[MUSIC] Hi, everyone. I'll close these with starter financing, why? Because start-ups must face specific issues in this respect. First, banks do not trust them because they cannot show any track record and they don't have any asset to provide as a collateral. Secondly, the innovative entrepreneur generally wants to achieve ultra high growth objectives. This reflect entrepreneurial drive in the first place, since the point is to conquer a new market, which have not yet been addressed. But this ambition also responds to a lesson of strategy, size drives market power. Let's explain this. In the late 70s, Michael Porter, a Harvard Strategy Professor, developed the 5 Forces Model to help companies assess the nature of an industry and develop strategies accordingly. Let's have a look at this and start with competitive rivalry. That's to say, the aggressiveness and hostility between business competitors. Then the threat of new entrants. We look here at the existence of barriers to entry such as patents, legal norms, physical constraints. Everything which makes it harder for new competitors to participate in the market. We follow with the bargaining power of customers. This refers to the ability to wait on negotiations in order to obtain better prices, better quantities or better general conditions, etc. And the bargaining power of suppliers under exactly the same terms. Finally, the threat of substitutes. Substitutes are products or services which deliver the same value to the clients but under a different technology or process arrangement. For example, digital photo replaces chemical photo. But both essentially fulfill the same need. These factors are useful to us as the appeal of a business sector. Let's see how they are related to the size of a company. I want to demonstrate that a larger size generally increases the ability of the firm to introduce the market and set the rules of the game. The larger the company is, the stronger its bargaining power with its customers and suppliers. The company is less substitutable and more deeply integrated within its partners' core business process. The larger the company is, the greater its ability to threaten its competitors or retaliate in order to impose prices and standards which suit it best. For the same reasons, the larger the company is, the more credible its threats to new entrants. The threat of substitutes is the only potent force which can be seen as relevant to more company size. Sometimes it is even detrimental to large firms, say in the case of Kodak. People frequently believe that this pattern is only applicable to established companies, and not relevant to start-ups. But the lesson of the last 15 years is that start-ups are also able to achieve global leadership. Think of Google, Facebook, Twitter. Getting big is a legitimate strategic objective. Financing is a decisive weapon in this respect, because, as you know, there is no growth without financing. Let's have a look at the funding cycle. First, it should be noted that, by definition, truly the firms do not address preexisting markets. Their customers don't spontaneously require their products. As a consequence, they need to allocate disproportionate resources to product development and client education. This is very expensive. Whereas revenues are uncertain and only tangible phase. The company will operate at a loss, it will burn capital during a long period of time before generating free cash flow. Again, see the cases of Google, Facebook and Twitter. Of course there are exceptions. Some firms can be financed by their operations. Bootstrapping refers to this situation, when the company is able to develop on the basis of its initial capital and operating revenues. If you are in this situation, congratulations! You don't need to attend this course. So, lets consider the general case of start-ups. They burn capital. Let's have a look at their balance sheet in relations with the critical stages of development. Act one, in the beginning, you funded the initial capital with your own money, and possibly the help of friends and family. There is a business idea that you want to develop, so you will use this money to acquire the mandatory resources, rent a space to work, buy a computer and the like. Act two, you are now able to describe your project in a structured way. You can set sales objectives and specify required financial resources. You need to demonstrate that the idea flies. You have spent all your cash and you need additional money to evidence the proof of concept. This funding is required to produce a prototype and approach potential clients on a testing mode. Business angels will provide you money in the context of a seed funding round. Act three, your company starts to sell. So you need to finance your operating cycle and the working capital requirements arising from timing differences between your revenues and cost. You keep developing your product and earn new clients, possibly in new geographies. You are now in a scale-up phase. You need capital because you still cannot access the debt market. Prepare to meet with the new type of investors, the venture capital firms. There are those who will find you. Act four, you think about making some acquisitions in order to improve your market position. This will eliminate your competitor, which is good, add new products to your portfolio, and increase your presence in important geographic areas. You also want to secure your legal position. You review your standard contracts and registered patents, trademarks or industrial designs. You also want to set up new subsidiaries, you continue to scale up. You get prepared to a potential IPO. This will provide an acquisition currency. You will be able to buy companies and pay with your own shares. All of this requires new money. Once again, you will need venture capitalists. And in particular those specialize in late stage investments. Note that banks start to understand your company better and you are also eligible to loans. Act five, your company gets listed on the stock market. You sell shares to a new type of investors, mutual funds. Unlike venture capitalist, they take very special interest in the liquidity of their investments. There are three take-aways in this first lecture I want you to know. Innovative entrepreneurs want to grow their company. Growth requires financing. Expect funding requirements to increase in a very substantial way as the company continues to develop. Goodbye. [MUSIC]
