Human and Financial Capital

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Copyright © 2003 by Marketspace LLC

Chapter 11 Lecture Slides

Human and Financial Capital

Rayport, Jaworski

Intro to e-Commerce, 2nd Ed

Exhibits and Tables

Last Updated: 08/31/03Copyright 2003 by Marketspace LLC

Human and Financial Capital— Chapter Topics

Overview

Building a Business

The Business Planning Process

Human Capital

Financial Capital


Source: Data from PricewaterhouseCoopers, MoneyTree Survey: Full Year & Q4 2001 Results: US Report.

0

20

40

60

80

100

120

1995 1996 1997 1998 1999 2000 2001

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Amount invested

Number of deals

Exhibit 11–1: Venture Capital — Market Size, 1995-2001


Seed StageSeed StageSeed StageSeed StageFinancing

Stages

InvestmentInvestment PurposePurpose

InvestmentInvestment PurposePurpose

Type ofType ofInvestorsInvestors

Type ofType ofInvestorsInvestors

Validate the business concept (e.g. build prototype, develop business plan, conduct market research)

Angel investors Traditional VC Consulting firms Online VC firms Incubators

StartupStartupStartupStartup

Build management team and complete product development

Angel investors Traditional VC Consulting firms Incubators

First-StageFirst-StageFirst-StageFirst-Stage

Expand production, marketing, or sales capabilities

Traditional VC Corporations

Second-Second-StageStage

Second-Second-StageStage

Provide working capital once shipping products or providing services

Traditional VC Corporations

MezzanineMezzanineMezzanineMezzanine

Fuel substantial growth (typically provided to business that are at least break even)

Traditional VC Corporations Buyout firms Investment banks

BridgeBridgeBridgeBridge

Prepare for initial public offering, usually planned in the next 6 months to a year

Traditional VC Corporations Buyout firms Investment

banks

Source: Gold Book of Venture Capital Firms, Bob Zider, “How Venture Capital Works,” Harvard Business Review

Early Stage Expansion Stage Later Stage

Exhibit 11–2: Startup Business Investment Stages



Overview

Building a Business


Human Capital

Financial Capital


Supporting Slide 11 — A

What is a Startup?

The term “startup” describes any business enterprise in early stages of development

Startups engage in 3 business processes Developing and refining the offering and strategy Obtaining initial funding to begin operations Building a capable management team to handle operations


Exhibit 11–3: The Relationship Between Human and Financial Capital

EntrepreneurEntrepreneur

Management TeamManagement Team

Strategic Advisors & Partners

Strategic Advisors & Partners

Logistical Advisors & Partners

Logistical Advisors & Partners

Human Capital

Business PlanningProcess

Business PlanningProcess

Financial Capital

Trade CreditTrade Credit Commercial Bank Loans

Commercial Bank Loans

Debt

BootstrappingBootstrapping

AngelsAngels Venture CapitalVenture Capital

Corporate VenturesCorporate Ventures

Equity

Holding CompanyHolding Company



Overview

Building a Business


Human Capital

Financial Capital


Supporting Slide 11 — B

The Business Planning ProcessThe objectives of a good business plan will help companies attract resources and test their business model:

Serve as a “resume” to attract ttract human & financial human & financial

capitalcapital

Provide framework Provide framework for testing business for testing business

throughout throughout developmentdevelopment

Successful Business Plan

Caution: Firms often focus the planning process on what investors want to see, rather than objectively fleshing out strategy.


Supporting Slide 11 — C

Elements of a Business PlanThere are several elements to a solid business plan:

Define the Value Proposition

Define the Value Proposition

What is the product/service the company will offer? Why do customers want it?

Frame the Market Opportunity

Frame the Market Opportunity

Identify that there is a need for the company

– Potential customers should be identified, segmented, and sized (along with a customer acquisition and retention plan)

Detail how to Reach Customers

Detail how to Reach Customers

Identify the marketing plan/strategy

– Solid marketing, sales, and customer relationship strategies are essential

Develop an Implementation

Plan

Develop an Implementation

Plan

For a product-oriented business, how will the product be designed and manufactured?

For an e-commerce website, how will the website be structured and built?

Evaluate Potential External

Influences

Evaluate Potential External

Influences

What macroeconomic factors can effect the business

– Market conditions, inflation, exchange rates, interest rates, government regulations, etc.


Articulate the Revenue Model

Articulate the Revenue Model

Determine how the business will make money

Identify Needed People

Identify Needed People

Who will run or help run the business? Identify any strategic alliances

Calculate Preliminary

Financial Projections

Calculate Preliminary

Financial Projections

Base numbers and assumptions should be as realistic as possible Should determine how much money will be required at different stages What type of return can investors can expect?

Establish Critical Milestones

Establish Critical Milestones

Should indicate when critical steps will be completed– Timeline (i.e., product development, product launch, headcount)

Provide a documented benchmark for future evaluation

Summarize the Advantage

Summarize the Advantage

What is the vision for the future, how will the company achieve that vision?

– Some combination of the previous elements should be summarized (list of core competencies)

Supporting Slide 11 — D

Elements of a Business Plan (continued)



Overview

Building a Business


Human Capital

Financial Capital


Supporting Slide 11 — E

Human CapitalSeveral groups of people are required to successfully grow a business:

Entrepreneur

Logistical Advisors &

Partners

Strategic Advisors &

Partners

Management Team


Supporting Slide 11 — F

Characteristics of Successful Entrepreneurs

Successful entrepreneurs have the following characteristics:

Keenly Observant Keenly Observant Make observations about industries, markets, and everyday life

– Find the best way to meet these needs

Willingness to Take Risks

Willingness to Take Risks

Driven Driven

Flexible Flexible

Visionary Visionary

Smart entrepreneurs take calculated risks

Willing to work long hours and make sacrifices in personal life Personal drive is extremely important in motivating others at early stages

Must be able to react quickly to changes Extremely important for the network economy where markets change extremely

quickly

Expressing passion for the idea to others Most successful entrepreneurs are motivated by vision rather than money


Supporting Slide 11 — G

The Idea

The ideas which entrepreneurs develop can be classified into 3 groups:

Introduce a New Product

Introduce a New Product

Products that enhance increase the functionality or lengthen the life cycle of existing technology Products that provide alternatives to existing products Products that displace provide a new means of doing something Products that transform change how people do business or live

Introduce a New Service

Introduce a New Service

Improve an Existing Model of

Business

Improve an Existing Model of

Business

Come as a result of identifying unmet needs in the existing market or as the result of a new technology

Doing things faster, better or cheaper than existing players Usually driven by technology


Supporting Slide 11 — H

The Management TeamThe management team is incredibly important to the success of a new venture, this team can be broken down into two key groups:

The Core Management

Team

The Core Management

Team

The Extended Management

Team

The Extended Management

Team

In the infant stages of a company, a core team must fulfill a few fundamental roles:

– Technology specialist (e.g., CTO or CIO)

– Sales and marketing specialist (e.g., VP Sales)

– Execution specialist (e.g., CEO)

As the business develops and finances permit, other positions must be filled:

– Chief Operating Officer

– Chief Financial Officer

– VP of Marketing (if not part of core team)

– VP of Business Development

– Chief People Officer


Supporting Slide 11 — I

Strategic Advisers and PartnersStrategic advisors and partners can provide the start-up with experience and industry connections:

Strategic Partnerships

Strategic Partnerships

Mutual exchange of expertise between companies in areas where the start-up lacks competency

There are different types of partnerships that vary by degree of commitment

– Strategic association, Strategic alliance, and Strategic joint venture

Advisory Board

Advisory Board

Provide some expertise on the business or industry Serve as an outsourced resource to fill a particular need More important in startup phase

Board of Directors

Board of Directors

Hold management accountable Formalized control structure for the company Increasingly important as the company grows


Supporting Slide 11 — J

Logistical Advisers and Partners

Logistical advisers provide the start-up with necessary operational expertise:

CPA

(Certified Professional Accountant)

CPA

(Certified Professional Accountant)

Responsible for compiling the financial history of the business Can be valuable in the process of validating and checking the assumptions that drive financial projections This role becomes increasingly important as the company approaches an IPO

Legal Counsel Legal Counsel Handles many legal issues of the startup Can provide credibility with investors

Intermediaries Intermediaries

Well connected individuals in the investment community Paid middlemen between startup company and potential investors

Consultants Consultants Can help determine the correct mix and source of financing Help the company devise and articulate it’s strategy

Ne

cess

ary

Su

ppo

rtin

g



Overview

Building a Business


Human Capital

Financial Capital


Supporting Slide 11 — K

Types of Capital

Capital

There are several types of capital available to companies:

Debt Equity

Trade CreditCommercial Bank Loan

Bootstrapping AngelsVenture Capital

Corporate Ventures

Holding Company


Exhibit 11–4: Summary of Primary Financial Capital Resources

Source What is it?Primary criteria for

investment selection

Key advantages and disadvantages

Pros Cons

Debt

Financing

Trade Credit Credit extended to a business by its suppliers A track record of prompt payment Provides an interest-free loan Certain terms could carry a costly implied interest rate Difficult for e-commerce startups to obtain

Commercial Bank Loan

Installment loans in which a business borrows a specific amount for a specified length of time, to be repaid in installments (with interest)

Likelihood of loan repayment Cash on hand Positive cash flow Acceptable burn rate

Provides cash without losing equity Difficult for e-commerce startups to obtain given criteria for investment

Bootstrapping Using personal resources to finance the early stages of a startup

Entrepreneur’s belief in his own business

Provides cash without losing equity Entrepreneur gains valuable operational

experience

Unlikely to provide enough cash to sustain extended growth

Angels Wealthy individuals who invest personal capital in startups

Referral through network connections Business in early stage of development Personal objectives Market potential Nature of the business concept Quality of management team (if any) Track record of the entrepreneur

Can provide expertise, networks, and credibility to help the entrepreneur build the business

Can provide referral to additional funding sources

Angels tend to negotiate terms more favorable for entrepreneurs than VCs

Difficult to locate Investors can decide to get very operationally involved with

the startup, creating potential conflicts with the entrepreneur

One angel alone is unlikely to provide enough capital for operations

Dealings with multiple angels can cause operational and logistical complications

Venture Capital

Private partnerships or closely held corporations that raise money from investors, which is invested in companies that hold promise for a liquidity event

Referral through network connections Potential return on investment in three

to five years Firm’s strategic objectives Existence of proprietary technology or

concept for sustainable advantage Plus items italicized for angels

Can provide large amounts of cash to sustain growth

Coaching, expertise, and industry contacts Name-brand recognition and publicity

Objectives are primarily financial, which can create conflicts with the entrepreneur’s vision for the company

Requires high equity stake Entrepreneur must give up a certain degree of control Difficult to locate and obtain

Incubator Organizations that support new companies, primarily through services rather than cash, in exchange for a piece of the business

Firm’s strategic objectives Plus items italicized for angels

Allows entrepreneur to focus on strategic rather than operational issues

Coaching, expertise, and industry contacts

Requires high equity stake

Equity F

inancing

Corporate Venture

Venture funds set up by large corporations Degree to which business complements corporation’s current strategic objectives

Right to utilize technology developed in the venture

Items italicized for angels

Provides operational expertise Provides credibility and visibility for the

business through corporation’s brand name Provides large amounts of cash Financing terms tend to be more favorable

than those of VCs Patient capital

Potential conflict of interest with parent company can cause problems

Complicated discussion of intellectual property rights if business later seeks VC funding

Slow to make investment decisions

Holding Company

Company that offers cash in exchange for equity in companies with an operational, rather than financial focus. Equity stakes typically range from 25% to 50%.

Usually defined by particular focus of the holding company

Items italicized for angels

Patient capital due to operational focus Ability to learn from other portfolio companies Investors usually very experienced in specific

industry

Requires a large equity stake, and thus control

Note: Items italicized for angels are those criteria common to multiple sources of funding.


Exhibit 11–5: Venture Capital Investments — Breakdown by Stage

$BBSource: Data from PricewaterhouseCoopers, MoneyTree Survey: Full Year & Q4 2001 Results: US Report.

0

10

20

30

40

50

60

70

80

90

100

Startup Early-stage Expansion Later-stage

1999 2000 2001


Exhibit 11–6: Top 10 Venture Capital Dealmakers in 2001

[i] Source: Data from PricewaterhouseCoopers, MoneyTree Survey: Full Year & Q4 2001 Results: US Report.

New Enterprise Associates Baltimore, Md. 82

Intel Capital Chandler, Ariz. 72

J.P. Morgan Partners New York, N.Y. 69

Bessemer Venture Partners Wellesley Hills, Mass. 68

Austin Ventures Austin, Texas 62

U.S. Venture Partners Menlo Park, Calif 61

Warburg Pincus New York, N.Y. 53

St. Paul Venture Capital Eden Prairie, Minn. 52

Technology Crossover Ventures (TCV) Palo Alto, Calif. 49

Mobius Venture Capital Mountain View, Calif. 47



Overview

Building a Business


Human Capital

Financial Capital


Supporting Slide 11 — O

The Business Plan

Description of the product or service that will be offered and the value proposition to the customer

Summary of the size and nature of the market opportunity

Explanation of the revenue model

Profiles of the management team, advisory board, and board of director members describing specific relevant skills and experience

Clear articulation of the startup’s core competencies and sustainable competitive advantage

Summary of financials and financing needs

In order to pique the interest of potential investors, a business plan must clearly address the following issues:


Exhibit 11–9: Venture-Backed IPOs, 1995-2001

143

216

121

68

248

200

21

1995 1996 1997 1998 1999 2000 2001

Number of IPOs

Source: Data from VentureOne research.

Human and Financial Capital

Economy & Finance

full year

management

business plan

core team

commerce startups

q4 2001 results

moneytree

early stages