A Primer in Entrepreneurship

The development of a firm’s business model follows the feasibility analysis stage of launching a new venture but comes before the completion of a business plan.

• Business Model
  • is a firm’s plan or diagram for how it competes, uses its resources, structures its relationships, interfaces with customers, and creates value to sustain itself on the basis of the profits it earns.

The business model stage addresses how to surround the product or service with a core strategy, a partnership model, a customer interface, distinctive resources, and an approach to creating value that represents a viable business model.

• There is no standard business model, no hard-and-fast rules that dictate how firms in a particular industry should compete.
  • A firm’s business model takes it beyond its own boundaries.
  • Almost all firms partner with others to make their business models work.
• A firm needs to have a business model in place before it can make additional substantive decisions.
  • It is premature (еще преждевременно) for a new venture to raise money, hire a lot of employees, establish partnerships, or implement a marketing plan.

Dell’s approach to selling computers versus traditional manufacturers’ represented a business model innovation in the computer industry.

• Business Model Innovation
  • refers to initiatives that are undertaken with the intention of revolutionizing how a particular product is produced, sold, and supported after the sale.

(Dell needs the cooperation of its suppliers, shippers, customers, and many others to make its business model possible.)

At the time of its introduction Dell’s business model was revolutionary. (Siehe Bild)

Having a clearly articulated business model is important, because it ...

• ... serves as an ongoing extension of feasibility analysis;

• ... focuses attention on how all the elements of a business fit together and constitute a working whole;

• ... describes why the network of participants needed to make a business idea viable would be willing to work together;

• ... articulates a company’s core logic to all stakeholders, including the firm’s employees.

It is very important for a new venture to look at itself in a holistic manner (взглянуло на себя комплексно) and understand that it must construct an effective “business model” to be successful.

The entrepreneur should diagram the business model on paper, examine and check whether the answers to the following questions are satisfactory.

• Does my business model make sense ?

• Will the businesses I need as partners participate ?

• If I can get partners to participate, how motivated will they be? Am I asking them to work for or against their self-interest?

• How about my customers, will it be worth their time to do business with my company and, if I do get customers, how motivated will they be ?

• Can I motivate my partners and customers at a sufficient scale (в достаточном объеме) to cover the overhead of my business and make a profit ?

• How distinct (отличным) will my business be ? If I’m successful, will it be easy for a larger competitor to step in and steal my idea ?

If the answer to each of these questions is not satisfactory, then the business model should be revised or abandoned.

Ultimately, a business model is viable only insofar as the buyer, the seller, and the partners involved see it as an appropriate method of selling a product or service.

• Two fatal flaws can render (могут сделать) a business model untenable (несостоятельной) from the beginning.
  • complete misread of customers (полное неправильное понимание клиентов)

  • utterly unsound economics (совершенно несостоятельная экономика)

It is helpful to study and analyze the value chain of a product or service.

• identify
  • ways to create additional value or room for improvement

  • opportunities for new businesses

• assess

  • the availability of means to create additional value

• understand

  • how business models emerge

• form

  • a firm to strengthen the value chain if a viable business model can be created to support it.

The analysis of the value chain may focus on a single primary activity, a support activity or an interface between two stages of the value chain.

• Core Strategy
  • how a firm competes

• Strategic Resources

  • how a firm acquires and uses its resources

• Partnership Network

  • how a firm structures and nurtures its partnerships

• Customer Interface

  • how a firm interfaces with its customers

The core strategy consists of a firm’s mission statement, the product/ market scope, and the basis for differentiation.

• mission statement
  • describes why the firm exists and what its business model is supposed to accomplish.

• product/ market scope

  • defines the products and markets on which it will concentrate. The choice of products has an important impact on a firm’s business model.

• basis of differentiation

  • of itself from its competitors in some way that is important to its customers.

cost leadership: competition on the basis of costs

differentiation: competition on the basis of quality, service, timeliness or other important dimension

Resources are essential for a firm to implement its strategy and, hence (следовательно), affect its business model substantially (существенно).

• core competency
  • is a resource or capability that serves as a source of a firm’s competitive advantage over its rivals.

• strategic assets

  • are anything rare and valuable (plant, equipment, location, brands, patents, customer data, highly qualified staff, and distinctive partnerships, etc.)

Firms try to combine core competencies and strategic assets to create a sustainable competitive advantage, to which investors pay close attention when evaluating a business.

A competitive advantage is achieved by implementing a value-creating strategy that is unique and not easy to imitate.

New ventures, in particular, rely on partners to perform key roles.

New ventures typically do not have the resources to perform all the tasks required to make their businesses work.

• suppliers

  • Vendors/ suppliers are companies that provide parts or services to another company. Almost all firms have suppliers who play a vital role in the functioning of their business models.

• other key relationships

  • Firms partner with other companies to make their business models work.

• But partnerships ...

  • ... involve risks if a single partner is a key component of a firm’s business model;

  • ... often fall short of meeting the expectations of the participants.

The type of customer interaction depends on how the firm chooses to compete.

• primary elements of customer interface are
  • A target market is the limited group of individuals or businesses that a firm goes after or tries to appeal to. The selection of the target market affects acquisitions of strategic assets, partnerships, promotional campaigns, etc.

  • Fulfillment and support (Выполнение и поддержка) describes the way a firm’s product or service “goes to market”; how it reaches its customers (channels a company uses, what level of customer support it provides). All these issues impact the shape and nature of a company’s business model.

  • Pricing structures/ models vary depending on a firm’s target market and its pricing philosophy.

New ventures must deal with important ethical and legal issues at the time of their launching.

Ethical and legal errors made early on can be extremely costly for a new venture down the road.

• establishing a strong ethical culture

• choosing an attorney

• ethically departing from an employer

• drafting a founders’ agreement

• avoiding litigation (избежание судебных разбирательств)

• choosing a form of business ownership

Establishing a strong ethical culture may have several potential payoffs.

strong ethical culture ⇒

• Better access to capital

• Improved brand reputation

• Improved employee commitment (заинтересованность)

• improved customer loyalty

• Decreased vulnerability (Уменьшенная уязвимость)

• Potential avoidance of fines

• lead by example (подавать пример)

  • The most important thing to do in order to build a strong ethical culture is to lead by example.

• establish a code of conduct (разработать кодекс поведения)

  • A code of conduct (or code of ethics) is a formal statement of an organization‘s values on certain ethical or social issues, which provides specific guidance to managers and employees regarding what is expected of them in terms of ethical behavior.

• implement an ethics training program

  • Ethics training programs teach and help employees resolve ethical dilemmas in an appropriate manner and improve their overall ethical conduct. An ethical dilemma is a situation that involves doing something that is beneficial to oneself or the organization, but may be unethical. (Этическая дилемма - это ситуация, которая включает в себя действия, приносящие пользу себе или организации, но может быть неэтичной.)

It is important to select an attorney as early as possible when developing a business venture.

• The attorney should be

  • ... familiar with start-up issues;

  • ... a specialist in dealing with intellectual property issues.

• An installment plan (план рассрочки) or other payment arrangements may be needed, since start- ups are usually short on cash.

  • Several other ways for entrepreneurs to save on legal fees should be considered:

    • group together legal matters (юридические вопросы);

    • offer to assist the attorney;

    • ask your attorney to join your advisory board;

    • use non-lawyer professionals.

• How to select an attorney...

  • Contact the local bar association and ask for a list of attorneys who specialize in start-ups in your area.

  • Interview several attorneys.

  • Select an attorney who is familiar with the start-up process.

  • Select an attorney who can assist you in raising money for your new venture.

  • Make sure your attorney has a track record of completing his or her work on time.

  • Talk about fees.

  • Select an attorney that you think understands your business and that you think you will feel comfortable spending time with.

  • Learn as much about the process of starting a business yourself as possible.

The majority of new ventures is started by people who hold traditional jobs. They should leave their employer following the two most important guidelines.

• Behave in a professional manner
  • Give proper notice of an intention to quit

  • Perform all assigned duties until the day of departure and do not spend the last days on making arrangements for the launch of the new venture

• Honor all employment contracts

  • The nondisclosure agreement (соглашение о неразглашении ) is a promise made by an employee or another party to not disclose the company’s trade secrets.

  • The noncompete agreement (неконкурентное соглашение) prevents an individual from competing against a former employer for a specified period of time.

A founders’ (or shareholders’) agreement is a written document which deals with issues such as ...

• the relative split of the equity among the founders;

• how individual founders will be compensated for the cash or the “sweat equity” (потный капитал) they put into the firm;

• how long the founders will have to remain with the firm for their shares to fully vest (наделение правами).

A founders’ (or shareholders’) agreement includes ...

• Nature of the prospective business

• A brief business plan

• Identity and proposed titles of the founders

• Legal form of business ownership

• Apportionment (Распределение) of stock

• Consideration (Вознаграждение) paid for stock or ownership share of each of the founders

• Identification of any intellectual property signed over to the business (переданной в собственность предприятия)

• Description of the initial operating capital

• Buyback clause (Оговорка о выкупе), which explains how a founder’s share will be disposed of if she or he dies, wants to sell, or is forced to sell by court order.

Most legal disputes are the result of misunderstandings, sloppiness (неосмотрительности), or a simple lack of knowledge of the law, and should be avoided by entrepreneurs.

• How to avoid legal disputes
  • Meet all contractual obligations on time, including paying vendors, contractors, and employees as agreed, and delivering goods or services as promised.

  • Get everything in writing to avoid disputes arising due to a lack of a written agreement or due to poorly prepared written agreements not anticipating potential areas of dispute.

  • Set standards that govern employees’ behavior beyond what can be expressed via a code of conduct.

• If legal disputes occur...

  • negotiation and mediation may settle disputes rather than more expensive and potentially damaging litigation

When a business is launched, a form of legal entity must be chosen.

• Sole Proprietorship
• Partnership
• Corporation
• Limited Liability Company

There is no single form of business ownership that works best in all situations.

It is up to the owners of the firm and their attorney to select the legal entity that best meets their needs.

• The decision typically hinges on ...

  • the cost of setting und maintaining the legal form;

  • the extent to which an entrepreneur can shield personal assets from the liabilities of the business;

  • tax considerations;

  • the ease of raising capital.

A sole proprietorship is a form of business organization involving one person: The person and the business are essentially the same.

• primary advantages

  • creation is easy and inexpensive;

  • the owner maintains complete control of the business and retains all the profits;

  • business losses can be deducted (вычтенный) against the sole proprietor’s other source of income;

  • no double taxation: since a sole proprietorship is not a separate legal entity, the profits/loss of the business flow through the owner’s personal tax return.

  • the business is easy to resolve.

Unlimited liability and difficulty in raising investment capital are the primary reasons entrepreneurs typically prefer other forms of legal entity as opposed to sole proprietorships.

• primary disadvantages

  • liability on the owner’s part is unlimited;

  • the business relies on the skills and abilities of a single owner to be successful; of course, the owner can hire employees who have additional skills and abilities;

  • raising capital can be difficult;

  • the business end at the owner’s death or loss of interest in the business;

  • the liquidity of the owner’s investment is low.

Partnerships are organized as either general or limited partnerships.

• General Partnership

  • A form of business organization where two or more people pool their skills, abilities, and resources to run a business.

• Limited Partnership

  • A modified form of a general partnership. The major difference between the two is that a limited partnership includes two classes of owners: general and limited partners.

A limited partnership is usually formed to raise money or to spread out the risk of a venture without forming a corporation.

• general partners of a limited partnership

  • General partners are liable (ответственный) for the debts and obligations of the partnership.

• limited partners of a limited partnership

  • Limited partners are liable only up to the amount of their investment.

The primary advantage of a general partnership over a sole proprietorship is that the business is not dependent on a single person for its survival and success

• primary advantages
  • creating one is relatively easy and inexpensive compared to a corporation or limited liability company;

  • the skills and abilities of more than one individual are available to the firm;

  • having more than one owner may make it easier to raise funds;

  • business losses can be deducted against the partners’ other sources of income;

  • it is not subject to double taxation.

The primary disadvantage of a general partnership is that the individual partners are liable for all the partnership’s debts and obligations.

• primary disadvantages
  • liability on the part of each general partner is unlimited;

  • the business relies on the skills and abilities of a fixed number of partners; of course, the owners can hire employees who have additional skills and abilities;

  • raising capital can be difficult;

  • because decision making among the partners is shared, disagreements can occur;

  • the business ends with the death or withdrawal of one partner unless otherwise stated in the partnership agreement;

  • the liquidity of each partner’s investment is low.

Corporations are separate legal entities organized under the authority of a state as C Corporations (or Subchapter S Corporations).

• C Corporation
  • A C Corporation is a separate entity that - in the eyes of the law - is separate from its owners.

• “piercing the corporate veil” (Пронзая корпоративную завесу)

  • If the owners of a corporation don’t file their annual paperwork, neglect to pay their annual fees, or commit fraud (мошенничество), a court could ignore the fact that a corporation has been established, and the owners could be held personally liable for actions of the corporation.

• primary advantages

  • owners are liable only for the debts and obligations of the corporation up to the amount of their investment;

  • raising money is easy (depending on the strength of the business);

  • no restrictions exist on the number of shareholders (which differs from subchapter S corporations);

  • stock is liquid if traded on a major stock exchange;

  • the ability to share stock with employees through stock options or other incentive plans can be a powerful form of employee motivation.

• primary disadvantages

  • setting up and maintaining one is more difficult than for a sole proprietorship or a partnership;

  • business losses cannot be deducted against the shareholders’ other sources of income;

  • income is subject to double taxation: a corporation is taxed on its net incomeand, when the same income is distributed to shareholders in the form of dividends, is taxed again on shareholders’ personal income tax returns;

  • small shareholders typically have little voice in the management of the firm.

The Limited Liability Company is a form of business organization that is rapidly gaining popularity in the U.S.: It combines the limited liability advantage of the corporation with the tax advantages of the partnership.

• primary advantages
  • members are liable for the debts and obligations of the business only up to the amount of their investment;

  • the number of shareholders is unlimited;

  • the number of members, tax issues, and implementation is flexible;

  • no double taxation, because profits are taxed only at the shareholder level.

The Limited Liability Company is rather complex to set up and maintain, and in some states the rules governing the Limited Liability Company vary.

• primary disadvantages
  • setting up and maintaining one is more difficult and expensive;

  • tax accounting can be complicated;

  • some of the regulations governing LLCs vary by state.

•  

Financial management deals with two things:

• raising money and
• managing a company’s finances

in a way that achieves the highest rate of return.

Most entrepreneurial firms have four primary financial objectives.

• profitability
• liquidity
• efficiency
• stability

Reasons for bankruptcy

• Excess of liabilities over assets (more liabilities then assets)

• Illiquidity

Profitability is the ability to earn a profit.

Many start-ups are not profitable during their first one to three years while they are training employees and building their brands.

However, a firm must become profitable to remain viable and provide a return to its owners.

Liquidity is the ability to meet its short-term financial obligations.

Even if a firm is profitable, it is often a challenge to keep enough money in the bank to meet its routine obligations in a timely manner.

Efficiency describes how productively a firm utilizes its assets relative to its revenue and its profits.

Stability describes the strength and vigor of the firm’s overall financial posture.

For a firm to be stable, it must not only earn a profit and remain liquid but also keep its debt in check.

Many experienced entrepreneurs stress (подчеркивают) the importance of keeping on top of the financial management of the firm.

In the competitive environment in which most firms exist, it’s simply not good enough to shoot from the hip when making financial decisions.

• Financial Statement

  • is a written report that quantitatively describes a firm’s financial health. The income statement, the balance sheet, and the statement of cash flows are the financial statements entrepreneurs use most commonly. In start-ups, financial statements are typically scrutinized closely to monitor the financial progress of the firm.

• Historical Financial Statements

  • reflect past performance and are usually prepared on a quarterly and annual basis.

• Forecasts
  • are an estimate of a firm’s future income and expenses, based on its past performance, its current circumstances, and its future plans. New ventures typically base their forecasts on an estimate of sales and then on industry averages or the experiences of similar start-ups regarding the cost of goods sold and other expenses.

• Budgets

  • are itemized forecasts of a company’s income, expenses, and capital needs and are also an important tool for financial planning and control.

• Pro Forma Financial Statements

  • are projections (прогнозы) for future periods based on forecasts (предсказания) and are typically completed for two to three years in the future.

• Financial Ratios
  • depict relationships between items on a firm’s financial statements and are used to discern whether a firm is meeting its financial objectives and how it stacks up against its industry peers.