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Chapter 2

FROM THE IDEA TO THE BUSINESS PLAN

ENTREPRENEURIAL FINANCE

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Chapter 2: Learning Objectives

Understand the components of a sound business model

Identify some of the best practices for high growth, high performance firms

Understand the importance of timing in getting from the idea to the opportunity

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Chapter 2: Learning Objectives

Identify the types of questions that a reasonable feasibility assessment should address

Identify quantitative criteria that assist in helping assess a new venture’s feasibility and its attractiveness to investors

Describe the primary components of a typical business plan

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Components of a Sound Business Model 企业商务模式构成成分 Generate Revenues (You must have

customers & sell them something) 产生销售收入

Make Profits (You must eventually have revenues that exceed the expenses of generating those revenues) 产生利润

Produce Free Cash Flows (You must generate cash inflows that exceed net working capital & capital expenditures) 产生净现金流

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Types of Small Business Firms 小企业类型

Entrepreneurial firms (broadly): 创业型企业（广义）small business including both high-growth, low-growth or stationary (lifestyle) businesses

Entrepreneurial ventures (narrowly): 创业型企业（狭义）：entrepreneurial firms that are flows and performance oriented as reflected in rapid value creation over time

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Best Practices of High Growth, High Performance Firms 高增长、高绩效企业的最佳实践环节

Three Areas: Marketing Practices 营销实践 Financial Practices 融资惯例 Management Practices 管理实践

[Note: While Operations/Production practices are not listed separately, they go hand-in-hand with high quality products & services, as well as on-time delivery]

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Best Practices: Marketing最佳营销实践

Deliver high quality products or services Develop new products or services that are

considered to be the “best” Offer products or services that command

higher prices & margins Develop efficient distribution channels &

superior service support facilities

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Best Practices: Financial最佳融资惯例

Prepare monthly financial plans for the next year & annual plans for five years

Anticipate & obtain multiple rounds of financing as the venture grows

Efficiently & effectively manage the firm’s assets, financial resources, & operating performance

Plan an exit strategy consistent with the entrepreneur’s objectives & business plan

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Best Practices: Management最佳管理实践

Assemble a management team balanced in functional area coverage & industry/market knowledge

Employ a decision-making style that is viewed as being collaborative

Identify & develop managers that support entrepreneurial endeavors 发现和培养支持创业精神的管理人才

Assemble a board of directors balanced in terms of internal & external members

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Time-to-Market and Other Timing Implications

Business opportunities exist in real time Most ideas have a relatively narrow window

of opportunity to become a successful business venture

Sometimes ideas are ahead of their time Of course, being “first to market” does not

necessarily ensure success

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Screening Venture Opportunities 筛选创业机会 A viable venture opportunity: 可行的创业机会

creates or meets a customer need, provides an initial competitive advantage, is timely in terms of time-to-market, and offers the expectation of added value to investors

Venture opportunity screening: 创业机会的筛选 assessment of an idea’s commercial potential to produce

revenue growth, financial performance, and value

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Qualitative Screening: Interview定性筛选：面试

Four Factor Categories Initially Evaluating a Potential Venture’s Attractiveness:

1. The Big Picture

2. Know Thy Customer

3. Production and Development Challenges

4. Financial Fortune-Telling

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Quantitative Screening: VOSTM Indicator定量筛选：间接指标 Attempt to quantify the following areas

• Industry/Market

• Pricing/Profitability

• Financial/Harvest

• Management Team

Supplement to, rather than replacement of, basic qualitative Q&A approach

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Factor Category: Industry/Market 行业与市场指标Potential Attractiveness: Market Size Potential

Average: $20-$100 million Venture Growth Rate

Average: 10%-30% Market Share (Year 3)

Average: 5%-20% Entry Barriers

Average: Timing/Size

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Factor Category: Pricing/Profitability 价格与盈利能力指标

Potential Attractiveness: Gross Margins

Average: 20%-50% After-Tax Margins

Average: 10%-20% Asset Intensity （ Total assets divided by

revenues ） Average: 1.0-3.0 turnover Return on Assets

Average: 10%-25%

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Selected Accounting Terms会计指标 Cost of Goods Sold:

direct costs of producing a product or providing a service

Gross Profit:revenues less the cost of goods sold

Gross Profit Margin:gross profit divided by revenues

Net Profit:dollar profit left after all expenses, including financing costs & taxes, have been deducted from the firm’s revenues

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Return on Assets (ROA) Model投资报酬率

Net Profit Margin (NPM):net profit divided by revenues

Asset Intensity:total assets divided by revenues, the reciprocal of asset turnover

Return on Assets (ROA):net after-tax profit divided by total assets

ROA Model:ROA = NPM x ATO

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ROA Model Considerations

Case 1: High Profit Margins & Low Asset Turnovers Examples: products & services based on technological innovations

Case 2: Low Profit Margins & High Asset Turnovers Examples: commodity-type products & services

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Factor Category: Financial/Harvest 融资与收益Potential Attractiveness: Cash Flow Breakeven

Average: 2-4 years Rates of Return

Average: 20%-50% per year IPO Potential

Average: 2-5 years Founder’s Control

Average: High Minority

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Selected Financial Terms

Operating Cash Flow: 经营活动产生的现金流cash flow from producing and selling a product or providing a service

Free Cash Flow to Equity: 分配给股东的现金流cash remaining after operating cash outflows, financing and tax cash flows, investment in assets needed to sustain the venture’s growth, and net increases in debt capital

Internal Rate of Return (IRR):compound rate of return that equates the present value of the cash inflows received with the initial investment

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Factor Category: Management Team

Potential Attractiveness: Experience/Expertise

Average: General/General Functional Areas

Average: Most Covered Flexibility/Adaptability

Able to Adapt Entrepreneurial Focus

Average: Founder

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VOS Indicator™ Average Scores

High Potential (average scores of 2.34-3.00) • ideas that have the potential to become high-growth,

high-performance ventures or “home runs”

Average Potential (average scores of 1.67-2.33)

Low Potential (average scores of 1.00-1.66)

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Key Elements of a Business Plan 商业计划书的要素 Business Plan:

written document that describes the proposed product or service opportunity, current resources, & financial projections

Cover Page:should identify the venture & provide the name, address, & phone number of the entrepreneur or other contact person

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Key Elements of a Business Plan 商业计划书的要素 Confidentiality Statement:

Example: “This business plan contains information that (the firm) considers proprietary. By accepting this business plan the recipient acknowledges the proprietary nature of this information contained herein and agrees to keep confidential all such information.”

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A Typical Business Plan Outline 商业计划书大纲

I. Executive Summary 执行摘要II.Business Description 业务描述

A. Description of the product/service

B. Industry background

C. Venture or firm background

D. Goals and milestone objectives

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Business Plan Outline (cont’d)

III. Marketing Plan and Strategy A. Target market and customers

B. Competition and market share

C. Pricing strategy

D. Promotion and distribution

IV. Operations and Support A. Quality targets

B. Technology requirements

C. Service support

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Business Plan Outline (cont’d)

V. Management Team A. Experience and expertise

B. Organizational structure

C. Intellectual property rights

VI. Financial Plans and Projections A. Income statements & balance sheets

B. Statements of cash flows

C. Break-even analysis

D. Funding needs and sources

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Business Plan Outline (cont’d)

VII. Risks and Opportunities A. Possible problems and risks

B. Real option opportunities

VIII. AppendixA. Detailed support for financial forecasts

B. Timeline and milestones