Harvard Business Review
Entrepreneurs Handbook
Everything you need to launch and grow your business
I read this book to learn more about how to build a team and launch a business.
What I learned: There is much to consider when deciding if starting a business is a good idea for you personally. Having a good business idea is important, but there is so much more that goes into it. Which is why 75% of startup ventures fail to return investors capital. An Entrepreneur, in order to be successful must have drive, passion, and people skills.
The opportunity being considered must meet a set of criteria to be pursued. A good business opportunity solves a real problem for customers, offers significant risk-adjusted profit potential, is a good fit for the leadership teams skills and experience, has the potential to remain profitable over a period of time, and is amenable to financing. The problem to be solved is often overlooked in its importance to the big picture. Adequate time needs to be spent testing how customers experience the problem. The more dialed in the team is to the user experience, the lower the risk of failing to deliver with a home run on the solution. It will also be much cheaper in the long run. A reference is made to the Lean Startup Method by Eric Ries, which is the last book I read about entrepreneurship.
Business Model and Strategy are two different things. The model includes all of the things associated with making something and all of the activities involved in selling that thing. Specifically (1) revenue sources such as sales, service fees, and advertising. (2) Cost drivers like labor, energy, and goods purchased for resale. (3) Investment size, which is how much money is needed to get the business off the ground and keep it operating. (4) the critical success factors, such as the ability to roll out new products, critical mass, or viability within a certain amount of time.
Strategy is all about competition and how to stay ahead of it. Strategic positioning can be (1) variety based, aiming to serve all or most needs of a set of customers or (2) Access-based, being strategically located. When formulating strategy it is important to look both outside the business at the economic environment and how it’s changing, and inside the business to see what skills and competencies gain a competitive advantage. Creating alignment within the company so that everyone understands the strategy and knows their role is critical. A startup should be viewed as an experiment, and if the experiment is failing, the company needs to pivot quickly.
The decision for what legal form a company takes is driven by your objective as an entrepreneur, and the objectives of your investors. Both taxes and liabilities play a role in this decision as well. There are pros and cons to each type of setup, the most significant being how much money is paid in taxes, and what kind of financing you are able to obtain. The legal form can change throughout the life of the business, but it can be expensive and complex to set up.
When writing a business plan for funding, it is important to remember that the best plans focus on the people and the business model behind them. The key elements to a solid plan are the description of the opportunity, the solution, the market, the model, and the team. A powerful executive summary cannot be overlooked. It is the first chance to make an impact on the prospective investor. It pays to do your research on who you’re pitching to and tailor your presentation accordingly. It is safe to assume that whoever is looking at your plan is busy, and in order to grab their attention an executive summary needs to get the message across clearly and quickly. A video can be effective if done right. A description of the team is also one of the most important elements of the plan, and investors are going to want to know about where everyone is from, where they went to school, where they’ve worked, who they’ve worked for, their current roles, accomplishments, skills relevant to the opportunity being pursued, motivations, their ability to hire quality people for the venture, how they plan on dealing with tribulations, and how realistic they are about the companies chances, to name a few. A business plan can be solid as a rock, but without the right team investors are not going to part with their capital. A good plan is also going to outline the goals of the company in terms of an exit, or cashing out their investors. This is, after all, what everyone is working towards.
The early stages of financing for startups usually include personal savings and small loans from friends and family. Sometimes small bank loans can be utilized, and trade credit from suppliers is a good way to get low cost financing. As a startup develops into a functioning business, online banks, accelerator programs, and crowdfunding can be used for growth. Only about 3% of new businesses qualify as high-growth and need to look to internally generated cash flow, asset based loans, and external equity for financing. Debt is usually the lowest-cost form of capital because interest rates are tax deductible, and the entrepreneur is not giving away partial ownership of the company in the form of equity. However, the more debt the business carries the riskier it is said to be. Other forms of external financing include issuing short term debt security, bonds, or preferred stock. For the very few businesses that reach the point of growth suitable for an IPO, selling shares of the company to the general public is a huge milestone, and infuses an enormous amount of cash into the business.
If the goal is to get the business to an IPO, it will take a lot of money to get there. The most likely source of early outside capital comes from Angel Investors. Angel Investors are usually high net-worth individuals who look for early stage businesses to invest in. They provide less money over all than venture capital firms, but fund far more deals. Angel investors are great for series A funding and provide resources young companies need to grow. Series B funding is where Venture Capitalists step in. VC’s provide funding, but take a significant percentage of ownership of the company and will want to be involved in management. They are typically looking for a return of 10 times the amount of capital they invest, over a period of 5-10 years.
Throughout the growing phases of a company, management becomes more and more important. Having the employee levels appropriate for output is just one element. Staff also needs to be organized and cultured. Management must constantly be questioning the sustainability of its strategy. Some mechanisms of sustainable growth are maintaining a cost advantage by staying ahead of the learning curve, and not pricing for maximum profits. A ton of profit will draw competitors, which will often trigger a reduction in revenue anyway. In this instance, leaving less meat on the bone will deter competitors from entering the market. Outsourcing can be a good way to scale up to meet rising demand, but any activity that puts the outsource partner in direct contact with the customer needs to be avoided.
As a company grows, responsibilities have to shift and decision making has to become decentralized. Nobody can do everything by themselves. Newly hired employees must have your vision instilled during training. It might be prudent to hire a professional management team that can implement the correct mode of management for your business.
Growth can challenge the innovative spirit of a company as so much time and energy are put into managing systems. It is important to preserve an innovation-friendly culture in the company, and not get bogged down or complacent. New products or refreshing existing products is imperative for continued growth.
The last chapter is about why, how, and when to harvest. The owners may want to diversify their wealth or begin something new. Or maybe the business has reached its potential. A company can be sold or merged with another company, sold to the management team, or sold to a new owner. Valuation is obviously very important in this process, and different methods for determining value will produce different results. A couple popular methods are a multiple of earnings before interest and taxes, and the discounted cash-flow method, which looks to the future potential of what a company can achieve.
The appendix goes into detail about Financial Statements, Break Even Analysis, and Valuation.
I loved this book for how detailed it was about each element of a companies evolution, from concept to exit. This will be a resource I refer back to often.
