Chapter 2

1. ENTREPRENEURIAL FINANCE Chapter 2 FROM THE IDEA TO THE BUSINESS PLAN

2. Chapter 2: Learning Objectives • Understand the components of a sound business model • Identify some of the best practices for high growth, high performance firms • Understand the importance of timing in getting from the idea to the opportunity

3. Chapter 2: Learning Objectives • Identify the types of questions that a reasonable feasibility assessment should address • Identify quantitative criteria that assist in helping assess a new venture’s feasibility and its attractiveness to investors • Describe the primary components of a typical business plan

4. Components of a Sound Business Model企业商务模式构成成分 • Generate Revenues (You must have customers & sell them something) 产生销售收入 • Make Profits (You must eventually have revenues that exceed the expenses of generating those revenues) 产生利润 • Produce Free Cash Flows (You must generate cash inflows that exceed net working capital & capital expenditures) 产生净现金流

5. Types of Small Business Firms 小企业类型 • Entrepreneurial firms (broadly):创业型企业（广义） small business including both high-growth, low-growth or stationary (lifestyle) businesses • Entrepreneurial ventures (narrowly):创业型企业（狭义）： entrepreneurial firms that are flows and performance oriented as reflected in rapid value creation over time

6. Best Practices of High Growth, High Performance Firms高增长、高绩效企业的最佳实践环节 Three Areas: • Marketing Practices 营销实践 • Financial Practices 融资惯例 • Management Practices 管理实践 [Note: While Operations/Production practices are not listed separately, they go hand-in-hand with high quality products & services, as well as on-time delivery]

7. Best Practices: Marketing最佳营销实践 • Deliver high quality products or services • Develop new products or services that are considered to be the “best” • Offer products or services that command higher prices & margins • Develop efficient distribution channels & superior service support facilities

8. Best Practices: Financial最佳融资惯例 • Prepare monthly financial plans for the next year & annual plans for five years • Anticipate & obtain multiple rounds of financing as the venture grows • Efficiently & effectively manage the firm’s assets, financial resources, & operating performance • Plan an exit strategy consistent with the entrepreneur’s objectives & business plan

9. Best Practices: Management最佳管理实践 • Assemble a management team balanced in functional area coverage & industry/market knowledge • Employ a decision-making style that is viewed as being collaborative • Identify & develop managers that support entrepreneurial endeavors发现和培养支持创业精神的管理人才 • Assemble a board of directors balanced in terms of internal & external members

10. Time-to-Market and Other Timing Implications • Business opportunities exist in real time • Most ideas have a relatively narrow window of opportunity to become a successful business venture • Sometimes ideas are ahead of their time • Of course, being “first to market” does not necessarily ensure success

11. Screening Venture Opportunities筛选创业机会 • A viable venture opportunity:可行的创业机会 creates or meets a customer need, provides an initial competitive advantage, is timely in terms of time-to-market, and offers the expectation of added value to investors • Venture opportunity screening:创业机会的筛选 assessment of an idea’s commercial potential to produce revenue growth, financial performance, and value

12. Qualitative Screening: Interview定性筛选：面试 Four Factor Categories Initially Evaluating a Potential Venture’s Attractiveness: 1. The Big Picture 2. Know Thy Customer 3. Production and Development Challenges 4. Financial Fortune-Telling

13. Quantitative Screening: VOSTM Indicator定量筛选：间接指标 • Attempt to quantify the following areas • Industry/Market • Pricing/Profitability • Financial/Harvest • Management Team • Supplement to, rather than replacement of, basic qualitative Q&A approach

14. Factor Category: Industry/Market行业与市场指标 Potential Attractiveness: • Market Size Potential Average: $20-$100 million • Venture Growth Rate Average: 10%-30% • Market Share (Year 3) Average: 5%-20% • Entry Barriers Average: Timing/Size

15. Factor Category: Pricing/Profitability 价格与盈利能力指标 Potential Attractiveness: • Gross Margins Average: 20%-50% • After-Tax Margins Average: 10%-20% • Asset Intensity （Total assets divided by revenues ）Average: 1.0-3.0 turnover • Return on Assets Average: 10%-25%

16. Selected Accounting Terms会计指标 • Cost of Goods Sold: direct costs of producing a product or providing a service • Gross Profit: revenues less the cost of goods sold • Gross Profit Margin: gross profit divided by revenues • Net Profit: dollar profit left after all expenses, including financing costs & taxes, have been deducted from the firm’s revenues

17. Return on Assets (ROA) Model投资报酬率 • Net Profit Margin (NPM): net profit divided by revenues • Asset Intensity: total assets divided by revenues, the reciprocal of asset turnover • Return on Assets (ROA): net after-tax profit divided by total assets • ROA Model: ROA = NPM x ATO

18. ROA Model Considerations • Case 1: High Profit Margins & Low Asset Turnovers Examples: products & services based on technological innovations • Case 2: Low Profit Margins & High Asset Turnovers Examples: commodity-type products & services

19. Factor Category: Financial/Harvest 融资与收益 Potential Attractiveness: • Cash Flow Breakeven Average: 2-4 years • Rates of Return Average: 20%-50% per year • IPO Potential Average: 2-5 years • Founder’s Control Average: High Minority

20. Selected Financial Terms • Operating Cash Flow:经营活动产生的现金流 cash flow from producing and selling a product or providing a service • Free Cash Flow to Equity: 分配给股东的现金流 cash remaining after operating cash outflows, financing and tax cash flows, investment in assets needed to sustain the venture’s growth, and net increases in debt capital • Internal Rate of Return (IRR): compound rate of return that equates the present value of the cash inflows received with the initial investment

21. Factor Category: Management Team Potential Attractiveness: • Experience/Expertise Average: General/General • Functional Areas Average: Most Covered • Flexibility/Adaptability Able to Adapt • Entrepreneurial Focus Average: Founder

22. VOS Indicator™ Average Scores • High Potential (average scores of 2.34-3.00) • ideas that have the potential to become high-growth, high-performance ventures or “home runs” • Average Potential (average scores of 1.67-2.33) • Low Potential (average scores of 1.00-1.66)

23. Key Elements of a Business Plan商业计划书的要素 • Business Plan: written document that describes the proposed product or service opportunity, current resources, & financial projections • Cover Page: should identify the venture & provide the name, address, & phone number of the entrepreneur or other contact person

24. Key Elements of a Business Plan商业计划书的要素 • Confidentiality Statement: Example: “This business plan contains information that (the firm) considers proprietary. By accepting this business plan the recipient acknowledges the proprietary nature of this information contained herein and agrees to keep confidential all such information.”

25. A Typical Business Plan Outline商业计划书大纲 I. Executive Summary 执行摘要 II. Business Description业务描述 A. Description of the product/service B. Industry background C. Venture or firm background D. Goals and milestone objectives

26. Business Plan Outline (cont’d) III. Marketing Plan and Strategy A. Target market and customers B. Competition and market share C. Pricing strategy D. Promotion and distribution IV. Operations and Support A. Quality targets B. Technology requirements C. Service support

27. Business Plan Outline (cont’d) V. Management Team A. Experience and expertise B. Organizational structure C. Intellectual property rights VI. Financial Plans and Projections A. Income statements & balance sheets B. Statements of cash flows C. Break-even analysis D. Funding needs and sources

28. Business Plan Outline (cont’d) VII. Risks and Opportunities A. Possible problems and risks B. Real option opportunities VIII. Appendix A. Detailed support for financial forecasts B. Timeline and milestones