ELEC4445 Entrepreneurial Engineering

Introduction

Entrepreneur: derived from the French words entre (between) and prendre (take) – is, in its most general sense, a person who creates or starts a new project, opportunity, or venture.

ELEC4445 offers students an insight into the world of business and entrepreneurs. It attempts to equip students with the basic knowledge and terminology to seize opportunities that will present themselves over the course of an engineers career. The course is taught through a series of lectures and guest lectures all of which are entertaining and extremely informative.

France loves this word so be familiar with this work. Pertinent = having a clear decisive relevance to the matter in hand

2009 Guest Lectures

• The Silanna Pty Ltd / François Ladouceur
  • Extremely interesting hearing about aspects concerning a well-funded extremely high-tech start-up from the perspective of a founder
• Summertime winebar / S. Scheeler
  • Recount of starting a winebar in England. Interesting to hear the level of market analysis and how detailed exit strategies can be.
• Better Place – Guy Pross
  • Another interesting recount about a well-funded start-up from the perspective of a start-up employee. A great deal of insight into how employees can have the start-ups vision instilled into them.
• IP: A primer for the entrepreneur / P. Lightbody
• Protecting your IP: a CTO perspective – J. Katsifolis
• Start-up life / Nick Cuevas
  • Interesting recount of a grad working for a small start-up company.
• Venture Capital / Tristen Langley
• 9Legal aspects of entrepreneurship / Rob McInnes
• Art in Intellectual Property / Dominik Mersch
  • Bloke from Danks st redfern talking about moving from engineering into art market. Interesting recount and discussed alot of issues relating to customer service and sales.
• Scouting startups / S. Duvall

Quizs

Mid session quiz is worth 25%! Here are sample responses from 2008/07

Film: Riot - on!

Introduction:

The year is 2000 and investors are going crazy about a new mobile phone company called Riot Entertainment. Many high profile companies, like Nokia, invest millions on this unknown firm. Two years later, when all the money has been spent and the company is bankrupt, the fun is over. What happened?

About Riot-E:

Riot-E Riot Entertainment Ltd, was a Finnish media company, focused on SMS content mobile phone games that, despite 20 million euros in venture capital invested in them by corporate giants like Nokia, News Corporation and The Carlyle Group, went bankrupt within two years.

Riot Entertainment managed to create a very positive public image. It seemed as if it had everything going for it: Investors with very deep pockets, relationships with top media brands of the world, contracts with large operators, an extensive worldwide gaming network, a very dynamic public image and worldwide presence. They were possibly the first company to offer highly branded mobile games and worldwide online gaming, years before the mainstream could even dream about such services.

They spent money on refurbishing an exclusive four-storey office with gaming rooms, sauna and a theater for 50 people. They built the first games from scratch and recruited 100 people in one summer, and the almost 24/7 workforce was nourished by daily breakfasts and frequent parties.

On July 4 2001, RIOT-E’s pay-per-download service had attracted close to 200,000 downloads of X-Men characters and images by subscribers to Japan’s Big Three operators. On July 16 2001, Riot-E announced that it "will develop interactive games for The Lord of the Rings fans and gaming communities"

The creditors were out 3.2 million euros. Hewlett-Packard and IBM did not get their leasing fees, BT Ignite ended up providing broadband services without compensation, Hertz will not be getting its car leasing fees, Nokia Ventures with 25 percent ownership, and Softbank UK Ventures with 15 percent ownership had nothing to show, operators in the Philippines (Global Handyphone), Italy (Telecom Italia Mobile – TIM), Spain (Telefonica) and Finland (Radiolinja) and the landlord is missing 157,000 euros worth of rent.

The company was such a spectacular failure that it was the subject of the award winning documentary Riot On!.

Company slogan: "We don't make games, we create riots."

Analysis of Riot-E

Riot-E demonstrated a number of key concepts surrounding the entrepreneurial process. The first was the value of a good sales force and clever marketing. Riot-E was able to obtain large investments from reputable companies through clever negotiation and manipulative sales techniques, primarily through the venture leader and founder NAME HERE. Riot-E was also able to generate substantial hype/interest in their venture and products through clever and viral marketing without having really produced any products. The founders of Riot-E were charismatic and possessed natural sales/marketing skills but unfortunately lacked other key skills required to transform the venture into a profitable business.

1. Riot-E lacked a clear business plan: During the initial pitch the founders used a crude business plan that contained some lofty ideas but no solid details on the direction of Riot-E. The business plan was not given any thought after the initial rounds of investment were secured. The founders of Riot-E didn't expect to receive the funding for their venture and once they did lacked the direction to manage the resources properly. If Riot-E had a more focused approach and business model it is possible that the venture would have been realised as a waste or could have produced some healthy profits.
2. Riot-E lacked management structure and a good team: The founders of Riot-E lacked the necessary skills to manage such a venture and when the investors called on Riot-E to boost the number of staff they selected employees very poorly. Riot-E hired family and friends into positions they did not have adequate qualifications to hold. Riot-E also grew they're workforce so quickly and irratically that the management structure was repeatedly changed without explanation or justification to the companies employees
3. Riot-E did not equate performance and salaries: The management of Riot-E essentially paid themselves and rewarded employees despite the current success of the business. Expense accounts, travel allowances and salaies were not monitored or managed. As a consequence alot of funds were wasted and lost.

Film: Enron- The Smartest Guys in the Room

http://thepiratebay.org/torrent/3835131/Enron_-_The_Smartest_Guys_In_The_Room.avi

this may help ...... lol

Introduction

Based on the best-selling book of the same name by Fortune reporters Bethany McLean and Peter Elkind, a multidimensional study of one of the biggest business scandals in American history. The chronicle takes a look at one of the greatest corporate disasters in history, in which top executives from the 7th largest company in this country walked away with over one billion dollars, leaving investors and employees with nothing. The film features insider accounts and rare corporate audio and video tapes that reveal colossal personal excesses of the Enron hierarchy and the utter moral vacuum that posed as corporate philosophy. The human drama that unfolds within Enron's walls resembles a Greek tragedy and produces a domino effect that could shape the face of our economy and ethical code for years to come.

Synopsis

The film's narrative begins with a profile of Enron founder and president Kenneth Lay, the son of an impoverished Baptist minister who dreamed about being wealthy from a young age. After founding Enron in 1985, he forged extensive relationships with future presidents George H.W. Bush and George W. Bush. However, in 1987, Enron became embroiled in scandal when two oil traders began betting on the oil markets, resulting in consistent and suspiciously high profits for the company. Enron's C.E.O., Louis Borget, was also discovered to be diverting company money to personal offshore accounts. After auditors uncovered their schemes, Lay encouraged them to "keep making us millions", as they were turning profits for the otherwise fledgling Enron. However, the traders were fired after it was revealed that they gambled away Enron's reserves, nearly destroying the company. During the subsequent scandal, Lay denied having any knowledge of the schemes of Borget and the traders.

Lay hired new C.E.O. Jeffrey Skilling, a visionary who proposed that Enron trade energy like stocks and bonds. Skilling joined Enron on the condition that they utilize mark-to-market accounting, which allowed the company to book potential profits on certain projects immediately after the deals were signed, whether or not those projects turned out to be successful. Therefore, Enron could subjectively give the appearance of being a profitable company even if it wasn't. Inspired by one of his favorite books in Harvard Business School, The Selfish Gene by Richard Dawkins -- which suggested that humanity survives by genetically passing on greedy and competitive traits -- Skilling established a Performance Review Committee at Enron that graded employees and annually fired the bottom fifteen percent, who were deemed unsuitable for the company's objectives. This created a highly competitive and brutal working environment at Enron. Skilling also changed his nerdy appearance, physically transforming himself into a bold, youthful face of Enron; he also took part in extreme sports.

At Enron, Skilling hired an inner circle of lieutenants that enforced his worldview inside the company, known as the "guys with spikes." They included J. Clifford Baxter, an intelligent but manic-depressive executive who was closer to Skilling than anybody else at the company; and Lou Pai, the C.E.O. of Enron Energy Services, who became a legendary figure within Enron for his ruthlessness, referred to by Skilling as "my ICBM." Pai was also notorious for using money from Enron shareholders to feed his obsessive habit of visiting strip clubs, and for allegedly inviting strippers into his office and onto the Enron trading floor. Pai abruptly resigned from EES with $250 million, soon after selling his stock and divorcing his wife to marry his girlfriend, a stripper. Despite the amount of money Pai had made, the divisions of Enron he formerly ran lost a total of $1 billion, a fact covered up by Enron. Pai later used his money to buy a large ranch in Colorado, and became the second-largest landowner in the state.

With the impressive bull market brought on by the dot-com bubble of the late 1990s, Enron saw its stock skyrocket. As it became increasingly successful, Enron sought to beguile stock market analysts by meeting their projections. Enron executives also pushed up their stock prices and then cashed in their multi-million dollar options in a process called "pump and dump." Enron executives and employees became subsequently fixated with the company's stock prices. Enron also mounted a public relations campaign to portray itself as a highly profitable and stable company, even though Lay and Skilling were concealing the fact that many of the company's worldwide operations were performing poorly. One of the company's biggest failures was the construction of the Dabhol Power Plant in India, which Enron built to defy the rival energy companies' fear of investing in India. However, Enron was forced to abandon the plant when it turned out that India couldn't afford the power it was producing, losing $1 billion. Enron also attempted to use broadband technology to deliver movies on demand, and also "trade weather" like a commodity; these ambitious initiatives, however, also failed.

By this time, stock market analysts were so mesmerized with Enron's profits that they began to uncritically believe everything the company told them. If an analyst proved to be skeptical about the company's profits and didn't give positive buy-recommendations, Andrew Fastow, Enron's chief financial officer, would pressure their employers to fire them. This was done to Jon Olson, an analyst for Merrill Lynch.

Analysis of Enron:

Too much for this page: Check out wikis entry [[1]]

The Entrepreneurial Revolution

Creative destruction

Creative destruction is the colourful expression introduced by the economist Joseph Schumpeter to describe his view of the process of industrial transformation that accompanies radical innovation. In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power.

The Entrepreneurial Process

Definition

Entrepreneurship is the practice of starting new organisations,particularly new businesses

• It results in: The creation, enhancement, realisation and renewal of value.
• It is based on: The creation and/or recognition of opportunities followed by the will and initiative to seize those opportunities.

• It requires: A willingness to take personal and financial risks.

Elements of a Venture

1. Opportunity: The Entrepreneurial processes is opportunity driven. Opportunities are more likely to be available in markets which are imperfect, that is, there is change and discontinuity. Market demand, market structure and size are helpful indicators to determine the level of opportunity available.
2. Team: Without a solid team and strong leader the new venture is almost certain to fail. Leaders should build entrepreneurial culture, direct the venture and exhibit resilience in times of distress. “In the world today, there is plenty of technology, plenty of entrepreneurs, plenty of money, plenty of venture capital.What's in short supply is great teams.Your biggest challenge will be building a great team.” – George Doriot
3. Resources: Resources are an element to be controlled and are not a driver of the process. Four basic types of resources Financial, Assets, People and Business Plan.

Leading Practices

• Management:
  1. Collaborative decision making
  2. Balanced and competent board of directors
  3. Delegate responsibility
  4. Create a management structure and treat it carefully
  5. Focus on finance and marketing operations first
  6. Calibrate and adapt strategies regularly
  7. Involve board of directors at strategic inflection point
• Marketing:
  1. Deliver products/services perceived at highest quality and pace setting
  2. Invest in a sale force
  3. Develop a product/service platform rather than diversity.
• Financing:
  1. Link long-term objectives to exit strategy
  2. Use financial vehicles that retain voting control
  3. Use financing willing/capable to increase future participation
  4. Anticipate multiple rounds of financing
  5. Selectively grant employees stock-options in order to retain voting control
• Planning:
  1. Prepare detailed plans for 12-24months in advance
  2. Link management compensation to actual vs. planned performance
  3. Share actual vs. planned performance data with employees
  4. Plan to be industry best

Opportunities Recognizing and Screening

The analysis of the opportunity is the starting point of any new venture because:

• The business strategy and business model derives from the nature of the opportunity;
• The financial and spreadsheet analysis derives from the business model which itself derives from the nature of the opportunity;
• The valuation of the company and its ownership distribution (who owns the business ultimately) also depend on the nature of the opportunity.

Sea Changes

We look for ideas that will change the way people live or work– Arthur Rock, Investor

The best place to start seeking to identify those ideas in a macro sense is to identify significant sea changes that are occurring or will occur i.e. Technology shifts, Market shifts or Societal shifts.

Window of Opportunity

The ability to recognise a potential opportunity when it appears and its timing is critical.

Opportunity Criteria: Market

Criteria	High Potential	Low Potential
Product/Service	Change the way people live and work	Incremental Improvement
Market Type	recurring revenue, identified, protected	unfocussed, onetime revenue
Customer	Reachable	unreachable through regulation or loyalty
Value Added	High, enable advance payments	Low,minimal impact on market
Product Life	Long	Short
Market Structure	Imperfect	Mature, concentrated, declining
Market Size	Massive	unknown, insufficient
Market Growth	HIGH	LOW/declining
Market share attainable	20% or more	less than 5%

Opportunity Criteria: Strategic Differentiation

Criteria	High Potential	Low Potential
Degree of fit	High	low
Team	Best in class	B team
Service management	Superior service concept	perceived as unimportant
Timing	Rowing with the tide	Rowing against the tide
Technology	Unique, Protected	Many substitute
Flexibility	Able to adapt	slow
Pricing	At or near leader	Underpricing competitor
Distribution Channel	Accessible	Unknown, unplanned
Room for Error	Forgiving	Rigid

Opportunity Criteria: Harvesting Wealth

Criteria	High Potential	Low Potential
Value-added potential	High	Low
Price/Earning Ratio	20+	<5
Exit mechanism	defined together with options	undefined, illiquid
Capital market context	Favourable valuations, proper timing, available capital, realisable liquidity	Unfavourable, credit crunch

Opportunity Criteria: Competitive Advantages

Criteria	High Potential	Low Potential
Fixed and variable costs	Low	High
Control over costs, prices and distribution	Moderate->Strong	Weak
Barrier to Entry
Proprietary Protection	Have or can gain	None
Lead time/response	Slow or unaware competition	Unable to gain edge
Legal, contractual advantages	Exclusivity, proprietary	None
Contacts and networks	Well developed, accessible	Crude, Limited
Key people	A-grade experienced and well-connected team	B grade losers

Opportunity Criteria: Economics

Criteria	High Potential	Low Potential
Time to break even	1.5-2yrs	4yrs+
ROI potential	25%+	<15%
Capital Investment	Low	Very High
IRR Potential	25%+	<15%
Free Cash Flow	20% of sales	<10%
Sales Growth	15-20%	<10%
Gross Margin	40%+	<20%
After Tax Profit	10%	low

Entrepreneur and the Internet

From a business point of view, the internet can be viewed as a tool or more generally as a new business environment. This new environment – or frontier –is still immature and the internet marketplace is moving very quickly. In that process new business models and business types are created continuously. As a general rule, e-commerce can be divided into three groups:

1. Business to business (B2B)
2. Business to customer (B2C)
3. Internet participants -> businesses whose business is about the internet ie service, software and hardware providers.

Internet Business Models

• Transaction Fee: Companies charge a few for services rendered.
• Advertising model: Vistors are attracted to the website for the content but pay now fees. Advertisers pay fees to site operators to reach the demongraphic group that frequent the site. Google profits through this method using content targeted advertising. Were users interests are specifically targetted by displaying ads which are relevant to the user.
• Intermediary: business acts as an intermediary bringing together buyers and sellers ie ebay.
• Affiliate model: Websites can direct visitors to other pages for a fee
• Subscription model: Websites that charge monthly/annual fees for their services.

Internet business support

The internet plays a significant role for businesses that are not strictly “internetcentric”. In fact, many traditional business tasks can be supported (supplemented?) by a web presence (their own or other’s), namely:

• Customer service/support
• Technical support
• Data retrieval
• Public and investor relations
• Selling products and services
• Financial results

Venture team and Resource Requirements

Basic Principles

The formation of venture teams is idiosyncraticand there seems to be a multitude of ways in which venture partners come together. Keep in mind the following basic points:

• Team members will contribute high value if they complement and balance each other and in particular the lead entrepreneur;
• The process of evaluating and deciding who is needed, and when, is dynamic and not a one time event.
• Filling the gap: try to answer the following questions:
• What are the key tasks? What distinctive competence are needed? What external contacts are needed? What should be outsourced? How much can the venture afford to pay?
• External vs internal: Is the need specialised, onetime, part time? Is it peripheral or critical to the business? Is the need for secrecy critical?

Forming a team is an unscientific, occasionally unpredictable and frequently a surprising exercise. Be aware of the following:

• Definition of roles: Maintaining a loose, flexible and flat structure is desirable in the initial phases of the business mainly to avoid duplication and minimise responsibilities. This structure will need to evolve, though.
• Value, goals and commitment: An early definition of the goals and expectations is fundamental. The notion of “psychological contract” can be of help when thinking about these issues.
• Agree to disagree: Define how disagreement will be resolved, how team members can leave the team or take time off, how future contributions will be valued, etc.

Most of these points fall under the concept of managing expectations.

Rewards and Incentives

Rewards and incentives are generally difficult subjects to discuss. Although if parties are open to discussions and simple, effective reward schemes are put into place they can become an excellent management tool. Remember that keeping track of percentage ownership is not as important as the success of the company.

The following are some general guidelines as to who to share rewards and incentives with.

• Share the wealth with those helping creating it:
  • The founders
  • The executives
  • Financiers – bank, VCs, angels, etc. (BTW, no choice here either...)
  • Directors
• Rewards are attributed subject to performance:
• Work backward from the predicted value of the business at harvest time(trade sale, IPO, stock swap, etc);
• Avoid rewarding passive/aggressive participants

Valuable Contributions to the venture include

1. Ideas
2. Business plan
3. Commitment and risk: "Sweat equity"
4. Skills
5. Responsibility

Reward Systems

Dividing the ownership/rewards among the founding team is an early critical tasks.The following points are to be kept in mind:

• What is perceived as rewards varies from team member to team member and depends on values, personal goals, aspiration, age, etc.;
• The reward systems should not appear to be discretionary/arbitrary;
• The rewards available vary over the life of the business;
• The way the business attributes its rewards will determine its credibility with investors because it reflects the commitment by the venture team. It is also often considered as a litmus test for the venture team;
• An appropriate reward system is one that continuously reflectperformances;
• Ideally, you want differentiation, performance and flexibility.

Stock Option Program

It is particularly efficient to attract early contributors (founders, key executive, key technologist, etc). It most common variant is the Californian model:

• Each key players is offered a given amount of stock options (right to buy shares at a pre-established price often set at $0)
• These options are linked (imperfectly) to performance through a vesting period i.e. that the right to buy can only be exercise periodically over a pre-established period. Typically, once a year over four years.

This basic model can be tweaked in various ways:

• A departing key player can be force to sell back is shares to the company if he departs early
• The vesting period might be weighted towards the last year or two of the vesting period

Obtaining Venture and Growth Capital

Basic Principles

Three central issues should be considered when beginning to think about obtaining
capital:

• Does the venture need outside capital?
• Do the founders want outside equity capital?
• Who should invest? (who can add value)

The question should always be considered in a context where:

• Capital can be injected (invested) as debt or equity;
• The earlier the capital is invested, the more costly it is;
• Capital injection is always a trade-off (equity, control, cash-flow);
• Timing is crucial – months are required to raise capital

Financial Math

Some terms

• Present Value (PV) ->value of asset at current point in time
• Future Value (FV) - > value of asset at the end of forcast

Simple Interest

$FV = PV + PV.r = PV(1+r)$ where r is the interest rate

Compound Interest

$FV = PV(1+r)^n$ Where r is the interest rate per period and n is the number of periods during which interest is paid.

Present Value

What is the present worth a payment received in the future? It is the amount you would have to invest now (PV, present value) in order to realise an amount equivalent to the payment (FV, future value).

$PV = \frac{FV}{(1+r)^n}$

Net Present Value

The NPV involves the discounting of cash flows to determine the value of a project in the present value terms. It requires

• Discounting all expected (present and future) cash inflows and outflows;
• Using an appropriate discount rate (can be problematic);
• Summing all contributions;

Mathematically this is expressed as follows

$NPV = \sum^n_{i=1}\frac{F_i}{(1+r)^i}-C_0$

where $F_I =$ cash flow generate in year i

r = interest rates

n = life of project

$C_0 =$ initial cost

If the net present value is positive then the investment is viable, it will add value to the firm. If it is negative is is considered not viable and will detract value from the firm. This does not give an indication of whether it is a good investment just whether it is possible.

Internal Rate of Return

One approach would be to define a (hypothetical) rate of return – called internal rate of return – that would be equivalent to the value accrued by undertaken the project. This can be done by saying that this IRR is the interest rate [discount rate] at which the NPV of the project is 0 – mathematically:

$0=\sum^n_{i=1}\frac{F_i}{(1+irr)^i}-C_0$

Our criteria then becomes: accept a project if its IRR is greater than the cost of capital [discount rate, interest rate], or reject the project if it is less.

Entrepreneurial finance

Key Points

• Cash and cash flow: Cash is king, cash-flow is queen of the entrepreneur’s kingdom.
• Timing: Start-ups are driven by opportunities which are here and now. Time is compressed and financing period are short.
• Capital market: Raising funds for start-ups is done in a imperfect market when personal contact are privileged. In contrast, corporate financial market are mature, predictable and rational.
• Emphasis on deal: Entrepreneur should not look for the best deal in financial terms (cost of money, pay back time, etc.) but should seek the best value-add backer – money, contact, experience, mentoring, etc.
• Raising capital: Maximising the amount of capital raised is not necessarily the best as it can increase risk. Staging the capital investment is probably wise when coupled with milestones and results. Capital can even be refused when it is believed that the valuation will raise substantially;
• Downside consequence: Such consequences can be devastating for entrepreneurs. A situation rarely seen in large corporate environment.
• Valuation methods: Established company valuation method (e.g. discounted cash flow) are mostly irrelevant in the context of start-ups.
• Goals: Creating value in the long term rather than maximising quarterly revenues should be prevalent in start-up environments.

Terms

• Free cash flow (FCF)
• Time until cash runs out or simply time to OOC (Out Of Cash)
• Time until close of financing or simply time to TCC (Time To Close)
• Burn rate: amount of cash “burned” per week/month/quarter
• Liquidity event -  point in time where investments into a start-up can be realised in monetary terms. Either through an acquisition or IPO.

The Deal: valuation, structure and negotiation

Price Earning Ratio

Price earning ratio is simply the price of each share over the companies earning per share.

$\frac{price}{earnings}$

Price earnings ratio is used to evaluate whether a company is correctly valued. Companies however can only be reasonably compared using P/E ratio if they are exist in the same industry. High P/E can be indicative of the market's predicted growth for the firm. Ie a high P/E can mean that the company is expected to grow. High tech and medical usually have high P/E where as banking and utilities have low P/E 30 vs 10.

VC Method

1. Based on your business plan, estimate the company net income (earnings)in its mature phase (e.g. 3 or 5 years after creation); 
2. Estimate the appropriate P/E ratio by examining similar companies in a similar environment;
3. Calculate the value of the company by multiplying the net income by the estimated P/E ratio. This will yield the estimated value of the company in its mature phase;
4. Calculate the present value of the company. VCs will use discount rate of 35–80% because of the risk involved;

From the present value of the company the Percentage Ownership can easily be calculated from  the following $\frac{Investment}{Present Value}$

Important Points

Good deals :

• They are SIMPLE;
• They are based on trust rather than legalese*;
• They align the interests of players; 
• They allow information to flow freely;
• They are not patently unfair to any specific player;
• They are robust i.e. do not crumble down under small perturbation;
• They are organic i.e. they allow variations around a theme;
• They make raising further capital “easy”;

Rapid Growth and Troubled Times

Organisation modes

The core management mode – or style – is dictated by the number of employees i.e. not by sales, number of customers, P/E ratios... The number of employees is representative of the complexity of the management tasks.

1. R&D phase –!essentially management free except perhaps when the development dominates completely – R&D
2. “Doing” phase –!Between 1–25 employees; the main role of management is to stimulate and obtain the best out of the employees creative/productive capabilities mostly on an individual basis;
3. Managing phase – Between 25–100 employees; management main responsibility is now to focus on goal achievements through team-work and its tasks is one of creating the right context and tools;
4. Managing managers – Greater than 100; the company must now be run along strategic lines and managers must be given directives on how to achieve this in their area of jurisdiction;

Corporate culture

The climate of an organisation – its corporate culture – has a great impact on its performance. This climate is created by the expectation of employees and by the practices/attitude of the management. Aim for:

• Clarity and simplicity – make the organisation structure clear, structured, concise and transparent so that everyone understand his/her role;
• Standards – make sure that management expect high-standards and provide the mean to reach those (encouraging rather than punitive);
• Commitment –!make sure that commitment to goals and objectives are high priorities;
• Responsibility –!Responsibility comes with authority should be a leitmotiv; responsibility without authority is a cancer;
• Recognition – emphasis should be on “job well done” rather than “pay for mistakes”

The Destination

Crises

The are non quantitative signals that are precursory of trouble times.

• Inability to produce financial statement on time;
• Change of behaviour of lead entrepreneur (avoiding phone calls, etc.); 
• Sudden change in advisors, accountants, auditors, etc.; 
• Accountant’s opinion that are qualified but not certified;
• Launching of a “big project”; 
• Lower R&D expenditures; 
• Reduction of credit line;

Once the trouble times have started, the following trends may be observed:

• Outside advice is ignored (avoidance is part of human nature);
• Managers have stopped making decision and answering their phone;
• Employees are left in a vacuum – nobody can/is willing to explain apart perhaps to be told that everything's fine;
• Rumours are flying; Inventory is out of balance; Account receivable ageing is increasing; The worse is yet to come;

Bankruptcy

Bankruptcy can be viewed from two different points of view

• Bankruptcy is a legally declared inability or impairment of ability of an individual or organisation to pay their creditors.
• Bankruptcy is a state granted to an individual or organisation under bankruptcy law providing protection from the creditors;

A declared state of bankruptcy can be requested by creditors in an effort to recoup a portion of what they are owed; however, in the overwhelming majority of cases, the bankruptcy is initiated by the bankrupt individual or organisation.

It is important to distinguish between voluntary and involuntary bankruptcies:

• Voluntary bankruptcy is requested by the management of the company (probably on a recommendation of its boards). Following this request, the firm is immediately granted protection from the creditors.
• Involuntary bankruptcy refers to the imposition of bankruptcy onto a company by its creditors. The conditions under which this is possible varies from country to county.

It is important to understand that forcing a company into involuntary bankruptcy is not attractive to creditors and, consequently, bankruptcy is a tremendous source of bargaining power for the troubled company.

Harvesting

There are several principal avenues by which a company can realise a harvest of the value (in total or in parts) it has created:

• Capital cow;
• Employee stock ownership programs;
• Management buyout;
• Merger and strategic alliance;
• Trade sale (aka outright sale);
• Public offering (IPO);
  • An IPO is the ideal vehicle to fund rapid growth as it provides access to large and sustained capital market;
  • An IPO brings the company into the big leagues and enhances its public profile;
  • Due to security commissions (ASIC in Australia, SEC in USA) regulations, it can take years for founders to realise their gains;
  • Disclosure requirements reduces the company operating confidentiality and imposes a high managerial cost for supporting public disclosure, audits and various tax filings;
  • The IPO changes the very nature of the business in that it now must focus on maximising shareholders’ value

IP Notes

Definitions

Background IP - refers to all IP predating the technology license agreement.

Foreground IP - refers to IP gener- ated during the collaborative period.

Patentability

The patent laws usually require that, in order for an invention to be patentable, it must

• be of patentable subject matter, ie a kind of subject-matter that is eligible for patent protection, and has not been previously published
• be novel (i.e. at least some aspect of it must be new),
• be non-obvious to a Person Having Oridinary Skills In The Art (PHOSITA) or involve an inventive step (in European patent law); and
• be useful (in U.S. patent law) or be susceptible of industrial application (in European patent law).

Disadvantages of IP

• Shelving - By purchasing a patent is it possible for a company to “shelve” a given product/process or technology that is perceived as endangering its core business.
• Weaponisation - Patents can be use to hinder or suppress the dissemination of free innovation by using them as legal pressure instruments.

Notes on Silanna

Overview

Silanna is a privately owned technology house that develops and commercialises products and processes in the area of data storage addressing the consumer electronics market. Silanna is a start-up attempting to commercialise holographic storage. Formed in 2006 with Prof Ladouceur contributing heavily during its initial stages. Currently Silanna is based in Brisbane and. is apparently making progress in its research and development

Investors

Silanna is currently privately owned with the majority shareholder an unknown Angel investor who made an initial contribution of 5 Million EURO!!. The remaining minority shareholders have received shares for the time and effort they have expended into the company, sweat equity.

From off hand comments the angel investor is one of the richest men in the world, privately owning food processing companies. He is of German origin and is  a strong believer in private ownership of companies. The unknown investor is a personal friend of the lawyer who helped form the start-up and is not concerned with the outcome of the Silanna venture.

Venture team 

• Legal counsel – Spruson & Ferguson Lawyers, Intellectual Property and Commercialisation
• Business advisor – Steven Duvall (ex-Intel Capital)
• Technology advisers – Prof François Ladouceur, Prof Arthur Lowery
• University collaborator –UCLA, UNSW, UQ
• Investor / banker – Mystery investor

Business Plan

When Silanna was formed in 2006 it hoped to revolutionise the solid state storage market by providing a faster, more durable and cheaper alternative to flash storage. It originally planned to develop the technology and possibly manufacture the devices or licence the technology. Since its inception however the solid state storage market has developed substantially and the limitations of holographic storage developed by Silanna has become apparent, forcing Silanna to re-evaulate its strategies. As the manufacturing of flash storage ramped up its cost has been dramatically reduced, limiting holographic storages ability to compete in terms of price. Holographic storage is also shaping up the be low density storage which limits its usefulness to niche applications. After these limitations become apparent Silanna seems to be heading towards selling its technology to a large semi-conductor manufacturing firm rather than deploying the technology itself.

IP

Silanna is currently developing its own portfolio of IP but a key patent required for the success of their design is held by UCLA. UCLA specifically hold a patent in regards to a polymer and before the company could be successful the rights to use the technology had to be secured.

The licencing agreement with UCLA included points on

• Agreement on background IP licensing terms: upfront cost, royalty rates;
• Negotiated milestone fees (if required by UCLA) for IP usage;
• Defined termination clauses (if required by both parties) ;
• Agreement on a sponsored research program (SRP) goals and objectives;
• Harmonise foreground IP terms with background IP terms;

Exit Strategy

The exit strategy for Silanna is unknown. Due to the nature of the technology and the beliefs of the majority shareholder it is unlikely that Silanna will have an IPO. More likely Silanna will be sold as a trade sale to another company or the technology it produces simply licenced out. If any of the minority stakeholders wish to exit Silanna they will be forced to sell their shares to the majority investor.

Note on Mersch Gallery

Overview

The Dominik Mersch gallery is located in Danks st in Sydney's South. It was founded by Dominik Mersch after becoming dissatisfied with his life as a consulting engineer to large financial and banking institutions. After deciding to pursue his love of Art Dominik embarked on a mericulous strategy to start and develop an art gallery. Extensive market research and planning resulted in Dominik opening an art gallery in Sydney's south away from established players and developing an impressive portfolio of artists and studio.

Dominik Mersch strategy involved running the gallery at a loss for the first two years but has since developed into a profitable business.

Market Analysis

Dominik started his analysis from the macro-level of the Australian economy, looking to determine whether Australians over the next 10 or so years will have disposable income to spend on art works. From there he researched the current Australian art market and how it is structured. Dominik then researched where in Sydney the Art market is located and how many galleries there are. He did this by physically visiting galleries and making notes.

Business Plan

From the results of his research Dominik formulated a business plan and a number of processes which would cover the different aspects of his business

Lessons Learnt

• Be persistent
• Be humble
• Be nice to clients and suppliers
• Stick to your plan - but change if necessary
• Market your niche and brand your business
• Only make the same mistake once...learn!
• Be open to changes -keep your curiosity
• Control, control, control (costs, payments, quality, ...)
• Play to win
• And most importantly: Enjoy what you do!

References

Most of this material is adapted from Prof. Ladouceur lectures and notes