ENT3003 Exam 3
Courage
Understand failure is part of learning to succeed
Business Model
Framework established to create value for consumer while preserving some value for entrepreneur
3 F's
Friends, family, fools (Treat these like formal investments though)
Websites for equity crowdfunding
Fundable, Crowdfunder, AngelList, and Circle Up
Razor & Razor Blade Model
Generate huge revenue from offering physical product (razors) at low cost to encourage sales of more expensive razor blades
Data Revenue Model
Generate revenue by selling high-quality, exclusive, valuable information to other parties - data brokers collect 3rd party info and tech giants collect personal user info
Advantages for crowdfunding
Get money to start business, provide idea of level of enthusiasm and interest in product prior to launch, save money on marketing, test ideas and get customer feedback at low cost, build relationships with customers, different options of crowdfunding, exciting process
Advantages to Formal Investments
Get needed money, gain advice and guidance from experienced people, get contacts & connections
Multiparty Business
Giving a product to one party for free but charging other parties - ad supported free content on Internet - free kids admission but charge adults - must balance free and paying users
Emotions after failure are most similar to...
Grief
Angela Lee Duckworth, u penn psychologist, discovery:
Grit is a trait that supersedes traditional methods of measuring talent
Break-Even Analysis
Helps entrepreneurs quickly determine what is needs to sell monthly/yearly to cover costs of running business
Skimming
High pricing, used for new products with no competition ex: IPad
Professional Revenue Model
Provide professional services on a time & materials contract ex: lawyers, accountants
Amortization
Relates to intangible assets like patents, copyrights, trademarks, and business methodologies - matches useful life with revenue generated
Tips for writing formal business plans
Remove the Fluff - describe with direct language, not decorative Define your Target Audience Be Realistic - earns strong ideas merit Focus On Your Competition Understand Distribution Channels - NO VAGUENESS Avoid Hockey Stick Projection - shows few sales in Year 1, but tons in 3/4. Graphed sales looks like hockey stick (very unrealistic) Avoid Typos & Inconsistencies Be Honest About Weaknesses Use Visuals
Interest Expense
Represents interest due in period on any borrowed money, good indicator of company debt
What does bootstrapping provide?
Resources
Advertising Revenue Model
Revenue gained through advertising products & services (ex: Google AdWords or promoted/suggested content)
Goal of Experimentation
See it as an opportunity for further learning and better decision making, rather than a series of failed tests - not to conduct the "perfect" experiment
Sales Price Per Unit
Selling price
What happens when you commit to managing a crowdfunding campaign?
Send out surveys to gain feedback - engage with audience
Target-Return Pricing
Set price based on amount of investment you have put into business
Alternative to Formal Business Plan
Social Capital
Resilience
Strength to recover from failure and overcome obstacles in order to persevere towards achievement of long-term goals
Crowdsourcing
Use the internet to attract, aggregate, and manage ostensibly inexpensive or even free labor from enthusiastic customers and like-minded people - resource for talent and labor - form of bootstrapping
Bootstrapping Techniques
Using the home as the office, renting before buying, minimizing personal salary, developing contacts, offer equity reimbursement, low operating inventories
What size projects use crowdfunding?
Usually small requiring less than $1,000
Study done on grit
West Point incoming cadets completed grit questionnaire to predict what cadet would remain at West Point after summer - higher grit levels = more likely to stay - also have growth mindset
Net Income
What is left after costs, expenses, and taxes are paid. Shows real bottom line
Conscientiousness
Working tirelessly in the face of challenges and toward the achievement of long-term goals
Process Inadequacy
Wrong (or missing) processes set up in the organization, causing communication breakdown
Lessons Learned by Kurt Theobald
- Fail Fast, but not too fast - beware of "shiny object syndrome" - find your formula - know who you are - know who are you - find your deeper purpose - focus on others - recognize when approach is wrong
Market value raised globally through crowdfunding campaigns
$34 billion
Revenue Model
A key component of the business model that identifies how the company will earn income and make profits - explains how entrepreneurs make money & capture value from delivering CVP
Exploratory Experimentation
A method whereby market tests are conducted to get early feedback and acquire important learning and information
Sweat Equity
A non-monetary investment that increases the value or ownership interest created by the investment of hard work for no compensation.
Concept Statement
A one sentence-paragraph description of your vision for your product/service. Should include all features of product, potential problems, target market - needs to be easy to understand
The Pitch Deck
A presentation highlighting the essential elements in a feasibility study & business plan (also called "launch plan") - needed for collegiate competitions, incubator apps, capital funding - replaced formal business plans - describes product, gets interest
Pro Forma Income Statement
A projections or estimate of what a company could potentially do. Estimates impact of revenue/expense on profit
Google Sketchup
A software tool used to create a sketch of a 3D model which save money
Planning
A verb/process of envisioning the future for a business, including what one plans to do and how one plans to do it - plan doesn't equal planning - planning pushes you to take action - plan organizes the actions - STARTS WITH A VISION
Business Model Canvas (BMC)
A visual plan useful for identifying gaps in business idea & integrating various components - 1 page with 9 blocks of business model
Licensing Revenue Model
A way of earning revenue by giving permission to other parties to use protected intellectual property (copyrights, patents, & trademarks) in exchange for fees ex: Apps are designed and licensed to Apple
Alibaba.com
A website that lists china's manufacturers, products, and capabilities. Search the site to find companies with similar products. Can instant message factory using English-Chinese system
How many businesses received formal equity investment out of 627,000?
About 8,500
Biggest problem for unprepared successful crowdfunders
Failure to deliver promised rewards
What is similar across different types of economies?
Fear of failure rates
Break-Even Units
Fixed costs / (sales price per unit - variable cost per unit)
How much did Michael Dell bootstrap dell computers with?
$1,000
XPRIZE
Focuses on finding solution to complex problems like air and ocean pollution and adult illiteracy. Saved on labor costs and found creative ways t build spaceship`
Questions to ask when strategizing revenue
- How much are my customers willing to pay? - How many customers do I need? - How much revenue can be generated from sales? - How much does each revenue stream contribute to the total?
Lending Model
A crowdfunding model where funds are offered as loans with the expectation that the money will be repaid. - different forms (expect interest, when to be paid back) - elements of patronage model can be within lending model
Questions To Ask During Planning
- What is your business and how does it add value? - Who is your customer? - How big is the market? - How will you enter the market? - What do you know about the industry? - Who is your competition and why are you better? - Who is on your team and what do they bring to the table? - What are your financial projections?
Signs of Fear of Failure
- children who are punished for failures but not rewarded for achievements - family with maternal irritability or paternal absence - people raised that failure is unacceptable won't view mistakes as learning opportunities - anxiety, lack self-esteem, reluctant to new things
Tips for Deciding Pricing
- know current rates - ask competition - talk to family/friends - think about customers
Support for not writing business plan
- plan is old as soon as it's made - based on untested assumptions - financial projections are too far out to have validity - process discourages action
How Metro Makes Profit?
- wealthy readers - paid to feature big events - easy to read content means low editorial costs - control news racks w distribution network
Initiatives to remove failure stigma
-FAILFaire - F***Up Nights - Pink Boa FailFest (DoSomething.org)
3 parts of business plan
-business concept (discuss industry, business structure, your product/service, and how you want to make your business successful) -marketplace section (describe and analyze potential customers and the competition) -financial section (balance sheet, income/cash flow, financial projections)
Income Statement (Profit & Loss Statement)
A financial report that shows revenue, expenses, and profit for a period of time, typically a month, quarter, or year. - subtracts COGS and expenses from total revenue - need pro-forma income statement - reflects depreciation and amortization of assets
Coping Strategies for Fear of Failure
1. Reframe specific goals to become achievable 2. Separate feelings from facts, esp relating to revenue 3. Allow yourself to feel fear (take deep breaths for 2 mins) 4. Seek support from role models
The Business Brief
2-3 page document outlining company overview, value proposition, customers, and milestones - less visual, sent to stakeholders
Bootstrapping Sources of Income
3 F's : financial assistance other than investments
Kickstarter video percentages
33% successful WITHOUT videos 66% successful WITH videos
Percentage of crowdfunded products delivered later than expected
75%
Business Plan
A formal lengthy written document discussing the business concept, product mix, marketing plan, operations plan, development plan, and financial forecast - must be thought of as work in progress because nothing ever follows plans - 20 - 40 pages of mission, strategy, tactics, goals , financials, 5-year forecast - 3 parts - useful for companies with history of data/operations
Pivot
A change in business direction after small "fail" - change product, customer segment, revenue model, distribution channel - small fail is event (valley), big fail is collapse over time
Investor Model
A crowdfunding model that gives backers an equity stake in the business in return for their funding. - different forms : buy shares in company(ownership) or take share of future revenue (without ownership)
Reward-based Crowdfunding
A crowdfunding model that rewards backers for supporting a project ex: product samples or experiences
Feasibility Study
An essential planning tool that enables entrepreneurs to test the possibilities of an initial idea to see if it is worth pursuing - Focuses on testing - solid foundation for developing business plan - focus on size of market, suppliers, distributors, and entrepreneur skills - assesses business concept viability - "Will my venture work?" - only for entrepreneurs eyes so be honest - key is speed - "Go/No Go"
Lower % Fear of Failure
Angola - 16% Columbia - 23%
Customer-Led Pricing
Ask customers what they are willing to pay, then offer it at that price - good for attracting people
Biggest Startup Failure
Bankruptcy or forced sale
GEM failure rate
Based on people who admit to perceiving opportunities to start a business but feel prevented from acting due to fear of failure. Failure is correlated with national culture - focuses on perceptions of 3 economies (perceived opportunities, perceived capabilities, fear of failure) and degree to which those capable of staring a business may intend to do so over next 3 years (entrepreneurial intentions)
Inattention
Becoming sidetracked from core business, by moving in a new business direction or delegating too much too soon with no follow up
Types of people who back crowdfunding campaign
Between 24-35 years old, men, income > $100,000
Variable Cost Per Unit
COGS plus operating expenses (inventory) that fluctuate with product production
Cost-led Pricing
Calculate all costs and expenses and add expected profit by predicting sales volume to get approx price
Vivid Vision
Challenges an entrepreneur to imagine what a business could be 3 years into the future which is a reasonable amount of time to "nail down" specific, measurable goals - leave usual working environment, go outside - write 3 page description/sketch thoughts - not steps or how to build business
Utility & Usage Revenue Model
Charge customers fees on basis of how often good/service is used - Pay-as-you-go model - ex: hotels, car rentals
Subscription Revenue Model
Charge customers to gain continuous access to product/service
Defining your brand
Choose 3-5 words that describe business as different than existing ones
Perseverance
Commitment to long-term goals through purposeful, deliberate practice
Excellence
Committing to activities that enhance skills, and prioritizing improvement over perfection
Build Blame-Free Culture
Communicate clearly what failures are acceptable and unacceptable ex: reckless conduct is bad but small fails during experimenting is okay
Reasons to bootstrap
Complement or avoid entirely traditional financing sources. Most entrepreneurs don't have business history or enough customers
Competition-Led Pricing
Copy the prices of other businesses selling the same/similar product
2 Types of Costs
Cost of goods sold (COGS) and operating expenses
Fixed Cost
Cost stays the same regardless of revenue generated or product amount produced
Operating Expenses
Costs of running a business, including rent, utilities, administration, marketing/advertising, employee salaries etc. - cutting expenses only gives short-term gain
4 Revenue Drivers
Customers, price, frequency, selling process - test hypotheses to determine revenue drivers
Deviance
Defies legal & ethical boundaries, leading to mismanagement of the venture ex: Theranos blood testing startup
Entrepreneurship is a method that ___
Demands practice
Failure Spectrum
Describes situations that may be perceived as failures, yet can sometimes have positive rather than negative outcomes - ranges from blameworthy to praiseworthy
Why did WHO use crowdsourcing?
Design a video to encourage HIV testing (contest in China)
What costs have technological advances reduced costs for entrepreneurial businesses?
Design, manufacturing, accountant & bookkeeping, sales
Parts of Failure Spectrum
Deviance, Inattention, Lack of Ability, Process Inadequacy, Uncertainty, Exploratory Experimentation
2 types of free financial models
Direct Cross-Subsidies Multiparty Markets
Elements of Feasibility Study
Does the idea fulfill a need or solve a big problem? Is there short/long term market potential? Who are customers and what're they willing to pay? Does the opportunity provide competitive uniqueness? Is model feasible/viable?
Classy Llama
E commerce firm founded by Kurt Theobald, 11th startup in 5 years. 10 past failures taught valuable lessons that led to success
Psychological pricing
Encourage customers to buy based on their belief that the product is cheaper than it really is - flash sales, bogo, bundled products - prices ending in .99 - used by fast food restaurants
Introductory Offer
Encourage people to try product by offering it basically free for certain amount of time
What problem was the Tea-In-One product able to solve?
Environmental Concerns
Kickstarters most backed project
Exploding kittens - 220,000 supporters
Largest global fundraising site
Indiegogo
Why is failure difficult for entrepreneurs?
It is hard to separate personal failure from professional failure since the identity of the business is tied to the identity of the entrepreneur
Most established crowdfunding site
Kickstarter
Key to written plans
Knowledge - showing you've done hw to impress audience
Uncertainty
Lack of clarity about future events that cause entrepreneurs to take unreasonable actions
Pebble Time record
Largest amount of money raised on crowdfunding platform
Other options to showcase business
LeanLaunchLab Lean Stack Plan Cruncher
What model supports micro financed loans?
Lending & Patronage
Other factors to consider in pricing calculation
Livelihood & mistakes
Tips for crowdfunding
Make sure your product solves a real problem (communicate it in 2 sentences), test & refine your idea, be prepared (to provide product), seek & accept advice, start campaign, money matters, focus on the pitch (include video), make the most of crowdfunding opportunities, commit to campaign, avoid crowdfunding curse (delays and failed deliveries due to under preparation)
Freemium Revenue Model
Mix free basic services with premium/upgraded services. Create at least 2 tiers of product - low end is free but limited -high end are more functional - ex: LinkedIn, SurveyMonkey, Skype, Metro newspapers
Highest % Fear of Failure
Morocco - 64% US - 35%
Loss Leader
Offer a product at a below-cost price n an attempt to attract more customers - special discounts or reducing prices - good for competing with established brand - Walmart & Amazon
4 contexts for crowdfunding
Patronage model, lending model, reward-based crowdfunding, and investor model
Backers
People who financially support crowdfunding ventures
Broker
People who organize transactions between buyers & sellers ex: eBay is auction broker, real estate brokers, Airbnb
2 types of Unit Sales
Physical goods & Intangibles
What benefits did Skybell get from crowdfunding?
Press coverage
Direct Cross-Subsidies
Price a product above market value to pay for loss of giving away a product below market value - customers who are pleased with free product pay for add-ons - more viable for web-based companies ex: cell phone companies lose money by giving out free phone handsets but cover less by charging monthly service fees, airlines have low far but fees for bags
Value-Based Pricing
Price product based on how it benefits the customer - buyers have major influence over pricing strategy ex: paying for water filter which will provide long term value - value can be pleasure or monetary
Printer & Ink Model
Printer is sold at low price but ink is very expensive which keeps generating revenue for manufacturer
Why did University of Washington use crowdsourcing?
Produce an accurate enzyme model using gamers who played online science game
3 rules of Kickstarter
Project must create something to share with others, project must be honest and clearly presented, project can't fundraise for charity, offer financial incentives, cover general business expenses, or involve prohibited items
One Reason Startups Fail - Eric Ries, author of Lean Startup
The allure of good plan, solid strategy, and thorough market research. - planning & forecasting is only accurate when based on long, stable operating history in static environment
Operating Profit
The amount left over from revenue once all costs and expenses are subtracted
Unit Sales Revenue Model
The amount of revenue generated by the number of items (units) sold by a company - used by retail businesses - 2 types of unit sales: physical goods & intangibles - razor & razor-blade model or printer & ink model
Deliberate Practice
The conscious effort to practice things we can't yet do - not doing the same thing over and over - must have purpose and long-term achievement goals
Depreciation
The cost of wear & tear on your physical assets such as machinery, equipment, and building - an asset with >1 year of life doesn't have whole cost on income statement in year its purchased
Fair Pricing
The degree to which both businesses and customers believe the pricing is reasonable - market testing is helpful
Intermediation Revenue Model
The different methods by which third parties, such as brokers (or middlemen) generate money
Cost of Goods Sold (COGS)
The direct cost of producing a product, occur when a sale takes place
Revenue
The income gained from sales of goods or services - commonality btwn all businesses
Franchising Revenue Model
The owner of existing business (franchisor) sells the rights to another party (franchisee) to trade under the name of that business - franchisor provides marketing, operations, and financing - franchisee pays royalties based of sales %
Bootstrapping
The process of building or starting a business with no outside investment, funding, or support - focuses on creative ways to access every available resource while minimizing spending - apply 8 parts of entrepreneurship model
Crowdfunding
The process of raising cash for a new venture from a large audience (the "crowd"), typically through the Internet - utilizes small contributions from large number of people - resource for money - form of bootstrapping
Grit
The quality that enables people to work hard and sustain interest in their long-term goals. Related to resilience bc perseverance is necessary to stick to long-term commitments
Business Failure
The termination of a commercial organization that has missed its goals and failed to achieve investors' expectations, preventing the venture from continuing to operate and resulting in bankruptcy/liquidation - can result in future improvements - failure is viewed as part of journey
Why do 42% of startups fail?
They don't solve a big enough problem
Other than money, why do entrepreneurs bootstrap?
They like the independence and control. Don't have to give away equity or explain decisions
3 Main Causes of Failure
They psyche, people mistakes, & market mistakes
What makes backers give larger amounts of money?
To be first to receive product when launched
Goal when using a video pitch
Total transparency (to sell the vision to people who don't know you)
Patronage Model
a crowdfunding model where backers do not expect any direct return for their donation or investment
Equity Crowdfunding
a form of crowdfunding that gives investors the opportunity to become shareholders in a company
Shiny Object Syndrome
a tendency to drop everything in favor of the latest new idea. Leads to many failures. Entrepreneurs need to be strategic about pursuing all opportunities at specific right times
Attributes of Grit
courage, conscientiousness, perseverance, resilience, excellence
Intelligent Failures
good failures that provide valuable new knowledge that can help a startup overcome hurdles and roadblocks - experimentation is necessary to find answers in never-explored situations - quick failures can produce positive results
How much money do most small businesses begin with?
less than $5,000. Formal investments are very rare
Bundled Pricing
packaging a set of goods or services together and selling them for lower price than if sold separately - customers see bargain - increase profit for company ex: fast food meals, cell phone packages
Intentional Iteration
process that involves prototyping, testing, analyzing, and refinement. Failure is part of experimenting
Lack of Ability
the lack of skillset to get the job done, entrepreneur is overextended. Good at the start but skills were needed as business grows - companies outgrow founders
