1

CoreTeck Inc. Case Study.

Capital venture case study

Names

Institution affiliation

2
CoreTeck Inc. Case Study.

CoreTeck Inc. case study.

CoreTeck is a company formed in 1994 by Parviz Tayebati, a former Program Manager of
optical computing technologies at Foster-Miller, Inc. The company was focused on developing
tunable photonic solutions for long haul and metropolitan dense wavelength division
multiplexing (DWDM) system. Parviz who had previous experience in acquiring government
grants at Foster-Miller helped the company win SBIR grants to support research and
development in the field. However, the grants were not enough to cater for the companies
infrastructural needs and the company went ahead and sought investments from a syndicate of
three VC firms, led by Adams Capital Management. The company received of $6m of in the A
round seeding. 9 months later the company received B round seeding of $20.5 million. In 2001,
the company was sold at 1.35 billion to Nortel Networks. The company founders received
approximately the 30% of the company.
Question 1
1. Why did the VC firms like the fact that the company had received significant
government grants? Assume that this had not happened and that all the funding for the
company had come from VCs. Add an earlier seed round to replace the government funds,
and make an estimate of the dilution that Parviz and the founders would have had to take
in this case if the VCs were to retain their IRR. Approximately how much less would the
founders have in their pockets when the company was sold?
Venture capital firms provide funding to small companies that have a promising growth in terms
of employees and annual revenue. They fund these companies at the kick-off period in exchange
for an ownership stake. The capitalist take the risk of investing in the companies and hope that

3
CoreTeck Inc. Case Study.

thy will become successful. Government funding also represented a majority confidence in the
project undertaken by CoreTeck ventures. For an investor, public confidence means easier
commercialization of products and an easy transition from a private company to a public
company.
There are very many factors that venture capital firms consider when funding a small
company. The financing firms always want to be assured that they will get interest from the
money they invest with a company. CoreTeck was a well-established company that had shown
signs of expansion from its earlier stages. Having received government grants, this shows that it
had demonstrated its worth to the government. Venture capital firms didnt have to contemplate
much when joining the company because most of the evaluations had been done by the
government. The government gives grants to businesses that have higher chances of succeeding
in the industry. They always have to consider the best companies to make sure that they funding
does not go to waste with unpromising companies. Having proven its worth to the government it
was not hard for the VC firms to invest in it because the company had demonstrated its potential.
The VC firms consider companies that have their own capital to avoid starting from scratch to
minimize risks... This was the case with CoreTeck.
Assuming that all the money for the company had come from the venture capital firms the
founders would have been diluted to 50% at the initial injection of the capital. In the second
seeding the founders would be diluted to own approximately 33% of the company. In the third
seeding the founders would be farther diluted to 17% of the companys ownership. This sums
would be approximately $230 million, half of the $400 they received after the company was
acquired by Nortel Networks.

4
CoreTeck Inc. Case Study.

Question 2.

5
CoreTeck Inc. Case Study.

Draft a short term sheet (no more than two pages) for each investment round under the
new circumstances of question 1.

6
CoreTeck Inc. Case Study.

SHORT TERM SHEET: EQUITY INVESTMENT

7
CoreTeck Inc. Case Study.

NOTES:

8
CoreTeck Inc. Case Study.

1. The provisions of this term sheet assume that the Investors:

9
CoreTeck Inc. Case Study.

(a) Will be issued ordinary shares in the Company and not a separate class of shares; and

10
CoreTeck Inc. Case Study.

(b) Where there is more than one Investor they are proposing to invest on materially, the same
terms and be parties to the same term sheet.

11
CoreTeck Inc. Case Study.

Non-legally binding: This term sheet is indicative only, not exhaustive and not legally binding
unless specifically stated within a certain paragraph. It sets out the proposed key terms and
conditions upon which the Investors are willing to invest in the Company.

12
CoreTeck Inc. Case Study.

1. Issuer:
2. Investor[s]:

CoreTeck INC
AdamsCoreTeck
Capital Management
& others (Lead Investor)
Inc. Case Study.

13

VC firm XXX
VC firm YYY

Adams Capital Management

4. Existing

Investor
VC firm ZZZ
1. Co-founder 1 - [Equity stake =
60%______________________
pre-investment]
Date:

Shareholders of

2. Co-founder 2 - [Equity position = 40% pre-investment

the Company and

pre-investment
equity stake:

4. The Co-

Parviz Tayebati & others

Founders:
5. Estimated

The investment is intended to be closed by Mid-Nov 2001.

Closing Date:
6. Amount of the

USD [$13 million] [Adams Capital Management]

Investment:

USD [$7 million] [VC firm XXX]

USD [$7 million] [VC firm YYY]
USD [$3 million] [VC firm ZZZ]
Target: USD 30,000,000

7.Post-completion

[Parviz Tayebati] [10]%

issued share

[Other Co-Founders] [7]%

capital of the

[Adams Capital Management] [27]%

Company:

[ VC firm XXX] [14]%

[ VC firm YYY] [14]%
[ VC firm ZZZ] [6]%

14
CoreTeck Inc. Case Study.

___________________________
Signed for and on behalf of
CoreTeck Inc.
Date: ______________________
Parviz Tayebati
Founder
Date: ______________________

Question 3
Give three reasons Adams Capital Management, the lead VC firm, was a good fit for this
opportunity.
Adams capital management had deep knowledge in the telecommunication sector. Investors with
a deep knowledge in your preferred field of specialization could help in quick decision making
of the firm. Perhaps the VC had unique business relationships throughout their industry
relationships. Regardless of the VCs particular strategy or niche, industry expertise and dealsourcing capabilities are important aspects for an investor to evaluate. The expertise of the
venture capital firms legal, finance, and investment sourcing teams should not be overlooked.

15
CoreTeck Inc. Case Study.

Investors evaluate how well-oiled the operations are at a VC before investing in abstract ideas or
technologies that are hard for the layman to understand.
Adams capital management was also keenly following the company operations this is deduced
from the fact that they took a very short period in deciding to partner with the CoreTeck Inc. It
also go along to show that the VC strongly believed in the vision of CoreTeck Inc.
The Adams Capital Management Company was founded to invest in early stage
technology implied companies. CoreTeck was a firsthand company in the industry and needed a
lead company that was going to guide it through the evolution process. This made Adams Capital
Management Company it the best option. The companys main scheme being to venture in
technology companies at their kick-off period it had good policies of guiding CoreTeck at its
early stages since. The company had started in 1994 thus it had a lot of experience on how to
monitor starting companies so has to make profits from them. The company was controlling
small upcoming companies for a long time before investing with CoreTeck. Being in the
business till that long means that it had not been making losses thus it was a good stepping stone
for CoreTeck too. CoreTeck enjoyed good leadership skill from Adams Capital Management
Company thus it turned to be among the best in the technology industry.
Adams Capital Management Company had one of the best management crew that
manages the company. Having a lead venture capital firm with an excellent management team
which is high skilled and well experienced means that the company way to enjoy the
management services too. Adams capital management being the lead firm in investing in
CoreTeck it had to be involved in the companys decision-making processes and running the
company. With the company having the best management team who were highly skilled they
made professional decisions which would facilitate the growth of the firm. With capable

16
CoreTeck Inc. Case Study.

management, it meant that decisions were made professionally and the company growth was
guaranteed. Management propels every business activity. Adams Capital Management Company
being an experienced company was the precise company for CoreTeck because it could help in
ascending to great heights in the technology industry since it was its main area of proficiency.
The company was wealthy company with a very wide capital investment. This meant that
the company would be able to gratify for the most of the CoreTeck financial needs. Since the
company was young in the industry it needed an investor who would fulfill most of its financial
requirements. CoreTeck was a new business and did not enough have resources to expand the
company. By having Adams Capital Management Company as the lead company meant that
CoreTeck would get most of the resources has it required and get the necessary guides in
development. The lead company having enough resources meant a strong foundation for the
company.

References
Kaplan, J. M., & Warren, A. C. (2010). Equity financing. In Patterns of entrepreneurship
management. Hoboken, NJ: Wiley.

17
CoreTeck Inc. Case Study.