Punch Tab Memo

The document discusses the differences between angel investors and venture capital firms as potential investors for PunchTab. Angel investors typically invest smaller amounts, require less equity, and provide hands-on mentoring. Venture capital firms invest larger amounts from funds, require more equity and board seats, but provide strategic guidance and industry connections to help companies scale rapidly.

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Punch Tab Memo

Uploaded by

Bernardo Santos

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PunchTab, Inc Memo

2220- Entrepreneurial Finance & Venture Capital

Professor Francisco Rodrigues Queiró
S2| Spring 2024

TB: Bernardo Santos- 58978

Bálint Bretz 60434

TC: Diogo Alcobia- 47081

TC: Rita Antunes- 47180

2220- Entrepreneurial Finance & Venture Capital

Q1.

PunchTab presents a compelling investment opportunity within the burgeoning loyalty

marketing sector, led by a seasoned entrepreneur, Kumaran, who boasts a successful track
record with YouSendIt. The company's strategic roadmap, as evidenced by the outlined
milestones, underscores a clear vision for growth and market penetration. Specifically,
PunchTab aims to achieve an attractive user experience and user acquisition, with membership
targets approaching 100,000. This focus on user engagement and acquisition aligns with
industry best practices and highlights PunchTab's commitment to building a strong user base.

Furthermore, PunchTab's innovative approach to loyalty marketing, particularly its emphasis on

a lightweight redemption system initially centered around offer-based rewards, demonstrates
an understanding of market needs and a willingness to adapt to evolving consumer
preferences. This agility and responsiveness to market dynamics position PunchTab as a
potential disruptor in the loyalty space.

The company's potential for leveraging data analytics further enhances its investment appeal.
By harnessing data insights, PunchTab aims to unlock new opportunities for personalized
marketing strategies and enhanced customer engagement. This strategic focus on data-driven
decision-making aligns with industry trends and underscores PunchTab's commitment to
delivering value to both clients and end-users. Moreover, PunchTab has garnered interest from
a diverse range of investors, including angel investors and venture capital firms. This investor
interest reflects confidence in PunchTab's business model, market potential, and the leadership
capabilities of Kumaran. Additionally, the collaborative approach adopted by Kumaran, seeking
input from industry experts like Sturiale and engaging with potential investors through
platforms like AngelList, demonstrates a proactive and resourceful approach to fundraising.

Overall, PunchTab represents an attractive investment opportunity characterized by a

compelling market proposition, a proven leadership team, and a clear roadmap for growth.
However, the ultimate decision to invest will depend on various factors, including the
alignment of investor expectations, the terms of the investment, and the company's ability to
execute on its strategic objectives.

Q2.

Convertible notes and traditional "priced" financing represent two distinct approaches to
raising capital for early-stage startups, each with its own advantages and considerations.

Convertible notes are a form of debt that can convert into equity in the company at a later
date, typically upon the occurrence of a specified event such as a future financing round or
milestone achievement. This structure provides flexibility for both the company and investors,
as it defers the valuation discussion to a later stage when more information about the
company's performance and market potential may be available. Additionally, convertible notes
often include features such as discounts or valuation caps to incentivize early investors and
mitigate their risk of dilution.

On the other hand, traditional "priced" financing involves determining a specific valuation for
the company at the time of the investment. This valuation is negotiated between the company
and investors based on various factors such as market opportunity, traction, team expertise,
and competitive landscape. Unlike convertible notes, priced rounds provide clarity upfront
2220- Entrepreneurial Finance & Venture Capital

regarding the ownership stake and dilution impact for both the company and investors.
However, they may require more extensive due diligence and negotiation, which can prolong
the fundraising process and increase legal costs.

For Kumaran, the choice between convertible notes and traditional priced financing depends
on several factors, including investor preferences, the stage of the company, and the desired
terms of the investment. Convertible notes may be preferred for their simplicity, speed, and
investor-friendly features, making them attractive for early-stage startups seeking to quickly
secure capital from angel investors. However, Kumaran should carefully consider the
implications of convertible notes, such as potential dilution and conversion mechanics, to
ensure they align with PunchTab's long-term growth strategy. Alternatively, traditional priced
financing offers more certainty and transparency regarding the company's valuation and
ownership structure but may involve more complex negotiations and documentation. Kumaran
should weigh the trade-offs between simplicity and clarity, considering factors such as investor
relationships, fundraising timeline, and future fundraising needs.

Ultimately, Kumaran's decision should prioritize alignment with investors, favorable terms for
PunchTab, and the company's strategic objectives for growth and scalability.

Q3. Suppose Punchtab raises a seed round of $750,000 using a convertible note, with a 20%
discount and a $6 million cap. They then raise $4 million in a series A round, and the series A
investor takes a 20% stake. What equity stake will the seed round investor get upon
conversion? You can assume there were 1 million shares outstanding before the seed round.

6 M/1M shares = 6$/per share maximum price seed investors will take

Post money valuation = 20 M

1 000 000 + 750 000/ 0.8X$ + 4 000 000$/X$ = 20 000 000 / $X  X$ = 15.0625$

Series A price per share = 15.0625$

Seed Round price per share = 15.0625$ * 0.8 = 12.05$

Seed Round therefore chooses Cap price = 6$ receiving 750 000$/6$ = 125 000 shares

Series A nº of shares = (1 000 000 – 125 000)/0.8 * 0.2 = 218 750 shares

Seed Round investor equity = 125 000 / 1 000 000 = 12.5%

Series A investor Equity = 218 750 / 1 000 000 = 20%

Founders Equity = (125 000 + 218 750) / 1 000 000 = 67.5%

Q4.
2220- Entrepreneurial Finance & Venture Capital

An important consideration that startups must have when raising capital is the type of
investors they want to reach.
Angel investors tend to invest fewer amounts of money (usually their own money),
requiring less equity, and early in the fundraising process. Many of these investors
operate as individuals and tend to provide more time working with and mentoring
business owners, having a closer contact.
On the other hand, venture capitals, are part of venture capital firms (rather than
individuals). The money they invest is not their own, since usually they have investors
that give money to the venture capital firm that then allocate these funds into start-ups,
leading to higher amounts invested. Frequently, they prefer to enter businesses in a later
stage, after some funding rounds have taken place. In return, they ask for higher amounts
of equity and insist on getting a seat on the company board of directors.
VC firms bring structured support, including strategic guidance, recruitment support,
and extensive networks of industry contacts, which can be pivotal for scaling. They also
have the capacity to lead or participate in follow-on funding rounds, providing startups
with the capital necessary for rapid growth.
While angel investors can offer a gentler introduction to external financing, VC firms
deliver the firepower and resources necessary for aggressive expansion. The choice
between angel investors and VCs hinges on PunchTab's specific needs, strategic
objectives, and the unique value each investor type brings beyond capital.
All in all, given the investment size and the stage business, approaching venture capital
firms would be a better approach.