Servervault: "Reliable, Secure, and Wicked Fast"

Abstract

In July 2000, two founders of this new web-hosting company are contemplating raising $5 million to $15 million in a second-round financing from venture capitalists. The task for the student is to forecast the firm's cash receipts and disbursements in an effort to determine the firm's “burn rate” (i.e., the rate of cash consumption and how long the financing will sustain the firm). The new economy setting of this case permits the instructor to extend well-known financial skills and concepts to an industry that attracts high student interest.

Excerpt

UVA-F-1304

Rev. Feb. 11, 2014

SERVERVAULT: “RELIABLE, SECURE, AND WICKED FAST”

In early July 2000, Patrick Sweeney and Jim Zinn, respectively the president/CEO and CFO of ServerVault, prepared for a series of meetings with private investors and venture capital firms from which they hoped to raise the capital to grow their firm. ServerVault had been founded eight months before and had demonstrated the efficacy of its business model. Now Sweeney and Zinn sought to implement an ambitious plan of expansion. They knew that prospective investors would want an estimate of the firm's rate of cash consumption, known as the “burn rate.” Therefore, they sought to have a forecast of the next two and a half years for the firm's statement of cash flows (SOCF) prepared on a monthly basis in order to reflect their plan of expansion. From this they hoped to identify the timing and amount of funds to be sought in the firm's capital-raising program.

Hosting Industry Overview

Companies in the hosting industry offered businesses and individuals the infrastructure to operate Internet-based applications, ranging from simple websites to sites featuring complex commercial transactions. Websites were streamed into the Internet from powerful desktop-size computers, called “servers.” Hosting companies offered physical space for the servers and supporting services. Web-hosting customers, like the customers of other outsourcing services, used the service to avoid the attention and expense of maintaining hardware or providing personnel to make Internet applications work. Hosting offered investors an “infrastructure play” in the Internet world. They offered an analogy to describe the role of hosting: “We are the arms merchant to the Internet. We don't care who's fighting, just as long as they continue to fight.” Because infrastructure players supplied the capacity to compete on the fast-growing Internet and generated cash flows from their inception, the capital market rewarded those firms with high valuation multiples. According to one analyst, web-hosting companies faced a bright future as “they ride two transforming tailwinds…growth of the Internet and the trend toward business outsourcing.”

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Keywords: corporate financial strategy, entrepreneurship, venture capital, financial forecasting, e-commerce