Traction Ventures Part A

Abstract:
John Beck, CEO of LightSpeed Computers, is
seeking $10 million in Venture Capital
financing to get his company off the ground
after its initial seed funding. Presented in
three parts, John faces a number of
challengarios, starting with the request from a
prestigious Silicon Valley Vc to hold off on
closing a financing deal for four weeks to give
him time to conduct due diligence. John later
receives term sheet from other, smaller VCs
and must decide whether to move forward or
stand by his original commitment. Later, he
must choose between two attractive but
economically different deals.

It seems the case presents several business

and ethical dilemmas and intellectual debate.
Business decision Vs. Ethical decision:
Business decision issues:
Does it make sense to make special
exceptions for the right investor?
How much information to provide
investors and how to best sequence the
process of raising funds?
Ethical Decision issues:
The CEO must choose between risking the
loss of a funding commitment and
reneging his promise to strategic
investor to provide him sufficient time to
conduct due diligence.

1. Should John tell Traction which

other VCs are looking at the deal?

 Pro:
Create a sense of a hot deal and
inevitability
Maybe Traction can provide
some good leads
Con:
They all talk to each other
This helps them to syndicate
What is the upside of doing
this?
What if you get a turn down
will it contaminate Tractions
opinion?

2. If he tells Traction all of the VCs

who are looking, will they
syndicate? Can he prevent it?

I have seen it both ways, i.e.

depending upon the syndicating VCs
perception of risk-reward of the deal
and how hungry are they and if it
makes business sense for them.
Seldom it makes a prestige or ego
issue.
3. The next Phase discusses the
strategy behind staging VC firms:
a) Go to top tier;
b) Go all at once

c) Start at the bottom

d) Go a few at a time

Decision tree
+ Financed company
+employees
Traction
Invests

Investor
Kept word ; Community
Reputation
-Burned bridges with Bancorp

Wait

Traction does
not invest

-unable to finance
company
-Employees
- Investors
0/+Kept word

Commitment to
Traction

+/- Community reputation

-

Burned bridges w
Bancorp

Dont wait

+Financed Company

Bancorp Syndicate
+employees
+Investors
-

Broke word
Community reputation
Burned bridges with
Traction

Go to top tier:
o Pluses They are the best for the long
term
o Minuses If they turn you down you
may be tainted
-many of them will play if they lead.
Go all at once:
o Pluses no sequencing problem

- No turn downs to distract others

o Minuses May look shopped
Start at the Bottom:
o Pluses Can do a few throw-away
without a lot of exposure
- Easier to get access to lower tier
firms
o Minuses What if they offer a term
sheet could you have done
better?
Go a few at a time:

o Pluses Can practice the pitch

and may be get some quite
turn-downs without impairing
the deal.
o Minuses Might take longer
- May run into sequencing
problems, a la Traction

Should John make the commitment to

wait?

 Pro:

o Traction wont do any work

without commitment
o No money raised so far
o Uncertain when it will close
- If goes long enough, then no
issue

o Prestigious firm
- Help in many ways
- Big brand name
Con
o Will you really wait
o Do you want them to drive
the deal price
o What if you wait and they
do not do the deal
- Will others get nervous

VOTE:
Agree to wait for traction:
Proceed without traction:

Part B

I. Do you delay Bancorp to allow

Traction to complete their due
diligence?

Pros:
o Meet your commitment to
traction (do not want to
alienate them in the future)
o Show other investor your
integrity

o Protect your personal

reputation
Cons:
o It is a sweet deal (Good
valuation and you can take
$14 million if you want and
you probably want)
o What if 9/11 happens
o What if another investor pulls
out
o The deal has a time bomb
What if you wait for Traction
and they do not do the deal?
o Will others get nervous and
thus the deal could be
contaminated
o Should not you just take the
money off the table without
delay?

II. Review John Becks other

commitments:

30 Employee
First round investors to consider
Fiduciary responsibility as CEO
For all parties, you are the Steward
of this company
Not taking the money may be fatal
How do you explain this?

 Did you make a mistake in making the

first commitment and if so, how do
you resolve it?
Vote:
Close the Bancorp Ventures deal
Wait for weeks for Traction