Reference no: EM132206295

Question - LearnRite offers e-commerce service for children's edutainment products and services. The word edutainment is used to de- scribe software that combines educational and entertainment components. Valuable product information and detailed editorial comments are combined with a wide selection of products for purchase to help families make their children's edutainment decisions. A team of leading educators and journalists provide editorial comments on the products sold by the firm. LearnRite targets highly educated, convenience-oriented, and value-conscious families with children under the age of twelve, estimated to be about 35 percent of Internet users.

The firm's warehouse distribution model results in higher net margins, as well as greater selection and convenience for customers, when compared to traditional retailers. Gross profit margins are expected to average about 30 percent each year. Because of relatively high marketing expenditures aimed at gaining market share, the firm is expected to suffer net losses for two years. Marketing and other operating expenses are estimated to be $3 million in 2011 and $5 million in 2012. However, operating cash flow breakeven should be reached during the third year. Net profit margins are expected to average 10 percent per year beginning in Year 3. Investment in bricks and mortar is largely in the form of warehouse facilities and a computer system to handle orders and facilitate the distribution of inventories. After considering the investment in inventories, the asset intensity or turnover is expected to average about two times per year.

LearnRite estimates that venture investors should earn about a 40 percent average annual compound rate of return and sees an opportunity for a possible IPO in about six years. If industry consolidation occurs, a merger might occur sooner.

The management team is headed by Srikant Kapoor, who serves as president of LearnRite.com and controls about 35 percent of the ownership of the firm. Mr. Kapoor has more than twelve years of experience in high-tech industries, including previous positions with US West and Microsoft. He holds a BS degree in electrical engineering from an Indian technology institute and an MBA from a major U.S. university. Sean Davidson, director of technology, has more than ten years of experience in software development and integration. Walter Vu has almost ten years of experience in sales and business development in the software industry, including positions at Claris and Maxis. Mitch Feldman, director of marketing, was responsible for the marketing communications function and the Internet operations of a large software company for six years. Management strives for continual improvement in ease of user interface, personalized services, and amount of information supplied to customers.

The total market for children's entertainment is estimated to be $35 billion annually. Toys account for about $20 billion in annual spending. Summer camps are estimated to generate $6 billion annually. This is followed by children's videos and video games at $4 billion each. Children's software sales currently generate about $1 billion per year in revenues, and industry sales are expected to grow at a 30 percent annual rate over the next several years.

LearnRite has made the following five-year revenue projections

Revenues:

2011 - $1.0

2012 - $9.6

2013 - $30.1

2014 - $67.8

2015 - $121.4

Project industry sales for children's software through 2015 based on the information provided above.

Calculate the year-to-year annual sales growth rates for LearnRite. [Optional: Estimate the compound growth rate over the 2011-2015 time period using a financial calculator or computer software program.]

a) Estimate LearnRite's expected market share in each year based on the given data.

b) Calculate the year-to-year annual sales growth rates for LearnRite. [Optional: Estimate the compound growth rate over the 2011-2015 time period using a financial calculator or computer software program.]

c) Estimate LearnRite's expected market share in each year based on the given data.

d) Estimate the firm's net income (loss) in each of the five years.

e) Estimate the firm's ROA beginning when the net or after-tax income is expected to be positive.

f) Score LearnRite's venture investor attractiveness in terms of the industry/market factor category using the VOS Indicator guide and criteria set out in Figures 2.8 and 2.9. If you believe there are insufficient data, indicate that decision with an N/A.

g) Score LearnRite's venture investor attractiveness in terms of pricing/profitability factors. Follow the instructions in Part F.

h) Score LearnRite's venture investor attractiveness in terms of financial/harvest factors. Follow the instructions in Part F.

i) Score LearnRite's venture investor attractiveness in terms of management team factors. Follow the instructions in Part F.

j) Determine overall total points and an average score for LearnRite as was done for the Companion Systems Corporation in the Appendix. Items where information is judged to be lacking and an N/A is used should be excluded when calculating an average score.

k) Provide a brief written summary indicating how you feel about LearnRite.com as a business opportunity.