Creating a Winning E-Business Second Edition Getting Your E-Business Off The Ground Chapter 4

2 Learning Objectives Describe the financing issues associated with an e-business startup Discuss the role of informal investors in an e-business startup Identify issues important to venture capital investors

3 Learning Objectives (continued) Pitch your e-business idea to investors Discuss the advantages and disadvantages of business incubators

4 Startup Financing Bootstrapping –Self-funding –Finding unique and inventive ways to acquire resources without borrowing money Informal investors –Friends –Family members –Angel investors

5 Startup Financing (continued) Friends and family members –Know and trust entrepreneur –Stand by during tough times –Invest in entrepreneur rather than business idea –Downside is potential risk to relationships Business misunderstandings Business failure

6 Startup Financing (continued) Angel investors –Individuals with money and time who enjoy the excitement of early-stage investing –Not averse to taking risks –Primarily interested in business idea –Angel investment club members Accredited investors with minimum net worth of $1M or annual income of $200,000 or household income of $300,000 over the last two years

7 Startup Financing (continued)

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9 Venture capitalist investors (VCs) –Professional investment company –Provide funds for startup businesses in exchange for equity position –Raise funds from endowments, insurance companies, and pension funds

10 Startup Financing (continued) Venture capitalist investors (VCs) (continued) –Take many forms Traditional partnerships Government-sponsored investment companies Corporate funding programs by high-tech companies

11 Startup Financing (continued)

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13 Startup Financing (continued) Venture capitalist investors (VCs) (continued) –E-business startup VC funding examples Draper Fisher Jurvetson (DFJ) and Hotmail Kleiner Perkins Caufield & Byers and Google Small Business Investment Companies (SBIC) and America Online

14 Pitching Your E-Business To Investors First meeting with investors is a sales meeting Bring a pitch document –Short marketing document based on Executive Summary portion of business plan Highlights market need Shows how startup meets that need Indicates potential profits Shows how management team can make it happen

15 Pitching Your E-Business To Investors (continued) Learn as much as possible about potential investors before the pitch meeting Be prepared for investor questions about –Business idea –Target market –Competitors –Critical marketplace issues Do not fake answers; if you don’t know, simply say so and move on

16 Pitching Your E-Business To Investors (continued) During the pitch meeting –Be on time –Be prepared –Be enthusiastic –Bring all necessary equipment and documents –Differentiate yourself and management team from your competitors –Create the feeling that your e-business idea is a viable, exciting investor opportunity

17 Business Incubators Nurture startup businesses –Offer development, administrative, and support services Office space Telecommunication hookups Reception and conference room facilities Computer networks Advisory services Access to potential investors

18 Business Incubators (continued) Non-profit organizations or commercial businesses –Offer a quick “leg up” for entrepreneurs needing administrative and support services –Provide access to knowledgeable professionals, advisors, potential investors –Cost to entrepreneur Fees for services Loss of equity

19 Business Incubators (continued) Advantages –“One-stop solution” for many startup problems –Easy access to professional advice –Venue for interacting with other startups Disadvantages –May be hefty fees for services –Giving up share of ownership equity to others

20 Business Incubators (continued) Non-profit business incubators –Generally cooperative venture between a university and local community –Examples Austin Technology Incubator (ATI) Advanced Technology Development Center (ATDC) Houston Technology Center Illinois Technology Enterprise Center (ITEC) Women’s Technology Cluster (WTC)

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27 Business Incubators (continued) Commercial business incubators –Businesses that provide incubation services for a fee and usually a large equity position –Examples Batavia Industrial Center (BIC) Idealab eCompanies

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29 Business Incubators (continued) Self-incubation –Participating in a members-only group of entrepreneurs Share practical experience Access to contacts Sell or barter products and services with members –Example Starve Ups

30 Chapter Summary An entrepreneur should expect to invest personal funds in a startup Informal investors include friends and family members and angel investors Angel investor – A wealthy individual who enjoys investing in startups Venture capitalist – A professional investor

31 Chapter Summary (continued) Meeting with investors –First meeting is a “pitch” or sales meeting –Use a carefully prepared pitch document –Anticipate questions –Be on time, be prepared, and be enthusiastic Pitch document – A brief sales document based on the Executive Summary portion of the business plan

32 Chapter Summary (continued) Non-profit and commercial business incubators offer access to resources in exchange for fees and an equity position Self-incubation offers access to some resources without paying fees or giving up equity