ENTREPRENEURSHIPANDVENTURECAPITALChapter5.docx

ENTREPRENEURSHIPANDVENTURECAPITALChapter5.docx

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ENTREPRENEURSHIPANDVENTURECAPITALChapter5

ENTREPRENEURSHIPANDVENTURECAPITAL

Chapter5:

TheEntrepreneurialProcess

Inthelastchapterwespentanextraamountoftimetalkingaboutwaystolookatandreviewthequalityoftechnologiesandtheproductsthatusethem.Thatmayseemsomewhattedious,butinrealityitisanecessarystepinordertoproperlyexaminealloftheopportunitiesthatanewtechnologywillpresenttotheentrepreneur.OnwaytolookattheprocessofdevelopinganewbusinessventureisgiveninTable5.1

Table5.1StepstoEstablishaNewBusinessVenture1

1.Identifyandscreenopportunities.Describetheinitialproductorserviceideasanddeveloptheappropriatevaluepropositionandbusinessmodel.Createthevisionofthecompanyandpulltogethertheentrepreneurialteam.

2.Refinetheconcept,determinefeasibility,andsetpreliminarygoals.Carefullyexaminetheproposedtechnologyandproductorproductstomakesuretheywillmeetspecificcustomerneeds.Researchthebusinesspotentialoftheproductsanddevelopdifferentpossiblescenarios.Drafttheoutlineofabusinessplan.

3.Prepareacompletebusinessplan.Includeafinancialplanthatsupportsthebusinessventureandexplainthelegalorganizationbeingpursued.

4.Determinetheamountofresourcesrequired.Explaintheneedforfinancial,physical,andhumanresource,howmuchofeachisneeded,andtheplantoacquirethoseresources.

5.Securethenecessaryresources.Takeactiontoobtaintheresourcesneededtobeginandbuildtheoperation.Starttheorganization.

YouwillnoticethatStepnumber1aboveisdiscussedinChapters2and3ofthisbook.Themeanstoaccomplishstepnumber2aregiveninsomedetailinChapter4.Theelementsofabusinessplan,stepnumber3above,willbediscussedinChapter6.Stepnumbers4and5willbediscussedinthischapterandagaininChapters7and8.Inthisway,youshouldbeequippedwithenoughmaterialtohelpyoucarefulevaluatethebusinessopportunityandprovidethedatasufficienttomakeintelligentdecisionsaboutthatopportunity.

TheEntrepreneurialProcess

“Theentrepreneurialprocessincludesallthefunctions,activities,andactionsthatarepartofperceivingopportunitiesandcreatingorganizationstopursuethem.”2Thisprocesswillhelptounderstandthenecessarypartsofasuccessfulventure,howtheyrelatetooneanother,andhowtoensurethatthepartsaresufficientlystrongtocontributetotheoverallstrengthoftheventure.Beforewegetintothespecificsofthebusinessplan,weexaminethisprocesssothatwecandevelopamorerobuststrategyandabetterfocusedbusinessplan.Astrongunderstandingofthemodeltobepresentedherewillgivetheentrepreneuramuchgreaterprobabilityofasuccessful,highpotentialventure.Youwillnoterightoffthatthisprocesshasstrongcentralthemesthatareapplicableacrossbusiness,geographies,andtechnologies:

∙Itisclearlyfocusedonopportunity.

∙Itisdrivenbyastrongentrepreneurialteam.

∙Itconcentratesonresources.

∙Itseekstoidentifyfitsandgaps.

∙Itiscompletelyintegrated.

ThemodelfortheEntrepreneurialProcesswasfirstdevelopedbypioneeringeducatorandentrepreneur,Dr.JeffryTimmonsofBabsonCollege.Ithasbeenwidelyusedbecauseofthewayinwhichitallowstheentrepreneurtovisualizetheneedsandactivitiesofcreatinganewventure.Figure5.1presentsthemodelwewilldiscussinthischapter.

Thebeginningpointoftheprocessistheopportunitybecausetheopportunityisusuallymuchbiggerthaneithertheteamortheresources.Itistheshape,size,anddepthoftheopportunitythatdeterminestheshape,size,anddepthoftheteamandtheresources.Asimportantastheopportunityis,noticethatthemodelispresentwiththeentrepreneurialteambalancingboththeopportunityandtheresources.Itistheroleoftheteamtojuggletheotherkeyelementsandkeeptheminbalance.VisitorsareoftenamazedatthefantasticdisplayofjugglingthatcanbeseenatthefamousChineseacrobaticsshows.Somespectacularfeatsofjugglingandbalancingabilityarepartofalmosteveryact.WehaveallseenthemperformedineitherthebigshowtheatersinShanghaiandBeijingtothesmallshowsatparksandfestivals.Tovisualizetheroleoftheentrepreneur,pictureajugglerbouncingupanddownonatrampolinethatismovingonaconveyoratunpredictablespeedsanddirections,whiletryingtobalancethreeballsintheair.Thatissimilartowhattheentrepreneurhastodoinbalancingtheopportunity,resources,andteamofthenewventure.Itisanexcitingandoftenamusingsceneandchallengeseventhemostskilledandexperiencedperson.

Theentrepreneurialteammustbeabletoevaluatetheopportunitythoroughly,answerquestionsthatmayariseaboutit,andquicklyaccommodatechangestoassumptionsandrealitiesofthemarketuponwhichtheoriginalopportunitywasexamined.Likewise,theresourcemixwillchangeovertimeduetothechangingcircumstancesofthebusiness,soacarefulbalancingactisrequiredtokeepresourcesinproperalignment.Eventheteamitselfwillundergochangeovertime,soteammembersmustbewillingtoadapttothechangingbusinessneeds.Wewillnowexaminethepiecesofthisprocessinsomedetail.

Figure5.1TheEntrepreneurialProcess3

Opportunity

Wehavealreadyspenttimetalkingabouttheneedforastrongandcompellingopportunitythatisfocusedonmeetingtheneedsoflargegroupsofcustomers.Wehavealreadydiscussedthatfactthatagoodideaisnotnecessarilyagoodopportunity.Itiswhenagoodideaismatchedbystrongmarketconditionsthatanopportunitycanberecognized.Notallgoodideascanbematchedtoacceptablemarketconditionssuchthatanopportunityiscreated.

Table5.2summarizesthemostimportantcharacteristicsofagoodopportunity.InEnglishtheyaresummarizedasthethreeM’s:

Marketdemand,Marketstructureandsize,andMarginAnalysis.ThetranslationtoChinesewillnotlikelyprovidesuchacleansoundingtrilogy,however.Thesethreemajorcharacteristicsprovidethesubstanceofastrongopportunityandmustbecarefullyevaluatedbytheentrepreneurialteam.Infact,theseelementsshouldbeusedtohelpguideintheopportunityevaluationthathasalreadybeendescribed.Thehigherthegrowthrate,thelargerthepotentialmarketsize,thelargerthegrossandnetmargins,andthestrongerthecashflow,thegreatertheopportunity.Ifchangeoccursmorerapidly,thegreatertheopportunity.Thegreatertheinconsistenciesinexistingserviceandquality,andthegreaterthegapsininformationandknowledge,thegreatertheopportunity.4

Table5.2OpportunityCharacteristics

1.Marketdemandisakeyingredienttomeasuringanopportunity:

a.Iscustomerpaybacklessthanoneyear?

b.Willmarketshareandgrowthpotentialbeatleast20%annualgrowth?

c.Isthecustomerreachable?

DoIknowwhotheyareandhowtoreachthem?

2.Marketstructureandsizehelpdefineanopportunity:

a.Isthemarketemergingorfragmented?

Istherespaceformyproduct?

b.IsthemarketatleastUS$50millionnowandwillitgrowtobylargerthanUS$1billion?

c.Arethereproprietarybarrierstoentryintothemarket?

3.Marginanalysishelpsdifferentiateanopportunityfromanidea:

a.CanIbecomethelowcostproducerwithgrossmarginsinexcessof40%?

b.Aretherelowcapitalrequirementsversusthecompetition?

c.CanIreachbreakeveninlessthan2years?

d.HowquicklycanIbecomecash-flowpositive?

Resources

Oneofthemostcommonmisconceptionsamongentrepreneursisthattheyneedlotsofmoneybeforetheyhaveanythingelse.Thatisnotthecase.Infact,manyentrepreneurialcompanieshavefailedbecausetheygottoomuchmoneytoosoon.Toomuchmoneyhasthetendencytosmotherthecreativityoftheteamandthwartsthedevelopmentoftheenterprise.Successfulentrepreneursoftensaythattoomuchmoneytoosoonisoneoftheworstthingsthatcouldhappentothem.

Therearethreemajortypesofresourcesthatwewillconsider.Figure5.2summarizesthemajorissuesaboutresources.

Figure5.2UnderstandingResources

Oneofthefirstthingstoconsiderwhenthinkingaboutresourcesiswhethertheresourcewillbeownedorcontrolled.Toowntheresourceistohavepurchasedtheassetorhiredthepeople.Tocontroltheresourcemeanstohaveitavailablethroughrental,leasing,orsomeconsultingcontractforpeople.Acompanydoesnotneedtoowntheresourceinordertogetthevaluethattheresourcecanprovide.Infact,astart-upcompanyisbetterofftominimizeresourcesbycreativewaysofcontrollingthem.Forexample,ifamanufacturingplantisneeded,isitpossibletooutsourcethemanufacturing?

Thatallowsmetominimizeandcontroltheresource,ratherthanmaximizeandownit.Suchthinkingshouldtakeplaceforeachandeveryresourceneeded.

TherearethreetypesofresourceslistedinFigure5.2:

Human,Financial,andPhysical.Thehumanresourceisthepeoplerequiredtomakethebusinessfunction.Thisisgenerallythepeoplewhoareinadditiontotheentrepreneurialteam.Considerationsherewouldbethetimingandnumberofnewhiresthecompanywouldneed.Whatskillsetsdothesepeopleneed?

Wheredotheyneedtowork（i.e.,cantheyworkfromhomeordotheyneedanoffice?

etc.）?

HowsoondoIneedtoaddpeopleinorderforthemtobeproductivewhenneeded?

Buildingthehumanresourcebeyondtheentrepreneurialteamisperhapsthemostchallengingpartofbusiness.Withpeoplewillcomeallthequestionsaboutpayandbenefitsaswellastheissuesthatarisefromhavingpeopleinteractingwitheachotherandwith