Doing a StartUP

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Doing a Start-UP
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Why Do a Start-up?

• Usually easier to buy an existing company than to
  create from ground zero
• A business is more than the sum of the parts
• May make sense for high tech, software, internet
  company ? companies having a lot of goodwill if
  purchased
• Goodwill hard to borrow against
• Low initial capital requirement
• Do a start-up when it doesnt make sense not to

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Ingredients

• Product or idea
• Management team
• Private placement memorandum
• Package
• Business Plan
• Venture Capital

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Organizational Form

• Mom and Pop ? what do we mean by this?
• Owner and business are the same, essentially
• Problems with Mom Pop
• Difficult to finance like lending to the
  individual
• Difficult to sell no value apart from individual
• Ex Doctors practice
• Functional organizational form ? one that
  transcends the individuals can be sold or passed
  on

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Partnership

• Advantages
• Easy
• Least costly to start
• Disadvantages
• Difficult to raise capital Why?
• Difficult to sell Why?
• Limited Life

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Corporation

• Advantages
• Unlimited life
• Easier to raise capital
• Easier to value and sell
• Necessary if planning on going public
• Disadvantages
• More costly to set up
• Double taxation (Sub S corporation)
• Agency problem ? what do we mean here?

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Organizational Form

• Should run company as if it were public
• Corporate charter
• Board
• Board meetings
• Documented minutes
• Arms length transactions

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Product Issues

• Profitability
• Size of market
• Production requirements
• Product characteristics

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Profitability

• Essentially, gross margin
• Difference between sales price cost of
  producing
• Demand driven or marketing driven?
• Pain-killer or vitamin?
• Need or discretionary purchase?
• Pricing ? demand driven, not cost driven
• New product ? 75-90 Why?

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Market Size

• Market potential is a key consideration
• Stage in life-cycle of industry why?
• Does your product/service create new markets?
• Size and projected growth of market?
• Current customers potential for many more
• Grow rapidly per year (25 - 45)

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Market Size

• 1 mistake If we only get 1 of the market we
  will succeed.
• Market too big ? may end up being the test case
  for bigger players
• What are sales and distribution channels?
• Retail? Niche?
• Existing shelf space?
• Market share w/o profitability (.coms)

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Capital Intensity

• Sunk cost or capital investment required
• Money lost if business fails
• Mistake want to produce internally instead of
  outsource ? you dont have to make what you
  sell
• Marketing costs as a sunk cost
• Does product/service depend on heavy advertising?

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Product and Firm

• One product firm?
• Amazon ? books, then expanded
• Callaway Golf ? drivers, then expanded
• Repeat orders?
• Cost of one (first) sale too high
• Too simple
• Too easy for competition to replicate

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Products Services, cont.

• At what stage are the products and services how
  long will the window of opportunity be open?
• What makes your product/service unique?
• Do you control means of production or provision?
  (see before)
• How are they dependent on technology?

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Product Qualities desired by VCs

• Be real and work
• Be unique and proprietary
• Solve a problem or improve a process
• Be for mass production with potential for cost
  reduction

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Investor Issues

• Exit strategy ? how and when are they going to
  cash out and realize a reasonable return
• Going public is the likely answer ? many
  implications, costs and benefits
• Complexity of the deal ? the more complex, the
  harder it is to sell
• Elevator

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Entrepreneur

• Conditioning
• Confidence
• Courage
• Competitiveness
• Charisma
• Character

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Management Issues

• Education, background, knowledge and skills
• Experience relevant to the business proposal at
  hand
• How does this team manage and eliminate the risks
  and problems?
• Entrepreneurial attributes drive, tenacity,
  energy, leadership

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Management Team

• Be able to adapt
• Know the competition
• Be able to manage rapid growth
• Show financial commitment
• Management is probably the single most important
  aspect of a new venture

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Capital Source by Stage