business models and funding startups (class 12.1 – april 9, 2013) cse 3316 – professional...

Business Models and Funding Startups(Class 12.1 – April 9, 2013)

CSE 3316 – Professional PracticesSpring 2013

Instructor – Bill Carroll, Professor of CSE

Guest Speaker – 4/11/2013

• Jeff Smith, Chief Innovation and Technology Officer, Numerix

• Entrepreneurship 2020• Location – Rady Room, Nedderman Hall

Copyright © 2010 Pearson Education, Inc.

publishing as Prentice Hall 10-1

Part IV: Start-up Financial Strategy

Chapter 10: The Business Model

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall 10-2

Chapter Overview

• Understanding business models

• Developing a business model

• Understanding why business models fail


What is a Business Model?• A way to create and capture economic

value

• Convert new technology to economic value and deliver that value to the customer

• Business model characteristics– Creates new value– Difficult to replicate– Based on accurate assumptions about the customer


Business Model is the Implementation of Strategy

Value Proposition

Customer definition Customer acquisition

Benefits Products & Services

Infrastructure

Core capabilities Partner Network

Supply Production Fulfillment Distribution

Marketing & Sales

Value Capture

Financing Pricing

Cost Structure Revenue Streams


Strategically Position the Company in the Value Chain

• Location is a function of:– The company’s capabilities

– Whether the technology is licensed or forms the basis for a start-up

– What kind of business the entrepreneur wants to operate


The Value Chain

Production

Marketing & Distribution

Raw MaterialsProduct Development

Manufacturing

Marketing & Selling

Logistics

Warehousing

Wholesale/Retail


Value Chain Characteristics

• Warehousing of inventory– Hold or outsource

• Ownership– Allow ownership in the channel?

• Financing and payments– Credit to smooth out cash flow variances

• Risk management– Mitigate with insurance carriers

• Member power– Degree that strong members control the system


Factors in Market Coverage

• Distribution: methods and processes used to take a product from manufacturer to customer

– How much control over the product does the entrepreneur want?

– Will the distribution strategy force customers to change the way they acquire and use the product?

– Do customers regularly use the channel?


Sources of Opportunity for New Business Models

Reposition on the value chain

Look for unserved or underserved niches and customer dissatisfaction.

Reinvent the value chain

Tear apart what currently exists and create a whole new value chain. Extrapolating from other industries is often the inspiration for a reinvented value chain in an industry.

Redefine value-added If, for example, competitors in the industry seek out contracts for work from customers, a company may choose instead to learn what customers typically want, do the work first, and then sell it to them in a turn-key package. It is then selling convenience. This is what J.D. Powers & Associates did in the market research industry.

Redefine distribution Think about where customers spend a lot of their time and put a product there. If customers typically are at the end of a long chain of intermediaries, consider selling direct.


Identify Cost Drivers

• Components/processes involved in developing the final product– Supply– Production,– Fulfillment – Distribution

• How do critical success factors (sales team, marketing strategy, occupancy, etc.) drive revenues, costs, and cash flow?


Other Factors to Consider

• Capture value with pricing, cost, and financing– Premium v. lower pricing– Purchase orders, credit cards, PayPal

• Test for weaknesses in the business model– Launch in limited markets to test– Get feedback from customers and

stakeholders– Conduct ongoing sensitivity analysis on the

critical success factors


Business Models Change

• Expanded geographically, new markets, different product offering

• Selling new products/services to existing customers

• Taking current business model into new product/service areas

• Expanding through acquisition or strategic alliances

• Leveraging existing capabilities to develop new business models


Metrics for Success

• Does the business model

– Inspire complementary products and services?

– Increase network effects among customers?


Why Business Models Fail?

• Predictions based on faulty logic

• Does not create and capture value

• The customer has not been identified


All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of

the publisher. Printed in the United States of America.

11-1Copyright © 2010 Pearson Education, Inc.

publishing as Prentice Hall

Part IV: Start-up Financial Strategy

Chapter 11: Funding the Technology Start-up



Chapter Overview

• Risks and stages of funding

• The cost of raising capital

• Government funding sources

• Seed capital

• Start-up funding

• Funding biotechnology



Risks and Stages of Funding

Revenue

R&D Risk

Manufacturing Risk

First Customer

Marketing Risk Management

Risk

Initial Public Offering

Seed Self Funding Friends and Family Private Investors SBIR/STTR

Early Stage Private investors Some Venture Capital Strategic Partners SBA Loans SBIC Bank Debt

Growth and Mezzanine Venture Capital Public Equity Strategic Partners



Risk Points• Seed capital stage

– Funding for product development and business launch

– Risk associated with technical feasibility and manufacturing

• Early stage or start-up– Secure first customer– Risk associated with capturing enough

customers for product acceptance

• Growth stage– Focus on managing growth– Risk associated with systems and controls



Cost of Raising Capital

• Up-front costs: preparation of financial statements, business plan, prospectus, legal advice, marketing to potential investors

• Back-end costs: investment banking fees, legal fees, marketing costs, brokerage fees, state and federal fees.

• Total costs can be as high as 25% of total amount raised



Bootstrapping

• Borrow, partner, lease

• Get into business quickly to prove the concept

• Hire as few employees as possible

• Lease or share as much as possible

• Use other people’s resources– Favorable terms from suppliers– Customers pay a portion up front



Government Funding Sources• Small Business Innovation Research Grants

(SBIR)– Phase 1: up to $100,000– Phase 2: up to about $750,000

• Small Business Technology Transfer Research Program (STTR): partnerships between research institutes and small technology companies

• Small Business Investment Company (SBIC)– Private VC firms licensed by SBA, provide long-term

loans

• The Small Business Administration (SBA)– Partners with commercial banks to guarantee 75% of

loan value



Seed Capital• Friendly money – people you know

– Money from strangers will require a private placement memorandum and prospectus to meet “blue sky” laws

• Debt Financing– Banks typically do not lend to start-ups– Credit cards, commercial finance companies

• Equity arrangements– Be careful of trading equity for services because it is

more expensive at this stage– Difficult to get rid of a person who doesn’t work out

• Strategic Partnerships and Intermediaries– Associating with a successful large company can give

a stamp of approval– R&D partnerships share the risk of development



Start-up Funding

• Risk factors for investors

– Degree of uncertainty

– Asymmetric information in favor of the entrepreneur

– Asset base is principally intangible (e.g. IP, know-how)

– Market conditions are often erratic



Angel Investors & Networks

• Private investors who are the principal source of informal capital

• Fund up to about $1 million

• Invest in people first, technology and market second

• Major risks include moral hazard and information asymmetry

• Invest in familiar industries

• Seek annual returns greater than 20%



Unlikely Angel Deals

Characteristics Not Favorable to Private Investment by an Angel

A “me-too” type of product A poorly defined vision for the company

No intellectual property No management team, a solo entrepreneur

Business location more than 100 miles away

Weak management team with no experience

Mature or fading industry Exit time more than 7 years away

Return on investment less than 15 percent Unfamiliar business or industry

Not enough market research with customer

Minority position with no voting rights

Weak competitive analysis Too many co-investors



Funding Biotechnology

• Challenges

– 7-9 years to bring a new drug to market

– Technology is typically unproven at early stages

– Most biotechnology is licensed from universities and research institutes, not owned by company

– Difficult to calculate the value of biotech firms because of intangibles



Stages of Biotech Funding• Seed stage

– Typically government grants to fund research– Investor capital sought on basis of technical strength

and initial market research

• First-round Funding: FDA Phase I Testing– Assess safety of drug, procedure, or device– Typically $15-$20 million required

• Second-round Funding: The Business Model– FIPCO: Fully Integrated Pharmaceutical Company

• Difficult entry and depends on IPO– Licensing Model

• Focus on development and testing, then licensing develop of applications and clinical trials to large pharma



All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of

the publisher. Printed in the United States of America.

Crowdfunding(Riedl, “Crowdfunding Technology Innovation,” Computer, March 2013, pp. 100-103)

• Crowdfunding – small-scale “investors” pledge money to a project, funds collected through various websites – Kickstarter, RocketHub, GoFundMe, Appbackr, …

• Kickstarter (founded in 2009)– 86,000 projects (44% fully financed)– 3.3M “investors”– $480M in funding

• Example Kickstarter projects– Pebble watch ($100K goal; $10M+ raised; 68,929 “Pebblers”)– Sun Come Up Oscar-nominated documentary movie ($14K goal)– Form 1 low-cost 3D printer ($100K goal; $2.9M+ raised; 2,068 backers)

• “Investors”– No ownership stake– T-shirts– Product samples– Credits, etc.

• Legal issues– Allowed under US law?– Intellectual property

business models and funding startups (class 12.1 – april 9, 2013) cse 3316 – professional...

Documents

prentice hall

pearson education

business model slide

nedderman hall slide

customer slide

system slide

business model launch

new business models