Entrepreneurship

MN0 2009 Other Forms of Entrepreneurship

Vivek Tandon

Agenda
Exit Options Social Entrepreneurship - Definition, form, differences

Corporate Entrepreneurship
- Definition, Facilitating Factors, Role of Champions

Solid Works
Assume that the expected income of SolidWorks 4 years from now is $ 2.5 million. The P/E for PTC is 35. What should the P/E for SolidWorks be?

Solid Works
Assume that the expected income of SolidWorks 4 years from now is $ 2.5 million. The P/E for PTC is 35. What should the P/E for SolidWorks be? What is value 4 years from now? : $62.5 m If rate of return is 20 %, value now = $62.5/ (1.2)4 ~ $30m

If investment is $4.5m , ownership demanded = 4.5/30 ~ 15%. If rate of return demanded = 50 % , what is ownership demanded? If 72 % ?

Beyond just the money

The number of seats, and who actually will represent investors, on the board of directors Possible changes in the management team and in the composition of the board of directors Right of first refusal granted to the investor on subsequent private or initial public stock offerings Stock vesting schedule and agreements Forced buyout Equity distribution provides incentives, proportional to contributions needed.

Social and Behavioral side of Venture Finance Social capital direct and indirect ties important for raising money
Social capital reduces tendency to act in a self-interested way Social ties provide information

Valuation and setting up the terms is not science and is influenced by behavioral biases - impression management - framing of business ideas properly

Exit Options

Exit is rarely, if ever, easy - letting go is frequently emotional - apart from pure economics: the attitudes, values and goals of entrepreneurs matter a lot. - exit strategies involve valuing a company and entrepreneurs frequently overvalue their baby

Exit Options: Sales or Transfer to Insiders

Succession in Family-Owned Businesses

Leveraged Buyouts: When Managers become owners

Employee Stock Ownership Plans: Gradual Transfer to employees

Exit Options: Sales or Transfer to Insiders

In family-owned businesses, owners have difficulty in letting go often due to four sources (Sharma & Irving, 2005): Affective commitment : emotional identification with the company. (I want to .) Normative commitment: feelings of obligation to remain with it. ( I ought to ) Calculative commitment: fear of loss of valuable investment or specific rewards. (I have to ) Imperative commitment: concern about available career opportunities. ( I need to )

Exit Options: Sales or Transfer to Insiders

Succession in Family-Owned Businesses - Share power in a gradual manner - Set up a trust - Limited Partnerships

Choice depends on the goals of the entrepreneur, relationship with the family members and tax considerations.

Exit Options: Sales or Transfer to Insiders

Leveraged Buyout - Often the top management team decide to purchase the company when the entrepreneurs depart - Sometimes cash or often through raising debt - Disruption is minimized why? - Good for firms with sufficient assets to serve as collateral ESOP - Several ways: setting up trusts, leveraged plan.

Exit Options: Sales to Outsiders

Valuation becomes critical.

Potential buyers: - Direct competitors - Indirect competitors who are in related markets - Non competitors
Selling to outsiders can often be efficient - synergies - Economies of scale and scope

Exit Options: Sales to Outsiders

Some steps to make the firm attractive to sellers: - Sell at the right stage of development; when it is on the way up - Sell when business cycle is strong - If the entrepreneur leaves the firm, and her talent is part of what makes the firm valuable, think of ways to compensate for this loss. - Identify and protect all intellectual property - Adopt transparent and conservative accounting policies appropriate to the sector - Resolve any open questions that makes it difficult to estimate value tax or legal issues

Exit Options: IPO

First sale of stock to the public Why? - Way to obtain new equity capital - Liquidity - Valuation becomes easier - Prestige Founders can also cash in usually after a period of time.

Qs. Why are founders usually barred from selling shares till some time?

Exit Options: IPO

Why not? - Lose control - Subject to more rules disclosure requirements - Expensive: direct economic costs and also managerial attention - Choosing an underwriter - Getting the timing right - Meeting government regulations for registration of shares - putting the house in order Examples of large firms who are not public?

Social Entrepreneurship: popular definitions

A process involving the innovative use and combination of resources to pursue opportunities to catalyze social change and/or address social needs.

Social Entrepreneur - societys change agent - give priority to social goals more than monetary goals

Social Entrepreneurs: Look like other entrepreneurs but

Innovative Achievement orientation Independence Sense of Control Tolerance for ambiguity

Social Entrepreneurs: Motivation

United by desire to serve a social cause. My reasons are purely selfish. I have been put on this earth for a very short period of time. I could apply my talents to making loss of money, but where would I be at the end of my lifetime? I would much rather be remembered for having made a significant contribution to improving the world into which I came than for having made millions.
-David Green (project Impact), quoted from The power of unreasonable people: how social entrepreneurs create markets

Social Entrepreneurs: Combination

Social Entrepreneurship: Social Goals

Social Entrepreneurship: Fast Growing Sector

When we first introduced social entrepreneurs at the World Economic Forum's Annual Meeting in 2002 at a session entitled "Come Meet the Social Entrepreneurs," scarcely anyone turned up ....... Today ...corporate leaders court them for their ideas, insights, and innovations, and the international media eagerly follow their stories. -Klaus Schwab, founder World Economic Forum
In the foreword to The power of unreasonable people: how social entrepreneurs create markets

Social Enterprises as hybrid forms

- From Kim Alter (2007), Social Enterprise Typology

Social Entrepreneurship: Many forms

For Profit

Plough-back-profit - generate profit to fund social programs

Subsidized service providers
- subsidized services to the needy, commercialized rates for regular

Work Integration Model

- skills training and/or employment to needy disadvantaged (e.g. La Fageda)

Not for profit serving a social mission Example 1 ; 2 a, b ; 3

Source: Social Enterprise Association

Social Entrepreneurship v. Commercial Entrepreneurship: Opportunity

Commercial: generally focus on growing market size and the industrys structural attractiveness. Social: recognized social need usually has more than enough market size.

The problem in social entrepreneurship is not the existence of the need but how resources can be marshaled and organized to meet that need.

The space of social needs is so vast, it is quite easy to lose focus.

Social Entrepreneurship v. Commercial Entrepreneurship: Environment

Market selection mechanisms may be less intense on operating ventures because of measurability problem and the vastness of the problems. - their social value may also insulate them. Social entrepreneurs are frequently attracted toward adverse contexts.

Social Entrepreneurship v. Commercial Entrepreneurship: Resources

Resource mobilization may be more difficult People - Rarely able to offer market rates for hires - Many times difficult to provide financial incentives.

Capital - Social entrepreneurs have fewer channels. - Economic sustainability is also a challenge
Social networks therefore become even more important since many resources are often out of their direct control

Social Entrepreneurship v. Commercial Entrepreneurship: Evaluation

Measurability: For commercial ventures, valuation is difficult but at least some common ground ROI Parameters: Remaining true to the mission do you chase resources or not ? Ratio of Administrative expense to Amount spent on the social cause. Triple Bottom Line: Profit, People, Planet

Bottom of the Pyramid Idea

ToP > $15,000 ~ 800 million

MoP $1500 - $15000 ~ 1.5 billion

BoP < $1500 ~ 4.5 billion

Source: prof Stuart Hart

Bottom of the Pyramid Idea

Massive underserved market (Prahalad and Hart, 2002) Assumptions challenged - The poor cant pay so we cannot have profitable models - The poor dont adopt new innovations. Can be an incubation site for radical technologies (Hart and Christensen, 2002)
Challenge for you: Q Drum ; video

Grameen Phone

Video Give small loans to create women operators in villages That would give access to a large population. 40,000 phones would put everyone within 10 minute walk of a telephone.

Grameen Phone

Profit: productivity enhancing; profitable People empowers women Planet reduction in travel avoid unproductive use of fuel etc.

Innovating for the BoP

Basis: Imagination - e.g. You dont need ownership, you need access Most barriers are in the mind innovation for the poor requires reexamining your assumptions - What is the difference between: Cost + Profits = Price v. Price Profits = Cost. - For instance, using world class technology with local adaptation. modern Video BBC documentary

Corporate Entrepreneurship
Entrepreneurship within existing firms. - Creating new ventures and exploring new business ideas within large established firms Many inventions and ideas within firms are not exploited by the firms. The champions of these ideas can leave the firm and become competitors Corporate entrepreneurship is a major source of renewal of firms. Allows established firms to change in highly competitive rapidly changing environments - e.g. Intel

Corporate Entrepreneurship: example

3M Post It

Corporate Entrepreneurship: Problems

Strengths of Big firms: Reliability - Depends on routines and controls - Routines reduce entrepreneurship Contentious resource allocation process.
How to make the elephant dance?

Corporate Entrepreneurship: Facilitating Factors

Design of Organization - Organic structure: decentralization, less formalism - Less organized for efficiency and more on detecting and rapidly exploring opportunities Awards & attitude - Encourage experimentation, tolerance for failure - Long term horizon

Networks - Lateral communication networks, multi-disciplinary teams Culture: Less turf wars, information sharing

Employee Selection: more enterprising, doers

Corporate Entrepreneurship: Intrapreneurs

Intrapreneurs are entrepreneurs within firms: dreamers who do (Pinchot, 1987) Champions the idea through the organization

Protects the ideas from naysayers

Musters resources together.

Corporate Entrepreneurship: Intrapreneurs

Charles House, HP - a new monitor which failed. - heavy, used power, cost as much - Went to marketing people, no results - Put it in his car, went around businesses looking for a use found many. - Packard saw it and said he did not want to see it in the lab. - House : ok, let us put it in production - Monitor was used in first moon landing and was a great success. - House got the award for meritorious defiance

Video

Summary
Social Entrepreneurship: - social mission - many models: Plough-Back; subsidized; workintegration - different challenges: focus; resources; evaluation criteria Corporate Entrepreneurship: - source of renewal within firms - facilitating structures and systems allowing risk-taking - role of champions