1111 2 Entrepreneurship

Entrepreneurship
Siva Rangaswamy Nov 2011
Copyright 2011, Siva Rangaswamy
Recap
The IPL Factor !

Idea
Idea to Product roadmap Product to Market roadmap Market to Growth/Sustainability roadmap Competition Profile
People
Complementary Competence/Skills Enthusiasm & Cultural Fit Hard-work & Integrity
Launchpad
First Customer(s) Funding Market Visibility
Copyright 2011, Siva Rangaswamy 3
Business Plan Preparation

1. Mission Statement 2. The Team 3. Market Summary 4. Opportunities 5. Business Concept 6. Competition 7. Goals & Objectives 8. Financial Plan 9. Resource Requirements 10. Risks & Rewards 11. Key Issues Copyright 2011, Siva Rangaswamy
Business Financial Model

Share Capital Loan Capital Source of Funds
Facilities / Equipment
Retained Profits ( or Reserves)
Products / Services
Fixed Assets
Use of Funds
Working Capital Sales

Product/Service Costs
Gross Margin/Gross Profit Minus Minus Minus Minus Minus
Operating Expenses
EBITDA
Depreciation
Depreciation
PBIT / Operating Profit
Interest Shareholder Equity ? Tax
Earnings / Net Profit / PAT / Net Income / Bottom Line

Dividend
Retained Profits
Balance Sheet as of 31st March, 2011 (all figures in Lakhs)
Balance Sheet
230 170 70
(USES OF FUNDS)
Fixed Assets Land & Buildings Plant & Equipment Vehicles Current Assets Stock Debtors Cash Current Liabilities Less: Creditors Working Capital Net Assets Employed
470
320 190 10
520
290
290 230
700
(SOURCES OF FUNDS)
Issued Share Capital 30,00,000 * 10 Rs. Share Reserves Retained Profits Shareholder Funds Loan Capital Net Capital Employed Copyright 2011, Siva Rangaswamy 300
200 500 200
700
Business Performance Ratios

Gross Profit
= Gross Profit / Sales
Operating Profit
= PBIT / Sales
Net Profit / Earnings / Bottom Line

= PAT / Sales
EPS
= PAT / No. of Shares
Liquidity Ratios
Current Ratio = Curr. Assets / Curr. Liab.
= (Stock + Cash + Debtors + S.T.Investments) / Curr. Liab.
Quick Ratio (or Acid Test Ratio)

= (Cash + Debtors + S.T.Investments) / Curr. Liab.
S.T. = Short Term = Less than 1 year
Exercise Work
(Back of Envelope Plan / Elevator Pitch)
Form groups (2 minimum)
Select & Discuss a Business Concept (15 minutes)
Scribble your Business Plan Presentation (in 2 pages max, free style)
Present to whole class, (each group member to have a presentation role ideally)
Funding
10
Debt v/s Equity Considerations ?
11
Debt v/s Equity Funding ??

Year 1
All Equity 50% Debt 50% Equity
Year 3
All Equity 50% Debt 50% Equity
PBIT Interest PBT Tax PAT No. of Shares EPS
-5.0 0 -5.0 0 -5.0 20 -0.25
-5.0 -1.0 -6.0 0 -6.0 10 -0.6
10.0 0 10.0 2.0 8.0 20 0.4
10.0 -1.0 9.0 1.8 7.2 10 0.72
Initial stages, when PBIT negative, Equity preferable.. As more profits, Debt preferable
Sources of Finance
Sources of Finance
Equity
Debt
Internally generated
(Bootstrap)
Angels & VCs
Issue of Shares
Long Term
(Eg.Debentures, Bonds,)
Medium Term
(Eg. Banks, Lease)
Short Term
(Eg. Trade Credit)
Sources of Long Term Finance
Sources of Short/Medium Term Finance
Short Term -> Upto 1 Year , Medium Term -> 1 to 10 yrs,

Long Term -> 10 Years

13
Debt v/s Equity Funding ??

(When do you go for each ?)
Equity Preferred When Existing Gearing Ratio high Start-up Biz with no record Initial losses & C/F deficit forecast Rising Interest rates Mostly intangible assets Biz risk is high Wish to avoid restrictive clauses Strong appetite in market Debt Preferred When Existing Gearing Ratio low Track Record of Performance Strong Cash Flow forecast Lower interest rates Quality Assets as Security for Loans Growth / Maturity Phase Retain control on business Avoid EPS dilution Tax shields from interest payments
14
Debt Funding Entitys Outlook

Other sources of funding ? Are they in place ? Sufficient cash generated for payments of Interest / Principal ? Any physical assets or other forms of collateral/security ? Debt to Equity Ratio in your Financial Statements
15
Equity Funding Entitys Outlook

How funds will be used ? Business Proposition (Idea -> Product -> Market) Competitive advantage of biz in marketplace over long term ? Experience and Capability of the Management Team Is the plan fully funded or additional equity needs in future ? Return on Equity ? Growth Prospects => Potential for capital appreciation / dividend stream Return on previous Equity injections, if any Exit Strategies/Plans
16
Business Planning
17
Why a Detailed Business Plan ?

Securing Finance Operational Management & Budgeting Resolving Conflicts, Building Consensus amongst Promoters Communicate a common Vision, Mission and Goals
18
The Business Planning Process

STRATEGIC PLANNING Vision, Mission & Objectives Environmental Analysis Industry & Competition Analysis Product & Portfolio Analysis SWOT Analysis Generation of Strategic Options
Implement Business Plan
Market Analysis Market Forecasts
Approved Business Plan
Operational Plan Business Modeling
Evaluate Funding Issues Risk Analysis
19
Strategic Planning
20
Environmental Analysis
Speed of Environmental Change
Stable strategy can be developed in advance Dynamic Turbulent strategy evolved as events unfold & uncertainty reduces
PEST Analysis
Political (Tax policies, Govt Spending, Trade Regulations, Corruption Levels) Economic (Employment Levels, Inflation, Interest Rates, Stock Markets, Credit Availability, Oil & Commodity prices) Social (Population, Age, Rural/Urban Migration, Cultural shifts) Technological (R&D investments, Production methods, New tech adoption rates)
Position v/s Leverage v/s Opportunities

POSITION Logic Steps
Establish Position Identify attractive market Locate a defensible position Fortify and Defend Where should we be ? Unique & Valuable Market Position Well Structured Slowly Changing Markets Altering Position when conditions change Sustained
LEVERAGE
Leverage Resources Establish a Vision Build Resources Leverage across Markets What should we be ? Unique & Valuable Inimitable Resources Well Structured Moderately Changing Markets Slow to build new resources as conditions change Sustained
OPPORTUNITIES
Pursue Opportunities Jump into Confusion Keep Moving Seize Opportunities Execute & Finish Well How do we proceed ? Key processes and unique simple rules Rapidly Changing, Ambiguous Markets Tentativeness in executing Opportunities Unpredictable
Answer to ? Advantage / USP Best suited to Risk Duration of Advantage Performance Goal
Profitability
Long-Term Dominance
Growth
Retailing in India ?
Indian IT / BPO ?
Consumer Electronics ?
22
Entrepreneurial v/s Strategic
Entrepreneurial Actions
Innovation Internationalization Organizational Learning Top Management Teams Growth
Strategic Actions
GROWTH
Innovation v/s Risk Matrix

High Innovation & Low Risk Move quickly High Protect innovation Innovation Lock in investment & operational costs via control systems, contracts & other measures Low Innovation & Low Risk Defend present position Low Accept limited payback Innovation Accept limited growth potential High Innovation & High Risk Reduce risk by lowering investment & operational Costs Maintain innovation Outsource high investment ops. Joint venture options Low Innovation & High Risk Increase innovation Develop competitive advantage Minimize investment Reduce financing costs Franchise option Abandon venture ? High Risk
24
Low Risk
Business Plan Preparation

1. Mission Statement 2. The Team 3. Market Summary 4. Opportunities 5. Business Concept 6. Competition 7. Goals & Objectives 8. Financial Plan 9. Resource Requirements 10. Risks & Rewards 11. Key Issues Copyright 2011, Siva Rangaswamy
25
Vision, Mission & Objectives

VISION
Sets out the purpose (what business of the organization), and Direction of the business (where it is trying to go)
MISSION
What needs to be done to translate vision into reality
OBJECTIVES
Specific and quantified targets to measure success of strategy and business plan Should be S.M.A.R.T., i.e., Specific, Measurable, Achievable, Relevant, Time-Bound
Templates For Business Planning

Business Plan Format (DOC) Business Plan Format (PPT) Financial Statements (EXCEL)
Managing Growth
28
Typical Lifecycle of a Venture

Business Led Technology Led
Revenues, Profitability, Productivity
New Venture Development
Start-up Activities
Venture Growth
Business Stabilization
Innovation or Decline
29
Most Challenging Transition

Amongst the different transitions that are possible, probably the most difficult to achieve and also perhaps the most important for organizational development is that of moving from a oneperson entrepreneurially managed firm to one run by a functionally organized, professional management team.
- Hofer/Charan
Reasons include -Highly centralized decision making -Overdependence on one or two individuals -Inadequate repertoire of managerial skills & training
30
Managerial v/s Entrepreneurial

Managerial Mindset
Decision Making Assumptions Values Past is best indicator of Future. Most decisions can be quantified. Quantitative Analysis based. Critical decisions will need rigorous analysis. Law of Large Numbers. Chaos & uncertainty can be resolved by analyzing right data. Problems represent unfortunate turn of events that threaten financial projections.
Entrepreneurial Mindset
New idea or New insight from a unique experience likely to provide emerging trends Driven more by real-world experiences and insights Law of small numbers. Single or several isolated incidents quickly become pivotal inputs Problems represent an opportunity to detect emerging changes & possibly new biz opportunities.
Beliefs
Approach to Problems
So what is ideally required in terms of above 2 business philosophies ?

What does it take to make this transition ?

1. Major modifications in Entrepreneur behaviour 2. Day-to-Day decision making procedures must be changed. Expanded participation and formal techniques/procedures. 3. Key operating tasks must be institutionalized. i.e. new people to supplement/replace existing indispensable individuals 4. Mid-Level management to be developed.
1. 2. Specialists to learn to become functional managers. Functional managers to learn to become General Managers.
5. Company strategy to be modified, if reqd, to achieve growth 6. Org.structure, Mgmt. Systems and Procedures to be slowly modified to fit new strategy and new managers 7. Professional board of directors
Source: Hofer/Charan
Using a Balanced Scorecard for Organizational Transformation
33
Balanced Scorecard
1 in 10 organizations execute their strategies successfully
72% of CEOs believe that executing their chosen strategy is more difficult than developing a good strategy
34
Strategy v/s Execution Challenge

Strategic success requires going beyond successful strategy 1 formulation to successful strategy execution
Strategy Formulation
Sound
Missed Opportunity
Strategic Success
Flawed
Doomed From The Start

Flawed
At Risk
Sound
Strategy Execution
Strategy Execution Challenge

There are generally accepted tools to manage finances, customers, processes, and people. But what about strategy?
Financial Management Tools

EVA Balance Sheets Income Statements Shareholder Value Analysis
Process Management Tools

Six Sigma Supply Chain Integration Cycle Time Reduction TQM
Strategy Management Tools
Customer Management Tools

Customer Satisfaction Measurement Customer Relationship Management Segmentation Analysis One-to-One Marketing
People Management Tools

Core Competencies Knowledge Management Pay for Performance HRIS
The Balanced Scorecard is the vehicle that fills the Strategy Management Gap
Strategy-Focused Organizations
STRATEGY: They made strategy the central organization agenda FOCUSED: They created incredible focus on the strategy ORGANIZATION: They mobilized their employees to act in fundamentally different ways, guided by the strategy
STRATEGY
The Balanced Scorecard Is a Performance Management Program That Puts Strategy at the Center of the Process
BSC Airlines Industry Example

Strategic Theme:
Operating Efficiency
Financial Profitability Fewer planes Customer Flight Is on time Lowest prices More customers
What will drive operating efficiency? More customers on fewer planes
How will we do that? Attract targeted customer segments who value price and on time arrivals What must the internal focus be? Fast turnaround
Internal Fast ground turnaround
Learning Ground crew alignment
Will our people do that? Educate and compensate ground crew regarding how they contribute to the firms success Employee stockholder program
BSC Airlines Industry Example

Diagram of the cause and effect relationships between strategic objectives (Strategy Map)
Strategic Theme: Operating Efficiency
Financial Profitability Fewer planes Customer Flight Is on time Lowest prices More customers
Statement of what strategy must achieve and whats critical to its success
How success The level of in achieving performance the strategy or rate of will be measured and improvement needed tracked
Key action programs required to achieve objectives
Objectives
Internal Fast ground turnaround
Measurement
Target
Initiative
Fast ground
turnaround
On Ground Time On-Time

Departure
30 Minutes 90%
Cycle time
optimization
Learning Ground crew alignment
39
Growth Challenges
40
Major Challenges of Growth

People Process Brand Customer Money (Financial)
41
Managing People Challenges
42
People Challenges in a Startup

Starry eyed people from large corporates with a romanticized view of making things happen. How do you deal ?
Good folks who want to live the Startup life without wanting to start one themselves. How do you deal ?
43
People Challenges in Growth

Attract & Retain Talent
Identify Critical Positions Fractal Leadership !!!
Southwest Airlines Indian example ?
Company Focus in Initial v/s Later Years

Initial - Product Development, Delivery and Sales Quality, HR, Finance dictating growth in later years Think like a big company right from the start
44
Performance Management Systems

System that everybody understands Regularly communicates with People Review of its efficacy, via external survey of your employees Focus on leadership development Support network for your leaders
45
Process v/s Freedom ?
46
Why Process when Growing ?

Growth means
New Ideas New Products / Services New People New Channels / Markets New Systems & Procedures
ALL GROWTH IS INHERENTLY DESTRUCTIVE !!! Centripetal v/s Centrifugal
P/E ratio in Growth - Process to Empathy Ratio

Customer Centricity
48
Are all customers good ?

IF A man is known by the company he keeps .. What is a Company Known by ? Which kind of customers to avoid then ? 4 suggested characteristics of a potential customer
Techno-Managerial ability Trust Sense of Equality Commercial Win-Win
Survivability of the contract long after exit of people who decided/signed that !!!
Good Sellers find Good Buyers. Cycle of Sustainable Growth !

Source : High Performance Entrepreneur, Subroto Bagchi Copyright 2011, Siva Rangaswamy 49
Things can still go wrong. !!! Reasons why many start-ups fail ?
50
Reasons why Start-ups Fail ?

Difference amongst founders Unresolved role-clarity and ownership patterns Underfunding / Poor Funding leading to Cash Flow challenges Deadly embrace (with a specific technology, offering, market or a customer) Cannot let it go !! Poor Corporate Governance Too Big Too Soon !! (examples ?) Wrong choice of investing partners (VCs, M&As etc) Stress
(Source: High Performance Entrepreneur, Subroto Bagchi)
A Really Valuable Company ?
52
Intrinsic (Real) value of a Company ?

Human Capital Intellectual Capital Customer Capital
The three are highly inter-dependant and enrich each other
53
The Indian Ecosystem for Entrepreneurial Initiatives
54
Networking Ecosystem in India

Pune Open Coffee Club (POCC) TiE, Pune Chapter Nasscom EMERGE Proto.in LinkedIn Groups
55
Tejas Networks Case
56
Thank You
siva.rangaswamy@gmail.com 98505 50568
57

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1111 2 Entrepreneurship

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Entrepreneurship

Siva Rangaswamy Nov 2011

Copyright 2011, Siva Rangaswamy

Copyright 2011, Siva Rangaswamy

The IPL Factor !

Business Plan Preparation

Business Financial Model

Retained Profits ( or Reserves)

Working Capital Sales

Interest Shareholder Equity ? Tax

Earnings / Net Profit / PAT / Net Income / Bottom Line

Balance Sheet as of 31st March, 2011 (all figures in Lakhs)

200 500 200

Business Performance Ratios

Net Profit / Earnings / Bottom Line

Copyright 2011, Siva Rangaswamy

Quick Ratio (or Acid Test Ratio)

S.T. = Short Term = Less than 1 year

Copyright 2011, Siva Rangaswamy

Select & Discuss a Business Concept (15 minutes)

Copyright 2011, Siva Rangaswamy

Copyright 2011, Siva Rangaswamy

Debt v/s Equity Considerations ?

Copyright 2011, Siva Rangaswamy

Debt v/s Equity Funding ??

PBIT Interest PBT Tax PAT No. of Shares EPS

-5.0 0 -5.0 0 -5.0 20 -0.25

-5.0 -1.0 -6.0 0 -6.0 10 -0.6

10.0 0 10.0 2.0 8.0 20 0.4

10.0 -1.0 9.0 1.8 7.2 10 0.72

Angels & VCs

Sources of Long Term Finance

Sources of Short/Medium Term Finance

Short Term -> Upto 1 Year , Medium Term -> 1 to 10 yrs,

Long Term -> 10 Years

Debt v/s Equity Funding ??

Copyright 2011, Siva Rangaswamy

Debt Funding Entitys Outlook

Copyright 2011, Siva Rangaswamy

Equity Funding Entitys Outlook

Copyright 2011, Siva Rangaswamy

Copyright 2011, Siva Rangaswamy

Why a Detailed Business Plan ?

Copyright 2011, Siva Rangaswamy

The Business Planning Process

Implement Business Plan

Market Analysis Market Forecasts

Approved Business Plan

Operational Plan Business Modeling

Evaluate Funding Issues Risk Analysis

Copyright 2011, Siva Rangaswamy

Copyright 2011, Siva Rangaswamy

Position v/s Leverage v/s Opportunities

Copyright 2011, Siva Rangaswamy

Entrepreneurial v/s Strategic

Innovation Internationalization Organizational Learning Top Management Teams Growth

Innovation v/s Risk Matrix

Business Plan Preparation

Vision, Mission & Objectives

Templates For Business Planning

Copyright 2011, Siva Rangaswamy

Typical Lifecycle of a Venture

Revenues, Profitability, Productivity