Digital Everywhere

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Harvard Business School

9-298-099 Rev. January 8,1999

Digital Everywhere, Inc.

Jerome Buse stared at the paper in front of him. He had just finished projections for his startup company, Digital Everywhere, Inc. He intended to use the projections to raise money. He was certain that he would be able to convince others of the potential of his new high speed digital food technology. He was less certain, however, of what value he should place on the business. He considered the options in front of him.

He considered the projections to be reasonable projections, although he guessed that he only had a 30% chance of hitting those numbers. He estimated that with 30% probability, the cash flows would be half of those projected in this case. The company would probably be worthless with 40% probability. He wondered how he should take these probabilities into consideration.

In estimating cashflows, Jerome thought that he would only need about $1 million in cash to run the business. Anything above and beyond $1 million would be considered excess cash. Because the company was just getting off the ground, there was no working capital and no property, plant and equipment at the beginning of 1998. Any working capital and net PPE at the end of the year would be a net investment.

Jerome also thought about the future. He thought that after 2003 he could expect the company to grow at aroW1d 5% per year, although he wondered what a somewhat more modest growth rate of 2% would do to the expected value of the firm.

He knew that any venture capitalist would totally ignore a reas'onable guess of cash flows and therefore decided to only show the best case numbers (see Exhibit 1). The venture capitalist from I.M. Greedy Ventures had stated that they would require a 60% rate of return on their investment in Digital Everywhere. Jerome wondered whether he could estimate what the venture capitalist would think his company was worth.

Jerome...