Entrepreneurship

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Entrepreneurship

• So You Want to be an Entrepreneur?
• Liberty Camp 2007
• Andy Eyschen

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What is an Entrepreneur?

• Word coined by French economist J.B. Say around
  1800
• His definition The entrepreneur shifts
  resources out of an area of lower and into an
  area of higher productivity and greater yield
• Opening another restaurant is not
  entrepreneurship, but McDonalds was
• Though McDonalds did not invent anything new, it
  applied management concepts, standardized the
  product, designed tools and processes, created
  customer value

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Introduction

• Several hundred thousand business ventures get
  started worldwide every year
• Many never get off the ground, many fail after
  sometimes spectacular starts
• What business do you want to be in?
• What capabilities would you like to develop?
• Why bother?

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On the Other Hand

• Every large business started off as a small
  business
• Most made their founders very rich
• The richest man in the world, Bill Gates, was
  unheard of until 1980, and started a small
  company
• Every great entrepreneur has a great story to
  tell
• Without new businesses starting, no wealth and no
  jobs will be created and progress will be limited

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Questions to Ask Yourself

• Are my goals well defined (both personal and
  professional)?
• Can I handle the risk?
• Do I have the right strategy?
• Am I starting the right business?
• Can I execute the strategy?
• Do I have the resources, the strength and the
  stamina to execute my strategy?

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Personal Goals

• An entrepreneur has closely linked personal and
  business goals (this may not be the case with a
  professional manager in a large firm)
• Most entrepreneurs list independence and control
  of their destiny, apart from getting rich, as
  their main reasons for starting a business
• However, you will need to be more specific

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What Do You Really Want?

• Rich enough to do what you want to do? What DO
  you want to do?
• An enjoyable lifestyle? What does that mean?
• Fame? Immortality by getting your name into the
  history books, having streets named after you or
  monuments erected?
• Or simply the satisfaction of knowing that you
  can and have achieved what you set out to
  achieve, i.e. achieve your objectives?
• Leave a fortune for your children?

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Are You Prepared?

• For the sacrifices? Your time, your dedication,
  your commitment, your money?
• For the risk? Of losing everything you have and
  maybe losing other peoples money as well? Of
  losing the confidence other people have in you?
  Of losing your reputation? Of losing your
  friends?
• To work without a salary?
• Do you have the talent?
• Do you have what it takes to succeed?

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If the Answer is YES!

• How will I get there?
• The first thing I need is a STRATEGY
• A strategy is a plan that is intended to achieve
  a particular purpose (to win a war, to beat the
  competition, to be number one in my chosen
  industry, etc.)
• Formulating a sound strategy is the single most
  important step

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What is a Sound Strategy?

• It must be well defined (what needs will the
  enterprise meet, where will it operate, what
  technical capabilities will it have, what is its
  vision and its mission, why does it exist, what
  values will it uphold, how will decisions be
  made, what will it not do, etc.)
• It must provide a clear direction for the
  business enterprise and be able to create profits
  and growth
• It should be bold and reflect the entrepreneurs
  (founders) aspirations

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Is it Sustainable?

• Can I earn a satisfactory return on my investment
  and that of other investors?
• What will be my competitive edge or advantage?
• Can I really supply something better than what
  already exists in the market?
• Can I charge a high enough price to cover all my
  costs and still make a profit?
• Can I be cheaper than my competitors? How?
• Is the market big enough to invest for the long
  haul?

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An Exit Strategy?

• How do I know when its time to quit?
• How will I quit? (Bankruptcy, Public Listing,
  Selling out, etc.)

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Can I Do It?

• Great ideas dont guarantee great performance
• Can I sell my ideas? To customers, to investors,
  to friends and family, to complete strangers, to
  my Banker?
• Key questions
• Do I have the resources?
• Do I have the organizational capability
• What will be my personal role in the venture?

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The Resources

• Money, Capital
• Talented employees (dont rely on the
  capabilities of your friends or family members,
  no matter how well intentioned they are)
• Customers no customer, no business!

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The Organization

• What infrastructure will I need?
• What will my organization chart look like?
• What growth rate do I expect?
• How can I react if the actual growth rate is
  different?
• How much empowerment do I give to my employees?
• What control mechanisms do I put in place?

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My Role

• Can I delegate or do I want to do everything
  myself? Can I let go?
• How much day-to-day involvement will I have in
  the running of the business?
• Will all decisions be made by me? If not, which
  decisions will I reserve for myself?
• What company culture do I intend to create?
• How quickly do I want to move to my next project?

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What Kind of Business?

• Idea in your head (new product or service)
• Seeing opportunity
• Solving problems
• The vast majority of new business ventures are
  restaurants, yet the success rate (profitable and
  still in business after 5 years) is 0.008 (8 out
  of 1,000)
• Evaluating the opportunity

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Key Questions

• Who is my customer?
• Why would the customer buy my product or service
  over my competitors?
• How compelling is my offering?
• Can I price it to attract the majority of my
  target customers? Is it affordable?
• How do I sell my offering and at what cost?

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The Business Plan
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Importance of the Plan

• Single most important document when starting a
  business, even if you dont need funding
• However, a good plan does not guarantee success
• All applications to Venture Capitalists (VCs)
  must include a Business Plan a typical VC firm
  receives over 2,000 Business Plans a year or
  about 40 a week or 5-6 a day
• All Business Plans are an act of imagination

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What Makes a Good Plan?

• They are simple, short and to the point
• They are fair to all parties
• They emphasize trust rather than legal ties
• They dont fall apart when reality differs
  slightly from the plan
• They dont include incentives that cause
  destructive behavior
• They include a Proof of Concept (Pilot)

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Components of a B.P.

• The People
• The Opportunity
• The Context
• Risks and Rewards

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The People

• Without the right team, the other parts dont
  matter
• Who are they?
• What do they know?
• Whom do they know?
• How well are they known?

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The Opportunity

• Focus on 2 questions
• Is the total market for the new ventures product
  or service large, rapidly growing or both?
• Is the industry now, or can it become,
  structurally attractive?
• It is easier to obtain a share of a large or
  growing market than to fight incumbents in a
  mature or stagnant market
• Attractive means that the market allows the
  venture to make money (technology is sometimes
  attractive but does not necessarily make money)

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The Context

• Opportunities exist in a context
• Macro-economic environment, inflation, exchange
  rates, interest rates, GDP growth, capital
  markets
• Government rules and regulations (tax policy,
  licenses, deregulation, etc.)
• Technology (does the new venture exploit
  technology is it vulnerable to new technology,
  etc.)
• Shift in context can turn an attractive idea into
  an unattractive one and vice versa (emergence of
  terrorism airline versus security business)

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Risks and Rewards

• Start with Risk it is unavoidable (ideal
  business takes all the rewards and gives all the
  risks to others)
• All sane people want to avoid risk
• Identify the risks inherent with the people, the
  opportunity and the context (all 3 are dynamic
  and dynamic means risk)
• What will you do when these risks actually
  appear? This activity is called Risk Management
• Insurance is a form of risk management

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Rewards

• How and how soon will the business make money?
• How will investors get their money back?
• What will be the return on their investment?
  (ROI)
• Is the venture IPO-able?
• How can profits be sustained?

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Typical Risk/Reward Visualization
Money
Potential Reward
Break-even Point
Time
Risk
Depth Of Hole
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Sources of Funding
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Where does Money come from?

• Equity versus Debt
• Own funds (savings)
• Family and friends
• Banks
• Venture Capitalists
• Angels
• Stock Market

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How much Money?

• Compile financial forecast with 3 elements
• Income Statement
• Balance Sheet
• Cash Flow Statement
• Look ahead 5 years
• Include 3 scenarios most likely, most
  optimistic, most pessimistic

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Sample Income Statement
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Sample Balance Sheet
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Sample Cash Flow Statement
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How much Money?

• Add up the time periods (months) in which Cash
  Balance is negative from the beginning that is
  minimum capital requirement
• It is not unusual for the first 2 years to have
  negative cash flow, sometimes longer
• Once you have positive cash flow, your business
  is self-sustaining until you need to make a new
  major purchase (e.g. buy new plant and equipment)

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Milestones for Successful Planning
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Why Milestones?

• New business will encounter many unknowns
• Confirm viability of new venture
• Avoid costly errors
• Opportunity to reevaluate the venture
• Opportunity to re-plan with growing body of
  real life facts

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10 Milestones

• Product/Concept Test
• Complete Prototype
• Start-up Funding
• Pilot Operation or Plant Test
• Market Testing

• Production Startup
• First major Sale
• First competitive action and reaction
• First redesign or redirection
• First significant price change

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Milestone Reviews

• Useless unless decisions are made to ensure
  success or reduce cost of failure
• Milestone, millstone or tombstone?
• Identify the most important events or actions
  that must occur in sequential order (critical
  path milestone chart) and their assumptions
• Ensure all assumptions are tested by milestones
• After the test, replace assumptions with facts
  and then review future planned events and
  evaluate them in light of the new facts

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Tips from an Entrepreneur(Michael Masterton)

• Start a business that you know! Avoid
  restaurants, retail shops, travel and
  enter-tainment outlets!
• Choose a business that has these 3 qualities
• An efficient marketing model (cost and time of
  acquiring a customer)
• A substantial profit margin
• Considerable back-end potential (better and
  higher priced products and services to existing
  customers)

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Tips from an Entrepreneur (2)

• Make sure there is an active market!
• Develop a unique selling proposition!
• Forget Retail and Glamour business!
• Sell first, tweak your product later!
• Dont throw good money after bad!

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Final Words of Advice

• Be brutally honest with yourself wishful
  thinking will get you nowhere dont be afraid of
  the truth!
• A great idea wont make it without great
  management hire good people!
• Ask how to make the business successful, not how
  much money will I make!
• Use help wherever you can get it dont let pride
  get in the way! You cant do everything yourself!
• Be friendly with your Bank Manager!