MGMT 160 FINAL
Basic Income Equation
Net Income = Revenues - Expenses
Who are Venture Capitalists? How are they different from angel investors?
They invest non-personal funds, are willing to take risks because they are looking for "home-run" companies who will give them exponentially greater returns on economic investments, they want more control such as a seat on the board or to replace the CEO because they give so much money, invest in stages to reduce risk and add pressure for company to meet goals
Fundamental Accounting Equation and what does "Dual Aspect" mean?
(Assets = Liabilities + Stockholder's Equity) -Dual Aspect means every transaction affects at least two items in the basic accounting equation.
What is an up round and a down round?
-An up round is when a venture increases in value in between financing events. -A down round is when a venture decrease in value in between financing events.
Two false schools of thought for what entrepreneurship is and why are they false?
-Entrepreneurship is an economic function and an entrepreneur is defined by the role in society. False because it doesn't make sense to decide what economic functions are entrepreneurial. -Entrepreneurs have a common set of individual traits. False because a single psychological profile doesn't exist.
What is strategy? What is operational effectiveness?
-The integrated set of choices that positions the business in its industry so as to generate superior financial returns in the long run -Operational effectiveness is performing business activities better than rivals (faster cheaper, less defects etc), this is not the same bc it's not integrated or unique and is very easy to copy
What 3 functions does the process of formulating a business plan serve?
-Validating ideas and what business opportunities are available in the market. - -How to communicate with potential investors about the company while raising money and attaining suppliers, investors, and customers.
When is the lean startup method not recommended?
-When mistakes must be limited (ie healthcare is risky). -When resources are plenty -When there is certainty about customer demand.
What are the Three Core Financial Statements? Define the purpose of each and whether it is a point or period in time?
1. Balance Sheet- shows what a company owns and owes at the time the report was made. It is a point in time because it is that company's financial position at that exact time. 2. Income Statement- shows what a company's actions resulted in over a period of time, and if they had a net gain or net loss in that period of time. 3. Statement of Cash Flows- shows the company's spending over a period of time, where it spends and where it earns cash
Three Common Approaches to Launching a Business
1. Build It and They Will Come- relies on founders vision, engineering team delivers product 2. Waterfall Planning- product development divided into phases, sequentially completed by different organizational units (can work well for a big company, but not all startups as they have to have a product before they can just hire HR and all that... startups are NOT just a small version of a big company!) 3. Just Do It- improvising based on customer and resource providers' feedback
12 Basic Accounting Concepts
1. Business Entity - financial statements are prepared for a business entity that is seperate and distinct from its owners 2. Going Concern- Unless evidence suggests otherwise, it is assumed that the business will continue operations into the foreseeable future. 3. Monetary Unit- Accounting is a measurement process that deals with only events that can be measured in monetary terms. 4. Accounting Period - Accounting measures activity for a specific interval of time, called the accounting period. 5. Consistency - Similar transactions are reported in a consistent fashion. 6. Matching - Accounting profit is the net result of matching related costs and revenues 7. Historical Cost - Nonmonetary and monetary assets are ordinarily initially recorded at their acquisition price. 8. Dual Aspect - Every transaction affects at least two items in the basic accounting equation. 9. Reliability of Evidence - Accountants recording events rely as much as possible on objective, verifiable documentary evidence. 10. Disclosure - Accounting reports should disclose enough information that they will not mislead careful readers reasonably well informed in financial matters. 11. Materiality - Accounting standards apply only to significant items. 12. Conservatism - A degree of professional skepticism should be adopted when assessing the prospects that incomplete transactions will be concluded successfully.
Nine Basic Blocks of the Business Model
1. Customer Segments - what demographics and groups of people is the company trying to target as a market 2. Customer Relationships - types of relationships with customers, is it personal or automated? Driven by customer retention, acquisition, and upselling. 3. Key Resources- describes the most important assets to make a business model work - physical, intellectual, human, financial. 4. Key Activities- most important things a company must do (like marketing and sales) 5. Key Partnerships- network of suppliers and partners, used for resources, optimization and to reduce risk 6. Value Proposition - products and services that create value, why a customer would choose them over another competitor **MOST IMPORTANT 7. Cost Structure- all costs incurred to operate a business model 8. Channels - how company will reach and communicate with its customers 9. Revenue Streams - in what ways will the company make money. Transaction (one time) and recurring revenues.
Six Techniques to Gain Customer Insights
1. Data Detective - use existing data that could apply to their market 2. Journalist- Talk to customers in real life (but sometimes they act differently than they say they would) 3. Anthropoligist- Observe customers in real world to see what gains, pains, and jobs they need, unbiased actions 4. Impersonator - pretend to be your customer and actively use products and services to see what pains, gains, and jobs you would need solved. 5. Co-Creator - Integrate customers into the process to explore and develop new ideas. 6. Scientist - get customers to participate in an experiment.
What are the three types of crowdfunding? Describe each, and tell which phase each is best for.
1. Donation/Charity- Donors give contributions with no tangible return. Sometimes given recognition or do it out of their own personal interest in product or company. BEST FOR PRE-STARTUP. 2. Lending/Debt- Donors lend money with the expectation that they will be paid back in some way at some point depending on business' conditions (sometimes paid back only when company is profitable). BEST FOR STARTUP STAGE. Can be rewards based (pre sales). 3. Equity- Donors contribute to receive a share or stake of the business. BEST FOR GROWTH STAGE.
What is included in the Four Actions Framework of Blue Ocean Strategy? How can you use the framework to develop a business strategy?
1. ELIMINATE unnecessary things that competitors do have to reduce costs. 2. REDUCE factors that competitors set the standard too high for to cut costs and save resources. 3. RAISE factors that competitors have set the standard too low for that customers have been compromising on, raise them above the current standard. 4. CREATE new sources of value for customers in your business strategy that competitors do not offer. You can use ELIMINATE and REDUCE to lower the cost structure of your business model compared to competitors. You can use RAISE and CREATE to create new, unique sources of value for customers that set you apart from the competition.
Five Data Traps to Avoid
1. False Positive- seeing things that are not there 2. False Negative- not seeing things that are there 3. Local Maximum- missing out on true potential 4. Exhausted Maximum- overlooking the limitations, for example the market is too small 5. Wrong Data- searching in the wrong place Persevere, Pivot, or Perish the business idea and model based on whether MVP validates all of its parts, some parts, or not enough.
What are three potential rewards for entrepreneurs?
1. Growth- get to face and beat challenges 2. Income- make money with your own business 3. Flexibility- get to make your own structure
7 Stages of the Industry Life Cycle
1. Introduction- when product is invented and initially developed 2. Growth- customer purchases increase at a rapid rate 3. Boom- very rapid increase in sales in a short amount of time 4. Shakeout- rapid decrease in the number of firms in an industry 5. Maturity- stabilization in demand 6. Decline- sales and profits fall 7. Retrenchment- must find new approaches to survive and improve
Name the three kinds of fit and give an explanation of each.
1. On Paper/Problem-Solution Fit: no evidence required? you just have the idea and customers saying that they like it 2. In the Market/Product-Market Fit: have evidence that your gain creators, pain relievers, and products and services create customer value and are getting traction in the market 3. In the Bank/Business Model Fit: have evidence that value proposition can be embedded in profitable and scalable business model
4 Types of Intellectual Property - how long do they last and what do they cover?
1. Patent- design 14 years, utility 20 years monopoly to sell, manufacture, or distribute an invention in exchange for disclosing how it works and its best practices. Must be non obvious to experienced people in the field, novelty, and useful. A provisional patent is a 1 year, cheaper placeholder commonly used by universities while waiting for a patent. Minimal filing. 2. Copyright- gives exclusive rights to the creators of tangible works. Lasts for life of author plus 70 years or 120 years from the date of creation. Does not protect idea or concept, only tangible expression. No need to register but can sue for more money if you do. 3. Trademark- Distinctive word, slogan, or image that identifies a product and its origin. Lasts indefinitely. 4. Trade Secrets- protects against any know-how from people that are not involved in company. Can include recipes and more, does not protect against reverse engineering. Can be as simple as a locked file cabinet or a non-disclosure agreement for all employees.
What are the two main factors in choosing a business form?
1. Personal liability of the business owner. 2. Taxation of both the entity and its owners. (2 more include: control of the business and continuity of the business (what is the time frame of the business?)
What are the TCA 7 P's of an Investor Presentation?
1. Pitch - who is company and why should they care, give a quick elevator pitch 2. People - can this team deliver? 3. Pain - Introduce the pain you aim to solve and why it is a problem for customers. 4. Product - describe product, its differentiation, and how it solves pain 5. Players - Who is the competition? 6. Projection - 3-5 year projections and timelines 7. (investment) Proposition - goals of funding and timelines, valuations, how much money is needed.
What are three benefits of crowdfunding for startups?
1. Product validation- customer feedback allows business to refine their product 2. Market validation- validates that there is interest in the product and a market of potential consumers. 3. Problem-solution validation- validates business idea, does it actually solve a customer problem?
Name the 6 Critical Dimensions of Business Practice and explain each in a short sentence
1. Strategic Orientation- 2. Commitment to Opportunity- What is an opportunity? 3. Resource Commitment Process- What resources are necessary? 4. Control of Resources- What do I need to own, borrow, or steal? 5. Management Structure- How do we manage the operation? 6. Reward Philosophy- How and when do we harvest?
4 Common Types of Business Plans
1. Traditional Business Plan (External Stakeholders)- detailed plan and scenario analysis, answers the six core questions of the critical dimensions of business practice. 2. Mini Business Plan (External Stakeholders)- contain summary of essential components of a new venture's go-to market and operating plans and how these translate into financial forecasts. 3. Go-To Market Plans (Internal)- Describe unmet needs of early adopters and how company will meet these needs. 4. Operating Plans (Internal)- Define the key activities, resources, and milestones that must be accomplished as the first offering is developed, produced, and delivered.
What are the three core financial implications of the business model? Explain each in a sentence or two.
1. profitability- the value of output versus the value of input determines how profitable. 2. asset intensity- how many funds need to be tied into the project or company to achieve positive cash flow. 3. pace of growth- the rate at which the business needs to grow, usually the faster it is, the more funds tied up in support
What are the 5 parts of the industry competitors chart?
1. suppliers bargaining power 2. buyers bargaining power 3. potential new entrants 4. substitutes 5. complements
What is a partnership?
A partnership is a business entity owned by two or more people that share the liability of the company.
Typical length of time for financial forecasts, and why could it be longer?
3-5 years. Could be longer if the venture requires ,ore long term investments to be cash flow positive, such as some biotech ventures which can take 10+ years.
What is a Strategy Canvas? What does the x-axis stand for? What does the y-axis stand for? What is the line connecting the dots on the strategy canvas called and what does it stand for?
A plan to develop a blue ocean business that is used to see what competitors are investing in currently as well as what customers value. X-axis: the range of factors that companies must compete on Y-axis: the offerings to consumers Line is the VALUE CURVE, and it stands for how well the company is doing compared to its competitors in the same industry.
What is a sole proprietorship?
A sole proprietorship is a business owned by one person in which the business and the owner are one in terms of liability and taxes - the owner is only taxed individually.
Cash Basis vs. Accrual Basis Accounting
Accrual Basis Accounting- revenues and expenses are recorded and taxed when they are earned, regardless of when the money is paid or received, more common Cash Basis of Accounting- recognizes revenues when cash is received, and expenses when they are paid. Does not recognize accounts receivable or payable.
What is an IPO?
An IPO or initial public offering is a transition from a private company to a public company where shares are sold to institutional investors and then on the stock market to the general public. Used to raise expansion capital and monetize investors' investments.
Who are angel investors? Give some characteristics and discuss their motivations, etc.
Angel investos invest their own personal funds into startups. They are generally former entrepreneurs or wealthy individuals whose motivations are economic returns and/or the thrill of watching the business grow and being involved with it. Highly localized and relationship driven.
What does the term bootstrapping mean?
Bootstrapping- Using your own personal funds to achieve positive cash flow and profitability, without giving any equity of your business to others.
What is Testing the Rectangle?
Business Model, provide evidence showing that they way that you intend to create, deliver, and capture value is likely to work.
Give the definition of a Business Model, Business Plan, Business Pitch, and Elevator Pitch.
Business Model- describes the rationale of how an organization creates, delivers and captures value. Business Plan- document that articulates the proposed venture's business model and provides significant detail. Business Pitch- presentation that can be used to communicate the model. Targets are potential investors, partners, advisers, employees etc. Elevator Pitch- a one-paragraph description of a new business opportunity, goal is to capture the interest of someone not make a sale.
Give the two equations for Current Investors' Ownership and Previous Investors' Ownership.
Current Investors' Ownership= investment amount % post money valuation Previous Investors' Ownership= pre-money amount % post money valuation
Current assets and liabilities versus noncurrent
Current- can be converted or paid in a year or less Non-current will take longer to convert or pay.
What is Testing the Circle?
Customers, provide evidence of what they care about before deciding how to help them (from Value Proposition circle of pains, gains, and jobs)
What are the primary differences between debt and equity fundraising? Give an example of each.
Debt Fundraising- ex: traditional bank -get money returned with a set rate of interest -face higher losses so take less risks -usually only fund businesses with a proven technology and/or business model, concerned about downside protection Equity Fundraising- ex: angel investor -receive a stake or share of the business and get returns proportional to its success -willing to take more risks because they have a chance of higher economic returns if the company is successful
What are the three widely applicable generic strategies for businesses of all types?
Differentiation- be unique in the industry Overall Cost Leadership- a combination of cost benefits in the industry Focus- targets a particular customer or product group with differentiation, cost leadership, or both
Two types of pricing mechanisms?
Fixed Pricing- price is not immediately affected by supply and demand Dynamic Pricing- price based on market conditions, can change immediately with supply and demand, ex: uber surge pricing after a concert, flight tickets surge during holidays when demand is high
How is the income statement linked to the balance sheet?
Income statement links beginning balance sheet with ending balance sheet
What are incubators and accelerators?
Incubators- help entrepreneurs start companies by providing office space, basic services, assistance to accessing funding, etc. Can be for profit or non-profit. Accelerators- "boot camp" like intensive coaching program, help startups be more efficient (less time and money spent experimenting) and increases leverage for investors. Almost always for profit.
Describe the pattern of an idealized high growth venture.
Invest more and work longer to make a profit, but "hockey stick" exponential growth and more potential for growth overall. -Venture capitalists want to see profit being made by around year 5.
The Environment Map... what is it used for and what are the four circles and an example of each?
It helps you understand the context in which you create. 1. Key Trends- regulatory laws (like FDA) and technology trends affects whats popular and allowed. 2. Market Forces- How easy is it for customers to switch? How big is the market? Market issues, segments, 3. Macro Economic Forces- Economic booms, bubbles, and recessions can affect companies in different ways. For example, if oil prices are low, running an airplane is cheaper. 4. Industry Forces- Is competition cutthroat or friendlier? For example, Kmart, Walmart, Target all have cutthroat competition which shows in their pricing. IF GIVEN A BUSINESS MODEL THAT LOOKS GOOD AND ASKED IF IT WILL SUCCEED, THINK ABOUT THESE 4. Especially market size.
What is a competitive advantage?
It is when you profit more by having a low cost structure but maintaining value for a high profitability.
What is convertible preferred stock?
Owner can exchange preferred stock for common stock if their equity of the company is higher than their original investment when the company liquidates. If it is lower, the company owes them their original investment back. Convertible note is like debt or a loan.
What are red oceans and blue oceans?
Red Oceans- represent all the industries already in existence today, the market is "bloody" with competition, known market space Blue Oceans- represent all of the industries not in existence today, there is no competition, unknown market space
Three Dimensional Landscape
Shows that you can be profitable, but may be more profitable with other combinations of strategy and aspects of the business model
What are strategic investors?
Strategic investors are corporations that invest in other businesses to gain access to important technology and sometimes try to block them from gaining a market share.
What are the 4 parts of the SWOT Analysis? What does strategy link?
Strengths and weaknesses (internal) and opportunities and threats (external). Strategy links the firm and its industry environment.
TAM vs TSM vs Target/Beachhead Markets
TAM- 100% of the market for type of product you sell TSM- 100% of the market you could actually sell to Target/Beachhead- Your most likely initial buyers
What are Tax, Managerial, and Financial Accounting?
Tax- based on specific accounting requirements set by governmental taxing agencies Managerial- intended to be used by managers for planning, directing, and controlling a business Financial- formal, rule based accounting used by outside owners, investors, banks, and regulators.
Describe the pattern of the idealized small business.
The idealized small business is only in debt for a year or two before they make a profit, but their profit curve is usually very modest. Uses own money and focus on sales and autonomy.
What is crowdfunding?
The outsourcing of capital formation for a business to a strategically defined network of actors (crowd) via an open call on a website platform. Usually a lot of donors and smaller amounts of money.
Transaction and recurring payments
Transaction- one time payment Recurring- multiple times, like a subscription model
What is Testing the Square?
Value Proposition, provide evidence showing that your customers care about how your product kills pains and creates gains (referring to square from Value Propositon square in chart with gain creators, pain relievers, and products and services)
What 2 questions does strategy answer?
Where should we compete? How should we compete?
A business pitch should answer three questions. What are they?
Why this? Why now? Why this team?
Lean Startup (hypothesis-driven entrepreneurship)
avoiding waste, testing hypotheses and receiving feedback and pivoting for a better chance of success.
Industry Forces include...
competitors, new entrants, substitutes, suppliers, and stakeholders
Definition of a Business Model
describes the rationale of how an organization CREATES, DELIVERS, and CAPTURES value
Macro-Economic Forces include...
global market conditions, capital markets, commodities and resources, and economic infrastructure.
Market vs industry
industry is all of the competing companies with close products and services and substitutes market is a group of current and potential buyers and customers willing to buy products and services to fulfill wants and needs scale- overall size of market, scope- location (ie, global, national, etc)
Market Forces include...
market issues, market segments, needs and demands, switching costs, and revenue attractiveness
Private Equity
ownership assets that aren't publicly traded; includes venture capital, in late stages, typically huge investments > $100M
Equation on how pre-money and post-money valuations are linked?
pre-money + investment amount = post-money
Strategic Orientation: What is a promoter and what is a trustee?
promoter- driven by perception of opportunity trustee- driven by resources currently controlled. They have the money
Value Proposition Canvas- square and circle chart
square- businesses design pain relievers, gain creators, and products and services --> circle- they observe gains (such as saving money, happiness and social gains), pains (anything that annoys), and customer jobs (things that customers want to get done in job or life) that are needs to be fulfilled
Key Trends include...
technology trends, regulatory trends, societal and cultural trends, and socioeconomic trends
Give the *exact* definition of entrepreneurship we learned
the pursuit of opportunity without regard to resources currently controlled
