Survey of Entrepreneurship: Test 2

Bootstrapping

- Bootstrapping is finding ways to avoid the need for $$ via creativity, ingenuity, thriftiness, cost cutting, or any means necessary - using $$ generated by venture operations to capitalize growth - typically out of necessity

The four C's of Debt

- Character of the managers of the business - Capacity of the business to repay both principal and interest on time - Conditions of the industry and economy in which the business operates - Collateral that can be used to secure the loan

Why do we fail?

- Psyche "mistakes" (fear) - waiting too long mistakes (going 'down with the ship') - hiring mistakes (adverse selection)

forms of equity financing

- angel investors - venture capitalists - initial public offering (IPO)

points to consider hiring employees

- attracting potential employees - evaluating potential employees - training new employees - retaining existing employees - legal issues

types of competitors

- direct competitors - indirect competitors - future competitors

pros of failing

- intensifies cognitive process - learning resulting in improvements - motivation to start another venture

factors most valuable to employees

- teamwork - contribution - recognition - empowerment - training

Freemium

Basic component is free, add-ons are extra

Copyright Infringement

Copyright infringement occurs when one work derives from another or is an exact copy or shows substantial similarity to the original work.

non-equity source : Friends and Family

Friends and family are the second source of funds for many new ventures

$$ needed if over 1M

VC (venture capital) private placement

$$ needed if over 5M

VC and IPO (initial public offering)

industry

an industry is a group of firms producing a similar product or service such as airlines, furniture, and fitness drinks

open-book policy

concepts that key employees should be able to see and understand a firm's financials

WAC (weighted avg. cost of capital)

expected avg. future cost of funds

sources to attract new employees

networking, internet recruiting, employee referral, comp. website, local churches, etc

business has low risk w/ more predictable return

strong cash flow, low leverage, audited financials, good management, healthy balance sheet funding: debt financing

What is the Environment?

• Sum total of forces outside of the entrepreneur.

The External Environment

• The forces, institutions and people (i.e., the rest of the world) outside the boundary of the firm.

The Idea-Expression Dichotomy

• The main exclusion is that copyright laws cannot protect ideas.

cost of capital

% cost of obtaining future funds

how entrepreneurs can value their companies?

- based on firms potential in chosen market - how similar companies are operating in same industry are being valued - valuation is very important in equity investment

5. bargaining power of buyers

- buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality

Variable Costs

- change in direct proportion to your unit of analysis - what does it actually cost to deliver one unite of whatever you do - direct labor, direct materials. commissions, packaging, unit transport, or delivery - marketing expenses are not variable

The nature of the funding and financing process

- few people deal with the process of raising investment capital until they need to raise capital for their own firm

venture capitalists

- money invested by venture capital firms in start-ups and small ventures with exceptional growth potential - roughly 900 venture capital firms in the U.S. - firms fund few entrepreneurial ventures compared to business angels (looking for the "home run") - angels invest earlier in company life, VCs come later

learning from failure

- separate personal and professional failure - accept failure as part of learning process - admit mistakes and move forward

federal laws as venture grows

- workplace safety - health insurance - other benefits - anti-discrimination

3 guidelines for training

1) give your employees opportunities to use their new skills 2) make training an ongoing process 3) think of training as an investment as opposed to an expense

The Five Forces

1. The Threat Substitutes 2. Threat of new entrants 3. Rivalry among existing firms 4. Bargaining power of suppliers 5. bargaining power of buyers

Trade Secrets

A trade secret is any formula, pattern, physical device, idea, process, or other information that provides the owner of the information with a competitive advantage in the marketplace.

adverse selection

As the venture grows, it becomes increasingly difficult to find the right employees, place them in the appropriate position, and provide adequate supervision

The total product approach

Core product • Basic description of what the product is• Iphone: just a phone Augmented product • Core product, plus features that tend to differentiate it from the competition • IPhone: brand name, quality level, packaging

The Failure Spectrum

Deviance, Inattention, lack of ability, process inadequacy, uncertainty, exploratory experimentation

You may need two distinct operating models

Front-stage operations---every aspect the customer is exposed to • Back-stage operations---every aspect the customer never sees but that is important to the business

Vicarious (indirect) liability

Indirect liability or responsibility for the actions of another.

IPO

Initial public offering, company's first sale of stock to public, most entrepreneurial firms go public on NASDAQ (leans to technology, biotech, and small-company stocks)

moral hazard

New hires typically do not have the same ownership incentives as the original founders, so new hires may not be as motivated as the founders to put in long hours and may even try to avoid work

Independent contractors

Persons working to achieve a certain goal without being subjected to substantial controls by another.

Who is Crowdfunding For?

Rewards-based crowdfunding • Early-stage ventures • Develop, commercialize, or market a specific product or service • $10,000 or less (on average) • Ventures that may not have access to debt or equity capital • *However, crowdfunding may actually serve as a 'bridge' to private equity in some instances! • Formlabs 3D printer ($3m on Kickstarter; $19m next year)

9/10 businesses fail; so i came up with a foolproof plan - create 10 businesses

Robert Kiyosaki

need money this quarter

SBA (small business administration), friends/family investment, strategic partners, bootstrapping

Direct Cross-Subsidies

Something free, but something connected is sold (e.g., sell minutes, giveaway phone)

Multi-Party Markets

Something free, but something separate is sold (e.g., LinkedIn- free resume listing, sell search)

steps to raise equity

Step 1: determine how much money is needed Step 2: determine type of financing or funding that is the most appropriate step 3: develop a strategy for engaging potential investors or bankers

crowdsurfing

The process of using the Internet to attract, aggregate, and manage ostensibly free labor from enthusiastic customers and like-minded people.

non-equity source : Debt

a legal obligation to pay money in the future

Tax abatement

a legal reduction in taxes by a government

Marketing plan

a systematic written plan of all phases of marketing for a business, including information on the product, price, and distribution and promotion strategy, as well as a clear identification of the target market and competition

foundation

an institution to which private wealth is contributed and from which private wealth is distributed for public purposes

legal forms of venture: corporation

artificial, formed by filing specific docs w/ state gov may be double taxed, C and S corp

need money not urgently

bank loan, bank line, SBA, friends/family, home equity, bootstrapping

investors value start ups by

based on experience and past success usage of product/service progress with business

legal forms of venture: limited partnership

created by filing docs with state gov, one or more partners may have no liability for debts and actions of partnership

tax credits

direct reductions in the amount of taxes that must be paid, dependent upon meeting some legal criteria

primary research types

ethnograpic research- data gathered by simple observation - seeing what consumers do rather than asking them focus group- form of data gathering from a small group led by a moderator survey- a data collection method using a questionnaire- in person or on phone

2. threat of new entrants

if the firms in an industry are highly profitable, the industry becomes a magnet to new entrants

off-the-job training

includes lecture, special study, videos, television conferences, case studies, role play

types of angels

individual angel, angel network, angel fund

stages of equity financing

investment and sales goes up as risk goes down

Legitimacy

is a perception of acceptance, appropriateness, and desirability within socially constructed system of norms, values, beliefs, and definitions

industry analysis

is business research that focuses on the potential of an industry

risk

level of probability that investment will not produce expected gains

Pricing strategies

mark up pricing -adding % to the cost skimming- setting at the highest possible price premium pricing- setting above the competition to indicate quality or prestige odd-even pricing - price ending in the number 5, 7, or 9. Psychological partitioned pricing- setting the price for the base product and charging more for additional components price lining- the practice of setting multiple price points

employee fit

match between needs, expectations, and culture of small business w/ expectations and skills of individual employee

financial leverage

measure of amount of dent relative to total investment

equity financing definition

money contributed to the venture in return for part ownership, usually in the form of stock

legal forms of venture: sole proprietorship

most common, easiest to create, greatest level of liability, single person responsible for debts and claims, can't sell ownership

legal form

only certain legal forms allow for entrepreneur to sell equity

failure can bring

pain, humiliation, shame, guilt, self-blame, anger

Dividends

payments of profits to owners of corporations

two types of market research

primary research- new information collected to solve a problem at hand or answer current questions Secondary research- information already collected for some other purpose than the current problem or questions

delegation

process of assigning activities/tasks to others

optimum capital structure

ratio of debt equity that provides max level of profits

survey types

scalar questions- questions that are answered by some sort of scale dichotomous questions- questions that have only two possible choices categorical questions0 questions that are answered by selecting the proper category open ended questions- questions that allow respondents to express themselves as they choose

4. Bargaining power of suppliers

suppliers can suppress the profitability of the industries to which they sell by raising prices or reducing the quality of the components they provide

breakeven

the point at which total costs equal revenue - Contribution Margin = revenue per unit- variable cost per unit - Contribution Margin Ratio = (contribution margin) / (revenue per unit) - BEq = (Total Fixed Costs) / (Contribution Margin) - BE$ = (Total Fixed Costs) / (Contribution Margin Ratio)

1. Threat of Substitutes

the prices that consumers are willing to pay for a product depends in part on the availability of substitute products

crowdfuning

the process of raisng funding for a new venture from a large audience via an internet based platform

What is failure?

the termination of an organization that has missed its goals and failed to achieve investors' expectations

probationary period

trial period in which employee has temporary statue before formal joining

have money before money needed

venture capital, strategic partners, SBA, IPO, provate placement

business has high risk w/ uncertain return

weak cash flow, high leverage, low-to-moderate growth unproven management funding: personal funds, friends, family, and other forms of bootstrapping

on-the-job training

while performing regular jobs, techniques include orientations, job instruction training, apprenticeships

Two key principles of guerrilla marketing:•

• (1) Resource leveraging; (2) Risk management

Copyrights

• A copyright is a form of intellectual property protection that grants to the owner of a work of authorship the legal right to determine how the work is used and to obtain the economic benefits from the work.• A work does not have to have artistic merit to be eligible for copyright protection.

Organizational Culture

• A set of shared beliefs, basic assumptions, or common, accepted ways of dealing with problems and challenges within a venture that demonstrate how things get done.

Trademark

• A trademark is any word, name, symbol, or device used to identify the source or origin of products or services and to distinguish those product or services from others. • Renewable every 10 years as long as in use

Prosocial crowdfunding

• Basic ventures • Generally impoverished individuals • Seed funding, purchase inventory, capital investments • Less than $1,000 (on average)

Organizational Identity

• Composed of the name, description, and distinctive elements of a firm, such as trademarks, uniforms, logos, characters and stories• Boundaries of the firm • External legitimacy

Factors to consider when setting your price

• Demand for the product • Value delivered to the customers • Prices set my competitors • Your business strategy and product placement

Location

• First choice for many entrepreneurs is their hometown• Local banker knows you, more likely to loan money• You understand market's needs and wants• Friends and family are usually first customers • Location may also be influenced by characteristics of your venture• Service firm• Manufacturer • Level of customer contact

What does Trademark law NOT protect?

• Immoral or scandalous matter• Deceptive matter• Descriptive marks (e.g., 'golf ball')• Surnames

Certification mark

• Marks, words, names, symbols, or devices used by a person other than the owner to certify a particular quality about a good or service • Renewable every 10 years as long as in use

• Direct sales

• Methods of going directly to your customer in order to sell your product. • Vending machines, door-to-door salespeople, leasing space at a craft fair, farmers' markets, party sales, most industrial sales, and selling from your own store / website

Competing on flexibility

• Mix - Ability to produce a variety of products /services with fast setups • Equipment - Ability to rapidly change over equipment and technology for a variety of products • Modification• Ability to implement rapid design changes • Customize standard products to meet customer requirements • Procedural - Ability to create products using alternative methods, routings, and techniques • Volume - Ability to accommodate variations in production quantities • Innovation• Ability to introduce new products into operations & • Accommodate short product life-cycles• Resource • Ability to handle variations in input resources (e.g. raw materials) & • Use alternative resources. • Infrastructure - Ability of the entire organization to adapt to change.

Utility patent

• New or useful process, machine, manufacturer, or composition of material or any new and useful improvement thereof. • 20 years from date of original application

More Contracting

• Noncompete clause• Part of a contract in which a person agrees not to open a certain type of business or seek employment doing certain things in a particular area for a period of time .• Exculpatory clause• Part of a contract in which a party to the contract states that he or she will not be responsible for certain actions. • Waiver • Part of a contract in which a party intentionally gives up legal rights or claims .• Hold harmless• A type of waiver in which a party agrees not to hold another party responsible for certain events.

The General Environment

• Part of the external environment made up of major forces that shape the people and institutions of the task and internal environments• E.g., The economic sector, Demographic sector, Regulatory sector

The Task Environment

• Part of the external environment made up of those components that the firm deals with directly such as customers, suppliers, consultants, media, interest groups, and the like. • The layer that directly impacts the venture • Regular and consistent interaction with actors

Competing on Quality

• Performance - the primary operating characteristics of the product or service • Features - the characteristics that define the function of the product or service • Reliability - probability of the product or service failing within a specified period of time • Conformance - the degree to which a product or service meets acknowledged standards • Durability - a measure of product life (both technical and economic) • Reliability - ability to perform service dependably and accurately • Serviceability - the speed, courtesy, competence, and ease of repair or recovery • Aesthetics - how a product or service looks, feels, sounds, tastes, or smells• Perceived Quality - various tangible and intangible aspects of the product from which quality is inferred

Service mark

• Similar to trademarks; are used to identify the services or intangible activities of a business, rather than a business's physical products • Renewable every 10 years as long as in use

Patent Infringement

• Takes place when one party engages in the unauthorized use of another party's patent. • The tough part (particularly from a small entrepreneurial firm's point of view) is that patent infringement cases are costly to litigate.

Customer retention

• Techniques that focus on efforts to promote satisfaction with and interest in the firm.

The Layers of the Environment

• The External Environment • General Environment • Task Environment • **Organizational Identity** • Internal Environment • Organizational Culture

Managing experiences

• The contemporary business distinguishes itself on the experiences that it creates for customers • Experiences are both mental and emotional (and sometimes physiological) • What do you want customers to think and feel when they are interacting in your environment? How do you want them to act?

Intellectual Property Audit

• The first step a firm should take to protect its intellectual property is to complete an intellectual property audit. • An intellectual property audit is conducted to determine the intellectual property a firm owns.

Internal Environment

• The people and groups within the boundary of a firm, including the owners, managers, employees, and board members of the firm.

Customer relationship management (CRM)

• The process of tracking the customer's different contacts with the firm, and using this data to help improve sales as well as the customer's experience.

Marketing funnel

• The rule of thumb in marketing that it takes a large number of people to be made aware of your product in order to find a purchaser.

Think like a franchise

• Think of your business like a franchise • Systematic • Activities defined and ordered• Consistency • Disciplined adherence to a process • Setting rules for order priority, customer priority and activity priority to ensure timely throughput

Collective mark

• Trademarks or service marks used by the members of a cooperative, association, or other collective group. • Renewable every 10 years as long as in use

Equity-based crowdfunding

• Ventures at all stages • Typically for high-growth, profitable ventures • Ventures that might also qualify for other forms of private equity (e.g., venture capital) • $$$$ (relatively large investments)

Tips for Success in Rewards-Based Crowdfunding

•Correct reward levels ($$$$) • Higher cost may cause higher scrutiny •Have seed funding (to start the campaign) • Social influence •Leverage your social network • Having a mix of strong & weak ties • Social capital within and outside of the platform •Try to get media coverage • Provide legitimacy & drive traffic

Who is This Crowd?

•Inexperienced laypersons • Kickstarter: 70% are first-time funders •25-34 years of age; college educated •Suggests emotion-based / heuristic decisions •Heterogeneous motivations • Desire for a product or service• Desire to support an entrepreneur or purpose • Desire for belonging

What is Crowdfunding?

•Rewards-based • Non-financial rewards • E.g., Kickstarter, Indiegogo, etc •Equity-based • JOBS Act • E.g., crowdfunder• Prosocial • Micolending • Poverty alleviation through entrepreneurship • E.g., Kiva Rewards-based crowdfunding represents the most common form

effects of failure

- financial loss - emotional strain/pain - decrease inclination or tolerance for risk taking - can be a positive experience

tips for learning

- find deeper purpose - focus on others - fail fast, not too fast - beware "shiny object syndrome"

hypothetical startup

- finding a co-founder - finding early funding - registering the company - finding an angel - cutting the pie - seeking venture capital - going public

build tolerance

- grit - courage - conscientiousness - perseverance - resilience - excellence

3. rivalry among existing firms

- in most industries, the major determinant of industry profitability is the level of competition among existing firms.

Angel Investors

- individuals who invest their personal capital directly in start-up - prototypical business angel is about 50 years old, has high income and wealth, well educated, has succeeded as an entrepreneur, and is interested in the start-up process - angel investors in U.S. increased dramatically over past decade - valuable due to willingness to make relatively small investments - angels may be difficult to find due to informality

what do angel investors provide?

- mentoring, monitoring, and guidance - provide connections and introductions to their widespread network - teach entrepreneurs valuable business strategies

Fixed Costs

- remain the same over a given range of volume - not affected by activity within the business - include rent, salaries, advertising, insurance, - in early stages of a venture, and with a growing venture, the range over which fixed costs stay fixed is continually changing - put semi-variable with fixed

Three dimensions of social capital

- structural: social capital based in the composition of your network and the benefits you can derive - cognitive: social capital bases in shared beliefs and identities - relational: social capital based on the nature of the relationships within your network. this is where trust and communication really come into play

accelerator

-organization that supports startup technology business by providing inexpensive office space, a variety of support services, and resources - most are associated with university

reasons ventures go public

1) raise equity capital to fund current and future operations 2) raise a venture's public profile, making it easier to attract high-quality customers, business partners, and employees 3) liquidity event that provides a way for investors to recoup their initial investments 4) creates a form of currency that can be used to grow the venture via acquisitions

why use equity capital

1) you will reduce your own exposure to financial loss 2) your business will not have increased costs in form of interest 3) bringing outside investors into an existing business can often reenergize it by providing new ideas, procedure, and processes

The logic of costs: 8 steps

1. Identify all of the costs in the business• (do not forget debt that has to be serviced) 2. Distinguish those related to what is being sold 3. Determine a unit of analysis 4. Group costs into 'fixed' and 'variable' 5. Identify revenue drivers 6. Look at prices---determine average 7. Calculate contribution margins 8. Determine breakeven

legal forms of venture: limited liability company (LLC)

created by filing required docs with state gov, choice of tax as corporations of partnerships

need money urgently

credit cards, existing line of credit, friends/family

what can fear be influenced by?

culture (shame) political/legal environment (bankruptcy)

Global fear of failure (GEM)

lowest fear - Africa, latin America, Caribbean highest fear - Asia, Oceana, Europe U.S. in the middle

gain on investments

percentage amount that the payout of an investment differs from original cost ([payout-investment+dividends]/investment)

diversify

provide capital to ventures of differing risk profiles for the purpose of reducing overall risk

non- equity source : Personal Funds

the vast majority of founders contribute personal funds along with sweat equity to their ventures - sweat equity represents value of the time and effort of founder

why most new venture need funding

there are three reasons new ventures need to raise money during their early life: - cash flow challenges - capital investments - lengthy product development cycles

where does fear come from?

underlying psychology, emotion, culture, political/regulatory environment pain can be similar to losing a loved one

business offers high return

unique business idea, high growth, niche market, proven management funding: equity

non-equity source : Bootstrapping

when the going gets tough, the tough get going

competitor analysis

• A competitor analysis is a detailed analysis of a firm's competition. • It helps a firm understand the positions of its major competitors and the opportunities that are available.• A competitive analysis grid is a tool for organizing the information a firm collects about its competitors.

Patents

• A patent is a grant from the federal government conferring the rights to exclude others from making, selling, or using an invention for the term of the patent. • 1.) Useful: it must have utility • 2.) Novel: It must be different from what has come before • 3.) Not Obvious: It must not be something that is obvious to a person of ordinary skill in the field

Plant patent

• Any new varieties of plants that can be reproduced asexually. • 20 years from original application

debt financing : SBA Guaranteed Loans

• Approximately 50% of the 9,000 banks in the U.S. participate in the SBA Guaranteed Loan Program.• The program operates through private-sector lenders who provide loans that are guaranteed by the SBA.• The loans are for small businesses that are not able to obtain credit elsewhere

Issues with debt & family/friends

• Banks often do not loan to start-up businesses.• Owners often do not want to share ownership.• Owners usually want to be their own bosses.• Owners typically do not want to be responsible to others for losses of the business.

Contracting

• Contracts• agreements in which the parties exchange promises • Standard contracts• company can just fill in the blanks as needed • Specialty contracts• unique contract terms, large dollar amounts at stake

Four Types of Intellectual Property (IP)

• Copyright • Trademark (and service mark) • Trade secret • Patent

Cost Drivers

• Cost of good sold (COGS): the value of goods sold when a sales takes place• Operating expenses: administrative, marketing, research, salaries, etc.

debt financing : Commercial Banks

• Historically, commercial banks have not been viewed as a practical source of financing for start-up firms. • This sentiment is not a knock against banks; it is just that banks are risk averse, and financing start-ups is a risky business.• Banks are interested in firms that have a strong cash flow, low leverage, audited financials, good management, and a healthy balance sheet.

environmental trends

• Include economic trends, social trends, technological advances, and political and regulatory changes.• For example, industries that sell products to seniors are benefiting by the aging of the population.

Design patent

• Invention of new, original, and ornamental design for manufactured products. • 14 years from date of original application

Intellectual Property

• Is any product of human intellect that is intangible but has value in the marketplace. • It is called "intellectual" property because it is the product of human imagination, creativity, and inventiveness.

Implications of cost structure

• More fixed costs mean increased risk • High fixed cost structure means it takes more sales each month to achieve breakeven • However, this also means that once you hit breakeven, you make more money• Thus, you need high volumes or high margins when you have high fixed costs • Customization drives up variable costs and limits volume- meaning you must be able to charge high margins • Most ventures have limited fixed costs

business trends

• Other trends that impact an industry. • For example, are profit margins in the industry increasing or falling? Is innovation accelerating or waning? Are input costs going up or down?

What Makes a Social Network Tick?

• Social Capital (that we discussed earlier)• Social capital develops between network ties over time • "Smooths" transactions between ties

Business Method patent

• Special utility patent • A business method patent is a patent that protects an invention that is or facilitates a method of doing business. • Amazon.com's one-click ordering system.