Managing Entrepreneurial Ventures Appendix A © 2007 Prentice Hall, Inc. All rights reserved.

L E A R N I N G O U T L I N E Use this Learning Outline as you read and study this chapter. The Context of Entrepreneurship Differentiate between entrepreneurial ventures and small businesses. Explain why entrepreneurship is important in the United States and globally. Describe the four key steps in the entrepreneurial process. Explain what entrepreneurs do. Discuss why social responsibility and ethics are important considerations for entrepreneurs. © 2007 Prentice Hall, Inc. All rights reserved.

L E A R N I N G O U T L I N E (cont’d) Use this Learning Outline as you read and study this chapter. Start-Up and Planning Issues Discuss how opportunities are important to entrepreneurial ventures. Describe each of the seven sources of potential opportunity. Explain why it’s important for entrepreneurs to understand competitive advantage. List possible financing options for entrepreneurs. Describe the six major sections of a business plan. © 2007 Prentice Hall, Inc. All rights reserved.

L E A R N I N G O U T L I N E (cont’d) Use this Learning Outline as you read and study this chapter. Organizing Issues Contrast the six different forms of legal organization. Describe the organizational design issues that entrepreneurs face. Discuss the unique human resource management issues entrepreneurs face. Describe what an innovation-supportive culture looks like. © 2007 Prentice Hall, Inc. All rights reserved.

L E A R N I N G O U T L I N E (cont’d) Use this Learning Outline as you read and study this chapter. Leading Issues Explain what personality research shows about entrepreneurs. Discuss how entrepreneurs can empower employees. Explain how entrepreneurs can be effective at leading employee work teams. Controlling Issues Describe how entrepreneurs should plan, organize, and control growth. Describe the boiled frog phenomenon and why it’s useful for entrepreneurs. Discuss the issues an entrepreneur needs to consider when deciding whether to exit the entrepreneurial venture. © 2007 Prentice Hall, Inc. All rights reserved.

The Context of Entrepreneurship What Is Entrepreneurship? Entrepreneurship is the process of starting new businesses, generally in response to opportunities. Entrepreneurial Ventures Organizations that pursue opportunities, are characterized by innovative practices, and have growth and profitability as their main goals. Small Business A firm that is independently owned, operated, and financed; has fewer than 100 employees; doesn’t necessarily engage in new or innovative practices, and has relatively little impact on its industry. © 2007 Prentice Hall, Inc. All rights reserved.

Why Is Entrepreneurship Important? Innovation Engage in the creative destruction process Act as agents of change Number of New Startups Increasing numbers of new firms Job Creation New ventures create 60-80% of net new jobs © 2007 Prentice Hall, Inc. All rights reserved.

Exhibit A–1 Global Entrepreneurship Monitor 2005—Country Clusters Cluster 1: Cluster 2: Middle-Income, High-Growth High-Income, High-Growth Argentina Australia Italy Brazil Austria Japan Chile Belgium Netherlands China Canada New Zealand Croatia Denmark Norway Hungary Finland Singapore Jamaica France Spain Latvia Germany Sweden Mexico Greece Switzerland Slovenia Iceland United Kingdom South Africa Ireland United States Thailand Venezuela Source: Adapted from M. Minniti, W. D. Bygrave, and E. Autio, “Global Entrepreneurship Monitor: 2005 Executive Report,” Babson College and London Business School. © 2007 Prentice Hall, Inc. All rights reserved.

The Entrepreneurial Process Exploring the Entrepreneurial Context Identifying Opportunities and Possible Competitive Advantages Starting the Venture Managing the Venture © 2007 Prentice Hall, Inc. All rights reserved.

Potential Sources of Opportunity The Unexpected New Knowledge The Incongruous Environmental Context Changes in Perception The Process Need Demographics Industry and Market Structures © 2007 Prentice Hall, Inc. All rights reserved.

Exhibit A–2 Evaluating Potential Ideas Personal Considerations: Marketplace Considerations: Do you have the capabilities to do what you’ve selected? Are you ready to be an entrepreneur? Are you prepared emotionally to deal with the stresses and challenges of being an entrepreneur? Are you prepared to deal with rejection and failure? Are you ready to work hard? Do you have a realistic picture of the venture’s potential? Have you educated yourself about financing issues? Are you willing and prepared to do continual financial and other types of analyses? Who are the potential customers for your idea: who, where, how many? What similar or unique product features does your proposed idea have compared to what’s currently on the market? How and where will potential customers purchase your product? Have you considered pricing issues and whether the price you’ll be able to charge will allow your venture to survive and prosper? Have you considered how you will need to promote and advertise your proposed entrepreneurial venture? © 2007 Prentice Hall, Inc. All rights reserved.

Exhibit A–3 Feasibility Study A. Introduction, historical background, description of product or service: Brief description of proposed entrepreneurial venture Brief history of the industry Information about the economy and important trends Current status of the product or service How you intend to produce the product or service Complete list of goods or services to be provided Strengths and weaknesses of the business Ease of entry into the industry, including competitor analysis B. Accounting considerations: 1. Proforma balance sheet 2. Proforma profit and loss statement 3. Projected cash flow analysis © 2007 Prentice Hall, Inc. All rights reserved.

Exhibit A–3 Feasibility Study (cont’d) C. Management considerations: Personal expertise—strengths and weaknesses Proposed organizational design Potential staffing requirements Inventory management methods Production and operations management issues Equipment needs. D. Marketing considerations: Detailed product description Identify target market (who, where, how many) Describe place product will be distributed (location, traffic, size, channels, etc.) Price determination (competition, price lists, etc.) Promotion plans (personal selling, advertising, sales promotion, etc.) © 2007 Prentice Hall, Inc. All rights reserved.

Exhibit A–3 Feasibility Study (cont’d) E. Financial considerations: Start-up costs Working capital requirements Equity requirements Loans—amounts, type, conditions Breakeven analysis Collateral Credit references Equipment and building financing—costs and methods F. Legal considerations: Proposed business structure (type; conditions, terms, liability, responsibility; insurance needs; buyout and succession issues) Contracts, licenses, and other legal documents G. Tax considerations: (sales/property/employee; federal, state, and local) H. Appendix: charts/graphs, diagrams, layouts, resumes, etc. © 2007 Prentice Hall, Inc. All rights reserved.

Researching Competitors Competitor Intelligence: What types of products or services are competitors offering? What are the major characteristics of these products or services? What are their products’ strengths and weaknesses? How do they handle marketing, pricing, and distributing? What do they attempt to do differently from other competitors? Do they appear to be successful at it? Why or why not? What are they good at? What competitive advantage(s) do they appear to have? What are they not so good at? What competitive disadvantage(s) do they appear to have? How large and profitable are these competitors? © 2007 Prentice Hall, Inc. All rights reserved.

Exhibit A–4 Possible Financing Options Entrepreneur’s personal resources (personal savings, home equity, personal loans, credit cards, etc.) Financial institutions (banks, savings and loan institutions, government-guaranteed loan, credit unions, etc.) Venture capitalists—external equity financing provided by professionally-managed pools of investor money Angel investors—a private investor (or group of private investors) who offers financial backing to an entrepreneurial venture in return for equity in the venture Initial public offering (IPO)—the first public registration and sale of a company’s stock National, state, and local governmental business development programs Unusual sources (television shows, judged competitions, etc.) © 2007 Prentice Hall, Inc. All rights reserved.

Investing in Entrepreneurial Ventures Venture Capitalists External equity financing provided by professionally-managed pools of investor money. Angel Investors A private investor (or group of private investors) who offers financial backing to an entrepreneurial venture in return for equity in the venture. Initial public offering (IPO) The first public registration and sale of a company’s stock. © 2007 Prentice Hall, Inc. All rights reserved.

Developing a Business Plan A written document that summarizes a business opportunity and defines and articulates how the identified opportunity is to be seized and exploited. Elements of a Business Plan Executive summary Analysis of opportunity Analysis of context Description of the business Financial data and projections Supporting documentation © 2007 Prentice Hall, Inc. All rights reserved.

Exhibit A–5 Legal Forms of Business Organization Structure Ownership Requirements Tax Treatment Liability Advantages Drawbacks Sole proprietorship One owner Income and losses “pass through” to owner and are taxed at personal rate Unlimited personal liability Low start-up costs Freedom from most regulations Owner has direct control All profits go to owner Easy to exit business Personal finances at risk Miss out on many business tax deductions Total responsibility May be more difficult to raise financing General partnership Two or more owners Income and losses “pass through” to partners and are taxed at personal rate flexibility in profit-loss allocations to partners Ease of formation Pooled talent Pooled resources Somewhat easier access to financing Some tax benefits Divided authority and decisions Potential for conflict Continuity of transfer of ownership © 2007 Prentice Hall, Inc. All rights reserved.

Exhibit A–5 Legal Forms of Business Organization (cont’d) Structure Ownership Requirements Tax Treatment Liability Advantages Drawbacks Limited liability partnership (LLP) Two or more owners Income and losses “pass through” to partner and are taxed at personal rate; flexibility in profit-loss allocations to partners Limited, although one partners must retain unlimited liability Good way to acquire capital from limited partners Cost and complexity of forming can be high Limited partners cannot participate in management of business without losing liability protection C corporation Unlimited number of shareholders; no limits on types of stock or voting arrangements Dividend income is taxed at corporate and personal shareholder levels; losses and deductions are corporate Limited Limited liability Transferable ownership Continuous existence Easier access to resources Expensive to set up Closely regulated Double taxation Extensive record keeping Charter restrictions © 2007 Prentice Hall, Inc. All rights reserved.

Exhibit A–5 Legal Forms of Business Organization (cont’d) Structure Ownership Requirements Tax Treatment Liability Advantages Drawbacks S corporation Up to 75 share-holders; no limits on types of stock or voting arrangements Income and losses “pass through” to partners and are taxed at personal rate; flexibility in profit-loss allocation to partners Limited Easy to set up Enjoy limited liability protection and tax benefits of partnership Can have a tax-exempt entity as a shareholder Must meet certain requirements May limit future financing options Limited liability company (LLC) Unlimited number of “members”; flexible membership arrangements for voting rights and income Income and losses “pass through” to partners and are taxed at personal rate; flexibility in profit-loss allocations to partners Greater flexibility Not constrained by regulations on C and S corporations Taxed as partner-ship, not as corporation Cost of switching from one form to this can be high Need legal and financial advice in forming operating agreement © 2007 Prentice Hall, Inc. All rights reserved.

Human Resource Management Issues in Entrepreneurial Ventures Employee Recruitment Concerns Locating high potential employees who: can perform multiple roles are willing to “buy-in” (commitment) Filling critical skill gaps Employee Retention Issues Potential for damage to client/customer relationships due to loss of employees Need to offer desirable benefits Compensation: base pay and incentives © 2007 Prentice Hall, Inc. All rights reserved.

Exhibit A–6 Suggestions for Achieving a Supportive Growth-Oriented Culture Keep the lines of communication open—inform employees about major issues. Establish trust by being honest, open, and forthright about the challenges and rewards of being a growing organization. Be a good listener—find out what employees are thinking and facing. Be willing to delegate duties. Be flexible—be willing to change your plans if necessary. Provide consistent and regular feedback by letting employees know the outcomes—good and bad. Reinforce the contributions of each person by recognizing employees’ efforts. Continually train employees to enhance their capabilities and skills. Maintain the focus on the venture’s mission even as it grows. Establish and reinforce a “we” spirit since a successful growing venture takes the coordinated efforts of all the employees. © 2007 Prentice Hall, Inc. All rights reserved.

Leading Issues Personality Characteristics of Entrepreneurs High level of motivation, abundance of self-confidence, ability to be involved for the long term, high energy level, persistent problem solver, high degree of initiative, ability to set goals, and moderate risk-taker. Proactive personality Individuals who are more prone to take actions to influence their environment—that is, they’re more proactive. © 2007 Prentice Hall, Inc. All rights reserved.

Leading Issues (cont’d) Motivating Employees Through Empowerment Empowerment Giving employees the power to make decisions and take actions on their own to solve problems Benefits of Empowerment Improved flexibility and speed Stronger work motivation Higher morale Better work quality Higher job satisfaction Lower turnover Higher productivity Improved quality © 2007 Prentice Hall, Inc. All rights reserved.

Leading Issues (cont’d) Empowering Employees Participative decision making Delegation Redesigning jobs © 2007 Prentice Hall, Inc. All rights reserved.

The Entrepreneur as Leader Leading Employee Work Teams Empowered teams Have the authority to plan and implement process improvements Self-directed teams Are nearly autonomous and responsible for many managerial activities Cross-functional teams Are composed of individuals from various specialties who work together on various tasks © 2007 Prentice Hall, Inc. All rights reserved.

Managing personal life choices and challenges Controlling Issues Managing Growth Managing Downturns Exiting the Venture Managing personal life choices and challenges © 2007 Prentice Hall, Inc. All rights reserved.

Controlling Issues (cont’d) Managing Growth Planning for growth Organizing for growth Financing growth Finding people Creating a growth-oriented culture Controlling for growth Managing Downturns Recognizing crisis situations—avoiding the boiled frog phenomenon Dealing with downturns, declines, and crises © 2007 Prentice Hall, Inc. All rights reserved.

Exiting the Venture Why Leave? Business Valuation Methods Desiring to harvest the value of the venture Facing serious organizational performance problems Desiring to pursue other interests/opportunities Business Valuation Methods Asset valuations Earnings valuations Cash flow valuations © 2007 Prentice Hall, Inc. All rights reserved.

Exhibit A–7 Issues in Exiting the Entrepreneurial Venture Be prepared. Decide who will sell the business. Consider the tax implications. Screen potential buyers. Decide whether to tell employees before or after selling. © 2007 Prentice Hall, Inc. All rights reserved.

Managing Personal Life Choices and Challenges Balancing Work and Personal Life Become a good time manager Seek professional business advice when needed Deal with conflicts as they arise Developing a network of trusted friends and peers Recognize when personal stress levels are too high © 2007 Prentice Hall, Inc. All rights reserved.

Terms to Know entrepreneurship entrepreneurial ventures small business feasibility study venture capitalists angel investors initial public offering (IPO) business plan sole proprietorship general partnership © 2007 Prentice Hall, Inc. All rights reserved.

Terms to Know (Cont’d) limited liability partnership (LLP) corporation closely held corporation S corporation limited liability company (LLC) operating agreement proactive personality “boiled frog” phenomenon harvesting © 2007 Prentice Hall, Inc. All rights reserved.