanded your focus to the Healthcare
Benefits business. You all agreed to take minimal salary, and one of you actually gave up salary
altogether in order to plow back all profits into further development of the transcription
software and realizing this vision. As the summer of 2010 arrived, you had resolved almost all
your initial questions surrounding HealthAnalytics and were starting to generate significant
buzz on the BodySense side. You had raised Mi-Fi’s profile through strategic appearances at
trade shows and conferences, and were building the BodySense brand across a broader
spectrum of customers. You were poised for significant growth. Expansion Plans and Capital
Needed To handle the growth, you hired 2 programmers, a part-time accountant, and several
commission-only sales managers. (These are all necessary hires, but nevertheless a strain on
your shoe-string operation.) By the end of September 2010, you are at a true moment of
decision. You have set goals to sign an additional 40 healthcare facilities within 12 months to
triple your client base and begin the rollout of your much anticipated HealthAnalytics services
with an immediate focus on Massachusetts insurers and the university health plans. To
conserve capital at the outset, you all made the decision to outsource production and assembly
of the BodySense sensor to a local producer. However, to increase the units of production and
retain the quality necessary for adoption, you realize that investing in your own assembly
facility is necessary. You expect an initial investment of around $3M to secure the lease and
equipment necessary to proceed. In addition, you will need to triple your development and
operations staff and add sophisticated business development professionals. You are also very
concerned about other companies entering your market, especially once you rollout
HealthAnalytics, which you anticipate could be much bigger overall than FitAnalytics. It is
critical that you build as much lead time as possible and continue to expand your service
offerings. You cannot do that without hiring additional developers and IT staff and extending
your IP reach. In short, if Mi-Fi is to expand and continue to grow, you must have more capital.
Candidly, not all of your team members are convinced that VC funding is the only way to go.
They worry about the cold funding environment and the lousy terms that founders are getting,
and the pressure to take less-than-desirable exits when VC funding is included. Your
teammates are also not confident that the accelerated development is worth the cost in
ownership and control that you will lose in Mi-Fi. While you may have some disagreement on
financing models, you are all truly committed to your process and to MIT/FIT. You believe in
the value of your business model, and that you are solving an enormous problem in an
innovative, win-win approach. The bottom line is that it is now late fall 2010. Mi-Fi has had a
great run of success as a young start-up. In order to move to the next stage of growth, build out
your client base, and rollout next-generation products, you must decide for yourselves how to
cut the best deal for outside funding. Quest for Cash: When you founded Mi-Fi, you all agreed
and resolved to fund the company yourselves as long as practicable. You have been lucky
enough to have Mi-Fi throw off some cash relatively early through BodySense. You have also
resorted to many traditional forms of early stage capital: self-financing, friends and family, and
credit cards. You all attended the 2009 MIT Venture Capital Conference last December. You
were encouraged to hear about the uptick in venture investment during the panel discussions.
Nevertheless, your team decided you were not ready to make a persuasive approach to a VC.
You’ve bided your time as long as you could, relying on bootstrapping. During 2010, as
operations increased, your expenses have correspondingly escalated as well. Fortuitously, one
of you has been able to loan $250,000 to Mi-Fi from a spectacular futures trade by levering up
on the strong gold rally during 2010. This infusion of cash has kept the company going for the
first half of 2010. However, during the summer, you realized that your burn rates were
increasing and that you had no option but to look in earnest for outside funding. You also
realized that you had a unique opportunity to capitalize on the momentum and investor interest
in your combined FitAnalytics and HealthAnalytics technology. Plugging back into the MIT
alumni network, you got some excellent free advice to sharpen and better define your business
model, your market, and your sustainable competitive advantage. In September, with a revised,
well thought-out business plan, you went back to a VC you had met at the MIT VC Conference
last year. A well-regarded senior associate at a leading Boston firm, she was impressed by your
rapid growth, recognized the immediate potential of your space, and your vision to transform
the healthcare benefits industry. You may assume that the VC has sold the concept to the firm’s
partners, and that they have completed their technical and market due diligence to their
satisfaction. They believe in the market space, your technology and approach, and that Mi-Fi
has a distinct technology that other entrants will not be able to replicate. They also believe your
team can execute to plan. To be successful, you must ramp up your company quickly. You
must prove to your customers that you can satisfy their needs and offer the best quality for the
price solution to customers. Furthermore, you realize that as soon as FitAnalytics gains
momentum in the market, competition will rapidly increase. In conversations with your VC,
you have valued Mi-Fi at $7 million. You calculate you need $4 million in this round to
capitalize on your current competitive advantage and execute to plan. This $4 million round
will allow you to run Mi-Fi cash flow positive and to expand the company rapidly. According
to your current projections, the investment should last you around 18 months. You do anticipate
the necessity for an additional round, perhaps 2, to get you to profitability. The VC firm has
made an offer and has presented a term sheet offering $4 million on a $4 million pre-money
valuation. You have looked it over, but think it is worthwhile to meet with your lawyer to
understand it better. You make an appointment with your lawyer, an experienced Boston-based
practitioner in the technology space. While you haven’t thought much about legal advice since
you were incorporated, you may assume that you have established a comfortable client
relationship with your lawyer. You consider your deal points with your team, and then go to
discuss the term sheet at your lawyer’s office. Your Jobs: You are all co-founders of Mi-Fi, but
your job titles are not pre-assigned. You should assume a title* that matches, or is close to,
your actual skill set. In other words, what job would a start-up hire you to do? It doesn’t matter
if by chance your team has 4 engineers – that mirrors many real-life startups. As a practical
matter, you should name someone from your team CEO*. The lawyers and VCs will look for
a decision maker. (The CEO’s assumed background, however, should still be his or her actual
background.) It is helpful to have a technical person or engineer (CTO or otherwise) as well.
Assign other executive titles as your team sees fit.
