Case - ChatChat - Practice Proposal Case Study

Sasha Belenko and Hayden Mendez are seeking $1 million in seed funding from Arrow Ventures for their messaging app ChatChat. Sasha came up with the idea for a simple messaging app without ads or fees while pursuing a master's degree. Hayden, Sasha's friend and roommate, saw potential in the idea and joined as co-founder after getting an MBA. They have spent a year developing ChatChat but are now running out of money from friends and family. They must convince Arrow Ventures to fund ChatChat so they can continue development and conduct a private beta test.

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Case - ChatChat - Practice Proposal Case Study

Uploaded by

Ishan Arora

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CHATCHAT

SUMMARY

Sasha Belenko and Hayden Mendez are trying to secure seed funding for their
start-up. Both have spent time living outside the United States and want an
easy way to stay in touch with their friends and family abroad. Sasha, who
recently earned a master’s degree in computer engineering, came up with the
idea of a simple messaging application (app), free of advertising and other
distractions, which users could just pay a small amount to download. Hayden,
Sasha’s roommate and good friend from their undergrad days at Marquette,
saw potential in the idea. After Hayden graduated with an MBA from the
Stanford GSB, the two spent the past year developing an app and writing a
business plan. They are calling their app “ChatChat.”

Unfortunately, Sasha and Hayden are running out of money. What they raised
from friends and family has supported them during the past year, including
hiring a part-time programmer to assist Sasha. The duo has been searching for
seed funding and is in talks with Arrow Ventures, which has expressed interest
and has asked them to send a proposal towards the funding amount, approx. $1
million. Since Sasha and Hayden have no other viable funding options at this
point, they must either convince Arrow Ventures to provide funding or
abandon ChatChat.

Challenge Task & Evaluation

Sasha Belenko and Hayden Mendez are sending the proposal to Casey Parker
and Quinn Nguyen of Arrow Ventures to secure a recommendation for seed
funding. Sasha and Hayden’s primary goals for this proposal are to:

 Confirm that Arrow Ventures recognizes the viability and potential of

their business proposal.
 Convince Arrow Ventures that they have the skills and ability to lead the start-
up.
 Address any concerns that Casey and Quinn might have regarding utilization of
funds and
timeline of the project.

Sasha Belenko: Software Engineer

Sasha was born in Ukraine and came to the United States when s/he was 11.
In high school s/he became a gamer, developing a passion for World of
Warcraft and an interest in computer programming. Sasha founded a computer
science club and began experimenting with Java programming language and
HTML (HyperText Markup Language, the standard markup language to create
web pages). S/he went on to attend Marquette University, earning a B.S. in
information technology. Before entering graduate school, Sasha spent a year
interning in the IT Management department of Porsche Consulting GmbH in
Stuttgart, Germany, and then came back to the U.S. to take a job as an
infrastructure engineer at Yahoo!. Sasha wanted to stay in touch with friends
and family outside the United States and was frustrated with the options—e-
mail felt cumbersome, Facebook and other social media included banner ads,
game promotions, and various other features that Sasha found distracting and
annoying. A bit disillusioned, Sasha left Yahoo! two years later to earn a
master’s degree in computer science at San Jose State University. During
her/his second year, Sasha realized that the infant Apple App Store was about
to incite an app developing frenzy. S/he came up with the idea of developing a
simple messaging app that people could just pay a few dollars for instead of
having to tolerate various advertisements. Sasha chatted about the idea to
her/his friend and roommate from undergrad years, Hayden Mendez, and
Hayden convinced Sasha that the messaging app was worth pursuing. Sasha
began developing what would become the basis for the ChatChat messaging
app as s/he finished up the master’s degree.

Hayden Mendez: MBA

Hayden attended a dual-language Spanish-English immersion program as a

child, graduating from high school with a California Seal of Biliteracy.
Wanting an experience far from home, s/he studied business economics and
accounting at Marquette University, earning a B.A. It was at Marquette that
Hayden met Sasha—the two were dorm roommates and became good friends.
Hayden spent her/his junior year abroad, studying in Spain and traveling
through much of Europe. After graduation, s/he worked at Ernst & Young in
finance for three years, traveling both domestically and internationally. From
there, Hayden entered the Stanford Graduate School of Business. During
Hayden’s second year, Sasha shared her/his observation that the nascent Apple
App Store was going to inspire a whole new app industry. Sasha explained
her/his gripes about the difficulties in easily staying in touch with people
internationally and described her/his idea for a messaging app. As the two
continued to chat over the next few months, Hayden became convinced that
Sasha was onto something. With Sasha’s software engineering experience and
Hayden’s business background, Hayden was confident that the two could turn
Sasha’s idea into a promising start-up.

Arrow Ventures:
The funder at Arrow, Casey loves the risk and reward associated with
transformational ideas. In the 1990s, Casey was frequently quoted in the
media on the emerging Internet 1.0 phenomenon, and in 2002 s/he was
recognized as a top analyst by Fortune Magazine and named a Wall Street All-
Star by the Wall Street Journal. She moved on to become a senior partner at
AVE Partners, investing in the mobile web, technology, and health care
spaces. Casey has also been an active angel investor, personally investing in
almost 40 companies during the past decade. S/he joined Arrow Ventures in
2005 to nurture he /his interest in seed stage funding and help entrepreneurs
with particularly transformational ideas build successful companies.
Quinn Nguyen possesses a passion for international business. Born in France,
he was subsequently educated in Israel and the United States. Holding a B.Sc.
in computer engineering from Technion Israel Institute of Technology, and a
M.Sc. and Ph.D. in computer engineering from Carnegie Mellon University,
s/he has published several technical papers and holds one U.S. patent. Quinn
has worked in large companies as well as start-ups. Prior to joining Arrow
Ventures in 2010, he was CEO of a digital video start-up (IPO in 2008) after
having served as the general manager of the European subsidiary of Compile
Inc., a leading American electronic design automation firm. Over the course of
her/his career, Quinn has held executive management, technical, and sales and
marketing positions. S/he has tremendous respect for entrepreneurs, whom
s/he sees as creative, brave, and constantly trying to beat the odds with their
relentless conviction.

COMPANY BACKGROUND

The Product

The co-founders envisioned a messaging app that would allow users to easily
communicate in real time with anyone around the world who had a capable
device. After paying a small amount to purchase the app, users would not be
subject to advertising and would not incur any additional charges. While the
concept was simple, executing the idea was not.

ChatChat needed to be able to synch with any phone number worldwide.

BlackBerry’s BBM was the only free texting service in the market, but it only
worked among BlackBerries. While Google’s G-Talk and Skype were other
options, both required additional logins. Because Sasha insisted that the app be
easy to use, s/he was designing ChatChat so that the mobile phone number was
the login—once the phone was turned on, the user would be logged in. Thus,
the first major hurdle to overcome was creating an app that would work with
any phone number and across any operating system.

Sasha had the basics of ChatChat’s back-end programmed. International

prefixes and variations from one country to another were myriad—Sasha had
recently begun sorting through regional differences but that would take
months. Needing an iPhone developer to code the front-end, Sasha found a
part-time programmer, Skyler Greer, through a friend from Carnegie Mellon.
The hope was to have a private beta within the next three to four months to
start collecting feedback on the app.

The co-founders and VC team had already come to agreement on ChatChat’s

product vision and business plan (see Exhibit 1 for highlights) at a previous
meeting. The one area where Casey and Quinn were cautious was around the
lack of advertising. Sasha had explained her/his extreme annoyance with
advertising and how that in large part had inspired the ChatChat concept. After
additional assessment, the VCs have asked them to highlight factors that
created a sufficient competitive advantage to overcome lost advertising
revenue.
Exhibit 1

ChatChat Business Plan Highlights

 Product: easy to use messaging app that works internationally and is

compatible across all phones and platforms.

 Strategy:
o Volume
o High penetration/adoption

 Revenue Model:
o small upfront cost to purchase the app (estimate $4.99 - $9.99)
o no additional usage charges or advertising

 Market Potential
YR 1 YR 2 YR 3 YR 4 YR 5

Global 300 500 725 1 billion 1.2 billion

smartphone million million million
Shipments

 Highest areas of growth are emerging markets such as

Russia, India, Indonesia and Latin America.
 Growth in smartphone shipments begins to level off after YR 5
 Alternative to purchasing texting plans from phone service providers

 Competitive Advantages

 First mover advantage

 Ease of use
 Works across phones/platforms
 International communication
 Lack of advertising and distractions
 One upfront cost vs. ongoing charges
 potential to attract customers away from texting plans offered by phone
service providers