Mastering Entrepreneurship

Gillian Lacey-Solymar
Lecture 7 - Marketing – Final frameworks and Sources of Finance

November 23rd 2017

Agenda

• Recap of marketing lecture

• Final marketing frameworks
• Sources of finance

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Jason Williams-Guest speaker

Founder of Shoal Games

Raised $2m last year
Was CEO of Bingo.com
Presentation Title Page 3
Technology
adoption curve

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Adopter Categorisation

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 Early markets: Innovators
Main characteristics:
— Technology enthusiasts; appreciate technology for its own sake
— Will forgive faults
— Make great critics; Feel strongly involved in development of
innovations
Organizational challenges;
— Innovators want cheap products; They generally work under strong
budgetary constraints
— Innovators demand access; They often require to be closely
involved in the development of technologies

Innovators are key because they are gatekeepers; therefore

first key to any high-tech marketing effort

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Early adopters: Visionaries
Main characteristics:
▪ Driven by a dream; not looking for an
improvement but seek fundamental breakthrough
▪ Tolerance towards risks of working with new
vendors; willing to buy into new unproven
technologies; low price-sensitivity.
Organizational challenges;
▪ Visionaries easy to sell to but difficult to please

Visionaries represent opportunity, early in a product’s life cycle to

generate a burst of revenue and gain exceptional visibility

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Early majority; Pragmatists

Main characteristics:
▪ Goal is gradual improvements; want incremental,
measurable, predictable progress; Pragmatists tend to
keep low profile and to view ‘risk’ as a negative word

Organizational challenges;
▪ Importance of building trust; pragmatists are hard to win
over but loyal once won.

Targeting pragmatists is long-term agenda requiring patience.

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Late majority; Conservatives

Main characteristics:
▪ Against discontinuous innovations; believe in
tradition rather than progress
▪ Fear of high-tech; only invest in technologies at end
of technology life cycle when products have become
commodities
▪ Customers don’t want to think about technology.
Organizational challenges:
▪ Hard to attract
Targeting conservatives involves offering pre-packaged solutions

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Laggards

Who cares???

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 Innovation adoption – potential
examples

▪ INNOVATOR
Self drive cars??
▪ EARLY ADOPTER
Virtual reality gaming??
▪ EARLY MAJORITY
Alexa??
▪ LATE MAJORITY
i-phone 6, electric cars
▪ LAGGARDS
internet shopping, smart-phones

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Adapted technology
adoption curve

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Problems with traditional High-Tech Model

Chasm

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Problems with traditional High-Tech Model

▪ Assertion that new markets along the Technology Life

Cycle unfold in a continuous and smooth way does
not seem to be justified;
▪ Organizations with technologically “superior” products
often don’t make it all the way along the curve
▪ A promising start is often followed by a failure to
reach the masses, where big profits are made

Geoffrey Moore
Along the technology adoption cycle, firms will need to target
different groups of customers with distinctive needs and
motivations; this requires different marketing approaches.

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Moore’s “revised technology adoption life
cycle” Moving from
one segment
to another is
not smooth for
discontinuous
innovations
(those that
require change
in behaviour)

Crossing the chasm entails making the transition from a company

serving early adopters to becoming a company serving the early majority

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 Moore’s “revised technology adoption life
cycle”

Early adopters Therefore

like a “radical you must
discontinuity market to
between the old them in
and the new” RADICALLY
DIFFERENT
WAYS – build
momentum to
make the
product a de
Early majority want facto
“productivity standard
improvements” and are
looking to minimise
discontinuity
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 How to cross the chasm
▪ Target a niche.
▪ Force your competitors out of the Similar
niche to
▪ Use that for a base from broadertheoperations
D-Day
▪ (Similar to D day landings) landings
▪ Eg Palm Pilot built a niche with targetting the
management teams of high tech enterprises.
▪ They simplified the product and lowered
the price
▪ The passion carried over into the next segment
of consumers
▪ The chasm was crossed!

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 How to cross the chasm

▪ Target a niche.
▪ Force your competitors out of the
niche
▪ Use that for a base from broader
operations.

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How to cross the chasm: example

▪ Eg Palm Pilot built a niche with targetting

the management teams of high tech
enterprises.
▪ They simplified the product and lowered
the price
▪ The passion carried over into the next
segment of consumers
▪ The chasm was crossed!

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Marketing Summary

▪ 4P’s – all must be in sync

▪ Focus on benefits, not features
▪ Market research – must be unbiased
▪ Understand your changing customer base over
time

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Marketing Summary

▪ 4P’s – all must be in sync

▪ Focus on benefits, not features
▪ Market research – must be unbiased
▪ Understand your changing customer base over
time
A deep understanding of the customer
is the key to your business.

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Sources of Finance

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Agenda

Different sources of finance: their pros

and cons

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First rule of finance

It is always
easier to ask
for money
when you
don’t need it

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Bankers Are Just Like Anybody Else,
Except Richer - Poem by Ogden Nash
This is a song to celebrate banks,
Because they are full of money and you go into them and all
you hear is clinks and clanks,
Or maybe a sound like the wind in the trees on the hills,
Which is the rustling of the thousand dollar bills.
Most bankers dwell in marble halls,
Which they get to dwell in because they encourage deposits
and discourage withdrawals,
And particularly because they all observe one rule which woe
betides the banker who fails to heed it,
Which is you must never lend any money to anybody unless
they don't need it.
I know you, you cautious conservative banks!
If people are worried about their rent it is your duty to deny
them the loan of one nickel, yes, even one copper engraving
of the martyred son of the late Nancy Hanks;
Presentation Title
Yes, if they request fifty dollars to pay for a baby you must
look at them like Tarzan looking at an uppity ape in the
jungle,
And tell them what do they think a bank is, anyhow, they had
better go get the money from their wife's aunt or ungle.
But suppose people come in and they have a million and they
want another million to pile on top of it,
Why, you brim with the milk of human kindness and you
urge them to accept every drop of it,
And you lend them the million so then they have two million
and this gives them the idea that they would be better off
with four,
So they already have two million as security so you have no
hesitation in lending them two more,
And all the vice-presidents nod their heads in rhythm,
And the only question asked is do the borrowers want the
money sent or do they want to take it withm.
Because I think they deserve our appreciation and thanks,
the jackasses who go around saying that health and happi-
ness are everything and money isn't essential,
Because as soon as they have to borrow some unimportant
money to maintain their health and happiness they starve
to death so they can't go around any more sneering at good
old money, which is nothing short of providential.
Ogden Nash
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Before you start to raise money, what are the
questions you need to ask?

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Before you start to raise money, what are the
questions you need to ask?

▪ How much do I need (to get to the next milestone)?

▪ What do I need it for?
▪ Who will it come from?
▪ When when I ask for it?
▪ What will I have to give up to get it?
▪ Is there a better way to achieve the same ends?(Other
forms of finance, begging, bartering, partnership??)

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 How do you get money?
How can you persuade someone?
- Credibility that you won’t lose their money/track record
- Communication: show them you know your stuff
- Clarity: understanding the investors’ risk profile

Promise of future upside

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Persuading isn’t easy…

An admirable plan Mr Gribbs,

but short on detail
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Where does the money
come from: choices

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Where does the money
come from: choices

▪ Personal investment
▪ Equity
▪ Debt/Loans
▪ Convertible Investments
▪ Cashflow finance
▪ Asset finance
▪ Crowdfunding (debt or equity)
▪ Grants and Government Support
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Personal Investment

▪ Will you risk what you have?

▪ If the venture is a success you get more upside
▪ If the venture fails you lose all you put in
▪ What is the right level of personal investment?
▪ What can you afford to lose?
▪ You may need to have some “skin in the game” to
convince others of your commitment
***You only have yourself to persuade***

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How to bootstrap!

▪ Never buy new what can be bought second hand

▪ Never buy what can be rented
▪ Never rent what can be borrowed
▪ Never borrow what can be begged
▪ Never beg what can be salvaged

Mantra: Spend money only to make money!

Source: Ian McMillan, Wharton

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Bootstrapping

▪ Personal Savings
▪ Credit Cards
▪ Mortgages
▪ Pension Funds
▪ Moonlighting, Second Jobs
▪ ‘Sweat - equity’ (ownership earned in lieu of wages)
▪ Paying Late, supplier credit
▪ Early customer payment
▪ Poker??
▪ Trading? (oneredpaperclip.com)

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One Red Paperclip

▪ The One Red Paperclip ProjectOn July 12,

2005 I posted a picture of a red paperclip on my
blog and in the barter section of craigslist and
asked if anyone wanted to make a trade for
something bigger or better.
▪ A few days later I traded the paperclip for a pen
shaped like a fish.
▪ Then I traded the pen for a doorknob.
▪ And so on, each time trading for something
bigger or better.
▪ Once all the dust settled, I'd made 14 trades
and wound up with a house located at 503 Main
Street in Kipling Saskatchewan.

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Equity – what is it?

A share is a right to the ownership of the future profits of the business

Current value is present value of future Capital gain and Dividends

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Equity

Shares also carry control rights under the Companies Act

▪ 50% +1 share = right to appoint directors
This gives you management control
▪ 75% +1 share = right to change the company’s constitution
(articles of association)
This gives you financial control (eg to return money to
shareholders)

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Who provides funds in return for equity?

▪ FFF - Friends and Family (and Fools!)–

People who don’t usually invest in
companies
▪ Angels –Independently wealthy
individuals, who regularly invest
▪ VCs and private equity: Funds raised
and managed by professionals
▪ Stock market – IPOs/rights issues
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The True Cost of Equity

When you raise equity, you:

▪ Give up a portion of the business
▪ Give up the future value of that share
▪ Convince someone of the value
• To successfully raise equity, you must have a
convincing argument for the future value
• Investors want high returns (15%+ pa, sometimes
much more)

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Equity – how do raise it?

▪ Whoever your shareholders are (even family)

the company will need to issue new shares
▪ This is a formal process
▪ A lawyer MUST be involved
▪ Or you could look at Company Secretarial
services online…

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Equity–pros and cons

Pros Cons
▪ Permanent capital - ▪ You dilute your own
no need to repay share
(but VCs want an ▪ The more equity
exit) you give, the more
▪ Permanent capital – control you lose
equity holders can’t ▪ Not tax efficient
force winding up
(unless they have
over 75%)

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Debt – what is it?

▪ Loan
▪ Original amount must be paid back
▪ Carries interest rate
▪ Ranks ahead of equity in a bankruptcy
▪ Secured debt ranks ahead of unsecured
debt

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Debt: types of debt

▪ Overdraft / Credit Cards

— Temporary extension of cash from regular
bank account
▪ Personal loan
— Borrow against personal assets
▪ Term loan
— Borrow money for a fixed period of time
— Business or personal, generally requires
asset backing
• Loan from the bank or from bondholders (much
much later if you issue corporate bonds)
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Banks

• Banks lend cash for interest

• They want to get the cash back
• Banks make money on the spread between
their cost of capital and the interest they
charge plus any fees for services
***Banks are not risk capital providers***

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Financing: Banks & Borrowing

▪ Bankers hate surprises

▪ Cautious lenders - primarily asset backed
▪ Commercial loan decisions heavily influenced by
personal impression
▪ Check what their charges are
▪ ‘Relationship banking’ – can be important

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Debt –pros and cons
Pros
▪ Cheap now
▪ Temporary whereas
equity is permanent
▪ If you pay regularly,
lender has no say in
business
▪ Interest is tax deductible
Cons
▪ Very hard to get now
▪ MUST pay back as a
priority (interest and
capital)
▪ Default can cause
bankruptcy
▪ Banks may insist on
personal guarantees
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Debt or Equity?

• Debt is cheaper than Equity because

▪ Debt is lower risk for investors (prior claim

if company goes bankrupt) so has lower return

▪ Interest is tax deductible, meaning lower

taxes and therefore more cash for the
company

▪ BUT… Page
Debt or Equity?

• • BUT: You cannot borrow money unless you

can provide the lender with sufficient security
to satisfy them that they will get it back … in
cash!
• As early stage ventures cannot offer any
security they are principally funded by selling
Equity

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Convertible Debt

Put into the business as a loan

• If company fails, gets repaid
• If company succeeds gets converted to equity
at pre-agreed rate (e.g. early stage
investment)
• Share in the upside if successful
- Interest rate much lower than it would
otherwise be (due to equity component)

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Cashflow finance

• Borrow against own creditors e.g. pay slowly

• Borrow from customers e.g. incentive for early
payment
• Invoice factoring/discounting

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Asset Finance

Remortgage your assets

▪ Factories
▪ Car fleet
▪ Offices

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“Alternative” finance

▪ Badly named, as it’s now mainstream

▪ £15bn in 2016 came from these sources

11/23/17 Page 53
Crowdfunding

▪ Can be for debt or for equity

▪ Relatively new
▪ Examples: Crowdcube, Seedrs
▪ Legally complicated when inviting funds from
inexperienced investors
▪ Administratively difficult having so many
shareholders
▪ …But this is becoming an increasingly popular
fund raising method
▪ Regulators are nervous…
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Types of “alternative funding”

Source: Nesta
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http://www.kauffman.org/multimedia/sketchbook/kauffman-sketchbook-wizard-of-fundz
Financing new ventures – “new” entrants

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Focus in on crowdcube

“Equity crowdfunding has transformed

equity investment in the UK,”
Luke Lang, (co-founder Crowdcube)

• raised funds for over £230m

• for more than 500 businesses,
• 60 businesses raised £1m+

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How much should you raise? ISSUES to consider

LESS MORE

Keep your independence

Speed of growth

Focus on running the business

Presentation Title Page 59

Grant Money

▪ Money given for a specific purpose or project

▪ Almost all are for proposed projects not for projects that
have been started
▪ Given under strict conditions
▪ Must be repaid if not used for intended purpose
▪ Matching generally required
▪ Must find the rest of the money from elsewhere

Presentation Title Page 60

Grant Money-Pros and Cons

Pros Cons
▪ “Free money” ▪ “There is no such thing
▪ Generally doesn’t have as a free lunch”
to be repaid ▪ Cost of raising money is
▪ Multiple sources time and focus
▪ Sometimes come with (opportunity cost)
advice as well as money ▪ There are costs of
reporting back etc
▪ Matching often required
▪ Timing can be slow
▪ You have to fit your
project to their criteria

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Equity in more detail

▪ Angel investors
▪ Venture capitalists

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Who are the angels?

▪ Originally: Individual financing a Broadway show

▪ Now: High net–worth individuals, often self made
millionaires, speculating in early-stage ventures
▪ Invest four times as much in early stage firms as venture
capitalist
▪ About 1/4 of VC funded businesses previously received
Angel funding
▪ Tend not to advertise themselves –find them through
lawyers, accountants, etc.
▪ Increasingly Angels forming networks (Bands of Angels) –
e.g. LBAN, IAN, GEIF (see www.eban.org)

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Who are the angels?

▪ Angels share the vision of the young company

▪ Often understand the industry
▪ Attracted by the opportunity as well as
potential returns
▪ Provide support, advice and money

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Raising Angel Capital

▪ Understand their motivations

▪ Don’t underestimate them
▪ Enable them to live vicariously
▪ Keep the message simple (they want a good
story)
▪ Be a nice person (They’re in this for fun)
▪ Sign up people they know (Reference
customers, advisors, credible parties)
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 Business Angels

▪ Choose one who can add

value to your company
▪ Can turn into ‘devils’
▪ Make sure you both have clear
idea of roles to be played by
Angels

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Venture Capital

I call my invention “the wheel,” but so far I’ve

been unable to attract any venture capital

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 Venture Capital/Private Equity

▪ Ambiguous –terms often used interchangeably

– BVCA (British Venture Capital Association
represents early stage and late stage)
▪ VC tends to be more early stage
▪ Private equity tends to be later stage (strictly –
Buyout/MBO = later stage)
▪ Here we focus on early stage
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 Understanding Venture Capital

▪ The VC business
— Seeking exceptional returns
— Focus, Expertise
— Significant due diligence
— Offer more than just money
— Fund/Portfolio managers
— Management of risk => Ruthless decisions, pay in stages

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What is Venture Capital
(early stage)?
▪ A financial intermediary
▪ Invests only in private companies
▪ VC firms are organized as funds.
▪ Funds raised from pension funds/rich
individuals/stock market
▪ The fund managers/ general partners
get approx:
— 2% of the fund annually as a
management fee
— 20% of the fund's gains.
▪ Takes an active role in the companies
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Equity Investors Expect
High Returns

Seed Start-Up Early Stage Expansion

Annual 80% 60% 40%

Return
Over 5.8x 4x 2.7x
3 years

Over 19x 10.5x 5.4x

5 years

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A Good VC Offers Many Things
▪ Access to cash
▪ Leverage with other organisations (banks, lawyers, access to local
talent pools etc.)
▪ Raising the next round of money
▪ Extensive network of valuable contacts
▪ Experience of building internationally competitive companies

A good VC could make the difference between

success and failure!

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 VC Funding Should Accelerate Your Business

Optimal

Minimalist

Net Flow £

Time

Source: Atlas
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What makes an attractive VC opportunity?

▪ Scalability
▪ Potential to be market leader in high growth industry with few
competitors (£50m+)
▪ Committed and competent management team
▪ Sustainable competitive advantage -profitable, repeatable,
expandable, predictable, defensible
▪ Sound business plan with plausible cashflows
▪ Viable exit strategy
▪ Reasonable valuation of existing company

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https://www.cbinsights.com/blog/increasingly-crowded-unicorn-club/
Venture Capital Backed Ventures
(a typical portfolio – data courtesy of John Bates, LBS)

▪ 218 ventures over 10 years

— Total loss - 15%
— Partial loss – 25%
— 5-10x investment after tax (25% compound)
- 8%
— >10x investment – 4%
— Modest returns – 48%
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 VC Fund Strategy

▪ Eliminate losers before investing

— Pre-investment due diligence
— Early market traction
— Challenged business models (look at exit dynamics)
▪ Lemons ripen before plums
— Losers will lose anyway - don’t prolong the agony, terminate early
— Success in raising external follow on funding is key to determining
level of support and valuation
— Ensures capital is channelled only to the winners

Source: Atlas
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Kleiner Perkins Caulfield & Byers: ‘80-99
Fund Vintage Multiple
KP II 1980 4.30X
KP III 1982 1.74X
KP IV 1986 1.83X
KP V 1989 4.01X But KP IX invested in Google.
KP VI 1992 3.33X
KP VII 1994 BEST 32.51X Yesterday it was worth $726bn
KP VIII 1996 17.00X
Put that in perspective:
KP IX 1999 WORST 0.40X *
.

* As reported December 2003

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Source: Atlas
Remember !

50% of a
lot is more
than 100%
of nothing!
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Financing new ventures
▪ Personal investment
— Will you risk your own money?
▪ Equity
— Sale of future upside for money today
▪ Debt/Loans
— Must be repaid (generally with interest
and penalties)
▪ Grants and Government Support
— No future promise but defined use
▪ Crowdfunding
— Apples and pears

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Finance Summary
▪ You will need money from different sources
▪ Each source has different requirements: you
need to understand each and tailor your
proposal for each
▪ Timing is everything

Don’t bet the farm

(unless you absolutely have to!)

Page 82
“Final-ish thoughts

Entrepreneurship You
▪ Entrepreneurship is not ▪ This has been fun
easy… ▪ Some of you are lovely
▪ But it can be amazing ▪ Some of you are super-
▪ Big risks, big rewards smart
▪ Not all of you should be ▪ Some of you are really
entrepreneurs going places…
▪ Are YOU one? ▪ Please keep in touch

Presentation Title Page 83

Thank you

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