CommuniteeWeb Case Answers

Question 1

Should CommuniteeWeb utilize Wall Street Venture Capital as its primary funding source? If not, why, and what should the firm’s next step be?

Community Web should seriously consider Wall Street Venture Capital’s offer. At this point, the company is redlining and any funding source approaching them should be heard. Unfortunately, the lack of transparency about Wall Street Venture Capital is a red flag that the company might not be trustworthy. Community Web is already in a bad situation and getting involved with an unreliable company may just make their situation worse. At this point, Community Web may want to consider bankruptcy or selling their company to another that might be able to utilize the intellectual property and relationships they have developed during the startup operations. 2.Assess the company’s burn rate (cash expenditure without any notable cash inflow) and financial outlook. High burn rates were a common phenomenon during the dot com boom. The underlying rationale was that large platforms and customer services would take time to develop but would eventually lead to excellent revenues. Unfortunately, many dot com companies were not able to convince customers of their value to them. Community Web appears to have exhibited similar behavior, as they were only able to sell a few franchises. The lack of growth in revenue does not show a good financial outlook for Community Web. Very few companies can operate at high burn rates before going out of business.

Question 3

What are some critical mistakes made by CommuniteeWeb?

Perhaps the main critical mistake of Community Web was not building a business model that would work. The company thought that their only competition was newspapers and local media, not other local IP source companies. They also overestimated that the interest areas would have in their franchise. By not testing their markets properly, they built a company based on overly inflated figures. 175 employees were hired to prepare for that anticipated growth, which never came. The company also did not handle legal matters in a professional manner, thus leading to problems with government agencies. Issuing equity without meeting government guidelines is problematic. This not only leads to legal concerns, but also may raise a red flag to other stakeholders as to the ethics of the company. Also, the company did not pay its payroll taxes. The company is clearly not meeting its legal obligations. Now it is getting involved with an investment source that is not reliable. All of these issues will take away from allowing the business to focus on growing its revenues.