1. 1 Confidential - for classroom use only The Entrepreneurial Life Cycle

2. 2 Confidential - for classroom use only The Entrepreneurial Life Cycle The best way to begin …is to consider the life cycle of an entrepreneurial venture. Entrepreneurship, it is said, is all about the pursuit of opportunities without regard to the resources one immediately has at his or her disposal. Thus, the entrepreneurial journey begins with the discovery of an opportunity that just might be ripe for pursuit. Before raising money and gathering other necessary resources, however, savvy entrepreneurs give careful scrutiny to the unity itself, ensuring themselves that the opportunity stands a decent chance of survival and that they won’t waste months or years of their lives – not to mention their precious entrepreneurial talent – chasing a fundamentally flawed idea. Thus, the first two steps in the entrepreneurial life cycle are discovering an opportunity and assessing it. Only then is it time for step three: crafting a business plan. With a solid plan in hand, it’s time for step four, gather the resources – the human and financial capital and other resources (like suppliers, partners, and so on) that it will take to give a nascent venture a fighting chance for success. With the resources in hand, and with the venture soon off the ground, the challenge, step five, is managing the growing business, to nurse it to sufficient critical mass that it can survive in the probably hotly competitive industry it has entered. Finally, if all goes well, at some point, the time may come to harvest any value that’s been created and exit the business by selling it, perhaps to a trade buyer, or floating it on a public stock exchange. Six simple steps: 1.Discovering opportunities 2.Assessing opportunities 3.Business planning 4.Gathering resources 5.Managing the growing business 6.Harvesting value John Mullins, “Can We Teach Entrepreneurship?” in Business Strategy Review (Winter 2006).

3. 3 Confidential - for classroom use only Business Paths Awareness Idea Preparation StartupStatic Growth Decline Termination Simon Bridge, Ken O’Neill and Stan Cromie, Understanding Enterprise, Entrepreneurship and Small Business, London: MacMillan Press, 1998. Marginal businesses consist of a high proportion that have a short life, and a large group that remain small, but survive Promising businesses consist of the very small group of businesses that achieve rapid growth in revenues and employment

4. 4 Confidential - for classroom use only The Successful Survivors New businesses frequently engage in some sort of arbitrage-type activity, buying low and selling high, in an unsettled market, and occasionally in a differentiated product – they cluster in niche markets and have narrow capabilities By contrast, the profits of a large company derive from many tangible and intangible assets, such as its plant and equipment, patents, customer relationships, distributor relationships, and know-how – they have diversified their risk –Large companies have dense and deeply embedded coordination mechanisms to control disparate activities – they have systems –When large companies pursue new opportunities, they tend to require serious planning, large initial investments, and involve less uncertainty –They also involve greater oversight, taking advantage of their control mechanism –There is no re-ordained path for converting from a small business to a large one The growing company accumulates a distinctive bundle of assets that are gradually deployed against a limited number of market opportunities, which set the boundary for future choices (i.e. the resource based view of the firm) –The choices open to the fledgling business are not thus constrained by accumulating assets and developing strategy, but by resource constraints and niche market opportunities Amar Bhide, The Origin and Evolution of New Business, (Oxford: 2000)

5. 5 Confidential - for classroom use only Constraints on the Growth of New Ventures Not all new ventures grow Per Cambridge Small Business Research Centre, constraints on small business growth include (by rank): 1.Availability and cost of finance for expansion 2.Availability and cost of overdraft facilities 3.Marketing and sales skills 4.Management skills 5.Overall growth of market demand 6.Increasing competition 7.Skilled labor 8.Availability of appropriate premises 9.Acquisition of new technology 10.Difficulties in implementing new technology 11.Access to overseas markets Simon Bridge, Ken O’Neill and Stan Cromie, Understanding Enterprise, Entrepreneurship and Small Business, London: MacMillan Press, 1998.

6. 6 Confidential - for classroom use only Practices of Fast Growth Firms Management practices: –Use collaborative decision making style with top management –Assemble a balanced top management team that includes founders and managers with significant outside experience –Assemble a top management team of 3 – 6 individuals who can be the entrepreneur’s entrepreneurs –Align the number of management levels with the number of top managers –Establish entrepreneurial competence first in functional areas of finance, marketing, and operations –Assemble a balanced board of directors –Involve board of directors at strategic inflection points Financial practices: –New round of financing every 2.5 years –Reliable funding sources capable of significantly expanding their participation amounts –Utilize financing vehicles that retain the founders’ voting control –Maintain control of the firm by selectively granting employees stock ownership –Link founders’ long-term objectives to a defined exit strategy Planning and control practices: –Prepare detailed written monthly plans for each of the next 12 – 24 months –Prepare detailed annual plans for 3 or more years –Establish functional planning and control systems that tie planned to actual performance and adjust management compensation accordingly –Share with employees periodic planned vs. actual performance data –Use MBOs to link job performance standards to the business plan –Prospectively model the firm based on benchmarks that exceed industry norms, competitors, and the industry leader Jeffrey Timmons and Stephen Spinelli, New Venture Creation, (McGraw-Hill Irwin: 2007).

7. 7 Confidential - for classroom use only Changes and Challenges for Entrepreneurial Managers Entrepreneurial management is characterized by founders who –create the organizational context in terms of the individuals who comprise it and the values that guide them –specify the business objectives and results desired –determine the particular tasks that will lead to these results –do the actual work Growing ventures are characterized by –scope and volume of operating activity –range and complexity of tasks –number and variety of employees Challenges include –erosion of creativity of founders –confusion over ambiguous roles, responsibilities, and goals –conflicts among team members –need for operating mechanisms and controls –desire for autonomy and control –failure to clone founders –specialization and erosion of collaboration

8. 8 Confidential - for classroom use only The Transition Per Michael Roberts (Harvard), Entrepreneurial management is characterized by –centralized decision making –informal control Professional management is characterized by –delegation of decision making responsibility –use of formal control systems Businesses that grow must attract new and different stakeholders –Expressions of interest and encouragement must be converted into firm commitments, which depend on the entrepreneur’s commitment and belief in the project, and the entrepreneur’s reliability –Stakeholders are reluctant to be the first to commit, therefore the entrepreneur should seek small increments of commitment from participants, parlay those commitments into new increments from new participants, and have good sales closing skills

9. 9 Confidential - for classroom use only The Transition from Entrepreneur to Manager When managing the growth stage, owner/manager: must remember two important points. First, an adaptive firm needs to retain certain entrepreneurial characteristics to encourage employee innovation and creativity while making a transition toward a more managerial style. The ability to remain entrepreneurial while adopting administrative traits is vital to a venture’s successful growth. The previous table compares the entrepreneurial administrative characteristics and pressures of five major factors: strategic orientation, commitment to seize opportunities, commitment of resources, control of resources, and management structure. Each of these five areas is critical to the balance needed for entrepreneurial managing. At the two ends of the continuum (from an entrepreneurial focus to an administrative focus) are specific points of view; Stevenson and Gumpert have characterized these in a question format. The Administrative Point of View: –What sources do I control? –What structure determines our organization’s relationship to is market? –How can I minimize the impact of others on my ability to perform ‘ –What opportunity is appropriate? The Entrepreneurial Point of View: –Where is the opportunity? –How do I capitalize on it? –What resources do I need? –How do I gain control over them? –What structure is best? Donald F. Kuratko and Jeffrey S. Hornsby, New Venture Management (Pearson Prentice Hall: 2009).

10. 10 Confidential - for classroom use only Promoter Trustee Continuum: Entrepreneurs and Managers Entrepreneurial Focus Characteristics Entrepreneurial Focus Pressures Managerial Focus Characteristics Managerial Focus Pressures Strategic Orientation Driven by perception of opportunity Diminishing opportunities Rapidly changing technology, consumer economics, social values, and political rules Driven by controlled resources Social contracts Performance measurement criteria Planning systems and cycles Commitment to Seize Opportunities Revolutionary, with short duration Action orientation Narrow decision windows Acceptance of reasonable risks Few decision constituencies Evolutionary, with long duration Acknowledgment of multiple constituencies Negotiation about strategic course Risk reduction Coordination with existing resource base Commitment of Resources Many stages, with minimal exposure at each stage Lack of predictable resource needs Lack of control over the environment Social demands for appropriate use of resources A single stage, with complete commitment out of decision Need to reduce risk Incentive compensation Turnover in managers Capital budgeting systems Formal planning systems Control of Resources Episodic use or rent of required resources Increased resource specialization Long resource life compared with need Risk of obsolescence Risk inherent in the identified opportunity Inflexibility of permanent commitment of resources Ownership or employment of required resources Power, status, financial rewards Coordination of activity Efficiency measures Inertia and cost of change Industry structures Management Structure Flat, with multiple informal networks Coordination of key non-controlled resources Challenge to hierarchy Employees’ desire for independence HierarchyNeed for clearly defined authority and responsibility Organizational culture Reward systems Management theory The role of the founders will start to move along the continuum from promoter to trustee, from entrepreneur to manager. The key question then becomes, Who is best placed to lead growth? Howard H. Stevenson and David E. Gumpert, “The Heart of Entrepreneurship” in Harvard Business Review (March/April 1985).

11. 11 Confidential - for classroom use only From Entrepreneur to Manager The transitions between the various stages of a venture are complemented (or, in some cases, retarded) by the entrepreneur’s ability to make a transition in style. Entrepreneurial style relates to the creativity, innovation, and risk-taking ability needed to start up a venture, whereas managerial style emphasizes the planning and organizational ability needed to operate the business. A key transition occurs during the growth stage, when the entrepreneur shifts into a managerial style. ‘This is not easy to do. As Hofer and Charan have noted, “Among the different transitions that are possible, probably the most difficult to achieve and also perhaps the most important for organizational development is that of moving from a one-person, entrepreneurial managed firm to one run by a functionally organized, professional management team.” A number of problems arise during this transition, especially if the enterprise is characterized by factors such as (1) a highly centralized decision-making system, (2) an overdependence on one or two key individuals, (3) an inadequate repertoire of managerial skills and training, and (4) a paternalistic atmosphere. These characteristics, although often effective in the start-up and survival of a new venture, pose a threat to the firm’s development during the growth stage. Quite often, these characteristics inhibit the venture’s development by detracting from the entrepreneur’s ability to manage the growth stage successfully. Donald F. Kuratko and Jeffrey S. Hornsby, New Venture Management (Pearson Prentice Hall: 2009).

12. 12 Confidential - for classroom use only Making the Transition To bring about the necessary transition, the entrepreneur must plan carefully, and gradually implement the transitional process. Hofer and Charan have suggested a seven-step process: 1.The entrepreneur must want to make the change and must want it strongly enough to undertake major modifications in his or her own behavior. 2.The day-to-day decision-making procedures of the organization must be changed. Specifically, participation in this process must be expanded. Greater emphasis also should be placed m formal decision techniques. 3.The two or three key operating tasks that primarily are responsible for the organization’s success must be institutionalized. This may involve the selection of new people to supplement or replace those “indispensable” individuals who have performed these tasks in the past. 4.Middle-level management must be developed. Specialists must learn to become functional managers, and functional managers must learn to become general managers. 5.The firm’s strategy should be evaluated and modified, if necessary, to achieve growth. 6.The organizational structure and its management systems and procedures must be modified slowly to fit the company’s new strategy and senior managers. 7.The firm must develop a professional board of directors. Donald F. Kuratko and Jeffrey S. Hornsby, New Venture Management (Pearson Prentice Hall: 2009).

13. 13 Confidential - for classroom use only The Entrepreneur is Critical There is no standard growth model. The entrepreneur is critical. He must 1.Formulate audacious goals 2.Articulate a strategy 3.Implement the strategy effectively 4.He must have a high level of ambition, tolerance for enhanced risk, imagination, constancy of purpose, the capacity to inspire and intimidate –But to grow, he must also learn to delegate to others who will assist in the translation of strategy into concrete initiatives – new ventures do not need such delegation, and in fact it could be detrimental to new ventures –In short, the entrepreneur must build a corporate culture Growth strategies should be informed by the opportunities offered and the constraints posed by the overall situation, not the position on the growth curve –New ventures face a more dynamic and uncertain environment, but have more room to change and maneuver Given a reasonable concept, competitive advantages are usually determined by the quality of execution. The survivors typically have more –audacity –imagination –a better balance of vision and pragmatism Amar Bhide, The Origin and Evolution of New Business, (Oxford: 2000)

14. 14 Confidential - for classroom use only Permanent Entrepreneurship Per Jeffrey Timmons, Entrepreneurship is an attitude and an approach which lead to success no matter what the size of the organization and its position on the growth curve –Vision –and Perpetual learning culture –foster Entrepreneurial mind-set and values –which lead to Widespread accountability and responsibility –and result in Shared pride and respect in achievement and success Jeffrey Timmons and Stephen Spinelli, New Venture Creation, (McGraw-Hill Irwin: 2007).

15. 15 Confidential - for classroom use only Disciplined Entrepreneurship A recent study conducted by Donald Sull suggests that entrepreneurs practice “disciplined entrepreneurship.” Even when the venture is up and running, the owner continuously faces the entrepreneurial challenge of dealing with risk and uncertainty when deciding on new products, markets, and so forth. Based on a review of the case histories of several entrepreneurial ventures, Sull recommends an approach similar to the scientific method when pursuing entrepreneurial activities. He uses the analogy that entrepreneurial ideas are like experiments. Based on this analogy, Sull suggests the following three steps: Step 1: Formulate a Working Hypothesis –Keep it fluid and change your hypothesis as the facts come in. –Be sure you have the right to an opinion by gaining the appropriate expertise. –Identify deal killers. Step 2: Assemble Resources –Raise enough financing for the next round of experiments. –Stabilize the business model before making key hires. –Outsource functions that are distracting to your experiments. Step 3: Design and Run Experiments –In the initial stages of the venture, conduct partial experiments by testing small parts of the business model. –Conduct holistic experiment when several variables must be tested at once. –Stage partial experiments before undertaking more expensive holistic experiments. –Avoid experiment creep by not letting the experiments drag on too long and exhaust your resources. Donald F. Kuratko and Jeffrey S. Hornsby, New Venture Management (Pearson Prentice Hall: 2009).

16. 16 Confidential - for classroom use only The Great Divide: The Lean Startup vs. The Process Driven Startup

17. 17 Confidential - for classroom use only The Lean Startup Thomas Eisenman, et. al. Hypothesis-Driven Entrepreneurship: The Lean Startup (Harvard Business School Background Note: 2011)

18. 18 Confidential - for classroom use only Introduction Startups are new organizations created by entrepreneurs to launch new products. A startup's founders typically confront significant resource constraints and considerable uncertainty about the viability of their proposed business model. A hypothesis-driven approach to entrepreneurship maximizes, per unit of resources expended, the amount of information gained for resolving such uncertainty. When following this approach, an entrepreneur translates her vision into falsifiable business model hypotheses, and then tests those hypotheses using a series of minimum viable products (MVPs). Each MVP represents the smallest set of activities needed to disprove a hypothesis. Based on test feedback, an entrepreneur must decide 1.whether to persevere with her proposed business model; 2.pivot to a revised model that changes some model elements while retaining others; or 3.simply perish, abandoning the new venture. She repeats this process until all of the key business model hypotheses have been validated through MVP tests. At this point, the startup has achieved product-market-fit: it has a product that profitably meets the needs of the target market's customers, and can commence scaling.

19. 19 Confidential - for classroom use only Speed Matters A hypothesis-driven approach helps reduce the biggest risk facing entrepreneurs: offering a product that no one wants. Many startups fail because their founders waste resources building and marketing products before they have resolved business model uncertainty. By contrast, early-stage entrepreneurs who follow a hypothesis-driven approach do not view growth as their primary objective. Instead, their goal is to learn how to build a sustainable business. By bounding uncertainty before scaling, the hypothesis-driven approach optimizes use of a startup's scarce resources. Entrepreneur Eric Ries coined the term lean startup to describe organizations that follow the principles of hypothesis-driven entrepreneurship. In this context, "lean" is often misinterpreted as meaning that a startup is bootstrapping, keeping costs to a bare minimum and relying only on its founders' personal resources. Rather, lean startups espouse the same objective as firms that embrace lean manufacturing: avoiding waste. A lean startup may eventually invest enormous amounts of capital in customer acquisition or operational infrastructure – but only after its business model has been validated through fast and frugal tests. Time is often an entrepreneur's scarcest resource; speed matters. Like lean manufacturing, the lean startup method and its intellectual antecedents – entrepreneur Steve Blank's customer development process, agile software development, and design thinking – accelerate the tempo of innovation by relying on rapid iteration, small batches and short cycle times.

20. 20 Confidential - for classroom use only Alternative Approaches …contrasts the lean startup method with three other approaches often used to launch startups: 1.Build-It-And-They-Will-Come bypasses customer feedback and demand validation, relying solely on a founder's vision for initial guidance, and then focusing an engineering-dominated team's energy on turning the founder's vision into reality. 2.Waterfall Planning divides product development work into phases (e.g., concept exploration, product specification, product design, product development, internal testing, alpha launch) that are completed in sequence by different organizational units, with each new phase commencing only when the prior phase's work passes a formal review. 3.Just Do It! eschews a strong product vision or detailed plan, relying instead upon an improvisational approach that adapts a startup's product and business model based on feedback from resource providers and customers. The Build-It-And-They-Will-Come and waterfall planning approaches both provide initial direction, but make limited use of feedback to subsequently correct course. By contrast, the Just-Dolt! approach embraces feedback, but a lack of initial direction means that some adaptations may turn out to be costly and time-consuming detours. The lean startup approach, by testing a comprehensive set of business model hypotheses, helps ensure that pivots – feedback-induced adaptations – are efficient and effective.

21. 21 Confidential - for classroom use only

22. 22 Step 1: Develop a Vision Before an entrepreneur can generate business model hypotheses, he must have a vision for the problem that his startup will address and a potential solution for that problem. This initial step of developing a vision, also called ideation, is less subject to "by-the-book" instruction than the other stages in the lean startup launch process.

23. 23 Confidential - for classroom use only Step 2: Translate the Vision into Hypotheses Next, having developed a vision, the entrepreneur translates it into falsifiable business model hypotheses. A business model is an integrated array of distinctive choices specifying a new venture's unique customer value proposition and how it will configure activities to deliver that value and earn sustainable profits. These choices… can be grouped into four elements that define the new venture's customer value proposition, technology and operations plan, go-to-market strategy, and cash flow formula. Falsifiability. For each business model element, an entrepreneur formulates a set of falsifiable hypotheses. As with the scientific method, a hypothesis is falsifiable when it can be rejected through a decisive experiment…. Whenever possible, entrepreneurs should generate hypotheses that require quantitative metrics for validation. Appropriate metrics will depend on the hypothesis to be tested, but entrepreneurs who follow the lean startup approach invariably monitor their customer conversion funnel closely. A conversion funnel represents a multi-step process through which a prospect may eventually be converted into a loyal customer…. Entrepreneurs combine conversion funnel data with other metrics to estimate the average lifetime value (LTV) of variable contribution margin earned from a typical customer of a given type, net of the average customer acquisition cost (CAC) for that type. Entrepreneurs often use cohort analysis to track trends in LTV/CAC, conversion funnel performance, and other metrics. A cohort encompasses a set of customers acquired during a specific period of time, often through the same marketing method…. Comprehensiveness. At a venture's outset, its founder need not develop detailed hypotheses for all elements of her business model. Business model analysis is an iterative and ongoing process. Due to serial dependence between business model elements, some assumptions simply cannot be analyzed unless others are addressed first. For example, until a team has formulated hypotheses regarding what customer segments they will target, they cannot generate falsifiable hypotheses regarding customer acquisition costs. While entrepreneurs should avoid over-investing in detailed analysis of downstream topics, they nevertheless should make a quick pass through all elements of their business model early in the process of evaluating an opportunity. Back-of-the-envelope analysis is adequate at this stage. The goal is to surface potential "deal-breaker" issues early-in particular, any Jack of internal consistency between model elements-and to stimulate a search for ways to address them.

24. 24 Confidential - for classroom use only Summary of Business Model Questions Customer Value Proposition 1.What unmet needs will the venture serve? 2.Which customer segments will it target? 3.Will it emphasize differentiation or low cost? 4.Will it serve a new or existing market? 5.What will be the minimum viable product at launch? The roadmap for adding features? 6.Who will provide complements required for a whole product solution? On what terms? 7.How will the product be priced? Does skimming or penetration pricing make sense? 8.Can the venture leverage price discrimination methods? Bundling? Network effects? 9.What switching costs will customers incur? What is the expected life of a customer relationship? 10.Relative to rivals' products, how will customers’ willingness to pay compare to their total cost of ownership?

25. 25 Confidential - for classroom use only Summary of Business Model Questions Go-To-Market Plan 1.What mix of direct and indirect channels will the venture employ? What margin and/or exclusive rights will channel partners require? 2.Given expected customer lifetime value (LTV), what customer acquisition cost (CAC) will the venture target? 3.What mix of free and paid demand generation methods will the venture employ? What will be the shape of its customer conversion funnel? The CAC for each paid method? 4.If the venture relies on free demand generation methods, what will be its viral coefficient? 5.Will the venture confront a chasm between early adopter and early mainstream segments? If so, what is the plan for crossing the chasm? 6.Does the venture have strong incentives to race for scale due to network effects, high switching costs, or other first mover advantages? Do scalability constraints and late mover advantages offset these incentives?

26. 26 Confidential - for classroom use only Summary of Business Model Questions Technology & Operations Management 1.What activities are required to develop and produce the venture's product? 2.Which activities will the venture perform in-house and which will it outsource? 3.Who will perform outsourced activities, and under what terms? 4.What are the cost drivers for key activities? Can the venture exploit scale economies in production by substituting fixed for variable costs? 5.Will the venture create any valuable intellectual property? If so, how will it be kept proprietary? 6.Are there other first mover advantages in technology & operations (e.g., preemption of scarce inputs)? Late mover advantages (e.g., reverse engineering)? 7.Given capacity and hiring constrains, can the venture scale operations rapidly?

27. 27 Confidential - for classroom use only Summary of Business Model Questions Cash Flow Formula 1.What contribution margin will the venture earn? 2.What fixed costs will the venture incur, and what breakeven capacity utilization and sales volume does this imply? 3.What share of the total addressable market does breakeven sales volume represent? 4.How much investment in working capital and property, plant & equipment will be required per dollar of revenue? 5.How will contribution margins, fixed costs, and investment/revenue ratios change over time? 6.Given projected growth, will be the profile of the venture's cash flow curve? How deep is the curve's trough, and when will it be reached?

28. 28 Confidential - for classroom use only Step 3: Specify MVP Tests For an entrepreneur confronted with uncertainty and controlling limited capital and team resources, it is essential to maximize learning per unit of time and effort expended. The best way to accelerate learning is…to "launch early and often.” Uncertainty can be resolved to some extent through traditional market research techniques such as focus groups and customer surveys. However, entrepreneurs get far more reliable feedback when they put a real product in the hands of real customers in a real world context. How can one launch early and often? By specifying a minimal viable product (MVP): the smallest set of features and/ or activities needed to complete what Ries calls a "Build-Measure-Learn” cycle and thereby test a business model hypothesis. Minimum viable products may be "minimal" in one or both of two ways, compared to the product an entrepreneur might expect to eventually offer when scaling aggressively. MVPs may constrain product functionality and/or operational capability. With constrained product functionality, customers experience only a subset of the features envisioned for subsequent versions of the product. With constrained operational capability, a startup relies on temporary and makeshift technology to deliver the MVP's functionality. The simplest MVPs take the form of smoke tests that radically constrain both functionality and operations, testing demand for a product that does not yet exist. When specifying MVPs, entrepreneurs should consider the risk that their test design may yield either a false positive or a false negative result. A false positive indicates that a hypothesis has been confirmed when in reality it is not valid. When evaluating demand, false positive results are sometimes observed when entrepreneurs recruit enthusiasts individuals with an unusual level of passion for the product category - as test subjects. If test subjects' preferences are not representative of those of the bulk of prospects who will be targeted as a startup scales, then high rates of engagement observed in an MVP test may not be meaningful indicators of demand. Concerns About MVPs. Entrepreneurs often express two concerns about "launching early and often" with MVPs: 1.Exposure to Idea Theft. Some entrepreneurs worry that an early launch will exacerbate the risk of competitors stealing their concept. In most instances, however, the value of early feedback greatly outweighs any risk of accelerating rivals' entry. Furthermore, ideas are worthless unless executed, and the iterative MVP methodology helps a startup improve its execution and time-to-market performance. In general, both entrepreneurs and corporate managers spend too much time worrying about competitors and not enough time understanding potential customers. 2.Reputational Risk. Other entrepreneurs cite the reputational risk of launching an MVP that may have limited features and / or have bugs. The MVP testing approach deliberately limits the target customer base to the minimum scale necessary to rigorously validate hypotheses, and thereby mitigates the reputational impact of any quality problems. Using a different brand name for MVP tests can sometimes also diminish reputational risks.

29. 29 Confidential - for classroom use only Step 4: Prioritize Tests After generating business model hypotheses and specifying MVPs to test them, an entrepreneur must prioritize the tests, deciding how to sequence them. As a general principle, an entrepreneur should give priority to tests that can eliminate considerable risk at a low cost. …when business model elements are serially dependent, then an entrepreneur will have little choice about how to sequence experiments. For example, hypotheses about a go- to-market plan or a technology sourcing strategy usually will depend on a startup's customer value proposition. Parallel Testing. Sometimes, however, entrepreneurs will have the option to pursue tests in parallel, because the relevant hypotheses are not serially dependent. There are tradeoffs involved with parallel testing. On the one hand, if an entrepreneur tests hypotheses A and 13 simultaneously, and A is decisively rejected in ways that render B irrelevant, then the effort expended on testing 8 has been wasted. On the other hand, if both hypotheses are validated, then the startup can gain a time-to-market edge by testing A and B in parallel, rather than in series. When a startup faces a threat of competitive preemption – especially in a winner-take-all market – parallel testing can confer benefits.

30. 30 Confidential - for classroom use only Step 5: Learn from MVP Tests In the next stage of the lean startup process, entrepreneurs evaluate feedback gained from MVP tests. As noted above, they should ask whether the result might be a false positive or false negative. Entrepreneurs also should be on guard against two other potential sources of error. 1.The first comes from customers, whose stated preferences do not always correspond to their true preferences. Consider the experience of Facebook in launching two new features: Beacon, which posted information about users' purchase transactions (e.g., their Netflix rentals) and News Feed. Both features generated protests from Facebook users. Yet, the former was dropped while the latter was retained. Why? Because Facebook had data to show that users were engaging with News Feed but not Beacon. Facebook's management acted on users' revealed rather than stated preferences. 2.The second source of potential error in interpreting test feedback comes from the entrepreneur herself. Extensive psychological research shows that humans are vulnerable to cognitive biases: they see what they want to see, and they see what they expect to see. In addition to collecting the data required to confirm or disprove hypotheses, entrepreneurs should be on the lookout for surprises as they conduct MVP tests. Surprises come in two forms: 1.Unexpected test results. When using a new product, customers frequently behave in unanticipated ways. 2.Information not derived from testing. An entrepreneur may also revise business model hypotheses based on other sources of unexpected information, beyond test results. Such sources include competitors' announcements, regulators' actions, and news about new technologies.

31. 31 Confidential - for classroom use only Step 6: Persevere, Pivot, or Perish After evaluating MVP test results and other market feedback, an entrepreneur must decide whether to persevere, pivot, or perish. 1.Persevere. If the MVP validates the business model hypothesis and other feedback does not prompt a shift in direction, then the entrepreneur perseveres on his current path, either testing remaining hypotheses or –if all hypotheses have been validated – preparing to scale. 2.Pivot. lf the MVP test rejects the business model hypothesis or if it validates the hypothesis, but other feedback indicates that greater opportunity lies elsewhere, then the entrepreneur may elect to pivot. In basketball, a pivoting player keeps one foot planted while moving the other. For startups, the same principle holds: a pivot changes some business model elements while retaining others. In particular, core aspects of the startup's original vision are typically retained, for example, a commitment to solving a broad problem, to serving a certain customer segment, or to employing a proprietary technology. Consistent with this, Ries defines a pivot as changing strategy while retaining one's original vision. Pivoting is neither a goal nor something to be avoided. While pivoting can be costly and disruptive, failing to pivot when assumptions are known to be flawed can be fatal. 3.Perish, If an MVP test decisively rejects a crucial business model hypothesis, and the entrepreneur cannot identify a plausible pivot, then she should shut down her business.

32. 32 Confidential - for classroom use only Typology of Pivots An entrepreneur may choose to pivot along one or more of the following dimensions of a business model: 1.Customer Value Proposition: Feature Set. A new venture may pivot to a new customer value proposition by expanding, contracting, or entirely changing its feature set. TiVo, for example, originally intended to sell home media servers; the venture contracted its feature set to focus solely on digital video recording, while still retaining its focus on the home entertainment sector. Chegg changed its feature set entirely while retaining its focus on college students: it pivoted from being a Craigslist-style marketplace for university communities to renting textbooks. 2.Customer Value Proposition: Customer Set. A startup may also pivot to a new customer value proposition by expanding, contracting, or entirely changing its customer set. Zipcar, for example, broadened its target market beyond environmentally conscious young urbanites to include young urban professionals, offering BMWs and similar brands to the latter segment cars that had little appeal for its initial customers. 3.Technology and Operations Management Strategy. An entrepreneur may choose to expand, contract, or shift the scope of activities that are performed internally, rather than externally by partners. For example, Keurig, after abortive efforts to develop the in-house capability to manufacture packaging line equipment and brewers and to develop its own brand of coffee, outsourced all of these activities to partners. 4.Go-To-Market Plan. A startup may change its main methods for acquiring customers. Dropbox, for example, initially expected to rely on a combination of search engine marketing and distribution by partners such as PC security software vendors. When these methods proved uneconomical and infeasible, respectively, Dropbox shifted to viral marketing. 5.Cash Flow Formula. A startup may pivot by changing its monetization approach. Google, for example, initially tried to license its search technology to online portals and other websites before shifting to paid search advertising

33. 33 Confidential - for classroom use only Step 7: Scaling and Ongoing Optimization If an entrepreneur has validated all key business model hypotheses, then he has achieved product- market fit. Product-market fit means that the venture has the right product for the market: one with demonstrated demand from early adopters and with solid profit potential. This in turn implies that the venture can deliver adequate value to all relevant parties: employees will join; customers will buy the product at the price being offered; partners will be motivated to provide technology and distribution; and investors will be able to earn adequate returns. It is time to scale, to invest aggressively in customer acquisition and to amass the additional resources required – staff and infrastructure – to serve a rapidly growing customer base. Entrepreneurs should continue to utilize hypothesis-testing methods even after confirming their business model assumptions. The purpose of these tests shifts from business model validation to business model optimization. In the spirit of kaizen – continuous improvement – optimization through rigorous experimentation never ends. Of course, startups may still need to – or choose to – pivot after they have achieved product-market fit. However, because the costs of doing so are much greater with a scaled-up organization, entrepreneurs are only likely to pivot in response to major and unexpected environmental changes that either disrupt business model elements or present unusually attractive new opportunities.

34. 34 Confidential - for classroom use only Limits to Lean Startup Methods When Mistakes Must be Limited A hypothesis-driven approach relies on the ability to make and learn from mistakes. However, new ventures do not always operate in environments where mistakes are tolerable. Three such situations are especially salient: when there is no post-launch ability to correct mistakes; when mistakes would impact customers' mission-critical activities; and when there is limited societal tolerance for mistakes. When Demand Uncertainty is Low With strong unmet demand for a new product, there is less need to seek feedback about customers' needs. This would be the case for a low-cost cancer cure that produced no adverse side effects. Similarly, there would be strong demand from utilities for a low cost, re liable, "green” solution for generating electricity that did not produce unpredictable, off-peak spikes in output requiring expensive power storage facilities - a limitation of solar and wind energy. With such new products, entrepreneurs should still follow a hypothesis-driven approach to testing alternative engineering approaches, but it is not imperative to launch early and often to get feedback about customer demand. When Demand Uncertainty is High but Development Cycles are Long Intrinsically long product development cycles, which are endemic to entrepreneurial projects that require engineering breakthroughs or massive infrastructure deployment, make it impossible to launch early and often. If demand uncertainty is low, this doesn't pose a major problem. But what if development cycles are intrinsically long for a radically innovative product for which there is considerable uncertainty about customer demand? Consider the case of Segway. Until the company had a working prototype of its two-wheeled "personal transportation system," could anyone accurately predict how early adopters would react to the product? In this context, there is no possibility of putting a real product in the hands of real customers, early in the product development process. But the entrepreneur should s till use hypothesis-testing methods whenever possible to gain insight on target customers' needs.

35. 35 Confidential - for classroom use only If You Really Want to Change the World A Guide to Creating, Building and Sustaining Breakthrough Ventures Henry Kressel and Norman Winarsky (Harvard Business Review Press: 2015)

36. 36 Confidential - for classroom use only Countering the Culture of Failure …we want to counter a pernicious trend that has taken over the start-up community. Let’s call it the culture of failure. The idea seems simple enough: you have a broad venture concept but not a clear understanding of the market and product. You put together a team, start the venture, and keep trying to succeed by a process of pivoting (trial and error). You expect repeated failures on the way, but you hope to get to a state where the product you develop actually meets the market need. This is not a good model for creating great ventures, and is not what this book is about. This book is about giving you a guide to the process that we— and others— have used to create and build companies that have become a permanent part of our landscape. … Failure has become de rigeur, particularly in software start-ups that initially require little capital and small teams. The idea seems simple enough: you start with an initial venture concept, put together a team, and launch the venture. You develop minimally viable products, keep testing different market and product hypotheses, and pivot based on the market feedback you get. You expect to fail repeatedly and hope to eventually get to a product– market fit. This approach is successful for some ventures— mostly for software-related companies with modest initial operating expenses. Often, the “pivot until you succeed” approach appeals to technologists who are in love with their tech. You get your technology into the market and see who wants it. There’s nothing wrong with being in love with tech; we’ve all been there, because new technology enables innovative ventures. But there is a problem with basing your business solely on your love of a piece of technology (sometimes called “tech push” or “tech transfer”). Technology is almost always best applied as a solution to a defined market problem. It enables the product to function. It is almost never a product in itself. For example, natural language was Siri’s solution to giving users to access web services by voice without clicks. Natural language alone was not a product. The hit-or-miss approach makes sense only when and if you have struggled with your existing value proposition, and it’s failing. Then, of course, you can and should change course from your original vision. But we agree with Mike Moritz, a leading venture capitalist at Sequoia Partners, who told us, “Pivot means you’ve failed. It’s not that you shouldn’t have to move on sometimes, but it shouldn’t be a strategy.” He went on, “‘ Fail fast, fail often’ is marketing rubbish. Nobody likes failure.

37. 37 Confidential - for classroom use only Four Ingredients for Start-Up Success Our process is fundamentally different by being a constructive approach, rather than a “fail fast, pivot often” approach. It guides entrepreneurs to building a breakthrough venture by combining four ingredients: 1.A large market opportunity with potential for rapid growth 2.An outstanding team capable of execution 3.A differentiated technology or business solution that trumps the competition 4.A value proposition and business plan that articulate the company’s value, strategy, and attract the required capital Without every one of these elements, the probability of success is nearly zero.

38. 38 Confidential - for classroom use only The Eight Elements of the Framework 1.Identify a large market opportunity with potential for rapid growth. 2.Identify a differentiated technology or business solution that trumps the competition and provides the basis for market growth 3.Build a team of people who are experienced in the market and technology space, with the leadership, energy, domain knowledge, and commitment to lead the company to success. 4.Develop a value proposition and a business plan that articulate the company’s value, strategy, and plan, and attract the required capital. 5.Find the right investors and members of the board who will be active in building value in the venture. They will be your partners, mentors, and supporters and must give you financial and strategic support …. 6.Build the organization, and execute with power, speed, and agility. 7.Manage success at the crossover stage. Once you’ve succeeded, you must be ready to cross over to becoming a large company. Many organizations fail at this stage 8.Ensure the future. Many large companies cease to innovate, or at least struggle with it. By modifying the process that helped you build your company, you can help sustain innovation, thereby sustaining your company for the long term. …you don’t work on these elements discretely, completing one and then moving to the next. Instead, you develop rough ideas for each element and then iterate on them in any order you choose, successively refining your value proposition.

39. 39 Confidential - for classroom use only Experience Matters …this is a major point for any entrepreneur. If you or your leadership team members don’t have experience in the industry you’re targeting, you are deeply at risk. No amount of talking to customers will give you sufficient knowledge to learn the intricacies of a complicated ecosystem.

40. 40 Confidential - for classroom use only 1. Breakthrough Market Opportunities Market pain = market opportunity. Greater pain = greater opportunity. A well-worn phrase among venture capitalists is that they seek businesses that are “painkillers, not vitamins.” Painkillers are pretty sure to be adopted by the market, and people are willing to pay for them. It’s much harder to predict demand for vitamins. Here are a few examples of reasons that consumers buy products or services: 1.To save time 2.To save money 3.To simplify their tasks 4.To experience surprise and delight 5.To be entertained 6.To generate income 7.To enable sharing and collaboration 8.To satisfy their vanity.

41. 41 Confidential - for classroom use only 2. Trigger Points …massive transformations open opportunities for the creation of world- changing businesses. The correct timing of new ventures is a key factor in their success. Although history never precisely repeats itself, it does have patterns. Equally important is an entrepreneur’s ability to take advantage of developing events. There are at least five primary trigger points creating opportunities for massive transformation, both enterprise and consumer. 1.New government regulations create new markets. 2.Market and technology trends converge. 3.A new technology platform emerges that creates new product and service opportunities. 4.A new technology platform emerges that displaces existing products and services. 5.New international markets create opportunities.

42. 42 Confidential - for classroom use only 3. The Team A good way to think of a product is that it is a representation of the genius of the people who created it. A great team can create a great product. A mediocre team will always create a mediocre product. Here’s our overall process for building teams. 1.Determine who are founders and who are executives. 2.Identify the CEO. 3.Define the characteristics of the start-up team. 4.Recruit the start-up team. 5.Develop the team and a culture of corporate integrity. 6.Develop and modify the team over the stages of the company’s life.

43. 43 Confidential - for classroom use only 3. The Startup Team The start-up team, though entrepreneurial, needs to have the leadership, market, operational, and technical skills necessary to execute the plan, as well as a common vision of the goals it’s aiming to achieve. Start-up teams are very different from management teams that run large companies. Start-up teams get paid less, and the expectation is that their ultimate financial reward is the equity they have in the business they’re building. They are problem solvers and risk takers and not dependent on the infrastructure of a big company to get their jobs done. They also expect to work day and night, seven days a week. Usually they have no retirement plan except for the equity they’re granted in the venture. The leaders need to be clearly established and respected. Although internal consultation and discussion are needed, decisions are rarely made unanimously. But the decisions must be respected by all, and this is why trust is important and the confidence in leadership critical. Effective people in start-ups must be more passionate about the opportunity than the financial reward.

44. 44 Confidential - for classroom use only 4. Project or Company? What are you ready to start— a project or a company? That is the fundamental question you must answer before you start putting together your venture. A project is an enterprise with limited objectives that reflect a limited understanding of the market or product. Frequently, the customer and the value proposition are not well understood, and the entrepreneurs are iterating (or pivoting) rapidly, seeking a product– market fit. The team members often hope that their efforts will lead to an early sale of the business under attractive financial terms and possibly to career opportunities in the acquiring company. The type of venture that we describe in this book starts out quite differently. Creativity is an essential element in a successful launch, but if you can’t put in place a financial plan based on the relevant realities, risky as it always is, you are not planning a business but a project— and hoping that unforeseen events will lead your project to success. We’re not talking about the mechanics of writing a business plan but rather about defining the essence of the new company and articulating why it can succeed. Addressing this question helps you define the issues the proposed new business will face and pinpoint ways to answer these issues in a credible way.

45. 45 Confidential - for classroom use only 4. The Business Plan The business plan of a potentially great company has seven ingredients. 1.A clear, simple mission statement articulating in a few paragraphs the major themes of the company. 2.A compelling business vision, business model, and go-to-market strategy to address a large and growing market. They describe the ecosystem in which the venture will operate. 3.A product or service solution that provides high value and clear differentiation from the competition— either through technology or the business model. 4.A quantitative statement of the benefits of the solution to the market. 5.A deep understanding and analysis of the competition. 6.A financial plan that anticipates risks and timing in reaching key milestones and states how they can be mitigated. 7.A value proposition that is a compelling statement of value to the market and the investor. This provides the foundation of your business plan and the reason for its anticipated success.

46. 46 Confidential - for classroom use only 5. Choosing Investors The greatest value investors and board members provide is their knowledge, experience, and support— not just their money. If you’re choosing investors for their money or deal terms alone, you’re at great risk. Entrepreneurs seek venture or private equity capital investment in order to accelerate business growth. In fact, 91 percent of the companies listed on the NASDAQ were backed by one or more of nine hundred venture capital firms. Normally, venture capitalists invest in companies that are potential home runs and can return ten times or more of the investment, at least if they’re investing in the earliest stages. This kind of financial success may happen only once in ten or twenty of their investments, but that is often enough to make their entire fund successful. It’s always valuable for the entrepreneur to be introduced to the investor by a respected entrepreneur or investor already known to them. Professional investors are focused on the character and reputation of the entrepreneurs they fund. Such introductions can greatly ease your ability to get a meeting with the right partners in a high- quality venture capital firm.

47. 47 Confidential - for classroom use only 5. The Investor Venture capitalists usually have only six to eight investments that they personally participate in at any one time. Most of those last for years, so the decision to invest in a new company and add one more company to their investment portfolio is not a frequent event. They may look at hundreds of companies before investing in a single one. It’s not unusual for a venture capitalist to invest in only one new company a year. Here are some parameters for you to consider in choosing lead investors: 1.Knowledge of your industrial sector. 2.Experience in working with early-stage companies. 3.Available references of past activities, particularly bearing on relationships with management teams and other investors. 4.Industry relationships that can help your venture. 5.Current activities in competitive companies. 6.How confidential will your information be kept? 7.Venture capitalists are rarely willing to sign a nondisclosure agreement. 8.Size and age of the fund. 9.Will follow-up investments be possible? 10.Historical pattern of the venture capital firm regarding follow-up investments. 11.Other commitments of the venture capital partner who will be responsible for the investment. 12.Will this person have the time needed to devote to your venture?

48. 48 Confidential - for classroom use only 5. Meeting the Investor Meeting 1: The Beginning When you meet venture investors for your first discussion, you need to convince them that the answer is yes to these three questions: Do you have a compelling vision and value proposition? Are you and your team passionate and unrelenting in your commitment to the vision? Are you and your team capable of executing? Meeting 2: In-Depth Discussions The next meeting provides more detail on your planned execution steps and the detailed capital requirements to meet milestones. Meeting 3: Focus on Major Risks and Issues The next discussions with the venture capital partner might involve one or more meetings to respond to questions and issues relating to the value proposition and business plan. Industry experts and consultants will likely be brought in. Remember— unlike what most people think— the venture capitalists take only calculated risks. They need to be aware of the known risks and understand your plan to deal with them. Meeting 4: The Venture Capital Partner Meeting A venture capital firm is a partnership in which decisions are frequently made by the entire partnership (or a subset of partners that constitutes an investment committee), and not by the individual partner. So even though the venture capital partner who is championing the opportunity may at this point be interested in making the investment, other partners need to be convinced. Meeting 5: Reaching a Deal If the venture partnership agrees to pursue the opportunity, the partner who is championing the opportunity will be given authority to negotiate terms for investment. Of course, the terms are very important to the team members and founders. They involve complexities that are best understood by experienced entrepreneurs and an experienced legal team. The terms can have a profound effect on the success of the company and are usually closely related to the industrywide terms that are generally understood to be acceptable both by the venture firm and by other venture investors.

49. 49 Confidential - for classroom use only 5. The Lead Investor The extensive process just described is finding what is called the lead investor firm because it has done the diligence necessary to understand and invest in the venture. The lead investor firm is usually the first and often the largest investor in the round. Frequently, additional investors will be solicited to join because investors generally like to share risk, even though they will, of course, be sharing the reward. Therefore, they will work with the team to identify other investors and syndicate with them. So the entrepreneur seeking investment needs to identify a lead investor having the experience and resources to make a long-term commitment to the new venture. The first investment round— sometimes called the seed round (or angel round) if it’s small, such as $ 250,000 to $ 2 million, or the A round if it’s larger— is rarely the last. Usually the first funding round finances the company to complete certain milestones, and the valuation placed on that round reflects the risks that the investors are taking. At the seed or angel round, the funds usually enable the company to recruit a core team and build a product demo or prototype. The A round usually brings the company to a product or service in the market, achieving some demonstration of market growth. A second round of funding usually follows at some time in the future, and the valuation of the company increases if it has met goals that suggest the key risks have been reduced. Further rounds, if the company progresses, are aimed at funding its growth, and the valuations placed on the company will increase. So, if things go well, over a period of years the company will raise increasing amounts of capital at increasing valuations until it becomes cash generative. A public offering (IPO) then becomes possible if public markets are favorable and if the company has reached a sufficient size to warrant the cost of being publicly traded.

50. 50 Confidential - for classroom use only 5. The Board of Directors It’s hard to overestimate the importance of the selection of board members in the development of your venture. As we mentioned above, your lead investor will almost certainly have a board seat. Boards normally meet no less than quarterly, but in early-stage companies monthly meetings are common practice, because the board has many rapidly changing issues to address and discuss. The board is legally charged with protecting the interests of the owners of the company. The board of directors is responsible for monitoring the financial health of the company, its strategic direction, and the appointment of the CEO, who reports to the board and serves at its will. Board members normally are not involved in daily operations. Usually the CEO is the only active employee of the company who serves on the board. The board is responsible for ensuring that leg Given the broad scope of the activities that the board is expected to participate in, it is important to pay special attention to its composition. Here are some practices that have proven helpful. The membership is limited to five or six people who have the time and interest to serve. Choosing an odd number of members can be valuable in avoiding ties in the event of rare but difficult votes. Board votes on major issues require that a quorum be present, so diligent participation from board members is important. The board membership is balanced, with investor representation, independent (noninvestor) industry experts, and the CEO. The agendas for meetings include reports on major activities such as marketing, product development, and financial results. These agendas are provided ahead of time to allow board members to digest the information prior to board discussion. Combining the CEO and chairman of the board roles used to be common, but it is less frequent now. The selection of one of the board members as chairman has benefits in dealing with difficult situations when management changes need to be implemented. There is a compensation scheme in place wherein board members are reimbursed for expenses incurred in conjunction with board activities. In addition, stock options are issued as an incentive for participation in building the equity value of the company.

51. 51 Confidential - for classroom use only 6. Execution There are probably hundreds or even thousands of individuals around the world who have had the same idea you’ve had. The primary difference between you and them will be your ability to execute. 1.It’s not obvious to most new entrepreneurs, but location is your first crucial decision. Distance from founders, distance from a supporting business ecosystem, distance from your likely new hires, distance from customers, distance from board members and investors, access to mass transit, the duration and costs of the lease, the ambiance of the environment— all these, and more, play a role…. There is a good reason venture capital firms tend to concentrate their investments in a few geographic areas, such as California’s Bay Area. 2.... the two most important metrics for all ventures are their burn rate (the monthly rate of use of available cash) and runway (the number of months of available cash remaining). 3.You must define an organizational structure from the start (subject to change with circumstance). It is not possible to hold people accountable if their responsibilities are not clearly defined. This means that you need to define reporting lines, along with responsibilities and timelines— a transition that is always painful. The starting team feels like a family, but with the addition of new people it soon becomes clear that chaos will be the result of poorly defined roles. 4.The process of getting products to market starts with defining what to make and how to make it (product management). Product marketing defines how to sell it, and project management defines how to execute the project. Unless all three roles are assigned and managers are responsible for working together, winning products will not see daylight. Either customers won’t want it, or it will be too expensive, or it will never be finished within a time frame when customers are willing to buy it. 5.…with limited resources to invest in market development, the key job of management is to decide which companies are actual potential customers and which are in the learning mode. If the value proposition is compelling, costs should be borne by the big company. Only the naive subsidize the learning experience of multibillion-dollar corporations.

52. 52 Confidential - for classroom use only 6. Execution

53. 53 Confidential - for classroom use only 6. Fatal Mistakes Fatal Mistake 1: Failing to Know Your Customer Value propositions and business plans, no matter how carefully crafted, make assumptions about customers and their buying behavior. But these assumptions are at best hypotheses. You may have talked with and gained assurance from many customers, but talking isn’t sufficient. As we discussed in chapter 1, it’s essential that your leadership team has deep domain knowledge and experience with customers and their ecosystem. Fatal Mistake 2: Keeping the Wrong CEO If you’re a CEO, you need to understand your own talents and limitations. Although you’ve created a great company, you may or may not have the skills to manage it in all the stages of its growth. This self-knowledge potentially determines the success or failure of the company as well as your own financial reward. Fatal Mistake 3: Mismanaging Finances Start-ups often spend more than they earn, but running out of money without the ability to raise more capital is the ultimate killer. As we’ve mentioned, the two most important metrics of any venture are the amount of cash available and the monthly burn rate. If you’re within three to six months of running out of cash, you’re in extreme danger. Hera are some ways that ventures waste money: 1.Hiring staff pre-maturely 2.Keeping the informality of the early venture too long as the company grows 3.Poor product management 4.The wrong partners 5.Erroneous cost accounting of products

54. 54 Confidential - for classroom use only 6. Fatal Mistakes Fatal Mistake 4: Being Overconfident If you think things are going great, why bother to change? Because an organization with this mind-set tends to become static and bureaucratic, with employees paying more attention to internal structure, position, and politics than to serving the customer. Early, rapid success is a good thing, but not if it leads to overconfidence. Often it causes ventures to neglect the competition or changing market needs. Teams begin to feel they are invincible, setting up the company for unpleasant surprises as competition emerges from unexpected sources. Overconfident ventures may avoid developing new products for fear that they will negatively impact existing products— or because information from the field says no new products are needed. As a result, only marginal product improvements are the order of the day. The solution? Stay paranoid! Perpetual paranoia needs to dominate a business as it runs harder and harder to gain its market position. Fatal Mistake 5: Failing to Anticipate Future Industry Developments A business cannot escape the impact the environment has on it. Anticipating future industry developments (good or bad) does not mean that the team needs to be gifted with prophetic powers. It does mean that the team must learn of historical trends likely to impact their venture. Such trends include the commoditization of products once considered proprietary, the consolidation of vendors, the growing importance of industry product and service standards, and, of course, the impact of new technologies that may be nascent when the venture is launched but that could become giant factors faster than anticipated.

55. 55 Confidential - for classroom use only 7. Managing Success at the Crossover Stage Get acquired, merge, refinance, or IPO? It’s not obvious. Your company has demonstrated that it can produce and sell valuable products, and its competitive position appears, for the moment, secure. Revenues are growing nicely, and you’ve reached profitability— or nearly so. Now is not the time to relax. You’ve reached the crossover stage. This is when management and the board need to make critical strategic decisions regarding the company’s future. Do you declare victory by selling the business, or is it time to continue big-time in business building? 1.Sell the company 2.Find new investors 3.Merge with another company in a stock swap 4.IPO (which requires predictable revenues and profits, the prospect of growth, and an experienced management team)

56. 56 Confidential - for classroom use only 7. Your Company at the Crossover Stage Here are some key elements that characterize a company that has reached the crossover stage. 1.Management has the resources and talent to effectively manage its current business. 2.There is an established customer base, with revenues that are becoming predictable, at least for one year going forward. 3.Although competition has intensified, revenues have been growing at rates exceeding those of competitors. Within its targeted market, the company enjoys a strong and growing position. Products are sold with a reasonable gross profit margin consistent with industry values. Looking ahead, however, you need to enlarge the product portfolio, requiring investments beyond your available financial resources. 4.Cash flow is predictable, if not yet profitable. Based on good projected revenue and performance data, the company can reach profitability within a certain projected cash use.

57. 57 Confidential - for classroom use only 7. Important Issues at the Crossover Stage Such success does not come without difficulties. Companies that reach this stage have been in existence for a few years. Now important issues need to be addressed. Here are some common ones. 1.There is a need for investor liquidity. The venture capital funds that financed the early years are maturing. They usually have a ten-year life, and hence there is a need for liquidity on the part of some investors. Tension exists between those influential people in the governance of the company who are seeking an event of liquidity, and those who think that the future prospects continue to be so compelling that a much bigger and more valuable company can be built. 2.Developing and marketing new products will require new capital. It has proven increasingly costly to develop new products of the same importance, because new competition has surfaced that increases the hurdles for new product success. 3.The company needs to invest more than it has in the past in international marketing, where growth prospects are highest. 4.One solution to the future growth problem is to acquire or merge with other companies to broaden the product portfolio and the technology base in the face of new industry developments. The funds to do that on a large scale are not available in the company.

58. 58 Confidential - for classroom use only 8. Ensuring the Future Many companies fail to renew themselves, and slowly die. Inevitably, those that continue to thrive are no longer implementing the same business model that launched the original company. Rather, they’ve pursued a continuous process of growth through innovation in all fronts— business model, products, marketing strategy, and business relationships. Here are seven key principles to guide you in thinking about the mature company’s culture, organization, and processes that will help it— and you— maintain a continuous cycle of innovation. 1.Start at the top There is no substitute for leading by example. Ultimately the most important factor in promoting an innovation mind-set is the behavior of management…. 2.Know how to manage exceptionally creative people 3.Establish a culture that motivates innovators 4.Establish a common language and process 5.Crate centers of innovation 6.Encourage innovation at all levels 7.Innovate continuously