Prof. Dr. Institutefor Strategy and Business Economics
Chapter 9: Building a New Venture Team Table of Contents I. Creating a New Venture Team A. The Founder or Founders B. Recruiting and Selecting Sl Key Employees C. The Role of the Board of Directors II. Rounding Out the Team The Role of Professional Advisors A. Board of Advisors B. Lenders and Investors C. Other Professionals 2
I. Creating a New Venture Team 1. A new venture team is the group of founders, key employees, and advisers that move a new venture from an idea to a fully functioning firm. 2. Usually the team doesn t come together all at once. Instead, it is built as the new firm can afford to hire additional personnel. 3. The team also involves more than paid employees. Many firms have boards of directors, boards of advisers, and professionals on whom they rely for direction and advice. 3
I. Creating a New Venture Team Liabilities of Newness 1. New ventures have a high propensity to fail. 2. The high failure rate is due in part to what researchers call the liability of newness, which refers to the fact that companies often falter because the people who start the firms can t adjust quickly enough to their new roles and because the firm lacks a track record with outside buyers and sellers. 3. Assembling a talented and experienced new venture team is one path that firms can take to overcome these limitations. 4
I. Creating a New Venture Team Elements of a New Venture Team 5
I. Creating a New Venture Team A. The Founder or Founders 1. Size of Founding Team a. The first decision that most founders face is whether to start a firm on their own or whether to build an initial founding team. Studies show that teams or partners start 50 to 70 percent of all new firms (CH: 47 percent). b. It is generally believed that new ventures started by a team have an advantage over those started by an individual, because a team brings more talent, resources, ideas, andprofessional contacts to a newventure than does a sole entrepreneur. 6
I. Creating a New Venture Team A. The Founder or Founders c. Several factors affect the value of a team that tis starting ti a new firm. i. First, teams that have worked together before, as opposed to teams that are working together for the first time, have an edge. ii. Second, if the members of the team are heterogeneous, meaning that they are diverse in terms of their abilities and experiences, rather thanhomogeneous,meaningthattheir homogeneous, meaning that their areas of expertise are very similar to one another, they are likely to have different points of view about important issues. These different points of view are likely to generate debate and constructive conflict. 7
I. Creating a New Venture Team A. The Founder or Founders 2. Qualities of the Founders a. One reason the founders are so important is that in the early days of the firm, their knowledge, skills, and experiences are the most valuable resource the firm has. b. Several features are thought to be significant to a founder s success. These factors include: The level of the founder s education Prior entrepreneurial experience Relevant industry experience Networking (the depth of the founder s professional network) 8
I. Creating a New Venture Team A. The Founder or Founders 2. Qualities of the Founders 9
I. Creating a New Venture Team A. The Founder or Founders 2. Qualities of the Founders 10
I. Creating a New Venture Team B. Recruiting and Selecting Key Employees 1. Founders differ in terms of how they approach the task of recruiting and selecting key employees. Some founders draw on their network of contacts to identify candidates for key positions, while others use executive search firms. 2. An executive search firm is a company that specializes in helping other companies recruit and select key personnel. 11
I. Creating a New Venture Team B. Recruiting and Selecting Key Employees 3. Many founders worry about hiring the wrong person for a key role. Because most new firms are strapped for cash, every team member must make a valuable contribution, so it s not good enough to hire someone who is well intended dbut who doesn t precisely fit the job. 4. Some founders approach the task of hiring by creating a formal hiring plan. Others approach the task more informally, and hire personnel as funds become available and opportunities emerge. 12
I. Creating a New Venture Team C. The Role of the Board of Directors 1. If a new venture organizes as a corporation, it is legally required to have a board of directors a panel of individuals who are elected by a corporation s shareholders to oversee the management of the firm. 2. A board is typically made up of both inside and outside directors. 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. 3. A board of directors has three formal responsibilities: appoint the officers of the firm, declare dividends, and oversee the affairs of the corporation. http://www.ubs.com/1/g/media_overview/media_switzerland/images/boardofdirecto overview/media switzerland/images/boardofdirecto rs.html 13
I. Creating a New Venture Team C. The Role of the Board of Directors 4. If handled dproperly, a company s board of directors can be an important t part of its new venture team. Two ways a board of directors can help a new firm get off to a good start and develop what, it is hoped, will become a sustainable competitive advantage are by providing guidance and lending legitimacy. 14
I. Creating a New Venture Team C. The Role of the Board of Directors Ways a Board of Directors Can Help a New Venture Get Off to a Good Start Function Provide Guidance Importance of Function Although a board of directors has formal governance responsibilities, its most usefulrole is to provide guidance and support to the firm s managers. Many founders and CEOs interact with their board members frequently and obtain important input and advice. Lend Legitimacy Another important function of a board of directors is to lend legitimacy to a firm. Well known and respected board members bring instant credibility to a firm. 15
I. Creating a New Venture Team C. The Role of the Board of Directors 5. Frequency of Meetings and Compensation Most boards of directors meet three to four times a year. New ventures are more likely to pay their boards in company stock or ask them to serve on a voluntary basis rather than pay a cash honorarium. 16
Chapter 9: Building a New Venture Team Table of Contents I. Creating a New Venture Team A. The Founder or Founders B. Recruiting and Selecting Sl Key Employees C. The Role of the Board of Directors II. Rounding Out the Team The Role of Professional Advisors A. Board of Advisors B. Lenders and Investors C. Other Professionals 17
II. Rounding Out the Team The Role of Professional Advisors Board of Advisers s Lenders and Investors Other Professionals 18
II. Rounding Out the Team The Role of Professional Advisors A. Board of Advisors 1. A growing go gnumber of sa start ups are aeforming gadvisory boards to po provide them with direction and advice. 2. An advisory board is a panel of experts who are asked by a firm s managers to provide counsel and advice on an ongoing basis. 19
II. Rounding Out the Team The Role of Professional Advisors A. Board of Advisors 3. Unlike a board of directors, an advisory board possesses no legal responsibility for the firm and gives nonbinding advice. 4. An advisory board can be established for general purposes or can be set up to address a specific issue or need. For example, some firms have customer advisory boards that help the firm identify new product and service ideas. 5. Most boards of advisors have between five and 15 members. Companies typically y py pay the members of their board of advisors a small honorarium for their service, either annually or on a per meeting basis. 20
II. Rounding Out the Team The Role of Professional Advisors A. Board of Advisors Guidelines to Organizing a Board of Advisers 1. Advisers will become disillusioned if they don t play a meaningful role in the firm s development and growth. 2. A firm should look for board members who are compatible and complement one another in terms of experience and expertise. 3. When inviting people to serve on its board of advisors, a company should carefully spell out to the individuals involved the rules in terms of access to confidential information. 21
II. Rounding Out the Team The Role of Professional Advisors Board of Advisers of Ugobe (http://www.ugobe.com/) ((http://www.ubs.com/1/g/media_overview/media_switz erland/images/boardofdirectors.h Name Profession Role on Advisory Board Steven Mayer Adviser to corporations such Adds legitimacy and provides the as Intel and Nintendo firm advice on management issues Curtis Sasaki Phil Schlein Abraham Wei Bill Hillard Vice President, Sun Microsystems cosyste s Partner, U.S. Venture Partners Senior Managing Director, Chinavest Merchant Bank Managing Partner, Hillard Equities/Sonn Hill Consulting Adds legitimacy and provides the firm advice product/market issues Adds legitimacy and provides the firm advice on financial related issues Adds legitimacy and provides the firm advice on financial related issues Adds legitimacy and provides the firm advice on financial and managementrelated issues 22
II. Rounding Out the Team The Role of Professional Advisors B. Lenders and Investors 1. As emphasized throughout this book, lenders and investors have a vested interest in the companies they finance, often causing them to become very involved in helping the firms they fund. 2. Aswiththeothernon employeemembers the employee members ofa firm s newventure team, lenders and investors help new firms by providing guidance and lending legitimacy, and assume the natural role of providing financial oversight. 3. In some instances, lenders and investors also work hard to help new firms fill out their management teams. 23
II. Rounding Out the Team The Role of Professional Advisors B. Lenders and Investors Beyond Financing and Funding: Ways Lenders and Investors Add Value to an Entrepreneurial Venture Help identify and recruit key management personnel Provide insight into the industry and markets in which the venture intends to participate Help the venture fine tune its business model dl Serve as a sounding board for new ideas Provide introductions to additional sources of capital Serve on the new venture s board of directors or board of advisors 24
II. Rounding Out the Team The Role of Professional Advisors C. Other Professionals At times, other professionals assume important roles in a new venture s success. Attorneys, accountants, and business consultants are often good sources of counsel and advice. di a. A consultant is an individual who gives professional or expert advice. New ventures vary in how much they rely on business consultants for direction. b. Consultants fall into two categories: paid consultants and consultants who are made available for free or at a reduced rate through a nonprofit or government agency. 25
Prof. Dr. Institute for Strategy and Business Economics 26
Chapter 10: Getting Funding or Financing Table of Contents I. The Importance of Getting Financing or Funding II. III. IV. Sources of Equity Funding Sources of Debt Financing Creative Sources of Financing and Funding 27
I. The Importance of Getting Financing or Funding A. Why MostNew Ventures Need Funding The Nature of the Funding and Financing Process Few people deal withthethe process ofraising investment capital until they need to raise capital for their own firm. As a result, many entrepreneurs go about the task of raising capital haphazardly because theylack experience in this area. Why Most New Ventures Need Funding next slide 28
I. The Importance of Getting Financing or Funding A. Why MostNew Ventures Need Funding 29
I. The Importance of Getting Financing or Funding B. Source of Personal Financing Alternatives for Raising Money for a Start Up Firm Personal Funds EquityCapital Debt Financing Other (Creative) Sources 30
I. The Importance of Getting Financing or Funding B. Source of Personal Financing 1. Typically, the seed money that gets a company off the ground comes from the founders themselves from their personal savings, mortgages, and credit cards, and by tapping into the cash value of life insurance. 2. Friends and family are the second source of funds for many new ventures. This form ofcontribution often comes asloans orinvestments, but can also involve outright gifts, forgone or delayed compensation, or reduced fees or rent. 3. Another source of seed money for new ventures is referred to as bootstrapping. Bootstrapping is the use of creativity, ingenuity, and any means possible to obtain resources other than borrowing money or raising capital from traditional sources. 31
I. The Importance of Getting Financing or Funding Bootstrapping Buying used instead of new equipment Coordinating purchases with other businesses Leasing equipment instead of buying Obtaining payments in advance from customers Minimizing personal expenses Avoiding unnecessary expenses Sharing office space with other businesses Applying for and obtaining grants 32
I. The Importance of Getting Financing or Funding C. Preparing to Raise Debt or Equity Financing 1. Step 1: Determine precisely how much money is needed. 2. Step 2: Dt Determine the most appropriate it type of financing i or funding. a. Equity financing means exchanging partial ownership in a firm, usually in the form of stock, for funding. b. Debt financing is getting a loan. 3. Step 3: Develop a strategy for engaging potential investors or bankers. An elevator speech is a brief, carefully constructed statement that outlines the merits of a business opportunity. 33
I. The Importance of Getting Financing or Funding C. Preparing to Raise Debt or Equity Financing Preparation for Debt or Equity Financing 34
I. The Importance of Getting Financing or Funding C. Preparing to Raise Debt or Equity Financing Two most common alternatives for raising money Alternative Equity funding Explanation Equity funding means exchanging partial ownership in a firm, usually in the form of stock, for funding. Angel investors, private placement, venture capital, and initial public offerings are the most common sources of equity funding. Equity funding is not a loan the money that is received is not paid back. Instead, equity investors become partial owners of a firm. Debt financing Debt financing is getting a loan. The most common sources of debt financing are commercial banks and the Small Business Administration (through its guaranteedloanprogram) program). 35
I. The Importance of Getting Financing or Funding C. Preparing to Raise Debt or Equity Financing Matchinga a NewVenture s Characteristics withtheappropriate the Form offinancing or Funding 36
I. The Importance of Getting Financing or Funding C. Preparing to Raise Debt or Equity Financing Elevator Speech An elevator speech is a brief, carefully constructed statement that outlines the merits of a business opportunity. Why is it called an elevator speech? If an entrepreneur stepped into an elevator on the 25 th floor of a building and found that by a stroke of luck a potential investor was in the same elevator, the entrepreneur would have the time it takes to get from the 25 th floor to the ground floor to try to get the investor interested in his or her opportunity. This type of chance encounter with an investor calls for a quick pitch of one s business idea. This quick pitch has taken on the name elevator speech. Most elevator speeches are 45 seconds to two minutes long. 37
I. The Importance of Getting Financing or Funding C. Preparing to Raise Debt or Equity Financing Guidelines for Preparing an Elevator Speech 38
II. Sources of Equity Funding Venture Capital Business Angels Initial Public Offerings 39
II. Sources of Equity Funding Venture capital: broad subcategory of private equity; refers to equity investments made for the launch, early development, or expansion of a business. Private equity: asset class consisting of equity securities in operating companies that are notpublicly traded ona stock exchange (keyword: leveraged buyout). 40
II. Sources of Equity Funding A. Business Angels (http://www.businessangels.ch/; http://www.asban.ch/) 1. Business angels are individuals who invest their personal capital directly in start ups. a. The prototypical business angel is about 50 years old, has high income and wealth, is well educated, has succeeded as an entrepreneur, and is interested in the start up process. b. The number of angel investors in the U.S. has increased dramatically over the past decade, partly because of the high returns some report. c. Business angels are valuable because of their willingness to make relatively small investments. This gives access to equity funding to a start up thatneeds just$50,000 000rather thanthe$1million the minimum investment that most venture capitalists require. 41
II. Sources of Equity Funding B. Venture Capital 1. Venture capital is money that is invested by venture capital firms in start ups and small businesses with exceptional growth potential. 2. Venture capital firms are limited partnerships of money managers who raise money in funds to invest in start ups and growing firms. The funds, or pools of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources. 3. Many entrepreneurs get discouraged d when they are repeatedly rejected for venture capital funding, even though they may have an excellent business plan. Venture capitalists are looking for the home run, and so reject the majority of the proposals they consider. 42
II. Sources of Equity Funding C. Initial Public Offering 1. An IPO is the first sale of stock by a firm to the public. When a company goes public, its stock is typically traded on one of the major stock exchanges. 2. Although there are many advantages to going gp public, it is a complicated and expensive process. The first step is to hire an investment bank. An investment bank is an institution, such as Credit Suisse First Boston, that acts as an underwriter oragent for a firm issuing securities. The investment bank acts as the firm s advocate and advisor, and walks it through the process of going public. 43
II. Sources of Equity Funding C. Initial Public Offering Four reasons that motivate firms to go public Reason 1 Reason 2 Reason 3 Reason 4 Is a way to raise equity capital to fund current and future operations. An IPO raises a firm s public profile, making it easier to attract high quality customers, alliance partners, and employees. An IPO is a liquidity event thatprovides a means for a company shareholders (including its investors) to cash out their investments. By going public, a firm creates another form of currency that can be used to grow the company. http://www.x cite.de/roadshows IPO Postbank 2_89_53.html 44
III. Sources of Debt Financing A. Commercial Banks Commercial Banks SBA Guaranteed Loans 45
III. Sources of Debt Financing A. Commercial Banks 1. Historically, commercial banks havenotbeenviewed viewed aspractical sources of financing for start up firms. This sentiment is not a knock against banks; it is just that banks are risk adverse, and financing start ups is risky business. 2. There are two reasons that banks have historically been reluctant to lend money to start ups: a. First, as mentioned previously, banks are risk adverse. In addition, banks frequently have internal controls and regulatory restrictions prohibiting them from making high risk loans. b. Second, lending to small firms is not as profitable as lending to large firms. In many instances, it is simply pynot worth a banker s time to do the due diligence necessary to determine the entrepreneur s risk profile. 46
III. Sources of Debt Financing B. SBA Guaranteed Loans 1. Approximately 50 percent of the 9,000 banks in the United edsaes States participate in the SBA Guaranteed Loan Program. While these loans typically aren t available to start ups, they are an important source of funding for small businesses in general. 2. The most notable SBA program available to small businesses is the 7(A) Loan Guarantee Program. This program accounts for 90 percent of the SBA s loan activity. Almost all small businesses are eligible to apply for an SBA guaranteed loan. 3. The SBA can guarantee as much as 85 percent (debt to equity) on loans up to $150,000, and 75 percent on loans of more than $150,000. 47
III. Creative Sources of Financing and Funding Leasing Strategic Partners Small llbusiness Innovation Research Grants 48
III. A. Leasing Creative Sources of Financing and Funding 1. A lease is a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments. 2. The major advantage of leasing is that it enables a company to acquire the use of assets with very little, or no, down payment. 3. The two most common types of leases that new ventures enter into are leases for facilities and leases for equipment. 49
III. Creative Sources of Financing and Funding B. Government Grants 1. The Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs are two important sources of early stage funding for technologyfirms firms. These programs provide cash grants to entrepreneurs who are working on projects in specific areas. 2. The SBIR Program is a competitive grant program that provides more than $1 billion per year to small businesses for early stage and development projects. Each year, 10 federal departments and agencies are required dby the SBIR to reserve a portion of their hiresearch and development funds for awards to small businesses. http://www.bbt.admin.ch/kti/ 50
III. Creative Sources of Financing and Funding B. Government Grants a. The SBIR is a three phase program, meaning that firms that qualify have the potential to receive more than one grant to fund a particular proposal. p b. Historically, less than 15 percent of all phase I proposals are funded, and about 30 percent of all phase II proposals are funded. The payoff for successful proposals, however, is high. The money is essentially free. It is a grant, meaning that it doesn t have to be paid back, and no equity is the firm is at stake. 3. The STTR Program is a variation of the SBIR for collaborative research projects that involves small businesses and research organizations, such as universities and federal laboratories. 51
III. Creative Sources of Financing and Funding B. Government Grants Small Business Innovation Research (SBIR): Three Phase Grant Program 52
III. Creative Sources of Financing and Funding C. Strategic Partners 1. Strategic partners are another source of capital for new ventures. Indeed, strategic partners often play a critical role in helping young firms fund their operations and round out their business models. 2. Biotechnology, for example, relies heavily on partners for financial support.biotechfirms, which aretypically fairly small,oftenpartner with larger drug companies to conduct clinical trials and bring products to market. 53