In November 2017, John Fruehwirth, managing partner of Rotunda Capital Partners (RCP), was considering the final terms of a Series B offer to StreetShares, Inc. (StreetShares), a fintech platform lending company whose principal business was lending to veteran-owned businesses. StreetShares was cofounded by Mark L. Rockefeller and Mickey Konson—both veterans themselves—in 2013, with the mission to provide better access to credit for veteran-run businesses. Since the financial crisis in 2008, banks had been reducing small-business lending, and the founders believed there were over a million veteran-run businesses that could benefit from better access to small loans and other forms of credit.
When Fruehwirth first met the two founders in the spring of 2017, initially he thought the company was too early in its development to satisfy his investment criteria—but he was impressed with the company’s management and mission. His view changed in October 2017, when StreetShares beat out Kabbage and several other online lenders to pilot a program for MILBANK, Inc., a large military affinity–focused bank, to offer small-business loans to its members. If successful, the pilot would significantly accelerate loan growth. But if the pilot failed, it would leave the firm with more expensive channels for growth and raise doubts about its small-loan business. Fruehwirth was contemplating a Series B–round investment of $20 million for 40% of the company's equity, but needed to determine whether the returns would satisfy his investors, knowing they were highly dependent on the success of the pilot.
The case contains RCP's offering memorandum summarizing the merits of the StreetShares investment and Fruehwirth's proposed deal terms. Students are asked to qualitatively evaluate the potential benefits and risks of the investment from the perspective of RCP's investors, and to quantitatively calculate the investment's returns.
Because the deal is earlier than those RCP usually invests in, Fruehwirth has asked for some protective terms—including, among others, seniority in liquidation over other round investors and a participating-preferred liquidation preference. To correctly calculate RCP's returns, students must incorporate the deal terms in their analysis.