Enterpreneurial Finance - Hotmail

Hotmail

 

1. Does Sabeer Bhatia have a good idea for a business? Why or why not?

 

Sabeer Bhatia’s initial idea for a business was of JavaSoft, which was database software. During that time where there were major players like Microsoft, Oracle, Sybase and Netscape in the database business, the idea does not seems to be a big idea or a new idea. They were trying to build something, which already existed. No VC’s were interested much in their initial ideas.

 

Their idea of electronic mail (email) was an excellent idea. It was an innovative idea and not such product was already in market. They were not competing were anyone with this idea. Also they already had JavaSoft in place that they could use for this new idea.

 

From a technical point of view there were many advantages compared to the existing mailing system at that time. Some of the advantages are listed below.

 

1. Hotmail is completely web-based unlike the existing mailing system that requires client software to be installed at the user’s end.
2. Can be accesses from anywhere from the world and from any system connected to Internet.
3. It’s targeted at the individual and creates a personal identity. New features can be added to give added advantages to users.
4. Easily integrated with existing e-mail accounts.

 

The venture capitalists were interested in this idea more than their JavaSoft product. Moreover, Sabeer’s plan was to grow fast and globally. He was not thinking for capturing the local market then expanding. This decision helped them grow fast and globally and avoided their competitors to catch up with them. Sabeer knew that as soon as this idea is open to the market, several other players would copy it. So they had to move fast. As soon as Hotmail became popular, there were so several players that entered into this business like Yahoo, Rediff and now Google.

2.  What are the Major Risk facing Hotmail? Be Specific.

 

• The Revenue model of Hotmail was dependent on advertisers. The World Wide Web was not popular at that time and not many companies use to advertise using WWW. The whole business model was in jeopardy, as it was not generating enough revenue. They needed money to expand their business and had to go back to VC.

 

• The VC’s were asking too much for their funding.

 

• It was hard to evaluate the value of Hotmail. The existing VC’s won’t provide more funding unless they know the value of the company. One option was to look for new VC’s and see the market value of their company.

 

3. Within the context of this case, what are the advantages of dealing with a venture capitalist? The disadvantages.

 

Advantages

• The VC does the initial funding for the business and in return they ask of certain percentage ownership of the company. VC take the risk of funding the business, if the business is not successful, their money is lost.
• The VC will review’s the business plan and with their experience, they reject those business plans which does not appeal them. If the business plan is attractive, they allow the new business to use their existing resources. That helps new business to cut cost.
•  

 

Disadvantages

·        The VC asks for certain % of ownership in the new organization. That leaves the employee and founder of the company with little percentage of the new company.

·        The VC’s becomes the board of director of the company and any decision or business plan has to be approved by him. The ownership does not lie in the hand of the founders. The founders are not free to implement their ideas.

·        The VC’s are inpatients and are only interested in revenues. If revenue is not generated soon then either they stop funding or force them founders to take an easy path for revenue. In case of Hotmail, spasm mails were being forced to generate revenues.

 

4. Use the Venture Opportunity Screener (VOS) from Chapter 2 (Page 44-45) to come up with an “opportunity score” for Hotmail. Based on your analysis, is this a good opportunity? Attach your VOS to your case.

 

 

Factor Category	Potential Attractiveness
	High	Average	Low
Industry/Market
Market Size Potential	3
Venture Growth Rate	3
Market Share (Yrs 3 )	3
Entry Barriers			1
Pricing/Profitability
Gross Margins			1
After-tax-margins			1
Asset intensity
Return on Asset			1
Financial/Harvest
Cash Flow breakeven			1
Rates of return			1
IPO Potential		2
Founder’s Control	3
Management Team
Experience/Expertise			1
Functional Area		2
Flexibility/Adaptability		2
Entrepreneurial focus		2
Total point by ranking	12	8	7
Overall Total Point (OTP)			26
Average score (OTP/16)			1.625