Who am I and what I teach? Marston Venture Management What happend? Putting The Seven Domains to Work to Develop Your Opportunity

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1 Putting The Seven Domains to Work to Develop Your Opportunity PROFESSOR FRÉDÉRIC DELMAR Who am I and what I teach? Phd 1996 Stockholm School of Economics Entrepreneurship New venture creation (opp identification and exploitation) New venture growth Undergraduate, master, IMBA, EMBA, PhD UmU, SU, SSE, EMLYON, HEC Montreal, LU Marston Venture Management What happend? 1

2 ProCom Bootstrapped the business with money from 3Fs to prove the model Raised $4 million from GE Capital when e-learning was all the rage Have treaded water since, no exit, but still around: the living dead Oxiden Raised 5 million from 3i Took two years to get product to market Then, a very lengthy sales cycle followed There was another solution Died after 4 years Darian Holdings Raised small amount of angel money An opportunity arose to buy a competitor at a very attractive price Having considerable success 2

3 Glencoren Turned down by several investors, but did eventually raise a small amount for proof of concept Now trying to raise the next round A very long lead time play changing surgeons behavior takes a long time Research Question How do entrepreneurs (and investors, too?) best assess market opportunities? The Conventional Wisdom Three crucial factors for entrepreneurial success Management Management Management! 3

4 In the World Of Warren Buffet «When a business with a reputation for poor fundamentals meets a management team with a reputation for brilliance It s the reputation of the former that remains intact» Integrating the Seven Domains Framework Market Domains Industry Domains Macro Level Micro Level Market Attractiveness Industry Attractiveness Mission, Ability to Aspirations, Execute Propensity on CSFs for Risk Team Domains Connectedness up and down Value Chain Target Segment Benefits and Attractiveness Sustainable Advantage e) The Logic of Analyzing New Venture Opportunities, LBS Source: Mullins, J.W. (2003). The New Business Road Test. Prentice Hall: London Is the market large enough? What is the growth rate and the upside potential? Market domain Industry domain Potential Profitability of opportunity Macro-level Market attractiveness Industry attractiveness Does the opportunity fit the team s business mission, personal aspirations, and risk propensity? Mission, aspirations, Ability to execute propensity for risk Team domain Connectedness up, down, and across value chain Venture strategy Micro-level Target segment benefits and attractiveness Sustainable advantage What industry forces have the strongest impact on profitability? How are industry forces likely to change in the future? Does the team have what it takes, To which target market is the in a human sense in experience venture s value proposition and industry know-how to deliver particularly compelling? superior performance for this particular opportunity? Is the target market large enough to support the business model? Is the team well connected up, down What entrepreneurial or firmand across the value chain so it will Does the target market provide an level capabilities create a be quick to notice any opportunity or Option to grow into other markets? sustainable competitive advantage need to change its approach if relative to rivals or potential rivals? conditions warrant? 4

5 General Guidance The domains are NOT additive; their relative importance can vary The wrong combination of factors can kill your venture Strength on some factors may mitigate weaknesses on others Scoring System Score your opportunity on the seven domains (1-10) Are there any domains which score very highly/ very poorly? Does a strong score in one domain affect a poor score in another domain? For domains with intermediate scores, reshape the opportunity if possible to counteract the difficulties Deal Makers There is no single domain where a strong score can by itself be a deal maker Niche market opportunities strength in micro dimensions is key High potential opportunities strength across domains is desirable 5

6 Deal Breakers Failure to provide a differentiated solution to customer pain (micro market domain) Lack of ability to execute on CSFs Unattractive Macro Level Domains May be overcome by strength at the micro level Especially if a strong, well connected team is in place Innovation may cause a stagnant market to grow Differentiation which is difficult for competitors to copy may provide sustainable competitive advantage Opportunities for Niche Market Entrepreneurs Macro-level factors of less importance Compelling customer benefits and clear differentiation in a carefully targeted segment is key 6

7 Five Common Traps To Avoid The large market fallacy The better mousetrap fallacy The no sustainable business model trap The me-too trap The hubris trap Investors want to know Marketing research has been undertaken There is evidence of genuine demand That there is a genuine appreciation of the competition Task You have until the end of the course to identify, research, and prepare a presentation Analyze your own entrepreneurial dream using the Seven Domains model Which elements concern you? Can you overcome the problem by reshaping the opportunity? 7

8 Some extensions Be able to describe the idea on which you want to commit Solve a problem, net positive cash flow, limited risk, superior, change in industry Be able to describe why you feel it is a good idea Financial model, good advice, uniqueness, targets a big market, intuition See my handout Academic Entrepreneurs When solution search for problem Distance from customer Limited industrial and entrepreneurial experience The importance of HC for CA High uncertainity High velocity Market for technologies (licensing), market for product and services 8

9 University third mission system The innovation system: Patenting University industry collaboration Research into practice The entrepreneurship system: Students, faculty starting new ventures Mostly students! Mostly faculty! Why are we do we care? The social returns to entrepreneurship? Economic development and growth, competition, job creation The individual returns to entrepreneurship? Highly uncertain income, financial risk taking, delayed returns Some recent results Åstebro T, Braguinsky S, Braunerhjelm P & Broström A, (Forthcoming). ACADEMIC ENTREPRENEURSHIP -- Bayh-Dole versus the Professor s Privilege. Science. 9

10 Table 1. Main findings. A comparison of the differences in the rates of entrepreneurship and earnings improvements for prior academics and non-academics becoming entrepreneurs between the U.S. ( ), and Sweden ( ). Universityemployed Non-university Relative employed Entry Rate Ph.D. Ph.D. U.S. Bi-annual entrepreneurship 0.9% 4.0% 23% rate Earnings difference from -15.1% -16.0% switching to entrepreneurship Sweden Bi-annual entrepreneurship 1.1% 2.5% 45% rate Earnings difference from -9.7% -12.1% switching to entrepreneurship Source: Authors estimates using NSF data and Statistics Sweden data. Survival The worst performing are likely to become S-E After two years, 60% of Swedish academic entrepreneurs have given up while a smaller fraction of U.S. academic entrepreneurs have quit (about 40%). This is considerably larger failure rates when compared population data the respective countries (Andersson and Klepper, 2013). About 66% of Swedish academics who give up their entrepreneurial ambitions return to academia, while only a third of Americans do. Firm performance These firms contribute significantly to productivity in their industries, i.e., spillover effect They create value but seem to be unable to approiate value (i.e., low growth), but somewhat higher survival Period Delmar, F., Wennberg, K. & Hellerstedt, K. (2011). Endogenous growth through knowledge spillovers in entrepreneurship: An empirical test. Strategic Entrepreneurship Journal, 5,

11 Conclusions Innovation systems Entrepreneurship systems The social returns The individual returns At individual faculty level: Rare, reduce income (- 10%), negative selection, low survival and low growth in their firms Contribute to growth Do not expect researchers do things they do not know! Large differences in relative rates between US and Sweden due to different systems We still know very little about e-ship coming from students Conclusions Different models, learn to use them proactively It is a question of fit (individual, opportunity, context) Think dynamically, it is a process Differ between description and argumentation Ask questions Gear up for the sale process (to help the customer to solve a problem) 11