Session #5: How to plan for a new venture?

Transcription

1 New Business Ventures Session #5: How to plan for a new venture? These slides are intended to support class discussions. They should not be considered a comprehensive set of issues to be dealt with.

2 Virtual Entrepreneurial Team Exercise (VETE) The goal of this exercise is to have a live experience of team dynamics in an entrepreneurial setting and reflect on that experience ~450 students from 11 schools in 9 countries divided into 100 virtual teams of ~ 5 members each Team task: Prepare a written pitch to a VC for funding a regional Asian business The VETE portal will open at 12:00 noon, March 28 th (Boston time) & will end at noon on April 7 th Your INSEAD assignment will focus on your experiential learning of team dynamics & is due on Tuesday 11 th April (20% of grade)

3 What happened to Zaplet? Late 2000: Zaplet receives $90M in venture funding. Build-up sales force to sell to enterprise market. Burn-rate at $14M per quarter. Early 2001: Promising big account leads fail to generate sales. The market tanked and Zaplets were not perceived as must have application but rather as nice to have. Spring 2001: Re-structuring and focus on collaborative business process management. But sales do not recover Fall 2001: New re-structuring and lay-offs. Burn rate reduced to $6M per quarter. Head-count at /2003: Baratz left. Company still focused on collaborative business process management with Zaplet3. Seems to be still struggling to survive. March 2004: Zaplet merges with another KPCB venture (typical approach to make discreet disappearance)

4 What happened to RightNow? After establishing a viable business by bootstrapping, fast ramp-up using venture capital Went public in August 2004 raising $40M Current market cap >$500M Revenues for 2005 of $87M (40% growth) >1000 active clients, > 400 employees Can we explain the different outcomes?

5 Common Pitfall in New Ventures But, there is more to it

6 Contrast strategic approaches Zaplet Inc. Causation Principles Expected return:identify the target market with highest potential return Competitive analysis: Position in the market to differentiate from competition Exploit knowledge: Do extensive market analysis using available information Right Now Technologies Effectuation Principles Affordable loss: Zero resources to market principle Strategic partnerships: Induce customers into strategic partnerships Leveraging contingencies: Execute and use the unexpected as source of new opportunities Source: Saras Sarasvathy (2001)

7 These are very different approaches Causal Reasoning The goal to be attained is well understood and clear Focus attention on the choice of best means to attain the goal To the extent that we can predict the future, we can control it. Effectual Reasoning The goal to be attained is not well defined but the opportunity space is Focus attention on the means at your disposal (who we are, what we know, who do we know?). What possible goals can I achieve with these means? To the extent that we can control our future, we don t need to predict it.

8 Effectual reasoning the process Lives and breathes execution (no planning) A coherent venture identity binds people together and makes sense of their actions (no pre-defined specific goals) The set of available means and their effects get reconfigured until it coalesces into a clear goal (no extensive search for best means)

9 Key benefits of effectual thinking Enables failure to occur earlier and at lower levels of investment if market not validated Allows the use of surprises and early market signals to change the course of action Enables action in the absence of specific goals

10 Where is effectuation likely to be more valuable? In situations of high ambiguity (e.g., when launching new products for new markets) In the earliest stages of new ventures In other situations, causal reasoning will likely dominate

11 Key Takeaways Two different rational ways of decision making Causal and Effectual Entrepreneurs seem to excel in effectual thinking The positive impact of effectual thinking is perhaps greatest in new markets and in the earliest stages of new ventures

12 Two Types of New Ventures 1: Focused on Existing Markets (FrogPubs) Established value chain of activities in industry (6 weeks internship, operating metrics, suppliers) Customers understand the product well (direct questions, survey) Traditional market research is possible (direct observation, market segmentation) Clear goals can be set and plans made causal reasoning Challenge is liability of newness: Difficulties during founding period (assembling team, developing working routines) Lack of resources (financial, knowledge) Lack of credibility to obtain support from environment (landlords, banks, initial customers)

13 Two Types of New Ventures 2: Focused on new Markets (Zaplet)- novel product concept for not-yet existing market Business model / market is unproven Difficult to evaluate value of opportunity Customer requirements not well-defined Difficult to set clear goals for the business Challenges are compounded in this case: Lack of market legitimacy Ambiguity on how to proceed with the venture Causal reasoning does not work very well Entrepreneurs often use effectual reasoning!

14 Learning from Zaplet case They had disciplined approach but based on causal reasoning (driven by VCs not the founders): trying to define clear goals and predict most attractive market segment May not be best approach in contexts of high ambiguity: traditional market segmentation and analysis hard to do when product not yet defined. Alternative approach is effectual reasoning: Zaplet could have started small engaged a few committed partners, learn value of technology, adjust to clients needs They could have found unexpected market opportunities that could grow over time But the pressure of $14M burn rate did not allow them this flexibility RightNow Technologies used this approach and, in the same opportunity space and without much funding, created a $400M business and went public in 2004.

15 How do you deal with an uncertain future?

16 What s Knight got to do with it? Type of Uncertainty The distribution of the future Type of probability Risk Uncertainty Knightian Uncertainty The future has a known distribution The future has an unknown distribution The future has no distribution it is unknowable A priori Statistical Unclassifiable instances Example Urn contains 7 green balls and 3 red balls. Drawing a red ball wins $50 Methods to deal with uncertainty Urn contains unknown number of balls. Drawing a red ball wins $50 Urn may contain balls or pink elephants! In fact you define what is inside the urn!! Analysis Estimation Effectuation Causation Source: Dew & Sarasvathy(2003)