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Thoughts on Business Plans

Thoughts on Business Plans. Entrepreneurship. Working definition: The relentless pursuit of opportunity without regard to tangible resources currently controlled A complete process from identification to harvesting A way of managing. The Structural Model. The critical elements People

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Thoughts on Business Plans

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  1. Thoughts onBusiness Plans

  2. Entrepreneurship • Working definition: The relentless pursuit of opportunity without regard to tangible resources currently controlled • A complete process from identification to harvesting • A way of managing

  3. The Structural Model • The critical elements • People • Opportunity • Context • Deal • The concept of FIT • The concept of dynamic FIT Management

  4. The Concept of FIT

  5. The Concept of FITThe Answer to Four Questions • To what degree do the people have the right experience, skills and attitudes, given the nature of the opportunity, the context and the deals struck? • To what degree does the opportunity make sense, given the people involved, the context and the deals struck? • To what degree do the deals involved in the venture make sense, given the people involved, the nature of the opportunity and the context? • To what degree is the context favorable, given the people involved, the nature of the opportunity and the deals struck?

  6. Dynamic FIT ManagementCHANGE (GOOD AND BAD NEWS)

  7. Capital Markets - Product Markets - Labor Markets Finance - Operations - Marketing - Human Resources P Leadership - BGIE - Ethics - FRC - Competition & Strategy C O D The Entrepreneurial Manager Continuous Experimentation and Learning Information Good News/Bad News Information Good News/Bad News Anticipation Response Identify - Marshal - Act/Exploit - Harvest

  8. People Questions • What have the founders done in the past that would lead you to believe they will succeed in the future? • Experience • Contacts • Reputation • Skills • Integrity • Attitude • Who is missing and how will they be recruited? • Team issues?

  9. Opportunity Questions • How big is the total market? • How much consumer value can be created? • How much producer value can be created and captured? • What are the implications of entry on the size of the pie?

  10. Essential Questions re Opportunities • Who is the customer? • How do they make decisions? • What risks do they perceive? What benefits? • To what degree is the product or service compelling? • How will the product or service be priced? • How will the venture reach target segments? • How much does it cost (money and time) to acquire a customer? • How much does it cost (money and time) to produce and deliver the product or service? • How much does it cost to support and retain a customer? • What is the lifetime value of a customer?

  11. Opportunity Sources • Change • New things old ways • New things new ways • Old things new ways • Both sides of the balance sheet • Market inefficiencies (P¹V or k¹k*) • Wholesale to retail • Rules of the game

  12. Opportunity Sources (cont.) • Execution • First mover advantages • Addiction/Switching costs • Uncertainty (insurance and security blankets) • New technologies • Applications of new technologies • Social/Demographic/Political trends

  13. Opportunity Sources (cont.) • Trojan horses • Razors and razor blades • Financial distress • Scale economies/Net consolidations • Learning curve effects (customer and producer) • Baggage

  14. Opportunity Sources (cont.) • Stupidity • Price discrimination • Selling ammunition to all sidesin a war without end

  15. Industry And Competitive Analysis • The five forces • The choice of a strategy • Opportunity duration • Interactions of capital and product markets • Ways to change the basis of competition • Perspective of the new entrant (war games)

  16. Positions From Which To Spot Opportunity • Customer • Supplier • Employee • Other • Local knowledge • Advisor • Consultant (not) • Investment banker (not) • “Knowing and being known” • You have to get in the “game”

  17. Opportunity - Not “How do you become a millionaire? Start out a billionaire and buy an airline.” Richard Branson, Virginia Atlantic - see also Warren Buffett

  18. Business Model Analysis • The “tracks” of the model are in the income statement and balance sheet • Income Statement • Sales • COGS • SG&A • Interest • Taxes • Depreciation • Balance Sheet • A/R A/P • Inventory Debt • NPPE Equity • What can be reengineered? By your company? By a new entrant? • Examples: can I get paid earlier? can I go direct? can I produce JIT? Fixed vs. Variable costs?

  19. Free Cash Flow Patterns

  20. The Disk Drive BusinessDisruptive Technologies

  21. Cash Flow time Patterns Growth options Simple project, no growth options Cash Flow time Clone options Uncorrelated options Cash Flow Cash Flow time time

  22. Curve Questions • What are the milestones? • How long does it take to reach each milestone? • How much does it cost to reach each milestone? • Uncertainty of payoff structure? • What are the options created or destroyed at each milestone? • What is the relationship between curves?

  23. Interactions Product Market Capital Market Labor Market

  24. Contextual Pressures • Heightened uncertainty • Global and domestic competition • The entrepreneurial revolution • Capital market pressures

  25. Deals • Fundamental premise: • People act in their own (perceived) best interest • How is cash allocated? • How is risk allocated? • What are the incentives? • What can be inferred by decisions? • What are the future (micro and macro) consequences of current decisions?

  26. Critical Steps In DealStructuring And Analysis • Complete list and assessment of the players • Complete “what if” analysis • Complete analysis of incentives • Sensitivity to sequencing (path matters!)

  27. Good and Bad Deals • Simplicity • Fairness • Trust • Robustness • Perverse incentives • Poison pills • The passage of time • Improving the chances of success • Decreasing the risk or consequences of failure

  28. Negotiations • Ranges of reasonable values • Understanding the key factors that affect risk and reward (where to give in and where not to) • Creating perception of overlap • Negotiating skills • Using external events to advantage • Turning adversaries into partners • Resolving impasses

  29. Risk/Reward Analysis And Management • What can go wrong? • What can go right? • What decisions can management make today and in the future to ensure that “what can go right” does go right and “what can go wrong” is avoided, or failing that, is prevented from critically damaging the company? • Structuring the analysis: • People • Opportunity • Context • Deal

  30. Probability of Occurrence Expected Value Probability of Losing 100% Goal 2 Goal 1 Return on Investment -100% +25% +100% Risk/Reward Management

  31. Impact of Leverage on Equity Risk Distribution of Probability Total Value (Debt of and Equity) Outcome Distribution of Total EquityValue Returns

  32. Free Cash Flow And The Choice Of Burn Rates

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