The Harvard Business Review Entrepreneur's Handbook - Deepstash

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Is starting a business right for you?

Is starting a business right for you?

Without these elements—a full understanding of a problem, new connections, and a vision or direction for a solution—there is no entrepreneurial venture. Whether the problem you’ve identified is global or local, broad or niche, your ability to spot it and conceive new solutions is a core element of entrepreneurship. And passion about the problem you are solving might not be as important as you think.

To launch a successful venture, you must also make other people see the merits of your idea and invest in it—whether they are employees, customers, or funders.

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Identifying a problem to solve

A business opportunity is primarily a product or service that creates significant value for customers and offers significant profit potential to the entrepreneur.

A business opportunity:

  • Solves a real problem for customers
  • Offers significant risk-adjusted profit potential
  • Fits well with the capabilities of the leadership team
  • Is potentially profitable over a reasonable time span
  • Is amenable to financing. 

Evaluate promising opportunities by considering the market, the current and anticipated level of competition, the underlying economics, and the resources you’ll need to be successful

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Defining your business model and strategy

A business model describes how an enterprise proposes to make money. 

A well-conceived and promising business model is only half the equation for success because it doesn’t take into account the market competition.

Dealing with competition is the job of strategy. Strategy is a plan to differentiate the enterprise and give it a competitive advantage. A successful business has both a solid business model and a good strategy.

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Defining your strategy

The 5 steps of strategy formulation are:

  • Looking outside the enterprise for threats and opportunities
  • Looking inside at resources, capabilities, and practices
  • Considering strategies for addressing threats and opportunities
  • Building a good fit among strategy supporting activities
  • Creating alignment between the organization’s people and activities and its strategy.

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Organizing your company

At the onset of your new venture, you will need to address the legal form your enterprise will adopt. Should it be a sole proprietorship, a partnership, a corporation, or a limited liability company? This decision is driven mainly by your objectives and those of your investors.

Taxation and legal liabilities also play a part. The trade-offs built into the law can make the choice difficult; to get the most favorable tax treatment, a business must often give up some protection from liability, some flexibility, or both.

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The business plan

A business plan is a document that explains a business opportunity, identifies the market to be served, and provides details about how the entrepreneurial organization plans to pursue it. To be effective, a good plan also describes the unique qualifications that you and your management team bring to the effort. It explains the resources you’ll need and forecasts financial results over a reasonable time horizon.

Any business that seeks outside funding from banks, angel investors, venture capitalists, must have a solid business plan. Without it, creditors and investors won’t take you seriously. 

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Writing your business plan

  • The executive summary should explain the opportunity, why it is timely, and how your company plans to pursue it. It should also describe your expected results and provide a thumbnail sketch of the company and the management team.
  • The business plan should state the company’s goals and explain how investors will eventually cash out.
  • Use as few words as necessary to get your points across. Avoid long, complex sentences whenever possible.
  • Make your document easy to skim by using simple data visualizations, headings, subheads, white space, and numbered and bulleted lists to break up blocks of text.

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Startup-phase financing

  • Startup-phase financing is initially bootstrapped from personal savings, credit cards, and other personal sources of income, followed by friends and family and, in some cases, by small bank loans.
  • Trade credit from suppliers is another low-cost source of financing.
  • Other early sources of financing include online banks, accelerators, and crowdfunding.

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Growth-stage financing

During the growth stage, your business expands its sales and develops a growing base of customers. As a result, you’ll need more capital—for expanding your operation, hiring and training new employees, etc.

Your company may already be generating some positive cash flows that can help finance these initiatives, but you’ll probably need more cash if your growth is strong. Having now proven your business’s credibility, though, you can generally tap external capital more easily than you could in the startup phase. For slow- to moderate-growth firms, much of that capital comes from bank debt.

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Angel investment and venture capital

  • The most likely source of outside venture funding comes from so-called angel investors. Angels are high-net-worth individuals who provide early-stage capital to startup businesses. Networking is often the best way to connect with angels.
  • Venture capital comes from an individual or a firm that seeks large capital gains through early-stage equity or equity-linked financing of high potential entrepreneurial enterprises. Entrepreneurs should not waste their time pursuing venture capital unless they have all the characteristics VCs look for.

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Going public

Growing firms with exceptional revenue potential have another option to achieve a significant cash infusion: they can seek financing through an IPO. This process presents ownership shares to the world of individual investors and institutional investors such as pension funds and mutual funds and results in a significant exchange of paper ownership shares for the hard cash the company needs for stability and expansion.

An IPO marks a major milestone in the life of a company. It signals that your enterprise has earned the confidence of people outside its inner circle of participants.

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Sustaining entrepreneurial growth

  • Growth forces companies through transitions. Continued growth is usually a function of a sustainable strategy, the ability to expand into other markets, and mechanisms for scaling up the volume of output.
  • Companies have several mechanisms for sustaining growth. They include (1) exploiting the learning curve to maintain a cost advantage, (2) not pricing for maximum profit (high profits attract competitors), and (3) continually refreshing the offer to customers.
  • To scale up, businesses often have to change their guidelines around processes like hiring to make themselves more nimble.

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Leadership for a growing business

Possible approaches to leading a startup faced with rapid growth:

  • Managing content: The most direct approach to getting things done is to do them yourself or to directly supervise those who do. 
  • Managing behaviors: you specify how people should behave; you identify the behaviors that lead to success and codify them as rules that employees are told to follow.
  • Managing results:  providing the resources, the training, and the motivation that people need to produce results.
  • Managing context:  you approach results more broadly by shaping the culture, values, and structure of the organization.

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Keeping the entrepreneurial spirit alive

Entrepreneurial leaders can keep the spirit alive if they:

  • Preserve an innovation-friendly culture
  • Establish a strategic direction
  • Remain personally involved with innovation
  • Continually improve the idea to-commercialization process
  • Apply portfolio thinking to their innovative efforts
  • Hire people with entrepreneurial attitudes
  • Create an ambidextrous organization that is effective at both getting today’s work done (operations) and anticipating the future.

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Why entrepreneurs cash out

There are probably as many reasons for harvesting an investment as there are entrepreneurs. Retirement is one reason. An offer “too good to refuse” is yet another.

Common reasons:

  • A need to diversify wealth: Successful entrepreneurs can easily get into a position in which most of their wealth is dangerously concentrated in one basket.
  • The business has reached the end of its line: Some successful entrepreneurs sense where the wind is blowing, and sometimes they sense an ill wind.
  • The owner’s urge to begin anew: Some entrepreneurs are motivated by the challenge of creating something from zero.

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IDEAS CURATED BY

erbrigh

Surveyor for building control

Curious about different takes? Check out our The Harvard Business Review Entrepreneur's Handbook Summary book page to explore multiple unique summaries written by Deepstash users.

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