Entrepreneurship and Innovation Management Spring 2016 Teacher: - - PowerPoint PPT Presentation

Entrepreneurship and Innovation Management

Spring 2016 Teacher: Prof. Myrto Chliova, PhD Teacher Assistant: Virva Salmivaara, PhD Candidate

Lecture 5: Funding of entrepreneurial ventures

Photo: Bunshee/flickr

The course structure

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Introduction to entrepreneurship and innovation Opportunity identification and creation Customer development, design thinking & the business model Corporate entrepreneurship and innovation Funding of entrepreneurial ventures Entrepreneurial idea pitching

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

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Source: http://dilbert.com/strip/2015-09-11

What are some sources

• f funding that you can

think of?

A brief summary..

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https://youtu.be/U470xXKfDyE

What is the difference between funding sources and revenue models?

FFF or 3F: Friends, family, fools

Photo: Marion Klein/flickr

Startup Accelerators

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• 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

Crowdfunding: what is it?

Photo: Scott Beale/flickr

Tekes

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Source: https://www.tekes.fi/en/funding/yic/startup-in-finland/

Tekes

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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)

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”

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Photo: Susanne Nilsson/flickr

Venture Capital

VCs:

• “raise money from individuals

and institutions for investment in early-stage businesses that

• ffer 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)

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Photo: rekre89/flickr

Is VC for you?

Their expectations are high:

• Massive and disruptive
• pportunity, huge market
• Unique team
• Sustainable competitive advantage,

intellectual property

• Well developed business model
• High acceleration and exit: through

acquisition (”trade sale”, ”byuout”)

• r IPO (initial public offering

through the stock exchange)

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Photo: Xraijs/flickr

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Source: Zider, 1998. How venture capital works. Harvard Business Review

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)

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Source: Mulcahy, 2013. 6 Myths about Venture Capitalists. HBR

Which funding source would you choose?

Funding timeline / series

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Seed funding:

• For prototype

development/ feasibility analysis

Startup funding:

• For launching

commercial sales

First-stage funding:

• For production

expansion

Second- stage funding:

• For production

and market expansion

Mezzanine funding:

• For further

expansion and as bridge to IPO/buyout

Buyout funding:

• For helping
• ne company

acquire another

Source: Adapted from Barringer & Ireland, 2012

How to pitch your idea

Photo: Eric Kilby/flickr

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!

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Source: adapted from Mike Bradshaw, Startup Sauna

How to make your pitch clear, and how to make it more memorable

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https://www.youtube.com/watch?v=4Na6a8DbL_8 https://youtu.be/aVSQtn5lHFA

A compelling story / motivation Components of a good story: Thesis - antithesis - synthesis (and) - (but) - (therefore)

Photo: JeremyPiehler/flickr

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!

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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)

Would you invest?

Photo: Duncan Hull/flickr

Pitch #1

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https://youtu.be/HDczbpIO85g

Pitch #2

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https://youtu.be/zumkSeC2u3M

Pitch #3

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https://youtu.be/GOFO1e08xes

Pitch #4

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https://youtu.be/-WzKghHe9zk

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, …)

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Premoney valuation + money raised = Postmoney valuation

Photo: Bunshee/flickr

investor's equity stake = (money invested/ post-money valuation)*100%

Photo: luftholen/flickr

Pre- and post-money valuation, equity stake: take 3’ to write down your answers

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• 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
• f 500.000 or a postmoney valuation of 500.000?

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

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Photo: John Haslam

What do they all have in common?

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Logos: Wikimedia Commons

They bootstrapped.

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Bootstraping

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• 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

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”

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Logo: Wikimedia Commons

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

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Logo: Wikimedia Commons

What went wrong?

• High merchant liabilities (290mn at the

time of IPO)

• Very high revenue growth at the cost of

profits (420mn, 2010 operating loss)

• Surviving and growing by constantly

infusing investor capital

• Using funding to cover high customer

acquisition costs

• Unsustainable business model (competitive

advantage easily copied, no clear value for merchants)

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Logo: Wikimedia Commons

Hear it from Andrew Mason

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https://www.youtube.com/watch? v=uX9ldi32Xnc&feature=youtu.be&t=1498

Turn again to the person next to you and take turns negotiating a valuation and equity stake in their emerging company (the one they just pitched to you): Assume you have enough money to make investments but you do not want to have big

• losses. How much would you be willing to pay

and why? Write down the amount you agreed (if at all).

Term sheet: economics (how the pie is split) + control (who gets to make which decisions)

Are investors:

• backing your team or expecting transitions?
• Oriented towards a trade sale (acquisition) or an IPO (initial public
• ffering through the stock market)?

Sell to a company or to the public?

• Trade sale: faster liquidity for entrepreneur and VC, but founders typically

need to become employees of acquirer, they lose control of the company and might also be replaced

• IPO: stock cannot typically be sold right afterwards, but management is

more likely to stay in place and retain control

• Overall trade sale is much more common

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Founders dilemma: to be rich (+value, -control)

• r to be king (+control, -value)

Photo: Bunshee/flickr

Getting rich and… fired!

Steve Jobs, Apple (fired by CEO Scully, after Apple went public)

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Yusupov, Hoffman, Krall of Vine (after it was bought by Twitter) Vimeo founders (bought by IAC Interactive Corp) Sandy Lerner of CISCO (after it went public)

Photos: Leo Lambertini, dalioPhoto (both from flickr), Wikimedia Commons

Would you prioritize control or value?

Lecture 5: Funding of entrepreneurial ventures

Photo: Bunshee/flickr