Exam

1. Personal (entrepreneur)

   • Characteristics and behaviors

   • Attitudes and beliefs

   • Objectives and ambitions

     (Do you have the energy, drive, skills, financial courage etc. to do it?)

2. Process and thinking (entrepreneurial thinking)

   • Diagnostics and vision

   • Business ideation and development

   • Funding and scaling

     (Is it really an opportunity, and have you found a way to profit from it?)

3. Infrastructure and environment (entrepreneurial ecosystems)

   • Institutions and support systems

   • Funding & Financing

     (Who do you connect to and how can you get help?)

“CAPITALIZING ON OPPORTUNITIES THAT HAVE ARISEN FROM FAILURE”

• identify a failure => do it differently

• Uber case: made what already existed (taxi) better: simpler, faster, more convenient. Uber capitalized on the points where taxis failed (payment method, receipts, price transparency of prices, having to call/book in advance, having to walk to them etc)

• So...What makes you think you’re addressing a failure? è We must think of a market mistake/fail and how we can introduce the solution. The idea should be to better something existent, not to invent something new or useless.

• Hotel check-in and check-out: Why do we do presential check ins? Everyone hates it, it’s a waste of time, but it’s normal. Usually, people don’t realize what the failure is. In check ins, they are annoyed at the queue, not the check inèit’s an opportunity for entrepreneurs to improve

1. Local failure

o Bad or non-existent local offer

o Think you can do better

2. Industry / Sector Failure

o Existing business models are ripe for change o You have something that makes you think you can do better

• Innovate (Latin): Renew

• Disrupt: Create from 0, completely new

• Entrepreneurship = Taking advantage of gaps in the market caused by lack of innovation

  Any type of evolution is always innovative but rarely disruptive. For example, Uber was different, but made possible by things that already existed. It’s not disruptive – it is evolutive.

  Even so, most companies don’t even innovate because it means changing things. And change is feared. Why? Because when people are comfortable and winning, they don’t feel the need to change èe.g., the Kodak moment (explained here) and Amazon almost committed the same mistake with e-books and Kindle (read about Bezos’s entrepreneur mentality here) because with the appearance of e-books, amazon could either innovate and sell e-books as well or maintains its business (core business was selling physical books online).

How visible is the failure? o The less visible, the more you can cause surprise (“WOW, all this time I thought it was

normal, how did I never notice it was so dumb? It’s way easier now”). Customers many times don’t see failures BUT be careful to ensure it really is a failure. Sometimes, it’s not good or facilitating enough to convince people it’s a better option.

o In sum: Less visible ó easier to surprise; Customers most times don’t see failure (but make sure it is really a failure).

• Is it possible to solve profitability? o Confirmation bias is probably the biggest enemy of an entrepreneur. Confirmation bias

is the tendency to search for, interpret, favour, and recall information in a way that confirms or supports one's prior beliefs or values while at the same time ignoring or minimalizing new information that contradict what we want to believe.

o Entrepreneurs feel defensive upon critics - it’s hard to not take it personal but criticism is essential because if we are the only ones getting it and liking it it’s not because we are better, it is rather because the idea is not good enough so probably, something must be changed. Don’t argue back, understand, and improve with feedback. Don’t stop looking and listening to people who doubt you.

o In sum: Confirmation bias is probably your biggest enemy; Always look and listen to people who doubt you.

• Can you build it? o Building a business and scaling it is not easy, can you bring the right skills to the table?

Entrepreneurs can have the motivation, personality, and technical knowledge in the ield, but they need to know about business and need to manage well OR get someone to do it well for them. Most investors invest in ideas and then people to accomplish them.

Every time the world changes, these questions are played again

Failure ->Opportunity ->Social Value

• Is there a difference in motivations of founders?

o Yes, in SE the objective is not make money but really to solve a problem (usually

environmental or social related) • Objectives and key stakeholders?

o The stakeholders are not investors, but rather the community and beneficiaries • Social service provision or social activism?

o There’s a difference – SE wants to solve problems and make a difference in practical terms, not just to sensibilize people and change minds like activism.

• Allocation of profits? o Make profit to use and improve the business, not to distribute to stakeholders.

Thinking about the channels will contribute to the Sales Operation (how and how much will it cost?) and thinking about offer will contribute to the Production Operation (how and how much will it cost?). The price must support all that (base on the Funding: how much do we need?). Price must tell us how much we need to sell (sold units) for how long to get the funding back – reach breakeven level.

Throughout all this it’s important to have the Innovation Idea clear: why are we unique? To really understand our Unfair Advantage how our uniqueness will allow us to profit (and how can it not be easily stolen?). So, entrepreneurship begins with an idea. But an idea is not only made by the product! It’s made by the pain, product, offer and everything else connected.

• Find a pain, a failure in the market that consumers really feel

• Define who exactly feels it and who is willing to pay for it (many times it’s the same person)

• Think about how much it’s worth...

• Can you build a solution to it?

• Can you transform that solution into a sustainable business?

  è You and your skills è Is there a long-term market?

The heuristic approach in decision making refers to a mental shortcut or rule of thumb that individuals use to make judgments or decisions quickly and efficiently.

These rule-of-thumb strategies shorten decision- making time and allow people to function without constantly stopping to think about their next course of action

tep 1: look for problems (where perfection is lacking) ó “hidden problems are the ones that become serious threats eventually”.

o Step 2: separate symptoms from the disease Symptoms => side effects => cause (if we solve this, we eliminate all side effects and symptoms).

o

Step 3: redefine quality.

Entrepreneurs have a different mindset and use different types of frame working/reasoning than managers taught in traditional schools. This way of thinking can be very helpful not only for start-ups but for traditional companies as well.

Causal Reasoning (managerial Thinking)

Selecting between given means to achieve a pre-determined goals -> try to get to what we want with what we have.

Creative Reasoning (strategic thinking)

Generating new means to achieve pre-determined goals è try to see what we can add to what we have, to get what we want.

Effectual Reasoning (entrepreneurial thinking)

Imagining possible new ends using a given set of means è see what we have and the different results we can obtain from there (“ it begins with a given set of means and allows goals to emerge

contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with).

Effectual reasoning demands something more: imagination, spontaneity, risk-taking, and salesmanship.

• Resources:

o Who am I – my traits, strengths, weaknesses, ...

o What I know – knowledge, experience, education, ...

o Whom I know (social and professional) – my network, my connections, ...

• Operating principles:

o Affordable loss principle (decision making - how much is it worth to lose until we start to win?)

o Strategic partnership principle (the right connections make life easier)

o Leverage contingencies principle*:

“Effectual reasoning may not necessarily increase the probability of success of new enterprises, but it reduces the costs of failure by enabling the failure to occur earlier and at lower levels of investment.”

1. Uncertainty of opportunity: they have a vague idea of the market and consumers... but will figure it out as they go along, but

   • There’s a need to be on the sharp end of sales, need to chase own customers

   • Need to have a quick cycle of trial-failure-learn èEvery interaction/try helps to clarify/confirm

2. Uncertainty of the business model: don’t really know how to produce, distribute, fund... but will figure it out as they go along, but

• There’s a need to be “out there” talking to people, trying to meet new people and get things going!

-> Every failure helps determine the next steps

BUT entrepreneurs have (or must have) a clear vision of the pain they want to solve:

• And this is the anchor of the business and the reason that keeps it going, so

• Every person met adds to the abilities

  So far, the entrepreneurial venture is based on the effectual principles, HOWEVER, as it grows, parts of all the business develops into becoming more structured, causal, and rational (new challenge):

3. Balancing the two operating logics: entrepreneurs have to constantly adjust causal and effectual reasoning as the company grows and in order to not fail, they must:

• Get the right people/governance in

• Acknowledge (see) and accept the need to balance – they can’t be stuck on the saga of

  the profitless, but exciting serial innovator rather than accept grow and introduce more traditional and rational logic too.

Entrepreneurs are entrepreneurial, as differentiated from managerial or strategic, because they think effectually (start by who they are, what they know, and whom they know); they believe in a yet-to-be- made future that can substantially be shaped by human action; and they realize that to the extent that this human action can control the future, they need not expend energies trying to predict it. In fact, to the extent that the future is shaped by human action, it is not much use trying to predict it – it is much more useful to understand and work with the people who are engaged in the decisions and actions that bring it into existence.

TAGE 1: IDEATION [RESEARCH / DISCOVERY PHASE] The seeds of an initial idea: very beginning where it’s essentially about the vision and effectuation logic

is followed; exploring different options to make sure we choose the best solution to the problem.

• A perception of pain / failure

• Starting to design a potential solution

• Starting to convert solution into a revenue generating business

• Fixing loose ends, clarifying things

STAGE 2: GROWTH [“TESTING” PHASE + CONVERT DISCOVERY INTO STRUCTURE AND FRAMEWORK]

The business is launched to start developing more solid processes and frameworks: more serious decisions are made (not definitive though) and besides vision and effectuation, strategy starts playing an important role.

• Everything is a pilot

• Every step aims to grow the business – revenue is the validator, not profits

Aiming to get a better understanding of how to create a business

STAGE 3: SCALE [THE BUSINESS STABILIZES OPERATIONS, ALLOWING PROFITABLE GROWTH]

The business starts to seek and deliver returns to shareholders and stakeholder: in this phase the size and structure have increased and a need for balance between effectuation and causal logic is needed so eventually a defined operating model will replace effectuating and along with the maintained strategy and vision will allow for scaling of the business.

• Consistency becomes important to allow for replication and repetition

• Replicating allows for scaling

  This phase is essentially where the business seeks to stabilize operations and thereby allow profitable growth.

Evaluating Ventures (Market Size)

Top Down Approach Sector / Industry Value Grounded hypothesis on share

Bottom Up Approach Current customer spend / period Multiple by number of expected customers

Value Approach Substitution of existing cost Multiply by potential customers

1. The opportunity

2. The operation

3. The roll out

4. The numbers

   
   

Business models describe “the rationale of how an organization creates, delivers, and captures value”

Self-employment: o Very small business, up to 3 employees; minimum investment o Financing: founders, microcredit, leasing, factoring - Small business can have no cash needs o Exit: none or sale to other entrepreneur

- Lifestyle: o Low-growth business opportunity with sufficiently high cash-flow potential to provide

founder with “comfortable life”; Up to 1M€ investment o Financing: founders, leasing, factoring, bank loans at later o Exit: none planned, sale to small firm or other entrepreneur

- High growth: o Long “death valley” and high (usually> 1M€ è 20,000€ doesn’t make sense) initial

investment. o Financing: bootstrapping followed by business angels, VC and/or strategic investor o Exit: trade sale or IPO.

The following graph shows the expected evolution of a entrepreneurial venture. The first funding is called the “seed”. It’s normal for the beginning to be characterized by a fast-paced expenditure of money to which follow other rounds of investment (from 2, 3, even 4 or 5 if investors keep believing and want to keep investing in the success of the venture). By the time the venture has achieved a certain level of profit (positive cashflow) and has a stable position in the market, it’s time to distribute the gains (“harvest”).

Market Attractiveness • Potential / Size • Business / market fit • Product / market fit

• Market on the ”brink of Change”

2. Founding Team

• Promise / Experience • Clarity of vision • Founder / market fit • Founder / product fit • Chemistry / Investor fit

3. Competition

• If highly competitive market – what is different? • Leadership position? • First, Changing?

4. Product Value

• Do we have superior technology? • Can we protect / evolve it? • What is changing?

5. Financials (more mature firms)

• Revenue and growth • Customer acquisition growth & churn • LTV (Margin based), CAC (Returns), evolution over time.

Entrepreneurial logic considers unit metrics: Different logicèthink about 1 customer and what’s his worth? Then go from there to find how many customers we need to support our business and make profit OR when do we stop needing more money/investment? How much time and how many clients do we need to support our self - BOTTOM-UP)

Entrepreneurial organizatins will tend to look at unit metrics as there is little market data:

• Customer Aquisiton Cost (CAC) – how much does it cost us to get a client

• Customer Lifetime Value (CLV) – how much is a customer worth to us over x years?

• Average Order Value

• Purchase frequency per period

• Customer Churn per period

Venture: this type of entity aims to fill a gap in the market. Its goal is to generate profit. The expectation of financial gain is accompanied by the risk of failure. In general, one or more people invest in this kind of business, hoping to generate revenue as the company grows. The profit will be shared by all investors. If the business fails, they will lose money -> it’s not just a business but an entrepreneurship lead by an entrepreneur.

The difference?

An entrepreneur will follow his own path and focus on innovation. He or she will be highly adaptable and flexible, have a growth mindset and take risks. Passion and motivation are paramount in order to succeed.

Businessmen, on the other hand, often walk on a defined path. They undertake an existing business idea and try to improve it rather than coming up with something new. They focus less on innovation and more on generating profit and growing the company. A businessman will try to mitigate risks and use growth strategies that have stood the test of time.

An entrepreneur may become a businessman in the long run. The difference between the two lies in their mindset. A businessman is a market player, while entrepreneurs are market leaders.

The latter also have a higher risk tolerance and tend to use unconventional methods to ignite business growth.

1. Seed Funding “Bootstrapping”

2. Operational Funding

3. Investor Funding

   
   

As said before this is the “seed”, the initial funding to start the business and must be enough to put it on its feet and working. Bootstrapping also means saving as much as possible (reducing needed funds). These first are more “personal”, they keep the control, ownership, and responsibility on the founder’s hands:

Founders:

o Use your own assets (garage companies)

o Cash: accumulated savings; credit card (not recommended) o

Take a second mortgage on your home

- Friends and family:

o Are they ideal investors? (what if it goes wrong – can cause personal life problems in the short and long term; also if family is involved, closures are delayed even if not avoidable – more debt, don’t want to disappoint)

o Can they provide collateral for a loan? (they don’t need to give money exactly and don’t suffer any losses if it fails – however they will lose the collateral assets if the venture fails)

o Can they open any doors? (okay, they can be investors but what more than money do they “bring to the table”? Knowledge or expertise? Good network and connections?)

-  Crowdfunding:

• -  How may a crowdfunding investor monitor and add value? (same issue as before, many times the investors are even anonymous so the only “gain” is usually the money itself)

• -  Perverse incentives? (ex: movie “The Producers”)

• -  Pre-selling of products to crowdfund (before they’re even mad/launched – needs buzz)

How can we gain better financial flexibility within our daily operations?

- Suppliers:

o Negotiate credit terms

o Make them see you as a strategic partner o Do you want them as an investor?

§ Under what terms?

How will your potential future investors (VC?s?) react?

Customers:

o Make them see you as a strategic partner -> convince them to pay fast or to finance your purchases;

Do you want them as an investor? (Their involvement brings credibility to the venture

Pre-orders and purchases (gain capital before the costs appear)

Cash management:

o At early stages cash is a very scarce commodity: save it:

Limit your costs to the absolute minimum

Garage company?

Starting with your own salary -> Negotiate generous payment terms with suppliers, Minimize your inventory; be as “just in time as possible”.

-  NOTE: 1st pay taxes (illegal not to), then suppliers (we need them more for the business), then employees (are more loyal to company specially if they also believe in the business and likely won’t want to leave unpaid – they want to get the return of their effort and probably even hope to get more from the “sacrifices” made)

 GOAL: Make it “linear”:

There’s also the option for investor funding (third parts, non-relate to the founder) who are willing to invest their money in the success of the business with the main intention of gaining big profit back. However, and contrary to the before mentioned funding types, this capital causes some loss of independence, control, and ownership of the venture. There are 2 main types of investors:

- Angel Investors / Corporates: o They’re individuals who have money and want to “take risks” and contribute a lot, are more personally invested. If angels have more than 25% ownership they can block decisions and injections – they also want to give advice, and may put pressure on what they want which is not always the best

Venture Capital / Corporates: o VCs are companies dedicated to the management and application of investors’ funds in high potential ventures. They are more professional and distant and also have more capital capacity (ex: 1-5million capital investment with an expected exit value of 50million), more professional but makes founders lose control of company: sometimes liquidity clauses happen (“I get 5 times my investment if the company is sold at any time”, high risk) - VCs bring money AND connections to the table. They usually come later into the process since they normally like to invest in businesses that already exists and not in air-floating ideas and hypothesis –it’s not seed capital it can be in even larger quantities to really help to scale the business.

• Angel investors are generally more eager to place a big bet on a startup with an interesting idea, whereas a VC firm will want to see growth potential.

• On average, VC firms will invest a larger amount of money than angel investors, but VC investors will also get a higher equity stake in the company.

• Perhaps the most important difference is that VC firms usually demand that they have some level of operational control, whereas angel investors prefer to be passive investors.

Underlying profitability

• Look at unit economics and scalability

• Key costs and revenue drivers

  
  

Asset Intensity

• Net Working Capital & Fixed Assets

• How much will the business need as it grows?

Rate of growth

• How fast does it need to/ will it grow?

• What does that mean for cash usage/needs?

Novely / Maturity of Technology

• How much extra investment will we need?

• Technology development

• Customer adoption cost

-> Cumolative cashflow needs over time

Start-up Phase:

• Vision of what can be; effectualy reasoning drives decision-making

• Initial Growth Phase

• First clients, first sales, first learnings • Vision gets clearer, start to develop more strategic reasoning.

• Rapid Growth Phase

• Vision and business strategy are clear • Need to build the organizaiton that can deliver the business strategy

• Continuous Growth Phase

• Vision, strategy and operating model are clear and being optimised • Organization has been built and is scaling; need to focus on culture and collaboration

Step 1: Differentiation of responsibilities o Horizontal -> specialization by function / department / area o Vertical -> usually people make a lot of mistakes

Step 2: Standardization

o Adoption of common, repeatable practices and procedures o In startups people don’t like it because it tells people what they have to do (lose personal freedom)

Step 3: Formalization

o Documentation of explicit rules and processes, but also of data collected.

-> making it visual and explicit

o GOOD FOR SHAREHOLDERS (the company is delivering what they promised)

• Step 4: Integration

o Ensuring alignment, collaboration and connectivity between the differentiated areas of the business.

o All about leadership!

Step 1: Informal “ad hoc”1 practices

o One room, informal communication, no process formalization or standardization (no need for it to operate)

Stage 2: Disciplined Planning & Problem Solving

o First indication of horizontal differentiation

o Start standardizing processes

Stage 3: Defined Structure and Roles

o More horizontal and vertical differentiation (reporting lines)

o Standardization is the norm o Hire people

Stage 4: Improved Formalization, Standardization & Repeatedly o As headcount increases, more need for structure

o Aiming to formalize everything

Stage 5: Integration

o Mission, Vision, Strategy alignment

o Leadership teams, departments, control and governance

Differentiation of responsibilities o Horizontal – specialization by function/ department/area (MKT, Logistics, Finance...) o Vertical –roles and responsibilities by tiered, hierarchical levels (CEO, VPs, Head, TLs.,...)

• Standardization: Adoption of common, repeatable practices and procedures

• Formalization: Documentation of explicit rules and processes, but also of data collected (good for

  shareholders because company is delivering what was promised)

• Integration: Ensuring alignment, collaboration, and connectivity between the differentiated areas of

  the business – it’s all about leadership here

  
  

NOTE: there is “THE PARADOX” between simultaneously “following the rules” (to reach efficiency levels) & “challenging the rules” (for innovation and growth). For a startup, it’s hard to reach equilibrium here because they are innovative and non-traditional (“challenge” more than “follow”) but at the same time

As the company grows it’s important that the entrepreneur and his/her mindset grow as well. There needs to be a transition from entrepreneur to CEO - which carries personal challenges in three dimensions: future-orientation, responsibility, and market-awareness. This means that the entrepreneur must simultaneously:

-> Extend their time horizon (from today and next week, to months and years in the future)

-> Change predominate behavior patterns from doing and deciding, to delegating and managing, to

leading and inspiring

-> Shift focus from the internal and operational aspects of the company to the external and strategic elements of the broader competitive environment

To succeed it’s necessary to build the organization (right people) that can build the business (note: it’s normal to lose people at every stage). Traditionally, there are predictable stages of corporate growth as seen in the figure:

However, and as we will see, this same predicted growth “spiral” is repeated within each phase of growth. First, let’s just see which are the phases of growth: