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Entrepreneurship: A Real-World Approach, 1st Edition

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Chapter 8: Financing Your Business

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Chapter 8: Financing Your Business

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Chapter 8 questions 1. CraigCieslaandMicahYairi eventually turned to friends and family for funding. Should they have done that first? What are the risks with raising money from such individuals? 2. Whatweretherisksandbenefits of waiting until they had been granted patents to ask for customer feedback? 3. thepartnersgaveupequity in their company—part of the ownership—to get help they needed. Was this a good idea? Why, or why not? 4. WhydoyouthinkCieslaandYairi stuck it out, even with such bad luck? What would it take for you to be so persistent? FINaNCING YOUr BUSINeSS 195 the new strategy was paying off. In the first week of March 2009, the guys got a “term sheet”—an offer—from an angel invest- ment group excited about the technology. they would get the money they needed to go to the next level. But once again, timing wasn’t on their side. On March 6, the Dow Jones plummeted. the stock market had dropped more than 50 percent in less than 18 months, with no bottom in sight. private investors overwhelmingly get their investment funds from their stock portfolios, so Ciesla and Yairi’s investors vanished overnight. It took a few weeks to figure out where to go next. “We realized this is something we hugely believed in. We needed more money to protect our intellectual property, to engage with prospective customers, to get a design firm on board to create an improved prototype,” said Ciesla. at that point, they turned to friends and family. they also brought on board Nate Saal, a friend and serial entrepreneur, who had founded and sold two prior companies. In early 2010, they launched an angel investment round and landed their first significant seed investor. the founders now went full-time with tactus. It was risky to give up full-time jobs, so they told themselves: “We have to raise this amount of money by this date, or we’re done.” With an angel round and several patents in place, they started talking to prospective customers. Without getting customer feedback, receiving Series a funding (the first round from VCs) would have been very difficult. During the bootstrapping phase, the partners put less than $100,000 into their fledgling business. they raised about $200,000 in the friends- and-family round. In the angel round, they raised around $1 million. When they finally got venture funding in 2011, they raised $6 million in their first round. Stage of company, market focus, size of investment, and level of risk all need to be aligned to find the right VC, they learned. “We spoke with doz- ens and dozens of venture capitalists. We heard ‘no’ a lot,” said Yairi. “We’re a hardware company, and VCs have shifted to a more conservative investing philosophy—investing in software, which can get great returns with less capital outlay. they want established revenues.” “there’s tension, figuring out how much to postpone the next phase of raising money,” said Saal. “the longer you can stretch funds in your existing stage, the more value you can build, and the more equity you’ll keep in the next funding round. how long do you bootstrap? Do you go to friends and family, find an angel investor? Will you do that big round with a VC? every entity needs to think about the right transition points—and how to maxi- mize value without putting the company at risk.” “raising funds took longer and required more effort than we expected. It’s basically nonstop. It’s a constant part of building a company,” said founder Ciesla.n Page Go to the specified printed page number Zoom Print Activate the following button to retrieve the URL to cite or link to this pageCite/Link Cancel