entrepreneurial manager tool kit course wrap-up the entrepreneurial manager harvard business school...
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Entrepreneurial Manager Tool Kit
Course Wrap-Up
The Entrepreneurial Manager
Harvard Business School
1May 2001
Logistics - Section C• Friday, 4 May 2001 - 9:00am-1:00pm
– Aldrich 10 (Aggarwal - Davis)
– Aldrich 107 (De los Reyes - Tepperman)
– Aldrich 108 (Terry - Zhao)
• Print Labs - Aldrich 7 & 8 – Download Printer Driver! http://www.mba.hbs.edu/admin/tech/download/hp4050_win95.html
• Computer Difficulties - Aldrich 7 Diskettes Provided Open Book / Open Notes
The Entrepreneurial Manager Final Exam
Entrepreneurial Manager Final Exam
• Integrate Quantitative and Qualitative Analysis– What questions are you trying to answer?– How do the numbers inform your overall analysis?– Clearly state/defend your assumptions.
• Be Specific in your Recommendations for Action– Support your recommendations with Analysis
• Use Your Time Carefully.
What Pieces of “Analysis” Might You Encounter?
• Understanding the Business Model– Assessing the Opportunity
• Sizing the Market - How much market share does the venture have to get to meet the revenue targets? How will it do that?
– Simple Diagnostics - e.g. “Taking the Company’s Temperature:”
• Financial Ratio Analysis • How does the company make money?
– Gross Margins– Asset Intensity– Cash Needs - Does the Company “Burn” cash or generate
cash? How much will the company need to execute its plan? From whom should it raise money?
Additional Pieces of “Analysis”• Understanding Effects of Financing
– Pre-Money and Post-Money Valuation– How much of the company must the entrepreneur give up?– How much of the company does the investor require to meet his/her
required rate of return?• FV = PV(1+IRR)n => IRR = (FV/PV)1/n - 1
• Valuing the Company– Lifetime Value of Customers based on FCF
• Customers we have today and those we expect to get.• FCF = EBIAT + Dep - CapEx - WC• CF = NI + Dep - CapEx - WC
– Discounted Cash Flows (ke = rf + (rm-rf))– EBITDA and/or Sales Multiples
• Comparable Companies and Industries – IPO or M&A Transactions
EM - Three Broad Questions What’s going on here?
– How has the company gotten to this point?– What’s the business model? What kind of company is this?
• Revenues, Costs, Financing…
– What is the opportunity going forward?– What resources do they need to pursue it?
• Cash? People? Customers?
What should they do about it?– Turn analyses into specific recommendations.
• Not just the what but the HOW?
– What are the risks? Anticipate consequences.• What can go wrong? What can go right?
How do we follow up? Measure the progress?
The Entrepreneurial Manager Introduction - Welcome to the Territory 5 Classes Fundamentals for the Entrepreneur 12 Classes
• Recognizing Opportunity• Forecasting Cash Flows• 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 the Enterprise
Summary - Pulling it all Together 2 Classes
Entrepreneurial Point of View
Skills and Frameworks
NewKnowledge
e.g., term-sheets, pre- & post-money valuation,venture capitalists, IPOs
e.g., evaluating an opportunity,reading a contract, unbundling risks
What Did We Learn?
Action in the face of uncertainty.
What Did We Learn from theEntrepreneurs & Advisors We Met in Class?
Jim Sharpe (Extrusion Tech) Robin Wolaner (Parenting) Rajath Chaudry (Lawyers & Leases) Matt Lieb (Kingsley Management) Sharon Ward, Paolo (Return Logic) Jim Fitzgerald (Balance) Barry Arnold (Retail Sports) Nick Lazaris (Keurig) Ginger Howard (Guidant) Tom & Tom (Nantucket Nectars) Alan Ellman (Screaming Media) Candace & Chris (Kendle) Louise Kitchen, Jeff Skilling (Enron) Katy, Andy, Elyce (kate spade) Rob Adler, Jeff Parker (CCBN)
Bob Reiss (TV Guide Game) Barb Schetter (R.R. Donnelley) Charles Ferguson (Vermeer) Chris Peters (Microsoft) Dr. V. (Aravind) Jeff Parker (Technical Data) Adi Cooper (Tracmail) Ann Meceda (PCC) Paul Ognibene (Clubtools) Sue Krukonis (Anasazi) Terry Opdendyk, Andy Swett (ONSET) Doug Macrae (Videoguide) Ralph Wagner (Walnut) Bob O’Connor (RBS - Walnut)
Knowledge, Skills & Frameworks Entrepreneurial Experiments
• Value of Information• Mitigating Risks by Staging
Experimentation and Funding• Due Diligence and Milestones
Financing • Term Sheets• Pre-Money, Post-Money• Sources of Financing• Interest Coverage• Deal Structure
Contracts• Leases, Term Sheets, Employment• Corporate Forms
– Managing Personal &Tax Liability• Working with Lawyers
– Questions to Ask– Structuring the Relationship
What is Entrepreneurship?• Approach to Management• Opportunity is the Driver• An Iterative Process
Opportunity Analysis• Reading Business Plans• Assessing Business Risks• Diagramming Business Models
– Fishbone Analysis• PODC Framework• Estimating Cash Flows and Drawing
Cash Curves• Risk/Reward Curves
– Probability of Failure– Expected Value of Returns– Robustness of Upside
Knowledge, Skills & Frameworks (Continued)
Building the Team• Interviewing Methods• Sharing Equity• Building the Board• Selecting Advisors• CEO Redeployment
Managing Relationships• Business Development Process
– ID Opportunity– Mapping the Business Network– Screen Potential Partners– Structuring Deal Forms
• Acquisition• Alliance• Equity Investment• Technology Licensing
– Managing the Relationship
Creating a Sustainable Venture• Preparing for Liquidity Events
– IPO– Private Sale– Strategic Investments
• Creating Structure and Designing Processes
– Flexibility vs. Discipline• Organizing the Team for the Next
Stage of Growth
Self Assessment?• Personal Propensities for Risk,
Uncertainty, Ambiguity?
• Desire for an Entrepreneurial Life?
Introduction R&R (Robert Reiss)
• An Entrepreneur follows Opportunity• An Entrepreneur spreads Risk and Owns very little
R.R. Donnelley (Barb Schetter)• Big Companies also have opportunities
Vermeer (Charlie Ferguson & Randy Forgaard)• A Visionary, A Technologist, still need A Manager• VC can help even if not a “friend”
Vermeer/Microsoft (Chris Peters)• Big Company seeking opportunity via acquisition
Aravind Hospital (Dr. Venkataswamy)• Grand Goal as an “Opportunity”• The Deal with People can be more than about Money
Introduction to Entrepreneurship
A way of managing rather than a specific economic function or a characteristic of an individual.
An approach to management that begins with OPPORTUNITY.
HBS working definition:• The pursuit of opportunity without regard to
resources currently controlled.
Exploit
Act
IdentifyOpportunity
MarshalRequiredResources
Deals
Harvest
Never-EndingProcess
Entrepreneurial Process:
Strategic OrientationStrategic Orientation
Control of ResourcesControl of Resources
Management StructureManagement Structure
Compensation/RewardsCompensation/Rewards
Commitment to OpportunityCommitment to Opportunity
InvestmentInvestment
Opp. DrivenOpp. Driven Resource DrivenResource Driven
EvolutionaryEvolutionaryRevolutionaryRevolutionary
Single-Single-StagedStaged
Multi-StagedMulti-Staged
Own or EmployOwn or EmployUse or RentUse or Rent
Formal HierarchyFormal HierarchyNetworks - FlatNetworks - Flat
Value/TeamValue/Team IndividualIndividual
Dimensions of Business PracticePromoter Trustee
Entrepreneurial Administrative
Fundamentals: Opportunity Recognition
Technical Data Corporation (Jeff Parker)• Build on Experience• Select Investors for more than just money• Don’t say No out of Envy
Tracmail (Adi Cooper )• Competing on Price is Tough • Seek Barriers that Protect• What are the barriers to Competitive Attack?
Private Communications Corp (Ann Meceda)• Not every Idea is an Opportunity• Understand your business model and experiment• Nothing goes exactly as planned
Fundamentals: Forecasting Cash Flows
Club Tools (Paul Ognibene)• Pick Investors Carefully• Cash Flow Forecasting Dilemma• Go big or start small
Anasazi (Sue Krukonis)• Going around the Distribution Channel is Challenging• Cash is King
Opportunity Analysis:Knowledge, Skills & Frameworks
• Reading Business Plans• Assessing Business Risks• Diagramming Business Models
– Fishbone Analysis
• PODC Framework• Estimating Cash Flows and Drawing Cash Curves• Risk/Reward Curves
– Probability of Failure
– Expected Value of Returns
– Robustness of Upside
Understand the Business Model...
Profits
Costs
Revenues
Driver 1
Driver 2
Driver 3
Driver 1
Driver 2
Driver 3
Driver 1
Driver 2
Driver 3
Using the Tool 1. Draw the key drivers of revenue and costs. 2. Identify key drivers and quantify assumptions. 3. Test sensitivity to changes in key drivers. 4. Analyze how reasonable key assumptions are. 5. Use the tool to surface key assumptions, logical inconsistencies, critical sources of uncertainty and important questions to ask
Dynamic Fit Management
PeoplePeople
DealDeal
ContextContext
OpportunityOpportunity
What can go wrong?What can go right?
Risk/RewardManagement
Change (Good & Bad News)
PatternRecognition
Learning
Cu
mul
ativ
eC
um
ulat
ive
Cas
h F
low
in $
Cas
h F
low
in $
TimeTime
BurnBurn RateRate
Date of First Cash Flow PositiveDate of First Cash Flow Positive
MaximumMaximum FinancingFinancing NeedsNeeds
DaDatete of Cashof Cash BreakevenBreakeven
The Cash Flow Cycle for a Venture
Managing Risk and Reward What are the underlying assumptions and drivers of the
decisions? What will change the odds?
Return on Investment+25%
Probability of Occurrence
Expected Value
Probability of Losing 100%
-100%
+100%
Goals in Managing Risk and Reward: - Increase Probability of Success - Increase Expected Returns
Fundamentals: Entrepreneurial Experiments
Value of Information Exercises• Experiments Pay when Cost and Probability of Failure are High. • Value of Information Depends on Alternatives
ONSET Ventures (Terry Opdendyk, Darlene Mann, Andy Swett)• Sequential Investment• Milestones, Objectives and Risk Mitigation• Venture Capital Model to Startups
Videoguide (Doug Macrae)• Product Driven (Field of Dreams)• Big Upfront Costs in Hopes of Lower Variable Costs Later• “Go Big or Go Home” Strategy May Send You Home Early
The Venture as a Series of Experiments:Knowledge, Skills & Frameworks
• Value of Information
• The Venture Capital Approach to StartUps– Mitigating Risks by:
• Staging Experimentation
• Staging Funding
– Due Diligence and Milestones
Running the 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
Staged Experiments
Time
Level of Commitment
Idea
Validation
Prototype
Commercialization
Mitigate Risks
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.
Fundamentals: Sources of Financing
Walnut Venture Associates A (Ralph Wagner)• What do Angels want?• How do you find out about a company and its people?
Walnut Venture Associates D (Bob O’Connor)• What do Entrepreneurs want from Financial Backers?• An Angel Term Sheet Can Look Like a Camel
Extrusion Technologies (Jim Sharpe)• Banks as a Source of Funds• Sophisticated Experience Prevented Mundane Mistakes
Parenting Magazine (Robin Wolaner)• Experiment gave good results but didn’t raise $• Corporate Partners have different needs• Career of the Entrepreneur (Each venture leads to others)
Sources of Financing:Knowledge, Skills & Frameworks
• Term Sheets
• Pre-Money / Post-Money Valuation
• Dilution
• Matching Opportunity to Source of Funding
• Sequencing Financing
• Calculating Interest Coverage
• Negotiating Deal Structure
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…
Own Money/Customers/Suppliers• kate spade, Kendle
Friends and Family• R&R, Technical Data, PCC
Angels• Walnut: RBS, Nantucket Nectars
Incubators• Clubtools, Peoplestreet
Venture Capitalists• Vermeer, Return Logic, Keurig, Anasazi
Asset Lenders (Banks)• Jim Sharpe
Corporations• Parenting Magazine, CCBN
Sources of Financing
Alternative Sources of Funding
Internally GeneratedFunds
Retain Control Minimize Oversight
Need Positive CF May Limit Growth
Friends & Family Quick Due Diligence Retain Control
Lack of Assistance Personal Conflicts
Angels Higher Valuations Retain Control
Varied Sophistication Can Turn off Future Funding
Incubators Mix of Services Access to Networks
Unproven Model Expensive Services/$$
Venture Capitalists Professional Investors Access to Future Capital
Aggressive Terms Loss of Control
Bank Debt Retain Equity Fixed Obligations
Corporate Partners Higher Valuations Access to Resources
Bureaucratic Limits Liquidity Options
Financing Source Pros for Entrepreneur Cons for Entrepreneur
Building the Successful Venture: Contracts
Lawyers & Leases (Rajath Chaudry)• Seek Strong Professional Advice
• Early Decisions Matter
• Beware of Conflicts of Interests
Kingsley Management (Matt Lieb & Chris Jones)• Don’t be Too Clever about Financing
• Fit Structure to Strategy
Return Logic (Sharon Ward, Paolo Motturo, Andrew Chan)• Dividing Equity has Repercussions
• Terms in Each Financing Affect the Next Round
• Decisions you Make Today Affect you Tomorrow
Building the Successful Venture: ContractsKnowledge, Skills & Frameworks
• Leases
• Term Sheets
• Employment Contracts
• Corporate Forms– Managing Personal and Tax Liability
• Working with Lawyers– Questions to Ask
– Structuring the Relationship
Building and Developing the Team
Cambridge Incubator: Peoplestreet (Mark Pitts)• Hiring is Critical and Can be Learned
• Hiring Well is a Competitive Weapon
• Hiring Mistakes are Expensive and Take a Long Time to Correct
Balance Inc. (Jim Fitzgerald)• Seek Advice but Don’t Compromise Personal Objectives
• Don’t Hire People You Don’t Like
• Use Board and Advisors for Recruiting
Retail Sports (Barry Almond)• Bad Things Can Happen to Good Entrepreneurs
• “Should I Stay or Should I Go?”
Building the TeamKnowledge, Skills & Frameworks
• Interviewing Methods
• Sharing Equity
• Building the Board
• Selecting Advisors
• CEO Redeployment
Reducing Risk in Hiring Be clear in the job description Stage your investment in rounds of interviews Hire part-time or as consultant before full-time Include different perspectives in the interviewing
• Content-e.g., skills, fit, background
• Interviewing approach
• Interviewer perspective
Check references Write an explicit employment agreement Think about questions
Entrepreneurship is a Team Sport Board of Directors
• Experienced Investors (e.g. VCs)• Mentor or Coach for CEO• Industry Expert
Top Management Team• Functional Expertise• Experience (Start-up and Large Company)• Organizational Fit
Professional Advisors• Lawyers• Accountants• Executive Recruiters
Entrepreneur’s DilemmaEntrepreneur’s
Vision
Bring in Critical Resources -Money -Professional Management -Advisors
Yield Control to Others -Investors -Board -Top Managers
Reduce Uncertainty
Managing Relationships
Keurig Coffee (Nick Lazaris)• R&R Revisited - Setting up the Virtual Company
• Assembling a Complex System of Stakeholders
Guidant Radiation Therapy (Ginger Howard)• What do you Have? What do Need? What Deal gets you There?
• Finding the Next Big Thing
Nantucket Nectars (Tom & Tom)• Be Willing to Do the Laundry, if Necessary
• Distribution is Not Obvious
• Achieving Liquidity while Preserving a Role
Managing RelationshipsKnowledge, Skills & Frameworks
• Business Development Process– ID Opportunity– Mapping the Business Network– Screen Potential Partners– Structuring Deal Forms
• Acquisition• Alliance• Equity Investment• Technology Licensing
– Managing the Relationship
The Business Development ProcessIdentifyOpportunity
DevelopBusinessModel
Identify/ScreenPotential Partners
StructureDeal
ManageRelationship
Clearly ArticulateOpportunity
Evaluate Opportunity
Map needed resources/skills
Decide which todo in-house andwhich outsource
Identify potentialpartners
Apply preliminaryscreen
Evaluate finalistson key criteria
Evaluate alternativeforms -Licensing -Equity investment -Alliance -Joint-venture -Acquisition
Structure contractto manage risks -Transfer -Reduce -Share
Negotiate Deal
Manage portfolioof ongoingpartnerships -Key metrics -Individual and portfolio level
Manage relationships -Ownership -As they evolve -Multiple points of contact
Managing Relationships Ongoing management is required because
reality is too complex to fully contract. Guidant’s Approach - Ginger Howard:
• Identify an Owner on each side responsible for the contract, negotiation and deliverables.
• Philosophical Alignment of People and Business Processes.
• Formal Reviews - Milestones, etc.• Constant Communication - Talk every day…• Ruthless Honesty.
Creating a Sustainable Venture ScreamingMedia (Kevin Clark)
• Moving from Chaos to Structure• Having Cash in a Downturn is a Strategic Advantage
Kendle International (Candace and Chris)• Build Organization for Next Stage of Growth• Valuations in Private vs. Public Markets
Enron (Louise Kitchen & Jeff Skilling)• Is there Entrepreneurship in Large Organizations?• Can you Develop Processes that Maintain Flexibility and Foster Pursuit of
Opportunity? kate spade (Katy, Andy, Elyce, Pamela)
• Money to Grow vs. Money to Compensate for Past Efforts CCBN (Jeff Parker)
• Is Entrepreneurship Learnable?
Creating a Sustainable Venture Knowledge, Skills & Frameworks
• Preparing for Liquidity Events– IPO– Private Sale– Strategic Investments
• Creating Structure and Designing Processes
– Flexibility vs. Discipline
• Organizing the Team for the Next Stage of Growth
Level of Structure
Benefit of Discipline
Benefit ofFlexibility
Start-up Established Firm
Achieving Disciplined Entrepreneurship
Taking it to the Next Level.. Can you scale up the business model,
especially cash? Can the management team make the next
step? Who do you bring along to the next step?
Who do you leave behind? Who gets on board?• Management• Investors• Customers• Partners
Avoiding the Flat-Line...
Actively search for opportunities Obsess about your customers Frame crises as opportunities not threats Frame action as experiment
• Don’t fire scientist when experiment fails (except if he runs same experiment twice)
After you raise the money, avoid the temptation to bet it all on one hand or roll of the dice.
What’s Stopping the Big Guysfrom Doing It?
Attackers’ Advantages– Innovative Business Concept– Sense of Urgency– Start-Up, Speed-Oriented Culture– Opportunity focused– Network of Relationships– Shareholder Value Focus
Defenders’ Dilemma– Cannibalization fears– Channel conflicts– Resource driven
• Curse of the deep pocket
– Current income focus– Conventional mindset
Entrepreneurial Point of View
Make Decisions Today and in the Future to Ensure that:• What can go right, goes right.
• What can go wrong is avoided or will not critically wound the company.
How can I make the future that I want to happen actually happen?
Knowledge, Skills, and Frameworks Mean Little without Action.• The great end of life is not knowledge but action.
– T.H. Huxley
• An ounce of action is worth a ton of theory.– Friedrich Engels
The Entrepreneurial Manager and You:Questions to Ask
Do I want to be involved in an early stage venture at some point in my career?
Do I want to be involved as a supplier of financing to early stage ventures?
What early career experiences will best prepare me? What is my risk profile? Can I tolerate ambiguity and uncertainty? Am I motivated by the love of a product, being in
control, creating something new, making money?
Career Choices
Be an Entrepreneur• Strategy 1 - Go For It Now• Strategy 2 - Learn Best Practices First
Work with Entrepreneurs• Private Equity• Consulting• Banking• Corporate Manager• Non-Profit• What Else?
Attitudes are Essential... There is no one “type” of entrepreneur Success is not forever, and failure is not fatal.
• Failure is the opportunity to begin again more intelligently. - Henry Ford
At the end of the day, what do you have?• Relationships• Reputation
Make every day an adventure• Just as in life, business is about development and growth. Each
is equally exciting. • Courage is doing what you are afraid to do. There can be no
courage unless you are scared. - Eddie Rickenbacker
It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, and comes short again and again; because there is not effort without error and shortcoming; but who does actually strive to do the deeds; who knows the great enthusiasms, the great devotions; who spends himself in a worthy cause, who at the best knows in the end the triumphs of high achievement and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who know neither victory or defeat.
On Effort and Failure and Continued Pursuit...On Effort and Failure and Continued Pursuit...
- Theodore Roosevelt, 1910 at the Sorbonne
Is it Luck or Hard Work?
I find the harder I work, the more luck I seem to have.
– Thomas Jefferson
Opportunity is missed by most people because it is dressed in overalls and looks like work.
– Thomas Edison
You Decide - Is the View Worth the Climb?“The view we enjoyed from the summit could hardly be surpassed in sublimity and grandeur; but one feels farfrom home so high in the sky, so much so that one is inclined to guess that, apart from the acquisition of knowledge and the exhilaration of climbing, more pleasure is to be found at the foot of the mountains than at their frozen tops. Doubly
happy, however, is the many to whom lofty mountain-tops are within reach for the lights that shine there illumine all that lies below.”
--John Muir
Exercise and recreation are as necessary as reading. I will say rather more necessary because health is worth more than learning.
--Thomas Jefferson
MEN WANTED!FOR HAZARDOUS JOURNEY.
SMALL WAGES, BITTERCOLD, LONG MONTHS OFCOMPLETE DARKNESS,
CONSTANT DANGER,SAFE RETURN DOUBTFUL.
HONOR AND RECOGNITIONIN CASE OF SUCCESS.
Ernest Shackleton
Will YOU Sign Up for the Entrepreneurial Adventure?
Recruiting Advertisement for Shackleton’s 1914 Trans-Antarctic Expedition aboard the Endurance - 5000 Men (and 3 Women) Applied - 27 Set Out on the Journey -27 Returned Safely
“Smooth Seas do not Make Skillful Sailors”
There is little point in setting out for a place that one is almost certain to reach. - H.W. Tilman
Setting off on the Journey