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Chapter 12: Early-Stage Business Development: Human and Financial Capital

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Title: Business Models Author: VP Last modified by: Dr. Parviz Ghandforoush Created Date: 8/17/2001 3:58:34 AM Document presentation format: On-screen Show – PowerPoint PPT presentation

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Title: Chapter 12: Early-Stage Business Development: Human and Financial Capital


1
Chapter 12 Early-Stage Business Development
Human and Financial Capital
  • Questions answered in this chapter
  • What are the key considerations in the business
    planning process?
  • What are the different sources of human capital
    that can play a role in a startup business?
  • What are the typical sources of funding for an
    early-stage startup business?
  • What elements are needed for a successful pitch
    to investors?

2
What is a Startup?
  • A startup is a business that is in the process of
    developing the underlying infrastructure needed
    to support future growth
  • A startup is a business engaging in the the
    following three basic processes
  • Developing and refining the offering and strategy
    to go to market
  • Obtaining initial funding to begin operations
  • Building a capable management team to handle
    operations

3
Relationship between Human and Financial Capital
  • Human and financial capital resources can
    influence the business planning process and, in
    turn, be influenced by the business plan
  • Human capital resources may include
    entrepreneurs, management team, strategic
    advisors and partners, and logistical advisors
    and partners
  • Sources for financial capital include debt
    financing and equity financing

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Elements of a solid business planning process
  • The major elements of a business planning process
    include the following
  • Defining the value proposition
  • Framing the market opportunity
  • Detailing how to reach customers
  • Developing an implementation plan
  • Evaluating potential external influences
  • Articulating the revenue model
  • Calculating preliminary financial projections
  • Establishing critical milestones
  • Summarizing the advantage

8
Human Capital
  • The role of human capital in a startup business
    is especially critical because, for a time, it is
    the only resource available
  • When investors consider funding an early-stage
    company, they assess its human capital
  • Who is the entrepreneur?
  • Does she have the drive to see this business
    through?
  • Who is on the management team?
  • Will they be able to execute?
  • The human capital attracts the financial capital

9
The Trials and Tribulations of the Entrepreneur
  • From the outset, the entrepreneur is faced with
    reconciling several difficult paradoxes
  • Being visionary vs. being realistic. The
    entrepreneur is faced with the challenge of
    coming up with unique ideas that are grounded in
    reality
  • Generating quick returns vs. investing in the
    future. The entrepreneur is challenged with
    staying the course to build the organization
    while meeting the demands of the investors who
    are needed to build the organization in the first
    place
  • Optimism vs. pragmatism. While optimism is an
    essential motivating force, it must be balanced
    with the pragmatism to evaluate potential
    weaknesses of the business

10
Characteristics of Successful Entrepreneurs
  • Key characteristics common to successful
    entrepreneurs include the following
  • Natural problem solvers. Entrepreneurs are those
    who are able to make observations about the needs
    of industries, markets, and everyday life and
    find the best way to meet these needs
  • Willingness to take risks. Entrepreneurs are
    willing to leave stable jobs and guaranteed
    salaries for their enterprises
  • Drive. The entrepreneurs personal drive is
    especially important in the early stages, when
    his enthusiasm spurs the drive of other employees
  • Flexibility. The ability to adapt and react
    quickly are especially important in the
    fast-changing Internet environment
  • Vision. The most successful entrepreneurs are not
    driven by money, but by a vision or a passion
    consistently pursued

11
The Entrepreneur and the Idea
  • Some of the most common types of business ideas
    include the following
  • Introduce a new product (new softwareMP3)
  • Introduce a new service (overnight
    deliveryFedEx)
  • Improve an existing model of business (selling
    books on the InternetAmazon.com)
  • Create demand (free one hour delivery
    serviceKozmo.com)
  • Build a brandthe first-mover advantage
    (eToys.com, Pets.com, eParty.com)

12
The Management Team
  • The core team consists of individuals essential
    to the early formative days of the startup who
    will fill the following three roles
  • Technology specialist is the person who
    understands the specific mechanics of how the
    product works, how it is manufactured, and how it
    can be utilized
  • Sales and marketing specialist is the person
    with an in-depth understanding of the startups
    customer
  • Execution specialist is the person who keeps
    everything in perspective in the startups
    development making the vision for the business a
    reality

13
The Management Team (contd)
  • Extended management team can be created on an
    as-needed basis, depending on how quickly the
    startup is growing
  • Chief operating officer
  • Chief financial officer
  • VP of marketing
  • VP of sales
  • VP of business development
  • Chief people officer
  • General counsel

14
Strategic Advisors and Partners
  • Strategic advisors and partners provide the
    startup with strategic direction, advice, and in
    many instances credibility for the organization
    as a whole
  • Advisory board members serve as an outsourced
    resource to fill a particular need and may
    receive stock options in exchange for their
    expertise
  • The board of directors consists of individuals
    who will be responsible for the well-being of the
    company, as well as holding the management team
    accountable for its actions when the business
    formalizes operations
  • A strategic association is the agreement of two
    entities to work together and exchange expertise
    in areas where they lack core competencies
  • A strategic alliance is a legally binding
    contractual agreement to share resources on a
    project for a particular timeframe

15
Logistical Advisors and Partners
  • Logistical advisors and partners differ from the
    strategic advisors and partners in that they are
    more involved in the day-to-day operations of the
    business
  • Necessary logistical advisors and partners
    include certified public accountants (CPA) and
    legal counsel
  • Supporting logistical advisors and partners serve
    as outsourced, human-capital leverage for the
    startup and may include intermediaries,
    consultants, and incubators

16
Financial Capital
  • Sources of debt financing (commercial banks,
    trade credit)
  • Sources of equity financing (owners equity,
    angels, venture-capital)
  • Strategic investors are concerned how a certain
    business compliments their current activities
    (exposure to cutting-edge technology or business
    model, collaboration in research and development
    for a product, etc.)
  • Financial investors are concerned with return on
    investment (ROI), internal rate of return, cost
    of capital, and return on equity

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18
Debt Financing
  • Trade credit is credit extended to a business by
    its suppliers. It is an interest-free loan
    covering the time period from when supplies are
    delivered to when the invoice is due
  • Suppliers typically offer trade credit to buyers
    with an established track record of making prompt
    payments
  • Hidden interest rate cost
  • Commercial bank loan is, typically, an
    installment loan in which the business borrows a
    certain amount of money for a specified period
    with either a fixed or variable interest rate
  • Commercial banks evaluate a business loan
    application by assessing the likelihood of loan
    repayment
  • Bank loans can be relatively difficult to obtain,
    especially for early-stage businesses with little
    collateral and no positive cash flow

19
Equity Financing Bootstrapping
  • Bootstrapping is the art of using personal
    resources to finance the early stages of a
    startup
  • Bootstrapping may include taking a personal loan,
    mortgaging a home, using credit cards or savings
    accounts
  • Bootstrapping provides the most viable option for
    the entrepreneur when the startup is in the
    earliest stages of business, especially during
    the stages that involve proving the business
    concept
  • Bootstrapping allows the entrepreneur to control
    the company and refine his business strategy
    without pressure from outside investors
  • The disadvantage of bootstrapping is that it is
    unlikely to provide sufficient cash for a good
    business concept to grow quickly beyond the
    earliest stages

20
Equity Financing Angels
  • Angels are wealthy individuals who invest
    personal capital in startups in exchange for
    equity or sometimes a seat on the board of
    directors
  • Its critical for the entrepreneur to develop a
    network of individuals within the industry to
    gain introductions to potential financiers
    because angels seldom look at unsolicited
    business plans
  • Business plans are evaluated based on the quality
    of the management team, market potential for the
    business idea, and the track record of the
    entrepreneur
  • Typically, angels are more flexible in
    accepting changes in the original business plan
    if it is necessary
  • Angels tend to be more involved in the
    day-to-day operations of startups

21
Equity Financing Venture Capital
  • Venture-capital firms are usually private
    partnerships or closely held corporations that
    raise money from a group of private investors
  • A venture-capital firm typically invests 250,000
    to 10 million in a business in exchange for a 30
    to 40 percent equity stake and a seat on the
    board of directors
  • In addition to receiving cash, the entrepreneur
    receives guidance for building the startup
  • Venture capitalists, typically, charge management
    fees on the order of 1 to 5 percent of the
    capital investment in a startup
  • A venture-capital firm seeks opportunities that
    will return 10 times the original investment
    within five years, but realizes that each
    investment is a gamble and that only 10 percent
    are likely to succeed
  • The biggest disadvantage of venture capital
    funding is the sources concern with the bottom
    line

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24
Equity Financing Corporate Ventures
  • Large corporations sometimes set up venture funds
    as a subsidiary that can make investments on
    behalf of the parent company, referred to as
    either corporate venture or direct investors
  • Corporate-venture funds invest in complimentary
    business for primarily strategic reasons
  • In exchange for cash, capital ventures seek an
    equity stake in the company and access to the
    companys technology or product
  • Established corporations can offer the
    operational expertise as well as the credibility
    and visibility that come from associating with an
    established high-profile parent
  • Because the investments are strategic rather than
    financial, the pricing of deals with corporations
    tends to favor the entrepreneur more than deals
    with venture-capital firms

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The Business Plan
  • A business plan should provide the following
    information to a potential investor
  • Description of the product or service that will
    be offered and the value proposition for the
    customer
  • Summary of the size and nature of the market
    opportunity
  • Explanation of the revenue model
  • Profiles of the management team, advisory board,
    and board of director members describing specific
    relevant skills and expertise
  • Clear articulation of the startups core
    competencies and sustainable competitive
    advantage
  • Summary of financials and financing needs
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