Hakan Ener

Business planning is increasingly under attack. Some suggest that it’s a thing of the past, calling business plans “historical artifacts”. Others continue to believe in it, and they hold national and international competitions in order to identify the best business plans (with prizes totalling $1 million, in one case). In my first post about this debate, I want to share a couple of interesting facts about how deeply rooted business planning is in the history of commerce and business.

As early as two millennia ago, when new traders considered operating along the Silk Road or the Spice Route, they engaged in a very simple version of business planning that shared some common features with what many entrepreneurs do today. They attempted to figure out whether an opportunity in the market would yield a profitable undertaking before they committed themselves to doing it. They took into account fluctuations in prices of goods, costs of inputs, and cost of capital (e.g. interest rates on loans), and evaluated whether the returns would be large enough to justify the perils of making a difficult journey, often in remote and unsafe locations. These basic ideas have not changed much until today.

Business planning became much more sophisticated during the “Age of Discovery” when Europeans began to look for maritime routes to Asia after the Ottomans’ conquest of Constantinople (today’s Istanbul, Turkey). These expeditions were very expensive in terms of manpower, ships, and armaments, which made royal families of Europe reluctant to fund every proposal that was presented to them. They became selective, and began to employ committees of specialists to carry out an in-depth evaluation of each expedition’s potential risks and returns. The financing needed for a large expedition, such as the famous one led by Christopher Columbus, typically required funding from several sources in different European territories. For instance, bankers in Italy provided half of Columbus’s funding while the Catholic Monarchs of Spain provided the rest. In order to explain the proposed expedition to different backers, Columbus circulated a document about the “Enterprise of the Indies” that explained the operational plan and the expected revenues from the expedition. Famously, things did not go according to plan. Nevertheless, this type of planning helped him to secure a deal with the Catholic Monarchs whereby he would be entitled to ten percent of the profits from his expedition.

Taking these deep roots into account, I think it would be foolish to suggest that business planning will soon disappear. Business planning has proven to be a valuable exercise for enterprising individuals for many centuries. The form and structure of business planning may change radically in the future, but the exercise itself is here to stay.

Maybe you’ve never heard of the week-long celebration of entrepreneurship that will take place from November 12 to 16 this year. Perhaps you didn’t know that it has become a global phenomenon, with thousands of activities planned in 104 countries. Now would be a good time to find out about it and make plans to participate.

In 2007 the British Prime Minister Gordon Brown and Carl Schramm, the CEO of Kauffman Foundation (which is the most important private initiative that supports entrepreneurship) launched the Global Entrepreneurship Week (GEW) in order to help entrepreneurs flourish. This involves not only activities for networking and developing new ideas but also making sure that entrepreneurs enjoy the spotlight for a brief time.

Putting the spotlight on entrepreneurs is, to me, the most important purpose of the GEW, because it helps company founders to realize that there is a large community of like-minded people out there. Especially for entrepreneurs who work “alone” (without co-founders) the GEW is a great time to meet others who have made the decision to launch a company, and notice how much they have in common regardless of which industry they have chosen to operate in. Sharing professional and personal tips – such as on how to deal with the ups and downs of building a business – is a core part of the activities. So, if you are interested in becoming an entrepreneur, but haven’t launched a business yet, the GEW is a wonderful opportunity to interact with company founders and understand what it’s like.

To further highlight why we need to celebrate entrepreneurship, just take a look at two astonishing numbers cited in the most recent World Development Report : the first is that there are currently 621 million young people around the world who are neither working nor studying. The second has to do with the number of new jobs that must be created worldwide if we are to maintain the world’s current employment rate (which is less than ideal to begin with): 600 million new jobs will be needed in the next 15 years! This is an enormous task, and can not be left to policymakers alone. So, it’s time to see how the Global Entrepreneurship Week can help.

IESE Business School’s Alumni Reunion will take place in Sao Paulo, Brazil for the first time (1-3 November). So, I thought it would be a good moment to reflect on the work of outstanding Brazilian entrepreneurs.

First, let’s be clear that any entrepreneur who creates a successful business in Brazil deserves praise. It’s remarkable that the country has grown so rapidly in the past decade despite having very challenging regulatory requirements for starting a business: in fact, the World Bank ranks Brazil 121st out of all countries when it comes to the ease of starting a business in 2012 (it’ even more surprising that the country’s overall ranking has not improved relative to 2006).

So, are there Brazilian entrepreneurs that truly stand out globally? Of course; let’s start with the most famous one: Eike Batista (founder of EBX Group). He is the owner of ports, mines, oil wells, and energy installations (did you know that his first job was selling insurance door-to-door?) What makes Batista unique is his ability to create not one but several multi-billion dollar businesses in different industries, all starting from scratch (rather than acquiring existing companies). When you think of successful entrepreneurs elsewhere, you often identify them with one or two companies at most, so Eike Batista’s track record is extraordinary not just for Brazil, but worldwide.

There are many less famous, but equally interesting, Brazilian entrepreneurs. I will just mention two more: thanks to the work of Endeavour and Fast Company in identifying high-potential entrepreneurs, I’ve learned about the fantastic work of Andre Dayan (founder, Vitrogen)  and Alexandre de Sene Pinto (co-founder, Bug Agentes Biologicos).

Andre Dayan’s start-up Vitrogen controls half of the world market for a very interesting product: in-vitro fertilization of livestock, which boosts the health and productivity of animals. Vitrogen was the first start-up in the world to fine-tune the test-tube technology for livestock and commercialize it, which many large companies had struggled to do before. Given the importance of beef exports for Brazil, you can imagine how important this company is for the country.

Away from the hustle and bustle of Sao Paulo and Rio de Janeiro, Alexandre de Sene Pinto’s Bug Agentes Biologicos also controls a large share of the world market for its products and services, which involve the optimal deployment of natural predators (e.g. wasps) to control harmful pests in agriculture. This solution is the only one granted permission for sale in Brazil, which is one of the largest agricultural markets in the world.

Brazil’s outstanding entrepreneurs are very good at tackling the country’s greatest opportunity, which is the effective use of its abundant natural resources. Perhaps the next Apple or Facebook will not come from Brazil, but you can be sure that many world-changing (I mean “real world”) innovations will emerge from this exceptional country.

According to my blog’s analytics service, a reader in Silicon Valley recently visited these pages by searching for the following phrase: What to say to co-founder when the going gets tough? This got me thinking: what kind of difficult problem would get an entrepreneur to turn to the Internet for advice on a delicate relationship with a business partner? Although I will probably not find out the answer for this particular case, I was reminded that co-founder relationships can be the most difficult part of an entrepreneur’s professional life.

A recent book by Noam Wasserman (Associate Professor at Harvard Business School) cites an academic article by Gorman and Sahlman (1989) that reports on a survey of venture capitalists where two-thirds of all troubled ventures’ woes were traced to ineffective senior management, which often refers to a poor collaborative relationship between co-founders. That is a staggeringly high ratio and deserves attention.

Co-founders’ collaboration may begin to break down following problems ranging from differences in strategic vision for the venture to disagreements over each founder’s personal contribution to the company’s success, which “spill over” into disputes over compensation and equity ownership. In fact, many successful entrepreneurs who do an excellent job of creating and growing a business have done very poorly in dealing with such problems. The most striking examples in my view are the fractured relationships between the co-founders of Microsoft (Bill Gates and Paul Allen) and Apple (Steve Jobs and Steve Wozniak). In each case, co-founders that started out as good friends later fell apart. Paul Allen spent several years with Bill Gates at Microsoft before quitting due to health reasons, and Steve Wozniak essentially went back to being a pure engineer at Apple before leaving the company. In both cases, the co-founders had serious misgivings about how the company’s ownership was allocated at the start-up phase and beyond.

While these examples don’t prove that co-founder problems are the most difficult aspect of entrepreneurship for every founder, they do show that technical genius and a good business sense are not enough to make the greatest positive impact as an entrepreneur.

Is a business worth what its founder says it is worth? If you said “No” you have a healthy dose of scepticism. Now, let’s change the question a bit: is a business worth what its founder has convinced investors to actually pay for it? The overwhelming majority would say “Yes.” Then how does Facebook, a $100 billion business as valued by professional venture capitalists soon before its initial public offering, shrink to half of that valuation in a few months when the business remains fundamentally the same?

I find it hard to explain the drop in Facebook’s valuation based purely on financial or economic criteria: the NASDAQ stock exchange index rose about 10% since Facebook’s listing, implying that there is no bubble bursting in the technology sector. Neither have we heard any real news concerning the underlying economics of Facebook’s business model since then: investors already knew that monetizing Facebook’s large user base was going to be difficult in light of the move towards smartphones where the company finds it difficult to earn advertising revenues. So, what changed?

My personal view: the real culprit is that the founder Mark Zuckerberg has started to lose investors’ confidence in the process of taking his company public. The first real sign of danger was when Zuckerberg did not oppose Facebook’s CFO signing off on offering the company’s shares to the public at the highest price point that the underwriting investment banks advised them to consider ($38 per share, which worked out to a company valuation of $100 billion).  That decision helped Zuckerberg to make a clear statement about what he believed Facebook to be worth, but it also violated standard practice in the investment banking industry where underwriting banks prefer to leave some “upside” for the stock price beyond the public offering in order to validate the newly-listed company’s status as an attractive investment.

The IPO pricing decision was accompanied by several actions that raised further concern: many professional investors decided to increase the amount of shares they would sell just before the IPO, more than doubling their sales in some cases. Around that time, Zuckerberg was not showing up at some events where he was scheduled to take questions from potential investors, and it became clear that his shares had 10 times the voting power compared to what most other investors would have, suggesting that he may not be receptive to shareholder demands in his new role as CEO of a public corporation, which is very different from life as the owner of a private business (this is a common issue in Silicon Valley). On the day of the IPO, Zuckerberg chose not to travel to New York for the symbolic act of ringing the market’s opening bell, which only served to distance him from the investment community. A few days after the IPO, some investors were so troubled about reports that Zuckerberg did not fully reveal the potential negative impact of increasing smartphone usage on the company’s advertising revenues that they decided to sue him and the underwriting banks for having misled the public regarding the company’s prospects.

In the past three months since Facebook’s listing, almost $50 billion dollars of the company’s valuation have been wiped off, but Zuckerberg continues to focus almost exclusively on the product and the user experience while doing little publicly to repair the trust that was lost with the investment community and Facebook’s employees, who were also severely impacted as the company’s share price declined.

Trust is such a valuable and fragile asset that a founder should ask before every decision: will I earn and maintain trust by doing what I do today? Carefully answering that question every day is the best way to convince people about the value of a business venture.

Entrepreneurship continues to thrive around the world, even at a time when the global economy is not doing very well. At the same time, entrepreneurs are trying innovative strategies to overcome economic adversity. In my role as mentor to start-up and corporate ventures, I’ve noticed that entrepreneurs are increasingly interested in “hedging their bets” by launching their businesses in multiple countries simultaneously in order to see where sales grow the fastest. For entrepreneurs outside the United States, this inevitably brings up the question “Should my venture establish a presence in the United States?”

This was the question that a Singaporean entrepreneur in the medical-technology field was grappling with recently. At a networking event where we were speaking about his ground-breaking innovation, he was approached by an executive who represented a global electronics manufacturer’s capital venture unit, which was looking to make investments in exactly this type of start-up. At one point, the Singaporean entrepreneur was asked “Do you have an office in the United States?” to which the entrepreneur responded that he was evaluating his options on this point. Then the capital venture executive told him something that helped to clarify his decision instantly – he said: “We only invest in ventures that are carrying out at least part of their research and development activities in the United States, which is where our capital venture unit has its main office.” And that was it: the decision to establish the Singaporean company’s presence in the US was made. The rest was a question of figuring out which state and city to choose, and dealing with the logistics of setting up a company halfway around the world (thankfully, there are good resources provided by the US government and collaborating organizations such as universities / business schools that help to navigate the process).

You may be asking: are there any other reasons to invest in the US besides access to financing? My answer would be: Yes, there are at least two other reasons for it.

First, if you need to hire employees with highly specialized skills, the US excels especially in scientific and technological fields: recently, a fast-growing European technology venture more than doubled its research and development activities by opening an office in Silicon Valley in order to be at the frontier of web-based technologies.

Second, your best customers may turn out to be American. This is especially relevant for entrepreneurs based in small countries or those with slow economic growth. The purchasing power of American consumers and companies is so large that now some ventures are establishing their sales force in the United States before anywhere else in the world (even before their home country!). An online travel reservations company I recently mentored made its first hire (outside the founding team) in order to develop customers in the United States even though its services will be offered in many countries and languages.

Whether it’s for accessing financing, hiring qualified engineers, or getting the first major customer, it’s important for entrepreneurs around the world to think carefully about where to locate their venture. The United States is a very good choice.

When you hear the phrase “Plan B” for entrepreneurs, it typically refers to the idea that founders have to make a radical change in the original business plan and business model before achieving success. However, the time and place to make such a change is not when you are presenting your venture.

What I mean by preparing for a Plan B in your presentation is best explained with a recent real-life example I encountered: in a crowded room with more than sixty potential investors, a successful serial entrepreneur was presenting a venture that he co-founded, and just as he was about to get into the technical details of the company’s innovative service, his voice started to fade. It was hard to tell what was happening as the entrepreneur began to show signs of dizziness and lost track of the ideas he was conveying to the audience. As several people from the audience got up to help him, it became apparent that it would be difficult for the entrepreneur to continue speaking.

As it turned out, none of the other co-founders came forward to pick up the presentation where he left off – they were busy at the office rather than accompanying their colleague on this very important day when investment decisions were made.

The practical tip I’m offering is that whenever your venture has more than one founder, one of them should be a “back up” in case something goes wrong at the last minute: whether it’s getting stuck in traffic on the way to the venue, or a health problem that arises during the presentation, all of the hard work that goes into preparing your presentation may be in vain if you have not prepared a Plan B.

By the way, in the real-life example I summarized above, the entrepreneur was fortunate to regain composure after a couple of minutes and continued brilliantly.

Who stands up in front of the audience to present your venture may be just as important as what you present. After all, the contents of a presentation are pretty standard:

1)      What is your product / service?

2)      Is there a market for it?

3)      Why should you enter the market now?

4)      What resources do you need in order to make it happen?

What is less straight-forward is to decide who should present the venture. If you’re a solo entrepreneur (one founder), this may seem easy: the entrepreneur makes the presentation. But is one person enough to make your venture a success? If you answered “Yes” you may have a problem: perhaps no one wanted to work with you, or you don’t realize what’s involved in building a successful company. In both cases, you should not be presenting your venture now – wait until after someone is excited enough about the opportunity to join you.

If you’re launching a company with a team of co-founders, the presentation setup will be tricky. If you go with the “safe choice” and have the lead entrepreneur (the majority shareholder, or the idea originator) present the venture, you should at least make sure to acknowledge and introduce who the other co-founders are. Even better would be to have at least one other co-founder join the lead entrepreneur in order to deliver part of the presentation. This would serve two purposes: provide the lead entrepreneur a space to breath, and show that the co-founders have a good rapport and collaboration. In that case, rehearsing the presentation becomes even more important, and for the co-founders to know who will handle what type of question from the audience. This is key for avoiding the awkward silence that often follows tough questions, and to establish confidence among the investors who are looking for signs about how the team will get along when the going gets tough.

What I don’t recommend doing is to get the whole team of co-founders (when you have three or more) in front of the audience, only to have one person present the venture. The silent team members would distract attention; moreover this may give the impression that the lead entrepreneur did not want to allow anyone else to speak up, which may be a red flag when investors evaluate how the team would get along in the future.

When you’re presenting your venture to investors, there’s nothing that captures the attention of the audience more than the use of social influence. This is when you refer to a recent meeting held with other investors, or with strategic business partners, and convey to the audience that people are interested in doing business with you.

Sounds simple enough, but most entrepreneurs don’t realize that this is the single most important factor in making investors reach for the chequebook. Typically, an entrepreneur fills the presentation with technical details of a product and its market analysis, giving little thought to the possibility that the investors may be more interested in evaluating the how “fundable” the entrepreneur is, rather than focusing on the product itself. Sure, the investors would receive a copy of the entrepreneur’s biography, but not even an impressive resumé will convince them to write a cheque if no one else has been willing to financially support the entrepreneur.

Does that sound like a catch-22 whereby you need investors’ support before investors will support you? Not necessarily. The key is to get business partners (key suppliers or customers) to show interest in working with you before you speak with investors. This is what makes the customer development process so crucial in the lean start-up methodology I mentioned earlier. Investors, who may not necessarily know your product market very well, will look for signs that suppliers are willing to offer you favorable payment conditions, or that customers would pay you before the supplier expects to be paid (in effect, reducing your working capital requirements to a minimum). After all, social influence is not simply “dropping names” of people you have talked to about your venture – it is about leveraging the support you have obtained from one person or company in your conversations with others.

What was the first comment that a professional investor made after listening to several new ventures present their business at a recent investment forum? “I don’t want to hear about market research reports or surveys – I want to hear about what happened when you tried to make a sale!”  This view reflects a major trend that entrepreneurs should know about: investors’ interest in “lean start-ups.”

The lean start-up methodology is a hot topic. In a nutshell, this new approach to building a new venture requires the entrepreneur to rapidly modify the start-up’s business model several times before settling on the one with the greatest potential. Ideally, each iteration should take place after testing assumptions about product specifications and pricing, based on credible feedback from potential customers. Nowadays when early-stage entrepreneurs go in front of investors and present some generic information from a market research report in an effort to justify their strategy and business model, the audience is not likely to be convinced, because old-fashioned market research involves no insights about whether customers will want to pay for the specific product / service offered by the venture. Even in cases where entrepreneurs do their own market research and ask directly about what customers would be willing to pay, it may not be convincing if the investors believe the business model needs further changes in order to maximize its market potential.

Instead of relying on market research, entrepreneurs should present insights from recent sales calls / visits they have made to potential customers, and convey to the audience whether they have gotten any closer to getting a “Letter of Intent,” which is credible evidence of the customer’s interest in making a purchase. Especially in today’s environment where investors think not twice but three times before making risky investments, this can make or break a venture presentation.