View
215
Download
2
Category
Tags:
Preview:
Citation preview
The Entrepreneurial Manager Introduction - Welcome to the Territory 5 Classes Fundamentals for the Entrepreneur 12 Classes
• Recognizing Opportunity• Forecasting Cash Flow• 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 Enterprise
Summary - Pulling it all Together 2 Classes
The Entrepreneurial Manager
Harvard Business School
28 March 2001
Entrepreneurial Manager Tool Kit
Designing Entrepreneurial Experiments& Sources of Financing
What is an Experiment? Experiment - A test made to demonstrate a known
truth, to examine the validity of an hypothesis, or to determine the efficacy of something previously untried.
An Entrepreneurial Experiment is a low-cost test designed to reduce a critical source of uncertainty prior to committing more resources:• Cost of Test < Full Investment
• Test Precedes Investment
• Test Need Not be 100% Accurate
Examples of Experiments Venture capitalists invest small amount before
investing larger amount. Customer research before introducing product. Product trial before full launch. Develop prototype before final product. Conduct due diligence before investing. Interview candidate before hiring.
Benefits of Staged Experimentation Staged Experimentation is an Entrepreneurial
Approach that Allows for:• Reduction of Risk over Time
– Technical– Market– Pricing/Distribution– People– Execution– Others?
• Acquisition of Information
• Preservation of Options– Know when to Drop back and Punt!
Staged Experiments
Time
Level of Commitment
Idea
Validation
Prototype
Commercialization
Mitigate Risks
Goal of the Entrepreneur?
Increase the Size of the Value Pie!
Minimize risk with as little cash as possible as quickly as possible!
Stages of Investment Seed Stage - A couple of entrepreneurs, a cool idea and a prayer!
Start-Up - Product development, Refining Biz Model, Bringing Together Management Team...
Expansion- Prototype complete, some sales and customer feedback, moving toward profitability,
still cash poor.
Late/Mezzanine - Establish market share, rapid growth, IPO
Concept LiquidityProfitsSalesCompany
Start-UpSeed MezzanineExpansionReducing Risk over Time
Raising Capital to Run Experiments Think of the amount of capital you raise in terms of paying
for experiments and the time to obtain experimental results. Think about the experiments and time as means of
obtaining the information you need to uncover the opportunity or the trap before you.
Experiments are incomplete, inaccurate and controversial - yet they must drive action.
How Do I Design Experiments? Step 1: Translate key risks into milestones and actions
• Identify key uncertainties.
• Determine milestones that would signify that uncertainties had been reduced to an acceptable level to move on to the next stage.
• Develop action plan to hit these milestones.
Step 2: Clearly cap the experiment’s cost and duration• Money invested and Time spent
Step 3: Design in external validation• Potential investors: ONSET’s “projection and reflection”
• Potential employees: attract and hire key management members
• Potential customers: letters of intent
Structuring Experiments to Test How can we structure experiments to assess the possible risks and
rewards? How long should we run the experiment? Can we do it quicker? At what cost? Can we do it cheaper? Who should we talk to? Who should we listen to? How do we structure
the conversations? What combination of resources do we need to run a fair experiment? What end products do we expect to have at the end of this stage? What information will we gather to evaluate the experiment? What criteria will we use to determine whether or not to move to next
level of commitment? How will we (or the market?) determine the magnitude of next level of
commitment? How will we morph our business model in light of new information?
The Entrepreneur Runs an Experiment
SUCCESSPayoff - Investment
INVEST NOW
- InvestmentFAILURE
SUCCESSPayoff - Investment - Cost of Test
INVEST
GOOD RESULTS - Investment - Cost of Test1 FAILURE
ABANDON- Cost of Test
1RUN A TEST
SUCCESSPayoff - Investment - Cost of Test
INVEST
- Investment - Cost of Test1 FAILURE
BAD RESULTS
ABANDON- Cost of Test
ABANDON0
P S|G
(1-P S|G )
P S|B
(1-P S|B )
P S
(1-P S)
(1-P G )
P G
Value of the Experiment Generally, Value of the Experiment is Greatest when:
• There is a Significant Cost of Failure.• There is a Significant Probability of Failure.• Cost of Test is Low Relative to the Investment.• The Experiment Yields Fairly Accurate Results.
Value of Information Depends on Your Alternatives• If Alternative is to Abandon
– Value goes up as Probability of Success goes up.
• If Alternative is to Invest– Value goes down as Probability of Success goes up.
Value as a Function of Probability of Success
Probability ofSuccess Range
Decision Strategy Valueof theTest
Low Abandon Venture 0
Low to MiddleRun the Experiment, but the second best
decision is to AbandonVT
Middle to HighRun the Experiment, but the second best
decision is to Invest.VT-VI
High Invest 0
Staged Capital Commitment, Risk and Marketplace Information
CASH FLOW
TIME
Seed Stage 1 Stage 2 Stage 3
IPO/Partial Sale
Seed. Intense Customer/ Supplier/ Investor Interviews
Stage 1. Construction of Prototype or Simulation
Stage 2. Beta Site Selection & Installation
Stage 3. Broad Customer Interviews & Targeting
… Always Accumulation of Information to Launch the Next Stage of the Attack
Free Cash Flow and Burn Rates
CASH FLOW
TIME
Conserve Fuel
Step on the Gas
Moderate Spending Rate
Phased Investment Decisions
Seed
Second
FirstAbandon
Invest Abandon
Invest Abandon
Invest Abandon
Invest
Founding The option to abandon can be more valuable than the option to continue.
Thoughts on Experiments
I should like to have a more perfect knowledge of things, but I do not want to buy it as dear as it costs.
– Michel de Montaigne
One must learn by doing the thing. For though you think you know it, you have no certainty until you try.
– Sophocles
I have not failed; I have found 10,000 ways that won’t work.– Thomas Edison
Don't be too timid and squeamish about your actions. All life is an experiment. The more experiments you make the better.
– Ralph Waldo Emerson
The Entrepreneurial Manager
Harvard Business School
28 March 2001
Entrepreneurial Manager Tool Kit
Sources of Financing
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?
Which Funding Source Do I Pursue?Ask Yourself…
Cash Flow Characteristics
VenturesBuyouts
Time Time
Free Cash Flows
Investment
TV
SeedStart-Up
First
Second
Technical Risk
Market Risk
Execution Risk
Cash Flow
Time
Nature of Opportunity Drives Financing Needs
IPO
Equity Markets
Bank Debt
Angels
VC
VCVC
Cash Flow
Time
Nature of Opportunity Drives Financing Needs
AngelsFriends & familyFounders’ capital Credit card debt Second mortgageMicroloans
Bootstrapping SBA loansCommunity banks Asset-backed borrowing Factoring A/RStrategic partners
Own Money/Customers/Suppliers Friends and Family Angels Incubators Venture Capitalists Asset Lenders (Banks) Corporations
Sources of Financing
Alternative Sources of Funding
InternallyGenerated Funds
AravindR.R. Donnelley
Retain Control Minimize Oversight
Need Positive CF May Limit Growth
Friends & Family TDC, R&R, PCC Quick Due Diligence Retain Control
Lack of Assistance Personal Conflicts
Angels Walnut/RBS Higher Valuations Retain Control
Varied Sophistication Can Turn off Future
Funding
Incubators ClubTools Mix of Services Access to Networks
Unproven Model Expensive Services/$$
Venture Capitalists Vermeer,ONSET, Anasazi
Professional Investors Access to Future Capital
Aggressive Terms Loss of Control
Bank Debt Jim Sharpe Retain Equity Fixed Obligations
Corporate Partners ParentingMagazine
Higher Valuations Access to Resources
Bureaucratic Limits Liquidity Options
Financing Source Cases Pros for Entrepreneur Cons for Entrepreneur
From Whom You Raise Capital is Often More Important than the
Terms
Bill Sahlman
Second-Year ElectivesEntrepreneurial Finance: (29 Sessions & Exam)
Objectives: To improve the practice of finance in entrepreneurial settings to enhance students' understanding of the relationships between the investment, financing, and organizational decisions confronting managers. Instructors: Professor William Sahlman, Professor Paul Gompers, Senior Lecturer G. Felda Hardymon
Venture Capital & Private Equity: (20 sessions & paper)Objectives: Seeks to help students understand how:1) Venture capital and private equity organizations work; 2) Why they take the forms that they do; and, 3) Where crucial problems and opportunities for innovation exist. Instructors: Professor Josh Lerner <<http://www.people.hbs.edu/jlerner/vcpe.html. >>
Senior Lecturer G. Felda Hardymon
International Entrepreneurial Finance: (30 Sessions & Exam)Objectives: 1) To enhance the understanding of the relationship between finance and entrepreneurship in an
international and cross-border context; 2) To improve the practice of finance in entrepreneurial firms and in private equity firms; and,3) To enhance the understanding of the relationships between investment, financing and
organizational decisions confronting owners and managers in fast-growing firms.Instructor: Assistant Professor Walter Kuemmerle
Recommended