Decision Making for Expert Entrepreneurs

Transcription

1 Decision Making for Expert Entrepreneurs September 9, 2015 Rob Wiltbank, PhD Use chat to submit questions Yes, you ll get the slides We re recorded, so come back and listen again 1

2 Mission: Fuel the success of angel groups and accredited individuals active in in the early-stage landscape World s largest trade group for angel investors o 220+ angel groups o 13,000 accredited investors o Voice of accredited individuals, portals, and family offices 50 US states + Canada Research/ education partner MEMBER GROUPS & ACCREDITED PLATFORMS New Dominion Angels 2

3 ACA PARTNERS GOLD Robert E Wiltbank, Ph.D. Willamette University Angel Fund 3

4 THE ENTREPRENEURIAL PROBLEM FOR PROFIT / SOCIAL / OTHERWISE Goals are rarely well known & specified The future is extremely unpredictable People don t follow instructions EFFECTUAL VS. PREDICTIVE LOGIC Distinguishing Characteristic Of Predictive Logic: Selecting various means to achieve pre-determined goals M 1 M 2 M 3 Given Goals M 4 M 5 New means may be generated over time 4

5 EFFECTUAL VS. PREDICTIVE LOGIC Distinguishing Characteristic of Effectuation: Imagining & Selecting various goals using a given set of means Given Means Imagined Ends E 1 M 1 M 2 E 2 M 3 M 4 M 5 E 3 E E n What CAN we do, rather than what SHOULD we do. Causal reasoning takes a particular effect as given and focuses on selecting between means to create that effect. What should we do? 5

6 Causal reasoning takes a particular effect as given and focuses on selecting between means to create that effect. What should we do? Effectual reasoning takes a set of means as given and focuses on selecting between possible effects that can be created with that set of means. What can we do? MARKETING Market Definition Segmentation (using relevant variables such as age, income, etc.) Causation Model from Expert Managers Targeting (based on evaluation criteria such as expected return) Positioning (through mktg strategies) THE CUSTOMER 6

7 EFFECTUATION Market Definition Segmentation (using relevant variables such as age, income, etc.) Causation Model from Expert Managers Targeting (based on evaluation criteria such as expected return) Positioning (through mktg strategies) THE CUSTOMER Customer Identification (through Who am I? What do I know? Whom do I know?) Segment Definition (through strategic partnerships & selling ) Adding Segments/Strategic Partners Definition of one of several possible markets Effectuation as Used by Expert Entrepreneurs THE PRINCIPLES OF EFFECTUATION Causal principles (red) generally taught in bschool Effectual principles are always in Blue 7

8 WHERE TO START Goals. Given (based on predictions) WHERE TO START Goals. Given (based on predictions) Means. The basis for decisions and new opportunities: Who I am What I know Whom I know 8

9 RISK, RETURN AND RESOURCES Expected Return. Calculate upside potential and pursue the (risk adjusted) best opportunity. RISK, RETURN AND RESOURCES Expected Return. Calculate upside potential and pursue the (risk adjusted) best opportunity. Affordable Loss. Calculate downside potential and risk no more than you can afford to lose. 9

10 ATTITUDE TOWARD OTHERS Competition. Set up transactional relationships with customers and suppliers. ATTITUDE TOWARD OTHERS Competition. Set up transactional relationships with customers and suppliers. Partnership. Build your future together with customers, suppliers and even prospective competitors. 10

11 WHEN THINGS POP UP Avoid them. Surprises are not good WHEN THINGS POP UP Avoid them. Surprises are not good Leverage Surprises. Surprises can present new opportunities

12 UNDERLYING LOGIC & WHAT TO DO To the extent we can predict the future, we can control it. PLAN To the extent we can control the future, we don t need to predict it. CO-CREATE A CRITICAL DIFFERENCE Prediction Control when facing uncertainty. Prediction: Control: efforts to position the venture for success based on forecasts of important market elements. efforts to directly construct important market elements, in order to lead the venture to success. 12

13 EFFECTUAL DECISION MAKING 1. Where to Start 2. Risk, Return and Resources 3. Attitude Toward Outsiders 4. Contingency 5. Approach Tactics for Control Assess Your Means. Take action based on what you have available: * Who I am * What I know * Whom I know Example: I have person A, I can achieve X, Y, or Z Set Affordable Loss. Pursue interesting opportunities without investing more resources than you can afford to lose. Set a limit on downside potential. Form Partnerships. Grow. Strategy is created jointly through partnerships to create new opportunities. Leverage Contingencies. Surprises are good. New developments encourage imaginative rethinking of possibilities and continual transformations of targets. Transformative. The future as shaped (at least partially) by actions of all players. Prediction is neither easy nor useful. Tactics for Prediction Set a Goal. Goals determine actions. For example, the goal of achieving X, will dictate I need person A with skills matched to X. Calculate Expected Return. Pursue the (risk adjusted) largest opportunity and accumulate required resources. Maximize upside potential. Perform Competitive Analysis. Protect. Strategy is driven by potential competitive threats. Avoid Contingencies. Surprises are bad. Contingencies are managed by careful planning and focus on targets. Predictive. The future is a reliable continuation of the past. Accurate prediction is possible and useful. 13

14 Yngve s Effectual Process Expanding cycle of resources Who I am What I know Whom I know Means Goals What can I do? Call people I know Stakeholder commitments New means New goals Converging cycle of constraints on goals Take Stock of your means: who, whom, what. What can you do for near zero; Or where you can afford to lose? What commitments have you attracted and followed? What surprises are you taking advantage of so far? 14

15 Effectuation in Action Expanding cycle of resources Goals Stakeholder commitments New means Means Engineer Summer Travel Biz Relationship with Sakada What can I do? Interact with people Converging cycle of constraints on goals New goals New markets Your Effectual Process Expanding cycle of resources Who I am What I know Whom I know Means Goals What can I do? Call people I know Stakeholder commitments New means New goals Converging cycle of constraints on goals Take Stock of your means: who, whom, what. What can you do for near zero; Or where you can afford to lose? What commitments have you attracted and followed? What surprises are you taking advantage of so far? 15

16 DISTINGUISHING EFFECTUATION IN VENTURE INVESTING Select ventures that appear most capable of influencing critical market elements. Create and Influence localized markets vs. compete in large ideal ones. Emphasize current means & capabilities rather than on plans for acquiring the best means to reach original goals. 1. Adjusting goals is less expensive than acquiring means. 2. Commitment is more important than Best. Encourage the venture to make smaller investments that get to cash flow positive rather than investing in the resources suggested by market research to hit plan. Overhead trails growth Avoid prediction as the basis for investment decisions. Emphasize affordable loss over maximizing expected values. Effectuation is related to a reduction in failures, but homeruns appear random Distribution of Returns by Venture Investment Hold: 3.0 yrs. US: Overall Multiple: 2.6X Holding Period: 3.5 Approx 27% years IRR UK: Overall Multiple: 2.2X Holding Period: 3.6 years Approx 22% IRR Percent of Exits Hold: 3.3 yrs. 10 Hold: 4.6 yrs. Hold: 4.9 yrs. Hold: 6.0+ yrs. - <1X 1X to 5X 5X to 10X 10X to 30X >30X Red Bars: U.K. % of exits in that Category Blue bars: U.S. % of exits in that Category Exit Multiple 16

17 Variable N= 539 Burners N=514 Earners Difference Test of Inc Year Significant Test of Variable Seller Population N= ,643,472 Burners N=514 11,136,083 Earners Difference Significant Variable Inc Exit Year year N= 539 Burners N=514 Earners Difference Inc Seller Tech Year Bubble Population 16,643, ,136, Diminishing Returns to Raising Capital Seller Exit year VC Population activity (M's) 16,643, ,136, Exit Tech Founding year Bubble VC Activity (M's) Tech Exit Same VC Bubble State activity (M's) Exit Founding Shareholder's VC activity VC Equity Activity (M's) (M's) Founding Same Assets State (M's) VC Activity (M's) Test of Same Shareholder's Revenue State (M's) Equity (M's) Significant Shareholder's Assets Retained Variable (M's) Earnings Equity (M's) N= (10,310,733.73) 539 Burners N=514 3,310, Earners Difference Assets Revenue Paid Inc Year in Capital (M's) 13,919, , Revenue Retained Total Seller Cashout Population (M's) Earnings (10,310,733.73) 37,051,885 16,643, ,310, ,442,152 11,136, Acceleration Retained Paid Years Exit year Capital Earnings (10,310,733.73) 13,919, ,310, , Paid Total Avg Tech Growth in Cashout Bubble Capital Rate 13,919,446 37,051, % ,442,152 95, % Larger Wins Total Years Deal Exit VC Profit Cashout activity Dollars (M's) 37,051,885 22,236, ,442,152 18,347, Years Avg Return Founding Growth on VC Capital Rate Activity (M's) 266.3% 16.3% % 53.8% Pain of Capital Intensity Avg Deal Same Growth Profit StateDollars Rate 22,236, % ,347, % Deal Return Shareholder's Profit on Capital Dollars Equity (M's) 22,236, % ,347, % Return Assets on (M's) Capital 16.3% % Raise Revenue past (M's) $1.1M = marginal effect of dilution > acceleration Retained Earnings (10,310,733.73) 3,310, Paid in Capital 13,919,446 95, Total Cashout 37,051,885 18,442, Years Avg Growth Rate 266.3% 188.8% Deal Profit Dollars 22,236,724 18,347, Return on Capital 16.3% 53.8% Robert E Wiltbank, Ph.D. wiltbank@willamette.edu 17

18 HOW WE VE LEARNED Do experts make decisions differently? It appears so: very different from novices AND from expert managers. Marketing Under Uncertainty: An Effectual Approach. Journal of Marketing 2009, vol 73 (May) p1-18 with N. Dew, S. Read, S. Sarasvathy Effectual versus predictive logics in entrepreneurial decision-making. Journal of Business Venturing 2009, v24(4): with N. Dew, S. Read, S. Sarasvathy HOW WE VE LEARNED Does the level of uncertainty actually matter? It appears so: as uncertainty is greater, groups of strategic action, and their sequence significantly effect valuations. Making Sense: Patterns of Competitive Actions and Valuation of New Firms. Strategic Management Journal, 2010, v31(13): with V. Rindova, W. Ferrier 18

19 HOW WE VE LEARNED Does the use of effectuation affect evaluation? It appears so: similarities between investors and entrepreneurs increases likelihood of investment and investment amount. I Like How You Think: The Role of Cognitive Similarity as a Decision Bias Journal of Management Studies :7, p , with C. Murnieks, M.Haynie, T.Harting HOW WE VE LEARNED Does the use of effectuation affect outcomes? It appears so: effectual angel investors experience fewer failures and the same rate of homeruns. Prediction and Control Under Uncertainty: Outcomes in Angel Investing Journal of Business Venturing 2009, vol 24 p with S. Read, N. Dew and S. Sarasvathy. A meta-analytic review of effectuation and venture performance Journal of Business Venturing 2009 S. Read, M. Song, W. Smit. 19

20 THANK YOU! UPCOMING WEBINARS September 22, 2015: Best Practice Series: Portfolio Strategy October 14, 2015: What You Need to Know About Structured Exits Audience Questions Webinar programs archived at: events/webinars/ ADDITIONAL RESOURCES Marianne Hudson Executive Director Angel Capital Association Christopher Mirabile Managing Director, Launchpad; Board Chair, Angel Capital Association ews-forbes/ ews-inc/ 20

21 UPCOMING ACA EVENTS October 21, 2015: New England Regional Meeting Boston, MA October 23, 2015: Southwest Regional Meeting - Tucson, AZ November 9 10, 2015: Angel Insights Exchange, New Orleans, LA May 9 11, 2016: ACA Summit, Philadelphia, PA 21