(1) What form of network communication does Skype use to connect users (not just communications protocol)? What makes this different than other discount Voice over IP (VoIP) services like Vonage? What are the pros and cons?
(2) What were Skype’s revenues for 2004 (the only year of “actual” financial performance available)? What were eBay’s projections for 2005 and 2006? What rate of growth does this represent? Does this seem achievable? Do you believe that this growth will present problems as the base of “paying” customers grows? What kind of additional resources will be required to support this growth?
(3) What was the initial investment made in Skype by Draper Fisher Jurvetson, Bessemer, and others? What was the sales price for the company (you can ignore the earn-out portion)? Assume that the company had an initial pre-money valuation of $20 million. What was the return to investors? How much did non-investor insiders get from the transaction? How could eBay justify this valuation? Please use specific details, numbers, and analysis to approximate a valuation from eBay’s standpoint.
Use this simple formula to determine valuation and ownership. The pre-money valuation is the value of the company before new investment money is put into it. The size of the round (round of financing) is the amount of venture capital put into the deal in the current transaction. The post-money valuation is the pre-money valuation plus the size of the round. Once the round is complete then the company must issue enough new stock to distribute equity appropriately based on the round.
For example, let’s say that company A gets a term sheet from venture firm B for $2 million. Company A has an established business that is still growing rapidly. Based on this rate of growth, the term sheet proposes a pre-money valuation of $2 million. Company A has 1 million shares of common stock issued or granted as options. The combination of the pre-money valuation of $2 million, and the total raise of $2 million, gives the company a post-money valuation of $4 million. Since the venture firm put in $2 million they will own 50% of Company A after the round closes ($2 million/$4 million = 50%). Company A will then need to issue 1 million shares of stock to venture firm B to bring ownership into alignment.