Orchid Partners: A Venture Capital Start-Up – Case Solution

Valuations were very low in 2002. Venture capital was still uninteresting. As we can see in Exhibit 6, the annualized returns of different types of funds were really low, except for seed and early VC.

Seed investments had a three-year annualized return equal to almost 37% compared to private equity’s return equal to around 5%. In fact, the time for a fund to raise and invest in seed investments did seem right and reasonable because of this downturn.

We can see that this is another reason why Orchid Partners seems to be a good business opportunity since market conditions were more or less good for them, and there is a need for start-up capital.

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Finally, besides Orchid’s deep roots in the software, retail, and hardware industries, the partners invested half a million dollars in Chasma, a pioneer in game publishing for wireless phones.

This first deal shows that Orchid Partners’ management expertise could support new companies and turn a seed investment into a company that generates positive cash flows.

Question 2: Is Orchid Partners a good opportunity for Todd?

As stated earlier, Orchid Partners seems to be a good business opportunity as a whole. Indeed, the team forming it seems to have the right knowledge, complementary, and ability.

The market seems to be at its lowest peak, but most of the seed venture capital firms have left the industry, and a big demand in this area has risen. Is this a good opportunity for Todd?

As stated in the case, the other general managers seem to be more “able” than Todd in this domain. The opportunity to be on such a team for him seems to be unique. Moreover, the business opportunity is favorable as well.

However, Todd hopes to make Zoots grow more, and his time is limited as it is divided by his CEO role at Zoots and father of 3 at home. As a family man, Todd would like to devote time to his family, and a VC firm would require a huge investment in time and effort from the partners.

Managing his CEO position, the VC fund, VC deals, and his family all together seems like a challenging task. As he has a family to take care of financially, stepping down from Zoots would be risky, knowing the risks of the VC business.

Moreover, entering the seed venture capital business is in itself an important decision he has to take: seed venture capital is one of the riskiest and most demanding businesses. Less risky opportunities are obviously more appealing to a family father.

As a man who has to provide for his family, and with his previous achievements and work experience, Todd is also likely to have a more interesting and less risky opportunity that could give him more personal financial stability.

Todd should then choose between time and financial safety with his family or managing a VC fund that comes at great financial risk but an even greater reward.

Question 3: Should the partners close on and start operating the fund, even if they haven’t met their size target?

Before making a decision, let us weigh both of the alternatives Orchid Partners has. If they decide to close the fund and start operating it, they would be investing in Chasma, which is a perfect match as described. It is good since they won’t be missing out on an excellent deal and on an opportunity they may not have later.

Nonetheless, in my opinion, it is much riskier to close the fund before reaching the size target because that goal is not random. It has been set by the partners based on data and a need to raise exactly $100 million.

On the other hand, choosing not to operate the fund and keep it going until they reach their target size is good because they would be sticking with their plan and ensuring that they have enough funding not to run into problems themselves in a few years. The negative aspect of it is, of course, that they would be missing on Chasma.

The enthusiasm not to miss on Chasma is their assumption that they won’t be getting better deals, but it might not necessarily be the case. Many companies might come up and match their culture and needs later, which makes it unworthy to take the risk of not completing their fund.

Moreover, it does not have to be an either/or kind of situation. Orchid can approach investors in the coming week with this amazing deal and apply this method to show the investors an attractive deal awaiting to raise their interest.

If they were able to raise funds in a short period of time to reach their goals before it’s too late, then it would be optimal. If investors disagree, it may also be an indicator that they did not see how promising the deal with Chasma is, and it is not that much of a great opportunity for Orchid to give up on its target size.

Therefore, having a large number of deals that may match their interests and the high importance of meeting and closing their fund, I believe that Orchid Partners should not rush into the deal and close its fund but rather keep up the work to close it.