lecture7_socialcorp

8/12/2019 Lecture7_SocialCorp

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Entrepreneurship

MN0 2009

Other Forms ofEntrepreneurship

Vivek Tandon


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Agenda

Exit Options

Social Entrepreneurship

- Definition, form, differences

Corporate Entrepreneurship

- Definition, Facilitating Factors, Role of Champions


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Solid Works

Assume that the expected income of SolidWorks 4 years

from now is $ 2.5 million.

The P/E for PTC is 35.

What should the P/E for SolidWorks be?


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Solid Works

Assume that the expected income of SolidWorks 4 years

from now is $ 2.5 million.

The P/E for PTC is 35.

What should the P/E for SolidWorks be?

What is value 4 years from now? : $62.5 m

If rate of return is 20 %, value now = $62.5/ (1.2)4 ~ $30m

If investment is $4.5m , ownership demanded = 4.5/30 ~15%. If rate of return demanded = 50 % , what isownership demanded? If 72 % ?


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Beyond just the money

The number of seats, and who actually will represent

investors, on the board of directors Possible changes in the management team and in the

composition of the board of directors

Right of first refusal granted to the investor on subsequent

private or initial public stock offerings Stock vesting schedule and agreements

Forced buyout

Equity distributionprovides incentives, proportional tocontributions needed.


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Social and Behavioral side of Venture

Finance

Social capitaldirect and indirect tiesimportant for raising

money Social capital reduces tendency to act in a self-interested way

Social ties provide information

Valuation and setting up the terms is not science and isinfluenced by behavioral biases

- impression management

- framing of business ideas properly


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Exit Options

Exit is rarely, if ever, easy- letting go is frequently emotional

- apart from pure economics: the attitudes, values

and goals of entrepreneurs matter a lot.

- exit strategies involve valuing a company andentrepreneurs frequently overvalue their baby


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Exit Options: Sales or Transfer to Insiders

Succession in Family-Owned Businesses

Leveraged Buyouts: When Managers become owners

Employee Stock Ownership Plans: Gradual Transfer toemployees


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In family-owned businesses, owners have difficulty inletting go often due to four sources (Sharma & Irving,2005):

Affective commitment : emotional identification with the

company. (I want to .)Normative commitment: feelings of obligation to remainwith it. ( I ought to )Calculative commitment: fear of loss of valuableinvestment or specific rewards. (I have to )Imperative commitment: concern about available careeropportunities. ( I need to )


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Succession in Family-Owned Businesses- Share power in a gradual manner- Set up a trust- Limited Partnerships

Choice depends on the goals of the entrepreneur,relationship with the family members and taxconsiderations.


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Leveraged Buyout- Often the top management team decide to purchase

the company when the entrepreneurs depart- Sometimes cash or often through raising debt

- Disruption is minimized why?- Good for firms with sufficient assets to serve ascollateral

ESOP- Several ways: setting up trusts, leveraged plan.


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Exit Options: Sales to Outsiders

Valuation becomes critical.

Potential buyers:- Direct competitors

- Indirect competitors who are in related markets- Non competitors

Selling to outsiders can often be efficient- synergies- Economies of scale and scope


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Exit Options: Sales to Outsiders

Some steps to make the firm attractive to sellers:- Sell at the right stage of development; when it is on

the way up- Sell when business cycle is strong

- If the entrepreneur leaves the firm, and her talent ispart of what makes the firm valuable, think of ways tocompensate for this loss.

- Identify and protect all intellectual property- Adopt transparent and conservative accounting

policies appropriate to the sector- Resolve any open questions that makes it difficult to

estimate valuetax or legal issues


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Exit Options: IPO

First sale of stock to the public

Why?- Way to obtain new equity capital- Liquidity- Valuation becomes easier

- Prestige

Founders can also cash in usually after a period of time.

Qs. Why are founders usually barred from selling shares tillsome time?


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Exit Options: IPO

Why not?- Lose control- Subject to more rulesdisclosure requirements- Expensive: direct economic costs and also managerialattention

- Choosing an underwriter- Getting the timing right- Meeting government regulations for registration ofshares

- putting the house in order

Examples of large firms who are not public?


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Social Entrepreneurship: popular definitions

A process involving the innovativeuse andcombination of resources to pursue opportunities tocatalyze social change and/or address social needs.

Social Entrepreneur- societys change agent- give priority to social goals more than monetary goals


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Social Entrepreneurs: Look like other

entrepreneurs but

Innovative

Achievement orientation

Independence

Sense of Control

Tolerance for ambiguity


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Social Entrepreneurs: Motivation

United by desire to serve a social cause.

My reasons are purely selfish. I have been put on thisearth for a very short period of time. I could apply my

talents to making loss of money, but where would I be atthe end of my lifetime? I would much rather beremembered for having made a significant contributionto improving the worldinto which I came than for havingmade millions.

-David Green (project Impact), quoted from The power of unreasonablepeople: how social entrepreneurs create markets


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Social Entrepreneurs: Combination


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Social Entrepreneurship: Social Goals


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Social Entrepreneurship: Fast Growing

Sector

When we first introduced social entrepreneurs at the WorldEconomic Forum's Annual Meeting in 2002 at a sessionentitled "Come Meet the Social Entrepreneurs," scarcelyanyone turned up .......

Today ...corporate leaders court them for their ideas,insights, and innovations, and the international mediaeagerly follow their stories.

-Klaus Schwab, founder World Economic ForumIn the foreword to The power of unreasonable people: how social entrepreneurs createmarkets


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Social Enterprises as hybrid forms

- From Kim Alter (2007), Social Enterprise Typology


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Social Entrepreneurship: Many forms

For Profit

Plough-back-profit - generate profit to fund social programs

Subsidized service providers- subsidized services to the needy, commercialized

rates for regular

Work Integration Model- skills training and/or employment to needy

disadvantaged (e.g. La Fageda)

Not for profitserving a social missionExample 1; 2 a, b ; 3

Source: Social Enterprise Association
http://www.youtube.com/watch?v=t_tGo3Ik3E8http://www.fastcompany.com/most-innovative-companies/2012/full-listhttp://www.youtube.com/watch?v=is44fqWInsM&feature=relatedhttp://www.youtube.com/watch?v=Mz_Yqzcp6FYhttp://www.youtube.com/watch?v=Mz_Yqzcp6FYhttp://www.youtube.com/watch?v=is44fqWInsM&feature=relatedhttp://www.fastcompany.com/most-innovative-companies/2012/full-listhttp://www.youtube.com/watch?v=t_tGo3Ik3E8


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Social Entrepreneurship v. Commercial

Entrepreneurship: Opportunity

Commercial: generally focus on growing market sizeand the industrys structural

attractiveness.

Social: recognized social need usually has

more than enough market size.

The problem in social entrepreneurship is not theexistence of the need but how resources can be

marshaled and organized to meet that need.

The space of social needs is so vast, it is quite easy to losefocus.!


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Entrepreneurship: Environment

Market selection mechanisms may be less intense onoperating ventures because of measurability problemand the vastness of the problems.

- their social value may also insulate them.

Social entrepreneurs are frequently attracted towardadverse contexts.


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Entrepreneurship: Resources

Resource mobilization may be more difficult

People- Rarely able to offer market rates for hires- Many times difficult to provide financial incentives.

Capital- Social entrepreneurs have fewer channels.- Economic sustainability is also a challenge

Social networks therefore become even more importantsince many resources are often out of their direct control


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Entrepreneurship: Evaluation

Measurability:For commercial ventures, valuation is difficult but atleast some common ground ROI

Parameters:

Remaining true to the mission do you chaseresources or not ?

Ratio of Administrative expense to Amount spent on

the social cause.

Triple Bottom Line: Profit, People, Planet


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Bottom of the Pyramid Idea

Source: prof Stuart Hart

ToP > $15,000 ~ 800 million

MoP $1500 - $15000 ~ 1.5 billion

BoP < $1500 ~ 4.5 billion


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Bottom of the Pyramid Idea

Massive underserved market(Prahalad and Hart, 2002)

Assumptions challenged- The poor cant pay so wecannot have profitable

models- The poor dont adopt newinnovations.

Can be an incubation site forradical technologies (Hart andChristensen, 2002)

Challenge for you:Q Drum; video
http://www.qdrum.co.za/http://wellowater.org/http://wellowater.org/http://www.qdrum.co.za/


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Grameen Phone

Video

Give small loans to create women operators in villages

That would give access to a large population. 40,000phones would put everyone within 10 minute walk of atelephone.
http://www.youtube.com/watch?v=Ixjxvzb2-Fw&feature=relatedhttp://www.youtube.com/watch?v=Ixjxvzb2-Fw&feature=related


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Grameen Phone

Profit:productivity enhancing; profitable

People

empowers women

Planetreduction in travelavoid unproductive use of fuel etc.


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Innovating for the BoP

Basis: Imagination- e.g. You dont need ownership, you need access

Most barriers are in the mindinnovation for thepoor requires reexamining your assumptions

- What is the difference between:Cost + Profits = Price v. PriceProfits = Cost.

- For instance, using world class technology withlocal adaptation. modern VideoBBC documentary
http://www.forbes.com/sites/rahimkanani/2011/08/08/jaipur-foot-one-of-the-most-technologically-advanced-social-enterprises-in-the-world/http://www.youtube.com/watch?v=kEp1CA9DSochttp://www.youtube.com/watch?v=go3NxBa6xs8&feature=relatedhttp://www.youtube.com/watch?v=5pGqj51-XPU&feature=relatedhttp://www.youtube.com/watch?v=5pGqj51-XPU&feature=relatedhttp://www.youtube.com/watch?v=go3NxBa6xs8&feature=relatedhttp://www.youtube.com/watch?v=kEp1CA9DSochttp://www.forbes.com/sites/rahimkanani/2011/08/08/jaipur-foot-one-of-the-most-technologically-advanced-social-enterprises-in-the-world/


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Corporate Entrepreneurship

Entrepreneurship within existing firms.

- Creating new ventures and exploring new businessideas within large established firms

Many inventions and ideas within firms are not exploited

by the firms. The champions of these ideas can leave thefirm and become competitors

Corporate entrepreneurship is a major source of renewalof firms. Allows established firms to change in highlycompetitive rapidly changing environments

- e.g. Intel


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Corporate Entrepreneurship: example

3M Post It
http://www.youtube.com/watch?v=AUX4As-QpdMhttp://www.youtube.com/watch?v=AUX4As-QpdM


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Corporate Entrepreneurship: Problems

Strengths of Big firms:Reliability

- Depends on routines

and controls- Routines reduceentrepreneurship

Contentious resourceallocation process.

How to make the elephant dance?


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Corporate Entrepreneurship: Facilitating

Factors Design of Organization

- Organic structure: decentralization, less formalism- Less organized for efficiency and more on detecting andrapidly exploring opportunities

Awards & attitude

- Encourage experimentation, tolerance for failure- Long term horizon

Networks- Lateral communication networks, multi-disciplinary teams

Culture: Less turf wars, information sharing

Employee Selection: more enterprising, doers


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Corporate Entrepreneurship: Intrapreneurs

Intrapreneurs are entrepreneurs within firms: dreamers

who do (Pinchot, 1987)

Champions the idea through the organization

Protects the ideas from naysayers

Musters resources together.


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Corporate Entrepreneurship: Intrapreneurs

Charles House, HP

- a new monitor which failed.- heavy, used power, cost as much- Went to marketing people, no results- Put it in his car, went around businesses

looking for a usefound many.

- Packard saw it and said he did not want tosee it in the lab.

- House : ok, let us put it in production- Monitor was used in first moon landing and

was a great success.- House got the award for meritorious

defiance

Video
http://www.youtube.com/watch?v=Y9GVC4FH2gUhttp://www.youtube.com/watch?v=Y9GVC4FH2gU


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Summary

Social Entrepreneurship:

- social mission- many models: Plough-Back; subsidized; work-integration

- different challenges: focus; resources; evaluationcriteria

Corporate Entrepreneurship:- source of renewal within firms- facilitating structures and systems allowing risk-taking

- role of champions

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