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The Start-Up Capital Formation Process

Adapted from Saratoga Venture Financing, 1999, and "High Tech Start Up", by Nesheim, J.L., 2000

Idea
Kitchen table
Founders' Commitment
Pullout from Employer
Business Plan Creation
Filling Management Team
Raising Seed Capital
Closing Capital & Incorporation

Finding a Home
Start-Up
Secondary Capital Rounds
Launch First Product
Raise Working Capital
Initial Public Offering (IPO)
Overall

Key Stages	Main Focus Activity	Elapsed Time Required	Typical Time Schedule Cumulative	Typical Participants	Help Needed	Major Costs	Main Risks	Results: ROI & Output
Idea	Secure a vision	Months to years	__	Yourself	Creativity Reality check	Own time	Lacks commercial realism	Inspiration & vision Personal profile
Kitchen Table	Solidify a dream	2-6 Months	Month 6	Friends & founders	Confidentiality Business judgment Technology Strategic thinking	Time of several people	Secrets leak out	Crisp view of risk-reward tradeoffs
Founders' Commitment	Get firm commitments from key people	1-2 Months	Month 7	Founders only	Commitment of 1 to 3 founders	Nerves to commit	Cold feet of founders	Yes or no from founder candidates
Pullout from Employer	Leave current employer: "stay clean"	1 Month	Month 8	Founder Lawyer	Good legal counsel: intellectual property and labor law	Nerves to start to live on own savings	Counteroffers or threat of legal action by former employers	Clean, legal separation from former employers
Business Plan Creation	Write fresh business plan	2-6 Months	Month 14	Founders Consultants Lawyer CPA Firm Patent lawyer	Wise business judgment, especially marketing and financing Sustainable ("unfair") advantage	Time Personal computer Business support software Copying & printing equipment	Plan is not worthy of being funded Plan lacks distinctive competence	Inspired document Sustainable advantage Clever strategy
Filling Management Team	Attract vital talent	2-9 Months	Month 18	Friends Consultants Media CPA Firm Recruiters	Candidates Compensation plan Wise people selection	Lots of time for interviewing	Compromise No money, no hire Leaks of secrets Distractions from business plan	Recruitment of top notch managers
Raising Seed Capital	Get $ cash commitment from lead venture investor	2-12 Months	Month 27	Business angels Venture capitalists Consultants Founders	Understanding venture investing process Search for investors Coaching on venture presentation, negotiation, and structuring the deal Judgment on pricing and valuation	Time Patience Copies Deliveries Telecom Travel	No lead venture capitalist Get shopworn	Firm commitments of seed venture capitalists
Closing Capital & Incorporation	Get cash into bank account	1-2 Months	Month 28	Lawyer Venture capitalists Founders Commercial banker	Good negotiating tactics Writing an agreement (see sample agreement) Financial counsel Legal advice	Legal fees	No cash, so must start over	$ Cash in the bank
Finding a Home	Rent working quarters	1 Month	Month 29	CEO Real estate broker	Real estate broker Facilities consultant	Time Rental deposits	Bad choice: size locations, $ per month, wrong length of lease	Place to work for a year
Start-Up	Hire people Get started building first product	6-18 Month	Month 30	Board of directors Investors Employees Suppliers Strategic partners	Start-up experience	Burn rate: $ per month	Short of good people Product completion slips Competition starts too soon	Live company in action
Secondary Capital Rounds	Raise more $ cash Leverage expensive equity	2-6 Month each round	In Years 2-4 after Seed Round closes	Venture capitalists Corporate investors CEO Equipment lessors	Venture capital leads Equipment lessors	Time of top management	Lack of management focus Run out of cash, miss payroll Bankruptcy	Sufficient $ cash in bank Price per round higher than last round
Launch First Product	Get customers	1-2 Years from start on work	24-36 Months	Customers Whole company PR firm	Strong marketing skills Positioning of company and first product Cash reserves Quality of execution of plan	Burn rate: $ per month	Lack of focus Product slips Poor market acceptance Big competitor counter-punch	Finish first product Begin first sales to customers
Raise Working Capital	Leverage equity	3 Month for each banking or leasing round	After first quarter of profitability	CEO CFO Commercial banker	Profitability Savvy banking and leasing contacts	Time of CFO and CEO	Have to use precious equity instead of cheaper loans	Funding for growth in working capital needs
Initial Public Offering (IPO)	Gets shares liquid Cash in some chips Celebrate	4 Months including road show	Goal: IPO ready at end of Year 3	Investment banker Securities lawyers Stock exchange analysts Industry media General public	Timing Pricing of shares	Underwriter's fees Legal fees CPA fees Travel costs Road show slides	Bad price per share Market window closes Business sours	Funding capitalists: ×5 to ×10 investment Founders: $ millions each Employees: × years of wages Image as successful company
Overall	Create and grow a viable, exciting, successful high-tech company	4-8 Years from start to IPO	Aim at 5 years start to finish	Many risk takers	Lots of effort Several big breaks	Founders' time, nerves, and money $ 3-50 million of investors' capital	Bankruptcy Company survives but is too small, not able to get public	Viable company Great place to work Created $ millions of wealth Growing, high ROI business

See also:

Problem - Solution - Action (PAS) Business Development Coach