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Entrepreneurial Manager Tool Kit Course Wrap-Up The Entrepreneurial Manager Harvard Business School 1May 2001.

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Presentation on theme: "Entrepreneurial Manager Tool Kit Course Wrap-Up The Entrepreneurial Manager Harvard Business School 1May 2001."— Presentation transcript:

1 Entrepreneurial Manager Tool Kit Course Wrap-Up The Entrepreneurial Manager Harvard Business School 1May 2001

2 u Logistics - Section C Friday, 4 May :00am-1:00pm –Aldrich 10 (Aggarwal - Davis) –Aldrich 107 (De los Reyes - Tepperman) –Aldrich 108 (Terry - Zhao) Print Labs - Aldrich 7 & 8 –Download Printer Driver! Computer Difficulties - Aldrich 7 u Diskettes Provided u Open Book / Open Notes The Entrepreneurial Manager Final Exam

3 Entrepreneurial Manager Final Exam Integrate Quantitative and Qualitative Analysis –What 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 Action –Support your recommendations with Analysis Use Your Time Carefully.

4 What Pieces of Analysis Might You Encounter? Understanding the Business Model –Assessing the Opportunity Sizing 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 Companys Temperature: Financial Ratio Analysis How does the company make money? –Gross Margins –Asset Intensity –Cash 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?

5 Additional Pieces of Analysis Understanding Effects of Financing –Pre-Money and Post-Money Valuation –How 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 - 1 Valuing the Company –Lifetime Value of Customers based on FCF Customers we have today and those we expect to get. FCF = EBIAT + Dep - CapEx - WC CF = NI + Dep - CapEx - WC –Discounted Cash Flows (k e = r f + (r m -r f )) –EBITDA and/or Sales Multiples Comparable Companies and Industries –IPO or M&A Transactions

6 EM - Three Broad Questions u Whats going on here? –How has the company gotten to this point? –Whats 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? u 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? u How do we follow up? Measure the progress?

7 The Entrepreneurial Manager u Introduction - Welcome to the Territory5 Classes u Fundamentals for the Entrepreneur 12 Classes Recognizing Opportunity Forecasting Cash Flows A Venture as a Series of Experiments Sources of Startup Funding u Building the Successful Venture9 Classes Starting Right Building and Developing the Team Managing Relationships u Alternatives for the Successful Venture4 Classes Achieving Liquidity & Sustaining the Enterprise u Summary - Pulling it all Together2 Classes

8 Entrepreneurial Point of View Skills and Frameworks New Knowledge e.g., term-sheets, pre- & post-money valuation, venture capitalists, IPOs e.g., evaluating an opportunity, reading a contract, unbundling risks What Did We Learn? Action in the face of uncertainty.

9 What Did We Learn from the Entrepreneurs & Advisors We Met in Class? u Jim Sharpe (Extrusion Tech) u Robin Wolaner (Parenting) u Rajath Chaudry (Lawyers & Leases) u Matt Lieb (Kingsley Management) u Sharon Ward, Paolo (Return Logic) u Jim Fitzgerald (Balance) u Barry Arnold (Retail Sports) u Nick Lazaris (Keurig) u Ginger Howard (Guidant) u Tom & Tom (Nantucket Nectars) u Alan Ellman (Screaming Media) u Candace & Chris (Kendle) u Louise Kitchen, Jeff Skilling (Enron) u Katy, Andy, Elyce (kate spade) u Rob Adler, Jeff Parker (CCBN) u Bob Reiss (TV Guide Game) u Barb Schetter (R.R. Donnelley) u Charles Ferguson (Vermeer) u Chris Peters (Microsoft) u Dr. V. (Aravind) u Jeff Parker (Technical Data) u Adi Cooper (Tracmail) u Ann Meceda (PCC) u Paul Ognibene (Clubtools) u Sue Krukonis (Anasazi) u Terry Opdendyk, Andy Swett (ONSET) u Doug Macrae (Videoguide) u Ralph Wagner (Walnut) u Bob OConnor (RBS - Walnut)

10 Knowledge, Skills & Frameworks u Entrepreneurial Experiments Value of Information Mitigating Risks by Staging Experimentation and Funding Due Diligence and Milestones u Financing Term Sheets Pre-Money, Post-Money Sources of Financing Interest Coverage Deal Structure u Contracts Leases, Term Sheets, Employment Corporate Forms –Managing Personal &Tax Liability Working with Lawyers –Questions to Ask –Structuring the Relationship u What is Entrepreneurship? Approach to Management Opportunity is the Driver An Iterative Process u Opportunity Analysis Reading Business Plans Assessing Business Risks Diagramming Business Models –Fishbone Analysis PODC Framework Estimating Cash Flows and Drawing Cash Curves Risk/Reward Curves –Probability of Failure –Expected Value of Returns –Robustness of Upside

11 Knowledge, Skills & Frameworks (Continued) u Building the Team Interviewing Methods Sharing Equity Building the Board Selecting Advisors CEO Redeployment u Managing Relationships Business Development Process –ID Opportunity –Mapping the Business Network –Screen Potential Partners –Structuring Deal Forms Acquisition Alliance Equity Investment Technology Licensing –Managing the Relationship u Creating a Sustainable Venture Preparing for Liquidity Events –IPO –Private Sale –Strategic Investments Creating Structure and Designing Processes –Flexibility vs. Discipline Organizing the Team for the Next Stage of Growth u Self Assessment? Personal Propensities for Risk, Uncertainty, Ambiguity? Desire for an Entrepreneurial Life?

12 Introduction u R&R (Robert Reiss) An Entrepreneur follows Opportunity An Entrepreneur spreads Risk and Owns very little u R.R. Donnelley (Barb Schetter) Big Companies also have opportunities u Vermeer (Charlie Ferguson & Randy Forgaard) A Visionary, A Technologist, still need A Manager VC can help even if not a friend u Vermeer/Microsoft (Chris Peters) Big Company seeking opportunity via acquisition u Aravind Hospital (Dr. Venkataswamy) Grand Goal as an Opportunity The Deal with People can be more than about Money

13 Introduction to Entrepreneurship u A way of managing rather than a specific economic function or a characteristic of an individual. u An approach to management that begins with OPPORTUNITY. u HBS working definition: The pursuit of opportunity without regard to resources currently controlled.

14 Exploit Act Identify Opportunity Marshal Required Resources Deals Harvest Never- Ending Process Entrepreneurial Process:

15 Strategic Orientation Control of Resources Management Structure Compensation/Rewards Commitment to Opportunity Investment Opp. Driven Resource Driven EvolutionaryRevolutionary Single-StagedMulti-Staged Own or Employ Use or Rent Formal Hierarchy Networks - Flat Value/TeamIndividual Dimensions of Business Practice Promoter Trustee Entrepreneurial Administrative

16 Fundamentals: Opportunity Recognition u Technical Data Corporation (Jeff Parker) Build on Experience Select Investors for more than just money Dont say No out of Envy u Tracmail (Adi Cooper ) Competing on Price is Tough Seek Barriers that Protect What are the barriers to Competitive Attack? u Private Communications Corp (Ann Meceda) Not every Idea is an Opportunity Understand your business model and experiment Nothing goes exactly as planned

17 Fundamentals: Forecasting Cash Flows u Club Tools (Paul Ognibene) Pick Investors Carefully Cash Flow Forecasting Dilemma Go big or start small u Anasazi (Sue Krukonis) Going around the Distribution Channel is Challenging Cash is King

18 Opportunity Analysis: Knowledge, Skills & Frameworks Reading Business Plans Assessing Business Risks Diagramming Business Models –Fishbone Analysis PODC Framework Estimating Cash Flows and Drawing Cash Curves Risk/Reward Curves –Probability of Failure –Expected Value of Returns –Robustness of Upside

19 Understand the Business Model... Profits Costs Revenues Driver 1 Driver 2 Driver 3 Driver 1 Driver 2 Driver 3 Driver 1 Driver 2 Driver 3 Using the Tool 1. 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 ask

20 Dynamic Fit Management People Deal Context Opportunity What can go wrong? What can go right? Risk/Reward Management Change (Good & Bad News) Pattern Recognition Learning

21 Cumulative Cash Flow in $ Time BurnRate Burn Rate Date of First Cash Flow Positive Maximum Financing Needs Da te of Cash Breakeven The Cash Flow Cycle for a Venture

22 Managing Risk and Reward u What are the underlying assumptions and drivers of the decisions? u What will change the odds? Return on Investment +25% Probability of Occurrence Expected Value Probability of Losing 100% -100% +100% Goals in Managing Risk and Reward: - Increase Probability of Success - Increase Expected Returns

23 Fundamentals: Entrepreneurial Experiments u Value of Information Exercises Experiments Pay when Cost and Probability of Failure are High. Value of Information Depends on Alternatives u ONSET Ventures (Terry Opdendyk, Darlene Mann, Andy Swett) Sequential Investment Milestones, Objectives and Risk Mitigation Venture Capital Model to Startups u Videoguide (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

24 The Venture as a Series of Experiments: Knowledge, Skills & Frameworks Value of Information The Venture Capital Approach to StartUps –Mitigating Risks by: Staging Experimentation Staging Funding –Due Diligence and Milestones

25 Running the Experiment

26 Staged Experiments Time Level of Commitment Idea Validation Prototype Commercialization Mitigate Risks

27 Phased Investment Decisions Seed Second First Abandon Invest Abandon Invest Abandon Invest Abandon Invest Founding The option to abandon can be more valuable than the option to continue.

28 Fundamentals: Sources of Financing u Walnut Venture Associates A (Ralph Wagner) What do Angels want? How do you find out about a company and its people? u Walnut Venture Associates D (Bob OConnor) What do Entrepreneurs want from Financial Backers? An Angel Term Sheet Can Look Like a Camel u Extrusion Technologies (Jim Sharpe) Banks as a Source of Funds Sophisticated Experience Prevented Mundane Mistakes u Parenting Magazine (Robin Wolaner) Experiment gave good results but didnt raise $ Corporate Partners have different needs Career of the Entrepreneur (Each venture leads to others)

29 Sources of Financing: Knowledge, Skills & Frameworks Term Sheets Pre-Money / Post-Money Valuation Dilution Matching Opportunity to Source of Funding Sequencing Financing Calculating Interest Coverage Negotiating Deal Structure

30 u 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? u 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? u 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? u 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? Which Funding Source Do I Pursue? Ask Yourself…

31 u Own Money/Customers/Suppliers kate spade, Kendle u Friends and Family R&R, Technical Data, PCC u Angels Walnut: RBS, Nantucket Nectars u Incubators Clubtools, Peoplestreet u Venture Capitalists Vermeer, Return Logic, Keurig, Anasazi u Asset Lenders (Banks) Jim Sharpe u Corporations Parenting Magazine, CCBN Sources of Financing

32 Alternative Sources of Funding Financing SourcePros for EntrepreneurCons for Entrepreneur

33 Building the Successful Venture: Contracts u Lawyers & Leases (Rajath Chaudry) Seek Strong Professional Advice Early Decisions Matter Beware of Conflicts of Interests u Kingsley Management (Matt Lieb & Chris Jones) Dont be Too Clever about Financing Fit Structure to Strategy u Return Logic (Sharon Ward, Paolo Motturo, Andrew Chan) Dividing Equity has Repercussions Terms in Each Financing Affect the Next Round Decisions you Make Today Affect you Tomorrow

34 Building the Successful Venture: Contracts Knowledge, Skills & Frameworks Leases Term Sheets Employment Contracts Corporate Forms –Managing Personal and Tax Liability Working with Lawyers –Questions to Ask –Structuring the Relationship

35 Building and Developing the Team u Cambridge Incubator: Peoplestreet (Mark Pitts) Hiring is Critical and Can be Learned Hiring Well is a Competitive Weapon Hiring Mistakes are Expensive and Take a Long Time to Correct u Balance Inc. (Jim Fitzgerald) Seek Advice but Dont Compromise Personal Objectives Dont Hire People You Dont Like Use Board and Advisors for Recruiting u Retail Sports (Barry Almond) Bad Things Can Happen to Good Entrepreneurs Should I Stay or Should I Go?

36 Building the Team Knowledge, Skills & Frameworks Interviewing Methods Sharing Equity Building the Board Selecting Advisors CEO Redeployment

37 Reducing Risk in Hiring u Be clear in the job description u Stage your investment in rounds of interviews u Hire part-time or as consultant before full-time u Include different perspectives in the interviewing Content-e.g., skills, fit, background Interviewing approach Interviewer perspective u Check references u Write an explicit employment agreement u Think about questions

38 Entrepreneurship is a Team Sport u Board of Directors Experienced Investors (e.g. VCs) Mentor or Coach for CEO Industry Expert u Top Management Team Functional Expertise Experience (Start-up and Large Company) Organizational Fit u Professional Advisors Lawyers Accountants Executive Recruiters

39 Entrepreneurs Dilemma Entrepreneurs Vision Bring in Critical Resources -Money -Professional Management -Advisors Yield Control to Others -Investors -Board -Top Managers Reduce Uncertainty

40 Managing Relationships u Keurig Coffee (Nick Lazaris) R&R Revisited - Setting up the Virtual Company Assembling a Complex System of Stakeholders u Guidant Radiation Therapy (Ginger Howard) What do you Have? What do Need? What Deal gets you There? Finding the Next Big Thing u Nantucket Nectars (Tom & Tom) Be Willing to Do the Laundry, if Necessary Distribution is Not Obvious Achieving Liquidity while Preserving a Role

41 Managing Relationships Knowledge, Skills & Frameworks Business Development Process –ID Opportunity –Mapping the Business Network –Screen Potential Partners –Structuring Deal Forms Acquisition Alliance Equity Investment Technology Licensing –Managing the Relationship

42 The Business Development Process Identify Opportunity Develop Business Model Identify/Screen Potential Partners Structure Deal Manage Relationship Clearly Articulate Opportunity Evaluate Opportunity Map needed resources/skills Decide which to do in-house and which outsource Identify potential partners Apply preliminary screen Evaluate finalists on key criteria Evaluate alternative forms -Licensing -Equity investment -Alliance -Joint-venture -Acquisition Structure contract to manage risks -Transfer -Reduce -Share Negotiate Deal Manage portfolio of ongoing partnerships -Key metrics -Individual and portfolio level Manage relationships -Ownership -As they evolve -Multiple points of contact

43 Managing Relationships u Ongoing management is required because reality is too complex to fully contract. u Guidants 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.

44 Creating a Sustainable Venture u ScreamingMedia (Kevin Clark) Moving from Chaos to Structure Having Cash in a Downturn is a Strategic Advantage u Kendle International (Candace and Chris) Build Organization for Next Stage of Growth Valuations in Private vs. Public Markets u Enron (Louise Kitchen & Jeff Skilling) Is there Entrepreneurship in Large Organizations? Can you Develop Processes that Maintain Flexibility and Foster Pursuit of Opportunity? u kate spade (Katy, Andy, Elyce, Pamela) Money to Grow vs. Money to Compensate for Past Efforts u CCBN (Jeff Parker) Is Entrepreneurship Learnable?

45 Creating a Sustainable Venture Knowledge, Skills & Frameworks Preparing for Liquidity Events –IPO –Private Sale –Strategic Investments Creating Structure and Designing Processes –Flexibility vs. Discipline Organizing the Team for the Next Stage of Growth

46 Level of Structure Benefit of Discipline Benefit of Flexibility Start-upEstablished Firm Achieving Disciplined Entrepreneurship

47 Taking it to the Next Level.. u Can you scale up the business model, especially cash? u Can the management team make the next step? u Who do you bring along to the next step? Who do you leave behind? Who gets on board? Management Investors Customers Partners

48 Avoiding the Flat-Line... u Actively search for opportunities u Obsess about your customers u Frame crises as opportunities not threats u Frame action as experiment Dont fire scientist when experiment fails (except if he runs same experiment twice) u After you raise the money, avoid the temptation to bet it all on one hand or roll of the dice.

49 Whats Stopping the Big Guys from Doing It? u Attackers Advantages –Innovative Business Concept –Sense of Urgency –Start-Up, Speed-Oriented Culture –Opportunity focused –Network of Relationships –Shareholder Value Focus u Defenders Dilemma –Cannibalization fears –Channel conflicts –Resource driven Curse of the deep pocket –Current income focus –Conventional mindset

50 Entrepreneurial Point of View u 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. u How can I make the future that I want to happen actually happen? u Knowledge, Skills, and Frameworks Mean Little without Action. The great end of life is not knowledge but action. –T.H. Huxley An ounce of action is worth a ton of theory. –Friedrich Engels

51 The Entrepreneurial Manager and You: Questions to Ask u Do I want to be involved in an early stage venture at some point in my career? u Do I want to be involved as a supplier of financing to early stage ventures? u What early career experiences will best prepare me? u What is my risk profile? u Can I tolerate ambiguity and uncertainty? u Am I motivated by the love of a product, being in control, creating something new, making money?

52 Career Choices u Be an Entrepreneur Strategy 1 - Go For It Now Strategy 2 - Learn Best Practices First u Work with Entrepreneurs Private Equity Consulting Banking Corporate Manager Non-Profit What Else?

53 Attitudes are Essential... u There is no one type of entrepreneur u Success is not forever, and failure is not fatal. Failure is the opportunity to begin again more intelligently. - Henry Ford u At the end of the day, what do you have? Relationships Reputation u Make every day an adventure Just 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

54 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. On Effort and Failure and Continued Pursuit... - Theodore Roosevelt, 1910 at the Sorbonne

55 Is it Luck or Hard Work? u I find the harder I work, the more luck I seem to have. –Thomas Jefferson u Opportunity is missed by most people because it is dressed in overalls and looks like work. –Thomas Edison

56 You 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 far from home so high in the sky, so much so that one is inclined 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 Muir Exercise and recreation are as necessary as reading. I will say rather more necessary because health is worth more than learning. --Thomas Jefferson

57 MEN WANTED! FOR HAZARDOUS JOURNEY. SMALL WAGES, BITTER COLD, LONG MONTHS OF COMPLETE DARKNESS, CONSTANT DANGER, SAFE RETURN DOUBTFUL. HONOR AND RECOGNITION IN CASE OF SUCCESS. Ernest Shackleton Will YOU Sign Up for the Entrepreneurial Adventure? Recruiting Advertisement for Shackletons 1914 Trans-Antarctic Expedition aboard the Endurance Men (and 3 Women) Applied - 27 Set Out on the Journey -27 Returned Safely

58 Smooth Seas do not Make Skillful Sailors There is little point in setting out for a place that one is almost certain to reach. - H.W. Tilman Setting off on the Journey

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