STACKA global internet-based service

based on Venture Capital funding?Various remarks

Jarmo Malinen

August 2, 2011

A possible service concept

AuthenticationUser control

Externalauthentication- Facebook- Google

SSO

OfBiz- Ledger- Licenses

Content & Material Databases

- Paypal- VISA- Mastercard- AMEX- Google

Store Student Teacher

Moodle

STACK Farm

PPP

High security area

Freew

areboundary

Note that STACK is unusable as a business brand!

Stack ecosystem?

In addition to students and their ordinary teachers, we have tosatisfy, at least, the needs of

I teachers that want to develop Stack materials,

I directors of teaching affairs that make decisions,

I external materials developers, testers, and localizers,

I corporate customers and partners,

I Stack system developers, and researchers.

Engineering Your Start-Up:A Guide for the

High-Tech Entrepreneur(2nd Ed., 2003.)

Written by James A. Swanson and Michael L. Baird.

Read the Book.It gives you a frame of reference. You need it.

What are the funding options?

As far as I can see, we have three alternatives:

1. A garage start-up on a shoestring budget,

2. Venture Capitalists (VC) and Business Angels, and

3. Corporate Investors. (BTW, who would they be?)

Venture capital is impatient but competent money.Corporate investors would regard our enterprise as a part of theirstrategic plans!All private funding is dependent on business cycles.

Why use Venture Capitalists? (1)

It is a fact of life that our time is too short to pull off this projectin global scale as a “garage project” on a shoestring budget.We probably could make a profitable, national“income-substitution business” that way if we had no other choice.If we were twenty-something and had nothing better to do, weshould try it — just for the fun of it.But for us, there is an easier way of getting a decent income, andwe all have jobs anyway.

Why use Venture Capitalists? (2)

On shoestring budget, augmented by public grants:

I The quickly emerging education technology markets wouldjust escape us.

I Adopting our service might seem too risky for potentialcustomers.

I We might succeed in creating a new market but be too smalland too slow to keep it.

Most importantly, we would fail to make a difference and changethe world. Unacceptable, isn’t it?

Times aren’t getting any better now!

I We are soon in the next economic boom.

I The education technology markets are already there, but theyare not yet fully developed. The competitors are hopefully notyet “entrenched”.

I After the Nokia f**k-up, there is a lot of public TEKES R&Dfunding available in Finland.

I There are some positive signals from technology investmentcircles for high-profit, high-risk projects.

Where should we be in five years? (1)

To be successful, we should at least enter/create a sufficientlylarge business

I to give ROI > 20 % five years...

I ... leading to break-even on 3rd year...

I ... and the revenue of 5M euros on the 5th year.

If we do not reach these goals, we either (1) go bankrupt or (2)lose the business to our investors.Hence, we cannot afford many mistakes.

Where should we be in five years? (2)

Hi-tech businesses of under 15 % market share typically losemoney, but those over 30 % are most often profitable. Thus,

I we should have a market share of significantly more than 20% in the full market of our choice in the fifth year, which...

I ... is certainly more than 100 times the volume of the STACKactivity we have in Aalto!

N.B: My numbers are probably not precise (whatever that means),but they are of the right magnitude!

How to get there in five years?

I To achieve this, we must find a global potential (but, for us,realistic) market of at least 50M euros...

I ... but preferably more than 100M euros a year.

I The present, global mathematics education technologymarkets may be just a fraction of the required potentialmarket size!

Indeed, I estimate that the global education technology markets forfirst year engineering mathematics is about 20M, and definitely notmore than 40M euros.

There is little honour intrying to make the Bomb

if you don’t havemore than a critical mass

of Plutonium-239.(Which is ≈ 10 kg.)

Time line of a start-up

conceptseed

product development

market development

steady state

First seed financing between 50 – 100ke.Then one or two capital injections between0.5Me – 1Me.Before steady state there will be VC Exit.

Funding – how much? (1)

In addition to seed funding, we need start-up funding of at least0.5M euros for developing materials and business software as wellas the initial marketing effort.Most of the start-up capital will be spent during first two years ofthe enterprise. We need to break-even safely before our externalfunding runs out!None of the ≈ 0.5M euros can be used for actual STACK-2development! We simply cannot afford any “Bells and WhistlesWork” before we are over the “Valley of Death”.

Funding – where to get it? (2)

I Part of the funding may be public (TEKES), but an essentialpart from Venture Capitalists (VC).

I VC’s share should remain preferably under 30 % and definitelyunder 50 % of the final diluted stock base.

I The VC will seek 50 % annual growth for their investment,leading to 10X increase in 5 years.

I Thus, the business should be of worth 15M euros in five years,i.e., the gross revenue of well over 3M euros.

What do we look like in VC’s eyes? (1)

newmarket

existingmarket

existing product new product

II

III

I

IV

marketingdriven (newuse for anexistingproduct)

faceentrenchedcompetition

missionarysales,technologypush

market-driven,technology-fueled,market-pull

Technology push vs. market pull!Are we in the best quadrant IV?

What do we look like in VC’s eyes? (2)

most desirableManagement Status

Product Status

2

3

4

5

3

4

5

6

4

5

6

7

5

6

7

8

Level 4:All members onboard andexperienced

Level 3:All membersidentified; some onboard only afterfunding

Level 2:Two founders;others notidentified

Level 1:Singleentrepreneur

Level 1:Idea only;marketassumed

Level 2:Prototypeoperable butnot developedfor produc-tion; marketassumed

Level 3:Product fullydeveloped;few or nousers; marketassumed

Level 4:Product fullydeveloped;satisfiedusers; marketestablished

We grade between 5 and 6. Marginally “fundable”?

What do we look like in VC’s eyes? (3)

To get venture capital, we need

I Competent and energetic people in key executive positions.

I Board of Directors with wide business experience andmarketing expertise.

Competition is good!

I Competition validates the existence of markets but...

I ... we must not be the fifth in the market of five.

I We must never end up competing against“Microsoft”.

The business plan (BP) must contain a full-scale market study toaddress all these questions quantitatively.This is actually the most important part of the BP.

What could be our competetive edge?

In the long run, we must be able to produce materials

1. faster,

2. at a lower price,

3. with superior quality, and

4. incontrovertibly on a higher sofistication level

than any of our competitors. To achieve this, the student solutionsdatabase should be effectively used to debug and optimize thealgorithms. Very difficult!

Scenarios of failure?

I Lack of focus — we get a hi-tech pancake.

I Overestimation of markets.

I Underestimation of marketing costs and competition.

I Management and recruitment problems.

I Contemplating “moral questions” instead of business.

I Running out of funds before break-even.

I Legal problems (licences and patents).

Officers

We need a full entrepreneurial team, and these three are theabsolute minimum in the beginning!

I Chief Executive Officer (CEO),

I Vice President of Marketing and Sales, and

I Chief Technical Officer (CTO).

The occupants of these positions are expected to change when thebusiness grows.

Board of Directors

We need a number of odd people:

I Chairman of the Board

I Expert in Marketing

I Expert in Business

I Representative of the Aalto University Foundation

I Representative(s) of Venture Capitalists

They better be an odd number of people.

Business plan

BP is a formatted document of 25– 40 pages, containing

I the service/product description & the ecosystem,

I a detailed market study & marketing strategy,

I the funding plan, time-table, & key persons,

I pro forma financials, and

I an executive summary of two pages.

Without proper introductions and recommendations the BP is notgoing to get read by VC’s at all.

Exit strategy

The fast growth of the enterprise is expected to end in about fiveyears.At this point, the venture capital will exit.

I Management buyout with the help of new private funding orbank loans?

I Going public?

I Selling out?

Personal questions for everyone

What is in it for me?Can I take the extra stress and work load?Is my health and physical condition good enough?How about the family matters?If I get on in business, can I still be authentically myself with therequired new mind-set (whatever that means)?

Know thyself.

Now, my friends,it is up to you.

Come, my friends.’Tis not too late to seek a newer world.Push off, and sitting well in order smiteThe sounding furrows; for my purpose holdsTo sail beyond the sunset, and the bathsOf all the western stars, until I die.