The 2009-2010 University of Dayton Business Plan Competition

Coaching Session five on growth

Some big dates coming up

November 11th: Application deadline

November 13th (MH 104), dress rehearsal

November 20th (MH 102), dress rehearsal

November 21st: Elevator Pitch presentations

Goal for Today’s session: Why growth?

What type of growth do judges want to see? How best to demonstrate growth? How’s the hook?

What is a high growth business?

By definition, it has annualized growth rates in excess of 20%. These last 5-10 years before growth rates slow.

The Inc 500 often has growth rates of 1,000%+ Growth is measured by sales, not profits.

Distinct characteristics of High Growth firms

FMA in a niche they pioneer Better execution Leaner operations (low overhead) Unique offerings

Why judges want to see growth

Validates the opportunity is attractive Demonstrates understanding of the concept More forgiving in terms of execution The bucket of capacity

– Your grow in “buckets”; a growth model serves to fill up that bucket quickly

Limits dangers (see next slide)

Dangers to not growing

Invites in competition Lose market power to more dominant competitors Reduced ability to identify future opportunities More likely reduction in future sales and income

Judges see these as limiting (and therefore less attractive)

Where to discuss growth

A good place is in the business model portion of the application

In the opportunity you discuss how pervasive is the problem—one sentence ought to discuss how much of the problem you plan to address

The other part ought to talk about how you plan to do so.

Some models for high growth

1. Replicable

2. Scalable

3. Roll-up

4. Roll-out

• Product extension

1. Replicability

Means the idea can be copied over and over without much problem

Doesn’t require great specialized knowledge on the part of local managers

Tends towards uniformity. Replicability is inherent to franchising.

– Document, document, document! College based businesses are naturals for replication

(4,000+ locations)

Making replication work

Remove yourself as the source of value-added—delegate to others

Identify aspects of plan that are unique, and protect them

Decide if uniformity or localization matter most (McDonalds vs. Old Spaghetti Factory)

Hire professionals who can train and equip the clones

Is “Clones” an insult?

No! It simply means that you want consistent performance—that requires selecting skilled individuals who can learn

This “selects in” similar folks

Making Replication work

McDonalds has “Hamburger U”, where owners go to learn the McDonalds process.

McDonalds spends heavily on training to ensure consistent expectations from each store.

Managing cash flow is crucial—easy to grow into bankruptcy if not careful

Hamburger U

McDonalds would rather finance/franchise a bright but poor person, than a rich but dumb person

McDonalds looks to its existing employees for future potential owners of franchises

Past performance is predictable, as is suitability for future ownership

Franchising is a replication model

Commonly seen near college campuses, and in “cluster communities”

If replication is your growth strategy then

Lay out a five year plan for the number of new sites you plan to open

– Identify the costs of opening each site– Lay out how long each site takes to cover its own costs– Lay out any economies of scale you’ll soon realize

Ensure that the “resources required from investors” reflects the costs of opening new sites.

2. Scalability

Similar to replicability, but it means that adding new sales is actually cheaper.

High fixed costs, low variable costs. E-Commerce is really a scaling business model: just

add blades to the server farm. If a unit requires your personal sales ability, its

scalability is very limited Automation often means a business can triple in sales

without needing to add employees.

Danger of scalability

Leads to tremendous price pressure when competition enters a market

Fiber optics lost $100 billion based on price war over a highly scalable product.

Barriers to entry are fewer, and resource endowed competitors can invade your market.

Element of surprise

Scalability is often a “real options model” works best when “get big fast” is not a requirement

If in proving out the concept you invite in competition, success is very limited (your competitors write an option on you)

If Scaling is your growth model then

Discuss how much it costs to add each fixed bucket of growth– How much revenue/net income can it add when fully

loaded– How long does it take to load that bucket of growth– How many buckets will you add each year?

Be sure to discuss how much it will cost to add a bucket in your resources required of investors

3. Roll-up

An acquisition model, where you buy local “Mom and Pop” outlets, and convert them into a chain.

Primarily retail or service.– Two styles: uniform and localized

It isn’t you are buying growth, you are buying quick market entry.

Funeral homes, florists, etc. make good roll-ups.– (so does Frisch’s Big Boy).

Challenges to making it work

Capital intensive—major start-up costs Need to do “due diligence”—this can go bad

ugly if you buy too rapidly Culture clash—can the management accept

the changes you are making Non-competes—can the owner become a

competitor?

Benefits

Economies of scale—buying bulk to save money

Developing an advertising awareness Buying stable cash flow can lead to future

expansion Good training opportunities

Example: John Deere

I worked with an entrepreneur who wants to roll-up John Deere franchises– Bulk orders save on shipping costs– Spread advertising across several stores– Many employees can be shared across stores– Inventory can be shared across stores

It looks very lucrative

If Roll-up is your model for growth then

Discuss in the opportunity section the economies of scale/scope this enjoys

– The buckets of capacity is a good argument to use here

This really isn’t best for the BPC, unless you partner with Mom and Pops, rather than buy them. The model works much the same

Be sure to talk about how much it costs to do a roll-up in the resources required of investors section

4. The roll-out

In many ways is the opposite of a scalability model

The Roll-out

Get large fast, immediate national scale businesses

High risk, because the costs of going national are so high – Fedex is a successful example of this– Webvan is a failed example of this

Roll-Outs require seasoned management

There really isn’t time for a “dress rehearsal”; you have to get the concept right the first time

Technology often falls into this category– can you just sell an iPod to a part of the market?

High up-front costs often create valuable barriers to entry.

For the BPC, attention to detail is crucial

A roll-out will seem dreamy and impractical unless you can demonstrate you understand what it takes to make it work

Best to avoid this one for now, unless you have a deep and experienced management team

Finally, the hook (tag line)

Think in terms of a jingle, a slogan.

Play on words are good, as are puns.

Avoid double entendres—too easy to get misinterpreted