Top 10Mistakes

Entrepreneurs Make

1“I don’t care about the

product, I just want to make loads of money”

NO REAL PASSION FOR THE BUSINESS

Linking Market Demand with passion, skills and resources to create an entrepreneurial opportunity

Market Demand

Passion

Skills

Resources

The Key Elements in Creating an Entrepreneurial Opportunity

OpportunityMarket Demand

Passion Skills Resources

Entrepreneur

Key questions to sourcing the right opportunity

• What do people need? Who will buy it? Why do they want it? How can I reach them?

• What am I (are we) deeply passionate about?

• How can I leverage my (our) unique skills?

• Where can I (we) get the resources to make it happen?

2“We want one so everyone

will want one”

NO UNDERSTANDING OF THE MARKET

Researching an IdeaWhat needs to be researched? How can one gather the

information?

Customers Market size. Growth The needs pf customers The buying decision of customers

Trade journals, market reports and industry associations.

Interviewing experts in the industry. Interviewing, observing or surveying

potential customers.

Competitors Number of competitors Product or service offerings of

competitors Where the competitors are situated. The strengths and weaknesses of

competitors

Become a customer of the competition.

Visit competitor websites, stores and read their promotional material.

Interview competitors customers

Collaborators Suppliers Funders Partners

Visit suppliers Discuss funding options with other

entrepreneurs Discuss funding options with the

banks Obtain and read the national venture

capital association handbook Search the web

The Company Model

Revenue Cost drivers Investment Critical success factors

Consider different revenue models: Evaluate the costs and the costs

drivers. Distinguish between fixed, variable and semi variable costs. Consider the source of costs:

Do cash flow projections Speak to industry experts

3“We are going to be just like Amazon.com, only better”

NO DIFFERENTIATION

Assessing an Opportunity

10

9

8

7

6

5

4

3

2

1

[VENTURE]

Concept Attractiveness

Competitive Advantage

[ENTREPRENERIAL TEAM]

Low

Low

High

High

1 2 3 4 5 6 7 8 9 10

Market Size Market Growth DifferentiationCustomer Need

Skills Resources Passion / EnergyNetwork

Response

10

9

8

7

6

5

4

3

2

1

[VENTURE]

Concept Attractiveness

Competitive Advantage

[ENTREPRENERIAL TEAM]

Low

Low

High

High

1 2 3 4 5 6 7 8 9 10

Avoid / Wait & Reassess in Future

Build / hire / develop the

required capabilities

Identify / exploit a specific under served niche

Revise product or business model

Invest and pursue the opportunity

Why do we exist?

PurposeWhat are our personal

objectives

Whom do we serve?

What value do we deliver?

Why do we matter?

Where are we at?

Current statusWhat are our strengths?

What are our weaknesses?

What are the opportunities for the business?

What are the threats for the

business?

How do we create value?

Business RecipeWhat is our org sustainability

model?

What is our value

proposition?

What makes us different?

How will we evolve as a business?

What is our organizational character? Organis-ational

CharacterWhat

assumptions guide us?

What turns us on?

What is not negotiable?

How do we behave?

What must we do and how will we make it happen?

Goals, Action & PrioritiesWhat are our 3

year goals?What are our 1

year goals?

What needs to happen in the next 30 days?

Who is responsible?

Strategy Formulation Questions

4“We are so unique that we have no competition in the

market”

NO COMPETITORS

If no competitors … WHY?

Be REAL about your competition

FACTORMy

BusinessStrength Weakness

Competitor A

Competitor B

Competitor C

Importance to

Customer

Products

Price

Quality

Selection

Service

Reliability

Stability

Expertise

Company Reputation

Location

Appearance

Sales Method

Credit Policies

Advertising

Image

Competitor Analysis

5“We will work out our

revenue and cost model as we go along”

NO BUSINESS MODEL

Business Model

Income Stream 1

Income Stream 2

Income Stream 3

Source of Revenue

Costs

Investment

Critical Success Factors

Key questions for building a business model

• What are the sources of revenue for the business? – Single or multiple revenue streams? – Payment terms – upfront, over a period of time or post delivery?

• What are the cost drivers for the new business? – Major costs incurred to generate revenue? – Nature of costs – fixed, variable or semi-variable? – Payment terms – upfront, over a period of time or post delivery?

• What size capital investment is required to launch and sustain the business? – To sustain a positive cash balance? – To make profit?

• What are the critical success factors for this business? – Identify the issues that will determine the success or failure of the

business?

New Busines

s

Inputs Required(Cost Drivers)

PeopleProduct

PremisesMarketing

etc.

BuyersWhat they buying

Range of products or servicesVolumes; Frequency

How they payTiming of payment

Up Front InvestmentEquipmentPremisesBranding Training

Working CapitalEtc

Input

Output

Input

$

$

$Critical Success Factors

What are the factors that are required to ensure that this model works?

Revenue

Costs

Investment

Business Model Diagram

6“We are four CAs so all is

okay”

NO BALANCE IN THE TEAM

0

Rands

Revenue

Investment

Extremist Revolutionary

Growth Entrepreneur

Lifestyle Entrepreneur

SurvivalistBreadline

Time

Types of Entrepreneurs

The Entrepreneurial Team

Inventor

Entrepreneurial Team

PromoterManager,

administrator

Creativity and Innovation

General management skills, business know-how and networks

Low

High

High

Source: Timmons & Spinelli. New Venture Creation.2004. McGraw Hill.

Quality of the team

Entrepreneurial Attributes1. Commitment and

Determination 2. Opportunity Obsession 3. Tolerance for Risk,

Ambiguity and Uncertainty

4. Creativity, Self-Reliance and Ability to Adapt

5. Motivation to Excel 6. Leadership

Management Attributes1. Marketing2. Operations / Production 3. Finance 4. Administration 5. Interpersonal / Team 6. Law

Source: Timmons & Spinelli. New Venture Creation.2004. McGraw Hill.

7“Who cares about cash when you’ve got the profit margins

we’ve got ”

NO CASHFLOW FORECAST

Financial Plan

• Sales forecast • Startup expenses• 12 Month profit and loss statement (monthly) • 12 Month cash flow statement (monthly) • 3 – 5 Year profit & loss (high level – quarterly)• 3 – 5 Year cash flow (high level – quarterly)• Opening balance sheet• Projected balance sheet • Breakeven analysis

Financial Plan

• Sales forecast • Startup expenses• 12 Month profit and loss statement (monthly) • 12 Month cash flow statement (monthly) • 3 – 5 Year profit & loss (high level – quarterly)• 3 – 5 Year cash flow (high level – quarterly)• Opening balance sheet• Projected balance sheet • Breakeven analysis

Cash Flow Forecast (NB)

M1 Budget

M2 Budget

M3 Budget

M4 Budget

M5 Budget

M6 Budget …

M12 Budget

Total Budget

Units Sold

Opening Cash Balance

+ + + + + + +

Cash Inflows

+ + + + + + +

Fixed Cash Outflows

_ _ _ _ _ _ _

Variable Cash Outflows

_ _ _ _ _ _ _

Closing Cash Balance

= = = = = = =

Sales Forecast

M1 Budget

M2 Budget

M3 Budget

M4 Budget

M5 Budget

M6 Budget …

M12 Budget

Total Budget

Cat 1 Units Sold* a

Sales Price Per Unit* b

Category 1 TOTAL axb=Z

Cat 2 Units Sold* c

Sales Price Per Unit* d

Category 2 TOTAL cxd=Y

Monthly Total

Z + Y

* State the assumptions on which these numbers are based

Start Up Expenses

Start Up Expenses

Real estate XXX

Capital equipment XXX

Location and admin XXX

Opening inventory XXX

Advertising and promotions XXX

Other expenses XXX

Reserve for contingencies XXX

Working capital XXX

TOTAL XXXX

Sources of Capital

Owners investment XXX

Bank loans XXX

Other loans XXX

TOTAL XXXX

P & L Forecast

M1 Budget

M2 Budget

M3 Budget

M4 Budget

M5 Budget

M6 Budget …

M12 Budget

Total Budget

Revenue + + + + + + +

Cost of Sales

_ _ _ _ _ _ _

Gross Profit

= = = = = = =

Expenses _ _ _ _ _ _ _

Profit before tax

= = = = = = =

Tax Expense

_ _ _ _ _ _ _

Profit after tax

= = = = = = =

P & L Forecast

M1 Budget

M2 Budget

M3 Budget

M4 Budget

M5 Budget

M6 Budget …

M12 Budget

Total Budget

Revenue + + + + + + +

Cost of Sales

_ _ _ _ _ _ _

Gross Profit

= = = = = = =

Expenses _ _ _ _ _ _ _

Profit before tax

= = = = = = =

Tax Expense

_ _ _ _ _ _ _

Profit after tax

= = = = = = =

EXAMPLESSalaries & wages Other operating expenses Interest payments Depreciation

EXAMPLESDirect cost of goods sold

Cash Flow Forecast (NB)

M1 Budget

M2 Budget

M3 Budget

M4 Budget

M5 Budget

M6 Budget …

M12 Budget

Total Budget

Units Sold

Opening Cash Balance

+ + + + + + +

Cash Inflows

+ + + + + + +

Fixed Cash Outflows

_ _ _ _ _ _ _

Variable Cash Outflows

_ _ _ _ _ _ _

Closing Cash Balance

= = = = = = =

Cash Flow Forecast

M1 Budget

M2 Budget

M3 Budget

M4 Budget

M5 Budget

M6 Budget …

M12 Budget

Total Budget

Units Sold

Opening Cash Balance

+ + + + + + +

Cash Inflows

+ + + + + + +

Fixed Cash Outflows

_ _ _ _ _ _ _

Variable Cash Outflows

_ _ _ _ _ _ _

Closing Cash Balance

= = = = = = =

EXAMPLESCash sales of goods or servicesCollection of accounts receivableInterest earnedSales of fixed assets or investmentsCapital from investorLoan received

EXAMPLESPayment of cash expensesPayment to creditorsPayment of salaries and wagesPurchase of inventory for cashPurchase of fixed assets or investmentsPayback loansPayout dividends

Balance SheetsOpening End Y1 End Y2 End Y3

Assets

Current Assets Cash

Inventory

Acc receivable

Fixed Assets Property

Equipment

Furniture

Vehicles

TOTAL ASSETS

Liabilities & Equity

Current Liabilities Accounts payable

Long Term Liab. Loans

Owners Equity Capital

Retain earnings

TOTAL LIAB & EQUITY

Balance SheetsOpening End Y1 End Y2 End Y3

Assets

Current Assets Cash

Inventory

Acc receivable

Fixed Assets Property

Equipment

Furniture

Vehicles

TOTAL ASSETS

Liabilities & Equity

Current Liabilities Accounts payable

Long Term Liab. Loans

Owners Equity Capital

Retain earnings

TOTAL LIAB & EQUITY

Goods or resources owned by the business to be transformed utilized / realized in 1 year

Goods or resources owned by the business that have a life span exceeding 1 year

Amounts owed by the business to be paid back within 12 months

Amounts owed by the business to be paid back after 12 months

Portion of the business attributable to the owners

Total amount OWNED by the business

Total amount OWED by the business to lenders or owners

8“We need R10m in venture capital and then we will get

going”

NO MOMENTUM UNTIL CAPITAL IS

RAISED

New venture financing and the equity gap

Stage

Source

Demand

Supply

Pre-seed Seed / Start-Up Early Later

Founders FamilyFriends

Angels / Angel Alliances

Venture Funds

Private Equity

100k 500k R5-10 mil R20 mil

Government Funds

Equity Gap

Adapted from a model proposed designed by Jeffery E Sohl – Center for Venture Research, University of New Hampshire

Equity Funding Sources Debt Funding Sources

Personal savings Family and friends Informal individual investors Venture capitalists Government agencies Partnerships / strategic alliances with

corporations Private equity investors (for established

businesses) Listing on stock exchange

o Alt-Xo Main Board

Loans from family and friends Loans from government agencies or NGO’s

supporting entrepreneurs Bank loans

Advantages Disadvantages Advantages Disadvantages

Often comes with useful management input and advice.

Equity investors can give access to a network of useful contacts

No immediate strain on cash flow in terms of repayments of the capital

Lose a portion of the ownership of the business.

Equity owners can be controlling which can cause friction with the founders

Difficult to value an entrepreneurial business when allocating shareholdings

Founder maintains full ownership of the business.

Founder can manage and run the business as he/she sees fit

Loan must be paid back which can create strain on cash flow for the new business.

Bank is unlikely to assist in opening doors, giving advice or introducing founders to useful contacts.

Sources of finance for a business

The Art of Bootstrapping

1. Focus on cash flow, not profitability2. Forecast from the bottom up 3. Ship, then test 4. Forget the “proven” team 5. Start as a service business 6. Focus on function, not form 7. Pick your battles 8. Understaff 9. Go direct10.Position against the leader 11.Take the “red pill.”

Source: Kawasaki, G. The Art of the Start. 2004. Portfolio.

Funding Realities

• More likely sources of funding for startup: – Bootstrapping – Personal funds – Close connections

• Some chance of getting funds for a startup:– Corporate investor – Government enterprise creation funds

• Low chance of getting funds – Bank loan – Venture capital

9“We have hired offices in

Sandton, acquired Hummer’s for the directors and will pay the most to get

the best”

NO FRUGALITY

BUDGETING

MONITORING

REPORTING

1.Budget for CASH FLOW2.Build your OWN models3.Its not just about HOW MUCH but also about

WHEN. 4.Know the NATURE of different cash flows 5.SHORT TERM = DETAIL; long term = big picture

6.Your BANK BALANCE is your truth7.Know your BASELINE (breakeven) 8.Keep UP TO DATE9.Balance off being overly PEDANTIC versus

dangerously LACKADAISICAL

10.Report results with PURPOSE

Entrepreneurial Financial Management

10

“Our marketing plan will be a combination of print, TV and internet advertising”

MISGUIDED MARKETING PLAN

Marketing mix component

Description of the component

Key questions to be answered by the entrepreneur

Considerations

Product Good marketing begins with a good product or service.

Does it meet a specific need? What is that need? Must we customize our product or service? Do we deliver the appropriate quality for the customer?

Product varietyQuality Design FeaturesPackaging Services WarrantiesReturns

Price You need to find a balance between attracting customers and making profits.

What does it cost us to produce the good or service? What are the competition charging for similar goods or services? Why are we charging more or less than the competition? How would revenue and profits be affected if we increased or decreased the price?

List price Discounts Allowances Payment period Credit terms

Simple Marketing Plan

Marketing mix component

Description of the component

Key questions to be answered by the entrepreneur

Considerations

Place This is about getting the product or service to the customer. Customers will only buy products or services that they have access to, thus it is critical to have distribution channels that reach the customer.

Are we going to sell locally, regionally, nationally or globally? How will we reach the customer? Do we need more than one channel for reaching the customer? Should we create our own distribution channel or partner with an established distributor?

Channels CoverageTransport

Promotion Promotion is about communicating the merits of the product or service to target customers and persuading them to buy.

How will we make customers aware of the benefits of buying our product or service?

Advertising Sales forcePublic relations Direct marketing

Simple Marketing Plan

OPPORTUNITYDemandPassionSkillsResources

STRUCUTREBusiness ModelLegal FormTools / FacilitiesTeam

FUNDINGTraditional financingBootstrapping Cash flow

SALESProduct Price Promotion Place Word of mouth

GrowthResearch

New Venture Creation Model

BUSINESS PLAN

Focus points in a business plan

• The People. The men and woman starting and running the venture, as well as outside parties providing key services or important resources for it such as suppliers, lawyers and advisors.

• The Opportunity. The need in the market for the proposed product or service. The size and growth of the potential market and the attractiveness of the industry in which the business will operate.

• The Business Model. A summation of the core business decisions and trade offs employed by a company to earn a profit. The decisions and trade offs include revenue sources, key expenses, investment size and critical success factors

• The Strategy. The methods and means of creating sustainable competitive advantage for the new business.

• The Context. The big picture – the regulatory environment, interest rates, demographic trends, inflation and the like – factors that inevitably change but cannot be controlled by the entrepreneur.

• Risk and Reward. An assessment of everything that can go wrong and right, and a discussion of how the entrepreneurial team can respond.