Martin Varsavsky. Professor. Instituto de Empresa
23 March 2004
To introduce his Entrepreneurship students at Instituto de Empresa to the business world, Prof. Varsavsky decided to change the methodology of his course. He turned it into a simulation game in which students became both entrepreneurs and investors.
Assisting me was Natalia Zang, who was Managing Director of Jazzya Investments, my personal venture. The course is still perfectible, yet unlike the one I gave in 2002, last year we managed to combine two extremely constructive study methodologies. On one hand, we respected the original structure, presenting real cases and experiences such as Viatel, Ya.com and Jazztel. On the other, we gave students the opportunity to act them out – in some cases, as part of a game; in others, as the pre-launch of their entrepreneurial careers.
As entrepreneurs, each student had to present a project. The only requirement was that it needed financing of 5 million euros to start operating and reach the break-even point. As my course is an elective for the end of their post-graduate degree, some students were already working on projects with real prospects. Others presented a business plan prepared for another course, while a minority complained that they fell into neither category.
Originally, they were to have three minutes during the second session to present the project, and two minutes in a later session. My instructions on their presentations were vague, which was intentional. I wanted to leave them free to surprise their potential investors. I received many queries on this, since most of them, though already entrepreneurs, had never had the experience of trying to sell their idea to somebody.
Entrepreneurs had to publish all information related to their projects on the IE virtual campus, which they could access at any time to update. Each entrepreneur had to sell 50 percent of the company for 5 million euros, giving their enterprises a post-money value of 10 million euros.
As investors, the 31 students received 1.5 million euros to invest in the project they considered most attractive. I decided to hold on to 10 million euros to endow projects that appealed to me.
Investment decisions were published in a forum created specially on the IE website, giving entrepreneurs and investors the opportunity to monitor investments at any time. At the end of the course, a ranking would be created that would reflect the global performance of each.
At that time, neither Natalia nor I imagined that instead of analyzing the projects on the basis of each investment profile, the viability of the idea presented and profitability of the business, buyers would take a simpler route: they got together to exchange investments with other students, thus ensuring a favorable score. We were surprised to discover that over 70 percent had opted for this "you-invest-with-me-and-I’ll-invest-with-you" formula. As the game advanced, we began to hear criticism from students who had not joined some investor pool and who, for that reason, feared obtaining lower scores. Just as the existence of cartels reduces benefits a competitive economy offers consumers, and discourages incorporation of new technologies to production processes, creation of these investor groups threatened to generate inefficient results in the game, insofar as success of the most profitable projects was concerned.
One fundamental criticism of the outsiders – those not members of any pool – was that investors did not analyze all the projects, and reached their decisions on the basis of these chains with geometric forms of up to eight points.
Despite encouraging them to choose projects with high returns, I found myself before a badly drawn curve, without a correlation between entrepreneurs’ performance (translated into the financing obtained), investors’ performance (translated into successful investments; i.e., the choice of projects they would have been able to finance completely) and the preliminary scores. Few projects had received the 5 million euros (some had been forced to reject investors because they were 100-percent backed), while many had not even been able to convince one investor.
I decided to distribute additional virtual money, so the game could proceed as planned. It was rekindled and I started getting requests from students to present their projects again to the class. I maintained the two-minute limit and presentations improved remarkably, as did questions from investors during the presentations.
In this second round, investors had an additional 1 million euros, but now crossover investmenting was forbidden. Nor could they back projects that were already fully underwritten. From that moment on, the class turned into a project fair, in which entrepreneurs offered in situ demonstrations of their products, distributed pamphlets and tried to convince investors of their virtues. They even managed to get some convinced investors to confirm their decision before the class.
Students exhausted their money before session nine, the penultimate class. In the last session, I outlined my decisions to them. With Natalia, I had drawn up a diversified investment portfolio of five projects.
Two weeks later, we received a little criticism and many congratulations from students who, irrespective of their scores, had understood how to draw an investor’s attention in a mere two minutes.
Learning from experience
As a result of this first experience, and taking into consideration suggestions from students on the previous course, I have decided to modify the game. It is true that some of the proposed goals were attained. Students greatly improved their presentations, learned to interact with investors and understood various important lessons:
- in business, as in the course, rules are dynamic, and sometimes less precise than they would like;
- an investor’s attention can be caught in a short time and in many different ways;
- the ideas presented best are not always the most successful; but this probability is much greater when presentations are effective;
- investors look not only for the returns each business offers, but also at whether it is compatible with their investment profile and the remainder of their portfolio;
- it is not always efficient to invest on the basis of how others invest.
I have decided that the only way to avoid interchanging investments, and insure buying on the basis of the profile and profitability of the projects, is to have students compose a portfolio as I did originally. In this way, each investor will have to fund a minimum of three projects and a maximum of nine. This ensures that investors analyze each project in depth.
Virtual money distributed among students should represent 30 percent of the funds necessary to bankroll all projects, and the professor will reserve an amount equivalent to 10 percent of total financing needs. Thus funds will be distributed to finance 40 percent of all undertakings.
Entrepreneurs will be able to sell 50 percent of their companies at a price of 5 million euros, thus affording their companies a post-money value of 10 million euros. All projects will require an investment of 5 million euros to get started and break even.
Entrepreneurs will present their projects twice during the course and will have a maximum of three minutes for each presentation. Entrepreneurs will be able to decide freely on the contents of their presentations, which will be published and updated on a site which all students can access.