MGMT 160: Quiz #5

VC (Venture Capitals)

- A new venture may be able to attract VC investors if the investments it needs are larger than the founders can obtain through bootstrapping, bank loans, or angels; can be staged (often over three to five years); and provide a chance of very high returns. = VC firms invest in new ventures using funds raised from limited partners such as pension funds, endowments, and wealthy individuals. - These firms are run by professional investors, often referred to as venture capitalists.

accelerators can be a good choice for the following types of entrepreneurs:

1) An outsider to the entrepreneurial community: = Entrepreneurs early in their careers can use an accelerator to build a network. 2) An outsider to a particular city or region. = If an entrepreneur has just moved to a particular region, an accelerator offers a great way to build a network in a rich and active startup ecosystem. 3) New to fund-raising.

3 things equity investors attempt to do when investing

1) Equity investors not only charge a "price" for bearing risk but also try to manage risk by investing in sectors where they have expertise and by influencing management decisions through their roles on boards of directors 2) Monitoring and governance are also more important for equity investors, given that they do not have secured assets as collateral to pay back the loan if the venture fails. 3) equity investors often seek a portfolio of investments to diversify risk.

Why does the reading focus on high-growth businesses?

1) First, and most important, the exploration of high-growth firms and their financing uncovers principles and tools of entrepreneurial finance that apply to all kinds of ventures. 2)Second, the target audience of this reading, MBA and executive education students, generally contains a much larger share of entrepreneurs interested in growth-oriented firms than the economy as a whole, and these entrepreneurs can substantially improve their odds of success with a sharper understanding of financing choices.

Financing implications of business decisions

1) First, differences in financing options influence location decisions for startups. 2) Second, some ventures can be cleverly designed to reduce their financing requirements. - ex: Skyhook 3) Third, changes in the risk and uncertainty profile of a project can jeopardize its financing. - TA Energy almost going with its own construction army instead of the preapproaved, safe international contractor with experience 4) Fourth, past financing decisions, especially those involving equity investors, can have implications for subsequent business decisions. - Sirtris drug company being told by VC that they should pursue blockbuster opportunity instead of safe one - A related phenomenon occurs when a startup has different types of investors. 5) Fifth, partnerships can shape a startup's financing requirements. - The partnership with SK Telecom dramatically reduced the cost of entry for Cherrypicks, which enabled the startup to achieve fast growth. 6) Finally, business decisions that reduce the uncertainty of a venture unlock financing options for entrepreneurs.

The article discusses five benefits of crowdfunding for startups. Please list three of them. (3 points)

1) Gain money: provides critical organizational resources in the form of money 2) Problem/solution validation: Validating the overall business idea-—Does the idea actually solve a consumer problem (problem/solution validation)? 3) Product validation: Refining the product or service with potential customers by receiving their feedback, likes, and dislikes (product validation). In this context, crowdfunding is a means to support user-generated innovation and a way to better understand customer preferences. 4) Market validation: Painting an accurate picture of how a new product will perform before officially going to market (market validation), thus allowing startups to fail early without investing additional time or money if they see little interest from a crowd. 5) Market Penetration/growth: Marketing, such as promoting a product or a direct sales channel by providing backers with the finished product and ensuring a readily avail- able sales pipeline (market penetration/growth).

The basic stages that high-growth ventures follow up to the point of sustainability

1) Seed and startup. 2) First and second round 3) Third round and beyond.

VC investors are looking for

1) VC investors are looking for opportunities that can deliver substantial returns—an often-cited benchmark for a venture is achieving revenue of $50 million to $100 million in five to seven years. 2) VC investors need to be able to deploy a sufficient level of capital in portfolio ventures to have an effect on their fund's performance (i.e., very small investments don't move the needle for a large fund).

differences in angel and VC structures and profiles

1) angel groups do not have a defined fund life, they may be more interested in earlier stage investment opportunities that take longer to mature. 2) angels invest their own money, in smaller amounts, and perhaps with less diversification. *Bigger VC funds need bigger investments and exit values for their economics to work, and angel groups often have more flexibility toward smaller investments. *

Types of equity investors

1) angels 2) VC investors 3) strategic investors.

During the experimentation and launch phases, additional financing may be provided by

1) banks 2) VCs 3) angels 4) strategic investors (corporations that invest in startups, generally to support a strategic goal).

Recently, who have many entrepreneurs have also turned to for financing during the early stage businesses?

1) crowd funding 2) angel networks 3) venture capital (VC)

types of angel investors

1) family 2) friends 3) fools 4) local business leaders 5) wealthy individuals 6) former entrepreneurs

In the early stages of exploring and shaping an opportunity, new ventures are often financed by who?

1) founders 2) friends 3) family members 4) banks, and 5) individual angel investors.

two key dimensions to consider when raising money from investors:

1) how much capital the venture needs to reach positive cash floe 2) the novelty of the venture's technology or business model. Startups in the left quadrants are less risky and so can often be financed through debt investments, which, as we've discussed, tend to be a less expensive source of external finance for entrepreneurs. The right-hand side of the chart represents businesses with higher levels of innovation and uncertainty. The more novel and unverifiable the technology proposed by the entrepreneur, the more difficult it is for traditional financial institutions to evaluate its creditworthiness. These projects tend to be too risky to attract debt finance and hence require equity investors.

2 benefits to bootstrapping

1) it instills discipline 2) can enforce a reasonable rate of growth - can pace development, ensuring that an entrepreneurial team and its product are ready for the pressure and scrutiny that come with rapid growth.

strategic investments vs. VC investments

1) the range of investment size is greater

What do financing decisions depend on

1) the type of venture 2) the amount of capital required to achieve positive cash flow

What are three factors, all of which affect how much cash is generated in a given period, differentiate businesses and their financing needs:

1) their underlying profitability 2) the asset intensity of their business models 3) the speed at which they need to grow.

3 main categories of crowdfunding

1) token crowdfunding: = Entrepreneurs promise a non-equity token in exchange for funding. The tokens can range from product samples to early access to product launches to recognition in marketing materials. ex: Kickstarter 2) crowdfund investing: = Non-accredited investors can invest in a startup or small business in exchange for equity when they use an SEC-registered crowdfunding platform. 3) regulation D crowdfunding: = Accredited investors can use the Internet and its platforms to invest equity or debt capital in private companies.

Debt vs. equity investors

1) types of startup firms they invest in a: Debt investors avoid risky and uncertain projects b: equity investors invest in promising ventures that may be highly risky, and they may even avoid less risky projects owing to their lower returns. 2) how they influence a startup's strategy a: Debt investors often advocate strategies that yield modest yet stable returns b: equity investors may push for strategies that increase the likelihood of greater returns but also greater losses.

The article discusses three core financial implications of the business model. What are the three core financial implications, and explain each in a sentence or two. (6 points)

1) underlying profitability = The profitability of a business depends on the value of the output relative to the value of the input. 2) asset intensity of their business models = the amount of assets that must be tied up in the business (net working capital plus net fixed assets) in order to generate sales, it determines how long it will take for the business to be cash flow positive. - The longer the payment cycle, the more asset-intensive the business is, because a greater proportion of its assets are tied up (in this case, in accounts receivable) instead of generating cash. 3) pace of growth = A final determinant of financing requirements is the speed at which a venture needs to grow. - The faster a business needs to grow, the more assets tend to be tied up in supporting its growth, and hence the more cash it will require.

Debt investors

= (such as traditional banks) lend a fixed sum of money for a specified period at a given interest rate. 1) investor's upside is limited = even if an entrepreneur is extremely successful, the debt investor's return will be equal only to the principal of the loan plus the prespecified interest. 2) they are concerned primarily about downside protection and lend only to ventures that have a proven technology or business model and that can collateralize assets (such as equipment or accounts receivable). 3) they seek businesses with steady, predictable cash flows that can cover interest payments. 4) investors tend to press entrepreneurs to take on less risky strategies and business models, since the investors cannot benefit from the increased risk, but do face the prospects of higher losses from a failed strategy. *debt is most feasible and valuable for businesses with a record of stable and predictable cash flows and low levels of uncertainty. *

business accelerator

= A business accelerator is a program, generally run by a for-profit organization, that provides office space, proximity to other startup entrepreneurs, mentoring, access to investors, and some seed funding for cohorts of entrepreneurs. aka: boot camps or microseed funds, - are linked with extensive networks of people and entrepreneurial catalysts (e.g., financing, mentors, advisers, board members, talent) in the entrepreneurship community.

Pace of growth

= A final determinant of financing requirements is the speed at which a venture needs to grow. - The faster a business needs to grow, the more assets tend to be tied up in supporting its growth, and hence the more cash it will require.

Start early and build a relationship.

= Earlier and more regular interactions, however, can build relationships and networks in advance of funding needs. Investors think carefully about each investment and put great emphasis on the entrepreneur and his or her management team. *strategies. Brief update meetings with VCs that convey this information allow investors to evaluate how a product is evolving and how the market is receiving it and to learn more about the entrepreneur as an individual. Thus, when the entrepreneur is ready to raise money, it becomes a much easier calculation and a faster decision for the VCs, who have already completed a lot of due diligence; *

Do your homework!

= Entrepreneurs can level the playing field by learning about typical deal terms for their types of venture, researching investors and past entrepreneurs' experiences with them (e.g., www.TheFunded.com ), and assembling the support of knowledgeable counsels.

Raise appropriate amounts of money to reach the next milestones.

= Entrepreneurs often raise money in multiple rounds. This can allow the financier to collect more information about the venture's prospects before investing deep amounts of capital. - raising money in increments after successful milestones are reached helps the entrepreneur negotiate advantageous terms in subsequent rounds. - however, if entrepreneurs do not leave sufficient room for this valuation growth, good opportunities can be severely damaged, because unrealistic early expectations make access to later financing rounds difficult.

"FFF"

= Family, Friends, & Fools - Many entrepreneurs obtain money for their ventures from friends and family. (Sometimes "fools" is added to the list)

What is crowdfunding? (2 points)

= It encompasses the outsourcing of an organizational function (capital formation) to a strategically defined network of actors (crowd) in the form of an open call (Kietzmann, 2017) via dedicated websites (crowdfunding platforms) = is the pooling of resources by many individuals to contribute to or invest in private companies and projects. a) The model allows a large number of individuals (who are generally not investment professionals) to invest small amounts of their personal capital in businesses, thereby distributing and limiting their personal financial risk. b) Not only do businesses benefit from the capital they receive, but they also build a community through the process.

Choose equity investors with care.

= Some can add great value to the company in nonfinancial terms, where as others provide just cash - Entrepreneurs need to consider the nonfinancial assistance that different kinds of investors provide. - Entrepreneurs should also remember that whom they raise money from today and the terms of the initial deal have a large bearing on their future financing options.

Deal terms have value, and it is easier to negotiate these than the value itself.

= Sometimes it is easier to negotiate on certain deal terms than directly on valuation. - Entrepreneurs often focus on the upside valuation of their ventures and neglect terms that have a reasonably good chance of being relevant.

A VC fund is managed by who?

= The VC fund is managed by general partners (GPs). GPs screen and select ventures, monitor and aid portfolio companies, manage the liquidity events for successful companies, and so on. - In return, the GPs typically receive an annual management fee and a predefined share of the fund's profits. A typical arrangement is a 2% management fee and a 20% share of fund profits.

underlying profitability

= The profitability of a business depends on the value of the output relative to the value of the input. ex) Commodities and products in very competitive industries generally cannot command a large profit because customers have many options and can seek the lowest prices. But businesses that operate in markets where demand is inelastic (that is, demand does not change in response to changes in price) or competition is low will tend to be very profitable.

AngelList

= The site allows entrepreneurs to pitch to investors and request meetings, and it gives investors a more efficient way to meet and learn about entrepreneurs and their ventures - AngelList is different from crowd funding sites because it allows only accredited investors who can help a startup in tangible ways beyond providing capital.

Build feelings of desire and urgency in investors.

= To the extent that entrepreneurs can instill a sense of desire and urgency in an investor, the venture may get a shorter funding clock. Two great ways to create urgency: 1) have alternative financing offers available 2) have media buzz. - A safer route is to develop strong investment presentations to create desire. The more investors feel that this deal might happen without them, the better for the entrepreneur.

angel investors in communities

= Typical examples are local business leaders, wealthy individuals, and former entrepreneurs. these investors are a good fit for ventures that require less than $1 million and so would not attract the typical VC - They are often seen as helping startups bridge the gap between the generation of a raw idea and the achievement of sufficient maturity and momentum to attract VC investment. - Although many angels are motivated by economic returns, these investors are often past entrepreneurs with successful exits and wealth who want to work with budding entrepreneurs to repeat the experience and thrills.

Understand that valuation is in the context of a financing negotiation.

= When developing a financing strategy and pitching to investors, entrepreneurs must recognize that there is no "true" value to their ventures. - Valuation is set in the context of a market that matches entrepreneurial ideas with entrepreneurial finance.

Seed and startup.

= an entrepreneur and founding team identify an idea and develop a business model. - The venture is pre-revenue and often developing a prototype. common funding options at this stage.: 1) on equity investments, either in convertible notes or priced equity 2) Bootstrapping 3) angel investing 4) seed investment funds

Angels

= are individuals, or groups of individuals, who invest their own money in startup ventures, distinguished by their use of personal rather than professionally raised and managed funds. advantage: 1) easy to get (because of high levels of personal trust) 2) the deal terms (interest rates, equity dilution, control) may be much more favorable than those offered by professional investors disadvantage: 1) FFF may have limited resources, expertise, or connections to industry and professional networks 2) potential for relationship damage if their ventures fail to meet expectations

Crowdfunding

= is the pooling of resources by many individuals to contribute to or invest in private companies and projects. a) The model allows a large number of individuals (who are generally not investment professionals) to invest small amounts of their personal capital in businesses, thereby distributing and limiting their personal financial risk. b) Not only do businesses benefit from the capital they receive, but they also build a community through the process.

the "lean startup" approach

= launching their ventures with little capital, quickly developing a minimal viable product that they can test through inexpensive forays into the marketplace, and then refining their offering on the basis of feedback from early customers. - allows entrepreneurs to delay raising large amounts of capital until the business model is refined—and can help them negotiate more favorable terms with VC investors—is

the expected value

= probability of success multiplied by value if successful

What are strategic investors? Give some characteristics and discuss their motivations, etc. (4 points)

= strategic investments are direct investments by larger firms in external ventures. - These investments may be made by operational managers on a one-off basis. *The investing firms are often called strategic investors because their motivations tend to be strategic (for instance, gaining exposure to a new technology or product area important to the firm's core operations) in addition to financial.* - Strategic investments are common in industries where there are a small number of large industry leaders that have the capacity to invest extra cash, where product development and delivery require substantial assets that these large firms may control, where independent searches for new products can be protected from intellectual property (IP) theft, and so on. - perhaps play a more important role in developing and emerging economies ex) An example is the pharmaceutical and biotech industry, where the large companies have the size and capabilities to take drugs developed by smaller players through government approval processes and on to consumers. The biotech startups facilitate the discovery of new products that may one day become the blockbusters of the large companies.

strategic investments

= strategic investments are direct investments by larger firms in external ventures. - These investments may be made by operational managers on a one-off basis. *The investing firms are often called strategic investors because their motivations tend to be strategic (for instance, gaining exposure to a new technology or product area important to the firm's core operations) in addition to financial.* - Strategic investments are common in industries where there are a small number of large industry leaders that have the capacity to invest extra cash, where product development and delivery require substantial assets that these large firms may control, where independent searches for new products can be protected from intellectual property (IP) theft, and so on. - perhaps play a more important role in developing and emerging economies ex) An example is the pharmaceutical and biotech industry, where the large companies have the size and capabilities to take drugs developed by smaller players through government approval processes and on to consumers. The biotech startups facilitate the discovery of new products that may one day become the blockbusters of the large companies.

Equity investors

= such as VC and angel investors, receive a long-term ownership stake in a venture in exchange for capital. 1) their return is proportionate to the value that can be created by using the investment. - If a firm becomes worth billions of dollars, their return is commensurately large. 2) This upside participation allows them to take on much more risk and uncertainty than debt investors can. - an equity investor who is comfortable with risk will invest in the project with the higher expected value, because the investor benefits from the higher returns the project can generate if it is successful, even if there is a much greater chance of failure. *Companies that face substantial uncertainty therefore rely more heavily on equity investors for external financing. But entrepreneurs pay for those investors' willingness to bear more risk. * *Equity investors not only charge a "price" for bearing risk but also try to manage risk by investing in sectors where they have expertise and by influencing management decisions through their roles on boards of directors. *

Demonstrate the "Mo."

= team. Persuading people with awesome track records in other companies to jump ship and join a startup is probably most difficult for first-time entrepreneurs, but it's not easy for anyone. Demonstrating this kind of leadership is invaluable. It shows investors that an entrepreneur has what it takes—the momentum, or "Mo"—to inspire others to his or her cause.

Asset intensity.

= the amount of assets that must be tied up in the business (net working capital plus net fixed assets) in order to generate sales, it determines how long it will take for the business to be cash flow positive. *The longer the payment cycle, the more asset-intensive the business is, because a greater proportion of its assets are tied up (in this case, in accounts receivable) instead of generating cash.* - In most businesses, there is a lag between the time that cash is initially converted into assets and the time that the assets generate more sales. ex) For an example of an asset-intensive business, think of a manufacturer that must buy expensive machinery to develop a product. ex) some small businesses allow customers to buy on credit, and these sales accrue under accounts receivable. That is, although the sale may occur today, the cash for the sale will not hit the business's bank account until the end of the payment cycle. *Asset intensity thus creates a wedge between the profitability of a business and the cash flow it generates. * ex) That is, although product sales generate significant profit on the business's P&L (profit and loss) statement, the business may not have sufficient cash to meet payroll or to buy the assets required to generate cash in the next cycle.

What does the term "bootstrapping" when referring to a startup? (3 points)

= to achieve early cash flow and become profitable by drawing on personal resources, without giving up any equity to investors. = To draw only on personal resources to achieve cash flow and become profitable. - build them up through personal savings, small loans, credit cards, and the company's retained earnings—

bootstrap

= to achieve early cash flow and become profitable by drawing on personal resources, without giving up any equity to investors. = To draw only on personal resources to achieve cash flow and become profitable. - build them up through personal savings, small loans, credit cards, and the company's retained earnings—

What is an important aspect of VC investment process?

An important aspect of the VC investment process therefore is making enough investments to increase the chances of funding a "home run"—an impressive success (e.g., a tenfold return on invested capital). - Moreover, since more than half the investments in a portfolio won't yield any returns, VCs need to own a sufficient share of the successful firms at exit (i.e., at the sale or public offering of the venture) in order to generate their overall returns. - any individual investment cannot be too capital-intensive in relation to the size of the overall portfolio, so that equity investors can both diversify across investments and have a sufficient fraction of the overall equity in the successful investments to cover the losses they incur in over half of their portfolio.

angel groups

Angel groups are networks of individual angels who meet to evaluate and potentially jointly invest in startup opportunities (as shown in the exhibit, they may not all invest in all the opportunities they explore together). - a variety of advantages to individual angels: shared due diligence, a higher profile among entrepreneurs, the ability to take on projects requiring larger investments, and more extensive networks and backgrounds for portfolio companies. *Though all members of an angel group may meet to evaluate opportunities, each angel ultimately makes an individual decision to invest his or her own money. If enough angels are interested—15 or 20 are often sufficient—then investments proceed. *

As discussed in the article, what are some of the primary differences between "debt" and "equity" fundraising? How are the motivations of debt and equity financiers different? Give an example of a debt investor and an example of an equity investor as discussed in the reading. (5 points)

Debt: = (such as traditional banks) lend a fixed sum of money for a specified period at a given interest rate. a) they are concerned primarily about downside protection and lend only to ventures that have a proven technology or business model and that can collateralize assets (such as equipment or accounts receivable). b) they seek businesses with steady, predictable cash flows that can cover interest payments. c) tend to press entrepreneurs to take on less risky strategies and business models, since the investors cannot benefit from the increased risk, but do face the prospects of higher losses from a failed strategy. *debt is most feasible and valuable for businesses with a record of stable and predictable cash flows and low levels of uncertainty. * Equity: = such as VC and angel investors, receive a long-term ownership stake in a venture in exchange for capital. a) their return is proportionate to the value that can be created by using the investment. - If a firm becomes worth billions of dollars, their return is commensurately large. 2) This upside participation allows them to take on much more risk and uncertainty than debt investors can. *Equity investors not only charge a "price" for bearing risk but also try to manage risk by investing in sectors where they have expertise and by influencing management decisions through their roles on boards of directors. *

Do not run out of cash.

Nothing can put an entrepreneur in a worse bargaining position than running out of cash!

portfolio of the fund's investments

Perhaps the most important feature of this portfolio is that VCs are seeking home-run opportunities. - The VCs know that many of their ventures will fail, but one or two tremendous successes make the economics work.

The article discusses three types of crowdfunding. What are they and briefly define each in a sentence or two. (6 points) Note: the article "Financing Entrepreneurial Ventures" uses four types of crowdfunding, while the JOBS Act of 2012 used three main categories of regulated crowdfunding. You can alternatively list the categories from one of these articles for full credit, but you can't mix and match since the categories overlap!

READING CATEGORIES: 1) Donation crowdfunding = the founder receives money from a crowd without any tangible return for their contributions a. pure donation - no rewards are offered to contributors b. rewards-based donation - an incentive system whereby backers receive non-monetary rewards such as personal recognition or experiential rewards (opportunity to meet the creators, attend special events, etc.) 2) Lending crowdfunding = raising money with the expectation that the founders will repay the supporters a. presales model - offers the finished product in return for the contributor's pledge b. traditional lending model - uses standard terms where loans are repaid with interest determined pre-campaign launch c. forgivable loan - repays contributions only if and when the project begins to generate revenue or profit. 3) equity crowdfunding = also referred to as investment crowdfunding, the venture raises money from a crowd in exchange for an ownership stake in the firm. That is, investors are offered equity or bond-like shares a. Investor-led equity crowdfunding - typically involves accredited investors, such as venture capitalists, angel investors, or sector specialists who negotiate with the founder on funding terms b. entrepreneur-led equity crowdfunding - campaigns are accessible to all crowd investors and the campaign proponent sets the valuations and determines the terms of the offering. JOBS ACT OF 2012 CATEGORIES: 1) token crowdfunding: = Entrepreneurs promise a non-equity token in exchange for funding. The tokens can range from product samples to early access to product launches to recognition in marketing materials. ex: Kickstarter 2) crowdfund investing: = Non-accredited investors can invest in a startup or small business in exchange for equity when they use an SEC-registered crowdfunding platform. 3) regulation D crowdfunding: = Accredited investors can use the Internet and its platforms to invest equity or debt capital in private companies.

Angel groups

Some of the most active angels in major cities have formed angel groups, which allow collective screening and investing in startup ventures.

Staging

Staging enables investors initially to contribute smaller amounts of money and then invest more in a series of rounds as an entrepreneur reduces the uncertainty and risk involved in bringing a novel technology or business model to market. - This approach allows better portfolio dynamics for a VC firm—investing less in the ventures that don't gain traction and more in those that do—and, as we will discuss, it can reduce an entrepreneur's equity dilution. *The key point here is that VC investors rarely fund a venture's full needs in the first financing round, instead providing only enough capital to get the venture to the next milestone (typically a clearly defined development that reduces the riskiness of the business).*

Third round and beyond.

The business has an experienced team, a product that is selling well in the market, and a well-defined and successful product-market positioning. - Additional capital is being raised to scale the model, revenue may be greater than $10 million, and the venture is profitable or nearly profitable. ventures have many financing options: 1) debt financing based on assets and cash flows 2) equity financing.

The critical concern of a VC:

The critical concern of a VC is to identify underperforming investments early on, close them, and shift the resources to higher-return opportunities in the portfolio, moving invested capital from left to right in

Pitch right for your type.

This reading highlights the need for an entrepreneur's pitch to reflect the interests of the financier. - know how to pitch your idea to the specific type of investor you are trying to reach

How do VCs raise their financial capital?

VCs raise their financial capital from limited partners (LPs), which include pension funds, endowments, high-net-worth individuals, and the like. - For the typical LP, VC-oriented investments represent a small share of an overall portfolio (5% or less) funds); their other investments are in public equity markets, government bonds, and so on. - LPs receive returns from the VC portfolio as they are realized. These returns are often distributed in the form of shares.

VCs raise a series of funds that overlap. What are the different phases?

Within each fund: 1) the first phase of three to five years involves making investments in companies. 2) The second phase focuses on growth and harvesting the ventures; investments are not made late in a fund's life. * VCs typically invest in companies that they think can create value in five to seven years.

What type of business display the greatest dependency on external financing?

businesses that are less profitable, have high asset intensity, and need to grow extremely fast will display the greatest dependency on external financing.

First and second round

first round: = During the first round of financing (often called Series A), the entrepreneur expands the team, develops a minimal viable product, and acquires early customers. second round: = During the second round, the enterprise becomes fully operational, with a full team in place and a product launch. The team clarifies its product-market positioning and begins generating revenue.

emotional appeal of crowdfunding

it targets the customers of the product, rather than active investors. = Because funding is derived from end users, the proposed venture receives direct, pre-purchase feedback about the product's market support.