Entrepreneurship 1: Lecture 9 Sources of Funding Avimanyu (Avi) Datta, Ph.D.

Some Hard Facts Few Entrepreneurs have all the money they need Entrepreneurs have to be willing to accept risks Don’t expect to get a loan from the bank. Are you credit/Investment worthy Have to give up something to get something

Some Hard Facts Raising money takes considerable time You will need to be a salesperson to get funding Raising funds also takes resilience Not all money is alike: Smart Vs Dumb You need an “F-plan”

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

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 4-5

Startup Financing (continued) 4-6 Informal InvestorsAdvantagesDisadvantages Friends and family members  Deal with family and friend investors just as you would any investor.  Require legal documentation for any investment transaction.  Confirm that family and friend investors understand the risks involved with a startup and can afford to lose their investment.  Next to self-funding, may be the easiest way to fund startup expenses.  Investors know and trust the entrepreneur.  Investors are likely to be supportive during hard times.  Investment is in the entrepreneur and his or her abilities, not the new business idea.  Possible strain on personal relationships because of business misunderstandings.  Potential loss of investment by those who may be least able to afford the loss.

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 4-7

Startup Financing (continued) 4-8 Informal InvestorsAdvantagesDisadvantages Angel investors Wealthy individuals who enjoy the excitement of investing in new business ideas. Typically invest in the new business idea, not the entrepreneur and his or her abilities. Primarily interested in how a new business idea fills a marketplace need Typically offer the first significant funding for a startup. May offer business advice, mentoring, or access to other investors. E-business idea may be required to pass a very rigorous screening process. Some angel investors focus on a single industry, such as technology. Individual angel investors typically invest relatively small amounts in several new businesses.

Startup Financing (continued) 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 4-9

Startup Financing (continued) Venture capitalist investors (VCs) (continued) ◦ Take many forms  Traditional partnerships  Government-sponsored investment companies  Corporate funding programs by high-tech companies 4- 10

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 4- 11

Startup Financing (continued) Professional InvestorsAdvantagesDisadvantages Venture capitalist firms Traditional partnerships or professionally managed investment companies. Government-sponsored investment companies. Corporate funding programs to augment internal research and development efforts. Provide access to hundreds of millions of dollars. May offer extensive knowledge about a specific industry. May offer access to important industry contacts. Focus is often on a specific industry or geographical area. Generally require a large equity position in a new business in exchange for an investment. Often require a seat on the board of directors and to be actively involved in major business decisions. A business plan may not get noticed unless it is submitted through a trusted third party.

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 4- 13

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 4- 14

Pitching Your E-Business To Investors (continued) During the pitch meeting Be on time Be prepared Be enthusiastic Bring all necessary equipment and documents Use a pitch document (a brief marketing document based on the executive summary portion of the e-business plan) to direct the meeting. Differentiate yourself and management team from your competitors Create the feeling that your e-business idea is a viable, exciting investor opportunity 4- 15

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  Web site design and hosting  Clerical support 4- 16

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 4- 17

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 4- 18

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) 4- 19

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 4- 20

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 4- 21

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 4- 22