Technology Start-up Initial Process From the idea to completion of the Business Plan August 24, 2011
AGENDA 12.05 pm to 12.10 pm Beacon VP Introduction 12.15 pm to 12.45 pm Technology Start Up Initial Process 12.45 pm to 1.00 pm Funding Overview 1.00 pm to 1.30 pm Next Future Workshop Workshop @ MGH Q&A
OUR NETWORK PRINCIPLES Pursue purpose beyond profit Put people at the center Spread economic opportunity Be bold- be an agent of change Our lives begin to end the day we become silent about things that matter. - Martin Luther King Jr.
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Technology Start-up Initial Process From the idea to completion of the Business Plan 2011 Ramin Abrishamian
no pain, no gain Gain = Pain
What are the Gains? Emotional/Spiritual Control over one s profession Creating something from nothing Solving problems Camaraderie and community building Learning new skills Financial Building equity
What are the Pains? Emotional/Spiritual Responsibility for one s profession Responsibility to investors Living with risk of failure don t have control over everything Each day brings a new problem Responsible for others income All consuming Financial Lack of stability High risk of loss
First Steps..
The Foundation The Desire Are you OK with the Gain = Pain equation? An Idea Business concept, and/or Technical gismo (hardware or software)
Initial Due Diligence self check - need complete clarity and honesty. How technically feasible is the idea? What s the actual or potential market? (Who is going to pay for/buy your idea)? How large is the market in $ s? Anything less than a few $100 s of million real or projected might be too small. Might need to hire consultants, use friends, colleagues and/or others to help out
How to organize?
Need to Incorporate Protects against liability Helpful for initial financing but is essential for receiving outside investment LLC vs. S Corp vs. C Corp LLC & S have tax benefits C is structurally more robust Which state? Typically registered in Delaware, HQ d in the state with most employees
Initial Support Team Lawyer (sorry!) Go with a reputable firm and negotiate on every task s costs Accountant Not necessary immediately but will need eventually Hire as a contractor not employee
Partners Existing Must agree on the following in writing signed and sealed Relative ownership positions Responsibilities Authority (position on the org chart)
Partners New Should you bring in a partner? Need to add to your initial skill set, e.g. you might have great technical skills, but lack adequate business skills or even some technical aspect that is critical to have when starting up the business Partner vs. simple employee? Partner is more willing to take risk will take lower or no salary in lieu of ownership position better at the early stages Make sure that you like and get along with the partner difficult to break up later The rules for existing partner apply to new partner.
Ready to go. Have the desire and the idea Worked out the founders team Have organized the company
Ready to go.
Thoughts on Capital Raising Capital raising is most efficient when done stage-wise Basically earlier investment is higher risk and is at lower valuation; later stage investment will be at lower risk and thus higher valuation It s best (ideal case) that the very first capital investment be from the founder (s) - obviously If you have no money, look to friends and family and to your Uncle Sam Best source of government money is research grants most popular is the SBIR grants
Thoughts on Capital Raising cont. Government research grants such the SBIRs are great, but Unless you are already plugged into the system, it will take 9 18+ months from start to actually receiving any money It will take time to write grants and shepherd them through government agencies It takes great skill (not to mention luck) to ensure that the objectives of the government and yours are aligned There are many startups that become stuck in a grant loop and don t go commercial
Sources of Capital Friends & Family Small amounts many investors not necessarily sophisticated Better valuation complicated/difficult investors Angels and Angel Groups Sophisticated high net worth investors High risk tolerance entrepreneur friendly VC s like these investors Typically up to $2 3 million Institutional Investors VC s Needs a whole separate session
Sources of Capital Joys of Bootstrapping Not! Using personal savings account, maxing the credit cards, tapping into the kids college fund, and the 401K Advantages: Reduces dilution Will not waste time waiting for investors Focuses and sharpens decision making Some times is the only way to kick start a business Disadvantages Distracts founders attention Financially risky Inhibits growth and expansion
The Business Plan Must have one! Essential in helping you get your thoughts, ideas and plans analyzed and organized Investors need to understand your idea and assess its feasibility and value A great business plan starts with a great story and ends with rigorous math (well, at least arithmetic)
How to Approach Writing the Business Plan It should be cogent and pithy please don t write a book! Best (and currently most popular) format is the PowerPoint slides it forces you to be cogent and pithy (no more than 30 or so slides) It should stand by itself i.e. one should be able to read it and understand it without your presence.
Content of the Business Plan Define the idea Describe the business strategy/model ( elevator pitch ) The main elements of developing the product Accessing and selling to the market
Content of the Business Plan Explain the investment opportunity (<3 slides) WHY SHOULD THE INVESTOR LISTEN TO THE REST OF YOUR PRESENTATION (can also be used as the Executive Summary) A summary of everything in your plan! The idea The benefits/advantages of the idea Description of the Market and why it s so attractive The plan of how you can capture a significant segment of this market The special and unique skills/strengths that you are bringing for commercializing this business idea What are the projected (pro forma) sales How would the investor realize her/his return IPO or Acquisition at what potential scale
Content of the Business Plan Give details of the background of the idea and its premise Explain the market give references as much as possible w/o making it tedious Give the size of the market again w/ references (so it is clear that you are not making this up) Why this idea and why you? (Strengths/ Advantages/Benefits) Resumes of the Founders (brief) Organization chart Product development plan with key milestones
Content of the Business Plan Brief marketing and sales plan Financial projections Present assumptions and basis If needed (depending on the type of business), add other tables breaking down the expenses and/or revenues in more details
Content of the Business Plan Key milestones and their schedule, including: Hiring of the key employees Product development Regulatory hurdles (if any) Product development steps Product testing and evaluation Start of the sales process Others that are relevant to the particular business
Content of the Business Plan Competition Be thorough and honest in listing them Err on the part of listing more of them than less Only describe one or two in any detail Competitive Advantages How is your idea protected against competition Why existing competition or any potential competition is not a threat
Content of the Business Plan Describe the risks, e.g.: Failure to overcome a critical technical problem Potential for change in the market New unexpected competition that isn t on the scene yet Disruption of financial markets preventing you from raising expansion capital Costs of goods ending up being higher than projected Changes in specific regulations and new adverse regulations Others..
Content of the Business Plan Explain what you are asking for: Obviously money How much and in how many tranches and when How far this investment will take you and what is your anticipation of future rounds of financing Towards what general tasks (e.g. x towards product development, y towards sales & marketing, z for administration, xx towards the purchase of a critical technology or equipment, etc.)
Content of the Business Plan Appendices Supporting information that you might need in your presentation and answer potentially critical questions
Before Formal Presentation Have it reviewed and critiqued by as many friends, colleagues, family members as possible (don t forget your mother-in-law!) Then, present it to a friendly investor. Don t get offended by critical comments remember that the goal is to communicate clearly and accurately the goals and benefits of your business idea. It doesn t matter what you think it matters what your audience takes away from your presentation.
Quick Do s s and Don ts Don t need to present or discuss valuation in your presentation (e.g. for $x million investment you we are giving up y% of the company ) Do prepare a detailed spreadsheet for your financials ( rigorous arithmetic ) and make sure it includes EVERYTHING Don t send or give this spreadsheet to potential investors until they have expressed serious interest in investing and are beginning their due diligence process
Quick Do s s and Don ts cont. Do identify potential senior hires and include them in the resumes section. You can keep their names out since they haven t joined yet Do be honest and forthright Don t BS
Remaining Issues (for another time.) Valuation How to answer questions from potential investors How to negotiate with potentially interested investors and the termsheet Board of Directors
Remaining Issues (for another time.) Founder as CEO Building the senior team Maintaining control Financial controls Managing a start-up
The End Thank you for your patience. Ramin Abrishamian ramina@alum.mit.edu
FUNDING OVERVIEW Start-up Financing Cycle Differences between Angels & VCs Risks & return on each start-up stage Odds of ventures getting funded by VCs
Image from Wikipedia: http://en.wikipedia.org/wiki/startup_company
DIFFERENCES BETWEEN ANGELS AND VENTURE CAPITALS (VCS) Angel Investors Money source Personal Others Venture Capitals (VCs) Investment Involvement Investment Goals Before seed & seed stage Internal rate of return; Personal; Community; Impact After seed stage Internal rate of return ONLY Investment Risk High Less risky than angel investors BUT ONE THING IN COMMON Both Angel Investors and VCs share risks and rewards with start ups!
RISKS AND RETURN FOR EACH STARTUP STAGE Stage Failure % Return On Investment (ROI) 5-Year Increase Seed 66% 60% 10x + Early 34% 40% 5X Expansionary 20% 30% 4X Sources: Later 20% 25% 3X ROI & 5 year increase- from Charles Sidman, Ph.D MP of ECS Capital Partners, LLC Failure % - from Ruhnka, J.C. Young, J.E. Journal of Business Venturing
ODDS OF VENTURES GETTING FUNDED BY VCS Walking dead Source: National Venture Capital Association (NVCA)
Next Workshop at MGH Date TBD How to develop an Elevator Pitch.
Q&A Session Source: http://avid.deviantart.com/art/optimist-prime-178004809