Week 4 Assignment Read the case “Tactus Tackles

QUESTION

Week 4 AssignmentRead the case “Tactus Tackles Fund-Raising” at the end of Chapter 8.Answer the following questions and/or statements in detail:1. Craig Ciesla and Micah Yairi eventually turned to friends and family for funding. Should they have done that first? What are the risks with raising money from such individuals? Explain in detail using sources and research. Use credible sources to support and explain.2. What are the risks and benefits of waiting until they had been granted patents to ask for customer feedback? Explain in detail using sources and research. Use credible sources to support and explain.3. The partners gave up equity in their company – part of the ownership — to get help they needed. Was this a good idea? Why or why not? Explain in detail using sources and research. Use credible sources to support and explain.4. Why do you think Ciesla and Yairi stuck it out, even with such bad luck? What would it take for you to be so persistent? Explain in detail using sources and research. Use credible sources to support and explain.Be sure to property cite your sources using APA 6th citations rules as well as an APA “References”(bibliography) section at the end of your paper.194ENTREPRENEURSHIPA REAL-WORLD APPROACHREAL-WORLD CASETactus Tackles Fund-RaisingchallengeFind funding for a killer start-upidea in a volatile economic climatesolutionAlter the funding strategyas necessary and seekout different sourcesCraig Ciesla and Micah Yairi had an incredible idea: What if the flat screenon your iPhone, ATM machine, or car dashboard could suddenly displayreal, three-dimensional buttons when you wanted them and stay flat whenyou didn’t? Wouldn’t that make it easier to type on a smartphone, useelectronics if you’re blind, or reach a button while you’re driving? How coolwould that be? Ciesla and Yairi, both PhDs with advanced physics backgrounds, had a way to make this seeming miracle occur: They would be thefirst to make physical buttons rise from a flat touch screen or panel.“The concept was solid. The market was huge. Anywhere there’s atouchscreen, there could be a need for physical keys. We thought we’d getfunding—no problem,” said Ciesla. “We were wrong.”They began with a classic case of bootstrapping. While working fulltime in other jobs, Ciesla and Yairi toiled nights and weekends at the diningroom table or in the garage, working on the core technology and pouringtheir own money into the business.“We discussed whether we should have a round of ‘Friends and Family’ money, but we shied away from that,” said Ciesla. “Even if you tell yourfriends and family that there’s a 90 percent chance they’ll lose their money,they won’t believe you.”“You don’t want to damage those relationships,” added Yairi. So theystarted looking for professional investors.“We put together a business plan and that took a lot of work,” he continued. “Based on that, we created PowerPoint presentations, and pitchedand pitched and pitched to investors. But we were lucky. We had connections to well-established venture capital firms here in Silicon Valley. Onewas sufficiently excited about our concept that they helped us craft our VCpresentation.”Things were going great; an investment in their company—now calledTactus Technology—from a top-tier venture capital firm was virtuallyassured.Yet forces outside their control were at work. This was September 2008.Days before their final presentation to VCs, the investment bank LehmanBrothers declared the biggest bankruptcy in U.S. history. America was nowin serious financial crisis.Venture capital was suddenly paralyzed. A new funding strategy had tobe developed for Tactus. The intrepid duo lowered the amount of moneythey hoped to raise, and targeted angel investors.To make that work, they decided to trade part of their equity in thecompany to bring in the appropriate type of people to meet their needs.They would give stock instead of cash, or to supplement it, so that theywould need less money. By good fortune, Ciesla and Yairi were introducedto a patent attorney who liked the idea so much that he took equity insteadof cash. That allowed Tactus to file critical patents, an important prerequisite before engaging with potential customers.CHAPTER 8The new strategy was paying off. In the first week of March2009, the guys got a “term sheet”—an offer—from an angel investment group excited about the technology. They would get themoney they needed to go to the next level.But once again, timing wasn’t on their side. On March 6, theDow Jones plummeted. The stock market had dropped more than50 percent in less than 18 months, with no bottom in sight. Privateinvestors overwhelmingly get their investment funds from theirstock portfolios, so Ciesla and Yairi’s investors vanished overnight.It took a few weeks to figure out where to go next. “We realized thisis something we hugely believed in. We needed more money to protectour intellectual property, to engage with prospective customers, to get adesign firm on board to create an improved prototype,” said Ciesla. At thatpoint, they turned to friends and family. They also brought on board NateSaal, a friend and serial entrepreneur, who had founded and sold two priorcompanies.In early 2010, they launched an angel investment round and landedtheir first significant seed investor. The founders now went full-time withTactus. It was risky to give up full-time jobs, so they told themselves: “Wehave to raise this amount of money by this date, or we’re done.”With an angel round and several patents in place, they started talkingto prospective customers. Without getting customer feedback, receivingSeries A funding (the first round from VCs) would have been very difficult.During the bootstrapping phase, the partners put less than $100,000into their fledgling business. They raised about $200,000 in the friendsand-family round. In the angel round, they raised around $1 million. Whenthey finally got venture funding in 2011, they raised $6 million in their firstround.Stage of company, market focus, size of investment, and level of risk allneed to be aligned to find the right VC, they learned. “We spoke with dozens and dozens of venture capitalists. We heard ‘no’ a lot,” said Yairi. “We’re ahardware company, and VCs have shifted to a more conservative investingphilosophy—investing in software, which can get great returns with lesscapital outlay. They want established revenues.”“There’s tension, figuring out how much to postpone the next phase ofraising money,” said Saal. “The longer you can stretch funds in your existingstage, the more value you can build, and the more equity you’ll keep in thenext funding round. How long do you bootstrap? Do you go to friends andfamily, find an angel investor? Will you do that big round with a VC? Everyentity needs to think about the right transition points—and how to maximize value without putting the company at risk.”“Raising funds took longer and required more effort than we expected.It’s basically nonstop. It’s a constant part of building a company,” saidfounder Ciesla. nF I N A N C I N G YO U R B U S I N E S Squestions1. Craig Ciesla and Micah Yairieventually turned to friends andfamily for funding. Should theyhave done that first? What arethe risks with raising money fromsuch individuals?2. What were the risks and benefitsof waiting until they had beengranted patents to ask forcustomer feedback?3. The partners gave up equityin their company—part of theownership—to get help theyneeded. Was this a good idea?Why, or why not?4. Why do you think Ciesla and Yairistuck it out, even with such badluck? What would it take for youto be so persistent?195

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