the start up challenge
DESCRIPTION
2005 Presentation on the start up challenge in high tech industry.TRANSCRIPT
Michael Kay
The Start Up Challenge
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Right Time, Right Product, Right Market
“The strongest principle of growth lies in human choice.”
George Eliot
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The Start Up Challenge – It’s Not Easy!
“We see others making progress, yet we seem to be stuck! Why?”
Is it technology?
Is it product?
Is it target market?
Is it money?
Is it location?
Are they just better than us?
Let’s take a look at some important elements………….
“If there is no struggle, there is no progress.” Frederick Douglass
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First Ask Yourself……… Why start a new business?
How big is the market opportunity?
Who is your customer?
What “customer pain” is being addressed?
What product and service will the business deliver?
How will the product benefit the customer?
Why will a customer use your products?
How much capital will be needed for each stage of development?
Where will the required capital come from?
What is the exit strategy for investors?
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Why Start a New Business?
Because you have a vision!Can the vision be articulated clearly and simply?
A business plan with attitude.
Are technology/products evolutionary or revolutionary? There is no right or wrong answer, just a clear answer.
If revolutionary the challenge can be a lot tougher!
What are the ingredients and factors for success? Quantified and qualified.
Is the business sustainable and scalable? Target growth markets – products to meet the demand
"Everything should be made as simple as possible, but not one bit simpler”. Albert Einstein
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How Big is The Business Opportunity? Do you know your target market (and segments)?
Be specific – don’t “cast a wide net”
Do you know what the market drivers are? What drives these markets? Will your customers pay a premium for your product/service?
How big is the market opportunity (TAM, SAM, SOM)? Top-down understanding is good, but must be supported with bottom-up planning
– this WILL require customer endorsement.
What is the “go-to-market” strategy? Alpha/Beta sites? Broad-based channel launch? Partnership?
Once in the market, can the products sustain a strong position? How will you handle competition (technology leadership, highly differentiated
product roadmap, customer support)?
Is the technology/product scalable? As the markets grow and new opportunities present themselves, is the technology
and product roadmap able to adapt?
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Who is Your Customer?
Know where you are in the “food chain”, and who sells to whom Component in a sub-system? Sub-system in a system? System solution?
Know the gestation period between winning the business and collecting payment! Design win to an order An order to a shipment/invoice Invoice to payment
Assess the risk and exposure in the food chain Capture revenue by point-of-sale (POS), not point-of-purchase. Build to order or build to inventory turns?
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What Customer Pain Points Are Addressed?Can you pinpoint the bottlenecks and pain points customers
suffer in your target markets?
Can you show them how your product removes the pain and bottleneck?
Customers want short term fixes and long term solutions (“aspirin” and “vitamin”).
Can you show a roadmap that will address your customer’s future challenges?
Can you show how your solution is unique or highly differentiated?
“Pain is inevitable; suffering is optional.” Unknown
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What Products and Services Will Be Supplied?
Are the products evolutionary or revolutionary? Revolutionary means concept selling, but should create longer term sustainability. Evolutionary requires first mover mindset – stay ahead of the crowd
How many products are there? Is this a one-product company? If so, make sure it’s “Coca Cola”!
Is there a product roadmap? Customers expect to see how the technology/product roadmap will support their needs going
forward.
What level of service will you have to provide? Field support, design in/win resources, sales training, system level reference designs
There is no product without service. Often underestimated, sometimes ignored.
A sign of celebrity is that his name is often worth more than his services.
Daniel J. Boorstin
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How Will The Product Benefit Your Customer?Features and benefits
Are the features clear, unambiguous and compelling?What is the benefit to the customer?
Time to market? Time to money? Cost? Competition “killer”? Performance? Flexibility, versatility?
Is “ease of use” a factor?Get the customer excited by your products!
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Why Will Customers Choose Your Product?
Sufficient differentiation and easy to understand benefits?
Compelling features and ease of use?
New companies are always considered a risk
Lack of resources, financial risk, may not meet commitments etc.
How will you overcome these perceived issues?
Use references.
Access to board members.
Initially, limited customer engagements to show focus and intent on success.
Close communication with customers at executive level.
Does the customer-base know you exist (or even care)?
Participation in standards committees, article contributions etc.
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How Much Capital Will Be Needed?
Has a thorough financial analysis been completed? By technology development
By product development
By cost center
By Geography
Have business objectives been correctly resourced? People, equipment, communications
Have value-building milestones been defined? Customer validation of products
First product delivery
First revenues
Can early revenues or pre-sales be leveraged? Customers/partners pre-paid participation
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What Are the Sources of Capital?
Own, family/friends
Pre-sales, NRE, joint development projects
Seed, “angel”
Institutional investors – VCs
Directed equity investment through corporate player
Private Placement
Initial Public Offering
Debt leveraging
The tooth fairy teaches children that they can sell body parts for money.David Richerby
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Private EquityStage Funding Sources Agent
Seed / StartupSelf / Family / Friends /
Angels / Venture CapitalNo
Early Stage(Series A)
Venture Capital No
Expansion(Series B)
Venture Capital / Corporate Sometimes
Expansion / Later Stage(Series C)
Venture Capital / Corporate / Institutional
Often
Mezzanine(Series D,...)
Corporate / Institutional Yes
Refinancing (“down round”, “pay to
play”, etc.)Self / Venture Capital Sometimes
Source: Soundview Technology Group
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Valuation
In the eye of the beholder!
Quite subjective, but look for comparables.
Based on forward looking projections, then discounted for risk.
Don’t expect a valuation that does not represent a fair market value
Strong position if revenues and earnings are measurable.
Financial trends are important.
Large up-rounds can be followed by large down-rounds!
Founders have to be realistic – think exit not entry.
“2 is not equal to 3, not even for large values of 2.” Grabel's Law
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Private Equity Valuation Drivers Quality of management team
Size and maturity of market opportunity
Scalability
Uniqueness and defensiveness of technology
Stage of product development
Competitive landscape
Credible financial projections
Prior investors and capital structure
“Cash in, cash out” (“X” times investment within “Y” years)
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Term Sheets
The obvious cost Shares sold Price per share
The hidden costs Cumulative dividends Liquidation preference Conversion rights and ratio Anti-dilution provisions Voting rights Protective covenants Registration rights Redemption rights Rights for purchase of new securities Option pool Board representation Expenses
When the gods wish to punish us, they answer our prayers.
Oscar Wilde
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Initial Public Offering (IPO)
Has become a major challenge!
Public investors want
Profitability
Stability
Visibility
Liquidity
Significant discount from public comparables
Unclear which IPOs will have appeal in public markets
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IPO Valuation Considerations
Minimum Market Float: $40 – $50 million
Maximum Percentage of Company Offered: < 30%
Average CY2003 P/E Multiple: 30x
less: “IPO discount” of 20% - 6x
24x
Minimum CY 2003 Earnings: $45 million
30% = $6.25M
24x (35% tax)
Derived CY 2003 Revenue: ~ $65 million (assuming 15% operating margin)
IPO possible if $50M+ in revenue, with excellent profitability!!Source: Soundview Technology
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Trade Sale
Can be stock or asset purchase
Asset purchase leaves “baggage” behind for acquirer and leaves shareholders with liabilities.
Can be outright purchase of all shares
Cash/stock based transaction – usually with earn-out
Sometimes, bonus payments for milestone achievements are included – normally hotly negotiated!
The “20 / 80 deal”
Buyer purchases combination of new / secondary shares representing <20% of pro forma outstanding shares
Option to purchase remaining shares at some formula price (typically revenue-based) at a future date
Often entails co-marketing and co-development agreements
Allows necessary funding without corporate buyer incurring interim operating losses
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Are You Meeting Milestones?
Be assured that companies making progress are addressing the issues and rationalizing their actions.
Have a plan and a strategy, but avoid strategic decisions!
The strategy will change as business factors change.
Contingency planning is part of the culture.
Systems and processes to help guide a company in its decisions.
Listen and ask for advise (board of directors, advisors, customers, analysts, press etc.).
“Focus 90% of your time on solutions and only 10% of your time on problems.” Anthony J. D'Angelo
The most dangerous strategy is to jump a chasm in two leaps. Benjamin Disraeli
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Simply Put…….
Vision! Expressed in a business plan. Revealed through the culture of the company.
Focus! Leadership and clarity.
Execution! Calculated and crisp.
And some luck! But don’t wait for it – create it!
“I'm a great believer in luck, and I find the harder I work the more I have of it.” Thomas Jefferson
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