Getting Your E-BusinessOff The Ground

Chapter 4

MIS/ENTR 375

Global E-Commerce

Learning ObjectivesDescribe the financing issues associated with

an e-business startup.Discuss the role of informal investors in an e-

business startup.Identify issues important to venture capital

investors.Pitch an e-business idea to investors.Discuss the advantages and disadvantages of

business incubators.

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Startup FinancingBootstrapping

Self-fundingFinding unique and inventive ways to acquire

resources without borrowing moneyInformal investors

FriendsFamily membersAngel investors

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Startup Financing (continued)Friends and family members

Know and trust entrepreneurStand by during tough timesInvest in entrepreneur rather than business

ideaDownside is potential risk to relationships

Business misunderstandings Business failure

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Startup Financing (continued)

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Informal Investors Advantages DisadvantagesFriends 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 risksPrimarily interested in business ideaAngel 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

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Startup Financing (continued)

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Informal Investors Advantages DisadvantagesAngel 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)CASE STUDY (Of Angels and E-Mail p. 115)

How did Sendmail get its start? Do you think it was difficult or easy to

get angel investors to look at the Sendmail e-business idea? Why?

Why do you think the Sendmail e-business idea was attractive to the members of Band of Angels and the co-founders of Sun Microsystems?

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Startup Financing (continued)Venture capitalist investors (VCs)

Professional investment companyProvide funds for startup businesses in

exchange for equity positionRaise funds from endowments, insurance

companies, and pension funds

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Startup Financing (continued)Venture capitalist investors (VCs) (continued)

Take many forms Traditional partnerships Government-sponsored investment companies Corporate funding programs by high-tech

companies

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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

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Startup Financing (continued)

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Professional Investors

Advantages Disadvantages

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.

Startup Financing (continued)CASE STUDY (Rackspace Managed Hosting p.

117)Who invested “sweat equity” in the business?What role did Weston and Miller play in

Rackspace’s startup funding?In what order was startup funding secured

for Rackspace? Is this order typical or atypical for a startup business?

At what point was it no longer necessary to secure equity funding for Rackspace?

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Pitching Your E-Business To InvestorsFirst meeting with investors is a sales

meetingBring 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

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Pitching Your E-Business To Investors (continued)Learn as much as possible about potential

investors before the pitch meetingBe prepared for investor questions about

Business ideaTarget marketCompetitorsCritical marketplace issues

Do not fake answers; if you don’t know, simply say so and move on

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Pitching Your E-Business To Investors (continued)During the pitch meeting

Be on timeBe preparedBe enthusiasticBring all necessary equipment and documentsUse 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

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Pitching Your E-Business To Investors (continued)CASE STUDY (Zipping Along to an IPOp.

121-123)What is the e-business idea behind

ZipRealty? Why would this e-business idea be attractive to angel investors and VCs?

What are the major lessons to be learned from the early experiences that Kucirek, Mini, and other ZipRealty management team members had at their pitch meeting?

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Business IncubatorsNurture 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

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Business Incubators (continued)Non-profit organizations or commercial

businessesOffer a quick “leg up” for entrepreneurs

needing administrative and support servicesProvide access to knowledgeable professionals,

advisors, potential investorsCost to entrepreneur

Fees for services Loss of equity

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Business Incubators (continued)Advantages

“One-stop solution” for many startup problemsEasy access to professional adviceVenue for interacting with other startups

DisadvantagesMay be hefty fees for servicesGiving up share of ownership equity to others

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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)

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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

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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

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Pitching Your E-Business To Investors (continued)CASE STUDY (Incubating Veritas

Medecine p. 129)Why did Knight and Adelman turn to CI to

seek funding? What services did CI provide to Veritas

Medicine? What did Veritas Medicine pay for the

services provided by CI? Was it worth it? If yes, why? If no, why not?

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