1. How is The Knot doing? What financial and non-financial metrics ...

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1. How is The Knot doing? What financial and non-financial metrics would you utilize to gauge its performance so far?
2. What is the nature of the business opportunity at The Knot? (Among the issues that you may want to consider are: industry, customer characteristics, competition, risks, barriers to entry, etc.) What is their business model (operating characteristics, nature of revenues, fixed asset and working capital needs, economies of scale, etc.)?
3. Was AOL the right investor for The Knot?* What did The Knot gain from AOL? How did AOL benefit from its relationship with The Knot?
4. How have past financings been structured, as described in Exhibit 10? Why?
5. What do you think about the management team at The Knot? What have they done in the past (including at The Knot) that would lead you to believe that they will succeed? Who is/are missing from the team?
6. How much money should The Knot raise? For what purposes? From whom? (Which different types of investors should The Knot consider for raising money? Discuss the pros and cons of raising money from each type of investor.)
7. Assuming that the deal will close at the end of year 1997, value The Knot. Make any reasonable assumptions you need to. (You could also use the data given in 9. below.)
8. What should the management team do as they move forward to enhance the likelihood of success?
9. Assuming that AOL negotiated a buyout clause at the time of funding, which gives AOL the right to buy founders’ equity holding after three years at the then fair market value. How would you value such a buyout clause? (If you can give me a quantitative answer making reasonable assumptions, it would be great. It will fetch more points than a qualitative answer!) You may assume a risk free rate of 6% and standard deviation (volatility) of returns to be 50%. Also assume that founders will receive the additional 65,714 shares when the buyout clause is invoked by AOL, translating into founders’ equity ownership of 165,714 shares.

*At the time AOL funded The Knot in 1997, AOL received up to 45% of The Knot’s equity, which can be computed as follows:

                            Shares         AOL Percentage

AOL                     100,000      100,000/220,000=45% if 65,714
                                                shares are not granted to the
                                                founders due to underperformance.
Element               165,714       (Includes 65,714 shares
                                                 to be granted contingent on
                                                 performance)
Other                   20,000         (Employee reserve/pool)

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Answer 1:
The Knot has brought innovative concepts in the wedding industry and has been able to create a strong image for itself through differentiated services. Since the business is in the inception stage, profitability would not serve as a strong measure for performance assessment since the business is incurring high expenses to market the brand and add varied product lines to it. At this stage, some of the financial measures would include the growth rate of sales on y-o-y basis (as shown in Appendix 1), the growth rate of revenues from different product lines such as registry, advertisement, etc. The cost structure would also be analyzed so that the cost-benefit analysis can be done for each individual segment and the decision can be taken accordingly with respect to further investment or phase-out of the segments. The non-financial metrics include the brand position of the company and the rate of consumer acceptance, as can be judged by parameters such as page visits per month, revenue per click, consumer base per month, etc. Competition would also be assessed in terms of market share, etc. so that sustainability of ideas can be determined.
Answer 2:
The Knot is targeted at the online segment of the wedding industry, which can be considered as a recession-proof industry, since consumers desire exclusivity while planning weddings. The online model represents the fastest growing segment of the industry due to the convenience and cost benefits offered by the same...

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