Monthly Archives: October 2016

In COMM101, we have discussed the benefits of raising large amounts of capital through IPO’s (Initial Public Offering). The main reason behind companies going public is the ability to expand their market reach by using their newly acquired capital. I figured this would be the same for every type of business no matter the size. I believed that the more capital you raise, the better off you will be. It wasn’t until I read “Why Raising Too Much Money Can Harm Your Startup” written by Mark Suster, that I realized this wasn’t always the case. I found Mark’s blog post very intriguing as it gave me new insight to a problem that I never thought existed in the realm of entrepreneurship. It turns out, as Mark explains, that raising as much money as you can all at once may not be beneficial in the long-run for several reasons:

No matter how much you raise, it will be spent within 12-18 months: It is human nature; when you have money, you spend it. Suster explains that if you have more money, you will hire more people and spend more liberally on areas such as marketing and legal work (patents, trademarks) before you have enough market feedback to justify the spending.

Valuation is determined by how much you raise: As a general guideline, investors want to own somewhere between 20-25% in order to invest in a startup. The temptation for most entrepreneurs is to set their valuation as high as possible. What sounds better? A $20 million pre-money valuation or a $8 million pre-money valuation? Although it may seem like the answer is a $20 million pre-money valuation, this isn’t always the case. For startups, it is significantly easier to raise $2-3 million dollars than $5 million.

Over-raising can be corrosive: Once all of the initial capital raised has been depleted, startups will need to look for another round of investment. Although it may have felt great it to raise $5 million on a $20 million valuation, raising the next investment of $8-10 million at a $40-50 million valuation will be substantially more difficult. When investing in startups, investors need to imagine at least a 10 times return on their investment. It is much easier for investors to imagine a $100-200 million outcome than a $400-500 million outcome.

Limited capital forces creativity: When given limited resources, humans must make the hard choices. It forces tough decisions to be made on who will be hired, how hard to negotiate for office space, and how to keep salaries reasonable in a world of inflation. If a seemingly unlimited amount of capital is infused into a startup, tough decisions may not be taken as seriously.

Image Source

Sources:

Mark Suster, “Why Raising Too Much Money Can Harm Your Startup“, Both Sides of the Table, June.30th/2016

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Samsung was previously known as one of the top smartphone providers in the world. Currently, Samsung is all over the news due to their newest smartphone, the Galaxy Note7. Unfortunately, this was not the publicity Samsung was expecting when they released the phone in August. As stated in Mike Fenato’s Blog, Samsung recently issued a worldwide recall of “2.5 million Galaxy Note7 smartphones whose faulty batteries sparked a number of fires”. Mike’s blog post was very intriguing and convinced me to follow up with the most recent developments of the recall. It turns out, the Samsung situation has progressed even further.

To compensate consumers who purchased the faulty Galaxy Note7, Samsung offered them new Note7’s with batteries from a different supplier. This solution failed. Even the smartphones distributed due to the recall had reports of exploding batteries. On October 11th, with no further solutions in sight, Samsung decided to stop all production, and selling, of the Galaxy Note 7. Samsung’s website states that they will provide an “[e]xchange towards a Galaxy S7 or Galaxy S7 edge device, [or] a refund for the Note7 device and Note7 specific accessories”. Brian X. Chen and Choe Sang-Hun of The New York Times see this decision as “highly unusual in the technology industry [because] companies tend to keep trying to improve a product rather than pull it altogether”. Based on a Reuters calculation, the termination of the Note7 will “equate to nearly $17 billion in lost revenue”.

In the smartphone industry, year after year, new phones are delivered to the market with incremental upgrades. Recently, the common points of differentiation to the ‘latest and greatest’ smartphones include improved resolution, larger screen size, and the quality of the camera. Smartphone producers tend to implement these upgrades into their phones slowly. They do not put all of their best technology into their newest phones all at once. They give their new phones small upgrades each year to ensure they never run out of new technology to add. If Samsung wants to gain back the trust, and interest, of their customers, small upgrades will no longer cut it. The next smartphone they produce must go above and beyond the current trends. Their next smartphone must be revolutionary.

Samsung’s recently recalled Galaxy Note7. Image Source

Sources:

Mike Fenato, “Samsung under Fire after Reports of Products “Exploding”“, UBC Blogs, Oct.2nd/2016

Brian X. Chen and Choe Sang-Hun, “Why Samsung Abandoned Its Galaxy Note 7 Flagship Phone“, The New York Times, Oct.11th/2016

Samsung, “Samsung Canada Announces Return Process for Galaxy Note7 Devices“, Oct.12th/2016

Se Young Lee, “Note 7 fiasco could burn a $17 billion hole in Samsung accounts“, Reuters, Oct.11th/2016

Word Count: 370

Performance Sports Group, or PSG, is the parent company to several of the largest sports equipment manufacturers. At the focal point of PSG stands Bauer, the largest and most renowned hockey equipment manufacturer in the world. Bauer has been known in the hockey community as the premium equipment provider for players ranging from minor hockey to the NHL. However, currently, Bauer is known for being the root cause of the lawsuit against PSG for misleading their shareholders.

Bauer generates a majority of their revenue by selling their equipment to individual retailers in the sports industry. The allegations of the lawsuit revolve around the inflation of Bauer’s sales. Bauer began to flood the market by implementing the business practice of ‘channel stuffing’. The witness in TSN’s article stated that, “[e]ven though the number of amateur hockey players in the U.S. remained flat or decreased, PSG put more [product] into the market than the market could handle. PSG threatened [retailers] with the loss of their discounts if they did not increase the size of their orders each year.” On top of the threats, Bauer also began to falsify their revenue by moving future sales into present financial quarters. Retailers currently give Bauer post-dated cheques as a down payment for their future orders in years to come. Although this income cannot be obtained until the date stated on the cheque, Bauer was adding it to their 2015 fiscal revenue. As seen in PSG’s 2015 Annual Report, they reported a total fiscal 2015 revenue of $675.2 million and an adjusted net income of $61.4 million (51.3% and 64.6% increase respectively, compared to fiscal 2014).

On August 15th 2016, as seen on Yahoo Finance, the PSG stock began to plummet as 14.6 million shares were traded and resulted in a 46.8% drop in stock price. This was a direct result of PSG publicly announcing their annual audited financial statements would not be filed by the deadline and would begin conducting an internal investigation. This is where the lawsuit began. Seeing PSG generate an extremely large increase in revenue and adjusted net income, makes an investor believe the company is expanding in all the right ways and entices an investor to buy their shares. In reality, this increase in revenue and income may not be truthful. PSG shareholders believe, if their allegations are true, they bought shares under false pretence and should be compensated.

Image Source

Sources:

Rick Westhead, “Owner of Bauer hockey accused of fraud and trying to ‘deceive the market“, TSN, Aug.17th/2016

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