CleanStart EnergyReport on the Outcome of Simulating a Clean Energy Start-up

Conducted by: Conor Walsh & Mike Taylor

SECTION IReflections on Business Insights Acquired from Conducting

the Simulation

Overview• Showed the quarterly nature of managing business

• Short term pressures forced us into unsustainable management• Graded on cumulative profit and net worth (what gets measured gets done)• Forced us to focus on these while ignoring the long term health of the business

• Difficult to focus on both metrics simultaneously

• Highlighted the importance of Cash Flow on business

• Showed how sensitive a business can be to subtle changes

Strategy

• Competitive Strategy

• Pursued strategy of Focused Differentiation

• Industry was competing on price

• We focused on developing quality product for premium price

• Hired ample staff: Mainly engineers focused on R&D and production to meet

rising demand

• Economy was improving: Disposable income of consumers allowed business

to invest

Strategy• Directional Strategy

A. Growth• Internally driven: started from scratch

• Sought Venture capital in Y1 to provide working capital & allow product development

• Drove sales through incentivised compensation schemes

• Kept price at constant level for 7 years to encourage sales and portray consistency of strategy

• Launched IPO early in Y3 as sales rocketed, to ride the crest of the wave and grow confidence in the company

Strategy

• Directional Strategy

B. Stability

• Implemented mid-project as a means of developing profitability

• Cut costs where allowable: Employee growth & Compensation

• Increased revenue where possible: Incremental price increases

• Negatively impacted upon net worth but we built in tolerance

Functional Strategy1. Pricing Strategy

• Product Leader

• Relatively high price compared to competitors but consistent

• Allowed for product research & development

• Difficult to generate initial sales – real fear of early bankruptcy

• Expected low volume of early sales, but soon picked up

• Raised price once established with strong level of sales

• Inflated price improved profitability in latter half of the project

Functional Strategy2. Employee Structure

• Chose to consistently grow employee numbers each quarter: In line with competitive and growth

strategies

• Began with high proportion of Engineers• To develop the R&D the product

• To manufacture the product for sale

• To develop the manufacturing efficiency and therefore lower the cost of production

• Slowly increased the proportion of Sales personnel• To push the sales of the product

• To improve customer service and therefore generate repeat sales

Functional Strategy3. Employee Compensation

• Part 1• Began with salary 2/3 of Industry average: Initial Cash flow concerns• Supplemented salary with profit sharing: encourage productivity

• Part 2• Slowly raised salary to attract and retain quality employees• Slowly reduced profit sharing percentage in line with salary rise

• Due to stability strategy mid-project of increasing cumulative profit

Functional Strategy4. Finance

• Seed Capital• Utilised in the first few years to establish the business and develop the product

• Lack of early sales meant dwindling of reserves

• Venture Capital• Sought 100k venture capital in Y1

• finance working capital

• tide business over until it became profitable

• Didn’t seek much funds: wanted to retain as much ownership of business as possible

Functional Strategy4. Finance

• Initial Public Offering• Launched early: the quarter after the business turned profitable• Waited for growth to ensure stock price would increase the worth of the business• Didn’t give away much (10%): ensure control and positive impact on net worth• Good qualitative reason for early IPO: garner public support for the company

SECTION IIShortcomings of the Simulation in terms of Reflecting Real-

Life

Overview• Very little control over the Balance Sheet• Project is short: physical companies need time to develop• Almost all data available is quantitative• No knowledge of the costs, financial or otherwise, of IPO or VC• No details of the real world or macro-economy beyond brief news

statement• No knowledge of the industry• No idea of the marketing strategy

Functional Analysis1. Pricing Strategy

• Arbitrary pricing decision: Difficult to know optimum gross profit

• No marketing data available to indicate optimum price• Unrealistic ability to change price on a quarterly basis

• Good-will & qualitative costs not impacted by sporadic price changes

• No input on procurement costs or value for money

• No feedback from VC or stock market as to pricing strategy

Functional Analysis

2. Employee Structure

• No sense of corporate culture: departmental rivalry

• No sense of a management structure

• Arbitrary hiring method: assessment of the need for staff

• No sense of the requirement for ancillary staff

Functional Analysis3. Employee Compensation

• Assumed that compensation is directly related to employee acquisition & retention• Realistically motivation is less tangible in start-ups

• Compensation is the only means to eliminate job dis-satisfaction in simulation

• An option of profit sharing before the business turns profit is unrealistic

• Micro management: founder would likely be more focused on more front line issues

• No option to differentiate pay levels: Engineers & Sales people paid the same

Functional Analysis

4. Finance• Seed Capital

• No stated cost of capital or IRR

• No access to debt financing • Generally cheaper than equity & easier to access

• No sense of budgets or overheads• No real control over costs other than salaries

Functional Analysis4. Finance

• Venture Capital

• Not solely about generating capital: As much about advice and direction

• We have no knowledge or skill in the industry as a founder

• This would be essential from a venture capitalist’s point of view

• Sought and acquired VC in the space of three months

• Realistically would take more time and work

Functional Analysis

4. Finance

• Initial Public Offering

• Costs involved not reflected in the simulation

• No sense of industry stock market performance

• Trends not reflected eg. Industry scandals

• Didn’t reflect the inflated perception of the company by the consumer

• No option to buy back share or to revert back to private company

Conclusion

• Useful simulation as a learning tool

• Good for demonstrating quantitative factors in a controlled setting

However…

• Does not reflect qualitative aspects of business adequately

• Forces micro-management

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