Masterclass en entrepreneuriat et gestion stratégique

1. Introduction: Good morning, Welcome entrepreneurs and investors. Welcome to my masterclass and entrepreneurship and strategic management. First of all, who am I? My name is Kara. I am 49 years old. And I'm sharing here with you my experience of having been managing leading companies for more than 20 years, including the latest one where I was counting Manager for Microsoft in Luxembourg and running a business of above 200 million of annual revenue. I'm also and you can see this on LinkedIn. Since 3-years independent board director, including a private equity holding in Dubai. And here specifically in this training, I'm also sharing my 15 years of business mentoring young and novice entrepreneurs and startups. And also what you will have here, access to it in this masterclass is in fact a class and I'm teaching at university level in a mouse integral partnership as well. What we will be discussing in this training is we will start from ideation, go to the launch phase. What are the main things that you need to know up to a growth phase maturity face, and even potentially going public with IPO DPO. So the purpose of this training is really that you understand the fundamental, that you gain confidence, that you've become decisive in your decisions as a novice entrepreneur, that you reduce your learning process, that you can benefit from my experience and also that you grew into an impactful person structure of the course. So the main chapter is going to be entrepreneurship and ideation. So the very first start incorporation major laws, strategic management. Corporate finance is also very essential, including things like cash and sales management, where people are not attentive, at least novice entrepreneurs are not attentive to. And then also some tips and tricks from myself and having mentors for many, many years, young entrepreneurs and novice entrepreneurs about the self-management as well, the project in terms of assignments, we will be practicing on a concrete example where I will ask you to do a strategic analysis of one of four potential companies, including a Five Forces model of micro pod and pestle. But that will be discussed in the training in the strategic management part. So in chapter three, and this class, as I said, has been created for you, for novice entrepreneurs, people who want to start their own business, people who want to become their own boss. So hope to see you in the first lesson. Thank you. 2. Entrepreneurship: Welcome back entrepreneurs, welcome back investors. So in this second lecture, as there is in the beginning, I'd like for us to introduce what entrepreneurship and actually means. So the, the term entrepreneur in fact comes from the French verb entrepreneur, which means to undertake. And very often entrepreneurs are. The definition of an entrepreneur is linked to a person, an individual, or sometimes a group of individuals. Individuals who have a new business idea, who want to create something new, want to even have a societal impact. And that's really what the idea is about undertaking something. And so 11 term that I just want to con here as well, which also pops up sometimes is intrepreneurship, which is basically the same, has the same meaning than entrepreneurship is linked to the existing company. So you have this very big companies that are sometimes in their comfort zone. They are not very innovative. So you have some people, or let's say some senior managers in those companies who allow people who they want to foster entrepreneurship inside the company, but as it is inside the company and existing company, they call it intrapreneurship, but it's basically the same. It's entrepreneurship from the inside of an existing company. And very often entrepreneurs are seen as innovators disrupt us. Sometimes even when you look at people like Elon Musk. And again, I don't want to judge now here. I will not have an opinion. I think he has at least ideas that they're gonna be even seen as superstars because they are disrupters and they come up with new ideas of goods and services. But basically the idea of an entrepreneur is really to generate new value by creating a new, new products, new services, coming up with something that's existing company's existing entrepreneurs, existing managers have not thought about yet. When I look at entrepreneurship and I'll try to summarize or take an analogy, how I look at entrepreneurship, basically, I look at it. This is a Roman god called Yanis, where this God in fact has two faces. And I think that entrepreneurs have to have these characteristics, those attributes of not just looking back the past, but also looking into the future. You cannot just look into the future and not look what is going on in your company and how your past performance was. Looking at the learnings. Because I think that there is a lot of things to learn from previous mistakes and bring those in into the future. Let's say decisions, future vision of the company. So I believe that entrepreneurs, they have to strike the right balance between looking at the past, looking at what is going on, but also thinking for the future of the company because otherwise, I mean, nobody else will do it. If it is not the founders of the innovators in the company when they look at entrepreneurship as well from, let's say, more economical perspective. As already said, that entrepreneurship is little bit defined as the process of undertaking something with generating a value through creation potential of a new product, new process, new services, and new idea. When you look at entrepreneurship, as I said from an economic perspective, economies, they look at entrepreneurship as one of the four forces that are part of the, let's say, production process as they call it. The three being lands, natural resources, labor, which could be your workforce, can be also robots, of course, and capital. So capitalists basically money or assets that you bring into the company as, as capital. And that's basically what economists say, is basically that entrepreneurship is really the idea of combining the other three resources, which are land, labor and capital, and doing, doing something out of it. So you can see that entrepreneurship is kind of an energy. It's driving force is the engine that in fact combines the other three resources to have some, let's say, positive outputs, hopefully. So that's really the intention of entrepreneurship. This just the detail. I do not like the term land and natural resources. I prefer to use property, plant equipment because it actually relates back to the balance sheet. But that's now a detailed question to you. I mean, there are many entrepreneurs. I mean, we discussed earlier, I mentioned earlier that maybe some, some entrepreneurs or even considered as rockstars. I mentioned, I think Elon Musk. I'm gonna be showing you a couple of pictures and I'd like you to put a name behind a picture of this people. And at the count of three, pause the course. And after the count of three, you're going to be resuming it. And let's say elaborate on who those people are. So let, let me do the count 123 and please pause now and have thought about who those people are. Alright, resuming back. So solving here, who are those people? You probably have recognized some of them. So on the top-left it, Steve Jobs, you're going to have Jeff Bezos. Warren Buffet, Jack Ma from Alibaba, Jack Welch, General Electric, great personality also in terms of strategic management, the founders of McDonald's, the founder of Coca-Cola. So those are just examples. And if you extend this, there have been huge amount of entrepreneurs throughout, let's say the last centuries. And it's not just now or a century ago that we are looking at entrepreneurship, but you had even big families like the RACI and the Vanderbilt's or Rockefeller's immediately in the middle age, more or less in Italy. There have been a lot of people that have had the energy. And this is how the world has evolved of people coming in with new and new ideas in fact. But those people, I mean, we were looking at people that were entrepreneurs two hundred, three hundred, four hundred years ago, they all had to face similar obstacles. It's true the world was not digitized as it is today, not globalized as it is today. But the obstacles have been very similar for all of those entrepreneurs. And let me, because you're going to see in the s-curve of corporate growth, I want to discuss a little bit what are or where do those obstacles play a role in the S curve of corporate growth? So let's first elaborate. What are the typical obstacles that entrepreneurs will face and have been facing if you look at the lives of those people, well, the first one is typically, very often it's easy to have ideas but then it's like, okay, do I have capital? How, who, or who can help me incorporate the company? And there is so much bureaucracy potentially with the government. I need to do sanitary reporting and this, and that. It's like it's a nightmare to just set up the company. So raising capital, as I said, I didn't have to hire talent and to keep this talent. And obviously it's not easy for startups. And when I'm discussing with young startups, it's not easy for them to hire and to keep talent because today even in 2022, a lot of those talents, they want to work for Amazon, they want to work for Google, they want to work for Facebook and for Microsoft. It's difficult for keeping them. So you need to have, let's say a vision about when you want to bring the company as a founder so that you can hire the best talent and keep that tannin. And it's really not an easy task. I admire the young entrepreneurs who have to deal with this obstacle. Then obviously acquiring customers. I mean, who's going to pay the salary at the end of the month of your salary, but also the salary of employees. It's the customer. I mean, let's be very clear. So if you don't acquire customers, I mean, you may have a lot of cash, but that cash will burn very, very rapidly and you may end up in a situation where you have to shut down the company. You will have also entrepreneurs have to provide leadership and management because people and teams I expecting from you to be the leader or the manager or the person who drives a vision, who sets the agenda for the future for the next years. And last but not least also, not just the people and the teams are expecting this from you, but it's in your interests, are also looking at market structures that competitors, what are the changes that are happening in the market? So that's the kind of thing that you will also have to deal with. When you take those six common obstacles. And I promise you, the Rockefellers, the vulnerabilities, the Dimitri, they had to deal with that as well. When you look at those six miles and we bring in here the S curve of corporate growth. So what is the S curve of corporate growth? S curve of corporate growth is the typical lifecycle that any company and I promised you any company goes through. It always starts with an idea. Obviously the company doesn't exist, then you are in the ideation phase. That's the inception of the company. Then you have the launch phase, company gets incorporated. Then you have the first customers that are being acquired you on a growth phase. Everybody super-happy. The growth is like triple digit growth. Every year you grow to a 103%, 100%, and then a certain moment in time, when the product is more mature, you already have a good market penetration. The company becomes mature. And also at one in time is like Okay, everybody has a product, so what's next? And at that moment in time, if you're not attentive to what is called a strict strategic inflection points, you may end up in a decline. And strategic inflection points, they happen to any company. And again, I promise you, strategic inflection points always come up. And it can come from a situation like COVID, it can. So external factors that can come from a change in regulation because the government has decided to change something that influenced the way how you sell your products. Or maybe you are no longer authorized to sell your product. So those are the kind of things where entrepreneurs, they have to monitor the external environment. That's why we're gonna be discussing about the Pascaline model. And try to be attentive on what could be potential strategic inflection points. And the most important thing here is not to miss those strategic inflection points. And as I told you, I've been working at max of as general manager for the Luxembourg subsidiary for many years. And even myself, I had to look at those strategic inflection points and Microsoft as a cooperation. Think they did a fantastic job. And Steve Bohmer started that, bringing in pivoting the company. So pivoting is really shifting and that's term that is used in entrepreneurship. So pivoting from a software editor to a Cloud service provider, would we have a would have missed that strategic inflection point. I'll probably today, maximum would be in huge trouble. But if you look at the past, Microsoft in the ideation phase has started as with Bill Gates, one of the founders of the company who developed an operating system for the Intel chips to make it very easy for IBM and then for the other ones like HP, Dell, etc. And so we're Apple was much more closed ecosystem. Windows and Office war as software, we're really catch cows of Microsoft and obviously you have new products coming in. But at the very end of the day, at a certain point in time, even for a company that has been so dominant as Microsoft, they came to a moment where competition came in like AWS, Google apps, apple developing their own productivity suite as well. So customer saying, well, we no longer wants to its burden to us, so always have to update the software. Can you count? You just run the show for us, Microsoft please. And this is where the strategic inflection point came. Plus also the fact that I'm not discussing it now here, but also from a cash predictability perspective. You also see more and more companies that want to have a subscription model in terms of revenue streams to have this predictability of cash inflows versus how it was funny Years ago, he was selling the software. You had all the cash now. But the customer potentially will no longer purchase from you from the next three years that was creating a lot of, let's say, fluctuation in the cache predictability, which is also not good because shareholders and investors and analysts and all the stakeholders and liked to have predictable cash inflows and cash outflows. So this is the S-curve, a corporate growth. And when you put now and as I said, this happens to all companies and we're gonna be discussing the next lectures that the cycles of this strategic inflection points, they come in fact more earlier, more and more because just the pace at which new innovations come up is increasing and the adoption and the dissemination of new technology is being reduced. In the past, you had a strategic inflection May be coming up every 30 years at the time of Rockefeller and Vanderbilt. Now, it's matter of after ten years, but stay with me. I'm going to be explaining this in a future lecture. When we come back to the milestones and the obstacles that entrepreneurs have to face when I've listed here, the first one being the incorporation of the company, the second one, obtaining the first round of money of capital. That's typically after the ideation phase, after the inception phase. And you can draw this in the s-curve of corporate growth when you look at obtaining financing, keeping talent, hiring talent, acquiring customers, but also providing leadership and management of the company. That's something that's why my cycle that I was showing earlier. This is something that will happen all the time. It's not something that you say, Yeah, I didn't know and now I can relax and go to the beach for the next ten years. Now, you have to care about your talent. You have to care all the time about your customers and avoiding churn, avoiding turnover and your customers, but potentially acquiring new customers as well. And people are expecting from you to provide continuous leadership and management of the company. So that's why you see here that the obstacles, two to five, I'm drawing them on the whole S curve of corporate growth. That's a continuous, let's say topic that you have to deal with as an entrepreneur. Then last but not least, managing competition and market changes. So I could have drawn the same line like two to five, but I decided to bring it a little bit late. And let me explain. I believe that when entrepreneurs start a company, they have incorporated the company. The company is a growth phase. Initially, most of the entrepreneurs, they don't care about competitors and market changes. Sometimes it's bad wake-up call because law changes and entrepreneurs haven't looked into it. But I believe that managing competition and managing market changes and clean things that can be, let's say, determined or analyze repeatedly, model that we're gonna be discussing in the strategic tools is something that comes. After the growth phase has started, It's not something that I recommend to entrepreneurs to start from the very beginning. It's clear that at the ideation phase before raising capital, you need to understand if there are already ten competitors are doing the same or have the same idea than you. And I may give you a concrete example. Learning platforms. I mean, I like a lot Udemy skillshare skill success. I have been asked not to participate in a new platform. This code invested Pro from California that has not launched yet. But if you are now the 25th learning platform that wants to go after the Udemy is the Skillshare. So skilled successes. It's very complicated. I mean, you need a lot of capital and a lot of efforts and probably some different shades to have the existing customers of those platforms switch to you. Or potentially you buy the takeover, the cost for switching them, but you need to provide value. So obviously in the beginning, of course, you need to look at competition. Otherwise you will be burning unnecessary cache and maybe you idea is bad. But that's part of what we're gonna be discussing the business model canvas and look into this. But afterwards, when the company has launched is growing faster than really, you will need to look at competitors and market changes. And again, I'm not speaking here too much in this training about it. But basically there is an discussing this in the corporate finance training. Basically in, on this curve linked to point number six, what is the incentive for competitors to come in and to exit the market? It's basically the profitability. So if you have an idea that is highly profitable, you're going to have somebody and you're the first one, you're going to have somebody who will copy you, I promise you it's like this. Today, for example, if you are in a market where you have 15 competitors and the average return on invested capital or so the average margin profitability of those 15 companies is like present. You're going to see that some competitors will drop out and they're going to exit the market. And so there you have also like this S curve doesn't profitability. So when profits are high, you're going to have competitors coming in and we want to replicate what you're doing. And when profitability is low, you're going to have competitors exiting a specific market. Look at the airline industry. Very capital-intensive. When margins were high, you had like low-cost coming in because they wanted to capture specific segments and democratizing airlines or flights in fact. So, but again, just understand that here on the S-curve, a couple of God, you have those six obstacles that you can reflect during the curve. So with that, I hope that you understand already what is intention entrepreneurship and what are, what are already the, let's say in the life cycle of a company, what are things that you need to be attentive looking at those six obstacles that an entrepreneur has to deal with. And I promise you, even two hundred, three hundred years ago, the same entrepreneurs had to deal with the same obstacles. They're just not that the world is more digitize, more and more technology heavy, but a more globalized. But basically the problems remain the same for any entrepreneur. In the next lecture, we're going to be discussing the history and the current state of innovation, looking at where innovation is coming from before then in the lecture afterwards, looking at how to structure the ideas and through MDPs, Bismarck can run those kind of things. So thanks for listening in and talk to you in the next lecture. Thank you. 3. History & current state of innovation: Our islands pronounce and investors. So as introduced in the previous lecture we are going to be discussing now are looking at the history and current set of innovation. When we look at history of innovation. And I'm not saying that it's the best way of looking into it because they're going to be discussing in, I think it's in a later chapter, when we look at the neuroscientific process of creativity. And we're going to be speaking about the full scientific paradigm. Well, let's just put that aside for 1 second. But very often innovation is linked, or people link innovation to the industrial revolutions. When we look at humanity for the last, let's say, a thousand years. And we could come back to the Egyptians, we could go back to the Greek, to the Roman civilization. But let's just look back at the last six hundred, seven hundred years. The first industrial revolution happens, let's say late 18th century, start of the 19th century and was in fact initiate it in, shall I say, in Britain, it was not still a United Kingdom. I think. I'm not a specialist on history, but anyhow, where in fact water and steam appearance and that allowed the mechanization of production. And you have the first trains being fuels by water and steam engines. First the first industrial revolution, and then of course that industrial revolution loud to build boats that were crossing the ocean and having engines as well. So really the mechanization of production, the second industrial revolution came like half a century later, more or less so between 18701920, some people relate to it as the Taylorism. Because it's really the idea about becoming much more efficient in managing a supply chain as a division of labor tasks as well. Also the appearance of electric power. And this allows mass production. If you look at Henry Ford, so the founder of Ford Motor Company, so it's automotive industry. Henry Ford was, if you look at the Model T, that was one of the first cars that was built in a supply chain with the intention of being able to have large volumes of production. Very repetitive. And that was really the idea of division of labor. Very specialized people that would do repetitive tasks day in, day out. So that was a secondary loss of revolution. You see that they have been not so many revolutions until now, let's say the last one hundred, one hundred fifty century. What happened then? Third Industrial Revolution is appearance of the transistor, which basically is linked to the n transistors being packed on microprocessors. So it's basically, it's the appearance of electronics. Also programming, programming chips. The whole information technology that started around a thing 1950s and 1960s of the Second World War, which then you had companies like IBM, the first mainframes. So really accelerating calculations that were done manually before, really having the opportunity to do a lot of calculations and having a lot of compute power. And then the fourth industrial revolution that's now since 2016 more or less. There's an interesting book from Charles Schwab called the Fourth Industrial Revolution, where we have seen this industrial evolution is of course building. In fact, every industry evolution is building on the predecessor, is building on a lot of the tech innovations of the 1950s and 1960s where we have now a lot of, let's say, technologies that have exponential growth. If it is DNA sequencing, if it is also virtual reality, artificial intelligence that was born in the 1950s and went through 23 winters, AI winters, and now people are really leveraging artificial intelligence. There is a blurring between the physical and the digital world, as well as what we call cyber-physical systems. So that's the fourth industrial revolution. So what we see is that if willing and if you allow me to link innovation to the industrial revolutions, that the pace of innovation has accelerated. And I'm expecting this will continue. In fact, over the next decades. What is difference or what? Yeah, when you, when you look at industrial revolutions and when you look at commodity technologies, you can look at private car, running water, a fridge, TV, and smartphone, social media. If you analyze how those technologies have been adopted, and this curve shows on US population, what is the penetration of the technology on the US population? So if you read 100%, it means that 100% of the US population has access, for example, to running water. And if you look around in water, it took nearly a full century, nearly 100 years for any American to have access to running water. It's still probably not the case because we know that there are some people who do not have access to running water, even the US. But we can consider here and allow me to say from an economic perspective as a central perspective that More or less everybody has access to running water. But if you look at the graph on the left-hand side, it took nearly a century to have everybody, any American having access to running water. Automobile tube-like 50 years from the Second Industrial Revolution, Henry Ford Model T, removing the horse carriages and being replaced by cars. Up to the 1980s, more or less, where around 80 per cent of the US population hat's a private car. So you see that the speed of dissemination of commodity technology was around 50 years, 100 years. If you look over the last decades, we are now in 2022. If you look back at 2010, you look at new technologies like tablets, smartphones, social media. You see that it took for those new technologies, commodity technologies, tube-like a decade maximum. That's 80% of the US population was having access to this. And this shows you why the pace of innovation is accelerating in an exponential way versus how it was before. Okay, that's good. But what's the consequence for cooperation? Where here in entrepreneurship and strategic management training, what's the consequence for corporations? Are basically corporations, they feel much more pressure. The strategic inflection points. What else? What I was explaining in the previous lecture, the strategic inflection points are coming much earlier. You can just relax for 30 years until the next strategic inflection point comes. Potentially, the next inflection point comes in five years and you're gonna be fully disrupted and you're gonna be going bankrupt because you have missed that strategic inflection points. A new way of looking at, or let's say confirming that this is true, that's a strategic inflection. Points are coming much earlier, is looking. And this is a study that was done by Professor Foster of Yale University and he has been analyzing on the SAP if I found it. So that's basically the 500 largest companies in the US. It has been analyzing the average lifespan of companies on the S&P 500. And you see that a century ago, 1920s, the average lifespan of a company listed on the S&P 500 Index was like 67 years. So like two-thirds of the century, if you look now, it basically has been divided by three. So basically accompany on the S&P 500 has a probability of survival of 15 to 20 years. This shows, and you said this has been continuously decreasing over the last century. This show, this shows what I'm trying to tell you three innovation that as the pace and the speed of innovation is growing exponentially, the companies are feeling that pressure and the strategic inflection points are becoming shorter and shorter and buy that more and more companies are disappearing at a faster pace. This is basically what the study or analysis by Professor fossil from Yale University is saying. And I could expand this to more, let's say dates. I just took two decades here. I took in 1999 before the.com bubble and in 2019 when you look at the largest market capitalisation. So these are not even as a P5 followed, but probably Dow Jones, 30 companies. You see that even in 20 years time, the landscape of the largest market capitalisation has changed. If we look at 1999, you had companies like General Electric, Exxon, Intel, loosened technologies, Nokia, Walmart, those were in the top ten of the largest market capitalisation in the world. If you look 20 years later and you would look today in 2022, you see that we have moved into the big tech area. You have companies like Apple, Alphabet for Google, metaphor, Facebook, Amazon, Microsoft, who are in fact running the show of the largest market capitalizations. And other companies like loosened technologies, I mean, even Nokia. Nokia, as I will not say, disappeared, but it was acquired by Microsoft, it was a failure, etc. But the world has changed for a lot of these companies. And when I'm teaching this training, I'm always saying to entrepreneurs, I think about those companies, the companies that are listed on the Dow Jones 30 on the S&P 500. Those are companies that have easy access to capital. They have easy access to talent because the brands interesting. Nonetheless, they disappear, they potentially go bankrupt. They miss the strategic inflection points. And imagined for an entrepreneur, startup, how difficult it is for them. I'm not saying that You shall stop here and even stop the training and do not move forward with your idea. I just want to be realistic that from the startups that start at the same moment in time, ninety-five percent will die. And this is just more than what you see here. And what Professor, Professor Foster from Yale University was explaining is that already big companies that have easy access to capital, to resources, talent because they have nice brands and everybody wants to work with them. They are challenged to imagine how startups or challenge. But nonetheless. I mean, the entrepreneurs, they have great ideas. They do things. Elon Musk, Tesla heated space x, and those kind of things. Jeff Bezos did Amazon, Jacques Monod, Alibaba. So there are definitely possibilities out there. And you need to believe in your idea, but your idea has to have an impact and really create value or solve a problem for people. And what we're going to be discussing this in the business model canvas and the value prop Canva. When we look at the origins of innovation, you could say, but okay, I mean, I understand that new companies come up, replace older companies, more mature companies like General Electric, Nokia, etc. Where are, in fact ideas? What is the origins of creativity and of innovation? One of the main element is not just individual to have something in their brain, have an idea. We're going to be discussing this in the next lecture. But it's also the academic world. So schools, universities that in fact are fueling innovation. And I mean, I will not go into the details and differences between fundamental research and applied research. But to make it simple applied research, it's innovation that will have an impact in the next, let's say four to ten years, five to ten years where fundamental research may have an impact for only in 30 years time. But that's basically the intention and the target of academia. And I've put here three pictures of large US universities. And I'm going to show in the next slide where you see an amine just looking at companies that have spins off our spin out of those universities where you had students that were at those universities in an environment that was fostering and Nurturing Creativity and Innovation. You see, for example. So the three pictures I took was Stanford University on the left, Harvard in the middle, and University of California. So UCLA on the right-hand side. If you just look at some examples of companies that have spins off or came out, the founders came out of this university is just look, Stanford University. They have been at the inception of LinkedIn, of Shazam of WhatsApp, Harvard, Facebook who losing AirBnB, UCLA, UBA go through lifts and MIT Dropbox for example, Pennsylvania University Space X. So it's true, let's be very honest. There is a lot of us, American influence. Israel has a very vibrant innovation and start-ups system as well, linked to the academic world. But really the Silicon Valley, not just the Silicon Valley in the US, but the Silicon Valley specifically has really an intangible asset of 40 to 50 years, at least what they have created this network of investors, of innovators where this whole innovation creativity is really nurtured in a spirit that actually what people think about new things and what they can do and have an impact on society and challenge, Let's say mature company. So this is just an example where innovation is coming from. I mean, we could extend this to Europe. It's true that if I look at, let's say, large market capitalisation, there is a lot of innovation going on in Europe, but less, I would say the big unicorns, like the LinkedIn's, the AirBNB is the universe. It's very, let's say US driven. But Europe is investing a lot of public money into innovation because we do know, and I'm a European, but we do know that we need to force right, to nurture much more innovation that what we are doing today specifically in her words. And again, I'm not going to geopolitics ever in a world where you have, we'll say, geopolitical tensions about who's going to have the economic leadership between China and the US? What about India and Russia and Europe has to find its own way with its 500 million of citizens and making sure that we also have a global impact through innovation and armies. We serve our own needs through, let's say, European and regional innovation. So that's why a lot of money from europe is going into European innovation as well. And we're not going into the details, but they measure which counters. And we have Switzerland. Switzerland has a lot of international global corporations like Nestle. You have other companies in Switzerland like farmer Rush, for example, rush holding. So there are some very, very big companies in Switzerland, the Nordics as well. A very innovative where for example, Eastern Europe has to catch up on innovation specifically in Europe. Before we switch gears and amigo into where innovation is coming also from a neuroscientific perspective. I just wanted to pause it when second and just show in 2021, what were the biggest unicorns? Unicorns aren't those startups that are, according to external stakeholders, external analysts to the press, very innovative. They're really disruptors. You can look at space x. Space x indeed is disrupting the way how space launchers are being used. Because SpaceX wants to reuse and has been shifting the assumptions of nasa and European Space Agency on launches. For example, you have Biden's with TikTok, which is a new social media with a different way of looking at social media versus for example, the Facebook and Instagram. So again, I don't want to go through all of them, but basically the idea what is happening and this is where innovation is coming from is after the ideation phase, if the company gets the right amount of or is able to raise the right amount of capital through family, friends in the beginning. And then series a, B, C, private equity before going IPO. And we're gonna be discussing initial public offering and direct public offering later on is really the, those companies, they put pressure on existing players. They put pressure and they become new competitors from unexpected places where the existing companies, they have not thought about very often as well. Those companies, they leverage global tools like internet, cloud computing to do a plug and play or to have, or to offer a plug-and-play business model with, I would say not 0 friction, but very low friction in terms of customer acquisition. And last but not least, and this happens also. This is also true for the big tech companies. There is also an effect because of globalization of concentration of some actors. You will, as already said earlier, I think wasn't previous lecture, you will not have 25 companies that will compete against our B&B. There is a network effect that you're going to have one or two players. And it's the same for hyperscale cloud service providers. You're going to have AWS and Microsoft. They own eighty-five percent of the worldwide market. The other ones will be struggling for 234 per cent of market share. And it's, it's gonna be tough if you're not the first or the second one is going to be tough to have a sustainable business model. And this is what we call not just the global concentration, but also the winner takes it all model or approach. So be attentive that if you are not part of this first or second big one, and this is where you need capital intensity and having the possibility to raise rapidly huge amounts of capital to become the number one or number two. Because if you're number three, number four, number five, it's going to be, in my opinion, pretty tough if you want to play on a global scale, of course, if you want to play locally, That's different story, but just think about those, let's say forces that play as well for new companies, new startups, that, I mean, not all of them become unicorns, but they may be competition out there. And so what does it mean to have a concentration and then takes it all models. So with that, let's stop here on the history and current set of information innovation. Sorry, I hope that was useful to give a perspective where we're coming from, why innovation is accelerating now, and what are the different elements and why they're putting pressure on existing and mature companies. In the next lecture, we're going to be very quickly addressing the, let's say the neuroscientific background of innovation. And also how then stopped from going from the idea into structuring the idea to a minimum viable product, but also structuring the idea with business model canvas in the lecture afterwards and then concluding entrepreneurship and ideation. And then in chapter two, we'll go into really incorporating the company. So thanks for listening in and talk to you in the next lecture. 4. Innovative ideas & MVPs: Or rather printers and investors. So in this lecture series, chapter number one about entrepreneurship and ideation. So really discussing the fundamentals, I just wanted to give a perspective on where ideas are coming from, not driven by external Industrial Revolution, what we have been discussing or external unicorns, what really lipid to the brain process around where innovative ideas come from and how then to start structuring them. So if you can, if you would ask your family, what do they think are your friends? Well, you guys are coming from some people who will say, Yeah, I mean, I have this friend, he always has great ideas. It's really what we call a first-time minds. And that person, he or she has a freedom and has the time to reflect on things. And has different way of looking at things versus people that have traditional thoughts on whatever our products, services, processes. You have some people who think opposites to group thinking can call it a deviation or deviators. But you have people who say, Well, if everybody thinks like this, for example, on a value investor, and you have a lot of people who are traders, lot of people who invest into tech companies, into growth stocks. And I'm really thinking differently. I'm looking at the intrinsic value of when I put my money on the stock market. And I buy companies and I read the annual reports and I don't think that a lot of people, I think that 95% of the people that put their money on the stock market, they are in fact growth or technical investors, but they are not value investors. So that's an idea about aviation dialogues. I mean, of course, talking to other people, thinking together about challenges, recognizing new needs of solving or new ways of solving things. That's also something, for example, in companies of the last decade, you hear often about workshops going on hackathons where people really bring other people together and you try to come out and to create an environment where ideation is basically happening. And one of the things that I really like to do, and I'm not sure if this happens to you as well, is giving the time to, to consider different ideas. And I think that in the world that we are today. But I think that COVID has given some reflection to a lot of people, is, I think now people again realize because of COVID that maybe we want to have more time for us. We want to work less and have more time to think and really removing this continuous pressure of executing, executing being heads-down in the operation that don't have the time to reflect on things. And I think also it's where ideas are coming from when you have time to think. So the question is, from, again, looking here at the brain, is really generating new idea. Is that happening really accidentally? Or is there some, let's say, scientific approach to it or scientific explanation to it. If you're really interested in, into where creativity is coming from, I recommend you to read the book neuroscience of creativity by Margaret Bowden, where she tries to structure the approach to creativity. And I'm kind of summarizing here how to look at creativity. Basically, there are three categories of creativities. You have. The combination of activity are going to give you examples in the next slides. Where basically you combine two existing products that solve a specific problem and you bring them together. And that's maybe that creates basically the new idea. The iPhone is basically a combination of creativity. You have an iPod, you have a phone, and a navigator. And basically you put all that together into one single device. Exploratory creativity you're going to be discussing the fourth scientific paradigm, but that's basically explain things beyond what you know and you are unsure what the outcome will be. Just sometimes people say, trial, fail fast, learn fast. Just try things and you're not sure where you're going. You have transformational activity that's really having very radical ideas. And very often those ideas are the ones that also capture Nobel prizes as an example. So that's really not going to give an example. Carbon-14 dating. That's really something that is pretty disruptive. In fact, I will not spend too much time on this, but when you look at it from an entrepreneurship perspective, because you have some time and I've seen people, entrepreneurs who said, well, basically I don't have myself an idea, but maybe I want to solve an issue or a question that somebody else has addressed. And you have people and you have even academic world that is looking into what are the 100 most known and most important problems that have to be solved? And you have less of this and you can then look into what the competitors Is there still, let's say free-space for me as an entrepreneur because nobody is addressing that specific problem. But what, why I'm discussing this here? Because I believe that for that two ways of looking at it. The first one is you got to have somebody somewhere in the world who's addressing the problem that where you think you have the innovative idea? In my opinion, it's maybe unknown to you. So here is a matter of speed of capital intensity. But very probably you are not the first one having a specific idea. But again, it's not enough of having good idea, having good team. There are other things that will play a role in the equation to become successful. And the second one is also because having stated that, a lot of people say, yeah, but can it, why should I then be an entrepreneur? I've seen because new problems up here every time, every year, every decade. If you look at recent new programs like how, I mean, we are discussing a lot about space exploration, space resources, living on other planets than earth is like, how can we produce water? How can you produce an atmosphere? How can we use resources on those planets to fuel launchers to go to the next planets. For example, if you look at electric vehicles, how can we charge those cause much more rapidly than versus how it is today recycling computers because there is environmental pressure also on the compute, on the hardware manufacturers to produce green hydrogen, how to treat cancer? Those were things. If you just look at those five questions, nobody was asking those questions essentially ago. So as society evolves, new problems, new questions that require entrepreneurship, entrepreneurial skills. There are, there will be new opportunities also for entrepreneurs. So I'm not saying that because the list of all the problems that have to be solved exist, there is no free room for new entrepreneurs. There's gonna be room for entrepreneurs because things also evolve over time. And so you remember when we were discussing about the neuroscientific approach to innovation and creativity. I want to give you examples of those three angles and we're going to start with combinational creativity. And some people believe that combinational creativity is like, wow, this is super disruptive. In fact, not it's very basic, very common, but nonetheless, entrepreneurs have been doing, who are entrepreneurs who apply combinational creativity? I've been doing a lot of money with that. Just look at the iPhone. The amount of money that Apple has been doing by combining the iPod for music or phone. And at that time we had those, sorry to say, ugly Nokia phones, ugly BlackBerry phones. Those keyboards and the screens were very small. And Apple was pretty disruptive of combining those things together plus access to the Internet as well. You have things like hadn't show loss. And remember, NAB is Procter and Gamble or Unilever doesn't matter who is the owner of Head and Shoulders shampoo. But basically they come up with the idea, instead of having a shampoo and hair conditioner one or combining both together. Well, that's combinational creativity feels very straightforward, but it works. And intrapreneurs that how those ideas are companies that has those ideas, had those ideas were able to monetize hugely based on cognition, creativity. When you look at exploratory creativity, I said this is going beyond things and you do not know what the outcome will be. And I'm going to take one example which is a pretty, let's say not recent but as an example as being a lot discussed over the last five to six years, linked to the fourth industrial revolution and linked to the use of artificial intelligence and specifically machine learning. And again, I will not go extensively into the conversation when you look at big data, I mean today the digital universe. So the volume of data being stored is growing exponentially. It's huge. The amount of data, just look at how many videos are being uploaded on YouTube every day. So companies are now have the possibility because the cost of storage has gone down exponentially. Companies neuron have to think about what is my cost of saving? Also having to store data. So basically they think about, I'm going to store the data. I have no clue what I will be doing with the data. But I don't have scientists. I don't have humans that are able to understand or to find innovation correlations. Things that are captured in the big data because the human brain is limited in terms of processing power. So let's shift how we look at big data and how we analyze big data. And instead of me asking humans to find correlations and big data, let's go, let's ask the machines. Let's ask artificial intelligence. Let's ask machine-learning, which is programmed by humans and try to find correlations that I have not been thinking about before. There's something that has typically done, for example, in medicine with big data where you can find correlations detecting early diseases were previously a human would not have thought about the correlation between, I don't know, an external environmental attribute versus brain cancer, for example. So this is extraordinary creativity and that's something that's definitely, as we speak over the last five to six years, where people plug machine learning and AI models on big data. You have transformational creativity. I mean, I'm not a physicist, not a specialist on chemistry, etc. But carbon-14 dating. You may have heard about it. It allows, in fact, true, determine the age of any living matter even if the matter has tides. And again, I'll let you read this, but a person called Willard Libby, who he won a Nobel Prize of chemists chemistry in 1960. He used a concept that was developed by physicists search cough are linked to carbon-14. And carbon-14 in fact, is everywhere in the atmosphere. And it can I say, it establishes itself into living matter. And by calculating back, because there is a curve of decay of carbon-14, you are able to, dates, are back date the age of any living matter, even if the living matter has died in the meantime, because carbon-14 is an unstable radioactive isotope. Without going into the details, I'm not a specialist. I'll let you read it up. But that's the kind of transformation creativity where nobody had thought about using carbon-14 dating, living matters. Then wrapping up here when, I mean, in the previous lecture, we discussed about the source of innovation and academia unicorns. And now here I hope that you see like the neuroscientific approach, it combinational creativity, transformational and exploratory, explanatory first before transformational. One of the last things before we switch gears, we go to the next lecture that I wanted to share with you as well. And remember the S curve of corporate growth. After here we're still in the ideation phase. So we have an idea. And the idea, I hope that you have seen various sources of where ideas are coming from. Can be academia, can be startups, can be people that you're talking to doing. Hackathon can just be machine-learning where you have an idea or certainly in time, that idea has to be made tangible. And I'm just speaking here about the idea. I'm not speaking about the business value or the value creation process we're going to discuss in the next lecture with the business model canvas and the value prop Canva. And here you remember that part of the learnings that I want entrepreneurs to have when they get out of this training is also the typical vocabulary of an entrepreneur. An MVP, minimum viable products is not the most valuable player in NBA is read the minimum viable product or MVP, is something that at a certain point in time, investors are potentially prospects that you want to check with them. Are you interested in our idea? Would you buy the idea? You need to build an MVP out of this. And the key criteria for an MDP. And I think this is an, I really emphasize on this also at university level when I'm teaching and I'm giving this lecture, you have to build an MDP does one thing. It can be mock-up, fine. But at a certain time you will have to do more than just a mock-up. It has to be a running MVP. What I've seen over the last 15 years is that some people build MVPs that only focused on functionality. So they add features, features, features, features, features. And I've seen an app in mentoring startups where the founders were focusing and they lost three to four years just focusing on, No, I don't want to go out to the market because I need more functionality and I don't feel comfortable. And I tried to tell him to tell them be attentive because during those three to four years, if you only focus on functionality, there's gonna be somebody else is going to capture a potentially your prospects. So when you build an MVP, you need to decide what is the minimum viable functions and features that you want to have. But also, you can not only have an MVP that has a lot of features, but it's ugly, is not usable, It's not reliable, it crashes all the time when you are shooting it to potential prospects. So think about, when you think about MDPs after the ideation phase at the MDP has to have some nice user experience, some nice ergonomics has to be useful for, can be usable, not useful, usable for potential prospects. Has to have some characteristic of reliability. It cannot crush all the time. And of course it has to have a minimum set of functionality so that people can let say, it resonates how they could potentially use your product or your service. So that's what I'm showing in those two triangles. Really thinking about the right way to build an MVP is having a little bit of everything. The wrong way of building MVPs, only having a lot of functionality. So be attentive to that as an entrepreneur if you think about after the ideation phase of building an MVP. So let's wrap up this lecture and in the next one, as we are coming from ideation, we discussed a little bit the MVP. Now we need more than just the MVP, we need to structure also the value creation process and potentially the business plan before trying to raise money. And this is what we're gonna be discussing in the next lecture. Thank you. 5. Structuring ideas with Business Model Canvas & Business Plans: Alright, entrepreneurs and investors. The last lecture of Chapter number one about structuring ideas with Business Model Canvas and also business plan. And also then concluding before we switch gears and go deeper into also incorporating the company. So we already discussed where we're ideation sits in the s-curve of corporate growth. How we can try to solve problems, which kind of problems exist at problems evolve over time. And also that innovation that is also fueled by industrial revolutions is also changing and bringing up new, new opportunities but also new, new problems. So when turning or when you want to turn an idea into business, It's not just enough to have a good idea and to have capital and to have maybe 23, let's say a team of 23 people which are complimentary to you as a founder, you will need to do more. If we need to find your market, you need to find support. You will probably have to outsource or to have suppliers as well. We already discussed very briefly, building a minimum viable product. You will need to build a financial model and test if your idea and your market allows to have a profitable business at a certain moment in time and start selling it. And you will have to iterate on this as a company grows. And for That's one of the, I mean, when I was part of startup weekends trying to coach startups and how to structure the idea beyond the MVP, what we discussed in the previous lecture. And beyond the ideation phase, when the idea is, let's say fixed to some extent, the MVP is being built. What are the tools that I definitely recommend? And I'm not the only one we're recommending them to really structure more than just the idea. Because there are certainly in time you will need to raise capital and to find your market. And we're going to be discussing here business model canvas, value proposition canvas, and also business plan. The pitch deck and evaluation, assessment and funding is something that we're gonna be discussing it run in the corporate finance chapter. One of the tools or Canvas that are most used for startups. And I really like, and I really recommend using it. And I'm gonna give you in the next minutes the keys to read the Business Model Canvas. This is how this model is. Canva is called Business Model Canvas and has been created by Alexander Osterwalder, is in photo strategic management template and you already see, I mean, the, the course is called masterclass into punishments strategic management. And here already we are touching just after the ideation phase or the end of the ideation phase that you will need to think as an entrepreneur about multiple elements of your idea. And it's not just enough about having a great idea and nobody wants to buy idea. And you do not know how to build the product on where to supply it from. The advantage of the business model, Canva, It's really that it's very visual and it covers basically all the main elements that an entrepreneur has to think about after the ideation phase when you're going into the launch phase. And you have this visual charts are gonna be walking you through those visual, visual, let's say elements are categories that you understand. And I'm gonna give you also the, let's say the priorities with what are the things that you have to start with? When looking at the business model Canva, basically it's divided into four, let's say sub parts. You have on the right-hand side, the customer focus in the middle, the value prop, value proposition. On the left-hand side, Let's say the, I call it the supply chain, the infrastructure. What are the key partners and key activities that you need that are required by your value proposition. And then below, obviously, what I already said earlier, I've been sometimes surprised. Working on mentoring young entrepreneurs. They didn't even know how to structure a business plan. So the financial viability, so the revenue streams and the cost structure as having something. Again, it's not rocket science. The business model canvas will force you to think about it. And that's the advantage of the bisimilar Canva. If you use the Business Model Canvas, you will address all the important elements of your, let's say your idea going into the launch of your company. I recommend and I'm going to give now here in order of things, I always recommend to entrepreneurs to start with the customer segments or the value props. Really understanding who are your customers? What are the things that you're trying to solve? What are, where is your product or service creating a gain or solving a problem, or relieving pain for your buying persona's buying prospects, buying customers. I think this is really critical. A lot of people, I've seen a lot of people that are really focusing on cost structure revenue streams. But they are not addressing correctly why people would buy their products that they have an idea for. So really think about the value prop, which customer segments you will be able to address with your value prop. That's really, I think the main fundamental and that's step number one when you're going to be using bisimilar camphor. If you're interested, there is a subset Canva that actually integrates and drills down more than just the business model canvas. And it has been invented by the same person by also value, which is called the value proposition canvas. So it's really going into the details of the value prop and the customer segment. And let me just elaborate here. The value proposition is you're going to have your customer profile where you need to think about the needs, the pains, and what the customer wants, and then also your value proposition in terms of what is the solution, what are the pain relievers and what is the experience? That when you are in the middle, you're going to have those unique starting points, what is called the USP. So that's really the differentiator. Why, why your value prop will work for which kind of customer? So that's basically it doesn't drill down. You can look it up on the internet. There are a lot of, let's say, elements where they explain or examples how well they explain how the value proposition canvas fits into the business model Canada. But again, the minimum that I want you to use the Business Model Canvas. If you want to go deeper, you can use value prop, Canva as part of the value prop and the customer segments, the business model canvas. Then the second step is really identifying the customer relationship and also the channels. So the customer relationship is really identifying the type of relationship or the company wants to have with their customer segments. Is it a personal relationship with dedicated itself services, automated, those kind of things. And the channels is you want to build up a direct sales channel. You want to have an indirect sales channels, so you need them to build up distributors that will sell for you. But then you have to think, what is the incentive for them to sell on my behalf, or do I prefer to have, let's say the success of my company, my own hands. And not all, I only want to have a direct sales model, direct sales channel to my customers. That's the kind of thing that you will have to think about it because then you already understand now the, the infrastructure part, how are you going to execute your plan? Your go-to-market plan will depend on the choices of the customer segments, the kind of relationships that you're going to have in the channels. Let's give a concrete example. If you are selling, I don't know. Surfer cloths. Your customer segments are aware probably not in the mountains but at beaches. Do you want to have a brick-and-mortar strategy, meaning that you want to have retail shops, so you will need to invest or to rent retail space. Probably close to nice beaches where you can have your surface because of surface are your customer segments or selling directly to them. You could have also, let's say, a way of selling to them that is purely digital because you don't want to have the high investment of renting brick and mortar shops, for example. You could also maybe partner with existing moles that are close to those beaches where you would be a shop in a shop for example. So that's the kind of thing that you will have to think. Obviously, do not forget, what's the value prop and why would customers shift? Maybe if the problem or the pennant they have is already been solved by a competitor, why they would switch to you? What is unique about your proposition? And would they be willing to switch from a to B or would they be willing to come to you? So that's again, starting first with the value problem, the customer segments, you really need to have this clear. Then you have to think about customer relationships and channel. Then of course, an arrow command before going to the infrastructure that you look into the revenue streams, it's like, okay, we have, we have it clear who our customers are, who is the buying persona? What is the value prop, what is a unique value proposition that we have? We know how, what is the kind of relationship we want to have with them is through social media, is that digital is its brick and mortar, shops, whatever. But other kinds of channels, direct, indirect mix of the two. For example, I've been working at Microsoft. We had a mix of managing the top customers directly and then all the rest was managed through partners for the smaller customers. So hybrid models in channels direct and indirect axis as well. Starbucks has the same. They have their own shops, but they also sell indirectly through Nestle, for example. They also have franchises. So that's also a different way of selling for Starbucks to bring in revenues, is that they have a mix of direct versus indirect channels. The revenue streams, how are you going to monetize when the product is killed, the customer segment is clear, the value prop is clear and unique. We need to think about how will the company make the revenue? Is it's, are we doing onetime sales of something of an asset? For example, you are sending the ownership of the physical goods from subscription model. Having, I have no clue success fees, are we having transactional fees? Are renting the assets. For example, I will licensing like the franchise model, the franchisee model, licensing things. So that's the kind of thing that you will have to think. What is the revenue stream that you want to have? The recommendation I'm giving you here is always thinking about cash predictability. Because as I said earlier, if you look at software companies funding years ago, they were selling the assets or at least the perpetual use rights of the assets being software. Now, everybody has switched into subscription fees. And if you look at Disney Plus, if you look at Netflix, everybody's in subscription fee is to have this predictability in terms of cash inflows. So you have to think about the revenue streams and how also the revenue stream is not just how you think about monetizing, but also what is acceptable for your customer segments. Also on other things. And I remember why I added this code, because I had this question when I was lecturing and university is I had a student who asked me, Why, Why do you start with price? So in the sense of with the revenue stream before the cost structure. Because I look at pricing strategy in the sense that I don't want, and that's my call. I don't want the cost structure to influence the price. First. I want first to understand what are my customers willing to pay for my value prop of my hopefully unique value prop. Before looking at cost structure, I believe honestly that if you do a bottom-up approach, you start with a cost structure and you define your pricing on top of your cost structure, you may end up in a situation where you're giving away unnecessary margin, unnecessary profitability, because you have this bottom-up approach. I prefer this top-down approach where basically you try to understand what are my customers willing to pay for something? Look at luxury watches, the huge amounts, the incredible amount of margin that they are doing, and how profitable luxury segments are. Because they know they do not start looking at cost structure and then putting a price on it. They look at what are customers willing to pay for luxury goods, luxury experience. And potentially you end up with 70, 60% of margin. That's why, and I remember I discussed this when I was giving the lecture the first time to my student was asking me, I always tend to start first with, what are my customers willing to pay for my product of my unique value proposition? This is what we are discussing or what, what goes or what comes with pricing strategies. So of course, you need to think that's sometimes products. You may set them too high so customers will not buy. And if you set them too low, we're giving away unnecessary margin or profitability. So try to think on the top-down approach. So understanding the willingness of the customer to pay a specific price, hopefully a premium price. And with that, make sure that all the costs, that's not the bottom-up approach at all, the costs are covered with a reasonable margin. So I have really dislike coming from the top-down but also having the reverse exercise looking at, okay, what are my costs and what is the margin that I'm gonna get out of selling at this price? Enough cause or a Sigma term you need to think if you are fighting with other competitors that are already on the market, you will have to think about what is unique and my value proposition versus competition. Why would customers switch from a competitor to me? And now, what is the price and I'm setting for specifically for that purpose. So that's the kind of thing also that those are kind of other factors that you need to bring into the equation as well. Then moving forward. So we started like step number one is customer segments and unique value prop priority number two, in order is looking at customer relationships, channels. Then priority number three, It's really looking at how you want to monetize. And as I already explained, my recommendations go with the top down approach before the bottom-up. Then number four is like, okay, what are the resources that I need for the company to run the business, to sell the products and services that I'm just having an idea to launch. What are the key activities do I need to supply to build a manufacturing plants to wine? As I said earlier with the surface shop example, do I need to buy or rent a brick-and-mortar shop? What am I keep partners as well. So who are my suppliers? Because maybe I don't want to build a manufacturing plant, but maybe I can find someone who can build this for me, for example. So that's the kind of thing that you will have to think about. And last but not least, the cost structure, of course. Here again, looking at what are the fixed costs or variable costs. And really, we're going to discuss this in a couple of slides, bringing this all together in a business plan. Thinking about how can I scale? Do I have economies of scale? Don't have economies of scope as well. We're actually, my unit price is actually going down because I'm finding those economies of scales and also economies of scope. Here I'm just giving an example. I mean, if you look up a business model canvas examples on the internet, you're going to find a hundreds of them. I just took care of a very I think it was an example from the Gary Fox.co site where he was basically like summarizing what is the Tesla business model canvas. So again, start with customer segments, value prop, and customer relationships channels, the revenue streams, then the infrastructure part of the partners, activities, resources, and landed cost structure. That's at least what I recommend you. Then you have the business model canvas. It doesn't stop there. So you want to go maybe beyond that and you want to open your capital, your equity to new investors, the business model canvas will not be enough. You will have to write the business plan. And again, it's not the purpose of this training to go in-depth into how to run the business plan. But basically I'm just going to show you the main chapters. So the main structure of a business plan, of course, it has to be an executive summary. There has to be vision and mission of the company. What are you as borrowing? As an organisation? You need to have a marketing plan, need to have an operations planning, to have a financial plan. Does this ring a bell? It, this is basically those are parts or categories or domains that are part of the visual business model come back. So basically it's just taking, let's say the bullet points that you have put into the business model canvas, which is a one slider, and describing them a little bit more in the business plan with more details. And that's basically what it's all about in the business plan. At the very end of the day, the business plan has, in my opinion, one very important thing. And I'm not saying that you shall not write a business plan with a lot of Verbit team in it. It does help people when new investors, when they do their due diligence. We're going to discuss it later on when they do their due diligence because they want to potentially put a million or $2 million into your company. Bins. My Canva is not enough. They want to read as well. What is your intention because they will be able I mean, when I do due diligence, I look into also not I mean, not the business model canvas, the minimum viable product, but I look as well. What is the company explaining in the business plan, but that's not enough. I gonna I mean, when when we were discussing your diligence is I'm going to share other things, but I do look very often at what's the core team, What's the attitude and the values, the ethical values, and the behavior of the team. Because I promise you, I can make any business plan look very shiny, very glossy. It's the best one in the world. At the very end of the day, I just haven't destroyed money because I invested into the wrong company. So for me, when investing into, when we speak about venture capitals, so really investing into as a business angel or venture capital is really about the team that's really core. What's the intention of the team and the financial plan? And this is coming back to what I said. I think already couple of lectures before. And I really put a specific emphasize in this masterclass about it. I'm giving concrete examples that I was surprised how young entrepreneurs, they do not know what to put into a business plan. And I'm zooming in here and again, giving you the keys of what are the three main elements that have to be part of a financial plan, that is part of the business plan, and it's an Excel file. It's not rocket science. You will have to decide on how many years, what is the outlook in terms of years? Just want a recommendation I'm giving you here. This is a real example, but I've changed all the numbers and some descriptions so that you cannot read the real figures. But this is a real example of a business plan that's I had to look into and there was a six-year business plan. I tend to say the following. When somebody serves you a business plan for the next ten years. Again, coming back to what I said earlier about the speed of change and the speed of innovation. I think that nobody has a crystal ball and has reasonable idea about what is the business plan will look like in ten years. I mean, here really for startup. I don't mean here for a company like Unilever that has very organic growth, selling food, selling, let's say commodity products. They're probably, you will have an idea about what's the revenue stream, What's the cash stream in the next 1020 years? Very probably. But here we are speaking about a startup. So I believe that a maybe a five-year plan is good average of a business plan and always start with the revenues first. Where is the money coming from? So what is the amount of customers that you want to have? How much revenue will you drive from? You remember when we were discussing the revenue streams or you're selling of the assets. So transferring the property of the assets, how much is coming from recurring revenue stream through subscriptions? Maybe you are renting or leasing your assets. So that's the kind of thing and I've given here, for example, is maybe you're adding consultancy services to it. So that's the kind of thing that you will have to think about in the revenue. So what are the revenue streams? And then you will have to deal also with all the operating expenses. And here you will have to separate between investment. So what are things that you invest in now that will depreciate it over time and you're going to capture the benefits of an investment, let's say 1 million supply chain investment in year one and then it will have the benefit of a five-year-old. So there's gonna be some tax incentives using the accountant for that. But you have to think about depreciation and also put everything that is recurring costs, costs that come with, let's say, the standard operation of the company. And as the company is growing, we need to think about variable costs, fixed costs. So those are the things I'm giving you examples. Here. It's about selling physical assets and you're going to have a cost of goods and services. Because in this business plan, we were supplying we're sub-contracting part of the manufacturing process when external company, if you're selling a product, very probably there are some warranty costs, some, some liabilities that you will have to cover or to have insurances for you will have the manpower. You will have to take into account marketing and sales costs, those kind of things, infrastructure and other expenses. But think about capital expenses, operational expenses and the operational expenses, but fixed and variable costs. Then last but not least, when I have to do due diligence about companies and startups. And I already said that I had the chance to participate in a lot of, let's say, pitch contests, as I call it. And it's not the beauty contest, is, of course, you need to have a nice pitch deck that summarizes the main elements in a, I don't know, 2025 slides and kind of summarizes the business plan, the financial panic of the business plan, summarizes the minimum viable product, summarizes the vision and the mission of the company is really thinking about. And the pitch deck has to be something that is nice. And I'm always saying, because people asked me entrepreneurs, what is making goods versus a bad pitch deck. And I'm always saying, you have the bullet points here. First of all, what is the program that you're undressing? You have in a good pitch deck. And again, of course, you need to think, is this pitched I've been presenting at a startup competition or is this pitch deck being used for series a, B, C funding? Let me put here, Let's put those competitions aside and really look at you're doing, you're writing a pitch deck to raise fresh capital and you're giving away part of your equity and bringing in new shareholders because you want to have, you want to raise that money. So a good pitch deck will explain what kind of problem you're trying to address so that invest in a Stan? Yeah. Okay. I have no idea what they are trying to address. What is the pain points? What is the market size and the addressable markets? What are the customer as the competition? I mean, this is something that is coming out of the business model canvas. What's the product and the services? And also, I believe that the pricing model of it, is it a subscription model at transfer or selling the assets? I always emphasize, I recommend to the people that are pitching to me that they bring in credentials and credentials, bringing credibility. Maybe you already have customer testimonials, very early customers, beta testers. Maybe already you have tangible results. Maybe you already have existing investors that have trusted and I already have put money into the company. If you own a series B, you already have a series a investor. Also, the financial projections, the summary of the business plan that we were just discussing the previous slide, the timeline and the milestones over the next, I don't know, over the next three years where you want to have the company be in 12 months and 24 months and 36 months. And again, let's not be fooled. Even myself, when I was drawing plenary annual plans, I have no crystal ball, but at least it tells you have a plan, gives an intention where you want to be. And you will have to adapt as, as the plan evolves over time. But at least it tells that you are thinking not just short-term, but also longer-term, at least midterm about the company and what is the intention. And one would say the two last things that are very important. The first one is I like to see an asset it already earlier when I invest into companies. And a risk peak here as independent board director into spin-offs, into private equity. Who are the founders? What is the core team? And very important how complimentary or the competencies of the team. What I hate to see in pitch decks is like you have a team of two people. One is CEO and the other one is COO. But CEO of what? Of himself or herself? I mean, I don't have problems with glossy titles, but what for me is important as an investor is that I understand if the team has three people, there is a person found responsible for strategy, there was another person responsible for sales, or maybe for finance. There is another person responsible for engineering and technology or the product, for example, the product design. Because I've seen so many startups where the idea was great, but the team were only technical guys, but there was nobody who was able to sell. All. There were only sellers in the team, but nobody had the ownership. There was no good competent or there were no good competencies in the startup about the technicality of the technical design of the product. And that's already, I mean, with that, if you have this, this balanced, you are kind of already set up for failure. So I really look at what is the core team, but not the titles of the people. I don't care about the types of the people I care about the competency. So please explain in pitch deck who is doing what. And this can be in one word or two words. And then at the very end of the day is what is your ask? And I had situations, for example, I do remember a fitness application accompany. I wasn't mouse mentoring the two founders. It was not clear, in fact, what they asked was at the end of the pitch deck. So that's something that you also have at the variant of the pitch deck is what is the ask that you have towards potential investors? So let's conclude on Chapter number one. And I hope that through the various lectures in chapter number one, you will able to grasp and to get an idea about where innovation is coming from, where creativity is coming from, fueled by industrial revolutions, fueled by the adoption and the speed of adoption of commodity technologies. And also the challenge is that existing companies have to face. And you have seen this through the Professor Foster of Yale University analysis of the biggest SAP 500 company is that the average lifespan is actually being drastically reduced since a century. And also think about the typical obstacles that entrepreneurs have to deal with them. Remember where I was putting those obstacles in the s-curve of corporate growth. Think about those strategic inflection point as well. That I hope that, that was more like the idea of the intention of the last two to three lectures is how to formulate and to structure your ideas using business model Canva, using the business plan, using a financial plan and using a pitch deck, in my opinion, will help you to kick off where the entrepreneur process and then being able to go in pretty occasions, condition and talk to potential new investors, even to your family, france to raise the first, let's say, capital to start launching and operating the business. So let's wrap up here, chapter number one, and in the next chapter a week, as you remember, in the process, we have gone now we are exiting the ideation process, defining the minimum viable product. And now we're going to let incorporate the company and what are the things that you need to know to incorporate a company. But let's discuss in the next lecture. Thank you. 6. Introduction to Incorporation & major laws: Welcome back entrepreneurs and investors. So we finished Chapter number one where we're discussing the origins of ideation, the defining entrepreneurship as well. So in Chapter two, remember we're following a specific sequence by finding the sequence of first of all, ideation, then after the idea is okay with the team incorporating the company and that the leaders of the company, or you as an entrepreneur that Uranus and what are the major segments of law that you need to know before incorporating all while and corporate incorporating the company. So that's basically what are we going to be discussing in Chapter number two? Let me start with introduction of Chapter number two about the legal aspects. So when entrepreneurs, let's say pass the threshold of Okay, we're gonna go from the idea into launching the company. You may ask yourself, why do I need to incorporate the company? In fact, you may have a situation where you prefer to be a freelancer, work as an independent person without having to incorporate the company, which is something that is possible as well. But still you will have to register as a freelancer, probably having to pay some taxes like VAT if you're providing, for example, consultancy services. The idea of incorporating the company and while incorporating the company. And this is what I'm going to try to explain to you specifically in the beginning of Chapter number 2. First of all, the company will be seen as a person, a moral person versus a physical person. And the company will be seen as a connection for contracts. So the company, so the body of the company. And if we define the company as a moral person, the company will serve as a common counterparty for various stakeholders. And those stakeholders, the relationship that you have with those stakeholders is basically through a contract. And the contract can be an employment contract. So you are potentially hiring people and the company will incorporate, company will work as the counterpart to the employee. You may have a contract with the supplier because you are purchasing parts from that supplier or services from that supplier. So again, here the company will act as the connection, as the counterpart for the supplier instead of you as a person. And he'll be the same for investors, would it be the same for customer? So basically the idea is really that the company acts as a moral person and that activity as a moral person is really focused on the connection point, the central point of connection for any kind of contract. If it is upstream for customers or downstream for suppliers or employees, and even for investors, that works as well. Another important element why there are benefits in cooperating company is really to isolate the ownership from the personal assets. So let me explain 1 second here. When you decide to launch the company and you decide to incorporate the company, you have two type of assets. You have the assets that you want to bring into the company as equity, you can bring in a laptop, for example, maybe a car, so that those assets will become part of the startup capital of the company that happens. It's, I mean, you can bring any assets which are non-cash assets into the company. You may need an accountant to value the amount of the assets, but basically you can bring non-cash assets into the starting capital of a company. But at the same time as a founder of the company, what you want to avoid is that there is a mix between your private assets, let's say your house, your private car, which will not be used for the activity of the company that you're incorporating. This is where also the benefits of incorporating a company come with. Because basically, we're going to discuss in the next lecture, you will be able to isolate the ownership and have a separation between you as a person and the company as a moral person. So the separation between, between the two and there's gonna be a clear boundary between the two. And this is an aspect of protection that is very valuable also for founders of companies that there is no mix between. So that basically, if there is any issue in the company that people cannot come after your personal assets. So really isolating the ownership of something important as well. Now I've already said the company by itself is considered as a person. So you as a founder will be considered as a physical person. And the company will be seen as moral or legal person in the eyes of the law. And so the company has in fact a personality in front of a trivial. So people, even it as customers and suppliers, they could go out to the company as a moral person, one cooperating company. So after the ideation phase, what happens very often, it starts with seed funding. So, and again, I'm showing you here a graph that will come later in the corporate finance chapter. Basically the seed funding is either yourself or bringing the seat founding in cash or non-cash capital. But very often is also what we call the triple apps or the friends, family and fools that believe in your ideas. It's only after that you go for business angel venture capitals, series a, B, C, etc. Then you go late-stage mezzanine funding private equity before potentially and hopefully doing an IPO or MDP or direct public offering, an initial public offering on the stock exchange and then going for the secondary market. But more about that in the corporate finance chapter. And as already said, the intention of this chapter number two and in general of this training is really to give you the foundations and hopefully a strong foundation, foundation as an entrepreneur, because you will need to have a minimum of understanding what are the basics in terms of legal aspects and legal, or let's say segments of law that you need to know when incorporating the company, but also after it's as the company will serve as a connection point for various contracts upstream for customers, downturn for suppliers, employees, investors potentially as well. So really the idea of this chapter number two is that you have a head-start in terms of having the right fundamentals in terms of legal knowledge when moving forward. So when, when we discuss when I'm sharing this training at university as well, I'm giving this lecture. I will not send, I think I said in an introduction, we will not have the time to go across all segments of law that applied to entrepreneurs. I'm giving you here some bullet points. The first one that we're gonna be discussing is the business permit and trade license loss. We then are going to discuss corporate and company information loss. We're going to discuss commercial and saves loss. But there are other segments of laws, employment and labor laws, the very country specific, also privacy laws. I mean, potentially have heard, if you are part of Europe, we had this GDPR thing. It's general data privacy, pigmentation regulation that came out a couple of years ago. And so there are many laws that apply to entrepreneurs. What makes it complicated for entrepreneurs as well? Because, I mean, how to deal with all that potential legal exposure. So you need to be a minimum fluent in legal aspects. And we're gonna be discussing in this training. And again, it's not the purpose of being illegal training, it's purpose of giving you a left to right the main elements of an entrepreneur and novice entrepreneurial entrepreneur. So basically what we're going to be discussing much more in detail, our business permanent tree license laws. That's the next chapter. That's a very quick one. But corporate company formation laws, including finance, bookkeeping, corporate tax laws, we're gonna be discussing commercial and says loss. We're going to also drill down into intellectual property law. So those are actually, that's basically the content of Chapter number two. There's gonna be some longer lectures. And I do remember, for example, the corporate company formation law, but also the intellectual property part of one of those lectures in chapter number two will be a longer one. But I think it's really necessary to go through it. If you're fluent in those matters. I mean, you can skip the chapter and go directly into the Strategic Management chapter number three. But otherwise I really recommend you of taking the time and going through those lectures because it will give you some keys to read and understand which major laws entrepreneurs have to deal with. And I said, but we will not cover in this chapter and in this training in general and this masterclass is employment and labor laws because those are very, very specific and also privacy laws because they are really both, I believe they are tied to regional or local, national aspects, while the other ones basically apply. And the main principles apply everywhere throughout the world. When we discussed about law in general, I think one of the key foundations to understand is to understand the legal systems throughout the world. Because basically they have different foundations and the fundamentals are different. And I'll try, I mean, I'm, I'm showing you here in this map that basically you can see through the color-coding. And now I'll let you read it also in the slide deck that, I mean, you do not have law, law systems that are homogeneous, homogeneous across the world. So you see that you have and we're going to discuss, I think it's the next slide. A lot of countries that applies civil law That's more like European influenced, Let's say civilizations. And then you have more common law. That's more, let's say US, UK influenced or Commonwealth countries that are more using common law versus civil law. But then you have also other type of laws. We have, for example, Muslim loss. You have Jewish laws, you have customary laws, you have many different laws. And there are nuances between the various countries. So just be aware. I mean, it's not the intention of this masterclass are said to be illegal training, but just be aware that there is no homogeneous legal system across the countries where potentially a company will operate in. The main, Let's say families of laws are in fact those two here, what we call common law and civil law. Common law is pretty, I mean, if you're in the US, you pretty much know common law. Common law, let's say the main attribute of common law, It's based on. Examples are precedents. So a judge has decided about something in a specific scenario, specific situation, and other judges potentially will rely on that precedent to rule the same or differently based on that. By having said that, I'm basically already expanding a little bit. What is missing to common law, where civil law is, in fact, very strong, is that civil law has the philosophy of trying to think and write, document all possible scenarios in advance. It's what is called codification. And Europe has been very strong at codifying everything possible. So if it is a commercial or labor law, civil law panel law. So they have thought about an enormous amount of things which obviously makes it complex. Because if you try to think in advance on all possible scenarios, I mean, you end up for each segment of law with books that may have like 500 pages just for one specific thing, one specific topic, let's say commercial law for example, or tax law. And this is a disadvantage at the same time of civil law versus the advantage of common law. As in common law, not everything is codified, are coded in advance. Basically, it requires judges, sometimes common sense, decide on how to judge a specific case. And then at the same time, it's also a disadvantage because potentially the judge is some, let's say cultural values, cultural attributes that may give a bad influence on what we would believe would become incense. While it is common sense for the judge, for example, what we see today is that more and more both systems, let's say the boundaries between both systems are blurring. So we have more and more civil law, which looks at precedence, even in civil law systems, which is basically an inference from common law. And we have common law which says, yeah, maybe we can not only work with precedents, maybe we have to qualify a little bit more. So you see like a blurring between the two systems and obviously the world having become much more global playground, economical playground. You see in fact also that expectations from stakeholders or that common and civil law are more predictable as you operate with your companies across various geographies. I'm giving you here a couple of examples. I'm taking you the example of Dubai International Financial Center, which is, I mean, I will explain this later on, but I'm sitting at the board of directors of a Debye private equity holding company. And that company is not sitting in Dubai, which is Sharia law, which is, let's say an Islamic law and I'm not a specialist about it. So sorry for my Islamic friends if they if my statement is not fully correct. But the private equity holding, the legal entity, the moral person, is sitting in the IFC, which is a dubai international financial center. So when I was asked and part of the board of directors of that private equity holding, I wondered what is the IFC because I didn't know exactly how, let's say the various territories were structured in the United Arab Emirates. I found out, and here I'm showing this to you in the red frame that basically the IFC follows UK law. And you can see in the red frame that basically it follows a common law system, which makes sense because they follow the UK, let's say legal system. And UK legal system, as you saw in the world map, is color-coded being a common law, let's say country versus Europe being blue colored, which is basically a civil law influenced, Let's say, territory for the many countries that are part of Europe. So this is an example. So you see that the laws and regulations that apply to Dubai International Financial Center, they say It's basically common law. And we're going to stop here as an introduction for Chapter number two. So I have that this gives you a first flavor of what we're gonna be discussing in the next chapter. But in the next chapters, as I told you, we're gonna go deeper into business permanent trade licenses, which is really the fundamental of everything. Going into cooperate and cooperate formation loss. We're gonna be discussing finance and bookkeeping laws because that's really a very important thing that you need also to know as an entrepreneur. And then commercial loss, where we will also go a bit deeper into intellectual property and everything that is around trademarks, copyrights with some examples, etc. Before concluding. And as I said, it's a cold I had to make here in arbitration. I decided not to go into employment laws and labor laws and not to go into privacy laws and other laws. I believe that with those four, let's say, categories of laws or segments of loss plus introduction I gave, I think that you have a good starting point as an entrepreneur. And then obviously you may need external legal support. Of course, that has a cost that you will have to incur. And that's part of potentially the cost that the company will incur. And very beginning is that you will have to run your commercial contracts, maybe with an external consultancy firm, maybe the first employment contract you will have to run through an external consultancy firm. So let's not be fooled about it. Creating an incorporated company comes with a certain amount of costs, which are not just linked on setting up the cause and bringing in capital and running the operations. There are some administrative aspects, and remember it's one of the first of the six, let's say problems or let's say problems, issues that entrepreneurs have to deal with, which is basically overcoming bureaucracy, but you will not have the choice. If you incorporate the company, the company becomes a moral person. You will have to deal a minimum and understand the minimum, the major segments of law for the territory's and for the product services. So the turtles you are operating and also the products and services that you're selling, but more about that in the next chapters. So thanks for tuning in and talk to you in the next lecture. Thank you. 7. Business permit & introduction to corporate formation law: Alright, entrepreneurs and investors, lecture number two in chapter two. So after having introduced the, let's say, the fundamentals around law systems and having also browse you through what are the segments of law that we're gonna be discussing? Let's go into it. And in this lecture, which will be a little bit longer lecture, we're going to be discussing business permits, licenses, but also go directly into corporate formation, loss. And also we're going to practice with some examples around that. So the first thing when incorporating, accompany and remember one of the six, let's say issues or problems that entrepreneurs have to deal with is overcoming bureaucracy. And it's one of the things. One of the very first things is the regulators, the country, the government will expect from the company to have a tax ID. So that's one of the preliminary requirements for entrepreneurs is to get a tax ID before they can do anything. And the intention of the texts idea is being able to pay taxes on, let's say on the profits of the company. On, let's say hiring employees, you will have to pay taxes. Opening up a bank account would have been necessary as well. And you will not be able to apply for business license and let's say permits, business permits until you have a tax ID. And this not only applies to companies as moral person, but this also applies by taking my own example. I'm independent board director and as my residents, my tax resonance is in Luxembourg. I do have a tax ID for the services I provide us independent board director because I'm getting paid for this. But I need to pay VAT taxes on it and I need to pay income taxes on those kind of things. That's the kind of thing. The very first step is really getting a tax ID. The second thing is after you have received tax ID is depending on what kind of business activity, so what kind of product service you are trying to sell, but also depending on the physical location. So where you are operating as a company and to which customers you are in, which geographies just selling your products and services, you will have to apply for a business license, then potentially also business permits. So why what's the reason for that? First of all, licenses, in fact, are intrinsically carrying competence. And I'll give you a concrete example. If I would decide to become a medical practitioner and I only have an MBA, I have no clue about medicine. It's not just it's not because I receive a tax ID that I can operate as a doctor, as a practitioner, I mean, that's illegal. You can not do those kind of things. You're going to have certain types of businesses, certain types of selling products or services. A doctor is selling his or her competence consultancy, service in advising on health conditions. So that requires, of course, a specific license and having an MBA as I have, is not good enough. The governments, and this is the case nearly in all countries. If you want to become a medical practitioner or a doctor, you will need to show that you have the right competence. Is it a master's degree, is it? I don't know. Ph.d. those kind of things. I take the example, Luxembourg, if you want to open up a restaurant, it's the same. You can just open up a restaurant because you have a tax ID. You will need to show to the Chamber of Commerce that you have a certain amount of experience or expertise, that they give you the license in order to operate a restaurant. So licenses imply competence and also receiving the authorization, the permits for, let's say, operating your company and selling your products and services to your customers, to your consumers. Also remember that the governor and through some specialized agencies, have the authority to execute also controls. So this is what I call permits, imply inspection as well. We were discussing mouth, you're running a restaurant. Imagine if you are selling fresh fish to your consumers, to the people that are coming into your restaurant. I mean, there are some health safety regulations that come with selling fresh fish. So where is the fish stores so that it doesn't develop bacteria? And again, I'm not the expert about restoration, but just be attentive that you may face. If you opening a restaurant, you may face inspections and controls by the foods and let's call it the Food Safety Agency of that counter that where your restaurant is in, just to make sure that you're operating the restaurant in a lawful way. And potentially the governments, they allow themselves if you are running the restaurant in an unheated, the unsaved way, there's risk for the consumers. They're going to remove the business license and the restaurant permit from you. So it just be attentive to those kind of things. Let me give you two concrete examples. I'm going to take European war with Germany and an American one. So there is in the US, the US Small Business Administration. And you see a couple of examples if it is like alcoholic beverages. So if you manufacture, import, or sell alcoholic beverages at a retail location, you will need to talk to specific agency. Well, in this one, in fact, there are potentially two. It's the Alcohol and Tobacco Tax and Trade Bureau in the US, and also the local alcohol beverage control boards. If you are, I have no clue into fishing. We were speaking about fish restaurant, but here it's more like commercial fisheries. So if your business engages in commercial fishing of any kind, you will need to talk to the National Oceanic and Atmospheric Administration, Fisheries Services, which is a US government agency. So they're gonna be probably to each of those business activities, some conditions, competencies that will be required by those agencies before that you get a permit. So you may get a tax ID before, but you may potentially not receive the permanent. So be attentive to this and I'm going to explain to you how to deal with this because it feels complex, but they're going to be the complex factors. On the right-hand side of this slide you see Germany, it's basically the same. You have a ticket example of gambling machines with prices. You will need a specific license for this. You cannot, just because you have a TAC side, you open up a casino. So there's gonna be some, let's say, things that you will need to show that you have a competence and that is set up in a correct way before even you get a chance to open up your casinos. So be attentive to that. How, because this thing is very complex. There are public sites. I've put you here some URLs where you can look into and you have those sides probably for every kind of, let's say country. Specifically in developed countries and probably emerging countries, you have the administration that are publishing this. So how to deal with this? Very often the best advice I can give you is get the support of an external counsel in the country that you want to operate. The opening your, let's say your, your business. And they're gonna be telling you what kind of, let's say permits, competencies you will need. And potentially the law firm, normally you have law firms, big law firm, we specialize in incorporating companies in their country. And they will take care of for you for, of course is going to be a course that you will have to incur. But I've seen setups where, for example, between 5€10 thousand, the law firm takes care of everything and also getting the right permits for you before you open up their business. So I mean, that was maybe quick about business, permanent realized, but there's nothing more to say. So just be attentive that depending on the kind of product, service that you're selling, you will need to show some level of competence or some level, let's say, of criteria. If your bank or your bank adviser, you cannot run this business without any substance. So are also the financial regulator will have some, let's say, expectations from you. So after having received the tax ID, after having received the authorization, the business permits, and the license for, let's say, running an operating and selling the products and services that you have documented that you intend to do. You have now the responsibility of incorporating the company. And by incorporating the company, there are some matters, some things that you have to think about. So first of all, let's define what is corporate loss of corporate law. And there is a very nice article from Harvard Law School. There is called the essential elements of corporate law. What is corporate law that was written in 2009 that I really recommend you to read. I have not found a more updated one, but it's really a nice one if you're interested. It's pretty long one, but nonetheless, it's very nice one. So corporate law is often referred to as company or company formation, or basically corporate law. And those are the five characteristics, attributes that we're going to be drilling down in this lecture. It's about legal personality, limited liability, the transferability of shares, the delegated management under a governance structure that is often called the supervisory structure or board of directors structure, but a manager structure. And then also the let's say, right, fair and equitable rights that investors gets, an owners of the company gets towards the company. So those are the five that we're gonna be discussing. And also one of the things that sometime, because here we have, we have passed the step of ideation, writing the business plan, the business model canvas. We have, and we didn't go into corporate finance now, but we have our first amount of capital to create the company. It can maybe from your own cash account and you have transferred that cash into the start in capital of the company. Maybe it comes from family or from France, where you have your, let's say initial capitals. So your seed funding. But also corporate law is not just about incorporation or company, company formation. Corporate law also tackles the elements and remember the S curve of corporate growth. It covers the elements of not just only launching the company, but also what happens when the company is growing. But because there's going to be situations where, for example, the shareholders will have to change. Also when the company is mature, but also when the company is declining. Or in case there is a liquidation of the company, that the company owners have decided to shut down the company. And it's not necessarily bankruptcy or accompanying going default. It's just that the owners of the company has decided we no longer want to do this. And we just, let's say, liquidate all our assets and the remaining cash will be used for paying off debts and paying off debt and the equity holders at the very end of the day. So corporate law deals with those, let's say parts of the life, of the moments of life of a company it is launch, growth, maturity, decline, and potentially liquidation. So the first of the five attributes that we're gonna be discussing is the legal personality of the company. So as you remember already said in the previous lecture, that the company will be the central connection points for contracts. And the company. Seen by the eyes of law makers, regulators, the government, the company has its own personality is what we call a moral or legal person versus I am a physical person. So the company has by itself a moral personality, legal personality. And remember that the main idea is that imagine, let's take the following example. That you are a shareholder, that you own a company, but you have other nine friend that owned the same company and everybody has ten per cent of the company ownership. If you are hiring an employee, if the company would not exist, you have to imagine that the work contract of that employee would have to be signed by the owners of the company. I mean, that's not scalable and that's why the company by itself has moral, legal personality so that basically the company as a single moral person, science is the counterpart for the employee that you are hiring. And through that you don't need to have the owners all of the owners have to sign that contract. We're going to be just not going to find to delegation of authority. Maybe you will require two signatories to owners out of ten to be signing that contract. That's the kind of thing That's part of the governance of the company. That's really the main contribution of corporate law when we speak about legal personality is that it gives to the company the opportunity to serve as a single counterpart contracting party and enabled to be able to scale. Because as I said, you're going to have upstream contracts with customers. For example, we're going to have downstream with suppliers, investors, employees, those kind of things. So that's really the main contribution that corporate law is giving this moral personality to the company. And by that, the company can act as a single contracting counter-party. Also, one of the things that corporate law gifts to the company is the separation in ownership of the asset. So there's going to be in a gonna be discussing in a visual example it clear separation between the assets that are owned by the company owners, which are privately owned, versus the assets that are really owned by the company. And then they give you a concrete example. If, let's imagine you are as an entrepreneur, you have a laptop. That laptop will be 100 per cent used for, let's say, developing the websites. That will be an e-commerce shop. And that's shop is obviously the main purpose of the company that you're now incorporating. You could bring that laptop into the company as as an asset. At that moment in time, you decide to transfer the assets. That is an non-cash asset, that laptop into the company. You bring it in, maybe you bring in with the invoice, the laptop, how to cancer cause of 2 thousand US dollars to Euros. And with the invoice, you can show that the value of that asset is two k whatever US dollar euros. And then from that moment on, if that asset is carried on the balance sheet, but we're gonna be discussing later on if that asset is carrying the balance sheet of the company, that asset no longer belongs to you as a private person, that asset belongs to accompany as a moral person, there is a clear separation between, between the two. And in which there were many time when the asset is transferred, it allows the company to do what the company wants with that asset. You as a private person that has grown in the asset and has received as a counterpart, a portion of equity, a portion of capital for that. You can no longer solely decide if you have other shareholders with you on what is happening with that asset. If the company decides to sell the assets. That's it basically. So this is an, again, I'm not speaking now here about percentage voting powers, voting rights of a share of voting rights that's come, that is coming later on. But just be attentive to that. There is a clear separation between privately owned assets and assets that are owned by the company as a moral person. And also an element that we're gonna be discussing later on is also what is called entity shielding. So as we have a separation between the assets that are owned by the persons, the private persons that are also at the same time owners of the company versus the assets that are owned by the company. There's also one thing that is called entity shilling is the following. So imagine that you are opening a company and you're taking a bank loan on the company. So the bank isn't external credit or to the firm. And the bank has probably giving you a loan based on the assets of the company is carrying in the balance sheet. So the bank can only claim, and this is where entity shooting comes in. The bank can only claim, let's say, its depths against the assets that are owned by the company and not on the assets that are privately owned by the owners of the company. At the same time, there is, and there's something that is not often discussed also in accounting trainings. And discussing this in my financial trainings about company variation in value investing is the there is a kind of a liquidation protection. Let me explain. If you look at the balance sheet we're going to be discussing later on, if you look at the balance sheet, basically have three parts. In fact, you have two parts. You have the assets on the left-hand side, you have the liabilities on the right-hand side and right-hand side. But if you can the liabilities, there is, there are two portions, the debt holders, so external and internal adept toddlers, which are the equity showers. We're gonna be discussing this later on. We're gonna be discussing ownership of the company. What lot of people do not know is that in case of liquidation of a company, when the assets are sold by liquidates or decided by the owners. Potentially, the external creditors will be paid off first before the owners of the company because first, what is remaining in terms of cash by having sold off all the assets of the company will go first to pay off the debts, pay off the depth of the creditors before what is then remaining after having paid off all the depths of suppliers, employees, bank loans, those kind of things. What is remaining will go to the equity holders or to the shareholders of the company. And so that's also one important element to take into account that legal personality. So those kind of attributes about separation of the ownership of the assets. There is a priority rule that depth told us can be for shareholders of the company. So that gives us supplemental level of protection in case of liquidation of the company. Also the authority elements. That's when something when the company decides to do something about the assets of the company, buying, selling, etc. There is really, the rules are defined through the legal personality and they are linked to the legal personality. They are no longer linked to the private persons that are owning the company. And last but not least, the legal personality also. I mean, there are many situations where you're going to have litigation's, so there's gonna be an angry customer. You're going to have an angry supply against you in an angry employee and you may end up in litigation. Also, corporate law defines the processes and procedures on how to deal with litigation's between customers, shareholders, suppliers, employees. But take those four stakeholders. And that's why also if you look at the contracts very often you have also the applicable jurisdiction that is written down in the contract so that in case there is litigation, the contract already states and if the contract has been signed by the two parties, which jurisdiction is applicable? Let's say it's the I have no clue Washington DC jurisdiction that is applicable or the Luxembourg let's say a commercial courts that are applicable in case of commercial litigation for example. So that's the kind of thing also when writing down contracts, that's the kind of thing that you need to be aware of and also look into. And also if you are the one writing the contract, that also applicable jurisdiction is written down so that it's clear from the very beginning which are jurisdictions you will in which, let's say jurisdictions you will face litigation. The second attributes that corporate law gifts to companies is Arthur legal personality is the limited liability. So we already discussed is that when a company goes, for example, a bankrupt and there is some external creditors, that the creditors can only make a limited amount of claims against the assets that are owned by the firm and those assets are written in the balance sheet. There is an inventory of all of those assets. They have no claim on the assets that are privately owned by the shareholders of the company. And that's something very important because this gives also, let's say, some form of peace of mind, the shareholders, because shareholders know that credit holders cannot come after they are privately owned assets. And this is where we are discussing as a partitioning and I'm gonna be making it visual here through a case study. Let me, let me elaborate here. So here, let's take the following example. We have this lady called Karen. She owns, she's 100% private, owner of a house somewhere in the US. At the same time, she's 20% shareholder of company a. The other 80% is hold by four other shareholders. Everybody has basically 20 per cent, so there are five shoulders with everybody has 20% stake in company a. Let's imagine that there is an excellent credit on. Let's imagine a bank has given a loan to the company for 2 million, or there are still 2 million to be paid off the loan. And at a certain point in time, what happens is a company is not very profitable. They have been destroying cash as the load. They could not turn the loan into profits. The company only currently carries 1.5 million tons of assets. The balance sheet is doesn't carry more than 1.5 million in terms of assets and also obviously in terms of liabilities. But the company now the bank says, Yeah, but guys, I'm seeing that. I mean, you're destroying money. I have claws in when I wrote the loan to you that I can claim at any moment in time the full amount of money that I that you still owe me and you still owe me 2 million. The problem is that the company only has 1.5 million of assets in the balance sheet. So the question yet you may now wonder, is, can the excellent credits or go after, for example, this real estate, Let's imagine this real estate is worth 1 million. So it would it would definitely cover the remaining 0.5 million, which is difference between the claim that the external creditor has against the maximum amount of assets that the company a has currently? The answer is no, and this is where the shielding mechanism and the asset partitioning. So remember the separation of ownership is that the private real estate of Karen is owned by Karen as a private person. It's not owned by the company because carbon is added not to bring in the real estate and to give the realtor as a warranty to the company in case something would go would go south with let's say the company operations. So the 0.5 million residual claim cannot be done by the creditor through company a to Karen. Or maybe this works the same way for the other shareholders. So the excellent credit can only make the claim on the assets that company a owns. That's basically it. And this is where the shielding mechanism, this limited liability and this acid partitioning plays a very important role and gives confidence to the shareholders as well. I would say here, you would say Yeah, but that's unfair. For example, the excellent credit would be a bank is unfair towards the bank. And I'm saying yes or no. But why did the bank give a loan to company a that was maybe too risky and the amount was too high. Maybe they should have limited the amount of money that they were borrowing to company a instead of being maybe familiar and just giving 0.5 million. So that's a risk that the external creditor took. That's not a problem of the shareholders. It's going to be the problem of company a. That's for sure Maybe company a has to be liquidated. I mean, depending on how the clauses of the loan have been written. But again, if if the excellent credit though was, allow me to say stupid enough and took too much risk on giving too much money versus the, let's say, the assets and the forecast and profitability. That's a problem of the external creditor. You see how this works and I hope it's clear for you also this shilling mechanism as partitioning or separation of ownership between privately owned assets by the shareholders and assets that are owned by the company as a moral person. So let's switch gears here. This one is a little bit more complex about, let's say, shares because basically when we speak about companies. I mean, except if you have a sole owner, a single owner of the company. But normally you're going to have various what is called shareholders. But first of all, let's define what is a share assurance. In fact, as already, you can guess it's an indivisible unit of capital of the company. So it expresses ownership. It expresses the ownership relationship between the company and a person, which is called the shareholder. But also remember that the shareholder can be a person, physical person, but you can have companies that are owners of companies. Take a concrete example. Blackrock as a, let's say, as an investment funds, is owner of other companies. They are owners of Berkshire Hathaway, Warren Buffett's company, owners of Microsoft. So remember that the ownership relationship between a company is not only with physical person, but it can also be with other moral persons. And the, when we speak about share capital, we refer in fact 100% of the shares of the corporation. So from that, of course, so this indivisible unit of capital that is called a share, and it can be determined in number of shares, percentage. Obviously, the shareholders are the person's physical persons or more persons that are reduced and by the corporation has a legal owners of the totality of the shares of the company. There is one single shareholder, or maybe part of the company. In the previous example with Karen, I was saying that there were five shareholders and each seller was having a 20% stake in the company. And sometimes we also refer to shareholders, equity holders or stockholders as well. So those are synonym is basically the same. What is the, the, the things that copyright law is expecting on transferability of sheriffs and also towards what are the expectations that corporate law has against the company related to shareholders? Well, first of all, the company has a moral person that has shareholders has to keep registry of who are the owners and how many shares, those owners of the company, and this is required by corporate law. The second problem as well, Let's say the second expectation that corporate law has against the company as a moral person is that the company needs to be able to continue. It's an operating its business, even if the owners of the company change. So on the first problem, you can deal, you can solve this expectation. So corporate law expecting, so government regulators expecting from the company to keep a registry of who are the owners of the company. You can deal with this by keeping a shovel or Registry and assigning the ownership or the accountability, sorry, the accountability of updating this registry to a specific person. So you are allowed to do this, to insource this, but you can also outsource this to, and there are going to show you in the next slide, there are companies that are specialized in managing this for big corporations. But this is something you will need to do. Just one very quick, Let's say detail here. You have anonymous owned companies in the other called inc incorporated companies in Europe, for example, you have an anemia, which means anonymous companies, where the Articles of constitution do not reflect who is owner of the company. In limited liability company is very often the articles of constitution show who is owner of the company and how many shares. The managers of the company, we don't call them shareholders, but we call them, I mean, they are owners as well as shared as well, but it's not called shares is called sum, sometimes social parts of the company or social shares of the company. That's now a detail. But just keep in mind that in various types of companies, the articles of constitution do not tell you who are the owners of the company and limited liability company is very often the articles have Constitution show who are the shareholders of the company. So I was speaking about the registry and the registrar which is the owner of the registry, the shareholder registry, while you have a company that is very well known, which is called computer share, they are listed on the Australian Stock Exchange. The ticker is CPU. In fact, one of the largest. I think they are the largest registrar for the very big corporations. And you need to imagine when you are a company like Microsoft, like Amazon, like Google, Alphabet, every day your shares are traded in and tried it out. I mean, you better have an automated process and somebody who keeps track of the millions of small shower changes that are happening every day. And this is where you have even a specific company called computer Sharp? Probably not the only ones. I'm sure they're not the only ones, but this is one of the biggest ones in the world. They keep track of all those changes in terms of shareholders. So that was the first problem. So what corporate law is expecting from the company as a moral person is to keep a register. So Registry and somebody owning or has the accountability to update this registry. The second problem is now, or the second expectation a corporate law has against the company, the newly created company, that the company needs to be able to operate even if the owners change or want to change. Here we come back to the principle of transferability of shares in the ownership. But basically, what, what can happen is that, Let's take the example of Karen's company. You have five shower as a non shareholder wants to get out of the company. The other foreshadows want to stay in the company. It's not because one of the shell is wants to get out that the company will stop working. So there are some specific processes and this is expectation or where corporate law kicks in is that even though there is a shallow who wants to sell his or her shares, let's imagine it would be carrying, carrying on Switch House wants to sell her 20% ownership. Basically, the company needs to continue operating. That's basically what the transferability of shares, expectations and possibilities are drafted. In fact, in corporate law, obviously this depends on jurisdictions as well. So you're going to have two types of transferability of shares. The first one is companies that are not publicly listed, companies, which are called private companies. And we're going to give you, are going to give you examples in the upcoming slides. And you have companies that are free, whether she has a freely tradable. And those are companies that are listed on the New York Stock Exchange, on Euronext, on the Australian Stock Exchange, on the Japanese stock exchange. I mean, you get the points. So they have the shares of freely tradable on those public markets. This is what we call secondary market, but you may have companies where you need transferability of shares, but those companies are privately owned. And when, specifically, when he's thinking about private companies, you may have, when you did a series a, series B round of funding. You want to have as founders, some specific clauses. If you have brought in the Series a funding a new investor in and doesn't even investor wants to get out and that new investor was earning 20% of the company. You may want to have the opportunity that the investor wants to get out, but they need to make you the proposal. First proposal to buy the shares at a specific price. That's the kind of thing that you can agree upon when the investor comes in. So you're going to have I will not read them here because it would take too much time. But you have typical clauses when you do, when you bring in new external investors in a series, a, series B, series C around a founding, which are called right of first refusal riser, first, right of first offer of founders, right of first offer, or potentially free transferability. So those are the kind of clauses that you will find in a term sheet that you will find in a shareholder agreements between new investor coming in versus the fairness for example. So you will need to be attentive to this. And again, it's not the purpose of this masterclass to go into all the details, get yourself help from an external legal counsel. But just be aware, that's the intention of this course. Just be aware that transferability of shares, you may want to protect yourself as a founder or you may want to protect yourself as an investor towards existing foreigners. So think about those kind of things. So maybe I'm going to ask you here, give me examples or think about examples of public and privately owned corporations. So maybe pause 1 second here of the master class and thinking about, you know, companies that are publicly listed, probably, yes, and they're gonna give you examples in the next night, but do you know companies that are privately owned, which are where the shares are not freely tradable. Just give it a thought one seconds. The examples I want to give you here, on the left-hand side, you have publicly listed companies where the shares are freely tradable. And on the right-hand side, you have privately owned companies where the shares are not freely tradable or nothing. So Udemy, they went on stock market a couple of, I think a couple of months ago. I'm not sure if 100% of the shares of freely tradable. Maybe it's just, I don't know, 80% of the shares that are freely tradable and 20% are still owned by the founders or private equity investors. Kellogg's and Nestle. Those are companies where a big portion of their shares are freely tradable. Remember when the shares are fully tradable, what I didn't mention when introducing the topic, I was not stating per default that 100% of the shares are freely traded. But for some companies it's the case. For other ones. It's maybe just 80% of the shares that are freely tradable off, 50% of the shares that are freely tradable. Thinking about Rushmore, for example, where 50% is owned by the family, 50% is freely tradable. Privately owned company has Skillshare, hasn't gone public yet. Ferrero, which is an Italian family, Owens, sweets. Oh, pastries and chocolates business and See's Candy, which is fully owned by Berkshire Hathaway. So by my friend Warren Buffett and Charlie Munger was a privately owned companies, so forth, one delegated management on the board structure. What corporate law also expects from companies or from a company as moral person, is that the shareholders give some of the main authority of corporate affairs, of corporate operations to some kind of supervisory body that is sometimes called the board of directors, sometimes called the supervisory board, sometimes it's called the Board of Managers. Just for the ease of keeping it simple here, we will only speak about board of directors, but sometimes you have a board of managers when it is limited liability company. Board of directors is basically a corporate governance structure where all or most decisions, with some exceptions which are very reserved decisions. But most of the decisions are in fact delegated to the board of directors. And the board of directors basically carries four basic features. The first one is that and we're going to be discussing T1 versus tier two governance models. But there is a separation between the kind of decisions or let's say what is called the Reserved matters of board of directors, which are topics and subjects that are really reserved to the decision of the Board of Directors which operation managers cannot take. Without the approval of the board of directors. The board of directors will be elected and dismissed by the shareholders. And also, very often the board of directors in most cases are different from the company shareholders. The company shareholders delegates the, let's say the governance and the, let's say the major decisions to the Board of Directors. And also what happens very often. Always the case. Sometimes you have a sole shareholder. And shareholder, in fact, doesn't need a board of director because any sort of shareholder resolution basically represents 100% of the power of the company. But very often what happens is that you're going to have a board of directors and the board of directors has to have some complimentary skills and competencies. 8. Finance & Bookkeeping law: Welcome back, entrepreneurs and investors. In this next lecture, we will study in Chapter number two where we're discussing after the ideation phase, really the incorporation of the company. You have been discussing corporate law and now we're going to look into the fundamentals of finance and bookkeeping law. It's not the corporate finance chapter that will come later on, but he is really setting the fundamentals, what are today, the accounting standards that company I have to face. In fact, before we go into discussing what is IFRS, US gap, local gap, just want to make a very quick introduction about the word accounting in fact, comes from the frozen accounting records that we have with that historians found were more than 7 thousand years old. When in fact they will records at the tiny Mesopotamia, which is basically today Iran, Iraq, which was one of the very ancient civilizations where they were in fact keeping a record of expenditures, goods received, the goods traded, and remember, before the appearance of money, people who are bartering so they would potentially sell, I have no clue crops for cow, for example, or they would sell cheese for bread. And obviously it was always complicated to say, how many pieces of bread do you need for a certain amount of cheese? This is where in fact, money came. The appearance of money facilitated traits. In fact, in those civilizations, one of the major milestones so we had during the Roman Empire. So we have the first double, double entry bookkeeping that was pioneered by the Romans and we are coming back. What is double entry bookkeeping is, for example, you credits one account and on the other hand, you debit an account. So the balances are always cans are always balanced out. And in the Medieval and Renaissance periods or around 15th century, we have this guy called Luca Bartolome or the peculiar partially, I haven't, I'm not sure what is the right Italian accent. So he was going beyond the initial double entry bookkeeping system of the Romans. And we could say basically it was really the appearance at that time of accounting. In the medieval ages. The purpose of accounting and bookkeeping is really preparing information for various stakeholders. As we had when we were discussing the various stakeholders. What's the purpose of company? You remember, if you don't remember, go back to that initial lecture. We were discussing that the company is in fact the connection points for various contracts can be for customers and stakeholders, for employees, for shareholders, for suppliers. But basically it's a little bit the same for the purpose of accounts accounting and bookkeeping is really preparing information for various stakeholders. It can be tax authorities, that can be shareholders. Can we potentially new investors that would like to invest into the company, but also for management employees, customers and suppliers, or even for banks mean we were also discussing about a bank loan at that moment in time where maybe the bank was giving up too high bank loan to the Karen, if you remember the exercise or the example that we were discussing. And so the intention also of accounting and bookkeeping is really to try to keep and to record the information as factual as possible. But nonetheless, and that's something that is, and I've been discussing this also in one of my last webinar. We were rehearsing financial statements is really, a lot of people believe that accounting is perfect science. It is not. An accounting requires interpretation. Just look at the example. You have bought an investments or shares of another company. How do you value that's investment that assets? So always keep in mind that the best accountants will never give you a precise information and 100% accurate. There's always going to be a certain risk because there is interpretation but also sometimes simplification. You're going to see they're going to be differences also in the way how various regulators, various, let's say authorities throughout the world. They use different standards and those standards potentially give allow certain room and space for interpretation. So that I think that's really the important thing to keep in mind that accounting is not a perfect science. And the intention and typically the general use at those various stakeholders such as customers, suppliers, shareholders, new investors potentially are doing with the financial reporting is really to take better decisions. Even though, as you just heard 30 seconds ago, that accounting is not a perfect science. Even though accountants tried to be factual, there's gonna be some room for interpretation and some room for simplification. But nonetheless, intention is really supporting stakeholders if it is buying, selling a holding, equity or debt instruments. When they have to exercise rights, if it is a shareholders, they want to know what are the profits of the company and how does profits want shall be allocated. And we're going to discuss as well also the role of statutory auditors. So the role of external audit and internal audit in trying to increase the accuracy of the accounting records and financial reporting. One or one or two of the most important elements that people are asking for as well. And that will structure the way how financial reports are done is first of all, being comparable between time periods. And this is and again, I'm not going into the details here. There's more like rater to a corporate finance or investing course, but I'm going to say here, but what people expect when they read the financial report is to know if our to make sure that the financial report is consistent from one year over the other year, from one quarter to another quarter. If there would be changes. In fact, the company has to disclose this. This is basically done. I mean, it's not the purpose of this course, but if you would go into a financial report, let's take US listed public company at ten K, ten q reports. So let's look at the ten K report, which is the annual audit report. If they are accounting changes from the previous year, they have to be written down. And the people who are going to read the report, you will see that there has been a change in the accounting policies are in the treatment of some, let's say, accounting figures. It's mandatory. The company has to mention it explicitly. And of course, the second need is really avoiding a distortion, avoiding an incomplete view on the company. So basically, all things should be recorded in the accounting systems. And again, it's not the purpose of this course, it's on the financial statements correspond nonetheless. For example, when I do analyse, look at financial reports, I always look into if they are off balance sheet item. So items actually that should be recorded in the balance sheet, but the company has decided for a specific reason not to record them in the balance sheet. So they're considered like off-balance sheet items. That's like, I will not say it's per default is gonna be fraud or somebody is trying to cook the books. But I mean, I will pay attention to this. So I always prefer not to have off balance sheet items. And really this point of incompleteness in the financial reporting. I will quickly mentioned it a couple of minutes ago. So basically, if you look worldwide and let me start first with a publicly listed companies that are listed on the New York Stock Exchange, on Euronext, on Japanese stock exchange, etc. So all the big stock exchanges in the world, mostly you're going to have companies that will either report through IFRS, international Financial Reporting Standards. And the, let's say the standardization body is called a USB. So International Accounting Standards Board, I've put you the URL if you are really interested in it. And then you have four US listed companies. They in fact do not use IFRS, but they use US GAAP. Us, GAAP means US generally accepted accounting principles. There are the, let's say, a standardization bodies called the FASB, the Financial Accounting Standards Board. And again, here you have the URL if you want to go a little bit deeper into that, let's say into that organization. Third that I mentioning in this slide is that I was just mentioning that IFRS and US GAAP is used mostly for publicly listed companies, which you may have. You may have companies, privately owned companies that are not listed on a stock exchange where those companies will report or structure the financial reporting following locally accepted accounting principles. So this is what we typically call local gap. And I'm gonna give you a couple of examples later on we are going to show you the lux Luxembourg gap and also the Spanish gap. But you're going to have this probably for any country in the world. And this again, those companies, I mean, companies that structure their financial reporting and they follow local gap. It's basically because they are not publicly listed companies, but privately owned companies. Just coming back 1 second about IFRS and US GAAP because I think it's important for you to understand that basically. And I read it quickly mentioning that IFRS is really the international standard for financial reporting with the IASB. So the International Accounting Standards Board being the body of normalization for IFRS. And I put it the statistic of February 2020, probably it has even increasing the meantime, we are now mid 2022. But you said that already two years ago there were more than 120 countries through Europe, through Asia, through South America that were in fact following the IFRS standards on US GAAP. Let's be very clear. Us these companies, they follow US GAAP, and they do not follow IFRS, and it's mandatory for them if they are listed on the New York Stock Exchange, they have to follow and they have to report. In US gap. And then you have the, as already said, the normalization and standardization body, which is called the FASB, the Financial Accounting Standards Board, which is a US body. Again, it's not the purpose of this course. This is an extract of another course about financial statements. And I'm just showing you a very quick summary that I was mentioning it a couple of slides ago that's between IFRS and US GAAP, there are differences. The one that is most, let's say, known to people is when you read, I'm just taking the example of a balance sheet. If you read a balance sheet in IFRS versus a balance sheet in US gap, in fact, the order, the sequence is inverted. So if you look at assets in US gap, we'll start with short-term current assets and it will, from the top, it will start with casual, sorry, with cash and cash equivalents. That's the most liquid and short-term asset. And it will go down to very illiquid, intangible, long-term assets, let's say for example, goodwill, intellectual property. If you look at the liability side of the balance sheet, still in US gap, it's going to start first with credit toddlers are like bank loans, suppliers, those kind of things. Accounts Payable does That's the supplier part, maybe employee's tax authorities and then it will go to longer-term adapt like very long bank loans that are beyond 12 months, then you have equity. So paid-in capital, retained earnings, those kind of things are retained losses. If there are losses, if you look at IFRS, it's actually the other way round. So you have assets on the left side and liabilities on the right-hand side, same like US gap. But in IFRS, you will have in the asset side, the very long-term non-current assets on the top, and cash and credit, cash and cash equivalents. We'd be at the very bottom on the left-hand side of the assets, on the liability side the other way. And it starts with equity and it goes back to then non-current debt, so long-term debt, and then it will go to very short-term adapt. In fact, like accounts payable for example. The other, there are other differences I'm just making here. I'll let you read. This slide is a little bit of a complex slide, but in the way how inventory, for example, if you produce goods, how you calculate inventory, how you value inventory, you have various options in IFRS and US GAAP, you can only do first-in-first-out for example. So the difference is, I will not go into the details of it, but just be attentive that IFRS and US GAAP, there are differences between the two. This is an example of a, I've put you the URL back to the IFRS list of standards. There are some big four companies like Deloitte, for example, who produce very nice synthetic documents about the overview, what is IFRS? And you see here, for example, the various categories just need to be aware that the older, let's say accounting standards. And now they're all called, while they all called, the new ones are called IFRS, for example. But just be aware that there's gonna be some references to ISO standards and other ones to IFRS. But basically it's all IFRS. Then one of the things that's also, as an entrepreneur has to be very clear to you, is who dictates what's kind of accounting standards you have to follow. The, basically the law decides this. If I look here at the example of Europe, clearly states that for European countries, companies that are listed on stock exchanges, they have to follow the set of international standards called IFRS. And that's it, full stop. So you have to be compliant with this. And this is laid down in a European directive, which is basically a European law. If, if I look, for example, at Luxembourg is companies that would not be listed. So privately owned company not listed on the stock exchange. You have here on the left-hand side, and I've put the URL below the link to the official journal of the Luxembourg government. So it's a, what we call a local regulation. So it's low. But it's a little bit lower in hierarchy on the norms of you have Constitution, laws, regulations. So this is considered to be a regulation. But the regulation, and this is an extract from September 2019. The regulation states, what are the, what is the chart of accounts? So what is a class one? When you have a financial account that is prefixed with one, it's an equity account when it is, for example, an account of category three. It's gonna be an inventory account. If it is 67, there's going to be income statement related accounts. One will be cost, the other one's gonna be revenues. So that's the C6 and C7 that's laid down in law regulation. Another example of a local gaps. So remember, if you are publicly listed, there's gonna be, let's say 100 per cent chance that you're gonna be aided through IFRS, US, GAAP doing your financial reports. If you are not a publicly listed company, depending on the, let's say on the local standards, you may need to follow local gap. And for example, here I'm giving you the example of Luxembourg, but also on the right-hand side in Spain where you see again, and I've put here as well, again, the link to a Spanish website. You'll see that there is a general chart of accounts with the numbering of what is category ten, account category 11. And you see it's basically the same like in Luxembourg. Third-party accounts or class for accounts, etc. So you have this nomenclature or taxonomy, this numbering system of accounts that is laid down regulation. And in the US, it's basically the same. And I've put here again, a link to the Treasury Department. I think it's a sub agency of the treasury department where they describe it's the Bureau of the fiscal service. They describe the US standard general ledger. The general ledger is like the big journal. And what are the numbers? The account numbers that US companies have to follow? And you see it's pretty similar to Europe. You see, for example, that everything starts with one thousandths, is really assets, cash receivables, liabilities or 2000s. Revenue is 5 thousand, expenses is 6 thousand, etc. So they have also taxonomy and they have or chart of accounts where you ask that US companies have to follow that you as accountants have to follow. So we don't start from scratch and just keeping in mind that regulators structure this. So this is defined by law. And when so, I hope that you understood that it is either IFRS, US, GAAP or local gap. But now is the question, when you look at the financial reports, how do you know what Stan the company is following? And I'm giving you here are two examples. One European publicly listed company, which is Mercedes-Benz, Daimler. And you see here this is an extract of their financial report. You see in fact in the red frame that they are stating that the accounting policies applied in the consolidated financial statements comply with the IFRS required to be applied in the European Union as of December 31st doesn't have 20. So this is an extract, as you can already see, that closes the financial fiscal year 2024 Mercedes, and they state that they follow IFRS. And you see this as part of the chapter. You may remember, what is the purpose and what is the need for accounting and financial reports. One of them is consistency and comparability between fiscal years. And here are ready, they say, this is part of the chapter is called the significant accounting policies. So if there will be changes, so not all, not only the significant accounting policies they have to say which accounting standard they follow. In the red frame, you see that they follow IFRS, but there would be changes, for example, there will be new IFRS standards that apply to them. It's the case here, IFRS 17 on insurance contracts. I do remember a couple of years ago we had IFRS 16 changing the way how leases are accounted for to make it very quick. Leases when you want not owning the building, but you will leasing the building initially before that change of IFRS 16, it was only accounted in the income statement. And IFRS 16. So the IASB so the International Accounting Standards Board has been asking that also lease, long-term lease liabilities and assets that are not owned by the company should sit, in fact, in the asset and liability side of the balance sheet. So that's a change in accounting policy that is not driven by the company that repos under IFRS, but that is driven by the standardization body, ESV. But such a change and the impact of such a change has to be described in a significant accounting policies for the company, specifically here for publicly listed companies, a US company, Kellogg's. So as already said, typically US public listed companies, they do not follow IFRS, but they follow US gap. Here again, you see in the red frame. So they say the preparation of financial statements and conformity with accounting principles generally accepted in the United States of America. So this is, this states, they do not write the acronym of US GAAP. This clearly states that the accounts are prepared and they follow US GAAP, let's say taxonomy and the US GAAP standards. This is basically it for the finance and bookkeeping part of the law. So I think you just need to understand that depending on where you operate, depending where you incorporate the companies, they will have to follow certain taxonomy of accounting standards. And specifically, if you are publicly listed, chances will be very high that it will be either IFRS for most of the world. And if a company gets listed or your IPO in the US that you will have to follow US GAAP at that moment in time. But just be aware of what is a frame. That's when you incorporate a company, that you will have to report your financials, but you need to keep in mind that it will follow a certain standard with that in the next one that's going to be longer one. We're going to be discussing commerce laws. I think that's an important segment of law. Very important family of laws are going to be discussing. What are the laws that structure, let's say the commercial interactions between customers, suppliers, and the company that you're incorporating. Talk to you in the next lecture. Thank you. 9. Commecial Law: Welcome back. In this last lecture of Chapter number two, we're going to be discussing commercial loss. And as already stated during the conclusion of the previous lecture, I think it's a very important segment that entrepreneurs will have to deal with even more than the finance and bookkeeping part. Because probably entrepreneurs will outsource this to a professional accountant, incorporation of the company. Probably you're going to outsource this also to law firm and also asking the law firm to get to the right business permits and trade licenses. But commercials is something that you as an entrepreneur will have to deal extremely often. You're going to have situations where you will have to refer back to commercial loss. I think it's good to be fluid on this and as already stated, is gonna be a little bit longer lecture related to commercialize because we're going to depict what kind of commercials and apply to companies. So first thing is really understanding where commercial law is coming from. So basically a commercial appears around the 16th century in Italy. And it's really a body of law that applies to, let's say, the relations and how people and companies shall behave, how they engage in commercial transactions, how they engage in traits in fact. And commercial law in fact, is a group and has many branches, group of laws and it's a big family of lawyers and includes many branches. A couple of those that we're gonna be discussing are contractual law, intellectual property law, competition law, consumer law, international trade and tax laws. But there's gonna be more. You may also end up depending on similar to the business permanent trade license. We have specific industries where you have specific laws that have been written for that industry. This happens, for example, in the media and telecom world, while you even have specific regulators, at least in the US, in Europe, for example, you may have regulatory bodies for giving licenses to Telco operators. So it goes with the business permit, but there's gonna be also specific law that is describing how that environment in fact works. So the main difference between copying and commercialize really that corporate law deals with the governance and the regulation of the company. But the commercial or really focuses on everything, on all the aspects that come from, let's say, buying and selling products and services, or it is called commercial trading. Vm. As already said, the commercial loans to the ones that are going to be discussing and as ready, I'm showing this here on the right-hand side is going to be our red, red line that will be helping us to navigate through the five section is going to be intellectual property law, contract law, consumer law, competition law, and tax law. So let's start with intellectual property law, also sometimes called the actual property, or abbreviated IP. Ip in fact, refers to the creations of the mind, such as invention or artistic works, designs, visual elements, symbols, sometimes brand names, also images. There's going to be used in a commercial activities. And intention of the intellectual property law is right to enforce and protect the rights of the people that are inventing or have created and own those inventories. Because at a certain point in time somebody has created something, but they can transfer the ownership of that creation, probably for a certain amount of money to somebody else. So it's not just about protecting the creators, but also the owners of inventions. And in intellectual property law is you're going to in fact have typical, typically four areas you're going to have and we're gonna be discussing, and then we're going to be exercising with concrete examples. You're going to have copyrights, trademarks, patents, and trade secrets. Let's start with copyright law, which is a subsection of intellectual property law. So the intention of copyright is really protecting the owner of work. If other people potentially would like to copy presented, display the work of the ulna without his or her permission. This applies not just to literature. So two books can be applied to computer software, can be applied to advertising, to art. And if somebody would breach this is called the copyright infringement. That's a vocabulary. Remember that also part of the intention of this masterclass is to give you a little bit of vocabulary that you become fluent with that kind of vocabulary. So typically, if there is a breach of an intellectual property of a copyright, you will speak about a copyright infringement that we've been unauthorized use of copyrighted works. There's gonna be also two typical rights that come with copyrights. One is the economic rights. Which is in fact allowing the owner of the copyrights. So let's say the work that has to be protected is really deriving financial rewards from the use of the work, potentially about other people. So you could potentially license a copyright to somebody and say, I allow you to use it, but you have to pay me €1 thousand per month, for example. And the second one is the moral rights that protects the non economic interests of the author. So there's really claiming the authorship of the work and potentially opposing changes to work that could harm the reputation of the owner of the creator of the work. So remember, it's not just the creative, but potentially also the owner. In most of the countries. I mean, the foundation of copyrights. And again, I'm not a legal specialist, but they have been laid down by the burned. So that's a city in Switzerland Convention of 1886. And you have an, I'm putting heels of the URL of the WIPO, which is a word, Intellectual Property Organization. So most, let's say entrepreneurs, at a certain point in time, they have to think when they build something, they want to protect a creation. If n for which countries, for which territories they are going to register the copyright. And one of the most easy ways of doing it is using the WIPO, which will then potentially, let's say for a certain cost, It's crazy cause, but we'll give you, will register the copyright for a lot of countries throughout the world. And an example is basically this training, this masterclass. There is lot of content that I've created myself. There are also other contents why I'm referring to external sources. We're gonna be discussing this if that is a infringement or not of intellectual property. But basically this course is copyrighted. So I'm not allowing somebody to take the exact same content and producing it are monetizing it without my consent. So that's a very clear example of copyrights and I don't have to reduce. So that's basically also what the Berne Convention says. I do not have necessarily to reduce it to prove that I own or that I have created the content of this masterclass. And also one of the things that is very important to know. And here again, a little bit similar to the legal system difference that we saw when I was showing you a map. In fact, on copyrights, the term. So when you register a copyright, how long that copyright remains, let's say protected. And you have famous examples of copyrights that expire after 50 years. Sometimes happens for artistic works like music, for example. In fact, there are differences between countries and you're going to have some countries where after 30 years it becomes the copyright is in fact voided. So there is no copyright on the piece of work, whatever it is, literature, art, et cetera. And for some countries like Mexico, it goes beyond 100 years. So it was century because also there is a value that comes with the time. So the cupboard is very fresh. There's going to be probably a lot of monetization opportunities. But if the work that is copyrighted is 100 years old, well maybe it doesn't carry any financial value. There is nothing at stakes. Then it became, the copyright becomes in fact obsolete. So that's about copyrights, trademarks. So the intention of trademarks is really signs. So like words, phrases, symbols, or designs. And you can already think about big brands. Think about Nike. Think about the Apple logo, the three stripes from the sports apparel company, Adidas or the, or you call it the swoosh, I think from NYC, that's a symbol. Or when NYC says, just do it. So that's the kind of trademarks that also those companies they want to protect. And a trademark is something that really distinguishes a specific good or specific surveys. If I put the Apple logo and I do not say that it's above or below. You're going to recognize that it's an apple trademark. If I put the Nike swoosh and you immediately recognize that this is nice. So really the idea is to protect those elements like words, phrases, symbol, or designs. We are not speaking here about the book. We're really speaking about short sentences, like just do it for Nike for example. And I'm making are any publicity here for Nike. The process basically there are two options. You can file a trademark application with the local Trademark Office, or you can use again, the WIPO system to file trademarks as well. I will not go into the details of it. But really there are ways of protecting your trademarks. And again, if you are a company, a startup, and you are building something very specific, like, I don't know, a logo, a symbol sentence that describes what you're doing. You will have to protect this very probably otherwise you're going to end up in trouble at a segment of town and somebody will steal this away from you. Those are examples of trademarks, and I was specifically here mentioning the following. I mean, my my family name is Kara. And what I'm trying to show you here is, in fact that trademarks can be limited to industries. If I just look at the career of brands, I mean, I can prove that I'm not infringing any trademark calling myself carry because it's my family name. If I decide to create a certain product called Coursera, I probably will be allowed up to certain extent to do this. Here you have watchmaker tag hire, who has specific category of watches that is called carrier. You have Porsche, which is a German automobile, luxury automobile sports or luxury automobile that has these 911 Carrara models you have carry genes, I think it's an Italian company. You have this Clara toys as well. And none of them are in fact in trademark infringement. And why? Because here the trademark is limited to an industry-specific, let's say scope. So watches, automotive cars, genes, so apparatus, fashion and toys. And with that, in fact, you see also that the logos are different even though the name Kara is being used in those of, by those four different companies, but it will not be considered an infringement because trademark can be limited to specific industries. And so here you have examples and again, it's not the purpose of this training, but some of you may have already followed other trainings I do about value investing. I'm a value investor as well and I believe I've become a better value investor being a business person. I believe I've become a better business person being a value investor. And here you see like the top 25 brands, I do use this Interbrand global brands listing that comes out once per year. It's very interesting to read. This is marketing agency and they analyse the power of the brands. And here's see, I was speaking about the Apple logo, which is today the highest value. It's intangible brand with nearly what is it foundered and 8 million US dollars, just what the apple is, what you see on number 11, the swoosh from a, from a Nike on position number nine, you CBM from McDonald's. So you clearly see that those are remarkable trademarks and you can immediately relate to them. And what they represent, that's really the power of marketing. And this is giving you examples that those logos are in fact protected. That's those are all trademarks. I'm going to give you an example of a trademark infringement. This is a real case when I was preparing this masterclass for teaching at a university first time. So you have on the, I don't know if you recognize those symbols and of course explain them. But here we really have two companies. One of them has been in fact, attacked for trademark infringement. So on the left-hand side, you might have recognized the Chanel logo, which is luxury. Is it's just clothing. I think they have perfumes as well, but I'm not a specialist in that area. That's the official channel logo. And on the right-hand side, it was a Chinese company called zoo. And this is the logo that they have been using. And in fact, Chanel has been raising the lawsuit against zoo for trademark infringement. And I enjoy it's now remember x2 is in fact a Spanish Chinese Jubilee year. And they said, no, sorry, that's, we believe that there isn't infringement. Because remember this industry specific trademarks are how you can have like a career or brand that is really separated between industry without having a trademark infringement. Well, here they were saying, it's really, I mean, the logo is very close to our channel logo. And on top of that, if Julia, I mean, it's, it's in the luxury area as well as if it is perfumes potential, also haute couture. So this is going to be potentially confusing of fooling customers. And Zoom may benefit from this, according to Chanel, trademark infringement to increase their revenues because it appears very similar to the Chanel brand. And it may, let's say interferon, impact the good reputation that Chanel. Chanel shareholders want to keep. Remember that's also one of the intentions of trademarks, is also to protect the reputation of a specific brand. And again, here you have it here. But basically Xu the Chinese are Spanish Chinese julia they lost, in fact, they lost the lawsuit against Chanel. Chanel was, let's say, considered to be in it's fair, let's say right to fight against this logo that was really confusing for customers. Then we have patent law and we're still in intellectual property law. We have patent law. So patterns are basically inventions that something else and writing a book. That's not necessarily an invention that's more copyrights or a visual, a logo like the Apple. Apple, the Nike swoosh, or the McDonald's yellow M. That's not a copyrights, That's a trademark. So that's sine or the just do it of NYC. That's a word. Sentence. Patterns are really about inventions and is really about products or process that provides a new way of doing something. And, or potentially offers a new technical way, our new technical solution to problem and the intention of patterns is really the patent owner has specific, let's say rights. And mostly the exclusive right to prevent other people from copying or commercially exploiting the invention of it. And it means that the invention that is protected by a patent cannot be used, commercially used, by somebody else, or sold or distributed without the patterns are not consent, similar to trademarks, similar to copyrights. Patents can be licensed, mortgage, or assigned. So you could say, I have invented something, but I'm just an R&D company. I don't have the scale and the distribution channels to sell this or to distributed throughout the world I going to license. So let's say there's gonna be companies who are willing to subcontract, not some co-driver in the sense, pay royalty fees, for example, or monthly fee, an annual fee for the use of the patterns. And potentially, you can potentially salad as well. Patterns typically also have territorial rights. So you have to think about in which country or region you operate and make sure that the pattern has been fired and granted for the territory as you're operating in. Normally patterns as well are limited in time similar to copyright. You cannot have a pattern. That is an idea. Remember for example, in the pharmaceutical industry, I mean they live from through patterns. You cannot have a pattern that is everlasting for 1 thousand years. So patterns also carry a limited amount of time before they fall under, let's say, public usage. This is an example because I wanted to make it very specific. Our pattern looks like. So. Here you see this is on the left-hand side, a US patterns. On the right-hand side. This is a pattern that has been followed through WIPO, the world intellectual property organization. And you see in fact those are technical designs and they describe things. Um, I mean, I mean, the companies, I'm sitting at the board of directors, we also create patterns and we find for patterns that are then let's say accepted. And this gives us a certain, let's say ownership. And then we have the possibility to potentially of selling it, license, licensing it, etc. An example of a design, patent infringements. So here we are not just about the sign, which would be a trademark, but really about design that carries certain characteristics. For educational purposes, I'm not flagging Skechers of being systematic design patent infringer versus Nike. I'm just copying information that is publicly available. And in 2019, Nike filed a lawsuit against rival companies, Sketchers, and claiming that they were infringing Nike design patterns. So not just the visual of the shoes. And you have below. I've put the URL to that you can read if you're interested in it. You have the Nike models on the left hand side, the blue one and a white one. Probably the blue one more for man's opera, the white one, I do not know. Maybe for women, I do not know, whatever. And on the right-hand side you have the, According to Nike, the sketches, models that were according to Nike, considered as a design patent infringement. Let's be very fair. They do have indeed similarities. Let's be very transparent about again, I'm not here. The one that decides about the outcome of the lawsuit was interesting in this lawsuit is that indeed so the Nike has filed a complaint In the US District Court at the Central District of California, September 30th, 2019, and claiming that Skechers had a coping strategy and they had people testifying, so witnesses testifying. And apparently there was one I've put it in the red frame here that indeed was commenting and apparently is not just Nike, but also Adidas, which also a very big sports apparel brand in the world, which is basically the Nike competitor. That apparently the witness was testifying. Indeed, that's management, senior management of Skechers was claiming Asking the sketches designers indeed to do exact copies of what's competitors like Nike and Adidas? Wondering again, I leave it to the courts. I'm just reading what has been testified here by a scatters co-operate witness. Alright, so trade secrets. Trade secrets, as we already discussed, we had so copyrights, trademarks, patterns, and then we have trade secrets. Trade secrets protect business practices, formulas, designs, or processes using a business. And they are designed specifically to provide a competitive advantage to a business. Just think about a trade secret. What is the most well-protected formula of a, let's say, drink company in the world, you have an idea in your mind or Yan's is Coca-Cola, That's correct. That's trade secret. So the trade secret is something that is considered commercially valuable because it's secret. And that's the difference between a trade secret and patterns. A pattern is something that becomes public and by that it becomes protected. You have to imagine that Coca-Cola does not want to lay down a patent on its secret formula. The formula has to remain secret. And that's the idea of a trade secret. So it will only be known to limited amount of users. And it's going to be subject to, let's say, protection measures to keep it secret, potentially also, if the trade secret would have to be maybe share it with, I don't know, a bottling company. That bottling company will probably have to sign a confidentiality agreement with the Coca-Cola for so that's the kind of thing where patterns would not fly. That will not be the right vehicle to protect. That's, let's say whatever formula, process, business practice that really has value to the business has to remain secret, cannot be filed as a pattern because everybody can read patterns. That's basically the idea. And assets trade secrets are protected also without registration per default. But you have to setup as well as a company appropriate steps. And this can be non-disclosure agreements or non, non compete agreements with various stakeholders. So that's the kind of thing that you will have to think about. As already said, one of the most known examples and the most, let's say a valuable secret formulas is really the secret formula for Coca-Cola drink. And you see here I think they have moved the secret formula to new volts. I think it's in the Atlanta, either headquarters or they have a museum in Atlanta. I actually also wants visited. It's, I think it's the, in the world of Coca-Cola in Atlanta. I'm City. And here this is an example of a trade secret. So this has to be protected and only, I think it's just three people who have access to the secret formula and imagine them breaching the secret formula. I mean, they will, they will go to jail. They will face an enormous lawsuit and they have to pay millions and millions of consequences if they would breach the confidentiality around it. And I was discussing earlier about this training, so this drilling is copyrighted, but you remember, I mean, at least for the content that I have created. But a lot of, I mean, there is a certain portion of this. A training which is in fact public information that I've brought in by referencing the sources, for example. Now I had, I had this thought process like by doing this course and using like this picture here of the Coca-Cola, of the new vote of Coca-Cola. Am I breaching something? Am I breaching any trademark? I mean, you have seen I've been using the Chanel logo. Is that a breach of a trademark? I was showing the Nike shoes. Is that an infringement of a design patterns? And the answer is no. The reason I'm giving you a concrete example, if the intention is of educating, teaching, as long as you show the sources, it will not be considered an infringement of copyright or trademark. And this is where, in fact, US Constitution, Let's say, describes that fair use of, let's say, content, trademarks, design patterns. It's more trademarks, copyrights in the sense of promoting progress of science and useful arts. So it allows indeed, authors to enforce the copyrights in all cases. But at the same time, there is the Copyright Act, Section 117 which says, but if it is in the tension of teaching, well then it will not be considered an infringement of copyright. So before we go into the examples, so keep this in mind. And again, it's like for the counting part of things, you probably, I mean, if you creating something new, you will probably have to work again with a law firm to say, how do I protect this? What's the cause of protein protecting this? You as law firm helping me. Can you take care of the filing of this pattern, for example, or laying down this trademark or copyright. So that's the kind of thing that you will have to think about. Or are you going for a trade secrets and you're going to protect the trade secret through, for example, nondisclosure agreements with if there would be stakeholders that you will have, like partners that you will have to deal with this trade secrets. Let me give you here an example, because intellectual property is not just one thing, it's not just designed patterns. I mean, if you look at the Nike shoes, indeed, they were claiming a design patent infringement, but they were also the way how the shoe was designed could have been considered trademark approach to trademark. And I'm going to give you a multivariate example of intellectual property. I'm asking you here. So, you know this brand Star Wars, maybe our fan, maybe you hated and you're a Star Trek fan. I don't know. You hate science fiction potentially. But do you have any clue since the release of the first Star Wars movie in 1977, Lucasfilm that is now has been acquired by business and basically the IEP that was carried by Lucasfilm as a company, Lucas has sold and transferred the ownership to this name. So Disney is now the owner of the patterns that trademarks and copyrights. I don't believe that there is any trade secrets. So any guess how many patterns have been reduced? That's how many trademarks on how many copyrights? Maybe pause here, write down three numbers, and they're going to resume now. What are the values behind those three question marks? So Star Wars carries in fact, 188 were just at patterns. 1138 registered trademarks and 3,952 registered copyrights. Probably the music or for example, from a trademark, may the force be with you the term Yoda or Skywalker or Darth Vader. Some visuals for example, the Star Wars fonts, how Star Wars is written. There's gonna be also protected. So there are a lot of things. The movies, there are some books, probably you see the amount of patents, trademarks, and copyrights is huge. Now one of the questions that of course comes up is, if somebody doesn't infringements, who's gonna notice it? Well, normally those companies, they do have lawyers that work full-time at screening the Internet screening, any kind of media, social media to see if the use automated tools as well. Artificial intelligence to detect if there is an infringement on patents, trademarks and copyrights. And you see as well, for example, if you publish videos on YouTube. You use music in your video. Youtube will tell you where this is copyrighted by this person and will tell you, Are you allowed to do this or not? All these will notify the person that you have potentially, that you are potentially using music that you do not own, for example. But you just see the amount of patents, trademarks and copyrights are the brand like Star Wars caries since night or has generated since 1977. Okay, Let's wrap up here on the intellectual property law. Let's go into contract law. I think you understood that. And basically intellectual property is what is basically intangible value that exists in your company. So now we'd have to look into the contract law. So contract law is again, another branch of the commercial law. And it really tries commercial law to structure, to regulate the creation. And also I will call it enforcement. But how contracts between your company and one or more parties are in fact followed, are structured, are respected, and those contracts are enforceable by law. You may recall, I think was in the first lecture, in the introductory lecture of this chapter I was discussing about typically you're going to have a certain point in time and contracts, you're going to put in your contract and your contract template, which jurisdiction, which courts are applicable for that contract. For example, if you are a, I don't know, a Dutch company incorporated in the Netherlands, you will very probably if you're working with a supplier, if you're working with a customer, you will probably make sure that in your terms and conditions of your commercial contract, it's going to stay probably that an in litigation will be ruled by a Dutch commercial code, for example. So that is, you know, that and when people sign a supplier signs with your customer, signs with you, they agree that in case of litigation it will be the courts where you are headquartered that will apply. Why do we need the contracts? And you remember that the intention of a company is to be the main objective of companies to be the central points of contracts. Because the company carries moral personality. And without contracts, it would be difficult for sellers and buyers to make any commercial transactions because without that, you would not have clear defined performances or performance metrics. What is expected, how much money you have to give for a specific product, for a specific service, or for specific transaction. So really the contract lays down the main elements. And also, let's say litigation clauses in case of a dispute or breach of contract between parties. And the typical requirements that we're going to see, we're going to find in, let's say a contract template is gonna be the offer and the acceptance. What constitutes the acceptance of a product or a service? The capacity and legality. So all the elements required for various agreements, date, signature, pricing may be taxes on it. What already stated a couple of seconds ago. What happens in terms of dispute, breach of contract remedies? Maybe you want to have some penalties. So for example, if you are the customer and you are buying a specific goods from somebody, and that specific good has a certain timeline. You want to have this good for, let's say, the end of August 2022. What happens if your supplier does not provide that? Maybe you want to put some penalties into the contract. And this penalties may write down or lay down that's for every day being laid on the delivery of this good, there's gonna be a 1% penalty on the price or 1% discount on the price. So that's the kind of thing that contracts in fact lay down. Of course, you will have to think what are the clauses that you want to put into the contract. And you will have to see if you aren't getting the contract, if you're the supplier. And I mean, the customer has a stronger position than you, so you need to look into that. There is not that this balance between the 21 of the things that is also important when looking at contracts. And this comes back also a little bit into, let's say accounting standards is really one of the steps in terms of revenue recognition. And it's not because you sold or that you have booked a contract, that you can already start booking the contract as revenue in your financial accounts. So you need to think about. A couple of things. First of all, is there a link between the contract with a specific customer? So what is this payment schedule? What is the substance? How does a proven look like? What are the performance obligations clearly identified? So if the performance obligation state that the product is delivered in years time, you cannot book now in your financial accounts, the whole amount. You have to determine as well as the price of the underlying transaction. What is the amount that the customer would have to pay for exchanging the goods or services. Are there any warranties or refund liabilities? Example, if you are the supplier and you have to deliver a one for money worth around a million US dollars, certain products and services. But the same time you have the liver dumps, you could book the 1 million at the same time. Your customer has a one-year refund window if there is any issue on the products that you have delivered. So potentially you will have to book a liability. And let's imagine that the liability would be at ten per cent. So that's the kind of thing that you need to keep into account. And your accountants will of course, look into how does revenue recognition look like? Because that's really, I mean, there have been a lot of scandals where companies have been, let's say, respectfully, over emphasizing revenue recognition while they were liabilities and they want to book into the liabilities and the same fiscal period, for example. So there are the costs, for example, there's a certain amount of financial accounting standards and practices and they have to be followed. So just be attentive that it's not because you get you have an order intake of 1 million that you can already book it as revenue. So there's some various things that osteo account and it will ask you for and this will also, they're going to rely on contract with your customer, for example, is laid down to understand how revenue recognition is happening. One of the most important things, and we're coming back to one thing I said earlier about accounting policies is accounting policies have to remain consistent from one fiscal period to another fiscal period. If you decide to do a change in how you recognize revenues, this has to be written down in the accounting policies and express in the financial report. And obviously, you cannot go back and forth. So in you're wondering this near to changing it and your 3ds are no. Well finally I come back to what I was doing in year one. That is really very bad practice. And this will not increase the level of trust that external stakeholders will have about your company. So keep this in mind. The really, the intent is really to have that consistent in how you also recognize revenues. Were already discussing a bit about refund liabilities. But if I look at a lot of products in Europe, for example, those products come with a warranty if the product breaks. Let's say for example, in the first year IN the product goes back to the supplier and potentially you, they have to replace it. Or I mean, this happens with laptops, for example, and have a one-year warranty. I mean, if it is shown that it's not something you did not break the laptop on purpose, but really that the laptop I don't know to fire or really there was no was not starting. And you can prove, reasonably prove that. I mean, it's not linked to any manipulation that is linked to you. Well, then the warranty, warranty kicks in, and potentially the supplier has to swap it at no cost. Sometimes it's part of the cost that is given back. I mean, it depends from one product to the other. And potentially also the warranty also describes what's the amount of time for replacement. So this can be for Caspi air parcel. I was taking the example of laptops, those kind of things. Then you have a refund liability. So warranty is not necessarily a refund warranty could be just that you replace the good, for example, or even the service that you're providing. A refund is really, I don't wanna replacement. I just want to get my money back so that in fact, the supplier is offering to the customer the right to return the product and get a full or partial refund of the amount paid if the product or the service is the service, sorry, it's not complying with, let's say the performance expectations that were, let's say promised to the buyer. So let's about contractual law to make it simple. So keep in mind that again, you will have a they feel the supplier to look at contract template that you will get. But if you are the entrepreneur, you will have to have specific terms and conditions, general terms and conditions, general commercial conditions. And gets really the advice from external law firm that will help you draft a valid contract template where, let's say payment schedules, performance metrics, warranties, those kind of things, are known in advance. So because that will impact your financials and it will avoid you any kind of bad surprise or think about contractual law as an important element as well. The next, the third category or subcategory of branch of commercial or is consumer law. First of all, in consumer law, there are certain amount of terms that you need to know. First of all, what is a consumer? Consumers, any individual who purchases goods or services sold by corporations, by companies, by manufacturer, so by retailers, consumer goods are, and I mean, we're speaking about consumer law. Consumer goods are in fact assets, personal assets that purchase primarily for individual, personal, family, or household use. So here we are speaking about B2C, business to consumer. We are not speaking. Consumer goods are goods that are used for professional use. And warranty we're discussing is really what expresses the performance promise. The promise generally speaking, of the product or the service, and what isn't at, let's say, and the typica 10. Introduction to Strategic Management: A comeback entrepreneurs and investors. We finished earlier chapter number two, which was really about all the legal elements that you need to know as an entrepreneur. And again, it wasn't the purpose of going deeper, just really touching upon the main segments of law that you need to know as an entrepreneur. So chapter number three, we're gonna be discussing strategic management. You may ask yourself, you may wonder, why are we speaking about strategic management? So coming back to what I said in the very beginning of this course, which is basically we're gonna go from ideation to maturity of the company you, so you remember, you see it here. Refreshing everybody's man on the S curve of corporate growth where it starts with an idea, the company gets incorporated. Now after having raised the first money or having brought in the first money, we are in the phase where the company will grow, the company will become mature and potentially a certain moment in time decline. One of the things that we need to set very clearly here is that when you have an idea, and I think I mentioned it already earlier in one of the starting lectures whenever discussing about where ideas come from, that chances are high that you will not be the first one having that idea. So a lot of ideas are in fact not new. And the functioning of markets or developing a new product for markets. What entrepreneurs often forget to do what they overlook is really looking at existing competition. What's the market structure? If there are external factors that's potentially influence that. Let's say segment as the segments of the market that they want to sell the products or services. I'm not saying that as an entrepreneur you cannot have an idea that nobody else hadn't before, but chances are high that you will not be the first one having that idea. But as I said, it's, it comes down to and boils down to execution, good execution. You may have people who hadn't good ideas, but the timing was wrong. It was too early even, and consumers were not ready to buy those products, are those services. So timing is essential. And I think if you look for the very big unicorns, very big corporations, they often get the timing of launching new products and new services, right? So just be attentive before you go into a market, before even you spent money on it. I have a thought, have a look at MIT the 23rd in a row whose launching this and what is different in my products and services. Why people who will switch customers will switch to me from existing competitors. Or maybe I'm, the idea that I have is really revolutionary and we'll really shift company the way how people perceive a specific product or specific service or serve, let's say, or solve problems that have not been solved before. So you may be the first one launching and are having this idea. But keep in mind that very probably will not be the case. It probably has already developed something similar to what you are doing, but maybe not in your geography may be exactly what you are trying to solve or to bring in terms of value to your potential customers and our prospects. So on the escrow of corporate growth, one of the things that I also mentioned earlier, and here's specifically strategic management is important to understand is that you may have companies that are, the first one is launching an idea. And if the profits of that company, of those companies are very high, you're going to see competitors coming in. And the reason why competitors come in is that profitability in the market is very high. And what happened as well, when do you see competitors exiting a specific market is when profitability goes down. We can discuss about airlines. Would you now, if you would have the capital, would you be launching an airline? How we look at the profitability that you can expect from the airline, how to differentiate. So that's the kind of thing that you need to think about when you are thinking about launching a product and or service, depending of course, on how much capital we have available. What is the competitive situation? Do you already have competitors that are on the market? Or if you're the first one, how long can you be the only one launching a new product and your service before other people see that you have very high profits and they will try to copy you. Of course, if the margins are bad, you're going to see competitors exiting. And it's limited to the current conversation that is going on in some industries that are for the time being not very green or sustainable, or that are very capital-intensive where you see in fact competitors, or let's say company shutting down the operations because they aren't able to make a profit from their operations. And on top of competitors that entered or that exits during the lifetime of your company, you also need to think either one, you're launching a new product. You are delivering new services to a specific market, specific customer segments. But you're going to have external factors that will influence the corporate growth. You may have. We were discussing about taxes in one of the previous lectures. If the government, local government, where you operate, decides to raise the taxes drastically on specifically the products or services that you're selling. It may be an issue. Let's imagine that you are selling e-cigarettes. Well, you're going to be probably challenged by external factors and external effect that can be also an external study on external perception. That is giving negative feedback on your product or your service. There's gonna be political external factors like government changing. Let's imagine from left to right. And this is going to be substantial changes in the way they deliver specific business permits for your goods and the services, and all the services that you are setting. So you need to keep in mind that it's not just about, you cannot live alone in your ivory tower. You're going to have, first of all, competitors, but you're going to have also external factors that will influence how you land on how you market your goods and services. Then you may have also global economy. I mean, now we have very high inflation. We have challenges on the supply chain as well. The central banks or European Central Bank, if it is the Federal Reserve in the US, are raising rates, interest rates really to cool down the economy because, because of the COVID, there was too much cash that was printed out, too much money that was printed. You may know that money has been disconnected. The US dollar has been disconnected from the supply of gold. So basically you can print as much money as you want. So that's the reason why we have now one to two years later. So high inflation because you have issues on the supply chain. But also at the same time, there has been so much money available. And the cost of, let's say borrowing money has been extremely low with even sometimes negative rates. External factors including global economy, societal pressure, people who want to buy green things, sustainable thing. So that's the kind of thing that also has an entrepreneur you need to think about not just competitive, competitive landscape competitors, but also those macro, economical, and external factors. So when we look at strategic management and we bring this back to the s-curve of corporate goals so that you see that I'm using this consistently. So after the ideation, the launch phase, we have incorporated the company. Now, if mean if you are the founder of the company, you need to make sure maybe you have people in your team that can take care of planning, but also just thinking about strategy. And there's gonna be a lot of challenges. I mean, from the lounge to the maturity phase, you will have to scale your operations. The operation will become more complex. You will have to recruit people. You need to retain talent. You, as we already discussed, if profitability is high, you may see competitors coming in, how you defend yourself against those competitors. You may have changes, societal changes, external elements, new technology, Function services that appear that are potentially disrupting what you're doing. I'm thinking here now directly of a concrete example which is a commodity services related to cognitive features like seeing, reading, translating. If you were a startup that thoughts five-years ago that you'll be the one developing. I don't know, object recognition. Well, probably today there's going to be in big tech company that offers this at a very low price. So potentially new, new availabilities of those commodity technology services and maybe disrupting your business model as an example. And as already said, also changes in laws and regulations. Do not believe that when you go, when you create a business and you incorporate this business, that they will not be over the course of, let's say, the lifetime of the company that there will be no changes in laws and regulations. There's gonna be changes in laws and regulations as well. So think always. And I mean, from my own experience having been at Microsoft for 12 years and eight years, General Manager for Microsoft Luxemburg. I have learned one thing is that when you are in high velocity industries, the only thing that is constant is changed. So you need to make sure that you as a company and you as a person not able to cope with that change, that you can navigate through that change and accept that it's gonna be all the time changes happening. And you may remember when we were discussing about the foster study from University, that even for very large corporations that were listed on the, was it the SAP 500s when you extract h and what the SOP, if I founded it was indeed that the average lifetime had gone down over the last century from 67 years to around 15 to 20 years. This also shows that markets are becoming more and more dynamic. And I do not expect this to be different in the future. There are conversation about the globalization, but today the world is global. And also with the availability of, let's say, high bandwidth Internet. I do not believe that we will completely go down to regionalized model. So just to wrap up on the introduction and what we're gonna be discussing in this strategic management chapter. So we will look into macroeconomic environments. So what are the things that influence the, let's say the area, the operations way a company is trying to sell its products or its services, we're going to bring in. So we're going to be discussing market structures as well, but on the macro economic or environment and most specifically the excellent environment. In January we're gonna be using the Tesla Model or the PESTEL model, which is little bit more structured than a swat models. If the spot mode, that's the strength weaknesses, that's not the internal. Look at the company and the OT is opportunities and threats. That's more the external attributes. So basically the past is little bit more than the OT part of the SWOT model. So as I said, market structure, I think it's important that you understand the basics around market structures. We are going to be speaking about concentration models, the HHI, concentration index, those kind of things. Then we're gonna go into the microeconomic environment. We are going to be discussing the Potter model, the model about differentiation. We are going to be discussing Blue Ocean as well. So I've tried to give you some tools that are even personally, I have been using running my businesses to really, I would say, try to understand what is happening. What are things where we as a company have to push the needle in order maybe to land our go to market plan. And if it is internal, external and I'll try to really structure and give you a radius, some strategic tools that you are able to also as an entrepreneur, to have, to get a sense of what it means to do strategic management of a company. And one of the things where sometimes people, let's say, I want to say challenged me but ask is like, okay, but we had crisis. And what's gonna be the future Eigen? I'm always saying I do not know what the future will look like. And I've been using this also in other trainings where I'm showing you since the last more than a century, that crisis is something constant. There's always gonna be a crisis. And crisis have always influenced global commerce. So that's something that you need to be attentive to and potentially thing about, how can I build up a company that is resilient enough because there's gonna be crisis. And if you go beyond this, this graph, you see that the graph stops in 2010. But there has been the meantime European debt crisis of 2010. The Brexit happened, COVID happened, and now we have war in Ukraine. And I guarantee you, I do not know from where it will come, what it will be, but there's going to be the next crisis in a couple of years. And some of you may know Peter Lynch has been a very famous investor. He always said, statistically in average every three years is going to be market corrections. So that's when the market goes down by more than ten per cent. And every four years in average is gonna be a bear market. That's when the market correction is more than minus 20%. This is driven by a macroeconomic and microeconomic aspect. So always keep this in mind that you need to think about how dependent and potentially in non-resilient is my cooperation versus what my employees, my customers are expecting from me. So also keep this in mind that do not expect it to be, let's say, a walk in the park, you're going to be challenged, buy things also external factors that you cannot control. In fact, at the very end of this chapter number three, and I decided to put it at the end. I could have put it at the beginning, the conversation about values and company culture. And I think I have the say later on in this specific cultural lecture where Peter Drucker has been one of the founders of marketing. He has a very famous say, which goes Culture, eats strategy and breakfast. I'm always saying you can have the best consultants that work for you, the best lawyers, you can have the best product if your culture in the company is crap and you as an entrepreneur are not attentive to this. And you, potentially you have people who are always negative. Potential to have good reasons or not. But you need to have a certain, let's say, framework, a certain frame of values and attributes that also you expecting your people to behave and to follow. That's something where people are always will look at you and you are the person who will lead and default. First of all, define and then lead and really repeat what is accepted behavior following the fundamental values and the culture that you want to have in the company and what is not okay. And again, really, and I really emphasize this. I have seen an awesome mentoring entrepreneurs Being in a lot of corporations culture, having a good culture can compensate for a lot of things. And it's not just about having the right tools, spending money on having external, fantastic consultants from big four companies. Mckinsey is really, really be attentive from the very beginning to the cultural expectations and the values that you're implementing in the company. That we're going to stop here. And in the next lecture, after this introduction of chapter three, we will start looking at macro environmental. We will be discussing the passenger model but also market structure. So going from very diluted, fragmented, non concentrated markets to potentially monopoly, which is like a perfect, let's say a setup for one company when there is absolutely no competition. But we're gonna be discussing in this next lecture. Thank you. 11. Macroenvironment and Market Structure: All right, Welcome back to lecture number two. In chapter three, we're going to be discussing macro-environment and market structures. I believe before we go into that, I think it's good just to take a step back and look at the history of commerce and welcome and stands today. So a little bit similar to what I was discussing, The basis of accounting, which was the area of Mesopotamia and where we had the first inventory is being held about crops and hurts. Little bit similar. In fact, you see again the importance and the role that Mesopotamia, so which is basically today the region of Iran, Iraq is playing as well on the history of commerce. So a lot started from there, and it started with cattle traits. But at the time money wasn't existing. It's only more or less 3 thousand, little bit more than 3 thousand years ago. So 1200, around 1200 before the common area. That's because bothering was becoming too complex that people started to trade with shells and precious materials. The first currency only appeared around a thousand years before our common area, which is basically 3 thousand years ago. And you can see from the map on the right bottom side of the slide that obviously, if we look at history of commerce and international trade, one of the first very big, let's say, movements of commerce and of goods and services being delivered was the Silk Road that started ones in China and really went back to Europe. And you may know, and again, I will not go into geopolitical conversation that today China is trying to rebuild a modern Silk Road to export their goods and services throughout the world. Then we add around 600 of the common area we saw it was the Tang dynasty in China during the seventh century, we had basically not only currency on that metal coins form, but also on the paper form appearing around. It was Spain, France, Britain. I mean, we had a lot of movements married him. Movements around the, between the 14th and the 16th century were in fact those countries were going out and trying to create, um, let's say, colonies and territories outside of Europe. Spain trying to really take ownership of South America, central America, with exception of Brazil. It's not been very glorious. I can say Portugal little bit the same. Then, of course, after the 16th century, you may recall we were discussing industrial revolutions, steam hearing in England's first era of industrialization and then second, third, for the Nazi revolution that obviously we're structuring as well the history of commerce. Today. When we look, we are speaking about global value chains, of global supply chains and obviously mean through the war in Ukraine and also through COVID, there has been a lot of disruption in the international supply chains. But because the world has been globalizing a lot over the last decades, and people tend to forget. So basically they say, Why has the word being globalized? Some people believe it's because of the appearance of e-commerce and digital technologies. And digital disruptors are a lot of people forget or in fact even do not know, is the standardization of Fred containers, of shipping containers. That has been something that has been facilitating transport. The exchange of goods, specifically of products and goods throughout the world. As not just being e-commerce and digital disruptions, but really also the normalization of shipping containers. When we look at how the global traits, what are the attributes of global trade today we do have, and again, it's not the intention of doing geopolitical comments here. Well, we do have the United States, which is the largest economy in the world, followed closely by China. Some people say China wants become number one where they achieve it. Then you can see that Germany, for example, Japan, France, Italy, the UK, Canada, India as well, are pretty strong economies as well. And obviously they have strong influence on global trade as well. We have this G7 movement, while you have the largest economies in the world that tried to, I will say, I will not say dictate, that would be a little bit too strong. But really to determine what's the right approach, the right attitude, even amongst them on the global trade. When we look so going away from history of commerce. But how those elements may influence your corporate strategy, your strategy as a company, how you sell goods or products, how you supply, let's say, raw materials that you need in order to produce your goods, maybe even your services. So the intention of this chapter is really to start giving you some tools that you can use to be strategic in the way how you manage your company. So the first thing is we're going to look at a macro environment and market structures. When you look at the external environment of the company to your company and you cannot control the external environment you will need. And there are some tools and truly is not rocket science. It's just trying to structure the ideas and hopefully not forget some elements that will be important. So typically, when you would even see students doing strategic assessments, typically use past of the past model. I do not like the past because I believe it's missing two attributes. So that's why I recommend that you use the pass linear model. So what is the PESTEL model? So it's, I mean, it's never a variation which actually describes six external categories or attributes, factors that will influence your company. The first one is a political one. So potentially, government and government policies will take decisions would intervene in the economy and this will have an impact potentially on your company as well. Just look when politicians decided to shut down cities to shut down everybody had to stay at home. Well, if you're a retail shop, because politicians have decided you will no longer have any customers. So you're going to have an issue potentially. That's why and how political and actions in fact intervene in the economy. Economical aspects. So economic growth rates, interest rates, exchange rates, inflation, unemployment rates that will also impact even if you are selling luxury goods. And you have unemployment rates going up. And we do know that luxury is pretty, let's say, resistant to crisis. But let's imagine that part of the luxury segment that you're trying to sell to is really middle-class people, not just the upper, high, wealthy people. Well, if unemployment rates or there is a mistress about the future, the economical outlook is looking bad. Well, probably this will impact your revenues as well and your profitability. Social, there are some cultural and demographic trends of society. I mean, you may have seen over the last ten years, more and more companies are building up subsidiaries in China because China was for a lot of them are very, very big market that was not addressed and China was growing. We're going to have today the conversation about India. They may even become bigger than China in terms of population. Then you have technological elements that can influence the way how you sell your goods and services. And those are external factors. For example, automation. I mean, if I look at banks, banks have very high costs. Looking at the middle office, that back-office technology can potentially disrupt that and use tools to automate what those humans aren't doing. As an example, there's gonna be legal elements. So changes we already discussed, it's about business permits, straight licenses, labor law changes. For example, if you have consumer price indexes that are high, you may have the government who says, this is the case, for example, for Luxembourg, where all salaries have to be increased by two-and-a-half percent at that state. You don't have the choice. It's the law in fact. And then you're going to have environmental elements. And again, it isn't the purpose of starting to make judgments here in this training. But you may have environmental elements like global warming, which will increase, I don't know, the amount of flooding that you're going to have. For example, imagine that your retail shop is very close to the sea. And in a city, in a downtown. And that downtown is suffering more and more from hurricanes of flooding. You may potentially need to consider If you shall move your retail shop from that location or not. And what's the disruption? Let's say consequences of not doing it. So that's the kind of external elements that will influence your strategy and you have to think about them. You cannot just be blinds. And that's why I like the past limb model because it adds what the past is missing the ligand and then the environmental aspects. But again, you don't need a PhD for this. This is common sense, but at least the past list structures. With each letter, there is one class of x and the elements that it pushes you that personally model to think about it. Then we go into market structure. So I mean, you have honest-to-God is outside the company. You need to look into this. You need to observe if they are potential changes to the parsley environment. Then you also need to look in the, let's say, customer segments that you're operating, that you're trying to sell your goods and or services is what's the market structure? I already said earlier on the S curve of corporate growth. It's great to have an idea. You may not be the only one having the ideas you may fit. You may face competition if you are the first one having that idea. Or maybe you're gonna be in a perfect situation where you're the only one starting with this good or service. This is where we have and this is very simplistic mind. We're going to practice it in the upcoming minutes. Where we have for typical market structures, where you have the slides here, but typically it goes from perfect competition. And you remember when we were discussing competitive law and also consumer protection law, this basically what consumers want is perfect competition. At least a contestable market where I or me as a buyer, I have a lot of opportunities to buy. There is competition out there. So by that there is a lot of innovation prizes are being pushed down. That's basically the best thing that I can have as a consumer. Remember what I said in the beginning of this chapter. So in the previous lecture that in the escrow of corporate growth, if there is too much competition for the suppliers, they're going to add a set amount of time and the profitability is bad, they're gonna go out of it. And that's why we had the situation where people were agreeing on a pricing mechanisms. You have this case of this. More or less ten airlines were fixing the prices just to avoid that, margins would become so bad that there would be pushed out of a certain market by their shareholders, for example, because Charlotte's have expectation, we're gonna be discussing these in chapter four about corporate finance. A child has had expectation on profitability as well and how they invest their money. Then we have on the right-hand side of the slide, you'll see a monopoly. So there is just one firm that is selling this good or the service. And the barriers to entry potentially can be extremely high. I give you a concrete example. In the railway industry. This can happen while you have in one country just want railway operator. And you need to imagine that if you want to build up competition, not only will this have environmental impacts in terms also of building and the construction of those new railways. Just to create competitions. And on top of it, it's gonna be very capital intensive. So the amount of capital needed will be very high. So railways, for example, is something where because of the capital intensity, the barriers to entry, it will be extremely high. And very often you may end up in only a couple of firms having the capabilities of doing this. For example, Luxembourg, there's one railway company, that's it, full stop and it's owned by the government. In Canada, there are not many you have, I think it's Canadian. Don't remember the names, but they are two tickers, a CPN and CNI. And I mean, if you want to be the one who brings new value, I mean, you will need to raise a lot of capitals. So there we clearly do not have a contestable market. And probably by that, while prices will not be competitive, because in fact the supplier dictates the, the prices at which customers will buy. But let's practice. So what I'll try. So coming back to perfect competition of contestable market oligopoly. So that's a few large firms. The pro characteristics are differentiated, the best trend, the barriers to entry are high. Then we have monopoly. So let, let's try to play. So I'm gonna give you here this eight companies and you see the logos. And I'll ask you to place them either into perfect competition, into contestable market, into an oligopoly or monopoly. So the eight examples I have is office for 65, which is the business productivity suites from Microsoft, Nespresso, Coca-Cola, Nespresso, coffee, coffee machines, and coffee cups, euros, so that you can do your very good coffee at home. Coca-cola is soft drinks and drinks in general, AT&T to telco operator in the US. Airbus, it's the R building airplanes. Spotify is music streaming. Lufthansa is an airline, an iPhone, a mobile phone device from Apple as a company. So pause here. And because they're gonna be continuing here the explanation, so pause here and try to take the time. And those eight look at what perfect competition, how it is defined on the number of firms, that product characteristics and barriers to enter the control of a price of their products. The ability to control the price of the inputs. And if there are any other features and look this with perfect competition, contestable market, oligopoly and monopoly. And try to place them here. So let's pause here and you assume when you are ready for the explanation. Alright, so this is my coal and again, it's not black and white. You will understand because models have the characteristics of trying to simplify things and it's not always as simple as it looks like. I tried more or less two plays. For example, Office for 65 of Microsoft, I've put them as a monopoly. And I will ask you later on, who are the competitors in fact, to those, let's say products. I believe that officer is 65, having more than 95% market share has a monopoly situation. Spotify, if you look, I mean, we had iTunes before and Apple Music is not extremely successful. If you look at music streaming, I mean, you don't have 25 competitors can maybe these are understand what Spotify is really the reference. So we are between 65 and Spotify, we have between monopoly and oligopoly. Airbus has Boeing as competitor. I mean, if you want to boot new airplanes, I mean, you have to have a lot of capital. But abacus has competition of Boeing. They do have smaller ones, Canadian bombard year, they do have Embraer. But I believe it really is sitting in an oligopoly. Coca Cola will discuss it or reveal it in the upcoming minutes. They do have competition. Iphone is in my opinion, oligopoly With Samsung, Android's. Show me Chinese mobile devices. At&t is an oligopoly. When you need to imagine that operating a telco network requires a lot of capital because you need to have fiber everywhere or microwave. So you need to telecommunication infrastructure five G for G antennas. So that's very capital intensive. So I believe that AT&T isn't in an oligopoly market? Nespresso, I believe they are in oligopoly. There are not very, a lot of corporations. Nespresso is owned by nasty, have the capacity to compete against an espresso, an airline like Lufthansa. I believe that Lufthansa isn't a contestable market or in a contested market. So there are a lot of firms. And we can discuss it if it is between perfect competition and contestable markets. Again, it's in black and white, but it's for sure not an oligopoly and monopoly is a product differentiated? Yes, to some extent, I think that Lufthansa is not the charter airline, it's more an airline for business. The barriers to entry at least and that's why I've put them into a contested market. I mean, you can rent airplanes. Specifically after the qubit. There was a lot of capacity available on the market. I do not believe that airlines are in a perfect competition where barriers to entry are low. I believe that there are some barriers to entry. Are renting an airline has a cause and getting the licenses, the pilots, et cetera. But again, as I said, please keep in mind that models simplify things. And I believe that, and I'm just trying to introduce you here to market structures that you'll get to understand how to look at competition. I believe that market structure model is too simplistic and I will give you a way if you want to go beyond and very easy and simplistic model with this for, let's say, market characteristics are going to give you a little bit more in the upcoming minutes. As I said, it's sometimes not always possible to put them exactly into one column. Competition. I mean, obviously 65 halves Google Ads is competition, but Google Apps, let's be very honest, is the market share is extremely low. Spotify or Apple Music has Boeing, and then really very small operators like bombarded and MBA from receivable money from Coca-Cola has Pepsi covariate, probably. The iPhone already mentioned. Samsung, AT&T has probably Verizon at T-Systems or T-Mobile. I don't know how it is called, so it's Deutsche Telekom, but in the US, you have a competitor to Nespresso, which may be Starbucks as well, and Lufthansa. There. Obviously there's much more competition if you look at the same segments that Lufthansa is serving, Let's say it's out of Europe, business travel. You're going to have British Airways, Air France for example, maybe KLM as well, which are competitors to Lufthansa. As I said, market structure analysis with those four columns is little bit too simplistic and there are other models. I mean, it's not the purpose of this training to go now deep into it. But again, I just want to open your eyes. You have ways of calculating how the market structure looks like and you have an easy way of calculating it is called the concentration ratios, which range between 0, 100%. And if you would look in the US, I think I'm giving it in the next slide if I'm not mistaken, the US Census Bureau, they in fact published, I think it's every two to three years, a concentration ratio analysis per market. So what does the C4 mean? It actually calculate what is the concentration of the four largest companies in a specific market. Look on the Right side of the slides and giving you the very simplistic example that I took from the internet. Imagine that in a specific market, you have a seven companies that are operating. And those seven companies have different market share. So you have first company has 33% market share, The second one has 22. I mean, you can read it 151287 and you have a company number seven has a very small market share, three per cent. The C4 concentration ratio just adds up the first four and comes up with a figure of 82%. So it's the sum of 33 per cent, 2215, 12%. So it means that the four largest companies in fact have eighty-two percent of 82% of the market share, which only leaves then, what is it? 18% available for the rest. In the US, C4 is used in Europe, we tend to use it a bit more than Herfindahl-Hirschman Index HHI, which is really more, let's say complex to calculate. And it's, it gives you a value and other percentage. But basically both. The calculation you see it's squares, the figures of all the companies in the market that we are looking at. And, but basically both if it is the concentration model, the C4 for companies, you can have a C3, C5, etc. The HHI index come up basically with the same idea, is trying to understand what is the markets, what are the market attributes? What is the market structure? Do we have low concentration? So the market is highly competitive and highly contested. Do have medium concentration even though the market is contested? Or do you have a very high concentration that goes from oligopoly. So a couple of very big players with very high barriers to entry to monopoly. The hyperscale. Look at the hyperscale cloud providers today, AWS, Microsoft, they're spending at least 10 billion per year on improving their datacenter infrastructure. I mean, we have an oligopoly situation and hyperscale cloud providers, you may have Google Cloud's that tries to run behind, maybe Oracle, maybe Alibaba Clouds, but it's very capital-intensive. So there, again, that's an example where we are gonna be sitting in a high concentrated oligopoly or monopoly. And I do recall more or less latest figures. But between, if you would do a C2 concentration ratio. So you would look at hyperscale cloud providers. You would just take the top tool, which is Amazon and Microsoft. It would be just at 80% for the top tool if you would take them the third and the fourth one, it's imagined it would be I think it's Google, the third one and the fourth one. I do not remember if it is IBM Oracle, but you will probably be ending up at 90 plus percent of C4 concentration ratio. This is an example where I was showing mentioning earlier that the US Census Bureau is doing this for every kind of industry. They do calculate C4 ratios. And it's pretty interesting. In fact, they bring this up several times. And I have in mind it's once every while, every couple of years where they're doing this calculations and Europe is doing the same. So you're also brings up statistics to look at what is the current concentration ratios on specific markets. What is clear is that this applies more to mature companies, then really to startups and to novice entrepreneurs. Because if you are a FinTech company or rack tech company on insure tech company, you will not find the exact industry description that matches your product or your service. So I think it's good for the general understanding of an entrepreneur that you have a market structure that you will be navigating in either need to understand how competitive it is and this kind of, let's say, models and vocabulary. I think it's important when you deal with strategy that you understand those things. But market structure C4 concentration HHI. Again, it's not the purpose that you look into this every day, but again, that you get this flavor that's on top of the external environment with the PESTLE analysis that you have to do assessments, that you have a little bit of thought process about, what does my market look like? One of the misconceptions that I wanted to clarify here as well. And even myself, I had a misconception on this. I always, and I have been taught that when the concentration is very high, that those markets are in fact much more profitable versus low concentrated markets. And in fact, it's not the case. And I'm showing you here extracts from the US Census Bureau. I think it was the 2017 study where they will kind of looking into all the industries that are, let's say, codified by a coach. We have the same in Europe, So we have a code of economic activity that describes specific industry. And they were looking into the concentration ratios versus the profitability. And it was interesting to see, and I had also misconception about this. It's not because the market is highly concentrated. So there are only a couple of actors, or potentially only just one actor. That profitability is high. And when I was preparing this, Let's say this masterclass also for the university master I'm teaching. I realized I was discussing earlier about Railway. You may have an industry which is really way transport of passengers and threat, and a threat because it's not necessarily the same. And the capital intensity is potentially so high, the maintenance cost is so high that indeed, even though you are the only actor, because railways, our government owns, and they only allow one operator in country where potentially the profitability is not very high. And I believe that, and again, without any critic, in France as NCF, which is a national railway operator. Indeed, the profitability is not very high, despite the fact that there is just one readily operator in France. And on the other hand, you may have markets that are extremely fragmented. So there's a lot of choice to consumers, so pressure on prices potentially, but still profitability can be very high. Alright? So that's about microenvironment of market structure. So think passively. So when you do strategic analysis of the markets, when you are growing, the company is now okay, what am I external factors that I have to take into account? Then also, what is my market structure and where the customer segments I'm trying to sell to. Where are they sitting? In the next lecture we're going to be discussing about strategic management and we're gonna be discussing about various tools that even I have been using really to manage in a strategic way. My company's Thank you. 12. Strategic Management: A comeback. Next lecture about strategic management. So coming back to this escrow of corporate growth, so I see this a little bit. Our red line as an entrepreneur from the ideation phase for the launch phase, the growth phase, shakeout, maturity, and potentially decline if we miss a strategic inflection points. So you may remember I said in the beginning of this chapter that companies need strategic management along this path, along this path of growth, because there's gonna be a lot of challenges that the company will have to face is recruiting talent, keeping that talent competition new entrants have profitability is high. External elements, if it is macro economic. But just the past lit environment that we saw in the previous lecture that will influence the way how you are selling products and services to your customer segments are markets. And also that we have this because of globalization, we have very dynamic markets. So we need to look into, you can just go blind and not look at how markets are evolving. And that's really something that is part of your role as a founder or an entrepreneur as leader of the company that you need to get knowledgeable about those things. When we are discussing about strategy, in fact, I introduced the term strategic management, but I didn't define what it means. And the origins of strategy is really the oranges in need for people to defeat the enemy. So you see there is a, let's say a war or military component to it. And in fact, the word strategy is derived from the Greek word strategos, which means army and hygiene. And my pronunciation is probably not the right one, which means leading and driving. Myself. I've been reading a lot, Sue and Sue. So when I was running my companies, I even negotiating complex contracts with customers and suppliers. Use the lot. The Chinese Sun Tzu, The Art of War, Document or essay and principles really to become a better leader. So it's definitely something I can recommend. Prior to 19, prior to 1960, the term strategy was primarily used in regards of war and political contexts not related to business. There hadn't been a lot of, let's say, contributors to, I mean, if you just Google up strategy or your strategy, I mean, you're gonna find on Amazon and you look for books about strategy, you're going to find hundreds of books. I believe that the most influential person has been, at least for me, Peter Drucker. And we're gonna be discussing again about Peter Drucker when coming back at the end of this chapter, we're going to be discussing how culture eats strategy for breakfast. But I believe that Peter Drucker has been one of the most influential contributors to stretchy. But there are other ones like Zelle, snake, Chandler, hands-off, and Henderson. So that's the definition of strategy and strategic management is really the actions, the, let's say, the daily decisions, the implementations that managers are taking to serve the goals of the company or, or to bring the company into a desired state. It's all about. And you may recall when I was defining entrepreneurship, bringing those factors of production, at least how economists define the factors of production if it is land, so property, plant, equipment, labor, capital, and the allergy of an entrepreneur and bringing those together. And that's really, let's say, the ones that are being taken and integrated into the actions, into the implementation of managers to try to achieve a certain goal, to achieve a certain state of the company. And obviously it involves specifying targets, specifying objectives, because if you do not know, it's like, I'm always taking the analogy with tennis. When I play a lot of tennis, when I play a tennis match, I go in with a plan. I'm not sure if we that panel will succeed or not. But as I always been saying the following thing to also my, let's say tiny pupils is like going with the plan. You may need to adapt it because if it's not set in stone, you need to have, it's going to be a dynamic environment as well, because you're going to have different environments. The courts will have issues. The weather may change, the wind conditions may change. But at least you have a plan and this is the intention that you have. So be intentional and set a target. That's the intention that you want to have. It's always better to have that than going into a tennis match without a plan and not knowing what you're going to be doing. And I promise you, it works the same. Company strategy and strategic management is really strategic management involves defining those objectives, defining policies, developing policies, and also allocating those resources. Property, plant and equipment, labor, capital. Really to try to achieve the goal that should become a common goal of your company. And maybe you go that you hopefully ago that you are setting as a leader for the company. You have. I mean, this is just general information. You have. First of all, models that assist in strategic management. We are going to be discussing this, but also we have companies that make that monetize on selling services around strategic management. I mean, you have schools, higher education that are making money by teaching their students, let's say strategic management and decision-making practices. So if I look at the big companies, that's, let's say most known to sell services to their customers. You have the big three, let's say strategic advisory firms, which are McKinsey, Bain, and Boston Consulting Group. And we're gonna be seeing some of their models. And then you have the big four, which also are seen as statutory auditors, which is PwC, Deloitte, KPMG, and Rooseveltian. So keep in mind that again, you as an entrepreneur, you cannot know everything. You can also get excellent advice, but again, that will have a cost. But I believe that entrepreneurs you need at least to understand what is expected from you from a strategic management perspective. Potentially that you get to help external, happy if it is really needed. One of the persons that are, let's say, I have been reading a lot in my career as a manager and this is now, I mean, I'm close to my 50s. I've been running companies for the last 20 plus years, has been Mike reporter in fact, so Michael Porter and you see his picture isn't economies researcher, author, adviser, speaker, teacher, whatever you want at HBS or our Business School. He has developed a lot of economical theories and also strategic concepts. And we're gonna be discussing one of them here, which I believe are simple models, but they do help like the passerine model, which is not from microbiota. But it helps to structure your ideas and make sure that you don't forget something. One of the first things I do recall having had conversations with young entrepreneurs where they were good technicians, engineers, but they had no clue what was needed from them as an entrepreneur, left to right to run a company. It's not just about building a great product and even the best possible MVP, it's really about doing much more, managing sales, managing marketing, managing, purchasing, managing distribution lines. You have finance and control as well. So strategic management is in fact a three-sixths and degree of discipline. And also one thing that I've been teaching entrepreneurs is you or maybe the founder of the company. But you may not be the CEO of the company because the CEO has to deal with this wheel of competitive strategy, you, the CEO will have to define the goals that you want to achieve as a business. But you as a founder will. Of course, I have, let's say, a specific expertise in one or many of those areas. So you need to think, am I the right CEO for this? Or do I get myself a team of people around me that can compliment me on where I am week and that is okay to be we cannot be expert in everything. I'm not an expert in everything. I tried to have a good overview of what it takes to run a company, but also sitting on the board of directors. I cannot be good at all. Matters were being discussed. That's why I asked the board of directors is complimentary amongst its members because you're going to have people that are more fluent in finance, other ones I'm often in audits in risk management matters are the ones more in cybersecurity, other ones more into R&D or the one to capital allocation and this kind of things. So the idea of strategic management is, and you as an entrepreneur, I mean, the walk-away message is, be aware that building up a company after the ideation and incorporation phase requires a lot of domains that you will need to cover. So either you get yourself excellent advice, it's better to have complementarity through team players that you hire people that you will tell them, please take care of human resource because I'm really not good at that. So that's the kind of thing that you will need to think about. On top of that, one of the mothers that is being used a lot. In fact, throughout, let's say the world of management on top of this, let's say the domains that the company has to tackle is really the balanced scorecard. And does a small breed about history. Balanced scorecard is not something new. It has been coined in 1992, but by these two gentlemen, so called Robert Kaplan and Norton. Before that time, let's say shareholders and management. What too much? Looking only at the financial perspective of companies. And you have seen from the previous, we'd have competitive strategy. That if you want to be good in, let's say, in growing your company, it's not the only way of measuring the performance of the company is looking at the financial perspective. Me as a value investor, I'm doing the same one I invest into company, not just investing because of financials look good. I try to understand the product. I want to hear feedback from employees, from external buyers. So the Net Promoter Score, how they feel about how they feel about the company are going to be looking at customer churn. If the company is able to retain its customers and grow its customer base or not. So there are a lot of things where before 1992 were in fact missed out because people, managers, shareholders, we're only looking at the financial perspective of things. And this is, I think the, the value that's Kaplan and Norton broad is to push those senior managers of companies, those entrepreneurs, those shareholders, knowledgeable shareholders, those independent border actors to look differently at a company or let's say to expand the perspectives. So the financial perspective, of course, will remain and we're going to be discussing this in chapter four, but corporate finance. But adding a customer perspective, how do customers see the company? Internal business perspective? How good are we at things? Do we have things that are efficient and non efficiencies? Can we improve those? Of course also, let's say the human part of a business innovation and learning perspective. Do I keep my people? Are people happy about the company you're working for the company and this is where we will, at the end of this chapter three, discuss culture. Because I promise you, if you have unhappy employees, even if your product is the best one in the world, you will not sell to your customers in the way customers should see and deserve getting the product from you because your sellers will misbehave. They will put less energy into them this way, culture plays a role. You're going to see actually through, through those four perspectives that we're going to also cultural performance metrics, or we'll try to put cultural performance metrics to capture what is the satisfaction of my place, but as a satisfaction of my customers, for example, what the balanced scorecard does not necessarily provide is the exact KPIs that you need to define and to measure. That's really something that's senior management board of directors they have to agree upon because those KPIs are gonna be industry specific, companies, specific, geography specific. There's really something where the balanced scorecard doesn't provide you. It provides you a lot of examples. And you can just Google and Bing this up. You're going to find hundreds of examples of KPIs or key performance indicators for balanced scorecard. But you need to figure out this is where judgment is required. You will need as an entrepreneur to figure out what are the metrics that reflect the culture and the strategy or 1.5 of the company and putting them into balanced scorecard, which makes it easy to Measure. Last one on this, but I'm always saying is you need to be careful as an entrepreneur and that's very important. And this is more than 20 years of experience when I'm sharing here is I've been using performance metrics, but I always set a green performance metric is the consequence of something. You see, sometimes it happens, unfortunately too often. That's when senior management in good faith with the good intention defines performance metrics to be achieved. That people will work to make those performance metrics green. And even, let's say, dress up, do things that may be potentially borderline in terms of internal compliance. Just to get those metrics green. And I always said it's okay to have a red metric or maybe one or more red or orange metrics. Because it will allow to have the right conversations if you as a n minus four and minus five manager or tricking the system and show you that everything is okay because you're distorting the way how the key performance indicator is being not necessarily measured, but how it is achieved. Well, that will create problems and it will show a wrong image of those metrics because those metrics are collected lacking tree structure that go up. And that's not okay. And I'm always saying also sitting at board of directors, it's okay to have a difficult conversation about KPI because we are maybe not selling or we're losing customers. That's the kind of thing that a board of directors has to deal with together with senior management and have a conversation. Do we need to change something? Do we need to allocate more capital? But please be attentive that KPIs are a consequence of something. I'm not a target by itself. Otherwise you're going to distort. And how distorted, how things are built up, how the company is being operated, because everybody is already looking into that. And I'm going to give you an example later on with Wells Fargo. While the KPI became the strategy. And that's really when you have this, I promise you. It will go south at a certain moment in time. You're going to end up in problems. Maybe it will take a couple of years, but I promise you when the KPI becomes a strategy, it will become very problematic. So be attentive to that. Just to complement on the balanced scorecard. Also matter of vocabulary on the financial perspective, the customer perspective, the internal business perspective, and innovation and learning. So typically on a financial perspective, it's you, I mean, you are sometimes or sometimes foods by how income figures are cooked up. And for example, people do not look at cashflow, for example, but cash is something very important. You need to look also how shareholders are remunerated and how they define the return or the return expectations. So things like return on invested capital versus return on equity. That's the kind of thing that you will probably want to measure at the highest level in the organization. You will look into terms like customer lifetime value from the moment a customer becomes your customer or prospect becomes a customer. For how much time you expecting this customer maybe to spend money with you. The average revenue per user, the ARPU, that's typically something that you see in the telco world. What is the average revenue and how you can increase this? Obviously, those are kind of a key performance indicators from a customer perspective. I already said it earlier or looking at things like net promoter score, customer retention, customer churn our customers happy with you, are able to retain them or not. That's the kind of thing where you need to think about when you analyze even your customer segments. Are they find grant and oven the analysis because maybe you have different type of buying persona has a younger generation. So like, let's say you have the millennials and Gen Z, the Gen X generation, etc. So maybe you have different KPIs for those different customer segments or maybe it's geographies. In fact determine your customer segments. And again, we don't want to go too far. But for example, today, when we look at internal business perspective, we're gonna be trying to capture things like, do we capture an exploit big and small data? What can you learn alphabet remember on the ideation, the fourth scientific paradigm is like, if the company has the opportunity to capture that big data, what are the learnings and maybe efficiencies are innovations that can come out of big data. We're going to look, also looking at retaining and growing talent as well, because we have scarcity of stem is scientific technical, mathematical resources and engineering and mathematics and resources. Do we use automation? Yes or no? Innovation and learning do invest into our people. Because again, I promise you, if you do not invest into your paper, you're going to have specifically on stem resources. This, there is a scarcity of resources in those areas out there. If you do not invest in your people, they're gonna go somewhere else. If you do not push them to learn new things. As I said earlier, change is the only thing that is constant in high velocity industries, they will not develop themselves. And with that, you as a company will stagnate as well. So before we wrap up, I just want to remind you where strategic management is coming from and what is the intention. So remember, in this S-curve, corporate growth, we have passed the ideation phase. We have positive and cooperation phase. We are after the launch phase. Now the company is supposed to grow, hopefully a lot to become bigger and to go from a growth stage to a mature phase. And the intention is, when you look at strategy from a definition perspective is really trying to defeat your enemies. Who are the companies enemies? And I don't necessarily like this term, a producer Tim competitors nonetheless. And that's also part of attention. You can be as good as you want at strategy. We are going to discuss culture later on. Let me not go into that one, but my personal preference and numerical, I already said the same in the previous chapter about the legal elements of running a company or an entrepreneur, my personal preference is focused on delighting customers. As long as you have happy customers, unhappy employees. I promised you that we will have to deal less with strategy. I'm not saying that you will not have to deal with strategy. We will have to deal with strategy. But as long as you delight customers, customers will come back to your customers will continue to buy from you. And I promise you, I mean, I've been running businesses. I remember the first time I had the accountability to the business. I was 28 years old. It was a it was a €50 thousand business per year for customers. And with the team, we grew this business to a above 1 million. I think it was a million and a quarter of Euros per year with 50 customers over three to four year period. The last business I've been running. The team, we grow the business from 56 million annual revenue to 209 million of revenue. If I'm not mistaken, I think was 2098 or 99 million of revenue. And before I decided to step out, again, I always said to my team. So obviously I was extremely attentive to culture, but I always say to my team, we need to make sure that customers buy from us. And I've been shocking people who were saying but Kenny, you're a sales guy, said No, no, no, you don't understand. I want my customers to be delighted by us. And that they feel that, let's say in their brain, they have, in the purchasing process, they have the feeling that they are buying the right thing from us. If we're able to, let's say, set this up, that we are delighting customers and that customers come to us to buy things. And sometimes you have to say no to customer, that's not the right service. We were selling services and products. It's not the right service that you need. That will also build up trust. And this comes back to culture, but really my personal preference is do not spend hours and hours on excellent files. Do not spend hours and hours on strategic management. Focus really the energy of the company has to be put into acquiring customers and delighting those cosmos that they stay with you and that you can continue monetizing on those customers. And this creates, in fact, what I call intangible assets. Intangible, let's say attributes of the business. Warren Buffett calls it sometimes a mode. It will be very difficult to replicate by competitors. And I promise you, if you have a happy customer, they will think twice before they switch. Because they've got maybe a great service and just think you as a person when you are, I don't know, you need to redo your garden. You want to buy a car, about the sales experiences that you have. And probably if you, I hope at least that when you had a great experience, that's at least probably you will say to your partner or to your spouse or husband. I think it was great, really experienced. Service was good. Okay. Maybe you will not buy a car every second day. But nonetheless, potentially and the Chancellor may be hired, you're going to go back to his garage and buy the car there because the first time you had a great experience there, it's going to be the same in a restaurant, is going to be the same in a retail shop. So that's the kind of thing where I put my focus with the teams is really on delighting customers and of course, acquiring customers first and then delighting customers and sticking to the, let's say, performance conditions that were defined. So when you're quiet customer, you say, this is basically what you're going to get when you buy this and that from us. And by that, then really sticking to your promise that customers also get to know you about if they say something, they deliver it. And that's also a way of how delighting customers. As I said also as well in this growth path from, let's say, after the launch phase from growth to maturity. We're also profits will kick in, cash will grow as well. You, when you think about strategic management on top of delighting customers. Strategic cannot be static strategy. I mean, you are navigating and we're all navigating in a very dynamic environment. And environments are complex. Environments are dynamic. Think about the PESTEL model. How many external elements will potentially influence the markets that you're sending to? What will it be dynamic as well. You have a great product. The product is matured. Do you want to sell the same product to new geography? Do you wanna build a new product because you have a new innovative idea? You're going to have elements that you need to think about. Those elements will change all the time. So strategic management will be required from you, but let's not get fooled. The first and most important thing is making sure that the customers are happy with you and that you acquire those customers and then that the customer stay with you. If you are able to do that, then you can really deal with strategic management, but it doesn't make sense that you start dealing with strategic management if you're unable to acquire customers and if you're unable to delight your customers, that's really the main message I want to share here in the next lecture. So we are wrapping up with the strategic management part in the next lecture is about strategy formulation and analysis mode. So we're going to be discussing the micropores are five forces model, The Blue Ocean Strategy, the variety of model on differentiation. Before we end up the chapter is thinking about Peter Drucker and the cultural elements of a company. The next lecture already to be very clear, it's longer one, there are a lot of slides, but I think it's important that you get to know also those models so that you get a sense of what it means also to how to formulate a strategy on other things that you need to take into account and how to analyze a strategy that, that's wrapped up here and talk to you in the next lecture. Thank you. 13. Strategy formulation & analysis models (Part 1): Welcome back entrepreneurs and investors. So in this next lecture, in fact, in the next two lectures, because I've decided to split this lecture into two because it's a pretty long one. So we're gonna be starting first looking at strategy formulation and I'll be discussing generic strategy. Let's see models and also discussing strategy formulation and just looking at a single product company or single service company. The first part of this lecture will end, in fact with a practice example linked to Starbucks, which is probably very well known to you, and also an assignment that you can send to me. They can review it. And it's exactly the same assignment I've been asking in the master I'm teaching at university. The second part of this lecture we're going to move in fact from a, let's say monoprotic, mono service company to a diversified company. Understanding what other reasons why companies diversify, but also looking at, again, models how to look at the portfolio of the company and what is the right, let's say balanced that the company has to have. So that will be the second part of this lecture. So let's start with strategy formulation. And we have been discussing in previous lectures, we have been defining the term strategy. We have been already introducing people like Michael Porter, Peter Drucker, Peter Drucker will come back. We've got to be discussing culture and your microbiota has been contributing with another model to, let's say everything that is strategy formulation or strategic thinking about a company. And he has been in 1985. So you'll see the smallest already pretty old, defining three generic strategies that companies can in fact follow. And if you apply those three generic strategies, we're going to be practicing it on. Also an example, you see that there are still very valid today. In fact, the first generic strategy that Porta, let's say, defined was differentiation. Differentiation is really the firm trying to be unique in its industry, in its customer segments. And also hoping that's pushing so that customers buy us, see the value of the differentiated value, the uniqueness of the company we're going to bring in later on. An attribute is called the RHIO model that will allow to ask the right questions to understand if the company is differentiated or not. And of course, through this differentiation, as there is in fact no competition or not, no perceived competition, the company is able to basically make higher profits. And this is coming because the company can in fact pushed to its buyers, customers premium price. That's really the intention of the generic differentiation strategy. The second generic strategy is about cost leadership. So there, I mean, as already, Let's see the definition of the two words. Say it. It's about looking at, the company really looks at becoming a low-cost producer or provider of the goods and services is providing to its customer segments or its industry odds, geography. Obviously the source of cost advantage there, it depends on the structure of the industry. Sometimes are linked to economies of scale. So we're looking at efficiencies, maybe a proprietary technology which also allows efficiencies. Maybe an easy access to raw materials where the other companies do not have that easy access. So there are indeed Cost leadership can come through different flavors. And obviously the, the, so here we are indeed company that seeks cost leadership will fight what I always, I always say from the bottom, the incumbent, let's say competitors that are present on the joint industry that they are fighting for the joint customer segments. The third generic strategy is focused strategy. So also here as I mean, it defines what the strategy is about, is really focusing on a narrow, or let's say a competitive scope. Sometimes people call it a niche. I'll also use like to use the term needed. It's easier than ever competitive scope. It can be a selection of one specific segment. For example, high luxury. It can be a family offices in the financial world, which is really a very specific narrow niche versus retail bank, for example. Some have, and you're going to see this in the examples. When you have a focus strategy, you can be, you can combine in fact, either cost leadership with a specific focus, also a differentiation focus. So you are looking at being very focused and very specific niche and being very differentiated in that niche. But we're going to be practicing this on examples. First before I give my examples. Maybe look at the slides and try for each of those quadrants. So there are four quadrants. So there is one differentiation industry-wide, low-cost, industry-wide particular segment only. Differentiate it. So focus differentiated and low-cost focus. So again, low-cost on a particular segment and tried to put for each of those four quadrants, a company name. And again, if you're unsure or you want to share it with me, Feel free to publish this as well on the course through either I would say the forum or you just send it to me that I can at least reply to you and share with you what is my perspective on the four companies that you have been picked? If I take my examples. So I have added in a little bit more than four examples. I'll start for us with differentiation industry-wide and I'm looking at coffee and we're going to be later on practicing with Starbucks. I consider that nespresso and Starbucks are really differentiated in the sense of providing coffee, good-quality coffee to everybody, to anybody. That's why I consider this to be industry-wide, low-cost position. But also that is industry-wide is obviously the Amazon marketplace. And in France, for example, if you may know, it's a sports apparel distributor called Decathlon, the manufacturer in the meantime, their own sports apparel competing through scale efficiencies and also lower costs against Adidas, Nike, and those premium brands. If I take two examples that are uniquely perceived by customers, but they really focused on a very, very, very niche segment. It's Patagonia, that's really for hikers. There are very specific attributes of Patagonia, very specific niche and Bugatti for those who like sports car. This is really, I mean, Bogata is the most expensive brand in the world, are one of the top two most expensive brands in the world. And I mean, just by selling so few vehicles it becomes so let's say exclusive. I mean, if you look at it, we've got the car. It can be at a couple of millions for a specific car. And they are really, really very focused on that niche. They do not have cars. If you look at competitors like porsche, ferrari, they have, Let's say entry luxury cars that can start at, let's say 200 thousand US dollars or euros, up to three to 4 million Bugatti does not have that. They are really on the upper side of, let's say, a price premium for luxury cars. Then you have Ryanair. Right now. I mean, some people who would have told me, maybe I would put them industry-wide as low-cost position. I believe that ryanair they are not focusing on the business travelers segment. They are more focused on tourism, charter, Those kind of things. So they're kind of through their low cost position on the specific holiday travel segments. Eating away those segments from undifferentiated brands like if I take in Europe, France, Lufthansa, British Airways, those kind of things. This is where they are really being and trying to be competitive. And reminder on when we're discussing, we are here discussing strategy formulation for a single product, single service company. So remember, again, nothing, It's good that you keep this all the time in mind. That we have this S-curve of corporate growth. You already have been discussing it a couple of times now, remember the strategic inflection points that come in at a certain moment in time. But here again, refreshing your mind about when competitors enter anyone competitors exit, competitors will enter. I mean, if you are today the one selling to specific segments, you will have competitors enter. If somebody of those people detect of those competitors the tags that you are having very high profits. So there's gonna be an entrepreneur is gonna say, I'll try to disrupt that model. I'll try to eat part of that share of profitability and compete against you, for example, as an entrepreneur, competitors will exit when obviously profitability is bad. You're going to have effects of, we're going to discuss later, run off potentially concentration as well. When you have been discussing about market structure and concentration models. When you have 25 actors and everybody those actors has like three to four per cent of market share. There's gonna be an effect at a certain moment in time of concentration. You're going to see actors trying to come together to gain economies of scale, cost efficiencies to a potentially stay in the market that they are in, are other ones that cannot have or do not have the possibility to raise fresh capital that are losing money. Profitability is probably not very high. You're going to have their shareholders who are going to push. To exit that specific customer segments or industry or market. A very important model that I've been personally using for many, many years is five forces model of Michael Porter. And basically what he stated here is that it's nice to have or to choose generic strategy, but you need to be attentive to a couple of elements. What he defines as the five forces. First of all, you're going to have competitors. So you can have rivalry among existing competitors, existing companies and the customer segments, segments, geographies, industries that you're selling to. But at the same time, you need to take into account the bargaining power of suppliers because, I mean, let's imagine you are a manufacturer of laptops or PCs. When they are not 25 suppliers of microprocessors for your laptop and building up your cell, that capability is very capital intensive. So if you only have one or two potential suppliers of microprocessors, Well begun to have more bargaining power because you don't have to match the choice. The other way around. Looking at by R Us, I mean, if it is easy for buyers to find your products at a competitor or your service at a competitor. And they are 25 of those competitors and you are undifferentiated. There is no differentiation, there is no uniqueness about you. While the buyers, they have bargaining power on the competitors. So that's something that you need to take into account as well. So that's really how horizontally and then vertically, there are two elements that have to be taken into account is the threat of new entrants. We already discuss it. When when do new entrants come in? Except if they want to lose money, but basically they're going to come in because profitability is highly specific customer segments, then you have also substitutes and we're going to be practicing this. You may have the threat of substitute products or services. The example I'm always taking in the Second Industrial Revolution in the 1920s, 1930s, in 1920, if you look in New York, transport of people was only done through a horse carriages. That was the only possibility to transport rapidly better than walking in the city. People from point a to point B, ten years later, after the Second Industrial Revolution. You may recall we discussed about Henry Ford, the T model, and there were no horses in New York anymore. They have had all been substituted, basically, buy a new, let's say offering, which was car, taxi cars or personal cars. Because people had the opportunity through the economies of scale that Henry Ford found through the terrorism and mass production to start to make cars more and more affordable for notice for an elite amount of people. So this five forces model is something very, very important. A lot of people, I mean, from my experience, what I have seen is they do not use this model to understand why the profitability is low, where they can improve potentially their profitability. Looking at alternative suppliers, the most important, let's say a weakness that people have where they do not see the thread coming from is really the substitutes. And this is very true for very mature companies that say we have always been doing like this. We have such a strong position and suddenly somebody comes and is in fact substituting and changing, shifting really how, let's say customers see the value. And this was the example of horses versus the cars. You have. Other, Let's see, elements like short-term flight being substituted by high-speed trains. That's not a competitor. Competitor would have been a second or third or fourth airline. So that's the kind of strategic thinking. When you do strategic formulation that you need to have. Asking the right question is very important. So when you, when you draw that Michael Porter's five forces model on your specific product market that you are selling to. And you try to understand what potential entrants, substitutes, buyer, suppliers, and already existing competitors. And market is never balanced. We already discussed that markets are dynamic. So you need to think when you are formulating the strategy. And that's the kind of thing that I think as well when I'm sitting on the board of directors and we need to take strategic decisions on where we want to move the company or entities of, let's say that's our part or subsidiaries that are part of our company. Where, what are the answers? What are the questions that we need to think about? Depending of course, on the profitability. So first example is there is no unbalance on the competitors. Example is you have a highly fragmented markets. There's gonna be what is called horizontal integration. So there's gonna be probably some people and I we had I mean, I will not go further for confidentiality reasons, but I already had that kind of conversation as well on let's say some entities about if it is a highly fragmented, wouldn't it be necessary, wouldn't make sense to just concentrate. So having a less fragmented market and concentrate more by doing merchant acquisition is one of the examples I'm giving here is Mittal Steel buying. In fact axilla, which was the true. We're very large manufacturers of stealing facts in the world. Which became then Arsalon my time in fact, when there is an unbalanced market situation, so too many competitors in things that are not allowed that we've already been discussing, which were not in favor of, let's say, of customers, of buyers was then potentially you have a cartel that is trying to protect its margins so they align on prices. We have the case with those ten of 20 plus companies on a fret airline. In other, if you want to avoid new entrants coming into the market, One of the things that you can do is increase the barriers to entry way of doing it is lobbying for new regulations. So if you're an incumbent operator and you want to avoid being a substitute or disrupted by new entrants. One of the ways of increasing barriers to entry is, for example, asking a government regulator to give you a Supplementary Protection. That's something, for example, that happened in Luxembourg in the financial services industry, specifically in the services professionals for managed services. Let's say in the IT sector was not just IT, but let's just consider that it was IT. And indeed what happened many years ago. So the association, let's say some people find, found a way of avoiding new entrants coming in by making sure that there wasn't new regulation, which was adding barriers to entry like you wouldn't need to have to managing directors. You will need to add, I think it wasn't the beginning one, dot 251 and a quarter of a million euros of capital in the company to have the licensed product manager or tea services, for example, to a bank in Luxembourg. So that's the kind of thing where a small company that wants to sell IT manager that he services to a bank does not have a 1,000,250 thousand while they will not be able to answer because you have that barrier to entry. Substitutes. I already shared that this is difficult to defend for mature company. Specifically, mature companies are very slow to pivot. And so what they will try to do is really to protect existing market shares and buyers. So for example, they have the financial firepower to really slashed prices. Nominee, I mean, I do not know if all the countries, but in some countries it's not allowed to sell. At a loss. You need to sell at least at cost. But potentially those very, very big companies, if they see new entrants coming in, they're going to slash prices are going to put pressure on the distribution channels. They're going to even potentially, I will not say bribe, but pay given incentives, supplementary incentives to distribution channels so that it doesn't look like a slashing of a price, but really giving higher incentives and by that, avoiding potentially substitutes coming in. Buyers. When, I mean, what can happen when you have this balance between buyers and let's say you as a company, what may happen is that the company seeks to purchase the bias. For example, a manufacturer that only has B2B buyers through distribution channels. And the distribution channel has a direct access to the end-consumers where maybe the manufacturer decides to buy the distribution channels. So that's a way of potentially integrating, let's say, buyers and bring them into your company Example to have more control. And it goes the other way round suppliers. So you may have the opportunity to say, well, if I have a too strong, I was giving an example of a chip manufacturer is just an assumption. Let's imagine that if it is apple that is using ARM chips while they're using derived version of ARM. So they're m1, m2 chips. Or you would be Microsoft or the service category. And you say No, I no longer want to be dependent on inter Alia, develop my own chips. Or potentially do I have the opportunity maybe to by Intel. I got to leave the anti-trust laws thing aside and what regulators will say on the market structure. But just from a supplier integration perspective, that would be a possibility that the company, when the bargaining power of suppliers is too high. Actually things about, well, let me by the supplier, this happen for example, in the steel manufacturing industry where absolute meta in fact in started to buy minds instead of being dependent on the miners to give prizes to us. And we had the same in coffee were discussing about stock, Starbucks. We're going to be discussing a couple of minutes again in our practice example. But Starbucks at a certain point in time decided to buy, in fact, the coffee producers in Costa Rica. So that's a way of integrating suppliers into your core business and that, that's a choice that you as an entrepreneur can do. In fact, one of the most important things and basic awesome me as a value investor that I look when I invest into companies is what Warren Buffett's calls mode. What is basically a mode initially is what is around the castle. So as Warren Buffett explains, you have a castle with lots. That's the business, That's the CEO and the cursor is business as being run with the market and the customers and the larger the mode. So that's the water between the outside lands and the castle has to be crossed to attack the castle. That's the analogy that Warren Buffett as explaining. The larger the more, the more difficult it will be true in fact, attack and take control of the car. So that's basically what a mode is about. And I've been learning from Warren Buffett and Charlie Munger To inverse into wide mode Companies. So really the, I mean, not just understanding what a mode is, but the most important thing to understand is that when you have companies that have very wide modes, I promise it will be unappealing for new entrance and existing competitors. So potentially, new entrants will not give it a try. If you have somebody who has money, they're going to put the money somewhere else. And competitors, I mean, if the, if the competitor to the competitor is very strong, has wide modes, maybe they're going to look into selling themselves to the bigger competitor or potentially exiting because profitability is going down for them because they do not have the same economies of scale, for example. In order for you to give examples of how I look at modes and nothing is the next slide. But for you to assess companies that have wide modes, it's very, and I'm saying this also in the value invest in training is, I mean, this is not rocket science, this fields and it is in fact common sense around the following questions with other friends or family. So ask them, what is the brand they love the most? Some people who maybe answer apple, Nike, Starbucks, McDonald's, I have no clue. Ask them for us that. Then ask them how much it would take to replace Starbucks by something else, to replace McDonald's by KFC, for example, by Burger King. And buy generic brands. And observe the reaction and even the body language and their resistance or not to change. If the company has modes, chances are high that your family, your friends, they will not consider switching and they're even willing to pay premium prices for that. That's really when you have those tangible elements and ask, ask girls around your house, get to yourself, what is the kind of company that you want to say? I've always been buying this. I will never change the brand and I'm willing to pay a premium for that. So that's the kind of thing where in fact the company has and load on you. When I look at modes and also has value investment, I look at Mel, It's basically, there are various ways, not just let's say sentiments, what we were discussing, what I will discuss it by brand strength later on. But there also tangible, even financial elements to figure out if a brand as a company has a modes. The modes, and I've learned this from Warren Buffett. The most tangible financial elements that the company has mode is when ROIC is our high and our gonna be even precise, are above 10% every year one return on invested capital is beyond 10%. And we're gonna be discussing these days run in the corporate finance chapter what ROIC is. But one return on invested capital is above 10% for the last decade, the last 20 years. And remember, when you remember the S curve of corporate growth, I said that when profitability, so ROIC is high, you're going to have new entrants coming in. But new entrants will not come in if the company has in loads. And this is a way of looking at if the company has a mode, is there is consistency in above 10% ROIC for a decade, two decades, three decades only, let's say large mode companies or widen what companies have this? Morningstar, this is, I'm showing you this year also on the Starbucks example. They in fact do a qualification. They list companies when they have a mode or not. And so they have three ways of saying if a company has a modal not so it goes from a wide mode, too narrow mode, to none. You've seen the Starbucks example below the one-stop price of 143 dots ten, that the economic mode is considered wide. For Starbucks, again, do not look just at one attribute to invest your money. It's not the purpose of this course, but I'm just saying it's like no candy said that if a company has is why you should invest in, you know, there are many attributes and you need to do another, let's say, a set of tests to really be more sure about in which company you're putting your money, the brand strength. So I do look at the string of the brands. I look this on a yearly basis and I like a lot Interbrand. So you can look on Interbrand.com. They bring out regional but also global brands. Rankings at least once per year for the global one. And you see variations. They value what is the financial value of the brand? So the intangible assets, net promoter score as well. Of course, this only works for large brands where you can Google, just type Starbucks Net Promoter Score. So the net promoters, because really how people feel about the brand, the more higher the score positive, so the better, Let's say, the less the probability that customers or buyers would switch. If it is negative, probably customers are unhappy about it though, is going to be something happening with that company in the future if they do not change something, glassdoor as well, I do look as well because modes not only come from having a customers that are very dedicated to the brand, but also having a priest a very dedicated to the brand. And I call this similar to the Net Promoter Score, which would be the consumer Net Promoter Score. Look at internal employee satisfaction. There's a very famous site. It's something only one that is called glassdoor.com when you can monitor. In fact, the what I call the E and NPS is the employee Net Promoter. There are also tools to make modes tangible or to push you to ask the right question. The most well-known tools looking at modes or the variety and the blue ocean to land, you're going to be discussing it and let's start with a variety. So first of all, what is a variety or the RHIO stands for value, rarity, imitability in organization. So it's tool that helps you as an entrepreneur. It helps companies to assess, to identify if the company has really an advantage that delivers a mode that delivers a competitive edge. And, and when you look at those four acronyms, very rarity meant to be written an organization which actually make up the acronym of rye. Or there are specific questions and again, this is an internal tool and let me switch to the question. That's the kind of questions that you can ask yourself when as an entrepreneur, when you're launching a product, first of all, about the value. And I want to really read them through because I think it's important we take the time here because I believe that differentiation and mode gives high profitability and that's what I would like to have and what I'm wishing you as an entrepreneur that you have high profitability. So let's look at value. That's the first one. And looking at just coming back once I looking at the graph, if already on value, It's a no in the answers that you are raising. On the answers to the questions that you're raising, then you already have a competitive disadvantage. And this goes the same way. You may have value. Is it ran no, then it's competitive neutral. Is it rare? Yes. Okay. What would it take somebody to replicate this? Is it's imitable easily? Or is it very capital-intensive? So then if the answer is, well, it's not very capital-intensive. Well then you may have a temporary competitive advantage. What I have sometimes with startups and mentoring, they have a niche product. But if it takes them ten years to go to the market, that competitive advantage has gone because they have a low cost of production, then you have organization. If the organization is, let's say not very efficient, is not very specific, or so on, ten, etc. Well, that something that potentially is not sustainable and is not creating a differentiation. So on value. So let me just read the question. What specifically ability to do empower customers to take advantage of? What reasons are valid you provide to customers. When establishing value, it's important to think not only about what your value is, but why your customers need you and why they choose your solution. Above the competition. If you can determine the value provided by organization, you need to rethink the value. Hope to provide an guide your resources towards that goal. So that's the value part of the variety analysis. On those questions. The answer is no, you're not providing value to your customers, then you are ready having a competitive disadvantage. And the variety of analysis stops there on rarity. Is it red to obtain the resources that you have, to have unique capabilities that you provide. Space acts as an example is providing launcher as that come back that are able to land versus today nasa, I can as fast, They do not have those type of larger as they have launchers which are, let's say consumables. That's unique capability that Elon Musk has developed with his engineers in space x. What part of your product service has low supply and high demand. For example, if you can identify organization refuge as a team has to brainstorm on new ways to enter your value to your customers experience. And since you have variable and common resources, there needs to be unique element to attract those customers. That's really what has to, they would give rarity in fact to it emits ability. Already mentioned it and that's a question I often have, or let's say it's upon, they often discuss with startup entrepreneurs, young entrepreneurs great products. They have some cash. They are starting to quiet customers. But what would it take for competitors to come in and take that, let's say rarity at they have a way by copying them. And sometimes you may have competitors. I will come in and say, Well, I just need 10 million on the table and they're going to be absolutely competitive. It took them three years to build a where they are today with me. It may take me three months because I have the capital to do so. That's the kind of thing, what I call cost of replication or because of duplication of the organization that you need to ask yourself, how much would it take to duplicate the uniqueness that I have? And if the answer is, well, it just takes 18 months though. You only have then a temporary competitive advantage. Come back to the variety or let's say process. If the answer is no. Again, it says you only have a temporary competitive advantage, so you need to accelerate on your go-to-market as an example, is anything similar that currently exists? Well then for sure you not even have a temporary competitive advantage, but you do not have a competitive advantage at all. Then organization is really reliable workflows within your business. That's really, let's say, we'll give you that success breeds success. And we have also very efficient margin structure has experienced people in place that will allow you to develop those competitive advantages and to sustain a competitive advantage over time. That's really the organization part of the rival. But I mean, I need to be very fair with you when I look at the variety of causes, local organization, no doubt about it. But I really look at rarity and imitability if I have to focus is really on those two because very often when I sit on the board of directors, the value has already been defined. We may need to pivot the value. That's okay. But we need them to think how raise it and how easy is to reproduce. And then obviously how good is our organization and the skills that we have an organization. A second tool that has been discussed over the last two decades is a blue ocean strategy. And so you have Chan Kim and Renee Mauborgne, where you see here that picture, those are inset professors and strategy and they have in fact authored Blue Ocean Strategy 2004. So it's doesn't have yet to decades. Basically what they're saying is, if you are, I mean, they take the analogy of an ocean with a lot of fishes and sharks. And the more shocks you have, I mean, they're going to be fighting for the same fish. There's going to be blood in the ocean. So that's the red ocean. You don't, you don't want to be in a red ocean. The ocean is really, what they are trying to achieve is really create a market space where you are, in fact alone, where competition becomes irrelevant, where you can charge a higher premium prices because as there is no competition, I mean, people have a different value perception and you can charge whatever you want. And again, it's not the purpose of gray now and deep into the Blue Ocean strategy, but I'll just show you the main, Let's say, tools and concepts used in the Blue Ocean strategy. The first one on the left hand side, what is called the Strategy Canvas. And in the next slide we're gonna be discussing about Cirque du Soleil, which is one of the most famous examples using the Blue Ocean Strategy book. So basically what it says, you have factors that you are competing against. I mean, we take the assumption that you're not alone in the market today and you're facing competition and profitability is not good. In trying to understand or you're trying to think, what can I do differently so that I can increase my profitability, change the customer perception. That the value perception also by the customers is increased on through that I can in fact charge higher prices. The most important thing. And this is really something that you need to be attentive when you use a blue ocean strategy is finding the competing factors. And that's, it requires sometimes creativity. I'm in the first four to five competing factors. I mean, you will find them, but you may have some that are less obvious to find. But that's really the first exercise is really finding those competitive factors. Then you have to read those factors, let's say from low to high. And it's in fact a value curves and how you position it. For example, if cost is a competing factor, you may have a high cost while your competitors have a low cost. So that is an example where you are not fighting on cost but on services. That's again an airline flying from Paris to London and you have 12 airlines doing this, cost is the same. Let's say that the cost is average or average low. So how do they differentiate amongst them? So what are the factors that are competing? Is it time of the day when they leave the Paris airport and the London and they arrived at London AirPods, which London output, or they're arriving underneath problems as London City, for example, because there is a big difference between the two specifically when you're looking at business professionals segments. So that's a kind of competing factors that you need to think about. Supplemental tools that are used in the Blue Ocean strategy are in fact. So first of all, is trying to think nodules on your current market, but trying to expand that market. If you are having a flight connection from Paris to London. And I got to be precise, from biracial local to London city. And for the time being, your strategy has been focused on businesspeople. With Brexit, business people are leaving London or Frankfurt for Paris, for maybe Amsterdam, whatever. And maybe you have not thought that basically you have another customer segment that would be interested or flying from Paris shoulder go to London city like tourists For example, we can tourists on one-to-two day tourists. So that's maybe the kind of thing that you need, that you need to think is, are there addressable markets that today you are not addressing? And this is where Blue Ocean says there is a tier one which is called the soon to be market of you, of your company. The market today is refusing to do this. And then you have the unexplored, in fact, people that you have not thought about at all. The ERC, that's the last customers are going to be presenting here before practicing. When you have made the strategic Canvas. So you know the competing factors. And let's imagine when you are in a red ocean, the curves are overlapping. And when you are having curves that are overlapping, if you want to differentiate, you need to think, which attributes do I need to move up or down so that they're not overlapping with the industry value curve. That's basically what you're trying to achieve with the blue ocean. So again, when you have done your strategic C 14. Strategy formulation & analysis models (Part 2 - The multi-product company): Welcome back. This is the second part of this longer lecture. We are looking at strategy formulation and analysis. We have been, I mean, just to summarize what we have been discussing in part one, we have been discussing strategy formulation tools. We have been discussing the five forces model of microbiota, very important one, we have been discussing the RHIO model. Basically we're looking at moles and I was giving you the tools to look at marriage, which is a variety of model. I tend to prefer little bit more of the blue ocean model because it's a little bit more even visual. It's simpler to people to understand, but both are absolutely, Let's say, valuable. And we ended up in having an example on Starbucks that you can reread that didn't spend I mean, I spent some time but not all the details of showing you how you do a strategy assessment on how even students do strategic assessments on companies like Starbucks. And then I gave you an assignment to do if you want to have some, let's say, concrete example for yourself to practice, you can send it over to me. I'm going to share feedback to you. And this is, the assignment is exactly the same assignment I'm giving at the University master of techno partnerships so that students have in groups of four people, they have the exact same assignment to do. Now, as I said in the very beginning of the part one of this lecture, we were discussing about one specific product. The assignment is about one company, one specific product, but companies often have to dilute the risks. And what happens if the product no longer sales? Does the company goes bankrupt? Is that part of the S-curve corporate growth? Well, yes, because maybe the product, we know that the program will become mature and there's going to be in the Klan and the products. So what will potentially replace that product or keep the profitability of the company? So really the intention of diversification of company is really about diluting the risk. And also diversification can also have, let's say the intention of changing the way how companies kept our revenues. Example, Microsoft setting Office and Windows as a software shipping through CDs, switching, doing very strong pivot into becoming a hyperscale Cloud provider with Office for 65, having predictability and the cashflows, for example, having recurring revenue streams on a monthly basis, which also gives predictability on potential investments as well. And that's the kind of thing where you also as an entrepreneur, you have to think, you also have to think about, I mean, I can of course raise capital going back to existing shareholders, but also potentially raising that through corporate apps, through bank loans. But I mean, I hate that generally speaking. But that's the kind of thing where as an entrepreneur is like, what is the right amount of depth that I want to have my company carry in my balance sheet. And diversification is a way, in fact, of bringing in fresh cash to finance new products, new research and development. So that's really like you have to think about why people diversified. Examples of reasons why people diversify. The types of diversification that exists is geographics. So I'm expanding to new market because if my markets go south, I don't know. It's a market where there is a big, You have done the PESTLE analysis. There's gonna be elections. And if that changes, and if the government change, changes, maybe they're going to impose a certain specific things that I will no longer be able to sell. The same product I need to expand to new geography. That's awesome diversification. I want to change from B2B to B2C segment. I want to sell various products and services, not just devices like iPhone, iPads, iPods by 1.5 also have a portfolio of various devices, but even I'm going to add services on top of those devices. Then up-selling and cross-selling that's turned, that is very often used as well, even more in sales and marketing. So what is basically cross-selling is you are selling to the same customer through various products. Upselling is the customer has bought or you're selling the same product but bigger, let's say volume or a bigger whatever size of the product That's really the intention of upsetting. So I hope that you understand why people think about diversification and what are ways of diversifying. Multiproduct services portfolio, multi geography, up-selling, cross-selling, multiple product lines as we already discussed, multiple segments as well. What I want to share with you is I'm coming back to the S curve of corporate growth. I hope that in the meantime we have understood that the escrow of corporate goals something important that you need to understand and also how it works from the ideation phase launch phase growth, shakeout, maturity, and then potentially decline with the strategic inflection points. What is important when you are in a process of diversifying is that your products may not be aligns. Your product number one will not be lined with product number two in terms of, let's put it, diversification stage. You may have in fact, the company that cannot just be simplified by one S curve corporate growth, but in fact by multiple, where the products in fact sit at different stages. For that, this is a tool that I've been using. It's a pretty simple tool, but it's a tool I've been using effectively. I mean, I've been mentioning that I run the latest company I've been running. We grew from 56 to two hundred and ten million. Two hundred and nine point nine doesn't matter annual revenue. And I've been using as well this tool to think, do I have the right balance? So it's what is called the BCG growth share matrix, the Boston Consulting Group per share matrix. It's one-off. You're going to find other tools. We're going to discuss the second one, which is a McKinsey GE model. But this is a very simplistic tool which shows you when you have decided that you need to dilute your risk by bringing in diversification in your strategy, in your company strategy. It's not enough to know that you have for products, but you need to know in which stage the product or your service is sitting. The BCG is the most simple way this quadrant to look into it. So basically we have four quadrants. We have the dogs, the question marks, the stars and the cash cows. Dogs are today. I mean products or new services and new products always start in the dark phase. It's a low, I mean, they have very low growth rate in the very beginning, they have low relative market share. What you like to have is that they shoot up to become a high-growth products and also they gain a lot of market share. But I said when in time, when they are maturity. So you have had the growth and the growth will not be 3% every year for 20 years, it will stagnate us at one in time. Your market share, remember market structure as concentration models. Well, maybe you will have already 60% market share and the effort of gaining five per cent more, maybe even raised the alarm bells regulators. So certainly in time, Eurostar service will become a cash cow. The cash cow is what you may have still high market share, but the growth rates are flat. In fact, let's even say that even organic. And then potentially the cash cow in the decline phase goes back to a dog. So people are no longer attracted by the products. We have low market share. And of course the growth rate is bad. That's a typical sign that you have for products and what you want to have. And I'm showing this, so I'm sharing here for us the cycle. So going from dogs to stars, cash cows. But what you want to have is this, and this is from my own experience I was dealing with because the 56 to tone and a nonmetal and company. So that was over the age of eight years. From 20142022. We were looking in fact, into our local markets. Do first of all, how is the portfolio balanced? We have in cash cows, are we having stars? Are we having dogs? Which are the dogs that we need to relaunch now because the stars will decline and become cash cows in four to five years. And we had that strategic thinking. And obviously through that, we decided on resource allocation, capital allocation, marketing budget allocation. And also where we wanted people to be incentivized, whether it should be working upon to move dogs into stars. And because we knew that stars would become cash cows and even existing cash cows now would go into dogs. This, so this cycle takes many, many years. So it's not something that from my experience that you do every every week, every month, I had a tendency of doing it every quarter for the quarterly business reviews with the teams. And this, I mean, what is interesting is the movement of the products. And it's gonna be very interesting because you're going to have products gonna be cannibalizing existing cash cows, for example. What you want to avoid is having question marks, question marks our products or services. That's half, maybe high growth rates, but the market share is low. And you remember coming back to market structures and concentration moles. And I hope through that that you understand why I'm having a specific sequence of things as well. Because now I can speak about market structure and concentration lot when you have low relative market share, you may have somebody who has big market share. So maybe you have to think, Shall I sell this off to this competitor? Because the efforts to have big market share is, I mean, it's too high to capital-intensive. Or you just stop the product potentially. Because I mean, I'm not discussing your profitability, but one of the things just to make it very simple, cash cows are the ones that are very profitable but are unattractive to buy us stars or profitability is okay, not so good as cash cows, but it's okay. But that's the one that's why we call them start-ups with the BCG growth share matrix molecules M stars because people are very attracted to the star, product and start services. The dogs are the ones that are starting now. Some people, early adopters are getting attracted them, but you're losing money on them because they are very early stage. So you see how the escrow of corporate growth applies to this BCG growth share matrix. It goes from launch dogs, two stars. So launch phase growth, shakeout, cash cows, maturity and then the cash cows, if they decline it, go back to dogs. In fact, you see again, this is common sense is just another way of looking at it. What is important is that if you have, if you're running a business with multiple products, multiple services, I recommend you to look at the evolution of your products using this BCG growth share matrix and do this at least once per year, if not every six months, if not on a quarterly basis. Another model that is little bit more complex, but it's a very, very valid one as well. It is the GE McKinsey matrix. You remember I mentioned McKinsey BCG to be in the top three, let's say strategic advisory firms in the world. The big for us. So they have to go to the General Electric. They have developed a model and nine bucks matrix are basically as well. You put, let's say the, I mean, you rate your products, your services, and you say if your business unit of your product has a competitive strength from high to low. And also if there is industry attractiveness on it, and then depending on that, how you put them, you're going to have in fact, nine actions is little bit like the ERC on Blue Ocean Strategy where you have like actions to take depending on where you put the factors were basically it's the same here. It goes from protecting the position to divesting. It's more fine-grained at the BCG. Bcg, the question mark is the same like the divest. What do we do with that? Both the question and I could also be expanded or hovers, so maybe I need to put more capital into it. Okay, That's part of the action. So you see that basically if you fill up the BCG is not detailed enough, use the GE McKinsey model. From my experience, the BCG was for me good enough in the, let's say, scale of business than I was running an already promise you, not a lot of people are doing this now if people are thinking in terms of Five Forces past this kind of things, Blue Ocean Strategy. But I promise you add a certain momentum. And remember, before we wrap up here and I have a second assignment for you is that the course has been structured. Starting from ideation, we have the launch phase. Now, we are in a mature phase. We are in the strategic management part of things do I mean, do not forget this. We are here speaking about strategic management. So you have in your hands, hopefully accompany that is mature. You have certain size of teams as well. You have competitors coming in. You need to deal with buyers and as well with potentially suppliers that have some powers. You have to deal with competitors, substitutes, and potentially new entrant as well. So this is where strategic management is required. That's why I'm really taking the time to address this. I know this lecture. Actually I wanted to split it in two because it's pretty, I mean, it's I hope in-depth even though I'm just touching the surface of some of these topics. But again, the intention for you as an entrepreneur, you know those things exist, exist and that you mean if you have the teams and marketing teams, that, that's the kind of thing you need to ask your marketing team to look into. But at least if you don't have marketing teenagers, you know that those kind of tools exist and you can do maybe once per year that thought process. It's again, as I said, all of that is common sense, doesn't matter that those tools bringing a certain standardization on vocabulary. All right, before we wrap up the second part of this lecture on strategy formulation and analysis, I have a second assignment for you. It's using this growth share matrix and we're going to practice it with apple, which is a company everybody knows who were speaking about. They have iPhones, iPods, iPads, they have the MacBooks Pro, the errors, etcetera. What I want you to use is I want you to look from 20192022. I want you to use the BCG growth share matrix with a template is here that you use these templates that you calculate the year over year growth for the main product categories and now even have. I mean, you don't have to look into the financial reporting entity or Russia if you're interested, but you have the figures here. What I want you to do it, you take the iPhone, the iPad, the wearables, home and accessories, and the storage. So they have five, let's say, reporting segments on their sales. So we have the two thousand, nineteen thousand, twenty thousand, twenty one thousand, Twenty-two figure for three months ended in March. It's just an example. You take those five segments. I want you to actually to draw those five reporting segments into BCG growth share matrix. It's as easy as that. I want you to understand and to try to interpret what, what is the thought process that you have when you see the movements of those five segments. Just going to give you one concrete example. Look at the iPhone. The iPhone has moved from thirty one billion, nineteen to 28 or nine to 47.9 to 55 billion. So what does this mean? And compare this with, for example, the whereabouts the wearables went from 51288 billion. I want you to do this interpretation and do not deal here with profitability. I just want you to think, what are the five reporting segments? What are the ones that are driving growth on APA style, which are the ones that are declining, for example, where you may have question marks about them. I will not go further, otherwise I will be resolving it for you. But do this exercise with the BCG growth share matrix. And if you want to send it over to me, I mean, feel free to do so. If you wanted to post it, obviously you can do that as well. Now we're going to wrap up here the second part of this long lecture. I think the two parts together, we'll probably be around one hour, 45 minutes. And in the next lecture we are going to be discussing culture because I think that culture is extremely important and it's something also that me as an independent board director, I have to deal and I have to think about as well with my other board colleagues. Do we have the right culture in the company? How can we contribute? What are things that we need to make sure that management takes in terms of actions on the couch. Well, we're gonna be discussing in the next lecture. We're going to be also having a case study on words Franco, wrapping up here and thanks for having been patient on these two parts that have been probably very deep for you and rehearse practice. That's why I'm giving you these assignments and this practical cases. It's really hear about practicing, practicing, but you're going to see those tools are very powerful. And I've now you're having to, having practice with them. You're going to see in fact that they are very simple to use, very practical to use, but it requires practice. And again, just giving that example for a wrap-up on the Blue Ocean, the value of the intrapreneur, the, let's say the expertise comes of determining the competing factors. The rest is just the process. Follow the process. That's the example on personally, when you have the six attributes, but it's really having the creativity to how to fill those six boxes. That's where, let's say management comes in and that's where you as an entrepreneur come in because you know your market and your customer segments. Okay, wrapping up here, I talked to you in the last lecture of Chapter number three, which will be about culture and concluding before we go into corporate finance as well. Thank you. 15. Culture: Welcome back entrepreneurs. In this final lecture of Chapter number three about strategic management. As you have already heard in the previous lecture, I want to conclude. Before I conclude, I want to discuss culture as a strategy. Because I believe that as an entrepreneur, you need absolutely to be aware of what is also expected from you in terms of, let's say leading by example, leading the company what employees, but also suppliers and specifically customers are expecting from you. So we're going to discuss quickly culture. I'm going to also give an example on Wells Fargo. And then we're going to conclude, wrap up this chapter number three. And then we're gonna go in the last very big chapter, which is about corporate finance because I think it's also essential as an entrepreneur because you will have to deal with money. Let's be very explicit about it so that you can then understand the various mechanisms around corporate finance. Alright? So culture, I got to start with this sentence. Culture eats strategy at breakfast. Who has coins this sentence? In fact, it's Peter Drucker. Peter Drucker. I already discussed it when I started to go into a strategic management that Peter Drucker has been instrumental in. Contributions on how today modern business corporations work. He has coin, has coined money, let's say analogies, expressions. But he has been extremely, let's say, fluent and clear in his vision about what are the things that make a company be performance or not? One of the, I mean, you can look this up on the Internet, but one for me. And I recall having done my MBA as well. One of the most important sentences that I have been thinking about a lot over the last, let's say 23 decades, having managed companies as well and multiple departments has been the sentence, Culture eats strategy at breakfast. And I think it's, I mean, it's self explaining. But nonetheless, let's go into why. Why is culture important? Why is culture so much stronger and it eats strategy? Why at breakfast? Because like just the morning thing. So strategy is a small detailed compared to culture. That's basically what Peter Drucker tried to say through this sentence. Culture eats strategy at breakfast. And culture is very important. Why? Because in fact, the best businesses have a culture, have a system of functioning that's going to be stronger that versus any individual than any individual. And this includes the CEO. You may have. Coso says we're gonna go left, but the company, the company will not follow, the CEO. Company will go right, for example, of course, that's problematic, but that's the kind of thought process as an entrepreneur you need to have. You can draft the strategy we're going to discuss about mission, vision, statement, and values. But you can draft a strategy, you can use the best tools, Blue Ocean Strategy, five forces model of Michael Porter. But at the very end of the day, people are not following you. So for that, you need to set up, you need to educate people, make people aware about what is the culture, what are the behaviors that first of all, you believe in what you're expecting from other people. And that's something I have been often discussing. And not later than a couple of days ago, I was sitting in one of my board of directors where we were discussing about culture. And I always tend to say culture is so strong that basically it will, let's say, dictate, it will influence how other employees will behave. So basically people your employees will see or if they, if they are new hires, they're going to see how the company works. And they will probably follow. If your company is super political, they're going to follow. You're going to feel that, well, if I want to be successful in this company and everybody has this behavior of being super political and everybody has like hidden agendas, et cetera. Well, probably I have to behave the same. Otherwise I may be excluded. And that's really complex on culture and we're going to discuss mission, vision, and values as well. But really keep in mind that culture is extremely important for you as an entrepreneur. If you are part of the team that is leading and is growing the company, you need to be attentive from the very beginning to set up a culture. And what I meant are startups that are already have passed, let's say the ideation phase of the launch phase, they're not in the growth phase that they come up with. Do I need to keep this person in the team because the person isn't behaving as I'm expecting. So the first question I'm asking the entrepreneur, he or she is like, have you expressed are you acting in your daily routines according to what you are expecting from this employee? Have you discuss, have you communicated with the employee and it can be an important person in the company, let's say the CTO, for example. Have you expressed on which elements you are not happy about what you're expecting. So this is really something that has culture has to be lived. And I'm always saying, we're going to discuss this in the example of Wells Fargo. And again, it's not about finger-pointing whilst Prague, but I think it was an interesting, it's an interesting example of where culture, or at least how culture and values were documented and let's say presented to the shareholders, the investors, so the external world and how the system actually was not working as it was supposed to work from the culture and the values that the top management team and the board of directors probably as well hats agreed, are laid down. So as I'm always saying, culture and values is not something on paper and it requires, and that's very important for you as an entrepreneur. It's requires repetition day in, day out and you, as an entrepreneur, people are looking at you need to live and you need to lead by example. And I'm always saying when having managed larger teams, the OSS, also to my managers, to the people I was talking to. If I allow misbehavior and I'm not correcting this misbehavior. And I can see this at the coffee machine. In meeting with a customer, you meeting with a supplier, in interactions of people that are part of my teams. And I do not politely and respectfully challenge or at least try to understand why the person has misbehaved. First of all, think about it and they will not hear from me what my expectations are and that's how they behaved, was misaligned with my expectations as the senior leader. Yes, it takes it depends on the let's say maybe in the geographies, the countries that you're in, but maybe your culture is less exposed or it's not so fluids to take somebody respectfully sign and tell him or her, listen, what I saw here does not match what I'm expecting. Being your manager, being your senior leader. And again, I'm always saying Do not prejudge people, ask first, can you explain to me, why did you behave like this? Then depending maybe the person has good explanation, then you have to rectify. And so to correct that, let's say misbehavior and say, Well, I hear you, but at the same time, this is what I'm expecting. We need to follow the values and how you behave is not aligned with the values. And now we shall behave in front of a customer with a colleague, et cetera. This way I'm seeing leaders. They really need to lead by example, but also they have to communicate and also when they see misbehaviors, they need to talk about it. And last but not least, before we move to the next slide. I'm also saying always to my managers, to the people that I've been managing when you see also a good behavior because we humans and specifically over the last, let's say a year as have a tendency to just call out things that are negative. But if you have somebody who has behaved as you expecting, reinforce the person, tell the person well, basically, thank you because that's exactly what I'm expecting from you. So thank you. While I was not present at that meeting, but I heard that you write stated something that was not correct by, for example, a colleague, and that's exactly what I'm expecting for you. So thank you for that. This will also be further we're going to be discussing present a couple of minutes, but this is giving further trust to your people that yes, they have been behaving as you expecting being the senior leader. If you're the entrepreneur, the founder or co-founder, people are looking at you, they're looking up and it's like if he or she behaves like this. Well, is that the norm, is that the standards. And that's the kind of thing that you need to lead by example as well. So I briefly introduced a ready, typically when we look at company culture and how, let's say the company shall work. Basically, you come up through all companies, mature companies with mission, vision statement and stating the values as well and promise you go on any website of any corporation, any annual report. You're going to see the company documenting, presenting the mission statement, division statement, and the values. And those three elements that are linked together, they really serve as a foundation for the company's strategy. We're going to discuss where the strategy sits in terms of importance versus those cultural elements which has a mission statement, division statement, and the values. And the intention is really when you draft the mission statement, division stem and the values that you really, you put the purpose of the company and the underlying values, the underlying behavior into those elements when they are developed in a correct way. Actually, those, those mission, vision and value statements are extremely powerful tools that will guide the company, the leaders, even the shareholders, employees, on specific situations. And even, I mean, I look, for example, at values and the companies I've been running myself or sitting at the board of directors. I'm using very often the value statement in complex decisions really to see what are the fundamentals of the company. We have a difficult decision to take, a or B decision. And by any chance, looking at our values, are our values guiding maybe two. For example, that decision a is much more appropriate versus decision be just from the values that we have been drafted. I'm not saying that values cannot change or evolve over time. But basically values represent basically the behavior that you're, that you as an entrepreneur, as the founder or co-founder, have been drafting what you are expecting from the people. And this becomes even more important as a company grows. Of course, because when you become a senior leader with hundreds of people that are in your organization, you will have the opportunity to have all hands talk individually to the people, see behaviors. But you need to scale out and think on what you spend your time with customers, with suppliers, with the employees. So you need to have other people that carry those values for you on the mission and vision seven, That's something I just want to take two minutes on this that people often do not understand or basically they mix it up. What is the mission and the vision statement? And I'm always saying that the mission statement is really an clarifies what the company wants to achieve and what are the acts that the path to achieve the vision. And I'm going to give me, give you some examples on vision statements. Disney division is making people happy. The mission statement. And very probably I have not looked this up. Very probably would be, how can I make people happy? Maybe I need to give them fantastic, unique, fun experiences. That's the mission statements. Through that they're going to be happy. That's the vision statements. Okay? So just to that you're not confused about mission versus vision statement. And then as we set a values, so really the values reflect initially values reflect what you as an entrepreneur, how you want the company to behave even if tomorrow you would die. And sorry for taking this example, if you would die, How would you expect the company to move forward without you? How are the values that basically maybe your parents, your social environment have influenced you, that you have been educated upon. How do those values are they incorporated? Are they in are they, let's say, sitting in the DNA of the company. And that's really a very fundamental. One of the authors I like to add on top of Peter Drucker is David Max fields. And I really like the diagram on the right-hand side. And let me summarize here what I want to say about strategy versus cultures. Remember Peter Drucker said Culture eats strategy for breakfast. What's also David Maxwell hand is very famous New York Times bestselling author, is very specialized on, let's say, organizational change and how companies are performance. And I think his sentence and I will elaborate with a graph with vision on the right-hand side. But one of his most important sentences has been that most leaders focus too much on strategy, what he calls the above the water line where we have processes, strategies, Five Forces model the variety or the Blue Ocean strategy. But basically, they do not focus enough on the culture. And if you have a culture that is not aligned with the strategy, or basically the culture does not support a strategy. As already said earlier a couple of minutes ago, maybe you want to bring the company into direction a. But people behave that the company is drifting too. Targets. Or let's say to an objective which is a b2 vision, that is B, that's problematic, right? I think that's common sense. So for that, I'm always saying you can have the best strategies, you can have the best business analysts, you can have the best external consultants, strategic adviser them that are helping you. If you do not on the daily basis, if you're not attentive to the culture, how you want your stuff, how even you as leader, interact with customers, with suppliers, with other employees. How do you want people to follow something that is on space, on paper, on strategy, I mean on strategic paper. And there is misaligned with how you behave. The underlying attitudes, unwritten rules, values, assumptions. As I said, implicit norms, implicit standards of the company, and it takes effort. I mean, let's be very clear. I mean, I have learned through managing many years companies that for me it was always very important to repeat this culture really. And as soon as I was seeing a misbehavior, respectfully not prejudging people, but respectfully ask the person. This is not aligned with my values. You remember what the values are? If not, maybe I can re-explain to you what am I'm expecting. Or maybe when we have new hires bringing them together and really expanding them. Why we have those values, what we're behaviors through examples that I was accepting as a leader and that was not accepting, but also what were the consequences of not following on misbehaving? I think it's important for people that they know in which frame that they are kind of, let's say swimming on navigating. That's really very important, at least for me, that culture is so fundamental and so strong. To wrap up on culture. I was always saying to my managers, to my team. Do you know when you were able to implement the culture that you want to have. Basically, I said, it's when you are not there, when you're not present at the customer meeting one, you are not present at a meeting with colleagues. And that you have created through repetition, through communication, through correcting misbehavior. So politely and respectfully, I'm trying to understand without prejudging why the person was misbehaving, that you have created this system of culture that auto corrects itself. So you're going to have, and that's so powerful, I promise you, you're going to have people. I'll take the following analogy that the people who will say in a meeting where you are not present in their brain, they're gonna say, this is not how candy would expect me to behave, or this is not how candy would like my colleague to behave. So let me write this, let me correct this poor lightly without prejudging. And even in front of a customer, say, stop maybe the conversation and say, Well, okay, to colleague, I hear you but I think we as a company, we have to behave like this. This is what we shall do and maybe the way how you present the commercial conditions in front of the customer is not appropriate. For example, when you have that, I really promise you from experience, more than 20 years of experience in nearly 30 years of managing people. This is so powerful. But again, when you have set up this system of values that auto corrects itself. I mean, through delegation, you are no longer present. It still requires that you continue monitoring and repeating so that it does not lose the current level that it has achieved. That's really what I'm really a very odd that I have been very attentive to. And also sitting on the board of directors is how, how culture in fact actually links correlates with strategy and are those aligned? And also when we have, when we speak, for example, two CEOs of some of our entities that come to the board of directors and present their strategy. We also of course, have in our interactions with them to discuss about culture. But we believe how they shall behave as CEOs of an entity or CEO of the main holding company. I just want to highlight one value that I believe is also from my experience having run a lot of businesses. And you can look this up on LinkedIn that you see what my career has been, is really trust. And I believe that my success and I'm saying this with a lot of humidity, my success not only came through being attentive on repeating and leading by example on the cultural elements. Of course, I had to have good strategy and I have the tools for that. That's fine. But really the cultural aspects and correcting smaller misbehaviors before they became too big. But also one of the fundamental things that I was always extremely attentive and they're going to be discussing about the 5510 rule that I've been using. And that's my rule. Maybe somebody has a similar role, but I call this my 5510 rule. It's really trust. I believe that probably this is due to the location of my parents, the education I tried to, let's say exchange bond with my with my family, with my kids is really that I believe that trust is the foundation of every successful business. And I believe that if it is interacting with your customers, with your employees, with your suppliers, with your shareholders, potentially, that trust has to be built up in every relationship. And organization leaders didn't really need to communicate also their trust to the staff, because it's also a matter you don't want to work as an entrepreneur 26 hours a day. You understand what I mean by that. You also need to find the right work-life balance. You have a private life, you have maybe different aspirations. That's the kind of thing where you need to be attentive about. And this will only come through culture. But one of the values sitting in culture that is super fundamental is really trust. The other ones like respect, integrity, those kinds of things. But trust is really one of the most fundamental ones. And so coming back to this 5510 room, and I'm always saying the following. Having conversation about who are the most important stakeholders that we have as a company. And I'm always saying it's our customers because customers are paying my payroll. Your payroll. If you are having unhappy customers, they gonna tell this around them and they will no longer come back to you. So the 5510 rule that I have always been extremely attentive about and also again, repeating this to my managers might teams, my staff was basically it takes five years when you're a new comer in the company. Let's imagine you are the sales person, the sales contact for a customer. The customer does not know you. Um, it takes a certain period of time depending on the counter that you're living. In some countries, it's easier to build up this trust relationship in other countries it takes longer time, but let's just assume as an average. And this is what I was saying in this 5510 route to my people. It takes really and honestly five years to build up a blind trust. It takes if you're misbehaving five-minutes to destroy it. And then after we have destroy the trust relationship you had. This works as well with your kids, with your partner in life. Sometimes you cannot even gain this trust back and earn this trust back. And sometimes it will take twice or three times as much time. So this way I'm seeing 5510 is like five years to build up trust and it's such a strong intangible asset that you have, that you carry. And it takes five minutes to destroy it because they have been misbehaving. I've been thinking about short-term goals of the company has short-term bonuses, or your people, maybe a salesperson, and then it takes potentially ten years back, probably you will have to change even the person that's very difficult. And I need to think about just from a financial perspective, the cost of, let's say, trying to earn back this trust with the customer. And it was maybe an important customer to you and your people went too far, you went too far. That has a huge cost to the organization, so that will have a financial impact. We're going to discuss return on invested capital is wrong. But those are the kind of elements that you not necessarily, a lot of, let's say analyst or strategies do not necessarily are attentive about because they look at quantitative metrics. But they don't look necessarily at customer satisfaction. And if in the interaction that your salespeople or you're after salespeople, your operations, having their customers, how customers feel about trusting you as a supplier, for example. And I believe an eye again, stick to my position. I believe that the success that I had in my career, whatever the successor, some people say that I've been very successful. Other people say that my scope of responsibility, it has been small compared to big CEOs of larger, let's say corporations that are listed on the stock exchange. I just say that in the interactions that I had with my employees, with the customers, with our suppliers, I have always been extremely attentive on the culture, the values that were defined and let's say acknowledging and recommending positive behaviors that were aligned on my expectations, but also without prejudgment giving the people the chance to explain why they were misbehaving and write stating this as soon as possible. So as long as the letter, the misbehavior was small before it grew too big. And then again for you as a leader, the effort to correct this is extremely high. So let's, before we practice, maybe pause 1 second and ask yourself, do you know companies where the culture was misaligned with a strategy and execution. Just pause. You want 1 second and think about if you have examples. Maybe privately owned companies, or maybe companies that you have been working in before are companies that are maybe a publicly known and they have misbehaved. I'm going to give you an example now. I've decided to take the example of Wells Fargo. And again, I'm not judging here Wells Fargo, but I think it's very interesting example. So who is the worst case? You would not know what his problem was probably is one of the largest banks in the United States with the round one dot 9 trillion. I mean, I do not remember exactly what the latest figures, but just say that they have 2 trillion in terms of assets under management on their balance sheet. And Wells Fargo, at the time when I did, the analysis was split into four segments, which were consumer banking, commercial banking, corporate investment banking and wealth and investment management and their markets from a geographical spread perspective, what mostly focused on the United States. And we're speaking about culture and values. And I have extracted you have the source below and you're going to understand why 2013. It's not specifically because it's outdated, but you're going to see what happened in 2013. We're going to look at the values that were drafted, that were shared in the annual report and what happened a couple of years later. So let me just read, read frames here. And again, you can look at the URL and read this by herself. So the CEO and Chairman. Here again, we're going to discuss that later on. But initially we have here a T1 governance model. So the CEO is at the same time chairman and president. And I already stated, I do not like TO1 governance modes are preferred tier two, but nonetheless, the CEO and the chairman says, it's not the words in the document that are important. So here we are in the annual report. It's how we embody these words and all that we do for fellow team members, customers, communities, and shareholders. Basically, when you read this, this is exactly what I was telling you a couple of minutes ago. Culture values, you need to behave according to those values and correct misbehaviors. It's not important what is on paper. It's how you live in all your daily actions, those values. That's basically what the CEO and Chairman is saying. The second red frame on the right-hand side. Our focus is on providing exceptional service every time we know excellent customer experience leads to more opportunities to increase customer loyalty and grow referrals. Exactly what I just said. I think in the previous slides, if you want to be successful, this 5510 rule, it takes up time to build up trust with your customers, but customers will come back to you. Net Promoter Scores fully aligned with my vision of how to manage a company. Last but not least, reputation, do not engage in activities or business practices that could cause permanent or irreparable damage your reputation. 5510 rule, five years to build up trust, five minutes to destroy it, and then potentially it will never come back or just the cost to earn the trust bank is just too high. I have not created this. I'm just telling you this is a concrete example on what is written in an annual report. Okay. So you see wow, yeah. I mean, grades, even for me. I mean, this resonates in my brain's like, Oh, wow, my Wells Fargo customer, no, well maybe I should think about I like the values. Now. I like how they, at least the chairman and CEO, once his staff, his employees, to behave potentially with me as a banking clients. And what happened is the following. You remember a couple of lectures ago, I also said that KPIs will be discussing about KPIs balanced scorecard, that KPIs cannot become a strategy by itself. Well, that's exactly what happened here. Wells Fargo was exposed to scandal where people were in fact, creating fake accounts and even forging signatures. Why? Because they wanted to earn the bonuses. So the targets were and again, I'm not judging here, but maybe the targets, the sales targets were so high that the whole corporate structure because the deputy, let's say the senior VP to the CEO that is responsible for, let's say retail banking have targets that were very high, was unable to defend that those targets were very high. So pushed down the throat of the people in the whole organization that guys, you need to meet those figures and with, let's say behavior that whatever it takes, you need to meet those targets. And what happens? I mean, creating fake accounts because you need to imagine Wells Fargo is listed on the stock exchange. And you need to imagine that obviously analysts looking at the performance and I'm not the biggest friend of analysts specifically, the analysts are always pushing for growth, growth, growth and grows the only thing that counts. And basically Wells Fargo, I believe honestly, I'm not taking the difference of antibody, but I believe that probably they had to show growth compared to other banks. So they pushed down the throat of the whole organization, whatever it takes. Okay, if you need to forge signatures and create fake accounts, at least that we can report to the analysts that we are signing up new customers. And obviously it's like a Ponzi scheme at a certain moment in time. This will explode just a matter of time and years. Our speaking about how much did it take, I showed you a 2013 annual report and I did this on purpose because three years later, remember I said that when people misbehave, it takes some time that the whole, let's say Ponzi scheme wherever explodes. It took him three years, at least until this exploded and not exploded, is that basically Wells Fargo and you can imagine lost. I mean, it was exposing the press. Imagine as shareholder and even director sitting at the board of directors like, Oh my God, what is this? Now we handle I'm going to clean up, allow me the terminal. We need to clean up this mess. Not to say something else here. Wells Fargo has been fined a 3 billion very quickly in 2020. So after there was a prosecution lounge than was lawsuits, and obviously, it came out through prove evidences that whole management structure had. So they did things that they wouldn't that are absolutely non-compliance. And you have unhappy customers because obviously I said many time customers started to say, but I didn't not asked to have a second or third bank account and you're charging me fees on that bank account. So it was really a mess. It was really a mess. And it went so far. I've taken here examples of two thousand and sixteen thousand and twenty two thousand, sixteen, This CEO and Chairman. So this guy, John Stumpf, I do not know him personally. But coming back to the slide of 2013, he was the one that let's say digitally assigned of how to how wildflower shall live, its vision and values. What I'm showing here in the three red frames. And the guy had to stamp down, obviously because he has totally lost his credibility. There were other senior leaders that had to step down, but he had to step down. And in 2020, so a couple of years later on, he was in fact, um, I'm not sure if the term is declared or he is in fact no longer allowed. I think it's for 25 years of thing. There's limited duration to work for a bank as a senior leader. So and on top of that, he has been fined with an 18 million penalty. So that's a lot of money. I do not know what his salary was or not. But I mean, you see that prosecutors went very far because the actions of Wells Fargo, they were absolutely noncompliance. And this is just an example, I promise you look on the internet, you're going to have a lot of companies that's misbehaved. While in the annual report on their communication, they said, Yeah, we want to be respectful of our customers if our employees, etc, and they were misbehaving next week. So you really have this discrepancy where the values and the culture, we're absolutely not the light on how the company on a daily basis was executing. Alright, so I hope that through this last lecture, you understood that culture as an entrepreneur, even after the launch has when you are growing, when you're hiring new people, you need to be attentive and detect those early-stage misbehaviors, but also correct behaviors and reinforce them are really, let's say kill them from the very beginning before they become a too big a problem. Alright, let's conclude the chapter number three. So just a very quick note here, because some of you may say, but, oh, wow, Okay, maybe this chapter was great and there are so many tools and need to think about culture. But maybe me as an entrepreneur, I don't have the scale, not the time now to deal with this. And I'm saying, that's perfectly fine. Remember that why I decided to structure the course, we went from ideation to launch to growth and maturity. Here we are in the maturity stage. And when you have an, Remember in the growth maturity phase, you're going to have more money, more cash, more profits. Hopefully, you're going to have as well people that will be dedicated. Maybe your marketing team, maybe you're going to have an Office of Strategic Management. But gunner, that you will be delegating to do those analysis for you. And this is basically what is happening in a very big cooperation that they do have an office that focuses on strategy. But again, it's not the purpose. I'm not telling you you need to have dedicated personal strategy. It's your role as an entrepreneur, even if the company is a three people shop to think about those elements. And that's why I'm not going deep dive into strategy, but I'm giving you like, let's say, the first levels of, let's say, of death. But the topics that you need to handle that you need to think about when you're looking into strategy. And first of all, you need to think about culture. And culture comes before strategy. I hope I've put it specifically in the last lecture because I wanted to, I could have started differently the chapter three, but I really wanted to go first into the tools, market structures, external elements with the PESTEL model. The five forces model of ports are looking at modes, competitive advantages with a variety of blue ocean strategy. When you move from a monoprotic mono service company to a diversified company, either various markets, various products, various services, various revenue streams. How do we analyze with BCG or GE McKinsey matrix? If it is, well, if you have, if you're striking the right balance or not in terms of risk management. And I said to myself, I want to put culture at the very end because yes, it's true, going from market structures to strategic management, to strategy formulation and analysis tools and models. That's great. And you buy yourself, could do a, you're going to find 250 courses are gonna go deep dive into the ocean, gonna go deep dive into GE McKinsey going to go deep dive into Vireo. But this why I decided to put at the end of the chapter number three from my experience and I'm really showing you my experience having managed a lot of companies like Okay guys, that's fine. You are good on tools. You knows those, you know those tools, those things. You are able to calculate the C4 HHI concentration index. Great, but you can have the best strategic consultants around you. You can be the best strategy. You're going to screw up your company. If you don t think about culture, values and you do not correct misbehaviors when they are young, let's say, small from the very beginning. And this is why I decided I felt that it would be better to finish this chapter with a culture at the answer, taking you out of the heads down into tools, etc.. And really telling you, yes, you need to know those tools. You need to think about external, internal suppliers, buyers, substitutes, fine grade, Culture, culture, culture, culture. And on a daily basis you need to lead by example and you need to believe in your values and people have to feel that you need to try to set up this auto regulatory system that corrects itself when you are not present in meetings and interactions with various stakeholders. So I hope that this was useful for you. And in the next chapter, we're going to go into the corporate finance fundamentals. We're going to be discussing value creation because of how to value a company that's very important for an entrepreneur. Looking into financial statements as well, really giving you like a first layer of understanding financial statements. 16. Introduction to Corporate Finance Fundamentals: Welcome back investors and entrepreneurs. In this chapter number four, we're going to be speaking about corporate financial fundamentals and they're frozen. Introduce you why corporate finance in fact, deserves a specific chapter in entrepreneurship and strategic management must have class. So let's not be naive. Remember where we're coming from? We're coming from the ideation to the launch phase, the growth phase, maturity phase. You may remember as well that one of the six major, let's say, problems or difficulties that entrepreneurs have to face is linked to raising capital and managing the financials of the company. At the very end of the day, let's not be fooled, let's not be naive. You as an entrepreneur, as a founder, as a shower there. Same for me, being part of a board of directors, has non-executive director, we are all accountable and legally liable also for the company financials and the integrity of the company financials. So what is the worst-case scenario is basically bankruptcy. But let's take 1 second on bankruptcy. This is a study I've put you the source that has been done by the European Commission 20114 to 6% only of the bankruptcies, at least in Europe or fraudulent, which is like one out of 20. There is nonetheless leaves in Europe. I'm not sure how it is in your counters or what would it be interesting that maybe you haven't thought about how it is in your countries that at least in Europe, the public opinion historically and also how the laws have been written. There has been a public opinion strong, let's say, perception of business failure with fraud, but closing a business is not necessarily fraudulent act. You can decide to liquidate the business because you no longer want to work in that specific segment or sell their products and services. And many honest people that went bankrupt, sometimes forced on forest. They feel discouraged as well. Because sometimes the laws, for example, I do if I'm not mistaken in Luxembourg, for example, when you asked for our business per minute, they're gonna look if you already were involved in a bankruptcy or not. I'm potentially depending on that, you may have more difficulties or even not receive a new business permits. And there is a supplemental, a secondary effects to this bankruptcy thing is that many want to be entrepreneurs that have heard about friends, other relatives going bankrupt. They have a fear or they just read it in the press. They have a fear of opening up or creating their own accompany. And because of the consequences, the legal consequences of a business failure. My personal belief and that's why I am also, I mean, first of all, creating this training to reduce the probability, I would say, of as you, as an entrepreneur to do things that you would not have been aware of. What are things that are required to manage and to create and to run a business. But also specifically on corporate finance and related to this bankruptcy and all fraud related matter. I hope that through this corporate finance chapter, which is gonna be a couple of lectures, I think six or seven lectures, that it will help you reduce the probability of going bankrupt, will also increase your awareness on, I mean, on the accountability and liability that you have as an entrepreneur, which is basically on key financial matters. And we're gonna be discussing this in what are the key financial methods in the next slides. And also hopefully reducing the probability of financial distress. So what we're gonna be discussing in this lecture, a couple of things. Remember where we are coming from, ideation, lounge, growth, maturity, and we already have covered strategic management. One of the things is, which is really key is a money. Because money is an energy that will fuel what you can do with your company. I believe that as entrepreneurs and I'm seeing this if it is on the platforms, I'm supporting a strategic advisor where I'm sitting at the board of directors. The methods that we have to deal with is understanding also what are the expectations of our shareholders. How, or at least understand how we create value for the shareholder, the expectation of the shareholder. In that context, fundamental elements like cost of capital weighted average cost of capital, return on invested capital return on equity are very important things. We're gonna be discussing this in a specific lecture also on things that are one thing that entrepreneur, entrepreneurs have to deal with is always the company evaluation in this sense of what's in the sense of they have created self-funded the founder of the company. So after the seed funding, they want to open up the equity or you want to open up your equity for series a, series B, how do you value your company? Maybe you're making profits already. So there are some, let's say, valuation, valuation methods that will be then easier to use. Maybe you're going to rely on the business plan to do the valuation. Maybe you're going to use just let's say out of thin air valuations, we're gonna be discussing this that you understand the company variation principles that in fact exists depending on which maturity phase you are. If you're on the launch phase and the growth isn't the maturity phase. What important thing that I felt was also necessary for entrepreneurs to cover is really the thing about company governance. We already discussed a little bit in the corporate law section. But the tier one, tier two governance. But I think that I need to add a couple of major keys to read corporate and understand corporate finance and also general accounting, but also auditing principles because I said morning time after the growth phase when the company becomes bigger, you will have to review also your financial statements and assign them off. Then last, not, last but not least is really understanding also the main financial vocabulary for entrepreneurs like cost of capital, working capital, days, sales, outstanding, cash conversion cycle, cashflow, cash burn rate, those kind of things. So that would be those points specifically on more sales and cash related or cash management related aspects. I think that's the last lecture in Chapter number four. So with that, in the next lecture, lecture number two of chapter four, we're going to start with value creation and cost of capital to have that clear from the very beginning. And then we're gonna go into financial statements mean accounting and auditing principles, company valuation, IPO, DPOs. So initial public offering and direct public offering when companies are ready to go to the secondary market so they become listed. And then the last lecture will be about cash and sales management. So talk to you in the next lecture. Thank you. 17. Value creation & cost of capital: Alright, welcome back, entrepreneurs and investors in this second lecture of Chapter number four. So remember we, under Corporate Finance Fundamentals, we're going to be discussing value creation and cost of capital. So maybe if you look at it from an investor perspective, but also if you look at it from a owner or create a founder perspective, what is the purpose of creating a company? I think you've asked me to company. I'm not discussing here philanthropic elements that you want to change the world, etc. I'm really speaking about money. Basically, the idea is that in most of the cases, you as an entrepreneur or let's say if you are an investor as well and you're giving your money to an entrepreneur is you want to generate profits right on top of probably changing the world, solving some problems. But you want to generate a profit. That's really the expectation that investors have. This comes with an expected return timeline. I'm giving you a million US dollars, ten thousand US dollars for your coffee shop. When I'm expecting the money back. And what is the return that I want to receive back after that period of time? So those are basically the fundamental two elements that when investors look into putting their money into vehicle, they are, they have an idea about the timeline and the return percentage. One important thing is those two elements, the timeline and the return percentage. They in fact, very related to an depending on the riskiness on the vehicle they're investing into. That's something that entrepreneurs, what I have seen from my experience or some mentoring young entrepreneurs are novice entrepreneurs. Even more mature, senior, senior people in companies, they tend to forget that investors do not only have you as an investment opportunity, but they have many other ones. And that's something that has to be also as an entrepreneur, if you want to raise money from somebody else, you are in competition with many other vehicles. I'm giving you here a curve. I'm using systematically in many trainings, which is basically the balance or curved that draws the balance between expected risk and expected return. So the higher the risk you're going to be speaking about primary market business angels. So that's a seed funding Series, a maximum. We're gonna be looking into extremely high return expectations. Why? Because most of the companies, we're going to see that later on when they're going to be discussing because of capital, but most of the companies they die at that stage, Let's say ninety-five percent do not survive the five-year period. Venture capitalists, there is serious ABC, private equity, mezzanine funding, preparing for going public. Then you have, again, it will not go too much into the details about non-investment grade months. So that's like corporate depth or sovereign debt, which is really high risk. Then you have public stocks, large cap stocks, which I mean if I'm a value investors, so I do invest into blue-chip stocks, that would be the category of large cap stocks. So are the riskiness is lower, but also my return expectations will be lower as well. To give a concrete example, when I put my money into blue-chip stocks from my own assets, I'm expecting six or seven per cent per year. If I'm able to do this over a three-year period, that's already great. I'm, I'm not necessarily investing into bonds are long-term treasury notes from the US government because the other written is not high enough, even though the risk is lower. That's really the balance that you need to understand between risk and expected return. And I was mentioning that entrepreneurs, you are facing competition if you are the one sitting on the side of the table and you're asking for money. What the potential people that can, that have that owned the capital, that can bring capital to you well, through this risk to return, let's say a function or drawing, you see in fact that there are many vehicles that an investor can invest into. The, probably one of the less riskier vehicles is putting your money into bank savings accounts. Until 2022, banks savings accounts, bank savings accounts were yielding close to 0%, even sometimes negative yield y, because the economy was depressed because of COVID and central banks wanted people to put their money into the economy, which created now a very high inflation will not go into the details of it. And now you are seeing banks savings accounts or long-term interest rates and short-term interest rates that are yielding. Giving a positive yields so that people have a tendency to spend less but keep more than money in the bank savings account. So it's a vehicle you can invest as I do, for example, into equity, blue chips. For example, a written there is a large cap stocks. So that has already said, I'm expecting yields six or 7% inflation-adjusted, of course, but I'm the risk. I mean, I'm doing this for more than 20 years and I have, this company has, has gone bankrupt, a very big brands on startups, typically the yields, So we are in the primary market, the venture capital business angels sites. The risk is ninety-five percent, so you're going to have maybe 5% survivability. So the remaining company, let's say one out of 20 has to finance the loss of the other ones where the money has in fact disappeared. That's how an investor will look into it. You can invest into real estate. It's less liquids. The risk if you're investing into geographies that are markets are geopolitically safe while the risk would be lower. So that's the, that's the kind of thing that you need to keep in mind, is an investor has the choice, has a choice of many vehicles and you as an entrepreneur, or only one of many options with a different risk versus return profile. So really keep this in mind. A lot of people do not understand this. And then obviously, I mean, what I'm always saying is that the decision for an investor to put his or her money into something is then like an equation. It's a function of risk, appetite, expected return, liquidity, but also competence. You have people that are very good at blue-chip investment are the ones that are good at. Venture capitals, are the ones that are very good at business. Angel are the ones that are very good at junk corporate nodes, for example. So everybody has its circle of competence. And that's really something that you also, you need to keep in mind. And I remember having, had not later than last week with one of the startups or mentoring conversation because they hadn't invested that wanted to come in. And the external investor, in my opinion, so the founders were asking me, can you, what is your opinion about this? And I looked a little bit into the kind of questions track record of that investor. And it wasn't invested that was not competent in the area and the customer segment and in the geographies markets that this startup wanted to go. So they decided not to continue the conversation with that potential investor. So as I already said, the purpose of commercial companies is really to generate profits, except with when you are in the mindset of philanthropy, you, you want to do something and you're not looking necessarily at profits, but basically when you put your money into a vehicle, investment vehicle, you want to have a specific return terms of percentage and a specific timeline related to that return percentage expectations. What you also have to think is, and I hope that is clear for you as an entrepreneur, is that profits cannot be generated from thin air. Companies need assets to generate profits. And I'm gonna be showing you the circulatory system. And that's basically like splitting of the balance sheet that you understand why the balance sheet is structured like this, but I hope it will be very clear how the company can, from being injected, transform this into assets, and then try to generate the profit out of those assets. So basically assets of a company, if it is a car, if it is manufacturing plants, if it is a retail shop, they do carry some intrinsic value. And the expectation is really that those assets that they generate future profits for the management of the company. But of course, for the shareholders, for the investors of the company. The benefits can be, I mean, the expectation is generating an inflow of cash, reducing the operational costs. Because through, let's say, for example, a new digital tool, the operational efficiency of a company's becoming better in trimming sales. Because maybe have invest into new CRM system or you're doing digital marketing campaign, you're putting your money on social media. So really, I'm always saying there are only two ways of looking at companies in generating profit is growing. The top lines are growing their revenue line or optimizing the bottom line, which is optimizing the operations. So you have assets that are either grow the top line or that optimize the bottom line. One other thing that you have to keep in mind as an entrepreneur, and I'm looking at it from a corporate finance perspective, is that assets change a value, of course, over time, a car that you have bought three years ago, or manufacturing plant that has been built 50 years ago or retail shop that you have bought 20 years ago? I mean, very probably they're going to need to refresh. So keep in mind that assets half useful lifetime. I mean, even from an accounting perspective, this can be, let's say, reported in this way. And so that's the kind of thing that you will need to keep in mind as well is that it's not because you invest now into an asset that the assets, let's take for tangible assets. We're going to have a certainly useful lifetime. Last but not least, before I show you the, how a company can create value for its, for its shareholders or investors. Always keep in mind that at the moment of inception of the company, the company normally, in most of the cases, the company does not have assets, most of the investors, or if it is you as an entrepreneur, being the one, self-funding, the company you're going to bring in cash. But remember that there are possibilities to bring in tangible assets into the company as well, or even an intangible asset. Then comes a question about now how do we evaluate that one? But very often, and this is what I'm showing here. The typical, let's say, cycle of value creation is, and basically this is, I'm splitting up the balance sheet. Assets on the left, on the left-hand side, liabilities on the right-hand side. There are two types of liability holders, debt holders and shareholders, so that toddlers are external creditors to the company. So people that are lending money to the company. So people that you admins printer borrowing from, then you have shareholders. And why are they consider as liability? Because it's the same. They are giving you money, so they are lending you money, so you are borrowing money from them and they have a hope of a return. The difference between the two is debt holders are external to the company, while shareholders, equity holders, they own a part of the company. Remember, we were discussing this in the legal chapter number two. So the typical cycle, and I'm putting here the Board of Directors and the CEO in the middle is really there is an inflow of cash in terms of capital coming in. Let's leave credit holders One second aside, the cash from investors, which carry some intrinsic cost of capital expectations, remember, cost of capital is, to make it simple, is an percentage expectation on the retina that money and also a timeline related to that. So then that cash that has been brought in by shareholders is given to management, was given to you as the entrepreneur. And that cash has to be, or will be invested into real assets. Probably be tangible. Most probably tangible assets. Let's say a retail shop and manufacturing plant, cars, whatever, buying products that you can then sell to your customers, consumers, whomever. And of course, those assets are the ones that we hope that we're generating a profit. And this comes after a certain cycle of operations. That's, let's say step number three. That's, we hope that this, those assets that we have, so from cash to assets, those assets have generated a profit. That cash has been generated by those operations. You have manufactured the product at 100 years, selling it at 120, those 20, your is your profit. Then at the end of a longer, let's say cycle. Let's imagine a quarter, a month, year. The management of the company, the board of directors. Maybe you as an entrepreneur, if it is a startup company and you only have three people, I hope for you that you have generated profits. Now comes the question, what do I do with those profits? And basically you have three choices. In startups, very often the only choice is the cash. The profits that have been generated are reinjected into the operations to acquire new customers, new and new marketing campaigns. Buying a second retail shop or renting a second retail shop, buying a new car, extending your manufacturing plants. Very often in startups, that's what we will be doing is really investing, reinvesting that money that has been generated as a prophet into the operations. But there are two other options here. We're speaking more about growth and mature companies is, well, maybe the company has taken up alone. So you need to pay back creditors like the Bank, for example, suppliers as well, are considered as external short-term credit holders. Then last but not least, if the company is profitable and maybe there is no further need for re-injecting fresh cash or Joseph, very small portion of it into operations because the company has a dominant position in the market. There are no further loans. Well then the rest of the money is potentially giving it back to your shareholders, to your investors. So those are really the three elements, three opportunities that company has. I'm not discussing here, share buybacks. It will be an option as well. That's something that has been done. Because typically if you look at the flow for B, which is cash return to investors, That's basically through cash dividends. But as cash dividends are taxed at company site at, at investors that as a source of income. Over the last, let's say, decade, a lot of companies have been buying back shares from the stock market to give an indirect return back to investors. But that's not the purpose of the course going into those details. And how do we measure how good the company is at generating, Let's say, return, first of all from its operations. But then as well written to investors, they're basically a couple of major metrics and that's vocabulary that you as an entrepreneur need to know as well. The most important one is return on invested capital. You have invested capital and capital is not just equity. So money, or let's say, let's say money contribution, capital contribution from equity holders. But capital is also adapt a bank loan if you are going to the bank and you're getting a loan for 1 million, that's capital as well. It carries some cost. Let's say it carries some written expectations to the banker. But that capital, that money can be used as capital to transform into assets. So when you look at return on invested capital, and that's why I do prefer return on invested capital versus the return on equity. Because return on invested capital looked at the whole capital structure of the company on the right-hand side of the balance sheet. So the dapp to that the company has, so the money that the company has borrowed, but then also the equity. If you only look at return on equity, you will miss the depth part. And if you look at companies that generate the same amount of profit, have the same amount of equity, But the one company has that, the other one does not have dept, the one that does not have that as a higher return. From a return on invested capital perspective, if you would look at it from a return on equity perspective, both of which are the same written and let's imagine the company is generated $100 of profits. It has an equity worth 1000s. There would be a 10% return on equity. But the second company has the same 100 of profits, 1 thousand of equity, but it has also 1 thousand of that. So the return on equity may be the same between the two, but the return on invested capital is a half because it would be 100's on 2000s. So it will be only five per cent. That's why I always look. And when I discussed with shareholders, I always think, what are their return on invested capital expectations? Then you can measure the yield, which is basically the shareholder or yields. That's the second way of looking into it. And as already mentioned, way of looking at it is like a cash dividends provided back to investors share buybacks, but also the increase in the book value of the company. Because sometimes shareholders what they want, they don't want to have cash dividends and share buybacks, but they want to have a gain on the capital invested and they are willing to sell the equity and maybe they have injected, let's say, a million US dollars. And ten years later, that million US dollars, that equity value is worth 20 times more and that they're gonna be willing to sell part of that or the totality of that amount of money. That's how investors think. A quick point about a term that is very often used also in the corporate finance, which is wag its weighted average cost of capital. And the conversation goes the following. Remember that on the capital sources we have two capitals sources, external credit TO loss, and I call them internal shareholders. But both are liabilities. Are seen as liabilities to the company. You need to pay them back at a certain moment in time. Creditor loss, very probably they're going to put much more pressure than shareholders. When you discuss about, and remember, I was saying in the introduction that sometimes are not, sometimes it's very often. If you are the entrepreneur, you want to raise capital from excellent investor, you're going to be facing competition from that external investor on multiple vehicles, bank savings account, real estate, start-up, a startup B, and then your startup for example. One of the things that is being discussed very often is what is the average cost of capital? Because depending on the source of financing, the average cost of capital in fact, varies over time at the moment the capital, let's say expectation is set. The formula of WACC, weighted average cost of capital is basically depending on the percentage of equity of percentage of debt that you're using in the company. The cost of capital, the cost of credit and equity holders will vary. Why? Because cost of equity that really depends on the investor. Not only I will extend a little bit further, the cost of equity depends on the kind of industry you're in. If it depends as well, on the type of company that you're in. Are you still in the very early stage startup? Are you in the launch phase when the venture capital, private equity, are we already in the secondary market? The company has gone IPO, a DPO so that the cost of equity expectations as well. Will be difference. And we're going to be discussing that later on when we're gonna be discussing with Pepperdine report and then cause of depth. Well, it depends on the bank or the source of funding that you're using. You might have a bank that has giving you a loan add three per cent for ten years. It depends as well. And probably now in, let's say after the summer of 2022, we have all again seen very high inflation. So we see that the cost of just taking a loan, a consumer loan at the bank has been increased a lot, at least in Europe, but I think in the US as well. And that's why we have treasury yields of the central bank in the US and in Europe also going up. But one thing, remember I said, I want to also for you to be clear. What are the expectations from an investor. It's an, they're giving you a certain amount of money. They expecting from that amount of money or certain return in a specific timeline. But not every return is good for an investor. And investors, basically, this is how they should think about and this is how I think as well about, let's say, using money is that companies, are you as an entrepreneur, only create value if the return on invested capital is above the cost of capital, because otherwise you are destroying value. Now going to be a little bit more precise when I look into return on invested capital, ROIC depends on weighted average cost of capital, which depends on the industry, on the geography are and we're gonna be discussing, doesn't wander around how he calculates cost of capital and cost of equity. And that will be, remember, this curve, risk versus expected return. An entrepreneur is on the very high end of risks, on the very high and expectations of return. Which means that if you are mature company, obviously there is, this risk is going down, but still you're going to be more risky than a risk-free rate. We do consider, again, take this as an assumption. When I calculate my risk premium, when I do my investments, I'm always saying that. Why taking a risk if the US government is giving me a, let's say two dots, six per cent return for the next 30 years. And even entrepreneurs telling me I'm giving it a two per cent over the next three years. And when I say, Wait, that doesn't work. The US government, which will vary probably. And that's another conversation that's not going to geopolitics will not go bankrupt over the next three years. It could be considered as a safe vehicle, is giving me higher return for nearly 0 risk versus you as an entrepreneur, very high-risk and you're only giving me 2%, which is lower. Sorry, I'm going to take my money, I'm going to put it into the US government. That's it. And then comes, and that's what the US government is trying to do as well, is that the risk-free rate should at least cover inflation on the longer-term, not on the short-term, but on the longer term. So basically the equation that you see it here in the red frame, I'm always saying is that written on written on invested capital has to be higher than cost of capital, has to be higher than risk-free rate. And through that, the minimum is that return on invested capital if it is higher than cost of capital and if it is higher than risk rate has to also be higher than the inflation. Otherwise, why would I, as an investor, keep that money in your vehicle? I'm speaking about series and vessels that want to generate profits over a certain period of time. That's how you need to look into money. You need to look into that, the money that you invest. And this is not only for you as an entrepreneur or as an investor, it's for everything you do, the money that you put into maybe a house that you put maybe into a car. If you're thinking of that asset and return generating assets, when you need to think, does that asset gain value over time? And thus the value, the valuation of that gain, is it higher than other vehicles? Is higher than a safe vehicle like a treasury yield of the US government, and is it higher than inflation? What I'm not discussing here is when and again, remember this spectrum from risk versus expected return when we are, we are now, what I'm saying here is not valid for mature companies, but it's valid for companies that have just launched. So after the ideation phase or that are in early hi growth, exponential growth phase. They're in fact the way of looking at value creation. I mean, if you remember the S curve of corporate growth, I was showing you that in the first, let's say, periods of after the ideation, the launch, the growth phase, the company is not generating a profit. So your return on invested capital is going to be negative because you are destroying more cash than generating profits. And the cash that you're generating from operations will be reinjected to expand the markets, the amount of customers that you have, increasing operational efficiency. So keep in mind that on the right-hand side of that curve, risk versus expected return. So launched companies, exponential growth, early-stage companies, that's the value creation. There cannot be measured by return on invested capital, but it will be measured through what is the market share that the company is gaining the amount of customers? The winner takes all approach. So that's the, basically the market structure over the market share. And that would be according to him, in my opinion. I mean, I'm sitting and just to elaborate it, I'm sitting on a board of directors of a holding company where indeed we do have those kind of entities that we put our money into. And we cannot directly look at them from a return on invested capital perspective. But we need to look at them into other growing their market share. Are they becoming dominance? And we know that the way how to measure a value creation for the shareholders and I'm representing at the board of directors, is not written on invested capital short-term that will come later on, but now it will be on exponential growth, increase of market share, increase revenues. But it's only a temporary measure of value creation. Why? Because at the very end of the day, remember on the expectation of the investor is having a certain percentage return after a certain period of time. So that creation of value, which is not written on invested capital for early stage companies, is only reflecting a future hope by the investor to gain even more money in the future. That's basically the promise that you're making as an early stage company. In fact, hope that it is, that this is clear for you, will not go into the details of it. I've just put here the examples. That's inflation rate. So also the treasury yields from the US government, they change over time. So have a look at it. You can find this triggers on Bloomberg. They are public. When inflation is high, government tends to o, central banks tend to increase the treasury yields. When inflation is lower, they bring them down to the people. Instead of saving their money in the bank account, in the savings account, they put their money into the economy and they spend so that the economy gets going. Alright, so coming back to corporate capital, because I didn't not say yet, how do you calculate cost of capital? Because again, with the exception of early-stage companies where the value creation is measured through increasing market share, increase in customers, increase in revenue, increase in operational efficiency. That's basically it. Nonetheless, after half past that stage and when profit starts to start to kick in and money has, I mean, money is available and money, there is money allocation decision to be taken by the management, by the board of directors, potentially by the sole shareholder, but you, by you being the sole shareholder, being the entrepreneur and the founder of the company. I wanted to share with you how you estimate cost of capital that I'm looking for as well as secondary market. The secondary market is companies that have become public, that have went public. That there is a guy that is called as what the mud around he is considered the Dean of company valuation evaluation in general. He is I think it's once per quarter The remember the exact frequency, but he is updating and you have the URL. So he's a professor at New York University and I think it's Stern School of Business. So he is calculating the return on capital of the firms based on a sample that he's elaborating. And then per industry, because indeed industry you have what you need to understand about why PR industry. Because you have industries that are very capital intensive, let's say chemistry, pharmaceutical companies, versus other industries that are less capital-intensive, let's say a software company. So obviously the return on capital cannot be compared one industry versus the other. It's, I mean, if you would be the investor, you have to look into this as well. Why investing into company that is maybe very high capital-intensive of the return on capital is low. So that's a question that investors have to think about. Maybe they're gonna do it nonetheless because they do understand chemistry and the company has modes because of they have been accumulating so much assets Over the balance sheet. They have a huge balance sheets, so that may be difficult to disrupt as well. But just keep in mind that here you can look this up much more in detail if you want to. But for the secondary market, the average cost of capital in January 2021 and probably has been updating this in the meantime. But it's five dots, 84 per cent. So that's the minimum when I mean, that's an average of averages. But you have it per industry, if you are, for example, in the consumer services and food processing, the return on capital expectation will be 171943 per cent. So if you're a mature company, we are speaking about companies that are in the secondary market. Well, probably the expectation will be to be at least covering your cost of capital. So to be above that when you add the primary markets. So it's not as what the modern Iran who is looking into this, but the Pepperdine Gretzky audio business school report that comes out, I think it's on a yearly basis. When you look at primary markets, are we discussing business angels, venture capital, and private equity? After private equity, the company goes IPO, or DPOs, goes on the stock exchange and becomes public on the primary market. Keep in mind before I share with you, what are the expectations? Is that, I mean, if you're speaking about seed funding or Series a, at seed funding, probably 99% of the companies will not survive for five years at series a, 95 per cent at Sirius B, maybe 80%. So what happened is that at each stage of funding, the survivability expectations are in fact increasing, or the survivability probability to be more precise and expectation of probability is increasing. And at a certain time when the company goes IPO, I mean, there are companies that after having IPO, they went bankrupt nonetheless. And you have companies that are there for three years on the market, they will go bankrupt nonetheless. So it's not a 0% probability of these companies shutting down. So if you look at the right-hand side, well, I just summarized in the previous slides, if the company has IPO, the expectations of cost of capital when the company is listed in January 2021, as an example, was factored 84 per cent. Now with inflation, it will be higher. On the left-hand side, the private market companies that have not IPO, that have, that are not listed on a public stock exchange, were there in fact, what is the expectation terms of cost of capital? So I already introduced this Pepperdine Gretzky REO business school report. It's a fantastic report and not a lot of people know this report and I believe it deserves much more attention. Well, as what does Miller and has a lot of attention. I believe that this report does not have enough attention. Basically, what they do is like similar to what As well as what does moderato is doing. Basically, they are serving bankers, investors, and they are, I think it's for the US market specifically. They're looking into what are the rates of return expectations from those investors, from those bankers, from those vc investors from this business, angels, depending on the maturity of the company. What is very interesting, and you see here in the graph, and I've put the URL, I really recommend that you look into it is that when you ask, remember this risk versus return curve, when you are business, angels say that's a very, very early stage. So after seed funding, there the written expectations, or at least in average between 18, 33%. There are sometimes higher. I mean, you see on the green curve that when it is seed funding from Angel, business, angel or startup. So the company is in startup phase after the seed funding for business angels, their symptoms are written. Expectations are at 50% in average when it is early stage, it will start already go down because maybe the first very risky milestones that the company had to face, having survived by the companies and then the written expectations can go down. And it's the same for venture capital. You see that if VC invests at seed stage startup, it's basically the same written expectations and then business angels than early-stage expansion, later stage. Those companies, companies that are in those phases then on generating profits, we will see in the next slide or the slide afterwards how high you need to know when we're discussing company valuation. So it comes later on how to value those companies are not generating profits. So it will come back to this Pepperdine gutsy audio and show you how people look into when you are a VC, how do you value a company? Not only will you have a rate of return expectation, but how would you value that company knowing that the company is not generating profits? So it's only based on what? On thin air, on, on, on probabilities. When you go into the private equity space, you see that there as the risk. So the probability of going bankrupt, of closing the business is going down. So the probability of survivability of survival is increasing. You see that the returns are gradually going down. And this is why I'm saying a bank, if you look on the left-hand side in the speaking of private capital markets, a bank is willing to ride alone to companies that are not seed or startup very proudly, bank is willing to give a loan or to ride alone, to lend money to a company that has probably already is showing certain revenues, certain profitability. And this is where the bank cannot ask a thirty-three percent return, but they're going to ask if after six per cent return, because it's again, it's linked to the risk versus return equilibrium balance. It's as simple as that. As an entrepreneur, that's really something fundamental that you need to understand. So basically to wrap up this lecture, what I wanted to show you here is you have so on this curve and this is the summary slides. So I hope that you understood that depending on the risk, there's gonna be some written expectations. And those written expectations, this percentage is basically an annual percentage. So the timeline is implicitly put into the expected return because that percentage is an annualized perspective on written on money invested that you want to have as an investor or that you have to give back to your investors if you are the entrepreneur and you're, you're getting that money. So we have the primary market. Those are companies that are not on the public stock exchanges. So it starts with a seed funding business, angels, and then it goes into early stage, and then it goes into venture capital. Private equity is already more mature companies but have not gone public, and then you have the secondary market. So it crosses the barrier where we have then company's IPO, initial public offering, direct public offering, they go public. Then you have obviously cost of capital expectations on the primary market, we saw, it can range from 50 per cent for VC business angels at seed or very, very early stage, and going down potentially to five-six percent for a bank loan in the primary market for very mature companies that already probably generating profits. When the companies go public. Then you have, depending on the type of vehicle, you may have companies that are raising corporate depths where they need to give back a six dots 2%. You have seen from the US what demoed and round that the average cost of capital 18. Understanding Financial Statements: Alright, entrepreneurs and investors. We are in lecture three and chapter four. So we under Corporate Finance Fundamentals and after having discussed cost of capital and how to look into value creation from an investor perspective and also from an entrepreneur perspective. We will now be very lightly touching upon the financial statements and the main tools that are being used on financial statements and what's the purpose of it. So when you look at a company from an investor perspective, so you as an entrepreneur, I have to think like this as well. Because probably accept if you are very rich, you will have to raise money from external investors. What investors want to know is what actually the company is worth. But sometimes more than what the company is worth. What type of assets the company is carrying in terms of tangible assets. So those are physical assets, cars manufacturing plant, retail shops, if they are, owns those kind of things. But also intangible assets like patents, trademarks, Any, any kind of thing that gives value or that can generate profits for the company. But also investors want to look into, and that's why financial statements exist as well as what kind of claims or liabilities exist on the company. So what are the claims that shareholders have on the company, but also potentially third party, let's say credit told us, of course, we're looking at the assets. Not only the investor is interested in looking at the type of asset, but also at the value of the assets. What was the asset? How is it carried? Is it carried at cost? What is the fair value, the market value of that asset, and then potentially any kind of uncertainty related to those assets or liabilities. The very end of the day. And this is how when I invest into companies, when I do what we call the due diligence, is that I try to reduce the risk of being deceived or reducing the amount of uncertainties are questions that I have by looking at, let's say the financial due diligence, but it's not only about financials, it's going to be a sales due diligence, legal due diligence, those kind of things. The next milestone typically when I mean, the typical process or path from you have started the company with your own funds and now you want to raise capital. You want to have an external investor. You're going to make this excellent investors certain amount of, let's say, information available. And of course, financial statements will vary, probably be required. And if the financial investor feels that the team, the products, if the financial investor, he or she believes that it's worth investing to the company, you will go into what is called a term sheet. So after the due diligence, where it's kind of a non-binding agreement showing the let's say the terms and conditions of the investment. So the valuation, the investment of amounts or percentage of equity, there are many specific provisions protecting let's imagine it's a serious a. What happens if a series B comes in? How the investor is protected on the Series a. Any preferences on liquidation, those kind of things. That's what we're gonna be seeing in a term sheet. But let's come back to the financial statements. But you understand the financial statements are really core when trying to see if the company is creating value, what the company is worth. You need to rely on financial statements. The financial statements show and they're gonna share with you the three most important financial statements. But basically financial statements show the records of the company and its financial performance from inception. And so one thing that I always tell to other investors, to other entrepreneurs is financial statements on an imperfect representation of the company. You gotta have some, I mean, if it's your accountants or it is the external accountant or the auditor's, there's gonna be some assumptions, estimation that will be done. And so always keep this in mind, is that the financial statements never perfect. There's always a representation with interpretation and with some assumptions for the company is worth. And also when we look at financial statements, normally, the external auditor always says that normally the financial statements have been prepared in the principle of forging, following the going concern. So getting concerned means that the company continues to operate for foreseeable future, the company will not go bankrupt. So that's the kind of thing. Also, when you look at fair value valuations of assets, they're gonna be considered not in a liquidation, in a fire sale, but they will be considered as going concern. So what would it be reasonable? Valuation of an asset, for example, financial statements they carry and I'm not going into the details of it, but they carry some requirements in terms of how information is presented, how valuation is done on assets and liabilities. To make it simple, there are three things that you need to know. What are the standards in terms of financial reporting you have IFRS, that's for International Financial Reporting Standards and US gap width, which is the United States generally accepted accounting principles. You may also have companies and your company being an entrepreneur, not being listed on the stock exchange, that will follow local gaps. You can have Luxembourg gap, Spanish gap, which is so Spanish generally accepted accounting principles. So you, but you can also follow IFRS. It's not because you are listed on the stock exchange that you have to follow. Ifrs are. But if you are listed on the stock exchange worldwide, you're gonna be either IFRS doing the reporting or under US gap. But you may only be privately owned company and you don't care about IFRS. I'm just going to follow local a gap regulations with its chart of accounts. Last but not least, as already said, that financial statements are important. And I do look when I have asked firstborn into the balance sheet and I'm going to explain it in upcoming minutes why I started looking into the balance sheet. But at the same time do not be fooled. Financial statements can, let's say as they are and I'm perfect representation of the truth of the company. You need to go beyond to value what the company is worth. And you can talk to customers to hear if they're happy with the product or not. For very, very large companies already discussed that in the strategic management part, you may look at net promoter score for the mode. You may look at competition, you may look at employee sentiment. You may look at rating agencies on the depths, but that does not exist for smaller privately owned companies. In the private equity world, you will need to do due diligence to look at financial customer supplier contracts, everything that is intangible assets. And in the venture capitalists who remember, we are here venture capital, very early stages of a company, whether they're, indeed, it's more of a gut feeling looking at the founders profile or the founders team profile or the complement, is there complimentarity in the team? Has the management team, what kind of problem they're trying, or the company that you are trying to solve. What are some potential total addressable market or the market size. That's the kind of thing. When you look into companies that you have to look into on top of the financial statements. But again, for publicly listed companies, you're going to find a lot of information because there's a lot of scrutiny on it for smaller companies while you may have, if you're lucky, an audited financial statement or you may have to ask for an audited financial statement when external statutory auditor. But potentially, you will need to rely before you do the investment on really guts feeling and some intangibles. That's the way it is. That's why the risk is higher on the VC side versus public equity. So kind of making the financial statements. And again, it's not the purpose of going down here deep into accounting things, et cetera. But what you need to understand and I'm trying to give you here the most important are the two most important keys to read financial statements and to understand financial statements. Basically, there are three main financial statement types. The first one is the balance sheet and that is the most important one. Remember when we were discussing in the previous chapter the value creation from the liability holders, creditors, shareholders to transforming that catheter, that money into assets and those assets hopefully generating a profit. I just explained to you what the balance sheet is. Liability holders, assets generating profit and then deciding if you're giving a written back to the liability holders, what people and myself and I was seeing this in a webinar. I was running last month with some of my students. I said that one of the things that I would have wished that my professors and university would have taught me even during my MBA much earlier is how to read the balance sheet because I did not understand what's different between the balance sheet income statement, cash flow statement, or maybe they didn't come and cashflow. But basically the balance sheets is the accumulation of wealth of the company since day zeros, since day one. So when I look into company and I have to potentially decides for my own money or for my shareholders money to invest into a company. I got to start looking at the company through the balance sheet because the balance sheet, it's not over a period of time. It's from these zeros on. So it shows how much money, how much assets, how much liabilities the company has accumulated since inception. It's also sometimes called statement of financial position. The difference with the income statement, sometimes called earnings statement and the cash flow statement and promise you in a lot of even mature companies, even the cashflow statement is not done. So you already have balance sheet and income statement. Is that the income same and the cashflow statement. And I will explain later on what, what's the difference between income and cash flow is that the income and cash flow and you sit on the graph here, are only on a specific reporting periods. The income would be the same. To make it simple like the balance sheet, it's not if it would look at day 0, day one until now, but typically, an income statement is from January 1st to December 31st for a quarter, for a semester, for a month. A balance sheet is from 0 to today, for example. That's really the fundamental difference is when you look at the balance sheet, it gives you a photography of everything that happened in the company since day 0, day one. That is not true for the income statement, that it's not true for the cashflow statement, income and cash flow statement. Look at a period of time. If I look at the balance sheet at any moment in time, it gives me this cumulative view since day 0, day one. That's, I think what I tried to show you. You hear through this graph that's very important. So the balance sheet is the accumulation of wealth since inception. The income statement is really the flow of wealth. What is coming in, revenues, what is going out expenses. The outcome of that will be sitting potentially as retained earnings, retained loss in the balance sheet. So really the idea of the income earning stem needs to be more fine-grained at the balance sheet and to see what is happening, what is coming in, what is going out through specific unit time per unit time, if it's monthly, quarterly, per week, per semester, annually, etc. And the cashflow statement, and this is what I'm going to be discussing in the upcoming minutes, is the same, but there is a different perspective on its income. You could recognize revenue. We were discussing this earlier, a couple of lectures ago. You can recognize revenue, but I have not seen the cash being paid by the customer yet. You may incur a cost of the supplier, but you have not paid your supplier yet. So there is a, depending on when you do the analysis, there may be differences between income and cash flow or income earnings statement. So what is coming in and coming out and also the cashflows because they're having payment terms. For example. This is where why I like to have an income statement and cashflow statements. Let's not be food at the very end of the day, I'm not going to be saying this in a couple of minutes. Both have to correlate back over a period of time. If you're sending out an invoice to the customer, that is worth, let's say, 10 thousand US dollars. But you have not received the money from the customer yet. So it's a customer where you have a receivables so you can already recognize the revenue if you have been giving him or her the product. But you may have 0 in terms of cash inflow. When the cash comes in, you see that both match. You have sin inverse of 10 thousand. You have collected the amount of money for the ten thousands. The difference between the two is 0. That's basically where I'm always saying. I've seen people cooking the books as we say, that tried to show something as the income statement, rest of the cashflow statement, the cashflow and the income always correlate back over time. Always, there is an exception to that. So those are examples of balance sheet income statement, cash flow statement is not the purpose of going into the details of it. For me, the most important one is a balance sheet and then indeed the income statement and seeing how the income statement follows the cashflow statement. But those are the three fundamental reporting documents, financial reporting documents that you need to know that exits. I tend to because cash is very important. We're going to be discussing at the end of this chapter. There's a lecture about cash management and sales management as well. But on cash is also always be attentive as an entrepreneur on your cash position and you're working capital. But we're gonna be discussing that later on. I was showing you here the financial, So the three main documents from a Mercedes Benz and Germany. And this is the Kellogg's balance sheet, income statement and cashflow statements. So the seconds, so first of all, before I go into the second row. So the first of all, again, repeating the balance sheet, is the accumulation of wealth since day 0, day one since inception of the company. Income statement cashless them are looking at a specific period of time. The difference between income earning statement and cash flow. I was giving you an example with sending out an inverse of 10 thousand, but you have not collected the cash yet is what we call basically, I mean, it's two different types of accounting principles. There is because there is a time difference between your cash movements and your business transactions. And we're gonna be discussing cash conversion cycle later on. When we're gonna be discussing cash, but imagine you are selling a product to your customer, but you already have had to pay the supplier. So you basically have spent more money that you have collected. So when you are giving the product to your customer, maybe the customer has 30 days to pay a product. So there's a time difference between the moment you have cashed out because you had to pay your supplier to get the product. And the moment you have been selling it and until the moment that the money comes in, if you're in retail, that's the advantage on your own retail. When customers buy something from a retail shop, they cannot go out of the retail shop with having, having paid. So this reduces the cash conversion cycle. If you are in B2B, for example, and you're selling consulting services between the moment you have to pay maybe your people on payroll until the moment you get your money? Well, there's going to be Tom different sometimes maybe two to three months. So this is really where different comes between income and cash flows. And because the income statement takes as well also into account, some non-cash items like depreciation. Depreciation is what is, Let's look at. So you have understood the time difference between cash and business transactions, but also you may have I given you this through, I'm explaining this for this example. Let's imagine you're a limousine service provider. Like UVA black, I have no clue. Something like this. You have two choices. You have the choice of when you need an assets to buy the limousine now or to rent the limousine. Let's start with the renting urine the limousine, you pay a monthly fee. So that's on the left-hand side of the slides here. And you're going to have a certain depending on how much the limousine we'll be using, you're going to have a certain amount of revenues that you can either bill, that you can potentially directly collect in terms of cash when people get out of the museum, I would expect it as luxury service. There is no cash transaction going to be probably sending invoice to the hotel that takes care of the VIP guests. It's not the v I peak as paying directly for it. Let's imagine this. So what you hope is that let's look at a period of five years. So is that you're going to be renting this limousine for five years. You have renting contact with Mercedes, for example. So you know what your costs will be on a yearly, monthly, weekly basis for this limousine and you're going to generate a certain amount of revenues. Let's say driving VIP customers from point a, from the hotel to the airport, for example. Okay. They're basically income and cash. All it's a pretty close without I mean, there is one which has a time difference, but there is no aspect of depreciation and amortization. On the right-hand side, we under scenario where this asset, the limousine, you do not want to run it, you want to buy it. As an entrepreneur, you take that decision. So it goes the following way. If I'm buying, if I'm the entrepreneur, I'm buying this limousine from the Mercedes garage, except if they finance me the limousine which would then be potentially renting or leasing, etc. But we are on the right-hand side. I have to immediately let's imagine pay 100 thousand US dollars to the Mercedes Benz garage. So I have this outflow of cash. This will, I mean, my bank account will be hit by this minus 100 thousand. So it's a real cash outflow because I decided to buy the limousine. On the other hand, income will be diluted over five years because the useful life of this tangible asset, which is, in this case, limousine, will in fact be used during five-years. Useful life of this asset is five years. And I got to have an income or revenue or stream of revenues, revenue stream over the next five years. So what accounting rules allow you is when you have this is in fact to depreciate your asset over its useful life, which means that I can no longer cashflows them, but on the income statement can actually take the 100 thousand. That's an assumption. I'm trying to explain it in either way, you take the 100 thousand and in fact, each year you are can I say virtually incur a cost of 20 thousand. So you depreciate the asset value. So in the balance sheet, you're gonna see from one year to the other that in year one, the value of the cow will be one hundred thousand and eighty thousand and sixty thousand and forty thousand and twenty thousand. And then the income same, you're going to incur depreciation cost of 20 thousand each year. There are some tax reasons related to it because. Governments tend to and tax administrations to give you incentives when you decide to invest, you can say remove some taxes from this versus renting, which will only be operational expenses. Why investing will be considered a capital expense? Yeah. Is where you see the difference is that the income statement will show minus 20 thousand for every year for the next five years, while your cashflow in year one with minus 100 thousand. So you see that in year one, your cashflow says minus 100 and your income says minus 20. But in year two, year three, year four, year five. And this one I'm showing on the right-hand side the cashflow statement. There's going to be 0 cash outflows for the car because you bought it in your one and you have fully paid off the car. But on the income same you're going to have in year 2345 minus 20 K. And you see that at the end of the five years, the U1 minus 100 K cash outflow and then 0 for the next four years, that's 100 K. And the sum of the minus 20 K per year over five years at minus 100 K, both correlate together. It's just that the tax treatment will be different. Then last but not least, the statements are linked together so you cannot make up things. And this is what I'm trying to show you here, is, of course, at the very end of the day, everything goes back and flows back to the balance sheet because the balance sheet is the most important report, document which shows the accumulated wealth or destruction of wealth of value since the 0 they want creation of the company. So basically the income statement, if you're making a profit, this profit will appear. In fact in, let's say the retained earnings of the balance sheet and making it as simple or potentially retained losses. So if you started with a capital of 10 million and every year you are having a net income of minus 1 million from the income statement while you are destroying equity every year by 1 million at the very end of the day, you may end up without equity or having a negative equity value. The cashflow statement is the same. You are collecting cash, you are having cash outflows because you need to pay people, suppliers, external consultants, external accountants, whatever. And even potentially shareholders. Bank loans that you need, need to pay off your adapt. And you start with a certain cash position at the beginning of the quarter of the year and you end up with another cash position. Well, the statement of cashflows, the balanced position of cash figures as well. In the cash and cash equivalent in the balance sheet. The income result sits in the retained earnings, retained losses. And I mean, if of course I mean, if it is decided to not redistributes through returned to shareholders paying off debt. But if the money that has been earned is just kept, you will increase the equity, the book value of the company, and the balance of the bank accounts, of the money bank account that you have will sit in the balance sheet as cash and cash equivalents. I'm just showing you here the example is that in the Mercedes Benz. So balance sheet income statement, cash flow statement. You see that the figures are linked together and in the Kellogg statement, it's exactly the same. So you have the cash and position sits in the balance sheet in the current asset as cash and cash equivalents. And then the net income and what is remaining. Then, depending on the distribution decision by the board of directors, by the shareholders, may end up in the retained earnings if not cashed out to the shareholders or to the credit told us before. But that would have an impact on the cash position. So then the cash position would in fact be smaller. Alright, I got to stop here because it's not the purpose of, this is not the purpose of being an accounting course. You're going to have an accountant for you. But I think that the most important things that you need to be aware when you look at the financial statements are what major financial statements exist in terms of reporting, that they have to follow a the IFRS US gap. If you're a listed company and if you're not listed company, it's going to be the local accounting standard can be local gap, but it can also be IFRS. Because some, let's say jurisdictions do not want to reinvent the wheel. And they say, Well, my local accounting principles are in fact IFRS, which makes things easy to be very honest as well. So then you have, we've discussed balance sheet income statement, the cashflow statement. Remember the difference, the timing difference that balance sheet looks at accumulated wealth or losses from the 0 they want started the company. Income statement, cashflow statement look at a certain period of time. The difference between income and cash flow. There are basically two differences. The first one is there is a timing difference in cash collection between recognizing revenue versus or incurring a cost versus when you have to spend the money or when you collect the money. The second one is on assets, on tangible assets, for example, but it works for intangible assets as well, is that the income statement reflects the precision amortization where the cashflow does not. Try to explain this to you. I hope in an easy way through a tangible asset where the company that provides luxury VIP services buys the car versus runs the car. Remember at the very end of the day, income statement and cashflow statement always reconsider, re correlate together. They have to correlate together, reconcile on the amount of time where the asset was depreciated, for example, otherwise, somebody is cooking the books. We're wrapping up here IN last but not least, that of course, that the three reports are linked together. So you're going to see in the balance sheet, the end position. So the end balance of the bank accounts and potentially if profits are not distributed to pay off debt or to pay back shareholders is going to be accumulated in the retained earnings section of the equity of the balance sheet. But the three documents are linked together. They have to correlate together, otherwise, it doesn't work. So with that, we're going to wrap up here this lecture about financial statements. Again, it's not the purpose of this going deep into accounting things, but really just giving you a sense of as an entrepreneur, what are things that you need to know on, on, let's say, treatment of let's say the financials depending on if you're looking at the balance sheet, income statement, cash flow statement, and I think at least that's the minimum that you need to note for their eyes. You're going to have a specialized accountants that will support you. In the next section, we're going to be discussing the main accounting and auditing principles, which are important as well. Then we're gonna go into company valuation. Alright, thank you. Talk to you in the next lecture. 19. Main accounting & auditing principles: Alright, next lecture and printers and investors are going to be discussing the main accounting and auditing principles. Because remember I said in the very beginning, why does corporate finance deserve a specific chapter? Because at the very end of the day, you are accountable and I'm accountable if you are the owner, shareholder, or director sitting at the board of a company, There's legal responsibility that comes with it. So I think it's important that you understand the main elements also when looking. So first of all, understanding How to, what does it mean to create value for shareholders or the cost of capital? Understanding the major and the main financial reports, financial statements, and the differences in terms of treatment between the three. That's what we did in the previous lecture. Now looking as well because there are certain one in time. Remember we have this ideation lounge, growth, maturity. When the company will grow, you're gonna be exposed to statutory auditors are going to be discussing this now, so you can adjust, let's say, half simplified financial reports that are not overlooked by an excitatory auditor. What do we need to have an external auditor that challenges and looks at what your accountant, if it has an internal personnel external service is doing and making sure that the financial statements are correct. That's the responsibility of the external auditor as well because there is a legal liability. Because you are in fact, I having an economic activity and the ministry is asking, well, give it after a certain size, I need to have a certain level of assurance guarantees how the company is run. So I am obliging through law to have a statutory auditor audit the books of the company, starting or certain threshold of size of company. This week we're going to be discussing very quickly here. So what are the expectations when you look at financial reports before we go into auditing and statutory audit, is that basically the responsibility of you as the owner, as the entrepreneur, but also of the accountant, is there are a couple of attributes principles that have to be respected when you present financial statements. So we're going to start with the first two, which is basically a fair presentation and also going concern. Fair presentation is what? It has to show. A faithful Presentation of everything that is going on in your company from a financial perspective and any other events and conditions. So remember we said that financial statements are not perfect. They are already a simplification of what is going on in the company, but still the expectation on the presentation of financial statements, they have to represent the truth as much as possible and that's your responsibility and that's the responsibility of your accountant as well. Then going concern normally except if you are in financial distress. But you always prepare the financial statements on a going concern basis, which means that do not have the intention to sell, to liquidate the company, to seize the business of the company. So this is what we call the going concern basis. We're going to see this term again coming up. When you look at valuation of companies, you can value a company at its liquidation value. But normally people do the valuation at a going concern or on a going concern basis, which means that a company may it doesn't mean ongoing concern. The company is profitable, but at least you consider that the company will continue to operate and potentially there's going to be new capital coming in by the shareholders, by, through a bank loan, etc. So that's what really going concern means. Another thing that is important on the affair of presentation is how you value assets. And there are two ways of valuing assets. You can value them at historical cost, but also you can value them at its current fair value. And this is the case. Imagine you are an investment holding. Your business is to take money from your customers and invest that money into the stock exchange. And the written that is generated, you're going to take some fees of that that will pay your operations and the rest is written for your customers. How do you value the assets that you have just invested into the stock exchange? Because the Stock Exchange is going up and down. That typically we're going to use a current valuation scheme and other historical cost. What we typically see in balance sheet being put as hissed at historical cost, not at S, but at historical cost. For example, land, land will not be depreciated over time, but it will also not be valued at its current valuation. It will be carried at cost in the balance sheet. That's the kinda thing that you need to be aware of. That the valuation of assets, there are various ways of doing it. A stock inventory, how do you value that? Is it first in, first out, because maybe the prices of the goods and the materials are changing over time. How do you deal with that? So I mean, there are methods for that. I'm just telling you that do not be fooled that assets have different ways of being measured. A very important thing. We already touched upon it when we were discussing the income statement versus cashflow statement and the differences in treatment between how you recognize revenue, how you recognize costs, versus how you recognize a cash outflow for an asset that has life, for a useful life of five years that you're going to be depreciating over five years. So basically they're also two accounting methods. And normally, I mean, with the exception of the cashflow statement, most of the companies do accrual accounting. And i've, I mean, we're going to discuss scandals later on, a couple of minutes. I have been in most of the companies they prepare the books on through the accrual accounting method. What does accrual accounting mean is that when you record the revenue, first of all, you are allowed to record the revenue because the expenses have been incurred. What you cannot do is, and we're not speaking about cash collections here are cash outflow. Cash payments is really here. If you are, if you have given the final product to your customer, you recognize that as revenue, but you need also then to incur the cost for producing that product that you just sold at the same moment in time, in the same period to make it simple. So this is where you need to be. Let's say attentive that. And obviously this is where people and I've seen this in startups as well. They tried to make things look better as they really are, because they record much more revenue that they would not be allowed to recognize and they do not show the costs. That would be even considered as a off-balance sheet item. And I hate off-balance sheet items. So to make it simple, is accrual accounting is you record and it flows also with a cost. So both together. And it does not take into account if you have collected or spend the cash. That's not the purpose of accrual accounting. So you can recognize revenue even though your customer has not paid you. You can recognize the cost of a supply even though you have not paid your supplier yet. That's accrual accounting, cash accounting. Know, that's probably not easy for you. Well, it's the other way round. You incur a cash inflow. When the customer has paid you, paid your invoice, you incur a cash outflow when you pay your supplier. So those are two different ways to accounting methods. So normally, if you look at financial reports, they are all done following the accrual accounting methods. And this is why a lot of companies, they do not have a cashflow statement. But I'm always asking him because I'd like to see the difference between the accrual accounting that is shown in the income statement versus the cash accounting which is shown in the cashflow statement. Because at the very end of the day, both have to correlate together. And if you would only have the Income Statement of Work potentially, they can show you things that you would feel that they are better. Where the cashflow statement, if you would have that you would see but gas, we have this trunk so much cash every year. So that's why I like to have the three balance sheet income statement and cashflow statements. Then as well. In the financial statements, there is a matter of frequency of reporting. I mean, if you're a young startup, you're not exposed to, let's say a sanitary audits. I mean, in my opinion, for external purposes, it will probably be enough to report annually. Maybe internally, you want to see an income statement prepared by your accountant on a quarterly basis, very probably on a cashflow statement as well. Larger companies that are listed on stock exchanges and they are exposed, first of all to International Accounting Standards, IFRS for the whole world and US GAAP, if you're listed on US stock exchanges like New York Stock Exchange, nasdaq. But on top of that the regulators, so there are, if I take the example of the US, you have a new organization that is government owned, which is called the Securities and Exchange Commission. They have laid down a set amount of rules where, because it's a matter of external investors trusting the US market, this is how the money, money markets, let's say markets work in general. Is that the SEC has said, Well, if you're listed on a US or US stock exchange, you have to comply to once per quarter, you have to report through a ten cure report, the company performance with all the financial statements, etc. We allow you that the ten q reports is unaudited. So you will not have an external auditory viewing it at least once per year. You have as US listed company to provide a ten K report. That's the annual report. And it has to be audited by an external auditor and it has to include the auditor's opinion. So there are some terms of reporting, There are some obligations if you're listed on the stock exchange, if there are material unscheduled events happening, you need to report them through an eight K report. If there are changes in beneficial owners, for example, changes in directors, all that has to be reported. So obviously, the bigger the company, the higher the regulatory obligations, the smaller the company, the smaller the reporting obligations are. So probably, I said if you're a young startup, you're going to local gap. If it is not IFRS. And with local gap, except if you're in the US, you've got to follow US GAAP probably as well, but it will be a simplified version of the balance sheet, the income statement, the cashflow statement, because that exist as well. And you mean you do not have external shell and so you're not obliged to report all of things. And at least probably once per year you need to publish their financial statements. And we're gonna be discussing when statutory auditors come in. Another element that is important as well. And you have to be aware of this as an entrepreneur is, I mean, you have to have consistency on how you present your figures. You can not from one year to the other change the way how you treat revenue, for example, how you calculate the value of your assets. Except if there would be an international on external change to the standards that happens with IFRS, for example, with US GAAP. But you have to have consistency and if you do changes in your accounting treatment of things, where you have them to report it. And again, you are allowed to do changes in how you treat revenues, for example. Of course, the accountant has to agree on this. And then if you have decided to change it once, you kinda the after changing bag because in fact you said no, it was not a K. In fact, I prefer the previous method because it was showing better results that don't work like this and you're not allowed to do this. This is where you as an entrepreneur start to become liable because it will tell you, well, for me, you're not allowed to do this. But at the very end of the day, it's your call as owner of the company, if you are the entrepreneur or me to say no, I want this treatment to be accounted for like this. So be, be attentive to this. And also another important principle that I really want to highlight is the last one here on this slide is the prudence principle. So I'm always saying companies, It's not a beauty contest. And I always said to my senior managers, if I were sitting at the board of directors, is I don't want figures to be made up to make me happy. I want to of course, to have the real figures. And that's why when companies I'm sitting in big, we're going to have external auditors confirming to me as an independent director that the figures are correct that are being served by the CFO and by management. But what I always want to have and that's a general principle that you have to follow as entrepreneur as well when you look at financial statements, and I think it even goes beyond financial statements, we're coming back to culture and values is being prudent and represent, maybe represent less revenue versus taking too much risk and recognizing revenue. And of course, there's gonna be some accounting treatments related to that, but do not overestimate things. I think it's really important that you are conservative when you are recording things so that you ask your accountant to be conservative when accounting for things. It is on the income statements side of things. So income versus outflows as well. Through That's because at the very end of the day it's about making money, right? We're not speaking philanthropy here. We are speaking about investors or put your money into your company, or you put your own money into your company to generate profits, to become more wealthy and have fun and solve problems. But when you have and again, after the lounge growth as you're going to have people working from you and those people and you want to motivate them through giving them incentives. Incentives, create risks. And, and always remember that the purpose of a company is to create long-term value for the shareholder. It's not short-term or long-term value. Normally a shallow should behave like this. And so what happened is that when you have, this happens very often for very big corporations. When you remember when we were discussing microbiota, competitive, we love strategy that KPIs and the balanced scorecard we were discussing when KPIs becomes a strategy and not just the consequence of strategy. Where basically people are making whatever is possible, and sometimes things that are borderline or even potentially non-compliant, just because they're gonna get an incentive on it, because they need to hit the KPI. And this is where you're going to damage the reputation of the company. You're going to harm the company as well as the shareholders. And for that reason, we were discussing Wells Fargo. Remember that, let's say the growth targets of Wells Fargo and that the management was pushing down the throat of the employees and the whole management chain became the strategy. And people who are even forging signatures just to hit the incentives and hit the metrics to receive the incentives. This is where in fact, because everything is a matter of trust also in financial markets. Is where government sets, okay, but wait a second. We know that there is a risk because the bigger the organization, the higher the probability that people will cook the books. Try to achieve the incentives by maybe doing things that are borderline in order to hit the targets. So what we need to do, because specifically for publicly listed companies, when the external investors that are not, let's say an external investor is a shareholder of the company in order to protect them and to reduce the risk. And also to protect external creditors like banks, governments, and most, I think most emerging developed countries have requested through law. This is where Logan becomes important. There are some audit requirements, so that's there is an external third party which is called the statutory auditor. That's doesn't reports, that is public about how the statutory auditor feels about the company. The company is well-managed and if the financial are being presented, correct or not. So why do we call that the statutory auditor? And before we go into that, sorry, one thing that is important also to mention here is that I said that when you have started your company as an entrepreneur, you don't need an external statutory auditor depending on the country you're in. You can self report your financial figures. Are having an accountant that prepares the figures for you. At the very end of the day, the statutory auditor doesn't change anything because you are liable. If you have if you don't have a salutary to audit or if you have or don't have an accountant working for you. So you can self-report. But what the government said is, after certain size of company, of balance sheet, of income, of number of employees. Basically, I'm pushing and I know it as the government. I know it's a cost that companies will incur. But given a certain size of balance sheet of income or employees, they will have to fulfill. And to pay an external auditor a couple of thousands of euros and profits in the ten to 20 to 30 thousand, at least for early-stage companies that are, that have passed this threshold, they will have to pay this external statutory auditor for providing an external audit opinion about the financial statements and how the company is being managed. That's the role of the statutory auditor. Not everybody can become statutory auditor when you have probably heard about the big four editor or editors and Young KPMG Deloitte, PwC. In the past, we had Arthur Andersen, we're going to be discussing scandals later on. But they have to certify, to their best knowledge the financial statements of the companies, but also of public entities like the government. Government is also themselves are exposed to Secretary audit as well, which makes sense because it's public money. We are as taxpayers and citizens, the shareholders kind of the government. That's why we vote for or against government, governments as well. And on top of certifying the financial statements, the statutory auditor has also expressed an opinion and this is what we're gonna be discussing it because you need also as an entrepreneur to understand a little bit of vocabulary around audit opinions. And the idea is really of improving the trust and the confidence of external investors or other stakeholders of how a company is being run. Alright, so if you look on the right hand sides, I'm taking the example of Luxembourg. If you have a balance sheet of more than four million, four million euros, or you have an income that is beyond eight dot 8 million and you have more than 50 employees doing a self-reporting of your financials, or maybe having an accountant who creates the financials for you and you publish them is not good enough. You will have to pay an external auditor. Well, it's clear that if let's imagine an assumption and yearly audits, external audit costs you let's say €30 thousand. If you have a net total of eight dot 8 million, you will probably be able to afford the cost of incurring a statutory audit. It's clear that if your company has 50 thousand of revenue, you cannot incur a cost of 30 thousand for an externalist statutory audit, that's just not possible. So I hope that you see the graduation between a company that has that exists, that has been incorporated and has launched that does not have the money to pay for statutory audit. While there It's basically self-reporting. Having an accountant that does it for you, maybe you incur a thousand Euros per year. Of course, you need to calculate this in. But at the very end of the liability does not change if you do self-reporting our financials, there is an external audit of your financials. And if you're even a listed company at the very end of the day, you are responsible for that and also legally responsible. So keep that in mind. It does not change. One of the things I wanted to share with you as well. Just guessing at the typical external audit is performed by the statutory auditor, the recommendation I'm always giving well, there are two things that you need to be attentive to. The first one is that you do not end up in conflict of interests. It means that your statutory auditor. So if you would have passed the launch phase, your new growth phase, where you have passed those thresholds that was shown on the previous slide. Like for that 4 million balance sheet, 88 minute increments, 50 employees and Luxembourg, that's the statutory auditor because you like them, is doing none of advisory. And this creates a conflict of interests. If now the statutory auditor, they shall not provide advisory are very, very minimal. And also my recommendation is it's not good to change the statutory auditor every year. This is what I'm showing you with you as my experience as independent board director, but I like to have external auditors be replaced every four to six years. Why? If you change them too early, what will happen is that they will not be able to go into the depth in order to understand the organization because of first year, yes, they are professionals, but also they are limited in time. And also they do not know exactly the company in year two, year three, then we're going to go deep because they already have learned in year one how the company works. What are the things that they need to be attentive about in revenue recognition in, I have no clue in valuation of assets, in cash management, those kind of things. On the risks that are there, for example, on the accounts receivable, at how much of them are really receivable and how much of them are fake, for example. But after, in my opinion, five to six years, they become so much in the comfort zone and management so good that then in my opinion, they are no longer able to fulfill the role of being independent and providing to me as an independent director. And I'm representing the shareholders a true it's a perspective on things. So I like to change the statutory, so the external statutory auditor every half decade, more or less, that's a recommendation I'm giving you as an entrepreneur that you build up this knowledge as well. And also when companies become bigger, very often, of course, the external statutory auditor will come with an opinion report. And very often the board of directors, if it's a bigger board of directors, they have a subset of the board of directors, which is the audit committee. Board of directors have let's say the full board. And when incisional taken, there is a majority, sometimes two-thirds, and have to vote in favor of a decision on a specific matters. You typically see three kinds of committees. You have an audit and finance committee, you have a remuneration committee for senior management. Then sometimes you have a strategy committee or sometimes you have a compliance committee that is sometimes mix up with the audit, but that's the kind of committees that you see that are a subset of the board of directors. And so normally the external audits, but also the internal audit, if that function exists in your organization. They technically reporting to the CEO, operationally speaking, but they really report for independence reasons into the board of directors. Myself, from my experience, I had I have requests to change an organizational chart of one of the companies. I've been sitting at the board of directors because they were showing that the internal audit and external audit was reporting to the CEO. And I said, no, this cannot be guys. And external statutory auditor and even the internal audit function can only report for independence reasons to the board of directors. And or if an audit committee exist, then to the audit committee, which is only basically a subset of the board of directors, but not to the CEO. The CEO can only operationally manage the internal audit as an example. And typically, what happens is that this excellent statutory auditor will then create a provide an opinion report that is being reviewed by the audit committee. And let's don't be fooled. There's going to be always conversations. And this is from my experience, how I always deal with Axon and statutory auditors. I have a very specific process, so let's imagine that fiscal year. So between January and December, I always ask because typically you need to provide to publish the financial reports of the fiscal year, let's say 2021 in April, May 2022. But I always do is I ask November of the ongoing fiscal year that is close to an end to have a kickoff meeting with the external statutory auditor and potentially with internal audit if that exists, then we agree on the process. What are the big milestones that they will report back to the audit committee, the draft reports so that we are ready to recommend to the full board the final financial statements report by, let's say, April, May timeline, depending on the legal obligations and legal timeline obligations that you have and having then also a meeting with the external auditor. Well, they present things to the audit committee. For example, things. I'm just showing you my experience that I typically ask. Also as well, the external auditors, I want to make sure that they have reviewed the bank accounts, that they have received from the external bank of confirmation on the bank balances, for example, that those figures are not forged by the CFO. I'm also asking the axon auditor, they confirm to me that they have checked the list of authorized signature is on the bank accounts and those kind of things. And this is where I'm asking the companies, I'm setting up the boat. They are bigger. They do have this external statutory audit, but it's a good practice for you as well as an entrepreneur if you have a smaller company, while making sure that caches correctly run, you have a document comes from the bank. If you have an accountant that really shows what the company is telling you, this is the amount of cash that you have, that this is also confirmed by the bank. And also he's authorized on the bank account, for example, of your company. I mean, this is common sense, right? But a lot of people do not look into those kind of things. This is where experience actually, of course comes in off those independent directors. Then when we discuss about the opinion. So I hope that you understood the process when we discussed about the opinion is what kind of opinion may in fact come out of the statutory audit. Well, basically, I'm trying to show this visually to you. If you have an unqualified opinion which is like, okay, everything is green, nothing to say, nothing material to say. You may have unqualified opinions like, yeah, maybe there is something that we as external statutory auditor and we need to report and they are allowed. Again, also very important and this is also in the way how I behave with external and statutory auditors when they publish the draft report to the audit committee or to you as an entrepreneur, if you are exposed to an external statutory auditor because you pass those thresholds of size of company. While you may disagree with maybe one or the other statements of the external statutory auditor. And that's part of the conversation with the statutory auditor. Maybe that's some words that maybe one other thing that you want to have adapted and that's fine. That's part of the conversation with the statutory auditor. But the one thing that you are not allowed to do is to force them to change something. Because, I mean, from a principle or perspective, that's not the purpose. They are, they shall be independent, right? So you can ask them maybe this kind of wording, would you be agreeing on adapting it for this reason, for that reason or maybe what you put here is not correct because this and that reason and if they would be willing to change, but they're allowed to say, No, I'm not willing to change, then you cannot do anything about it, even though you are paying them. They are supposed to be independent. That's it. So if they have qualified, are making a disclaimer on adverse opinion while you will have to live with it because that's the role of the external statutory auditor because they are mandated by the government through the law that given a certain size of company they have or you have, you are obliged to publish financial statement report that has been where there is an opinion that carries an opinion of an external statutory auditor, even though you are paying for them. It is as it is. And this is what governments are trying to do to keep a certain level of trust in the market and the financial markets to investors, to stake holders In, in their economy. This is how it works. I'm taking the example of Kellogg's, where you sit here in the example in the blue frame where you see that, for example, the auditor, I don't remember if it was KPMG, doesn't matter who it was. The internal audit or how does an opinion look like? They say it's opinion on the financial statements and internal control over financial reporting. They say in our opinion, the consolidated financial statements referred to above presents fairly in all material respects the financial position of the company as of January 2021, et cetera, blah, blah, blah. So you basically see that here. They probably have no problem on the opinion that they're presenting. And of course, you as an entrepreneur, as a CEO, as a board of directors, that's what you want. You want. And you're looking for an unqualified opinion that there is in fact, nothing to report by the external auditors to the external stakeholders. And this is where sometimes what can happen is that nonetheless, what I was just commenting couple of minutes ago that management pushes the external auditor because as they are paying them and even potentially they are giving them a lot of advisory services that they should not give. Look at the Sarbanes Oxley related regulation where you may end up in things. Not correctly handled and this is where taking one step back outside of the process, why we have external statutory auditors when they come up, what kind of opinion they come up with is like, even though there is a clear row that is expected from statutory auditors. And you remember that I said that financial statements are not precise. There are always a simplification, a representation of the truth of the company, because it is like this. You just looking at liquids, marketable securities mean the market value changes every day. So how do you value that assets? But okay, no longer coming back on that. Despite having statutory auditors and laws, etc, we always end up regularly in scandals. The latest, biggest one was why are caught in Germany? Just have a look and Google wire card. But there was Lehman Brothers, was Enron, MCI, WorldCom. And those are all big companies. And I've just extracted from Wikipedia the accounting scandals. That happens. Sorry to say, but we have one that is every year on a big company. So imagine how this works for smaller companies and all of the statutory auditors are impacted by this. I don't want a finger point on one or the other, but basically all have just a catalyst. The catalyst there is Ernst and Young KPMG, PWC involved in it. Deloitte has been involved. Smaller ones, more regional ones. So again, I mean, I do like external statutory auditors and I like to be respectful of them, and I'm very clear about what I'm expecting from them when we have this kickoff meeting on a yearly basis before the external audit starts. And also, I'm extremely clear about to my management that I don't want to have any conflict of interest with the statutory auditors. So one of the things, for example, if I asked my management as well before meeting the statutory auditors for the draft financial report is like, can you extract from the accounting system how much advisory services we have paid last year to the external statutory auditor. And I hope that the figure is extremely, extremely low. If not 0. If the figure is high or higher than what we are paying the excellent statutory auditor for executing the external statutory audit. I going to have a conversation with management about how can this be, how can our external auditor be independent if we're giving them more money for consulting services versus we are paying them. My shareholder is basically asking me as an independent director sitting in the audit committees to have an independent review of what management is doing. I cannot do this if there is a conflict of interest because we are paying them so much on consultancy fees. So that's the kind of thing that you need, need to be attentive about on how really how this works. With that, again, just summarizing here. I mean, we have seen a couple of things in this chapter just to wrap up here before we wrap up, I mean, we explained or I tried to explain to you, what are the main principles, how you report on your financials. We discussed power presentation going concern prudence. We discussed about accounting methods like accrual versus cash. We discussed about things like, what are the frequency of reporting that you're obliged to report as an entrepreneur, what it depends on the size of the company and every country is different. You saw this through this yellow table when I was showing you here at which moment in time statutory audit kicks in. If you're a small company just launched you. I mean, you have to deal with with a lot of other things and now excitatory audit, but given a certain size or government says Hold on a second, I need to guarantee Trust. And as you are now having more substance as a company, I obliged you to execute a statutory audit. And this, of course, is true, even more true for listed companies. Then again, remember that an excellent statutory audit is not a guarantee by itself. Remember the independence that you should expect, that you shall expect as an entrepreneur if you are the shareholder or the owner of the company from the external audits. And so, but again, always keep in mind that financial statements are never precise. It's always a simplification of the truth of representation of the financials and the operations of the company. And also remember, very important, we were speaking about the independence of the axon auditor, so they shall report into the audit committee. But also, if you have a chance to grow your company so big that you have an internal audit. But internal audits shall report into the Board of Directors, operationally, may report into the CEO, but you need to provide and to guarantee independence of those people. But you as a the audit committee about other writers, you need to give the internal audit the means as well. That's also part of your role as an entrepreneur. So let me wrap up here. I hope that you understood why I wanted to bring you, that you get this, Let's say first set of principles when you will have to deal with financial statements, when you will have to deal with accounting and auditing practices. I hope I was able to share my experience with you. In the next lecture we're gonna be discussing about company valuation because at the very end of the day, you need to know the fundamentals on financial statements because of capital accounting, auditing principles. But as an entrepreneur, what you want to create is a value for your shareholders except, except know. But potentially you are the shareholder because you are the owner of the company as well. And maybe you need fresh capital or you want to bring in a new shareholders. 20. Company Valuation & Equity dilution: Welcome back entrepreneurs and investors. We're still in chapter number four about corporate finance fundamentals. And now we're gonna go into a very important matter which is valuing and the valuation of companies. Why is this important? And of course, they're gonna be elaborating this in this lecture is that there are two ways of looking at it. If you are on the buyer side, that you want to raise capital as an entrepreneur or from somebody who potentially has money available, they're gonna look from a buyer side what your company is worth. And if you're on the seller side, meaning you as the entrepreneur, you will have to develop an opinion what the company is worth versus the amount of, let's say, of equity that you want to sell. So both things are pretty important. And a core aspects specifically for entrepreneurs related to corporate finance fundamentals is really this part of company valuation. So I already introduced as what the moat around who is a professor of finance and he's considered as the Dean of valuation. He's working at the Stern School of Business at the New York University, and he always sets, knowing what an asset is worth is really a prerequisite, is a very good foundation in order to take this intelligent decisions. Of course, by discussing here about intelligent investment decisions. So the AG devaluation is basically trying to determine, reasonably determine what an asset is worth. An asset can be accompany an asset can be a part of the balance sheet of a company. It can be tangible asset occur or supply chain. It can be an intangible asset like a trademark, like a copyright. So really the intention and the objective of valuation is either an inflammation purpose. So you have your financial analyst, you want to express an opinion about that company, what the company is worth. So that's one reason why people do valuation. They are external to the company. They just want to provide that information. They may sell the inflammation as well and monetize on devaluation that they have been doing. There is also the objective of variation can be related to a transaction purpose. So that's really linked if you're the buyer or seller side and you see it now here what I was saying in the introduction, that depending if you are willing to spend your money and buy an asset, or if you're on the selling side and you want to sell your company part of the company's assets. There is a transaction purpose behind it. And obviously, when you're on the buyer's side, you will try to buy as cheap as possible and you're going to try to find all types of, let's say, factual arguments to avoid overpaying. And when you're on the seller side, specifically you as an entrepreneur, you're giving away to equity because you want to bring in, in this series a new investor where you will try to make up the figures, but you will try to sell as high as possible and to show the best possible figures to potential external buyers because you are the seller and you, what you absolutely need to avoid is understanding your company, of course, are part of your company. The typical evaluation mistakes, they come from where in fact, we're gonna be discussing what type of valuation methods to Xist. And of course, they will depend on where you are in terms of maturity of the company. So typically is when you value a company, you're going to probably look at the future hope of cash inflows, the future hope of revenue streams, of profitability, but you do not, do not have a crystal ball. I mean, nobody could have predicted COVID for example. So there is some, let's say, there are a lot of sources of valuation errors because you do not control macroeconomic environment. You cannot predict this one. Just read the Peter Lynch or I mean, I think that you'll find it on YouTube as well, the patella and video, New York 1994. He was speaking at the National Press Club. And it was mentioning that if the Fed and they have a lot of calculation power, they have a lot of analysts. If they only know three to six months in advance, how interest rates will look like, because there are so many factors from a macroeconomic perspective that are evolving over time. Now, we had, were coming out of COVID. We have now war in Ukraine, disruption on the supply chains. So there is a lot of uncertainty and actually this uncertainty has already on the cost of capital is bringing in a certain amount of uncertainties. And obviously, you cannot predict 30 years in advance what your earnings will look like. So there is some, let's say, estimations and guesswork that has to be done. Remember as well, if you're doing evaluation based on financial statements, I said here maybe my my term I'm using that financial statements are wrong is maybe a little bit tough, but basically financial statements, if they would be wrong, what I mean here, there are two things to fold. The first thing if financial statements are wrong, well, that creates a valuation mistake. But as well, there are maybe some evaluation of assets inside the balance sheet that are, let's say they cannot be correctly estimated. So that will also create valuation mistakes or errors. Also one thing in terms of vocabulary, There's difference between financial analysis and financial evaluation. Sometimes people tend to mix up things. Financial evaluation is really weighing what the company or the asset is worth. That's it. Financial analysis is really looking at the performance of the company. That's not what we're looking here. We're not looking at liquidity, profitability, solvency ratios. I mean, there are specific courses for that, but financial analysis complements the valuation. But the valuation is really being able to determine if I would have the money to buy that company or that asset. What's the asset worth? This way, I'm always saying that valuation is an art because art is an expression application of human creative skills and imagination. Because it's not a perfect science, you cannot do a perfect violation of a company. There's gonna be a lot of variables in it and guesswork involved in doing evaluation of an asset or a company specifically when those are larger mature companies. So it will not go, just as a reminder, before we go into the various valuation methods that normally the company's value comes from the long-term sustained growth in revenues, but more specifically in profits. And this is measured by return on invested capital. Remember, we had a conversation about return on invested capital versus written on equity and return on invested capital versus cost of capital. And how your company, if you're trying to sell a state of your company and you are looking for buyers, are willing maybe to buy 20 per cent of your company. How your company competes with other companies for the same amount of money from that investor at potential than investor has other investment vehicles like real estate bank savings account, long-term treasury yields. So keep that in mind and keep in mind that as we already said, that the act of valuation and the assets carry a certain level of uncertainty. So it's not something that you can be 100% precise. So coming back now to first of all, and we're going to practice out to practice exercises in this lecture about one of the categories of evaluation, basically, there are two main categories of alteration. It's the absolute valuation with asset-based valuation and going concern valuation and relative valuation. The one that I use most and I've been teaching this now for a couple of years, is really absolute valuation. Because it's one that I tend to prefer, because it allows me to be able to determine versus the price that the market or the seller is offering me what I estimate to be the appropriate price. You can. So absolutely, evolution has two sub-categories is acid-base variation to make it simple, is like balance sheets based valuation. So we're looking at the assets of the company and then determining what is the company worth. In fact, the disadvantage of just looking at the balance sheet, and I'm always seeing it like this. And I think it's Warren Buffett. I learned this from Warren Buffett is that basically you do not buy a company for its current, a balance sheet. You buy the company for its current assets, but the profits that those assets will generate in the future. That's why you are buying a company or a part of the company. It's not just because you want to buy it now, the assets that would only be in the case of liquidation scenario, but that's a very specific asset-based valuation method in case the company would have to liquidate, which is a country of growing concerns and going concern valuation means that basically you're not looking at the balance sheet, but you're looking at, you consider that the company will continue to operate in the future forever. And you are estimating on the, let's say, on the cash inflows, on the future earnings, on future income, what the company is, what it would be the going concern variations. What is here very important on us than is really that asset-based valuation is you do the valuation based on the assets of the balance sheet. That's it. Going concern valuation is you do the valuation of the company on the future streams of cash and revenues or income. That's the going concern and this forever what the asset based valuation, so the balance sheet based valuation is lacking, is it doesn't take into account what the company will generate in terms of profit in the future. And that's why most people, if there is one method of valuation that people know it and we're going to be practicing this is the discounted cashflow as they call it the DCF, which is a going concern evaluation. And they look at this period of time forever, and they evaluate the company based on that, then you have relative valuation. That's really, you're calculating ratios. And we're going to discuss later on when I will show you what kind of ratios exist. That's a very fast way of valuing a company and benchmarking that company with other companies in the same geography, in the same industry. So it's really more used as a quick test, but it will not tell you what the company is worth. It will only tell you what the company is worth compared to. Let's say, the market price that you get and compare it to other industries, other benchmarks, other similar companies. But it's a very quick and effective way of doing evaluation. But I will address this. So first of all, absolute valuation. So you have understood. So there are two main categories repeating. This one is important. There are two main categories, absent variation, relative variation. In absolute violation, there are two subcategories which are acid-base. That's the, you look at the assets in the balance sheet and you value the company based on that. But you're missing future streams of revenue and income going concern. As you can tell, the company will operate forever and you look into that one. So I have now structured here a little bit further and there's some granularity to it. You can, the first way of valuing a company is look at it's a market capitalisation. How many shares the company has, the company is listed on a public stock exchange. Of course, this does not work for private equity. And you multiply the amount of shares by the current market price, this gives you a valuation. And you have maybe heard over the last couple of years that, for example, Apple had a wasn't more than a trillion market capitalisation. One of the things as well as the book value method. So this is really looking at if that would be completely paid off, how much remains in terms of equity and dividing this by the amount of outstanding shares. It's not the purpose. I mean, here we are in entrepreneurship and strategic management course. There are specific courses on company valuation. I have one specifically as well, which really goes very deep into how to do book value, then there isn't adjusted asset method. This is typically interesting when you have assets like land, which are often carried at cost. Or for example, you have an intangible asset like a trademark, where the company carries it at a certain value, your valuation. But you have external brands, agencies that estimate that the brand value is much higher so that you can do adjustments of the value or the valuation of those assets. Predation value. That's very interesting. One is if tomorrow the company decides to shut down, the speed at which assets have to be sold will have an impact on the valuation probability will go down in fact. So the faster you need to sell, the more discount you're gonna give to a buyer to immediately transform the asset into cash. That's also a way of looking at absolute valuation. And sometimes when I invest into the stock exchange, I specifically during bear markets, you sometimes have companies that are really even below the book value and even sometimes at the liquidation value because market is super depressed. But again, it's not necessarily station just to look at book value. Book value is looking very good that you buy the company, that is maybe a reason to it, but that's not the purpose of this course. Yeah. Then you have in terms of going concern multiple revenue and earnings methods, There's chosen multiple. And in this method basically you have a business appraisers. You have big four companies, strategic advisory firms. They keep a benchmark of in this specific industry, what is the typical multiple on earnings that is being, let's say, used for a buyout, buying that company. And basically you're using these multiple as like a benchmark independent of the re-evaluation of the company. Then you have, we're going to be practicing this cashflow to the firm's free cash flow to the firm and Free Cash Flow to Equity. And we're looking specifically at free cash flow to the firm, which is called DCF, will not go into the details of this slide. I just showed it nonetheless with you. This is an extract of another course where you see where you find the information in order to do and to execute the various evaluation absolute valuation methods. I have not discounts, disgusting the dividend discount model of the Gordon Growth Model and the total shareholder yield. But that's, I mean, that's free cash flow to equity. But just be aware there are many ways of doing valuation. The one that I prefer most is really the book value methods, or at least the adjusted book value or asset methods. And really the discounted cashflow, discounted future earnings. And that's the DCF and the DFE are the ones that also most of the people basically use. Not a lot of people use the other ones, but those two are the most used. Then you have relative relations. So we have ratios like price to book value, price to cash flow, price to earnings, price to sales, enterprise value to EBITDA, which are the earnings before interest, taxes, depreciation, amortization. So sometimes you have. The academic world and the financial world that find new ratios because he believed that the ratios are now outdated and they reinvent something new. The very end of the day, it comes back to the same relative valuation. The advantage is that it gives you a ratio and that ratio is comparable with similar companies in similar sectors or in other markets, those kind of things. So it's pretty interesting to look into that as well. I do use relative valuation as well as very quick test to see if the company is cheap. The one that I typically use is price-to-book and price to earnings. But again, it's not the purpose of this training to discuss this same slide here as the one before an absolute valuation methods. Where do we find information? Obviously, when you look at price to book, you're gonna be looking at the balance sheet because the book value is the equity value of the company. We look at price to earnings. You're gonna be looking at the income statement. When you look at price to cash flow, you're going to look at the cashflow statement. So you see also how the three financial statement reports in fact are used to this valuation methods. And if it is an absolute but also in relative valuation methods. One of the things I was mentioning earlier is that depending on where you are in terms of maturity of the company, that you may have to use various evaluation methods. So obviously, when the company is very mature, the company is writing profits. The company has retained earnings, the company as positive cashflows, you're gonna be using those typical absolute valuation methods you're going to be using going concern. But what about when you're going if remember this curve, risk versus return, when you are going up that curve into the business angel, the world, into the venture capital world. Well, they're the company. I mean, you will be able to calculate the book value. The book value will in fact decrease every year because you're burning more cash and generating losses versus profits. So you're going to be using what multiples of, what multiples of revenues maybe you are looking at benchmarks. So you're going to ask business or strategic advisory firms to it, even if the company is losing money, if I would have to sell part of that company, what do I use to value the company? Well, they're going to tell you, these are the multipolar benchmarks. Just guessing, for example, I think was it when Facebook bought Instagram are now meet. I bought Instagram. I mean, I mean, Mark Zuckerberg put a lot of money and don't remember exactly the amount of money, but probably there was a lot of guessing part of that valuation as well or not, or he did his career calculations. What happens if Instagram is competing strongly against Facebook? What will be the quantitative impact of that? So just keep in mind and I'm just giving you an extract. How, for example, a key ally partners, which are, I think they are a private equity and VC fund to how they look. And this is one example. There are many VC and PE companies throughout the world. Even myself, I am sitting in a private equity and venture capital holding company in Dubai, in the board of directors? Of course, I have to think depending on what we are valuing. On the buyer's side, if we're on the seller side, what is the appropriate method of evaluation? And one of the things that is important for specifically for entrepreneurs now is that after half past, so let's take the assumption that you have passed the ideation phase, the launch phase, you have funded through friends, family, yourself, the company, or let's even imagine you're at 100% owner of your company at a certain point in time, except if you have, let's say deep pockets and you have unlimited capital and access to capital from yourself. So you can add biased by your own, your own cash to the company. You're gonna be at a certain point in time, require fresh money coming in. This is how it works, is like you have the idea and somebody has the capital and those tools have to come together. So what will happen is that if you need fresh capital, you will probably open your capital to new investors. And in order to do that, what does that mean? Opening or raising new capital? You're gonna be printing new shares. So let's imagine that your company has started with 10 thousand shares. You want to give 20 per cent away of equity ownership to a new investor, you're gonna give this new investor 20 thousand new share. So the total amount of shares, and we're going to be practicing this would be 120 thousand, for example. So that's basically the, what we call equity dilution. When you bring in an each round where you bring in new investors, you're going to dilute the previous existing equity. Of course, as long as the value of each share. So basically, as long as the value of the company grows and grows hopefully exponentially because there's new capitals will fuel exponential future growth. There is no concern equity dilution is totally fine. What is not fine is when you have been a series a investor, founder and the company with new rounds of investment continues to dilute, not on its equity, but to dilute its value per share. That is problematic and this is where you have what is called anti-dilution measures, which are basically good practices where previous investors in fact half and this is often written in a term sheet. They have specific, let's say rules and let's say Yeah, rules, requirements to avoid. If there is a series B, C, etc, coming in to avoid too much dilution of the equity. So too, I mean, it's protection measures because we know a series a knows that if all goes well, there's gonna be Sirius B, Series C, etc. But the series a needs to defend his or her interests. So if he's, if she is knowledgeable, they're going to be requesting from the founders to have some anti-dilution mechanisms and measures In the term sheets to sign up as Series a, just to protect them when the future rounds of equity dilution would happen. But let's practice is to make it practical. One thing that is important here, the two sheets that are going to be sharing here, the one is an equity dilution. Then we're going to use a full model on discounted future earnings and discounted cashflow. They are downloadable in the learning platform so you can buy yourself, play with those. Equity dilution would also future cashflow valuations. Let's take the following assumption. You, as an entrepreneur, you have started your company, you have pass this seed funding angels, a business angel funding series a, B, C, and D p, or this would be the steps that you foresee for your company. With those steps, and basically you see that I'm reusing here the S curve of corporate growth. Basically, not only the revenues and the profits and the cache will grow, but also the amount of shares outstanding will grow until you get listed on a public stock exchange, which is the IPO, initial public offering, direct public offering. And the amount of shares can even grow afterwards when the ROIC is very high. So at the maturity phase. And it's pretty fun because the curve could go down. If the curve is the curve of shares outstanding. You have effects where companies, instead of paying cash dividends, they buy shares from the market, what is called share buybacks. And by that they reduce the amount of diluted shares outstanding, which is a very positive measure for previous investors because of their stake is increasing, linked to the fact that the company is buying shares from the market. So let's imagine there would be thousand shares or a million shares on the market and the company would buy 100 thousand shares from the market back. There are no long. They are only now 900 thousand shares outstanding. If you are earning 100 thousand shares before, you had 10% equity. Now you have, in fact more because you have one hundred thousand, nine hundred thousand outstanding shares versus before he had 100 thousand or a million shares. So this is where shy to share buybacks are also interesting. And you need to know that isn't in fact a reverse dilution effect on equity. So giving you a concrete example. So let me explain here the bullet points and the red frame. So you have here the various phases I was showing you from startups hit Angel series, ABC to IPO DPO. So I'm taking the following assumptions. The founder as one, the company has created credit company with 100 thousand shares and they foresee seed Angel series a, B, C, and an IPO investment rounds. And they have decided in terms of dilution, that at each step the dilution would be 15% for seed, 15 per cent use it on the top. 15% on angel investors, 20 per cent on series 800 per cent answer is B, 25 per cent, and series C and 30% when they go, when they become listed on a public Stock Exchange. And if you play with the extra sheet only play with a gray South, the rest is being calculated automatically. When you look at bullet point number one, of course, at the moment of starting up the company, if you are the founder, you're the sole founder. You own 100% of the shares. There are only 100 thousand shares outstanding and you own 100 thousands. When the seed investor comes in, let's imagine you have decided to give to the seed investor to create 15 thousand new shares. The total amount of shares becomes 115 thousand, meaning that you, as initial founder. Now only own, it is six, which is on the left-hand side on the bottom, you only owe now 86 096% because you only own 100 thousand out of 150 thousand shares. And the seed investor, as you have diluted 15%, owns now 1304 per cent, that's the fifteen thousand, one hundred thousand. And if you get the idea, this works for every, let's say, investment rounds. At angel investors, you dilute 15% supplemental, this is generating 70,250 new shares. Series a, you dilute 20%, so you add 36 thousand chairs. I mean, I hope that you understand by that. If you look at on the red frame on the left, that is with a dot one, but the bottom one, you see how the founders equity is getting diluted over time. So the founder started at startup with 100 per cent ownership and each round of dilution, and that's the principle of dilution. The state of the founders, the founder gets smaller. It is six per cent seventy-five percent sixty three, 2%, 42%, N32. In this example. The same for the seed investor. The investor came in at step number 215 thousand shares. But those 15 thousand chairs, as there is an angel series a, B, C, and IPO investment around afterwards, the 13% become folded eighty-five percent at IPO. But you were telling me about can you why do people accept this? Because what people wants, obviously by injecting fresh money, is that the book value of the company increases. So basically through that, and this is what I'm showing you here in the red frame on the right-hand side, which is with a number two or with with with figure number two. I have simulated through earnings and retained earnings on top of the initial equity, which was ten per share. So it was basically meaning that the company had starting equity of 1 million. That suddenly the equity becomes 40. Let's say 40 years or 40 US dollars per share for 115 thousand shares, €160 or US dollars per share for 132 thousand shares, etc. By that, even though, and you see the counter effect, even though the rounds of supplemental investment are diluting the percentage of the founders by an increase in the book value. What is happening is that this is also on the red frame on the right-hand side, the founders valuation has grown from 1 million to 250 million in this example. And despite the fact that the founder stayed with only 100 thousand shares from startup to IPO. And if you look at, from a percentage perspective, that the startup founders equity percentage, equity stake went from 100% to 3231 per cent. Despite that, the foreigners valuation has been multiplied by, let's make it simple by 200s. This is because the hope is that with new fresh money, the earnings are generating AI increasing the book value of the company through retained earnings. And by that, in fact, the company increases its book value in absolute terms and it counter effects the dilution effect of equity. So maybe pause 1 second, have a review about it. Maybe play with a file as well and play with the percentages and maybe with a book value. And you're going to see, I think it's in two slides, are going to show you what happens if the book value remains constant. So the book value does not change under stays at ten. This is the same, but I call it the equity dilution cascade visually. But basically it shows you how founders, how you see the cascade going from one hour to 32 or 31 per cent. The seed investors in orange from 13 to four, basically it's the same that you have in the table here, the percentage table on the bottom left, but just shown visually. And this is how basically it works from the ADH and launch phase to IPO. This is the equity dilution principle. What I'm showing you here now in this example is if the book value and this is a theoretical example you will keep, you would keep the same percentage of dilution for the same amount of steps, but the book value would remain unchanged at ten. And you see that with a book value remaining at tan, that's in this scenario, the effect of the founder is not very positive. The founder has retained 100 thousand shares. Through I mean, we're speaking about multiple years, let's say five to ten years. And the founders valuation has not moved because the book value has not moved. But at the same time, on the bottom left, the founder's equity percentage has been divided by three from 100% or 32 per cent because of this six rounds of equity dilution. So you see that what is the most important thing to understand here is the book value per share. If with fresh money, you are not able to increase the book value per share, or let's say the profits of the company. You're gonna be destroying. Let's say, value wealth for the previous round investors. If the book value is increasing, even your previous round investors wouldn't be very happy. And this is what I'm showing the first example when there is an increase in evaluation. And you see here, the same cascade is just for the purposes of practicing. So that's one way. And as an entrepreneur, I mean, let's be very clear. If you are thinking about launching your company and you know that you will not have enough cash, you will need to go and find excellent investors. Understanding this equity dilution principle is super, super important. So really gets knowledgeable about it. And look on the internet for typical term sheets. What are the equity dilution protective or anti dilution? Productive measures that series a investors, for example, are asking for and get yourself help from an external, I mean, here we are speaking about an external legal advisor that will help you to set up this those rounds of funding. So that's one thing. The, This is way of valuation because you need to understand, and very often I get questions, but how do I value if I'm giving away 15 thousand shares, how do I value that? You will need to look at your business plan. So using your business plan, production maybe or five years and doing discounted cash flow or discounted future earnings just based on the business plan is fine. This is a way of how to doing it, the valuation of the company and this is why I want now to practice. How do you do this? How do you use either existing earnings, existing cashflows? Are you're basing yourself just on business plan projections. And through that, you're gonna be calculating devaluation of the firm in five years time, in ten years time. What would then be worth 10% of the company where it would be fitting percent. That's basically the amount of shares that you're giving to the new investor. So when we look at discounted future earnings, discounted cashflow, basically the hours, those are two massive methods, as they already say, is discounted future earnings is looking at future earnings. So at earnings forecasts and cashflow is you're looking at expected future cash flows. Why? Because one is linked to the income statement and the other one is linked to the cashflow statements. Remember that at the very end of the day, over a longer period of time, cash and earnings have to reconcile over time. And one other things, and we're going to be practicing here discounted cashflow in and it's kinda future earnings in and you have an XL file for that as well. In case the valuation of the tool would differ too much, you need to review and understand where the valuation difference comes between the discounted future earnings and discounted cashflow. Very often, discounted future earnings is using EBITDA for example. And discounted cashflow is just looking at cancer very often the discounted future earnings will be better than the discounted cashflow. But normally the one that is the norm is really the discounted cash-flow. Because at the very end of the day, it's all about cash inflows and cash outflows. How does the model work? And I've put here the former is basically you are calculating a cash-flow now and future. The question will be, how much in the future and how much will those cashflows of future earnings growth. So there's going to be, this is why it is an art and not a precise science because you need to estimate how many years you want to calculate. What are the growth assumptions that you want to calculate? So it needs to take into account as well market conditions, competition need to take into account level of investments. Because depending on how much you invest, that will have an impact on your profitability as well. So what I do, and that's my call. Normally the discounted cashflow, discounted future earnings model would say you start now and you divide the value of year one by the cost of money, the expected return. You do this for the second year, but you bring this back. So you square the value that you are dividing by the cash flow of year two, because you need to bring in back to the present value, what it is worth. Now, you do the same for year three. You're dividing it by the expected rate of return. But then not only squared, but exponential three, etcetera, etcetera. And you can do this perpetuity. The question is now, is perpetuity fine or not? Because perpetuity would mean that the company is going concern forever. But you have seen from the, was it the Professor Foster study that companies are, their lifetime is being decreased. And even publicly listed companies from what was it 67 years in 1920 to around 15 to 20 years now, a century later. So you have to make a call. You can do a cash flow calculation on five-years, on ten years, on 30 years, on 100 years. What I do and Ireland is from Warren Buffett listening to his, let's say annual shareholder meetings, what he is doing when he used the discounted cashflow. Of course, you need to make some assumptions about growth estimations for the next years and also the expected return. I do two things. I'm expecting at average inflation of two per cent, which is now higher. Now my unwritten expectation would be eight to nine per cent short-term, but otherwise long-term, my written expectation of six to seven per cent. That's one thing. That's the r-value and the n, which is the amount of years. I'm doing this on a third years and without a terminal value, you have, when you would look up on the internet, you're going to have people and a lot of DCF models that add at the very end terminal value on top of ten years, 20 years, 30 years. I personally believe that adding this, which means that the company will survive for perpetuity at this growth rate only makes the business case better. So I'm taking myself margin of safety by excluding the terminal value. I do a calculation on 30 years with some growth assumptions. I will be showing you this in the practice example. With an expected return in my case of six to 7% over 30 years, that's absolutely okay for me. Why six to 7%? Because it's my choice, it's my risk premium on top of risk-free rates and inflation, which I consider it to be at an average of two per cent over a three-year period. And if I'm able to generate seven per cent profit on my, on my assets every year. We take me ten years to double my amount of assets. So imagine the power if I do this, if I double my assets every ten years with a 7% return. But we're the impact on 30 years. So one thing that it has to be also, let's say cleared out and precise. A lot of people use discounted cashflow, but the term being used is not correct. 21. IPO & DPO: Welcome back In this lecture on Chapter number for discussing Corporate Finance Fundamentals in the proofs when we were discussing valuation methods and equity dilution and this one and we're gonna be discussing, we are late-stage company, very mature. We want to go into the public stock markets. So for that, you can remember the S curve of corporate growth where it was showing the series. So the seed funding, ABC mezzanine, and then now we are at very nearly at maturity stage going IPO. So going IPO. So what does mean? What does IPO mean? It means initial public offering and is direct public offering on direct listing, basically, the intention of going on the stock market is again, raising fresh capital, but not from private investors, but from a public investors. To raise that capital, you are selling a portion of your equity. Again, you have seen in the previous chapter and the previous lecture, sorry, not chapter but lecture the conversation about equity dilution and play with the actual forget yourself, knowledgeable and aware of how that works. The difference between IPO and DPO is that the IPO will be underwritten by an investment bank or by multiple investment bankers. While the DPO is a direct listing is the company goes directly on the stock market. So the IPO is really the intention of transforming a DPO. The true basically have the same intention is transforming a private company into public company, which brings a lot of new reporting requirements. If you remember, ten K, ten K reports as an example, eight k and those kind of things. So you again, diluting equity specifically in the IPO, you are diluting equities are creating new shares and selling those new shares. So portion of, let's say, of what is being existing today will be sold to new shareholders. The advantage of having the investment banker, well, first of all, they're going to help you in everything that is, let's say prospectus. So you need to have approval of the Securities Commission of the country that Stock Exchange is listed. You need to read the prospectus. We need to have lawyers who do this for you. What happens as well is that investment bankers, sometimes they de-risk the deal, they by themselves between the letter the issuers of the shares, so the existing shareholders. And before the IPO is executed, that investment banker, sometimes by all or a part of the shares, will be released on the public markets. So this is de-risking. So this is taking away the risk from the company that wants to go IPO. They also take care of doing row chose, of doing publicity around it. All of those things have cost. If it is buying portion of totality of the shares that will be sold on the secondary market. That is, that is a risk. So they're going to monetize on that risk. If it is writing the prospectus for you're getting the SEC approval, it is in the US, for example, making road shows to investors, while all of that has a cost, and that cost will of course be charged to the company that wants to go IPO. It's part of the cost of going up here. This is where a couple of now I think years ago and I think the most famous one has been Spotify. This music streaming. It's the leader currently on music streaming in the world. They decided that they would not like to have an investment banker do the underwriting. And they said, We're going to take the risks, the risk directly. We will, let's say, sell our shares directly on the stock market. And existing shareholders can then directly sell to the public. The risk of that is, you don't have an underwriter. You do not have this row chose. You have no guarantee that the equity, so the shares that you want to sell it will all cell, which is something that investment bankers, they would take care of if they would buy those all 100% of the shares after the IPO, investment bankers in the IPO support as well. To avoid that, the company is a, for example, losing money directly on the valuation of the shares, selling. But DPOs or direct listings has some attractiveness and Spotify was the first one and in December 2020. So you see it's like three years ago, the US Securities and Exchange Commission announced that it would allow, let's say, more frequent direct listings. What I can tell you as well is that IPOs and DPOs only happen when the market is very favorable, very positive, very excited. Now we are August 2020 to the market being, let's say, depressed. There was a crash of the tech industry couple of months ago. You will not see a lot of IPOs DPO is happening, it's not the right timing. So, but just be aware that those two ways exist of going. So after, let's say a Series C, D mezzanine from private equity to public equity. You have IPO and DPU. And this is what I'm basically showing you here, is that if you have this curve, so the esco of corporate growth with starting from startups seats, angel investing series a, B, C, up to men's and in investing and then going from private equity to public. You have two ways of doing it. Ipo and the PO, IPO. The difference is that you have the underwriter which takes away risks from you as the amine, as being the company that wants to go on the public stock market. And DPO is, you'll go directly and you will not incur the cost of the underwriter on the writers. It's a choice. I'm not saying that one of the other one is good or bad. I'm just saying that at the very end of the day is do you need to go? And that's the main question. Do you want to become a public company? Because becoming a public company involved and comes with a lot of supplemental requirements, you're gonna be exposed. You're going to have all the time Exxon analysts that we'll be looking at you, creating an opinion about you, etc. So the level of, let's say, of pressure will be higher. The advantage is that you will get fresh money from the stock markets. That's why people go IPO or DPO. And I just want to analyse, I mean, there's not much more to say, but IPOs and DPOs for entrepreneurs, I think it's good enough because in any case, you will need the support of an external law firm for an investment banker to take care of this. But I think what is worth a conversation not only of what I was just saying while wrapping up the previous slide is like, is it worth doing an IPO DPO while if it is the only way of raising fresh money? Yes, potentially. But there are also some on top of that. As I said, what are the consequences in terms of reporting requirements being exposed and the time you're spending on shareholder meetings, talking to external financial investors, to the news, to Bloomberg to write us when this takes time away from your management team as well. So you need to be attentive to do this well, if you decide to go IPO DPO. Now the main question that comes up very often and me being a value investor, my apologies, I'm not a growth investor for my family money. I mean, on the other companies, I'm sitting on the board of directors there. Of course we are doing private equity and venture capitals, so I have a different perspective on that. But what is the performance after companies go IPO and basically is very mixed bag. You have companies that went IPO where the money has really, the value of the valuation of the company has increased exponentially. And of course, if you are the one who bought shares on the public market, the secondary market at IPO, and the company has grown by 700%. You're gonna be happy, happy shareholder, of course, at that moment in time, it was the case for Facebook. Now meta, the company variation has increased exponentially. If you look, not all IPOs have been successful. They're gonna give you a couple of examples here. So give me an example of GoPro. I mean, I have myself a GoPro. I think it's a GoPro for if I'm not mistaken, GoPro Hero 45 doesn't matter. So look at the curve. I mean, the company, and this is the kind of announcement that is done in 2014. So it's now eight years ago, the company has announced going public. And the initial pricing was at 24 US dollars per share. When I extracted the gravity was at age 75. And I looked up this morning before doing the recording. At yesterday's closing on the US market, GoPro was at 6% to 83 years dollar per share. That's tough for an investor. That's really tough. And you see that after the IPO from 24, it went up to 9090 plus now it's at 683 per cent. So basically it means that if you have bought, if you would have bought an IPO at 24 years old and you will have sold at 95, you would have multiplied your profits by, or let's say your capital gain by, let's say three times, making it easy for time, something between 34. But if you would have expected that the stock would continue to grow to 200s. While basically, if you would have bought a 24, now, you would have divided by four because you bought a 24 potentially. And now one share is worth 683. Etsy, I think it's an Israeli company, if I'm not mistaken, is it works. I don't remember. So Etsy is very well-known being a marketplace for, let's say, that connects people that by, oh sorry, that sell unique goods. So crafters, typically, maybe it's US company, not an Israeli company, doesn't matter. So they have been announcing 2015, so a year after GoPro that they would go IPO at that time, DPO was not typical. And you see also the underwriters were Goldman Sachs and Morgan Stanley. And you see that they said at that time that the IPO price would be 16 years dollar per share. And you see that the maximum after you sit directly after the IPO in 2015, in fact, the stock went down and then it went up to 300s. And today, yesterday evening at US markets, closing was at 11761 US dollar per share. So if you would have invested at 16, even though you would have missed maybe selling the company at 300s, which would have been a multiple of, I don't know, 20 times, at least now, if you would sell at 117, you would have still earn ten times on the IPO price. So you see, I mean, it does on those two examples, it's very unclear just by looking at graphs and I'm not a trader or not a graph investor, I'm in fundamental investor. I look at the value and variation of companies before I put my money somewhere. If it is venture capital, private equity, but also as investing my own money into blue chips. It's unclear through those graphs what is driving the up and down of the share price. There are many effects too. That's what I just tried to show here and I added Fitbit. You may, if I'm not mistaken, Fitbit has been bought in the meantime by Google. They have those smartwatches. I actually bought my wife two or three of these Fitbits, and I must say it was not extremely happy about the quality of them. Sorry to say. But what is interesting is, you see on the left-hand side, those are statistics I took out. What was the year-over-year growth of the revenues are speaking about topline revenues of GoPro, Fitbit and Etsy. And the dots is when the IPO happened. What is interesting to see, and basically this is what I was telling from the very beginning. Now the company has, let's say, achieve its maximum growth rate kind of and it's very mature. Then comes a moment to IPO. And you'll see this effect because the growth rates year over year or decreasing before the IPO. There is another aspect and again, I'm don't want to hear to come across as bad Martin Vout one or the other company. But I looked as well. I mean, those are grubs that I create them as well as profitability, earnings per share for those three companies. Remember, so Etsy and who has its GoPro, they IPO, thousand fifty thousand, sixteen and also 2016. We look at earnings per share. It's interesting to see that, for example, GoPro before the IPO and in 2015, the earnings per share were positive in 13, That's the blue histograms in 20131415, Fitbit, the earnings per share were positive, very negative in 2013, but positive in 1415 and add s0 before they IPO, the earnings per shares were negative. And again, I'm just showing you my key to read this. Did the managers of those companies may make it on purpose to do the IPO because they knew that earnings would become negative for GoPro and FitBits. This is how I could interpret this. And again, allow me to be very brutal here. I'm not saying it is the truth. I have not talked to those people. It's an assumption. But when I look at those figures, I'm saying, How can it be that Fitbit was earning money in 201415. So the hats positive, Let's say profitability on earnings per share. And after the IPO is suddenly it goes negative. Gopro the same. They were earning money 131415. And suddenly after the IPO, it becomes catastrophic. I mean, the year 2016 hasn't been brilliantly if a GoPro, which could explain the graph tendency and look at Etsy. Etsy is the other way around. Maybe it shows. And again, this is now part of my value investing thought process, ETC. Before they went IPO, they didn't not fool investors. They were saying that indeed our earnings are negative, but we believe that it will grow after the IPO. Etsy increase the year-over-year revenue. And they become, they became positive on the earnings per share. So you see kind of when you do this analysis, that may be, and you'll see now I'm looking behind the graph that this could maybe explain why GoPro has become a very negative from the initial IPO price of 24 years or less per share. Shut up. Let's say respect maybe its promises. I wasn't able to achieve its promises. And now it's at six dots 83. While Etsy, maybe they didn't over-promise, they were negative in terms of earnings. And now they went up to 300s. But now COVID came in and the tech bubble went bust couple of months ago. And now they are still at 117, which is ten times more. That could be a way how I would read behind the graphs because I don't look at the graph. The graph is do not tell me anything. I need to understand what are the fundamentals behind. So you see how even an IPO is DPO is. I look at what could be the interpretation of why the IPO went north or south. In fact, I hope and I'm going to wrap up here. So I hope that you understand from the IPO and DPO mechanism, mechanisms that basically you have those two. So with an underwriter that takes away the risk from you, but that has a cost, or you go directly to the stock market. But there is no guarantee that the amount of shares that you're offering will be bought. In any case, when your IPO DPO, you will have to have somebody that will help you legal advisory firm for doing this. Because I mean, as an entrepreneur, you will have to deal with the principle of willing to go public, but you will not take care of the details. Somebody will have to take care of the details. And they are companies out there like give advisory firms, investment bankers that are specialized in those things. So let's stop here and we're gonna go into the last lecture of Chapter number four, which is about cash and sales management, which is also very important topic as an entrepreneur to understand. Thank you. 22. Cash & Sales Management: Alright, entrepreneurs and investors. Last lecture of Chapter number four. Remember chapter number four is about corporate finance fundamentals are giving you those layers and vocabulary and main principles that you need to know as an entrepreneur dealing with corporate finance. In this last lecture, we're going to be discussing cash and sales management. Why? Is? Because I believe that a lot of people underestimate the importance of cash, specifically entrepreneurs, young entrepreneurs. It's something that I've been experiencing. So that's why I'm giving you, Let's say this is not only true for cash, but it's also true for sales. I want to give you some tips and tricks about how to look and correctly manage if it is cash or aunts and sales. Remember that cash will be used as an, is used in one of the major evaluation methods, which is a discounted free cash flow to the firm when it's typically called the DCF. We have been seeing this in previous two lectures. And I consider that analyzing cash is not only paramount for entrepreneurs and investors for valuation, it also is super important to be able to survive as a company, to guarantee the resilience of the company and avoiding having to take up short-term depth. Because you are burning cash like crazy. And because paying off a loan to a bank has a cost which is called interests. And interests can eat up your cash as well if you have too much interest cost on your depth. Look at the example of epigram day and what China has been doing lately on real estate. I mean, the amount of what is called the interest coverage ratio. So how much of your profits have to be paid just in terms of interests, not just in terms of paying off debt, but does in terms of interest. I mean, you have ratios there and that's the part of the financial analysis, not financial valuation, if you remember. But I mean, it's been just too much. So correctly, managing cash involves a couple of things. The first thing, and when I discuss with young novice entrepreneurs, when I try to understand where they are, one of the first question I ask them is, what is your cash burn rate? It means that how much cash do you have and how much cash are you burning each month? And how much time do we have until you are running out of cash? If you do not know this as an entrepreneur, I already tell you you're gonna be ending up in a lot of trouble. You need as young novice entrepreneurs because you got to have a limited amount of capital, you need to look into your cash burn rate. That's it. And you need to know, and if I haven't, entrepreneurs who are unable to answer me this, so they are unable to answer those two questions. What is our cash burn rate, your monthly cash burn rate, and many mountains do we have in terms of cash to pay off your costs? If you do not know this, an entrepreneur, you already set up for failure, I promise you. So think about it. Then we have the second element which is working capital. So what is working capital? Working capital is basically the difference between, let's say, short-term receivables and short-term depth. And it's basically the capitals that is used to fund the short-term operations and short-term obligations like suppliers, payroll, those kind of things. Those are short-term obligations. A pension is something long-term, but the payroll next month, that's a short-term liability. So it basically is the difference between the current or short-term assets and the current liabilities. I will give you tips on how to read working capital as well. But basically, the I mean, the more you have in terms of current assets and current assets are bigger than the current obligations. So the current short-term depth, you will probably be in a good position. Of course, you will need to collect the cash. That's the next topic. But normally you will not have to go to the bank and say, I need to take a loan to pay my suppliers because my, I don't have enough income in terms of customers. So that you will have more short-term depth than, let's say, short-term assets. But if you have more short-term assets versus short-term debt, you're gonna be already generating very probably a positive operating cash flow. And then comes a very, speaking about cash, a very, very, very important thing. And I have seen so many entrepreneurs not being attentive to this and this is part of conversations even at board of directors level. Unfortunately, sometimes is that what is called days sales outstanding and the cash conversion cycle. Let me already, I think I mentioned it a couple of lectures ago. What is this all about? It? Let me take the following assumption. You as a company. Selling a product for 1 million to a customer. But that 1 million is not net profits. You, I mean that product has some raw materials, etc. You have to pay a supplier for 0.5 million. So you're working capital could be okay because you have 1 million receivable versus 0.5 million of short-term debt to pay off your supplier. So that's positive in terms of working capital. But if you never collect that 1 million, you will have to pay back your supply at a certain point in time. So let's imagine from a timeline perspective that you need to supply, you need to pay a supplier immediately. So the 500 thousand hours, you only have an accounts receivable for 1 million, but your customer is not paying you for six months, but you have already cached out the payment of the supplier. That's where days sales outstanding and cash conversion cycle plays a role. You need to be. And if you have a financial manager as an entrepreneur working for you, one of the most important things is on top of the cash burn rate. As young entrepreneur, novice entrepreneur is making sure that you convert your revenue into cash, is what is called the cash conversion cycle, that you do not allow customers to pay your, let's say your invoices in six months time, you need to be extremely strict and this is where we come back. Remember in the legal chapter, we will speak about corporate laws, were discussing about commercial laws and I was telling you, you will probably have to work on a standard template with terms and conditions that may also include payment terms. So maybe you will allow because you want to be kind with your new customers, because you are a young company, you allow them 30 days to pay. But maybe if they do not pay within those three days, you need to charge a cost on those customers. I need to have your financial manager call them up every day until they have paid. Because if they do not pay you, you will have to pay your supplier. So this is all about day sales outstanding and cash conversion cycle. So that's also extremely important and I'm very attentive when I mentor young companies or when I'm sitting at the board of directors, how we manage cash as well, because cash is king. So a good cash burn rate is less than 1 12th of available cash, which means basically that you're burning, but just probably still have more than 12 months in front of you. But if you only have three months remaining and you have not even started raising fresh money, I mean, I can tell you it's going to go into liquidation scenarios. So That's a good way of looking at what is the cash burn rate versus total cash. It should be below a 12th, which means that you still have 12 months to raise fresh money. The working capital ratio is something, of course, that you need to look into to avoid potential future liquidity problems. And giving you an example, a ratio of one dot five to two is interpreted as the company is in a solid financial grant in terms of liquidity, which means that you have 1.5 times current assets versus short-term debt, or two times current assets versus short-term depth. But then of course, you need to make sure that you convert those accounts receivable into cash as fast as possible. So there, and that's the advantage when you are in the world of retail. You don't care about cash conversion cycle because when somebody buys at Starbucks, the person who buys at the cashier even pace or an unbiased pace at the cashier. The goods, it has order at a cafe latte, for example, before even it receives the goods. So the cash conversion cycle is 0, days sales outstanding is 0. Make it simple. That's the best thing that you can have is that customers pay at checkout. You have in the B2B world when you're providing consultancy service, well, you do not have that. You will have to pay your people, your consultants, on the payroll, but maybe your customer will only pay you 60 days later. So you need to be attentive on those things. It's very, very important. This is an example of things that, I mean, it's a little bit more fine-grain about day sales outstanding, but you have other measures like days in inventory when you are creating products. The average days in accounts payables or the average days in accounts receivables. So very often suppliers, and if you're a young company, you do not have. Remember the bargaining power coming back to five forces model of Michael Porter, you see how this comes together. You don't have power against the supplier to tell them I'm going to pay you when my customer has paid me. This works for big companies, but not for a young, young company. So very often it's the other way around. When you are young company, you are happy to get the goods from the supplier. And the supplier will tell you as young company and there's where the risks you need to pay me immediately to get my goods. Then only you are able to sell to your customers and your customers will maybe take some time, except if you're in the retail world when they pay at checkout, but otherwise it would take some time. So this cash conversion cycle is extremely important. That's about cash. There are not 20 thousand things to say about cash, but those fundamental ones, cash burn rate, working capital, days, sales outstanding, and cash conversion cycle are super, super important. If you're an entrepreneur, you're hiring a finance manager. That's the kind of question to ask your finance manager that you are about to recruit. What are the 345 key things? That's you as finance manager can support me as an entrepreneur to be attentive from a financial perspective? Well, normally it should be cash burn rate, of course, profitability. Maybe the finance manager knows about equity dilution, those kind of things, but it really be about cash burn rate. We're working capital and cash conversion cycle, day sales outstanding. That's really, really cool. I really promise you. It's really cold. This I'm speaking here from experience and not theory, sales management also speaking. And I initially I did not add this to the training, but from my experience and having been sitting and board of directors managing myself company is mentoring a lot of novice entrepreneurs. Also, this is extremely important, is people do not pay enough attention to a couple of things. Very often, young entrepreneurs are not pay enough attention on cash management. And very often they do not pay enough attention on sales manager. And I'm gonna give you here some, let's say, good practices about how to manage correctly. Say, first of all, sales, It's a funnel. You go from unqualified suspects to maybe qualified prospects to, let's say, closing the deal and then having customers. So it's a funnel and the funding has different stages. And you're going to have either people tell, salespeople are gonna do call outs or customers that come to you because you have been paying through Google AdWords and advertising and they come to you and you have an E sharp and e-commerce shop. Or maybe you have account managers or sales manager that take care of the relationship with your B2B customers, for example. What is important is that to understand that first of all, marketing plays an important role in filling up the funnel. And very often marketing is only seen as a communication vehicle, but not as a funnel filling engine. I have always considered my marketing departments as an engine to give early signals to the sales team and filling up the pipe depending if you're a B2B or B2C, of course, a pipeline, as we said, it's a funnel, it has different sales stages. And stages you need to go through. Those stages are kinda go from 0 to closing a deal. There's going to be typically aligning. I'm looking now at maybe B2B, aligning with the customer the requirements, making a demonstration and making a proposal, negotiating the financials and then closing the thing. Of course, in the retail world it's much easier because people will come maybe to the shop and they're going to like the apparel, for example, that you are selling. If it was a sports apparel and they're going to buy it from you. But I mean, you have been doing that research and you have been incurring costs already before and building up inventory. So it's maybe a little bit different perspective, but maybe you are doing promotions through the marketing department to bring in people to your retail shop. When I look at when there is a real interaction, terms of pipeline, you're selling services to, for example, customers. There are various things that you have to look into to make sure that your pipeline is healthy and we're going to be practicing this. First of all is the final taxonomy. About the same stages, because as I said, you can go from 0 suspects, unqualified suspect to closing in today. So you need to build up a pipe and your pipe has to be filled up. You will set some, let's say financial targets. Maybe the targets for your sales manager this year will be, I don't know, €2 million or 2 million US dollars. So you will need to define sales stages. You will need to define when you do the budgeting exercise how much revenue extracting from this product, from this segment, from this type of geography, from this market, from this kind of service and giving those targets to your sales manager. And what you will also need or what you will build up as an entrepreneur is when you will be looking as the CEO, because entrepreneur very often becomes the CEO of the company. You're gonna be looking at the pipeline healthiness, the pipeline quality. You will look at not only the size. If you have a target of 100s, how much is the pipe versus the target? If you have a pipe of 85% of your total target, you will never hit your target. So you will need to have a pipeline of maybe 150 versus a target of 100, because not everything will convert from pipeline into customer to revenue. So we need to know your conversion rates and this will build up with, with time, you will get experience in what is my conversion rate depending on where I am in the sales stage. So maybe you need to give to you, I'm sorry, to a sales manager. Targets that above, let's say what your financial targets are. So that's people drive more, more pipeline because, you know, and you're saving manual should know that you will lose as a company part of that pipeline. Sales stages, starting from unqualified suspect too. And inquiry to qualified lead by marketing to a lead that is accepted by the sales manager. Maybe you have a sale stage where you want to show that you're in demonstration phase, stays sales stage where you are writing the proposal or have already sent a proposal to the customer. The sales stage where you are doing the funding negotiation on the terms and the pricing and then closing, you only waiting now for the letter the contract to be signed. So those are things, I mean, there is no secret sauce. You need to define your own taxonomy. That's the kind of thing we're looking at sales management. Those are the things that you need to look into. Let's practice on a concrete example. Let's imagine your company with the sales funnel. And there are nine opportunities in the sales funnel. There are various customer names, various products that the company is basically a digital shop. They're selling software as a service. Let's say solution a, and a Software as a Service solution B, they have mixed between selling, let's say the licenses and also maintenance could have been subscription, but they also sell implementation services or consulting services for implementing the solutions they sell. Not always, but it happened. You see there's an opportunity 78. Huge opportunity has a certain amount, that's the total estimated amounts. And the opportunity has a certain closing date. And you have also the sales stage. So what we were seeing before and the taxonomy and make it, I made it simply, I only took opportunities that had between 20, 60%. So it was either the lead was accepted by the sales team 40 per cent. You were presenting the value to the customer and the customer expresses interests and that's 60%. There is a pilot project or proof of concept that is going on. So this is what you see on the sale stage in the sense that each column, one of the things that very often says managers should be able to do is through the sales stage, is basically understand what is my total pipeline. Not 100% will convert, but bringing a conversion rates, you can do awaited pipelines. You take the total amount and you multiply it with the sales stage, which is a conversion rate. So you see that currently the weighted pipeline is 44% of the two dots six minutes, so it's one million, one hundred eighty eight. Then on looking at unhealthy pipeline as a CEO of a company, or at least because I presume you will not have a Chief Sales Officer in the beginning, but if you would have one, That's the kind of thing that the sales officer needs to look into is and I'm giving you here three examples. I've taken the non opportunities one to nine, and I've put them into various graphs. The first graph on the bottom left is the sales stage, so 2040, 60% and the amount. So you see that the pipeline is well balanced. That would be my interpretation visually now, is well balanced between opportunities that are ads 6040, 20% maybe on the opportunities that are 20 per cent, the amounts are not in well-balanced. The opportunity is 14 and five are in fact smaller opportunities. And you see it's opportunity one is 127, K, opportunity for is 270 and opportunity five is 25. So maybe I wouldn't need to push my sales team to try to increase that pipeline Because maybe that pipeline will only convert in nine months time, so I cannot have a gap. So maybe I see that compared to 46 per cent, maybe the qualification of the pipeline is not correct or I need to add supplemental pipeline into the 20% stay stitch. Grabbing the middle is a following. And that's something that also typically you need to inspect as entrepreneur is when you look at your pipeline. Again, this is really a threat experience. I've seen entrepreneurs at first of all, did not have clarity about what was their pipeline, did not have clarity on the following. Or they were telling me, I have great pipeline. I have two million six. And I said, Okay, but they were telling me I have a salesperson taking care of this and I was telling them, do you know on the opportunities, how long they are sitting in the same sales stage in terms of days in sales stage. And for example, here, I'm looking at the middle graph and on the bottom, opportunity 98, which are in fact very big ones, are sitting for a very long time in the pipeline unchanged at Stage 40%. That would be for me doing the inspection and would ring alarm bells because it cannot be that opportunities and is now an assumption. Let's say that opportunity nine is untouched and is remaining at Stage 40% since six months. And we know that our conversion cycle is nine months. There would be something where I would inspect and say, are we talking to the customer, how can it be is what we are being shown here. Is that correct? Maybe the sales manager forgot to update the pipeline. That's the kinda thing that you need to inspect. Inside stage. If things are not moving in the same stage, there is something going wrong. I promise you from experience. Then you have on the third graph on the bottom right. That's another way of looking at pipeline is maybe you want to have a look at, remember the BCG growth share matrix, strategic products. So start Services, cash, cows, dogs. Well maybe I'm showing here an example that may be the three and the five, which are maintenance services, are highly profitable and you want to know how much highly profitable pipeline do you have? 35, for example. The amount shows here not the amount of profitability. You could also change the total amount of the opportunity by them, by the contribution margin, for example, by the gross profit. So you see that there are many ways of looking at Pi brand. I'm just trying to tell you from experience. That's the kind of thing. If you have the opportunity either yourself to deal with pipeline or you have a sales manager. That's basically what you should be expecting, what you shall be expecting from a sales manager or even from your CFO, is inspecting the pipeline, the health of the pipeline, what is the size versus how much do you need to be breakeven this year, for example, or versus the sales targets that you have sets. What is happening with the pi bond? Do we have the right balance and the pipeline between products, between customer segments, between sales stages as well. Your pipeline is living that you do not have pipeline that is owed and just sitting there and only, let's say, making things look better than they really are. If you have an opportunity that is sitting there 300 days at 20% and has not been touched by your sales people. Sorry, I mean, this opportunity no longer exists. Very probably been and people are just lying to you. So be attentive to those kind of things. And I hope that this kind of experience, feedback allows you to have a first key to read things about cash, but also sales management. Because those are, I wanted to do a very specific chapter on this. Those are very pragmatic, very operational things, but you can be really set up for failure if you do not look at cash and if you do not look at sales. So that's why I'm sharing this with you and really emphasizing on this. Because he has an entrepreneur will have to deal with equity dilution. You as an entrepreneur will have to deal with a market structures and BCG growth share matrix and legal aspects. But an entrepreneur has to deal with the fundamentals which are managing the cash, managing the people. We were discussing culture before, managing the strategy, managing as well sales pipeline. I'm always saying I have been, let's say, having all hands with my people, I always set at the very end of the day, it's not me paying your salaries, it's the customers. So if you don't have customers, if customers are unhappy, we're going to, the shop, will stop, the music will stop. So we need to make sure that we have enough customers and the customers that we acquire. Keep coming back to us and keep coming, buying from us. If you have this and then have tools, this is not rocket science. You have the tools to look if pipeline is healthy, if it is well balanced. Per product, per timeline, per sale stage, per days in sales stage, etcetera, etcetera amounts. Oh, probably you will already be in the 5% or 10% upper, let's say companies versus the other 90% that will fail early stage because they have no clue how to manage those things and they are not attentive on the important things. Right? We have finished chapter number four. We're going now to the conclusion of this chapter number four. So let me just take one step back and just recap what we have been discussing. And now for the last multiple lectures on, let's say a corporate finance fundamentals. I hope that you understood that. And we started with value creation. How buyers, how investors look at value creation, very often return on invested capital. So a specific yield in terms of percentage of a specific timeline. But also, we have been discussing that investors have various opportunities to put their money into and depending on investment vehicle, remember this graph, risk versus return. The expectations will be set differently. Then we discussed financial statements because financial statements is something also fundamental because you are through legal requirements, you are liable as an entrepreneur for what we are doing with your company. You cannot do everything and stupid things with the company. So I tried to give you the keys to read financial statements. Understanding also the main accounting principles. Also understanding when the company becomes bigger, that you will be exposed to external statutory audit and the reasons why, and potentially also various requirements on reporting requirements and reporting frequency. I tried as well. That's also something very fundamental to give you. First key is to read how to evaluate companies the various methods between absolute valuation. Acid-base balance sheet based valuation methods going concern, but also relative valuation. And then we looked into something very important that entrepreneurs have to deal with. Very often, the equity dilution part and play with the actual file. Get yourself knowledgeable how even though you're diluting your equity, are diluting the equity of Series a investors and series B, if you go up to the IPO, how nonetheless you're going to grow your wealth. Then we have, we will have been briefly discussing IPO DPO. So difference between the underwritten public offering, which is the IPO, one with investment bankers or take care of a lot of things, even de-risking the deal. And a direct listing where in fact, you are alone as a company going on the stock market. But now securities, let's say regulators for exchange marketplaces, they do allow direct listing. The first big one was Spotify in 2018. And then just sharing on top of, let's say those more allow me to say theoretical elements. Even though I tried to practice as much as possible with you. And sharing my experience. Very, very fundamental, very basic thing to look into is how you manage your cash. Because it's this will determine your success or not short-term. And also how you manage sales and giving you some keys to read out a good sales pipeline looks like versus not. Of course, this has to be put into perspective if you're selling it to B2B or B2C on cash, if you are in retail as a Tojo brick-and-mortar, people pay at checkout. You don't have a problem on paying your suppliers very probably even though. But that's the kind of thing that you need to think. And this will allow you as well as entrepreneur because you will get yourself people around you. You're going to have person taking care of finance, person taking care of says, I hope that with those various lectures, various topics that we've touched upon that you can have even you can set expectations towards those people, even at doing the recruitment stage, whether the typical questions to ask them, if they are not fluent in those things. If a finance manager and you are young startup is unable to tell you that managing cash and what working capital is me, please do not hire the person. You're going to end up in big, big trouble if you are not the ones specialized in finance, are you going to be ending up doing the work of your finance manager, but why then hiring finance manager? So be attentive to those things, please. All right, and with that in the next lecture and very final lecture before we wrap up, we're gonna be discussing about self-management because I mean, I've been mentoring lot of startups, talking to a lot of CEOs, sitting at a board of directors, so with subsidiaries as well. And I've seen that. And this is also why mentoring has been created. It came initially from Quebec that people I expecting from entrepreneurs to be superman superwoman. But those people have a lot of doubts, but we're gonna be discussing this in the next chapter, which is a single lecture one. And then we're going to be wrapping up the whole masterclass. Thank you. 23. Self Management & Conclusion: Alright, entrepreneurs and investors, the last lecture and the last chapter, but it's only one lecture about self-management. As I said in the closing lecture of the conclusion of Chapter number four, what I have seen and even myself, I mean, the first time I was leading a company was a small company, was a company with four customers. I think we only had €50 thousand. It wasn't the security world. You can look this up on LinkedIn. And the I had to, let's say grow the company. That was the expectations from the shareholder. But I add myself a lot of doubts and that's why also I decided now what's 12 years ago to mentoring a young entrepreneurs and others entrepreneurs. Why? Because I wanted to give back and maybe share my experience. I mean, I'm now 49 years old. I started managing company, so my first, let's say, leading position was at 28 years old. And I had I had at that time a lot of doubts and I had to face a lot of struggle as work-life balance, what things to prioritize. And you have seen through the competitive wheel of strategy that managing a company. And you have seen this for this masterclass. You need to know a little bit of everything as an entrepreneur, yes, you need to know about strategy, need to know by corporate findings about maybe auditing principles. You need to know about. Corporate law, needs to know about equity dilution, need to know about sales management, why cash is important? So you see, and that's the beauty of entrepreneurship, is that you become, let's say, knowledgeable about a lot of things, how really company works, and that's the beauty of it. If you're only into, with all due respect into finance, you're going to be super specialized in finance. But you may do not know how to sell to a customer. And that's why I like, and that's why I built this masterclass. And as I said, I'm teaching this at university level as well, this masterclass because I tried to capture all the three-sixths degree perspective on how or what are the things that I expect it from an entrepreneur to the last one I wanted to share from experience hadn't been discussing a lot through my mentorship, one-on-ones with my mentees. I do not like the term mentee because it feels like the mentor is superior to the mentee. It was always an exchange and I've been learning a lot in those mentorship relations. But one of the things that I've tried to structure here is what I could see through those 12 years of mentorship in many young entrepreneurs, novice entrepreneurs, the struggles, the question that they will ask and I wanted to share this with you if this allows you maybe to not necessarily thinking differently, but to give you some keys and maybe how to deal with certain situations, it will, hopefully, it will make your life more efficient. So as I said, I'm showing here observations from 20 years, making myself a senior manager in high velocity industries, mostly tech industry, 15 years myself or 12, Whatever turn, 15 years mentoring, officially, 13 years mentoring at the Chamber of Commerce, for example, and three years as independent board director. So what I've seen and a couple of topics that I want to address here. First of all, and we were discussing culture. Remember Peter Drucker, Culture eats strategy and breakfast. A leader, people are looking at. A leader needs to role model and you need, if you are defining the company values, you need to live those values. And that's why I'm putting this frame on the right bottom side. Remember I said when you're mistaken about culture, if you're not the one respecting the values, if you're not the one correcting misbehavior as on the values without prejudging but explaining why people, they will continue to act appropriately. So this will have consequences on the company. You need to, as a leader, you need to coach people because you are the one that people are looking to. I mean, you are the role models. And also by coaching, it doesn't mean that you need to be the expert in everything. That's something when I say that you need to coach people. But it really is a different perspective. It's not related to expertise, but really to tell them to have maybe a different perspective on things. Can be in their interactions with people, for example, can be in how to develop themselves, et cetera, et cetera. Then genuinely care about people I'm in May becomes with my the way I've been educated by my parents, how I tried to deal with my family, with my friends, with my colleagues as well. It's I believe that when you genuinely care about people, that also people will be also kind to you, doesn't mean that you shall not have strong expectations, performance expectation from your people. But when they are in a tough situation, you need also not just to look at them as an asset that generates profits, but also as human beings. And they have their problems. And yes, when you're not entrepreneur, you need to deal, allow me the term to deal with the **** that comes with the problems of the people. It's part of the job of an entrepreneur. You can adjust, be disconnected from your people. And also, so that's one thing. So the model coach cat thing. Sorry, an entrepreneur seen as leader will also to do more than only model coach care. I've seen through my experience since more than 20 years that if you are not the one envisioning how success looks like, people who will not envisioned it for you. So it's very important that you build up this vision and that you repeat and communicate systematically why you want to bring the company, why you want to bring the group, why you want to bring the customers? Another important element is learn to say no, I really put this here in bold because I've seen so many entrepreneurs. They were, let's say, having solicitations from left and right, and they were I mean, I cannot disclose for confidentiality reasons, but I'm now even mentoring now, a very bright founder. She's a lady, she has a great team around to her. She's super knowledgeable. And the company that she has founded is winning a lot of awards and gaining a lot of external attraction. So a lot of conversations with investors, with politicians. The person always has to go with the negations when they go abroad and do pitches, etc. And she's struggling with her time. And I try gently and with a lot of humidity also to tell her to say no, that she needs to think that she cannot hurt. Time is limited. That you cannot chase all rabbits. So she needs to develop, Let's say, a thought process on how to be selective, on how actions, where she's saying yes to will contribute to the success of the company, of her, of the staff, of the company, of the customers of the company. I also told her, you're going to have a vision of, I at least use vision of rings. Ring 0 is myself. First of all, I need to manage myself. Then I have to know what am I keep people around me that includes for me, that's my choice, family, my spouse as well, kids. Then key stakeholders. What are the key stakeholders I need to talk with regularly? Can be a shareholder, can be, other board members, can be. I have no clue. Can Be my students for example. Then you have less important people and then you have ring for which is basically the people that basically do not contribute. So they are potentially even just eating up energy from you. And you need to be able to even just disconnect from those people. And it may sound very brutal. I'm normally, I'm a very kind person. I always like to talk to people and even myself. I had to learn to say no to people. But it's very important if you are a young entrepreneur that you learn to say no, that you know, what will make you efficient and effective. Where are your priorities and how your daily actions, your day-to-day actions contribute to this. All of those principles will help you building up a culture and value system and values that will be respected by your staff in the company. Last but not least, and it may sound so simple. Maybe we're going to be stating here. But you would be surprised how many managers I have seen that's unable to take decisions. People, employees, they expect from their leaders to take decisions. And I'm four people speaking up. But if I would always have looked into in order to take decisions that democracy is needed. It would not work. Sometimes as a leader, you have to say, guys, we're gonna go right, we're gonna go left. And I take the responsibility and we're going to see what's gonna be happening, or maybe only 95% sure of my call. But let's stop talking here because we have competitors out there. We need to gain those customers. Let's go there. Let's take the risk. I think that's important as well. That's, you understand that people expect that leaders take decisions and not only nice decisions, but also tough decision. And this can also be dismissing a person. I'm always think if you have a rotten apple in the basket of apples, if you do not remove that rotten apple, well then maybe the whole basket will go, go, let's say will rot. So that's the kind of thing that you need to think about. As well. Leaders you as an entrepreneur, your people are expecting from you that you provide feedback and not only negative feedback. Already mentioned it a couple of lectures ago when discussing culture, but also positive feedback when people have a good behavior, tell them when they won. Nice project. Tell them, Do not only half the angular. And I think that our society today is taking to match the angle of only criticizing moments in the life of a company. I believe that. We should more provide positive feedback to people as well, not all the time. So you need to strike the right balance. But I have been having managers as well. And I mean, that would be superior to me. And I was always happy when they were maybe once per quarter timey. Well, even though we are maybe tough on you on the challenges, but we want to thank you for the great work that you're doing. You'll recognize the efforts and you're doing a great job. So please continue like this, even though of course we are expecting from you more performance in the future. Just that sentence is like saying, thank you, and that's great. So do not forget those kind of things. And as I said, is always push people up, remain respectful. You would probably hear it if somebody would talk in a disrespectful way to you, but remain respectful, but push people up. That's what also what people are expecting from you. That you make them grow. As already sets that often lead us and you as an entrepreneur, you very probably a firefighting have so many things to deal with that you do not know exactly where to start. And one of the tips and the tools that I can share with you is first of all, you need to have good sleep. You need to have some physical activity and good food hygiene as well. I'm not now say that you need to be vegan or vegetarian and this, But I mean, if you strike the right balance between sleeping, because sleep is very important for memory as well and re-energizing and your health. Physical activity the same and correct food hygiene. While you already have good foundation of your permit to be successful, then you need to prioritize things. I was discussing it earlier. A lot of entrepreneurs do not know the Eisenhower matrix, which is basically something where you have two attributes, is something urgent and non-urgent. I, something important, non-important. And depending on how you classify, It's like if something is important and urgent, you need to do it now. And if something is not urgent and not important is like just delete it. And if something is urgent but not important in your scope of responsibility, think about if you can delegate it, for example, if something is not urgent, but it isn't potent than maybe schedule it as easy as that. Organize yourself. Again, repeating on tips and tools to use. But I said earlier, people are expecting from you to draw the vision of where you want to bring the company, the team, the customers in ten years time, in five years time. So built a Northstar plant. I mean, I can tell you I have been systematically after certain amount of years of experience managing companies myself, systematically building a whatever three to four to five-year plan and putting a name on the plan and repeating all all the time on that plan, doing during the all hands or check in where we are on the plan, providing feedback except as well as the plan, you don't have a crystal ball. You will note that you probably, but you will iterate on the plan. I have my latest plan or the 2024 plan. And I was thinking about maybe eight strategic pillars and I added the ninth one after a year and then I added the tenths strategic pillar in after two years, for example, because I felt like I was missing something. Have also growth mindset do not have a fixed mindset. Things change over time. You do not know everything, and it's okay to tell your people that you do not know, but you're going to be looking into it and it's okay for people also not necessarily to know and to learn. This is where learning, remembering the balanced scorecard. Well learning comes as well. We're traveling today in industries and through globalization and through internet at the speed of light. If you remember the foster study, That's why the, let's say the lifetime of companies even large, very much accompanies, has gone down in a century from 67 years to between 1520. And this is why I'm saying you need to continuously learn and change is the only thing that will be permanent in your company, I promise you that. And also, you cannot deal with everything yourself, even though you want to learn, learn things that are important, things that are not important, maybe you can delegate those things. And so it means as well, compliment yourself by people that are better than you on those things that you can delegate, like sales for example. Am I saying that it is not important? Well, it's not as important as maybe looking for you as an entrepreneur on, to, on this strategy, looking at the strategy of the company and maybe say is you have a great salesperson that is better at closing sales, sales funnel than you? Well, delegate this to this person because cells will only be a part of managing the company. So this is where I said many time, your circle, your ring of importance, in fact, will move as the company grows in the S curve of corporate growth. So with that, let's finish. The whole masterclass. I hope will probably be at, I do not know, 1314 hours, as I told you, this is a Tuesday lecture at university level. So we were looking into, I hope, multiple aspects that are required by an entrepreneur. So you have seen that the red line that has been. Let's say that I've been drawing the sequence of this masterclass has started with ideation, or ideation comes from going to launch phase. But I think that you need to know when you launch your company, even before launching the company, what an MVP is, how to build up a business plan. Looking at the business model canvas, which, which things you should start or shells started in the business model canvas. Then you need, when you have decided to launch the company and you have your first capital, you need to incorporate the company. What is a business permit? What are the main segments of law that you need to know on commercial elements on so trademarks, intellectual property, those kind of things. Findings and bookkeeping law, corporate law as well. What is a T01 governance versus a two tier two governance small, for example. Then as through the s-curve of corporate grow when the company has lounge is growing, now you need to deal with strategic management. So what am I market structures? Which tools can I use if I'm in the mono product company, this five forces model of Michael Porter, how do I formulate the strategy? How I, how do I look into modes as well? Then last but not least, but in fact, the most important thing on top of strategy that eats up strategy at breakfast is culture and values and how to live those values. And I was showing you through an example of a bank, a US bank, how written down values that were not lived by management, in fact created a massive couple of years later on. Then we looked into corporate finance. So how do buyers look into you as an entrepreneur when they potentially want to buy a part of your company. How to, what kind of valuation methods to exist when the company is growing as well. What are the regulatory requirements in terms of financial reporting? In terms of statutory audit, the main accounting principles that you need to follow. Then already said, we discussed various valuation methods depending on where you are in the maturity stage of the company and potentially, and hopefully that would be great for you if you IPO DPO, what are the main things to know about going on the public markets, on the secondary market. Then last but not least on chapter four, we discussed cash and sales management. So very basic things, but so important and really overlooked by a lot of entrepreneurs, specifically early-stage entrepreneurs, then self-management. I just wanted to share with you what I believe makes because that's the kind of thing when I invest into people or when an investment to companies and those companies are not writing profits is like what? What are, what are the main elements of that person in terms of culture? How the person behaves ready with me, with other people, that's the kind of thing I will look into if the person is a good person or bad person. So I hope that with that, so from entrepreneurship ideation to the launch phase, the growth has the maturity phase and trying to give you tips and tricks, tools having practiced. That's closing up with this self management perspective. That with that, I'm wrapping up here, this masterclass has been a very long one. I think it's my largest training that I've been writing so far for Internet platform. So teaching platforms. So do not hesitate to provide feedback if there are things that you would believe that I could add or deepen, of course, feel free to come back to me and I will of course be happy to also receive your assignments if you're interested in doing a project on assignments. And it's the same assignments that I'm giving to my university students. Feel free to do so. I will be happy to provide feedback. And here you have my contact information where you can contact me. You can find me on LinkedIn, but you can also find me on 36 square capital.com with that. Thank you so much for your patience. Thank you so much for the time spent on this course and I hope I will be hopefully talking to you very soon and wishing you a lot of success as an entrepreneur or investor and your future endeavors. Thank you very much.