​REAL-WORLD CASE Tactus Tackles Fund-Raising Craig Ciesla and Micah Yairi had an incredible idea: What if the flat screen on your iPhone, ATM machine, or car dashboard could suddenly display real, three- dimensional buttons when you wanted them and stay flat when you didn't? Wouldn't that make it easier to type on a smartphone, use electronics if you're blind, or reach a button while you're driving? How cool would that be? Ciesla and Yairi, both PhDs with advanced physics backgrounds, had a way to make this seeming miracle occur: They would be the first to make physical buttons rise from a flat touch screen or panel. " The concept was solid. The market was huge. Anywhere there's a touchscreen, there could be a need for physical keys. We thought we'd get funding—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 dining room table or in the garage, working on the core technology and pouring their 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 your friends 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 they started 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 pitched and pitched and pitched to investors. But we were lucky. We had connections to well-established venture capital firms here in Silicon Valley. One was sufficiently excited about our concept that they helped us craft our VC presentation." Things were going great; an investment in their company—now called Tactus Technology—from a top-tier venture capital firm was virtually assured. Yet forces outside their control were at work. This was September 2008. Days before their final presentation to VCs, the investment bank Lehman Brothers declared the biggest bankruptcy in U.S. history. America was now in serious financial crisis. Venture capital was suddenly paralyzed. A new funding strategy had to be developed for Tactus. The intrepid duo lowered the amount of money they hoped to raise, and targeted angel investors. To make that work, they decided to trade part of their equity in the company 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 they would need less money. By good fortune, Ciesla and Yairi were introduced to a patent attorney who liked the idea so much that he took equity instead of cash. That allowed Tactus to file critical patents, an important prerequisite before engaging with potential customers. PAGE 195 The new strategy was paying off. In the first week of March 2009, the guys got a "term sheet"—an offer—from an angel investment group excited about the technology. They would get the money they needed to go to the next level. But once again, timing wasn't on their side. On March 6, the Dow Jones plummeted. The stock market had dropped more than 50 percent in less than 18 months, with no bottom in sight. Private investors overwhelmingly get their investment funds from their stock portfolios, so Ciesla and Yairi's investors vanished overnight. It took a few weeks to figure out where to go next. "We realized this is something we hugely believed in. We needed more money to protect our intellectual property, to engage with prospective customers, to get a design firm on board to create an improved prototype," said Ciesla. At that point, they turned to friends and family. They also brought on board Nate Saal, a friend and serial entrepreneur, who had founded and sold two prior companies. In early 2010, they launched an angel investment round and landed their first significant seed investor. The founders now went full-time with Tactus. It was risky to give up full-time jobs, so they told themselves: "We have to raise this amount of money by this date, or we're done." With an angel round and several patents in place, they started talking to prospective customers. Without getting customer feedback, receiving Series A funding (the first round from VCs) would have been very difficult. During the bootstrapping phase, the partners put less than $100,000 into their fledgling business. They raised about $200,000 in the friendsand-family round. In the angel round, they raised around $1 million. When they finally got venture funding in 2011, they raised $6 million in their first round. Stage of company, market focus, size of investment, and level of risk all need 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 a hardware company, and VCs have shifted to a more conservative investing philosophy—investing in software, which can get great returns with less capital outlay. They want established revenues." "There's tension, figuring out how much to postpone the next phase of raising money," said Saal. "The longer you can stretch funds in your existing stage, the more value you can build, and the more equity you'll keep in the next funding round. How long do you bootstrap? Do you go to friends and family, find an angel investor? Will you do that big round with a VC? Every entity 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," said founder Ciesla. Read 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.