STACK. A global internet-based service based on Venture Capital funding? Various remarks. Jarmo Malinen. August 2, 2011

Transcription

1 STACK A global internet-based service based on Venture Capital funding? Various remarks Jarmo Malinen August 2, 2011

2 A possible service concept External authentication - Facebook - Google High security area Authentication User control SSO Content & Material Databases PPP OfBiz - Ledger - Licenses Store Student Teacher Freeware boundary - Paypal - VISA - Mastercard - AMEX - Google Moodle STACK Farm Note that STACK is unusable as a business brand!

3 Stack ecosystem? In addition to students and their ordinary teachers, we have to satisfy, at least, the needs of teachers that want to develop Stack materials, directors of teaching affairs that make decisions, external materials developers, testers, and localizers, corporate customers and partners, Stack system developers, and researchers.

4 Engineering Your Start-Up: A Guide for the High-Tech Entrepreneur (2nd Ed., 2003.) Written by James A. Swanson and Michael L. Baird. Read the Book. It gives you a frame of reference. You need it.

5 What are the funding options? As far as I can see, we have three alternatives: 1. A garage start-up on a shoestring budget, 2. Venture Capitalists (VC) and Business Angels, and 3. Corporate Investors. (BTW, who would they be?) Venture capital is impatient but competent money. Corporate investors would regard our enterprise as a part of their strategic plans! All private funding is dependent on business cycles.

6 Why use Venture Capitalists? (1) It is a fact of life that our time is too short to pull off this project in global scale as a garage project on a shoestring budget. We probably could make a profitable, national income-substitution business that way if we had no other choice. If we were twenty-something and had nothing better to do, we should try it just for the fun of it. But for us, there is an easier way of getting a decent income, and we all have jobs anyway.

7 Why use Venture Capitalists? (2) On shoestring budget, augmented by public grants: The quickly emerging education technology markets would just escape us. Adopting our service might seem too risky for potential customers. We might succeed in creating a new market but be too small and too slow to keep it. Most importantly, we would fail to make a difference and change the world. Unacceptable, isn t it?

8 Times aren t getting any better now! We are soon in the next economic boom. The education technology markets are already there, but they are not yet fully developed. The competitors are hopefully not yet entrenched. After the Nokia f**k-up, there is a lot of public TEKES R&D funding available in Finland. There are some positive signals from technology investment circles for high-profit, high-risk projects.

9 Where should we be in five years? (1) To be successful, we should at least enter/create a sufficiently large business to give ROI > 20 % five years leading to break-even on 3rd year and the revenue of 5M euros on the 5th year. If we do not reach these goals, we either (1) go bankrupt or (2) lose the business to our investors. Hence, we cannot afford many mistakes.

10 Where should we be in five years? (2) Hi-tech businesses of under 15 % market share typically lose money, but those over 30 % are most often profitable. Thus, we should have a market share of significantly more than 20 % in the full market of our choice in the fifth year, which is certainly more than 100 times the volume of the STACK activity we have in Aalto! N.B: My numbers are probably not precise (whatever that means), but they are of the right magnitude!

11 How to get there in five years? To achieve this, we must find a global potential (but, for us, realistic) market of at least 50M euros but preferably more than 100M euros a year. The present, global mathematics education technology markets may be just a fraction of the required potential market size! Indeed, I estimate that the global education technology markets for first year engineering mathematics is about 20M, and definitely not more than 40M euros.

12 There is little honour in trying to make the Bomb if you don t have more than a critical mass of Plutonium-239. (Which is 10 kg.)

13 Time line of a start-up concept seed steady state market development product development First seed financing between ke. Then one or two capital injections between 0.5Me 1Me. Before steady state there will be VC Exit.

14 Funding how much? (1) In addition to seed funding, we need start-up funding of at least 0.5M euros for developing materials and business software as well as the initial marketing effort. Most of the start-up capital will be spent during first two years of the enterprise. We need to break-even safely before our external funding runs out! None of the 0.5M euros can be used for actual STACK-2 development! We simply cannot afford any Bells and Whistles Work before we are over the Valley of Death.

15 Funding where to get it? (2) Part of the funding may be public (TEKES), but an essential part from Venture Capitalists (VC). VC s share should remain preferably under 30 % and definitely under 50 % of the final diluted stock base. The VC will seek 50 % annual growth for their investment, leading to 10X increase in 5 years. Thus, the business should be of worth 15M euros in five years, i.e., the gross revenue of well over 3M euros.

16 What do we look like in VC s eyes? (1) new market existing market II III marketing driven (new use for an existing product) face entrenched competition I IV missionary sales, technology push market-driven, technologyfueled, market-pull existing product new product Technology push vs. market pull! Are we in the best quadrant IV?

17 What do we look like in VC s eyes? (2) Management Status most desirable Level 4: All members on board and experienced Level 3: All members identified; some on board only after funding Level 2: Two founders; others not identified Level 1: Single entrepreneur Level 1: Idea only; market assumed Level 2: Prototype operable but not developed for production; market assumed Level 3: Product fully developed; few or no users; market assumed Level 4: Product fully developed; satisfied users; market established Product Status We grade between 5 and 6. Marginally fundable?

18 What do we look like in VC s eyes? (3) To get venture capital, we need Competent and energetic people in key executive positions. Board of Directors with wide business experience and marketing expertise.

19 Competition is good! Competition validates the existence of markets but we must not be the fifth in the market of five. We must never end up competing against Microsoft. The business plan (BP) must contain a full-scale market study to address all these questions quantitatively. This is actually the most important part of the BP.

20 What could be our competetive edge? In the long run, we must be able to produce materials 1. faster, 2. at a lower price, 3. with superior quality, and 4. incontrovertibly on a higher sofistication level than any of our competitors. To achieve this, the student solutions database should be effectively used to debug and optimize the algorithms. Very difficult!

21 Scenarios of failure? Lack of focus we get a hi-tech pancake. Overestimation of markets. Underestimation of marketing costs and competition. Management and recruitment problems. Contemplating moral questions instead of business. Running out of funds before break-even. Legal problems (licences and patents).

22 Officers We need a full entrepreneurial team, and these three are the absolute minimum in the beginning! Chief Executive Officer (CEO), Vice President of Marketing and Sales, and Chief Technical Officer (CTO). The occupants of these positions are expected to change when the business grows.

23 Board of Directors We need a number of odd people: Chairman of the Board Expert in Marketing Expert in Business Representative of the Aalto University Foundation Representative(s) of Venture Capitalists They better be an odd number of people.

24 Business plan BP is a formatted document of pages, containing the service/product description & the ecosystem, a detailed market study & marketing strategy, the funding plan, time-table, & key persons, pro forma financials, and an executive summary of two pages. Without proper introductions and recommendations the BP is not going to get read by VC s at all.

25 Exit strategy The fast growth of the enterprise is expected to end in about five years. At this point, the venture capital will exit. Management buyout with the help of new private funding or bank loans? Going public? Selling out?

26 Personal questions for everyone What is in it for me? Can I take the extra stress and work load? Is my health and physical condition good enough? How about the family matters? If I get on in business, can I still be authentically myself with the required new mind-set (whatever that means)? Know thyself.

27 Now, my friends, it is up to you. Come, my friends. Tis not too late to seek a newer world. Push off, and sitting well in order smite The sounding furrows; for my purpose holds To sail beyond the sunset, and the baths Of all the western stars, until I die.