Human and Financial Capital


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Human and Financial Capital

  1. 1. CONFIDENTIAL Copyright © 2003 by Marketspace LLC Chapter 11 Lecture Slides Human and Financial Capital Rayport, Jaworski Intro to e-Commerce, 2 nd Ed Exhibits and Tables
  2. 2. Human and Financial Capital — Chapter Topics <ul><ul><li>Overview </li></ul></ul><ul><ul><li>Building a Business </li></ul></ul><ul><ul><li>The Business Planning Process </li></ul></ul><ul><ul><li>Human Capital </li></ul></ul><ul><ul><li>Financial Capital </li></ul></ul>
  3. 3. Source: Data from PricewaterhouseCoopers, MoneyTree Survey: Full Year & Q4 2001 Results: US Report . Exhibit 11–1: Venture Capital — Market Size, 1995-2001
  4. 4. <ul><ul><li>Validate the business concept (e.g. build prototype, develop business plan, conduct market research) </li></ul></ul>Seed Stage Financing Stages Investment Purpose Type of Investors <ul><ul><li>Angel investors </li></ul></ul><ul><ul><li>Traditional VC </li></ul></ul><ul><ul><li>Consulting firms </li></ul></ul><ul><ul><li>Online VC firms </li></ul></ul><ul><ul><li>Incubators </li></ul></ul>Startup <ul><ul><li>Build management team and complete product development </li></ul></ul><ul><ul><li>Angel investors </li></ul></ul><ul><ul><li>Traditional VC </li></ul></ul><ul><ul><li>Consulting firms </li></ul></ul><ul><ul><li>Incubators </li></ul></ul>First-Stage <ul><ul><li>Expand production, marketing, or sales capabilities </li></ul></ul><ul><ul><li>Traditional VC </li></ul></ul><ul><ul><li>Corporations </li></ul></ul>Second-Stage <ul><ul><li>Provide working capital once shipping products or providing services </li></ul></ul><ul><ul><li>Traditional VC </li></ul></ul><ul><ul><li>Corporations </li></ul></ul>Mezzanine <ul><ul><li>Fuel substantial growth (typically provided to business that are at least break even) </li></ul></ul><ul><ul><li>Traditional VC </li></ul></ul><ul><ul><li>Corporations </li></ul></ul><ul><ul><li>Buyout firms </li></ul></ul><ul><ul><li>Investment banks </li></ul></ul>Bridge <ul><ul><li>Prepare for initial public offering, usually planned in the next 6 months to a year </li></ul></ul><ul><ul><li>Traditional VC </li></ul></ul><ul><ul><li>Corporations </li></ul></ul><ul><ul><li>Buyout firms </li></ul></ul><ul><ul><li>Investment banks </li></ul></ul>Source: Gold Book of Venture Capital Firms, Bob Zider, “ How Venture Capital Works,” Harvard Business Review Early Stage Expansion Stage Later Stage Exhibit 11–2: Startup Business Investment Stages
  5. 5. Human and Financial Capital — Chapter Topics <ul><ul><li>Overview </li></ul></ul><ul><ul><li>Building a Business </li></ul></ul><ul><ul><li>The Business Planning Process </li></ul></ul><ul><ul><li>Human Capital </li></ul></ul><ul><ul><li>Financial Capital </li></ul></ul>
  6. 6. Supporting Slide 11 — A What is a Startup? <ul><li>The term “startup” describes any business enterprise in early stages of development </li></ul><ul><li>Startups engage in 3 business processes </li></ul><ul><ul><li>Developing and refining the offering and strategy </li></ul></ul><ul><ul><li>Obtaining initial funding to begin operations </li></ul></ul><ul><ul><li>Building a capable management team to handle operations </li></ul></ul>
  7. 7. Exhibit 11–3: The Relationship Between Human and Financial Capital Entrepreneur Management Team Strategic Advisors & Partners Logistical Advisors & Partners Human Capital Business Planning Process Financial Capital Trade Credit Commercial Bank Loans Debt Bootstrapping Angels Venture Capital Corporate Ventures Equity Holding Company
  8. 8. Human and Financial Capital — Chapter Topics <ul><ul><li>Overview </li></ul></ul><ul><ul><li>Building a Business </li></ul></ul><ul><ul><li>The Business Planning Process </li></ul></ul><ul><ul><li>Human Capital </li></ul></ul><ul><ul><li>Financial Capital </li></ul></ul>
  9. 9. Supporting Slide 11 — B The Business Planning Process The objectives of a good business plan will help companies attract resources and test their business model: Successful Business Plan Caution: Firms often focus the planning process on what investors want to see, rather than objectively fleshing out strategy. Serve as a “resume” to a ttract human & financial capital Provide framework for testing business throughout development
  10. 10. Supporting Slide 11 — C Elements of a Business Plan There are several elements to a solid business plan: <ul><li>Define the Value Proposition </li></ul><ul><ul><li>What is the product/service the company will offer? </li></ul></ul><ul><ul><li>Why do customers want it? </li></ul></ul><ul><li>Frame the Market Opportunity </li></ul><ul><ul><li>Identify that there is a need for the company </li></ul></ul><ul><ul><ul><li>Potential customers should be identified, segmented, and sized (along with a customer acquisition and retention plan) </li></ul></ul></ul><ul><li>Detail how to Reach Customers </li></ul><ul><ul><li>Identify the marketing plan/strategy </li></ul></ul><ul><ul><ul><li>Solid marketing, sales, and customer relationship strategies are essential </li></ul></ul></ul><ul><li>Develop an Implementation Plan </li></ul><ul><ul><li>For a product-oriented business, how will the product be designed and manufactured? </li></ul></ul><ul><ul><li>For an e-commerce website, how will the website be structured and built? </li></ul></ul><ul><li>Evaluate Potential External Influences </li></ul><ul><ul><li>What macroeconomic factors can effect the business </li></ul></ul><ul><ul><ul><li>Market conditions, inflation, exchange rates, interest rates, government regulations, etc. </li></ul></ul></ul>
  11. 11. Supporting Slide 11 — D Elements of a Business Plan (continued) <ul><li>Articulate the Revenue Model </li></ul><ul><ul><li>Determine how the business will make money </li></ul></ul><ul><li>Identify Needed People </li></ul><ul><ul><li>Who will run or help run the business? </li></ul></ul><ul><ul><li>Identify any strategic alliances </li></ul></ul><ul><li>Calculate Preliminary Financial Projections </li></ul><ul><ul><li>Base numbers and assumptions should be as realistic as possible </li></ul></ul><ul><ul><li>Should determine how much money will be required at different stages </li></ul></ul><ul><ul><li>What type of return can investors can expect? </li></ul></ul><ul><li>Establish Critical Milestones </li></ul><ul><ul><li>Should indicate when critical steps will be completed </li></ul></ul><ul><ul><ul><li>Timeline (i.e., product development, product launch, headcount) </li></ul></ul></ul><ul><ul><li>Provide a documented benchmark for future evaluation </li></ul></ul><ul><li>Summarize the Advantage </li></ul><ul><ul><li>What is the vision for the future, how will the company achieve that vision? </li></ul></ul><ul><ul><ul><li>Some combination of the previous elements should be summarized (list of core competencies) </li></ul></ul></ul>
  12. 12. Human and Financial Capital — Chapter Topics <ul><ul><li>Overview </li></ul></ul><ul><ul><li>Building a Business </li></ul></ul><ul><ul><li>The Business Planning Process </li></ul></ul><ul><ul><li>Human Capital </li></ul></ul><ul><ul><li>Financial Capital </li></ul></ul>
  13. 13. Supporting Slide 11 — E Human Capital Several groups of people are required to successfully grow a business: Strategic Advisors & Partners Management Team Entrepreneur Logistical Advisors & Partners
  14. 14. Supporting Slide 11 — F Characteristics of Successful Entrepreneurs Successful entrepreneurs have the following characteristics: <ul><li>Keenly Observant </li></ul><ul><ul><li>Make observations about industries, markets, and everyday life </li></ul></ul><ul><ul><ul><li>Find the best way to meet these needs </li></ul></ul></ul><ul><li>Willingness to Take Risks </li></ul><ul><li>Driven </li></ul><ul><li>Flexible </li></ul><ul><li>Visionary </li></ul><ul><ul><li>Smart entrepreneurs take calculated risks </li></ul></ul><ul><ul><li>Willing to work long hours and make sacrifices in personal life </li></ul></ul><ul><ul><li>Personal drive is extremely important in motivating others at early stages </li></ul></ul><ul><ul><li>Must be able to react quickly to changes </li></ul></ul><ul><ul><li>Extremely important for the network economy where markets change extremely quickly </li></ul></ul><ul><ul><li>Expressing passion for the idea to others </li></ul></ul><ul><ul><li>Most successful entrepreneurs are motivated by vision rather than money </li></ul></ul>
  15. 15. Supporting Slide 11 — G The Idea The ideas which entrepreneurs develop can be classified into 3 groups: <ul><li>Introduce a New Product </li></ul><ul><ul><li>Products that enhance increase the functionality or lengthen the life cycle of existing technology </li></ul></ul><ul><ul><li>Products that provide alternatives to existing products </li></ul></ul><ul><ul><li>Products that displace provide a new means of doing something </li></ul></ul><ul><ul><li>Products that transform change how people do business or live </li></ul></ul><ul><li>Introduce a New Service </li></ul><ul><li>Improve an Existing Model of Business </li></ul><ul><ul><li>Come as a result of identifying unmet needs in the existing market or as the result of a new technology </li></ul></ul><ul><ul><li>Doing things faster, better or cheaper than existing players </li></ul></ul><ul><ul><li>Usually driven by technology </li></ul></ul>
  16. 16. Supporting Slide 11 — H The Management Team The management team is incredibly important to the success of a new venture, this team can be broken down into two key groups: <ul><li>The Core Management Team </li></ul><ul><li>The Extended Management Team </li></ul><ul><ul><li>In the infant stages of a company, a core team must fulfill a few fundamental roles: </li></ul></ul><ul><ul><ul><li>Technology specialist (e.g., CTO or CIO) </li></ul></ul></ul><ul><ul><ul><li>Sales and marketing specialist (e.g., VP Sales) </li></ul></ul></ul><ul><ul><ul><li>Execution specialist (e.g., CEO) </li></ul></ul></ul><ul><ul><li>As the business develops and finances permit, other positions must be filled: </li></ul></ul><ul><ul><ul><li>Chief Operating Officer </li></ul></ul></ul><ul><ul><ul><li>Chief Financial Officer </li></ul></ul></ul><ul><ul><ul><li>VP of Marketing (if not part of core team) </li></ul></ul></ul><ul><ul><ul><li>VP of Business Development </li></ul></ul></ul><ul><ul><ul><li>Chief People Officer </li></ul></ul></ul>
  17. 17. Supporting Slide 11 — I Strategic Advisers and Partners Strategic advisors and partners can provide the start-up with experience and industry connections: <ul><li>Strategic Partnerships </li></ul><ul><ul><li>Mutual exchange of expertise between companies in areas where the start-up lacks competency </li></ul></ul><ul><ul><li>There are different types of partnerships that vary by degree of commitment </li></ul></ul><ul><ul><ul><li>Strategic association, Strategic alliance, and Strategic joint venture </li></ul></ul></ul><ul><li>Advisory Board </li></ul><ul><ul><li>Provide some expertise on the business or industry </li></ul></ul><ul><ul><li>Serve as an outsourced resource to fill a particular need </li></ul></ul><ul><ul><li>More important in startup phase </li></ul></ul><ul><li>Board of Directors </li></ul><ul><ul><li>Hold management accountable </li></ul></ul><ul><ul><li>Formalized control structure for the company </li></ul></ul><ul><ul><li>Increasingly important as the company grows </li></ul></ul>
  18. 18. Supporting Slide 11 — J Logistical Advisers and Partners Logistical advisers provide the start-up with necessary operational expertise: <ul><li>CPA </li></ul><ul><li>(Certified Professional Accountant) </li></ul><ul><ul><li>Responsible for compiling the financial history of the business </li></ul></ul><ul><ul><li>Can be valuable in the process of validating and checking the assumptions that drive financial projections </li></ul></ul><ul><ul><li>This role becomes increasingly important as the company approaches an IPO </li></ul></ul><ul><li>Legal Counsel </li></ul><ul><ul><li>Handles many legal issues of the startup </li></ul></ul><ul><ul><li>Can provide credibility with investors </li></ul></ul><ul><li>Intermediaries </li></ul><ul><ul><li>Well connected individuals in the investment community </li></ul></ul><ul><ul><li>Paid middlemen between startup company and potential investors </li></ul></ul><ul><li>Consultants </li></ul><ul><ul><li>Can help determine the correct mix and source of financing </li></ul></ul><ul><ul><li>Help the company devise and articulate it’s strategy </li></ul></ul>Necessary Supporting
  19. 19. Human and Financial Capital — Chapter Topics <ul><ul><li>Overview </li></ul></ul><ul><ul><li>Building a Business </li></ul></ul><ul><ul><li>The Business Planning Process </li></ul></ul><ul><ul><li>Human Capital </li></ul></ul><ul><ul><li>Financial Capital </li></ul></ul>
  20. 20. Supporting Slide 11 — K Types of Capital Capital There are several types of capital available to companies: Debt Equity Bootstrapping Angels Venture Capital Corporate Ventures Holding Company Trade Credit Commercial Bank Loan
  21. 21. Exhibit 11–4: Summary of Primary Financial Capital Resources Note: Items italicized for angels are those criteria common to multiple sources of funding. <ul><li>Requires high equity stake </li></ul><ul><li>Allows entrepreneur to focus on strategic rather than operational issues </li></ul><ul><li>Coaching, expertise, and industry contacts </li></ul><ul><li>Firm’s strategic objectives </li></ul><ul><li>Plus items italicized for angels </li></ul>Organizations that support new companies, primarily through services rather than cash, in exchange for a piece of the business Incubator <ul><li>Requires a large equity stake, and thus control </li></ul>Cons Pros <ul><li>Potential conflict of interest with parent company can cause problems </li></ul><ul><li>Complicated discussion of intellectual property rights if business later seeks VC funding </li></ul><ul><li>Slow to make investment decisions </li></ul><ul><li>Objectives are primarily financial, which can create conflicts with the entrepreneur’s vision for the company </li></ul><ul><li>Requires high equity stake </li></ul><ul><li>Entrepreneur must give up a certain degree of control </li></ul><ul><li>Difficult to locate and obtain </li></ul><ul><li>Difficult to locate </li></ul><ul><li>Investors can decide to get very operationally involved with the startup, creating potential conflicts with the entrepreneur </li></ul><ul><li>One angel alone is unlikely to provide enough capital for operations </li></ul><ul><li>Dealings with multiple angels can cause operational and logistical complications </li></ul><ul><li>Unlikely to provide enough cash to sustain extended growth </li></ul><ul><li>Difficult for e-commerce startups to obtain given criteria for investment </li></ul><ul><li>Certain terms could carry a costly implied interest rate </li></ul><ul><li>Difficult for e-commerce startups to obtain </li></ul><ul><li>Patient capital due to operational focus </li></ul><ul><li>Ability to learn from other portfolio companies </li></ul><ul><li>Investors usually very experienced in specific industry </li></ul><ul><li>Usually defined by particular focus of the holding company </li></ul><ul><li>Items italicized for angels </li></ul>Company that offers cash in exchange for equity in companies with an operational, rather than financial focus. Equity stakes typically range from 25% to 50%. Holding Company <ul><li>Provides operational expertise </li></ul><ul><li>Provides credibility and visibility for the business through corporation’s brand name </li></ul><ul><li>Provides large amounts of cash </li></ul><ul><li>Financing terms tend to be more favorable than those of VCs </li></ul><ul><li>Patient capital </li></ul><ul><li>Degree to which business complements corporation’s current strategic objectives </li></ul><ul><li>Right to utilize technology developed in the venture </li></ul><ul><li>Items italicized for angels </li></ul>Venture funds set up by large corporations Corporate Venture <ul><li>Can provide large amounts of cash to sustain growth </li></ul><ul><li>Coaching, expertise, and industry contacts </li></ul><ul><li>Name-brand recognition and publicity </li></ul><ul><li>Referral through network connections </li></ul><ul><li>Potential return on investment in three to five years </li></ul><ul><li>Firm’s strategic objectives </li></ul><ul><li>Existence of proprietary technology or concept for sustainable advantage </li></ul><ul><li>Plus items italicized for angels </li></ul>Private partnerships or closely held corporations that raise money from investors, which is invested in companies that hold promise for a liquidity event Venture Capital <ul><li>Can provide expertise, networks, and credibility to help the entrepreneur build the business </li></ul><ul><li>Can provide referral to additional funding sources </li></ul><ul><li>Angels tend to negotiate terms more favorable for entrepreneurs than VCs </li></ul><ul><li>Referral through network connections </li></ul><ul><li>Business in early stage of development </li></ul><ul><li>Personal objectives </li></ul><ul><li>Market potential </li></ul><ul><li>Nature of the business concept </li></ul><ul><li>Quality of management team (if any) </li></ul><ul><li>Track record of the entrepreneur </li></ul>Wealthy individuals who invest personal capital in startups Angels <ul><li>Provides cash without losing equity </li></ul><ul><li>Entrepreneur gains valuable operational experience </li></ul><ul><li>Entrepreneur’s belief in his own business </li></ul>Using personal resources to finance the early stages of a startup Bootstrapping Equity Financing <ul><li>Provides cash without losing equity </li></ul><ul><li>Likelihood of loan repayment </li></ul><ul><li>Cash on hand </li></ul><ul><li>Positive cash flow </li></ul><ul><li>Acceptable burn rate </li></ul>Installment loans in which a business borrows a specific amount for a specified length of time, to be repaid in installments (with interest) Commercial Bank Loan <ul><li>Provides an interest-free loan </li></ul><ul><li>A track record of prompt payment </li></ul>Credit extended to a business by its suppliers Trade Credit Debt Financing Key advantages and disadvantages Primary criteria for investment selection What is it? Source
  22. 22. Exhibit 11–5: Venture Capital Investments — Breakdown by Stage $BB Source: Data from PricewaterhouseCoopers, MoneyTree Survey: Full Year & Q4 2001 Results: US Report .
  23. 23. Exhibit 11–6: Top 10 Venture Capital Dealmakers in 2001 [i] Source: Data from PricewaterhouseCoopers, MoneyTree Survey: Full Year & Q4 2001 Results: US Report. 47 Mountain View, Calif. Mobius Venture Capital 49 Palo Alto, Calif. Technology Crossover Ventures (TCV) 52 Eden Prairie, Minn. St. Paul Venture Capital 53 New York, N.Y. Warburg Pincus 61 Menlo Park, Calif U.S. Venture Partners 62 Austin, Texas Austin Ventures 68 Wellesley Hills, Mass. Bessemer Venture Partners 69 New York, N.Y. J.P. Morgan Partners 72 Chandler, Ariz. Intel Capital 82 Baltimore, Md. New Enterprise Associates
  24. 24. Human and Financial Capital — Chapter Topics <ul><ul><li>Overview </li></ul></ul><ul><ul><li>Building a Business </li></ul></ul><ul><ul><li>The Business Planning Process </li></ul></ul><ul><ul><li>Human Capital </li></ul></ul><ul><ul><li>Financial Capital </li></ul></ul>
  25. 25. Supporting Slide 11 — O The Business Plan <ul><ul><li>Description of the product or service that will be offered and the value proposition to the customer </li></ul></ul><ul><ul><li>Summary of the size and nature of the market opportunity </li></ul></ul><ul><ul><li>Explanation of the revenue model </li></ul></ul><ul><ul><li>Profiles of the management team, advisory board, and board of director members describing specific relevant skills and experience </li></ul></ul><ul><ul><li>Clear articulation of the startup’s core competencies and sustainable competitive advantage </li></ul></ul><ul><ul><li>Summary of financials and financing needs </li></ul></ul>In order to pique the interest of potential investors, a business plan must clearly address the following issues:
  26. 26. Exhibit 11–9: Venture-Backed IPOs, 1995-2001 Number of IPOs Source: Data from VentureOne research.