Accessing Resources for Growth from External Sources 

In this chapter we explored alternate means by which an entrepreneur can grow his or her business. Franchising was discussed as a means of new entry that can reduce the risk of downside loss for the franchisee and also as a way that an entrepreneur can expand his or her business by having others pay for the use of the business formula. For the franchisee, the advantages of franchising are that he or she enters into a business with an accepted name, product, or service; has access to managerial assistance provided by the franchisor; receives up-front support that could save the entrepreneur significant time and possibly capital; has access to extensive information about the market; and has other operating and structural controls to assist in the effective management of the business. However, there are a number of potential disadvantages, which usually center on the inability of the franchisor to provide the services, advertising, and location that were promised.

For the franchisor, the primary advantage of franchising is that he or she can expand the business quickly, using little personal capital. But the franchisor also incurs certain risks in choosing this expansion alternative. In some cases, the franchisor may find it very difficult to locate quality franchisees. Poor management, in spite of all the training and controls, can still cause individual franchise failures, and these can reflect negatively on the entire franchise system. As the number of franchises increases, the ability to maintain tight controls becomes more difficult.

Entrepreneurs can also achieve growth through joint ventures. The effective use of joint ventures as a strategy for expansion requires the entrepreneur to carefully appraise the situation and the potential partner(s). First, the entrepreneur needs an accurate assessment of the other party to best manage the new entity in light of the ensuing relationship. Second, there needs to be symmetry between the two (or more) firms in terms of "chemistry" and the combination of their resources. Third, expectations of the results of the joint venture must be reasonable. Far too often, at least one of the partners feels that a joint venture will be the cure-all for other corporate problems. Expectations of a joint venture must be realistic. Finally, the timing must be right.

Another way the entrepreneur can expand the venture is by acquiring an existing business. For an entrepreneur, there are many advantages to acquiring an existing business, such as gaining access to an established image and track record, familiar location, established distribution and resource channels, and knowledgeable and skilled employees. Besides, the cost of an acquisition can be cheaper than other mechanisms for growth. However, history suggests that acquisitions have only a marginal success record. Entrepreneurs seem to be overly confident about their ability to achieve envisioned synergies, integrate organizational cultures, and retain key employees. After balancing the pros and cons of the acquisition, the entrepreneur needs to determine a fair price for the business.

Mergers and leveraged buyouts are other ways that entrepreneurs can grow their businesses. An essential skill for all these alternatives is the ability of the entrepreneur to negotiate. Good negotiation involves two tasks. The first task involves determining how the benefits of the relationship are going to be distributed between the parties. The second task is exploring the mutual benefits that can be gained from the relationship. To negotiate in a way that maximizes benefits requires the entrepreneur to use information about one's own preferences and those of the other party to create an outcome that is mutually beneficial. This requires an initial assessment of oneself and the other party and the use of strategies to elicit more information during the negotiation interactions to better inform those initial assessments. To these ends, this chapter offered four important assessments an entrepreneur should make and four strategies that can be used to achieve a successful negotiation.

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Informal Risk Capital, Venture Capital, and Going Public 

In financing a business, the entrepreneur determines the amount and timing of funds needed. Seed or start-up capital is the most difficult to obtain, with the most likely source being the informal risk-capital market (angels). These investors, who are wealthy individuals, average one or two deals per year, ranging from $100,000 to $500,000, and generally find their deals through referrals.

Although venture capital may be used in the first stage, it is primarily used in the second or third stage to provide working capital for growth or expansion. Venture capital is broadly defined as a professionally managed pool of equity capital. Since 1958, small-business investment companies (SBICs) have combined private capital and government funds to finance the growth and start-up of small businesses. Private venture-capital firms have developed since the 1960s, with limited partners supplying the funding. At the same time, venture-capital divisions operating within major corporations began appearing. States also sponsor venture-capital funds to foster economic development. To achieve the venture capitalist's primary goal of generating long-term capital appreciation through investme1nts in business, three criteria are used: The company must have strong management; the product/market opportunity must be unique; and the capital appreciation must be significant, offering a 40 to 60 percent return on investment. The process of obtaining venture capital includes a preliminary screening, agreement on principal terms, due diligence, and final approval. Entrepreneurs need to approach a potential venture capitalist with a professional business plan and a good oral presentation.

Valuing the company is of concern to the entrepreneur. Eight factors can be used as a basis for valuation: the nature and history of the business, the economic outlook, book value, future earnings, dividend-paying capacity, intangible assets, sales of stock, and the market price of stocks of similar companies. Numerous valuation approaches that can be used were discussed. In the end, the entrepreneur and investor must agree on the terms of the transaction, known as the deal. When care is taken in structuring the deal, the entrepreneur and the investor will maintain a good relationship while achieving their goals through the growth and profitability of the business.

Going public—transforming a closely held corporation into one in which the general public has proprietary interest—is indeed arduous. An entrepreneur must carefully assess whether the company is ready to go public as well as whether the advantages outweigh the disadvantages of doing so.

Once the decision is made to proceed, a managing investment banking firm must be selected and the registration statement prepared. The expertise of the investment banker is a major factor in the success of the public offering. In selecting an investment banker, the entrepreneur should consider reputation, distribution capability, advisory services, experience, and cost. To prepare for the registration date, the entrepreneur must organize an "all hands" meeting of company officials, the company's independent accountants and lawyers, and the underwriters and their counsel. A timetable must be established for the effective date of registration and for the preparation of necessary financial documents, including the preliminary and final prospectuses. Following the initial public offering, the entrepreneur should strive to maintain a good relationship with the financial community and adhere strictly to the reporting requirements of public companies.

acquisition financing  

Financing to buy another company

acquisition   Purchasing all or part of a company

affordable loss principle  

Prescribes committing in advance to what one is willing to lose rather than investing in calculations about expected returns to the project

aftermarket support   Actions of underwriters to help support the price of stock following the public offering

assessment of a new entry's attractiveness  

Determining whether the entrepreneur believes she or he can make the proposed new entry work

assessment of risk   Identifies potential hazards and alternative strategies to meet business plan goals and objectives

asset base for loans   Tangible collateral valued at more than the amount of money borrowed

assets   Items that are owned or available to be used in the venture operations

assets of newness   Positive implications arising from an organization's newness

attribute listing   Developing a new idea by looking at the positives and negatives

backward integration  

A step back (up) in the value-added chain toward the raw materials

balance of payments  

The trade status between countries

bargaining zone   The range of outcomes between the entrepreneur's reservation price and the reservation price of the other party

barter   A method of payment using nonmoney items

big-dream approach   Developing a new idea by thinking without constraints

bird-in-hand principle  

Involves negotiating with any and all stakeholders who are willing to make actual commitments to the project; determines the goals of the enterprise

blue-sky laws   Laws of each state regulating public sale of stock

book value   The indicated worth of the assets of a company

brainstorming   A group method for obtaining new ideas and solutions

breakeven   Volume of sales where the venture neither makes a profit nor incurs a loss

breakthrough innovations  

New products with some technological change

brokers   People who sell companies

business angels   A name for individuals in the informal risk-capital market

business ethics   The study of behavior and morals in a business situation

business plan   (1)The description of the future direction of the business (2) Written document describing all relevant internal and external elements and strategies for starting a new venture

causal process   A process that starts with a desired outcome and focuses on the means to generate that outcome

Chapter 07 bankruptcy  

Requires the venture to liquidate, either voluntarily or involuntarily

Chapter 11 bankruptcy  

Provides the opportunity to reorganize and make the venture more solvent

Chapter 13 bankruptcy  

Voluntarily allows individuals with regular income the opportunity to make extended time payments

checklist method   Developing a new idea through a list of related issues

cognitive adaptability  

Describes the extent to which entrepreneurs are dynamic, flexible, self-regulating, and engaged in the process of generating multiple decision frameworks focused on sensing and processing changes in their environments and then acting on them

collective notebook method  

Developing a new idea by group members regularly recording ideas

comment letter   A letter from the SEC to a company indicating corrections that need to be made in the submitted prospectus

comprehension questions  

Questions designed to increase entrepreneurs' understanding of the nature of the environment

concept stage   Second stage in product development process

connection tasks   Tasks designed to stimulate entrepreneurs to think about the current situation in terms of similarities and differences with situations previously faced and solved

contract   A legally binding agreement between two parties

conventional bank loan  

Standard way banks lend money to companies

copyright   Right given to prevent others from printing, copying, or publishing any original works of authorship

corporate culture   The environment of a particular organization

corporation Separate  

legal entity that is run by stockholders having limited liability

creative problem solving  

A method for obtaining new ideas focusing on the parameters

deal structure   The form of the transaction when money is obtained by a company

demand uncertainty   Considerable difficulty in accurately estimating the potential size of the market, how fast it will grow, and the key dimensions along which it will grow

departure points   The activities occurring when the venture is started

description of the venture  

Provides complete overview of the product(s), service(s), and operations of new venture

development financing  

Financing to rapidly expand the business

direct exporting   Involves the use of independent distributors or the company's own overseas sales office in conducting international business

disclosure document  

Statement to U.S. Patent and Trademark Office by inventor disclosing intent to patent idea

distribution task   Negotiating how the benefits of the relationship will be allocated between the parties

diversification strategy  

A strategy to grow by selling a new product to a new market

diversified activity merger  

A conglomerate merger involving the consolidation of two essentially unrelated firms

dual process for grief  

Involves oscillation between the two grief recovery approaches (loss-orientation and restoration-orientation)

due diligence   The process of deal evaluation

early-stage financing  

One of the first financings obtained by a company

earnings approach   Determining the worth of a company by looking at its present and future earnings

effectuation process  A process that starts with what one has (who they are, what they know, and whom they know) and selects among possible outcomes

emerging industries   Industries that have been newly formed and are growing

employee stock option plan (ESOP)  

A two- to three-year plan to sell the business to employees

entrepreneur as an innovator  

An individual developing something unique

entrepreneur   Individual who takes risks and starts something new

entrepreneurial culture  

The environment of an entrepreneurial-oriented firm

entrepreneurial intentions  

The motivational factors that influence individuals to pursue entrepreneurial outcomes

entrepreneurial mind-set  

Involves the ability to rapidly sense, act, and mobilize, even under uncertain conditions

entrepreneurial process  

The process of pursuing a new venture, whether it be new products into existing markets, existing products into new markets, and/or the creation of a new organization

entrepreneurial resource  

The ability to obtain, and then recombine, resources into a bundle that is valuable, rare, and inimitable

entrepreneurial self-efficacy  

The conviction that one can successfully execute the entrepreneurial process

entrepreneurial strategy  

The set of decisions, actions, and reactions that first generate, and then exploit over time, a new entry

entrepreneurially fostering environment  

An environment that enhances organizational members'perceptions of entrepreneurial action as both feasible and desirable

entrepreneurship   (1) Process of creating something new and assuming the risks and rewards (2) is the process of creating something new with value by devoting

environmental analysis  

Assessment of external uncontrollable variables that may impact the business plan

equity participation   Taking an ownership position

equity pool   Money raised by venture capitalists to invests

error of commission   Negative outcome from acting

error of omission   Negative outcome from not acting

exporting   The sale and shipping of products manufactured in one country to a customer located in another country

factor approach   Using the major aspects of a company to determine its worth

factors in valuation   Nonmonetary aspects that affect the fund valuation of a company

FIFO   Inventory costing method whereby first items into inventory are first items out

final approval   A document showing the final terms of the deal

financial plan   Projections of key financial data that determine economic feasibility and necessary financial investment commitment

Financial ratios   Control mechanisms to test the financial

strength of the new venture

focus groups   Groups of individuals providing information in a structured format

forced relationships   Developing a new idea by looking at product combinations

Form S-1   Form for registration for most initial public offerings of stock

forward integration   A step forward (down) on the value-added chain toward the customers

foundation company  A type of company formed from research and development that usually does not go public

Franchising   is an arrangement whereby a franchisor gives exclusive rights of local distribution to a franchisee in return for their payment of royalties and conformance to standardized operating procedures.

free association   Developing a new idea through a chain of word associations

full and fair disclosure  

The nature of all material submitted to the SEC for approval

gazelles   Very high growth ventures

general partner   The overall coordinating party in a partnership agreement

general valuation approaches  

Methods for determining the worth of a company

going public   Selling some part of the company by registering with the SEC

Gordon method   Method for developing new ideas when the individuals are unaware of the problem

government as an innovator  

A government active in commercializing technology

grief   A negative emotional response a person feels from the loss of something important

high-potential venture  

A venture that has high growth potential and therefore receives great investor interest

horizontal integration  

Occurs at the same level of the value-added chain but simply involves a different, but complementary, valueadded chain

horizontal merger   A type of merger combining two firms that produce one or more of the same or closely related products in the same geographic area

idea stage   First stage in product development process

imitation strategies   Copying the practices of other firms

indirect exporting   In international business, involves having a foreign purchaser in the local market or using an export management firm

industry analysis   Reviews industry trends and competitive strategies

informal risk-capital market  

Area of risk capital markets consisting mainly of individuals

initial public offering (IPO)  

The first public registration and sale of a company's stock

integration task   Exploring possible mutual benefits from the relationship so that the "size of the pie" can be increased

intellectual property  Any patents, trademarks, copyrights, or trade secrets held by the entrepreneur

international entrepreneurship  

An entrepreneur doing business across his or her national boundary

inventor   An individual who creates something new

involuntary bankruptcy  

Petition of bankruptcy filed by creditors without consent of entrepreneur

joint venture   (1) The joining of two firms in order to form a third company in which the equity is shared (2) Two or more companies forming a new company

key success factors   The requirements that any firm must meet in order to successfully compete in a particular industry

lead time   The grace period in which the first mover operates in the industry under conditions of limited competition

lemonade principle   Prescribes leveraging surprises for benefits rather than trying to avoid them, overcome them, or adapt to them

leveraged buyout (LBO)  

Purchasing an existing venture by any employee group

liabilities of newness  

Negative implications arising from an organization's newness

liabilities   Money that is owed to creditors

licensing   (1) Contractual agreement giving rights to others to use intellectual property in return for a royalty or fee (2) Involves giving a foreign manufacturer the right to use a patent, technology, production process, or product in return for the payment of a royalty

lifestyle firm   A small venture that supports the owners and usually does not grow

LIFO   Inventory costing method whereby last items into inventory are first items out

limited partner   A party in a partnership agreement that usually supplies money and has a few responsibilities

liquidation value   Worth of a company if everything was sold today

loss-orientation   An approach to grief recovery that involves working through, and processing, some aspect of the loss experience and, as a result of this process, breaking emotional bonds to the object lost

majority interest   The purchase of over 50 percent of the equity

in a foreign business

Management contract  

A nonequity method of international business in which an entrepreneur contracts his or her management techniques and skills to a (foreign) purchasing company

Managing underwriter  

Lead financial firm in selling stock to the public

market development strategy  

Strategy to grow by selling the firm's existing products to new groups of customers

market extension merger  

A type of merger combing two firms that produce the same products but sell them in different geographic markets

market knowledge   Possession of information, technology, know-how, and skills that provide insight into a market and its customers

Market segmentation  

Process of dividing a market into definable and measurable groups for purposes of targeting marketing strategy

marketing goals and objectives  

Statements of level of performance desired by new venture

marketing mix   Combination of product, price, promotion, and distribution and other marketing activities

needed to meet marketing objectives

marketing plan   (1) Describes market conditions and strategy related to how the product(s) and service(s) will be distributed, priced, and promoted (2) Written statement of marketing objectives, strategies, and activities to be followed in business plan

marketing strategy and action plan  

Specific activities outlined to meet the venture's business plan goals and objectives

marketing system   Interacting internal and external factors that affect venture's ability to provide goods and services to meet customer needs

merger   Joining two or more companies

me-too strategy   Copying products that already exist and attempting to build an advantage through minor variations

minority interest   A form of direct foreign investment in which the investing entrepreneur holds a minority ownership position in the foreign venture

new entry   Offering a new product to an established or new market, offering an established product to a new market, or creating a new organization

Nonequity arrangement  

A method by which an entrepreneur can enter a market and obtain sales and profits without direct equity investment in the foreign market

Opportunity identification  

The process by which an entrepreneur comes up with the opportunity for a new venture

Opportunity parameters  

Barriers to new product creation and development

Ordinary innovations  

New products with little technological change

organizational plan   Describes form of ownership and lines of authority and responsibility of members of new venture

owner equity   The amount owners have invested and/or retained from the venture operations

parameter analysis   Developing a new idea by focusing on parameter identification and creative synthesis

participative style of management  

The manager involves others in the decision-making process

patchwork quilt principle  

Means-driven action that emphasizes the creation of something new with existing means rather than discovering new ways to

achieve given goals

patent   Grants holder protection from others making, using, or selling similar idea

penetration strategy  

A strategy to grow by encouraging existing customers to buy more of the firm's current products

Perceived desirability  

The degree to which an individual has a favorable or unfavorable evaluation of the potential entrepreneurial outcomes

pilot-in-the-plane principle  

Urges relying on and working with people as the prime driver of opportunity and not limiting entrepreneurial efforts to exploiting factors external to the individual

political risk analysis  

Prior to entering into business in another country, an assessment of that country's political policies and its stability

Preliminary screening  

Initial evaluation of a deal

present value of future cash flow  

Valuing a company based on its future sales and profits

pricing amendment   Additional information on price and distribution submitted to the SEC to develop

the final prospectus

principle of analysis   Understanding how time is currently being allocated, and where it is being inefficiently invested

principle of desire   A recognition of the need to change personal attitudes and habits regarding the allocation of time

principle of effectiveness  

A focus on the most important issues

principle of prioritized planning  

Categorization of tasks by their degree of importance and then the allocation of time to tasks based on this categorization

principle of reanalysis  

Periodic review of one's time management process

principle of teamwork  

Acknowledgment that only a small amount of time is actually under one's control and that most of one's time is taken up by others

private offering   A formalized method for obtaining funds from private investors

private venture-capital firms  

A type of venture-capital firm having general and limited partners

pro forma balance sheet  

Summarizes the projected assets, liabilities, and net worth of the new venture assets Items that are owned or available to be used in the venture operations

pro forma cash flow   Projected cash available calculated from projected cash accumulations minus projected cash disbursements

pro forma income   Projected net profit calculated from projected revenue minus projected costs and expenses

pro forma sources and applications of funds  

Summarizes all the projected sources of funds available to the venture and how these funds will be disbursed

problem inventory analysis  

A method for obtaining new ideas and solutions by focusing on problems

product development stage  

Third stage in product development process

product development strategy  

A strategy to grow by developing and selling new products to people who are already purchasing the firm's existing products

product extention merger  

A type of merger in which acquiring and acquired companies have related production and/or distribution activities but do not have products that compete directly with each other

product life cycle   The stages each product goes through from introduction to decline

product planning and development process  

The stages in developing a new product

product safety and liability  

Responsibility of a company to meet any legal specifications regarding a new product covered by the Consumer Product Safety Act

production plan   Details how the product(s) will be manufactured

professional-support network  

Individuals who help the entrepreneur in business activities

prospectus   Document for distribution to prospective buyers of a public offering

public-equity market  

One of the risk-capital markets consisting of publicly owned stocks of companies

quiet period   90-day period in going public when no new company information can be released

red herring   Preliminary prospectus of a potential public

offering

referral sources   Ways individual investors find out about potential deals

reflection tasks   Tasks designed to stimulate entrepreneurs to think about their understanding and feelings as they progress through the entrepreneurial process

Registration statement  

Materials submitted to the SEC for approval to sell stock to the public

Regulation D   Laws governing a private offering

replacement value   The cost of replacing all assets of a company

research and development limited partnerships  

Money given to a firm for developing a technology that involves a tax shelter

reservation price   The price (the bundle of resources from the agreement) at which the entrepreneur is indifferent about whether to accept the agreement or choose the alternative

resources   The inputs into the production process

Restoration-orientation  

An approach to grief recovery based on both avoidance and a proactiveness toward secondary sources of stress arising from a major loss

Reverse brainstorming  

A group method for obtaining new ideas focusing on the negative

risk   The probability of, and magnitude of, downside loss

risk-capital markets   Markets providing debt and equity to nonsecure financing situations

role models   Individuals influencing an entrepreneur's career choice and style

S corporation   Special type of corporation where profits are distributed to stockholders and taxed as personal income

SBIC firms   Small companies with some government money that invest in other companies

SBIR grants program  

Grants from the U.S. government to small technology-based businesses

scope   A choice about which customer groups to serve and how to serve them

situation analysis   Describes past and present business achievements of new venture

state-sponsored venture capital fund  

A fund containing state government money that invests primarily in companies in the state

strategic tasks   Tasks designed to stimulate entrepreneurs to think about which strategies are appropriate for solving the problem (and why) or pursuing the opportunity (and how)

switching costs   The costs that must be borne by customers if they are to stop purchasing from the current supplier and begin purchasing from another

synergy   In a joint venture, the qualitative impact on the acquiring firm brought about by complementary factors inherent in the firm being acquired

target market   Specific group of potential customers toward which venture aims its marketing plan

technological innovations  

New products with significant technological advancement

technological knowledge  

Possession of information, technology, know-how, and skills that provide insight into ways to create new knowledge

technological uncertainty  

Considerable difficulty in accurately assessing whether the technology will perform and whether alternate technologies will emerge and leapfrog over current technologies

technology transfer   Commercializing the technology in the laboratories into new products

test marketing stage  

Final stage before commercialization in product development process

third-party arrangements  

Paying for goods indirectly through another source

time management   The process of improving an individual's productivity through more efficient use of time

top management commitment  

Managers in an organization strongly supporting corporate entrepreneurship

trade barriers   Hindrances to doing international business

trade secret   Protection against others revealing or disclosing information that could be damaging to business

trademark   A distinguishing word, name, or symbol used

to identify a product

traditional managers  

Managers in a non-entrepreneurial-oriented organization

turn-key project   A method of doing international business whereby a foreign entrepreneur supplies the manufacturing technology or infrastructure for a business and then turns it over to local owners

uncertainty for customers  

Customers may have considerable difficulty in accurately assessing whether the new product or service provides value for them

underwriting syndicate  

Group of firms involved in selling stock to the public

venture-capital market  

One of the risk-capital markets consisting of formal firms

venture-capital process  

The decision procedure of a venture-capital firm

vertical merger   A type of merger combining two or more firms in successive stages of production

voluntary bankruptcy  

Entrepreneur's decision to file for bankruptcy

window of opportunity  

(1) The period of time when the environment is favorable for entrepreneurs to exploit a particular new entry (2) The time period available for creating the new venture

work history   The past work experience of an individual