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The Entrepreneur

Most entrepreneurs 1 See and seize a commercial opportunity 2 Act doggedly optimistic 3 Plan the resources (physical, financial, and human) needed 4 Work hard and are driven to succeed.

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Entrepreneurship is the process of changing ideas into commercial opportunities and creating value.

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Entrepreneur is an individual who thinks, reasons, and acts to convert ideas into commercial opportunities and to create value.

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Start Your Own Business

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New U.S. business form in the millions annually. Firms with less than 500 employees represent over 99 percent of all employers and account

for about one-half of the annual gross private domestic product.

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Opportunity exists, but not without risk

A representative study conducted by Headd shows 1/3 of new firms endure less than 2 years,½ endure less than 4 years,60% endure less than 6 years but, about 1/3 were “successful” at closing

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Over 60% of new businesses are terminated during the first 2 years.

Sources of Entrepreneurial Opportunity

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J. Case research suggests 12% of Inc. 500 success is due to extraordinary

idea and 88% due to exceptional execution of ordinary idea

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Trends that suggest possible entrepreneurial

innovations: 1 Societal changes like global economy 2 Demographic changes like baby boomers

3 Technological changes like Internet 4 Financial Crises

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Financial Crises

2008 Financial crisis changed the game but provided cost containment innovations, alternative energy, and government stimulus.

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7 E-Financing Principles

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#1 Real, Human, and Financial Capital Must be Rented from Owners 1 Money has owners and therefore costs – Time and Risk – 2 Expect to provide a return or the venture will not survive in a market economy

#2 Risk and Expected Reward Go Hand in Hand 1 Time value is not the only cost when using others’ funds 2 More risk brings more reward 3 Reward is market determined

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#3 While Accounting is the Language of Business, Cash is the Currency 2 reasons to employ accounting: tracking and accountability for actions and quantifying different visions of the future but remember cash flow is a new venture’s lifeblood “Get enough accounting to see through the accruals to the cash account” Cash burn is the gap btw. cash spent and collected; cash build is the excess cash receipts over cash distributions

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#4 New Venture Financing Involves Search, Negotiation, and Privacy Public Financial Markets standard contracts traded on organized exchanges vs. Private Financial Markets customized contracts bought/infrequently sold in inefficient private negotiations – usually where early ventures get financial capital

#5 A Venture’s Financial Objective is to Increase Value over price, margin or sales and profit, return or net worth (Market) Value ability to generate cash to pay capital providers for their capital

#6 It is Dangerous to Assume that People Act Against Their Own Self-Interest Aligning incentivesis critical—as situations change, renegotiation is important Owner-manager conflicts are differences btw. a manager’s self-interest and the owners vs. Owner-debt holder agency conflict divergence of interests getting closer to bankruptcy

#7 Venture Character and Reputation Can be Assets or Liabilities Many entrepreneurs state high ethical standards as critical to long-term success—ventures can be meaningful societal contributions—financially and personally involved in charitable work

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Entrepreneurial Finance

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Venture Life Cycle The stages of a successful venture’s life from development through various stages of revenue growth

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Development Stage

Developing opportunities and seed financing

Startup Stage Gathering resources and startup financing

Survival Stage Gathering resources, managing and building operations and first-round financing

Rapid-Growth Stage Managing and building operations and second-round mezzanine, & liquidity stage financing

Early Maturity Stage Managing and building operations and obtaining bank loans, issuing bonds, & issuing stock

Development Stage involving the progression from an idea to a business

opportunity Startup Stage the venture is organized, developed, and an initial revenue model is put in place Survival Stage revenues start to grow and help pay some of the expenses

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Seed Financing funds needed to determine whether the idea can be converted into a viable business opportunity—founders always first then friends and family!

Startup Financing funds needed to take the venture from having established a viable business opportunity to initial production and sales

First Round Financing equity funds provided during the survival stage to cover the cash shortfall when expenses and investments exceed revenues

2nd Round Financing financing for ventures in their rapid-growth stage to support investments in working capital

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Seed & Startup Financing

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Financial Bootstrapping finding unique ways of financing a new venture

Business Angels wealthy individuals who invest money in fledgling ventures

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5 Qs Entrepreneurs Must Answer for Investors…

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Why is it compelling?

How will (does) the

business make

money?

Why is this the right team at the right time?

How does an investor exit

the investment?

What is the market

opportunity?

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Types of Firms

Salary replacement firms provide owners with earnings comparable to working for much

larger firms Lifestyle firms allow owners to pursue specific lifestyles they enjoy while being paid to do so Entrepreneurial ventures firms that are flows and performance oriented showing rapid value creation over time

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A Sound Business Model 1 Generate Revenues You must have customers and must have something to sell them 2 Make Profits You must eventually have revenues that exceed the expenses generating from those revenues 3 Produce Free Cash Flows You must generate cash inflows that exceed net working capital and capital expenditures

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Best Practices of High Growth, High Performance Firms

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Marketing Financial ManagementPrepare detailed monthly financial plans for the next year and annual financial plans for the next several years Anticipate and obtain multiple rounds of financing as the venture grows Efficiently and effectively manage the firm’s assets, financial resources, and operating performance Staying consistent with the entrepreneur’s objectives and business plan Plan an exit strategy

Assemble a team with functionality and industry/market knowledge

Employ a collaborative decision making style

Identify and develop managers that support entrepreneurial endeavors

Assemble board of directors with internal and external members

Initial “Litmus Test” A viable venture opportunity creates or meets a customer need, provides an initial competitive advantage, is timely in terms of time-to-market, and offers the expectation of added value to investors

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SWOT analysis considers 1 Unfilled customer need 2 Intellectual

property rights 3 First mover 4 Lower

costs and/or higher quality 5 Experience/expertise 6 Reputation value

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Venture opportunity screening An assessment of an idea’s commercial potential to produce revenue growth, financial performance and value

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Must have an adequate niche to gain market share and perform financially

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The business plan describes the proposed product or service opportunity, current resources, and financial projections

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Cover Page identifying the venture and contact info of the entrepreneur Confidentiality Statement “This business plan contains information that (the firm) considers proprietary. By accepting this business plan the recipient acknowledges the proprietary nature of this information contained herein and agrees to keep confidential all such

information.” Executive Summary is the main summary and ideas

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