entreprenurship strategy

Hanson

case5.pdf

Home >Business & Finance homework help >Operations Management homework help >entreprenurship strategy

Afuah−Tucci: Internet Business Models & Strategies Text & Cases, Second Edition

V. Cases 5. LiveREADS: Valuing an E−book Start−Up

Case Five

LiveREADS: Valuing an E-book Start-Up

READING AND A NEW FRONTIER

At 2:34 A.M. on Friday, November 17, 2000, Neal Bascomb finally turned off his computer. Five errors—he had found and corrected five errors in the final version of Orpheus Emerged, a newly discovered novella by Beat legend Jack Kerouac. Bascomb’s new e-book publisher LiveREADS would introduce the novella in a revolutionary new e-format three days later on Monday, Novem- ber 20. Orpheus Emerged would be the first e-book published to include an interactive, multimedia design. Too restless to let things go, CEO and cofounder Bascomb had insisted on reading both the Adobe GlassBooks and Microsoft Reader editions himself to be sure that there were no errors. Now, over 600 pages later, he was ready for bed. Later that day, he would deliver both versions to bn.com, the exclusive e-tailer for this inaugural LiveREAD.

As he attempted to fall asleep, Bascomb ticked through the implications of Monday’s launch in his mind. After raising about $700,000 in a series of angel rounds, cash was starting to run low. He and cofounder Scott Waxman had used the bulk of the money to enter into contracts with 20 New York Times best-selling writers, paying them for options to original works the company had to exercise within four to six months (see Exhibit 5.1). They desperately needed to make the leap to the next level and raise $5 million to begin pub- lishing the next series of LiveREADs before the options expired. Venture cap- italists had been lukewarm on a content play but might be swayed if Orpheus Emerged made a big enough splash. And then there was the question of a strategic investor. The venture arm of a major media company had recently

NYU Stern School of Business MBA Candidates Diane Bartoli, Chris Lemmond, Ashok Sinha, Daniel Urbas, and Stephen Wells prepared this case under the supervision of Professor Christopher L. Tucci for the purpose of class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2002 by Christopher L. Tucci. All rights reserved.

Afuah−Tucci: Internet Business Models & Strategies Text & Cases, Second Edition

V. Cases 5. LiveREADS: Valuing an E−book Start−Up

approached the founders to merge LiveREADS with an e-book publisher it had been incubating in an all-stock deal. Should the founders take the deal or hold out for a venture capitalist that would let them retain control and a larger piece of the pie? How would the founders even know what to accept from a VC or from this entertainment behemoth? How much was their company worth to these two different investors, and what other factors should they take into consideration?

ONCE UPON A TIME, THERE WAS LIVEREADS . . .

Nearly a year before, cofounder Neal Bascomb had been an agent at one of New York’s more exclusive literary agencies, Carlisle & Co. He had helped Michael Carlisle, a respected veteran in publishing, break free from the giant William Morris Agency to go out on his own. Previously an editor at St. Mar- tin’s Press, Bascomb was one of the first employees at Carlisle in the summer of 1998 and quickly set to work building a long and profitable client list. Competitors joked that if he didn’t pace himself he would be the Prefontaine of the agenting world, making reference to the champion runner who started with a flash and ended as fast. But pacing wasn’t in Bascomb’s vocabulary and by the end of year 1 he laid claim to nearly $1 million in book contract sales with major publishers, one of the most successful first years for an agent wit- nessed by the industry.

After that banner first year, Bascomb started to dream about running his own publishing house. First he went to his boss, Michael Carlisle, and talked about how the agency could be a bit more entrepreneurial in how it made money. Perhaps they should do more in exploiting the digital rights for their clients’ works. But it seemed this was outside the scope of what Carlisle felt they were capable. Nearly a year and a half after starting at Carlisle, Bascomb decided to venture out on his own.

Bascomb began writing the business plan for what would eventually become LiveREADS. He called on every entrepreneur and visionary he knew in the business and interviewed them about future trends and the viability of an e-publishing model. Among the first of these interviewees was Scott Wax-

302 Part Five Cases

EXHIBIT 5.1 Author Qualifications

20 brand-name, best-selling authors 6 New York Times #1 bestsellers The #1 travel writer in America The #1 personal finance writer in America The #1 adventure writer in America The #1 popular science writer in America The #1 sports writer in America National Book Award winner Over 75 million copies sold by authors

Afuah−Tucci: Internet Business Models & Strategies Text & Cases, Second Edition

V. Cases 5. LiveREADS: Valuing an E−book Start−Up

man, a young industry player who had started his own very successful agency a few years before. Although only 32, Waxman had a full head of salt-and- pepper hair and the self-assuredness of a veteran. In fact, when he learned that Bascomb left Carlisle & Co., he immediately attempted to convince him to join The Waxman Agency as a partner. But when Bascomb introduced the idea of an e-publisher, Waxman realized the true potential of a different kind of partnership. Shortly after reading Bascomb’s business plan he called to say he wanted to help launch the business. Knowing that Waxman had a host of expertise as well as publishing and e-world contacts to bring to the table (Waxman’s brother was a founder of Flooz.com), Bascomb was eager to accept the offer.

After officially incorporating in February 2000, the two founders immedi- ately set about trying to find funding for their new venture. They talked to ven- ture capitalists, angel investors, investment arms of media companies—anyone who would take a meeting with them. Rather than money, what they mostly got was advice. But they also found a lead angel investor in former Sony Corp. chairman Michael “Mickey” Schulhof, who helped finalize their e-publishing model as a business-to-consumer play that would build on the brands of established best-selling writers. In addition, LiveREADS would use the full extent of the digital medium by enhancing e-books with video, audio, anima- tions, live links, and additional information all keyed to the text (see Exhibit 5.2 for information on characteristics of the LiveREAD product). Schulhof based his investment on a series of milestones the founders had to reach. These mile- stones were mostly in the form of author contracts, initially targeting a total of 15 contracts.

LET’S MAKE A DEAL

Since they had limited funds, Bascomb and Waxman constructed a contract similar to a movie option contract that would allow LiveREADS to gain access to some of the most successful writers in America for a relatively small cash outlay. In a traditional book contract, a publisher pays an author advance

Case 5 LiveREADS: Valuing an E-book Start-Up 303

EXHIBIT 5.2 Hoped-for Characteristics of LiveREADS product

• Original—A new experience that surpasses other mediums. • Size—Digestible size of 50–100 pages long. • Compelling—It has to be worth the time it takes to read; holds reader’s

attention. • Unique—No other comparable online options available. • Frequently refreshed—Sense of urgency and timeliness. • Topical—Meets the reader’s expectations. • Professional—Clean and easy to read and maneuver; accurate. • Entertaining—Delivers written word in a fun, immersive way. • Thorough—Leaves the reader satisfied.

Afuah−Tucci: Internet Business Models & Strategies Text & Cases, Second Edition

V. Cases 5. LiveREADS: Valuing an E−book Start−Up

against royalties in three stages: on signing, on delivery of the manuscript, and on publication. LiveREADS adapted that model by paying each author $10,000 in cash on execution of a contract that locked the writer into an option for four to six months. The remainder of the advance would then be made in the same stages as in a traditional contract, minus the option price of $10,000. All the works commissioned had never been published. In addition, LiveREADS specifically commissioned medium-length works to avoid the “book length” options most writers were bound to with their traditional publishers. Live- READS was not responsible for the remainder of the advance unless it chose to exercise the option. Payments for the remainder of the advance were tied to exercise of the option, delivery of the manuscript, and the publication of the work, thereby limiting LiveREADS’s overall exposure. LiveREADS did not retain the print rights; however, it did retain rights for electronic text, multime- dia, dramatization, worldwide translation, audio (which can be worth as much as half the value of the total advance), and perhaps most importantly, an option on the author’s next midlength original work in the electronic medium, which held the author bound to LiveREADS for 18 months to two years.

With this blueprint in mind, Bascomb hired a publisher to help sign the authors. Paul Bresnick had most recently been an executive editor at William Morrow, a large traditional publisher. But his 30-year career spanned from Spy magazine to Penthouse to Doubleday Publishing. Over the course of his career, Bresnick had published renowned authors James Baldwin, T. C. Boyle, Betty Friedan, Joyce Carol Oates, Lawrence Block, and perhaps most notably, Bill Cosby. Cosby’s Fatherhood was one of the biggest bestsellers of the eighties and one that announced the dawn of the celebrity book. Now Bres- nick was onboard at LiveREADS to use his deep connections in the old world to see the dawn of yet another revolution in publishing—the emergence of the e-book. Bresnick’s traditional experience was a neat counterbalance to the e- knowledge CTO Tim Cooper brought to the table. Cooper was the founder and president of a technology and programming consultancy that, among other things, developed digital products for the publishing industry.

By the beginning of September, the team at LiveREADS had met with vir- tually every major literary agency in the business and concluded deals with more than 20 major New York Times best-selling writers. Each deal required a long and complicated contract negotiation because LiveREADS was break- ing new ground in the assignment of digital rights in respect to the combina- tion of electronic text with multimedia (audio, video, animation) as well as e- commerce and advertising/sponsorship sales. This investment of time was vital to the success of the company—Bascomb and Waxman considered their contracts with these major agencies as valuable assets and key barriers to entry protecting LiveREADS from other fledgling e-publishers looking to compete in the space.

Having signed the targeted number of authors, and with the remainder of the angel financing in the bank, the company was ready for the next step in the

304 Part Five Cases

Afuah−Tucci: Internet Business Models & Strategies Text & Cases, Second Edition

V. Cases 5. LiveREADS: Valuing an E−book Start−Up

business plan: raising the Series A round of financing. In preliminary meetings with venture capitalists, the founders soon learned that despite their impres- sive roster of writers, VC investment would not happen without more proof of concept. To prove themselves and their business model, and gain credibility with potential investors, they needed to publish their first LiveREAD.

MAKING THE LEAP

With time working against them, Bascomb and Waxman rallied the team. They had to publish their first LiveREAD within one month. Bresnick called literary agent Sterling Lord and told him the company would be exercising the option for a never-before-published novella by Jack Kerouac, Orpheus Emerged. Over the next month, LiveREADS would not only design and pro- duce the interactive e-book, but also put together a series of marketing and distribution deals necessary to reach its target market. But before they could get started, they first needed to determine the price for their first LiveREAD.

There were a few factors to be considered in setting the price. There was a relatively short history of established e-book prices that ranged from $1 (Stephen King’s The Plant) to as much as 10 percent below the traditional book price (about $18). In addition, mass-market paperback books (the most inexpensive books on the market) ranged from $5.50 to $9.00. Bascomb and Waxman wanted to price Orpheus Emerged inexpensively enough to encour- age customer adoption. At $3.95 the founders felt it was cheap enough to encourage readers to take the leap. Plus, at $3.95 Bascomb estimated that they would need to sell only 20,000 copies to break even, a mere fraction of Ker- ouac’s sales.

LiveREADS chose bn.com, the online arm of the Barnes & Noble super- store, as the exclusive distributor on the guarantee of a significant marketing campaign (including advertising and keyword searches on Yahoo!, AOL, MSN) and affiliate network push (over 400,000 sites would be offered the opportunity to carry the title). Furthermore, bn.com would build a boutique within its site that promoted LiveREADS and its first publication. With that distribution deal in place, LiveREADS began building its own marketing net- work based on revenue-sharing deals. Apple, Blah-blah Network, Flooz, Adobe, Salon.com, and tens of other sites would promote the lost Kerouac classic. On the day of the launch direct online marketers EMAIL SHOWS and Zooba would email over 300,000 people. Tens of thousands of flyers would be dis- tributed on over 50 college campuses across the country. And a national pub- licity campaign, including stories in the LA Times and on National Public Radio’s Fresh Air, would begin on November 20. As the head of bn.com’s e-book division said: LiveREADS was the first company to actually be “publishing” an e-book instead of simply making a digital version of a pre- existing work available.

Case 5 LiveREADS: Valuing an E-book Start-Up 305

Afuah−Tucci: Internet Business Models & Strategies Text & Cases, Second Edition

V. Cases 5. LiveREADS: Valuing an E−book Start−Up

THE BURGEONING E-BOOK MARKET

The e-book market gained a legitimate toe-hold in 2000 by attracting the atten- tion of the most powerful players in new media, including Rupert Murdoch’s News Corporation, Microsoft, Adobe, Amazon, Barnes & Noble, and the world’s largest publishers, including Bertelsmann and Time Warner.

Still in its infancy, the e-book and digital publishing industry was marked by a virtual cacophony of players staking claims and forming alliances, all with public pronouncements of tempered, cautious optimism about the future of the market. Lower forecasts of the market potential reflected sheer derision of the format, while higher estimates reflected the belief that e-books would inevitably dominate book publishing.

Some analysts estimated the market would grow to $218 million by 2002.1

An industry-financed study performed by Andersen Consulting estimated that e-books would represent $2.3 billion, or 10 percent of the book market by 2005.2 Forrester, on the other hand, forecast an e-book market share of only 2 percent by 2005.3

As of November 2000, bn.com carried 2,700 e-book titles in three compet- ing formats,4 and Amazon carried 1,000 e-book titles available in the Microsoft Reader format.5 Tom Turvey, e-books manager at bn.com, remarked:

Digital content is something that began slowly a few years ago and now is something that really has picked up steam. Even a year ago, this may have been a smaller part of our business, but with the strong partners, and now the strong original content from within the author community, it really has gained a lot of traction even in the last six to eight months.6

How fast the industry would grow would depend on the settlement of issues that had similarities to those facing the music industry. Importantly, authors and publishers wanted to ensure that published works were protected from piracy and that technologies and standards protected their intellectual property rights. Additionally, booksellers were cautious about the potential of cannibalization of their current bound-book business, and printers and distributors feared that they would be disintermediated out of the book publishing supply chain.

COMPETING AND DISTRIBUTOR FORMATS, PUBLISHERS

One of the most crucial issues for the growth of the e-book industry was the extent of consumer adoption of the digital format. Consumers had three ways to view digital content at the end of 2000. Consumers could download books directly to their personal computers to be read off the computer screen; they could download e-books to a specialized e-book reader; or, for a smaller por- tion of book titles, consumers could download to a personal digital assistant (PDA) using Microsoft’s Reader or Reciprocal software.

Faced with these options, a number of manufacturers were striving to become the dominant standard. However, the existence of competing, incompatible

306 Part Five Cases

Afuah−Tucci: Internet Business Models & Strategies Text & Cases, Second Edition

V. Cases 5. LiveREADS: Valuing an E−book Start−Up

formats exacerbated the problem for the industry. The main players included two of the largest software providers, Microsoft and Adobe, and Gemstar International’s e-book reader format. Additionally, Reciprocal, a small soft- ware provider, was introducing a format to download e-books to personal computers as well as PDAs using the Palm operating system. Except for Adobe’s Glassbook Reader, all competing formats adopted the ‘Open E-Book’ (OEB) standard, which used common HTML and XML Web programming. The first LiveREAD, Orpheus Emerged, was made available in both Adobe Glassbook and Microsoft Reader formats. It is important to note that only Glassbook allowed for the full effects of the connectivity and innovative design LiveREADS developed, despite the fact that it was impossible to print the novella from this edition. Although only plain text, the Microsoft Reader edition was printable. Exhibit 5.3 outlines the various attributes of the com- peting formats.

While concerned about cannibalization of their current bound books, the major publishers embarked on various initiatives that encompassed selling e- books on their own content websites, to distributing to traditional book e-tailers, to developing entirely new content. For current, fast-moving titles, the e-book model would be “time phased,” where e-books would be released prior to print publication at print or print discount prices. Industry incumbents Random House and Warner Books had already announced new e-publishing divisions. In addition, new pure-play companies were coming on the scene. The most notable of these was Mighty Words (see Exhibit 5.4). Internet book retailers and other content sites had announced their own plans to distribute e-books (see Exhibit 5.5).

Case 5 LiveREADS: Valuing an E-book Start-Up 307

EXHIBIT 5.3 Competing Formats

Source: Company websites.

Gemstar Microsoft International Adobe Reciprocal

Products Microsoft Reader Rocketbook & Glassbook Reciprocal Softbook

Availability MSN.com, online Retailers bn.com TBD bookstores, Windows CE 3.

Price Free $299–$699 Free TBD

Standard Open Open Closed Open

Additional Over 1 million down- Murdoch-backed Preferred by New (launched in Comments loads in 3 months company, encryption LiveREADS. Nov. 2000), allows

after 8/2000 launch supported by pub- for download to lishers. Palm o/s.

Afuah−Tucci: Internet Business Models & Strategies Text & Cases, Second Edition

V. Cases 5. LiveREADS: Valuing an E−book Start−Up

308 Part Five Cases

EXHIBIT 5.4 Publishers’ e-Book Initiatives

Random House (Bertelsmann)

Mary Bahr, editorial director of @Random, scheduled to launch in January 2001, said the new division would offer titles for consumers who “don’t necessarily read book reviews or frequent bookstores.”a

Warner Books (Time Warner) Warner announced the March 2001 launch of iPublish.com, which would utilize digital content to test- market new talent and develop printed books. Greg Voynow, general manager, announced that iPublish might offer a subscription series of romantic short stories for “an insatiable fan to read at her desktop or print it out, on her lunch hour or at work, or before she puts her kids to bed.”a

Mighty Words A first mover in digital publishing, Mighty Words’ parent, Fatbrain, received $35 million in funding from Microsoft cofounder Paul Allen. With an existing large-scale operation, the bulk of its operations related to vanity press–type publishing. Like LiveREADS, most of its works were short, original works. In November, bn.com agreed to carry Mighty Words content. According to Chris MacAskill, Mighty Words’ CEO, “Business, technology and mind/body titles make up about 80 percent of our titles, with fiction and other nonfiction titles comprising only about 20 percent. Our bread is buttered by professional titles today, because at this stage it’s still an early adopter market. On BN.com today, there are 120 titles, 85 percent original and exclusive.”b

a. Paul D. Colford, “Hot Copy Publishers Ponder Paperless Books,” New York Daily News, November 7, 2000. b. Paul Hilts, “Mighty Words Titles to Be Offered at BN.com,” Publishers Weekly, November 6, 2000.

EXHIBIT 5.5 Retailers’ e-Book Initiatives

Amazon Amazon created a special e-book section for its website and supported the Microsoft reader format only. Amazon would not push e-books for the holiday 2000 season, as it had not yet worked out secure encryption technologies to enable e-book gift-giving. Amazon typically retained 55 percent of revenues from its e-book offerings.

bn.com The Barnes & Noble website, 40 percent owned by Bertelsmann, offered e-books available in the Microsoft Reader, Gemstar e-book, and Adobe Glassbook formats. Like Amazon, it retained 55 percent of e-book revenues.

Contentville Contentville offered a limited range of titles that utilized the Microsoft, Gemstar, and Adobe Glassbook formats.

Lycos In November, Lycos announced that it was entering into a five-year, nonexclusive commitment to carry Random House’s “Modern Library” collection of downloadable new and old classics, available at Lycos Shops.

Afuah−Tucci: Internet Business Models & Strategies Text & Cases, Second Edition

V. Cases 5. LiveREADS: Valuing an E−book Start−Up

SELLING OUT?—ACQUISITION BECOMES AN OPTION

In early November, LiveREADS management was approached with an all- stock buyout offer. A newly formed investment and incubation group majority owned and backed by a global entertainment giant had spent the previous few months creating an e-book company and hoped to merge with LiveREADS to create a digital publishing and distribution company and website. Bascomb and his partners would receive shares in the resulting new company in exchange for their entire equity stake in LiveREADS.

The incubator had been formed as a subsidiary of the parent’s music, motion picture, television, and related entertainment division. Its mandate was to cre- ate, incubate, operate, invest in, and acquire digital media companies. Given his business’s dependence on consumer acceptance of new forms of enter- tainment technology, Bascomb saw this mission as a natural complement to LiveREADS.

The incubator focused on core digital media technology areas including broadband services, wireless, personal broadcasting, e-mail/direct marketing, digital asset management, e-commerce facilitation, and professional Internet services. In addition to equity financing, it provided portfolio companies with critical support in areas including: strategic planning; infrastructure needs rang- ing from office space, phones, administrative assistance, computers, network, and Internet connectivity to full human resources support, accounting, access to credit and financial administration; Web development and design; recruit- ment; product management; marketing; and a rich network of distribution part- ners in both online and off-line channels.

Bascomb was impressed with the company’s portfolio and expected that if LiveREADS was acquired, many synergies could be realized for the new dig- ital publishing company. These included a private, high-speed broadband net- work, a full-service digital rights management (DRM) solution, and a leading global infrastructure technology platform for the aggregation, distribution, and seamless integration of digital content to websites, portals, and wireless networks. The incubator had also helped manage well-known media and tech- nology start-ups that had ultimately gone public or had been acquired by indus- try heavyweights.

The potential acquirer was focused almost exclusively on enabling tech- nologies that would help consumers optimize their online entertainment expe- riences. The merger would provide LiveREADS with access to the parent’s rich library of entertainment content, which could be integrated into future products. But Bascomb worried about the management and direction of the acquiring firm: it had received a substantial sum from its parent company, and although it had been operational for only a few months, there was little evidence that any real progress had been made.

Bascomb wondered how to value the new stock offer. His partners, investors, and he would receive stock in the merged publishing entity. But what would that be worth? How could he justify accepting an all-stock offer when he and

Case 5 LiveREADS: Valuing an E-book Start-Up 309

Afuah−Tucci: Internet Business Models & Strategies Text & Cases, Second Edition

V. Cases 5. LiveREADS: Valuing an E−book Start−Up

his colleagues had worked for so long with little income and when his investors had already given him much cash? Should they accept stock in the new merged entity, and if so, how much?

GETTING MONEY “THE VC WAY”

Like every other start-up, LiveREADS embarked on the campaign of raising money. LiveREADS had started by raising $700,000 from angel investors. In the four angel rounds, equity was distributed to the investors in installments amounting to 10 percent each. This meant that the LiveREADS founders ended up keeping 60 percent of the company (see Exhibit 5.6 for details of previous financing rounds). Now LiveREADS was considering the first round of ven- ture capital fund-raising, hoping to raise $5 million.

When asked about how the VCs place a money valuation on LiveREADS, Bascomb replied, “VCs look at your stage of business development, the type of company—in our case it is a content driven company, and the valuation from the last angel round.”7 VCs would then look at projected net income after a certain period (for instance, five years) to determine how much of the com- pany they would need to own to realize an appropriate return on their initial investment. Exhibit 5.7 shows a typical calculation, with the appropriate P/E multiple crucial in determining the value of the company after an appropriate investment horizon and the amount of equity VCs will require.

In terms of the stage of development, LiveREADS had accomplished a few significant milestones, and the initial launch would also demonstrate a viable business model, if successful. Nevertheless, much needed to be done (see Exhibit 5.8 for future milestones).

The fact that LiveREADS was a content-driven company could also prove to be an issue. While plenty of funds were available for investment, and the VCs had substantial amounts of funds, there was a perception that funds were not being invested in companies. In particular, content companies appeared out of favor with the VC community.

However, translating these generalities into a specific valuation to take to the VCs would be difficult—Bascomb needed to know what specific factors the VCs would take into consideration when valuing the company in order to come up with a value. Bascomb knew that the core assets of the company, specifically the contracts with the authors, would play a large part. Achieving

310 Part Five Cases

EXHIBIT 5.6 Previous Financing Rounds

Premoney Amount Postmoney Date Valuation Raised Valuation

15 May 2000 $900,000 $100,000 $1,000,000 1 July 2000 1,350,000 150,000 1,500,000 1 September 2000 1,800,000 200,000 2,000,000

Afuah−Tucci: Internet Business Models & Strategies Text & Cases, Second Edition

V. Cases 5. LiveREADS: Valuing an E−book Start−Up

Case 5 LiveREADS: Valuing an E-book Start-Up 311

EXHIBIT 5.7 VC Money Valuation for LiveREADS

Time to Exit 5 years (Investment horizon, generally between 2 and 7 years.)

Year 5 Net Income $1.7M (LiveREADS projections.)

Year 5 Valuation 1.7 times X (X is an appropriate P/E multiple.)

VC Investment $5 M

Est. VC Annual Return 40% (Required return varies between 40% and 70%, depending on the risk of the company. LiveREADS was shipping product, so estimated return is lower.)

Cumulative 5-Year Return 5.4 times (5 years of 40% growth per annum.) Future Value of VC Investment $26.9M ($5M investment multiplied by required 5-year

return.)

VC Equity Share 26.9/year- (Amount of the company the VC would 5 valuation require to obtain the required return.)

EXHIBIT 5.8 Milestones

Based on the company’s projections, the following milestones are instrumental to LiveREADS’s plans:

2nd/3rd Quarter, 2000 • Develop online demo and begin site development. • Hire a chief technology officer, vice president of content development. • Sign 25 NYT best-selling writers. • Begin investigating content delivery platforms. • Secure $700,000 in angel financing and set Advisory Board.

4th Quarter, 2000 • Sign 10 NYT best-selling authors. • Secure $5 million in financing. • Coordinate content partnerships with portals and major media sites. • Build out website and technology infrastructure. • Hire chief operating officer, vice president of marketing, vice president of business development,

and creative director.

1st Quarter, 2001 • Create 6 LiveREADS for launch. • Develop strategic e-commerce partnerships for LiveREADS. • Launch version 1.0 of website. • Further integrate production/packaging abilities in-house. • Obtain 50 content affiliates.

2nd Quarter, 2001 • Launch 8 LiveREADS. • Develop key strategic partnerships. • Sign 20 additional NYT best-selling writers.

Afuah−Tucci: Internet Business Models & Strategies Text & Cases, Second Edition

V. Cases 5. LiveREADS: Valuing an E−book Start−Up

their required return on investment, ownership and control issues, and other factors would also be under consideration in dealing with the VCs.

From a control perspective, Bascomb knew that if he went the VC route, the LiveREADS founders would end up giving away another 30 to 40 percent of the remaining equity. On the other hand, if he chose to accept the buyout offer, LiveREADS founders’ equity would likely be diluted to 5 percent of the new company.

CONCLUSION

In deciding which avenue to pursue, Bascomb also had to take a number of other factors into consideration. LiveREADS was burning approximately $30,000 per month, which gave the company a fume date of mid-February 2001, although the company could theoretically proceed at a reduced pace without the additional capital. While cash outflows could be slowed, the company was anxious to exercise its author options before they expired and deliver the prod- uct to market. Aside from generating revenues, it would also provide credibil- ity and assist in signing additional authors and raising capital.

Strategically, Bascomb had to determine how each financing route fit with potential exit strategies. The feeling of the founders and angel investors was that if all went according to plan, the best time to exit would be within two years, with a trade sale the most likely outcome. While recognizing that start- ups don’t often proceed according to plan, Bascomb also felt the natural urge to ensure that any exit would allow them to reap some of the reward from the sweat equity invested in the company and would be liquid to a certain degree. Control issues were also important in the overall decision, as was the value that each of the different investors would bring to the company in addition to their capital contribution.

These and other issues were under consideration as CEO Neal tried to decide which route to pursue, and how he should value the company to present his “price” to each of the potential investors.

1. The Sunday Patriot-News (Harrisburg), November 5, 2000. 2. John Dorschner, “E-Books Still Long Way Off From Joining Best-Seller

List,” Chicago Tribune, October 16, 2000. 3. Mary Jo Foley, “New Flare-Up in Battle Over E-Books,” ZDNet News,

November 6, 2000. 4. Paul Kendall, “A New Chapter in the History of the Book,” Daily Mail,

November 7, 2000. 5. Paul D. Colford, “Hot Copy Publishers Ponder Paperless Books,” New

York Daily News, November 7, 2000. 6. Kevin Featherly, “Barnesandnoble.com Set to Sell Bevy of E-Books,”

Newsbytes News Network, October 30, 2000. 7. Team interview with Neal Bascomb, November 13, 2000.

312 Part Five Cases

Notes