1 C21 - April 21, 2008 Business 54 - Introduction to eCommerce Spring 2008

2 C21 - April 21, 2008 Class Game Plan  The Startup Game I.  Question and Answer.  Lab Time.

3 C21 - April 21, 2008  The defining document for your eCommerce business.  Also applicable for corporate eCommerce initiatives.  Usually averages about 40 pages in length with tables-charts.  Consolidates-unifies your Business Strategy, Business Model and Revenue Model.  Your calling card for investors and corporate decision-makers / approvers.  Key Sections of the Business Plan include: Executive Summary Market Demographics Marketing and Product Strategy Staffing-Management Team Historical and Prospective Financial Statements and Investment Returns The Business Plan

4 C21 - April 21, 2008 Business & Revenue Model Re-Cap Business Models  Business to Consumer.  Business to Business.  Peer to Peer.  Communities.  Exchanges-Marketplaces.  Coercive-Governmental. Revenue Models  Banner-Advertising.  Subscription.  Transactional.  ‘Begging’-Donations.  Middlemen.  Taxation.

5 C21 - April 21, 2008 Three Year Financials  Financials provide the ‘Burn Curve’.  The Business Plan must contain at least three years of revenue cost projections; most investors prefer 5 years.  Financials also provide the timing and size of the Return On Investment (ROI).  Old Rules of the Game Spend, Spend, and Spend some more!!!!!!!!!! No interest in making a profit Additional investment always available  New Rules of the Game / New “Burn Curve’: For eCommerce businessesFor Fortune 1000 initiates Year OneLose $ Incur costs; See no benefits Year Two Break evenBenefits begin to flow Year Three Start to make a profit Positive Net Present Value / ROI

6 C21 - April 21, 2008 Raising the Money  Also called the Money Chase.  Will consume the company and senior management until you achieve cash neutrality.  The single, most important job for Founder/CEO at this stage of company development.  The Money Chase has a number of progression steps and funding levels: Sweat Equity Friends and Family Dumb Money Angels Smart Money / Strategic Partners Venture Capitalists IPO  May not pass thru all levels. May skip some steps-levels.  Need to balance debt and equity fundraising. Week Four

7 C21 - April 21, 2008 Dilution  A natural consequence, albeit a disappointing part, of the Startup game.  Basically trading off ownership and control for investment dollars.  Typical Dilution Timeline: Ownership % Control1 BoD2 BoD3-5 BoD SeatSeatsSeats InvestmentSweatF&FAngelVCVCIPO LevelEquityRoundRound 1Round 2 Company$0$1mm$3-5mm$9-12mm$20-24mm$50mm+ Valuation Your Value$0$.95mm$2.6mm$4.9mm$6.7mm$10mm+

8 C21 - April 21, 2008 ‘Sweat Equity’  How you get started with an eCommerce business == self-funding  Sources of funding: Bank Account / Savings Credit Cards Free Labor (you, your CFO, CTO and CMO)  Most important thing is Vision and Passion!  Don’t forget to keep your day job!  Remember to place a value on your own time ($50/hr) and be critical of your time investment.

9 C21 - April 21, 2008 Friends & Family  Best described as the Bank of Mom & Dad.  Generally Unsophisticated Investors.  Also, Emotional Investors.  May not be interested in a return on their investment (or even the repayment of the original investment).  Usually funds in the $50k to $100k range.

10 C21 - April 21, 2008 ‘Dumb’ Money  Also called D & D Money.  Investors Only bring cash to the company.  No Connections, Introductions or Management Expertise.  Each Individual Investor puts in $25K or less.  Lots of work for very little investment  Need a Subscription Agreement --- Must be Accredited Investors.  Bragging Rights / Ego is key to this class of investor.

11 C21 - April 21, 2008 Angel Investors  Semi-formal association of sophisticated High Net Worth investors who invest as a group.  Like early stage companies / ideas, especially in technology.  Like to cash out early.  Usually regionally based (e.g., Bay Area Angels) and only fund ‘local’ companies.  Sponsor dinners / presentations / conferences.  Normal Investment ranges from $500k to $1.5mm.

12 C21 - April 21, 2008 ‘Smart Money’ & Strategic Partners  Investment by Non-Financial Companies: EMC IBM Sun Microsoft  Intent is to further basic technical research or to gain early access to breakthrough products.  Investment specifically targeted to Large Company’s own interests: Sun = Server & Chip Technology EMC =Disk Technology & Software  Investment usually takes the form of Vendor Financing (Debt, not Equity) for the startup to purchase the Investor’s products and services.

13 C21 - April 21, 2008  Can be useful to gain access to large potential Fortune 1000 Customers and/or utilize the Partner's Sales Force/Reseller Channel.  Startup can be easily acquired at a poor valuation or as a debt restructuring by the Investor. ‘Smart Money’ & Strategic Partners

14 C21 - April 21, 2008  The last round of investors before going public. Investment ranges from $5mm to the sky.  VC’s provide much more than money: Board of Directors memberships on competing or aligned firms. Executive level guidance and coaching. Promotion-Publicity. Promise of Addition / add on rounds.  BUT CAN BE VERY DEMANDING!!!!!!!!!!!!!!!!!!!!!!!!!!  They only invest in companies which meet their thresholds $100mm revenue potential within three years. Projected net income before taxes = 20% of revenues. Disruptive ideas or technology. Venture Capitalists

15 C21 - April 21, 2008  % of Revenues. Disruptive ideas or technology.  Set performance targets, which if not met result in: Claw Back Cram Down New Management Team  Some ‘Big Name firms’ are: Kleiner Perkins (SFO) Benchmark Partners (Palo Alto) Flatiron / Chase Capital Partners (NYC) Accel Partners (Palo Alto) Venture Capitalists

16 C21 - April 21, 2008 Exit Strategies  Today there are three preferable exit strategies: IPO Sale-Merger at a good valuation Annuity-Family Business  Return-wise, IPO is best.  Two bad exit strategies: Bankruptcy --- Chapters 7 or 11 Sale-Merger at a bad valuation  More and more eCommerce companies are turning into annuities-family businesses: Today’s company valuations are poor. Less fundraising needed. Less pressure to succeed / Fewer penalties for missing targets. Founder can remain with the company / retain or pass control.

17 C21 - April 21, 2008 C17 - April 7, 2008 Questions…… (and maybe some) Answers

18 C21 - April 21, 2008 C17 - April 7, 2008 Lab Time  Visit GoBig funding/?gclid=CMmu6MDh6pICFRwqagodXTy14Q funding/?gclid=CMmu6MDh6pICFRwqagodXTy14Q  Look for investors or be an investor and look for companies / ideas.  Visit Accel partners.  Check out a traditional VC in Silicon Valley.  Which seems to be the better route to financing your idea?