Beautiful Legs by Post

1. Beautiful Legs by Post

2. Class vote • How many of you would invest in this venture? • Would invest • Wouldn’t invest

3. Career choices Measure New venture Job Salary now Small $60-70k Salary 5 years Depends on success $100-150k Long-term rewards Capital gain Stock options Work hours 7 days a week 5 days a week Experience ? ?

4. Stakeholders and Goals • Who are the stakeholders in this case and what are their goals? • Elizabeth • Dickon • Supplier of tights • Department stores • Other upscale stores • Consumers

5. Opportunity • What is the opportunity? • Why did Elizabeth choose tights as the first product? • Who in this class wore tights regularly as part of a dress code (official or unofficial)?

6. Opportunity Describe the opportunity that exists for BLBP in terms of the 3 M’s • #1 Market demand • Market share & growth potential = 20%+, 20% annual growth, and durable? • Is the customer reachable? • Customer payback < 1 year • #2 Market size and structure • Emerging and/or fragmented • Proprietary barriers to entry • #3 Margin analysis helps differentiate an opportunity from an idea • Low cost provider? (40% gross margin) • Low capital requirement versus the comp.? • Break-even in 1-2 years? • Value added increase of overall P/E?

7. Entrepreneurs • Is Elizabeth the right entrepreneur to pursue this opportunity? • Is Dickon the right entrepreneur to pursue this opportunity? • Are Elizabeth and Dickon as a team the right entrepreneurs to pursue this opportunity?

8. Resources • How much money does the team need in the next 30 days? • 110,000 Pounds • Is this the right amount? • How urgent is their need for capital?

9. Resources • Would a venture capitalist be interested in this project? • Strong skills, none in mail order = not an A team • Venture will not get big enough to interest VC • Industry segment not one that attracts seed-stage VC • Unlikely to acquire money in 30 days

10. Resources • Will a bank loan any money to this venture? • Company has no assets to secure debt • Bank will require personal guarantees from Elizabeth and Dickon, and even then probably would not be eager to make this loan

11. Resources • Would a strategic partner invest in Beautiful Legs by Post? • Beautiful Legs by Post has no track record • In this type of industry, strategic partners invest in companies with proven track records. In the rare event that they do provide seed-stage capital, it is to a founder with a track record of success in the industry • It will take several months to attract such interest even if it were possible

12. Evaluating business plans • Important skills because it makes you more critical of your own business plans • What would you look at? • Would you view the business plan in any specific order?

13. Evaluating business plans • Order in which external reviewers read a business plan: • Resumes/CVs • Executive Summary • Opportunity • Entrepreneurs • Resources

14. Evaluating business plans • Do my financials matter? • You must have financials - demonstrates your perspective of the business model • However, investors will most likely want the financials reworked to address their concerns • Investors tell the entrepreneurs how much money is required

15. Evaluating business plans • Let’s take a look at the Beautiful Legs by Post business plan • Is this a good plan? • What aspects of this plan are particularly strong? • What if anything is missing?

16. Evaluating business plans • What is the entry strategy for Beautiful Legs by Post? • Does this strategy make sense? • Compare this strategy to the entry strategy for Fax International.

17. Financial Highlights • 40% Gross Margins • Ł195,811EBIT YR 3 • Exit @7x Earnings • ROI for Investors of 60% (Ł80,000 for 20% equity + Ł30,000 note)

18. What are the Critical Assumptions? • Response rate (1.5%) • Average order (4 pairs/Ł30) • Customer retention rate • Friend of a friend rate

19. Sensitivity Analysis

20. Sensitivity Analysis: Basis

21. Hit Rate -25%

22. Hit Rate +25%

23. Order Size -25%

24. Order Size +25%

25. Sensitivity Analysis Results

26. Implications of Sensitivity Analysis • Results are extremely sensitive to response rate, order size, and retention rate • 25% drop in any factor creates disastrous results • What does this mean for Elizabeth and Dickon?

27. 1. Beautiful Legs by Post 2.2 Directors' Compensation and Share of Ownership During the three moth test phase both directors are forgoing all compensation. On completion of the first round of financing the directors will each be paid a basic salary of £25,000 per annum with no benefits-in-kind. This is significantly lower than the market level which INSEAD graduates command. Until the first round of financing, each director will own 50% of Beautiful Legs by post, having each made an equity investment of £5,000. As a potential investor is there anything which might be a red flag in this passage? __________________________________________________________________ __________________________________________________________________

28. 2. Beautiful Legs by Post 1.6 Competitive Advantage We will have the advantage of being the first mover. We will be the first to locate the buyers of high quality tights and will be able to keep them by offering an efficient and reliable service through a Monthly Order Program. For a new entrant, since many potential customers will be our customers, their "hit-rates" will be reduced. This means that the cost of acquiring clients becomes prohibitive. New entrants cannot gain market share through price reductions since quality is perceived to be reflected in price. Identify three things should concern an investor in this passage (there are more than three)?

29. “1.9 Exit Strategy We seek to have a saleable business by the end of the third year. The potential purchaser is likely to be a trade buyer, either from the hosiery or mail-order business. Hosiery companies are currently fighting for market share and this would give them another distribution channel closer to the customer. A mail-order house would be interested in our client base since it will contain names of active purchasers of a quality item. These names could be used to launch new products.” What would concern you about this statement as a potential investor?

30. “1.10 Proposed Offering The offering will comprise of Ordinary Salaries (1 pound par value) and short-term debenture stock. Under the business plan's assumptions, there will be one round of financing. We are asking outside investors to purchase 20% of the company for 80,000 pounds, and to loan 30,000 pounds in the form of debenture stock that will be repayable in six months.” What, if anything, seems wrong with this offer from the perspective of potential investors? Keep in mind that half the class said they would invest.

31. 6. Beautiful Legs; Direct Marketing Letter (see also section 4.2 if necessary, p 12) We have chosen a well-known French hosiery company founded in 1829 called Dore Dore to be our supplier. They have a number of advantages compared to the others that we considered. They are willing to supply marketing material, such as samples and discounted product. - They are able to supply goods in small lot sizes. Production runs with special packaging require a minimum order of 2,000 units as opposed to the industry average of 24,000 units. - They have an excellent reputation for quality, especially in France - They are willing to supply us on a weekly basis. - Lead times are short. They can deliver within 5 working days of receiving an order, and the transportation time is less than 24 hours - They wish to enter the British fine gauge hosiery market. They are established as high quality suppliers of men's and children's socks - We have negotiated credit terms of 60 days, with a discount of 2.75% for payment within 30 days. - They supply socks to other mail-order companies and thus have experience of our industry. Thinking strategically (ie Porter), what concerns, if any, would you have with their choice of supplier and why? (be specific with the framework language)