Final Exam Study Guide ENT 6008

Remember the goal of the entrepreneurial process is to create value!

Week 1

Introduction to Entrepreneurship and Entrepreneurial Mindset

The entrepreneurial process includes developing opportunities, gathering resources, and managing and
building operations with the goal of creating value.

Entrepreneurship is the process of changing ideas into commercial opportunities and creating value.
While there is no prototypical entrepreneur, many are good at recognizing commercial opportunities,
tend to be optimistic, and envision a plan for the future.

Entrepreneur Characteristics:

Research indicates that successful entrepreneurs take calculated risks.

Successful entrepreneurs typically are able to see and seize a commercial opportunity, plan for the
venture’s future, and are optimistic about the venture’s success.

Entrepreneurs think differently than non-entrepreneurs.

• Entrepreneurs often make decisions in highly uncertain environments, with high stakes and
immense time pressures.

• Given this decision-making environment, an entrepreneur needs to think structurally, engage in

bricolage, effectuate, and cognitively adapt.

Forming opportunity beliefs often requires creative mental leaps launched from one’s existing
knowledge.

• The creative mental leap could be from knowledge about a technology to a new market that
could benefit from its introduction.

• Making these connections between a new product and a new target market is aided by the
superficial similarities and structural similarities between the source (e.g., the market) and the
destination (e.g., technology).

• The entrepreneurial challenge often lies in making mental leaps based on structural similarities.

Bricolage

• Entrepreneurs often lack resources, so they seek resources from others to provide the slack
necessary to experiment and generate entrepreneurial opportunities or engage in bricolage.

• Bricolage refers to taking existing resources and experimenting, tinkering, repackaging, and/or
reframing them so that they can be used in a way for which they were not originally designed or
conceived.
Cognitive Adaptability

• Cognitive adaptability describes the extent to which entrepreneurs are dynamic, flexible, self-
regulating, and engaged in the process of generating multiple decision frameworks focused on sensing
and processing changes in their environments and then acting on them.

• It is reflected in an entrepreneur’s metacognitive awareness, that is, the ability to reflect upon,
understand, and control one’s thinking and learning.

Five stages in the life-cycle of a successful venture are: (1) Development Stage, (2) Startup Stage, (3)
Survival Stage, (4) Rapid-Growth Stage, and (5) Early-Maturity Stage.
Week 2 - Opportunity Recognition

Opportunity identification is the central domain of entrepreneurship. The first step for any entrepreneur
is the identification of a good idea. Entrepreneurs, ever alert to opportunities that inhabit the external
and internal environments around them often spot potential opportunities. Entrepreneurs must be able
to learn from their experiences, acquiring and transforming information, knowledge, and experience
into recognizable opportunities through the exercise of their cognitive abilities. At the core of
entrepreneurship lies the questions of how, why, and when opportunities for the creation of goods and
services arise in an economy. When the entrepreneur has discovered a good opportunity, they are well
on their way to becoming more serious about starting a business.

Types of entrepreneurship:

• Survival firms that provide an opportunity to create an income for the entrepreneur

• Lifestyle firms are firms that allow owners to pursue specific lifestyles while being paid for doing
what they like to do.

• Entrepreneurial ventures are entrepreneurial firms that are flows and performance oriented as
reflected in rapid value creation over time.

Opportunities

A viable venture opportunity is one that creates or meets a customer need, provides an initial
competitive advantage, is timely in terms of time-to-market, and offers the expectation of added value
to investors.

Entrepreneurial Opportunities are an idea that create or add significant value to a customer or end user.

SOURCES OF ENTREPRENEURIAL OPPORTUNITIES

• Societal Changes
• Demographic Changes
• Technological Changes
• Emerging Economies and Global Changes
• Crises and “Bubbles”
• Disruptive Innovation

Disruptive innovation is an innovation that creates a new market or network that disrupts and displaces
an existing market or network.

Opportunities come from technology advancement. For example Moore’s law states the number of
transistors in a dense integrated circuit doubles about every two years. This increase in processing
power and decline in price created opportunities to use this technology. Technological advances create
opportunities for new products and markets such as streaming services, video conferencing and
network platforms combining the Internet and Smart Phone technology.

Value chain disruption also provides new opportunities for new business to be created to provide
services or products based on creating new ways of delivering value.
One source of opportunities is a developing societal megatrend /sea change – for example in the 1990s
the development of the Internet and in the 2010s the sharing economy.

Market based opportunities are the focus of entrepreneurs.

Screening opportunities by the following metrics

• Industry/Market (market size potential, industry barriers to entry)

• Pricing/Profitability (size of expected profit margins, accounting-based rates of returns)
• Financial/Harvest (expected investment returns, potential for an initial public offering [IPO])
• Management Team (quality of management team)

Ideation

Identify - Identify a “migraine headache” problem worth solving.

Discover – (1) Actively search for opportunities in problem-rich environments, (2) Leverage your
passions and areas of extreme curiosity to spot problems, (3) Explore current trends that are getting a
lot of attention

Enhance - Add innovation and novelty to enhance existing opportunities.

Anticipate - Use the four sources of change to anticipate new opportunities: social and demographic,
technological, political, and regulatory.

Target - Identify target customers and understand their unmet needs.

Evaluate - Practice scoring, selecting, and defending high-quality ideas, Circumvent confirmation bias
and other cognitive biases to avoid falling in love with bad ideas, Avoid the excessive optimism trap and
use critical thinking to evaluate ideas

Marketing

The new marketing logic requires a fundamental rethinking of the old rules and realizes that today’s
marketing is dynamic and happening in real time where the customer is in control. This new marketing
for entrepreneurs includes knowing what a market consists of, the understanding of marketing research,
the development of a marketing plan, the effective understanding and application of social media
marketing, and the proper approach to a pricing strategy.

4Ps of marketing – product, price, placement, promotion

Week 3 Business Model and Patterns in Business Models

Business Model – Keep blocks in order as there is a logic to this order in developing the business model

1. Customer Segments - The Customer Segments Building Block defines the different groups of people
or organizations an enterprise aims to reach and serve
1.1. Mass Market
1.2. Niche Market
1.3. Segmented
1.4. Diversified
1.5. Multi-Sided Platforms (or Multi-Sided Markets)
2. Value Propositions - The Value Propositions Building Block describes the bundle of products and
services that create value for a specific Customer Segment
3. Channels - The Channels Building Block describes how a company communicates with and reaches
its Customer Segments to deliver a Value Proposition
4. Customer Relationships- The Customer Relationships Building Block describes the types of
relationships a company establishes with specific Customer Segments
5. Revenue Streams -The Revenue Streams Building Block represents the cash a company generates
from each Customer Segment (costs must be subtracted from revenues to create earnings)
6. Key Resources - The Key Resources Building Block describes the most important assets required to
make a business model work
7. Key Activities - The Key Activities Building Block describes the most important things a company
must do to make its business model work
8. Key Partnerships - The Key Partnerships Building Block describes the network of suppliers and
partners that make the business model work
9. Cost Structure - The Cost Structure describes all costs incurred to operate a business model

Patterns

Un-Bundling Business Models - Unbundle the product

Long Tail

• Value Proposition – offering a wide scope of products – user generated content

Focus on niche customers

• Niche producers are key partners

Multi-sided Platform

• Main cost is incurred in developing platform

• Bring together two or more distinct but interdependent groups – e.g. credit cards, Uber, etc
• Creates value through facilitating interaction
• Network effect
The multi-sided platform business model brings together two or more distinct but interdependent
customer groups. To implement the multi-sided platform business model successfully a network effect is
required.

Free as a Business Model

• Providing one customer segment to benefit from product or service free-of-charge

• Non-paying customers are supported by other customer segments
• Platform key component
• Free accounts conversion to paid accounts
• Examples Skype, Red Hat, Flickr

Open Business Model

• Open innovation as means to overcome R&D cost and low productivity

• Connecting internal capacity of outside partners
• Buy and sell innovation
• Lean Startup
• Many entrepreneurs face significant barriers to entry regarding the resources needed to start
their venture. Entrepreneurs also face the product validation conundrum – how can they
introduce a product to test the value proposition? The Lean Startup approach is method or
developing a business or product in the most efficient way possible to reduce the risk of failure.
It is an approach for launching businesses and products that treats all product and business
ideas as assumptions that must be validated by rapid experimentation in the marketplace. The
approach relies on scientific experimentation, iterative product releases, and customers’
feedback to generate validated learning. The approach is like the precepts of lean management.
In this module we will cover the creation of the minimum viable product to allow for the
collection of customer feedback.

Minimum Viable Product - Build the minimum features to get feedback from customers

Lean Startup Process

• Phase 1: State hypothesis

• Phase 2: Test the problem – develop the MVP
• Phase 3: Test the solution - test the MVP
• Phase 4: Preserve or Pivot

Pivoting - structured course correction designed to test a new fundamental hypothesis about the
product, strategy, and engine of growth. Pivots are not minor changes in product or business model
but wholesale changes based on what is learned from the MVP testing
Week 4 - Learning from Your Customer, Creativity and Pitching

Entrepreneurs need to be able to learn from their customer, to tap into their own creativity and be able
to develop teams that can be creative and need to develop their skills to communicate their ideas. In
this module you will review the methods of learning from your customer. You will have the chance to
enhance your creativity. And you will have a chance to tell the world what you have learned and created
by pitching your ideas.

Hypothesis - an assumption that your value proposition, business model, or strategy builds on.

Learning from your customers:

• Successful entrepreneurs know with exactness the wants, wishes and buying behavior of their
target customers
• Understanding their buying behavior
• Watching how they use products and services
• Testing your hypotheses

Characteristics of a good hypothesis

Testable - Your hypothesis is testable when it can be shown true (validated) or false (invalidated), based
on evidence (and guided by experience).

Precise - Your hypothesis is precise when you know what success looks like. Ideally, it describes the
precise what, who, and when of your assumptions.

Discrete - Your hypothesis is discrete when it describes only one distinct, testable, and precise thing you
want to investigate.

Entrepreneurial creativity - The primary novel, useful ideas may have to do with: (a) the products or
services themselves, (b) identifying a market for the products or services, (c) ways of producing or
delivering the products or services, or (d) ways of obtaining resources to produce or deliver the
products or services.

Investment Theory of Creativity - (a) redefine problems in novel ways, (b) take sensible risks, (c) “sell”
ideas that others might not initially accept, (d) persevere in the face of obstacles, and (e) examine
whether their own preconceptions are interfering with their creative process.

Design Thinking

• A process that results in a plan of action to improve a situation.

• A skill that incorporates situational awareness and empathy into idea generation.
• A mindset in which ideas are triggered from diverse, even discrepant, sources, and then built
upon to inform progressively better solutions to challenges.
• A series of action and accumulation of knowledge based on structured loop

Environment for Creativity: Freedom, Resources and Time, Challenge

Week 5

Business Plan

Business plans and the business planning process are a crucial to development of a new venture.
Business planning provide a jumping off point for an entrepreneur to create and develop their new
venture. A business plan is the written document that details the proposed venture. It must describe
status, expected needs, and projected results of the new business. Every aspect of the business needs to
be covered. It is the entrepreneur’s road map for a successful enterprise. The business plan describes to
investors and financial sources all the events that may affect the proposed venture. The business plan
should be the result of meetings and reflections on the direction of the new venture. It is the major tool
for determining the essential operation of a venture. A major benefit is that helps the enterprise avoid
common pitfalls. This module covers the material required to create an effective business plan. The
business plan forces the entrepreneur to view venture critically and objectively and allows for the close
scrutiny of assumptions that underlie the venture. The business plan allows for the development and
examination of operating strategies and expected results for outside evaluators and quantifies goals and
objectives by providing measurable benchmarks for comparing forecasts with actual results. The plan
provides the entrepreneur with a communication tool for outside financial sources as well as an
operational tool for guiding the venture towards success.

Cash flow is the life blood of new venture. The availability of cash is what drives the entrepreneurial
venture. Inadequate cash often constrains the venture’s ability to grow, is a primary cause of financial
distress, and can result in bankruptcy even though the venture may be profitable in an accounting
sense. The process of preparing short-term projected financial statements also helps the entrepreneur
anticipate and estimate additional external financial capital needed to support the business plan during
the next year.

Business Plan Sections – know the sections of the business plan

Week 6

Introduction to Venture Finance

Seed and startup financing are sources of financing available during the development and startup stages
of a venture’s life cycle. Included are the entrepreneur’s physical and financial assets, family and
friends, and business angels. Other venture investors, including venture capitalists, may also be sources
of financial capital during the very early-stages of a venture’s development and operation.

Financial bootstrapping involves minimizing the need for financial capital and finding unique ways of
financing a new venture. The entrepreneur attempts to minimize costs during the very early stages of
the venture in order to minimize the need for additional capital.

Business angels are wealthy individuals who invest in early stage ventures in exchange for the
excitement of launching a business and a share in any financial rewards. Business angels are self-made,
wealthy individuals with substantial business and financial experience who enjoy the thrill of being
involved in new ventures. Business angels typically initiate their investments during the early stages,
development stage or startup stage, of a venture’s lifecycle to gain the highest potential returns on their
investments.

A balance sheet must be in balance because the amount of total assets must be equivalent to the sum of
the firm’s total liabilities and the owner’s equity.

The income statement is a performance measure of a firm’s operations over a period of time. Many
different accounts that make up the income statement are used to determine trends in costs and
revenues.

EBIT is defined as the earnings of a company before accounting for any interest expense/income and the
taxes to be paid. Net income results from subtracting interest expense and taxes from EBIT.

Net Cash Build: exists when the sum of cash flows from operations and investing is positive

Net Cash Burn: occurs when the sum of cash flows from operations and investing is negative

Variable expenses depend upon the level of production while fixed expenses are items that are
independent from production levels and will be incurred regardless.

Contribution profit margin is the portion of the sale of a product that contributes to covering the fixed
costs.

Cash build is the amount the firm receives on its sales calculated by net sales less the change in
receivables. Cash burn is the amount of cash a firm uses on its operating and financing expenses and on
its investments in assets.

The balance sheet equation states that total assets = total liabilities + owners’ equity

Financial statement that provides a snapshot of a business’ financial position as of a specific date is
called the balance sheet
Net profit margin is net income divided by net sales

Net income is internally generated funds which are available for distribution to owners of for
reinvestment back into the business to support future growth.

A cash budget is a financial tool showing the inflows and outflows of the firm’s cash balance over a
period of time. It is calculated by determining all of the cash-basis expenses and revenues the firm has
over a period of time to find out how cash is being built and burned.

Life cycle stage of a successful venture typically include the following stages: development stage, startup
stage, survival stage, rapid-growth stage, and early-maturity stage

Life cycle stage and sources of financing:

• development stage - seed financing – self, friends, family and sometimes Angel Investors
• startup stage - Startup financing - Business angels
• survival stage - First-round financing – VC firms & commercial banks
• rapid-growth stage - second round financing, mezzanine financing, liquidity-stage financing – VC
firms & commercial banks, venture lenders/investors, investment bankers
• maturity stage – seasoned financing, public offering – all of the sources plus public markets for
equity and bonds

Private financial markets are those involving direct two-party negotiations over illiquid non-standardized
contracts. Public financial markets are those where transactions involve more liquid securities with
standardized contract features.

In general, early-stage ventures raise debt capital from individuals, venture lenders, and when profitably
entering rapid-growth, possibly other financial institutions.

The founding entrepreneurial team, business angels, and venture capitalists are the primary sources of
early-stage equity capital. In some instances, debt and/or preferred stock convertible into shares of
common equity is held by venture investors.

Seasoned financing is obtaining bank loan, issuing bonds, and issuing stock is characteristic of which
type of financing during the venture’s life cycle

Net present value is the present value of a set of future flows plus the current undiscounted cash flow

Required cash: amount of cash needed to cover a venture’s day-to-day operations

Surplus cash: cash remaining after required cash, all operating expenses, and reinvestments are made

A P/E multiple is the price/earnings multiple and is used in comparable valuations

Harvesting a venture refers to the process of exiting a privately held business venture to unlock the
owners’ investment value.

Factoring is selling receivables to a third party at a discount from their face value

Venture harvesting techniques:

1. “Going public” is a venture harvesting process when the firm registers equity and sells it via an IPO
of new shares followed by a secondary offering of existing shares.
2. Systematic liquidation is venture harvesting process when the firm distributes the venture’s cash
flows directly to the owners.
3. Outright sale
4. Leveraged buyout and management buyout

A secondary stock offering can include the founder and venture investor shares being sold to the public
after the initial public offering.

The relative value method estimates a firm’s value by examining how comparable firms are valued
based on value-related multiples.

A venture’s value is determined by the size and timing of its future free cash flows and the time value of
money.

A corporation offers the easiest transfer of ownership

The private financial market involves direct two-party negotiations over illiquid, non-standardized
contracts such as bank loans and direct placement of debt

Venture’s operating cycle measures the time it takes to purchase raw materials, assemble a product,
book the sale, and collect on the sale.
Week 7 - Innovation, Intellectual Property, Lean Startup, Marketing

Innovation

Invention or creativity is the generation of a novel and useful idea and innovation is implementing these
novel and useful ideas into value-creating new products or processes. Innovation is combining creative
ideas with resources and competencies in order to embody that creative idea into a useful, value-
creating form – and then to successfully commercialize that new product or service or to realize the
benefits of that new process. In this module we will examine the sources of innovation and the role that
innovation plays in new venture creation.

Terms and concepts:

Innovation is combining creative ideas with resources and competencies in order to embody that
creative idea into a useful, value-creating form – and then to successfully COMMERCIALIZE that new
product or service or to realize the benefits of that new process

Disruptive innovation - An innovation that creates a new market or network that displaces an existing
market or network.

Innovation Strategy Options

First mover, innovation culture, able to create and then dominate the market against fast followers

Fast follower, firm must be very good with innovation and have strong R&D, and good at figuring out
why the first mover was not so hot so you can jump in fast and grab the market

Niche strategy, focus on specific niche market, requires a close connection to customers on what they
want as far as product differentiation

Reactive, firms that are followers and have a focus on operations, have a wait and see approach and
look for low risk opportunities, will copy proven innovation.

Disruptive innovation is an innovation that creates a new market or network that displaces an existing
market or network.

Intellectual Property

Intellectual property that takes the form of ideas that can be patented or copyrighted and the image of
the firm that can be trademarked important to the success of new venture. Entrepreneurs may overlook
the value of their intellectual property. The value of intellectual property is clear to established firms.
Apple defended its tap-to-zoom utility and iPhone design patents in a seven lawsuit against Samsung.
The patent is invaluable to the entrepreneur because it allows him to compete innovatively with much
larger organizations. The patent also helps protect the entrepreneur from unfair manipulation by his/her
larger competitors. A patent allows an innovator time to capitalize and receive a fair return on his/her
investment. A patent provides a person with a chance of legal recourse against any infringements of
his/her rights.
Patents: intellectual property rights granted for inventions that are useful, novel, and non-obvious.
There are four kinds of patents: (1) utility, (2) design, (3) plant, and (4) business method.

Trade secrets: intellectual property rights in the form of inventions and information not generally known
to others that convey economic advantages to the holders.

Trademarks: intellectual property rights that allow firms to differentiate their products and services
through the use of unique marks. The four types of “marks” are: trademarks, service marks, collective
marks, and certification marks.

Copyrights: intellectual property rights to writings in written and electronically stored forms.

Growth

Growth plays are crucial role in the survival of new entrepreneurial ventures. High growth rates lead to
higher levels of survival, but growth comes with problems. High growth firms face management and
organizational problems establishing a sustainable on-going business model and operations. Successful
firms face opportunity overload, abundance of capital, misalignment of cash burn and collection, and
are overwhelmed in terms of decision-making and expanding space and facilities. We will exam the
range of growth strategies that firms can use to build a sustainable and competitive business.

Growth Strategies

Penetration strategy - Encouraging existing customers to buy more of the firm’s current products and
relies on taking market share from competitors and/or expanding the size of the existing market

Market development strategy - Selling the firm’s existing products to new groups of customers. New
geographical market - Selling in new locations New demographic market - Selling to a different
demographic group New product use - Selling an existing product, which may have a new use, to new
groups of buyers

Product development strategies - Developing and selling new products to people already purchasing the
firm’s existing products

Diversification strategies Backward integration: A step back (up) in the value-added chain toward the
raw materials Forward integration: A step forward (down) in the value-added chain toward the
customers Horizontal integration: Involves a different, but complementary, value-added chain

Family Business

Family businesses form a significant part of entrepreneurial activity in the US and internationally. Family
firms are also represented in large multinational companies where issues related to intergenerational
ownership and management transfer have effects on these publicly traded firms. Family firms and
family enterprising create their own unique characteristics. Family firms develop firm specific knowledge
that may be provide a competitive advantage.

Key concepts:

Challenges to Family Business - Path dependency, Legacy value, Differences in risk profile between
generations, Difficulty passing entrepreneurial commitment to successor generations
Advantages of Family Business 1) They're frugal in good times and bad; 2) They set a high bar for capital
expenditures; 3) They carry little debt; 4) They acquire fewer (and smaller) companies; 5) They're more
diversified; 6) They're more international; and 7) They retain talent better than their competitors do.