MINI CASE: LEARNINGBEAM.COM CORPORATION Learningbeam.com offers e-commerce service for childrens edutainment products and services.

The word edutainment is used to describe software that combines educational and entertainment components. Valuable product information and detailed editorial comments are combined with a wide selection of products for purchase to help families make their kids edutainment decisions. A team of leading educators and journalists provide editorial comments on the products sold by the firm. Learningbeam targets highly educated, convenience oriented, and value conscience families with children under the age of 12, estimated to be about 35 percent of Internet users. The firms warehouse-distribution model results in higher net margins, as well as greater selection and convenience for customers, when compared to traditional retailers. Gross profit margins are expected to average about 30 percent each year. Because of relatively high marketing expenditures aimed at gaining market share, the firm is expected to suffer net losses for two years. Marketing and other operating expenses are estimated to be $3 million in 2006 and $5 million in 2007, respectively. However, during the third year operating cash flow breakeven should be reached. Net profit margins are expected to average 10 percent per year beginning in year 3. Investment in bricks and mortar is largely in the form of warehouse facilities and a computer system to handle orders and facilitate the distribution of inventories. After considering the investment in inventories, the asset intensity or turnover is expected to average about two times per year. Learningbeam estimates that venture investors should earn about a 40 percent average annual compound rate of return and sees an opportunity for a possible initial public offering in about six years. If industry consolidation occurs, a merger might occur even sooner. The management team is headed by Srikant Kapoor who serves as President of Learningbeam.com and who personally controls about 35 percent of the ownership of the firm. Mr. Kapoor has more than twelve years experience in high-tech industries including previous positions with US West and Microsoft. He holds a B.S. degree in electrical engineering from the Indian Institute of Technology and an MBA from the Wharton School. Sean Davidson, Director of Technology has more than ten years of experience in software development and integration. Walter Vu has almost ten years of experience in sales and business development in the software industry including positions at Claris and Maxis. Mitch Feldman, Director of Marketing, was responsible for six years for the marketing communications function and the Internet operations of a large software company. Management strives for continual improvement in ease of user interface, personalized services, and amount of information supplied to customers. The total market for children entertainment is estimated to be $35 billion annually. Toys account for about $20 billion in annual spending. Summer camps are estimated to generate $6 billion annually. This is followed by kids videos and video games at $4 billion each. Kids software sales currently generates about $1 billion per year in revenues and industry sales are expected to grow at a 30 percent annual rate over the next several years. Learningbeam has made the following five-year revenue projections: Year Revenues ($M) 2006 $1.0 2007 $9.6 2008 2009 2010 $30.1 $67.8 $121.4

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A. Project industry sales for kids software through the year 2010. 2006 Market for Children Entertainment: Toys $20 billion Summer camps 6 billion Kids videos/games 4 billion Kids software sales 1 billion Miscellaneous 4 billion Total Market $35 billion Kids Software Sales Growing at 30% annually: Year 2007 Sales = Year 2006 Sales x 1.30; and so forth. Industry Year Forecasted Sales 2006 $1.00 billion 2007 1.30 billion 2008 1.69 billion 2009 2.20 billion 2010 2.86 billion B. Calculate the year-to-year annual sales growth rates for Learningbeam and estimate the compound growth rate over the 2006 through 2010 time period. Growth Rate = [(Next Year Sales Current Year Sales)/Current Year Sales] x 100 Learningbeam Year Forecasted Sales Sales Growth Rate 2006 $1.00 million 2007 9.60 million 860% 2008 30.10 million 214% 2009 67.80 million 125% 2010 121.40 million 79% Arithmetic average = (860% + 214% + 125% + 79%)/4 = 320% Compound average (using a financial calculator and point-to-point estimate between 2002 and 2006) = 232% [Enter: present value = -1.00; future value = 121.40; number of periods = 4; then solve for %i] Geometric average = [(1 + 860) x (1 + 214) x (1 + 125) x (1 + 79)]1/4 = 208% C. Estimate Learningbeams expected market share in each year based on the above data. Note: use data for the kids software industry from (A) and for Learningbeam from (B). Percent of Year Industry Sales 2006 0.1%

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2007 2008 2009 2010 D.

0.7% 1.8% 3.1% 4.2%

Estimate the firms net income (loss) in each of the five years. Year 2006 2007 2008 2009 2010 Net Income (Loss) $-2.70 million -2.12 million 3.01 million 6.78 million 12.14 million

Year 2006: Gross profit is $0.30 million ($1.0 million sales x .30 margin) less marketing expenses of $3 million produces a loss of $2.70 million Year 2007: Gross profit is $2.88 million ($9.6 million x .30 margin) less marketing expenses of $5 million produces a loss of $2.12 million Years 2008-2010: Net profit is 10% of that years forecasted sales E. Estimate the firms return on assets beginning when the net or after-tax income is expected to be positive. Millions of Dollars: Return Net Income / Forecasted Assets = on Assets $-2.70 $0.50 -540.0% -2.12 4.80 -44.0% 3.01 15.05 20.0% 6.78 33.90 20.0% 12.14 60.70 20.0%

Year 2006 2007 2008 2009 2010

Note: Since the asset intensity or turnover is 2.00, total assets will be one-half of forecasted sales. Alternatively, return on assets = net profit margin (10.0%) times asset turnover (2.0 times) = 20.0% F. Score Learningbeams venture investor attractiveness in terms of the Industry/Market Factor Category using the VOS Indicator guide and criteria set out in Figures 2.6 and 2.7. If you believe there are insufficient data, indicate that decision with an N/A. Industry/Market Market Size Potential: kids software sales = $1 billion Venture Growth Rate: greater than 30% annually Market Share (Year 3): 1.8% of industry sales Entry Barriers: possible timing barriers Score High High Low Average

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G.

Score Learningbeams venture investor attractiveness in terms of pricing/profitability factors. Follow the instructions in Part F. Pricing/Profitability Gross Margins: 30% margins are estimated After-Tax Margins: 10% margins are estimated Asset Intensity: 2.0 asset turnovers are estimated Return on Assets: 20% returns are estimated Score Average Average Average Average

H.

Score Learningbeams venture investor attractiveness in terms of financial/harvest factors. Follow the instructions in Part F. Financial/Harvest Cash Flow Breakeven: estimated to occur in Year 3 Rates of Return: 20% investor returns are estimated IPO Potential: estimated in Year 6 Founders Control: 35% ownership by founder Score Average Average Low Average

I.

Score Learningbeams venture investor attractiveness in terms of management team factors. Follow the instructions in Part F. Management Team Experience/Expertise: very good in software/tech industries Functional Areas: good except for finance Flexibility/Adaptability: experience suggests flexibility Entrepreneurial Focus: startup risks accepted by founder/team Score High Average Average Average

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