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Getting Your E-Business off the Ground
Chapter 5
Startup Financing
• As an entrepreneur starting a new e-business, you must be prepared to invest time, effort, and your own money to get your new e-business off the ground.
Personal Assets
• Sweat Equity- You put in your time and effort
• Mortgage Personal Assets –you put up property as collateral to a bank
• Personal loans – you take a loan without collateral (higher interest rate).
• Credit card/credit line advance –similar to a personal loan. (Usually a high interest rate.)
Friends and Family
• Friends and family investors are family members or friends who invest in a business.
• Many entrepreneurs successfully solicit startup money from their network of friends and family.
• A network of potential friends and family investors extends beyond immediate family members and friends to their families and friends and their families and friends.
Friends and Family
• Advantage: It may be the easiest money you’ll ever get.
• Disadvantage: You are getting money from Friends or Family and putting their MONEY at RISK.
Angel Investors
• The term angel investor originally referred to wealthy investors in Broadway theatrical productions.
• In this context it refers to any individual with the assets and interest to invest in a startup business.
• Not the same as a Venture Capitalist• May be members of an Investment club.
Touched by an Angel
• Angels can be difficult to find.
• Angels sometimes appear unexpectedly.
• The key is networking and research.
An Angel Investment Club
Venture Capital Investors
• Venture capital (VC) firms are organized to invest specifically in new business startups.
• Typically they take a significant equity interest in the firm with in exchange for providing startup capital.
Venture Capital Investors
• They may also provide expertise.
• They typically do not invest for the long term but expect to “cash out” after the business establishes a successful track record and can be sold or acquired by others.
• There are many established VC firms.
Venture Capital Firm
Business Incubators
• Business incubators have traditionally been government- or university-supported nonprofit organizations that nurture new businesses.
• Provide startup companies with management advice, office space, networking opportunities, and other critical startup services.
Business Incubators
• Commercial business incubators offer startup e-businesses access to the same services offered by nonprofit incubators.
• Commercial business incubators are primarily interested in high-technology businesses that can become financially viable quickly and leave the incubator within six months to a year.
NASA Ames Incubator
Batavia Industrial Center
Incubators
• May take an equity interest as well as charge for services.
• Not for profit incubators may use returns from equity to reinvest.
Idealab!
Internet Accelerators
• Some e-business incubators such as iStart ventures and Katalyst style themselves as internet accelerators.
• An internet accelerator is a commercial business incubator whose goal is to get a new e-business up and running quickly.
Keiretsu Providers
• Keiretsu is a Japanese term that refers to a network of businesses that do business with each other as a means of mutual security.
• Incubators that use the keiretsu model offer entry into a network of companies that do business with one another with the goal of serving the overall interest of the network.
Questions to Ask and Answer
• Does the business incubator offer seed money or venture capital funds linked to the incubator?
• What specifically will the business incubator do to help your e-business?
• What is the business incubator’s track record with other e-business startups?
Questions to Ask and Answer
• How much will it cost your e-business—in cash and equity—to be incubated?
• How long is the incubation period? • How do you feel about the
business incubator’s environment?
Self Incubation
• Some e-business startups like the idea of sharing office space with other entrepreneurs, exchanging ideas with others going through the startup process, and taking advantage of a mutual network of advisors.
Pitching Your Idea
• The first meeting with angel investors or VCs is a sales meeting.
• Your immediate objective in a first meeting is to get potential investors excited about your e-business idea.
And Here’s the Pitch
• Define your product or service• Define who will buy your product or
service and how much they will pay for it
• Define your key industry competitors
• Explain how much it will cost to provide the product or service
And Here’s the Pitch
• Explain when the investors can expect your e-business to be profitable
• Illustrate the planned exit strategies both for investors and for your e-business principals
• Detail how much money you are looking for, and how it will be spent