Launching the New Venture Organizing Resources and Raising - - PowerPoint PPT Presentation

Launching the New Venture

Organizing Resources and Raising Capital

The Basic Paradox

• Entrepreneurship
• Seizing opportunity without being constrained by

resources currently controlled

• New Venture
• Without resources there is no new venture

Resolving the Paradox

 If you  Do not have money  You must have something that  Money cannot buy  So that people with money  Would like to support you

Resources for a New Venture

New venture requires resources that :

• Can help an organization implement its

strategy (valuable)

• May not be available to all competitors

(rare)

• Cannot be duplicated easily or

inexpensively (hard to copy)

• Are significantly different than resources

employed by other firms (non- substitutable)

The PROFIT Model for Resources

 Physical  Reputational  Organizational  Financial  Intellectual and

human

 Technological

Physical

• Tangible assets

for use in

• Production
• Administration
• Plant and

equipment

• Sourcing of key

inputs

Reputational

• Positive perceptions

that people have of the founders/company

• Can exist at the

individual level

• At the company level
• Key criteria
• Management

integrity

Organisational Resources

• A firm’s structure, processes

and systems

• Information generation

and decision making systems

• Capability to manage the

complexity and turbulence in the environment

• Addressing issues

associated with the age and life cycle stage of a business

• Borrowing capacity,

ability to raise new equity and amount of cash generation from internal operations

• Raising money at

advantageous terms

• Credit rating
• Financial

performance

Financial Resources

Intellectual Resources

• Knowledge, training and experience
• f the entrepreneur and the team
• Judgment, insight, creativity vision

and intelligence of team members

• Social skills of the entrepreneur
• Relationship capital
• Networking gives the

entrepreneur access to resources without controlling them

• Minimizes potential risk of
• wnership and keeps the
• verheads down
• Process, Systems or

physical transformations

• R&D facilities
• Testing and quality

control techniques

• Intellectual property
• Patents, copy rights,

trademarks, designs, licences

• Proprietary processes

Technological Resources

Hewlett – Packard Apple

Google

Nearly 45 years ago, when Bill Bowerman was having breakfast he looked at the waffle iron that his wife just used to make waffles. He was so

• bsessed with creating shoes lighter

and faster that he ran to his lab brought a couple of bottles to make the urethane and used the waffle iron to press out a new sole. It cost Bill’s wife $ 12 but it was the birth of a multi billion dollar company, Nike.

Bill’s breakthrough spawned Nike’s Waffle Trainer, released in 1974, the first innovation in a company that became known for them. Before it, most athletic soles were flat with shallow patterns. The waffle had nubs that protruded like the tread on a motorcycle tire .

Recipe for a New Venture

Nike Oregon Waffle Trainers ca. 1973

Development, IP and Commercializatipon

Asset Parsimony

• Most start-ups are chronically short of

resources

• Being conservative with expenditure is an
• verriding philosophy
• Creative use of accessing and using assets
• Never buy new what can be bought second hand
• Never buy what can be rented
• Never rent what can be borrowed
• Never borrow what can be begged
• Never beg what can be salvaged
• Never incur fixed costs if they can be avoided

Help Helps

• Entrepreneurs who seek and get help from:
• Industry or trade associations
• Mentors already in business
• Business development centres
• Incubators
• Business school professors
• Do substantially better than those who try to

get by alone

Types of Help

0% 10% 20% 30% 40% 50%

Information or advice Introductions to other people Access to financial resources (equity, loans or loan guarantees) Business services (legal and accounting assistance) Physical resources (use of land, space, building or equipment) Personal services (household help) Other kinds of assistance

Clusters

 High-quality human

resources

 Research in local

universities

 Availability of investment

capital

 Representative

customers

 Suppliers and

complementors

 Competitors  Consultants, attorneys

and accountants

Incubators

 Focus on the core task  Administrative and

infrastructure facilities

 Proximity to other

entrepreneurs

 Links with angel

investors and venture capitalists

 Association with local

development agencies

 Deshpande Centre for

Technological Innovation

 SINE, FITT & NDBI

Key Human Resource

Entrepreneur & the Team

The Ultimate Resource: Entrepreneur

 Individuals who are unique resources  Resources that money cannot buy  Provide value in terms of  Creativity  Unique vision  Intuitions  Have ability to bring together other critical resources  Knowledge base  Specific skills  Motives  Commitment  Personal attributes

Personal Inventory

Required Capabilities of the Entrepreneurial Team

• Able to accommodate uncertainty and ambiguity
• Flexibly adapts to changing circumstances and competitors
• Seeks to evaluate and mitigate the risks of the venture
• Creates a vision of the venture to communicate the opportunity of staff and

allies

• Attracts, trains, and retains talented, educated people capable of

multidisciplinary insights

• Skilled at selling ideas and have a wide network of potential partners
• Has talent, knowledge, and experience within the industry where the
• pportunity occurs
• Seeks important opportunities with sizable challenges and valuable potential

returns

• Able to select an opportunity in a short period: timely
• Creatively explores a process that results in the concept of a valuable solution

for the problem or need

• Able to convert an opportunity in to a workable and marketable enterprise
• Wants to succeed: achievement-oriented

Six Resources for a Creative Enterprise

• Knowledge in the

required domain and fields: and knowing what is new.

• Intellectual abilities to

recognize connections, redefine problems, and envision and analyze possible practical ideas and solutions.

• Inventive thinking about

the problem in novel ways.

• Motivation toward

action.

• Opportunity-
• riented

personality and

• penness to

change.

• Contextual

understanding that supports creativity and mitigates risks.

Networks

 Successful entrepreneurs are consummate

networkers

 Essential because networks are links to  Potential sources of capital  Strategic alliance partners  Service providers  New employees  Allow entrepreneurs to  Share information and assessment of  Markets and technology

Number of Owners Involved in Start-ups

2 3 10 40 45

Single Two Three Four Five

Two founders, rather than

• ne, significantly increases

your odds of success: customer growth 3 times as fast and raise 30% more investments.

Why Join a New Venture?

• Autonomy and Growth
• Challenging and interesting work
• Participation in decision making
• Freedom to be creative
• opportunity to develop new skills
• Increasing responsibilities
• Recognition of contributions
• Career guidance and mentoring
• Rewards & Opportunities
• Opportunities for promotion and advancement
• Opportunities for personal growth
• Pay and bonuses tied to performance
• Continual professional training

The Appeal of Similarity

• Similarity leads to liking
• Almost any kind of

similarity will do— similarity with respect to

• attitudes and values,
• demographic factors,
• interests, etc.
• Such effects are both
• strong and general

The Value of Complementarity

• Avoids

redundancy

• Provides a wider

range of information, skills, aptitudes, and abilities

• The whole is

greater than the sum of its parts

• Focus primarily on complementarity with

respect to knowledge, skills and experience

• Bring similarity into the picture with respect

to personal characteristics and motives

Founding Team Relationships

• Three factors are crucial in

developing strong working relationships among the team:

• Clear initial assignment of roles
• Careful attention to perceived

fairness

• Effective communication

Role/Responsibility/Reward

Financial Resources

1.

• 1. Fou
• undin

ing S g Stage

• The Entrepreneurial

Team Begins with a Vision, Business Model and Strategy 2.

• 2. Seed S

Stage

• Initial Financial

Capital 3.

• 3. Gr

Growth S Stage

• Growth Capital

Required 4.

• 4. Harve

vest st S Stage ge

• IPO or Acquisition

Provides Return to Investors and Founders

Four Financial Steps in Building a Successful Firm

Stages of Financial Needs throughout a Company’s Lifecycle

• 1. Seed and Start-up Capital [Type]
• Bootstrapping Friends and Family

Private Investors [Source]

• Idea and Proof of Concept [For What]
• 2. Growth and Expansion Capital
• Angel Investors’ Networks Venture

Capital Strategic Partners Customers

• First Customer and Proven Concept
• 3. Acquisition, Public Offering,

Buyout

• Public Equity Venture Capital Private

Equity Firms

• Rapid Growth and Expansion or Exit

The first stage:

• This stage covers the period of

time from the conception of the product/service through early start-up. This is where the business concept is tested to make sure that customers want what you’re offering. The second stage:

• This stage takes over when the

concept is proven and your company is ready to grow to the next level — by entering a new market, introducing new products, or developing multiple locations. The third stage:

• You reach the third stage when

your company is looking for a liquidity event so investors can cash out, or you want to acquire another company or be acquired by another company.

Information Asymmetry Problems

• Entrepreneurs have information about their business

that investors don’t have

• This creates three problems:
• Investors must make decisions on limited

information

• Entrepreneurs can take advantage of investors
• Adverse selection

 Investors must make judgments based on little actual

evidence

 Entrepreneurs and investors disagree on value of new

venture

 Investors want collateral

Uncertainty Problems/Implications

Initial Losses by New Ventures

1 2 3 4 5 6 7 8 Initial equity breakeven, 75 months Breakeven, 30 months Profit Loss

• 10
• 20
• 30
• 40
• 50
• 60
• 70

20 10

Loss (percent of initial equity)

Valley of Death

Sources of Capital

• Savings
• Friends and family
• Business angels
• Venture capitalists
• Corporations
• Banks
• Asset-based

lenders

• Government

programs

 Founders  Family  Friends

Principle: Many kinds of sources for investment capital for a new enterprise exist and should be compared and managed carefully.

Life Cycle Financing

• Early stage financing
• Seed capital: to prove the concept is viable
• Start-up capital: to make business operational
• Expansion or development financing
• Second-stage financing: to support first

commercial sales

• Third stage financing: to expand
• Fourth stage financing: to make the leap from

private to public company

Acquiring First-Stage Money

First-stage money is hard to come by for several reasons:

• New ventures don’t have a track record, so everything that investors see in the business

plan is pure speculation on the part of the entrepreneur.

• New ventures often fail, so they represent perhaps the riskiest investment of all.
• Most new ventures have no intellectual property rights — proprietary assets or secrets that

would give them a competitive advantage in the marketplace.

• The founders of the venture themselves often don’t have a track record
• Most start-ups are merely “me-too” ventures; in other words, they haven’t identified a

significant unfair advantage that makes them valuable to customers and investors. For these reasons and more, entrepreneurs have to bootstrap — rely on their own resources and the kindness of friends and family, or anybody else who will listen to their stories. Bootstrapping for a new venture has three key principles:

• Hire as few employees as possible-the single biggest expense of most businesses.
• Lease, share, and barter everything that you can. When you lease facilities and equipment,

you avoid tying up precious capital that you could use to produce your product or service. Bartering also has become a popular way to acquire needed resources.

• Use other people’s money. You can ethically use other people’s money in many ways.

Getting customers to pay quickly is one way; convincing suppliers to give you more time to pay is another.

Angel Investors

• Angels are wealthy individuals, usually experienced

entrepreneurs, who invest in business start-ups in exchange for equity in the new ventures Criteria for Angel Investments: The New Venture is/has:

• Within the industry that the angel has experience
• Located within a close proximity
• Recommended by trusted business associates
• Entrepreneurs with attractive personal characteristics

such as integrity and coachability

• Good market and growth potential for the opportunity
• Seeking an investment of few lacs to couple of crores

Development Assistance

 Technology Development Board  Technology Development &

Demonstration Programme

 Home Grown Technologies Programme  Technopreneur Promotion Programme

(TePP)

 Small Business Innovation Programme  NIDHI/PRAYAS  BIRAC/BIG

Source of Finance Throughout the Evolution of the Entrepreneurial Firm

Founders, friends & family Business Angels Venture capitalists Equity Markets Commercial Banks Seed Start - up Established Early Growth

Stage of Development of Entrepreneurial Firm Level of Investment Risk Assumed by Investor

High Low Development Agencies

Risk and Reward Profile for Various Investments

50 40 30 20 10 Treasury Bonds Corporate Bonds Franchises Imitations, Improvements Innovations, Technology Strong Growth Companies Acquisitions Money Market Funds Risk: Low Medium High Chance of 0 30% 60% Total Loss E x p e c t e d A n n u a l R e t u r n (%)

How Much Money Do You Really Need? Setting Up Your Funding Plan

• Carefully determine exactly what your company needs to reach your goals.
• You have to plan for several stages of growth and financing. Initially, you want to have

enough cash to launch the business and survive until the company is generating enough revenues to cover expenses. Beyond that, you’ll establish some milestones such as multiple customer segments, multiple products, and so forth.

• Target your potential sources for each stage of financing.
• Recognize that some first-round money sources will want to be paid back or cashed out

(get their investments back, in other words) before the next round of financing, so make sure that you plan for it.

• Raising money takes time, so you shouldn’t wait until you need it, when it will be too late.

If you need angels for your second-round financing, you must start networking now. It takes time to build a business relationship so that you feel comfortable approaching the person about your financing needs and the person feels comfortable listening.

• Keep tabs on your progress against the timeline you set.
• If you’re significantly off from your projections, you may need to reevaluate your plan.

Perhaps you were a bit too aggressive in your expectations. Keep in mind that you’re in a hurry; investors aren’t, so allow for some slack in your overall plan.

Startup Costs

• All costs incurred to get the business off the

ground

• Determine the capital you need
• Determine what you’ll do with the capital once

you get it

Bootstrapping

 Establishing a business on limited personal

resources

 Spend only as much time and capital  As is needed to credibly demonstrate to other

resource providers that

 The opportunity is commercially feasible

Bootstrap Financing

• To start a firm by one’s own efforts and

to rely solely on the resources available from oneself, family, and friends

Advantages Disadvantages

• Low pressure on valuation
• Easy term s on ow nership
• Control by founders
• Little tim e spent on finding

investors

• Unable to fund grow th

phase

• Lack of funding

com m itm ent for future

• Loss of advice from

professional investors

Evaluating the Financing Options

Personal Control Personal Risk Potential Reward Personal resources High High High Angel investors Equity financing Low to medium Low Low to medium Business development Programme Low to medium Low Low to medium Unusual Sources Low to high Low Low to high Venture capitalists (equity financing) Low to medium Low Low to medium Financial institutions (debt financing) Low to medium Low Low to medium Public offerings (equity financing) Low Low Low

Thank You

Uncertainty Problems

 Investors must make judgments based on little

actual evidence

 Entrepreneurs and investors disagree on value of

new venture

 Investors want collateral