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  1. 1. Engineering entrepreneurship IEMS 325 Northwestern University
  2. 2. Why study entrepreneurship? <ul><li>It is the engine of the capitalistic economy </li></ul><ul><li>The economy can be modeled as a birth and death process </li></ul><ul><ul><li>A Markov process with transient states such as IPO, acquisition, LBO or divestiture </li></ul></ul><ul><ul><li>The terminal state (ergodic) is liquidation or acquisition </li></ul></ul><ul><ul><li>The initial state is Ideation/incorporation </li></ul></ul><ul><li>The majority of the economy (value and growth) comes from small businesses and entrepreneurship </li></ul><ul><li>Entrepreneurship behavior seems sufficiently different from general management behavior to be interesting to researchers </li></ul><ul><li>Small Business administration has forms, advice and information for the entrepreneur including business plan templates etc </li></ul>
  3. 3. What is entrepreneurship? <ul><li>It is a special case of general management </li></ul><ul><ul><li>Management of a startup </li></ul></ul><ul><ul><li>Where employees are partners/co-owners </li></ul></ul><ul><ul><li>Risk orientation </li></ul></ul><ul><ul><li>Management under uncertainty </li></ul></ul><ul><li>Majority of new technology ventures are founded by teams, not individuals </li></ul>
  4. 4. Creative destruction <ul><li>The economist Joseph Schumpeter popularized and used the term to describe the process of transformation that accompanies radical innovation. In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power. </li></ul><ul><li>Per Wikipedia Jan 2009 </li></ul>
  5. 5. What research tells us <ul><li>Context and considerations for the technology entrepreneur: </li></ul><ul><ul><li>The personal characteristics of the technology entrepreneur themselves </li></ul></ul><ul><ul><li>The need for a capable management team </li></ul></ul><ul><ul><li>The purposeful search for opportunity </li></ul></ul><ul><ul><li>Capital formation in the context of the inherent technological risks </li></ul></ul>
  6. 6. What makes an entrepreneur? <ul><li>Entrepreneurial heritage </li></ul><ul><li>Better education, typically Master’s degree </li></ul><ul><ul><li>Not necessarily a technical background </li></ul></ul><ul><li>Mid thirties </li></ul><ul><li>Strongly felt need for independence </li></ul><ul><li>Historically male dominated </li></ul><ul><ul><li>Shifted since 1991 towards more female participation </li></ul></ul><ul><li>Based on data compiled by Ed Roberts (MIT, 1991) </li></ul>
  7. 7. Founding team <ul><li>Partners not employees </li></ul><ul><ul><li>Share in the risk and the reward </li></ul></ul><ul><li>Essential elements of the team: </li></ul><ul><ul><li>A lead entrepreneur. Assembles the team and knows their strengths and limitations </li></ul></ul><ul><ul><li>Experience and relevant industry connections </li></ul></ul><ul><ul><li>Cohesion that allows the team to function well as a unit and that relies on a founding vision as the point of orientation </li></ul></ul><ul><ul><li>Integrity-shared commitment and mutual respect </li></ul></ul><ul><ul><li>Reward and compensation that is fair to all parties </li></ul></ul>
  8. 8. Governance concerns <ul><li>Do you need a board of advisors? </li></ul><ul><ul><li>Technology focused </li></ul></ul><ul><ul><li>Management focused </li></ul></ul><ul><li>Should complement the work of the management team </li></ul><ul><ul><li>Fill in gaps. Provide a learning context </li></ul></ul><ul><ul><li>Provide environmental scans </li></ul></ul><ul><ul><li>Broad based knowledge including of the industry, technology and management of startups </li></ul></ul>
  9. 9. Sources of innovation <ul><li>Irritation/pleasure </li></ul><ul><li>Limits </li></ul><ul><li>Surplus/shortage </li></ul><ul><li>Major change </li></ul><ul><li>Market inefficiency </li></ul><ul><li>Copycat </li></ul><ul><li>Import/export </li></ul><ul><li>Piggyback </li></ul>
  10. 10. Types of innovation <ul><li>Radical </li></ul><ul><ul><li>New platform or new technology </li></ul></ul><ul><li>Incremental </li></ul><ul><ul><li>Derivative product, refinement of existing products, </li></ul></ul><ul><ul><li>Application of existing technology </li></ul></ul><ul><li>Term can apply to either the technology/product or the PROCESSES imbedded in the organization </li></ul>
  11. 11. Categories of innovation <ul><li>New technology </li></ul><ul><li>New product (bundling of technology or services) </li></ul><ul><li>New application </li></ul><ul><li>New distribution model </li></ul><ul><li>New services model </li></ul><ul><li>New channel strategy/logistics model </li></ul><ul><li>New market to be served </li></ul>
  12. 12. Classic struggle <ul><li>Differentiate your products to meet the needs of the markets they serve </li></ul><ul><li>Versus: </li></ul><ul><li>Standardize your offerings to minimize fixed costs and streamline your operations </li></ul><ul><li>Example: Ford Contour….a true “world” car…..or is it simply a car that satisfies nobody uniformly? </li></ul>
  13. 13. What are the innovations here? <ul><li>Federal Express at its origin? </li></ul><ul><li>Apple iPOD? </li></ul><ul><li>Dell computers </li></ul><ul><li>Southwest Airlines </li></ul><ul><li>Wal-Mart </li></ul><ul><li>McDonalds versus Krispy Kreme </li></ul>
  14. 14. Essentials of a business model <ul><li>A concept of how customer value will be created </li></ul><ul><li>A concept of how the new venture will build for itself a structural competitive advantage in providing that value </li></ul><ul><li>Implicitly: The new venture must be able to efficiently extract that customer value to generate sales and margins </li></ul>
  15. 15. Customer value <ul><li>The subset of societal needs that can be recognized in the marketplace </li></ul><ul><ul><li>Can be bought and sold </li></ul></ul><ul><li>You must build a competitive enterprise that can deliver the value and capture enough of it to be self sustaining </li></ul><ul><ul><li>You must make enough money for continual reinvestment and long term growth </li></ul></ul>
  16. 16. Role of technology <ul><li>Needs to mesh well with the value sought in the marketplace </li></ul><ul><li>Advanced technology in and of itself is not sufficient to be a success in the market </li></ul><ul><ul><li>May be independent of how well the technology “works”… </li></ul></ul><ul><ul><ul><li>What does “works” mean? </li></ul></ul></ul><ul><ul><li>Brainstorm: Think of one new product that is high tech in nature and was a commercial success and one that was a commercial failure </li></ul></ul>
  17. 17. Technology based products <ul><li>Successes </li></ul><ul><ul><li>Personal computers </li></ul></ul><ul><ul><li>Cellular phones </li></ul></ul><ul><ul><li>ABS brakes and all wheel drive cars </li></ul></ul><ul><ul><li>Satellite television </li></ul></ul><ul><ul><li>Satellite radio?? </li></ul></ul><ul><ul><li>iPOD/iTunes </li></ul></ul><ul><ul><li>Wireless networking </li></ul></ul><ul><li>Failures </li></ul><ul><ul><li>Digital audio tape </li></ul></ul><ul><ul><li>Iridium-satellite telephony </li></ul></ul><ul><ul><li>Concorde aircraft </li></ul></ul><ul><ul><li>- HD DVD </li></ul></ul><ul><ul><li>PDAs ??? </li></ul></ul><ul><ul><li>Scanners </li></ul></ul>
  18. 18. Technology as competency <ul><li>Core competencies are the tasks that an organization does well </li></ul><ul><li>Distinctive competencies are the subset of core competencies that are difficult for competitors to copy </li></ul><ul><ul><li>They create a sustainable competitive advantage </li></ul></ul><ul><ul><li>This causes a surplus which, at least in part, it gets reinvested and keeps the technology fresh and prevents competitors from catching up or leapfrogging </li></ul></ul>
  19. 19. Competencies of entrepreneurs <ul><li>Ability to generate innovative business ideas </li></ul><ul><li>Ability to turn ideas into a wealth creating business </li></ul><ul><li>Relationship and alliance building </li></ul><ul><li>Conceptual competencies </li></ul><ul><li>Organizing competencies </li></ul><ul><li>Strategic competencies </li></ul><ul><li>Commitment competencies </li></ul><ul><li>Detienne and Chandler-Academy of Management-2004 </li></ul>
  20. 20. Technology’s role <ul><li>Technological change can act as a catalyst, creating opportunity and, depending on timing, can create temporary vacuums where the entrant can play on a nearly equal playing field as the incumbents </li></ul><ul><li>Success depends on: </li></ul><ul><ul><li>barriers to entry and </li></ul></ul><ul><ul><li>nature of the intellectual property and </li></ul></ul><ul><ul><li>who has what IP rights </li></ul></ul>
  21. 21. Word of wisdom <ul><li>Technology alone, or even a new product concept alone, does not guarantee success: </li></ul><ul><ul><li>What is needed is a strong business model </li></ul></ul><ul><ul><li>A sustainable plan that creates and maintains a competitive advantage and secures adequate funding while yielding a return for the investors </li></ul></ul>
  22. 22. Types of capital <ul><li>Natural capital </li></ul><ul><li>Financial capital </li></ul><ul><li>Intellectual capital (knowledge economy) </li></ul><ul><ul><li>Human capital-skills and capabilities </li></ul></ul><ul><ul><li>Organizational capability-patents and processes, databases and networks </li></ul></ul><ul><ul><li>Social capital-quality of the relationships with customers, suppliers, partners, etc </li></ul></ul><ul><li>Entrepreneurial capital-competence by commitment </li></ul>Technology Ventures-Richard Dorf, 2005
  23. 23. Model of the global economy <ul><li>Variations in living standards are a function of differential productivities </li></ul><ul><li>Productivities are defined as sum of all outputs of an economy divided by the sum of all inputs </li></ul><ul><ul><li>Entrepreneurs are an agent of progress </li></ul></ul><ul><ul><li>Entrepreneurs improve the productivity by implementing more efficient business models </li></ul></ul>Technology Ventures-Richard Dorf, 2005
  24. 24. Dynamic capitalism <ul><li>Dynamic capitalism is the process of wealth creation by the disequilibrium-the disruption of existing markets with new entries (Defined by Joseph Schumpeter, 1942) </li></ul><ul><ul><li>Dynamic disequilibrium-economy is a constant state of churn, which is healthy </li></ul></ul><ul><ul><li>Sometimes termed a state of creative destruction </li></ul></ul><ul><li>Based on radical innovations-discontinuities/disruptions </li></ul>Technology Ventures-Richard Dorf, 2005
  25. 25. Basic five steps of evaluation of a new venture <ul><li>Capabilities -Is the venture opportunity consistent with the capabilities, knowledge, and experience of the team members? </li></ul><ul><li>Novelty : Does the product or service have significant novel, proprietary or differentiating qualities? Test: Ease of replication </li></ul><ul><li>Resources : Can the venture team attract the necessary financial, physical and human resources consistent with the magnitude of the venture? </li></ul><ul><li>Return : can the product be produced at a cost so that profit can be obtained? Is the expected return consistent with the risk of the venture? </li></ul><ul><li>Commitment : Do the entrepreneurial team members feel compelled to commit to this venture? </li></ul>Technology Ventures-Richard Dorf, 2005
  26. 26. Example new venture <ul><li>Frustration emanating from a recent personal UHAUL truck rental experience </li></ul><ul><ul><li>$29.95 per day was the advertised rate for a 14’ (old) truck </li></ul></ul><ul><ul><li>Rate per mile was not advertised and easily tripled the daily rate </li></ul></ul><ul><ul><li>Gas costs added another significant chunk of cost since the vehicle rented averaged 7 miles per gallon </li></ul></ul><ul><li>A new business venture, competing with UHAUL directly, that is based on use of more modern, FUEL EFFICIENT vehicles such as the Dodge Sprinter truck which achieves 27 mpg </li></ul><ul><li>Call the venture HAULCHEAP….mirror UHAUL in everything (distribution, service areas, markets served, etc) except the efficiency of the trucks. Start by focusing on school towns and servicing large University towns </li></ul><ul><li>Discuss the strengths, challenges and scenarios behind such a new business venture…. </li></ul>
  27. 27. Four quadrants Investor Business Employee Self employed “ Rich Dad, Poor Dad ”, Richard Kiyosaki, 1998 Leverage Perceived risk
  28. 28. Leverage <ul><li>Ability to increase positive cash flow while minimizing the energy input needed to produce the cash flow </li></ul><ul><ul><li>Employed and self employed situations are generally poorly leveraged </li></ul></ul><ul><ul><li>Some businesses requiring significant ownership involvement are poorly leveraged </li></ul></ul><ul><ul><li>Most investments are well leveraged </li></ul></ul>
  29. 29. Redefined accounting <ul><li>Assets-Create a positive cash flow </li></ul><ul><ul><li>Rental property </li></ul></ul><ul><ul><li>Cash flow positive businesses </li></ul></ul><ul><ul><li>Cash flow positive investments </li></ul></ul><ul><li>Liabilities-Create a negative cash flow </li></ul><ul><ul><li>Most personally owned vehicles </li></ul></ul><ul><ul><li>Most residential homes </li></ul></ul><ul><ul><li>Depreciating property </li></ul></ul>“ Rich Dad, Poor Dad ”, Richard Kiyosaki, 1998
  30. 30. Types of businesses Services Products Hi Growth Lo Growth Personal services: Massage, tutoring, taxi driving Federal express Servicemaster HP-iPOD Dell laptops Motorola Razr Custom products Restaurant