Updated: Sources of Funding


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This is a slightly revised version, most recently presented in Kiev, November, 2013.

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  • Sandra will go into more detail on this later!
  • Updated: Sources of Funding

    1. 1. Sources of Funding (How Entrepreneurs & Investors Find Each Other!) Marty Kaszubowski President, General Ideas @MartyKasz
    2. 2. A Startup Is a Temporary Organization Designed to Search for a Repeatable and Scalable Business Model • Failure is an Integral Part of the Search for the Business Model • No Business Plan Survives First Contact with Customers • Preserve Cash While Searching for a Repeatable Business Model. After It’s Found, Spend • Communicate and Share Learning • Startups Demand Comfort with Chaos and Uncertainty Per Steve Blank, et al
    3. 3. But not all startups are the same! There are six distinct organizational paths for entrepreneurs: 1. 2. 3. 4. 5. 6. Lifestyle business Small business Scalable startup Buyable startup Large company Social entrepreneur Per Steve Blank, et al
    4. 4. Types of startup ventures 1. Lifestyle Startups: Work to Live their Passion. Examples: Professional Photographers, Healthclubs, Surf Shops, Ski Instructors, Golf Pros 2. Small Business Startups: Work to Feed the Family. Examples: Restaurants, Clothing stores, coffee shops, Cleaning Services, Contractors, Taxi Cabs, Consultants 3. Scalable Startups: Born to Be Big: Examples: Google, Facebook, Skype, Apple, Ford, Boeing, Мобильные Телесистемы, SoftServe, etc.
    5. 5. Types of startup ventures 4. Buyable Startups: Born to Flip: Examples: Tumblr (acquired by Yahoo), Instagram (acquired by Facebook), Groupon (should have taken the offer from Google!) 5. Large Company Startups: Innovate or Evaporate: Examples: Boeing (satelites, rockets), Ford Motor Company (Ford credit), Apple Computer (iPod, iPhone, iPad), Hewlett Packard (printers), Research In Motion (?) 6. Social Startups: Driven to Make a Difference: Examples: Tom’s (shoes), Ethos (water), Husk Power Systems (electricity generation)
    6. 6. Which type are you planning to build? 1. Lifestyle business 2. Small business 3. Scalable startup 4. Buyable startup 5. Large company 6. Social entrepreneur
    7. 7. You probably don’t need “Venture Capital”… Getting the money to build your business is the most important challenge for most startups. • It’s not enough to sketch your idea on a napkin, and hope investors will throw money at you. • In the US, only 3 out of 100 companies will get funding from an Angel investor • The percentage of companies that get Venture Capital (VC) investments is even lower.
    8. 8. There are many ways to fund your company Too many companies fail to explore all the options Every approach has advantages and disadvantages: • Outside capital requires giving up some ownership and control, but offers the resources needed to grow. • Doing it yourself allows you to retain control, but takes much longer to grow and, potentially, misses rapidly emerging opportunities.
    9. 9. The right kind of financing … … depends on a number of factors: • • • How quickly your target market is emerging How much tolerance you have for giving up control How large the company can potentially get
    10. 10. Another metaphor ... Do you want to own 100% of a grape? Or 10% of a Watermelon?
    11. 11. What options are available? “Bootstrapping” Competitions Friends and family Crowdfunding Small business grants Strategic Partners Loans & lines-of-credit Angel Investors Bartering Venture Capital
    12. 12. Profitability Start-up Venture Financing Early Stage (Angels & VCs) Seed Capital (Friends/Family & Angels) Later Stage ( VCs & Strategic Partners) Valley of Death Time Growth Stage (IPO, Investment Banks)
    13. 13. Stages of Company Maturity Venture Performance Embryonic Growth Mature Launch the venture, establish competitive position Grow the venture, improve competitive position Sustain competitive position Abandon? VCs Partners Angels Loans Government Friends/Family Venture Maturity Source: Third Generation R&D, Roussel, Saad, & Erickson Aging
    14. 14. Let’s talk about each of these ... “Bootstrapping”  Friends and family  Small business grants  Loans & lines-ofcredit  Bartering  Competitions  Crowdfunding  Strategic Partnerships  Angel Investors  Venture Capital 
    15. 15. “Bootstrapping” “Bootstrapping” refers to the myth that a person can “lift himself up by his bootstraps” to achieve his goals A old term that means “Doing it yourself with little or no help!”
    16. 16. If you do it yourself ... Advantages: • There’s no one to convince but yourself • You own the entire enterprise • You maintain control of all aspects of the business Disadvantages: • Growth will be slow … too slow? • You may miss opportunities for new business
    17. 17. Friends & Family People who know and trust the founders are usually the first to be approached for funding. A relatively small amount of money is invested The investors are usually not wealthy, so even a small amount is very important to them!
    18. 18. If you ask your friends and family... Advantages: • They trust you and won’t ask for too many details • You can retain ownership and control • They will stick with you when things go bad ... Disadvantages: • Growth will be slow, and you may miss opportunities for new business • You risk destroying important personal relationships.
    19. 19. Loans & Lines of Credit Banks lend money to businesses based on projected revenues and/or collateral Usually not available to startups with un-proven technologies and/or uncertain markets
    20. 20. Loans and Lines of Credit Advantages: • Banks are everywhere Disadvantages: • They want you to pay it back … with interest! • Usually not even an option for start-ups • Can be inflexible and onerous when revenue projections are not met • Can be a severe restriction of cash flow
    21. 21. Bartering Trading your company’s products or services for something you need. Underutilized as a way to help fund start-ups Most appropriate for engineering services, IT services, commonly needed products.
    22. 22. Bartering Advantages:    Everyone needs something … Does not require out-of-pocket cash Helps you prove and refine your product or service Disadvantages:    Can be time consuming to find the right deal and deliver the service Often hard to agree on value Doesn’t qualify as “revenue”
    23. 23. Small Business Grants The US and Europe have government programs that fund research and development at small businesses Grants can be sizable ($MM). Example: US “Small Business Innovation Research” (SBIR) Program
    24. 24. Small Business Grants Advantages: • • • Sizable sums of money to advance the research and support product development efforts The government often buys the product when its ready You can retain ownership and control Disadvantages: • • • Usually takes a long time and lots of paperwork to get the money The research (usually) has to be tied to a government program, which may not be of interest Few nations outside of US, Europe, UK have such programs
    25. 25. Competitions Start-ups can obtain seed funding by competing in local, regional, national, and international contests. Generally aimed at improving the economy in the area and promoting entrepreneurship, in general Events are usually wellpublicized and held annually.
    26. 26. Competitions Advantages: • • • • • • Doesn’t cost much to participate (travel expenses, time) Competitions are usually connected to another event to promote entrepreneurship education, mentoring, etc. Usually no need to give up equity No restrictions against competing at many, many events Often get additional, “in-kind” services Good way to get attention! Disadvantages: • • “Prize money” varies and is aimed mostly at “pre-seed” Some competitions require joining an incubator or accelerator
    27. 27. Crowdfunding Start-ups can obtain seed funding by appealing to a wide range of people who are willing to give small amounts Many people providing small amounts = a big fund! Numerous new (!) web sites managing a crowdfunding process: • A place for companies to “apply” for funding • Hundreds of small contributors • Usually focused on local start-ups
    28. 28. Crowdfunding Advantages: • • • Can generally retain majority ownership and control Simpler due-diligence process (?) No dominant investor to appease Disadvantages: • • • Crowdfunding is still a VERY NEW as a way to fund a company Still some confusion about how it operates, how investors get insight into the performance of the company, how investors “cash out”, how management communicates with potentially hundreds of individual stakeholders Mostly available in US and UK, but growing everywhere!
    29. 29. Strategic Partnerships Alliances with large companies who see value in your technology and are willing to fund further development Usually aimed at improving the large company’s current products or meet future market demand Large company offers money, expertise, testing facilities, etc. Large company usually demands some ownership of the technology and may want to acquire the small company sometime in the future
    30. 30. Strategic Partnerships Advantages: • • • • Can generally retain majority ownership and control Large company is often interested in acquiring the company Simpler due-diligence process, more focused on technology than financial performance Take advantage of large company’s market access, customer relationships, etc. Disadvantages: • • • Large companies often find it difficult to work with start-ups Large companies are slow … Small company has no control over strategic direction of large company
    31. 31. Angel Investors Wealthy individuals (often former entrepreneurs or business executives) who make personal investments. A sizable amount of money is invested, but the investors can afford to take the risk. Primary interests are:  Making money  Opportunity to participate in “the next big thing”  A chance to help and support founders
    32. 32. Angel Investors Advantages: • • • • Interested in helping grow the company Take advantage of the Angel’s network of partners, customers, management, talent, etc. Not as much “due-diligence” as a Venture Capitalist Will usually not take majority ownership Disadvantages: • • Hard to find, not as much money available as a VC Often not as sophisticated as they think they are …
    33. 33. Venture Capital VCs want to help your business to grow so they and their stakeholders can profit Big investments (usually $MM) aimed at highly scalable ventures
    34. 34. Venture Capital Advantages: • Grow, grow, grow • Take advantage of the VC’s network of partners, customers, management, talent, etc. Disadvantages: • Hard to find, hard to convince • High expectations, lots of “Due Diligence” • Generally have to give up majority ownership
    35. 35. How will you fund your venture? You will probably use many of tools we talked about today. It depends on many factors: •Growth plans •Cash flow •Risk tolerance •Available forms of capital •Control issues
    36. 36. Finding an Investor • “Gatekeepers” (Accountants, Lawyers, Consultants, Wealth Managers, Bankers) • On-line services (Angelist, GUST) • Local Events and Organizations • Incubators, Accelerators • Published databases, Google, Yandex, etc. • Other Entrepreneurs!
    37. 37. Getting attention from Investors • • • • • Have a plan. • Set realistic milestones and achieve some of them. • Attract a well-rounded team. Build qualified advisory board. Ship a minimum product now. • • • Get a real customer & real revenue. Register some intellectual property. Get some “testimonials”. Show personal investment. Become a visible expert.
    38. 38. Focus on a few key things … 1. What do you need? Why are you here? Before you can get into the details, let them know: • how much you’re raising, • how much you have committed, and • what you’re going to do with the money.
    39. 39. Focus on a few key things … 2. Talk about your team Tell me about your team and what you’ve done before. • Is there are range of skills on the team? • What’s missing?
    40. 40. Focus on a few key things … 3. What SPECIFIC(!) problem are you solving • Why is this an important problem that really needs to be solved? • How many people have the problem and are they willing and able to pay to have it solved?
    41. 41. Focus on a few key things … Investors want to know your answers to the questions above … But they really want to learn about how you think and how much you know, and what you believe.
    42. 42. The Entrepreneur that impresses investors … • Highlights team strengths, more than his own. • Describes customer needs and benefits first, then product features. • Has a rational business model, with prices and volumes. • Talks about the implementation plan, not the idea. • Keeps a clear focus on achievable milestones.
    43. 43. But, what really impresses investors is …
    44. 44. Let’s talk traction … “Traction” is evidence that your product or service has proven that it provides real value in a real market with real customers • Started the “hockey-stick” adoption rate • Has a valid business model • Has a sustainable growth based on a repeatable sales process • Financial projections are based on real evidence
    45. 45. How do we measure “Traction”? Sales of a priced offering: • One customer is not traction • Beta tests with a thousand customers at no cost don’t count. Free and freemium products need a solid base: • If your product is free (advertising!), you need ~ one million page views per month. • ~ 10,000 active users and doubling every 3 months.
    46. 46. How do we measure “Traction”? Market penetration: • Show direct progress in your target sector, demographic, and sub-categories. Average transaction size & revenue per customer: • Is your average transaction size, number per customer, or margins going up? Customer acquisition cost: • Your cost to acquire a new customer should be coming down…
    47. 47. How do we measure “Traction”? Acceptance by key industry participants: • Signed contracts with big name customers • Agreements with major distributors in your industry. Public statements from industry experts & groups: • Respected industry groups, like Gartner Research or Forrester Research • Industry bloggers, CNET, app reviewers, etc. Don’t ask investors if you have traction – if you have to ask, you probably won’t like the answer.
    48. 48. Questions?