Foundations of Entrepreneurship

Quiz 2 ContentSpring 2013

5 steps to the perfect pitch

1. Identify a big pain that invokes an emotional response in your audience

2. Offer a brilliant solution that logically follows and solves the big pain you've identified

3. State how your solution is different (i.e., better) by acknowledging and dismissing current solution providers

4. State convincingly why you are the right person to make this opportunity a reality.

5. Push your audience to act - get them to the point where they say "Tell me more."

How to connect with your audience

• Why should you care about how you come across to your “catcher?”

• Entrepreneurs come up with great pitches to show how their plans or concepts are attractive, timely durable, and high-margin

• But corporate decision makers don’t “get it” and ideas go unfunded

• Why? Is it the pitcher’s or the catcher’s fault? • You can model yourself after one of three types of

pitchers to succeed

3 types of pitchers

• Showrunner: “professionals” who combine creative inspiration with production and technical know-how

• Artist: quirky and unpolished, prefer creativity over reality

• Neophyte: tend to be – or act as if they were – young, inexperienced, and naïve, but are prepared to “do the impossible.”

Project yourself as one of these three creative types and convince the “catcher” s/he is a creative collaborator and you improve your chances of selling the idea

Traits we use to stereotype “creatives”

• Unconventionality• Intuitiveness• Sensitivity• Narcissism• Passion• Youth

People rely on stereotypes – We use visual and verbal matches with these pitching models and remember only the characteristics that identify the pitcher as a particular type

Which creative pitching type is the best fit for you?

How to succeed

• Catchers overwhelmingly look for showrunners – be a showrunner if you have the skill set

• Artists and neophytes can wind through enchantment and charm (and overcome gaps in experience)

• Showrunners are also the most dangerous because they can blind the catcher through glitz

Founding teams

Anchoring vision in team philosophy and attitudes

• The most successful entrepreneurs seem to anchor their vision of the future in certain entrepreneurial philosophies and attitudes:– What a team is– What its mission is– How it will be rewarded

• Unwritten ground rules, rewards, compensation, and incentive structures rest o these philosophy and attitudes

Anchoring vision in team philosophy and attitudes

“The capacity of the lead entrepreneur to craft a vision, and then to lead, inspire, persuade, and cajole key people to sign up for an deliver the dream makes an enormous difference between success and failure.”

Jeffrey Timmons

Ways to success – advantages of a team

• More feedback• Increased portfolio of skills• Higher level of social support• Moral support• Greater capacity for innovation• Extended network

Things to keep in mind when creating a start-up

Evaluate your skills

Use your strengths

Ask for feedback of your actions

Building a powerful team

Create a staffing plan

Find people to fill positions

Your personal network

Your advisors’ Network

Your extended Network

• Friends• Family

• Professors• Alums

• Professional Managers• Tech experts

You have at least three types of networks to source team members – make the most of them!

Attributes of successful teams

• Cohesion – “We’re in this together”• Teamwork – make others’ job easier; no individual

heroes• Integrity – hard choices and trade-offs based on what

is good for the customer• Commitment to the long haul – no one benefits by

signing up now and bailing out early• Harvest mind-set – capital gain is the goal, not a

paycheck

Attributes of successful teams

• Commitment to value creation – making the pie bigger for everyone

• Equal inequality – democracy does not work well in start-ups –divide the pie based on what you bring to the table - $, talent, contacts, experience

• Fairness – rewards are based on contribution, performance, and results over time

• Sharing of the harvest – 10 – 20% of “winnings” is frequently set aside to distribute to key employees; characteristic of the most successful entrepreneurs

Filling the gaps

• “Successful entrepreneurs search for people and form and build a team based on what the opportunity requires, and when.”*

• Team members contribute high value when they complement and balance the lead entrepreneur and each other

• The process of evaluating and deciding who is needed, and when, is dynamic and not a one-time event

* Timmons, 1975

Filling the gaps

• The founder• Every team starts with the founder (aka, the

lead entrepreneur)• Founder determines whether team is needed,

assesses talent, skills, track record, and contacts of possible members

• Founder needs to determine what the venture requires in order to succeed

Filling the gaps

• The opportunity• Whatever the team needs are depends on the fit

between the lead entrepreneur and the opportunity• Entrepreneur must clearly define:

– the value added and logic of business model (revenues and costs)

– Critical success factors – Extent to which s/he has access to critical resources and

relationships

Filling the gaps

• Outside resources• Gaps can be filled by external resources:• Boards of directors, accountants, lawyers,

consultants, etc.• Entrepreneur must consider:

– Whether need is specialized, one-time or part-time or a critical continuous need

– What trade secrets might be compromised if external expertise is used

Examples of External Team Members

Virtual

team

Outside Investors

Lawyers

Accountants

Board of Advisors

Board of Directors

Do Nots of double employment• Do not use your employer’s resources• Do not expropriate intellectual property from

your current employer• Do not solicit your employer’s customers until

you quit the job• Do not conceal the fact that you are founding

your own venture

Problems that new venture teams face

• Family pressures: intense commitment of time and effort can stress family relationships

• Burnout: entrepreneurs need to be mentally tough and focus on the long haul

• Interpersonal conflicts: minor conflicts between team members can blow up under high pressure

Entrepreneurial teams

William Sahlman remarks on creating the best start-up teams

Notes from Stanford EdCorner series

4 critical elements to hiring

• Four critical elements to observe in the process of hiring people are:

1. Integrity, 2. References, 3. Attitude and 4. Adaptability. • Sahlman highlights the importance of seeing through

a resume to the core of the person underneath, one way of which is to use your network of contacts to get the back story on an individual.

4 critical elements to hiring

• You have to pay the most attention to integrity.• In 180 companies Sahlman has seen, he's only had to

deal with 3 bad people. • Issues to consider:

– When confronted with decision that may benefit person or team, person who makes decision on his or her behalf is absolute poison. integrity has to be the forefront of your thinking.

– Conflict is everywhere. you have to deal with situations where people may prefer to act in their best interests. if you're concerned, don't hire them..

References and attributes

• A resume is a marketing document to sell yourself – people don’t talk about failures, just how they want you to see them

• Find people with valuable competencies – use your networks because your first hires will make or break your venture

• Attitude is everything in early hires – make sure they’re capable of change – see second bullet on networks…

Challenges of hiring good people

• Recruiting good people is hard work• Mistakes are common, fixing them is critical• Entrepreneurs must expend extra effort in

interviewing and screening because a bad hire can kill the company

• Entrepreneurs must be ruthless in fixing hiring mistakes

Interviewing

• Do you love to interview people? (most of us don’t)• We are biased to want that person in front of us to

be the right person – it’s still a 50/50 proposition (aka chance for mistakes)

• A bad hire in an established company costs $500k; bad hire in start-up costs the company

• People don’t change; give them feedback, treat them with respect, but realize that org requires great people

Teams are more important than individuals

• Teams are the central unit of entrepreneurial success

• Many companies succeed because of the team, not any particular individual – entrepreneurs should think carefully about breaking up teams as well as the effect that replacing an individual has on a team – worry more about the quality of the team than the person you are removing or adding to the team

Summary

• What you want from ideal candidates: integrity, references, adaptability, attitude, and valuable capabilities – integrity is paramount

• Teams are more important than individuals• You must expend more effort in your hiring

activities than established companies expend• You must deal with bad hires as soon as

possible

The Business Plan

Why write a business plan?

• Always when a new venture needs outside funding

• Early in the planning process when you are looking at a large-scale project

• Later or not at all when you are bootstrapping

Dollinger, 2008

Costs and benefits of planning

• Writing a plan takes considerable time, money, and energy

• Every plan deals with economic uncertainty and risks posed to new venture – founders may be uncomfortable confronting risks and uncertainties and avoid writing a plan

• Writing the plan helps founders confront risks and conflicts before they become serious problems

Dollinger, 2008

The plan demonstrates how you

1. Create or add significant value to a customer or end user

2. Solve a significant problem or meet a significant need for which someone is willing to pay a premium

3. Have robust market, margin, and money-making characteristics

4. Have a good fit with the founders, management team at time of market entry, and the risk/reward balance

Timmons, 1999

After you write the plan

• It becomes a point of departure for due diligence for potential investors and to determine risks of venture (technology, market, management, competitive, financial risks)

• This homework is crucial even if you don’t try to raise outside capital

• The most valuable investors will see weaknesses, even flaws, and will propose tactics and people to fix them

Timmons, 1999

Tips for business planning and raising outside funds

RE: Venture capitalists• There are a lot of them; don’t talk to all of them• Getting a “no” is as difficult as getting a “yes;”

qualify your targets and force others to say no• Be vague about which other VCs you are talking

to• Do not meet with an associate or junior

member twice without a partner

Timmons, 1999

Tips for business planning and raising outside funds

RE: The plan• Stress your business concept in the executive

summary• The numbers matter less than the economics (value

proposition and business model)• Make the business plan look and feel good w/o

using “filler”• Be prepared to provide copies of published articles,

contracts, market studies, purchase orders, resumes, etc.

Timmons, 1999

Tips for business planning and raising outside funds

RE: The Deal• Make sure investors want you as bad as you

want them• Create a market for your venture• Never say no to an offer price• Use a lawyer with venture deal experience• Don’t stop selling until the money is in the

bank

Timmons, 1999

Tips for business planning and raising outside funds

RE: The fund raising process• It is much harder than you ever thought it

would be• You can last much longer than you ever

thought you would• The venture capitalists have to do this the rest

of their careers

Timmons, 1999

Critiquing the plan – General criteria• Comprehensiveness – use a template to help• Analysis – resource, industry, competitor and

product analysis; financial projections with percentages, returns, and comparisons with analogs

• Reasonableness – assumptions are comparable to benchmarks and facts

• Writing and presentation – well written and organized

Dollinger, 2008

Critiquing the plan – Specific criteria• Management – experience, honesty, integrity• Resources – rare, valuable, hard to copy,

unique• Projections and returns – all data must have

solid foundation in reality, yet optimistic enough to attract investors

• Exit – how and when will investors recoup money?

Dollinger, 2008

New venture resources

Steps to identifying, acquiring, developing, and deploying resources

in start-ups

New venture resource endowments

Reality of start-ups• No administrative

history • No loyal customer base• No performance

reputation• No shared experience

Implications• Each resource decision

choice has substantial implications for survival and growth of the firm

• Early strategies must focus on unique capabilities rooted in innovative combinations of resources

Jeff Hawkins

• Developed patent on handwriting algorithm as doctoral student in neurobiology

• Licensed patent to former employer Grid Systems to commercialize it to keep track of deliveries

• Grid customers said they wanted personal devices – saw demand for a consumer product

HUMANExperience, education,

reputation

SOCIALIndustry contacts

TECHNOLOGICALPatent

PHYSICALCOMBINATIONS

PHYSICAL

ORGANIZATIONAL

FINANCIAL

Complex• Intangible• Systemic• Knowledge-

based

Simple• Tangible• Discrete• Property-based

Utilitarian Instrumental

Resource development pathway at Palm

HUMANExperience, education,

reputation

SOCIALIndustry contacts

Customer/supplier relationships

TECHNOLOGICALLicense

PHYSICALCOMBINATIONS

PHYSICAL

ORGANIZATIONALExperienced employees

FINANCIALPersonal funds

Complex• Intangible• Systemic• Knowledge-

based

Simple• Tangible• Discrete• Property-based

Utilitarian Instrumental

Resource development pathway at Handspring

Opportunity Entrepreneur

Resources

Fits & GapsBusiness plan

Uncertainty Uncertainty

UncertaintyChallenges in building a resource base

The Timmons Model for Entrepreneurial Success

For example

Human – tacit and functional knowledge

Social – ability to extend industry, supplier, financial, vendor relationshipsOrganizational management & employee teams, tacit knowledge

Technical – patentSocial – industry contactsHuman – work experience, reputation, technical education

Financial – personal capitalTechnical – licenseHuman – entrepreneurial experience, industry reputationSocial – industry and financial contacts

Unique advantage

Strategic assets

Core competencies

Capabilities

Genericresources

Resource pyramidof value creation

Palm Handspring

Attracting initial resources

• Concept must be viable…• …but there must also be a connection

between the founder and the potential sources of resources

• The entrepreneur’s reputation, capabilities, commitment, and conduct – plus human and social capital – determine his/her ability to attract resources

The resource-development pathway

• Resource-development pathway tool helps the entrepreneur begin with starting endowments and connect the specification steps to acquisition of other needed resources

• This process is facilitated by the social skills – a competence – of the entrepreneur

Five social skills for the entrepreneur

• Social perception – the accuracy with which the entrepreneur assesses the traits, intentions, and motives of others

• Impression management – how one induces positive reactions from others

• Expressiveness – ability to express emotions and feelings clearly and generate enthusiasm in others

• Persuasiveness – ability to change others’ view or behaviors in face-to-face encounters

• Social adaptability – ability to feel comfortable in a wide range of social situations

Combining initial resources

• Entrepreneur can fit resources to a particular industry environment or develop new combinations

• Initial basic resources are combined and configured into unique resources that provide competencies and capabilities – not bigger bundles of resources

• Entrepreneurs can leverage activities (e.g., technological expertise) they are uniquely good at with these competencies and capabilities

Transforming personal resources into organizational ones

• Resources unique to the founder must be transformed into organizational ones – they do so by moving through the combinatory process to develop a unique advantage

• Resources are formalized and transformed into specialized capabilities that can be integrated into higher order clusters of competencies

Transforming personal resources into organizational ones

• An entrepreneur with knowledge of the product, market, and industry – along with a good reputation by working successfully in that work space – can specify resource needs more closely, identify and attract potential resource providers more efficiently, and engage in exchange at lower cost

• Ventures that can’t transition individual resources to organizational ones will be growth-constrained

Developing a strategic resource plan

• New ventures need to develop routines and systems, define policies by which people work, and create incentive systems

• This part of resource development emphasizes building and transferring knowledge by creating a shared understanding among employees of the venture’s direction and focus – the entrepreneur will need to engage in intense and frequent communication to develop this

Lessons

1. An idea can become a significant source of wealth creation if the company’s resource position is strategically developed from the time of the initial launch

2. Resource strengths must be developed into valuable and unique resources that will provide a competitive advantage

3. Entrepreneurs need to construct their resource base and build a foundation for developing capabilities

Questions from Craigslist case

• What was the innovation behind the Craigslist concept?

• What are some of the sources of Craiglist's competitive advantages? Which of these resources are valuable, rare, and costly to imitate?

• Evaluate the challenges to Craigslist as it grows globally. How can it overcome these challenges?

• What are some of the key motivators that drive advertisers to Craigslist? Do these stakeholders provide Craigslist with a competitive advantage?

Questions from Craigslist case

• What was the innovation behind the Craigslist concept?– Creating an online community around free

classified ads

Questions from Craigslist case

• What are some of the sources of Craiglist's competitive advantages? Which of these resources are valuable, rare, and costly to imitate?– First-to-market service (a rare feat, since first-to-market movers

rarely win) (valuable, rare, costly to imitate)– Simple navigation and design (valuable, rare)– Low overhead to operate (valuable, rare)– Loyal established base of community members (valuable, rare,

costly to imitate, no substitutes)– Allows intermediation of goods and services on a local level that

is superior to eBay or newspaper classifieds (valuable, rare, costly to imitate, no substitutes)

Questions from Craigslist case

• Evaluate the challenges to Craigslist as it grows globally. How can it overcome these challenges?– Will this business model translate well into other

countries and cultures?– Newmark will need to hire interpreters, language

experts– Possibility of global-scale scams

• Overcoming these challenges will require substantial financial, technological, and human resources

Questions from Craigslist case

• What are some of the key motivators that drive advertisers to Craigslist? Do these stakeholders provide Craigslist with a competitive advantage?– Craigslist has an enormous, dedicated base of users

because of the sense of community the site promotes. – This sense of community provides Craigslist with its

advantage. – As with practitioners of medicine, Newmark should

“first, do no harm” to this sense of community.