Business Financing and Entrepreneurial Finance with Bootstrapping

Department of Management and Production Engineering

Department of Management and Production Engineering (DIGEP) Business Financing Entrepreneurial Finance Prof. Elisa Ughetto E-mail: elisa.ughetto@polito.it ICO DI Od INO ..... 1859 - 190 POLITECNICO DI TORINONICO D LITO 1859 POLITECNICO DI TORINO LITE DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering

Entrepreneurial Finance Concepts

Setting the ground: Entrepreneurial finance: conceptsNICO D LITO . 1859 POLITECNICO DI TORINO LITE DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering

Understanding Entrepreneurial Finance

• Entrepreneurship is the process of designing, launching and running a new venture
• Entrepreneurial finance is the study of resource allocation in new ventures
• What are the key questions which challenge all entrepreneurs addressed by entrepreneurial finance?NICO D LITO . 1859 POLITECNICO DI TORINO LITE DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering

Addressing Gaps in Entrepreneurial Finance

Entrepreneurial Finance Typically, entrepreneurs suffers of two significant gaps: . Funding gap · Knowledge gap Filling these gaps is fundamental for high performances and success Entrepreneurial finance helps answering the question "how do entrepreneurs fill these gaps?"NICO D POLITI 1859 POLITECNICO DI TORINO YORge Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering 3 DIGEP

Goal of Entrepreneurial Finance

• To understand: " How (owner)-managers of entrepreneurial firms can make better financing decisions and solve (or alleviate) the funding gap; " How managers of financial institutions which are interested in these firms can make better investment decisions.

Entrepreneurial firms Large, established firms Corporate finance Entrepreneurial FinanceNICO D LITO 1859 POLITECNICO DI TORINO LITE DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering

Basic Questions in Entrepreneurial Finance

• Why start-ups need funding / entrepreneurs are searching for funding? How much funding do they need, how many rounds? Under what conditions? What is the cost of financing? ....
• But ..... · Not All Startups Are Equal in terms of objectives, entrepreneurs' vision, potential of growth, field of activity, etc.
• What investors are searching for in startups? Are all investors the same? What is their role? What are the selection criteria they apply? What are metrics of evaluation do they implement? Are they "efficient" in their decisions? ... Not all investors /sources of financing are equal

NICO D LITO 1859 POLITECNICO DI TORINO LITE DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering

Defining a Start-up

What is a Startup?

? What is 0 2 STARTUP ? LA TEMPORARY NO organization FUTURE! Designed to SEARCH ... For a REPEATABLE and SCALABLE ... * BUSINESS MODEL .NICO D . 1859 POLITECNICO DI TORINO LITE DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering

Startup Definitions from Experts

• "A startup is a company working to solve a problem where the solution is not obvious and success is not guaranteed" Neil Blumenthal (entrepreneur)
• "A startup is usually a company designed to effectively develop and validate a scalable business model." Katila et al., 2012 (scholars) START-UPNICO D . 1859 POLITECNICO DI TORINO DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering

Startup Age and Definition

• "A company five years old can still be a startup," writes Y Combinator accelerator head Paul Graham via email. "Ten [years old] would start to be a stretch."
• "I think [a startup is] not connected with time," told journalist Nastya Chernikova (Google translated from Russian). "They say that age - it's not the number, but how it feels. For example, I do not feel like I'm 38" C 5 6 16 5 0 6 0/12 5841 W1 /12 1 7 LITENICO D LITO 1859 POLITECNICO DI TORINO LITE DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering

Steve Blank on Start-ups

• Watch the video by Steve Blank on what is a start-up https://www.youtube.com/watch?v=GAzYdTUjDgQ& feature=youtu.be POLITECNICO DI TORINO TORINONICO D O 1859 POLITECNICO DI TORINO OLITE LOP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering 3 DIGEP

Startup Process and Examples

Non-Linear Startup Process

A start-up does not follow a linear process ... POLITECNICO DI TORINO TORINONICO D O . 1859 14 POLITECNICO DI TORINO YORge Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering 3 DIGEP

Examples of Non-Linear Processes

Three examples of non-linear process ... HELLOFLO BROOKLYN WINERY YouTube IT POLITECNICO DI TORINO TORINONICO D POLITECNICO DI TORINO LOP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering 3

Keys to Startup Success

Predicting Startup Success

How can you know if a start-up will be successful? TEAM IDEA MARKET The idea is not enough .. POLITECNICO DI TORINO TORINO DIGEP . 1859 LITENICO D LITO . 1859 POLITECNICO DI TORINO LITE DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering 3

Importance of the Team

The importance of the TEAM «From my experience in YC, the fundamental characteristics I have seen in all the great founders are: they are totally mission driven [ ... ] they have frugality [ ... ] they have passion.» (Sam Altman, YC President) FOCUS MISSION - DRIVEN FRUGALITY PASSIONNICO D . 1859 LOP DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering 3

Founder Communication Skills

The founder and communication skills «Communication skills, I think, are one of the most important founder qualifications that people don't think about enough. So much of your job as a founder is about communication.» (Sam Altman, YC President) • The founder has to communicate: · To his employees, the constant recall to the mission · To his investors: to convince them to invest · To new potential team members: to convince them to work for him 15 POLITECNICO DI TORINO LITENICO D LITO . 1859 POLITECNICO DI TORINO LITE DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering

Importance of the Idea

The importance of the IDEA «There's a creativity component. There is an ability to think independent thoughts component [ ... ] What we learned is that the good founders are the people that have ideas all the time [ ... ] Their iteration speed, the speed with which they can generate a hypothesis, test it and implement it, is unbelievable» (Sam Altman, YC President) CREATIVITA PENSIERO INDIPENDENTE COSTANTE GENERAZIONE NUOVE IDEE RAPIDITA' DI ESECUZIONE «What you are looking for are good ideas that look like bad ideas» (Sam Altman, YC President)NICO D LITO . 1859 POLITECNICO DI TORINO COR DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering

Importance of the Market

The importance of the MARKET «What you should care about is the size of the market in 10 years. [ ... ] You should prefer a small market growing super quickly to a very large market today.» (Sam Altman, YC President) • The ideal market: • Small actual dimension of the market · High growth rate: number of users is increasing rapidly LITENICO D LITO 1859 POLITECNICO DI TORINO LITE DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering

Recognizing a Good Market

How to recognize a good market? «If you can command a premium and you have large customers paying you early, it's a great sign that you have product market fit [ ... ] Then, revenue renewal or recurrence is really important. [ ... ] Then customer mix: how dependent are you on one or two customers?» (Elad Gil, Serial entrepreneur and business angel) $ DISPONIBILITA' A PAGARE PREMIUM PRICE REVENUE RENEWAL LOW CUSTOMER DEPENDENCY 18NICO D LITO . 1859 POLITECNICO DI TORINO DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering 3

Startup vs. Firm Characteristics

Difference between firm and start-up START UP · Exponential growth · Success rate 10-20% · More capital · Equity FIRM · Linear growth · Success rate 40-60% · Less capital · Debt 19 LITENICO D 1859 6 .... POLITECNICO DI TORINO DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering 3

Start-up Act in Italy (d.l. 179/2012)

Innovative Startups Register

Start-up Act in Italy (d.l. 179/2012) «Innovative startups» register Advantages: · ad hoc regulatory environment · new solutions to access finance Requirements: · newly established or have been incorporated since less than 5 years · headquarters in Italy, or in another EU/EEA Member State (provided a production facility or a branch in Italy) · annual turnover lower than €5 million · do not distribute their profits • innovation as mission statement · do not the result of a company merger or split-up, or of a business or branch transfer 20NICO D LITO . 1859 POLITECNICO DI TORINO LITE DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering 3

Criteria for Innovative Startups

Start-up Act in Italy (d.l. 179/2012) At least one of the three criteria must be met: 1. R&D expenditure corresponds to at least 15% of either total production costs or total production value (the highest is considered) 2. The total workforce includes at least 1/3 of PhDs, PhD students or researchers, or at least 2/3 of the team hold a master's degree 3. The company is the owner or licensee of a registered patent (or it has filed an application for an industrial property right) or it owns an original registered software 21NICO D LITO 1859 6 POLITECNICO DI TORINO LITE DIGEP Dipartimento di Ingegneria Gestionale e della Produzione Department of Management and Production Engineering 3

Number of Innovative Start-ups in Italy (2019-2023)

Number of innovative start-ups in Italy (2019-2023) 14.264 14.074 13.394 11.983 10.893 Anno 2019 Anno 2020 Anno 2021 Anno 2022 Anno 2023 Source: based on Infocamere data, annual report 2024, MISE 22