Netscape
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Introduction
Marc Andreessen and Jim Clark founded Netscape in 1994 under the name Mosaic Communications Corporation. The company focused on the expanding world of the internet and released the web browser Mosaic Netscape 0.9. In November of 1994 the company took on the name Netscape after trademark ownership problems. A year later, Netscape was growing impressively and was looking for new ways to raise capital to fund its growth. Among the various alternatives, the IPO was the chosen method. There was huge interest in the IPO of Netscape and the initial price of $14 per share was being reconsidered. The boards responsibility was thus to determine the appropriateness of the proposed increase in price after balancing the potential risks and rewards that might accompany the move taken.
The reasons for going public
Netscape does need to start looking for new sources to finance its capital needs. According to the following rationales:
The company is on the early growing stage with a lot of existing fixed costs which make it harder to adapt in case of emergency shortfall or change in business climate. The company seems to be vulnerable to market risks and thus need to look for bigger funding sources in order to minimize its exposures.
There are acceptable evidences that the company will potentially need high amount of capital for the next 3 to 5 years, as follows.
Sales strategy of giving out today make the costs of marketing very high, in which it accounts for 50% of total revenue in 1995.
Netscape is the technological company that, in nature, requires lots of capital on research and development. It incurs high cost to hire programmers and developers, in which accounts for 30% of total operating costs.
The company needs more working capital to manage its growing revenue and sales. This includes also the capital for expanding the market base, and maintaining the competitiveness.
Based on our estimation, Netscape would need to have a capital base of around $500 million for the next 3-5 years so as to able maintain its daily operations as well as investing for the future to achieve its growth potential.
Although there are many sources of funds available in the market, characteristics of Netscape make it unlikely to meet their requirements.
Issuing bonds
The company is in its early stage with ongoing losses, the balance sheet does not look stable and the market direction is unclear. There is low creditability over the company which makes it impossible to be successful in issuing corporate bonds. Without a strong financial background and the company is still in its infancy, it is hard for it to gain awareness from investors. Also, even if it can issue corporate bonds, its credit rating would not be good. As such, it would have to incur unnecessary higher costs due to the higher yield that it has to offer.
Private equity
The existing shareholders already invested so much in the company. Even though they can put more into, they might not want to. However, there are other sources to finance than using 100% private equity. In this case, the amount of capital needed by Netscape is too large to be satisfied by private