Entrepreneurship: Successfully Launching New Ventures Modified from Barringer and Ireland (2008) Organizational Feasibility Analysis Day #3 Chapter 9: Building a New Venture Team

Why is a New Venture Team Important? Fundamental Problem for New Firms: Liabilities of Newness –The basic concept: New ventures have a high likelihood of failing because the people who start the firm can’t adjust quickly enough to their new roles and because the firm lacks a “track record” with those in external environment One way to overcome liabilities of newness is via a talented and experienced new venture team –They have a track record (e.g., via their experience) –They can provide legitimacy for external others –Research shows that the composition of the team is an important success factor of new ventures Multiple people simultaneously identify the same opportunity –Success often depends on abilities of initial founders and their helpers

What is a New Venture Team? 1. Group of founders 2. Key employees 3. Boards of directors 4. Boards of advisers 5. Lenders and Investors a)VCs (institutionalized, angels) and Bankers 6. Others (e.g., accountants, attorneys, etc.)

Element 1: Founder(s) of the Firm The individual(s) who initiate and have equity stakes in the venture Important factors about founder(s): –Founder characteristics & early decisions impact new venture team development Higher education Prior entrepreneurial experience Relevant industry experience The ability to “network” effectively –Should you found a Solo- or Team-based Venture? 50% to 70% of all new ventures started by more than one person New ventures started by a team have an advantage (especially growth oriented) –More talent, more ideas, psychological support, faster firm growth, better network quality Teams more successful if 1) have previously worked together & 2) are heterogeneous 2 potential problems with teams –Members may not get along –As firm grows, if need to establish a formal structure with a hierarchy, may cause problems

Element 2: Recruiting Key Employees New venture operations are usually very lean –For most (e.g., high growth firms), there is a “breaking point” where to remain competitive and prosperous, employees must be hired When and why should you hire employees?...it depends –Startups vary in how quickly they need to add personnel Decisions based on necessity, financial abilities, knowledge needs, time, hierarchy needed, etc. Requires founder(s) to evaluate their skills for shortcomings High growth firms: usually based on need and knowledge specialization –eBay needed a CEO, Starbucks needed an operations manager Salary Substitutes and lifestyles: primarily time issues, necessity, and financial abilities How to you identify appropriate hires?...depends on type of personnel needed –Networks almost always appropriate for any type of position and venture type –Executive search firms appropriate for high-growth ventures seeking TMT members –Placement offices (e.g., colleges)—good for a variety of positions and firms

Element 3: Board of Directors (BODs) What is a BOD? –Panel elected by a corporation’s shareholders to oversee the management of the firm Why have a BOD? –Legally, if new venture is a corporation, it is required to have a BOD –Gain legitimacy and reduce liabilities of newness if BOD has well-known, respected people –Most useful role is to provide guidance and support the firm’s managers Sambazon, Inc. increased legitimacy and benefited from guidance from the founder of Silk Soymilk Who in on a BOD?...it depends –Typically made up of insiders and outsiders An inside director is a person who is also an officer of the firm An outside director is someone who is not employed by the firm –Often prior corporate officers –Corporate officers from other firms (which can sometimes become an interlock) –Research suggests certain mixes of BODs is important for different types of venture development

Element 3: Board of Directors (BODs) Guidelines for Forming Effective BODs 1.Aim high: experience and reputation matter 2.Composition: diversity, experience, inside/outside matters 3.Establish ground rules pertaining to decisions 4.Share information: keep updated and “in the loop” 5.Use committees: use standing committees 6.Motivate board members: compensation and opportunities are motivators 7.Address liabilities issues: disclose liabilities to members

Element 3: BODs (continued) What do BODs Do? –BODs have three formal and fiduciary responsibilities Appoint the officers of the firm Declare dividends Oversee the affairs of the corporation Sarbanes-Oxley Act of 2002, or SOX, was established and increases the legal responsibility of a company’s board – –Provisions include that a firm cannot make a loan to a board member and that the SEC has “oversight and enforcement authority of the Board” Why do people serve on BODs? –Create interlocks –Obtain knowledge resources and create resource exchange relationships –Stay “tapped” into the industry –Desire to contribute to the development of a firm or cause –Small start ups will usually start by asking friends and family to be their first board When do they meet and how are they paid? –How frequently? Most BODs meet 3-4 times a year Depends on the standards set in the articles of incorporation and the formal firm procedures –How are they compensated? BODs are mostly compensated in company stock or serve voluntarily Paying a cash honorarium is not thought to be effective

Element 4: Board of Advisors (BOAs) What is a BOA? –Panel of experts who provide counsel and advice on an ongoing basis Informal group with no legal responsibility for the firm and their advice is nonbinding Easier to recruit due to fewer time requirements and no legal liability Often geographically dispersed and meet online or via telephones Why have a BOA? –For general guidance purposes or to address a specific issues –Lends credibility/legitimacy Guidelines to Consider when Organizing a BOA –Make sure they play a meaningful role in the firm’s development and growth –Members compatible and complementary (heterogeneous) in experience –When inviting people to be on BOA, carefully spell out the “rules” What their role is How to handle access to confidential information

Element 5: Lenders & Investors Lenders (e.g., banks) provide debt financing –Can be useful for finding customers, providing support, etc. Investors provide equity financing (e.g., they acquire equity stake in venture) –Two main types of investors: 1) institutionalized venture capitalists and 2) angel investors –How do investors add value to a new venture (see Table 9.3 for more)? With a vested interest in the companies they finance, causes them to become involved They provide guidance & lending advice Assume the natural role of providing financial oversight Very helpful for recruiting customers Important Considerations with Lenders & Investors –Their goals are sometimes not inline with entrepreneurs’ They often want a liquidity event –Often require substantial controlling power and profit percentages

Element 6: Other Professional Advisors Many other professionals can make up a firm’s new venture team –Attorneys for legal issues –Accountants for financial issues –Business consultants Business Consultants –An individual who gives professional or expert advice. –Business consultants fall into two categories: Paid consultants Consultants available for free or at a reduced rate via nonprofit or governmental agency –Small Business Administration (SBA) at national and local levels National SBA: Columbus SBA: –Small Business Development Centers (SBDC) At UD: At Wright State U: In Springfield: –Business Incubators –University Entrepreneurship Centers

Organizational Feasibility Analysis: New Venture Team Assignment Requirements Describe the founding Management Team (e.g., the people in your group) –Describe the qualifications of each member of the team as well as if and how your team is uniquely qualified to make this business a success. –Discuss if your qualifications are lacking, what must you do to improve your abilities? If you are not qualified and cannot acquire the necessary skills within the team, how will you handle these shortcomings? Describe any Anticipated Future Human Resource Needs –As your firm grows, you will likely need to hire on additional employees. –Describe 2-3 additional people that should be added to the venture’s employee roster (not the name of a person –the profile of the type of person you’d want). Describe the unique contribution each of these individuals could bring to the team. Include the appendices of your deliverables, a copy of each team member’s current resume.