STUDY BLUE PART B FUNDRAISING DECISIONS

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1 CASE: E373-B DATE: 04/06/11 STUDY BLUE PART B FUNDRAISING DECISIONS It was June 2010 and Becky Splitt, CEO of StudyBlue, had just met with a group of angel investors out of Boston to discuss funding for the company s Series A round. Splitt had recently been introduced to the group by a mentor who had worked with Brandon Reyes, one of the lead investors, on a previous deal. Reyes had run his own private equity firm for 20 years which invested both domestically and internationally across a range of industries. Though education was a new space for him, Reyes had asked all the right questions, quickly honed in on StudyBlue s primary challenges and demonstrated a genuine enthusiasm for the company s future prospects. He had subsequently arranged for a follow-up meeting between Splitt and several other partners with whom he had previously invested so that they could engage in a more in-depth discussion about potentially financing the company. After a productive meeting, Splitt left with the promise of a term sheet. Though she had previously been pursuing financing through the venture capital (VC) community, Splitt was impressed by the Boston investors respective track records and insights into StudyBlue s strategic direction. Reyes was also one of the few potential investors with whom she d met who flew to Madison to visit the company, perhaps a small detail but one that stuck out in her mind. Partnering with this group would provide a significant advantage in that they would not impose as restrictive a set of terms on StudyBlue as the VCs surely would. Even with less imposing terms, however, StudyBlue would have to be particularly careful about structuring the deal such that a Series B round would still prove appealing to VCs. Specifically, if StudyBlue wanted to raise $5 million in VC dollars in the future, its valuation would need to remain far below $10 million in this next round in order to provide the potential future VCs with Sara Rosenthal prepared this case under the supervision of Lecturer John Morgridge and Professor Charles A. Holloway as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 2011 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of the Stanford Graduate School of Business. Every effort has been made to respect copyright and to contact copyright holders as appropriate. If you are a copyright holder and have concerns about any material appearing in this case study, please contact the Case Writing Office at cwo@gsb.stanford.edu.

2 StudyBlue E373B p. 2 the ownership share they expected. Splitt explained, We realized that we couldn t go much beyond our current $7 million valuation, or it would be harder for many VCs to justify an investment. 1 One the one hand, StudyBlue would face fewer financial constraints while buying time to build the business and increase the value before considering institutional investors. However, they would also have to raise less money and therefore face a shorter runway in order to leave the option open for future VC financing. Prior to her conversations with the Boston angel investors, Splitt had made numerous trips to the West Coast to meet with various Sand Hill Road VC firms. She had gained significant traction with a few and felt confident that she would be able to secure financing with at least one in the next several weeks. The arguments for going with VC financing were clear: they provided savvy advisors, experienced board seats, and help with acquiring new talent. Additionally, StudyBlue would be able to raise more money from a VC, providing the company more time to execute their strategy before hitting the streets to fundraise again. Finally, establishing a relationship with a VC in StudyBlue s earlier stages would not only give the investors an opportunity to shape the board and bring on senior level management from their network, but would also allow StudyBlue to leverage the VC s connections for hiring in what was then a fiercely competitive market. Splitt knew that whichever decision she made, it was going to have to happen soon and would have a major impact on the future of the company. Relocation An additional complicating factor in her discussions with the various VC firms in particular was the question of whether to relocate StudyBlue s Madison headquarters. The large majority of VCs indicated to Splitt that StudyBlue would be a much more desirable investment target as a west coast-based company. One of the VC firms with which StudyBlue had gained the most traction had even made financing all but dependent upon the company s relocation. StudyBlue s board was divided as to whether or not to relocate the company and Splitt, too, was torn as to what to do. She could certainly see the benefits of moving the company West. Being closer to Silicon Valley s venture community would doubtless make StudyBlue a more attractive target in this and future rounds of funding. Additionally, there was an indisputably deeper pool of talent from which to draw in California, or even Washington for that matter. However, Splitt had moved back to Madison from Washington to raise her family in the town where she grew up and she knew that many of her employees had strong ties to the area as well. Discussions in the office about a possible relocation had certainly had an impact on employee morale, generating anxiety that would not be resolved until a final decision one which was inextricably linked to their choice of financing was made. COMPETITIVE LANDSCAPE During the short time period between 2009 and 2010 when StudyBlue was evaluating both their distribution strategy and financing options, the competitive landscape within the space changed dramatically. Chegg, a leading textbook rental company, had recently raised $112 million in 1 Interview with Becky Splitt, February 23, All subsequent quotations are from the interview unless otherwise noted.

3 StudyBlue E373B p. 3 venture funding to fuel its expansion. One of Chegg s lead investors had recently set up a meeting with Splitt to discuss investing in StudyBlue. This same investor was also a board member for Cramster, one of StudyBlue s closest competitors and self-described provider of online homework help for high school and college students. 2 Though no formal announcement had yet been made, most in the industry, including Splitt, believed that Chegg s acquisition of Cramster was imminent. Other players such as Course Hero, an online note sharing site targeted mainly at the college market, continued to gain traction in the market and received endorsement of their business model in mid-2010 with venture capital funding for their Series B round. Quizlet, another emerging market leader, was one of the few independently-operated players in the space. In its five-year history, Quizlet had received favorable and widespread media attention, due both to its ease of use as well as the novelty of its founding by a 15-year old high school student. The Bay Area-based company provided electronic flashcards covering topics ranging from language and history to math and standardized tests. They primarily targeted high school students and recently touted their one millionth user, though they were making inroads into the college market as well. On the flip side, several players which had once previously held strong standing in the space had actually receded from StudyBlue s line of sight throughout 2010, either because of a shift in their direction or because of declining performance. Smart.fm had refocused their product on the language learning category and moved operations to Japan where they were well-received by the student market but as a result, no longer directly competed in StudyBlue s category. Two other previously prominent competitors, SparkNotes and Koofers, both providers of online study guides, had lost significant traction throughout Though both companies were still in existence, they appeared to have been lost in the noise amidst the broad array of products offered by Barnes and Noble, SparkNotes corporate parent, and AOL, Koofers primary investor. Two recent entrants to the online education market included Inkling and Kno, both of which were gaining significant traction with their respective products. The companies competed in the online textbook space along with another competitor, Flat World Knowledge. Whereas Flat World Knowledge actually published free and premium content for online textbooks, Inkling and Kno utilized tablet formats to digitize textbook content with interactive tools such as searchable text, note writing capabilities and highlighted, researchable key terms. Inkling s product was designed specifically for the ipad while Kno offered a dual-screen tablet on the Linux operation system. Inkling had received funding from Sequoia Capital, a leading Silicon Valley VC firm and Kno was backed by the VC firm started by Marc Andreeson, co-founder of Netscape and serial entrepreneur. Amidst the rapidly changing landscape, the market had matured enough by the end of 2010 that the winners were beginning to rise to the top and likewise, the weaker players were getting weeded out. It was in this context that StudyBlue evaluated their position. With so many wellfunded players quickly gaining a foothold, Splitt knew that the next 12 months would be the most critical window yet for the company to execute upon their newly developed strategy and establish what they hoped would be a leadership position within the space. 2 Cramster, (March 15, 2011).

4 StudyBlue E373B p. 4 Exhibit 1 Study Blue User Growth ( ) 350, , , , , ,000 50,000 - Fall Fall Fall Fall 2010

5 StudyBlue E373B p. 5 Questions 1. Would you pursue financing from the Boston investors or the venture capital community? Provide reasons for your decision. 2. If you were Becky, how would you handle the issue of relocation with both your employees and potential investors? 3. How, if at all, does the competitive landscape as presented in Part B change your answers from Part A regarding StudyBlue s strategic direction?