SBDC Develop, Market, Finance a New Product (Two Hour)

transcript

How to Develop a New Product, Take it to Market, and Finance it

November 1, 2016 (2-Hour Workshop)

Jim Wasson, Ph.D., MBATechnology Commercialization Business Consultant

SC Small Business Development Centerwassonjw@mailbox.sc.edu

843-804-9026

Small Business Development Centers

• We are a federal and state program - funded by Congress and administered by the SBA

• We provide confidential business consulting at no charge to you

• We have 20 SBDC Centers in South Carolina• Technology Commercialization for the coastal

area is provided by the Charleston SBDC Center

SC SBDC Economic Impact• 1,278 Jobs Created / Saved • $52.9 Million in Capital Formation • $1.4 Billion in Government

Contract Awards• 183 New Businesses

Started • Over 5000 Small Businesses and

Individuals Served

ROI = $46.8 MM in Per Capita Income

Your Facilitator

• Founder of three small high-tech business– Growth Strategies International, LLC – ProLink, Inc. (GPS Golf Course Management System)– Avionics Engineering Services, Inc.

• Chief Technology Officer at BAE Systems, Inc.– Responsible for new product development for 16 product lines

• 20 years at Boeing and GE as Director/Manager– Engineering / Program Management / Business Development

• Chair of University of Phoenix Graduate Business and Management College and MBA Professor

Keys to Success

Probabilityof technicalcompletion

Overallprobabilityof success =

Probability ofcommercialization

given technicalcompletion

XProbability of

economicsuccess given

commercializationX

EngineeringFocus

MarketingFocus

Financial Focus

How will you make moneyfrom your new product idea?

Invention/Innovation

Proof of Concept

MarketValidation

Final Product Development and Initial Production

CompanyExpansion

(Jobs)

Pre-Commercial Arena Commercial Arena

Idea generation, prototyping, presentation, data collection, analysis and learning

BUSINESS PLAN

BUSINESS MODEL• Who's your target customer?• What customer problem or challenge do you solve?• What value do you deliver (Value Proposition)?• How will you reach, acquire, and keep customers?• How will you define and differentiate your offering?• How will you generate revenue?• What's your cost structure?• What's your profit margin?

Start-Ups: Testing a Hypotheses

SCALING

Business Case

AGENDA• Concept Feasibility

– Forming a Business– New Product Development

• Business Case– Product / Market Fit– Value Proposition

• Scaling Your Business– Prototype to Production– Distribution Channels

• Financing Your Business– Sales, Costs and Profits– Debt and Equity Financing

Forming a Legal Entity

• Sole Proprietor• General or Limited

Partnership• Limited Liability

Company (LLC)• S-Type Corporation• C-Type Corporation

COO CFO CTO

ORGANIZATION CHART

Product Development Process

IdeaGeneration

ConceptDevelopment

and MVP Testing

MarketingStrategy

Development

IdeaScreening

BusinessModel

Development

ProductDevelopment and Testing

Manufacturing And Distribution

Financial Analysis

Where are you in launching your Product?

Concept Analysis – What is Innovation?

• An innovation is a new match between a need and a solution.

• Successful innovations create value. • An invention has the potential to become a

successful innovation. • An opportunity is the seed that might become an

innovation. • Development of new products and services that

meet a customers need better than current alternatives do.

What is an MVP?

• A Minimum Viable Product has only the minimal set of features necessary to demonstrate the ability of the product to satisfy a customer need

• An MVP is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort

• The final, complete set of features is only designed and developed after considering feedback from the product's initial users

MVP Key Characteristics

• It has enough value that people are willing to use it or buy it initially

• It demonstrates enough future benefit to retain early adopters

• It provides a feedback loop to guide future development

• It assumes that early adopters can see the vision of the final product and provide valuable feedback needed to guide developers forward

Systems Engineering ProcessSystem ConceptClarify ProblemEstablish NeedEstablish Value

Feasibility Study

System Definition / Preliminary Design

Functional Reqmts. Cluster functions into

subsystemsSystems analysis on

alternativesDesign Specifications

Detail Design / Systems Development

Detail design of oper and support systemsDevelop test models

and test systemsDesign production

capability (make/buy)

Systems EvaluationSystem Analysis

Modification

Systems Operation/SupportInstallation, test, maintenance,

training, enhancementProduction

Systems EvaluationSystem Analysis

Modification

Phase-Out

WHAT? HOW?

From: “Managing Business & Engineering Projects” by John M. Nicholas

Defining the “What”User Requirements System Requirements

Vehicle must accelerate from 0 to 60 mph in 10 sec & seat 6 people

Vehicle size, weight, horsepower, kind of transmission

House must be spacious for a family of 4 Number and size of rooms

Space Station must operate life support, manufacturing, and lab

Type and kilowatt capacity of power generating equipment

Computer system must provide summary reports on a daily basis

Type of computer hardware, software, collection, entry, storage and processing

What is your user requirements? What are your system requirements?

Analysis and Selectionof the “How”

Objectives

Problem Formulation

Alternatives

Resources, Constraints

Selection Criteria

Systems Model (PMP)

System Concept

Concept Formulation

Research and Trade-Off Analysis

Analysis andJudgement

Verify

Iterate Systems Analysis to Optimize Solution

Technical Maturity

Pre-Concept RefinementMaterial Solution Analysis

Technology DevelopmentEngineering and Manufacturing Development

Production & Deployment

Technology Readiness Levels

Rapid prototyping and MVP market testing reduces overall risk and cost

Intellectual Property

• Non-Disclosure Agreements• Copyrights © • Trademarks™ ®• Trade Secrets• Design Patents• Utility Patents• Plant Patents• Provisional Patent Applications

USPTO Pro Se Assistance: IndependentInventor@uspto.gov

1-866-767-3848

Concept Analysis Summary

• Innovation is a match between a need and a solution - successful innovations create value

• A Minimum Viable Product has the minimal set of features necessary to demonstrate the ability of the product to satisfy a customer need

• Bringing a new product to market requires experimentation to determine a viable solution solves a real problem that customers want

Product / Market Fit• Who are the customers?• What problems do they have?• What solution are you proposing?• Who will be your competition?• What is your value proposition

– Why is your solution better than the competition?

• What is the market size?

“A product must be relevant to the customer (demand pull) or so innovative that that its existence changes the game (technology push)” MG Ted Bowlds

Role of Marketing

• Determine customer needs • Forecast product demand• Control and manage demand

– Marketing Plans, Programs, Promotional Campaigns

– Sales, Discounts, Incentives

Market Research

• Systematic design, collection, analysis• Reporting of data and relevant findings• Regarding a specific market condition

www.census.govwww.bea.govwww.sec.govwww.bls.govwww.sba.gov

Market Strategy Planning

CustomersNeeds and other

SegmentingDimensions

CompanyMission, Objectives

Resources

CompetitorsCurrent &

Prospective

TargetMarket

Product Place

PromotionPrice

External Market EnvironmentTechnology Political & Legal Social & Cultural Economic

Targeting &Segmentation

Positioning &Differentiation

Narrowing down to focused strategy with quantitative and qualitative screening criteria

Marketing Mix

The Four Customer 4’c

CustomerSolution

CustomerCost

Commun-ication

Conven-ience

TargetMarket

Product Place

PromotionPrice

Value Propositions

• Our product/service is for (target customers)

• Who are unhappy with (situation or alternative)

• Our product is a (new product)

• That provides (solution)

• Unlike (current alternatives

ProLink’s Value Prop

• Our product/service is for resort golf courses• Who are unhappy with slow speed of play • Our product is a golf course management

system• That provides 10% -15% increased revenue• Unlike relaying on persistent ranger surveillance

Revenue Generation via Leasing per Round of Golf:Golf Course: 25,000 rounds/year x $50/round = $1.25MM. 10% = $125,000 increase/yr.ProLink, Inc.: 25,000 rounds/year x $2/round = $50,000 x 2 years = $100,000 break even

Customer Adoption

2 1/2%Innovators

13 1/2%Early

adopters

34%Early

majority

34%Late

majority16%

Laggards

Time of adoption innovations

Stages:• Awareness• Interest• Evaluation• Trial• Adoption

Characteristics:• Relative advantage• Compatibility• Complexity• Divisibility• Communicability

Fitbits, Tablets, I-Phones were all technologies that adopters were late to embrace

The Product Life Cycle

EMBRYONIC GROWTH MATURE AGING

REJUVENATE?GROW NEW BUSINESS

IMPROVE COMPETITIVE

POSITIONLAUNCH NEW

BUSINESS

ESTABLISH COMPETITIVE

POSITION

SUSTAIN COMPETITIVE

POSITION

DIFFERENTIATION

COST REDUCTION

CUSTOMER SUPPORT

COST REDUCTION EXTEND RANGE OF PRODUCTS

IMPROVE FEATURES

REDUCE COST

RENEW?

ABANDON?REVENUE $

INDUSTRY MATURITY

Source: “Third Generation R&D: Managing the Link to Corporate Strategy”, Harvard Business School Press, 1991

Early Adopters Early Majority Late Majority Laggards

Sales Forecast

• Number of potential sales in each stage• Probability and $ at each stage & time to close• Monthly projection of sales revenues

Break-Even Analysis

Determines number of units needed to be sold where revenues equal total cost

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000

Fixed Costs

Variable + Fixed Costs

Break Even Point

Business Case

• Estimate total sales by unit– Integrate sales forecast with

production forecast• Estimate costs/profits

– Cost of Good Sold– Gross Profit– Development Costs– Marketing Costs– Distribution Costs– Allocated Overhead– Net Profit

Marginal Cost (MC)Marginal Revenue (MR)

Average Total Cost (ATC) = Fixed Costs (overhead)

+ Variable Costs

en.wikipediaderivative work: Jarry1250 (Costcurve_-_Combined.png)

Pricing Strategies

• Initial Price– Cost of material and service plus profit– Match competition

• Adjust Price– Monitor customer demand– Compare to competition– Insure values to customer– Reduce costs before increasing prices

• Price Set Too Low– Disrupt marketplace (price war)– New business suffers the most

Price Elasticity of Demand =Quantity Demand

Why New Products Fail

• “Over Championing”• Overestimated Demand• Poor Design• Poor Marketing Execution• High Development Costs• Strong Competitive Reaction

Business Case Summary

• Exceptional products deliver customer satisfaction at an acceptable price conveniently

• A unique value proposition solves a customer’s problem better than any other alternative

• Product promotional and pricing strategies vary depending on the stage of the product life cycle

• A Business Model requires a value proposition and a business case to illustrate how revenue will be generated

• Break-Even occurs when sales volume covers both fixed and variable costs

• Financial Analysis requires a sales forecast and estimate of start-up costs and operating expenses to maintain a positive cash flow

Scaling Your Business

ProblemSolution

SolutionMarket

FitScale

Pre -Commercialization Commercialization

Focus: Validated learningExperiments: Hypotheses Testing & Pivoting

Focus: GrowthExperiments: Optimizations

Carefully calibrate the growth of your operations so that they are in sync

with your revenue growth

Market Research toProduct Launch

Failure ModeEffects AnalysisAnd Testing

Design and Performance Specifications

RapidPrototyping

Distribution Channels

From Prototype to Production

• Bill of Materials– Metal or fabric? – How many parts?– Open market or custom fit?

• Minimum Order Quantity– Volume price breaks that factor in time to

set up and take down your project plus required labor and material plus profit

http://lineshapespace.com/manufacturing-costs-taking-your-idea-from-prototype-to-production

• Purchase Order– To hit “start,” factories ask for a third to

half the total cost up front

• Tooling– A custom mold or fixture used to make

your product can cost from $1,000 to $200,000. You own it.

• Quality Control– Work with factory to understand the

steps required to translate handmade or low-volume prototypes into large quantities

• Packaging– If your product is destined for retail

shelves, you’ll need packaging– Not just to protect your product, it’s

your marketing pitch

• Shipping– Budget $1,000–$5,000 for relocating your

wares to storage

• Storage– Unless you have a garage, you will need a

storage center

Feasibility Assessment

RISK CUBE

Scaling Your Business Summary

• Incremental prototyping and product and market testing reduces overall risk and cost

• Scaling to production requires adding purchasing, tooling, quality, packaging, shipping and distribution functions

• Must consider economic, technical, operational and schedule feasibility factors

• Financing Your Business > > Break?– Sales, Costs and Profits– Debt and Equity Financing

Bootstrapping• Bootstrapping is self funding to

avoiding the need to raise external financing

• 90 percent of entrepreneurs use

bootstrapping, since other people’s money comes with negative strings attached– Investors have Board Seats– Monthly Financial Reports– Constant Oversight – Justify Pivots– Constantly worry about Payback– Take over Control & Boot you out

"Bootstrapping with Friends and Family" https://www.youtube.com/watch?v=sfvwzUbBH4I

As long as you can bootstrap, not at the sacrifice of competitive advantage, bootstrapping is a

really powerful thing because it allows you to be totally devoted to your vision.” - Nick Woodman

(Founder and CEO of GoPro)

Bootstrapping Methods Work out of your home or

share office space Lease equipment or buy

used equipment Coordinate purchases

with other businesses Barter for services Federal Lab CRADA

Compensate with equity Obtain payments in advance Obtain vendor financing Emphasize profitability over

revenue growth Making due – manage on a

shoestring budget Get free advice on how to “do-it-

yourself”

Requires creativity, ingenuity, thriftiness and cost-cutting

http://techlinkcenter.org/crada

External Financing

• Family and Friends• Crowdfunding• Angel Investors and VCs

Equity

• Credit Cards & Bank Loans• Peer-to-Peer Lending• Angel Investors

• Grants.gov• SBIR.gov• Fedbizops.gov

Grants &Contracts

Sources of Funds

SavingsBank LoansCredit CardsFamilyBusiness AcquaintancesAngels InvestorsClose FriendsVenture Capital FirmsGovernment Grants

Kauffman Foundation survey of the 5,000 fastest growing U.S. companies

Angels versus VC Funds• Pre-Seed and Seed Capital Funds

– No product or organized company yet - still in the exploratory stage– Few Angels and VCs fund at this stage and amount invested would be small– Funding typically by Founder, Friends, and Family, and/or Crowdfunding– Create a sample product, fund market research, cover administrative costs

• Startup Capital Funds– Sample product available with at least one principal working full-time– Angel funding to cover recruitment of other key management, additional

market research, and finalizing of the product or service– Most Angels prefer sacrificing near-term profitability to maximize growth

• Early Stage and Expansion Capital (Series A/B Rounds)– After 2-3 years, management team is in place and sales are increasing– VC funding to increase sales to break-even, improve productivity, or efficiency– Private Equity Firms lever the business with debt to reduce equity investment

Staged InvestmentsStages: Tech Discovery Proof-of-Concept Design Develop Deliver

Investment: $25K $100K $500K $1MM $5MM $10MM $50MM

Type: Pre-Seed Funds Seed Start-Up Early Stage (A) Expansion (B)

Founders

Friends & Family

SBIR Phase I & II

Crowdfunding

Angel Investors

VC Funds

Private Equity

Loans / Bonds

Sources:

Valuation (3X Revenue): $1MM $5MM $15MM$30MM $150MM

Banking Basics

• Commercial & Retail Banks– Business Checking Account– Business Loans

• Investment Banks for Exit Strategy– Mergers and Acquisitions (M&A)– Initial Public Offerings (IPO)

• Buys common shares and sells them on the stock market– Leveraged Buy-Outs (LBO)

• Limited Partners in Private Equity Fund buy preferred shares of stock from company

• Stock is “leveraged” with Bank Loan

Know Your Credit Scores

Reports and Scores• Experian, Trans Union, and Equifax

Correcting errors

Where to get a free credit report• Report: Annualcreditreport.com• Score: myfico.com

How to Talk to a Banker

• Know how much you would like to borrow and what it will be used for

• Know how much you can afford to borrow

• Prepare a Loan Package• Be prepared to discuss your

ability to repay and terms• Be prepared to offer

collateral to secure the loan

Loan Package Components

Business Plan Loan Request Description of Collateral

Opening Day Balance Sheet

Summary of Start-up Costs

Sources and Uses of Capital

Personal Financial

Statement(s)

Lease Agreement

Tax Returns Resume(s)

Why do I need a Business Plan?

• Roadmap to the future• Gives basic structure • Translates your thoughts

and ideas to paper• Forces you to make a

budget• Necessary item for almost

every Funding Source

Business Plan Components

• Executive Summary• Company Background• Product/Service• Target Customers• Market Analysis• Competition• Barriers to Entry (IP)• Business Strategy

• Advertising/Promotion• Strategic Alliances• Organization• Financial Projections

– Sources & Uses of Funds – Balance Sheet – Income (P&L) Statement– Monthly Cash Flow

• Future Plans

Financial Projections

• Sources & Uses of Funds– List amount of funding needed and

expected source of each fund– List start-up costs - all items needed in

order to get the business running– List working capital needed based on cash

flow projections• Balance Sheet (Net Worth)

– Shows what you own (assets), what you owe (liabilities), and your equity (investment + retained earnings)

Assets(what the company owns)

Liabilities and Capital(what the company owes)

Must equal

Sample Balance Sheet

Financial Projections

• Income or P&L Statement– Gross Profit Margin– Net Profit Margin– Determines tax liabilities

• Monthly Cash Flow– Money that comes in and goes out to cover day-

to-day operations– Company can be profitable but still have negative

cash flow – may need to have a line of credit

Sample P&L Statement

Sample Cash Flow Statement

Are You Profitable?

• Gross Profit Margin (GPM)How much do you have left to pay fixed costs?

• Net Profit Margin (NPM)How much do you have left…period!

• Return on Total Assets (ROTA) How much do you make on the investment you have in the company?

Income Statement

(Sales – Costs of Goods Sold = GPM)

(Gross Margin – Operating Expenses, Interest and Taxes = NPM)

Balance Sheet

(Profit + Interest Income / Total Assets = ROTA)

Commercial Lending

• 6 C’s of Credit– Character/Credit

history– Capital/Equity– Capacity to

Repay/Cash Flow– Collateral– Conditions– Confidence

Evaluation Criteria

SBA 7a Loans

• Maximum $5MM Loan Guarantee– Secured by real estate are eligible to be financed up to

90% of the cost– Not secured by real estate are limited to 80% of cost – Business acquisitions are limited to 75%

• Lower payments due to longer amortization– Acquire, improve, or refinance real estate up to 25 years– Loans limited to non-real estate are limited to 10 years– Useful life equipment can be extended up to 15 years

SBA 7a Loans

• Don’t have to be fully collateralized– Borrower provides a full personal guarantee of the loan and

pledges “all available” business (and personal, if necessary) assets

• No loan covenants– Your business does not need to meet arbitrary goals or

numbers to keep your loan

• Never a balloon payment– SBA loan is fully amortized and cannot include any balloon

payment

Example: $500,000, 5-year loan, Prime + 2.25%, Guarantee Fee 3.0%

Equity Financing Questions• Why are you the right team?• Why are you going after this opportunity? • How do you know this is needed? • What are the early indications of product market fit?• What is the business model? What is the pricing?• What are the unit economics?• How are you going to acquire the customers?• What will this business be like in three years from now? • Who are the right investors? Why would they invest?• How do you get in front of them? https://angel.co• What will be important to them? https://gust.com

Equity Crowdfunding• Title III of JOBS Act to provide Seed Funding

– Finally, unregistered securities can now be sold to unaccredited investors (net worth < $1MM)

• A Small Business can raise up to $1MM/year• Maximum investment $100K/each/yr.

– Net worth or income <$100K: $2K or max 5%– Net worth or income >$100K: max 10% invest

• Rules for Small Business– Must use one investment platform at a time– Provide financial report to investors and SEC– Independent audit if more than one round

http://crowdfundcapitaladvisors.com/cca-reg-cf-index

Equity Crowdfunding Sites

• Wefunder• SeedInvest• StartEngine• NextSeed• FlashFunders• CrowdFundingSTAR • Crowdboarders.com• TruCrowd• IndieCrowdFunder• Jumpstart Micro

https://www.sec.gov/spotlight/jobs-act.shtml

Equity Crowdfunding Sites are NOT Fundraiser Sites like KickStarter or Indiegogo

https://republic.co/learn/investors/eligibility

Investor Pitch Deck (10/20/30)

• Start with a real world Problem or Opportunity • Solution – tell a story how you solved their pain• Size and growth potential of market opportunity• How the business model funds the business• Competitive advantage and barriers to entry• Start-up team strengths and experience• Marketing, Promotions, Advertising and Sales Plans• Projected revenue and expenses over 5 years• Immediate investment required and use of funds• Projected investor return and exit strategy

http://www.slideshare.net/QuintinAdamis/pitch-deck-template-by-guy-kawasaki

Equity Ownership

• Stock – Unit of equity ownership in a company (junior to debt) – Common Stock

• Issued to founders, employees and consultants

– Preferred Stock• Issued to Angel and VC investors• Preference over common stock on

dividends, distributions, liquidation and redemption (see backup slide for details)

Preferred Stock

• Charter terms -Liquidation preference -Dividend rights -Conversion rights -Veto rights

• Contractual control and protection -Voting control and board seats

-Veto rights -Equity participation rights -Registration rights

Investor Term Sheets

• Outline of the terms of the transaction– Typically a Convertible Promissory Note

• Not a binding agreement to fund– Subject to due diligence and other provisions

• Confidentiality– Prohibits disclosure of terms and its existence

• Exclusivity– May give the investor some period of exclusivity (typically 30 to

60 days)

Convertible Note• Debt that is payable before any return on equity

(stock) is distributed • Converts into stock upon specified events

– Equity financing (e.g., Series A round)– Sale of the company

• May have a cap (maximum conversion price) regardless of valuation

• Bears interest which will convert into equity along with the principal

• Maturity Date based on achieving next milestone

Example - Convertible Note

• $100K convertible note, 5% interest, 25% discount • Converts to equity upon raise of $1MM • 18 month term • Series A round at $1.00 per share • Note converts into shares of Series A round:

- Principal + interest = $105K - Note converts at 25% discount ($0.75 per share) - $105K / $0.75 = 140,000 shares of preferred stock

• New investors get only 100,000 shares for $100,000

When to use Notes• Usually simpler, faster and cheaper than preferred stock

financing through a Series A round• Generally speaking

- $500K or less, use convertible notes - $1MM or more, use preferred stock

• Consider if parties can’t agree on Company’s value: - Often the company and the investors just can’t agree

on the value of the company at an early stage– Notes are a way to treat angel money fairly by deferring a valuation until

institutional equity firms can negotiate

http://www.startupcompanylawyer.com

Valuation versus Dilution

Angel Seed Round

Founder 1Founder 2AngelOption Pool Uncle

13.513.52.6

Early Stage Series A Round

Founder 1Founder 2AngelOptionsUncleVC Employee

Company Valuation = $500K$500K x 31.2% = $156,000

Company Valuation = $10MM$10MM x 19.2% = $1,920,000

Note: Stock Options are considered Deferred Compensation under IRC Section 409A

Aggregate Dollars Invested ÷ (Pre-Money Valuation + ADI) = Ownership PercentagePaul Graham’s Advice: Only give up N% equity if it will result in 1/(1-N) growth

Financing Summary• Bootstrapping avoids the need to raise

external debt or equity financing• Debt financing is based on ability to repay

the loan with interest and is secured by collateral

• Equity financing requires giving up a portion of ownership to provide investors with an return on investment

• Early-stage financing can include loans, convertible notes, and preferred stock

• Exit strategies can be IPO, M&A or LBO

Questions?

843-804-9026

Please schedule an appointment:

Jim Wasson, Ph.D., MBATechnology Commercialization Business

Consultant SC Small Business Development Centers

Citadel Bond Hall - Room 256A6296 Rivers Avenue, Suite 302, North

Charlestonwassonjw@mailbox.sc.edu

843-804-9026 or 607-727-4727

SBDC Develop, Market, Finance a New Product (Two Hour)

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