Entrepreneurship and Innovation Management Spring 2016 Teacher: Prof. Myrto Chliova, PhD Teacher Assistant: Virva Salmivaara, PhD Candidate
Photo: Bunshee/flickr Lecture 5: Funding of entrepreneurial ventures
The course structure Introduction to entrepreneurship and innovation Opportunity Entrepreneurial identification and idea pitching creation Customer development, Funding of entrepreneurial design thinking & the business ventures model Corporate entrepreneurship and innovation 10/05/16 3
Agenda for today Understand: - What are the sources of venture funding - How to evaluate different funding options - How to value your venture - How to pitch your idea to investors Practice: - Evaluating pitches - Crafting an elevator pitch (30’’) of your group’s idea 10/05/16 4
Source: http://dilbert.com/strip/2015-09-11 10/05/16 5
What are some sources of funding that you can think of?
A brief summary.. https://youtu.be/U470xXKfDyE 10/05/16 7
What is the difference between funding sources and revenue models?
Photo: Marion Klein/flickr FFF or 3F: Friends, family, fools
Startup Accelerators • A global phenomenon • Y Combinator perhaps the most famous example • At Aalto: - Startup Sauna: Twice yearly - AaltoES: Summer of startups - Startup Center (Ruoholahti) Photo: Paul Miller/flickr 10/05/16 10
Crowdfunding: what is it? Photo: Scott Beale/flickr
Tekes Source: https://www.tekes.fi/en/funding/yic/startup-in-finland/ 10/05/16 12
Tekes In general: - Not for very early stage - Mostly fund expansion abroad - Company needs to cover approximately 50% from own money Types of funding: - ”Planning for global growth” grant (max 50.000 € ) if company for small new company with a new business idea with genuine international market potential - ”Companies’ research projects” grant (max 100.000 € ) to create new knowledge and competence - ”Development and piloting” loan (max 100.000 € ) to demonstrate the functionality of your solution - “Young Innovative Companies” grant + loan (max 1,25 mn € ) to expand internationally if company is young and has exceptional potential (customers, venture capital investments, turnover) - Also invests in venture capital funds that then invest in seed and startup funding (one example is Superhero venture fund – our guest for the last session) 10/05/16 13
Business Angels: individuals that invest their own capital in new ventures Angels typically: - are retired serial entrepreneurs or corporate executives - have knowledge of the field they invest in - work closely with the entrepreneur to provide added value - Fund early-stage ventures with “seed capital” Photo: Susanne Nilsson/flickr 10/05/16 14
Venture Capital VCs: - “raise money from individuals and institutions for investment in early-stage businesses that offer high potential but high risk ” (Sahlman, 1990) - have a limited life span of about 10 years - typically specialize by stage and industry (so do your research first!) - Also corporate VCs (CVCs) Photo: rekre89/flickr 10/05/16 15
Is VC for you? Their expectations are high: - Massive and disruptive opportunity, huge market - Unique team - Sustainable competitive advantage, intellectual property - Well developed business model - High acceleration and exit: through acquisition (”trade sale”, ”byuout”) or IPO (initial public offering through the stock exchange) Photo: Xraijs/flickr 10/05/16 16
Source: Zider, 1998. How venture capital works. Harvard Business Review 10/05/16 17
Are VCs worthy of so much publicity? Apart from money, a good VC can add value with: - Strategy (decision-making advice) - financial (bringing on other investors, process towards IPO) - networking (hires, partners, customers ect) - reputational (hires, customers, partners, IPO, ect) - discipline (changes in management, pressure) But they do not necessarily: - Provide startup funding - Offer great advice - Generate great returns (compared to stock market) Source: Mulcahy, 2013. 6 Myths about Venture Capitalists. HBR 10/05/16 18
Which funding source would you choose?
Funding timeline / series Seed Startup First-stage Second- Mezzanine Buyout funding: funding: funding: stage funding: funding: funding: • For prototype • For launching • For production • For further • For helping development/ commercial expansion expansion and one company • For production feasibility sales as bridge to acquire and market analysis IPO/buyout another expansion Source: Adapted from Barringer & Ireland, 2012 10/05/16 20
Photo: Eric Kilby/flickr How to pitch your idea
Structure of a pitch - Hi! - TAGLINE (10-120 words) - PROBLEM (who & what) - SOLUTION (how) - VALUE (why would people pay) - BUSINESS MODEL (who pays, how much, how often - simple) - LANDSCAPE (competition / existing market) - TEAM (unfair advantage, photo) - TRACTION (past/present: feedback, protoype, customers, revenue) - ASK (not money, but advice, connections, fb&twitter) - Thank you! Source: adapted from Mike Bradshaw, Startup Sauna 10/05/16 22
How to make your pitch clear, and how to make it more memorable https://www.youtube.com/watch?v=4Na6a8DbL_8 https://youtu.be/aVSQtn5lHFA 10/05/16 23
Photo: JeremyPiehler/flickr A compelling story / motivation Components of a good story: Thesis - antithesis - synthesis (and) - (but) - (therefore)
Pitch delivery First impressions matter: - People decide in less than 90’’ whether they want to know more about an idea - They need between 7-20’’ to form a first impression, which is nearly 93% based on non-verbal communication. (Hoehn-Weiss et al, 2004) Non-verbal communication: - Clear, relaxed voice, eye contact, - Move around, but not too much - Don’t read slides, don’t use jargon - Convey your enthusiasm! 10/05/16 25
You have 5’ to write down a 30’’ pitch for your group’s idea. Then, take turns pitching your idea to the person next to you Offer suggestions on how to improve the pitch (content & delivery)
Photo: Duncan Hull/flickr Would you invest?
Pitch #1 https://youtu.be/HDczbpIO85g 10/05/16 28
Pitch #2 https://youtu.be/zumkSeC2u3M 10/05/16 29
Pitch #3 https://youtu.be/GOFO1e08xes 10/05/16 30
Pitch #4 https://youtu.be/-WzKghHe9zk 10/05/16 31
How much money do you need (to ask for)? Know the underlying logics and assumptions behind any number you quote - Basic assumptions: # of units, price of unit, cost of unit - Customer-related metrics: Customer lifetime value & acquisition cost, channel depth (how many customers), sales cycle (how long to get a customer) Money to next milestone, not exact projection: - Burn rate x months to visible next milestone (e.g. Product launch, …) 10/05/16 32
Premoney valuation + money raised = Postmoney valuation Photo: Bunshee/flickr
Photo: luftholen/flickr investor's equity stake = (money invested/ post-money valuation)*100%
Pre- and post-money valuation, equity stake: take 3’ to write down your answers • If I have 100.000 premoney valuation and raise another 100.000 from FFF, what is my company’s postmoney valuation? • If I have a postmoney valuation of 500.000 after raising 200.000 what was the premoney valuation before this fundraising round? • If I ask an investor to give me 100.000 for a 20% stake in my company, what is the postmoney valuation? The premoney valuation? • If the postmoney valuation after a financing round is 1 m, and premoney 600.000, what percentage of equity did I just give away? • If I am raising 100.000, is it better if I negotiate with an investor a premoney valuation of 500.000 or a postmoney valuation of 500.000? 10/05/16 35
Too much or too little money? Raising too little: - Danger of running out of money before you have reached major milestone that validates your idea Raising too much: - Danger of giving up too much equity - Danger of not meeting the higher profit expectations Photo: John Haslam 10/05/16 36
What do they all have in common? Logos: Wikimedia Commons 10/05/16 37
They bootstrapped. 10/05/16 38
Bootstraping • It’s about being in a privileged position in terms of working capital • Your best investor is your customer • Not about starting with nothing https://youtu.be/udX-yoz5Pro 10/05/16 39
The Tableau story • Data visualization software company • Most of the 15mn raised sits in their bank accounts • Used a lean approach: MVP, customers as beta- testers, heavy discounts and customization for their needs • Lifestyle downsizing • Created a bootstrapping cutlure and hired the right team for that • Cut costs everywhere • ”Raise customers before you raise capital” Logo: Wikimedia Commons 10/05/16 40
The Groupon story – the rise and fall • Launched 2008 in Chicago with 1mn seed capital • Fastest growing American firm on revenue basis • Expanded aggresively to 44 countries and over 500 markets • Raised over 1.1bn in pre-IPO funding • Launched IPO in 2011 to raise 700mn • CEO and founder, Andrew Mason, fired in February 2013 • Stock has lost 90% of its value since its listing • Laid off 1.100 employees in 2015 Logo: Wikimedia Commons 10/05/16 41
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