Entrepreneurial Ventures: How do you do them? Gordon Bell 29 February 2000

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Entrepreneurial VenturesHow do you do
them?Gordon Bell29 February 2000

• High Tech Ventures A Guide to Entrepreneurial
  Success
• C G Bell J McNamara, Addison Wesley, 1991
• http//www.research.microsoft.com/gbell

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The Bell-Mason Diagnostic

• A system based on a company development model for
• measuring risk,
• predicting the course,
• tracking the progress, and
• improving high tech, high growth, early
  stage ventures aka startups
• http//research.microsoft.com/gbell

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The Bell-Mason Diagnostic Founding Premise

• "You don't have to understand the technology to
  ask the right business questions"
• The BMD provides the critical technology,
  product, marketing, and people expertise

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The Bell-Mason Diagnostic Background

• A rule-based system to assess new ventures
• Developed by Gordon Bell, and Heidi Mason, with
  Coopers Lybrand over a 5 year period
• Based on experience with 100s of ventures
• Shows "health risk" of a new venture by
  asking a series of questions in 12 categories,
  at each stage of 4 stages of growth
• Licensed to Coopers Lybrand (1990) for
  startups
• Licensed to Digital (1991) for corporate
  ventures
• Licensed to Australian Ventures (1997)
• Licensed to Diamond Technology Partners (1999)
  for IntraVentures

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Using the Bell-Mason Diagnostica versatile tool
to answer questions about

• Readiness - Are we (i.e. the venture) ready to
  start up?
• Are we ready to go to the next stage?
• Initial Screening - Should we look closer at
  investing?
• Due Diligence - Should we invest now?
• Ongoing tracking planning - Is the venture on
  track?
• External review - What is the health of the
  venture?

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The Bell-Mason Diagnostic

• Space Twelve standard dimensions characterize a
  venture (a chapter of High Tech Ventures)
• Time Four, well-defined stages of company
  development with 7 sub-stages of product and
  market development
• Quantification Clear, yes/no questions (i.e.
  rules) incapsulate knowledge for evaluating a
  company
• Visualization a relational graph shows company
  position

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12 Dimensions of Analysis
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Four Stages of Growth
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Time Four Stages of Growth
Overview
IPO
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Outcomes of stage-to-stage transition
Stage

• Move to the next stage
• Loop within a stage by receiving more funds
• License technology or product for funds to
  complete the stage
• Return to an earlier stag, finish requirements
  (e.g. redesign product or address a different
  market)
• Acquisition by or merger with a stronger company
• Cease operations

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Stages and sub-stages of a Venture

• Concept I 0-? Months
• II Seed (Plan the Company) 3 - (6) -12
• III Product Development 6- (23) - 37
• Hire and Plan, IIIa 0 - (3) - 6
• Design and Build, IIIb 4 - (14) - 24
• Alpha (internal) Test, IIIc 1 - (3) - 5
• Beta (external) Test, IIId 1 - (3)- 5
• IV Market Development 2 - (3) - 4 years
• Calibrate Market, IVa 3 - (6) - 9
• Market Expansion, IVb (mkt. beta) 6 - (9) -
  12
• Steady-State Operation, IVc 12 - 18
• Steady-state Company ...

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BMD Checklist Questions Scoring the "Ideal"

• Heuristic -- It has been determined (and verified
  by numerous experiments in software engineering)
  that by using a method of inspection whereby one
  or more persons "walk through" another person's
  programs, fewer errors occur in the resulting
  product.
• Rule -- Engineering must have a design review
  process which includes code inspection or code
  walk-throughs.
• BMD Question -- Does engineering have a design
  review process which includes code inspection or
  code walk-throughs?

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BMD Staged Evolution of Questions

• Concept -- "Does the company have evidence of
  product possibilities, given the technology, that
  customers are likely to buy?"
• Seed -- "Does a simple product specification
  exist with features and functions that can be
  presented to potential users?"
• Product Development -- "Are an appropriate number
  of beta systems (3 for large systems, gt20 for
  mass marketed software) operating in real user
  environments with users satisfied and testifying
  that the product exhibits unique capabilities
  and/or significant performance and/or
  performance/price benefits?"

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Evolution of the "Ideal" State at Each Stage
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Business Plan at Concept Seed

• I. CONCEPT
• 6-10 page plan for technology, product, market
  and development of formal business plan completed
• plan successful in raising Seed Stage
  financing
• II. SEED
• 20 - 30 page formal business plan produced,
  with 8 key components
• Verifies and refines assumptions from
  beginning of stage
• Funding requirements and milestones based on
  product development schedule
• All key risks identified, evaluated and
  rationalized for current plan

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ExamplesA Market Failure A Product Failure
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Ovation At Product Introduction
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An Example, Ovation

• Founded 1982
• Funding 6.8 million
• Product Ovation, to be sold for 495. Next
  generation integrated software with word
  processing spreadsheet, database management, and
  communications.
• Target Market Fortune 1000 volume corporate
  purchase
• Outcome Chapter 11, October 1984 --- having
  won product of the year as "vaporware"

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Analytica Market Development
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An Example Analytica

• Founded 1982
• Funding 8 million
• Product Reflex, to be sold for 495 Next
  generation microprocessor software -- relational
  database with integrated, easy to use analytical
  tools
• Target Market Fortune 1000, volume corporate
• purchase, departmental orientation (eg. sales)
• Outcome Distress acquisition by Borland 10/85

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Venture Life Cycle for e-Ventures
Ventures
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Stimulating New Companies
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Encouraging New Ventures

• Understand the critical factors (people) that
  create wealth --- not just those that store it or
  move it around
• Reduce and eliminate bureaucracy
• Some examples SJ Center for Software
  InnovationBoulder Tech Incubator , The
  Corporate Incubator copiers to
  consultants Teknikron Singapore Industrial
  Development Japan's MITI
• Informationalization ala Davis Davidson's 2020
  Vision

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Exogenous Effectors for Each Dimension
Reasonable expectations, patience,
Tech workforce, sub-contractors, components
Market, infrastructure for "complete" product,
partners, strategic alliances, PR, etc.
Competitive Products, co-components
Customers, sales personnel, channels to
international mkt.
Eng, sci., tech, tech svcs, univs, other co.s,
consultants
Trained pool of gen. mgrs successful "role models"
Trained personnel to hire, area-specific
consultants
Acctng, legal, financing infra- structure
BOD with Industry, market, product, engineering,
financial experience
Market
Cash financing experience, "patience"
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MITI Role in Establishing Industries

• I. Development of a domestic Japanese industry.
  a. Market control. Imports limited essentially
  to zero. b.Borrowed technology c.Vertical
  integration of most manufacturing d. Major
  investments.
• Establishing an export market base. a. The
  establishment of world-wide sales
  organizations. b. Researching and understanding
  of the foreign markets. c. Establishment of a
  reputation for quality and reasonable prices.d.
  A limited focus, especially in those markets less
  attractive to domestic manufacturers.
• III. Major market penetration. a. Cooperation
  among the Japanese companies with respect to
  models, prices, and markets. b. Focus at the
  mainstream of the foreign market. c. High
  inventories because of poor markets in Japan,
  i.e., an export push at any cost is necessary and
  expedient. d.Extremely low prices to the mass
  market to gain market share
• IV. Market exploitation. A period marked by
  higher prices (e.g. TV sets)

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Does it work?
100
90
80
70
60
50
Companies that scored 75 or over had a business
success rate of 95
Averaged Diagnostic Score
40
30
20
10
0
0
5
10
15
20
25
30
35
Company
Source Nanyang Mgmt PLC Ltd
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What do you need to do?What are some common
flaws?
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Business Plan Flaws

• Unrealistic Plans
• Doing Research and Calling It Product Development
  
• Losing Touch with Reality
• Lack of a Sustaining Technology or Product
• Questionable Motivation (Chronic Entrepreneur,
  Getting Even, Getting Rich, Lacking a Sustaining
  Product)
• Skipping the Seed Stage
• Multiple Agendas
• Two or More Start-ups in One ... doing too much
• Writing a plan while part of another organization
  is immoral and potentially illegal!

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Business Plan Seed Questions

• 4.1 Has the five-year business plan (about 20-30
  pages sans financial appendices) been updated,
  expanded, and confirmed as a result of the seed
  stage? The business plan has a five-year strategy
  and direction, but primary emphasis in planning
  should be for the next 24 to 36 months, with
• executive summary with vision, mission and
  business statement
• technology uniqueness for a sustaining company
• product concept (what) with critical areas to
  explore and competitive scene
• rationale (why) in terms of customers and
  applications
• gross estimates of target market (who)using a
  simple "market map" to identify the channels of
  distribution (how sold), including some
  consideration to international
• key milestones in product development for the
  various functions
• year financial plan, including product cost with
  first two years in detail by quarter
• resources estimates in 's, time and people
  (including their biographies)

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Business Plan Seed Questions -2

• 4.2 Does the plan indicate a sustainable company
  and initially verify the assumptions explored in
  seed? (e.g. is technology implementable, is the
  engineering plan valid, why will customers buy?)
• 4.3 Does plan refer to a detailed plan for
  Product Development Stage III (objectives,
  schedule with milestones, and people
  resources)?
• 4.4 Are the product development times, product
  cost and performance, and external risks (e.g.
  component or process) clearly identified and are
  they accounted for in the funding of the plan?

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CEO Seed Questions

• 7.1 Has the CEO led the team to successful and
  timely completion of the principle objectives of
  the Seed stage proof of technology uniqueness,
  clear translation of that uniqueness to the
  development plan for the product and a successful
  financing?
• 7.2 Has the CEO been successful in
  attracting/recruiting key employees and Directors
  for the Board?
• 7.3 Is the CEO a leader and team builder across
  departments and can he/she lead and manage the
  team?
• 7.4 Has the CEO understood and resolved the
  content, scheduling and management
  interdependencies of engineering and marketing in
  the early phases, and manufacturing and sales in
  the later stages?
• 7.5 Can the CEO function actively as company
  missionary in pre-selling, negotiating strategic
  alliances, and co-development partners during
  Product Development?

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CEO Flaws

• Low Energy, Low Intelligence, and/or Low
  Integrity
• Inadequate Hiring Skills (and Inability to
  Attract an A team)
• Poor Managerial and Team Building Skills
• Inability to Build a Team or Keep a Team Together
• Inability to Sell the Company to the Financial
  Community (Failing the Short Socks Test)

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Team Seed Questions

• 8.1 Are the key people on board (core leaders
  who form technology and product development,
  manufacturing if critical processes are required,
  and marketing) functioning as an integrated team
  (6-8 people)?
• 8.2 If innovative manufacturing processes are
  required such as in semiconductor or disk
  manufacturing, is an experienced manufacturing
  leader with a core team of functional specialists
  on board?
• 8.3 Is the team orientation a balance of "do" and
  "manage" , i.e. can each of the members "play"
  several positions on their teams, versus just
  being able to manage players?
• 8.4 Have criteria been established for hiring and
  is there a systematic method in place for
  recruitment?
• 8.5 Is everyone informed about the company via
  effective staff meetings where review, direction
  setting, and problem identification/resolution
  takes place?
• 8.6 Has the team explicitly described their
  desired corporate culture and is it compatible
  with recruiting and the reward structure? A
  corporate culture statement should exist, and the
  benefits and compensation plan should be in line
  with the statement.

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Team and Board Flaws

• A Mercenary Team
• Conflicting Egos
• Lack of Respect --Incompetence in one or more
  groups. Love of each other is not a criterion
  for team members.
• The team falls apart at Concept or Seed because
  of their inability to get along while preparing
  the Business Plan.
• Board of Directors
• An Investor Heavy Board with No Industry
  Experience
• A Board That Runs the Company
• No External Product/Market Review with a TAB or
  CAB

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The End
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Who Are the Users?

• entrepreneurs
• intrapreneurs
• management
• employees
• board
• investors
• bankers
• equipment lessors
• government
• infrastructure

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How A Diagnostic Is Performed

• 1. Review Business Plan and Historical Material
  (1/2 day)
• 2. Select appropriate stage BMD questionnaires,
  and re-read questions prior to the interview (1
  hour)
• 3. Arrange and perform diagnostic interview
  session with CEO and top-level team (1/2 day)
• 4. Analyze and summarize interviews using the BMD
  software for comments, scoring and graphing.
• Produce results package and recommendations for
  company (1/2 day)
• 5. Present results of diagnostic to company (2
  hours)

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Goals of the Bell-Mason Diagnostic

• 1. Understand new ventures, particularly
  start-ups - demystify, turn art into science
• 2. Provide common "ground-rules" or "checklist"
  for analysis, diagnosis and implied prescription
  fora. Entrepreneurs and Intrapreneurs b.
  Engineers and marketeers c. Financial
  community, including venture capitald. General
  business community and academe
• 3. Encapsulate traditional and venture capital
  wisdom in order to improve the start-up process
• 4. Alternative to cases and statistical factor
  analysis (Approach is similar to medical training)

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Goals of the Bell-Mason Diagnostic -2

• To make "new venturing" a science-based,
  factory-like process.
• To provide a method of "new venturing" that is
  as widely acclaimed and reliable as software
  engineering management methodology is in creating
  and evolving new software.
• An entrepreneurial or intrapreneurial venture can
  be started up and run with a very high (gt 50)
  likelihood of success.

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BMD Functions and Benefits-1
Readiness Initial screening of business plan

• Self-diagnosis to aid the entrepreneur or
  intrapreneur
• Quick and accurate means of categorizing and
  sifting business opportunities aids in making
  initial decisions expands the number of
  opportunities to review

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BMD Functions and Benefits-2
In-depth tool for "due diligence"

• Speeds and improves accuracy and thoroughness of
  due diligence
• yields risk profiles in a day
• improves the odds of making good investments

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BMD Functions and Benefits-3
On-going tracking system at key stages in company
development

• Insures position with efficient "early warning
  system" for on-going assessment of
  companiescontinued health and risk profiles aid
  in mid-course correction and assessment of
  additional funding

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BMD Functions and Benefits-4
Standard system for measuring, tracking, and
reporting among management, directors, and
investors

• "Short hand" reporting system to measure business
  effectiveness, manage expectations, and bring
  responsible investors into high technology

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BMD Functions and Benefits-5
System and basis for assisting each venture

• Having a common, way of viewing and measuring the
  key, critical activities, ventures will improve
  through the diagnostic review process.
• Asking the question, often leads to a solution.
• Diagnosis often suggests prescription.

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Benefits of Using BMD at Digital

• 5 million payoff after one month use on a
  single joint, venture
• Improved negotiating position on external deals
• Improvement in quality and consistency of
  funded ventures
• Decision making time cut from 12 weeks to 6
  weeks
• Increased the number of opportunities reviewed
  by a factor of two, while increasing depth of
  analysis
• With consistent reporting scheme, report
  generation time is reduced to 1/2 hour versus 2
  hours

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Benefits of Using the BMD at Digital - 2

• A standard methodology reduces learning time
  for new personnel
• A standard methodology allows a "learning
  curve"
• A standard methodology reduces dependence on
  individual artistry and is repeatable with
  different people
• Decisions are firmer and measurable (e.g. a
  "no" is not a "maybe" ... "maybe" deals are tied
  to specific action items)
• Automatically builds a database of companies,
  ventures, and projects funded over time, allowing
  automatic tracking and down-stream analysis

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Benefits of Using BMD at Philips

• It is likely to have a very high payoff for a
  single venture. For example, Digital had a 5
  million payoff after one month use for one joint,
  venture.
• Improved negotiating position on external deals
• Improvement in quality and consistency of
  funded ventures
• Decision making time cut from 12 weeks to 6
  weeks
• Increased the number of opportunities reviewed
  by a factor of two, while increasing depth of
  analysis
• With consistent reporting scheme, report
  generation time is reduced to 1/2 hour versus 2
  hours

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Benefits of Using the BMD at Philips - 2

• A standard methodology reduces learning time
  for new personnel
• A standard methodology allows a "learning
  curve"
• A standard methodology reduces dependence on
  individual artistry and is repeatable with
  different people
• Decisions are firmer and measurable (e.g. a
  "no" is not a "maybe" ... "maybe" deals are tied
  to specific action items)
• Automatically builds a database of companies,
  ventures, and projects funded over time, allowing
  automatic tracking and down-stream analysis

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Benefits of Using BMD

• It is likely to have a very high payoff for a
  single venture. For example, one large company
  saw a 5 million payoff for one joint, venture.
• Improved negotiating position on external deals
• Improved quality and consistency of funded
  ventures
• Decreased decision making time (from 12 weeks
  to 6 weeks)
• Increased opportunities by a factor of two,
  while increasing depth of analysis
• Decreased report generation time (1/2 hour
  versus 2 hours) with a consistent reporting
  scheme

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Benefits of Using the BMD - 2

• Reduced learning time for new personnel
• Increased quality and decreased times via
  "learning curve"effect
• Reduced dependence on individual artistry
  (results are repeatable with different people)
• Measurable and firmer decision making (e.g. a
  "no" is not a "maybe" ... "maybe" deals are tied
  to specific action items)
• Potential for improved performance via
  downstream analysis on ventures that use BMD

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How Are Diagnosticians Trained(Learn by doing)

• A two-day, workshop-type training session
• Workshop includes presenting the staged, start-up
  model and the dimensions being diagnosed
• View "role playing videotape" to understand
  scoring and use of diagnostic and evaluation
  software
• Perform 1-2 diagnostics with a trained team