88 PartII

expected, and the occasional guests from hell. Thegrass is always greener, so they say.

The TimmonsModel: Where Theoryand Pradice Collide in the Real World

How can aspiring entrepreneurs-and the investorsand associates who join the venture-get the odds ofsuccess on their side? What do these talented aríd

successful high potential entrepreneurs, their ven-ture capitalists, and their private backers do differ-ently? What is acéounting for their exceptionalrecord? Are there generallessons and principIes un-derlying their successes that can benefit aspiring en-trepreneurs, investors, and those who would join aventure? If so, can these lessons be learned?

These are the central questions of our lifetimework. We have been immersed as students, re-searchers, teaéhers, and practitioners of the entre-preneuríal process. As founding shareholders andinvestors of several high potential ventures (some ofwhich are now public), directors and advisors to ven-

tures and venture capital fu~.ás, a charter directorand advisor to the Kauffman Center for Entrepre-neurial Leadership at the Ewing Marion KauffmanFoundation, and as director of the Arthur M. BlankCenter for Entrepreneurship at Babson College, wehave each applied, tested, refined, and temperedacademic theory as fire tempers iron into steel: in thefire of practice.

Intellectual and Practical Collisionswith the Real World

Throughout this period of evolution and revolution,New Venture Creation has adhered to one core prin-cipIe: In every quest for greater knowledge of the en-trepreneurial process and more effective learning,there must be intellectual and practical collisionsbetween academic theory and the real world of prac-tice. The standard academic notion of somethingbeing all right in practice but not in theory is unac-ceptable. This integrated, holistic balance is at theheart of what we know about the entrepreneurialprocess and getting the odds in your favor.

~,

#.., 9'ó1ue Creation: The Driving Forcesl \\

Al core, fundamental entrepreneurial process ac-counts for the substantially greater success patternamong higher potential ventures. Despite the greatvariety ofbusinesses, entrepreneurs, geographies, and

The Opportunity

technologies, central themes or driving forces domi-nate this highly dynamic entrepreneurial process.

. It is opportunity driven.. It is driven by.a lead entrepreneur and anentrepreneuríal team.. It is resource parsimonious and creative.. It depends on the fit and balance among these.. It is integrated and holistic.. It is sustainable.

These are the controllable components of theentrepreneurial process that can be asses'sed, influ-enced, and altered. Founders and investors' focus onthese forces during their careful due-diligence processto analyze the risks and determine what changes canbe made to improve a venture's chances of success.

First, we will elaborate on each of these forces toprovide a blueprint and a definition of what eachmeans. Then using the early years of Netscape as anexample, we will illustrate how the holistic, balance,and fit concepts pertain to a startup.

1

Change the Odds: FiJéIt, Shape It,Mold It, Make It

The driving forces underlying successful new venturecreation are illustrated in Exhibit 3.5. The processstarts with opportunity, not money, strategy, net-works, team, or the business plan. Most genuineoppórtunities are much bigger than either the talentand capacity of the team or the initial resources avail-able to the team. The role of the lead entrepreneurand the team is to juggle all these key elements in achanging environment. Think of a juggler bouncingup and down on a trampoline that is moving on a con-veyor belt at unpredictable speeds and directions,while trying to keep all three balls in the air. That isthe dynamic nature of an early-stage startup. Thebusiness plan provides the language and code forcommunicating the quality of the three driving forcesof the Timmons Model and of their fit and balance.

In the entrepreneurial process depicted in theTimmons Model, the shape, size, and depth of theopportunity establishes the required shape, size, anddepth of both the resources and the team. We have ifound that many people are a bit uncomfortable '1viewing the opportunity and resources somewhat ;precariously balanced by the team. It is especially .disconcerting to some because we show the three key :elements of the entrepreneurial process as circles,and thus the balance appears tenuous. These reac-tions are justified, accurate, and realistic. The entre-'preneurial process is dynamic. Those who recognize ,1the risks better manage the process and garner morereturn. 19~-h"""--

Chapter 3 The Entrepreneurial Process 89

EXHIBIT3.5

The Timmons Model of the Entrepreneurial Process

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The lead entrepreneur's job is simple enough. Heor she must carry the deal by taking charge of the suc-cessequation.In this dynamiccontext, ambiguityandrisk are actually your friends. Central to the home-work,creative problem solving and strategizing, anddue diligence that lies ahead is analyzing the fits andgapsthat exist in the venture. What is wrong with thisopportunity? What is missing? What good news andfavorableevents can happen, as well as the adverse?What has to happen to make it attractive and a fit forme? What market, technology, competitive, manage-ment, and financial risks can be reduced or elimi-nated? What can be changed to make this happen?Whocan change it? What are the least resources ne~-essaryto grow the business the farthest? Is this therightteam? By implication, if you can determine theseanSwersand make the necessary changes by figuringouthow to fill the gaps and improve the fit and afuactkeyplayers who can add such value, then the odds forsuccess rise significantly. In essence, the entrepre-neur's role is to manage and redefine the risk-rewardequation-all with an eye towards sustainability. .Sincepart of the entrepreneur's legacy is to create pos-¡tiye iplpact without harming the environment, thecommuwty,or society, the concept of sustainabilit)r ap-pe~s ~ the underlying foundation in the model.'-

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~E~;¡ The Opportunity .At the heart of the process is '-

the opportunity. Successful entrepreneurs and in-vestorsknow that a good idea is not necessarily a good

,¡:"t~ 30"JohnDoerr's Start-Up Manual," Fast Company, February-March 1997, pp. 82-84.

opportunity. For every 100 ideas presented to in-vestors in the form of a business plan or proposal,usúally fewer than 4 get funded. !v1orethan 80 per-cent of thos~ rejections occur in the first fe\\' hours;another 10 to 15 percent are rejected after investorshave read the business plan carefully. Less th¡pl 10percent attract enough interest to merit a more duediligence thorough review that can take several weeksor months. These are very slim odds. Countless hoursand days have been wasted by would-be entrepre-neurs chasing ideas that are going nowhere. An im-portant skill for an entrepreneur or an investor is to beable to quickly evaluate whether serious potential ex-ists, and to decide how much time and effort to invest.

John Doerr is a senior partner at one of the mostfamous and successful venture capital funds ever,Kleiner, Perkins, Caulfield & Byers, ánd is consid-ered by some to be the most influential venture capi-talist of his generation. During his career, he hasbe en the epitome of the revolutionaries describedearlier, who have created new industries as leadinvestors in such legends as Sun Microsystems,Compaq Computer, Lotus Development Corpora-tion, Intuit, Genentech, Millennium, Netscape, andAmazon.Com. Regardless of these past home runs,Doerr insists, "There's never been a better time thannow to start a company. In the past, entrepreneursstarted businesses. Today they invent new businessmodels. That's a big difference, and it creates hugeopportunities.,,30

90 PartIl

EXHIBIT3.6

The Entrepreneurial ProcessIs Opportunity Driven*

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Marketdemand is a key ingredientto measuringan opportunity:. Is customer payback less than one year?. Do market share and growth potential equal 20 percentannual growth and is it durable?. Is the customer reachable?

Market structure and size help define an opportunity:. Emerging and/or fragmented?. $50 million or more, with á $1 billion potential?. Proprietary barriers to entry?Margin analysis helps differentiate an opportunity from an idea:. Low cost provider (40 percent gross margin)?. Low capital requirement versus the competition?. Break even in 1-2 years?. Value add.ed increase of overall corporate PIE ratio?*Durability of an opportunity is a widely misunderstood concept. In

entrepreneurship, durability exists when the investor gets hermoney back plus a market or better return on investment.

.".

Another venture capitalist r~cently stated, "Afterthe irrational exuberance of the late 90s, it is 'again agreat time to start a business. Venture capital is plen-tiful, valuations make sense and venture capitalistsare anxious for high potential ventures.,,31

Exhibit 3.6 surnmarizes the most important char-acteristics of good opportunities. Underlying marketdemand-because of the value-added properties ofthe product or service, the market's size and 20-pluspercent growth potential, the economics of the busi-ness, particularly robust margins (40 percent or more),and free cash flow characteristics-drives the value

creation potential.We build our understanding of opportunity by first

focusing on market readiness: the consumer trendsand behaviors that seek new products or services.Once these emerging pattems are identified, the as-piring entrepreneur develops a service or productconcept and, finally, the service or product deliverysystem is conceived. We then ask the questions artic-ulated in the exhibit.

These criteria will be described in great detail inChapter 4 and can be applied to the search and eval-uation of any opportunity. In short, the greater the

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1, 31É'?n:~'Parizeau, Partner. Norwest Venture Partners, June 2001..' \\

> '

The Opportunity

EXHIBIT3.7

Understand and Marshall Resources,Don't Be Driven by Them

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Think cash last!

growth, size, durability, and robustness of the grossand net margins and free cash flow, the greater theopportunity. The more impeifect the market, thegreater the opportunity. The greater the rate afchange, the discontinuities, and the chaos, thegreater is the opportunity as we saw with Moore'sLaw and Drucker's Postulate in Chapter 2. Thegreater the inconsistencies in existing service andquality, in lead times and lag times, and the greaterthe vacuums and gaps in information and knowledge,the greater is the opportunity.

Resources: Creative and Parsimonious

One of the most common misconceptions among un-tried .entrepreneurs is that you first need to have allthe resources in place, especially the money, to suc-ceed with aventure. Thinking money f'irst is a bigmistake. Money follows high potential opportunitiesconceived of and led by a strong management team.Investors have bemoaned for years that there is toamuch money chasing too few deals. In other words,there is a shortage of quality entrepreneurs and op-portunities, not money. Successful entrepreneursdevise ingeniously creative and stingy strategies tamarshal and gain control of resources (Exhibit 3.7r.Surprising as it may sound, investors and successfulentrepreneurs often say one of the worst things thatcan happen to an entrepreneur is to have too muchmoney too early. .

Howard Head is a wonderful, classic example ofsucceeding with few resources. He developed thefirst metal ski, which became the market leader, andtren the oversize Prince tennis rackét-developingtwo totally unrelated technologies is a rare feat. Head

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Chapter 3 The Entrepreneurial Process 91

lefthisjob at a large aircraft manufacturer duringWorldWar II and worked in his garage on a shoestringbudgetto create his metal ski. It took more than 40versionsbefore he developed a ski that worked andcould be marketed. He insisted that one of the

biggestreasons he finally succeeded is that he had solittlemoney. He argued that if he had complete fi-nancinghe would have blown it all long before heevolvedthe workable metal ski.

Bootstrapping is a way of life in entrepreneurialcompaniesand can create a significant competitive ad-vantage.Doing more with less is a powerful competi-tiveweapon, as we saw in Chapter 2 as upstart CellularOne outperformed NYNEX three-to-one with one-half to one-third. the resources. Each company'sapproachwas to minimize and control the resources,butnot necessarily own them. Whether it is assets forthebusiness, key people, the business plan, or startupandgrowth capital, successful entrepreneurs think cashlast.Suchstrategiesencouragea disciplineofleanness,where everyone knows that every dollar counts, andtheprincipIe "conserve your equity" (CYE) becomes awayof maximizing shareholder value.

The Entrepreneurial Team T,here is little dis-pute today that the entrepreneurial team is a key in-gredient in the higher potential venture. Investorsare captivated "by the creative brilliance of a com-pany's head entrepreneur: A Mitch Kapor, a SteveJobs, a Fred Smith . . . and bet on the superb trackrecords of the management team working as agroup.,,32 Venture capitalist John Doerr reaffirmsGeneral George Doriot's dictum: 1 prefer a Grade Aentrepreneur and team with aGrade B idea, over aGrade B team with a Grade A idea. Doerr stated, "Inthe world today, there's plenty of technology, plentyof entrepreneurs, plenty of money, plenty of venturecapital. What's in short supply is great teams. Yourbiggest challenge will be building a great team.,,33

Famous investor Arthur Rock articulated the im-

portance of the team more than a decade ago. He putit this way: "If you can find good people, they can al-ways change the producto Nearly every mistake I'vemade has been 1 picked the wrong people, not thewrong idea.,,34 Finally, as we saw earlier, the ventureswith more than 20 employees and $2 million to $3million in sales were much more likely to survive andprosper than smaller ventures. In the yast majority ofcases, it is very difficult to grow beyond this without ate~ of two or more key contributors.

iCleady, a new venture requires a lead entrepre-neu~ that has personal characteristics described in, ~

EXHIBIT3.8

An Entrepreneurial Team Is a CriticalIngredient for Success

An entrepreneurialleader.Learns and teaches-faster, better.Dealswith adversity,is resiIient '. Exhibitsintegrity,dependability, honesty.Builds entrepreneurial culture and organization

Qua lit y of the team.Relevant experience and track record.Motivation to excel.Commitment, determination, and persistence.Tolerance of risk, ambig¡,¡ity, and uncertainty.Creativity.Team locus of control.Adaptability.Opportunity obsession.Leadershipand courage.Communication

""355\0\\'

Exhibit 3.8. But the high potential venture also re-quires interpersonal skills to foster communicationsand, therefore, team building.

Exhibit 3.8 summarizes the important aspects ofthe team. These teams invariably are formed and ledby a very capable entrepreneuri;li leader whose trackrecord exhibits both accomplishments and severalqualities that the team must possess. A pacesetterand culture creator, the lead entrepreneur is ,centralto the team as both a player and a coach. The abilityand skill in attracting other key management mem-bers and then building the team is one of the mostvalued capabilities investors look foro The founderwho becomes the leader does so by building heroesin the team. A leader adapts a philosophy that rewardssuccess and supports honest failure, shares thewealth with those who help create it, and sets highstandards for both performance and conducto We willexamine in detail the entrepreneurialleader and thenew venture team in Chapters 7 and 8.

Importance of Fit and Balance Roundingout the model of the three driving forces is the con-cept of fit and balance between and among theseforces. Note that the team is positioned at the bottomof the triangle in the Timmons Model (Exhibit 3.5).Imagine the founder, the entrepreneurial leader ofthe venture, standing on a large ball, balancing thetriangle over her head. This iIbagery is helpful in

32William D. Bygrave and Jeffry.A. Timmons, Venture Capital at the Crossroads (Boston: Harvard Business School Press, 1992), p. 8.33Fast Company, February-March 1997, p. 84.34Arthur Rock, "Strategy vs. Tactics ffom aVenture Capitalist," Harvard Business Review, November-December 1987, pp. 63-67.

92 Part II

appreciating the constant balancing act since oppor-tunity, team, and resources rarely match. When envi-sioning a company's future, the entrepreneur canask: What pitfaIls will I encounter to get to the nextboundary of success? WiIl my current team be largeenough, or wiIl we be over our heads if the companygrows 30 percent over the next two years? Are myresources sufficient (or too abundant)? Vivid exam-pIes of the failure to maintain a balance are every-where, such as when large companies throw toomany resources at a weak, poorIy defined opportu-nity. For example, Lucent Technologies' misplacedassumption slowness to react to bandwidth demandresulted in an almost 90 percent reduction in mar-ket capitalization.

Exhibit 3.9 shows how this balancing act evolvedfor Netscape from inception through the initial pub-lic offering to just before its merger with AOL TimeWarner. While the drawings oversimplify theseincredibly complex events, they help us to think con-ceptuaIly-an important entrepreneurial talent-'about the comp¡¡.ny building process, including thestrategic and management implications of striving toachieve balance and the inevitable fragility of theprocess.

The Internet was a huge, rapidW growing, but elu-sive opportunity. Mark Andressén had 'no significantcapital or other resources to speak of. There was noteam. Such a mismatch of ideas, resources, and talentcould quickly topple out of the founder's control and

The Opportunity

fall into the hands of someone who could turn it into

a real opportunity:Visually, the process can be appre-I ciated as a constant balancing act, requiring continua!

assessment, revised strategies and tactics, an experi-mental approach. By addressing the types of questionsnecessary to shape 'the opportunity, the resources,and the team, the founder begins to mold the ideainto an opportunity, and the opportunity into a busi-ness, just as you would mold clay from a shapelessform into a piece of artwork.

At the outset, founder Marc Andressen wouldhave seen something like the first figure, Exhibit3.9(a), with the huge Internet opportunity far out-weighing the team and resources. The gaps weremajor. Enter venture capitalist John Doerr, the firstventure capitalist to vividly see the size and potentialof the opportunity. He had great faith in Andressenand knew he could fill the resource gaps and helpbuild the team, both with inside management andoutside directors and professional advisors. This newbalance in Exhibit 3.9(b) creates a justifiable invest-mento The opportunity is stiIl huge and growing, andcompetitors are inevitable (see Exhibit 3.9(c)). TofuIly exploit this opportunity, attract a large andhighly talented group of managers and professionals,and create even greater financial strength than com-petitors, the company must complete an initialpublic stock offering (IPO). Strategic investors cangreatly enhance the balance of the driving forces.Strategic investors, or partners, are defined as

EXHIBIT 3.9(a)

Netscape-Journey through the Entrepreneurial Process:At Startup, a Huge Imbalance

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Chapter 3 The Entrepreneurial Process 93

EXHIBIT 3.9(b)

Netscape-Journey through the Entrepreneurial Process:At Venture Capital Funding, toward New Balance

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Netscape-Journey through the Entrepreneurial Process:At IPO, a New Balance

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94 Part 11 The Opportunity

EXHIBIT 3.9(d)

Netscape-Journey through the Entrepreneurial Process:Today,toward a New Imbalance '

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people who can fill gaps left by other members of theteam. They create balance where imbalance exists.

, The role of the strategic investor differs according tothe needs of aventure.

Netscape emerged (see Exhibit 3.9(d)) larger andstronger in people and resources but faced newchallenges. Even the best and brightest of new ven-tures tend to erode over two or more decades into

slow-moving, re active firms. Could Netscape sus-tain and reinvent its entrepreneurial roots andorganization as the opportunity continued to mush-room and competition for markets, people, andtechnology were greater than ever? Would it be-come blindsided and eclipsed by a new disruptivetechnology, just as Apple Computer and Microsoftbludgeoned IBM and Digital Equipment? Netscapewas acquired by A'OL (.45 shares in AOL for everyshare of Netscape) in 1998. This all-stock dealvalued Netscape at $4.2 billion. In effect, AOL ac-quired Netscape so that AOL would not become abrontosaurus!

This iterative entrepreneurial process is based onboth logic and trial and error. It is both intuitive andqonsciously planned. It is a process not unlike whatthe Wright brothers originally engaged in while creat-ing ~ first self-propelled airplane. They conductedmore" than 1,000 glider flights before succeeding.

These trial-and-error experiments led to the newknowledge, skills, and insights needed to actually fly.Entrepreneurs have similar learning curves.

The fit issue can be appreciated in terms of aquestion: This is a fabulous' opportunity, but forwhom? Some of the most successful investments

ever were turned down by numerous investors be-fore the founders received backing. Intuit received20 rejections for startup funding by sophisticated in-vestors. One former student, Ann Southworth, wasturned down by 24 banks and investors before re-ceiving funding for an elderly extended-care facility.Ten years later, the company was sold for an eight-figure profit. Time and again, there can be a mis-match between the type of business and investors,the chemistry between founders and backers, or amultitude of other factors that can cause a rejection.Thus, how the unique combination of people, op-portunity, and resources come together at a particu-lar time may determine a venture's ultimate chancefor success.

The potential for attracting outside funding for aproposed venture depends on this overall fit andhow the investor believes he or she can add value to

this fit and improve the fit, risk-reward ratio, andodds for success. Exhibit 3.10 shows the possibleoutcomes.

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Chapter 3 The Entrepreneurial Process 95

EXHIBIT3.10

Fit of Entrepreneur and Venture Capital

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