American Family Seeks Nicholas Center Recommendation on Venture Capital Decision

“Without the element of uncertainty…the greatest business triumph would be dull, routine, and eminently unsatisfying,” said J. Paul Getty. Nowhere is uncertainty as evident in the business world as venture capital, where the rewards can be lucrative but the risk perilous.  It was with this in mind that American Family, a Madison-based national insurance provider, asked second-year Nicholas Center students to evaluate a potential investment in a startup in the tech space.

The students found themselves grappling with uncertainty from the start as this particular tech sector had just recently emerged, resulting in sparse data on not only the startup but also its competitors and the sector itself. Nevertheless, the students and their undergrad research assistants mined the industry for as much information as could be gathered, and gradually, the team was able to frame the potential investment in the broader industry context, where they also included a rigorous analysis of opportunities and hurdles.

The team proceeded to value the investment using the venture capital method. Taking proxies from the broader industry of software, the team developed value assessments of the startup that sensitized the most important variables, including revenue growth and investor’s IRR. From this valuation and overall industry assessment, the team formed its recommendations to American Family.

One additional step the team undertook was valuing the use of the company’s services for American Family, independent of any equity position the insurance company might take in the startup. This analysis focused on providing the breakeven point for cost savings that American Family would need to accrue from using the company’s services over the course of a multi-year contract.

American Family welcomed the Nicholas Center students’ presentation, hailing it as insightful. The students benefited as well; working on this consulting project bolstered their powers of articulation, strategic thinking, and analytical skills.