Knowledge Based Entrepreneurship

Knowledge based
Entrepreneurship
by John Heebll
NOTE: This is a pre-release version for students at DTU 42435, DTU

42705, Copenhagen University SCIENCE and KU-HUM/DTU
Summerschool 2007. For your personal use only.
Preface
What is entrepreneurship? Think about it, and you will probably come up
with several sensible definitions by yourself. Google it and you will find
that the definition has intrigued scholars, economists, politicians and the
like
overwhelmingly.
Summer
2006
gave
3.3
mills.
hits
on
entrepreneurship definition. Google itself suggests this short one from

the Government of Saskatchewan website: Entrepreneurship is "the
process of looking at things in such a way that possible solutions to
problems and perceived needs may evolve in venturing." This is a
good one, indicating that entrepreneurship is about creating business
out of problems. Hence, an entrepreneur is an opportunity-driven
person, seeking value-creating solutions to needs and problems and
turn them into money and positive cash flow.
Now, can entrepreneurship be taught and learned? The question was
raised at an international conference in Vienna, July 1993 addressing
universities education of entrepreneurs and it triggered a heated debate
between the academia present. The English were against and found
that entrepreneurs arise by themselves just like fluff. The Germans were
for and found that entrepreneurs are created through goal-oriented and
hard work in well-structured courses. The French discussed the
question from a more sophisticated point of view and found both pros
and cons. The conclusion landed somewhere in the middle: business
start-up with success is conditioned by the ability to spot the potential for
a business combined with factual knowledge about how to capitalize on
it. Teaching and training entrepreneurship probably cannot change a
persons inherited entrepreneurial drive, but it certainly improves a
persons capacity for identifying and managing a complex business
venture.
Lets elaborate a bit on that one. With the acquired capacity comes
some self confidence, based on a personal belief that you are able to
sort realistic ventures from dream work, and that you are capable of
Start Internet Explorer-browser.lnk
mastering the process of getting a business up and running. What better

preconditions for entrepreneurship can one imagine? So the author is a
firm believer in the significance of good entrepreneurship teaching and
training: it creates more and better entrepreneurs and as an inherent
part of that: more and better companies.
The rest of this book is dedicated this purpose.
Being a kind of Mr. Pickwick within entrepreneurship in Denmark for
quite some years, I report on what we may call the emergence of an
academic entrepreneurial culture. Being also an observer of the
American endeavours in this field, I report on similarities and
differences. Since this is a preface: here are the digests. Consider them
the axioms on which this book rests:
During the late nineteen nineties and early third millennium, a

Danish academic entrepreneurship culture has emerged out of
universities and the knowledge based industries, driven mostly
by political incentives and venture capital plus some inspiration
from the outside world.
This is in parallel to what happened in USA from late nineteen

seventies, and basically we are just some twenty years behind.
Hence, study the American high-tech entrepreneurial culture,
and you will get a fairly good idea of what is going to happen
here in Denmark in the coming decennia.
In the nineteen eighties, entrepreneurship in US was spurred by

concerns about the national twin deficit and the loss of global
economical leadership. The buzzword was globalization to
increase income from exports and decrease expenditures on
import.
Entrepreneurs
were
encouraged
to
develop
internationally competitive products and start exports. To day,

2007, globalization still ranks high as a political goal for
promoting entrepreneurship. However, much concern is also

raised on the issue of finding strategic countermeasures to the
fierce competition on classic industrial production from newly
industrialized countries, particularly in Asia. Entrepreneurs are
encouraged to join in the development of a completely new wing
of highly competitive knowledge based industries, capable of
gaining foothold on the international markets and expand, and
we cannot get enough of them: the quicker the better!
The academic entrepreneurial culture deals with complex

commercialization processes, where the presence of capital,
advanced specific knowledge and wideband interdisciplinary
skills and resources combined, create the preconditions for
success. In the start-up phase, the skills and experiences of the
founding team are mission-critical, and venture capital is
prudent. Capital is invested in teams capable of executing.
Hence, you better get to know what execution is about before
you launch your own venture.
High tech business start-up is a complex project to run. Apart from a

mandatory technical knowledge within the core business, it takes an
array of legal, economical and managerial skills and experiences. The
task is also demanding both physically and mentally; you are quickly
whirled into a chaotic and committing working life, which will absorb
almost any free time. During the critical years of gaining your
commercial foothold, it is never off your mind. To some, this is a rich and
rewarding lifestyle. To others it is devastating. And you are probably
somewhere in between. One of the purposes of this book is to introduce
you to this kind of working life so that you can prepare yourself mentally
and professionally - or opt out of it if your priorities are somewhere else.
This book differs as a textbook in that it treats the specific fields in a
holistic approach. You will not be able to find that much specific
information and tools, but you will be introduced to entireties and

interrelations to enable you to acquire and maintain an overview of your
own situation plus an appropriate set of priorities.
It is not bookkeeper qualifications that make you a successful
entrepreneur. Success depends far more on your ability to maintain
control of a complex situation, your ability to weed out the essential from
the non-essential and your capacity for strategic thinking combined with
energetic tactical execution, a continous focus on serving your
customers needs while maintaining a sense of urgency. These abilities
do not unfold unless you keep an overview of your project, and this is
again is preconditioned by your ability to think in entireties and
interrelations and to grasp a complex and highly detailed project.
The failure rate of new businesses is appalling, and it can be argued
that no wise man or woman should ever engage in a business start-up.
Observations however indicate that with methodical preparations,
common sense, some intelligence, good customer relations, and good
advisors with networks and managemeent experience, only few
ventures flop. Quite a high proportion of them never really expand,
though. Some even close down again, but the entrepreneurs get on,
unhurt, to new endeavours and with increased capabilites. This
viewpoint, admittedly, does not rest on firm data and research, rather
than the surprizing staying power of companies, started together with
the Danish semi-public preseed investors: the innovation environments
(innovationsmiljerne), which methodically pick and choose the winning
teams from their deal flow. Darwin at work, and the sorting criteria are
management competencies and value creation perspectives combined.
This book aims at qualifying the readers capacity for identifying and
pursuing perspective business ventures. You are introduced to the
business plan, which is a mandatory compilation of your considerations,
analyses and calculations. The business plan is your personal basis for
your kick-off decision. It is also the indispensable precondition for
acquiring capital and human resources. In appendix 1 you will find a
commented recipe on how to make a business plan. Use it with a bit of

imagination; include all the wisdom contained in this book plus a lot of
common sense. Then your start-up project will not fail although no
guarantees are given.
Many classic errors are repeated by one entrepreneur after another. It is
senseless to fall into well-documented pitfalls. Turn to chapter XX and
find them before you fall into them yourself. Equally, successful
business start-ups have common features, which can also be studied in
chapter XX.
Business start-up with success takes efficient resource management,
the right kind of ressoruces (like money) at the right time, plus qualified
business management. Read about how to manage your business in
chapter XX, how to raise capital in chapter XX, and how to build up a
competent management in chapter XX.
This textbook is first and foremost designed for the students that sign up
at the entrepreneurial courses at graduate- and PhD-level at Technical
University of Denmark and Copenhagen University. Thus, it addresses
our darling: the knowledge-based high-tech entrepreneur and it takes
you all the way through a venture-backed ambitious and growth-oriented
internationally focussed start-up project. If you can do this, you can do
anything. So if you are more attracted by a less ambitious and probably
less risky concept, creating a sustainable, controllable and highly
awarding working life for you and your co-founders and employees, you
will also find most of what you need in this textbook.
The visiting lecturers at the entrepreneurial courses at Technical
University of Denmark since 1993 have provided a substantial part of
the input used in this book. They are successful and skilled
entrepreneurs, they come from pre-seed and venture capital companies,
they come from the Danish and Southern Swedish business community,
from other institutions of higher education, or from industrial

development programmes. It is a group of more than 35 competent and
experienced consultants, investors, teachers, and entrepreneurs, all of
whom I wish to thank dearly for their contribution since 1993. None
mentioned none forgotten.
It is not possible to write a practically oriented book about business startup without involving the entrepreneurs themselves. From 1987 to 2000,
Technical University of Denmark ran a centre for start-up companies:
Innovationscenteret. In 2000 Innovationscenteret was acquired by The
Hoersholm Research Center, which again was acquired by Technical
University of Denmark and split into a research park, a pre-seed
investor: SCION-DTU A/S and an innovation environment : DTU
Innovation A/S. This system naturally is being swarmed with
entrepreneurs and their start-up companies. They are an inexhaustable
source for inspiration, information, experiences and knowledge and
visiting lectures. Thank you for letting me watch from the sideline and
thank you for joining us in the lecture room.
Three major Danish industrial foundations initially funded the first and
second edition of this book:
Tuborgfondet
Karl Pedersens og Hustrus Industrifond
Thomas B. Thriges fond
The foundations charters aim at supporting the development of Danish
industry and business. I hope that this book will help to promote this
purpose, and thank you very much for the economical support from
these great institutions within Danish industry.
The third edition of the book has been funded in a collaborative effort
between the International Danish Entrepreneurship Academy IDEA,
Socialfonden (EU Foundation for the Improvement of Living and
Working Conditions) and Erhvervs & Byggestyrelsen through grants to

the Technical University of Denmark, Greenhouse+. (Greenhouse+
delivers entrepreneurship teaching and training as well as pre-start
consultancy at the DTU campus in Lyngby, Copenhagen.) Thus, these
three major promoters of entrepreneurship together with Technical
University of Denmark, Department of Manufacturing and
Management have enabled a long needed update of the textbook for
which I and hopefully also my future students - and the reader - are
grateful.
Snekkersten, August 2007
John Heebll
Summary
The focus of this book is the knowledge-based business: a company,
which to a considerable extent is based on advanced technical
specialist knowledge.
The first chapter concludes that there is a great need for knowledgebased entrepreneurs in our society. They stimulate the knowledge
diffusion from research to business. They revitalize industry by filling
gaps and by capturing technology-driven business opportunities. They
are important drivers in the continous adaption of industry and
businesses to the ever-changing conditions on national and global
markets. Some of them succeed in creating stunning ventures that
surpass the community of well established, well run companies on
valutation and shareholder value to underline the importance of a vibrant
community of start-ups as the breeding ground for future large and
globally competitive companies. Together, they impact the gross
domestic product (GDP) visibly, and whether big or small, growing or
stationary, they provide exiting and challenging working lives for
founders and employees.
The following chapters XX - XX deal with the fundamentals of starting a
new business. The classic question about how you identify a business
opportunity is discussed. Opportunity-driven creativity as an adaptable
skill as well as some appropriate commercialization strategies for
bringing the ideas via products or services to the market are introduced.
So is the working life in a newly established knowledge-based business.
Observations on the entrepreneurs background, personality, and
motivation are quoted, the classic startup process is introduced, and last
but not least, the classic doctrine of success and failure of the startup is
reviewed.
Then we turn to the mysterious art of creativity. A relative short chapter
explains the origin of ideas, and concludes, that opportunitydriven
creativity can be acquired and perfected. Once the idea is there, action
10
must be taken to commercialize but how? For this, the difficult but
important art of developing appropriate business strategies is
introduced..
In chapter XX, the business plan, which is the synthesis of the
preliminary surveys and analyses, with an execution plan and some
budgets on top of that, is introduced. Appendix 1, which is an extension
of chapter 6, is a recipy for business planning, designed as a tool for
systematically analysing and planning a new venture.
The remaining XX chapters dig into classic fields within economy and
law, in order to highlight problems, essential to a knowledge-based
business start-up process. The idea is to provide the reader with
operational and practical solutions to problems and challenges that are
generic to high-tec start-ups. This should remove any excuse for staying
behind your desk for too long. New companies are not created in the
office, at the desk. Hiding among your books, notes and computers for
fear of the real world, where your ideas are put to the test, is one of the
most classic entrepreneurial pitfalls. You need to go out and do it.
The last chapter deals with intellectual property rights (IPR) such as
patents and critical know-how from the start-up companys perspective.
Hopefully, at the end, the reader has acquired an overview of how to
handle a complex commercialization process, which again can be
turned into a realistic business plan, a sound and well founded decision
and, at the end: a successful new business venture, based on good
business management and entrepreneurship.
All the best!
11
Contents
Preface ...................................................................................................................................................................... 3
Summary................................................................................................................................................................... 6
Chapter 1................................................................................................................................................................. 11
More Businesses, Please! .......................................................................................................................................
1.1. Our Ancestors were Peasants ......................................................................................................
1.2. Today, We Are a Necessary Evil ................................................................................................
1.3. The Employment Society of the Future ......................................................................................
1.4. The Knowledge-based Entrepreneur of the Future .....................................................................
1.5. The Promotion of Enterprise in the Future..................................................................................
1.6. The Danish Enterprise Culture ....................................................................................................
1.7. Summary, Chapter 1. ...................................................................................................................
11
11
11
12
12
13
14
15
Chapter 2................................................................................................................................................................. 16
Characterization of an Entrepreneur ......................................................................................................................
2.1. Personality Types.........................................................................................................................
2.2. Motivation and Driving Force .....................................................................................................
2.3. The Personal Requirements.........................................................................................................
2.4. The Ideal Team ............................................................................................................................
2.5. Summary, Chapter 2. ...................................................................................................................
16
16
17
18
19
20
Chapter 3................................................................................................................................................................. 22
The Startup of the Business....................................................................................................................................
3.1. Types of Businesses.....................................................................................................................
3.2. The Start of the Manufacturing Business ....................................................................................
3.2.1. The Preparation Phase...........................................................................................
3.2.2. The Startup Phase..................................................................................................
3.2.3. The Expansion Phase ............................................................................................
3.3. The Startup of Service Businesses ..............................................................................................
3.4. Summary, Chapter 3 ....................................................................................................................
22
22
24
24
25
26
26
28
Chapter 4................................................................................................................................................................. 29
The Good Idea ........................................................................................................................................................
4.1. The Birth of an Idea.....................................................................................................................
4.2. The Birth of the Good Idea..........................................................................................................
4.3. From Need to Problem ................................................................................................................
4.4. Registration of a Need .................................................................................................................
4.5. From Problem to Idea ..................................................................................................................
4.6. From an Idea to a Good Idea; a Systematic Process ...................................................................
4.7. A Final Check ..............................................................................................................................
4.8. Summary, Chapter 4 ....................................................................................................................
29
29
30
30
33
34
35
36
37
Chapter 5................................................................................................................................................................. 39
Learning from Experience...................................................................................................................................... 39
12
5.1. The Universe of the Entrepreneur ...............................................................................................

5.2. The Success Factors of the Business. ..........................................................................................
5.3. The Failure Factors of the Business ............................................................................................
5.4. The Bankruptcy Statistics............................................................................................................
5.5. DICs Observations .....................................................................................................................
5.6. The Classic Rules of Thumb .......................................................................................................
39
40
40
41
42
43
Chapter 6................................................................................................................................................................. 44
The Business Plan...................................................................................................................................................
6.1. The Purpose of the Business Plan ...............................................................................................
6.2. What is a Business Plan? .............................................................................................................
6.3. What Does a Business Plan Contain?..........................................................................................
6.3.1. The Introduction....................................................................................................
6.3.2. The Static Part .......................................................................................................
6.3.3. The Dynamic Part .................................................................................................
6.3.4. The Conclusion Part..............................................................................................
6.3.5. The Sensitivity Analysis .......................................................................................
6.4. The Gathering and Processing of Information ............................................................................
6.5. Quality Considerations ................................................................................................................
6.6. Summary, Chapter 6 ....................................................................................................................
44
44
45
45
45
46
47
48
48
48
49
51
Chapter 7................................................................................................................................................................. 52
Marketing Economics for Entrepreneurs ...............................................................................................................
7.1. Michael Porters Market..............................................................................................................
7.2. The Reaction of the Market to a New Product............................................................................
7.3. The Marketing Plan .....................................................................................................................
7.4. Summary, Chapter 7 ....................................................................................................................
52
52
55
57
58
Chapter 8................................................................................................................................................................. 59
Sale and Marketing.................................................................................................................................................
8.1. The Art and Ethics of the Sale.....................................................................................................
8.1.1. The Salesman Must Believe in the Product..........................................................
8.1.2. The Product Must Create Values..........................................................................
8.1.3. The Unique Advantage of the Product .................................................................
8.1.4. Expand the Visible Offer ......................................................................................
8.1.5. Create an Expectation and Make an Offer............................................................
8.1.6. Quality and Trust ..................................................................................................
8.2. Marketing Methods......................................................................................................................
8.3. Summary, Chapter 8 ....................................................................................................................
59
59
60
60
61
61
62
62
63
65
Chapter 9................................................................................................................................................................. 67
Export .....................................................................................................................................................................
9.1. Export from Day One ..................................................................................................................
9.2. Where to Start ..............................................................................................................................
9.3. How to Start .................................................................................................................................
9.4. Distribution on the Export Market ..............................................................................................
9.5. Agent, Dealer, or Your Own Marketing Subsidiary ...................................................................
9.6. An Export Seminar for Sellers.....................................................................................................
67
67
69
69
71
72
75
13
9.8. Summary, Chapter 9 .................................................................................................................... 77

Chapter 10............................................................................................................................................................... 78
The Finances of a Business ....................................................................................................................................
10.1. Book-keeping in Practice...........................................................................................................
10.1.1. The Accountant...................................................................................................
10.1.2. The Book-keeper.................................................................................................
10.2. Cash Flow through Budgetary Control .....................................................................................
10.3. The Financial Statements...........................................................................................................
10.3.1. The Accounts ......................................................................................................
10.3.2. The Profit and Loss Account ..............................................................................
10.3.3. The Balance Sheet...............................................................................................
10.3.4. The Notes to the Accounts..................................................................................
10.4. The Budgets of the Business .....................................................................................................
10.4.1. Spreadsheet Models ............................................................................................
10.4.2. The Cash Budget.................................................................................................
10.4.3. The Profit and Loss Budget ................................................................................
10.4.4. The Balance Sheet Budget..................................................................................
10.5. Summary, Chapter 10................................................................................................................
78
78
81
81
82
83
83
84
85
86
86
87
88
88
89
90
Chapter 11............................................................................................................................................................... 91
Financing ................................................................................................................................................................ 91
11.1. Capital; for What?...................................................................................................................... 93
11.2. Types of Capital for Running and Investments......................................................................... 96
11.3. Subordinate Loan Capital or Debt Capital? .............................................................................. 98
11.3.1. The Risk of Debt Capital .................................................................................... 99
11.4. How the Investors Assess a Business........................................................................................ 99
11.4.1. Investors Think Three-Dimensionally.............................................................. 101
11.4.2. The Rich-Gumpert Evaluation System............................................................. 102
11.5. Where Does the Money Come From?..................................................................................... 104
11.5.1. Financing of the Preparation Phase .................................................................. 104
11.5.2. Financing of the Startup Phase ......................................................................... 106
11.5.3. Financing of the Expansion Phase.................................................................... 109
11.5.4. Summary, Section 11.5..................................................................................... 110
11.6. Investor Types ......................................................................................................................... 110
11.6.1. Venture Capital ................................................................................................. 110
11.6.2. The Development Investment Companies........................................................ 113
11.6.3. Institutional Investors........................................................................................ 114
11.6.4. Subordinate Loans............................................................................................. 114
11.6.5. Leasing .............................................................................................................. 115
11.7. A Survey of Financing Schemes ............................................................................................. 116
11.8. Investors You Should Know Of .............................................................................................. 117
11.8.1. Venture Companies........................................................................................... 117
11.8.2. The Danish Fund for Industrial Growth ........................................................... 119
11.8.3. The Development Investment Companies........................................................ 120
11.8.4. 2M Invest .......................................................................................................... 121
11.9. Subordinate Loan Capital Injection in Practice....................................................................... 121
11.9.1. The Investor's Demands Regarding the Return on
Investments................................................................................................ 122
11.9.2. Capital for Business A ...................................................................................... 122
11.9.3. Capital for Business B....................................................................................... 125
11.10. Summary, Chapter 11............................................................................................................ 127
14
Chapter 12............................................................................................................................................................. 128

Commercial Law for Entrepreneurs.....................................................................................................................
12.1. Corporate Forms ......................................................................................................................
12.1.1 The Single Proprietorship ..................................................................................
12.1.2. The Partnership .................................................................................................
12.1.3. The Limited Company and the Private Limited
Company....................................................................................................
12.1.4. Other Corporate Forms .....................................................................................
12.2. The Selection of Corporate Form............................................................................................
12.2.1. Risk Versus Corporate Form ............................................................................
12.2.2. Fiscal Considerations ........................................................................................
12.2.3. Company Image ................................................................................................
12.3. Company Conversion ..............................................................................................................
12.4. Agreements ..............................................................................................................................
12.5. The Danish Sales of Goods Act...............................................................................................
12.6. Product Liability ......................................................................................................................
12.7. Rules between the Seller and the Buyer..................................................................................
12.7.1. Rules between the Producer and the Wholesaler .............................................
12.8. The Danish Salaried Employees Act.......................................................................................
12.9. Summary, Chapter 12..............................................................................................................
128
128
129
129
130
131
132
132
133
134
134
135
136
137
138
139
140
140
Chapter 13............................................................................................................................................................. 142

Business Management for Entrepreneurs ............................................................................................................
13.1. The Core Group and the Employees .......................................................................................
13.2. The Board ................................................................................................................................
13.2.1. The Board in Practice........................................................................................
13.2.2. The Board Work in the New Business .............................................................
13.2.3. The Main Tasks of the Board ...........................................................................
13.2.4. The Useful Effect of the Board.........................................................................
13.2.5. The Directors Fee ............................................................................................
13.3. Summary, Chapter 13..............................................................................................................
142
142
145
146
148
149
151
151
153
Chapter 14............................................................................................................................................................. 154

Intellectual Property Law .....................................................................................................................................
14.1. The Patent; Capitalism or Business Promotion.......................................................................
14.2. The Basics of Intellectual Property .........................................................................................
14.3. The Patent ................................................................................................................................
14.3.1. Patentability.......................................................................................................
14.3.2. The Patent Application and the Regulatory
Requirements.............................................................................................
14.3.3. The Scope and Time of the Patent....................................................................
14.3.4. The Commercial Protection of the Patent.........................................................
14.3.5. The Interaction between Patents.......................................................................
14.3.6. The Patent Procedure ........................................................................................
14.4. The Utility Model ....................................................................................................................
14.5. Design Protection.....................................................................................................................
14.6. Trademark................................................................................................................................
14.7. Trade Secrets............................................................................................................................
14.8. The Buying and Selling of Intellectual Property Rights........................................................
154
154
155
155
155
157
158
159
159
161
162
163
163
164
165
15
14.9. Patent Strategies for Knowledge-Based Entrepreneurs .......................................................... 167

14.10. The Search Report ................................................................................................................. 169
14.11. Summary, Chapter 14............................................................................................................ 169
Danish Development Investment Companies as of 27th July 1995 .................................................................... 171
Appendix 1 ............................................................................................................................................................... 1
16
Chapter 1
Summary
Entrepreneurs are important to us: they create jobs, they
innovate, they challenge the existing industry and business
community, and their activities even impact the gross domestic
product of nations. The Danish entrepreneurial activity level as
such is average in an international context, but our entrepreneurs
dont really seem to expand their ventures. [GEM 2005: Global
Entrepreneurship Monitor: a cooperation between universities all
over the world, providing compatible researc on entrepreneurial
activities on a national level] This is a serious problem, which
needs special attention. This book is part of that.
New business ventures have a high mortality rate, but
countermeasures such as starting in teams, get acces to
experiences, acquiring entrepreneurial skills, apply common
sense, do sanity checks, and communicate with the customers
before start-up, have a dramatic impact on the staying power of
new ventures.
A such sanity-check list from MIT is presented. The importance of
applying it before throwing resources into a new business venture
cannot be emphasized strongly enough.
Next, the personal traits of the entrepreneur are presented. So is
the importance of developing a strong founding team, if you plan
to start a complex high tech venture.
Consequently, the art of team-formation is presented. What kind
17
of skills, experiences and personalities do you need, and how do

you attract such people? Some ideas and answers are given.
Finally, personal incentives and preconditions for starting a new
business as well as the working life in nacent businesses are
presented.
By the end you have developed a a more comprehensive picture
of what knowledge-based entrepreneurship is about and what it
requires from you. If it doesnt appeal to you then dont do it. If it
does: read on!
More Companies, please

Do we need entrepreneurs?
An obvious question: do we really need more entrepreneurs?
We invest a lot of attention, time, money, energy and
enthusiasm in encouraging, promoting, supporting and teaching
entrepreneurship in virtually all its many forms. Almost from
kindergarden to retirement. Does it really matter?
The Global Entrepreneurship Monitor (GEM) is a sensible
starting point in the quest for answers. GEM represents a
collaborative effort between universities in many countries aiming
at establishing global standards for monitoring entrepreneurial
activity on a national level, supporting monitoring programs
worldwide, based on the GEM standards and of course
submitting periodical reports on their findings.
So letss have a look at what GEM has to say about the
importance of a sound and active entrepreneurial culture to a
18
nation. In the very first GEM report 1999, following questions are
discussed:
1. Does the level of entrepreneurial activity vary between

countries, and, if so, to what extend?
Answer: Yes it does. In the 1999 cohorte of nations, it
spanned from 1,4% to 8,4% of the adult population having
been involved in a start-up venture per year. We will
have a look at the 2005 situation later on and include
Danish figures in a global cross section
2. Does the level of entrepreneurial activity affect a

countrys rate of economic growth and prosperity?
Anser: Yes it does. The level of entrepreneurial activity is
positively correlated with recent gains in GDP1. Variation in
the rates may account for as much as one-third of the
variation in economical growth. This finding was most
certainly an eye-opener that infused a lot of attention and
action into industrial development programs and industrial
policy-making in the early years of the first decennium of
the third millenium
3. What makes a country entrepreneurial?

Answer: In the most active countries, entrepreneurship is
an integral and accepted feature of economical and
1
A region's gross domestic product, or GDP, is one of several measures of the size of its
economy. The GDP of a country is defined as the market value of all final goods and services
produced within a country in a given period of time. Until the 1980s the term GNP or gross
national product was used. The two terms GDP and GNP are almost identical. The most
common approach to measuring and understanding GDP is the expenditure method:
GDP = consumption + investment + government spending + (exports imports)
19
personal life. In the remaining GEM countries, entrepreneurship through enterprise creation remains a structural
and cultural anomaly. Clearly this indicates that there is no
easy road to change. GEM consequently conludes, that in
such countries, it may take decades of sustained changes
in
many
national,
cultural,
political
and
economic
institutions, if they are to join the elite of entrepreneurial

economies.
In Denmark, this and other impacts revitalized the
puplic interest in furthering entrepreneurship. Since then,
perspective entrepreneurial programs within education and
industrial development have been initiated and maintained.
By
example:
public
pre-seed
capital
available
to
perspective start-up projects and public investments into

the development of quality entrepreneurship teaching in
further and higher education. Thus, we have embarked on
change and here in 2007, it seems quite likely, that
entrepreneurship will change from a structural and cultural
anomaly into an accepted feature of economical and
personal life. And now, let the numbers have their saying.
Entrepreneurship in Denmark, 2005

One very active observer of the Danish entrepreurial culture,
Vaekstfonden has released a number of analysis that shed some
light on entrepreneurship in Denmark in an international
comparative context. In an analysis of GEM data, Vaekstfonden
draws following picture:
Pct. of the Adult Population involved in Entrepreneurial Activities, per Year.
Red line indicates global average
20
18
16
14
12
10
8
20
6
4
2
0
New
Australi
Ireland
USA
Denmar
Finlan
As such, this picture does not indicate any serious problems

though room is still left for improvement. However, in October
2005, GEM published a report on growth perspectives: GEM
2005 Report on High-Expectation Entrepreneurship. Look at
the synopsis: The first global study of high expectation
entrepreneurship has found that just 9.8% of the world's
entrepreneurs expect to create almost 75% of the jobs
generated by new business ventures. The report defines high
expectation entrepreneurship as all start-ups and newly formed
businesses, which expect to employ at least 20 employees
within
five
years.
These
ventures
have
far
reaching
consequences for the economies in which they operate,

particularly because of their impact on job creation and
innovation.
So in other words - the entrepreneurial activities as presented
in fig. 1 above do not present the full information needed to
assess the state and importance of the entrepreneurial culture.
We need to look at ambitions and growth also.
GEM concludes that differences between nations are high. By
example: 5% of US entrepreneurs are HE-entrepreneurs. The
21
Nordic countries display a discouraging 0,7%. Since these more

ambitious entrepreneurs are the true job- and wealth creators,
we have a problem here. It cohers with figures from
Vaekstfonden, concluding that whereas up to 15% of newly
founded companies start to grow rapidly in the best countries,
only 5% of Danish start-ups are able to expand out of the
cradle.
This rollercoaster ride to perceiving the Danish entrepreneurial
culture thus leads to the conclusion that we have an acceptable
entrepreneurial birthrate, but the new businesses for whatever
reasons dont grow. This is probably the singlemost important
challenge to policy-makers within entrepreneurship and
certainly also an important issue in entrepreneurship teaching
and training: we need more entrepreneurs willing to and
capable of expanding their ventures.
This book is very much about growth. Throughout he
subsequent chapters, a number of preconditions for growth,
such
as
appropriate
venture
strategies,
good
business
management and venture capital backing are treated to turn

you, dear reader, into the qualified and successful highexpectancy entrepreneur, that we need so much
Applied Entrepreneurship
To most of us, entrepreneurship is synonymous with risk and luck.
This perception is justified by the discouraging fact than less than
half of newly founded companies in Denmark live to celebrate
their five years birthday. A closer look, however, disclose a more
encouraging picture of the knowledge-based entrepreneurial
activities.
22
First, we are dealing with a small proportion of the app. 15 20.000 companies being started per year in Denmark. No
statistical data are available, and, of course, numbers depend on
definition. A guesstimate around less than 1.000 companies,
being started to commercialize advanced knowledge per year in
Denmark, is probably not far from reality. Among these, less than
2 - 300 are backed by venture capital. These companies have a
completely different staying power and a capacity for growth.
They tend to stubbornly stick to life and fight for a break through to
success.
Secondly, succesrate increases with experience. The so-called
Serial entrepreneurs prove this beyond any reasonable doubt.
Coming
from
USA,
where
venture
capital
backed
entrepreneurship has a long and distinguished track record, serial

entrepreneurship descripes the phenomenon that founding,
developing and selling companies becomes a lifestyle of gifted
entrepreneurs with a talent for identifying and exploiting business
opportunities. This is really intriguing. Clearly these people
demonstrate that success in starting a business is more than just
random luck. So how do they do it? Where is the hidden secret?
Can it be learned?
The answer is complex but predominantly yes. Complex
because part of the causes for success are embedded in personal
behaviour and characteristics such as energy, aggressiveness,
self-confidence, vanity, boldness, stubbornness, integrity etc.,
which together form the enterprising and executive person.
23
The more straightforeward part of the answer is that starting

knowledge-based companies requires vocational skills that are
generic to business venturing and which can be acquired. What
more efficient learning procedure can one imagine than learning
by doing? (Well - maybe learning from others successes and
failures could be a more cost-efficient way so carry on reading!)
Personal networks and personal credibility are also part of the
preconditions for repetitive success. Hence, serial entrepreneurs
are prudent and carefull about their personal track records. Not
that they try to hide failure but they turn failure into a learning
process and a precondition for future success. And they are
generally believed and rightfully so. Some home-spun
philosophy here: not long ago, flopping a start-up venture here in
Denmark meant loss of credibility and social denouncement. The
so-called Janteloven, defined as a set of views that scorns
individual success and those who set themselves above others;
the who-do-you-think-you-are to-be-better-than-us mentality,
prevailed, in particular in what might be defined as the
tradesmans entrepreneurial culture, where it may still live a
miserable life. It does not apply within the academic
entrepreneurial culture that developed rapidly in DK since the
start of the millennium. Here, it is acceptable even
courageous to fold, as long as the company flops for reasons
that are an inherent part of high-risk high gain ventures, and as
long as no third parties are economically or otherwise
devastated by the disaster. In other words: even well thought
out and well managed start up ventures may crash on the
impact with reality. You cannot possibly cover all aspects in
your preparations, and luck also has some saying. So, as long
as the quality of preparations, decisions and management is
24
impeccable, your personal standing is not harmed by a

company collapse. It could even be strengthened, and surely
you gained valuable and recyclable experience.
Serial entrepreneurs tend to operate in regional business
communities such as the well-known entrepreneurial hotspots like
Silicon
Valley
or
Route
128,
Boston,
where
business
opportunities, customers and venture capital are found in

abundance and where getting known in the right networks is
achievable. In such communities, entrepreneurs can raise to the
level of rock stars. In Denmark this phenomina is less developed,
but still we have samples such as the Navision Billionaires and the
Giga-man.
Finally, it is important to notice, that high-tec venturing is a team
sport. Even though the entrepreneur is often very visible, rest
assured that there is a team behind every good one. Often
carefully designed to match the challenges of the start-up and
early development stages.
And now to the question: what can we learn from all that:
Personal characteristics are important to success. Hence:

when you form your entrepreneurial team, you should think
about what skills and personalities you need to access. We
dig into this later.
Personal networks are also important to success. If you

succeed in getting connected in the regional business
communities, you get access to knowledge and resources
25
that can be applied when needed. You also get access to

experienced
advisors,
who
may
even
join
your
management at some point in time. And you get access to

their networks too. Quite often this allows you to recruit
your personell, to find your founding partners and your
funding sources or even better: to get access to your first
customers. Networks are also an indicator of your ability to
involve other people, which again is a precondition for
growing a business. With entrepreneurship you are really
in the people-business. Enjoy!
The skills: indisputably, the repeated successes of serial

entrepreneurs depend on acquired skills, which allow them
to act almost by instinct whenever they sense a business
opportunity. This sense of opportunity and how to act upon
it- at least to some extend - can be acquired through
teaching and training. Just like good airmanship can be
acquired to some extend in the flight simulator. So read
on to get airborne!
Common sense and rational decisionmaking: This is the

hallmark of fine businessmanship. Take a look at stunning
successes, and you will find them almost without exeption
easy to comprehend. Further, success seems to follow as
a logic consequence of apparently uncomplicated, rational
and obvious decisions. But this picture is deceptive: to
analyse a complex business opportunity, to distill the
essential information, to formulate the conclusions and
formulate the decisions, requires the combination of
knowledge, experience, time and work.
26
The knowledge-part and some experience can be acquired

by learning and training, and that is where the highlights of
this textbook comes in and here it comes:
be relentless in complying with the following five basic

rules. If you are, you have a business opportunity, and
aswers to questions on how to pursue it come easy.
The Entrepreneurs Five Basic

Rules
The following rules2 are the singlemost important checkpoints
in this book. Learn them by heart and put them to the test
whenever you consider a new business venture. If you
comply, you have increased your chances of succeeding,
even more than you may imagine!
Rule No. 1.
Where is the Pain?
If you cannot identify a real pain = a strong need in the market,
you should turn your attention to better start-up projects.
Please be loyal to this! And be carefull too: pain can be so
difficult to identify or interpret. By example: an entrepreneur
invents a wireless diaper that trickers an alarm when fouled.
He thinks that the pain is in the mothers anxiety and guilt
when baby rash (inflammation of private parts) occur. Well
2
The fundamental rules as presented here are copied from the MIT Sloan School of Business
executive entrepreneurial course: MIT Entrepreneurship Development Program, in which the author
participated, Cambridge, Boston Massachusetts, January 30 February 3, 2006 with the kind
support of IDEA: International Danish Entrepreneurship Academy.
27
there is some pain here, but the real pain that eventually
caused a major distributor to acquire the entrepreneurs
company was the need to differentiate an established diaper
brand in a highly competitive and stagnant market with five big
companies, fighting for market shares. So what the
entrepreneur first perceived as a large competitor turned out to
be his real business opportunity and here he found pain on a
large scale.
Rule No. 2.
What is Your Value Proposition?
You need to really kill the pain. There is so much noise out
there and so many fighting for the customers time and money,
that unless you really can do something extraordinary, you
dont get any attention. This applies in particular to new
businesses without a track record.
Rule No. 3.
Quantify Your Value Proposition.
You cannot sell on qualitive statements in professional
business-to-business markets, which is where almost all hightec ventures operate. And you dont get any attention from
your customer, unless you are able to quantify the value
creation that comes with buying your product or service. A lot
of other questions like your selling price also find their
answers, once you have made some calculations on the value
creation. By example: the selling price is determined by the
values that your product or your service creates for your
customer not by what it costs to produce and sell it and a
good deal is equally beneficial to buyer and seller. So once
you know your quantified value proposition, you also know
28
your selling price. Simple and logic isnt it? But it is certainly
not always easy to get the information needed to calculate the
QVP. The diaper-case: introducing a high-end wireless diaper
is expected to increase the sales of ordinary dispensable
diapers by some 3 - 5% simply because it draws attention and
adds a flavour of high-tec and better baby care to the brand.
With an annual turnover of USD 250 mill. and annual net
profits around USD 50 mill. on the existing product portfolio,
the wireless diaper thus will increase profits by 1.5 to 2.5 mill.
USD. A price for the start-up company is agreed upon, based
on a simple payback time of two years worst case - and the
entrepreneur walks away with USD 3 mill. plus some
performance-based options. Not bad for inventing, developing
and testing a simple wireless diaper, which took him three
years and some USD 100.000 to procure.
Rule No. 4.
Who is Your Jury?
Who decides to buy? You focus on your customer, but quite
often several stakeholders have to be catered for, before your
customer is allowed to sign the order form. Identify the
decision makers and prepare yourself for rule no. 5. The
diaper case: the jury is not only the worried mother. Its the
management in particular the CEOs of the large distribution
companies. So Mr. Big is on your jury too.
Rule No. 5.
Prepare Your Elevator Pitch. (1 minute max.)
Now, this rule is very American and somewhat alien to us
Danes. It does hold some qualities though. An elevator pitch
29
by definition: imagine yourself entering an elevator, and there

you meet Mr. Decision Maker and CEO of a very important
company, whom you have dreamt of meeting, whithout being
able to get even close. You now have one minute to catch his
attention, explain your value proposition and get a meeting set
up, before the elevator reaches its destination and Mr. D.
Maker steps out. You probably acknowledge that this requires
a very well prepared speech, where Mr. D. Makers pain is
identified and the perspectives of killing it are cut out
unmistakingly.
Elevator pitches do not work in Denmark for the sheer lack of
high-rises, but there are other ways of bumping into Mr. Big.
Further, the importance of presenting your companys reason
for being, shortly, precisely and to the point, cannot be
underestimated. If you cannot do it, you most likely dont have
a business case.
If you can do it, you can conquer the world at least you can
get a lot of people interested, and thats what your company
thrives on.
The Entrepreneur
Given the importance of the business birth rate, it comes as
no surprise that the personal traits and motives of
entrepreneurs
have
been
exposed
to
comprehensive
research. By example, one of the American grand old men

within entrepreneurship research, Professor Karl H. Vesper of
University of Washington Business School in his book New
30
Venture Strategies" identifies a wide variety of personalities,

all of whom deserve the right to be called entrepreneurial:
-
The single self-employed individual; independent,
hard-working people who work without help from others. In

this group we find small retailers and businessmen as well as
the Mom and Dad company..
-
The job-shopper: someone who is always brewing on a
new start-up venture. Goes for any interesting business

opportunity, which pops up randomly and only rarely goes all
the way to a commercial breakthrough. Quite often, otherwise
sensible entrepreneurs in economical distress turn into job
shopping to survive. Not so bad provided they get back on
their trail once they enter fair weather.
-
The team builder; this type is able to turn even the
most modest of enterprise projects into large corporations

through an incredible ability to find the right employees and
fully exploit their knowledge and talent.
-
The independent innovator: the Edison-type who is
primarily a remarkable inventor, but rarely a great business

talent. Once in a while, they hit the jackpot, and that is
remembered. Great innovators that are able to team up with
executive and skilled business people often produce very
successful start-up ventures. Such teams are the darlings of
venture capital companies.
-
The pattern multiplier type: enters an already existing
31
business
area
with
phenomenal
business
and
organizational talent and turns a local shop into a global

player. In Denmark we have a fine sample in Lars Larsen
from Jysk Sengetoejslager. (Sells reasonably good quality
towels, bed linen, pillows, etc., at moderate to low prices
globally!).
-
The economy-of-scale exploiter is the type who knows
how to bring down the cost level and thereby increase the
earnings through economies of scale and well-thought out
logistics. Henry Ford is one of the most well known.
-
The capital aggregator. This type pulls together a
substantial financial stake, which is used on starting a large

business, which almost from one day to the other establishes
itself as dominating on its market. Not a frequent phenomina
in Denmark, though.
-
The acquirer is at the lookout for businesses, which are
ready to be straightened out, instead of starting from the

bottom. In this group we find the corporate raiders who take
over troubled companies, break them up, sell off the best
pieces, dump the rest, and use the profit to live a life in the
utmost luxury. See the movie Pretty Woman with Richard
Gere and Julia Roberts in which the underlying business
ethics are commented amongst other issues. This approach
however should not hide the fact that many good companies
have been developed by talented acquirers, so this could be a
fine way of getting started.
In fact many companies are
acquired when the original founder retires. New management

often works wonders with such companies.
32
There are many types of entrepreneurs to choose from, and if

this - on the one hand - creates more confusion than clarity, it
contains the positive message, that on the other hand most of
us have some of the characteristics, which match one or more
of these types. This again underlines that there is a kind of an
entrepreneur in all of us. The challenge is rather to identify
what the start-up project requires and then think of getting
yourself a team with a match.
The Entrepreneurial Team

Most high-tech ventures are founded by teams or by partners,
if you like. For many good reasons. Stress and loneliness is
one. You need capacity and you need to share and discuss
your thoughts. The required wide band skills and experiences
needed to handle a technology venture is another good one.
Here is a third from the authors own library of experiences:
once the going gets tough, you invariably get frustrated and
exhausted and ready to give up at some point in time, but
then there is always someone else in the team in a better
condition than you, who manages to revitalize optimism and
pull through to better times. (The hallmark of a real good team
member: he/she knows how to act in difficult times.) Finally,
given the importance of networks, teams have larger
networks than individuals.
So you need a team. But who should they be, and how do
you attract them? Answers to these two questions depend on
preconditions and objectives of your business venture. You
33
will find some of the basics about how preconditions and

strategies relate to your team in subsequent chapters. The
rest can be picked up below.
A good tool to assist you in identifying your vocational and
professional needs is the spider web graphical presentation of
skills. Start by considering what kinds of expertice and
experiences you think you need to establish a team, capable
of handling the tasks and challenges, you expect to meet
during the start-up phase. Then draw up a diagram like a
spider web, letting each radial represent a competence or
experience. Then for each competence or experience estimate on a scale from say zero to ten, the level that you
have access to already. Draw a polygon, and it will indicate
where you are compared to where you should be. If you have
a technical-scientific background, your polygon will probably
lay askew as indicated below. Here, we have fictious team of
a scientist from a technical university and a production
engineer, who have joined forces with a retired CEO. Clearly,
this venture needs access to people with some background
within sales, specific market experience and business
administration.
Founding Team Competencies

General Business Experience
10
Technology
Strategic Business Management
6
4
2
Production & Logistics
Business Administration
34
Specific Market Experience
Sales & Marketing
Start-up Experience
Now, professional skills are not enough to form the complete

founding team. Different personalities that supplement each
other are essential too. Here, we get some help form the
famous American economist, Dr. Ichak Adizes3, who divides
human personal traits into four categories, claiming that you
find them all in each of us, but one of them would typically
prevail. Here they are, and Dr. Adizes recommends that you
try to get them all into your team to get a group capable of
handling any situation:
Producer (P)
Producers like to produce. They stay busy and get things
done. They focus on what we are doing and this makes the
organization functional. They would rather work than go to
meetings. They have no time for filing or planning. They finish
one project and are ready to start another. They would rather
work alone because they have no time to train others. Need
something done? Give it to a Producer.
Administrator (A)
Administrators like to organize. They like rules, systems, and
procedures. They focus on how we do our work. If you dont
have a policy on this, they will create one for you. They make
sure we are doing things right, and by the book. Time is a
primary orientation. They are on schedule and would like
others to be also. Need something organized? Give it to an
Administrator.
Entrepreneur (E)
Entrepreneurs are thinkers and risk takers. They create and
develop ideas of what to produce in the future. They are
energetic and enthusiastic. They are always on the move,
Learn more about the Adizes Methodology at: www.adizes.com
35
sometimes not looking where they are going. Need to start

something new? Give it to an Entrepreneur.
Integrator (I)
Integrators bring people together and help people feel
involved. Their focus is on who is helping and how well we are
working together. This makes an organization organic, or
interdependent, like a living entity. Need to connect with
others or resolve conflicts? Call an Integrator.
How you find such partners ?

Part of the answer is, that it is a marketing job. You need to
sell your visions and your project. So start by preparing your
elevator pitch and a brief business plan. Your prospects will
ask for the latter, once their interest is spurred by the first.
Allow them to put your assumptions to the test. If they involve
themselves even as opponents - the first hurdle is passed.
Secondly, you find your partners via networks. So if you go
about the team creation in a serial way, your acces to
networks increase whenever the next partner is identified.
We also cannot conceil that success in team formation
depends on your own personal traits. Most remarkable
entrepreneurs are very extrovert and charismatic people. It
cannot be taught but it can be promoted. So dont be shy.
Once you feel confident that the business opportunity is really
there and you have checked the five basic rules: consider
what kind of back-up you need and start your quest for
partners and consultants. And also keep one of Soeren
Kierkegaards most famous statements in mind:
individual does not act, destiny cannot prevail.
36
if the
The Incentives
We need more entrepreneurs and we need better ones
with a high expectancy and a capacity for growth. But the
risks involved and the advanced broad-band skills needed
are counterproductive to this. Add to this, that real good
entrepreneurs usually dont need to look for a job and
good
entrepreneurs
are
capable
of
creating
really
interesting working lives for them selves and others. So why

would they bother to start up something of their own?
This question is highly interesting to those who want to
further high-expectancy entrepreneurship. Consequently, a
lot of efforts have been invested in understanding what
trickers an entrepreneur.
As the personal driving force and motivation, Karl Vesper
lists the following:
- An intense need for freedom
- Finds joy in creating
- A need to see concrete results
- Financial profit
- Threats in the present job
- Stimulation by challenging and risky jobs
- Obsessed with the role of entrepreneur
- A need to direct others
- A need to prove own competence to him/herself and
to others
- A need to dominate
-
A need to get a job
37
Vaekstfonden has also been here and found, that among

the many motives, the predominant ones here in Denmark
are the need for creating tangible and much-admired results
and to make money on it.
In USA you often hear that we are in it for fun and profit.
That is very good reasoning!
According
to
Karl
Vesper,
the
entrepreneurs
place
themselves low on Maslows hierarchy of needs in regards

to the need for safety and love, but high when it comes to
creating respect for themselves. That fits nicely with the
above statements
Within
the
five
management
disciplines;
planning,
organizing, human resources, management, and control,

the entrepreneurs turn out to be very good at planning
activities and to select and motivate staff members, but they
are not very good at organizing and controlling the
activities. Thus Karl Vesper.
So where does that bring us? Well, at least one usefull
statement can be deducted: when you set up your founding
team, you need to motivate your tentative partners to join,
and here, you may draw upon the above in attracting good
entrepreneurs: being part of a visible success apparently is
one of the strongest incentives. The possible obscene gain
is another. So be it. Enter these perspectives in your draft
business plan to facilitate your team building.
38
The Personal Preconditions

Finally lets have a look at the working life that awaits you, and at
some of the essential personal preconditions and traits that helps
you getting through the tough years of business formation.
In his Guide for Entrepreneurs and Smaller Businesses [18],
Niels Ravn points out that the entrepreneurs must be prepared to:
-
Make decisions under pressure
Take chances; that is make decisions on a loose
ground
-
Cut through
Be a good loser
Work hard
Cope with deprivation; vacations, family, other interests
Delegate responsibility
Consequently, the requirements of an entrepreneur thus are a

good health, a patient family, and a capacity to work under
stressing conditions witout getting too stressed.
Next a Swedish viewpoint on the subject: Peter Tovman and
Bengt-Arne Vedin claim in their book Start Your Own Business With Success [41], that the ideal personal specifications of the
entrepreneur are:
-
Motivation and energy
Experience within the business area
Work experience
39
A positive life situation
A good education
Focus
The point of views of Tovman and Vedin are interesting from

several perspectives: they underline the business experience as
an important precondition for success, and they also warn against
staring a business out of dire necessity.
In fact, Tovman and Vedin indirectly suggest that you prepare
your business from a secured social and economical position and
settle down in a business area where you feel at home - without
violating the Salaried Employees Act and the Marketing Practices
Act. The latter is the authors addition with a view to the inherent
conflict of interests that arise, when a good employee quits her job
to start her own in the very market where she was previously
paied to operate.
This could be a good place to comment on the relationship
between established companies and entrepreneurial employees.
In the academic entrepreneurial culture and amongst knowledgebased industries, such divorces are generally peacefull and they
often end in cooperation with the old company as the first
customer, maybe even co-owner and represented in the
management based on an investment through its corporate
venture division. This is in stark contrast to the situation among
Danish industries in the late previous century, where active
entrepreneurship was perceived as disloyalty and handled
consequently. But thats behind us now. The essence of spinning
out new companies from existing ones is that of course you must
be methodical in not violating the rights of your employer. Rather,
40
you should look for mutual interests and act based on the
assumption that your employer is governed by common sense
and professionalism when you present you start-up visions.
Types of Businesses
Before digging into the issues of business formation, we need to
establish some categories of start-up companies.
The differences between different types of start-ups are
pronounced, and without a sensible divison into types, we loose a
lot of type-sensitive information. Here is a way of looking at this:
A. The traditional start-up company.
New businesses within trade, manufacturing, service etc. like car
repair shops, hairdressers, bicycle shops, plummers, etc.
Companies like lawfirms, dentists, etc. also arguably belong to
this group. These businesses are much needed. They keep many
hands and heads busy. They keep the existing business
community on the marks. They create some wealth, they provide
a breeding ground for entrepreneurship in general and they
deserve all the back up they can get from regional business
development programs, since it is not easy at all to get such
companies up and running. It requires a lot of hard work,
continous
attention
and
high-level
vocational
skills
and
craftmanship. Though highly esteemed, they are however not the

focus of this textbook.
B. Knowledge based companies
This is our field of interest. These companies depend on specific
41
and advanced knowledge. They thrive on research results and

close relations to universities, research institutions and major
knowledge based industries. They are often started by teams of
highly skilled academics and business people, and occasionally
they create stunning values to their owners, customers and
employees. Since the late nineteen nineties, a venture capital
industry has emerged in Denmark to stimulate the growth and
success of such companies through early-stage high-risk highgain investments. A lot more about this later in this book.
Knowledge-based companies operate in a wide variety of
business areas, and their need for capital and competencies differ
correspondingly. For the purpose of this book, it is convenient to
divide them according to their need for resources to get into
business.
The underlying reasoning is, that from the entrepreneurs point of
view,
resource-demanding
and
growth-oriented
start-up
company is very different in objectives, working life and

management skills from a start-up company with a capacity for
breaking even, based on own earnings, the founders savings plus
maybe a little from family and friends.
One may argue that the divison into types should include a divison
into biotech, life sciences, information technology, communication
and industry, since the capital requirements and the investors in
the venture capital market reflect this kind of mapping. However,
the preconditions for venture capital funding are basically the
same, independent of types, so for the purpose of this book, such
subdivision does not really matter.
42
What really matters in the way a start-up venture is managed, is

the need for resources to break even. So a sensible subdivision
related to the following chapters would be
1. Resource demanding business ventures. By example:
a. Drug development companies
b. Manufacturing companies
c. Research and development companies
2. Self-contained business ventures. By example:
a. Software companies
b. Consulting companies
Whether your start-up venture belongs to one type or the other
depends on whether or not it can get up and running based on a
combination of following three resources:
1. FFF = Family, Friends and Fools, who invest in your
venture.
2. In kind = using facilities that belong to someone else,
benevolent to your course.
3. Your first customers money. That is really the best.
If you can do that, you dont need to bother about professional
funding like venture capital and hence, your company belongs to
group 2 unless you want it kick-started and expanded rapidly,
which again requires external fundig.
If funding is what you want or need, you have to acquire capital
from the financial markets, and that is quite a challenge, which we
are going to spend quite some time on studying closer.
43
Here is another statement that may surprise you: the rest of this
book is about catergory 1: the resource demanding and venture
capital backed business ventures. The reasoning is simple: if you
can do that, you can do anything including starting selfcontained business ventures.
In the lecture rooms at the Technical University of Denmark, this
approach invariably provokes some of the students, who find it
arrogant and over-ambitious. But this is an unjust interpretation.
As pointed out unambiguously in chapter 1, we need more highexpectancy entrepreneurs. Insight in what it takes to start a new
company with a venture capital potential is your personal
precondition for deciding, if you want to do it. Finally, there is a lot
to learn from venture capital backed business formation. Study
what it takes and you become a better entrepreneur and business
manager, whether you decide to go for external backing of your
business venture or not.
Enough of this. Lets for a moment have a look at the fundamental
precondition for a start-up venture: the business idea. You need to
have an idea, so you need to do some creative invention to start
with.
Opportunity-driven Creativity
Two schools with very different vews on the importance of
creativity and the ability to train creativity seem to coexist:
(According to the Hunter Center of Entrepreneurship, University of
Strathclyde, Scotland)
44
The elitist view:

1. Creativity is a rare talent
2. Creativity cannot be taught or learned
3. Creativity is irrelevant to most employees
4. Creativity is an individual process
The developmental view on creativity:
1. Creativity is available to all
2. Creativity is released through training and development of
personal potential.
3. Creativity is within the scope of all jobs
4. Creativity is encouraged or discouraged within groups,
depending of their climate
5. Creativity is released by personal stuckness.
It appears that the elitist view is somewhat outdated and had its
time in the vertical hierarchies of classic industries. As related to
starting and developing new businesses, it is completely useless
and will scare any valuable partner or employee away.
The developmental view on creativity is more in line with
entrepreneurship, though it can be overstressed if combined with
the view that creativity is the singlemost important precondition for
entrepreneurial success. In this book, we take a more balanced
view on that.
1. The commercial and creative potential of an idea is less
important than the management and marketing skills of the
entrepreneurial team.
45
2. A good idea in a business start-up context emerges as a

logic answer to an identified business opportunity: that is: a
need or a pain in a market.
3. Consequently, creativity depends on the entrepreneurs
ability to identify business opportunities. Hence we call it
opportunity-driven creativity.
4. Opportunity-driven creativity can be trained. We have
different talents, but whatever we have can be improved.
5. Opportunity-driven creativity is provoked by a desire to get
a company up and running.
The rest of this chapter is about how to increase your opportunitydriven creative skills, plus some usefull background on how ideas
are conceived.
Before we embark on this, however: a word of warning to the
technology-driven person: If you have a technical background,
you are probably used to concentrate on technical solutions to
complex problems. Market opportunities and the perspectives for
starting up a new business and make a profit probably rank
second and is new turf. So you have to exercise some discipline
in validating your ideas, because now you need to look at
customers need and business opportunities first and technology
second. Use the five basic rules from chapter one to start with to
avoid getting away with ideas that do not really appeal to those
who are going to pay.
The Birth of an Idea
46
At this point, we need to introduce Dr. Sigmund Freud and his

classic model of personality, published in The Ego and The Id
(1923). Freud lived and worked as a a psychiatrist in Vienna from
1886 to 1938.
Perhaps the most significant contribution Freud has made to
modern thought is his conception of the dynamic unconscious. In
our context the dynamic unconscious is capable of producing
original ideas when being provoked and allowed some time at
work.
Consequently, we need to know how to provoke it. This is delt
with below. In a later chapter on management, Sigmund Freuds
personality model once againg comes in handy in explaining the
impact of context on behaviour, which again helps you to shape
and train your team.
Sigmund Freud divides the conscious layers into the Super-ego,
controlled by culture, norms and rules which we may also call
the context in which the individual exists and the Ego, which is
controlled by rationale, logics and common sense. The model
indicates a hierarchy with the Super-ego in charge.
Down under, the sub-conscious layers - or the ID in the Freudian
terminology - prevails. The conscious layers feed the ID, inducing
feelings, anger, frustration, happiness and the like. Freud was
inspired to develop this model by his observations of hysteria,
which he perceived as a kind of volcanic eruption that broke
through the filter and into the Ego, causing a very non-rational
behaviour for a period, until the pressure released and normality
47
settled. Now, in Freuds view, this hyper-pressure in the

unconscious layers develops as a concequence of the individual
being subject to a mismatch between context and basic needs
and instincts like the mismatch between Victorian moral rules
and basic human sexuality, which prevailed in Vienna during
Freuds working years. That was Freuds field of interest. We are
looking at creativity, however, but basically, the processes are the
same.
According to Freuds model, ideas are created when the

conscious layers, not being able to produce solutions to specific
urgent problems, provoke the unconscious layers. (Frustration
and personal stuckness prevails)
The unconscious layers go to work. They return lots of ideas,
which are filtered in the boundary layers between the conscious
and the unconscious. Initially, production is high but quality is low.
Later, production goes down, but quality increases. Sometimes
48
often days after being provoked the real original idea appears.
The Birth of the Good Idea

Let us assume for a moment, that the Ego is bombarded with
more or less crazy ideas. If you are very particular in sorting, not
much will be left and often the creative but perhaps original and
inspiring ideas are rejected just because they violate convention.
So in short: gard the conventions and you get no good ideas. This
is probably one of the most difficult preconditions to change, and
you may need to work hard on it: You need to establish criterias
for filtering ideas, which allow original ideas to present
themselves. Fortunately, it seems that this ability can be trained,
and that it is influenced by context.
The other precondition for generating good ideas is to allow the ID
to work on the problem for some time. So take your time and dont
rush but keep the pressure or the frustration level high, until
your ID has delivered.
The third precondition for generating good ideas is quality food for
the ID. Your perception of the pain of the business opportunity if
you like must be correct and qualified. Otherwize the rule Crap
in Crap out applies. So here we arrive at one of the central
statements of this chapter: Getting good ideas depends on your
ability to spot the pain and then start working on ideas on how to
solve the problem in a way that creates values for your customer.
This is what opportunity-driven creativity is about.
- and to summon up:
49
Opportunity-driven creativity depends on

1. Your ability to identify pain in the market. This again
depends on experience, attention and observation, and
you can develop your skills through training.
2. Your ability to identify and quantify customers value
creation, This ability is depending on experience and
training. If you dont have that, you should get access to
someone that does.
3. Time and context in the generation of ideas: You should
allow ideas some time to develop, and you need to create
a friendly environment that promotes the flow of ideas
through incentives, encouragement and rewards.
4. Many ideas to pick and chose from. This will allow you to
increase the quality of your idea portfolio instead of
jumping to the first useful idea that comes up, which again
is a typical error amongst frustrated entrepreneurs who
cannot wait to continue into business development.
From Pain to Problem.

A problem is a need, a demand or some pain put into words.
Thus, the problem formulation is the art of turning the recognition
of a need into an exact and quantified account of what the pain is
about.
As the wireless diaper case indicates, problem formulation is not
always obvious. But if you are not methodical in translating need
into problem, your idea-generation will run askew.
By example: we all need point-to-point transportation, but when
you buy an Aston Martin it is because you have a need of a more
50
sophisticated nature, which is not satisfied by a comfortable cabin

on four wheels and with an engine to press it foreward from point
A to point B on your command and under your control.
Most often, the identification of pain in a market is the most
difficult and time-consuming part of the creative process. And
since you are about to invest your future time, career and some
money in your business venture, you probably agree that it makes
sense to also invest some time and some work in the identification
of a demand and the subsequent formulation of the problem.
The importance of this kind of preparations before starting
inventing was indicated by a famous statement, made by Albert
Einstein, being put to the test by the question: The world will
disappear
in
an
hour
from
now.
What
will
you
do?
Answer:Spend 50 minutes in understanding the problem and 10

minutes in solving it. That is a good division of time, indicating,
that only when you really understand the nature of the problem
will you be able to solve it.
The obvious needs, which we are all able to register, draw many
entrepreneurs from the principal that where there is honey there
will be bees. Easily registered needs, which can be met by
relatively simple means, put your entrepreneurial and executive
power to the test since the competition will quickly become
unbearable. So maybe you should look for some solid entry
barriers which you are better than most to negotiate due to your
education and experiences.
From Problem to Ideas

51
Lets assume that you have identified a highly interesting business

opportunity. Next step is to put your and others ID at work.
Having grasped the problem, the ID starts to produce ideas and
the Ego starts to sort them.
So you need filtering criteria.
Initially it is in itself a good idea to allow all kinds of ideas with a
business perspective to filter through to conscience. Thus, your
first filtering criterium could be: we are looking at ideas on how to
solve a specific and given problem, which appeal to many wealthy
customers. In this way you keep the commercial objectives in
focus, but otherwise allow creativity to span over many
technologies and skills. Further, you dont get distracted by other
issues, which you have to address later in the process.
Hopefully you end up with a number of ideas to pick and choose
from. Now you may tighten the knots and set up some casesensitive requirements like:
1. The product or the service must be technically feasible.
2. There must be market entry barriers like:
a. The know-how and experiences of your team must
be essential to the development and rollout of this
product or service.
b. There must be niching opportunities (a small and
specialized market, which allows you to establish
your
company
without
being
washed
out
immediately by someone bigger or better.)

c. There must be freedom to operate (no patents that
cannot be worked around or acquired) and also the
52
possibility for filing own patents

3. It must be a real painkiller.
4. The value creation must be tangible, realistic and
significant.
Opportunity-driven
Teams
Creative
Theorem 1: Many great ideas are born in a creative process

where several people with different qualifications participate.
Theorem 2: Many great ideas are born as the result of changes in
markets, be they technological, demographical or economical,
which create or increase demands. By example: oil prices
increase and so does innovation and company formation within
rational energy consumption and sustainable energy production.
As a consequence of these theorems together, viable product
concepts are created as a result of people in a collaborative effort
- looking for solutions to problems, which occur as a result of
change.
This viewpoint has many adherents and it can be substantiated
by remarkable results. That is why many techniques on how to
stimulate the inventiveness of groups have been developed in the
course of time.
The American business consultant, Alex Osborne, developed a
53
well-known method, the brainstorm, in the late ninenteen fifties.

Osbornes clients were corporations with a well-developed
hierarchy. When setting up project groups in such organizations, it
was impossible to avoid internal tensions and limitations because
the members were either managers of others in the group or
competing to become managers, themselves. The first did not
want to expose their weak sides. The latter appraised their bosses
ideas and critizised their collegues. And hence the group got
stuck, and no quality ideas were produced. Osborne found that
such groups produced less creative output than each member on
his or her own, and the climate was lousy. Everybody got
annoyed.
Thus inspired, Osborne developed the following four rules for idea
development in groups:
1. Criticism of ideas is not allowed.
2. As many ideas as possible must be produced.
3. Original and unconventional ideas are welcome.
4. Each participant build on the other members ideas.
Idea-creating sessions are repeated, filtering criterias are
tightened from session to session, specific ideas are selected for
further development, and everybody are having fun.
Today, Osbornes principles are commonly recognized, and why
not profit from his endeavours, also in entrepreneurial teams?
At the Technical University of Denmark and also Copenhagen
University, students have been working with opportunity-driven
creativity in teams for many years. Groups are formed as part of
54
the entrepreneurial teaching programs. In general only few of the

team members know each other in advance, and they have only
little experience to draw upon within business economics and
specific market insight. So how does it work?
In general it works well. But the results depend mainly on three
preconditions. First, that the participants succeed in challenging
and provoking each other in a positive and stimulating way, which
draws on humor and reward. Secondly, that criticism, which is
most often confined to a few individuals, obsessed with resisting
change, is avoided or ignored. And thirdly, that the groups actively
seek and exploits mentors and lecturers during the creative
phase.
A side remark: the groups in general encompass a specific
technology at high level to provide for a competitive vocational
strength from the very start.
Some of these groups have continued collaboration, ex university
and created great start-ups, won venture cup competitons and
even acquired venture capital, big time.
A final recommendation to innovative teams: at the end of the
creative sessions, the candidate business ideas should be
checked and comply with the five basic rules of business
formation. Remember?
From Good Idea to Company

One of the hallmarks of the skilled entrepreneur is the ability to
55
develop realistic and applicable business strategies and enforce

them.
A highly recommendable book on this issue amongst others - (in
Danish) is Forretningsiden om ivrksttelsens tidligste faser
by Sren Hougaard, Samfundslitteratur, 2004, ISBN 97-5931106-1 and in English: The Business Idea The Early Stages of
Entrepreneurship, Samfundslitteratur, ISBN 87-593-1136-3.
It is however, probably not possible to master the complex
process of designing appropriate strategies through studying
without training. And learning by doing, off course is a very
effective though not always the most cost-efficiant way of
acquiring some sound and solid skills.
This is also a field where experienced advice is invaluable. So
once your ideas on how to break into a market and establish a
position start to materialize, you should find someone who has
been there and done that and get some feedback on your
strategy.
Some basic preparations are mandatory, however. Otherwize you
waste your mentors time and your own. Here is one of the most
important:
Get to know your future market. Without insight and without a
basic understanding of what goes on there, you fight like a blind
hen.
In chapter XXX. Professor Michael Porters systematic approach
to understanding the fundamentals of a market will be presented.
56
(The Five Forces). This is a good starting point for developing

appropriate start-up strategies.
Once you understand the balance of power between stakeholders
in the market, the forces that drive change, and the relations
between companies and customers, you have established the
most important preconditions for developing sound entry
strategies.
Next, you also have to decide what kind of company you want to
set up. Hopefully, you are a high-expectancy entrepreneur looking
at business formation as a time-limited project, aiming at creating
a perspective and expandable business with some exit
opportunities. This cohers nicely with the venture capital approach
to business development.
A short stopover in the field of venture capital to provide you with
strategy-relevant information:
Within some areas like biotechnology and drug development,
venture capital backed business formation is probably the only
applicable concept.
Since venture capital investors are gregarious animals by nature,
you will find business areas, which are dry like deserts from a
financing point of view. Typical examples are stagnant markets
with low innovation activities and little turnover in related stock
markets. Check the situation and include your findings in your
start-up strategy. You may save incredible amounts of time and
frustration if you can do that.
57
So lets summon up your preconditions for developing your

commercialisation strategy:
you have identified a business
opportunity (some pain), you have a portfolio of product- or

service ideas, you have a qualified understanding of the market,
which you are about to enter, you have reflected on the type of
business you want to start, and you probably have discussed your
thoughts, ideas and assumptions with some experienced
mentors.
Next step is to develop a sensible strategy for establishing your
company in a perspective position on a market. Here is a
collection of templates to pick and choose from:
The Sleeping Lion Strategy
This is the stealth approach: you sneak into the market place
without anyone noticing. You develop your customer relations
and your economical strength before anyone starts to feel
threatened or hungry. Once you become visible, you have
achieved the staying power needed to survive in a hostile
environment. Your competitors will start thinking of acquiring
your company instead of fighting it.
Riding the Tiger
In this strategic concept, you act on the change that follows
when real big companies are on the move. When companies
like Google or Microsoft or Hewlett Packard launch new
products or technologies, a lot of new business opportunities
follow by consequence. Microsoft alone has created the
preconditions for a whole start-up industry and also acquired
some of the more sucesfull ventures. Navision is a well-known
58
Danish case, which created a few new DK billionaires. So

riding the tiger implies that you do some sensible technologyand product forecasting and prepare your own business
venture for launch, when your predictions start to materialize.
The Trojan Horse
This is another stealth-like approach: you establish your booth
in the marketplace to sell some products, which dont offend or
threat anyone there.
Thus, you are allowed to get into
business. And once your business is up and running, you

launch the real thing that scares your competitors and prompt
them to act. And if they cannot beat you, they buy you. Thats
exactly what we want them to do.
This approach comes in handy if you have invented a killer
application or if you control a patent with the capacity to
eventually wash out present technology from the market. Here,
you need to establish your business activites below radar
detection level to avoid aggressive countermeasures from
threatened giants.
Hand in Hand with Mr. BIG
Here we refer to early strategic partnerships that offer you
protection and distribution channels, normaly not available to
start-ups. By example: you have invented and developed a
perspective new laser technology, which allows the telecom
companies to expand bandwith in existing fibreglass networks
for a modest investment. Clearly, such companies would never
buy new technology from nacent companies without a track
record. So you have set up an agreement with one of the major
suppliers of such equipment. They do the marketing and
59
customers relations bit. They also do the manufacturing and

they help you getting from lab to manufacturing. They allow you
some discrete precense in their markets to enable you to do
further demand-driven innovation, and they support you in what
you really master: research and development. So your
company is now a R&D company, living from royalties and
licensing. Rest assured that your big partner continuously
considers buying your company. So your next strategic
challenge is to push the validation of your venture by increasing
your patent portfolio and new products in your pipeline and
make yourself independent from Mr BIG to tease his appetite.
The Numskull Jack Strategy
Here you hide behind an odd appearance, a strange business
concept, and a completely different behaviour in the
marketplace. You are completely unpredictable, you challenge
sometimes even violate paradigms, and your competitors are
simply not taking you serious until too late. You get into
business by addressing a target group that doesnt mind your
strange ways. They may even love it, and you may even
acquire a cult status.
The Danish author Hans Christian Andersen gives us a
wonderful example from his world of adventures: KlodsHans
(Numskull Jack) rides a goat, he collects a damaged clog, he
fills it with mud and a dead crow, and he offers his collection to
the princess. He has a lot of fun, he is good company, and he
wins the princess in front of his two orderly brothers. They are
everything a mother in law could dream of. But the princess is
the decision maker, and they failed to understand her pain. She
was bored and fed up with mainstream.
60
A few examples:
Danish readers probably remember the BonBon sweets
manufacturer, who introduced sweets named Dogfarts, Big
Boops, Seagull Droppings and the like. The names were
inspired by local early teenage culture, and the disrespectful
and unappetizing products completely took the market by
storm.
The author had the opportunity to hear the Symantec story, told
by the companys founder in Austin, Texas, 1992. The
company was founded just ten years before. In its early days,
Symantec appeared odd, run by a spoiled Ph.D student from
Stanford University. Symantec until around the mid eighties had a flavour of casualty, beer, redwine, and Californian
college culture to it, which the Texans didnt like at all. What
might not work in Texas, however, worked on the West Coast
and allowed the company to get into business in San
Francisco. After a few years working uphill, where the founders
learned about the software business the hard way, Symantec
changed from developing own software products in a job-shop
like concept into acquiring and merging software companies
and putting them back to work in a better shape. This is a
completely different business model indeed, and two years
after the successful takeover of Peter Norton Computing
in 1990, the company valuation on the NASDAQ stock market
exceeded one billion USD. Now, this surely appealed to the
Austin audience. To day; Symantec is a global company with
more that 15.500 emplyees.
61
Likewize, the author in early 2006, heard a Cambridge-Boston

located venture capitalist admitting with every sign of dismay,
that he had invested in a company named BoingBoing .
(Originally bOINGbOING). Boing Boing started as a magazine
in 1988 in the cyberpunk subculture. Themes and issues
usually were treated from a left-wing perspective. Boing Boing
became a website in 1995 and later relaunched as a weblog on
January, 2000, described as a "Directory of wonderful things.
The company incorporated in 2004 as Happy Mutants Ltd.
(This name was probably even more adverse to the venture
capitalist.) BoingBoing represents an anomaly within company
cultures, which seems to have its devotees among Eastcoast
intellectuals and leftwing liberals. Its editors are cult persons, it
has won the prestigious US prize Web log of the Year twice,
(2004 and 2005) and it seems full of energy, initiative and
perspectives, even from a more republican venture capitalists
viewpoint. An interesting combination of left wing intellectual
business venture, backed by cool venture capital, which one
rarely finds on the European side of the Atlantic.
So much about the Numskull Jack approach. If not the best in
technology venturing, it does make life a lot more coulorfull to
the entrepreneurs and to the rest of us.
The Moving Target
This strategy applies to agile new companies, able to move
quickly to other markets and other products, once their
competitors catch up with them. You need to be quick to
predict and exploit new business opportunities and in particular
you need to link your product development activites closely to
your market strategy (which is a generic thing, by the way. All
62
companies should do that.)

The Need for Speed
Here, we are in a situation where rapid technological change
prevails. Since large companies are usually locked by
investments and momentum, they leave it to new bold
companies to innovate and to exploit business opportunities,
created by new technology. Hence, they rely on outrunning the
pioneers and beat them on distribution channels and customer
loyalty, once the market has developed through their triviality
limit.
You may however outsmart the big ones by creating a situation
where acquiring your company is a more cost efficient solution.
If your technology is of strategic importance to the big ones,
you may even push the validation of your company beyond
imagination.
By example: the dominant Danish telecom company TDC
stated, that it waited to enter the market for internet telephony
until it had matured and demonstrated that it was worthy of the
interest of this grand company.
In this rapidly changing market, waiting however is not an
option, and Skype, which was hardly established when TDC
made the above announcement, was acquired in 2005 for a
sum that exceeded the valuation of TDC.
Set up a Net and wait for Fish
63
Another strategy, which has demonstrated striking capabilities,

and which fits well into high technolgy venturing from advanced
research labs: You push the technology into the frontier area,
where there is no significant business to be made, but you
have reason to believe, that at some point in time there will. So
you set up your company and you develop your technology
beyond market standards and then wait for industry to catch
up. Sooner or later the big ones arrive to find that instead of
investing time and money in developing their own proprietary
technology, they acquire yours if their price offering is good
enough.
One may say that Giga, acquired by Intel in a bidding
competition with Cisco, did that.
You may also combine ideas and principles to develop your own
hybrid start-up strategy.
What is often overlooked, however,
when newbies develop start-up strategies, are the entry barriers

and the time that it takes to get established in new markets. In
general, markets are noisy places, customers have their favourite
suppliers, and they dont buy from unknown companies without a
track record, unless they really have to. This is why the five basic
rules are so important. So when you set up your strategy, you
should in general address these questions:
Is the pain strong enough to counterbalance the

customers disinclination to buy from a new company?
Is there a niche, so small in numbers and market potential,

that a new company is allowed to conquer it, to survive in
it, and to establish a stronghold from where to expand out
64
of it?
Is there a path of least resistance to the market, which

can be navigated quickly without spending too much time
and money?
Once you have developed a sensible start-up strategy, it is time to

proceed to execution.
This takes some planning and budgetting, which we are going to deal
with in the next chapter.
From Strategy to Business Plan

This chapter is supplemented by Annex 1: a recipy for business planning,
which includes an overview of the job which lays ahead of you to allow you
to plan and to work efficiantly and on the website, which this book relates
to, (www.entrepreneur.dk\textbook.htm), you will find a complete template,
which can be copy-pasted into your own document to eventually become
your own business plan.
Do apply some case sensitive common sense, however to customize your
structure and coverage of issues. Templates are templates and business
start-up is a very case sensitive matter
The Purpose of the Business Plan.

Business start-up is the result of a decision - made by the entrepreneur and
repeated by the stakeholders: near-and-dear ones, partners, investors,
employees and advisers just to name the most important.
65
So first and foremost, the business plan is a prerequisite for a highly

important personal decision and for involving others, whom you need to
relate to your project.
Next you need money. Whether it comes from FFF (including business
angels) or from venture capital doesnt matter in this context. You need to
have a business plan, explaining your business opportunity, (pain,
customers, value creation, market, competitors, start-up strategy, etc.) how
you intend to execute, how much money, you need, what you need it for,
when you need it, how cashflow is expected to develop over time, and finally
whats in it for your investors and how risky it is.. Thats about it.
Having passed these two hurdles successfully, you are ready to act. The
business plan includes a project plan, and so, it is also a project
management
tool,
specifying
activities,
resources,
time
schedules,
milestones and results. Your management skills are put to the test, and your
ability to deliver specified results at milestones within your budget, are
monitored. Your performance impacts your future role in - and often also
your ownership ratio of the company. More about this to follow in chapter
XXX, but it underlines the importance of the business plan as a project
management tool.
Once your business is established and starts to consolidate and expand,
your management will require an updated business plan all the time. Good
managerial practice requires the management team to continuously plan the
future strategy and activities of the company on the basis of experience,
present situation and expected future conditions. That is exactly what a
business plan does. So a business plan is also a dynamic document, which
is continuously being updated to serve the management.
In short: the business plan is the entry fee to entrepreneurship at least the
66
high-expectancy entrepreneurship, which is our field.

Students at DTU critizise the business plan early versions for being highly
hypothetical, and they are most often right, since much of the information
needed is very difficult and time-consuming to obtain and hard to analyse.
So, yes, the first business plan is pretty much science fiction, and
consequently, the business venture is highly risky at this stage. But then
again, this is the nature of starting new businesses, and there is no better
alternative in complex and venture-backed business start-up. Further, the
business plan allows you to adjust quickly from fiction to prediction, once
facts replace assumptions.
And finally, to obscure the nice painting, produced so far, Babson College,
Massachusetts,
one
of
the
most
distinguished
US
schools
of
entrepreneurship, launch a research project, late 2006, to uncover the true

role of the business plan as a precondition for success. Quite a number of
smashing start-ups didnt have a plan at kick-off time, at all. Then, what did
they have, what kind of preparations did they do, and when did they write
their first business plan? While waiting for science to give us some answers
here, we maintain the importance of a decent business plan, since you will
get absolutely nowhere with the Danish community of venture capitalists and
professional business angels without it.
Elements of a Business Plan

One important issue, before your start: some of your most important readers
dump your business plan if they dont capture the perspectives within few
minutes. So let your initial summary be your elevator pitch and help your
overloaded readers to make the day.
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There is no such thing as a standard for business plans. There are a lot of
templates available, however. (37.400 hits on <Business Plan Template> on
Google, August 2006. I didnt check them all).
More important than trying to pick and choose from this vast array of
samples: apply some common sense and cover the essential issues
according to the nature of your business case and your conditions for
executing and then maybe use a couple of the templates as checklists to
make sure you didnt forget anything important. .
With a view to the above purposes of the business plan, this following list of
themes gives a good coverage:
First issue decides if your business plan is being read at all.
1. Summary, max 1 A4 page, including
a. How much money is needed and indicate investment
perspectives if foreign capital is an option at all
b. Complience with four out of The Five Basic Rules:
i. The business opportunity (the pain)
ii. Your value proposition
iii. Your quantified value proposition
iv. Your customer decision maker jury.
c. Who are you, and why are you capable of managing this
venture?
2. Your vision: is it a company, being acquired, making you and your
partners very rich, is it total global dominance in the market, is it a
fully controlled family-owned company or what?
3. Your management team. (Show us the spider web)
4. Your start-up strategy
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5. Your company specifications

a. Legal type
b. Staff and organization (dont overdo it at this early stage)
The next six issues are real important, since they sell your project.
6. Your customer(s). Comprehensive coverage and possibly interviews
or other types of imperical information, please.
7. The pain in more detail also with customers comments, if
possible
8. The value creation quantified also with customers comments, if
possible.
9. The product related to the pain: how does that really work?
10. The product from a technical and economical viewpoint. Try to
calculate unit prices, identify barriers to production, scalability of
production things like that.
11. The product from a legal viewpoint: Freedom to operate, patent
opportunities, specific risks related to use, legal barriers to trade, etc.
The rest of the plan demonstrates that you have been methodical and
prudent and tried to foresee obstacles, opportunities, ways to handle these,
etc. We are in the business school field, now. Your skills as a business
starter are indicated. Trust in you is established, and that is a very important
thing within team sports.
12. The market(s), with some coverage on:
a. Michael Porters Five Forces if applicable
b. Important driving forces like technology change, change in
macro economics like India and China coming up, etc.
c. Competitors: knowing and understanding your foe is your first
step to victory.
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d. Your competitive edge.

13. The business system
a. Production
b. Distribution
c. Revenue streams
d. Value chains and where to achieve control of them
14. The technology and -trends
15. The IPR (Patents etc.). Maybe allready covered in your section on the
product, so here you can take the strategic and economical angel on
patents and know how
16. The forecasted development in sales and market shares (A
precondition for budgeting)
17. Budgets: cash flow first and foremost.
18. Conclusions on perspectives and capital requirements.
19. Worst-case scenario: risk assessments and some contingency plan
to cut losses or recover investments.
20. The business development plan
a. Objectives
b. Activities with milestone specifications
c. Ressources needed
d. Time schedule
e. Budget: total and cashflow.
This should cover the essential issues: why you believe, there is a business
opportunity, how you plan to exploit it, why you think your team can do it, how
much you are going to sell, how much money you make, how much money
you need and when you need it , and what is in it for your customers,
stakeholders and investors.
Finally, a few words about working out a business plan: consider following:
A business plan is a kind of a differential equation. First you determine the
70
boundery conditions. Then you set up and solve the equation. The solution
is number of sold units as a function of time. Be it products, hours or
whatever. So working out a business plan can be divided into two phases:
intelligence and analysis. Intelligence provides the preconditions for
forecasting sales. Analysis predicts sales, designs the motor (the business)
and calculates consequences of predicted sales.
Kind of weird way of looking at it, you may say, but then again: the
singlemost important information which the business plan tries to provide, is
how your sales develop in time. If you are able to forecast how many
products or how many hours you are able to sell in the time domain - the
rest of the calculations are state-of-the-art and relatively straightforeward
business economics.
By example: you have determined the price per unit (unit costs) as a function
of units produced (Hours or products: doesnt matter. Find the cost), and your
business plan gives you a forecast of your sales (number of units sold) as a
function of time. It is then a simple matter for you to calculate total production
costs as a function of time. From your quantified value proposition, you have
determined your selling price. So now you are able to determine your
revenues and your profits as a function of time. From your studies of the
market, you also know the payment standards (time from invoice received to
transfer of payment), and hence you are able to calculate cash-in and cashout of your companys money box. Further, you have calculated the cash
drain from running the business as a function of time. Consequently, you are
able to calculate the net cash flow as a function of time. By establishing the
integral of the net cash flow as a function of time, you know at each point in
time, how much cash you have in your money box. Since there is no such
thing as negative cash in hand, the integral of net cash flow gives you your
capital requirements. You simply top up your money box with cash from
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loans and/or equity capital until the cash in hand is positive. Whether
achieving external funding is realistic, is another issue, addressed elsewhere
in your business plan.
Dont worry if all this sounds confusing at this point. We will dig into the
economical calculations in a later chapter. Just capture this statement: the
utility of a business plan depends on the assessment of the sales as a
function of time.
Thats why DTU students often find the business plan completely useless.
They are not capable of estimating sales at any level of credibility. But that
changes rapidly, once customers enter the arena. So thats another
important reason to involve customers at a very early stage.
For your further enlightment, reference is made to a good book on business
planning: (In Danish: Forretningsplanen. Hndbog for Nye Virksomheder,
McKinsey & Partners, Brsens Forlag 2000, ISBN 87-7553-798-2.) The
original authors have been kind enough to offer their book to the public
domain by making a PDF available from the internet. The title is: STARTING
UP Achieving success with professional business planning: Authors:
Thomas Kubr, Heinz Marchesi, Daniel Llar, McKinsey & Company, Inc., The
Netherlands.
Please Google it to free the author from any accidental
reference to a site, where copyrights may have not have been sorted
properly out in advance.
Marketing Economics for Entrepreneurs

According to statistics on bankruptcy, the most common reasons for
enterprise projects to capsize are related to markets and sales. Pretty
obvious, one may add, but then again, quite a few fold for a number of
reasons like poor management, no access to capital, production problems or
72
too high production costs eroding profits, patent infringements etc. etc.
Pitfalls are plenty. All that counts for only 1/3 of chrash landings, however.
The Devil is in the market place.
So statistics tell us to concentrate on market issues and on getting our stuff
sold.
Now, in most cases, high tech entrepreneurs work in highly specialized
Business-to Business markets. It may take years to fully understand such
domains, to develop networks and customers trust and loyalty, to find your
niche and your unique value proposition to develop your distribution channels
and to learn to sell.
As a founder, you dont have the time, nor the money to climb the learning
curve. So you should be looking for ways to quickly acquire a working
relationship with your future market.
Profesor Michael Porter of Harvard Business School in 1980 gave us a
methodology which allows us to quickly grasp the essentials of a specific
market: his famous Five Forces Model. Very usefull, also to founders and
would-be entrepreneurs.
A lot of literature is available in the puplic domain for those who want to dive
into this. One real good reference is:
http://www.quickmba.com/strategy/porter.shtml.
Michael Porters Market.

In this chapter Michael Porters Five Forces are briefly introduced. We will
also look at the typical response of the market to a new product. With these
73
model considerations as a basis, we will look at some simple, but important

fundamental principles for the planning of the marketing activities and the
assessment of the effects of them.
Michal Porters five forces act in the market, so initially we need to define the
market..
Our business is in the center of the universe with competitors on both sides.
Below we find our buyers: the distributors, (our customers) who bring the
products further out to the next layer in the food chain, which eventually ends
at the end users. The competitors and the buyers constitute the market.
Thats it. Above the market we find the the suppliers. Below it, we find our
buyers customers. On both sides of the market we find interesting
phenomina called intruders and substitutes.
These are the five stakeholders, and Michale Porters Five Forces are forces,
which push the stakeholders to act in specific ways in our market. You may
also perceive the five forces as major economical interests which constitute
the preconditions for the ongoing processes in the market. (A process by
example: a slow shift from a number of small competing industries which
were established during an early pioneering period (like die Grndezeit in
Germany
just
after
the
French-German
War,
when
French
remunerations were used to finance German industrialization)
war
into a
consolidated market with few huge companies (Like Siemens or Philips),

competing hard in a saturated market. Long-term, sometimes even subtle
and hardly perceivable processes change the market over time. Or sudden
technological breakthroughs penetrate the market, driven by clever
entrepreneurs, who completely wash out the previous community of not so
bright companies. (The creative destruction). This is Michael Porters forces
at work.
74
So in brief: if you study your market by statistics, you get the static picture.
If you apply Michael Porters Five Forces model, you grasp the dynamics too.
Both the statistics and the dynamics are important preconditions for acting in
a market.
Statistics are food for short term planning. The Five Forces impact strategy.
If you understand them, you are able to act in a business situation and take
advantage of it.
So lets have a closer look at those forces.
1. Supplier Power
Suppliers like to control your market by controlling your acces to their
products (and their competitors for that matter). Getting in control
allow them to control prices and market shares. Part of the control
game is preventing you from changing from one supplier to another.
Think about it and find a good example of strong suppliers apart
from oil producers.
So the key-word in assessing the supplier power is: how hard is it for
the suppliers to drive up prices in your market?
2. Buyer Power
Now, you have become a supplier. Are you facing a multitude of small
buyers, who are not organized in the market, or are you addressing a
75
few very big ones, who tell you what they want, when they want it,
what they want to pay for it, and what they plan to do if you dare sell
to their competitors.
Think about it and find a good example of strong buyers apart from
the groceries market, where a few large companies purchase and
distribute the merchandise to the consumers.
So the key-word in assessing the buyer power is: how hard is it for the
buyers to drive down prices?
3. Competitive Rivalry
Now, we have looked up, and we have looked down. Its time to look
around. How many competitors do you have? How good are they? Do
you see a lot of small and more or less equal players, who offer more
or less the same services or products, which are more or less similar
to your own? If so, you are in dire need. You will have a hard time
getting into business, and customers will zap if you are not up to the
marks. If, however, you offer something better than the rest of the lot,
you may develop a strong competitive edge, which allows you to
penetrate the market and start ramping up on market shares. This
position is the essence of the entrepreneurial quest.
Mostly, you will find the market crowded, saturated and dominated by
a few major competitors. Dont panic. If your value proposition is good
- which is quite often the case, when high tech entrepreneurs take
advantage of new technological or scientific breakthroughs you have
a golden opportunity to establish yourself in the market. From a
position beneath radar detection level, you create the commercial
results, which together with your proprietary technology, makes your
company a smashing delicacy for the big ones.
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4. Threat of Substitution
Imagine that your buyers find new ways to get rid of their pain. This
happens all the time. By example, silence settled in the Swiss valleys,
when the Japanese managed to develop a digital watch. To the
Swiss, this was unthinkable and they were genuinely chocked. What
happened was a change of paradigms, and history is filled with
famous examples of people, not being able to grasp radical change
and either making fools of themselves by offering statements that turn
out to be so utterly wrong in very short time, or they go bankrupt.
So be on the alert, when new technology is on the move and new
products start to pop up. It may kill your company, but likewise, it may
offer great opportunities to those who sense it in due time and capture
the business opportunities that follow in the wake of change.
5. Threat of New Entry
Allow me to introduce you to yourself. Entrepreneurs are great in
doing creative destruction by entering existing markets with new ways
of doing things, which offer advantages unheard of in the field. Thats
why those companies already established in the market are on the
continous lookout for potentially dangerous competitors like newbies
with crazy ideas.
At some point in time, when your company is well established in the
market, you should also consider the risk of being outsmarted. Quite
often, this makes sense already at start-up time. If so, those entry
barriers, which you can establish to prevent others from entering your
turf, can be very valuable. By example: a good patent or some
inventive software algoritms that only super nerds can develop, may
77
protect you against competition and make your company a juicy

investment opportunity for venture capital companies.
Another example of new entry: once volume in a developing market
has passed through the triviality limits of big companies, they enter,
and they probably buy the most perspective companies already being
there, to cut corners and to outcompete the rest. Clearly this is a
threat to those not being bought and an opportunity to the rest.
In this situation you may either sell your business or find something
else to do, which mostly means going back to the niche and be very
good to very few. And if you dont want to sell your company, you
either go bankrupt or you cry all the way to the bank with your check
to cash in an obscene lot of money. Life can be so hard!
The Market Response to a New Product and a New Company

Here is our starting point: you have developed a wonderful new product. It
has obvious competitive advantages compared to existing stock, there are
customers out there who would really benefit from buying it, and now you are
ready to go to market, and conquer your rightfull place. Question is: how is
the market going to respond?
One of the singlemost important facts about the market entry, which
entrepreneurs need to know, is that in general it doesnt respond at all. There
is so much noise out there, people are so busy, relationships between
suppliers and customers in business-to-business trade are so tight,
competitors protect their turf vigourously and for a reason, no one ever heard
about you, your company is completely new so will it exist two years from
now, your product is not battle proven, you have no references, nobody
endorses you, etc., etc. The list of entry barriers can be expanded further.
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The central statement is, that it takes a lot to enter a new market, and it can
be very surpricing and very frustrating to unexperienced entrepreneurs with
high expectations when they chrash into the market entry barriers. Be
prepared!
The market entry barriers can be worked around. Otherwize we would see
no new businesses come and grow, would we? The issue has been treated
to some extend in the section about business start-up strategies. Starting in a
niche and team up with someone already established in the market, reflect
two ways of circumventing entry barriers. Start-up strategies as such are
case- and ambition-sensitive policies for getting around the entry barriers
and hence expand.
A little insight in the lifecycle of a new product may help you adjusting your
strategy and your marketing plans to the nature of customers.
A graphic approach may facilitate the adoption of this model.
What you see below, is the adoption of a new product on a market. It has a
kind of a break-through character. Then a time of sound growth, and finally a
stagnant period.
This life cycle is well known and well described in litterature. As the product
matures in the market, new types of customers start bying it. These
customers are categorized as follows:
A. Innovators want to be on the leading edge and are eager to try new
innovations. They have an ability to work with complex and often
underdeveloped ideas as well as substantial financial resources to help them
79
absorb the uncertainties and potential losses from innovation. They pull you
up from ground level, but they constitute a limited number. You cannot build
your future on them.
B. Early adopters are more mainstream oriented and often opinion
leaders. Hence they are often also visionaries. They observe the innovators
and report to the majority. They are motivated by opportunity and quickly
appreciate the nature of an innovation.
C. The Early Majority - adopts before the average customer. Their decision
making is often lengthy and pragmatic. They are analytic conformists by
nature, and they require proven results. They represent a significant
proportion of the market, and their adoption signals the phase of rapid
diffusion.
D. The Late Majority adopts new products and new technology because
of economical necessity and pressure from their equals. Some of these are
early adopters, and hence, early adopters are important drivers. The Late
Majority customers are conservative by nature, and they require evidence of
value before they adopt. They tend to have less money available than the
previous groups. Whether this is explained
or caused by their
conservatism remains open for debate.

E. The Laggards are sceptical by nature. They are not really influenced by
the previous groups, since they are somewhat disconnected. They are
conservative bordering to radicalism, and they safeguard their money
80
The market economists consider the transition from early adopters to early
majority as a critical point, which requires special attention. The problem is
embedded in the difference between visionaries and pragmatists. You may
penetrate the innovators and the visionaries with fascinating new technology,
but here, the value creation of your product is put to the test. If it fails to pass
the test, you will not succed. Opposite if opposite, given that you know how to
handle pragmatic conformatists and expand your shop.
This life cycle model spins off some usefull hints:
1. Look for the innovators, when you enter your new market. In this way
you avoid the high entry barriers to the majority and build up strength
and references which allows you to pass on to early adopters. (Here
you got yourself a marketing strategy: Call it: Pick the Low-hanging
Oranges).
2. Pain killing and value creating properties are crucial, once the days of
technology fascination are over and the early adopters are saturated.
You need to penetrate into a more conservative and analytical market,
and you will not pass the chasm unless the economical benefits of
your product to your customers are undisputable. So once again the
importance of the 5 basic rules is underlined.
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3. To follow up on a succesfull bridging of the chasm and expand into a

numerically large market puts you to the test. You need resources,
you need quite new management skills, able to run large
organisations and you need money. So once early adopters start
reporting to the early majority about value creation and efficiency, you
should prepare yourself for growth by preparing a funding round and
an expansion of your company. And we are not speaking about
peanuts here, since risks are low and high gains are within reach. This
is the point in time, when a company acquires maybe 30 50 mill.
DKK from Danish and international venture capital companies and
quickly expands to maybe 50 80 people. This is a truly awesome
task, so get yourself some experienced and professional help
4. You may not like the late majority and even dislike the laggards, but
they have some qualities, which you should consider and build into
your long term strategy. Here, we approach the end of the product life
cycle. So development costs and investments in production facilities
and distribution channels are probably paied and written of since long.
Now, since the price of your product is determined by the value
creation provided to your customer, (unless there is a fierce
competition, but then again, competitors try to keep up prices and
compete on other things if they are sane) the gap between production
costs and selling price can be quite high. So you have got yourself a
cashcow. The thought of gaining high profits from selling to laggards
does hold some qualities, doesnt it? And they benefit too. Win-win as
usual. Make that your company motto.
The Marketing Plan.

At this point you have acquired some usefull models that will allow you to
produce motivated start-up strategies and marketing strategies.
82
Next, you have to execute. Resolute execution is one of the most important
capacities of a successful entrepreneur. A lot of people can think up
wonderful strategies, but only few act expediently to create great companies.
Instead they stick to their desktop. You wouldnt do that.
You do however plan your market entry and subsequent activities, since you
need to safeguard your time and money and get the most out of it. The point
of origin is the market analysis, which outlines your preconditions for setting
up sales activities. First, you slice out your niche probably with the help of
Michael Porter. Next, you define your target groups, based on your estimates
of pain and value creation: where does it hurt the most? Then you look for
the pioneers and the early adopters, and voil you have your customers.
They are probably geographically dispersed, so you may have to look into
demographicals as well as cultural and practical entry barriers to decide
where to start.
The marketing plan specifies the activities needed to reach your customers,
who are going to do it, what kind of ressources and back-up they need, when
things are going to happen and what it all costs. Same template as the
business plan or most other plans for that matter: they encompass
1. Activities (Including milestones = what came out of this last work
period?)
Activities would typically be sales efforts: visiting and
receiving customers, going to fairs, setting up distribution channels,

which means finding your future agents and dealers and setting up
your agreements on sales, inventory, service, revenue split, etc..
2. Ressources needed (including personnel)
3. Time schedule
4. Budget and dont forget travelling expenses. A good salesman can
easily cost you the equivalent of his or her salaries in hotels, airtickets,
83
taxies and mileage. Selling is very expensive and time consuming!

So with the marketing plan in hand, you are ready to act and to put people at
work.
For the sake of good order it should be mentioned that some marketing
economists regard the marketing plan as being an independent decisionmaking and management tool. In connection with business startup, however,
it is necessary to integrate the marketing plan into the business plan because
marketing must be related to - and tuned with all the other cash-consuming
tasks of the ressource-limited company.
By example: you probably accept, that you have to pay your own suppliers.
Since suppliers are normally paid well before you get your money from your
own customers, one may argue, that you own the part of your production,
which you have paied yourself withou having yet received payments from
your customers. This can easily be several months of production! Consider
now the happy case where sales ramp up quickly. In this case, you own an
ever increasing amount of goods, which you still have not been paied for.
Even though revenues increase, they are never enough to pay your
suppliers bills. So your bills and your debts increase with your success in the
market.
A big and going concern does not really need to worry. Overdraft facilities
offered by banks will solve this happy problem.
You need to worry, however, because you have to put up personal collateral
for overdraft facilities, since your company is still too new to have developed
any significant securities, and you are yourself a newbie. Personal collateral
increases your personal risk considerably. In fact it can be most devastating
to your future possibilities for getting back on your feet after a failure. Your
84
family may not like it either, once the house is gone. So here are your
alternatives: either you option out personal collateral and accept a slow
expansion rate, based on customers early payment and suppliers patience.
Or you accept a considerably increased personal risk level by providing
personal securities. Or if you ignore the problem you company goes
bankrupt. It is called the expansion death.
A well balanced business plan will help you to avoid such a problem, since
you have spotted it well in advance and prepared for most contingencies.
Further, you may have involved venture capital in a sensible way. There is a
complete chapter on that issue to be read later. To give you an idea of what
can be done, however, here is an example: you and your investor have
agreed on a payment plan, which includes a payment to cover expansion
costs after a successful market entry. It can be expensive, since your
investor has to set the money aside well in advance and cannot put it at work
in other investments. Further, your investor takes the risk you dont. That
has a strong impact on the share value, which he is ready to accept. A high
share value gives him a low ownership ratio and hence a low return on the
investment, which he will not accept, given the high risk. So you have to sell
shares cheap to get the money, and you loose a lot of your initial ownership
of the company. However, the money is there when you need it, and you
reduce your personal risk to a level where you can get up and start anew if
crashing.
Now, where does the marketing plan fit into this? Well, it makes sense to
adjust marketing activities to the financing plan to allow you to establish early
proofs of business before you prepare for a major funding of your company.
Thus, you concentrate on a target group of geographically accessible
pioneers to penetrate the market and then prepare for a modest expansion
into the early adopters. Then, when the risk has been reduced to the risk of
85
chrashing when jumping the asbyss to the early majority, you prepare for a
funding round. Thus, you have tuned your marketing plan to your start-up
strategy and related it to your financing plan. It fits into the jigsaw.
Sales and Marketing

Selling is a field where entrepreneurs consistantly underestimate the power
needed to break through and to get an order. By example, it is more
expensive to sell a car than to produce it, but still, the enthusiastic
entrepreneur, who has lived with his/her dazzling idea for a long time,
believes firmly that it will sell by itself and that rumour will spread from mouth
to ear. This does not happen..
Selling is also a field, which many technical entrepreneurs dont like to enter,
since their professional training and sometimes their personality does not
support the social and psychological sides of selling. They simply dont feel
comfortable when confronted with customers. The first contact with
customers can also be a frightening experience. It is a crucial event, where
theories on value creation and salabililty are put to the test. You are, off
course very enthusiatic, and then you ram into a sceptical customer, who
needs to be convinced about the obvious, and who has a lot of concerns
about your ability to deliver professionally and long term. So the first visit to
the marketplace may leave you traumatized, feeling completely discarded.
So you may fold, but the trained salesman knows better and takes critics
as signs of interest as well as valuable feed back and builds a compelling
case on that, luring the customers to find the arguments, which finally make
them buy.
Selling is often regarded as an inferior task. Not what you spent five-six years
86
in higher education for. The fact is that in business to business trade, selling
is a highly demanding task, requiring both personality and skills. You are not
taken seriously by professionel decision makers unless your own
qualifications and your understanding of your customers problems equal
theirs.
Selling most often requires a lot of travelling, which is fun during vacations.
To someone with a life outside the company, however, it is not that attractive
to spend maybe more than houndred days a year on the road.
So you should emphazise your sales people with great respect and
admiration and make sure that they get the support and incentives needed to
compensate a life in airplanes, trains, cars and hotels.
At MIT, lecturers joke, that salespeople are not lower life forms. Just to make
sure that their students dont forget. Hereby duly quoted. Sales activities and
sales people are fuelling the second stage of your rocket to success. First
stage is driven by the innovative skills of your founding team Second stage
by selling. Obviously you need both to reach orbit, and at some point, the
second stage becomes the driving force and the singlemost important to your
company. As a matter of fact, in more mature companies, the distribiution
channels and the sales dept. adds a lot more to the evaluation than the R&D
dept..
The Ethics of Sales.

We have allready touched upon the ethics of pricing: a good trade is equally
advantageous to both parties. It is a very usefull statement which at the same
time must dispel any misunderstanding regarding the price fixing: the sales
price of a product has nothing to do with the cost of production. If the buyer
gains great advantages by purchasing your product, it is only fair that you get
87
a good price also. A large profit is therefore in no way unethical. But the
quantified value creation can be hard to estimate. That is another good
reason for knowing your customer better than he does himself.
The art of selling is to gain the customers acceptance that the claimed
advantages are rightfully estimated and that even though the price is a bit
tough, it is easily compensated by the benefits which go with the product.
The ethics of course tell us that the the claimed quantified values created by
your product are fairly estimated.
In professional trade, bonds between buyer and seller are often strong. Once
you have established a relationship and your product has proven that it is
worth the money, your buyer will buy again, often even by himself. This
underlines the importance of high ethic standards, but again these do not
prevent you from getting a decent profit.
The Salesman Must Believe in Your Product.

No good salesman can sell without a firm belief that the product really
creates the assumed values and that it is worth the money. It is a basic law in
all selling techniques. This belief is the basis for the enthusiasm, without
which, no good salesman would function. This is perhaps a bit against our
prejudice, but good salesmen are honest people.
The Unique Advantages of Your Product.

On a competitive market, the salesman must emphasize exactly thee unique
quality,
which
makes
your
product
superior
to
your
competitors
products.This is called the Unique Selling Proposition (USP).

New technology in existing products will often carry a strong USP. Find your
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own and write the compelling story, which the salesman should communicate
to your customers.
Expand the Visible Offer

When the unique advantages have become obvious to the customer, we are
getting to the extra winnings and the secondary competitive parameters. First
of all, the offer can be expanded by quality, special warranty, recycling of
material, pure and sustainable technologies, low consumption of resources in
operation, good manuals, simple use, no maintenance, favorable terms of
payment, 24/7 access to service, automatic software updates, etc. These do
not need to burden neither the production costs, nor your companys cash
burn very much but they can sharpen the customers interest and justify a
higher price.
Basics of a Sales Talk.

1. You have very little time to present your case.
2. You cannot sell unless your customer accepts your value proposition
So the purpose of the sales presentation is to convince your customer about
the benefits of your product and then make an offer.
One good way of obtaining this is getting your customer to accept your
assumed value creation. It can be done by asking questions like:
Is it not correct, Mr. Buyer, that your products are sold on a highly
competitive market, where performance-to-price is crucial? Of course the
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answer is yes. You knew it in advance, and your buyer would look like a fool
if he denied.
Next: Now, if I told you that we have developed and patented a component
which can improve your products and allow you to outperform your
competitors, would you be interested? Obviously the answer is yes. Now,
you have won two small victories.
So you proceed: Our Chief Technical Officer (CTO) is in town, these days.
Can we set up a meeting with your engineering department to look into the
details? Mr. Buyer agrees and endorses you and your CTO to his technical
staff. Now, they have to evaluate your statements and Mr Buyer will ask
them if you were right. You have broken the first and most difficult barrier.
Did you notice the principle? serial acceptance of your assumptions makes
it difficult for your buyer to back out without looking like a fool. Now does this
seem unethical to you?
You will probably accept that given the value
creation is real, and the cost-to-benefit ratio is favourable, you have cheated
nobody. You just helped Mr. Buyer to realise your value creation himself.
This is good salesmanship and Mr Buyer is happy.
The Importance of Satisfied Customers

First time sales are more expensive by magnitude than resales. So it pays
well to keep your customers satisfied. In particular if your product has the
nature of consumer goods. But this applies to services and consultancy also.
Customers are your most important embassadors in the market. So spending
money on creating satisfied customers can be a most profitable investment in
the future of your company.
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What makes a satisfied customer, then? Here are some obvious measures:
Quality: it goes without saying, and customers are so spoiled. Just

look at cars for example. Even the cheapest cars are good quality,
since customer loyalty is everything in a trade where selling is more
expensive that producing. The worst that can happen to a car
manufacturer is annoyed customers. They toggle to another maker,
next time, and they blog their annoyance all over the internet.
Value creation lives up to expectations. Anyone who bought

something that does not live up to promises, discards the vendor and
tells everybody about it.
Service. Your customers are always wellcome to call you any time,
and you set everything aside to help them. Even if you sometimes feel
that they are some ungrateful and demanding jerks.
Awareness. Pay attention to them not only during the sales process
but also after. Call them or mail them to hear, if the service rendered
was OK, if your product arrived safely and in working order, if there is
anything you can do to assist them in implementing the product etc.
Make them feel special because they are.
The Importance of Early Sales

Most of the risk involved with business start-up relates to sales and
marketing. Early sales even to pioneers and early adopters are the best
indicators of success.
Hence, early proofs of salability and profitability are important in many
aspects.
If you plan to get venture capital funding, you are in the game of risk versus
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gain assesment. Assuming that your company constitutes a venture case at

all, the campany valuation or the value of shares if you like - depends on
the risk-to-gain ratio. That means, that the lesser the risk, the more money
you get per percentage ownership of the company you sell. You will probably
acknowledge, then, that early sales before closing an investment are
important. That leads us directly to the statement, that the first money
invested in a high growth start-up company should be used for assessing
salability and profitability before going for major venture capital injections.
Some biotech companies can burn cash for ever and ever in research for
new drugs, but that is not contradictory to the above statements. Mostly, the
salability of the drugs is unquestionable. The risk is relateted to the clinical
trials, and quite often, they form alliances with major distributors early on to
provide efficient distribution channels and GMP production facilities, once the
clinical trials are concluded successfully. So just hold on to the basic rule,
that early sales are gold and enter it into your start-up strategy.
A good way of testing the sales potential is to target small, selected customer
segments. Select a few, but typical customers and to see what happens
when you confront them as a salesman.
Export
To most knowledge-based entrepreneurs the Danish market is only the takeoff runway. Often it is not even possible to sell the first products in Denmark,
and then the entrepreneur must enter the export markets right away. Some
of the most importen how toes will be examined in this section
Export from Day One.

Foreign markets are generally perceived as being strenuous and risky, and a
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large number of businesses have come up against considerable problems in

connection with the startup of international sales. The classic problems are
related to language and differences in culture. Professional relations with
professional customers often require the command of complex technical and
legal English, and the differences in business culture can be pronounced.
The colourfull stories of Danes insulting Germans or getting desperate with
Swedes are plentifull. So, yes, it is more complicated to start your sales in
foreing markets, but it truly pays back in the end, since Denmark is so small
to niching companies.
Consider this: Danish knowledge-based entrepreneurs have the same
professional qualifications as their counterparts in, say, the United States.
There is nothing wrong with the "assets" between the ears: the values are
there. Let this be our point of departure. A Danish knowledge-based
entrepreneur addresses a domestic market of some 5 million ultimate users.
The American counterpart addresses a domestic market of 250 million
ultimate users, and shares a common language with an equal number of
people living outside the US. This means that every time the American
entrepreneur sells 50 units in his domestic market, the Danish entrepreneur
is able to sell 1 unit. Consequently, the American business is able to grow 50
times bigger than its Danish counterpart on the domestic market, and the US
start-up faces a considerably smaller linguistic barrier to a gigantic export
market, since Broken English is the most widespread language in this world.
As an ambitious high-tech high-expectancy entrepreneur in Denmark, you
have to be internationally oriented from day one. From the very start you
might as well be ready to see the Danish market as an experimental minimarket and the world as your market place. This statement is contradictory to
the widely accepted view that the business should develop its references in
the domestic market before entering the export markets. It is, off course, an
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advantage to have won your spurs on the domestic market, as you have then
learned to run your shop and early customer references have been
established at the lowest possible cost. But you loose time, and that can be a
problem in markets characterized by a rapid rate of technological change.
They just dont wait for you to finalise your local business development.
Distribution Channels.
Export often starts out of your home office with you flying around the world.
Next, agreements with independent distributors, whom you visit regularly, are
set up. At the end, you set up your own marketing subsidiary in the most
prosperous markets.
There is a lot of publicly financed expertice and services set up to assist you,
since exports are highly valuable to the society as such. The Danish foreign
Ministry is one of the obvious first places to visit, and they are real good.
Dont miss the chance to involve them The Association of Danish
Industrialists or DI also have a highly skilled team of consultants to assist
their members in setting up and further develop exports.
You should, however, acquire some basic knowledge about international
trade, before you approach these honourable institutions or start setting up
distribution agreements on your own. Here are the basics:
First, you have to discern between agents and distributors.
An agent is a local business, which does the marketing, approaches the
customers and conducts the sales, but it does not provide a warehouse, an
inventory, a spare part store or supply any additional services to the
customers. The agent receives orders, but the actual sale takes place
between the Danish business and the foreign customer. The agent is a
middle-man, usually paid on a commission basis. This means that he is paid
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per unit sold. The agent is cheaper than the dealer, since his risks and
involvement in all the hassle related to sales and customers is limited to
conducting the sales. The agent will usually be able to get his sales activities
under way rather quickly, as neither a warehouse nor service departments
with in-house technical competencies have to be established at first. The
disadvantage of selling via an agent is that you have to provide services on
foreing markets, and you have to collect your payments. This may be an
expensive task if the product in question requires special implementation,
guidance, maintenance, or consumer materials. However, with the internet,
you may handle most of this remotely. So in many cases, an agency is a
good solution to start-ups.
The dealer buys the product from the Danish business and resells it in his
own name on his own market. He provides all kinds of services, and your
own company is more or less invisible. The dealer runs a higher risk than the
agent. He is not exempted from product liability and he has to invest in
inventory and a service department to support sales of technically
complicated products. The advantages of selling through a dealer are that
consignments are paid for quickly, that no service has to be supplied, and
that the dealer will usually place sizable orders, whereas the agent's orders
will tend to be spread more unevenly. So dealers are self-propelled. You only
need to inspire them occationally and ship your products when orders run in.
The disadvantage is that the dealer has to be paid for his services, which are
far more comprehensive and expensive than the agents. Distributing the
product through a dealer will typically reduce your price by 50%, so you need
to be able to lift of a decent profit within this limit. A further drawback is that it
takes more time and money to establish dealer-based distribution channels.
A run-in period of two or three years is by no means unusual. Dealers quite
naturally focus on creating a profit for themselves, and hence, they
concentrate on the most profitable products. As a consequence, it makes a
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big difference to them if you have allready references on sales. Hence,

dealers probaly are the next natural step in the development of your
distribution channels.
Relations between dealers or agents and their suppliers are regulated by
national law and international conventions. Many business areas also have
their own standard agreements. The most important problem covered, is the
divergense of interests between dealer/agent and supplier, once the sales
start booming. This will be the time when you want to get rid of your partner
and set up your own subsidiary to collect the full profits. Your partner,
however, has invested in developing customer relations and sales, so he
doesnt give up his agency voluntarily. Consequently, you stick with him,
once success is in hand, and to get rid of him requires substantial payment ,
which is certainly fair enough. A way in between could be to set up a local
subsidiary in a partnership with the dealer/agent.
Dealers and agents have to be kept on their marks continously. You also
have to stay on the marks yourself by further developing your products.
Otherwise trade dries out. So the difference between direct sales and sales
via agents or dealers is not that big in the sense that you still have to fly
around in the world to visit your partners. You may not, however have to
spend that many days on tour, and the partners may travel too. It is quite
common to invite them to Denmark now and again, to share experiences,
present new products and be sociable too. After all, it is a working
relationship, you have set up, and your distributers goodwill and friendship
also influence their sales efforts.
Your end user is a bit more remote when you set up distribution channels via
partners, so consider having a few markets, where you sell directly, yourself.
That will give you a more intimate knowledge about customers needs and
pains, which again is a precondition for successful product development. So
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cut out some turf for yourself, when dividing the world market amongst
dealers and agents.
It is important that you get yourself the best distributors possible. One way of
creating a strong incentive to join you is to start selling your products in their
own back yard and once the business opportunity is evident, make a contact
to a few potential and good distributors
If your preferred agent is reluctant, you may even refer potential buyers to
him to enhance his appetite and strengthen your own value proposition.
Getting requests from his own market place, which he cannot meet unless he
concludes an agency agreement with you, is a strong push indeed. Simple
applied smartness on your part, and everybody are happy.
An Export Seminar for Sellers.

The above sections are based on the assumption that you are able to work
with people of foreign cultural origin. In some form or another everybody
knows the story of the R&D engineer, who participated in a meeting with an
important German customer, wearing a home-knitted sweater, and
addressing Herr Director Dr. Gnter Eberhardt in English, first name and the
second person singular in the prescence of his staff. Such lack of cultural
empathy and social intelligence can be devastating to your future relations to
your German customer!
From our own back yard, we have a story about a company within building
dynamics, seeing Japan as a highly perspective market but also with some
very tough entry barriers. With the help of the Danish embassy staff in Tokyo
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and a highly reckognized Japanese professor, who saw and reckognized the
qualities of the companys products, a meeting was set up with a number of
potential buyers and distributors at the Danish embassy. An invitation to a
dinner with the Danish embassador was arranged too. The founder and his
CEO met in their best clothes, well prepared for the specific Japanese way of
doing business and being courteous. The Japanse professor endorsed their
product, and the company managed to get the first small orders really just
to test the Danish people and their technology. To day, the company has
established a distribution agreement with a major Japanese construction
company. The methodically tuned approach to the would-be distributors was
instrumental in achieving this.
So get to know the local standards and adapt to them. Visit the web portal of
the Danish Foreign Ministry, where differences in behavioural patterns in
business communities are lined out, before you even start planning your
campaigning, and then apply some empathy.
Empathy in our context means understanding foreign cultures - without
relating to values - and to use this knowledge in planning your own entry and
setting up your business and customers relations.
International flow of goods and money

The purpose of this book is not to sound the depths of complicated matters
as rules and practice in international trade, but a lot of hassle and costs can
be avoided by knowing a few principles, when your customer asks for a
quotation.
International trade is regulated by widely accepted terms. The ones, you
should know a little about, are Incoterms 2000.
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Incoterms 2000 are internationally accepted commercial terms defining the

respective roles of the buyer and seller in the arrangement of transportation
and other responsibilities. They specify when the responsibility and the
ownership of the merchandise passes from seller to buyer. They are used in
conjunction with a sales agreement or other methods of transacting the sale
You have probably come across designations like FOB, FAS, FCA, CIF, CIP
etc. These are INCOTERMS abbreviations, which refer to standards of
transport, delivery, and payment.
Various business areas tend to have their favourites. Find out and watch for
pitfalls like you having to pay custom duties and VAT at the receiving end.
Usually, transferral of payments in international trade and transport is best
left in the hands of the banks. So add your banks IBAN number to your letter
footer to facilitate due payment, and take into account, that due payment in
international trade is often 2-3 months from shipping time, which again puts
an extra strain on your overdraft facility.
One way of fighting slow payments, which is also good at avoiding customers
with a tarnished credit history, is to ask for a letter of credit..
The letter of credit is either a guarantee which the buyer issues to his own
bank at the seller's request, or an amount of money which the buyer pays to
his bank. When the buyer receives the documentary bills, e.g. the shipping
company's waybill which states that the shipment is on its way and specifies
the items sent, the payment is transferred from the buyers to the seller's
bank, and the amount is transferred to the seller's account, once the goods
have arrived in good order. In other words, the letter of credit provides a
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guarantee of payment and this may be important for a newly-established

business, which is often financially vulnerable or even worse: with personal
securities covering the overdraft facility.
Alltogether, export requires a little training and knowledge, and you should
draw on experts and consultants to set up your trade and to collect and
transfer the payments,
Business Administration
This section is about such trivialities as setting up and running a business
administration, which allows you to control your resources without spending
more time than absolutly necessary on these non-productive issues.
Some entrepreneurs neglect administration because they hate it and end up
by either going bankrupt, much to their own surprise, or by spending a
miserable lot of time in cleaning up the mess, they left behind.
Some entrepreneurs spend too much time on administration, since it gives
them a wonderful feeling of being in control of a complex project. They may
end in a fully controlled bankrupcy, since they didnt spend time on
customers and sales, which are the singlemost important tasks in business.
Here is a key to good business administration: get the cash flow up under
your skin and leave bookkeeping and accounting to the experts. Thats it.
Simple in principle and difficult in practise, though.
A few tools may come in handy. First and foremost, you need to establish
and maintain a cashflow budget. Next, you need to know how to destill
information, which you receive from your bookkeeper and enter it into your
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cashflow budget.
We will look a bit into the classics of bookkeeping and accounting but only
to give you the background needed to understand the information you get
and to prepare your own economical reports to your future board and to
investors.
Whatever is being said about business admin: never forget that being in
control of the cash flow of your company is your singlemost important task
within business administration.
Here is a good and battle proven way of establishing your cash flow
supervision:
1. Set up a budget for ALL incoming and outgoing money transactions,
be it payments from customers, incoming cash from loans or
investments, salaries, VAT coming in and going out, tax (company tax
once a year, your employees personal tax, once a month), payments
to suppliers, etc., etc. We will return to this important task in a section
below. Time division: one month for the first couple of years and then
maybe quarterly for the next few years, depending of your case
specs. The more turbulent the business venture, the shorter the time
divisions.
2. Check incoming and outgoing payments on a regular basis. Once a
month at a minimum. (Realised cash flow).
3. Adjust projected incoming and outgoing payments according to the
latest informations that you have. (Like new orders, adjusted VAT
calculations etc.)
4. Enter realized cash flow as well as adjusted cash flow projections in a
budget similar to the original cashflow budget, hereafter called the
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cash flow forecast.

The cash flow forecast gives you the most essential economical information
of all and you do get a lot, when professional accounting systems start to
noise.
The most interesting key figure of the cash flow forecast is the projected cash
in hand (accumulated cash-in minus accumulated cash-out). How much
money do you have, when incoming payments are added to and outgoing
payments are subtracted from your cash in hand last month? When cash in
hand goes negative, your company is history.
A good administrative system will give you information, which makes you act
in a sensible way well before the problems get mission critical. The cash flow
forecast holds this quality, and it is quite easy to act upon. We get back to
some of the preventive measures in the example below.
At this point it is emphazised, that the process, during which, you establish
an updated cash flow projection, is the process, during which, you achieve an
overview of the economical situation of your company. Once you have
finished your home work, you are ready for change and repair, and the
staying power of your company is significantly increased.
By example: your cash flow forecast indicates that in one year from now,
cash in hand dumps below zero, and if nothing is done, it will sink until minus
2 million DKK before sales start to pull in earnest. After another year, cash in
hand is back in the legal domain. How would you survive that one year?
Three obvious measures are available at least:
1. Reduce costs (outgoing cash: fire someone not needed - if any.
Postphone payments to suppliers - by agreement. Get whatever you
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can for free and watch every penny.)

2. Increase sales (incoming cash: get your payments on time or better:
before due, be muscular to tarnished customers, increase prices, sell
costly equipment that you dont need, get some free marketing
through news media, web portals etc.)
3. Get some money from someone else (family, friends, banks, business
angels, venture capital companies etc.)
So acting in due time and with common sense on the basis of cash flow
forcasting is the essence of the entrepreneurs guide to business
administration.
The statement has its opponents, who insist that business administration is
about handling VAT, salaries, tax payments, filing paper and stuff, which, off
course, it is. But it is not the entrepreneurs job, unless he or she hasnt
anything better to do. Nowadays, professional bookkeepers, accountants and
auditing companies deliver these jobs at highly cost efficiant prices.
And
here is what they deliver.
Annual Reports
Once a year you get a comprehensive report from your auditor or your
bookkeeping agency. Usually it is way beyond the needs of a small start-up,
but since your company is expecting high growth rates, the relevance of this
statement will not last for long, so get accustomed to reading and
understanding annual reports.
The annual report of a business is normally divided into:
1. The profit and loss account
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2. The balance
3. The notes to the accounts
The annual also contain the report from the management as well as the
auditor's remarks.
The managements report is an essay which elaborates on the results within
sales, R&D and economy. It also includes a general view on the future
development of the company.
When you write it, you should consider your audience. It is everybody. The
annual results are published by Erhvervs & Selskabsstyrelsen (the Danish
Commerce and Companies Agency.) This is your price to pay for running a
company with a limited responsibility. (an A/S or an ApS). Ideally, your
customers and suppliers can check your economy in the public files, before
they enter into business with you. So writing an annual report is something
very different from writing a scientific paper, mind you. Do not disclose what
you dont need to, but be honest with what you have to.
Another good reason for writing short and precise management reports is
that if you go for venture capital, everything filed and documented will be
examined as part of the investors due diligence. Good annual reports
indicate good management which again increases share value and investors
appetite.
The Auditors declaration about the state of the company, the risks involved
and the administration and bookkeeping is also a very important part of the
annual report, and you serve your own interests in having a good running
relationship with the auditor to ensure a clean declaration every year. Apply it
with care, however. Auditors are very expensive consultants.
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The Profit and Loss Account

The profit and loss account summarizes the revenues and expenses of a
business for an accounting period. The account is usually drawn up
according to either natural or functional expenses. In both types of accounts
the turnover, i.e. the amount of goods sold multiplied by the selling price, is
the basis for revenue.
If the profit and loss account has been drawn up according to natural
expenses, the costs are those of materials, rent, staff, depreciations, etc.,
whereas the profit and loss account drawn up according to functional
expenses divides its costs up between the various functions of the business,
i.e. production, marketing, distribution, administration, etc.. Among other
things, the choice of account type depends on the level of the business'
organization. In the case of a newly-established business, which is obviously
not fully organized, the profit and loss account drawn up according to natural
expenses is probably the most suitable. This type of account also makes it
easier to gain insight into what the money has been spent on.
When all the primary expenses have been deducted from all the revenues,
we arrive at the profit, which is often called the EBITDA or Earnings Before
Interest, Tax, Depreciation and Amortisation. Deduct all these measures,
and you arrive at the profit available to the owners of the company: the
shareholders. If they decide to have a little extra bonus for them selves that
year, a dividend is paied out, and you arrive at the profit, which the company
sets aside for its own future purposes. Usually, start-up companies do not
pay dividend, since start ups are in a chronical need for cash and their
shareholders are the founders, who desperately want the company to grow
and succeed.
If, indeed, there is a profit, tax is charged against it. A loss, on the other
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hand, may be carried forward and set off against future profits to reduce tax.
A couple of words on taxation: The underlying principle of company taxation
is that all costs stemming from the maintenance of a business activity are tax
deductible. This principle is administered by an infinity of rules and circulars,
but once you understand the general idea behind the principle, you have
created a framework for understanding the taxation authorities without
actually knowing the specific rules of the game. Among other things, the
principle explains why a personal debt, which stems from a guarantee for a
loan to a now deceased business, is not tax deductible, since the payments
are not related to maintaining a business activity. Gnawing at such a debt is
probably one of the worst experiences in the world of entrepreneurship.
YYYY
The Balance Sheet

This is where the company keeps track of its values (the assets) and how
they are financed (liabilities).
The assets include everything from buildings and machinery to stocks,
debtors, and cash in hand, etc. Intellectual property such as patents and
goodwill such as customer relations are also included. Since these values
are not tangible, endless discussions can arise on the issue of their actual
value. The essence of this in a start-up cpontext is, that you need to
safeguard the assets of your company since companiers without assets are
not legal. Hence, when your cash is transformed into development, the
development results must be given a value which is entered into the list of
assets. Otherwise your cash burn will soon deplete the company assets
below the legal point.
The liabilities include the owners' invested capital, loans, trade creditors,
debts owed to the Customs and Tax Administration, etc. These amounts
together are set off against the assets. What is left is known as the equity,
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which is in principle the money which is left, when all shareholders and
customers and creditors have got their money back, after the company was
sold at a price equal to the sum of all assets. So in theory, the equity is the
companys own money.
The Notes to the Accounts.

Both the profit and loss account and the balance sheet draw some of their
figures from the notes to the accounts, in which the different activities of the
business are broken down into details.
The reporting programs of modern accounting systems are able to provide
ready-made lists of notes, which may be arranged in accordance with the
user's own needs. As an example, project-oriented businesses are able to
supervise their various projects in notes, which provide them with outlines of
the costs of consumption per hour, the costs of goods sold and the costs of
payments. Manufacturing businesses are able to supervise development
projects, sales activities, etc., by means of the notes. Costs of premises, cars
and business administration are other examples of activities which may be
supervised via the notes.
The Budgets
One frequently asked question about budgets is: why bother with budgets
when preconditions are so uncertain. Lets get around that one once and for
all:
1. The perspectives of your business venture are hard to capture unless
quantified. Without economical calculations, you dont even know if
your project is interesting to investors, and hence you cannot plan
your funding.
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2. You will be surprised, once you dig into the cost side. A lot of items,
which you had never thought about, materialize and summon up.
3. Along same line: anyone putting money into your project wants to
know what you plan to use that money for. Hence, you need to break
down your initial business development into activities and related
costs to create transparancy and to report to your investors at regular
intervals on realised cash burn compared to estimates.
4. The budget is like the managements nautical chart, where the route
to sail is plotted. From time to time, position is measured and
compared to planned position. Hence, speed-made-good (the
equivalent to cash burn in this allegori) is calculated to replace
estimated speed and the navigation plan is recalculated. At the
beginning of the voyage, the officers (the management) dont really
know the properties of their ship, but after a few fixes, their dead
reckoning becomes precise, and they become able seamen. In other
words: the budget is a vital management tool, and its precision and
efficiency increases as guesstimates are replaced by facts.
So lets press on and look at the most common types of budgets:
the
cashflow budget, the profit and loss budget, and the assets & liabilities
budget.
The Cashflow Budget

This is the mother of budgets. It is also in principle the most simple, and
in practise the most complex.
It has been presented allready, and here is a sample from a spreadsheet
model, available at the web portal: www.entrepreneur.dk to illuminate the
creation of this most vital budget
We are modelling the first three years of a production company, which is
going to develop and hence sell a product in two variants
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GRAFIK ind!
Comments to the sample:
Cash In:
The first product starts to sell in second quarter 2008 and sales
expand by end 2009. Incoming payments including VAT are entered
at the time they hit your bank account. You will have to pay the VAT
on to the Tax authorities at a later time. This can be handled in a
separat sub spreadsheet. Typical you get from 1 month to three
month credit time, here. Try to get three to let the VAT parked in your
company help to finance the start-up.
We have an investor on board, who invests 1.5 mio. This could be

one of the preseed investors like DTU Innovation or CAT Symbion
Invest. The figures are the last to enter in the spreadsheet . See
below.
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We have an overdraft facility, which we get, once the product has

proven its profitablity and risk has declined. See Other in Cash in. It
helps to finance production costs, but not entirely so, since it is an
expensive financing model.
Cash Out:
We have staff on the payroll from day one. This calculation is not
simple, and you should establish a sub-spreadsheet to calculate
wages and taxes and holiday alowances and enter them at the
appropriate times, when money is actually transferred to either the
employees or to the tax authorities. Link the final cash flow to the cash
flow budget.
Rent: your company has to have a headquarter. In our model, rent

expands with increasing number of employees, since you need more
space.
You need some special equipment and you need to invest in

computers, telephones, chairs, desks and the like. This is where you
can spend a lot of money, some of which could be saved by being a
little modest and smart. Remember that the early money is other
peoples money, and it is expensive, one way or the other, so it pays
to get acces to some in kind support from friends, here.
Production costs: clearly they expand with increasing sales, and since
you have to pay your suppliers before you get the money home from
your customers, production costs tend to pile up in front of expanding
sales. Be ready for that. Payments are entered inclusive VAT, which
you have to pay to your subcontractor, when you pay their bills. The
VAT is payed back to you from the tax authorities at a later time: from
one month to one quarter after you registered the bill in your
accounting system. Try to get the money back as soon as possible to
reduce the cash demand.
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Other: here you see the repayments on the overdraft facility. You
may enter an exact calculation in a separate sub spreadsheet, once

you know the terms from the agreement with the bank.
VAT: with 25%, VAT is not a trivial contribution to cash-in and cashout, and quite a few companies have run into severe problems, when
they forgot to include VAT in their forecastings. The tax authorities are
strict in collecting their money, so be careful, here. In the above
sample, outgoing VAT (which is VAT you got from your customers) is
fairly low, since you export most of your products outside EU. The
incoming VAT, which is the VAT you pay to your subcontractors and
later get reimbursed from the tax authorities, is linked to the
production costs, since your suppliers are mainly Danish (or from an
EU memberstate for that matter). A separate sub spreadsheet will
probably be helpful in keeping track of VAT payments.
This is how you establish the figures:

1. Get sales from your business plan, market analysis and marketing
plan. Convert sales into payments and enter these at the time, you
receive the money from your customers. (Typical error: you enter the
figures simultanious with shipping the goods. This is a grave one,
since international payments are often 2 3 months underway).
2. Calculate production costs from sales numbers and unit costs and
enter payments to suppliers incl. VAT at the time you have to pay at
the latest.
3. Enter staff related costs based on your organisation plan, which you
have developed on the basis of the estimated sales. Remember that
people are often hired several months sometimes up to half years
before their efforts start to materialize on the income side.
4. Enter the equipment and initial investments. Remember to include
VAT appropriately.
5. Finalise VAT calculation.
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Now you have established the basic cashflow. But look at the accumulated
cash flow (Cash in hand). It probably looks awfull = negative, which is
prohibitive for running your business. We need to get it positive. You need
some outside money, and this is where your financing plan comes in.
We assume that your business project has an upside, which will interest
venture capital companies. (Allowing them to get their money back X 10
within 3 6 years.).
We further assume that you will be able to get an overdraft facility of up to 1
mio. kr. Enter payments from that one in Incoming Cash and calculate or
estimate repayments, which you enter in the Outgoing Cash.
Look at the accumulated cash flow once again and enter one or two
payments from the investor. These payments need to be big enough to pull
the accumulated cashflow up into the positive. In other words: install some
payments from your would-be investor, that are big enough to ensure a
positive cash in hand throughout the planning period. In the sample above,
three installments of DKK 500.000 do the job.
At the end of the planning period, your company hopefully is able to survive
in its own rights based on income from sales. If you look at the sample
above, you will see a cashflow calculation without investments and loans,
which allows us to see how the core business develops. In the last year of
the planning period, the cash flow is positive, and hence, this company is
starting to make money. More money than it spends, and hence, it is
airborne. But it took two years and a lot of help from investors.
The Profit and Loss Budget.

With the profit and loss budget we are in the field of analysis. This is where
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you examine your business performance and acquire an overview of medium

to long term profitability etc.
It is also usefull in communicating economical perspectives and possible
returns on investments.
The profit and loss budget further informs us about the earnings before and
after deduction of depreciations, tax, interest and ammortisation and hence
indicates how much money we can set aside, year by year, once the
company starts making a profit.
The profit and loss budget is a condition for finalising the cash flow budget,
since company tax is calculated as 30% of earnings after depreciation and
interests and after deduction of earlier years deficits, to be paied each year in
October. .
Here is a sample, which is the P&L budget from same company case as
treated above.
One difference from the cashflow budget is, that income from sales is
registered one quarter earlier, since this is the time when our accountant
registers an outstanding payment in our favour.
Another difference is, that expences related to initial investments and special
equipment are not included, since these are not fully tax deductible. Instead
they are deducted as depreciations spread out over a number of years:
typically four. In our case, the depreciations amount to 31.300 DKK a year.
VAT is also not included anywhere in the P&L budget.
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Interesting, this company makes a profit allready in the second year, where
the cash flow is still negative. The reason basically is the diffence in time (1
quarter) between registering an income until we actually get the money. This
is a typical feature of rapid expanding companies: though they make a profit
on paper, they are in continous need for cash. That is one reason why many
claim, that cash is more important than your mother.
At the end of the third year, this company starts to pay tax.
The Assets and Liabilities Budget

Here we try to keep track of the values, generated and how these values
are financed.
In this budget, we look for items like:
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creditors and deptors
Value of tangibles such as cars, machinery, computers etc.
Value of intangibles such as patents and customer relations
cash in hand
equity capital
Here is a sample: same company as above:

First item is an intangible asset: apparently, the founders have made an
invention and the patent rights have been transferred to the company. The
auditor has accepted an opening value of DKK 250.000. This asset is
depreciated like any other asset by 25% of its initial value per year.
Second item covers equipment and initial investments in production tools,
cars and the like.
Third item concerns customers owing money to the company. In this simple
model, the figure is determined by deducting paied sales from registered
sales in the last quarter of the year. Notice how it grows. You should do
whatever you can to keep it down.
Fourth item is the cash in hand, end year. You get it from the cashflow
budget. Keep it up: Cash is King!
First item in the liabilities is the loan. Here you see the overdraft facility and
repayments have of course been deducted. You may also have other types
of loans like convertible loans to a venture capital company or ordinary bank
loans.
Next you see what your company owes to others. In this case it is basically
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your suppliers, end year. Sometimes suppliers are ready to be patient to help
a customer in need. Remember that, when the bank refuses to accept an
overdraft facility or a much needed loan.
Tax and VAT to be paied is also listed among liabilities.
Finally we arrive at the equity capital: the money which is not owed to
anyone. Here, one single figure is presented. Often, it is subdivided into the
original investment, the subsequent funding rounds and the inherent capital
expansions (we shall get back to that one later) plus the contributions from
each years earnings after tax, amortisation, interests, depreciation plus
eventual dividends to the shareholders all has been deducted.
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Financing
Before diving into this highly interesting theme, a few principles on
financing early stage business development are highlighted.
1. High risk and high revenue are interlinked. Without a hockeystick
perspective to sell, you dont get investors to buy into your venture,
even if your business model is sound.
2. Professional venture capital investors are offcourse seeking to
make a profit on their investments. Hence such capital is inherently
linked with an exit policy. They dont go in unless they can get out
again which usually means that the company will be sold to
someone else at exit time. That applies to your shares too.
3. The higher the risk the higher the price on capital. So to be
successful in rising early capital: reduce risk and increase
perspectives, before approaching investors. Risk is mostly related
to saleability and management skills. So work on these to reduce
risk: prove that you product can sell and get yourself a qualified
founding team before approaching the investors
4. For same reason: try to reduce dependancy on foreing capital
during the start-up phase. Here are three options to assist you:
a. First money = own money + FFF (Family, Friends and
Fools). This is an old and fundamental rule, and private
money, earned the hard way, consistantly impresses
investors, whom you seek to involve later on.
b. In-kind: exploit ressources available to you. A good
entrepreneur can be quite exhausting. Thats OK in most
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cases, as long as you dont forget that there is something

called pay-back time!
c. The first customers money. Quite often you will be able to
start your company in a collaborative effort with your first
customer, who badly needs your product and hence is ready
to support you with money and in-kind.
If you have captured the above principles, you have understood the
essence of modern pre-seed and early stage financing. Before we dive
into the details, however, we need to to look at some basic characteristics
of high risk financing.
Types of capital
Basically two types are of relevance:
1. Loan capital:
a. Overdraft facility: the well known credit facility, allowing the
company to survive short term heavy loading of the cash in
hand. In start-ups, severe collateral is a precondition for this
type of loan.
b. Ordinary loan. Usually secured through private collateral,
since the start-up company doesnt own anything valuable,
capable of covering the losses after a crash.
c. Convertible loans: a special type used mostly by venture
capital companies The loan can be converted to share
capital on given conditions. Usually it gives the investor
some special handlebars to control management and
business development.
d. Mezzanine loan: a mix between loan and equity: a loan in
terms of payback terms and interests, but like equity capital it
is less secured. A revenue-linked bonus to the credit
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company compensates the high risk

2. Equity capital: for start-up companies, this is basically venture
capital and own/private money. The money is invested in the
company and in return, the investor buys herself a share of the
company by acquiring shares. In essence, the money is paied to
the company bank account in return of a registration of the
ownership. The conditions for the investment are laied down in a
shareholders agreement, which again acts like a lighthouse to the
daily management of the company.
Some usefull terms within high risk equity capital financing:
a. Pre-seed capital: equity capital invested before the company
enters the market. Risk is usually too awesom to attract
professional and prudent investors, but since it is so close to
the cambrium of would-be entrepreneurs to really make an
impact on the business birth rate, some public incentives are
often at work to bind entrepreneurs and professional
business developers together
b. Seed and early stage capital: also equity capital, but now,
both business and investor are more advanced, and
consequently we are talking about investments into
companies with a battleproven product and an organized and
competent management.
c. Second-round and follow-on capital: as indicated: equity
capital invested into companies that have allready passed
through pre-seed and early stage investment rounds. Quite
often these second round investments are implemented in a
joint effort between venture capital companies: socalled
syndicated investments.
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Types of investors
1. Family, Friends and Fools: Maybe not so often seen here in
Denmark. In other coutries with a more developed entrepreneurial
tradition, private money is often invested into the heroic
entrepreneurial endeavours of sons and daughters and nephews
and neighbours and old friends and the money is typically written
off and forgotten until the venture eventually succeeds. Since this
type of investors assumably will increase here in Denmark, also,
bear in mind as an entrepreneur - that you should never ask for
more money from anyone than said person is capable of loosing
without severe consequences and without jeopardizing your
relationship. Further you should be generous at pay-back time, for
this is truly high risk investments and hard earned money.
The Fool in high risk start-up investments is probaly no fool at all,
but rather the socalled business angel: a private person with a
feeling for talent and business, who invests prudently and usually
insists on having a role in the management. Most of this investment
activity unfolds in a fertile twilight zone. We do not have any precise
figures to indicate the volume, but it is considered the highest by
magnitudes, compared to professional venture capital investments.
Also, business angels buy themselves into start-up companies with
a sound business platform, but without the growth perspective
needed to attract venture capital. So fools should be looked upon
with respect and interest. By combining competence, capital and
networks, they are often able to do miracles to small start-up
companies.
2. Banks and credit institutions: not so important in pre-seed and seed
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stages, unless you come up with some collateral. Industrial

development programs providing securities to loans may change
that statement significantly, however. Look for what is around. The
picture changes all the time.
3. Venture capital companies: we have some 30 of them in Denmark,
2007. They constitute an interesting phenomina, invented in USA
back in the ninetyfifties. This is how they work: a group of clever
people with experiences within business development form a team
(a VC-team) and go fundraising amongst real big funds. They offer
to invest on behalf of those huge funds like pension funds, and they
invest in high-risk high-gain newly started and young companies.
The huge funds also called funds-of-funds, when convinced about
the capacity of the VC-team, invest in a venture capital fund,
managed by the VC team, which the VC-team then re-invests in
perspective companies to create a pipeline of portfolio companies.
The VC-team also invests time in the management of its portfolio
companies to continously spur them to expand and develop to the
point when they are ripe for exit. Exit means that the VC company
pulls out by selling its shares. This could be at the stock exchange
or to a big company . Usually the founders pull out too sometimes
after a lock-up period where they work to deliver the goods sold and everybody get rich in the end. That is the master plan.
The money from the successful exits flows back to the VC fund. At
some point in time, the VC-fund, which hopefully has grown big and
fat in shares, cash and companies, is liquidated, meaning that
values are sold and money is paied back to the funds-of-funds + an
interest: the so-called hurdle rate, which could be like 20% p.a. of
the money invested by the fund-of-funds into the VC-fund. What is
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left of the VC fund cash is then split between the fund-and-funds

and the VC-team, meaning that if the latter have performed well,
they eventually get rich too.
Successful VC-teams usually have a number of VC funds under
their administration. They open a new VC fund in due time before
the previous VC fond is fully committed (meaning that the VC fund
money has either been invested, is locked up in investment
agreements or retained for follow-on investments in the most
perspective portfolio companies). This allows the VC team to
continously invest in new comets and gazelles while still being able
to develop the existing portfolio.
From the entrepreneurs point of view, a VC company can be a
tremendous partner, but you need to relate to a few facts, before
you chose your path:
a. You must be fully committed to the exit principle and
consider your venture a time-limited project. Forget about
venture capital if you want to start a family dynasty. VC is for
rapid success and wealth creation to allow you to move on in
your life as an entrepreneur in a better and fatter shape.
b. VC people join your mangement. Its a tight partnership, and
they require speed and competency. The sense of urgency is
always present with such characters on board. So forget
about venture capital if you prefer safety to speed and your
own hands on the controls only.
c. VC teams are very particular. They collect their pickings from
say one out of ten investments, and they invest in one out of
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maybe 10 20 well prepared business investment

opportunities. This means that if your business venture is
not able to produce a return on the investment by at least
tenfold, they are not interested.
d. Since VC teams are not risk adverse and since they prosper
on say one in ten investments, one might think that nine in
ten vc-backed companies fold. But that is not the case. In
contrast to the gross average, VC-backed companies in
general have a much higher survival rate. They are usually
well managed and able to develop into quite prosperous
businesses. So dont stay away from venture capital because
you are afraid of being sent into an orbit ending in a chrash
landing. Usually VC companies back out in a friendly
manner, once they realize that a company is not amongst
their winners.
You may ask and with some reason too why venture capital
takes so much attention here. There are two answers to that.
a.
VC teams offer the ultimative start-up concept, where

money, high-tech, competencies, experience, networks and
ambition unite to produce real serious and valuable
companies and high quality jobs.
b.
Some of the most successful start-ups, in particular in

markets in a rapid technological transition, are venture
capital backed. So despite the fact that venture capital
finances only a fraction of start-ups, the impact on industrial
development as such is high.
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c.
High tech start-ups and graduates from universities

dominate the founding teams that eventually attract venture
capital. Hence, a textbook on knowledge-based
entrepreneurship, designed for eship teaching at a
technical university would be senseless without an
emphasis on this demanding and rewarding type of capital
4. Finally a short note on corporate venture capital. This is a variation

of the venture capital descriped above. The main difference is that
the corporate VC is funded by the mother company and invests in
companies of strategic importance to the corporation that owns it.
Corporate VC is known to invest in spin-offs and founding teams
from the corporation. So corporate VC is often driving the corporate
entrepreneurship. A few large industries like NOVO, Danfoss,
Danisco and Carlsberg have corporate VC departments to indicate
a mature and well developed attitude to corporate entrepreneurship.
A summary view on the Danish VC community 2007

After some severe hiccups in the nineties and another few heavy blows
from the dot.com collapse and the September Eleven crisis, the Danish
venture capital industry has now emerged and matured to serve
perspective start-ups with a little business history and driven by
competent founding teams.
Some YYY
Investors incentives
Understanding the investors incentives is the first step in a seduction.
Here is how it works. Let us have a short look at banks and loans at first..
Loan Capital
If you run a bank, you prosper on interest and fees, and with interests
below 10 % p.a., clearly your revenue model is sensitive to losses and
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there is no way that you can make money in investments where maybe
half of them fail to pay the money back. So banks have a hard time in
making money on high risk investments, and since they are good at
making money, they dont invest in high risk without securities. They clamp
down on anything that can compensate a loss, like tangible assets that
can be sold in a worst case situation.
They certainly also look at you and your capacity for generating an income
as a highly valuable employee in a company, after your own venture
folded. This is where most pain arises from failing a business venture. So
be carefull about personal securities. Like when you gamble in Las Vegas:
do not bring more money into the gambling archade than you can afford to
loose, and when it is lost: go home. In the start-up situation: consider how
much money you are ready to owe to the bank after a failure and stick to
your decision if the worst case scenario materializes.
Some measures have been developed to make bank loans an option to
high risk ventures. The point is that from a society pint of view, we need
those start-ups to succeed, and hence, the semi-public investor
Vkstfonden offers collateral in various forms to perspective projects.
These products change all the time, and drawing a permanent map is not
possible. Look for such industrial development programmes when your
time has come. They should be quite visible.
Equity capital
Investors buy into the upside of your project. That means that they buy
company shares when these are cheap and sell them again after a
breakthrough at an obscenely high price if they possibly can.
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Consequently, VC companies and business angels look for investment

opportunities in need for money and with a capacity for rapid expansion.
Expansion or scalability is truly a crucial precondition for this type of
investors. Further, there should be a market for their portfolio companies,
once they have grown. That would either be a stock market or real big
companies buying into innovation through aquiring newcomers.
This incentive explains why VC companies invest resources in the
management of their portfolio. They simply promote their investments
through business development. Some of them are good at it. Here in
Denmark we still have not really seen any shake-out in this investment
industry. In USA you will find renounced venture capital companies with a
stunning success rate, indicating that they master the art of picking the
winners and making winners even bigger winners at a level that distinguish
them from their peers.
Evaluation of a business
If you want foreing investors to join you, they need to know the value of
your company the evaluation or valuation in order to calculate how
much ownership they achieve per invested DKK.
We are in the world of high risk high gain. The price that an investor is
willing to pay for a share in a business venture depends on risk and gain.
The lower the risk the higher the price provided the possible gain is
interesting. Likewize: the higher the gain, the higher the price. So
increasing evaluation is about decreasing risk and increasing gain. Thats
really all.
Before arousing the venture capital investors interest, however, you need
to consider if your company is a venture case at all. In Boston, a venture
case is ruled by the 126-equation: turn-over increases to more than 100
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million dollars with a profit margin higher than 20% in six years or less.
That makes it pretty easy to remember but of course, this is not generic.
The venture case threshold is a highly case sensitive thing. The Boston
formula however is good at indicating what it takes to trigger the curiosity
of a VC investor. He is quite spoiled and prudent, and a venture case is
really a rare bird amongst start-ups. The impact of venture cases however
is significant. They produce more jobs and values than the non-venture
cases combined. [Hvor ved du det fra?]. So venture cases are what we
want. Hence this book.
So perspectives and scaleablility of your start-up have to be significant.
We have touched upon that earlier on. It all starts when you start to
generate and filter business ideas. Look out for ideas addressing markets
in rapid transition and expansion. Here money is available and invested
much more freely than in old stagnant markets. In expanding markets, new
companies are able to display stunning growth rates and exit opportunities
are around. So thats where you should be, before you contact investors.
Next you need to look at risk. Here is some risk to consider and to work
with:
Technological risk: does it work meaning does your product really relieve
pain and create values?
Risk reduction: prototype at work in your first customers plant, drug in
phase one clinical trials, fully functional software demo, expert evaluations,
etc. As a minimum, you have substantial customer feed back on the
benefits of your product ideas.
IPR risk: do you have the freedom to operate? Can you identify and
protect your inventions through patenting?
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Risk reduction: a decent novelty search and possibly file a patent.

Market risk: have you understood pain and value creation correctly? Have
you developed an appropriate market strategy that works in the specific
environments that constitute your market?
Risk reduction: customer feed back and testimonials, indicating that you
are or will be an accepted supplier or that your distribution channels will
work, also during scaling up.
Management risk: starting and expanding a new business is a difficult
managerial task. Hence, the competencies, experiences, track records
and networks of your founding team are mission critical. As treated earlier
on: make sure that your team covers as much area in the spider web as
possible before approaching the VC community.
Quite interesting, you can do a lot to reduce risk, almost for free. Risk
depends a lot on your choices and decisions during the pre-start time
Another note on risk: it relates to the proof-series: proof of principle, proof
of concept, proof of business, proof of pull, proof of profit, what have you.
All of these are answers to questions on risk issues and also treated below
Hence, a good fund raising strategy is to reduce risk by elaborating on the
above bullits and pushing the start-up project through the proof series, as
far as you can before approaching the VC lions.
The value of a start-up company (the valuation) tends to develop stepwize.
Whenever a major event illuminates and reduces risk, the risk-to-gain ratio
changes and so does the share price. The events will typically be the
proofs. We have a lot of them. Definitions are vague, and hence, so are
interpretations of what they really imply. Here are the most common: if you
stick to them, you cant go entirely wrong.
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Proof of Principle:
Technology/knowledge works vs. the problem
Proof of Concept:
The customers value creation is verified and the
technology is proved to be unigue and probably patentable. No

infringements of other peoples IPR.
Proof of Business: The business is founded with able management and
admin, and all internal business processes are outlined. You can run it.
Proof of Market:
The pioneers start buying
Proof of Pull:
So does the early adopters
Proof of Profit:
So does the early majority, and the company starts
making a profit
Proof of Expansion: The company demonstrates its capacity for growth
indcated by increasing market shares and penetration of new
geographical markets.
Proof of Exit: Exit opportunities are unquestionable and offers even start to
dump into your mailbox.
The graphic presentation below indicates how striking the stepwize
upramping of company valuation can be. It is a very usefull model
containing a lot of inspiration for you when drawing up your business
development strategy. By example: timing of funding is essential, and you
should always try to push through a proof before you start negotiating
evaluation with investors. Dramatical things will happen to valuation, after
you proved that you can sell the stuff and your customer is happily ready
to pay a price, which allows you a high profit margin. As indicated earlier:
first customers feed back is gold. Here it is gold in quite a litteral sense.
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Algebra of equity investment

To give you an idea of how an equity capital investment is calculated, and
how values develop through the expansion of a successful start-up company:
consider following scenario:
Our entrepreneurs have invented and patented a product. Together with a
pre-seed investor (f.ex. an innovation environment) they start a company: a
private limited company, which requires an investment (cash and/or noncash contribution) worth at least 125.000 DKK.
The pre seed investor agrees to invest a small sum to get the company
founded and a more significant sum, if the first milestone specifications like
development goals (proof of principle) and/or first customer positive
feedback (proof of concept) are achieved within a specific time period.
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The algebra of the start-up looks like this:
Explanation:
The founding team buys shares for DKK 50.000. The pre seed investor buys
for DK 45.000 worth of shares. At start-up time, they get one share of
nominally DKK 1 for a price of DKK 1,00. You may choose higher share
value and higher nominal capital. You may even divide shares into classes.
One class of shares can be given preferences, which reduce risk in various
ways. Such shares, off course will have a higher share price. Investors will
typically insist on having some preferences that protect their investment.
Consequently they have to pay a higher price per share than the founding
team, which again means less dilution of the founding team per invested
venture capital DKK. So you may protect your ownership ratio by accepting
souch preferences. They are treated below in the section on shareholders
agreement.
The founding team, who has invested time and private money in generating a
bright idea and filing a patent, sells the patent to the company and receives
shares worth DKK 30.000 as a payment. This is called a non-cash
contribution, and in fact you may sell whatever you like to the company and
get shares as payment. The only precondition is that an independent auditor
accepts the value of whatever you put into the company as reasonable and
present. Non-cash contribution invariably calls the interest of tax authorities,
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since you have to pay personal tax from the values, which you invest. If our
entrepreneurs have paied costs from their personal incomes equal to DKK
30.000 to file the patent before the company is started and the patent
ownership transferred to the company, no tax issue is raised. If they just
claim that the idea is worth this amount without it having cost them anything
to create, and they then invest it in the company as a non-cash contribution,
they have to pay tax of a personal income of DKK 30.000. All these details
are here to remind you about yet another classic pitfall: when you invest noncash values in your company, you may become liable to a considerable tax
payment. The number of people who fell into this one is considerable, since
of course it is quite tempting to invest ideas instead of personal cash. Dont
be the next and do accept, that there is no such thing as free lunch.
After funding the company is up and going with DKK 95.000 in cash and a
valuable patent on the list of assets.
Now, after a short while, the first important goals are met, and the pre-seed
investor is ready to invest another 1 mio. DKK in the company.
The parties have agreed allready at start-up time, that if milestone specs are
met, the company will be worth DKK 4 mio. kr., since risk is now much less,
and since it is clear that the product can be produced and sold at a profit.
What you should pay attention to in this table are:

Valuation, pre-money (or ante investment): this is the value of the company
which the investor and the founding team have agreed upon, before money
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is invested. This is where the horse-trading comes in. Of course, the

founders try to push it sky-high, whereas the investor tries to get away with a
low pre money valuation. In our case, the parties agreed on DKK 4 mio. kr.,
since a lot of risk has been taken out during the first critical months.
Share price: we know that shares of nominally DKK 125.000 have been
issued, and we know, that the company is worth DKK 4 mio. Consequently,
each share of nominally DKK 1,00 is worth DK 32,00.
Nom. ante or nominal shares, owned before the new investment: these
figures are the ones that we know from the founding of the company.
Founders shares from non-cash and cash contribution have been added to
shares from cash contribution to constitute the founding teams equity
holdnings.
Value ante: this is the value of the various stock holdings before investment
and based on a pre money valuation of DKK 4 mio. Note that the value of the
founderss stock holdings has increased from DKK 80.000 to DKK 2.5 mio.
Quite an increment, wouldnt you say! Then again, this is only on paper.
These shares cannot be converted into cash at this point in time.
Contribution: this is the cash money invested by the parties. In our example,
the pre-seed investor invests one mio. DKK. This is done by the company
issuing new shares of nominally DKK 1,00 and selling them to the investor at
a price of DKK 32,00. This is done by officially registering the decision
(usually minutes from a shareholders general assembly, where the capital
increase was decided) and registering the new equity capital. This is done
simultaneously with the investor transferring DKK 1 mio. to the bank account
of the company and then enter the new shareholder specs in the companys
register of shareholders. The latter could be a versionised and dated spread
sheet like the one above, which is filed in the records of the company after
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conclusion of the capital increase.

The additional shares issued are calculated by dividing the new cash
contribution by the share price. Evidently the investor buys nominally DKK
31.250 shares for a price of DKK 1 mio.
Now the new share capital can be calculated by adding the original shares
issued at start-up time to the new shares. In our case, we have to register a
share capital of DKK 156.250.
The new ownership ratio can be calculated from the new individual share
holdings. Note that the founding team has been diluted down from 64% to
51,2%, but then again, the value of their holdings has increased from 80.000
to 2.56 mio. Probably the founders have no reason to cry.
After the procedure is concluded, another DKK 1 mio is available at the
company bank accounts to be used according to the managements
decisions. Often, these have to comply with rules laid down in a financing
agreement between the company and the investor.
Second round
Now the company has the money needed to break through in a limited
market. Assuming that it succeds in this, the management team thereby has
proven that they can run the business (proof of business) and the concept
has proven that it can sell (proof of market). There is good reason to believe
that the company will be able to jump the abyss to the early majority and to
expand internationally. A lot of money is needed for this purpose.
Consequently, the business plan is updated to include a major sales &
marketing effort. According to the cash flow projections, the company will
need another DK 10 mio. to conclude a succesful international development
of distribution channels to new geographical markets.
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So the pre-seed investor does what pre-seed investors are supposed to do

and helps the founders in raising more capital.
Here is the calculation:
Note that the pre-money valuation has increased to DKK 15 mio. from where
we saw it last: DKK 5 mio. (Pre money valuation 4 mio. plus 1 mio. in cash
being invested also called the post money valuation). Now the founders
and the first investor suddenly share an interest in pushing the pre-money
valuation. The DKK 15 mio is the final result of tough negotioations between
the founders and the pre-seed investor on one side and the venture capital
investor on the other.
Calculations follow the same template. With a pre money valuation of DKK
15 mio., the shares are worth DKK 96 per share of nominally DKK1,00. In
percentage, the share price has increased from 100 to 9.600. That is quite a
lot, but certainly not unusual in high-tech venturing. And dont forget that we
are actually looking at a real commercial breakthrough.
Now, with a share price of DKK 96 per nominally DKK 1, the new investor will
get shares of nominally DKK104.166,67 for a cash contribution of DKK 15
mio. Again, this is done by issuing nominally DKK 104.166,67 new shares
and thus increasing the share capital of the company from nominally DKK
156.250 to DKK 260.416,67.
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After investment, the company will be worth DKK 25 mio. (pre-money val +
invested cash)
The value of the founders shares has increased to DKK 7.68 mio. But still
this only paper money. After the last capital infusion, they have been diluted
down to 30,72%. The new investor got 40% of the company.
You can be sure, that the new investor also insisted in a complete rewriting of
shareholders agreement and business plan as well as changes in the
management of the company. This is typically a point in time where a
professional CEO is hired and installed. To the founders this means yet
another push away from control of their own baby. But then again, this is
what VC funding is about: competent money means the best management
available at any given time in the history of the start-up company, and
founders usually are better at getting ideas and setting up companies than
running quickly expanding medium sized companies in the middle of an
international consolidation. The usually also like it a lot more.
Exit time
Assuming now that the company succeeds in establishing an international
market position and starts beating allready established companies on market
shares and growth, conquered through superior proprietary technology and
good salesmanship and management. Such a company is a juicy bite for a
bigger company, which may cut corners and make a by-pass to a stronger
market position. So the shareholders start receiving request on whether the
company is for sale.
This is another field where the competencies of the venture capital company
come to the test. To develop the right sales strategy and to execute and
conclude an acquistion requires experience combined with sense of timing
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plus a lot of bargaining skills.

Assuming that a selling price of DKK 250 mio. is accepted, the algebra looks
like this.
The founders got DKK 76.8 mio out of their pains, which is initial money back
by 960 times. The pre-seed investor, who took the high risk, but couldnt
defend his ownership positions at second round, got DKK 73,2 mio back,
which is 70 times invested money, which is a real good deal for a pre-seed
investor, though. The investor who came in at second round, when
everything was peace of cake, got his money back tenfold, which is what
venture capital investors usually expect. So he is happy too.
After exit, the founders probably have a lock-up period, where they cannot
cash out fully of their company and the management probably also has to
stay with the company for some time to ensure smooth transition and
continous operations..
After then, the founders probably take a deep breath, relax, start to get bored
and then start up yet another company or maybe several and now they
dont have to ask for other peoples money. They have turned into serial
entrepreneurs, and that is very good.
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Commercial Law for Entrepreneurs

This chapter is designed on a need-to-know basis to give you the most
relevant digest from the Danish laws that regulate formation, expansion,
management of businesses as well as trade and agreements between
relevant parties.
This is a kind of a quick and dirty approach, since the field is so vast and
complex. Ideally, you acquire a sence of important issues and laws, which
again allows you to act with due diligence in specific situations and to call for
expertice when needed and to communicate with expertice.
The probles treated are generic in nature, and you will find most of them
treated in national laws applicable in the area where you set up your booth.
Our reference in this chapter however, is Danish law.
We shall look at themes such as:
Company form: choosing the appropriate legal form
Contract law
Law regulating relations between employer and employee
Issues related to owning shares and companies
Company first. You have the following options to pick and choose from, when
you want to do business:
1. The Personally Owned Company: (v/ ): it is your born right to
sell to any person who wants to buy from you, once you are 18
years old or more. When the volume of trade exceeds a very
nominal figure, (DKK 50.000 in 2007 and certain exeptions
for specific types of services and products. Check it on
138
www.virk.dk) you have to register your activities to allow

authorities to deduct tax and VAT. This type of company is
called the personally owned company, and it has three
interesting features:
No contribution is necessary. You just start running your

business. Soon you register it too. But you dont have to
invest money in the company upfront because ---
You are personally liable for whatever the company

does. If someone claims compensations of it and wins
the case, you have to pay out of your own personal
money and there is no limit. You may go completely
personally bankrupt without much possibility to get up
and going again for a long period. It has happened to
many, and it is a miserable experience.
The expences by running the company are fully taxdeductable in your personal income. By example: if you
start
the
company
while
still
being
employed
somewhere else, and the company makes a deficit, this

can be deducted in your personal income before you
pay tax. Clearly this could be an advantage in a start-up
period as long as the first bullit is of no concern.
2. The Partnership Company (I/S): This is basically an expansion
of
the
personally
owned
company
with
same
main
characteristics. Expenses are tax deducable in the partners

personal incomes, and they are fully responsible for whatever
damages or accidents or debts. The liabilities are called joint
and several liabilities, (solidarisk hftelse in Danish) meaning
that each and any of the partneres is liable in full. So if a claim
for compensation is raised and some of the partners cannot
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pay, the claimant will sue the one who has. Note that the latter
may not even be the one who caused the case. So clearly, the
partnership agreement, which is a contract between the
founders, which regulates amongst other issues the
decision making procedures, is a sine qua non. A need-tohave. Get your laywer involved here.
Cash contribution is not necessary to start a Partnership
Company . You just register to deduct expenses and VAT etc.,
but you may soon find it necessary to get external assistance
for bookkeeping and sharing of tax deductions, handling of
VAT etc.
3. The private limited (ApS) and the limited (A/S) company: some
understanding of the logics behind this company type, which
dates back to the early renaissance can be usefull: When trade
started to develop in earnest, back then,
people, be they
shipowners or merchants, would go completely bankrupt when

ships went down or cargoes were lost. So the development of
enterprise and trade suffered from the grave personal
consequencies of losses and risk prevented the development
of wealth and prosperity. To circumnavigate this deadlock, the
state allowed companies with limited capital to be formed.
Such companies would pay compensations until exhausted
and
then
go
bankrupt.
No
additional
or
remaining
compensation could be claimed from the company owners

the shareholders - who of course suffered the loss of their
investment in the diseased company, but not their complete
personall fortune. The precondition for running such a
company was that it published its economic key figures
regularly to allow anyone trading with the company to assess
the risk involved. This principle has survived to this very day,
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and you may look into the ecomical specs and achievements
of any limited or private limited company. Here in Denmark
these data are available from Erhvervs og Selskabsstyrelsen:
Danish Commerce and Companies Agency. If you found a
limited company yourself, you may enter into serious business
without putting your carreer, you family your house and the dog
at risk.
So much to indicate, that the principal characteristic of a

limited company is the limited responsibility, which
protects the founding team and other shareholders
against grave economical consequences of failure.
The equity capital provided as a cash- or non-cash

contribution at start-up time is another important feature
of a limited company. In Denmark you need to invest
DKK 125.000 to start a private limited company and
DKK 500.000 to start a limited company.
The differences between the private limited and the

limited company are small and are basically concern
management and auditing. Usually new companies are
started as private limited and later converted int limited
companies through an increase of equity capital.
4. Any other type: we have a number of different types and

combinations of limited companies and partnership companies
like K/S, AmbA etc, which are not relevant to the entrepreneur
because they are difficult and hence expensive to administer,
and they are unknown to most customers and hence
regarded with mistrust. So forget about them.
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So which one should you chose?

Apparently the choice depends on the risk involved, whether the company
makes a profit or a deficit, and the kind of profile you want to signal to the
world.
Risk:
If risk is related to using your product or your consulting sevice, and cannot
be elliminated though insurance, the limited company becomes the obvious
choice. Worst case, compensations can fold the limited company, but you
survive to tell the story and to get on.
If risk is related to the company needing money before it starts making a
profit, which is the case when you start a high risk- high gain company, the
limited company is also an obvious choice. A personal or a partnership
company cannot sell shares, and hence these two types can only get access
to capital through loans. If a personally owned or partnership company fails,
the founder(s) have to pay back the loan from their personal and personally
taxed income, now the business is gone, which is a bitter pill to swallow.
If the company owes money to the public, be it tax or VAT, the limited
responsibility of limited company protects shareholders in case of a flop,
whereas public debt owned by personally owned companies and partnership
companies that fold, automatically is transferred to the person or the
partners. If the company cannot pay salaries to employees during a crisis,
their salaries during their grace period are paied by a public fund
(Lnmodtagernes Garantifond), which again will try to get its money back
from the bankrupt estate which is you or you and your partners, if you did
not start in a limited form. So once you hire people, you should transform
your company into a limited form.
Tax
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Assuming no risk is involved, it makes sense to start your company as a

personally owned or a partnership company to benefit from being able to
deduct expenses in your personal income(s). That will work for some time. If
your company doesnt start to make a profit, however, the tax authorities will
rightfully claim, that this is not a business, this is a tax arrangement and
insist that you close down operations. So after a year or two, you need to
make a profit. Thats when you should think about changing into a limited
form.
Profile
Clearly limited companies indicate serious and committed founders. Private
limited companies still do too, though to a lesser degree.
Partnership
companies are not often seen in high-tech high-gain, so they are

coonsidered strange and hence suspicious The joint and several liabilities
make them more safe to deal with, but is that important? And anyhow, if risk
is of essence, the sanity of the partneres will be questioned.
Personally owned companies in the high risk domain are for madmen only.
To summon up, the private limited company later converted into a limited
company
is
the
most
frequent
type
of
company
within
serious
knowledgebased entrepreneurship. Sometimes a partnership company is

used for a short while often allowing the founders to do a tax-free
conversion, which is a brilliant idea, but take care of joint and several
liabilities
Company conversion
Companies are allowed to change from one form to the other.
By inviting a partner into your personally owned company who paies you a
handsome sum in return, to achieve a partnership your business changes
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into a partnership company.

If the values of a partnership company or a personally owned company for
that matter exceeds the minimum equity demands of the private limited or
limited company, the company can be transformed taxfree into one of the
limited forms with some help from an auditor. The tax, you would otherwise
have to pay, when the assets of your personal or partner company are used
for non-cash contribution into a limited company can be parked until the day
you sell the limited company at en exit for example. This can be a good
idea for an entrepreneur without a personal fortune.
A final remark on choosing and setting up your company: some hassle is
involved on the regulatory side, and a lot of experiences and specific legal
competencies when selecting the appropriate type, setting up partnership- or
shareholders agreements and articles of association. Further, serving public
demand for information and data as well as bookkeeping makes it a
nightmare to start up a company all alone, if you have not done it before. This
is where you should use professionals like laywers, auditors and accountants
and hence you should set aside money for hiring these experts, when you do
the cashflow projections. You should however also be able to communicate
with these people, so re-read the above when you reach the point in time
when you start up your future company.
Agreements.
Agreements are widely used by businesses to regulate relations between
buyer and seller, between employer and employee or between owners. A
fundamental knowledge of agreements is therefore an important part of an
entrepreneurs empirical background.
First of all you need to clarify if you are allowed to make an agreement at all.
Some laws like the Salaried Employees Act set mandatory provisions
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which you cannot overrule by individual agreements.
Further, internal
company rules, often embedded in the shareholders agreement and/or

articles of association usually define the powers to bind the company. You
should know your own clearance and seek authorization to sign agreements
on a case by case basis from your management/board.
Now to the legal definition: An agreement can be defined as an offer and
an acceptance.
To fulfill the requirements of a valid offer, the offer will have to be brought to
the knowledge of the counterpart.
To fulfill the requirements of a valid acceptance, the acceptance will have to
be in complete agreement with the offer and communicated to the other
party. This must be done in due time, if a such time limit is defined in the
offer.
If no time limit is defined, the offer stands for good.
In some countries like UK -, an offer is not binding at all. Check national law
on such crucial issues before entering into business in that region.
Where would you prosecute the other party, if it violates the agreement,
causing you considerable loss? Well, this should be stated in the agreement
as well, if the other party is foreign. You have to define which laws and which
judicial system should be applied in case of a dispute. For want of an explicit
statement of law, the sellers national law applies, which in practice means
that the buyer cannot defend his legal position. A young Danish company for
example would not like to pursue its rights in a courthouse in New York. So
try to define your own legal system as venue.
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Verbal agreements are binding, but in reality most such agreements are
annulled in the case of a trial because of the state of the evidence. They are
sometimes referred to as gentlemens agreements, though in reality, mostly
they are not real agreements and that none of the parties are gentlemen.
Agreements that are not agreements

We also need to look at the grey zone of understandings. You create an
understanding of a mutual cause by indicating your intention to do specific
things. Your partner, who has reasons to believe in you, acts according to
this.
Thus, understandings create expectations leading to all kinds of
investments in a common cause. A lot of our actions and our relations are
guided by such understandings. By example: you vote on the basis of an
understanding of what your favourit party of politician will do an stands for.
Other example: there is a natural and widespread understanding of fidelity
amongst lovers. In case of a breach of such understandings, the aggrieved
part can do little since there is no agreement amongst the parties and each
part is free to follow his or her own inclinations within the limits of the law. But
still a feeling of betrayal, anger and frustration prevails on the aggrieved
party. If you translate this to business relations, you will find many examples
of relations that broke up because understandings were not fulfilled, to
replace trust by mistrust, which again is highly counterproductive in business
relations. You have to coinsider whether to replace important understandings
by agreements, and you have to very methodical in avoiding creating
understandings which you are not ready to act upon to live up to
expectations. Apply common sense, awareness, and basic honesty and
become a good business man/woman.
This applies in particular to
communities like venture capital markets where trust is crucial, where

everybody knows everyone, and where information is disseminated at a
speed faster than the light. It certainly also applies to customers. If you do not
live up to the profile and the statements on which you sell, resales will not
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occur, and customers will not recommend you to new customers.
Agreements between sellers and buyers

Agreements are very common in connection with the selling and purchasing
of goods. The Danish Sales of Goods Act is a type of basic agreement which
regulates the relationship between the buyer and the seller, unless other
arrangements have been made. In this domain, you are free to set up
whatever kinds of agreements you like. If you dont, the law applies. As the
Danish Sales of Goods Act protects the buyer first and foremost, you, as a
seller, should consider your legal position more carefully than you being a
buyer.
In this field, a breach of an agreement is usually either a delay or defective
goods. Let it be known, that a breach, caused by you, which means that the
other party looses money, usually is followed by claims of compensation that
can be completely devastating to your company. So be methodical when
making quotations or entering into agreements, where your contributions are
crucial in a larger context.
In international contracts between sellers and buyers, the Convention on
International Sales of Goods (CISG) is often included to create a
comprehensive framework for further collaboration. CISG is a set of rules,
developed by the Un and recognized by most countries. It is very similar to
the Danish Sales of Goods Act, however, not as strict in terms of the sellers
privileges. As an example, a delay is considered an essential defect
according to Danish legislation, whereas the extent of the defect in case of a
judgement or adjudication according to CISG will be assessed, casse by
case. The CISG does not alter choice of national law. It will normally be the
law of the country in which the seller resides which will be applied.
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Agreements between producers and agents/distributors

Remember that the agent is only a middleman selling in your name (you are
the principal in the legal context), whereas the distributor is selling your
products in own name from own inventory.
The Commercial Agent Act, which is the result of an EU directive, states that
if no arrangements have been made between the agent and the principal,
then general principles of reason shall apply. In particular, a term of
termination of the agency has to be followed which is set to one month per
year that the agency has existed with a minimum of 6 months. Naturally, it is
possible to agree on a longer term of termination, but it is illegal to agree on
shorter terms of termination. In the case of a termination on the part of the
principal, the agent is entitled to a compensation equal to one years
commission calculated as the average of up to five previous years
commission. In connection with a termination, it is common that the agent
accepts a competition clause. The popular reason for a termination of an
agency is that the agent has succeeded in selling the product to an extent
that makes it more profitable to set up a subsidiary company. Since we are
working in the field of commercial breakthroughs, five previous years
commission can be insignificant compared to the profits to be gained through
a subsidiary company. However, since your agent apparently is competent
and well connected, you might want to employ him/her as manager and coowner of the subsidiary and thereby save the compensation.
Agreements between producers and users

- or rather the consequences of not knowing your customer and hence not
being able to set up specific agreements on the use of your product. So,
essentially, this section is about Product Liability, which can be defined as
damages to third parties caused by a defect in a certain product.
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Danish legislation in this field is subject to EU codification, which covers two

areas:
1.Personal injury
2.Defective consumer products
It is not possible to contract out of product liability, because obviously, the
parties to the contract do not know each other. The violated part is a third
person, who involentarily was in the wrong place at the wrong time
International conventions dictate, that directions on how to use a specific
product have to be written in the local language. Warnings printed in
directions or manuals do not exempt the producer from product liability.
Product liability is similar to no-fault liability, which means that evidence does
not have to be presented concerning the question of guilt. If defects have
been found, a liability claim can be put forward. The consumer can place the
responsibility with the middleman or the producer at his discretion. If the first
option is chosen, and the middleman has to pay compensations and punitive
damages, the middleman will have to make his claim with the producer, if he
wants to recover or to share his losses. In other words, liability can backtrack
through the value chain from injured part to the producer. Judicial practice
proves that in most cases, the producer end up with the liability claim.
A claim for compensation can be quite considerable. Therefore, you must
guard yourself against the consequences of the accidents that your product
might cause: First and foremost by selling safe products, but also through
insurance and worst case through the limited company.
The worst case product liability causes involve personal injury. In Europe,
149
you can protect yourself by taking out an insurance, but in America or

Canada, this is not always sufficient because of the sometimes astronomical
claims for compensation which are brought forward in these countries and
because the insurance itself awakes the appetite of the vultures.
The reasons for these very high amounts of compensation in America and
Canada are:
1.
Legal costs are covered by the State, and it is risk-free to bring forward
an action. So people bring their disputes to the court much more
frequently than f.ex. Europeans do.
2.
The amount of compensation is decided by a jury made up of "ordinary

citizens, who have a bias towards a fellow countryman being violated
by a foreign company.
3.
Punitive damages are used as a way of punishing the producer. The

fine is made payable to the injured person, and it can be outrageously
out of proportions with the actual damages suffered, which apparently
cause the people to flock to the courthouse and the laywers to chase
even trivial accidents on a no cure no pay and 50% of revenues in
case of success basis. Ethics are widely debated.
The limited company or the private limited company is a quite effective risk
barrier. Not that it cannot be penetrated, but this requires the case to be
brought to the local court. By example, assuming that your company is sued
in US and sentenced to pay punitive damages, which again makes it go
down the sink and the offended party decideds to charge you personally as
the engineer behind the product and the owner of the limited company - the
US laywer has to prosecute you as a person here in Denmark and by Danish
law. That will only happen if you have a personal fortune worth tapping into. If
you are an ordinary person, it is senseless to sue you.
150
This brings us to a final remark on these matters: of course actions taken in

case of a breach of an agreement or damages caused by product flaws
depend on the possible outcome of the case. Thus, a wealthy company is
much more liable to claims of compensation than a poor one. Consequently,
you should consider reinforcing your protective measures, once your
company starts to develop values in earnest, and you should know that
visible values make you a juicy target. Life is definitely not for newbees!
Agreements between employer and employee

Hiring your first employee marks a serious milestone in the life of your
company.
Since a comprehensive and mandatory law regulates the
relationship between employee and employer, you need to consider what

you are doing when hiring. This chapter tries to highligt the essentials.
All nations have laws protecting employees, and they differ widely. Here in
Denmark we have the socalled flexicurity system: the Danish Salaried
Employees Act, stating relatively short notice
periods on dismissal,
combined with a social security net to protect employees against the

devastating consequences of a complete loss of income, and a widely used
unemployment insurance system. This allows companies to adjust their
manpower to their needs more quickly than say companies in France or
Germany, which again is a true asset for a start-up company, navigating
troubled waters.
So the Salaried Employees Act (Funktionrloven) is very much about hiring
and firing. As a first time employer, you may jump to the conclusion that
instead of hiring people and battle the hassle, you enter an agreement with
them as consultants for a specific job. Wrong! The law works even before
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hiring people. If an employee works under conditions that are closely related
to the conditions of employment for salaried employees, he or she will very
quickly attain the status of a salaried employee including notice to quit and
company oblidged to pay holiday allowances and to withhold and pay
employee personal tax. An employee, who does not, or only in part, receive
income from other clients and work 15 hours or more for your company per
week, is considered a salaried employee of yours. So what can you do when
hiring consultants: a) make sure they work for others also and b) make sure
that they are VAT registered and pay VAT due.
Likewize, blue collar workers (working on an hourly rate and no notice period
when dismissed) are easily converted in to whitecollars or salaried
employees, if they start doing what whitecollars are supposed to do. So be a
little careful about what your bluecollars are asked to do for your company.
If hired, employees have some fundamental rights that you should memorize:
1. A written contract on the nature of the employement.
2. Notice period if dismissed:
a. First month of employement: 1 month notice
b. Next 32 months of employment: 3 months notice
c. Then one more month per year employed up to six months
3. The right to resign with one month notice always, unless the
employeer wants a longer period, which again costs one additional
month notice on dismissal on top of what is allready earned per one
month extention of resign notice period.
In case of an obvious breach of rules and laws on the whitecollars part, you
are entitled to dismiss said person summarily: that is asking the crook to
leave immediately, and no wages to be paied. This is a quite fiece responce,
however, which should be considered carefully, since the crook is entitled to
compensation if the summarily dismissal was not due. It takes theft, abuse or
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fraud or any combination of these to justify a summarily dismissal.

You may for other reasons like preventing a person, who is about to leave
the company, from having access to confidential information - insist that said
person leaves the company premises immediately after dismissal or
resignment, but then you have to pay salaries etc. throughout the grace
period.
You may need to ask certain entrusted employees like the sales people to
sign non-competition clauses oto prevent them from resigning and bring vital
customer information and customer relations to your competitor.
The
provisions for trusted, salaried employees in the Danish Salaried Employees

Act, provide the opportunity for such clauses. The rules of practice of the
labor market, however, demand that the salaried employee should be
financially compensated for this limitation in his or her career options. Ask the
relevant labor market organizations about the general practice before the
salaried employees employment contract is drawn up.
Finally, you may hire whitecollars for a specific period, and you may prolong
the period once. Second time you do it, the salaried employees Act takes
over to define dismissal, notice periods etc.
Agreements between shareholders
Here we are free to set up whatever agreements we like. There is no such
thing as a law protecting the stupid against the smart as long as criminal
offence is not involved. . Hence you need to know a little about the
essentials.
Partnership Companies (IS/)
You probably remember the joint and several liability problem (solidarisk
153
hftelse). The importance of an agreement between the partners can not be

overstressed, and in particular, you need to set up rules on how to make
decisions.
Limited companies (ApS and A/S)
Here issues are a bit more complex. You have to imagine a number of
owners like the founding team, one or more venture capital investors (VCs)
and maybe also meployees, who executed
on a stock option program.
Various interests are represented, and the agreements aims at creating a

framework for focussed business development towards an exit.
Following issues are usually covered:
Decision-making authority
Sets the limits of the daily management and the borderline between
board- and daily management.
Rules for capital contribution
The rules apply to the situation when the company needs more cash.
Who decides and what company valuation should be set as a
minimum for further cash injection into the company.
Rules for selling and buying shares

The VCs are trying to prepare a smooth exit at a high validation, which
again depends on how ownership is composed. Hence some control
of who become co-owner during the company development phase is
essential to the VCs. Another aspect is the warrant programs that
allow valuable employees to buy shares. This is usually regarded an
asset by VCs, but it needs to be regulated.
Protection against conflicts of interest (disloyalty)
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Shareholders may start working in competing companies or VCs
invest in competing companies. To avoid such unpleasanties, a field

like a business area or a technology field can be defined in the
agreement, and the partners agree not to act within said fields unless
in the interest of the company.
.
Maintain the exit as the ultimate goal.
It is one of the more difficult interests to handle. However, the VC

has a legitimate interest in pursuing exit opportunities, which the
founders are not always happy about since for them it is often the
end of the venture even if they get bloody rich in the process. So
an obligation on the managements and the boards part to develop
and prepare the company for an exit is usually entered in the
shareholders agreement. Whether management and board have
complied with this clasue to their best effort is, however, probably a
hopeless issue to bring to the court in case of a dispute.
Protect investor against dilution
Imagine that the company needs more money. The VC cannot

participate in a second round. Then the founders decide to take in
more capital at a very low valuation. This would dilute the VC
considerably and jeopardise the return on the investment. To protect
himself against this. the VC will usually insist that decisions about
share prices at new funding rounds cannot be taken without his
acceptance.
Tax issues for shareholders

This section deals with some specific tax issues related to own shares in a
company, destined for exit.
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The problem if you like is, that as a private shareholder, you can not sell your
shares withou being taxed on the financial returns, immediately when they
materialize and at a higher rate than companies ar being taxed in same
situation. You will pay in between 28% and 43%. Rules are a bit complex.
The point is, however, that if the shares are owned by a financial company
a so-called holding company, you dont have to pay tax on financial revenues
until you have decided what you want to use the money for.
If you use it for salaries, you have to pay personal tax, which is probably
more than 43%. In that case, a holding company is senseless. If, however,
you use the money for bying shares in new companies, you dont pay tax at
all. This is what holdning companies are created for, and this is what serial
entrepreneurs do.
A few rules to comply with: the holding company needs to own more than
20% of the shares in the company sold, and ownership should be more than
3 years old. So if you are part of a founding team, your pain threshold
dilutionwize is 20%. If investment calculations like those presented above
indicate that you become diluted below that, one of the major qualities of
holding companies is gone.
A few questions about holding companies:
1. When should they be founded?
Concurrent with the operating company. It is not easy at all for anyone
with a private economy to buy shares in the operating company, ones
valuation starts to climb. That goes for a privately owned holding
company also. Founding time is a window of opportunities for people
without money.
2. What are the costs?
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Holding companies are private limited companies, so the minimum

price starts at DKK 125.00. You may invest non-cash contribution,
however.
Now, once the holding company is founded, it spend its money to buy
shares in the operating company. So you dont have to pay more
money to get the operating company off the ground. Even non-cash
contribution like f.ex. a patent, can move from the holding company
into the operating company. Thus you may get started with a holding
company and an operating company for an investment of DKK
125.000 plus some 10 15.000 to cover laywer, auditor, admin. etc..
3. Why not start a holding company together with the rest of the founding
team?
You may do that, but an array of problems at exit time may wait for
you. Ask you lawyer, because this is highly complex stuff and also
depending on current interpretations of the tax law on the tax
authotities part. Startin one holding company however, may solve the
problem of loosing central tax incentives when diluted below 20%.
Summary, Chapter NN
In this chapter,the essential corporate forms were presented. The rules of

taxation will decide whether you should establish a single proprietorship or a
partnership, while the amount of risk will decide whether you should establish
your business in the corporate form. The specific hazards of joint and several
liabilities of the partnership company were emphazised.
The most essential company relations with the outside world were
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introduced: product liabilty where 3. persons are involved, the essentials of

the Salaried Employees Law, relations with customers and distributors, plus
the agreements and understandings beteen share- and stakeholders. Finally
some tax issues related to selling shares, prompting for ownership through
holding companies were discussed.
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Business Management for Entrepreneurs

Management is the art of achieving results by means of other people. Never
forget this fundamental maxim when hiring, firing and working with your
employees.
The statement does not in any way indicate a classic industrial and class
separated system with you controlling a herd of downstairs employees by
whipping them to work.
In a high tec start-up your employees are highly educated, proud and
independent people with lots of career opportunities. If you dont give them
the right conditions, they quit.
So in a contemporary context, results are achieved by giving people a great
sense of personal achievements and rewards by running as fast they can for
your company. Thats what management is about. Your challenge is to get
the best people for each job and make them run for it. That is where your
skills as a manager and a leader come to the test.
In this chapter, we will look at how you set up an environment which appeals
to your employees commitment, diligence and creativity. Before getting to
that, a few other issues need some coverage.
Part of the management task is running your shop at the strategic and the
administrative level and thus pursuing longterm business goals while staying
in control with cashflow and capital requirements and thus displaying good
start-up governance. This is where the capacities of the CEO (Chief
Executive Officer), the board and the rest of the chief officers come in.. This
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wilol be treated in a specific section, below

Managing a startup is a difficult task. One reason is the rapid business
development, which calls for continous and quick adaption to new
managerial challenges. Managers of start-ups have to cope with that on a
daily basis and often they have to give in at a certain point, when the
situation of the company calls for more professional leadership. This explains
why entrepreneurs are often moveing from the CEO to the CTO position
(chief technical officer), when the company can afford to hire professionals.
This is a situation which the VC representative in your board will have a
specific interest in. Often the change in management is coupled with a new
funding round, where further capital injection is depending of a reshuffle of
management to prepare for increased growth on international markets. This
is something you should prepare for also and when the moment occurs: be
faithfull to your company by doing what you are best at. Even if it means that
someone else takes over the handle bar.
Another reason why start-up management is not trivial is the lack of skills and
resources in business administration. A third reason is the cronical lack of
capital, which calls for methodical administration of ressources while the
abbyss is never far away with all the stress and concerns coming with that.
Hiring a good bookkeeper - freelance if you like who is able also to analyse,
predict and interfere - can make wonders and make life much easier for you.
Dont do those trivial things yourself, if you are not good at it.
An interesting paper [Chr. Vin tergaards note om venture capital I USA: find
den ..] concludes, that senior managers with a track record from existing
industry are not good at managing VC-backed start-ups. Three possible
explanations: they are not used to handle rapid change, they are used to
being served by skilled staff, and finally, the strategic challenges of start-ups
differ from what those of big companies. A comment on that:: the author has
160
seen a number of cases where battle proven silverbacks in semi-retirement

did great jobs for start-up companies by bringing their networks and their vast
experiences into the game. But then again, they were backed up by a
coherent set of competencies: technical as well as administrative, in the
management team. So this book advocates a strong believe in the value of
combining young founding teams with trained managers from industry on
the condition that the management team is set up methodically and covering
all essential areas such as sales and marketing, international distribution,
management of human ressources, technology including R&D, legal issues
including patents and IPR, fundraising and business administration. The
issue is treated in part in chapter XX: se the spider web of a founding team.
Managing your team

In this section we will dig into the question of what makes your employees
pull for the cause by establishing a framework of rules, goals, values, ethics
etc., which combined is referred to at the context or the corporate culture.
To acknowledge the importance of setting and maintaining the corporate
culture, you need to understand mans response to context.
A good starting point could be Fredus personality model. Here it is for your
recollection:
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Corporate culture or corporate context is the set of norms, rules , which

the super-ego of a person would try to relate to in the company. Common
sense, rationality and logics the ego are the noble servants, and the ID is
rumbling below, occationally provoking the irrational behaviour, which is also
part of the daily life in a busy and active company.
Assuming Freuds model is valid, next question is: how strongly would a
person respond to context?
In his famous experiment on human obedience, July 1961, and in an attempt
to understand the background of Nazi warcrimes, Stanley Millgram let
university students administer electrical shocks to test persons under the
guidance of an authoritarean experiment manager. The test persons were in
fact actors, who simulated near-death experiences when exposed to
electrical shocks. They convultet and jerked while crying for help and mercy,
while the experiment manager emphazised the importance of the scientific
experiment and urged the students to continue. 65% of them did, convincing
Millgram et al. that man is highly sensitive to context.
It is fair to assume, that so are your employees, and so is the importance of
setting up a context, which promotes the good sides of humans while
increasing market shares, profits and turn-over of your company.
A few reflections on a such context rather like food for thought. The right
context is case sensitive. What works in one company with a lot of engineers
on board may not work in a company where laywers, architects or graphical
designers are core employees:
1. Since skilled and hard working employees are much in demand, you
need to set up a context attractive to such people.
a. There must be carreer options: they need to see how they can
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grow with the company. In other words: part of the concept is

influence, responsibility, acquired and portable skills etc.
b. There should be incentives to reward skill, creativity, diligence
etc.
c. It should be fun: that is interesting collegues, a real team, self
governance, fringe benefits, a prevailing sense of good humor,
free Friday bar, regular parties, a super lunch, catering and
stuff.
d. The company must demonstrate that it cares: that is tolerance,
patience and a good measure of empathy.
The corporate culture is not something that is set up once and for all. It needs
continous attention, maintenance and development. That underlines the
importance of you being a visible and active part in the daily turmoils to
capture deviations and act upon them.
Enough of this! Just dont forget it, when your company starts to expand
and you find yourself spending more time on making other people work that
on your own work.
The Complete Manager

Probably does not exist. But you need to develop a few guidelines for
yourself to fit into the role of a good manager.
First, you are always on. There is no such thing as being invisible or having a
bad day. You have to be a role model to your employees, and you have to
behave in coherence with the corporate context. It will definitely put your
patience to the test and never ever loose control of yourself.
Your employees expect you to understand their situation and to stay cool and
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informed. They also expect you to intervene in conflicts and help solving
problems. They expect you to be an independent individual that does not
side up with any wings in the daily small quarrels and they rely on you to
respect their interests and their integrity. If your lack of due diligence or your
poor fighting for the company causes costs them their job, they will never
forgive you. If your timely management and leadership makes them a visible
part of a success, you will be their worshipped hero.
If you correct them in the prescence of their collegues, you have lost them.
In a research published in one of the major Danish newspapers (Berlingske
Tidende), employees were asked about the key personal traits of their
favourite managers, and the whole thing boiled down to integrity and some
intelligence. There you are.
The Board
Check the law on boards at first. In private limited companies you dont need
a board whereas in a limited company it is mandatory and the Danish
Company law is quite specific (see 54 etc.) about the role and the duties of
the board. If you decide to include a board in the management of a private
limited company, the law applies even though the board is a voluntary thing.
Now why would you need a board anyway?
The best reason probably is that a board is a reference group to the daily
management. This is where you are allowed to discuss the company
situation, including all your anxiety and worries, ideas and visions and this is
where you are challenged by friendly and competent peers.
When appropriately designed for the task, the board becomes your
singlemost important consultant and an invaluable portal to all kinds of
164
networks.
If your company is going for venture capital, the board becomes mandatory,
independand of the company form. You just dont get the money without a
credible board.. The VC investor exerts the influence he needs through his
board position, and the shareholders agreement includes a number of
clauses to empower the board in specific situations, where the law is not
detailed. By example: when should the CEO involve the board, who appoints
the boardmembers, how should board meetings and board decisions be
recorded, who should have access to the records etc..
Several preconditions need to be settled before the business will benefit from
a board. One of them is an efficient and due reporting on the operational
situation of the business, based on good administrative practise and
bookkeeping.. A board is an administrative extra load on you. No doubt abot
that. A board meeting can easily cost you a days work in setting up the
agenda, calling the meeting, writing the managerss situation report, updating
cashflow budgets and writing and communicating the minutes,. If you are not
ready to make that effort, your board is not able to serve and to live up to its
legal responsibilities, and hence, you shouldnt bother anyone by asking
them to join it anyway.
If you decide to do this extra, however, you will benefit not only from an
enlightened board, but also from personally developing an overview of the
company situation and the economy, which allows you to exercise a
competent leadership.
Having introduced this practise in the company well before meeting the
money-guys, makes a strong impression on them and adds to the
reckognition of your managerial capacities and hence to the likelihood of
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succeeding your fundraising.

So far into the introduction of the board, it could be usefull to have a look of
realities. Here is a report from real life.
The Board in Practice.

In the fall of 1990, 40 managers and board members from small and
medium-sized Danish companies were interviewed for a poll carried out by
cand.psych., Lisbeth Holt for the Development Office, Aarhus County, and
the following conclusions were made:
-
Only in few cases were the board members selected on the basis of
real experience and talent.
The main motive for joining a board had very much to do with prestige
and the opportunity to become part of a network of people.
Most board members had prior to joining the board looked into the
legal aspects, but they had not looked into what practical board work
meant. The main part of them recommends a more thorough
preparation for board work.
About 80% of the time of a typical board meeting is used on discussing

the past and about 20% on discussing the future, which is regarded as
an inappropriate distribution.
Most board members miss the informal being together with the
management as a supplement to the very formal and structured
meetings.
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2/3 of all the boards have at least one lawyer serving. The other
members are mostly business managers with some business
experience.
The investors representative on the board is considered to be passive

and at times destructive. This however does not apply to
venturecapital but rather to banks.
Family boards are regarded to be useless, and in certain situations

also as destructive and counterproductive by the management.
Most boards avoid conflicts. Persistent, temperamental, and rude

individuals are considered to be cumbersome and are excluded from
the network even though their courage, enthusiasm, and persistence
is often admired.
The chairman usually is the predominant individual on the board, and

via his cooperation with the management, he is also one of the most
powerful persons in the business.
On an average, the board members spend about two hours on

preparing for a meeting.
The board meetings are of high priority. The boards are usually
complete in number.
The boards see the cooperation with the management as their most
important task. This cooperation is far from uncomplicated. Some of
the main problems stem from difficulties for a board to form a correct
interpretation of the situation of the company because of more or less
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edited information from the management. On the other hand, the

management often considers the boards demand for documentation
as a waste of time and interference with the day-to-day management.
-
The right and duty of the board to hire and fire the day-to-day
management does not invite to an open dialog between the parties.
The main part of the boards in the interview only knew of the situation
of the company from the managements reporting.
According to the assessment of the management, over half of the

boards only have a superficial knowledge of the industry. Especially
the socalled professional board members lack insight on this area.
It seems that most board members misjudge the managements

assessment of their board work. The management very often sees the
board as:
1.
opponents
2.
passive
3.
demanding a lot of documentation
4.
destructive in situations of crisis
5.
poorly informed of the conditions of the industry
The employee representatives on the board do not get high grades for
their contribution and effort by the other board members.
Use Lisbeth Holts survey to avoid the classic traps, and make your board an
asset.
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The Board at Work in a High Tech Start-up

In a new and knowledge based business without a capital base with one or
few owners, and with a new and inexperienced management, the board is
primarily serving as a competent discussion partner, a think tank, and a
network to the relevant business sector.
However, the board also has a responsibility which it can only live up to
through insight and decisions.
The board is responsible to the public authorities and the creditors for
appropriate management including the finances of the business, and it is the
responsibility of the board to ensure that it has a true and fair picture of the
situation of the company. If the board does not receive the information
needed to form such a picture, it should react duely and promptly since it is
also legally responsible for acquiring the information needed to excersize its
duties and obligations. Responsibilty for damages caused by inadequate
board interference is joint and several, The individual board member could
face the full claim for compensations. Such claims tend to land in the lap of
those able to pay like those insured and it is up to them or their insurance
company to collect from the rest of the board. Clearly this calls for some care
and attention from each and every boardmember as to the quality of duly
information from the daily management. Get out of there if you dont get it.
Claims of compensation is poor way of rewarding you for serving on the
board.
In the new business, the administrative system and the day-to-day manager
however will not be able to and should not - deliver a great number of very
detailed analyses and reports. Consequently, the board must be prepared to
169
have to make decisions on a rather incomplete basis. At the same time, the
manager must respect the boards need of information, analyses, and
documentation.
A final word on board responsibility: the culpa principle applies: if you are
methodical and exercise common sence and due diligence in serving as a
boardmember, you will not incur a liability in damages. In this case, you have
done what you could, and what could be expected from you. Well if this
principle didnt prevail, who would ever serve on a board: you would be
defenceless and victimized: a scapegoat for evil managers and merciless
injured parties.
The Main Tasks of the Board.

Here we become formal. The main tasks of the board, along with certain
mandatory issues are specified in the rules of procedure which the chairman
and the manager use as a checklist when setting up the agenda and giving
notice of a meeting to the rest of the board.
The most important tasks of the board are:
1. Checking the situation and the economy
2. Discussing specific crucial issues.
3. Issuing instructions to the management in particular when cash is
low
4. Strategic development of the company
The most important subjects which are discussed at board meetings are:
1. The business system
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Sales & Marketing

Distribution
2. The development of the business finances
3. The financing of the business expansion
4. Product development
5. Staff matters
6. The future of the business
171
HERTIL
The agenda for board meetings can roughly be divided into intelligence matters,
decision-making matters, and control matters. Added to this comes the items of a
more administrative nature.
A typical agenda for a medium-sized business includes:
1. Adoption of the agenda.
2. Adoption of the minutes from the last meeting.
3. Intelligence matters: How is it going? and Since last time
1. Announcements.
2. Sale; the sale in relation to the projected, orders, key
figures, trends, etc.
3. Finances; results in relation to the budgets.
4. The running; capacity, sub-suppliers, etc.
5. Projects; the status in relation to the plans.
6. Forecast of the financial and operational development of the
business.
4. Decision matters: What do we do?
a. Updating of strategic plans. (More occasionally.)
b. Adoption of new plans for sale and product development.
c. Adoption of budgets.
d. Adoption of larger financial transactions.
e. Miscellaneous adoptions, fx the financial statements, etc.
5. Control matters.
Capital stock register, auditors record, accounts, asset
management, etc.
6. AOB
7. Date for next meeting.
While item 3 on the agenda, intelligence matters, is valuable by first of all forcing the
manager to monitor and analyze the running of the business so that the board can
receive a proper statement, item 4, decision matters, is important to the discussions
about the development of the business in the future, and this is where the priority and
time of the board work should be.
The number of meetings in a year depends especially on the speed of development of
the business, and on potential crises. A typical average is 6-8 meetings a year.
Remember to give the individual meetings numbers, and to refer to these numbers in
all material which is sent out because there is a lot of paper in board work, and
therefore a great need for order and system.
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The agenda, along with any appendix, should be forwarded no later than one week
before the date of the meeting. If the agenda is accompanied by a proper statement of
the situation of the business, the board will quickly be able to finish discussing its
control obligations, and get to the important discussions about the future and strategy
of the business.
The minutes, which in most cases is only a resolution minutes with reference to the
matching agenda, should be sent out immediately after the meeting, as the board
members will have forgotten what was said, and the suspicion of manipulation will
begin to grow.
13.2.4. The Useful Effect of the Board..

Some concrete examples of how valuable a good board can be:
1. ncreased trustworthiness towards the investors and financial institutions; the
preconditions and arguments of the business plan cannot be challenged, the
management appears competent, the running of the business is controlled, the
relationship between the manager and the board is worked in and functions.
2. Sale via the boards network and business connections.
3. It leaves a better impression with customers and business connections; the
production, quality, and service are under control.
4. More structure in the day-to-day management and better control of the
activities, schedules, and budgets.
The ideal result of a good cooperation between the manager and the board is a wellorganized, well-run, expanding business with a simple, logic, and well-argumented
mission statement, and with good earnings, and a good profit.
13.2.5. The Directors Fee.

The directors fee should be agreed upon at the first meeting.
It does pose a problem that the business on the one hand wants the best people
possible, and on the other hand they cannot afford to pay them a fair fee during the
startup phase.
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The model below for calculation of the fee has been developed by DIC in
cooperation with lawyer, Erik Nyborg, accountant, Peter Bloch, and accountant, John
Andersen. The purpose of the draft is to create a remuneration system which, on the
one hand, does not burden the finances of the business at an unfavorable point of
time, and which, on the other hand, remunerates the board fairly for a good and in the
beginning unpaid effort. It has been tested in practice and it worked just great.
Everybody was happy.
The idea is in all its simplicity that the board is not remunerated until the business is
generating a profit. In return, the fee will quickly reach a level which must be
regarded as attractive for a business of such a size. The amounts have been adjusted
from the practice in Danish business.
- Profit before tax<DKK 500,000; no directors fee
- DKK 500,000<profit before tax<DKK 500,000; directors fee = 12% of the
profit before tax.
In other words, the total fee costs are between DKK 60,000 and DKK 600,000. If
there are five board members and the chairman gets a double fee, the individual
member will be able to collect between DKK 10,000 and DKK 100,000 for his effort
depending on the profit when it is more than DKK 2m.
If the business is run in a corporate form, the draft is implemented by adding to the
rules that the directors fee is fixed at the annual general meeting. The principle for
the calculation of the fee is added to the rules of procedure.
The sole trading business can implement the draft by making a written agreement
between the owner and the board members about the calculation of the fee.
Former board members should receive fees in a period of about a year after their
resignation as there is a time lag between their effort and the profit.
It is not unusual that the chairman is paid double fee if the post demands an extra
effort.
Just a word of warning; it happens that board members will send you bills for
consulting assistance on jobs that they have been assigned to do by the board. It is
especially professional board members who do this. It is necessary that you and the
chairman adopt the principle that no consultancy jobs are done unless an offer has
been made or a maximum for the amount of the bill has been agreed upon.
Otherwise, you may be in for some interesting surprises.
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13.3. Summary
The management problems of the business were discussed with a focus on the
creation of an initiator group, management of employees, and the establishment of
the strategic management function with support from a board of directors.
The initiator group should be created according to complemental personal criteria so
that the members supplement eachothers strong and weak sides. Adizes four
personality types, the manufacturer, the administrator, the entrepreneur, and the
integrator were emphasized as a good starting point.
It was boldly claimed that young businesses should employ young employees
because the working life in an entrepreneur business is wild at the same time as the
pay level must be kept down.
The group spirit and the creative zest were emphasized as the most important
motivation factor in the young business. The employees must match eachother,
otherwise it will not penetrate.
When employing the staff, you should do it according to the principle; the best man
in each position, and save being with close friends until your spare time.
The laying off of employees means a loss of knowledge which for a knowledgebased businesses can be particularly severe. It is therefore important to plan resources
so that core employees can be maintained.
The board was introduced - for better or for worse. If the members have been
selected from objective criteria and the board receives all the necessary information it
needs in order to assess the situation of the business properly, it can be a very large
asset and one of the most important success parameters.
A good board means that the initiators will get a qualified opposition and inspiration
in the general decision-making processes. Also, the trustworthiness vis--vis banks,
investors, customers, etc. is increased.
Some tested administrative guidelines for the board work were discussed in
conclusion.
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Chapter 14Chapter 14
Intellectual Property Law

In this chapter the intellectual property rights include the knowledge and the
experiences which together form the knowledge basis of the business. Part of this
basis can be protected - more or less effectively - against the plagiarism of the
competitors by the use of patents, utility models, design, trademarks, and secrecy.
Chapter 14 has been divided into 10 sections; we will look at the community of
interest of the society and the business sector on the field of intellectual property. We
will look at the practical procedures to ensure intellectual property rights. We will
look at how intellectual property rights are bought and sold. We will also discuss
some principles for the establishment of a protective strategy which is based on the
somewhat special situation which characterizes a new knowledge-based business.
The viewpoint here is that the business protective strategy must be based on general
considerations which balance the need of ensurance of knowledge against the
allowance of other just as necessary and just as valuable activities, such as marketing,
the establishment of a production, and the development of new products. Naturally,
the market potential and the life of the product are included in the prioritization
considerations.
14.1. The Patent; Capitalism or Business Promotion.

The American constitution determines that The Congress shall have the power to
promote the progress of science and the useful arts by securing for limited times to
authors and inventors the exclusive right to their respective writings and discoveries.
This is the deal society gives inventors and artists; by giving them the exclusive right
to their invention or work for a limited period of time, science and the prevalence
and the utilization of the useful arts are promoted. Patents and intellectual property
rights are not limiting for the prevalence of a great idea. Many naive inventors,
especially among the scientists, have prevented a general prevalence of their genius
products by publishing them as a gift to the public instead of applying for a patent
and selling them to a suitable and potent company. A publication means that no one
will invest in the development, producing, and sale of those products which
encapsulate the ideas, because if the products are saleable the competition will soon
be unbearable. Especially for the pioneers who worked hard to develop the
technology and open the markets. They are therefore also financially weaker than the
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ones who are waiting and copying. Geographically and limited monopolies, which
protect the investments, simply express the conflict of interest between the society
and the creative inventors.
In return of giving these monopolies, society demands that the invention is made
publicly available. There are several reasons for this. Two of them are especially
important. One is that the technologies of the business are made publicly available.
We are able to study them and learn from them, and continue the development of the
state of the art. Societys collective fund of technological knowledge is open and we
will not be as dependent on large international groups, which tend to keep everything
a secret. We are able to study how they do it, and everything is less secretive. The
other reason is that it becomes almost impossible to infringe other patents, and
thereby time is also saved in that inventions are not repeated.
14.2. The Basics of Intellectual Property.

Intellectual property rights are protected especially by the use of patents, utility
models, design protection, and trademarks. Each of these give a limited monopoly on
a national market for commercial exploitation of a technical method, a unique design
or a trade symbol.
14.3. The Patent.

The patent is regarded to be the most effective protection of intellectual property
rights. At the same time it is the most difficult, the most expensive, and the most time
consuming protection to establish.
Below we will look at which conditions must be met in order for the invention to be
patentable. We will also look at the formal structure of the patent application, the
international coverage of the patent, the interaction between different patents, and
also at the commercial protection of the patent.
14.3.1. Patentability.
Inventions can be patented if they fulfill certain requirements. Discoveries cannot be
patented.
A discovery can be defined as a description of how things are connected according to
the laws of nature. An invention can be defined as a method for how the laws of
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nature can be utilized. For example, electromagnetism is a discovery whereas the

electromotor and the radio are inventions resulting from this discovery. Thus,
H. C. Oersted was not able to patent his discovery, but it was very useful to Thomas
B. Thrige in his patents.
Patentable inventions are:
- inventions which can be regarded as novel
- inventions which are useful
- inventions which are unobvious - that is, does the invention provide one or more
new and unexpected results.
Novelty means that the invention has not been published before the application date.
It is regarded as a publication if the inventor cannot put names on the persons who
know of the surprising part of the invention. If others, no matter how far away in
distance and time, have published the idea the novelty requirement has not been
fulfilled. Thus, early in the renaissance Leonardo da Vinci novelty-defeated
considerable parts of the basic patents within modern technological generations such
as the tank, the parachute, and the helicopter.
In the United States and Canada there is a grace period of one year from the date of
publication until the application must be filed. This means that if the inventor
intentionally or unintentionally has novelty-defeated the invention there is still a
possibility of protecting it on these markets. In Japan the grace period is six months.
In the rest of the industrialized world the patent is lost.
The invention is normally regarded to be useful unless there is reason to believe that
the invention does not work. In the patent application you must render probable that
it is useful, for example by referring to your experiments. Look at it in this
connections as a matter of curiosity that even the most vile military inventions, such
as the land mine, is regarded as useful if it works = rips peoples legs off. On the
other hand, patents are not issued on inventions which outrage public decency.
Decency is obviously more important than legs.
The unobviousness is said to be present if the invention is unobvious to a person
skilled in the art. This person is to be regarded as an unimaginative but skilled person
- in other words; a person with a high level of technical knowledge but without the
ability to combine. We all know the type.
A patentable invention is a use of known principles combined in a new way, which
has a surprising effect. A needle with a hole for the tread has been known and used
by mankind since the era of Arild. A needle with the hole in the sharp end gave
Singer a highly effective patent which lay the groundwork for the development of the
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modern sewing machine.

In the last decades, technology has developed with such a speed that the patent
system has had a hard time keeping up from a legal point of view. Software and
genetech are difficult areas. That is; programs can only be patented if they contain a
mathematical algorithm which have a technical effect. It is not a requirement that the
computer is connected to a machine but the output must be used in a way which has a
physical expression.
Biotechnological generations are broken down in machines, processes, and chemical
compositions. The first two categories do not cause the patent system problems.
Chemical compositions which are not found in the nature, or which are
commercialized in a form which is physically different from the ones of natural
occurrence are also manageable. It is not until we are nearing us Gods own
inventions that the problems start to occur. Today, July 1995, patents are not issued
on plants and animals in Denmark. This is possible in other countries. The human
gene is yet another problem area with a lot of controversies. The large investments in
gentech research and development mean a great pressure from the manufacturing
industry to secure the rights, and as many of the perspectives of gentech generations
are life-quality improving to mankind the law on this area is changing.
Biotechnological patents will in the near future gain commercial importance, and as
many of the new ideas originate from the research environments, you will have a
chance to rub shoulders with the others if you are associated to one of them and if
you have a biotechnological patent.
14.3.2. The Patent Application and the Regulatory

Requirements. .3.2. The Patent Application and the
Regulatory Requirements
Physically the patent is a document with the authoritys seal and signature. It can be
compared to a deed, which documents the property rights in a piece of land. The text
summarizes the state of the art, describes the principles the invention is based on,
documents the surprising effect of the invention, and clarifies the advantages it
carries with it. The claims consist of a describing part, which defines the
technological basis of the invention, and a claims part, which specifies the scope of
the invention.
Normally, the patent authorities will send a number of office actions before they will
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accept the claims. The classic battle is the inventors wish to get the broadest
coverage possible while the examiner is trying to define the claims so that the patent
will survive a battle in court.
14.3.3. The Scope and Time of the Patent.

If you are able to patent your idea, the patent is enforceable from the first filing in the
first country. If you file an application in other countries after the first filing, the
rights are carried back in each of these to the date of the first filing. This right to carry
back the time of the patents enforceable monopoly period to the filing of the first
application expires 12 months after the first filing in the first country, cf. the Paris
Convention, which is mentioned below.
The priority right is an important quality. From the moment that you have received
the filing date and the serial number of your patent application, and this date is
registered very carefully, you have a globally covering patent if you decide to take
out a patent on your invention in other countries at a later date. In other words, you
can mail the application to the Patent Office and then go to a Danish or a foreign
company with your invention as if it was already patented. If the company is willing
to buy your invention you will make an agreement with the company to finance the
international patent proceedings which may lead to the patent on which the company
will obtain a license agreement. This naughty example illustrates one of the
surprising effects of the priority right.
176 countries issue national patents and other forms of protection of intellectual
property rights. This is why they are each and all very interesting as markets to
foreign companies. However, it may seem contradictory that a country must issue
patents to foreigners, thus giving up a monopoly to a foreigner who is thereby placed
in a more favorable position than the countrys own companies on the domestic
market. Indeed, there are countries which are known to work against foreign
inventors taking out patents. Especially Japan is known to be rather protectionist.
In order to open up for the international exchange of goods, different international
conventions and treaties have been established, which some of the 176 countries have
joined.
The four most important are the Bern Convention, which is mostly about copyright,
and which most of the countries have ratified. The Paris Convention, which ratify the
twelve month priority right. The European Patent Convention according to which 17
European countries confer the issuing authority to a collective body (the European
Patent Office - EPO), and finally the international patent scheme (the Patent
Cooperation Treaty, PCT) which 55 countries, including America and Japan, have
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joined. This treaty extends the priority right another 18 months under the
precondition that the application is filed with a joint authority (in Munich) no later
than 12 months after the first filing.
Of course, with a niche oriented knowledge-based product with a limited potential on
the Danish market, the business has to think in international lines right away when it
comes to patent coverage. The most obvious procedure is to file an application with
the EPO which gives coverage in 17 European countries, and then filing a PCT
application in order to get extra time to reach an additional 38 markets. In this way
the costs are also spread over the longest period possible.
It is expensive to establish an internationally covering patent position; an investment
of about DKK 1m or more is needed in the first five to seven years. At the same time
it is also important to be aware of the fact that the market life of many hightechnological products is shorter than this period. We will return to the timing
considerations which have to be made in this connection.
14.3.4. The Commercial Protection of the Patent.

The patent can be described as a territorial exclusive right. As long as this right is in
force others are excluded from:
using the invention commercially
manufacturing the invention
selling the invention
importing the invention
offering the invention for sale.
As long as the patent is in force you are not allowed to help others infringing the
patent for example by:
selling machines which manufacture the invention
selling material which is especially suitable for the manufacturing of the
invention when you know that the buyer intends to infringe the patent
encouraging others to infringe the patent.
It is therefore necessary to obtain the patent owners consent - license - if you want to
manufacture and/or sell the product.
14.3.5. The Interaction between Patents.

The patent does not block others from taking out patents on supplementing
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improvements. This can be demonstrated through the screw patent, a known

example which Ole Plougmann, co-owner of the patent agency Plougmann &
Vingtofte, has the right to. According to Ole Plougmann A has invented a screw; a
gripping unit with a driving in part and a gripping part characterized by one or more
tangentially and in the longitudinal direction placed rises placed on the gripping part.
During the twenty years that the patent is in force no one else can produce these
screws without As authorization.
In figure 7, the technical coverage of the patent is illustrated by the large circle. If
time is marked out upwards, the term of the patent is made graphic as a cylinder in a
three-dimensional rights time domain.
A few years later, another inventor, B, invents and patents the slotted screw. This
patent is inside the screw patent. The protection volume of the slotted screw is
illustrated by the small cylinder.
B now has a monopoly on any commercial use of slotted screws, but he cannot
practice this right as his patent is comprised in As screw patent. On the other hand,
A cannot produce slotted screws as Bs slotted screw patent thereby is infringed. This
could lead you to believe that B cannot use his idea until As patent expires at the
same time as B has blocked A from using an obvious improvement.
This is also the way it will be if A and B cannot stand the sight of each other.
However, most businessmen will not let personal feelings interfere with rational
decisions. Instead something completely different happens. They start to cooperate.
This cooperation is taking place within the boundaries of a license agreement or via a
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strategic alliance.
On the one hand, the example demonstrates the value of being the first taking out a
basic patent. A can force a license agreement on later applications or secure a right to
use them himself. On the other hand, the example also illustrates how B can force his
way into As markets by adding an extra feature which will increase the demand on
As product.
Thus, Ole Plougmanns example uncovers one of the most important qualities of the
patent. A: it can secure the owner getting access to using the invention himself or
receiving license from later supplementing patents. B: it can be used for forcing your
way into a market which is closed because of effective patent monopolies.
The interesting is that both A and B can benefit from it.
With this example in mind, let us return to the wisdom of the previous chapters:
upgrading of well-known products by the use of new technology is one of the safest
ways of creating new and saleable products. New technology used on well-known
problems can often be patented. Each time technology opens new possibilities a
vacuum on the judicial area is created in product areas which are normally
considered to be inaccessible because of the patent situation. If you understand to use
these openings, for example by keeping close to the front line of trenches of the
technically scientific research, the chances of exploiting a technological progress are
favorable.
14.3.6. The Patent Procedure. .3.6. The Patent

Procedure
There are many different procedures, depending on whether you file your application
in Denmark, in the PCT-system, or in the EPO-system. It is not important to know all
the details of the procedure, because the Patent Office is more than willing to help
with information. It is more important that you are aware of your options, and that
you are able to make use of them in the right way. Actually, you can choose between
filing with the Danish Patent Office - this is what you do if you have no intention of
exporting - or the European patent authority, the EPO. When you file your
application, your application is given a number and a priority filing date. After a
battle with the examiner on the subject of novelty, inventive height, and wording the
application is ready to be submitted for any objections from a third party. Thereafter
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you can choose to file a PCT application to extend the area of coverage. If the
application survives the procedure, and about 70% of all applications filed in
Denmark are issued - or in the 14 member countries of the European Patent
Convention. During the procedure, you have paid a filing fee, a submission fee, and
annual fees. When filing in the PCT system, you need to pay again. For each out of
the 38 possible countries you have designated in your application, you have to pay
for having the application translated into each of the languages, the filing fee, the
annual fees, and the patent procedure. If you have hired a patent agent to take care of
your intellectual property rights, which would be the wise thing to do if you want to
patent outside the EPO, then this will of course also cost money. Another thing is that
a competent patent agent is able to produce much stronger patents than the layman.
It is a costly affair to protect intellectual property rights with patents. The
accumulated cost over the first four to six years will be a minimum of DKK 1m for
an effective protection on all the large markets. At the same time, the protection is
not effective if you cannot afford to defend it. If the patent is attacked or infringed it
will cost you a huge amount of money.
14.4. The Utility Model.

The poor mans patent - or the mini patent between friends, is a cheap kind of
protection, which looks much like its big brother, the patent. The price is low because
the Patent Office does not assess the novelty and inventive height of the invention. It
is deferred until there is a lawsuit between the infringer and the injured party.
The inventive height and novelty requirements of the utility model are the same as
those of the patent, but as mentioned above, it is not checked. This means that you do
not actually know if your rights are really protected when it comes to the point.
It is rather easy to attack a utility model. Anyone can pay to have it re-examined, and
if it falls through it is simply canceled. You should seriously consider paying for a reexamination right away so that you know in advance if the protection is real or
imaginary.
The utility model registration is designed for small inventions on the Danish
domestic market, but it can also be utilized to gain cheap protection of internationally-oriented niche products. Before the submission = publication and noveltydefeating, your are able to lift it up into the patent class, zero the priority clock, and
continue the patent case first in Denmark and then abroad.
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14.5. Design Protection.

A pattern is a unique design, a special design, an ornament, a design expression.
Design protection is especially used for protecting a product where the shape is an
essential competitive parameter. The haute couture models can be design protected at
an advantage. The same applies to instrument cabinets and similar designs, which
signals function, or quality, or lifestyle.
The Patent Office examines the applications for design protection.
The protection only covers Danish territories. If you would like to export, you should
apply for design protection - copyright - on the export markets.
14.6. Trademark.
The law defines a trademark as a peculiar characteristic for goods or services which
is used or intended for use in a business. We are talking about the company logo,
about a peculiar graphic product indication, about any kind of slogan, company
names, figures, type of packaging, etc.
You gain the right to a trademark by using it. If your right is not challenged during
the period of time that it takes your trademark to establish a place on the market, the
right is real, and after that you can go after any competitor who gets too close.
The advantage of registering a trademark with the Patent Office is that they examine
if the trademark is already registered. Much time and money can be saved by
registering the trademark before the commercialization begins.
You should register the name and logo of your business with the Patent Office
because the name examinations of the Danish Commerce and Companies Agency in
connection with business startup are sporadic, and without guarantee that you are not
infringing others.
The registering of a trademark only protects in Denmark and the Danish territories. If
you export, you should secure your trademarks on the export markets so that you
avoid that others own or obtains the right to the trademark. For example, a large
Danish business which sells kitchen sections had to buy the right to use their own
trademark in Canada from a swindler, who had registered a very similar trademark
and thereby a blocking trademark over there. He did this well knowing that the
business was trying to enter the Canadian market. It can almost be compared to
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highway robbery.
The business trademark portfolio can be quite valuable. Just imagine owning the
right to the word CocaCola.
14.7. Trade Secrets.

You would normally want to protect the particular know-how of the business, which
typically includes manufacturing processes, specially developed tools, programs,
customer registers, formulas, materials, components, etc., by not entrusting them to
others than those who must know them and by making employees and consultants
sign non-disclosure agreements. The Danish Salaried Employees Act contains certain
regulations which obligate entrusted employees to keep important knowledge a
secret. Often the obligations are extended through so-called competition clause in the
employment contract in return for a higher pay. The competition clause dictates that
the employee cannot take a job with competitors or start his own competing business
in a fixed period of time after the employment ends. In chapter 11 it was mentioned
that investors often will investigate if the trade secrets of the business have been
properly secured through the employment conditions of the salaried employees.
Naturally, the reason for this is that irreplaceable intellectual valuables can disappear
together with the employees, and they can even be moved over to the competitors
and used against the business.
Many high-technological businesses protect their intellectual properties by
surrounding their trade secrets with a large security apparatus. Naturally, it is a cheap
and simple safe-guarding but it demands constant alertness, and it also carries a risk
of the development department being so closed that intellectual inbreeding happens.
With the progress of the internet and the many professional conferences on the net, a
new and interesting possibility of leakage of trade secrets has emerged. The problem
is that valuable information leaks both ways. Many development employees from
different businesses trade information against information in this giant chaos, and this
is something to be both enthusiastic and worried about when you own a company
because it is difficult to control and at the same time hard to do without.
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14.8. The Buying and Selling of Intellectual Property

Rights. .8. The Buying and Selling of Intellectual
Property Rights
There are several reasons why you should know a little about how you buy and sell
intellectual property rights. If you come from the research world, you will run into
this problem when your research yields commercially interesting ideas. If you are a
spare-time inventor, you will typically find yourself in a situation where you have to
make a choice between selling the idea or starting a business which can
commercialize it. Thirdly, it may also be necessary for your business to buy some
intellectual property rights. Fourthly, intellectual property rights can form part of
benefits-in-kind deals. They may even gain you access to interesting markets, cf.
Ole Plougmanns screw-slotted screw example.
If you sell your patents to businesses you will find three things out. First of all, the
price is fixed from ice-cold business considerations. Second, you will be treated
exactly as you deserve. Thirdly, the business will only be interested if your idea fits
very closely into the strategic focus.
The price of a patent is fixed from risk assessments and earnings considerations. The
risk assessments is all about product salability. If your idea is conceptualized and has
proven saleable on a market, the patent is valuable. If your idea is a prototype and
there is the slightest doubt whether it matches a need, the price range will be lower.
As a semi-proportional, your idea can add a new quality to the business product
which can increase or prolong the sale, or improve the product in relation to the
competitors, and in reality, it can be the most interesting quality of them all.
In the negotiation situation you must expect that your naivet and your idealistic
notion will be used against you. Let us for example assume that the business is not
interested in your patent and that you have not given them a deadline for when to
respond. The decision is made very quickly but the message to you is that they are
positive towards the invention, but that they would like to look into the matter a bit
closer. As time pass, the time to pay the expensive international patent costs draw
closer, and thereby your negotiation platform is degraded. At a certain point of time
you will be ready to sell for nothing or simply just give up the patent. The business
finds itself in a much better situation because even if it was never interested in buying
the invention, there is always a risk of an error of judgment. At least now the
competitors will not benefit from this possibility. The example was not made up. The
author has twice experienced that a large and respected industrial giant has used this
method on naive scientist-inventors, and I was one of them.
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Let us say that you gave up to give out a license on your invention and instead started
a business. If the product is a success you may experience that the competitors
deliberately infringe your rights, as they think that you cannot afford to prosecute
them. If you decide to do so anyway, they will typically delay the judicial decision
for years. In other words, your intellectual property rights are not worth much if you
cannot afford to defend them. This is a strong claim, but there are too many examples
of infringement in bad faith for it to be dismissed. Exactly this problem speaks for
having a financially strong partner to back you up when you enter the international
markets. If the competitors know that you are able to liberate a huge amount of
money in a short time to defend your patents, they will ordinarily not try to attack
you on this area.
As implied above, there are many traps to fall into for the small inventor. Let us
therefore end this section with a few and rough rules of thumb for how to sell your
intellectual property rights.
First of all, always assume that the further you can get away from the laboratory in
the direction of the market, the more you are able to get for your idea. This is also a
reason for considering starting a business which could do the test launch, and then
sell it with all the rights that it owns.
As an inventor, when you go out to sell your invention, your patent must preferably
be newly filed. You must start by sending an appetizer and a non-disclosure
agreement, and you need to contact the largest businesses on the area - globally, all at
once, and with a deadline for the first declaration of interest. If you like, you can
differentiate between going serially and parallel on the market. Any computer freak
knows that there is more action on the parallel communication, and when it comes to
exploiting the commercial opportunities of a patent, you need a high baud rate. Every
single customer takes time and you have only got the one-year rule (the priority year)
at your disposal.
In the next phase where the more specific content of the patent is disclosed, you need
to make a deadline for decisions about further negotiations, and it is important that
you demand that the counterparty pays the costs in connection with travel expenses
and the legal fees. When the rights are transferred, you must receive an up-front
payment which at a minimum covers your development costs. You must also receive
a fixed minimum license, and thereafter a marketing license calculated from the
amount of goods passing the factory gates - because this amount is always counted.
Furthermore, the license agreement must always be geographically limited to the
most important markets of the business, so that you can find other license holders on
the other markets. Finally, the license holder should pay the patent costs on the
geographic area where he holds the rights.
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You should get a lawyer to draft the non-disclosure agreement. This agreement
should contain three obligations. First of all, your counterparty must obligate himself
not to use the knowledge that you disclose, and which the counterparty verifiably
does not have at his disposal at the time of disclosure, without your consent. Second,
you need to promise exactly the same, because otherwise the counterparty will not
participate in the negotiations. Third, the counterparty must promise not to attack
your patent. This is an obvious possibility if you are not able to agree. If the
counterparty violates these demands, you must demand that he compensates your
liquidated damages, and the case must be tried in the Copenhagen Maritime and
Commercial Court.
In order for you to go through with the licensing, it is vital that you have not noveltydefeated your idea. In other words, you need to be very secretive until the patent
application has been filed and the non-disclosure agreement has been signed. You
have to measure the amount of information you give, so that on the one hand the
business is tempted to negotiate, but on the other hand not so much that you defeat
your opportunities of obtaining an international patent.
14.9. Patent Strategies for Knowledge-Based Entrepreneurs.

For a well-established business the design of the patent strategy is not so difficult. All
forms of protection are used in their full extension. Important products are protected
by patents and design protection on all the essential markets. The key employees are
obligated - and paid for it - through competition clauses. Trade secrets are zealously
protected by use of non-disclosure agreements and rules for the internal security.
The trademark has been registered where the product is sold. There is a connection
between things, and the business may even afford a department which specializes in
handling problems with the rights and monitor the competitors via their patent
activities.
A new business cannot match this. It must balance the many different cost
demanding activities in the startup phase.
To make the right decision about how the intellectual property rights are secured, is
at the same time one of the most difficult ones.
Let us begin in the cheap end. It is obvious that you need to keep your trade secrets.
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It is a good idea that these secrets are defined and described. Thereby everybody who
is associated to the business knows what they can talk freely about. One of the most
important trade secrets is ideas and inventions not yet patented. But there is no reason
to discuss marketing plans, price policy, or product development plans with a
stranger without demanding that they sign a non-disclosure agreement.
Trademarks and design protection offer more protection per invested dollar and
should therefore be included in the protection strategy of the new business.
Patents are the most difficult ones to understand. It is tempting to declare patenting
for the large business domain because the costs are high, especially if you have to
defend the patents. The competition that these costs inflict on the marketing, the
expansion, the product development, are not very pleasant because they cannot be
averted once the process is in motion. As mentioned above, the patent costs will hit
hard after three - five years, which is the time when few of the new businesses are
adequately consolidated to carry them without considerable side effects.
At the same time, it is important that you take the product life cycle and the product
development strategies into your considerations. If your product has a very short life
on the market, it would be reasonable not to consider patent protection, or you can
wait until the last moment to throw in a Danish patent application. If the competitors
start to show interest, you could consider filing an open PCT application which
extends the priority period from one year to twenty, even thirty months, and then you
follow up with applications on the markets where the product has a present and a
future.
If the product addresses a niche, the possibilities of paying interest on the investment
in a patent are correspondingly less than if the market potential is great. At the same
time, there are less competitors. The protection in a niche may therefore replace the
patent protection.
If the product is the first in a family, you may consider waiting to take out a patent
until the second or third product is put on the market, and let the earnings from the
sale of the first product finance the following patents.
Obviously, your decision on the patent strategy must include consideration for the
current patent activity on the area. It is very difficult to get a current impression as
the patents are not published until 12 - 20 months after they have been filed, and
many of them are not published in Denmark. By studying the patent literature, you
will be able to see which applications and which technologies the competitors are
occupied with. If the author is not too smart, you will also be able to read a little
about the content of the patent from the patent name, which is published shortly after
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the application has been filed. At the same time, such a close reading will ensure that
you are not infringing other patents, and in any case, you will be able to read a lot
about other businesses assessment of what is saleable and what should be patent
protected in the published patent publications. In practice, you are able to make your
studies in the Patent Offices reference library, where you have direct access to 80%
of the more that 30 million patents, which have ever been issued. The employees
there will be able to help you point out the relevant classes so that you can target
your search. After that, it normally does not take long to find your way to the core.
If you decide to write your first patent yourself to save money, the Office has an
excellent guide. Usually, the examiner will also help the layman to write the
application. However, the best thing is to let a competent patent agent handle your
patents as soon as you are able to afford one.
14.10. The Search Report.

It has already been mentioned in several connections; you must investigate the state
of the art of the patents before you pour resources into product development. Here it
is repeated explicitly because it is one of the first and most important activities in the
conceptualizing of a product idea. Furthermore, it has become clear that many
application research projects reinvent technologies which have already been
patented, and just because the scientists are unfamiliar with the system. At DTU we
have several traumatic experiences of projects being dropped when confronted with
the patent literature. Are you a candidate for the next reference?
14.11. Summary, Chapter 14.

In principle, there are five ways of protecting your intellectual property rights:
1.
2.
3.
4.
5.
The patent
The utility model
Trademark registration
Design protection
Non-disclosure
The patent is the most effective one and the most expensive. The utility model is especially
interesting on the Danish market, but can also be used for the first cheap protection of a later
patent. Trademarks and utility models are often more cost efficient than the patent, but they do
not have the same coverage. Non-disclosure is a natural part of the protection of the intellectual
191
property rights.
Patents, which protect new qualities of known products, can be used to force way into already
protected markets by creating obvious conflicts of interest with the owners of the blocking
patents.
A worked in trademark can become very valuable. It should therefore be registered on the
markets where the product is to be sold. The value depends on the success of the product, but a
well-known trademark makes it considerably easier to introduce new products in that customer
loyalty sticks to the mark.
The value of intellectual property rights depends primarily on the demonstrated salability. Thus,
the value of a patent will increase distinctively if sales references exist. This point of view is
essential to the planning of activities prior to the sale of the intellectual property rights.
An effective protection strategy makes use of all the possibilities available in the system. The
new business needs to develop its protection strategy by looking at a number of factors; the
market potential, the product life cycle, consideration for the marketing, establishment of a
production and development of new products, just to mention the most important ones.
One of the preconditions for developing a balanced patent strategy is that you are familiar with
the patent situation; especially the most important patents, the patent activity, and the market and
technological trends which patents and the activity level reflect.
Finally, remember to do a search report before you start analyzing your idea. The search report
will tell you if you are infringing others rights, or if there is room for your idea, of if you can
make a screw-slotted screw construction.
---oooOooo---
192
Chapter 5
Learning from Experience

In chapter 5, the conclusions of learning from experience regarding the success and
failure factors for business startup are summarized: Why did it go well, why did it not
go so well, why did it end up in the enforcement court?
The experiences have to a large extent been given by Karl Vesper from Seattle, by
the National Agency of Industry and Trades (now the Danish Agency for the
Development of Trade and Industry) publications, by DTI Innovations advisers,
DICs own entrepreneurs, by the American association National Business Incubators
Association, which DIC is a member of, and also by the Ministry of Trade and
Industrys enterprise report of 1995.
5.1. The Universe of the Entrepreneur.1.

First, we will look at the job situation you must predict to end up in if you head up an
enterprise initiative. Predictability is of course a success factor, and if you have
prepared yourself for the chaos waiting ahead you stand a better chance of surviving
psychically and you have a better basis for making solid decisions.
The universe of the entrepreneur is characterized by:
1. Decisions being made under pressure.
2. Decisions being made on an incomplete basis.
3. The job being full of action; small and large problems, which demand immediate
answer, are presented continuously - and orally; many cases are running at the
same time. The telephone demands a lot of attention - all the time and at the most
inconvenient times.
4. The workload being great.
5. The personal stake - both in the career and earnings - being great.
6. The dependency on customers and creditors being great.
7. The responsibility for the employees being experienced as burdensome, especially
when dismissals because of the financial situation are necessary.
The characterization, which fits to the turn of a hair with DIC-observations, was
developed in 1986 by consultant MSc Jens Kenneth, the Technological Institute in
Jutland, Denmark - now the DTI.
193
5.2. The Success Factors of the Business..

The list mentioned below is one of the most important in the book. Read it carefully
and decide on the postulates.
The list is a synthesis of the experience material of the literature, DICs own
observations and not least the point of views which were given by the lecturers at
DTUs course in business startup.
Entrepreneur businesses which succeed are characterized by;
1.
Startup in growth markets.
2.
Market shares being prioritized over profit.
3.
The products substituting already existing products.
4.
Deliberate steering against equity financing of expansion.
5.
More equity than loan capital in the financing of the business.
6.
The objectives being exact, logical, and easy to comprehend.
7.
Meticulous preparation before startup.
8.
Order and system in the management and the financial control.
9.
Efficient intern/extern team building (employees, board, advisors).
10.
Business intuition and sound business practice in the core group.
11.
Good advisers and opponents (qualified participants, who give an effective
resistance in the discussions).
12.
New products in the melting pot all the time.
13.
Market orientation rather than technology orientation.
14.
On-going adjustment of the organization and the division of labor.
15.
Visible and respected management.
5.3. The Failure Factors of the Business.

In the same way as above, you can make a list of the reasons why it did not turn out
as well as expected. The sources are the same as above.
The failure factors are:
1.
Bad timing of the launch; especially too late.
2.
Wrong sale and distribution strategy.
3.
No logical connection between the product and the design.
4.
Wrong market segment.
5.
Vague strategic targeting.
6.
Undercapitalization.
7.
Inappropriately composited financing.
8.
Premature borrowing.
9.
Bad advisory services; no personal control of the quality.
194
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
Unrealizable product; all development plans and budgets are exceeded.

Wrong service strategy; applies to manufacturing businesses as well as
service businesses.
Too high sales costs.
Too poor a quality.
Too tough competition.
No internal division of responsibility and authority; all power to the
entrepreneur.
Inadequate financial management; sudden and unpredicted claims empty
the cash box and the business will go bankrupt.
Capital locked in debtors = expansion death and billing phobia.
Capital locked in machines and buildings. Today you do not build a factory;
you place yourself in a supplier-chain and you have only got the most
necessary production equipment.
Bad location; applies especially to grocery stores, but knowledge-based
businesses which are dependent on infrastructure and highly educated
employees must also choose business address with care.
Too high a personal salary.
Wrong attitude about starting a business; it means a 100% commitment.
5.4. The Bankruptcy Statistics.

The bankruptcy statistics are, and here we are talking about voluntary as well as
involuntary closure, a clear comment to the above list. Again we must turn to Karl
Vesper, but the figures correspond fairly well with the Ministry of Trade and
Industrys own surveys:
The reasons for business closure are:
1.
Insufficient sale:
39%
2.
2. Out competed:
21%
3.
Too high operating costs: 11%
4.
Debtor payment problems: 9%
5.
Production problems:
6.
Too high overhead costs: 4%
7.
All the below in one:
- Disorder and negligence
- Bad location
- Catastrophes
- Fraud
4%
12%
195
- Personal collapse
Please note that in the above list problems with the sale weigh 60%. In the Ministry
of Trade and Industrys enterprise report [72], which, among other things, is based on
interview surveys with the registered public accountants, marketing economic related
problems are stated to weigh 73%, which is about the same as in Karl Vespers list.
In the same survey the lacking ability of the entrepreneur to manage a business stands
out very clearly in the closure statistics.
All in all, the list is a serious warning to focus the energy on getting the sale going at
the same time as the costs and investments are kept low, and to collect money which
customers owe you. At the same time, it seems that it is a good idea to prepare
yourself for the job as manager before you start anything.
5.5. DICs Observations.

From the authors own world part of the experiences can be confirmed. An overview
of success and failure factors for knowledge-based entrepreneurs, 1988-1993, looks
about the following:
Success factors:
1.
Product and service OK.
2.
High level of ambition.
3.
Good internal team building.
4.
A very high level of activity with many sales-oriented initiatives.
5.
Relations with DTU-institutes will supply both employees and knowledge.
6.
Openness to equity financing = new partners.
Failure factors:
7.
The job-shop syndrome; undercapitalization in relation to targeting cause
the business to go for the quick earnings when the cash box is almost empty.
8.
Vague targeting; the business is launched on the basis of technical expertise
and not because of a registered problem on the market.
9.
Product/market problems; especially insufficient sale and too few marketing
initiatives.
10.
The level of ambition was too low; no growth-oriented targets.
11.
No or insufficiently prepared business plan.
12.
Neither internal nor external team building.
DICs closure statistics show about the same as the above:
1. Insufficient sale
2 businesses
(voluntary winding-up)
2. Negligence and disorder 1 business
(bankruptcy)
196
3. Fraud
4. Out competed
1 business
1 business
(bankruptcy)
(bankruptcy)
5.6. The Classic Rules of Thumb.

It would be appropriate to end chapter 5 with a summing up of the classic rules of
thumb for business startup before we plunge into the reading of the business plan:
1. The product idea must be overhauled (cf. chapter 4.)
2. The business plan must be thoroughly prepared (cf. chapter 6.)
3. Start the preparations in your spare time to keep costs down.
4. Secure orders before you expand costs.
5. Avoid taking unnecessary chances; the initial capital is expensive.
6. Funding by loans in the startup phase is only for confirmed orders.
7. Do not start on an insufficient capital base.
8. Control the cash flow and balance it off against the budget.
9. Employ the right people for your business. (Competent and complemental)
10. Focus all your efforts on establishing and expanding the sale.
197
198
Danish Development Investment Companies as of 27th

July 1995
WOW! Half t of these companies have ceased to exist by 2006. JH
Danish Development Finance Corporation
Focus on projects or products which add something essentially new to the market,
which is in demand, and where market penetration is assessed to be realistic.
Phone: 39 66 04 00
Fax: 39 66 13 11
Dansk Kapitalanlg A/S
Invests in smaller businesses which are founded on the basis of a new product or a
new product idea, even though the business has not yet documented the earnings
capacity.
Phone: 33 15 70 30
Fax: 33 93 70 44
LMX Development A/S
Specialty in businesses within visual information systems and high-technological
graphical solutions. With headquarters in Billund you must assume that LMX
Development A/S makes strategic investments which can benefit from the know-how
and the distribution channels of the Lego group.
Phone: 75 33 86 99
Fax: 75 35 30 02
Service Development, Inc.
Invests in service businesses within business service, welfare service, household
service, as well as the hotel and entertainment industry. The company is owned by a
number of large employees funds, including the Employees Capital Pension Fund.
Phone: 33 14 02 44
Fax: 33 13 35 12
Industry Development, Inc.
The focus is on export-oriented manufacturing businesses with a turnover of DKK 20
- 100m which are financially sound, and which have a potential of growth and an
enterprising management. The financial partner of the gazelle business, you could
call it. It has the same address and fax as Service Development A/S, and therefore
probably the same group of owners more or less.
Phone: 33 13 04 42
Fax: 33 13 35 12
Fritz Schur A/S
This development company invests in small and medium-sized Danish businesses
199
which in a businesslike suitable manner can work together with businesses in the
Fritz Schur Group. Their specialties are paper, plastic, and packaging.
Phone: 33 93 00 11
Fax: 33 93 90 11
DICO A/S
Information technologically oriented investor which stakes on new businesses with a
potential for establishing an international niche dominance.
The product must be fully developed and the capital injection must contribute to
putting it on the world market.
Phone: 33 14 06 00
Fax: 33 14 78 55
Olicom Ventures A/S
Information technology is also the focus of this investor. Especially mobile
computing, multimedia, wireless communication, digital video, and digital audio.
The investments must contribute to the conquering of the world market on the basis
of Olicoms own expertise within management, distribution, production, and
development.
Miljoeudvikling A/S
This development company invests in development businesses which can be turned
into profitable businesses, which can contribute to the practical use of new
technologies combined with the creation of jobs, especially within the gathering and
handling of waste products, production of green products, and development,
production, and sale of environment technology and know-how.
Phone: 39 45 45 80
Fax: 39 45 45 81
Soenderjyllands Udviklingsselskab A/S
Based on a regional local knowledge this company invests in local businesses or
businesses which make themselves local - within the manufacturing sector and under
the precondition that the potential for growth can be rendered probable.
Phone: 74 62 23 84
Fax: 74 62 67 60
NOVI A/S
NOVI is domiciled in Aalborg University Center Science Park, which is also called
NOVI. NOVIs particular field of interest is businesses which are located in the
following five science parks with the first two as especially prioritized:
- NOVI
- The Science Park FYN
- The Copenhagen Science City Symbion
- The Center for Advanced Technology, Risoe
- The Aarhus Science Park
200
It must be presumed that businesses in the Innovation House, The Science Center in
Hoersholm, and DIC, which with over twenty businesses form the largest cluster in
Denmark of new high-technological businesses with close relations to a
technologically scientific university environment, would also be of interest to NOVI.
Phone: 98 15 85 33
Fax: 98 15 86 50
201
Appendix 1Appendix 1
Guidance in Business Planning
1. Working Method
1.1. Financial estimates and estimates of rights
Before you invest time in business planning, you should orient yourself whether the
idea has a future on the market at all. Make some rough estimates, and move on with
the development of the idea if the estimates do not look too good. If the financial part
looks reasonable, what you need to do next is to investigate whether you are
infringing others rights, or if the idea can be patented, or if you can add an essential
new quality to already existing patents. You can do this by getting the Patent Office
to do a search report.
And then take a closer look on whatever competitors you find out there. And dont
let yourself be intimidated: competitors are great buyers of small companies, and
they may be your key to a future personal fortune. Quite many start-ups were
founded by skilled entrepreneurs to develop into acquisition baits for specific big
companies. On the other hand: no competitors is a sign of danger: no competitors
usually indicate that there is no market. Here it is time to remember, that the pioneers
die while the settlers take the claims. Dont be the one who has to invest his life and
fortune in breaking new ground.
So slot into the lot and be good at something. And stubborn and persistent too.
1.2. The product description

When the development of the idea and the preliminary analyses are finished, you will
need to write a product description which your future customers will be able to
understand. The ideal product description is a popular description which is both
interesting and clear, and which clearly emphasizes the advantages that the
customer gains by buying the product. Many technicians really run in to problems
on this point.
1.3. The market analysis

Now you need to get started on gathering and processing information on the market
so that you can make qualified assessments about how the product must be marketed.
Statistical reference books and business records will be the most important sources.
Go to the library and find the information.
1.4. Marketing and distribution

On the basis of your new knowledge about the future market, you need to explain
how you are going to reach your customers. A description of the distributors in your
line of industry combined with some common sense and well-argumented solutions
are the most important ingredients when you need to formulate a solution as to how
you are going to put your product in a favorable position on the market without the
competitors attacking you.
1.5. Development and production

Plan the product development, the product ripening, and the production. The projects
must bring your idea from the desk to the gates of the production facilities. The plans
should contain goals, activity descriptions, time schedules, and budgets. You should
also point out important sub-suppliers, who can be involved in the production.
1.6. Selection of corporate form

You are now able to describe your product, you know your market, and you know
what it will cost you in activities, time, and money to realize the product and put it on
the market. You are able to assess the fiscal consequences, and you have assessed the
risks which are connected to the sale of the products.
Thereby, you have the basis for deciding what corporate form you should select, and
when to change from one form to the next. Make a sound decision and state it
together with the grounds in the business plan.
1.7. Finances
All the activities and part of the costs and investments of the business have been
described. Next you need to draw up an overall financial survey of the startup phase,
which includes a cash budget for the first couple of years as well as a profit and loss
budget, and a balance budget for the first 3 - 5 years. The cash budget shows how
much capital is required to get started.
Financial surveys are easily impossible to get an overall view of. It would be a great
help to the reader if you were to analyze and comment the budgets and outline the
key figures in the conclusion.
1.8. Compile the business plan
Now you have gathered and processed the information which you need in order to
produce a finished business plan. You start by compiling the sections, so that the
content is consistent and without contradictions. Then you write a short, but very
important summary, and a short, but equally important conclusion. Finally, you
generate a table of contents and produce a nice print-out.
- et voil - the business plan is finished -
1.9. Assessment of the business plan

Whether your business plan is judged by an examiner at the course 8396 Business
Startup at the Technical University of Denmark or by an investor or by a future board
member the reader will attach importance to the following qualities:
1.
2.
3.
4.
The important pieces of information have been gathered in a

summary on the first page.
Common sense and thoroughly prepared arguments.
Documented prerequisites.
Simplicity and clarity in the formulation and the structure.
2. The Structure of the Business Plan

2.1. The summary
The introduction should be a short overview of the content of the business plan in
support of the readers memory and overview.
2.2. The conclusion

The main point of views, activities, and key figures are presented. The summary and
the conclusion are executive briefing when the project is submitted to committees,
boards, investment managers, etc.
The summary and the conclusion together should not be of more than one or two
pages, at the most.
2.3. The background

The history of the initiative is outlined. It is especially interesting to hear about the
technological development and the development of the market which lead to this
business opportunity. Furthermore, the initiators and their professional background
are introduced.
2.4. The table of contents

The table of contents is an important part of the business plan, primarily because the
reader uses it to get a quick overview of the content and structure. Structure the table
in two to three levels and if necessary, add a table of appendixes and a bibliography.
2.5. The goals of the business

The goals of the business must be formulated in short, precise, easy to understand
terms, and with coherence. If it fulfills these hard requirements, it forms a good basis
for building up a well-functioning business. It is the managements practical and
ideological platform in that a good manager establishes an enthusiastic community of
work by defining clear goals to his employees and creating a community of interest
on the realization of these goals.
At the same time, the goals are a definition of the company mission which can help
outsiders understand what kind of business it is.
Before you start formulating the goals, you need to see your future business in your
minds eye. Forget all the beautiful visions about a small business with only a few
employees. Such a business is not very interesting to others, and its power of
resistance against changes in the external environment is normally poor. Instead, you
should go for a size which is only limited by market potentials, capital, and your own
and your partners personal abilities.
Classic goals determine that the business must
carry on production and trade within---.
establish and maintain a position as a market leader on the domestic market

on the basis of its special competence within---.
expand by increasing its market share, and by introducing its product on new
geographical markets.
-
develop new products for exisiting customers, first at home then abroad
(survival in the long run).
develop exisiting and new products for new customers, or new uses
(expansion in the long run).
The order reflects the priority.

Often, the goals are accompanied by an operative part, which quantify, delineates,
and describes the results, which are the prerequisites for reaching the overall goals.
For example, the product and the geographical markets are specified. You state the
desired sales figures, the turnover goals, the earnings goals, etc. In practice, the
operative part of the goals is a synthesis of a number of problems which are dealt
with later in the business plan.
After all the fancy words about goals, it must be established that in most cases the
purpose of the activities of the business in the startup phase is to demonstrate to
investors, important clients, or people who are interested in buying the business that
the product can be sold at a profit, and that you are capable of managing the store.
Thereby you have established a trustworthiness which is a prerequisite for raising the
capital necessary for a distinctive expansion and an international sale.
2.6. Selection of corporate form

Select the corporate form which is best suited for the present project, and present
your arguments for your choice in the business plan. Avoid complicated and
unmanageable corporate constructions and go with the simple construction. The
subject has been discussed in detail in chapter 12, section 12.1. and 12.2.
2.7. The organization

Divide the business into functions: sale, production, development, finances, etc. If
you are able to appoint named persons as your future function managers, it is a good
thing because then authority and responsibility will have been divided from the
beginning. This will increase the readiness when the business stands before an
expansion, and it does make a good impression on the investor, who will compare the
names with the career descriptions from the background orientation. See also the
Rich-Gumperts evaluation matrix in section 11.4.2.
2.8. Business management

It is very important to establish a competent management from the beginning, who
reports to a sensibly composited board. The details have been discussed in chapter 13
on the basis of Adizes manager profiles.
In the section on management in the business plan, you should briefly state:
-
how the finances of the business are controlled? (and it is first of all the cash
flow we are talking about.
how are the projects or the production controlled?
how is the cooperation with the board established?
does the initiator group have the professional skills to manage a business? If
the answer is negative, you will have to state how you are going to
complement the lack in personal qualities and experience.
2.9. Facilities
What physical facilities (buildings, cars, computers, printers, telephones, furniture,
instruments, etc.) are necessary before the business is operative? Prepare an
investment budget. The assembly of machinery is discussed below in section 2.10, no
18. The budget is used in the future financial analysis. Moreover, it pays to be thrifty
in the beginning. Use all available capital to finance sale and production and wait
with bricks, machines, perks, and status symbols. Buy from sub-suppliers and keep
the overhead costs low.
2.10 Product description

The product must be described technologically, legally as well as financially and
with an angle on product development, production, and logistics.
Technology
1.
2.
Technological product description for a layman; precise, easy to

understand, and exciting. You actually have to sell the product
the first time here.
What are the customers advantages? What needs can the
product satisfy, what problems does it solve, what values does it
create with the customer?

3.
How is the product different from already existing products?
4.
Rights: What kind of rights are linked to the product? Is it a

patent right, a utility model right, a design protection right, or
some other right? Who owns the rights? Are others infringed? Is
the idea new? The section is a synthesis of your search at the
Patent Office.
5.
Protection of rights: can an effective patent be taken out, and

what will it cost? Patents must be applied for on the most
interesting markets, that is, internationally. It is expensive, and
the costs usually occur in the middle of the startup phase where
it is the most inconvenient. Remember to include the patent
costs and the intellectual property assets in the
budgets.
6.
Alternative kinds of product protection; for example, is the

product protected through advanced know-how and therefore
difficult to copy? Is there a potential for a quick market
penetration and a quick exit? Can a strong trademark be
established?
7.
Relevant legislation on environment, security, seal of approval

on products, certificates, norms and standards, etc., should be
looked into, also on important international markets. Typically,
there is a number of technical barriers to trade, not least within
the EU. If the product is an export product, it can be the pivotal
factor that these technical barriers to trade are known when the
product is specified prior to the development.
8.
The product liability; in legal formulation, product liability is

the liability that a businessman has for damages that a
deficiency in one of his products cause to persons or things,
except from damages on the actual product. Product liability
can occur in relation to any later damage, regardless whether the
injured party is a buyer, a consumer, or a chance passer-by. For
this reason you are not able to avoid product liability as the
Law
producer does not know who will be the victim in advance. The
injured party can choose to claim damages against anyone who
is involved in the manufacturing and distribution of the product,
however, except from those who only transport the product.
In your business plan, you need to state what accidents your
product could cause if the worst comes to the worst, and the
kind of insurance you have got. Read more about product
liability in chapter 12, section 12.6.
Product development
9.
What development potentials are present? How are they
connected to the goals? Is your product a one-time-onlyproduct, or is it the first version in a line, or the first product in a
portfolio?
Production
10.
11.
Packaging of the product; an often overlooked hindrance to sale

and distribution. Often, good solutions are expensive.
Remember that in the budgets.
12.
Supervision of quality standards; how do you supervise your

sub-suppliers, what are the quality standards in this industry,
how is the final product checked? Do you need an ISO 9000
certificate of approval before the customers believe you?
13.
Assembly of machinery; what equipment do you need to

acquire in order to start a production?
Logistics
14.
15.
Product ripening; is the product ready for production or does it

still need some completion? If so in the latter case, the project
must be described; goal, resources, activities, timetable, and
budget.
Can the product be spread out on several sub-suppliers so that

you will not become dependent on one single sub-supplier? And
if so, which sub-suppliers?
Are the raw materials available with acceptable delivery time
and certainty of delivery?
16.
Finances
17.
18.
Is there any kind of dependency on key components or key

knowledge which could threaten the supplies?
Product estimate; draw up a detailed and piecemeal estimate of

the manufacturing costs. What does a unit cost when 10, 100, or
1,000 units are produced at a time, for example? The figures are
used later on in the financial analysis.
Investment estimate; how much needs to be invested in
machines and productive equipment. The figures are used later
on in the financial analysis. As a main rule, it is a good idea to
hold back on the initial investments by spreading the production
out on a net of sub-suppliers.
2.11. Market description

The market must be mapped out and quantified in every way. If no information is
available, you must make a qualified guess which can be up-dated when you move
into the market.
The geographical markets
countries
customer base in figures
purchasing power in comparison with Danish customers
seasonal fluctuations
trading obstacles
The customers
nature and size of the target group
who is the decision maker
buying patterns
marketing standards
purchase triggering product qualities. (Quality, price, derived savings,
certainty of delivery, etc.)
can the customers afford to buy the product?
does it carry advantages which are commensurate with the price or the
consequences in case of possible failure? (The Down-Time syndrome; if the
product fails, the customers costs may quickly offset all advantages.
Therefore, the customer will stick to the familiar solutions.)
are there any culturally determined differences in the buying behavior and
need of the customers?
what does your strength and survival on the market mean to the customer?
Often large businesses will not buy from small and new or financially illfounded businesses because service and obligations cannot be secured.
The competitors
who are they, how large are they, how aggressive are they?
do they feel threatened?
do they form a clique?
will they be able to distribute the product for you?
(If a large and well-known business were to step in between you and your
customer, it may solve the credibility problem, which was mentioned above.)
Trends
does the product live up to the technical market standards, is it pioneertechnology, or is it already out-dated on the day of the introduction?
can the product be developed further in accordance with the technological
development trends of the market?
2.12. The marketing plan

We are now going to discuss the above mentioned markets and customers. Among
other things, you are going to decide on:
10
1.
What geographical markets to attack first?
2.
Which customer groups; size, nature, characteristics?
3.
What price? Be careful not to sell the product at too low a price
on the domestic market. When you start on the export markets,
the distribution costs will be considerably higher, and the
contribution margin must be able to bear it.
4.
How are the customers informed of your product, and how do

you follow up on an information campaign?
5.
Agent, distributor, or direct sale, which is the most suitable?

The question is difficult to answer, but you must at least be able
to give an account of what kind of distribution of your product
on the first geographical markets you have in mind.
6.
On the basis of the above considerations you will make an

estimate of the projected sale and the costs of marketing in the
coming three to four years. The estimate is later used in the
financial analysis.
2.13. Finances
Now all the prerequisite conditions must be processed financially in the form of a
cash budget (about 2 years), a profit and loss budget, and a balance sheet budget (3 5 years).
It is important that you understand the interrelationship between these budgets and
that you are able to give an account of them to an interested reader.
The cash budget
The cash budget shows how much money the business has.
The cash budget comprises all the current payments. A month is used as a time unit if
things develop quickly, otherwise a quarter of a year is used. The full expenses from
the investment estimate of the point in time when these are expected to fall due are
included in the cash budget.
Remember to include the difference in time between payment of sub-suppliers and
payment from customers, the building-up of intermediate stocks, etc. VAT and tax
are also included in this budget. You will often find that the better it is going for your
business the worse it is going for the cash flow. Or to put it in another way: The risk
of bankruptcy is literally proportional to the rate of success, which is a bit odd.
The profit and loss budget
The profit and loss budget includes the projected earnings and costs (less VAT) and
it shows if the business is yielding a profit or a loss on a yearly basis.
-
In practice the projected earnings are the sale and any grants.
The projected sale is budgeted in accordance with the marketing plan, cf.
2.12. no 6, above.
The costs are divided into variable and fixed costs.

The variable costs are those costs which vary dependent on the size of the
sale, e.g. the consumption of materials, goods, pay to the hourly workers, etc.
These costs are included in the budget on the basis of the product estimate, cf.
11
2.10. no 17, above. Furthermore the marketing costs are included on the basis
of the marketing plan, cf. 2.12. no 6.
The fixed costs are those costs which do not change regardless of how much
you sell. Examples: Rent, pay to the permanently employed, insurance,
installments.
Also remember to set aside your own pay in the budget. Naturally, your own
pay must be able to cover your need of a place to live, etc., and personal tax.
-
Besides the fixed and the variable costs, you need to budget for depreciations.
The depreciations are decided on the basis of the investment estimate, cf.
2.10. no 18. As the investments which are made in machines, productive
equipment, and office furniture and fittings normally last for several years,
you do not charge it to the profit and loss budgets all at once, but instead you
spread the costs over the projected life of the purchases. If you project that a
machine can last for 3 year, you allow for _ of the price of the machine as a
depreciation on the profit and loss budget in each budget year.
Furthermore interest yields and interest payments are also to be included.

As the interest payments are calculated on the basis of the
resulting capital requirement found in the cash budget, it is necessary to work
out this budget before the interests can be budgeted.
When the costs of the year have been deducted from the earnings, the profit or loss
before tax will show.
This is transferred to the balance sheet budget, which you will be able to draw up by
means of chapter 10, section 10.3. and 10.4.4., perhaps supplemented by the example
in chapter 11, section 11.8.
12
2.14. The financing plan

Now you have to give an account of how the necessary funds to cover the cash
requirements in the startup phase are raised. Read about this difficult problem in
chapter 11.
2.15. The sensitivity analysis

The last item on the business plan is a parameter study which shows the cash
budgets, the profit and loss, and the balance sheet budgets sensitivity to changes in
the laid down prerequisites, especially in the form of marketing problems.
Indicate the most critical factors together with a proposition as to how the project can
be saved, should things not work out as planned.
3. The Moment of Truth

Finally you have trimmed the business plan. There is reason in your estimates, your
planning, and your expectations to the development of the business. During this
process, you have gained a substantially better overview of the projects coherence,
and you are as well-equipped as you will ever be to start the business.
The moment of truth has come: If you believe in the prerequisites, and the business
plan shows that it is a financially sound enterprise, just roll up your sleeves and get to
it.
Maybe you cannot get the budgets to balance. In that case you need to drop the
project or make some radical changes in the mission.
In any case, good luck on your project.
13

Knowledge Based Entrepreneurship

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Knowledge Based Entrepreneurship

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Knowledge based

NOTE: This is a pre-release version for students at DTU 42435, DTU

entrepreneurship definition. Google itself suggests this short one from

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mastering the process of getting a business up and running. What better

During the late nineteen nineties and early third millennium, a

This is in parallel to what happened in USA from late nineteen

In the nineteen eighties, entrepreneurship in US was spurred by

internationally competitive products and start exports. To day,

promoting entrepreneurship. However, much concern is also

The academic entrepreneurial culture deals with complex

High tech business start-up is a complex project to run. Apart from a

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information and tools, but you will be introduced to entireties and

commented recipe on how to make a business plan. Use it with a bit of

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from other institutions of higher education, or from industrial

Working Conditions) and Erhvervs & Byggestyrelsen through grants to

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5.1. The Universe of the Entrepreneur ...............................................................................................

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9.8. Summary, Chapter 9 .................................................................................................................... 77

Chapter 12............................................................................................................................................................. 128

Chapter 13............................................................................................................................................................. 142

Chapter 14............................................................................................................................................................. 154

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14.9. Patent Strategies for Knowledge-Based Entrepreneurs .......................................................... 167

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of skills, experiences and personalities do you need, and how do

More Companies, please

1. Does the level of entrepreneurial activity vary between

2. Does the level of entrepreneurial activity affect a

3. What makes a country entrepreneurial?

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institutions, if they are to join the elite of entrepreneurial

perspective start-up projects and public investments into

Entrepreneurship in Denmark, 2005

As such, this picture does not indicate any serious problems

consequences for the economies in which they operate,

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Nordic countries display a discouraging 0,7%. Since these more

management and venture capital backing are treated to turn

entrepreneurship has a long and distinguished track record, serial

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The more straightforeward part of the answer is that starting

impeccable, your personal standing is not harmed by a

opportunities, customers and venture capital are found in

Personal characteristics are important to success. Hence:

Personal networks are also important to success. If you

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that can be applied when needed. You also get access to

management at some point in time. And you get access to

The skills: indisputably, the repeated successes of serial

Common sense and rational decisionmaking: This is the

The knowledge-part and some experience can be acquired

be relentless in complying with the following five basic

The Entrepreneurs Five Basic

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by definition: imagine yourself entering an elevator, and there

research. By example, one of the American grand old men

Venture Strategies" identifies a wide variety of personalities,