1 ENT422: The Role of Entrepreneurship in Value Creation in Large and Small Enterprises Lecture 6

2 Guest Speaker: David Hessler Entrepreneur in Residence High Tech Rochester  Financing a New Venture –Sources –Proforma Statements  Assembling a Team –Similar or complementary skills? –What two dimensions are most important?  Which is more important financing or the team? What did we learn from Dave regarding the importance of?

3 The Timmons Model of the Entrepreneurial Process The Entrepreneurial process is –  Opportunity driven  Driven by an entrepreneur and an entrepreneurial team  Resource parsimonious and creative  Depends on the fit and balance of the these elements  Integrated and Holistic  Sustainable

4 EXHIBIT 3.5 The Timmons Model of the Entrepreneurial Process Communication Opportunity Resources Team ➨ Business plan Fits and gaps Ambiguity Creativity ➨ Exogenous Forces Leadership ➨ UncertaintyCapital market context Founder Sustainability: For Environment, Community and Society

5 Market demand is a key ingredient to measuring an opportunity:  Is customer payback less than one year?  Do market share and growth potential equal 20 percent annual growth and is it durable?  Is the customer reachable? Market structure and size help define an opportunity:  Emerging and/or fragmented?  $50 million or more, with a $1 billion potential?  Proprietary barriers to entry? Margin analysis helps differentiate an opportunity from an idea:  Low cost provider (40 percent gross margin)?  Low capital requirement versus the competition?  Break even in 1-2 years?  Value added increase of overall corporate P/E ratio? EXHIBIT 3.6 The Entrepreneurial Process is Opportunity Driven Market Segments Opportunity

6 EXHIBIT 3.7 Understand and Marshall Resources, Don’t Be Driven by Them “Bootstrapping” Resources Minimize and Control Versus Maximize and Own Relationships Unleashing creativity Financial resources AssetsThink cash last! People Your business plan

7 EXHIBIT 3.8 An Entrepreneurial Team is a Critical Ingredient for Success Team An entrepreneurial leader  Learns and teaches–faster, better  Deals with adversity, is resilient  Exhibits integrity, dependability, honesty  Builds entrepreneurial culture and organization Quality of the team  Relevant experience and track record  Motivation to excel  Commitment, determination, and persistence  Tolerance of risk, ambiguity, and uncertainty  Creativity  Team locus of control  Adaptability  Opportunity obsession  Leadership and courage  Communication “Passion”

8 EXHIBIT 3.9(a) Netscape―Journey Through the Entrepreneurial Process: At Startup, a Huge Imbalance Communication Opportunity Very large, growing and undefined Resources Very limited Team ➨ Business plan Fits and gaps Innumerable: Money and Management Ambiguity Creativity ➨ Exogenous Forces Leadership ➨ UncertaintyCapital market context Founder Sustainability: For Environment, Community and Society

9 EXHIBIT 3.9(b) Netscape―Journey Through the Entrepreneurial Process: At Venture Capital Funding, Toward New Balance Communication Opportunity Larger and growing faster Resources Money to launch Team ➨ Business plan Fits and gaps Resources and team Catching up Ambiguity Creativity ➨ Exogenous Forces Leadership ➨ Uncertainty Capital market context Founder Sustainability: For Environment, Community and Society

10 EXHIBIT 3.9(c) Communication Opportunity Even bigger and faster growing Competitors Resources Great balance sheet Great free cash flow Team Can play with the best ➨ Ambiguity Creativity ➨ Exogenous Forces Leadership ➨ UncertaintyCapital market context Founder Sustainability: For Environment, Community and Society Netscape―Journey Through the Entrepreneurial Process: At IPO, a New Balance Business plan Fits and gaps How large and profitable can we become?

11 EXHIBIT 3.9(d) Netscape―Journey Through the Entrepreneurial Process: Today, Toward a New Imbalance Communication Opportunity Major growth potential Competitors and Microsoft Resources Unlimited access to capital markets and other resources ➨ Business plan Fits and gaps Candidate fro brontosaurus capitalism? Threat of disruptive technology Sustaining and reinventing entrepreneurial organization Ambiguity Creativity ➨ Exogenous Forces Leadership ➨ Uncertainty Capital market context Founder Sustainability: For Environment, Community and Society Team One of the best

12 Baron and Shane Chapter 5 “Assembling the Resources” Selected Highlights from the Chapter Entrepreneurship

13 “Assembling the Resources”  The team should have complementary skills rather than similar skills – because building a company requires a broad range of attributes and knowledge.  Choosing the right co-founders requires that the lead entrepreneur first determine his/her skills capabilities, personal characteristics and motives.  It is important to establish clearly defined roles and responsibilities for members of the founding team.

14  Team members often perceive they are be treated unfairly and demand more and doing less which may result in withdrawal from the group thus jeopardizing the success of the new venture.  Effective communication among team members is important including a recognition that destructive criticism of another member could lead to feelings of hostility and intense conflict. “Assembling the Resources” (cont.)

15 Baron and Shane Chapter 6 “Financing New Ventures” Selected Highlights from the Chapter Entrepreneurship

16 “Financing New Ventures”  Problems of uncertainty and information asymmetry means that investors often have to make investment decisions on less information that entrepreneurs possess - thus making it more difficult to raise funds  Investors compensate for information asymmetry by encouraging self-financing, contract provisions, syndications specialization and localized investing  New ventures usually require very little capital to start but require more capital as they experience negative cash flow from operations

17  Startups are typically financed by equity rather than debt because cash flow is generally not sufficient to pay for higher interest rates on borrowed money.  Business angels and venture capitalists follow similar paths to investing beginning with a referral, initial screening and more in-depth due diligence evaluation ending with negotiations or rejection.  Professional investors typically follow the venture capital model to calculate the amount of equity to demand in return for the investment.  Entrepreneurs frequently raise funds from people they know because the ties reduce the possibilities that entrepreneurs will take advantage of them. “Financing New Ventures” (cont.)

18 Stegmart Case is Due Class Discussion

19 Workshop  Exercises 3-5 should be completed. Groups are not required to hand them in. However questions and comments are welcome.  Work on Exercise 6. It is to be handed in at the next class.

20 Assignment for November 2 Guest Speaker on November 2 Ms. Lauren Dixon CEO, Dixon Schwabl, Inc. Topic: Our Successful Marketing Plan

21 Assignment for November 2  Lecture: Developing a Winning Marketing Plan for a New Venture.  Reading: Baron, Chap. 9 “Marketing the New firm”  Case Due: Schubadub Auto Wash – Page 383. The report should be typewritten, individually prepared and not more than two pages long answering the questions at the end of the case. It will be discussed in class.

22 Workshop  Hand in Exercise 6. It will also be discussed in class.  Work on Exercises 7 & 8. Hand in Exercise 8 next week. It will also be discussed in class