A Primer in Entrepreneurship

The analysis of a firm’s historical financial statement is followed by the preparation of forecasts which are predictions of a firm’s future sales, expenses, income, and capital expenditures.

The two main forecasts are

• 1. Sales Forecast
• 2. Forecast of Cost of Sales and Other Items

Sales Forecast is a projection of a firm’s sales for a specified period.

• A sales forecast for an existing firm is based on ...

  • (1) its record of past sales;

  • (2) its current production capacity and product demand;

  • (3) any factors that will affect its future production capacity and product demand.

Once a firm has completed its sales forecast, it must forecast its cost of sales and the other items on its income statement.

• 1. percent-of-sales method
  • is a method for expressing each expense item as a percentage of sales. Using the percent-of-sales method, the net result is that each expense item on its income statement (with the exception of those items that can be individually forecast) will grow at the same rate as sales. This approach is called the constant ratio method of forecasting.
• 2. Once a firm completes its forecast using the percent-of-sales method, it usually goes through its income statement on an item-by-item basis to see if there are opportunities to make more precise forecasts.

A completely new firm’s forecast should be proceeded in its business plan by an assumption sheet .

Completely new firms typically base their forecasts on

• a good-faith estimate of sales;

• industry averages (based on a percentage of sales);

• the experiences of similar start-ups for cost of goods sold and other expenses.

Consequently, they should include in the business plan an assumption sheet – the explanation of the sources of the numbers for the forecast and the assumptions used to generate them.

Investors typically study assumption sheets like hawks (ястребы) to make sure the numbers contained in the forecasts and the resulting financial projections are realistic.

A firm’s forecasts provide the basis for its pro forma financial statements.

A firm’s pro forma financial statements are similar to its historical financial statements, except that they look forward rather than track the past.

A well-developed set of pro forma financial statements helps a firm create accurate budgets, build financial plans, and manage its finances in a proactive, rather than a reactive, manner.

Once a firm forecasts its future income and expenses, the creation of the pro forma income statement is merely a matter of plugging in the numbers.

The pro forma balance sheet provides a firm with a sense of how its activities will affect its ability to meet its short-term liabilities, and how its finances will evolve over time.

The pro forma balance sheet is also used to project the overall financial soundness of a company.

The pro forma statement of cash flows shows the projected flow of cash into and out of the company during a specified period.

The most important function of the pro forma statement of cash flows is to project whether the firm will have sufficient cash to meet its needs.

The same financial ratios used to evaluate a firm’s historical financial statements should be used to evaluate the pro forma financial statements.

This work is completed so the firm can get a sense of how its projected financial performance compares to past performance, and how its projected activities will affect its cash position and its overall financial soundness.

Usually the team doesn’t come together all at once. Instead, it is built as the new firm can afford to hire additional personnel.

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.

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.

New Ventures have a high propensity (наклонность) to fail.

• Early hirings are most critical!

• Hire fast, fire fast.

• Form team with complementary skills.

Can+Like=Happy

Can+Dislike=Bored

Can’t+Like=Motivated

Can’t+Dislike=Challenged

Grow or go.

Assembling a talented and experienced new venture team may hinder firms to fail due to the liability of newness.

• liability of newness
  • refers to the fact that companies often falter (спотыкаться) 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.

It is widely known that a well-conceived business plan cannot get off the ground unless a firm has the leaders and personnel to carry it out.

Siehe Bild

The first decision that most founders have to make is about the size of the founding team.

Founders have to decide whether to start a firm on their own or whether to build an initial founding team.

It is generally believed that new ventures started by a team have an advantage over those started by an individual.

Compared to a sole entrepreneur, a team brings to a new venture ...

• more talent,

• more resources,

• more ideas,

• more professional contacts.

• Teams that have worked together before, as opposed to teams that are working together for the first time, have an edge (имеют преимущество).

• If the members of the team are heterogeneous (being diverse in terms of abilities and experiences) rather than homogeneous (areas of expertise being very similar to each other) 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.

There's little correlation between a group of collective intelligence and the IQs of its  individual members. But if a group includes more women, its collective intelligence rises.

A part of that finding can be explained by differences in social sensitivity, which we found is also important to group performance. Many studies have shown that women tend to score higher on tests of social sensitivity than men do. So what is really important is to have people who are high in social sensitivity, whether they are men or women.

One reason the founders are so important is that in the early days of the firm, the founders’ qualities are the most valuable resources the firm has.

• level of education
  • Evidence suggests that important entrepreneurial skills are enhanced through higher education.

• prior entrepreneurial experience

  • Founders with prior entrepreneurial experience are familiar with the entrepreneurial process and are likely to avoid costly mistakes than founders new to the rigors of the entrepreneurial process.

• relevant industry experience

  • Founders with experience in the same industry as their new venture will most likely have better-established professional networks and more applicable marketing and management expertise than founders without relevant industry experience.

• professional network

  • Founders with broad social and professional networks have potential access to additional know-how, capital, and customer referrals.

Many founders worry about hiring the wrong person for a key role.

Since most new firms are strapped for cash (ограничены в средствах), every team member must make a valuable contribution(вклад), so it’s not good enough to hire someone who is well- intended but who doesn’t precisely fit the job.

A board of directors is a panel of individuals who are elected by a corporation’s shareholders to oversee (осуществлять надзор) the management of the firm.

If a new venture organizes as a corporation, it is legally required to have a board of directors.

A board is typically made up of both inside and outside directors.

• inside director is a person who is also an officer of the firm.

• outside director is someone who is not employed by the firm.

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 cash honorarium.

A board of directors has three formal responsibilities.

• 1. appoint the officers of the firm
• 2. declare dividends
• 3. oversee the affairs of the corporation

If handled properly, a company’s board of directors can be an important part of its new venture team.

There are 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.

• provide guidance

  • Although a board of directors has formal governance responsibilities, its most useful role 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 (придавать законность)

  • Well-known and respected board members bring instant credibility to a firm (мгновенно завоевывают доверие компании).

Along with the new venture team members founders often rely on professionals with whom they interact for important counsel (наставление) and advice.

• ⇒board of advisors
• ⇒lenders and investors
• ⇒other professionals

• A growing number of start-ups are forming advisory boards to provide them with direction and advice.
  • advisory board is a panel of experts who are asked by a firm’s managers to provide counsel and advice on an ongoing basis. 
  • Most boards of advisors have between five and 15 members. 
  • Companies typically pay the members of their board of advisors a small honorarium for their service, either annually or on a per- meeting basis.

• Guidelines for Organizing a Board of Advisers

  • Advisers will become disillusioned (будут разочарованы) if they don’t play a meaningful role in the firm’s development and growth.

  • A firm should look for board members who are compatible and complement one another in terms of experience and expertise.

  • When inviting people to serve on its board of advisors, a company should carefully spell out (четко разъяснить) to the individuals involved the rules in terms of access to confidential information.

Lenders and investors have a vested interest (личную заинтересованность) in the companies they finance, often causing them to become very involved in helping the firms they fund.

• As with other non-employee members of a firm’s new venture team, lenders and investors help new firms by ...

  • ... providing guidance

  • ... lending legitimacy

Furthermore, they assume the natural role of providing financial oversight (надзор).

In some instances, lenders and investors also work hard to help new firms fill out their management teams.

• Beyond financing and funding, lenders and investors add value to an entrepreneurial venture by ...

  • ... helping to identify and recruit key management personnel;

  • ... helping the venture fine-tune its business model;

  • ... providing introductions to additional sources of capital;

  • ... providing insight into the industry and markets in which the venture intends to participate;

  • ... serving as a sounding board for new ideas;

  • ... serving on the new venture’s board of directors or board of advisors.

Other professionals assume important roles: Attorneys, accountants, and business consultants are often good sources of counsel and advice.

• consultant
  • is an individual who gives professional or expert advice. New ventures vary in how much they rely on business consultants for direction.

    • paid consultant

    • consultants who are made available for free or at a reduced rate through a nonprofit or government agency

• There are three reasons that most entrepreneurial ventures need to raise money during their early life.

  • Cash Flow Challenges

    • Inventory must be purchased, employees must be trained and paid, and advertising must be paid before cash is generated from sales.

  • Capital Investments

    • The cost of buying real estate, building facilities, and purchasing equipment typically exceeds a firm’s ability to provide funds for these needs on its own.

  • Lengthy (Длительный) Product Development Cycles

    • Some products are under development for years before they generate earnings. The up-front costs (Первоначальные затраты) often exceed a firm’s ability to fund these activities on it own.

• Many entrepreneurs lack experience in raising capital.

  • Few people deal with the process of raising 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 (беспорядочно) because they lack experience in this area.

• There are four alternatives for raising money for a start-up firm.

  • Personal Funds

  • Equity Capital

  • Debt Financing

  • Other (Creative) Sources

For each of the three common profiles of new ventures a specific type of financing or funding is appropriate. (SIEHE BILD)

The seed money that gets a company off the ground comes from the founders’ own pockets.

• Personal Funds
  • Involves both financial resources and sweat equity. Sweat equity represents the value of the time and effort that a founder puts into a firm.

• Friends and Family

  • Often comes in the form of loans or investments, but can also involve outright gifts, foregone or delayed com- pensation, or reduced or free rent.

• Bootstrapping

  • Finding ways to avoid the need for external financing through creativity, ingenuity (изобретательности), thriftiness (бережливости), cost- cutting, obtaining grants, or any other means.

Because it is hard for new firms to get financing or funding early on, many entrepreneurs bootstrap out of necessity.

• Bootstrapping

  • Buying used instead of new equipment

  • Leasing equipment instead of buying

  • Minimizing personal expenses

  • Sharing office space with other businesses

  • Coordinating purchases with other businesses

  • Obtaining payments in advance from customers

  • Avoiding unnecessary expenses

  • Applying for and obtaining grants

Once a start-up’s financial needs exceed what personal financing can provide, dept and equity are the two most common sources of funds.

• Determine precisely how much money is needed.

• Determine the type of financing or funding that is the most appropriate.

• Develop a strategy for engaging potential investors or bankers.

There exist two common alternatives for raising money.

• Equity financing
  • means exchanging partial ownership in a firm, usually in the form of stock. 
  • 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

  • is getting a loan.

  • The most common sources of debt financing are commercial banks and the Small Business Administration (through its guaranteed loan program).

The lead entrepreneurs in a new venture should prepare an elevator speech.

• Elevator Speech
  • It is a brief, carefully constructed statement that outlines the merits (достоинства) of a business opportunity.

  • Most elevator speeches are 45 seconds to two minutes long.

The elevator speech is a very brief description of your opportunity, product idea, qualifications. (SIEHE BILD)

Business Angels

• Business Angels are individuals who invest their personal capital directly in start-ups.

  • The prototypical business angel ...

    • ... is about 50 years old;

    • ... has high income and wealth;

    • ... is well-educated;

    • ... has succeeded as an entrepreneur;

    • ... is interested in the start-up process.

  • Business angels are valuable because of their willingness to make relatively small investments. This gives access to equity funding to a start-up that needs just $50,000 rather than the $1 million minimum investment that most venture capitalists require.

Venture Capital

• Venture Capital is money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential.
  • Private Equity
    • Asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange (keyword: leveraged buyout)

  • Venture Capital

    • Broad subcategory of private equity; refers to equity investments made for the launch, early development, or expansion of a business.

  • Venture Capital: funds, or pools of money, are raised from wealthy individuals, pension plans, university endowments, foreign investors, and similar sources,

  • Venture Capital Firms

    • are limited partnerships of money managers who raise money in “funds” to invest in start-ups and growing firms.

    • Many entrepreneurs get discouraged 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.

• An Initial Public Offering 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.
  • 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 or agent 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.

• Initial Public Offering: There are four reasons that motivate firms to go public.

  • 1. It is a way to raise equity capital to fund current and future operations.

  • 2. An IPO raises a firm’s public profile, making it easier to attract high-quality customers, alliance partners, and employees.

  • 3. An IPO is a liquidity event that provides a means for a company shareholders (including its investors) to cash out their investments.

  • 4. By going public, a firm creates another form of currency that can be used to grow the company.

• Although there are many advantages to going public, it is a complicated and expensive process.

Debt financing involves getting a loan or selling corporate bonds.

• There are two most common sources of debt financing available to entrepreneurs.

  • Commercial Banks

    • Historically, commercial banks have not been viewed as practical sources of financing 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.

    •  

      There are two reasons that banks have historically been reluctant to lend money to start-ups.

      • 1. As mentioned previously, banks are risk-adverse. In addition, banks frequently have internal controls and regulatory restrictions prohibiting them from making high-risk loans.

        2. Lending to small firms is not as profitable as lending to large firms. In many instances, it is simply not worth a banker’s time to do the due diligence necessary to determine the entrepreneur’s risk profile.

         

  • SBA Guaranteed Loans

    • While these loans typically are not available to start-ups, they are an important source of funding for small businesses in general.

    • Approximately 50 percent of the 9,000 banks in the United States participate in the SBA Guaranteed Loan Program.

    • 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.

    • 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.

• Symptoms of crisis

  • Good people leave the firm

  • Asks for advance pay

  • Payment delays

  • Investment jam (пробка)

  • High interest rates

  • Banks exiting

  • Asset stripping (Разделывание)

  • Cutting of marketing and sales spending

• Overcoming crisis (Преодоление кризиса)

  • Liquidity first

    • Sale and lease back

    • Prepayment (предоплата)

    • New investors

  • Bargain with creditors and banks

  • Cost cutting, get rid(избавление) of non-profitable business

  • Sale of unused assets