Atish Dipankar University of Science & Technology

Mirpur Unit, Dhaka.

ASSIGNMENT
ON

After completing BBA & MBA, you want to start a business; which section would you like for investment and why?
Submitted in the partial fulfilment for the requirement of the Course No. FIN 435.

Investment Theory

{Submitted By}
M. A. Khashru Noman ---------------------------------------------------------------------------------------------------------------------------------------Student of
Bachelor of Business Administration Class Roll: [122-0038-731]

{Submitted To}

-----------------------------------Lecturer of IBS, ADUST. {Date of Submission} 16th September, 2012.

Investment Theory
Introduction:
This assignment is related to the subject of Investment Theory so first of all we are going to discuss about Investment Theory and along with that we are describing here about starting a new business and investing capital in existing business. So at the very beginning we are here with the definition of Investment Theory and some related information. Investment theory encompasses the body of knowledge used to support the decision-making process of choosing investments for various purposes. It includes portfolio theory, the Capital Asset Pricing Model, Arbitrage Pricing Theory, and the efficient market hypothesis. After completing BBA & MBA a person when think about to start a new business or investing capital in some where; this is very much essential to get knowledge, ideas and lot of observation on present business market. Because those people who are already in the market they will be my opponent when we get into. Suppose we find a great investment opportunity, but you lack the cash to take advantage of it. This is the classic problem of financing. The short answer is that you borrow -- either privately from a bank, or publicly by issuing securities. Securities are nothing more than promises of future payment. They are initially issued through financial intermediaries such as investment banks, which underwrite the offering and work to sell the securities to the public. Once they are sold, securities can often be re-sold. There is a secondary market for many corporate securities. If they meet certain regulatory requirements, they may be traded through brokers on the stock exchanges, such as the NYSE, the AMEX and NASDAQ, or on options exchanges and bond trading desks. Securities come in a bewildering variety of forms - there are more types of securities than there are breeds of cats and dogs, for instance. They range from relatively straightforward to incredibly complex. A straight bond promises to repay a loan over a fixed amount of interest over time and the principal at maturity. A share of stock, on the other hand, represents a fraction of ownership in a corporation, and a claim to future dividends. Today, much of the innovation in finance is in the development of sophisticated securities: structured notes, reverse floaters, IO's and PO's -- these are today's

specialized breeds. Sources of information about securities are numerous on the world-wide web. For a start, begin with the Ohio State Financial Data Finder. All securities, from the simplest to the most complex, share some basic similarities that allow us to evaluate their usefulness from the investor's perspective. All of them are economic claims against future benefits. No one borrows money that they intend to repay immediately; the dimension of time is always present in financial instruments. Thus, a bond represents claims to a future stream of pre-specified coupon payments, while a stock represents claims to uncertain future dividends and division of the corporate assets. In addition, all financial securities can be characterized by two important features: risk and return. These two key measures will be the focus of this second module. Once the American humorist Will Rogers (1879 - 1935) had remarked "I'm more concerned about the return of my money than with the return on my money". And, he was certainly correct. We all attempt to enhance our wealth and it is an intuitive and natural instinct of human beings. However, we should do so in a fashion and style those do not put our wealth, savings, and investments to undue and undesirable risk. Perhaps, there is always some element of risk and speculation inherent in most of investments, yet with a prudent and informed approach such risks may be contained to a large extent (though not always). Over a period of time, are pancakes, the desire of management of finance has resulted into many styles of personal investing (as also general and other investing), and these styles have given rise to a number of theories of investments. These Investment Theories try to explain and support particular type of Investment Strategies.

Executive summery:
This assignment is based on a beginner who is totally like a fresh meet in the business industry. In that case this is very much essential for him/her to make the right decision and choose the right at the beginning stage of starting business. Because we think completing BBA & MBA is not the main criteria to start a new business. Nowadays there are huge competitions in the business world and this is not just in local but also internationally. So before think about to start a new business or investing capital in some where; this is very much essential to get knowledge, ideas and lot of observation on present business market. Because those people who are already in the market they will be my opponent when we get into. So we can say passing BBA & MBA will provide us the basic theoretical knowledge about business but beside that this is very much essential to earn and learn the policy of basic business. Therefore here in this assignment we are going to discuss about Decisions to Be Made When Starting a New Business, 5 Financial Decisions Before Starting a Business, Some Theoretical Tactical and Practical Business environment, Capital Investment, Investment Theories, 7 Controversial Investing Theories. In this assignment we also talk about Capital Markets and Investment Performance, 10 steps to opening a new business and last but not the least Investing in

Pharmaceuticals Business.
When it comes to investing, there is no shortage of theories on what makes the markets tick or what a particular market move means. The two largest factions on Wall Street are split along theoretical lines into adherents to an efficient market theory and those who believe the market can be beat. Although this is a fundamental split, there are many other theories that attempt to explain and influence the market - and the actions of investors in the markets. In this assignment we will also look at some common (and uncommon) financial theories.

Description:
Decisions to Be Made When Starting a New Business:
Starting a business is not easy, and it will require you to make a number of key decisions. The early stages of a business's life are often the most difficult, so you'll need to be sure you're getting off on the right foot. Keep decisions can include how you'll fund your operation, how much money you'll need to survive the early period and the location of our facility. Savings In many cases, businesses do not turn a profit initially or the owner may not be able to afford to pay herself a salary. A necessary step is to determine if your savings will carry you until you can turn a profit. A carefully prepared business plan and budget should indicate if your savings will last until your business becomes profitable. Health Insurance If you're leaving your job to start a business, you'll need to determine where you will pick up health insurance. Consolidated Omnibus Budget Reconciliation Act, or COBRA, will allow you to carry your group coverage for up to 18 months after leaving your job, but you'll no longer have the benefit of your employer paying a portion of the premium. After 18 months, you'll need to find an affordable plan on the open market. Your spouse could also add you to his group plan if you have that option available. Financing If you're not using your own money to start your business, you'll need to find a source of financing to get started. You'll need to determine whether you want to borrow money from a bank or if you are eligible for grant money. Another option is to borrow what you need from friends or family members or to take on a partner who can supply the needed capital. Type You'll need to decide the business type that is best for you. You can start a business from scratch which may take longer to establish. Another option is to purchase an existing business and put your own "stamp" on it, or buy a franchise. With a franchise, you'll pay an upfront fee and a percentage of your sales to a franchisor in exchange for a proven business model to follow. Site If you're planning to start a brick-and-mortar retail operation as opposed to an Internet or homebased business, choosing a location is a critical step. If your location is out of the way or difficult to find, your chances of success are limited. Proximity to competitors is also something you'll need to consider, as well as if the location offers room to expand as your business grows. To accomplish our goals, we use our investment theory to tailor your portfolio to your exact objectives, risk tolerance and time horizon, spreading risk globally to attain the highest probability of success in today's uncertain times.

5 financial decisions before starting a business:

It's really interesting because when people ask for advice about starting a business and when the economy is stumbling than when things are humming along. However, that's not as counterintuitive as it may at first seem. Getting laid off, or just the possibility of losing a job, often causes people to focus on how they might create their own enterprise. So, we find ourselves talking a lot about the financial decisions people must make before starting their own businesses. Here are five of the biggest: 1. How long can you live on your savings? This isn't an issue for people who are able to raise enough money for their startup venture to pay themselves a salary from Day One. But most small-business startups include the disturbing feature of declining personal bank balances in the early going. As long as you're looking at your expenses and how long you can live on your savings, you should also figure out now what personal costs you can at least temporarily eliminate. It's usually emotionally easier to review your personal budget and tighten expenses when you're contemplating a new venture than it is to cut back after you've started. The first path tends to feel voluntary; the second feels imposed by an economic struggle. 2. How deeply in debt are you willing to go? Business loans can fund expansion, help improve profit ratios, and improve overall cash-on-cash returns. In short, business debt can be good. For the smallest entrepreneurs, however, business debt is often personal debt. Many people start a venture by lending money to their business or by simply deferring any payments for their own labor. As many small-business owners will tell you, lenders may make loans to a business, but the business owner will often be required to personally guarantee the loan. So although the debt is on the business' books, you'll ultimately be personally on the hook if the enterprise goes sour. 3. What are you going to do about health insurance? If you currently work for an entity that offers health insurance and is subject to Consolidated Omnibus Budget Reconciliation Act (COBRA) regulations, you can probably temporarily keep your coverage by paying for your policy, plus administrative costs. I've also seen many people starting new ventures use COBRA as a stopgap, paying the premiums for four or five months until they find a health insurance plan more affordable or more appropriate for their individual needs. 4. Have you lined up your lines of credit in advance? The time to get approval for a loan is when you don't need one. If you have a lot of equity in your home, it's possible to set up a home equity line of credit that will let you borrow money at an attractive interest rate. Banks and other lenders are, for obvious reasons, more willing to make loans to someone who has had a job with a steady paycheck for several years than to someone who has just quit entering the wild, wonderful world of self-employment. If you have an excellent credit rating, you can probably get a home equity or other secured loan with a minimal amount of paperwork. Once you're self-employed, you'll probably have to provide at least youre most recent tax return and other documentation before getting approval. 5. Are you covered against not being able to run your business? You may have some disability insurance through your current employer. The problem is, disability insurance (unlike health insurance) usually cannot be kept or transferred to an individual policy when you leave your job. To protect yourself, get your own disability policy while you are still employed. Once 6

you have the policy established and are paying the premiums, you should be able to keep the policy when you go out on your own. (Check with your insurance agent to make sure that any policy will remain in force after you leave a job.)

Theoretical, Tactical and Practical Business Environment:

The term Business Environment is composed of two words Business and Environment. In simple terms, the state in which a person remains busy is known as Business. The word Business in its economic sense means human activities like production, extraction or purchase or sales of goods that are performed for earning profits. On the other hand, the word Environment refers to the aspects of surroundings. Therefore, Business Environment may be defined as a set of conditions Social, Legal, Economical, Political or Institutional that are uncontrollable in nature and affects the functioning of organization. Business Environment has two components: 1. Internal Environment 2. External Environment Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and management, usually within the control of business. Business can make changes in these factors according to the change in the functioning of enterprise. External Environment: Those factors which are beyond the control of business enterprise are included in external environment. These factors are: Government and Legal factors, GeoPhysical Factors, Political Factors, Socio-Cultural Factors, Demo-Graphical factors etc. It is of two Types: 1. Micro/Operating Environment 2. Macro/General Environment Micro/Operating Environment: The environment which is close to business and affects its capacity to work is known as Micro or Operating Environment. It consists of Suppliers, Customers, Market Intermediaries, Competitors and Public. (1) Suppliers: They are the persons who supply raw material and required components to the company. They must be reliable and business must have multiple suppliers i.e. they should not depend upon only one supplier. (2) Customers: - Customers are regarded as the king of the market. Success of every business depends upon the level of their customers satisfaction. Types of Customers: (i) Wholesalers (ii) Retailers (iii) Industries (iv) Government and Other Institutions (v) Foreigners

(3) Market Intermediaries: - They work as a link between business and final consumers. Types:(i) Middleman (ii) Marketing Agencies (iii) Financial Intermediaries (iv) Physical Intermediaries (4) Competitors: - Every move of the competitors affects the business. Business has to adjust itself according to the strategies of the Competitors. (5) Public: - Any group who has actual interest in business enterprise is termed as public e.g. media and local public. They may be the users or non-users of the product. Macro/General Environment: It includes factors that create opportunities and threats to business units. Following are the elements of Macro Environment: (1) Economic Environment: - It is very complex and dynamic in nature that keeps on changing with the change in policies or political situations. It has three elements: (i) Economic Conditions of Public (ii) Economic Policies of the country (iii)Economic System (iv) Other Economic Factors: Infrastructural Facilities, Banking, Insurance companies, money markets, capital markets etc. (2) Non-Economic Environment: - Following are included in non-economic environment:(i) Political Environment: - It affects different business units extensively. Components: (a) Political Belief of Government (b) Political Strength of the Country (c) Relation with other countries (d) Defense and Military Policies (e) Centre State Relationship in the Country (f) Thinking Opposition Parties towards Business Unit (ii) Socio-Cultural Environment: - Influence exercised by social and cultural factors, not within the control of business, is known as Socio-Cultural Environment. These factors include: attitude of people to work, family system, caste system, religion, education, marriage etc. (iii) Technological Environment: - A systematic application of scientific knowledge to practical task is known as technology. Everyday there has been vast changes in products, services, lifestyles and living conditions, these changes must be analyzed by every business unit and should adapt these changes. (iv) Natural Environment: - It includes natural resources, weather, climatic conditions, port facilities, topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must look for these factors before choosing the location for their business.

(v) Demographic Environment :- It is a study of perspective of population i.e. its size, standard of living, growth rate, age-sex composition, family size, income level (upper level, middle level and lower level), education level etc. Every business unit must see these features of population and recognize their various needs and produce accordingly. (vi) International Environment: - It is particularly important for industries directly depending on import or exports. The factors that affect the business are: Globalization, Liberalization, foreign business policies, cultural exchange. Characteristics:1. Business environment is compound in nature. 2. Business environment is constantly changing process. 3. Business environment is different for different business units. 4. It has both long term and short term impact. 5. Unlimited influence of external environment factors. 6. It is very uncertain. 7. Inter-related components. 8. It includes both internal and external environment.

Capital Investment:
The term Capital Investment has two usages in business. Firstly, Capital Investment refers to money used by a business to purchase fixed assets, such as land, machinery, or buildings. Secondly, Capital Investment refers to money invested in a business with the understanding that the money will be used to purchase fixed assets, rather than used to cover the business' day-to-day operating expenses. If you are seeking investors for your business, you will most likely find that interested investors prefer to make a Capital Investment, specifying what the money will be used for. Also Known As: Venture capital. Common Misspellings: Capital investment, capitol investment, capital investment. Examples: Jenna agreed to make a capital investment in Bupinder's new business, specifying that the money was to be used to buy the machinery needed to start production.

Investment Theories:
Once the American humorist Will Rogers (1879 - 1935) had remarked "I'm more concerned about the return of my money than with the return on my money". And, he was certainly correct. We all attempt to enhance our wealth and it is an intuitive and natural instinct of human beings. However, we should do so in a fashion and style that does not put our wealth, savings, and investments to undue and undesirable risk. Perhaps, there is always some element of risk and speculation inherent in most of investments, yet with a prudent and informed approach such risks may be contained to a large extent (though not always). Over a period of

time, are pancakes, the desire of management of finance has resulted into many styles of personal investing (as also general and other investing), and these styles have given rise to a number of theories of investments. These Investment Theories try to explain and support particular type of Investment Strategies. Some of the major and popular Investment Theories are: 01. Bernstein's Psychology of Successful Investing: How Personality Traits Affect Successful Financial Investments. Here we will earn a higher return on investments if you know a little "money psychology." Here are four ways personality traits affect your thoughts and behaviors about money. Knowing the psychology behind your financial investments - and how personality traits affect your investment portfolio - can change the way you invest in low-risk mutual funds, medium-to-high risk stocks and bonds, or your company's 401K plan. 02. Top down Investing: An investment approach that involves looking at the "big picture" in the economy and financial world and then breaking those components down into finer details. After looking at the big picture conditions around the world, the different industrial sectors are analyzed in order to select those that are forecasted to outperform the market. From this point, the stocks of specific companies are further analyzed and those that are believed to be successful are chosen as investments. An investor may use different criteria when deciding to employ the top-down approach. For example, an investor may consider such factors as geography, sector and size. What is important with this approach is that a big picture perspective is taken first before looking at the details. Although there is some debate as to whether the top-down approach is better than the bottom-up approach, many investors have found the top-down approach useful in determining the most promising sectors in a given market. 03 Bottom up Investing: Bottom Up Investing is an investment theory which takes a dramatically different view of investing if compared to Top Down Investing. It takes a micro approach and starts analyzing the individual securities and the firms, moves on to have an idea of the industry. Thereafter, it still moves forward to look deeply into the position of the stock market and the economy in its totality. If positive indications emerge, the investor buys the stocks with which he/she had started the analysis. 04. Buy the Rumor & Sell the Fact: A phrase often quoted by stock or futures traders that explain price declines that occur after an anticipated positive event has happened. For example, stocks prices may rally ahead of the monthly unemployment report on the anticipation that employment will be weaker than expected. The weaker numbers are interpreted to mean that the Federal Reserve is likely to cut interest rates, which is a positive event for stocks because it lowers a companys borrowing costs. However, when the actual unemployment numbers are released and match the lower expectations, stocks may trade lower. 05. Castle-in-the-Air Theory: The Castle-in-the-Air Theory, one of the Investment Theories, is rather opposite in its postulations compared to the Firm Foundation Theory. The Firm Foundation Theory believes and tries to understand the intrinsic value of any stock or other asset. The castle-in-the-air

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theory delves deep into another aspect of investing behavior - it tries to unravel and understand the psychic values and behavior of the group of investors. This theory was made popular in 1936 by John Maynard Keynes, a famous economist (as also an investor) and the theory postulates that the investors try to build a sort of castles in the air and think of the probable price rise in the future than estimating the intrinsic values of stocks. Once the investor has estimated this, he/she tries to beat the crowd by building positions in the preferred stocks before the crowds (read other investors) start buying those stocks and the price surges ahead. 06. Constant Stock-Bond Ratio Theory: The constant ratio plan is an asset allocation strategy that establishes fixed percentages for the different types of securities contained in a portfolio. For example, a typical constant ratio plan could be made up of an allocation of 45 percent of portfolio investments in stocks, 45 percent in bonds, and 10 percent invested in money market (cash) securities. The percentages allocated to the different types of investments are determined by the investor's objectives and risk tolerance. Changes in asset allocation percentages can be made to coincide with changes in these objectives as well as changes in the conditions of the markets. A conservative, risk-averse investor who's approaching retirement and needs additional income might use a portfolio allocation of 25 percent stocks, 70 percent bonds, and 5 percent in money market securities. On the other hand, a young investor seeking growth in his or her portfolio may choose an allocation with a greater possible rate of return (along with more exposure to risk), such as 80 percent invested in stocks, 15 percent in bonds, and 5 percent in money market securities. 07. Cybernetic Analysis: Cybernetics is a Tran disciplinary approach for exploring regulatory systems, their structures, constraints, and possibilities. Cybernetics is relevant to the study of mechanical, physical, biological, cognitive, and social systems. Cybernetics is only applicable when the system being analyzed is involved in a closed signal loop; that is, where action by the system causes some change in its environment and that change is fed to the system via information (feedback) that enables the system to change its behavior. This "circular causal" relationship is necessary and sufficient for a cybernetic perspective. System Dynamics, a related field, originated with applications of electrical engineering control theory to other kinds of simulation models (especially business systems) by Jay Forrester at MIT in the 1950s. Concepts studied by cyberneticists (or, as some prefer, cyberneticians) include, but are not limited to: learning, cognition, adaption, social control, emergence, communication, efficiency, efficacy, and connectivity. These concepts are studied by other subjects such as engineering and biology, but in cybernetics these are removed from the context of the individual organism or device. Cybernetics was defined in the mid 20th century, by Norbert Wiener as "the scientific study of control and communication in the animal and the machine. Cybernetics from the Greek meaning to "steer" or "navigate." Contemporary cybernetics began as an interdisciplinary study connecting the fields of control systems, electrical network theory, mechanical engineering, logic modeling, evolutionary biology, neuroscience, anthropology, and psychology in the 1940s, often attributed to the Macy Conferences. During the second half of the 20th century cybernetics evolved in ways that distinguish first-order cybernetics (about observed systems) from second-order cybernetics (about observing systems). More recently there is talk about a third-order cybernetics (doing in ways that embraces first and second-order).

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Fields of study which have influenced or been influenced by cybernetics include game theory, system theory (a mathematical counterpart to cybernetics), perceptual control theory, sociology, psychology (especially neuropsychology, behavioral psychology, cognitive psychology), philosophy, architecture, and organizational theory. 08. Diversification Theory: Diversification is one of the long standing and widely prevalent Investment Theories to reduce the Investment Risks relating to holding and investing in stocks and other financial assets. Diversification may be practiced in different ways; one or more of these ways may be combined to create a diversified portfolio. Generally, diversification of a portfolio may be achieved by: Stock Diversification Geographical Diversification Strategy Diversification Asset Diversification

09. Efficient Market Theory: Efficient Market Theory is one of the Investment Theories, and the theory postulates that at any given point of time the prices of securities being traded in a stock market or any other financial market fully reflects all available information and data. People buy securities thinking that the price shall move up, and they sell securities thinking that the price shall go down. Now, according to Efficient Market Theory, as the prices fully reflect all the available information, any price movement upward or downward is a matter of luck. However, like many Investment Theories, the Efficient Market Theory has also its plus and negative points. 10. Firm Foundation Theory: The Firm Foundation Theory is one of the important Investment Theories. It postulates that any financial asset like a stock or real estates like a piece of property has an intrinsic value. The condition in the market either keeps the price below the intrinsic value or above the intrinsic value - it rarely remains at or around the intrinsic value. This position offers the investor a choice - in case, he/she is able to buy the stock or the real estate below its intrinsic value, and he/she shall make profits when the price goes above the intrinsic value. 11. Life Cycle Investment Theory: Discussion of lifecycle investing theory may seem a bit academic for a wealth management practice website, but we felt a brief discussion of the main points may be helpful. Much of this material is sourced from Professor Zvi Bodies article, Thoughts on the Future: Life-Cycle Investing in Theory and Practice. The challenges facing us today in planning for lifetime financial security is very different from previous generations. One might think that new challenges would lead to new solutions. Yet, the wealth management industry today is often still working to an outdated theoretical model, and not surprisingly, it is proposing outdated strategies and solutions. Clients come to us knowing that aside from what they create for themselves, there are few, if any, reliable financial safety nets available to them in old age. The defined benefit pension plan is virtually dead. State pension plans are acknowledged to be insolvent. In the real world, insolvency means no can pay. What the state will eventually do about this is an open question. States have reached the point where they are saying, "Yes, we have a problem". They are still working towards "This is what we will do about it". Furthermore, people are living longer and health 12

care costs are increasing. Family support is not as available as in prior generations, and there are some very unrealistic expectations about appropriate savings rates and expected investment returns. As we have seen in the market turmoil recently. The Swiss market index returned -11% from 1998 to 2008. To these challenges, the Wealth Management industry by and large responds with the old paradigm view outlined in the table below. We feel strongly that the new paradigm is far more appropriate to the challenges and issues facing us today and we try to incorporate that into our planning and advice. Old vs. New Paradigm of Wealth Management

12. Markowitz Portfolio Selection Theory: Modern portfolio theory (MPT)or portfolio theorywas introduced by Harry Markowitz with his paper "Portfolio Selection," which appeared in the 1952 Journal of Finance. Thirtyeight years later, he shared a Nobel Prize with Merton Miller and William Sharpe for what has become a broad theory for portfolio selection. Prior to Markowitz's work, investors focused on assessing the risks and rewards of individual securities in constructing their portfolios. Standard investment advice was to identify those securities that offered the best opportunities for gain with the least risk and then construct a portfolio from these. Following this advice, an investor might conclude that railroad stocks all offered good risk-reward characteristics and compile a portfolio entirely from these. Intuitively, this would be foolish. Markowitz formalized this intuition. Detailing mathematics of diversification, he proposed that investors focus on selecting portfolios based on their overall risk-reward characteristics instead of merely compiling portfolios from securities that each individually has attractive risk-reward characteristics. In a nutshell, inventors should select portfolios not individual securities. If we treat single-period returns for various securities as random variables, we can assign them expected values, standard deviations and correlations. Based on these, we can calculate the expected return and volatility of any portfolio constructed with those securities. We may treat

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volatility and expected return as proxies for risk and reward. Out of the entire universe of possible portfolios, certain ones will optimally balance risk and reward. These comprise what Markowitz called an efficient frontier of portfolios. An investor should select a portfolio that lies on the efficient frontier. James Tobin (1958) expanded on Markowitz's work by adding a risk-free asset to the analysis. This made it possible to leverage or deleverage portfolios on the efficient frontier. This lead to the notions of a super-efficient portfolio and the capital market line. Through leverage, portfolios on the capital market line are able to outperform portfolio on the efficient frontier. Sharpe (1964) formalized the capital asset pricing model (CAPM). This makes strong assumptions that lead to interesting conclusions. Not only does the market portfolio sit on the efficient frontier, but it is actually Tobin's super-efficient portfolio. According to CAPM, all investors should hold the market portfolio, leveraged or de-leveraged with positions in the riskfree asset. CAPM also introduced beta and relates an asset's expected return to its beta. Portfolio theory provides a context for understanding the interactions of systematic risk and reward. It has shaped how institutional portfolios are managed and motivated the use of passive investment techniques. The mathematics of portfolio theory is used in financial risk management and was a theoretical precursor for today's value-at-risk measures. 13. Selling Theories: Firms may be financed by their suppliers rather than by financial institutions. There are many theories of trade credit, but few comprehensive empirical tests. This article attempts to fill the gap. We focus on small firms whose access to capital markets may be limited and find evidence suggesting that firms use more trade credit when credit from financial institutions is unavailable. Suppliers lend to constrained firms because they have a comparative advantage in getting information about buyers, they can liquidate assets more efficiently, and they have an implicit equity stake in the firms. Finally, firms with better access to credit offer more trade credit. 14. The 10 Percent Rule: The Ten-Percent Rule, for predicting the strength and stiffness of fiberpolymer composites on the basis of simple rule-of mixtures formulae, is here extended beyond its prior restriction to only fiber patterns in the 0,45,90 family of balanced laminates. This has been accomplished by characterizing the implicit, but previously unused, lamina failure envelope associated with the model, and increasing the transverse strains-to-failure in the fibers to prevent prematurely predicted matrix failures undercutting fiber-dominated strengths. The use and validity of such an extension is demonstrated for the composite materials and fiber patterns involved in an international exercise (organized by Hinton, Soden and Kaddour). The theory is applied also to a 55 glass-epoxy laminate, and a 30,90 glass-epoxy laminate. The simplifications remain valid only for highly orthotropic materials, like fiberpolymer composites.

7 Controversial Investing Theories:

When it comes to investing, there is no shortage of theories on what makes the markets tick or what a particular market move means. The two largest factions on Wall Street are split along 14

theoretical lines into adherents to an efficient market theory and those who believe the market can be beat. Although this is a fundamental split, there are many other theories that attempt to explain and influence the market - and the actions of investors in the markets. In this article, we will look at some common (and uncommon) financial theories. Efficient Market Hypothesis: Very few people are neutral on efficient market hypothesis (EMH). You either believe in it or adhere to passive, broad market investing strategies, or you detest it and focus on picking stocks based on growth potential, undervalued assets and so on. The EMH states that the market price for shares incorporates all the known information about that stock. This means that the stock is accurately valued until a future event changes that valuation. Because the future is uncertain, an adherent to EMH is far better off owning a wide swath of stocks and profiting from the general rise of the market. Opponents of EMH point to Warren Buffett and other investors who have consistently beat the market by finding irrational prices within the overall market. (See why investors today still follow this old set of principles that reduce risk and increase returns through diversification. Fifty Percent Principle: The fifty percent principle predicts that, before continuing, an observed trend will undergo a price correction of one-half to two-thirds of the change in price. This means that if a stock has been on an upward trend and gained 20%, it will fall back 10% before continuing its rise. This is an extreme example, as most times this rule is applied to the short-term trends that technical analysts and traders buy and sell on. This correction is thought to be a natural part of the trend as it's usually caused by skittish investors taking profits early to avoid getting caught in a true reversal of the trend later on. If the correction exceeds 50% of the change in price, it's considered a sign that the trend has failed and the reversal has come prematurely. Greater Fool Theory: The greater fool theory proposes that you can profit from investing as long as there is a greater fool than yourself to buy the investment at a higher price. This means that you could make money from an overpriced stock as long as someone else is willing to pay more to buy it from you. Eventually you run out of fools as the market for any investment overheats. Investing according to the greater fool theory means ignoring valuations, earning reports and all the other data. Ignoring data is as risky as paying too much attention to it; so people ascribing to the greater fool theory could be left holding the short end of the stick after a market correction. Odd Lot Theory: The odd lot theory uses the sale of odd lots small blocks of stocks held by individual investors as an indicator of when to buy into a stock. Investors following the odd lot theory buy in when small investors sell out. The main assumption is that small investors are usually wrong. The odd lot theory is contrarian strategy based off a very simple form of technical analysis measuring odd lot sales. How successful an investor or trader following the theory is depends heavily on whether or not he checks the fundamentals of companies that the theory points toward or simply buys blindly. Small investors aren't going to be right or wrong all the time, so

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it's important to distinguish odd lot sales that are occurring from a low-risk tolerance from odd lot sales that are due to bigger problems. Individual investors are more mobile than the big funds and thus can react to severe news faster, so odd lot sales can actually be a precursor to a wider sell-off in a failing stock instead of just a mistake on the part of small time investors. Prospect Theory (Loss-Aversion Theory) Prospect theory states that people's perceptions of gain and loss are skewed. That is, people are more afraid of a loss than they are encouraged by a gain. If a person is given a choice of two different prospects, they will pick the one that they think has less of chance of ending in a loss, rather than the one that offers the most gains. For example, if you offer a person two investments, one that has returned 5% each year and one that has returned 12%, lost 2.5%, and returned 6% in the same years, the person will pick the 5% investment because he puts an irrational amount of importance on the single loss, while ignoring the gains that are of a greater magnitude. In the above example, both alternatives produce the net total return after three years. Prospect theory is important for financial professionals and investors. Although the risk/reward trade-off gives a clear picture of the amount of risk an investor has to take on to achieve the desired returns, prospect theory tells us that very few people understand emotionally what they realize intellectually. For financial professionals, the challenge is in suiting a portfolio to the client's risk profile, rather than reward desires. For the investor, the challenge is to overcome the disappointing predictions of prospect theory and become brave enough to get the returns you want. (Discover how some strange human tendencies can play out in the market, posing the question: are we really rational? Rational Expectations Theory: Rational expectations theory states that the players in an economy will act in a way that conforms to what can logically be expected in the future. That is, a person will invest, spend, etc. according to what he or she rationally believes will happen in the future. By doing so, that person creates a self-fulfilling prophecy that helps bring about the future event. Although this theory has become quite important to economics, its utility is doubtful. For example, an investor thinks a stock is going to go up, and by buying it, this act actually causes the stock to go up. This same transaction can be framed outside of rational expectations theory. An investor notices that a stock is undervalued, buys it, and watches as other investors notice the same thing, thus pushing the price up to its proper market value. This highlights the main problem with rational expectations theory: it can be changed to explain everything, but it tells us nothing. Short Interest Theory: Short interest theory posits that a high short interest is the precursor to a rise in the stock's price and, at first glance, appears to be unfounded. Common sense suggests that a stock with a high short interest that is, a stock that many investors are short selling is due for a correction. The reasoning goes that all those traders, thousands of professionals and individuals scrutinizing every scrap of market data surely can't be wrong. They may be right to an extent, but the stock price may actually rise by virtue of being heavily shorted. Short sellers have to eventually cover their positions by buying the stock they've shorted. Consequently, the buying pressure created by the short sellers covering their positions will push the share price upwards. The Bottom Line:

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We have covered a pretty wide range of theories, from technical trading theories like short interest and odd lot theory to economic theories like rational expectations and prospect theory. Every theory is an attempt to impose some type of consistency or some type of frame to the millions of buy and sell decisions that make the market swell and ebb on a daily basis. While it is useful to know these theories, it is also important to remember that there is no unified theory that can explain the financial world. During certain time periods, one theory seems to hold sway only to be toppled the next instant. In the financial world, change is the only true constant. (Break down and examine the potential consequences of economic/financial scenarios.

Capital Markets and Investment Performance:

Suppose you find a great investment opportunity, but you lack the cash to take advantage of it. This is the classic problem of financing. The short answer is that you borrow -- either privately from a bank, or publicly by issuing securities. Securities are nothing more than promises of future payment. They are initially issued through financial intermediaries such as investment banks, which underwrite the offering and work to sell the securities to the public. Once they are sold, securities can often be re-sold. There is a secondary market for many corporate securities. If they meet certain regulatory requirements, they may be traded through brokers on the stock exchanges, such as the NYSE, the AMEX and NASDAQ, or on options exchanges and bond trading desks. Securities come in a bewildering variety of forms - there are more types of securities than there are breeds of cats and dogs, for instance. They range from relatively straightforward to incredibly complex. A straight bond promises to repay a loan over a fixed amount of interest over time and the principal at maturity. A share of stock, on the other hand, represents a fraction of ownership in a corporation, and a claim to future dividends. Today, much of the innovation in finance is in the development of sophisticated securities: structured notes, reverse floaters, IO's and PO's -- these are today's specialized breeds. Sources of information about securities are numerous on the world-wide web. For a start, begin with the Ohio State Financial Data Finder. All securities, from the simplest to the most complex, share some basic similarities that allow us to evaluate their usefulness from the investor's perspective. All of them are economic claims against future benefits. No one borrows money that they intend to repay immediately; the dimension of time is always present in financial instruments. Thus, a bond represents claims to a future stream of pre-specified coupon payments, while a stock represents claims to uncertain future dividends and division of the corporate assets. In addition, all financial securities can be characterized by two important features: risk and return. These two key measures will be the focus of this second module. I. Finance from the Investor's Perspective: Most financial decisions you have addressed up to this point in the term have been from the perspective of the firm. Should the company undertake the construction of a new processing plant? Is it more profitable to replace an old boiler now, or wait? In this module, we will examine financial decisions from the perspective of the purchaser of corporate securities: shareholders and bondholders who are free to buy or sell financial assets. Investors, whether they are individuals or institutions such as pension funds, mutual funds, or college endowments, hold portfolios, that is, they hold a collection of different securities. Much of the innovation in investment research over the past 40 years has been the development of a theory of portfolio management, and this module is principally an introduction to these new methods.

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It will answer the basic question, what rate of return will investors demand to hold a risky security in their portfolio. To answer this question, we first must consider what investors want, how we define return, and what we mean by risk. II. Why Investors Invest What motivates a person or an organization to buy securities, rather than spending their money immediately? The most common answer is savings -- the desire to pass money from the present into the future. People and organizations anticipate future cash needs, and expect that their earnings in the future will not meet those needs. Another motivation is the desire to increase wealth, i.e. make money grow. Sometimes, the desire to become wealthy in the future can make you willing to take big risks. The purchase of a lottery ticket, for instance only increases the probability of becoming very wealthy, but sometimes a small chance at a big payoff, even if it costs a dollar or two, is better than none at all. There are other motives for investment, of course. Charity, for instance. You may be willing to invest to make something happen that might not, otherwise -- you could invest to build a museum, to finance low-income housing, or to re-claim urban neighborhoods. The dividends from these kinds of investments may not be economic, and thus they are difficult to compare and evaluate. For most investors, charitable goals aside, the key measure of benefit derived from a security is the rate of return. III. Definition of Rates of Return The investor return is a measure of the growth in wealth resulting from that investment. This growth measure is expressed in percentage terms to make it comparable across large and small investors. We often express the percent return over a specific time interval, say, one year. For instance, the purchase of a share of stock at time t, represented as P t will yield P t+1 in one year's time, assuming no dividends are paid. This return is calculated as: R t = [ P t+1 - Pt]/ Pt. Notice that this is algebraically the same as: Rt= [P t+1/ Pt]-1. When dividends are paid, we adjust the calculation to include the intermediate dividend payment: Rt=[ P t+1 - Pt+Dt]/ Pt. While this takes care of all the explicit payments, there are other benefits that may derive from holding a stock, including the right to vote on corporate governance, tax treatment, rights offerings, and many other things. These are typically reflected in the price fluctuation of the shares. IV. Arithmetic vs. Geometric Rates of Return There are two commonly quoted measures of average return: the geometric and the arithmetic mean. These rarely agree with each other. Consider a two period example: P0 = $100, R1 = -50% and R2 = +100%. In this case, the arithmetic average is calculated as (100-50)/2 = 25%, while the geometric average is calculated as: [(1+R1)(1+R2)]1/2-1=0%. Well, did you make money over the two periods, or not? No, you didn't, so the geometric average is closer to investment experience. On the other hand, suppose R1 and R2 were statistically representative of future returns. Then next year, you have a 50% shot at getting $200 or a 50% shot at $50. Your expected one year return is (1/2)[(200/100)-1] + (1/2)[(50/100)-1] = 25%. Since most investors have a multiple year horizon, the geometric return is useful for evaluating how much their investment will grow over the long-term. However, in many statistical models, the arithmetic rate of return is employed. For mathematical tractability, we assume a single period investor horizon. V. Capital Market History The 1980's was one of the greatest decades for stock investors in the history of the U.S. capital markets.

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We measure stock market performance by the total return to investment in the S&P 500, which is a standard index of 500 stocks, weighted by the market value of the equity of the company. Dividends paid by S&P 500 companies are assumed to be re-invested in shares of stock. This provides a measure of total investor return, before individual taxes are paid.

In the 1930's stock markets crashed all over the globe. U.S. stock investors experienced a zero percent return for the eleven-year period from 12/1929 to 12/1939 U.S. Capital Markets over the Long Term: 1926 1995. Over the past 68 years, a stock investment in the S&P increased from $1 to $800.

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VI. Risk Premium Notice in the preceding figure that a dollar invested in stock grew to $889 over the period, while a dollar invested in corporate bonds grew to $40. Why the big difference? This return differential is commonly attributed to a difference in the risk associated with stocks as opposed to bonds. Notice that the stock line is "shakier" than the bond line. Wealth invested in stocks since 1926 was more volatile than wealth invested in bonds. Despite the higher return, the risks were higher as well. An investor typically cares about the riskiness of an investment. If, for instance, you are saving for a home purchase sometime in the next year, then you really care whether your $100,000 nest egg has a significant probability of dropping to $50,000 in twelve months. As a matter of fact, you might be willing to trade a lower rate of investment return for "insurance" that your principal will be secure. This is called risk-aversion -- and all things being equal, most investors prefer less risk to more. Summary Statistics of U.S. Investments from 1926 through March, 1995. Source:Ibbotson Associates Investment S&P total return U.S. Small Stock TR U.S. LT Govt TR U.S. LT Corp. TR U.S. 30 day T-Bills geom. mean 10.30 12.28 4.91 5.49 3.70 arith.mean 12.45 17.28 5.21 5.73 3.70 std 22.28 35.94 8.00 7.16 .96 high ret. 42.56 73.46 15.23 13.76 1.35 low ret. -29.73 -36.74 -8.41 -8.90 -0.06

The difference between the S&P total return and the U.S. 30 day T-Bill return is called the equity premium. It is the amount of return that investors demand for holding a risky security such as stocks, as opposed to a riskless security, such as T-Bills. The annual equity premium is about 9% arithmetic, and 6% geometric, over the 1926 - 1995 periods. VII. Standard Deviation as a Measure of Risk Stock returns may be riskier or more volatile, but this concept is a difficult one to express simply. To do so, we borrow a concept from statistics, called standard deviation. Standard

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deviation is a summary measure about the average spread of observations. It is the square root of the variance, which is calculated as:

The standard deviation of one-year S&P 500 returns is about 22.28%. If S&P returns are normally distributed, this means that about 2/3 of the time we should observe an annual return within the range (12.45-22.28)= -9.93 and (12.45+22.28)= 34.73. A histogram of S&P 500 annual returns shows that returns are approximately normally distributed, or are they? A normal distribution should allow returns lower than -100%. Stocks do not. In fact, the log of the variable being normally distributed is a better approximation. However, there is evidence to suggest that even this is not quite right. The tails of stock returns are a bit "fatter" than should be observed if returns were log-normally distributed. This lends some support to the hypothesis advanced by Benoit Mandelbrot that stock returns follow a "stable" distribution, with undefined variance. Have a look at the S&P 500 histogram yourself:

How well does standard deviation capture the notion of investor risk? It equally weights high returns with low returns. It heavily weights extreme observations. It is not concerned with the shape of the distribution. All of these are valid criticisms. However the benefits to using standard deviation are large. It is a single measure, allowing us to quantify asset returns by risk. As we will see in the next chapter, it also provides the basis for investor decisions about portfolio choice.

10 Steps to Opening a New Business:

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Before opening a new business or investing somewhere or in some existing business this is essential to follow those important steps for batter result. Here we discuss those steps one by one.

Step 1: Create a Life Plan:

As we always say, plan our life, and then plan our business. Some of the most successful and happy people we know are entrepreneurs who created a business thats in perfect synchronicity with what they want out of life. If we do what we love, we will work harder, better and more happily. In this step we will focus on: Elements of our Life Plan Using our Life Plan

Elements of our Life Plan

Our Current Status Think carefully and honestly about where we are now in our life. Consider work, recreation, relationships, finances and anything else thats important to us. And then jot down some simple, succinct bullet points in each of these categories: Quality rating of our life on a scale of 1 through 100, with 100 being the best possible life. Realities of our life, including responsibilities, funds available to start a business, expenses. Things that make us happy. Things that make us unhappy.

Our Ideal Life This is a snapshot of your ideal life, in a very brief, bulleted list. And remember, the skys the limit, so dont be afraid of being bold or maybe even a little grandiose. Factor in things like family time, hobbies, charity work, and early retirement anything that gets us really excited. Our Loves: What we Really Like Doing Think about the types of things that we love to do, whether at work, at home, or at our local soup kitchen. List these things out briefly. And don't worry if some themes are starting to repeat in each section that just means you have some really focused ideas about what we want in life! Our Skills & Capabilities: What we do well List the abilities, experience and strengths we can build on to attain that ideal life. Bear in mind that our skills need not be strictly from our professional life list skills developed in our personal life as well. It may be a combination of skills that leads us to a startup thats best suited to fit our needs. Our Track Record: What we Have Experience Doing

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List those accomplishments in our professional and personal life of which we are most proud. Pay particular attention to successes we have had that would be helpful in starting a business and managing it successfully. Our Ideal Work Style Whether full-time or part-time, at-home or on the road, working behind the scenes or interacting with lots of people understand what your work style priorities are so you can define the best kind of business for you. Another way to look at this is, what level of risk do you want to take? You may want a relatively low-pressure first-go at entrepreneurship. Our Manifesto This is your personal mission, your values and what drives you forward, all wrapped up into a one-page (maximum) statement. To write this, you should draw on everything youve already discovered about yourself in steps 1 through 6, and bring it all together into a clear statement of your principles and priorities. Our example manifesto Work as Freedom: We think work is about pursuing our dreams, not for the benefit of some nameless, faceless company, but for ourselves. We believe that owning our own business leads to the liberties and freedoms that the forefathers of our country envisioned for us. Were free to choose the kind of business we conduct. Were free to choose the way we spend our time. Were free to choose the people with whom we work. Were free to set our priorities. Work as Family: Weve tried to create a workplace environment where employees feel like theyre actually members of a greater family. Theres a sense of common purpose, mutual respect, and deep trust. Everyone should feel important and as though theyre a meaningful member of the collective effort. Its an environment that empowers people to share in the hard workand in the benefits. Work as Fulfillment: Weve made it a priority to ensure that our work gives us a sense of satisfaction. When we wake up in the morning, we cant wait to get on the phone, get online, and get our team in gear. The work we do is truly the work we love. For us theres nothing that turns us on more than facing a challenge and transforming it into an opportunity. Theres nothing more thrilling than seeing a customer use our product. Theres nothing more gratifying than helping someone else turn a dream into a real business. And over time, weve found that our fulfillment comes as much from the process of trying to achieve our goals as it does from actually achieving them. Key Moves to Get You Where You Want to Go These are simple strategic action items we must develop in order to transform your Life Plan from a self-assessment into an action plan. At this point in life planning, we know where we want to go, what skills you already have, as well as what type of work suits we best. Draw from that information a list of moves we will need to make to achieve your ideal life. Using your Life Plan Its very important to print your Life Plan and keep it in plain view. We will find that its presenceeven in your peripheral visionwill constantly remind you of what you want, whats important, and what to do next. Ideally, we should also revisit our Life Plan periodically to measure our success and to make adjustments and additions where appropriate. Its okay if things change over timelife is a fluid and dynamic thing and our Life Plan should be, too! 23

Use our Life Plan to provide context for strategic decisions we makeincluding what niche we choose to operate in, what business model we will use, whether we will have lots of employees or a home-based, one person operation. Most importantly, our Life Plan will position us to do what you LOVE and that always brings out the best in an entrepreneur.

Step 2: Choosing a Business Model:

Thanks to technology, there are more business models to choose from than ever before. Today we can start a business part-time or full-time, at home, online or in a brick-and-mortar commercial location! The key is to choose a business model that fits our Life Plan. This will ensure that you spend the right number of hours each week, take the right level of risk (some models involve more risk than others), are practical in terms of our financial wherewithal, and gain the kind of satisfaction and success ou're after. First off, we have to make a key choice: How much time do we want to devote to our business? When we go for a full-time business model, we leave behind whatever we were doing previously to commit yourself completely to our startup. When we make this leap, expect to spend more hours working than we ever did working for someone else. Alternatively, we can start up a business part-time. With this model, we adapt our business to time-consuming obligations we already have, such as our day job, parenting responsibilities or any other activities that would keep we from making our startup your primary focus. Once we have determined whether we see ourselves as a part-time or full-time entrepreneur, consider our list of business model options. Home-based Brick-and-mortar e-Commerce eBay Franchising Licensing your product Multi-level marketing

Business Model Options

Home-based Business Drawing upon technology, we can create a legitimate and competitive business from home. Its part of our culture now, accounting for more than half of all businesses. Home-based businesses can be run full-time or part-time, and may or may not be web-based. Upside

Less risk and lower startup costs - allows us to test the entrepreneurial waters without having to spend money on real estate and staff. Easily saleable - we can make our home-based business as big or small as we would like to suit existing commitments, such as parenthood and a day job.

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Outsourcing - a great strategy to keep things simple at home. We can contract with other companies to do our public relations, warehousing, shipping, website management, even manufacturing.

Downside Shipping activities and customer traffic at residential properties are restricted by local zoning ordinances (check with our local government for details). Working at home can come with lots of distractions and can infringe on our other domestic commitments. If foot traffic is necessary in your business, our home may not make the desired impression on customers. Brick-and-Mortar This is a business with a classic physical location outside of the home. It involves a dedicated facility - whether retail, wholesale, service or manufacturing. Upside Gives us an opportunity to work face-to-face with people and become more involved in your community. A physical location may attract walk-in traffic to supplement traffic we gain through marketing efforts, depending on our type of business. Gives us a dedicated space to go to work each day and become mentally and physically immersed in running your business. Downside Higher risk and startup costs (build-out costs to set up our location, lease/purchase costs). Requires a full-time commitment upfront to get the facility ready for business, as well as to hire personnel to staff it. If our concept is retail-oriented, we must acquire inventory to merchandize our store. E-Commerce In this model, we dont have foot traffic in your business, only traffic to your website. We sell your product through our website to consumers or to other businesses. Upside As with a home-based business, this is a lower risk, lower cost business to start. We dont necessarily need lots of personnel, inventory and facilities. We can choose to do it full-time or part-time. Easily saleable We can make your e-commerce business as big or small as we would like to suit existing commitments, such as parenthood and a day job. We can tap into a national, or even global, customer base through the internet. Downside As with a brick-and-mortar store, shipping, inventory management, and credit card processing can all become headaches if we dont do them right, particularly if we are a one-person show. Over 800 million people access the internet globally, but its a challenge to a) get that traffic to come to our site and b) convert them into a customer confident enough to make a purchase.

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eBay-entrepreneurship A sub-category of e-commerce, but one big enough to consider on its own, eBay can serve as a location for your online store, and allow us to tap into its huge marketplace. Upside Lower cost, lower risk than starting an independent e-commerce site as there are a great many tools to help eBay sellers get their businesses off the ground (e.g. PayPal to accept payment, a ready-made marketplace, online store templates, market research tools). Avoid having to build website traffic from scratch - eBay has a huge following worldwide, so we tap into a vast existing customer base. Downside As with a brick-and-mortar store, shipping, inventory management, and credit card processing can all become headaches if we dont do them right, particularly if you are a one-person show. Even with the guaranteed traffic that eBay offers, we will still face stiff competition from existing sellers who have already staked their claim and built up a strong feedback rating & customer base. Franchising When we choose a franchise business model, we use someone elses proven business concept as our entrepreneurial roadmap. Typically we pay an upfront fee, as well as a portion of revenues over time, to the franchisor. Upside Lower risk than opening an independent brick-and-mortar business, because franchising provides us with a streamlined process to start your business, as well as support for marketing, business plan samples and estimates, assistance with real estate issues, and staff training. Provides us with a recognized, established brand to attract customers more quickly. To illustrate the lower risk inherent in a franchise, success rates for franchises are higher than non-franchise businesses. Downside We have got to be able to pay the upfront franchise fees. Franchise guidelines can be strict and limit your ability to get creative with our business. Your financial upside is somewhat limited because we must pay our franchisor a cut of our profits. Licensing your Product If we are working a day job and dont want to start a business, we can still take advantage of our great product idea by licensing the product to another company that has the entire infrastructure in place to properly manufacture, market and sell the product . Upside Lower risk because we can work on your product part-time.

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Lower cost because our main expense is production of a prototype and testing the product to make it attractive to potential licensees (rather than the cost involved in setting up an entire business to make, market and sell the product). Freedom to move on to the next big business idea - if we do successfully license our product idea, we could receive royalties long after we have stopped working on the product!

Downside Finding the right licensee takes tenacity and determination, and can take a long time dont quit our day job! Unless our product gets sold in a significant enough volume by the company to which we license it, the amount of royalties we receive can be low or non-existent. Its extremely difficult to get through the door of big companies to start a negotiation. Thats partly why less than 3% of all patented ideas actually make it to market through licensing agreements. Multi-level Marketing Multi-level marketing (MLM) is a marketing and distribution structure. People at the top sell to those below them, who in turn sell to those below them. The higher up we are in this structure, the more money you can make. The challenge with MLM businesses is that people at the top are frequently the winners. The vast majority of people at the bottom end up spending money and time to get involved and end up losing whatever they put in. If you're determined to choose a business with an MLM model, be sure to check with at least a handful of other people who've entered at your level (who you identify on our own, separate from people the MLM promoter refers you to), and see what they have to say. Find out their perspectives on how - and if its possible - to be successful. Upside Typically, limited startup costs (a membership or initial inventory commitment). Viable home-based business. You are provided pre-packaged tools, products and sales techniques. Downside Most people lose money in MLM activities, because they cant sell the product as effectively as they thought they could. Credibility can become an issue, especially if you start treating friends like theyre customers.

Step 3: Create a Business Plan:

In our experience, the process of creating and writing a business plan is as valuable as the end product itself - a document that will provide the priorities, context and sanity we need as us start up our business. Just remember that the most important audience for a business plan is WE! We will be forced to be accountable to all of the statements, claims, stats and facts inside of it. We may also use your business plan as a tool to generate interest from financiers, prospective employees and strategic partners. We focus on 3 aspects of business planning to consider as you write a business plan: 27

1. The "Defining Dozen" questions you must answer. 2. Key components of a business plan. 3. Writing a business plan. The "Defining Dozen" questions To write a good business plan, we have to know the answers to the Defining Dozen questions, which we describe in detail in StartupNation: Open for Business, our book. Jot down the answers to each of these questions and hang on to them. You might not use every answer in writing your business plan, but they could be helpful when we update our plan as our new business grows. 1. Whats our business idea? 2. How does our idea address a need? 3. What model suits us best? 4. Whats so different about what we offer? 5. How big is the market and how big will we grow? 6. Whats our role going to be? 7. Who's on our team? 8. How will customers buy from us, and how much will they pay? 9. How much money do we need, and how much will we make? 10. Where's the startup money coming from? 11. How will we measure success? 12. What are our key milestones? Once we have answered these questions, we should be prepared to write the actual business plan document. Key components of a business plan Executive Summary Summarizes the most important information within the pages of our business plan - the people, the idea, the market, the competition, the strategy - typically no more than two pages long, the executive summary is usually written last. It takes discipline to keep the summary short, but it's a must. Business Description Details the mission, goals, value proposition, business model, and key assets. After someone reads this section of the plan, they should be able to "get" what we are offering with total clarity! Market Analysis Dives into the needs and wants of potential customers in the market, as well as your competition and the percentage of the market you expect to reach. Be sure to include any pertinent market research and competitive analysis we have done - and cite your sources. Marketing and Distribution Discusses our strategy and timeline for achieving our marketing goals and defines how you get what we offer into customers hands. Be sure to include any new or novel ideas we have for marketing and distributing your product.

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Personnel Describes the management team (existing or future) and any other key personnel that will be instrumental to the business success. Includes each team member's role and responsibilities, as well as any background information that illustrates why they are highly qualified for their role. Exit Strategy Puts into words what you see as the ultimate destiny of the company, especially as it may affect those who finance your new business, as well as other equity holders in the startup. Financials Distills your strategies and assumptions into how much theyll cost and how much money theyll make you in the course of your new business. The Financials section should map out your first few years of business and contain: Written narrative of key business assumptions Income statement Balance sheet Statement of cash flow Cash management report Weve developed an important tool to help you forecast and manage the financial side of your startup business - a cash management report. It looks at how cash moves in and out of our business on a monthly basis. By preparing a cash management report before the launch of our business, we be able to determine if youll need to rise outside capital, when youll need it, and how much will be required. Writing your Business Plan Your business plan should be concise and neatly formatted. We suggest a Microsoft Word document for the bulk of the business plan, with financial documents as attached or embedded spreadsheets created in Microsoft Excel. Avoid fancy graphics, flowery language or photos. The easier you make it to read for a potential investor or partner, the better. If you are the type of person who works better with templates and wizards, there are many business planning software packages available that cost around $100, as well as a few free online business plan templates. The advantage to using business planning software is that it offers a step-by-step approach to the process (similar to a wizard), and can include sample business plans for specific types of businesses (e.g. restaurants, manufacturing, service) to help you outline some of the unique requirements or expenses associated with that particular business. It also formats your business plan for you. A drawback to using business planning software is that it might not provide you the flexibility to convey some of the uniqueness and creativity of your new business, since it's written through the software system.

Step 4: Select a Business Structure

To each his own, as the expression goes. The same holds true for business structures theres no universally right structure for all businesses. Choosing the best one depends on the specific needs you and your business have. Before setting up your company, its important to understand all the options available to usin particular, we will want to evaluate the 29

advantages and disadvantages of each business formation, paying special attention to the tax implications and government formalities. We will look at four forms of business ownership in this step: Sole Proprietorships Partnerships Corporations Limited Liability Companies Forms of Ownership For starters, its important to take the time to review your life plan and business plan. What should emerge are answers to questions like: Do we want investors as shareholders in our company? Do we want to maintain control of the company if we have investors involved? Do we anticipate losses in the early stages that can be taken as tax benefits by shareholders? Do we want to avoid double taxation? Is there a great risk of liability associated with our specific business? To help us determine the best structure for our business, weve put together an overview of several options. And remember, its always best to work closely with an attorney and/or accountant to ensure you make the right choice. Sole Proprietorship Sole proprietorships are a popular choice for many new business owners because so little is needed to set them up. Apart from local business licenses, there are minimal government fees and paperwork. On the other hand, there are also considerable risks to considerfor example, our personal assets are vulnerable to creditors and other liabilities such as lawsuits. You also dont get to take advantage of certain tax breaks that are reserved for more formal business structures such as Corporations or Limited Liability Companies. Most importantly, as a sole proprietorship, your company name is not protected. In other words, there is nothing to prevent another company from incorporating under our business name. Partnerships Similar to sole proprietorships, partnerships are extremely easy to set up and maintain, requiring no government fees or annual state paperwork. On the downside, you and your partners are each held fully responsible for all of your companys debts. This means if you or one of your partners defaults on a company loan, creditors can go after your personal bank accounts, property holdings and other assets to satisfy the entire loan. As a partnership, you are also at a disadvantage when it comes to raising funds. For example, you cannot raise capital by selling stock, and private investors may be wary of investing in your company without personal liability protection. Finally, just as with sole proprietorships, your company name is not protected. This means any new or existing business could incorporate using your company name. Corporations Corporations are the standard for many businesses in todays market. The primary reason is that incorporating shields you and the members of your company from personal liability. In other words, if your business hits hard times, creditors cannot go after your personal assets to

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make up for any company shortfalls. But protection from personal liability is not the only benefit that comes with incorporating. The corporate business structure also offers significant tax savings, greater business flexibility, company name protection and increased opportunities for raising capital. You can also choose to set up your corporation as either a C-Corp or an SCorp in order to take advantage of different tax options. One thing to keep in mind corporations do require some initial set up fees and a certain amount of regular maintenance. For example, youll have to keep up-to-date corporate records as well as file an annual report with the state. C Corporations If youre ready for the big time and want to sell shares of stock in your business, consider a C Corporation. All publicly-traded companies are C Corporations which are considered a separate legal entity from the owners (also called the shareholders or stockholders) of the business. Because of this, the shareholders are not responsible for fees, liabilities and losses associated with the business. The stock money and assets earned by the corporation belong to the corporation. Dividends are distributed to shareholders under the direction of the corporations shareholder-elected Board of Directors. Stockholders then pay taxes on the earned dividends, and the corporation also pays taxes on all profits (known as double taxation). To become incorporated, you basically fill out the appropriate documents for the state and have all shareholders vote on overall corporate management, stock shares, the name of the company, business industry and other key guidelines. As a C Corporation you will need to hold annual stockholder meetings and keep meticulous records to avoid legal and accounting problems. In addition, forming a corporation is an intricate process, so we highly recommend that you find a good attorney or consultant to
assist you.

S Corporations It is possible to avoid the double taxation of a C Corporation by forming an S Corporation. Here, the corporations income is divided among all of the shareholders who report the earnings on their individual tax returns. This is a tax-efficient way to structure your business if you expect losses in the short term because the individual shareholders can report the losses on their tax returns rather than paying the double taxation of the C Corporation. The downside is that to become an S Corporation, you must run the company according to a fiscal calendar year, have less than 35 individual stockholders who are all U.S. residents, and have only one class of stock, in addition to other guidelines. Limited Liability Companies For many new entrepreneurs, choosing a business structure comes down to liability protection, tax savings and convenience. LLCs require fewer formalities and less on-going paperwork than corporations while offering the same personal liability protection and tax flexibility. Just as with a corporation, your company name is protected, and you and the other members of your company are shielded from creditors and other company liabilities such as lawsuits. But with an LLC, you only have to keep minimal company records, and there is no limit to the number of members your LLC can maintain.

Step 5: Create Key Business Assets

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Its a well-known fact in the business world: Your company assets are only as good as your ability to protect them. This is especially true where intellectual property is concerned. Whether its your company name, logo, latest invention or best-selling product, its imperative that you take certain steps to secure your ownership rights. We will explore seven types of key assets in this step: Website Address Trademarks Copyrights Patents Provisional Applications for Patents Inventor's Logs Confidentiality Agreements

Types of Key Assets

Website Address (domain name) More than ever, businesses are turning to the web for both retail opportunities and online marketing. Key to establishing a website presence is securing a website domain name for your business. (An example of a domain name is http://www.drsaima.co.cc/ There are a number of low-cost web services that will not only register your domain name, but also set up email and websites for you, complete with e-commerce capabilities. If you have a unique name for your company or product, be sure to immediately register it. If you discover someone else has already claimed the name you want, dont be discouraged. Often entrepreneurs allow their domain name registration to expire or are willing to sell their name to you at a reasonable price. Most domain name registration services provide contact information for domain name owners or offer a way to bid on domain names that are up for sale. Trademarks A trademark is one of the most important business assets youll ever own. Its your brand name, your logo, or any other symbol that distinguishes your company or your companys goods from those of another manufacturer. By registering your trademark you go on record as the official owner of the mark, which gives you a significant leg up in court should a dispute over your right to use the mark ever arise. This comes in handy, for example, if you discover that another person or company is hurting your business reputation or causing confusion by using your mark to sell similar or cheaper-quality goods. An owner of an unregistered mark may indicate ownership of a mark with the symbol TM for a trademark, or SM for a service mark. In general, generic marks do not receive trademark protection because they are so general. On the other hand, owners of a registered mark are entitled to use the registration symbol in connection with their mark. Copyrights Its not uncommon for people to confuse copyrights with trademarks. Whereas trademarks are used to protect intellectual property such as company names, brands, logos and symbols, a copyright grants you exclusive legal rights to your creative work, which can include anything from literary or website content to musical or artistic compositions. In order to receive copyright protection for your work, your creation must be expressed in a tangible form such as

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a piece of writing or a recording. Once granted, a copyright prevents others from copying, performing or using your work without your permission. Patents If you have a bright idea, dont wait for someone else to turn it into a commercial success. You should quickly protect your invention (assuming it is novel) so you can cash in first. The best way to protect your idea is to get a patent on it. A patent is a property right granted by the Government to an inventor to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States for a limited time in exchange for public disclosure of the invention when the patent is granted. There are three kinds of patents, including: utility patents, design patents, and plant patents. Utility patents may be granted to anyone who invents a useful process, a machine, an article of manufacture, or a composition of matter. Design patents may be granted to anyone who invents a new, original, and ornamental design for an article of manufacture. Plant patents may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plants.

A common misconception is that the patent gives its owner the right to make, use, or sell the invention. The patent only gives the owner the ability to exclude others from making, using or selling the invention. In a standard scenario, patents last for twenty years. The twenty years begins on the date that an application for a non-provisional or provisional patent was first filed. In deciding to patent your invention, we always recommend consulting a patent attorney. Provisional Applications for Patents A Provisional Application is a fast and easy way to temporarily protect your invention until youre ready to commit the time and money required to submit a full patent application. Think of it as a legal placeholder. Because the application to secure patents is a lengthy and expensive process, the USPTO created a provisional patent which allows you to temporarily protect your invention. The non-provisional application establishes the filing date of your patent application and begins the examination process. A provisional application only establishes your filing date and expires automatically after one year. You may file a provisional application if you are not ready to enter your application into the regular examination process. A provisional application establishes a filing date at a lower cost for a first patent application filing in the United States. A Provisional Application makes sure no one else rushes in and claims your invention while youre busy fine-tuning your design, securing funds, or testing your ideas market potential. A provisional application allows the term "Patent Pending" to be applied to your invention which can be useful in warding off any imitators. But be careful. Provisional patents can come back to bite you later. You might find yourself limited or locked-in to what you describe in it, even though youve come up with additional improvements during your yearlong provisional period. If you go this route, we highly recommend that you at least include legitimate claims, a key part of a formal patent. Otherwise, you should contact an attorney to patent your invention, or at least help you complete the application. Inventor's Logs The United States Patent and Trademark Office award a patent to the first person who can prove theyve invented a new product. An Inventors Log Book helps you establish that you were the first to develop your idea by recording the progress of your inventing. You should

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begin using an inventors log the moment you conceive of an idea and continue to keep a detailed record of your activities as you develop your idea into reality. Creating an Inventors Log In order to prove that you are the inventor of a specific invention, you should document and memorialize all information in an inventors log. U.S. Patent requires that you are the inventor of any invention claimed in a patent application and keeping an inventors log may prove invaluable should you ever need to substantiate inventorship. A patent log also can be valuable if you need to prove that you were the first to invent a particular invention. The inventors log is literally a diary. The first entry should be posted when you conceive of your idea. This first entry should describe the invention, how you came upon it, the place, the circumstances, and any preliminary conceptual details. As you develop your invention, include in your inventors log all engineering and testing data, drawings, research data, as well as any information related to similar products or patents you discover. Its also important to record the names of anybody to whom you disclose your idea and the details relating to any such disclosures or meetings. Your log entries should be kept in chronological order with entries posted one after the other on consecutively numbered pages, written in pen, and dated. Entries can take the form of strictly text, or could be drawings, or both. If you finish an entry partway down a page, do not start the next entry on the next page, rather post entries one right after the other in contiguous order. It is also beneficial to have an unbiased witness sign and date an entry if such a witness is conveniently available. Its important that you select a logbook with pages that cannot be added or subtracted without it being evident. Should anyone else participate in the development of the invention, its very important that you detail the contribution and clarify whether or not this participation resulted in an activity of inventorship or not. In order for a patent to be valid, all inventors must be named on the application. Keep your notebook or notebooks in a secure location, and regularly photocopy or scan entries to keep a complete second copy of the log should the original get damaged or lost. Keep the copy in a separate location. Confidentiality Agreements Anytime you are considering exposing some of your companys secrets, whether it is a customer list, business process or financial data that you want to keep out of the hands of the competition, it is critical that you safeguard this information. With a Confidentiality Agreement, also called a Non-Disclosure Agreement or NDA, you can do just that. Typically, there are two types of NDAs: One-Way and Mutual. When you hire a new employee or offer information to a potential business partner, a one-way NDA provides the protection you need in case the potential employee or business partner decides not to come onboard or engage you in business. When information is being passed both ways, each party should sign a mutual NDA.

Step 6: Find and Funding

This is a critical step. You've got to find funding for your business but ensure that it's the right kind of funding. Yes, there's the adage, "beggars can't be choosers," but the fact is, you must be

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selective and smart when seeking money for your startup or it could turn your dream business into a nightmare. To identify which form of financing is just right for you, think about your long-term personal and business goals and the type of business you're planning to launch. Money comes in many forms, from tapping credit cards and taking equity out of your home to government grants and high net worth "angel" financing. We dedicate a whole chapter to this subject in Startup Nation: Open for Business to ensure that you understand what we call the "Goldilocks Approach, a way for you to find the funding that's the right amount at the right time with only the right "strings attached. We will tackle seven ways to fund your business in this step: 1. Bootstrapping 2. Debt Financing 3. Grants 4. Friends and Family 5. Angel Investors 6. Factoring 7. Venture Capitalists

Ways to Fund your Business

Bootstrapping Look no further than yourself to find the funding you need - perhaps using your savings, your initial revenues, credit cards, equity pulled from your home, etc. Upside You maintain complete financial and operational control over your business. No equity-holders to pay off if the company hits it big. If you are able to use savings, you won't have monthly payments to add to your business expenses. Downside If the business fails, you may face a lot of personal debt. Depending on the source of your personal capital, you may end up paying a high interest rate (if you use a credit card), or you may miss out on earning interest (if you use savings). Typically, this form of funding limits the amount of money you have for strategic purposes and the rate of growth of your business can be significantly slowed down as it starves for cash. Debt Financing Debt financing requires that you qualify for a traditional bank loan (not common for raw startups), or that you find a bank that can provide you a loan with a SBA guaranty. Before you land a loan, you need to understand how to maximize your odds for success in landing a loan. The lending process is inherently a tough one, but it's also a system that has been the catalyst of success for many small businesses. In fact, some entrepreneurs would say that their relationship with their banker has been the pivotal ingredient to growth. Upside You don't have to give up equity, proceeds or control in order to get funded. 35

You build a powerful relationship with your banker that can open up additional forms of debt financing you may need down the road.

Downside Bank loans typically go to existing small businesses with 2 years of history and credit. You must pay interest, and if you don't keep up with your loan payments, you could find yourself in a tough spot with the bank. You may be required to provide personal collateral, such as your home, to obtain the loan. Grants Grants are special programs designed to fuel the innovative fires of small businesses, and typically target specific groups or types of businesses, such as technology businesses, veteranowned businesses, women-owned businesses and minority-owned businesses. Upside You don't pay interest - grants are essentially "free money." Potential investors (should you be seeking additional funding) love the "leverage" that grants provide. Downside The competition is stiff for grants, and grant writing (applying for the grants) is an art form, so you may want to find a grant writer to help you. How you can use grant funds is strictly defined by the organization that provides them. Friends and Family Just like it sounds, raise money from people you know well, either in exchange for equity or as a loan to be repaid. Upside This option has the fewest contractual strings attached, although you should still draw up a contract to protect your friend's or family member's investment. Funds are typically available quickly. Downside This is usually a limited, one-time source of funding. You are spending your friend's or family member's money - so does so wisely, and is prepared to deal with the consequences if your business does not succeed. Angel Investors Angel investors are individuals who invest in companies at an early stage in exchange for equity and the chance to help guide the company. In contrast, venture capitalists invest as a profession and generally on behalf of other investors. Generally one is ready to approach angels when they have exhausted their friends and family but are not yet ready to approach venture capitalists for money. Approach angels if you are looking for large amounts ($25K to $1M) of "smart money" - the people who provide this form of funding have already "made it big" in their own careers and can help guide you to do the same. Upside

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Angels invest more than money - they provide mentoring and contacts. Angels are patient about their investment. There are no monthly payments with this type of financing - angels make their money when you achieve your business' exit strategy.

Downside Angels are difficult to find. Angels deserve regular and thorough reporting, which can take up valuable time. You are giving up equity in your company. Factoring Factoring is where the financial institution (factor) advances the entrepreneur money against proceeds from the entrepreneur's outstanding accounts receivables. Factoring firms generally are paid a percentage of the invoice's value. Upside Provides funds quickly, when they might not otherwise be available. Helps companies with an unsteady and unbalanced cash flow. Downside Factoring requires increased accounting oversight and administration. A substantial "cost of money" is involved in factoring. A hefty portion of your receivables will go the way of the factoring firm. Your customers are actually paying a factoring company rather than you. Venture Capitalists Venture capitalists are individuals or companies with large amounts of capital to invest and expect higher returns. Use Venture Capitalists if you already have a great track record in your field or as an entrepreneur, and if you have a business concept that will require a lot of money ($250K to $10s of millions) and will have a rapid growth curve. Upside VCs invest smarts and networking, in addition to money. VCs typically have more money available if you need it to grow down the road. Downside VCs typically only invest in established companies. You must be willing to give up significant control over major decisions for your company. You must have a "fast growth" company. You must have an aggressive exit strategy to sell your business or do an IPO within 5-7 years.

Step 7: Organize Logistics

Logistics are not the most exciting aspect of starting up a business, but having your logistics in order can mean the difference between success and failure. Having your books in order, your contracts buttoned up, your money safely managed and your downside covered are each critical to your personal and business future. Accountants, lawyers, bankers, insurance agentsthe 37

big fourare some of the people that can help you get organized and put you on a path to starting up smart. These service providers will be instrumental as you grow, too. In addition to the big four, there are other service providers that may be vital to your business success. For example, you might need a website developer or a realtor it just depends on your business model and plan. Before you start your search for these service providers, its important to know what you want to accomplish with each of them, and to set a well-defined budget to meet your goals. Once youve hired these professionals, you should work with them to establish clear milestones to reach, a strict timeline for reaching them and a plan for communicating with each other along the way. Regardless of who you retain, they should be well-versed in assisting entrepreneurs, and they should understand the nature of your industry. Most importantly, you should be able to trust them. Therefore, the best way to find these service providers is through referrals from your friends and business associates. In this step, we will focus on nine areas of logistics: 1. Accounting 2. Legal Services 3. Insurance 4. Banking 5. Information Technology 6. Website Development 7. Merchant Banking/e-Commerce 8. Travel 9. Real Estate Accounting Accountants bring structure and order to your business and help you plan for current and future needs. They can help you choose a structure for your business, file the paperwork to do so, and advise you on tax-related issues and account management. Accountants can also help you set up financial timelines with potential revenue and expenses so that you can accurately project your company's cash flow. Once your business is formed, accountants can assist you with ongoing bookkeeping, payroll and financial analysis and management. In fact, many businesses bring in an outside accountant once a week to assist with payroll and bookkeeping. Like attorneys, accountants generally charge by the hour or on a project basis, depending on the work. The amount charged can vary by geographic location and experience level of the accountant. Questions to ask a prospective accountant: Do you specialize in businesses like mine? Are you qualified to prepare income tax returns as well as keep my books? Can you provide me with references from clients similar to me? Can you explain your fee structure? Are you a CPA (certified public accountant)? Youll also need an accounting software package like Microsoft Office Accounting or Quickbooks to track all of the financial transactions in your business on a daily basis. Maintaining your financials in an accounting program helps you stay organized throughout the

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year, and makes things much easier come tax time when your accountant needs to decipher your books and prepare your tax returns. Legal Services Attorneys help you strategize and formalize key relationships with vendors, product sources, financiers and employees. They can also help you form your company, draft contracts and nondisclosure agreements with vendors or other parties, and comply with a sea of regulations ranging from zoning and securities to environmental and Sarbanes-Oxley. If you are an inventor, a patent attorney is particularly important for you, as they can help you conduct patent searches and file your patent paperwork. You need to select an attorney who is an expert in the area of law with which you need help. The best way to find an attorney is to ask your friends, accountant, banker, business associates or vendors for recommendations. You can also check with your state or local bar association, or search a directory like the ones at Lawyers.com, but these sources may not have direct experience with the listed attorneys. Therefore, it is important to interview prospective attorneys carefully yourself. Attorneys generally charge an hourly rate for research, writing and negotiation. In addition, they typically bill for things like filing fees, telephone calls, copies, and work done by other professionals within the firm. Fees depend on the experience of the attorney, the size and geographic location of the law firm, the matter being worked on and the clients financial situation. Some cases may be worked out on a project fee basis. Questions to ask a prospective attorney: Have you handled matters like mine, and can you give me examples? What is your track record of working with companies of my size, stage and industry? What will the timeline be for completion of this work? How will you keep me informed of your progress? What assurances can you give me that I will be a priority client? What is a ballpark figure for the total bill, including fees and expenses? Will you be working on my file, or will an associate work on the file to cut costs? (i.e. can junior attorneys or paralegals in your office handle some of the administrative work at a lower rate?) Do you have sample legal forms and agreements that I can use for my business? Would you be willing to work out a more creative fee structure based upon the success of my business, or perhaps accept fee for service?

Insurance Health insurance is a particularly hot topic these days, and it probably comes as no surprise to hear that costs are increasing exponentially each year. Health insurance costs are, in fact, one of the number one concerns of most small business owners. An economical source to consider for health insurance is your local chamber of commerce. Oftentimes, chambers group their members companies together to obtain deep discounts on health insurance, discounts you might not otherwise have access to on your own. You can also obtain insurance through an agent. Insurance agents make their money through commissions on the products they sell, so there should not be any upfront cost to you. You should seek out several agents, obtain quotes and go with your gut. Insurance agents can counsel you as to what kinds of insurance you will need and the type of coverage available to you, such as health insurance, property insurance, general liability insurance, workers compensation and malpractice insurance.

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Questions to ask a prospective insurance agent: Are you a licensed agent? How many companies do you currently represent? Are you independent or do you work for an insurance brokerage/agency? How long has your agency been in business and how long have you been with the agency? If you are independent, how many insurance carriers do you work with? What kind of insurance do you sell? Have you worked with businesses like mine before? What types of value-added services do you provide - employee benefits, retirement planning, wealth management, human resources outsourcing? Do you offer 24/7 service? How do you perceive your role in handling claims? How often will you review my policies to see if better prices or coverage are available? Banking Even if you dont need or qualify for a loan yet, banks do provide a suite of other products fundamental to your business that is mostly (but not completely) financial in nature. These can include business checking accounts, business credit cards and perhaps even a credit reference from your banker. Banks also have great contacts in the community and can be an excellent source of business referrals. It's vital for you to separate your business and personal finances early on, to simplify bookkeeping and tax returns. Open a business checking account at your local bank to start things off on the right foot. You should also establish a relationship with your banker early on, so you can learn from him how best to position yourself for a loan down the road (if you will need one). Your banker can also keep you apprised of what other financial products might be appropriate for your particular business such as merchant banking services, payroll services, treasury management services and much more. Information Technology Information technology (IT) encompasses a lot of things, including purchasing computers, setting up computer networks, security measures, email systems, software, backing up business data, high-speed internet access, and phone systems. The extent of the IT services you'll need depends on your business model, and you may or may not need or want to hire an IT professional to assist you. If you plan to go it alone, tap into resources like the Small Business Technology Institute or the Microsoft Small Business Center for articles and online training on a variety of IT topics. If you decide to hire an IT consultant to help set up and support your computer system on a one-time or ongoing basis, you should ask for referrals from business associates, your trade association or the retailer from which you purchase your computer equipment. Questions to ask a prospective IT consultant: Do you specialize in my industry and in assisting small businesses? What will your availability be if I have an urgent problem? Do you charge a retainer or by the hour, and do you charge for any other expenses? What services do you offer - website hosting, ongoing consulting and troubleshooting? Website Development 40

Your website may be the backbone of your entire company, especially if you are an online retailer. And there are a wide variety of options for developing your website, so choose carefully. For example, there are online services, like Microsoft Office Live (a Startup Nation sponsor) and Template Monster, that will provide you with the tools to create your own site using templates, and they'll even set up your web hosting for you. If you need a customized and complex site, you may decide to hire a website designer and programmer. Designers create the look and feel of the site, and design any artwork, while programmers are the ones who build the back-end of your site and make it actually function. Its also possible to find a professional who is both a designer and a programmer, if you prefer to go that route. Regardless of which path you take, you must first decide what you want in a website. Here are a few things to consider 1. What is the primary purpose of the site? Do you want to sell products (e-commerce)? Do you need to provide information? Will your site contain multimedia elements like music and video? All of the above? 2. Will you host the site, or do you need someone to host it? 3. How often will the site need to update? 4. Do you want to be able to update the site yourself or pay someone else to update it? There are content management systems available that let non-technical staff update images, text, and pages on a website. 5. Who will develop the content for the site? And finally, if you're operating on a tight budget that really doesn't allow for hiring a website development firm, you can ask if an individual developer is willing to do the work on a freelance basis. Questions to ask a prospective website developer 1. Do you have experience in designing and programming a site similar to mine? 2. Do you design and program yourself, or do you outsource some of the work? 3. What is the timeline for designing and programming my site? 4. How many designs will you "mock-up" for me to review? 5. Do you charge by the hour or by the project? 6. How many corrections am I allowed to make before you charge me for additional work? 7. Will you also host the site and secure a domain name? 8. Do you have experience building search-engine friendly websites, and can you provide examples of sites you've designed that rank well in natural search engine results? 9. Can you point me toward a sample portfolio of websites you have designed? 10. Can you provide me with your website address so that I can take a look? (You can tell a lot by looking at a web design company's site. Would you hire a plumber whose own kitchen sinks is leaking? The same holds true for website developers) Merchant Banking If you are planning to accept credit cards as a form of payment, you must have a merchant banking account. Merchant banking accounts can be tough to come by for startup businesses. Factors that merchant banks take into consideration 1. Whether you already have an established business. 2. The type of product(s) you are offering and the amount of sales volume you expect. 3. Your credit risk, including personal credit history. 4. Whether you have ever applied for bankruptcy.

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5. Whether you appear on the Terminated Merchant File List or MATCH file. 6. Whether you have a website and clearly state your return policy. 7. Whether you have ever been convicted of credit card fraud or a related felony. To find a merchant banking service, the best place to start is your current bank. If you qualify for a merchant banking account, you will need to invest in some hardware and software to process transactions. There will also be fees associated with your application, each transaction, each statement and customer support. Travel If youre starting a business that will have you or your staff traveling frequently to trade shows and client meetings, its a good idea to leverage the Internet for discounted travel options. Additionally, setting up frequent traveler reward accounts with your preferred airline, hotel and car Rental Company will help you accrue points towards free tickets, hotel stays, and maybe even upgrades and amenities. Going the traditional route of using a travel agent is certainly still an option, and could be the right one if you frequently have complex itineraries and no time to shop for good prices yourself. Searching websites that aggregate discounted prices from a variety of airlines, hotels and car rental companies is also a simple way to get a broad sampling of your options. But some airlines and hotels offer better deals directly at their own websites, and may not even participate in the aggregated travel sites, so be sure to shop around. Real Estate If you are opening a brick-and-mortar store or an office, you will, of course, need some real estate. You can choose to lease a property or buy one, but in either case, its best to begin with the Downtown Development Authority or the Citys Planning Commission in the community in which you want to locate. These entities may be able to help you identify the perfect location for your business, perhaps even one that carries some attractive tax incentives. Otherwise, you may try working with a commercial real estate agent or developer to identify the right location. A real estate agent or broker will take a commission on the sale price or lease, just as they do in personal real estate transactions. To find a commercial real estate agent near you, ask for references from other small business owners in your community, or peruse the yellow pages. Questions to ask a prospective realtor: Do you have many properties listed in my desired region? How often will you contact me about available listings? Do you have a website where I can view properties online? Do you represent both the buyer and the seller? What commission level do you charge?

Step 8: Find Great People

In a small business, the impact of a single team member can be enormous. Every person you add to your team must be a star. Is that possible? Absolutely First, make sure you define what a star is within each role of your company. Then you can go find them. We dedicate an entire chapter to the Power of People in our book Startup Nation: Open for Business to highlight the critical importance of building a superstar team. Well focus on four action items in this step 42

Understanding the Power of People Find the stars to bring onto your team Keep your stars Importance of a mentor

The Power of People The single most important factor in the success of a company is its people. It all starts with you as the entrepreneur and flows from there to everyone on your team. Great people can take a mediocre idea and turn it into success. But no matter how great the idea is, if you have mediocre people on the team it will not succeed. We have asked many angel investors and venture capitalists what the most important factor is in determining whether they will invest in a company. Its the quality of the people. Successful entrepreneurs say the same thing. Its star people that have made their businesses shine. In tapping into the power of people, you must understand that it is the personal relationships that you have or can cultivate that will make the difference in your ability to attract stars to your team. If you are proactive about building those relationships, you will have a much greater opportunity for success. The challenge is that its not easy to invest your personal energy and time. It seems like a slow process. The reality is that you are at a great advantage as a small business. You can utilize your personality and uniqueness in a way that larger businesses cannot. Take advantage of that. Finding Your Superstars You must be proactive if you are going to attract superstars to your team. A college football coach goes after coveted high school seniors by sitting at the kitchen table with the recruit and mom and dad. You can hire people by placing ads but you run the risk of attracting walk-ons. Superstars need to be pursued. Here is a proactive strategy to increase your odds of adding stars to your team: Create a superstar list. Write down the names of 12 people that you would like to work with. Dont limit the list to people who could fit a current need on your team. Just choose stars, no matter what their specific gifts are. Now heres the key step CALL THEM!! Tell each of the 12 that you have selected them to be on this elite superstar list and the reasons why. They will be appropriately flattered and motivated to want to help you build your team of stars. They may personally be in a season of their lives where they will join you. But even they are not; they will be able to point you to other stars to pursue. Stars know how to identify other stars. Bonus Strategy If you already have a team that you are building upon, ask each of your team members to create their own superstar list of 12. Encourage them to proactively reach out to those stars even when you are not in an official hiring mode. Developing relationships in advance of the moment of need is extremely productive. Create a budget of both time and dollars so that you and your employees can cultivate superstar relationships. Remember, superstars need to be pursued. Look for three types of people for your superstar list People with potential People with proven skills People who are what we call power brokers"

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Hiring people with potential allows for growth into a position and keeps the employee motivated over a longer period of time (this works even at executive levels in your company). Its also less expensive. Hiring people with proven skills will allow you to quickly fill in areas where your team is weak. Power brokers have both skills and can wield influence in your community or industry. Posting on Job Boards If you want an influx of resumes to make your selections from you can consider posting your open position on internet job boards. Your company will get worldwide or regional exposure depending on what sites you choose. This can be helpful for you to gain an understanding of the average candidate that is currently actively hunting for a new job. You can use this information to compare to the stars that you are cultivating through your proactive strategy. Its even possible that you will find a diamond in the rough. But realize that you will need to budget a good deal of time and energy to sift through all of the responses and you have an obligation to respond to every person who submits a resume. Keep Your Superstars Remember the great advantage that small businesses have. Youre small! You can be more personalized. Create an environment that is unique, flexible and customized. You can! Bigger companies cant.

Three Strategies to Retain your Stars

Customized perks Ask your team what they want. Instead of traditional cash-oriented perks, some may prefer a gym membership, others a flexible work schedule. Customization is a great way to compete against bigger companies who can offer your employees bigger salaries and better benefits. Recognize the whole team People are attracted to small companies because they like being a part of an intimate team. Be careful about singling out only a few people on a regular or long-term basis. This can be more hurtful than beneficial to a small team's chemistry. Communicate more than you think is necessary Special events like monthly barbecues and field trips to ball games are terrific but make sure you pay special attention to the little day-to-day communication. Its so much better to over communicate than under communicate, especially with a small team.

On Your Own? Get a Mentor If you are a sole proprietor it is essential that you recruit a mentor to give advice, offer moral support, and break up the routine. A mentor is someone who can offer you wisdom, creativity, connections, accountability, credibility, and fresh thinking about your business. Meet with your mentor at least once a quarter to discuss your business and make certain that your mentor is willing to challenge you. If your mentor has experience in your industry she/he can certainly provide you with specific in-the-trenches insight, but it is not necessary that a mentor have a similar background to you.

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In fact, it is often more valuable if a mentor has a different set of skills and background to bring that fresh perspective. Expanded Mentor Strategy As you grow your business, step up from a single individual to a multi-member advisory board. This will give you the opportunity to broaden even further the backgrounds and demographics of your advisors. Mentors and people you ask to be on your board will be honored to play that role and enjoy networking with each other too.

Step 9: Establish a Brand

One of the most important assets you can develop for your business is a powerful brand. Brands are not just logos or tag lines. Brands are the culmination of who you are, how youre different from your competition, and why a buyer should do business with you. Whether youre an established company or small start-up, a brand has tremendous impact. A brand instills confidence, creates loyalty, and many times can command a premium price. But most of all a great brand reduces a buyers perception of risk and makes the purchase choice easy. Developing a brand is much more than just deciding on a name or picking some colors. A brand is the sum of all you do. Its derived from all your touch points with your customers and prospects. Developing a brand requires having a plan that consistently communicates what your company is and does, along with your distinct attributes, image, and personality. In Startup Nation: Open for Business, we introduce the concept of a marching branda consistent, immediately recognizable mental imprint that delivers a clear and compelling message. Branding consultant and author Karen Post, compares this notion to a brain tattooput there by choice, but which certainly can be removed at any time. That, by the way, is the name of her latest book, Brain Tattoos, Creating Unique Brands that Stick to your Customers Minds. Her book delves into many creative ways companies and people can build and leverage their brand. In this step we look at some of Karen Post's recommendations and action items for establishing a super brand: 1. Draft your brand DNA or essence 2. Define and relate to your target audience 3. Choose a brand name 4. Create a logo 5. Make a list of all your other touch points 6. Create a demand for your brand

Recommendations and action items

Draft your Brand DNA or EssencePurpose, Points of Difference, Personality, Promise This is the foundation for everything you do and should guide your business, marketing, and communication decisions. These are your draft brand drivers. As you move through the following process, you may tweak those drivers or add something completely new. But at the end of the day, you should clearly define: Your brand purpose: a logical snapshot of what you provide the market.

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Your brand points of difference: things that are truly distinct that your competitors cant copy. While great customer service is important, its not a point of difference; many of your competitors will claim the same thing. A point of difference can include a visual symbol, story, color scheme, proprietary process or product, historic milestone, physical characteristic, or combination of several of these. Your brand personality: a collection of human-like traits and adjectives that best describe your brand. Your brand promise: the emotional side of your purpose. If you were a tailor, your purpose would be to make and alter clothes and your promise would be to give people confidence when their clothing fits just right.

Define and Relate to your Target Audience This means understanding your audiences age, sex, ethnicity, income, education level and locale. What motivates them to buy? How do they think? What are their hot buttons? Set up customer profiles, even if its just in a simple spreadsheet. If you've done your homework in Step 3 and created your business plan, chances are you already have your target audience defined. Choose a Brand Name While your name is certainly not everything, it is an important piece to building a lasting brand. Great brand names: Are emotional Stick on the brain Have personalities Have depth to tell stories and communicate with As soon as you pick a name for your company, secure a domain name that is consistent with your brand name. You should also research trademark availability. Should a name be literal and descriptive or obscure and emotional? There are strong arguments on both sides. Leaning toward the obscure and emotional can lead to very distinctive brands, which the literal and descriptive can speed up the process of communicating your message to your audience. Each case is unique and sometimes brand names get passed down and changing them would take an act of Congress. Be original Generic names like Computer Solutions, Performance Printing, or Innovative Technologies will just make you spend more and work harder at building a brand. They dont have legs and will likely drown in the sea of sameness. Being descriptive - as opposed to being generic - is not a bad thing for names. Given your limited budget, it can actually be a great way to go. Try to be original so your name stands out, so it means something, so you can own it, and so it will be much harder to copy. Avoid names that are hard to spell or pronounce Ask yourself, how will the market receive the name? With supporting context, will the market get it? Will it jive with your strategic positioning of the brand? Are there negative connotations or associations with the name? Is there a magic, fool-proof method for testing names?

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No. In fact, sometimes too much analysis just delays decisions and defeats the whole mission of naming your brand before the next decade. I recommend that you test a little, listen a little to people you respect, listen to your gut feelings, and proceed with a choice. While the brand name is very important, a brand cannot survive on name alone. The brand name and how the brand is executed are equally vital for a successful and sustained brand life. A great brand name can serve as the anchor to your cause, a symbol to your story, a point of difference in your marketplace, a memory trigger, or just one important part of your branding arsenal. Create a Logo A logo is the visual image of your company that will be used in a variety of applications. When you are considering a design, think simple. Some of the best logos are one color and for a startup, this can save you printing expenses. Test how it photo copies and works in a digital environment. Sample other venues that you may grow into like an outdoor sign, moving vehicle, or promotional items like t-shirts and golf hats. Make a List of all your Other Touch Points Every time you touch a customer or prospect, you should feel your brand breathing. This can include your environment, other promotional activities, and even how your phone is answered. Remember the brand is the sum of you; infuse as many contact areas as possible with your brand essence or DNA. Create a Demand for your Brand Your products performance, your customer service, follow-through, and your communication add up to a brand experience. Great experiences turn your brand into a magnet for new and repeat business. Buyers will seek you out, tell their friends, and remain loyal. Your brand can make the buyers choice easy. That is the power of the brand.

Step 10: Market & Sell

This last step in our startup process is all about getting the word out about your business so customers come through your door (or perhaps to your homepage). First and foremost, youll need to study up on your target audience to develop a marketing message that will resonate with them. Once youve got a grasp of how to best express the special sauce of what you offer, make sure you maintain that message consistently throughout your marketing efforts. It should be reinforced repeatedly to build on your brand identity and to give people a clear reason to be interested in your business. To get you up the curve on marketing, well first give you an approach to defining your target market. That will get you prepared for setting a strategy to move forward. Well provide an overview of the types of materials and a menu of marketing tactics to choose from its up to you to pick the methods that apply best to your opportunity. We touch on three essential marketing items in this step: 1. Research & Strategy 2. Marketing Materials 3. Marketing Methods Doing Market Research & Setting a Marketing Strategy

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Just as you have to do intensive research for your business plan, you should also do a healthy amount of fact-finding in order to put together a well-oiled marketing strategy. If you do, your marketing effort will be much more methodical and effective. To get started on your marketing strategy, answer the following questions: Who is your typical buyer?

Whats a description of your target market? For example: mothers, age 25-45, urban location, $90,000 household income, college-educated.

How do your potential customers habits and behavior play into their purchasing decisions?

What are their hot buttons? o Specific pain points, such as Time delay Shipping cost Credit card security concerns o Urgent offers, such as This offer ends tomorrow at midnight o Getting a great deal o Being first to get it (people referred to as early adopters) o Being trendy (must have the latest and hottest) o Hand-holding and personal attention (relationships rule their pocket book

How do you know they want what you offer?

What related purchases do they make that give you confidence theyd be interested in what you offer?

How much are they willing to pay?

Youve got to figure out the all-important matter of pricing. What price tag is best for what you offer? It basically comes down to a combination of what you need to make in order to achieve workable profit margins, and what prices your customers are willing to bear. Oftentimes, its a challenge to get these two numbers to match up. So, ask yourself: o Whats the right price, based on your costs and your estimate of the maximum amount your customers are willing to pay? o What form of payment will customers want to use? o For wholesalers, what terms of payment will they be willing to accept?

Where (and how) will your customers want to buy your product or service?

In-person or online? Via catalog or phone? From a trusted retail store?

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How many people are in the overall market youre going after? And how many of them are reasonably strong candidates to be customers?

In our book, Startup Nation: Open for Business, (p.137), we talk about the common mistake of using Chinese math. Chinese math works something like this: since I make a product for the Chinese people, and since there are a billion Chinese people living in China, the total market for my product is one billion people. The flaw in this logic is that its extremely difficult to reach most of those people with a marketing message. How, practically, are you going to get through the rural rice paddies to let an average Chinese person know that you want to sell them something? And where are those people going to get the money to buy it in the first place?! Instead of using Chinese math, its important to segment the total market down into sectors that have the highest likelihood of purchasing what you offer. And while the number might not start with a b like billion, there still could be millions of very appealing people who are viable potential customers. Its crucial that you dont buy into your own hype as we like to warn. Get real with the answers to questions like this.

Why would your potential customers buy from you instead of your competition?

This assumes your target market already demonstrates a desire to use or purchase something like what you offer. Is this so? If not, educating your customer will be critically important in your marketing. And that can be very expensive and timeconsuming. You must know what your value proposition is a crystal clear statement that anyone could understand but, most importantly, your targeted customer would quickly get about why they should be interested in what you offer.

What media has the greatest impact with your target market? Your choices are as varied today as theyve ever been. Theres everything from billboards at the roadside to animated online banners, from sandwich board-toting hucksters to direct mail through the mail slot, from online radio to cable TV, and from magazines to local classified ads. With this many options, or noise, as we like to call it, coming at your prospective customer, its more and more difficult to be sure your offering will stand out and get the attention you want it to. Just be sure you know to what theyre tuned in to so you can be confident your marketing efforts will get noticed. With all of these questions answered, its time to start weaving a marketing strategy together. The Right Marketing Materials: Once you have your target audience well defined, youre in a much better position to know what marketing materials would be appealing and useful to your audience. There are basic printed materials you should consider - things like business cards, letterhead and brochures. These kinds of materials are essential for your communication, networking and sales activities. One way to make the most of the dollars you spend is to create materials that have information that will stay true and accurate for the longest possible period of time. Things change often in a young business, so when possible use evergreen, long-lasting information. Include inserts with the latest, greatest info that you print on your own. Another key to developing good marketing materials without breaking the bank is to identify an affordable graphic designer and

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printer that will work with you. A local source for this can be a great help. Online sources are completely viable as well in this day and age of broadband internet access. Marketing a Menu of Methods:

There are various types of marketing for you to consider. Below youll find an overview of:
1. 2. 3. 4. 5. Grassroots Marketing Public Relations Affiliate Marketing Online Marketing Traditional Advertising

Grassroots Marketing: This is certainly the most affordable type of marketing. It consists of using resources you already have to spread the word about your product or service.

Distribute your marketing materials (business cards, brochures, flyers) at local businesses, schools, churches and community centers. Give great customer service, and then ask customers to spread the word about your company and/or to write testimonials about their positive experience with your company. Participate in local/community events. Write an article and pitch it to local papers or niche publications. Word-of-mouth tell friends, family and acquaintances and ask them to tell 5 people. Talk about your business every chance you get. Give out free samples of your product.

We give one form of grassroots marketing special attention networking. Networking is a great, low cost way to connect with potential customers and strategic partners and spread the news about your business. Chambers of commerce is great venues for thisthey provide an ecosystem of members who are all looking for business, as well as sources of products and services. Joining a chamber is extremely important to expanding your network, while at the same time, as a member you may be entitled to great discounts on services you might need, such as office supplies, telecommunications, health insurance, etc. Public Relations: Watch TV? Do much reading? Listen to talk radio? The news that you experience comes from a combination of reporters uncovering their own story themes and pitches sent to reporters by outside sources. As a new entrepreneur with a great business fresh on the scene, you may have a highly appealing story that reporters are interested in learning and writing about. And if they do write about your business, it can be a homerun opportunity for you. We often refer to the power of PR, a phenomenal way to generate awareness about what youre up to--virtually for free--that will touch potentially thousands or millions of people. Many entrepreneurs say their PR efforts have benefited them in ways they could never have afforded to pay for. Doesnt that sound tempting? The question for we should be whether you choose to do your PR in-house or, instead, use a professional like Rembrandt Communications, the firm Startup Nation uses. There are pros and cons to both strategies. As for doing it inhouse:

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Pros of in-house PR:

Your passion is contagious and gets the reporters attention You control the message more closely

Cons of in-house PR:

Youre an amateur and your pitch to reporters may seem that way You dont have the preexisting media contacts that a professional has

Affiliate Marketing: Affiliate marketing involves hooking up with other businesses or organizations that share a similar target audience to yours. With affiliate marketing, you work out a mutually beneficial relationship through which you swap advertising or share revenues with the other organization, and reach more people with your marketing message. Online Marketing: These days a website is essential. And depending upon your niche and your objectives, it can be a major part of your marketing initiatives. Creating a website can be made fairly simple by working with a company that specializes in helping small businesses create their web presence. But how about getting the word out about your site, and getting visitors to come back again and again? It's important to fill your website with content that's effective. Its what you say and how you say it that makes all the difference online. The content (words) on your site must be crisp and intelligent. What you say should grab a visitors attention, establish credibility, pique their interest and motivate them to action. There are a number of ways to promote your business online, heres just a sample of the most popular methods:

Online display advertising the granddaddy of online advertising, involving the purchase of display space on a popular website. Everyone has seen banner ads at the top of websites despite reports of their demise, display ads are still popular for their reach and for the branding effectiveness of graphical ads. Search engine marketing this catch-all has two primary marketing tools under its umbrella; search engine advertising and search engine optimization. Both involve driving traffic from the hundreds of millions of eyeballs that scan search results on Google, Yahoo, MSN and other search engines, but the approach is drastically different be sure you understand the distinctions. Email marketing along with online display ads, email marketing got a bad rap, mostly thanks to spammers clogging your inbox with offers to refinance your mortgage. But with new rules and regulations, and much stricter controls on spam, getting your message out through email is enjoying a revival. Email can be an outstanding customer retention tool, so youll want it to be part of your online marketing mix.

Traditional Advertising: Traditional paid advertising includes the things so many of us are already familiar with (and encounter so often in everyday life). Think of things like billboards, magazine and newspaper ads, and broadcast spots such as those on TV and radio, and even direct mail pieces that seem to clog your mailbox each day. 51

In the previous section we discussed online display advertising, which is often paid for on a cost-per-thousand impressions (CPM) basis. In other words, the people selling you the advertising space price their opportunity based on the specific reach of that advertising. The same pricing model applies to traditional advertising methods, where the reach of the advertising medium whether its the size of a subscription list, listenership, or viewership will determine the rate youll pay to reach that audience. Advertising can do the following:

Attract new customers, prospects and leads Encourage existing customers to spend more on your product or service Build credibility, establish and maintain your brand or unique business identity, and enhance your reputation Inform or remind customers and prospects of the benefits your business has to offer Promote your business to customers, investors or others and slowly build sales

Should your business warrant advertising (and your pocketbook allow for it), its important to create an advertising plan and budget in advance. Points to consider: Who is in your target market and what mediums are grabbing their attention? When obtaining rate card information, be sure to understand how many of your ad impressions are reaching your target audience vs. those who are not in your target audience. And ALWAYS negotiate published rates. Frequency! Frequency! Frequency! Is the name of the game. Thats why its important to create a comprehensive six-month or year-long plan before you even take out your first ad, so you know you can afford to advertise on a frequent basis. Signing up for a frequency rate will allow you to spend less per ad, if you do this from the beginning. If you are advertising in print publications, always ask your sales rep for the best positioning. A right-hand page, for example, may get many more viewings than a lefthand page. Create advertisements that generate a response you can measure. Examples include coupons which are redeemed in stores or include a specific web address that customers visit for redemption. Make sure your advertisements stay true to your brand and are consistent with all other marketing mediums.

Investing in Pharmaceuticals Business

There are so many business sectors in Bangladesh among them I just listed down and describing the few top business sectors. Besides pharmaceuticals business these sectors are not that much stable for investing money as a newly investor that is why we choose pharmaceuticals. Moreover pharmaceuticals business is much stable in Bangladesh perspective and it has less amount of risk beside other business sectors.

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1. Top Business Sectors of Bangladesh: There are several profitable sectors in Bangladesh where one can invest in. The main advantage of investing in Bangladesh is the cheap labor force and the low manufacturing cost. Here are some potential investing sectors of Bangladesh: A: 1 Textile: The textile industry of Bangladesh is well reputed all over the world. Bangladesh is the largest exporter of readymade garment and knitwear to the USA and a number of European countries. In all, Bangladesh is the second largest readymade garment and knitwear exporting country of the world. There are several Export Processing Zones (EPZ) in the country. The garment products manufactured in these zones are entirely dedicated for exporting. Foreign Direct Investment in the textile sector is extremely encouraged by the Government. The leading companies of this sector are KDS Group, Pride Group, Noman Group and Beximco. B: 1 Leather and Leather Products: Bangladesh has a large leather industry. These industries make leather based products, such as shoes, belts, bags, and jackets. These products are sold both in the domestic and foreign markets. Leather Footwear is the fastest growing segment of the leather industry. Bangladesh meets the demand for about 10% of the worlds total leather market. The main benefit of the leather industry of Bangladesh is the ample supply of raw materials. C: 1 Frozen Food: The frozen food sector of Bangladesh is the second largest export of the country. There are numerous hatcheries by the sea-shores of the country. Shrimp farming and processing, and fish processing are rapidly growing industries in Bangladesh. Market leader of this industry is Aftab Group. D: 1 Jute and Jute Products: Bangladesh is the second largest jute producing country in the world. Once, she had the biggest jute mill in the world, the now defunct Adamjee Jute Mill. Due to the uprising of synthetic products, jute has lost its popularity in the world. However, jute still has a high demand in making carpets, sacks etc. E: 1 Oil and Gas: Bangladesh has a reserve of about 23 TCF gas reserved, in which about 14 TCF is accessible. Fifty-seven wells have been drilled so far. The oil and gas sector of Bangladesh has a lot of potential and the government is open to foreign companies to invest in drilling and recovering this natural resources. F: 1 Power: The scarcity of electricity in Bangladesh is a major problem for the country. The government has asked foreign companies to help in producing electricity. Several quick rental companies have started working in Bangladesh. Currently, the Government is negotiating with Russia and a few other countries about establishing a nuclear energy plant. Marker leader of this sector is Summit Power. G: 1 Electronics: As the population of the country is growing, the demand for electronic goods is budding with it. Therefore, investing in the electronic industry has no chance of backfiring. Top players of this industry are Grameen Shakti and Rahimafrooz. H: 1 Tourism: In recent years, Bangladesh has started promoting the tourism industry more than ever. Bangladesh has the largest sea beach and the largest mangrove forest in the world. There are beautiful hill stations, such as Bandarban, Rangamati and Khagrachhari. 53

Investing in the tourism industry of Bangladesh is like picking up a ripe apple ready to be eaten. Apart from these sectors, there are few other options available in Bangladesh for investors to put their money in; such as IT and software, real estate and shipbuilding. Bangladeshi corporate houses are doing well these days which indicates that the market economy is in full force. As a new investor in business these sectors are not that much stable for investing besides pharmaceuticals business that is why we choose pharmaceuticals. Moreover pharmaceuticals business is much stable in Bangladesh perspective because we have a huge population here so we have uncountable customer here and it has less amount of risk beside other business sectors. 2. History of Pharmaceutical Industry: The pharmaceutical industry in Bangladesh is one of the most developed hi-tech sectors within the country's economy. In 2000, there were 210 licensed allopathic drug-manufacturing units in the country, out of which only 173 were in active production; others were either closed down on their own or suspended by the licensing authority for drugs due to non compliance to good manufacturing practices or drug laws. The industry manufactured about 5,600 brands of medicines in different dosage forms. There were, however, 1,495 wholesale drug license holders and about 37,700 retail drug license holders in Bangladesh. After the promulgation of Drug Control Ordinance - 1982, the development of this sector was accelerated. The professional knowledge, thoughts and innovative ideas of the pharmaceutical professionals working in this sector are the key factors for this development. Due to recent development of this sector, the industry is exporting medicines to global markets, including the European market. This sector is also providing 97% of the total medicine requirement of the local market. Some of the companies produce insulin, hormones, and anticancer drugs, which were not previously produced in Bangladesh. Leading pharmaceutical companies are expanding their business with the aim to expand into the export market. Recently, a few new industries have been established with high tech equipment and professionals to enhance the strength of this sector. Square Pharmaceuticals has retained the top position with its local sales figure reaching Tk 10.70 billion in 2009 in the country's Tk 55.0 billion pharmaceutical market followed by Incepta Pharma,Square Pharmaceuticals, established in 1958.Incepta Pharma, established in 1999, stood at Tk 4.52 billion in 2009.Beximco Pharma's position in the country's top 10 pharmaceutical companies was the third in terms of sales. Its total sales were Tk 4.2 billion in 2009.Fourth position took by the ACME Laboratories and its sales were Tk 2.64 billion in 2009.Opsonin Pharma Ltd., established in 1956, ranked the fifth by local sales worth Tk 2.61 billion in 2009.Eskayef took the sixth position with sales of worth Tk 2.52 billion.Reneta Pharma sales were nearly Tk 2.50 billion in 2009 and took the seventh position .Eight position took by the Advance Chemical Industries (ACI) with local sales worth Tk 2.46 billion.The sales of Aristopharma products were Tk 2.23 billion and Drug International's were Tk 2.13 billion.Respectively they took the 9th and 10th position in the local pharmaceutical market.Sanofi-Aventis ranked the top among the multinational pharmaceutical companies followed by GlaxoSmithKline.Sandoz took the third position. Sales of Square Pharmaceuticals, the market leader, were Tk 1,270 crore in 2010,Beximco grew faster than other companies at a staggering 33 percent in 2010 with Tk 523 crore sales.Incepta's sales and growth rate were Tk 665 crore and 31 percent respectively, followed by Acme's Tk 600 crore and 17 percent. Eskayef logged Tk 426 crore in sales and the growth rate was 27 percent, the third highest pace in the 2010.

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Nowadays, Bangladesh Pharmaceutical Industry is successfully exporting Active Pharmaceutical ingredients (APIs) and a wide range of pharmaceutical products covering all major therapeutic classes and dosage forms to 79 countries. Beside regular forms like; Tablets, Capsules & Syrups, Bangladesh is also exporting high-tech specialized products like HFA Inhalers, CFC Inhalers, Suppositories, Nasal Sprays, Injectables, IV Infusions, etc. are also being exported from Bangladesh, and have been well accepted by the Medical Practitioners, Chemists, Patients and the Regulatory Bodies of all the importing nations. The packaging and the presentation of the products of Bangladesh are comparable to any international standard and have been accepted by them. 3. Here we showed the top 20 pharmaceutical companies in Bangladesh: Ran k 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Manufacturer Name Square Beximco Incepta Pharma ACME Eskayef Drug International Aristopharma Sanofi Aventis A.C.I. Renata Opsonin Pharma Glaxosmithkline Orion Lab. General Sandoz Healthcare Pharma Ibn Sina Nuvista Pharma Novo Nordisk Novartis Market Value Market Share (US$) Dec 2007 (%) Dec 2007 106,853,218 54,406,039 43,672,495 31,990,257 26,896,796 23,163,408 23,005,700 22,505,617 22,438,789 21,531,753 20,754,444 17,159,150 12,789,998 10,409,370 101,042,702 9,552,740 8,288,494 7,382,732 6,739,984 6,682,644 18.03 9.19 7.37 5.40 4.54 3.91 3.88 3.80 3.79 3.63 3.50 2.90 2.16 1.79 1.69 1.61 1.40 1.25 1.14 1.13 Market Growth (%) Dec 2007 28.63 4.08 19.92 20.06 22.46 -3.91 32.74 18.91 33.04 13.30 2.99 9.09 10.76 16.72 22.37 37.83 42.16 5.57 25.71 29.04

4. Bangladeshs Pharmaceutical Market: According to the UKTI (April, 2010) the total size of the pharmaceutical market of Bangladesh was estimated to be US$700 million in 2007. It also reports that the industry produced medication worth $715 million in 2007 with the market growing over 12% annually over the last half a decade and firms primarily focus primary on branded generic final formulations by using mostly imported APIs. According to the World Bank report (2008) about 80% of the drugs sold in Bangladesh are generics and 20% are patented drugs. It also reports that domestically Bangladeshi firms generate 82% of the market in pharmaceuticals and locally based multinational companies account for 13%, and the final 5% is imported. There are 240 registered pharmaceutical companies in Bangladesh where 164 of these actively involved in the manufacture or marketing of pharmaceutical products (Hussain et al., 2008). 55

The top 30 to 40 companies dominate almost the entire market, where the top 10 hold 70% of domestic market share and the two companies Beximco and Square capture over 25% of the market (World Bank report, 2008). The pharmaceutical market of Bangladesh is dominated by a few large companies. This kind of market structure is defined as oligopoly (Gillespe, 2010, p. 302; Griffiths & Wall, 2008, p. 226; Salvatore, 2007, p. 340; Besanko et al, 2010, p. 221). The decisions of one company influence, and are influenced by, the decisions of other companies. For example, when the pharmaceutical market leader Square got the UK MHRA approval, the second largest company Beximco immediately started the process desperately to secure it (UKTI, 2010). 5. OUR Analysis: PESTEL analysis provides a framework to examine the external environment of a company (Gillespie, 2010, p. 13; Morrison, 2006, p. 30). PESTEL stands for political, economical, social, technological, environmental and legal factors. PESTEL analysis helps a company to categorize the relevant issues in its environment, so that it can assess its relative importance and develop an appropriate strategy (Sloman & Hinde, 2007). The following sections provides an overview of the currently affecting the Novartis in Bangladesh. Political factors: Experienced international businesses engage in political risk assessment, a systematic analysis of the political risks they face in foreign countries and any changes in the political environment that may adversely affect the value of a companys business activities (Griffin & Pustay, 2010, p. 97; Czinkota et al., 2009, p. 102; Daniels et al, 2009, p. 154). Politically Bangladesh is now a stable country after decades of instability and coups. Support of Government: Bangladesh government regards the pharmaceutical industry as one of the key sector for foreign investment in the country (BOI, 2010a). With strong government support Bangladesh is developing a robust manufacturing and technically experienced industrial base for this sector. Bangladesh was placed 15th globally for the protection which it affords investors in the World Banks (2009) Doing Business survey. Issues: General strikes by opposite political parties those caused huge loss to the businesses and industries were a regular part of political life in Bangladesh. The situation has improved a lot in past few years despite of very few occasions (BBC, June 2010). Companies are still facing some corruption and bureaucracy issues when to do business in Bangladesh. For example, according to the World Bank report (2009) it requires 7 procedures and takes 44 days to start a business there. Despite some bureaucratic problems in overall the current political environment of Bangladesh is business-friendly for Novartis. Economic factors: When a company wants to do business in another country, it should have good knowledge on growth rate, inflation, unemployment, wages, income, stability, poverty and the like of that country (Daniels et al. 2009, p. 185). These factors of Bangladesh are analysed in following sections and also compared with China, India, Pakistan and UK to get a comparative picture. GDP Growth:The economy of Bangladesh has grown 5-6% per year since 1996 despite many internal problems like political instability, poor infrastructure, corruption, and insufficient power supplies and its growth was resilient during the 2008-09 global financial crisis and recession (Figure 1). The GDP growth rate of Bangladesh was higher than in 56

Pakistan or UK, and very close as in India (Figure 2) and according to the World Factbook (2009) its position was 18th among the 213 countries in 2009. GDP per capita of Bangladesh was US$ 1,600 that was lower than India, China and Pakistan.

Country Comparison on GDP Per Capita (PPT) (2009). (Source: The World Factbook (2009). Washington, DC: Central Intelligence Agency).

GDP - real growth rate. This entry gives GDP growth on an annual basis adjusted for inflation and expressed as a percent. (Source: The World Factbook (2009). Washington, DC: Central Intelligence Agency).

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Gross Domestic Product (GDP) Growth of Bangladesh (1980 2009) Source: MOF (2010) Ministry of Finance, Bangladesh. Inflation rate is a measure of the increase in the cost of living that influences on many parts of the economic confidence, and the stability from 1991 the inflation rate of Bangladesh is always under 10 percent.

Inflation Rate of Bangladesh (1980 2009), Source: MOF (2010) Ministry of Finance, Bangladesh.

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Inflation Rate in 2009 (Consumer Prices). (Source: The World Factbook (2009). Washington, DC: Central Intelligence Agency). In 2009 the inflation rate of India and Pakistan was over 10 percent whereas in Bangladesh it was just above 5 percent. Higher inflation rate raises the cost of living and historically annual inflation rates of 10 to 30 percent, erodes confidence in a countrys currency and spurs people to search for better ways to store value. Lower inflation is a good indicator for Novartiss Bangladesh marketplace. Unemployment: Daniels et al (2009) argues that unemployment depress economic growth, create social pressures, and provoke political uncertainly. The unemployment rate in Bangladesh was 2.5 percent in 2009 and that was lower than China, India, Pakistan and UK

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Unemployment Rate in 2009 based on consumer prices. (Source: The World Factbook (2009). Washington, DC: Central Intelligence Agency). The proportion of unemployed workers in a country shows how well a country productively uses its human resources. In Bangladesh unemployed workers do not get any benefits or allowances from the government. Without unemployment benefits, people are compelled to engage in some work, even if this is only a few hours in low-paid informal jobs (Mujeri, 2004). Lower unemployment increases buying capabilities of customers in Bangladesh. Debt: The larger the total debt becomes, the more uncertain a countrys economy becomes (Daniels et al., 2009, p. 198). The internal public debt that was measured by the percentage of Bangladeshs GDP was lower than in India, Pakistan or UK in 2009.

Internal Public Debt as percentage of GDP in 2009. (Source: The World Factbook (2009). Washington, DC: Central Intelligence Agency). The resulting pressure to revise government policies, in the face of growing internal debt, can create economic uncertainties for investors and companies (Daniels et al., 2009). Bangladesh is in better position than neighbor countries in terms of debt problem and that is a good sign for its pharmaceutical industry. Labor Force and Cost: For the pharmaceutical industry, the cost of labor is one of the key elements of total production costs. Companies always search the world for the best deal with the difference between low-cost and high-cost countries (Daniels et al., 2009, p. 201). According to the Office of the US Trade Representative (2008) the cost of manufacturing one million tablets was estimated to be $18,000 in the USA, $8,000 in India and $6,500-7,500 in Bangladesh. This is accounted for Bangladeshs highly competitive labor and energy costs. The report also highlights that the labor costs in the pharmaceutical industry are 20-30% lower in Bangladesh than in India. Bangladesh is 8th according to the number of total labor force in the world that is more than Pakistan, UK, Germany, France or Japan (World Factbook 2009). Abundant supply of cheap labor forces would be attractive factor for Novartis to extend their investment in Bangladesh.

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Total Labor Forces in 2009. (Source: The World Factbook (2009). Washington, DC: Central Intelligence Agency). Socio-cultural factors: A company should identify key cultural differences in the country where it is doing or intended to do business and then it must need to alter its customary practices to succeed there (Daniels et al., 2009). Alternative Medicines: There is a long tradition of self-medication in Bangladesh as many of its population cannot afford to see health professionals when they fall ill. Majority of population are still using complementary and alternative medicine (CAM) in the country (Islam & Farah 2008). Alternative medicine refers to health practices, approaches, knowledge and beliefs incorporating plant, animal and mineral based medicines, spiritual therapies, manual techniques and exercises, applied singularly or in combination to treat, diagnose and prevent illnesses or maintain well-being. Reports of Islam and Farah (2008) estimated that 70-75% populations of the country still use traditional medicine namely herbal, homeopathy, religious and magical methods for management of their health problems of various kinds. Religion: According to the World Factbook (2010), 89.5% of the population in Bangladesh is Muslim. The religious belief and practices have influence and impact on national/international business that is seen in a cultures values and attributes toward entrepreneurship, consumption and social organization (Griffin & Pustay, 2010; Morrison, 2006 and Czinkota et al., 2009). Many Muslim workers require extra time break for daily prayer. Muslims are forbidden from the consumption of pork and alcohol. The pharmaceutical companies need to consider these religious factors to do the business in Bangladesh. Population Demographics: Bangladesh tops South Asia with its average life expectancy of 61 years though per capita consumption of medication is one of the lowest in the region (World Factbook, 2009). The population of Bangladesh ranks seventh in the world with about 140 million people and it is one of the most densely populated countries in the world.

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Due to the total size of the population, good life expectancy and the stable growth of economy, the country has considerable market for pharmaceutical products. Technological factors: Technological environment is another important dimension of a country and the foundation of its resource base (Griffin & Pustay, 2010). Three key technological factors are discussed in following sections. Research and Development: Foreign direct investment has brought about the globalization of production, but this has not led to the globalization of technological innovation in Bangladesh. Large companies have tendency to concentrate their R&D activities in their home countries, but progressively specialized R&D is being decentralized to overseas locations, to benefit from different areas of excellence in different localities (Patel & Pavitt, 1991; Archibugi & Michie, 1997). According to the World Bank report (2008), pharmacists of Bangladesh have been trained for quality assurance and skilled engineers for reverse engineering and manufacturing but its workforce has lack of new research and innovation skills, which is very important for innovative drugs. Bangladeshi pharmaceutical firms target mainly lower-end branded generics. Despite the country possessing huge manufacturing capabilities of domestic need, the complete lack of R&D in domestic companies could cause the market to be idle. According to the Kostermanss (2008) report, universities and government research is currently under funded in Bangladesh and the pharmaceutical industry here currently invests about 1% in R&D. Active Pharmaceutical Ingredient: Around 80% of Bangladeshs total need of Active Pharmaceutical Ingredient (API) is being met through imports (UKTI, 2010). To meet the API demand locally the Bangladesh government is developing an API park, that is due to open in 2011 to meet at least 70% of countrys API supplies and it will develop the infrastructure with state-of-the-art facilities including a central effluent treatment plant and incinerator for solid and liquid waste-management (BOI, 2010b). Novartis and other pharmaceutical companies in Bangladesh will be benefited from this park to minimize their production cost by using locally produced APIs. Energy: Bangladeshs unreliable power supply forces most Bangladeshi firms to depend on self-generation of power (World Bank, 2008). Disruptions of power supply result in significant productivity losses in Bangladesh. The World Bank (2008) reports that the power cost could be lower when generators are running on highly under-priced natural gas of Bangladesh. Large pharmaceutical companies like Novartis can install gas based energy system. Environmental factors: Couple of key environmental factors discussed in following sections those significant for Novartis operation in Bangladesh. Climate Change: Bangladesh is now widely recognized to be one of the countries which are most vulnerable to climate change as a result of global warming. It is a low-lying region that risks submerging some of its parts beneath the sea (Morrison, 2006, p. 428). Natural hazards that come from increased rainfall, rising sea levels, and tropical cyclones are expected to increase as climate change, each seriously affecting agriculture, water & food security, human health and shelter (MoEF, 2008). Environmental impacts are often considered necessary side effects of development or the price to pay in order to achieve progress (Furley, 1996; Hesselberg, 1992; Weissman, 1993). Novartis (Bangladesh) claims in their website that it takes

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a leading role in its work in the areas of Health, Safety and Environment in pharmaceutical industry. Waste Management: The National Drug Policy 2005 of Bangladesh states that the pharmaceutical plants must need to comply with environmental legislation like disposal of waste streams. Environment may have hazardous impact if the wastages of manufacturing plants are not managed properly. Novartis takes care of all their toxic and non toxic waste to make sure that all the disposable water is properly treated and disposed (Novartis Bangladesh Website). Legal factors: Every company in every country must comply with local legal system and regulations regarding operations (Daniels et al., 2009). The legal environment has a great impact on doing business in any country. According to the World Bank (2009) reports Bangladesh is ranked 119 out of 183 economies on ease of doing business whereas India ranked 133 .

Bangladesh Compared to global good practice economy as well as selected economies. National Drug Policy: The Bangladesh governments Director of Drug Administration (DDA) has an essential monitoring and supervisory role on all activities related to import, procurement of raw materials, production and import of finished drugs, export, sale, pricing, etc. for all kinds of medicine. The National Drug Policy (2005) states that the WHOs current Good Manufacturing Practices (GMP) should be strictly followed and that manufacturing units will be regularly inspected by the DDA. Other key features of regulation are restrictions on imported drugs (where these are produced by four or more local firms); a ban on the production in Bangladesh of around 1,700 drugs which are considered non-essential or harmful; and strict price controls, affecting some 117 principal medicines. TRIPS: The World Trade Organizations (WTO) Trade Related Aspects of Intellectual Property Right (TRIPS) agreement permits 49 Least Developed Countries (LDCs) including Bangladesh to reverse-engineer, manufacture and sell patented generic pharmaceutical products locally as well as for export to other developing and Least Developed Countries (LDCs) until

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2016 (World Bank, 2008, p. 15). Bangladesh is unique among the 49 LDCs as it has a strong pharmaceutical base. This sector is the second largest sector in terms of national revenue and it exported drugs to over 50 countries in the world (Azad, 2006).

Recommendations:
According to our analysis, pharmaceutical sector in Bangladesh has a positive external environment in overall and there are no other sector then pharmaceuticals for investing as a new investor. Here are some recommendations based on the outcome of this analysis regarding investing in current market situation and future operations and strategies. Bulk Drug Manufacturing: If there is enough fund and very much decided for expand our business in Bangladesh to increase its production. Increasing the scale of production will allow it to a lower cost per unit of output and yield economies of scale. By doing this we can increase is total market share in Bangladesh that is currently only 1.69% of total pharmaceutical market and top to local companies have 18% and 9%. Under the TRIPS in Bangladesh can manufacture patented drugs until 2016 in bulk for Bangladesh as well as to export other 49 such patent exempted lease developed countries of the world. Research & Development Setup: We also can invest in R&D setup in Bangladesh for reverse engineering as well as bioequivalence study and clinical trials. Rivalry in pharmaceutical sector is very high as a good number of investments have taken place in this sector, but very few companies have invested on R&D. The research on developing drug for localized diseases like dengue fever, arsenic poisoning by using our R&D skills and local scientist would be an excellent investment for us. According to the UNESCO report there is a huge demand of drugs for these diseases not only in Bangladesh but also in other countries in South-East Asia.

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Conclusion:
In this assignment our current operations in Bangladesh are analyzed about pharmaceuticals business. This is very much essential to do market research before investing and also aware about that dont invest all the money at a time. Here we have also some PESTEL analysis which is used to examine few significant factors of external environment and discussed how they influence the business. At the end of the assignment couple of recommendations is provided for current and future strategies or operations and obviously things to do as a new investor in Bangladesh.

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Refference:
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The Daily Star, Novartis again top medicine exporter, Star Business Report, 13/03/2008. Available: http://www.thedailystar.net/story.php?nid=27481 (Accessed on 25 July 2009) The World Bank (2008) Public and private sector approaches to imporving pharamaceutical quality in Bangladesh. Bangladesh Development Series, Paper No. 23, Human Development Unit of South Asia Region, March 2008.

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