Top
10
Mistakes of
Entrepreneurs
NO REAL PASSION FOR THE BUSINESS
“I don’t care about the product, I just want to make loads of money”
Linking Market Demand with passion, skills and resources to create an entrepreneurial opportunity
Skills
Market Demand
Passion
Resource s
The Key Elements in Creating an Entrepreneurial Opportunity
Entrepreneur Market Demand
Opportunity
Passion
Skills
Resource s
Key questions to sourcing the right opportunity
• What do people need? Who will buy it? Why do they want it? How can I reach them? • What am I (are we) deeply passionate about? • How can I leverage my (our) unique skills? • Where can I (we) get the resources to make it happen?
NO UNDERSTANDING OF THE MARKET
“We want one so everyone will want one”
Researching an Idea
What needs to be researched? How can one gather the information?
Customers
Market size. Growth The needs pf customers The buying decision of customers Number of competitors Product or service offerings of competitors Where the competitors are situated. The strengths and weaknesses of competitors
Suppliers Funders Partners
Trade journals, market reports and industry associations. Interviewing experts in the industry. Interviewing, observing or surveying potential customers. Become a customer of the competition. Visit competitor websites, stores and read their promotional material. Interview competitors customers
Visit suppliers Discuss funding options with other entrepreneurs Discuss funding options with the banks Obtain and read the national venture capital association handbook Search the web Consider different revenue models: Evaluate the costs and the costs drivers. Distinguish between fixed, variable and semi variable costs. Consider the source of costs: Do cash flow projections Speak to industry experts
Competitors
Collaborators
The Company Model
Revenue Cost drivers Investment Critical success factors
NO DIFFERENTIATION
“We are going to be just like Amazon.com, only better”
Assessing an Opportunity
High
10 9
Market Size Market Growth Differentiation Customer Need
8 7 6
[VENTURE] Concept Attractiveness
5
4 3 2
Low
Skills Resources Passion / Energy Network
1 1 2 3 4 5 6 7 8 9 10
Low
Competitive Advantage
High
[ENTREPRENERIAL TEAM]
Response
High
10 9
8
[VENTURE]
7 6 5
4 3 2
Concept Attractiveness
Build / hire / develop the required capabilities
Invest and pursue the opportunity
Avoid / Wait & Reassess in Future
Identify / exploit a specific under served niche
Revise product or business model
Low
1 1 2 3 4 5 6
7
8
9
10
Low
Competitive Advantage
High
[ENTREPRENERIAL TEAM]
Strategy Formulation Questions
Why do we exist?
What are our personal objectives Whom do we serve? What value do we deliver? Why do we matter?
Purpose
Where are we at?
What are our strengths? What are our weaknesses?
What are the opportunities for the business?
What are the threats for the business?
Current status
How do we create value?
What is our org sustainability model? What is our value proposition?
What makes us different?
How will we evolve as a business?
Business Recipe
What is our organizational character?
What assumptions guide us?
What turns us on? What is not negotiable? How do we behave?
Organis-ational Character
What must we do and how will we make it happen?
What are our 3 year goals? What are our 1 year goals?
What needs to happen in the next 30 days?
Who is responsible?
Goals, Action & Priorities
NO COMPETITORS
“We are so unique that we have no competition in the market”
If no competitors … WHY?
Be REAL about your competition
Competitor Analysis
FACTOR
Products
My Business
Strength
Weakness
Competitor A
Competitor B
Competitor C
Importance to Customer
Price
Quality Selection Service
Reliability
Stability Expertise Company Reputation Location Appearance
Sales Method
Credit Policies
Advertising
Image
NO BUSINESS MODEL
“We will work out our revenue and cost model as we go along”
Business Model
Income Stream 1
Source of Revenue
Income Stream 2
Income Stream 3
Costs
Investment
Critical Success Factors
Key questions for building a business model
• What are the sources of revenue for the business?
– Single or multiple revenue streams? – Payment terms – upfront, over a period of time or post delivery?
• What are the cost drivers for the new business?
– Major costs incurred to generate revenue? – Nature of costs – fixed, variable or semi-variable? – Payment terms – upfront, over a period of time or post delivery?
• What size capital investment is required to launch and sustain the business?
– To sustain a positive cash balance? – To make profit?
• What are the critical success factors for this business?
– Identify the issues that will determine the success or failure of the business?
Business Model Diagram
Inputs Required (Cost Drivers) People Product Premises Marketing etc.
Input
$
Investment
$
Critical Success Factors What are the factors that are required to ensure that this model works?
Costs
New Busines s
$
Input
Up Front Investment Equipment Premises Branding Training Working Capital Etc
Revenue
Output
Buyers What they buying Range of products or services Volumes; Frequency How they pay Timing of payment
NO BALANCE IN THE TEAM
“We are four CAs so all is okay”
Types of Entrepreneurs
Extremist Revolutionary
Rands
Growth Entrepreneur
Revenue
Lifestyle Entrepreneur
Survivalist
Breadline
0
Time
Investment
The Entrepreneurial Team
High
Inventor
Creativity and Innovation
Entrepreneurial Team
Promoter
Manager, administrator
Low
High
General management skills, business know-how and networks
Source: Timmons & Spinelli. New Venture Creation.2004. McGraw Hill.
Quality of the team
Entrepreneurial Attributes 1. Commitment and Determination 2. Opportunity Obsession 3. Tolerance for Risk, Ambiguity and Uncertainty 4. Creativity, Self-Reliance and Ability to Adapt 5. Motivation to Excel 6. Leadership Management Attributes 1. Marketing 2. Operations / Production 3. Finance 4. Administration 5. Interpersonal / Team 6. Law
Source: Timmons & Spinelli. New Venture Creation.2004. McGraw Hill.
NO CASHFLOW FORECAST
“Who cares about cash when you’ve got the profit margins we’ve got ”
Financial Plan
• • • • • • • • • Sales forecast Startup expenses 12 Month profit and loss statement (monthly) 12 Month cash flow statement (monthly) 3 – 5 Year profit & loss (high level – quarterly) 3 – 5 Year cash flow (high level – quarterly) Opening balance sheet Projected balance sheet Breakeven analysis
Financial Plan
• • • • • • • • • Sales forecast Startup expenses 12 Month profit and loss statement (monthly) 12 Month cash flow statement (monthly) 3 – 5 Year profit & loss (high level – quarterly) 3 – 5 Year cash flow (high level – quarterly) Opening balance sheet Projected balance sheet Breakeven analysis
Cash Flow Forecast (NB)
M1 Budget M2 Budget M3 Budget M4 Budget M5 Budget M6 Budget … M12 Budget
Total Budget
Units Sold
Opening Cash Balance Cash Inflows Fixed Cash Outflows
+
+
+
+
+
+
+
+
+
+
+
+
+
+
_
_
_
_
_
_
_
Variable Cash Outflows
Closing Cash Balance
_
_
_
_
_
_
_
=
=
=
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Sales Forecast
M1 Budget M2 Budget M3 Budget M4 Budget M5 Budget M6 Budget … M12 Budget
Total Budget
Cat 1 Units Sold* Sales Price Per Unit* Category 1 TOTAL Cat 2 Units Sold* Sales Price Per Unit* Category 2 TOTAL
a b axb=Z c
d
cxd=Y
Z+Y
Monthly Total
* State the assumptions on which these numbers are based
Start Up Expenses
Start Up Expenses Real estate
Capital equipment Location and admin
XXX
XXX XXX
Opening inventory
Advertising and promotions
XXX
XXX
Other expenses
Reserve for contingencies
XXX
XXX
Working capital
TOTAL
XXX
XXXX
Sources of Capital Owners investment
Bank loans
XXX
XXX
Other loans
TOTAL
XXX
XXXX
P & L Forecast
M1 Budget M2 Budget M3 Budget M4 Budget M5 Budget M6 Budget
…
M12 Budget
Total Budget
Revenue Cost of Sales
Gross Profit Expenses
+
_ = _
+
_ = _
+
_ = _
+
_ = _
+
_ = _
+
_ = _
+
_ = _
Profit before tax Tax Expense
Profit after tax
=
_ =
=
_ =
=
_ =
=
_ =
=
_ =
=
_ =
=
_ =
P & L Forecast
M1 Budget M2 Budget M3 Budget M4 Budget M5 Budget M6 Budget
…
M12 Budget
Total Budget
Revenue Cost of Sales
Gross Profit Expenses
+
_ = _
+
_ = _
+
+
+
+
+
_ = _
EXAMPLES _ _ _ _ Direct cost of goods sold
= _ = _ = _ = _
Profit before tax Tax Expense
=
=
=
=
=
_ =
=
_ =
=
_ =
_ _ _ EXAMPLES_ Salaries & wages Profit after = = = Other operating expenses= tax Interest payments Depreciation
Cash Flow Forecast (NB)
M1 Budget M2 Budget M3 Budget M4 Budget M5 Budget M6 Budget … M12 Budget
Total Budget
Units Sold
Opening Cash Balance Cash Inflows Fixed Cash Outflows
+
+
+
+
+
+
+
+
+
+
+
+
+
+
_
_
_
_
_
_
_
Variable Cash Outflows
Closing Cash Balance
_
_
_
_
_
_
_
=
=
=
=
=
=
=
Cash Flow Forecast
M1 Budget
Units Sold
Opening Cash Balance Cash Inflows Fixed Cash Outflows
+
EXAMPLES M2 M4 M6 Cash M3 sales of goodsM5 services or Budget Budget Budget Budget Budget Collection of accounts receivable Interest earned Sales of fixed assets or investments Capital from investor Loan received
+ + + + +
…
M12 Budget
Total Budget
+
+
_
Variable Cash Outflows
Closing Cash Balance
_
EXAMPLES + + + + + Payment of cash expenses Payment to creditors _ _ _ _ _ Payment of salaries and wages Purchase of inventory for cash Purchase of fixed assets or investments _ _ _ _ _ Payback loans Payout dividends
= = = = =
+
_
_
=
=
Balance Sheets
Opening Assets End Y1 End Y2 End Y3
Current Assets
Cash Inventory Acc receivable
Fixed Assets
Property Equipment Furniture Vehicles
TOTAL ASSETS
Liabilities & Equity Current Liabilities
Accounts payable
Long Term Liab.
Loans
Owners Equity
Capital Retain earnings
TOTAL LIAB & EQUITY
Balance Sheets
Opening
Assets Current Assets
Cash Inventory Acc receivable
End Y1
End Y2
End Y3
Goods or resources owned by the business to be transformed utilized / realized in 1 year
Fixed Assets
Property Equipment Furniture Vehicles
Goods or resources owned by the business that have a life span exceeding 1 year
TOTAL ASSETS Liabilities & Equity
Current Liabilities
Accounts payable
Total amount OWNED by the business
Amounts owed by the business to be paid back within 12 months
Long Term Liab.
Loans
Amounts owed by the business to be paid back after 12 months
Portion of the business attributable to the owners
Owners Equity
Capital Retain earnings
TOTAL LIAB & EQUITY
Total amount OWED by the business to lenders or owners
NO MOMENTUM UNTIL CAPITAL IS RAISED
“We need R10m in venture capital and then we will get going”
New venture financing and the equity gap
Stage
Pre-seed Seed / Start-Up Early
Later
Government Funds
Founders Family Friends Angels / Angel Alliances
Source
Venture Funds R5-10 mil R20 mil
Private Equity
100k
Demand
500k
Supply
Equity Gap
Adapted from a model proposed designed by Jeffery E Sohl – Center for Venture Research, University of New Hampshire
Sources of finance for a business
Equity Funding Sources Debt Funding Sources
Personal savings Family and friends Informal individual investors Venture capitalists Government agencies Partnerships / strategic alliances with corporations Private equity investors (for established businesses) Listing on stock exchange o Alt-X o Main Board Disadvantages
Lose a portion of the ownership of the business. Equity owners can be controlling which can cause friction with the founders Difficult to value an entrepreneurial business when allocating shareholdings Often comes with useful management input and advice. Equity investors can give access to a network of useful contacts No immediate strain on cash flow in terms of repayments of the capital
Loans from family and friends Loans from government agencies or NGO’s supporting entrepreneurs Bank loans
Advantages
Advantages
Founder maintains full ownership of the business. Founder can manage and run the business as he/she sees fit
Disadvantages
Loan must be paid back which can create strain on cash flow for the new business. Bank is unlikely to assist in opening doors, giving advice or introducing founders to useful contacts.
The Art of Bootstrapping
1. Focus on cash flow, not profitability 2. Forecast from the bottom up 3. Ship, then test 4. Forget the “proven” team 5. Start as a service business 6. Focus on function, not form 7. Pick your battles 8. Understaff 9. Go direct 10. Position against the leader 11. Take the “red pill.”
Source: Kawasaki, G. The Art of the Start. 2004. Portfolio.
Funding Realities
• More likely sources of funding for startup:
– Bootstrapping – Personal funds – Close connections
• Some chance of getting funds for a startup:
– Corporate investor – Government enterprise creation funds
• Low chance of getting funds
– Bank loan – Venture capital
NO FRUGALITY
“We have hired offices in Sandton, acquired Hummer’s for the directors and will pay the most to get the best”
Entrepreneurial Financial Management
1.Budget for CASH FLOW 2.Build your OWN models 3.Its not just about HOW MUCH but also about WHEN. 4.Know the NATURE of different cash flows 5.SHORT TERM = DETAIL; long term = big picture 6.Your BANK BALANCE is your truth 7.Know your BASELINE (breakeven) 8.Keep UP TO DATE 9.Balance off being overly PEDANTIC versus dangerously LACKADAISICAL
BUDGETING
MONITORING
REPORTING
10.Report results with PURPOSE
MISGUIDED MARKETING PLAN
“Our marketing plan will be a combination of print, TV and internet advertising”
Simple Marketing Plan
Marketing mix component Description of the component Good marketing begins with a good product or service. Key questions to be answered by the entrepreneur Does it meet a specific need? What is that need? Must we customize our product or service? Do we deliver the appropriate quality for the customer? Considerations
Product
Product variety Quality Design Features Packaging Services Warranties Returns List price Discounts Allowances Payment period Credit terms
Price
You need to find a balance between attracting customers and making profits.
What does it cost us to produce the good or service? What are the competition charging for similar goods or services? Why are we charging more or less than the competition? How would revenue and profits be affected if we increased or decreased the price?
Simple Marketing Plan
Marketing mix component Description of the component Key questions to be answered by the entrepreneur Are we going to sell locally, regionally, nationally or globally? How will we reach the customer? Do we need more than one channel for reaching the customer? Should we create our own distribution channel or partner with an established distributor? Considerations
Place
This is about getting the product or service to the customer. Customers will only buy products or services that they have access to, thus it is critical to have distribution channels that reach the customer.
Channels Coverage Transport
Promotion
Promotion is about communicating the merits of the product or service to target customers and persuading them to buy.
How will we make customers aware of the benefits of buying our product or service?
Advertising Sales force Public relations Direct marketing
New Venture Creation Model
STRUCUTRE Business Model Legal Form Tools / Facilities Team
OPPORTUNITY Demand Passion Skills Resources
BUSINESS PLAN
Research
FUNDING Traditional financing Bootstrapping Cash flow
SALES Product Price Promotion Place Word of mouth
Growth
Focus points in a business plan
• The People. The men and woman starting and running the venture,
as well as outside parties providing key services or important resources for it such as suppliers, lawyers and advisors. • The Opportunity. The need in the market for the proposed product or service. The size and growth of the potential market and the attractiveness of the industry in which the business will operate. • The Business Model. A summation of the core business decisions and trade offs employed by a company to earn a profit. The decisions and trade offs include revenue sources, key expenses, investment size and critical success factors
• The Strategy. The methods and means of creating sustainable
competitive advantage for the new business. • The Context. The big picture – the regulatory environment, interest rates, demographic trends, inflation and the like – factors that inevitably change but cannot be controlled by the entrepreneur. • Risk and Reward. An assessment of everything that can go wrong and right, and a discussion of how the entrepreneurial team can respond.
Business In A Box www.biz-box.net Email – Slides greg@learninglab.co.za
Blog – Slides
fisherg@blogspot.com
Go out and do it…