Organising for entrepreneurship
Master Business Economics 2018-2019, KU Leuven
Prof. Melillo
1
,Table of Contents
Introduction..................................................................................................................................5
1. Moving from an idea to an entrepreneurial firm..............................................................6
The lean start-up method....................................................................................................6
Introduction....................................................................................................................................6
Traditional approaches to launch a start-up...................................................................................6
Hypothesis-driven entrepreneurship approach (Lean start-up).....................................................7
Limits of the lean start-up approach...............................................................................................7
The LS process................................................................................................................................7
Business Model Canvas...................................................................................................................8
Hypotheses.....................................................................................................................................9
Specify minimum viable products tests........................................................................................10
Prioritize tests...............................................................................................................................11
Learn from MVP tests...................................................................................................................11
Preserve, pivot or perish (PPP) until product-market fit...............................................................11
Scaling...........................................................................................................................................12
Assembling the founding team..........................................................................................13
Solo founding vs. Co-founders.....................................................................................................13
How many cofounders..................................................................................................................13
Symbolic founders vs. hires..........................................................................................................13
Founding-team dilemmas: The 3Rs model...................................................................................14
Relationships dilemmas................................................................................................................14
Roles.............................................................................................................................................16
Rewards........................................................................................................................................16
Beyond the team dilemmas.........................................................................................................18
Evolution of hiring decisions.........................................................................................................18
Attracting investors: rich vs king...................................................................................................18
Succession....................................................................................................................................19
2. Managing the growth of an entrepreneurial firm...........................................................21
Preparing for growth.........................................................................................................21
Growth not always a good thing...................................................................................................21
Reasons for pursuing growth.......................................................................................................21
Managing growth.........................................................................................................................21
Stages of growth...........................................................................................................................22
Challenges of growth....................................................................................................................22
Strategies for firm growth............................................................................................................23
Internal and external growth strategies.......................................................................................23
Advantages and disadvantages of internal growth.......................................................................23
New product development...........................................................................................................24
Other product-related strategies..................................................................................................24
Internal expansion........................................................................................................................24
Advantages and disadvantages of external growth......................................................................24
Mergers and acquisitions..............................................................................................................25
Exit strategies....................................................................................................................25
Exit dilemmas...............................................................................................................................25
Exit types......................................................................................................................................26
Should we sell our start-up...........................................................................................................27
Should we go public......................................................................................................................28
2
, Divergence in the team.................................................................................................................28
How does founder replacement affect the likelihood of a liquidity event....................................28
Wealth-versus-control dilemmas (rich vs king)..................................................................29
Entrepreneurs are resource constrained......................................................................................29
King...............................................................................................................................................29
Rich...............................................................................................................................................29
Do founders make consistent decisions?......................................................................................30
Other alternatives.........................................................................................................................31
Other choices that affect rich vs king outcomes...........................................................................31
Better and worse outcomes..........................................................................................................31
Rich vs king term sheet negotiations with VC’s............................................................................31
Is ‘private equity premium’ really a puzzle?.................................................................................32
Tips if you want to become entrepreneur....................................................................................32
3. Cases.............................................................................................................................33
Dropbox – it just works................................................................................................................33
Rent the runway..........................................................................................................................34
Apple’s core.................................................................................................................................35
Ockham technologies..................................................................................................................37
Founder-CEO succession at Wily technology................................................................................40
Nantucket Nectars.......................................................................................................................42
Overview cases.................................................................................................................43
4. Extra readings................................................................................................................44
Why the lean start-up changed everything..................................................................................45
The fallacy of the perfect business plan........................................................................................45
Stealth mode’s declining popularity.............................................................................................45
Creating an entrepreneurial innovation-based economy.............................................................45
A new strategy for the 21st century corporation...........................................................................46
Early teams: the impact of team demography on VC financing and going public.........................48
The first deal: the division of founder equity in new ventures.....................................................49
Theory...........................................................................................................................................49
Findings........................................................................................................................................49
Founder-CEO succession and the paradox of entrepreneurial success.........................................50
Findings........................................................................................................................................50
What happens to a start-up when venture capitalists replace the founder.................................50
Early teams: the impact of team demography on VC financing and going public.........................51
Findings........................................................................................................................................51
Variables.......................................................................................................................................51
Prior research...............................................................................................................................52
The first deal: the division of founder equity in new ventures.....................................................54
Introduction..................................................................................................................................54
Theory...........................................................................................................................................54
Findings........................................................................................................................................54
Alternative explanations (but proven wrong)...............................................................................54
Variables.......................................................................................................................................55
Alternative explanations (but proven wrong)...............................................................................56
Founder-CEO succession and the paradox of entrepreneurial success.........................................57
Findings........................................................................................................................................57
Founder-CEO vs past succession research....................................................................................57
Theory...........................................................................................................................................57
3
,Alternative hypotheses (control variables)...................................................................................58
Explanation of findings.................................................................................................................59
Limitations....................................................................................................................................59
......................................................................................................................................................59
4
,Introduction
Entrepreneurs are reinventing the company (redesigning capitalism)
Vb. Uber, Airbnb, Amazon, Tesla
Mythmaking industry: success is inevitable if you have a great idea/ exceptional mind
! Selection bias
Most start-ups fail within few years from finding (even high potential start-ups)
o External risk
o Internal risk
Entrepreneurship can be learned
Not just the result of good genes/ being in the right place at the right time
5
, 1. Moving from an idea to an
entrepreneurial firm
Lean start-up
Assembling the founding team
Organizing for flexibility
The lean start-up method
Introduction
The marshmallow challenge
Prototyping matters
! Planning: committing a mistake and not have time/ resources to recover
The marshmallow as metaphor for the hidden assumptions of a project
Test early and often
Key lessons for entrepreneurship
Action > plan
Especially because entrepreneurship is an uncertain setting
Action = experiments
Failure of experiments provides learning, using minimal resources to learn what may work
Traditional approaches to launch a start-up
Build-it-and-they-will-come
Focus on product development
Bypasses customer feedback and demand validation (= ego defensive strategy)
Risk of inventing the wrong product
Waterfall planning (stage-gate planning)
Translation of vision into plan
Completely sequenced phases
! Customer feedback is late
Different functions work in parallel
Hard to revise, not iterative process
Rigid system, not good for start-ups that need to adapt to customers’ feedback
Just do it!
Improvisational approach (no strong product vision or detailed plan)
Leverage scarce resources by tailoring a product to suit resource providers’ preferences
Rely heavily on feedbacks and assistance
Adapt quickly to new opportunities
Hard to know when to make course corrections
6
,Hypothesis-driven entrepreneurship approach (Lean
start-up)
Experimentation (falsifiable, comprehensive hypotheses) > elaborate planning
Customer feedback > intuition
Iterative design > big design up front
Minimizing waste > minimizing expenses
Comparative advantage of the LSM
Evaluates an early-stage start-up’s entire business model
Focusing narrowly on the product
Scientific method (hypotheses)
Balances founder’s vision with market feedback
Business mistakes
1. Building something nobody wants -> LS reduces the risk of this mistake
2. Hiring poorly
3. Lack of focus
4. Fail to execute sales & marketing
Uncertainty resolution > start-up growth
Maximize: information gained to resolve uncertainty per unit of resources used
o Speed matters
Maximizes speed with which learning takes place
o Test then invest (minimizing waste)
! Not bootstrapping (minimizing expenses)
Fallacy of the perfect business plan
Business plan rarely survives first contact with customers
Start-ups are not smaller versions of large companies
Large companies execute a business model, start-ups look for a business model
A start-up is a temporary organization designed to search for a repeatable and scalable business
model under conditions of extreme uncertainty
Limits of the lean start-up approach
LS is less applicable when
Mistakes must be limited
Demand uncertainty is low
Demand uncertainty is high but development cycles are long
Software-based businesses are best suited
The LS process
1. Develop a vision
Vision -> strategy -> product
2. Translate the vision into falsifiable hypotheses
Through the Business Model Canvas
3. Specify minimum viable product tests (MVP)
4. Prioritize tests
5. Learn from MVP tests
6. Preserve, pivot or perish (until product market fit)
7
, 7. Scaling and ongoing optimization
Business Model Canvas
Makes the key hypotheses explicit
Customer value proposition
Reliance on powerful partners
! weak bargaining power (no track record)
Customer skepticism
Discount may be necessary to attract early adopters, customers’ willingness to pay
Limited market research options
Survey or focus groups, smoke tests
Customer switching costs
Delivered value of start-up > value of competitor + switching costs
Later, the start-up can impose higher switching costs
Network effects
When WTP depends on amount of other customers (FB)
Technology and operations management
Vertical integration (in-house activities)
o Avoids high uncertainty
o Avoids small numbers bargaining
o Avoids asset specificity
o ! Major investments
First-mover
o Preemption of customer relationships
o Preemption of scarce valuable assets
o Preemption of key partners
Late-mover advantages
o Reduction of R&D costs through reverse engineering (!patent)
o Chance to leapfrog leaders with newly invented, superior production technologies
! Founders tend to overestimate first mover advantages and underestimate the difficulty of
pioneering when a new market requires significant behavioral changes by customers
Go-to-market plan (marketing challenges)
Choices depend on new market/ existing market
Crossing the chasm
Virality: relying on online networks (viral coefficient)
! Low marketing budget needed
o Direct network effects
o Word of mouth
o Casual contact
o Incentives to existing customers to recruit new ones
Profit formula
Evaluates the venture’s economic viability
Doesn’t require additional choices about the business model design
8
, Hypotheses
Formulating hypotheses
Falsifiable
o For each business model element, an entrepreneur formulates a set of “ hypotheses
Comprehensive
o Interdependences among business model elements
o Internal consistency between model elements
o Don’t have to be detailed for all elements
Key hypotheses: customer discovery (leap-of faith assumptions)
o A value hypothesis
o The growth hypothesis
Benchmarks from similar ventures to articulate specific hypotheses (! Radical innovations)
Customer conversion funnel
Average lifetime value of a typical customer (net of the average customer acquisition cost)
Hypotheses testing
Validate learning
Learning as the unit of progress for start-ups (concrete, accurate and faster than BP)
Making progress by solveng key uncertanties
o Via experiments (not market research)
o Value is providing benefit to the customer
Customer development model
9
Master Business Economics 2018-2019, KU Leuven
Prof. Melillo
1
,Table of Contents
Introduction..................................................................................................................................5
1. Moving from an idea to an entrepreneurial firm..............................................................6
The lean start-up method....................................................................................................6
Introduction....................................................................................................................................6
Traditional approaches to launch a start-up...................................................................................6
Hypothesis-driven entrepreneurship approach (Lean start-up).....................................................7
Limits of the lean start-up approach...............................................................................................7
The LS process................................................................................................................................7
Business Model Canvas...................................................................................................................8
Hypotheses.....................................................................................................................................9
Specify minimum viable products tests........................................................................................10
Prioritize tests...............................................................................................................................11
Learn from MVP tests...................................................................................................................11
Preserve, pivot or perish (PPP) until product-market fit...............................................................11
Scaling...........................................................................................................................................12
Assembling the founding team..........................................................................................13
Solo founding vs. Co-founders.....................................................................................................13
How many cofounders..................................................................................................................13
Symbolic founders vs. hires..........................................................................................................13
Founding-team dilemmas: The 3Rs model...................................................................................14
Relationships dilemmas................................................................................................................14
Roles.............................................................................................................................................16
Rewards........................................................................................................................................16
Beyond the team dilemmas.........................................................................................................18
Evolution of hiring decisions.........................................................................................................18
Attracting investors: rich vs king...................................................................................................18
Succession....................................................................................................................................19
2. Managing the growth of an entrepreneurial firm...........................................................21
Preparing for growth.........................................................................................................21
Growth not always a good thing...................................................................................................21
Reasons for pursuing growth.......................................................................................................21
Managing growth.........................................................................................................................21
Stages of growth...........................................................................................................................22
Challenges of growth....................................................................................................................22
Strategies for firm growth............................................................................................................23
Internal and external growth strategies.......................................................................................23
Advantages and disadvantages of internal growth.......................................................................23
New product development...........................................................................................................24
Other product-related strategies..................................................................................................24
Internal expansion........................................................................................................................24
Advantages and disadvantages of external growth......................................................................24
Mergers and acquisitions..............................................................................................................25
Exit strategies....................................................................................................................25
Exit dilemmas...............................................................................................................................25
Exit types......................................................................................................................................26
Should we sell our start-up...........................................................................................................27
Should we go public......................................................................................................................28
2
, Divergence in the team.................................................................................................................28
How does founder replacement affect the likelihood of a liquidity event....................................28
Wealth-versus-control dilemmas (rich vs king)..................................................................29
Entrepreneurs are resource constrained......................................................................................29
King...............................................................................................................................................29
Rich...............................................................................................................................................29
Do founders make consistent decisions?......................................................................................30
Other alternatives.........................................................................................................................31
Other choices that affect rich vs king outcomes...........................................................................31
Better and worse outcomes..........................................................................................................31
Rich vs king term sheet negotiations with VC’s............................................................................31
Is ‘private equity premium’ really a puzzle?.................................................................................32
Tips if you want to become entrepreneur....................................................................................32
3. Cases.............................................................................................................................33
Dropbox – it just works................................................................................................................33
Rent the runway..........................................................................................................................34
Apple’s core.................................................................................................................................35
Ockham technologies..................................................................................................................37
Founder-CEO succession at Wily technology................................................................................40
Nantucket Nectars.......................................................................................................................42
Overview cases.................................................................................................................43
4. Extra readings................................................................................................................44
Why the lean start-up changed everything..................................................................................45
The fallacy of the perfect business plan........................................................................................45
Stealth mode’s declining popularity.............................................................................................45
Creating an entrepreneurial innovation-based economy.............................................................45
A new strategy for the 21st century corporation...........................................................................46
Early teams: the impact of team demography on VC financing and going public.........................48
The first deal: the division of founder equity in new ventures.....................................................49
Theory...........................................................................................................................................49
Findings........................................................................................................................................49
Founder-CEO succession and the paradox of entrepreneurial success.........................................50
Findings........................................................................................................................................50
What happens to a start-up when venture capitalists replace the founder.................................50
Early teams: the impact of team demography on VC financing and going public.........................51
Findings........................................................................................................................................51
Variables.......................................................................................................................................51
Prior research...............................................................................................................................52
The first deal: the division of founder equity in new ventures.....................................................54
Introduction..................................................................................................................................54
Theory...........................................................................................................................................54
Findings........................................................................................................................................54
Alternative explanations (but proven wrong)...............................................................................54
Variables.......................................................................................................................................55
Alternative explanations (but proven wrong)...............................................................................56
Founder-CEO succession and the paradox of entrepreneurial success.........................................57
Findings........................................................................................................................................57
Founder-CEO vs past succession research....................................................................................57
Theory...........................................................................................................................................57
3
,Alternative hypotheses (control variables)...................................................................................58
Explanation of findings.................................................................................................................59
Limitations....................................................................................................................................59
......................................................................................................................................................59
4
,Introduction
Entrepreneurs are reinventing the company (redesigning capitalism)
Vb. Uber, Airbnb, Amazon, Tesla
Mythmaking industry: success is inevitable if you have a great idea/ exceptional mind
! Selection bias
Most start-ups fail within few years from finding (even high potential start-ups)
o External risk
o Internal risk
Entrepreneurship can be learned
Not just the result of good genes/ being in the right place at the right time
5
, 1. Moving from an idea to an
entrepreneurial firm
Lean start-up
Assembling the founding team
Organizing for flexibility
The lean start-up method
Introduction
The marshmallow challenge
Prototyping matters
! Planning: committing a mistake and not have time/ resources to recover
The marshmallow as metaphor for the hidden assumptions of a project
Test early and often
Key lessons for entrepreneurship
Action > plan
Especially because entrepreneurship is an uncertain setting
Action = experiments
Failure of experiments provides learning, using minimal resources to learn what may work
Traditional approaches to launch a start-up
Build-it-and-they-will-come
Focus on product development
Bypasses customer feedback and demand validation (= ego defensive strategy)
Risk of inventing the wrong product
Waterfall planning (stage-gate planning)
Translation of vision into plan
Completely sequenced phases
! Customer feedback is late
Different functions work in parallel
Hard to revise, not iterative process
Rigid system, not good for start-ups that need to adapt to customers’ feedback
Just do it!
Improvisational approach (no strong product vision or detailed plan)
Leverage scarce resources by tailoring a product to suit resource providers’ preferences
Rely heavily on feedbacks and assistance
Adapt quickly to new opportunities
Hard to know when to make course corrections
6
,Hypothesis-driven entrepreneurship approach (Lean
start-up)
Experimentation (falsifiable, comprehensive hypotheses) > elaborate planning
Customer feedback > intuition
Iterative design > big design up front
Minimizing waste > minimizing expenses
Comparative advantage of the LSM
Evaluates an early-stage start-up’s entire business model
Focusing narrowly on the product
Scientific method (hypotheses)
Balances founder’s vision with market feedback
Business mistakes
1. Building something nobody wants -> LS reduces the risk of this mistake
2. Hiring poorly
3. Lack of focus
4. Fail to execute sales & marketing
Uncertainty resolution > start-up growth
Maximize: information gained to resolve uncertainty per unit of resources used
o Speed matters
Maximizes speed with which learning takes place
o Test then invest (minimizing waste)
! Not bootstrapping (minimizing expenses)
Fallacy of the perfect business plan
Business plan rarely survives first contact with customers
Start-ups are not smaller versions of large companies
Large companies execute a business model, start-ups look for a business model
A start-up is a temporary organization designed to search for a repeatable and scalable business
model under conditions of extreme uncertainty
Limits of the lean start-up approach
LS is less applicable when
Mistakes must be limited
Demand uncertainty is low
Demand uncertainty is high but development cycles are long
Software-based businesses are best suited
The LS process
1. Develop a vision
Vision -> strategy -> product
2. Translate the vision into falsifiable hypotheses
Through the Business Model Canvas
3. Specify minimum viable product tests (MVP)
4. Prioritize tests
5. Learn from MVP tests
6. Preserve, pivot or perish (until product market fit)
7
, 7. Scaling and ongoing optimization
Business Model Canvas
Makes the key hypotheses explicit
Customer value proposition
Reliance on powerful partners
! weak bargaining power (no track record)
Customer skepticism
Discount may be necessary to attract early adopters, customers’ willingness to pay
Limited market research options
Survey or focus groups, smoke tests
Customer switching costs
Delivered value of start-up > value of competitor + switching costs
Later, the start-up can impose higher switching costs
Network effects
When WTP depends on amount of other customers (FB)
Technology and operations management
Vertical integration (in-house activities)
o Avoids high uncertainty
o Avoids small numbers bargaining
o Avoids asset specificity
o ! Major investments
First-mover
o Preemption of customer relationships
o Preemption of scarce valuable assets
o Preemption of key partners
Late-mover advantages
o Reduction of R&D costs through reverse engineering (!patent)
o Chance to leapfrog leaders with newly invented, superior production technologies
! Founders tend to overestimate first mover advantages and underestimate the difficulty of
pioneering when a new market requires significant behavioral changes by customers
Go-to-market plan (marketing challenges)
Choices depend on new market/ existing market
Crossing the chasm
Virality: relying on online networks (viral coefficient)
! Low marketing budget needed
o Direct network effects
o Word of mouth
o Casual contact
o Incentives to existing customers to recruit new ones
Profit formula
Evaluates the venture’s economic viability
Doesn’t require additional choices about the business model design
8
, Hypotheses
Formulating hypotheses
Falsifiable
o For each business model element, an entrepreneur formulates a set of “ hypotheses
Comprehensive
o Interdependences among business model elements
o Internal consistency between model elements
o Don’t have to be detailed for all elements
Key hypotheses: customer discovery (leap-of faith assumptions)
o A value hypothesis
o The growth hypothesis
Benchmarks from similar ventures to articulate specific hypotheses (! Radical innovations)
Customer conversion funnel
Average lifetime value of a typical customer (net of the average customer acquisition cost)
Hypotheses testing
Validate learning
Learning as the unit of progress for start-ups (concrete, accurate and faster than BP)
Making progress by solveng key uncertanties
o Via experiments (not market research)
o Value is providing benefit to the customer
Customer development model
9
