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14 e

  1. 1. Accessing Resources for Growth from ExternalSourcesIn this chapter we explored alternate means by which an entrepreneurcan grow his or her business. Franchising was discussed as a means ofnew entry that can reduce the risk of downside loss for the franchiseeand also as a way that an entrepreneur can expand his or her businessby having others pay for the use of the business formula. For thefranchisee, the advantages of franchising are that he or she enters intoa business with an accepted name, product, or service; has access tomanagerial assistance provided by the franchisor; receives up-frontsupport that could save the entrepreneur significant time and possiblycapital; has access to extensive information about the market; and hasother operating and structural controls to assist in the effectivemanagement of the business. However, there are a number ofpotential disadvantages, which usually center on the inability of thefranchisor to provide the services, advertising, and location that werepromised.For the franchisor, the primary advantage of franchising is that he orshe can expand the business quickly, using little personal capital. Butthe franchisor also incurs certain risks in choosing this expansionalternative. In some cases, the franchisor may find it very difficult tolocate quality franchisees. Poor management, in spite of all thetraining and controls, can still cause individual franchise failures, andthese can reflect negatively on the entire franchise system. As thenumber of franchises increases, the ability to maintain tight controlsbecomes more difficult.Entrepreneurs can also achieve growth through joint ventures. Theeffective use of joint ventures as a strategy for expansion requires theentrepreneur to carefully appraise the situation and the potentialpartner(s). First, the entrepreneur needs an accurate assessment ofthe other party to best manage the new entity in light of the ensuingrelationship. Second, there needs to be symmetry between the two (ormore) firms in terms of "chemistry" and the combination of theirresources. Third, expectations of the results of the joint venture mustbe reasonable. Far too often, at least one of the partners feels that ajoint venture will be the cure-all for other corporate problems.Expectations of a joint venture must be realistic. Finally, the timingmust be right.
  2. 2. Another way the entrepreneur can expand the venture is by acquiringan existing business. For an entrepreneur, there are many advantagesto acquiring an existing business, such as gaining access to anestablished image and track record, familiar location, establisheddistribution and resource channels, and knowledgeable and skilledemployees. Besides, the cost of an acquisition can be cheaper thanother mechanisms for growth. However, history suggests thatacquisitions have only a marginal success record. Entrepreneurs seemto be overly confident about their ability to achieve envisionedsynergies, integrate organizational cultures, and retain key employees.After balancing the pros and cons of the acquisition, the entrepreneurneeds to determine a fair price for the business.Mergers and leveraged buyouts are other ways that entrepreneurs cangrow their businesses. An essential skill for all these alternatives is theability of the entrepreneur to negotiate. Good negotiation involves twotasks. The first task involves determining how the benefits of therelationship are going to be distributed between the parties. Thesecond task is exploring the mutual benefits that can be gained fromthe relationship. To negotiate in a way that maximizes benefitsrequires the entrepreneur to use information about ones ownpreferences and those of the other party to create an outcome that ismutually beneficial. This requires an initial assessment of oneself andthe other party and the use of strategies to elicit more informationduring the negotiation interactions to better inform those initialassessments. To these ends, this chapter offered four importantassessments an entrepreneur should make and four strategies thatcan be used to achieve a successful negotiation.http://highered.mcgraw-hill.com/sites/0073530328/student_view0/chapter14/
  3. 3. Informal Risk Capital, Venture Capital, andGoing PublicIn financing a business, the entrepreneur determines theamount and timing of funds needed. Seed or start-up capital isthe most difficult to obtain, with the most likely source beingthe informal risk-capital market (angels). These investors, whoare wealthy individuals, average one or two deals per year,ranging from $100,000 to $500,000, and generally find theirdeals through referrals.Although venture capital may be used in the first stage, it isprimarily used in the second or third stage to provide workingcapital for growth or expansion. Venture capital is broadlydefined as a professionally managed pool of equity capital.Since 1958, small-business investment companies (SBICs) havecombined private capital and government funds to finance thegrowth and start-up of small businesses. Private venture-capital firms have developed since the 1960s, with limitedpartners supplying the funding. At the same time, venture-capital divisions operating within major corporations beganappearing. States also sponsor venture-capital funds to fostereconomic development. To achieve the venture capitalistsprimary goal of generating long-term capital appreciationthrough investme1nts in business, three criteria are used: Thecompany must have strong management; the product/marketopportunity must be unique; and the capital appreciation mustbe significant, offering a 40 to 60 percent return on investment.The process of obtaining venture capital includes a preliminaryscreening, agreement on principal terms, due diligence, andfinal approval. Entrepreneurs need to approach a potentialventure capitalist with a professional business plan and a goodoral presentation.
  4. 4. Valuing the company is of concern to the entrepreneur. Eightfactors can be used as a basis for valuation: the nature andhistory of the business, the economic outlook, book value,future earnings, dividend-paying capacity, intangible assets,sales of stock, and the market price of stocks of similarcompanies. Numerous valuation approaches that can be usedwere discussed. In the end, the entrepreneur and investor mustagree on the terms of the transaction, known as the deal. Whencare is taken in structuring the deal, the entrepreneur and theinvestor will maintain a good relationship while achieving theirgoals through the growth and profitability of the business.Going public—transforming a closely held corporation intoone in which the general public has proprietary interest—isindeed arduous. An entrepreneur must carefully assesswhether the company is ready to go public as well as whetherthe advantages outweigh the disadvantages of doing so.Once the decision is made to proceed, a managing investmentbanking firm must be selected and the registration statementprepared. The expertise of the investment banker is a majorfactor in the success of the public offering. In selecting aninvestment banker, the entrepreneur should considerreputation, distribution capability, advisory services,experience, and cost. To prepare for the registration date, theentrepreneur must organize an "all hands" meeting ofcompany officials, the companys independent accountants andlawyers, and the underwriters and their counsel. A timetablemust be established for the effective date of registration andfor the preparation of necessary financial documents, includingthe preliminary and final prospectuses. Following the initialpublic offering, the entrepreneur should strive to maintain agood relationship with the financial community and adherestrictly to the reporting requirements of public companies.
  5. 5. acquisition Financing to buy another companyfinancingacquisition Purchasing all or part of a companyaffordable loss Prescribes committing in advance to what oneprinciple is willing to lose rather than investing in calculations about expected returns to the projectaftermarket support Actions of underwriters to help support the price of stock following the public offeringassessment of a new Determining whether the entrepreneurentrys believes she or he can make the proposedattractiveness new entry workassessment of risk Identifies potential hazards and alternative strategies to meet business plan goals and objectivesasset base for loans Tangible collateral valued at more than the amount of money borrowed
  6. 6. assets Items that are owned or available to be used in the venture operationsassets of newness Positive implications arising from an organizations newnessattribute listing Developing a new idea by looking at the positives and negativesbackward A step back (up) in the value-added chainintegration toward the raw materialsbalance of The trade status between countriespaymentsbargaining zone The range of outcomes between the entrepreneurs reservation price and the reservation price of the other partybarter A method of payment using nonmoney itemsbig-dream approach Developing a new idea by thinking without constraintsbird-in-hand Involves negotiating with any and allprinciple stakeholders who are willing to make actual commitments to the project; determines the goals of the enterpriseblue-sky laws Laws of each state regulating public sale of stockbook value The indicated worth of the assets of a companybrainstorming A group method for obtaining new ideas and solutionsbreakeven Volume of sales where the venture neither makes a profit nor incurs a lossbreakthrough New products with some technological changeinnovationsbrokers People who sell companiesbusiness angels A name for individuals in the informal risk- capital marketbusiness ethics The study of behavior and morals in a business situation
  7. 7. business plan (1)The description of the future direction of the business (2) Written document describing all relevant internal and external elements and strategies for starting a new venturecausal process A process that starts with a desired outcome and focuses on the means to generate that outcomeChapter 07 Requires the venture to liquidate, eitherbankruptcy voluntarily or involuntarilyChapter 11 Provides the opportunity to reorganize andbankruptcy make the venture more solventChapter 13 Voluntarily allows individuals with regularbankruptcy income the opportunity to make extended time paymentschecklist method Developing a new idea through a list of related issuescognitive Describes the extent to which entrepreneursadaptability are dynamic, flexible, self-regulating, and engaged in the process of generating multiple decision frameworks focused on sensing and processing changes in their environments and then acting on themcollective notebook Developing a new idea by group membersmethod regularly recording ideascomment letter A letter from the SEC to a company indicating corrections that need to be made in the submitted prospectuscomprehension Questions designed to increase entrepreneursquestions understanding of the nature of the environmentconcept stage Second stage in product development processconnection tasks Tasks designed to stimulate entrepreneurs to think about the current situation in terms of similarities and differences with situations previously faced and solvedcontract A legally binding agreement between two
  8. 8. partiesconventional bank Standard way banks lend money to companiesloancopyright Right given to prevent others from printing, copying, or publishing any original works of authorshipcorporate culture The environment of a particular organizationcorporation legal entity that is run by stockholders havingSeparate limited liabilitycreative problem A method for obtaining new ideas focusing onsolving the parametersdeal structure The form of the transaction when money is obtained by a companydemand uncertainty Considerable difficulty in accurately estimating the potential size of the market, how fast it will grow, and the key dimensions along which it will growdeparture points The activities occurring when the venture is starteddescription of the Provides complete overview of the product(s),venture service(s), and operations of new venturedevelopment Financing to rapidly expand the businessfinancingdirect exporting Involves the use of independent distributors or the companys own overseas sales office in conducting international businessdisclosure Statement to U.S. Patent and Trademarkdocument Office by inventor disclosing intent to patent ideadistribution task Negotiating how the benefits of the relationship will be allocated between the partiesdiversification A strategy to grow by selling a new product tostrategy a new marketdiversified activity A conglomerate merger involving the
  9. 9. merger consolidation of two essentially unrelated firmsdual process for Involves oscillation between the two griefgrief recovery approaches (loss-orientation and restoration-orientation)due diligence The process of deal evaluationearly-stage One of the first financings obtained by afinancing companyearnings approach Determining the worth of a company by looking at its present and future earningseffectuation process A process that starts with what one has (who they are, what they know, and whom they know) and selects among possible outcomesemerging industries Industries that have been newly formed and are growingemployee stock A two- to three-year plan to sell the businessoption plan (ESOP) to employeesentrepreneur as an An individual developing something uniqueinnovatorentrepreneur Individual who takes risks and starts something newentrepreneurial The environment of an entrepreneurial-culture oriented firmentrepreneurial The motivational factors that influenceintentions individuals to pursue entrepreneurial outcomesentrepreneurial Involves the ability to rapidly sense, act, andmind-set mobilize, even under uncertain conditionsentrepreneurial The process of pursuing a new venture,process whether it be new products into existing markets, existing products into new markets, and/or the creation of a new organizationentrepreneurial The ability to obtain, and then recombine,resource resources into a bundle that is valuable, rare, and inimitable
  10. 10. entrepreneurial self- The conviction that one can successfullyefficacy execute the entrepreneurial processentrepreneurial The set of decisions, actions, and reactionsstrategy that first generate, and then exploit over time, a new entryentrepreneurially An environment that enhances organizationalfostering membersperceptions of entrepreneurial actionenvironment as both feasible and desirableentrepreneurship (1) Process of creating something new and assuming the risks and rewards (2) is the process of creating something new with value by devotingenvironmental Assessment of external uncontrollableanalysis variables that may impact the business planequity participation Taking an ownership positionequity pool Money raised by venture capitalists to investserror of commission Negative outcome from actingerror of omission Negative outcome from not actingexporting The sale and shipping of products manufactured in one country to a customer located in another countryfactor approach Using the major aspects of a company to determine its worthfactors in valuation Nonmonetary aspects that affect the fund valuation of a companyFIFO Inventory costing method whereby first items into inventory are first items outfinal approval A document showing the final terms of the dealfinancial plan Projections of key financial data that determine economic feasibility and necessary financial investment commitmentFinancial ratios Control mechanisms to test the financial strength of the new venturefocus groups Groups of individuals providing information in
  11. 11. a structured formatforced relationships Developing a new idea by looking at product combinationsForm S-1 Form for registration for most initial public offerings of stockforward integration A step forward (down) on the value-added chain toward the customersfoundation company A type of company formed from research and development that usually does not go publicFranchising is an arrangement whereby a franchisor gives exclusive rights of local distribution to a franchisee in return for their payment of royalties and conformance to standardized operating procedures.free association Developing a new idea through a chain of word associationsfull and fair The nature of all material submitted to thedisclosure SEC for approvalgazelles Very high growth venturesgeneral partner The overall coordinating party in a partnership agreementgeneral valuation Methods for determining the worth of aapproaches companygoing public Selling some part of the company by registering with the SECGordon method Method for developing new ideas when the individuals are unaware of the problemgovernment as an A government active in commercializinginnovator technologygrief A negative emotional response a person feels from the loss of something importanthigh-potential A venture that has high growth potential andventure therefore receives great investor interesthorizontal Occurs at the same level of the value-addedintegration chain but simply involves a different, but
  12. 12. complementary, valueadded chainhorizontal merger A type of merger combining two firms that produce one or more of the same or closely related products in the same geographic areaidea stage First stage in product development processimitation strategies Copying the practices of other firmsindirect exporting In international business, involves having a foreign purchaser in the local market or using an export management firmindustry analysis Reviews industry trends and competitive strategiesinformal risk-capital Area of risk capital markets consisting mainlymarket of individualsinitial public offering The first public registration and sale of a(IPO) companys stockintegration task Exploring possible mutual benefits from the relationship so that the "size of the pie" can be increasedintellectual property Any patents, trademarks, copyrights, or trade secrets held by the entrepreneurinternational An entrepreneur doing business across his orentrepreneurship her national boundaryinventor An individual who creates something newinvoluntary Petition of bankruptcy filed by creditorsbankruptcy without consent of entrepreneurjoint venture (1) The joining of two firms in order to form a third company in which the equity is shared (2) Two or more companies forming a new companykey success factors The requirements that any firm must meet in order to successfully compete in a particular industrylead time The grace period in which the first mover operates in the industry under conditions of limited competition
  13. 13. lemonade principle Prescribes leveraging surprises for benefits rather than trying to avoid them, overcome them, or adapt to themleveraged buyout Purchasing an existing venture by any(LBO) employee groupliabilities of Negative implications arising from annewness organizations newnessliabilities Money that is owed to creditorslicensing (1) Contractual agreement giving rights to others to use intellectual property in return for a royalty or fee (2) Involves giving a foreign manufacturer the right to use a patent, technology, production process, or product in return for the payment of a royaltylifestyle firm A small venture that supports the owners and usually does not growLIFO Inventory costing method whereby last items into inventory are first items outlimited partner A party in a partnership agreement that usually supplies money and has a few responsibilitiesliquidation value Worth of a company if everything was sold todayloss-orientation An approach to grief recovery that involves working through, and processing, some aspect of the loss experience and, as a result of this process, breaking emotional bonds to the object lostmajority interest The purchase of over 50 percent of the equity in a foreign businessManagement A nonequity method of international businesscontract in which an entrepreneur contracts his or her management techniques and skills to a (foreign) purchasing companyManaging Lead financial firm in selling stock to the
  14. 14. underwriter publicmarket development Strategy to grow by selling the firms existingstrategy products to new groups of customersmarket extension A type of merger combing two firms thatmerger produce the same products but sell them in different geographic marketsmarket knowledge Possession of information, technology, know- how, and skills that provide insight into a market and its customersMarket Process of dividing a market into definable andsegmentation measurable groups for purposes of targeting marketing strategymarketing goals and Statements of level of performance desired byobjectives new venturemarketing mix Combination of product, price, promotion, and distribution and other marketing activities needed to meet marketing objectivesmarketing plan (1) Describes market conditions and strategy related to how the product(s) and service(s) will be distributed, priced, and promoted (2) Written statement of marketing objectives, strategies, and activities to be followed in business planmarketing strategy Specific activities outlined to meet theand action plan ventures business plan goals and objectivesmarketing system Interacting internal and external factors that affect ventures ability to provide goods and services to meet customer needsmerger Joining two or more companiesme-too strategy Copying products that already exist and attempting to build an advantage through minor variationsminority interest A form of direct foreign investment in which the investing entrepreneur holds a minority ownership position in the foreign venturenew entry Offering a new product to an established or
  15. 15. new market, offering an established product to a new market, or creating a new organizationNonequity A method by which an entrepreneur can enterarrangement a market and obtain sales and profits without direct equity investment in the foreign marketOpportunity The process by which an entrepreneur comesidentification up with the opportunity for a new ventureOpportunity Barriers to new product creation andparameters developmentOrdinary New products with little technological changeinnovationsorganizational plan Describes form of ownership and lines of authority and responsibility of members of new ventureowner equity The amount owners have invested and/or retained from the venture operationsparameter analysis Developing a new idea by focusing on parameter identification and creative synthesisparticipative style of The manager involves others in the decision-management making processpatchwork quilt Means-driven action that emphasizes theprinciple creation of something new with existing means rather than discovering new ways to achieve given goalspatent Grants holder protection from others making, using, or selling similar ideapenetration strategy A strategy to grow by encouraging existing customers to buy more of the firms current productsPerceived The degree to which an individual has adesirability favorable or unfavorable evaluation of the potential entrepreneurial outcomespilot-in-the-plane Urges relying on and working with people asprinciple the prime driver of opportunity and not limiting entrepreneurial efforts to exploiting
  16. 16. factors external to the individualpolitical risk Prior to entering into business in anotheranalysis country, an assessment of that countrys political policies and its stabilityPreliminary Initial evaluation of a dealscreeningpresent value of Valuing a company based on its future salesfuture cash flow and profitspricing amendment Additional information on price and distribution submitted to the SEC to develop the final prospectusprinciple of analysis Understanding how time is currently being allocated, and where it is being inefficiently investedprinciple of desire A recognition of the need to change personal attitudes and habits regarding the allocation of timeprinciple of A focus on the most important issueseffectivenessprinciple of Categorization of tasks by their degree ofprioritized planning importance and then the allocation of time to tasks based on this categorizationprinciple of Periodic review of ones time managementreanalysis processprinciple of Acknowledgment that only a small amount ofteamwork time is actually under ones control and that most of ones time is taken up by othersprivate offering A formalized method for obtaining funds from private investorsprivate venture- A type of venture-capital firm having generalcapital firms and limited partnerspro forma balance Summarizes the projected assets, liabilities,sheet and net worth of the new venture assets Items that are owned or available to be used in the venture operationspro forma cash flow Projected cash available calculated from
  17. 17. projected cash accumulations minus projected cash disbursementspro forma income Projected net profit calculated from projected revenue minus projected costs and expensespro forma sources Summarizes all the projected sources of fundsand applications of available to the venture and how these fundsfunds will be disbursedproblem inventory A method for obtaining new ideas andanalysis solutions by focusing on problemsproduct development Third stage in product development processstageproduct development A strategy to grow by developing and sellingstrategy new products to people who are already purchasing the firms existing productsproduct extention A type of merger in which acquiring andmerger acquired companies have related production and/or distribution activities but do not have products that compete directly with each otherproduct life cycle The stages each product goes through from introduction to declineproduct planning and The stages in developing a new productdevelopmentprocessproduct safety and Responsibility of a company to meet any legalliability specifications regarding a new product covered by the Consumer Product Safety Actproduction plan Details how the product(s) will be manufacturedprofessional-support Individuals who help the entrepreneur innetwork business activitiesprospectus Document for distribution to prospective buyers of a public offeringpublic-equity One of the risk-capital markets consisting ofmarket publicly owned stocks of companiesquiet period 90-day period in going public when no new company information can be released
  18. 18. red herring Preliminary prospectus of a potential public offeringreferral sources Ways individual investors find out about potential dealsreflection tasks Tasks designed to stimulate entrepreneurs to think about their understanding and feelings as they progress through the entrepreneurial processRegistration Materials submitted to the SEC for approval tostatement sell stock to the publicRegulation D Laws governing a private offeringreplacement value The cost of replacing all assets of a companyresearch and Money given to a firm for developing adevelopment limited technology that involves a tax shelterpartnershipsreservation price The price (the bundle of resources from the agreement) at which the entrepreneur is indifferent about whether to accept the agreement or choose the alternativeresources The inputs into the production processRestoration- An approach to grief recovery based on bothorientation avoidance and a proactiveness toward secondary sources of stress arising from a major lossReverse A group method for obtaining new ideasbrainstorming focusing on the negativerisk The probability of, and magnitude of, downside lossrisk-capital markets Markets providing debt and equity to nonsecure financing situationsrole models Individuals influencing an entrepreneurs career choice and styleS corporation Special type of corporation where profits are distributed to stockholders and taxed as personal income
  19. 19. SBIC firms Small companies with some government money that invest in other companiesSBIR grants Grants from the U.S. government to smallprogram technology-based businessesscope A choice about which customer groups to serve and how to serve themsituation analysis Describes past and present business achievements of new venturestate-sponsored A fund containing state government moneyventure capital fund that invests primarily in companies in the statestrategic tasks Tasks designed to stimulate entrepreneurs to think about which strategies are appropriate for solving the problem (and why) or pursuing the opportunity (and how)switching costs The costs that must be borne by customers if they are to stop purchasing from the current supplier and begin purchasing from anothersynergy In a joint venture, the qualitative impact on the acquiring firm brought about by complementary factors inherent in the firm being acquiredtarget market Specific group of potential customers toward which venture aims its marketing plantechnological New products with significant technologicalinnovations advancementtechnological Possession of information, technology, know-knowledge how, and skills that provide insight into ways to create new knowledgetechnological Considerable difficulty in accurately assessinguncertainty whether the technology will perform and whether alternate technologies will emerge and leapfrog over current technologiestechnology transfer Commercializing the technology in the laboratories into new productstest marketing Final stage before commercialization in
  20. 20. stage product development processthird-party Paying for goods indirectly through anotherarrangements sourcetime management The process of improving an individuals productivity through more efficient use of timetop management Managers in an organization stronglycommitment supporting corporate entrepreneurshiptrade barriers Hindrances to doing international businesstrade secret Protection against others revealing or disclosing information that could be damaging to businesstrademark A distinguishing word, name, or symbol used to identify a producttraditional Managers in a non-entrepreneurial-orientedmanagers organizationturn-key project A method of doing international business whereby a foreign entrepreneur supplies the manufacturing technology or infrastructure for a business and then turns it over to local ownersuncertainty for Customers may have considerable difficulty incustomers accurately assessing whether the new product or service provides value for themunderwriting Group of firms involved in selling stock to thesyndicate publicventure-capital One of the risk-capital markets consisting ofmarket formal firmsventure-capital The decision procedure of a venture-capitalprocess firmvertical merger A type of merger combining two or more firms in successive stages of productionvoluntary Entrepreneurs decision to file for bankruptcybankruptcywindow of (1) The period of time when the environmentopportunity is favorable for entrepreneurs to exploit a
  21. 21. particular new entry (2) The time period available for creating the new venturework history The past work experience of an individual