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328 PART 3 I MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM

encouraging students and others to "get out of the building" and talk to as many
potential customers as possible while developing a business idea. Brooks and Chen
followed Blank's advice. They interacted with over 200 girls in their target age range
(ages 6-12) to see what worked best. They also asked young girls to experiment with
early prototypes of Roominate at local events and the Children's Creativity Museum
in San Francisco. They took time to talk to parents and educators and did a lot of
prototyping. Brooks and Chen followed Blank's class with two stints at StartX, which
is Stanford's start-up accelerator. Through this program they were put in touch with
mentors and subject matter experts, such as attorneys, who helped them develop the
business side of Roominate.
The next step was raising funds. Money was needed for two reasons. First, the
entrepreneurs needed financial capital so they could scale production through large-
quantity orders of wood, electronics, and assembly costs. At this point, Brooks and Chen
were assembling Roominate kits by hand, which was unsustainable. Second, because
Roominate was designed to be played with by children under the age of 14, money was
needed to fulfill the tests required to certify compliance with toy safety standards.
Brooks and Chen decided to launch a Kickstarter campaign. The campaign was
launched in mid-2012 with a $25,000 goal. Pause for a moment and go to https://www.
kickstarter.com and type "Roominate" into the search box. Although the Roominate
campaign is long since over, Kickstarter archives all campaigns indefinitely. You'll be
able to view the video pitch, see what the Roominate toy looks like, and examine the
specifics of the campaign. The $25,000 goal was easily exceeded, with $85,964 raised
from 1,154 backers. The successful Kickstarler campaign was a big plus for Brooks
and Chen. Not only did it help fund their initial production run, but the overwhelmingly
positive response was a big confidence-builder.
Since the Kickstarler campaign concluded in mid-2012, Roominate has pro-
gressed. !n defining the first three years of Roominate, Brooks characterizes year one
(2012) as developing the product and raising money via Kickstarter, year two (2013) as
finding customers and slowly building sales, and year three (2014) as finding retailers
and ramping up. ln 2013 and 2014, Brooksand Chen raised approximately$1 million
from angel investors to fund the buildup. Several things happened along the way that
demonstrated momentum, which was important in securing the angel investments.
First, Roominate won several toy awards, which provided external validation for the
efficacy of the idea and the product. Along with that, it attracted positive PR, including
an appearance by Brooks and Chen on the Today Show in 2013. Second, sales started
to build in 2013, primarily through specialty stores, the Roominate website, and via
Amazon.com. Third, mainstream retailers, including Toys"R"Us and Walmart, started
showing interest.
The next logical step for Roominate, in terms of funding, would be a Series A round
of venture capital. Roominate's ability to get to that point will depend on whether it dem-
onstrates broad product acceptance and is seen as a potential high-growth business.

n this chapter, we focus on the process of getting financing or funding. We

begin by discussing why firms raise capital. We follow this with a description
of personal financing and the importance of personal funds, capital from
friends and family, and bootstrapping in the early life of a firm. We then turn
to the different forms of equity, debt, and creative financing available to entre-
preneurial ventures. We also emphasize the importance of preparing to secure
these types of financing.
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330 pART 3 II
MovrNG FRoM AN TDEATo AN ENTREpRENEURTAL FIRM

Being an entrepreneur
in the biotech industry
requires a lot of
determination and drive.
The path to getting a
new drug approved takes
up to 10 years. This
"tortoise-like pace" of
new product development
takes substantial up-front
investment.

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To prevent their flrms from running out of money, most entrepreneurs

need investment capital or a line of credit from a bank to cover cash flow short-
falls until their firms can begin making money. It is usually difficult for a new
firm to get a line of credit from a bank (for reasons discussed later). Because
of this, new ventures often look for investment capital, bootstrap their opera-
tions, or try to arrange some type of creative financing.

Capital lnvestments
Firms often need to raise money early on to fund capital investments. Although it
may be possible for the venture's founders to fund its initial activities, it becomes
increasingly difficult for them to do so when it comes to buying property, con-
stmcting buildings, purchasing equipment, or investing in other capital projects.
Many entrepreneurial ventures are able to delay or avoid these types of expendi-
tures by leasing space or co-opting the resources of alliance partners. However, at
some point in its growth cycle, the firm's needs may become specialized enough
that it makes sense to purchase capital assets rather than rent or lease them.

Lengthy Product Development Cycles

In some industries, firms need to raise money to pay the up-front costs of
lengthy product development cycles. For example, it typically takes between
one and a half and two years to develop an electronic game. In the biotech
industry, the path to commercial licensing takes approximately eight years.4
This tortoise-like pace of product development requires substantial up-front
investment before the anticipated payoff is realized. While the biotech industry
is an extreme example, lengthy product development cycles are the realities
ventures face in many industries.
To meet these challenges, and others described in the chapter and
throughout the book, many entrepreneurs like to partner with others to launch
their ventures. A fertile place for young entrepreneurs to find potential busi-
ness partners is to attend a Startup Weekend. A description of what Startup
Weekend is and why it represents a fertile place to find a business partner is
describe in the "Partnerin$ for Success" feature nearby.
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 I
332 pART 3 I rrltovrxe FRoM AN IDEA To AN ENTREpRENEURTAL FIRM

Sources of Personal Financing

LE.ERNTNG OBJECTTVE Tlrpically, the seed money that gets a company off the ground comes from the
3. ldentify and describe the founders' own pockets. There are three categories of sources of money in this
three sources of personal area: personal funds, friends and family, and bootstrapping. These sources are
financing available to depicted in Figure lO.2 and are explained next.
entrepreneurs.

Personal Funds
The vast majority of founders contribute personal funds along with sweat
equity to their ventures.5 In fact, according to data complied by Fundable,
57 percent of start-ups are funded by the entreprene_urs' personal savings
and credit. The average amount invested is $48,000.6 Sweat equity, which
represents the value of the time and effort that a founder puts into a new
venture, is also important. Because many founders do not have a substan-
tial amount of cash to put into their ventures, it is often the sweat equity
that makes the most difference.

Friends and Family

Friends and family are the second source of funds for many new ventures.
According to the s€rme Fundable data, 38 percent of start-ups are funded by
friends and family, with an average investment of $23,000.7 This type of con-
tribution often comes in the form of loans or investments, but can also involve
outright gifts, foregone or delayed compensation (if a friend or family member
works for the new venture), or reduced or free rent. For example, Cisco Systems,
the giant producer of Internet routers and switches, started in the house of one
of its co-founder's parents.
There are three rules of thumb that entrepreneurs should follow when
asking friends and family members for money. First, the request should be
presented in a businesslike ma.nner, just like one would deal with a banker or
investor. The potential of the business along with the risks involved should be
carefully and fully described. Second, if the help the entrepreneur receives is
in the form of a loan, a promissory note should be prepared, with a repayment
schedule, and the note should be signed by both parties. Stipulating the terms
of the loan in writing reduces the potential of a misunderstanding and protects
both the entrepreneur and the friend or family member providing the funding.
Third, financial help should be requested only from those who are in a legiti-
mate position to offer assistance. It's not a good idea to ask certain friends or
family members, regardless of how much they may have expressed a willing-
ness to help, for assistance if losing the money would cripple them financially.
Entrepreneurs who are unable to repay a loan to a friend or family member
risk not only damaging their business relationship with them, but their per-
sonal relationship as well.8

ffiffiffiWffiffi Kffi-ffi
Sources of Personal
Financing Finding ways to avoid
lnvolves both financial i Often comes in the form
resources and sweat i of loans or investments, the need for external
but can also involve financing through
represents the value of outright gifts, foregone creativity, i ngen u ity,
the time and effort that a i or delayed thrift iness, cost-cutting,
founder puts into a firm. i compensation, or obtaining grants, or any
reduced or free rent. other means.
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334 3 I *ou,*o FR.M AN To AN ENTRE'RENEURTAL F'RM
'ART 'DEA

located, rather than working from home, may be worth it if it provides entre-
preneurs access to a network of people who can be relied on to provide social
support and business advice.l I

Preparing to Raise Debt or Equity

Financing
LEARNING OBJECTIVE Once a start-up's financial needs exceed what personal funds, friends and fam-
4. ldentify and explain the ily, and bootstrapping can provide, debt and equity are the two most common
three steps involved in sources of funds. The most important thing an entrepreneur must do at this
properly preparing to raise point is determine precisely what the company needs and the most appropriate
debt or equity financing. source to use to obtain those funds. A carefully planned approach to raising
money increases a firm's chance of success and can save an entrepreneur con-
siderable time.
The steps involved in properly preparing to raise debt or equity financing
are shown in Figure 10.3 and are discussed next.

S*mp H Determine precisely how much money the company needs.

Constructing and analyzing documented cash flow statements and
projections for needed capital expenditures are actions taken to
complete this step. This information should already be in the busi-
ness plan, as described in Chapter 6. Knowing exactly how much
money to ask for is important for at least two reasons. First, a com-
pany doesn't want to get caught short, yet it doesn't want to pay for
capital it doesn't need. Second, entrepreneurs talking to a potential
lender or investor make a poor impression when they appear uncer-
tain about the amount of money required to support their venture.
ffi€mp ffi Determine the most appropriate tpe of financing or funding.
Equity and debt flnancing are the two most common alternatives
for raising money. Equity financin$ (or funding) means exchanging
partial ownership of a firm, usually in the form of stock, in return
for funding. Angel investors, private placement, venture capital, and
initial public offerings are the most common sources of equity fund- *1

ing (we discuss all these sources later in the chapter). Equity funding
is not a loan-the money that is received is not paid back. Instead,
equity investors become partial owners of the firm. Some equity in-
vestors invest "for the long haul" and are content to receive a return
on their investment through dividend payments on their stock. More
commonly, equity investors have a three- to five-year investment
hortzon and expect to get their money back, along w"ith a substan-
tial capital gain, through the sale of their stock. The stock is typi-
cally sold following a liquidity event, which is an occurrence that
converts some or all of a company's stock into cash. The three most
common liquidity events for a new venture are when it goes public,
finds a buyer, or merges with another comparry.
mi
en
ffiffiffiffiffiffi Kffi-ffi of
Preparation for Debt or cif
Equity Financing wit
Determine Determine the most Develop a strategy in
precisely how appropriate :
for engaging
much money type of financing potential investors
is needed. or funding. or bankers. or
pr(
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 I
I
336 PART 3 I MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM

TJIffiLE [0"4 Matching an EntrepreneurialVenture's Gharacteristics

with the Appropriate form of Financing or Funding

Characteristics of the Venture Appropriate Source of Financing or Funding

The business has high risk with Personal funds, friends, family, and other forms
an uncertain return: of bootstrapping

. Weak cash flow

High leverage

Low to moderate growth

Unproven management

The business has low risk with Debt financing

a more predictable return:

Strong cash flow

Low leverage

Audited financials

Good management

Healthy balance sheet

The business offers a high return: Equity

Unique business idea

High growth

Niche market

Proven management

or funding it is likely to qualiSz for, as depicted in Table LO,2. Then, a list of

potential bankers or investors should be compiled. If venture capital funding
is felt to be appropriate, for example, a little legwork can go a long way in pin-
pointing likely investors. A new venture should identiflr the venture funds that
are investing money in the industry in which it intends to compete and target
those firms first. To do this, look to the venture capital firms'websites. These
reveal the industries in which the firms have an interest. Sometimes, these
sites also provide a list of the companies the firm has funded. For an example,
access the website of Sequoia Capital (www.sequoiacap.com), a well-known
venture capital firm.
A cardinal rule for approaching a banker or an investor is to get a personal
introduction. Bankers and investors receive many business plans, and most
of them end up in what often becomes an unread stack of paper in a corner in
their offices. To have your business plan noticed, find someone who knows the
banker or the investor and ask for an introduction.
The third step in engaging potential investors or bankers is to be prepared
to provide the investor or banker a completed business plan and make a pre-
sentation of the plan if requested. We looked at how to present a business plan
in Chapter 6. The presentation should be as polished as possible and should
demonstrate why the new venture represents an attractive endeavor for the
Iender or investor.
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 I
I
338 pART 3 I uovrrue FRoM AN IDEA To AN ENTREpRENEURTAL FIRM

Retail (7 percent), and Financial Services/Business Products and Serrrices

(7 percent). The average equity received was 12.5 percent with deal valuation
at $2.8 million. According to the Center for Venture Research at the University
of New Hampshire, in 2013,2L.6 percent of start-ups that were able to get in
front of angel investors received investments. This is a relatively high percent-
age. Historically, the number has been closer to 15 percent.2l
Business angels are valuable because of their willingness to make rela-
tively small investments. This gives access to equity funding to a start-up
that needs just $75,OOO rather than the $1 million minimum investment
that most venture capitalists require. Many angels are also motivated by
more than financial returns; they enjoy the process of mentoring a new
firm. Most angels remain fairly anonymous and are matched up with en-
trepreneurs through referrals. To find a business angel investor, an entre-
preneur should discreetly work a network of acquaintances to see if anyone
can make an appropriate introduction. An advantage that college students
have in regard to finding business angels is that many angels judge col-
lege- or university-sponsored business plan or business model competitions.
The number of organized groups of angels continues to grow. Tlpically,
each group consists of 1O to 150 angel investors in a local area that meet
regularly to listen to business plan presentations. An example of an an-
gel group is Ann Arbor Angels (www.annarborangels.org) located in Ann
Arbor, Michigan. The group invests in early-stage technolo$/ companies in
Southeast Michigan. Similar to most angel groups, a small committee of
members screens investment applications and determines the start-ups that
will pitch to the larger group. The group itself does not make investments.
Instead, investment decisions are made independently by each member, of-
ten in partnership with other members.22
According to Fundable, angel investors invest in approximately 61,900 com-
panies per year, which is 16 times the number of investments made by venture
capitalists.2s

Venture Capital
Venture capital is money that is invested by venture capital firms in start-ups
and small businesses vrith exceptional growth potential.2a There are about 875
venture capital firms in existence, which have approximately $tgS billion un-
der management. In 2013, venture capital firms invested $29.6 billion in just
over 4,041 deals.25 The peak year for venture capital investing was 2OO0, when
$gS.O biltion was invested at the height of the e-commerce craze. A distinct dif-
ference between angel investors and venture capital firms is that angels tend
to invest earlier in the life of a company, whereas venture capitalists come in
later. The majority of venture capital money goes to follow-on funding for busi-
nesses that were originally funded by angel investors, government programs
(which are discussed later in the chapter), or by some other means.
Venture capital firms are limited partnerships of money managers who
raise money in "funds" to invest in start-ups and growing firms. The funds,
or pools of money, are raised from high-net-worth individuals, pension plans,
university endowments, foreign investors, and similar sources. In 2013, the
average fund size was $f tO.S mi11ion.26 The investors who invest in venture
capital funds are called limited partners. The venture capitalists, who ma.n-
age the fund, are called general partners. The venture capitalists who manage
the fund receive an annual management fee in addition to 20 to 25 percent of
the profits earned by the fund. The percentage of the profits the venture capi-
talists get is called the carrSr. So if a venture capital flrm raised a $f OO million
fund and the fund grew to $500 million, a 20 percent carry means that the
flrm would get, after repaying the original $tOO million, 20 percent of the $4OO
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I
 I
340 PART 3 I MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM

wffiffiil-ffi *S.{* Stages (or Rounds) ofVenture Capital Funding

Stage or Round Purpose of the Funding

Seed funding lnvestment made very early in a venture's life to fund the development of a prototype and
feasibility analysis.

Start-up funding lnvestment made to firms exhibiting few if any commercial sales but in which product
development and market research are reasonably complete. Management is in place, and
the firm has its business model. Funding is needed to start production.
First-stage funding Funding that occurs when the firm has started commercial production and sales but requires
financing to ramp up its production capacity.

Second-stage funding Funding that occurs when a firm is successfully selling a product but needs to expand both its
capacity and its markets.
Mezzanine financing lnvestment made in a firm to provide for further expansion or to bridge its financing needs
before launching an IPO or before a buyout.
Buyout funding Funding provided to help one company acquire another.

to ensure that they are a good fit. An entrepreneur should ask the following
questions and scrutinize the answers to them before accepting funding from a
venture capital firm:

t Do the venture capitalists have experience in our industry?

ffi Do they take a highly active or passive management role?
ffi Are the personalities on both sides of the table compatible?
ffi Does the firm have deep enough pockets or sufficient contacts within the
venture capital industry to provide follow-on rounds of financing?
ffi Is the firm negotiating in good faith in regard to the percentage of our firm
they want in exchange for their investment?

Along with traditional venture capital, there is also corporate venture

capital. This type of capital is similar to traditional venture capital except that
the money comes from corporations that invest in start-ups related to their areas
of interest. Corporate venture capital fi.rms provide an estimated 1O.5 percent
of the venture capital invested by all venture groups. Examples of corporate
venture capital firms include Intel Capital, Google Ventures, and Time Warner
Investments,
Just because a firm receives venture capital funding doesn't mean it's a
sure success. In fact, venture-funded firms are under extreme pressure to per-
form to meet investors' expectations. A firm that received venture capital fund-
ing, DrawQuest, and regrettably failed is profiled in the "What Went Wrong?"
feature. The feature includes a heartfelt statement by its founder, Chris Poole,
which provides unique insight into how failing after taking money from ven-
ture capitalists feels.

lnitial Public Offering

Another source of equity funding is to sell stock to the public by staging an
initial public offering (IPO). An IPO is the first sale of stock by a firm to
the public. Any later public issuance of shares is referred to as a secondary
market offering. When a company goes public, its stock is typically traded on
one of the major stock exchanges. Most entrepreneurial firms that go public

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I
342 pART g lI HaOUTO FROM AN IDEATO AN ENTREPRENEURIAL FIRM

4. The opening features for Chapters 6, 7 , and I feature at http://blog.drawquest.com/, accessed on September 14, 2014;

student start-ups that have launched smartphone J. Constine, "With Tiaction but Out of Cash, 4chan Founder Kills
off canvas/DrawQuest, " Techcrunch, available at http://techcrunch.
apps. What lessons can these start-ups learn from h/, posted on an ary
com/ 201 4 / A1 / 21 /when-g oods- not-g ood-eno ug J u
DrawQuest's exPerience? 21,2014, accessed on September 15,2014;E. Hamburger, "Achan
creator chris Poole Draws a Future Where Anyone can Make Afi,"
Sources; C. Poole, "Today My Startup Failed," Chris Hates Writing
The Verge, avai lab le at http ://www.theverge. com/ 2A1 3 / 2 / 8/ 39 421 1 0 /
blog, avai lable at http ://chri shateswriti n g. com/posV7 4083032842 /lo-
drawquest-for-ipad-chris-poole-moot, posted on February 8, 2013,
day-my-startup-failed, accessed on September 1 5, 201 4; DrawQuest
accessed on September 14,2014.
blog, "A Recent Security Breach and the End of DrawQuest," available

trade on the NASDAg, which is weighted heavily toward technolo$, biotech,

and smarr-cor"p"ny Jto"ros.3o An p6 is an important milestone for a firm.31
Tlrpically, a firm is not able to go public until it has demonstrated that it is vi-
able and has a bright future.
Firms decide to go public for several reasons. First, it is a way to raise
equity capital to fund current and future operations. Second, an IPO raises
a firm's public proflle, making it easier to attract high-quality customers, alli-
ance partners, and employees. Third, an IPO is a liquidity event that provides
a mechanism for the company's stockholders, including its investors, to cash
out their investments. Finally, by going public, a flrm creates another form
of currency that can be used to grow the company. It is not uncommon for
one 1rm to buy another company by payrng for it with stock rather than with
cash.32 The stock comes from "authotized but not yet issued stock," which in
essence means that the firm issues new shares of stock to make the purchase.
Examples of well-known flrms that have gone public in recent years include
Faceb-ook, Tpitter, GrubHub, Alibaba, and King Digital Entertainment (maker
of the popular mobile game Candy Crush Saga).
AtLough there .re mary advantages to going public, it is a complicated
and expersir. process and subjects firms to substantial costs related to SEC
reporting requiiements. Many of the most costly requirements were initiated by
tfr! SarUanes-Oxley Act of 2OO2. The Sarbanes-Oxley Act is a federal law that
was passed in response to corporate accounting scandals involving prominent
corporations, such as Enron and WorldCom. This wide-ranging act established
a number of new or enhanced reporting standards for public corporations.
The first step in initiating a public offering is for a firm to hire an invest-
ment bank. An investment bank is an institution that acts as an underwriter
or agent for a firm issuing securities.ss The investment bank acts as the firm's
advocate and adviser and walks it through the process of going public. The
most important issues the firm and its investment bank must agree on are the
amountbf capital needed by the flrm, the type of stock to be issued, the price
of the stock when it goes public (e.g., $20 per share), and the cost to the firm
to issue the securities.
There are a number of hoops the investment bank must jump through to
assure the Securities and Exchange Commission (SEC) that the offer is legiti-
mate. During the time the SEC is investigating the potential offering, the in-
vestment bank issues a preliminary prospectus that describes the offering to
the general public. The preliminary prospectus is also called the "red herring."
After the SEC has approved the offering, the investment bank issues the final
pfospectus, which sets a date and issuing price for the offering.
In addition to getting the offering approved, the investment bank is respon-
sible for drumming up support for the offering. As part of this process, the in-
vestment bank typically takes the top management team of the firm wanting to
go public on a road show, which is a whirlwind tour that consists of meetings
in key cities, where the firm presents its business plan to groups of investors.34
Untif December 1, 2OO5, the presentations made during these road shows
were seen only by the investors physically present in the various cities; an SEC
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cash flow, low leverage, audited financials, good ma"nagement, and a healthy
balance sheet. Although many new ventures have good management, few have
the other characteristics, at least initially. But banks are an important source
of credit for smali businesses later in their life cycles.
There are two reasons that banks have historically been reluctant to lend
money to start-ups. First, as mentioned previously, banks are risk averse. In
addition, banks frequently have internal controls and regulatory restrictions
prohibiting them from making high-risk loans. So when an entrepreneur ap-
proaches a banker with a request for a $25O,OOO loan and the only collateral
he or she has to offer is the recognition of a problem that needs to be solved,
a plan to solve it, and perhaps some intellectual propert5r, there is usually no
practical uray for the bank to help. Banks typically have standards that $uide
their lending, such as minimum debt-to-equity ratios that work against start-
up entrepreneurs.
The second reason banks have historically been reluctant to lend money to
start-ups is that lending to small firms is not as profitable as lending to large
firms, which have been the staple clients of commercial banks. If an entrepre-
neur approaches a banker \vith a request for a $25,OOO loan, it may simply not
be worth the banker's time to complete the due diligence necessary to deter-
mine the entrepreneur's risk profile. Considerable time is required to digest a
business plan and investigate the merits of a new firm. Research shows that
a firm's size is an important factor in determining its access to debt capital.3T
The $25,OOO loan may be seen as both high risk and marginally profitable
(based on the amount of time it would take to do the due diligence involved),
making it doubly uninviting for a commercial bank.38
Despite these historical precedents, some banks are starting to engage
start-up entrepreneurs-although the jury is still out regarding how signifi-
cant these lenders will become. When it comes to start-ups, some banks are
rethinking their lending standards and are beginning to focus on cash flow
and the strength of the management team rather than on collateral and the
strength of the balance sheet. Entrepreneurs should follow developments in
this area closely.

SBA Guaranteed Loans

Approximately 5O percent of the 9,OOO banks in the United States participate
in the SBA Guaranteed Loan Program. The most notable SBA program
available to small businesses is the 7(A) Loan Guaranty Program. This pro-
gram accounts for 90 percent of the SBA's loan activity. The program operates
through private-sector lenders who provide loans that are guaranteed by the
SBA. The loans are for small businesses that are unable to secure financing
on reasonable terms through normal lending channels. The SBA does not cur-
rently have funding for direct loans, other than a program to fund direct loans
for businesses in geographic areas that are hit by natural disasters.
Almost all small businesses are eligible to apply for an SBA guaranteed
loan. The SBA can guarantee as much as 75 percent (debt to equity) on loans
up to $5 million. For loans of $15O,OOO or under, the guaranteed amount is 85
percent. Guaranteed loan funds can be used for almost any legitimate busi-
ness pu{pose. The maximum lengths of the loans are seven years for working
capital, 10 years for equipment (or useful life of equipment), and 25 years for
real estate purchase. To obtain an SBA guaranteed loan, an application must
meet the requirements of both the SBA and the lender. Tlrpically, individuals
must pledge all of their assets to secure the loan. Interest rates are negotiated
between the borrower and the lender but are subject to SBA maximums.3e
Although SBA guaranteed loans are utilized more heavily by existing small
businesses than start-ups, they should not be dismissed as a possible source
of funding. There is a general misconception that the SBA is a "lender of last
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346 3 Lou,*n FR.M AN .DEA To AN ENTRE'RENEURTAL F,RM
'ART

and RocketHub. These sites allow entrepreneurs to create a profile, list their
fund-raising goals, and provide an explanation (typically via video) of how the
funds will be used. Individuals then pledge money in exchange for some type
of amenity, like being one of the first lOO people to obtain the company's prod-
uct. The site takes a small percentage of the funds raised by the individuals for
their service. Once a novelt5r, rewards-based crowdfunding has become a major
source of start-up funds. TWo of the student start-ups profiled in this book,
LuminAid (Chapter 3) and Roominate (in this chapter), raised money via crowd-
funding. ln 2014, COOLEST, the subject of the You Be the VC Ll.2 feature,
raised $f S.Z million from 62,642 donors on Kickstarter, which at the time'was
the all-time crowdfunding record. There are currently over 45O crowdfunding
platforms. Some, such as Kickstarter, help fund a wide range of creative projects
and business start-ups. Others, such as Giveforward (subject of the You be the
VC 7.1 feature), are n€rrrow in scope. Giveforward utilizes crowdfunding to help
people raise money for medical expenses. If you're not familiar with how crowd-
funding works, go to www.kickstarter.com and type 'COOLEST Cooler" into the
search engine. Although the campaign is over, Kickstarter leaves the campaign
proflles up on its site indefinitely. Looking at COOLEST's campaign \ dll provide
you a good sense of how rewards-based crowdfunding campaigns work.
The second type of crowdfunding is equity-based crowdfunding. Equity-
based crowdfunding helps businesses raise money by tapping individuals
who provide funding in exchange for equity in the business. Three of the more
popular equity-based crowdfunding sites are FundersClub, Crowdfunder.com,
and Circle Up. The catalyst for the advent of equity-based crowdfunding was
the JOBS Act, which was passed in April of 2012. The act is still going into
effect, so the full set of rules and regulations that will govern equity-based
crowdfunding sites are unknowrl. As of the time this chapter was written
(September 2014), it appears that equity-based crowdfunding will be confined
to entrepreneurs raising money from accredited investors. An accredlted in-
vestor is a person who is permitted to invest in higher-risk investments such
as business start-ups. In the United States, a person must have a net worth of
at least $ t million (not including the value of their house) or have an income of
at least $2OO,OOO each year for the past two years (or $3O0,0OO together with
their spouse if married) and have the expectation to make the same amount in
the current year. Still, there is substantial enthusiasm surrounding the poten-
tial for equity-based crowdfunding in the future.

Leasing
A lease is a written agreement in which the owner of a piece of property al-
lows an individual or business to use the property for a specified period of time
in exchange for payments. The major advantage of leasing is that it enables
a compa.ny to acquire the use of assets with very little or no down pa5rment.
Leases for facilities and leases for equipment are the two most common types
of leases that entrepreneurial ventures undertake.aa For example, many new
businesses lease computers from Dell Inc. or other PC manufacturers. The
advantage for the new business is that it can gain access to the computers it
needs with very little money invested up-front.
There are many different players in the leasing business. Some vendors,
such as Dell, lease directly to businesses. As with banks, the vendors look for
lease clients with good credit backgrounds and the ability to make the lease
payments. There are also venture-leasing fir:nrs that act as brokers, bring-
ing the parties involved in a lease together. These firms are acquainted with
the producers of specialized equipment and match these producers with new
ventures that are in need of the equipment. One of the responsibilities of these
firms is conducting due diligence to make sure that the new ventures involved
will be able to keep up with their lease payments.
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I
348 ,ART 3 I n or,*u FR.M AN To AN ENTRE'RENEURTAL F'RM
'DEA

trffiffi$-ffi g&"ffi Srnall Business Innovation Research: Three-Phase Program

Phase Purpose of Phase Duration Funding Available (Varies by Agency)

Phase I To demonstrate the proposed innovation's Upto6 Up to $t S0,000

technical feasibility. months

Phase Il Available to successful Phase I companies. Upto2 Up to $1 million

The purpose of a Phase ll grant is to years
develop and test a prototype of the
innovation validated in Phase l.*

Phase lll Period in which Phase ll innovations move Open No SBIR funding available; however, federal
from the research and development lab to agencies may award non-SBIR-funded follow-on
the marketplace. grants or contracts for products or processes
that meet the mission needs of those agencies,
or for fufther R&D.

'Some agenci€s have a fast-track program where applicants can submit Phase I and Phase ll applications simultaneously. Government
agencies that participate in this program include the following: Dopartment ol Agriculture, Department of Commerce, Department of Dsfense,
Department of Education, Department of Energy, Department of Health and Human Sorvices, Department ot Homeland Security, Oepartment
of Transpodation, Environmental Protoction Ag6ncy, NASA, National lnstitut€s of HEalth, and National Science Foundation.

The SITR Prograrn is a variation of the SBIR for collaborative research

projects that involve small businesses and research orgarlizations, such as
universities or federal laboratories. In 2OlO, over $tOO million in grants were
awarded through the program. More information about the SBIR and STTR
programs can be obtained at www.sbir.gov.

Other Grant Programs

There are a limited number of other grant programs available to entrepreneurs.
Obtaining a grant takes a little detective work. Granting agencies are, by nature,
low-key, so they normally need to be sought out. A typical scenario of a small
business that received a grant is provided by Rozalia Williams, the founder
of Hidden Curriculum Education, zr for-profit company that offers college life
skilts courses. To kick-start her business, Williams received a $72,500 grant
from Miami-Dade Empowerment Trust, a granting agency in Dade Count5r,
Florida. The purpose of the Miami-Dade Empowerment Trust is to encourage
the creation of businesses in disadvantaged neighborhoods of Dade County.
The key to Williams's success, which is true in most grant-awarding situations,
is that her business fit nicely with the mission of the granting orgarizatior:^,
and she was willing to take her business into the areas the granting agency
was committed to improving. After being awarded the grant and conducting
her college prep courses in four Dade County neighborhoods over a three-year
period, Williams received an additional $IOO,OOO loan from the Miami-Dade
Empowerment Trust to expand her business .47 There are also private founda-
tions that grant money to both existing and start-up firms. These grants are
usually tied to specific objectives or a specific project, such as research and
development in a specific area.
The federal government has grant programs beyond the SBIR and STTR
programs described previously. The full spectrum of grants available is listed
at www.grants.gov. State and local governments, private foundations, and
philanthropic organizations also post grant announcements on their websites.
Finding a grant that fits your business is the key. This is no small task. It is
worth the effort, however, if you can obtain some or all of your start-up costs
through a granting agency.
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 I

350 PART 3 I
I
MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM

Chapter Summary
I*S3. Commonly, entrepreneurs discover that putting all profits back into the busi-
tryrng to operate their business without ness, establishing partnerships and shar-
borrowed funds or invested capital is diffi- ing expenses with partners, and sharing
cult. Because of this, entrepreneurs need to office space and/or employees with other
understand the different approaches avail- businesses.
able to them to gain access to the amount fr$4 " The three steps involved in properly pre-
of capital needed to successfully support paring to raise debt or equity financing
their ventures in the pursuit of orgariza- are as follows: Determine precisely how
tional success. much money is needed, determine the
fr{}*" For three reasons-cash flow challenges, type of financing or funding that is most
capital investment needs, and the reality appropriate, and develop a strategy for
of lengthy product development cycles- engaging potential investors or bankers.
most new firms need to raise money at Cash flow statements are helpful to efforts
some point during the early part of their to determine the amount of capital a firm
life. Firm growth can generate cash flow requires at a point in time. When deciding
problems, typically because of the lag how to finance their venture, entrepre-
between the need to spend capital to neurs commonly choose between equity
generate additional revenue and the time financing (where partial ownership of the
required to earn positive returns from firm is exchanged for financial support)
those investments. Founders of entrepre- and debt financing (where the entrepre-
neurial ventures may be able to fund their neurs gain access to capital by taking out
firm's initial capital investment needs. a loan). Entrepreneurs then develop an
But, larger investments are required to elevator pitch (which is a brief, carefully
support firm growth that is the foundation constructed statement outlining a busi-
for long-term success. In some instances, ness opportunit5r's merits), identiff the
the time required for a product to be intro- best prospects to contact to seek financ-
duced can be lengthy. When this happens, ing, and prepare themselves to present a
additional investments are necessary to potential investor with an effectively devel-
keep a firm going during what may be a oped business plan.
lengthy product development cycle. f-OS. Business angels, venture capital, and an
I*$S. Personal funds, friends and family, and initial public offering (IPO) are the three
bootstrapping are the three sources of most important sources of equity fund-
personal financing available to entrepre- ing available to entrepreneurs. Business
neurs. It is very common for entrepre- angels are individuals who invest their
neurs to use their own funds to invest in personal capital directly in start-up ven-
their ventures while simultaneously pro- tures. These investors tend to be high-
viding their "sweat equity" (or hard work) net-worth individuals who generally invest
to keep the firm going. Entrepreneurs also between $1O,OOO and $50O.OOO in a single
receive support through funds provided by company. Venture capital is money that is
members of their family and their friends. invested by venture capital firms in start-
These investments come in various forms, ups and small businesses with excep-
including loans and gifts. When bootstrap- tional growth potential. Tlrpically, venture
ping, entrepreneurs find ways to avoid the capitalists invest at least $1 million in a
need for external funding. Exercising their single company. An initial public offering
creativity and ingenuity and finding ways (IPO) is an important milestone for a firm
to reduce their firm's costs are examples for four reasons: It is a way to raise equity
of what entrepreneurs do to reduce the capital, it raises a firm's public profile, it
need for support provided through exter- is a liquidity event, and it creates another
nal funding. Indeed, entrepreneurs are form of currency (company stock) that can
often very creative in finding ways to be used to grow the company.
bootstrap to raise money or cut costs. L$6. The sources of debt available to entre-
Additional examples of bootstrapping in- preneurs include commercial banks, SBA
clude minimizing personal expenses and

.*16' *
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 I
g52 pART 3 I vovtruo FRoM AN IDEA To AN ENTREpRENEURTAL FIRM

1O-9. Describe the most common sources of 10-15. What is meant by the term uenhtre capital?
debt financing. Where do venture capital firms get their
10-10. What is the purpose of an elevator speech? monef What types of firms do venture
Why is preparing an elevator speech one of capitalists commonly want to fund? Why?
the first things an entrepreneur should do ro-16. Describe the purpose of an initial public
in the process of raising monef offering (IPO). Why is an initial public
10- I 1. Why is it so important to get a per- offering considered to be an important
sonal introduction before approaching a milestone for an entrepreneurial firm?
potential investor or banker? to-L7. What is the purpose of tJle investment
LO-12. What are the three steps required to bank in the initial public offering procbss?
effectively engage potential investors or 10-18. In general, why are commercial banks
bankers? reluctant to loan money to start-ups?
10-13. What are the three most common forms 10-19. Briefly describe the SBA s 7(A) Loan
of equity funding? Guaranty Program. Do most start-up
10-14. Describe the nature of business angel firms quali$z for an SBA guaranteed
funding. What types of people typically loan? Why or why not?
become business angels, and what is the lO-2O. What is a Small Business Innovation
unique role that business angels play in Research (SBIR) grant? Why would a
the process of funding entrepreneurial firm want to apply for such a grant if it
firms? qualifies for it?

Application Questions
LO-21. Write a 6o-second elevator speech for paternal grandmother over the weekend,
Carelinx, which is the "YoLl Be the VC and she has agreed to lend him $25,000
10.1" feature in this chapter. to launch the firm. When you asked Jim
lO-22. Samantha Smith, a friend of yours, was what a.rrangements he has made with
recently telling you about a company his grandmother to formalize the loan,
that her father is starting in the solar he lookedpuzzled and said, "She plans
power industry. Samantha's father is to send me a check in a week or so-she
using a technology he developed, which just needs to get the money out of her
has received favorable write-ups in sev- savings account." Jim seemed concerned
eral technical publications. He has been by the worried look on your face and
approached by two angel investors who said, "Tell me what you're thinking. I
are eager to invest in his proposed ven- really want to do the right thing here."
ture. He's also been offered a spot in a What would you say to Jim?
prestigious technologz incubator, where lO-24. Kathy Baker is in the midst of starting a
he can maintain an office and a lab to computer hardware firm and thinks she
work on his project. Samantha says that has identified a real problem that her
her dad has turned away the potential company will be able to solve. She needs
investors and is opting to work out of a investment capital, but doesn't know
shop on some property he owns, rather much about the process and doesn't
than move into the incubator. He'Il be know where to begin. She's turned to you
able to fund the company from personal for advice. Write Kathy a 25O- to 3OO-
savings, at least for the first two years. word e-mail message introducing her to
Do you think Samantha's dad is making the process of raising investment capital.
good decisions? What are the pluses and LO-25. Imagine you invented a new type of car
minuses of his decisions? seat for children, which is lighter and
LO-23. Jim Carter, a classmate of yours, is pre- safer than the car seats currently on
paring to launch an e-commerce com- the market. You have a business plan
pany to sell home repair guidebooks, and have won two business plan con-
tools, how-to videos, and related material tests based on your idea. You also have
for home repair and remodeling projects. a working prototype. You'd like to find
He just told you that he talked to his an angel investor to fund the launch of
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354 PART 3 I MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM

" \ffeh: www.*ffire$inx.ecr:ru " ilac*h**k: SarmLi*x; Twitten: &*mneL*r'xx

Business ldea: Design a caregiver marketplace that the insurance, paperwork, and taxes. Duq to the impor-
allows families in need of a caregiver and professional tance of finding the ideal caregiver for an individual who
caregivers to connect online. needs care, Carelinx isn't just a website. Once a family
goes to the company's website and completes the initial
Pitch: The traditional way families in need of a caregiver survey, they are contacted by a Carelinx team member,
have arranged for care is to enlist the services of a brick
who walks them through the process. Caregivers set
and mortar agency. The problem with this approach is their own hourly rate, and salary is negotiated between
that it is expensive and the pool of available caregivers is the caregiver and the family with the need. Carelinx
limited to the people that work for the agency. Carelinx's
charges the family with the need a 15 percent service fee
approach is different. lt has created an online platform for the duration of the caregiving relationship. The pro-
that makes it easy for families in need of caregivers to find cess typicatly saves families thousands of dollars, whose
professional caregivers online. Via the Carelinx platform,
alternative is to enlist the services of a traditional bricks-
a family is able to find, video interview, read background
and-mortar caregiving agency.
checks, hire, manage, and pay professional caregivers
that match their specific needs and budgetary constraints. From the caregiver's point of view, Carelinx provides
them an easy way to find clients in their area who need
The idea for Carelinx emerged from a personal experi- home health care. lt also offers flexibility. Caregivers can
ence of its founder, Sherwin Sheik. Sheik and his family select clients of their choice, set their hourly pay, and
experienced firsthand the challenges involved with find- choose clients that fit with their schedules. Caregivers
ing and managing professional caregivers for a sister being paid through Carelinx earn up to 25 percent to 30
who has multiple sclerosis and an uncle with ALS. They percent more than those working through a traditional
were referred to several local agencies and found the agency.
process to be inefficient and costly. To complicate mat-
ters, Sheik's mother lived in San Francisco, while the sis- ln short, Carelinx is a win-win for both the caregiver and
ter that needed help lived in Los Angeles. The distance the family in need. Carelinx's goal is to disrupt the $100
between the two required Sheik's mother to constantly billion-plus home care service delivery industry.
fly back and forth to coordinate care. There was really no
10-30. Based on the material covered in this chapter, what
good way for Sheik and his family to manage the care for
questions would you ask the firm's founders before
his sister and uncle efficiently.
making your funding decision? What answers would
Carelinx takes the inefficiency out of the process. A satisfy you?
caregiver can be located and interviewed online. All 10-31. lf you had to make your decision on just the informa-
caregivers on the site are prescreened and extensive tion provided in the pitch and on the company's web-
background checks are provided. Carelinx takes care of site, would you fund this company? Why or why not?

\W*h: www.p&**ge*vtus*ffi.ffi$ry? * Ylru$ttmr: &ffifl**g*Musi* u Smm*h*mk: Fledg*h$um$*

Business ldea: Provide musicians an online direct-to-fan Kickstarter and lndiegogo. lt is focused solely on raising
platform to reach out to their fan base to pre-sell, market, funds for musicians. lt allows two distinct types of fund-
and distribute music projects including recordings, music raising campaigns. The first is direct-to-fan campaigns,
videos, and concefts. which are managed like Kickstarter campaigns. The art-
ist sets a target amount to raise (to fund a new album,
Pitch: Musicians often have creative ideas for recordings, music video, or similar creative project) and provides
music videos, or similar projects but can't raise the amenities in exchange for pledges. Contributors are not
money to move fonruard. When their fans hear that
charged until the target amount is reached. The second
they've passed on an album or a creative new approach
type of campaign is a preorder campaign. Contributors
to offering their music, they often react by saying or are charged immediately to preorder an album or music
thinking to themselves, "Man-l wish there had been a
video, much like many online music sites. The artist is
way that I could have helped." paid upon project completion. Approximately 90 percent
Now there is. PledgeMusic is a direct-to-fan music plat- of direct-to-fan campaigns are successful, with most ar1-
form that bears similarities to crowdfunding sites like ists raising approximately 140 percent of their goal.
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356 PART 3 I MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM

Frankovich used this insight to improve on the ini- They starled showing videos of their most recent proto-
tial prototype. To provide for more side visibility at night, type to bike shop owners. The response was very posi-
he decided to not only mount lights on the front tire but tive. They felt that they were on to something but still
on the back tire as well. To make it not only functional couldn't be absolutely sure that such was the case.
but super cool, the design was for white lights on the To test the waters in a substantive fashion, they de-
front tire and red lights on the back. The result was cided to launch a Kickstarter campaign. The campaign
360 degrees of illumination, offering not only improved launched in mid-2011 with a $43,500 goal.'The money
lighting (for the person riding the bike) but improved would be spent on the final design and development work
visibility from all sides. for the Revolights system and on the first production run.
At this juncture, put the case aside for a moment and,
go to Kickstarter.com. Type "Revolights" into the search
bar, and select the Revolights campaign that was funded
After settling on the initiat design, Frankovich met Adam on September 27,20'11 (Revolights ran two subsequent
Pettler at a friend's get-together. Pettler was complet- Kickstader campaigns). Watch the 2-minute, S0-second
ing an MBA from the University of California, Davis. video pitch. You'll see Revolights's original pitch. The
According to an interview with Frankovich and Pettler video also provides a nice demonstration of the Revolights
on the Core77 website (Core77 is a site for industrial system. The Kickstarter campaign raised $215,621 from
designers), Frankovich told Pettler about his idea, and 1,442 backers (496 percent of the original goal). That suc-
pulled out his phone and played a video of the proto- cess provided Frankovich and Pettler the confidence to
type. "Dude," Pettler reportedly said, "We should start a proceed with Revolights and make it an all-out effort.
business." Coincidentally, Pettler had to write a business
plan for a class and was looking for an idea. The two hit
it off and formed a partnership.
Over the next several months, Frankovich and Frankovich and Pettler proceeded to build Revolights.
Pettler produced several iterations of the original idea. Because the Revolights system is a physical product, in-
They formed a company named Revolights. At this ventory must be bought and paid for before the product
point, the Revolights bike lighting system consisted of is sold. As a result, scaling the company has required
two narrow rings of LED lights that mounted directly Frankovich and Pettler to raise money. The nearby table
to each bike wheel using a series of rim-specific clips. shows the funding that has taken place.

Revolights's Funding JourneY

Source of Funding Use of Funds Amount of Funding

2011 Kickstarter Campaign Finish design and development work and pay for $215,621
initial production run
2011 SBA Loan Fund additional production $250,000
2013 Kickstarter Campaign Fund the company's second-generation product, $94,793
Revolights City
2013 Shark Tank Fund R&D and production $300,000
2014 Series A Round Led by Expand the team, grow sales and marketing, and $1 million (includes $900,000
Sierra Angels expand product line Shark Tank commitment)

As mentioned, the first funding was the initial The next round of funding was a bold one.
Kickstarter campaign. Buoyed by a positive response, Frankovich decided to take his chances on Shark Tank.
Frankovich and Pettler decided to expand the pro- The advantages of appearing on Shark Tank are three-
duction run and took out a $250,000 SBA loan. ln fold: first, the possibility of raising money; second, the
early 2013, they ran a second Kickstarter campaign. potential to get an investment from a high-profile inves-
The $14,500 goal was easily met, in that they raised tor, such as Mark Cuban, Barbara Corcoran, or Robert
$94,793 from 233 backers. The differences in the vid- Herjavec; third, the exposure an appearance brings. ln
eos that accompanied the 2011 and 20'13 Kickstarter 2013, each episode averaged over six million viewers.
campaigns showed how much the company had ma- Appearing on Shark Tank also exposes a product's com-
tured. The purpose of the 2013 campaign was to fund pany, like Revolights, to potential retailers, distributors,
the company's second-generation product, Revolights and business paftners.
City. Revolights City fit more bike rims and would The Shark lank episode was filmed in late 2013
make Revolights more widely accessible. The com- and aired on March 7,2014 (Season 5, Episode 19). A
pany also announced a partnership with Mission Bike transcript of the episode is available at http://revolights.
Company, which would start selling a family of bikes com/pages/shark-tank. Frankovich asked for $1 50,000
with Revolights lights built in. in exchange for 10 percent of the company. The sharks
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I
358 PART 3 I MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM

GASE 10.2
Kickstarter: .H,n Increasingly lrnportant fiorum
for ltaising Seed Capital
, Web: www.kickstarter.com , Facebook: Kickstarter " Twitter: @kickstarter

Bruce R. Barringer, Oklahoma State University

R. Duane lreland, Texas A&M University

lntroduction Design, Fashion, Film and Video, Food, Games, Music,

Photography, Publishing, Technology, and Theater.
Kickstarter is a crowdfunding platform. The idea be- Business start-ups are eligible if they fit a category. For
hind crowdfunding is to raise money from the public example, a company that's creating a new type and
(i.e., the crowd) rather than through traditional means. style of denim jeans would fit into the fashion category.
Kickstarter's stated mission is to bring creative proj- Of the categories, Film and Video and Music are the
ects to life. The platform was started in April 2009 by largest and have raised the most amount of money.
Perry Chen, Charles Adler, and Yancy Strickler. Since Once accepted, a person uses tools provided by
then, it has reportedly helped raise over $1 billion in Kickstarter to set up a fund-raising campaign. The cam-
pledges from five million donors to fund 60,000 proj- paign, which is displayed on Kickstader.com and can
ects. Kickstarter is open to projects based in the United be accessed via the mobile app, includes a description
States, Canada, Australia, New Zealand, and the United of the project, a video pitch (not required but recom-
Kingdom. Backers can come from anywhere in the mended), the fund-raising goal, the deadline, and a list of
world. While most people think of Kickstarter as a web- the incentives that are provided in exchange for pledges.
site, it launched a mobile app in February 2013. lf the minimum isn't reached by the deadline, pledgers
get their money back. Pledges are tiered ($ZS, $50, $75,
How It Works etc.), with each tier earning a certain incentive. Some
Kickstarter funds creative projects. Anyone that meets incentives are merely thank you acknowledgments. For
the company's creator requirements is eligible to example, a $25 pledge may earn a thank you note from
launch a project on Kickstarter. A project must fit into the person running the campaign. ln contrast, some
pledges result in nice rewards. For example, COOLEST
one of Kickstader's 13 categories and 36 subcatego-
ries. The 13 categories include Art, Comics, Dance, Cooler ran the most successful Kickstarter campaign

This photo depicts an

assortment of Pebble
Smartwatches. Pebble
raised over $10 million
on Kickstarter. Pebble
smartwatches use
Bluetooth technology to
connect to smartphones.
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 I
I
360 PART 3 I MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM

Pledge Amount lncentive

$128 or more FOUR x "Letter Memobottles" with black or white lids-includes recycled paper packaging and a
thank you card for supporting Memobottle and for helping to stop the single-use bottle disaster.
$250 or more MEMO ONE YEAR WONDER Receive one of every product that Memobottle manufacturers for the
next 12 months.
$SOO or more MEMO AMBASSADOR Get your mug featured tor 12 months on our website. And of couide one of each
bottle.

$'1,000 or more MEMO LIFEMEMBER Receive one of every product that Memobottle manufacturers for the next five
years!

The Memobottle campaign includes a 3-minute, long, people lose interest. Fourth, it's important to not
'16-second video that shows exactly how the Memobottle set your financial goal too low. lf a Kickstarter cam-
conveniently slides into a messenger bag and that drives paign is successful, it tends to quickly lose momentum
home the negative environmental impact of single-use once it reaches 1 00 percent of its goal-even though
water bottles. more money can be collected. Finally, it's imperative
that a video pitch be included. lt's much easier to do-
l'low to Run a $uccessfui Kicksta*er Oampaign nate money to a person or organization's project if you
can hear someone talking about it and see the passion
There are several things that people who have run suc- in their eyes.
cessful Kickstarter campaigns learn. First, Kickstarter
shouldn't be thought of as a tool for funding one-off lIt/lrat's Ahead?
projects or events. lnstead, it's best to think of it as a
mechanism for providing seed capital to help a project Kickstarter has no immediate plans to broaden the
or event get up and running, and then grow it from there. scope of its platform. lt does have a growing number
Second, it's impoftant that the person or organization of competitors. There are now over 450 crowdfunding
that initiates a Kickstarter campaign promote it. Most platforms. Some, such as lndiegogo and RockHub, are
people who contribute to a specific campaign don't find broad-based platforms like Kickstafter. Others focus on
it by chance. lnstead, they go to Kickstarter.com looking specific industries, such as PledgeMusic, which helps
for it. ln the table shown next, several methods for pro- musicians raise money for albums, concerts, and music
moting a Kickstarter campaign are listed. DVDs. There are areas in which Kickstarter is becoming
Third, the majority of donations are made at the more adventurous. For example, it periodically hosts film
beginning and the end of campaigns. As a result, festivals that feature animations, short films, documen-
shorter campaigns are typically more effective than taries, and more, all funded on Kickstarter. ln 2014, a
longer ones. A Kickstarter campaign can last between Kickstarter film festival was held in Brooklyn in July and
one and 60 days. Campaigns lasting less than 30 days Los Angeles in September, and one was in the planning
have the highest success rates. lf a campaign is too stages for London in the later part of the year.

Techniques for Promoting a Kickstarter Campaign

Platform Execution

E-mail Send an e-mail to your e-mail distribution list, describing the campaign. Kickstafter campaigns
aren't funded entirely by strangers. lnstead, they're often funded largely by the campaign
initiator's friends, family, business associates, and so forth.
Twitter and Facebook Reach out to both your Twitter and Facebook audiences. Provide frequent updates. Try to find
the balance between saturating your Twitter followers and Facebook friends with Kickstarter
info and providing them with timely reminders.
Blogs and media Reach out to bloggers and news outlets in the industry that your campaign focuses on. Ask
that they mention your campaign and offer support. For example, it would make sense for
Memobottle to reach out to bloggers and journalists who write about environmental issues.
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362 PART 3 I MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM

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