The Knot Essay
According to Sahlman, the success of entrepreneurial ventures, such as The Knot, is dependent on four critical success factors, namely the people, the opportunity, the deal and the context. Each of these factors is dynamic and the entrepreneur must constantly reevaluate and adjust the four factors to create value. People The category people include the key players of the entrepreneurial venture. Within this category, the strengths and weaknesses and the experience of the people involved is critical. The entrepreneur has to determine if something is missing in the team, thus if people should be added or replaced.
The Knot’s management team consists of four ex New York University’s Film School students. All of them are experienced entrepreneurs. First, Liu and Roney are co-founders of the CD-ROM development company RunTime Inc. Pervious, Liu was an experienced manager and Roney spent six years as creative director and editor. Second, Wolfson and Fassino are founders of the Digital Media Division for Margeotes Fertitta + Partners. Before, Wolfson was founder of a creative production company and Fassino has experience in the advertising industry.
The two different companies successfully collaborated at the Sotheby’s project. The four partners emphasize the potential of their collective experience and know-how, including management, advertising, the creative industry and production. They found Element Studios in 1995 to capitalize their abilities. After the acquisition of Bridal Search, Russ and Becky Casenhiser were added to the management team. Both of them were successful entrepreneurs as well. Russ developed the industry’s largest, searchable database and Becky procured and maintained relationships with all the manufacturers.
Especially their experience in retail was valuable when the business model developed further. After all, the team of The Knot consists of capable people with experience in multiple disciplines who complement each other. However, when entering the gift registry business, in which inventory management and delivery arrangements would be crucial, there is a need for people with experience in logistics. Experienced people could be recruited as employees or entrepreneurs in this industry could be added to the management team. The opportunity
The characteristics of the opportunity are critical for the success of the venture as well as for the way the entrepreneur should respond to a certain opportunity. Characteristics of the opportunity include the nature and the possibility to replicate by competitors. The task of the entrepreneur is to determine if the opportunity should be exploited immediately and to set eventually milestones to assess the success of the project. Element was founded with the aim to realize a successful media business, however, there was no focus on a certain opportunity before the company was founded.
The management team started looking for an opportunity and was attracted by the high advertising revenue in the wedding industry. They found an opportunity in the lack of a fresh competitor and the possibility to differentiate by building an online business foundation. Besides the possibility to differentiate, the online business foundation required a lower investment. Thus, the initial business model consisted of creating an online medium that attracts visitors and generates advertising revenue. The Knot’s team formulated their initial goals as ‘becoming a full-service online wedding resource and a recognizable brand in the industry’.
The initial investment is relatively low compared to the potential revenue with an advertising market of $168 million and a limited number of competitors. Since the idea is easy to copy by potential competitors, it was important to exploit the idea immediately to gain first mover advantage. The initial business model was complemented in stages. With the launch of The Knot’s own web site in May 1997, they entered the retail market via The Knot Gift Shop. Their first venture in retail started with the sale of cameras, but other products were quickly added.
In June 2007, after the acquisition of Bridal Search, The Knot could offer the only comprehensive online database of wedding dresses to its customers. As a result, advertising revenue increased. After successful development of The Knot’s current business activities, Liu focused on the bridal registry business. This business has enormous potential since it represents half of all wedding-related revenue. The process of the development of a comprehensive list of gifts by soon-to-be-weds that had to be purchased by wedding guests was ready for an online solution.
Moreover, characteristics of the registry business encompassed the opportunity to efficiently organize delivery arrangements with manufacturers. In turn, this would allow The Knot to maintain more control over its brand, pricing and merchandising. Since the listing of products and services did not require inventory to be held, this would enable effective management of The Knot’s balance sheet. Although the model for gift registry is already in a later stage of development, it is important to exploit immediately since competitors have had capital investments already. Deals
The opportunity has to be structured by different deals. These deals include considerations such as incentives and contingencies and the choice between financing instruments and financers. The entrepreneur should aim to motivate all players according to their input and create stakeholders that increase the probability of success. By joining the Greenhouse program of American Online (AOL), The Knot aimed to garner a substantial proportion of the online wedding consumer market. Besides initial investments, AOL could be seen as a strategic partner with a developing online consumer base.
AOL invested in return for warrants up to 45% of The Knot’s equity, 20% of the revenue from advertising on the AOL property and a percentage of advertising revenue from The Knot’s own web site. In addition, Bridal Search was acquired for 10. 000 shares of common stock, while they had the opportunity to earn up to an additional 32. 857 shares. This potential bonus could be referred to as an extra motivation to perform. The context Contextual issues can change the nature of the opportunity. Issues include current and potential competitors, the government and economic conditions and trends.
The entrepreneur should attempt to forecast contextual movements and benefit from these changes. The competitive context of The Knot before the exploitation of the opportunity was characterized by three magazines, with an average of 40 years of experience in the industry and strong relationships with advertiser. There was a change that the deeply entrenched magazines would renounce moving to the internet since they feared cannibalization of their existing businesses. This changed the nature of the opportunity in a way that it was an extra motivation to launch an online business.
The Knot’s performance To reach their goals, The Knot put effort to optimize their services and build brand awareness. First, the provision of value-added services to users, such as information about travelling, wedding planning and fashion, resulted in development of a strong user community. Further, from the early beginning, The Knot targeted potential partners to build awareness of the brand, resulting in The Knot’s Registry Partner Program with nationwide key players. The first offline brand building effort was implemented in August 2007 by signing a three-book deal with Bantam Doubleday.
In addition, they agreed to co-produce a television program entitled Wedding for the Real World to promote online services and books. The usefulness of performance metrics significantly differs for startups in comparison with established companies. Although startups are diverse, they share some common characteristics that affect the use of financial metrics. To illustrate, revenues are small or non-existing and the establishment of a business generally result in significant operating losses. Therefore, financial metrics such as the income statement, balance sheet, and the statement of cash flows provide little usable information.
However, the information in these financial metrics regarding predicted years could be used to calculated performance measures, such as return on investment (ROI) and return on assets (ROA). Instead, to gauge the performance of a startup company like The Knot’s, other financial and non-financial metrics are used. First, it is important to measure the ability of the company to generate revenue at an early stage. The Knot managed to generate significant revenue at an early stage. After their initial appearance on AOL, The Knot generated over $ 25. 000 of advertising revenue.
Later, after the acquisition of Bridal Search, three deals representing $ 750. 000 in advertising revenue were signed. Second, the period that a company can survive without raising additional capital is an useful measure for startups. The ‘burn rate’ is referred to as the money spend by a company each month. The number of months that a company has to raise additional capital is calculated by dividing the amount of cash reserves by the burn rate. Since The Knot only has enough money to coffer its operation for three months by November 1997, the need to raise capital is very urgent.
This can be explained by their initial focus on gaining market share instead of becoming profitable. This strategy is particularly common for ‘dot-com’ companies. Besides financial metrics, non-financial metrics are important to measure the performance of startups. Non-financial metrics for e-commerce companies include for instance retained customers. However, for the wedding industry, this metrics are not applicable since customers are not expected to return after their first number of product and service purchases. Other measures that are applicable to The Knot are web metrics such as total page views and total unique visitors.
Concerning this measures, The Knot performed above expectance with an increase in unique visitors of their AOL page from 65. 000 to 260. 000 in seven months. In addition, after launching their own Web site, they realized 2. 7 million page views. To conclude, The Knot has managed to gain attention at an early stage from potential customers, this resulted in advertising income. The company has a relatively high burn rate as compared with their current liabilities; this leads to an urgent need for additional capital investors since they can coffer their operating expenses for just three months.
The need for additional funding As predicted by the life-cycle of a VC fund, which predicts focus on investment in the first four to five years, The Knot needs further funding in their current phase. First, there is a need for cash to invest in the development of The Knot brand and build out the technological infrastructure to capitalize Knot’s current momentum in the race for scale economies. On a more practical level, capital is needed to fund the payroll and pay for day-to-day operating expenses. Second, The Knot needs funding to develop the gift registry business.
The need for quick funding rose due to developments on the competitive front. The Knot’s current business activities were targeted by competition form online businesses that had recently launched web sites. Furthermore, Internet Gift Registries, which would be a competitor of The Knot after entering the gift registry business, had recently received funding from a private investor. Financial advisors agreed that The Knot is an attractive investment and recommended The Knot’s management team to raise as much capital as possible.
After all, the management team and its financial advisors agreed that The Knot would seek $10 million in exchange for Series B Convertible Preferred Stock. This proceeds will be used to develop its registry service and to accelerate marketing and promotion of its online services. Valuation of the company In order to give a fair estimate of the value of The Knot, a combination of both the NPV method and the Market approach method is used. The use of the NPV method is possible because this is not a completely new company and it has a track record to evaluate.
Also, in the business plan The Knot presented, they give extensive predictions for future performance and cash flows. The NPV method alone would not be enough since these numbers are still only a prediction. Even though these predictions were made by an external company, helping to make them more reliable and independent than when The Knot had made them, they are still not hard numbers. Combining the results of the NPV with a comprehensive Market analysis, in which both market potential will be measured and comparable companies, the multiples, will be analyzed, will give an accurate estimate of the value of The Knot.
Using only the market approach would also not suffice since the relatively new nature of the business (registry online) makes it hard to find other companies to effectively compare with The Knot. The asset valuation approach is not used because, given the nature of internet companies, there would be little tangible assets to value. Since intangible assets are a lot harder to value this would not give an accurate value for The Knot (2). The multiplication method is not used because The Knot is currently still not at break-even, which makes it near impossible to calculate.
Also, since the prediction show a very sharp estimated increase in revenues after the capital injection, the multiplication method could be very far off the true value of the firm and ergo not be a reliable method to determine the value (2). To conclude, the average between the NPV method and the market approach will give the most reliable value estimate for The Knot. Potential investors The Knot is looking for an investment of $10 million to develop brand image and develop their registry business.
However, the urgent need for investment due to the forecasted ‘fume’ in January 1998 needs to be taken into account. This leads to disqualification of the strategic partnership option because The Knot would be in a very week place at the negotiation table because of time pressure. Besides this, a partner for a new business venture would probably not be hard to find, but finding a partner who is willing to pay for the operational cost for the other activities of The Knot as well, would seem much more unlikely.
Finally, forming partnership takes time and time is something The Knot does not have. Choosing between angel investors and VC’s comes down to the nature of these investment entities. Angel investors are usually less risk averse but they tend to focus on invest in new start-ups and their investments are relatively lower compared to a VC (1). A VC usually invests in a later point of the start up and invests larger sums of money (1). Looking at these characteristics of both these entities, it seems clear that going for a VC would be the best option.
If the valuation of The Knot comes out favorably, it would cover the more risk averse nature of the VC and justify a sizable investment of 10 million. There are drawbacks of using a VC, namely they most likely will want to exercise a lot of control over The Knot’s business, more so than angel investors. However, engagement of the VC can have a positive affect on the development of capabilities as well. Looking at the time constraints and the amount of needed cash this seems unavoidable. Therefore, capital investment by a VC would be the best option to meet the needs on The Knot.