Entrepreneurship and Venture

Capital Management
 Chapter 1

The Entrepreneurial
Process
 Lecture Sub-topics

What Is The Ups

0 02 Quick 0
Entrepreneurship and
1 Facts 3
? Downs….

Some Types of 0 Entrepreneuria

0 Entrepreneur l Traits
0 Reasons to 6
5 s
4 Become an
Entrepreneur
Near- Scale-
The Spider- 0 0
0 Neighbor Free
Web 8 9
7 Networks Networks
Model

The Getting Started

1 1 Stage 1, 2, 3, 4,
Internet
0 1 5
(work)
 What Is
Entrepreneurship?
Root of the Word
• From the French word entreprendre, which refers to individuals
who “undertook” the risk of a new enterprise

Today’s Meaning
• The process of planning, organizing, operating, and assuming the
risk of a business venture
• More than just the creation of a business; it also includes the
generation and
implementation of an idea.
• It is about being a dynamic thinker and operator which includes
effective communication to all of your stakeholders
• It is not about being a maverick; entrepreneurs must think
tactically and strategically, and operate in a similar fashion
 Quick Facts

• Annual creation of 600,000 to 800,000 new companies

• More employees work for entrepreneurial ventures than any other sector
in the economy
• No sector of the U.S., and world, economy has been as vital, dynamic,
and
creative as entrepreneurship
• Think:
 The Ups and Downs ....

Ecstasy

New cost model Orders

It works!
looks good!
Approvals
Customers Have a fix
Qualification
like it!
Yes it does!
Entrepreneurship is Enthusiasm New fix works

usually a Roller-Coaster Yields

Yes it is! are low
Ride No it
Doesn’t work

doesn’t

Have Cost too high

an idea! Not proprietary
Despair
Vision Time Commercialization

From R. J. Saldich
 Some Reasons to Become an Entrepreneur

Entrepreneurs learn to think differently.

Triggers to start your own venture:
• Independence and Freedom from the restrictions and bureaucracy of
corporate life
• Being able to “do your own thing”
• Plateauing in current job
• Opportunity for sustained growth and mobility
• Flexibility
• Financial reward
• Loss of Current Employment

“Looking back, the day that I got fired was the best day of my life” ……
successful entrepreneur.
 Types of Entrepreneurs

The Choice
• As the economy has shifted to place a premium on
portable skills and knowledge, as well as effective
networks, entrepreneurship has become a viable career
alternative.
• Entrepreneurs are classed into several categories:

• Serial Entrepreneur—Someone who starts, grows, and

sells several businesses over the course of their
career.
 Types of Entrepreneurs

Types of Entrepreneurs – 2

• Aspiring Entrepreneurs—Dream of starting a

business; they hope for the chance to be their
own bosses, but have not yet made the leap
from their current employment into the
uncertainty of a startup. Research indicates that,
at any given time, 7 million adults are trying to
start businesses in the U.S.
 Types of Entrepreneurs

Types of Entrepreneurs – 3

• Lifestyle Entrepreneurs—Have developed an enterprise

that fits their individual circumstances and style of life.
Intention is to earn income for themselves and their
families. Sometimes
referred to as “small businesses” or “mom-and-pop
shops”. 13 million
Americans (25 million if you count part-timers) run their
own business from home.
 Types of Entrepreneurs

Types of Entrepreneurs – 4
• Growth Entrepreneurs—Have both the desire and
ability to grow as fast and as large as possible.
Their firms are the most dynamic job generators
in the U.S. economy.
There are over 300,000 entrepreneurial
companies with more than 50 employees that
are growing at a rate of 20 percent per year.
 Types of Entrepreneurs

Ask Yourself “What Type am I”

• One of the major mistakes aspiring entrepreneurs make when

starting out is NOT to closely question what they want to be when
“they grow up”.

• Each type of entrepreneur is a control and lifestyle choice with

many advantages and disadvantages that must be considered

• Decide early on what is most important to you – control,

wealth,
lifestyle…..
 Entrepreneurial
Traits
Common Characteristics of Entrepreneurs:
• Passionately seek new opportunities and are always looking for the
chance to profit from change and disruption in the way business is
done
• Pursue opportunities with tremendous discipline
• Pursue only the very best opportunities, and avoid exhausting
themselves and their organizations by chasing after every option
• Focus on execution—specifically, adaptive execution
• Engage the energies of everyone in their domain
• Lead by example, network, and communicate well
 Entrepreneurial
Traits
Entrepreneurs are Comfortable in Paradoxical Situations.
They Learn to
Balance:

• Ambiguity vs. Planning

• Creativity vs. Discipline
• Urgency vs. Patience
• Flexibility vs. Organizational Structure
• Responsiveness vs. Systematic Processes
• Risk Taking vs. Controlled Risk
• Short Term Actions vs. Long Term Goals
 The Spider-Web Model

• Managing a Start-up is analogous

to building and maintaining a
fragile Spider-web which is
under continuous attack.
• Unlike a large company
with specialists for different
functions, entrepreneurs must
learn “on-the-
job” and fulfill role
many simultaneously, s
manyhave
they for no experience or whic
training.
h
 Near-Neighbor Networks

• The Interstate Network is

an example in which each node
has a similar
characteristic…it is
connected more or less
equally with its neighbors.

• Such networks offer little value

to entrepreneurs.
 Scale-Free Networks

• The Airline Network

is an example in
which certain nodes
have a highly
concentrated set of
connections.

• Entrepreneurs
identify and network
with highly connected
people, or key
influencers and
build network power
into their business
models.
 The Internet (work)

The Internet is an example

of a “Scale-free”
network.
Entrepreneurs exploit its
unique characteristic for
finding s
resources tacklin
problem , g
s and creatin
efficient
strategie marke g
s. t entry

Internet map courtesy of A.

Barabasi
 Getting Started - Stage 1

Stage 1: Conducting Opportunity

Analysis

• Innovate and create the vision

• Conduct market analysis and
research
• Evaluate the competition
• Research pricing and sales
strategies
 Getting Started - Stage 2

Stage 2: Developing the Plan and Setting up

the Company

• Set goals and objectives

• Start writing the plan
• Investigate new processes and technologies
• Determine pricing, market, and distribution
channels
 Getting Started - Stage 3

Stage 3: Acquiring Financial Partners and Sources

of Funding

• Innovate and create the vision

• Conduct market analysis and research
• Evaluate the competition
• Research pricing and sales strategies
 Getting Started - Stage 4

Stage 4: Determining the Resources Required and

Implementing the Plan

• Determine value of licenses, patents, and copyrights

• Prepare the organization for growth
• Develop a business model to maximize value retention and
sustainability
• Manage the finances
 And Possibly – Stage 5

Stage 5: Scaling and Harvesting the

Venture

• Prepare a full business plan

• Discuss options and alternatives
– Sell or merge
– Go public
– Form a strategic alliance
• Communicate the opportunity
Entrepreneurship and Venture Capital
Management
 Chapter 2

The Art of Innovation – Developing Ideas and

Business Opportunities
 Lecture Sub-topics

01 Why Innovate? Types of Derivative

02 03
Innovation Innovation

Disruptive Waves of Disruption in Models for

04 05 06
Innovation Lighting Innovation

Where Ideas for Converting an Idea into The Five Phases to

07 08 09
Opportunities Originate an Opportunity Success

Frameworks for Evaluating

Questions to Evaluate the Evaluating the 09
10 11 an Opportunity – 1, 2, 3 & 4
Business Opportunity Opportunity
 Why Innovate?

• The Growth of the Internet

• Shift to a Service Economy
• Reduction of International Trade Barriers
• International Free-Flows of Capital
• Rapid Technological Obsolescence
 Types of Innovation

• The S-Curve of Innovation

• Derivative vs. Radical
• Disruptive Innovation

− Candles to Incandescent
Lighting
• Incremental Innovation

− Evolution of Designer
Candles
 Derivative Innovation

Derivative Innovation gives

Incremental Improvements
Performance

Time

The S-Curves with Incremental Innovation

 Disruptive Innovation

Disruptive Innovation
Leads to Radical Changes

Performance

Time to adopt radical innovation –

before performance advantages.

Time

S-Curves for a Disruptive Innovation

 Waves of Disruption in Lighting

LED’s

Discharge Lamps
Incandescent Lamps

Candles
Performance

Time

New Disruptive Technologies Changed the

Lighting Industry Many Times – What’s Next?
 Models for Innovation

• Analogs
− Leafbusters
• Intersection of Technology Trends
– Netflix and Streaming Video
• “Points of Pain”
– SmartPak
• Analysis of Existing Businesses
– SuperFast Pizza
 Where Ideas for Opportunities Originate

Present Work Secondary

Sources:
Environment
Brainstorming,
4 7 % Trade
Publications,
Commerce
B u s i n e s s O n l y,
Idea Brokers,
Venture Capital
Firms,
Te c h n o l o g y
Transfer
Agencies
2 7 %

Vision of
Opportunity
Improving
11 %
Existing
Te c h n o l o g y,
Product, or
Service 1 5 %
 Converting an Idea into an
Opportunity

What is an Opportunity?
• Identifying which business ideas have real commercial potential is one of the most difficult
challenges that an entrepreneur will face.

Seize the Opportunity

• Know what factors create opportunity out of an initial idea.
 The Five Phases to Success

• Recognize the Opportunity and ACT

• Investigate the Need

• Develop the Plan

• Determine the Resources Needed

• Manage the Business

 Questions to Evaluate the Business Opportunity

• What indicators suggest the idea may be the basis of a valuable and viable opportunity?

• What are the conditions that enable the opportunity to be successful?

• How might the future of the initial product or service change over time?

• How long (in terms of time) is the window of opportunity?

• How big is the opportunity?

 Evaluating the Opportunity
Does the Opportunity……

Fill a need that customers will value?

Show evidence of customer acceptance?

Show that a substantial market exists now?

Indicate that your solution is much better than the competition?

Show a significant upside potential?

Can be achieved with reasonable costs?

 Frameworks for Evaluating an Opportunity – 1

Market Issues:
Criterion Stronger Opportunity Weaker Opportunity
Need Identified Unclear
Customers Reachable; receptive Unreachable or loyalties
established
Payback to user/customer Less than one year Three years or more
Product life cycle Long; recover investment Short; recover investment
Industry structure Competition or emerging Aggressively competitive
Potential market size $100 million sales Less than $10 million sales
Market growth rate Growing at 30% to 50% Contracting less than 10%
Gross margins 30% to 50% Less than 20%; volatile
Market share attainable (year 5) 20% or more Less than 5%
 Frameworks for Evaluating an Opportunity – 2

Financial and Harvest Issues:

Criterion Stronger Opportunity Weaker Opportunity
Profits after tax 10% to 15% or more; durable Less than 5%; fragile
Time to:
Break-even Under 2 years More than 3 years
Positive cash flow Under 2 years More than 3 years
ROI potential 25% or more per year Less than 15-20% per year
Value High strategic value Low strategic value
Capital requirements Low to moderate; fundable Very high; unfundable
Exit mechanism Present or envisioned harvest Undefined; illiquid
options investment
 Frameworks for Evaluating an Opportunity – 3

Competitive Advantage Issues:

Criterion Stronger Opportunity Weaker Opportunity

Fixed and Variable Costs

Production, marketing Lowest Highest
distribution
Degree of Control
Prices, channels of Moderate to strong Weak
resources/distribution
Barriers to Entry
Proprietary protection Yes None
Response/lead time 6 months to one year None
Legal contractual advantage Proprietary of exclusivity None
Sources of differentiation Numerous Few or none
Competitors mindset and Live and let live; not self Defensive and strongly
strategies destructive reactive
 Frameworks for Evaluating an Opportunity – 4

Management Team and Risk Issues:

Criterion Stronger Opportunity Weaker Opportunity

Management team Existing, strong, proven Weak, inexperienced,

performance lacking key skills
Contacts and networks Well-developed; high Crude; limited; inaccessible
quality; accessible
Risk Low High
Fatal Flaws None One or more
Entrepreneurship and Venture Capital
Management
 Chapter 3

Ideas into Business Models

 Lecture Sub-topics

01 Business Model 02
Business Business Model
Definitions 03
Models Components

Attributes of a Good Business Model Canvas Canvas Components – 1

04 05 06
Business Model (Osterwalder Model) &2

Example –
Example - Disrupting 09 Re-structuring
07 Minimum Viable Product 08
the Supply Chain the Supply
Chain

Example – Netflix, (contd.)

Example – Netflix
10 11 Early-mover Advantage and Accumulation of Customer. Data
Use of Data-Mining
Provides Sustainable Business Model
 Lecture Sub-topics
Example - DBI Inc.
Example - DBI Inc.
12 Using Accumulated Data 13 Unique Vehicle + Database of Vegetation Allows Fast Service –
to Build Customer “Lock-
in” Important for Railroads.

Licensing and License Agreements:

14 15 License Agreements 16
Franchising Key Issues

Example: James Dyson Licensed Asian Rights

17 to “Bootstrap” his Company. He Later Bought Them Back.
Hoover Turned Down his Licensing Offer!

Example-Ultrafast’s Business Model with Multiple Licenses to Complementary Tool Companies

18
Solving both Marketing and Funding Problems
 Lecture Sub-topics

19 Franchise Agreements 20 Franchise Agreements: Key Issues

Example - Chemstation’s Unique Business Model

21 22 Outsourcing
Built on Regional Franchises

Social Networks in Social Networks in

Outsourcing: The
23 24 Business Models. 25 Business Models.
Choice
Example - Threadless Example - Vocalpoint

26 Social Networks in Business Models.

P&G Launches eStore to sell Tide direct to Customers
 Business Model Definitions

• With the business environment evolving in such a dynamic and rapid way, it is no longer
sufficient for a company to build a company solely around a new product or service idea.

• A business model is a description of how your company intends to create value in the
marketplace. It includes that unique combination of products, services, image and
distribution that your business carries forward. It also includes the underlying organization of
people, and the operational infrastructure that they use to accomplish their work.
 Business Models

More Simply:

“A business model is the way a

company applies knowledge to capture value.”

 Business Model Components

Requires blending of multiple business aspects:

• Manufacturing
• Finance
• Marketing
• Information
• Suppliers and Customers
• Product and Service development
 Attributes of a Good Business Model

• A Business Model states how a company creates VALUE in the market

• A Business Model is more than just strategy – it is the fundamental architecture of a

business

• Good Business Models are:

– SCALABLE
– Create BARRIERS TO FOLLOWSHIP
– Align the Interests of ALL STAKEHOLDERS
– Provide VALUE to ALL STAKEHOLDERS
– Use NETWORK effects
– Are CAPITAL efficient
– Provide sustainable high GROSS MARGINS
Business Model Canvas
(Osterwalder Model)
 Business Model Canvas
(Osterwalder Model)

https://www.youtube.com/watch?v=QoAOzMTLP5s
 Canvas Components – 1

• We are part of a complex supply chain. Who are our key partners? Why do we need them
and vice versa?

• What is unique about what we can do better than others? What are our key activities? How
do we contribute to the value proposition?

• What are the needs for each subgroup of customers? What value are they seeking?

• What key resources do we need to perform our activities—human, intellectual,

financial, and physical?
 Canvas Components – 2

• Who are our customers, and how do we contribute to the value proposition?
• How do we relate to these selected customers?
• How do we segment these customers, and which are the most valuable to us?
• How do we get to these customers?
• Where are the major costs? For our resources? For our activities?
 Minimum Viable Product

• Minimum Viable Product (MVP) is the product with the highest return on investment
versus risk.
• MVP’s help start-up companies test customers’ reactions early and use the results to guide
product development
• MVP’s reduce the need for funding
• MVP’s reduce risk in product development and improvements
• MVP’s should be a component of a business model

https://www.youtube.com/watch?v=-FC96kttRhk
 Example - Disrupting the Supply Chain

• Used pioneering “Direct Model” in this industry that allows them to provide a customized
product, superior technology, and superior service, for a low-cost.

• Model based on: One-to-one customer contact, Accountability, Made-to-Order, and Non-
Unique Products (modularity)
 Example – Netflix
Use of Data-Mining

https://www.youtube.com/watch?v=BYcCL68KWdA
 Example – Netflix, (contd.)
Early-mover Advantage and Accumulation of Customer
Data Provides Sustainable Business Model
 Licensing and Franchising

• Licensing and Franchising are two valuable components of a business model

• Both are agreements between an issuer—a licensor or franchisor—and a receiver—a
licensee or franchisee.
• These contracts grant the receivers certain rights to access certain “intellectual properties”
such as patents, trademarks, trade secrets, and copyrights
 License Agreements

License agreements allow a licensee to use intellectual property under certain conditions as
spelled out in the agreement.
 License Agreements: Key Issues

1. Licensee and Licensor are identified together on the basis of their reasons for entering into
an agreement

2. The licensed Intellectual Property (IP) is precisely defined

3. The granted rights to the IP are carefully defined

4. The “territory” allowed for practice of the rights is defined

5. The level of exclusivity is defined

6. In exchange for gaining certain rights, the licensee pays fees to the licensor. These usually
include up-front fees, running royalties, or periodic payments

7. Other items considered: term of the agreement, confidentiality, payment scheduling, need
for audit, treatment of breaches of contract, warranties, liabilities, indemnifications, and
other general legal requirements
 Franchise Agreements

A franchise is a legal and commercial relationship between the owner (franchisor) of a

trademark, service mark, trade name, or advertising symbol and an individual or group
(franchisee) wishing to use that identification in a business.

Example:
 Franchise Agreements: Key Issues

1. Franchisee and franchisor are defined together for the reason they are entering into the
agreement

2. The business of the franchise is stated, and the deliverables that the franchisor must provide to
the franchisee are specified

3. The franchisor may offer to fund part of the start-up costs

4. The commitments of the franchisee are defined

5. In exchange for entering into the agreement and receiving support from the franchisor, the
franchisee pays fees to the franchisor

6. Items stating under what terms a franchisee can sell its business

7. Other terms: term of agreement, conditions for renewal, confidentiality, payment scheduling,
need for audit, treatment of breaches of contract, warranties, liabilities, indemnifications,
other legal requirements
Example - Chemstation’s Unique Business Model
Built on Regional Franchises
 Outsourcing

Has become a viable option due to the following:

• To realize cost efficiencies/economies of scale

• To realize core competencies
• To leave specialized tasks to the specialists
• To free up essential resources from non-core functions
 Outsourcing: The Choice

Checklist for whether you should outsource:

• Is the activity central to the company’s success?

• Can the outsourcing lead to a loss of intellectual property rights or a leakage of valuable
trade secrets to competitors of their suppliers?
• Is the task routine and wasteful of your staff’s time?
• Is this a one-off or periodic need?
 Outsourcing: The Choice

Checklist (continued):

• Is it less expensive to have an outsider do it rather than in-house?

• Alternatively, will the task cost less in-house BUT use resources that are more valuable
elsewhere?
• Is the skill so specialized that it’s impractical to have a full-time employee provide the best
input?

If none of these questions elicit concern, you should consider outsourcing the task.
 Outsourcing: The Choice

Tips for finding an external resource:

• Ask around for recommendations

• Choose a company that understands your needs and can meet them
• Outsourcing implies a loss of direct control, so clearly communicate the performance
standards
• Meet regularly
• Have a backup plan
 Social Networks in Business Models.
Example - Threadless

Social Networks in Business Models

Threadless.com – customers design products for free, sales generated

prior to manufacture.
Social Networks in Business Models.
Example - Vocalpoint

P&G’s Social Network for Moms with Kids

provides new ideas and viral marketing.
 Social Networks in Business Models.
P&G Launches eStore to sell Tide direct to Customers

Idea and Initial Market Research undertaken via Vocalpoint

Entrepreneurship and Venture Capital
Management
 Chapter 4

Writing the Winning Business Plan

 Lecture Sub-topics

01 The Value of a Business 02

Setting Goals and Starting the Process
Plan 03
Objectives to Write the Plan:
Five Steps

A Lean and Full

Determining What Business Plan Understanding Why
04 05 06
Type of Business Plan Format and Business Plans Fail
is Best Content
 The Value of a Business Plan

• Test the feasibility of the business idea.

• Act as a safety net.
• Increase the likelihood of the venture’s success.
• Provide a platform.
• Attract bank loans and investors.
 Setting Goals and Objectives

• Determine whether the business is viable

• Raise capital for the business
• Project sales, expenses, and cash flows for the business
• Explain to employees their responsibilities as well as company expectations
• Improve and assess company performance
• Plan for a new product/service development
 Starting the Process to Write the Plan: Five Steps

Here are five steps :

• Identify the objectives by using the Canvas Model
• Draft the outline
• Review the outline
• Draft the plan
• Have the plan reviewed and updated
 Determining What Type of Business Plan is Best

Three major types of plans exist:

• Full Business Plan

• Executive Summary or “Short” Plan
• Action Plan
 A Lean and Full Business Plan Format and Content

• Creating the Title Page and Table of Contents

• Writing the Executive Summary
• Writing the Overview of the Company, Industry, Products, and Services
• Compiling the Marketing Analysis
• Describing the Marketing and Sales Plans
• Pricing Strategy and Plan
• Advertising, Public Relations, and Promotion Strategies
• Other Elements
• Describing Operations
• Describing the Management Team
• Describing the Financial Plan
• Establishing the Amount of Funds Required
• Exhibits (Typical)
 Understanding Why Business Plans Fail

• Identify potential problems that could significantly affect the new company.
• Let potential investors know up-front that there are risks associated with the venture.
• Loss of key employees
• Inadequate working capital
• Unproductive R&D
• Breakdowns in plant and equipment
• Bottlenecks in the distribution channels
• Factors not covered by insurance policies
 Understanding Why Business Plans Fail

• Inability to protect IP and patent violations

• Changes in technology, government regulation or protectionist legislation
• Adverse economic conditions, market changes
• Failure to procure enough funding
• Unstable banking/financial and transportation/distribution systems
• Potential effects on financial plans
Entrepreneurship and Venture Capital
Management
 Chapter 5

Setting Up the Company

 Lecture Sub-topics

Forms of Doing
01 Identifying What Form 02 Business-
Public Limited
of Ownership is Best 03
Company
Indian
Perspective

Private Limited Limited Liability

04 05 Partnership Firm 06
Company Partnership

07 Sole Proprietorship 08 One-Person Company 09 Section 8 Company

Company Limited by Limited Liability

10 11
Guarantee Company
 Identifying What Form of Ownership is Best

Ask yourself these questions:

1. How big can the business potentially become?

2. How much control do you need in the decision-making process of the company?
3. How much capital is needed to start the business?
4. What tax considerations are important?
5. In case of failure, to what extent are you willing to be personally responsible for debts
created by the business?
6. Is it important that the business continue in case of the owner’s incapacity or death?
 Forms of Doing Business- Indian Perspective

There are mainly eight types of business organizations in India as follows

• Public Limited Company
• Private Limited Company
• Partnership,
• Limited Liability Partnership
• Sole Proprietorship
• One Person Company
• Section 8 Company
• Company Limited by Guarantee
 Public Limited Company

Overview:

A public limited company is a company listed on a recognized stock exchange and the stocks are
traded publicly.

Pros:
• Members
• Limited Liability
• Board of Directors

Cons:
• Prospectus
• Expensive
• Equity Dilution
• Loss of Management Control
 Private Limited Company

Overview:
A private limited company is a company which is privately held for small businesses.

Pros:
• Ownership
• Minimum number of shareholders
• Legal Formalities
• Management and Decision Making

Cons:
• Shares cannot be sold
• Public cannot be invited to subscribe to the shares
 Partnership Firm

Overview:
A partnership firm is an organization which is formed with two or more persons
to run a business with a view to earn profit.

Pros:
• Ease of Formation
• Flexibility of Operations
• Greater Financial Resources
• Greater Managerial Resources

Cons:
• Unlimited Liability
• Restriction on Transfer of Interest
• Inadequacy of Capital
• Mutual Conflicts
 Limited Liability Partnership

Overview:
A Limited Liability Partnership or LLP is an alternative corporate
business form which offers the benefits of limited liability to the partners at
low compliance costs.
Pros:
• Organized
• Operates based on an agreement
• Easy to form
• Offers flexibility
Cons:
• Public Disclosure
• Income is personal income and hence it is taxed accordingly.
• Profit can not be retained in the same way as a company limited by shares
 Sole Proprietorship

Overview:

A Sole Proprietorship has a single owner and only requires local business licenses to open.

Pros:
• Simple to create
• Low start up fees
• No special legal restrictions
Cons:
• Unlimited personal liability
• Limited access to capital
• Lack of Continuity for the Business
 One Person Company

Overview:

Section 2(62) of Companies Act defines a One-Person Company (OPC) as a company that has only
one person as to its member.

Features
• Private Company
• Single Member
• Nominee
• No Perpetual Succession
• Minimum One Director
• No minimum paid-up share capital
• Special privileges
 Section 8 Company

Overview:
The Companies Act 2013 defines a Section 8 company as one whose objectives is to promote
fields of arts, commerce, science, research, education, sports, charity, social welfare, religion,
environment protection, or other similar objectives.
Features
• Charitable Objectives
• No Minimum Share Capital
• Limited Liability
• Government License
• Privileges
• Firms as members
 Company Limited by Guarantee

Overview:
Company limited by guarantee is also termed as Guarantee Company. In a simpler term, it is a
company without any share holders but it is owned by members called guarantors who agrees to
pay a nominal amount in the event of company’s being wound up.

Features

• Members will have protection for being held liable in their personal capacity for the amount
borrowed for business in the name of the company.
• Members of the company are only liable to pay only the guaranteed amount as mentioned in
MoA of the company.
• Members are liable to pay only at the time of winding up of company.
 Limited Liability Company
(LLC)

Overview:
• A Limited Liability Company (LLC) does not exist in India. An LLC is the US-specific form of a
private limited company.

Pros:
• Liability protection (a separate legal entity as in a C Corporation).
• LLC is not a tax paying entity (tax benefits to members).
• Statute meetings and minutes are not required.
Cons:
• Unlikely that a venture capitalist would invest.
• Cannot take the company public.
• Different shareholder interests result in complex operating agreements.
• All members must consent to transfer ownership.
• Some states have different management and member rules.
• Often used initially before converting to a C Corporation, which incurs costs.
Entrepreneurship and Venture Capital
Management
 Chapter 6

Funding the Venture

PART A
 Lecture Sub-topics

01 The “Virtual” Company Securing Early-Stage

02 03 Self-Funding
Funding

Moonlighting and Part- Bootstrapping

04 05 06 Family and Friends
Time Consulting Methods

MicroEquity and
07 Angels 08 MicroLoans: A Little 09 Bank Loans
Money, a Lot of Help

Factoring, and Supplier Managing Your Personal Government Sources of

10 11 12
Lines of Credit Credit Rating Funding
 Lecture Sub-topics

13 How to qualify The State of the Venture

14 15 Super-Angels
Capital Industry

Equity Investment Using Private

16 Understanding the
Fundamentals 17 Equity for 18
Venture Capital Process
Fundraising

19 Guide to Selecting a 20
Venture Capitalist Private Investment
 Lecture Sub-topics

21 Home Runs or Singles? Strategic Partnerships and

22 Corporate Debt 23
Corporate Investments

Early-Stage
How To Value a Business Early-Stage
24 Investments: The
at the Early Stage 25 26 Investments: Milestone
Venture Capital
Methods
Model
 The Virtual Company

• The internet enables a new venture to develop without significant overhead costs
– Internet video conferencing for meetings
– Project management software such as Basecamp
– Outsourced HR software
– Locating experts who can work as “pay-as-you-go” consultants
– No need for offices, etc. etc.
– Use of MVP
– Use of Crowd-sourcing
• Such ventures can be much more efficient in the use of funds and therefore reducing the
need for capital
• If a sale to an existing company is planned, then only the ESSENTIAL assets need be created.
Early Stage and Later Stage Sources of Finance

Early Stages Later Stages

Self-Funding Super-angels
Moonlighting and Consulting Institutional Venture Capital
Bootstrapping Private Placements
Family and Friends/Angels Corporate Debt
Micro-equity, Micro-loans Strategic Partnerships
Personally Secured Bank Loans Mezzanine Finance
Factoring and Supplier Financing Initial Public Offerings
Government Programs
 Self Funding

Investing your own money – “sweat” equity for stock

– Offers greatest return, if successful

– Investors and venture capital sources usually require it

– Your personal funds can be treated as equity or debt

 Moonlighting

• Founder still working a regular job

• Income used to support the entrepreneur during needed cash flow
• When the venture begins paying as well or better - entrepreneur leaves job
 Bootstrapping

• A general term that refers to building value in a company without taking on outside investors
or bank loans
• Usually overlooked as a source of resources by entrepreneurs
• Effective bootstrapping allows founders to retain more of their ownership
• Often the ONLY way to grow a company
• The entrepreneur becomes more efficient and cost conscious which is attractive to investors
 Friends And Family

• The most popular source of funds for startup capital

• Friends and family are not as worried about quick profits as professional investors
• Usually they do not investigate the business and are not familiar with all the risks
• The best advice is to provide the same full disclosure to a friend as you would a professional
investor
• Document the transaction
 Angels

 Well-off individuals with money to invest

 Good prospects get funded

 Need good contacts found via networking

 Seek local Angel Networks. Fees range from $150-$300

 Seek Angel Support Networks such a Ycombinator, DreamIt Ventures

 List on Angelsoft.com
 Micro-equity and Micro-loans

Early stage funding and networking are offered by Micro-Equity Groups such as
and

These groups provide some financing, incubator support and mentoring to prepare
entrepreneurs for later funding. They take a small equity position for this work.

Micro-loans, which are well established for developing economies, are just gaining acceptance in
the US. A number of lending networks can be found on the internet.
 Bank Loans

• The primary advantage of debt financing is that the entrepreneur does not have to give up
any part of ownership to receive the funds.

• Many loans have certain conditions (“covenants”) that come with them.

• These covenants are not so different from conditions that might be applied by equity
investors, and therefore, they often remove some control of the company from the founders
until the loan is repaid.

• Bank loans therefore are more suitable for companies that have a track record of sales and
growth
 Factoring and Supplier Line of Credit

FACTORS provide credit to companies that are unable to access a conventional bank loan. Factors
secure the loan against purchase orders received by the company. Customers pay the factor
directly, who deducts high interest and fees sending the remaining amount to the company.

SUPPLIERS may delay invoicing or receiving payment from a small company in order to retain the
business and help through the early stages.
 Managing Your Personal Credit Ratings

• Initial check on the credit history of the entrepreneur

• A good track record of previous loan payments helps the loan seeker
• Pay all your bills on time
• Check the reason in case of credit refusal and sort it quickly for a cleaner record
 Government Sources of Funding

There are two major funding sources of Government

• Federal Agencies- The agency works with intermediaries, banks, and other lending
institutions to provide loans and venture capital financing to small businesses unable to
secure financing through normal lending channels.

• Small Business Innovation Research Program - The program allocates in excess of $1 billion
annually to businesses with proposals for developing scientific innovation
 Government Sources of Funding

There are two major funding sources of Government

• Federal Agencies- The agency works with intermediaries, banks, and other lending
institutions to provide loans and venture capital financing to small businesses unable to
secure financing through normal lending channels.

• Small Business Innovation Research Program - The program allocates in excess of $1 billion
annually to businesses with proposals for developing scientific innovation
 How to Qualify (For Government Funding)

To begin the process, the entrepreneur should remember that the SBIR receives more than eight
thousand proposals each year with fewer than one thousand grants being approved.
Some more programs
• Small Business Technology Transfer Program
• Financing for Minorities and Women
• State and Local Small Business Financing Initiatives
PART B
 The State of the Venture Capital Industry

The venture capital industry is going through a major restructuring. At the height of the dot.com
bubble, any company with “.com” in its name could raise enormous amounts of capital. The
resulting current restructuring has radically impacted the availability and suitability of venture
capital for most entrepreneurs for the following reasons :

• With the influx of large amounts of cash in 2000, VCs moved their investments to later
stages
in start-ups.
• The dearth of exit opportunities meant that the VCs had to continue to support their existing
portfolio companies diverting funds away from new companies.
• Moving to the later stages reduced the risk and length of time to get to an exit event.
• The sum of these problems has led to fewer VC firms, dropping from 860 in 2000 to 790 in
2010 where it has now stabilized.
 Super-Angels

Super-angels are an emerging group of investors that sit between conventional private angel
investors and the venture capitalists.

• Some super-angel groups are even raising money from others and managing both their own
money and others .
• Compete directly with VC firms.
• Identifying super-angels in your community and making them aware at an early stage of your
plans can open doors later when you might need an alternative to VC funds
 Equity Investment Fundamentals

Equity Investment occurs when an entrepreneur sells part ownership in the company to raise
funds. It has two types

• Public Stocks - A kind of financial security granting rights of ownership in a corporation, such
as a claim to a portion of the assets and earnings of the corporation and the right to vote for
the board of directors.

• Private Equity- the term private equity covers a broad range of investment categories that
come into play at different stages of a company’s, and even an industry’s, life cycles
 Using Private Equity for Fund Raising

A privately held company can acquire funds for its operations and growth is to sell an ownership
position in the company to willing investors.

• Investments occur in Rounds termed seed, A, B, C etc.

• If value decreases between rounds it is a Down Round
• A Capit (alization) Table lists the % ownership
• Investors expect to earn a high Internal Rate of Return, IRR of at least 30% for taking a high risk
• Investors may also receive Stock Options or Warrants permitting them to buy more ownership at a
later date at a pre-determined (low) value
• Private Stock rarely pays a Dividend, or if one exits it is usually accrued until a liquidity event
• A Stock Option Pool is part of the future compensation for key employees. It is listed in the Cap
Table.
 Using Private Equity for Fund Raising

• Investors may also insist certain Covenants:

– A board seat

– Control of certain management decisions

– Right to invest in later rounds

– Protection against dilution if milestones are not reached

– Right to force an exit after a certain time

• Bridge Financing helps the company get to the next financing round. This can be very dilutive.
• Term Sheet is a non-binding agreement to invest
• Due Diligence, a detailed investigation of a company performed after a term sheet is agreed.
• Lead Investors source deals, undertake due diligence, negotiate terms, take board seats.
 Understanding the Venture Capital Process

How the VC firms work?

Nearly all venture capital firms are organized as partnerships. A group of professional managers
gets together to manage high-risk private equity investments for investors who wish to
participate in this sector of the investment market. Some these factors influence the VC firm’s
funding decisions:
• Specialized industries for the ventures
• The location of venture
• Stage of fund
• Stage of development
 Guide to Selecting a Venture Capitalist

• Scrutinize your business with a critical eye.

• Beef up management.
• Keep a high profile so the VCs will visit.
• Target the search.
• Keep a lookout.
• Investigate possible venture partners.
 Private Placement Memorandum (PPM)

• An alternative to seeking venture capital, is to offer shares in your company to one or more private
investors using a PPM.

• There are a number of federal and state restrictions that must be met and you will need a securities
lawyer to prepare the documents and make sure all the regulations are followed

• You should only offer shares to “accredited investors” who must meet certain requirements
regarding personal net-worth and income history. They must certify in writing that they are
able to lose all their investment.

• The PPM must list all the risk factors in the investment

• There are private bankers that have networks of private investors that they advise. You will need an
introduction and you should check on references. They take a fee for raising the agreed
finance.
 Home Runs or Singles?

• The structure of a VC partnership implies that in order to get a high return for the limited
partners, there has to be a home-run investment to cover for the inevitable poor performers
in the portfolio and to provide the limited partners an incentive to participate in a new fund.
• This drives the VCs toward investing more and more capital over a long period, chasing this
home run.
• The limited funds are used to build the “essential” assets for an early sale to a larger
company in two to three years, thereby “hitting a single”—rather than waiting and taking
high risks for a VC-driven—home run, which may take seven to eight years.
 Corporate Debt

At the early stages of a company, it is unlikely that there are any assets to collaterize a bank loan
and any loan must be underwritten by the entrepreneur personally. An unsecured loan is a
personal or signature loan that requires no collateral; it is granted on the background and
strength of the borrower’s reputation. But as the company grows, and has quantifiable assets and
customers, it is worth exploring a commercial loan for a working capital. Stages to loan

• Preparing a loan proposal

• The Four Cs of lending; character, cash flow, collateral and contribution.
• Establishing the terms of debt
• Rates
• Building a relationship with banker
 Strategic Partnerships and Corporate Investments

Structuring a strategic partnership that includes an equity investment is an excellent alternative

for many companies to raise equity funds
Here are some points to consider:

• The corporation is usually seeking only access to intellectual property and know-how rather
than a direct return on the investment it makes in the entrepreneur’s company.
• The corporation may perceive that the small company is financially weak and use this fact to
take advantage
• The relationship may reduce the chance of receiving VC funding, particularly if the corporate
investor is considered to be a prime target to buy the company later
• Corporations are usually slow in making decisions and may hinder the growth of the smaller
firm.
• Corporate management often changes, and the champion supporting the relationship may
suddenly disappear or be moved to another position.
 How to Value a Business at the Early Stage

• The business plan should have financial pro formas for 5-7 years

• For the first 1-2 years the cash flow will be negative but thereafter it should be positive and growing

• The sum of these cash flows are discounted back to the present using a chosen internal rate of
return or discount rate

• The earlier the stage of the company, the higher the risk is for an investor, and hence the discount
rate will be higher too.

• The minimum discount rate is 30% for an early stage company

• In addition investors are likely to reduce your estimated cash flows recognizing that
companies rarely meet their financial targets in the early years. A factor of 2X reduction is typical

• The modified current value of future cash flows is the assumed current value of the company.
 Early Stage Investments:
The Venture Capital Model

• This is often used by VC’s to determine their investment decision.

• Investors can only receive a return on their investment when there is a LIQUIDITY event – the
company is sold to another or there is an IPO
• Therefore the investor wishes to know what the company COULD be sold for, if it meets its goals,
and WHEN.
• Comparisons are sought for transactions where similar ventures have been sold (COMPS).
• These values may be based on different metrics - P/E Ratios, Revenues, Growth, Gross Margins and
Strategic Importance.
• These SALE values are discounted back to the present using a 30% minimum discount rate,
reduced for the risk level to get today’s value.
• If the entrepreneur can argue that the sale could be strategic to a few competitors, the value is
likely to be enhanced
 Early Stage Investments: Milestone Methods

• The lack of financial history, and uncertainty of meeting the business plan, has
investors seeking other methods of determining value.
• The attainment of key milestones is often used
• One simple model is the Berkus model:
If Exists Add to Value
Sound Idea (Basic Value) Up to $500K
Prototype, reducing technology risk $500K - $1M
Good management, reducing execution risk $500K - $2M
Strategic Relationships, reducing marketing risks $500K - $1M
Quality Board, reducing governance risk Up to $1M
Sales, (reducing production risk Up to $1M

• Another is the 25 question Cayenne Valuation Model

Entrepreneurship and Venture Capital
Management
 Chapter 7

Managing Resources—Money and People

 Lecture Sub-topics

01 Financial Statements The Value of the Balance The Value of an Income

02 03
Sheet Statement

The Value of a Cash Preparing Financial Preparing an Annual

04 05 06
Flow Statement Projections Budget

Preparing a Cash Flow Preparing a Breakeven Analyzing an Investment

07 08 09
Forecast Analysis Decision

Managing Human
The Stresses of 12 Resources—
10 Taxes and Filing 11
Managing Money
Introduction
 Lecture Sub-topics

13 Developing a Strong 14
Finding and Hiring the Dealing with Firing an
Corporate Culture 15
Best People Employee

Dealing with a Conflicts of Interest

16 17 18 Legal Issues
Resignation and Business Ethics

Setting Up Stock-Option
19
Agreements
 Financial Statements

1. The balance sheet (also called the statement of financial position)

2. An income statement or profit-and-loss (P&L) statement.

3. The statement of cash flows (also called source and use of funds).
 The Value of the Balance Sheet

• Balance sheet = Liabilities + Shareholders equity

• Book Value = total of the tangible assets less subtracting all the liabilities

• Book value does not include intangible assets like Intellectual Property and goodwill

• Goodwill includes factors like brand, market share, and human capital
 The Value of an Income Statement

The statement of operations, also known as the income statement or P&L statement, summarizes
the revenue (or income) and expenses of a company on a monthly basis for one year or on an
annual basis for several years.

• It divides expenses into broad categories, such as cost of goods sold and operating expenses.

• The cost of goods sold would represent the resources that went into production of the
products ultimately recognized as sales.

• These costs would include materials, labor, and manufacturing expenses.

• There are two more costs – Inventory Costs and Production Costs
 The Value of a Cash Flow Statement

A cash flow statement is a financial statement that provides aggregate data regarding all cash
inflows a company receives from its ongoing operations and external investment sources.

• It includes all cash outflows that pay for business activities and investments during a given
period.
• A company's financial statements offer investors and analysts a portrait of all the transactions
that go through the business, where every transaction contributes to its success.
• The cash flow statement is believed to be the most intuitive of all the financial statements
because it follows the cash made by the business in three main ways—through operations,
investment, and financing. The sum of these three segments is called net cash flow.
 Preparing Financial Projections

Financial Planning or Projections are made after measuring the financial performance of the
business. There are three widely used methods of measuring
financial performance:

• Measuring sales volume

• Measuring profits
• Measuring cash generated
 Preparing an Annual Budget

• The annual budget presents a month-by-month projection of revenues.

• It is used for planning and control. Each month compare actual with budget and make
adjustments as necessary.
• The budget is the foundation for projecting the other financial statements.
• An entrepreneur must always be aware of how long the current cash reserves will last…..the
cash “runway”.
• It always takes much longer to raise funds than planned.
 Preparing a Cash Flow Forecast

Young companies are usually short of cash and therefore it is important to forecast cash needs

long before starting to raise capital as equity or debt.

A Forecast of Cash Flow is a month to month projection of receipts and disbursements activity

including:
• Receipts from Sales. The detail from sales, the payment terms the company extends its
customers, and the company’s collection history
• Other Receipts. Other receipts include bank loans, equity investments, tax refunds or
any other inflows of cash
• Disbursements from Expenses. The detail from expenses and the payment terms
• Other Disbursements. This includes capital equipment acquisitions and payment of debt.
 Preparing a Break-Even Analysis

The breakeven technique is a decision-making model that helps the entrepreneur determine
whether a certain volume of output will result in a profit or loss.

The formula: the price per unit (P) multiplied by the number of units sold (X) is equal to the fixed
costs (F) plus the variable costs (V) multiplied by the number of units produced expressed as the
following formula:

P(X) = F + V(X)
 Analyzing the Investment Decision

In evaluating whether to make an investment, for example, in a piece of

expensive equipment, an entrepreneur must consider not only how much
cash the company must give out but also whether the investment will earn
a suitable return for the company. There are certain methods to analyze
the decision

• Net present value method

• Internal rate of interest
 Taxes and Filing

• The entrepreneur is required to withhold federal and state taxes from employees

• Each month or quarter (depending on the size of the payroll), deposits or payments need to
be made for funds withheld from wages.

• Generally, federal taxes, state taxes, Social Security, and Medicare are withheld from
employees’ salaries and are deposited later.

• If payments are late, high interest and penalties will be assessed.

 The Stresses of Waging Money

• Managing the money is one of the most important aspects in building a company securely.
• A financial adviser should be engaged from the initial stage.

• Not knowing precisely whether you have sufficient funds to execute your plans is one of the
most stressful and dangerous threats to a company.
• Generating funds for the firm takes longer time than expected.

• Sound financial accounting systems and forecasting can help manage these stresses.
 Managing Human Resources - Introduction

• One of the greatest challenge entrepreneurs face is the day-to-day management of human
resources

• A young company is not a set of independent activities, such as marketing and sales, money
management, or product development, but a complex and changing interplay among all
functions made more complicated by the individual aspirations and behaviors of creative,
high-energy employees.

• The stress to manage the business every day will be reduced by creating a supporting culture
and employee expectations that in many cases will actually deflect problems before they
develop
 Developing a Strong Corporate Culture

• The ability to lead an organization on a mission where everyone is involved everyday in

moving forward toward clearly defined goals makes the difference between success and

failure.

• There are 10 leadership attributes that, above all others, should be practiced within

companies to insure successful innovation.

• Building a culture Is a top-down, everyday leadership responsibility.

• EVERY action must reflect the culture that you are building and there should be NO

inconsistences in behaviors.
 Developing a Strong Corporate Culture
10 Attributes of a Successful Innovative Company

Attribute Definition Example

Degree to which employee has “I trust people I work with and

confidence in integrity, ability, and find it easy to be open and
Honesty character of others within the honest with people from all
organization over the company”

“We have clear aims and

Degree to which the interests and objectives which everyone
actions of each employee support understands; we build
Alignment the clearly stated and consensus around key
communicated key goals of the objectives; we recognize and
organization reward loyalty”

“I am encouraged to
Degree to which organization and experiment; we take calculated
Risk individuals take risks risks; we encourage and reward
error”
 Developing a Strong Corporate Culture
10 Attributes of a Successful Innovative Company

Attribute Definition Example

The degree to which team

performance is emphasized “We promote teamwork, it’s the
Teams center of everything we do”
over individual performance

“As a manager I’m expected to

The degree to which each delegate; we have a no-blame
Empowerment employee feels empowered by culture; we allow our staff to
managers and the org. make decisions

The degree to which self- “I’m allowed to do my own

initiated and unofficial activities thing; we encourage people to
Freedom are tolerated and approved take initiative; we recognize the
throughout the organization individual”
 Developing a Strong Corporate Culture
10 Attributes of a Successful Innovative Company

Attribute Definition Example

The degree to which new ideas are

welcomed from all sources and “We encourage fresh ideas; we
Support responded to promptly and reward innovative individuals and
appropriately teams”

“Management understands the

The degree to which all levels of the operations of the company; I can
organization are engaged with the share my problems with my
Engagement customer and the operations of the managers; I know my job is
organization important”

The degree to which it’s understood “I am encouraged to search

that unrelated knowledge can externally for information and
Stimuli impact product, service, and obtain data from many sources; we
operations improvements listen to suppliers’ suggestions”
 Developing a Strong Corporate Culture
10 Attributes of a Successful Innovative Company

Attribute Definition Example

“I am kept in the picture on

how we’re performing; we have
The degree to which there is excellent formal channels of
both planned and random communication; we use best
Communication interaction between functions practice knowledge transfer
and divisions at all levels of the between our departments; we
organization actively manage our intellectual
assets

• Does your leadership style exhibit these attributes?

• Work on demonstration each of these EVERY day
• A vibrant culture results from top-down leadership
 Finding and Hiring the Best People

Hiring
• Your company is only as good as the people that you hire
• Use networks to access potential hires
• Beware hiring friends and family members
• Hire to match your culture
• Values are inherent, skills can be learned
• If in doubt, don’t hire for expediency
 Finding and Hiring the Best People

Interviewing
• Be prepared and punctual
• Relax the candidate by telling YOUR story
• Clearly establish the cultural values of the company
• Invite them to tell their story
• Explore values, creativity and ambitions
• Use open-ended questions, challenge, change topics
• Invite their questions before summarizing
• Record impressions immediately
• Act promptly whether no or yes
• Check references if a hire is contemplated
• Seek second opinion if possible
 Dealing with Firing an Employee

5 Reasons to Fire an Employee

• The company is short of funds
• The company is changing direction and no longer needs their specific skills
• Repeated poor performance
• Disruptive behavior
• For actual cause
 Dealing with Firing an Employee

Firing Procedures
• Try to avoid surprises. Have a warning system. It is better to help someone perform better
than to fire them
• When there is no alternative, act promptly
• Remind them of their contractual obligations
• If you have to fire someone, keep the discussions unemotional, and try to retain trust
• If possible, allow them to preserve their self-esteem
• Offer to help if appropriate
• Ask them to leave the premises immediately
• “The day you enjoy firing someone, its time to leave yourself”
 Dealing with a Resignation

• Agree the procedures for hand-over

• Avoid taking it personally
• Keep the door open, you may want to re-hire them later
• Celebrate and let everyone know that you regret the decision but you wish them success
• Conduct an exit interview
• Remind them of their contractual obligations
• Analyze what went wrong – learn.
 Conflicts of Interest

• Be continually aware that you may slip into a “conflict of interest” situation
• Carefully analyze any situation where a conflict may arise
• Even if there is no real conflict, others may not understand – make a point of explaining the
issues and your position
• Take steps to resolve any perceived or actual conflict quickly
 Business Ethics

Three Steps to Resolve Ethical Dilemmas

• The “Gut-feel” test. If you have a feeling that there is a conflict or ethical issue, then there
most likely is. Don’t try to hide it – deal with it.

• Stake-holder analysis. There are no GRAY or FUZZY LINES. Understand who is affected, how,
and what obligations all parties have to each other.

• Full Disclosure. Expose and discuss the issues and concerns with ALL possible affected
stakeholders. If in doubt, tell more parties than less, and provide more information, not less.
 Legal Issues

Key Legal Documents – Employment Agreement

• Every employee should execute this agreement which must contain at least these five
obligations:
– Confidentiality during and after employment

– Return all company materials when they leave

– Cannot work for another business

– Cannot compete while employed or for an agreed period after leaving

– All inventions must be assigned to the company

 Legal Issues

Key Legal Documents – Consulting Agreement

• Work-for-hire requirement
• All work output belongs to the company
• Confidentiality is required
• Project is clearly defined
• Consultant must keep records of time spent and out-of-pocket expenses
• Company is not responsible for insurances and taxes other than those required by the law
 Legal Issues

Key Legal Documents – Separation Agreement

• Used when an employee leaves voluntarily or is fired
• Re-define both parties obligations with regard to confidentiality
• Re-assert non-compete obligations with specific terms and conditions
• Agree and define any public statements that either may make
• General release from all other future legal obligations by both parties
 Legal Issues

Sales and Marketing Agreement

• An agreement between two companies, one of which will market and sell the products or
services of the other
• Important to clearly define the responsibilities of both parties
• Exclusive or not?
• Define products, pricing, payments, regions, commissions, publicity, quality, support etc.
• State term, renewable options, and termination procedures
 Legal Issues

Key Legal Documents – Confidentiality Agreement

• Entered into between two or more parties to protect exchange of information needed to
explore a possible business relationship
• May protect the information of one or more parties
• Defines the information to be disclosed and procedures for its treatment and return
• The term for confidentiality must be stated together with legal ramifications if
the
confidentiality is breached
• Also known as a “Non-Disclosure Agreement”
 Setting up Stock Option Agreement

• Used to incentivize key employees

• Component of compensation that can help preserve cash reserves
• Only available to employees of the company
• Two forms, ISO and NSO – differ in their tax implications
• Need to be approved by board and stock-holders
• Usual to set aside 10-15% of the outstanding shares of the company held in a pool for future
key employees – this must be disclosed and approved by potential investors
• The tax implications can be complex and the entrepreneur should get professional advice
when setting up the plan.
Entrepreneurship and Venture Capital
Management
 Chapter 8

Exiting the Venture

 Lecture Sub-topics

Selling an Equity Stake to Valuing a Later-Stage

01 Why Create an Exit 02
a Strategic Partner
03
Company
Strategy and Plan

Implementing the Plan Preparing a Selling

04 05 Selling the Business 06
of Action Memorandum

Using an Employee Using a Management

Merge with Another 09
07 08 Stock Ownership Plan Buyout (MBO)
Business
(ESOP)

Consider a Public
10
Offering
 Why Create an Exit Strategy and Plan

Some entrepreneurs start with the intention of creating an exit for their investors. But, as we
have seen, many entrepreneurs, more interested in their lifestyle, never intend to give up control
of their companies.

• Entrepreneurs spend so much time creating a business that many do not plan for a successful
exit.

• Realization may occur when new technologies impact the current product revenues or when
competitors gain market share and the company loses its market position; then it is too late.

• It is important to prepare the exit plan early in the business cycle and at the right time
 Selling an Equity Stake to a Strategic Partner

Selling an equity stake in the business to a strategic partner can substantially increase the value of the
venture and offer an exit option to the entrepreneur.

• A well-researched and targeted effort is needed to determine why an alliance partner should
purchase a stake and the reasons and justification for the sale.

• Usually, for the entrepreneur to sell an equity position, the partnership must be beneficial to all
parties.

• To initiate the alliance, the entrepreneur can offer the company licenses to patents, copyrights, or
trade secrets, and the other company can bring a stronger marketing organization with an eye
toward growing the business.

• The alliance can be mutually beneficial by obtaining additional revenue from existing products,
limiting the amount of capital to invest in needed capacity, and avoiding the need to add personnel.

• Success in any or all of these factors of strategic alliances develops the relationship for the partners
to purchase an equity stake in the venture.
 Valuing a Later Stage Company

Valuation Techniques for Later Stages – Asset Based

As a company grows and has a few years’ history of asset purchases, sales, and profits,
conventional methods for valuation are used:

Asset Valuations include:

• Book Value = Current assets + property + equipment

• Adjusted Book Value =Current assets + market value of property + equipment +
intangible assets
• Liquidation Value does not include intangible factors such as reputation, talent, or
goodwill
• Replacement Value is cost of replacing assets after a total loss
 Valuing a Later Stage Company

Valuation Techniques for Later Stages – Earnings Based

• Can be based on either historical or projected earnings, or a blend

• Estimate Price/Earnings (P/E) ratio by

– comparing to similar public companies if available
– or use S&P quarterly industry analysis handbook

• Modify based on an assessment of these factors on a 1-6 scale

– Risk (high/low)
– Competitive position (strong/weak)
– Industry (attractive/non-attractive)
– Growth opportunity (high/low)
– Desirability
– Sum the factors and take the average as a multiplier for the P/E
 Valuing a Later Stage Company

Valuation Techniques for Later Stages – DCF Based

• Once there is a history and solid projections on future financial performance the DCF method
can be used effectively for later stage companies
• The discount rate and risk adjustment factors are much lower than for a pre-revenue
company
 Implementing the Plan of Action

The first principle in positioning the alliance partner to acquire an equity stake is to know what
value the partner sees in the business. The most common value for most alliances is increasing
the revenue or decreasing the costs of operation. The following actions serve as a guide for
establishing an alliance:

• Identify the objective of a proposed alliance

• Build a target list of possible candidate companies.
• Research the candidates and examine their web sites and press releases.
• Present the finding on each target to the key members of the areas that will be impacted
by
the relationship
• Develop a nonconfidential introduction kit and cover letter to send to possible alliance
partners.
 Selling the Business

Selling the business is another option in the entrepreneur’s exit plan. This is
the most common form of exit for entrepreneurs and investors. In order to
create the highest value, you should build valuable assets and identify them
clearly in the selling process.

• Analyzing the strengths and weaknesses of your target buyers will guide you to where you
should direct your resources in preparation for a sale.

• For a technology-based company, intellectual property and evidence of the innovation’s

practicality will be on top of the list

• for a retail company, long leases on prime locations; for a software company, proof of
demand and the ability to create high gross margins; for a service company, long-term
contracts with customers, key employees, and suppliers; and so on.
 Preparing a Selling Memorandum

The memorandum should be a comprehensive document because it reflects the quality of the
organization.
1. Outline of a selling memorandum
Executive Summary
Products and Services
Marketing and Sales
Manufacturing
Management
Employers
Historical Financial
Statement
Financial Projections

2.Letter of Intent- This will include; the purchase price, what is being purchased, the
structure, the payouts, escrow of contingencies, other significant terms, other required
agreements, the purchase agreement, due diligence, professional fees, exclusivity agreement,
bust-up fees
 Preparing a Selling Memorandum

3. Other Conditions
• Applicable Law
• Adjustments of Purchase Price for Interim Results

4. Performing Due Diligence

5. Preparing the Purchase Agreement

6. Closing the Deal

 Merge with Another Business

• A merger is a transaction between two companies.

• When a company loses its competitive advantage in the marketplace, a merger may be the
only path center to follow.

• Planning a merger requires calculating the values of both the business and all existing
resources.

• The benefits of a merger can be the route to instant product diversification and quick
completion of product lines.
 Merge with Another Business

• A merger is a transaction between two companies.

• When a company loses its competitive advantage in the marketplace, a merger may be the
only path center to follow.

• Planning a merger requires calculating the values of both the business and all existing
resources.

• The benefits of a merger can be the route to instant product diversification and quick
completion of product lines.
 Using an Employee Stock Ownership Plan (ESOP)

Definition of 'Employee Stock Ownership Plan - ESOP‘

• A qualified, defined contribution, employee benefit plan designed to invest primarily in the stock of
the employer. ESOPs are "qualified" in the sense that the ESOP's sponsoring company, the
selling shareholder and participants receive various tax benefits. ESOPs are often to align the
interests of a company's employees with those of the company's shareholders

• An ESOP can be structured so that over time employees can end up with owning the company and
thereby “cashing out” the founders

• It is also a way in which the culture and uniqueness of the company can be retained

• Although the gross value to the founders may be somewhat lower than an outright sale to a third
party, the net proceeds may be attractive because of the special tax treatments.
 Using a Management Buyout (MBO)

Definition of 'Management Buyout – MBO’ – When the managers and/or executives of a

company purchase a controlling interest in a company from existing shareholders

• These shareholders can be founders who feel they wish to “cash-out” and allow key
managers to continue to run the company
• In most cases, the management will buy out all the outstanding shareholders because it feels
it has the expertise to grow the business better if it controls the ownership completely
• if the company is public, the new team will take the company private
• Often, management will team up with a venture capitalist specializing in MBO’s to acquire
the business because it's a complicated process that requires significant capital.
• Often much of the purchase price is funded through debt in which case the transaction is
referred to as a “leveraged buy-out, (LBO)”
 Consider a Public Offering

Entrepreneurs can realize a harvest from the value they have created by considering a public
offering.

• The following questions need to be addressed in making an IPO decision:

• Are you ready to share the ownership of your company with the public?
• Are you prepared to disclose your company’s most closely held secrets?
• Can you live with the continued scrutiny of investors and market analysts? Can you devote
the required 100 percent of your time for six to eight months and pay the substantial fees
that it takes for a typical IPO?
• Are you prepared to take on the issues, challenges, costs, and responsibilities of going
public?
Entrepreneurship and Venture Capital
Management
 Chapter 9

Social Entrepreneurship
 Lecture Sub-topics

Social Entrepreneurship
01 Social Entrepreneurs 02 To Profit or Not to Profit 03
and Tax Issues
and Green Initiatives

Differences Between
04 Business and Social Stakeholder Issues and Growth and Management
05 06
Entrepreneurs Challenges Challenges

Using the Inverse

Enhanced Revenue Social Entrepreneurship
07 08 09 Commons to
Opportunities Business Models
Build a
Social
Enterprise
Using Social Media to
10
Grow
 Social Entrepreneurs and Green Initiatives

Social entrepreneurs are individuals with innovative solutions to society's most pressing social
problems. They use market-oriented entrepreneurial approaches to address social issues

• Social Entrepreneurship is often associated with “green” or so-called “sustainable” initiatives

addressing large societal challenges such as global warming, social inequality, pollution and
preservation of natural resources
• Solving these complex problems often requires large long-term investments – major changes
in human behavior are needed and challenges must be attacked in multiple ways at many
levels.
 To Profit or Not to Non-Profit

• The main aim of a social entrepreneurship venture is to create benefits to society

• ]Many social ventures are operated as “non-profit” entities

• However there is no fundamental reason why a social venture should not be profitable

• Profits can be kept within the venture to expand its influence

• But profits can also be used to benefit investors, employees, founders or donated to other
social ventures
 Social Entrepreneurship and Taxation Issues

One of the most important decisions to be made before launching a social enterprise is choosing
a legal structure. India has limited options in terms of legal structure
There are three types of legal structures that social enterprise can opt for:

• Non-profit or public charitable organization: Non-profits can register as a Trust (under the
Indian Trusts Act, 1882), a Section 25 company (under of the Companies Act, 1956) or as a
Society (pertaining to societies registration, of the concerned state).

• The for-profit social enterprise: In India, there are many choices when it comes to setting up
a for-profit social enterprise. Broadly, there are five different types of for-profits: sole
proprietorship, partnership, limited liability partnership, private firm, and co-operative.

• The hybrid model: These type of social enterprises start off as a non-profit or for-profit and
then launch an exact opposite twin.
Differences Between Business and Social Entrepreneur

Attribute Business Social

Focus Wealth Creation Social Benefit

Market Forces Highly Dependent Partly Dependent

Market and Financial

Discipline Very Strong Weak

Bootstrapping, investors Bootstrapping, donations,

Funding and loans rarely investors, volunteers

Employee Motivation Wages, stock options Job satisfaction

Usually impossible to
Value Quantification Market determination measure
 Stakeholder Issues and Challenges

Social ventures tend to have greater stakeholder issues and challenges than traditional
entrepreneurial ventures.

• Culture often emotionally charged – the “do-good above all else” atmosphere
• External stakeholders such as donors, beneficiaries, tax authorities and volunteers watch the
venture carefully to check on mission fulfillment
• Internal stakeholders will bring their own, often passionate values into the organization.
Hiring, training, incentives and feedback must be emphasized
• Regular and clear communications to ALL stakeholders is demanded from leaders at all times.
 Growth and Management Challenges

There is always the possibility that employees will feel “betrayed” by the venture and the
entrepreneur if they perceive that the venture is getting off mission, or that the mission has
shifted to one for which they do not have the same passion.

• Employees join for more than monetary benefit. As the venture grows, they may
feel
betrayed if the organization becomes more bureaucratic and they feel “just an employee”

• In this case, employees who may have been working for below market wages may now
demand increases

• Volunteers may be less likely to contribute to a larger organization

• Sources of external funding for growth may be limited and continually seeking donors can
undermine the effectiveness of the organization
 Enhanced Revenue Opportunities

• Just as a social venture has some heightened challenges, it also has some heightened
opportunities.

• Social ventures can at times get third parties to pay for the services or products they
produce.

• People who believe in the social mission of the venture tend to be willing to pay a higher
price for products and services.

• Social venture products and services also tend to draw customers to purchase from the social
venture so as to support the venture that supports their cause
 Social Entrepreneurship and Business Models

The “Pure” Business Model

• Focused entirely on a social mission
• Organized as a not-for-profit entity
• Must rely on bootstrapping, volunteering, government grants and donors for financing
• Structure may limit impact potential

PROS CONS
Clear Focus on Social Mission Complicated tax and corporate governance issues
Limited conflict of interest issues Inability for founders to participate financially
Can get foundation grants Difficult to sustain over time
Clear Message to constituents Inability to attract equity investments
Easy to attract volunteers and donors Difficult to attract top talent
All revenues used to build the enterprise
Low or zero tax liability
 Social Entrepreneurship and Business Models

The “Hybrid” Business Model

• Combination of non-profit and for-profit entities
• Can fulfill dual missions – social good and wealth creation
• Flexibility allows funding from investors
• Founders and employees can enjoy financial benefits
• Ability to attract top talent at market rates.

PROS CONS
Provide social benefits AND wealth creation Complicated tax and corporate governance issues
Non-profit remains tax-exempt Need for separate and non-conflicting boards

Non-profit can get foundation grants All intra-group transactions must be at market rates and
at “arms’ length”
For-profit can attract external capital Ambiguous and untested taxation legislation
For-profit can make tax-deductible donations to non- High accounting and legal fees.
profit
For profit can hire highly paid talent
 Social Entrepreneurship and Business Models

The “Dual-Mission” Business Model

• A single for profit entity that balances a strong social mission within a value building structure
• Fulfills dual missions – social good and wealth creation
• Flexibility allows all types of funding including equity investors
• Founders and employees can enjoy financial benefits
• Ability to attract top talent at market rates.

PROS CONS

Provide social benefits AND wealth creation Difficult to maintain social mission over time

Potential conflict of interests between founders and

Simple governance and tax structure investors
Sources of investment more limited than a pure
Able to attract external capital business mission enterprise
Founders can benefit financially Exit strategies for investors limited
Can attract talent
 Social Entrepreneurship and Business Models
The “Cooperative” Business Model
• A group of individual entities agree to cooperate based on the following values:
– Voluntary and Open Membership
– Democratic Member Control
– Economic Participation of all Members
– Autonomy and Independence of Members
– Education, Training and Information shared among Members
– Cooperation among Cooperatives
– Concern for Community
• Cooperatives can benefit from economies of scale
• Cooperatives are usually locally based, but not always.
PROS CONS
Provide clearly defined social benefits Often limited to local rather than global impact
Low or zero tax payments Governance issues may be complex
May get foundation grants Needs trust between cooperative members
Easier to sustain over long time Profit distributions can be contentious
Builds communities and trust Needs a clear leader to start the cooperative
Members can extract profits Deciding payments to management executives
 Using The Inverse Commons to Build a Social Enterprise

• This term describes a community in which every time a member contributes to the resources of the
community, value is provided to every member
• As the number of members grow, an individual contribution has an ever- increasing impact and
thereby accelerates community growth
• The internet has greatly expanded the ability to expand inverse commons
• In the context of social entrepreneurship, contributions are made voluntarily
• Motivations for contributing to the common good include:
– Personal philosophy
– Altruism
– Bricolage, the pure joy of creating
– Peer Recognition
– Fame
• Well-known examples are Wikipedia, Linux Operating System, and YouTube uploads
• Capturing the power of the inverse commons can rapidly expand a social enterprise
 Using Social Media to Grow

• The growth of social networks provides entrepreneurs ways to grow ventures rapidly
• This is particularly true for social ventures where you can tap into the motivations of inverse
commons contributors and volunteers
• Here are some that you join – there will certainly be more……
Entrepreneurship and Venture Capital
Management
 Chapter 10

Technology Entrepreneurship
 Lecture Sub-topics

Concepts Relevant to Path Dependency

01 Technology-Based 02 Path Dependency 03 Example:
Companies Alternate
Keyboards

Network Effects – Network Effects –

04 Network Effects 05 Value Gap Created by a 06 Loss of Value by a Weaker
Fast Leader Follower

Example of Poor
Technology Example - Video 09 Roadmapping –
07 08
Road-Maps Recorder Iridium
Satellite Phone System

Compatibility, Standards Gartner’s

10 11 Some Regulatory Issues 12
and Regulations Hype Cycle
 Lecture Sub-topics

Rogers’ Bell-Curve –
Gartner Hype Cycle:
13 Gartner’s Hype Cycle – 14 15 Technology Adoption
Definitions - 1 & 2 Example 2009
Patterns

The Long-Tail Intellectual Property Is

16 17 18 Patent Classifications
Phenomenon Property

Patentable inventions The United States

19 20 The Patent Process 21
must have: Constitution

Statutory Requirements A Patent Only Enables

22 23 24 Patents - Key Points
for a US Patent You to Do One Thing
 Lecture Sub-topics

Typical Patent
25 Criteria for Filing a 26 27 Kinds of Claims
Patent Application Legal Costs

28 Software Patents Patents on IP, the Internet

29 30
Business Models and e-Commerce

Example: The “Single Examples of Courts Have

31 32 33
Click” Claim Legal Actions Ruled that...

Copyright Copyright Elements of US Copyright

34 35 36
Definitions Issues – 1 & 2 Law
 Lecture Sub-topics

37 Trademark Definitions 38 Trademark Value 39 Trademark Process

Trade Secrets - Definition Miscellaneous

40 41
and Issues Points on IP
 Concepts Relevant to Technology-Based Companies - Definition

“What distinguishes technology entrepreneurship from other entrepreneurship types such as:

− social entrepreneurship

− small business management

− and self-employment

is the collaborative experimentation and production of new products/services, assets, and their
attributes, which are intricately related to advances in scientific and technological knowledge and
the firm’s asset ownership rights”.

Prof. Tony Bailetti, Carleton University, Ottawa, Feb. 2012

 Concepts Relevant to Technology-Based Companies

The following topics cover the unique constraints that are often encountered in technology
entrepreneurship and the paths that you may take to reduce their impact.

• Path dependency
• Network Effects
• Innovation
• Government Regulations
• Standard and Compatibilities
• Timing Issues
 Concepts Relevant to Technology Based Companies -Path
Dependency

The best technology does not always prevail – new innovations have to fit with existing
infrastructure and history which can be highly constraining. For example:

Path Dependency is the tendency of a past or traditional practice or preference to continue even
if better alternatives are available.

Also related to so-called Lock-in or Legacy Effects.

“You can’t always start from here!”

Concepts Relevant to Technology Based Companies -Path
Dependency Example: Alternate Keyboards

Still Dominant after

nearly 150 years!

The original QWERTY keyboard designed for mechanical typewriters

has not been replaced by later, supposedly better, innovations.
 Concepts Relevant to Technology Based Companies- Network
Effects

A network effect (also called network externality) is the effect that a single new user of a good
or service has on the value of that product to other people. When a network effect is present,
the value, V, of a product or service increases as the Number, N, of people using it according to

Metcalf’s Law V=N2

For example, the introduction of the FAX machine had no value to the first user; a network
needed to be in place for Metcalf’s Law to be effective. How can this be achieved?

Related Topics – Inverse Commons, Tipping Point, Viral Marketing, Lock-in Standards
 Concepts Relevant to Technology Based Companies- Network
Effects –
Value Gap Created by a Fast Leader

An entrepreneur can
claim a large part of a
market if they can take
advantage of network
effects. But if a
competitor has already
been a “fast leader”
then trying to take away
market share is difficult
and risky…………
 Network Effects –
Loss of Value by a Weaker Follower

Examples of winners/losers: Netflix/Blockbuster; Facebook/Myspace, VHS/Betamax etc.

Concepts Relevant to Technology Based Companies Innovation &
Technology Road – Maps

A technology roadmap is a plan that matches short-term and long-term goals with specific
technology solutions to help meet those goals. It is a plan that applies to a new product or
process, or to an emerging technology.

Roadmaps are important for:

a) Spotting when a number of unconnected innovations reach practicality and together create
something new and valuable

b) Searching for possible threats to an innovation as new technologies mature

create obsolescence
Concepts Relevant to Technology Based Companies Example -
Video Recorder
Technology does not evolve linearly or synchronously. Commercial application may involve many unrelated
developments coming together at the right market timing.
 Concepts Relevant to Technology Based Companies Example of Poor
Road mapping –
Iridium Satellite Phone System
• Conceived by Motorola in 1985 – a mobile phone to work anywhere
• Phones communicate via network of 66 satellites in stationary orbits
• $5 billion spent on R&D, deployment and marketing
• Service launched in 1996 and failed to gain any market share
• Phones cost $3000, weighed 1lb., low battery life, high call charges
• Long transmission paths led to delay between caller and receiver
• The company filed for bankruptcy in 1999
• The system is still operable and used by reporters and the military only.

The engineers failed to undertake a future technology road map

covering emergence of hig-speed digital networks, programmable
phones, GPS enhancements, battery technology, memory costs, etc.
etc.

The technology used was obsolete the day that the product came
on sale!
 Concepts Relevant to Technology- Based
Companies- Government Regulations, Standard and
Compatibility
New technology innovations may have to fit products and systems that are already in existence.
This usually requires compatibility, and meeting existing standards and satisfying government
regulations.

Examples:

Compatibility: Apple requires any application written for its products are compatible with their
operating systems. Mobile networks require any device that communicates with them to be
compatible with the network protocols. Gasoline blends must be compatible with the
specifications laid out by the automobile manufacturers.

Standards: All electronic devices must meet certain standards with regard to radio-frequency
emissions, insulation, drop resistance etc. All building components must meet standards defined
by the building industry and its codes.

Regulations: All medical products sold in the US for therapeutic use must be approved by the
FDA. All new cars sold in the US must meet emission standards stated by the Federal Government
 Concepts Relevant to Technology Based Companies-
Government Regulations, Standard and Compatibility

• Regulations can vary from country to country, state to state and even county to county

• FDA can be a major hurdle in getting new foods, pharmaceuticals and medical devices into
the market. Sometimes overseas market entry are a means to overcome stringent US
regulations

• FTC Regulations on electronic products can be a major hurdle. Issues like bandwidth
availability, RF emissions, interference, safety etc. must be met

• Regulations often do not keep up with technology advancements and being a pioneer to get
new technologies past regulators can take a long time and a lot of funding
 Concepts Relevant to Technology-Based Companies Timing
Issues - Gartner’s Hype Cycle

An exciting “breakthrough”
technology often creates a
lot of interest, fueled by the
media. New companies are
formed and attract
investment. Rarely do the
promises come true.
Gartner describes this
“bubble” as a “Hype Cycle”.
 Concepts Relevant to Technology Based Companies Gartner’s Hype
Cycle –
Definitions – 1

Stage 1: Technology trigger. A breakthrough, public demonstration, product launch or other

event that generates significant press and industry interest.

Stage 2: Peak of inflated expectations. A phase of over-enthusiasm and unrealistic projections

during which a flurry of publicized activity by technology leaders results in some successes but
more failures as the technology is pushed to its limits. The only enterprises making money at this
stage are conference organizers and magazine publishers.

Stage 3: Trough of disillusionment. The technology becomes unfashionable and the press
abandons the topic, because it did not live up to its overinflated expectations.
 Concepts Relevant to Technology Based Companies Gartner’s Hype
Cycle –
Definitions – 2

Stage 4: Slope of enlightenment. Focused experimentation and solid hard work by an

increasingly diverse range of organizations lead to a true understanding of the technology's
applicability, risks and benefits. Commercial off-the-shelf methodologies and tools become
available to ease the development process.

Stage 5: Plateau of productivity. The real-world benefits of the technology are demonstrated and
accepted. Tools and methodologies are increasingly stable as they enter their second and third
generation. The final height of the plateau varies according to whether the technology is broadly
applicable or only benefits a niche market.
Concepts Relevant to Technology Based Companies
Gartner Hype Cycle: Example 2009

Where are they now?

 Concepts Relevant to Technology-Based Companies- Rogers’
Bell-Curve – Technology Adoption Patterns

Roger’s curve
describing market
entry strategy applies
particularly strongly to
new technology
products and services
where the innovators
and early adopters
can be avid early
customers.
 Concepts Relevant to Technology-Based Companies- The Long-
Tail Phenomenon

Anderson introduced
the concept of “the
long-tail” to illustrate
that a large number of 50% demarcation line
niche products can
add-
up to a large market.
Search engine
capability, and web-
marketing can enable a
small company to find
customers for a new
technology product by
focusing on the long-tail
initially.
 Intellectual Property Management - Intellectual Property Is
Property

• IP is usually a key asset of a technology based venture.

– IP has value

– It can be sold or licensed

– It can be stolen

– It can and should be protected

– It is subject to much of property and contract law as well as to specialized IP law

 Intellectual Property Management -Patent Classifications

• Design patents are issued to individuals who have created a novel ornamental design. These
are often of limited value as they are easy to get around.

• Plant patents are issued to individuals who have invented or discovered a novel type of plant
and who have been able to reproduce that plant asexually.

• Utility patents are issued to individuals who have invented novel processes, machines, and
compositions of concern matter, or improvements. These are by far the most common forms
of patents.
 Intellectual Property Management - Patentable inventions must
have:

• Utility: Any useful machine, process, or improvement may be patented provided is not
disclosed in prior art

• Novelty: requires that the invention predates public knowledge and the use or sale within
the U.S. or any foreign country

• Non-obvious: if the invention is judged to have been obvious to any person in the field
relating to the invention, it may be barred from receiving patent approval
 Intellectual Property Management -The Patent Process

Prepare Patent Patent Patent Patent

Examination Grant
Document Search Application

Disclosuree

Preliminary search Inventor files Patent Office Patent Office

of patent records formal written makes thorough documents
declarations, and application with search and patent new patent
Provisional Filing drawings claims, examination, and
required fees grant
declarations, and specifies claims
to establish priority
date at required allowed
fees
patent office
Final patent
recorded and
Recorded as “patent Pending letters patent
sent to inventor
 Intellectual Property Management - The United States
Constitution

Article I, Section 8:

Congress shall have the power...to promote the progress of Science and useful Arts by securing
for limited times to Authors and Inventors the exclusive Right to their respective Writings and
discoveries.

(This “right” is granted to an inventor in exchange for fully disclosing the invention and how it
may be executed).
 Intellectual Property Management - Statutory Requirements for
a US Patent

• Allowable scope?
– Cannot be a Law of nature

• Novelty
– Is there any Prior Art?

• Utility
– Good for something?

– Must be “operable”

• Non-obviousness
– To one of ordinary skill in the art

• Full disclosure of knowledge

• Reduction to practice not necessary
Intellectual Property Management - A Patent Only Enables You to
Do One Thing

• You can prevent someone else -- anyone else -- from practicing what you have claimed in a
jurisdiction (country) where you have a valid patent
– This is a legal monopoly

– But antitrust law and legal precedents can prevent you from exercising if you have
“market power”
– Or, you can license others to practice your invention

• You may nevertheless not be able to practice your own invention without licenses to patents
owned by other parties which may cover part of your requirements to practice
 Intellectual Property Management - Patents – Key Points

• A patent is an exclusionary monopoly

• The monopoly is defined by the claims
• Patent value is arrived at from a business case
• A patent is virtually worthless if no one else wants to practice the invention
• Lawyers are not optional
• Filing a full patent and maintaining especially overseas is very expensive
• Therefore it is important to evaluate whether it is worth patenting an invention
 Intellectual Property Management - Criteria for Filing a Patent
Application

• Size of market affected by invention

• Novelty of the technical field covered
• How central is the invention to expected products
• Scope of broadest claims
• Portfolio needs in the area of the invention
• How easily can use of the invention be detected
• How easy is it to avoid using the invention
• What percentage of companies in the field may use the invention
• Any value to current or anticipated alliance activity
• Any value to current or anticipated technology transfer activity
• Likely enhancement of your (or your organization’s) prestige and ability to raise capital
Intellectual Property Management - Typical Patent Legal Costs

Service
Attorney Agent
Description

Initial Consultation Free Free

Hourly Rate $500 $350

Preparation and
Submission $15,000 $7,500

Expected Total Costs $15 – $25K $7,500 – 10,000

 Intellectual Property Management - Kinds of Claims

• Structure
• Process
• Method
• Use
• Combination
• Form of matter
• Software
• Form of life (gene, plant...)
• A single patent can have many claims, of different types
• Broken into primary and dependent claims
• May be different in different countries
 Intellectual Property Management - Software Patents

• Currently are being (very!) freely granted

• Critical difference from copyright:

– Copyright protects form of presentation
– Patent protects essential idea
• Software patent must meet same statutory requirements as any other patent
– Useful
– Novel
– Non-obvious

• Value still being established

• It’s a jungle and the rules are not clearly established

• Essential to seek legal advice

Intellectual Property Management - Patents on Business Models

• Can make incredibly powerful patents

• Need very little "technical" substance

• Emerging and important trend

– Particularly financial instruments
– E-commerce, Internet, “web 2.0” methods etc.

• Opportunity for clever "inventors" to stake out huge claim

– Need to meet statutory requirements
– "Obviousness" seems less a problem

• Various examples

– Freeny: Delivery of goods mediated by network

• Often, Patent Examiner lets a questionable one through

– Only courts can remedy
– See USPTO White Paper: www.uspto.gov/web/menu/busmethp
 Intellectual Property Management - IP, the Internet and e-
Commerce

• Just because it's there, it may not be free

• Internet creators advertise they are free spirits
– Intellectual property is free as the air

• Downloading software or content creates big exposures, such as

– Use of the material infringes a patent

– The material is copyright

– The license terms are restrictive

– The protected material will be inadvertently incorporated in a product

– Posting material may limit owner's rights

– Posting material may reveal owner's missteps

 Intellectual Property Management - Courts Have Ruled that...

• Software patents are valid

• Business method patents (“ways of doing”) are valid

• Algorithm Patents (“ways of calculating”) are valid

 Intellectual Property Management - Copyright Definitions

• The exclusive privilege of an author or proprietor to make multiple copies of literary, artistic
or intellectual productions and license others to do so
– The right to copy

• Protects the form, not the underlying idea

• The work must be original -- but may be a derivative work
• It is created -- and therefore subject to copyright -- when it is fixed so it may be perceived,
reproduced or otherwise communicated
• Notice optional
• Registration optional -- necessary for statutory damages
– Otherwise, only actual damages
 Intellectual Property Management - Copyright Issues – 1

• Copyrights give you full rights to

– Reproduce
– Prepare derivative works
– Distribute copies
– Perform
– Display
– Each can be assigned separately

• Fair use allows some exceptions

• First sale allows subsequent transfer
• Proof of infringement is not always easy
– Infringers may insert bogus elements, lines of code, addresses, etc
 Intellectual Property Management - Copyright
Issues – 2

• First strategy for protecting computer programs if Patent Office refused patent protection
• Copyright easy and inexpensive
– Shrink wrap or online license protects copyright

• Limited protection from infringement

– Modifications
– Proof needed
• Only in recent years has USPTO made software patents easier to get
– Still difficult to enforce
– S/W culture negative
– Discovery a challenge
• Many (most) programs are not patentable
 Intellectual Property Management - Elements of US Copyright
Law

• "Original" works of authorship

– Not necessarily "novel"

• "fixed in a tangible medium"

– Such as film, tape, disk...

– An unrecorded game or performance is not protected

• "...of expression"
– Limits protection to "expression", not "idea"

– Separation of "expression" from "idea" no easy matter

• How much change is necessary to create a "new" work? Usually not much
 Intellectual Property Management - Trademark Definitions

• Trademarks are tools employed to distinguish a company’s product from its competitors
• Can take the form of: a name, symbol, motto, jingle, etc.
• Also of the Trademark family:
– Service mark—applies to services rather than products

– Collective mark—used by orgs. to denote membership

– Certification mark—used when someone, other than the owner, is using the trademark
 Intellectual Property Management - Trademark Value

• The value of a trademark is in its potential to create a positive impression on consumers

which will spur them to buy your product

• Trademarks will also allow you to differentiate your product or service clearly from
competitors
 Intellectual Property Management - Trademark Process

Process to Register

1. Consult an attorney; ensure uniqueness of proposal

2. Decide on Use vs. Intent-to-Use Application

3. Amendment to allege use vs. statement of use

4. Registration confirmation (usually 1 yr after submission)

5. Must remain in use to maintain rights of registration

 Intellectual Property Management - Trade Secrets – Definition
and Issues
• ...A secret formula or process, unpatented, known to a limited number of individuals who use
it, to competitive advantage, in the manufacture of an article of trade having commercial
value..."
• Relevant factors
– How widely known
– How protected
– How valuable
– How hard to develop independently
– Owner has demonstrable evidence that they intend to protect the secrets..e,g restricted
entrance, shredded documents, need-to-know policies etc.
• Can only be disclosed under confidential agreement
• Do not exist without a contract
• Can be licensed as IP
• Lasts forever -- unless no longer secret
• May be preferable to patent in some cases – especially for process know-how which is
difficult to detect in final product.
 Miscellaneous Points on IP

• Cost of a patent: Think “$thousands”, usually less than fifty

• Cost of suing to protect your patent: Think “$million”, at least one, perhaps ten
– A decision will take years

– If you’re lucky, you might get an injunction

– Expect to settle -- everyone tries to

• Time to get a patent: About two years from file date

– It’s a secret while in the USPTO for first 18 months

– But you have no other protection until it issues

• Life of a patent: Twenty years from date of filing

• Life of a copyright: Life of creator plus 75 years
• Life of a trade secret: As long as it stays secret
Entrepreneurship and Venture Capital
Management
 Chapter 11

Family Businesses: Important and Different

 Lecture Sub-topics

Family Business
01 Global Economic 02 03 The 3 Subsystem Model
Relevance Characteristics

04 Categories Types of Family Challenges: Succession

05 06
Businesses Planning

Factors Influencing Challenges - Helping the Challenges – Building

07 08 09
Succession Transition a Legacy

Challenges - Challenges – Challenges – Funding

10 11 12
Professionalization Family Dynamics Growth
 Lecture Sub-topics

Governing Governing
13 Governing the Family 14 15
the Owners the Business

Family Use of Reputational Family

16 17 18
Capital Capital Tradition
 Global Economic Relevance
Sample Data
% of Family
Country Businesses % of Workforce Employed % of Stock Market GNP GDP

Belgium 70-80 55%

Brasil 90 65%
Canada 45 50 45%
China 90
Finland 80-90 40-45 40%
France 60 40-50 >60%
Germany 60-80 50-60 55%
Greece 80
India 95 75 65%
Italy 73 50-70
Japan 95 75 42
Mexico 95 46
Netherlands 74 40 54%
Poland 50-80 35%
Singapore 80-90
South Africa 80
Spain 75 65% 65%
Sweden 80
Turkey 90
United Kingdom 65 >50 40%
USA 80-90 60 60 40% 49%
 Family Business Characteristics

• Ownership and control of the organization are firmly intertwined with a family system.
• Family members are involved in the strategic directions of the firm and/or day-to-day
decision-making.
• These firms are shaped by a dynastic motive and plan for multi-generation involvement and
leadership.
 The 3 Subsystem Model

Ownership
Business

Family

Family firms can be modeled as having three overlapping, interacting and

interdependent subsystems
 Categories
Type Key Attributes Advantages Disadvantages

 Perception of nepotism
 Priority is the family and the  When family members are interested in the  Negative perceptions from non-family
family goals. business finding people to take over the members.
Family  Employment is a birthright. business is easier.  Difficult to maintain when family
Dominant  Family members are expected to  Owners are likely to involve family members members
work for the firm. early in their lives. are not interested in the business.
 Pressures family members to be involved
even when they are not interested.

 Promotes the education of family members

 Priority is the business subsystem. who want to join the business.  Family members are often discouraged from
 The goal in these family  Focuses on skills and abilities of employees joining the business, which makes intra-
Management/B
usiness businesses is to have a well and not last name. family succession difficult.
Dominant managed firm that grows.  Perceived as fair by non-family employees.  No commitment to family succession in
 Focuses on hiring practices that promote management.
qualifications and not associations.

 Focus on efficiency can hurt human

processes.
 Priority is the shareholder.  Can hurt family dynamics because owners
 The focus is on the economic  Promotes processes that will help the
Ownership organization be efficient and effective. that are not involved in the management can
Dominant returns to shareholders. guide decisions.
 Focus on economic returns can hurt the
long-term continuity of the family business.
 Types of Family Businesses

Key Attributes
 Priority is the family and the family goals.
Family  Employment is a birthright.
Dominant
 Family members are expected to work for the firm.

Management/B  Priority is the business subsystem.

usiness  The goal in these family businesses is to have a well
Dominant managed firm that grows.

Ownership  Priority is the shareholder.

Dominant  The focus is on the economic returns to shareholders.
 Challenges: Succession Planning

Trans-generational Failure Rate in Family Businesses

100

90

80

70

60

50

40

30

20

10

0
First Generation Second Generation Third Generation
 Factors Influencing Succession
 Characteristics of the Industry
Industry  Competitive Structure
 Regulations of the Industry

 Family dynamics (i.e., harmony, unity, collaboration, trust between family members, and level of conflict)
 Influence of the family in the business decisions
Family  Interest and commitment of family members to be part of the business
 Family policies in relation to membership/ownership in the business
 Cultural expectations
 Social norms
Social  Ethics
 Religion
 Laws

 Tax burden during succession

 Insufficient financial resources to buy-out family members
Financial  Inadequate financial resources to hire highly qualified employees in managerial positions
 Opportunity costs associated with raising additional capital
 Formalization of the business and ownership structures.
 Change in business performance
Business  Loss of key customers
 Inadequate strategic planning
 Key non-family employees relationships with the successor

 Previous succession experiences

 Lack of planning
Process  Relationship between incumbent and successor
 Poor communication regarding expectations, roles, and performance of successor and incumbent
 Reluctance/inability to transfer leadership in the firm
 Personal fears (i.e., to lose control, power, status, or identity)
Incumbent  Mistrust of others
 Resistance to change
 Unexpected loss of incumbent

 Low ability of successor

Successor  Lack of motivation of the successor
 Commitment towards the business
 Factors Influencing Succession

• Industry – Characteristics & Regulations

• Family – Dynamics, policies, & interest of members
• Social – Laws, Cultural expectations, Norms
• Financial – Financial Resources and Policies
• Business – Professionalization & Performance
• Process – Planning & past experiences
• Incumbent – Individual characteristics
• Successor – Ability and Motivation
 Challenges – Helping the Transition

Overcoming the Personal Fear of Losing a Dominant Part of One’s Life by Transitioning Control to
the next generation can be helped by:

• Acceptance of the Necessity for Handover

• Acceptance of Changing Roles
• Personal Commitment to its Success
• Sharing Information Openly
• Active, Energetic Mentoring over a Long Time
 Challenges – Building a Legacy

Family Businesses focus on building a legacy by:

• Transferring Control to Later Generations

• Celebrating Traditions
• Involving Employees Personally and Financially in the Success for the Firm
• Espousing Family Values
• Involvement in the Community
• Philanthropy
• Charitable Endeavors
 Challenges – Professionalization

Growth and long-term survival demands shifting from a family run business to a professional
organization that can compete against all other firms. Attention must be given to:
• Defining Clear Governance Structures
• Defining Clear Ownership Structures and Rights
• Defining Explicit Roles and Responsibilities
• Using the Subsystem Model to Define Interactions, Emphases, Agendas and Balance between
the Three Categories of Influence
• Specifying Human Resources Processes and Incentives to Attract, Train and Retain Top Non-
family Managers
• Specifying Policies for the Employment of Family Members
• Developing a Financing Plan for Growth
 Challenges – Family Dynamics

Every Family has a unique emotionally driven culture that can impact a family business, both positively
and negatively. These factors influence decision making in the firm. Managers must be aware of:

• Structural issues:
– Composition and generational history
– Educational background of family members
– Residential Location of key family members
– Any explicit rules governing relationships.

• Tacit relationship issues:

– How the Family functions
– Family Climate
– Family Cohesion or lack of Cohesion,
– Family Factions

Family Conflicts can seriously damage a company and managers must monitor and mitigate dangerous
family influences as they arise.
 Challenges – Funding Growth

Family Businesses have limitations when accessing funds for growth. Equity based methods are
not attractive to investors or employees. Strategies that are employed include:

• Bootstrapping
• Bank financing
• Family Member Financing
• Equipment Leasing
• Factoring
• Public Markets using Preference Voting Shares
 Governing the Family

 Addresses family issues separately from the business.

 Provides a structured forum to communicate concerns and have input in
issues that deal with the family and the business.
 Provides a place to have a dialogue about the interest of the family in the
business. Not a Legal Body
Family Council  Helps to determine the representative(s) of the family to the board of Serves as a board of
directors. directors for the family.
 Helps develop policies that deal with the intersection of family and
the
business issues.
 Helps articulate non-economic goals, vision, and family values.

 Vehicle to educate family members about their rights and responsibilities in

relation to the business. Used primarily in large
Family  Helps elect members of the family council. multigenerational families.
Assembly  Votes on issues about family employment and compensation policies.
 Helps communication, and renewal of family bonds. Annual family gathering.
 Forum of discussion for all family members.

 Assists family owners in their duties/responsibilities. At the intersection of

Family Office  Help with joint family investment, family philanthropy, family private equity, family and ownership.
tax and legal issues.
 Governing the Owners

 Protect the interest of shareholders and owning family Legal Entity

 Assist in the development of the strategy for the company.
 Ensure the ethical management of the business. In family firms, BOD can
Board of Directors  Mitigate conflicts between shareholders include family members,
(BOD)  Serve as a source of information and feedback for top management. non-family members that
 Assist in the succession process. work for the firm, and/or
 Help with the recruitment of Board Members external advisors.

 Helps develop good governance procedures for the owners.

 Provides a vehicle to educate the owners regarding the rights and
responsibilities of ownership.
 Establishes policies to govern ownership procedures.
 Critical as ownership involves more family members. Similar to a family council
Ownership but focuses exclusively on
Council  Helps maintain common interests between owners as the number of
ownership issues.
owners increase.
 Explain ownership structure and transfer policies among owners.
 Creation of buy/sell agreements
 Determine and communicate dividend policies

Annual  Communicates information from the ownership council.

Shareholders  Company presents a report on information that is important to Legal Entity depending on
Meeting country.
shareholders regarding performance and strategy.
 Governing the Business

 Help establish, implement and assess goals for the

firm.
 Articulate the expectations and roles necessary to
achieve organizational success.
 Communicate values and expectations to help
achieve firm goals.
 Develop policies that will facilitate the
Top implementation of organizational strategy. Highest level executives
Management responsible for the
Team  Help implement and evaluate processes for organization.
organizational goals.
 Establish and follow the procedures and
expectations to run day-to-day operations of the
firm.
 Asset management and support.
 Create opportunities for the organization.
 Family Capital

Family firms can access resources beyond those of non-family firms:

Acquired knowledge, and skills leading to superior performance. Human capital within the
Human capital family enables transfer of tacit knowledge.

Goodwill and resources that are made available through the networks of relationships
Social Capital between individuals/organizations. Family firms can benefit from the embedded, available,
and derived connection that family members possess.

Family firms are able to pursue more creative and innovative strategies because the family
Patient Financial Capital often has the financial means to invest thinking about long term, and not having to worry
about short-term success.

Personal resources that family members are willing to loan, contribute, or share for the
Survivability Capital benefit of the family business especially in hard times
Governance Structure
and Costs Capital Structures and family bonds reduce governance costs.

Connections between family members enable the development of strong relationships

Family Social Capital characterized by trust and solidarity. This form of capital allows members to work together as
a team.

Reputational Capital Perceptions that external stakeholder have about the family firm.
 Use of Reputational Capital

• “Family” has connotations that can provide competitive advantages

• It conveys trust, honesty, longevity, attention to quality, pride in products and services, etc.
• Family values can be implied via:
– Company Name: “Wilkin and Son”

– Tag-lines: “we are a family-owned business”

“run by the 3rd generation of Smiths”

– Company Image and Statement
 Family Tradition

• Wilkin & Sons have not changed their label much over the last century.

• Family Tradition can express subtle values.

Then Now