Entrepreneurship & Innovation

Prof. Sonia S. Siraz

ssiraz@faculty.ie.edu

Entrepreneurship
 Program for today
- General Presentation Feedback
- Peer evaluation (Business Opp. project)
• 5% of grade.
• An assignment will be created in campus online to
upload an excel file with the evaluation (from 0 to
10) that you give your teammates.
• Fill out the evaluation NO LATER than FRIDAY 7th
- Innocent Drinks
- Course wrap up and information about the final exam

Entrepreneurship
 Key points from previous sessions

-Oral presentations
-Cite important information!
-Never put ‘unreadable’ information in a slide…
-Team analysis: only mention what makes this team particularly suitable
for this idea (why us and not others?)
-Apps: always think of how you would use the data generated from that
application (may actually generate an additional source of revenue).
-Clarity: avoid any ambiguity… pitching an idea to investors is about
convincing an audience to trust you, so minimize confusion (it scares
investors away).

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 Why entrepreneurs cash out (harvest)?

• A need to diversify personal wealth.

• Business has gone as far as it could go.

• The founder’s urge to begin new projects.

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 Harvesting

What options do entrepreneurs have to recover their

initial investment?
• There are five principal avenues by which a company can
realize a harvest from the value it has created…

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 Harvesting

1) Acquisition by another firm:

• Complex transaction. Entrepreneurs typically don’t have
experience dealing with such operations, so they need to
enlist legal or financial advisers.

• It is well accepted that it is a much faster way to cash out

than going IPO.

• But because you are avoiding the risks that would accompany
selling shares directly to the public, you generally accept a
discounted return.

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 Harvesting

2) Employee stock ownership plan:

• Sell part of the firm to actual employees as a form of
remuneration.

• It also serves as a vehicle to quickly realize some liquidity from

selling their stock to employees. Since an ESOP usually creates
widespread ownership of stock among employees, it is viewed
as a powerful motivational device as well.

• Disadvantages: eventually, employees end up owning most of

the firm. Valuation has to be done yearly by independent
expert.

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 Harvesting

3) Management buyout:
• A management buyout (MBO), is one way by which a founder
can realize a gain from a business by selling it to existing
partners or to other key managers in the business.

• This happens when the founder is not motivated to continue

to run the company but the existing managers want to keep
control of the organization.

Entrepreneurship
 Harvesting

4) Initial Public offering (IPO):

• Selling the company publicly may result in a higher payoff
than simply selling it to private hands, but the process of IPO
is not easy and entails much uncertainty…

• Power shifts from founders to shareholders.

• You only want to go IPO if you’re sure that the company is

likely to grow and expand successfully.

• It also increases public awareness and possibility of further

financing in the future if needed.

Entrepreneurship
 Harvesting

5) Shearing or ‘cash cow’ approach:

• Stop reinvesting everything and start cashing-out the excess
beyond the amount needed to continue operations

• May be dangerous because you stop the value creation

process.

• Not easy to achieve: may require too much patience and

therefore be destined to fail.

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 Today’s reading

How fast can your company grow?

Will Churchill and John Mullins (Harvard Business Review)

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 Growing a startup

-A key challenge for managers of any growing

company is to strike the right balance between
consuming cash and generating it.
-Fail to strike that balance, and even a thriving
company can find itself out of business –a victim of its
own success.
Churchill and Mullins (2001, HBS Publishing)

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 Growing a startup

Need to keep in mind 3 aspects to calculate the self-

financing growth rate (SFG):
-The company’s operating cash cycle.
-The amount of cash needed to finance each euro of sales.
-The amount of cash generated by each euro of sales

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Operating cash cycle

Entrepreneurship
 Growing a startup

Calculating the self-financing growth rate (SFG):

%&'()* '+ ,-./ 01)12-*13 45 1-,/ 1(2' '+ .-61. 9:;

!"# = ∗
%&'()* '+ ,-./ )11313 *' +7)-),1 1-,/ 1(2' '+ .-61. 3-5. '+ <==

Entrepreneurship
 Growing a startup

Which levers can I use to influence the SFG?

-Speeding cash flow.
-Reducing costs.
-Increasing prices.

Entrepreneurship
 Growing a startup

Key to avoid running out of cash:

Know your burn rate!!
Use it to estimate when will you go out of cash.

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 The Cash Flow Cycle For A Venture
Cumulative Cash Flow in $

Date of First Cash Flow Positive

Time

Date of Cash Breakeven

Maximum Financing Needs

Burn Rate

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Innocent drinks

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 Innocent drinks

U.K. based smoothies venture

Started operations in 1999

Founding team: three former college friends

Unexpected success

What to do next: grow? harvest, both?

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Wrap up

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 Being an entrepreneur

Entrepreneurial “hubris”…

-Both an advantage and a disadvantage!

-Goes together with passion, perseverance, determination

-Drives entrepreneurs to “create something out of nothing”

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 Being an entrepreneur
Being an entrepreneur is not a job…
-“Irrational passion, not a job”, “it’s a virus”

-It’s an all-encompassing activity, not something you do a few

hours a day…

-Being an entrepreneur affects all aspects of your life.

-It is about discovering a market need – a customer problem that

begs to be solved – and have the passion and commitment to
come up with a better solution than what’s out there. That’s what
real entrepreneurs do.

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 Being an entrepreneur

Get out of the building…

-Start from having a good understanding of the customer

-Then move on to design/produce the product/service.

Entrepreneurship
 Being an entrepreneur

Develop the customer…

-Startup è “a series of guesses”

-Fatal guesses: “I know what the customers need/want”,

therefore “I know what to build”

-Make sure you have customers, and then build your

product.

-“Pivot back to discovery” (iteration is key)

Entrepreneurship
 Being an entrepreneur

Who is ‘cut out’ to be an entrepreneur?…

-Are you easily discouraged?

-Are you considering it because of money, as an investment?

-Are you too risk averse?

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 Entrepreneurship: Craft or Plan?
“Planning” view:
-Comprehensive analytical procedure
-Fully investigate an opportunity
-Measure every risk and deliberately assess tradeoffs
-Design a detailed plan and execute it to the detail

“Craft” view:
-Inherently practical discipline
-Understand the entrepreneurial process as ‘holistic’ and not
sequential.
-Make decisions using “informed” intuition
-Integrate action and analysis, and be ready to change course

Entrepreneurship
 Entrepreneurship as a “process”

Think of entrepreneurship as a process, not as an

outcome…
-Entails search, discovery, and execution of an
opportunity.

-A process that leads to an outcome: the creation of

a sustainable business or simply the harvesting.
-It’s an inherently practical discipline

-You learn by doing

Entrepreneurship
 The journey we’ve been through…
-What is entrepreneurship and why we care? (macro perspective)
-Opportunity recognition
-Lean startup approach
-Business models
-Customer development
-Teams
-Raising capital
-Growing the venture
-Entrepreneurship in large corporations
-Exit strategies

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 Key concepts

Effectual reasoning…
-Opposite to ‘causal’ reasoning

-“Bird-in hand principle”: start with the resources you control

-No pre-defined goal… multiple possible goals

-Affordable loss: spend only what you can afford

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 Key concepts

Lean startup methodology…

-Hypothesis driven approach

-Design an MVP to test your hypotheses

-Based on the feedback: “pivot”, “move on”, or “die”

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 Key concepts

Business models…
-Definition?

-Not about competitors… about how the business “works” and

generated a profit

-Business model canvas: key tool to design, craft, describe

change, communicate a business model

-Business models have to be adapted to new markets

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 Key concepts

Biases…
-Selection bias

-Confirmation bias

-Hindsight bias

-Sunk cost fallacy

-Anchoring and adjustment

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 Key concepts

Cases…
-How VCs evaluate new ventures
-Gametime
-Patagonia
-Zipcar
-Angel investor with an agenda
-Bonnier
-Innocent drinks

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 Key concepts

Financing new ventures…

-Bootstrapping

-Equity investment (different types)

-Debt financing

-Each type has advantages and disadvantages. Know them!

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 Entrepreneurship

Final exam
Monday 10th
- You need at least a 4 to pass the course
- Multiple choice (40%)
- Essay questions (60%)
- Cases & readings

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 Entrepreneurship
Example of essay question:
Throughout the course we have argued that startup growth is
important in many ways, even if it is extremely challenging for
entrepreneurs to manage it. At the same time, we argued that policy-
makers should focus less on the creation of new ventures and more
on the growth of existing new ventures.

- Explain the rationale behind these statements, and why growth makes
sense from an economic perspective and a new firm perspective.

- Also, elaborate on the main difficulties that startups face when trying to
grow in size.

- And finally explain how the role of the founder entrepreneur evolves as
the venture goes from early stage to a growing organization.

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 Entrepreneurship courses
-Entrepreneurship courses offered in the
entrepreneurship track:
-Entrepreneurship Do-it-Yourself
-Build your startup
-Management control for start-ups
-Social entrepreneurship
-Technology new ventures
-Entrepreneurship in emerging markets
-Digital business
-Advanced Coding
-Business intelligence for startups
-Technology venture creation practicum (luxury industry)
-Corporate entrepreneurship
-Family firms
-Introduction to coding
-Generating value from new technologies

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 Opportunity Project

Peer evaluation!
- Grade your teammates (form 0 to 10)
- Reward or penalize according to effort made in the project.

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 Entrepreneurship

Questions? Comments?

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Thank you and good luck!
And most important, the
very best for your future
plans!

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