Getting Your E-Business off the Ground

Chapter 5

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.

Personal Assets

• Sweat Equity- You put in your time and effort

• Mortgage Personal Assets –you put up property as collateral to a bank

• Personal loans – you take 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 and their families and friends.

Friends and Family

• Advantage: It may be the easiest money you’ll ever get.

• Disadvantage: You are getting money from Friends or Family and putting their MONEY at RISK.

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 key is networking and research.

An Angel Investment Club

Venture Capital Investors

• Venture capital (VC) firms are organized to invest specifically in new business startups.

• Typically they take a significant equity interest in the firm with in exchange for providing startup capital.

Venture Capital Investors

• They may also provide expertise.

• They 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

• 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.

Business Incubators

• Commercial business incubators offer startup e-businesses access to the same services offered by nonprofit incubators.

• Commercial business incubators are primarily interested in high-technology businesses that can become financially viable quickly and leave the incubator within six months to a year.

NASA Ames Incubator

Batavia Industrial Center

Incubators

• May take an equity interest as well as charge for services.

• Not for profit incubators may use returns from equity to reinvest.

Idealab!

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 sales meeting.

• Your immediate objective in a first meeting is to get potential investors excited about your e-business idea.

And 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

And Here’s the Pitch

• Explain when the investors can expect your e-business to be profitable

• Illustrate the planned exit strategies both for investors and for your e-business principals

• Detail how much money you are looking for, and how it will be spent