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Entrepreneurship Workshop 2

WEMBA &CCMBA September 16, 2016

Jon Fjeld

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Agenda

•  Quick review •  Framework •  Discussion: strategy

–  Target customers –  Business Model –  Sustainable competitive advantage –  Milestone planning

•  Project presentations •  Wrap-up

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FRAMEWORK

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Companyforma6on

“Nuclea6on”Comingupwith

theidea

Earlyplanning

Earlyrevenue

Growth

Ourfocus

Stages in new venture creation

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What does it take to succeed?

Entrepreneurial Success

=

Good idea

good planning

good execution money luck + + + +

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Plan

Do

Learn

The basics

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..

Need(market)

SolutionTeam

Financialviability

Competition

Evaluating an opportunity

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Evaluation of an opportunity

1.  IsthereasufficientlyaMrac6vemarketopportunity(needorproblem)?

2.  Istheproposedsolu6onfeasible,bothfromamarketperspec6veandatechnologyperspec6ve?

3.  Dowehaveanteamthatcaneffec6velycapitalizeofthisopportunity?

4.  Canwecompete(overasufficientlyinteres6ng6mehorizon)?

5.  Whatistheprofileriskandreturnofthisopportunity?

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Targetcustomer 

Businessmodel 

Sustainablecompe66veadvantage

Roadmap(milestones)

Elements of strategy

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Evaluation and strategy

Opportunityevalua3on Factgathering,analysis,basisfordecisionmaking

StrategyDecisions,choices:investmentandpriori6es

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Need/problem

Feasiblesolu6on

Team

Possibilityofcomp.advantage

Riskreward

Targetcustomer

Businessmodel

Choicesforsustainablecomp.advantage

Milestones

Theseac6vi6esareongoing10

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Business plan document

Opportunityevalua6on:•  Need/problem•  Solu6on•  Team•  Possibilityofcompe66ve

advantage•  Risk/return

Company’splan:•  Strategy:

–  Targetcustomers–  Businessmodel–  Choicesforsustainable

compe66veadvantage–  Roadmap/milestones

•  Opera6ngplan:–  Planforeachfunc6onal

area–  Budget

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Two sides of execution

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Framework for analysis

Investment prospectus:

•  Need/problem •  Solution •  Team •  Competitive

advantage •  Risk / return

Company’s plan: •  Strategy:

–  Target customers –  Business model –  Choicesforsustainable

compe66veadvantage–  Roadmap /

milestones •  Operating plan:

–  Plan for each functional area

–  Budget

Execu6on:•  MarketResearch•  Strategydevelopment•  Marke6ng•  Businessdevelopment•  Salesplanning•  R&DManagement•  Opera6onsmanagement•  Processandinfrastructure

management•  Budge6ng•  Financing•  Peoplemanagement

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The first two laws of entrepreneurship

FirstLawAlwaysstartwiththeneed.

SecondlawMakenoinvestmentbeforeits6me.

Analysis—comprehensiveanddiscreteelementsSequencing—basedonseverity,probability,andcostofresolu6on

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Strategy in a new venture

•  Similar but different •  More and less freedom

Compared to corporate strategy

New venture strategy

1.  Targetcustomer–  Whatarethechoices?–  Segments–  Value/marketsize?

2.  Businessmodel–  Product:“wholeproduct,”valuechain–  Again,whatarethechoices?

3.  Sustainablecompe66veadvantages–  Howcanyoucompeteoverthelongterm?–  Whatinvestments?

4.  Milestoneplanning–  Whatistheorderofinvestment?–  Whatarethekeymilestones?–  Howdoyoustructurefinancing?

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Theseques6onsarealllinked.

Theprocessisitera6veandpiecemeal,notsequen6al

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Planning

1.  Strategy•  Targetcustomers•  Businessmodel•  Choicesforsustainablecompe66veadvantage•  Milestoneplanning

2.  Opera6ngplan•  Planforeachfunc6onalarea•  Budget

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How do customers differ?

•  What is the need/pain and how severe is it? –  Value / willingness to pay –  For what product

•  What are the customers’ alternatives? •  How many customers? Size of the opportunity •  How will you convince them to buy?

–  Interests –  Influences

•  What are the inhibitors or obstacles?

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Target customers

Start with formulating a choice: –  Who are potential targets?

•  Based on segmentation –  What do they represent?

Considerations: –  What is the required solution?

•  Can we deliver? Cost •  Does it strengthen us? Competitive implications

–  Ease of implementation for the customer –  Decision process –  Size of opportunity represented

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A conceptualization

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Value/ Differentiation

Difficulty / cost to the company

Good

Bad

Size of market also a consideration

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Planning

1.  Strategy•  Targetcustomers•  Businessmodel•  Choicesforsustainablecompe66veadvantage•  Milestoneplanning

2.  Opera6ngplan•  Planforeachfunc6onalarea•  Budget

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Business model

Product: •  What is the “whole product”?

–  How will it get to the customer?

–  What will your role be? (place in the value chain)

Price: •  What is the perceived value? •  What will customers pay for? •  How do they want to pay?

(revenue model)

Place / promotion: •  Description, messaging,

articulation of value, outlets •  Distribution Business practices: •  How will customers interact

with the company? •  Service / support Functions inside vs. outside the firm •  Partnerships •  Staffing

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A complicated example: the iPod

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Need Solu6on Product Technology

Portablemusicforaverageconsumers

iPod

•  Whatistheinnova6on?•  Whatconnectstheproduct

totheneed?

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The iPod solution

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Need Solu6on Product Technology

Portablemusicforaverageconsumers

iPod

iTunessoiwareforPC&Mac

iTunesStore

iPodclickwheel

System:•  Acquiring•  Storing•  Organizing•  Selec6ng•  Playing

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Planning

1.  Strategy•  Targetcustomers•  Businessmodel•  Choicesforsustainablecompe66veadvantage•  Milestoneplanning

2.  Opera6ngplan•  Planforeachfunc6onalarea•  Budget

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Sources of competitive advantage

Whatthefirmdoes:decisions&policies

Assetsfirmstartswith(usuallyIPofsomekind)

Compe66veadvantage

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Competitive strategy

Marketanalysis

Industryanalysis

Valuetocustomer

Compe6tors&partners

Choices & actions that determine and strengthen competitive position

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Value

TothecustomerProduct •  Function / price /

packaging / other? Cost of ownership •  Product purchase •  Maintenance / expansion •  Quality •  Skills needed •  Other?

Sourcesofvalue•  Capabilities •  Quality •  Integration •  Selling process •  Service •  Packaging •  Consulting •  Ease of doing business •  Fun

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Competences

Firms do many things •  Design / develop •  Manufacture •  Market •  Sell •  Service

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•  Hire •  Innovate •  Strategize •  Plan

Mediocre Advantage Competent

Where is the company on the spectrum?

Where do they need to be?

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Core competences: a fundamental concept

Businessmodel

Sustainablecompe66veadvantage

Corecompetences

How much and what part of the solution will you provide?

Position in the value chain

Business relationships

How are you uniquely identified?

Position versus competitors

What is defensible? Brand / messaging

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Position

Value chain

Competitors

X

X

X

X

X

X

You

X

X

Solutions Customers

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Competitive position

Whatiscompe66veadvantage?•  Somethingthatallowsthefirmtodelivervalueto

thecustomerprofitably•  (impliesthatthefirmdoesitbeMerthan

compe6tors)

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Whatissustainablecompe66veadvantage?•  Acompe66veadvantagethatisrare&hardto

imitateorinnovatearound

Objective: Sustainable competitive advantage: VRIN

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Sources of sustainable competitive advantage

•  Skills&exper6se:people–  Hiring/HRpolicies

•  Intellectualproperty–  Patents–  Otherformsofprotec6on:TM,secrecy

•  Complementaryassets–  E.g.,distribu6onforacontentcompany

•  Rela6onships–  Customers:“firstmoveradvantage”–  Suppliers–  Keypartnerships

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Digression on innovation

Sustaining: •  Make a product or

service perform better in ways that customers in mainstream market value

•  Always introduced by incumbents

Disruptive: •  Create an entirely

new market •  Perform worse on

some dimension important to mainstream

•  Lower margin

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How to analyze industry players

Resources: •  People •  Equipment •  Technologies •  Cash •  Product designs •  Information •  Relationships •  Customers

Processes: •  Patterns of

–  Interaction –  Coordination –  Decision making

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Values:•  Standardsbywhich

employeessetpriori6es,e.g.:•  Margin•  Revenuepoten6al•  Posi6on/brand

RPV analysis

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Planning

1.  Strategy•  Targetcustomers•  Businessmodel•  Choicesforsustainablecompe66veadvantage•  Milestoneplanning

2.  Opera6ngplan•  Planforeachfunc6onalarea•  Budget

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How to proceed

•  Yourideaisprobablywrong•  Canyoufindagoodideabeforeyourunoutofresources—6meandmoney?–  Timeismoney.–  Earlymoneyismoreexpensivethanlatermoney

•  Whenyoufinda“goodidea,”howefficientlyyouusecapitaldeterminesyourshare,overallreturn,andpossiblyevensuccessorfailure.

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Managing uncertainty

Experiments(“Lean”)

Milestones

Efficientuseofcapital

Seed VC Growth

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Differentterminologies,sameunderlyingconcept

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Net cash

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$0 Time

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Cost of money

•  Timeactuallyismoney

•  Animaginaryhomerun;100,000shares,2founders,1yearbeforemoney

Stage SharesCompany

valueAmountinvested Sharevalue

Valueof$1inequity

Founding 100,000 $100,000 $200,000 $0.50 2Seed 100,000 $1M $500,000 $10 0.1SeriesA 150,000 $15M $7.5M $100 0.01SeriesB 225,000 $225M $112.5M $1,000 0.001

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Why?

•  “Risk”offailureishigh.– Manyassump6onsthatmaynotbetrue.

•  Andgoesdownasyoureduceuncertainty.–  Probabilityofsuccessgoesupasassump6onsaredeterminedtobetrue.

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Not all risk is the same

Ameasureofrisk:

severityofimpactXprobabilityRisksalsodifferon

costofresolu3on

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Resolution of uncertainty

•  Involvesevidence—hypothesistes6ng•  Requiresjudgment&imagina6on

Theissueisgenerallytoestablishmarket/productfitbeforethemarketexists

–  Valida6onoftheneed–  Technicalfeasibility–  Possibilityofpartnerships–  Protectability–  Etc.

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Milestones

Basic question: Will your venture succeed? Imagine a series of big steps that increase your confidence

–  E.g.: a customer, validation of technology, selling model

These steps can constitute a series of objectives for the

venture: –  And become the milestones in your financing plan

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Lowest cost resolution of uncertainty

1.  Iden6fytheassump6onsanddiscretesteps(elementsofuncertainty)requiredforyourventure.

2.  Rankorderthepointsofuncertainty(assump6ons)indecreasingorderofrisktotheventure

(severityXprobability/cost)•  Thisisthesequenceofexecu6on•  Requiresfindingawaytoresolveeachpointofuncertaintyforthelowest

cost(6meandmoney).3.  Factorinanyissuesofoverall6melinessandinterdependencies.4.  Usethesemilestonesasaframeworkforyourplan.5.  Commitsufficientresourcetoachievethenextmilestone.6.  Makecorrec6onsasyoulearn(“pivot”).

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How much money should you raise or invest?

•  Should you raise the total amount of cash needed (according to projections) in a single investment?

Usually not •  How much is the business worth? •  What increases the value of the

company? Reduction of uncertainty

1.  Establish a plan (which you will end up revising):

2.  Determine a milestone that produces a step up in valuation - what will remove the (a?) main source of uncertainty?

•  (Keep in mind that investment may be tranched)

3.  Determine cash needs •  Including asset based financing to reduce

requirement for equity based financing

4.  Raise enough to get you to the next milestone that would cause step up in valuation (+ small cushion, if possible)

$0 Time

-$5

$5

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The first two laws of entrepreneurship

FirstLawAlwaysstartwiththeneed.

SecondlawMakenoinvestmentbeforeits6me.

Analysis—comprehensiveanddiscreteelementsSequencing—basedonseverity,probability,andcostofresolu6on

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Resources

Guidelinesfortheentrepreneur:

hMp://www.dukeven.com/

ProgramforEntrepreneurs:hMp://www.dukep4e.org

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CONCENTRATION hMp://www.dukep4e.org/fuqua-program-for-entrepreneurs/emba-concentra6on

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Teams

•  An important principle of start-ups: you cannot tolerate anyone who is not performing.

•  Seek diversity in your team

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Concentration process

Summer, 2016 Fall, 2016 Spring, 2017

•  Identify opportunity •  Form team •  Memo to Fjeld summarizing

•  Validate opportunity •  Formulate strategy •  Submit as final project in Entrepreneurial

Strategy or Entrepreneurship & New Venture Management

•  Create business plan document •  Submit in fulfillment of concentration

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