Growing up in China: The Financing of BabyCare Ltd.
Valuing investment projects are often computed using the DCF approach, forecasting future revenue
and costs by applying a percent-of-sales methodology. There are many industries where using the
percent-of sales method is inappropriate, because sales are based on subscriptions with customers, not
aggregate growth information. There are many industries in which the cash flows are dependent on
customers coming and going. Some examples include Sirius XM Radio, magazine subscriptions, cell
phone contracts, advertising, water systems, snack food kiosks, etc.
An alternate approach, and one that is better suited for these types of companies, is the subscriber
model.
The BabyCare case provides an opportunity for you to develop a detailed cash flow model for a fastgrowing startup company. Given the subscription nature of the BabyCare business model along with its
limited and varied operating history, a subscriber model is the most logical method of forecasting future
BabyCare cash flows. With this methodology, you must determine the expected cash flows associated
with the tenure of an individual subscriber, produce a forecast of the number of new subscribers that
the company expects to acquire based on their forecast to secure third-round financing, aggregate the
expected cash flows associated with the projected new subscribers, and account for the company’s fixed
expenses. Specifically, the analysis involves:
1. Reverse engineering the revenue forecast to determine the implied number of new subscribers
expected in 2002 through 2007
2. Determining the value of a new BabyCare subscriber
3. Constructing aggregate expected cash flows based on the forecasted acquisition of new
subscribers and the company’s fixed operating expenses
4. Analyzing the sensitivity of the valuation and cash flow forecasts to the various assumptions
made in the constructed subscriber model
This case highlights the importance of understanding the dynamic interactions of individual customer
cash flow requirements and the company’s growth oriented business plan. Interactions between the
company’s business plan and financing plan cannot be avoided and trade-offs between them must be
made.
Topics to Address in Your Case Analysis and Write Up (All students (groups of two for this case) submit
a formal case analysis, including supporting spreadsheets)
1. How is (or isn’t) BabyCare’s business model tailored to the idiosyncrasies of an emerging
market?
2. Construct an annual subscriber model for BabyCare that can be used to forecast the expected
revenues for a new subscriber through 2007. What critical assumptions does the subscriber
model rely on? Which assumptions would you question as a venture capitalist? How would
you defend them as the entrepreneur?
3. What is the value of a new BabyCare subscriber? (Assume a discount rate of 20%, and a
terminal growth rate of 3%)
4. Does a discount rate of 20% make sense? Why, or why not? If you were to construct your own
discount rate, what would it be and why? How would that affect the value?
5. Does a terminal growth rate of 3% make sense? Why, or why not? If you were to construct
your own terminal growth rate, what would it be and why? How would that affect the value?
6. How much cash does BabyCare need to have a reasonable chance of achieving its long-run
objective?
7. Assuming that BabyCare does not change its forecast projections, what is the value of
BabyCare?
Much of the information provided in this document has been extracted from the Teaching Note for the case from Harvard Business Publishing
as a guide for students. Copying or posting outside of FNAN441 is an infringement of copyright.
Growing up in China: The Financing of BabyCare Ltd.
8. Is building a plant to manufacture products locally a good idea?
9. How would you evaluate BabyCare’s funding opportunities?
10. Would you invest in BabyCare?
STRUCTURE for the paper:
1. Executive Summary (including your recommendation)
2. A statement of the problem(s) you see the firm or decision maker facing
3. Methodology or techniques (those that you believe are best for this problem and that
you recommend employing)
4. Data requirement or sources (those necessary to employ your recommended
technique)
5. Key assumptions (those you had to make to conduct your analysis)
6. Analysis
7. Conclusions and concerns
Much of the information provided in this document has been extracted from the Teaching Note for the case from Harvard Business Publishing
as a guide for students. Copying or posting outside of FNAN441 is an infringement of copyright.
Exhibit 5 - BabyCare Projected Income Statement
($000s)
# Markets with Sales
# New Markets Invested
Gross Revenues
% Growth
Value Added Tax (VAT)
Retail Offers
Net Revenues
Cost of Goods Sold
Gross Profit
SGA
HR Expense
Operating Exenses
Product Development
Depreciation
Pretax Income
Income Tax
Net Income
2001
2
1
2,142
242
43
1,857
(522)
1,335
(1,292)
(1,161)
(502)
(7)
(361)
(1,988)
2002
6
4
5,718
166.9%
567
113
5,038
(1,390)
3,648
(2,819)
(1,248)
(369)
(119)
(204)
(1,111)
(1,988)
(1,111)
2003
13
7
13,572
137.4%
1,530
271
11,771
(2,825)
8,946
(6,003)
(1,530)
(520)
(235)
(294)
364
364
2004
24
11
33,787
148.9%
5,744
676
27,367
(6,568)
20,799
(13,234)
(2,574)
(729)
(350)
(365)
3,547
2005
36
12
59,311
75.5%
10,083
1,186
48,042
(11,050)
36,992
(24,496)
(3,347)
(947)
(400)
(411)
7,391
2006
48
12
82,501
39.1%
14,025
1,650
66,826
(15,370)
51,456
(32,882)
(3,848)
(1,089)
(400)
(501)
12,736
2007
60
12
107,912
30.8%
18,345
2,158
87,409
(20,104)
67,305
(42,830)
(4,233)
(1,898)
(400)
(637)
17,307
3,547
7,391
12,736
17,307
Source: BabyCare
Exhibits are provided as part of "Growing Up in China: The Financing of Baby Care"
HBS 9-204-029
Common Size (% of Gross Revenues)
0.00%
2001
2002
Gross Revenues
100.0% 100.0%
VAT
11.3%
9.9%
Retail Offers
2.0%
2.0%
Net Revenues
86.7%
88.1%
Cost of Goods Sold
-24.4%
-24.3%
Gross Profit
62.3%
63.8%
SGA
-60.3%
-49.3%
HR Expense
-54.2%
-21.8%
Operating Expenses
-23.4%
-6.5%
Product Development
-0.3%
-2.1%
Depreciation
-16.9%
-3.6%
Pretax Income
-92.8%
-19.4%
Income Tax
Net Income
-92.8%
-19.4%
2003
100.0%
11.3%
2.0%
86.7%
-20.8%
65.9%
-44.2%
-11.3%
-3.8%
-1.7%
-2.2%
2.7%
2004
100.0%
17.0%
2.0%
81.0%
-19.4%
61.6%
-39.2%
-7.6%
-2.2%
-1.0%
-1.1%
10.5%
2005
100.0%
17.0%
2.0%
81.0%
-18.6%
62.4%
-41.3%
-5.6%
-1.6%
-0.7%
-0.7%
12.5%
2006
100.0%
17.0%
2.0%
81.0%
-18.6%
62.4%
-39.9%
-4.7%
-1.3%
-0.5%
-0.6%
15.4%
2007
100.0%
17.0%
2.0%
81.0%
-18.6%
62.4%
-39.7%
-3.9%
-1.8%
-0.4%
-0.6%
16.0%
2.7%
10.5%
12.5%
15.4%
16.0%
Exhibits are provided as part of "Growing Up in China: The Financing of Baby Care"
HBS 9-204-029
Exhibit 6 - BabyCare Projected Cash Flows Statement
($000s)
Net Income
Capital Expenditure
Change in NWC
Depreciation
Change in Cash
Cash on Hand
Cash Investment
Cumulative Cash
2001
(1,988)
(140)
(134)
361
(1,901)
3,000
1,099
2002
(1,111)
(429)
(1,021)
204
(2,357)
1,099
2003
364
(992)
(240)
294
(574)
(1,258)
2004
3,547
(770)
(1,642)
365
1,500
(1,832)
(1,258)
(1,832)
(332)
2005
7,391
(3,851)
(1,120)
411
2,831
(332)
2006
12,736
(5,411)
(2,722)
501
5,104
2,499
2007
17,307
(2,320)
(2,304)
637
13,320
7,603
2,499
7,603
20,923
Source: BabyCare
Exhibits are provided as part of "Growing Up in China: The Financing of Baby Care"
HBS 9-204-029
Revenue Stream of a Cohort
UNITS Consumed per Year
Products
DHA
Ca+D
Bainfant Liquid
Children's Multi
Colostrum
Protein Drink
Follow on Formula
Year 1
2
3
0
0
2
2
0
Year 2
4
6
3
0
3
4
30
Year 3
6
4
3
0
2
4
40
Year 4
3
3
0
4
2
1
60
Year 5
2
2
0
4
1
1
80
Year 6
2
2
0
4
2
1
0
Year 7
2
2
0
4
3
1
0
REVENUE per Year
Products
DHA
Ca+D
Bainfant Liquid
Children's Multi
Colostrum
Protein Drink
Follow on Formula
Annual Revenue per Cohort
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
28 $
56 $
84 $
42 $
28 $
28 $
28
48
96
64
48
32
32
32
54
54
52
52
52
52
36
54
36
36
18
36
54
56
112
112
28
28
28
28
90
120
180
240
$
168 $
462 $
470 $
386 $
398 $
176 $
194
$
Prepared by:
Member Price
$
14.00
$
16.00
$
18.00
$
13.00
$
18.00
$
28.00
$
3.00
Member Price
$
14.00
$
16.00
$
18.00
$
13.00
$
18.00
$
28.00
$
3.00
Prepared by:
Data Available for BabyCare Subscriber Model
1st Year
2nd Year
3rd Year
4th Year
5th Year
6th Year
7th Year
Attrition Average Spend
Rate
per Customer
60%
$168
20%
$462
10%
$470
10%
$386
10%
$398
10%
$176
10%
$194
Prepared by:
Subscriber Model for BabyCare
2001
2002
2003
2004
2005
2006
2nd Yr
1,000
462,000
3rd Yr
800
376,000
4th Yr
720
277,920
5th Yr
648
257,904
6th Yr
583
102,643
7th Yr
525
101,827
New customers in 2001
1st Yr
# of customers
10,000
Revenues 1,680,000
2nd Yr
3rd Yr
4,000
3,200
1,848,000 1,504,000
4th Yr
2,880
1,111,680
5th Yr
2,592
1,031,616
6th Yr
2,333
410,573
7th Yr
2,100
407,307
New customers in 2002
# of customers
Revenues
1st Yr
2nd Yr
20,798
8,319
3,494,000 3,843,400
3rd Yr
6,655
3,127,962
4th Yr
5,990
2,312,030
5th Yr
5,391
2,145,516
6th Yr
4,852
853,894
New customers in 2003
# of customers
Revenues
1st Yr
47,302
7,946,680
2nd Yr
18,921
8,741,348
3rd Yr
15,137
7,114,171
4th Yr
13,623
5,258,432
5th Yr
12,261
4,879,716
1st Yr
122,310
20,548,106
2nd Yr
48,924
22,602,917
3rd Yr
39,139
18,395,447
4th Yr
35,225
13,596,975
1st Yr
155,641
26,147,624
2nd Yr
62,256
28,762,386
3rd Yr
49,805
23,408,349
1st Yr
163,255
27,426,820
2nd Yr
65,302
30,169,502
Existing customers in 2001
# of customers
Revenues
New customers in 2004
# of customers
Revenues
New customers in 2005
# of customers
Revenues
New customers in 2006
# of customers
Revenues
New customers in 2007
# of customers
Revenues
Total Number of Customers
Total Revenues (000)
Growth in customers
Growth in sales
2007
1st Yr
205,930
34,596,258
11,000
2,142
25,598
5,718
59,541
13,572
151,414
33,787
228,866
59,311
286,522
82,501
375,474
107,912
132.71%
166.95%
132.60%
137.36%
154.30%
148.95%
51.15%
75.54%
25.19%
39.10%
31.05%
30.80%
Prepared by:
NPV of a New Subscriber
Costs as % of Gross Revenue
VAT
Retail offers
COGs
17.0%
2.0%
18.6%
Probability
Revenue per year
Expected Revenue
1st yr
100.0%
$168
$168.0
2nd yr
40.0%
$462
$184.8
3rd yr
32.00%
$470
$150.4
4th yr
28.8%
$386
$111.2
5th yr
25.9%
$398
$103.2
6th yr
23.3%
$176
$41.1
7th yr
21.0%
$194
$40.7
Cost per subscriber
VAT
Retail offers
COGS
($28.56)
($3.36)
($31.25)
($31.42)
($3.70)
($34.37)
($25.57)
($3.01)
($27.97)
($18.90)
($2.22)
($20.68)
($17.54)
($2.06)
($19.19)
($6.98)
($0.82)
($7.64)
($6.92)
($0.81)
($7.58)
$104.8
$115.3
$93.8
$69.4
$64.4
$25.6
$25.4
Earnings before Corp
Discount rate
NPV of a new subscriber
20%
$296.75
Prepared by:
BabyCare Total Enterprise Value
Value of new subscriber (NPV)
Discount rate
Perpetuity growth rate
Year
Subscriber outcome
$296.75
20%
3% (equal to inflation)
0
2002
Value of future subscribers
Projected new subscribers
Value of new subscriber
47,302
$296.75
14,036,663
Value of projected new subscribers
PV of projected cash flows
PV of terminal
PV of new subscribers
Adjusted PV at midpoint
Value of existing subscribers
Total subscribers (2002)
Value per subscriber
PV of existing subscriber
Corporate costs:
SGA
HR Expense
Operating Exenses
Product Development
Capital Expenditure
Change in NWC
Total corporate costs
PV of corporate costs
PV of terminal
PV of total corporate costs
Adjusted PV at midpoint
Pre-tax Enterprise Value
1
2003
2
2004
122,310
$296.75
36,295,263
3
2005
155,641
$296.75
46,186,002
4
2006
163,255
$296.75
48,445,517
5
2007
205,930
$296.75
61,109,295
5
TV
370,250,435
111,551,729
148,795,346
260,347,074
285,195,931
25,598
$296.75
7,596,036
(2,819,000)
(1,248,000)
(369,000)
(119,000)
(429,000)
(1,021,000)
(6,003,000) (13,234,000) (24,496,000) (32,882,000) (42,830,000)
(1,530,000) (2,574,000) (3,347,000) (3,848,000) (4,233,000)
(520,000)
(729,000)
(947,000) (1,089,000) (1,898,000)
(235,000)
(350,000)
(400,000)
(400,000)
(400,000)
(992,000)
(770,000) (3,851,000) (5,411,000) (2,320,000)
(240,000) (1,642,000) (1,120,000) (2,722,000) (2,304,000)
(6,005,000)
(9,520,000) (19,299,000) (34,161,000) (46,352,000) (53,985,000)
############
(131,448,362)
(222,606,632)
(243,853,347)
48,938,619
48,938,619
2.0%
2.5%
3.0%
3.5%
4.0%
10%
95,105,379
99,358,290
#########
#########
#########
15%
62,513,859
63,857,911
65,313,968
66,896,638
68,623,187
Prepared by:
20%
47,708,673
48,306,076
48,938,619
49,609,499
50,322,309
25%
39,110,825
39,426,047
39,755,598
40,100,476
40,461,777
30%
33,411,100
33,595,780
33,787,300
33,986,047
34,192,438
##########
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