1

ENT422: The Role of Entrepreneurship in Value Creation in Large and

Small Enterprises

Lecture 6

2

Guest Speaker: David Hessler Entrepreneur in Residence

High Tech Rochester

Financing a New Venture– Sources– Proforma Statements

Assembling a Team– Similar or complementary skills?– What two dimensions are most important?

Which is more important financing or the team?

What did we learn from Dave regarding the importance of?

3

The Timmons Model of theEntrepreneurial Process

The Entrepreneurial process is –

Opportunity driven

Driven by an entrepreneur and an entrepreneurial team

Resource parsimonious and creative

Depends on the fit and balance of the these elements

Integrated and Holistic

Sustainable

4

EXHIBIT 3.5

The Timmons Model of the Entrepreneurial Process

Communication

Opportunity Resources

Team

➨

Business plan

Fits and gaps

Ambiguity

Creativity ➨

Exogenous Forces

Leadership

➨

Uncertainty Capital market context

Founder

Sustainability: For Environment, Community and Society

5

Market demand is a key ingredient to measuring an opportunity: Is customer payback less than one year? Do market share and growth potential equal 20 percent annual growth

and is it durable? Is the customer reachable?Market structure and size help define an opportunity: Emerging and/or fragmented? $50 million or more, with a $1 billion potential? Proprietary barriers to entry?Margin analysis helps differentiate an opportunity from an idea: Low cost provider (40 percent gross margin)? Low capital requirement versus the competition? Break even in 1-2 years? Value added increase of overall corporate P/E ratio?

EXHIBIT 3.6

The Entrepreneurial Process is Opportunity Driven

Market SegmentsOpportunity

6

EXHIBIT 3.7

Understand and Marshall Resources, Don’t Be Driven by Them

“Bootstrapping”Resources

Minimize and Control

Versus

Maximize and OwnRelationships

Unleashing creativity

Financial resources

Assets Think cash last!

People

Your business plan

7

EXHIBIT 3.8

An Entrepreneurial Team is a Critical Ingredient for Success

TeamAn entrepreneurial leader Learns and teaches–faster, better Deals with adversity, is resilient Exhibits integrity, dependability, honesty Builds entrepreneurial culture and organization

Quality of the team Relevant experience and track record Motivation to excel Commitment, determination, and persistence Tolerance of risk, ambiguity, and uncertainty Creativity Team locus of control Adaptability Opportunity obsession Leadership and courage Communication

“Passion”

8

EXHIBIT 3.9(a)

Netscape―Journey Through the Entrepreneurial Process:At Startup, a Huge Imbalance

Communication

OpportunityVery large,

growing and undefined

ResourcesVery limited

Team

➨

Business plan

Fits and gaps

• Innumerable: Money and Management

Ambiguity

Creativity ➨

Exogenous Forces

Leadership

➨

Uncertainty Capital market context

Founder

Sustainability: For Environment, Community and Society

9

EXHIBIT 3.9(b)

Netscape―Journey Through the Entrepreneurial Process:At Venture Capital Funding, Toward New Balance

Communication

OpportunityLarger and growing faster

ResourcesMoney to launch

Team

➨

Business plan

Fits and gaps

• Resources and team

• Catching upAmbiguity

Creativity ➨

Exogenous Forces

Leadership

➨

Uncertainty

Capital market context

Founder

Sustainability: For Environment, Community and Society

10

EXHIBIT 3.9(c)

Communication

Opportunity• Even bigger and

faster growing• Competitors

Resources• Great balance

sheet• Great free cash

flow

TeamCan play

with the best➨

Ambiguity

Creativity ➨Exogenous Forces

Leadership

➨

Uncertainty Capital market context

Founder

Sustainability: For Environment, Community and Society

Netscape―Journey Through the Entrepreneurial Process:At IPO, a New Balance

Business plan

Fits and gaps

• How large and profitable can we become?

11

EXHIBIT 3.9(d)

Netscape―Journey Through the Entrepreneurial Process:Today, Toward a New Imbalance

Communication

Opportunity• Major growth

potential• Competitors and

Microsoft

ResourcesUnlimited access to capital markets and other resources

➨

Business plan

Fits and gaps

• Candidate fro brontosaurus

capitalism?

• Threat of disruptive technology

• Sustaining and reinventing

entrepreneurial organizationAmbiguity

Creativity ➨

Exogenous Forces

Leadership

➨

UncertaintyCapital market context

Founder

Sustainability: For Environment, Community and Society

TeamOne of the best

12

Baron and Shane Chapter 5

“Assembling the Resources”

Selected Highlights from the Chapter

Entrepreneurship

13

“Assembling the Resources” The team should have complementary skills

rather than similar skills – because building a company requires a broad range of attributes and knowledge.

Choosing the right co-founders requires that the lead entrepreneur first determine his/her skills capabilities, personal characteristics and motives.

It is important to establish clearly defined roles and responsibilities for members of the founding team.

14

Team members often perceive they are be treated unfairly and demand more and doing less which may result in withdrawal from the group thus jeopardizing the success of the new venture.

Effective communication among team members is important including a recognition that destructive criticism of another member could lead to feelings of hostility and intense conflict.

“Assembling the Resources” (cont.)

15

Baron and Shane Chapter 6

“Financing New Ventures”

Selected Highlights from the Chapter

Entrepreneurship

16

“Financing New Ventures”

Problems of uncertainty and information asymmetry means that investors often have to make investment decisions on less information that entrepreneurs possess - thus making it more difficult to raise funds

Investors compensate for information asymmetry by encouraging self-financing, contract provisions, syndications specialization and localized investing

New ventures usually require very little capital to start but require more capital as they experience negative cash flow from operations

17

Startups are typically financed by equity rather than debt because cash flow is generally not sufficient to pay for higher interest rates on borrowed money.

Business angels and venture capitalists follow similar paths to investing beginning with a referral, initial screening and more in-depth due diligence evaluation ending with negotiations or rejection.

Professional investors typically follow the venture capital model to calculate the amount of equity to demand in return for the investment.

Entrepreneurs frequently raise funds from people they know because the ties reduce the possibilities that entrepreneurs will take advantage of them.

“Financing New Ventures” (cont.)

18

Stegmart Case is Due

Class Discussion

19

Workshop

Exercises 3-5 should be completed. Groups are not required to hand them in. However questions and comments are welcome.

Work on Exercise 6. It is to be handed in at the next class.

20

Assignment for November 2

Guest Speaker on November 2

Ms. Lauren Dixon

CEO, Dixon Schwabl, Inc.

Topic: Our Successful Marketing Plan

21

Assignment for November 2

Lecture: Developing a Winning Marketing Plan for a New Venture.

Reading: Baron, Chap. 9 “Marketing the New firm”

Case Due: Schubadub Auto Wash – Page 383. The report should be typewritten, individually prepared and not more than two pages long answering the questions at the end of the case. It will be discussed in class.

22

Workshop

Hand in Exercise 6. It will also be discussed in class.

Work on Exercises 7 & 8. Hand in Exercise 8 next week. It will also be discussed in class