Creating a Winning E-BusinessSecond Edition

Getting Your E-BusinessOff The Ground

Chapter 4

2

Learning Objectives

• Describe the financing issues associated

with an e-business startup

• Discuss the role of informal investors in an

e-business startup

• Identify issues important to venture capital

investors

3

Learning Objectives(continued)

• Pitch your e-business idea to investors

• Discuss the advantages and

disadvantages of business incubators

4

Startup Financing• Bootstrapping

– Self-funding– Finding unique and inventive ways to acquire

resources without borrowing money

• Informal investors– Friends– Family members– Angel investors

5

Startup Financing (continued)

• Friends and family members– Know and trust entrepreneur– Stand by during tough times– Invest in entrepreneur rather than business

idea– Downside is potential risk to relationships

• Business misunderstandings• Business failure

6

Startup Financing (continued)• Angel investors

– Individuals with money and time who enjoy the excitement of early-stage investing

– Not averse to taking risks– Primarily interested in business idea– Angel investment club members

• Accredited investors with minimum net worth of $1M or annual income of $200,000 or household income of $300,000 over the last two years

7

Startup Financing (continued)

8

Startup Financing (continued)

9

Startup Financing (continued)

• Venture capitalist investors (VCs)– Professional investment company– Provide funds for startup businesses in

exchange for equity position– Raise funds from endowments, insurance

companies, and pension funds

10

Startup Financing (continued)

• Venture capitalist investors (VCs) (continued)– Take many forms

• Traditional partnerships• Government-sponsored investment companies• Corporate funding programs by high-tech

companies

11

Startup Financing (continued)

12

Startup Financing (continued)

13

Startup Financing (continued)

• Venture capitalist investors (VCs) (continued) – E-business startup VC funding examples

• Draper Fisher Jurvetson (DFJ) and Hotmail• Kleiner Perkins Caufield & Byers and Google• Small Business Investment Companies (SBIC)

and America Online

14

Pitching Your E-Business To Investors

• First meeting with investors is a sales meeting• Bring a pitch document

– Short marketing document based on Executive Summary portion of business plan

• Highlights market need• Shows how startup meets that need• Indicates potential profits• Shows how management team can make it happen

15

Pitching Your E-Business To Investors (continued)

• Learn as much as possible about potential investors before the pitch meeting

• Be prepared for investor questions about– Business idea– Target market– Competitors– Critical marketplace issues

• Do not fake answers; if you don’t know, simply say so and move on

16

Pitching Your E-Business To Investors (continued)

• During the pitch meeting– Be on time– Be prepared– Be enthusiastic– Bring all necessary equipment and documents– Differentiate yourself and management team from

your competitors– Create the feeling that your e-business idea is a

viable, exciting investor opportunity

17

Business Incubators• Nurture startup businesses

– Offer development, administrative, and support services

• Office space• Telecommunication hookups• Reception and conference room facilities• Computer networks• Advisory services• Access to potential investors

18

Business Incubators (continued)• Non-profit organizations or commercial

businesses– Offer a quick “leg up” for entrepreneurs needing

administrative and support services– Provide access to knowledgeable professionals,

advisors, potential investors– Cost to entrepreneur

• Fees for services

• Loss of equity

19

Business Incubators (continued)

• Advantages– “One-stop solution” for many startup problems– Easy access to professional advice– Venue for interacting with other startups

• Disadvantages– May be hefty fees for services– Giving up share of ownership equity to others

20

Business Incubators (continued)• Non-profit business incubators

– Generally cooperative venture between a university and local community

– Examples• Austin Technology Incubator (ATI)• Advanced Technology Development Center (ATDC)• Houston Technology Center• Illinois Technology Enterprise Center (ITEC)• Women’s Technology Cluster (WTC)

22

Business Incubators (continued)

23

Business Incubators (continued)

24

Business Incubators (continued)

25

Business Incubators (continued)

26

Business Incubators (continued)

27

Business Incubators (continued)

• Commercial business incubators– Businesses that provide incubation services

for a fee and usually a large equity position– Examples

• Batavia Industrial Center (BIC)• Idealab• eCompanies

28

Business Incubators (continued)

29

Business Incubators (continued)

• Self-incubation– Participating in a members-only group of

entrepreneurs• Share practical experience• Access to contacts• Sell or barter products and services with members

– Example• Starve Ups

30

Chapter Summary

• An entrepreneur should expect to invest personal funds in a startup

• Informal investors include friends and family members and angel investors

• Angel investor – A wealthy individual who enjoys investing in startups

• Venture capitalist – A professional investor

31

Chapter Summary(continued)

• Meeting with investors– First meeting is a “pitch” or sales meeting– Use a carefully prepared pitch document– Anticipate questions– Be on time, be prepared, and be enthusiastic

• Pitch document – A brief sales document based on the Executive Summary portion of the business plan

32

Chapter Summary(continued)

• Non-profit and commercial business incubators offer access to resources in exchange for fees and an equity position

• Self-incubation offers access to some resources without paying fees or giving up equity