Empowering Entrepreneurs: Insights & Inspiration for New Ventures

1. Introduction to entrepreneurship: Developing new ventures Dr. Marina Ranga University of Warsaw Faculty of Management 4 June 2019

2. Outline 1. Types of entrepreneurs and new ventures 2. Stages of creating a new venture 3. Writing a business plan 4. Possible structures of new ventures 5. Development stages and funding for new ventures

3. Types of entrepreneurs and new ventures

4. a. Lifestyle entrepreneurs • Lifestyle entrepreneurs • Seek independence, career is built around their life, based on their own rules, exploit an asset or expertise • Focus on life rewards and passion over profits, experiences matter more than money • Lifestyle venture • The most common type of new venture • Business based on “What life do I want to lead?” • Set up and run primarily with the aim to provide an occupation and a particular level of income for the founder, a foundation for a particular lifestyle. • Not necessarily very creative or innovative • Usually based on online operations • Location-independent, usually led from home • Typically has a slow and gradual growth plan

5. Tim Ferriss “Indiana Jones for the digital age” One of Fast Company’s “Most Innovative Business People” “The Superman of Silicon Valley” (Wired) "The World's Best Guinea Pig" (Newsweek) 7th most powerful online personality in Newsweek's Digital Power Index 100 Angel investor and advisor to over 20 companies start-ups (incl. Facebook, Twitter, Evernote, Uber) Author of five books, all featured on The Wall Street Journal and The New York Times Best Seller lists “People who like to create something from nothing. That is what makes entrepreneurism. Ideas, in and of themselves are kind of valueless I think – it’s the people who take those ideas and have the stomach and the courage and the excitement and the enthusiasm to go through all the trials and tribulations to create something meaningful is what separates them.” American entrepreneur, author, podcaster, angel investor Net worth ≈ $100 million 41 years old

6. Chris Guillebeau Founder of the Art of Non-Conformity blog Author of the New York Times and Wall Street Journal bestselling book The $100 Start Up Founder of the annual World Domination Summit in Portland Oregon (3,000 people attending in 2013) Best known online for his mission of travelling to every country in the world by the age of 35 (completed in 2013). Writer of Unconventional Guides business  sells digital downloads of his ebooks and multimedia guides, Runs the Travel Hacking Cartel membership site “Entrepreneurship is about creating personal freedom. The ability to structure your life around your own skills and rhythms is very important, and one of the true benefits for successful entrepreneurs who can balance this well” … “Most wealth around the world is created by entrepreneurs, and studies show that your best chance of becoming wealthy is to start a business.” American nonfiction author, blogger and speaker. Net worth ≈1 million 41 years old

7. b. Growth entrepreneurs • Growth entrepreneur • Emphasis on quick growth, wealth and influence • Aim to create something of long-term value, continually seek to make the business bigger and more competitive. • Higher risk, more financial rewards if successful • Growth enterprise • Aggressive growth of new businesses (often serial entrepreneurs) • "Gazelles": double company size either by number of employees or in gross profit every 2-4 years. • Can become large corporations through acquisitions • Usually needs larger investment both in upfront capital and management time for the business • Constantly reinventing itself to grow faster • Capital-intensive • Apply market growth strategies: Market penetration, Market expansion, Product expansion, Diversification, Acquisition

8. Robert Gryn Poland’s youngest self-made man: #57 on Forbes’ 2017 100 Richest Poles list CodeWise develops smart traffic and tracking tools for performance marketers, based on marketing technology platforms Zeropark and Voluum. Entirely self-funded, revenue > $50m in 2016; 290% average revenue growth rate since 2012 start. Deloitte Fast 50 Rising Star Award (2015) Winner of both the Deloitte Technology Fast 50 and Big Five rankings in Central Europe (2016) "What advice would you give to students who want to pursue a career in your field? It’s difficult to overcome the fear of setting up a business right after university. I would suggest to do what I did, which is to get a job at a small start-up and get your fingers in everything. The finances, IT, management and so on - see how it is to run a business from A-Z. After a year or two, you will have a real-life MBA and the courage to go out on your own. Also, allow your curiosity to guide you throughout your career." Polish entrepreneur, CEO and owner of Codewise, 2nd fastest growing company in Europe (FT1000). Net worth ≈178 million USD 33 years old

9. c. Innovative (revolutionary) entrepreneurs • Innovative entrepreneur • Driven by the desire to create something new, change something in the world - social, cultural, or environmental issues (poverty, access to education and healthcare, etc.) • Launches new products, discovers new markets, establishes new methods of production, restructures the enterprise • May get independence, reputation and wealth, but these are not primary goals • Technology entrepreneurs • Well educated (Master's degree) • Work experience (13-15 years), 30-40 yrs old • Moderate n-Ach, low n-Aff • Social entrepreneurs • Need passion and vision, brokerage and networking skills, build coalitions of support, access diverse resources • Pay gap because of the lack of eager investors • May be non-profit, for-profit, or hybrid

10. CallPage: Ross Knap (CEO) Sergey Butko (CMO), Andrey Tkachiv (CTO)   Nominated in Forbes “30 under 30” 2019  CallPage - Krakow-based start-up (2015) created a cloud-based software that reaches out to website visitors before they leave, to try and convert them into customers. Analyzes user behaviour in real time, when it recognizes an interested visitor, it offers them a free call back and connects businesses with potential customers in a mere 28 seconds. 30 people staff Secured seed investment of €500,000 (2016) Raised $4.5 million, one of the biggest financing rounds in Poland (July 2018) Polish entrepreneurs Sergey Butko (CMO, 22 years old) Ross Knap (CEO, 26 years old) Andrey Tkachiv (CTO, 23 years old) 

13. 2. Stages of creating a new venture 3. Writing a business plan

14. Stages of creating a new venture

15. The innovating firm in 1. Assessing the opportunity • Critical determinant for the venture success • Requires ability to connect a specific technology or know-how with a commercial application  skills, experience, insight, circumstances • Ability to bring together scientific knowledge and market acumen • Social capital (linkages, partnerships, networks) • Opportunity driven by : • Economic factors (changes in employment status, income, etc.) • Technological developments that may reduce barriers to entry • Demographic trends (aging population, more leisure time) • Regulatory changes (environmental rules, health and safety, etc.) • Key questions: • Does your business idea have a demonstrated market need? • Is there sufficient demand for the product or service? • Is creating the product or service economically feasible? • Will there be a sufficient return on the investment of starting a new business? • What is the cost of NOT pursuing this business opportunity (business opportunity cost)?

16. Assessing Potential Business Opportunities – The RAMP method

17. 2. Developing a business plan - Why? 1. To attract external funding (bank loans, equity funds from VCs or angel investors) 2. To test feasibility of the business idea 3. To reach formal agreement and vision among founders on the venture development 4. To translate abstract goals into explicit operational neds, support decision-making and prioritization 5. To define short-term and long-term objectives, benchmarks and milestones 6. To better understand competition and customers, position your brand on the market

18. Typical structure of a business plan

19. Structure of a business plan • Executive Summary Summary of company’s mission statement and a description of its products and services. Explains what you expect your business to accomplish, why you’re starting your company. Include details about your experience in the industry you’re entering. Typically written last. • Company Description Key information about your business: structure, management team (CVs appended), company history and ownership, personnel plan, goals and customers you plan to serve. Explains how your business will stand out from others and how your products and services will be helpful to your target audience. Details of your products/services. • Opportunity and market analysis a) Opportunity: describe market gap and explain what caused it, how it was identified and how it can be filled. Provide a roadmap/future plans for solving the gap. b) Market: Describe target market: total size, segmentation, growth rates, expected market share, market trends, how your company will fit into it. Discuss barriers to entry, suppliers, substitute products and competition. Describe target customers, where they are, how to reach them and how to deliver your product to them..

20. Structure of a business plan (cont.) • Competitor analysis • Describe who your competitors are and how you stack up against them—why are • you sure there’s room for you in this market • Execution • Financial plan: projected profit and loss (income statement), cash flow, balance sheet • Break-even analysis • Sales forecast, business ratios • Money needed to launch the business(donations, loans) • Any other financial and other resource requirements for the business • Key risks identified and how to deal with them • Appendix: standard tables and charts • Financial plan (profit and loss projections, cash flow, balance sheets) • Sales forecast tables, projected business ratios, market analysis tables, • Personnel listings, CVs. • Bar charts and pie charts to illustrate the numbers.

21. Profit and loss (income statement) • Reports income over a particular time period (e.g. FY 2018). • Shows how the net revenue that is realized by the company gets transformed into net earnings (profit or loss). • Income statement: revenue and gains + expenses and losses • Operating Revenue: realized through primary company activities (sales) • Non-operating Revenue: realized through secondary, non-core activities (interest earned on business capital in the bank, rental from business property, royalties, etc.) • Gains: net money made from other activities (e.g. sale of long-term assets: an old van, unused land,  a subsidiary company, etc.) • Expenses linked to primary activities: cost of goods sold (COGS), general and administrative expenses (SG&A), depreciation or amortization, and R&D expenses (e.g. salaries, sales commissions, expenses for electricity, transportation. • Expenses linked to secondary activities (e.g. interest paid on loan money). • Losses: all expenses that go towards loss-making sale of long-term assets, one-time or any other unusual costs, or expenses towards lawsuits • It does not cover receipts (money received by the business) or the cash payments/disbursements (money paid by the business).

22. Cash flow • Cash Flow = Cash Received - Cash Paid Out (per month, quarter, year) • Operating Cash: cash on hand that you have to work with at the start of a given period (e.g. for a monthly projection, this is the cash balance available at the start of a month). • Revenue: the total sources of cash for each month: estimated sales figures, tax refunds or grants, loan payments received or incoming fees. • Expenses: Cash outflows: salaries and other payroll costs, business loan payments, rent, asset purchases, etc. • Net Cash Flow: The closing cash balance: excess funds or a deficit.

23. Cash flow statement (example)

24. Balance sheet • Snapshot of the overall financial condition of your company right now • Shows all of the company’s assets, liabilities and shareholders’ equity. • Assets - liabilities = shareholders' equity (money left over for shareholders if all debts were repaid, or company net worth at any given point in time). •  Investors and creditors analyse the balance sheet to see how a company's management is putting its resources to work.

25. Break even analysis Compares production costs with income from sales to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss (the "break-even point"). • Production costs: • "variable" : change when production output changes (raw materials, direct labour, fuel, commission from revenues) • "fixed": not directly related to production volume (rent and rates, depreciation, R&D, marketing costs, administration costs)

26. 3. Deciding on the new venture structure • Questions to consider: • How much capital is needed to start the business? • How much control and ownership do I want? • How much risk am I willing to take on, in case of failure? • How large could the business become, and how fast? • What are the registration, reporting and tax implications of different structures? • What are the harvest strategies or exit routes in each case? • Who could become the beneficiary of the business? • Possible venture structures: • Sole Proprietorship • Partnership • Corporation • Limited Liability Company (LLC)

27. 1. Sole Proprietorship • The simplest business entity: just one owner • Owner may choose to use their name or “d/b/a” (“doing business as”) • Minimal requirements: social security number + permits and licenses • Very economical way to start up a small business • Benefits: • Light regulation, reporting • Total control, autonomy of decision-making, no conflicts with partners, associates or family members • Direct personal incentive to succeed • Ease of exit, very easy to dissolve • Light taxation: income is taxed once, not twice (as a company + personal revenue) • Drawbacks: • Personal liability of the owner: no distinction between the individual and the business (in case of financial problems of the firm, owner’s personal assets can be jeopardized; in case of personal problems of owner, the business can suffer) • Owner is 100% responsible for all of the decisions and raising capital. • Limited access to capital, limited rate of development • Partial cost deduction from the firm’s income

28. 2. Partnership • Two or more individuals or companies form a written agreement to operate a business together. • Can also be formed among one or more businesses and one or more individuals. • Benefits: • Fairly simple and inexpensive to establish • Larger pool of expertise and capital • Partners share all profits • Have flexibility to extend the partnerships as the business grows • Drawbacks: • Shared responsibilities for raising capital, making important decisions, and managing operations  potential for personality and decision-making conflicts • Buy out partners who want to leave • Joint unlimited liability of the partners • Business can be endangered when conflicts arise in case of unresolved issues • If one partner makes a financial or legal misstep, it can be a disaster for the company as a whole.

29. 3. Corporation • Most flexible type of company (“incorporation”) • Benefits: • Owners have limited liability as the corporation has separate legal standing • Owners are protected from personal legal action, if the business is sued. • Drawbacks: • A lot of scrutiny and accountability for their actions at a higher level (e.g. in appointing board of directors, holding regular meetings, recording and publishing meeting minutes) • Income is subject to taxation as both personal and business revenue. • Ownership can be transferred through the sale of stock or transfer of a controlling interest within the corporation.

30. 4. Limited Liability Company-LLC • Benefits • Easy and cheap to establish • Better access to capital for growth • Limited liability for owners • Can be owned by a variety of entities, including individuals, trusts, other LLCs, and corporations. • If set up under the proper guidelines, an LLC can be taxed like a partnership, which is an advantage. However, there is quite a bit of paperwork required to form and operate an LLC to ensure that it will not be taxed as a corporation. • Drawbacks: • Reporting requirements • Potential for conflict due to different shareholders' interests • Restrictions in the sale and transfer of assets

31. 4. Funding sources for new ventures • Self-funding (own cash or with collateral on your assets. • Can be useful in later stages as it proves a long-term commitment to investors and bankers and readiness to take risks • 'Love money" (3F: "Family, friends and fools") • Will be repaid later as business profits increase. • 3F rarely have much capital, may want equity in the business • May affect relationship with family or friends • Government grants and subsidies • Strong competition, tough award criteria, co-funding • Bank loans • Prefer ventures with sound track record and have credit. • Start-up loans require a solid business plan and a personal guarantee from the entrepreneurs.

32. Business angels: • Wealthy individuals or retired company executives, leaders in their field, invest directly in small firms owned by others. • Provide experience and network of contacts, technical and/or management knowledge. • Finance the early stages of the business: $25k - $100k. • Supervise the company's management, have a seat on the board of directors and an assurance of transparency. • Tend to keep a low profile • Venture capital • Identify ventures with high-growth potential, mainly technology-driven start-ups and companies in sectors such as ICT, biotechnology ('Pick winners') and help them develop • Take an equity position in the company to help it carry • out a promising, but higher risk project. • Expect a healthy return on their investment, when the business starts selling shares to the public • Crowdfunding • Small amounts of money from a large number of people, typically via the Internet

33. Funding sources for new ventures by development stage http://www.eban.org/about-angel-investment/early-stage-investing-explained

34. Pre-Seed Funding • The earliest stage of funding a new company • Comes so early in the process that it is not generally included among rounds of funding at all. • Company's founders are first getting their operations off the ground. • Sources: self-funding, 3F (friends, family, supporters) • Can happen very quickly or take a long time, depending on the nature of the company and the initial costs for developing the business idea, • Investors unlikely to investment at this stage in exchange for equity in the company

35. 2. Seed funding • The first official equity funding stage for the venture • Early financial support to help the business operations until the firm can generate its own cash flow, e.g. market research, product development, determine its final products, who its target demographic is. • Used to employ a founding team to complete these tasks. • Sources: self-funding, 3F, incubators, business angels, venture capital, • Funding levels: $10,000 - $2 million • Company valuation: $3 million - $6 million • Some start-ups only use seed funding and may never engage in next range of funding (Series A).

36. Series A (Optimize) • For optimizing company's user base and products on different markets. • Emphasis on developing a business model to generate long-term profit. • Great ideas + strong strategy for turning idea into a successful business • Funding levels: $2 mil - $15 mil, higher for high-tech ("unicorns“) • Firm valuation: up to $15 million. • Sources: • VC: usually, a few VC firms (or a single investor “anchor”) provide Series A funding, then other investors may follow. Series A investors come from more traditional VC firms (Sequoia, Benchmark, Greylock, Accel.) • Angel investors, but have much less influence than in seed funding. • Crowdfunding can also be used, especially for those who have successfully generated seed funding but failed to develop interest among VC investors (less then 50% of seed funded companies will go on to raise Series A funds as well).

37. Series B funding (Build): • For expanding market reach, meet demands of a broad customer base • Emphasis on developing a winning product, growing a team, requires quality talent acquisition. • Focus on business development, sales, advertising, tech support, and employees • Funding levels: $7 million - $10 million. • Firm valuation: $30 million - $60 million. • Sources: similar to Series A in terms of processes and key players • VC: often led by many of the same VCs as in Series A (key anchor investor that helps to draw in other investors), plus other VCs that specialize in later stage investing.

38. Series C (Scaling up) • For developing new products, expanding into new markets, or even to acquiring other companies, boosting valuation in anticipation of IPO • Investors inject capital aiming to get back more than double that amount • Focus on scaling the company, growing quickly and successfully • Funding levels: +$100 million • Firm valuation: +$100 million • Sources: • More investors in Series C: hedge funds, investment banks, private equity firms and big secondary market groups • Usually, a company will end its equity funding with Series C, but some companies can go on to Series D and even Series E to develop on a global scale, to go for an IPO, or achieve the goals they set out to accomplish during Series C funding. • Series D Round stage is generally for financing a special situation, such as a merger with a competitor, or acquisition of another company

39. THANK YOU! marina.ranga@gmail.com