Entrepreneurial Economics Dimple Pandey

Entrepreneurial Economics

Entrepreneurial Economics is the study of the entrepreneur and entrepreneurship within the economy

What are the characteristics of an entrepreneurial economy? High levels of innovation combined with high level of entrepreneurship resulting in the creation of new ventures as well as new sectors and industries.

Entrepreneurial Economics

Who is an Entrepreneur? Person who starts his own, new and small business with chances of profit or loss. An individual who bears the risk of operating business in the face of uncertainty about the future conditions.

Characteristics of successful entrepreneur Risk taker Interest and vision Relevant skills and expertise Investment Passion Organization and Delegation Motivation to succeed Famous entrepreneurs Bill Gates- By linking his microsoft software to IBMs first PCs , he dominated the industry He developed a two-prong strategy of expanding the market while maintaining a strong hold on competitors

Michael Dell- created a new model for PC sales Cutting out the retail middleman and custom building computers to suit buyers needs put Dell at the front of the class of PC makers Tom Anderson and Chris DeWolfe Founders of MySpace.com Registering 160,000 people per day with no marketing There are over 200 million accounts Harland Sanders- KFC-Opened Sanders Court & Caf in the front room of a gas station He began franchising in 1952

Role of entrepreneur in economy

New product in market Money circulation Creation of employment Better standard of living New ideas bring huge changes Develop new market Mobilize capital resources New technology Discover new source of material

How to be a successful entrepreneur

Self confident and optimistic Able to take calculated risk Respond positively to changes Flexible and able to adapt Knowledgeable of markets Able to get along well with others Independent minded Creative Responsive to suggestions Take initiatives

Several factors determine the possibility of forming a new company. The government must provide the infrastructure to help a new venture. The entrepreneur must have the necessary background. The market must be large enough and the entrepreneur must have the marketing know-how to put it all together. Financial resources must be available.

The Nature and Development of Entrepreneurship

It involves four aspects: The creation process The devotion of time and efforts The assumption of risks Rewards of independence, satisfaction, money

Advantages of Entrepreneurship

To an Individual Self Employment Employment for near & dear Prolonged career for next generations Freedom to use own ideas - Innovation and creativity Unlimited income / higher retained income Independence Satisfaction

To the Nation Provides larger employment Results in wider distribution of wealth Mobilizes local resources, skills and savings Accelerates the pace of economic development Stimulates innovation & efficiency

Factors favouring Entrepreneurship

Growth of education- science, technology & management Developed infrastructure facilities Financial assistance Training facilities Protective and promotional policies Globalization

Performance emerges from the combination of knowledge, skills and attitude Competency is developed

Skills of an entrepreneur

Initiative Taking actions that go beyond job requirements or demands of the situation. Doing things on own before being asked for or being forced by the events. Taking actions to start the business and expand into new areas, products and services. Seeing & acting on opportunities Looking for and taking actions to seize opportunities Seeing and acting on opportunities for business development or for personal growth. Seeing unusual opportunities Seizing opportunities, need, procuring and mobilizing necessary resources.

Persistence Taking repeated actions to overcome obstacles that get in the way of achieving goals Taking actions in the face of obstacles. Ensuring all efforts to solve a problem or barrier. Information seeking Taking action s on own to help reach objectives. Personally undertaking a research or analysis to find out answers to some problem. Seeking information to clarify what is needed. Using networks to obtain information.

Concern for high quality of work Doing things that meet or beat existing standard of excellence. Stating a desire to produce work of high quality Comparing work favorably to that of others. Making all out efforts to ensure the quality of product or services.

Work commitment Placing highest priority for getting a job completed. Taking all the effort to complete a job. Accepting responsibilities for failures. Expressing utmost concern for the customers Readiness to work at any level to get work done.

Efficiency Orientation Constantly looking for ways to do things faster or with fewer resources or at a lesser cost. Using business tools to increase personal or professional efficiency. Expressing concern for assessing cost versus reward of some improvements, changes or action. Systematic Planning Developing and using logical steps to reach goals. Breaking a large task into several sub tasks. Developing plans after duly anticipating obstacles. Evaluating alternatives on merits and demerits.

Problem Solving Identifying and applying new ideas to reach the goals. Identifying the root cause of the problem. Developing strategies in the light of objectives, resources, and constraints. Generating new ideas or innovative solutions. Self Confidence Having a strong belief in own abilities. Sticking with own judgment in the face of opposition or early lack of success. Doing something for which chances of success are not very fair.

Persuasion Persuading others successfully Selling someone an idea, product or service. Making someone agree to provide resources Convincing with confidence, competence and respect. Use of Influence Strategies Using a variety of strategies to influence others successfully Developing professional and business contacts. Using influential people to get own things done. Carefully limiting the information to be given to others Using others authority and resources, but remaining ethical

Assertiveness Confronting problems and issues with other directly Speaking politely but firmly. Telling others clearly what they have to do Reprimanding those who fail to perform as expected however close they may be. Monitoring Ensuring smooth progress of project or work. Personally supervising all aspects of the work to its completion. Developing a system of supervision and monitoring.

Concern for others welfare Having a concern and taking actions to improve others welfare. Responding positively to employees specific needs. Having a concern for the welfare of employees, their families and society at large

Factors Influencing Entrepreneurship

Individual
Economic Environment

Socio-cultural factors Support Systems

Political Environment

Legal Environment

Technological Environment

Political & Governmental Environment

Global
Trade

National
Taxation

Barriers Trade Agreements Tariffs & Duties Political Risks

Regulations Protections (Patents) Govt. spending

State Govt.
Taxation

Local Issues
Taxations

State Laws Licensing /Approvals Incentives

Zoning Cost of Living Lifestyle

Environmental Analysis

Scanning to detect change (identify key elements and their characteristics) Monitoring to track development (that affect the survival and profitability of the new business) Forecasting to project the future (such as level of prices, inflation, interest rates, availability of funds, market share, market growth, etc. Assessing to interpret data (what does it all mean to the entrepreneur?)

Entrepreneurship and Economic Development

Entrepreneurs set up Enterprises Entrepreneurs combines resources, put their time and efforts and produce goods or services What they contribute productivity, output, value addition, income and employment Entrepreneurship is a Low Cost Strategy. Entrepreneurs perform the crucial role themselves The spirit of Entrepreneurship Drive, achieving higher goals, creativity, innovative attitude. A dynamic society emerges and the spirit spreads like a chain reaction.

The Invention Process

Market Need

Technology observation

Need Analysis

Parameter Identification

Creative Synthesis

Realization

Invention, which meets the need

Entrepreneurship and Management Students

Enterprises in protected economy can be mismanaged. Enterprises in competitive environment are essentially to be managed. A Management Graduate is a person trained to manage an enterprise. Naturally, he will deliver the best results. A Management Graduate should not be just a Job Seeker. He can and should take the role of Job Provider.

An Entrepreneur has to be a Manager. But a Manager need not be an Entrepreneur

Entrepreneurial Decision Process

Pull Factors Perception of Advantages Spotting an Opportunity Government Policies Motivation from Biographies or Success Stories Influenced by Culture, Community, Family Background, Teachers, Peers, etc.

Push Factors Job Dissatisfaction Relocation Lay-off Retirement Boredom

THE FUTURE OF ENTREPRENEURSHIP

Entrepreneurship is currently being embraced by educational institutions, governments, societies and corporations. Schools are increasing their emphasis on entrepreneurship in terms of courses and academic Governments have also promoted the growth of entrepreneurship-tax incentives Some state governments are developing strategies for fostering entrepreneurial activity.

ctors Affecting Entrepreneurial Growth

1. Economic Environment:
Capital: is one of the most important factor of production

for the establishment of an enterprise. Increase in capital investment in viable projects results in increase in profits which help in accelerating the process of capital formation. Entrepreneurship activity too gets a boost with the easy availability of funds for investment.

ctors Affecting Entrepreneurial Growth

Labor: Easy availability of right type of workers also effect entrepreneurship. The quality rather than quantity of labor influences the emergence and growth of entrepreneurship. Raw Materials: it is one of the basic ingredient required for production. Shortage of raw material can adversely affect entrepreneurial environment. Without adequate supply of raw materials no industry can function properly and emergence of entrepreneurship to is adversely affected.

ctors Affecting Entrepreneurial Growth

Market: The role and importance of market and marketing is very important for the growth of entrepreneurship. In modern competitive world no entrepreneur can think of surviving in the absence of latest knowledge about market and various marketing techniques.

ctors Affecting Entrepreneurial Growth

2. Social Environment:
Strongly affect the entrepreneurial behavior, which contribute to entrepreneurial growth. The social setting in which the people grow, shapes their basic beliefs, values and norms. The social factors can be Family Background Joint Family can Provide Family Resources to Invest and Expand Family Business. Friends and Relatives, Religion, Social status

ctors Affecting Entrepreneurial Growth

3. Compelling Factor Many a times, it is a compulsion rather than willingness which forces one to become entrepreneur whether he succeeds or fails. Strong desire to do something independent Government incentives. To make use of their technical and professional skill Manufacturing experience Business experience Technical know how Excess funds lying idle can also encourage one to become entrepreneur. Responsibility of maintenance of large families, shortage of funds

ctors Affecting Entrepreneurial Growth

4. Cultural Factor Tangible man made objects like furniture . Intangible concept like laws, morals knowledge. Values and behavior accepted within the society.

5. Facilitating Factor Elders are resistant to permit young entrepreneur. Parents should encourage the young entrepreneur The success stories of entrepreneurs can be incorporated in the curriculum.

ctors Affecting Entrepreneurial Growth

6. Psychological Factor Achievement motivation means a drive to overcome challenges. It is a personality characteristics which is a major determinant of entrepreneurship development. Average level of achievement motivation existing in a society ensures a relatively high amount of entrepreneurship in the society. People with low achievement motivation work for money or other such incentive. People with high achievement motivation work for status, prefer personal responsibility for decision, take moderate risk and possess interest in concrete knowledge of the result. The trait of need for achievement can be developed through various training programs.

ctors Affecting Entrepreneurial Growth

7. Attitude of Government: Government all over the world can play a very important role in the emergence of entrepreneurship. Positive actions by the government can facilitate growth of entrepreneurship whereas negative actions can adversely influence entrepreneurial emergence & growth. It is the govt. which regulates business activities. Govt. policies are going to influence all the decisions of the entrepreneurs regarding what to produce, how much to produce, of what quality to produce where to produce and for whom to produce. The entrepreneurs are to operate within the concessions and limits set by the govt. It is in the interest of the potential entrepreneur to thoroughly scan the govt. policies before taking decisions with regard to setting up his enterprise.

ctors Affecting Entrepreneurial Growth

Government should maintain a proper distribution of economic power between private and public sector. They Encourage the tempo of industrialization by spreading entrepreneurship to every city, town or village. They should disseminate the entrepreneurial talent concentrated in a few dominant communities to a large number of people of varied social and economic groups. Several institutes should be established to encourage the entrepreneurship.

ctors Affecting Entrepreneurial Growth

8. Education and Technical Know How Education, entrepreneurship and development are interrelated. Education helps in the development of capabilities of individuals which facilitates the emergence and growth of entrepreneurship In the modern competitive world to survive the entrepreneurs have to keep an eye over the technological advances taking place around. These technological development provide opportunities for the entrepreneurs to develop and produce new product.

ctors Affecting Entrepreneurial Growth

9. Financial Assistance from Institutional Sources Liberal financial assistance from institution certainly boosts moral of young entrepreneurs. For seeking the assistance it is necessary for the entrepreneurs to have some financial base and the institutions and banks also provide facilities in the form of finance, consultancy, purchase of land, availability of fixed assets on hire-purchase installment. The government grant finance to the entrepreneur on concessional basis at the low rate of interest Various types of subsidies, concessions and facilities are given to attract entrepreneurs in backward area.

ctors Affecting Entrepreneurial Growth

10. Accommodation in Industrial Estate

The industrial estate are meant to provide wide variety of facilities to the entrepreneur. Including common production and testing facilities. The provision of industrial estates has helped Create new employment opportunity Disperse industry outside the concentrated cities Relocate the existing units operating in congested areas Raise the efficiency of small units through common facilities.

ctors Affecting Entrepreneurial Growth

11. Encourage from Large Business Reservation policy initiated by the government prohibits the large houses to compete with the small. 12. Machinery on Hire-purchase Entrepreneurs are supplied machinery through liberalized terms and condition

Importance of Entrepreneurship in The Process Of Economic Development

Creation of Employment Opportunity
Unemployment is one of the most important problems

confronting developing and underdevelopment countries Entrepreneurs by setting up their own units enabling themselves to get self employment. With the setting up of more and more units by entrepreneurs both on small and large scale, numerous job opportunities are created for others.

 Capital Formation

Importance of Entrepreneurship in The Process Of Economic Development

Entrepreneurs as an organizer of factors of production

employs his own as well as borrowed resources for the setting up of his enterprise. Entrepreneur mobilizes idle saving of the public and put them to productive use. In this way he helps in capital formation which is so essential for the industrial and economic development of a country.

 Balanced Regional Development

Importance of Entrepreneurship in The Process Of Economic Development

Small scale units can be set up in industrially backward

and remote areas with limited financial resources.

Use of Local Resources

In the absence of any initiative local resources are likely

to remain unutilized. Proper use of those resources can result in the progress or development of the area and that too at lower cost.

Importance of Entrepreneurship in The Process Of Economic Development

Improvement in Per Capita Income
More enterprises will lead to more production, employment and

generation of wealth in the form of goods and services. It will result in the increase in the overall productivity and per capita income in the country.

Improvement in The Standard of Living

Entrepreneurs by adapting latest innovations helps in the production

of wide variety of goods and services. By making efficient use of the resources they start producing more of better quality and that too at lower costs which ensures easy availability of better quality products at lower prices to the consumer and results in the improvement in the standard of living of the people.

Importance of Entrepreneurship in The Process Of Economic Development

Economic Independence
Entrepreneurs develop substitute goods being imported and

thus prevent over-dependence on foreign countries and at the same time help in saving of previous foreign exchange. Through sale of their surplus products in foreign market entrepreneurs enable a country to earn foreign exchange. Export promotion and import substitution thus help in promoting economic independence of the economy.

 Preventing Industrial Slums

Importance of Entrepreneurship in The Process Of Economic Development

Dispersal of industries can help in the overcoming the problem

of industrial slums which results in over burdening of civic amenities.

Reducing Social Tension

Unemployment amongst the young and educated people is

emerging as the major cause of social unrest. Entrepreneurship Development can help in channeling the talent of this section of society in the right direction by providing proper guidance, training and assistance for setting up their enterprise.

 Facilitating Overall Development

Importance of Entrepreneurship in The Process Of Economic Development

An entrepreneur acts as a catalytic agent for change which

results in chain reaction. With the setting up of an enterprise the process of industrialization is set in motion. This unit will generate demand for various types of inputs required by it and there will be so many other units which will require the output of this unit. This leads to more and more unit there. Entrepreneurs, thus create an environment of enthusiasm and convey a sense of purpose.

Why do people engage in entrepreneurship and commit large parts of their personal wealth to their business, despite comparably low returns and high risk They hold highly undiversified asset portfolios, entrepreneurs are less risk-averse than the rest of the population Nonpecuniary benefits of entrepreneurship, such as being independent in the workplace, also contribute to an explanation of entrepreneurial behavior private equity premium puzzle, denotes the observation that returns to private business equity are low in spite of the high risk associated with it

Private equity premium puzzle

An phenomenon that describes the anomalously higher historical real returns of stocks over government bonds. The equity premium, which is defined as equity returns less bond returns, has been about 6% on average for the past century. It is supposed to reflect the relative risk of stocks compared to "risk-free" government bonds Investors are being rewarded very well for holding equity compared to government bonds.

Their results indicate that the average returns to private equity are not higher than the returns to the public market equity index. Why, then, do entrepreneurs invest so much in the equity of a single private firm, which is likely to be much riskier than investing in the public equity index? private equity premium puzzle, is a question mark?

The classical public equity premium puzzle in contrast, is concerned with the much higher returns to public equity stocks in comparison to safe government bonds. High degree of risk aversion could explain why people invest in safe bonds at all, given the spread in the returns. This makes even more puzzling the observation that entrepreneurs take on even larger risks in private equity without, on average, earning higher returns than on the public equity market.

why people become entrepreneurs despite facing restrictions in risk diversification. These may be nonpecuniary benefits of control, such as being your own boss,

Advantages of Social Entrepreneurship

Provides unrestricted earned income Allows for financial self-sufficiency Provides a better understanding of community needs Offers more freedom to respond to community needs Allows for increased and better use of financial resources Enhances coordination between staff and board Enhances credibility with other funders, clients, and caregivers Sharpens organizational focus Increases community impact Improves research, planning, and marketing skills Expands your most effective services Stops or transfers weak or duplicative services Adds new services that meet emerging or growing needs Promotes continuous learning and improvement

Barriers of Entrepreneurship

There may be a variety of barriers to enterprise, depending on the industry sector, region and type of enterprise. Regulatory barriers, such us administrative barriers to entry Cultural and social barriers, such us the fear of failure and a lack of entrepreneurial knowledge and skills Financial end economic barriers, such us, insufficient access to risk capital both seed /early stage and longer term financing Regulatory barriers Barriers to exit Cultural and social barriers The fear of failure

Business Environment

Supportive policies- Fiscal and monetary policies, which are essential to provide a basis for a stable macroeconomic environment. Structural policies that determine the overall economic framework in which the business sector operates, such as those affecting labour markets, tax design, competition, financial markets and bankruptcy laws. Role models must be also presented in order to give entrepreneurs an idea of the rewards and benefits of enterprise creation and reduce the stigma of failure.

Why should we have some knowledge about barriers to entrepreneurship? An understanding of the inhibiting factors or barriers will help prospective entrepreneurs to develop a strategy to overcome them. A systematic study of the barriers will lead to a proper understanding of the fields or areas in which they occur. Once the barriers are clearly identified, the society, government and other supporting agencies can develop effective programmes to tackle the issues to create a conducive entrepreneurial climate. An insight into the barriers will lead to insight into the entrepreneurs personality that is so essential in the process of entrepreneurship.

examples of barriers arising out of social environment? In some societies, the business is considered as a profession of lower hierarchy. Business people are considered inferior to office-goes, engineers, doctors etc. Such a social response to entrepreneurs can be a big hurdle in developing and nurturing entrepreneurs. Social factors such as insistence on conformity an excessive protective attitude among children during their formative years discouragement to mobility will all thwart the following essential values of entrepreneurship. creativity innovative spirit sense of adventure.

how can the economic environment create barriers for an entrepreneur? The capital for setting up the new venture is not accessible for the entrepreneur Non-availability of labour at reasonable cost. If the labour market is unreliable and is fraught with undescipline and selfishness, it will also become a barrier for entrepreneurship. Shortfall in the availability of raw materials in the desired quality and quantity. Inadequate infrastructure to transport the raw material to the factory. Non-availability of easy access to the market for the finished goods.

Do you think there are cultural barriers to entrepreneurship in our society? This is evident from the fact that the cultural values in our society are bound by conventionalism status-quo rituals strong cultural taboos etc. All these may curb the entrepreneurial spirit.

The political environment can work against the interest of entrepreneurs in the following ways A political environment that is characterised by instability and insecurity will discourage entrepreneurs. Political policies can retard the growth of entrepreneurial ventures in a country. Excessive interference in the form of controls, delays etc. from the government can discourage prospective entrepreneurs.

Personal barriers to entrepreneurship. Motivational : Once the venture starts functioning, the obstacles faced in the initial stages can make the entrepreneurs to lose their commitment and consequently their level of motivation dips. Perceptional : Certain perception barriers can hamper the progress of the entrepreneur. Lack of a clear vision and misunderstanding can result in faulty perception. If the entrepreneur demands everything to be clear and well-defined in order to develop a perception, it will lead to disappointment. As entrepreneurs world is basically disorderly and ambiguous, the people who excessively depend on order will find it a barrier to entrepreneurship.

Starting a new business

Evaluating new business opportunities Selection of an industry Initial prospects study Product marketing concept Decision to proceed Feasibility study Project evaluation Starting a new business Location Infrastructure Industrial estate Telecommunication Transport

Water Machinery Raw materials Finance Marketing Project

The Life Cycle of the Company

Feasibility Analysis: Key Questions

Five Forces Analysis

Venture Finance

How is the capital structure determined How much equity and debt The mix (or proportion) of a firms permanent long-term financing represented by debt, preferred stock, and common stock equity. Self funding

The Firms Capital Structure

Capital structure is one of the most complex areas of financial decision making due to its interrelationship with other financial decision variables. Poor capital structure decisions can result in a high cost of capital, thereby lowering project NPVs and making them more unacceptable. Effective decisions can lower the cost of capital, resulting in higher NPVs and more acceptable projects, thereby increasing the value of the firm.

Capital Structure

Firm must decide how to raise long term funds Capital structure decision The capital structure decision is one of the most important strategic decisions faced by a firm

Can have large affect on the overall value of the firm Direct impact on health of the firm and viability

Capital Structure

Many aspects to the decision:

How much debt and how much equity? Equity preferred stock or common stock? Maturity of debt long term versus short term? Structure of debt bank debt vs. bonds, secured vs. debentures, use of convertible bonds, et cetera What currency should debt be denominated in? If capital structure is to be changed, how to accomplish it? Other aspects

Here, we will concentrate on the most basic question: Debt versus equity how much of each? How much should the firm borrow? Is there an optimal capital structure?

Assumption: The goal of the financial manager is to maximize the value of the firm. Makes capital structure decision in order to help accomplish this.

Types of Capital

Factors Affecting Capital Structure-

Factors Affecting Capital Structure- which of type of fund- equity or debt Risk and Return Analysis Debt fixed obligation to pay interest, Equity will affect control ability of the management Cost Factor- Debt is cheaper as returns fixed and also tax deductible. Floatation cost is also less. Time Factor- During boom and prosperity company can issue equity shares, during days of depression firm can go for debt capital Flexibility Factors

Why are So Many Ventures Self-Funded?

Many new ventures are initially funded by the entrepreneur, because:

No intellectual property rights or licenses to give them a competitive advantage Many lack a significant track record of success Many ventures have not fully defined themselves in the marketplace, which makes investment risky. Investors see new ventures as too risky

Financing of Enterprise

Need for financial planning- Finance is the life blood of enterprise Financial planning is a financial forecast made for the enterprise in the beginning itself How much money is needed Where will money come from When does the money need to be available Estimation of money needed Adequate money to pay the purchase considerations Sufficient capital at disposal to support business operations up to 3 initial months of the enterprise Enough provision should be made to meet unexpected business expenses. These three amounts will constitute the total money needed to start the enterprise

Financial Objectives of a Firm

Primary Financial Objectives of Entrepreneurial Firms

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Financial Objectives of a Firm

Profitability Is the ability to earn a profit. Many start-ups are not profitable during their first one to three years while they are training employees and building their brands. However, a firm must become profitable to remain viable and provide a return to its owners. Liquidity Is a companys ability to meet its short-term financial obligations. Even if a firm is profitable, it is often a challenge to keep enough money in the bank to meet its routine obligations in a timely manner.

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Financial Objectives of a Firm

Efficiency Is how productively a firm utilizes its assets relative to its revenue and its profits. Southwest Airlines, for example, uses its assets very productively. Its turnaround time, or the time its airplanes sit on the ground while they are being unloaded and reloaded, is the lowest in the airline industry. Stability Is the strength and vigor of the firms overall financial posture. For a firm to be stable, it must not only earn a profit and remain liquid but also keep its debt in check.

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Factors Affecting Financing

There are four basic factors that determine how a firm is financed:

(1) the firms economic potential (2) the size and maturity of the company (3) the nature of the firms assets (4) the personal preference of the owners as they consider the tradeoffs between debt and equity

An entrepreneurial firm that has high growth potential has many more possible sources of financing than does a firm that provides a good lifestyle for the owner but nothing in the way of attractive returns to investors. The size and maturity of a company have a direct bearing on the types of financing that are available. Tangible assets serve as great collateral when a business is requesting a bank loan; intangible assets have little value as collateral.

Debt and Equity Financing

Choosing between debt and equity financing involves tradeoffs with regard to potential profitability, financial risk, and voting control. Borrowing money rather than issuing common stock (ownership equity) creates the potential for higher rates of return to the owners and allows the owners to retain voting control of the company, but it also exposes the owners to greater financial risk. Issuing common stock rather than borrowing money results in lower potential rates of return to the owners and the loss of some voting control, but it does reduce their financial risk.

Internal sources- Owners own money-Equity External sources On the basis of extent of performance Fixed capital Working capital On the basis of period of use Long-term capital Short-term capital

How Do Entrepreneurs Raise Money?

Sweat Equity Friends, Family Banks Savings, 2nd Mortgage, etc. Angels Venture Capitalists

Lender (Banks) Expectations

Good Business Track Record Ability to Repay Staying Power Community impact Collateral < 100% funds

Angel Investor Expectations

Return Ego Involvement

VC Investor Expectations

Clear understanding of the business: Competitive Advantage- what is the value proposition Huge Market- do you understand it. Strong Management Team Strong Marketing and Sales Plan Some Skin in the Game Exit Strategy Return

What Does a VC Do?

Organizes Partnership Raises Capital Receives Management Fee Creates Deal Flow in Focus Area: Stage of Company Size of Deal Business Area Geography Performs Due Diligence Syndicates Deals

What Does a VC Do?

Invests, but is not just a financial intermediary: Supplements Management Team Sits on Board Arranges Exit and Liquidation Creates Wealth for: Workers Investors Entrepreneur Society

What Does a VC Look for in an Investment Opportunity?

Management, Management, Management Full time Committed & enthusiastic Skilled Willing to listen Clear, Concise Executive Summary Written Business Plan with Financials Feasible Business Model Knowledge & understanding of Industry, Market, Competition

What Does a VC Look for in an Investment Opportunity?

Proprietary Intellectual Property Realistic Time Frame/Milestones Revenues Via Business Model Clean Balance Sheet Uses of Funding VC Exit Strategy

Raising Money is as Much of a Strategy as the Business Is

Raising money is a process Prepare Sales documents- Plan & Presentation Must pursue multiple simultaneous paths to finance Start looking before you need it its a long process, network is critical Identify right partners Industry focus Investment phase segment Product Valuation depends on selling the opportunity

Key Elements for Presentations to Investors:

Need a Formal Business Plan, but also Concise Executive Summary Complete, Realistic Financials Know the business Barriers to Entry Competitive Analysis Strong Management Team Scalability

Business Plan Content

Executive Summary Company Description Product/Services Description Industry Overview Market Analysis Competitors/Customer Marketing and Sales Plans

Development Operations Management/Personnel Financial Summary Financials Offering Appendices

Key area- Competitive Analysis

Clearly understood value proposition Knowledge of industry Realistic analysis of potential market Ability to protect intellectual property/patents Customer references

Key area- Strong Management Team

Experience Entrepreneurial Industry Advisors Board of Directors Board of Advisors Professional service providers Lawyers Accountants Consultants

Key area- Exit Strategy

Venture companies are not lifestyle companies Know your exit before you enter Exits change with the marketplace Advisors and board are critical Company structure can help or hinder No exit strategy = no venture money

Stages in venture capital

Seed Money: Low level financing needed to prove a new idea. Start-up: Early stage firms that need funding for expenses associated with marketing and product development. First-Round: Early sales and manufacturing funds. Second-Round: Working capital for early stage companies that are selling product, but not yet turning a profit. Third-Round: Also called Mezzanine financing, this is expansion money for a newly profitable company Fourth-Round: Also called bridge financing, it is intended to finance the "going public process

Advantages of venture capital

Economy OrientedHelps in industrialization of the country Helps in the technological development of the country Generates employment Helps in developing entrepreneurial skills

Investor oriented Benefit to the investor is that they are invited to invest only after company starts earning profit, so the risk is less and healthy growth of capital market is entrusted. Profit to venture capital companies. Helps them to employ their idle funds into productive avenues.

Entrepreneur oriented Finance -The venture capitalist injects long-term equity finance, which provides a solid capital base for future growth. Business Partner -The venture capitalist is a business partner, sharing the risks and rewards.

Mentoring Alliances -The venture capitalist also has a network of contacts in many areas that can add value to the company

Facilitation of Exit -The venture capitalist is experienced in the process of preparing a company for an initial public offering (IPO) and facilitating in trade sales.

Bank Loans

Bankers primarily make business loans in one of three forms: lines of credit, term loans, and mortgages. In making a loan decision, a banker always considers the five Cs of credit:

(1) the borrowers character (2) the borrowers capacity to repay the loan (3) the capital being invested in the venture by the borrower (4) the conditions of the industry and economy (5) the collateral available to secure the loan

Obtaining a bank loan requires cultivation of a banker and personal selling, including a presentation that addresses:

(1) how much money is needed (2) what the venture is going to do with the money (3) when the money is needed (4) when and how the money will be paid back

Other detailed financial information might be requested, including three years of the firms historical financial statements, the firms pro forma financial statements, and personal financial statements showing the borrowers net worth and estimated annual income.

An entrepreneur should carefully evaluate available banks before choosing one, basing the decision on factors such as the banks location, the extent of services provided, and the banks lending policies. In negotiating a bank loan, the owner must consider the accompanying terms, which typically include the interest rate, the loan maturity date, the repayment schedule, and the loan covenants.

Business Relationship Financing

Business suppliers can offer trade credit (accounts payable), which is the source of short-term funds most widely used by small firms. Suppliers also offer equipment loans and leases, which allow small businesses to use equipment purchased on an installment basis. Asset-based lending is financing secured by working-capital assets, such as accounts receivable and inventory.

Private Equity Financing

Business angels are private individuals, generally having moderate to significant business experience, who invest in others entrepreneurial ventures. Formal venture capitalists are groups of individuals who form limited partnerships for the purpose of raising capital from large institutional investors

Government Loan Programs

The federal government helps new businesses get started through the programs and agencies of the Small Business Administration (SBA), which include:

Loan Guaranty Program small business investment companies (SBICs) the Small Business Innovative Research (SBIR) Program

State and local governments finance new businesses in varying manners, though programs are generally geared to augmenting other sources of funding. Community-based financial institutions are lenders that use funds from federal, state, and private sources to serve low-income communities and small companies that otherwise would have little or no access to startup funding.

Other Sources of Financing

Large companies may finance smaller businesses when it is in their self-interest to have a close relationship with the smaller company. Stock sales, in the form of either private placements or public sales, may provide a few high-potential ventures with equity capital.

Sources of finance

Internal sources- equity, deposits, loans, retention of profits External sources- Borrowings from relatives, from banks, credit facilities from commercial banks, term loans from FI, venture capitalists Optimum capital structure Mix of debt and equity which will maximise the market value of a company Minimum cost and the maximum yields Adopted capital structure should be flexible enough to fulfil the future requirements of the capital as and when needed Use of debts should be within the repaying capacity of the enterprise Capital structure should not be a control diluting one

Factors determining capital structure

Nature of business Size of the enterprise Trading on equity Cash flows Purpose of financing Provision for future

Term loans Short term loans Long term loans- for acquiring fixed assets Sources of term loans Issue of shares Issue of debentures Loans from financial institutions Loans from commercial banks Public deposits Retention of profits Difference between shares and debentures

Key Differences Separation of Investment and Financing Decision

How is entrepreneurial finance different from corporate finance? In Corporate: Financing decisions are often made after investment decisions Financing decisions often made independently of wishes of firm owners Money raised is allocated among many projects OPPOSITE IS TRUE FOR MOST ENTREPRENEURIAL ENTITIES

Key Differences Non-diversification of Risk

Diversification More Difficult Owner often cannot diversify away from the firm; too much personal assets tied into the firm Firm may have only a few projects, so risk of each cannot be diversified successfully

Key Differences Managerial Involvement by Outsiders

Entrepreneurial entity investors are active protect their own investments by staying knowledgeable about the firm act as advisors to the firm provide safety net recommend professional service providers

Key Differences Necessity to Sell the Idea to Outsiders

Corporations use signaling to surreptitiously give information to the market to entice new investors dividend decisions, stock issues or repurchases, pre-announcement earnings statements Entrepreneurs have to take potential investors into their confidence no hidden agendas

Key Differences Incentive and Contract Issues

Corporate entityalign interests of management with interests of owners managerial stock options and performance bonuses debt covenants pit creditors against management and owners Entrepreneurial entityowner IS the manager outside investors will demand protective contracts and active managerial role owners will want to maintain control of the firms equity More flexibility for mutually beneficial contracts

Importance of self-interest

Owner goals usually a mix: financial and non-financial Become a large public firm Increase # locations Current family support Future family support Increase value of the business for future sale Provide inheritance for children Achieve independence Survive financially Live particular life style Employ family members Get off welfare or avoid unemployment Render a needed service Be part of challenging or creative venture

Key Differences Exit Strategies Needed

Corporate Entity Owners investors have market liquidity can sell out whenever they choose Entrepreneurial Entity Owners no liquidity to sell out have to create liquidity events

Youve Cleared the Hurdles Youve Won the Race What Now?

youve got to make the transition from entrepreneur to CEO facing personal challenges To meet these challenges, the entrepreneur must simultaneously: Extend his time horizon (from today and next week, to months and years in the future) Change predominate behavior patterns from doing and deciding, to delegating and managing, to leading and inspiring Shift his focus from the internal and operational aspects of the company to the external and strategic elements of the broader competitive environment

What is Leadership?

The entrepreneur must make a successful transition to the role of CEO become a leader! What is leadership? The most admired leaders have strong beliefs about matters of principle an unwavering commitment to a clear set of values passionate about their causes. Leadership is a relationship between those who aspire to lead and those who choose to follow Leaders mobilize others to get extraordinary things done in organizations [they] create a climate in which people turn challenging opportunities into remarkable successes

The Life Cycle of an Entrepreneurial Firm

Period of Transition The Corner: Strategy, product positioning,

a critical marketing, resources, management turning point team, infrastructure, management systems, culture, leadership roles, risk management

Maturity

$50M Startup
Product, Initial Customers

S EL AS

Sustained and Profitable Growth

Expansion, diversification, new product development

3 yrs 5yrs

TIME

Leadership Roles in the Life Cycle of the Firm

Initial Growth
Direction Setter Drive Sales & Market Share

Continuous Growth
Organizational Builder Strategic Innovator Chief of culture

S EL AS

Startup

Rapid Growth
Lead the Market Team Builder: Acquire, Integrate & Align Resources

Doer/Decision Maker Markets & Products

TIME

The Challenges of Growth

Classic In order to succeed, the entrepreneur must Entrepreneurial Strengths Visionary and pioneering also learn to: Plan, balancing short-term and long-term Always searching for new goals of all constituencies opportunities and challenges Passionate and energetic Communicate to produce alignment Driven to achieve Build a team and facilitate their working High standards of excellence as a team Creative, innovative Resolve conflicts Proactive, future-focused Understand that people and culture are Smart, capable, decisive your key assets Sense of urgency Learn from every success and failure you Confident risk-taker have, and from mentors and other successful entrepreneurs Problem solver Determined to create wealth and make a difference

Startup Stage Company Goals Understand your personal goals and objectives Figure out product and concept that customers want to buy Identify initial customers and build relationships Develop limited organizational capabilities Leaders Role Doer/Decision-maker Clearly in charge; making all of the decisions Rest of the organization reports to one leader

S EL AS

TIME

Key Questions: Is it Right for You?

For entrepreneurs, setting a direction involves personal as well as business choices. He suggests that entrepreneurs must continually ask themselves what business they want to be in and what capabilities they would like to develop. Developing a strategy consistent with the entrepreneurs personal strengths and objectives is critically important.

Setting the Direction: Personal Goals

Before they can set goals for a business, entrepreneurs must be explicit about their personal goals: Why do they want to launch their new venture? Achieve independence? Control my own destiny? Serve others? What are your financial objectives? Quick profits? Build a sustainable enterprise to pass on to my children? What is the end game? Do you have an exit strategy? Only when entrepreneurs are clear about what they want from their businesses does it make sense to ask three key questions: What kind of enterprise do I need to build? What risks and sacrifices does such an enterprise demand? Can I accept the risks and sacrifices?

Initial Growth Stage

Company Goals Set the direction (articulate a strategy) Launch differentiated product (competitive advantage) Capture market share Grow revenues Leaders Role Delegator/direction-setter Monitor progress Ultimate decision-maker for major decisions

S EL AS TIME

Initial Growth Stage

Key Challenges Articulate and reinforce your vision for the company Understand your personal goals for the long term Use scarce resources creatively Watch critical performance indicators, especially financial ones. Integrate input from stakeholders with your own perspective Hire multitalented people whose values match yours Use mentors

Initial Growth Stage

Personal Changes in Leadership Role Focus, focus, focus Manage proactively, not reactively Begin delegating responsibility, establish systems and structure with clearly defined roles, responsibilities Stop making all the decisions, solving all the problems, answering all the questions Trust others and hold them accountable for results Start planning for the future instead of reacting Share the credit and limelight with others Spend more time working on the big picture

Rapid Growth Stage

Company Goals Gain significant market share Become a market leader and ward off competitors Build infrastructure and team for aggressive growth Hire and integrate a lot of new people Leaders Role Team Builder Coach Planner Communicator

S EL AS

TIME

Rapid Growth Stage

Key Challenges Hire people who are smarter than you to fill gaps in functional expertise Define new roles/responsibilities build a management team that works together Lead team to create a strategic market-focused vision and plan for growth Create processes to align employees with companys vision and culture Develop a meaningful communication process Be a champion for the customer Listen to and consider the views of all constituencies

Rapid Growth Stage

Personal Changes in Leadership Role Use the companys plan to focus and track its efforts Shift your focus from doing work to managing and coaching others Stop being the ultimate decision-maker develop a consensus-oriented decision-making style Learn to facilitate effective teamwork Encourage all ideas to be heard in a healthy debate Stop tolerating organizational misfits Admit you dont have all the answers focus on unleashing the creativity of others Be a champion for effective, efficient processes

Continuous Growth

Company Goals Dominate the industry Expand to new markets and grow new niches in current markets Move from products to solutions Brand the company and its people as thought leaders Leaders Role Change catalyst Organization builder Strategic innovator Chief of culture

S EL AS

TIME

Continuous Growth

Key Challenges Recognize the need for fundamental change and proactively lead the discovery and implementation of a strategic plan for dramatic new growth Develop the executive team so that each member becomes a company leader; empower the team to run day-to-day operations while you focus only on strategic issues Find and develop high-level partnerships and relationships to leverage for growth Institutionalize the culture and values, and ensure that reward and recognition programs are effectively aligned

Continuous Growth Stage

Personal Changes in Leadership Role Spend all your time working on the big picture, not on the day-to-day aspects of the business Make strategy and culture your primary focus Hold the management team accountable for sharing strategic leadership Constantly refine and redevelop the organization and culture

Caitlin & Matthews: Leadership Roles in the Life Cycle of the Firm

Initial Growth
Direction Setter Drive Sales & Market Share

Continuous Growth
Organizational Builder Strategic Innovator Chief of culture

S EL AS

Startup

Rapid Growth
Lead the Market Team Builder: Acquire, Integrate & Align Resources

Doer/Decision Maker Markets & Products

TIME

Building a Management Team

Building a management team is critical to the survival of the enterprise: it requires careful planning, a clear understanding of both organizational and personal objectives, a willingness to accept help and criticism, the confidence to give up control, and an abundance of personal humility. The skills, aptitudes and motivations required to launch a new venture are very different from those required to lead and manage a rapidly growing firm in a competitive market environment Making that transition is frequently the toughest challenge for a young entrepreneur!

Letting Go

The development of CEO-level managerial and leadership skills requires experience, mentoring and practice that frequently spans decades of personal growth It is asking a great deal of a young entrepreneur, focused on overcoming technical, marketing and financial challenges to simultaneously acquire the full portfolio of managerial and leadership skills necessary to ensure the success of his venture as the challenges shift from early growth to operational effectiveness, market leadership and a successful exit. It is frequently essential for the entrepreneur to recognize his limitations and turn over the reins to an experienced manager, in order to ensure the ultimate success of the venture he has nurtured from inception.

Internal driving factors

organization of machinery and equipment, technological capacity, organizational culture, management systems, financial management employee morale.

External driving factors

Competition (what are they doing?) Customer behavior (needs, wants, and desires) Industry out look (local, national, global) Demographics (the change populations, there density, etc.) Economy (are we peaking, or moving negatively) Political movements and/or interference Social environment Technological changes General environmental changes Government interference (laws, regulations, policies, ect.)

Preparing for Change

Provide a compelling reason for change Make aims and tangible results of change clear Make information on changes freely available Get commitment from management Do as much as possible, as quickly as possible dont change piecemeal Address cultural components of change Consult staff on process of change

People orientated actions for Change

1. 2. 3. 4. 5. 6. 7.

Create sense of urgency Brief people on effect of changes Help people deal with change Keep people informed about changes as they progress Break changes down into small parts Empower staff top make changes themselves Demonstrate commitment to change from the top until project is complete

Yukl (2002)

Complying with government regulations

All businesses need to comply with federal, state and local laws The enforcement agency has no obligation to notify the business that it must comply with the law. Laws and regulations include licensing and registration of business name, workers compensation etc. Entrepreneurs need to know what laws and regulations apply to their particular business. Entrepreneur should collect information about the types of taxes owed, when to pay them, where to pay them, and how to compute the amounts due.

Public policy

How do government policies and regulation affect entrepreneurship? What can governments do to affect the level of entrepreneurship

Government policy and regulatory framework

Recognition and promotion of early-stage investments Angel investing: An angel investor is an individual who invests his own money directly in a seed stage venture in which there is no family connection Early-stage venture capital investing: Investments in an early stage venture by an entity which is registered with the appropriate financial regulatory authority

Impact investing: Investments in businesses and social ventures with the intention to generate measurable social and environmental impact alongside a financial return Impact investing is based on the conviction that such investments play a crucial role in addressing social and environmental challenges.

Strategic policy areas

Fuelling entrepreneurial mindsets Helping entrepreneurs handle risk Gearing entrepreneurs for growth and competitiveness Improving the flow of finance Creating a more SME friendly regulatory and administrative framework

Ease entrepreneurial activity: Regulations and processes for setting up, operating, and exiting a business as in India they are time-consuming and complex. Governments and their agencies can at all levels central, state, and local reduce transaction time and costs through measures such as single-window clearance and access to well developed industrial clusters.

Ease exits for investors: Policy framework for easier exits will encourage early stage investments by Angels and others: i. Provide appropriate fiscal incentive on capital gains to Angels and other early stage investors. ii. Simplify IPO requirements including permitting overseas listing without requirement of domestic listing and exclusion of such investors from lock in provisions. iii. Enable preferential treatment of such investment in liquidation Establish expeditious procedures for closing of businesses:

Permitting pension funds, insurance funds and provident funds to invest a small part of their corpus in early-stage venture funds could significantly improve capital flows. Special incentives such as tax credits could be provided to HNIs, corporates and institutions that invest in early stage venture funds and to angel investors. Banks must also be encouraged to invest in early-stage venture capital funds by treating such investments as priority sector funding Expand the lender base by incentivizing banks to offer SIDBI-like schemes to early stage ventures. Banks to create capacity and capability for lending to such ventures. The media TV, print and online should disseminate entrepreneurial success stories to inspire and encourage entrepreneurship. Creating an online portal that provides comprehensive information to a new entrepreneur is highly valuable

Entrepreneurship is found to be closely linked to equitable economic development. This leads to improvement in living standards and increase in level of happiness and satisfaction, leading to social harmony and reduction in crime. Government and regulators must have a mindset that prioritizes entrepreneurship as a national goal and aim to become service providers to emerging businesses.