Entrepreneurship Exploration Test 1

Cash Flow

Def: Money that comes into the bus. That you can then use for capital; The total amount of money being transferred into and out of a business, especially as affecting liquidity Most entrepreneurs fail by running out of cash, and this cash flow shortfall is usually based on overly optimistic revenue forecast Greater free cash flow = greater opportunity

Opportunity Recognition

I. At heart of entrepreneurial process II. Opportunity recognition is experimenting with new ideas III. Part of the three aspects of courage · 1. Moral strength and principles · 2. Being a fearless experimenter · A lack of fear of failing at the experiment · And most undertakings · And a lack of fear of conflict that may arise

Who Should Write a Business Plan (p. 164)

I. Do not hire outsiders to do your plan. II. Writing the business plan allows the founders to develop their venture at a detailed level. III. No quality investor will spend time with a team that outsourced this critical exercise.

Opportunity Recognition (p. 32-33)

o At heart of entrepreneurial process o Opportunity recognition is experimenting with new ideas o Part of the three aspects of courage § 1. Moral strength and principles § 2. Being a fearless experimenter § A lack of fear of failing at the experiment · And most undertakings · And a lack of fear of conflict that may arise

Venture Opportunities (p. 122-126)

o Criteria for evaluating venture opportunity § Industry and Market § Economics § Harvest Issues § Competitive Advantage Issues § Sustainability § Management Team § Fatal Flaw Issue - Personal Criteria § Strategic Differentiation

Customer Service

o Customer service is the direct one-on-one interaction between a consumer making a purchase and a representative of the company that is selling it. o Most retailers see this direct interaction as a critical factor in ensuring buyer satisfaction and encouraging repeat business.

Boot strapping

o Describes a situation in which an entrepreneur starts a company with little capital, relying on money other than outside investments. o An individual is said to be bootstrapping when they attempt to found and build a company from personal finances or the operating revenues of the new company.

Barriers to Entry (p. 120 & 125)

o If an industry has low entry barriers it is unattractive, so a firm needs to be diligent in examining these. Things like a favorable window of opportunity, proprietary protection, regulatory advantage, or other legal or contractual advantage is attractive. Other advantages are response or lead times and knowledge of industries and contacts that only come with experience. o High potential: § Knowledge to overcome § Proprietary protection: Have or can gain § Response/lead time: Competition slow; napping § Legal, contractual advantage: Proprietary or exclusivity § Contracts and networks: Well-developed; accessible § Key people: Top talent; an A team o Low potential: § Proprietary protection: None § Response/lead time: Unable to gain edge § Legal, contractual advantage: None § Contracts and networks: Crude; limited § Key people: B or C Team

Financial Practices (p. 88)

o Leading financial practices of fast-growth firms § Anticipate multiple rounds of financing (an average every 2.5 years) § Secure funding sources capable of significantly expanding their participation amounts. § Utilize financing vehicles that retain the entrepreneur's voting control § Maintain control of the firm by selectively granting employee stock ownership § Link the entrepreneur's long-term objectives to a defined exit strategy in the business plan

Private Equity (p. 14)

o Long-term perspective, not liner o The U.S. investment and capital markets have been an integral part of this revolution in entrepreneurship o It is important to recognize the long-term resilience of the system o Building an entrepreneurial society § The poor get richer § 3 that made the journey - profiles of: · Adam: The Union Path · Helen: The Corporate Ladder · Lanice: The Enterprising Route § Create equal opportunities § Economic and social mobility increases with entrepreneurship

Entrepreneur vs. Manager (p. 30)

o Managers create an agenda by planning and budgeting; Leaders by establishing direction o Managers develop a human network for achieving the agenda through organizing and staffling; Leaders do so by aligning people; o Managers execute by controlling and problem solving; leaders by motivating and inspiring o Managers produce a degree of predictability and order; leaders produce change.

Scalability (p. 113)

o New Venture means thinking about scale -- the ability to build a business beyond a sole proprietorship and to build one that can grow with the right resources and people while building equally for you and your investors. o Only ~5% of ventures emerge from the pack to grow into big companies. Pattern recognition of their attributes is what best identifies their attributes vs. a formula or execution checklist.

Entrepreneurship Age Requirements (p. 37)

o No age requirements! o The average age of entrepreneurs starting high-potential businesses is in the mid-30s, and there are numerous examples of entrepreneurs starting businesses in their 60s. What is critical is possessing the relevant know-how, experience, and contacts that greatly facilitate recognizing and pursuing an opportunity.

Entrepreneurship Process

o Opportunity recognition is at the heart of the entrepreneurial process o The entrepreneurial process starts with opportunity o Opportunity-driven o The possibility of greater opportunity when there are greater gaps in available information and knowledge

Solving a Problem (p. 31)

o Persistent in solving problems o Innovative solution to a compelling market problem

Innovation (p. 11-12)

o Spirit of innovation at the heart of entrepreneurship o Most orgs using technology for growth o Small entrepreneurial firms (since WWII) are: § Responsible for half of all innovation § Credited with 95% of all radical innovation § Led to the creation of major new inventions and technologies

Market Based Opportunities (p. 33)

o Successful entrepreneurs consistently focus on the market-based opportunity rather than the money, resources, contacts, and appearances. o Think opportunity first, cash last

Philanthropist (p. 13-14)

o Successful entrepreneurs give back to the community. § New buildings, classrooms, athletic facilities, and universities § Local buildings, stadiums, science or art centers o Governments inefficient at solving the world's problems

Entrepreneurship Myths (p. 37)

1. Entrepreneurs are born, not made 2. Anyone can start a business 3. Entrepreneurs are gamblers 4. Entrepreneurs want the whole show to themselves 5. Entrepreneurs are their own bosses and completely independent. 6. Entrepreneurs work longer and harder than managers in big companies 7. Entrepreneurs experience a great deal of stress and pay a high price 8. Start a business and fail and you will never raise money again 9. Money is the most important startup ingredient 10. Entrepreneurs should be young and energetic 11. Entrepreneurs are motivated solely by the quest for the almighty dollar 12. Entrepreneurs seek power and control over others 13. If an entrepreneur is talented, success will happen in a year or two 14. Any entrepreneur with a good idea can raise venture capital 15. If an entrepreneur has enough startup capital, he/she cannot miss 16. Entrepreneurs are lone wolves and cannot work with others 17. Unless you attained 6001 on your SATs or GMATS, you will never be a successful entrepreneur

Business Plan (p. 163)

1. Great way to analyze an opportunity while gaining experience working together 2. Developing The Business Plan § Culmination of a usually lengthy, arduous, creative and iterative process § Will carefully articulate the market, business model, investment requirements, risk, and returns on the opportunity § Is obsolete as it emerges from the printer but is an important work in progress - which must be completed to raise outside capital, attract key advisors, directors, and team members 3. Big diff. btwn screening an opportunity and developing a bus. Plan 4. A business plan is the start of a relationship with the investors and bankers § It's a work in progress

Steps to Writing a Business Plan

1. Segment Information: An overall plan needs to be devised and needs to include priorities 2. Creating an overall schedule a) Next, create a specific list of tasks, identify priorities and who is responsible for them b) Determine when they will be started and computed 3. Creating and action calendar: Tasks on the to do list need to be placed on a calendar 4. Doing the work and writing the plan. · The necessary work then needs to be done and the plan written · If the work is done well, the plan will be straightforward to put together.

Entrepreneurship Characteristics (p. 29-30)

3 Characteristics of an Entrepreneur: 1. The need for achievement - for measurable personal accomplishment against a self-imposed standard not in competition with others 2. The need for power - to influence others and to achieve an "influence goal" 3. The need for affiliation - to build a warm relationship with someone else and/or to enjoy mutual friendship. Intrinsically motivated, tolerate ambiguity, innovative, effectively commercialize technologies, high energy leaders, can mitigate risk

Please explain the expression: The numbers in the plan don't matter.

A business plan is obsolete before it goes to the printer. The process of developing the business plan focuses the entrepreneur's attention on gathering, detailed data, interpreting it, and presenting it clearly. The actual figures developed are less important than that the economics—value proposition and business model.

Business Plan Characteristics

A business plan is the end result of a lengthy, arduous, creative, and iterative process. It articulates the merits, requirements, risks, and potential rewards of the opportunity. A business plan is prepared for two audiences: potential investors and the entrepreneur and his or her management team. It is difficult to raise capital from informal and formal investors without a business plan. Potential investors will scrutinize the business plan to be sure the team understands the venture opportunity and is committed to it. The business plan also benefits the founders. In the process of planning and of writing the business plan, the entrepreneur will examine the significant risks and problems, the long-term profit prospects, and the future financing and cash flow requirements. Different strategies and resource requirements for launching can be examined. This process provides a guide for the policies and actions of the firm over the first few years.

What is a business plan, for whom is it prepared, and why?

A business plan is the end result of a lengthy, arduous, creative, and iterative process. It articulates the merits, requirements, risks, and potential rewards of the opportunity. A business plan is prepared for two audiences: potential investors and the entrepreneur and his or her management team. It is difficult to raise capital from informal and formal investors without a business plan. Potential investors will scrutinize the business plan to be sure the team understands the venture opportunity and is committed to it. The business plan also benefits the founders. In the process of planning and of writing the business plan, the entrepreneur will examine the significant risks and problems, the long-term profit prospects, and the future financing and cash flow requirements. Different strategies and resource requirements for launching can be examined. This process provides a guide for the policies and actions of the firm over the first few years.

What is a dehydrated business plan, and when and why can it be an effective tool?

A dehydrated business plan usually runs from 4 to 10 pages. It covers key points, such as those in the executive summary. Such a plan documents the analysis of and information about the heart of the business opportunity, competitive advantages the company will enjoy, and creative insights that an entrepreneur often has. Since it can be completed in a few hours, the entrepreneur is able to continue operating a business. In many instances, investors prefer a dehydrated plan in the initial screening phase.

How does an idea differ from a good opportunity?

An idea is nothing more than a tool in the hands of an entrepreneur. An idea has no substance. In order for it to be an opportunity, someone must recognize it and take advantage of it. Thousands of ideas can be developed, yet most will not be attractive or feasible. An opportunity occurs when the right person is at the right place, with the right skills, at the right time.

High Potential Opportunities (p. 120-121 - Exhibit 5.6)

Can identify a market niche for a product or service that meets an important customer need and provides high value-added benefits to customers.

Describe in detail entrepreneurial leadership?

Entrepreneurial leadership is the ability of an entrepreneur to activate vision and a willingness to invest in new technology while maintaining a professional attitude and at the same time, while having patience. Entrepreneurs have different traits from managers and establish direction, align people, motivate and inspire and produce change. Entrepreneurial leaders share three common traits: perseverance, a builder's mentality, and a strong propensity for taking calculated risks.

How does experience help people create opportunities, and where do most good opportunities come from? Why is trial-and-error learning not good enough?

Experience is vital in looking at new venture ideas. Experienced entrepreneurs exhibit an ability to recognize quickly a pattern—and an opportunity—while it is still taking shape. The recognition of patterns is a creative process that is not simply logical, linear, and additive but intuitive and inductive as well. Herbert Simon contended that it takes ten years or more for people to accumulate what he called the "50,000 chunks" of experience that enable them to be highly creative and recognize patterns.

T/F: A real business opportunity is one in which the customers have a low sense of urgency and are unwilling to pay for a solution.

F

T/F: Entrepreneurs motivated purely by monetary reward typically build companies of substantial value.

F

T/F: Entrepreneurship works well in schools of business and engineering, but it has not been proven to be useful in fields such as architecture, medicine, and life sciences

F

T/F: Gearing entrepreneurs for competitiveness is likely to hinder the process of entrepreneurial resolution

F

T/F: Researchers found that new and growing smaller firms had little effect on the economy as a whole

F

T/F: Successful entrepreneurs seek power and control over others

F

T/F: The importance of an idea is often underrated, and the need for products or services that can be sold in enough quantity to real customers is overemphasized

F

T/F: The key to success is failing slowly

F

T/F: The threshold concept proposes that the odds of success change as a venture reaches a critical mass of over $8 million in sales and 50 employees.

F

T/F: Too much control and an obsession w/ orderliness are prerequisites to a successful entrepreneurial approach.

F

T/F: Value creation is a linear process as it requires a short-term perspective

F

T/F: The business plan is more of an end in itself than a work in progress

F -It's a work in progress!

T/F: It's best to hire outsiders to prepare a business plan.

F -YOU should do it!

T/F: A business plan carefully articulates the market, business model, investment requirements, and returns from an opportunity but does not include the risks involved.

F -includes risks

T/F: Business plans are seldom obsolete and last throughout the lifecycle of a product.

F -obsolete as it emerges from the printer -it's a work in progress

T/F: In a business plan, the bus. concept should be described vaguely in the executive summary to attract more venture captalists.

F -should be STRESSED in exec. summary

Sections of a Business Plan

I. EXECUTIVE SUMMARY · Description of the business concept and the business opportunity and strategy · Target market and projections · Competitive advantages · Costs · The team · The offering II. THE INDUSTRY AND THE COMPANY AND ITS PRODUCT(S) OR SERVICE(S) · The industry · The company and the concept · The product(s) or service(s) · Entry and growth strategy III. MARKET RESEARCH AND ANALYSIS · Customers · Market size and trends · Competition and competitive edge · Estimated market share and sales · Ongoing market evaluation IV. THE ECONOMICS OF THE BUSINESS · Gross and operating margins · Profit potential and durability · Fixed, variable, and semivariable costs · Months to breakeven · Months to reach positive cash flow V. MARKETING PLAN · Overall marketing strategy · Pricing · Sales tactics · Service and warranty policies · Advertising and promotion · Distribution VI. DESIGN AND DEVELOPMENT PLAN · Development status and tasks · Difficulties and risks · Product improvement and new products · Costs · Proprietary issues VII. MANUFACTURING AND OPERATIONS PLAN · Operating cycle · Geographical location · Facilities and improvements · Strategy and plans · Regulatory and legal issues VIII. MANAGEMENT TEAM · Organization · Key management personnel · Management compensation and ownership · Other investors · Employment and other agreements and stock option and bonus plans · Board of directors · Other shareholders, rights, and restrictions · Supporting professional advisors and services IX. SUSTAINABILITY AND IMPACT · Issues of sustainability of the venture · Impact on the environment · Impact on the community, nation X. OVERALL SCHEDULE XI. CRITICAL RISKS, PROBLEMS, AND ASSUMPTIONS I. THE FINANCIAL PLAN · Actual income statements and balance sheets · Pro forma income statements/ forma balance sheets · Pro forma cash flow analysis · Breakeven chart and calculations · Cost control · Highlights II. PROPOSED COMPANY OFFERING · Desired financing · Offering · Capitalization · Use of funds · Investor's return III. APPENDICES

Business Plan Uses (p. 163)

I. Will carefully articulate the market, business model, investment requirements, risk, and returns on the opportunity I. Raise outside capital, attract key advisors, directors, team members, or the like

Why do people say, "Ideas are a dime a dozen?"

Ideas have no real value of themselves. Of 100 ideas presented to investors, only a handful will be funded. An idea has the qualities of being attractive, durable, and timely. It is anchored in a product or service, which creates or adds value for its buyer or end user. An idea may or may not be feasible. It may be too expensive or the market may not be big enough. There may not be a competitive advantage to pursuing it. There must also be a window of opportunity large enough to exploit.

Smartest person in the room

Most entrepreneurs are not the smartest person in the room - you wanna hire people smarter than you

What criteria and characteristics do high-growth entrepreneurs, venture capitalists, and private investors seek in evaluating business opportunities? How can these make a difference?

Private investors, venture capitalists, and high-growth entrepreneurs look for high potential, higher growth ventures. Private investors, unlike the venture capitalists, can invest smaller amounts and are prime sources for less capital-intensive startups and early-stage businesses. Investors also look for business founders who understand and use entrepreneurial principles and entrepreneurial reasoning.

Market Readiness (p. 83)

Refers to consumer trends and behaviors that seek new products or services

Low Potential Opportunities (p. 120-121 - Exhibit 5.6)

Represented by a poor understanding of customer requirements and market demands.

Do you agree with the saying "Entrepreneurs are made, not born." Why or why not?

Some characteristics are innate rather than acquired, including energy, health, and emotional stability; creativity and innovativeness; and intelligence. Recent research suggests that leadership is a complex subject, depending on the interactions among the leader, the task, the situation, and those being led; entrepreneurship may be closely related. There are also certain attitudes and behaviors that can be acquired, developed, practiced, and refined through a combination of experience and study, such as the ability to learn from mistakes and great perseverance and determination. These attributes do not guarantee success, however. Entrepreneurs are able to improve these skills through nurturing and practicing them

"One person's ham is another person's poison." What does this mean as it relates to entrepreneurship?

Strengths vs. Weakness Entrepreneurs and would-be entrepreneurs have different strengths and weaknesses and different likes and dislikes. It is important to thoroughly explore your own personal strategy before you set entrepreneurial goals. While you may like running a lifestyle business and supporting your family comfortably, your friend may prefer bigger risks and prefer taking a high tech venture public, for example. Because we all have different interests and likes, it is important the entrepreneurial venture be a fit to a person's desires and interests for long-term success.

What are the most important skills, values, talents, abilities, and mind-sets one needs to cultivate as an entrepreneur?

Successful entrepreneurs share common attitudes and behaviors. They work hard and are driven by an intense commitment and determined perseverance; they see the cup as half full, rather than half empty; they strive for integrity; they thrive on the competitive desire to excel and win; they are dissatisfied with the status quo and seek opportunities to improve almost any situation they encounter; they use failure as a tool for learning and eschew perfection in favor of effectiveness; and they believe they can personally make an enormous difference in the final outcome of their venture and their lives. They possess not only a creative and innovative flair, but also solid general management skills, business know-how, and sufficient contact. Most successful entrepreneurs follow a pattern of apprenticeship, where they prepare for becoming entrepreneurs by gaining the relevant business experiences from parents who are self-employed or through job experiences. There is also a strong connection between the presence of role models and the emergence of entrepreneurs. Ninety percent or more of founders start their companies in the same marketplace, technology, or industry they have been working in. Entrepreneurs are likely to have role models, have 8 to 10 years of experience, and be well educated. Successful entrepreneurs have emerged at the top of their class and at the bottom. You do not have to be a genius to found a business—there are many different kinds of intelligence. Finally, there are critical skills and capacities that are at the heart of entrepreneurial leadership and achievement that are not measured by IQ tests. Some of these skills and capacities are: leadership skills; interpersonal skills; team building and team playing; creativity; motivation; learning skills; persistence and determination; values, ethics, honesty, and integrity; goal-setting orientation; self-disciplined; frugality; resourcefulness; resiliency and capacity to handle adversity; ability to seek, listen, and use feedback; reliability; dependability; and sense of humor.

T/F: A strong management team recognizes the window of opportunity and develops competitive advantage to give a business additional leverage to exploit the market

T

T/F: All successful entrepreneurs share characteristics of raw energy and intelligence.

T

T/F: Entrepreneurship results in the creation, enhancement, realization, and renewal of value, not just for owners, but for all participants and stakeholders.

T

T/F: In the context of psychological motivation of entrepreneurial behavior, the need for power is the need to influence others to achieve a goal.

T

T/F: Knowing the difference btwn a good idea and a real opportunity is vital for would-be entrepreneurs.

T

T/F: Studies indicate that smaller firms generate twice as many innovations per research and development (R&D) dollar spent as the established multinationals.

T

T/F: Successful entrepreneurs possess a well-developed capacity to exert influence w/o formal power.

T

T/F: The classic expression of entrepreneurship is the raw start-up company, an innovative idea that develops into a high-growth company

T

T/F: The primary reason that first-time entrepreneurs run out of cash at a faster rate than they bring in customers and profitable sales is that they have not focused on the right opportunity

T

What should a complete business plan include?

The business plan should include: the executive summary; an analysis of the industry and the company and its products or services; market research and analysis; details of the economics of the business; the marketing plan; design and development plans; manufacturing and operations plans; descriptions of the management team; an overall schedule; critical risks, problems, and assumptions; the financial plan; proposed company offering; and appendices. The details of these segments are presented in Text Exhibit 7-1 "Business Plan Table of Contents."

What is meant by classic entrepreneurship and the high- potential venture?

The classic expression of entrepreneurship is the raw startup company, an innovative idea that develops into a high growth company. Examples include Microsoft, Home Depot, Intuit, and Staples. In the 1970s and 1980s, large corporations, such as IBM, were decimated by upstart ventures. While the giants downsized, cutting jobs, these post-brontosaurus companies flourished and added jobs. Not all entrepreneurial firms experience rapid growth. A small percentage of these firms, high potential ventures, grew at a compounded annual growth rate of 30 percent or more for three years.

How does a manager differ from a leader?

The differences between management and leadership are summarized in Text Exhibit 2.1 Managers create an agenda by planning and budgeting; leaders by establishing direction. Managers develop a human network for achieving the agenda through organizing and staffing; leaders do so by aligning people. Managers execute by controlling and problem solving; leaders by motivating and inspiring. Managers produce a degree of predictability and order; leaders produce change.

What are the most important determinants of success and failure in new businesses? Who has the best and worst chances for success, and why?

The failure rate for startups is 46.4 percent. Avoiding this pattern of failure is a result of several factors. Successful firms find a way to either direct the arena of competition away from the areas of competitive disadvantage or find creative ways to develop the required competency. The chances of survival and success are lower in small, job-substitute businesses. Failure rates also vary across industries. Retail trade, construction, and small service businesses account for 70 percent of all failures and bankruptcies. Ninety-nine percent of failed companies have fewer than 100 employees. The odds for success increase when the venture reaches a critical mass of at least 10 to 20 people with $2 to $3 million in revenues and is currently pursuing opportunities with growth potential. Survival rates more than double for firms that grow, and the earlier in the life of the business that growth occurs, the higher the chance of survival.

What are the most important things you can do to get the odds in you favor?

The odds for success increase when the venture reaches a critical mass of at least 10 to 20 people with $2 to $3 million in revenues and is currently pursuing opportunities with growth potential. Businesses that attract startup financing from successful private venture capital companies are also more likely to succeed. Finally, founders of successful higher potential ventures insist on backers and partners who do more than bring just money, friendship, commitment, and motivation to the venture. They surround themselves with backers who can add value to the venture through their experience, know-how, networks, and wisdom.

Describe who should be an entrepreneur and who should not?

This chapter has reviewed the various characteristics of successful entrepreneurs. As a review, most successful entrepreneurs listed three attributes as the principal reasons for their success: The ability to respond positively to challenges and learn from mistakes, Personal initiative, and Great perseverance and determination. Individuals with these attributes should consider entrepreneurship. It should also be noted that a person's interest in entrepreneurship may change over time with experience and work history as well as an improved ability to spot trends, patterns, and opportunities.

What conditions and possible societal and economic changes could drive future opportunities?

This involves guessing the future. Trends that are currently occurring may not continue. After the September 11 attacks our society changed focus overnight as did the Tsunami in Indonesia and Hurricane Katrina on the U.S. gulf coast in 2005 or Ebola's rise again in late 2014. Few people foresaw that event occurring. Technological changes are almost as difficult to predict. Some trends are more easily determined. The U.S. government tracks population shifts, which can indicate societal trends. And the economy will always go from boom to recession to boom.

Opportunity Scalability (p. 83)

o Successful entrepreneurs work hard to mitigate risk before launching their venture o Most entrepreneurial endeavors fail by running out of cash, and this cash flow shortfall is usually based on an overly optimistic revenue forecast. It is important to think big enough about a scalable company o Good opportunities have risks - the perfect deal has yet to be seen o The possibility of greater opportunity when there are greater gaps in available information and knowledge

Self Made Entrepreneurs (p. 14)

o The Millionaire Next Door by Thomas J. Stanley and William D. Danko o Millionaire - a person with a net worth of $1 million or more o Traits of these millionaires § 2/3 are self-employed § Over 80% accumulated their wealth in one generation § 57 years old § Live below their means o Accumulated their wealth through hard work, self-discipline, planning, and frugality, all entrepreneurial virtues

Lifestyle Business

o Vast majority strive to be o Business developed around the bus owner/founder o Spotted Cow - family company didn't want headaches of going big -> keep it in Wisconsin o Can still be very successful