Finance 335 chapter 2
2. Identify three types of startup firms
1) Salary-replacement firms are firms that provide their owners with income levels comparable to what they could have earned working for much larger firms. 2) Lifestyle firms are firms that allow owners to pursue specific lifestyles while being paid for doing what they like to do. 3) Entrepreneurial ventures are entrepreneurial firms that are flows and performance oriented as reflected in rapid value creation over time.
5. Describe the differences between entrepreneurial ventures and other entrepreneurial firms.
Entrepreneurial ventures are entrepreneurial firms that are flows and performance oriented as reflected in rapid value creation over time. Such ventures strive for high growth in revenues, profits, and cash flows. In contrast, some small businesses may have some of the trauma and rewards of the entrepreneurial lifestyle, but remain centered on a small-scale format with limited growth and employment opportunities.
Identify some of the best marketing and management practices of high growth, high performance firms.
Successful high-growth, high-performance firms typically sell high quality products or provide high quality services. Such firms also generally develop and introduce new products or services considered the top or best in their industries; they are product and service innovation leaders. Their products typically command higher prices and profit margins. In summary, these firms' "marketing profiles" are characterized by high quality, innovative leadership, and pricing power Best management practices include: (1) assemble a management team that is balanced in both functional area coverage and industry/market knowledge, (2) employ a decision-making style that is viewed as being collaborative, (3) identify and develop functional area managers that support entrepreneurial endeavors, and (4) assemble a board of directors that is balanced in terms of internal and external members.
1. How do we know whether an idea has the potential to become a viable business opportunity?
The answer is that we don't know with absolute certainty. While there is no infallible screening process, there are tools and techniques that can help examine similarities between a new idea and previously successful ventures.
Describe the factor categories used by venture capitalists and other venture investors when they screen venture opportunities for the purpose of deciding to invest
The categories used by venture investors to screen are the industry or market, pricing and profitability, the management team, and financial harvest indicators. The market size of the industry, now or expected in the future, is a critical factor in the likelihood that a venture can become high growth, with potential sales or revenues of more than $100 million being required to scoring a "high" in terms of potential attractiveness. Profitability, indicated by the gross profit margin, is one of the most important metrics for judging the potential for a viable business opportunity, with a large gross profit margin providing a cushion for covering related business expenses while still providing sufficient return for investors. In general, a gross profit margin greater than 50 percent indicates that a venture has the potential to be a high growth, high performance opportunity. The net profit margin may also be used to evaluate ventures, with after-tax greater margins greater than 20 percent suggesting the potential for a high growth, high performance venture. Venture screening usually begins with an assessment of the management team's experience and expertise, with a high score being given to a management team having both expertise and experience in the proposed business opportunity's industry or market. Finally, venture investors give high scores to entrepreneurs who have given some thought in relation to providing investors with an exit from their venture investment. Financial harvest indicators such as operating cash flow breakeven, free cash flow to equity, and internal rate of return (IRR) provide indications that a venture will be able to achieve an exit strategy, and returns to investors, in an acceptably short period of time.
4. What are the components of a sound business model?
The components of a sound business model are the abilities to generate revenues, create a profit, and produce free cash flow. These components must be achieved within a reasonable time frame as the venture progresses through the early stages of its life cycle.
3. Briefly describe the process involved in moving from an idea to a business plan
Start with "ideas," then assess the "feasibility" (finding an unfilled need), and then develop a "business plan
Time to market is generally important, but being first to market does not necessarily ensure success
"Time-to-market" is particularly critical when ideas involve information technology, as a few months might determine success or failure. EBay's rapid progression from concept to market dominance provides an example of the advantages of acting quickly in a technology market. "First to market," does not always result in success, as quite often companies entering the market later may achieve significant competitive advantages such as more efficient production, distribution, and service, superior product design, and a more sound financial position. The portable computer, first sold by Osborne, provides an example of a technology product that failed to achieve success by being "first to market."
10. Describe how a SWOT analysis can be used to conduct a first-pass assessment of whether an idea is likely to become a viable business opportunity.
A SWOT analysis is an examination of strengths, weaknesses, opportunities, and threats to determine the business opportunity viability of an idea. One typically "begins" by asking whether there is an unfilled customer need. Other considerations that could be potential strengths or weaknesses include: intellectual property rights, first mover, lower costs and/or higher quality, experience/expertise, and reputation value. Areas to consider as potential opportunities or threats include: existing competition, market size/market share potential, substitute products or services, possibility of new technologies, recent or potential regulatory changes, and international market possibilities
What is a business plan? Why is it important to prepare a business plan?
A business plan is a written document that describes the proposed venture in terms of the product or service opportunity, current resources, and financial projections. More formal business plan development is common in ventures moving from the development stage to the startup stage. The process of business planning is beneficial to the entrepreneur, who must be the first to believe the plan is reasonable. The entrepreneur must be convinced that starting this business is the right thing to do personally and professionally; the business plan reflects the excitement, opportunity, and reasonableness of the business idea to the members of the management team, potential investors, and other stakeholders
What are the major elements of a typical business plan?
A typical business plan contains, in its Introduction, a cover page, confidentiality statement, table of contents, and executive summary. The Business Description section presents some of the considerations related to the venture opportunity-screening phase on industry/market factors. The Marketing Plan and Strategy section addresses the target market and customers, competition and market share, pricing strategy, and promotion and distribution. The Operations and Support section discusses how production methods or services will be delivered. The Management Team section presents the experience and expertise characteristics of the management team. In the Financial Plans and Projections, the business plan typically includes financial projections in the form of income statements, balance sheets, and statements of cash flows. These projections provide the basis for how the venture is expected to start up and operate over the next several years. The business plan should include a discussion of possible Problems or Risks. The Appendix should contain the detailed assumptions underlying the projected financial statements in the Financial Plans and Projections section. It should also include a timeline with milestones indicating the amount and size of expected financing needs.
What is meant by a viable venture opportunity?
A viable venture opportunity is one that creates or meets a customer need, provides an initial competitive advantage, is timely in terms of time-to-market, and offers the expectation of added value to investors
Describe the characteristics of a viable venture opportunity. What is a VOS Indicator?
A viable venture opportunity will meet a customer need, have a competitive advantage, be able to be brought to market quickly, and offer attractive investment returns compared to the risk associated with it. A VOS Indicator is a guide to help investors and entrepreneurs screen business opportunities. It contains a checklist for indicating the potential attractiveness of a proposed venture.
Describe and discuss some of the best financial practices of high growth, high performance firms. Why is it also important to consider production or operations practices?
High-growth, high-performance firms consider their financial practices as important as their marketing and operating functions. To this end, they plan for future growth and unexpected contingencies that may develop as the firm operates. They prepare realistic monthly financial plans for at least the coming year, and also may prepare annual financial plans for the next three to five years. As rapid growth typically requires multiple rounds of financing, successful ventures anticipate financing needs in advance and seek to obtain financing commitments before the funds are actually needed. Financing sources that allow, whenever possible, the entrepreneur to maintain control over the firm, are highly desirable. Successful high growth firms devote the necessary resources and effort to manage the firm's assets, financial resources, and operating performance efficiently and effectively. They also develop preliminary harvest or exit strategies and may indicate potential liquidity events in their business plans.
What are real options? What types of real option opportunities are available to entrepreneurs?
Real options are real or non-financial options available to a venture's managers as the venture progresses through its life cycle. Examples of real options include growth options, flexibility options, learning options, and even exit options. Growth options represent the possibility that, if the venture's market begins to grow rapidly, an initial toehold position in a scalable technology or service may provide a platform for quick expansion to capture market share. Flexibility or learning options may develop when an investment in new technology has multiple potential applications and revenue streams. Exit options relate to the venture's ability to provide a return in a variety of ways other than remaining as a free-standing venture. The venture's intellectual property can be licensed or purchased by other firms, the venture can be absorbed into another public or private entity or the venture can remain independent and use its cash flow to provide a return for the investors.
11. Describe the meaning of venture opportunity screening
Venture opportunity screening is the assessment of an idea's commercial potential to produce revenue growth, financial performance, and value.
