Technology Development Pt 2

Financial Comparisons Friends, Family, Fools (FFF)* Idea FFF • Typically < $100k1 • Usually invest only once • Financed in one single payment • Receive Common Stock Part 2 Angel* Preseed Seed Angel Startup • $50k - $3 million1 • Open to investing in multiple rounds - “Angels look at each decision point one round at a time”1 • Financed in multiple payments • Require certain rights and privileges on their investment - Director position in company • Receive Preferred Stock • Terms vary by investor Snapshot of Angel and FFF Financing Pros FFF Angel Cons - No lengthy application process - Pay back not always required - Surrender of company control not required - Commitment to project is proven to later stage investors1 - Transparency with investors (being asked about business at family events) -Emotional attachment to investments/investors - Risking family assets creates pressure - If poorly structured, can prohibit later stage funding - Angel may have expertise in the industry - Medium ground between FFF and VC financing - Easier to align goals due to varying investor preferences - Largely based on connections - Payments are staggered - Can become too involved in management decisions Types of financing (that you may or may not have heard of) • • • • • • • Factoring Leasing Revolving line of credit SBIR Angel & FFF Bootstrapping Non-recurring Engineering There are many financial mechanisms you can implement to advance your idea What is bootstrapping? A practical definition: “A situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to found and build a company from personal finances or from the operating revenues of the new company.” (4) • A key tenet of bootstrapping is to exploit resources other than capital, i.e. social network, sweat equity, etc., to create value. • By definition, operating with scarce resources breeds innovation and creativity. Interesting Facts: • The term originated from the expression, “Pulling yourself up by your bootstraps“ taken from a Horatio Angler story about moving from rags to riches. • Bootstrapping is the source of initial equity for more than 90% of tech firms. (5) • Some of today’s most innovative companies used bootstrapping. (9) • Examples: Microsoft, Dell, Cisco, Oracle, ebay, Apple, Samuel Adams Overview Bootstrapping focuses on six areas of business management: • Employee Expenses • Operating Expenses • Overhead • Marketing • Owner Financing • Trade Financing Why Bootstrap? What should I know before starting? Necessity • Many entrepreneurs use bootstrapping to finance their startups simply because they have no other choice. • They may face limited starting capital, collateral, or credit. • They might not be able to demonstrate cash flows needed to service debt. • Yankee Candle started with $20 borrowed from a friend. Keep your equity • You command complete control over decision making. • Performance measures can be yours alone. • Your original business objectives remain intact. Know your business • Business plan Account for the cost savings you intend to benefit from in your BP. • Expense plan Be realistic given the nature of your business. Stick to your plan. • Contingency plan Nothing is certain in business, a backup plan is essential. Employee Expenses Assume more responsibilities and know your capacity • Cut salary expenses by acting as bookkeeper, receptionist, and even janitor. • Use part time employees, contractors, and interns to fill gaps in capacity. • Under-hire as much as possible. Develop management talent from within • Promoting talent from within reduces hiring costs for potential management. • Managers groomed from within know your product and your culture. • Hiring good resources is harder than you think, and can impede progress. Replace high compensation with alternative rewards • Flexible hours, additional time off, performance incentives, and home offices. • Think profit sharing instead of issuing equity—you want to keep the business simple. Operating Expenses Outsourcing every chance you get • Utilize outside resources for manufacturing, shipping, and administrative duties. • Focus on your core competencies: product development, customer service, etc. Inventory management • Keeping inventory and raw materials at proper levels for immediate needs is a particularly important and tricky cost saving measure. • Actively manage the cost of each unit sold including all relevant costs. • Strive to reduce excess product and capacity while meeting demand. Managing accounts receivable • • • • Maintaining consistent cash flows is vital during times of growth. Maintaining positive cash flows can be the difference between thriving and folding. Find your leverage and let customers know YOU are NOT financing their operation. (6) Offer discounts for prompt payment. Overhead Managing your startup’s overhead is essential • Operates out of your lawyer’s spare office space or conference room for meetings. • Forgoing a paycheck and bartering with suppliers for goods AND services. • Administrative expenses—reduce by taking care of administrative duties. Office space • Start your business in the home, out of your garage, even if you have employees. • Create a virtual office where employees can work from home. This may not be an option for some industries like manufacturing. • Look around for businesses in your area with excess space—utilize your network. Equipment • Avoid upfront payments, consider renting, leasing, sharing—with other companies. • Buy used equipment from failed business, at auction, or from brokers. Marketing Know your customer inside and out • Know your customer: what are their buying patterns? • Step back and do some marketing AND financial analysis. • Content creation (created by you) can have a better ROI than other marketing methods, i.e. advertising, PR campaigns, mailing programs . Campaign to change something • Identify a problem in your marketplace? Start an awareness program. • Make your business part of the solution—attract customers through your solution. Cross-promote products and network • Leverage your relationship with the customer. Add value by selling service. • Find where potential customers meet. Join trade orgs. and business groups. Publicity • Newspapers struggle for decent content. Write an op-ed for your local paper. Owner Financing Personal funds: savings, (401K), credit cards • Reality: commercial banks aren't viable without assets. • Plastic is king, a loan against your home puts it at risk. • Should be able to repay funds in 90 days, based on projected revenue. Family and friends • Get it in writing, be creative, consider family dynamics. Employee sweat capital • Don't issue equity, develop profit sharing to reward hard work. Employee loans • Debt problems can occur even while revenues increase. • As a last resort businesses have offered equity to employees. Trade & Customer Financing Bartering for goods and services Products AND Services: Look to utilize excess capacity to maximize value. Slow down supplier payments • Aim for net 60 or net 90. This may be tough for brand new businesses. • Use creative terms, for example 50% upon receipt with the balance net 60-90. Using customer as a capital source • Get creative, don't just look for prepayments from customers. • Demonstrate benefits to your customers and they become a source of capital. (6) • Consider cash flow ramifications of business improvements-increased credit sales. Is Bootstrapping right for you? Benefits Drawbacks Maintain control over all decisions Minimize the inherent risk of startups Focus on core competencies by outsourcing - know the downsides too Develops corporate culture May not provide enough investment to become successful at a reasonable rate Not helpful when your market requires immediate action Sacrificed paychecks for quite some time to make this work Types of financing (that you may or may not have heard of) • • • • • • • Factoring Leasing Revolving line of credit SBIR Angel & FFF Bootstrapping Non-recurring Engineering There are many financial mechanisms you can implement to advance your idea NRE: Non-Recurring Engineering • NRE is when your customer pays you to build it and then buys it from you! • Situation: – You’re building something: widget, machine, software, etc. to address a NEED you’ve identified in the market – You need financing to build it (sort of goes without saying but I decided to say it) • You approach your customer and tell them what NEED of theirs your invention will address • They jump up and down because you’ve done your homework (interviewed customers, competitors, users, etc.) to identify their NEED • You say, “I’m glad you like my solution. I’ll tell you what I’m going to do for you, to address your NEED. You pay me to build it and then buy it from me.”