1 Andy Guo Thoughts on Business Plans

2 Andy Guo Entrepreneurship l Working definition: The relentless pursuit of opportunity without regard to tangible resources currently controlled l A complete process from identification to harvesting l A way of managing

3 Andy Guo The Structural Model l The critical elements  People  Opportunity  Context  Deal l The concept of FIT l The concept of dynamic FIT Management

4 Andy Guo The Concept of FIT

5 Andy Guo The Concept of FIT The Answer to Four Questions l To what degree do the people have the right experience, skills and attitudes, given the nature of the opportunity, the context and the deals struck? l To what degree does the opportunity make sense, given the people involved, the context and the deals struck? l To what degree do the deals involved in the venture make sense, given the people involved, the nature of the opportunity and the context? l To what degree is the context favorable, given the people involved, the nature of the opportunity and the deals struck?

6 Andy Guo Dynamic FIT Management CHANGE (GOOD AND BAD NEWS)

7 Andy Guo P C OD Information Good News/Bad News AnticipationResponse Information Good News/Bad News The Entrepreneurial Manager Continuous Experimentation and Learning Identify - Marshal - Act/Exploit - Harvest

8 Andy Guo People Questions l What have the founders done in the past that would lead you to believe they will succeed in the future?  Experience  Contacts  Reputation  Skills  Integrity  Attitude l Who is missing and how will they be recruited? l Team issues?

9 Andy Guo Opportunity Questions l How big is the total market? l How much consumer value can be created? l How much producer value can be created and captured? l What are the implications of entry on the size of the pie?

10 Andy Guo Essential Questions Related to Opportunities l Who is the customer? l How do they make decisions? l What risks do they perceive? What benefits? l To what degree is the product or service compelling? l How will the product or service be priced? l How will the venture reach target segments? l How much does it cost (money and time) to acquire a customer? l How much does it cost (money and time) to produce and deliver the product or service? l How much does it cost to support and retain a customer? l What is the lifetime value of a customer?

11 Andy Guo Opportunity Sources l Change  New things old ways  New things new ways  Old things new ways l Both sides of the balance sheet  Market inefficiencies (P  V or k  k*) l Wholesale to retail l Rules of the game

12 Andy Guo Opportunity Sources (cont.) l Execution l First mover advantages l Addiction/Switching costs l Uncertainty (insurance and security blankets) l New technologies l Applications of new technologies l Social/Demographic/Political trends

13 Andy Guo Opportunity Sources (cont.) l Trojan horses l Razors and razor blades l Financial distress l Scale economies/Net consolidations l Learning curve effects (customer and producer) l Baggage l Stupidity l Price discrimination l Selling ammunition to all sides in a war without end

14 Andy Guo Industry and Competitive Analysis l The five forces l The choice of a strategy l Opportunity duration l Interactions of capital and product markets l Ways to change the basis of competition l Perspective of the new entrant (war games)

15 Andy Guo Positions From Which To Spot Opportunity l Customer l Supplier l Employee l Other l Local knowledge l Advisor  Consultant (not)  Investment banker (not) “ Knowing and being known ” You have to get in the “ game ”

16 Andy Guo Business Model Analysis The “tracks” of the model are in the income statement and balance sheet Income Statement Sales COGS SG&A Interest Taxes Depreciation Balance Sheet A/RA/P InventoryDebt NPPEEquity What can be reengineered? By your company? By a new entrant? Examples: can I get paid earlier? can I go direct? can I produce JIT? Fixed vs. Variable costs?

17 Andy Guo Free Cash Flow Patterns

18 Andy Guo The Disk Drive Business Disruptive Technologies

19 Andy Guo Patterns time Cash Flow time Cash Flow time Cash Flow time Cash Flow Simple project, no growth options Growth options Clone options Uncorrelated options

20 Andy Guo Curve Questions l What are the milestones? l How long does it take to reach each milestone? l How much does it cost to reach each milestone? l Uncertainty of payoff structure? l What are the options created or destroyed at each milestone? l What is the relationship between curves?

21 Andy Guo Interactions Product Market Capital Market Labor Market

22 Andy Guo Contextual Pressures l Heightened uncertainty l Global and domestic competition l The entrepreneurial revolution l Capital market pressures

23 Andy Guo Deals l Fundamental premise:  People act in their own (perceived) best interest l How is cash allocated? l How is risk allocated? l What are the incentives? l What can be inferred by decisions? l What are the future (micro and macro) consequences of current decisions?

24 Andy Guo Critical Steps in Deal Structuring and Analysis l Complete list and assessment of the players Complete “ what if ” analysis l Complete analysis of incentives l Sensitivity to sequencing (path matters!)

25 Andy Guo Good and Bad Deals l Simplicity l Fairness l Trust l Robustness l Perverse incentives l Poison pills l The passage of time l Improving the chances of success l Decreasing the risk or consequences of failure

26 Andy Guo Negotiations l Ranges of reasonable values l Understanding the key factors that affect risk and reward (where to give in and where not to) l Creating perception of overlap l Negotiating skills l Using external events to advantage l Turning adversaries into partners l Resolving impasses

27 Andy Guo Risk/Reward Analysis and Management l What can go wrong? l What can go right? What decisions can management make today and in the future to ensure that “ what can go right ” does go right and “ what can go wrong ” is avoided, or failing that, is prevented from critically damaging the company? l Structuring the analysis:  People  Opportunity  Context  Deal

28 Andy Guo Risk/Reward Management Probability of Occurrence Expected Value -100%+25%+100% Return on Investment Probability of Losing 100% Goal 1 Goal 2

29 Andy Guo Impact of Leverage on Equity Risk Returns Probability of outcome Distribution of Total Value (Debt and Equity) Distribution of Total Equity Value

30 Andy Guo Free Cash Flow and The Choice of Burn Rates