Entrepreneurial Process - A Framework
Of course, there are many ways to organize the effort of planning, launching and building a venture. But there are a set of fundamentals that must be covered in any approach. We offer the following as a way to break down the basic activities necessary.
It is useful to break the entrepreneurial process into five phases: idea generation, opportunity evaluation, planning, company formation/launch and growth. These phases are summarized in this table, and the Opportunity Evaluation and Planning steps are expanded in greater detail below.
1. Idea Generation: every new venture begins with an idea. In our context, we take an idea to be a description of a need or problem of some constituency coupled with a concept of a possible solution. (A characterization of this phase is still work in process on this site.)
2. Opportunity Evaluation: this is the step where you ask the question of whether there is an opportunity worth investing in. Investment is principally capital, whether from individuals in the company or from outside investors, and the time and energy of a set of people. But you should also consider other assets such as intellectual property, personal relationships, physical property, etc.
3. Planning: Once you have decided that an opportunity, you need a plan for how to capitalize on that opportunity. A plan begins as a fairly simple set of ideas, and then becomes more complex as the business takes shape. In the planning phase you will need to create two things: strategy and operating plan.
4. Company formation/launch: Once there is a sufficiently compelling opportunity and a plan, the entrepreneurial team will go through the process of choosing the right form of corporate entity and actually creating the venture as a legal entity.
5. Growth: After launch, the company works toward creating its product or service, generating revenue and moving toward sustainable performance. The emphasis shifts from planning to execution. At this point, you continue to ask questions but spend more of your time carrying out your plans.
Although it is natural to think of the early steps as occurring sequentially, they are actually proceeding in parallel. Even as you begin your evaluation, you are forming at least a hypothesis of a business strategy. As you test the hypothesis, you are beginning to execute the first steps of your marketing plan (and possibly also your sales plan). We separate these ideas for convenience in description but it is worth keeping in mind that these are ongoing aspects of your management of the business. In the growth phases, you continue to refine you basic idea, re-evaluate the opportunity and revise your plan.
This website is focussed on the early phases of new ventures. It does not delve into the process of generating the original idea. Nor does it cover the phases of growing a company much beyond it's initial launch. However, the topics of evaluation and business planning remain relevant well into the early life of the company.
The focus here is the evaluation and planning phases. We first develop a framework for understanding and analyzing this process. This table summarizes this framework:
Opportunity evaluation (investment prospectus)
- Competitive position
- Risk / reward profile
- Target customer
- Business model
- Milestones / company objectives
- Company timeline
- Staffing plan
- Financing plan
- Market research
- Business development
- Sales planning
- R&D management
- Operations management
- People management
- Process and infrastructure
To take this analysis one level deeper, we can break down each of these phases as follows.
It is helpful to think of the evaluation step as continually asking the question of whether the opportunity is worth investing in. You are actually constructing and then continually revising an "investment prospectus."
There are five basic questions that you should ask as you evaluate an opportunity.
- Is there a sufficiently attractive market opportunity?
- Is your proposed solution feasible, both from a market perspective and a technology perspective?
- Can we compete (over a sufficiently interesting time horizon): is there sustainable competitive advantage?
- Do we have a team that can effectively capitalize of this opportunity?
- What is the risk / reward profile of this opportunity, and does it justify the investment of time and money?
If you can answer all of these questions affirmatively, then you have persuaded yourself that this opportunity is worth investing in. This is the first step toward being able to convince others, whether they be prospective customers, employees, partners or providers of capital.
These ideas are developed in the Opportunity Evaluation section
There are four main areas of strategy: determination of the target customer set, business model, position and objectives. These are described briefly below and in more depth in the sections devoted to these topics.
The target customer is the set of potential buyers who are your focus as you design your company's solution. The more you know about them, the better off you are. Your characterization should be both qualitative and quantitative.
You should investigate any alternatives the customer has for solving or working around the problem or need that you are targeting. You should understand the buying process in detail, including who are the decision makers and who influences the decision.
The business model is your theory about how you will make money. It involves a definition of a solution to the customer's need, an hypothesis about how and how much the customer will pay for that solution. If there are any assumptions required for your theory to be true (such as the existence of complementary product or services, or the customer's willingness to change business processes) these should also be articulated.
"Position" refers both to how your company is differentiated from any competitors and also how it relates to other companies in the value chain. This is an opportunity to define, at a fundamental level, what your company will do and what it will not do.
An element of position is your company's vision: how it wants to be known or thought of. A compelling vision is necessary to inspire investors, recruit and motivate employees, and to excite customers and partners.
Milestones / Objectives
As a first step toward creating your operating plan, you should create a set of high level objectives for your business. This should include:
- Key milestones (prototype, product, customer, partnerships,etc.)
- Share or penetration into your chosen market
A clear articulation of objectives will allow you to set priorities for your venture, which will be critical as you face the many tough decisions that any entrepreneur must face.
These ideas are developed in the Strategy Development section
Your operating plan is where you spell out all of the things that you plan to do and what they will yield for your business. The activities will cover all areas of the business: marketing, selling, engineering, etc. These activities should yield products by a certain date, possibly partners,customers, etc. These activities will drive the financial performance of the company.
Your operating plan will be a combination of plans, i.e., these people working on this topic for this period of time will produce result X, and forecasts or projections, i.e. predictions about what results will occur. The primary and most important forecast concerns revenue, but predictions about costs of materials and other things may be important as well. The operating plan is the core of your business, and you should make it as good as you can - your plans should be as thorough as possible and your forecasts should be based on the best and most complete evidence you can compile.
Begin with your strategy and break down what needs to be accomplished to achieve your objectives - this is the basis of your plan. The more detailed and fine grained analysis you can develop, the more accurate and reliable your plan will be.
This is a representation of all the major accomplishments or deliverables that are necessary for you to achieve your strategy.
This is the document where you capture all of the hiring your firm will do (skills, experience and timing).
The budget is where all the pieces of the operating plan come together and are expressed in financial terms. This is a critical document for managing your business.
This includes the capital needs of the company, the timing of those needs and the desired/expected sources of that capital.
Here are a few important principles:
- The actual budget, staffing plans, etc. are then driven by estimates of what it takes to accomplish the tasks in the required timeframe.
- Build a plan that captures everything (so that you are not hurt by surprises or unexpected expenses)
- Revenue: detailed bottom up plan, based on best information about customer groupings, conversion rates, sales activity, …
- Expenses: usually people driven – build in realistic hiring timetables, training, learning curve, benefits, travel, etc.
- Program expenses: mostly marketing – must support the plan and estimates should be equally comprehensive
- The plan must close – all pieces tie together.
The plan becomes more manageable when you break it down into major functional areas. The traditional breakdown is as follows, but you don't have to be bound by this except in so far as you should follow Generally Accepted Accounting Practice.
- Research and development
- People management
- Processes & infrastructure
You should monitor your budget carefully and continually, and make adjustments as needed.
A more detailed description of the process of building an operating plan may be found at: Operating Plan Development Process
Execution is organized by the core functional areas of the company: