10 - 1

Resource Requirements

10 - 2

The Entrepreneurial Approach to Resources

• 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

10 - 3

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!

10 - 4

Networking

• Successful entrepreneurs identify the right advisors BEFORE they launch!• Social capital is strongly associated with

entrepreneurial activity• Leverage LinkedIn (www.linkedin.com)• 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

10 - 5

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.

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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

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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% required directors to own company stock.• 23% of companies had a non-executive chair of

the board, 48% had a lead director, and 83% conducted meetings without corporate managers present.

• 36% conducted formal evaluations of their own members.

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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

10 - 9

Attorneys

• Entrepreneurs seek assistance from attorneys within 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

10 - 10

Attorney Selection Criteria• In one survey, 54% of the respondents said personal

contact with a member of a 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.

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Other Professionals

• Bankers

• Accountants• Book keeping and payroll can be outsourced

• Consultants• Free services - Incubators/SCORE/NSBDC/SBA

• Real Estate Professional

• Logistics

• Insurance• Beware those on commission

10 - 12

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!

10 - 13

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

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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

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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?

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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

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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

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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

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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

10 - 20

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

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Case

•Keurig•Build your brain trust exercise (pg. 390)