technology start-up initial process · 12.05 pm to 12.10 pm beacon vp ‐introduction 12.45 pm to...

Technology Start-up Initial Process

From the idea to completion of the Business Plan

August 24, 2011

12.05 pm to 12.10 pmBeacon VP ‐ Introduction

12.45 pm to 1.00 pmFunding Overview

1.00 pm to 1.30 pmFuture Workshop

Q&A 

12.15 pm to 12.45 pmTechnology Start‐Up Initial 

Process

AGENDA

12.05 pm to 12.10 pmBeacon VP ‐ Introduction

1.00 pm to 1.30 pmNext Workshop @ MGH

Q&A 

12.15 pm to 12.45 pmTechnology Start‐Up Initial 

Process

OUR NETWORK PRINCIPLES

• Pursue purpose beyond profit

• Put people at the center

• Spread economic opportunity

• Be bold- be an agent of change

“Our lives begin to end the day we become silent about things that matter.”

- Martin Luther King Jr.

We believe in the positive impact of entrepreneurship 

WE ARE A NETWORK ORGANIZATION

Technology StartTechnology Start--up up Initial ProcessInitial ProcessFrom the idea to completion of the Business Plan

© 2011 Ramin Abrishamian

Gain = Pain

“no pain, no gain”

What are the What are the ““GainsGains””??

Emotional/SpiritualControl over one’s professionCreating something from nothingSolving problemsCamaraderie and community buildingLearning new skills

FinancialBuilding equity

What are the What are the ““PainsPains””??

Emotional/SpiritualResponsibility for one’s professionResponsibility to investorsLiving with risk of failure – don’t have control over

everythingEach day brings a new problem Responsible for others’ incomeAll consuming

FinancialLack of stabilityHigh risk of loss

First Steps.. First Steps..

The FoundationThe Foundation

The DesireAre you OK with the Gain = Pain equation?

An IdeaBusiness concept, and/orTechnical gismo (hardware or software)

Initial Due DiligenceInitial Due Diligenceself check self check -- need complete clarity and honesty.need complete clarity and honesty.

How technically feasible is the idea?

What’s the actual or potential market? (Who is going to pay for/buy your idea)?

How large is the market in $’s? Anything less than a few $100’s of million real or projected might be too small.

Might need to hire consultants, use friends, colleagues and/or others to help out

How to organize?How to organize?

Need to IncorporateNeed to Incorporate

Protects against liability

Helpful for initial financing but is essential for receiving outside investment

LLC vs. ‘S’ Corp vs. ‘C’ Corp◦ LLC & S have tax benefits – C is structurally more robust

Which state?◦ Typically registered in Delaware, HQ’d in the state with

most employees

Initial Support TeamInitial Support Team

Lawyer – (sorry!)◦ Go with a reputable firm and negotiate on every

task’s costs

Accountant◦ Not necessary immediately but will need eventually◦ Hire as a contractor not employee

Existing –◦ Must agree on the following in writing – signed and

sealed

Relative ownership positionsResponsibilitiesAuthority (position on the org chart)

PartnersPartners

PartnersPartnersNew◦ Should you bring in a “partner”? ◦ Need to add to your initial skill set, e.g. you might

have great technical skills, but lack adequate business skills – or even some technical aspect that is critical to have when starting up the business◦ Partner vs. simple employee?

Partner is more willing to take risk – will take lower or no salary in lieu of ownership position – better at the early stagesMake sure that you like and get along with the partner –difficult to break up laterThe “rules” for existing partner apply to new partner.

Ready to goReady to go……..

Have the desire and the ideaWorked out the founders teamHave organized the company

Ready to goReady to go……..

Thoughts on Capital RaisingThoughts on Capital Raising

Capital raising is most efficient when done stage-wise◦ Basically earlier investment is higher risk and is at

lower valuation; later stage investment will be at lower risk and thus higher valuation

It’s best (ideal case) that the very first capital investment be from the founder (s) - obviouslyIf you have no money, look to friends and family and to your Uncle SamBest source of government money is research grants – most popular is the SBIR grants

Thoughts on Capital Raising Thoughts on Capital Raising –– cont.cont.

Government research grants such the SBIRs are great, but…◦ Unless you are already plugged into the system, it will

take 9 – 18+ months from start to actually receiving any money◦ It will take time to write grants and shepherd them

through government agencies◦ It takes great skill (not to mention luck) to ensure

that the objectives of the government and yours are aligned◦ There are many startups that become stuck in a

“grant loop” and don’t go commercial

Sources of CapitalSources of Capital

Friends & Family◦ Small amounts – many investors not necessarily

sophisticated◦ Better valuation – complicated/difficult investors

Angels and Angel Groups◦ Sophisticated high net worth investors◦ High risk tolerance – entrepreneur friendly◦ VC’s like these investors◦ Typically up to $2 – 3 million

Institutional Investors – VC’s◦ Needs a whole separate session

Sources of CapitalSources of Capital

Joys of Bootstrapping – Not!◦ Using personal savings account, maxing the credit

cards, tapping into the kids’ college fund, and the 401K◦ Advantages:

Reduces dilutionWill not waste time waiting for investorsFocuses and sharpens decision makingSome times is the only way to kick start a business

◦ DisadvantagesDistracts founders’ attentionFinancially riskyInhibits growth and expansion

The Business PlanThe Business PlanMust have one!

◦ Essential in helping you get your thoughts, ideas and plans analyzed and organized

◦ Investors need to understand your idea and assess its feasibility and value

“A great business plan starts with a great story and ends with rigorous math (well, at least arithmetic)”

How to Approach Writing the How to Approach Writing the Business PlanBusiness Plan◦ It should be cogent and pithy – please don’t write a

book!

◦ Best (and currently most popular) format is the PowerPoint slides– it forces you to be “cogent and pithy” (no more than 30 or so slides)

◦ It should stand by itself – i.e. one should be able to read it and understand it without your presence.

Content of the Business PlanContent of the Business Plan

Define the idea

Describe the business strategy/model (“elevator pitch”)◦ The main elements of developing the product◦ Accessing and selling to the market

Explain the investment opportunity (<3 slides)WHY SHOULD THE INVESTOR LISTEN TO THE

REST OF YOUR PRESENTATION – (can also be used as the Executive Summary)◦ A summary of everything in your plan!

The ideaThe benefits/advantages of the ideaDescription of the Market and why it’s so attractiveThe plan of how you can capture a significant segment of this marketThe special and unique skills/strengths that you are bringing for commercializing this business ideaWhat are the projected (pro forma) salesHow would the investor realize her/his return– IPO or Acquisition at what potential scale

Content of the Business PlanContent of the Business Plan

Content of the Business PlanContent of the Business PlanGive details of the background of the idea and its premiseExplain the market – give references as much

as possible w/o making it tediousGive the “size” of the market – again w/ references (so it is clear that you are not making this up)Why this idea and why you? (Strengths/ Advantages/Benefits)Resumes of the Founders (brief)Organization chartProduct development plan with key milestones

Content of the Business PlanContent of the Business PlanBrief marketing and sales planFinancial projections

Present assumptions and basisIf needed (depending on the type of business), add other tables breaking down the expenses and/or revenues in more details

Content of the Business PlanContent of the Business Plan

Key milestones and their schedule, including:

◦ Hiring of the key employees◦ Product development◦ Regulatory hurdles (if any)◦ Product development steps◦ Product testing and evaluation◦ Start of the sales process◦ Others that are relevant to the particular business

Content of the Business PlanContent of the Business Plan

Competition◦ Be thorough and honest in listing them◦ Err on the part of listing more of them than less◦ Only describe one or two in any detail

Competitive Advantages◦ How is your idea protected against competition◦ Why existing competition or any potential

competition is not a threat

Content of the Business PlanContent of the Business Plan

Describe the risks, e.g.:◦ Failure to overcome a critical technical problem◦ Potential for change in the market◦ New unexpected competition that isn’t on the scene

yet◦ Disruption of financial markets preventing you from

raising expansion capital◦ Costs of goods ending up being higher than projected◦ Changes in specific regulations and new adverse

regulations◦ Others..

Content of the Business PlanContent of the Business Plan

Explain what you are asking for:◦ Obviously money◦ How much and in how many tranches and when◦ How far this investment will take you and what is

your anticipation of future rounds of financing◦ Towards what general tasks (e.g. x towards product

development, y towards sales & marketing, z for administration, xx towards the purchase of a critical technology or equipment, etc.)

Content of the Business PlanContent of the Business Plan

Appendices

◦ Supporting information that you might need in your presentation and answer potentially critical questions

Before Formal PresentationBefore Formal PresentationHave it reviewed and critiqued by as many friends,

colleagues, family members as possible (don’t forget your mother-in-law!)

Then, present it to a “friendly” investor.

Don’t get offended by critical comments – remember that the goal is to communicate clearly and accurately the goals and benefits of your business idea. It doesn’t matter what you think – it matters what your audience takes away from your presentation.

Quick DoQuick Do’’s and Dons and Don’’tstsDon’t need to present or discuss valuation in your presentation (e.g. “ for $x million investment you we are giving up y% of the company”)Do prepare a detailed spreadsheet for your financials (“rigorous arithmetic”) and make sure it includes EVERYTHINGDon’t send or give this spreadsheet to potential investors until they have expressed serious interest in investing and are beginning their due diligence process

Quick DoQuick Do’’s and Dons and Don’’ts ts –– cont.cont.

Do identify potential senior hires and include them in the resumes section. You can keep their names out since they haven’t joined yet

Do be honest and forthright

Don’t BS

Remaining IssuesRemaining Issues…… (for another time.)(for another time.)

Valuation

How to answer questions from potential investors

How to negotiate with potentially interested investors and the termsheet

Board of Directors

Remaining IssuesRemaining Issues…… (for another time.)(for another time.)

Founder as CEO

Building the senior team

Maintaining control

Financial controls

Managing a start-up

The End

Thank you for your patience.

Ramin Abrishamianramina@alum.mit.edu

FUNDING OVERVIEWStart-up Financing CycleDifferences between Angels & VCsRisks & return on each start-up stageOdds of ventures getting funded by VCs

Image from Wikipedia: http://en.wikipedia.org/wiki/Startup_company

DIFFERENCES BETWEEN ANGELS AND VENTURE CAPITALS (VCS)

Angel Investors Venture Capitals (VCs)

Money source Personal Others

Investment Involvement

Before seed & seed stage After seed stage

Investment Goals Internal rate of return; Personal; Community; Impact

Internal rate of return ONLY

Investment Risk High Less risky than angel investors

BUT…ONE THING IN COMMONBoth Angel Investors and VCs share risks and rewards 

with start‐ups!

RISKS AND RETURN FOR EACH STARTUP STAGE

Stage Failure %Return On Investment

(ROI)5-Year Increase

Seed 66% 60% 10x +

Early 34% 40% 5X

Expansionary 20% 30% 4X

Later 20% 25% 3X

Sources:

ROI & 5 year increase- from Charles Sidman, Ph.D – MP of ECS Capital Partners, LLC

Failure % - from Ruhnka, J.C. Young, J.E. Journal of Business Venturing

ODDS OF VENTURES GETTING FUNDED BY VCS

Source: National Venture Capital Association (NVCA)

“Walking dead”

Next Workshop at MGH Next Workshop at MGH –– Date Date TBDTBD

How to develop an “Elevator Pitch”.

Q&A Session

Source: http://avid.deviantart.com/art/Optimist-Prime-178004809