This is the last post in my series of lessons learned from the last day of my entrepreneurial finance class. Here you will read how our professor, with over 50 years of investment banking and venture capital experience, describes what a good deal looks like to him. As he likes to say, a good deal can be characterized by the following "easily identifiable but hard to assemble attributes."
- Team: World-class managerial team.
-Cover the necessary verticals and horizontals (top to bottom and across functions)
-Relevant skills for opportunity
-Ideally worked successfully together in the past. This last point allows the team to function quickly and efficiently, bypassing "get to know you time."
- Opportunity: Attractive, sustainable model.
-From a survey of entrepreneurs we read in class, 71% of entrepreneurs got their idea by replicating or modifying an idea encountered through previous employment. This means that ideation is usually experiential, not a light bulb going off in your head in a garage.
-Doing something with the idea in real life is better than planning and postponing. In the same study as above, only 28% of entrepreneurs had a full-blown business plan, and 41% had no formal written plan at all. Though our school prides itself on the "Business Plan Development" class it offers, our professor told us that it could be ok to proceed without a formal plan if one has experience in the field, since plans never really survive once they make contact with the real world.
-Offense: Create a competitive edge. This means having multiple options for expansion and an opportunity that is unique to the enterprise and the team.
-Number of ways to extract value from the opportunity. This could be through a positive harvest, like a sale or IPO, as well as the option to scale down operations to a sustainable, more profitable niche area, and liquidation when necessary.
-Defense: Defend your edge through continuous innovation.
- Context: Favorable regulation and macroeconomics.
- Deals: Sensible, binding the opportunity with people through correct incentives.
- Financed: By individuals who add value in addition to their capital, increasing the likelihood of success.
- Financing terms: Provide the right incentives for the provider and recipient of capital.
In class, we read an interview with past Disney CFO Gary Wilson. When asked what creates value, he wrote, "Creativity creates value. In finance that means structuring deals creatively." But we know that financing doesn't cure management problems and is only the tail end of the process; it doesn't make or break a business but rather just gives managers time to succeed or fail.
- Capital: Access to additional capital as warranted.