In September we had the first Entrepreneurship module as part of my MBA program at Skolkovo. We dove into how investment funds work, how companies are valued at different stages and how decisions are made in high-uncertainty conditions.

Before that, we had an “intro game” to get to know our group and the campus. Besides lectures and group work, the program included two guest speakers, a welcome evening with the MBA-7 group and a few organizational events. The daily schedule went like this: breakfast at 8AM, lectures and group sessions from 9AM to 6PM, a guest speaker from 6PM to 9PM and then group prep for the next day until about 1AM.

Before the module, they sent us pre-readings, mostly case studies, about 200 pages in total, plus a list of recommended books. Each case was a detailed breakdown of a real-world business, packed with metrics and in-depth descriptions of its processes.

Some of the cases were from Russia, but most were international examples. When I first started reading, I thought, “If it’s not about Russia, how is this going to be relevant?” Turns out, working through a case is really about learning the methods and approaches, and those are universal, no matter the context.

The lecture part is always mixed with group work. Each group session ends with a presentation of our solution, followed by a discussion in the classroom. After that, the professor walks us through how the case actually played out in real life. My group had six people.

Everyone’s different, some have experience running production, others come from consulting or auditing. The group is super active and that’s probably the biggest challenge. At the start we spent a lot of energy just figuring out how to structure our workflow. You learn a ton from your classmates and even more, if you pay attention to how you behave in the process.

The course was led by Benoît Leleux from IMD. He’s originally from Belgium but spent many years in the US. He’s invested in 20 companies and had some level of involvement in every case we studied, you can really feel that. Here are a few key takeaways for me:

Raising money

— The cost of raising money for a startup is different at each stage. There are four main stages:

1. Seed – when there’s just an idea and a team. At this stage, an investor might put money into the idea if the founders can convince them they’ll get a 75–100% annual return;
2. Start-up – when there’s a product and the first sales in the target market. Here, investors expect around 75% annual returns;
3. Growth – by this point, the core ideas are validated and funding is for scaling up. You need to show investors the company can deliver growth, returns of 25–50%;
4. Late – when the company has already gone through its rapid growth phase. Funding usually comes not from funds but from corporate partners. For example, teaming up with a large company to access their customer base. Investors at this stage expect about 15–20% annually.

— A company’s valuation and the size of the funding round is always discussed together with the conditions the company must meet (with all the “ifs”). Valuation by itself is an abstraction, the terms make it real.

— Companies raise money in rounds because it makes the valuation more accurate. You give up a smaller equity stake, promise more predictable results and it’s easier to convince investors. This process is called staging.

— Staging is interesting because if an investor comes in during the first round and the startup delivers on its promises, the valuation goes up in the next round. Then the investor can sell part of their shares at a higher valuation.

— Staging also pushes founders to assess their company and their ability to deliver on all those “ifs” more realistically at each round. If they overvalue the company early on, they risk ending up in a situation where the share price in the next round is lower than in the previous one. And that’s a really bad signal for the market.

For example: we value our company at 10 million and raise 1 million for 10%. We commit that in 18 months we’ll have a working technology that can increase a sow’s litter size from 25 to 32 piglets.

— Reading TechCrunch announcements about funding rounds without all the “ifs” is pretty pointless;

— When raising money, negotiations are often all about those “ifs.” The conversation usually goes like this: “Whatever valuation you want, you can have it. But if you don’t deliver on all the ‘ifs,’ we’re taking it all back”;

— You don’t need to spend hours debating exact deadlines for each “if”, everyone just understands they need to be met fast;

— A normal, healthy entrepreneur hates risk;

— One idea kept coming up: Dilution is nominal. Run out of money is terminal;

— A business plan itself isn’t as important as the process of thinking it through;

— Early-stage startups aren’t really interesting to clients or big companies. First, you have to earn their trust.

Negotiating with investors

— Investors use three moves to test whether a founder is realistic:

1. They ask if the founder understands that a different CEO could be brought in if that person would be more valuable for the company. If the founder freaks out, it’s a red flag, they could end up hurting the company. You can’t think of yourself as untouchable.
2. They set up a board of directors with four investor representatives and only one from the founders’ side. Investment funds have the reputation of being laser-focused on making money, while founders usually don’t have much reputational weight yet.
3. When the founders present their business plan and all the “ifs,” investors might say: “Okay, we agree with your valuation. We believe you’ll hit revenue of N with the profitability you’ve outlined. But let’s include in the agreement that no dividends will be paid until you actually reach N with all the ‘ifs’ met.

These kinds of questions are called ‘smoking out of entrepreneurs’.
Experienced founders respond with something like: ‘No problem, of course we’re committed to hitting the targets we set. But if we reach them in N months, we want to keep a bigger share of the equity.’

— If a company raises funding but doesn’t become a unicorn, just turns into a ‘walking zombie’ with steady revenue, investors can ask to have their money returned with all the accrued interest. Only after that can the founders start taking a share of the dividends.

Due Diligence, the situation in Russia and sexy businesses

— It’s harder for B2B companies to go public because, at the end of the day, it’s ‘regular’ people buying the shares;

— A business plan itself isn’t as important as the process of thinking it through;

—A pitch deck is never truly finished, it’s an endless iterative process;

— Big companies often avoid entering the same market with a new technology because of the ‘why shoot yourself in the foot?’ mentality. (By the way, there’s an explanation of this in The Innovator’s Dilemma );

— Once an investor confirms they’re ready to invest, a Term Sheet is signed and the Due Diligence process begins. During Due Diligence they check the founders’ and key team members’ backgrounds, the functionality of the solution, potential patent infringements and the overall ‘cleanliness’ of the company. This process can take quite a while and cost anywhere from a few thousand to several million dollars. Only after that is the investment agreement signed;

— There are few investment rounds In Russia or business acquisitions because doing a full, legally sound Due Diligence is often nearly impossible;

— If the round closes, the startup pays for the due diligence. The cost is deducted from the funding amount;

— A situation where a startup takes the Due Diligence report from one investor and shows it to another is basically impossible. Investors are usually more like friends than competitors;

— Investors insist on getting preferred shares, which give them priority in getting their money back if the company goes bankrupt;

—It’s always better to have more resources than you think you need. That gives the company more resilience. If you don’t have that buffer, cut down the number of directions you’re working on;

— In developed countries a lot of processes are outsourced. In developing countries that usually doesn’t work, there just aren’t companies with well-established specializations. That’s why many businesses end up being vertically integrated. For example, a model pig farm might start selling specialized feed storage platforms to the market because they had to figure out how to make them themselves and the product turned out to be in demand;

— You win long-term if you’re a maniac about operational work;

— Slip age is when the business is making money overall, but you don’t really know which areas are driving it and you fail to notice when a part of the business is running inefficiently;

— Some brands make products specifically for sales. For example, Nike has collections that are sold only in outlet stores;

— Do not ask for permission, ask for forgiveness. A short way to describe the entrepreneurial spirit inside a company;

— Companies can roughly be divided into three types: VC / Startup – no established model or market yet, business processes are still messy. Growth – the model works, and the company is in a rapid growth phase. Buyout / Mature – the business is stable and fully developed. The VC stage is what many entrepreneurs see as the ‘sexy’ business. But there’s often more money in the third stage, which people tend to ignore because it seems boring. Benoît admitted he loves boring businesses – the more boring, the better, in his view. Sexy businesses always have more competition, full of players chasing their ego rather than making money.

About entrepreneurship

— Management is creating a role that others perform, while you remain responsible for the outcome;

— People see the world differently. Some think it’s completely unpredictable, so why bother making any plans? Others believe it can be predictable, so if you have a stable job and salary, you’re safe. In reality, the world is somewhere in between, with a high level of unpredictability;

— Entrepreneurs spend their time gathering means, methods and leverage points. Once they’ve built up enough, they discover new opportunities. Steve Jobs’ Stanford speech touches on this;

— Methods build up by answering these questions: Who am I? What do I know? Who do I know?

— Start with intention, don’t wait for opportunities to come to you.

Conclusion

The module gets a 9 out of 10. The best part is: it set a high bar for the rest of the courses and the material is packed with value. The pre-readings and group work add a lot. The downside is that the guest speakers didn’t really connect much to the module’s topic.