1111 2 entrepreneurship

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Entrepreneurship

Siva Rangaswamy

Nov 2011

1Copyright 2011, Siva Rangaswamy


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Recap



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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 Visibility3Copyright 2011, Siva Rangaswamy


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Business Plan Preparation

1. Mission Statement

2. The Team

3. Market Summary

4. Opportunities

5. Business Concept6. Competition

7. Goals & Objectives

8. Financial Plan

9. Resource Requirements10. Risks & Rewards

11. Key Issues4Copyright 2011, Siva Rangaswamy


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EBITDA

Minus

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

Minus

Use of FundsFixed Assets Working Capital

Facilities / Equipment Products / Services

PBIT / Operating Profit

Minus

Business Financial Model

5

Source of Funds

Share Capital Loan Capital Retained Profits( or Reserves)

Gross Margin/Gross Profit

Minus

Operating Expenses

SalesProduct/Service Costs

Interest

DepreciationDepreciation

Tax

Minus

Dividend Retained ProfitsCopyright 2011, Siva Rangaswamy

Shareholder Equity ?


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Balance Sheet


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

(USES OF FUNDS)Fixed AssetsLand & Buildings 230Plant & Equipment 170

Vehicles 70 470

Current Assets

Stock 320Debtors 190Cash 10 520

Current LiabilitiesLess: Creditors 290 290

Working Capital 230

Net Assets Employed 700

(SOURCES OF FUNDS)Issued Share Capital30,00,000 * 10 Rs. Share 300

Reserves

Retained Profits 200

Shareholder Funds 500

Loan Capital 200

Net Capital Employed 700


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Business Performance Ratios


Gross Profit

= Gross Profit / Sales

Operating Profit

= PBIT / Sales

Net Profit / Earnings / Bottom Line

= PAT / Sales

EPS

= PAT / No. of Shares


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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.

Liquidity Ratios


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


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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 roleideally)



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Funding



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Debt v/s Equity Considerations ?



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Debt v/s Equity Funding ??

All Equity 50% Debt

50% Equity

PBIT -5.0 -5.0

Interest 0 -1.0

PBT -5.0 -6.0

Tax 0 0

PAT -5.0 -6.0

No. of Shares 20 10

EPS -0.25 -0.6

Year 1

All Equity 50% Debt50% Equity

10.0 10.0

0 -1.0

10.0 9.0

2.0 1.8

8.0 7.2

20 10

0.4 0.72

Year 3

Initial stages, when PBIT negative, Equity preferable.. As more profits, Debt preferable


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Sources of Finance


Sources of Finance

Equity Debt

Internally

generated

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

Angels

& VCs

(Bootstrap)


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Debt v/s Equity Funding ??(When do you go for each ?)


Debt Preferred When

Existing Gearing Ratio low Track Record of Performance Strong Cash Flow forecast

Lower interest rates Quality Assets as Security for LoansGrowth / Maturity Phase Retain control on business Avoid EPS dilution Tax shields from interest payments

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


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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



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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



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Business Planning



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Why a Detailed Business Plan ?

Securing Finance

Operational Management & Budgeting

Resolving Conflicts, Building Consensus amongst Promoters

Communicate a common Vision, Mission and Goals



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The Business Planning Process


STRATEGIC PLANNING

Vision, Mission & Objectives

Environmental Analysis

Industry & Competition Analysis

Product & Portfolio Analysis

SWOT Analysis

Generation of Strategic Options

Market Analysis

Market Forecasts

Operational PlanBusiness Modeling

Evaluate Funding Issues Risk Analysis

Approved Business Plan

Implement Business Plan


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Strategic Planning



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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)



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Position v/s Leverage v/s Opportunities


POSITION LEVERAGE OPPORTUNITIES

Logic Establish Position Leverage Resources Pursue Opportunities

Steps Identify attractive marketLocate a defensible position

Fortify and Defend

Establish a Vision

Build Resources

Leverage across Markets

Jump into Confusion

Keep Moving

Seize Opportunities

Execute & Finish Well

Answer to ? Where should we be ? What should we be ? How do we proceed ?

Advantage /

USP

Unique & Valuable Market

Position

Unique & Valuable

Inimitable Resources

Key processes and unique

simple rules

Best suited to Well Structured Slowly ChangingMarkets

Well Structured Moderately

Changing Markets

Rapidly Changing, Ambiguous

Markets

Risk Altering Position whenconditions change

Slow to build new resources

as conditions change

Tentativeness in executing

Opportunities

Duration of

Advantage

Sustained Sustained Unpredictable

Performance

Goal

Profitability Long-Term Dominance Growth

Retailing in India ? Indian IT / BPO ? Consumer Electronics ?


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Entrepreneurial v/s Strategic


Entrepreneurial

Actions

StrategicActions

InnovationInternationalizationOrganizational Learning

Top Management TeamsGrowth

GROWTH


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Innovation v/s Risk Matrix


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 Innovation & Low Risk

Move quickly

Protect innovation

Lock in investment & operational

costs via control systems, contracts

& other measures

Low Innovation & Low Risk

Defend present position

Accept limited payback

Accept limited growth potential

Low Risk High Risk

LowInnovation

HighInnovation


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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 Requirements10. Risks & Rewards

11. Key Issues25Copyright 2011, Siva Rangaswamy


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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



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Business Plan Format(PPT)

Financial Statements(EXCEL)

Templates For Business Planning

Business Plan Format(DOC)


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Typical Lifecycle of a Venture

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Copyright 2011, Siva Rangaswamy

New Venture

Development

Business Led Technology Led

Start-up

ActivitiesVenture

Growth

Business

Stabilization

Innovation or

Decline

Revenues,

Profitability,

Productivity


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Most Challenging Transition

Amongst the different transitions that are possible, probably themost difficult to achieve and also perhaps the most important

for organizational development is that of moving from a one-

person 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


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Managerial v/s Entrepreneurial


Managerial Mindset Entrepreneurial MindsetDecision Making

Assumptions

Past is best indicator of Future.

Most decisions can be quantified.

New idea or New insight from

a unique experience likely to

provide emerging trends

Values Quantitative Analysis based.

Critical decisions will need rigorous

analysis.

Driven more by real-world

experiences and insights

Beliefs Law of Large Numbers. Chaos &uncertainty can be resolved by

analyzing right data.

Law of small numbers. Singleor several isolated incidents

quickly become pivotal inputs

Approach to Problems Problems represent unfortunate

turn of events that threaten

financial projections.

Problems represent an

opportunity to detect

emerging changes & possibly

new biz opportunities.

So what is ideally required in terms of above 2 business philosophies ?


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What does it take to make this transition ?

1. Major modifications in Entrepreneur behaviour2. 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. Specialists to learn to become functional managers.

2. 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/Charan32Copyright 2011, Siva Rangaswamy


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Using a Balanced Scorecard for

Organizational Transformation



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Balanced Scorecard

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1 in 10 organizations executetheir strategies successfully

72% of CEOs believe thatexecuting their chosenstrategy is more difficult thandeveloping a good strategy



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Strategy v/s Execution Challenge

35

StrategicStrategic

SuccessSuccess

At RiskDoomed FromDoomed From

The StartThe Start

Missed

Opportunity

Strategy

Formulation

Flawed Sound

Flawed

Sound

Strategic success requires going beyond successful strategyformulation to successful strategy execution

Strategy Execution

1



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Strategy Execution ChallengeThere are generally accepted tools to manage finances, customers,

processes, and people. But what about strategy?

The Balanced Scorecard is the vehicle that fills the

Strategy Management Gap

Financial Management Tools

EVA

Balance Sheets

Income Statements

Shareholder Value Analysis

Customer Management Tools

Customer Satisfaction Measurement

Customer Relationship Management

Segmentation Analysis

One-to-One Marketing

Process Management Tools

Six Sigma

Supply Chain Integration

Cycle Time Reduction

TQM

People Management Tools

Core Competencies

Knowledge Management

Pay for Performance

HRIS

Strategy Management Tools

?


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STRATEGY:They made strategy the centralorganization agenda

FOCUSED:They created incredible focus on the

strategy

ORGANIZATION:They mobilized their employees to actin fundamentally different ways,guided by the strategy

The Balanced Scorecard Is a Performance Management

Program That Puts Strategy at the Center of the Process

Strategy-Focused Organizations

STRATEGY



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Strategic Theme:Operating Efficiency

ProfitabilityFinancial

Learning

Morecustomers

Ground crewalignment

Lowestprices

Fewer planes

Flight

Is on time

Customer

Internal

Fast groundturnaround

BSC Airlines Industry Example

What will drive operating efficiency? More customers on fewer planes

How will we do that?

Attract targeted customer segments who valueprice and on time arrivals

What must the internal focus be? Fast turnaround

Will our people do that?

Educate and compensate ground crewregarding how they contribute to the firms

success Employee stockholder program



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Objectives


Statement of

whatstrategy

mustachieve and

whatscritical to its

success

Target

30 Minutes 90%

The level ofperformance

or rate ofimprovement

needed

Strategic Theme:

Operating Efficiency

ProfitabilityFinancial

Learning

More

customers

Ground crewalignment

Lowestprices

Fewer planes

Customer

Internal


Diagram of the cause and effect

relationships between strategicobjectives (Strategy Map)

FlightIs on time

Cycle timeoptimization

Key actionprogramsrequired to

achieveobjectives

InitiativeMeasurement

On Ground Time On-Time

Departure

How successin achievingthe strategy

will bemeasured and

tracked

BSC Airlines Industry Example



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Growth Challenges



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Major Challenges of Growth

People

Process

Brand

Customer

Money (Financial)



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Managing People Challenges



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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 wantingto start one themselves. How do you deal ?



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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



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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



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Process v/s Freedom ?



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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


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Customer Centricity



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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


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Things can still go wrong. !!!

Reasons why many start-ups fail ?



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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)



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A Really Valuable Company ?



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Intrinsic (Real) value of a Company ?

Human Capital

Intellectual Capital

Customer Capital

The three are highly inter-dependant and enrich each other



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The Indian Ecosystem for

Entrepreneurial Initiatives



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Networking Ecosystem in India

Pune Open Coffee Club (POCC)

TiE, Pune Chapter

Nasscom EMERGE

Proto.in

LinkedIn Groups



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Tejas Networks Case



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Thank You

[email protected]

98505 50568


1111 2 entrepreneurship

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