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

2. The Entrepreneurial Manager Final Exam
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
Diskettes Provided
Open Book / Open Notes

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 Company’s 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 (ke = rf + (rm-rf))
EBITDA and/or Sales Multiples
Comparable Companies and Industries
IPO or M&A Transactions

6. EM - 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?

7. The Entrepreneurial Manager
Introduction - Welcome to the Territory 5 Classes
Fundamentals for the Entrepreneur Classes
Recognizing Opportunity
Forecasting Cash Flows
A Venture as a Series of Experiments
Sources of Startup Funding
Building the Successful Venture 9 Classes
Starting Right
Building and Developing the Team
Managing Relationships
Alternatives for the Successful Venture 4 Classes
Achieving Liquidity & Sustaining the Enterprise
Summary - Pulling it all Together 2 Classes

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

9. What 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)

10. Knowledge, Skills & Frameworks
What is Entrepreneurship?
Approach to Management
Opportunity is the Driver
An Iterative Process
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
Entrepreneurial Experiments
Value of Information
Mitigating Risks by Staging Experimentation and Funding
Due Diligence and Milestones
Financing
Term Sheets
Pre-Money, Post-Money
Sources of Financing
Interest Coverage
Deal Structure
Contracts
Leases, Term Sheets, Employment
Corporate Forms
Managing Personal &Tax Liability
Working with Lawyers
Questions to Ask
Structuring the Relationship

11. Knowledge, Skills & Frameworks (Continued)
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
Self Assessment?
Personal Propensities for Risk, Uncertainty, Ambiguity?
Desire for an Entrepreneurial Life?
Building the Team
Interviewing Methods
Sharing Equity
Building the Board
Selecting Advisors
CEO Redeployment
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

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

13. Introduction 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.

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

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

16. Fundamentals: Opportunity Recognition
Technical Data Corporation (Jeff Parker)
Build on Experience
Select Investors for more than just money
Don’t say No out of Envy
Tracmail (Adi Cooper )
Competing on Price is Tough
Seek Barriers that Protect
What are the barriers to Competitive Attack?
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
Club Tools (Paul Ognibene)
Pick Investors Carefully
Cash Flow Forecasting Dilemma
Go big or start small
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...
Driver 1
Driver 1
Revenues
Driver 2
Driver 2
Driver 3
Driver 3
Profits
Driver 1
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
Costs
Driver 2
Driver 3

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

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

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

23. Fundamentals: Entrepreneurial Experiments
Value of Information Exercises
Experiments Pay when Cost and Probability of Failure are High.
Value of Information Depends on Alternatives
ONSET Ventures (Terry Opdendyk, Darlene Mann, Andy Swett)
Sequential Investment
Milestones, Objectives and Risk Mitigation
Venture Capital Model to Startups
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
SUCCESS
Payoff - Investment
INVEST NOW
- Investment
FAILURE
Payoff - Investment - Cost of Test
INVEST
GOOD RESULTS
- Investment - Cost of Test 1
ABANDON
- Cost of Test
RUN A TEST
BAD RESULTS P
S|G
(1-P )
S|B S G

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

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

28. Fundamentals: 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 Camel
Extrusion Technologies (Jim Sharpe)
Banks as a Source of Funds
Sophisticated Experience Prevented Mundane Mistakes
Parenting Magazine (Robin Wolaner)
Experiment gave good results but didn’t 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. Which 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?

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

32. Alternative Sources of Funding
Financing Source
Pros for Entrepreneur
Cons for Entrepreneur

33. Building the Successful Venture: Contracts
Lawyers & Leases (Rajath Chaudry)
Seek Strong Professional Advice
Early Decisions Matter
Beware of Conflicts of Interests
Kingsley Management (Matt Lieb & Chris Jones)
Don’t be Too Clever about Financing
Fit Structure to Strategy
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
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
Balance Inc. (Jim Fitzgerald)
Seek Advice but Don’t Compromise Personal Objectives
Don’t Hire People You Don’t Like
Use Board and Advisors for Recruiting
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
Be clear in the job description
Stage your investment in rounds of interviews
Hire part-time or as consultant before full-time
Include different perspectives in the interviewing
Content-e.g., skills, fit, background
Interviewing approach
Interviewer perspective
Check references
Write an explicit employment agreement
Think about questions

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

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

40. Managing Relationships
Keurig Coffee (Nick Lazaris)
R&R Revisited - Setting up the Virtual Company
Assembling a Complex System of Stakeholders
Guidant Radiation Therapy (Ginger Howard)
What do you Have? What do Need? What Deal gets you There?
Finding the Next Big Thing
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
Model
Identify
Opportunity
Identify/Screen
Potential Partners
Structure
Deal
Manage
Relationship
Clearly Articulate
Opportunity
Evaluate
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
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.

44. Creating a Sustainable Venture
ScreamingMedia (Kevin Clark)
Moving from Chaos to Structure
Having Cash in a Downturn is a Strategic Advantage
Kendle International (Candace and Chris)
Build Organization for Next Stage of Growth
Valuations in Private vs. Public Markets
Enron (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 Efforts
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. Achieving Disciplined Entrepreneurship
Benefit of
Discipline
Benefit of
Flexibility
Level of Structure
Start-up
Established Firm

47. Taking 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?
Management
Investors
Customers
Partners

48. Avoiding the Flat-Line...
Actively search for opportunities
Obsess about your customers
Frame crises as opportunities not threats
Frame action as experiment
Don’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.

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

50. Entrepreneurial 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. Huxley
An ounce of action is worth a ton of theory.
Friedrich Engels

51. The 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?

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

53. Attitudes are Essential...
There is no one “type” of entrepreneur
Success is not forever, and failure is not fatal.
Failure is the opportunity to begin again more intelligently Henry Ford
At the end of the day, what do you have?
Relationships
Reputation
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. On 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

55. Is it Luck or Hard Work?
I find the harder I work, the more luck I seem to have.
Thomas Jefferson
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! Ernest Shackleton
Will YOU Sign Up for the Entrepreneurial Adventure?
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
Recruiting 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

58. Setting 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”