Lecture Notes Entrepreneurship The Practice and Mindset 3e Heidi M. Neck (Author), Christopher P. Ne

Lecture Notes For Entrepreneurship The Practice and Mindset 3e Heidi M. Neck (Author), Christopher P. Neck (Author), Emma L. Murray (Author)

Lecture Notes Chapter 1: Practicing Entrepreneurship Learning Objectives 1-1.

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Describe the six most important features of modern entrepreneurship.

Explore various pathways to participating in entrepreneurship.

Distinguish between entrepreneurship as a method and as a process.

Illustrate the key components of the Entrepreneurship Method.

Explore the role of deliberate practice in developing entrepreneurial expertise and recognize how this book supports such a practice.

Annotated Chapter Outline I.

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Introduction A. Entrepreneurship: A way of thinking, acting, and being that combines the ability to find or create new opportunities with the courage to act on them.

B. Entrepreneurs have consistently changed the world despite the obstacles of their time.

Entrepreneurship May Be Different From What You Think A. Startup: As defined by Steve Blank, a temporary organization in search of a scalable business model.

B. Entrepreneur—someone who begins a startup/creates a business based on the validity of an idea/business model.

C. Features of Modern Entrepreneurs i. Feature 1: Entrepreneurship is a Method That Requires Practice a. Process view of entrepreneurship—starting something new is a linear, predictable process. b. Entrepreneurship is not predictable and cannot be adequately taught as a process. c. Method view of entrepreneurship—skillsets with an entrepreneurial mindset constitute a toolkit for entrepreneurial action. ii. Feature 2: Entrepreneurs Think Differently a. Serial entrepreneurs: People who start several businesses, either simultaneously or consecutively. b. Effectuation: As defined by Saras D. Sarasvathy, the idea that the future is unpredictable yet controllable through human action.

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1. Effectuation theory: a theory that describes how entrepreneurs think in order to start new ventures; based on the idea that the future is mostly unpredictable yet controllable through human action. c. Entrepreneurs create and obtain control by: 1. Taking actions to learn.

2. Collecting new and relevant information.

3. Reducing risk and uncertainty.

4. Using resources that are available. d. Stakeholders: Individuals and groups who are impacted by the performance of a business. iii. Feature 3: Entrepreneurs Act More Than Plan a. Evidence-based entrepreneurship: Planning that aligns with the scientific method of collecting data and testing ideas to validate (or not) that an opportunity is worth pursuing. b. No evidence to suggest entrepreneurs take more risks than anyone else. c. Risks are personal and relative. d. Entrepreneurship should never be an all-or-nothing decision. iv. Feature 4: Profit is Not the Only Motive a. The highest performing companies do good while making money. b. Americans are almost equally motivated by wealth and impact. c. Americans are less motivated to continue a family tradition. v. Feature 5: Entrepreneurs Collaborate More Than They Compete a. Building strong connections with others is key to business success. b. Best networks provide access to external information, financing, emotional support, and expertise, and allow for mutual learning and information exchange. c. Network building is dynamic, and collaboration and sharing are fundamental. d. Having business partners/collaborators can reduce loneliness and help new entrepreneurs develop their mindset. vi. Feature 6: Entrepreneurship Is a Life Skill a. Entrepreneurship education provides a set of skills that can be applied to many other fields and organizations. b. Hiring managers want employees with an entrepreneurial skillset and mindset. c. Thinking and acting more entrepreneurially helps one get comfortable with uncertainty, accept change, and look at the world through a solution-driven, opportunity lens.

Beyond the Startup: Ways to Access Entrepreneurship A. Corporate Entrepreneurship

i. Corporate entrepreneurship: A process wherein employees create new products, ventures, processes, or renewal within large corporations. a. Identify opportunities. b. Build teams. c. Create something of value to enhance competition and profitability. ii. Corporate venturing: A classification of corporate unit that can invest directly in external startups and sometimes internal startups.

B. Entrepreneurship Inside i. Entrepreneurs inside (intrapreneurs): Employees who think and act entrepreneurially within any type of organizations. ii. Feel like owners of their work. iii. Embrace experimentation. iv. Different level of pride/engagement than an average employee. v. Have the capacity/desire to change organizations from within.

C. Franchising i. Franchising: A method of distributing products or services involving a franchisor (the founder of the original business; the creator of the brand name and business operating system) and franchisee (the operator that buys the license to do business using the company name and operating system). ii. Can help entrepreneurs get a head start in launching their own business. iii. Often referred to as a ―turnkey operation.‖ iv. Royalties: A percentage of monthly sales revenue, usually 4–12%, that franchisees pay the franchisor.

D. Buying a Small Business i. Entrepreneur buys out the existing owner and takes over operations. ii. Thousands of businesses are for sale, but only 30–40% actually sell.

E. Social Entrepreneurship i. Social entrepreneurship: The process of sourcing innovative solutions to social and environmental problems. ii. Sustainable Development Goals (SDGs): A blueprint developed by the United Nations for achieving a thriving, inclusive, and sustainable society by 2030 (e.g., ending poverty, combating climate change, improving health care). iii. Benefit corporation (B Corp): A form of organization certified by the nonprofit B Lab that ensures that strict standards of social and environmental performance, accountability, and transparency are met.

F. Family Enterprising i. Family enterprise: A business that is owned and managed by one or more family members beyond the founding generation. ii. Each generation has an opportunity to bring the organization forward.

G. Serial Entrepreneurship

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i. Serial (habitual) entrepreneurs: People who start several businesses, whether simultaneously or one after another. ii. Not satisfied with just focusing on one business. iii. Constantly look out for the next big thing/explore ways to implement diverse ideas.

Entrepreneurship Is A Method That Requires Entrepreneurial Thinking A. Traditionally, entrepreneurship has been viewed as a process of sequential steps that lead to a successful business.

B. However, entrepreneurship is nonlinear, unpredictable, ill-defined, unstructured, and complex.

C. 20% of startups fail within the first year; 50% fail by the end of the fifth year.

D. Entrepreneurship as method: i. Approach to doing something with no guarantee of a particular outcome. ii. Can guide you through chaos and increase your chances of success. iii. Gets easier and more useful with practice.

E. Managerial Versus Entrepreneurial Thinking i. Entrepreneurial ventures are not smaller versions of large corporations; managers lead corporations (process) but entrepreneurs lead new ventures (method). ii. More uncertainty and risk and a lot less information and data in entrepreneurship. iii. We thought more entrepreneurially when we were babies—everything was a mystery and learned by trial and error. iv. Traditional education—the need to find the correct answer, measurement, and assessment—inhibits entrepreneurship. v. New ventures need entrepreneurs and managers to function; need to know when each role is appropriate. vi. In the beginning, you need to be thinking like an entrepreneur: a. Fail in order to make progress. b. Experiment with new ideas. c. Collaborate. d. Share ideas. e. Recognize uncharted territory. f. Recognize the learning process along the way.

The Entrepreneurship Method Described A. Method of entrepreneurship in the text is based on Babson‘s Entrepreneurial Thought & Action® (ET&A), which is grounded in effectuation theory. i. Smart action over planning. ii. Moving quickly from whiteboard to real world. iii. Can be learned, repeated, and practiced. iv. Assurances: a. You will act sooner, even when you don‘t know exactly what to do. b. Those things you can do, you will, and those things you can‘t, you will try.

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c. You will try more times because trying early is a low-cost experiment. d. You will fail sooner—enabling better, higher-quality information to be incorporated into the next iteration. e. You‘ll likely begin experimenting with many new ideas simultaneously. f. The ideas that start to gain traction will likely be deeply connected to who you are and the impact you want to make on the world.

B. Seven Components of the Entrepreneurship Method i. Come up with your why statement. ii. Start with your means at hand. iii. Describe the idea today. iv. Identify first (or next) actions. v. Enroll stakeholders. vi. Calculate affordable loss. vii. Act, learn, and build.

C. The Entrepreneurship Method in Practice i. ―Curry in a Hurry‖ by Sarasvathy. ii. More traditional approach assumes: a. Have the finances and resources for research and marketing. b. Have the time to invest in intensive planning and research. iii. Entrepreneurship Model: a. Focuses on building relationships. b. Starting quickly without as much investment (can incorporate feedback and grow or move on without too much loss). c. Prioritizes diverse opportunities.

Entrepreneurship Takes Deliberate Practice A. Deliberate practice: The process where high performers carry out carefully focused efforts to improve current performance.

B. Deliberate Practice Shapes the Brain i. When brain cells sense focused repeated activity, myelin is created, which increases the speed and strength of neural impulses and improves performance. ii. Regular practice without focused effort, consistent feedback, and guidance only reinforces mindless, automatic habits.

C. Deliberate Practice and Entrepreneurs i. Sustained effort, concentration, and focus have important cognitive benefits (e.g., enhancing perception, memory, intuition, and metacognition). ii. Entrepreneurs who engage in deliberate practice are more skilled at: a. Perceiving situations. b. Understanding the meaning of complex patterns. c. Recognizing differences between (ir)relevant information. d. Storing/retrieving new information. e. Understanding what is (un)known.

f. Guiding passion with awareness. g. Intuiting and decision making.

D. How This Book Will Help You Practice Entrepreneurship i. Entrepreneurship in Action. ii. Mindshift. iii. Entrepreneurship Meets Ethics. iv. Research as Work. v. Case Study.

Lecture Notes Chapter 2: Activating an Entrepreneurial Mindset Learning Objectives 2-1. Differentiate between a fixed and growth mindset.

2-2. Define ―entrepreneurial mindset‖ and explore five themes underlying the definition.

2-3. Connect the Entrepreneurship Method‘s ―why statement‖ to the entrepreneurial mindset.

2-4. Explore five habits you can practice to develop an entrepreneurial mindset.

Annotated Chapter Outline III.

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Introduction A. Activating an entrepreneurial mindset is a journey of changing how you think under uncertainty in entrepreneurial environments.

B. As you practice the Entrepreneurship Method, recognize that your mindset is shifting to a more entrepreneurial way of thinking.

What Is Mindset?

A. Fixed mindset: As defined by Carol Dweck, a way of thinking in which people perceive their talents and abilities as set traits. i. Brains and talent alone are enough for success. ii. Goal: Look smart all the time. iii. Take constructive criticism personally. iv. Attribute others‘ success to luck/unfair advantage.

B. Growth mindset: As defined by Carol Dweck, a way of thinking in which people believe that their abilities can be developed through dedication, effort, and hard work. i. Brains and talent are the starting point of success. ii. Eager to enhance qualities through lifelong learning, training, and practice. iii. See failure as an opportunity to improve.

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C. Although people tend to exhibit one mindset or the other, you can learn a growth mindset by: i. Becoming aware of the voice in your head that questions your ability to take on a new challenge. ii. Recognizing that you have a choice in how you interpret what that voice is telling you. iii. Responding to that voice. iv. Taking action.

D. Recent research has contradicted what mindset theorists have claimed; the science of mindset continues to evolve.

The Entrepreneurial Mindset A. Entrepreneurial mindset: As defined by Daspit, Fox, and Findley, a mental process that enables one to recognize and act on valuable opportunities with incomplete information, while being resilient under complex and uncertain conditions.

B. Mental Process i. Relate to cognitive strategies—techniques people use to solve problems (e.g., reasoning, analyzing, experimenting, etc.). ii. Metacognition: The ability to understand and be aware of how one thinks and the processes one uses to think and make decisions. iii. Entrepreneurial self-efficacy (ESE): The belief entrepreneurs have in their ability to start new ventures; an essential part of the entrepreneurial mindset and thought to be a good indicator of intention to start something and a strong precursor to action. iv. In general, research shows that people with high levels of ESE are more likely to: a. Put in more effort. b. Persist with an idea. c. Persevere with a task. v. Nascent entrepreneur: A person engaging in startup efforts who has not officially started a business C. Value Creation i. Essence of entrepreneurship is to create value. ii. Value is not easily defined, yet it seems to be understood and felt. iii. Entrepreneurs put resources together in a particular way to create something new that generates economic and social value. iv. On a societal level, value is generated by what the company produces, how it produces it, and whom it serves.

D. Recognizing and Acting on Opportunities i. Opportunity: A possibility of generating value through the introduction of unique, novel, or desirable products, services, and even processes that have not been previously exploited in a particular context. ii. Mindset affects how one views the world and how they recognize opportunity.

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E. Adaptability and Resilience i. Resilience: The capacity to withstand and positively recover from life‘s challenges. ii. Setbacks, failures, and unexpected challenges are part of the Entrepreneurship Method. iii. Resilience can be built over time with practice. iv. Common theme—ability to move forward and push through in the face of adversity/failure.

F. Decision-Making With Limited Information Under Certain Conditions i. The Entrepreneurship Method encourages taking actions to learn in the hopes of limiting uncertainty and risk, but uncertainty is always present. ii. Purpose relates to the belief in what you are doing and the impact that can be made. iii. Vulnerability acknowledges you are opening yourself to losses. iv. The Entrepreneurship Method encourages taking small, quick actions over and over again to help manage unknowns and uncertainty, such as: a. Learning about the reasons for an entrepreneurial failure. b. Talking to other entrepreneurs who experienced failure yet persevered. c. Researching other companies in the industry that succeeded d. Reaching out to entrepreneurs who are succeeding in the same industry.

How Your ―Why Statement‖ Connects to Your Entrepreneurial Mindset A. Connects to your curiosity, drive, and motivation, defines your purpose, and guides your direction.

B. Referred to as the North Star.

C. If you understand your purpose, then you are better able to connect to new opportunities, be resilient, and tolerate the ambiguity of making decisions.

D. The Role of Passion i. Entrepreneurial passion: An intense positive emotion, which is usually related to entrepreneurs who are engaged in meaningful ventures, or tasks and activities, and which has the effect of motivating and stimulating entrepreneurs to overcome obstacles and remain focused on their goals. ii. Two issues: a. Unsure of passions—people who try to ―find their passion‖ are less likely to try new things and tend to give up easily; ―developing your passion‖ through a growth mindset is a more powerful approach. b. Confirmation bias: The tendency to only use positive information, interpret new information as positive, or ignore information that discredits one‘s idea or business.

E. Characteristics of a Why Statement i. Simon Sinek popularized the idea of starting with your why in ―How Great Leaders Inspire Action.‖

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ii. Sinek‘s four characteristics of an effective why statement: a. Simple and clear. b. Focused on the impact. c. Truthful to who you are rather than aspirational. d. Connects you to all aspects of your life.

Habits to Practice for an Entrepreneurial Mindset A. Habit: An unconscious pattern of behavior that is carried out often and regularly.

B. ―Habit loop‖—a process by which our brain decides whether a certain behavior should be stored/repeated, so if we feel rewarded, we are more likely to continue doing it.

C. Mindshift: A shift from an existing mindset to a more entrepreneurial one—a mindset in which you have more courage to take action without complete information, navigate uncertainty, and embrace ambiguity while developing your skillset to identify new business opportunities. i. The Creativity Habit a. Creativity: The ability to use knowledge in new ways. b. Foundation from which new opportunities are created/discovered. c. With an entrepreneurial mindset, you are better able to spot problems and generate new and valuable solutions. d. Daniel Pink and the move toward right-brain thinking and the ―conceptual age.‖ e. However, little scientific support for the left-/right-brained model. f. Csikszentmihalyi‘s research on highly creative individuals and dialectic personalities. g. Commonalities among successful entrepreneurs: 1. Envision success while also preparing for failure.

2. Value autonomy in deciding and acting.

3. Assume responsibility for problems and failures.

4. Driven by intense commitment to their ideas.

5. Tend to be both optimistic and pragmatic.

D. The Improvisation Habit i. Improvisation: The art of spontaneously creating something without preparation. ii. Helps develop the cognitive ability to rapidly sense/act/change direction quickly. iii. Many major business schools offer business students courses on improvisation. iv. Especially relevant when uncertainty is high and the ability to react is essential. v. Can help entrepreneurs manage fear. vi. The ―Yes, and‖ principle—listening to what others have to say and building on it by starting with the words, ―Yes, and.‖ vii. Self-doubt (and the underlying fear of failure) is the most common barrier to improvisation.

viii. People who engage in improvisation are more tolerant of failure because it: a. Helps them break free of traditional structured thinking. b. Releases their need for control. c. Opens their minds. d. Improves their listening skills. e. Builds their confidence by encouraging quick thinking under pressure. ix. Research shows the brain generates unpredictable ideas when selfmonitoring is suppressed.

E. The Fear Management Habit i. Fear causes self-doubt, insecurity, and discomfort. ii. Writing down what scares you about entrepreneurship can be a first step toward overcoming this fear; trick is to fight against and manage the fear. iii. Most fears are due to not having enough information; getting it requires action. iv. According to the Global Entrepreneurship Monitor (GEM) in 2022: a. ~65% of U.S. adults believe they possess the knowledge/skills for starting a business. b. Fear of failure among those seeking opportunities reached 43%, the highest level recorded by GEM in the U.S. v. Failure is part of the learning process of being an entrepreneur and should be celebrated; the only way not to fail is to never try.

F. The Self-Leadership Habit i. Self-leadership: A process whereby people can influence and control their own behavior, actions, and thinking to achieve the self-direction and self-motivation necessary to build their entrepreneurial business ventures. ii. Behavior-focused strategies: Processes that help increase selfawareness to manage behaviors, particularly when dealing with necessary but unpleasant tasks, including self-observation, self–goal setting, selfreward, self-punishment, and self-cueing. iii. Self-observation: A process that raises one‘s awareness of how, when, and why they behave the way they do in certain circumstances. iv. Self-goal setting: The process of setting individual goals for oneself. v. Self-reward: Tangible or intangible ways in which people compensate themselves when they achieve their goals. vi. Self-punishment (self-correcting feedback): A process of examining one‘s mistakes before making a conscious effort not to repeat them. vii. Self-cueing: The process by which certain environmental cues encourage constructive behaviors and reduce or eliminate destructive ones. viii. Natural reward strategies: The processes that endeavor to make aspects of a task or activity more enjoyable by building in certain features or by reshaping perceptions to focus on the most positive aspects of the task

and the value it holds (e.g., building in a break to listen to some music or take a short walk outside). ix. Constructive thought patterns: Models to help you form positive and productive ways of thinking that can benefit performance (e.g., reframing destructive beliefs by practicing self-talk).

G. The Reflection Habit i. Reflection: A thoughtful exercise in which one reviews an experience, considers it deeply, and evaluates the experience. a. Identify the event. b. Describe the situation. c. Think about how it made you feel. d. Identify why the event happened. e. Critically review your actions. f. Determine what you could do different in the future. g. Put into practice what you learned in the future. ii. Reflection-on-practice—a process in which you do something and then reflect on what you did. iii. Reflection-in-practice—reflection that takes place as you are doing something such as interviewing a customer, pitching to investors, or dealing with a supplier challenge.

Lecture Notes Chapter 3: Facilitating Social Entrepreneurship Learning Objectives 3-1. Define social innovation and social value creation.

3-2. Explain how social entrepreneurship can help solve wicked problems around the world that are connected to the United Nations Sustainable Development Goals.

3-3. Explore different types of social entrepreneurship.

3-4. Examine funding sources for social ventures.

3-5. Identify the primary attributes of stakeholders and how stakeholders can help or hinder a social entrepreneur.

3-6. Discuss how social ventures measure impact beyond profit.

Annotated Chapter Outline VIII.

The Two Dimensions of Social Entrepreneurship A. The primary purpose of social entrepreneurship is to identify pressing social and environmental problems in society and create sustainable solutions for positive and long-term impact.

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B. When an organization is started as a result of this process, it‘s called a social venture.

C. Social and traditional entrepreneurs both practice The Entrepreneurship Method. i. Traditional entrepreneurs‘ goal is to make a profit. ii. Social entrepreneurs‘ goal is to tackle social problems and bring about social change.

D. Social Innovation i. Social Innovation: A novel solution to a social problem that is more effective, efficient, or just than existing solutions and for which the value created accrues primarily to society as a whole rather than private individuals. ii. Gaining popularity; can create social and economic value at the same time. iii. Five elements of social innovation: a. Social need—e.g., United Nations Sustainable Development Goals (UNSDGs). b. Innovative element—when something new and novel is introduced. c. Implementation—innovation does not occur without implementation, and this can be done through a social venture. d. Improvements—need to be made over what is currently done without negative repercussions. e. Relationship and collaborations—stakeholders that need to be involved.

E. Social Value Creation i. Social value is generated when the solution can be turned into an organization/used inside an organization. ii. What constitutes social value is not very clear; in general, social value is created when people place value on changes they are experiencing. iii. Example: proliferation of microfinancing.

Social Entrepreneurs Solve Wicked Problems A. Wicked problems: Large, complex social problems with no clear solution, where there is contradictory information, and where a whole range of people with conflicting values engage in debate (e.g., climate change, homelessness, health care, poverty, terrorism).

B. Nature of wicked problems poses significant challenges to social entrepreneurs, but it also provides huge opportunities to make a real difference.

C. Examples: i. Recycling and the Interaction Design Foundation. ii. Animal farming and Impossible Foods. iii. Ocean cleanup and 4ocean.

D. The UN Sustainable Development Goals i. United Nations Sustainable Development Goals (SDGs)—17 goals serve as a blueprint for achieving a thriving, inclusive, and sustainable society by 2030.

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ii. Considered universal and address major issues (e.g., climate change, chronic health conditions, aging populations). iii. $12 trillion could be generated (food, agriculture, small cities, energy materials, health, well-being) and 380 million jobs created worldwide. iv. Lines between social entrepreneurship and other forms are blurring, suggesting all entrepreneurship is social.

Types of Social Entrepreneurship A. For-Profit Social Ventures i. For-profit social venture: A business that has a dual mission, aiming to achieve both social or environmental objectives and financial sustainability. ii. Key characteristics: a. Seeks to generate revenue and maximize profits. b. Significant emphasis on creating positive social/environmental outcomes. iii. Example: Lime and e-bikes. iv. Generating economic value while providing solutions to social and environmental problems has also been called shared value, but it is most often associated with larger organizations. v. Benefit corporation (B Corp)—subcategory of for-profit social ventures, a form of organization certified by the nonprofit B Lab for for-profit companies that ensures that strict standards of social and environmental performance, accountability, and transparency are met.

B. Enterprising Nonprofits i. Enterprising nonprofits: Nonprofit organizations that act more like forprofit ventures and operate with a mission to address social or environmental challenges and create a positive impact while sustaining themselves through forms of revenue generation that are more similar to for-profit companies. ii. Incorporate earned-income activities, those that involve the sale of products or services that are used as a source of revenue generation. iii. Leverage innovative and entrepreneurial approaches to achieve their social purpose. iv. Generate revenue through market-based approaches. v. Becoming more common due to challenges in the traditional nonprofit model; 43% of nonprofits cite rising operating expenses as their greatest challenge. vi. All nonprofits must reinvest their profits back into the venture, but not every nonprofit is an enterprising nonprofit. vii. Example: Centre for Vision in the Developing World (traditional) vs.

VisionSpring (enterprising).

C. Four Models of Revenue Generation i. Customer Model a. Sells a product/service to a specific target group. b. Example: World Education Services (WES).

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ii. Employee Model a. Revenue is generated by the type of people hired (e.g., those with particular needs/who face challenges). b. Example: Digital Divide Data (DDD). iii. Product Model a. Monetizes a product/service to make a social impact. b. Example: ABLE. iv. Combined Model a. Combination of 2+ of the other models. b. Example: Furniture Bank.

D. Hybrid Social Venture i. Hybrid social venture: An organization engages in revenue-generating activities while also having a philanthropic strategy to help deliver social value (e.g., TOMS Shoes, FIGS). ii. Hybrid models exploit the advantages of both for-profit and nonprofit models but are less likely to receive venture capital (VC) funding or philanthropic donations because they sit in a gray zone between business and charity.

Funding Social Ventures A. Social Venture Capital (For-Profit Social Ventures) i. Social venture capital (SVC): A form of investment funding that focuses on social ventures with a social or environmental mission. Investment is made with the expectation of achieving a positive social/environmental and a financial return. ii. Examples: a. The Social Entrepreneurs Fund (TSEF) at Maycomb Capital. b. The Impact Engine.

B. Venture Philanthropy (For Enterprising Nonprofits) i. Venture philanthropy: A type of impact investment where investors support social ventures by applying some principles of venture capital funding. ii. Investors typically have a high level of engagement and involvement with the managerial side of the business. iii. Main goal: make a positive social impact. iv. Venture philanthropists share experience with nonprofit entrepreneurs to help grow/scale the company to drive social change. v. More focused on making investments that promote social good rather than profit. vi. Emphasizes funding social causes in particular. vii. Needed to help nonprofits scale and make a larger impact.

Social Entrepreneurs and Their Stakeholders A. Social ventures have stakeholders, people, groups, or organizations affected by or involved with the venture.

B. Two key questions:

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i. What is at stake for your stakeholders? ii. How are you creating value for each stakeholder?

C. Types of Stakeholders i. Three primary attributes of stakeholders to consider: power, legitimacy, and urgency. ii. Dormant Stakeholders a. ―Sleepers‖—hold power but do not tend to use it unless they are given a reason. iii. Discretionary Stakeholders a. No power to influence and no urgent claims, but do have legitimacy. iv. Demanding Stakeholders a. Possess urgency but no power/legitimacy. b. Maybe the only dissenting voice in the room. v. Dominant Stakeholders a. Have both power and legitimacy, which gives them strong influence. vi. Dependent Stakeholders. a. Have both urgency and legitimacy but lack the power to influence. vii. Dangerous Stakeholders a. Possess both power and urgency but may use power to coerce or even resort to violence. viii. Definitive Stakeholders. a. Only ones who possess all three attributes. b. Significant role; claims must be given priority.

Measuring Impact A. Social impact measurement: The process of measuring social change attributed to the direct activities of an organization during a certain period of time.

B. Developing a Theory of Change i. Theory of change—a plan that explains how/why a set of specific change initiatives is expected to lead to certain outcomes. ii. Can help figure out how/why a development program will work before it begins. iii. Everyone in the initiative is able to: a. Articulate and share in the same vision of success. b. Understand potential outcomes and how they will be implemented and measured. c. Be motivated, inspired, and collaborative. iv. Example: Nesta and the Rockefeller Foundation‘s toolkit on how to deliver great results and impact. a. What is the problem you are trying to solve? b. Who is your key audience? Who is most affected by the problem? c. What is your entry point to reaching your key audience? Where do you want to start your work? d. What steps are needed to bring about change? What actions will you take?

e. What is the measurable effect of your work? What do you want the key outcome to be in the shorter term? f. What are the wider benefits of your work? g. What is the long-term change you see as your goal? v. Asking specific questions can often lead to surprising outcomes. vi. Spending time first on identifying the problem is the most important step in the process.

C. Calculating Social Return on Investment (SROI) i. Social return on investment (SROI): A method for measuring the value of social, economic, and environmental factors created by a company; measures in financial terms whether the benefits outweigh the costs. ii. Calculated by estimating the social and environmental value and dividing it by the financial cost of the project, initiative, or venture. iii. Creates a cost-benefit ratio that should be greater than 1; the bigger the number, the greater the social return for every dollar of investment. iv. Social entrepreneurs can use it to share the value the program has created for the desired target market/beneficiaries. v. Social investors can use it to evaluate the success of their investments. vi. Financial proxy—a complex conversion from nonfinancial to financial that can be more art than science.

Lecture Notes Chapter 4: Creating and Developing Opportunities Learning Objectives 4-1.

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Explain how the entrepreneurial mindset relates to opportunity recognition.

Employ strategies for generating new ideas from which opportunities are born.

Explore four pathways to opportunity identification.

Practice the IDEATE Method to generate high-potential ideas.

Recognize challenges different people face moving from idea to opportunity.

Annotated Chapter Outline XIV.

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Introduction A. Entrepreneurial mindset positions you to identify entrepreneurial opportunities and take action.

What Is ―Opportunity‖ in Entrepreneurship?

A. Three central characteristics of business opportunities i. Potential economic value.

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ii. Novelty or newness. iii. Perceived desirability.

B. Opportunity—a possibility of generating value through the introduction of unique, novel, or desirable products, services, and even processes that have not been previously exploited in a particular context.

C. Before any opportunity can be realized, there is an idea.

D. Innovation, Invention, Improvement, or Irrelevant? i. Part of recognizing an opportunity is the ability to evaluate ideas and identify those with the highest likelihood of success. ii. One framework rates an idea on four different dimensions: a. Innovation—the product or service is novel, useful, and valuable. b. Inventions—similar to an innovation, but does not address demand.

1. If an invention does not reach the market/appeal to consumers, it is rendered useless.

2. Inventions find a market become innovations. c. Improvement—ideas that enhance existing products. d. Irrelevant—ideas that score low on both novelty and usefulness. iii. Even the most bizarre inventions can find a home.

Opportunities Start with Thousands of Ideas A. First step: Idea generation.

B. Quantity and quality of ideas are both important.

C. The Myth of the Isolated Inventor i. Ideas do not spring fully formed into our minds. ii. Many well-known inventions evolved because of both improvements made over the years, competition, and a substantial number of people working on them. (e.g., the Wright brothers‘ airplane, Edison and Tesla).

D. Build Your Idea Generation Skillset i. Scanning a. Alertness: The state of being ready to think, notice, understand, and act in a particular situation. b. Prior knowledge: Information gained from a combination of education, life, and work experience. c. Prior knowledge + alertness = ability to scan the environment for new opportunities. ii. Connecting a. Connecting—consciously making links between concepts to create new concepts. b. Bisociation: A mental process that allows us to connect two things are seemingly unrelated or unconnectable into something new. c. Pattern recognition—Our brain recognizes patterns that allow us to interpret what we are seeing in order to make better decisions. iii. Lateral Thinking

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a. Lateral thinking: As defined by Edward DeBono, the mental process that uses indirect and creative approaches to solve problems, allowing us to look at problems from different angles. b. Linear thinking is the comfort zone. iv. Imagining a. Imagination-based strategies: Approaches that involve suspending disbelief and dropping constraints in order to create unrealistic states or fantasies. b. Though it can be playful or absurd, freeing behavior allows our minds to think in ways we had not thought possible. v. Observing a. Everyone observes the world through a unique perspective; what/how we observe impacts what we discover and do. b. Focused observation—shifting attention outward in order to look at the world in a new way; contrasts an inward focus, in which we interpret everything in terms of how it impacts us. vi. Collaborating a. Ideas are generated as a group, and group members build on each other‘s ideas. b. Brainstorming—common tool for generating ideas that emphasizes the creativity of the group over the individual. c. Alex Osborne‘s four most important ground rules for brainstorming: 1. Suspend all judgment.

2. Be open to wild suggestions.

3. Generate as many ideas as possible.

4. Put ideas together and improve on them. d. Nominal group technique (NGT)—a more structured method for group brainstorming where people prefer to work in silence, when some group members may not be comfortable voicing their opinions and ideas aloud, when group members are unfamiliar with one another, when a large quantity of ideas is needed, or when the topic being worked on is controversial in some way.

1. Step 1: Identify the question that is being brainstormed.

2. Step 2: Silent writing by group members.

3. Step 3: Reporting, clustering, and labeling ideas.

4. Step 4: Group members prioritize what they would like to work on in greater depth.

Four Pathways to Opportunity Identification A. Valuable—there is a market of customers.

B. Rare—the opportunity offers some novelty that does not exist.

C. Costly to imitate—creates barriers to entry to other entrepreneurs.

D. Fit—aligns with skills/knowledge of the entrepreneur/founding team.

E. The Find Pathway

XVIII.

i. Find pathway: The method that assumes opportunities exist independent of entrepreneurs and are waiting to be found. ii. Least complicated/most common form of identifying new opportunities. iii. Problem is clear to most, but the entrepreneur acts on the potential solution.

F. The Search Pathway i. Search pathway: The method that is used when entrepreneurs are not quite sure what type of venture they want to start but engage in an active search to discover new opportunities. ii. Utilizes existing information sets/knowledge bases.

G. Effectuate Pathway i. Effectuate pathway: The method that focuses on creating opportunities than simply overcoming them and involves using what you have to uncover an opportunity that uniquely fits with the entrepreneur. ii. Role as an entrepreneur: a. Take action. b. See how the market responds. c. Recognize patterns. d. Learn from iteration to define the opportunity as it evolves.

H. Design Pathway i. Design pathway: One of the most complex pathways that can also be the most value-creating, the method that focuses on unmet needs of customers, specifically latent needs. ii. Creates a new market. iii. Discovery—find and search. iv. Creation—effectuate and design.

The IDEATE Method for Creating New Opportunities A. Identify i. Find migraine headache problems (MHPs): Significant problems that need to be solved and for which there are large numbers of people willing to pay for the solution. ii. Look at how existing MHPs are currently being solved and if that can be improved.

B. Discover i. Search problem-rich environments you are already familiar with. ii. Look for MHPs based on your own experiences. iii. Consider challenges in your everyday life and in areas where you have passions, curiosities, or sources of enjoyment. iv. Think about opportunities elsewhere that may work in your own context.

C. Enhance i. Add innovation/novelty to existing products/services or make an inferior product/service better. ii. SCAMPER technique: a. Substitute.

b. c. d. e. f. g.

Combine.

Adapt.

Modify/Magnify.

Put to Other Uses.

Eliminate (or Reduce).

Reverse (or Rearrange).

D. Anticipate i. Look at an unknown future, anticipate changes, and create new ideas based on the problems/opportunities those changes create. ii. Four sources of change: a. Social/demographic—changes in people‘s characteristics/behaviors. b. Technological—increase in possible outputs given a certain level of inputs created through invention and innovation. c. Political or regulatory—changes in governmental laws and regulations. d. Market/industry—change that occurs due to economic shifts (up or down), changes in consumer behavior, market trends, and technology.

E. Target i. Find a large customer group, identify their needs, pain points, or MHPs, and then create a solution. ii. Emphasizes product-market fit (products that meet the needs of an existing market).

F. Evaluate i. Winnow down many ideas to the most likely ideas that could be converted into a viable new business. ii. Get rid of the not-so-good ideas to start working on ideas that have potential. iii. Shifting to analysis: a. Step 1: Score all the ideas using the Gut Check formula (Idea Score = (MHP x Enthusiasm) + Gut) to create a ranking of the top 10 ideas.

1. MHP = Degree to which the idea solves a big problem for a lot of people who are willing to pay.

2. Enthusiasm = Your excitement, passion, and belief in the idea.

3. Gut = Feeling that the market size is large enough, customers are reachable, you can defend your position, you can compete. b. Step 2: Google search.

1. If the idea already exists, there is a market.

2. If the idea exists, how is your own idea going to better it? c. Step 3: Take the remaining ideas and do a Value Marker Analysis.

1.

2.

3.

4.

5.

6.

7.

XIX.

Size of market is substantial enough to support a business.

Path to revenue is possible.

Clear value proposition.

Reachable target market.

Idea has uniqueness and differentiation.

Idea is not easily imitated or replicated.

Ability to leverage existing knowledge, resources, and network to take action on the idea.

8. Your enthusiasm for the idea.

G. Using IDEATE to Shape One Idea i. Example: Modern-day gourmet food truck.

H. First and Third Person Opportunities i. First-person opportunities—defined by our own personal lens through which we view the world; limited to our immediate environment and daily life. a. Opportunities for me. b. Generally involve areas of familiarity. c. Considered to be easier to implement and carry less risk. d. Likely to be less innovative. ii. Third-person opportunities—focus on a much broader spectrum of significant problems or MHPs to solve for consumers. a. Opportunities for someone else. b. Involve less familiar territory and carry more risk and uncertainty. c. May be more innovative and have higher potential. iii. Through the IDEATE process, it is possible to convert a third-person opportunity to a first-person opportunity, particularly during the Target and Evaluate steps.

Challenges Moving from Idea to Opportunity A. Even when there is a market for an entrepreneur‘s products/services, nascent entrepreneurs of all kinds still face a lot of challenges (e.g., who they are, who they know, where they live, and what they have).

B. Social factors mean that entrepreneurial drive does not always translate into entrepreneurial success. i. Black Americans start more businesses than any other ethnic groups, yet only 1% of venture capital funding is invested in Black-owned ventures.

C. Those who execute on opportunities are more likely to have access to: i. Important networks. ii. Information. iii. Capital.

D. Entrepreneurs of color are 30% more likely than white entrepreneurs to face roadblocks.

E. Entrepreneurship is often considered a democratizing force in the world, but the ability to sustain a business is still very challenging.

Lecture Notes Chapter 5: Using Design Thinking Learning Objectives 5-1. Differentiate between design and design thinking.

5-2. Demonstrate design thinking as a human-centered process focused on customers and their needs.

5-3. Describe the role of empathy in the design-thinking process.

5-4. Illustrate the five phases of the design-thinking process.

5-5. Demonstrate how to observe and interview customers to generate insights.

5-6. Explore design thinking for services.

Annotated Chapter Outline XX.

XXI.

What Is Design Thinking?

A. Design thinking: A human-centered, interactive, problem-solving process that places emphasis on identifying people‘s needs, creating solutions to meet those needs, and testing solutions to make them better.

B. Design thinking is a tool for entrepreneurs (not entrepreneurship itself).

C. Five Skills of Designers that Entrepreneurs Should Have i. Observation. ii. Listening. iii. Emotional intelligence. iv. Problem framing. v. Problem solving.

Design Thinking Is Human-Centered A. Need: A lack of something desirable, useful, or required.

B. Innovation and valuable solutions sit at the intersection of: i. Desirability—what do people need? ii. Feasibility—can it be done from an organizational and/or technical perspective? iii. Viability—can we make money doing it?

C. Because design thinking is human-centered, the focus is on ―users,‖ those you are designing for, because they are not necessarily the buyer of the solution.

D. Even if you do not know who your customers are yet, find an opportunity space— a space that you are interested in—and watch and learn from people in this space to uncover needs.

E. The human-centered approach is based on: i. Thinking about what people need.

XXII.

XXIII.

ii. Exploring how people behave. iii. Asking people what they think. iv. Empathizing with how people feel.

Design Thinking Requires Empathy A. Empathy: The combination of social and emotional skills to better understand the circumstances, intentions, thoughts, feelings, and needs of others.

B. Allows us to better understand not only how people do things but why; their physical and emotional needs; the way they think and feel; and what is important to them.

C. Empathy vs. sympathy: i. Experience what others experience vs. showing concern for what one might experience. ii. Experiencing feelings with another person vs. experiencing feelings for another person. iii. Creates a bond vs. Shows concern and potentially isolates.

D. While rationalism and analytical techniques are important, design thinking is a human-centered approach and looks at the emotional and functional side of problems.

The Design-Thinking Process: Five Phases A. Stanford‘s d.school‘s five phases.

B. Divergent thinking: A type of thinking that allows us to expand our view of the world to generate as many ideas as possible without being trapped by traditional problem-solving methods or predetermined constraints (e.g., in the Empathize, Define, and Ideate phases).

C. Convergent thinking: A type of thinking that allows us to narrow down the number of ideas generated through divergent thinking in an effort to identify which ones have the most potential (e.g., in the Prototype and Test phases).

D. The design challenge—problem that stimulates the start of the design thinking process; framed as a question that begins: ―How might we…?‖ Examples: i. How might we enhance the entrepreneurship education experience of students? ii. How might we improve how older people live independently? iii. How might we redesign how adults learn in virtual worlds? iv. How might we reimagine how people get around in a city without cars?

E. Empathize i. Helps us see the world through the eyes of other people (e.g., AGNES suit). ii. Latent needs: The needs we have but do not know we have. a. More easily identified by observing. b. Solutions are sometimes the most innovative/market-creating. iii. Designers observe people in their environments to identify real needs.

F. Define i. Identifies needs and uncovers problems encountered by users. ii. Needs are verbs; solutions are nouns.

XXIV.

G. Ideate i. Generating and developing new ideas to address (latent) needs based on observations made during the Empathy phase and insights developed in the Define phase. ii. Work with a diverse group of people whose experiences span many different disciplines. iii. Brainstorming is a common technique.

H. Prototype i. Select ideas generated in the Ideate phase are transformed into artifacts, called prototypes, that require user interaction. ii. Prototype—a model of the product being designed that can be used as a prop to get feedback from potential users/customers. iii. Rapid prototype—the most useful prototype, a quickly created model used to visualize a product/service.

I. Test i. Seeks to answer the questions: a. I have an idea, so how do I get feedback? b. How do I test it, how do I iterate, and how do I learn as quickly as possible whether there is a useful and innovative product that has a market? ii. Low-cost experimentation using rapid protypes involves: a. Acting in order to learn. b. Trying something new. c. Learning from the attempt. d. Building that learning into the next iteration. i. Provides evidence that a new product idea can/cannot work.

A Deeper Dive Into Observation and Interviewing A. Observation: The act of closely monitoring the behavior and activities of users/potential customers in their own environment to arrive at greater empathic understanding.

B. Insight: Rather than just reporting what you heard in the conversations or an idea, an interpretation of an observation or a sudden realization that provides us with a new understanding of a human behavior or attitude that results in some sort of action.

C. Observations = what; insight = why.

D. Observation Techniques i. The more we practice observation, the higher the likelihood of developing new, meaningful insights that can lead to innovative solutions. ii. AEIOU framework: An acronym for a technique used to guide observation efforts that stands for activities, environments, interactions, objects, and users. iii. Small adjustments can help increase powers of observation.

E. Interviewing Potential Customers to Better Understand Their Needs

i. Interviewing is an important part of the design thinking process that can help you understand users and identify needs ii. Alternative or complement to observation. iii. Feedback interview: An interview in which entrepreneurs conduct with customers after the customers have purchased a product or service. iv. Need-finding interview: An interview which takes place much earlier in the process used to develop insights and identify needs. v. Preparing for an Interview a. Think about whom you want to interview (people in the space you are interested in). b. Talk to strangers to produce better data. c. Formula: question, listen, probe. vi. Conducting the Interview a. Have an approach; a good tip when approaching is simply saying, ―Do you have 2 minutes to talk about….?‖ b. Take notes throughout/record (with permission). c. Use questions as a guide only. d. Golden rule: actively listen to the other person. e. Practice parroting—repeat back what the person has said.

1. The person may correct you because you have misrepresented.

2. The person may change their answer/provide more detail. f. Do not: 1. Become so focused on prepared questions that you neglect to pay attention to what the other person is telling you.

2. Interrupt or try to guess the answers.

3. Feel obliged to fill the space during pauses. g. Record some basic facts about the person. h. Goal: Learn as much as possible—not to sell something to the person. i. Most common mistake: seeking validation for your ideas. vii. After the Interview a. As soon as the interview finishes, go through your notes and write down any additional observations/thoughts while the interaction is fresh in your mind. b. Craft insights by looking for themes/patterns based on responses to questions; make note of findings that have emerged. c. Empathy maps can help you: 1. Collate and integrate interview data to discover surprising insights.

2. Uncover unmet needs 3. Find the source of any frustrations.

4. Discover areas for improvement.

XXV.

5. Explore different perspectives.

6. Question your own assumptions and beliefs.

7. Spot contradictions/tensions.

Service Design-Thinking A. Service design thinking: The process of planning and organizing sustainable solutions to enhance the customer experience.

B. Principles of Service Design i. User-centric—services should always be designed to meet customer needs rather than business needs. ii. Cocreated—service design is a collaborative process involving interaction with users of the service journey. iii. Sequencing—the process of analyzing the overall customer journey and separating it into small processes, interactions, or touchpoints. iv. Visualizing—visual aids help teams focus on each step of the journey and create solutions to any issues that may arise. v. Holistic—service designers must deliver a unified and efficient system by taking a holistic view of the entire process to fully understand each aspect of the service. vi. Failure is not a threat as long as it happens early and is used as a springboard for further learning—―Fail early to succeed sooner.‖

Lecture Notes Chapter 6: Building Business Models Learning Objectives 6-1.

6-2.

6-3.

6-4.

Define the business model.

Identify the four primary components of a business model.

Explain the importance of the customer value proposition.

Describe the different types of customer value propositions and learn how to identify customer segments.

6-5. Explore the components of the Business Model Canvas and the Lean Canvas.

Annotated Chapter Outline XXVI.

What Is a Business Model?

A. Business model: Describes the rationale of how a new venture creates, delivers, and captures value.

B. Strong business models support: i. Differentiation: Describes meeting a unique need, incorporating new features not currently in similar products or services, and providing unmatched customer service.

ii. Crowdsourcing: The use of the internet to attract, aggregate, and manage ostensibly inexpensive or even free labor from enthusiastic customers and like-minded people. iii. Disruption: The process by which smaller companies that enter a market and outcompete the larger players that are currently there. a. Sharing economy: The feature that allows people to rent or borrow goods and services from private individuals, typically through the internet, and which has created many disruptive models.

XXVII. The Four Parts of a Business Model A. Journey to gather evidence and prove that the startup can be a sustainable business.

B. Evidence-based entrepreneurship: The practice of hypothesizing, testing, and validating to create a business model. i. New businesses tend to be small, so it is easier to make quick, efficient changes to the business model during the startup stage. ii. If successful, the business can scale as the business model is tested and validated.

C. Larger/more established organizations have more difficulty changing business models (e.g., BlackBerry, Kodak, Blockbuster).

D. However, competitive advantage doesn‘t always come from the product/service; it can come from the other areas of the business.

E. The Offering i. Offering: What you are offering to a particular customer segment, the value generated for those customers, and how you will reach and communicate with them. ii. Customer value proposition (CVP): A statement that describes why a customer should buy and use your product or service versus the competition. a. ―Value‖ means how much your product/service is worth to your customers. b. Example: Storage Scholars caters to college students who live on campus and need to store their belongings during the summer.

F. The Customers i. Customers: People who populate the segments of a market served by the offering. ii. Must determine: a. Who is most likely to buy what you‘re offering. b. How you will reach those segments. c. How you will maintain a relationship with these customers. iii. Example: Storage Scholars customers are primarily students or parents of students.

G. The Infrastructure

i. Infrastructure: The resources (people, technology, products, suppliers, partners, facilities) that an entrepreneur must have in order to deliver the CVP. ii. Example: Storage Scholars partners with major shipping providers.

H. Financial Viability i. Financial viability: The revenue and cost structures a business needs to meet its operating expenses and financial obligations. ii. How much will it cost to deliver the offering to our customers? How much revenue can we generate from customers? What is our profit? iii. Example: Storage Scholars found funding up front, allowing the company to buy moving materials and cover shipping/storage costs.

XXVIII. The Customer Value Proposition (CVP) A. Focus should always be on the value generated for the customer and how this value is captured as profit.

B. For your CVP to be truly effective, it must: i. Offer better value than the competition. ii. Be measurable in monetary terms (i.e., you must be able to prove that your CVP is better value than other offerings on the market). iii. Be sustainable (i.e., you must have the ability to execute it for a considerable length of time).

C. Design thinking helps you create a CVP that is unique and differentiating. i. Customer‘s viewpoint rather than an organizational perspective. ii. Must demonstrate that you are meeting the needs of various customer segments. iii. Examples: Tata Motors, Shopify.

D. Jobs, Pain Points, and Needs i. Key to a successful CVP—deep understanding of what the customer really wants/needs. ii. Businesses start and survive because they successfully answer three questions for customers: a. What does the product/service do for me? b. Why should I believe you? c. Why should I care? iii. Overt benefit: The one big benefit for the customer. iv. Real reason to believe: Provides evidence to the customer that you will do as you promise. v. Dramatic difference: The uniqueness of your product or service in relation to other available options.

E. Four Problems Experienced by Customers i. If you can find a new way to solve one of these problems, you‘re on your way to creating a good CVP. ii. Lack of Time a. In the U.S., the average person spends 43 days waiting on hold over the course of their lifetime.

XXIX.

b. Many companies are taking steps to improve customer experience and addressing long waiting times (e.g., chatbots, directly texting/emailing customer service representatives). iii. Lack of Money a. Delivering previously unaffordable products or services for less money/free can help open up a whole new market. b. Free products can include paid upgraded services (e.g., YouTube TV). iv. Lack of Skills a. People might like to accomplish a task but lack the specialized skills to get the job done. b. Opportunity for easy-to-use solutions to convert complex, professional-level tools into customer products (e.g., Babbel). v. Lack of Access. a. All levels of staff are required to innovate and experiment to increase productivity and satisfaction. b. Examples: ThedaCare, Teladoc.

Different Types of CVPs and Customer Segments A. Even if you feel you have the best product/service idea, how do you convince others of its greatness?

B. CVP delineates the value of your idea in meeting customer needs.

C. Types of Value Propositions i. All-benefits: A type of value proposition that involves identifying and promoting all the benefits of a product or service to customer segments, with little regard for the competition or any real insight into what the customer really wants or needs. ii. Points-of-difference: A type of value proposition that focuses on the product or service relative to the competition and how the offering is different from others on the market. iii. Resonating focus: The gold-standard value proposition that describes why people will really like your product and focuses on the customers and what they really need and value; sometimes called a product–market fit. iv. Product–market fit: an offering that meets the needs of customers. v. Example: Storage Scholars‘ strategy of targeting and creating value for students, parents, and college administrators is clear, direct, and on point.

D. Types of Customer Segments i. Mass market: A large group of customers with very similar needs and problems. ii. Niche market: A small market segment that consists of customers with specific needs and requirements. iii. Segmented market: A market divided into groups according to customers‘ different needs and problems. iv. Diversified market: Two or more customer segments with different needs and problems that bear no relationship to each other.

V.

v. Multisided markets: Markets with two or more customer segments that are mutually independent of each other.

Two Canvases, One Business Model A. The Business Model Canvas (BMC) i. Business model canvas (BMC): Introduced in 2008 by Swiss business theorist Alexander Osterwalder, a one-page plan that divides the business model into nine components in order to provide a more thorough overview. ii. When the four parts are divided into nine components, the result looks like this: a. The offering constitutes the (1) value proposition. b. Customers relate to (2) customer segments, (3) channels, and (4) customer relationships. c. Infrastructure includes (5) key activities, (6) key resources, and (7) key partners. d. Financial viability includes (8) cost structure and (9) revenue streams. iii. Questions each of the nine components must address: a. Customer Value Proposition. b. Customer Segments. c. Channels. d. Customer Relationships. e. Key Activities. f. Key Resources. g. Key Partners. h. Revenue Streams. i. Cost Structure. iv. One of the most important adaptations—adding sections for social/environmentally-driven companies or nonprofit organizations. v. Overall goal—lay out your assumptions to test them.

B. The Lean Canvas i. Lean Canvas: An adapted version of the BMC that was created to better address the needs of startup entrepreneurs. ii. Compared with the BMC, the Lean Canvas: a. Places less emphasis on customer segments but more emphasis on likely first adopters. b. Begins with a problem rather than a value proposition. c. Addresses key metrics and suggests focusing on one key metric to track how your business is doing. d. Addresses competitive advantage and uniqueness, called ―unfair advantage.‖ iii. New aspects in the Lean Canvas that are not included in the BMC: a. Problem. b. Solution. c. Key Metrics.

d. Unfair Advantage.

Lecture Notes Chapter 7: Developing Your Customers Learning Objectives 7-1.

7-2.

7-3.

7-4.

Define customers and markets.

Differentiate the types of customers entrepreneurs may encounter.

Identify your customers through segmentation.

Explain the importance of market sizing in growing your customer base.

Annotated Chapter Outline XXX.

XXXI.

Customers and Markets A. Entrepreneurs with limited resources can use methods to identify and target their customers, estimate the potential of their market size, and create ways to gain a deeper understanding of who is buying their products and why.

B. Businesses don‘t exist without customers, so gaining a deep understanding of your customers is absolutely essential to early business success.

C. While we tend to use the terms customer and consumer interchangeably, they do not mean the same thing.

D. Customer: Someone who pays for a product or service.

E. Customers become consumers when they actually use the product or service.

F. Market: A place where people can sell goods and services (the supply) to people who wish to buy those goods and services (the demand). i. A set of actual or potential customers— ii. For a given set of products or services— iii. Who have a common set of needs or wants, and iv. Who reference each other when making a buying decision.

G. Supply: The sellers that compete for customers in the marketplace.

H. Demand: Prospective customers‘ desire for the goods and services available.

I. Market opportunity: The degree of customer or market demand for a specific product application.

J. Product application: Goods or services created to meet a demand, thereby providing a solution to a customer problem.

K. Before you jump into a new venture, you need to do some market research to figure out if your idea will translate into a successful business.

Customer Psychology A. Customer psychology: The study of the processes involved in understanding what customers want or need, the thoughts and emotions that drive decisions, the impact of outside influences (friends, family, media) on purchasing decisions, and the reasons why people choose to buy one product over another.

B. Depending on the type of business you are in, the customer may play more than one role.

C. Different actors in the complex world of customers: i. End users: The customers who will actually use your product. ii. Influencers (opinion leaders): The customers with a large following who have the power to influence our purchase decisions. iii. Recommenders: The people who may evaluate your product and tell the public about it, such as bloggers or experts in an industry. iv. Economic buyers: The customers who have the ability to approve largescale purchases, such as buyers for retail chains, corporate office managers, and corporate VPs. v. Decision makers: The customers similar to economic buyers who have even more authority to make purchasing decisions as they are positioned higher up in the hierarchy. vi. Saboteurs: People who can slow down, derail, or even completely thwart the decision to buy.

D. Customer Personas i. Customer personas: Profiles or representations of your ideal customers based on information and market research. ii. Building personas is a powerful way to anticipate buyer behavior and help create more targeted messaging to attract ideal customers. iii. Customer personas usually consist of 6 items: a. Demographics: Useful data in identifying your target end user, but they may not be entirely accurate when it comes to understanding your end user. b. Psychographics: Method used to describe the psychological attributes (attitudes, values, or fears) of your target end users. c. Proxy product: Product that gives you an idea of what else your potential customer is likely to buy or are currently using. d. Day in the life: A profile of end users‘ daily lives. e. Biggest fears and motivators: What keeps your end users awake at night and their top fears and motivators. f. Challenges and pain points: Problems faced by the person depicted in the persona that are potentially being solved by your product/service. iv. Example: Platforms that connect people providing services with those looking to purchase them (e.g., DishDivvy). v. Research can lead to key customer insights: a. Buyers who are interested in your product/service and those who will never be interested. b. Features of your solution that are relevant to them and those that are irrelevant. c. Attitudes that put off your buyers from considering your offering.

For example, perhaps they have had a negative experience with

a product similar to yours, which prevents them from trying your offering. d. Kinds of resources your buyers trust when it comes to evaluating their options. e. Types of buyers who are involved in the decision and the amount of influence they employ.

E. Customer Journey Maps i. Customer journey map: A visual representation that captures customer experience across multiple touchpoints. ii. It is designed to provide a holistic view of your customers‘ experience with your product or service while also allowing you to identify pain points. iii. Journey mapping is a necessary process to develop empathy for customers and learn how to make their experience a great one. iv. Benefits of customer journey mapping: a. Presents a clear picture of how your customers interact with your business, including their goals, needs, and expectations. b. Clarifies what your customers think and how they feel about their experiences by identifying positive and negative emotions. c. Confirms whether the customer journey is in a logical order. d. Highlights the gaps between the desired customer experience and the one actually experienced by your customers. e. Allows you to connect to customers on an emotional level and provide the optimal customer experience by addressing and resolving key pain points. v. Customer journey mapping can be a lot of work, but not doing it runs the risk of unsatisfied customers and loss of opportunities to improve.

F. Elements of a Customer Journey Map i. Discovery—need is identified by the customer. ii. Research—finding information about the need. iii. Purchase—making a decision to buy a specific product/service. iv. Delivery—either immediate or shipped. v. After sales—e.g., thank you notes and discounts for future purchases. vi. Factors to keep in mind when completing a journey map: a. Key Touchpoints: How does your user interact with your company? b. Tasks: What is your customer trying to achieve? c. Knowledge: What does your customer want to know? d. Pain Points: How does your company disappoint the customer? e. Happy Points: How does the company satisfy the customer? f. Emotions: What is your customer feeling at each stage of the process? g. Wish List: What would make the customer experience awesome? h. Influencers: Who or what are the key influencers in your customer‘s decision-making process?

G. Confirming Your Findings i. Certain data is useful in confirming the findings made from your journey map. ii. Website Analytics a. Examples: customers‘ locations, the amount of traffic to your site, and the number of clicks on each page. b. Expose weaknesses (e.g., where the customer abandoned the site). iii. Social Media Tools a. Example: Social Mention, surveys. b. Insight into customers‘ journey (whether positive or negative). iv. Direct Customer Contact a. Difficult to organize but worthwhile.

XXXII. Customer Segmentation A. Companies often group these types of customers into specific groups based on their common needs, common behaviors, or other attributes.

B. Once this has been achieved, the Business Model Canvas (BMC) can be tailored around the customers‘ needs.

C. Customers can be divided into separate segments if: i. Their needs validate an offering. ii. They have different distribution channels. iii. They call for different types of relationships. iv. They have substantially different profitabilities. v. They are willing to pay for different aspects of the offer.

D. 4 ways to define customer segments: i. Who are they? ii. Where are they? iii. How do they behave? iv. What are their needs?

E. Target Customers i. To understand the targeting process, you must understand the difference between how the targeting process works in traditional marketing versus entrepreneurship. a. Traditional marketing—most viable customer segment is identified and a new product is developed for it. b. Entrepreneurship—many entrepreneurs start with the idea of a new product and then identify the target customer segment. ii. Everett Rogers‘s technology adoption life cycle—model that describes the process of acceptance of a new innovation over time, according to defined adopter groups. a. Innovators: The first customers to try a new product; those who are enthusiastic about new technology and are willing to take the risk of product flaws or other uncertainties that may apply to early versions. (2.5% of customers).

b. Early adopters: The second group to adopt a product; those who tend to buy new products shortly after they hit the market but are not motivated by their enthusiasm for new technology (next 13.5% of customers). c. Early majority: Those who take an interest in a new product once it begins to have mass market appeal (next 34% of customers). d. Late majority: Those who are typically skeptical, pessimistic, risk averse, and less affluent than the previous groups (next 34% of customers). e. Laggards: The last group to adopt a new innovation; those who tend to have a negative attitude toward technology in general and have a strong aversion to change (final 16% of customers). iii. In an ideal world, all five categories of customers would adopt the new innovation, but this is not the case.

F. Crossing the Chasm i. Geoffery Moore identified cracks between each phase of the adoption life cycle; according to him, the biggest difficulty is making the transition between early adopters and the early majority—the ―chasm.‖ ii. Crossing the chasm involves focusing your resources on a single, primary market first, known as a launch market, before winning over that market and then using that momentum to dominate larger markets. iii. Finding your launch market is key to attacking other markets, which will generate a larger following. iv. 4 factors that define a launch market: a. The customers in that market buy similar products. b. Those customers have similar expectations of value. c. The customers may be centrally located, such as in one town or city. d. The customers use word of mouth, likely through their social media channels, to share experiences. v. Launch Market a. Once you have identified your launch market, then you can use the following three steps to successfully cross the chasm: 1. Create the entire product first.

2. Position the product.

3. Distribute the product through the right channels. b. Moore has further refined these three steps by using the analogy of a bowling alley. vi. The Tornado: Moore suggests that if the bowling strategy is executed successfully, your product and your business may enter a tornado. vii. Main Street: Following the tornado, your business is likely to enter a period of calm.

XXXIII. Market Sizing

A. Market sizing: A method of estimating the number of potential customers and possible revenue or profitability of a product or service.

B. If you cannot prove that you have a good chance of penetrating the local market, investors will be unable to see the growth potential of your business.

C. Investors will want to see you have thought through three important acronyms that represent different subgroups of the market: i. TAM, or Total Available Market: The total market demand for a product or service. ii. SAM, or Serviceable Available Market: The section of the TAM that your product or service intends to target. iii. SOM, or Share of Market: The portion of the SAM that your company is realistically likely to reach.

D. To really give investors what they need, entrepreneurs need to go beyond TAM, SAM, and SOM, to establish a launch market.

E. Calculating Market Size i. Define your segment of the market. ii. Conduct a top-down analysis: Determining the total market and then estimating your share of the market; usually involves demographic data like population, age, income, or location. iii. Conduct a bottom-up analysis: Estimating potential sales using calculations in order to arrive at a total sales figure. iv. Don‘t forget to do sanity checks. v. Check out the competition.

Lecture Notes Chapter 8: Testing and Experimenting With New Ideas Learning Objectives 8-1.

8-2.

8-3.

8-4.

Define experiments and describe why we do them.

Identify the types of experiments most commonly used.

Explore prototypes in greater depth.

Demonstrate how the scientific method guides experimentation and testing of new ideas.

8-5. Explore the interviewing process for customer feedback.

8-6. Evaluate the value of collecting your own data.

Annotated Chapter Outline XXXIV. Experiments: What They Are and Why We Do Them A. Market validation: The process of interacting with potential customers to acquire reasonable evidence that a need is being met with a new product or service and

that people are willing to pay for that product or service; market validation involves taking action, testing and experimenting, and building that learning into the next iteration.

B. Experiment: A test designed to help you learn and answer questions related to the feasibility and viability of your venture.

C. Experiments guide us toward which customer opinions to listen to, what important product or service features should take priority, what might please or upset customers, and what should be worked on next.

D. An experiment begins with a hypothesis: An assumption that is tested through research and experimentation.

XXXV. Types of Experiments i. Amount of effort put in tends to correlate to the believability of the information coming out. ii. Giff Constable, author of Testing With Humans, illustrates this concept in his truth curve.

A. Interview i. A fast, inexpensive way to get insights into your idea from your target customers before you begin the experiment.

B. Paper Testing i. A simple way to outline your vision and spot any mistakes before the process goes any further. ii. Techniques include: wireframes and paper-based versions.

C. Advertising i. Involves spreading the word about your business using brochures/social media directed toward your relevant target market and assessing the level of response.

D. Button to Nowhere i. When your users click on the feature, nothing happens; used to test whether customers will engage with a feature. ii. The more clicks, the higher the likelihood your new feature will attract interest.

E. Landing Page i. Include a particular call to action such as ―click here for more information.‖ F. Task Completion i. Also known as usability testing. ii. Involves watching someone using your product to understand what does (not) work.

G. Prototype i. Early and often crude version of a product (many different types). ii. Rapid prototyping—crudest version; build a model of a product out of scrap-like material to have a potential customer interact with the physical product.

H. Preselling

i. Testing technique where you try to book orders for your product before it has been developed.

I. Live Product and Business i. Previous tests have provided enough insights/validation to launch your live product and business. ii. Some of the experiments in Constable‘s truth curve also count as prototypes (e.g., paper test or storyboard).

XXXVI. A Deeper Look at Prototypes A. Prototypes can range from basic models/sketches (low fidelity) or highly realistic models (high fidelity) that inform others and communicate what our ideas look, behave, and work like.

B. Low Fidelity Prototypes i. Rapid prototypes—quickly created models used to visualize a product or service (e.g., paper models or storyboards). ii. Mock-up prototype—presented as a model that looks like the finished product but lacks functionality. iii. Role-playing (experiential prototyping)—helps you step into the shoes of your user by capturing their emotional experience of testing a product/service. iv. User-Driven Prototypes a. User-Driven Prototypes: Require the user to create the prototype, which in turn enables you to better understand their thinking. b. Example: you have an idea about how to improve the waiting experience at airports, so you ask users to draw their own version of what this might look like or build a LEGO prototype. v. Storyboard a. Storyboard: An easy form of low fidelity prototyping that provides a high-level view of thoughts and ideas arranged in sequence in the form of drawings, sketches, or illustrations.

C. Medium Fidelity Prototypes i. 3D printed prototypes can be used for design, biomedical devices, and mechanical parts. ii. Can be a powerful way to present your product as a visual aid.

D. High Fidelity Prototypes i. Minimum viable product (MVP): A version of a new product that allows a team to collect the maximum amount of validated learning about customers with the least effort. ii. Pilot experiment: A small-scale study conducted to assess the feasibility of a product or service. iii. Storyboards E. The Power of Storyboarding i. Compiles your thoughts and ideas into one visual, easy-to-understand, logical document or set of documents.

ii. No hard and fast rules, but there must be a clear sense of what needs to be accomplished and an effort to maintain the flow/sequence of thoughts and ideas. iii. Goal is not to create a work of art but to communicate: to use visual imagery to make your entrepreneurial idea more understandable to yourself and to others. iv. According to Dan Roam, author of The Back of the Napkin, we can visually solve problems with pictures. v. Problem-solution-benefit framework—three main questions to keep in mind: a. What is the problem your customer is experiencing? b. What are you offering as a solution to the problem? c. How will your customer benefit from your product/service offering? vi. Four-quadrant framework: a. Problem. b. Solution. c. Organize/perform. d. Outcome/benefits.

XXXVII. The Scientific Method Applied to Entrepreneurship A. Testing a hypothesis is not just about gathering data—also involves matching the results of our tests to the original hypothesis and potentially adapting our original assumptions to better understand our customer target base.

B. The scientific method can be adapted to entrepreneurs starting new ventures.

C. 6 steps of the scientific method: i. Identify a question. a. Ask lots of questions to define the most specific one. ii. Gather background information. a. Important to have an understanding of what‘s already on the market and what needs are already being satisfied. iii. Form a hypothesis a. Without a clear hypothesis, it is almost impossible to abandon popular assumptions for new solutions. iv. Test the hypothesis. a. Run experiments (e.g., sharing storyboards). v. Analyze the results. a. What did you learn vs. what you thought you would learn? b. Is your original hypothesis supported? vi. Form a conclusion. a. What changes should be made to the original concept? b. Should you continue testing? c. Is there a next hypothesis? d. Should we stop and start over?

vii. Entrepreneurial experimentation is about acting to learn, rather than scientific rigor. viii. By taking action and experimenting quickly and cheaply, you will have a better chance of refining ideas into feasible and viable opportunities.

D. The Experimentation Template i. What is the hypothesis? ii. What is the pass/fail metric? iii. Who are the participants in the experiment? iv. How many participants are needed? v. How are you going to get participants? vi. How will the experiment be run? vii. How long is the experiment?

E. Low-Cost Customer Engagement i. One of the most important parts of an experiment is customer engagement with your product/service. ii. Provides you with immediate feedback. iii. Makes connections with people who may buy your product/service when it is fully launched. iv. Generates real-time data. v. Entrepreneurs operating a startup will be far more likely to gather evidence and data from conducting simple, low-cost experiments.

XXXVIII. Interviewing For Customer Feedback A. Feedback interviews: Used to get feedback on prototypes and are useful when used in conjunction with experimentation because you get more information on ―why‖ people are interacting with your product or service in different ways.

B. Feedback interview involves: i. The use of some type of prototype. ii. Asking users their opinion of the product or service. iii. Understanding if there is value for the user for the product or service. iv. Identifying ways to make the product better. v. Determining if you are targeting the correct customers.

C. Think about what you want to learn from the interview.

D. Draft an introduction to the interview.

E. Prepare open-ended interview questions.

F. Record basic demographics and psychographics about the interviewee.

G. The Case for Curiosity i. Important strength for many entrepreneurs; opportunities would never be identified without curiosity. ii. A growing body of research shows that curiosity increases perseverance and boosts performance. iii. Kashadan and colleagues‘ 5-dimensional model of curiosity: a. Deprivation sensitivity. b. Joyous exploration. c. Social curiosity.

d. Stress tolerance. e. Thrill seeking.

H. How to Stay Curious i. Connect with other curious people. ii. Be a curiosity ambassador. iii. Focus on learning. iv. Broaden your networks. v. Ask ―Why?‖ ―What if…?‖ and ―How might we…?‖ vi. Without risk there is no reward; entrepreneurs need to foster curiosity to reap the benefits of confronting new challenges and leaping into the unknown.

XXXIX. The Reward of Gathering Your Own Evidence A. Gathering your own evidence is an important part of the Entrepreneurship Method. Without evidence collection, many people make decisions based on intuition or experience alone.

B. Decision-making can be affected by unconscious bias: the tendency to make unfair judgments or decisions toward a certain person or group based on deeply ingrained thought patterns, interpretations, or assumptions that are outside our conscious awareness.

C. One type of unconscious bias is confirmation bias: a type of unconscious bias that can influence how we make decisions and make us think our ideas are wonderful, when maybe they are not.

D. Example of successful testing: Dropbox i. A/B testing allowed the company to measure the impact of an explainer video. The video was shown to drive sign-ups and user engagement.

E. In experiments, all results must be taken into account, even if they contradict initial assumptions.

F. Example of experimentation best practices: Brown‘s Super Stores i. Brown listened to stakeholders and tested their feedback through experimentation.

Lecture Notes Chapter 9: Developing Networks and Building Teams Learning Objectives 9-1.

9-2.

9-3.

9-4.

Explain the role of networks in building social capital.

Demonstrate the value of networks for entrepreneurs.

Describe different ways of building networks.

Explore how networking can help to build the founding team.

Annotated Chapter Outline XL.

XLI.

The Power of Networks A. Two sources of personal differentiation: i. Human capital—our talent, intellect, charisma. ii. Social capital: Our personal social networks populated with people who willingly cooperate, exchange information, and build trusting relationships with each other, is our source for ideas, support, reputation, new knowledge, and resources.

B. The best networks provide entrepreneurs with access to external sources of information, financing, emotional support, and expertise, and allow for mutual learning and information exchange.

C. Network building is a dynamic process—continuously making purposeful and valuable connections is essential for business success—and builds social capital.

D. Anywhere that provides the opportunity to interact socially will help build social capital if you recognize the value in purposeful relationships.

E. 3 dimensions of social capital: i. Structural—components of your network and the degree to which these ties are (in)formal. ii. Relational—what contacts represent (e.g., trusting relationship). iii. Cognitive—norms, visions, values, interpretations, and beliefs you may share with others, which provide a foundation for working well together.

F. Organization for Economic Co-operation and Development (OECD) has three varieties of social capital: i. Bonds: Connections with people who are just like us (e.g., family, friends, and others who have a similar cultural background or ethnicity). ii. Bridges: Links that go further than simply sharing a sense of identity (e.g., making connections with classmates or colleagues who may have different backgrounds, cultures, or other characteristics). iii. Linkages: Connections to people or groups regardless of their position in an organization, society, or other community.

G. Benefits to social capital: i. Sense of shared value. ii. Emotional, social, and economic support.

H. Downsides to social capital: i. Strong ties can be restrictive. ii. Connections with people who are too similar to us can prevent an open mind to alternatives. iii. Too much loyalty can cause people to go against the interests of society as a whole.

The Value of Networks A. Entrepreneurs must interact with investors, mentors, advisors, professors, potential employees, resource providers, and other stakeholders.

B. Advantages to Networks

i. Access to private information (information not available to the general public). ii. Access to diverse skillsets (broader perspective on situations and enables trade of information and skills). iii. Access to power (people in senior positions can provide expert advice and introduce you to other powerful people in their network).

C. Impression Management and Self-confidence i. Impression management: Paying attention to the way people perceive you and taking steps to be perceived in the way you want others to see you. ii. Research shows first impressions are formed in a tenth of a second; it pays to be mindful of how you might be perceived by others. iii. You can manage impressions others form of you by the way you dress, being aware of your body language, being polite and courteous, confident and open. iv. Implicit bias: The attitudes or stereotypes that affect our understanding, actions, and decisions in an unconscious way. a. Everyone possesses implicit biases, but they may not necessarily align with our declared beliefs. b. Researchers have suggested implicit biases are malleable and that we can unlearn and de-bias ourselves. c. When you meet someone for the first time, make an effort to notice if any of your impressions align with common stereotypes. v. Lack of confidence also plays a part in students‘ reluctance to make connections with others—fear of failure, of not asking the ―right‖ questions, and insecurity about themselves and what they want to achieve are factors that may prevent students from approaching guest speakers and asking questions. vi. Some people may regard networking negatively, thinking of it as an insincere way of gaining a personal advantage. vii. Never underestimate the value of networking with your peers while in college; interact with them, learn from shared experiences, make connections, and use them to expand your network.

D. Self-Selected Stakeholders i. Self-selected stakeholders: The people who ―self-select‖ into an entrepreneur‘s network to offer some type of short-term or long-term commitment to the venture and to connect the entrepreneur with resources—whether subject-matter expertise, funding, advice, introductions to others, new perspectives, feedback on concepts, or mentorship—in an effort to steer the venture in the right direction. ii. Do not need to be pitched to or sold to; helping because they are motivated to give you access to information and resources that you didn‘t otherwise have.

XLII.

iii. Key to building the network—enrolling people in your idea rather than selling. iv. Peter Senge‗s three guidelines for enrollment: a. Be enrolled yourself. b. Be truthful. c. Let the other person choose. v. New ventures require a variety of talents; confining yourself to a particular group whose experience mirrors yours is unlikely to expand your skillset. vi. Participating in a shared activity builds trust and passion; it allows people to be themselves outside a formal environment in the attainment of a common goal.

Building Networks A. To develop a really useful network, make an effort to meet other individuals in your geographic location.

B. Entrepreneurs get support and networking opportunities from many areas (e.g., chambers of commerce, civic organizations, seminars, incubators, accelerators, and other organizations dedicated to supporting entrepreneurs).

C. Incubators and Accelerators i. Startup incubator: An organization that helps early-stage entrepreneurs to refine an idea into a viable business model. ii. Startup accelerator: An organization that provides tailored support for existing startups that have already built an MVP by helping to scale and grow their business through focused programming designed to accelerate sales and establish a presence in the market.

D. Learning How to Network i. Networking is a two-way game, a targeted search guided by a philosophy of contributing, giving value, sharing/exchanging information, and interacting with people. ii. Networking Events a. Do your research before attending a networking event. b. Read the room. c. Look for potential groups to join. d. Commit fully to the discussion. e. Be careful not to dominate the conversation. f. Keep questions brief. g. Disengage gracefully. a. Thank people for advice. iii. The Give and Take of Networking a. The quid pro quo (meaning something that is given or done in return for something) strategy is often used to initiate a business relationship. b. Guy Kawasaki‘s tips for networking: 1. Discover what you can do for someone else.

2. Ask good questions.

XLIII.

3. Unveil your passions.

4. Read voraciously so that you have an array of information to draw on during conversations.

5. Follow up with a short but personal note within 24 hours.

6. Prepare a self-introduction of 7 to 9 seconds (not a 30second elevator speech).

E. Networking to Find Mentors i. Mentors of entrepreneurs act as role models and provide emotional support, knowledge development, business expertise, guidance, and valuable connections and industry contacts. ii. Most well-known entrepreneurs credit their mentors for their success. iii. Entrepreneurs typically build up a network of mentors over time, which can be useful when you are seeking different perspectives or guidance during particular stages of your venture.

Networking to Build the Founding Team i. Founding team: A group of people with complementary skills and a shared sense of commitment coming together in founding an enterprise to build and grow the company. a. Usually consists of the founder and a few other cofounders with complementary skills. b. Goal: build and grow the company and provide economic and social returns for themselves, employees, other owners, and potential investors. ii. Research shows more and more new fast-growth ventures have been founded by entrepreneurial teams rather than sole entrepreneurs. iii. Having a partner is essential because: a. They bring a diverse skillset. b. They are a friend on the startup journey. c. They can take over. d. They can find the blind spots. iv. Researchers found entrepreneurs are most likely to find their founding team members among colleagues in organizations where they were previously employed; organizations similar to the founding firm; prior working relationships across organizations (e.g., buyers, suppliers, consultants); family members and friends; and deliberate search by the lead entrepreneur.

A. Characteristics of a Great Founding Team v. Team members are generally found in the network of the lead entrepreneur. vi. Most founding teams have a lead entrepreneur (usually the team CEO) who: a. Creates the vision. b. Has full belief in the venture.

c. Has the motivation and passion to persevere, inspire team members, and make judgments and decisions during difficult times. vii. Positive social relations within the team are key to providing social and emotional support.

B. The Value of Team Diversity i. We often think of diversity as referring to demographic characteristics (e.g., age, gender, race, and ethnicity); diversity is also in people‘s career paths and goals, viewpoints, educational backgrounds, and life experiences. ii. Homogeneous teams: A group of people with the same or similar characteristics such as age, gender, ethnicity, experience, and educational background. a. Members are more likely to feel included, which aids in communication. b. Lack of diversity can stifle creativity and information processing. iii. Heterogeneous teams: A group of people with a mix of knowledge, backgrounds, skills, and experience. a. Diverse set of collective characteristics aids in decision-making, expands a group‘s set of possible solutions, and allows the group to conceptualize problems in new ways. b. Tends to have higher creativity and innovativeness. iv. What matters more than demographic diversity (age, gender, race, etc.) is team commitment and cognitive comprehensiveness, a process in which team members examine critical issues with a wide lens and formulate strategies by considering diverse approaches, decision criteria, and courses of action. v. Groupthink and Healthy Conflict a. A team whose members are from diverse backgrounds, hold complementary skills and experiences, and have commitment to the venture is healthy. b. Groupthink: A phenomenon in which people share too similar a mindset, which inhibits their ability to spot gaps or errors. c. Challenge is ensuring constructive conflict does not degenerate into dysfunctional interpersonal conflict. d. Kathleen Eisenhardt‘s 6 traits of teams with healthy conflict: 1. Developed multiple alternatives to enrich the level of debate.

2. Shared commonly agreed-upon goals.

3. Worked with more information rather than less.

4. Injected humor into the decision process.

5. Maintained a balanced power structure.

6. Resolved issues without forcing consensus.

e. One way of preventing groupthink and promoting healthy conflict is the use of a devil‘s advocate to challenge assumptions and encourage different perspectives. f. In sum, healthy and constructive conflict is good, provided team members are clear on the organization‘s goals and free of hidden agendas.

Lecture Notes Chapter 10: Creating Revenue Models Learning Objectives 10-1. Distinguish a revenue model from a business model and illustrate the most popular revenue models.

10-2. Explain how companies generate revenue by profiting from ―free.‖ 10-3. Identify the drivers that affect revenue as well as cost.

10-4. Describe different strategies entrepreneurs use when pricing their product or service.

10-5. Explore different methods of calculating price.

Annotated Chapter Outline XLIV.

What Is a Revenue Model?

A. Diverse though the businesses may appear to be, they all have one very important thing in common: the ability to generate revenue: The income gained from sales of goods or services.

B. Revenue model: A key component of the business model that identifies how the company will earn income and generate profits.

C. As an entrepreneur, if you have a clear strategy for generating revenue from your business, you have a better chance of surviving. i. How much are my customers willing to pay? ii. How many customers do I need? iii. How much revenue can be generated through sales? iv. If I have more than one revenue stream, how much does each stream contribute to the total?

D. Different types of revenue models have different revenue streams (e.g., primary vs. combination).

E. Each type is characterized by different ways in which revenue is generated; affects who your customers will be.

F. Unit Sales Revenue Model

i. Unit Sales Revenue Model: Measures the amount of revenue generated by the number of items (units) sold by a company. ii. Typically, retail businesses rely on the unit sales revenue model by selling products or services directly to consumers: a. Physical goods and intangibles like digital products. b. The razor-and-razor-blade model.

G. Advertising Revenue Model i. Advertising revenue model: Relies on the amount of revenue gained through sales of advertising products and services. ii. Magazines and newspapers used to charge for ads by the space/word; the ad revenue model has evolved to encompass the digital world. iii. Meaningful advertising revenue generated in the digital world is dependent on attracting traffic or developing a dominant niche (e.g., Google Ads). iv. Most ―influencer‖ ventures have been started using an advertising revenue model.

H. Data Revenue Model i. Data revenue model: Generate revenue by selling high-quality, exclusive, valuable information, called data assets. ii. Data can be sold in raw form or in the form of insights derived from data analysis. iii. Increasing use of AI to help monetize data. iv. Data marketplaces have gained popularity.

I. Intermediation Revenue Model i. Intermediation revenue model: Methods by which third parties, such as brokers (or ―intermediaries‖) can generate money. ii. Brokers: The people who organize transactions between buyers and sellers and who play important roles in connecting people to different services. iii. In recent years, various entrepreneurial ventures have emerged to put a new creative spin on the role of the broker to connect people with services in a more efficient and less expensive way.

J. Licensing Revenue Model i. Licensing revenue model: Earning revenue by giving permission to other parties to use protected intellectual property (copyrights, patents, and trademarks) in exchange for royalties or fees. ii. Technological innovations are often sold to larger companies that have the financial and technical expertise to maximize their potential (e.g., iPhone apps).

K. Franchising Revenue Model i. Franchising revenue model: The owner of an existing business (the franchisor) sells the rights to another party (a franchisee) to trade under the name of that business.

XLV.

XLVI.

ii. The franchisor helps the franchisee by providing support in marketing, operations, and financing, and in return, the franchisee pays the franchisor royalties based on an agreed percentage of sales.

L. Subscription Revenue Model i. Subscription revenue model: Involves charging customers to gain continuous access to a product or service. ii. This type of model has been traditionally applied to magazines and newspapers that charge customers a subscription fee to receive each issue of the publication. iii. Today, a growing number of startup companies also use the subscription revenue model.

M. Professional Revenue Model i. Professional revenue model: Provides professional services on a time and materials contract. ii. Example: Consultants, lawyers, and accountants often charge by the hour for their services.

N. Utility and Usage Revenue Model i. Utility and usage revenue (pay-as-you-go) model: Charges customers fees on the basis of how often goods or services are used. ii. Some mobile phone carriers use this model by charging users a fee for data usage; a cloud storage provider bases charges on the amount of storage used.

Generating Revenue from ―Free‖ A. Unlikely as it may sound, the freemium revenue model is becoming more popular as a means of encouraging widespread customer adoption.

B. Freemium revenue model: Involves mixing free (mainly web-based) basic services with premium or upgraded services.

C. Businesses create at least two versions or tiers of products or services.

D. The company gives away the low-end version of the service for free; this ―basic‖ version usually comes with limits on usage and functionality.

E. The company also creates and sells higher-end versions that offer more functionality and performance.

F. Key to a sustainable revenue model involving ―free‖ is earning enough money on some part of the business to pay for the costs of supporting the free side of the business.

G. Direct cross-subsidies: Pricing a product or service above its market value to pay for the loss of giving away a product or service for free or below its market value.

H. Example: cell phone companies lose money by giving away the phone handsets for free, but then cover the loss by charging monthly service fees.

Revenue and Cost Drivers A. Revenue models influence who your customers are and how you reach them.

B. Equally important to have a deep understanding of what is driving revenue and cost, in order to generate as much value (profit) as possible for your company.

C. Revenue Drivers i. Customers—How many customers will come into your coffee shop? How much are they willing to pay to stay? How will you attract customers to your location? ii. Purchase frequency—How often will your customers come into your coffee shop? What incentives can you offer to keep them coming back? iii. Selling process—How much time will you be able to sell? What kind of upselling or cross-selling opportunities can you find? iv. Price—If you think your price per minute should be higher than what your competitors charge, what are the factors that increase the value of your product? If you raise or lower prices, what will be the impact on your customer base? v. Actively testing your assumptions/hypotheses is the best way of figuring out the underlying factors that will drive revenue for your business.

D. Cost Drivers i. Cost of Goods Sold (COGS) a. Cost of goods sold (COGS): The direct cost of producing a product. b. Once you know how much money it takes to produce your product/service, you can lower the COVS to sell it at a lower price. c. Must ensure that you are not devaluing your product to the extent that it would reduce your customers‘ willingness to buy it at all. ii. Operating Expenses a. Operating expenses: The costs of running your business, including your rent, utilities, administration, marketing/advertising, employee salaries, and so forth. b. More difficult to reduce, and reductions may work in the short term but have negative effects long-term.

E. Income Statement i. Income statement (profit and loss statement): A financial report that shows revenue, expenses, and profit for a period of time, typically a month, quarter, or year; it subtracts the COGS and expenses from the total revenue to give you a net income figure, which will be either a profit or a loss. ii. Pro forma income statement—projection/estimate of what the company could potentially do. iii. Depreciation—cost of wear and tear on your physical assets (e.g., machinery, equipment, building). iv. Amortization—cost of intangible assets (e.g., patents, trademarks, copyrights, business methodologies). v. Operating profit—amount left over from revenue once all costs and expenses are subtracted. vi. Interest expense—a good indicator of the company‘s debt; interest due in the period on any borrowed money.

vii. Taxes—last expense item before net income; all federal, state, and municipal taxes (if any) due for the period. viii. Net income—what is left after all costs, expenses, and taxes have been paid; shows the company‘s real bottom line. ix. Over time, you can compare your company‘s income statements; this helps you chart trends in your company‘s financial performance. Trends will help you to set future financial goals and strategies.

XLVII. Pricing Strategies A. If your price is too high, you might drive customers away, but if your price is too low, then you run the risk of making very little profit.

B. Key to sustaining a new business: create consistent revenue streams.

C. Once you have acquired new customers, your goal is to hear from them again.

D. Can be difficult for one-time events, but for corporate events, there are ample opportunities for repeat business, which brings a steady stream of revenue.

E. Once you have a better idea of your competition, your target market, and how your qualifications measure up against others, it is time to plan your pricing strategy.

F. Pricing Products and Services i. There is no right way to determine your pricing strategy, nor is there any such thing as long-term fixed pricing. ii. As your business evolves, your prices will adjust according to demand; the best way to set a price is to base it on the information you have already gathered. iii. The positioning and brand of your product or service will affect how much it sells for; understanding your brand is important when defining your business. iv. A useful exercise is to think of three to five words to describe your business that sets it apart from other competitors. v. Once you have defined your brand, you can carry the theme through your packaging, website, marketing materials, and other communications with potential customers.

G. Different Types of Pricing Strategies i. Competition-Led Pricing a. Competition-led pricing: A pricing strategy that matches prices to other businesses selling the same or very similar products and services. ii. Customer-Let Pricing a. Customer-led pricing: A pricing strategy that asks customers how much they are willing to pay and then offers the product at that price. iii. Loss Leader a. Loss leader: A pricing strategy whereby a business offers a product or service at a lower price in an attempt to attract more customers.

iv. Introductory Offer a. Introductory offer: A pricing strategy to encourage people to try a new product by offering it for free or at a heavily discounted price. v. Skimming a. Skimming: A high pricing strategy, generally used for new products or services that face very little or even no competition. vi. Psychological Pricing a. Psychological pricing: A pricing strategy intended to encourage customers to buy on the basis of their belief that the product or service is cheaper than it really is. vii. Fair Pricing a. Fair pricing: The degree to which both businesses and customers believe that the pricing is reasonable. viii. Bundled Pricing a. Bundled pricing: A pricing strategy whereby companies package a set of goods or services together and then sell them for a lower price than if they were to be sold separately.

XLVIII. Calculating Prices A. Number crunching is not an exact science, but there are a few ways to calculate prices that will help you decide which one is best for your business.

B. Key to pricing: ensure you make a profit, as well as to create value for your customers.

C. Break-even analysis can also help set price; break-even is that point when your revenue equals your costs; anything sold beyond break-even is considered profit. i. Break-even units = Fixed costs / (sales price per unit – variable cost per unit).

D. Cost-Led Pricing i. Cost-led pricing: A pricing strategy that involves calculating all the costs involved in manufacturing or delivering the product or service, plus all other expenses, and adding an expected profit or margin by predicting your sales volume to get the approximate price.

E. Target-Return Pricing i. Target-return pricing: A pricing method whereby the price is based on the amount of investment you have put into your business.

F. Value-Based Pricing i. Value-based pricing: A pricing method that involves pricing your product based on how it benefits the customer. ii.

Lecture Notes

Chapter 11: Anticipating Failure Learning Objectives 11-1. Describe failure and its effect on entrepreneurs.

11-2. Explore the spectrum of reasons for failure.

11-3. Discover the underlying reasons for fear of failure.

11-4. Recognize the different ways entrepreneurs can learn from failure.

11-5. Explain the role of resilience in overcoming failure.

Annotated Chapter Outline XLIX.

L.

Failure and Entrepreneurship A. Many startups fail and make mistakes.

B. Business failure—termination of a commercial organization that ceases operations because of its inability to cover expenses and make a profit.

C. Failure can be painful, but it can also fuel development.

D. Common Reasons for Startup Failure i. Some are small, adjustable, informative, linked to bigger goals, and designed to highlight key issues. ii. Others involve rigid thinking/discouragement and may result in reputational damage. iii. Contributing factors often include: a. Lack of a business model. b. Poor timing. c. Situations that are out of our control (e.g., COVID-19 pandemic). iv. Example: funding discrimination (e.g., against LGBTQ+ entrepreneurs). v. Pivot: Significant changes in direction that can happen due to mistakes.

The Failure Spectrum A. Amy C. Edmondson (Harvard Business School) believes that failure ranges from big to small along a failure spectrum (from blameworthy to praiseworthy).

B. Failure spectrum describes situations that may be perceived as failures yet can sometimes have positive rather than negative outcomes.

C. Deviance i. Deviance: An entrepreneur defies legal and ethical boundaries leading to mismanagement of the venture.

D. Inattention i. Inattention: An entrepreneur gets sidetracked by inattention: either in a new business direction or by delegating too much too soon without following up.

E. Lack of Ability F. With lack of ability, the entrepreneur is overextended and lacks the skillset to get the job done.

G. Process Inadequacy

LI.

i. Process inadequacy: The wrong processes are set up in the organization; communication breaks down among employees and things begin to fall through the cracks.

H. Uncertainty i. Uncertainty: The lack of clarity about future events that can cause entrepreneurs to take unreasonable actions.

I. Exploratory Experimentation i. Market tests are conducted to get early feedback and acquire learning and information; some may fail but exploratory experimentation is crucial for learning.

Fear of Failure A. Despite learning from perceived failures, many view failure negatively/try to avoid it.

B. Concept of failure provokes an emotional reaction/antifailure bias that inhibits us from learning from the experience rather than tackling the reasons behind it.

C. Seldom hear much about the emotions of failure entrepreneurs experience when businesses go under.

D. For entrepreneurs, failure is especially difficult because it is hard to separate personal failure from professional failure.

E. Entrepreneurial Fear of Failure Dimensions i. Researchers have suggested the origins of fear of failure may lie in parentchild relations. ii. Studies show individuals raised to believe that failure is unacceptable and has negative consequences will go out of their way to avoid failure. a. Rather than seeing mistakes as opportunities to learn/improve skills/compete, they will view them as threatening and judgmentoriented experiences. iii. Avoiding mistakes stunts growth and maturity, leading only to more mistakes and failures over time. iv. Coping strategies to deal with the fear of failure: a. First, reframe specific goals so they become more achievable. b. Second, if the product fails to generate as much revenue as you would like, separate your personal feelings from facts. c. Third, by deliberately allowing yourself to feel the fear, you are more likely to diminish the fear of failure. d. Finally, seek support from the role models in your life.

F. Global Fear of Failure i. Strong fear of failure is often rooted in one‘s national culture; the Global Entrepreneurship Monitor report (GEM) measures fear of failure on a global level according to country. ii. GEM study focused on how people‘s personal perceptions in these economies have influenced their decision to start a business, which include the following: Perceived opportunities; Perceived capabilities; Fear of failure; and Entrepreneurial intentions.

LII.

LIII.

Learning From Failure A. Businesses do fail, which is why it is important for aspiring entrepreneurs to learn from others who have experienced failed businesses.

B. It would be better to reframe the term failure as intentional iteration—a process that involves prototyping, testing, analyzing, and refinement.

C. Intelligent failures: Good failures that provide new knowledge to help a startup innovate and stride ahead of its competition.

D. Lessons Learned by Successful Entrepreneurs i. Kurt Theobald—cofounder and CEO of the e-commerce firm Classy Llama. ii. Despite 10 failures behind him, Theobald learned valuable lessons and persevered until he achieved success with his 11th new venture, a growing business that earns +$8 million in annual revenue.

E. Building a Blame-Free Environment i. Blame culture isn‘t healthy for you or your company because you won‘t learn from the failure. ii. Building blame-free cultures encourages people to share, accept, learn from, and recover from failure. iii. Employees also need to feel assured that they will not receive a negative reaction when they admit mistakes; this provides an opportunity for the team to analyze what went wrong and explore new approaches to prevent the same thing from happening again. iv. Key to building a blame-free culture: communicate clearly what sorts of failures are acceptable and unacceptable.

Using Resilience to Overcome Failure A. Growing amount of research suggests resilience is important in managing all the stressors faced by entrepreneurs.

B. Whereas resilience is associated with overcoming adversity, grit is the quality that enables people to work hard and sustain interest in their long-term goals.

C. Grit Versus Resilience i. According to Angela Lee Duckworth, a psychologist at the University of Pennsylvania, grit is ―passion and perseverance for long-term goals.‖ ii. Duckworth‘s research is related to Stanford psychologist Carol Dweck‘s research on mindset: people with a fixed mindset believe that intelligence and talent is something we‘re born with, and they avoid failure, whereas people with a growth mindset develop their abilities through dedication, effort, and hard work. iii. Duckworth also believes in the concept of deliberate practice—the conscious effort to practice things that we can‘t yet do.

D. Psychological Resilience and Mental Health i. Psychological resilience: A responsive process that involves perceptions, thoughts, coping strategies, and behaviors in relation to adversity. ii. Entrepreneurs can develop resilience to cope with all levels of adversity.

iii. Example: Emily Lagasse, founder of Petwell Supply Co. iv. Grit is about staying committed to one goal for a prolonged period of time; resilience is handling the stressors that pop up daily, regardless of the goal.

E. Developing Resilience i. Emotional factors—we can be stressed/overwhelmed but going into a situation with a positive emotional state can build resilience to adversity in the moment. ii. Cognitive factors—if we can‘t see opportunity/believe that we can meet the challenge and solve the problem, resiliency will be hard. a. Ongoing learning and education are important as well. iii. Prior Experience—every adverse experience we have and overcome contributes to our resiliency ―muscle.‖ i. Social factors—networks, family, founding team, and even a tight-knit community can all build a safety net that can help being resilience seem easier.

F. Removing the Stigma of Failure i. Certain exercises can help remove the stigma (feelings of shame and embarrassment) traditionally associated with failure.

Lecture Notes Chapter 12: Bootstrapping and Crowdfunding for Resources Learning Objectives 12-1. Define bootstrapping and illustrate how it applies to entrepreneurs.

12-2. Describe common bootstrapping strategies used by entrepreneurs.

12-3. Explain the difference between crowdsourcing and crowdfunding.

12-4. Describe the effects of crowdfunding on entrepreneurship.

12-5. Discuss the 4 contexts for crowdfunding.

12-6. Examine best practices entrepreneurs use to conduct successful crowdfunding campaigns.

Annotated Chapter Outline LIV.

What Is Bootstrapping?

A. Bootstrapping: The process of building or starting a business with very little funding or capital or virtually nothing at all.

B. Seven components of the Entrepreneurship Model: i. Your why statement. ii. Start with the means at hand. iii. Describe the idea today.

LV.

LVI.

iv. Calculate affordable loss. v. Take small action. vi. Network and enroll others in your journey. vii. Build on what you learn.

C. Entrepreneurs are more likely to turn to friends, family, and fools (―the 3 Fs‖) for financial assistance.

D. Bootstrapping or External Financing? i. Bootstrapping means acquiring resources without long-term external financing sources such as raising equity from venture capitalists or borrowing from banks. ii. Although it is more difficult to acquire funding from formal channels (e.g., venture capital firms, and angel investors), there are benefits to this route. iii. In the beginning, most new ventures are simply not ready for investment; outside investors are more likely to invest in a business that has been bootstrapped from the beginning. iv. An entrepreneur who bootstraps with a good product-market fit, a committed team, and a decent customer base is in a much better negotiating position.

The Bootstrapped Startup A. Can use cash from your savings, carefully use certain credit cards, fund your startup out of your salary from your existing job, or take equity out of your home.

B. Look for creative ways and use whatever resources you have to save money while getting your business off the ground.

C. Most new ventures begin as a marathon; start with a steady pace.

D. Sweat equity: A non-monetary investment that increases the value or ownership interest created by the investment of hard work for no compensation.

Crowdfunding Versus Crowdsourcing A. The emergence of crowdfunding, the process of raising cash for a new venture from a large audience (the ―crowd‖), mostly through the Internet, is a new pathway for many. i. Draws on small contributions from a large number of people to fund entrepreneurial ventures.

B. Crowdsourcing uses the Internet to attract, aggregate, and manage inexpensive or even free labor from enthusiastic customers and like-minded people.

C. Crowdfunding is a resource for money; crowdsourcing is a resource for talent and labor.

D. Companies have capitalized on information resources by tapping into crowdsourcing social media platforms and social networking sites.

E. Crowdsourcing for Customer Engagement and Satisfaction i. An existing customer base can be your ―crowd‖ to: a. Create positive word of mouth. b. Get feedback. c. Foster community. d. Build loyalty.

LVII.

e. Find other unmet needs to create new products. ii. Can engage them formally (e.g., survey, focus groups) or informally (e.g., social media channels). iii. Keeps existing customers engaged and helps attract new ones, leading to higher customer satisfaction, greater purchase intentions, and a better product offering.

F. Crowdsourcing to Reduce Labor Costs i. Will not incur overhead; benefit from the lower cost of labor in other countries. ii. Can find innovative solutions to problems, get design and development work done, and test beta products. iii. Many crowdsourcing sites operate on a pay-per-task model, which greatly reduces the overall cost of labor.

G. Crowdsourcing for Innovation i. Diversity of thoughts, opinions, and ideas that can lead to more creative solutions to complex problems.

H. Crowdsourcing as a Product i. In some cases, an entire company can be built on crowdsourcing (e.g., Stuff That Works).

Crowdfunding Startups and Entrepreneurship A. Several factors attributed to the growth of crowdfunding: overall acceptance as a legitimate way to raise funds, number of platforms available, growth of the gig economy, and growth in social media to promote campaigns.

B. Has helped raise billions for all types of businesses, including art, theater, photography, charity, retail, fashion, gaming, real estate, etc.

C. As banks become nervous about lending money and investors are more cautious, crowdfunding is a democratized method of raising money for upcoming entrepreneurs.

D. U.S. and Canada lead the globe in crowdfunding ($74 billion).

E. Types of Crowdfunding Sites i. Launched in 2009, US–based Kickstarter is the most established crowdfunding site, as well as the largest platform for creative projects in the world. ii. Makes money by charging a percentage of the funds collected from each successful project, in addition to payment processing fees. iii. Expectation: money raised will be used to further develop/complete a project and backers will receive some reward for contributing. iv. Five basic rules: a. Projects must create something to share with others. b. Projects must be honest and clearly presented. c. Projects can‘t offer equity, revenue sharing, or investment opportunities. d. Projects can‘t fundraise for charity. e. Projects can‘t involve prohibited items.

LVIII.

v. Kickstarter crowdfunders must be aware that a project must be fully funded by the time the period of the campaign ends, or they get nothing. vi. Rewards can be different: if you are looking to put on a play, you might offer potential backers free tickets on opening night, front row seats, or the chance to meet the actors backstage after the event. vii. Alternatives to Kickstarter (e.g., Indiegogo).

F. Equity Crowdfunding i. Equity crowdfunding: A form of crowdfunding that gives backers the opportunity to become shareholders in a company. ii. U.S. sites like WeFunder, StartEngine, Fundable, Republic, and Circle Up provide investors with the opportunity to invest in companies in exchange for ownership or the promise of future returns.

The 4 Contexts for Crowdfunding A. Patronage Model i. Patronage model: The financial support is given by backers without any expectation of a direct return for their donations. ii. Crowdfunding platform Patreon allows patrons to fund illustrators, authors, podcasters, musicians, etc.

B. Lending Model i. Lending model: The funds are offered as loans with the expectation that the money will be repaid. ii. Different forms: a. Interest paid on the loan. b. Reimbursement only if/when the project starts generating revenue or begins to make a profit. iii. Where small amounts are loaned to impoverished people in developing countries, backers might waive any expectation of repayment as the loans are promoting the social good.

C. Reward-Based Crowdfunding i. Reward-based crowdfunding involves rewarding backers for their support. ii. Rewards often take the form of unique offerings (e.g., product samples, experiences).

D. The Investor Model i. The investor model involves giving backers an equity stake in the business in return for their funding. ii. Investors can either buy shares in the company or can take a share of the future revenue/profits of a company without ownership.

E. The Advantages of Crowdfunding for Global Entrepreneurs i. By judging customer interest before product launch, you save money on marketing, enabling you to gather customer feedback and test ideas. ii. Allows you to build early relationships with customers who are likely to buy your product when it is launched.

LIX.

iii. Committed customers are more likely to help to promote your offering through their own social networks. iv. Excellent way for you to make new contacts, build your brand, attract customers, raise awareness, and create a buzz before your product even hits the market. v. To succeed, you need to plan ahead: a. Think about the type of customers you would like to attract. b. Consider how to reach them. c. Clearly communicate vision. d. Convince the online audience your product/service is worth investing in.

A Quick Guide to Successful Crowdfunding A. Crowdfunding may seem easy, but it involves thought, commitment, and hard work.

B. 1. Make Sure Your Product or Service Solves a Real Problem i. You will need to convey this message to prospective backers. ii. If you can‘t communicate your idea in 2 sentences, spend time to get a sense of the essence of your product.

C. 2. Test and Refine Your Idea i. The most successful crowdfunding efforts are a result of testing, refining, and planning.

D. 3. Be Prepared i. Successful entrepreneurs prepare in advance by setting up links with suppliers, distributors, and customers before launching on a crowdfunding site to ensure they are able to deliver as promised.

E. 4. Seek and Accept Advice i. Seek guidance from other entrepreneurs who have been through the crowdfunding process. ii. Request feedback on your idea.

F. 5. Start Socializing Your Campaign Early i. Successful entrepreneurs build their customer base by spreading the word through social media/other outlets before they sign up for crowdfunding. ii. Example: release drawings/post a photo of the prototype on sites like Facebook or Twitter so your audience can provide feedback.

G. 6. Money Matters i. Very few successful crowdfunding entrepreneurs have launched a product without some kind of financing beforehand. ii. Be aware of how much money you will actually need rather than how much you would like. iii. Make sure the amount you set is realistic and conservative enough to attract backers while high enough to cover all your manufacturing/delivery costs.

H. 7. Focus on the Video i. Campaigns with videos earn 105% more funding.

ii. Goal is to let potential backers see who you are.

I. 8. Make the Most of Crowdfunding Opportunities i. Additional perks: important feedback from backers (more ideas/opportunities); success brings press coverage (can open doors into other industries).

J. 9. Promote Your Campaign Extensively i. Crowdfunding campaigns require active promotion to reach a wide audience. ii. Engage with backers promptly to generate goodwill. iii. Collaborate with others who can spread the word about your campaign.

K. 10. Commit to and Manage Your Campaign i. If your idea proves to be popular with backers, you will need to reply to a lot of emails, send updates on a regular basis, and fulfill reward promises. ii. Biggest problems: delays/setbacks in product delivery and failure to deliver the promised rewards. iii. Funded projects sometimes fail altogether to deliver what they promised, which causes bad feeling among those who have been generous enough to donate. iv. Frustrated, impatient backers can destroy an entrepreneur‘s reputation and a product. v. They have put faith in you and deserve to know what is happening; make a good-faith effort at all times to be honest about any situation and fulfill your promises.

Lecture Notes Chapter 13: Financing for Startups Learning Objectives 13-1. Define equity financing for entrepreneurs and outline its main stages.

13-2. Illustrate the basics of business valuation.

13-3. Describe angel investors and how they finance entrepreneurs.

13-4. Explore the role of venture capitalists and how they finance entrepreneurs.

13-5. Explain how investors carry out due diligence processes.

Annotated Chapter Outline LX.

What Is Equity Financing?

A. As the company begins to grow/show potential, entrepreneurs begin to look at equity financing: the sale of shares of stock in exchange for cash.

B. Way to get capital from investors to start/grow a business.

LXI.

C. General rule: Avoid seeking investment for as long as possible to give your enterprise time to grow and build value so you can secure a better deal later on.

D. At times, competition will drive you to seek investment quickly; some businesses are more capital-intensive than others.

E. Splitting the Ownership Pie i. When you are the only owner of the company, you own 100% of a small pie; when someone invests to enhance growth, your pie becomes bigger. ii. As you need to give away equity in exchange for the investment, the company is no longer fully yours, but, if the company does well, then your smaller slice of the bigger pie will be much larger than the original smaller pie. iii. However, splitting the pie starts before investment if there is a team involved; tricky because you are splitting what doesn‘t yet exist.

F. Stages of Equity Financing i. Seed-stage financing: Small or modest amounts of capital are provided to entrepreneurs to prove a concept. ii. Startup financing: The money provided to entrepreneurs to enable them to implement their ideas by funding product research and development. iii. Early-stage financing: Larger amounts of funds for companies that have a team and a product or service tested or piloted but show little or no revenue yet. iv. As the business grows and starts to take in more revenue, entrepreneurs may seek second-stage or later-stage financing. v. Later, a profitable company looking to go public through an initial public offering (IPO) may seek investment through the third or mezzanine stage of financing. vi. Finally, entrepreneurs may need bridge financing to cover the expenses associated with the IPO. G. Forms of Equity Financing i. Typically, 3 Fs (family, friends, and fools) either: a. Invest cash in exchange for equity. b. Provide a loan. c. Provide a loan that can later be converted to equity (convertible debt). ii. Angel investors: Those who use their own money to provide funds to young startup private businesses run by entrepreneurs who are neither friends nor family. iii. Venture capitalist (VC): A professional investor who invests in emerging companies because of long-term growth potential.

The Basics of Valuation A. Before entrepreneurs seek equity investment, they must know the value of their company so they will know how much equity to give up.

B. With fund-raising, most investors will expect to see an approximate valuation of your business so the entrepreneur and investor can negotiate the equity percentage and division of ownership.

C. How Can Entrepreneurs Value Their Companies? i. Very few overnight successes; entrepreneurs need to use the tools available to them to determine just how much their company is actually worth. ii. Entrepreneurs usually value their companies based on the firm‘s potential in their chosen market; the easiest way is to check similar companies operating in the same industry. iii. Remember: entrepreneurs have their valuation calculation, and investors mostly have their own; true valuation falls somewhere in the middle.

D. How Do Investors Value Startups? i. Knowing the criteria that matter to them, you can better position your company to attract investors. a. Experience and team‘s past successes. b. How many people use your product/service. c. Having a distribution channel already set up. d. Whether the industry is popular with investors at the moment. ii. Pre-money valuation—company‘s value before it receives outside investment. iii. Post-money valuation—company‘s value after it receives a round of financing.

E. The Age of the Unicorn i. Unicorn: In the venture capital industry, originally coined by Aileen Lee, any tech startup company that has received a $1 billion valuation, as determined by private or public investment. ii. While unicorn startups are rare (< 1% chance), they are becoming more common.

F. Convertible Debt i. Convertible debt (convertible bond or convertible note): A short-term loan that can be turned into equity when future financing is issued; a middle ground between debt and equity financing. ii. Initial debt converts to shares of stock after an agreed certain point (conversion event). iii. Benefits and Advantages a. Valuation becomes easier after the first round of financing when there is more data and information to work with. b. If your company succeeds, your investors may be entitled to a discount on the share price or bonus when converting the debt into equity, which can be an incentive for investors to commit. c. If the discount is too low, investors may not commit; if it is too high, the investor may take this into account when pricing stock, which may end up coming out of your own shares.

LXII.

iv. Cautions and Disadvantages a. Early lenders may not want to take the risk of having their money tied up until the debt is converted into equity. b. They may be wary of losing money if the conversion event doesn‘t happen or if the company ends up filing for bankruptcy. c. A clause can be added to address this possibility; initial investment could remain as debt (which the entrepreneur must repay).

Angel Investors A. ―Angel‖ was used to describe wealthy people who invested in Broadway theatrical productions.

B. Now, ―angel‖ has evolved to anyone who uses personal capital to invest in an entrepreneurial venture.

C. Angels are eligible to invest as long as they are accredited investors, earning an income of over $200,000, or having a net worth of over $1 million.

D. Experienced self-made entrepreneurs themselves, angel investors can add significant value by providing advice, skills, expertise, and lucrative contacts.

E. Finding an Angel Investor i. AngelList and the Angel Capital Association have made it much easier to find a business angel today. ii. Some angels will accept only referrals, but most will consider unsolicited submissions of ideas. iii. Tap your network and think about who could provide you with an introduction. iv. Those who can provide you with referrals to angels include: attorneys, other entrepreneurs, and university faculty; having a professional vouch for you is always a good start.

F. Types of Angel Investors i. Business angels have many different objectives and styles of operating (from silent investors to those who want full involvement in the operations). ii. Entrepreneurial Angels a. Have already successfully started and operated their own businesses, which they may or may not still be running. iii. Corporate Angels a. Usually former business executives, often from big multinationals, looking to use their savings or current income to invest. iv. Professional Angels a. Doctors, lawyers, dentists, accountants, consultants, and the like who use their savings and income to invest in entrepreneurial ventures. v. Enthusiast Angels a. Wealthy (semi)retired entrepreneurs/executives who often invest their personal capital in startups as a hobby.

G. Angel Groups

LXIII.

i. Many angels pool funds to invest and work together to conduct due diligence, analyze financials, and learn more about the opportunity. ii. Typically meet regularly to hear pitches, ask the entrepreneurs questions, and decide if there is enough interest to hear more. iii. Spread all over the country and tend to specialize in specific areas. iv. Research suggests women are better investors than men, as they take more time researching potential entrepreneurial ventures, spot more market opportunities, and take on less risk. v. Very few business angels from marginalized racial/ethnic backgrounds. vi. When your business has hit the following milestones, seek angel investment: a. Product is developed or near completion. b. Have existing customers/potential customers who will confirm they will buy from you. c. Invested your own money and exhausted other alternatives. d. Demonstrate the business is likely to grow rapidly and reach at least $10 million in annual revenues in the next 3–7 years. e. Business model is in top shape.

Venture Capitalists (VCs) A. Often former or current entrepreneurs, but unlike angels, they are mostly professional money managers.

B. Like angel investors, look for opportunities likely to return 10 times their investment in 5 years.

C. Money managers form a venture capital limited partnership fund that earns money through ownership of equity in different companies.

D. Fund usually goes through a 10-year cycle before it dissolves, and the assets are distributed to each of the partners.

E. Many look for entrepreneurial ventures that have received seed funding in the early stages because it legitimizes the entrepreneur, helps to validate the idea, and shows an ability to stimulate belief among the entrepreneur‘s personal network.

F. Even if VCs do invest in young companies, it comes at a price; they take more equity, more control, and may even take over the running of the company.

G. Although it is rare for seed-stage entrepreneurs to receive venture capital, it is not impossible.

H. The History and Future of Venture Capital i. Roots in the early 20th century when wealthy families like the Rockefellers, Bessemers, and Whitneys were looking for ways to earn profits by investing in promising young companies. ii. American Research and Development (ARD) was created in 1946 by cofounder and Harvard professor General George F. Doriot (―father of venture capital‖).

LXIV.

iii. Today, ARD is mostly recognized for its enormously successful investment in Digital Equipment Company (DEC) in 1957 when its investment of $70,000 was valued at over $355 million when DEC went public in 1968. iv. Small Business Investment Act of 1958 officially allowed small business investment companies (SBICs) to finance entrepreneurial ventures seeking startup capital. v. Dotcom bubble—Internet began to thrive, innovative Silicon Valley firms began to pop up. vi. ―Dotcom crash‖ on NASDAQ in 2000—startups collapsed, leaving investors to deal with huge losses. vii. After recovery from the 2008 worldwide financial crisis, some predicted another dotcom boom; high interest rates and the COVID-19 pandemic have deterred investment. viii. Heavy investment in B2B, B2C, Energy, Finance, Healthcare, IT, and Materials and Resources.

I. How Venture Capital Works i. Work within a specific investment portfolio; have a defined list of the types of businesses in which they would like to invest. ii. Take an interest in entrepreneurs who surround themselves with smart, talented, well-respected people who support their ideas. iii. Also ensure your goals for growth, control, and harvest (stage at which they will cash in their investment) are aligned with their goals. iv. Look for great teams, big markets, and unique and innovative ideas; most investors would rather have an ―A‖ Team with a ―B‖ idea, than a ―B‖ Team with an ―A‖ idea. v. Finding the Right VC for Your Venture a. Be prepared with your ideas and goals. vi. Why VCs Might Say No a. Your venture really has to stand out from the crowd; do not take it personally if your firm is turned down.

J. What About a Bank Loan? i. Debt financing: Borrowing money to start a business that is expected to be paid back with interest at a designated point in the future. ii. Banks typically don‘t give money to startups because they are too risky. iii. If they do, banks expect entrepreneurs to have: capital, collateral, capacity, credit rating.

Due Diligence A. Due diligence: A rigorous process carried out to evaluate an investment opportunity prior to a deal being finalized.

B. Angel investors/groups do not carry out as much due diligence due to time constraints, resource constraints, and lack of information.

C. The Due Diligence Process for VCs i. Investing in early-stage companies is risky; VCs need to identify any potential red flags to ensure they are making a sound investment.

ii. Entrepreneurs, teams, and the company will undergo a vigorous appraisal, which generally lasts several weeks or even months. iii. Backgrounds of the entrepreneurial team will be verified; references checked; and corporate compliance, employment and labor, intellectual property rights, and legal issues reviewed.

D. Exits/Harvesting i. VCs expect a return when the firm exits the investment within ~5-10 years. ii. Money is repaid through 1 of 3 exit strategies: a. Initial public offering (IPO): A company‘s first opportunity to sell stocks on the stock market to be purchased by members of the general public. b. Acquisitions—smaller companies are bought by bigger companies (increase their profitability and, in some cases, swallows competition). c. Buyback—gives the entrepreneur an opportunity to buy back a venture capital firm‘s stock at cost + premium (less common). iii. Getting through the due diligence process is the final step before contracts are signed and you finally receive capital. iv. Essential part of building a foundation of trust and commitment with your investor.

E. Rich or Ruler? The Trade-off Entrepreneurs Make i. Entrepreneurs who give up a bigger slice of equity to investors tend to build more valuable companies. ii. Any investment comes with a price; you need to have a very clear idea of how you want to run your business and what matters to you most. iii. By giving away equity, you may even be at risk of losing your CEO position; directors will take over much of the decision-making, including whether to keep you as CEO, move you to a different position, or even push you out. iv. Startup may not have the expertise or financial resources to market and sell a product to customers or the know-how to set up after-sales service. a. People with different skills (e.g., financial executives, accountants, lawyers, etc.) need to be hired. v. Maximizing control over wealth and vice versa can negatively impact success. vi. While the ideal would be to make tons of money and be completely in control, few entrepreneurs have managed to do both.

Lecture Notes

Chapter 14: Navigating Legal and IP Issues Learning Objectives 14-1. Discuss how legal considerations can add value to entrepreneurial ventures.

14-2. Explore the most common types of legal structures available to startups.

14-3. Define IP and how it affects entrepreneurs.

14-4. Assess the global impact of IP theft.

14-5. Explain the legal requirements of hiring employees.

Annotated Chapter Outline LXV.

LXVI.

Legal Considerations A. Startup legal costs vary, depending on the type of business you are setting up.

B. Using certain sites online is a good way to gather research and identify the type of legal counsel you might need.

C. The United States government provides resources like the United States Patent and Trademark Office (USPTO), which provides a pro bono legal program to support entrepreneurs.

D. The Small Business Administration sponsors the SCORE association: Business counselors throughout the United States and its territories, who serve as counselors, advisors, and mentors to aspiring entrepreneurs and business owners.

E. The Founders‘ Agreement i. Founders’ agreement: A clear agreement between founders on a number of key issues that their business might face. a. May not be legally binding, but provides a useful overview of how the cofounder relationships will work, how the business will be structured, and how cofounders intend to tackle problems in the future. ii. Vesting: The concept of imposing equity forfeitures on cofounders over a certain period of time on a piecemeal basis should they not stay with the company.

Types of Legal Structures A. A company‘s legal structure affects the authorities you need to notify regarding your business, tax and other contributions, records and documentation you need to maintain, and how decisions are made about the business.

B. If, after research, you are unsure which one suits your business, paying for a legal consultation can be a worthwhile investment.

C. Sole Proprietorship i. Sole proprietorship: A business owned by one person who has full exposure to its liabilities. ii. The business is completely managed and controlled by the owner, and they are entitled to all the profits. iii. However, it also means you are personally exposed to all the risks and legal responsibilities or liabilities of the business.

D. General Partnership i. General partnership: A business owned by two or more people who have made a decision to comanage and share in the profits and losses. ii. As each partner reports profits and losses on individual tax returns rather than the corporate level (pass-through taxation), taxes are also paid at your personal income tax rates (after deductions). iii. Wise to have a legal expert draft a formal agreement to lay out the terms of the partnership. iv. Each partner is still personally liable for the company‘s financial obligations. v. Crucial to have a high level of trust before entering into a partnership.

E. C Corporation i. C corporation (“C-corp”): A separate legal and taxable entity created through the state government and owned by an unlimited number of shareholders. ii. Corporation is legally liable. iii. The most money shareholders can lose is their personal investment (value of their stock). iv. Transferable ownership—can issue shares of stock to investors in exchange for capital. v. Continuous existence—will still survive after the demise of its owners, allowing it to plan for the future. vi. Corporations are not very time-consuming expensive to set up; many are owned by only one or a few stockholders who elect themselves as directors and officers. vii. In a startup, corporate profits are often paid out to the owners as additional compensation. viii. The corporate tax is calculated at a rate without adding the additional income of stockholders and their spouses, which means there is no double taxation.

F. S Corporation i. S corporation (“S-Corp”): A type of corporation that is eligible for, and elects, special taxation status. ii. Must be a U.S. domestic corporation. iii. Must have no more than 100 shareholders, who in most cases must be individual U.S. citizens or legal immigrants (not corporations, partnerships, or trusts), all of whom must own only one class of common stock (ordinary shares). iv. Income and losses are passed through to the company‘s shareholders‘ tax returns and taxed at individual rates, after deductions. v. This is attractive for corporations expecting to lose money in the short term, as losses will offset other income earned by shareholders, acting as a ―tax shelter.‖ G. Limited Liability Company

i. Limited liability company (LLC): A business structure that combines the taxation advantages of a partnership with the limited liability benefits of a corporation without being subject to the eligibility requirements of an Scorp. ii. Profits and losses are reported on individual tax returns, and there is potential tax sheltering from losses while personal assets are protected. iii. Advisable for owners (―members‖) to enter into ownership agreements, often contained within an operating agreement that serves the combined purposes of bylaws and stockholder agreements in corporations.

H. Limited Partnership and Limited Liability Partnership i. Limited partnership (LP)—pass-through tax entity with either general partners, who manage the business but have personal exposure for its liabilities, or limited partners, who are silent investors but are protected from liabilities. a. Has been largely replaced by the limited liability company. b. Does not prohibit any member from getting involved in management. ii. Limited liability partnership (LLP)—general partnership that, in exchange for registering with the state and paying an annual fee, gets a form of limited liability for its partners; the partners are still not protected from the consequences of wrongful acts committed by themselves and, in some cases, their employees. a. Generally popular only among firms of licensed professionals.

I. Benefit Corporation i. Benefit corporation (or B-corp)—certified by the nonprofit B Lab, which ensures that strict standards of social and environmental performance, accountability, and transparency are met. ii. B Lab certification ensures that the for-profit company fulfills its social mission. iii. Statutory B corporation declares in its charter one or more social benefit goals, which protects it from lawsuits from shareholders claiming that the company is spending more time or resources on social issues than on maximizing profit. iv. The difference between a B-corp and a corporation is that B-corp‘s managers are responsible for ensuring a balance between profit and social benefit goals.

J. Not-for-Profit Entities i. Not-for-profit: A tax status granted to companies performing functions deemed by Congress to be socially desirable that exempts them from income tax and, in some cases, allows them to receive tax-deductible donations. ii. All not-for-profits are exempt from income tax on their profits (―surplus‖), and some are eligible to receive tax-deductible donations.

iii. One important condition is that none of the organization‘s earnings are permitted to benefit individuals. iv. Although not-for-profits can pay reasonable compensation to employees, they cannot have shareholders; all profit must be reinvested in the business.

K. Legal Mistakes Made by Startups i. It is very common for entrepreneurs to make mistakes at the very beginning of their ventures. ii. Never let advice from people you know be a substitute for seeking professional guidance from a lawyer. iii. It is vital to choose the right business structure. Be aware that business structures vary from state to state. iv. Experienced investors generally only invest in C corporations. v. It is essential that you enter into a formal written agreement with your cofounders early on that formalizes the terms of the business.

LXVII. Intellectual Property (IP) i. Intellectual property (IP): Intangible personal property created by human intelligence, such as ideas, inventions, slogans, logos, and processes. ii. Intellectual property rights (IPR) legally protect inventions. iii. Many startups are dependent on IP protection, regardless of industry or line of business—from manufacturing to tech enterprises to restaurants, IP is essential to the survival of small businesses. iv. IP is one of the most valuable assets for startups when it comes to transforming ideas and innovations into real market value and one of the major things that investors look for in a startup. v. But it is complicated: if you start working to create IP for a venture while still employed at another or when you have just left a job, as per contracts and the law of most jurisdictions, rights to inventions that substantially relate to the employee‘s old job description belong to the company. vi. It is fundamental in the early stage of a startup that you seek legal advice from an IP attorney and review employee contracts and applicable law.

A. The Four Types of Intellectual Property i. Copyright a. Copyright: A form of protection provided to the creators of original works of literature, music, drama, choreography, art, motion pictures, sound recordings, and architecture. ii. Trademark and Service Mark a. Trademark: Any word, name, symbol, or device used in business to identify and promote a product is a trademark; its counterpart for service industries is the service mark. iii. Trade Secret a. Trade secret: Confidential information that provides companies with a competitive edge and is not in the public domain, such as

formulas, patterns, customer lists, compilations, programs, devices, methods, techniques, or processes. iv. Patent a. Patent: A grant of exclusive property rights on inventions through the U.S. and other governments.

B. Nondisclosure Agreement i. One way for a startup to protect its IP is through a nondisclosure agreement (NDA) or confidentiality agreement, which is a legal contract that outlines confidential information shared by two or more parties. ii. However, NDAs should not be used when you just have a half-baked idea with no resources; if you place an NDA in front of someone, especially an early investor, they may not sign it. iii. While you don‘t need an NDA in the early stages, when the time comes, NDAs are essential for entrepreneurs to protect against the growing threat of IP theft.

LXVIII. Global IP Theft A. Recent statistics show that global online piracy is rife in the area of digital content such as movies, music, software, games, and e-books.

B. IP theft costs the United States between $225 and $600 billion every year, and it has a huge negative impact on legitimate businesses.

C. IP rights are territorial—while your rights may be protected in the U.S., they are not necessarily protected in a different country.

D. Entrepreneurs seeking to do business abroad conduct a search to ensure their company‘s name and brand can be used in that country; then, they must register for local IP ownership within that country or extend U.S. registrations to foreign countries at the beginning of the process.

E. Do not rely on your patent for business strategy; build customer relationships, promote your trademarked brand, provide quality, and implement rapid innovation to guard against the effects of IP theft.

F. Common IP Traps i. Publicly Disclosing Your Invention a. Disclosing your new product or service in public before you have filed a patent application means in most countries you will not be permitted to patent it at all. b. One way of protecting your IP that works in the United States is to file a provisional patent application before you make your idea public. c. You will have to file a full patent application as soon as the 12 months is up; otherwise, the knowledge it holds will become publicly available. ii. Failure to Protect Product and Processes a. Some inventors and scientists protect their products by building unique markers into them; for example, a unique chemical

LXIX.

―thumbprint‖ can reveal through a simple test if someone else has copied their product. b. Another option is to license their innovation to a larger organization that has the tools already in place to protect and commercialize the invention. c. The inventor then profits through a stream of royalties. iii. Inability to Determine Originality a. Entrepreneurs often build on existing products, tools, and techniques to create their innovations. b. The outcome must be both novel and useful if it is to qualify for IP protection. c. Ensure that products and services contain enough features to significantly improve the way they are used by others, with the intention of solving a problem. iv. Failure to Assign Ownership a. It is best to make formal agreements regarding IP ownership prior to any further development, in order to decide who owns and controls the innovation, and who doesn‘t. b. Ownership can even vest in people you haven‘t paid, people you have paid but who haven‘t signed a formal assignment of ownership, or people who have otherwise made a valuable contribution to the innovation. v. Failure to Protect IP in Global Markets a. Entrepreneurs hoping to sell in different territories need to get the right legal advice and carry out due diligence before even starting their business, in order to understand how to navigate any obstacles up front. b. Otherwise, they risk running into some major difficulties along the way. c. Case in point: Apple Inc. versus Proview International Holdings, China.

Hiring Employees A. There‘s more to the hiring process than interviewing and selecting the best person for the job.

B. As an employer, you need to understand federal and state labor laws in order to protect both your business and your employees.

C. Equal Employment Opportunity i. Federal U.S. laws prohibit discriminating against employees on the basis of race, sex, creed, religion, color, national origin, or age. ii. Workers with disabilities are also protected; employers can refuse to hire on the basis of a disability if it prevents the worker from fulfilling job tasks. iii. Some states forbid discrimination on the basis of sexual orientation.

D. Employer Identification Number

i. Before hiring your first employee, get an employer identification number (EIN). ii. Used on documents and tax returns for the IRS and when reporting employee information to state agencies. iii. Regulatory requirement to register newly hired employees with your state directory within 20 days of the hire date.

E. Unemployment and Workers‘ Compensation i. Register with your state‘s labor department to pay unemployment compensation taxes, which provide temporary relief to employees who lose their jobs. ii. Depending on business size, most states will require you to register for workers‘ compensation insurance (some states make exceptions for very small businesses).

F. Withholding Taxes i. Need to withhold part of your employee‘s income and keep records of employment taxes for the most recent four years. ii. Need to report these wages and taxes every year; potential requirement to withhold state income taxes.

G. Employee Forms i. Set up personnel files containing important documents for every employee. ii. W-4 form—employer knows how much money to withhold from their paychecks for federal tax purposes. iii. Form 1-9—requires employers to verify new employees‘ eligibility to work in the U.S. iv. IRS Form 940—report federal unemployment tax, which provides payment of unemployment compensation to employees who have lost their jobs.

H. Benefits i. Decide what sorts of benefits you plan to provide your employees. ii. U.S. law requires you to pay and withhold Social Security taxes and an additional rate for Medicare and to pay for unemployment insurance. iii. Businesses with over 50 employees must also provide family and medical leave and health insurance. iv. Optional benefits are subject to many regulations; consultation with an accountant experienced in such benefits is a worthwhile investment.

I. Safety Measures i. All employers have a responsibility to their employees to maintain a safe and healthy workplace environment (e.g., training employees, ensuring the workplace is free from hazards, maintaining safety records, and reporting any serious accidents to government administrators). ii. Have provisions in place (e.g., medical treatment, rehabilitation services) to support employees who are injured on the job.

J. Payroll i. Maintaining payroll records. ii. File tax returns on time.

iii. Keep your employees informed. iv. Ensure you are up to speed with federal reporting requirements.

K. Hiring a Contractor or an Employee? i. Many startups/small businesses use independent contractors to save money: a. Do not require contributions to benefits. b. Greater flexibility in hiring and letting go of workers. c. Contractors who are experts do not require training. ii. Misclassifying contractors and employees could have costly legal consequences. iii. Most significant factor: Amount of control the employer has over the work being carried out (e.g., employees are required to show up at the same time every day and work a set period of hours with close oversight).

L. Compensating Employees i. When faced with this resource constraint, entrepreneurs come up with alternative ways to compensate employees (e.g., flexible hours, additional days off, small perks). ii. Compensation in the Form of Equity a. Issuance of shares to employees and contractors risks noncompliance with securities laws. b. Income tax is triggered when an individual receives property in exchange for performing services, not just when paid in cash. c. If the shares are subject to a vesting schedule, the problem becomes magnified as the tax may not apply until the shares have vested. iii. Unpaid Internships a. The Fair Labor Standards Act provides a minimum wage, overtime pay, and other protections to most workers; hiring an intern to work might require compliance with these requirements. b. In 2018, the U.S. Department of Labor adopted a ―primary beneficiary‖ test, allowing this practice if the benefits of the internship flow primarily to the intern and not to the employer. c. The Department of Labor has published a list of seven factors it will consider in determining the ―primary beneficiary,‖ including whether the internship is tied to the intern‘s formal education program and the extent to which the intern‘s work complements the work of paid employees.

Lecture Notes

Chapter 15: Engaging Customers Through Marketing Learning Objectives 15-1. Explain the principles of marketing and how they apply to new ventures.

15-2. Define entrepreneurial marketing and explain how it is different from traditional marketing.

15-3. Describe branding and the importance of building a brand.

15-4. Explore the most important elements of digital marketing for entrepreneurs.

15-5. Discover how influencers are becoming a core part of entrepreneurial marketing.

Annotated Chapter Outline LXX.

The Basic Principles of Marketing A. Marketing: The activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large. i. Showing how a product meets customer needs. ii. Pricing products in a way that accurately represents value perceived by customers. iii. Implementing delivery of products. iv. Maintaining a relationship with the customer even after the sale.

B. Practices seek to identify, satisfy, and retain customers.

C. As technology advances, marketers must adapt and leverage technology to deliver innovative strategies.

D. The Marketing Mix i. Marketing mix: A framework that helps define the brand and differentiate it from the competition. ii. Made of the 4 Ps: a. Product: Anything tangible or intangible (such as a service) offered by the company. b. Price: The amount that the customer is expected to pay for the product, its perceived value, and the degree to which the price can be raised or lowered depending on market demand and how competitors price rival products. c. Promotion: All the ways in which companies tell their customers about their offering. d. Place: The location where the product is actually distributed to your target market: trade fairs, retail stores, catalogs, mail order, online, and so forth. iii. Important questions that can be answered using the 4 Ps: a. What are the benefits and features of my product? b. What is the value of my offering, and what are customers willing to pay? c. How will they know my business exists?

LXXI.

d. How will the customers be reached? Where will they buy my product or service? iv. Newer marketing models extend the 4 Ps to 7 Ps: a. People: Those responsible for every aspect of sales and marketing. b. Packaging: Every single visual element of the offering is viewed through the eyes of your customer. c. Positioning: How customers think or talk about a product and a company relative to competitors.

E. Reframing the 4 Ps: The S.A.V.E. Framework i. A 5-year study conducted by Harvard Business School concluded the 4 Ps model overemphasizes product technology and quality, understates explaining the value of the product and why customers need it, and distracts businesses from promoting themselves. ii. S.A.V.E framework—Solution, Access, Value, Education: a. Solution rather than product—businesses tend to get caught up in the features and functions of their product, when all customers really want to know is how the product solves their problems. b. Access rather than place—focus is on how accessible your company is to your target customer. c. Value over price—customers are drawn to value more than to price. d. Education rather than promotion—today‘s businesses are in a good position to educate customers by providing information that they want to read that is up-to-date and relevant.

Entrepreneurial Marketing A. Entrepreneurial marketing: A set of processes adopted by entrepreneurs based on new and unconventional marketing practices to gain traction and attention in competitive markets.

B. Unique Characteristics of Entrepreneurial Marketing i. Resource Constraints a. Constraints associated with money, people, and time. b. Entrepreneurial marketing requires fewer resources than traditional marketing does. c. Word-of-mouth is now ―social media marketing.‖ d. Chasing reputation, credibility, and buzz. ii. Speed and Experimentation a. Entrepreneurs make rapid decisions, experiment with different marketing tactics, and iterate how they promote, price, and place products and services based on feedback and real-time data. b. Low-cost experimentation works well. iii. Integrated Marketing Communications

a. Integrated marketing communications: The practice of producing consistent messaging across channels to produce a unified brand experience for customers. iv. Brand Building a. Entrepreneurs focus on developing a compelling value proposition, building brand loyalty, and establishing a distinct, resonant image. v. Growth and Scale a. A startup has to grow to survive; all marketing tactics must be designed to increase market share in order to scale the business.

C. Guerrilla Marketing i. Guerrilla marketing: A low-budget strategy that focuses on personally interacting with a target group by promoting products and services through surprise or other unconventional means. ii. Examples of guerrilla marketing strategies: a. Pop-up shop. b. Free samples. c. Sticker marketing. d. Location filters. e. Selected marketers. f. Pop-up truck. g. Workshops. h. Floating projections. i. Experiential (engagement) marketing. iii. Limitations: a. Need to have a good understanding of your target market and where the high traffic exists. b. Need to get the timing right. c. Success can be difficult to measure. d. Need to have a good sense of the community and any legal, social, or moral restrictions that may cause a negative reaction.

LXXII. Building a Brand A. Branding: The process of creating a name, term, design, symbol, or any other feature that identifies a product or service and differentiates it from others.

B. Logo—face of your brand; should be integrated into your website, packaging, and promotional materials.

C. People are more likely to invest in brands that they have an emotional connection to, are trustworthy, are worth spending money on, are fashionable, and are adept at meeting their needs.

D. Brand strategy: A long-term plan to develop a successful brand; it involves how you plan to communicate your brand messages to your target customers.

E. Start defining the brand you would like for your company by answering: i. What is the primary goal of your company? ii. What are the best features and benefits of your products or services?

iii. What are your customers and prospective clients already saying about you and your company? iv. What sorts of qualities do you want them to associate with your company?

F. How to Build a Brand i. Choose a Name a. A successful brand all starts with a name. ii. Design a Logo a. Your logo is the gateway to your overall brand image. iii. Spread the Word a. Get your brand out into the world (e.g., on social media). iv. Know Your Customer a. Knowing what your customer wants is key to building a successful brand. v. Become your Brand a. Incorporate your brand into every aspect of your business. vi. Write a Tagline a. While it can be difficult to capture the essence of brand in one statement, a tagline is important for communicating your brand message. vii. Always Deliver on Your Brand Promise a. Customers are more likely to buy into your brand if it consistently meets and exceeds their expectations. viii. Be Consistent with Your Brand a. While it is possible to tweak a logo or a tagline, make sure you always retain the brand voice and deliver on your brand promise.

G. Evolving a Brand Through Trends i. Virtual & Augmented Reality a. Integrating VR into marketing strategies is becoming more popular. b. Metaverse: A shared virtual environment accessed by the internet where users can interact with each other. ii. Artificial Intelligence (AI) a. AI can analyze vast amounts of data and identify patterns humans might miss (e.g., customer behavior), allowing entrepreneurs to optimize marketing strategies. iii. Social Responsibility a. Social responsibility marketing: A marketing approach designed to attract customers to support a cause or want to make a positive difference in their purchasing decisions. b. Recent survey found 55% of people were more likely to buy from companies whose values and sustainable/ethical practices matched their own. iv. User-Generated Content

a. User-generated content (UGC): Brand-specific content created by customers and posted on social media in the form of images, videos, reviews, blog posts, images, or podcasts. b. People are twice as likely to perceive UGC content as more authentic. v. Influencer Marketing a. Many brands are seeking the help of influencers on TikTok, Instagram, Facebook, Snapchat, Twitter, YouTube, and Pinterest.

LXXIII. Digital Marketing A. Digital marketing: The use of digital or social channels (e.g., the internet, social media, search engines, mobile devices, and anything else digital) to promote a brand or reach customers.

B. Key to reaching a wider audience and growing a business.

C. Social Media Marketing i. Social media is a valuable way of following market trends, finding new employees, and building and maintaining relationships with customers. ii. Sites like Twitter, LinkedIn, Facebook, Instagram, YouTube, and TikTok all provide ways to connect with experts in the field, or fellow entrepreneurs: anyone who can help you develop, build, and grow your venture. iii. Getting the Most From Social Media a. Start With Research 1. Take a look at how your competitors use social media. b. Think About Your Goals 1. Many companies use social media to provide efficient customer service. c. Design Your Strategy 1. Think about ways in which you can measure your online presence. d. Post Regular Updates 1. Once you have launched your social media campaign, make sure you post regular updates. e. Monitor Your Social Media 1. Be vigilant about monitoring your social media—; every day, check for new followers, any feedback, questions, or complaints.

D. Content Marketing i. Involves creating and sharing valuable, informative, and entertaining content to attract and engage a target audience (e.g., blog posts, infographics, videos, whitepapers, e-books, etc.). ii. Goal: build brand awareness, establish thought leadership, and generate leads. iii. To be effective, entrepreneurs should: a. Conduct extensive research to understand needs, interests, and pain points.

b. Create a content strategy that aligns with business goals. iv. Marketers must also be educators—ready to provide easy-to-understand, engaging content that appeals to the target audience. v. Creating content is not about advertising or self-promotion; instead, it aims to educate, inspire, and entertain people enough that they grow to trust you/your brand. vi. If you can create content that is meaningful to your audience, they will share it through their own social networks. vii. Publishing content regularly is essential if you want to maintain a loyal following.

E. Email Marketing i. Involves sending marketing messages and promotional content to a list of subscribers via email. ii. Allows entrepreneurs to reach customers and prospects directly and promote their products/services. iii. To be effective, entrepreneurs should: a. Build a high-quality email list of subscribers. b. Create engaging email content that resonates and drives action. c. Segment their email list and personalize their messages. d. Track email marketing campaigns closely and analyze the results.

F. Company Website i. Websites with crisp, clean designs with a clear description of your product or service that flow well in relation to each other, are the most successful. ii. Particularly important for your website to be quick and easy to navigate on both a large computer screen and a mobile device. iii. Simply building a website will not encourage visitors to flock to your site; attracting an audience takes time and patience. iv. Search Engine Optimization a. Search engine optimization (SEO)—process of optimizing a website to rank higher in search engine results pages (SERPs). b. Goal: increase the visibility of a website in organic search results, driving more traffic to the website. c. Tactics include: 1. Keyword research—identify keywords/phrases people use to search for products/services in a particular industry.

2. On-page optimization—optimize the content on a website to make it more relevant to keywords/phrases.

3. Link building—acquire high-quality links from other websites, which can improve a website's authority/visibility in search engine results. d. AI can be incorporated by: 1. Analyzing search engine algorithms and identifying highperforming keywords to help optimize websites/content for maximum visibility.

2. Automating repetitive tasks (e.g., keyword research, content creation, social media management).

G. Pay-Per-Click Advertising i. Pay-per-click (PPC) advertising—digital advertising that involves paying for each click on an ad. ii. Can be highly effective for entrepreneurs looking to drive targeted traffic to their websites and generate leads. iii. To be effective, entrepreneurs should: a. Conduct extensive keyword research. b. Create highly relevant ad copy. c. Monitor campaigns closely and adjust bids/targeting as necessary.

H. Measuring Results i. Establish purpose. ii. Choose the right metrics. a. Website traffic. b. Conversion rate. c. Leads. d. Sales. iii. Use analytics tools. iv. Analyze your results. v. Make adjustments as you go. vi. Repeat the process.

LXXIV. Influencer Marketing A. Influencer marketing: A type of social media marketing where brands collaborate with influencers to promote products or services.

B. +70% of Gen Z and Millennials follow influencers; 50% trust product recommendations.

C. Types of Influencers i. Mega- or Celebrity Influencers a. Have the most followers (usually +1 million) and are often already celebrities. b. Partnering can be costly. ii. Macro-influencers a. Have 100,000 to 1 million followers. b. Less costly but still expensive. iii. Micro-influencers a. Have 1,000 to 100,000 followers. b. More affordable and can be more effective. c. Have a 60% higher engagement rate; can drive 20% more conversions for a brand. iv. Nano-influencers a. Most affordable. b. ~40% of brands preferred to collaborate with nano-influencers in 2023.

c. Evidence of influencer pay disparities between genders and ethnicities.

D. Influencer Marketing Strategy i. Define Goals a. Influences results. b. Most common reasons for using influencer marketing: 1. Boost brand awareness.

2. Increase sales. c. Be specific in defining end goal strategy. ii. Set a Budget a. Determines the extent of your campaign. b. Plan for agency fees on top of influencer fees. iii. Choose a Type of Campaign a. Tailor the campaign to the audience you want to attract (e.g., guest posting, sponsored content, unboxing, giveaways, competition, and takeovers). iv. Find the Right Brand Influencers a. Should understand your brand/what you want to achieve, have the ability to share the message in a way that connects with the audience you are trying to attract, and be familiar with the content you‘re promoting. v. Promote Your Campaign a. Can include posting on your social media platforms or writing a blog to generate buzz. vi. Track the Success of the Campaign a. Using metrics to monitor website traffic and degree of engagement, conversions, and impressions will give you a sense of the extent of the potential audience the influencer was able to reach. b. Check data regularly to assess what has worked and if there is anything you need to tweak. c. Compare the success of your influencer content with noninfluencer content through platforms like Meltwater Influencer Marketing Suite.

E. Building a Fan Base i. One main goal: Attract enough people to your company to make what you are doing financially worthwhile. ii. True fans: People who will buy anything you produce; they will wait in line for your products, drive for hours to attend one of your events, and preorder your next product without even knowing what it looks like. iii. Kevin Kelly argues building a lasting, sustainable business is based on 1,000 true fans; requires patience, consistency, and a keen focus on building long-term relationships.

iv. Long tail theory—an idea that focus is shifting from mainstream products/services offered by big brands toward a wide variety of smaller niche markets. v. Internet provides small businesses with a chance to take some market share away from megabrands.

Lecture Notes Chapter 16: Pitching to Launch Learning Objectives 16-1. Examine ―planning‖ from an entrepreneurial perspective.

16-2. Explore the 4 most common planning activities of startups.

16-3. Review the essential questions that any planning document must answer.

16-4. Describe the different types of pitches entrepreneurs should create.

16-5. Show examples of the content in an extensive pitch deck.

16-6. Acquire tips for delivering effective pitches.

Annotated Chapter Outline LXXV. Planning for Pitching A. Planning: The future you envision for your business, including what you plan to do and how you plan to do it.

B. Pitch: The act of clearly presenting and describing a product or service to others that includes a call to action.

LXXVI. The Most Common Planning Activities for Entrepreneurs A. Proponents of writing a business plan: i. Helps you gain clarity. ii. Keeps you organized. iii. Establishes the core message. iv. Creates alignment among team members. v. Helps establish legitimacy.

B. Business plans can be useful when you have partners/team members on board.

C. Although a business plan was considered the #1 tool for startups, the standard today is to have a pitch deck that articulates the launch plan.

D. Those against writing a business plan: i. Old as soon as it comes off the printer. ii. Based on untested assumptions. iii. Financial projections are too far out to have validity. iv. Actual writing and compiling discourages action and gathering real data.

E. Formal business plan is most appropriate after you are earning revenue and soliciting serious investment/bank loans.

F. The Business Brief i. Business brief: Typically, a two- to three-page document outlining the company overview, value proposition, customer, and milestones. ii. Something you can easily send to stakeholders that will give them an at-aglance understanding of who you are, the business, and its potential. iii. Not too time intensive. iv. Indicates you‘re doing your homework and thinking critically about the business.

G. Feasibility Study i. Feasibility study: An internal tool that allows entrepreneurs to test the possibilities of an initial idea to see if it is worth pursuing. ii. Focuses on the size of the market, suppliers, distributors, and skills of the entrepreneur. iii. Helps you identify the essentials to make the business work: any problems or obstacles, the customers, marketing strategies, the logistics of delivering your product or service, your competition, and the resources you need to start your business and keep it running until it is established. iv. From the entrepreneurs‘ perspective, it is useful to assess whether they have the time, energy, abilities, and resources to get their venture off the ground. v. Key is speed. vi. To produce a feasibility study, there must be action, testing, information gathering, and analysis.

H. The Pitch Deck i. Brief presentation highlighting many of the essential elements found in a feasibility study and a business plan; some call this the launch plan. ii. Replaced the formal business plan in most venues. iii. Needed for collegiate competitions, applications to accelerators and incubators, and for angel and venture capital funding.

I. The Business Plan i. Business plan: The most formal of the planning tools, typically a lengthy written document discussing the business concept, product mix, marketing plan, operations plan, development plan, and financial forecast. ii. Traditional business plan usually consists of 20 to 40 pages, plus additional pages for appendices and financial statements. iii. Also includes the organization‘s mission, strategy, tactics, goals, financials, and objectives, together with a 5-year forecast for income, profits, and cash flow; this information is divided into three main parts. iv. Business plans come after idea generation, business model canvas, feasibility study, and pitch deck. v. You will be able to prove that your product works, a real market exists, and your financials are not based just on guesswork.

LXXVII. The Questions That Any Type of Planning Document Must Answer

A. Regardless of type of plan, you must ask some questions; not all plans require lengthy, complex answers, but it is important to ask the right questions before you put your plan into action.

B. What is Your Business and How Does it Add Value? i. A useful way to gain clarity on the type of business you are setting up, and the value it brings to your customer base, is to write a concept statement, which is a written representation of your vision for your product or service. ii. The statement should include all the features of your product or service, potential problems that it solves, and the target market.

C. Who Is Your Customer? i. Write down who your target customers are (end users, distributors, retailers), their defining characteristics and why they will buy your product or service. ii. Remember to include all this information in the plan you are writing as it will help you gain clarity on the right customer segments for your business.

D. How Big Is the Market? i. Once you have a clear idea of your target customers, you will be able to conduct market sizing analyses to establish the size of your market and the share of the market you intend to capture.

E. How Will You Enter the Market? i. Write down your strategy for entering the market; it involves describing the needs your product or service fulfils for your customer, the problems you are solving for them, and any evidence you have to show that your potential customers will want to buy your offering.

F. What Do You Know About the Industry? i. The more knowledge you have about your industry, the more likely you will be able to find ways to differentiate your own ideas. ii. Write down any research you have carried out that supports your ideas and make sure it is correct and up to date.

G. Who is Your Competition? How Are You Unique? i. Preparing a competitive analysis is the best way to find out more about your competition and establish the reasons why your business is better. ii. The ―What do you know about your Competition‖ Mindshift provides a competitive analysis template which allows you to compare your venture with other competitors.

H. Who Is on Your Team and What Do They Bring to the Table? i. Note down the different members of your team, their key duties and responsibilities, and the unique skills they bring to the venture. ii. If you are planning to add people to your team, write those down too, and add any details of when they will start work.

I. What Are Your Financial Projections? i. Include in your plan a concise forecast of your future revenues and expenses.

ii. This is a good exercise for taking stock of where your company is right now, the targets and milestones you hope to achieve, and any obstacles that you may need to overcome.

LXXVIII. Pitches Take Many Forms A. Two outcomes across all forms: i. Receiver of the pitch understands your business. ii. Receiver is compelled to learn more.

B. Three questions to think about as you begin to prepare your various pitches: i. What do you want the receiver of the pitch to know? ii. What do you want the receiver of the pitch to feel? iii. What do you want the receiver of the pitch to do?

C. Regardless of audience, you must articulate your idea clearly and tell a compelling story.

D. Most stories are based on a three-part narrative arc: i. Introduction—presents the characters and ideas. ii. Climax—outlines the problem and how your solution can overcome issues. iii. Resolution—explains how you expect things to work out.

E. A story will be successful only if it is authentic and is told with genuine enthusiasm and energy.

F. The longer the pitch, the more important it is to tell a good story.

G. The key to telling a good story is to tell the right story to the right audience; do your research.

H. Pocket Pitches i. Extremely short (few seconds); helps you convey what separates your business from others. ii. ―Pocket‖ denotes something small and simple that is easily accessible.

I. The 1-Minute Elevator Pitch i. First elevator pitch: Elisha Otis Elevator Company (1853). ii. Start with developing 1 sentence similar to the concept statement. For example: a. FlowDog is an aquatic and rehabilitation center for dogs that suffer from physical injuries. b. VentureBlocks sells computer-based simulations to educators in order to help teach students how to interview potential customers. iii. Might want to add content related to: a. The problem you are solving. b. Where you are in the startup process. c. What you want from the person you are talking to.

J. The 3-Minute Rocket Pitch i. Babson College: students and alumni can pitch their business in 3 minutes with only 3 slides. ii.

K. The Investor Pitch (a.k.a The Pitch Deck) i. Longest of all pitches.

ii. Robust deck of slides that describes in detail the: a. Nature of the business. b. Need/problem it solves. c. Industry characteristics. d. Customer. e. Market size. f. Business model. g. Profit potential. h. Details of financials and capital needs. i. Operations. j. Milestones reached. k. Team. l. Call to action. iii. Any stakeholder who has a vested interest could be an audience. iv. Regardless of slide count/style, all pitch decks must answer the same questions: a. What is the problem/need? b. How will you solve the problem or meet the need in a unique way? c. Who is the customer, and are there enough customers to build a viable venture? d. What is the size/extent of the market for this product/service idea now and in the future? e. How will you reach, acquire, and keep the customer? f. Whom will you compete with, and how are you different? g. What is the revenue/expense model? h. What capabilities does your team have to execute the venture? i. What have you done so far? j. What is your call to action? v. Generally should not exceed 20 minutes. vi. Anticipate questions in advance and create backup slides with answers.

LXXIX. The Pitch Deck A. Slide 1: Title i. Include: a. Name of the company. b. Logo. c. Your name. d. Contact information. ii. Pay attention to slide design. iii. Consider putting your name and company on every slide.

B. Slide 2: Company Purpose/Description i. Revisit the 1-sentence beginning of the elevator pitch. ii. Can also include a comparison for a widely known brand.

C. Slide 3: The Problem/Need

i. Describe the problem your company solves/how you address a customer need. ii. Describe how the problem is currently being solved by other companies; point out any inefficiencies/why existing solutions are insufficient. iii. Must prove to your audience that the problem is big/the need is great.

D. Slide 4: The Solution i. Value proposition—if you can solve the customer‘s problem in a unique way, you are already creating value. ii. If possible, offer a live demonstration. iii. If the product/service is not yet fully developed, show a prototype/picture of a prototype. iv. If the solution is web-based, a mockup landing page is a must. v. Use case: A methodology used in the software industry to illustrate how a user will interact with a specific piece of software.

E. Slide 5: Market Opportunity i. Must convince your audience that the time is now for your product/service. ii. Point out trends/changes that prove that your company is timely. iii. Think about the three subgroups of the market: a. TAM (total available market): The total market demand for a product or service. b. SAM (serviceable available market): The section of the TAM that your product or service intends to target. c. SOM (share of market): The portion of SAM that your company is realistically likely to reach.

F. Slide 6: Getting Customers a. Must demonstrate who your customers are and how you will reach them. b. Show you understand what kind of people you will be targeting and how you will reach them. c. Number of customers × price × frequency of purchase = market size $.

G. Slide 7: Competitor Analysis and Differentiation i. Shows how your company differentiates itself from others providing similar solutions. ii. Key is to show how you are doing something better/different/more compelling. iii. A strong analysis will show the audience your competitive advantage; why or how you will outperform others. iv. Competitive grid analysis compares your company to significant competitors and details their strengths and weaknesses relative to your own business. v. Positioning matrix illustrates how you intend to position your business relative to competition.

vi. Competitive matrix positions your company relative to the competition on selected variables (e.g., price, quality, etc.). vii. Do your homework on the competition; one of the worst mistakes is claiming you have no competition.

H. Slide 8: Traction i. Traction—all the work you‘ve done to date to build your venture. ii. Your audience, especially investors, want to see the actions you have taken to construct your venture and the milestones you have achieved. a. Early customer adoption and showing you have revenue. b. Completion of customer research. c. Working website. d. Working prototype or minimum viable product. e. Submission of patent application. f. Formation of team. g. Product testing. h. Contracting of suppliers. i. Creation of first batch of product. j. Successful crowdfunding campaign (where relevant). k. Securing of space (in the case of retail). l. Securing of investment or loans. iii. Traction includes recognition and press. iv. Can also include future milestones (e.g., expansion, number of customers you intend to reach, hiring more staff).

I. Slide 9: Financials i. Must demonstrate that you have a clear understanding of potential profit/loss. ii. Highlight key drivers of revenue and expenses, but keep it at the highest levels for now. iii. Show at least 3 years of revenue projections with best, worst and likely case scenarios to show investors you are trying to be realistic about projections.

J. Slide 10: Team i. If the team is strong, it‘s more likely that the team will be able to pivot as necessary to give the business the best possible chance for success. ii. Include a list of all team members; provide photos, their experience and education, and their role in the company. iii. If you have an advisory board, include those names; if you have an amazing team, consider moving this slide to the beginning of your presentation.

K. Slide 11: Call to Action iv. It doesn‘t matter who you are pitching to: a venture capitalist, an angel investor, the audience, your professor, etc., you must always have a call to action. v. If you are presenting to an investor, you are probably asking for money and you need to say how you plan to use the money.

vi. If you are pitching to classmates, you might be asking for feedback. vii. If you are pitching to a professor, you are asking them to act as an advisor. viii. If you need team members, ask, but be specific in skillsets you are looking for.

LXXX. Pitching A. The Hook to Evoke Emotion i. Hook: The opening tactic used in a presentation that immediately captures your audience‘s attention and imagination so they will be motivated to listen to whatever you have to say. ii. Creates an emotional response; what is pitched needs to evoke emotion as well.

B. Impressions Matter i. From the beginning, investors will invest in you first and foremost and not just in your idea. ii. Spend time figuring out how you‘re going to market yourself before you pitch anything. iii. Research has indicated a 10-second first impression can be almost as powerful as ongoing, long impressions. iv. Focus on nonverbal factors that could get in the way of conveying a positive first impression (e.g., slouching, avoiding eye contact, frowning, relying on technical jargon, reading slides, speaking too fast/slowly, untidy physical appearance, and gesturing too). v. Research has shown 93% of our communication is nonverbal: a. 55% of the message is conveyed through facial expression. b. 38% of the message is conveyed through tone of voice. c. 7% of the message is conveyed through words. vi. Adjust elements for people who learn information in different ways (e.g., visual, auditory or kinesthetic learners).

C. The Q&A Period i. Team Questions a. Why is the team capable of executing what you have proposed today? b. How do you divide up responsibilities among the team members? c. What is the equity split among team members? d. How are decisions made among the team members? e. Who is the boss? f. Who came up with the original idea? g. Who else do you need to add to your team in the short term? h. What obstacles have you faced, and how did you overcome them? i. Are you open to changing your idea? ii. Product/Customer Questions a. What makes customers try your product/service? b. What is the technology behind your product? c. How does your product work in more detail?

d. What are the risks? e. What is the next step in your product evolution? f. Where do most of your customers come from today? g. How many customers do you have today? h. Who is going to be your first paying customer? i. How are you understanding customer needs? j. How do you really know people want this? iii. Competition Questions a. Which competitor do you fear the most? b. Are the barriers to entry high or low? In other words, is it easy for competitors to enter the same market? c. How much money have your competitors made? d. Why do you think you are unique among your competitors? e. Can the competition do what you are doing if they want to? f. Why hasn‘t this already been done? iv. Financial Questions a. How did you calculate your market size? b. What are the assumptions behind your revenue projections? c. Are your numbers comparable to those of your competitors? d. What happens if you don‘t achieve your projected revenue? e. If I invest, what exactly are you going to do with the cash and what impact will it have on your business? f. What is the typical cycle between making initial customer contact and closing the sale? g. How much does it cost to acquire one customer? v. Growth Questions a. If your startup succeeds, what additional areas might you be able to expand into? b. Are there other applications for your product/service/technology? c. How are you defining success? d. How big do you want to grow? e. What is a likely exit strategy for this business? f. What competition do you fear most? g. Where do your growth projections come from?

D. Public Speaking Tips i. Practice but don‘t memorize. ii. Pay attention to time restrictions. iii. Don‘t hold anything in your hands. iv. Don‘t read slides. v. Dress the part. vi. Drink water. vii. Eye contact cannot be faked. viii. Learn to improvise. ix. Move but don‘t pace.

x. xi. xii. xiii.

Practice crisp articulation.

Vary your voice to avoid the monotone trap.

Choreograph your rhythm.

Embrace your nervousness.

Lecture Notes Supplement A: Financial Statements and Projections for Startups Learning Objectives A-1. Demonstrate how financial statements are an essential part of financial projections.

A-2. Describe the journey of cash through the cash conversion cycle.

A-3. Discuss how to build a pro forma financial statement.

A-4. Explain how to apply assumptions when building pro forma statements.

Annotated Chapter Outline LXXXI. Three Essential Financial Statements A. Financial statements provide a window into the financial health/performance of a company.

B. Income statement (profit and loss statement): A report that measures the financial performance of your business on a monthly or annual basis.

C. Balance sheet: A financial report that shows what the company owes, and what it owns, including the shareholders‘ stake, at a particular point in time.

D. Cash flow statement: A financial report that details the inflows and outflows of cash for a company over a set period of time.

E. The Income Statement i. Subtracts COGS (cost of goods sold) and expenses (administrative, marketing, research, and other operating expenses) from total revenue for a net income figure, which will be either a profit or a loss. ii. Backlog: Orders that have been received but not delivered to the customer. iii. Operating expenses—expenditures that the company spends to generate income, including sales, general, and administrative (SG&A); research and development (R&D); and marketing expenses. iv. Also reflects the depreciation and amortization of your company‘s assets. a. Depreciation—cost of wear and tear of physical assets. b. Amortization relates to intangible assets such as patents etc. v. Depreciation is referred to as a ―noncash‖ expense usually ignored when calculating free cash flow or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

vi. From a short-term perspective, depreciation is a noncash charge to earnings, but in the long term, someone has to write a check for replacement. vii. The second most important profit margin to monitor is operating profit, which is the amount left over from revenue once all costs and expenses are subtracted. viii. Another component of EBITDA is interest expense, which shows the extent of the company‘s debt burden as well as representing any interest owed on borrowed money. ix. The third profit margin item is net income, which indicates what is left after all costs, expenses, and taxes have been paid. x. For an accurate picture of financial health, the balance sheet and cash flow statements need to be analyzed.

F. The Balance Sheet i. Shows at a particular point in time of what the company has today (assets), how much it owes (liabilities), and what it is currently worth (shareholder equity). ii. Current assets: Cash and other assets such as inventory, accounts receivable, and prepaid expenses that can be converted into cash within a year. iii. Accounts receivable: Money owed to the company for goods or services provided and billed to a customer. iv. Prepaid expenses: Payments the company has already made for services not yet received. v. Fixed assets might also appear on the balance sheet as property, plant, and equipment (PP&E). vi. Other Types of Assets a. Goodwill: The price paid for an asset. b. Intangible assets: The value of patents, software programs, copyrights, trademarks, franchises, brand names, or assets that cannot be physically touched. c. Long-term investments: Assets that are more than one year old and are carried on the balance sheet at cost or book value with no appreciation. vii. Liabilities and Shareholder Equity a. Liabilities: Economic obligations of the company (e.g., money it owes to lenders, suppliers, and employees). b. Current liabilities: Bills that must be paid within one year of the date of the balance sheet. c. Accounts payable: Money owed by a business to its suppliers. d. Accrued expenses: Costs incurred by the company for which no payment has been made (e.g., wages, taxes). e. Short-term debt: The portion of long-term debt that must be paid within a year (e.g., bank loans).

f.

Other current liabilities: Short-term liabilities that do not fall into a specific category (e.g., sales and income tax). g. Long-term debt: An obligation for debt that is due to be repaid in more than 12 months. (e.g., bank loans, finance). h. Shareholder equity: The money that has been invested in the business plus the cumulative net profits and losses the company has generated; subtracting what the company owns (total assets) from what it owes (total liabilities) provides shareholders‘ equity.

1. Retained earnings: The cumulative amount of profit retained by the company and not paid out in the form of dividends to owners.

2. Capital stock: The original amount the owners paid into the company plus any additional paid-in capital to purchase stock in the company.

3. Increases when a profit is made (increase in retained earnings) or new stock is sold to increase the capital stock.

4. If the company has a loss, which lowers retained earnings, or pays a dividend, which also lowers retained earnings, these actions will result in a decrease in shareholder equity.

G. The Cash Flow Statement i. Tracks the movement of cash into (cash inflows) and out of (cash outflows) the company over a period of time. ii. Cash inflows include loans, sales, interest, and shares; cash outflows include payments to suppliers, wages and salaries, and dividends to shareholders. iii. Two basic parts: a. Cash generated from operations/profit-making activities. b. Cash generated from investment and financing activities. iv. Net Income Versus Cash Flow a. Net income is determined by accounting principles and includes accruals and noncash items such as depreciation and amortization. b. Cash flow, in contrast, deals only with actual cash transactions.

H. Linkages Between the Three Financial Statements i. A company‘s pricing/credit policies will have a direct impact on revenue, an income statement item, and accounts receivable, a balance sheet item. ii. Each financial statement provides a different view of the company, but each statement is also related to the other. iii. When a sale is made and the product/service is accepted by the customer, revenue on the income statement increases.

iv. When the customer pays, accounts receivable decreases and this amount becomes a cash inflow; when a sale is made, the value of the product is moved from inventory (balance sheet item) to cost of goods (income statement item). v. Understanding how cash flows through a company helps us understand how policies related to credit, inventory, and payables can affect the time it takes for the cash to be converted into products and come back to the company at a profit.

LXXXII. The Journey of Cash: The Cash Conversion Cycle A. Cash is used to purchase materials, which are then made into products, payments to material suppliers are on the balance sheet in accounts payable.

B. Products are stored on the balance sheet in inventory and are sold.

C. Company collects cash for the selling price, which appears on the balance sheet in accounts receivable; this cash has now returned to the company hopefully at a profit.

D. Cash conversion cycle (CCC): The number of days a company‘s cash is tied up in the production and sales process.

E. Journey for cash is long, from the point of leaving the company to the point of return: i. Days sales outstanding (DSO): A measure of the number of days that it takes to collect on accounts receivable. ii. Days of inventory (DOI): A measure of the average number of days it takes to sell the entire inventory of a company. iii. Days payable outstanding (DPO): A measure of the number of days it takes you to pay your bills.

F. To calculate CCC, you need to include several items from the financial statements: i. Income statement (Beginning and ending inventory). ii. Revenue and COGS (Beginning and ending accounts receivable). iii. Balance sheet (Beginning and ending accounts payable). iv. Increase in sales usually results in an increase in working capital necessary to support higher sales, so, you must be able to fund the growth of the company.

LXXXIII. Building Pro Forma Financial Statements A. When entrepreneurs are assessing the long-term viability of a business, it‘s important to make projections and develop pro forma financial statements.

B. Pro forma financial statements give an idea of how the actual statement will look if the underlying assumptions hold true.

C. Includes 3+ scenarios of financial forecast—each with an income statement, the balance sheet, and cash flow statement.

D. Scenarios must manipulate revenue and cost drivers to see where there is leverage to deal with what may go right or wrong with the business.

E. Must be strategically compelling and operationally achievable, and they must convey both confidence and realism to investors.

F. The Mechanics and Research i. Entrepreneurs often begin with an existing model and then try and tweak elements to ―make the numbers work.‖ ii. Better to research various business model elements that drive revenue and costs, which requires both primary and secondary research.

G. Research i. Much of your research should focus on customers, market size, and growth potential. ii. Segment your market in greater detail to better understand the various subgroupings and their respective buying habits and behaviors (needs, expectations, price sensitivity, frequency of purchase, etc.) iii. Primary research: Data gathered by yourself through sources such as focus groups, interviews, and surveys. iv. Secondary research: Data gathered from external sources: industry publications, company websites, government agencies, and the like.

H. Building Assumptions: Forecasting Sales i. Bottom up (or build-up) method: A technique that involves first estimating revenue and costs from the smallest unit of sales and building up from there. ii. You can estimate revenue for a typical day, and then extrapolate what that revenue might be for a typical month and year (e.g., sales from a pizzeria). iii. Helps you understand the levers that might be used to generate more revenue (e.g., whether spending more on advertising and promotions brings more people to the store).

I. Building Assumptions: Cost of Goods and Operating Expenses i. First cost item on the income statement: Cost of Goods Sold (COGS). ii. Businesses also incur operating expenses (e.g., salaries, rent, advertising, marketing, and possibly research and development), which can also be validated through primary and secondary research. iii. Buildup method is employed to round the numbers up to the monthly or yearly costs. iv. Operating profit is not net profit (profit after interest, depreciation, and taxes have been paid).

J. Labor Estimates i. More complex business that involves research and development and a greater number of employees would require a detailed approach to structuring new hires (people can account for 75–85% of operating costs). ii. Schedule of new hires must be carefully thought out and matched to product development and sales requirements and milestones. iii. Plan for each department should consider: time and cost involved in screening, hiring, and onboarding new employees. iv. Capital expenses will not appear as a: line item on an income statement, asset on a balance sheet, and outflow on a cash flow statement.

v. What will appear on your income statement is depreciation, which reflects the annual decrease in value of these assets over their useful lives.

LXXXIV. Building Assumptions: Operating Policies and Other Key Assumptions A. Operating policies can greatly affect the speed at which cash makes its journey back to the company.

B. In constructing pro forma financial statements, these policies need to be carefully considered and enforced by the company.

C. Some of the more critical policies include: i. Purchasing policy. ii. Pricing policy. iii. Compensation policy. iv. Credit policy. v. Payables policy. vi. Inventory policy.

D. Other critical assumptions can affect the timing of cash flows (e.g., when to expect the first sale, how long it will take for the business to ramp up to full capacity).

E. Be sure to take into account the time and training it may take before new hires hit their stride and begin achieving the established sales quota.

F. Assumptions must also be considered for local, state, and federal taxes; interest; and inflation.

G. Building Integrated Pro Forma Financial Statements i. Using the validated assumptions from the revenue worksheet, build out a monthly pro forma income statement, balance sheet, and cash flow statement for a minimum of 2 years, followed by years 3 through 5 on an annual basis. ii. Ensure you understand how changes on one statement can affect other statements. iii. Understanding these linkages and especially how cash makes its journey through the business can mean the difference between success and failure. iv. Essential to know the amount of funding you will need until your business is producing enough cash to survive without constant external funding.

H. Sensitivity Analysis i. Address critical assumptions related to the revenue and cost drivers to test what your business might look like in different scenarios relating to customer traffic and seasonality, or cost of raw materials. ii. During this analysis, a minimum of 3 scenarios is recommended: best case, worst case, and likely case. iii. Understanding what can go right or wrong, and what you would do to mitigate any controllable circumstances is the greatest benefit to building pro forma financial statements.

I. Reasonableness Test

i. Using comparable data gathered during your research, compare your statements to those of similar businesses. ii. Unless you have an entirely new business model, your numbers should be similar to businesses of similar size and scope. iii. Includes accounting for seasonal changes in demand, the rate of sales growth, growing expenses in lockstep with sales, etc. iv. Consider all of the questions that a potential investor may have; be prepared to answer using data from your research and comparable analysis; if numbers do not pass the reasonableness test, revisit your assumptions until you can defend the model.