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Case | HBS Case Collection | October 2013 (Revised August 2016)

NOWaccount

by Ramana Nanda, William A. Sahlman and Lauren Barley

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Abstract

It was September 2013, and NOWaccount Network Corporation (NOW®) co-founders John Hayes and Lara Hodgson were putting the final touches on the presentation deck for their annual shareholders' meeting. Along with co-founder Stacey Abrams, the pair had designed NOW's business model three years ago, and the company was at a critical juncture. NOW offered a program—called NOWaccount—that provided working capital to small businesses by converting their trade receivables almost immediately into cash. Founded in December 2010, Atlanta, Georgia-based NOW was serving clients in nine states. With 2013 year-to-date revenue of roughly $100,000, NOW was financed with $2.5 million of founder, and friends and family equity.

NOW's wholly-owned, not-for-profit special purpose entity (SPE), Trade Credit Guaranty Corporation (TCGC), purchased approved receivables, funding 90% of the invoice face values by electronic transfers into clients' bank accounts. As of September 2013, TCGC had purchased more than $13 million of small business trade receivables from more than 40 clients. Once TCGC reached a scale of approximately $150 million of funds in use for receivable purchases, the co-founders planned to tap into the securitization market for capital by issuing asset-backed securities (ABS), collateralized by a pool of receivables, much like the credit card industry. ABS would provide TCGC ongoing capital at a lower cost.

The question the co-founders confronted was whether they should get to the $150 million securitization threshold by piecing together smaller pools of capital from credit unions and possibly smaller banks (a slower approach but one that did not involve dilution because it was all debt finance), or by accepting larger chunks of capital from a major global bank and a private equity firm, getting them much closer to the threshold but at the cost of significant dilution (35%) as these financiers were also looking for a combination of equity and warrants in NOW. As they prepared to discuss their options at the shareholders' meeting, Hayes and Hodgson considered each option's trade-offs in timing, cost, control, and execution risk.

Keywords: finance; entrepreneurial finance; entrepreneurship; Finance; Entrepreneurship;

Language: English Format: Print 21 pages EducatorsPurchase

Citation:

Nanda, Ramana, William A. Sahlman, and Lauren Barley. "NOWaccount." Harvard Business School Case 814-048, October 2013. (Revised August 2016.)

Related Work

  1. Case | HBS Case Collection | October 2013 (Revised August 2016)

    NOWaccount

    Ramana Nanda, William A. Sahlman and Lauren Barley

    It was September 2013, and NOWaccount Network Corporation (NOW®) co-founders John Hayes and Lara Hodgson were putting the final touches on the presentation deck for their annual shareholders' meeting. Along with co-founder Stacey Abrams, the pair had designed NOW's business model three years ago, and the company was at a critical juncture. NOW offered a program—called NOWaccount—that provided working capital to small businesses by converting their trade receivables almost immediately into cash. Founded in December 2010, Atlanta, Georgia-based NOW was serving clients in nine states. With 2013 year-to-date revenue of roughly $100,000, NOW was financed with $2.5 million of founder, and friends and family equity.

    NOW's wholly-owned, not-for-profit special purpose entity (SPE), Trade Credit Guaranty Corporation (TCGC), purchased approved receivables, funding 90% of the invoice face values by electronic transfers into clients' bank accounts. As of September 2013, TCGC had purchased more than $13 million of small business trade receivables from more than 40 clients. Once TCGC reached a scale of approximately $150 million of funds in use for receivable purchases, the co-founders planned to tap into the securitization market for capital by issuing asset-backed securities (ABS), collateralized by a pool of receivables, much like the credit card industry. ABS would provide TCGC ongoing capital at a lower cost.

    The question the co-founders confronted was whether they should get to the $150 million securitization threshold by piecing together smaller pools of capital from credit unions and possibly smaller banks (a slower approach but one that did not involve dilution because it was all debt finance), or by accepting larger chunks of capital from a major global bank and a private equity firm, getting them much closer to the threshold but at the cost of significant dilution (35%) as these financiers were also looking for a combination of equity and warrants in NOW. As they prepared to discuss their options at the shareholders' meeting, Hayes and Hodgson considered each option's trade-offs in timing, cost, control, and execution risk.

    Keywords: finance; entrepreneurial finance; entrepreneurship; Finance; Entrepreneurship;

    Citation:

    Nanda, Ramana, William A. Sahlman, and Lauren Barley. "NOWaccount." Harvard Business School Case 814-048, October 2013. (Revised August 2016.)  View Details
    CiteView DetailsEducatorsPurchase Related

About the Authors

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Ramana Nanda
Sarofim-Rock Professor of Business Administration
Entrepreneurial Management

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William A. Sahlman
Baker Foundation Professor, Dimitri V. D'Arbeloff - MBA Class of 1955 Professor of Business Administration, Emeritus
Entrepreneurial Management

View Profile »
View Publications »

 

More from these Authors

  • Case | HBS Case Collection | September 2016 (Revised April 2018)

    Western Technology Investment

    Ramana Nanda, William A. Sahlman, Nicole Keller, Ramana Nanda, William A. Sahlman and Nicole Keller

    Based in Portola Valley, California, Western Technology Investment (WTI) specialized in a hybrid form of debt and equity financing for early-stage companies. Like traditional venture capital and private equity firms, WTI raised funds from institutional investors and evaluated deals. However, instead of making initial investments in the form of equity, WTI focused primarily on lending money to start-ups, charging them interest and receiving warrants that could later be converted to stock in the case of a liquidity event. Most initial investments—usually in the range of $3–$5 million—were made in tandem with or following a company’s early rounds of venture capital equity financing. In addition, like more traditional venture capital investors, WTI hoped to participate in follow-on debt and equity investments in its successful portfolio companies.

    Keywords: entrepreneurial finance; venture capital; entrepreneurship; finance; Equity; Finance; Venture Capital; Entrepreneurship; Financing and Loans; California;

    Citation:

    Nanda, Ramana, William A. Sahlman, and Nicole Keller. "Western Technology Investment." Harvard Business School Case 817-019, September 2016. (Revised April 2018.)  View Details
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  • Case | HBS Case Collection | September 2016 (Revised April 2018)

    Western Technology Investment

    Ramana Nanda, William A. Sahlman, Nicole Keller, Ramana Nanda, William A. Sahlman and Nicole Keller

    Based in Portola Valley, California, Western Technology Investment (WTI) specialized in a hybrid form of debt and equity financing for early-stage companies. Like traditional venture capital and private equity firms, WTI raised funds from institutional investors and evaluated deals. However, instead of making initial investments in the form of equity, WTI focused primarily on lending money to start-ups, charging them interest and receiving warrants that could later be converted to stock in the case of a liquidity event. Most initial investments—usually in the range of $3–$5 million—were made in tandem with or following a company’s early rounds of venture capital equity financing. In addition, like more traditional venture capital investors, WTI hoped to participate in follow-on debt and equity investments in its successful portfolio companies.

    Keywords: entrepreneurial finance; venture capital; entrepreneurship; finance; Equity; Finance; Venture Capital; Entrepreneurship; Financing and Loans; California;

    Citation:

    Nanda, Ramana, William A. Sahlman, and Nicole Keller. "Western Technology Investment." Harvard Business School Case 817-019, September 2016. (Revised April 2018.)  View Details
    CiteView DetailsEducatorsPurchase Related
  • Technical Note | HBS Case Collection | October 2013 (Revised April 2018)

    Non-Equity Financing for Entrepreneurial Ventures

    Joan Farre-Mensa, Ramana Nanda and Piyush Jain

    Young, and particularly high-growth ventures often need to raise significant external finance, since their internal cash flow is usually insufficient to support the investments needed to grow. Although raising equity from venture capital or angel investors is the most well-known source of external finance for high-growth ventures, many entrepreneurs, particularly small business owners, rely on debt and other non-equity sources of capital to finance their ventures, either because equity capital is not available to them or because they want to avoid the ownership dilution and governance constraints associated with equity investments.

    This note focuses on these non-equity sources of financing for entrepreneurs, paying particular attention to how the emergence of new technologies in risk assessment have expanded their availability for young firms.

    Keywords: entrepreneurial finance; finance; Entrepreneurship; Finance; Financial Services Industry;

    Citation:

    Farre-Mensa, Joan, Ramana Nanda, and Piyush Jain. "Non-Equity Financing for Entrepreneurial Ventures." Harvard Business School Technical Note 814-005, October 2013. (Revised April 2018.)  View Details
    CiteView DetailsEducatorsPurchase Related
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