Exam 1

Lecture 1: Prototyping

• Importance of Prototyping

  • Essential tool for developing new ventures from idea stage to viable business.

  • 50-90% of new ventures fail, highlighting the need for effective prototyping.

• What is Prototyping?

  • The process of quickly assembling working models (prototypes) to represent ideas, test design aspects, and gather early customer feedback.

• Purpose of Prototyping

  • The core aim is to elicit responses from target customers or users.

• Types of Prototypes

  • Low-Fidelity vs High-Fidelity Prototypes

    • Low-Fidelity: Express the rough product concept, either in two-
      dimensional or three-dimensional form, often in
      basic materials (e.g., paper)

    • High-Fidelity: Designed to look like a final completed product
      concept, representing detailed assumptions about
      the product or service

  • Looks-like and Works-like Prototypes

    • Looks-like: Appears similar or identical to a final product but does not function as the final product is expected; useful to test
      assumption regarding product design and appearance

    • Works-like: Operates like the final intended product design;
      demonstrating product functionality or usability, but often
      does not appear at all like the end product

  • Specific Types

    • Paper: Simple sketches or layouts on paper. can help and entrepreneur consider different design configurations and tradeoffs

    • 3D: Physical models made from various materials. working independently with support of a 3D designer looks like and even works like prototype.

    • Crowdfunding: Prototypes developed for fundraising platforms AKA Backers they financially support new product. need to develop a looks like prototypes to convey not only their creative vision but also to signal their professionalism.

• Co-creation

  • Involves customers in the prototyping/product development process for feedback and collaboration.

• Minimum Viable Product (MVP)

  • A version of the product with essential features to motivate customer purchases.

  • Rapidly screens out or reconfigures product concepts; a market testing strategy for evaluating product ideas early.

Lecture 2: Business Models

• What is a Business Model?

  • Describes the rationale of how an organization creates, delivers, and captures value.

• Purpose of a Business Model

  • Tool for business planning to transition from a "venture concept" to a "functional new venture".

• Components of the Business Model Canvas

  • Customer Segments

  • Value Proposition

  • Revenue Streams

  • Cost Structure

  • Channels

  • Customer Relationships

  • Key Resources

  • Key Activities

  • Key Partnerships

• Value Proposition

  • Core of any venture: defines what is built, for whom, and the problems addressed.

  • What it isn’t: not about the specific product/service.

  • What it is: solving specific customer problems or needs.

• Product Market Fit

  • relationship between your value proposition and how much it is desired or needed by your target market segment(s) is referred to as product market fit

  • in order to maximize product market fit, it is important to tie your value proposition to your target customer segments

• Three Components of Value Proposition

  • what product Features you have or services you’re providing

  • What Pains are you solving for them

  • what Gains are you creating for a potential customer?

• Market Segmentation

  • Dividing populations into distinct groups based on similarities (demographic, psychological, geographical, socioeconomic, consumption, perceptual ).

• Market Types

  • Existing- customers are known, their needs are distinct, and performance based, competition is substantial, risks include lack of initial sales, lack of branding lack of distribution. EX: Google

  • Re-segmented- possibly known, needs relate to better fit, competition is substantial if you’re wrong few if right, risks if you get the market and product re-definition wrong, EX: Southwest

  • New- customers unknown, customer needs will be transformational, competition non existent, risk lack of customers education and knowledge, need for substantial initial resources EX: Amazon

  • Clone- customers possibly known, needs will be localized, competition is basically non-existent, risk center around misjudging the significance of the local needs EX: Baidu

  • The type of market you target has substantial
    effects on almost all aspects of your new
    venture

• Startup Costs and Cost Structure

  • All costs associated with moving from an initial business
    concept to having products/services available to the market for
    purchase Startup costs

  • Cost structure refers to the types and relative proportions of costs
    that a business will incur in order to produce and sell its product
    or service

  • 40% of new ventures fail within the first three
    years of operation

  • Fixed vs Variable costs Components of Cost structure

Lecture 3: Marketing and Consumer Awareness

• What is Marketing?

  • Function/process of creating, communicating, and delivering customer value while managing relationships.

• Why is marketing critical for entrepreneurs

  • Essential for market establishment and growth.

  • Difficult and costly to launch new products/services.

  • Differentiation is key for company value.

  • Ability to swiftly adapt marketing strategies to attract new segments.

• Challenges for Entrepreneurs in Marketing

  • Limited financial, managerial, and time resources.

  • Limited market information.

  • Decision-making affected by biases and relationships with audiences.

• Types of Market Data

  • Primary Data: Collected directly from customers for a specific purpose.

  • Secondary Data: Published, economical, and usually used to collect baseline information.

• Components of Marketing Strategies

  • Segmenting: group of customers defined by certain common bases or characteristics that might include factors such as (demographics, psychographics, or behavioral factors) critical to define and understand key aspects of the new ventures value propositions, but also how to best communicate with core customers.

  • Targeting: compares defined segments and then selects the most attractive to pursue.

  • Positioning: describes a companies offerings relative to its product or service attributes, what customers care about most, price quality, and convenience, tied to the new venture value proposition.

• Four P's of Marketing

  • Product: the core the augmented product, essential good and service whereas the augmented product is the set of attributes, line between products and services has been eroding for some time (CVP) (Product differentiation, making product more unique in order to build a distinctive image for the brand. (Product life cycle) , Growth, Maturity, and decline.

  • Price: key role in how consumers perceive a products position in the market. EX: KIA, Bentley Get big get fast, perceived value pricing (Price points) standardized and fixed pricing values (Price promotion) a tool by which marketers can achieve specific goals such as introducing a product to a new customer market.

  • Place: important for new ventures to understand exactly where and how customers will obtain their product or service. (distribution strategy) (interdependency in a distribution channel or outsource fulfillment.

  • Promotion: Marketing communications convey messages to the market
    about the company’s products, services, and the company
    itself The communications mix is defined as advertising, sales
    promotion public relations, personal selling, and direct
    marketing Push strategies aim to push a product through the
    channel using tools such as trade promotions, trade
    shows, and personal selling to distributors or other
    channel members
    Pull strategies create end-user demand and rely on
    that demand to pull the product through the
    channel

• Stages of Product Life Cycle

  • Growth

  • Maturity

  • Decline

• Stages of Product Diffusion

  • Innovators (2.5%)

  • Early Adopters (34%)

  • Late Adopters (34%)

  • Laggards (16%)

• Pricing Strategies

  • High growth

  • Price skimming: sets high margins you can expect to gain limited market share because your prices will be relatively high compared to customer expectations.

  • Penetration pricing: Penetration pricing aims to gain high market
    share with lower margins and relatively lower
    prices (e.g., Netflix, Internet & Cable Providers)

  • Price discrimination: venture charges different prices to different customer segments; often can be a function volume/ value of total purchases.

• Place Strategies

  • Channel Coverage: 3 types

  • Intensive: (Intensive coverage) blanket relatively indiscriminate coverage brings the product to as many potential markets and segments as possible.

  • Selective: (Selective coverage) brings the product/service to specific distributors often limiting selections geographically by establishing a dealer network

  • Exclusive: (Exclusive coverage) Limits distribution to a single outlet associated with “luxury” products can command highest prices and profits if exclusivity translates into customer perceptions of quality and prestige.

  • Channel Conflict: Channel conflict refers to situations where differing
    objectives and turf overlap lead to disharmony
    between channels

• Guerrilla Marketing

  • Marketing activities that are non-traditional,
    grassroots, and captivating gain consumers’
    attention and build awareness of the company
    Given the rapid rise of social media, this is often a
    common tool used to engage in such activities

Lecture 4: Building the Entrepreneurial Team

Who is the Founding Team?

• Group of individuals that are responsible for the strategic decision making and ongoing operations of a new venture. (90% of new ventures are started by teams, rather than individuals)

Where do you fit in?

owners/founders are not expected to assume key roles, know your strengths and weaknesses in order to acquire complementary skills and capabilities. entrepreneurs must develop the ability to distribute responsibilities amongst team members

Benefits of Having a Team

• Enables entrepreneurs to accomplish more.

• Revenue is correlated with team size.

• Teams increase chances of success.

Provides crucial support throughout entrepreneurial process.

Human Capital

• Varied experience, education, knowledge, and skills within team members.

• ideally the founding team will maximize the breath and depth of human capital necessary to successfully create your new venture.

Depth vs. Breadth

• Depth

• refers to the experience, skills, and expertise that individual team members have within a given area

• Depth may result from a high level of education, experience, or expertise within a specific area

• Depth affords new ventures a greater ability to address key issues in specific areas

• Breadth

• Breadth refers to the variety of knowledge that individuals and teams have across a broad spectrum of functional areas

• It is imperative for new venture teams to have a diverse set of skills and capabilities

• Evidence suggests that breadth of human capital is even more crucial than depth in determining new venture success

Benefits of Depth and risks

• Benefits

• Increased functional skills and capabilities

• Shared perspectives regarding where the new venture is heading and how best to accomplish new venture goals

• Faster decision making as a result of common background and logic

• Risks

• Increased likelihood of deficiencies in key areas vital to the success of the business

  Reduces ability to form comprehensive decisions from consideration of diverse perspectives

  Decreased creativity and innovativeness

Benefits of Breadth and risks

• Benefits

• Greater likelihood of having the requisite skills and expertise to address the variety of issues that arise when starting the business

• Broader social networks that can provide access to important resources necessary for new venture success

• Increased creativity and innovation as a result of diverse individual backgrounds

• Risks

• Slower decision making as a result of more complex decision-making processes

• Potential for reduced technical skills and capabilities required to create and run the business

• Increased likelihood for interpersonal conflict as a result of a lack of common background and perspective

Forms of Human Capital

• Education-

• Experience

• Technical Skills

• Social Connections

• Life Experiences

• Functional Background

Advantages and disadvantages of involving friends and family in the team.

• Advantages

• Better understanding of the specific human capital each member brings to the team

• Greater level of commitment to the new venture

• Increased desire to ensure the success of the new venture as a result of close social relationships

• Disadvantages

• Potential loss of objectivity regarding team members

• Increased susceptibility that personal relationships will cloud judgment

• Greater likelihood decisions will be based upon personal relationships rather than what is best for the new venture

Compensation of Team Members

• Salary- Team members should be paid in accordance with their human capital Could potentially tie salary increases with closing subsequent rounds of funding it could be beneficial to consider non-monetary forms of salary (e.g., tools, access to resources, etc.)

• Equity- Two basic ways of distributing equity:

  •Founder shares

  •Option pool

• Important to limit the group of individuals receiving founder shares (usually 3 or less)

  Do not divide shares equally between all founders

• Benefit Packages- Benefits packages can often be an important form of non-monetary, non-equity form of compensation

  •Holiday and vacation leave

  •Life insurance

  •Health care plans

• External Team Members

  • Outside Investors- friends family fools three F’s, angel investors, financial institutions, grants.

  • Board of Advisors- source of expert guidance and feedback, current and former entrepreneurs, key suppliers, venture capitalists and angel investors, professor, etc prepare list of questions you are most interested in gaining insight about prior to contacting advisor

  • Board of Directors- more formal capacity than the Board of Advisors, Typically begins with five members: CEO, CFO, two members representing lead investors, an outside members, imperative to develop a clear set of expectations, ethical standards, and procedures for board members and how they are required to conduct their roles

Lecture 5: Entrepreneurial Finance Worldwide

• What is Micro-financing?

  • Micro-financing: is a form of lending where in financial institutions provide small loans to low-income groups or individuals who otherwise would not have access to financial services EX: Grameen Bank, Pacific Community Ventures, Kiva

Funding Sources

Informal Investors

• Close family and relatives (49.4%)

• Friends and neighbors (26.4%)

• Other relatives (9.4%),

• work colleagues (7.9%),

• and strangers (6.9%)

negative or zero return on half of all informal investments., only 22% of informal investors expect a return of 100% or more on their investment

Crowdfunding

Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet.One of the earliest examples of crowdfunding occurred in the early 1700s when Pope Alexander gathered subscribers to fund a translation of Homer’s Iliad into English

• There are four common types of crowdfunding 

  –Rewards- individuals donating to a project or business with the expectation of receiving a non-financial reward in return, 

  –Donation- individuals donate small amounts to meet the larger funding aim of a specific charitable project while receiving no financial or material return.

  –Lending- also known as peer-to-peer or P2P lending, is a form of fundraising through which people can finance projects or businesses with direct loans.

  –Equity- consists of selling a stake in a new venture to a number of investors in return for investment.

  Venture Capital

  • form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth.

• What is Venture Capital?

  • Private equity financing provided by VC firms to startups/emerging companies with high growth potential.

• Characteristics of VC-backed Firms

  • Usually operational before VC investment.

  • Have a network of informal investors/angels.

  • Expect a minimum of 25% rate of return on investment.