Zimmerman, Dante

Camboia, Jacinda
Fin 441
Endeca Assignment

Endeca

During the early 2000s, the United States, as well as other countries, was seeing an

investment boom with many Information Technology (IT) companies. During the late 20th

century, technology was still being developed, thus not much information was out there in terms

of what IT was. Endeca’s primary feature is taking information across multiple areas within a

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business, which could have a vast amount of unorganized data. It would allow the business to

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access that information much faster. Regardless of Endecas impressive product, it was how it

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obtained the funding and partnerships with venture capitalists that proved to show how
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remarkable Endeca as a company would be.
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Endeca formed in 1999, in this time it was just one of 800 companies that were looking
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for outside funding. Shortly after the formation of Endeca, it was able to raise $1.8 million just

shortly after its formation. However in their series B fundraising, Endeca was able to raise that
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number to $8.1 million. Although Endeca was able to raise money and show it had customers
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paying for their product, eventually more money would be needed. Endeca was not in a

desperate situation, but rather devising a plan on how to secure more funding was of immediate
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concern. Two possible funding ideas surfaced at about the same time with different ideologies
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attached. One would be lower priced but focused on the customers, whereas the other one

would offer higher stock price and included a new lead investor but would exclude the customer

(Harvard Case Study).

As stated above Steve Papa, who is the CEO of Endeca Technologies is searching for

financing of his company. Furthermore this time Steve Papa is looking for a third round of

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 financing. He was given a few different evaluations of his company. In the beginning, it could be

argued that Endeca could be relatively easy to evaluate for pre money valuations. There were

multiple firms that could be used a gauge for Endecas pre money valuations. In the Harvard

Business Review case study, it is noted that Endeca valuation changed significantly during

2001. Starting at $90 million, it fell to $60 million and then to $30 million. Since the correct

valuation of Endeca was $90 million, While Endeca was trying to get their third round of

financing, it had an incorrect valuation. This could prove to be difficult when trying to get

investors to come in.

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The two bids that are still under consideration by Papa come from a combined Venrock

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and BVP, and then the second bid is proposed by Ampersand. The valuation by Venrock and
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BVP was less than that of Ampersand ($.985 a share to $1.25 a share). Even though Venrock

and BVP have a lower valuation, they may be a safer option for Endeca Technologies based on
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their history with Endeca. Venrock and BVP dealt with Steve and Endeca in both series A and
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series B, where as Ampersand had not worked with Endeca and Steve prior to the series C

financing. Typically when venture capital firms are giving valuations over time for a company the
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valuation continues to rise. However, that is not the case for Endeca Technologies. When the
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VC firms were financing Endeca it was a bit harder than typical valuations because of the

timing; the early 2000’s dot com bubble caused issues for technology firms.
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During the third round of financing for Endeca, Steve Papa invoked a couple of

strategies. Papa talked about the listing of their pre money valuation, which he stated was “in

the hundreds of millions of dollars” (Harvard Business Review). A pre money valuation of this

size for Endeca was not far off. Due to the fact Endeca had current customers and Papa’s plan

during this round was to secure more customers as quickly as he could. The pre money

valuation provided an investors an insight to how much Endecas shares were worth. However,

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 his pre money valuation ended up only being $80 million. Papa later points out that since he’s

seeking a $3-$4 million commitment from investors, it would be best if he met with strategic

investors who could potentially use his product, thus becoming customers of Endeca. On top

of securing more customers and product, Papa ensured he had a management team that would

help him in the Series C financing. The thought behind this was a in order to have a strong

company, you need to build a good management team. When Steve Papa originally sought

investors, he started with a company who had worked with him. This is a great beginning

strategy because there was familiarity. The company had worked with Papa, thus knowing his

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work ethic and him as a person. However, what finally triggered all the investors was when

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Endeca had an outsider led term sheet.

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The venture capital firms Venrock/BVP and Ampersand supplied Endeca Technologies

with term sheets containing the details of their offers. The main discrepancy between the two
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term sheets that we noticed was the price per share difference. Ampersand gave a higher price
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per share. This was done to look more appealing to Endeca because of the previous financing

that Endeca had done with Venrock/BVP. Another main difference that Ampersand had in it’s
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term sheet was that their “Dividends shall accrue on each share of Series C Preferred Stock
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when and as declared by the Company’s Board of Directors, and shall be payable before the

payment of any dividends with respect to any other Series of Preferred or Common Stock and in
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the event of a liquidation, dissolution or winding up of the Company” (Harvard Case Study).
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Ampersand would also offer liquidation preference to their series C stock, which was absent

from the Venrock/BVP term sheet. One advantages of choosing Venrock/BVP over Ampersand

is the fact that all of Endecas financing would rank the same, rather than using a specific series

for payout.

After looking at the different valuations, the impact of the two different anti-dilution

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 provisions show the following: With Venrock and BVP the term sheet includes an anti-dilution

clause that states it would follow the average weighted protection. This is favorable for Endeca

because when a venture capitalist firm uses the average weighted protection it dilutes

everyone's shares equally which in Endecas case would be the best case scenario besides no

dilution at all. Ampersand on the other hand has an anti-dilution clause that states it will use the

full-ratchet method. The full-ratchet would protect Ampersand from any price erosion until it

could be converted from preferred stock to common stock. For Endeca, this would mean that in

the event their stock price decreased, it would bear the full weight of that responsibility. Though

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a full ratchet anti-dilution method is lucrative to investors in the way it protects themselves from

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potential price decreases, the risk associated with this method is mostly on Endecas end. It

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would also limit possible ownership of common stock and involve the company bearing all of the
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price risk. In the excel document provided, if we look at the different weighted averages and full

ratchet protection between the venture capitalist firms, Endeca would retain the most ownership
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in a weight average protection from Ampersand.

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We have read the academic honesty expectations for this assignment and followed them to the best of our
ability.

X_________________ __________
Jacinda Camboia Date

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 X_________________ ___________
Dante Zimmerman Date

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