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Internet Securities, Inc: Financing growth

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Salma Mathlouthi

on 10 May 2016

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Transcript of Internet Securities, Inc: Financing growth

Case 15: Spotfire: Managing a Multinational Start-up
During his studies at Chalmers, Ahlberg participated in an entrepreneurship program in which he gave a brief presentation of the visualization technology he was developing.
Innovations Kapital (Swedish VC firm) saw the presentation and expressed interest.
Ahlberg was the president of the Spotfire, which he founded as an independent company in 1996.
By the time Ahlberg earned his Ph.D., he had written a basic business plan and planned to turn his technology into a venture.
In April 1996, with seed financing from Innovations Kapital, Ahlberg, Truvé and Wistrand formed IVEE Development AB, later renamed Spotfire after the Company's core product.
Management team

While globalization forces are shaping up our lives ever faster and deeper, entrepreneurs
often are the lead players of the new economic game. More and more entrepreneurial
firms expand into international markets at early stage of their growth and many are born global firms. This broad phenomenon is labeled as internationalization of start-ups.
This case presents an entrepreneurial software venture that was started in 1996 by Ahlberg in order to solve the data visualization problem of the companies. Initially the company had its office only in Sweden, but as the customer base expanded, company established another head office in United States. Most of the customer base of the company was located in U.S and were the ones who were using the software at small scale. The case basically discusses the problems that the company faced while going from the status of a national company to a multinational company. Other than this, the case also discusses the need of the company to manage its early stage of growth and develop new customers and products.
The company's creation
Historic and projected financial statements
Case questions
Adding Professional Management
The company today
On May 2, 2007 it was announced that TIBCO would buy the company.
Spotfire was acquired by Tibco for US$195 million in cash.(NASDAQ:TIBX)
The company employed 200 employees and had 800 clients . 60% of its sales are made ​​in the USA .
TIBCO spotfire operates in different industries: Academics, Advertising,Media, Business Services,Consulting, Chemicals, Consumer Goods, Retail Energy, Utilities, Financial Services, Government Health care, Insurance, and Life Sciences, Manufacturing, Technology,Telecommunications,Transportation.
In 2014, Vista Equity Partners bought the company for $4.3 billion.
Christopher Ahlberg was named among the World's Top 100 Young Innovators by MIT Technology Review and received the TR100 award in 2002.
Christopher serves on boards of companies in the software (Wingu,Apptus Technologies), education (Hult International Business School, London), and financial services sectors.
Christopher Ahlberg today is the Co-Founder and CEO of a company called Recorded Future that arms organizations with real-time threat intelligence, allowing them to proactively defend against cyber attacks.
Chris Ahlberg biography
Usage potential for spotfire in pharmaceutical industry by R&D stage
Ahlberg received his M.Sc. in Computer Science in 1992.
He received a Ph.D. in 1996 from Chalmers University of Technology in Sweden.
Spotfire’s core products were based on Ahlberg’s doctoral research
Ahlberg earned his doctorate from Chalmers University of Technology and has worked as a visiting researcher at the University of Maryland.
By the time Ahlberg earned his Ph.D., he had written a basic business plan and planned to turn his technology into a venture.
He is very young entrepreneur.
Spotfire sold its software to clients in packaged goods for consumers, manufacturing, banking, telecommunications and a range of other industries.
In early 1997, Atlas Ventures provided Spotfire's with $3 million first round financing under certain terms: adopt a “vertical” strategy (focus on one specific market where it could provide real solutions software)
Spotfire decided to focus on the related fields of chemistry and biology (in general) and the pharmaceutical industry (in particular).
In November 1997, Ahlberg flew to the United States with Jonas Karlsson (a sales representative) for a sales trip.
They convinced 8/12 companies to become customers.
Within the first two months of selling:
generated $100,000 in revenues
positive response from many of their customers.
base of external credibility for further sales efforts and for raising capital.
The company growth
Spotfire organizational chart
Senior managers resume
Spotfire historic and projected profit and loss statement
Spotfire historic and projected statement of cash flows
Spotfire customers
Atlas accepted to invest in Spotfire if the company adopts a vertical product/marketing strategy, and brings on a professional manager.
Meanwhile, Gnatovich, helped Atlas evaluate business plans and carry out due diligence on potential portfolio firms.
He had managed an Internet start-up through its acquisition by Parametric Technology.
He had run and grown several small companies in addition to his work with VC firms
Gnatovich joined Spotfire in May as President, with Ahlberg remaining as CEO.
Ahlberg continued to manage Europe: product development, linking customer feedback with the development team in Göteborg, and product marketing.
Gnatovich developed and implemented the sales strategy.
Visual Discovery
Many ventures involved gathering and using complex data .
They turned to statisticians and data analysts, using advanced statistics and algorithmic tools.
Analysts lacked the skills to interpret the data appropriately, and those who are able to interpret the data lacked the training to use statistical analysis software.
Spotfire’s technology was designed to enable researchers to visualize data in an intuitive and interactive format.
By displaying data in a wide range of graphic formats, a researcher could identify patterns to develop leads or eliminate unpromising lines of study.
It enables researchers to mine data from extensive warehouses of chemical compound structure and behavior, looking for desired characteristics which means reducing discovery time and time to sell the drug.
Technological advanced software allowed the measurement of the activity levels of thousands of genes under particular conditions in a single measurement.
Spotfire cut the time in half by offering visual data filtering.
Spotfire offered two products: Spotfire pro (applicable to manufacturing firms, financial services companies and a wide range of other industries) and Plug-in pro (added value to a particular subset of customers, with more tailored forms of analysis)
The service
Alternate demands on departmental budgets
Convince firms to invest in data visualization.
First stage deals were $30,000 or less.
Quarterly payment plan has been introduced instead of an annual fee.
Direct competition: Diverse information visualization and analysis (DIVA) is a tool in the chemical database business by Oxford Molecular.
Indirect competition: Netgenics: Its synergy software integrated incompatible databases and analysis algorithms into a single formal for research in biotechnology and pharmacy.
Market size
pharmaceutical and biotechnology
Medical Diagnostic Laboratories, sold its data base product or 25000 seats
The market might be around 30000 seats
Spotfire felt that almost every Medical Diagnostic Laboratories (MDL) user was a potential customer for spotfire Pro and the MDL plug-in.
The best pharmaceutical and biotechnological companies employed about 1.2 million people at the end of 1997.
Spotfire estimated that 12% of these employees are R&D and that full adoption would imply one seat for every two R&D employees.
Should Spotfire be identified as a Swedish or a US company?
The development team is composed of swedish engineers and Sweden has a strong technical reputation.
The finance company did not want to finance Spotfire s $25,000 lease because their bank was Swedish.
Eventually, Spotfire was offered financing under unfavorable terms (they give them the money in stages and a very high interest rate).
Spotfire established a european headquarter and development center in Goteborg in Sweden and another US headquarter in Massachusetts.
Ahlberg and Gnatovitch had to coordinate development in Sweden and marketing in the US. by organizing meeting in both countries

In April 1996, Spotfire original funding of $300,000 in seed money from Innovation kapital (they invest in early stage and concentrated on information technology and biotechnology). That fall they invested an additional $350,000 against 46% of equity.
Carlstedt Research and technology provided $40,000 and technical support.
Spotfire started to operate and established credibility which made the first round of financing in 1997 easy.
The second round of financing set aside stock option (20% of the company's equity)
Atlas Venture financing
Atlas did due diligence by:
Speaking to customers to make sure that the product had big potential
Sought extensive personal references on each of the founders
Atlas insisted on 3 conditions:
Anti dilution clause: if spotfire did a follow up financing at a lower valuation, Atlas would be issued shares.
If no exit strategy had been carried out after 5 years, they would have the option to withdraw their money with interest.
If Spotfire was acquired at a valuation that gave Atlas less than a 3 times he return, they would get their investments returned before dividing the rest pro-rata.
Atlas would have been willing to do without the first and third clauses in exchange for a lower valuation ($2 instead of $2.27).
Moving forward- From start-up to strategic partner
Spotfire established itself as a strategic partner for its clients since it is a key element in their research process.
Spotfire sold small orders ranging from one to few dozen seats.
The management team knew that large scale adoption was key to viability and second round of financing.
Spotfire had 30 billion pounds in revenue from Unilver ( UK/Netherlands company) in exchange of a discount of %50 .
Spotfire became very well established and no entry discount were needed.
Spotfire pro went from a generic data visualization tool to a real solutions product by linking the general data mining capability with specific intelligence on tasks the user will want to use regularly.
Gnatovitch's goal was to sell Spotfire pro for an annual fee of $3000/seat.
For the plug ins customers, the annual fee would be between $25,000 and $50,000.
Share ownership and financing details
Sample of software companies and most recent VC financing
The proposed time of the second round of financing was in the second quarter of 1999.
The time goes along with the fact that Spotfire needed cash and with the strategic development of the firm.
Spotfire wanted to go big and go worldwide.
Gnatovish had to put a table with information on three publicly listed software firms.
Spotfire headcount projections
Valuation comparisons of publicly listed software firms
Moving forward- From start-up to strategic partner
Looking to the future
Ahlberg felt that Spotfire had given up too much equity in its seed round of financing.
To avoid this happening again, the firm needed to:
Expand its customer base
Convince some of its customers to adopt spotfire on a much larger scale
Spotfire needed to introduce new products (plug ins for biology) and continue to develop the existing product line
Spotfire needed also to develop its internal infrastructure and a formal feedback process to link development with marketing.
Spotfire needed also to make more key hires before the next financing round.
1. What is the nature of the opportunity for spotfire? What strategy should the company pursue over the next three to five years?
2. Spotfire expects to raise additional capital in the first half of 1999. How much capital is needed? What is the valuation of the company? Under what terms should Spotfire seek to raise capital?
3. Spotfire's development group and the rest of the firm work in geographically separated locations. Is this strategy sustainable? Why? Why not?
4. Where is Spotfire's home base location? What kind of activities (home-base-augmenting or home-base-exploiting) is Spotfire carrying out in the other location?
Alhberg and Gnatovitch had the ability to distinguish successful projects from those that turn out to be not so successful ones. They created spotfire in order to solve the data visualization problem of the companies, allowing firms to reduce the discovery time and earn time to market their product. They were the lead players of the new economic game since they used an advanced software technology. They decided to focus on the chemistry, biology and pharmacy because they generate a big profit.
Spotfire needs to adopt an expansion strategy over the next three to five years which means it needs to introduce new products (plug ins for biology) and continue to develop the existing product line. Spotfire needs also to develop its internal infrastructure and a formal feedback process to link development with marketing.
Spotfire expects to raise additional capital in the first half of 1999 in order to finance its expansion strategy and go worldwide.
The company's goals are to increase in breadth and depth of market penetration and strengthen its internal infrastructure.
In my opinion, the firm should raise between $10 million and $30 million of new equity capital in order to cover its expansion expenses.
The managers shouldnt sell shares at no lower valuation since the company projects to generate a profit of $4,410 million in 2000.
The second round of financing set aside stock options which would amount to 20% of the company's equity upon exercise.

Spotfire's work in Boston, USA and the rest of the firm work in Göteborg, Sweden. This strategy is sustainable.
Since internet was available, the team could use videoconferencing, intranets, and email in order to communicate.
Geographically dispersed teams can offer huge benefits efficiency, cost savings (the delopment team would cost $5000 in Sweden vs $8000 per month in US) if the team strong communication technologies.
Spotfire is a Swedish company that established a european headquarter and development center in Goteborg in Sweden and another US headquarter in Massachusetts.
Spotfire's had to identify itself as a US based company in order to raise capital.
Spotfire is a home-base-exploiting because it carried out their R&D activity in Sweden and established to support manufacturing facilities in the US.
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