2. Chapter 1
The Entrepreneurial Mind: Crafting a Personal Entrepreneurial Strategy
McGraw-Hill/Irwin
New Venture Creation, 7/e
© The McGraw-Hill Companies, Inc., All Rights Reserved. 2

3. Overview of Tonight Guest Speakers Discussion of New Venture Club
Course Outline
The Entrepreneur and Entrepreneurial Process 3

4. Speakers 4

5. New Venture Club
Purpose
Organization
Role 5

6. Course Outline Materials Timmons & Spinelli, New Venture Creation
HBSP Case Packet tml?name=cp&c=c66998
HBR on Entrepreneurship (optional) 6

7. Course Assessment Case Presentation (20%)
Feasibility Presentation (10%)
Deal Structure (10%)
Plan Presentation (10%)
Business Plan Document (40%)
Participation (10%) 7

8. Milestones Elevator Pitches (Week 4)
Feasibility Presentations (Week 9)
Business Plan Presentations (Weeks 15/16) 8

9. Entrepreneurship Defined
Entrepreneurship—a way of thinking, reasoning, and acting that is opportunity obsessed, holistic in approach, and leadership balanced
(This definition of entrepreneurship has evolved over the past two decades from research at Babson College and the Harvard Business School and has recently been enhanced by Stephen Spinelli, Jr., and John H. Muller, Jr., Term Chair at Babson College.) 9

10. 10

11. Entrepreneurship Results
Value:
Creation
Enhancement
Realization
Renewal
For:
Owners
Stakeholders
All Participants 11

12. What is an entrepreneur?
Two broad schools of thought
Attributes
An entrepreneur is someone who possesses attribute X
Behavioral/functional
An entrepreneur is someone who does Y
So what are X and Y? 12

13. Attribute Approach Psychological Traits Demographics
Intelligence, extraversion, locus of control, need for achievement, social competence, creativity, risk-taking
Demographics
Social networks, age, marital status, parental influences, work experience, education, income level, social status
Are these attributes necessary?
Founding vs. Success 13

14. Behavioral/Functional Approach
Cantillon
Knight
Schumpeter
Kirzner
Gartner
Stevenson
Phelan
One who works for uncertain wages
One who buys factors at certain prices and sells them in the future at uncertain prices (1921)
One who creates new products, processes, inputs, markets, or organizations (1911)
One who is alert to profit opportunities
One who creates a new venture
One who pursues opportunities regardless of resources currently controlled
One who seeks to earn entrepreneurial profits 14

15. Exhibit 1.2 15

16. The Entrepreneurial Mind in Action
Successful entrepreneurs have a wide range of personality types
Research has considered genetics, family, education, career experience, etc., but no psychological model of entrepreneurship has been supported.
Acquired skills are more important that specific inherent traits 16

17. Converging on the Entrepreneurial Mind
Desirable and Acquirable Attitudes, Habits and Behaviors
Six Dominant Themes
Commitment and Determination
Leadership
Opportunity Obsession
Tolerance of Risk, Ambiguity and Uncertainty
Creativity, Self-Reliance, and Adaptability
Motivation to Excel 17

18. Exhibit 1.3 18

19. Exhibit 1.6 19

20. Exhibit 1.7 20

21. Complications Intrapreneurs Social entrepreneurs Craft entrepreneurs
Job substitutes versus high potential ventures 21

22. Leadership and Human Behavior
No single psychological model of entrepreneurship has been supported by research
But, behavioral scientists, venture capitalists, investors, and entrepreneurs agree the venture will depend a great deal upon the talent and behavior of the lead entrepreneur and his or her team
Myths still exist about entrepreneurs and entrepreneurship 22

23. Exhibit 1.9 (Part 1) 23

24. Exhibit 1.9 (Part 2) 24

25. Myth #1 It takes a lot of money to finance a new business.
Not true. The typical start-up only requires about $25,000 to get going. The successful entrepreneurs who don’t believe the myth design their businesses to work with little cash. They borrow instead of paying for things. They rent instead of buy. And they turn fixed costs into variable costs by, say, paying people commissions instead of salaries.
From Scott Shane “The Illusions of Entrepreneurship” 2008 25

26. Myth #2 Venture capitalists are a good place to go for start-up money.
Not unless you start a computer or biotech company. Computer hardware and software, semiconductors, communication, and biotechnology account for 81 percent of all venture capital dollars, and seventy-two percent of the companies that got VC money over the past fifteen or so years.
VCs only fund about 3,000 companies per year and only about one quarter of those companies are in the seed or start-up stage. In fact, the odds that a start-up company will get VC money are about one in 4,000. That’s worse than the odds that you will die from a fall in the shower. 26

27. Myth #3 Most business angels are rich.
If rich means being an accredited investor –a person with a net worth of more than $1 million or an annual income of $200,000 per year if single and $300,000 if married – then the answer is “no.”
Almost three quarters of the people who provide capital to fund the start-ups of other people who are not friends, neighbors, co-workers, or family don’t meet SEC accreditation requirements.
In fact, thirty-two percent have a household income of $40,000 per year or less and seventeen percent have a negative net worth. 27

28. Myth #4 Start-ups can’t be financed with debt.
Actually, debt is more common than equity. According to the Federal Reserve’s Survey of Small Business Finances, fifty-three percent of the financing of companies that are two years old or younger comes from debt and only forty-seven percent comes from equity. So a lot of entrepreneurs out there are using debt rather than equity to fund their companies. 28

29. Myth #5 Banks don’t lend money to start-ups.
This is another myth. Again, the Federal Reserve data shows that banks account for sixteen percent of all the financing provided to companies that are two years old or younger.
While sixteen percent might not seem that high, it is three percent higher than the amount of money provided by the next highest source – trade creditors – and is higher than a bunch of other sources that everyone talks about going to: friends and family, business angels, venture capitalists, strategic investors, and government agencies. 29

30. Myth #6 Most entrepreneurs start businesses in attractive industries.
Sadly, the opposite is true. Most entrepreneurs head right for the worst industries for start-ups. The correlation between the number of entrepreneurs starting businesses in an industry and the number of companies failing in the industry is That means that most entrepreneurs are picking industries in which they are most likely to fail. 30

31. Myth #7
The growth of a start-up depends more on an entrepreneur’s talent than on the business he chooses.
Sorry to deflate some egos here, but the industry you choose to start your company has a huge effect on the odds that it will grow.
The odds that you will make the Inc 500 are 840 times higher if you start a computer company than if you start a hotel or motel. There is nothing anyone has discovered about the effects of entrepreneurial talent that has a similar magnitude effect on the growth of new businesses. 31

32. Myth #8 Most entrepreneurs are successful financially.
Sorry, this is another myth. Entrepreneurship creates a lot of wealth, but it is very unevenly distributed.
The typical profit of an owner-managed business is $39,000 per year.
Only the top ten percent of entrepreneurs earn more money than employees.
And the typical entrepreneur earns less money than he otherwise would have earned working for someone else. 32

33. Myth #9
Many start-ups achieve the sales growth projections that equity investors are looking for.
Not even close. Of the 590,000 or so new businesses with at least one employee founded in this country every year, data from the U.S. Census shows that less than 200 reach the $100 million in sales in six years that venture capitalists talk about looking for.
About 500 firms reach the $50 million in sales that the sophisticated angels, like the ones at Tech Coast Angels and the Band of Angels talk about.
In fact, only about 9,500 companies reach $5 million in sales in that amount of time. 33

34. Myth #10 Starting a business is easy.
Actually it isn’t, and most people who begin the process of starting a company fail to get one up and running. Seven years after beginning the process of starting a business, only one-third of people have a new company with positive cash flow greater than the salary and expenses of the owner for more than three consecutive months. 34

35. The Concept of Apprenticeship
Shaping and Managing an Apprenticeship
Windows of Apprenticeship
The Concept of Apprenticeship: Acquiring the 50,000 Chunks
Role Models
Myths and Realities
What Can Be Learned?
Nexus Theory
Experience meets opportunity
MIT patent example 35

36. Exhibit 1.8 36

37. A Word of Caution
Leadership and achievement, the heart of the entrepreneur, are not measured by IQ tests, SATs, or GMAT scores and include:
Leadership skills
Interpersonal skills
Team building and team playing
Creativity and ingenuity
Motivation
Learning skills (versus knowledge)
Persistence and determination
Values, ethics, honesty and integrity
Goal-setting orientation
Self-discipline
Frugality
Resourcefulness
Resiliency and capacity to handle adversity
Ability to seek, listen, and use feedback
Reliability
Dependability
Sense of humor 37

38. Personal Entrepreneurial Strategy
Gather data both from yourself (past and present profiles – start with EQ)
Gather data from others (constructive feedback)
Evaluate the data you have
Think ahead
Craft your personal entrepreneurial strategy 38

39. Reasons for Planning
Planning helps the entrepreneur with the following:
Managing the risks and uncertainties of the future
Working smarter rather than harder
Developing and updating a keener strategy by testing the sensibility of his or her ideas and approaches with others
Motivating
Achieving “results orientation”
Managing and coping with what is by nature a stressful role 39

40. The Entrepreneurial Process40

41. The Entrepreneurial Process
It is opportunity driven
It is driven by a lead entrepreneur and an entrepreneurial team
It is resource parsimonious and creative
It depends on the fit and balance among these
It is integrated and holistic 41

42. Think Big for Higher Potential Ventures
Don’t think too small
Smaller often means higher failure odds
Getting the odds in your favor
Entrepreneurship should not be a job substitute
Odds for survival, growth, and a higher level of success, changes when the ventures reaches a size of people with $2-$3 million in revenues 42

43. Exhibit 3.3 43

44. Exhibit 3.4 44

45. The Timmons Model 45

46. Exhibit 3.6 46

47. The Opportunity A good idea is not necessarily a good opportunity.
For every 100 ideas presented to investors, usually fewer than 4 get funded.
An investor has to be able to quickly evaluate whether potential exists and to decide how much time and effort to invest.
According to John Doerr, a successful venture capitalist, “There’s never been a better time than now to start a business.”
Underlying market demand drives the value creation potential.
The greater the growth, size, durability, and robustness of the gross and net margins and free cash flow, the greater the opportunity. 47

48. Resources
One of the most common misconceptions is that to succeed, you first need to have all the resources in place, especially the money.
Money follows high potential opportunities conceived of and led by a strong management team.
Successful entrepreneurs devise creative and stingy strategies to marshal and gain control of resources.
Bootstrapping can create a significant competitive advantage.
Such strategies encourage a discipline of leanness, where everyone knows that every dollar counts. 48

49. The Entrepreneurial Team
The entrepreneurial team is a key ingredient in the higher potential venture.
Great teams are in short supply.
The lead entrepreneur is central to the team as both a player and a coach.
Opportunity, team, and resources rarely match
The entrepreneurial process is based on both logic and trial and error.
Some of the most successful investments ever were turned down by numerous investors before the founders received backing. 49

50. Case: R&R
Prepare for discussion at start of Week 3 50

51. 4 The Opportunity: Creating, Shaping, Recognizing, Seizing Chapter 51
McGraw-Hill/Irwin
New Venture Creation, 7/e
© The McGraw-Hill Companies, Inc., All Rights Reserved. 51

52. New Ventures Think big Fundamental realities
Better end up exhausted and rich then just exhausted
Fundamental realities
Most new ventures are works in process and works of art
Most business plans are obsolete at the printer
Speed, adroitness of reflex, and adaptability are crucial
The key to succeeding is failing quickly and recouping quickly, and keeping the tuition costs low 52

53. New Ventures Fundamental realities
Success is highly situational, depending on time, space, context, and stakeholders
The best entrepreneurs specialize in making “new mistakes” only
Starting a company is much harder than it looks, or you think it will be; but you can last a lot longer and do more than you think if you do not try to do it solo 53

54. Exhibit 4.1 Circle of Venture Capital Ecstasy54

55. The Capital Market Food Chain
R&D
Funds <$200K from founders, angels, FFF (friends, fools, family), Small Business Innovation Research fund
Seed
Up to $500K
Launch
$1-$50m
Venture Capital, strategic partners, private equity
Series A – startup, Series B – product devlopment, C - shipping
High Growth
IPOs, strategic acquirers, private equity 55

56. Four Anchors Create or add value to a customer or end-user
Solving a significant problem, removing a serious pain point, or meeting a significant want or need – for which someone is willing to pay a premium
Communicable business model
Large market ($50m+)
High growth (20%+)
High margins (40%+)
Recurring revenue, low assets/working capital
25-30% return for investors
Good fit with management team 56

57. To summarize…
…a superior opportunity has the qualities of being attractive, durable, and timely and is anchored in a product or service which creates or adds value for its buyer or end- user – usually by solving a very painful, serious problem. 57

58. Where are Opportunities Born?
“We look for ideas that change the way people live or work”
Technology sea change
Moore’s Law
Metcalf’s Law
Disruption
Market sea change
Value chain disruption/obsolescence/vulnerability
Deregulation 58

59. Where are Opportunities Born?
Societal sea change
Changes in ways we live, learn, work, etc.
Gilder’s Law – 10xs in 10 years
Brontosaurus factor
Arrogance
Loss of peripheral vision
Deadened reflexes – turning the tanker
Irrational exuberance
Undervalued assets 59

60. The Role of Ideas Ideas are merely the first step
Beware the mousetrap fallacy
Good ideas often come from pattern recognition
50,000 “chunks” of experience over 10 years
Creative linking or cross-association of experience, know- how, contacts
Not simply linear, additive or logical
Ability to see what others do not 60

61. Adams On Ideas Think you idea has to be unique? You’re deluded
Good ideas are not scarce, what is rare is a team that can execute = execution intelligence
Execution intelligence
Domain knowledge, fast-growth scar tissue, experience in hyper- competitive markets, risk management (anticipate customer pain) balanced team, leadership know-how
Want me to sign a nondisclosure? Instead, say “I’m clueless”
The 1:8:20 rule (1 Austin, 8 Boston, 20 Palo Alto)
Ideas are commodities
Getting to market first? Big deal.
Execute to dominate, not define, a market space
Think there’s no competition? You’re naïve.
I want to keep my money, laziness, and DIYers if nothing else
The existence of competition suggests that the idea itself is competitive 61

62. Brainstorming Rules Can creativity be learned? Brainstorming
De Bono makes a living from it
Brainstorming
Record ideas in full view
Invent to the “void”
Resist becoming committed to one idea
Identify the most promising ideas
Refine and prioritize 62

63. Exhibit 4.6 63

64. Exhibit 4.7 64

65. Evaluating Criteria for evaluating venture opportunity
Industry and market
Economics
Harvest issues
Competitive advantage issues
Management team issues
Personal criteria
Strategic differentiation 65

66. Gathering information
Finding ideas
Existing businesses
Franchises
Patent brokers
Product licensing information services
Corporations with a licensing program
Universities & research institutes
Trade shows & association meetings
Consulting & networking
Published sources (statistics, forecasts, reports, filings) 66

67. Case: EastWind 67

68. Screening Venture Opportunities68

69. Anchors of Superior Businesses
Create or add significant value to a customer or end user
Solve a significant problem, or meet a significant want or need, for which someone is willing to pay a premium 69

70. Anchors of Superior Businesses
Are a good fit with the founder(s) and management team at the time and marketplace and with the risk-reward balance 70

71. Anchors of Superior Businesses
Have robust market, margin, and moneymaking characteristics
Large enough ($50 million+)
High growth (20 percent +)
High margins (40 percent +) 71

72. Anchors of Superior Businesses
Have robust market, margin, and moneymaking characteristics
Strong and early free cash flow (recurring revenue, low assets, and working capital)
High profit potential (10 to 15 percent + after tax)
Attractive realizable returns for investors
(25 to 30 percent + IRR) 72

73. Screening Methodologies
QuickScreen
Provides a broad overview of an idea’s potential
Enables the entrepreneur to conduct a preliminary review and evaluation of an idea in a short period of time
See page 170 73

74. Adams On Customers Before you build it, validate the market
Don’t have a solution looking for a problem
The ready-fire-aim approach
Common illusion – I know my customers
Limited feedback and personal experience generate the illusion
Why validate?
Get the product right the first time
A beta community emerges
You generate a ready-made contact list of first customers
You can more easily raise smart investment capital
You use capital more efficiently
You clarify your competition 74

75. Market Validation You cannot sell to everybody Pyramid of influence
A target market is a limited, discrete subset of companies or individuals whose pain is so great without the product that they will readily buy it
Your solution should be a “must-have” for your targets
Pyramid of influence
Stage 0: Secondary research
Stage 1: Primary market research
Stage 2: Quality influencers
Stage 3: Leverage influencers 75

76. Stage 0-1 Secondary research Primary research
Market size, trends, growth
Research competitors, customers
Read the industry press & specialized reports
Remember that secondary research is not validation
Primary research
Who needs the product most?
Who has the worst pain?
What does this market look like?
Test at least 3 hypotheses with data
Be prepared to revise hypotheses and start again
Interview at least 100 customers
Understand the customers and develop a sense of their pain
Make it everyone’s job to interview – even engineers!
Get a professional firm to develop questions and analyze data
Eliminate temptation to lead customers or offer solutions 76

77. Stage 2 Quality influencers Presentation & prototype Results:
Have high pain, interested in a solution, a willingness to be contacted again
Also use thought leaders (speakers, writers, analysts) who also understand the pain
Presentation & prototype
Outline the pain, the target segment, and solution
Demo a prototype
Results:
Feedback on essential product features
Cultivate core customers
Fine-tune presentation and prototype 77

78. Stage 3 Leverage influencers Results:
Analysts, thought leaders, editors, consultants
Get them excited!
Results:
Visibility in analyst reports & publications
Revenue possibilities (from consultants)
Easier financing
Customers change – keep validating
Build what the customers want and only what they want 78

79. Screening Methodologies
Venture Opportunity Screening Exercises (VOSE)
Segments the screening of ideas into extremely detailed but manageable pieces
I have mixed feelings
These are best screening instruments available
Is it possible to know all the answers to these questions so early?
Gives a roadmap for end of semester 79

80. Reaching the Customer

81. HP Survey According to an HP survey:
64% of small businesses lack confidence in their marketing decisions,
60% felt their marketing could be more effective, and
only 27% had designed a company logo 81

82. Basic Marketing Customer orientation – identify needs
Segmentation & Targeting
Positioning vis-à-vis competition
Marketing mix (Four Ps)
Plus people, processes, physical evidence (case studies, testimonials, demonstrations) 82

83. Five Questions What's unique about your business idea? The USP.
Craft headlines to promote your USP
Who is your target buyer?
Who buys your product or service now, and who do you really want to sell to?
Who are your competitors?
Can you effectively compete in your chosen market?
What positioning message?
How can you position your business or product to let people know it is special
What's your distribution strategy?
How will you get your product or service in the hands of your customers? 83

84. 35 online marketing tactics
Blogging
Search engine optimization
Blogger relations
marketing
Corporate web site
Social networks (Facebook, LinkedIn)
Pay per click
Online public relations
Webinars/Teleconference
Online display ads 84

85. Tactics ctd. Social News / Bookmarking Viral marketing
eCommerce Feeds/Comparison Shopping
Blog advertising
IM / Microblogging (Twitter)
Online communities/forums
Sponsorship / Cross Branding
Paid reviews
Affiliate marketing 85

86. Tactics ctd Free content (white papers) Online contests, giveaways
Behavioral targeting
RSS advertising
Advergames
Podcasts
Rich media apps/demos (Flash)
Rich media avatars 86

87. Tactics ctd. Virtual worlds Virtual tradeshows Video marketing
Contextual Advertising
Widgets
Mobile ads
User generated content
Branded microsites 87

88. Marketing Metrics Tracking who buys, when, how, why, where
Cost to acquire and retain
Following up leads 88

89. Case
Juice Guys
Icebreaker

90. Personal Ethics and the Entrepreneur
McGraw-Hill/Irwin
New Venture Creation, 7/e
© The McGraw-Hill Companies, Inc., All Rights Reserved. 90

91. Ethical Exercise
Undertake the ethical exercise on page 321 in groups of 3-4
Try to reach a consensus on each situation and report back your answers to the whole class 91

92. Exhibit 9.1 92

93. Exhibit 9.2
Utilitarianism vs Universal Rights vs. Justice 93

94. Exhibit 9.3 94

95. Exhibit 9.4 95

96. MGT 709 New Venture Creation
Business Models
MGT 709 New Venture Creation 96

97. Business Model Analysis (Hammermesh)
A business model is a “profit engine” or cash generating machine
Revenue drivers
Cost drivers
Investment size
Critical success factors
Also think about:
Value creation/capture/protection 97

98. Economics of One Unit (EOU)
Take one unit (can be a good or service)
Selling price per unit
less Cost Of Goods Sold per unit
Materials
Labor
=Gross Profit per unit
Can you drill down and defend your assumptions? 98

99. Revenue Types Models Fishbone model
Single stream, multiple streams, interdependent, loss leader
Models
Subscription (gym, magazine)
Volume or unit-based (typical retail)
Advertising-based (google, TV)
Licensing/syndication (biotech)
Transaction fee (realtors, brokers)
Fishbone model 99

100. Fishbone Revenue Model
Avg. tuition
rate
Student
mix
Tuition
Curriculum
# of
students
Rate
of return
COB
Revenue
Endowments
Reputation
Size of
endowments
Grants
Grant
applications
Quality of
faculty
Executive
education
100

101. Costs Types Structures Fixed, variable, semi-variable, non-recurring
Payroll-centered (direct)
Payroll-centered (support)
Inventory
Space/rent
Marketing/advertising
101

102. Fishbone Cost Model # of faculty Productivity Faculty Salaries (80%)
Market rates
Faculty mix
COB
Expenses
# of staff
Support
ratio
Support
Salaries (10%)
Salary rates
Teaching
resources
Operating
Expenses
(10%)
Research
resources
102

103. Investment Size Maximum financing needs (lowest point)
Positive cash flow
Cash breakeven
Cash flow diagram is useful
cash balance over time
Cash is needed for infrastructure, salary, inventories etc.
103

104. Critical success factors
Which factors have the greatest impact on profitability?
Sensitivity analysis
104

105. Discovery Driven Planning (McGrath)
The Reverse Income Statement
Total Figures
Required profits to add 10% to total profits = $4m
Necessary revenues on 10% net profit margin = $40m
Allowable costs to deliver 10% sales margin = $36m
Per Unit Figures
Required unit sales at $160 per unit = 250,000 units
Necessary percentage of world market share of OEM unit sales = 25%
Allowable costs per unit for 10% sales margin: $144
105

106. Building assumptions Assumption Measurement 106 10% of sales $40
1. Profit margin
10%
of sales
2. Revenues
$40
million
3. Unit selling price
$160
4. Size of OEM market 1
million drives
5. Fixed asset investment to sales
1:1
6. Effective production capacity per line 25
drives per minute
7. Effective life of equipment 3
years
8. Average OEM order size
100
drives
9. Sales calls per OEM order 4
calls per order
10. Sales calls per salesperson per day 2
calls per day
11. Selling days per year
250
days
12. Annual salesperson's salary
$ ,000
13. Containers required per order
container
14. Shipping cost per container
$10,000
15. Quality level needed
50%
fewer flaws
16. Production days per year
348
17. Workers per production line per day 30
per line
18. Annual manufacturing worker's salary
$50,000
19. Materials costs per disk
$20
20. Packaging costs per 10 disks
106

107. Revisit Income Statement
Allowable costs
Sales-force salaries $2.0 million
Manufacturing salaries $3.0 million
Disk materials $5.0 million yen
Packaging $1.0 million
Shipping $2.5 million
Depreciation 13.3 million
Allowable administration and overhead costs $9.2 million yen
107

108. Milestones
Each milestone allows for sets of assumptions to be tested and adjusted.
Stage 1: Preliminary – salaries, shipping costs, market size, competitor prices
Stage 2: Prototyping – materials costs, customer feedback on quality/features
Stage 3: Beta testing – price/quality
Stage 4: Production – sales/production metrics
108

109. Expectations for Feasibility Presentations
Exercise 3 (p. 178)
Exercise 4 (p. 184)
109

110. Case Study
Zipcar
110

111. The Business Plan
111

112. The Business Plan Objectives
Carefully articulate the merits, requirements, risks, and potential rewards of the opportunity and how it will be seized
Demonstrate how the four anchors reveal themselves to the founders and investors by converting all the research, careful thought, and creative problem solving from the Venture Opportunity Screening Exercises into a thorough business plan
112

113. What Does It Reveal?
A business plan for a high potential venture reveals the business’ ability to:
Create or add significant value to a customer or end user
Solve a significant problem, or meet a significant want or need for which someone will pay a premium
Have robust market, margin, and moneymaking characteristics
Fit well with the founder(s) and management team at the time, in the marketplace, and with the risk-reward balance
113

114. Who Develops the Plan?
Reasons not to hire an outside professional to prepare the business plan
Consequences of different strategies and tactics can be considered
Human and financial requirements for launching and building the venture can be examined
114

115. Writing a Business Plan
Steps outlining the process by which a business plan is written
Segmenting information
Creating an overall schedule
Creating an action calendar
Doing the work and writing the plan
115

116. Business Plan I. EXECUTIVE SUMMARY
Description of the business concept and the business opportunity and strategy
Target market and projections
Competitive advantages
Costs
Economics, profitability, and harvest potential
The team
The offering
116

117. Business Plan II. THE INDUSTRY AND THE COMPANY AND ITS
PRODUCT(S) OR SERVICE(S)
The industry
The company and the concept
The product(s) or service(s)
Entry and growth strategy
III. MARKET RESEARCH AND ANALYSIS
Customers
Market size and trends
Competition and competitive edge
Estimated market share and sales
Ongoing market evaluation
117

118. Business Plan IV. THE ECONOMICS OF THE BUSINESS V. MARKETING PLAN
Gross and operating margins
Profit potential and durability
Fixed, variable, and semivariable costs
Months to breakeven
Months to reach positive cash flow
V. MARKETING PLAN
Overall marketing strategy
Pricing
Sales tactics
Service and warranty policies
Advertising and promotion
Distribution
118

119. Business Plan VI. DESIGN AND DEVELOPMENT PLAN
Development status and tasks
Difficulties and risks
Product improvement and new products
Costs
Proprietary issues
VII. MANUFACTURING AND OPERATIONS PLAN
Operating cycle
Geographical location
Facilities and improvements
Strategy and plans
Regulatory and legal issues
119

120. Business Plan VIII. MANAGEMENT TEAM
Organization
Key management personnel
Management compensation and ownership
Other investors
Employment and other agreements and stock option and bonus plans
Board of directors
Other shareholders, rights, and restrictions
Supporting professional advisors and services
IX. OVERALL SCHEDULE
X. CRITICAL RISKS, PROBLEMS, AND ASSUMPTIONS
120

121. Business Plan Actual income statements and balance sheets
XI. THE FINANCIAL PLAN
Actual income statements and balance sheets
Pro forma income statements / forma balance sheets
Pro forma cash flow analysis
Breakeven chart and calculations
Cost control
Highlights
121

122. Business Plan Desired financing Offering Capitalization Use of funds
XII. PROPOSED COMPANY OFFERING
Desired financing
Offering
Capitalization
Use of funds
Investor’s return
XIII. APPENDICES
122

123. Adams On Plans
The business plan is not the be-all and end-all for getting funded
Sometimes investors don’t even read plans
Writing a business plan is not the problem
Viewing the business plan as your primary goal is the problem
More evidence of output rather than execution orientation
Myth: Investors fund business plans
123

124. The Work Don’t focus on the plan…do the work
Put together a great team
Execution intelligence
Great idea, poor team = no
Great team, so-so idea = maybe
Great advisors and directors are crucial for legitimacy and guidance
Validate the market
Get to market fast
Define value inflection points
Presentation and executive summary may be all you need (and “the pitch”)
124

125. The Pitch Cater your message to the audience’s needs
Clearly articulate features and benefits
Relationships rule
Who can influence the investors?
One or two good referrals cuts through the noise
Supplement the pitch with collateral
Treat the plan as a brochure – it has about the same effect on investor decision making
Ideal: ten slide PowerPoint, an executive summary, and team/advisor bios
125

126. The Pitch Contents Company Overview Customer pain/problem Solution
What problem are you solving?
Why is it a problem? How severe?
How big is the market?
What segments have the worst pain?
How have you validated the needs?
Solution
Competition
Team
Business Model
How will you make money?
Revenue model, distribution model, milestones
Financials
When will you be profitable? How much capital?
126

127. The Pitch Process Have as many team members participate as you can
Investors want to assess your team
Project energy, enthusiasm, confidence
Malleability
You have to be comfortable not keeping your sacred cows
Do you want to be king or rich?
You don’t need to have all the answers but you must be able to respond thoughtfully
127

128. Thoughts on Business Plans (Sahlman)
On a scale from 1 to 10, business plans rank no higher than a 2
Four components that must “fit”
People, opportunity, external context, deal
Three questions
What can go wrong? What can go right?
How can management make more go right than wrong?
The role of management is to increase the fit
POCD Framework
128

129. People Adages Questions:
Successful founders have two characteristics: they are “known” and they “know”
I’d rather back an “A” team with a “B” idea than a “B” team with an “A” idea
Citing the need to recruit experienced people is like wishing to draw 4 cards to make a straight – a low prob. Event!
Questions:
Who are the founders? What have they accomplished in the past? What directly relevant experience do they have? What skills do they have? Whom do they know and who knows them? What is their reputation? How realistic are they? Can they adapt? Who else needs to be on the team? Can they make hard choices? How will they respond to adversity? What are their motivations? How committed?
129

130. Opportunity Adages Questions
Is the total market large and/or growing? Is the industry attractive?
Use analogies to describe what the venture will look like if it is successful – the next Walmart
“Invest in industries where growth can overcome the shortcomings of management”
Buy low, sell high, collect early, pay late, have growth options
Questions
Who is the customer and how do they make decisions? is the product a compelling purchase for them? how will you reach the customer? at what price? How much does it cost to acquire a customer? How much does it cost to deliver the product? How much does it cost to support a customer? How easy is it to retain a customer? Who are your competitors? How will they respond? Abnormal profits will go away.
130

131. Context & Deals Context Deals Questions
A shift in context can turn an unattractive business into an attractive one
Deals
From whom you raise capital Is often more important than the deals
How much money to raise and in what stages?
Money is time
time to discover the right team, opportunity, and context
Investors have to decide whether to give you more time
Deals are fair, simple, robust, reflect trust rather than legalese
Questions
What new information would change the likelihood of success? How much time and money are required to “buy” that information? To what degree would more money increase the rate of growth? Without extra money will you lose a winner takes all market?
From whom should the money be raised? How much is needed? What deal terms are fair?
131

132. Risk/Reward Management
Myth of entrepreneur as risk seeker
All sane people want to avoid risk
True entrepreneurs want to capture all of the reward and give the risk to others
I hardly ever look at the numbers any more
They are most likely wrong
I like to see the team has thought through the key business drivers
Due diligence is important for investors
132

133. Case
Room for Dessert
133

134. The New Venture Team
134

135. Importance of The Team
There is a strong connection between the growth potential of a venture and the quality of its management team.
A quality management team can be the difference between a life style firm and a higher potential venture.
Venture capitalist have become even more active in shaping management teams.
135

136. The Lead Entrepreneur
The capacity of the lead entrepreneur to craft a vision and then to lead, inspire, and persuade key people makes an enormous difference between success and failure.
Instilling a vision, and the passion to win, occurs very early.
Many lead entrepreneurs with outstanding technical skills or education credentials become lone achievers and lack the team mentality.
136

137. The Key to Growth Team traits Cohesion Teamwork Integrity
Commitment to the long haul
Harvest mind-set
Commitment to value creation
Equal inequality
Fairness
Sharing of the harvest
137

138. Key Questions for the Lead Entrepreneur/Founder
Is formation of a team desirable or necessary?
Do I want to grow a higher potential company?
What talents, know-how, skills, track record, contacts, and resources are currently available (‘the chunks’)?
Some teams form by accidents of geography, common interest, or working together.
Others form teams by virtue of past friendships.
Having an established team will yield higher valuation and reduce ownership loss.
What is needed to succeed? When?
Who is needed to complement me?
138

139. Practical Issues
Gaps can be filled by accessing outside resources, such as boards of directors, accountants, lawyers, and consultants.
Tax and legal expertise is best used part-time.
If the expertise is a must for the venture and the lead entrepreneur cannot provide it, then one or more people will have to be acquired.
Forming and building a team is unscientific and unpredictable.
139

140. Common Pitfalls
The group does not use the “honeymoon” period of start-up advantageously
A team may not deal with sensitive issues.
Can lead to a premature disbanding of promising teams
The success of the venture is the most important goal; other priorities come second
Do not answer the questions of who is in charge, who makes the final decisions, and how real differences of opinion are resolved
Do not address or recognize the deficiencies of the lead entrepreneur or the management team
140

141. Common Pitfalls
Do not recognize that creating and building a new venture is a dynamic process
Do not identify and defuse destructive motivations of investors, prospective team members, or the lead entrepreneur
Do not value trust and integrity
A team may stay together but not work through these issues
141

142. Slicing the Founder’s Pie
How much stock ownership should go to whom?
Share the wealth with those who help to create the value and thus the wealth
Realize a harvest of at least 5 to 10 times the original investment
Make sure the company prospers and grows thus creating a huge, shared pie
142

143. Distribution Issues Differentiation Performance Flexibility
Reward system recognizes differences in contributions among team members – contributions are rarely equal
Performance
Reward is a function of performance (as opposed to effort)
Flexibility
Reward system acknowledges and accounts for changes in contributions of team members (and reward preferences such as salary vs. stock)
143

144. Timing Considerations
Events may require change
A team member who has a substantial portion of stock may not perform and need to be replaced.
A key team member may quit or die
Consider:
Returning stock to the treasury at the price at which it was purchased.
A buyback agreement.
Place stock in escrow awaiting an exit event
144

145. Stock-Vesting Agreement
the venture places the stock purchased by team members in escrow to be released over a three- or more year period.
Fosters longer-term commitment to the success of the venture
Provides a method for a civilized, no-fault corporate divorce if things do not work out – you only hold vested shares
145

146. Consideration of Value
Idea
Business plan preparation
Level of commitment and risk
Skills, experience, track record, or contacts
Responsibility
146

147. Case NanoGene Nova Flow http://www.youtube.com/watch?v=xu0QifxOGvs
Relax Kids &feature=related
147

148. Resource Requirements
148

149. The Entrepreneurial Approach to Resources
People, such as the management team, the board of directors, lawyers, accountants, and consultants
Financial resources
Assets, such as plant and equipment
Business plan
149

150. Resource Minimization Strategy
Staged capital commitments
Less capital
Lease rather than own equipment
More flexibility
Low sunk cost
Lower costs
Employ professional experts on a project basis
Reduced risk
BOOTSTRAPPING!
150

151. Networking
Successful entrepreneurs identify the right advisors BEFORE they launch!
Social capital is strongly associated with entrepreneurial activity
Leverage LinkedIn (
Attend mixers
Entrepreneurs use other people’s resources (OPRs) including time and money
Skill at impression management and skill at persuasion and influence are important for successful new ventures.
See Phelan and Alder
151

152. The Board Is a board necessary?
A corporation must have a board of directors
Outside directors can provide missing relevant experience, know-how, and networks
The fear that boards will take over the company is largely unfounded
A board of advisors may be cheaper and have less control but you tend to get what you pay for!
An outside board benefits the venture by:
Preventing dumb mistakes.
Keeping entrepreneurs focused on what really matters.
Stopping them from getting gloomy.
152

153. Risks and Rewards for the Board
A top-notch outside director usually spends at least 9 to 10 days per year on his or her responsibilities.
Quality directors become involved for the learning opportunities, not for the money.
In addition to their fees, directors are usually reimbursed for their expenses.
People who could be potential board members are increasingly cautious about getting involved.
Directors of a company can be held personally liable for its actions and those of its officers.
Courts have held that, if a director acts in good faith, he or she can be excused from liability
153

154. Paying the Board
In a recent board survey (2005), key findings include:
Median retainer of $39,500 (+ meeting fees)
Median total cash compensation $54,385.
Equity awards representing 59 percent of total
38% requiring directors to own company stock.
23% of companies having a non-executive chair of the board, 48% with a lead director, and 83% conducting meetings without corporate managers present.
36% conducting formal evaluations of their own members.
154

155. Relationship with the Board of Directors
Simple rules for a productive relationship with the board of directors
Treat your directors as individual resources
Always be honest with your directors
Set up a compensation committee
Set up an audit committee
Never set up an executive committee
155

156. Attorneys
Entrepreneurs seek assistance from attorneys with several areas of the law
Incorporation, Franchising and licensing, Contracts and agreements, Formal litigation, Real estate, insurance, and other matters, Copyrights, trademarks, patents, and intellectual property protection, Employee plans, Taxes, Bankruptcy, M&A, personal needs
Entrepreneurs should never outsource legal decisions and knowledge to their attorney. The entrepreneur must understand the meaning of any document they are considering and use attorneys as teachers and advisors
156

157. Selection Criteria
In one survey, 54% of the respondents said personal contact with a member of the firm was the main decision criteria, followed by reputation and prior relationship with the firm.
Recommendations can come from acquaintances, members of the management team, or of accountants, bankers, and partners in venture capital firms.
The Martindale-Hubbell Law Directory is a listing of lawyers.
For a small venture, smaller firms may be more appropriate.
The chemistry between the entrepreneur and the lawyers is also important.
Most attorneys are paid on an hourly basis, through retainers and flat fees are sometimes paid.
157

158. Other Professionals Bankers Accountants Consultants
Book keeping and payroll can be outsourced
Consultants
Free services - Incubators/SCORE/NSBDC/SBA
Real Estate Professional
Logistics
Insurance
Beware those on commission
158

159. Financial Resources Cash is the lifeblood of the venture
Computers and spreadsheet programs are tools that save time and increase productivity and creativity.
Answer “what if” questions
Capital Requirements
Pro Forma Income Statements
Balance Sheets
Budgeting
Break-Even Calculations
Cash Flow Projections
Plenty of tools out there- MBAs have a real advantage!
159

160. 160

161. Adams On Bootstrapping
Raise the right amount of capital at the right stage of development
Market risk is higher than technical risk (in IT at least)
The risk you will launch a product and point it in the wrong direction
Higher risk means less likely to get cash
Get the right product to the right market with a reasonable amount of money
161

162. Why raising too much money is a problem?
Company becomes output-oriented not execution oriented
Temptation to spend, spend, spend
My experience at Fastpac
Only tangible progress towards proving the business model counts
Ownership becomes diluted
High risk means low valuation
Employees not as motivated
Second round investors less interested
162

163. Alternative Value inflection points = execution milestones
Raise new finance only after you pass a milestone
Raise only what you need to get to the next milestone
Building infrastructure is never validating the market
Get infrastructure done as quickly as possible – use pre- arranged deals or outsource
How long would it take you to find some reputable and economical people to do tax, banking, payroll, and legal services in Las Vegas?
163

164. The Big Two #1 Market validation
See earlier lecture
#2 Develop a profitable business model
Is demand sufficient to generate profits?
Focus and speed help here
Both these are “must-dos” to raise seed capital
164

165. Other Milestones Recruit senior executives and key advisors
People willing to bet their reputations and careers on the opportunity
Hire quality managers and individual contributors
Predict up front who you will need to hire and when – quarter by quarter
The team is what enables you to execute
Product evolution:
prototype and develop the product
Sign on brand name customers – ultimate validation
Establish partnerships
Line up investors
Lead, strategic, other
165

166. Some Big Rules Big rule #1: NEVER RUN OUT OF CASH
things will cost more than you think
Big Rule #2: Everything will take TWICE as long as you think
Concept of the Virtuous Circle
166

167. Reduce asset specificity
Reusable, off the shelf inputs
Reduces supplier risk
Reduces employee training risk
Reduces customer investment in learning, search, and adaptation
Problem is that these inputs can be easily imitated and therefore not source of CA
Make specific investments in area of greatest payoff
Undertake phased development
167

168. Convincing Stakeholders
Attributes
Enthusiasm, belief in product, reliability, perseverance
Ham and Egging
Everyone else is on board or almost on board
Ask for small increments of commitment and leverage that to the next stakeholder
Basic sales skills
Develop a decision schedule, know what you need, anticipate objections, handle advisors, follow up
168

169. Case
Keurig
Build your brain trust exercise (pg. 355)
169