Walnut Ventures

Harvard Business School

9-899-062

Rev. December 7, 1998

Walnut Venture Associates (A): RBS Group

Investment Memorandum

Ralph Wagner pulled his file on the RBS Group, a young company that developed and sold

accounting software specifically targeted to software companies. Wagner was a private investor—an

“angel”—and a member of an informal group of other investors known as Walnut Venture

Associates. (See Exhibit 1 for background information on Walnut) RBS was seeking to raise $2

million in equity capital to fund its growth. Wagner had agreed to take the lead role in evaluating

RBS as an investment opportunity for Walnut. While Wagner would spearhead the process, each

individual would make his own decision about whether to invest in the company.

It was December 26, 1997 and Bob O’Connor, RBS’s founder and CEO, had presented to the

Walnut group one week ago. The group had been impressed with O’Connor, with RBS’s business

focus, and with the fact that the company had a product, sales and even earnings.

Based on this positive first impression, the group had decided to take the next step and begin

a more in-depth investigation of the company and its prospects. Half a dozen or so “Walnuters” had

indicated an interest in possibly investing, and it was up to Wagner to come up with a due diligence

agenda for these individuals. He pulled out RBS’s plan (See Exhibit 2) and began to sort through the

issues the group should investigate during this phase, as well as an agenda for the meeting where

they would get together, share their efforts, and decide whether to proceed.

Background - Walnut

Angel investing has long been a popular source of financing for entrepreneurial ventures.

Researchers estimated for instance, that nearly $30 billion of angel financing was raised in 1996,

compared to approximately $10 billion or so of “professional” venture capital. A recent survey of the

Inc. 500 (see: “Bootstrap Finance: the Art of Start-ups” by Amar Bhidé,...