Getting Your E-Business off the Ground Chapter 5

The Entrepreneurial Process

Startup Financing As an entrepreneur starting a new e- business, you must be prepared to invest time, effort, and your own money to get your new e-business off the ground. Private placement memorandum (p. 173) – Fed/state securities may require an attorney to prepare – Discloses the benefits and risks of an investment in your e-business to potential private investors

Personal Assets Sweat Equity: putting in time and effort Mortgage Personal Assets: put up property as collateral to a bank Personal loans: taking a loan without collateral (higher interest rate) Credit card/credit line advance: similar to a personal loan (usually a high interest rate)

Friends and Family Friends and family investors are family members or friends who invest in a business. Many entrepreneurs successfully solicit startup money from their network of friends and family.

A network of potential friends and family investors extends beyond immediate family members and friends, to their families and friends, to their families and friends, and so on. Advantages? Disadvantage? Friends and Family (cont’d)

Angel Investors The term angel investor originally referred to wealthy investors in Broadway theatrical productions In this context it refers to any individual with the assets and interest to invest in a startup business Not the same as a Venture Capitalist May be members of an Investment club

“Touched by an Angel” Angels can be difficult to find. Angels sometimes appear unexpectedly. The keys are networking and research. Usually provide small-medium investments – $10,000 up to $300,000 – May want to become involved in the business – May want an equity position in the business

An Angel Investment Club 4/2000 – 85 members - $6M investment pool Waiting list of 50 potential members

An Angel Investment Club Must quality as an accredited investor – Min. net worth of $1M – Individual income of min. $200,000 per year – Household income of min. $300,000 per year Band of Angels – 140 high-tech executives – $60.5 M in 109 companies

Venture Capital Investors Venture Capital (VC) firms are organized to invest specifically in new business startups. Typically take a significant equity interest (perhaps 20-40%) in the firm with in exchange for providing startup capital.

Venture Capital Investors May also provide expertise Typically do not invest for the long term but expect to “cash out” after the business establishes a successful track record and can be sold or acquired by others There are many established VC firms

Venture Capital Firm

Business Incubators Have traditionally been government- or university- supported nonprofit organizations that nurture new businesses Provide startup companies with management advice, office space, networking opportunities, and other critical startup services

Commercial Business Incubators Offer startup e-businesses access to the same services offered by nonprofit incubators Are primarily interested in high-technology businesses that can become financially viable quickly and leave the incubator within six months to a year

Incubators May take an equity interest as well as charge for services Not-for-profit incubators may use returns from equity to reinvest

Internet Accelerators Some e-business incubators such as iStart Ventures and Katalyst style themselves as Internet accelerators. An Internet accelerator is a commercial business incubator whose goal is to get a new e-business up and running quickly.

Keiretsu Providers Keiretsu is a Japanese term that refers to a network of businesses that do business with each other as a means of mutual security. Incubators that use the keiretsu model offer entry into a network of companies that do business with one another with the goal of serving the overall interest of the network.

Questions to Ask and Answer Does the business incubator offer seed money or venture capital funds linked to the incubator? What specifically will the business incubator do to help your e-business? What is the business incubator’s track record with other e-business startups?

Questions to Ask and Answer How much will it cost your e-business — in cash and equity — to be incubated? How long is the incubation period? How do you feel about the business incubator ’ s environment?

Self-Incubation Some e-business startups like the idea of sharing office space with other entrepreneurs, exchanging ideas with others going through the startup process, and taking advantage of a mutual network of advisors.

Pitching Your Idea The first meeting with angel investors or VCs is a ________ meeting. Your immediate objective in a first meeting is to get potential investors ________ about your e-business idea. Be brief Present a brief pitch document (short marketing document)

“Here’s the Pitch…” Define your product or service. Define who will buy your product or service and how much they will pay for it. Define your key industry competitors. Explain how much it will cost to provide the product or service.

Explain when the investors can expect your e-business to be profitable. Illustrate the planned exit strategies. Detail how much money you are looking for, and how it will be spent. “Here’s the Pitch…” (cont’d)

Potential investors will try to determine how well you understand your: – E-business – Target market – Competitors – Critical marketplace issues During your presentation, you should: – Differentiate yourself – Show a real commitment – Create the feeling of viable, exciting opportunity

Term Sheet List of the major points of the proposed financing being offered by the investor, and is used to start negotiations for the investment deal Example: – Invest $200,000 for 10% equity, then the investor values your e-business at $2 M May include other demands Have reviewed by a qualified attorney