2The Entrepreneurial Manager Final Exam Logistics - Section CFriday, 4 May :00am-1:00pmAldrich 10 (Aggarwal - Davis)Aldrich 107 (De los Reyes - Tepperman)Aldrich 108 (Terry - Zhao)Print Labs - Aldrich 7 & 8Download Printer Driver!Computer Difficulties - Aldrich 7Diskettes ProvidedOpen Book / Open Notes
3Entrepreneurial Manager Final Exam Integrate Quantitative and Qualitative AnalysisWhat questions are you trying to answer?How do the numbers inform your overall analysis?Clearly state/defend your assumptions.Be Specific in your Recommendations for ActionSupport your recommendations with AnalysisUse Your Time Carefully.
4What Pieces of “Analysis” Might You Encounter? Understanding the Business ModelAssessing the OpportunitySizing the Market - How much market share does the venture have to get to meet the revenue targets? How will it do that?Simple Diagnostics - e.g. “Taking the Company’s Temperature:”Financial Ratio AnalysisHow does the company make money?Gross MarginsAsset IntensityCash Needs - Does the Company “Burn” cash or generate cash? How much will the company need to execute its plan? From whom should it raise money?
5Additional Pieces of “Analysis” Understanding Effects of FinancingPre-Money and Post-Money ValuationHow much of the company must the entrepreneur give up?How much of the company does the investor require to meet his/her required rate of return?FV = PV(1+IRR)n => IRR = (FV/PV)1/n - 1Valuing the CompanyLifetime Value of Customers based on FCFCustomers we have today and those we expect to get.FCF = EBIAT + Dep - CapEx - WCCF = NI + Dep - CapEx - WCDiscounted Cash Flows (ke = rf + (rm-rf))EBITDA and/or Sales MultiplesComparable Companies and IndustriesIPO or M&A Transactions
6EM - Three Broad Questions What’s going on here?How has the company gotten to this point?What’s the business model? What kind of company is this?Revenues, Costs, Financing…What is the opportunity going forward?What resources do they need to pursue it?Cash? People? Customers?What should they do about it?Turn analyses into specific recommendations.Not just the what but the HOW?What are the risks? Anticipate consequences.What can go wrong? What can go right?How do we follow up? Measure the progress?
7The Entrepreneurial Manager Introduction - Welcome to the Territory 5 ClassesFundamentals for the Entrepreneur ClassesRecognizing OpportunityForecasting Cash FlowsA Venture as a Series of ExperimentsSources of Startup FundingBuilding the Successful Venture 9 ClassesStarting RightBuilding and Developing the TeamManaging RelationshipsAlternatives for the Successful Venture 4 ClassesAchieving Liquidity & Sustaining the EnterpriseSummary - Pulling it all Together 2 Classes
8What Did We Learn? New Knowledge Skills and Frameworks e.g., term-sheets, pre- & post-money valuation,venture capitalists, IPOsNewKnowledgee.g., evaluating an opportunity,reading a contract, unbundling risksSkills and FrameworksAction in the face of uncertainty.Entrepreneurial Point of View
9What Did We Learn from the Entrepreneurs & Advisors We Met in Class? Bob Reiss (TV Guide Game)Barb Schetter (R.R. Donnelley)Charles Ferguson (Vermeer)Chris Peters (Microsoft)Dr. V. (Aravind)Jeff Parker (Technical Data)Adi Cooper (Tracmail)Ann Meceda (PCC)Paul Ognibene (Clubtools)Sue Krukonis (Anasazi)Terry Opdendyk, Andy Swett (ONSET)Doug Macrae (Videoguide)Ralph Wagner (Walnut)Bob O’Connor (RBS - Walnut)Jim Sharpe (Extrusion Tech)Robin Wolaner (Parenting)Rajath Chaudry (Lawyers & Leases)Matt Lieb (Kingsley Management)Sharon Ward, Paolo (Return Logic)Jim Fitzgerald (Balance)Barry Arnold (Retail Sports)Nick Lazaris (Keurig)Ginger Howard (Guidant)Tom & Tom (Nantucket Nectars)Alan Ellman (Screaming Media)Candace & Chris (Kendle)Louise Kitchen, Jeff Skilling (Enron)Katy, Andy, Elyce (kate spade)Rob Adler, Jeff Parker (CCBN)
10Knowledge, Skills & Frameworks What is Entrepreneurship?Approach to ManagementOpportunity is the DriverAn Iterative ProcessOpportunity AnalysisReading Business PlansAssessing Business RisksDiagramming Business ModelsFishbone AnalysisPODC FrameworkEstimating Cash Flows and Drawing Cash CurvesRisk/Reward CurvesProbability of FailureExpected Value of ReturnsRobustness of UpsideEntrepreneurial ExperimentsValue of InformationMitigating Risks by Staging Experimentation and FundingDue Diligence and MilestonesFinancingTerm SheetsPre-Money, Post-MoneySources of FinancingInterest CoverageDeal StructureContractsLeases, Term Sheets, EmploymentCorporate FormsManaging Personal &Tax LiabilityWorking with LawyersQuestions to AskStructuring the Relationship
11Knowledge, Skills & Frameworks (Continued) Creating a Sustainable VenturePreparing for Liquidity EventsIPOPrivate SaleStrategic InvestmentsCreating Structure and Designing ProcessesFlexibility vs. DisciplineOrganizing the Team for the Next Stage of GrowthSelf Assessment?Personal Propensities for Risk, Uncertainty, Ambiguity?Desire for an Entrepreneurial Life?Building the TeamInterviewing MethodsSharing EquityBuilding the BoardSelecting AdvisorsCEO RedeploymentManaging RelationshipsBusiness Development ProcessID OpportunityMapping the Business NetworkScreen Potential PartnersStructuring Deal FormsAcquisitionAllianceEquity InvestmentTechnology LicensingManaging the Relationship
12Introduction R&R (Robert Reiss) R.R. Donnelley (Barb Schetter) An Entrepreneur follows OpportunityAn Entrepreneur spreads Risk and Owns very littleR.R. Donnelley (Barb Schetter)Big Companies also have opportunitiesVermeer (Charlie Ferguson & Randy Forgaard)A Visionary, A Technologist, still need A ManagerVC can help even if not a “friend”Vermeer/Microsoft (Chris Peters)Big Company seeking opportunity via acquisitionAravind Hospital (Dr. Venkataswamy)Grand Goal as an “Opportunity”The Deal with People can be more than about Money
13Introduction to Entrepreneurship A way of managing rather than a specific economic function or a characteristic of an individual.An approach to management that begins with OPPORTUNITY.HBS working definition:The pursuit of opportunity without regard to resources currently controlled.
14Entrepreneurial Process: Exploit Act Harvest Never- Ending Process IdentifyOpportunityMarshalRequiredResourcesNever-EndingProcessExploitDealsActHarvest
15Dimensions of Business Practice Promoter TrusteeEntrepreneurialAdministrativeStrategic OrientationOpp. DrivenResource DrivenCommitment to OpportunityRevolutionaryEvolutionaryInvestmentMulti-StagedSingle-StagedControl of ResourcesUse or RentOwn or EmployManagement StructureNetworks - FlatFormal HierarchyCompensation/RewardsValue/TeamIndividual
16Fundamentals: Opportunity Recognition Technical Data Corporation (Jeff Parker)Build on ExperienceSelect Investors for more than just moneyDon’t say No out of EnvyTracmail (Adi Cooper )Competing on Price is ToughSeek Barriers that ProtectWhat are the barriers to Competitive Attack?Private Communications Corp (Ann Meceda)Not every Idea is an OpportunityUnderstand your business model and experimentNothing goes exactly as planned
17Fundamentals: Forecasting Cash Flows Club Tools (Paul Ognibene)Pick Investors CarefullyCash Flow Forecasting DilemmaGo big or start smallAnasazi (Sue Krukonis)Going around the Distribution Channel is ChallengingCash is King
18Opportunity Analysis: Knowledge, Skills & Frameworks Reading Business PlansAssessing Business RisksDiagramming Business ModelsFishbone AnalysisPODC FrameworkEstimating Cash Flows and Drawing Cash CurvesRisk/Reward CurvesProbability of FailureExpected Value of ReturnsRobustness of Upside
19Understand the Business Model... Driver 1Driver 1RevenuesDriver 2Driver 2Driver 3Driver 3ProfitsDriver 1Using the Tool1. Draw the key drivers of revenue and costs.2. Identify key drivers and quantify assumptions.3. Test sensitivity to changes in key drivers.4. Analyze how reasonable key assumptions are.5. Use the tool to surface key assumptions, logical inconsistencies, critical sources of uncertainty and important questions to askCostsDriver 2Driver 3
20Dynamic Fit Management Change (Good & Bad News)PeopleContextOpportunityDealPatternRecognitionWhat can go wrong?What can go right?Risk/RewardManagementLearning
21Date of First Cash Flow Positive Maximum Financing Needs The Cash Flow Cycle for a VentureCumulative Cash Flow in $Date of First Cash Flow PositiveTimeDate of Cash BreakevenMaximum Financing NeedsBurn Rate
22Managing Risk and Reward What are the underlying assumptions and drivers of the decisions?What will change the odds?Probability of OccurrenceExpected ValueProbability of Losing 100%-100%+100%Goals in Managing Risk and Reward:- Increase Probability of Success- Increase Expected Returns+25%Return on Investment
23Fundamentals: Entrepreneurial Experiments Value of Information ExercisesExperiments Pay when Cost and Probability of Failure are High.Value of Information Depends on AlternativesONSET Ventures (Terry Opdendyk, Darlene Mann, Andy Swett)Sequential InvestmentMilestones, Objectives and Risk MitigationVenture Capital Model to StartupsVideoguide (Doug Macrae)Product Driven (Field of Dreams)Big Upfront Costs in Hopes of Lower Variable Costs Later“Go Big or Go Home” Strategy May Send You Home Early
24The Venture as a Series of Experiments: Knowledge, Skills & Frameworks Value of InformationThe Venture Capital Approach to StartUpsMitigating Risks by:Staging ExperimentationStaging FundingDue Diligence and Milestones
25Running the Experiment SUCCESSPayoff - InvestmentINVEST NOW- InvestmentFAILUREPayoff - Investment - Cost of TestINVESTGOOD RESULTS- Investment - Cost of Test1ABANDON- Cost of TestRUN A TESTBAD RESULTSPS|G(1-P)S|BSG
26Staged Experiments Level of Commitment Commercialization Prototype ValidationMitigate RisksIdeaTime
27Phased Investment Decisions AbandonInvestAbandonInvestSecondAbandonFirstAbandonSeedThe option to abandon can be more valuable than the option to continue.Founding
28Fundamentals: Sources of Financing Walnut Venture Associates A (Ralph Wagner)What do Angels want?How do you find out about a company and its people?Walnut Venture Associates D (Bob O’Connor)What do Entrepreneurs want from Financial Backers?An Angel Term Sheet Can Look Like a CamelExtrusion Technologies (Jim Sharpe)Banks as a Source of FundsSophisticated Experience Prevented Mundane MistakesParenting Magazine (Robin Wolaner)Experiment gave good results but didn’t raise $Corporate Partners have different needsCareer of the Entrepreneur (Each venture leads to others)
29Sources of Financing: Knowledge, Skills & Frameworks Term SheetsPre-Money / Post-Money ValuationDilutionMatching Opportunity to Source of FundingSequencing FinancingCalculating Interest CoverageNegotiating Deal Structure
30Which Funding Source Do I Pursue? Ask Yourself… How much money will we need?How deep is the cash trough?What stage are we in the life-cycle of this opportunity? How close to break-even?What are the exit options?From whom should we raise money?What do they provide in addition to funds? Expertise? Networks? Credibility?What will be their impact on our future fund-raising efforts?How will this deal influence our future flexibility?What are my personal preferences?How much control am I willing to give up?Am I willing to make a personal guarantee?What level of risk can I--and my family/significant other--live with?Is this a good time to raise money?What is happening in the broader capital markets right now?Is the IPO market hot right now? Will it still be hot when we want to sell?
31Sources of Financing Own Money/Customers/Suppliers Friends and Family kate spade, KendleFriends and FamilyR&R, Technical Data, PCCAngelsWalnut: RBS, Nantucket NectarsIncubatorsClubtools, PeoplestreetVenture CapitalistsVermeer, Return Logic, Keurig, AnasaziAsset Lenders (Banks)Jim SharpeCorporationsParenting Magazine, CCBN
32Alternative Sources of Funding Financing SourcePros for EntrepreneurCons for Entrepreneur
33Building the Successful Venture: Contracts Lawyers & Leases (Rajath Chaudry)Seek Strong Professional AdviceEarly Decisions MatterBeware of Conflicts of InterestsKingsley Management (Matt Lieb & Chris Jones)Don’t be Too Clever about FinancingFit Structure to StrategyReturn Logic (Sharon Ward, Paolo Motturo, Andrew Chan)Dividing Equity has RepercussionsTerms in Each Financing Affect the Next RoundDecisions you Make Today Affect you Tomorrow
34Building the Successful Venture: Contracts Knowledge, Skills & Frameworks LeasesTerm SheetsEmployment ContractsCorporate FormsManaging Personal and Tax LiabilityWorking with LawyersQuestions to AskStructuring the Relationship
35Building and Developing the Team Cambridge Incubator: Peoplestreet (Mark Pitts)Hiring is Critical and Can be LearnedHiring Well is a Competitive WeaponHiring Mistakes are Expensive and Take a Long Time to CorrectBalance Inc. (Jim Fitzgerald)Seek Advice but Don’t Compromise Personal ObjectivesDon’t Hire People You Don’t LikeUse Board and Advisors for RecruitingRetail Sports (Barry Almond)Bad Things Can Happen to Good Entrepreneurs“Should I Stay or Should I Go?”
36Building the Team Knowledge, Skills & Frameworks Interviewing MethodsSharing EquityBuilding the BoardSelecting AdvisorsCEO Redeployment
37Reducing Risk in Hiring Be clear in the job descriptionStage your investment in rounds of interviewsHire part-time or as consultant before full-timeInclude different perspectives in the interviewingContent-e.g., skills, fit, backgroundInterviewing approachInterviewer perspectiveCheck referencesWrite an explicit employment agreementThink about questions
38Entrepreneurship is a Team Sport Board of DirectorsExperienced Investors (e.g. VCs)Mentor or Coach for CEOIndustry ExpertTop Management TeamFunctional ExpertiseExperience (Start-up and Large Company)Organizational FitProfessional AdvisorsLawyersAccountantsExecutive Recruiters
39Entrepreneur’s Dilemma VisionYield Control to Others-Investors-Board-Top ManagersReduceUncertaintyBring in Critical Resources-Money-Professional Management-Advisors
40Managing Relationships Keurig Coffee (Nick Lazaris)R&R Revisited - Setting up the Virtual CompanyAssembling a Complex System of StakeholdersGuidant Radiation Therapy (Ginger Howard)What do you Have? What do Need? What Deal gets you There?Finding the Next Big ThingNantucket Nectars (Tom & Tom)Be Willing to Do the Laundry, if NecessaryDistribution is Not ObviousAchieving Liquidity while Preserving a Role
41Managing Relationships Knowledge, Skills & Frameworks Business Development ProcessID OpportunityMapping the Business NetworkScreen Potential PartnersStructuring Deal FormsAcquisitionAllianceEquity InvestmentTechnology LicensingManaging the Relationship
42The Business Development Process ModelIdentifyOpportunityIdentify/ScreenPotential PartnersStructureDealManageRelationshipClearly ArticulateOpportunityEvaluateMap neededresources/skillsDecide which todo in-house andwhich outsourceIdentify potentialpartnersApply preliminaryscreenEvaluate finalistson key criteriaEvaluate alternativeforms-Licensing-Equity investment-Alliance-Joint-venture-AcquisitionStructure contractto manage risks-Transfer-Reduce-ShareNegotiate DealManage portfolioof ongoingpartnerships-Key metrics-Individual andportfolio levelManage relationships-Ownership-As they evolve-Multiple points ofcontact
43Managing Relationships Ongoing management is required because reality is too complex to fully contract.Guidant’s Approach - Ginger Howard:Identify an Owner on each side responsible for the contract, negotiation and deliverables.Philosophical Alignment of People and Business Processes.Formal Reviews - Milestones, etc.Constant Communication - Talk every day…Ruthless Honesty.
44Creating a Sustainable Venture ScreamingMedia (Kevin Clark)Moving from Chaos to StructureHaving Cash in a Downturn is a Strategic AdvantageKendle International (Candace and Chris)Build Organization for Next Stage of GrowthValuations in Private vs. Public MarketsEnron (Louise Kitchen & Jeff Skilling)Is there Entrepreneurship in Large Organizations?Can you Develop Processes that Maintain Flexibility and Foster Pursuit of Opportunity?kate spade (Katy, Andy, Elyce, Pamela)Money to Grow vs. Money to Compensate for Past EffortsCCBN (Jeff Parker)Is Entrepreneurship Learnable?
45Creating a Sustainable Venture Knowledge, Skills & Frameworks Preparing for Liquidity EventsIPOPrivate SaleStrategic InvestmentsCreating Structure and Designing ProcessesFlexibility vs. DisciplineOrganizing the Team for the Next Stage of Growth
46Achieving Disciplined Entrepreneurship Benefit ofDisciplineBenefit ofFlexibilityLevel of StructureStart-upEstablished Firm
47Taking it to the Next Level.. Can you scale up the business model, especially cash?Can the management team make the next step?Who do you bring along to the next step? Who do you leave behind? Who gets on board?ManagementInvestorsCustomersPartners
48Avoiding the Flat-Line... Actively search for opportunitiesObsess about your customersFrame crises as opportunities not threatsFrame action as experimentDon’t fire scientist when experiment fails (except if he runs same experiment twice)After you raise the money, avoid the temptation to bet it all on one hand or roll of the dice.
49What’s Stopping the Big Guys from Doing It? Attackers’ AdvantagesInnovative Business ConceptSense of UrgencyStart-Up, Speed-Oriented CultureOpportunity focusedNetwork of RelationshipsShareholder Value FocusDefenders’ DilemmaCannibalization fearsChannel conflictsResource drivenCurse of the deep pocketCurrent income focusConventional mindset
50Entrepreneurial Point of View Make Decisions Today and in the Future to Ensure that:What can go right, goes right.What can go wrong is avoided or will not critically wound the company.How can I make the future that I want to happen actually happen?Knowledge, Skills, and Frameworks Mean Little without Action.The great end of life is not knowledge but action.T.H. HuxleyAn ounce of action is worth a ton of theory.Friedrich Engels
51The Entrepreneurial Manager and You: Questions to Ask Do I want to be involved in an early stage venture at some point in my career?Do I want to be involved as a supplier of financing to early stage ventures?What early career experiences will best prepare me?What is my risk profile?Can I tolerate ambiguity and uncertainty?Am I motivated by the love of a product, being in control, creating something new, making money?
52Career Choices Be an Entrepreneur Work with Entrepreneurs Strategy 1 - Go For It NowStrategy 2 - Learn Best Practices FirstWork with EntrepreneursPrivate EquityConsultingBankingCorporate ManagerNon-ProfitWhat Else?
53Attitudes are Essential... There is no one “type” of entrepreneurSuccess is not forever, and failure is not fatal.Failure is the opportunity to begin again more intelligently Henry FordAt the end of the day, what do you have?RelationshipsReputationMake every day an adventureJust as in life, business is about development and growth. Each is equally exciting.Courage is doing what you are afraid to do. There can be no courage unless you are scared. - Eddie Rickenbacker
54On Effort and Failure and Continued Pursuit... It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, and comes short again and again; because there is not effort without error and shortcoming; but who does actually strive to do the deeds; who knows the great enthusiasms, the great devotions; who spends himself in a worthy cause, who at the best knows in the end the triumphs of high achievement and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who know neither victory or defeat.- Theodore Roosevelt, 1910 at the Sorbonne
55Is it Luck or Hard Work?I find the harder I work, the more luck I seem to have.Thomas JeffersonOpportunity is missed by most people because it is dressed in overalls and looks like work.Thomas Edison
56You Decide - Is the View Worth the Climb? “The view we enjoyed from the summit could hardly be surpassed in sublimity and grandeur; but one feels farfrom home so high in the sky, so much so that one isinclined to guess that, apart from the acquisition of knowledge and the exhilaration of climbing, more pleasure is to be found at the foot of the mountains than at their frozen tops. Doubly happy, however, is the many to whom lofty mountain-tops are within reach for the lights that shine there illumine all that lies below.”--John MuirExercise and recreation are as necessary as reading. I will say rather more necessary because health is worth more than learning.--Thomas Jefferson
57MEN WANTED! Ernest Shackleton Will YOU Sign Up for the Entrepreneurial Adventure?MEN WANTED!FOR HAZARDOUS JOURNEY.SMALL WAGES, BITTERCOLD, LONG MONTHS OFCOMPLETE DARKNESS,CONSTANT DANGER,SAFE RETURN DOUBTFUL.HONOR AND RECOGNITIONIN CASE OF SUCCESS.Ernest ShackletonRecruiting Advertisement for Shackleton’s 1914 Trans-Antarctic Expedition aboard the Endurance Men (and 3 Women) Applied - 27 Set Out on the Journey -27 Returned Safely
58Setting off on the Journey There is little point in setting out for a place that one is almost certain to reach.- H.W. Tilman“Smooth Seas do not Make Skillful Sailors”