New Venture Creation

1. New Venture Creation Professor Alexander Settles

2. Entrepreneurial versus Administrative

3. Drivers of Growth

4. Life Cycle

5. Traits Characterizing Rapidly Growing Companies • High levels of change, ambiguity, and uncertainty • Ongoing succession of nonlinear and nonparametric events • Inexperience of management team • Counterintuitive, unconventional patterns of decision-making • Informality and fluidity of organization structure and procedure

6. Entrepreneurial Actions

7. Entrepreneurial Influence Skills • Interpersonal/teamwork skills • Ability to create, through management, a climate and spirit conducive to high performance • Ability to understand the relationships among tasks and between the leader and followers • Ability to lead in those situations where it is appropriate

8. Characteristics of Successful Managers • Managers skilled in leadership, vision, and influence • Skillful in creating clarity out of confusion, ambiguity, and uncertainty • Able to define adroitly and gain agreement on who has what responsibility and authority • Manage in a way that builds motivation and commitment to cross-departmental and corporate goals, not just parochial interests

9. Characteristics of Successful Managers • Managers skilled at helping, coaching, and conflict management • Creatively handle conflicts, generate consensus decisions, and share power and information • Recognize that high-quality decisions require a rapid flow of information in all directions • Accept that knowledge, competence, logic, and evidence need to prevail over official status or formal rank in organization

10. The Key to Growth • Team traits • Cohesion • Teamwork • Integrity • Commitment to the long haul • Harvest mind-set • Commitment to value creation • Equal inequality • Fairness • Sharing of the harvest

11. Key Questions for the Lead Entrepreneur/Founder • Is formation of a team desirable or necessary? • Do I want to grow a higher potential company? • What talents, know-how, skills, track record, contacts, and resources are currently available? • What is needed to succeed? • Who is needed to complement me?

12. Forming and Building a Team • Three issues for consideration • Values, goals, and commitment • Definition of roles • Peer groups

13. Common Pitfalls • Do not use the “honeymoon” period of start-up advantageously • Do not answer the questions of who is in charge, who makes the final decisions, and how real differences of opinion are resolved • Do not address or recognize the deficiencies of the lead entrepreneur or the management team

14. Common Pitfalls • Do not recognize that creating and building a new venture is a dynamic process • Do not identify and defuse destructive motivations of investors, prospective team members, or the lead entrepreneur • Do not value trust and integrity

15. Slicing the Founder’s Pie • How much stock ownership should go to whom? • Share the wealth with those who help to create the value and thus the wealth • Realize a harvest of at least 5 to 10 times the original investment • Make sure the company prospers and grows thus creating a huge, shared pie

16. Distribution Issues • Differentiation • Reward system recognizes differences in contributions among team members • Performance • Reward is a function of performance (as opposed to effort) • Flexibility • Reward system acknowledges and accounts for changes in contributions of team members

17. Stock-Vesting Agreement • Stock-vesting agreement—An agreement between venture and team member used to guard against the event that some portion of the stock has been earned and some portion will remain unearned, as when a team member quits or dies; the venture places the stock purchased by team members in escrow to be released over a two- or three-year period.

18. Stock-Vesting Agreement • Fosters longer-term commitment to the success of the venture • Provides a method for a civilized, no-fault corporate divorce if things do not work out • Establishes a period of years, often four or more, where founding stockholders can “earn out” their shares

19. Consideration of Value • Idea • Business plan preparation • Commitment and risk • Skills, experience, track record, or contacts • Responsibility

20. The Entrepreneurial Approach to Resources • Resources • People, such as the management team, the board of directors, lawyers, accountants, and consultants • Financial resources • Assets, such as plant and equipment • Business plan

21. Resource Minimization Strategy • Staged capital commitments • Less capital • More flexibility • Low sunk cost • Lower costs • Reduced risk

22. Relationship with the Board of Directors • Simple rules for a productive relationship with the board of directors • Treat your directors as individual resources • Always be honest with your directors • Set up a compensation committee • Set up an audit committee • Never set up an executive committee

23. Financial Resources • Cash is the lifeblood of the venture • Computers and spreadsheet programs are tools that save time and increase productivity and creativity. • Answer “what if” questions • Capital Requirements • Pro Forma Income Statements • Balance Sheets • BudgetingBreak-Even Calculations • Cash Flow Projections

24. Part 2

25. Entrepreneurial Finance • Three core principles of entrepreneurial finance • More cash is preferred to less cash • Cash sooner is preferred to cash later • Less risky cash is preferred to more risky cash

26. Finance Process

27. Bargaining Power • Three vital corollaries determining bargaining power • Burn rate • Time to OOC (Out Of Cash) • TTC (Time To Close)

28. Free Cash Flow • The cash flow generated by a company or project is defined as follows: • Earnings before interest and taxes (EBIT) • Less tax exposure (tax rate times EBIT) • Plus depreciations, amortization, and other non-cash charges • Less increase in operating working capital • Less capital expenditures

29. Operating Working Capital • Operating working capital can be defined as follows: • Transactions cash balances • Plus accounts receivable • Plus inventory • Plus other operating current assets • Less accounts payable • Less taxes payable • Less other operating current liabilities

30. Factors Affecting Financing • Accomplishments and performance to date • Investor’s perceived risk • Industry and technology • Venture upside potential and anticipated exit timing

31. Factors Affecting Financing • Venture anticipated growth rate • Venture age and stage of development • Investor’s required rate of return or internal rate of return • Amount of capital required and prior valuations of the venture

32. Factors Affecting Finance • Founders’ goals regarding growth, control, liquidity, and harvesting • Relative bargaining positions • Investor’s required terms and covenants

33. Examples of Entrepeneurial Ventures

34. Five Year Performance TrendsUS Venture vs Buyouts vs Stocks

35. Venture Capital Funding

36. Obtaining Risk Capital • Three central issues to be considered • Does the venture need outside equity capital? • Do the founders want outside equity capital? • Who should invest?

37. Angel Investors • Who are angel investors? • Most are self-made entrepreneur millionaires • Many are in their 40s and 50s • Most are well educated • Ninety-five percent have college degrees from four-year colleges • Fifty-one percent have graduate degrees (Forty-four percent are in a technical field and thirty-percent percent are in business or economics) • Ninety-six percent are men

38. Informal Investors • What type of ventures lends themselves to the use of informal investors? • Ventures with capital requirements of between $50,000 and $500,000 • Ventures with sales potential of between $2 million and $20 million within 5 to 10 years • Small, established, privately held ventures with sales and profit growth of 10% to 20% per year

39. Informal Investors • What type of ventures lends themselves to the use of informal investors? • Special situations, such as very early financing of high-technology inventors who have not developed a prototype • Companies that project high levels of free cash flow within three to five years

42. Venture Capital Deals

44. What to Look for in Investors • Seek investors who: • Are considering new financing proposals and can provide the required level of capital • Are interested in companies at the particular stage of growth • Understand and have a preference for investments in the particular industry

45. What to Look for in Investors • Seek investors who: • Can provide good business advice, moral support, and has contacts in the business and financial community • Are reputable, fair, and ethical and with whom the entrepreneur gets along • Have successful track records of 10 years or more advising and building smaller companies

46. Advantages of Going Public • To raise more capital with less dilution than occurs with private placements or venture capital • To improve the balance sheet • To reduce or eliminate debt (thereby enhancing the company’s net worth • To obtain cash for pursuing opportunities that would otherwise be unaffordable

47. Advantages of Going Public • To access other suppliers of capital and to increase bargaining power, as the company pursues additional capital when it needs it least • To improve credibility with customers, vendors, key people, and prospects • To achieve liquidity for owners and investors

48. Advantages of Going Public • To create options to acquire other companies with a tax-free exchange of stock, rather than having to use cash • To create equity incentives for new and existing employees

49. IPO Proceeds

50. Exhibit 13.11