In-Fusion, Inc

Abstract

This case is designed as an introductory exercise to familiarize students with several methods used to value early-stage companies. The value of a young biotech company is compared under the venture capital (VC), discounted cash flow (DCF), and real option methods of valuation. Students are asked to value the firm under the VC and DCF methods and then compare those values to the value obtained under the real option method. It is suggested that the student spreadsheet (UVA-F-1584X) be assigned in advance of the class with instructions to have students value the firm under the VC and DCF methods. A separate worksheet in the file (which can be hidden at the instructor's discretion) provides the option valuation for later discussion purposes. A technical note, "Valuing the Early-Stage Company" (UVA-F-1471), covering the basics of the VC and DCF methods of valuation can be assigned with the case.

Excerpt

UVA-F-1584

March 4, 2009

IN-FUSION, INC.

Joe Wilshire returned to business school with one idea in mind: to start his own business. Wilshire graduated from college with a degree in mechanical engineering, and prior to coming to business school, he worked for a small start-up biotech company. He gained valuable experience at the firm and enjoyed the challenge of trying to build something from scratch. But the tasks of managing the pharmaceutical approval process, raising funds, retaining key employees, and mapping out a competitive strategy motivated his return to graduate school. “Things may not turn out as expected for a lot of reasons,” he said, “but I don't intend to be one of those reasons.”

After graduation, Wilshire pursued his interest by developing contacts with a number of venture capital (VC) firms that specialized in the biomedical field; he thought a firm might provide an entry for him by having him manage one of their portfolio companies. This proved more difficult than expected, and while many firms were willing to talk to him, none of them offered him a position. Instead, he took his first job with a West Coast consulting firm that focused on developing high-tech products. “One year as a consultant convinced me I was a ‘doer,'” he later recalled. His pursuit of VC contacts, however, produced an unexpected dividend. Wilshire had put together a document describing his background, interests, and future ideas for the purpose of making contact with VC fund managers. He sent this document to a number of VCs—and through one of those contacts, he found a position at IN-fusion, Inc., a firm located outside of Pittsburgh, Pennsylvania, in February 2006. IN-fusion specialized in developing and commercializing a new drug delivery system. Its technology increased the efficacy of treatments by “delivering the right drug to the right place in the right amount at the right time.” IN-fusion's technology could potentially work on a broad range of diseases that required ongoing and precisely calibrated medication.

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Keywords: valuation, venture capital, early stage, start up