1. Should Community Web utilize Wall Street Venture Capital as its primary funding source? If not, why and what should the firm’s next step be? Community Web should seriously consider Wall Street Venture Capital’s offer. At this point, the company is redlining and any funding source approaching them should be heard. Unfortunately, the lack of transparency about Wall Street Venture Capital is a red flag that the company might not be trustworthy. Community Web is already in a bad situation and getting involved with an unreliable company may just make their situation worse.
At this point, Community Web may want to consider bankruptcy or selling their company to another that might be able to utilize the intellectual property and relationships they have developed during the startup operations. 2. Assess the company’s burn rate (cash expenditure without any notable cash inflow) and financial outlook. High burn rates were a common phenomenon during the dot com boom. The underlying rationale was that large platforms and customer services would take time to develop but would eventually lead to excellent revenues.
Unfortunately, many dot com companies were not able to convince customers of their value to them. Community Web appears to have exhibited similar behavior, as they were only able to sell a few franchises. The lack of growth in revenue does not show a good financial outlook for Community Web. Very few companies can operate at high burn rates before going out of business. 3. What are some critical mistakes made by Community Web? Perhaps the main critical mistake of Community Web was not building a business model that would work.
The company thought that their only completion was newpapers and local media, not other local IP source companies. They also overestimated the interest areas would have in their franchise. By not testing their markets properly, they built a company based on overly inflated figures. 175 employees were hired to prepare for that anticipated growth, which never came. The company also did not handle legal matters in a professional manner, thus leading to problems with government agencies. 4. Are there any ethical and/or legal concerns in this case? Issuing equity without meeting government guidelines is problematic.
This not only leads to legal concerns, but also may raise a red flag to other stakeholders as to the ethics of the company. Also, the company did not pay its payroll taxes. The company is clearly not meeting its legal obligations. Now it is getting involved with an investment source that is not reliable. All of these issues will take away from allowing the business to focus on growing its revenues. 5. What were some of the major reasons that Community Web was having problems taking its business model to market? Community Web was caught up in the dot com frenzy of its time. Many companies made similar mistakes.
They did not test their concept in the market well enough before building the business. Ultimately, regardless of the technology and market, a business must adhere to business fundamentals to survive. The company was overly optimistic about the interest customers would have in their services, so their business model was incorrect. Additionally, they never really had a reliable business plan to show to potential investors. The company was projecting having a billion dollar business, but only had $1. 6 million in investment. Clearly, their research and projections were unrealistic. . What were some of the reasons that Community Web was having trouble obtaining financing? Community Web would have benefitted from having a business plan that was supported by solid market research. It appears that the company was operating on a strong hunch that their business would be very successful. While many companies do indeed start with that, investors require firm market and financial support to verify this. The excessive burn rate coupled with a lack of professional leadership and unreliable projections made the company unattractive for obtaining financing.
7. Evaluate the Community Web business plan as an effective tool for raising capital. As stated in the case, the business plan was constantly changing and eventually was disconnected from the day to day operations. Clearly, the business was struggling with direction, as also evidenced by the legal and ethical issues facing the company. The plan bases its figures on more secondary data than solid primary data, which limits its reliability for verifying its financial projections. There is not enough reliable data to give potential investors confidence in financing the business.
Evidence of the unrealistic outlook of the company can be found in the Business Model section. The company expects to sell its services to areas that are small and underrepresented by larger companies. However, there may be a good reason why larger companies have not serviced these areas. It appears there is a lot of activity required by local community coordinators to operate the service, but revenues in these areas may be small. Again, the basic financial model does not allow the company to generate enough revenues to cover its costs.