Start–Up Guide for the Technopreneur: Financial Planning, Decision Making, and Negotiating from Incubation to Exit + Website

Praise for Start–Up Guide for the Technopreneur

"The job of the first–time founder isn′t easy. You wear a dozen hats at once often for the first time. Finance is a crucial part of entrepreneurship, but few founders wear the CFO hat with confidence. This book teaches you to think like a CFO and like an investor. It′s like having an experienced, sympathetic start–up CFO whispering in your ear, explaining the financial implications of every decision you make. If you plan to raise funding, then this book belongs on your bookshelf next to The Art of the Start, The Startup Owner′s Manual, and Venture Deals."
Meng Weng Wong, serial entrepreneur, angel investor, and cofounder of JFDI Asia

"Shelters′s Start–Up Guide for the Technopreneur is a refreshing and realistic approach to start–up finance for any non–finance entrepreneur. Easy to understand and chock– full of practical, usable advice."
Cory Brown, VP Product Development, Pronto Marketing

"Attention aspiring entrepreneurs, this one is for you. A must–read, step–by–step guide to master the art of financial planning and fund raising for any start–up that will boost your chances of success exponentially."
Peter Kopitz, cofounder and Managing Director of Zalora, Rocket Internet Thailand

"David has written an excellent guidebook for tech start–up founders to rely on while building and learning how to build their first ventures. His insight into the minds on the financial side of the table is especially useful to any technopreneur. I wish I had a guide like this in my first few start–ups! Still, it holds a great deal of valuable information even for seasoned serial entreprenuers. Few resources, if any, have adequately approached this angle David has done an excellent job of shedding light on the world of financing for geeks!"
Efraim Pettersson Ivener, founder and CEO of eKita (www.ekita.co)

Start–Up Guide for the Technopreneur puts an emphasis on practical application. To that end, this book provides readers with exclusive access to a companion website filled with supplementary materials, allowing you to continue learning in a hands–on fashion long after closing the book.

Preface xiii

Acknowledgments xvii

CHAPTER 1 Finance for Start–Ups 101 1

Fundraising Stages 1

Prefunding Period 2

Seed Funding Stage 3

Series A Funding Stage 3

Series B Funding Stage 5

Risk/Return 5

Types of Funding 7

Private Equity 7

Debt Funding 8

Alternative Types of Funding 9

Public Funding 12

Incubator/Accelerator Programs 13

Capital Structure 13

Intellectual Property 17

Valuation 19

Asset–Based Valuation Models 20

Pro Forma–Based Valuation Models 20

Comparable–Based Valuation Models 21

Strategic–Based Valuation 22

Exit Strategy 23

Summary 24

CHAPTER 2 Know Your Investors 27

KYI #1: Their Primary Objective Is to Make Money 27

KYI #2: There Are Many Types of Investors, Each with Different Expectations and Capabilities 30

Types of Investors 30

Investment Criteria 35

KYI #3: Prospective Investors Are Looking for Success Traits 37

Skin in the Game 38

Innovation 39

Defined Target Market 39

Value Proposition 40

Commercial Viability 41

Risk Mitigation Factors 42

Burn Rates 43

Strength of Management 43

Use of Funds 44

Traction 45

KYI #4: Money Is Not Enough 47

Know the Space 48

Nonfinancial Advantages 49

Alignment of Interests 49

Issues of Control 51

Summary 56

CHAPTER 3 Business Planning from a Strategic Financial Perspective 57

Value of a Business Plan 57

Composition of a Business Plan 59

Executive Summary 60

Defined Problem and Solution 61

Product/Service 63

Value Proposition 63

Marketing Plan 65

Management Team 72

Strategic Partners 74

Operational and Expansion Plan 76

Company Objectives 78

Current Positioning and Traction 80

Risk Factors 81

Financials 84

Exit Strategy 90

Business Plan Customization 91

Marketing Plan 91

Operational and Expansion Plan 92

Company Objectives 92

Financials 93

Exit Strategy 93

Business Plan Rudiments 94

Summary 95

CHAPTER 4 Financial Planning for Maximizing Returns 97

Importance of Having a Financial Plan 98

Assistance in Overall Business Planning 99

Ensuring the Health and Integrity of Capital Structure 101

Determining Sufficient Funding Amounts 101

Securing Funding in a Timely Manner 102

Securing Funds on the Most Favorable Terms 104

Determining Appropriate Responses to New Challenges and Opportunities 104

Instilling Discipline and Maintain Focus 105

Maximizing ROI upon Execution of Exit Strategy 106

Formulating a Financial Strategy 106

Financial Objectives 108

FREE 108

FREE Measurement Tools 109

Financial Plan Composition 120

Rules of Thumb 121

Summary 122

CHAPTER 5 Successful Fundraising 125

Planning Funding Presentations 125

Prospectus Materials 127

Executive Summary 127

Business Plan 127

Funding Proposal 128

Private Placement Memorandum 129

Shareholder Letter 130

Technology Brief 131

Demonstrations 131

Market Trends and Research Report 131

Other Miscellaneous Prospectus Materials 132

Different Types of Presentations 133

Elevator Pitch 134

Lobby (PowerPoint) Pitch 135

Conference Room Pitch (Formal Presentation) 135

Summary 140

CHAPTER 6 Becoming a Formidable Negotiator 143

Prenegotiations 144

Letter of Intent 144

Nondisclosure Agreement 144

KYI Research and Inquiries 145

Leverage 146

Negotiating Capital 149

Due Diligence 149

Due Diligence Checklist 149

Due Diligence Response 149

Actual Negotiations 150

Term Sheet 150

Negotiation Approaches 150

Best Practices and Tactics 151

Points of Negotiation (Terms) 153

Have a Negotiating Plan 168

Concluding Negotiations 174

Successful Conclusion of Negotiations 174

Unsuccessful Conclusion to Negotiations 174

Negotiation Postmortem 175

Summary 175

CHAPTER 7 Establishing an Investment–Grade Organization 179

Corporate Governance 180

Attributes 180

Benefits of Good Corporate Governance 181

Corporate Governance Best Practices 182

Corporate Governance Structures 182

Ethical Behaviors 189

Stakeholder Relations 194

Summary 199

CHAPTER 8 Financial Decision Making for Optimal Performance 201

Financial Decision–Making Process 202

Practicing Sound Corporate Governance 202

Understanding Existing and Potential Decision–Making Dynamics 203

Managing Financial Expectations 206

Financial Decision–Making Structures 208

Establishing Appropriate Decision–Making Bodies and Procedures 209

Allocating Decision–Making Authority and Responsibilities 212

Placing Individual Decision Makers on Appropriate Decision–Making Bodies 216

Financial Decision Making in Practice 219

Strategic Financial Planning/Fundraising 219

Budgeting 221

Operational (Day–to–Day) Financial Decision Making 222

Financial Dealings with External Parties 224

Exiting 228

Summary 232

Afterword 235

APPENDIX A Sample Financial Plan 237

APPENDIX B Sample Funding Proposal 241

APPENDIX C Dictums of Entrepreneurial Finance 245

Glossary 251

About the Author 271

About the Website 273

Index 275

DAVID SHELTERS provides investment banking, business brokerage, and financial advisement services through his company, Karon Business Consulting. He is also an active participant in the local tech entrepreneurial scene, presenting at numerous BarCamps and other tech conferences. Shelters currently mentors several local software start–ups and is the in–house financial mentor at Hubba, a co–working space in the heart of Bangkok. He has over fifteen years of entrepreneurial experience as a founder, cofounder, or financial advisor to numerous tech start–ups in both the United States and Asia. Shelters has a BA in history and political science from the State University of New York at Albany, an MS in international affairs from Florida State University, and has completed the coursework for a master′s in international business studies at Georgia State University. David regularly blogs at www.financeforgeeks.com.

"The book should be an eye–opener for aspiring and new technology entrepreneurs and can help you navigate the dangerous waters known as venture capital. Even better, Shelters has over fifteen years of entrepreneurial experience as a founder, co–founder as well as an advisor to numerous United States–based and Asia–based startups." ––YoungUpstarts.com