The Start Up Challenge Michael Kay Kay Associates May 05
Right Time, Right Product, Right Market <ul><li>“ The strongest principle of growth lies in human choice .”   </li></ul><u...
The Start Up Challenge – It’s Not Easy! <ul><li>“ We see others making progress, yet we seem to be stuck!  Why?” </li></ul...
First Ask Yourself……… <ul><li>Why start a new business? </li></ul><ul><li>How big is the market opportunity? </li></ul><ul...
Why Start a New Business? <ul><li>Because you have a vision! </li></ul><ul><ul><li>Can the vision be articulated clearly a...
How Big is The Business Opportunity? <ul><li>Do you know your target market (and segments)? </li></ul><ul><ul><li>Be speci...
Who is Your Customer? <ul><li>Know where you are in the “food chain”, and who sells to whom </li></ul><ul><ul><li>Componen...
What Customer Pain Points Are Addressed? <ul><li>Can you pinpoint the bottlenecks and pain points customers suffer in your...
What Products and Services Will Be Supplied? <ul><li>Are the products evolutionary or revolutionary? </li></ul><ul><ul><li...
How Will The Product Benefit Your Customer? <ul><li>Features and benefits </li></ul><ul><ul><li>Are the features clear, un...
Why Will Customers Choose Your Product? <ul><li>Sufficient differentiation and easy to understand benefits? </li></ul><ul>...
How Much Capital Will Be Needed? <ul><li>Has a thorough financial analysis been completed? </li></ul><ul><ul><li>By techno...
What Are the Sources of Capital? <ul><li>Own, family/friends </li></ul><ul><li>Pre-sales, NRE, joint development projects ...
Private Equity Source: Soundview Technology Group Kay Associates May 05 Stage Funding Sources Agent Seed / Startup Self / ...
Valuation <ul><li>In the eye of the beholder! </li></ul><ul><ul><li>Quite subjective, but look for comparables. </li></ul>...
Private Equity Valuation Drivers <ul><li>Quality of management team </li></ul><ul><li>Size and maturity of market opportun...
Term Sheets <ul><li>The obvious cost </li></ul><ul><ul><li>Shares sold </li></ul></ul><ul><ul><li>Price per share </li></u...
Initial Public Offering (IPO) <ul><li>Has become a major challenge! </li></ul><ul><li>Public investors want </li></ul><ul>...
IPO Valuation Considerations <ul><li>Minimum Market Float:  $40 – $50 million </li></ul><ul><li>Maximum Percentage of Comp...
Trade Sale <ul><li>Can be stock or asset purchase </li></ul><ul><li>Asset purchase leaves “baggage” behind for acquirer an...
Are You Meeting Milestones? <ul><li>Be assured that companies making progress are addressing the issues and rationalizing ...
Simply Put……. <ul><li>Vision! </li></ul><ul><ul><li>Expressed in a business plan. </li></ul></ul><ul><ul><li>Revealed thro...
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The Start Up Challenge

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2005 Presentation on the start up challenge in high tech industry.

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  • The Start Up Challenge

    1. 1. The Start Up Challenge Michael Kay Kay Associates May 05
    2. 2. Right Time, Right Product, Right Market <ul><li>“ The strongest principle of growth lies in human choice .” </li></ul><ul><ul><ul><ul><li>George Eliot </li></ul></ul></ul></ul>Kay Associates May 05
    3. 3. The Start Up Challenge – It’s Not Easy! <ul><li>“ We see others making progress, yet we seem to be stuck! Why?” </li></ul><ul><ul><li>Is it technology? </li></ul></ul><ul><ul><li>Is it product? </li></ul></ul><ul><ul><li>Is it target market? </li></ul></ul><ul><ul><li>Is it money? </li></ul></ul><ul><ul><li>Is it location? </li></ul></ul><ul><ul><li>Are they just better than us? </li></ul></ul><ul><li>Let’s take a look at some important elements…………. </li></ul>“ If there is no struggle, there is no progress .” Frederick Douglass Kay Associates May 05
    4. 4. First Ask Yourself……… <ul><li>Why start a new business? </li></ul><ul><li>How big is the market opportunity? </li></ul><ul><li>Who is your customer? </li></ul><ul><li>What “customer pain” is being addressed? </li></ul><ul><li>What product and service will the business deliver? </li></ul><ul><li>How will the product benefit the customer? </li></ul><ul><li>Why will a customer use your products? </li></ul><ul><li>How much capital will be needed for each stage of development? </li></ul><ul><li>Where will the required capital come from? </li></ul><ul><li>What is the exit strategy for investors? </li></ul>Kay Associates May 05
    5. 5. Why Start a New Business? <ul><li>Because you have a vision! </li></ul><ul><ul><li>Can the vision be articulated clearly and simply? </li></ul></ul><ul><ul><ul><li>A business plan with attitude. </li></ul></ul></ul><ul><ul><li>Are technology/products evolutionary or revolutionary? </li></ul></ul><ul><ul><ul><li>There is no right or wrong answer, just a clear answer. </li></ul></ul></ul><ul><ul><ul><li>If revolutionary the challenge can be a lot tougher! </li></ul></ul></ul><ul><ul><li>What are the ingredients and factors for success? </li></ul></ul><ul><ul><ul><li>Quantified and qualified. </li></ul></ul></ul><ul><ul><li>Is the business sustainable and scalable? </li></ul></ul><ul><ul><ul><li>Target growth markets – products to meet the demand </li></ul></ul></ul>&quot;Everything should be made as simple as possible, but not one bit simpler”. Albert Einstein Kay Associates May 05
    6. 6. How Big is The Business Opportunity? <ul><li>Do you know your target market (and segments)? </li></ul><ul><ul><li>Be specific – don’t “cast a wide net” </li></ul></ul><ul><li>Do you know what the market drivers are? </li></ul><ul><ul><li>What drives these markets? </li></ul></ul><ul><ul><li>Will your customers pay a premium for your product/service? </li></ul></ul><ul><li>How big is the market opportunity (TAM, SAM, SOM)? </li></ul><ul><ul><li>Top-down understanding is good, but must be supported with bottom-up planning – this WILL require customer endorsement. </li></ul></ul><ul><li>What is the “go-to-market” strategy? </li></ul><ul><ul><li>Alpha/Beta sites? Broad-based channel launch? Partnership? </li></ul></ul><ul><li>Once in the market, can the products sustain a strong position? </li></ul><ul><ul><li>How will you handle competition (technology leadership, highly differentiated product roadmap, customer support)? </li></ul></ul><ul><li>Is the technology/product scalable? </li></ul><ul><ul><li>As the markets grow and new opportunities present themselves, is the technology and product roadmap able to adapt? </li></ul></ul>Kay Associates May 05
    7. 7. Who is Your Customer? <ul><li>Know where you are in the “food chain”, and who sells to whom </li></ul><ul><ul><li>Component in a sub-system? </li></ul></ul><ul><ul><li>Sub-system in a system? </li></ul></ul><ul><ul><li>System solution? </li></ul></ul><ul><li>Know the gestation period between winning the business and collecting payment! </li></ul><ul><ul><li>Design win to an order </li></ul></ul><ul><ul><li>An order to a shipment/invoice </li></ul></ul><ul><ul><li>Invoice to payment </li></ul></ul><ul><li>Assess the risk and exposure in the food chain </li></ul><ul><ul><li>Capture revenue by point-of-sale (POS), not point-of-purchase. </li></ul></ul><ul><ul><li>Build to order or build to inventory turns? </li></ul></ul>May 05 Kay Associates
    8. 8. What Customer Pain Points Are Addressed? <ul><li>Can you pinpoint the bottlenecks and pain points customers suffer in your target markets? </li></ul><ul><li>Can you show them how your product removes the pain and bottleneck? </li></ul><ul><li>Customers want short term fixes and long term solutions (“aspirin” and “vitamin”). </li></ul><ul><li>Can you show a roadmap that will address your customer’s future challenges? </li></ul><ul><li>Can you show how your solution is unique or highly differentiated? </li></ul>“ Pain is inevitable; suffering is optional.” Unknown Kay Associates May 05
    9. 9. What Products and Services Will Be Supplied? <ul><li>Are the products evolutionary or revolutionary? </li></ul><ul><ul><li>Revolutionary means concept selling, but should create longer term sustainability. </li></ul></ul><ul><ul><li>Evolutionary requires first mover mindset – stay ahead of the crowd </li></ul></ul><ul><li>How many products are there? </li></ul><ul><ul><li>Is this a one-product company? If so, make sure it’s “Coca Cola”! </li></ul></ul><ul><li>Is there a product roadmap? </li></ul><ul><ul><li>Customers expect to see how the technology/product roadmap will support their needs going forward. </li></ul></ul><ul><li>What level of service will you have to provide? </li></ul><ul><ul><li>Field support, design in/win resources, sales training, system level reference designs </li></ul></ul><ul><li>There is no product without service. </li></ul><ul><ul><li>Often underestimated, sometimes ignored. </li></ul></ul><ul><li>A sign of celebrity is that his name is often worth more than his services. </li></ul><ul><ul><li>Daniel J. Boorstin </li></ul></ul>Kay Associates May 05
    10. 10. How Will The Product Benefit Your Customer? <ul><li>Features and benefits </li></ul><ul><ul><li>Are the features clear, unambiguous and compelling? </li></ul></ul><ul><ul><li>What is the benefit to the customer? </li></ul></ul><ul><ul><ul><li>Time to market? </li></ul></ul></ul><ul><ul><ul><li>Time to money? </li></ul></ul></ul><ul><ul><ul><li>Cost? </li></ul></ul></ul><ul><ul><ul><li>Competition “killer”? </li></ul></ul></ul><ul><ul><ul><li>Performance? </li></ul></ul></ul><ul><ul><ul><li>Flexibility, versatility? </li></ul></ul></ul><ul><li>Is “ease of use” a factor? </li></ul><ul><li>Get the customer excited by your products! </li></ul>May 05 Kay Associates
    11. 11. Why Will Customers Choose Your Product? <ul><li>Sufficient differentiation and easy to understand benefits? </li></ul><ul><li>Compelling features and ease of use? </li></ul><ul><li>New companies are always considered a risk </li></ul><ul><ul><li>Lack of resources, financial risk, may not meet commitments etc. </li></ul></ul><ul><li>How will you overcome these perceived issues? </li></ul><ul><ul><li>Use references. </li></ul></ul><ul><ul><li>Access to board members. </li></ul></ul><ul><ul><li>Initially, limited customer engagements to show focus and intent on success. </li></ul></ul><ul><ul><li>Close communication with customers at executive level. </li></ul></ul><ul><li>Does the customer-base know you exist (or even care)? </li></ul><ul><ul><li>Participation in standards committees, article contributions etc. </li></ul></ul>Kay Associates May 05
    12. 12. How Much Capital Will Be Needed? <ul><li>Has a thorough financial analysis been completed? </li></ul><ul><ul><li>By technology development </li></ul></ul><ul><ul><li>By product development </li></ul></ul><ul><ul><li>By cost center </li></ul></ul><ul><ul><li>By Geography </li></ul></ul><ul><li>Have business objectives been correctly resourced? </li></ul><ul><ul><li>People, equipment, communications </li></ul></ul><ul><li>Have value-building milestones been defined? </li></ul><ul><ul><li>Customer validation of products </li></ul></ul><ul><ul><li>First product delivery </li></ul></ul><ul><ul><li>First revenues </li></ul></ul><ul><li>Can early revenues or pre-sales be leveraged? </li></ul><ul><ul><li>Customers/partners pre-paid participation </li></ul></ul>Kay Associates May 05
    13. 13. What Are the Sources of Capital? <ul><li>Own, family/friends </li></ul><ul><li>Pre-sales, NRE, joint development projects </li></ul><ul><li>Seed, “angel” </li></ul><ul><li>Institutional investors – VCs </li></ul><ul><li>Directed equity investment through corporate player </li></ul><ul><li>Private Placement </li></ul><ul><li>Initial Public Offering </li></ul><ul><li>Debt leveraging </li></ul><ul><li>The tooth fairy teaches children that they can sell body parts for money. </li></ul><ul><ul><li>David Richerby </li></ul></ul>Kay Associates May 05
    14. 14. Private Equity Source: Soundview Technology Group Kay Associates May 05 Stage Funding Sources Agent Seed / Startup Self / Family / Friends / Angels / Venture Capital No Early Stage (Series A) Venture Capital No Expansion (Series B) Venture Capital / Corporate Sometimes Expansion / Later Stage (Series C) Venture Capital / Corporate / Institutional Often Mezzanine (Series D,...) Corporate / Institutional Yes Refinancing (“down round”, “pay to play”, etc.) Self / Venture Capital Sometimes
    15. 15. Valuation <ul><li>In the eye of the beholder! </li></ul><ul><ul><li>Quite subjective, but look for comparables. </li></ul></ul><ul><ul><li>Based on forward looking projections, then discounted for risk. </li></ul></ul><ul><ul><li>Don’t expect a valuation that does not represent a fair market value </li></ul></ul><ul><ul><li>Strong position if revenues and earnings are measurable. </li></ul></ul><ul><ul><li>Financial trends are important. </li></ul></ul><ul><ul><li>Large up-rounds can be followed by large down-rounds! </li></ul></ul><ul><ul><li>Founders have to be realistic – think exit not entry. </li></ul></ul>“ 2 is not equal to 3, not even for large values of 2.” Grabel's Law Kay Associates May 05
    16. 16. Private Equity Valuation Drivers <ul><li>Quality of management team </li></ul><ul><li>Size and maturity of market opportunity </li></ul><ul><li>Scalability </li></ul><ul><li>Uniqueness and defensiveness of technology </li></ul><ul><li>Stage of product development </li></ul><ul><li>Competitive landscape </li></ul><ul><li>Credible financial projections </li></ul><ul><li>Prior investors and capital structure </li></ul><ul><li>“ Cash in, cash out” (“X” times investment within “Y” years) </li></ul>Kay Associates May 05
    17. 17. Term Sheets <ul><li>The obvious cost </li></ul><ul><ul><li>Shares sold </li></ul></ul><ul><ul><li>Price per share </li></ul></ul><ul><li>The hidden costs </li></ul><ul><ul><li>Cumulative dividends </li></ul></ul><ul><ul><li>Liquidation preference </li></ul></ul><ul><ul><li>Conversion rights and ratio </li></ul></ul><ul><ul><li>Anti-dilution provisions </li></ul></ul><ul><ul><li>Voting rights </li></ul></ul><ul><ul><li>Protective covenants </li></ul></ul><ul><ul><li>Registration rights </li></ul></ul><ul><ul><li>Redemption rights </li></ul></ul><ul><ul><li>Rights for purchase of new securities </li></ul></ul><ul><ul><li>Option pool </li></ul></ul><ul><ul><li>Board representation </li></ul></ul><ul><ul><li>Expenses </li></ul></ul><ul><li>When the gods wish to punish us, they answer our prayers. </li></ul><ul><ul><li>Oscar Wilde </li></ul></ul>Kay Associates May 05
    18. 18. Initial Public Offering (IPO) <ul><li>Has become a major challenge! </li></ul><ul><li>Public investors want </li></ul><ul><ul><li>Profitability </li></ul></ul><ul><ul><li>Stability </li></ul></ul><ul><ul><li>Visibility </li></ul></ul><ul><ul><li>Liquidity </li></ul></ul><ul><ul><li>Significant discount from public comparables </li></ul></ul><ul><li>Unclear which IPOs will have appeal in public markets </li></ul>Kay Associates May 05
    19. 19. IPO Valuation Considerations <ul><li>Minimum Market Float: $40 – $50 million </li></ul><ul><li>Maximum Percentage of Company Offered: < 30% </li></ul><ul><li>Average CY2003 P/E Multiple: 30x </li></ul><ul><li>less: “IPO discount” of 20% - 6x </li></ul><ul><li>24x </li></ul><ul><li>Minimum CY 2003 Earnings: $45 million </li></ul><ul><li> 30% = $6.25M </li></ul><ul><li> 24x (35% tax) </li></ul><ul><li>Derived CY 2003 Revenue: ~ $65 million (assuming 15% operating margin) </li></ul><ul><li>IPO possible if $50M+ in revenue, with excellent profitability!! </li></ul>Source: Soundview Technology Group Kay Associates May 05
    20. 20. Trade Sale <ul><li>Can be stock or asset purchase </li></ul><ul><li>Asset purchase leaves “baggage” behind for acquirer and leaves shareholders with liabilities. </li></ul><ul><li>Can be outright purchase of all shares </li></ul><ul><ul><li>Cash/stock based transaction – usually with earn-out </li></ul></ul><ul><ul><li>Sometimes, bonus payments for milestone achievements are included – normally hotly negotiated! </li></ul></ul><ul><li>The “20 / 80 deal” </li></ul><ul><ul><li>Buyer purchases combination of new / secondary shares representing <20% of pro forma outstanding shares </li></ul></ul><ul><ul><li>Option to purchase remaining shares at some formula price (typically revenue-based) at a future date </li></ul></ul><ul><ul><li>Often entails co-marketing and co-development agreements </li></ul></ul><ul><ul><li>Allows necessary funding without corporate buyer incurring interim operating losses </li></ul></ul>Kay Associates May 05
    21. 21. Are You Meeting Milestones? <ul><li>Be assured that companies making progress are addressing the issues and rationalizing their actions. </li></ul><ul><li>Have a plan and a strategy, but avoid strategic decisions! </li></ul><ul><li>The strategy will change as business factors change. </li></ul><ul><li>Contingency planning is part of the culture. </li></ul><ul><li>Systems and processes to help guide a company in its decisions. </li></ul><ul><li>Listen and ask for advise (board of directors, advisors, customers, analysts, press etc.). </li></ul>“ Focus 90% of your time on solutions and only 10% of your time on problems.” Anthony J. D'Angelo The most dangerous strategy is to jump a chasm in two leaps. Benjamin Disraeli Kay Associates May 05
    22. 22. Simply Put……. <ul><li>Vision! </li></ul><ul><ul><li>Expressed in a business plan. </li></ul></ul><ul><ul><li>Revealed through the culture of the company. </li></ul></ul><ul><li>Focus! </li></ul><ul><ul><li>Leadership and clarity. </li></ul></ul><ul><li>Execution! </li></ul><ul><ul><li>Calculated and crisp. </li></ul></ul><ul><li>And some luck! </li></ul><ul><ul><li>But don’t wait for it – create it! </li></ul></ul><ul><ul><li>“ I'm a great believer in luck, and I find the harder I work the more I have of it.” Thomas Jefferson </li></ul></ul>Kay Associates May 05

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