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Walnut Case Study

Walnut Venture Associates Case Study: To Invent in RBS?

Walnut Venture Associates had been looking into investing with RBS, an accounting software developing company, as the organization was looking to raise $2 million through angel investors. This was more than the Walnut group had initially set limits on committing, as they had stated a cap of $1 million during the very first round of financing in any organizational context. Before committing to anything outright, Ralph Wagner, one of Walnut Venture Associate's primary members, had to evaluate the situation and conclude whether or not RBS was a good investment for the group. Initially, there was positive interest, and so members of Walnut began to look deeper into RBS and its potentiality for profit. RBS had some success with their software SOFTRAX, which had proven successful in streamlining organizational operations, finances, and online platforms. RBS proved to be a potentially lucrative investment into a growing software industry at the time. After all, "The software industry is the fastest growing segment of the U.S. economy," (Roberts 1998 p 8). Walnut saw something potential in this software, as it was the only one offering full integration at the time. Still, RBS was still a very young organization, and thus it was clear that a more thorough investigation was needed in order to make recommendations to the Walnut Group members in terms of their possible investment strategies in this particular case. There are a number of recommendations to be evaluated here. Overall, examining the research, it is clear that Walnut should be investing in RBS through several rounds of financing. Doing so will prove to have huge future profit margins if conditions proceed as they are expected to. Essentially these show that set up the strategy of RBS to achieve a sustained growth rate over the nest several years as to keep adding more customers into their arsenal and bank off of a growing reputation within the software industry to avoid heavy investments in marketing to new clients who had never heard of the organization. Additional adjustments to future software packages will also help diversify customer channels, thus creating a stronger foundation for RBS to grow, especially into a more lucrative enterprise market.

There were a number of key issues in this particular case that could serve as influential factors in the initial investment decision on behalf of Walnut Venture Associates. First, the ability for new sales offices to perform as desired was questionable. It was considered a major risk to invest so much funding into the opening of new locations for such a young organization. Yet, the last two openings in the later half of 1997 had proven successful, with over $600,000 generated in those locations alone. This essentially helped make this issue look more like a lucrative opportunity than a potential risk, even despite the age and lack of proven experience within the young RBS organization. Still, where to place these new locations proved another major element to be overviewed by the group. Location plans were essentially strewn about North America, making control and maintenance a potentially difficult issue. Walnut had to examine another potential risk within the investment strategy as well. In opening new locations, there were the inevitable high costs of investing into human and operational capital. These fixed costs are a major chunk of funding, and thus had to be justified appropriately in terms of potential revenue potential for these new locations.

Even more risky, was the set up of how RBS drew in its revenue. Essentially, the company had high revenue potential for upfront costs to its customers. Yet, once the software was sold and installed, RBS saw a huge drop in sales and needed a way to keep working with its list of clientele. Still, the organization had developed a business strategy that allowed for consistent revenue based on a number of individual elements. First, RBS charged additional user fees. Thus, as their customer continued to grow, RBS continued to collect additional revenues based on the number of users added to that company. In this "ongoing revenue is generated by additional users," (Roberts 1998 p 11). This was one of the stronger strategies in this process. The second, a high dependence on consulting and implementation revenue, was a little more risky. Here, RBS was relying on its customers to purchase ongoing services in order to keep the platform operating smoothly and to integrate most effectively into their current organizational set up. Yet, this was actually one of the most risky endeavors undertaken by RBS. The research showed that once customers had used their system for two years, demand for consulting services dropped dramatically. Thus, unlike the additional user strategy, consulting services eventually ended up a dead end revenue stream every time. RBS had been planning the implementation of SOFTRAX 5.0, which was thought to re-enter a number of existing clients into the fold of consulting services, yet prior projects show a similar timeline where eventually consulting services revenue will once again diminish as time goes by. Still, the implantation of a web order approach to SOFTRAX also hold some future benefits that will make it easier to add new customers to the fold, rather than relying so heavily on existing customers. It will be important for RBS to bring in a consistent stream of new clients as to avoid being too bogged down by the organization's dependence on consultation services. The new launch of a web-based approach to ordering its platforms will help streamline the process and maximize the efficiency of the new locations opening up around the country.