CEO Training Part 6 - Riding the great depression

JWI 599 Capstone, week7 summary, 8/18/13

Team CTC had a rough DSS result this week. We left $14M in lost sales to our competition. The production was simply not on target and as the low price leader we ended up completely sold out. Our finances have suffered greatly.

Role plays this week taught us a few important lessons:
(i) Always have the courage to ask ! The worst thing you can hear is no.
(ii) Question your assumptions constantly. What held true in the past may not be true now. Challenge with data.
(iii) Fight for what you believe in. Do not let group think sway you.
(iv) Listen more than you speak. Ensure every team member is heard.
(v) Do not be conservative. Make bold decisions and take risk.
(vi) When in trouble, go back to the strategy and remain aligned.

I need to spend more time with the DSS and help the team with decision making when the debate is unending despite due deliberation. I must become intimately aware of cash flow as it is a GM responsibility.

another exhausting but also exhilarating week
Dr DP

Choose the right legal structure for the business - Proprietorship, C-corp, S-corp, Partnership, LLC

JWI 575 New Business Ventures & Entrepreneurship, Week7 summary, 8/18/13

This was another excellent week of learning again. I never really thought about the legal aspect of creating a business this deeply until now. I now understand clearly the critical importance of choosing the right legal structure at the very beginning of the venture itself.

After creating the mission, vision, values and strategy for the company, the structure of the firm should be chosen. The right legal form of the business depends on the short-term and long-term needs and goals of the firm (Kaplan & Warren, 2010). Due consideration should be given to the tax laws and cash flow needs of to arrive at the best fit for the legal structure of the company.

Additionally, legal contracts such as Non-Disclosure Agreements, Employment Agreements and Stock Option Agreements (JWI 575, W7L1) are key to enter into proper contracts with employees and create a cohesive and motivated work force. Great people decisions are vital especially in finding competent lawyers and accountants who need to stay ahead and abreast of the changes in laws. To stay on top of the legal issues and ensure compliance with state, federal and international laws a comprehensive checklist (Kaplan & Warren, 2010, pp 144-147) should be used.

Detailed takeaways below

Dr DP

Reference

Kaplan, J. & Warren, A. (2010). Patterns in Entrepreneurship Management. Third Edition. John Wiley & Sons, Inc.

JWI 575 New Business Ventures & Entrepreneurship, Week7 summary, 8/18/13

I. Choose the legal structure that fits the needs of the company

There are five legal forms of business - the best fit depends on needs of the company

Depending on the short term and long term needs of the company, five legal forms of the business can be considered namely sole proprietorship, C-corporation, S-corporation, Partnership or Limited Liability Company (LLC).

A sole proprietorship is the simplest form of business in which a single owner does business himself or herself. It is easy to set up and involves low start-up fees. The owner gets all the profits and retains total decision-making authority. However disadvantages include unlimited personal liability, limited skills and capabilities of the sole owner, limited access to capital from lending institutions and the lack of continuity for the business when the owner dies or becomes incapacitated.

The C-corporation is the most common form of business ownership and is preferable especially for early-stage companies that are looking to raise capital. The corporation in this case is a separate legal entity apart from its owners and may engage in business, issue contracts, sue and be sued, and pay taxes. Stockholders own the company, a board of directors drives the overall operation of the company, and officers such as the President, CEO and Vice Presidents manage and lead the day to day operations of the company. This form of business provides the most flexible structures for various rounds of private equity investments and venture capitalists demand this for of incorporation.

Advantages of a C-corporation form of business include limited liability of the stockholders, ability to attract capital, ability to continue indefinitely without depending on a single individual or a group of individuals, transferable ownership and a wide base of skills, expertise and knowledge of the employees, officers and the board of directors. Disadvantages of a C-corporation include cost and time involved in the incorporation process, double taxation wherein corporations are taxed on the profits while shareholders who receive dividends also pay tax, high administration and compliance costs.

The S-corporation elects to avoid corporate income tax and gets tax benefits by being a domestic company with only one class of stock which is owned by individuals and certain trusts. Shareholders pay the taxes directly and cannot be nonresident aliens and a maximum of 100 shareholders are allowed. Stringent rules are to be followed to maintain the S-corporation status and there are administrative and cost burdens as well. S-corporation may be beneficial for startup companies that anticipate net losses or highly profitable firms with substantial dividends to payout to shareholders.

A Partnership is defined an association of two or more people carrying on as co-owners of a business for profit. It is easy to establish and benefits from the complementary skills of the partners. Profits can be divided among the partners and each partner's asset base improves the ability of the business to borrow needed funds. So long as there is one general partner who will face unlimited liability, partners with limited liability can come together. As the partnership can react quickly and creatively to changing market conditions new opportunities can be swiftly seized. Like sole proprietorship, a partnership company can avoid double taxation. Consulting groups such as BCG or McKinsey are examples of parternships. Challenges with this form of business is unlimited liability for one partner, inability to attract capital, restrictions of continuity or elimination of general partnership and the potential for personality and authority conflicts.

An LLC is a blend of some of the best characteristics of corporations, partnerships and sole proprietorships. It is a separate legal entity like a corporation but it is entitled to be treated as either a sole proprietorship or a partnership for tax purposes. The owners do not assume liabilities for debt and may offer different classes of memberships and there are no restrictions on the number and types of owners. However there may be difficulties in expanding the business out of state or in transferring the ownership. Requirements may vary by state.

II. Legal contracts - NDA, EA, SOA

Nondisclosure agreements, employment agreements and stock option agreements (JWI 575, W7L1) are key to enter into proper contracts with employees. Nondisclosure agreements help to protect company secrets. Employment agreements spell out the terms under which intellectual property is developed by employees within the company and ultimately owned by the company. Such agreements also clarify grounds under which employment can be terminated. Stock options offer a great way to align the growth of a company with incentives for employees. By sharing the wealth created, a company can motivate long term commitment from its work force.

CEO Training Part5 - Right Product, Right Price, Right Timing

JWI 599 Capstone, week6 summary, 8/11/13

Delighted to see our firm CTC emerging as the market leader.

I. Leadership Dashboard
********************
Here is how we are doing versus metrics that matter:
Is the firm profitable ? Yes !
Is contribution margin (CM) on track to hit 70%-75% ? Yes !
Is the team delivering numbers and are the behaviors consistent with core values ? Yes !



But this is no time to be complacent. We had CTC meeting #10 today to go over the next decisions.

Pricing => hold; market is growing; demand is growing; we are investing in marketing and increasing quality spend

Marketing => CTC is the best in market; spend just a little bit more

People vs Machines => we have a nice balance of labor & automation => hold

Supplier => expect to be limited by raw materials for production capacity this quarter

Customer => continue to get market research and sell like hell; figure out the right price, quality and volume for the new products

Quality => invest some more to get to target level

II. New product introduction
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The marketplace is central to everything we do (Gerstner, 2002) in CTC. In the technology business that CTC is in, change in the marketplace is the only constant. Newer and better products built with state-of-art technologies are constantly replacing older offerings. Therefore, staying wedded to an old product is not an option for CTC. A better strategy is to anticipate the lifetime of the core product and readily introduce a new product to take its place when the demand begins to drop.

Some factors are key to the success of new product introductions.

Right product
Firstly, it must be the right product for the customer at the current time and economic conditions. CTC must constantly evaluate the market conditions and invest in Research & Development to be ready with new product introductions.

Right timing
Secondly, timing of new product introduction is critical. This is especially so in the technology industry where the competitive landscape changes all the time. A product that is ahead of its time may not find adequate customers and the firm can suffer by absorbing the development cost of tools by being the front runner. Close followers can benefit from this investment made ahead by the market leader. On the other hand, if a product comes in too late it can miss the window of opportunity and lose the investment made to create it.

Right price
Pricing affects perception of quality and also influences sales volume. Therefore price point for the new products must be set carefully. When a new product is introduced the customer will need to know exactly why they should buy it and not the core product the firm has been selling till now. The up side from the value proposition of the new product must be so clear to the customer that the decision to shift is relatively easy. The price to value ratio has to be compelling to get customers to shift the demand to the new product.

Short term and Long term implications
In the short term, developing new products will require commitment to research and development. Firms under pressure in the market and running short of funds may be tempted to cut R&D to survive a market down turn. However, successful firms do the exact inverse. They commit to innovation through R&D investment, recognizing that it represents a lifeline for the firm going into the future.
In the longer term, new products will be the ones that bring in profits to the customer.

CTC must commit to investing at least 5% of the revenues in R&D each year. This investment level must be benchmarked against spending by competition. By committing to be a market leader in innovation, CTC has a better chance to survive and thrive over the long term as a superior agent of the customer.

Dr DP

Project financials, pitch effectively to investors and select the right investor

JWI 575 New Business Ventures & Entrepreneurship, week6 summary, 8/11/13


I am grateful for another outstanding week of learning at JWMI. The lecture materials, case studies and DQ discussions continue to expand my thinking in exciting ways.

Financial projection, business pitch and investor selection
This week I learned more about the critical skills needed to succeed with entrepreneurship. I understand the importance of accurately projecting the financial needs of the firm ahead of time (JWI 575, W6L1) and attracting investors with a succinct pitch. I recognize the vital need for self-confidence in picking the right investor after taking into account the motivations of the parties concerned and the fit for the firm (JWI 575, W6L2).

Understanding and anticipating the "burn rate", the rate at which the capital will be depleted in the firm, is a critical first step. Ability to quickly communicate to the investors the unique value proposition in the business plan is the second step. The business plan must address the customer segment being targeted, the customer pain point being solved and the differentiation in products and services versus competition. Moreover, the business plan must highlight the amazing team that is collaborating and building the venture.

Finally, the investor must be selected carefully after due considerations. Some investors may be impatient and want to cash out quickly while others may be more patient and open to a longer term partnership. Beyond money, factors that venture capitalists (VCs) could bring such as domain expertise, connections to influential people and a track record of launching successful companies should be considered. Compatibility in working styles with the VCs is also crucial for successful cooperation in high pressure environments with well defined deliverables and deadlines.

These are valuable concepts that I will use in business ventures going forward. I will need to develop further my skill in pitching business ideas to investors and prospective employees and other stakeholders more effectively.

Dr DP

(I) Fund the venture (W6L1)
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Determine burn rate and therefore start-up capital needed

(II) Attract the right equity investors with a tight pitch
******************************************************
For [customer portrait]
who [description of problem he or she faces],
we offer [solution],
which unlike [competitor/substitutions],
offers [unique selling proposition].
I’m building this venture with [amazing team].
[Here’s why you would make a great collaborator.]

Links to Business Pitch
************************
    http://www.masschallenge.org/
    http://www.alumni.hbs.edu/careers/pitch/
    http://www.ted.com/talks/lang/eng/david_s_rose_on_pitching_to_vcs.html
    http://faculty.babson.edu/academic/sye3/RocketPitch/Student/index.htm (Look for the link to Sample Rocket Pitches in the presentation.)

(III) Pick the right investor (W6L2)
*********************************
This is a critical partnership over a long time
Understand investor motivation: make money, derive value & satisfaction

What investor brings to the table:

(a) money
*********
aligned objectives    immediate return to investors (short term cash) OR
                      build long term value, bold bet with huge long term payout
(b) non-monetary benefits
**************************
- domain expertise
- network of connections
- Adult supervision - keep you on your toes
- larger VCs - record of successful investments; introduce to other companies in portfolio - learn from, sell to
- compatible working styles


(IV) Framework used by Venture Capitalists to evaluate projects (Roberts & Barley, 2004):
*****************************************************************************************
(i) Opportunity
Is the idea exciting, interesting and unique? What is the value proposition?
Does it attempt to offer a solution to a customer pain point? What is the big A-ha (Welch, 2005), the differentiator that hooks customers and investors alike?
What is the time window for this opportunity?

(ii) Competitive Advantage
What is the moat that keeps competitors from taking away the business?
For example, is there a new technology? In order to create a barrier, the technology has to be hard to execute.

(iii) Prototype
Is there a working prototype to demonstrate the promised solution or is this just at the idea stage?

(iv) Market size and growth potential
Is the market big enough? Is the sector fast growing?
Explosive growth makes it difficult for rivals to catch up or incumbents to respond.

(v) Customer
Is there any proven customer engagement?
Interest from a customer who is willing to pay could strengthen the business case and make it more attractive to investors (Kaplan & Warren, 2010).

(vi) Team
Does the founder understand the business side and the technical side of the company?
Is the interest of the founder compatible with the interest of the VC firm?
If the founder wants to retain control as the CEO it may restrict the ability of the VC firm to extract financial gains from the investment in a timely manner.

Are the business functions appropriately staffed by talented and the best qualified people?
Do the team members have the desired qualities such as creative skills, drive to win and humility (JWI 575, W5L1)?
Who among the team are assets to the company? Who are likely to be liabilities and need to be replaced?

(vii) Risks vs. Reward
What are the technical, competitive and market risks? Can the technology become obsolete quickly?
How many competitors exist and how are their offerings differentiated?
Do the current economic environment and the global context support the market for this business case?
Can the company run out of funds before customer adoption ? (Steve Blank, 2009)
What is the financial return projected for the investment?

(viii) Business Model
What is the price point? What is the customer acquisition strategy? What is the revenue target? 
What is the expense model? What is the cash flow needed to get to break even?

Rigorous business model analysis (Hamermesh et al, HBS 2002)
*****************************************************
How likely is the business to turn cash flow positive?
How much time is required to ramp-up the revenue in order to turn cash flow positive?
How large an investment is required to pursue the business model ?
What are the critical success factors and associated risks?

(ix) Financial analysis
What is the projected revenue over time for the company? What is the gross margin?

CEO Training Part4 - Role plays & Team evaluations

JWI 599 Capstone Week5 Summary, 8/4/13

At the core the problem boils down to a lag in spending for marketing and quality. The concern is competition may be outspending the CTC team. The team regrouped and corrected the course this week with strategic moves in marketing and quality. If our decisions are right we should see contribution margin stepping up nicely to 62% vs target of 70%-75%.

Through the role plays we learned how to work together with the Union and build bridges for a brighter future together. We also succeeded in getting favorable deals from suppliers. 

As the GM, I learned how to evaluate the performance of each team member by thinking critically about where they each can improve further. As every team member is performing at the highest level, this was another great week for everyone.

Dr DP

CEO Training Part 3 - OPs review

JWI 599 Capstone, week4 update

We focused on creating a power point for an Operations (Ops) review by executives. It was great fun to assemble charts from diverse points of view including general management, finance, marketing, production, R&D and Quality.

We rehearsed as a team and made 10 revisions to the ppt file. The presentation went very well and was rated by the executives as one of the best ever.

When team work is realized, great things are possible

Dr DP

Build winning teams, Create winning culture, Think like a Venture Capitalist

JWI 575, New Business Ventures & Entrepreneurship, Week5 Summary, 8/4/13

This week I learned how to build a winning team and nourish it by creating a winning culture. Early members of the team are vital to success and so it is absolutely important to put the best and the brightest people into new ventures (JWI 575, Welch, W5 video). Essential qualities of a winning team includes sales ability, drive, humility, a knack for hiring up, domain knowledge, solid track record, formal credentials, creative skills, record of past collaborations and good instincts (JWI 575, WK5 L1). Elements of a winning start up culture include execution and accountability, transparency in decision making, wealth sharing, conflict resolution, work-life balance and clear metrics of progress (JWI 575, W5 L2). It is important to keep asking the dumb questions but there is no need to micromanage every little detail (JWI 575, David Calhoun, W5 video).

The Ockham case study (Wasserman, 2004) helped to apply and reinforce the concepts learned this week to a practical business situation. Learning how venture capitalists evaluate potential opportunities (Roberts, 2004) helped me to think more like an investor and less like a technologist.

The skills learned this week will help me build superior management teams, create winning cultures and shape business plans that can win the hearts and minds of investors such as venture capitalists.

Dr DP

References
Wasserman, N (2004), Ockham Technologies: Living on the Razor’s Edge. Boston, MA: Harvard Business School Publishing. Retrieved from icampus.strayer.edu 
Roberts, M. (2004), How venture capitalists evaluate potential venture opportunities. MA: Harvard Business School Publishing. Retrieved from icampus.strayer.edu