Barrier to entry

1.Core Strategy (how a firm competes)

2.Strategic resources ( how a firm acquires and uses   resources)

3.Partnership networs (how a firm structures and nurtures its partnerships)

4.Customer interface (how a firm interfaces with its customers)

Its a Loan generally come from commercial banks and small business administration (SBA) guaranteed loans. They are not investors so they demand intrest paid on all loans given to a company. Aslo, they only loan money to low risk firms who meet certin criteria;strong cash flows, low leveragel audited financial statments, good mangement, and a healthy balance sheet. Firms generally have no restrictions on where they can spen the loaned money.

Is money that is given to the firm by investors (angel,VC,IPO). In return the invester now owns a smaller portion of the comapny. Equity investors are very demanding and fund only small portion of the business plan they consider. They only invest in unigue business opportunity, high growth potential, a clearly defined nich market, and proven management.

1. Seed Funding

2. Start-up funding

3. First stage funding

4. Second stage funding

5. Mezzanine financing

6. Buyouy funding

• Substitute examples – most small businesses where the owner makes just enough to live on (small shop or craftsmen – plumber, carpenter, mechanic, etc.)
• Lifestyle examples – seasonal businesses that allow individuals lots of time off (ski instruction, climate/season-based tourism, etc.)
• Entrepreneurial businesses are focused on growth and/or pursuit of opportunities (note the definition of entrepreneurship)
• One way to think about it – entrepreneurial means pursuit of opportunity. First two – who is the opportunity focused upon? (the person starting the business, not the customers that have a clear need)
• Another way to think about it – entrepreneurial firms will be less common/run-of-the-mill – compare the number of restaurant with the number of solar materials manufacturers

 

They are both novel and useful

▪

E.g. Solve a problem in a new way

Growing means new customers, don’t need to steal, no retaliation

It means that demand growing fast, but few competitors – little concern about competition

First mover – insurmountable advantage gained by being first to market

Second mover – learn from first mover and do it better/cheaper, but without R&D/introduction/education expenses

First mover advantage is rare: need many requirements for it to hold, you won’t likely have them

First movers have an advantage when:

•          They control scarce or intangible assets - Leave little or lesser quality for the competition (IP)

•          More customers result in increased value – eBay – network externalities

•          Customers pay a high cost for switching products - Cost isn’t just $ - it can be time to learn how to use the new product or the pain in the a** it might be to switch (think about cell phones before you could keep your number – or reluctance for people to switch from PC to Mac)

•          People are content with the status quo - If you become status quo by being first, competition will have to make a much better product – not generally easy to do

•          Reputations are important - If done right (set the standard) people remember the first more and better than followers

•          The learning curve for production is proprietary - Keep the knowledge (of the market for example) within your business

Feasibility is used just to determine whether idea should be pursued further and doesn’t provide a lot of detail about how the idea will be realized

Feasibility can be done without as much detail available – in fact it helps you figure out some details for the plan

B-plan - Improve business model, add data, show viability add operations, marketing and financials

Provide a road map to insiders and a selling document to persuade outsiders (investors) – describes the opp and how it will be pursued

– helps you think more detailed about your business - gives you a roadmap/plan and makes you consider things you might not consider otherwise

It’s something that you should continually refer to and update – see quote from David Beattle on p. 101

Also mentioned as part of Pandora case

Executive summary – first (and maybe last) section read

It is written last. It needs to have characteristics of good plan, but in 1-2 pages. It is a summary, not an intro. It should state what is needed (reason why person is reading it).

High barriers to keep people out – that keeps industry profits higher

Low before you enter market, but high after – or high always, but you have a way around the barrier

 

Know the five forces and how they affect industry profitability

Start-ups most likely can’t compete on price!!!! – Competition will respond and will have deeper pockets. The only way to make it work is to have some strategic resource that you own and others don’t that makes production cheaper for you – If they can copy it, they could do it too

 

Go for value instead – you make as much selling 1000 items at $10 margin as 10,000 items at $1 margin (both $10k) – but you work much less for the former

NDA is something you might want signed anytime you discuss your idea – helps protect it

NCA is something you want your employees to sign to make sure they don’t just learn from you and then leave to start their own company or work for a competitor – also need to make sure you don’t hire someone that signed a NCA with a competitor

Only need license(s) to start, cheap, owner has complete control, Losses reduce individual tax burden

Also – easy to dissolve, may need to file paperwork if operating under an assumed name rather than personal name – a fictitious name certificate filed locally

 

Some drawbacks:

Usually salary-substitute or lifestyle firm

One owner means limited knowledge and experience (tradeoff b/w individual and team)

Capital raising difficult due to one person and can’t sell shares (equity)

Increases ability to raise money, lets general members deal with management (keep ‘investment partners’ only involved financially – but this may be a disadvantage for the investor), Limited partners have limited liability due to their lack of management.

It’s the only one taxed at the entity level, all others have profits and losses flow directly to the owners/members – no other form offers dividends!

Compared to Sole prop/Partnership: limited liability

Compared to C Corp: he profit/lost flow (no double taxation),

Better than LLC because: it’s perpetual, can sell shares easier, less complicated legally (some states)

IMO - Tax considerations and liability

I used to think S Corp, moving towards LLC as it’s becoming more common (first appeared in 1978, laws still being worked out)

It also just depends on the situation – that’s why the table is useful

Notes from paragraph above:

-          ability to pursue opp hinges on availability of money

-          success doesn’t mean there are no financial challenges

-          firm can run out of cash, even if product selling like hotcakes

-          growth demands cash

Given all that – the second and third questions about cash are the most important

Liquidity – again a firm can be profitable but can be challenged with being able to pay bills – need to watch inventory and accounts receivable

Like the previous answers – cash flow!

Also see the Importance of Cash slide

(next slide) – minimize A/R, reduce inventory, spend less, delay A/P…also get creative (see TQ12)

“A” team with a “B” idea – can change the idea more easily (and more likely) than the team

Building an “A” team

[image]      Familiarity – leads to getting along

[image]      Important qualities among the team:

–        Relevant industry experience

–        Prior entrepreneurial experience

–        Education

–        Broad social and professional Network

Main difference is binding vs. non-binding advice

Note difference between inside and outside directors

Directors have two roles: guidance and legitimacy

Advisors provide broad or specific advice

Book gives good advice for assembling advisory board

Burn rate is how fast a company burns through capital before profitable – negative cash flow

Debt kills cash flow! Equity doesn’t hurt it – the big advantage

Spend a few minutes making sure they understand the difference

Until you have positive cash flow, fixed payments will be very difficult. You also have to have some form of collateral. Book says also leads to higher risk decisions because you stand to gain more (your payments are fixed costs)

Debt can be: credit card or home equity, asset-based (secured by the equipment you buy), and supplier credit (or can be debt to friends and family)

Personal, then equity, debt is least likely Get past the idea that a bank is going to give you a loan (quote from the beginning – get cash when you don’t need it

Angels – 10 – 100,000’s	VCs – millions
– often former e’s	– often professional investors
– individuals (may be part of consortium like CHAP)	– company
– many and scattered thus may be hard to find	– few and concentrated and all are publically known
– wide range of industries	– narrow range (mostly tech)
- generally want moderate equity share	- generally want high equity share

Similar – may join boards, want high growth (30-40% per year), have networks – and require networks to get foot in door, engage in syndication, generally invest close to home

often times you get additional input (advice, connections, etc. – come from a desire by equity holders to see you succeed – from professionals this could be good, from friends and family it may be a nuisance)

Note what Theo said in DD

Unfortunately, Ed is unlikely to have any better luck with the second and third bank he visits.  As shown in Table 10.2 in the textbook, banks are interested in firms that have a strong cash flow, low leverage, audited financials, good management, and a healthy balance sheet.  Although Ed may be very creditworthy and have a great idea, his potential new firm, like most potential new firms, simply doesn’t meet the criteria that bankers are looking for.  This reality isn’t necessarily a knock against banks; it’s just that banks are risk-adverse, and financing start-ups is a risky business.  

Benefit is what the customer gets out of using your good or service. Feature is what helps create the benefit. Benefit = making holes, feature = speed, rechargability, weight, etc.

Think about what people would do with the features – those are the benefits.

Benefit = problem solved

People buy things in order to receive the benefits, if you don’t focus on that you miss the point and will not sell your products well. You also miss out on being able to provide the best product for your customers.

Benefit is also referred to as the core product, features are the actual product

 

Clarify book – CD is not core product, protection from viruses is

Just something to get them to think a bit about their name. Point of second part is to make sure they provide a consistent message. Create a personality for the company. Also need to create value for the customer – then they associate that value with the brand. That brings it back to selling benefits.

Value-based -> higher margins means working less to make same profit. Value-based means it is priced based on the value the customer receives (customer perceived value)

Price suggests quality -> low price = cheap

PR better because it’s generally cheaper and more credible

If you do advertise keep it very focused/targeted  - don’t waste money – remember that people ignore ads

1 Utility

2 Design

3 Palnt

Raises the cost of imitation – licensing

Provides a monopoly right

Prevents a second party from using the invention as a trade secret

Also - Helps to raise capital by demonstrating competitive advantage

One major drawback – time and cost (note table 12.2 – 2.5 years for approval, getting worse)

Requires disclosure of the invention

Provides only 20 year monopoly

Can be circumvented – “invent around”

Difficult and costly to defend

Less effective for most types of technology

Can be irrelevant if technology is fast moving

Requires world-wide patent application

1 Must be kept hidden to remain valuable – may go to extreme lengths to do so: restrict access, label documents, password protected files, visitor logbooks, material access logs, other security measures

2 Doesn’t provide a monopoly right- if someone else discovers it independently (didn’t steal it) they have a right to it.