Managing Entrepreneurial Ventures
Appendix A
L E A R N I N G O U T L I N E
Use this Learning Outline as you read and study this chapter.
The Context of Entrepreneurship
Differentiate between entrepreneurial ventures and small businesses.
Explain why entrepreneurship is important in the United States and globally.
Describe the four key steps in the entrepreneurial process.
Explain what entrepreneurs do.
Discuss why social responsibility and ethics are important considerations for entrepreneurs.
L E A R N I N G O U T L I N E (cont’d)
Use this Learning Outline as you read and study this chapter.
Start-Up and Planning Issues
Discuss how opportunities are important to entrepreneurial ventures.
Describe each of the seven sources of potential opportunity.
Explain why it’s important for entrepreneurs to understand competitive advantage.
List possible financing options for entrepreneurs.
Describe the six major sections of a business plan.
L E A R N I N G O U T L I N E (cont’d)
Use this Learning Outline as you read and study this chapter.
Organizing Issues
Contrast the six different forms of legal organization.
Describe the organizational design issues that entrepreneurs face.
Discuss the unique human resource management issues entrepreneurs face.
Describe what an innovation-supportive culture looks like.
L E A R N I N G O U T L I N E (cont’d)
Use this Learning Outline as you read and study this chapter.
Leading Issues
Explain what personality research shows about entrepreneurs.
Discuss how entrepreneurs can empower employees.
Explain how entrepreneurs can be effective at leading employee work teams.
Controlling Issues
Describe how entrepreneurs should plan, organize, and control growth.
Describe the boiled frog phenomenon and why it’s useful for entrepreneurs.
Discuss the issues an entrepreneur needs to consider when deciding whether to exit the entrepreneurial venture.
The Context of Entrepreneurship
What Is Entrepreneurship?
Entrepreneurship is the process of starting new businesses, generally in response to opportunities.
Entrepreneurial Ventures
Organizations that pursue opportunities, are characterized by innovative practices, and have growth and profitability as their main goals.
Small Business
A firm that is independently owned, operated, and financed; has fewer than 100 employees; doesn’t necessarily engage in new or innovative practices, and has relatively little impact on its industry.
Why Is Entrepreneurship Important?
Innovation
Engage in the creative destruction process
Act as agents of change
Number of New Startups
Increasing numbers of new firms
Job Creation
New ventures create 60-80% of net new jobs
Exhibit A–1 Global Entrepreneurship Monitor 2005—Country Clusters
Cluster 1: Cluster 2:
Middle-Income, High-Growth High-Income, High-Growth
Argentina Australia Italy
Brazil Austria Japan
Chile Belgium Netherlands
China Canada New Zealand
Croatia Denmark Norway
Hungary Finland Singapore
Jamaica France Spain
Latvia Germany Sweden
Mexico Greece Switzerland
Slovenia Iceland United Kingdom
South Africa Ireland United States
Thailand
Venezuela
Source: Adapted from M. Minniti, W. D. Bygrave, and E. Autio, “Global Entrepreneurship Monitor: 2005 Executive Report,” Babson College and London Business School.
The Entrepreneurial Process
Exploring the Entrepreneurial Context
Identifying Opportunities and Possible Competitive Advantages
Starting the Venture
Managing the Venture
Potential Sources of Opportunity
Environmental Context
The Incongruous
The Process Need
Industry and Market Structures
Demographics
Changes in Perception
New Knowledge
The Unexpected
Exhibit A–2 Evaluating Potential Ideas
Who are the potential customers for your idea: who, where, how many?
What similar or unique product features does your proposed idea have compared to what’s currently on the market?
How and where will potential customers purchase your product?
Have you considered pricing issues and whether the price you’ll be able to charge will allow your venture to survive and prosper?
Have you considered how you will need to promote and advertise your proposed entrepreneurial venture?
Do you have the capabilities to do what you’ve selected?
Are you ready to be an entrepreneur?
Are you prepared emotionally to deal with the stresses and challenges of being an entrepreneur?
Are you prepared to deal with rejection and failure?
Are you ready to work hard?
Do you have a realistic picture of the venture’s potential?
Have you educated yourself about financing issues?
Are you willing and prepared to do continual financial and other types of analyses?
Marketplace Considerations:
Personal Considerations:
Exhibit A–3 Feasibility Study
A. Introduction, historical background, description of product or service:
Brief description of proposed entrepreneurial venture
Brief history of the industry
Information about the economy and important trends
Current status of the product or service
How you intend to produce the product or service
Complete list of goods or services to be provided
Strengths and weaknesses of the business
Ease of entry into the industry, including competitor analysis
B. Accounting considerations:
1. Proforma balance sheet
2. Proforma profit and loss statement
3. Projected cash flow analysis
Exhibit A–3 Feasibility Study (cont’d)
C. Management considerations:
Personal expertise—strengths and weaknesses
Proposed organizational design
Potential staffing requirements
Inventory management methods
Production and operations management issues
Equipment needs.
D. Marketing considerations:
Detailed product description
Identify target market (who, where, how many)
Describe place product will be distributed (location, traffic, size, channels, etc.)
Price determination (competition, price lists, etc.)
Promotion plans (personal selling, advertising, sales promotion, etc.)
Exhibit A–3 Feasibility Study (cont’d)
E. Financial considerations:
Start-up costs
Working capital requirements
Equity requirements
Loans—amounts, type, conditions
Breakeven analysis
Collateral
Credit references
Equipment and building financing—costs and methods
F. Legal considerations:
Proposed business structure (type; conditions, terms, liability, responsibility; insurance needs; buyout and succession issues)
Contracts, licenses, and other legal documents
G. Tax considerations: (sales/property/employee; federal, state, and local)
H. Appendix: charts/graphs, diagrams, layouts, resumes, etc.
Researching Competitors
Competitor Intelligence:
What types of products or services are competitors offering?
What are the major characteristics of these products or services?
What are their products’ strengths and weaknesses?
How do they handle marketing, pricing, and distributing?
What do they attempt to do differently from other competitors?
Do they appear to be successful at it? Why or why not?
What are they good at?
What competitive advantage(s) do they appear to have?
What are they not so good at?
What competitive disadvantage(s) do they appear to have?
How large and profitable are these competitors?
Exhibit A–4 Possible Financing Options
Entrepreneur’s personal resources (personal savings, home equity, personal loans, credit cards, etc.)
Financial institutions (banks, savings and loan institutions, government-guaranteed loan, credit unions, etc.)
Venture capitalists—external equity financing provided by professionally-managed pools of investor money
Angel investors—a private investor (or group of private investors) who offers financial backing to an entrepreneurial venture in return for equity in the venture
Initial public offering (IPO)—the first public registration and sale of a company’s stock
National, state, and local governmental business development programs
Unusual sources (television shows, judged competitions, etc.)
Investing in Entrepreneurial Ventures
Venture Capitalists
External equity financing provided by professionally-managed pools of investor money.
Angel Investors
A private investor (or group of private investors) who offers financial backing to an entrepreneurial venture in return for equity in the venture.
Initial public offering (IPO)
The first public registration and sale of a company’s stock.
Developing a Business Plan
Business Plan
A written document that summarizes a business opportunity and defines and articulates how the identified opportunity is to be seized and exploited.
Elements of a Business Plan
Executive summary
Analysis of opportunity
Analysis of context
Description of the business
Financial data and projections
Supporting documentation
Exhibit A–5 Legal Forms of Business Organization
Unlimited personal liability
Divided authority and decisions
Potential for conflict
Continuity of transfer of ownership
Ease of formation
Pooled talent
Pooled resources
Somewhat easier access to financing
Some tax benefits
Unlimited personal liability
Income and losses “pass through” to partners and are taxed at personal rate
flexibility in profit-loss allocations to partners
Two or more owners
General partnership
Unlimited personal liability
Personal finances at risk
Miss out on many business tax deductions
Total responsibility
May be more difficult to raise financing
Drawbacks
Low start-up costs
Freedom from most regulations
Owner has direct control
All profits go to owner
Easy to exit business
Unlimited personal liability
Income and losses “pass through” to owner and are taxed at personal rate
One owner
Sole
proprietorship
Advantages
Liability
Tax Treatment
Ownership Requirements
Structure
Exhibit A–5 Legal Forms of Business Organization (cont’d)
Expensive to set up
Closely regulated
Double taxation
Extensive record keeping
Charter restrictions
Limited liability Transferable ownership Continuous existence
Easier access to resources
Limited
Dividend income is taxed at corporate and personal shareholder levels; losses and deductions are corporate
Unlimited number of shareholders; no limits on types of stock or voting arrangements
C corporation
Cost and complexity of forming can be high
Limited partners cannot participate in management of business without losing liability protection
Drawbacks
Good way to acquire capital from limited partners
Limited, although one partners must retain unlimited liability
Income and losses “pass through” to partner and are taxed at personal rate; flexibility in profit-loss allocations to partners
Two or more owners
Limited liability partnership (LLP)
Advantages
Liability
Tax Treatment
Ownership Requirements
Structure
Exhibit A–5 Legal Forms of Business Organization (cont’d)
Cost of switching from one form to this can be high
Need legal and financial advice in forming operating agreement
Greater flexibility
Not constrained by regulations on C and S corporations
Taxed as partner-ship, not as corporation
Limited
Income and losses “pass through” to partners and are taxed at personal rate; flexibility in profit-loss allocations to partners
Unlimited number of “members”; flexible membership arrangements for voting rights and income
Limited liability company (LLC)
Must meet certain requirements
May limit future financing options
Drawbacks
Easy to set up
Enjoy limited liability protection and tax benefits of partnership
Can have a tax-exempt entity as a shareholder
Limited
Income and losses “pass through” to partners and are taxed at personal rate; flexibility in profit-loss allocation to partners
Up to 75 share-holders; no limits on types of stock or voting arrangements
S corporation
Advantages
Liability
Tax Treatment
Ownership Requirements
Structure
Human Resource Management Issues in
Entrepreneurial Ventures
Employee Recruitment Concerns
Locating high potential employees who:
can perform multiple roles
are willing to “buy-in” (commitment)
Filling critical skill gaps
Employee Retention Issues
Potential for damage to client/customer relationships due to loss of employees
Need to offer desirable benefits
Compensation: base pay and incentives
Exhibit A–6 Suggestions for Achieving a Supportive Growth-Oriented Culture
Keep the lines of communication open—inform employees about major issues.
Establish trust by being honest, open, and forthright about the challenges and rewards of being a growing organization.
Be a good listener—find out what employees are thinking and facing.
Be willing to delegate duties.
Be flexible—be willing to change your plans if necessary.
Provide consistent and regular feedback by letting employees know the outcomes—good and bad.
Reinforce the contributions of each person by recognizing employees’ efforts.
Continually train employees to enhance their capabilities and skills.
Maintain the focus on the venture’s mission even as it grows.
Establish and reinforce a “we” spirit since a successful growing venture takes the coordinated efforts of all the employees.
Leading Issues
Personality Characteristics of Entrepreneurs
High level of motivation, abundance of self-confidence, ability to be involved for the long term, high energy level, persistent problem solver, high degree of initiative, ability to set goals, and moderate risk-taker.
Proactive personality
Individuals who are more prone to take actions to influence their environment—that is, they’re more proactive.
Leading Issues (cont’d)
Motivating Employees Through Empowerment
Empowerment
Giving employees the power to make decisions and take actions on their own to solve problems
Benefits of Empowerment
Improved flexibility and speed
Stronger work motivation
Higher morale
Better work quality
Higher job satisfaction
Lower turnover
Higher productivity
Improved quality
Leading Issues (cont’d)
Empowering Employees
Participative decision making
Delegation
Redesigning jobs
The Entrepreneur as Leader
Leading Employee Work Teams
Empowered teams
Have the authority to plan and implement process improvements
Self-directed teams
Are nearly autonomous and responsible for many managerial activities
Cross-functional teams
Are composed of individuals from various specialties who work together on various tasks
Controlling Issues
Managing Growth
Managing Downturns
Exiting the Venture
Managing personal life choices and challenges
Controlling Issues (cont’d)
Managing Growth
Planning for growth
Organizing for growth
Financing growth
Finding people
Creating a growth-oriented culture
Controlling for growth
Managing Downturns
Recognizing crisis situations—avoiding the boiled frog phenomenon
Dealing with downturns, declines, and crises
Exiting the Venture
Why Leave?
Desiring to harvest the value of the venture
Facing serious organizational performance problems
Desiring to pursue other interests/opportunities
Business Valuation Methods
Asset valuations
Earnings valuations
Cash flow valuations
Exhibit A–7 Issues in Exiting the Entrepreneurial Venture
Be prepared.
Decide who will sell the business.
Consider the tax implications.
Screen potential buyers.
Decide whether to tell employees before or after selling.
Managing Personal Life Choices and Challenges
Balancing Work and Personal Life
Become a good time manager
Seek professional business advice when needed
Deal with conflicts as they arise
Developing a network of trusted friends and peers
Recognize when personal stress levels are too high
Terms to Know
entrepreneurship
entrepreneurial ventures
small business
feasibility study
venture capitalists
angel investors
initial public offering (IPO)
business plan
sole proprietorship
general partnership
Terms to Know (Cont’d)
limited liability partnership (LLP)
corporation
closely held corporation
S corporation
limited liability company (LLC)
operating agreement
proactive personality
“boiled frog” phenomenon
harvesting
