Chapter. 1. The Entrepreneurial Mind: Crafting a Personal Entrepreneurial Strategy. McGraw-Hill/Irwin New Venture Creation, 7/e. © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Overview of Tonight. Guest Speakers Discussion of New Venture Club Course Outline
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Chapter 1 The Entrepreneurial Mind: Crafting a Personal Entrepreneurial Strategy McGraw-Hill/Irwin New Venture Creation, 7/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
Overview of Tonight • Guest Speakers • Discussion of New Venture Club • Course Outline • The Entrepreneur and Entrepreneurial Process
New Venture Club • Purpose • Organization • Role
Course Outline • Materials • Timmons & Spinelli, New Venture Creation • HBSP Case Packethttp://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=cp&c=c66998 • HBR on Entrepreneurship (optional)
Course Assessment • Case Presentation (20%) • Feasibility Presentation (10%) • Deal Structure (10%) • Plan Presentation (10%) • Business Plan Document (40%) • Participation (10%)
Milestones • Elevator Pitches (Week 4) • Feasibility Presentations (Week 9) • Business Plan Presentations (Weeks 15/16)
Entrepreneurship Defined • Entrepreneurship—a way of thinking, reasoning, and acting that is opportunity obsessed, holistic in approach, and leadership balanced (This definition of entrepreneurship has evolved over the past two decades from research at Babson College and the Harvard Business School and has recently been enhanced by Stephen Spinelli, Jr., and John H. Muller, Jr., Term Chair at Babson College.)
Entrepreneurship Results • Value: • Creation • Enhancement • Realization • Renewal • For: • Owners • Stakeholders • All Participants
What is an entrepreneur? • Two broad schools of thought • Attributes • An entrepreneur is someone who possesses attribute X • Behavioral/functional • An entrepreneur is someone who does Y • So what are X and Y?
Attribute Approach • Psychological Traits • Intelligence, extraversion, locus of control, need for achievement, social competence, creativity, risk-taking • Demographics • Social networks, age, marital status, parental influences, work experience, education, income level, social status • Are these attributes necessary? • Founding vs. Success
Cantillon Knight Schumpeter Kirzner Gartner Stevenson Phelan One who works for uncertain wages One who buys factors at certain prices and sells them in the future at uncertain prices (1921) One who creates new products, processes, inputs, markets, or organizations (1911) One who is alert to profit opportunities One who creates a new venture One who pursues opportunities regardless of resources currently controlled One who seeks to earn entrepreneurial profits Behavioral/Functional Approach
The Entrepreneurial Mind in Action • Successful entrepreneurs have a wide range of personality types • Research has considered genetics, family, education, career experience, etc., but no psychological model of entrepreneurship has been supported. • Acquired skills are more important that specific inherent traits
Converging on the Entrepreneurial Mind • Desirable and Acquirable Attitudes, Habits and Behaviors • Six Dominant Themes • Commitment and Determination • Leadership • Opportunity Obsession • Tolerance of Risk, Ambiguity and Uncertainty • Creativity, Self-Reliance, and Adaptability • Motivation to Excel
Complications • Intrapreneurs • Social entrepreneurs • Craft entrepreneurs • Job substitutes versus high potential ventures
Leadership and Human Behavior • No single psychological model of entrepreneurship has been supported by research • But, behavioral scientists, venture capitalists, investors, and entrepreneurs agree the venture will depend a great deal upon the talent and behavior of the lead entrepreneur and his or her team • Myths still exist about entrepreneurs and entrepreneurship
Myth #1 • It takes a lot of money to finance a new business. • Not true. The typical start-up only requires about $25,000 to get going. The successful entrepreneurs who don’t believe the myth design their businesses to work with little cash. They borrow instead of paying for things. They rent instead of buy. And they turn fixed costs into variable costs by, say, paying people commissions instead of salaries. • From Scott Shane “The Illusions of Entrepreneurship” 2008
Myth #2 • Venture capitalists are a good place to go for start-up money. • Not unless you start a computer or biotech company. Computer hardware and software, semiconductors, communication, and biotechnology account for 81 percent of all venture capital dollars, and seventy-two percent of the companies that got VC money over the past fifteen or so years. • VCs only fund about 3,000 companies per year and only about one quarter of those companies are in the seed or start-up stage. In fact, the odds that a start-up company will get VC money are about one in 4,000. That’s worse than the odds that you will die from a fall in the shower.
Myth #3 • Most business angels are rich. • If rich means being an accredited investor –a person with a net worth of more than $1 million or an annual income of $200,000 per year if single and $300,000 if married – then the answer is “no.” • Almost three quarters of the people who provide capital to fund the start-ups of other people who are not friends, neighbors, co-workers, or family don’t meet SEC accreditation requirements. • In fact, thirty-two percent have a household income of $40,000 per year or less and seventeen percent have a negative net worth.
Myth #4 • Start-ups can’t be financed with debt. • Actually, debt is more common than equity. According to the Federal Reserve’s Survey of Small Business Finances, fifty-three percent of the financing of companies that are two years old or younger comes from debt and only forty-seven percent comes from equity. So a lot of entrepreneurs out there are using debt rather than equity to fund their companies.
Myth #5 • Banks don’t lend money to start-ups. • This is another myth. Again, the Federal Reserve data shows that banks account for sixteen percent of all the financing provided to companies that are two years old or younger. • While sixteen percent might not seem that high, it is three percent higher than the amount of money provided by the next highest source – trade creditors – and is higher than a bunch of other sources that everyone talks about going to: friends and family, business angels, venture capitalists, strategic investors, and government agencies.
Myth #6 • Most entrepreneurs start businesses in attractive industries. • Sadly, the opposite is true. Most entrepreneurs head right for the worst industries for start-ups. The correlation between the number of entrepreneurs starting businesses in an industry and the number of companies failing in the industry is 0.77. That means that most entrepreneurs are picking industries in which they are most likely to fail.
Myth #7 • The growth of a start-up depends more on an entrepreneur’s talent than on the business he chooses. • Sorry to deflate some egos here, but the industry you choose to start your company has a huge effect on the odds that it will grow. • The odds that you will make the Inc 500 are 840 times higher if you start a computer company than if you start a hotel or motel. There is nothing anyone has discovered about the effects of entrepreneurial talent that has a similar magnitude effect on the growth of new businesses.
Myth #8 • Most entrepreneurs are successful financially. • Sorry, this is another myth. Entrepreneurship creates a lot of wealth, but it is very unevenly distributed. • The typical profit of an owner-managed business is $39,000 per year. • Only the top ten percent of entrepreneurs earn more money than employees. • And the typical entrepreneur earns less money than he otherwise would have earned working for someone else.
Myth #9 • Many start-ups achieve the sales growth projections that equity investors are looking for. • Not even close. Of the 590,000 or so new businesses with at least one employee founded in this country every year, data from the U.S. Census shows that less than 200 reach the $100 million in sales in six years that venture capitalists talk about looking for. • About 500 firms reach the $50 million in sales that the sophisticated angels, like the ones at Tech Coast Angels and the Band of Angels talk about. • In fact, only about 9,500 companies reach $5 million in sales in that amount of time.
Myth #10 • Starting a business is easy. • Actually it isn’t, and most people who begin the process of starting a company fail to get one up and running. Seven years after beginning the process of starting a business, only one-third of people have a new company with positive cash flow greater than the salary and expenses of the owner for more than three consecutive months.
The Concept of Apprenticeship • Shaping and Managing an Apprenticeship • Windows of Apprenticeship • The Concept of Apprenticeship: Acquiring the 50,000 Chunks • Role Models • Myths and Realities • What Can Be Learned? • Nexus Theory • Experience meets opportunity • MIT patent example
Leadership and achievement, the heart of the entrepreneur, are not measured by IQ tests, SATs, or GMAT scores and include: Leadership skills Interpersonal skills Team building and team playing Creativity and ingenuity Motivation Learning skills (versus knowledge) Persistence and determination Values, ethics, honesty and integrity Goal-setting orientation Self-discipline Frugality Resourcefulness Resiliency and capacity to handle adversity Ability to seek, listen, and use feedback Reliability Dependability Sense of humor A Word of Caution
Personal Entrepreneurial Strategy • Gather data both from yourself (past and present profiles – start with EQ) • Gather data from others (constructive feedback) • Evaluate the data you have • Think ahead • Craft your personal entrepreneurial strategy
Reasons for Planning • Planning helps the entrepreneur with the following: • Managing the risks and uncertainties of the future • Working smarter rather than harder • Developing and updating a keener strategy by testing the sensibility of his or her ideas and approaches with others • Motivating • Achieving “results orientation” • Managing and coping with what is by nature a stressful role
The Entrepreneurial Process • It is opportunity driven • It is driven by a lead entrepreneur and an entrepreneurial team • It is resource parsimonious and creative • It depends on the fit and balance among these • It is integrated and holistic
Think Big for Higher Potential Ventures • Don’t think too small • Smaller often means higher failure odds • Getting the odds in your favor • Entrepreneurship should not be a job substitute • Odds for survival, growth, and a higher level of success, changes when the ventures reaches a size of 10-30 people with $2-$3 million in revenues
The Opportunity • A good idea is not necessarily a good opportunity. • For every 100 ideas presented to investors, usually fewer than 4 get funded. • An investor has to be able to quickly evaluate whether potential exists and to decide how much time and effort to invest. • According to John Doerr, a successful venture capitalist, “There’s never been a better time than now to start a business.” • Underlying market demand drives the value creation potential. • The greater the growth, size, durability, and robustness of the gross and net margins and free cash flow, the greater the opportunity.
Resources • One of the most common misconceptions is that to succeed, you first need to have all the resources in place, especially the money. • Money follows high potential opportunities conceived of and led by a strong management team. • Successful entrepreneurs devise creative and stingy strategies to marshal and gain control of resources. • Bootstrapping can create a significant competitive advantage. • Such strategies encourage a discipline of leanness, where everyone knows that every dollar counts.
The Entrepreneurial Team • The entrepreneurial team is a key ingredient in the higher potential venture. • Great teams are in short supply. • The lead entrepreneur is central to the team as both a player and a coach. • Opportunity, team, and resources rarely match • The entrepreneurial process is based on both logic and trial and error. • Some of the most successful investments ever were turned down by numerous investors before the founders received backing.
Case: R&R • Prepare for discussion at start of Week 3