Lecture 6: Resource Acquisition & Legitimation Strategies PDF

She relates well with her constituencies (car manufacturers, members) Less so with her own team (emotional transparency, negativity) Key take-aways it is rare to see a leader exhibit more than two or three of the 4 core capabilities...

She relates well with her constituencies (car manufacturers, members) Less so with her own team (emotional transparency, negativity) Key take-aways it is rare to see a leader exhibit more than two or three of the 4 core capabilities effective leaders know what their strong suit is and do not all for the myth of the omniscient leader the leader we are when we start is not the leader we will become, we evolve and develop as leaders this case shows that start of Robin Chase — buut also the experiences that helped her to develop, the mistakes she made, and the resilience she showed in getting through and the transition she makes Lecture 6 Recap Resource acquisition and legitimation strategies Setting the stage: Entrepreneurial Resource Acuisition venture managers rarely possess everything they need to seize an opportunity — need external resources Foundations and Forms of Entrepreneurship 37  but, because, uncertainty is high, they also dont knwo the exact resources that will be needed — remember that new ventures are commercial experiments resource acquisition is a process of trial and error driven by ‘asset parsimony’ = securing the resources to achieve the desired business results at minimum cost — Asset parsimony is a key principle in entrepreneurial resource acquisition. It refers to the practice of securing only the essential resources needed to achieve business goals while minimizing costs. This approach helps startups operate efficiently and conserve capital, especially when resources are limited. The evaluation of novel ideas Novel ideas are critical for firms’ competitiveness and economic growth, but many do not reach the implementation stage because they are rejected by the audience who first evaluate them — A novel idea is a new, original, or innovative concept that has not been previously explored or implemented. It represents a departure from existing norms, practices, or ways of thinking, often offering a fresh perspective or solution to a problem. Novel ideas are characterized by their uniqueness and potential to create value or bring about significant change in a particular field or industry. both scholarly and anecdotal evidence provides plenty of examples of successful innovations that were initially rejected by key audiences The Paradox of Entrepreneurship entrepreneurship is about the discovery/creation of new opportunities [doing sth that did not exist before] — this newness is what new ventures derive their competitive advantage from but the more innovative the business is, and the less performance history a venture has, the more difficult and constrained its resource acquisition process will be [paradox of new venture legitimation] Problem with novelty Foundations and Forms of Entrepreneurship 38  — Key challenge for novel initiative is to obtain legitimacy— legitimacy is a generalised perception that a novel idea is ‘desirable, proper or appropriate within some socially constructed system of norms, values, beliefs and definitions’ Legitimacy is not a fixed attribute of an idea [yes/no] —i ts in the eye of the beholder Legitimacy is the perception that an entity or idea is appropriate, proper, and acceptable within a given social context. For entrepreneurs, it's crucial as it: Facilitates access to resources Enhances credibility with stakeholders Increases chances of survival and success Gaining legitimacy is particularly challenging for novel ventures due to their lack of track record and departure from established norms. Entrepreneurial Legitimacy the most appropriate strategy to gain legitimacy depends on the degree of technology/market novelty Foundations and Forms of Entrepreneurship 39  Option 1 is the lest risky option for many startups Option 4 is essentially a brand-new startup The Entrepreneurial Newness Framework The Entrepreneurial Newness Framework is a model that helps categorize new ventures based on two key dimensions: 1. Market Newness: This refers to how novel or unfamiliar the market is for the venture's products or services. 2. Technology Newness: This dimension considers how new or innovative the technology or approach used by the venture is. Based on these two dimensions, the framework creates four quadrants: 1. Low Market Newness, Low Technology Newness: These are typically traditional small businesses entering established markets with proven technologies. 2. High Market Newness, Low Technology Newness: This represents ventures that use existing technologies to serve new markets or customer segments. Foundations and Forms of Entrepreneurship 40  3. Low Market Newness, High Technology Newness: These ventures introduce innovative technologies or approaches to established markets. 4. High Market Newness, High Technology Newness: This quadrant represents the most innovative and potentially disruptive ventures, creating new markets with new technologies. Understanding where a venture falls within this framework can help entrepreneurs identify appropriate strategies for gaining legitimacy and acquiring resources. It also helps in assessing the potential risks and opportunities associated with different types of entrepreneurial endeavors. Sources of Financing strategy about position comes handing when you try to pinpoint where are you standing building your legitimacy when new to the game comes with good positioning — Foundations and Forms of Entrepreneurship 41  Selecting Funding Sources: A Framework Small business, established models/technologies personal lines of credit bank loans proven models/technologies, capital intensive commercial banks public project financing — corporate Foundations and Forms of Entrepreneurship 42  strategic low/medium capital requirements, new model, technologies angels seed investments venture capital capital intensive, untested technologies valley of death The "valley of death" refers to a critical phase in a startup's lifecycle, particularly for those developing capital-intensive or untested technologies. It is the period between initial seed funding and generating sustainable revenue, where many startups struggle to secure additional funding. This phase is characterized by: High cash burn rates due to ongoing research and development Lack of revenue or insufficient revenue to cover expenses Difficulty in attracting investors due to high risk and uncertainty Potential for running out of funds before achieving market traction Startups in this phase often face significant challenges in obtaining financing, as they are too risky for traditional lenders but may not yet be attractive to venture capitalists. Overcoming the valley of death is crucial for a startup's survival and progression to later stages of growth. Foundations and Forms of Entrepreneurship 43  Bootstrapping — self-financing or borrowing from family or friends Crowdfunding — raising small amounts of money form a large number of people, typically via internet, in exchange for a discount or early access to a solution Debt — secured financing of a new venture that involves a payback of the funds plus a fee Equity — involves the sale [exchange] of some of the ownership interest in the venture in return for a unsecured investment Understanding Audience Diversity When approaching audiences, it is important to understand what they value [their meaning- making logic] and link your proposition to that Different audiences have different logics Foundations and Forms of Entrepreneurship 44  Crowdfunding backers → community logic, drawn to ventures that demonstrate commitment to community values and ideology Government agencies → state logic, operate to fulfill government mandates, place value in the prestige and selectivity of government funding for science, see themselves as stewards of government funds Angel investors → market logic, can be relatively autonomous in their decision making, draw authority from their past entrepreneurial success and the personal wealthy that stems from that, invest for personal economic returns and for the opportunity to participate in entrepreneurial endeavours Venture capitalists → professional logic, depends on their investment track record as a source of their own legitimacy, operate from a self-interested perspective and invest with a strong focus on generating economic returns, which benefits them and their fund investors Corporate venture capitalists → corporate investment logic, the logic of investment is for strategy enhancement, CVC investors look for ventures that offer something to enhance the strategy of the corporation Pre-seed funding family, freinds, self-funding pre-seed is when the ideas i form and there is mostly intangible aspects of the company present equity → 50/50 between founders (bootstrapping) Seed funding angel networks, crowdfunding, bank loans, lines of credit seed is when your company is becoming more tangible equity → it is spread out but the most hold has a probably the angle investor (early) Seedling funding same as before but the rounds repeat seedling is when the company is staring to grow (growth) Baby Plant funding Foundations and Forms of Entrepreneurship 45  bridge loans, open market offerings, SPAC [special purpose acquisition company], merges Baby plant is when the company is getting stronger and it’s growing (exit) Working out your financials Projecting Financials try not to project much further than 24 months, investors are less likely to believe a projection for a longer time horizon know that until you start selling your numbers are just rough estimates! so be conservative in your projections [better to estimate higher rather than lower costs] remember that financial forecasts show a startups's strategic assumptions about how to intends to create, deliver and capture value → investors care about your assumptions and thinking process so focus on explaining what will drive revenues — they know the actual numbers are likely to change Cash is King — main reason for business failure amoung startups is cash Foundations and Forms of Entrepreneurship 46  cash flow statement is a record for a given period of when cash came in, when it went out and what is left over usually done month by month cash flow statement for the first year includes different scenarions — best, expects and worst case important because a startup can make a loss and still survive but if it lacks cash, it is heading towards the cemetery — needs money to get through the 'valley of death' difference between when cash comes in and when it goes out — especially if gives its customers 90-day payment terms [three months wait for payment but still has to pay the bills Cash flow statememt equation Key pre-launch startup costs Foundations and Forms of Entrepreneurship 47  regulatory requirements [eg insurance, health and safety liabilities, registering with the tax office and other government agencies] capital equipment pre-launch operational costs incurred to get the product or service ready [eg buying supplies, warehousing, sales and logistics] living expenses contigency reserve to cope with delays and problems 4 main sources of fixed costs 1. total sales and marketing costs — the costs involved in promoting and selling a product or service 2. total general and administrative costs [eg rent, insurance, utility] 3. total personnel costs [eg founder and employees salaries] 4. total product development Profit and Loss vs Cash Flow Profit and Loss (P&L) and Cash Flow are two essential financial statements that provide different insights into a company's financial health: Profit and Loss (Income Statement): Shows revenues, expenses, and profit over a specific period Indicates the company's profitability Uses accrual accounting (records transactions when they occur, not when cash changes hands) Cash Flow Statement: Shows the inflow and outflow of cash during a specific period Indicates the company's liquidity and ability to pay bills Uses cash accounting (records transactions when cash is received or paid) Key differences: Foundations and Forms of Entrepreneurship 48  1. Timing: P&L may include future income or expenses, while Cash Flow only shows actual cash movements 2. Purpose: P&L shows profitability, Cash Flow shows liquidity 3. Importance for startups: Cash Flow is often more critical, as it shows if the company can meet its immediate financial obligations A company can be profitable on paper (P&L) but still face cash flow problems, or vice versa. Both statements are crucial for a comprehensive financial analysis. Market sizing: TAM, SAM, SOM TAM (Total Addressable Market) This is the entire market for your product or service. Example: For a company selling organic dog food, the TAM might be all dog owners in the country. SAM (Serviceable Available Market) This is the portion of TAM that your company can realistically target with its current business model and technology. Example: For the organic dog food company, the SAM might be dog owners who buy premium or organic pet food. SOM (Serviceable Obtainable Market) This is the portion of SAM that you can realistically capture in the near term. Example: For the organic dog food company, the SOM might be dog owners in cities where they currently have distribution, who are interested in organic food and can afford premium prices. Think of it as a series of nested circles: SOM is a subset of SAM, which is a subset of TAM. This helps you understand your market potential and set realistic goals. Lecture 7 — guest lecture: Apollo Agriculture — Leondro Sales, Vise President of technology Foundations and Forms of Entrepreneurship 49