1 Andy Guo

Thoughts on Business Plans

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Entrepreneurship

Working definition:

The relentless pursuit of opportunity without regard to tangible resources currently controlled

A complete process from identification to harvesting A way of managing

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The Structural Model

The critical elements People Opportunity Context Deal

The concept of FIT The concept of dynamic FIT Management

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PEOPLE & RESOURCES

OPPORTUNITY DEAL

CONTEXT

APPROPRIATE RISK/REWARD ALLOCATION &

INCENTIVES INVESTOR-

VALUE ADDED

PROJECT APPROPRIATE FINANCING

OPTION PRESERVATION

FAVORABLE TECHNOLOGY

MACROECONOMY

FAVORABLE SOCIOLOGICAL

FACTORS

FAVORABLE RULES OF THE

GAME

OPPORTUNITY APPROPRIATE EXPERIENCE CONTACTS

SKILLS ATTITUDE

The Concept of FIT

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The Concept of FITThe Answer to Four Questions

To what degree do the people have the right experience, skills and attitudes, given the nature of the opportunity, the context and the deals struck?

To what degree does the opportunity make sense, given the people involved, the context and the deals struck?

To what degree do the deals involved in the venture make sense, given the people involved, the nature of the opportunity and the context?

To what degree is the context favorable, given the people involved, the nature of the opportunity and the deals struck?

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PEOPLE & RESOURCES New Hires

Exits Mgt. Structure

OPPORTUNITY Entry

Substitutes Customer Response

Pricing Growth Options

DEAL New Capital

New Employees New External Deals

CONTEXT Technology Factor Prices New Rules

FLEXIBILITY ITERATION

OPPORTUNITY COST

ROBUSTNESS OPTION PRESERVATION

EXPOSURE MANAGEMENT

ABILITY TO ATTRACT OR ABANDON RESOURCES INSURANCE

ROBUSTNESS FLEXIBILITY SENSITIVITY INCENTIVES

OPTION TO ABANDON �FLEXIBILITY INCENTIVES

ANTICIPATION What Can Go Wrong? What Can Go Right?

RESPONSE Risk/Reward Management

LEARNING EXPERIENCE

PATTERN RECOGNITION

Dynamic FIT ManagementCHANGE (GOOD AND BAD NEWS)

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P

C

O D

Information

Good News/Bad News

Anticipation Response

Information

Good News/Bad News

The Entrepreneurial ManagerContinuous Experimentation and Learning

Identify - Marshal - Act/Exploit - Harvest

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People Questions

What have the founders done in the past that would lead you to believe they will succeed in the future?

Experience Contacts Reputation Skills Integrity Attitude

Who is missing and how will they be recruited? Team issues?

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Opportunity Questions

How big is the total market? How much consumer value can be created? How much producer value can be created and captured? What are the implications of entry on the size of the pie?

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Essential Questions Related to Opportunities

Who is the customer? How do they make decisions? What risks do they perceive? What benefits? To what degree is the product or service compelling? How will the product or service be priced? How will the venture reach target segments? How much does it cost (money and time) to acquire a customer? How much does it cost (money and time) to produce and deliver the product

or service? How much does it cost to support and retain a customer? What is the lifetime value of a customer?

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Opportunity Sources

Change New things old ways New things new ways Old things new ways

Both sides of the balance sheet Market inefficiencies (PV or kk*)

Wholesale to retail Rules of the game

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Opportunity Sources (cont.)

Execution First mover advantages Addiction/Switching costs Uncertainty (insurance and security blankets) New technologies Applications of new technologies Social/Demographic/Political trends

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Opportunity Sources (cont.)

Trojan horses Razors and razor blades Financial distress Scale economies/Net consolidations Learning curve effects (customer and producer) Baggage Stupidity Price discrimination Selling ammunition to all sides

in a war without end

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Industry and Competitive Analysis

The five forces The choice of a strategy Opportunity duration Interactions of capital and product markets Ways to change the basis of competition Perspective of the new entrant (war games)

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Positions From Which To Spot Opportunity

Customer Supplier Employee Other Local knowledge Advisor

Consultant (not) Investment banker (not)

“Knowing and being known” You have to get in the “game”

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Business Model Analysis

•The “tracks” of the model are in the income statement and balance sheet

Income StatementSales

COGSSG&AInterestTaxes

Depreciation

Balance SheetA/R A/PInventory DebtNPPE Equity

•What can be reengineered? By your company? By a new entrant?•Examples: can I get paid earlier? can I go direct? can I produce JIT?

Fixed vs. Variable costs?

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Free Cash Flow Patterns

TIME

0

+

-

INVEST

HARVEST

GROWTH OPTION

CASHFLOW

A growth option is an opportunity to invest thatresults from being in a particular business (e.g.,the ability to introduce a new product or service toexisting customers).

Free Cash Flow Patterns

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The Disk Drive BusinessDisruptive Technologies

TIME

CASHFLOW

0

+

-

14-inch

2.5-inch

8-inch

5.25-inch

Issues:

Relationships between curvesConsequences of missing a curve

Projection

Reality

The Disk Drive Business Disruptive Technologies

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Patterns

time

Cash

Flow

time

Cash

Flow

time

Cash

Flow

time

Cash

Flow

Simple project, no growth options Growth options

Clone options Uncorrelated options

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Curve Questions

What are the milestones? How long does it take to reach each milestone? How much does it cost to reach each milestone? Uncertainty of payoff structure? What are the options created or destroyed at each milestone? What is the relationship between curves?

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Interactions

Product Market

Capital Market

Labor Market

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Contextual Pressures

Heightened uncertainty Global and domestic competition The entrepreneurial revolution Capital market pressures

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Deals

Fundamental premise: People act in their own (perceived) best interest

How is cash allocated? How is risk allocated? What are the incentives? What can be inferred by decisions? What are the future (micro and macro) consequences of current

decisions?

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Critical Steps in Deal Structuring and Analysis

Complete list and assessment of the players Complete “what if” analysis Complete analysis of incentives Sensitivity to sequencing (path matters!)

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Good and Bad Deals

Simplicity Fairness Trust Robustness Perverse incentives Poison pills The passage of time Improving the chances of success Decreasing the risk or consequences of failure

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Negotiations

Ranges of reasonable values Understanding the key factors that affect risk and reward (where

to give in and where not to) Creating perception of overlap Negotiating skills Using external events to advantage Turning adversaries into partners Resolving impasses

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Risk/Reward Analysis and Management

What can go wrong? What can go right? What decisions can management make today and in the future to

ensure that “what can go right” does go right and “what can go wrong” is avoided, or failing that, is prevented from critically damaging the company?

Structuring the analysis: People Opportunity Context Deal

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Risk/Reward Management

Probability of

Occurrence Expected Value

-100% +25% +100% Return on Investment

Probability ofLosing 100%

Goal 1

Goal 2

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Impact of Leverage on Equity Risk

Returns

Probability of outcome

Distribution of Total Value (Debt and Equity)

Distribution of Total Equity Value

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Free Cash Flow and the Choiceof Burn Rates

TIME

CASHFLOW

0

+

-

Step on the gas

Moderatespending rate

Conserve fuel

Free Cash Flow and The Choice of Burn Rates