Enterprenuership Paper Print

SECTION ONE
INTRODUCTION
Course Purpose
This course teaches about the financing new entrepreneurial ventures, emphasizing those that
have the possibility of creating a national or international impact. The course examines the
entrepreneur's and the investor's perspective and places a special focus on the venture capital
process, including how they are formed and managed, accessing the public markets, mergers,
and strategic alliances.
Objectives and Teaching Methods
The main objective of this course is to enable students entrepreneurial ability that would
enable them to start a new venture; coordinating both human and non-human resources.
Enable them to take calculated risks that will result in successful achievement of goals.
The course uses tutorials, case studies and guest speakers to explore issues in financing
entrepreneurial ventures. Topics range from entrepreneurial team formation, legal issues in
the startup phase, perspectives on venture capital and financing to successfully exiting the
venture.
The tutorial requires that you come to class prepared, having read the materials required and
with prepared questions for the tutors. The guests are all high-caliber individuals who give
their time to come to Berkeley and have very high expectations of the students who take the
class.
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Copyright 2010 Rift Valley University College Adama
Entrepreneurship and Small Business Management Buma- 431
Teaching Guide: Requirements
It is imperative that the tutorial for this course to be involved with significant financings and
intimately aware of the norms to getting those deals done. The material and the high-quality
guests which make the course valuable are best taught by an individual familiar with both the
entrepreneurial endeavor and the roles of venture capitalists and investment banks.
Use of Guests
The course makes heavy use of guest tutorials, each of whom can describe the financing of a
new venture either in general, such as a venture capitalist, or in specific, such as an
entrepreneur associated with a case.
1.1 Essentials of Entrepreneurship and Small Business Management
A contemporary approach to entrepreneurship and small business management, following the

process of starting and managing a small business. Coverage includes foundations of
entrepreneurship, building the business plan, putting the plan to work, and the ethical, legal,
and regulatory environment. It includes chapter learning objectives and summaries, margin
definitions, discussion questions, and homework projects.
1.2 Entrepreneurship and Small Business Management
Preparing you to start and successfully operate your own small business is the emphasis of
the Entrepreneurship and Small Business Management Program. This program encompasses
all aspects of starting a business from initial evaluation of an opportunity and forming the
structure of the business to operational management.
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Essential elements covered in this course include:
risks involved in starting a business

valuing an existing business
fundamentals of franchising
effective small business operating methods
cash flow analysis
Ready and anxious to launch your business? A one-year certificate program is available for
students who already have a marketable skill or product ready for market. All of the courses
in the one-year certificate program are required in the two-year degree program. Therefore, it
is easy for a student who gets a one-year certificate to decide to go on for a two-year degree.
Please refer to Business Management: Entrepreneurship and Small Business Management.
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SECTION TWO
ENTREPRENEURSHIP THEORY
2.1 Abstract
Dr Kojo Saffu
For some time now, women have been starting businesses at a rate more than twice that of
men. Globally, women-owned businesses constitute between a quarter and a third of all
businesses. While little empirical research has addressed women-owned businesses, even
fewer studies have addressed women-owned businesses in Africa. Using the resource-based
theory, this study reports the correlates of the performance of ventures owned by Ghanaian
women. More specifically, the study focuses on the strategic, firm-level factors related to
business performance. We hypothesize that performance of women-owned businesses is
affected by strategic planning, the resources of the business, the skill and previous experience
of the owner.
The data for this study were collected in Ghana from June to August 2003. Subjects for the
study were randomly selected from databases held by a quasi government organization and
two womens business organizations. The data were collected by eleven University of Ghana
and nine Cape Coast University students after a one day orientation facilitated by the first
author. During the first half of the day, interviewing skills and the duties of the students as
interviewers were discussed, and during the second half of the day, students were
familiarized with the questionnaire. Before starting the actual data collection, the students
under the supervision of the first author, interviewed a sample of thirty female respondents.
Face to face interviews were used to collect the data because the other means of data
collection by mail and telephone were found to be less effective in Ghana. The postal system
in Ghana is slow and unreliable, while the telephone system is erratic and therefore not
dependable. Strategic planning was measured by asking respondents to indicate how far
ahead they planned certain business activities ranging from 1 = less than three months to 5 =
more than two years. Ventures resources were measured by asking respondents to rate eleven
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items related to different resources of the firm on a 5-point Likert scale, ranging from
1=weak to 5= strong. The items were then factor analysed.
Experience was measured dichotomously where 1=yes and 2=no. Business owners skills
were measured on a 5-point Likert scale, ranging from 1=weak to 5=excellent. Factor
analysis was carried out on the responses. Business performance was measured by means of
sales, number of employees, and profitability. Examination of the relationship between the
selected strategic capabilities and performance utilized factor analysis, one-way analysis of
variance, cross tabulations and Pearson correlations. Finally, in order to examine the
relationships among all the variables, we executed multiple regressions for each of the
performance variables. Findings from the study and implications deriving from the findings
are discussed.
2.2 Introduction
For some time now, women have been starting businesses at a rate more than twice that of
men (GEM, 2003; Dollinger, 1999). According to Moore (1999), globally, women-owned
businesses make up between a quarter and a third of all businesses. Notwithstanding the
growth in women-owned businesses, researchers (Baker et al., 1997; Holmquist and Sundin,
1996) have decried the paucity of empirical research addressing female business owners.
Studies that have focused on the correlates of the performance of firms owned by women
have been few (Lerner et al 1997). In particular, there is a dearth of research on the
relationship between strategy and performance of women-owned businesses (Lerner and
Almor, 2002). In a recent study, Moore (1999) identified areas of female entrepreneurship
research, however, strategic aspects of women-owned businesses were missing. While little
empirical research has addressed women-owned businesses, even fewer studies have
addressed women-owned businesses in Africa. This study addresses this neglected area of
female entrepreneurship research. Using resource-based theory, the study focuses on the
strategic, firm-level factors related to the performance of female Ghanaian businesses.
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2.3 Resource Based Theory
The resource-based perspective argues that sustained competitive advantage is generated by
the unique bundle of resources at the core of the firm (Conner and Prahalad, 1996; Barney
1991). In other words, the resource-based view describes how business owners build their
businesses from the resources and capabilities that they currently possess or can acquire
(Dollinger, 1999). The term resources was conceived broadly as anything that can be
thought of as a strength or a weakness of the firm (Wernerfelt, 1984:172). The theory
addresses the central issue of how superior performance can be attained relative to other
firms in the same market and posits that superior performance results from acquiring and
exploiting unique resources of the firm.
Implicit in the resource-based perspective is the centrality of the ventures capabilities in

explaining the firms performance. Resources have been found to be important antecedents to
products and ultimately to performance (Wernerfelt, 1984). According to resource-based
theorists, firms can achieve sustainable competitive advantage from such resources as
strategic planning (Michalisin et al 1997; Powell 1992)management skills (Castanis and
Helft 1991), tacit knowledge (Polanyi, 1962, 1966), capital, employment of skilled personnel
(Wernerfelt, 1984) among others. Resource based theorists ( eg. Barney 1991; Grant 1991;
and Peteraf 1993) contend that the assets and resources owned by companies may explain the
differences in performance. Resources may be tangible or intangible and are harnessed into
strengths and weaknesses by companies and in so doing lead to competitive advantage. The
resource-based theory continues to be refined and empirically tested (Bharadwaj, 2000;
Hadjimanolis, 2000; Medcof, 2000). Given that the resource-based view addresses the
resources and capabilities of the firm as an underlying factor of performance, it was found to
be a suitable theory to use in this study.
2.4 Theoretical Framework
It presents the theoretical framework for this study. Following the resource-based
perspective, we hypothesise that strategic planning; the resources of the business, the skill as
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well as the previous experience of the owner influence the performance of Ghanaian women-
owned businesses.
2.4.1 Strategic Planning and Performance
Research has shown an association between planning in small businesses and performance.
The literature suggests that planning is a good management practice, and may be beneficial
to business (Gibson et al 2002; Schwenk and Shrader, 1993). According to Berman, Gordon
and Sussman (1997:14) firms that plan produce better financial results than firms that do not
plan. Bracker et al (1986; 1988) found that firms that undertook strategic planning
performed better financially. Lerner and Almor (2002) contend that planning lays the
groundwork for developing the strategic capabilities needed for high performance.
Strategic planning has been studied by various scholars including (Mintzberg, 1973, 1994;
Brush and Bird, 1996; Bracker and Pearson, 1986; Braker, Keats and Pearson, 1988 ). The
findings can be summarised as follows: there is a positive relationship between strategic
planning and firm performance. According to Miles and Snow (1978), successful, proactive
firms have the propensity to invest time in strategic planning. On the contrary, unsuccessful,
reactive firms do not invest time in strategic planning, rather they fight fires. Rue and
Ibrahims study involving 253 US small firms found that there was a link between planning
sophistication and growth in sales. A recent study of 168 manufacturing SMES s in Sri Lanka
found that planning and control sophistication led to increased sales (Wijewardena et al
2004). Their study concluded that the greater the sophistication in planning the greater the
sales. A study of 297 Ghanaian entrepreneurs found a significant gender difference in the
planning sophistication of small firms in Ghana (Yussuf and Saffu, forthcoming). Firms
owned or managed by males had more sophisticated planning compared to female owned or
managed businesses. Research shows that women put less stress on long-range, formalised
strategic planning (Brush and Bird, 1996). Implicitly, women-owned ventures that put less
emphasis on strategic planning will have low performance. From the foregoing, we
hypothesise thus:
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H1: Strategic planning by Ghanaian women business owners is positively related to the
performance of their ventures.
2.4.2 Venture Capabilities and Performance
According to the resource-based perspective, venture resources in the form of capabilities,

assets, and skills provide competitive advantage and underpin the organisations performance
(Barney 1991; Grant 1991; and Peteraf 1993). In other words, resource-based theory hinges
on the resources and capabilities of the firm as an underlying factor of performance. Findings
from Chandler and Hanks (1994) study of small manufacturing businesses demonstrate the
link between the availability of resource-based capabilities and venture performance. An
abundance of capabilities in the firm ensures survival, rapid growth and profitability
(Chandler and Hanks, 1994). The centrality of the business owner in the operation of the firm
cannot be overemphasized (Lerner and Haber, 2000). To the extent that the business owner
makes all the important decisions, his/her skills become a critical asset on which the success
of the firm depends. Implicitly, when the skill set is stronger, the performance of the business
will be higher (Lerner and Almor, 2002). From the foregoing, we hypothesise:
H2: Strong venture resources are positively related to venture performance.
2.4.3 Previous Experience and Performance
There is recognition in the entrepreneurship literature of the significance of the contribution

of entrepreneurial experience to venture performance (Ronstadt, 1988). Vesper (1980)
contends that prior entrepreneurial experience can lead to success. Similarly, specific
experience in similar businesses ensures survival and growth (Cooper, Gimeno-Gascon and
Woo, 1994; Chandler and Hanks, 1994). A large proportion of women entrepreneurs lack
prior entrepreneurial experience (Bowen and Hisrich, 1986). Fischer, Reuber and Dyke
(1993) found that female business owners who had opened their business had less experience
in similar industries, in management, and in opening and managing the businesses they were
in. Based on the resource-based theory, it is plausible to argue that previous entrepreneurial
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experience is a resource that women bring to the firm. The findings lead to the following
hypothesis:
H3: Previous entrepreneurial experience of Ghanaian female business owners is positively

related to venture performance.
2.4.4 Business Owners Skills and Performance
Research shows that an entrepreneurs management skills contribute to venture performance

and growth (Lerner and Almor, 2002; Bird, 1995; Cooper and Gimeno-Gascon, 1994). The
propensity of the entrepreneur to employ and apply a variety of skills has been recognised
(Hunger and Wheelen, 1996). According to Hood and Young (1993), some of the important
skills of successful entrepreneurs include accounting, marketing, sales and financial
management. However, women business owners often rate themselves lower than men in
financial skills (Brush 1992). Hisrich and Brush (1984) found that US women entrepreneurs
scored themselves high on generating ideas, product innovation and dealing with people,
average on marketing and operations, and weak on financial skills. From the foregoing, we
hypothesise that:
H4: Managerial skills of Ghanaian female business owners are positively related to venture
performance.
2.5 Methodology
2.5.1 Data Collection

The data for this study were collected in Ghana from June to August 2003. Participants for
this were randomly selected from databases held by a quasi government organization and two
womens business associations/organizations. One hundred and eighty female entrepreneurs
were selected but 171 were used in the analysis. The sample however varies as some
respondents with missing data were omitted in some analysis.
The data were collected by using a questionnaire originally developed by Hisrich and Brush
(1985) and adapted for use in Israel by Lerner and Almor (2002). Eleven students from the
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University of Ghana and nine students from Cape Coast University were hired as
interviewers. They were initially trained at a one-day orientation facilitated by the first
author. During the first half of the day, interviewing skills and the duties of the students as
interviewers were discussed, while in the course of the second half of the day, students were
familiarized with the questionnaire. The questionnaire was pilot-tested on a sample of twenty
female respondents who were not included in the final sample. Following the advice of the
second author, face to face interview was employed in the data collection because the other
means of data collection such as mail and telephone survey were found to be less effective in
Ghana. The postal system in Ghana is slow and unreliable, while the telephone system is
erratic and therefore not dependable
2.5.2 The Research Variables
A. Independent Variables
Independent variables in the study included strategic planning, venture resources, previous
experience and business skills.
To measure strategic planning, we used a nine-item scale and for each item, we asked
respondents about how far ahead they planned certain business activities ranging from 1 =
less than three months to 5 = more than two years. We computed an index by summing up all
the items on the scale. Reliability analysis showed an alpha of .78. Multiple regression
analysis was conducted using the nine item-scale as the predictors.
Venture resources were measured using a eleven item scale by asking respondents to rate
eleven items related to different resources of the firm on a 5-point Likert scale, ranging from
1=weak to 5= strong. Pearson correlation analysis/multiple regression was conducted to test
the hypothesis between venture capabilities and performance. The items were then factor
analysed leading to three factors.
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We measured the business owners skills on a 5-point Likert scale, ranging from 1=weak to
5=excellent. Multiple regression, correlation analysis and factor analysis were carried out on
the responses. Reliability analysis was alpha of .75.
Previous experience - entrepreneurial and family- was measured by asking a dichotomous

question where 1=yes and 2=no. A univariate ANOVA and chi-square test were carried out
on two independent variables.
B. Dependent Variables
Dependent variables in this study were number of employees, sales and profitability. These
performance measures have been used in prior studies (Lerner and Almor, 2000, 2002;
Brush, 1984). Size was measured by the number of employees in the firm, consistent with
prior practices in the small business literature (Lerner and Almor, 2000, 2002). Number of
employees was an open question. Sales were divided into 5 categories and respondents were
asked to indicate their gross turnover for the previous year by checking the range closest to
their total revenue. Profitability was measured using an ordinal scale where 1=a profit,
2=neither profit or loss and 3=a loss.
2.5.3 Descriptive statistics

A. Type of Business
An overwhelming majority of the firms 75 percent were in the service industry, 19 percent
were in retailing and the rest 6 percent were in manufacturing.
B. Firm Age and Size
The firms in the sample were small in size, with a mean of 11.65 full time employees. 11
percent employed less than five employees; 40 percent employed between five and fifty
employees; 10 percent employed between 51 and a hundred people while 39 percent
employed more than a hundred employees. The average age of the businesses was 12.08
years with minimum of 2 years and a maximum of 38 years.
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C. Ownership
Almost 74% of the businesses were sole proprietorships while 12.9 % were limited liability
businesses. These contrast with 2.3% and 1.8% for joint venture and other means of
ownership respectively.
D. Location
Of the sample, 32 percent of the businesses were located in the business owners home, 23
percent were in the businesses own premises while 42 percent were located in rented
premises.
E. Education of Business Owner
13 percent of the female business owners had nine years of schooling, 20 percent had
secondary education and 67 percent had post-secondary education.
F. Owners Experience
19 percent had previous entrepreneurial experience; 66 percent had previous experience in

the same industrial sector; and 57 percent had a family member who owned a business.
2.5.4 Strategic Planning and Performance
We tested the hypothesis that strategic planning was a predictor of performance (H1) by
conducting a multiple regression using a nine-item scale as predictors. Size was denoted by
number of employees, as the dependent measure for performance. The items in the scale
were measured on a five-point scale ranging from 1= planning less than 3 month to
5=planning for more than two years. The respondents were required to indicate how far ahead
they planned along this dimension. The information presents the findings of the hypothesised
relationship between strategic planing and performance. Although the overall model was not
significant thereby not fully supporting the hypothesis, one item in the scale was a significant
predictor. Planning ahead for new products was more likely to lead to a higher number of full time
employees.
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SECTION THREE
CHARACTERISTICS AND BACKGROUND OF
ENTREPRENEURS
3.1 Feelings on Belief
Before considering the various characteristics and backgrounds of the typical entrepreneur, it
should be emphasized that there are no significant differences between entrepreneurs and the
overall general profile. There is really no such thing as a true entrepreneurial profile.
Entrepreneurs come from a variety of educational backgrounds, family situations, and work
experiences. A potential entrepreneur may presently be a worker, salesperson, mechanic,
engineer, secretary, etc. A potential entrepreneur can be male or female.
One common concern people have when considering a new venture creation is whether they
will be able to sustain the drive and energy required not only to overcome the inertia in
creating something new but also to manage the new enterprise and make it grow. Are you
driven to succeed and win? An initial assessment of this can be made by answering the 10
Yes-No questions.
Checklist for Feelings on Control
1. Do you often feel Thats just the way things are and theres nothing I can do about it?
2. When things go right and are terrific for you, do you think I was lucky!?
3. Do you think you should go into business or do something with your time for pay because
everything you read these days is urging you in that direction?
4. Do you know that if you decide to do something, you will do it and nothing can stop you?
5. Even though it is scary to try something new, are you the kind who tries it?
6. If your friends, parents tell you that it is foolish of you to want a career. Have you listened
to them?
7. Do you think it is important for everyone to like you?
8. Do you get a feeling of satisfaction from doing a job properly?
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9. If you want something, do you ask for it rather than wait for someone to notice you and
just give it to you?
10. Even though people tell you it cannot be done, are you going to find out it yourself?
After answering these questions you can determine whether you are internally or externally
driven. (Is your wish to succeed and win an internal necessity or there is a desire to satisfy
someones will?) Answering Yes to questions 4, 5, 8, 9, and 10 indicates that you possess the
internal control aspect of being an entrepreneur. Answering Yes to questions 1, 2, 3, 6, and 7
indicates that you are subjected to external controls which may inhibit your entrepreneurial
tendencies.
While internal beliefs appear to differentiate entrepreneurs from general public, they do not
differentiate entrepreneurs from managers; both have internal tendency.
3.2 Feelings on Independence
An entrepreneur is the kind of person who needs to do things in his or her own way and time.
To evaluate your feelings on independence answer the questions. Yes answers to questions 1,
4, 5, 8, 9, and 10 indicate that you do not have a strong need for independence.
Checklist for Feelings on Independence
1. I hate to go shopping for clothes alone.

2. If my friends dont want to go to a movie I want to see, I will go by myself.
3. I want to be financially independent.
4. I often need to ask other peoples opinions before I decide on important things.
5. I would rather have other people decide where to go out.
6. When I know Im in charge, I dont apologize, I cant do it, I just do what has to be done.
7. I will speak up for an unpopular cause if I believe in it.
8. Im afraid to be different.
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9. I want the approval of others.
10. I usually wait for people to call me to go places, rather than intrude on them.
3.3 Risk Taking
Virtually all the definitions of an entrepreneur indicate a risk-taking component. Indeed, risk
taking, whether financial, psychic, or social, is a part of the entrepreneurial process. You can
assess your risk-taking behavior by answering the questions. If you answered Yes to
questions 2, 5, and 9 you may need a greater willingness to take risks.
Checklist for Willingness to Take Risks
1. Can you take risks with money, that is, invest, and not know the outcome?
2. Do you take an umbrella with you every time you travel? A thermometer?
3. If youre frightened at something, will you try to conquer the fear?
4. Do you like trying new food, new places, and totally new experiences?
5. Do you need to know the answer before you ask the question?
6. Have you taken a risk in the last six months?
7. Can you walk up to a total stranger and strike up a conversation?
8. Have you ever intentionally traveled an unfamiliar route?
9. Do you need to know that its already been done before youre willing to try it?
10. Have you ever gone on a blind date?
3.4 Entrepreneur Background
While a wide variety of aspects of an entrepreneurs background have been explored, only a
few have differentiated the entrepreneur from the general populace or managers. The
background areas explored include childhood family environment, education, personal
values, age, and work history.
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3.5 Childhood Family Environment
In terms of the occupation of the entrepreneurs parents, there is strong evidence that
entrepreneurs tend to have entrepreneurial fathers as male entrepreneurs. Female
entrepreneurs appear to have entrepreneurial mothers. Parents are supportive and encourage
independence, achievement, and responsibility.
3.6 Education
While it is frequently stated that entrepreneurs are less educated than the general population,
the research indicates this is clearly not the case. Education is important in the upbringing of
the entrepreneurs. Its importance is reflected not only in the level of education obtained but
in the fact that it continues to play a major role in helping to cope with problems and
correcting deficiencies in business training. Although a formal education (a diploma in a
pocket) is not necessary for starting a new business, as reflected in the success of such
entrepreneur high school dropouts as Andrew Carnegie, William Durant, Henry Ford, it does
provide a good background, particularly when it is related to the field of the venture.
Entrepreneurs need education in the areas of finance, strategic planning, marketing
(particularly distribution), and management. The ability to deal with people and to clearly
communicate in the written and spoken word is important in any entrepreneurial activity.
3.7 Personal Values
While there have been many studies indicating that personal values are important for
entrepreneurs, these studies often fail to indicate that entrepreneurs can be differentiated on
these values from managers, unsuccessful entrepreneurs, or even the general populace. For
example, while entrepreneurs tend to be effective leaders, this does not distinguish them from
successful managers. While personal values, such as support, aggression, benevolence,
conformity, creativity, etc. are important for identifying entrepreneurs, they often also
identify successful individuals as well. However, a successful entrepreneur is usually
characterized as an honest person in doing business.
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3.7.1 AGE
In terms of chronological age, most entrepreneurs start their entrepreneurial careers between
ages of 22 and 55. Earlier starts in an entrepreneurial career are better than later ones.
Generally male entrepreneurs tend to start their first significant venture in their early 30s,
while women entrepreneurs tend to do so in their late 30s.
3.7.2 Work History
Work history is important both in the decision to launch a new entrepreneurial venture and in
the growth and eventual success of the new venture. Experience areas particularly are:
obtaining financing, such as bank financing; developing the best product or service for the
market; establishing manufacturing facilities; developing channels of distribution; and
preparing the marketing plan.
As the venture becomes established and starts growing, managerial experience and skills
become increasingly important.
It is generally easier to start a second, or third venture than to start the first one. The need for
entrepreneurial experience increases as the complexity of the venture increases.
3.7.3 Motivation
What motivates an entrepreneur to take all the risks and launch a new venture? Although
many people are interested in starting a new venture and even have a background and
financial resources to do so, few decide to actually start their own businesses. Individuals
who are comfortable and secure in a job situation, have a family to support, like their present
life-style and predictable leisure time often do not want to take the risks associated with
venturing out alone.
The most often reason for becoming an entrepreneur is independence not wanting to work
for anyone else. This desire to be ones own boss is what drives both male and female
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entrepreneurs to accept all the social, psychic, and financial risks and to work the numerous
hours needed to create and develop a successful new venture. Money is the second reason for
starting a new venture for men while job satisfaction, achievement, opportunity, and money
are the reasons in rank order for women.
3.8 Role Models and Support Systems
One of the most important factors influencing entrepreneurs in their career choices is role
models. Role models can be parents, brothers or sisters, other relatives, or successful
entrepreneurs.
An entrepreneur needs a strong support and advisory system in every phase of the new
venture. This support system provides information, advice, and guidance on such matters as
organizational structure, obtaining needed financial resources, marketing, and market
segments. As initial contacts and connections expand, they form a network.
It is important for every entrepreneur to establish a moral-support of family and friends. Not
only can friends provide advice that is often more honest than that received from other
sources, but they can also provide encouragement, understanding, and even assistance.
Relatives can also be strong sources of moral support to overcome the many difficulties and
problems.
In addition to moral encouragement the entrepreneur needs professional support. This advice
can be obtained from a mentor (a teacher, consultant), business associates in trade
associations (buyers of the ventures product or service; lawyers, or accountants; suppliers of
the goods or services to the venture (help to establish credibility) business counterparts
word of mouth advertising.
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3.9 Men versus Women Entrepreneurs
Men make up the majority of people who start and own their own businesses.
Men are often motivated by the drive which often stems from disagreements with their
bosses or a feeling that they can run things better. In contrast, women tend to be more
motivated by independence and achievement arising from job frustration.
For men, the transition from a past occupation to the new venture is often facilitated when
the new venture is an outgrowth of a present job. Women, on the other hand, often leave a
previous occupation with only a high level of enthusiasm for the new venture rather than
experience, making the transition more difficult.
Start-up financing is another area where male and female entrepreneurs differ. While males
often list investors, bank loans in addition to personal funds as sources of start-up capital,
women usually rely solely on personal assets or savings.
Occupationally, there are differences between male and female entrepreneurs. Men more
often are recognized specialists in their fields or have attained competence in a variety of
business skills. Their experience is often in manufacturing, finance, or technical areas. Most
women, in contrast, usually have administrative experience, usually in more service-related
areas such as education, secretarial work, or retail sales. The result is often smaller female-
owned businesses with lower net earnings. In terms of personality, there are strong
similarities between male and female entrepreneurs. Both tend to be energetic, goal-oriented,
and independent. However, men are often more confident and less flexible and tolerant than
women, which can result in different management styles driving the new venture.
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Glossary:
Sustain- keep strong

Inhibit- hold back
Blind date- a meeting between two people who have not met before
Benevolence- a wish to do good
Conformity- act in accordance with established rules
Self Check Exercise
1. What is gained from analyzing the characteristics of entrepreneurs?

2. Recalling the definition of entrepreneurship (English No.6, 2000), what characteristics
would you expect to find in a typical entrepreneur?
3. Why do you think that some successful entrepreneurs have had difficulty in managing
their companies beyond the start-up stage? How could entrepreneurial education help this
problem?
4. How do you think male and female entrepreneurs will differ in 10 years?
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SECTION FOUR
STARTING A NEW VENTURE: GETTING DOWN TO
BUSINESS AS COMPANY FOUNDER
4.1 Research Triangle Park
Reaching the first business transition point means cash is in play. The founders first jolt of
harsh reality occurs at the time the company is financed. Whether it is a personal obligation
to a family member who provides funding, debt that has to be personally guaranteed to a
commercial bank, a grant requiring research results, or the obligation to shareholders taking
private equity, the founder owes somebody something from the beginning. Successful
founders will handle this set of transactions by:
Treating the financing partners with business respect
Managing the money with appropriate professional judgment
Keeping them informed of progress
Visibly, and with thoughtful action, committing to the fulfillment of the obligation
4.2 Finding the Right Management Team

If financing isnt enough pressure, adding to that pressure is the selection of the management
team. For the first time, the founders have to decide where they really belong in the
company, based on their personal skills and abilities. The new members of the management
team have to fill the gaps that the founders cannot fill. Quite often, the founders need an
experienced CEO to run the company. Experienced executives need to be brought into to
accomplish the first set of milestones whether they are product research, product
development, marketing introduction, early sales or manufacturing operations. Therefore,
management team selection is not a one-time event. It has to be done throughout the life of
the company. This is a difficult task for founders, and should be facilitated by experienced
business executives. The keys to making the right selections are:
Accurately and honestly assessing the skills and abilities of the current team; thereby
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determining what additional executive skills that are needed
Openly admitting where help is needed by leaving no problem without thorough
consideration
Crisply defining the roles and responsibilities for the new members of the team
Rigorously and intelligently selecting the people to fill the positions
4.3 Business Growth and Maturity

As a business matures, many things can happen to cause a founder to change their
involvement in the company. Typical examples of this are: realizing the founder is not
contributing or is a disruptive force, the founder in not required for future success when the
companys business direction changes, additional funding dilutes the founder to a minority
shareholder, personnel conflicts occur that require the founder to leave the business, or the
company is put up for sale. These are difficult times for the founder and have to be dealt with
from the point of view of what is best for the shareholders of the company. When personal
issues creep into the discussions, these situations can become very debilitating and actually
destroy the company in its tracks. To successfully pull through these issues:
The founder has to put the needs of the business ahead of personal issues; its all about
business
As when the founder had great business advice when starting the company, listen to trusted
business advisors through these issues as well
Be a constructive participant in doing what has to be done, embracing the change and
making the transition successful
Continue to support the vision of the business and be role model for the entire team by
leading the way for necessary change
4.3.1 Business Exit

Dealing with the sale or merger of the company is equally as difficult, and the founder has to
deal with it in the same manner. The sale is a final departing point and represents the day the
founders company reaches adulthood. Lots of questions arise about selling or not selling the
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business: the right price, who stays, who goes, and many more gut wrenching questions.
Getting cold feet is the last thing you want to have happen on either side of the transaction.
Before a founder even entertains a sale or merger they must:
Know what they want in the transaction and what the walk away terms are
Think through and accept the implications of the transaction once the deal is signed
Negotiate in good faith and from a clearly communicated set of deal principles
Again, lead the way to making the transition successful
4.3.2 Exhibit Mature Business Behavior
All potential alliance partners of a company, whether they provide funding, development,
marketing, sales or operations, will want to see the right business and personal behavior of
the founder before they proceed. If a founder shows inappropriate behavior, the best of deals
will be cut off very quickly. If the founder exhibits mature behavior, in the most difficult of
business situations, the partnership will benefit and the company will be on a path to success.
4.4 Research Triangle Park, N.C.
With the economic downturn and unemployment rising, many more people than ever
are thinking about starting a company. As a company founder, you should know what you
are getting into. The business and personal behavior of a companys founder will, at any time
in the history of the company, determine whether the company will succeed or fail. Venture
firms know that. Banks know that. Public grant associations know that. Attorney and
accounting firms know that. Most well-informed private investors know that. As a company
matures, there are many transition points that require the founder to make key decisions:
Selecting the founding team
Picking advisors
Funding the company
Selecting the management team
Deciding when to step aside or give up ownership
Selling the company
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4.5 Founder Lock
If the founder handles these decisions intelligently, the chances for success are much higher.
If not, the company will experience a quick demise. I call this ailment Founder Block.
Major roadblocks to success occur when:
Founders pick incompatible founding team members who dont share the vision and buy
into the business proposition
Inexperienced and irrelevant advisors are picked to assist with the business
Founders display inappropriate business behavior that shakes investor confidence that the
founder has the required maturity
The founder does not relinquish control to the management team
They dont step aside when more qualified people are needed to run the company
Founders balk when share ownership changes occur and when the company is going to be
sold
At the Start-up of the Company

Lets start at the very beginning of a companys life. The founder has a vision and
an idea for a company. The founder does the research and creates a business plan to
flesh out the idea and determine if a viable business can be created. Depending on
the type of business, the founder might need other people with different skills to
join in the early formation of the company to complete the business plan and
actually get the company started. This founding team has to be put together
considering the following essential principles:
Every founder has the passion for the vision and is willing to make incredible
personal sacrifices to accomplish it
Everyone has skin in the game, in both time and money
They all agree on the business plan
The founders create the culture of the company and have compatible business and
personal values
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Everyone is an A player, and their skills are complementary and necessary to
create the company
They work well together
4.6 Business Advisors

Every successful company has had solid business and technical advice from a small group of
highly qualified and relevant advisors. A board of advisors can help a struggling founder
avoid a lot of early pitfalls. Considerable thought is required to pick them, making sure the
advisor team consists of:
Relevant technical expertise within the companys selected industries
Business development experience and a broad array of contacts in the companys market
segment
People with a broad range of experiences in business, finance and management
People with complementary product or services experiences that can assist with
determining alliance partners
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SECTION FIVE
FINANCING A NEW VENTURE
Overview
The Great American Dream to profit from your creativity. But to succeed in an
innovative new venture you need invention, drive, and cash. This article will discuss the
cash. Most individual inventors no longer expect they will receive venture capitalist
financing within months of starting a new venture. There remains confusion and
uncertainty on sources of start-up funds; this is the sort of thing I currently discuss with
new venture clients. Generally speaking such ventures are "unbankable", that is, banks
are unwilling to make business loans to the venture.
5.1 Licensing of a Provisional Patent Application

The inventor files a provisional patent application and then contacts large manufacturing
firm licensees with the hope of obtaining a license which provides cash for use in obtaining
the nonprovisional patent. Prospective licensees typically require agreement that no
confidential relation exists between the parties, and that the inventor will rely only on patent
protection for his or her invention. A provisional application is inexpensive and provides
priority and "protection" for one year. It expires after one year and there is no patent
protection at all unless a nonprovisional patent application is filed before expiration of the
year. There is nothing intrinsically wrong with this scheme, and I often recommend filing
provisional applications, keeping in mind that protection is limited to that which is clearly
described in the application.
The practical limitation of this strategy is that one year is not a long time when searching for
a suitable licensee and negotiating the license deal. Unfortunately, approaching a licensee
with a provisional application may send two undesirable messages. It may appear that the
inventor does not have enough confidence in the invention to invest in a regular
nonprovisional patent application. It may suggest to the licensee that the inventor will be
unable to make a nonprovisional patent application and soon will have no patent protection at
all if no interest in the invention is expressed.
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Own Sources
The individual inventor probably will have to face the reality of finding start-up funds from
his or her own resources. This is the way inventions traditionally have been financed. Each
source of start-up funds has some advantages and disadvantages.
From savings
This is the most desirable source of funds, as it assures the ownership of the invention
remains with the inventor. Unfortunately, savings often are not available. The inventor may
not have enough confidence to risk his or her own savings. If this is the case, the inventor can
hardly expect to convince others to risk their cash, and he or she had better go back to
complaining about the insensitivity of the capitalist system to the truly innovative.
From your 401(k) Account

This follows the above approach, but it puts at risk not only your present, but your future
personal solvency. Not even I can recommend it; but it may be necessary if you are to get
your business off the ground.
Borrowing Using Credit Cards

This works, and doesnt involve annoying discussions with loan officers. The main
disadvantage is that credit cards have high interest rates. Search for cards with low rates
before starting your venture. If worse comes to worse, personal bankruptcy will discharge
credit card debts. (But be sure to see a lawyer before undertaking this strategy, particularly if
you own a home).
Borrowing on Your House

This provides funds at the lowest interest rate, and the interest may be tax deductible. It may
be your best bet. But never forget if you fail to make the monthly payments, the bank will
take your house - no ifs, ands, or buts.
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Borrowing from your family and friends
Again this is a traditional source of funds. But be sure to consult a lawyer before promising a
portion of the company, invention or proceeds to the provider of the money. Be sure all
agreements are recorded in writing. Future venture capital will be impossible to obtain if
ownership of the company is vague or uncertain. No one wants to buy a lawsuit. "If this
works out, youll get a share of the company" is uncertain. "If you write the software you get
1% of the company" is certain with respect to the ownership of the company.
Grants and contracts

Generally available from government agencies, such as the National Institutes of Health,
such contracts are life-saving for many technology start-up companies. One disadvantage is
the time and effort required to obtain the grants and contracts. It is of course necessary that
the research required by the grant or contract actually be done. Ideally the research will fit
the company requirements. Unfortunately, the companys greatest needs may be in areas
other than research, such as market and product development. Nevertheless, few start-ups can
afford to ignore grants and contracts.
Other Sources
There are a variety of state and local government programs which can provide needed cash.
JREF is a private non-profit foundation is which provides low-interest loans to Howard
County companies. Information on these opportunities is available from the Small Business
Development Center on Bendix Road.
Outside Investors
All the above schemes (with the possible exception of family and friends) do not involve
transfer stock to outsiders, and certainly allow the inventor to control the business. Financing
at the next stage, involving angel investors, venture capitalists, bank loans, and private and
public offerings of stock, is beyond this article. These financing arrangements all involve a
greater or lesser loss of control by the company founder. Any founder who sells the majority
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of the company stock should not be surprised when someday he or she is asked to give up
control. Thats when you know its time to start a new venture.
The Iceberg Principle

The Iceberg of Opportunities' Principle, which our Business e-Coach is to help you reverse,
illustrates a tremendous potential for bridging the equity gap - the gap between venture
capital (VC) sough by start-up firms and VC available with prospective investors, but not
used. To illustrate:http://www.1000advices.com/micro/ten3_micro_sets_entrepreneur.html -
VF
from the VC receiver side, only 6 out of 1000 innovative ideas get funded by
venture investors on an average.
The main reason for rejection is that though first-time entrepreneurs may have great
technology of business ideas they lack skills for converting these ideas into a successful
business. To venture capitalists, "ideas are a dime a dozen: only execution skills count."
from the VC supplier side, in 2000 in the US, business angels - early stage private
investors - put US$40 billion behind 50,000 deals. The size of the angel market could
potentially become 10 to 20 times larger, however. It is estimated that only 7% of potential
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business angels in US invest in start-up ventures. The remaining 93% are virgin angels who
would like to invest but don't do it for a number of reasons, which include lack of proposals
matching their investment criteria, lack of quality business proposals, lack of trust in the
entrepreneur or management team, lack of experience in valuating and pricing deals, and lack
of experience in due diligence and monitoring.
Many see a problem in this huge equity gap. We see an opportunity here. Let's work together
to bridge it!
5.2 Understanding the Venture Financing Chain

Technology ventures demand an unbroken financing chain, from pre-seed capital to stock
market. The financing chain is no stronger than its weakest link.
High-tech start-ups usually go through multiple funding rounds. Equity financing
conventionally follows the below trajectory:
founders, friends & family (the "3Fs", sometimes spelled out as "founders, friends &
fools"), or bootstrapping phase
business angels
venture capital (VC), and
initial public offering (IPO) or mergers & acquisitions (M&A)
5.2.1 Bootstrapping
Bootstrapping is a means of financing a small firm through highly creative acquisition and
use of resources without raising equity from traditional sources or borrowing money from a
bank. It is characterized by high reliance on any internally generated retained earnings, credit
cards, second mortgages, and customer advances, to name but a few sources.
Bootstrapping is the most likely source of initial equity for more than 90% of technology
based firms. It offers many advantages for entrepreneurs and is probably the best method to
get an entrepreneurial firm operating and well positioned to seek equity capital from outside
investors at a later time. The entrepreneurs should learn bootstrapping options and practice
bootstrapping strategies to be able to bridge successfully the equity gap... More
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5.2.2 Business Angels
Business angels are a source of pre-revenue seed funding and management guidance for
start-ups. Business angels are wealthy individual investors - usually, people who have made
their own money as entrepreneurs. Better equipped and more flexible than banks and most
capital funds to assess the potential of very young business, they contribute not only equity
but also much needed business expertise, offering company hands-on support and advice.
Angels bridge the gap between the personal savings of entrepreneurs and the 'early stage' or
'second round' financing which venture capitalists are able to offer.
To ensure seamless integration of financing through the life cycle of a company, good
relations between business angels and VC communities are essential... More
5.2.3 Venture Capital Firms

Venture investing is a process by which investors fund early stage, more risk-oriented
ventures. Being a principal funding source, venture capital can not finance innovation on its
own. Too many VC firms remain unwilling to invest in high-tech start-ups in the early stage,
often because they lack the investment appraisal capacity to act as the "first investor". To be
fully effective, venture capital must form part of an unbroken investment chain, from seed
capital to stock market.
To target and pursue the appropriate professional venture capital providers, it is a must for
the venture capital seeker to understand their investment strategy and preferences...More
5.3 The Critical Role of Your Business Model

Many venture capitalists see themselves as investing in a business model. Consequently it
often is the venture capital investor that pushes for a change in the business model when it
becomes apparent that the original model is not working... More
5.3.1 Corporate Investing

Corporations are a major - and rapidly growing - source of funds for new ventures. In today's
new entrepreneurial economy, the real shareholder value is created by companies whose
corporate strategies include well-developed venture strategies. Partnership between small
innovative firms and large corporation is mutually beneficial. While entrepreneurial
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companies can identify technology and market opportunities and move faster to capitalize on
them, they can achieve enormous leverage through technology and distribution agreements
with large global corporations.
According to Venture Economics and the National Venture Capital Association, in United
States in 1994, only 2% of venture capital investments were corporate venture capital, but in
2000, corporate venture capital accounted for 17%, nearly $20 billion. In four years, from
1996 through the end of 1999, the number of companies that were investing in outside ideas
increased eleven fold, from 30 to 330. During the same period, corporate venture capital
spending rose from $100 million to $ 17 billion annually.
By 2000 spinouts, a new form of creating and financing a high-tech company has become
more popular. This novel approach has a number of advantages over a merger or acquisition
and it plays an increasingly high role for high-tech companies... More
5.3.2 Banks
Banks are businesses too. They have stockholders to whom they must report and they are
highly regulated by federal and state agencies. You must prepare a comprehensive
documentation if you to obtain a commercial loan for your venture... More
5.3.3 Stock Markets
Stock markets for high growth companies stimulate venture capital activity by offering an
'exit route' of flotation. They offer a means for venture capital funds to realize a return on
investment in new companies. Compared with other exit routes, typically an Initial Public
Offering (IPO) realizes the greatest return on investment.
5.3.4 Mergers and Acquisitions
The role of mergers and acquisitions had evolved as a strategy tool for fast-track technology-
led companies. Any pure technology company looking to get funded that views an
acquisition strategy as a likely outcome, ideally needs to position itself to fill a future
technology need that more than one major company is likely to fight for.
When weighing your options, be sober about your company's commercial prospects. Early
success with a single application or product lines does not translate into long-term viability in
the face of well-capitalized, entrenched competitors with strong customer relationships.
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Therefore, the short-term technologic advantage realized by start-ups may be best exploited
by seeking a merger partner... More
5.3.5 Business Start-up Finance for Your New Venture

When it comes to starting your own business one of most important factors to take care of is
your start-up business finance. There are many funding options open to you, with the main
forms being categorised as either debt finance or equity finance.
It has been said that roughly 60 or 70% of all new business ventures call on their local bank
as their first attempt to gain start-up finance. Gaining a bank loan to fund a business start-up
is one form of debt finance. This debt finance comes in the form of a bank loan that typically
has to be repaid at an agreed interest rate. The way in which banks usually agree to bank
loans is by securing your loan against an asset. The way in which this works is if your
business then fails to repay the loan, the bank can then claim the asset. So what exactly is this
asset? An asset stands as usually a house/premises or equipment that is owned by your
business.
The main problem with a bank loan is your company then becomes locked into a tight
payment schedule that could cause problems for small businesses. There are also other forms
of debt finance that are starting to prove just as popular with small business, such as credit
cards and leasing. The term leasing refers to the borrowing of money to buy specific
equipment/machinery. In this case small businesses borrow against the store sales.
All forms of debt finance means that you are borrowing against reserves rather then giving
someone ownership of your shares. The main thing that you have to keep in mind when it
comes to debt finance is finding the aspect of funding that is right for your business; there is
however one flaw to this theory; what if no form of debt finance is right for your business?
To answer this predicament I bring to your attention, equity finance.
Although the definition of equity finance slims down to pretty much being risk capital, it is
the saviour of many small/new businesses who are either turned down for a bank loan or
merely can't keep up with the repayments.
Equity equals true risk capital as there is no guarantee that the investor will get there money
back. The big advantage however is that the money that is invested into your business from
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equity finance never has to be repaid. Investors to your business are prepared for risk capital
in return for a growth share of your business profit.
The investors behind equity finance give you the money that you need to get your business
off the ground and to cover all aspects of your business start-up costs such as rent, the
purchasing of equipment and staff wages as well as all of your utility bills for the first few
months.
Whatever finance you decide to use for your business venture, make sure you make a
realistic and informed decision based on your business needs. There is a lot to take into
account and you need to ensure that you have all of your business information sorted before
making any decisions.
5.4 Financing the New Venture

5.4.1 Description
How will entrepreneurs raise money for their ventures? This module surveys the resources
and issues involved in answering this question. Emphasis is placed on comparing the benefits
and risks of the different sources of capital, types of financing, and the kinds of deals
available to entrepreneurs. This module also shows how financing a new venture is an
ongoing challenge for the entrepreneur.
5.4.2 Sections
1. Sources of Capital and Forms of Financing
2. Friends and Family
3. Angel Investing
4. Venture Capital
5. Bootstrapping
6. Valuation and Risk Analysis
5.4.3 Resources
Comments
When you have finished studying this module, you will be able to fulfill the following
learning objectives:
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List formal and informal sources of capital.
Compare the benefits and risks of different forms of financing.
Explain how financing deals are negotiated and structured.
Discuss the pros and cons of raising money from friends and family.
Compare the pros and cons of angel investing.
Explain why an entrepreneur may or may not seek venture capital for a new venture.
Demonstrate the venture capital method of computing valuations.
Discuss the pros and cons of bootstrapping.
Conduct a risk assessment and valuation for a new venture.
This module opens with a video of venture capitalist Christine Comaford-Lynch. What
advice does she have for financing new ventures?
A. Sources of Capital and Forms of Financing
Sources of financial capital for new ventures range from venture capital to debt financing (De
Clercq, Fried, Lehtonen, and Sapienza, 2006). Although there is much talk in the media
about venture capital, the reality is that comparatively few ventures are funded by venture
capitalists. Funding through your own savings and debt, from friends and family, and from
angels is more common.
Typically, funding proceeds in a series of rounds. At the first stage of financing,
entrepreneurs usually invest their own funds and raise funds from friends and family. The
next stage usually includes a round of financing from angel investors. After this angel round,
the next round might include what is known as a Series A financing, which includes funding
from institutional investors, such as venture capitalists.
Examine the following resources to identify the various sources of financing. Can you think
of any additional sources?
Further explore three forms of financing. What are the potential advantages and
disadvantages of the three forms that you explored?
Consider some of the more creative approaches to financing. Why would an entrepreneur
employ these creative approaches rather than seek financing through more traditional
channels?
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FIGURE 5.1 Range of Expected Annual Rates of Return Based on Deal Structure
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FIGURE 5.2 Funding Sources by Stage Y = Yes, P = Possible depending on company
characteristics and industry.
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B. Friends and Family
Raising financial capital from friends and family is a common approach for entrepreneurs
launching a new venture (Young, 1997). Friends and family are more likely to invest in your
venture because of the personal relationship you have established with them over time. These
investors are less likely to scrutinize the details of your plan at the same level as a
professional investor. Although it is often easier to raise financial capital from friends and
family, there are significant risks associated with mixing business and personal relationships.
Assess your attitudes toward friends and family financing. Why or why not would you use
this source of capital for your new venture?
What are the potential risks when raising money from friends and family? Are there certain
ways to structure friends and family financing to reduce the likelihood that the financing will
be a burden on the personal relationship?
I. Asking Friends and Family for Financing
Entrepreneur.com I need to learn how to approach friends and family for startup
financing. Can you provide a short list of resources or references for me?
II. Blood Money

Hitting up family and friends is the most common way to finance a start-up. It's also the
riskiest.
5.5 Inc.'s Small Business Success Newsletter

Sitting behind his desk at a marketing firm, Chris Baggott often daydreamed of owning his
own business. In 1992, he finally took the plunge. At the age of 31, he quit his job and
bought Sanders Dry Cleaning, a local store that he eventually built into a chain with seven
outlets. To make it happen, Baggott borrowed $45,000 from his father-in-law, James Twiford
Anderson, a physician who also agreed to cosign a $600,000 bank loan.
With the financing in place, and 10 years of marketing experience, Baggott thought he was
set. And then the whole "business casual" trend caught fire. "People stopped wearing suits,"
Baggott recalls. Revenue fell to just $60,000 a month, far short of Baggott's original
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projections of $110,000. What's more, he owed $14,000 in monthly payments to the bank.
Propping up the business with credit cards, he began missing loan payments--and the loan
officer's phone calls went straight to his father-in-law. Says Baggott: "He'd call us and say,
'What the heck is going on here?' And then he'd have to write a check to cover it from his
own funds."
Eventually, Baggott felt he had no choice but to sell the business, pay his debts, and move
on. But there was one investor he couldn't repay: his father-in-law, who ultimately lost tens
of thousands of dollars on the venture. "It was painful," Baggott says, though his father-in-
law was "great" about it. "You win some, lose some; it's trite to say, but it's true," says
Anderson, who knows from running his own practice and from some real estate ventures that
things don't always go as planned. "I know whatever project Chris goes into, he puts his heart
and soul into it." Still, Baggott felt the business losses put a strain on their relationship.
If anything puts family members' love to the test, it's asking them for money. Yet it happens
every day. In fact, investments by family and friends account for more than 70% of all
venture dollars for start-ups, according to a recent study by Babson College, the London
Business School, and the Kauffman Foundation. On average, investors sink $1,667 a year
into businesses owned by friends and family, and some invest far more--an average of
$255,000 a year for top investors.
The trouble is, entrepreneurs who turn their loved ones into creditors put more than just their
financial futures on the line--they're putting their most important personal relationships in
jeopardy, too. "It's the highest risk money you'll ever get," says David Deeds, an assistant
professor of entrepreneurship at Case Western Reserve University in Cleveland. "The
venture may succeed or fail, but either way, you still have to go to Thanksgiving dinner."
Fortunately, there are ways to increase the odds that your relationships remain harmonious as
your business becomes a financial success.
A classic mistake is hitting up friends and family too early, before a formal business plan is
in place, says Stephen Spinelli, director of the Arthur M. Blank Center for Entrepreneurship
at Babson. No matter how excited you are about your idea, you need to be as rigorous as you
would be if you were wooing the most jaded banker. That means supplying formal financial
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projections, as well as an evidence-based assessment of when your loved ones will see their
money again. Why? For one thing, it reduces the likelihood of unpleasant surprises. It also
lets your investors know that you think of their funds as something more than Monopoly
money. What makes business sense makes relationship sense, too.
Before you ask, think about how to structure the arrangement. Are you willing to give up
equity? Or would you rather pay interest on a loan? The answers to these questions have
major implications for both your business and your personal relationships. That's what Jill
Crawley discovered three years ago, when she and her husband began plans to open
Coriander, a 50-seat restaurant in Sharon, Mass. Two friends expressed interest in investing,
but as the discussions progressed, it became clear that the parties were looking for different
things: The Crawleys wanted a loan, while their friends wanted an ownership stake in the
restaurant--something the Crawleys suddenly realized they had no interest in giving up. They
ultimately raised $75,000--including low-interest loans--from their parents, other close
family members, and a couple of close friends. "These are people who sincerely want to see
us realize our dreams," Crawley says. "They're not going to be hanging over our shoulders
and looking at our books."
Many entrepreneurs prefer debt, because it's cheaper over the long haul and involves no loss
of control. Plus, you can deduct the interest as a business expense. On the other hand, if your
business expects low cash flow for several years, or if you want to make your balance sheet
look stronger because you're planning to borrow more money from an independent third
party, a deal that involves equity could be preferable.
Whatever the terms, keep in mind that the investor usually comes attached to the cash. That's
why you need to be careful, warns Case Western's Deeds. "You want to get the right people
onboard," he says. "The wrong investors can suck up an amazing amount of your time and
force you to divert resources away from building the business."
The wrong investors can suck up an amazing amount of your time and force you to divert
your resources."
Indeed, pick the wrong investors and you may find that your personal relationships suffer as
well. One southern California entrepreneur (who asked not to be named) learned this lesson
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the hard way. During the dot-com boom, he convinced 10 college buddies to put $150,000
into his software start-up in exchange for equity. Without really understanding what he was
doing, he gave his investors control over any future financing arrangements that would affect
the value of their equity stake. Unfortunately, when a venture capitalist came along and
wanted to invest $5 million in the firm, the original investors vetoed the deal. "They thought
that VCs were vampires, trying to steal their money," the entrepreneur remembers. The
whole mess almost wound up in court, but at the last minute, both sides agreed to mediation
and restructured the terms of the loan. The business survived, but the friendship didn't: The
onetime college pals haven't spoken since.
But it doesn't have to end that way. Remember Chris Baggott, the dry-cleaning entrepreneur?
In October 2000, he launched another business, ExactTarget, an e-mail marketing firm.
Baggott again turned to friends and family--but this time, he went out of his way to
emphasize the risk involved. "I said, 'Here's our business plan, but this is just a plan, and the
chances are good that you'll never see this money again,'" he says.
Ultimately, he raised more than $1 million, and this time, it's going better. ExactTarget has
grown from two to almost 70 employees over the past three years, and while Baggott won't
share exact figures, he says sales grew 1,000% last year and more than 400% this year.
Among his new investors: his father-in-law. How did he muster the courage to turn to him?
"You've got to have supreme confidence that you're doing the right thing," Baggott says. "I
knew I had a great idea, and I felt an obligation to let him in. Had I not let him in, and then I
made money in this business, how much would that have strained our relationship?"
Accepting Money From Friends & Family
4 ways to get your cash without wreaking havoc on your personal relationships
http://www.entrepreneur.com/article/printthis/51542.html
It has never been easy to raise capital for your small business, especially if you are in the
start-up phase. If you can't finance your business out of your own pocket, by maxing out your
credit cards or taking out a second (or third or fourth) mortgage on your home, you'll have to
seek funding from the people who know and love you. That means approaching the "three
Fs"--family, friends and fools--for the funds.
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First, the good news: Friends and family members are more willing to invest in you because
they love you. They are less likely to scrutinize every comma and semicolon in your business
plan, or to demand a high return on their investment.
Now the bad news: Raising money from friends and family creates personal and emotional
issues that go beyond business judgment. If you borrow $10,000 from your Aunt Irma and
fail to pay it back, you will have to see Aunt Irma at every Thanksgiving dinner until she
dies. Even if she is the forgiving sort, she will no doubt remind you about how you blew her
casino funds, and may be tempted, especially after the second glass of white zinfandel, to tell
the whole family about it, over and over and over again.
Content Continues Below
Aside from personal embarrassment, there are some real risks in taking money from friends
and family. Friends and family members will inevitably say they are "giving" you money for
your business, but rarely do they mean to make you an outright gift in the legal sense.
Because friend/family investments are usually made in a very informal way,
misunderstandings can occur about precisely what the friend or family member expects in
return for their money. You may think it is a loan, which you will repay in time with interest.
Your friend or family member, on the other hand, may think of it as an investment for which
they will receive stock or an ownership interest in your business. That initial confusion may
have bad legal consequences down the road.
Also, sad to say, money changes a lot of people, and not necessarily for Learn More
the best. People who honestly intend to "give" you money when you are
Before you accept
just getting started may be tempted later on to think they are entitled to a
financing from
return on their "investment" when your hot new product hits the market
loved ones, heed
and you are rolling in dough.
these warnings.
Even if your friend or family member doesn't change his or her mind
about their gift, you can't be sure other people will see it the same way. If Aunt Irma "gives"
you $10,000 and then dies the following month, you are no longer dealing with your loving
Aunt Irma. You are now dealing with the executor of Aunt Irma's estate, who may be 1) a
greedy relative who sees the "gift" as an investment for which the estate is entitled to a
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substantial piece of your business, 2) a local estate lawyer whose main purpose in life is to
squeeze as many assets out of the estate as possible so as to maximize their fees, or 3)
someone even worse.
When seeking money from friends and family, it's important to be as disciplined as you
would be in dealing with a professional investor. Here are some basic rules:
5.5.1 Treat them as if they were Strangers
Forget for the moment that your investor is a friend or family member. Make it an "arm's
length" transaction, and insist on the same sort of legal documentation you would prepare if
your investor was a total stranger. If it's a loan, have your lawyer prepare an I.O.U. (called a
"promissory note") for the friend or family member, and don't offer less than a "commercial"
interest rate (currently 6 to 8 percent).
5.5.2 Debt may actually be better than equity
If someone "lends" you money, you only have to pay it back, with interest. They can't tell
you how to run your company. If someone buys stock in your business, they are legally your
business partner. When in doubt, make it a loan, and pay it back as soon as you can.
5.5.3 Tie all payments to your cash flow
Try to avoid obligations with fixed repayment schedules. Consider instead "cash flow"
obligations, in which your investor will receive a percentage of your operating cash flow (if
any) until they either have been repaid in full with interest, or have achieved a specified
percentage return on their investment.
5.5.4 Consider Nonvoting Stock
If your friend or family member insists on buying stock in your company, try to make it
nonvoting stock, so they don't have the right to second-guess your every management
decision.
5.5.5 Angel Investing
An angel investor includes any individual who invests his or her own money in a new
venture, typically in return for equity in the venture. Angels range from professionals, such
as doctors and lawyers, to successful entrepreneurs who are now seeking to finance one or
more new ventures. A typical angel investment is in the $50,000 to $100,000 range.
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Activity: Use the resources in this section to answer the following questions.
1. What types of investors fit the categories of affiliated and unaffiliated angels?
2. What are the pros and cons of seeking angels as sources of capital for your new venture?
3. Consider your network. Who might be an angel investor for your new venture.
4. Compare and contrast angel investors and venture capitalists as funders.
5.5.6 Angel Investor
Definition: An individual who invests his or her own money in an entrepreneurial company
used to describe investors in Broadway shows, "angel" now refers to anyone who invests his
or her money in an entrepreneurial company (unlike institutional venture capitalists, who
invest other people's money). Angel investing has soared in recent years as a growing
number of individuals seek better returns on their money than they can get from traditional
investment vehicles. Contrary to popular belief, most angels are not millionaires. Typically,
they earn between $60,000 and $100,000 a year; which means there are likely to be plenty of
them right in your own backyard.
Angels come in two varieties: those you know and those you don't know. They may include
professionals such as doctors and lawyers; business associates such as executives, suppliers
and customers; and even other entrepreneurs. Unlike venture capitalists and bankers, many
angels are not motivated solely by profit. Particularly if your angel is a current or former
entrepreneur, he or she may be motivated as much by the enjoyment of helping a young
business succeed as by the money he or she stands to gain. Angels are more likely than
venture capitalists to be persuaded by an entrepreneur's drive to succeed, persistence and
mental discipline.
Angel investors vary widely, but they are typically willing to accept risk and demand little or
no control in return for the chance to own a piece of a business that may be valuable
someday.
Angels can be classified into two groups: affiliated and nonaffiliated. An affiliated angel is
someone who has some sort of contact with you or your business but is not necessarily
related to or acquainted with you. A nonaffiliated angel has no connection with either you or
your business. It makes sense to start your investor search by seeking an affiliated angel since
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he or she is already familiar with you or your business and has a vested interest in the
relationship. Begin by jotting down names of people who might fit the category of affiliated
angel:
5.5.7 Professionals
These include professional providers of services you now use--doctors, dentists, lawyers,
accountants and so on. You know these people, so an appointment should be easy to arrange.
Professionals usually have discretionary income available to invest in outside projects, and if
they're not interested, they may be able to recommend a colleague who is.
5.5.8 Business Associates

These are people you come in contact with during the normal course of your business day.
They can be divided into four subgroups:
A. Suppliers/vendors
The owners of companies who supply your inventory and other needs have a vital interest in
your company's success and make excellent angels. A supplier's investment may not come in
the form of cash but in the form of better payment terms or cheaper prices. Suppliers might
even use their credit to help you get a loan.
B. Customers
These are especially good contacts if they use your product or service to make or sell their
own goods. List all the customers with whom you have this sort of business relationship.
C. Employees
Some of your key employees might be sitting on unused equity in their homes that would
make excellent collateral for a business loan to your business. There's no greater incentive to
an employee than to share ownership in the company for which he or she works.
D. Competitors
These include owners of similar companies you don't directly compete with. If a competitor
is doing business in another part of the country and doesn't infringe on your territory, he or
she may be an empathetic investor and may share not only capital, but information as well.
The nonaffiliated angel category includes:
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I. Professionals
This group can include lawyers, accountants, consultants and brokers whom you don't know
personally or do business with.
II. Middle Managers
Angels in middle management positions start investing in small businesses for two major
reasons--either they're bored with their jobs and are looking for outside interests, or they're
nearing retirement or fear they're being phased out.
III. Entrepreneurs
These angels are (or have been) successful in their own businesses and like investing in
other entrepreneurial ventures. Entrepreneurs who are familiar with your industry make
excellent investors.
Approaching affiliated angels is simply a matter of calling to make an appointment. To look
for nonaffiliated angels, try these proven methods:
IV. Advertising
The business opportunity section of your local newspaper or The Wall Street Journal is an
excellent place to advertise for investors. Classified advertising is inexpensive, simple, quick
and effective.
V. Business Brokers
Business brokers know hundreds of people with money who are interested in buying
businesses. Even though you don't want to sell your business, you might be willing to sell
part of it. Since many brokers aren't open to the idea of their clients buying just part of a
business, you might have to use some persuasion to get the broker to give you contact names.
You'll find a list of local business brokers in the Yellow Pages under "Business Brokers."
VI. Telemarketing
This approach has been called "dialing for dollars." First you get a list of wealthy individuals
in your area. Then you begin calling them. Obviously, you have to be highly motivated to try
this approach, and a good list is your most important tool. Look up mailing-list brokers in the
Yellow Pages. If you don't feel comfortable making cold calls yourself, you can always hire
someone to do it for you.
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VII. Networking
Attending local venture capital group meetings and other business associations to make
contacts is a time-consuming approach but can be effective. Most newspapers contain an
events calendar that lists when and where these types of meetings take place.
VIII. Intermediaries
These are firms that find angels for entrepreneurial companies. They're usually called
"boutique investment bankers." This means they are small firms that focus primarily on small
financing deals. These firms typically charge a percentage of the amount of money they raise
for you. Ask your lawyer or accountant for the name of a reputable firm in your area.
Angels tend to find most of their investment opportunities through friends and business
associates, so whatever method you use to search for angels, it's also important to spread the
word. Tell your professional advisors and people you meet at networking events, or anyone
who could be a good source of referrals, that you're looking for investment capital. You
never know what kind of people they know.
5.6 Angel Capital and the Hotor Not Approach

Andy Bechtolsheim
Andy has a heart-stopping track record. First, he was a co-founder of Sun Microsystems.
Then he founded Granite Systems (gigabit Ethernet switches) which Cisco bought. Then he
founded Kealia (server technology) which Sun bought. He is an angel investor in Magma
Design Automation (electronic design automation). Oh yeah, he was also the first investor in
Google when he wrote a check for Larry and Sergei in 1998before they had a bank account
to deposit it in. To put it mildly, he the uber angel investor of angel investors. He is currently
the chief architect of Sun.
Ron Conway
Ron is the "godfather of Silicon Valley." He is the former managing partner of Angel
Investors LP. He has invested in over 500 startups and has personal investments in RockYou,
Twitter, Plaxo, Digg, and DanceJam. He is also an advisor to FaceBook. Oh yeah, he was
also an early investor in Google.
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Dr. Ian Sobieski
Ian is a founder and managing director of the Band of Angels Fund. This is a $50 million
fund that receives approximately 100 pitches per month. A screening committee then selects
three companies to present at the Band's monthly meeting. The Band has invested in 240
companies and has had more than forty profitable acquisition exits and nine IPOs.
Prediction: Blu-ray iMacs released in 2009?
The Global Technology Symposium hosted the panel on February 1, 2008 in Palo Alto,
California. The panel's premise was simple: Why bother impressing venture capitalists when
(a) it takes less money to start a company and (b) there are plenty of angels who will fund
early-stage deals? Here are some of highlights:
You can't reach these angels by sending them an email out of the blue.
They want to read a one-page executive summary and not much more.
They decide whether they like a company in the first thirty seconds think HotorNot, not
eHarmony.
They don't rely upon business plans for due diligence.
They seldom serve on boards or do "heavy lifting" for a company.
By contrast, most entrepreneurs are sending long emails with big attachments to angels they
don't know; they are sweating over long business plans and fifty-slide PowerPoint
presentations; and they're looking for "value-add" investors who will mentor them. This is all
wrongif you don't believe me, watch the video. Even if you do believe me, you should
watch the panel anyway just to hear Andy's decision-making process for writing a check to
Google.
5.7 Recent News

We are from South Africa and have 14 years experience in vehicle tracking and recovery. We
use to own a vehicle tracking franchise. This was suddenly purchased back fro us at a very
low payment. We used our experience and developed our own tracking system that has no
comparison worldwide. Furthermore have we developed a sofware program as well as
firmware for our systems that also has no comparison in the world? We have the source
codes for these. We have just started our own company in South Africa selling nationwide
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and has already received orders from several countries abroad. We have used our own capital
in access of R60 m. which is USD 7.5 m. We are in need of funding to get the company well
established and to expand to neighboring countries as well as Latin America. Is there any
help out there? We will gladly accept investments or partnerships.
We have established a strong infra-structure in our country for the business. Any additional
information will galdly be made available. If you know the situation in developing countries,
you will know that this can only be a great success. Our systems are built in Asia and we
have a staff compliment of 55.
I wished I could have an idea to implement these. The information I just gained would rotten
away because of no idea.
Respectful debate is welcome, but comments that are defamatory, indecent, abusive, or in
violation of any law will be removed.
Those High-flying Angel Investors: VC Panel Talks up Creative Financing for
Startups
Software manufacturing, software programs to defeat spam, new business data technology
and web services are all areas of opportunity for entrepreneurs, according to venture
capitalists taking part in a panel on creative financing at a recent Wharton Entrepreneurship
Conference. And those entrepreneurs, who cut costs, sign on angel investors and find other
creative ways to finance their start-ups will be rewarded with more equity in their firms,
assuming they become successful.
"You would be amazed how little capital [it requires to get a company going] if you are
creative about it," said David Flaschen, an advisor to Flagship Ventures, of Cambridge,
Mass., and former chief executive of Donnelley Marketing Inc.
Flaschen advised entrepreneurs seeking venture capital to be willing to accept professional
management. "Right from the start, make clear that you value the concept of 'foundership'
much more than 'CEOship,'" he suggested. "What you should say is, 'I want to make this
company interesting and strong enough that we can hire the most effective chief executive
officer.'"
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One way to help finance a company in the early stages is to get customers to pay up front,
said Flaschen, and, if possible, get vendors to make concessions to help the company's
revenue stream. "Even before you go out and raise money, ask 'How can I do this with as
little money as possible?'" If an entrepreneur takes less financing, then investors have less
control. "The dirty little secret is, it is not a lot of fun to have a VC partner in your business.
It is a lot more fun to own a majority stake, or 100%. The more you strive for that, the
happier you will be."
Flaschen sees opportunities today in software manufacturing, particularly with the growth of
open-source software development, and is also interested in the idea of defeating spam by
creating unique addresses for each Internet transaction.
Herding Cats
Bob Greene, co-founder of New York-based on core Capital, likes the potential of new
business data technology. Theoretically, everything in manufacturing "from the loading dock
to the front door of Wal-Mart, will be data-enabled. We can't predict how far it is going to
go, but it's fascinating."
His biggest obstacle to financing new ventures is price. "I am always looking for a great idea
and a large market opportunity with strong leadership and a fair price. The last piece is
usually what doesn't intersect. I like a lot of companies, but I can't always negotiate the right
entry point." Typically he looks for companies run by the classic entrepreneur. "You have to
be half-crazy to be an entrepreneur and do a startup. A great leader is manic and will go to
the mat. So I look for those qualities."
He also looks for a leader who is able to articulate the company's vision, and he tries to be
open minded about financing first-time entrepreneurs. "In our industry investors say they
don't want to back a younger person's first business. But everyone starts somewhere. Often
creative, groundbreaking ideas come from people who don't know how hard it is." In addition
to leadership, he focuses on the basic idea behind a start-up. "One of the biggest challenges is
finding an idea that hasn't been done five times."
Greene warned that angel investors, a layer of financing that usually comes between friends
and family and venture capital, is becoming increasingly sophisticated. "It's not what it used
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to be. It's getting more organized and more professional." Angel investors can be valuable to
a start-up because they can offer advice and contacts in addition to early, high-risk capital.
Yet it remains difficult to round these angel investors up. "The process of getting angel
money is, in my observation, a little bit like herding cats," he said. "It's a confederation of 12
to 15 wealthy individuals who are doing this somewhere between a hobby and a part-time
activity." Angel investors tend to travel frequently and miss meetings, or have trouble
following up. "This is a great group to go after, but it can take awhile. You can't go in there
and have a half-hour meeting over breakfast and they write you a check. That happened in
the bubble phase, but not now. To get eight of them to all write checks requires many, many
meetings."
Companies should take on more than one source of funding, he said, adding that he likes to
co-invest in new companies with other venture capitalists to provide additional "brain
power." "You should try to take around (of financing) with three venture funds together so
that when you hit a problem - and you will hit a problem - you don't have just one decision-
maker." He suggested that when building a syndicate of investors, companies should look for
venture funds that have worked successfully together in the past. Greene also warned that
venture capitalists will be as just as involved in a firm they take a 15% stake in as they would
with a 50% investment.
Venture investors, for their part, should be careful they don't take on too much equity in a
firm, diminishing the founders' incentive to succeed. Greene does not like to leave founders
with anything less than 20% to 25% of their companies. His firm has metrics for how much
of the firm a recruited chief executive and chief financial officer should retain. "I tell the
CEO and the management team, 'If it's not working for you, you're not going to do a good job
for me. Slavery is over.'"
5.8 Customers as References

Vincent J. Schiavone, an entrepreneur and investor who now operates Prioratus LLC, an
incubator and advisory service for start-ups, is currently working on several companies that
are developing web services. "What interests me most is how you synch all the devices and
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communications we already have. I think that is a huge area of optimization and
simplification."
Schiavone, who is also a member of Robin Hood Ventures, a Philadelphia angel group, said
angel investors should not be considered in the same camp as friends and family and should
be used as mentors. "Angel investing is not dumb money. At Robin Hood, we don't steal
from the rich and give to the poor. It's a very hard group to get dollars from and a very hard
group to live with."
According to Schiavone, too many entrepreneurs don't put enough thought into the sales part
of their businesses before approaching investors. "In the early days, the founder often wants
to work on the product, but we want to see the sales people." Entrepreneurs should also try to
introduce investors to customers who can serve as a reference. "We want to see the people
who are taking the risk with you because your technology is good." In addition,
entrepreneurs must develop strategies for different points of exit. As an entrepreneur,
Schiavone said he would be willing to give up more control along the way to people who can
help.
"Pick your VCs or angels carefully," he said. "From a serial entrepreneur's point of view, it's
not about giving up control ... but you want to make sure you give up control to someone
who knows about the business."
Chris Starr, managing director of Innovation Philadelphia, a local economic development
organization, suggested that investors are showing strong interest in companies with revenue,
but pre-revenue firms are not getting funded. To fill the gap, companies are becoming much
more aggressive in gathering early so-called friends and family money. "One of the most
important things you need to do at the first stage is to milk the 'friends, family and fools' for
all it's worth," said Starr.
In the past, companies were able to raise about $100,000 at this stage, but recently he had a
company that came in with $2 million. Others have raised $500,000 from these early
investors. "We are starting to see people get creative about extending their networks from
existing family across the country and around the world."
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A second increasingly important source of early funding for resourceful entrepreneurs is
government. Starr noted that the federal government has $2.5 billion available for various
small business programs that recognize the need to provide funding for high-risk
technologies the private markets won't touch yet. State and local governments are also
getting into the business, with innovative programs to nurture start-ups on the bet they will
grow into successful companies that can provide jobs and enhance the tax base.
5.9 Venture Capital

Distinct from angel investors, venture capitalists (VCs) raise money from outside investors
for investment in new, high-growth ventures. With this investment, a VC typically takes an
equity position in the new venture, expecting an annual return of 25 to 35% (Zider, 1998). A
typical VC deal is in the $2-$10 million range.
What is venture capital, and how does it work?
What would be the benefits and risks of using venture capital to fund your entrepreneurial
activities?
Use the following resources to answer these questions and to create a tip sheet on how to
attract venture capital. What do venture capitalists look for in an entrepreneur? Develop your
tip sheet collaboratively with classmates.
Interview with Deborah Farrington of Starvest Partners
venturevoice.com In this interview, Venture Voice speaks with Deborah Farrington of
Starvest Partners. She founded the venture capital firm in 1998 and rode out the bubble. Her
female-led firm has had numerous successes in recent years.
Statistically speaking, Starvest Partners shouldn't be in business: Few venture capital funds
raised in 1998 survived the dot com bust, first-time partners are a huge bet, and no other
venture capital firms are run by women. But don't tell that to Deborah Farrington, the founder
and co-chairman of Starvest. Her firm's performance has excelled in the past several years
and is headed into the top quartile of its field. Debby's got a number of big hits under her belt
now, but she's not about to stop taking risks.
Went to Harvard Business School.
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Worked at Merrill Lynch doing corporate finance for 10 years in New York, Hong
Kong and Tokyo.
'They [the investment firm Debby where used to work] kept saying 'Why don't you do
it like this.' Like many entrepreneurs, I said no no no no no. I had a vision I wanted to
pursue.'
In 1998, four partners who'd never worked together before raised a $150 million fund.
Starvest Partners, L.P. was born.
7:45 Cold calls and building relationships
'Being able to set forth an idea in a succinct fashion and not wasting the other person's
time was important.'
11:50 Raising a venture fund
'We knew in order to get in the game we had to give up something. We don't have to
do that today.'
Strategy was focusing on investing in business services, which was not traditionally a
hot industry for venture investing.
'And also, let's face it, luck generally plays a role as well. It was a super time for fund
raising.'
'We made one investment in 1999 because we could not find anything that met our
criteria' Often we asked ourselves, 'whats wrong with us?'' That discipline paid off
big in the long run.
'The largest companies definitely require 5 to 6 to 7 years to build, and there's really
nothing to get around that.'
19:45 NetSuite investment
Made an investment in NetSuite, founded by Larry Ellison of Oracle fame.
When asked if she wanted to invest: 'I, with stars in my eyes, said absolutely.'
'When he approached us, he said, 'Debby, you're about the only venture capitalist that
I know that I think is really smart but also nice, so I'd like to work with you.'
Starvest committed $6.7 million to NetSuite before it had any revenues and couldn't
get any West Coast venture capitalists to back it. Now NetSuite has $40 million in
revenue going on $100 million and is going public soon.
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22:50 Be nice?
24:35 Board involvement
'The majority of our companies have CEOs they did not start with.'
29:00 CEO's abilities to scale
'If we've had a failure as a firm, it's been not changing out CEOs soon enough.'
36:00 Giving up control by taking on investors
'If you had 10% of a billion dollars, that's not too shabby.'
42:10 Pitching to Debby
'We're funding someone now who had a prior company that failed, but we think it's
terrific because he learned on somebody else's nickel.'
49:40 Women in venture capital
While Debby attended Harvard Business School, women accounted for only 10% of
the class.
'I've always liked being a pioneer.'
'I think there definitely will be more women venture partners.'
'This is a very tough business. I've always gravitated toward things that I thought
were difficult to do. Perhaps something perverse in my personality.'
54:35 Women in the firm
'Politics completely leaves the room. Testosterone completely leaves the room.'
'Three attractive women walk in and nobody forgets you.'
'All of our portfolios are headed by men except one. It's [gender] really not an issue.'
58:40 Harvard PresidentLarry Summers controversy
'My advice to Larry is remember you're never off the record.'
'I think the whole gender argument is overdone.'
63:03 The title 'Chairman'
63:20 Starvest's promising portfolio companies and future
NetSuite: planning on going public in mid-2006.
Newgistics: planning on going public in mid-2007.
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Comparison Market: owns insurance.com, largest insurance operation on the web,
planning to go public in mid-2007.
Mazu.
Message One
Blazent.
Starvest expects to raise a second fund in 2006. The goal for next fund is $200
million.
Required reading for the Starvest team's off-site retreat: Tom Friedman's The World
Is Flat and Malcolm Gladwell's Blink.
Official bio:
Deborah Farrington is a Founder and Co-Chairman of StarVest Partners, L.P., a $150 million
New York City based venture capital fund formed in 1999 to invest in e- business services
and software.
Ms. Farrington's 25-year career in financial services encompasses private equity investing,
investment and merchant banking, both in the U.S. and abroad, and securities analysis. Her
focus during the past several years has been on investing in business services companies; she
has significant experience in business services, e-Business and application service providers.
She has worked with many private and public companies as a director, officer, investor and
advisor and has special expertise in financial strategy, analysis of growing companies and
corporate governance. She has operational and management experience having served as
Chairman of the Board and COO of both public and private companies.
On behalf of StarVest, Ms
Farrington is currently a director of NetSuite, Inc., a San Mateo, California based company
that provides an integrated web based accounting and other business services to small
businesses and of which Larry Ellison is founder and former Chairman; ComparisonMarket
Inc., a Cleveland, Ohio company that provides comparative insurance quotes over the
Internet and is the largest independent insurance agent in the U.S.; and Fieldglass Inc., a
Chicago based software company that provides spend management services to large
enterprises. She is also a director of Collectors Universe, Inc. (NASDAQ: CLCT) the largest
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grader and authenticator of high-end collectibles, including coins, stamps, sports cards and
autographs.
From 1993 to1997, Ms. Farrington was President and CEO of Victory Ventures, LLC, a New
York-based private equity investment firm. During her tenure with Victory, she was a
founding investor and Chairman of the Board of Staffing Resources, Inc., a diversified
staffing company, when it grew from $17 million to $250 million in revenues.
From 1987 to 1993, Debby was managing director with Asian Oceanic Group and its
affiliates, a Hong Kong-based merchant bank, which invested side by side with its Asian
entrepreneur clients. From 1991 to 1993, she was Executive Vice President and a Director of
Tigera Group, Inc., a NASDAQ listed public company affiliated with Asian Oceanic and she
also served as a director of VideoTech.
From 1976 to 1987, Debby was with Merrill Lynch & Co. where she had a variety of
international and domestic assignments in investment banking, securities analysis and
management, while based in New York, Hong Kong and Tokyo. At Merrill Lynch, she
worked on numerous public and private offerings and mergers & acquisitions for U.S. and
international clients. She also held positions with responsibility for international planning,
strategy and human resources.
Ms. Farrington is a 1972 graduate of Smith College and received an MBA in 1976 from the
Harvard Business School. She has been active in fund raising and alumni affairs for both
Smith and Harvard, and currently serves as on the Board of Directors of the Harvard
Business School Alumnae Association. She is a member of the Committee of 200 and is
President of her New York City Co-op.
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Comments
She seems to be a genius! Young woman who did a lot of things and achieved a lot! We need
such people.
Bootstrapping
Bootstrapping has two meanings. On the one hand, bootstrapping means self-funding a
venture and thus, is limiting or avoiding outside investment. On the other hand, bootstrapping
also implies running a venture on a shoestring budget.
What are different ways to self-fund a new venture?
What are the benefits and risks associated with these self-funding approaches?
What are the benefits and risks associated with starting a venture on a limited budget?
Counterintuitively, there may be risks to having too much financial capital. What might these
risks include?
Assess your attitude towards bootstrapping. Is this an approach that would work for you in a
new venture?
Bootstrappers avoid outside money ties
Some start-up firms prefer to go it alone
By Robert Weisman, Globe Staff | February 5, 2007
NEWTON -- Here come the bootstrappers.
They use their own money to start businesses. They fund their growth through their sales.
They're resourceful in finding workers, customers, and advice. And they don't want outside
money.
"If all the money you spend is based on what you're bringing in, you very quickly focus on
the right things to spend it on," said Tripp Micou , founder and chief executive officer of
Practical Computer Applications Inc., a closely held and profitable software company
operating out of cramped offices overlooking the Massachusetts Turnpike.
Micou and his partner, serial entrepreneur Kent Summers , may be the venture capital
industry's worst nightmare. With a roster of companies from PepsiCo to Marsh USA lined up
to buy their customized business software, they estimate they're on course to double their
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annual revenue -- it was less than $5 million in 2006 -- for each of the next several years.
And their door is closed to would-be investors.
At a time when commodity computing, open source software, and viral marketing are
making it cheaper than ever to fund a start-up on a credit card or a loan from a rich uncle, the
decision to forgo venture capital is becoming more common. Entrepreneurs and financiers
agree bootstrapping is on the rise, though there are no statistics heralding the trend. And it's
happening even as venture firms, from Route 128 to Silicon Valley, are swimming in capital
from pension funds, university endowments, and other limited partners seeking outsized
returns.
Venture capitalists insist they have no shortage of companies to fund, and claim the most
ambitious start-ups still clamor for the rocket fuel of venture capital to propel them to an
initial public offering or a sale to a deep-pocketed buyer. Still, the standoffish start-ups has
prompted some soul-searching in venture circles where industry veterans fret that firms are
under so much pressure to put money to work that they're neglecting to play their historic
mentoring role.
"What you're seeing is a change in the value proposition of venture capital to entrepreneurs,"
said William W. Helman , partner at Greylock Partners in Waltham. "There are fewer venture
capitalists who are company creators, who can offer companies the expertise and value-add
that used to be the norm. For some firms, venture capital is becoming an asset management
business."
Some venture firms have begun reaching out to the new generation of low-cost
entrepreneurs. Charles River Ventures, with offices in Waltham and Menlo Park, Calif.,
introduced a new funding program late last year called CRV Quick Start, offering loans of up
to $250,000 known as "convertible notes," meaning they can be converted into equity if and
when the start-up raises its first round of venture capital.
"They want to connect with these small companies and become their best friend early on,"
said Mark G. Heesen , president of the National Venture Capital Association, an Arlington,
Va., trade group.
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Micou, at Practical Computer Applications, decided early on to steer away from venture
capital. A University of Michigan graduate who earned a master's degree in engineering from
the Massachusetts Institute of Technology, he launched his business in 1992 with money he'd
earned from consulting for companies on their software and database needs. He negotiated
free rent on his first office near Boston's Downtown Crossing in exchange for providing 20
hours a month of technology services to the company that owned the building.
"I didn't want to create a marketing plan that was more than a page," Micou recalled. "The
venture firms want a 100-page business plan and a 50-slide PowerPoint presentation with lots
of hockey-stick graphics" showing a projected upward sales trajectory.
Micou said his company was profitable from the start and had only one rough patch in late
2001, when businesses began scaling back their spending after the Sept. 11, 2001, terror
attacks. About five years ago, through the MIT Venture Mentoring Services program, he met
Summers, who had started and sold several high-technology businesses, including some that
were venture-backed. Summers, who shares Micou's aversion to venture financing, joined the
Newton Company two years ago.
"We're a couple of frugal Yankees who saw eye to eye about growing a great business," said
Summers, who is spending the bulk of his time on sales while Micou concentrates on
operations.
To accommodate their growth, they plan to move the business into larger quarters west of
Boston later this year and to roughly double its 20-person workforce over the next 12
months. The partners agree that the business could grow faster with venture capital, but say
they'd have to give up control and spend more time working on their "exit strategy" than on
helping their customers or hiring the best employees.
"Venture capitalists give you a big bat and tell you to hit a home run," Summers said.
"Singles, doubles, and triples don't count."
Another entrepreneur who's been approached by venture capitalists but hasn't been receptive
is Ali Merchant , co founder of CADNexus, a two-year-old Medford start-up that makes
software linking computer-aided design systems to simulation tools.
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"I think it would be too much pressure on us now," said Merchant, who hasn't ruled out
seeking venture funds in the future. "We want to build out the product and properly focus on
the customers we have. If we use venture capital, they'll ask us to more aggressively build
out the team and sell more."
Heesen, for his part, agreed that venture capital isn't for everybody.
"In the information technology space, it's become so much cheaper to create a company that
you don't need to raise venture capital if you don't want to go public," he conceded. "If they
have management expertise, if they know lawyers and accountants, more power to them. We
certainly don't criticize anyone who doesn't want venture dollars."
In the best scenarios, however, venture investors contribute more than money, Heesen said.
"Venture capitalists bring expertise in a narrow field and the ability to look at a business
from a management perspective, which many of the entrepreneurs can't do," he said.
5.10 Valuation and Risk Analysis
Valuation is an important task at various stages in a new ventures evolution and is linked
closely to financing the venture. Foremost, valuation is necessary to determine the allocation
of equity in return for any outside financial equity investments. This valuation will change at
each round of financing. Second, as it comes time to execute an exit strategy, such as a sale
or initial public offering (IPO) of the venture, valuation is necessary to determine the sale
price or IPO offering price.
What are the common valuation approaches? What are the differences between the
approaches?
Why would you select one valuation approach over another?
Although you will often hear that entrepreneurs are risk takers, skilled entrepreneurs are
actually quite adept at mitigating and managing risk. Risk analysis is an important step in
determining the key sources of risk for your venture and the possible actions you can take to
mitigate and manage this risk.
What are the primary sources of risk for a new venture?
What are ways to manage these different forms of risk?
Why is it so important to manage risk during the new venture formation process?
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5.10.1 "Thinking About Valuation"
The ultimate question for both Entrepreneur and Investor is: "What is the venture worth?" In
the past week, I have had discussions with three of my clients about this question. One is a
five-year-old, 10-person company with hardware and software products, funded to the tune
of $1,500,000 by family and friends, and which has an opportunity to introduce an advanced
digital signal processing (DSP) product. The second is a 10-year-old networking related
company whose sales have started to increase dramatically. Two years ago, it couldn't get
the time of day from investors, but today it has a term sheet from a major venture capital firm
and equity investment offers from three major networking companies. The third is a one-
year-old interactive online marketing startup with two very experienced people who are in
discussions with a major record company.
There are some major differences in the valuations which these companies may receive, but
the basic question the Investor is asking in each case is, "How much can I earn on my
money?" Remember, the Investor can earn a nice safe return by investing in U.S. Treasury
bills. What return will it take to get the Investor to tie up money in an illiquid private
company?
Ultimately valuation is a matter of negotiation. Successful negotiation requires homework to
support a convincing case. Financial projections should be based on hard facts, if possible,
and should be internally consistent and integrated with the business plan strategy. It is hard
to close a deal with an Investor who finds obvious "holes" in your plan and numbers.
5.10.2 Valuation Approaches

So what is the valuation? There are several techniques which might be used to "bound" or
reality check the valuation. The most basic is the discounted cash flow (DCF) method. What
are the projected revenue/profit numbers in five years when the investor wants to get his
money out? What are the price/earnings multiples for comparable companies today?
Multiply these numbers to get an assumed value in year five and then discount that number
back to today. The discount rate is a judgment call based on a number of variables including
risk and the current market for similar investments. Venture capitalists often talk of a 30 to
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40 percent annual compounded return target. The result of the analysis is what the value of
the company is today. Obviously the analysis involves a number of judgment calls, but if
you do a sensitivity analysis by varying the assumptions, you would be surprised to see the
number of times when you can't get anywhere near the valuation an entrepreneur is asking.
For my DSP client, a challenge is to get the Investors to focus not on past revenues, but
rather on the DCF of the new product line.
Sometimes, but rarely, the DCF analysis is enough. Other valuation perspectives are often
used. For example, if an acquisition is a realistic exit strategy, then look at what prices have
been paid recently for comparable companies. This works for my networking client because
in the past year there was a $35 million acquisition of a similar company with lesser
technology. If there have not been comparable company acquisitions in your industry
because the technology is too new or whatever, then look to acquisitions which have been
made in other industries for reasons which are similar to why you think your company will
be an attractive candidate.
What if your asset is an "enabling technology" for an industry that is only starting to
develop? This is possibly the case with my interactive company where a DCF analysis on
what the Founders realistically projects in five years yields a fairly low value. The Founders
have projected relatively low five-year numbers because they do not expect to see massive
interactive online sales within five years because a number of pieces have to come together
first. In this case, a mergers and acquisitions investment banker suggested looking at
valuation based on multiples of projected market share. He pointed to the software operating
system market where percentage market share valuations correlate with DCF valuation, and
actual market values of companies such as Microsoft.
5.10.3 Pre-Money and Post-Money

It is critical to understand whether you are talking about "pre-money" or "post-money"
valuation. I have some technology and an idea and I attract an Investor. We agree on three
points: we will incorporate the venture, the value of the venture is $1 million and the Investor
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will put in $300,000. The ownership percentages will depend on whether we mean a $1
million pre-money or post-money valuation:
$1M Pre$
$1M Post$ Valuation
Valuation
Value % Value %
Entrepreneur $1M 77% $700K 70%
Investor $300K 23% $300K 30%
Total $1.3M 100% $1M 100%
5.10.4 Fully Diluted

Even if we agree that we are talking about pre-money valuation, there is still the question
about what that value applies to. Investors usually mean a fully diluted valuationi.e.,
assuming that all outstanding options and warrants are fully exercised and all convertible
securities are converted. If the management team is not fully fleshed out, the Investors may
mean fully diluted, taking into account full issuance of stock to a fully formed team. These
points are often a subject of negotiation with questions such as: what happens if the option
pool is not fully used up? Do the Founders get the shares or are they in effect shared with the
Investors? What if one Founder leaves and forfeits shares under vesting arrangements? Do
the other Founders get the shares?
Valuation is not a science, but it is not totally an art either. Do your homework and build a
realistic, defensible set of projections. Most importantly, you must "own the numbers" by
having a well-thought-out, consistent, believable story about why your plan will succeed
that can really help you get your valuation.
Special thanks to Ken Schiciano of TA Associates and Stu Auerbach and Charlie Yie of
Ampersand Ventures for their thoughts on this subject.
Disclaimer: This column is designed to give the reader an overview of a topic and is not
intended to constitute legal advice as to any particular fact situation. In addition, laws and
their interpretations change over time and the contents of this column may not reflect these
changes. The reader is advised to consult competent legal counsel as to his or her particular
situation.
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SECTION SIX
VALUING THE PRIVATELY HELD BUSINESS
Company owners should consider determining their businesss value for reasons other than
just keeping score or knowing the potential selling price. Other purposes include securing
financing for business growth, dividing assets in a divorce and estate tax planning.
6.1 Methods of Company Valuation
Whether you use a professional business appraiser or attempt a self-evaluation, it is helpful to

understand the basic methods of valuation that may be used to determine a value for your
company--or a company you are thinking of acquiring. A professional business appraiser
typically applies several different methods of valuation that fit into these categories and uses
the knowledge gained to pick one or two methods that make the most sense to arrive at a
range of values for a company. The three most widely-accepted approaches to valuation are
the Comparable Worth method, the Asset Valuation method, and the Financial Performance
method.
6.1.1 The Comparable Worth Method

The notion of comparable worth reflects the performance and potential selling prices of
publicly and privately held companies compared to yours, in order to arrive at a value. The
appraiser examines publicly held companies that operate in the same or similar industry,
providing the same or similar products and/or services. The justification for this method is
that potential buyers will not pay more for the target company than what they would spend
for a similar company that trades publicly. The appraiser must carefully choose the publicly
held companies with which to compare. Obviously, the companies should be as similar to the
target as possible, particularly with regard to geographical location(s) and the relationship to
suppliers.
Because it is not possible to find companies that are the same as the target company in all
respects, it is important for the appraiser to use the available data as "creatively" as possible.
For example, because of differences in the businesses' sales volumes, it is more useful to
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compare the ratio of sales to costs, rather than absolute amounts of sales to each other.
Comparisons of this type will provide a clearer picture of the strengths and weaknesses of the
target company relative to those of others in its industry.
Once the appraiser arrives at a preliminary range of values using this method, it is necessary
to adjust the prices for situations particular to the target company. If, for example, the target
company has profits that are consistently above industry averages, thanks to an unusually low
cost structure, then its value must be adjusted upward to account for that competitive
advantage. As with all methods of valuation, all prices and subsequent adjustments must be
backed up. Buyers or investors must be able to see and understand the justification for a
valuation higher than that of apparent comparables, or they will not be willing to pay the
premium.
If the target business is a closely held company, this method can present some difficulties.
The goals of financial reporting for a publicly held company can be quite different from
those for a closely held company. A publicly held company's management strives to show
high earnings on its financial reports, in order to attract people to buy its stock and therefore
to improve its price-to-earnings ratio. A closely held company's management may be a solo
entrepreneur or small group wishing to minimize the earnings shown on its financial reports,
in order to minimize its tax burden. Both goals are legitimate, but clearly some confusion
would arise if an appraiser tried to compare the key financial ratios of a closely held
company with those of similar but publicly traded companies in the industry.
6.1.2 The Asset Valuation Method

If a company has a large portion of its value wrapped up in fixed assets, an appraiser may
lean towards some type of asset valuation when attempting to price it. The justification for
asset valuation is that the buyer will pay no more for the target company than it would cost to
obtain a comparable set of substitute assets. Within these guidelines, the appraiser can choose
how to value the substitute assetscalculating the "Cost of Reproduction," that is, of
constructing a substitute asset using the same materials as the original but at current prices, or
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the "Cost of Replacement," that is, of obtaining the same asset at current prices while
adhering to modern standards and using modern materials. The appraiser also considers the
time that would be required until replacement or new assets could be put in place and made
usable.
The asset valuation method involves examining every asset held by the company, both
tangible and intangible. A great degree of detail is required in order to arrive at a fair
valuation. The appraiser must assess all machinery and equipment, real estate, vehicles,
office furniture and fixtures, land and inventory. The value of intangibles like patents and
customer lists should also be included. These intangibles often are referred to as the
company's goodwill, the difference in value between the company's hard assets and its true
value. It is more difficult to convince buyers of the value of intangibles, since they usually
want to be able to see and verify the assets in order to feel comfortable with the price.
Generally it is in the seller's best interest to supply the business appraiser with as much
concrete detail as possible about the company's intangibles. The greater the value of goodwill
that can be attributed to specific, well-defined intangibles, the higher the company's valuation
is likely to be set. For example, rather than lumping patents that the company holds under the
intangible goodwill category, list the patents as separate assets and include specifics
pertaining to each one, such as date of expiration and effect on the company's operations.
6.1.3 Financial Performance Methods

Perhaps the most commonly-used set of valuation methods in the context of small-to-medium
company acquisitions, financial performance methods attempt to measure historical
performance as well as predict future performance in determining the value of the seller's
business to the buyer on a post-closing basis. These methods include Net Present Value
(NPV), Internal Rate of Return (IRR) and Return on Investment (ROI).
A. Net Present Value
Net Present Value is probably the most common financial-performance calculation used by
appraisers in a pre-acquisition valuation. It is a capital-budgeting model that compares the
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present value of the proposed transaction's benefits and costs. The difference between
benefits and costs is the net present value of the proposed deal. A positive NPV means that
the proposed transaction's benefits exceed its costs, and the decision to undertake the deal
increases the value of the buyer and its shareholder wealth. A negative NPV means that the
proposed transaction's costs exceed benefits, and the decision to undertake it would decrease
the value and shareholder wealth of the buyer. Zero NPV means that the proposed
transaction's benefits are equal to costs, and the decision to make the deal does not change
the value of the buyer or the wealth of its shareholders.
B. Internal Rate of Return
Internal Rate of Return is a capital-budgeting model represented by the discount rate that
equates the price with the anticipated profits from the proposed transaction. Computing the
IRR is tantamount to answering the following question: If the proposed transaction were
similar to a bank account, what interest rate would the bank have to offer in order to produce
the same benefits as the proposed deal? To evaluate the seller's business using the IRR, the
appraiser takes two steps: calculating the IRR and comparing the IRR to the required rate of
return. Acceptable proposed transactions are those with an IRR greater than the required
return. Proposed transactions should be rejected if the IRR is lower than the required rate of
return. Shareholders are indifferent when the IRR is equal to the required rate of return.
C. Return on Investment
Return on Investment Ratio may be used in certain cases to decide whether to acquire a target
company. Taken as an average of the recent years' earnings compared to equity and long-
term debt, the ROI can be useful in providing an important benchmark for the buyer. It is
important to remember, however, that such decisions must be based on the interaction of
numerous factors; and the whole picture, not just fragments, must be studied in order to make
a sound decision. Evaluating a company's financial health and future growth prospects is a
very involved process through which the professional business appraiser is trained to lead the
potential buyer.
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It's Not So Simple
The professional appraiser (or whoever is conducting the analysis) should not use any one
valuation method without considering other methods or other factors. One method may
overlook key aspects of the business that will be uncovered only after further investigation
required for another method is completed. For example, if the appraiser utilizes several
methods and consistently arrives at a range of $2.2 million to $2.6 million, then an asset
valuation that yields a result of only $1.5 million can be eliminated if the appraiser finds that
the value of the company's assets is not a fair approximation of its entire value when
intangibles or other market or competitive trackers are added in. And if the asset valuation
method were the only one used, then the company would be dramatically underpriced.
Proper valuation of a company is never simple. A method that appears to be too simple
probably is. For purposes other than merger-and-acquisition transactions, simple methods are
commonly used, and are actually prescribed by law in some cases. However, it is wiser to
invest a bit more time and effort initially than to experience remorse over an inappropriate
initial valuation after the deal has been concluded.
One term commonly heard in the business world as a simple way of calculating ca company's
value is "industry multipliers" or "multiples." Multipliers are set by unknown entities based
on unknown factors that most likely were valid at one time in a particular market, but may no
longer hold true. For example, it may be said that in Industry X, the price to pay for a
business is five times the company's annual earnings or amount of goodwill. However, it
would be difficult to convince a well-informed potential buyer to purchase a company for a
price defined only by such a formula. From the seller's perspective, there is no guarantee that
the company is not worth more than the amount arrived at by using a simple formula without
basis. In fairness to both parties, the appraiser should not be taking the easy way out of this
task.
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6.2 Evaluating the Final Report
At the end of the analysis, the appraiser produces a final report detailing the range of values
for the business. Paradoxically, just when the formal valuation process seems to have ended,
the acquisition team must evaluate the impact the report will have on the actual price and
structure of the transaction.
If the acquiring company perceives that it will benefit from the economies of scale that will
be created by an acquisition, it may be willing to pay more than would otherwise be
expected, known as the "acquisition premium," an added cost to the buyer's shareholders and
a windfall to the seller's shareholders. But if the buyer is really just looking to acquire only
certain assets or views the acquisition as a short-term tactic, then the price it is willing to pay
may not even approach the price given by the appraiser. From the seller's point of view, if the
founders or owners are really not very eager to give up the business just yet, the negotiated
price may be driven higher. However, if the seller is motivated to sell quickly, the negotiated
price could plummet.
It is an essential aspect of the valuation process that while detailed methods of valuation can
provide a solid starting point, that often remains all they provide. The final negotiated price
can vary widely and depend on diverse factors, including market conditions, timing of the
negotiations and of the valuation date, internal motivation and goals of both buyer and seller,
operating synergies that will result from the transaction, the structure of the transaction and
other factors that may not even be explicitly defined.
6.3 Managing Risk in a New Venture

You cant get rid of all the risk of starting up a business, but you can certainly take a few
steps to mitigate it.
6.3.1 Business Success Toolbox

Business Success Toolbox is your arsenal for developing and maintaining sound financial
plans and business strategy.
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Most definitions of entrepreneurs that I have seen include something along the lines of
"someone who takes risks." While there is certainly some level of risk in every new firm, the
process of starting a business should not be about taking risks; rather, it should be about
managing the risk that is involved. There are two main sources of risk in a new venture: the
risk due to uncertainty surrounding the business and the risk due to what is at stake if the
business should fail. You can't get rid of all risk from either source, but there are steps you
can take to mitigate it.
6.3.2 Risk Due to Uncertainty Surrounding the Business

No business is a sure thing, but much of the uncertainty can be resolved through analysis of
three of its sources: the market, the operational model, and the financial model.
A. Market Risk
Market risk is a result of many factors, including whether the market is large enough to
support your business, whether the market is growing, what trends exist in the industry, how
the competition is structured, and how distribution works. If industry trends are moving away
from your product or service or if potential customers are already locked up by competitors,
it will be difficult to gain customer momentum. The issue of market size is also important in
feasibility analysis. For instance, if you are starting a microbrewery, it is important to
understand that your market likely is not the nationwide microbrew market, nor the local beer
market. It is more than likely the local microbrew market, which is much smaller.
Additionally, you should understand what regulatory trends are occurring: If you want to
open a cigar shop and lounge, for instance, you would be wise to consider the potential
impact of anti-smoking laws. Again, though you cannot get rid of all of the risk in entering a
particular market, you can reduce your margin for error by understanding the nature of the
market and customer buying behaviors. As a mentor of mine likes to say, "Become a student
of your industry."
B. Operational Risk
Operational risk deals with whether the business can set up internally to deliver goods and
services to customers effectively. For product-related companies, this will include
manufacturing and assembly of goods, which is often difficult to set up in terms of cost and
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quality control. This is even true if outsourcing to experienced firms. For instance, your
manufacturer in Asia may ship you goods that have the logos sewed on upside-down-a
simple mistake but significant problem (This happened to a start-up I know in the Twin
Cities). Operational risk will also include logistical issues with delivery and returns and
effective use of service staff. Remember that your ability to execute internally and keep costs
under control will be essential to business success.
C. Financial Model
Financial model risk refers to the risk that the business won't work due to the numbers. For
any business, you should generate financial projections to get a picture of where breakeven
will occur and what will drive the business financially. In other words, make sure to
understand what revenues and costs must be in order to make the business financially viable
and what factors impact revenues and costs the most. This will tell you your critical factors
for success and provide you with tools for managing the business. For instance, if your main
cost drivers are labor and materials, then you should concentrate on methods that ensure
efficient use of labor and lower input costs. Remember that the financial model paints the
picture of all aspects of the business and that the business cannot be successful if it is not
economically viable.
6.3.3 Risk Due to What is at Stake
There are really two aspects to consider here, opportunity risk and financial risk, and you
should be sure that the upside of the business is worth the risk in both areas.
A. Opportunity Risk
Opportunity risk comes from the fact that if the business fails, you could have been doing
something else with your time and money. There is not a lot you can do about this risk except
to weigh the merits of all opportunities you have before making a decision on starting a
particular venture.
B. Financial Risk
The more important source of risk for most entrepreneurs is financial risk -- the tangible
value that you and your investors lose when the business fails. One of the most significant
strategies you can take to manage this risk is turning as many fixed costs to variable costs as
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possible. For instance, rather than investing money in a sales force and manufacturing
facility, consider hiring sales representatives and outsourcing production. You also may be
able to tie some product development or other initial costs to sales rather than paying for
them all upfront. In addition to keeping initial investments lower, turning fixed costs to
variable will also lower your breakeven point and reduce the likelihood of failure due to
lower-than-anticipated sales. This will help to deal with some of the uncertainty about sales
levels early on. Of course, these concepts work together: In a venture where there is more at
stake if the business fails, it is in the entrepreneur's best interest to spend more time reducing
uncertainty surrounding the business. However, do not get caught in what is called paralysis
by analysis: don't spend so much time doing research that you miss the market opportunity.
The key is to do enough research that you feel the opportunity is right, take steps to limit the
downside risk, and then execute your plan!
Disciplined Entrepreneurship
Library Database This article discusses the approaches used by startups and established
companies to manage uncertainty while pursing opportunities. While the pursuit of
opportunity promises outsized rewards to entrepreneurs and established enterprises, it also
entails great uncertainty.
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References
1. Jeffrey Timmons and Stephen Spinelli, Jr., (Authors) (2006) "New Venture
Creation: Entrepreneurship for the 21st Century." 7th Edition, McGraw-
Hill Irwin Publishers
2. Robert Baron & Scott Shane (2005) "Entrepreneurship: A Process
Perspective." Thompson South-Western Publishers
3. Donald Kuratko and Richard Hodgetts (2007)"Entrepreneurship: Theory, Process,
Practice," 7th Edition. Thompson South-Western Publishers
4. Kathleen R. Allen (2006) "Launching New Ventures: An Entrepreneurial
Approach 4th Edition, Houghton Mifflin Publishing Company
Recommended Journals:
1. Journal of Business Venturing.
2. Entrepreneurship Theory & Practice
3. Journal of Small Business Management
4. International Small Business Journal
5. Journal of Small Business Economics
Readings & Web: <http://www.entreworld.org>
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SECTION ONE

Objectives and Teaching Methods

1.1 Essentials of Entrepreneurship and Small Business Management

A contemporary approach to entrepreneurship and small business management, following the

1.2 Entrepreneurship and Small Business Management

risks involved in starting a business

Implicit in the resource-based perspective is the centrality of the ventures capabilities in

2.4 Theoretical Framework

2.4.1 Strategic Planning and Performance

2.4.2 Venture Capabilities and Performance

According to the resource-based perspective, venture resources in the form of capabilities,

H2: Strong venture resources are positively related to venture performance.

2.4.3 Previous Experience and Performance

There is recognition in the entrepreneurship literature of the significance of the contribution

H3: Previous entrepreneurial experience of Ghanaian female business owners is positively

2.4.4 Business Owners Skills and Performance

Research shows that an entrepreneurs management skills contribute to venture performance

2.5.1 Data Collection

2.5.2 The Research Variables

Previous experience - entrepreneurial and family- was measured by asking a dichotomous

2.5.3 Descriptive statistics

B. Firm Age and Size

E. Education of Business Owner

19 percent had previous entrepreneurial experience; 66 percent had previous experience in

2.5.4 Strategic Planning and Performance

Checklist for Feelings on Control

3.2 Feelings on Independence

Checklist for Feelings on Independence

1. I hate to go shopping for clothes alone.

3.3 Risk Taking

Checklist for Willingness to Take Risks

3.4 Entrepreneur Background

3.7 Personal Values

3.7.2 Work History

3.8 Role Models and Support Systems

Sustain- keep strong

Self Check Exercise

1. What is gained from analyzing the characteristics of entrepreneurs?

4.1 Research Triangle Park

4.2 Finding the Right Management Team

4.3 Business Growth and Maturity

4.3.1 Business Exit

4.3.2 Exhibit Mature Business Behavior

4.4 Research Triangle Park, N.C.

At the Start-up of the Company

4.6 Business Advisors

5.1 Licensing of a Provisional Patent Application

From your 401(k) Account

Borrowing Using Credit Cards

Borrowing on Your House

Grants and contracts

The Iceberg Principle

5.2 Understanding the Venture Financing Chain

5.2.3 Venture Capital Firms

5.3 The Critical Role of Your Business Model

5.3.1 Corporate Investing

5.3.5 Business Start-up Finance for Your New Venture

5.4 Financing the New Venture

II. Blood Money

5.5 Inc.'s Small Business Success Newsletter

5.5.8 Business Associates

5.6 Angel Capital and the Hotor Not Approach

5.7 Recent News

5.8 Customers as References