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Starting an independent new business is rife with both opportunity and risk. And as an entrepreneur, you’re the one in charge: your actions can make or break your business. You need to know the tried-and-true fundamentals—from writing a business plan to getting your first loan. You also need to know the latest thinking on how to create an irresistible pitch deck, mitigate risk through experimentation, and develop unique opportunities through business model innovation.

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▪ Stories of real companies, from Airbnb to eBay

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Everything You Need to Launch and Grow Your New Business

Entrepreneur’s Handbook

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Harvard Business Review Entrepreneur’s Handbook

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Harvard Business Review Entrepreneur’s Handbook Everything You Need to Launch and Grow Your New Business

Harvard Business Review Press

Boston, Massachusetts

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HBR Press Quantity Sales Discounts

Harvard Business Review Press titles are available at signifi cant quantity dis- counts when purchased in bulk for client gifts, sales promotions, and premiums. Special editions, including books with corporate logos, customized covers, and letters from the company or CEO printed in the front matter, as well as excerpts of existing books, can also be created in large quantities for special needs.

For details and discount information for both print and ebook formats, contact [email protected],

tel. 800-988-0886, or www.hbr.org/bulksales.

Copyright 2018 Harvard Business School Publishing Corporation All rights reserved

The material in this book has been adapted and revised from works listed in the Sources section and from Harvard Business Essentials Entrepreneur’s Toolkit: Tools and Techniques to Launch and Grow Your New Business (Harvard Business School Press, 2005), subject adviser Alfred E. Osborne.

No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to permissions@ hbsp.harvard.edu, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.

The web addresses referenced in this book were live and correct at the time of the book’s publication but may be subject to change.

Library of Congress cataloging information is forthcoming.

eBook ISBN: 9781633693715

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Contents

Introduction 1

PART ONE

Preparing for the Journey

1. Is Starting a Business Right for You? 11

PART TWO

Defi ning Your Enterprise

2. Shaping an Opportunity 23

3. Building Your Business Model and Strategy 41

4. Organizing Your Company 63

5. Writing Your Business Plan 77

PART THREE

Financing Your Business

6. Startup-Stage Financing 103

7. Growth-Stage Financing 115

8. Angel Investment and Venture Capital 131

9. Going Public 149

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PART FOUR

Scaling Up

10. Sustaining Entrepreneurial Growth 171

11. Leadership for a Growing Business 181

12. Keeping the Entrepreneurial Spirit Alive 195

PART FIVE

Looking to the Future

13. Harvest Time 213

Appendix A: Understanding Financial Statements 225

Appendix B: Breakeven Analysis 241

Appendix C: Valuation: What Is Your Business Really Worth? 245

Appendix D: Selling Restricted and Control Securities: SEC Rule 144 257

Glossary 263

Further Reading 273

Sources 277

Index 285

vi�Contents

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Introduction

William Bygrave, a scholar and practitioner of entrepreneurship, describes

an entrepreneur as someone who not only perceives an opportunity but

also “creates an organization to pursue it.”

That last part of Bygrave’s defi nition is essential. Ideas are one thing,

but opportunities as we generally understand them are best addressed

through business organizations formed by entrepreneurs. Thomas Edison,

for example, recognized the business opportunity in urban electric illu-

mination, which he pursued through tireless laboratory e xperiments that

eventually produced a workable incandescent light bulb. But invention was

only part of Edison’s genius. He also formed a company that brought to-

gether the human and fi nancial resources needed to implement his vision

of commercial and residential lighting. That company was the forerunner

of the General Electric Company, one of today’s largest and most powerful

enterprises.

The same formula has been repeated through history: recognizing op-

portunity and addressing it through an organization. Some opportunities

are evident and just need to be harnessed; others are created by the en-

trepreneur. For example, in 2007, when roommates Brian Chesky and Joe

Gebbia could no longer afford the rent on their San Francisco loft, they

decided to rent out space to guests. They set up a website with some photos

of their apartment, quickly gaining three guests for their fi rst weekend, at

$80 each. Soon they began hearing from others who had found their site

and wanted a similar offering for informal lodging in cities around the

world.

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2�HBR’s Entrepreneur’s Handbook

The next spring, Chesky and Gebbia enlisted former roommate Nathan

Blecharczyk to help them establish Airbed & Breakfast. To raise early fund-

ing, they bought cartons of breakfast cereal, repackaged it in the theme of

the 2008 election, and resold it to conventioneers, raising about $30,000.

Nevertheless, their site’s growth stalled. While living off the extra cereal,

though, they were accepted into Y Combinator’s accelerator program. In

the summer of 2009, they began testing their own services to better un-

derstand their users’ needs. Realizing how poorly the properties were rep-

resented online, the entrepreneurs began a photography program in which

hosts could have professional shots of their properties taken.

Learning and course-correcting as they went, Chesky and Gebbia

saw their customer base rocket from one thousand in 2009 to over a mil-

lion in 2011. Airbnb’s fi nancials are not formally disclosed, but in 2015,

market reports placed its value at $25.5 billion with projected revenue of

$900 million for the year, based on the company’s reported three-million-

plus listed properties worldwide.

Not all startup stories are so bright, of course. A complete defi nition of

the entrepreneur must also recognize another factor: risk. In the fi nancial

world, risk contains the possibility of both gain and loss. The entrepreneur

puts skin in the game—usually in the form of time and personal savings.

If the venture goes badly, his or her time and hard-earned savings are lost.

And indeed, 75 percent of startup ventures fail to return investors’ capital,

according to research by Harvard Business School’s Shikhar Ghosh. But if

things go well, the entrepreneur can reap a sizable profi t. So if you have a

business idea or an idea about how to fi ll a market need—or even if you just

think you’re interested in starting a business—how do you make sure that

your venture is successful?

The same basic process applies whether your idea is the next high-

growth wunderkind, a robust B2B player in a critical industry niche, or

a local retail shop close to home. You recognize a potential commercial

opportunity and pursue it through an organization, your own managerial

or technical talents, and some combination of human and fi nancial capital.

Of course it’s never quite this simple; in fact, the entrepreneurial journey

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Introduction�3

often takes many twists and turns. This book will walk you through this

process in more detail.

The role of entrepreneurs

Entrepreneurs play an important role in society. As described by econo-

mist Joseph Schumpeter in the 1930s, entrepreneurs act as a force for cre-

ative destruction, sweeping away established technologies, products, and

ways of doing things and replacing them with others that the marketplace

as a whole sees as representing greater value. In this sense, entrepreneurs

are agents of change and, hopefully, progress. Thus, it was entrepreneurs

who displaced home kerosene lamps with brighter and cleaner-burning

gas in the middle to late 1800s. Those gas lamps, in turn, were displaced

by Edison’s incandescent electric light system, which provided better per-

formance and greater safety. Fluorescent lighting came along years later,

displacing many incandescent applications.

We see this pattern repeated in virtually every industry. Entrepreneurs

invent or commercialize new technologies that displace the old. Photo-

copying, the personal computer, the World Wide Web, the spreadsheet,

and new and improved drug therapies and medical devices are all prod-

ucts of enterprising entrepreneurs. Entrepreneurs also introduce products,

services, and platforms that deliver something entirely new: the electronic

calculator, next-day package delivery, crowd fund-raising, aircraft simu-

lation software, oral contraceptives, angioplasty to open narrow heart ar-

teries, and online marketplaces for everything from apartment rentals and

ride-sharing to homemade crafts and fi nancial payments. Entrepreneurs

have given us even mundanely useful things that our parents or grand-

parents would not have imagined: computers we take everywhere (like our

iPhones), contact lenses, milk in aseptic packaging that requires no refrig-

eration, online auctions that bring together buyers and sellers from every

part of the world, and on and on. These products and services improve

customers’ lives. Many are also benefi cial to society and to the planet, be

they improved drug therapies, microloan systems that alleviate poverty

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4�HBR’s Entrepreneur’s Handbook

around the globe, or drones that target pesticides to the crops that need

them most, eliminating waste and pollution.

In conceiving of these new products and services and forming and

running enterprises to bring them to customers and users, entrepreneurs

often sweep away stagnant industries and replace them with growing ones

that generate new jobs, often at higher wages. Thus they have a central role

in building wealth and dynamism in the societies in which their enter-

prises operate.

What’s ahead

This book takes a linear approach to entrepreneurship, from initial ques-

tions that you should ask yourself before you begin (“Am I the type of person

who should start a business?”) to the last issue that you’ll need to consider

as a successful business owner (“How can I cash out of the business I’ve

built?”). Though your own experience is likely to differ from this simplifi ed

framework—the entrepreneurial process is nothing if not iterative—this

book should give you a good overview of the issues you’ll probably face and

how to approach them.

Part 1 prepares you for your journey. In chapter 1, we describe the

self-diagnosis that every prospective entrepreneur should undertake. Are

you the right type of person to start up and operate a business? This chap-

ter will help you answer that important question.

Part 2 helps you defi ne your enterprise. The fi rst steps in the entrepre-

neurial process are to identify and evaluate potential business opportuni-

ties. Chapter 2 offers fi ve characteristics you should look for in a business

opportunity, particularly focusing on the problem your business is trying

to solve. It also introduces the lean-startup methodology as a way to eval-

uate market interest and to experiment with other hypotheses about the

opportunity you’ve identifi ed.

If your initial evaluation of the opportunity pans out, you’ll further

refi ne your business model and strategy. These two critical concepts are

the focus of chapter 3. It describes how the business model explains the

way key components of the enterprise work together to make money—and

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Introduction�5

how to begin to test your business model with real customers. It also shows

how strategy must be designed to differentiate the entity and confer it with

a competitive advantage. Finally, the chapter offers a fi ve-step process for

formulating strategy and aligning business activities with it.

Assuming that your evaluations and experiments have given you con-

tinued confi dence in your business idea, you’ll need to structure your busi-

ness from a legal perspective. In chapter 4, you’ll learn about the various

legal forms of business organization used in the United States. You’ll see

their pros and cons and decide which organizational structure is best for

your venture: a limited-liability corporation, a sole proprietorship, a part-

nership, a corporation, or something else.

Chapter 5 gets you started on writing a plan for your business, incorpo-

rating many of the elements discussed previously. A business plan explains

the opportunity, identifi es the market to be served, and provides details

about how your organization expects to pursue the opportunity. The plan

also describes the unique qualifi cations that the management team brings

to the effort, lists the resources required for success, and predicts the re-

sults over a reasonable time horizon. This chapter tells you why a business

plan is necessary, gives you a format for organizing one, and offers tips for

developing each section in the format. It also describes other documents

similar to a business plan, such as a pitch deck.

Part 3 focuses on how to get the funding you need to fi nance the vari-

ous stages of your enterprise. The global recession of 2008 took a big toll on

entrepreneurship, a sector that has not yet recovered. In the United States,

new business starts went from 525,000 in 2007 to just over 400,000 in

2014. There are many reasons for this drop-off, but small businesses tend

to fare the worst in a recession because they depend heavily on bank debt,

which becomes harder to obtain during economic downturns. Since the re-

cession, some new forms of fi nancing, such as crowdfunding, angel invest-

ing, and online banking, have appeared. This part of the book describes

those new forms along with more traditional methods of raising capital.

Chapter 6 concentrates on the fi nancing requirements that businesses

typically encounter in the fi rst phase of their life cycles. It also provides an

overview of life cycles for different types of businesses.

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6�HBR’s Entrepreneur’s Handbook

In chapter 7, the discussion of fi nancing continues. It addresses the

next stages of a business’s life cycle: that of growth and maturity.

Chapter 8 focuses on rapidly growing fi rms and their need for external

capital specifi cally. Entrepreneurs can bootstrap early development from

personal sources, friends, and relatives, but these enterprises usually need

external infusions of capital to move to a higher level. This chapter intro-

duces two external sources of capital—angel investors and venture capi-

talists or venture-capital fi rms (VCs)—and explains how best to approach

them and win their support.

At some point, many growing fi rms with exceptional revenue potential

seek and obtain fi nancing through an initial public offering (IPO) of their

shares to individual and institutional investors such as pension funds and

mutual funds. That rare event results in a signifi cant exchange of paper

ownership shares for the hard cash the fi rm needs for stability and expan-

sion. Chapter 9 describes what it takes to be an IPO candidate, the pros

and cons of going public, the role of investment bankers, and eight steps

for doing a deal. Because very few businesses will obtain external capi-

tal from an IPO, we also present an alternative arrangement: the private

placement.

In part 4, we discuss the effects of growth on your organization. Par-

adoxically, success is sometimes the entrepreneurial company’s greatest

enemy; hierarchy, bureaucracy, and complacency frequently follow. Chap-

ter 10 walks you through the organizational and strategic aspects of deal-

ing with growth, while chapter 11 emphasizes that you as a leader may

need to reexamine your way of working and even your own role as your

business becomes larger.

As organizations grow, they tend to become more complacent about

how to best serve their customers. Chapter 12 addresses how you can sus-

tain entrepreneurial innovation and energy in your growing company even

as it naturally becomes more process-driven and operations-focused. You

can keep new ideas fl ourishing through efforts to manage your organiza-

tion’s culture, strategic considerations around innovation, and your own

leadership involvement.

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Introduction�7

Finally, in part 5, we look to the future. In chapter 13, you learn about

harvesting your investment in a private business. Founders—and the busi-

ness angels and venture capitalists who support them—look forward to

the day when they can turn their paper ownership into real money. This

chapter describes the motivations that lead to harvesting, the primary

mechanisms for doing so, and the methods you can use to answer the

all-important question, “What is this business worth?”

Additional resources

The back of this book contains material you may fi nd useful. Appendix A

is a primer on fi nancial statements. If you haven’t studied accounting or

haven’t thought about it for a long time, this material will bring you up

to speed. Go to appendix B for details of breakeven analysis not covered

elsewhere in the book. Appendix C provides an overview of the methods

used to determine the value of business enterprises. The appendix won’t

make you a master of this very technical and specialized subject, but

it will teach you enough that you can deal intelligently with valuation

experts. Finally, appendix D is taken directly from the US Securities and

Exchange Commission site. It explains Rule 144 on the sale of restricted

and control stock. Few readers will ever need to understand Rule 144,

but those who do may fi nd this useful reading.

The appendixes are followed by a glossary that provides definitions

of key terms.

Finally, the book includes a “Further Reading” section. There you’ll fi nd suggestions of books and articles—both recent and classics—that

provide more detailed information or unique insights into the topics cov-

ered in these chapters.

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PART ONE

Preparing for the Journey

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1.

Is Starting a Business Right for You?

What makes entrepreneurs tick? More specifi cally, what are the personal

traits and backgrounds of people who become successful entrepreneurs?

This chapter considers those questions and helps you decide whether you

have the right stuff to be a business entrepreneur.

Many books and websites include self-scoring tests that you can use

to assess your fi tness for entrepreneurial life. (The US Small Business

Administration [SBA] provides one such test on its site at https://www

.sba .gov/starting-business/how-start-business/entrepreneurship-you.)

These assessments can be a good place to start as you think through

what entrepreneurial work would mean for you and whether it’s a good

fi t for your personality and goals. This self-evaluation is especially useful

if you’re starting with an idea for a business. Having ideas is important,

but it’s only one step in a process that also requires other skills and per-

sonality traits.

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12�Preparing for the Journey

This and other tests typically integrate some combination or subset of

the traits shown in table 1-1. Let’s look at these traits in more detail.

Ideas and drive

Christopher Gergen and Gregg Vanourek, founding partners of New

Mountain Ventures, an entrepreneurial leadership development company,

describe the basic process of entrepreneurship as follows: “Understand a

problem, grasp its full context, connect previously unconnected dots, and

have the vision, courage, resourcefulness, and persistence to see the solu-

tion through to fruition.”

Without those fi rst elements—a full understanding of a problem, new

connections, and a vision or direction for a solution—there is no entrepre-

neurial venture. Whether the problem you’ve identifi ed is global or local,

broad or niche, your ability to spot it and conceive new solutions is a core

element of entrepreneurship. And passion about the problem you are solv-

ing might not be as important as you think—see the box “A passion for the

work.”

People skills

Having identifi ed a problem or even a potential solution is one thing. But

to launch a successful venture, you must also make other people see the

merits of your idea and invest in it—whether they are employees, custom-

ers, or funders. Your ability to lead, persuade, take feedback, and build a

network will determine whether you’ll actually be able to bring your idea

to fruition.

In the HBR Guide to Buying a Small Business, Harvard Business

School professors Richard S. Ruback and Royce Yud

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