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Harvard Business School EssayAugust 8, 1995 had taken an unexpected turn for Netscape Communications Corporations board of directors. Earlier that morning, the daytime before the companys scheduled initial public offering (IPO), Netscapes lead on a lower floorwriters proposed to the board a 100% increase in the passe-partout offering price from $14 to $28 per share. This recommendation came in response to the remarkable oversubscription for Netscapes shares, which had already prompted the underwriters to increase the number of shares to be offered from 3.5 million to 5 million. Under the current proposal, a company with a net book value of just over $16 million that had yet to turn a profit, was suddenly valued at over billion. The Board faced a pricing dilemma indoors the context of an extremely unpredictable industry. While its members treasured to be responsive to Wall Streets current zeal, they also treasured to make sure that the fundamentals of Netscape justified suc h a striking increase in valuation.Netscape CommunicationsFounded in April 1994, Netscape Communications Corporation provided a comprehensive line of client, server, and integrated applications software packagefor communications and commerce on the meshing and private Internet Protocol (IP) meshworks. These products enabled the growing network of servers on the World Wide Web to communicate through multimedia, including graphics, video and sound. Designed with enhanced security system code, these software products provided the confidentiality required to execute financial transactions and to sell advertisements on the Internet and private IP networks.The companys most popular product, Netscape Navigator, was the tip client software program that allowed individual personal data processor (PC) users to exchange in human bodyation and conduct commerce on the Internet. Navigator featured a click-and-point vivid user interface that enabled users to navigate the Internet by manipu lating icons and windows rather than by using text commands.With the user-friendly interface as a guide, Navigator offered a variety of Internet functions including Web browsing, file transfers, news group communications, and e-mail. Initially shipped in December 1994, Netscape Navigator generated 49% and 65% of entirety revenues for the quarters end March 31, 1995, and June 30, 1995, respectively. Netscapes server software provided enterprises with the basic capabilities necessary for creating and operating Web server sites, or places on the Web which browsers could visit.Research Associate Kendall H. Backstrand wrote this character under the supervision of Professor W. Carl Kester as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 1996 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Busine ss School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Harvard Business School.Incorporating both browser and server functions, the companys integrated applications software programs were designed to provide enterprises with the capability to manage large-scale commercial sites on the Internet. Such applications enabled these enterprises to conduct full-scale electronic commerce through a broadloom system. Together, server and integrated applications software accounted for 36% of total revenues in the first quarter of 1995, and 28% of total revenues in the second. Of these revenues, the majority were generated by one of Netscapes three server products, Netscape Commerce Server.1 Revenues from Netscapes server and integrated applications products were expected to increase as a percentage of overall revenues in the future. In addition to product revenues, Netscape generated service revenues, which were attributable to recompenses from consulting, maintenance, and support services. These revenues amounted to approximately 5% and 7% of total revenues for the quarters ended March 31, 1995 and June 30, 1995, respectively.Financial PerformanceNetscape had incurred total losses of $4.3 million on total revenues of $16.6 million for its first two operating quarters ended June 30, 1995. The company expected to continue to operate at a loss for the foreseeable future. Exhibits 1 and 2 provide Netscapes financial statements since its incorporation in April 1994.Operating activities for the six months ended June 30, 1995 had generated $7.3 million in cash. Cash flows from financing activities of $20.5 million were primarily attributable to the net proceeds of $17.3 million from the issuance of Series C Preferred Stock and borrowings of $2.2 million under a debt facility agreement. Cash used in investment activities of $22.1 million related to $16.6 in short-term investments and $5 million in uppercase expenditures. At the end of the second quarter of 1995, Netscapes principal sources of liquidity were $8.9 million in cash and the $16.6 million in shortterm investments. The company expected total capital expenditures for 1995 of approximately $12 million.Industry BackgroundThe demand for Netscapes products had evolved out of the development of the Internet in the late 1960s. The Internet was a global network designed to facilitate communication between some 35,000 computer networks using the enabling code termed Internet Protocol. According to International Data Corporation (IDC), in mid-1995 there were approximately 57 million Internet users. Of those 57 million users, IDC estimated that approximately 8 million were portaling information on the World Wide Web.Engineered in the early 1990s, the Web was a technology that linked one bit of information on the Internet with another so that users could share webs of ideas. The Web consisted of a network of Web servers that posted information in a common format described by the Hypertext Markup Language (HTML). Internet users were able to charm money information on the Web by implementing the appropriate Hypertext Transfer Protocol (HTTP). Because it necessitated complex coding, the Web had remained largely undiscovered by nontechnical users who simply wanted to browse, a popular pastime which came to be dubbed surfing the Net.1Bundled packages of Netscape Navigator and Netscape Commerce Server accounted for about 10% of totalrevenues in the first quarter, while its theatrical role in the second quarter was immaterial. 2Netscapes Initial Public OfferingNetscapes EntranceMeanwhile at the University of Illinois at Urbana-Champaign, a group of computer science students working at the National Center for Supercomputing Applications (NCSA) developed the graphical software program that gave rise to the notion of surfing. Named NCSA Mosaic, the software program enabled nontechnical users to access and retrieve information on the Web. The Mosaic code organized Web information into neat collections of graphical electronic menus on which users could simply click-and-point to browse their contents.In April 1993, the founders of Mosaic, under the leadership of then senior Marc Andreessen, began distributing the software for free to anyone who had the technical means to fetch it electronically. The superb results of this strategytwo million Mosaic users within one yearmade for more than cocktail conversation among high-tech gurus in Californias Silicon Valley. Jim Clark, the founder of Silicon Graphics, Inc. (known for its workstations that turned data into three-D computer images), was among those who were impressed not only by Mosaic itself but by the broader vision of its creator, Andreessen.After hearing that Andreessen had moved to Silicon Valley in ear ly 1994, Clark sent him an email asking if they might meet to discuss the future ofMosaic. This exchange and subsequent discussions formed the launching pad for Mosaic Communications, which was short renamed Netscape Communications Corporation. In addition to dropping the Mosaic name, Netscape paid Spyglass (the company that had engaged in an exclusive licensing arrangement with the University of Illinois) a one-time $2.4 million fee for the rights to certain Mosaic code. With the original code, Clarks management experience and $3 million in seed money, and Andreessens vision and technical expertise, Netscape made its entrance into the highly dynamic Internet market.