Transcript PPT - Launching the Venture

Countdown to Launch
MBA 101
Patrick Vernon
Clinical Assistant Professor, Executive Director
Center for Entrepreneurial Studies
©2013 Patrick Vernon1
Agenda
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Accounting
Finance
Operations
Marketing
Economics
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Accounting
• Purpose: account for and communicate
• Necessarily “backwards looking”
Prof. Mark Lang:
“What’s the difference between an
African village market and WalMart?”
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Financial Statements
3 Communications Pieces:
• Balance Sheet
• Income Statement
• Cash Flow Statement
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Accounting: All Three
Balance Sheet
CocaCola 2009
Income Statement
Cash Flow Statement
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Balance Sheet
Like a bank statement summary: shows what you have now
• Snapshot
• Assets and liabilities
• No income
• Not very relevant
for startups
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Income Statement
Like a pay check or tax return: shows where things went
• Official accounting of income (e.g., for
IRS or SEC)
• Complications
for startups…
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Income Statement: Complications
• When can you book sales and how do
you handle inventory?
(cash vs. accrual)
(accounts receivable and inventory)
• How do you handle loan payments?
(interest vs. principle)
• How do you handle big purchases?
(depreciation)
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Cash Flow Statement
• Accounts for those
things
• Very complicated
• Not for us
(anytime soon)
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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For Startups
We “project” using income statement:
EBITDA
(earnings before interest, taxes,
depreciation and amortization)
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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EBITDA
Balance Sheet
Income Statement
Cash Flow Statement
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Income Statement
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Variable vs. Fixed Cost
• Variable = scaling with production
– COGS (cost of goods sold)
– Sales commissions
• Fixed = overhead
– Rent
– Depreciation of equipment
– R&D
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Variable vs. Fixed Costs
• Gray area: labor cost
– Temps → variable
– Salaried → fixed
• Ideal business model:
– All costs are variable, and you can get
income first (accounts receivable before accounts payable)
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Accounting Glossary
COGS
Overhead
Gross Margins
Cap Ex
Depreciation
Cost of goods sold
Fixed cost
Income – COGS
Capital (or BIG) expenditures
Asset written off over years
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Agenda
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Accounting
Finance
Operations
Marketing
Economics
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Finance
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Purpose: planning how to invest
Invest = put some in now, get some back
“Forward looking”
Key topics:
– DCF, NPV, ROI
– Liquidity
– Debt and equity
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Finance
• Time value of money: DCF
(discounted cash flow)
PV
(present value)
=
FV
(1+r)
(future value)
• Pricing risk with a discount rate (r)
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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What is the value of:
“Two Birds in the Bush”
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Bird in the Hand
PV
(present value)
=
FV
(1+r)
(future value)
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Risk and Return
• Higher risk implies higher potential
return and higher variability
(we may win big or lose all)
• Risk gets converted into discount rate
– Bird in the hand | r = 100%
– Savings account | r = 1.5%
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Why bother?
We have to decide how much we are
willing to invest based on:
• Expected risk: r
Examples: risk and r
• Expected end value: FV Savings Account 0.75%
More Examples: risk and r
Money Market
1.5%
Variable Mortgage
2.5%
Bonds
4.0%
Fixed Mortgage
3.5%
Public Stocks
7.0%
Home Equity Line
10%
Tech Startup
10X !
Credit Card
17%
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Another Lens: NPV
• Net Present Value
• The current value of future cash flows
• Minus the investment required
PV – Investment = NPV
Example: $100 - $90 = $10
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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ROI
Return on Investment
ROI =
Gain
÷ # years
Investment
Note: does not account for compounding.
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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ROI
Examples
$1.50
$100
$50
$100
÷ 1 year = ROI 1.5%
÷ 5 years = ROI ~10%
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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ROI Example
• $50,000 to start venture
• Sold in year 5 for $150,000
• ROI
– $100,000 ÷ $50,000 ÷ 5
– 40% over 5 years
• Or “3X return in 5 years”
How can we estimate the exit value?
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Estimate Value = “Valuation”
• #1 = find comparables
• #2 = use multiples
• But remember
– Depends on what someone is willing to pay
(= “market driven”)
– Illiquid asset
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Liquidity
• Liquid: spend/trade easily
• Illiquid: takes days/months/years to trade
• Cash: liquid
• Equity: illiquid
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Why bother?
We have to decide how much we are
willing to invest based on:
• Expected risk: r
• Expected end value: FV
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Why not bother?
• For startups, the odds of success and
potential future values are wildly variable
• So we should know these concepts exist,
create goals, but don’t get married to the
specific numbers
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Finance Acronyms
ROI
IRR
DCF
NPV
r
return on investment
internal rate of return
discounted cash flow
net present value
discount rate
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Agenda
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Accounting
Finance
Operations
Marketing
Economics
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Business Model Generation
Operations
Marketing
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Operations
• Purpose: maximize efficiency in business
activities
• Key topics:
– Supply chain and inventory (SKUs)
– Production (capacity/queues)
– Complexity
– Core competency
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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What are they famous for?
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Sell By Dates
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Complexity: Which is Better?
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Complexity
• SKUs (stock keeping unit): code for each
product
• More SKUs = more complexity =
exponentially more variability = death
• Simple is king
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Core Competency
• You can’t be good at everything
• Anything you cannot dominate…
…outsource!
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Capacity and Queues
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Capacity and Queues
• Lookout for bottlenecks (where in the
production line you have limited capacity)
– MBAs call these “Herbies,” from The Goal
• Bottlenecks = HUGE queues
• General rule: capacity should be well
below 90%
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Operations
Focus
Keep it Simple
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Agenda
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Accounting
Finance
Operations
Marketing
Economics
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Business Model Generation
Marketing
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Marketing
• Purpose: connect with customers
– Design products and services according to
customer needs
– Communicate (both ways) and interact with
customer
– Set prices fairly with knowledge of customers,
competition and company strengths
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Marketing: 4 P’s
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Product
Placement
Pricing
Promotion
= 5th P = “Positioning”
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Product •
Place • Promotion • Price
• “Understand customer needs and design
products and services accordingly”
• Differentiation (of products)
• Segmentation (of market)
• Product “mix”: multiple products for
multiple segments
• “Value proposition”
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Product
• Place
• Promotion • Price
Channels
• Direct
– We directly contact customers
• Indirect
– A partner, reseller or distributor contacts
customers
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Product
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Place •
Promotion
• Price
Advertising
Sales
PR
Print ads
Broadcast ads
Packaging Inserts
Product placement
Brochures
Posters
Billboards
Display signs
Point of purchase
Logos
Symbols
Trademarks
Premiums
Gifts
Sampling
Fairs
Trade shows
Exhibits
Demonstration
Coupons
Rebates
Trade-ins
Tie-in
Loyalty
Bundling
Blogging
Tweeting
Website
Press kits
Speeches
Seminars
Charity
Sponsorships
Publications
Community relations
Lobbying
In-house magazine
Events
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Product
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Place • Promotion •
Price
• Positioning
• Value vs. quality
• Rational vs. emotional
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Pricing Strategies
Cost Plus
Going Rate
Premium
Set prices to cover
variable costs and a
portion of fixed
costs.
Create pricing wars
between competitors
who offer the same
or similar.
Penetration
Opportunistic
Predatory
Price at a loss to
gain market share.
Set premium prices
for products/ services
in high demand with
short supplies.
Price-cutting
prevents others
from entering the
market.
Price to match
customers’
enhanced
perception.
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Pricing Lesson
Do not compete on price!*
*Unless you have a cost advantage.
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Positioning – Segmentation
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Light
IT Impact
Segmentation
Incredimail
Bissmail
DIY
Target Market
1- email
MindArrow
eMailgen
1-1 email
eDesigns
silverPOP
Zaplet
MailRound
Heavy
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Segmentation
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Agenda
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Accounting
Finance
Operations
Marketing
Economics
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Economics
• Purpose: understand production and
consumption best practices
• Key topics:
– Supply and demand
– Utility
– Elasticity
ACCOUNTING ● FINANCE ● OPERATIONS ● MARKETING ● ECONOMICS
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Economics
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Elasticity
• “Price elasticity of demand”
• How much will demand change as price
changes
Examples of elastic products?
Inelastic?
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Porter’s Five Forces
• Framework to assess
attractiveness of an
industry
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Barriers to Entry
• How to stop others from competing
• Sustainable competitive advantage
– Patent
– Trade secret
– Superior business practice
– Location
– Partnerships
– First mover?
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Economics Glossary
Economies of The increase in efficiency as size
increases
scale
Utility
Commodity
Sunk cost
Opportunity
cost
Measure of satisfaction
Same no matter who produces it; must
compete on price
Amount already spent; should not be
factored into future return potential
Consider the lost income of other
activities; e.g., add lost income to cost of
going to school
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MBA “Core” Curriculum
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Accounting
Finance
Operations
Marketing
Economics
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