1C21 - April 21, 2008

Business 54 - Introduction to eCommerce

Spring 2008

2C21 - April 21, 2008

Class Game Plan

The Startup Game I.

Question and Answer.

Lab Time.

3C21 - April 21, 2008

The defining document for your eCommerce business.

Also applicable for corporate eCommerce initiatives.

Usually averages about 40 pages in length with tables-charts.

Consolidates-unifies your Business Strategy, Business Model and Revenue Model.

Your calling card for investors and corporate decision-makers / approvers.

Key Sections of the Business Plan include:• Executive Summary• Market Demographics• Marketing and Product Strategy• Staffing-Management Team• Historical and Prospective Financial Statements and Investment Returns

The Business Plan

4C21 - April 21, 2008

Business & Revenue Model Re-CapBusiness Models Business to Consumer.

Business to Business.

Peer to Peer.

Communities.

Exchanges-Marketplaces.

Coercive-Governmental.

Revenue Models Banner-Advertising.

Subscription.

Transactional.

‘Begging’-Donations.

Middlemen.

Taxation.

5C21 - April 21, 2008

Three Year Financials Financials provide the ‘Burn Curve’.

The Business Plan must contain at least three years of revenue cost projections; most investors prefer 5 years.

Financials also provide the timing and size of the Return On Investment (ROI).

Old Rules of the Game • Spend, Spend, and Spend some more!!!!!!!!!!• No interest in making a profit• Additional investment always available

New Rules of the Game / New “Burn Curve’:For eCommerce businesses For Fortune 1000 initiates

• Year One Lose $ Incur costs; See no benefits• Year Two Break even Benefits begin to flow• Year Three Start to make a profit Positive Net Present

Value /ROI

6C21 - April 21, 2008

Raising the Money Also called the Money Chase.

Will consume the company and senior management until you achieve cash neutrality.

The single, most important job for Founder/CEO at this stage of company development.

The Money Chase has a number of progression steps and funding levels:• Sweat Equity• Friends and Family• Dumb Money• Angels• Smart Money / Strategic Partners• Venture Capitalists• IPO

May not pass thru all levels. May skip some steps-levels.

Need to balance debt and equity fundraising.

Week Four

7C21 - April 21, 2008

Dilution A natural consequence, albeit a disappointing part, of the Startup game.

Basically trading off ownership and control for investment dollars.

Typical Dilution Timeline:Ownership 100 95 85 55 33 20%

Control 1 BoD 2 BoD 3-5 BoDSeat Seats Seats

Investment Sweat F&F Angel VC VC IPOLevel Equity Round Round 1 Round 2

Company $0 $1mm $3-5mm $9-12mm $20-24mm $50mm+Valuation

Your Value $0 $.95mm $2.6mm $4.9mm $6.7mm $10mm+

8C21 - April 21, 2008

‘Sweat Equity’

How you get started with an eCommerce business == self-funding

Sources of funding:• Bank Account / Savings• Credit Cards• Free Labor (you, your CFO, CTO and CMO)

Most important thing is Vision and Passion!

Don’t forget to keep your day job!

Remember to place a value on your own time ($50/hr) and be critical of your time investment.

9C21 - April 21, 2008

Friends & Family

Best described as the Bank of Mom & Dad.

Generally Unsophisticated Investors.

Also, Emotional Investors.

May not be interested in a return on their investment (or even the repayment of the original investment).

Usually funds in the $50k to $100k range.

10C21 - April 21, 2008

‘Dumb’ Money Also called D & D Money.

Investors Only bring cash to the company.

No Connections, Introductions or Management Expertise.

Each Individual Investor puts in $25K or less.

Lots of work for very little investment

Need a Subscription Agreement --- Must be Accredited Investors.

Bragging Rights / Ego is key to this class of investor.

11C21 - April 21, 2008

Angel Investors Semi-formal association of sophisticated High Net Worth investors who

invest as a group.

Like early stage companies / ideas, especially in technology.

Like to cash out early.

Usually regionally based (e.g., Bay Area Angels) and only fund ‘local’ companies.

Sponsor dinners / presentations / conferences.

Normal Investment ranges from $500k to $1.5mm.

12C21 - April 21, 2008

‘Smart Money’ & Strategic Partners Investment by Non-Financial Companies:

• EMC• IBM• Sun• Microsoft

Intent is to further basic technical research or to gain early access to breakthrough products.

Investment specifically targeted to Large Company’s own interests:• Sun = Server & Chip Technology• EMC = Disk Technology & Software

Investment usually takes the form of Vendor Financing (Debt, not Equity) for the startup to purchase the Investor’s products and services.

13C21 - April 21, 2008

Can be useful to gain access to large potential Fortune 1000 Customers and/or utilize the Partner's Sales Force/Reseller Channel.

Startup can be easily acquired at a poor valuation or as a debt restructuring by the Investor.

‘Smart Money’ & Strategic Partners

14C21 - April 21, 2008

The last round of investors before going public. Investment ranges from $5mm to the sky.

VC’s provide much more than money:• Board of Directors memberships on competing or aligned firms.• Executive level guidance and coaching.• Promotion-Publicity.• Promise of Addition / add on rounds.

BUT CAN BE VERY DEMANDING!!!!!!!!!!!!!!!!!!!!!!!!!!

They only invest in companies which meet their thresholds• $100mm revenue potential within three years.• Projected net income before taxes = 20% of revenues.• Disruptive ideas or technology.

Venture Capitalists

15C21 - April 21, 2008

% of Revenues.• Disruptive ideas or technology.

Set performance targets, which if not met result in:• Claw Back• Cram Down• New Management Team

Some ‘Big Name firms’ are:• Kleiner Perkins (SFO)• Benchmark Partners (Palo Alto)• Flatiron / Chase Capital Partners (NYC)• Accel Partners (Palo Alto)

Venture Capitalists

16C21 - April 21, 2008

Exit Strategies Today there are three preferable exit strategies:

• IPO• Sale-Merger at a good valuation• Annuity-Family Business

Return-wise, IPO is best.

Two bad exit strategies:• Bankruptcy --- Chapters 7 or 11• Sale-Merger at a bad valuation

More and more eCommerce companies are turning into annuities-family businesses:• Today’s company valuations are poor.• Less fundraising needed.• Less pressure to succeed / Fewer penalties for missing targets.• Founder can remain with the company / retain or pass control.

17C21 - April 21, 2008C17 - April 7, 2008

Questions……

(and maybe some) Answers

18C21 - April 21, 2008C17 - April 7, 2008

Lab Time

Visit GoBig http://www.gobignetwork.com/small-business-funding/?gclid=CMmu6MDh6pICFRwqagodXTy14Q Look for investors or be an investor and look for companies /

ideas.

Visit Accel partners. http://www.accel.com Check out a traditional VC in Silicon Valley.

Which seems to be the better route to financing your idea?