| January 30, 2017


Practical Exercise


Learning Outcome Assessed: a – e


Written ReportCase Study Analysis (2000 words)


ImageCafé Arthur M. Blank Center

for Entrepreneurship

Babson Park, MA Phone: 781-239-4420

02457-0310 Fax: 781-239-4178

Printed 8/16/04URL:

This case is written by Kathryn F. Spinelli under the direction of Professor Stephen Spinelli, Jr.

© Copyright Babson College, 2004. Funding provided by the HBCU Consortium. All rights reserved.


Staying Afloat

With his company, ImageCafé, struggling amidst financial uncertainty, Clarence

Wooten, Jr. faced some difficult decisions. With a current burn rate1of nearly $50,000

per month, the bridge loans2and Angel investments3of $710,000 would not be not

enough capital to carry the company to break-even. While struggling to close a $3

million financing round, a Virginia-based Internet-services company, Network Solutions

Inc., approached Wooten about selling ImageCafé. Time seemed to be running out and

closing the $3 million on acceptable terms was proving to be more difficult than Wooten

had ever anticipated.

Should he sell ImageCafé to Network Solutions, or risk losing it all for the potential of a

greater gain, if/when the financing materialized? And if he did decide to sell, what was

the right price?

Time was clearly not on his side.

Clarence Wooten Jr.

Clarence Wooten Jr. had a typical childhood dream: to get rich. His early

childhood, however, was less typical. At an early age, Wooten was fascinated by

television-based video games; for Christmas one year, he convinced his parents to buy

him an Atari game system. Wooten soon discovered that the game cartridges were too

expensive for him to purchase by himself. One day, a friend told him that home

computers such as the Commodore 64 did not require cartridges to play games, but used

program diskettes instead. One of the advantages of this new medium was that diskettes

could be copied from the original, effectively eliminating the expense of paying for

games cartridges. Wooten also learned that with a computer, games could be transferred,

or downloaded, between computers through conventional telephone lines using a modem

and what was called bulletin board software (BBS). A bulletin board was a computer that

would run 24 hours a day so that people could log in and download files from that host

computer. The following Christmas, Wooten persuaded his parents to buy him a

Commodore 64 home computer equipped with a modem.

It wasn’t long before his computer gave him access to a world he found more exciting

than non-computer reality. Wooten reflected fondly, “It was like the wild, wild West.”

This was clearly a discovery filled with adventure and challenge. From the age of

twelve, Wooten was on his computer from the minute he came home from school, until

well after midnight when his parents would finally make him go to sleep. He became so

immersed in this computer-based world, so obsessed with downloading the latest games,

that by age 14 his parents decided it was necessary to intervene. They banned him from

using the computer; it spent more than 3 months on a shelf locked in a closet. And

Wooten did not have the key. He remembers that, “It was like going cold turkey, like

sending a hacker to jail. But I was always computer savvy because of that background.”

Although the rest of his high school career was dominated by his involvement in

athletics, particularly basketball, Wooten never lost interest in his first love, the


Growing up

Wooten saw good times and bad during his childhood, moving between the city

and the suburbs in and around Baltimore, Maryland. Wooten was an only child; by the

time he was a teenager, both of his parents had become self-employed. As such, the

family’s income fluctuated depending on the success of his parents’ small businesses.

His father, Clarence Wooten Sr., formerly a steel mill laborer, gradually accumulated

rental properties in Baltimore. His mother, Cecilia, formerly a seamstress, ran a 24-bed

assisted living home with her sisters. The Wootens owned a house in the city, and when

times were good, they would rent that out while renting a house in the suburbs for

themselves. When times were not as good, they would move back into the city.

These frequent moves meant that Wooten had to transfer in and out of different school

systems—eight times in all. The constant transitioning between homes, school systems,

and friends was difficult for Wooten; however, this life style did enable him to become

comfortable adapting quickly to different situations. Wooten recalls, “Looking back, it

really helped me in terms of being able to be comfortable around all people. I can deal

with, literally, thugs and hardened criminals as well as people raised in a pampered

suburban lifestyle.” Wooten also credits his tumultuous life style as his motivation to

create wealth that would sustain himself, and eventually his entire family. He did not

want his adult life to be dictated by small fluctuations in income, as it had for his parents.

He was serious about his ambitions.

Wooten joked that he was the only high school kid with a business card.

An Underworld Introduction to Entrepreneurship

It was in the suburbs of Baltimore, that he became a member of a “cracking

group.”4Under the alias of “King Kaoz,” Wooten and fellow group members used their

computers to crack anticopying features enabling electronic games to be duplicated.

Unbeknownst to his parents, Wooten had become well known as part of a competitive

and elite computer “underworld.” The title “elite” meant that within 24 hours of a new

game’s release, you either cracked it, or had access to a cracked version. “I was more

interested in getting the games than actually playing them, it was the competition.” With

his computer and his intellect, he began to feel nothing was unobtainable; nothing was

out of his reach.

Wooten’s days as a software pirate started with his love of video games. After acquiring

his first home computer and receiving copies of cracked games from friends, Wooten

became obsessed with acquiring more and more games as quickly as possible. Diskettes

could easily be copied, but the software companies became more savvy and started

writing code onto the disks for copyright protection. This is where Wooten and his

cracking group came in. The group was a team: each had a task to perform in the

duplication process: The rich kid bought the software as soon as it was released, the

cracker removed the copy protection and added the group’s intro screen into the game,

and then Wooten, the distributor, used his computer to post the games on virtual bulletin

boards. The software was distributed to pirates and crackers around the world. The

bulletin board distribution method also involved “getting around” the phone bill incurred

from the dial up connection necessary to distribute and download software. It would

have been difficult for a pre-teen such as Wooten to explain to his parents why there were

international long distance calls on the phone bill, let alone afford the charges. One of

the “entry exams” to becoming “elite” was learning all of this on your own. Crackers

never divulged their dodging techniques. Wooten explained:

“I eventually ran my own bulletin board, Kastle Kaoz, with my computer which

went all day and night, connected to the phone line so that people could log in,

and if you were ‘elite’, I would give you access so you could download all the

latest games. There were only about 15-20 people in the World that had access to

my bulletin board, if you had access, you were like a ‘made’ guy. Our group was

he biggest in the world on the Commodore 64 for 6-7 months. So, it’s like being

an entrepreneur, it’s like being part of the Fortune 500, when you think if it.”

They were spurred on by the love of competition: which groups could crack the latest

software first, who could crack the most overall. There was a sense of pride from

accomplishing something never before accomplished. The reward was in a job well done

and the title of being elite, albeit pirate, members of the computer-cracking underworld.

Wooten noted that, “We’d add our own intro screens to games that we cracked so that

any kid in the world who received a copy of the game knew who we were. We were the

celebrities of the computer underworld.”

College Years: From architecture to computer graphics

In 1990, Wooten then 18, wanted to attend college to study architecture. He had a

small list of schools that were not only offering him a basketball scholarship, but also had

well known architectural programs. Wooten believed that the study of architecture would

satisfy all of his creative instincts. Unfortunately, he felt he had to compromise his

choice of academic programs to those offering him money. After Wooten’s best

scholarship offer fell through, he decided to attend Catonsville Community College in

Maryland. There, he decided to balance his time between basketball and architecture

classes, all the while deciding into which other college program he would eventually


The recession of the late 1980’s and early 1990’s left many professionals out of work;

many of these professionals returned to school to gain more marketable skills. Wooten

met many such professional architects in his college classes that had returned to the

classroom to learn about the newest computer-based architectural design programs,

known simply as CAD.5Wooten learned from these seasoned professionals that

architects generally did not start making significant incomes until they had reached their

40’s and had started their own firms. This notion raised doubts about architecture as his

career choice—Wooten’s intention was to achieve above average financial success in a

less than average amount of time. He remembered an event from his childhood when he

attended a catered party at a friend’s house. The reality of what “catered” meant came to

him as a shock; he had not previously known such things existed. In that seemingly

wealthy neighborhood everyone’s father was an entrepreneur of sorts, and no one’s

mother had to work. He recalled someone at that party telling him that a

disproportionately large amount of the country’s wealth was controlled by a relatively

small percentage of the population.6That was one conversation that Wooten never


Wooten was anxious to seek out opportunity, determined not to let his age or lack of

experience deter him. While still enrolled in architecture classes, he submitted a

prototype of one of his computer programs to a competition held by CADalyst magazine.

He came in first place, winning an AutoDesk Caddie Image Award for his production of

3-D architectural walk through animation.7More impressively, the prototype that won

the contest used information that was self-taught. Considering Wooten’s affinity for

computers and programming, it came as no surprise that he was a natural with CAD. In

fact, his skill with CAD and animation began to surpass his professors. As a result, the

college asked him to teach a course in animation while still a student. He accepted the

offer without hesitation.

Start-up #1: Envision Design

At the age of 20, while still enrolled at Catonsville Community College, Wooten

started his first company. Spurred on by the desire to create and to make money, he

founded Envision Design, a company based around his CAD and animation prowess.

Wooten’s idea was to produce 3-D walk-through animation for architects using similar

software to that which won Wooten theCADalyst magazinecontest.

Wooten identified his competition as the scale model business; architects still made

elaborate scale models of proposed buildings out of foam and cardboard. Some

architectural companies were willing to pay between $10,000 and $50,000 for such scale

models. He decided to price his service in line with scale models, under the assumption

that if customers were willing to pay a certain amount of money for a model, then they

would be willing to pay the same amount for his higher quality product. He charged

between $10,000 and $20,000 for a complete walk-through animation sequence.

Intuitively it made sense to the 20-year-old Wooten that a young college student starting

a small business should target other small firms as clients. He attempted to attract clients

by sending letters to every small architectural firm in the telephone directory from

Baltimore to Washington D.C. The letter was on Envision Design letterhead, stating the

service he offered and asking for a meeting to make a sales presentation. Envision

Design was ultimately unsuccessful. After one paying contract with a small firm,

Envision fizzled.

Failure and Re-start: Lessons Learned

Wooten decided that even though Envision Design had not been a success, he

wanted to continue working with animation. To further his understanding and education

in the field of animation, Wooten wanted to learn more about special effects and film

animation. He discovered that he would need to learn how to use the latest high-end

computer animation software that ran on Silicon Graphics Computers (SGI). He found

that the University of Maryland Baltimore County was building a state-of-the-art

computer science building equipped with SGI computers. He quickly decided to transfer

there. At UMBC, Peggy Southerland, herself a three-time Emmy winning computer

animator, ran the University’s Imaging Researching Center. Wooten was constantly

talking to Peggy, asking her countless questions and soliciting advice for his career.

Eventually, she offered him an internship. The internship meant that Wooten would gain

the necessary knowledge to work with SGIs, and have a well-renowned animator as his


Start-up #2: Metamorphosis Studios

Constantly on the look out for an opportunity, Wooten saw a way to use his new

knowledge of SGI animation software, to start his second company; Metamorphosis

Studios was developed with a partner, Andre Forde. Wooten and Forde had met at a

party when Wooten overheard a group of college students (including Forde) talking about

SGI software. Wooten was surprised to hear this topic of conversation, because as far as

he knew not many people, let alone young people, even knew about SGI. After meeting

and engaging in the conversation, both men knew they wanted to work together. A

chance encounter had become a major milestone for both Wooten and Forde.

Metamorphosis Studios focused on special effects and multimedia presentations. This

was achieved using PC-based animation and authoring software packages. As yet, the

two young men could not afford to purchase high-end Silicon Graphics Computers. The

company developed presentations and electronic brochures for any kind of medium,

including diskettes, CD-ROMs, and touch screens. Metamorphosis’ first customer,

Bingwa, was an educational software company that made an offer for a yearlong contract.

The contract required the Metamorphosis team to develop one software product per

month for a year, a total of 12 products, one for each grade 1-12. Metamorphosis was to

be paid $30,000 per product, a total of $360,000 by the year’s end. Both Wooten and

Forde considered this an enormous amount of money; clearly the pair was elated. After

earning $60,000 in two months for producing the software programs for grades 1 and 2,

Bingwa asked Metamorphosis Studios to relocate to Princeton, NJ and to become

employees of Bingwa. Although both Wooten and Forde were offered salaries of

$80,000 per year, they rejected the offer. They knew they were headed for bigger things.

Shifting Gears

After his experience with Bingwa and other various business customers, Wooten

decided that he wanted to shift his business model from a service-oriented focus to a

product-oriented focus. He wanted to bypass payment and commitment problems that

had arisen in dealing with customers such as Bingwa. Wooten saw “service” customers

as unreliable.

As Wooten and Forde contemplated their next move, they concluded that one of

their largest failings was their lack of focus and dedication to a specific task or goal.

Their multimedia skills enabled them too many options to pursue. They had dabbled in

producing products ranging from CD ROM educational titles and games, to Afro-centric

web site portals and virtual tours for online real estate brokers. Wooten had so many

ideas and so much energy, but before he had even fully thought out one idea, he had had

another and the first idea was pushed off to the side while the subsequent new idea began

to take shape. It was a problematic cycle that was having detrimental effects on their

success. If they were going to succeed, they would have to pick the “most” right product

idea and develop it from start to finish without distraction.

Besides the issue of focus and idea selection, another problem that Wooten and

Forde encountered was that Metamorphosis Studios was not generating revenue during

its new product development cycle. Fortunately, there seemed to be a dearth of capital

available for the right deal, especially for young African-American entrepreneurs such as

him.8Traditionally, African-American entrepreneurs tended to be trapped in small-scale

ventures more often than their Caucasian counterparts because it was more difficult to

obtain growth capital. Wooten believed that social, cultural, and racial hierarchies and

biases were to blame for the disproportionately large number of Caucasian investors, and

accordingly the disproportionately small amount of growth capital available to the

African-American business community. In as much as he could empathize with the risk

perspective of such investors, he clearly felt the result to be unfortunate. (See Endnotes 1

and 2). Despite this belief, Wooten remained undeterred. Once they had identified the

idea and target market for their next venture, ImageCafé, Wooten and Forde sold the

assets of Metamorphosis Studios for $20,000.It was time to move on.

Back To School, Again

Fascinated by entrepreneurs and their roads to success, Wooten read everything

he possibly could about their lives and their experiences, good and bad. He found the

stories of Fred Smith, Reginald Lewis, and Bill Gates to be particularly inspirational.

Wooten realized that the common thread connecting these entrepreneurs was that they all

understood finance. Based on this conclusion, he changed his major to Business

Administration and Finance, and enrolled at Johns Hopkins University. Wooten knew

that he needed a much deeper understanding of finance if he wanted to be a successful

entrepreneur, regardless of how creative with a computer he was. He finally understood

that the value of being fluent in Finance would be reflected by his success in raising

capital to build a high potential venture. In addition to finance, Wooten was intensely

interested in understanding exactly how to scale and grow a business—the two kernels

essential for success as Wooten envisioned it. Wooten received his business degree in

1998 with great personal satisfaction.

In 1995 the Internet began to grow with exponential speed. Companies were flocking to

the Internet in droves. Even small companies, that lacked the resources to hire a

professional web design firms to create their websites, were experiencing a growing need

to be on the World Wide Web. When he thought about it, creating websites seemed like

a natural transition for Wooten and Forde given their background. They had extensive

knowledge in the field and the creative design skills. In fact, it was what Wooten and

Forde did best. And most importantly, to fulfill their personal goals, he had an idea of

how they could make creating web sites for companies a product, not a service. This time

they believed they had the knowledge and the focus to succeed.

Launching ImageCafé

Wooten became obsessed with websites. At this time, there were about 4.1

million active commercial online service users and a forecasted 9 million online service

customers worldwide. The number of online customers worldwide was expected to

increase by 6 million in the next year.Online observers also forecasted that in 1996

there would be nearly 80,000 websites worldwide, and in 2001, approximately

50,000,000.Wooten surmised that many of these computer users and companies would

need a website.

Wooten surmised that there were two ways for a company to obtain a website. The first

was to hire a dedicated, full-time web design firm. The cost of such a service was

typically $3,000 to $6,000.12The second option was more of a “do-it-yourself” (DIY)

method with relatively inexpensive software programs that gave businesses the basic

tools to design a website independently. Wooten saw problems with both options. His

experience with Metamorphosis Studios taught him that small businesses could not afford

the high costs of hiring a full-service web design company. And the problem with the

DIY software was that there was a steep learning curve for its appropriate use, not to

mention the sheer necessity of pure creativity. Without technical skill and artistic ability,

the results were often websites that seemed “cheap” and “unprofessional.” The web was

becoming an extension of a company’s image; none could afford to erode their images.

Wooten saw a clear demand by small businesses for his innovate product.

Times were changing fast. Small businesses were beginning to understand that a

website was a necessary cost of doing business. They generally did not have the

resources big businesses had to invest in costly professionally designed websites.13

Wooten knew he could meet some of this demand, and in early 1998, ImageCafé was

founded. His vision was to create the world’s first online superstore of prefabricated

websites for small businesses. Using their extensive knowledge of high-end software,

HTML, web programming, and artistic ability for developing graphical-user interfaces,

ImageCafé would design high-end websites. The interesting angle for ImageCafé was

that it would develop website templates created to imitate the premium and costly custom

sites designed by fully dedicated web design firms. Wooten referred to the templates as

“customizable website masters,” a term that he felt was more marketable. By

prefabricating the website masters, ImageCafé lowered its costs without sacrificing the

premium appearance of the websites. The template business model also took the

“service” aspect out of the business by providing a product that was ready to be deployed

quickly. The array of website templates was offered through ImageCafé’s online

superstore. Customers would create an account, log-in, and shop for the website of their

choice, which could then be customized easily to specific needs using ImageCafé’s

online website manager tools. Wooten remarked:

Small businesses are tough clients because they want the world, but they are not

willing to pay for it. Business owners started to see a website like they did their

telephones. They couldn’t imagine not having a telephone and they started to

think the same about a website.

By prefabricating the templates, ImageCafé could charge under $500 for what originally

would have cost many times that amount to design the website. This model seemed an

incredible value for the world of small business. Wooten’s slogan was “look like the

Fortune 500 for under $500.” ImageCafé addressed and solved the pitfalls that had been

the downfall of his two previous companies. He knew this market, he focused on what he

knew he could do best, and he transitioned from the service industry to the product

industry as planned.

The Search for Capital

Once Wooten had thoroughly thought through the concept and model of

ImageCafé, the next critical step was to secure enough capital for its launch. Wooten had

recently read The Burn Rate,14which mentioned the law firm Wilson, Sonsini, Goodrich

& Rosati (WSGR), one of the most powerful law firms in Silicon Valley. Wooten

believed that if he could become a client of WSGR, it would help give him the credibility

needed to raise capital.

WSGR practiced in the areas of Antitrust, Corporate & Securities, Employee Benefits,

Employment Law, Fund Services, Intellectual Property, Litigation, Realestate/Environmental, Tax, and Wealth Management, and was known for its technologypractice. On the firm’s website, Wooten began reading the alphabetical the profiles of itsattorneys. Wooten did not have to get past the “A’s” before he picked out four youngassociates close in age to himself that he hoped might be able to relate to him and hisgoals. He sent emails to these associates saying that he had founded an east coast basede-commerce Internet startup, and was not only looking for Silicon Valley based legalrepresentation, but also venture capital funding.

Wooten’s plan worked—he managed to catch the attention of one such attorney, Mike

Arrington. After reading ImageCafé’s Executive Summary and viewing the web-based

prototype, Arrington was intrigued by the unique idea; he believed that Wooten and

Forde would be able to obtain funding. Within a few short days of that initial meeting,

Wooten and Forde had WSGR representation. Wooten had negotiated a package of legal

services totaling $40,000, which would be written off if ImageCafé failed to receive

sufficient funding.

The Relentless Pursuit of Capital

Herein began ImageCafé’s quest for capital. Wooten decided he needed to meet

other entrepreneurs or individuals that might be interested in supporting his vision. One

such individual was Dwayne Walker, a well-known ex-Microsoft employee who left with

stock options, great technical knowledge and a thirst to start his own company—

Techwave. As Wooten put it, “he was a black man who raised $10 million. That

qualified him as a man I needed to meet.” After calling Walker daily, Wooten eventually

spoke with him to set up a meeting in Seattle, Washington where Walker was based. The

meeting went well. As the meeting ended, Walker declared that he wanted to be

ImageCafé’s first Angel investor.

But there was a catch. Walker wanted to be able to incubate15the new company in the

Seattle area, which meant that Wooten and Forde would have to relocate to the west

coast. A move would be hard on ImageCafe. At the time, Wooten and Forde had a small

team of two programmers working on the back-end programming part time as

moonlighters. The programmers had agreed to be paid $30,000 in stock or cash once

capital had been raised. When Walker made his offer the ImageCafe superstore was 60%

finished—Wooten could not possibly relocate his whole team, not at the crucial eleventh


After hearing the second catch, that the half million dollars would be paid to ImageCafe

in $20,000 increments based on milestones, Wooten and Forde said no thank you, and

goodbye to Mr. Walker.

Still Going

WSGR set up several meetings for Wooten with venture capital firms in Silicon

Valley. While waiting for the flight to the west coast, he remembered reading about an

African-American, Earl Graves (See Endnote 3), who had obtained his Pepsi bottling

franchise in part by sitting next to one of the Pepsi executives on a plane in first class.

Wooten said to himself, “Maybe it does pay to fly first class.” Wooten convinced a flight

attendant friend to move him up from coach. With luck apparently on his wing, Wooten

found himself seated next to Bill Daniels, a principal at Bank Boston Robertson

Stevenson. Wooten recalled, “I had a captive audience for literally 6 hours. I talked

about why I was going to Silicon Valley and whom I was going to see. I showed him the

business plan…” By the end of the flight Daniels had become Wooten’s first realistically

interested Angel investor. Wooten walked off the plane with a list of names to see in

Silicon Valley. This was a good way to start off his trip.

Shortly after returning from his trip to Silicon Valley, Wooten decided to speak to his

family and friends to raise a few hundred thousand dollars. Closing the “friends and

family round” proved to be challenging. However, his girl friend (now wife) at the time

passed the business plan on to her cousin who worked for Sonny Stern, a New Jersey

doctor who had been involved with venture capital for many years. As luck would have

it, Dr. Stern turned out to be a client of the same Bill Daniels that Wooten had met on his

trip to Silicon Valley a month earlier. Upon conferring with Mr. Daniels, and sending

Wooten to meet with other potential investors in New York, Dr. Stern and Bill Daniels

decided to lead an Angel round. Wooten was also able to get WSGR to invest in the

financing. This was big!

Wooten wanted $300,000 in capital, based on a $3,000,000 valuation; for this, he was

willing to give up 10% of the company. In total, ImageCafe received $110,000 from ten

Angel investors, for which he relinquished 11% of ImageCafé’s equity. And to think,

this chain of events had all started with a “chance” encounter on an airplane. However

good news this was, still, Wooten was a bit disappointed; he had been expecting more.

It was December of 1998, the software was 70% finished, and the $110,000 would not be

nearly enough. With a touch of sour grapes, Wooten remembered, ”During that time,

everybody was throwing out five million dollar valuations, before they had anything. I

had a functional prototype, as well as a plan. I went from Silicon Valley to Silicon Alley,

raising money. I thought a $3,000,000 valuation was fair, but I couldn’t get a bite.”

Four months later, in April of 1999, the ImageCafé website was finished and ready for

launch—but Wooten and Forde were out of cash. Upon launch, ImageCafé received

enough press attention that additional investors seemingly came out of the woodwork to

invest in the Company. Armed with additional interest from new potential investors,

Wooten was able to negotiate an additional $150,000 in the form of a bridge loan from

the existing investors. The loan would be convertible at a small discount at the close of

the first venture capital round. Wooten felt as though he could expect to raise $3,000,000

at a $10,000,000 valuation from one or more venture capitalist firms.

Just before the $150,000 came through, Wooten was able to secure a big customer,

Mindspring, one of the largest Internet Service Providers (ISP). Mindspring agreed to

commit to ImageCafé’s products before Wooten and Forde had even finished the

products! They only had a prototype and knew they would need millions of dollars to

execute their plan. Wooten recalls:

We wanted to leverage the existing channel, and that was the Internet Service

Providers. They had a lot of small business customers. We basically would allow

them to co-brand and create their own, what I call, virtual franchise, their own

ImageCafé superstore—ImageCafé at Mindspring, ImageCafé at Earthlink, Image

Café at AOL…and it was good for them because it allowed them to pick up more

hosting business. They wanted to host the website; we wanted to sell the website

as well as subscriptions to our website manager tool. I made sure we didn’t go

into the hosting business because I didn’t want to cannibalize our channel. It was

a beautiful business model.

Still, this required cash that ImageCafe did not have. Although Wooten and Forde had

burned through the $260,000 (the initial $110,000 equity investment plus the $150,000

bridge loan), they managed to launch the product and attract a large customer.

At the same time as the Mindspring deal, Wooten was also courting Network Solutions,

Inc., a company which nearly had a monopoly on dot com (domain) names. Wooten

believed that Network Solutions would be a perfect channel to deliver the ImageCafe

product line. Millions of people went to Network Solutions “credit card in hand” to buy

a domain name; the next natural step after obtaining a domain name was to build (or buy)

a website. Because Image Café was a shopping experience and not a building

experience, Network Solutions could attach ImageCafé to its purchase flow. As soon as a

small business customer bought a domain name, the new company could also buy an

ImageCafe website. The phrase, “one stop shopping” certainly came to mind. Wooten

recalls, “It didn’t hurt their channel because most of their resellers of domain names were

ISP’s. So here, we could help them to reward their top resellers, by sending them hosting

business from customers who had purchased ImageCafe websites.”

Wooten finally set a meeting with Network Solutions and quickly moved up the ranks to

the Company’s, then new, CEO, Jim Rutt. Rutt loved ImageCafé, and believed it was the

perfect product extension for Network Solutions’ business.

Product On Track, But Out of Cash (OOC!)

By June of 1999, Image Cafe was again out of cash. Wooten had been working to

arrange what he perceived as the perfect financing round for several months: He had 3

major investors who were interested in investing, two venture capital firms, and Network

Solutions. Wooten was looking for a total investment of $3,000,000; he wanted

$1,000,000 from each investor, on a $10,000,000 valuation. One investor felt a

$10,000,000 valuation was too high. As the negotiations dragged on, another of the three

agreed to loan Image Cafe $150,000. Negotiations continued to drag on because of the

valuation. Wooten was even willing to sweeten the deal with $500,000 in warrants, split

three ways.

In the middle of the valuation discussions, Network Solutions made a buy out offer.

After brief, but intense discussions with Rutt, Wooten found himself with a offer that was

potentially worth $21 million: a third in cash, a third in Network Solutions stock, and a

third in an earn-out.16Wooten owned a majority of ImageCafe, and this offer would

clearly mean a big payday. But there was a hitch.

The last bridge loan Wooten had received from the venture capitalists had a 90-day “no

shop” clause attached. Running out of cash, and unable to sell the company until

September, Wooten went to a company called Mid Atlantic Ventures, who had been

interested in investing all along.

With now more than 20 employees to pay, and a burn rate of $50,000 per month, the cash

was going fast. Although very interested, Mid Atlantic Ventures (MAV) would not be

able to invest until it had performed its required due-diligence. In the meantime,

understanding Wooten’s immediate cash needs, MAV referred him to two new Angel

investors who agreed to extend him a $300,000 bridge loan with warrant coverage on a

$6,000,000 valuation—this would at least hold Image Cafe over through the summer.

Wooten remembered intensely, “I had worked so long and hard to put together the

perfect financing round that never went through because I wanted a $10,000,000

valuation—and on a Sunday afternoon, I ended up giving that away out of necessity.”

It was September, and again out of cash, Wooten had a difficult decision to make.

Image Cafe hung in the balance. Should he sell now, or secure more capital to continue

the fight?

Preparation Questions:

1. Evaluate Clarence Wooten’s strengths and weaknesses.

2. What do you think about Clarence’ product versus service conclusion? What

are the strengths and weaknesses of his argument?

3. Analyse and assess the Image Café opportunity.

4. What do you think of Clarence’ fund raising strategy?

a. Should he have taken Dwayne Walker’s offer?

b. Does he need to raise $3 million?

5. How would you respond to Network Solutions offer?

6. How would you go about valuing Image Café?

7. What are the personal implications for Clarence Wooten if he sells or not?

End Note 1

African-American applicants for small-business financing are denied credit twice as often

as Caucasians with similar creditworthiness, according to the latest research. One key

study, already posted by the National Bureau of Economic Research, found raw loandenial

rates of 27% for Caucasians and 66% for African-Americans. “There’s evidence

that the market isn’t working properly,” says lead author David G. Blanchflower,

chairman of the economics department at Dartmouth College in Hanover, N.H.

Endnote 2

“Minorities and Venture Capital” A new study from the Ewing Marion Kauffman

Foundation (NCOE’s sponsor) provides the most detailed look to date at the connections

between minority entrepreneurs and the venture capital industry. The report examines

funds operated by members of the National Association of Investment Companies

(NAIC), an association of investment firms with interest in backing minority business

enterprises (MBEs). A few interesting findings stand out. First, the growth in minority

enterprise venture financing is quite rapid. In the early 1990s, only several million dollars

had been invested in MBEs. Today, the industry has more than $1 billion under

management. The researchers, Wayne State’s Timothy Bates and University of

Washington’s William Bradford, also found that this sector is quite profitable. The

average investment per firm was $562,000; the average net return on this investment

exceeded $1 million. The average rate of return exceeded 20%-compared to a 17%

return for the S&P 500 over the same period. These funds also tend to invest in a wider

mix of industrial sectors, thus cushioning the industry from some of the effects of the

technology downturn. Overall, the authors conclude that the minority venture capital

investment sector is poised for further expansion.

Please see the following for more information: “Minorities and Venture Capital:

A New Wave in American Business,” by Timothy Bates and William Bradford,

Endnote 3

Earl G. Graves is considered the preeminent authority in America on African-American

business. The locus of that authority isBlack Enterprise, the magazine he founded in

1970, and which now has a circulation of nearly 300,000 and revenues of $24 million.

Graves is the magazine’s publisher as well as both the president and chief executive

officer of the parent company, Earl G. Graves Limited. He is also co-owner with Earvin

“Magic” Johnson of a Washington, D.C.-based Pepsi Cola distributorship, a firm which

happens to be the largest minority-controlled Pepsi franchise in the nation. Johnson

serves as chief executive officer of the Pepsi franchise. These two business ventures

have propelled Graves into the ranks of elected board members of prestigious businesses

and trustees of well-known foundations. He has become a leading spokesperson on

issues that affect the well-being and economic success of African-Americans. He has

used his expertise to educate others on trends and opportunities in African-American

entrepreneurship.(Biography Resource Center, 2001,Gale, Group Inc.)

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