15.390 New Enterprises

15.390 New Enterprises Class One Howard Anderson Ken Zolot

Course Objective… To learn how to form, organize and build a new enterprise. We don’t just study entrepreneurs, we become entrepreneurs.

Our Final Exercise ofLast Semester: • Your friend in chemical engineering has discovered a polymer which, when applied to metal, causes water to bead. Cars could keep their shine for months. • You went to MIT’s Technology Licensing Office and got an exclusive license to use this technology for auto polishers, and you agreed to give MIT: • a fee of $100,000 • a continuing royalty of 2% of wholesale sales • a right to own 2% of the company

You determined that materials will cost $0.25 to make a 16-oz bottle, and packaging will cost $0.15 per bottle. • Competitors charge $6.00 a bottle, and wholesale price is 65% of that. • You can buy a used bottling plant for $100,000, and you’ll need to staff it with 5 people.

There are 200,000,000 cars and trucks on the road, and each year 15,000,000 additional ones are sold. • There are 10,000 car washes in the US

Recap • MIT TLO deal: $100,000 + 2% wholesale, +2% equity stake • Cost/bottle: $0.25 materials, $0.15 packaging • Competitors charge $6.00 retail, $3.90 wholesale • Buy a plant for $100,000, need staff of 5 • 200,000,000 vehicles on road, add 15,000,000/yr • 10,000 car washes

Discussion Points • Costs to ramp up, projected sales, amount of funding needed? • How long before break-even? • Distribution options: • Sell direct to consumers? Retailers? • Partner with existing wax company? • Partner with car supply company that doesn’t yet sell wax? • Sell direct to car washes? • Partner with wholesale care wash supply company?

Our New Enterprises Class... • Cram as much experience into 13 weeks as possible • Goal: have a business plan built that will yield a company a market capitalization of $50 million within three years of launch • Cases and readings are important, but the idea is to pick up lessons and insights from that directly apply to the business plan

The Company You’ll StartFor This Class • Rules: Company must be technology based, may not be a “consulting” company (company must have a product or service) • Company may or may not require resources that you do not control (intellectual and financial)

Finding the Next Great Idea(s)(and knowing what to do with them) Often variations or derivations of existing products or services….

Lessons • Attackers, Defenders,… • Attackers make all the money, have all the fun • Gates, Dell, Redstone, Jobs, ….. • Starting new companies is LESS risky than thought… and orders of magnitude more rewarding

Ken’s section...

Methodology The big 3... • Team • Market • Technology Then add a viable business model that ties these all together.

Team • Drive • Entrepreneurial instincts • Domain knowledge • Intelligence • Track record • Credentials • Past collaboration

Market • Size • Addressability • Readiness to buy • Stage of purchase decision (early adopter, mission critical, etc.) • Does team understand its market?

Technology • Pain points solved? • Defensible (“special sauce” or patents)? • Ready? • Stable? • Able to assess a value?

Viable Business Model • Paying the team, paying rent, benefits, etc • Developing the technology such that it can be priced to solve the market’s pain points • Segmenting and presenting to the market • Allow for a chunk to go to your sales force, distributor, channel, etc. • Raising capital and still maintaining sufficient equity to motivate the team • Getting liquid (or “exit strategy”): • Break even then generate free cash flow • Raise more money (IPO) • Acquisition Work backward from one of the above three: come up with a desired valuation, and figure out what you have to do to get there.

Pricing/Selling Strategy • Distribution options • Vertical or horizontal specialization • Sell a product or service? • Loss leader early pricing, importance of early adopter? • Low-end early product to hook the market? • Selling a core component that takes refills/expansion modules (Gillette model)?

Value Proposition How does this product increase value for your customers? Does it... • increase the price they can charge? • increase the volume they can sell? • give them access to a new customer base? • give them an edge over their competitors (K-mart v Walmart)? • reduce their cost structure?

Finding Credibility • Use your expertise • Find opinion-leaders, industry experts • Launch from an established base

back to Howard...

First Assignment • Submit a One-Page Idea…..What is the product/service? What does it do? Who are the customers? What does it cost? How many customers? Why is this better than the currently available product/services? • Submit your one-page idea by Friday, February 7, at 8 pm electronically: upload to SloanSpace or (last resort) email to Phil: plapsley@sloan.mit.edu • We will post all plans online for you to read, and you will vote on the best ones

First Assignment Continued Also submit, in a separate file, a quick summary of your bio (a paragraph or two). • Write your name, what school you're enrolled in, what year you're in, your major or area of study, what schools(s) you've attended before, where you worked before, business interests, things you'd like to get out of the class, etc. • Attach a jpeg photo image to help us to get to know you.

Next, Everybody Votes • Can’t vote for your own idea • Pick the one where you would like to work • Professors vote too • 3rd class: winning teams present, then everybody networks… go talk to the plan’s author (CEO) • Team will work together for the whole semester, build a business plan (and ideally a company!) • You may do your own... But this will be hard

More on the Idea... • Needn’t be “real,” but needs to be feasible • We’re more interested in seeing your thoughts/plans develop than in whether the product is viable

More on the Idea... • Need not be high-tech; preferably some tech • Examples of non-obvious previous plans: • put a farm tiller on the back of a motorcycle • software to enhance image recognition in prostate xray, improve surgery • devulcanize tires for rubber recycling • golfball with GPS-tracking capability • Think of an idea that ties in to your background: what are you good at? What have you studied? Who do you know with expertise?

IMPORTANT • Intellectual property is public domain: if you’ve got an amazing secret, disguise it or pick your number 2 idea. • Do not write “confidential” or “proprietary” on your assignments or submitted plans. • We will freely distribute submitted plans to your classmates, and will use non-secured email/websites.

Survivor • At end of semester, the plan gets a grade. • A = a plan that an angel investor/venture capitalist would ideally fund • A- = a plan that an angel investor/venture capitalist would at least put on the active list • B+ = a plan where the angel/v.c. would take the first meeting • B = a plan that an angel/v.c. would refer to a fellow angel/v.c. who he/she held in minimal high regard • C = no brainer turndown (NBTD)

Your Instructors • Howard Anderson • Ken Zolot • Phil Lapsley

Howard Anderson • Started Yankee Group, 1970, age 25 • Sold to Primark/Reuters. 1996 • Started Battery Ventures, 1984 • Started YankeeTek, 2000

Ken Zolot • Founded Egenera, 2000, data center infrastructure, introduced “bladed” servers(try a Google on the phrase “zolot egenera”) • Co-founded YankeeTek Ventures • Technology Strategist to Goldman Sachs • Founded Geer Zolot Associates • Founded Spectra Communications • S.M. Sloan MOT, B.S. in Computer Science, B.A. in Philosophy

Phil Lapsley • Currently a second-year Sloanie • Co-founded Indivos, whose service allows you to pay for goods and services using only your fingerprint • Co-founded BDTI, a consulting and software development firm specializing in digital signal processing • Author of one book, five patents, numerous technical articles • B.S. and M.S. in Electrical Engineering and Computer Sciences from U.C. Berkeley

What Else? • Every few weeks, a different part of the plan is due (marketing, financing, business model, staffing, ownership) • Each part will get a preliminary grade • Fix the parts that need fixing • You’ll come pitch to us once at YankeeTek, once to the whole class • The final plan is the parts put together

Readings/Assignments • VISIT “SLOANSPACE” FREQUENTLYhttp://sloanspace.mit.edu/class/15.390a-new-enterprises/ We may change the syllabus and the readings, SloanSpace is the final authority • Make sure you’re signed up for the class in SloanSpace to get class emails • Go buy a course packet at “copy-tech” in the basement of E52 -- all cases and readings are in the packet • The classroom powerpoints will be posted on SloanSpace

Final Exercise? • An in-class test, but it’s easy.

Grades 25% Class participation. We expect you to:- attend and be punctual to every class- display a namecard in front of you- not use your laptop in class, especially when we have a guest speaker- read the assignments, study guests’ backgrounds - contribute (we will cold-call you) 25% Written assignments (chapters of full plan) 25% Full Business Plan at end of semester 25% In-class exercise on last day of classes your fellow team members will grade your contribution to the team, used to “round up” or “round down” your grade

Is This a Hard or Easy Course? • Demands creativity. • We don’t “study” entrepreneurs, we become entrepreneurs. • Successful companies have “balance” = technology, marketing, team, finance.

Working With UsOutside Of Class • Every Monday, one of us will stay late after class. • Every month, we’ll hold a more fun version of this Q&A session at “The Muddy Charles.” (March 3, April 7, May 12) • We will man a “phone hotline” where one of us will be available to take calls during posted hours just before an assignment is due. We’ll post these hours/phone numbers as we approach the assignments. • We always respond to emails quickly, and welcome questions. • Office appointments are always available: just ask!

Contact Info Use Email... It is much easier for us, and responses will be quicker. • Howard Anderson:YankeeTek, 1 Memorial Drive, 12th floor.(617) 250 0555handerson@yankeetek.com • Ken Zolot:E39-115(617) 354 6565 zolot@mit.edu • Phil Lapsley:510-381-0356 (cell)plapsley@sloan.mit.edu

Recap of Upcoming Assignments • By Friday, Feb 7, 8 pm: submit (by uploading two files to SloanSpace, or emailing them to plapsley@sloan.mit.edu): file 1 - one-page business idea file 2 - one/two paragraph personal bio & photo • By Tue, Feb 11, 8 pm: have read and voted on one-page business ideas (vote via SloanSpace) • On Wed, Feb 12 we will announce winners and form teams

15.390 New Enterprises