The Crunch Case &

Mythbusting Entrepreneurship

WEEK 2
 What‟s Today about?…
• Analyse a real life case of how a new venture
evolves through phases of start-up and
growth
• Bust some myths about entrepreneurship
• Business plan assessment criteria
 Crunch Case Group Exercise
• Form groups of 5
• Do up a timeline of critical events in
Crunch’s evolution (what are the key things
that directly impacted upon and affected
Crunch’s success)
• Answer the questions on the next slide
Group Questions…
• Describe the personality of the CEO.
• What role did brand play in Crunch’s success?
• Who was Crunch’s target market?
• How did Crunch fund most of its growth?
• How did Crunch’s business model (the way they get
money into the firm) change over time? Why was it
necessary to change?
• How did the structure of the company change?
• How sustainable is this venture? Would you have
invested? Provide reasons?
Crunch Case: Some Points for
Entrepreneurship…
• Crunch was an entrepreneurial business – the ambition was for growth
• You need business ideas that can sustain growth – Levine’s original idea
that men would get into aerobics in a big way didn’t materialize. Shifted
focus to men and women, pre-paid memberships. This gave upfront
cash flows to fund growth
• This means that things change and you can only predict so much in your
business plan. You need to be able to adapt to change – adaptive
execution
• Primary financing strategy for growth was bootstrapping – using internal
funds to finance growth. Levine didn’t want to be controlled by
outsiders. The more you can do yourself the better – it shows you can
create something out of few resources – a key feature of
entrepreneurship
• You need ideas that can sprout multiple revenue streams – gym
memberships, personal training and licensing fees from apparel. This
gives you a bigger base on which to cover costs and create profit (sales
revenue – expenses)
Crunch Case: Some Points for
Entrepreneurship…
• Think of business evolution in two phases: start-up and
growth
• The key challenges are different (next two slides)
• Link your strategy and structure in each stage
• The importance of brand – differentiates you from others,
makes people excited, has psychological power, creates
opportunities for additional revenue. So, you are not just
building a business, you are building a brand
• The importance of people – you are only as good as the
talent of your people – recruitment, selection, training &
development. Management skills and people skills are vital.
Can you get the best out of other people? How would you
create a culture that motivated people over the short and
long terms? Investors often invest in people rather than
businesses.
 Priorities Start-up Growth

Financial Get cash flow positive Focus on profit and

goal company value

More emphasis on adaptive Deliberate planning needed

Role of execution than planning but for growth
Planning depends on rate of change in
environment (bounded
rationality)

Finance through May need external finance –

Financing bootstrapping (using profit sell equity shares and/or
strategy and other internal sources to bank loans. Bootstrapping
fund future initiatives) not enough
 Priorities Start-up
Business Work out the business model –
model what products for what
markets, how it makes a profit,
what are our core capabilities
(what are we better than
competition at)
Strategy & Flat structure (not too many
Structure management levels), keep
overheads down, learn fast.
Need this nimble structure to
learn what strategy should be
without spending too much
money.
Growth
Replicate winning business
model in other markets, with
other products in other
geographic locations. Take what
you are good at (core
capabilities) and multiply it
Need a corporate structure to
oversee the operating structure
(individual stores for example).
Need standard operating
procedures for standardising
best practice in all outlets
Is entrepreneurship all about offering something
new?
 Bhide’s Research
• Harvard Professor
• Interviewed founders of 100 companies from the Inc.
500 list – a compilation of the fastest growing
privately-held companies in the US
• Revenues of about $15 million, 135 employees, 5-year
sales growth of 1407%
• Inc. listing requires 5-year track record of rapid growth
• The sample represents the separation of winners from
also-rans
Bhide’s Research…
 Bhide’s Research…
• Most promising ventures in the Inc 500 do
not start with a unique or proprietary product
• Only 12% of founders surveyed attributed
the success of their companies to “an unusual
or extraordinary idea”
• 88% reported their success was mainly due to
the “exceptional
execution of
an ordinary idea”
Are the most profitable businesses also the most
popular?
Most Popular Start-ups
 Bhide’s Research
• Limited overlap between most popular businesses and
those that were most successful
• Promising ventures occurred in a broad range of
industries like computer software, pizza chains, selling
secondhand copiers
• Popular often means easy to get into (low capital and
skill costs), easy to get into often means more intense
competition and more intense competition means thin
profit margins
• The most promising ventures occurred in industries characterized by
high product-market uncertainty. This means that you take a bit of
a risk to enter these industries but with that risk comes the
possibility of a lucrative upside…the potential for growth is large
• Industries have structures (Porter, 1990) and some will
allow you to make more profit than others.
Is the main competition entrepreneurial firms
face at start-up from big established players?
Bhide‟s Research: Typical Competition Profile
for Promising Start-ups
When starting out, where do entrepreneurs
mainly get their money from – banks or
investors?
Sources of Initial Funding for Start-ups
Do you need to do a business plan or is it better
to get on with it and learn as you go?
Examples of the contents of a business
plan…
EXHIBIT 8.2 (Timmons, 2010) - BUSINESS PLAN TABLE OF CONTENTS
I. EXECUTIVE SUMMARY
• Description of the Business Concept and the Business Opportunity and Strategy.
• Target Market and Projections.
• Competitive Advantages.
• The Team.
• The Offering.
II. THE INDUSTRY AND THE COMPANY AND ITS PRODUCT(S) OR SERVICE(S)
• The Industry.
• The Company and the Concept.
• The Product(s) or Service(s).
• Entry and Growth Strategy.
III. MARKET RESEARCH AND ANALYSIS
• Customers.
• Market Size and Trends.
• Competition and Competitive Edges.
• Estimated Market Share and Sales.
• Ongoing Market Evaluation.
IV. THE ECONOMICS OF THE BUSINESS
• Gross and Operating Margins.
• Profit Potential and Durability.
• Fixed, Variable and Semivariable Costs.
• Months to Breakeven.
• Months to Reach Positive Cash Flow.
EXHIBIT 8.2 (Timmons, 2010) Cont…….
V. MARKETING PLAN
• Overall Marketing Strategy.
• Pricing.
• Sales Tactics.
• Service and Warranty Policies.
• Advertising and Promotion.
• Distribution.
VI. DESIGN AND DEVELOPMENT PLANS
• Development Status and Tasks.
• Difficulties and Risks.
• Product Improvement and New Products.
• Costs.
• Proprietary Issues.
VII. MANUFACTURING AND OPERATIONS PLAN
• Operating Cycle.
• Geographical Location.
• Facilities and Improvements.
• Strategy and Plans.
• Regulatory and Legal Issues.
VIII. MANAGEMENT TEAM
• Organisation.
• Key Management Personnel.
• Management Compensation and Ownership.
• Other Investors.
• Employment and Other Agreements and Stock Option and Bonus Plans.
EXHIBIT 8.2 (Timmons, 2010) Cont…….
• Board of Directors.
• Other Shareholders, Rights and Restrictions.
• Supporting Professional Advisors and Services.
IX. SUSTAINABILITY AND IMPACT
• Issues of Sustainability of the Venture.
• Impact on the Environment.
• Impact on the Community and Nation.
X. OVERALL SCHEDULE
XI. CRITICAL RISKS, PROBLEMS AND ASSUMPTIONS
XII. THE FINANCIAL PLAN
• Actual Income Statements and Balance Sheets.
• Pro Forma Income Statements.
• Pro Forma Balance Sheets.
• Pro Forma Cash Flow Analysis.
• Break-Even Chart and Calculation.
• Cost Control.
• Highlights.
XIII. PROPOSED COMPANY OFFERING
• Desired Financing.
• Offering.
• Capitalisation.
• Use of Funds.
• Investor’s Return.
XIV. APPENDIXES
 NOTE:

You do not need to follow the

previous examples (Tables of
Contents) for your Business Plan
assessment.

A more general approach is provided

by Sahlman, 2000, outlined next....
How to Write a Great Business Plan
(Sahlman, 2000)

• Four interdependent critical factors:

– The People
• The jockeys
– The Opportunity
• Nature of the market & Industry structure
• Balance sheet and cash flow
• Competition
– The Context
– Risk and Reward, Harvest or Exit Strategies
 Some Facts from Bhide…
• Course Reader: Reading 1 of Week 1
(Insert of p. 152 - Does Planning Pay?)
– 41% of the entrepreneurs had no business
plan at all
– 26% had a rudimentary plan (rough sketch)
– Only 28% wrote up a full-blown business
plan
 The Case Against The Business Plan for Some
Start-Ups
• Capital constraints – can’t afford extensive analysis
• Small opportunity cost – don’t have much to lose from
forecasting errors. Entrepreneurs of promising start-ups enter
small niches requiring limited capital investment. They often
come from lower paid employment meaning they don’t have
much to lose from failed planning.
• Most copy ideas that have proven their market viability thus not
requiring extensive further research
• Expected profits in niche markets don’t justify large planning
outlays
• Learning-by-doing yields more accurate data because hard to
forecast some specifics
• Uncertainty means that, in highly volatile conditions, by the
time the entrepreneur has finished researching a market space
the basis of competition has changed rendering void the prior
analysis
 The Case for Business Plans
• Helps discipline the entrepreneur’s thinking about venture design
and the merits of value-creating potential
• Is an important communication tool with stakeholders such as
investors
• Offers solutions to problems in a less costly and time-consuming
manner than afforded by trial and error learning
• Helps the entrepreneur to organize and prioritize actions at
different stages of venture creation thereby minimizing the
likelihood that the venture will be delayed by undertaking
activities in an ineffective sequence
• Communicates goals to those who must execute them
(milestones)
• Managing growth requires skillful planning. Learn early how to
plan.
 The Verdict?
It’s often not an either/or choice.
Investors/banks will demand a plan.

How much planning is needed varies according

to the type of business.

It is best to think of planning as an ongoing

exercise that should be constantly revised
through adaptive execution…
 How Entrepreneurs Craft
Strategies That Work
Bhide: Course Reader: Reading 1 of Week 1
Three critical elements for consideration:
1. Opportunity screening:
Where do entrepreneurs get their ideas? P.151
– Screen out losers quickly
• Consider: “Objectives of the venture”, “Leverage
provided by external change” and “Basis of competition:
Proprietary Assets vs. Hustle”.
– Gauge relative attractiveness (risk vs. rewards)
• Consider: Capital requirements, shut-down costs,
entrepreneurial values and goal.s
Three Critical elements for consideration (Cont.):
2. Parsimonious Planning and Analysis
– Some critical uncertainties cannot be resolved through
more research.
– No one-size fits-all approach; analytical priorities vary for
each venture.
– Entrepreneur has to live with critical uncertainties which
are not easy to analyse.
3. Integrate Action and Analysis
- Often cannot separate action from analysis.
- Action show commitment.
- Characteristics: Handle tasks in stages, Look for
solutions as the arise, Simultaneous research and selling,
& Smart arrogance.
 This Course:

• Deliberate Planning: Weeks 1-10

• Adaptive Execution: Weeks 11+12

 Deliberate Planning
• A business plan is a written document outlining the
business model for achieving desired goals.
Business plans are often a compulsory
communication tool required by investors and
lenders as they protect against risk.

• A business model is the entrepreneur’s business

design for determining how to make a profit? –
what product? what market? what strategy?
 Adaptive Execution
• Going about the start-up and roll-out of your
business in a way that minimizes risk and
maximises learning about your business
model – does it need changing? How? What
assumptions did you make in your business
plan that have turned out to be wrong? Are
you recognizing and seizing better
opportunities to improve cash flow?
 Your Business Plans…
• Look at the assessment criteria (follow this
criteria strictly)
• Decide on group members (3-5)
• At this stage, just have some ideas for a new
venture. The next lecture’s material will help
you make a more firm decision.
 Next Week „s Lecture is
important…we start your
business plan journey…I bet you
can‟t wait!!!

Remember to refer to your reader

(Timmons Ch13, 15 & 19)