DEAS E’Ship Series 2005

Michael J. Roberts

Entrepreneurship: a definition

• “The pursuit of opportunity w/out regard to resources currently controlled”

What does it mean to be Opportunity-Driven?

• Looking out instead of looking in

• Accepting the risks of – trying to do what you don’t know how to do– building a biz around capabilities and resources

you don’t yet have– stretching to acquire what you need instead of

figuring out how to use what you already have

The Entrepreneurial Environment(running w/ ankle weights)

• Uncertainty

• Resource Scarcity

• Rapid change

• Growth

Entrepreneurship is NOT a “steady-state equilibrium”

• Forces of change open the opportunity window

• But for an unknown time period

• And in the context of significant uncertainty

• All this creates considerable risk…and the possibility of considerable return

Lots of Factors Create Opportunity at “Macro” Level

• Technology

• Demographics

• Unique skills / abilities

• Creativity

• Unique resources

Opportunity

• Depends on the person

• Depends on the environment / context

• Depends on access to/ pricing of the required resources

• Depends on timing

New Venture Ingredients

OpportunityOpportunity

Person/TeamPerson/Team DealDeal

ContextContext

Questions to ask when evaluating a new venture

Source: William A. Sahlman, “How to write a great business plan,” Harvard Business Review, July-August 1997

OPPORTUNITY

CONTEXT

PEOPLE DEAL•Whom do they know and who knows them that will help them to succeed?

•What critical skills, experience, capabilities do they posses?

•What is their reputation? How do you know?

•How committed are they to this opportunity? How do you know?

•Why has this opportunity appeared right now?

•What regulatory, technical, financing or product market changes gave rise to this opportunity?

•How long will the window of opportunity be open?

•How will you know when the window is about to close?

•Who are the investors? How sophisticated are they? What do they expect? Do they have a relationship with the entrepreneurs? Will this help or hurt the venture? What do they provide in addition to cash?

•How much money will it take to produce results?

•Does the deal provide appropriate incentives for all investors?

•How big is the market?

•Who is the customer? What is the product or service? How will you deliver it?

•What pain are you solving for customers?

•How much will it cost to acquire a customer? What is there lifetime value?

•What can go right? What can go wrong?

Opportunity AnalysisHow do you know if you have a good one?

The Business Model works if you• can articulate a way to generate cash flow

• can articulate the risks and rewards i.e., – the (as yet unproven) assumptions you are

making and your degree of confidence in them– the dimensions of the reward at the end of all

the hard work

• can give up what you need to to get the resources you need and still have enough left over for you!

Business Models & Financial Analysis

• Opportunities have lots of non-financial dimensions

• But ultimately, everything comes down to creating value, especially if you are raising outside capital.

A Business Model...

• A summary of the company’s strategy and the core business decisions that underlie it

• The math of how you make money and create value• Requires detailed knowledge of revenue sources,

cost and margin parameters, and capital requirements

• Sheds insight on key drivers underlying Inc St. & BS

• Is either a set of assumptions or an articulation of reality, depending on where you are in the process

profits

costs

revenues

Driver 1

Driver 2

Driver 3

Driver 1

Driver 2

Driver 3

Driver 1

Driver 2

Driver 3

Be clear about the business model

1. Identify the key drivers of revenue and costs 2. Quantify assumptions 3. Test sensitivity to changes in key drivers 4. Analyze how reasonable key assumptions are 5. Surface key assumptions, logic, critical

sources of uncertainty, important questions to ask, and things to track once you start

Generic Models

• A “subscription” model

• An “advertising” model

• A “content” model

• A “razors and blades” model

Two General Rules

• If contemplating a new venture in an unproven/new market, be able to tell a story about why a change in context has created this opportunity.

• If contemplating an existing/mature market, be able to tell a story about how you are going to change the income statement or balance sheet

In any Business, The ONLY way to create value is

• Assemble a collection of assets and people• Through the power of an idea/vision/ business

model• And the discovery of an attractive market “space”• Create a large, growing, durable, stream of cash

flow (sometimes you can get away w/ something else)

• Where what you need to pay for the req’d resources is less than the value you create

PhysicalAssets

People

Money

Business Model

Market Opportunity

Revenues

Customer Base

Profits

Cash Flow

Intellectual Property

Value Creation

via

Inputs/ Resources Recipe Target OutputsHow Output

Valued

Intellectual Capital

LicenseRevenues

•IPO

•Merger/ Acquisition

•Dividend Stream

•Compensation

•Personal

Brand

Physical Assets

The Raw Economics

• How much cash goes in and how much cash comes back - NPV or IRR is what matters

• Most entrepreneurs / teams are putting in everything BUT the money – what do you get to keep in exchange?

Example

• A business requires an investment of $3 million and throws of $1 million per year…is this a good opportunity?

Think about it in a fine-grained fashion – bottom-up

• Unit economics: A customer, a product, a location

• Ramp-up time

• Overhead

• Capital as well as operating costs

Business Model

• Helps you understand what matters• See what you don’t know- what are the

risks• What can you learn before you spend $• What are you betting on?• Track actual performance against key

variables• Build up a set of financials

Questions to Ask

• What are revenues, costs and capital requirements?

• What are the venture’s MONTHLY cash flows?

• How much cash is required in total – how deep is the trough?

• What size bites do we want it in?• What returns will investors expect?

The Cash Flow Cycle for a Venture

CumulativeCumulative Cash Flow in $Cash Flow in $

TimeTime

BurnBurn RateRate

Date of First Cash Flow PositiveDate of First Cash Flow Positive

MaximumMaximum FinancingFinancing NeedsNeeds

DaDatete of Cumulative Cashof Cumulative Cash BreakevenBreakeven

Restaurant Business Model

• What do you think it looks like?

Access

Insurance

Parking

Fuel

Maintenance

Lease

Contribution Margin/ Member

Monthly interest

# Uses

Hours/Use

$/Hour

Miles/Use

$/ Mile

$/ member

i rate (monthly)

Key May ’00 Biz Plan/ Actual September Data

Recurring View (Monthly) – Blended Model

Hours used/ month

Utilization rate

Costs/ Car

Members/ Car

Revenues/ Member

# Members

Total Contribution Margin/ Month

Monthly Usage

Monthly Fee

Attrition

Beginning Members

New Members

Car Cost/ Member