Professional Documents
Culture Documents
Entrepreneurship
by John Heebll
Preface
What is entrepreneurship? Think about it, and you will probably come up
with several sensible definitions by yourself. Google it and you will find
that the definition has intrigued scholars, economists, politicians and the
like
overwhelmingly.
Summer
2006
gave
3.3
mills.
hits
on
Entrepreneurs
were
encouraged
to
develop
Tuborgfondet
Karl Pedersens og Hustrus Industrifond
Thomas B. Thriges fond
The foundations charters aim at supporting the development of Danish
industry and business. I hope that this book will help to promote this
purpose, and thank you very much for the economical support from
these great institutions within Danish industry.
The third edition of the book has been funded in a collaborative effort
between the International Danish Entrepreneurship Academy IDEA,
Socialfonden (EU Foundation for the Improvement of Living and
John Heebll
Summary
The focus of this book is the knowledge-based business: a company,
which to a considerable extent is based on advanced technical
specialist knowledge.
The first chapter concludes that there is a great need for knowledgebased entrepreneurs in our society. They stimulate the knowledge
diffusion from research to business. They revitalize industry by filling
gaps and by capturing technology-driven business opportunities. They
are important drivers in the continous adaption of industry and
businesses to the ever-changing conditions on national and global
markets. Some of them succeed in creating stunning ventures that
surpass the community of well established, well run companies on
valutation and shareholder value to underline the importance of a vibrant
community of start-ups as the breeding ground for future large and
globally competitive companies. Together, they impact the gross
domestic product (GDP) visibly, and whether big or small, growing or
stationary, they provide exiting and challenging working lives for
founders and employees.
The following chapters XX - XX deal with the fundamentals of starting a
new business. The classic question about how you identify a business
opportunity is discussed. Opportunity-driven creativity as an adaptable
skill as well as some appropriate commercialization strategies for
bringing the ideas via products or services to the market are introduced.
So is the working life in a newly established knowledge-based business.
Observations on the entrepreneurs background, personality, and
motivation are quoted, the classic startup process is introduced, and last
but not least, the classic doctrine of success and failure of the startup is
reviewed.
Then we turn to the mysterious art of creativity. A relative short chapter
explains the origin of ideas, and concludes, that opportunitydriven
creativity can be acquired and perfected. Once the idea is there, action
10
must be taken to commercialize but how? For this, the difficult but
important art of developing appropriate business strategies is
introduced..
In chapter XX, the business plan, which is the synthesis of the
preliminary surveys and analyses, with an execution plan and some
budgets on top of that, is introduced. Appendix 1, which is an extension
of chapter 6, is a recipy for business planning, designed as a tool for
systematically analysing and planning a new venture.
The remaining XX chapters dig into classic fields within economy and
law, in order to highlight problems, essential to a knowledge-based
business start-up process. The idea is to provide the reader with
operational and practical solutions to problems and challenges that are
generic to high-tec start-ups. This should remove any excuse for staying
behind your desk for too long. New companies are not created in the
office, at the desk. Hiding among your books, notes and computers for
fear of the real world, where your ideas are put to the test, is one of the
most classic entrepreneurial pitfalls. You need to go out and do it.
The last chapter deals with intellectual property rights (IPR) such as
patents and critical know-how from the start-up companys perspective.
Hopefully, at the end, the reader has acquired an overview of how to
handle a complex commercialization process, which again can be
turned into a realistic business plan, a sound and well founded decision
and, at the end: a successful new business venture, based on good
business management and entrepreneurship.
All the best!
11
Contents
Preface ...................................................................................................................................................................... 3
Summary................................................................................................................................................................... 6
Chapter 1................................................................................................................................................................. 11
More Businesses, Please! .......................................................................................................................................
1.1. Our Ancestors were Peasants ......................................................................................................
1.2. Today, We Are a Necessary Evil ................................................................................................
1.3. The Employment Society of the Future ......................................................................................
1.4. The Knowledge-based Entrepreneur of the Future .....................................................................
1.5. The Promotion of Enterprise in the Future..................................................................................
1.6. The Danish Enterprise Culture ....................................................................................................
1.7. Summary, Chapter 1. ...................................................................................................................
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11
11
12
12
13
14
15
Chapter 2................................................................................................................................................................. 16
Characterization of an Entrepreneur ......................................................................................................................
2.1. Personality Types.........................................................................................................................
2.2. Motivation and Driving Force .....................................................................................................
2.3. The Personal Requirements.........................................................................................................
2.4. The Ideal Team ............................................................................................................................
2.5. Summary, Chapter 2. ...................................................................................................................
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16
17
18
19
20
Chapter 3................................................................................................................................................................. 22
The Startup of the Business....................................................................................................................................
3.1. Types of Businesses.....................................................................................................................
3.2. The Start of the Manufacturing Business ....................................................................................
3.2.1. The Preparation Phase...........................................................................................
3.2.2. The Startup Phase..................................................................................................
3.2.3. The Expansion Phase ............................................................................................
3.3. The Startup of Service Businesses ..............................................................................................
3.4. Summary, Chapter 3 ....................................................................................................................
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22
24
24
25
26
26
28
Chapter 4................................................................................................................................................................. 29
The Good Idea ........................................................................................................................................................
4.1. The Birth of an Idea.....................................................................................................................
4.2. The Birth of the Good Idea..........................................................................................................
4.3. From Need to Problem ................................................................................................................
4.4. Registration of a Need .................................................................................................................
4.5. From Problem to Idea ..................................................................................................................
4.6. From an Idea to a Good Idea; a Systematic Process ...................................................................
4.7. A Final Check ..............................................................................................................................
4.8. Summary, Chapter 4 ....................................................................................................................
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29
30
30
33
34
35
36
37
Chapter 5................................................................................................................................................................. 39
Learning from Experience...................................................................................................................................... 39
12
39
40
40
41
42
43
Chapter 6................................................................................................................................................................. 44
The Business Plan...................................................................................................................................................
6.1. The Purpose of the Business Plan ...............................................................................................
6.2. What is a Business Plan? .............................................................................................................
6.3. What Does a Business Plan Contain?..........................................................................................
6.3.1. The Introduction....................................................................................................
6.3.2. The Static Part .......................................................................................................
6.3.3. The Dynamic Part .................................................................................................
6.3.4. The Conclusion Part..............................................................................................
6.3.5. The Sensitivity Analysis .......................................................................................
6.4. The Gathering and Processing of Information ............................................................................
6.5. Quality Considerations ................................................................................................................
6.6. Summary, Chapter 6 ....................................................................................................................
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44
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45
46
47
48
48
48
49
51
Chapter 7................................................................................................................................................................. 52
Marketing Economics for Entrepreneurs ...............................................................................................................
7.1. Michael Porters Market..............................................................................................................
7.2. The Reaction of the Market to a New Product............................................................................
7.3. The Marketing Plan .....................................................................................................................
7.4. Summary, Chapter 7 ....................................................................................................................
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52
55
57
58
Chapter 8................................................................................................................................................................. 59
Sale and Marketing.................................................................................................................................................
8.1. The Art and Ethics of the Sale.....................................................................................................
8.1.1. The Salesman Must Believe in the Product..........................................................
8.1.2. The Product Must Create Values..........................................................................
8.1.3. The Unique Advantage of the Product .................................................................
8.1.4. Expand the Visible Offer ......................................................................................
8.1.5. Create an Expectation and Make an Offer............................................................
8.1.6. Quality and Trust ..................................................................................................
8.2. Marketing Methods......................................................................................................................
8.3. Summary, Chapter 8 ....................................................................................................................
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60
60
61
61
62
62
63
65
Chapter 9................................................................................................................................................................. 67
Export .....................................................................................................................................................................
9.1. Export from Day One ..................................................................................................................
9.2. Where to Start ..............................................................................................................................
9.3. How to Start .................................................................................................................................
9.4. Distribution on the Export Market ..............................................................................................
9.5. Agent, Dealer, or Your Own Marketing Subsidiary ...................................................................
9.6. An Export Seminar for Sellers.....................................................................................................
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87
88
88
89
90
Chapter 11............................................................................................................................................................... 91
Financing ................................................................................................................................................................ 91
11.1. Capital; for What?...................................................................................................................... 93
11.2. Types of Capital for Running and Investments......................................................................... 96
11.3. Subordinate Loan Capital or Debt Capital? .............................................................................. 98
11.3.1. The Risk of Debt Capital .................................................................................... 99
11.4. How the Investors Assess a Business........................................................................................ 99
11.4.1. Investors Think Three-Dimensionally.............................................................. 101
11.4.2. The Rich-Gumpert Evaluation System............................................................. 102
11.5. Where Does the Money Come From?..................................................................................... 104
11.5.1. Financing of the Preparation Phase .................................................................. 104
11.5.2. Financing of the Startup Phase ......................................................................... 106
11.5.3. Financing of the Expansion Phase.................................................................... 109
11.5.4. Summary, Section 11.5..................................................................................... 110
11.6. Investor Types ......................................................................................................................... 110
11.6.1. Venture Capital ................................................................................................. 110
11.6.2. The Development Investment Companies........................................................ 113
11.6.3. Institutional Investors........................................................................................ 114
11.6.4. Subordinate Loans............................................................................................. 114
11.6.5. Leasing .............................................................................................................. 115
11.7. A Survey of Financing Schemes ............................................................................................. 116
11.8. Investors You Should Know Of .............................................................................................. 117
11.8.1. Venture Companies........................................................................................... 117
11.8.2. The Danish Fund for Industrial Growth ........................................................... 119
11.8.3. The Development Investment Companies........................................................ 120
11.8.4. 2M Invest .......................................................................................................... 121
11.9. Subordinate Loan Capital Injection in Practice....................................................................... 121
11.9.1. The Investor's Demands Regarding the Return on
Investments................................................................................................ 122
11.9.2. Capital for Business A ...................................................................................... 122
11.9.3. Capital for Business B....................................................................................... 125
11.10. Summary, Chapter 11............................................................................................................ 127
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Chapter 1
Summary
Entrepreneurs are important to us: they create jobs, they
innovate, they challenge the existing industry and business
community, and their activities even impact the gross domestic
product of nations. The Danish entrepreneurial activity level as
such is average in an international context, but our entrepreneurs
dont really seem to expand their ventures. [GEM 2005: Global
Entrepreneurship Monitor: a cooperation between universities all
over the world, providing compatible researc on entrepreneurial
activities on a national level] This is a serious problem, which
needs special attention. This book is part of that.
New business ventures have a high mortality rate, but
countermeasures such as starting in teams, get acces to
experiences, acquiring entrepreneurial skills, apply common
sense, do sanity checks, and communicate with the customers
before start-up, have a dramatic impact on the staying power of
new ventures.
A such sanity-check list from MIT is presented. The importance of
applying it before throwing resources into a new business venture
cannot be emphasized strongly enough.
Next, the personal traits of the entrepreneur are presented. So is
the importance of developing a strong founding team, if you plan
to start a complex high tech venture.
Consequently, the art of team-formation is presented. What kind
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18
nation. In the very first GEM report 1999, following questions are
discussed:
A region's gross domestic product, or GDP, is one of several measures of the size of its
economy. The GDP of a country is defined as the market value of all final goods and services
produced within a country in a given period of time. Until the 1980s the term GNP or gross
national product was used. The two terms GDP and GNP are almost identical. The most
common approach to measuring and understanding GDP is the expenditure method:
GDP = consumption + investment + government spending + (exports imports)
19
personal life. In the remaining GEM countries, entrepreneurship through enterprise creation remains a structural
and cultural anomaly. Clearly this indicates that there is no
easy road to change. GEM consequently conludes, that in
such countries, it may take decades of sustained changes
in
many
national,
cultural,
political
and
economic
example:
public
pre-seed
capital
available
to
20
18
16
14
12
10
8
20
6
4
2
0
New
Australi
Ireland
USA
Denmar
Finlan
five
years.
These
ventures
have
far
reaching
21
as
appropriate
venture
strategies,
good
business
Applied Entrepreneurship
To most of us, entrepreneurship is synonymous with risk and luck.
This perception is justified by the discouraging fact than less than
half of newly founded companies in Denmark live to celebrate
their five years birthday. A closer look, however, disclose a more
encouraging picture of the knowledge-based entrepreneurial
activities.
22
First, we are dealing with a small proportion of the app. 15 20.000 companies being started per year in Denmark. No
statistical data are available, and, of course, numbers depend on
definition. A guesstimate around less than 1.000 companies,
being started to commercialize advanced knowledge per year in
Denmark, is probably not far from reality. Among these, less than
2 - 300 are backed by venture capital. These companies have a
completely different staying power and a capacity for growth.
They tend to stubbornly stick to life and fight for a break through to
success.
Secondly, succesrate increases with experience. The so-called
Serial entrepreneurs prove this beyond any reasonable doubt.
Coming
from
USA,
where
venture
capital
backed
23
24
Valley
or
Route
128,
Boston,
where
business
25
advisors,
who
may
even
join
your
26
Rule No. 1.
Where is the Pain?
If you cannot identify a real pain = a strong need in the market,
you should turn your attention to better start-up projects.
Please be loyal to this! And be carefull too: pain can be so
difficult to identify or interpret. By example: an entrepreneur
invents a wireless diaper that trickers an alarm when fouled.
He thinks that the pain is in the mothers anxiety and guilt
when baby rash (inflammation of private parts) occur. Well
2
The fundamental rules as presented here are copied from the MIT Sloan School of Business
executive entrepreneurial course: MIT Entrepreneurship Development Program, in which the author
participated, Cambridge, Boston Massachusetts, January 30 February 3, 2006 with the kind
support of IDEA: International Danish Entrepreneurship Academy.
27
there is some pain here, but the real pain that eventually
caused a major distributor to acquire the entrepreneurs
company was the need to differentiate an established diaper
brand in a highly competitive and stagnant market with five big
companies, fighting for market shares. So what the
entrepreneur first perceived as a large competitor turned out to
be his real business opportunity and here he found pain on a
large scale.
Rule No. 2.
What is Your Value Proposition?
You need to really kill the pain. There is so much noise out
there and so many fighting for the customers time and money,
that unless you really can do something extraordinary, you
dont get any attention. This applies in particular to new
businesses without a track record.
Rule No. 3.
Quantify Your Value Proposition.
You cannot sell on qualitive statements in professional
business-to-business markets, which is where almost all hightec ventures operate. And you dont get any attention from
your customer, unless you are able to quantify the value
creation that comes with buying your product or service. A lot
of other questions like your selling price also find their
answers, once you have made some calculations on the value
creation. By example: the selling price is determined by the
values that your product or your service creates for your
customer not by what it costs to produce and sell it and a
good deal is equally beneficial to buyer and seller. So once
you know your quantified value proposition, you also know
28
your selling price. Simple and logic isnt it? But it is certainly
not always easy to get the information needed to calculate the
QVP. The diaper-case: introducing a high-end wireless diaper
is expected to increase the sales of ordinary dispensable
diapers by some 3 - 5% simply because it draws attention and
adds a flavour of high-tec and better baby care to the brand.
With an annual turnover of USD 250 mill. and annual net
profits around USD 50 mill. on the existing product portfolio,
the wireless diaper thus will increase profits by 1.5 to 2.5 mill.
USD. A price for the start-up company is agreed upon, based
on a simple payback time of two years worst case - and the
entrepreneur walks away with USD 3 mill. plus some
performance-based options. Not bad for inventing, developing
and testing a simple wireless diaper, which took him three
years and some USD 100.000 to procure.
Rule No. 4.
Who is Your Jury?
Who decides to buy? You focus on your customer, but quite
often several stakeholders have to be catered for, before your
customer is allowed to sign the order form. Identify the
decision makers and prepare yourself for rule no. 5. The
diaper case: the jury is not only the worried mother. Its the
management in particular the CEOs of the large distribution
companies. So Mr. Big is on your jury too.
Rule No. 5.
Prepare Your Elevator Pitch. (1 minute max.)
Now, this rule is very American and somewhat alien to us
Danes. It does hold some qualities though. An elevator pitch
29
The Entrepreneur
Given the importance of the business birth rate, it comes as
no surprise that the personal traits and motives of
entrepreneurs
have
been
exposed
to
comprehensive
30
31
business
area
with
phenomenal
business
and
how to bring down the cost level and thereby increase the
earnings through economies of scale and well-thought out
logistics. Henry Ford is one of the most well known.
-
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33
6
4
2
Production & Logistics
Business Administration
34
Start-up Experience
Producer (P)
Producers like to produce. They stay busy and get things
done. They focus on what we are doing and this makes the
organization functional. They would rather work than go to
meetings. They have no time for filing or planning. They finish
one project and are ready to start another. They would rather
work alone because they have no time to train others. Need
something done? Give it to a Producer.
Administrator (A)
Administrators like to organize. They like rules, systems, and
procedures. They focus on how we do our work. If you dont
have a policy on this, they will create one for you. They make
sure we are doing things right, and by the book. Time is a
primary orientation. They are on schedule and would like
others to be also. Need something organized? Give it to an
Administrator.
Entrepreneur (E)
Entrepreneurs are thinkers and risk takers. They create and
develop ideas of what to produce in the future. They are
energetic and enthusiastic. They are always on the move,
35
36
if the
The Incentives
We need more entrepreneurs and we need better ones
with a high expectancy and a capacity for growth. But the
risks involved and the advanced broad-band skills needed
are counterproductive to this. Add to this, that real good
entrepreneurs usually dont need to look for a job and
good
entrepreneurs
are
capable
of
creating
really
37
to
Karl
Vesper,
the
entrepreneurs
place
the
five
management
disciplines;
planning,
38
ground
-
Cut through
Be a good loser
Work hard
Delegate responsibility
Work experience
39
A good education
Focus
40
you should look for mutual interests and act based on the
assumption that your employer is governed by common sense
and professionalism when you present you start-up visions.
Types of Businesses
Before digging into the issues of business formation, we need to
establish some categories of start-up companies.
The differences between different types of start-ups are
pronounced, and without a sensible divison into types, we loose a
lot of type-sensitive information. Here is a way of looking at this:
A. The traditional start-up company.
New businesses within trade, manufacturing, service etc. like car
repair shops, hairdressers, bicycle shops, plummers, etc.
Companies like lawfirms, dentists, etc. also arguably belong to
this group. These businesses are much needed. They keep many
hands and heads busy. They keep the existing business
community on the marks. They create some wealth, they provide
a breeding ground for entrepreneurship in general and they
deserve all the back up they can get from regional business
development programs, since it is not easy at all to get such
companies up and running. It requires a lot of hard work,
continous
attention
and
high-level
vocational
skills
and
41
resource-demanding
and
growth-oriented
start-up
42
43
Here is another statement that may surprise you: the rest of this
book is about catergory 1: the resource demanding and venture
capital backed business ventures. The reasoning is simple: if you
can do that, you can do anything including starting selfcontained business ventures.
In the lecture rooms at the Technical University of Denmark, this
approach invariably provokes some of the students, who find it
arrogant and over-ambitious. But this is an unjust interpretation.
As pointed out unambiguously in chapter 1, we need more highexpectancy entrepreneurs. Insight in what it takes to start a new
company with a venture capital potential is your personal
precondition for deciding, if you want to do it. Finally, there is a lot
to learn from venture capital backed business formation. Study
what it takes and you become a better entrepreneur and business
manager, whether you decide to go for external backing of your
business venture or not.
Enough of this. Lets for a moment have a look at the fundamental
precondition for a start-up venture: the business idea. You need to
have an idea, so you need to do some creative invention to start
with.
Opportunity-driven Creativity
Two schools with very different vews on the importance of
creativity and the ability to train creativity seem to coexist:
(According to the Hunter Center of Entrepreneurship, University of
Strathclyde, Scotland)
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45
46
47
48
often days after being provoked the real original idea appears.
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50
in
an
hour
from
now.
What
will
you
do?
51
company
without
being
washed
out
52
Opportunity-driven
Teams
Creative
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56
57
58
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A few examples:
Danish readers probably remember the BonBon sweets
manufacturer, who introduced sweets named Dogfarts, Big
Boops, Seagull Droppings and the like. The names were
inspired by local early teenage culture, and the disrespectful
and unappetizing products completely took the market by
storm.
The author had the opportunity to hear the Symantec story, told
by the companys founder in Austin, Texas, 1992. The
company was founded just ten years before. In its early days,
Symantec appeared odd, run by a spoiled Ph.D student from
Stanford University. Symantec until around the mid eighties had a flavour of casualty, beer, redwine, and Californian
college culture to it, which the Texans didnt like at all. What
might not work in Texas, however, worked on the West Coast
and allowed the company to get into business in San
Francisco. After a few years working uphill, where the founders
learned about the software business the hard way, Symantec
changed from developing own software products in a job-shop
like concept into acquiring and merging software companies
and putting them back to work in a better shape. This is a
completely different business model indeed, and two years
after the successful takeover of Peter Norton Computing
in 1990, the company valuation on the NASDAQ stock market
exceeded one billion USD. Now, this surely appealed to the
Austin audience. To day; Symantec is a global company with
more that 15.500 emplyees.
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63
64
of it?
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tool,
specifying
activities,
resources,
time
schedules,
milestones and results. Your management skills are put to the test, and your
ability to deliver specified results at milestones within your budget, are
monitored. Your performance impacts your future role in - and often also
your ownership ratio of the company. More about this to follow in chapter
XXX, but it underlines the importance of the business plan as a project
management tool.
Once your business is established and starts to consolidate and expand,
your management will require an updated business plan all the time. Good
managerial practice requires the management team to continuously plan the
future strategy and activities of the company on the basis of experience,
present situation and expected future conditions. That is exactly what a
business plan does. So a business plan is also a dynamic document, which
is continuously being updated to serve the management.
In short: the business plan is the entry fee to entrepreneurship at least the
66
one
of
the
most
distinguished
US
schools
of
67
There is no such thing as a standard for business plans. There are a lot of
templates available, however. (37.400 hits on <Business Plan Template> on
Google, August 2006. I didnt check them all).
More important than trying to pick and choose from this vast array of
samples: apply some common sense and cover the essential issues
according to the nature of your business case and your conditions for
executing and then maybe use a couple of the templates as checklists to
make sure you didnt forget anything important. .
With a view to the above purposes of the business plan, this following list of
themes gives a good coverage:
First issue decides if your business plan is being read at all.
1. Summary, max 1 A4 page, including
a. How much money is needed and indicate investment
perspectives if foreign capital is an option at all
b. Complience with four out of The Five Basic Rules:
i. The business opportunity (the pain)
ii. Your value proposition
iii. Your quantified value proposition
iv. Your customer decision maker jury.
c. Who are you, and why are you capable of managing this
venture?
2. Your vision: is it a company, being acquired, making you and your
partners very rich, is it total global dominance in the market, is it a
fully controlled family-owned company or what?
3. Your management team. (Show us the spider web)
4. Your start-up strategy
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boundery conditions. Then you set up and solve the equation. The solution
is number of sold units as a function of time. Be it products, hours or
whatever. So working out a business plan can be divided into two phases:
intelligence and analysis. Intelligence provides the preconditions for
forecasting sales. Analysis predicts sales, designs the motor (the business)
and calculates consequences of predicted sales.
Kind of weird way of looking at it, you may say, but then again: the
singlemost important information which the business plan tries to provide, is
how your sales develop in time. If you are able to forecast how many
products or how many hours you are able to sell in the time domain - the
rest of the calculations are state-of-the-art and relatively straightforeward
business economics.
By example: you have determined the price per unit (unit costs) as a function
of units produced (Hours or products: doesnt matter. Find the cost), and your
business plan gives you a forecast of your sales (number of units sold) as a
function of time. It is then a simple matter for you to calculate total production
costs as a function of time. From your quantified value proposition, you have
determined your selling price. So now you are able to determine your
revenues and your profits as a function of time. From your studies of the
market, you also know the payment standards (time from invoice received to
transfer of payment), and hence you are able to calculate cash-in and cashout of your companys money box. Further, you have calculated the cash
drain from running the business as a function of time. Consequently, you are
able to calculate the net cash flow as a function of time. By establishing the
integral of the net cash flow as a function of time, you know at each point in
time, how much cash you have in your money box. Since there is no such
thing as negative cash in hand, the integral of net cash flow gives you your
capital requirements. You simply top up your money box with cash from
71
loans and/or equity capital until the cash in hand is positive. Whether
achieving external funding is realistic, is another issue, addressed elsewhere
in your business plan.
Dont worry if all this sounds confusing at this point. We will dig into the
economical calculations in a later chapter. Just capture this statement: the
utility of a business plan depends on the assessment of the sales as a
function of time.
Thats why DTU students often find the business plan completely useless.
They are not capable of estimating sales at any level of credibility. But that
changes rapidly, once customers enter the arena. So thats another
important reason to involve customers at a very early stage.
For your further enlightment, reference is made to a good book on business
planning: (In Danish: Forretningsplanen. Hndbog for Nye Virksomheder,
McKinsey & Partners, Brsens Forlag 2000, ISBN 87-7553-798-2.) The
original authors have been kind enough to offer their book to the public
domain by making a PDF available from the internet. The title is: STARTING
UP Achieving success with professional business planning: Authors:
Thomas Kubr, Heinz Marchesi, Daniel Llar, McKinsey & Company, Inc., The
Netherlands.
reference to a site, where copyrights may have not have been sorted
properly out in advance.
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too high production costs eroding profits, patent infringements etc. etc.
Pitfalls are plenty. All that counts for only 1/3 of chrash landings, however.
The Devil is in the market place.
So statistics tell us to concentrate on market issues and on getting our stuff
sold.
Now, in most cases, high tech entrepreneurs work in highly specialized
Business-to Business markets. It may take years to fully understand such
domains, to develop networks and customers trust and loyalty, to find your
niche and your unique value proposition to develop your distribution channels
and to learn to sell.
As a founder, you dont have the time, nor the money to climb the learning
curve. So you should be looking for ways to quickly acquire a working
relationship with your future market.
Profesor Michael Porter of Harvard Business School in 1980 gave us a
methodology which allows us to quickly grasp the essentials of a specific
market: his famous Five Forces Model. Very usefull, also to founders and
would-be entrepreneurs.
A lot of literature is available in the puplic domain for those who want to dive
into this. One real good reference is:
http://www.quickmba.com/strategy/porter.shtml.
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Michal Porters five forces act in the market, so initially we need to define the
market..
Our business is in the center of the universe with competitors on both sides.
Below we find our buyers: the distributors, (our customers) who bring the
products further out to the next layer in the food chain, which eventually ends
at the end users. The competitors and the buyers constitute the market.
Thats it. Above the market we find the the suppliers. Below it, we find our
buyers customers. On both sides of the market we find interesting
phenomina called intruders and substitutes.
These are the five stakeholders, and Michale Porters Five Forces are forces,
which push the stakeholders to act in specific ways in our market. You may
also perceive the five forces as major economical interests which constitute
the preconditions for the ongoing processes in the market. (A process by
example: a slow shift from a number of small competing industries which
were established during an early pioneering period (like die Grndezeit in
Germany
just
after
the
French-German
War,
when
French
war
into a
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So in brief: if you study your market by statistics, you get the static picture.
If you apply Michael Porters Five Forces model, you grasp the dynamics too.
Both the statistics and the dynamics are important preconditions for acting in
a market.
Statistics are food for short term planning. The Five Forces impact strategy.
If you understand them, you are able to act in a business situation and take
advantage of it.
So lets have a closer look at those forces.
1. Supplier Power
Suppliers like to control your market by controlling your acces to their
products (and their competitors for that matter). Getting in control
allow them to control prices and market shares. Part of the control
game is preventing you from changing from one supplier to another.
Think about it and find a good example of strong suppliers apart
from oil producers.
So the key-word in assessing the supplier power is: how hard is it for
the suppliers to drive up prices in your market?
2. Buyer Power
Now, you have become a supplier. Are you facing a multitude of small
buyers, who are not organized in the market, or are you addressing a
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few very big ones, who tell you what they want, when they want it,
what they want to pay for it, and what they plan to do if you dare sell
to their competitors.
Think about it and find a good example of strong buyers apart from
the groceries market, where a few large companies purchase and
distribute the merchandise to the consumers.
So the key-word in assessing the buyer power is: how hard is it for the
buyers to drive down prices?
3. Competitive Rivalry
Now, we have looked up, and we have looked down. Its time to look
around. How many competitors do you have? How good are they? Do
you see a lot of small and more or less equal players, who offer more
or less the same services or products, which are more or less similar
to your own? If so, you are in dire need. You will have a hard time
getting into business, and customers will zap if you are not up to the
marks. If, however, you offer something better than the rest of the lot,
you may develop a strong competitive edge, which allows you to
penetrate the market and start ramping up on market shares. This
position is the essence of the entrepreneurial quest.
Mostly, you will find the market crowded, saturated and dominated by
a few major competitors. Dont panic. If your value proposition is good
- which is quite often the case, when high tech entrepreneurs take
advantage of new technological or scientific breakthroughs you have
a golden opportunity to establish yourself in the market. From a
position beneath radar detection level, you create the commercial
results, which together with your proprietary technology, makes your
company a smashing delicacy for the big ones.
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4. Threat of Substitution
Imagine that your buyers find new ways to get rid of their pain. This
happens all the time. By example, silence settled in the Swiss valleys,
when the Japanese managed to develop a digital watch. To the
Swiss, this was unthinkable and they were genuinely chocked. What
happened was a change of paradigms, and history is filled with
famous examples of people, not being able to grasp radical change
and either making fools of themselves by offering statements that turn
out to be so utterly wrong in very short time, or they go bankrupt.
So be on the alert, when new technology is on the move and new
products start to pop up. It may kill your company, but likewise, it may
offer great opportunities to those who sense it in due time and capture
the business opportunities that follow in the wake of change.
5. Threat of New Entry
Allow me to introduce you to yourself. Entrepreneurs are great in
doing creative destruction by entering existing markets with new ways
of doing things, which offer advantages unheard of in the field. Thats
why those companies already established in the market are on the
continous lookout for potentially dangerous competitors like newbies
with crazy ideas.
At some point in time, when your company is well established in the
market, you should also consider the risk of being outsmarted. Quite
often, this makes sense already at start-up time. If so, those entry
barriers, which you can establish to prevent others from entering your
turf, can be very valuable. By example: a good patent or some
inventive software algoritms that only super nerds can develop, may
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The central statement is, that it takes a lot to enter a new market, and it can
be very surpricing and very frustrating to unexperienced entrepreneurs with
high expectations when they chrash into the market entry barriers. Be
prepared!
The market entry barriers can be worked around. Otherwize we would see
no new businesses come and grow, would we? The issue has been treated
to some extend in the section about business start-up strategies. Starting in a
niche and team up with someone already established in the market, reflect
two ways of circumventing entry barriers. Start-up strategies as such are
case- and ambition-sensitive policies for getting around the entry barriers
and hence expand.
A little insight in the lifecycle of a new product may help you adjusting your
strategy and your marketing plans to the nature of customers.
A graphic approach may facilitate the adoption of this model.
What you see below, is the adoption of a new product on a market. It has a
kind of a break-through character. Then a time of sound growth, and finally a
stagnant period.
This life cycle is well known and well described in litterature. As the product
matures in the market, new types of customers start bying it. These
customers are categorized as follows:
A. Innovators want to be on the leading edge and are eager to try new
innovations. They have an ability to work with complex and often
underdeveloped ideas as well as substantial financial resources to help them
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absorb the uncertainties and potential losses from innovation. They pull you
up from ground level, but they constitute a limited number. You cannot build
your future on them.
B. Early adopters are more mainstream oriented and often opinion
leaders. Hence they are often also visionaries. They observe the innovators
and report to the majority. They are motivated by opportunity and quickly
appreciate the nature of an innovation.
C. The Early Majority - adopts before the average customer. Their decision
making is often lengthy and pragmatic. They are analytic conformists by
nature, and they require proven results. They represent a significant
proportion of the market, and their adoption signals the phase of rapid
diffusion.
D. The Late Majority adopts new products and new technology because
of economical necessity and pressure from their equals. Some of these are
early adopters, and hence, early adopters are important drivers. The Late
Majority customers are conservative by nature, and they require evidence of
value before they adopt. They tend to have less money available than the
previous groups. Whether this is explained
or caused by their
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The market economists consider the transition from early adopters to early
majority as a critical point, which requires special attention. The problem is
embedded in the difference between visionaries and pragmatists. You may
penetrate the innovators and the visionaries with fascinating new technology,
but here, the value creation of your product is put to the test. If it fails to pass
the test, you will not succed. Opposite if opposite, given that you know how to
handle pragmatic conformatists and expand your shop.
This life cycle model spins off some usefull hints:
1. Look for the innovators, when you enter your new market. In this way
you avoid the high entry barriers to the majority and build up strength
and references which allows you to pass on to early adopters. (Here
you got yourself a marketing strategy: Call it: Pick the Low-hanging
Oranges).
2. Pain killing and value creating properties are crucial, once the days of
technology fascination are over and the early adopters are saturated.
You need to penetrate into a more conservative and analytical market,
and you will not pass the chasm unless the economical benefits of
your product to your customers are undisputable. So once again the
importance of the 5 basic rules is underlined.
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Next, you have to execute. Resolute execution is one of the most important
capacities of a successful entrepreneur. A lot of people can think up
wonderful strategies, but only few act expediently to create great companies.
Instead they stick to their desktop. You wouldnt do that.
You do however plan your market entry and subsequent activities, since you
need to safeguard your time and money and get the most out of it. The point
of origin is the market analysis, which outlines your preconditions for setting
up sales activities. First, you slice out your niche probably with the help of
Michael Porter. Next, you define your target groups, based on your estimates
of pain and value creation: where does it hurt the most? Then you look for
the pioneers and the early adopters, and voil you have your customers.
They are probably geographically dispersed, so you may have to look into
demographicals as well as cultural and practical entry barriers to decide
where to start.
The marketing plan specifies the activities needed to reach your customers,
who are going to do it, what kind of ressources and back-up they need, when
things are going to happen and what it all costs. Same template as the
business plan or most other plans for that matter: they encompass
1. Activities (Including milestones = what came out of this last work
period?)
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family may not like it either, once the house is gone. So here are your
alternatives: either you option out personal collateral and accept a slow
expansion rate, based on customers early payment and suppliers patience.
Or you accept a considerably increased personal risk level by providing
personal securities. Or if you ignore the problem you company goes
bankrupt. It is called the expansion death.
A well balanced business plan will help you to avoid such a problem, since
you have spotted it well in advance and prepared for most contingencies.
Further, you may have involved venture capital in a sensible way. There is a
complete chapter on that issue to be read later. To give you an idea of what
can be done, however, here is an example: you and your investor have
agreed on a payment plan, which includes a payment to cover expansion
costs after a successful market entry. It can be expensive, since your
investor has to set the money aside well in advance and cannot put it at work
in other investments. Further, your investor takes the risk you dont. That
has a strong impact on the share value, which he is ready to accept. A high
share value gives him a low ownership ratio and hence a low return on the
investment, which he will not accept, given the high risk. So you have to sell
shares cheap to get the money, and you loose a lot of your initial ownership
of the company. However, the money is there when you need it, and you
reduce your personal risk to a level where you can get up and start anew if
crashing.
Now, where does the marketing plan fit into this? Well, it makes sense to
adjust marketing activities to the financing plan to allow you to establish early
proofs of business before you prepare for a major funding of your company.
Thus, you concentrate on a target group of geographically accessible
pioneers to penetrate the market and then prepare for a modest expansion
into the early adopters. Then, when the risk has been reduced to the risk of
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chrashing when jumping the asbyss to the early majority, you prepare for a
funding round. Thus, you have tuned your marketing plan to your start-up
strategy and related it to your financing plan. It fits into the jigsaw.
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in higher education for. The fact is that in business to business trade, selling
is a highly demanding task, requiring both personality and skills. You are not
taken seriously by professionel decision makers unless your own
qualifications and your understanding of your customers problems equal
theirs.
Selling most often requires a lot of travelling, which is fun during vacations.
To someone with a life outside the company, however, it is not that attractive
to spend maybe more than houndred days a year on the road.
So you should emphazise your sales people with great respect and
admiration and make sure that they get the support and incentives needed to
compensate a life in airplanes, trains, cars and hotels.
At MIT, lecturers joke, that salespeople are not lower life forms. Just to make
sure that their students dont forget. Hereby duly quoted. Sales activities and
sales people are fuelling the second stage of your rocket to success. First
stage is driven by the innovative skills of your founding team Second stage
by selling. Obviously you need both to reach orbit, and at some point, the
second stage becomes the driving force and the singlemost important to your
company. As a matter of fact, in more mature companies, the distribiution
channels and the sales dept. adds a lot more to the evaluation than the R&D
dept..
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a good price also. A large profit is therefore in no way unethical. But the
quantified value creation can be hard to estimate. That is another good
reason for knowing your customer better than he does himself.
The art of selling is to gain the customers acceptance that the claimed
advantages are rightfully estimated and that even though the price is a bit
tough, it is easily compensated by the benefits which go with the product.
The ethics of course tell us that the the claimed quantified values created by
your product are fairly estimated.
In professional trade, bonds between buyer and seller are often strong. Once
you have established a relationship and your product has proven that it is
worth the money, your buyer will buy again, often even by himself. This
underlines the importance of high ethic standards, but again these do not
prevent you from getting a decent profit.
which
makes
your
product
superior
to
your
competitors
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own and write the compelling story, which the salesman should communicate
to your customers.
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answer is yes. You knew it in advance, and your buyer would look like a fool
if he denied.
Next: Now, if I told you that we have developed and patented a component
which can improve your products and allow you to outperform your
competitors, would you be interested? Obviously the answer is yes. Now,
you have won two small victories.
So you proceed: Our Chief Technical Officer (CTO) is in town, these days.
Can we set up a meeting with your engineering department to look into the
details? Mr. Buyer agrees and endorses you and your CTO to his technical
staff. Now, they have to evaluate your statements and Mr Buyer will ask
them if you were right. You have broken the first and most difficult barrier.
Did you notice the principle? serial acceptance of your assumptions makes
it difficult for your buyer to back out without looking like a fool. Now does this
seem unethical to you?
creation is real, and the cost-to-benefit ratio is favourable, you have cheated
nobody. You just helped Mr. Buyer to realise your value creation himself.
This is good salesmanship and Mr Buyer is happy.
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What makes a satisfied customer, then? Here are some obvious measures:
Service. Your customers are always wellcome to call you any time,
and you set everything aside to help them. Even if you sometimes feel
that they are some ungrateful and demanding jerks.
Awareness. Pay attention to them not only during the sales process
but also after. Call them or mail them to hear, if the service rendered
was OK, if your product arrived safely and in working order, if there is
anything you can do to assist them in implementing the product etc.
Make them feel special because they are.
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Export
To most knowledge-based entrepreneurs the Danish market is only the takeoff runway. Often it is not even possible to sell the first products in Denmark,
and then the entrepreneur must enter the export markets right away. Some
of the most importen how toes will be examined in this section
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advantage to have won your spurs on the domestic market, as you have then
learned to run your shop and early customer references have been
established at the lowest possible cost. But you loose time, and that can be a
problem in markets characterized by a rapid rate of technological change.
They just dont wait for you to finalise your local business development.
Distribution Channels.
Export often starts out of your home office with you flying around the world.
Next, agreements with independent distributors, whom you visit regularly, are
set up. At the end, you set up your own marketing subsidiary in the most
prosperous markets.
There is a lot of publicly financed expertice and services set up to assist you,
since exports are highly valuable to the society as such. The Danish foreign
Ministry is one of the obvious first places to visit, and they are real good.
Dont miss the chance to involve them The Association of Danish
Industrialists or DI also have a highly skilled team of consultants to assist
their members in setting up and further develop exports.
You should, however, acquire some basic knowledge about international
trade, before you approach these honourable institutions or start setting up
distribution agreements on your own. Here are the basics:
First, you have to discern between agents and distributors.
An agent is a local business, which does the marketing, approaches the
customers and conducts the sales, but it does not provide a warehouse, an
inventory, a spare part store or supply any additional services to the
customers. The agent receives orders, but the actual sale takes place
between the Danish business and the foreign customer. The agent is a
middle-man, usually paid on a commission basis. This means that he is paid
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per unit sold. The agent is cheaper than the dealer, since his risks and
involvement in all the hassle related to sales and customers is limited to
conducting the sales. The agent will usually be able to get his sales activities
under way rather quickly, as neither a warehouse nor service departments
with in-house technical competencies have to be established at first. The
disadvantage of selling via an agent is that you have to provide services on
foreing markets, and you have to collect your payments. This may be an
expensive task if the product in question requires special implementation,
guidance, maintenance, or consumer materials. However, with the internet,
you may handle most of this remotely. So in many cases, an agency is a
good solution to start-ups.
The dealer buys the product from the Danish business and resells it in his
own name on his own market. He provides all kinds of services, and your
own company is more or less invisible. The dealer runs a higher risk than the
agent. He is not exempted from product liability and he has to invest in
inventory and a service department to support sales of technically
complicated products. The advantages of selling through a dealer are that
consignments are paid for quickly, that no service has to be supplied, and
that the dealer will usually place sizable orders, whereas the agent's orders
will tend to be spread more unevenly. So dealers are self-propelled. You only
need to inspire them occationally and ship your products when orders run in.
The disadvantage is that the dealer has to be paid for his services, which are
far more comprehensive and expensive than the agents. Distributing the
product through a dealer will typically reduce your price by 50%, so you need
to be able to lift of a decent profit within this limit. A further drawback is that it
takes more time and money to establish dealer-based distribution channels.
A run-in period of two or three years is by no means unusual. Dealers quite
naturally focus on creating a profit for themselves, and hence, they
concentrate on the most profitable products. As a consequence, it makes a
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cut out some turf for yourself, when dividing the world market amongst
dealers and agents.
It is important that you get yourself the best distributors possible. One way of
creating a strong incentive to join you is to start selling your products in their
own back yard and once the business opportunity is evident, make a contact
to a few potential and good distributors
If your preferred agent is reluctant, you may even refer potential buyers to
him to enhance his appetite and strengthen your own value proposition.
Getting requests from his own market place, which he cannot meet unless he
concludes an agency agreement with you, is a strong push indeed. Simple
applied smartness on your part, and everybody are happy.
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and a highly reckognized Japanese professor, who saw and reckognized the
qualities of the companys products, a meeting was set up with a number of
potential buyers and distributors at the Danish embassy. An invitation to a
dinner with the Danish embassador was arranged too. The founder and his
CEO met in their best clothes, well prepared for the specific Japanese way of
doing business and being courteous. The Japanse professor endorsed their
product, and the company managed to get the first small orders really just
to test the Danish people and their technology. To day, the company has
established a distribution agreement with a major Japanese construction
company. The methodically tuned approach to the would-be distributors was
instrumental in achieving this.
So get to know the local standards and adapt to them. Visit the web portal of
the Danish Foreign Ministry, where differences in behavioural patterns in
business communities are lined out, before you even start planning your
campaigning, and then apply some empathy.
Empathy in our context means understanding foreign cultures - without
relating to values - and to use this knowledge in planning your own entry and
setting up your business and customers relations.
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Business Administration
This section is about such trivialities as setting up and running a business
administration, which allows you to control your resources without spending
more time than absolutly necessary on these non-productive issues.
Some entrepreneurs neglect administration because they hate it and end up
by either going bankrupt, much to their own surprise, or by spending a
miserable lot of time in cleaning up the mess, they left behind.
Some entrepreneurs spend too much time on administration, since it gives
them a wonderful feeling of being in control of a complex project. They may
end in a fully controlled bankrupcy, since they didnt spend time on
customers and sales, which are the singlemost important tasks in business.
Here is a key to good business administration: get the cash flow up under
your skin and leave bookkeeping and accounting to the experts. Thats it.
Simple in principle and difficult in practise, though.
A few tools may come in handy. First and foremost, you need to establish
and maintain a cashflow budget. Next, you need to know how to destill
information, which you receive from your bookkeeper and enter it into your
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cashflow budget.
We will look a bit into the classics of bookkeeping and accounting but only
to give you the background needed to understand the information you get
and to prepare your own economical reports to your future board and to
investors.
Whatever is being said about business admin: never forget that being in
control of the cash flow of your company is your singlemost important task
within business administration.
Here is a good and battle proven way of establishing your cash flow
supervision:
1. Set up a budget for ALL incoming and outgoing money transactions,
be it payments from customers, incoming cash from loans or
investments, salaries, VAT coming in and going out, tax (company tax
once a year, your employees personal tax, once a month), payments
to suppliers, etc., etc. We will return to this important task in a section
below. Time division: one month for the first couple of years and then
maybe quarterly for the next few years, depending of your case
specs. The more turbulent the business venture, the shorter the time
divisions.
2. Check incoming and outgoing payments on a regular basis. Once a
month at a minimum. (Realised cash flow).
3. Adjust projected incoming and outgoing payments according to the
latest informations that you have. (Like new orders, adjusted VAT
calculations etc.)
4. Enter realized cash flow as well as adjusted cash flow projections in a
budget similar to the original cashflow budget, hereafter called the
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And
Annual Reports
Once a year you get a comprehensive report from your auditor or your
bookkeeping agency. Usually it is way beyond the needs of a small start-up,
but since your company is expecting high growth rates, the relevance of this
statement will not last for long, so get accustomed to reading and
understanding annual reports.
The annual report of a business is normally divided into:
1. The profit and loss account
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2. The balance
3. The notes to the accounts
The annual also contain the report from the management as well as the
auditor's remarks.
The managements report is an essay which elaborates on the results within
sales, R&D and economy. It also includes a general view on the future
development of the company.
When you write it, you should consider your audience. It is everybody. The
annual results are published by Erhvervs & Selskabsstyrelsen (the Danish
Commerce and Companies Agency.) This is your price to pay for running a
company with a limited responsibility. (an A/S or an ApS). Ideally, your
customers and suppliers can check your economy in the public files, before
they enter into business with you. So writing an annual report is something
very different from writing a scientific paper, mind you. Do not disclose what
you dont need to, but be honest with what you have to.
Another good reason for writing short and precise management reports is
that if you go for venture capital, everything filed and documented will be
examined as part of the investors due diligence. Good annual reports
indicate good management which again increases share value and investors
appetite.
The Auditors declaration about the state of the company, the risks involved
and the administration and bookkeeping is also a very important part of the
annual report, and you serve your own interests in having a good running
relationship with the auditor to ensure a clean declaration every year. Apply it
with care, however. Auditors are very expensive consultants.
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hand, may be carried forward and set off against future profits to reduce tax.
A couple of words on taxation: The underlying principle of company taxation
is that all costs stemming from the maintenance of a business activity are tax
deductible. This principle is administered by an infinity of rules and circulars,
but once you understand the general idea behind the principle, you have
created a framework for understanding the taxation authorities without
actually knowing the specific rules of the game. Among other things, the
principle explains why a personal debt, which stems from a guarantee for a
loan to a now deceased business, is not tax deductible, since the payments
are not related to maintaining a business activity. Gnawing at such a debt is
probably one of the worst experiences in the world of entrepreneurship.
YYYY
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which is in principle the money which is left, when all shareholders and
customers and creditors have got their money back, after the company was
sold at a price equal to the sum of all assets. So in theory, the equity is the
companys own money.
The Budgets
One frequently asked question about budgets is: why bother with budgets
when preconditions are so uncertain. Lets get around that one once and for
all:
1. The perspectives of your business venture are hard to capture unless
quantified. Without economical calculations, you dont even know if
your project is interesting to investors, and hence you cannot plan
your funding.
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2. You will be surprised, once you dig into the cost side. A lot of items,
which you had never thought about, materialize and summon up.
3. Along same line: anyone putting money into your project wants to
know what you plan to use that money for. Hence, you need to break
down your initial business development into activities and related
costs to create transparancy and to report to your investors at regular
intervals on realised cash burn compared to estimates.
4. The budget is like the managements nautical chart, where the route
to sail is plotted. From time to time, position is measured and
compared to planned position. Hence, speed-made-good (the
equivalent to cash burn in this allegori) is calculated to replace
estimated speed and the navigation plan is recalculated. At the
beginning of the voyage, the officers (the management) dont really
know the properties of their ship, but after a few fixes, their dead
reckoning becomes precise, and they become able seamen. In other
words: the budget is a vital management tool, and its precision and
efficiency increases as guesstimates are replaced by facts.
So lets press on and look at the most common types of budgets:
the
cashflow budget, the profit and loss budget, and the assets & liabilities
budget.
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GRAFIK ind!
Comments to the sample:
Cash In:
The first product starts to sell in second quarter 2008 and sales
expand by end 2009. Incoming payments including VAT are entered
at the time they hit your bank account. You will have to pay the VAT
on to the Tax authorities at a later time. This can be handled in a
separat sub spreadsheet. Typical you get from 1 month to three
month credit time, here. Try to get three to let the VAT parked in your
company help to finance the start-up.
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Cash Out:
We have staff on the payroll from day one. This calculation is not
simple, and you should establish a sub-spreadsheet to calculate
wages and taxes and holiday alowances and enter them at the
appropriate times, when money is actually transferred to either the
employees or to the tax authorities. Link the final cash flow to the cash
flow budget.
Production costs: clearly they expand with increasing sales, and since
you have to pay your suppliers before you get the money home from
your customers, production costs tend to pile up in front of expanding
sales. Be ready for that. Payments are entered inclusive VAT, which
you have to pay to your subcontractor, when you pay their bills. The
VAT is payed back to you from the tax authorities at a later time: from
one month to one quarter after you registered the bill in your
accounting system. Try to get the money back as soon as possible to
reduce the cash demand.
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Other: here you see the repayments on the overdraft facility. You
VAT: with 25%, VAT is not a trivial contribution to cash-in and cashout, and quite a few companies have run into severe problems, when
they forgot to include VAT in their forecastings. The tax authorities are
strict in collecting their money, so be careful, here. In the above
sample, outgoing VAT (which is VAT you got from your customers) is
fairly low, since you export most of your products outside EU. The
incoming VAT, which is the VAT you pay to your subcontractors and
later get reimbursed from the tax authorities, is linked to the
production costs, since your suppliers are mainly Danish (or from an
EU memberstate for that matter). A separate sub spreadsheet will
probably be helpful in keeping track of VAT payments.
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Now you have established the basic cashflow. But look at the accumulated
cash flow (Cash in hand). It probably looks awfull = negative, which is
prohibitive for running your business. We need to get it positive. You need
some outside money, and this is where your financing plan comes in.
We assume that your business project has an upside, which will interest
venture capital companies. (Allowing them to get their money back X 10
within 3 6 years.).
We further assume that you will be able to get an overdraft facility of up to 1
mio. kr. Enter payments from that one in Incoming Cash and calculate or
estimate repayments, which you enter in the Outgoing Cash.
Look at the accumulated cash flow once again and enter one or two
payments from the investor. These payments need to be big enough to pull
the accumulated cashflow up into the positive. In other words: install some
payments from your would-be investor, that are big enough to ensure a
positive cash in hand throughout the planning period. In the sample above,
three installments of DKK 500.000 do the job.
At the end of the planning period, your company hopefully is able to survive
in its own rights based on income from sales. If you look at the sample
above, you will see a cashflow calculation without investments and loans,
which allows us to see how the core business develops. In the last year of
the planning period, the cash flow is positive, and hence, this company is
starting to make money. More money than it spends, and hence, it is
airborne. But it took two years and a lot of help from investors.
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Interesting, this company makes a profit allready in the second year, where
the cash flow is still negative. The reason basically is the diffence in time (1
quarter) between registering an income until we actually get the money. This
is a typical feature of rapid expanding companies: though they make a profit
on paper, they are in continous need for cash. That is one reason why many
claim, that cash is more important than your mother.
At the end of the third year, this company starts to pay tax.
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cash in hand
equity capital
First item in the liabilities is the loan. Here you see the overdraft facility and
repayments have of course been deducted. You may also have other types
of loans like convertible loans to a venture capital company or ordinary bank
loans.
Next you see what your company owes to others. In this case it is basically
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your suppliers, end year. Sometimes suppliers are ready to be patient to help
a customer in need. Remember that, when the bank refuses to accept an
overdraft facility or a much needed loan.
Tax and VAT to be paied is also listed among liabilities.
Finally we arrive at the equity capital: the money which is not owed to
anyone. Here, one single figure is presented. Often, it is subdivided into the
original investment, the subsequent funding rounds and the inherent capital
expansions (we shall get back to that one later) plus the contributions from
each years earnings after tax, amortisation, interests, depreciation plus
eventual dividends to the shareholders all has been deducted.
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Financing
Before diving into this highly interesting theme, a few principles on
financing early stage business development are highlighted.
1. High risk and high revenue are interlinked. Without a hockeystick
perspective to sell, you dont get investors to buy into your venture,
even if your business model is sound.
2. Professional venture capital investors are offcourse seeking to
make a profit on their investments. Hence such capital is inherently
linked with an exit policy. They dont go in unless they can get out
again which usually means that the company will be sold to
someone else at exit time. That applies to your shares too.
3. The higher the risk the higher the price on capital. So to be
successful in rising early capital: reduce risk and increase
perspectives, before approaching investors. Risk is mostly related
to saleability and management skills. So work on these to reduce
risk: prove that you product can sell and get yourself a qualified
founding team before approaching the investors
4. For same reason: try to reduce dependancy on foreing capital
during the start-up phase. Here are three options to assist you:
a. First money = own money + FFF (Family, Friends and
Fools). This is an old and fundamental rule, and private
money, earned the hard way, consistantly impresses
investors, whom you seek to involve later on.
b. In-kind: exploit ressources available to you. A good
entrepreneur can be quite exhausting. Thats OK in most
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Types of capital
Basically two types are of relevance:
1. Loan capital:
a. Overdraft facility: the well known credit facility, allowing the
company to survive short term heavy loading of the cash in
hand. In start-ups, severe collateral is a precondition for this
type of loan.
b. Ordinary loan. Usually secured through private collateral,
since the start-up company doesnt own anything valuable,
capable of covering the losses after a crash.
c. Convertible loans: a special type used mostly by venture
capital companies The loan can be converted to share
capital on given conditions. Usually it gives the investor
some special handlebars to control management and
business development.
d. Mezzanine loan: a mix between loan and equity: a loan in
terms of payback terms and interests, but like equity capital it
is less secured. A revenue-linked bonus to the credit
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Types of investors
1. Family, Friends and Fools: Maybe not so often seen here in
Denmark. In other coutries with a more developed entrepreneurial
tradition, private money is often invested into the heroic
entrepreneurial endeavours of sons and daughters and nephews
and neighbours and old friends and the money is typically written
off and forgotten until the venture eventually succeeds. Since this
type of investors assumably will increase here in Denmark, also,
bear in mind as an entrepreneur - that you should never ask for
more money from anyone than said person is capable of loosing
without severe consequences and without jeopardizing your
relationship. Further you should be generous at pay-back time, for
this is truly high risk investments and hard earned money.
The Fool in high risk start-up investments is probaly no fool at all,
but rather the socalled business angel: a private person with a
feeling for talent and business, who invests prudently and usually
insists on having a role in the management. Most of this investment
activity unfolds in a fertile twilight zone. We do not have any precise
figures to indicate the volume, but it is considered the highest by
magnitudes, compared to professional venture capital investments.
Also, business angels buy themselves into start-up companies with
a sound business platform, but without the growth perspective
needed to attract venture capital. So fools should be looked upon
with respect and interest. By combining competence, capital and
networks, they are often able to do miracles to small start-up
companies.
2. Banks and credit institutions: not so important in pre-seed and seed
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b.
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c.
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there is no way that you can make money in investments where maybe
half of them fail to pay the money back. So banks have a hard time in
making money on high risk investments, and since they are good at
making money, they dont invest in high risk without securities. They clamp
down on anything that can compensate a loss, like tangible assets that
can be sold in a worst case situation.
They certainly also look at you and your capacity for generating an income
as a highly valuable employee in a company, after your own venture
folded. This is where most pain arises from failing a business venture. So
be carefull about personal securities. Like when you gamble in Las Vegas:
do not bring more money into the gambling archade than you can afford to
loose, and when it is lost: go home. In the start-up situation: consider how
much money you are ready to owe to the bank after a failure and stick to
your decision if the worst case scenario materializes.
Some measures have been developed to make bank loans an option to
high risk ventures. The point is that from a society pint of view, we need
those start-ups to succeed, and hence, the semi-public investor
Vkstfonden offers collateral in various forms to perspective projects.
These products change all the time, and drawing a permanent map is not
possible. Look for such industrial development programmes when your
time has come. They should be quite visible.
Equity capital
Investors buy into the upside of your project. That means that they buy
company shares when these are cheap and sell them again after a
breakthrough at an obscenely high price if they possibly can.
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Evaluation of a business
If you want foreing investors to join you, they need to know the value of
your company the evaluation or valuation in order to calculate how
much ownership they achieve per invested DKK.
We are in the world of high risk high gain. The price that an investor is
willing to pay for a share in a business venture depends on risk and gain.
The lower the risk the higher the price provided the possible gain is
interesting. Likewize: the higher the gain, the higher the price. So
increasing evaluation is about decreasing risk and increasing gain. Thats
really all.
Before arousing the venture capital investors interest, however, you need
to consider if your company is a venture case at all. In Boston, a venture
case is ruled by the 126-equation: turn-over increases to more than 100
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million dollars with a profit margin higher than 20% in six years or less.
That makes it pretty easy to remember but of course, this is not generic.
The venture case threshold is a highly case sensitive thing. The Boston
formula however is good at indicating what it takes to trigger the curiosity
of a VC investor. He is quite spoiled and prudent, and a venture case is
really a rare bird amongst start-ups. The impact of venture cases however
is significant. They produce more jobs and values than the non-venture
cases combined. [Hvor ved du det fra?]. So venture cases are what we
want. Hence this book.
So perspectives and scaleablility of your start-up have to be significant.
We have touched upon that earlier on. It all starts when you start to
generate and filter business ideas. Look out for ideas addressing markets
in rapid transition and expansion. Here money is available and invested
much more freely than in old stagnant markets. In expanding markets, new
companies are able to display stunning growth rates and exit opportunities
are around. So thats where you should be, before you contact investors.
Next you need to look at risk. Here is some risk to consider and to work
with:
Technological risk: does it work meaning does your product really relieve
pain and create values?
Risk reduction: prototype at work in your first customers plant, drug in
phase one clinical trials, fully functional software demo, expert evaluations,
etc. As a minimum, you have substantial customer feed back on the
benefits of your product ideas.
IPR risk: do you have the freedom to operate? Can you identify and
protect your inventions through patenting?
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Proof of Principle:
Proof of Concept:
Proof of Pull:
Proof of Profit:
making a profit
Proof of Expansion: The company demonstrates its capacity for growth
indcated by increasing market shares and penetration of new
geographical markets.
Proof of Exit: Exit opportunities are unquestionable and offers even start to
dump into your mailbox.
The graphic presentation below indicates how striking the stepwize
upramping of company valuation can be. It is a very usefull model
containing a lot of inspiration for you when drawing up your business
development strategy. By example: timing of funding is essential, and you
should always try to push through a proof before you start negotiating
evaluation with investors. Dramatical things will happen to valuation, after
you proved that you can sell the stuff and your customer is happily ready
to pay a price, which allows you a high profit margin. As indicated earlier:
first customers feed back is gold. Here it is gold in quite a litteral sense.
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Explanation:
The founding team buys shares for DKK 50.000. The pre seed investor buys
for DK 45.000 worth of shares. At start-up time, they get one share of
nominally DKK 1 for a price of DKK 1,00. You may choose higher share
value and higher nominal capital. You may even divide shares into classes.
One class of shares can be given preferences, which reduce risk in various
ways. Such shares, off course will have a higher share price. Investors will
typically insist on having some preferences that protect their investment.
Consequently they have to pay a higher price per share than the founding
team, which again means less dilution of the founding team per invested
venture capital DKK. So you may protect your ownership ratio by accepting
souch preferences. They are treated below in the section on shareholders
agreement.
The founding team, who has invested time and private money in generating a
bright idea and filing a patent, sells the patent to the company and receives
shares worth DKK 30.000 as a payment. This is called a non-cash
contribution, and in fact you may sell whatever you like to the company and
get shares as payment. The only precondition is that an independent auditor
accepts the value of whatever you put into the company as reasonable and
present. Non-cash contribution invariably calls the interest of tax authorities,
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since you have to pay personal tax from the values, which you invest. If our
entrepreneurs have paied costs from their personal incomes equal to DKK
30.000 to file the patent before the company is started and the patent
ownership transferred to the company, no tax issue is raised. If they just
claim that the idea is worth this amount without it having cost them anything
to create, and they then invest it in the company as a non-cash contribution,
they have to pay tax of a personal income of DKK 30.000. All these details
are here to remind you about yet another classic pitfall: when you invest noncash values in your company, you may become liable to a considerable tax
payment. The number of people who fell into this one is considerable, since
of course it is quite tempting to invest ideas instead of personal cash. Dont
be the next and do accept, that there is no such thing as free lunch.
After funding the company is up and going with DKK 95.000 in cash and a
valuable patent on the list of assets.
Now, after a short while, the first important goals are met, and the pre-seed
investor is ready to invest another 1 mio. DKK in the company.
The parties have agreed allready at start-up time, that if milestone specs are
met, the company will be worth DKK 4 mio. kr., since risk is now much less,
and since it is clear that the product can be produced and sold at a profit.
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Second round
Now the company has the money needed to break through in a limited
market. Assuming that it succeds in this, the management team thereby has
proven that they can run the business (proof of business) and the concept
has proven that it can sell (proof of market). There is good reason to believe
that the company will be able to jump the abyss to the early majority and to
expand internationally. A lot of money is needed for this purpose.
Consequently, the business plan is updated to include a major sales &
marketing effort. According to the cash flow projections, the company will
need another DK 10 mio. to conclude a succesful international development
of distribution channels to new geographical markets.
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Note that the pre-money valuation has increased to DKK 15 mio. from where
we saw it last: DKK 5 mio. (Pre money valuation 4 mio. plus 1 mio. in cash
being invested also called the post money valuation). Now the founders
and the first investor suddenly share an interest in pushing the pre-money
valuation. The DKK 15 mio is the final result of tough negotioations between
the founders and the pre-seed investor on one side and the venture capital
investor on the other.
Calculations follow the same template. With a pre money valuation of DKK
15 mio., the shares are worth DKK 96 per share of nominally DKK1,00. In
percentage, the share price has increased from 100 to 9.600. That is quite a
lot, but certainly not unusual in high-tech venturing. And dont forget that we
are actually looking at a real commercial breakthrough.
Now, with a share price of DKK 96 per nominally DKK 1, the new investor will
get shares of nominally DKK104.166,67 for a cash contribution of DKK 15
mio. Again, this is done by issuing nominally DKK 104.166,67 new shares
and thus increasing the share capital of the company from nominally DKK
156.250 to DKK 260.416,67.
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After investment, the company will be worth DKK 25 mio. (pre-money val +
invested cash)
The value of the founders shares has increased to DKK 7.68 mio. But still
this only paper money. After the last capital infusion, they have been diluted
down to 30,72%. The new investor got 40% of the company.
You can be sure, that the new investor also insisted in a complete rewriting of
shareholders agreement and business plan as well as changes in the
management of the company. This is typically a point in time where a
professional CEO is hired and installed. To the founders this means yet
another push away from control of their own baby. But then again, this is
what VC funding is about: competent money means the best management
available at any given time in the history of the start-up company, and
founders usually are better at getting ideas and setting up companies than
running quickly expanding medium sized companies in the middle of an
international consolidation. The usually also like it a lot more.
Exit time
Assuming now that the company succeeds in establishing an international
market position and starts beating allready established companies on market
shares and growth, conquered through superior proprietary technology and
good salesmanship and management. Such a company is a juicy bite for a
bigger company, which may cut corners and make a by-pass to a stronger
market position. So the shareholders start receiving request on whether the
company is for sale.
This is another field where the competencies of the venture capital company
come to the test. To develop the right sales strategy and to execute and
conclude an acquistion requires experience combined with sense of timing
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The founders got DKK 76.8 mio out of their pains, which is initial money back
by 960 times. The pre-seed investor, who took the high risk, but couldnt
defend his ownership positions at second round, got DKK 73,2 mio back,
which is 70 times invested money, which is a real good deal for a pre-seed
investor, though. The investor who came in at second round, when
everything was peace of cake, got his money back tenfold, which is what
venture capital investors usually expect. So he is happy too.
After exit, the founders probably have a lock-up period, where they cannot
cash out fully of their company and the management probably also has to
stay with the company for some time to ensure smooth transition and
continous operations..
After then, the founders probably take a deep breath, relax, start to get bored
and then start up yet another company or maybe several and now they
dont have to ask for other peoples money. They have turned into serial
entrepreneurs, and that is very good.
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Contract law
Company first. You have the following options to pick and choose from, when
you want to do business:
1. The Personally Owned Company: (v/ ): it is your born right to
sell to any person who wants to buy from you, once you are 18
years old or more. When the volume of trade exceeds a very
nominal figure, (DKK 50.000 in 2007 and certain exeptions
for specific types of services and products. Check it on
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The expences by running the company are fully taxdeductable in your personal income. By example: if you
start
the
company
while
still
being
employed
the
personally
owned
company
with
same
main
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pay, the claimant will sue the one who has. Note that the latter
may not even be the one who caused the case. So clearly, the
partnership agreement, which is a contract between the
founders, which regulates amongst other issues the
decision making procedures, is a sine qua non. A need-tohave. Get your laywer involved here.
Cash contribution is not necessary to start a Partnership
Company . You just register to deduct expenses and VAT etc.,
but you may soon find it necessary to get external assistance
for bookkeeping and sharing of tax deductions, handling of
VAT etc.
3. The private limited (ApS) and the limited (A/S) company: some
understanding of the logics behind this company type, which
dates back to the early renaissance can be usefull: When trade
started to develop in earnest, back then,
people, be they
then
go
bankrupt.
No
additional
or
remaining
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and you may look into the ecomical specs and achievements
of any limited or private limited company. Here in Denmark
these data are available from Erhvervs og Selskabsstyrelsen:
Danish Commerce and Companies Agency. If you found a
limited company yourself, you may enter into serious business
without putting your carreer, you family your house and the dog
at risk.
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142
Partnership
is
the
most
frequent
type
of
company
within
serious
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Agreements.
Agreements are widely used by businesses to regulate relations between
buyer and seller, between employer and employee or between owners. A
fundamental knowledge of agreements is therefore an important part of an
entrepreneurs empirical background.
First of all you need to clarify if you are allowed to make an agreement at all.
Some laws like the Salaried Employees Act set mandatory provisions
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Further, internal
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Verbal agreements are binding, but in reality most such agreements are
annulled in the case of a trial because of the state of the evidence. They are
sometimes referred to as gentlemens agreements, though in reality, mostly
they are not real agreements and that none of the parties are gentlemen.
investments in a common cause. A lot of our actions and our relations are
guided by such understandings. By example: you vote on the basis of an
understanding of what your favourit party of politician will do an stands for.
Other example: there is a natural and widespread understanding of fidelity
amongst lovers. In case of a breach of such understandings, the aggrieved
part can do little since there is no agreement amongst the parties and each
part is free to follow his or her own inclinations within the limits of the law. But
still a feeling of betrayal, anger and frustration prevails on the aggrieved
party. If you translate this to business relations, you will find many examples
of relations that broke up because understandings were not fulfilled, to
replace trust by mistrust, which again is highly counterproductive in business
relations. You have to coinsider whether to replace important understandings
by agreements, and you have to very methodical in avoiding creating
understandings which you are not ready to act upon to live up to
expectations. Apply common sense, awareness, and basic honesty and
become a good business man/woman.
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Legal costs are covered by the State, and it is risk-free to bring forward
an action. So people bring their disputes to the court much more
frequently than f.ex. Europeans do.
2.
3.
The limited company or the private limited company is a quite effective risk
barrier. Not that it cannot be penetrated, but this requires the case to be
brought to the local court. By example, assuming that your company is sued
in US and sentenced to pay punitive damages, which again makes it go
down the sink and the offended party decideds to charge you personally as
the engineer behind the product and the owner of the limited company - the
US laywer has to prosecute you as a person here in Denmark and by Danish
law. That will only happen if you have a personal fortune worth tapping into. If
you are an ordinary person, it is senseless to sue you.
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periods on dismissal,
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hiring people. If an employee works under conditions that are closely related
to the conditions of employment for salaried employees, he or she will very
quickly attain the status of a salaried employee including notice to quit and
company oblidged to pay holiday allowances and to withhold and pay
employee personal tax. An employee, who does not, or only in part, receive
income from other clients and work 15 hours or more for your company per
week, is considered a salaried employee of yours. So what can you do when
hiring consultants: a) make sure they work for others also and b) make sure
that they are VAT registered and pay VAT due.
Likewize, blue collar workers (working on an hourly rate and no notice period
when dismissed) are easily converted in to whitecollars or salaried
employees, if they start doing what whitecollars are supposed to do. So be a
little careful about what your bluecollars are asked to do for your company.
If hired, employees have some fundamental rights that you should memorize:
1. A written contract on the nature of the employement.
2. Notice period if dismissed:
a. First month of employement: 1 month notice
b. Next 32 months of employment: 3 months notice
c. Then one more month per year employed up to six months
3. The right to resign with one month notice always, unless the
employeer wants a longer period, which again costs one additional
month notice on dismissal on top of what is allready earned per one
month extention of resign notice period.
In case of an obvious breach of rules and laws on the whitecollars part, you
are entitled to dismiss said person summarily: that is asking the crook to
leave immediately, and no wages to be paied. This is a quite fiece responce,
however, which should be considered carefully, since the crook is entitled to
compensation if the summarily dismissal was not due. It takes theft, abuse or
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The
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Decision-making authority
Sets the limits of the daily management and the borderline between
board- and daily management.
The rules apply to the situation when the company needs more cash.
Who decides and what company valuation should be set as a
minimum for further cash injection into the company.
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155
The problem if you like is, that as a private shareholder, you can not sell your
shares withou being taxed on the financial returns, immediately when they
materialize and at a higher rate than companies ar being taxed in same
situation. You will pay in between 28% and 43%. Rules are a bit complex.
The point is, however, that if the shares are owned by a financial company
a so-called holding company, you dont have to pay tax on financial revenues
until you have decided what you want to use the money for.
If you use it for salaries, you have to pay personal tax, which is probably
more than 43%. In that case, a holding company is senseless. If, however,
you use the money for bying shares in new companies, you dont pay tax at
all. This is what holdning companies are created for, and this is what serial
entrepreneurs do.
A few rules to comply with: the holding company needs to own more than
20% of the shares in the company sold, and ownership should be more than
3 years old. So if you are part of a founding team, your pain threshold
dilutionwize is 20%. If investment calculations like those presented above
indicate that you become diluted below that, one of the major qualities of
holding companies is gone.
A few questions about holding companies:
1. When should they be founded?
Concurrent with the operating company. It is not easy at all for anyone
with a private economy to buy shares in the operating company, ones
valuation starts to climb. That goes for a privately owned holding
company also. Founding time is a window of opportunities for people
without money.
2. What are the costs?
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Summary, Chapter NN
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159
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161
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informed. They also expect you to intervene in conflicts and help solving
problems. They expect you to be an independent individual that does not
side up with any wings in the daily small quarrels and they rely on you to
respect their interests and their integrity. If your lack of due diligence or your
poor fighting for the company causes costs them their job, they will never
forgive you. If your timely management and leadership makes them a visible
part of a success, you will be their worshipped hero.
If you correct them in the prescence of their collegues, you have lost them.
In a research published in one of the major Danish newspapers (Berlingske
Tidende), employees were asked about the key personal traits of their
favourite managers, and the whole thing boiled down to integrity and some
intelligence. There you are.
The Board
Check the law on boards at first. In private limited companies you dont need
a board whereas in a limited company it is mandatory and the Danish
Company law is quite specific (see 54 etc.) about the role and the duties of
the board. If you decide to include a board in the management of a private
limited company, the law applies even though the board is a voluntary thing.
Now why would you need a board anyway?
The best reason probably is that a board is a reference group to the daily
management. This is where you are allowed to discuss the company
situation, including all your anxiety and worries, ideas and visions and this is
where you are challenged by friendly and competent peers.
When appropriately designed for the task, the board becomes your
singlemost important consultant and an invaluable portal to all kinds of
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networks.
If your company is going for venture capital, the board becomes mandatory,
independand of the company form. You just dont get the money without a
credible board.. The VC investor exerts the influence he needs through his
board position, and the shareholders agreement includes a number of
clauses to empower the board in specific situations, where the law is not
detailed. By example: when should the CEO involve the board, who appoints
the boardmembers, how should board meetings and board decisions be
recorded, who should have access to the records etc..
Several preconditions need to be settled before the business will benefit from
a board. One of them is an efficient and due reporting on the operational
situation of the business, based on good administrative practise and
bookkeeping.. A board is an administrative extra load on you. No doubt abot
that. A board meeting can easily cost you a days work in setting up the
agenda, calling the meeting, writing the managerss situation report, updating
cashflow budgets and writing and communicating the minutes,. If you are not
ready to make that effort, your board is not able to serve and to live up to its
legal responsibilities, and hence, you shouldnt bother anyone by asking
them to join it anyway.
If you decide to do this extra, however, you will benefit not only from an
enlightened board, but also from personally developing an overview of the
company situation and the economy, which allows you to exercise a
competent leadership.
Having introduced this practise in the company well before meeting the
money-guys, makes a strong impression on them and adds to the
reckognition of your managerial capacities and hence to the likelihood of
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Only in few cases were the board members selected on the basis of
real experience and talent.
The main motive for joining a board had very much to do with prestige
and the opportunity to become part of a network of people.
Most board members had prior to joining the board looked into the
legal aspects, but they had not looked into what practical board work
meant. The main part of them recommends a more thorough
preparation for board work.
Most board members miss the informal being together with the
management as a supplement to the very formal and structured
meetings.
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2/3 of all the boards have at least one lawyer serving. The other
members are mostly business managers with some business
experience.
The board meetings are of high priority. The boards are usually
complete in number.
The boards see the cooperation with the management as their most
important task. This cooperation is far from uncomplicated. Some of
the main problems stem from difficulties for a board to form a correct
interpretation of the situation of the company because of more or less
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The right and duty of the board to hire and fire the day-to-day
management does not invite to an open dialog between the parties.
The main part of the boards in the interview only knew of the situation
of the company from the managements reporting.
1.
opponents
2.
passive
3.
4.
5.
The employee representatives on the board do not get high grades for
their contribution and effort by the other board members.
Use Lisbeth Holts survey to avoid the classic traps, and make your board an
asset.
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In the new business, the administrative system and the day-to-day manager
however will not be able to and should not - deliver a great number of very
detailed analyses and reports. Consequently, the board must be prepared to
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have to make decisions on a rather incomplete basis. At the same time, the
manager must respect the boards need of information, analyses, and
documentation.
A final word on board responsibility: the culpa principle applies: if you are
methodical and exercise common sence and due diligence in serving as a
boardmember, you will not incur a liability in damages. In this case, you have
done what you could, and what could be expected from you. Well if this
principle didnt prevail, who would ever serve on a board: you would be
defenceless and victimized: a scapegoat for evil managers and merciless
injured parties.
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HERTIL
The agenda for board meetings can roughly be divided into intelligence matters,
decision-making matters, and control matters. Added to this comes the items of a
more administrative nature.
A typical agenda for a medium-sized business includes:
1. Adoption of the agenda.
2. Adoption of the minutes from the last meeting.
3. Intelligence matters: How is it going? and Since last time
1. Announcements.
2. Sale; the sale in relation to the projected, orders, key
figures, trends, etc.
3. Finances; results in relation to the budgets.
4. The running; capacity, sub-suppliers, etc.
5. Projects; the status in relation to the plans.
6. Forecast of the financial and operational development of the
business.
4. Decision matters: What do we do?
a. Updating of strategic plans. (More occasionally.)
b. Adoption of new plans for sale and product development.
c. Adoption of budgets.
d. Adoption of larger financial transactions.
e. Miscellaneous adoptions, fx the financial statements, etc.
5. Control matters.
Capital stock register, auditors record, accounts, asset
management, etc.
6. AOB
7. Date for next meeting.
While item 3 on the agenda, intelligence matters, is valuable by first of all forcing the
manager to monitor and analyze the running of the business so that the board can
receive a proper statement, item 4, decision matters, is important to the discussions
about the development of the business in the future, and this is where the priority and
time of the board work should be.
The number of meetings in a year depends especially on the speed of development of
the business, and on potential crises. A typical average is 6-8 meetings a year.
Remember to give the individual meetings numbers, and to refer to these numbers in
all material which is sent out because there is a lot of paper in board work, and
therefore a great need for order and system.
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The agenda, along with any appendix, should be forwarded no later than one week
before the date of the meeting. If the agenda is accompanied by a proper statement of
the situation of the business, the board will quickly be able to finish discussing its
control obligations, and get to the important discussions about the future and strategy
of the business.
The minutes, which in most cases is only a resolution minutes with reference to the
matching agenda, should be sent out immediately after the meeting, as the board
members will have forgotten what was said, and the suspicion of manipulation will
begin to grow.
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The model below for calculation of the fee has been developed by DIC in
cooperation with lawyer, Erik Nyborg, accountant, Peter Bloch, and accountant, John
Andersen. The purpose of the draft is to create a remuneration system which, on the
one hand, does not burden the finances of the business at an unfavorable point of
time, and which, on the other hand, remunerates the board fairly for a good and in the
beginning unpaid effort. It has been tested in practice and it worked just great.
Everybody was happy.
The idea is in all its simplicity that the board is not remunerated until the business is
generating a profit. In return, the fee will quickly reach a level which must be
regarded as attractive for a business of such a size. The amounts have been adjusted
from the practice in Danish business.
- Profit before tax<DKK 500,000; no directors fee
- DKK 500,000<profit before tax<DKK 500,000; directors fee = 12% of the
profit before tax.
In other words, the total fee costs are between DKK 60,000 and DKK 600,000. If
there are five board members and the chairman gets a double fee, the individual
member will be able to collect between DKK 10,000 and DKK 100,000 for his effort
depending on the profit when it is more than DKK 2m.
If the business is run in a corporate form, the draft is implemented by adding to the
rules that the directors fee is fixed at the annual general meeting. The principle for
the calculation of the fee is added to the rules of procedure.
The sole trading business can implement the draft by making a written agreement
between the owner and the board members about the calculation of the fee.
Former board members should receive fees in a period of about a year after their
resignation as there is a time lag between their effort and the profit.
It is not unusual that the chairman is paid double fee if the post demands an extra
effort.
Just a word of warning; it happens that board members will send you bills for
consulting assistance on jobs that they have been assigned to do by the board. It is
especially professional board members who do this. It is necessary that you and the
chairman adopt the principle that no consultancy jobs are done unless an offer has
been made or a maximum for the amount of the bill has been agreed upon.
Otherwise, you may be in for some interesting surprises.
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13.3. Summary
The management problems of the business were discussed with a focus on the
creation of an initiator group, management of employees, and the establishment of
the strategic management function with support from a board of directors.
The initiator group should be created according to complemental personal criteria so
that the members supplement eachothers strong and weak sides. Adizes four
personality types, the manufacturer, the administrator, the entrepreneur, and the
integrator were emphasized as a good starting point.
It was boldly claimed that young businesses should employ young employees
because the working life in an entrepreneur business is wild at the same time as the
pay level must be kept down.
The group spirit and the creative zest were emphasized as the most important
motivation factor in the young business. The employees must match eachother,
otherwise it will not penetrate.
When employing the staff, you should do it according to the principle; the best man
in each position, and save being with close friends until your spare time.
The laying off of employees means a loss of knowledge which for a knowledgebased businesses can be particularly severe. It is therefore important to plan resources
so that core employees can be maintained.
The board was introduced - for better or for worse. If the members have been
selected from objective criteria and the board receives all the necessary information it
needs in order to assess the situation of the business properly, it can be a very large
asset and one of the most important success parameters.
A good board means that the initiators will get a qualified opposition and inspiration
in the general decision-making processes. Also, the trustworthiness vis--vis banks,
investors, customers, etc. is increased.
Some tested administrative guidelines for the board work were discussed in
conclusion.
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Chapter 14Chapter 14
176
ones who are waiting and copying. Geographically and limited monopolies, which
protect the investments, simply express the conflict of interest between the society
and the creative inventors.
In return of giving these monopolies, society demands that the invention is made
publicly available. There are several reasons for this. Two of them are especially
important. One is that the technologies of the business are made publicly available.
We are able to study them and learn from them, and continue the development of the
state of the art. Societys collective fund of technological knowledge is open and we
will not be as dependent on large international groups, which tend to keep everything
a secret. We are able to study how they do it, and everything is less secretive. The
other reason is that it becomes almost impossible to infringe other patents, and
thereby time is also saved in that inventions are not repeated.
14.3.1. Patentability.
Inventions can be patented if they fulfill certain requirements. Discoveries cannot be
patented.
A discovery can be defined as a description of how things are connected according to
the laws of nature. An invention can be defined as a method for how the laws of
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178
179
accept the claims. The classic battle is the inventors wish to get the broadest
coverage possible while the examiner is trying to define the claims so that the patent
will survive a battle in court.
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joined. This treaty extends the priority right another 18 months under the
precondition that the application is filed with a joint authority (in Munich) no later
than 12 months after the first filing.
Of course, with a niche oriented knowledge-based product with a limited potential on
the Danish market, the business has to think in international lines right away when it
comes to patent coverage. The most obvious procedure is to file an application with
the EPO which gives coverage in 17 European countries, and then filing a PCT
application in order to get extra time to reach an additional 38 markets. In this way
the costs are also spread over the longest period possible.
It is expensive to establish an internationally covering patent position; an investment
of about DKK 1m or more is needed in the first five to seven years. At the same time
it is also important to be aware of the fact that the market life of many hightechnological products is shorter than this period. We will return to the timing
considerations which have to be made in this connection.
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During the twenty years that the patent is in force no one else can produce these
screws without As authorization.
In figure 7, the technical coverage of the patent is illustrated by the large circle. If
time is marked out upwards, the term of the patent is made graphic as a cylinder in a
three-dimensional rights time domain.
A few years later, another inventor, B, invents and patents the slotted screw. This
patent is inside the screw patent. The protection volume of the slotted screw is
illustrated by the small cylinder.
B now has a monopoly on any commercial use of slotted screws, but he cannot
practice this right as his patent is comprised in As screw patent. On the other hand,
A cannot produce slotted screws as Bs slotted screw patent thereby is infringed. This
could lead you to believe that B cannot use his idea until As patent expires at the
same time as B has blocked A from using an obvious improvement.
This is also the way it will be if A and B cannot stand the sight of each other.
However, most businessmen will not let personal feelings interfere with rational
decisions. Instead something completely different happens. They start to cooperate.
This cooperation is taking place within the boundaries of a license agreement or via a
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strategic alliance.
On the one hand, the example demonstrates the value of being the first taking out a
basic patent. A can force a license agreement on later applications or secure a right to
use them himself. On the other hand, the example also illustrates how B can force his
way into As markets by adding an extra feature which will increase the demand on
As product.
Thus, Ole Plougmanns example uncovers one of the most important qualities of the
patent. A: it can secure the owner getting access to using the invention himself or
receiving license from later supplementing patents. B: it can be used for forcing your
way into a market which is closed because of effective patent monopolies.
The interesting is that both A and B can benefit from it.
With this example in mind, let us return to the wisdom of the previous chapters:
upgrading of well-known products by the use of new technology is one of the safest
ways of creating new and saleable products. New technology used on well-known
problems can often be patented. Each time technology opens new possibilities a
vacuum on the judicial area is created in product areas which are normally
considered to be inaccessible because of the patent situation. If you understand to use
these openings, for example by keeping close to the front line of trenches of the
technically scientific research, the chances of exploiting a technological progress are
favorable.
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you can choose to file a PCT application to extend the area of coverage. If the
application survives the procedure, and about 70% of all applications filed in
Denmark are issued - or in the 14 member countries of the European Patent
Convention. During the procedure, you have paid a filing fee, a submission fee, and
annual fees. When filing in the PCT system, you need to pay again. For each out of
the 38 possible countries you have designated in your application, you have to pay
for having the application translated into each of the languages, the filing fee, the
annual fees, and the patent procedure. If you have hired a patent agent to take care of
your intellectual property rights, which would be the wise thing to do if you want to
patent outside the EPO, then this will of course also cost money. Another thing is that
a competent patent agent is able to produce much stronger patents than the layman.
It is a costly affair to protect intellectual property rights with patents. The
accumulated cost over the first four to six years will be a minimum of DKK 1m for
an effective protection on all the large markets. At the same time, the protection is
not effective if you cannot afford to defend it. If the patent is attacked or infringed it
will cost you a huge amount of money.
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14.6. Trademark.
The law defines a trademark as a peculiar characteristic for goods or services which
is used or intended for use in a business. We are talking about the company logo,
about a peculiar graphic product indication, about any kind of slogan, company
names, figures, type of packaging, etc.
You gain the right to a trademark by using it. If your right is not challenged during
the period of time that it takes your trademark to establish a place on the market, the
right is real, and after that you can go after any competitor who gets too close.
The advantage of registering a trademark with the Patent Office is that they examine
if the trademark is already registered. Much time and money can be saved by
registering the trademark before the commercialization begins.
You should register the name and logo of your business with the Patent Office
because the name examinations of the Danish Commerce and Companies Agency in
connection with business startup are sporadic, and without guarantee that you are not
infringing others.
The registering of a trademark only protects in Denmark and the Danish territories. If
you export, you should secure your trademarks on the export markets so that you
avoid that others own or obtains the right to the trademark. For example, a large
Danish business which sells kitchen sections had to buy the right to use their own
trademark in Canada from a swindler, who had registered a very similar trademark
and thereby a blocking trademark over there. He did this well knowing that the
business was trying to enter the Canadian market. It can almost be compared to
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highway robbery.
The business trademark portfolio can be quite valuable. Just imagine owning the
right to the word CocaCola.
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187
Let us say that you gave up to give out a license on your invention and instead started
a business. If the product is a success you may experience that the competitors
deliberately infringe your rights, as they think that you cannot afford to prosecute
them. If you decide to do so anyway, they will typically delay the judicial decision
for years. In other words, your intellectual property rights are not worth much if you
cannot afford to defend them. This is a strong claim, but there are too many examples
of infringement in bad faith for it to be dismissed. Exactly this problem speaks for
having a financially strong partner to back you up when you enter the international
markets. If the competitors know that you are able to liberate a huge amount of
money in a short time to defend your patents, they will ordinarily not try to attack
you on this area.
As implied above, there are many traps to fall into for the small inventor. Let us
therefore end this section with a few and rough rules of thumb for how to sell your
intellectual property rights.
First of all, always assume that the further you can get away from the laboratory in
the direction of the market, the more you are able to get for your idea. This is also a
reason for considering starting a business which could do the test launch, and then
sell it with all the rights that it owns.
As an inventor, when you go out to sell your invention, your patent must preferably
be newly filed. You must start by sending an appetizer and a non-disclosure
agreement, and you need to contact the largest businesses on the area - globally, all at
once, and with a deadline for the first declaration of interest. If you like, you can
differentiate between going serially and parallel on the market. Any computer freak
knows that there is more action on the parallel communication, and when it comes to
exploiting the commercial opportunities of a patent, you need a high baud rate. Every
single customer takes time and you have only got the one-year rule (the priority year)
at your disposal.
In the next phase where the more specific content of the patent is disclosed, you need
to make a deadline for decisions about further negotiations, and it is important that
you demand that the counterparty pays the costs in connection with travel expenses
and the legal fees. When the rights are transferred, you must receive an up-front
payment which at a minimum covers your development costs. You must also receive
a fixed minimum license, and thereafter a marketing license calculated from the
amount of goods passing the factory gates - because this amount is always counted.
Furthermore, the license agreement must always be geographically limited to the
most important markets of the business, so that you can find other license holders on
the other markets. Finally, the license holder should pay the patent costs on the
geographic area where he holds the rights.
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You should get a lawyer to draft the non-disclosure agreement. This agreement
should contain three obligations. First of all, your counterparty must obligate himself
not to use the knowledge that you disclose, and which the counterparty verifiably
does not have at his disposal at the time of disclosure, without your consent. Second,
you need to promise exactly the same, because otherwise the counterparty will not
participate in the negotiations. Third, the counterparty must promise not to attack
your patent. This is an obvious possibility if you are not able to agree. If the
counterparty violates these demands, you must demand that he compensates your
liquidated damages, and the case must be tried in the Copenhagen Maritime and
Commercial Court.
In order for you to go through with the licensing, it is vital that you have not noveltydefeated your idea. In other words, you need to be very secretive until the patent
application has been filed and the non-disclosure agreement has been signed. You
have to measure the amount of information you give, so that on the one hand the
business is tempted to negotiate, but on the other hand not so much that you defeat
your opportunities of obtaining an international patent.
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It is a good idea that these secrets are defined and described. Thereby everybody who
is associated to the business knows what they can talk freely about. One of the most
important trade secrets is ideas and inventions not yet patented. But there is no reason
to discuss marketing plans, price policy, or product development plans with a
stranger without demanding that they sign a non-disclosure agreement.
Trademarks and design protection offer more protection per invested dollar and
should therefore be included in the protection strategy of the new business.
Patents are the most difficult ones to understand. It is tempting to declare patenting
for the large business domain because the costs are high, especially if you have to
defend the patents. The competition that these costs inflict on the marketing, the
expansion, the product development, are not very pleasant because they cannot be
averted once the process is in motion. As mentioned above, the patent costs will hit
hard after three - five years, which is the time when few of the new businesses are
adequately consolidated to carry them without considerable side effects.
At the same time, it is important that you take the product life cycle and the product
development strategies into your considerations. If your product has a very short life
on the market, it would be reasonable not to consider patent protection, or you can
wait until the last moment to throw in a Danish patent application. If the competitors
start to show interest, you could consider filing an open PCT application which
extends the priority period from one year to twenty, even thirty months, and then you
follow up with applications on the markets where the product has a present and a
future.
If the product addresses a niche, the possibilities of paying interest on the investment
in a patent are correspondingly less than if the market potential is great. At the same
time, there are less competitors. The protection in a niche may therefore replace the
patent protection.
If the product is the first in a family, you may consider waiting to take out a patent
until the second or third product is put on the market, and let the earnings from the
sale of the first product finance the following patents.
Obviously, your decision on the patent strategy must include consideration for the
current patent activity on the area. It is very difficult to get a current impression as
the patents are not published until 12 - 20 months after they have been filed, and
many of them are not published in Denmark. By studying the patent literature, you
will be able to see which applications and which technologies the competitors are
occupied with. If the author is not too smart, you will also be able to read a little
about the content of the patent from the patent name, which is published shortly after
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the application has been filed. At the same time, such a close reading will ensure that
you are not infringing other patents, and in any case, you will be able to read a lot
about other businesses assessment of what is saleable and what should be patent
protected in the published patent publications. In practice, you are able to make your
studies in the Patent Offices reference library, where you have direct access to 80%
of the more that 30 million patents, which have ever been issued. The employees
there will be able to help you point out the relevant classes so that you can target
your search. After that, it normally does not take long to find your way to the core.
If you decide to write your first patent yourself to save money, the Office has an
excellent guide. Usually, the examiner will also help the layman to write the
application. However, the best thing is to let a competent patent agent handle your
patents as soon as you are able to afford one.
The patent
The utility model
Trademark registration
Design protection
Non-disclosure
The patent is the most effective one and the most expensive. The utility model is especially
interesting on the Danish market, but can also be used for the first cheap protection of a later
patent. Trademarks and utility models are often more cost efficient than the patent, but they do
not have the same coverage. Non-disclosure is a natural part of the protection of the intellectual
191
property rights.
Patents, which protect new qualities of known products, can be used to force way into already
protected markets by creating obvious conflicts of interest with the owners of the blocking
patents.
A worked in trademark can become very valuable. It should therefore be registered on the
markets where the product is to be sold. The value depends on the success of the product, but a
well-known trademark makes it considerably easier to introduce new products in that customer
loyalty sticks to the mark.
The value of intellectual property rights depends primarily on the demonstrated salability. Thus,
the value of a patent will increase distinctively if sales references exist. This point of view is
essential to the planning of activities prior to the sale of the intellectual property rights.
An effective protection strategy makes use of all the possibilities available in the system. The
new business needs to develop its protection strategy by looking at a number of factors; the
market potential, the product life cycle, consideration for the marketing, establishment of a
production and development of new products, just to mention the most important ones.
One of the preconditions for developing a balanced patent strategy is that you are familiar with
the patent situation; especially the most important patents, the patent activity, and the market and
technological trends which patents and the activity level reflect.
Finally, remember to do a search report before you start analyzing your idea. The search report
will tell you if you are infringing others rights, or if there is room for your idea, of if you can
make a screw-slotted screw construction.
---oooOooo---
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Chapter 5
193
194
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
4%
12%
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- Personal collapse
Please note that in the above list problems with the sale weigh 60%. In the Ministry
of Trade and Industrys enterprise report [72], which, among other things, is based on
interview surveys with the registered public accountants, marketing economic related
problems are stated to weigh 73%, which is about the same as in Karl Vespers list.
In the same survey the lacking ability of the entrepreneur to manage a business stands
out very clearly in the closure statistics.
All in all, the list is a serious warning to focus the energy on getting the sale going at
the same time as the costs and investments are kept low, and to collect money which
customers owe you. At the same time, it seems that it is a good idea to prepare
yourself for the job as manager before you start anything.
196
3. Fraud
4. Out competed
1 business
1 business
(bankruptcy)
(bankruptcy)
197
198
199
which in a businesslike suitable manner can work together with businesses in the
Fritz Schur Group. Their specialties are paper, plastic, and packaging.
Phone: 33 93 00 11
Fax: 33 93 90 11
DICO A/S
Information technologically oriented investor which stakes on new businesses with a
potential for establishing an international niche dominance.
The product must be fully developed and the capital injection must contribute to
putting it on the world market.
Phone: 33 14 06 00
Fax: 33 14 78 55
Olicom Ventures A/S
Information technology is also the focus of this investor. Especially mobile
computing, multimedia, wireless communication, digital video, and digital audio.
The investments must contribute to the conquering of the world market on the basis
of Olicoms own expertise within management, distribution, production, and
development.
Miljoeudvikling A/S
This development company invests in development businesses which can be turned
into profitable businesses, which can contribute to the practical use of new
technologies combined with the creation of jobs, especially within the gathering and
handling of waste products, production of green products, and development,
production, and sale of environment technology and know-how.
Phone: 39 45 45 80
Fax: 39 45 45 81
Soenderjyllands Udviklingsselskab A/S
Based on a regional local knowledge this company invests in local businesses or
businesses which make themselves local - within the manufacturing sector and under
the precondition that the potential for growth can be rendered probable.
Phone: 74 62 23 84
Fax: 74 62 67 60
NOVI A/S
NOVI is domiciled in Aalborg University Center Science Park, which is also called
NOVI. NOVIs particular field of interest is businesses which are located in the
following five science parks with the first two as especially prioritized:
- NOVI
- The Science Park FYN
- The Copenhagen Science City Symbion
- The Center for Advanced Technology, Risoe
- The Aarhus Science Park
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It must be presumed that businesses in the Innovation House, The Science Center in
Hoersholm, and DIC, which with over twenty businesses form the largest cluster in
Denmark of new high-technological businesses with close relations to a
technologically scientific university environment, would also be of interest to NOVI.
Phone: 98 15 85 33
Fax: 98 15 86 50
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Appendix 1Appendix 1
Guidance in Business Planning
1. Working Method
1.1. Financial estimates and estimates of rights
Before you invest time in business planning, you should orient yourself whether the
idea has a future on the market at all. Make some rough estimates, and move on with
the development of the idea if the estimates do not look too good. If the financial part
looks reasonable, what you need to do next is to investigate whether you are
infringing others rights, or if the idea can be patented, or if you can add an essential
new quality to already existing patents. You can do this by getting the Patent Office
to do a search report.
And then take a closer look on whatever competitors you find out there. And dont
let yourself be intimidated: competitors are great buyers of small companies, and
they may be your key to a future personal fortune. Quite many start-ups were
founded by skilled entrepreneurs to develop into acquisition baits for specific big
companies. On the other hand: no competitors is a sign of danger: no competitors
usually indicate that there is no market. Here it is time to remember, that the pioneers
die while the settlers take the claims. Dont be the one who has to invest his life and
fortune in breaking new ground.
So slot into the lot and be good at something. And stubborn and persistent too.
so that you can make qualified assessments about how the product must be marketed.
Statistical reference books and business records will be the most important sources.
Go to the library and find the information.
1.7. Finances
All the activities and part of the costs and investments of the business have been
described. Next you need to draw up an overall financial survey of the startup phase,
which includes a cash budget for the first couple of years as well as a profit and loss
budget, and a balance budget for the first 3 - 5 years. The cash budget shows how
much capital is required to get started.
Financial surveys are easily impossible to get an overall view of. It would be a great
help to the reader if you were to analyze and comment the budgets and outline the
key figures in the conclusion.
Now you have gathered and processed the information which you need in order to
produce a finished business plan. You start by compiling the sections, so that the
content is consistent and without contradictions. Then you write a short, but very
important summary, and a short, but equally important conclusion. Finally, you
generate a table of contents and produce a nice print-out.
- et voil - the business plan is finished -
expand by increasing its market share, and by introducing its product on new
geographical markets.
-
develop new products for exisiting customers, first at home then abroad
(survival in the long run).
develop exisiting and new products for new customers, or new uses
(expansion in the long run).
how the finances of the business are controlled? (and it is first of all the cash
flow we are talking about.
does the initiator group have the professional skills to manage a business? If
the answer is negative, you will have to state how you are going to
complement the lack in personal qualities and experience.
2.9. Facilities
What physical facilities (buildings, cars, computers, printers, telephones, furniture,
instruments, etc.) are necessary before the business is operative? Prepare an
investment budget. The assembly of machinery is discussed below in section 2.10, no
18. The budget is used in the future financial analysis. Moreover, it pays to be thrifty
in the beginning. Use all available capital to finance sale and production and wait
with bricks, machines, perks, and status symbols. Buy from sub-suppliers and keep
the overhead costs low.
2.
4.
5.
6.
7.
8.
Law
producer does not know who will be the victim in advance. The
injured party can choose to claim damages against anyone who
is involved in the manufacturing and distribution of the product,
however, except from those who only transport the product.
In your business plan, you need to state what accidents your
product could cause if the worst comes to the worst, and the
kind of insurance you have got. Read more about product
liability in chapter 12, section 12.6.
Product development
9.
What development potentials are present? How are they
connected to the goals? Is your product a one-time-onlyproduct, or is it the first version in a line, or the first product in a
portfolio?
Production
10.
11.
12.
13.
Logistics
14.
15.
16.
Finances
17.
18.
are there any culturally determined differences in the buying behavior and
need of the customers?
what does your strength and survival on the market mean to the customer?
Often large businesses will not buy from small and new or financially illfounded businesses because service and obligations cannot be secured.
The competitors
who are they, how large are they, how aggressive are they?
do they feel threatened?
do they form a clique?
will they be able to distribute the product for you?
(If a large and well-known business were to step in between you and your
customer, it may solve the credibility problem, which was mentioned above.)
Trends
does the product live up to the technical market standards, is it pioneertechnology, or is it already out-dated on the day of the introduction?
can the product be developed further in accordance with the technological
development trends of the market?
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1.
2.
3.
What price? Be careful not to sell the product at too low a price
on the domestic market. When you start on the export markets,
the distribution costs will be considerably higher, and the
contribution margin must be able to bear it.
4.
5.
6.
2.13. Finances
Now all the prerequisite conditions must be processed financially in the form of a
cash budget (about 2 years), a profit and loss budget, and a balance sheet budget (3 5 years).
It is important that you understand the interrelationship between these budgets and
that you are able to give an account of them to an interested reader.
The cash budget
The cash budget shows how much money the business has.
The cash budget comprises all the current payments. A month is used as a time unit if
things develop quickly, otherwise a quarter of a year is used. The full expenses from
the investment estimate of the point in time when these are expected to fall due are
included in the cash budget.
Remember to include the difference in time between payment of sub-suppliers and
payment from customers, the building-up of intermediate stocks, etc. VAT and tax
are also included in this budget. You will often find that the better it is going for your
business the worse it is going for the cash flow. Or to put it in another way: The risk
of bankruptcy is literally proportional to the rate of success, which is a bit odd.
The profit and loss budget
The profit and loss budget includes the projected earnings and costs (less VAT) and
it shows if the business is yielding a profit or a loss on a yearly basis.
-
In practice the projected earnings are the sale and any grants.
The projected sale is budgeted in accordance with the marketing plan, cf.
2.12. no 6, above.
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2.10. no 17, above. Furthermore the marketing costs are included on the basis
of the marketing plan, cf. 2.12. no 6.
The fixed costs are those costs which do not change regardless of how much
you sell. Examples: Rent, pay to the permanently employed, insurance,
installments.
Also remember to set aside your own pay in the budget. Naturally, your own
pay must be able to cover your need of a place to live, etc., and personal tax.
-
Besides the fixed and the variable costs, you need to budget for depreciations.
The depreciations are decided on the basis of the investment estimate, cf.
2.10. no 18. As the investments which are made in machines, productive
equipment, and office furniture and fittings normally last for several years,
you do not charge it to the profit and loss budgets all at once, but instead you
spread the costs over the projected life of the purchases. If you project that a
machine can last for 3 year, you allow for _ of the price of the machine as a
depreciation on the profit and loss budget in each budget year.
When the costs of the year have been deducted from the earnings, the profit or loss
before tax will show.
This is transferred to the balance sheet budget, which you will be able to draw up by
means of chapter 10, section 10.3. and 10.4.4., perhaps supplemented by the example
in chapter 11, section 11.8.
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