ENTREPRENEURSHIP

Gate 1-Preparation: Money, Model & Mentors

What’s your big Idea?

Idea is the prerequisite for a business venture. Without a good, doable idea,
 Funding or Money cannot be justified,
 Model or Business model cannot be designed, and
 Mentors that can add value can’t be matched.

Exhibit 2-1: Preparation Needed to Bring an Idea to Life

MONEY

IDEA
MODEL

MENTOR
S

Exhibit 2-2: Basic Questions to Address in an Elevator Pitch for Waters Bio Mineral Pot

Basic Questions in an Example

Elevator Pitch
Who is your target Middle class households spending at least ₱100-500 worth of drinking water weekly
market? from water refill stations.
What is being offered? Over 90% of consumers do not drink water directly from the tap, they buy from water
refill stations, without realizing their weekly ₱150 expenditure for drinking water is
translated to at least ₱500,000 lifetime expenditure. Waters Bio Mineral Pot will offer
consumers over 90% economic savings from their lifetime bill. Waters also offers the
convenience and unlimited usage of a high quality home water purifier.
Waters Bio Mineral Pot is a 3-in-1 alkaline, mineral and purified home water system.
Why is the offer relevant The product is delivered via direct selling and with affordable installment plans.
and unique? Waters keep people healthy while saving them money.

How will this make Exclusive distributorship granted with good margin + extra income from installment
money for the firm? sales, replacement filter sales and after sales support.
The organization of a highly-incentivize direct sales organization and installment sales
infrastructure create higher barriers for competitive entry.

The elevator pitch should be ready with photos (easily stored in mobile phones as part of a presentation folder) for easy
reference and better comprehension.
Exhibit 2-3: Why the 4 Basic Questions are Important to Investors
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 Basic Questions in an Elevator Why Important to Address Upfront?
Pitch
Who is your target market? This gives an indicator of how big market is. A bigger market is always
preferred for greater scalability and sustainability.

What is being offered? This answers what’s in it for the target market, addressing the pain
points of the consumers. Pain points can be conscious (actual demand)
or unconscious (latent demand) that can be pointed out by the seller.

This answers why the offer is compelling to the target market.

Why is the offer relevant and
unique?

How will this make money for the This answers how the firm can win in the marketplace and what’s in it
firm? for the investors.

Exhibit 2-4: 3 Levels of Strategy

3 Levels of Strategy Key Questions Example: Waters Philippines

• Corporate Level
• Business Level
What industry do we enter / exit
and why? What’s the potential
value capture?
What is (or could be) our
competitive advantage?
Home water purifiers with low
market penetration of the middle
class. Potential to profit more by
selling on installment.
The 1st home water purifier using
multilevel marketing (MLM)
system with installment plan and in-
depth training modules.

• Functional Level What is the compelling reason for 3-in-1 Alkaline-Mineral-Purified at

consumers and customers to buy a small fraction of the price per liter
our products and/or services and versus those sold in water refill
prefer us over competition? stations.

While entrepreneurs must be prepared to answer more in-depth questions. It is equally indispensable to understand and be
realistic about two things:
• The value chain cycle until the company can be operational and products capable of being sold to a paying customer.
The longer barriers along the value chain can’t be solved, such as government licenses and permits not coming out,
suppliers not accepting an agreement, and the like, the bigger the cash drain it will be the company.
• Consumer’s path to purchase, in order to know how long the sales cycle will be as this will affect cash flow. The
longer the sales cycle, the bigger cash flow required.
Cash flow
-is one of the biggest reasons why companies can stop operating, an access to which new companies are underfunded
neophyte entrepreneurs may not readily have. Entrepreneurs need a reality check of their big idea in order to launch, grow,

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and scale in a sustainable manner. At times, their original plan may need to be shelved in favor of a more viable plan until
cash flow become stable.

PERSONAL BRANDING

From investment perspective, entrepreneurs must have integrity as part of their personal branding – used to describe the
image of one’s self in the public’s mind from previous choices made that will affect the future level of personal influence,
which is part of self-awareness and self-mastery. Like product branding, personal branding creates good or bad brand
association based on specific attributes associated with the person.
Having good personal branding will be advantageous as the entrepreneur becomes investable. The Chinese call this “shin
diong” means creditworthy. Each success adds, “Shin diong” to their personal branding, each wrong move removes “shin
diong” from their personal branding.

• Integrity Issue
 Collection deposited to own account instead of company instead of company account
 Transferring funds from company to personal bank account
 Charging personal expenses to the company
 Padding expenses
 Getting personal commission from company’s deals
 Intellectual property of the company registered in own name instead company name while using company funds
 Borrowing or using lots of money without board approval
 Creating bogus board resolutions
• Planning Issue
 No alignment on where to take the business to the next level
 No alignment on how and when to take corrective action
 No financial plan for passive expansion
 Propensity to take unnecessary “shortcuts”
• Priority Issue
 Lack of accountability, acting like they work only for themselves and not considering other partners
 Not spending enough time in a partnership business while using company resources to build own image publicly
 Mismanaging internal operations – confusing publicity with good management skills
 Valuing loyalty over competency in promoting people to key positions
• Political Issue
 Blaming others as non-supportive to save face while having no remorse
 Delusional self-image
 Having a sense of entitlement by hanging on to power and position
 Changing agenda to avoid discussing real issues

Personal branding makes others feel good and feel right working and dealing with the entrepreneur. Lack of good
personal branding will not attract talent and resources so entrepreneurs must therefore not underestimate its
importance, as every act they make is a rehearsal for the future.

Raising Funds
There are many ways to raise funds for the business, the more basic ways are listed in exhibit 2-5, and the more
advanced ways from outsiders are noted in exhibit 2-6, taking into consideration the ideas formulated in exhibit 2-2.

Exhibit 2-5: Simplest Ways to Raised Capital

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 Funding from
What are they??
Immediate Network
• SAVINGS Discretionary funds from unspent money earned previously by the
entrepreneur.
• PARTNERSHIP Includes investment from relatives, friends and acquaintances.

• LOANS Money advances, which may be sourced from individuals, informal channel
or financial intermediaries like banks.
• CUSTOMER’S Terms of sales advantageous to the seller, such as cash with order (CWO),
ADVANCES asking for down payment (DP), cash on delivery (COD), or collecting
franchise fee upfront.

For funding, never put yourself, your family’s or your investor’s financial well-being at risk. Always have a
limit with full disclosure of a worst-case scenario. The money invested may be retirement money, gifts from
marriage, fund for a child’s education, and savings from working abroad in hardship, so always financially
responsible in starting a business. Create realistic and rolling financial projections up to 24 months so you can
see implications of business decisions to finances.
Exhibit 2-6: Sources of Funding from Outsiders
Funding from Outsiders What are they??
• Angel investor Money invested by an outside individual to a firm.
• Super angel Big amount of money invested by an outside individual to a firm.
• Venture capital Amount of money invested by outside investors, typically over 10
individuals with none owning over 10% of the investment pool, forming
themselves as a venture investing company.

• Private equities Amount of money invested by outside investors, typically over 10

individuals, forming themselves as a private equity investing company,
focusing on firms that already have revenues and profit.

• Going Public Amount of money invested via initial public offering (IPO) from the stock
market.

One important note is that of all billionaires in the Philippines and elsewhere, most have taken their company via IPO,
selling at least 20% of their company to the public at a premium in exchange for cheap funds to finance their expansion.
Why Partners are needed?
The right partners can provide the needed initial funding, opening doors to further fund and spread financial risk, creating
immediate credibility and making the entrepreneur highly accountable.

Exhibit 2-7: Inventory of Benefits of Having Great Partners

1. Provide immediate feedback on strengthens and weaknesses of plans
2. Help give operational and strategic directions
3. Provide additional funding
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 4. Spread out financial risk
5. Narrow your knowledge gap
6. Offer immediate credibility to your company
7. Open their network of contacts to you (key suppliers, customers) to lower cost or raise revenues
8. Give an assurance of fairness on dealing with valuation and stock ownership specially after recovering investment.
9. Mentorship on a professional level.
10. Mentorship on a personal level.

Outside Investors and your Company’s worth

If outside investors would be needed, discipline is needed and the entrepreneurs cannot do business leisurely
as investors expect the entrepreneur to work hard for long hours to grow fast, attain goals, be better than
competition and be market leader.

Exhibit 2-8: 3 Series of Investment

Series Revenue Profit Description Risk Level Invest

ment
Premiu
m
Product or service exists but no High None or
A NO NO business operation Lowest
Business exists with revenue Moderate but can be Case-to-
generation but lack either attractive if investment case
B YES NO revenue sources or productivity will leapfrog volume way
scale to be profitable. beyond breakeven point
Company is operating with both Low Highest
C YES YES revenue and profit increasing.

Endowment Effect and Loss Aversion

In order for investors to gain, a challenge of entrepreneurs is to avoid the “endowment effect”, a supply-side thinking of
overvaluing the things they have, more than what they are actually worth in the market, a reflection of emotions and
cognitive blind spots. Endowment effect also happens even if the seller acquires the things sale at much lower price than
what is being offered to be bought, an indicator of loss aversion where people typically place more importance on potential
losses than they place on potential grains.

Exhibit 2-9: 16 Questions Investors Need to Ask

Inter-related Factors for Goal Key Questions they ask themselves

Investors to Maximize ROI
(Return of Investment)
Market To determine if there • Is the market/industry big with lots of unserved
is a scalable and market?
sustainable market. • Can it be scaled fast?
• Are there customers waiting?
• Are there exclusive agreement?
Product To determine if the • Is the value proposition (product and price)
value proposition is compelling to the customers to keep buying?
• Is the product or technology already available?
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 compelling and • Is there a potential source of competitive advantage,
ownable. i.e. a barrier for competitive entry (patent, copyright,
etc.)?
• Is the margin food for better cash flow?
People To determine if the • Has the entrepreneur done well in the past?
entrepreneur is • Has the entrepreneur demonstrated high AQ?
trustworthy and • Is this entrepreneur committed and is the right person
believable. for the job?
• Does my intuition feel good about working with the
entrepreneur?
ROI (Return of To determine if • Are uncertainties negated?
Investment) beyond market, • Is the timing right?
product and people, it • Are tensions controllable?
is a good investment. • Is it a good deal?

Forming your Team

Entrepreneurs cannot create a business by themselves. They need to work with other people and create an ecosystem.
Three issues need to be planned well. Choosing partners, choosing founding members and choosing mentors. Entrepreneurs
need to realize they need to be effective first, then efficient, and then create an impact, hopefully sooner than later.

Exhibit 2-10: 12 Agenda Items for a Shareholder Agreement

Critical
KEY QUESTIONS Examples of Potential Agreement
Stage
Before • How will decision making among Majority decisions among partners. In case of tie, the chairman
Operating partners be made? decides.
• Who is to do what? CEO is overall supervision, one partner in-charge of business
development, another marketing, another operations and
logistics, and another finance.
• How will profit and dividend be split? A management fee of x% is set for partners actively managing
the business before profit is distributed according to shares
owned.
• Is the intent to grow or exit and sell thePartners selling shares must give right of first refusal to fellow
business eventually? If exit, should partners by way of open disclosure to all.
stockholders sell individually or as a
block?
While • What happens when work load of Software may have lesser workload in the future, instead of
Operating partners become lighter in the future hiring a software programmer, the IT partner will handle
because the critical task has been done administration to expand role.
ahead?

• Are partners allowed to pursue their Partnership will have right of first refusal. Partners are expected
own business opportunity? If so, will to allocate 80% of their office time to the business.
individual partners be required to
submit an opportunity to the board with
right of first refusal?

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 • What will happen when there is call for
additional capital and one or some
partners cannot or do not wish to put
their corresponding shares?
• What happens when a founder changes
priorities while the business is
ongoing?
When • What happens when things turn bad?
Leaving
• How do we ensure that history of the
company will be preserved and
founders, who gave the idea, as well as
those who brought the idea to life,
introduced innovation during or after
company launch, are recognized for
their effort?
• In case of major conflict, how will this
be resolved?
• In case of an impasse, what must be
done when a conflict cannot be
resolved and one party is unhappy?
Partners who cannot and will not put out additional funds when
needed, must agree to be diluted.
Partners will have vesting schedules and cannot withdraw
investment in the first x years as a protection to the business.
The management fee will also be affected. Salary will be
reassessed based on time and impact contribution.
Accountabilities to employees and suppliers will be paid based
on a win-win formula before partners get what is left of their
money.
Company website will have a history page with founders’ names,
partners’ names and their corresponding contributions.
Legal remedy will be last resort. Senior mentor acceptable to
parties in conflict will be the first option under the principle of
win-win
Consider selling shares to the rest after having a conversation in
a public place outside the company.

Choosing Mentors
A mentor is a trusted and experienced adviser who is interested in the success of the mentee. He/she does this by investing
time to be sounding board, to listen and understand context, ask questions, give sound advice, offer alternative opinions,
opening windows of opportunities and lessening risks of the mentee.

Types of Mentors

Types of Mentors Role of Mentor for the entrepreneurs Examples for a Start-Up
Needed Advertising Agency
• Operational Guides on matters related to present Client Acquisition, Presentation,
operations, especially key factors for success Execution
that the firm should do exceptionally well.
• Functional Guides on matters related to support Accounting, Tax, Human
functional areas on which the entrepreneur Resource
may need some advice.
• Personal Guides on matters related to personal growth. Work – Life Harmony

• Strategic Guides on matters related to the future vision Consulting, Service

of the entrepreneur.

Exhibit 2-12: 8 Qualities Expected from Great Mentors

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 1. Interested in the success of the mentee.
2. Invest time to listen and understand the different situations of the mentees
3. Provide advice, both business and personal.
4. Help mentees by tapping into the mentors’ network.
5. Open doors of opportunities.
6. Lessen risk by calling attention to such areas
7. Inspire the mentee.
8. Sincerely desire that the entrepreneur succeeds and be even better than them.

The best way to invest in a relationship with a seasoned entrepreneur as potential mentor is when the mentee does not need
mentorship yet. Start small relationships to build trust without asking for formal mentorship yet. Trust is important in a
mentor-mentee relationship, and trust can only be gained through time when the mentor would be willing to share time,
experience, contacts and even sometimes, money to the mentee.

Model
This chapter deals with an idea that leads to three issues related to preparation- money, model, and mentors. Money and
mentors have been discussed, but we have allocated an entire chapter to discuss about model or business model in chapter.

THE BUSINESS MODEL

Understand the industry

Before the entrepreneur details his/her business model, there must be a thorough understanding of the industry he/she wants
to enter in two levels - first, is an understanding of how the industry works, then second, an understanding of the forces that
make the industry attractive or unattractive, and the potential strategic move/s that can make the entrepreneur’s company
thrive.

Industry Framework: The Franchising Model

In 2013, Josiah Go was privileged to present the Mansmith Franchising Model on how franchising works in the annual
conference of the Philippine Franchising Association (PFA), The Philippines’ pioneer and largest franchise association.

Exhibit 3-1: Mansmith Franchising Model on How Franchising

Quality of Quality of
Local Effort Company

Quality of
Quality of Franchisor Product Value
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Franchisee ENTREPRENEURSHIP
 Exhibit 3-2: 5 Forces of Water Refill Station Franchising
1. Rivalry of Competition
- The extent to which firms within an industry put pressure on one another and limit each other’s profit
potential.
 HIGH: Proliferation of water refilling stations with declining prices promo

2. Threat of New Entrants

- Threat new competitors pose to existing competitors pose to existing competitors in an industry.
 HIGH: Water refilling stations are easy to put up without many barriers. Franchises are also getting
cheaper to acquire.
3. Threat of Substitutes
- the availability of a product or service that the consumer can purchase instead of the industry’s product.
 HIGH: Bottled water/boiled water/own home water purifier on installment plans are readily
available.

4. Bargaining Power of Suppliers

- The pressure suppliers can exert on businesses by raising prices, lowering quality or reducing availability of
their products.
 HIGH: Franchisor has parts and provides service, franchisee cannot buy from other suppliers.

5. Bargaining Power of Customers

- the pressure customers can exert on businesses to get them to provide higher quality products, better customer
service, and lower prices.
 HIGH: Customers have many water refill stations to choose from, most products are not
differentiated.

WHAT IS A BUSINESS MODEL?

A business model is a description of the means and methods a firm employs to generate sales revenue, profit, and cash flow,
while providing a template for the business to scale up. It has 10 building blocks subdivided into two parts – the Offering
Model and the Operating Model.

The Offering Model is composed of wat people in the marketing and sales department typically handle – target
market, value proposition, channel, customer bonding strategy and revenue model.
The Operating Model, is what people in the operations department, like supply chain and customer fulfillment,
oversee – value chain, resources and processes, Complementors, configuration and cost.
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 Compared to the concept of business model by other authors, the Mansmith Business Model Map, introduced
by Mansmith and Fielders Inc. in June 2010, added two more important components:

 Value Chain, which can either be expanded or collapsed as part of the innovation effort, after auditing
the current strengths and weaknesses of each member of the value chain.

 Configuration (or reconfiguration, to attain differentiation at lower cost. This is especially critical as
resources of entrepreneurs are typically not a lot, hence, frugality must be practiced in order not to spend
for costs that do not create value for the firm.

Exhibit 3-3: 2 Parts of a Business Model

Note that to improve a firm’s profit, the entrepreneur looks at maximizing his revenue in the offering model
while minimizing cost in the operating model, hence, entrepreneurs can look into pivoting the offering model to
raise revenues and the reconfiguration in the operating model to reduce cost.

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Operating Model Offering Model
Value Network Target Market
The strategic linkage of extended supply chain for the The intended recipients of a firm’s products or
firm to provide specific products or services to the services.
customers.

Resources & Processes Value Proposition

Resources-the hard and soft assets deployed by the The relevant and unique benefit that the customer
firm to carry out its value proposition of the customers. gets from buying or owning the firm’s product or
services.
Processes-the critical repetitive activities that are
routinized by the company to deliver the value to the
customers and to the company in a sustainable way.

Cost Revenue Model

The monetary consequences of the means to carry out The compensation a firm will get for providing its
the value proposition. value proposition to support its profit.

Complementors Channel
People or groups who will help, both directly ang The distribution system where products or services
indirectly, to enhance the value proposition will be made available to the customer.

Configuration Customer Boding Strategy

Rearrangement of resources, processes activities and The relationship as well as the solution that will be
offerings that can help enhance the profit goal. established with buyers and users.

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Converting Value Proposition into Revenue

2. Value Proposition
Novelty – What are the
biggest unmet needs we 4. Customer Bonding
should satisfy in a novel Strategy
way??
Organization – How do we have a
customer-centric organization that
5. Revenue Model can engage, deliver solutions &
build positive relationships with
Price – What will be the customers better than
most attractive pricing competition??
scheme that can leapfrog
demand and meet our
objectives (revenue, profit
or social cause?)

Four tests to spot losing concepts:

1. Are you unique without being relevant?
2. Are you investing in cost that does not add value?
3. Are you guilty of having a lower price – higher cost business model?
4. Will consumers prefer the status quo than change their preference in your favor?

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ISABELA STATE UNIVERSITY – Cabagan Campus ENTREPRENEURSHIP