deas e’ship series 2005 michael j. roberts. entrepreneurship: a definition “the pursuit of...
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DEAS E’Ship Series 2005
Michael J. Roberts
Entrepreneurship: a definition
• “The pursuit of opportunity w/out regard to resources currently controlled”
What does it mean to be Opportunity-Driven?
• Looking out instead of looking in
• Accepting the risks of – trying to do what you don’t know how to do– building a biz around capabilities and resources
you don’t yet have– stretching to acquire what you need instead of
figuring out how to use what you already have
The Entrepreneurial Environment(running w/ ankle weights)
• Uncertainty
• Resource Scarcity
• Rapid change
• Growth
Entrepreneurship is NOT a “steady-state equilibrium”
• Forces of change open the opportunity window
• But for an unknown time period
• And in the context of significant uncertainty
• All this creates considerable risk…and the possibility of considerable return
Lots of Factors Create Opportunity at “Macro” Level
• Technology
• Demographics
• Unique skills / abilities
• Creativity
• Unique resources
Opportunity
• Depends on the person
• Depends on the environment / context
• Depends on access to/ pricing of the required resources
• Depends on timing
New Venture Ingredients
OpportunityOpportunity
Person/TeamPerson/Team DealDeal
ContextContext
Questions to ask when evaluating a new venture
Source: William A. Sahlman, “How to write a great business plan,” Harvard Business Review, July-August 1997
OPPORTUNITY
CONTEXT
PEOPLE DEAL•Whom do they know and who knows them that will help them to succeed?
•What critical skills, experience, capabilities do they posses?
•What is their reputation? How do you know?
•How committed are they to this opportunity? How do you know?
•Why has this opportunity appeared right now?
•What regulatory, technical, financing or product market changes gave rise to this opportunity?
•How long will the window of opportunity be open?
•How will you know when the window is about to close?
•Who are the investors? How sophisticated are they? What do they expect? Do they have a relationship with the entrepreneurs? Will this help or hurt the venture? What do they provide in addition to cash?
•How much money will it take to produce results?
•Does the deal provide appropriate incentives for all investors?
•How big is the market?
•Who is the customer? What is the product or service? How will you deliver it?
•What pain are you solving for customers?
•How much will it cost to acquire a customer? What is there lifetime value?
•What can go right? What can go wrong?
Opportunity AnalysisHow do you know if you have a good one?
The Business Model works if you• can articulate a way to generate cash flow
• can articulate the risks and rewards i.e., – the (as yet unproven) assumptions you are
making and your degree of confidence in them– the dimensions of the reward at the end of all
the hard work
• can give up what you need to to get the resources you need and still have enough left over for you!
Business Models & Financial Analysis
• Opportunities have lots of non-financial dimensions
• But ultimately, everything comes down to creating value, especially if you are raising outside capital.
A Business Model...
• A summary of the company’s strategy and the core business decisions that underlie it
• The math of how you make money and create value• Requires detailed knowledge of revenue sources,
cost and margin parameters, and capital requirements
• Sheds insight on key drivers underlying Inc St. & BS
• Is either a set of assumptions or an articulation of reality, depending on where you are in the process
profits
costs
revenues
Driver 1
Driver 2
Driver 3
Driver 1
Driver 2
Driver 3
Driver 1
Driver 2
Driver 3
Be clear about the business model
1. Identify the key drivers of revenue and costs 2. Quantify assumptions 3. Test sensitivity to changes in key drivers 4. Analyze how reasonable key assumptions are 5. Surface key assumptions, logic, critical
sources of uncertainty, important questions to ask, and things to track once you start
Generic Models
• A “subscription” model
• An “advertising” model
• A “content” model
• A “razors and blades” model
Two General Rules
• If contemplating a new venture in an unproven/new market, be able to tell a story about why a change in context has created this opportunity.
• If contemplating an existing/mature market, be able to tell a story about how you are going to change the income statement or balance sheet
In any Business, The ONLY way to create value is
• Assemble a collection of assets and people• Through the power of an idea/vision/ business
model• And the discovery of an attractive market “space”• Create a large, growing, durable, stream of cash
flow (sometimes you can get away w/ something else)
• Where what you need to pay for the req’d resources is less than the value you create
PhysicalAssets
People
Money
Business Model
Market Opportunity
Revenues
Customer Base
Profits
Cash Flow
Intellectual Property
Value Creation
via
Inputs/ Resources Recipe Target OutputsHow Output
Valued
Intellectual Capital
LicenseRevenues
•IPO
•Merger/ Acquisition
•Dividend Stream
•Compensation
•Personal
Brand
Physical Assets
The Raw Economics
• How much cash goes in and how much cash comes back - NPV or IRR is what matters
• Most entrepreneurs / teams are putting in everything BUT the money – what do you get to keep in exchange?
Example
• A business requires an investment of $3 million and throws of $1 million per year…is this a good opportunity?
Think about it in a fine-grained fashion – bottom-up
• Unit economics: A customer, a product, a location
• Ramp-up time
• Overhead
• Capital as well as operating costs
Business Model
• Helps you understand what matters• See what you don’t know- what are the
risks• What can you learn before you spend $• What are you betting on?• Track actual performance against key
variables• Build up a set of financials
Questions to Ask
• What are revenues, costs and capital requirements?
• What are the venture’s MONTHLY cash flows?
• How much cash is required in total – how deep is the trough?
• What size bites do we want it in?• What returns will investors expect?
The Cash Flow Cycle for a Venture
CumulativeCumulative Cash Flow in $Cash Flow in $
TimeTime
BurnBurn RateRate
Date of First Cash Flow PositiveDate of First Cash Flow Positive
MaximumMaximum FinancingFinancing NeedsNeeds
DaDatete of Cumulative Cashof Cumulative Cash BreakevenBreakeven
Restaurant Business Model
• What do you think it looks like?
Access
Insurance
Parking
Fuel
Maintenance
Lease
Contribution Margin/ Member
Monthly interest
# Uses
Hours/Use
$/Hour
Miles/Use
$/ Mile
$/ member
i rate (monthly)
Key May ’00 Biz Plan/ Actual September Data
Recurring View (Monthly) – Blended Model
Hours used/ month
Utilization rate
Costs/ Car
Members/ Car
Revenues/ Member
# Members
Total Contribution Margin/ Month
Monthly Usage
Monthly Fee
Attrition
Beginning Members
New Members
Car Cost/ Member