From the Case Study Growing Up in China: The Financing of BabyCare Ltd. by Harvard University, (1)

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From the Case Study Growing Up in China: The Financing of BabyCare Ltd. by Harvard University, (1) evaluate each of the following financing options that Babycare has in full details, and (2) Recommend the financing option that is best suited to Babycare. Give reasons for your answer

Third Round of Financing: Expansion Capital

Estes and Mumford felt that BabyCare was still too young to undertake a full-scale public offering. Six months away from breakeven and having demonstrated success in the Dalian market, BabyCare needed $2.5 million of financing to get to the point where expansion capital was self-generating from existing markets. Working capital requirements were also growing as a result of the long supply chain and growing demand. Estes and Mumford got approval from the BabyCare board to raise $2.5 million at a $20–$30 million valuation. Management had three options, and hoped that the Templeton team would provide a fourth:

1. Small investment, low valuation. Existing investors offered to provide $1 million in expansion capital at an $8 million valuation. The model would be further tested and expanded and additional capital could be raised once the market had another six months to recover.

2. Large investment, higher valuation. One of the leading private equity firms in healthcare offered to invest $6 million at a $26 million valuation. Based in the US, the firm prided itself on having impeccable connections with all the major healthcare companies, which could support BabyCare in product expansion.

3. Desired investment, mid-range valuation. A Hong Kong-based baby accessory company offered $2.5 million at a $19 million valuation. The company offered synergy opportunities in terms of product development, market expansion, and cost savings. Mumford worried that having a strategic investor might complicate a later sale of the company.

4. Desired investment, innovative structure. Franklin Templeton Investments was contemplating a convertible instrument that would provide $2.5 million in a four-year 10% convertible note with a conversion at a $22 million valuation. Templeton further offered a 12% $1 million fixed-rate note to sweeten the deal and allowed them to put more funds to work in a transaction otherwise considered small for the firm’s normal “sweet spot.”