Entrepreneurial Strategy Final Exam

Board of directors have 3 formal responsibilites

1. Appoint the officers of the firm. 2. Declare dividends. 3. Oversee the affairs of the corporation.

Steps to Preparing to Raise Debt or Equity Financing

1. Determine precisely how much money is needed 2. Determine the type of financing or funding that is the most appropriate 3. Develop a strategy for engaging potential investors or bankers

Reasons that Motivate Firms to Go Public

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

Start-Up Firms must follow three steps

1. Segmenting the market 2. Selecting a target market 3. Establishing a unique position in the target market

Issues to Consider in Choosing a Legal Form of Business Ownership

1. The cost of setting up and maintaining the legal firm. 2. The extent in which personal assets can be shielded from the liabilities of the business. 3. Tax Considerations 4. The number and types of investors involved.

Business Licenses

A business needs a license to operate. If run out of the founder's home, a separate home occupation business license is often required. If a business has employees or is a corporation, LLC, or limited partnership, it will usually need a state business license in addition to its local one. A narrow group of companies are required to have a federal business license, including investment advising, drug manufacturing, and interstate trucking.

Liquidity

A company's ability to meet its short-term financial obligations.** Even if a firm is profitable, it is often a challenge to keep enough money in the bank to meet its routine obligations in a timely manner.

Initial Public Offering

A company's first sale of stock to the public. When a company goes public, its stock is traded on one of the major stock exchanges. Most entrepreneurial firms that go public trade on the NASDAQ, which is weighted heavily toward technology, biotech, and small-company stocks. An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future.

SBIR Program

A competitive grant program that provides over $1 billion per year to small businesses in early-stage and development projects. Each year, 11 federal departments and agencies are required by the SBIR to reserve a portion of their R&D funds for awards to small businesses. Guidelines for how to apply for the grants are provided on each agency's Web Site

Business Model

A firm's plan or diagram for how it competes, uses its resources, structures its relationships, interfaces with customers, and creates value to sustain itself on the basis of the profits it generates. Includes all the activities that define how a firm competes in the marketplace. A firm's business model takes it beyond its own boundaries. Business model is developed after the feasibility analysis stage of launching a new venture.

Debt-to-Equity Ratio

A higher debt-to-equity ratio typically shows that a company has been aggressive in financing its growth with debt, and there may be a greater potential for financial distress if earnings do not exceed the cost of borrowed funds.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations.

What is Marketing Mix?

A set of tools/decisions under the control of the company that the company uses to influence demand from the customers.

SBIR Program (CONT)

A three phase program, meaning that firms that qualify have the potential to receive more than one grant to fund a particular proposal. Historically, less than 15% of all phase I proposals are funded. The payoff for successful proposals, however, is high. The money is essentially free. It is a grant, meaning that it doesn't have to be paid back and no equity in the firm is at stake. The small business receiving the grant also retains the rights to any intellectual property generated as the result of the grant initiative.

Leasing

A written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments. Major advantage of leasing is that it enables a company to acquire the use of assets with very little or no down payment.

Founder's Agreement

AKA shareholders' agreement, is a written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the cash or the "sweat equity" they put into the firm, and how long the founders will have to remain with the firm for their shares to fully invest.

How can you build up a brand?

Advertising Promotions: Sales and trade shows Public Relations Sampling Sponsorships Provide support for social causes Websites

Types of Promotion

Advertising Public Relations Social Media Sites Viral Marketing Guerrilla Marketing

Size and Type of Loans

Almost all small businesses are eligible to apply for an SBA guaranteed loan. The SBA can guarantee as much as 85% on loans up to $150,000 and 75% on loans over $150,000 An SBA guaranteed loan can be used for almost any legitimate business purpose. The SBA has helped make $280 billion in loans to nearly 1.3 million businesses.

Profit Margin

An increasing profit margin means that a firm is either boosting its sales without increasing its expenses or that it is doing a better job of controlling its costs. A declining profit margin means that a firm is losing control of its costs or that it is slashing prices to maintain or increase sales.

Difference between Angel Investors and Venture Capitalists

Angels tend to invest earlier in the life of a company, whereas venture capitalists come in later.

Strategic Partners

Another source of capital for new ventures. Many partnerships are formed to share the costs of product/service development, to gain access to particular resources, or to facilitate speed to market. Older established firms benefit by partnering with young entrepreneurial firms by gaining access to their creative ideas and entrepreneurial spirit.

SBA Guaranteed Loans

Approximately 50% of the 9000 banks in the U.S. participate in the SBA Guaranteed Loan Program. Program operates through private-sector lenders who provide loans that are guaranteed by the SBA. Loans are for small businesses that are not able to obtain credit elsewhere. The 7(A) Loan Guaranty Program The most notable SBA program available to small businesses.

Profitability Ratios

Associate the amount of income earned with the resources used to generate it. Includes ROA, ROE, and Profit Margin

Sources of Equity Funding

Business Angels Venture Capital Initial Public Offerings

Examples of Bootstrapping Methods

Buying used instead of new equipment Obtaining payments in advance from customers Coordinate purchases with other businesses Buying items cheaply but prudently via options such as eBay Minimizing personal expenses Sharing office space or employees with other Businesses Leasing equipment instead of buying Avoiding unnecessary expenses Hiring interns

Why Most New Ventures Need Funding

Cash Flow Challenges Capital Investments Lengthy Product Development Cycles

Founder(s)

Characteristics of the founder(s) of a firm and their early decisions have a significant impact on the manner in which the new venture team takes shape. 50%-70% of all new ventures are started by more than one individual. It is believed that new ventures started by a team rather than a single individual have an advantage.

Sources of Debt Financing

Commercial Banks SBA Guaranteed Loans

Two pricing methods

Cost-based Pricing Value-based Pricing

Importance of establishing a brand

Creates brand loyalty, makes your product/company recognizable, and defines price.

How to Segment the Market

Demographics (age, location, gender, etc) Product Type Price (low price vs. medium vs. high) Customers served

Passive Income

Earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved.

Place (Distribution)

Encompasses all the activities that move a firm's product from its place or origin to the consumer. A firm has to decide whether to sell its products directly to consumers or through intermediaries (such as wholesalers and retailers)

Bootstrapping

Finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost-cutting, or any means necessary. Many entrepreneurs bootstrap out of necessity.

Factors that may contribute to a founders' success

Firm started by a team Higher education Prior entrepreneurial experience Relevant industry experience The ability to "network" effectively

Venture Capital (CONT)

Firms fund very few entrepreneurial firms in comparison to business angels. Many entrepreneurs get discouraged when they are repeatedly rejected for venture capital funding, even though they may have an excellent business plan. Venture capitalists are looking for the "home run" and so reject the majority of the proposals they consider. For the firms that qualify, venture capital is a viable alternative for equity funding. An important part of obtaining venture-capital funding is going though the due diligence process: Capitalists invest money in start-ups in "stages" meaning that not all the money that is invested is disbursed at the same time. Some venture capitalists also specialize in certain "stages" of funding.

Elements of a New Venture Team

Founder(s) of the venture then: Key Employees Board of Directors Management Team Board of advisers Lenders and Investors Other Professionals

Other Sources of Debt Financing

Friends and Family Credit Cards: Should be used sparingly Peer-to-Peer Lending Networks Organizations that Lend Money to Specific Groups

Return On Assets (ROA)

Gives an idea as to how efficient management is at using its assets to generate earnings.

New Venture Team

Group of Founders, key employees, and advisers that move a new venture from an idea to a fully functioning firm. Team also involves more than paid employees: Can include boards of directors, boards of advisers, and professionals on whom they rely on for direction and advice.

Commercial Banks

Historically, commercial banks have not been viewed as practical sources of financing for start-up firms. Banks are risk adverse 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.

Positioning

How a firm differentiates itself from its rivals. Part of the market that a firm is claiming as its own. Firms establish a unique position in their customers' minds by drawing attention to two or three of the product's attributes. Firms develop a "tagline" to reinforce the position they have staked out in their market. Becomes associated with the company. Establish position by: Price Quality Customers What you have that competitors dont

Efficiency

How productively a firm utilizes its assets relative to its revenue and its profits.

What is a brand?

How you differentiate yourself from others. Your company's name or image. Set of attributes people associate with your product/company. Attributes can be positive or negative.

Business Angels

Individuals who invest their personal capital directly in start-ups. Prototypical angel is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and is interested in the startup process. The number of angel investors in the U.S. has increased dramatically over the past decade. Valuable because of their willingness to make relatively small investments. Generally invest between $10,000 and $500,000 in a single company Are looking for companies that have the potential to grow between 30% to 40% per year. They are difficult to find

Market Segmentation

Involves studying a firm's industry and determining the different target markets in that industry.

Establishing a Strong Ethical Culture

Lead by Example: Most important thing for entrepreneurs to do. Establish a Code of Conduct: Formal statement of an organization's values on certain ethical and social issues. Implement an Ethics Training Program: Teach business ethics to help employees deal with ethical dilemmas and improve their overall ethical conduct. An ethical dilemma is a situation that involves doing something that is beneficial to oneself or the organization, but may be unethical.

Creative Sources of Financing or Funding

Leasing Small Business Innovation Research Grants Other Grant Programs Strategic Partners

Corporations

Legally required to have a board of directors**

Equity Funding

Means exchanging partial ownership in a firm, usually in the form of stock, for funding.

Debt Funding

Means simply getting a loan from a bank to fund your venture.

Liquidity Ratios

Measure the extent to which a company can quickly liquidate assets to cover short-term liabilities Includes Current Ratio and Quick Ratio

Quick Ratio

Measures a company's ability to meet its short-term obligations with its most liquid assets.

Return on Equity (ROE)

Measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

Overall Financial Stability Ratios

Measures the overall financial stability of a firm. Includes Debt Ratio and Debt-to-Equity Ratio

Venture Capital

Money that is invested by venture-capital firms in start-ups and small businesses with exceptional growth potential. There are about 650 venture-capital firms in the U.S. that provide funding to about 2,600 firms per year. These firms are limited partnerships of money managers who raise money in "funds" to invest in start-ups and growing firms. The funds are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources. A typical fund is $75 million to $200 million and invests in 20 to 30 companies over a 3-5 year period.

Frequency of Meetings and Compensation

Most board of directors meet three to four times a year. New ventures are more likely to pay their board members in company stock or ask them to service on a voluntary basis rather than pay a cash honorarium.

Leasing (CONT)

Most leases involve a modest down payment and monthly payments during the duration of the lease. At the end of an equipment lease, the new venture typically has the option to stop using the equipment, purchase it for fair market value, or renew the lease. Leasing is almost always more expensive than paying cash for an item, so most entrepreneurs think of leasing as an alternative to equity or debt financing.

Avoiding Legal Disputes

Most legal disputes are the result of misunderstandings, sloppiness, or a simple lack of knowledge of the law. Several steps that an entrepreneur can take to avoid legal disputes: Meet all contractual obligations Avoid undercapitalization Get everything in writing Set Standards

Items to Include in a Founders' Agreement

Nature of the prospective business A brief business plan Identity and proposed titles of the founders Legal form of business ownership Apportionment of stock Consideration paid for stock or ownership share of each of the founders Identification of any intellectual property signed over to the business Description of the initial operating capital Buyback clause

Liabilities of Newness

New ventures have a high propensity to fail. High failure rate is due in part to liabilities of newness, which refers to the fact that new companies often falter because the people involved cant adjust fast enough to their new roles and because the firm lacks a track record of success. Assembling a talented and experienced management team is one path that firms can take to overcome these limitations.

Board of Directors

Panel of individuals who are elected by a corporation's shareholders to oversee the management of the firm. Typically made up of both inside directors and outside directors Inside-person who is also an officer of the firm. Outside-someone who is not employed by the firm.

How to Raise Money for a New Venture

Personal Funds Equity Financing Debt Financing Creative Sources

Potential Payoffs for Establishing a Strong Ethical Culture

Potential Avoidance of Fines Better access to capital Decreased Vulnerability Improved Customer Loyalty Improved Employee Commitment Improved Brand Reputation

Public Relations Techniques

Press releases Articles in industry press and periodicals Monthly newsletter Civic, social, and community involvement Media coverage Blogging News conference

4 P's of the marketing mix

Product Price Promotion Place

Financial Objectives of a Firm

Profitability Liquidity Efficiency Stability

Pros and Cons of Advertising

Pros: Raise customer awareness of a product. Explain a product's comparative features and benefits. Create associations between a product and a certain lifestyle. Cons: Low credibility. The possibility that a high percentage of people who see the ad will not be interested. Message clutter. Relative costliness compared to other forms of promotion. Intrusiveness.

Board of Directors can Help Start-Ups get off to a good start by

Providing Guidance: most useful role of a board of directors is to provide guidance and support to the firm's managers. Lend Legitimacy: well-known and respected board members bring instant credibility to a firm.

Business Model Innovation

Refers to a business model that revolutionizes how a product is produced, sold, or supported after the sale.

Promotion

Refers to the activities the firm takes to communicate the merits of its product to its target market.

How to select the target market

See where you can make the most money. Find niche in market, where there are not many competitors. The market must be attractive and the firm must have the capability to serve it.

Choosing an Attorney for a Firm

Select an Attorney as early as possible: Critically important that the attorney be familiar with startup issues. Intellectual Property: For issues dealing with IP, it is essential to use an attorney who specializes in this field.

Importance of Business Models

Serve as an ongoing extension of feasibility analysis. Focuses attention on how all the elements of a business fit together and constitute a working whole. Describes why the network of participants needed to make a business idea viable are willing to work together. Articulates a company's core logic to all stakeholders, including all employees.

Business Permits

Some businesses may need to obtain one or more permits, in addition to obtaining licenses. The need to obtain a permit depends on the nature and location of the business: If selling food, you'll need a city/county health permit. If your business is open to the public, you may need a fire permit. Some communities require businesses to obtain a license to put up a sign. All businesses that plan to use a fictitious name need a fictitious business name permit.

Recruiting Key Employees

Startups vary in terms of how quickly they need to add personnel. Founders will sometimes work alone for a period of time while on the other hand employees may be hired immediately. A skills profile is a chart that depicts the most important skills that are needed and where skills gaps exist in a new firm.

Value Chain

String of activities that moves a product from the raw material stage, through manufacturing and distribution, and ultimately to the end user. An organization can use the value chain to identify ways to create additional value and assess whether it has the means to do so. Helpful in identifying opportunities for new businesses and in understanding how business models emerge.

SBIR and STTR Grants

The Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs are two important sources of early-stage funding for technology firms. These programs provide cash grants to entrepreneurs who are working on projects in specific areas. The main difference between the SBIR and the STTR programs is that the STTR program requires the participation of researchers working at universities or other research institutions.

Profitability

The ability to earn a profit.** Many start-ups are not profitable during their first one to three years while they are training employees and building their brands. However, a firm must become profitable to remain viable and provide a return to its owners.

Price

The amount of money consumers pay to buy a product. The price a company charges for its products sends an important message to its target market.

Personal funds, friends, family, and other forms of bootstrapping

The business has high risk with an uncertain return: Weak Cash Flow High Leverage Low-to-moderate Growth Unproven Management

Debt Financing

The business has low risk with a more predictable return: Strong Cash Flow Low Leverage Audited Financials Good Management Healthy balance sheet

Equity Financing

The business offers a high return: Unique business idea High Growth Niche Market Proven Management

Other Government Grants

The federal government has grant programs beyond the SBIR and STTR programs. Be careful of grant-related scams.

Product

The good or service a firm offers to its target market.

Cost-Based Pricing

The list price is determined by adding a markup percentage to a product's cost.

Value-Based Pricing

The list price is determined by estimating what consumers are willing to pay for a product.

Stability

The strength and vigor of the firm's overall financial posture, specifically as it relates to its debt-to-equity ratio. For a firm to be stable, it must not only earn a profit and remain liquid but also keep its debt in check.

Personal Funds

The vast majority of founders contribute personal funds, along with sweat equity, to their ventures. Sweat Equity represents the value of the time and effort that a founder puts into a new venture. Friends and Family are the second source of funds for many new ventures

Private Grants

There are a limited number of grant programs available. Getting grants takes a little detective work. Granting agencies are low key and must be sought out.

Value Chain (CONT)

Used to pinpoint where the value chain can be made more effective or to spot where additional "value" can be added. Analysis may focus on: A single primary activity such as marketing and sales. The interface between one stage of the value chain and another, such as the interface between operations and outgoing logistics. One of the support activities, such as human resource management.

Dell

When Dell's business model was first introduced it was a business model innovation.