mark harris
TRANSCRIPT
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Prof. Dr. Sc. math. Dr. h.c.
Mark Harris CEO and Founder
Adjunct Professor for Technology Entrepreneurship & Innovation
™
European Innovation Academy Tallinn, January 21-27 2013
Global Technology Entrepreneurship
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Differences are Valuable
innoVaventures – UC Berkeley come with their own view – the Silicon Valley perspective
Regional effects cause entrepreneurship to take its own unique form everywhere
Through the identification of major regional trends, and an appreciation for the success models of Silicon Valley, each participating University can chart its own course to build a successful program.
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Literature:
Accompanying Literature:
Timmons/Spinelli New Venture Creation ISBN 978-007-125438-0
Steven Gary Blank The Four Steps to the Epiphany ISBN 0-9764707-0-5
Geoffrey A. Moore Crossing the Chasm ISBN 0-88730-717-5
Clayton M. Christensen The Innovator’s Dilemma ISBN 0-87584-585-1
Henry Chesbrough Open Innovation ISBN 1-57851-837-7
Recommended Literature:
David J. Teece Managing Intellectual Capital ISBN 0-19-829-542-1
Annalee Saxenian Regional Advantage ISBN 0-674-75340-2
> www.innovaventures.com >NEWS>Blog>24 October American University in Bulgaria 3 Youtube Videos about 5 hours total.
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The 5 Minute University
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Introductions / Expectations
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Lecture Series
1. Innovation, Entrepreneurship and Globalization
2. The Professional Entrepreneur, The Entrepreneurial Venture
3. Venture & Growth Capital
4. Opportunity Recognition
5. Open/Closed Innovation and the Innovator’s Dilemma
6. Communication Channels
7. Smart Business Plans
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1. Innovation, Entrepreneurship and Globalization
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What is innovation ?
Innovation is an invention, paired with a process and a market
invention market process
Entrepreneurship
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Light Bulb Hall of Fame
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Computer Hall of Fame
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What is Entrepreneurship ? What is Technology Entrepreneurship ?
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Entrepreneurship is: A process
Not a person
About BIG companies that happen to be small
Not about small business
Important to BIG business
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What is Entrepreneurship ?
„The pursuit of opportunity beyond the resources one currently has under control“. *
* Source: Professor Howard Stevenson
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Entrepreneurship Bridges the Gap
Technology/ Opportunity Value Entrepreneurship
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What is Technology Entrepreneurship ? Cash Flow
II III IV I
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The technical invention
The company
The business innovation
Needed: Technology Entrepreneurship Skills Management Skills (MBA etc)
So Technology Entrepreneurship is not only „What“, but also „When“ !!
Derived: Prof. Jerry Engel UC Berkeley Enhanced: Prof. Dr. Mark Harris
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The Entrepreneurial Process
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The Entrepreneurial Process
Identify • Need • Solution • ‘Unfair Advantage’
Acquire • Technology rights • People • Money
Resources
Opportunity
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The Entrepreneur’s Task….
Key Resources • Technology • Money • People
People
Money Technology
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Who is the Professional Entrepreneur? Personal Entrepreneurship Styles Entrepreneurship is a team sport • Many can play – even if they are not ‘born’ entrepreneurs
Three modes • Lead • Follow • Execute
Three functions • Create • Manage
• Innovate
Which role is right for you?
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Personal Entrepreneurship Styles: Modes: Lead or Follow
Lead
Follow
Execute
High Performance entrepreneurial teams are :
• Self organizing • Flexible • Self disciplined • Common goal • Common priorities • Common values • Enabled by shared
ownership Same people may play
different roles on different teams within the same company
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Personal Entrepreneurship Styles Functions: Create or Manage
Innovation requires a combination of creativity and management – brought by a team
• Creation requires the greatest technical competency
• Management requires technical affinity
• Different functions are best suited for different people.
• Functions rarely are exchanged
• All collaborate in BOTH dimensions Manage
Create Innovate
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Entrepreneurship is a Team Sport Results are What Count
Innovation
Execution
Entrepreneurship High performance technology
entrepreneurship • Is a BLEND of Innovation and
Execution
• Requires collaboration and discipline
• It is best performed by a team • Alignment of incentives
directly and dramatically related to the outcome
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Who is the Entrepreneur?
Manager, administrator
Entre- preneur Inventor
Promoter
Creativity and
innovation
General management skills, business know-how, and networks
High
High Low
Low
Source: J. Timmons, New Venture Creation, p. 25.
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The Professional Entrepreneur Cash Flow
II III IV I
t
The technical innovation
The company
The business innovation
Needed: Technology Entrepreneurship Skills
Entrepreneurship Skills (MBA etc)
Visioning the Future into the Present
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The Professional Entrepreneur Cash Flow
II III IV I
t
The technical innovation
The company
The business innovation
Needed: Technology Entrepreneurship Skills
Entrepreneurship Skills (MBA etc)
Zone of Collaboration
Zone of Competition
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The Importance of Teamwork Entrepreneurship is a team sport
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Entrepreneurship and Globalization
Sourcing Selling
Regional
Global
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U.S. Start-up
Entrepreneurship and Globalization
Sourcing Selling
Regional
Global
U.S. Start-up U.S. Start-up
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U.S. Start-up
Entrepreneurship and Globalization
Sourcing Selling
Regional
Global
U.S. Start-up U.S. Start-up • Beta customers • Executive selling • Scaling direct sales • Developing distribution
• Local tech team • Local sourcing • May outsource manufacturing • Retain quality control
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U.S. Start-up
• Recurring customers • Standardized selling • Scaling direct sales • Expanding distribution
• Local tech team • Local sourcing • May outsource manufacturing • Retain quality control
Entrepreneurship and Globalization
Sourcing Selling
Regional
Global Outsource • software development [India] • manufacturing [China] • Call Center customer support [India]
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U.S. Start-up
• Recurring customers • Standardized selling • Scaling direct sales • Expanding distribution
• Local tech team • Local sourcing • May outsource manufacturing • Retain quality control
Entrepreneurship and Globalization
Sourcing Selling
Regional
Global Outsource • software development [India] • manufacturing [China] • Call Center customer support [India]
VP Sales • Europe [through UK] • Asia [through Japan] • WRO [may license] Localization Joint Ventures/Co-Branding Establish subsidiary
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U.S. Start-up
• Recurring customers • Standardized selling • Scaling direct sales • Expanding distribution
• Local tech team • Local sourcing • May outsource manufacturing • Retain quality control
Entrepreneurship and Globalization
Sourcing Selling
Regional
Global Outsource • software development [India] • manufacturing [China] • Call Center customer support [India]
VP Sales • Europe [through UK] • Asia [through Japan] • WRO [may license] Localization Joint Ventures/Co-Branding Establish subsidiary
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Entrepreneurship and Globalization
U.S. Start-up
• Recurring customers • Standardized selling • Scaling direct sales • Expanding distribution
• Local tech team • Local sourcing • May outsource manufacturing • Retain quality control
Sourcing Selling
Regional
Global Outsource • software development [India] • manufacturing [China] • Call Center customer support [India]
VP Sales • Europe [through UK] • Asia [through Japan] • WRO [may license] Localization Joint Ventures/Co-Branding Establish subsidiary
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E.U. Start-up
Entrepreneurship and Globalization
Sourcing Selling
Regional
Global
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E.U. Start-up
Entrepreneurship and Globalization
Sourcing Selling
Regional
Global
• Beta customers • Executive selling • Scaling direct sales • Developing distribution • Hit “glass ceiling”
• Local tech team • Local sourcing • May outsource manufacturing • Retain quality control
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E.U. Start-up
• Recurring customers • Standardized selling • Scaling direct sales • Expanding distribution • Pushing ‘glass ceiling’
• Local tech team • Local sourcing • May outsource manufacturing • Retain quality control
Entrepreneurship and Globalization
Sourcing Selling
Regional
Global Early Focus on U.S. Sales • US sales office • Establish U.S. Subsidiary early • US Sales support Asia [through Japan] WRO [may license] Joint Ventures/Co-Branding
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E.U. Start-up
• Recurring customers • Standardized selling • Scaling direct sales • Expanding distribution • Breaking ‘glass ceiling’
• Local tech team • Local sourcing • May outsource manufacturing • Retain quality control
Entrepreneurship and Globalization
Sourcing Selling
Regional
Global Outsource • software development [India] • manufacturing [China] • Call Center customer support [India]
Early Focus on U.S. Sales • US sales office • Establish U.S. Subsidiary early • US Sales support Asia [through Japan] WRO [may license] Joint Ventures/Co-Branding
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E.U. Start-up
• Recurring customers • Standardized selling • Scaling direct sales • Expanding distribution
• Local tech team • Local sourcing • May outsource manufacturing • Retain quality control
Entrepreneurship and Globalization
Sourcing Selling
Regional
Global Outsource • software development [India] • manufacturing [China] • Call Center customer support [India]
Early Focus on U.S. Sales • US sales office • Establish U.S. Subsidiary early • US Sales support Asia [through Japan] WRO [may license] Joint Ventures/Co-Branding
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™Sourcing Selling
Regional
Global
U.S. Start-up E.U. Start-up
Entrepreneurship and Globalization
Depends on Were you are Starting From
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Technology Entrepreneurship The New Way Forwards EUR
Observations:
• EU 2020 declaration highly focussed (#1 issue) on innovation and entrepreneurship.
• Invention (ideas,patents ) is good, but commercialization is not.
• Very low VC activity in EU (1/5th US), huge equity GAP
• Attitude of entrepreneurship and failure not being an option a big hindering factor.
• Need to catch-up on some 20+ years of entrepreneurship education
• Need to broaden where and how entrepreneurship is taught
• Need to get EU success rates (20%) close to US (30%).
Criteria US Europe Comparison Comment
GDP (2010) 14.66 T$ 14.82 T$ Economies in same Ballpark
Domestic Patents (2009) 82000 135000
Europe invents +65% more (actually much more because no SW patents in Europe, CII)
VC activity (H1’2010) 12.4 B$ 2.6 B$
Europe only ~ 1/5th the VC
% of population that consider entrepreneurship
67% 45% US is 50% higher
% of Population that become entrepreneurs
13% 4.5% US is 289% higher
% of population that accept possible failure in a startup
75% 54% US 40% higher
Entrepreneurship Education since 1980’s Early 2000’s
Trying to catch up 20-25years of Education and attitude
Breadth (# types) 8 1-2
Programs in HE and now starting in K12
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2. The Professional Entrepreneur, The Entrepreneurial Venture
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The Professional Entrepreneur Cash Flow
II III IV I
t
The technical innovation
The company
The business innovation
Needed: Technology Entrepreneurship Skills
Entrepreneurship Skills (MBA etc)
Visioning the Future into the Present
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The Professional Entrepreneur Cash Flow
II III IV I
t
The technical innovation
The company
The business innovation
Needed: Technology Entrepreneurship Skills
Entrepreneurship Skills (MBA etc)
Zone of Collaboration
Zone of Competition
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The Importance of Teamwork Entrepreneurship is a team sport
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The Entrepreneurial Venture FOUR PERIODS of DEVELOPMENT
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The Entrepreneurial Venture FOUR PERIODS of DEVELOPMENT
Cash Flow
II III IV I
t
The technical innovation
The company
The business innovation
Needed: Technology Entrepreneurship Skills
Entrepreneurship Skills (MBA etc)
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The Entrepreneurial Venture Attributes that characterize each Phase
Period I: Pure
Entrepreneurship
Period II: Strategic Focus
Period III: System Building
Period IV: Coporate Management
Defining the concept of the business
What business aren’t we in?
Finacial Controls Hiring „outsider“
Gathering Financial Resources
IMPLEMENTING the business we are in!
Stable division of labor Going Public
Assembling the startup Team
Knowing better than ANYONE else:
Reporting relationship and authorities
Making acquistitions
Identifying customers
What will people pay Developing systems of internal control
Adding the follow-on Products(s)
Analyzing the competition
How many will they buy Formalizing the terms of a sale
Shedding those who can‘t keep up
Building the prototype
How to distribute Operational systems Formalizing the culture
Getting your first customer
How to service the customer
Production, Outsourcing Rationalizing the strategy
Distribution, Sales
Service, Warranties *Source: Professor John Freeman Professor Jerry Engel UC Berkeley
Cash Flow
II III IV I
t
The technical innovation
The company
The business innovation
Needed: Technology Entrepreneurship Skills
Entrepreneurship Skills (MBA etc)
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The Entrepreneurial Venture Attributes that characterize each Phase
Period I: Pure
Entrepreneurship
Period II: Strategic Focus
Period III: System Building
Period IV: Coporate Management
Defining the concept of the business
What business aren’t we in?
Finacial Controls Hiring „outsider“
Gathering Finacial Resources
IMPLEMENTING the business we are in!
Stable division of labor Going Public
Assembling the startup Team
Knowing better than ANYONE else:
Reporting relationship and authorities
Making acquistitions
Identifying customers What will people pay Developing systems of internal control
Adding the follow-on Products(s)
Analyzing the competition
How many will they buy
Formalizing the terms of a sale
Shedding those who can‘t keep up
Building the prototype How to distribute Operational systems Formalizing the culture
Getting your first customer
How to service the customer
Production, Outsourcing Rationalizing the strategy
Distribution, Sales
Service, Warranties *Source: Professor John Freeman Professor Jerry Engel UC Berkeley
Cash Flow
II III IV I
t
The technical innovation
The company
The business innovation
Needed: Technology Entrepreneurship Skills
Entrepreneurship Skills (MBA etc)
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The Entrepreneurial Venture Attributes that characterize each Phase
Period I: Pure
Entrepreneurship
Period II: Strategic Focus
Period III: System Building
Period IV: Coporate Management
Defining the concept of the business
What business aren’t we in?
Finacial Controls Hiring „outsider“
Gathering Finacial Resources
IMPLEMENTING the business we are in!
Stable division of labor
Going Public
Assembling the startup Team
Knowing better than ANYONE else:
Reporting relationship and authorities
Making acquistitions
Identifying customers What will people pay Developing systems of internal control
Adding the follow-on Products(s)
Analyzing the competition
How many will they buy Formalizing the terms of a sale
Shedding those who can‘t keep up
Building the prototype How to distribute Operational systems Formalizing the culture
Getting your first customer
How to service the customer
Production, Outsourcing
Rationalizing the strategy
Distribution, Sales
Service, Warranties *Source: Professor John Freeman Professor Jerry Engel UC Berkeley
Cash Flow
II III IV I
t
The technical innovation
The company
The business innovation
Needed: Technology Entrepreneurship Skills
Entrepreneurship Skills (MBA etc)
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The Entrepreneurial Venture Attributes that characterize each Phase
Period I: Pure
Entrepreneurship
Period II: Strategic Focus
Period III: System Building
Period IV: Coporate Management
Defining the concept of the business
What business aren’t we in?
Finacial Controls Hiring „outsider“
Gathering Finacial Resources
IMPLEMENTING the business we are in!
Stable division of labor Going Public
Assembling the startup Team
Knowing better than ANYONE else:
Reporting relationship and authorities
Making acquistitions
Identifying customers What will people pay Developing systems of internal control
Adding the follow-on Products(s)
Analyzing the competition
How many will they buy Formalizing the terms of a sale
Shedding those who can‘t keep up
Building the prototype How to distribute Operational systems Formalizing the culture
Getting your first customer
How to service the customer
Production, Outsourcing Rationalizing the strategy
Distribution, Sales
Service, Warranties *Source: Professor John Freeman Professor Jerry Engel UC Berkeley
Cash Flow
II III IV I
t
The technical innovation
The company
The business innovation
Needed: Technology Entrepreneurship Skills
Entrepreneurship Skills (MBA etc)
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The Professional Entrepreneur Cash Flow
II III IV I
t
The technical innovation
The company
The business innovation
Needed: Technology Entrepreneurship Skills
Entrepreneurship Skills (MBA etc)
Visioning the Future into the Present
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3. Venture & Growth Capital
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New Venture Funding Stream
Sales"$"
time"$1"
Cash "Flow"
$20"
$40"IPO"
$80"
$8"
Venture Capital Rounds!
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Structuring the Financing The “Why” of multiple rounds
Management
Technology/Product
Marketing
Time
Value is a Step Function:
Value
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Adding Technology Value
Value
Time
Concept Feasibility or Prototype
Patent Application Working Prototype
Manufacturing Prototype Regulatory Approvals
Market Introduction
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Adding Market Value
Value
Time
Market Analysis - Published Data Qualitative Research (Focus Groups)
Surveys/Concept Testing
Technical Reports Published
Market Launch
Satisfied Customers
Backlog
Beta Test
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Adding Management Value
Value
Time
Chief Technologist President
Marketing Vice President Controller
Manufacturing Vice President
Chief Financial Officer
Human Resources Mgr
Sales Manager
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The Entrepreneurial Venture FOUR PERIODS of DEVELOPMENT
Time
Cash Flow
II III IV I
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Valuation in Steps
II III IV I
Time
Concept Defined
Early Validation
Market Traction
Scale Validated
Predictable Scale
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Staged Financing
Concept Defined
Early Validation
Market Traction
Scale Validated
Predictable Scale
II III IV I
Time
Seed Series A
Series B
Series “n”
IPO
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Venture Capital
Investment Capital for Entrepreneurial Ventures tends to clump • By Region • By Industry
It is important to encourage local investment in Entrepreneurial Ventures
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Inve
stm
ent
($m
illio
ns)
Quarter
Venture Investment, US & Europe
Europe
North America
Perspective on European Market
Overall Investment
Source: BLN Business Leaders Network
US Venture investment comes back strong. Europe’s lowest for 5 years (632M$).
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Perspective on European Market
Overall Investment
Source: BLN Business Leaders Network
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Inve
stm
ent
($m
illio
ns)
Quarter
Venture Investment, Europe by Country
Israel
E Europe
S Europe
Ireland
N Europe
BENELUX
DACH
France
UK
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Perspective on European Market (Patent applications) Europe (135.000) versus US (82.000)
Sources: U.S. PATENT AND TRADEMARK OFFICE and EPO (European Patent Office)
PART A1-‐ Table A1-‐1a, Breakout by Country of Origin Number of Patents Granted as Distributed by Year of Patent Grant.Granted: 01/01/1963 -‐ 12/31/2009
Pre 1996 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 All Years
Total, U.S. And Foreign Origin 2401288 109645 111984 147517 153485 157494 166035 167330 169023 164290 143806 173772 157282 157772 167349 4548072
-‐-‐ Subtotal -‐-‐ U.S. Origin 1497955 61104 61708 80289 83905 85068 87600 86970 87893 84270 74637 89823 79526 77502 82382 2620632
-‐-‐ Subtotal -‐-‐ Foreign Origin 903333 48541 50276 67228 69580 72426 78435 80360 81130 80020 69169 83949 77756 80270 84967 1927440
JAPAN 313267 23053 23179 30840 31104 31295 33223 34858 35515 35348 30341 36807 33354 33682 35501 761367
GERMANY 188840 6818 7008 9095 9337 10235 11260 11280 11444 10779 9011 10005 9051 8914 9000 322077
UNITED KINGDOM 85906 2454 2680 3467 3576 3669 3967 3843 3631 3450 3148 3585 3292 3094 3175 132937
FRANCE 72160 2788 2958 3674 3820 3819 4041 4035 3868 3380 2866 3431 3130 3163 3140 120273
CANADA 43077 2232 2379 2973 3226 3419 3606 3431 3427 3374 2894 3572 3318 3393 3655 87976
TAIWAN 9245 1897 2057 3100 3693 4667 5371 5431 5298 5938 5118 6361 6128 6339 6642 77285
KOREA, SOUTH 4649 1493 1891 3259 3562 3314 3538 3786 3944 4428 4352 5908 6295 7548 8762 66729
SWITZERLAND 38555 1112 1090 1279 1279 1322 1420 1364 1308 1277 995 1201 1035 1112 1208 55557
ITALY 26916 1200 1239 1584 1492 1714 1709 1751 1722 1584 1296 1480 1302 1357 1346 47692
SWEDEN 23939 854 867 1225 1401 1577 1741 1675 1521 1290 1123 1243 1061 1060 1014 41591
NETHERLANDS 22611 797 808 1226 1247 1241 1332 1391 1325 1273 993 1323 1250 1330 1288 39435
AUSTRALIA 9010 471 478 720 707 705 876 859 902 953 910 1325 1265 1291 1221 21693
ISRAEL 4861 484 534 754 743 783 970 1040 1193 1028 924 1218 1107 1166 1404 18209
BELGIUM 8628 488 515 693 648 694 718 722 622 612 519 625 520 510 594 17108
AUSTRIA 8656 362 376 387 479 505 589 530 592 540 463 577 457 464 503 15480
FINLAND 4844 444 452 595 649 618 732 809 865 918 720 950 850 824 864 15134
DENMARK 5026 241 333 392 487 436 479 426 529 414 358 439 388 391 390 10729
U.S.S.R. 6963 16 4 6 3 1 0 1 0 0 0 0 0 0 0 6994
CHINA, PEOPLE'S REPUBLIC OF 528 46 62 72 90 119 195 289 297 404 402 661 772 1225 1655 6817
SPAIN 2797 157 177 248 222 270 269 303 309 264 273 295 268 303 317 6472
NORWAY 2890 139 142 198 224 248 265 242 262 243 220 244 247 273 265 6102
INDIA 493 35 47 85 112 131 178 249 342 363 384 481 546 634 679 4759
SINGAPORE 301 88 94 120 144 218 296 410 427 449 346 412 393 399 436 4533
CHINA,HONG KONG S.A.R. 845 88 81 160 155 179 237 233 276 311 283 308 338 311 305 4110
SOUTH AFRICA 2614 111 101 115 110 111 120 113 112 100 87 109 82 91 93 4069
HUNGARY 2242 43 25 50 39 36 60 48 72 48 46 49 47 66 46 2917
NEW ZEALAND 1106 52 85 114 114 107 124 140 135 142 122 136 113 105 127 2722
IRELAND 805 77 71 71 90 121 141 127 163 186 156 174 146 164 177 2669
RUSSIAN FEDERATION 139 116 111 189 181 183 234 200 203 169 148 172 188 176 196 2605
MEXICO 1614 39 45 57 76 76 81 94 85 86 80 66 56 54 60 2569
BRAZIL 875 63 62 74 91 98 110 96 130 106 77 121 90 101 103 2197
CZECHOSLOVAKIA 2090 8 9 9 5 0 0 0 0 0 0 0 0 0 0 2121
ARGENTINA 698 30 35 43 44 54 51 54 63 46 24 38 37 32 45 1294
MALAYSIA 88 12 17 23 30 42 39 55 50 80 88 113 158 152 158 1105
LUXEMBOURG 567 18 22 20 22 40 33 37 35 44 41 33 38 24 36 1010
POLAND 626 15 11 15 19 13 16 11 17 16 23 29 32 54 35 932
Others (142) 4862 200 231 296 359 366 414 427 446 377 338 458 402 468 527 10171
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Creating Value
The Individual Company Perspective
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Growth Capital
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Company Formation
Founders A, B and C each purchase 1M shares of Common Stock at a purchase price of $.001 per share.
Person Shares % Total ValueFounder A 1,000,000 33.3% $1,000Founder B 1,000,000 33.3% $1,000Founder C 1,000,000 33.3% $1,000
totals 3,000,000 100%Post-Money Valuation $3,000
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Person Shares % Total ValueFounder A 1,000,000 20.0% $10,000Founder B 1,000,000 20.0% $10,000Founder C 1,000,000 20.0% $10,000President 1,000,000 20.0% $10,000Option Plan 1,000,000 20.0% $10,000
totals 5,000,000 100%Post-Money Valuation $50,000
Hiring a President/CEO Creation of an Option Plan
The company hires a chief executive officer who purchases 1M shares of Common Stock at a purchase price of $.01 per share. Additionally, in order to attract additional key employees, the Company establishes an employee stock option plan and reserves 1M shares of Common Stock for issuance under this plan. The pre-financing valuation is $30,000.
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Initial Venture Capital Round
$5,000,000 venture capital financing at a purchase price of $1 per share, representing a pre-financing valuation of $5,000,000 (5M shares with a value of $1 per share). The new shares are typical venture capital Series A Preferred Stock, with each share of Series A Preferred Stock being convertible into one share of Common Stock.
Person Shares % Total ValueFounder A 1,000,000 10.0% $1,000,000Founder B 1,000,000 10.0% $1,000,000Founder C 1,000,000 10.0% $1,000,000President 1,000,000 10.0% $1,000,000Option Plan 1,000,000 10.0% $1,000,000Series A Inv 5,000,000 50.0% $5,000,000
totals 10,000,000 100%Post-Money Valuation $10,000,000
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Series B Preferred Financing
$10,000,000 Series B Preferred Stock financing at a purchase price of $2 per share, representing a pre-financing valuation of $20,000,000 (10M shares with a value of $2 per share). Like the Series A Preferred Stock, each share of Series B Preferred Stock is convertible into one share of Common Stock.
Person Shares % Total ValueFounder A 1,000,000 6.7% $2,000,000Founder B 1,000,000 6.7% $2,000,000Founder C 1,000,000 6.7% $2,000,000President 1,000,000 6.7% $2,000,000Option Plan 1,000,000 6.7% $2,000,000Series A Inv 5,000,000 33.3% $10,000,000Series B Inv 5,000,000 33.3% $10,000,000
totals 15,000,000 100%Post-Money Valuation $30,000,000
Person Shares % of Total ValueFounder A 1,000,000 6.7% $2,000,000Founder B 1,000,000 6.7% $2,000,000Founder C 1,000,000 6.7% $2,000,000President 1,000,000 6.7% $2,000,000Option Plan 1,000,000 6.7% $2,000,000Series A Inv 5,000,000 33.3% $10,000,000Series B Inv 5,000,000 33.3% $10,000,000
Post Financing Valuation 15,000,000 100% $30,000,000
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Initial Public Offering (IPO)
A total of 5M shares to be sold in the offering, including 3M shares sold by the Company and 1M shares sold by each of the Series A and Series B investors. Shares will be sold at a price of $10 per share, representing a pre-financing valuation of $150,000,000 (15M shares with a value of $10 per share.) Series A and Series B Preferred Stock automatically converted into
Common Stock. All shares sold in offering will be Common Stock. Note that the interest of each founder has decreased from 33.33% at the Company’s formation to 5.55% following the IPO. However, the value of the interest of each founder has increased from $1,000 to $10,000,000.
Person Shares % Total ValueFounder A 1,000,000 5.6% $10,000,000Founder B 1,000,000 5.6% $10,000,000Founder C 1,000,000 5.6% $10,000,000President 1,000,000 5.6% $10,000,000Option Plan 1,000,000 5.6% $10,000,000Series A Inv 4,000,000 22.2% $40,000,000Series B Inv 4,000,000 22.2% $40,000,000Public IPO 5,000,000 27.8% $50,000,000
totals 18,000,000 100%Post-Money Valuation $180,000,000
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Concept Defined
Early Validation
Market Traction
Scale Validated
Predictable Scale
II III IV I
Time
Seed
Series A
Series B
Series “N”
IPO
Growing the Equity Pie
Person Shares % Total ValueFounder A 1,000,000 33.3% $1,000Founder B 1,000,000 33.3% $1,000Founder C 1,000,000 33.3% $1,000
totals 3,000,000 100%Post-Money Valuation $3,000
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Concept Defined
Early Validation
Market Traction
Scale Validated
Predictable Scale
II III IV I
Time
Seed
Series A
Series B
Series “N”
IPO
Growing the Equity Pie
Person Shares % Total ValueFounder A 1,000,000 20.0% $10,000Founder B 1,000,000 20.0% $10,000Founder C 1,000,000 20.0% $10,000President 1,000,000 20.0% $10,000Option Plan 1,000,000 20.0% $10,000
totals 5,000,000 100%Post-Money Valuation $50,000
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Concept Defined
Early Validation
Market Traction
Scale Validated
Predictable Scale
II III IV I
Time
Seed
Series A
Series B
Series “N”
IPO
Growing the Equity Pie
Person Shares % Total ValueFounder A 1,000,000 10.0% $1,000,000Founder B 1,000,000 10.0% $1,000,000Founder C 1,000,000 10.0% $1,000,000President 1,000,000 10.0% $1,000,000Option Plan 1,000,000 10.0% $1,000,000Series A Inv 5,000,000 50.0% $5,000,000
totals 10,000,000 100%Post-Money Valuation $10,000,000
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Concept Defined
Early Validation
Market Traction
Scale Validated
Predictable Scale
II III IV I
Time
Seed
Series A
Series B
Series “N”
IPO
Growing the Equity Pie
Person Shares % Total ValueFounder A 1,000,000 6.7% $2,000,000Founder B 1,000,000 6.7% $2,000,000Founder C 1,000,000 6.7% $2,000,000President 1,000,000 6.7% $2,000,000Option Plan 1,000,000 6.7% $2,000,000Series A Inv 5,000,000 33.3% $10,000,000Series B Inv 5,000,000 33.3% $10,000,000
totals 15,000,000 100%Post-Money Valuation $30,000,000
Person Shares % of Total ValueFounder A 1,000,000 6.7% $2,000,000Founder B 1,000,000 6.7% $2,000,000Founder C 1,000,000 6.7% $2,000,000President 1,000,000 6.7% $2,000,000Option Plan 1,000,000 6.7% $2,000,000Series A Inv 5,000,000 33.3% $10,000,000Series B Inv 5,000,000 33.3% $10,000,000
Post Financing Valuation 15,000,000 100% $30,000,000
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Concept Defined
Early Validation
Market Traction
Scale Validated
Predictable Scale
II III IV I
Time
Seed
Series A
Series B
Series “N”
IPO
Growing the Equity Pie
Person Shares % Total ValueFounder A 1,000,000 5.6% $10,000,000Founder B 1,000,000 5.6% $10,000,000Founder C 1,000,000 5.6% $10,000,000President 1,000,000 5.6% $10,000,000Option Plan 1,000,000 5.6% $10,000,000Series A Inv 4,000,000 22.2% $40,000,000Series B Inv 4,000,000 22.2% $40,000,000Public IPO 5,000,000 27.8% $50,000,000
totals 18,000,000 100%Post-Money Valuation $180,000,000
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The Entrepreneurial Venture PARADOX OF POWER
Power of
Founder/ CEO
II III IV I
“Control” Tipping Point
Series A: Manager for
and with others
Series B, etc.
IPO: Influential executive
Zone of Freedom Zone of Management Time
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4. Opportunity Recognition
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How to Evaluate a Deal from the Company’s Perspective
Founder’s Issues
Employee’s Issues
Corporate Issues • Sufficient Capital
• Freedom of Operation
Previous Investor and Creditor Issues
Etc.
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How to Evaluate a Deal from the Investor’s Perspective
Potential for Adequate Return
Opportunity for a Home Run?
Potential ‘Fatal Flaws’
Time Requirements
Follow-on Investment Requirements
Portfolio and Fund Compatibility
Etc.
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Effect of Eleven Factors on Company Valuation
Variables Lower Valuation Higher Valuation Technology • Stage of Development Concept Product • Patent Status None Filed Issued • Time to Market Long Short
Market • Demonstrable Need No Yes • Size & Growth Small Large • Market Penetration Slow Rapid
Management Team Novice Tested Financial • Profit Margins Low High • Total Capital Required High Low
Return on Investment • Potential Future Valuation Low High • Time to Liquidity Long Short
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5. Open/Closed Innovation and the Innovator’s Dilemma
Recommended Literature: Open Innovation Henry Chesbrough ISBN 1-57851-837-7
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Open Innovation (Intro)
Obviously, talking about Open Innovation, there must be something like „Closed Innovation“. So lets first cover the „Closed Innovation Paradigm“
Research Development
Research Projects
The Market
Boundary of the firm
Source: Open Innovation Henry Chesbrough
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Open Innovation (Intro)
Assumptions of Closed Innovation: • We should hire the best and brightest people, so that the smartest people in the industry work for us. • In order to bring new products and services to the market, we must discover and develop them ourselves. • If we discover it ourselves, we will get to market first • The company that gets an innovation to market first will usually win. • If we lead the industry in making R&D investments in R&D, we will disciver the best and the most ideas and will come to lead the market as well. • We should control our intellectual property, so that our competitors don‘t profit from our ideas.
Source: Open Innovation Henry Chesbrough
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Open Innovation (Intro)
Advantages of Closed Innovation: • The logic of Closed Innovation created a virtuous circle. • Companies invested in internal R&D, which led to many breakthrough discoveries. • Those discoveries enabled those companies to bring new products and services to market. • Because of those products they could realize more sales and higher margins, which enabled them to spend more in internal R&D, which led to further breakthroughs. • And because the intellectual property (IP) that arises from this internal R&D is closely guarded, others could not exploit these ideas for their own profit.
Source: Open Innovation Henry Chesbrough
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Open Innovation (Intro)
Origin of Closed Innovation Paradigm: • First started in the German Chemical Industry in the 19th + 20th century with the creation of a central research Lab. • Copied by Thomas Edison in a US version, developed and perfected a number of breakthroughs, and founded General Electric‘s famed laboratory. • Bell Labs discovered amazing physical phenomena and harnessed its discoveries to create the transistor among its many important achievements. • US government created an ad hoc central reseach Lab to conduct a crash project on nuclear fission, which led to the development of the A-Bomb • The cold war kept some level of Closed Innovation going.
Source: Open Innovation Henry Chesbrough
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Open Innovation (Intro)
Research Development
Research Projects
The Current Market
Boundary of the firm
The New Market
Open Innovation Paradigm
Source: Open Innovation Henry Chesbrough
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Open Innovation (Intro)
Assumptions of Open Innovation: • Not all the smart people work for us. We need to work with smart people inside and outside of our company. • External R&D can create significant value; internal R&D is needed to claim some portion of the value. • We don‘t have to originate the research to profit from it. • Building a better business model is better than getting to market first. • If we make best use of internal and external ideas, we will win. • We should profit from other‘s use of our IP, and we should buy other‘s IP whenever it advances our own business model.
Source: Open Innovation Henry Chesbrough
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Open Innovation (Intro)
• Examples of Industries: nuclear reactors, mainframe computers
• Largely internal ideas
• Low Labor mobility
• Little VC
• Few, weak start-ups
• Universities unimportant
• Examples of Industries: PCs, movies
• Many external ideas
• High Labor mobility
• Active VC
• Numerous start-ups
• Universities very important
Comparison: Closed / Open Innovation:
Source: Open Innovation Henry Chesbrough
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The Innovators Dilemma (Intro)
Recommended Literature: The Innovator‘s Dilemma Clayton M. Christensen ISBN 0-87584-585-1
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The Innovators Dilemma (Intro)
Source: The Innovator‘s Dilemma Clayton M. Christensen
The Impact of Sustaining and Disruptive Technological Change
t
Prod
uct
Perf
orm
ance
P
Performance Demanded At the high end of the market
Performance Demanded At the low end of the market Disruptive
Technological innovation
Revolutionary Innovation
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The Innovators Dilemma (Intro)
Source: The Innovator‘s Dilemma Clayton M. Christensen
Disruptive Technologies: • Disruptive technologies bring to a market a different value proposition than available previously. • Generally, disruptive technologies underperform established products in mainstream markets. • But they have other features that other new customers value. • Products based on disruptive technologies are typically cheaper, simpler, smaller, and frequenty more convenient to use.
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The Innovators Dilemma (Intro)
Source: The Innovator‘s Dilemma Clayton M. Christensen
Disruptive Technologies: • So should I focus on developing disruptive technologies ?
• The conclusion by established companies that investing aggresively in disruptive technologies is not a rational financial decision for them to take is based on three arguements: 1. disruptive products are simpler and cheaper; they
generally promise lower margins, not greater profits 2. disruptive products are typically first commercialized in
emerging or insignificant markets 3. Leading firms‘ most profitable customers generally don‘t
want and indeed can‘t use products based on disruptive technologies
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The Innovators Dilemma (Intro)
Source: The Innovator‘s Dilemma Clayton M. Christensen
Harnessing the Principles of Disruptive Innovation: • Harness versus fighting disruptive technologies.
(Example: antique versus modern flight)
Principle #1: Companies depend on Customers and investors for resources Its really customers and investors who decide how money will be spent.
Principle #2: Small markets don‘t solve the growth needs of Large Companies Play with numbers (40-48M$ growth is 20%, 4-4.8B$ is also 20% but 800M$
is larger than any new emerging market) Principle #3: Markets that don‘t exist can‘t be analyzed
Sound market research and good planning are the hallmarks of good management in sustained technological innovation
Principle #4: Technology supply may not Equal Market demand Many companies don‘t realize the speed at which they are moving up-market,
over-satisfying the needs of the origional customers as they race the competition towards higher performance, higher-margin markets. In doing so, they create a vacuum at lower proce points into which competitors employing disruptive technologies can enter.
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Prod
uct P
erfo
rman
ce
Time or Engineering Effort
“Sustaining” Technological Innovation Big Companies Need A Continuous Process
First Technology
Second Technology
Third Technology
Strategy: Using Small Markets as “Beach Heads”
Source: Clayton M. Christensen, “Exploring the Limits of the Technology S-Curve. Part I: Component Technologies,” Production and Operations Management 1, no. 4 (Fall 1992): 340. Reprinted by permission.
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Source: Clayton M. Christensen, “Exploring the Limits of the Technology S-Curve. Part I: Component Technologies,” Production and Operations Management 1, no. 4 (Fall 1992): 361. Reprinted by permission.
Perf
orm
ance
as
Def
ined
in A
pplic
atio
n “A
”
Time or Engineering Effort
Perf
orm
ance
as
Def
ined
in A
pplic
atio
n “B
” Application (Market) “A” Application (Market) “B”
Disruptive Technology takes over the larger established market!
Older BIG company playing catch-up
New entrant dominates
Technology 2
Technology 1
Disruptive Technology • new market niche • small markets • small companies
Strategy: Using Small Markets as “Beach Heads”
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6. Communication Channels
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6. Communication Channels CH 1: PRESENTATION
CH 4: EARS
CH 5: LEFT HAND
CH 3: EYES
CH 6: RIGHT HAND
CH 7: BODY
CH 2: VOICE
CHANNEL IN OUT PRESENTATION ✔ VOICE ✔ EYES ✔ ✔ EARS ✔ LEFT HAND ✔ RIGHT HAND ✔ BODY ✔
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7. Smart business models ?
• How to become the next Facebook, Google, etc. ???
• If this was a pure science and any of us new the exact formula, we wouldn’t be here…
• Much of that is a function also of the right product at the right time and (besides greatness) tons of luck….
• Larry and Sergey first failed with their strategy to offer a new search algorithm to Yahoo…. (I wonder if that Yahoo employee who turned it down is still there ??)
• Or look at the Intel founders Robert Noyce and Gordon Moore, they left Fairchild to follow their passion !!
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Smart business models ?
• Follow your passion !! Being passionate about your new business will help you survive J
• Create your new venture as “global born”. Focusing initially on a local market is fine, but don’t loose sight of the global opportunity
• Know and understand your customers !!! • Know and understand your market !!! • Focus on YEAR ONE !! Get that right. • Have several exit strategies already when you start.
• Work with global enablers like ™
101
™
Your path to success !!!
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Backup
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™103 Slide:
Question: What is the shortest distance between points A and B ?
Sure, a straight line: A B
as long as we are in two dimensional space....
in three dimensional space, for example on a globe it is the
GREAT Circle (ARC)
A short excursion in Math:
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™Slide:
The Path (Trail) to New Ventures
Start(up)
Gazelle
loop forever
So what is the shortest path for a new venture ?
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Phase 4 Angel Funding infrastructure
Phase 31st real BizPlans Summer schools
Bootcamps Seed Funding
Phase 2 Coaching
Consulting Mentoring
Experimental labs Industry connections
Phase 1
entrepreneurship education,
Educational BizPlan Competitions
Phase 5 VC / further scale
Educational Process
Real-life practice
Real companies
helps you to bridge the GAP !! ™
Entrepreneurship Education
Seed Funding
Services
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Phase 4 Angel Funding infrastructure
Phase 31st real BizPlans Summer schools
Bootcamps Seed Funding
Phase 2 Coaching
Consulting Mentoring
Experimental labs Industry connections
Phase 1
entrepreneurship education,
Educational BizPlan Competitions
Phase 5 VC / further scale
Educational Process
Real-life practice
Real companies
helps you to bridge the GAP !! ™
Entrepreneurship Education
Seed Funding
Services
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InnoVaventures Global Network of Experts
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InnoVaventures Network of
-in negotiation (Phase I)
-planned (Phase II)
-planned (Phase III)
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Network of Global Clusters of Innovation
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Pioneering need
Market
Existing Need
Enabling new
applications Type of Product
Faster, cheaper, better
Lowest Risk Known Business Model Unknown
Creation Risk
Execution Risk
Never
Highest Risk
Never
Dangerous Dangerous
Investment Framework
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Pioneering need
Market
Existing Need
Enabling new
applications Type of Product
Faster, cheaper, better
Lowest Risk Known Business Model Unknown
Creation Risk
Execution Risk
Never
Highest Risk
Never
Dangerous Dangerous
All Stages
Seed Only
Investment Framework
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Pioneering need
Market
Existing Need
Enabling new
applications Type of Product
Faster, cheaper, better
Lowest Risk Known Business Model Unknown
Creation Risk
Execution Risk
Never
Highest Risk
Never
Dangerous Dangerous
Investment Framework
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Return on Investment Expectations at Various Stages Financing Business Objectives Expected Time To LiquidityRound (capital use) Annual Return (IPO or merger)
Seed Product Research 75 - 100% 5 - 8 YearsMarket ResearchPreliminary Plan
Start-up Product Development 50 - 75% 4 - 7 YearsWorking PrototypeComplete Management TeamConfirm Market Size
1st, 2nd, 3rd Alpha & Beta Tests 30 - 50% 3 - 5 Yearsrounds Selling
ManufacturingExpand Work Force
Mezzanine Prepare For IPO 24 - 30% 1 - 2 Years
Public Of fering Market Development 10 - 20% ImmediateNew Products
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Investor Ownership Expectations
Investment"Expected PV (discounted at required ROI)"="Ownership"
required"
Future Value"(1+Necessary ROI)"n(years)"="Expected PV"
="Future Value" Net Income"(year n)" X PE"
How much ownership will the investor want/require?
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Investor Ownership Expectations
A VERY Simple Example
ASSUMPTIONS Company:
NI in Year 5 $2.5M P/E 15 times NI
Investor: Investment $2.0M ROI 50% Holding Period 5 years
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How much ownership will the investor want/require?
FUTURE V"ALUE (FV) (Y"ear 5)"
NI X P/E = ($2.5M X 15) = $37.5M"
PRESENT" V"ALUE (PV)"(FV)" $37.5M"(1+i)"n" (1 + .50)"5"
OWNERSHIP REQUIRED"A $2M investment would require ownership of:"Investment" $2M" (PV)" $4.93M"
(i = ROR, n = year)"
= $4.93M"="
=" = 41%"
Post Money Value
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So the Company’s Value is…..
Post money [investment] value……. $4.93m
Pre-money value is……. $2.93m