ENTREPRENEURSHIP

PFS 3233
• Theory component: Lectures
• Tests
• Assignments:
1. Research on existing entrepreneurs
2. Business Plan
3. Formation & dissolving of Companies
4. Executing a business

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 Rule of the game for Good Students
• Listen when the teacher talk
• Talk when asked to talk
• Late assignment will not be accepted
• Attendant must be >80%

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 Entrepreneurship
Fifth Edition
by

Robert D. Hisrich, Ph.D.

Case Western Reserve University

Michael P. Peters, Ph.D.

Boston College

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 Chapter 1

The Nature and Importance

of Entrepreneurs

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1-1

The Nature & Development of E’ship

The word “entrepreneur” (French word)

means “between-taker” or “go between.”
Our definition involves four aspects:
1. The creation process.
2. The devotion of time and effort.
3. The assumption of risk.
4. Rewards of independence, satisfaction
of achievement, money.

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1-2

Entrepreneurship:
1. Process: creating something new with
value

2. Requirement: devoting time & effort,

financial, psychic, and social risks,

3. Result: receiving reward => Personal

satisfaction, independence & monetary

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1-2

Entrepreneurship:
is the process of creating something
new with value by devoting the
necessary time and effort, assuming the
accompanying financial, psychic, and
social risks, and receiving the resulting
rewards of personal satisfaction &
independence and monetary return.

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1-3

From the opening case, compare and

contrast the profile of this man with our
definition of “entrepreneur.”

Ted Turner
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1-4

Entrepreneurial Decision Process

refers to the decision to leave a present
career or lifestyle (to pursue that ‘big idea’)
due to:
1. Unpleasant work environment
2. Disruption
3. Completion of educational degree.
How will the completion of your educational
program influence your entrepreneurial
decision process? Got any ‘big ideas’?
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1-5

3 types of start-up ventures.

1 A lifestyle firm exists primarily to support the
owners and usually has little growth opportunity.
2 Foundation companies are firms created from
research and
development that lay the
foundation for a new industry.
3 High powered ventures
(“gazelles”) are new companies that
receive the greatest interest & publicity.

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1-6

Does entrepreneurship has a future?

• Most Universities are offering
courses.
• Societal support is strong.
• “Intrapreneurship”
(entrepreneurship within an
existing company) helps large
companies respond to hyper-
competition.

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1-7

Types of Skills Required in E’ship

1. Technical 2. Business 3. Personal
Management

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1-7

Types of Skills Required in E’ship

1. Technical 2. Business 3. Personal
Management
Writing
Oral Comm.

Monitoring the
Environment
Using
Technology

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1-7

Types of Skills Required in E’ship

1. Technical 2. Business 3. Personal
Management
Planning
Decision Making

Human Relations

Marketing
(Selling)

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1-7

Types of Skills Required in E’ship

1. Technical 2. Business 3. Personal
Management
Inner Control
Risk Taking

Innovative

Change-oriented
visionary

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1-7

Types of Skills Required in E’ship

1. Technical 2. Business 3. Personal
Management
Writing Planning Inner Control
Oral Comm. Decision Making Risk Taking

Monitoring the Human Relations Innovative

Environment
Using Marketing Change-oriented
Technology (Selling) visionary

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 What have we learn?
1. Entrepreneurship
2. Entrepreneur, Intrapreneur, Businessman
3. Entrepreneurial decision process
4. Types of start-up venture
- Life-style; Foundation; High-powered
(gazalles)
5. Types of skill required
- Technical; Business Mgt; Personal.
6. Future of entrepreneur

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 Assignment 1
to be submitted before the next class.

1. Define Entrepreneur, Intrapreneur and

Businessmen.
2. Write an assay (min. 2 pages) a Malaysian
entrepreneur you admire most. Highlight
his/her entrepreneurial characteristics that
make him/her successful.

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 What have we learnt?
1. Entrepreneurship
2. Entrepreneur
3. Entrepreneurial decision process
4. Types of start-up venture
- Life-style; Foundation; High-powered
5. Types of skill required
- Technical; Business Mgt; Personal.
6. Future of entrepreneur

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 Chapter 2

The Entrepreneurial and

Intrapreneurial Mind

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2-1

The Entrepreneurial Process involves

finding, evaluating, and developing an
opportunity by overcoming the strong
forces that resist the creation of some-
thing new.

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2-2

The Entrepreneurial Process

has 4 distinct phases
1. Identification and evaluation of the
opportunity
2. Development of the business plan
3. Determination of the required resources
4. Management of the resulting enterprise

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2-3

Opportunity Analysis: Assessing the

Opportunity
 What market need does it fill?
 What personal observations have you
made?
 What are the underlying social conditions?
 Examine the market research data.
 Assess competition. Any patents?
 Where is the money to be made?

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2-4

“Intrapreneurship” is entrepreneurship
within an existing business structure.
The process begins by establishing an
an intrapreneurial culture. This refers
to instilling the entrepreneurial spirit
in an existing organization in order to
innovate and grow.

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 2-5
Corporate vs. Intrapreneurial
Organizational Culture
1. climate & reward a. develop visions,
system favors goals and plans.
conservative decision
b. suggest, try and
making.
experiment.
2. follow instructions,
don’t take initiative. c. flat organizational
3. hierarchical lines of structure with
authority. networking and
teamwork.
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 2-6

Characteristics of an Intrapreneur
1 Often operates on the frontiers of technology
so understands multiple aspects of the
environment.
2 Has a vision.
3 Possesses flexibility, problem
solving skills and uses a
multi-disciplinary approach.
4 Encourages open discussion and
teamwork.
5. Builds a coalition of supporters.

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 2-7

To establish intrapreneurship in an
organization:
1. Secure commitment by top, upper and
middle management.
2. Identify ideas and general interest
areas.
3. Use technology for greater flexibility.
4. Use a group of interested managers.
5. Get close to the customers.
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 Lesson to-day
 Entrepreneur & Entrepreneurial Mind
 Entrepreneurial process
 Opportunity analysis
 Intrapreneur vs Entrapreneur
 Culture: Entrepreneur vs Intrapreneur
 Establishing Intrapreneur in an organization

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  Discuss the development of an
entrepreneur from intrapreneur.

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 Chapter 3

The Individual Entrepreneur

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 3-1

No “true entrepreneurial profile.”

 Locus of control refers to the internal-external
control dimension of an individual. Managers
and entrepreneurs both have more of an
internality tendency than the general public.
 Entrepreneurs also seem to have a high need for
independence and may have a high need for
achievement (McClelland 1961).
 Risk taking seems to be a part of the process.

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3-2

Key Elements in Entrepreneur’s Background

 Supportive childhood family
environment.
 Having a father who is self-
employed helps.
 Education is important.
 Aged 22-45 when starting venture.
 Work history: dissatisfied with
company job but has technical
knowledge.

Bill Gates
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 3-3

Role Models
 parents, relatives, or
entrepreneurs in the
community.
 may serve as mentors.
 may help establish a
moral support
network.
 invaluable source of
counsel and advice.
Who are your entrepre-
neurial role models?
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3-4
Entrepreneurs
Men Vs. Women
 motivated to achieve  motivated to accomplish a
independence and ‘make goal and achieve
things happen.’ independence.
 Departure point: job  Departure point: job
dissatisfaction, layoff. frustration, change in
 Support group: friends, personal circumstances.
professional acquaintances.  Support group: spouse,
 Initiates between ages 25-35. family, close friends.
More likely to start a  Initiates between ages 35-
business in manufacturing, 45. More likely to start a
construction or high tech. service business.

Most other dimensions show no differences.

(Hisrich & Peters, p. 76)
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3-5

Entrepreneur Vs. Inventor

An inventor creates something for the first
time. While the entrepreneur falls in love
with the new venture, the inventor falls in
love with the invention and often requires
the expertise of an entrepreneur to launch a
new venture.

Historians classify Albert Einstein as an inventive genius and Henry

Ford as an entrepreneurial genius. Do you agree or disagree? Why?
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3-6

Warning: Difficult personality types.

Shotgun An entrepreneurial type who quickly
Sam identifies new, promising opportunities but
rarely, if ever, follows through.
Simplicity A type who thinks everything is a lot simpler
Sue than it actually is and feels she can create a
successful business through easy solutions.
Prima A type so in love with his own idea the he
Donna Paul feels everyone is out to steal his idea and take
advantage of him.
Ralph the This type is well grounded in theory but lacks
Rookie real-world business experience.

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3-7
Difficult personality types (continued)
Meticulous A perfectionist type who is so used to having
Mary things under control that she cannot handle
catastrophe, ambiguity and/or chaos.
Underdog This type is not comfortable with actually
Ed transforming the invention into a tangible
business success. Attends seminars.
Hidden This type does not have the right motives and
Agenda objectives for developing and expediting a
Harry new enterprise.
Inventor An inventor more than an entrepreneur, Irving
Irving is more concerned with the invention itself
rather than creating and expediting a business.
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 Chapter 4

International Entrepreneurship
Opportunities

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 4-1

International Entrepreneurship is the

process of an entrepreneur conducting
business activities across national
boundaries.
• Foreign investors helped build the
early industrial base of the
United States.
• Ability of US. entrepreneurs
to take advantage of foreign
markets will significantly
impact future, U.S. economic
health.
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 4-2

The entrepreneur attempting to “go

international” should also consider an
international joint venture. Here, two
firms get together and form a third
company in which they share the equity.

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 4-3
The joint venture should have
synergy.

• Synergy means that

the whole is greater
than the sum of its
113
parts so that:

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 4-4

Strategic Issues to Consider:

1. Is rapid entry into the market needed?
2. Will joint venture result in obtaining a
competitive advantage?
3. The allocation of responsibility between
the U.S. and the foreign operation.
4. Would the joint venture lower the
chances of expropriation (mining
ventures)?
5. What’s the degree of standardization
possible?
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 4-5

Options for entering

international markets.
• Indirect exporting
involves using a
foreign purchaser
in a local market.
• Direct exporting
uses independent
distributors.
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 Consider ‘entrepreneurial partnering’ to
enter international market. Local partner
has better understanding of the nature of
entrepreneurship in that
country. Suggested targeted
areas:
• Europe
• The Far East
• Controlled and transition economies
(China, Latvia, Hungary).

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 4-6

Barriers to International Trade

• GATT (the General Agreement on Tariffs
and Trade) seeks to help overcome
barriers.
• Some countries (Japan) allegedly present
barriers due to their complicated
distribution system.
• FTA’s (free trade agreements) such
as NAFTA reduce barriers and
encourage investment
between countries (in this case
the U.S., Canada and Mexico.)
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 Chapter 5

Creativity and the Business Idea

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 5-1

Sources of ideas for new ventures:

• Consumers. Determine their wants/needs.
• Existing companies. See if there are ways to
improve upon products and services in the
market.
• Distribution channels. Elicit
suggestions from channel members.
• The Federal Government. Check
the Government’s Patent Office
files.
• R.&D. Conduct your own research
& development.
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 5-2

Methods available for generating

new venture ideas:
• Focus groups used for initially
screening ideas and concepts.
• Brainstorming by using the
spontaneous contributions of
participants.
• Problem inventory. Here
consumers are given a list of
problems for a general product
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 5-3

Engage in creative problem solving by:

• Reverse Brainstorming: A group method for obtaining
new ideas by focusing on the negative (criticism is
encouraged).
• Synetics: A method for individuals to solve problems
through one of four analogy mechanisms: personal,
direct, symbolic and fantasy.
• The Gordon Method: A method for developing new
ideas when the individuals are
unaware of the problem.
• Checklist Method: A method for developing
a new idea through a list of
related issues.

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 5-4

Engage in creative problem solving by:

• Free association: Developing a new idea through a chain
of word associations.
• Forced relationships: Developing anew idea by looking
at product combinations.
• Collective notebook method: Developing a new idea by
group members regularly recording ideas.
• Heuristics: Discovery is made through a progression of
thoughts, insights, learning.
• The scientific method: Involves inquiry and testing.
• Value analysis: Evaluates the worth of aspects of ideas.
• Attribute listing: Looks at positives and negatives.
• The Big Dream Approach: Dream about the problem
and its solution.
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5-5

Product Planning and Development

• Idea stage: Idea is
generated.
• Concept stage: May
include laboratory
development.
• Product development
stage: Begin with a pilot
production run.
• Test marketing stage: Get
actual sales results with a
semi-commercial planned
trial.
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5-6

The Web for E-Commerce: Checklist

for Website Design
• Professional outlook
• Credibility
• Functionality: search capability, shopping
cart, secure server connection, credit card
payment, customer feedback.
• Characteristics: speed, ease
of use, customization, interna-
tional orientation, browser
compatibility.

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 Chapter 6

Legal Issues for the Entrepreneur

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 6-1

Intellectual property includes patents,

trademarks, copyrights and trade
secrets. Entrepreneurs should take
steps to protect these important assets.

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 6-2

What is a patent?
• A patent is a contract between the
government and an inventor.
• The government grants the inventor
exclusivity for 17 years.
• The patent gives the owners a negative
right, preventing any-
one from making,
using or selling the
defined invention.
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 6-3

The process for filing a patent involves:

• filling out an application contain-
ing a complete history and de-
scription of the invention as
well as claims for its usefulness.
• Sending in the application. The status of
the invention becomes “patent pending,”
providing protection until the application
is approved.

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 6-4

Types of patents
• Utility patent (17 years) grants the
owner protection from anyone else
making, using, and/or selling the
identified invention.
• Design patent (14 years) excludes
others from making, using or selling
an article having the ornamental
appearance given in the drawings
included in the patent.
• Plant patent (17 years) is issued on
new varieties of plants.
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 6-5
Checklist for Minimizing Patent Risks
• Seek a patent attorney who has expertise in your
product line.
• Consider a design patent to protect the product
look.
• Seek legal council before making an external
disclosure of an invention.
• Evaluate competitor patents.
• Verify that employment contracts with individual
who may contribute new products have clauses
assigning those inventions or new products to
the venture.
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 6-6
How do trademarks differ from
patents?
• Trademarks may be words, symbols or
designs which identify the source of
certain goods.
• Trademarks can last indefinitely.
• File by completing the form, drawing the
mark, showing actual use and paying the
fee.

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 6-6

What is a copyright?
• A copyright protects original
works of authorship.
• Copyrights are registered with
the Library of Congress.
• The term is the life of the
author plus 50 years or, if the
author is an institution, date of
publication plus 75 years.

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6-7

Issues relevant to selecting a

lawyer:
• Lawyer may work on a retainer basis so the
entrepreneur may call as the need arises without
incurring high hourly fees.
• Lawyer may be hired for one-time fee.
• Find someone to whom you
can personally relate to and
who is trained in that
specific field.

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 Chapter 7

The Business Plan

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 7-1

The Business Plan is a written document

prepared by the entrepreneur that
describes all the relevant external and
internal elements involved in starting a
new venture. It is often an integration of
functional plans such as marketing,
finance,
manufacturing,
and human
resources.
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 7-2

Feasibility Study
• Before committing time and energy to
preparing a business plan, the
entrepreneur should do a quick feasibility
study of the business concept.
– Are their any barriers to success?
– Can the product be marketed, financed,
produced?
– Use the Internet as a source of
information.
– Are goals and objectives of the venture
clearly defined?
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 7-3

Sources of Information for Planning:

• Market Information: The first step is to
define the market.
• Operations Information Needs considers
manufacturing operations, materials,
labor, overhead.
• Financial Information: pro forma income
statements, balance sheets and cash flow
statements for the next 3 years.
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 7-4

Use the Internet as a source of

information for starting the new
venture. Recommended web sites
include: www.sba.gov which provides
information on business
opportunities as well
as on starting and
financing your
business.

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 7-5

Exhibit 7-2
Outline of a Business Plan
1 Introductory Page 6 Marketing Plan
2 Executive 7 Organizational
Summary Plan
3 Industry Analysis 8 Assessment of
4 Description of Risk
Venture 9 Financial Plan
5 Production Plan 10. Appendix

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 7-6

Helpful Questions, Critical Issues

• Critical issues for industry analysis are
included in Figure 7-4.
• Questions to consider in describing the
venture are included in Figure 7-5.
• Issues to consider for the production plan
are listed in Figure 7-6.
• Questions regarding the organization
structure are given in Figure 7-7.
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 7-7

Why do business plans fail?

• Goals are unreasonable
and/or immeasurable.
• Total commitment to the
business was never made.
• Entrepreneur has insuf-
ficient experience and
knowledge.
• Customer’ need was never established.
• Entrepreneur has no sense of potential threats
or weaknesses to business.

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 Chapter 8

The Marketing Plan

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 8-1

Market planning should be an

annual activity that focuses on
implementing decisions related to
the marketing-mix variables of
product, price, distribution and
promotion.

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 8-2

The steps to follow in a market

research study:
1 Define the purpose or objectives.
2 Gather data from secondary source.
3 Gather information from primary
sources.
4 Analyze and interpret the
results.

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8-3

What Market Planning Can/Can’t Do

Can Do Cannot Do
Enhances firm’s ability to integrate Does not provide a crystal ball
all marketing activities to achieve enabling management to
corporate goals and objectives.
predict the future with
precision.
Minimizes the effects of surprise from Does not prevent management
sudden changes in the environment. form making mistakes.
Establishes a benchmark for all levels Will not go through the year
of the organization. without some modification as
the environment changes.
Enhances management’s ability to Does not provide guidelines for
manage since guidelines and every major decision.
expectations are clearly designated
and agreed to by many members of
Judgment is still critical.
the marketing organization.
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 8-4

Marketing research involves

determining:
• who will buy the product or service?
• what is the size of the potential market?
• what price should be charged?
• the most appropriate distribution channel.
• the most effective promotion
strategy to inform and reach
potential customers.
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8-5

Marketing research can begin with a

questionnaire and a clipboard. Who
should do marketing research?

McGraw-Hill/Irwin
This means you!
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 8-6

Table 8-6 Critical Decisions for Marketing Mix

Marketing
Variable Critical Decisions
Product Quality of components or materials,
style, features, options, brand name.
Price Quality image, list price, quantity,
discounts, quick payments credit.
Channels of Use of wholesaler and/or retailers,
Distribution type of wholesaler or retailers, #.
Promotion Media alternatives, message, media
budget, role of personnel selling.
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 8-7

The steps in preparing the marketing

plan:
1 Define the business situation.
2 Define target market/opportunities and
threats.
3 Consider strengths and weaknesses.
4 Establish goals and objectives.
5 Define marketing strategy.
6 Coordinate, budget, imple-
ment and monitor.
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8-8

Why some plans fail:

• Lack of a real
plan.
• Lack of adequate
situation analysis.
• Unrealistic goals
• Unanticipated
competitive
moves, product
deficiencies, and
acts of God.
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 Chapter 9

The Financial Plan

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 9-1

Cash flow is not the same as profit.

Cash flow results from the difference
between the actual cash
receipts and cash payments.
Cash flows only when actual pay-
ments are received or made. Sales
may or may not result in immediate
cash.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

9-2

Before developing the pro forma financials:

1 Prepare operating and capital budgets.
2 Develop a sales budget.
3 Production or manufac-
turing budgets will provide
a basis for projecting cash
flows. Note that:
Operating budgets focus on operating costs.
Capital budgets evaluate expenditures that
will impact the business for more than one
year.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
9-3

Because many of the businesses that fail run

out of cash, it is important for the
entrepreneur to develop a realistic, pro
forma cash flow statement.
If disbursements exceed receipts, plan to
either borrow funds or tap cash reserves.
Invest positive cash flows in short term
sources.
Provide different scenarios
based on different levels of
success.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 9-4

To prepare a pro forma

income statement:
1 calculate sales by
month.
2 project operating ex-
penses for each month of the 1st year.
3 Reference unusual expenses with an
explanation at the bottom.
4 Be conservative especially regarding
sales.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 9-5

Break-even analysis is a technique for determining

how many units must be sold in order to break-even.
 The break-even formula is:
B/E(Q)= TFC/(SP-VC/Unit)
Break-even is the volume of sales needed to cover
total variable and fixed expenses.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 9-6

Spreadsheet programs can be used for break-

even analysis, constructing pro form financial
statements, check writing, payroll, invoicing,
inventory management, bill paying, credit
management and taxes.
• Popular packages
include “Quickbooks,”
“Peachtree First
Accounting,” “MS
Financial Manager” and
“Managing Your Money.”

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 Chapter 10

The Organizational Plan

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

10-1

The entrepreneur needs to consider

the alternatives regarding the legal
form of the organization.
Proprietorship
Corporation
Partnership
Limited Liability
Corporation

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 10-2

Building an organization that will last

requires careful planning and strategy.
• Potential investors are interested in
the quality of the management team.
• The initial organization
design is simple.
The entre- preneur
handles multiple
tasks.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 10-3

The Sole Proprietorship.

• owner has full responsibility
for operations.
– owner is legally liable for all
aspects of the business.
– low cost start-up.
– income is personal income. This means
no double taxation. Owner keeps all
profits.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 10-4

The Partnership.
• Owners may have general or limited
ownership.
• General partners share the amount of
personal liability equally, regardless
of their capital contri-
bution.
• Partnership agreement
is recommended.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 10-5

The Corporation

• ownership is reflected by
possession of shares of stock.
• owners are liable only for
the amount of their investment.
• can be created only by statute and requires
legal advice.
• The corporation is the most attractive form
for raising capital.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 10-6

The S Corporation has an advantage over

the C-Corporation in that capital gains or
losses are treated as personal income or
losses by the shareholders on a pro rata
basis. The corporation is thus not taxed.
The LLC (limited liability corporation) is a
partnership-corporation hybrid that has
greater flexibility.
Consult an attorney before
making a final decision!
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
10-7
Factors Proprietorship Partnership Corp.
Individual No limitation on #of No limitation on # of
Ownership partners stockholders

Owner personally liable for In general partnership, Amount of capital contribution

Liability of business liabilities individuals all liable. In is limit of shareholder liability.
owners limited partnership
Partners liable for amount
of capital contribution.
None other than filing fees Partnership agreement, Created only by statute.
Costs of for trade name. legal costs and minor filing Articles of incorporation, filing
starting fees for trade name. fees, taxes and fees for states in
which corp. registers.
business
Death dissolves the In general partnership, Greatest form of continuity.
Continuity death dissolves. In limited Death will not effect legal
business. partnership, death of one existence of business.
limited partner has no
effect.
Capital Capital raised only by loan General partner can Most flexible. Stockholder can
or increased contribution transfer interest only with sell or buy stock at will.
Requirements by proprietor. consent. Limited partner
can sell interest.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

10-8

What’s the difference between job analysis,

job description and job specification?
• The job analysis is a more general guide for
determining hiring procedures, training,
appraisal, compensation and job de-
scription.
• The job description specifies the details of
the work to be performed.
• The job specification identifies the require-
ments needed by the person applying for a
job (skills, experience, education, etc..)
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
10-9

What’s the role of the board of

directors?
• review operating and
capital budgets.
• develop longer-term
strategic plans for growth.
• support day-to-day activities.
• resolve conflicts.
• ensure proper use of assets.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter 11

Sources of Capital

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 11-1

Types of financing:
• Debt financing involves an interest
bearing instrument, usually a loan.
– Short term money is used for working
capital.
– Long term debt (>1year) is used to
purchase assets.
• Equity financing offers the investor some
form of ownership.
• Internally generated funds are used most
often. Why?
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
11-2

Where do entrepreneurs obtain

start-up capital?
1 Their personal funds. Outside inves-
tors expect this financial commitment.
2 Family and friends.
3 Commercial Banks.
4 Small Business
Administration loans.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

11-3

The Role of Commercial Banks:

• Commercial banks are the most
frequently used source of short-term
funds.

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11-4

Types of bank loans include:

• accounts • lines of credit
receivable loans • installment loans
• inventory loans • straight,
• equipment loans commercial loans
• real estate loans • long term loans
• character loans

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

11-5

Lending decisions are based on the

five C’s. Can you name them?
• Character
• Capacity
• Capital
• Collateral
• Conditions
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11-6

Access the SBA online at

www.sba.gov.
• The SBA guarantees
that 80% of the loan
will be repaid to the
bank if the company
defaults.
• Micro-loans are made
up to $100,000 through
the SBA’s “LowDoc
Loan Program.”
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
11-7

Private Placements are another

source of funds.
• Private investors may be:
– family
– friends
– wealthy individuals.
• Private investors usually want an
equity position in the business.
– “Regulation D” simplifies private
offerings and contains specific operating
rules.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter 12

Informal Risk Capital and

Venture Capital

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

12-1

Regarding the basic stages of venture

funding:
• Early stage financing is the most
difficult and costly to obtain.
• Expansion or development financing is
easier to obtain.
• Acquisition or leveraged buyout
financing is used for traditional
acquisitions, buyouts and going
private.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12-2

Table 12.1 Stages of Funding

Early Stage Financing
Seed Capital Relatively small amounts to
prove concepts and finance
feasibility studies.

Start-up Product development and

initial marketing, but with no
commercial sales yet; funding
to actually get company
operations started.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12-3

Stages of Funding (continued)

Expansion or development financing.
Second Working capital for initial growth
Stage phase, but no clear profitability or
cash flow yet.
Third Stage Major expansion for company with
rapid sales growth, at break-even or
positive profit levels but still private
company.
Fourth Bridge financing to prepare company
Stage for public offering.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12-4

Stages of Funding (continued)

Acquisitions and Leveraged Buyout Financing.
Traditional Assuming ownership and control of
Acquisitions another company.
Leveraged Management of a company acquiring
Buyouts company control by buying out the
present owners.
Going Some of the owner/managers of a
Private company buying all the outstanding
stock, making the company privately
held again.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12-5

Also consider the informal, risk-

capital market.

• This market consists of a

group of wealthy “business
angels” who are looking for
equity investment
opportunities.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

12-6

• Angels generally prefer

manufacturing of both
industrial and consumer
products.
• Angel investors find their
deals through referral
sources such as business
associates, friends, and
brokers.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

12-7

Table 12.3 Total Venture Dollars Invested

(in billions of dollars)
18
16
14
12
10
8
6
4
2
0
1991 1992 1993 1994 1995 1996 1997 1998

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12-8

Stages in the venture capital decision

process:
• Stage one: preliminary screening. The
business plan is submitted.
• Stage two: agreement on principal terms.
• Stage three: detailed review and diligence.
• Final stage: final approval. A
comprehensive investment memorandum
is prepared.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
12-9

Valuation approaches include:

• Assessing comparable, publicly held
companies.
• The present value of
future cash flows.
• Replacement value.
• Adjusted book value considers
acquisition cost minus liabilities.
• The earnings approach is most widely
used.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter 13

Preparing for the New Venture

Launch: Early Management
Decisions

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

13-1

Procedures for Hiring Job

• Advertise, use a network Opening
of friends and business
associates, contact a
personnel agency.
• Collect resumes, establish
an assessment procedure to determine
candidates’ strengths.
• Provide incentives to insure loyalty
and commitment of employees.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-2

Effective record keeping is important

for:
• effective control and tax purposes.
• knowledge about sales by customers
both in terms of units and dollars.
• maintaining a database about
employees both for labor management
and for withholding federal and state
taxes in order to make deposits on a
quarterly basis. © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
13-3

Table 13-1
Accrual versus Cash Basis
Accrual Method Cash Method
Sales Accounted for Not counted until
when sales are cash is received.
made.
Ex- Accounted for Not counted until
penses when the ex- cash is actually
pense is paid out.
actually in-
curred.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

13-4

Inventory Control
• FIFO: Inventory
costing method
whereby first items into
inventory are first
items out.
• LIFO: Inventory
costing method
whereby last items into
inventory are first
items out.
If you are running a convenience store, use which method? Why?
Answer: FIFO so inventory does not become obsolete.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-5

Ratios can be used to assess financial

strengths and weaknesses.
• Liquidity ratios (the current ratio, the
acid test ratio) are used to measure
short term solvency.
• Activity ratios (average collection
period, inventory turnover)
measure efficiency of venture
in managing and selling its
inventory.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

13-6

• Leverage ratios analyze the firm’s

capital structure.
– Debt ratio assesses
ability to meet obligations.
– Debt to equity ratio
assesses the firm’s capital.
• Profitability ratios indicate firms
ability to translate sales into profits
(Net profit margin) and ability to
manage total investment in assets
(R.O.I.).
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-7
The early venture must have an
effective marketing plan because
marketing is “the
engine that pulls the
entire train.”

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

13-8

To effectively promote the new

venture:
• Develop awareness of the product or
service offered through publicity and
advertising.
– Publicity is free advertising provided by a
media outlet.
• Publicity introduces the company.
• Advertising focuses on specific customers.
– Ad agencies provide promotional services.
– Ad agencies can help launch the product.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-9
Develop a website promoting
your company.
• Indicate background
of the company, its
products, officers,
address, email, phone,
and direct ordering
information.
• Use YahooStore,
Ebay, Lycos and/or
Excite to promote and
sell your product or
service.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
13-10

Avoid the “Field of Dreams.”

 “If we build it, they will

come.” -Field of Dreams

NEWS FLASH:
If you don’t
promote it, they
aren’t coming!
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter 14

Managing Early Growth

of the New Venture

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

14-1

Not all new ventures grow rapidly.

• Many continue to exist at a satisfying level
of sales with little or no growth.
• Other’s may ‘hit
the growth wall.’
– Cash runs out
– Key employees leave
– Operations reach out of control
proportions
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
14-2

How much additional cash is needed to

support new sales in the next period?
((Sn-GP) + OH/Td) x Tar = cash needed
Where Sn= new sales in next period
GP = gross profit
OH = additional overhead in next period
Td = time frame of sales forecast in days
Tar = average collection period for acc. rec. in days
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
14-3

An effective organization culture is

needed to meet the challenges of
business growth. Owner should:
• Communicate.
• Listen.
• Delegate
responsibility.
• Provide feedback.
• Train key employees.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
• Emphasize results and build in
14-4

incentives encouraging managers to

train and delegate.
• Establish a mission and focus on goals
using consensual decision making.
• Adopt a “we” spirit
not a “me” spirit in
meetings and
memorandums.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

14-5

The long term strategic plan includes:

• Restating the mission to reflect the
entrepreneur’s long term vision.
• Goals and objective for
the next 3-5 years.
• Business situation
analysis.
• Strategy formulation, implementation,
evaluation and control.
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14-6

Time Management
• Process of
improving
individual's
productivity
through more
efficient use of
time.

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14-7

Develop good time management by:

• Recognizing that he or she is a time
waster.
• Focus on the important issues.
• Analyze how time is currently spent.
• Enlist the help of the management team.
• Prioritize, plan, then refocus on the key
issues.
• Periodically review and adjust the
objectives.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
14-8

Customer Service/ Satisfaction

Record and assess complaints
and comments from customers.
Plan regular meetings with staff members
to determine why the complaints are occur-
ring and what solutions can be enacted.
Focus groups can be used to monitor and
track customer satisfaction.
Customer surveys enable the entrepreneur
to standardize measured responses
regarding service/satisfaction.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
14-9

The entrepreneur should have a certain

acceptable expectation regarding service
that, if not met, should involve some
consideration of change. Entrepreneurs
must be people who care about their
customers and are willing to
do whatever it takes to in-
sure favorable, customer
relations.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 Chapter 15

New Venture Expansion

Strategies and Issues

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 15-1

Expand the venture through:

• Joint ventures
• Acquisitions
• Mergers
• Leveraged buyouts
• Franchising.
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15-2

Joint ventures are separate entities

involving two or more partners.
• Most common type is that between two
or more private sector companies.
• Some are formed to do cooperative
research.
• Industry-university agreements for
research purposes are increasing.
• International joint ven-
tures provide a way to
enter foreign markets.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 15-3

An acquisition is the purchase of a company

or part thereof such that it is completely
absorbed and no longer exists.
• In determining the price, consider the
three widely used valuation approaches:
– Asset valuation
– Cash flow
– Earnings

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 15-4

Key Factors in Evaluation a Firm

• One-person • Poorly prepared
management financial statements
• Poor corporate • Sales growth with no
concomitant increase in
communications the bottom line
• Few management • Dated inventory
tools being used • Aging accounts
• Insufficient receivable
financial control • No change in products
• Highly leveraged or customers

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 15-5

Mergers, like acquisitions, are trans-

actions involving two or more
companies in which only one survives.
• Merger motivations range from
survival to protection to diversi-
fication to growth.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 15-6

Franchising is an arrangement whereby

the manufacturer or sole distributor of
a trademarked product or service gives
exclusive rights of local distribution to
independent retailers in return for their
payment of royalties and
conformance to
standardized operating
procedures.
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 15-7

• The franchiser is the company or

person(s) offering the franchise.
• The franchisee is the person who
purchases the franchise hoping to
enter the business having a better
chance to succeed
than starting a
new business
from scratch.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 15-8

To evaluate a franchise opportunity:

• Conduct a self-evaluation to see if you
match the franchise.
• Talk to random sample of franchisees.
• Read the Franchise Disclosure
Statement and assess financial
stability, market potential,
profit potential.
• Negotiate the franchise
agreement.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter 16

Going Public

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 16-1

“Going public” occurs when the

entrepreneur and other equity
owners sell some part of the
company to the public through a
registration statement filed
with the S.E.C.

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 16-2

Advantages
• Obtaining new equity capital for
growth and survival.
• Valuing the company and
transferring assets.
• Enhancing the company’s ability to
obtain future funds.

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 16-3

Disadvantages:
• Public exposure and potential loss
of control.
• Loss of flexibility and increased
administrative burdens.
• Expenses involved.
• The process is burdensome.

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 16-4

Alternatives to going public:

• Seek a private placement to obtain
funds with minimum public disclosure.
• Use bank loans.
• Secure credit through equipment
leasing companies, mortgage bankers,
trade suppliers.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

 16-5

Timing issues for going public.

• Is the company large enough?
• Are company’s earnings strong enough
to warrant going public?
• Are the market conditions for new
public offerings favorable?
• How urgently is the money needed?
• What are the needs and desires of the
present owners?
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 16-6
Important issues for a venture after
going public.
• Once the stock is issued, the managing
underwriter will usually provide
aftermarket support and try to stabilize
the market.
• An increasing amount of time will be spent
developing a good relationship with the
financial community.
• Reporting requirements include Form SR,
Form 10-K, Form 10-Q, Form 8-K.
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 16-7
Eight Myths About Going Public
Myth 1: In this market, high-tech is the name of the game.
Myth 2: If you’re doing OK, don’t worry about the
aftermarket.
Myth 3: The analysts will follow you through thick and
thin.
Myth 4: The young entrepreneurial companies will
continue to be in the spotlight this year.
Myth 5: You need to be profitable to get a high valuation.
Myth 6: Of course, you want to be the next Netscape.
Myth 7: During your IPO, you’re the center of attention.
Myth 8: Somebody knows where IPO market is headed.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter 17

Ending the Venture

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17-1

The bankruptcy act of 1978 protects

entrepreneurs from both creditors and
competitors. The act was designed to:
• ensure fair distribution
of assets to creditors.
• protect debtors from un-
fair depletion of assets.
• protect debtors from
unfair demands by creditors.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-2

The Act provides three alternative provisions:

• Chapter 11 bankruptcy provides the opportunity
to reorganize and make the venture more
solvent.
• Chapter 13 bankruptcy voluntarily allows
individuals with regular income the opportunity
to make extended time payments.
• Chapter 7 bankruptcy requires
the venture to liquidate either
voluntarily or involuntarily.

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17-3

Chapter 11 bankruptcy is the least

severe alternative.
• A reorganization plan is prepared
dividing the debt and ownership
interests.
• Plan is approved by the U.S.
Bankruptcy Court.
• Creditors and owners
agree to comply with
the plan.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-4
The decision made in the chapter 11
reorganization plan generally reflects one or
a combination of the following:
I. Extension. This occurs when two or more of the
largest creditors agree to postpone any claims.
II. Substitution. If the future potential of the venture
looks promising enough, it may be possible to
exchange stock or something else for the existing
debt.
III. Composition Settlement. The debt is prorated to
the creditors as a settlement for any debt.

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17-5

Warning signs of bankruptcy:

• Management of finances is neglected.
• Directors cannot document large
transactions.
• Customers are given
large discounts to en-
hance payments due
to poor cash flow.
• Contracts are accepted below
standard amounts to generate cash.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-6

• Bank requests subordination of its

loan.
• Key personnel leave the company.
• Materials are lacking to meet orders.
• Payroll taxes are not paid.
• Suppliers demand payments in cash.
• Customer complaints re-
garding both quality and
service increase.

McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

17-7

Regarding the succession of a

business:
• Experts estimate that half of
businesses fail to make the transition
from first to second generation
ownership.
• When a family member is not
interested in assuming responsibility
for the business, a number of
alternative choices remain:
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
17-8

• Pass the business to an employee. This

ensures that the new owner is familiar
with the business.
• Hire a professional manager.
• Harvest the business by selling it
outright to an employee or an outsider.
• Transfer ownership of the business
through a public offering.
• Merge with another business.
McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.