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Masters in Engineering and Management of Technology
Masters in engineering Design
Entrepreneurship and New Venture Creation
Rui Baptista
Entrepreneurship - Rui Baptista3
Anchors of Superior Business
They create or add significant value to a customer or end user
They solve a significant problem, or meet a significant want or need, for which someone is willing to pay a premium
They are a good fit with the founder and management team at the time, as well as with the marketplace and the risk-reward balance
They have robust market, margin, and moneymaking characteristics
Entrepreneurship - Rui Baptista4
Timmons’ Opportunity Criteria
Industry and Market Issues Economics and harvest issues Competitive advantage issues Management team fit Fatal flaws/Overall assessment Strategic Differentiation
Entrepreneurship - Rui Baptista5
Venture Criteria: Questions to be Answered (I)
Product/service creates or adds significant value to
customer or end-user solves a significant problem / need for
which the customer is willing to pay a premium
Customers are reachable and receptive Product life is durable Robust market in terms of potential
revenues and margins
Entrepreneurship - Rui Baptista6
Venture Criteria: Questions to be Answered (II)
Competitive advantages exist: “First mover” advantages Control over prices or costs Patents or trade secrets Special know-how Special relationships with customers or suppliers Contractual advantages
Attractive value creation and realization: Offers attractive returns for investors (ROI) Has low to moderate capitalization needs that are fundable Has a viable exit strategy Risk/reward balance
Entrepreneurship - Rui Baptista7
Screening Criteria: Customer/Market Need/Problem Customer Description/Identifiable and Reachable User Benefit Demand Durability Market Structure Market Size Market Growth Market Trends Market Capacity Market Share Attainable
Entrepreneurship - Rui Baptista8
Screening Criteria: Competitors/Competitive Advantage
Competitor AssessmentBarriers to EntryCompetitive Lead TimeCompetitive Advantage
• Cost/Price• Channels• Proprietary Technology• Lead Time• Service• Contracts/Contacts• Key People
Entrepreneurship - Rui Baptista9
Screening Criteria: Economics and Financial Issues
Gross/Profit MarginsEBITSustainabilityTime to Positive Cash FlowROICapital Requirements/Resource NeedsGradual Resource UsageScalability of Investment
Entrepreneurship - Rui Baptista10
Screening Criteria: Harvest/Exit
Strategic ValueValuation of Assets and Capital CostsExit PossibilitiesCapital Market Timing
Entrepreneurship - Rui Baptista11
Screening Criteria: Management
Entrepreneurial SkillsIndustry and TechnicalIntegrity and Intellectual HonestyAbility to Work TogetherBalanced in Team Roles and StylesGoal Alignment
Team Skills Management Holes/Gaps
Entrepreneurship - Rui Baptista12
Screening Criteria: Personal Fit
Risk/RewardGoalsTiming/Opportunity CostsStress and Life Style Issues
Entrepreneurship - Rui Baptista13
Screening Criteria: Overall Assessment
Fit between Opportunity-Team-ResourcesUpside-Downside RiskFatal FlawsGo/No Go
Entrepreneurship - Rui Baptista14
First-Mover Advantage in the Assessment of New Venture Opportunities
Lead Times: new ventures introducing new products/technologies benefit from high barriers to entry being more likely to survive because high barriers provide long lead times for ventures to get established
Entry Timing: pioneers have a disadvantage because they face greater uncertainty (lower financing) and greater customer reluctance to buy, and therefore experience greater costs to enter
Entrepreneurship - Rui Baptista15
First Mover Advantage: Myth or Reality
First mover advantages are based on the ability to:
Lock in customersBuild relationships with customers,
suppliers and partnerships to build brand and increase market share
Learn to operate and achieve advantages over competitors
Influence business practicesGarner industry attention
Entrepreneurship - Rui Baptista16
Sustainability of First Mover Advantage (I)
Such advantages may not hold if:Customers don’t perceive switching costsPioneers face significant resistance from
customers or there are high training or market education costs
Pioneer products are poor and produce customer dissatisfaction
Newer technologies replace pioneering technologies
Entrepreneurship - Rui Baptista17
Sustainability of First Mover Advantage (II)
Such advantages may not hold if:Single strong competitor reduces margins for
pioneering companiesExisting larger competitors can easily
develop competing capabilities – no protected intellectual property
Competitors can withstand financial losses better than pioneer
Entrepreneurship - Rui Baptista18
Sustainability of First Mover Advantage (III)
Such advantages may not hold if:Pioneer products don’t have significant cost
or differentiation advantagesPioneers are not able to develop
organizational and corporate capabilities to exploit technologies
Unsustainable first mover advantage benefits “fast seconds”
Entrepreneurship - Rui Baptista19
Fast Second: Technological Knowledge as a Public Good
Non-rivalry: the cost of replicating new technology is usually trivial when compared with the cost of creating it in the first place
Incomplete Excludability: property rights can be assigned by law to the creators of new ideas; however, technology determines how easy it is to prevent unauthorized use
This means that a “fast second” firm may reach the market with a new product reaping some of the benefits of innovation without facing its costs
Entrepreneurship - Rui Baptista20
The Timing of Innovation and the Fast Second Advantage
The larger the expected profit from introduction, the greater the probability of innovating first
The smaller the profit from the present product/technology, the greater the probability of innovating first
The larger the difference between present and expected profits (after introduction), the greater the loss from being beaten to the market
Entrepreneurship - Rui Baptista21
A Simple Model of the Timing of Innovation
T* T
RevenuesCosts
V - Total Net Revenue
D - Total R&D Costs
V1
T1*
V2
Entrepreneurship - Rui Baptista22
Case – Securities OnLine: Customer/Market
Product: rapid, easily accessible informaton on emerging East European capital markets (higher risk/return–greater demand for information)
Customers: financial/business/legal/data services – sophisticated, diverse, geographically dispersed financial operators + advertisers
Opportunity: customers’ frustration with current lack of resources/information
Large market with high potential for growth Customers are multiple users and have low switching costs Demand subject to international fluctuations in economic
growth and financial markets
Entrepreneurship - Rui Baptista23
Case – Securities OnLine: Industry (I)
Competition: inexistent/weak in the market presently; increasing in the near future (reduced lead time)
Low barriers to entry Sources of competitive advantage:
First mover advantage Technology: low entry costs, low operation costs (but possibly
growing as scope of services widens) Product differentiation: quality content and presentation, fast
distribution, segmentation per type of customer and type of information
Entrepreneurial team dominates both product content and distribution technology
Entrepreneurship - Rui Baptista24
Case – Securities OnLine: Industry (II)
Risks: Low barriers to entry – increased competition eroding first-
mover advantage Low switching costs – limits to product differentiation Large information providers (Reuters, Bloomberg) may
enter the market soon with the advantage of established customer base
Technology risk: quality and quantitiy of content vs. quick internet access; security and integrity of data
Political instability and economic fluctuations
Entrepreneurship - Rui Baptista25
Case – Securities OnLine: Economics and Financial Issues
Low investment requirements: $0.514M in the conservative scenario (C); $1,022M in the agressive scenario (A)
Gradual resource usage; high scale economies Quick to positive cash-flow: 14 months (C); 13 months (A) EBIT: $0.7M (C); $1.3M (A) by year 3 Expected ROI by year 3: 36% (C); -31,5% (A) Expected Sales Margin by year 3: 24% (C); 26% (A) Sustainability: strongly conditioned by risk – low barriers to
entry; low switching costs; increasing competition; political and economic instability
Discounted Expected Cash-Flow (DCF): $2.5M (C); $5.5M
Entrepreneurship - Rui Baptista26
Case – Securities OnLine: Harvest/Exit Issues
Exit possibilities: Merger vs. IPO vs. Venture Capital
Potential investors:Large financial information providersLarge multimedia companies (financial cable
chanells)Associated customers: financial services (First
Boston, ING); information providers (FT)Local (East European) investors
Entrepreneurship - Rui Baptista27
Case – Securities OnLine: Management Team/Personal Fit
Strong technical skills Low entrepreneurial experience, partially
compensated by the advisory board Ability to commit, giving up highly paid
corporate jobs Question: ability to extend human resources
and management team with the same level of skills
Entrepreneurship - Rui Baptista28
Case – Securities OnLine: Overall Assessment
Good fit between opportunity, team and resources as regards market and technology
Strong/average upside – first mover advantage, good established connections, but average/low initial revenues as customer base grows
Strong downside: exit through acquisition of strategic assets: customer base and human resources
Possible flaws: co-ordination of geographically dispersed team and
customer base Risk of internet capital market bubble bursting