MIS/ENTR 375 Global E-Commerce Creating a Winning E-BusinessSecond Edition Getting Your E-BusinessOff The Ground Chapter 4
Learning Objectives • Describe 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.
Startup Financing • Bootstrapping • Self-funding • Finding unique and inventive ways to acquire resources without borrowing money • Informal investors • Friends • Family members • Angel investors
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
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
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?
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
Startup Financing (continued) • Venture capitalist investors (VCs) (continued) • Take many forms • Traditional partnerships • Government-sponsored investment companies • Corporate funding programs by high-tech companies
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
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?
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
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
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
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?
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
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
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
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)
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
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
Pitching Your E-Business To Investors (continued) • CASE STUDY (Incubating VeritasMedecine 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?