Ent Notes Module 7 8 9

Entrepreneurship and New Venture Creation

KSOM Notes by Dr. Sneha

BANGALORE UNIVERSITY

MBA

SEMESTER III

ENTREPRENEURSHIP AND NEW VENTURE CREATION

MODULE 7

Introduction to Entrepreneurial Finance

Entrepreneurs tend to prioritize their sources of funds. Start from the funds that are cheapest and

easiest to access, they move on to the costlier and more difficult sources of finance. At the top of the

list, there would be self-generated funds that can be spared for the business. Then they would get in

touch with friends and family. This is a great source of funds but is fraught with danger. In case things go

bad, personal relationships might get ruined.

Entrepreneurial finance consists of venture capital and private equity funding involving an entrepreneur

who holds a high proportion of the equity of the enterprise. This contrasts sharply with classic

investment or corporate finance and also with the main features of the private equity class of Micro

Finance Institution (MFIs). If the venture needs further infusion of funds, the entrepreneur will tap the

banks and Non-Banking Financial Companies (NBFCs) for debt financing. According to Janet Kiholm

Smith and Richard L. Smith, "Just as corporate finance is concerned with financial decision-making by

managers of public corporations; entrepreneurial finance is concerned with financial decision-making by

entrepreneurs who are undertaking new ventures".

Q. Explain the principles of entrepreneurial finance? (2 marks)

Principles of Entrepreneurial Finance

Entrepreneurial finance draws its basic principles from both entrepreneurship and finance.

The seven principles are as follows:

1) Real, human and financial capital must be rented from owners,

2) Risk and expected reward go hand in hand,

3) While accounting is the language of business, cash is the currency,

4) New venture financing involves search, negotiation and privacy,

5) A venture's financial objective is to increase value,

6) It is dangerous to assume that people act against their own self-interests, and

7) Venture character and reputation can be assets or liabilities.



Q. Why Most New Ventures Need Funding? (8 marks)

There are three reasons that most new firms need to raise money during their early life:

1) Cash Flow Challenges: As a firm grows, it requires an increasing amount of cash to service its

customers. Often, equipment must be purchased and new employees hired and trained before the

increased customer base generates additional income. The lag between spending to generate revenue

and earning income from the firm's operations creates cash flow challenges, particularly for small firms

and firms that are growing rapidly. If a firm operates in the red, its negative real-time cash flow, usually

computed monthly, is called its burn rate. A company's burn rate is the rate at which it is spending its

capital until it reaches profitability. Although, a negative cash flow is sometimes justified early in a firm's

life to build plant and equipment, train employees, and establish its brand. A firm usually fails if it burns

through all its capital before it becomes profitable. This is why inadequate financial resources are one of

the primary reasons new firms fail. A firm can simply run out of money even if it has good products and

satisfied customers. This is what almost happened to Cisco Systems early in its life. To prevent the firm

from running out of money, most entrepreneurs need investment capital or a line of credit from a bank

to cover cash flow shortfalls until their firms can begin making money. It is usually difficult for a new firm

to get a line of credit from a bank so; new ventures often look for investment capital or try to arrange

some type of creative financing.

2) Capital Investments: Firms often need to raise money early on to fund capital investments. While it

may be possible for the firm's founders to fund its initial activities, it becomes increasingly difficult for

them to do so when it comes to buying property, constructing buildings, purchasing equipment, or

investing in other capital projects. Many firms are able to delay or avoid these types of expenditures by

leasing space or co-opting the resources of alliance partners. However, at some point in its growth cycle,

the firm's needs may become specialized enough that it makes sense to purchase capital assets rather

than rent or lease them.

3) Lengthy Product Development Cycles: Firms need to raise money to pay the upfront costs of lengthy

product development cycles. For example, it takes about two years and 10 lakh to develop an electronic

game. In the biotech industry, it often takes a decade or more to get a new medicine approved. For

example, Scios, a biotech firm that was founded in 1982, got its first medicine approved in 2001, close to

20 years after its founding. This tortoise-like pace of product development takes substantial upfront

investment before the anticipated pay-off is realized. Although, the biotech industry is an extreme

example, lengthy product development cycles are present in many industries. Firms entering these

industries require considerable capital upfront to pay for the cost of developing products.

Q. Name the sources of Capital / Financing (2 marks)

An Overview One of the most difficult problems in the new venture creation process is obtaining

financing. They need a huge amount of fund for establishing and running it venture. They get these

funds from many sources. Some sources ire as follow: -

1) Equity Financing,



2) Debt Financing,

3) Personal Fund,

4) Internal or External Fund,

5) Family and Friend,

6) Funding from Banks (Commercial Banks Financing),

7) Financial Institutions Financing,

8) Government Incentive, Grants and Subsidies,

9) Developmental Sources (Research and Development Limited Partner

10) Private Placement,

11) Bootstrap Financing,

12) Venture Capital, -

13) Informal Agency in Entrepreneurship Financing,

14) Foreign Direct Investment (FDI).

Q What is Equity Financing (2 marks)

Equity financing is the act of raising money for company/venture activities by selling common or

preferred stock to individual or institutional investors. In return for the money paid, shareholders

receive ownership interests in the corporation. The primary advantage of equity funding is that because

investors become partial, owners of the firms in which they invest, they often try to help those firms by

offering their expertise and assistance. In addition, unlike a loan, the money received from an equity

investor does not have to be paid-back. The investor receives a return on their investment through

dividend payments and by selling the stock. The primary disadvantage of equity funding is that the

owners of the firm give-up part of their ownership interest and May lose some control.

Q. Explain sources of equity financing (12 marks)

1) Business Angels: Business angels or Angel investors are the investors who invest their own money,

along with their time and expertise, in unquoted firms in the hope of any financial gain.

Business angels Activity constitutes what is also known as the informal venture capital market, in

contrast to the formal source of equity funding, namely the institutional venture capital industry made



up of private partnerships or closely held corporations funded by pension funds, endowments,

foundations, wealthy individuals, foreign investors, and venture capitalists themselves.

Business angles are difficult to find. Most angels remain fairly anonymous and are matched-up with

entrepreneurs through referrals. To find a business angel investor, an entrepreneur should discretely

work their network of acquaintances to see if anyone can make an appropriate introduction.

2) Initial Public Offering: Another source of equity financing is to sell stock to the public by staging an

Initial Public Offering (IPO). An IPO is the first sale of stock by a firth to the public. When a company goes

its stock is typically trade cl on one of the major stock exchanges.

Firms decide to go public for several reasons:

i) It is a way to raise equity capital to fund current and future operations. amazon.com, for example,

went public in May 1977 and rose over 4 crore by selling stock to the public.

ii) An IPO raises a firm's public profile, making it easier to attract high-quality customers, alliance

partners, and employees.

iii) An IPO is a liquidity event that provides a mechanism for the company's stockholders, including its

investors, to cash-out their investments.

iv) By going public, a firm creates another form of currency that can be used to grow the company. It is

not uncommon for one firm to buy another company by paying for it with stock rather than with cash.

The stock comes from "authorized but not yet issued stock", which in essence means that the firm issues

new shares of stock to make the purchase. In fact, a large percentage of Cisco System's 70-plus

acquisitions were paid for in this manner.

Q. What is Debt Financing (2 marks)

In debt financing a firm raises money for working capital or capital expenditures by selling bonds, bills,

or notes to individual and/or institutional investors. In return for lending the money, the individuals or

institutions become creditors and receive a promise that the principal and interest on the debt will be

repaid.

Q. Explain common types of loans (8 marks)

There are two common types of loans:

1) Single-Purpose Loan: In this, a specific amount of money is borrowed that must be repaid in a fixed

amount of time with interest.

2) Line of Credit: In this, a borrowing "cap" is established and the borrower can use the credit at his or

her discretion. Lines of credit require periodic interest payments. –

There are two major advantages to obtaining a loan as opposed to equity financing:



1) None of the ownership of the firm is surrendered — a major advantage for most entrepreneurs.

2) Interest payments on a loan are tax deductible in contrast to dividend payments made to investors,

which are not.

There are two major disadvantages of getting a loan:

1) It must be repaid, which may be difficult for a start-up that is focused on getting its company off the

ground. Cash is typically "tight" during a new venture's first few months and sometimes for a year or

more.

2) Lenders often impose strict conditions on loans and insist on ample collateral to fully protect their

investment. Even if a startup is incorporated, a lender may require that an entrepreneur's personal

assets be collateralized as a condition of the loan.

Q. Explain the Sources of Debt Financing (8 marks)

A business may consider a number of financial institutions as possible lenders. The large and popular

ones include:

1) Banks: Both commercial banks and savings and loan associations grant a significant portion of all the

available credit they have on hand to businesses.

2) Commercial Finance Companies: Most commercial finance companies have a specialty, such as

discounting accounts receivable. Interest rates are generally higher with finance companies because as a

financing source they seem to be institutions of last resort. Companies that are unable to find other

means of financing may resort to commercial finance companies.

3) Insurance Companies: Many large insurance companies participate in investment banking both

directly and indirectly. Typically, insurance companies loan substantial blocks of money. Because of this,

the typical insurance company borrower is a large company. They do not as often or as readily extend

credit to smaller companies. Insurance companies prefer transactions of 10 lakhs or more. Some

insurance companies are interested only in transactions greater than 50 lakh.

4) Brokerage Houses: Many stock brokerage houses offer or arrange financing that ranges from bonds

and commercial paper to private loans from individual investors. Brokerage houses do just as their name

suggests. They broker money from sources to ultimate

5) Investment Bankers: Investment banking may be a function of any of the previously named lenders.

They generally facilitate the sale of security issues, through either a bidding process or a contractual

arrangement. •For a fee, they use their expertise and market contacts to sell securities. In some

financing agreements, the lender takes an equity position in connection with a loan or takes an option

or warrant to buy stock in the event that the company grows. This is known as a kicker or sweetener and

generally is viewed by borrowers as giving-up some possible future control over the business in

exchange for controlling current costs. Many investors wish to have some financial or managerial say



over the direction and nature of the business. Typically, when substantial funds are loaned to a business,

it has to give-up some measure of control.

6) Venture Capitalists: Venture capitalists may be investment bankers when they invest capital, make

loans, and give management advice intended to assist the company to achieve significant growth. Many

companies financed by venture capitalists convert from closely held corporations to public corporations

during the course of their growth.

7) Government Loan and Grants: The Government offers a wide variety of loan programs. Some are

direct loans, others are government-sponsored or guaranteed loans channeled through banks. Small

Business Administration loans are available to smaller businesses.

Q. Explain Securing Debt Finance (8 marks)

The process of securing debt finance is very taxing. This is the time the entrepreneur puts all his/her

cards on the table and the viability of the is repeatedly questioned; tankers are bound to discover

several real and imagined flaws. The process for swilling a business loan can be summarized as follows:

I) Drawing-Up the Business Plan: The business plan has-to be drawn-up and the sources and uses of

funds have to be determined and put-down in writing. While writing the business plan, it is necessary to

determine how much loan finance is needed and when it is needed.

2) Identifying Sources of Debt Finance: There will be a number of banks in the city. Some will have the

reputation of being transparent in their dealings. It is prudent to ask other business owners to rate the

banks.

3) Presenting the Proposal to the Bank: Initially, this has to be presented to the Branch Manager or a

Disbursing Officer. The bank will have its set of forms, which have to be filled-out.

4) Going for Further Talks: If the Manager is considering your proposal favorably, you will have to go for

further talks and you will need to answer some questions the bank officials will have regarding your

proposed business or about the guarantees and collaterals you are pledging to the bank.

5) Working-Out Details: Once the two parties have broadly agreed, details regarding amounts,

schedules, interest and charges, extent of collateral and sureties pledged, etc., have to be worked-out.

6) Purpose: The bank might have preferences about the nature of the client. Some banks would prefer

to deal with a limited company and many would be reluctant to deal with a proprietorship concern

when large sums of money are involved.

7) Safety: The bank has to satisfy itself that the borrower has the capacity to successfully manage the

business they are engaged in and is honest. The bank wants to ensure that the money is safe in the

hands of the borrower and that it is being used for the purpose for which it was taken. The bank wants

to be sure that the loan will be repaid in time as per the terms agreed upon.



8) Profitability: Like any other business, the bank too is interested in making a profit. Most of the

revenue generated in a bank stems from its lending. The bank will be more interested in lending to an

entity that presents greater profitability. The RBI has deregulated interest rates and banks are free to fix

their lending rates.

Q. Explain Personal Fund (2 marks)

New ventures are started without the personal funds of the entrepreneur. Not only are these the least

expensive funds in terms of cost and control, but they are absolutely essential in attracting outside

funding, particularly from banks, private investors, and venture capitalists. The typical sources of

personal funds include savings, life insurance, or mortgage on a house or car. These outside providers of

capital feel that the entrepreneur may not be sufficiently committed to the venture if he or she does not

have money invested. As one venture capitalist succinctly said, "I-want the entrepreneurs so financially

committed that when the going gets tough, they will work through the problems and not throw the keys

to the company on my desk"

Q Explain Internal or External Funds (8 marks)

Financing is also available from both internal and external funds. The type of funds most frequently

employed Is internally generated funds. Internally generated funds can come from several sources

within the company i.e., profits, sale of assets, reduction in working capital, extended payment terms,

and accounts receivable. In every new venture, the start-up years involve putting all the profits back into

the venture; even outside equity investors do not expect any payback in these early years. Sometimes

the needed fund can be obtained by selling little used assets.

Assets, whenever possible, should be on a rental basis (preferably on a lease with an option to buy) not

an ownership basis as long as there is not a high level of inflation and the rental terms is favorable. This

will help the entrepreneur to conserve cash, a practice that is particularly critical during the start-up

phase of the company's operation.

A short-term, internal source of funds can be obtained by reducing short-term assets such as inventory,

cash, and other working-capital items. Although care must be taken to ensure good supplier relations

and continuous sources of supply, taking a few extra days in paying can generate needed short-term

funds. A final method of internally generating funds is collecting bills (accounts receivable) more quickly.

Key accountholders should not be irritated by implementation of this practice, as certain customers

have established payment practices. For example, mass merchandisers; pay their bills to supplying

companies in sixty to ninety days, regardless of a supplying company's accounts receivable policy, the

size of the company, or the discount offered for prompt payment. If a company wants this mass

merchandiser to carry its product it will have to abide by this payment schedule.

Whenever an entrepreneur deals with items external to the firm, particularly with people and

institutions that could become stakeholders, ethical dilemmas can sometimes occur.



Q. What are the internal sources of fund? (8 marks)

1) Internal Sources of Finance

i) Retained Profit: This method can be used by a company after a few years when the company starts

making profits, (remember the companies usually break-even in the first year and make profits later). If

the business had a successful trading year and made a profit after paying all its costs, it could use some

of that profit to finance future activities. This can be a very useful source of long-term finance, provided

the business is generating profit.

ii) Controlling Working Capital: The money invested in current assets like raw material, finished goods,

debtors, etc., is the working capital. In other words, money required for day-to-day operations of

business/enterprises is called 'working capital'. The entrepreneur can keep a control on the working

capital by prudently judging the requirements for day-to-day operation. They learns with experience and

hence like retained profits; the entrepreneur would be able to use this method after sometime when

the business gets established.

iii) Sale of Assets: The business can finance new activities or pay-off debts by selling its assets such as

property, fixtures and fittings, machinery, vehicles, etc. It is often used as a short-term source of finance

(for example, selling a vehicle to pay debts) but could provide more longer-term finance if the assets

being sold is very valuable (for example, land or buildings). If a business wants to use its assets, it may

consider sale and lease-back where it may sell its assets and then rent or hire it from the business that

now owns the assets. It may mean paying more money in the long-run but it can provide cash in the

short-term to avoid a crisis.

iv) Owners Personal Savings: This mainly applies to sole traders and partnerships. Owners may use some

of their own money as capital to invest in the business. It can be a short or long-term source of finance,

depending upon the amount invested and the decision of the person using their savings.

v) Reducing Stocks: Stock is a type of asset and can be sold to raise finance. Stock includes the business

holdings of raw materials (inputs), semi-finished products and also finished products that it has not yet

sold. Businesses will usually hold some stock. It can be useful if there is an unexpected increase in

demand from customers. Stock levels tend to rise during economic slowdowns or recessions as goods

are not sold and `pile-up' instead. It is not usually a source of large amounts of finance if a business has

very large stockpiles, it might mean that nobody wants to buy the product and reducing stocks will

therefore be hard. It is often considered to be a short-term source.

vi) Trade Credit: A business does not normally pay for things before it takes possession of them. Instead,

it will usually place an order for supplies/inputs and will pay after receiving the items. It is good practice

to pay quickly (often within one month) as this will help the business to develop a good relationship with

its suppliers. This source of finance appears on the balance sheet as trade credit. This method of

deferring (delaying) payment to a future date is a form of very short-term borrowing and helps with the

problems of the cash cycle identified in the work on liquidity.



Q Explain the External Sources of Finance (8 marks)

i) Debentures: This is a form of long-term loan that can be obtained by a public limited company for a

large sum and it will be paid back over several years. It is usually borrowed from specialist financial

institutions.

ii) Share Issue: An important source of finance for limited companies. A share issue involves a business

selling new shares that entitle the shareholders to share in the control of the business. Each share gives

the shareholder a vote on the direction of the company. This usually means that the shareholder can

elect the Board of Directors of the company each year. If the shareholder does not like the way the

directors are running the business, they can elect new directors. This is a good incentive to the directors

to run the business well and make a profit, which will be paid to the shareholders in the form of

dividends.

iii) Factoring Services: Businesses are often owed money. A business may have difficulty in collecting its

debts from its customers but may need to get it, hands on money very quickly. A special factoring

company may offer to handle the debt collection process for a charge. The factoring company pays the

business most of the value of the debt first and would then collect the money from the debtor. This is a

short-term source of finance.

iv) Commercial Banks: Commercial banks offer two types of finance to businesses i.e., overdrafts and

loans. If a business spends more money than it has in its bank account, says that it has become

overdrawn. Businesses will often have an arrangement with the bank whereby the bank will pay the

extra money, provided the business will pay them back in a fairly short period of time, with interest.

Q. Explain Family and Friends as a source of capital (2 marks)

Family and friends are a common source of capital for a new venture. They are most likely to invest due

to their relationship with the entrepreneur. This helps to overcome one portion of uncertainty felt by

impersonal investors that is knowledge of the entrepreneur.

Family and friends provide a small amount of equity funding for new Ventures, reflecting in part the

small amount of capital needed for most new ventures. Although it is relatively easy to obtain money

from family and friends, like all sources of capital, there are positive and negative aspects. Although the

amount of money provided may be small, if it is- in the form of equity financing, the family members or

friends then have an ownership position in the venture and all rights and privileges of that position. This

may make them feel they have a direct input into the operations of the venture, which may have a

negative effect on employees, facilities, or sales and profits.

Although this possibility must be guarded against as much as possible, frequently family and friends are

not problem investors and in fact are more patient than other investors in desiring a return on their

investment.



In order to avoid problems in the future, the entrepreneur must present the positive and negative

aspects and the nature of the risks of the investment opportunity to try to minimize the negative impact

on the relationships with family and friends should problems occur.

Q. Explain the Funding from Banks (Commercial Banks Financing) (12 marks)

A commercial bank is a type of financial intermediary and a type of commercial banking is also known as

business banking. It is a bank that provides checking accounts, wings accounts, and money market

accounts and accepts time deposits. Commercial bank is the term used for normal banks to distinguish it

from an investment bank or retail bank.

Commercial financing is the function of offering loans to businesses. Most commercial banks offer

commercial financing and the loans are either secured by business assets or alternatively can be

unsecured, where the lender relies of the cash flows of the business to repay the facility. The funds

provided are in the form of debt financing and, as such, require some tangible guarantee or collateral.

This collateral can be in the form of business assets (land, equipment, or the building of the venture),

personal assets (the entrepreneur's house, car, land, stock, or bonds), or the assets of the cosigner of

the note.

Forms of Bank Financing Bank financing may take any of the following forms:

1) Unsecured Loans: Most short-term unsecured loans are self-liquidating. This kind of loan is

recommended for use by companies with excellent credit ratings for financing projects that have quick

cash flows. They are appropriate when the firm must have immediate cash and can either repay the loan

in the near future or quickly obtain longer-term financing. The disadvantages of this kind of loan are

that, because it is made for the short-term, it carries a higher interest rate than a secured loan and

payment in a lump sum is required.

2) Secured Loans: If a borrower's credit rating is deficient, the bank may lend money only on a secured

basis, i.e., with some form of collateral behind the loan. Collateral may take many 'forms including

inventory, accounts receivable or fixed assets. In some cases, even though the company is able to obtain

an unsecured loan, it may still give collateral in exchange for a lowest interest rate.

3) Lines of Credit: Under a line of credit, the bank agrees to lend money to the borrower on a recurring

basis up to a specified amount. Credit lines are typically established for a one-year period and may be

renewed annually. Construction companies often use such as arrangement because they usually receive

only minimal payments from their clients during construction, being compensated primarily at the end

of a job. The advantages of a line of credit for a company are the easy and immediate across to funds

during tight money market conditions and the ability to borrow only as much as needed and repay

immediately when cash is available. The disadvantages relate to the collateral requirements and the

additional financial information that must be presented to the bank. Also, the bank may place

restrictions upon the company, such as ceiling on capital expenditures or the maintenance of a

minimum level of working capital. Further, the bank will charge a commitment fee on the amount of the

unused credit line. When a company borrows under a line of credit, it may be required to maintain a



deposit with the bank that does not earn interest. The deposit is referred to as a compensating balance

and is stated as percentage of the loan. The compensating balance effectively increases the cost of the

loan. A compensating balance may also be placed on the unused portion of a line of credit, is which case

the interest rate would be reduced.

4) Installment Loans: An installment loan requires monthly payments. When the principal on the loan

decrease sufficiently, re-financing can take place at lower interest rates. The advantage of this kind of

loan is that it may be tailored to satisfy a company's seasonal financing needs.

Q. Explain the different Types of Loans (8 marks)

There are several types of bank loans available. To ensure repayment, these loans are based on the

assets Or the cash flow of the venture.

Following-are the important types:

1) Accounts Receivable Loans: Accounts receivable provides a good basis for a loan, especially if the

customer base is well-known and creditworthy. For these creditworthy customers, a bank may finance

up to 80 per cent of the value of their accounts receivable.

2) Inventory Loans: Inventory is another of the firm's assets that is often a basis for a loan, particularly

when the inventory is liquid and can be easily sold. Usually, the finished goods inventory can be financed

for up to 50 per cent of its value. Trust receipts are a unique type of inventory loan used to finance floor

plans of retailers, such as automobile and appliance dealers. In trust receipts, the bank advances a large

percentage of the invoice price of the goods and is paid on a pro raw basis as the inventory is sold.

3) Equipment Loans: Equipment can be used to secure longer-term financing, usually on a 3-10 year

basis. Equipment financing can fall into any of several categories: financing the purchase of new

equipment, financing used equipment already owned by the company, sale-leaseback financing, or lease

financing. When new equipment is being purchased or presently owned equipment is used as collateral,

usually 50 to 80 per cent of the Value of the equipment can be financed depending on its salability.

Given the entrepreneur's tendency to rent rather than own, sale-leaseback or lease financing of

equipment is widely used. In the sale-leaseback arrangement, the entrepreneur "sells" the equipment to

a lender and then leases it back for the life of the equipment to ensure its continued use. In lease

financing, the company acquires the use of the equipment through a small down payment and a

guarantee to make a specified number of payments over a period of time. The total amount paid is the

selling price plus the finance charges.

4) Stock Hedge Loan: A Stock Hedge Loan is a special type of securities lending whereby the stock of a

borrower is hedged by the lender against loss, using options or other hedging strategies to reduce

lender risk.

5) Pre-Settlement Loan: A pre-settlement loan is a non-recourse debt; this is when a monetary loan is

given based on the merit and awardable amount in a lawsuit case. Only certain types of lawsuit cases



are eligible for a pre-settlement loan. This is considered a secured non-recourse debt due to the fact

that if the case reaches a verdict in favor of the defendant the loan is forgiven.

6) Real Estate Loans: Real estate is also frequently used in asset-based financing. This mortgage

financing is usually easily obtained to finance a company's land, plant, or another building, often up to

75 per cent of its value.

Q. Explain the Procedure Loans are a time-tested way of raising capital for the business. (12 marks)

Following procedure are followed in raising the right amount of capital for business:

1) Decide how much Money is Needed: This is an obvious but often overlooked. Entrepreneurs

particularly start-ups, when budgeting for their business often focus on what they will need to get their

business going, to finance a particular project without accounting for working capital or cash for

contingencies. This is dangerous because lack of working capital can mean the death knell for the

business. On the other hand, some entrepreneurs, again start-ups, drastically overestimate their costs.

This will make lenders not only question the entrepreneurs' assumptions, but also question whether

they know what they are doing. For deciding on the amount, focus on the lender capacity.

i) Start-Up Business: Loan amounts below 5, 00,000 are considered smaller, micro-loans. Not all banks

will be interested in small amounts (more below). Micro-lenders and alternative-lenders are better

equipped to handle this type of loans. These lenders usually make smaller loans and have are

community focus. Look to credit unions, local development corporations, and other non-profit lenders.

ii) Existing Business: If entrepreneur own a company that has documented sales (it will need to show

previous years' tax statements) then they can apply for conventional bank loans. These loans are usually

easier to apply, and may have lower interest rates. Normally, for a conventional bank loan, business will

need to be in operations for at least 2 years.

iii) Set the Expectations: The bank does not want to own the business. It is highly unlikely that one will

get a loan for a 100% per cent of the project cost. Entrepreneur will need to put down a co-payment.

Although the minimum co-payment varies by industry and lender, expect to put down at least 20%-30%

or more of the cost of the project.

2) Find-Out the Credit Score: Entrepreneur should check their credit score and look over the credit

report to make sure there are no problems. A credit score of above 650-680 is considered "Good", but it

does not mean they will get a loan. A credit score in the 700-800 is very good and increases the chance

of getting approved.

3) Start Researching the Options: Evaluate all the options. Think of ways to strengthen the loan

application. If it perceives that one are not a strong candidate for a business loan, then present the

lender with options to increase the chances.

4) Start Writing the Business Plan and Create the Financial Projections: The business plan is more than a

plan, it is a tool that helps to evaluate the business concept, product or service, and discusses how to



implement the ideas. A business plan is also a tool to obtain investors, lenders, and strategic partners.

Entrepreneur can find many resources and opinions on the internet as well as the local bookstore on

how to build an effective business plan. A lender will usually require a comprehensive business plan as

well as a projected 1-year cash flow projection (month-by-month), 3 years income statements, a balance

sheet, a statement of sources and uses of funds, and a loan amortization schedule. One mistake that

usually see is that the figures on the Business Plan do not match the figures on the financial projection.

5) Find a Lender: Finding the right lender is not easy; each lender has its own criteria for lending.

i) Commercial Banks: Banks are one of the largest small business lenders but their approach to lending

varies. Commercial Banks decisions are based on the strength as a borrower (a good credit score,

personal financial statements, experience, and collateral) the banks goals for the period and their

lending philosophy. Banks may be looking to expand their small business loan consumer base; others

may focus on larger loans or a specific industry. Entrepreneur will need a high credit score if they are

applying for a bank loan.

Although, this is not an absolute rule for all banks, it is found that a credit score over 700 is a better

predictor on the success of a loan application. The bank may look for collateral (home equity, saving,

etc.) for larger amount. The borrower's personal financial situation is key factor for the application. The

bank's underwriter will analyze the person's net worth; as well as look at her previous earnings, length

of credit history, among other factors. For lower amounts, the bank may not require a business plan.

However, if there is a particular weakness in the loan application, the loan officer may ask the borrower

to submit a business plan and financial projections.

ii) Non-Bank Lenders: These institutions do not conduct consumer banking but offer business services

and business loans. Lenders' requirements vary depending on the institution, and some prefer lending

to specific industries. The non-bank lender may take longer to process the loan application than a

regular bank, but they can approve loans that banks find too risky. Non-bank lenders usually require a

business plan and ample documentation with the loan application. Compared to banks these lenders

have more flexibility working with lower credit scores as long as the borrower has the necessary

experience and collateral.

iii) Region Specific Lenders: They are neighborhood specific for profit/non-profit lenders that have more

flexible lending terms. For example, Credit Unions and Community Development Organizations may lend

to specific neighborhoods. The nature of the business and the reason of loan should fit with the

organizations' goals.

iv) Micro and Alternative Lenders: Micro and Alternative Lenders lend to riskier borrowers. These

borrowers usually have low credit scores or they are just building credit, also they do not have a strong

financial history and have little or no collateral. These institutions lend lower amounts and charge higher

interest rates.

6) Prepare the Loan Application Package: A "Loan Package” is the paperwork entrepreneur submits to

the bank in order to apply for a loan. The Loan Package includes the following:



i) Business plan,

ii) Business financial projections,

iii) Personal financial information,

iv) Personal tax statements,

v) Information about business, location, sales contracts, etc.

vi) Business owners' resumes.

7) Waiting: Loan applications are approved or declined much quicker than people think. A lender can

approve a loan within 36 hours. Regular commercial loans have similar processing times. One should

expect to get an answer within 2 weeks, and hopefully close the loan (get access to the money) within

another 2 weeks. However, if the institution needs more documentation, or if the loan is for a larger

amount, then it might take longer to process the loan.

Q. Explain Financial Institutions Financing (12 marks)

The financial institutions have traditionally been the major source of long-term funds for the economy.

These institutions provide a variety of financial products and services to fulfill the varied needs of the

commercial sector. Besides, they provide assistance to new enterprises, small and medium firms as well

as to the industries established in backward areas. Thus, they have helped in reducing regional

disparities by inducing widespread industrial development. Following are the major financial institutions

which provide the financial support to venture:

1) lDBI (Industrial Development Bank of India): During 1964, the Central Government felt the need for a

Centralized Development Bank for growth of industries. Until then the Commercial Banks and private

banks were doing financing work for the industries. Government therefore established IDBI in order to

do a concentrated activity for industrialization throughout the country. Initially, IDBI was a subsidiary of

RBI and in 1976 IDBI was converted as an autonomous body. The important feature of IDBI is what it has

to play a role of principal financial institution for coordinating the activities of institutions engaged in

financial promoting and developing the industry.

Objectives of IDBI

i) It works as an apex institution for term finance to industries and coordinates the functioning of the

agencies financing, promoting, and developing the industries.

ii) Play a supportive role to entrepreneurs who are planning and developing the industries. To assist

those industries who are required on priority in development of the industrial structure of the nation.

iii) To undertake research work pertaining to service of economic studies and techno-commercial

studies in connection with development of industries.

iv) Provide finance for the export of engineering goods and service on deferred payment basis.



Sources of Funds for IDBI

i) By public issue of IDBI bonds,

ii) By way of deposits from the public,

iii) Capital contribution from the Central Government,

2) IFCI (Industrial Finance Corporation of India): IFCI was started in 1948 with the objective of providing

medium and long-term credits to various types of industries in India. Its objectives are as follows:

i) To extend financial assistance to industries in Rupees as well as foreign currency as per the necessity.

ii) Direct subscription on shares and debentures of industries.

iii) Underwriting of shares, debentures, and issues of industries.

3) ICICI (Industrial Credit and Investment Corporation of India):

ICICI was started in 1955 with the main objective of assisting and developing the small-scale and

medium-scale industries in private sector. It is started with collecting .funds by way of public issues,

issue of shares to Commercial Banks, insurance companies, and the corporations in U.S.A. and U.K.

4) NIESBUD (National Institute for Entrepreneurship and Small Business Development): The National

Institute for Entrepreneurship and Small Business Development was established in 1983 by the Ministry

of Industry (now Ministry of Small Scale 'Industries), ' Govt. of India, as an apex body for coordinating

and overseeing the activities of various institutions/agencies engaged in entrepreneurship development

particularly in the area of small industry and small businesses. The Institute which is registered as a

society under Govt. of India Societies Act (xxi of 1860) started functioning from 6th July, 1983. The

policy, direction and guidance to the Institute are provided by its governing council whose Chairman is

the minister of SSI.

Mission of NIESBUD Remote, Support and Sustain Entrepreneurship and Small Business through:

i) Training, ii) Education, iii) Research, iv) Consultancy, and v) Other Interventions.

Objectives of NIESBUD

i) To evolve standardized materials and processes for selection, training, support and sustenance of

entrepreneurs, potential and existing. ii) To help/support and affiliate institutions/organizations in

carrying out training and other entrepreneurship development related activities

5) SIDBI (Small Industries Development Bank of India): The Small Industries Development Bank of India

(S1DBI) was set-up in 1990 under an act of parliament the SIDBI Act, 1989. The charter establishing SIDBI



envisaged SIDBI to be 'the Principal financial institution for the promotion, financing and development

of industries in the small scale sector and to coordinate the functions of other institutions engaged in

similar activities'. SIDBI commenced its operations on 2 April 1990, by taking over the outstanding

portfolio and activities of IDBI pertaining to small scale sector. In pursuance of the SIDBI (Amendment)

Act, 2000 and as approved by the Government of India, 51.1 per cent equity shares of SIDBI held by IDBI

have been transferred to public sector banks, LIC, GIC and other institutions owned and controlled by

the Central Government. Presently, SIDBI has 35 banks, insurance companies, investment and financial

institutions as its shareholders in addition to IDBI, which continues to hold 49 per cent share in SIDBI.

Objectives of SIDBI Four basic objectives are set-out in the SIDBI charter.

They are:

i) Financing,

ii) Promotion,

6) SFCS (State Financial Corporations): SFCs are set-up in 1948 to provide financial assistance to medium

and large-scale industries. Later on in 1951, the role was extended for assistance to small-scale units

also There are 18 SFCs in different states with each having prefix of the state name. For example, KSFC is

Karnataka State Financial Corporation. Each SFC is having its own Managing Director, Executive Director,

Board of Directors, and Management team to take care of the activities independently. Term loans are

provided to various small, medium, and large industries in various categories like proprietary,

partnership, cooperative, private, and public limited companies.

Q. Explain the meaning and purpose of Government Incentives, Grants and Subsidies Incentives,

Grants and Subsidies (12 marks)

They are the financial aids provided by various institutions either governmental or non-governmental. It

is an effective tool to the _entrepreneurship promotion. They perform functions of promoter for a

developing entrepreneur.

Meaning of Incentives

The term incentive means encouraging productivity. It is a motivational force which makes an

entrepreneur takes a right decision and act upon it. Broadly, incentives include concessions, subsidies

and bounties action. Economic incentives both financial and non-financial push an entrepreneur

towards decision of starting a new venture.

Meaning of Subsidy

Subsidy denotes a single lump-sum which is given by a Government to an entrepreneur to cover the

cost. The term 'bounty' denotes a bonus or financial aid given to an industry to help it to compete with

other units in country or in a foreign market The objective of incentives is to motivate an entrepreneur

to set up a new venture in the larger interest of the nation and the society



Schemes of Incentives and Subsidies in Operation

Incentives in Operation Subsidies in Operation

i) Interest free loans, Export/Import subsidies and bounties,

ii) Exemption from property tax, Subsidy for R&D works,

iii) Incentives to NRIs, Capital investment subsidy,

iv) Special incentives to women entrepreneurs, Transport subsidy,

v) Exemption from income-tax, Interest subsidy,

vi) Interest-free sales tax loans, Subsidy for power generations,

vii) Sales tax exemptions, Subsidies to artisans and traditional industries including handlooms,

viii) Land and building at concessional rates Subsidy for buying test equipment,

Meaning of Grants

Grants are a financial assistance in the form of money by the federal government to an eligible

guarantee with no expectation that the funds will be paid back. The term does not include technical

assistance which provides services instead of money, or other assistance in the form of revenue sharing,

loans, loan guarantees, interest subsidies, insurance, or direct appropriations. Even in the most

economically challenged times, the government grants is one of the best sources for fund.

For example, the National Institute of Standards and Technology's, Advance Technology Program offers

grants to co-fund "high-risk, high-pay-off projects" that will benefit industry. Whatever the project is, we

can bet it will be scrutinized by a Board of qualified experts and academia.

Need for Incentives

1) To Remove Regional Disparities in Development: While developed regions in a country are

overcrowded with industrial and business activities the backward areas remain ignored for want of

facilities for industrial development. Incentives are used as baits to lure industrialists to locate their

units overlooking such deficiencies. In the long run the backward areas become developed and regional

imbalances are corrected. Such a development may lead to the effective utilization of regional

resources, removal of disparities in income and levels of living and contribute to a more integrated

society,

2) To Promote Entrepreneurship and Strengthen the Entrepreneurial base in the Economy: The new

entrepreneurs may face a number of problems on account of inadequate infrastructure facilities and

other supporting services such as market assistance, technical training and consultancy and other

institutional services, etc. All these problems may demotivate them. The various incentives normally

tend to mitigate some or all of the problems by several means. Industrial estates, growth centers, power



tariff concessions, capital investment subsidies, transport subsidy, etc., are a few examples of incentives

and subsidies which are aimed at encouraging entrepreneurs to take up new ventures without much

reluctance.

Types of Incentives

Policy instruments adopted by the government to encourage the growth of Small Scale Industry (SSI)

comprise:

1) Financial Incentives: Small Industrial Development Bank of India (SIDBI) provides direct assistance. '-

among others, for specialized marketing agencies, industrial estates, acquisition of

machinery/equipment, both indigenous and imported, equity capital through soft loan schemes,

through Seed Capital Scheme and National Equity Fund Scheme, Modernization Schemes, Bills

Rediscounting and Direct Discounting Scheme.

2) Fiscal Incentives: These comprise investment allowance, tax holidays, additional depreciation for new

plant and machinery, excise tax concessions by the Central Government, exemption from sales tax and

turnover tax and state local governments providing exemption from electricity tariffs.

3) General Incentives: General incentives include among other things reservation of items for exclusive

purchase from SSI, price preference over medium and large scale units in public sector purchases and

scheme for 'Self-Employment to Educated Unemployed Youth’ (SEEUY)'.

4) Special Incentives in Backward Areas: Some of the schemes WI/WI are operational are concessional

finance scheme, transport subsidy scheme and income tax incentive.

Q: Explain the various skills for entrepreneurs (8 marks)

Various Schemes An entrepreneur requires a continuous flow of funds not only for setting-up of their

business, but also for successful operation as well as regular up gradation/modernization of the

industrial unit. To meet this requirement, the Government (both at the Central and State level) has been

undertaking several steps like setting-up of banks and financial institutions; formulating various policies

and schemes, etc.

Most of the programs and schemes of the Government are implemented through two principal

organizations:

1) Small Industries Development Organization (SIDO): It is an apex body for promotion and development

of small-scale industries in the country. Its major activities include:

i) Advising the Government on formulation of policies and programs for the small-scale industries.

ii) Conducting periodical census/survey of the small-scale industry and generating data/reports on

various important parameters/indicators of growth and development of the sector.



iii) Maintaining Close liaison with other Central Ministries, Planning Commission, State Governments,

Financial Institutions, and other organizations concerned with the development of small-scale

industries.

iv) Facilitating linkage of small-scale industries as ancillaries to large and medium-scale industries.

v) Dew-loping human resource base through training and skill up gradation.

For achieving its objectives, SIDO has devised a comprehensive range of schemes for providing credit

facilities, technology support services and marketing assistance etc.

Some of the major schemes are as follows:

i) Credit-Linked Capital Subsidy Scheme for Technology Up gradation,

ii) Credit Guarantee Scheme,

iii) ISO 90001150 14001 Certification Reimbursement Scheme,

iv) Integrated Infrastructure Development (IID Scheme),

v) SSI MDA Scheme,

vi) Assistance to Entrepreneurship Development Institutes,

vii) Micro Finance Program.

National Small Industries Corporation Ltd. (NSIC):

It has been established with the objective of promoting, aiding, and fostering the growth of small-scale

industries in the country. It has been assisting small enterprises through a set of specially-tailored

schemes which facilitate marketing support, credit support, technology support, etc. i) Marketing

Support Schemes: Sound marketing is critical for the growth and survival of small enterprises. NSIC acts

as a facilitator to promote small industries products and has devised a number of schemes to support

small enterprises in their marketing. ii) Credit Support Schemes: NSIC facilitates credit requirements of

small enterprises in several areas. These include:

a) Equipment Financing: Through schemes like 'Hire Purchase' and 'Term Loan' for the procurement of

equipment, the equipment financing can be facilitated.

b) Financing for Procurement of Raw Material: By facilitating bulk purchase of bask raw materials at

competitive rates, import of scares raw materials, etc. NSIC also takes care of all the procedures,

documentation, and issue of letter of credit in case of imports.

c) Financing for Marketing Activities: Such as internal marketing, exports, and bill discounting, etc.



d) Financing through Syndication with Banks: By entering into strategic alliances with commercial banks

so as to facilitate fund requirement of the small enterprises. It involves an arrangement of forwarding

the loan applications of the interested small enterprises to the banks.

e) Performance and Credit Rating Scheme for Small Industries: So as to enable the small enterprises to

ascertain the strengths and weaknesses of their existing operations and take corrective measures

accordingly.

Q. Explain the Various Subsidies given to Entrepreneurs (8 marks)

1) State Subsidies: Apart from various incentives and subsidies of the State Government, there are few

more incentives to the entrepreneurs in the State. State Capital Subsidy, various types of assistance like

interest subsidy, consultancy subsidy, power subsidy, generating set subsidy, stamp duty subsidy, etc.,

are given to entrepreneurs. For tiny and small scale units up to 4% interest subsidy, 100% consultancy

subsidy, up to 9 paisa (per unit) power subsidy are provided under the marginal money scheme. The

Government also provides up to 10% margin money to tiny and small scale units. Special concessions are

given to Pioneer and Prestige industries. A pioneer industry is one which is set-up in zero industry Tehsil

where there is no unit having investment of rupees one crore or more.

A pioneer industry receive special capital subsidy of 15% (max. 15 lakh).

A prestige unit is one which is set-up with an investment of 25 crore and more.

A prestige unit receives all the concessions and incentives available to a pioneer industry. A prestige unit

also receive State Capital subsidy of 15% in case they set-up ancillary industry in conformity will the

Government of India norms of nucleus projects.

2) Interest Subsidy: State Governments provide interest subsidy to entrepreneurs on term loans which

they get from State Financial Institutions/Scheduled Banks. The facilities are available in Jammu and

Kashmir, Andaman and Nicobar Islands, Sikkim, Meghalaya, Himachal Pradesh, Punjab, Rajasthan,

Andhra Pradesh and Manipur.

3) State Transport Subsidy: Some State Governments provide State transport subsidy at notified rates

from time to time to industrial units on transportation of raw materials and finished products. The

facilities are available in Jammu and Kashmir, Andaman and Nicobar Islands, Nagaland and Manipur.

4) Subsidy for Technical Know-How: State Governments provide subsidy on the cost of technical know-

how obtained by small scale industries from reputed and well-established research and development

organizations. For obtaining such technical know-how, prior permission from State Governments has to

be obtained. The facilities are available in Jammu and Kashmir, Sikkim, Delhi, Kerala and Manipur.

5) State Capital Investment Subsidy: In order to encourage: setting-up of industrial units in their States,

State Governments provide State Capital Investment Subsidy to Priority Sector industries. The facilities

are available in Uttar Pradesh, Jammu and Kashmir, Andaman and Nicobar Islands, Sikkim, Karnataka,



Meghalaya, Himachal Pradesh, Gujarat, Punjab, Andhra Pradesh, Kerala, Maharashtra, Tripura and

Manipur.

6) Sales Tax Concessions: State Governments give concessions in sales tax to new units/sick units on the

sale of their finished products at the first point-of-sale for a period of three to fifteen years. The facilities

are available in Uttar Pradesh, Jammu and Kashmir, Sikkim, Daman and Diu, Karnataka, Meghalaya,

Himachal Pradesh, Gujarat, Nagaland, Punjab, Rajasthan, Andhra Pradesh, Kerala, Haryana and Tripura.

Q. State the Advantages of Incentives, Subsidies and Grants (8 marks)

1) Incentive acts as motivators and encourages both potential industrialists and also existing

industrialists.

2) Incentives help as compensatory factors for various disadvantages for starting ventures in backward

areas.

Regional development and employment opportunities improve. The assistance for modernization and

up gradation of technology improves competitive ability.

Promotion of industries and development of national economy will enhance by popularizing and

investing on the incentives.

Disadvantages of Incentives, Subsidies and Grants

1) Past records and studies have proved that about 25% of the industries in backward areas were

started mainly to exploit subsidies and financial institutions,

2) The benefit disbursements have been made mainly on considerations' of favoritism and gains to

officials.

3) In the paper work the prices of capital investments have been jacked up to increase the subsidy by

dishonest applicants and officials.

4) The schemes and incentives and subsidies have been treated as opportunities for unethical practice

by Govt. officials.

5) The purpose for which the scheme is started is not well taken care due to: i) Delays in disbursements

ii). Unethical practices in government offices

Q: What are the Incentives and Facilities to Exporters? (8 marks)

In order to improve the export prospects the Government has started various institutions and bodies

for different type of assistance. They are aimed to help in financial, materials, tax rebates, sales

exhibitions and promotions, simplified procedures and duty drawbacks etc. Such assistance is required

more to small scale and medium scale industries who are lacking in terms of knowledge and resources

to take care of the exports.



Only few big industries can afford to take care of the international business without the assistance of

Government subsidies.

1) Duty Drawback: The facility is available for the products exported from India for the following:

i) Excise duty paid for various inputs in the manufacturing and

ii) Duties paid for import of raw-materials and components.

iii) This procedure was followed as per the provisions prevailing before liberalization and was helpful to

exporters. After liberalization however the import duties have been drastically reduced and waved on

many raw-materials. Also the MODVAT scheme on excise is any how helpful to both sales on domestic

market as well as exports. Hence the duty drawback is not as big a help as it used to be before

liberalization.

2) Advance License Duty Exemption Scheme: Scheme was helpful to get duly exemption for raw-

materials intended for production for exports. Such advance licenses were issued to exporters on the

condition that import should be made only for production of exportable goods. Those who opt for this

method cannot apply for duty drawback method. The companies which were doing high volume

electronic goods were taking advantage of this advance license method as they used to buy raw-

materials from the collaborators. The brand name and Documentation was helpful to show the records

of imports against exports. After liberalization this procedure also is not as helpful as it was before

liberalization. The reason being there is drastic waver and reduction of import duties on various

materials.

3) Excise Rebate: Finished goods which are subject to excise duty for home consumption are exempt

from the duty when they are exported. The scheme is also applicable where exported goods contain

excisable goods in their manufacture. The exporter can avail of this facility in either of the following

methods, where finished goods are excisable:

i) Export under Bond: Under this method, the exporter has to execute a bond in favor of Central Excise

Authorities. The amount of the bond will be equal to the duty on the estimated maximum outstanding

of goods leaving the factory without paying the duty and pending acceptance of their proof of export by

excise authorities. No excise need be paid by the exporter.

ii) Refund of Duty: If the duty is already paid, after export is made, the exporter should make a claim

with the Central Excise authorities. After verification of the claim, the excise authorities will arrange, for

the refund of the central excise.

4) Marketing Assistance: For helping marketing of Indian products abroad the Government has created a

Marketing Development Fund (MDF) to provide grants. Various export promotion schemes are taken

care to boost the exports. Some of the schemes for which up to 60% of funding is made by MDF are as

follows:

i) Assistance for market survey to under the export potential and domestic market.



ii) For participation of various trade exhibitions abroad.

iii) For setting up of showrooms, service centers and displays in the domestic and export market.

iv) Assistance for R&D work and consultancy services.

v) For starting marketing offices abroad.

5) Raw-Materials: The organizations exporting their goods are given priority in allotting raw-materials

like steel and alloys, copped and alloys, aluminum alloys, electronic components and the materials

which are to be imported. The engineering export promotion council even reimburses the cost

difference between local and overseas market for the raw-material.

6) EOU (Export Oriented Units): The companies which export their entire production of goods can be set

up under EOU Scheme. Such units are provided separate space in the industrial area called EPZ {Export

Processing Zones). This area is separately fenced since the tariffs are different compared to other

industries. Such EPZ are created in Chennai, Mumbai, Cochin, Noida and Visakhapatnam, These are

nearer the Seaport or Airport to enable easy shipment of goods to other countries.

7) Facilities for the EPZ

i) Readymade plots and buildings are provided in the EPZ area.

ii) No licensing is required for import of machineries, spares, consumables and raw-materials for the

units under EPZ area.

iii) The units are exempted from Excise Duty for all the goods manufactured in EPZ.

iv) Foreign investment is approved up to 100%.

v) Income Tax is exempted for a period of 5 years.

vi) Allowance will be given for sale of up to 25% production in the domestic market to take of ups and

downs of international market.

vii) Off-loading part of the workload can be done with sub-contractors. viii) Working capital will be

provided at concessional interest rates.

8) Other Concessions

i) Exemption of Sales Tax and Income Tax.

ii) Training of employees in India and abroad.

iii) Concession in the interest burden for finance from EXIM Bank

Q. What are the Developmental Sources (Research and Development Limited Partnerships) (8 marks)



Research and development limited partnerships are another possible source of funds for entrepreneurs

in high-technology areas.

This method of financing provides funds from investors looking for tax shelters.

A typical R&D partnership arrangement involves a sponsoring company developing the technology with

funds being provided by a limited partnership of individual investors. R&D limited partnerships are

particularly good when the project involves a high degree of risk and significant expense in doing the

basic research and development, since the risks, as well as the ensuing rewards, are shared.

Elements of Research and Development Limited Partnerships The three major components of any R&D

limited partnership are as follows:

1) Contract: The contract specifies the agreement between the sponsoring company and the limited

partnership, whereby the sponsoring company agrees to use the funds provided to conduct the

proposed research and development that hopefully will result in a marketable technology for the

partnership. The sponsoring company does not guarantee results but rather performs the work on a

best-effort basis, being compensated by the partnership on either a fixed-fee or a cost-plus

arrangement.

The typical contract has two key features:

i) The liability for any loss incurred is borne by the limited partners.

ii) There are some tax advantages to both the limited partnership and the sponsoring company.

2) Limited Partnership: Similar to the stockholders of a corporation, the limited partners have limited

liability but are not a total taxable entity. Consequently, any tax benefits of the losses in the early stages

of the R&D limited partnership are passed directly to the limited partners, offsetting other income and

reducing the partners' total taxable incomes. When the technology is successfully developed in later

years, the partners share in the profits. In some instances, these profits for tax purposes are at the lower

capital gains tax rate as opposed to the ordinary income rate.

3) Sponsoring Company: It acts as the general partner developing the technology. The sponsoring

company usually has the base technology but needs funds to further develop and modify it for

commercial success. It is this base technology that the company is offering to the partnership in

exchange for money. The sponsoring company usually retains the rights to use this base technology to

develop other products and the right to use the developed technology in the future for a license fee.

Sometimes, a cross-licensing agreement established whereby the partnership allows the company to

use the technology for developing other, products.

An R&D limited partnership generally progresses through three stages:



I) Funding Stage: In this stage, a contract is established between the sponsoring company and limited

partners, and the money is invested for the proposed research and development effort. All the terms

and conditions of ownership, as well as the scope of the research, are carefully documented.

2) Development Stage: In. this stage, the sponsoring company performs the actual research, using the

funds from the limited partners.

3) Exit Stage: If the technology is subsequently successfully developed, the exit stage commences, in

which the sponsoring company and the limited partners commercially reap the benefits of the effort.

There are three basic types of arrangements for doing this:

i) Equity Partnership: In the typical equity partnership arrangement, the sponsoring company and the

limited partners form a new, jointly owned corporation. On the basis of the formula established in the

original agreement, the limited partners' interest can be transferred to equity in the new corporation on

a tax-free basis. An alternative is to incorporate the R&D limited partnership itself and then either

merge it into the sponsoring company or continue as a new entity.

ii) Royalty Partnerships: Another possible exit to the equity partnership arrangement is a royalty

partnership. In this situation, a royalty based on the sale of the products developed from the technology

is paid by the sponsoring company to the R&D limited partnership. The royalty rates typically range from

6 to 10 per cent of gross sales and often decrease at certain established sales levels. Frequently, an

upper limit, or cap, is placed on the cumulative royalties paid.

iii) Joint "Ventures: A final exit arrangement is through a joint venture. Here the sponsoring company

and the partners form a joint venture to manufacture and market the products developed from the

technology. Usually, the agreement allows the company to buy-out the partnership interest in the joint

venture at a specified time or when a specified volume of sales and profit has been reached.

Q Explain Private Placement (12 marks)

Another source of funds for the entrepreneur is private investors, who may be family and friends or

wealthy individuals. Individuals who handle their own sizable investments frequently use advisors such

as accountants, technical experts, financial planners, or lawyers in making their investment decisions.

Private investors invest in all venture ideas i.e., entertainment, contracting, construction, real estate,

brokerage, catering, pet supplies, craft stores, appliance repair, retail, greeting cards, photography,

consulting, beauty salon/products, interior design, online businesses and others.

Private investors tend to invest based on goals, interests and location.

I) Entrepreneurs starting up businesses should research funding sources to ensure they find the best

source for their purposes.

2) Private investments are estimated at approximately 430 to 850 crore of private money annually,

compared to an annual 370 crore from venture capital firms and funds.



3) Private investors tend to invest in businesses located within 50 miles or so of their homes or offices.

4) A private investor is generally prepared to take a risk in investments, and is prepared to face

substantial capital loss, yet still invests.

5) Some common reasons why private investors reject a deal are lack of growth potential, overpriced

equity, under-qualified or untalented management, or lack of information about the entrepreneur.

6) Finding private investors has become much easier with advanced communication media, such as the

internet and investor search programs.

Types of Investors

An investor usually takes an equity position in the company, can influence the nature and direction of

the business to some extent, and may even be involved to some degree in the business operation. The

degree of involvement in the day-to-day operations of the venture is an important point for the

entrepreneur to consider in selecting an investor.

Some investors want to be actively involved in the business; others desire at least advisory role in the

direction and operation of the venture. Still others are more passive in nature, desiring no active

involvement in the venture at all Each investor is primarily interested in recovering his or her investment

plus a good rate of return. The most important type of private investor is business angels.

Private Offerings

Private offering is method of raising capital through private rather than public placement. The result is

the sale of securities to a relatively small number of investors. Investors involved in private placements

are usually large banks, mutual funds, insurance companies, and pension funds. It is a formalized

approach for obtaining funds from private investors.

A private offering is different from a public offering or going public in several ways. Public offerings

involve a great deal of time and expense, in large part due to the numerous regulations and

requirements involved.

A private offering is an issue of shares or of convertible securities by a company to a selected group of

persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue.

This is a faster way for a company to raise equity capital. A private placement of shares or of convertible

securities by a listed company is generally known by name of preferential allotment. A listed company

going for preferential allotment has to comply with the requirements contained in Chapter XIII of SEBI

(DIP) Guidelines pertaining to preferential allotment in SEBI guidelines which inter alia include pricing,

disclosures in notice, etc., in addition to the requirements specified in the Companies Act.

A qualified institutions placement is a private placement of equity shares or securities convertible into

equity shares by a listed company to Qualified Institutions Buyers only in terms of provisions or Chapter



XIIIA of SEBI Guidelines. The Chapter contains provisions relating to pricing, disclosures, currency of

instruments, etc.

Guidelines for Private Offering SEBI give various guidelines regarding private offering. Some are as

follows:

Lock-in Period: The allottees of private offering will not sell their securities in the open market for a

minimum period of three years from the date of allotment. This period is known as the lock-in period.

This period is applicable in case of promoters' contribution. However, in case of pre-issue of share

capital of an unlisted company, the lock-in period is one year from the date of commencement of

commercial production or the date of allotment in the public issue, whichever is earlier.

Special Resolution: The private offering can take place only if three-fourths of the shareholders agree to

the issue on preferential basis.

Minimum Issue Price: The minimum price of such an issue has to be an average of highs and lows of the

26 weeks preceding the date on which the Board resolves to make the preferential allotment.

Open Offer: If the private offering is made over and above 15 per cent of the equity, an open offer is

mandated by the SEBI.

Q: Explain Bootstrap Financing (8 marks)

Bootstrap finance means using your own money or resources to incorporate a venture. It reduces the

dependence on investors and banks. While the risk is omnipresent for the founder, it also gives them

absolute freedom and control over the management of the company. It is usually meant for small

business ventures

It is considered as an inexpensive option and also ensures optimal finance management. Bootstrap

financing will involve, for example, using virtually all personal resources, borrowing from family, barter,

credit and consignment inventory from suppliers, aggressive cost reduction strategies, purchasing used

equipment, leasing or otherwise leveraging real estate and property, plus a very close management of

the cash flows of the business.

Q. Who are Angel Groups (2 marks)

Angel Groups are informal or formal private (wealthy) investor groups that help to fund businesses too

small to attract professional venture capital. Angels do not usually require a large piece of the company

in exchange for their money like VCs.

Q. Explain Government-Affiliated Investment Paradigms (2 marks)

Government affiliated investment programs help companies locally, statewide, or federally; venture

capital firms may augment their own firm with federal funds and leverage their investment in qualified

investing companies.



Q. Explain Venture Capital Funding Process (8 marks)

Obtaining capital for a project through this route is very difficult. It involves many steps, which a

prospective entrepreneur has to adopt when they approaches an investor.

They are

1) Making a Deal (Deal Origination): A continuous flow of deals is essential for the venture capital

business.

Deals may be referred to the VCs through associations, friends, etc. The venture capital industry in India

has become quite proactive in its approach to generating the deal flow by encouraging individuals to

come up with their business plans. Venture Capital Funds (VCFs) carry out initial screening of all projects

on the basis of some broad criteria.

For example, the screening process may limit projects to areas in which the venture capitalist is familiar

in terms of technology, or product, or market scope. The size of investment, geographical location and

stage of financing could also be used as the broad screening criteria. ,

2) Evaluation or Due Diligence: Once a proposal has passed through initial screening, it is subjected to a

detailed evaluation or due diligence process. Most ventures are new an4=the entrepreneurs may lack

operating experience. Hence a sophisticated, formal evaluation is neither possible nor desirable. The

VCs thus rely on a subjective but comprehensive evaluation. VCFs evaluate the quality of the

entrepreneur before appraising the characteristics of the product, market or technology. Most venture

capitalists ask for a business plan to make an assessment of the possible risk and expected return on the

venture.

3) Investment Valuation: The investment valuation process is aimed at ascertaining an acceptable price

for the deal. The valuation process goes through the following steps:

i) Projections on future revenue and profitability.

ii) Expected market capitalization.

iii) Deciding on the ownership stake based on the return expected on the proposed investment.

iv) The pricing thus calculated is rationalized after taking into consideration various economic scenarios,

demand and supply of capital, founder's/management team's track record, innovation/Unique Selling

Propositions (USPs), the product/service size of the potential market, etc.

4) Deal Structuring: Once the venture has been evaluated as viable, the venture capitalist and the

investment company negotiate the terms of the deal, i.e., the amount, form and price of the

investment. This process is termed as deal structuring. The agreement also includes the protective

'covenants and earn-out arrangements. Covenants include the venture capitalists' right to control the

investee company and to change its management if needed, buy back arrangements, acquisition,

making Initial Public Offerings (IPOs); etc. Earn Out arrangements specify the entrepreneur's equity



share and the objectives to be achieved. Venture capitalists generally negotiate deals to ensure

protection of their interests. They would like a deal to provide for a return commensurate with the risk,

influence over the Ann through board membership, minimizing taxes, assuring investment liquidity and

the right to replace management in case of consistent poor managerial performance.

5) Post-Investment Activities and Exit: Once the deal has been structured and agreement finalized, the

venture capitalist generally assumes the role of a partner and collaborator. They also involves in shaping

of the direction of the venture. This may be done via a formal representation on the board of directors,

or informal influence in improving the quality of marketing, finance and other managerial functions. The

degree of the venture capitalists involvement depends on his policy.

Q. Explain the Guidelines for Dealing with Venture Capital (8 marks)

1) Check the Venture Capital Firm's References: Just like with a product do not want to buy the services

of a venture capital firm without checking references. How many successful deals has the venture

capital firm put together? Has the firm worked with a firm like this? How successful was the deal? What

about deals that did not work-out? How did the venture capital firm handle that?

2) Venture Capital Firm's Financial Strength: Obviously, venture capital firms must have the financial

strength to support the operations and probably several other businesses. Venture capital firms have

portfolios of businesses to spread their risk; otherwise, they take on too much risk. Funding is generally

in stages with venture capital funds and one must make sure that the venture firm has enough funding

for financing in different stages.

3) Integration between the Venture Capital Firms Style and Business: Often, venture capital firms wish to

be very involved with the business of the firm they are financing. They may wish one or more seats on

the Board of Directors and a stake in the ownership of the firm in the form of preferred stock. If

entrepreneur, do not mind relinquishing some control of firm, then no problem. However, some venture

capital firms are satisfied with monthly or quarterly reports, but obviously still have a stake in the firm

since they bought an ownership interest. A large venture capital firm may have more rigid requirements

than a smaller firm. Choose a firm that most suits the business style.

4) Venture Capitalists are Networkers: The venture capital market is a networking and communications

market. Of course, the venture capital firm they choose will help them with finance and management.

The firm may also be able to offer the valuable introductions to potential customers, suppliers, banks,

accountants, attorneys, and other valuable contacts.

5) Know the Exit Strategy of the Venture Capital Firm: Venture capitalists are usually short-term

investors. Entrepreneurs should discuss with the venture capital firm when they will "cash-out" of the

business so they can plan for the future.

Q. Explain how to approach a Venture Capitalist (8 marks)

Approaching a venture capital firm is a difficult and complex task that carries risks as big as the potential

gains. Venture capitalists deal with hundreds of potential clients, and reject the majority of them. Before



approaching a venture capital firm, entrepreneurs make sure that they know their business inside and

out. Following are important guidelines to approach venture capital firms in a professional manner that

will improve the chance of raising capital:

1) Explain why the business idea works or why the product has potential through a face-to-face meeting.

Everyone has a novel idea that could perhaps make significant changes in the market, but if the why and

if are not explained properly, then that business idea would not be able to prosper as easily as it was

envisioned.

2) Know the product inside and out. Entrepreneur should be able to give an hour-long lecture as easily

as a thirty-second "elevator speech" about what the product is and why the market needs it. If they

cannot explain their product in both a long speech and an extremely short sentence, they need to get

back to the drawing board before raising venture capital.

3) Differentiate the offering from what is already on the market. Entrepreneur must offer something

unique that will catch the attention of the venture capitalist that they plan to approach with their

business idea.

4) Determine how the product or idea has the potential to create a new market trend. Creating new

market trends does not just start with a novel idea. This novel idea has to have goals and visions of

doing something greater not only in terms of monetary return but in helping to shape the lives of the

consumers who will benefit

5) Make professional contact with the venture capital firm. Walking in off the street, calling or sending

an unsolicited email with a business plan does not usually succeed. Find a connection to a venture

capital firm to introduce the business or, if they do not have such a connection, use an online

networking tool. Coming to a venture capital firm through a mutual contact will hugely increase the

esteem in the eyes of the firm.

6) Develop an airtight business plan. A business plan is a rigorous document that takes a very specific

format. It is generally not considered optional by venture capital firms, so they should have a

professional looking business plan, complete with profit and overhead projections, before they go-out to

raise venture capital.

7) Find the right kind of venture capital firm. Venture capital firms are divided by size and industry. Look

for a firm that fits the project and focuses on the industry in which the product belongs. 8) Know the

range of how much financial assistance these firms would invest. If the product or idea needs a lot of

capital, then one should contact firms who can give a start-up with the amount needed for it-they have

done their detailed presentations.

) 9) Remember that VC funding is all negotiation:

i) Never let the VC think that you do not have other options. If they think you are between a rock and a

hard place, you are in trouble.



ii) VCs know the financing game in and out, and often they will tell that the deal is dead and not call back

for weeks just to get them hungry. Sometimes the VC is in on this strategy. One must be patient. iii) Even

with contracts, the broker may only secure a few deals a year to make a great living. If they have

invested four months on the project, they want the deal as badly as they do. Then ask for concessions.

Realize they might jump up and down and scream as part of their negotiations. It is a common strategy;

terms can also change. look past it. In every deal, conditions change, and one must remember that

commissions, fees.

Q: Explain the scenario for Venture Capital in India (8 marks)

The venture capital sector is the most Vibrant industry in the financial market today. Venture capital is

money provided by professionals who invest alongside management in young, rapidly growing

companies that have the potential to develop into significant economic contributors. Venture capital is

an important source of equity for start-up companies.

Venture Capital can be visualized as "your ideas and our money" concept of developing business.

Venture capitalists are people who pool financial resources from high net worth individuals, corporates,

pension funds, insurance companies, etc., to invest in high risk-high return ventures that are unable to

source funds from regular channels like banks and capital markets. The venture capital industry in India

has really taken-off in. Venture capitalists not only provide monetary resources but also help the

entrepreneur with guidance in formalizing his ideas into a viable business venture. Five critical success

factors have been identified for the growth of VC in India, namely:

1) The Tax, and legal environment should play an enabling role as internationally venture funds have

evolved in an atmosphere of structural flexibility, fiscal neutrality, and operational adaptability.

2) Resource rising, investment, management and exit should be as simple and flexible as needed and

driven by global" trends.

3) Venture should become an institutionalized industry that protects investors and investee firms,

operating in an environment suitable for raising the large amounts of risk capital needed and for

spurring innovation through start-up firms in a wide range of high growth areas.

4) in view of increasing global integration and mobility of capital it is important that Indian venture

capital funds as well as venture finance enterprises are able to have global exposure and investment

opportunities.

5) Infrastructure in the form of incubators and R&D need to be promoted using government support and

private management as has successfully been done by countries such as the U.S., Israel and Taiwan. This

is necessary for faster conversion of R&D and technological innovation into commercial products.

Major Venture Capital Player

I) Companies: Promoted by All India Financial Institutions):



i) Venture capital Division of IDBI

ii) Risk Capital Technology Finance Corporation Ltd. (RCTC) (subsidiary of IFCI)

iii) Technology development and Information Company of India Ltd. (TDICI) (promoted by ICICI & UTD)

2) Companies Promoted by State FIs:

i) Gujarat Venture Finance Ltd. (promoted by Gujarat University Campus)

ii) Andhra Pradesh Industrial Development Corporation Venture Capital Ltd. (promoted by APIDC)

3) Companies Promoted by Banks:

i) Can Bank Venture Capital Fund (promoted by Cantina and Canara Bank)

ii) SBI Venture Capital Fund (promoted by SBI caps)

iii) Indian Investment Fund (Promoted by Grind lays Bank) iv) Infrastructure Leasing (promoted by

Central Bank of India)

4) Companies in Private Sector:

i) Indus Venture Capital Fund (promoted by Mafatlal and Hindustan Lever)

ii) Credit Capital Venture Fund (India) Ltd.

iii) 20th Century Venture Capital Corporation Ltd.,

iv) Venture Capital Fund promoted by V.B. Desai & Co.

Q. Explain Informal Agency in Entrepreneurship (2 marks)

Financing According to Mason (2006), it is possible to identify two basic sources of informal funding are:

1) Funds supplied by the founders themselves, their families and friends (often termed either 3Fs or

"love money"),

2) Financing coming from strangers or business angels.

Q. Who are Business Angels or Angels Investors? (2 marks)

The informal risk-capital market is the most misunderstood type of risk capital. It consists of a virtually

invisible group of wealthy investors, often caged business angels, who art looking for equity-type

investment opportunities in a wide variety of entrepreneurial ventures. Business angels or Angel

investors are the investors who invest their own money, along with their time and expertise, in

unquoted firms in the hope of any financial gain. Business angels activity constitutes what is also known

as the informal venture capital market, in contrast to the formal source of equity funding, namely the

institutional venture capital industry made up of private partnerships or closely-held corporations



funded by pension funds, endowments, foundations, wealthy individuals, foreign investors, and venture

capitalists themselves. The role of the different forms of formal and informal equity funding varies

according to the size of the investment and the stage of business development.

Q. Explain Foreign Direct Investment (FDI) (8 marks)

Foreign direct investment means investment in a foreign country where the investor retains control over

the investment. It is also a source of financing the enterprise. The investor is usually a multinational

corporation. The control over the enterprise in which the investment is made does not merely involve

the control of the invested capital. It is control in terms of actual power of management and effective

decision-making in the major areas of working, for example, finance,- production, technology, marketing

and so on. Foreign direct investment typically occurs in the form of setting up a subsidiary, starting a

joint venture or acquiring a stake in an existing firm in a foreign country.

Direct investment is combined with management control of the firm. There are three main categories of

FDI i.e., equity capital, reinvested earnings, and lending of funds by a multinational to its affiliate. When

the investor makes only investment and does not retain control over the enterprise, it is known as

portfolio investment. The investor is interested only in return on his capital and does not want control

over the use of the invested capital. Portfolio investment is for a short period and is influenced by short-

term gains. On the other hand, foreign direct investment involves long-term commitment and cannot be

easily liquidated. Therefore, long-term considerations like political stability, government policy,

industrial prospects, etc. influence it. Direct investors have direct responsibility for the promotion and

management of the enterprise.

But portfolio investors have no direct responsibility for promotion and management of the enterprise.

Portfolio investment takes place through Foreign Institutional Investors (FIIs) like mutual funds and

through American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and Foreign Currency

Convertible Bonds (FCCBs). ADRs, GDRs and FCCBs are securities issued by Indian companies in the

foreign markets to mobilize foreign capital.

Q. Explain the Determinants of Foreign Direct Investment (8 marks)

The volume of FDI in a country depends on the following factors:

1) Natural Resources: Availability of natural resources in the host country is a major determinant of FDI.

Most foreign investors seek an adequate, reliable and economical source of minerals and other

materials. FDI tends to flow in countries which are rich in resources but lack capital, technical skills and

infrastructure required for the exploitation of natural resources. Though their relative importance has

declined, the availability of natural resources still continues to be an important determinant of FDI.

2) National Markets: The market size of a host country in absolute terms as well as in relation to the size

and income of its population and market growth is another major determinant of FDI. Large markets can

accommodate more firms and can help firms to achieve economics of large scale operations. Market

access has been the main motive for investment by American companies in Europe and Asia.



3) Availability of Cheap Labor: The availability of low cost unskilled labor has been a major course of FDI

in countries like China and India. Low cost labor together with availability of cheap raw materials

enables foreign investors to minimize costs of production and thereby increase profits.'

4) Rate of Interest: Differences in the rate of interest prevailing in different countries stimulate foreign

investment. Capital tends to move from a country with a low rate of interest to country where it is

higher. Foreign investment is also inspired by foreign exchange rates. Foreign capital is attracted to

countries where the return on investment is higher.

5) Socio-Economic Conditions: Size of the population, infrastructural facilities and income level of a

country influence direct foreign investment.

6) Political Situation: Political stability, legal framework, judicial system, relations with other countries

and other political factors influence movements of capital from one country to another. Government

Policies: Policy towards foreign investment, foreign collaborations, foreign exchange control,

remittances, and incentives (monetary, fiscal and others) offered to foreign investors exercise a

significant influence on FDI in a country. For example, Export Processing zones have been developed in

India to attract FDI and to boost exports.

Q. What are the Components of FDI (2 marks)

The three basic components of FDI flows are as follows:

1) Equity Capital: This constitutes the value of the MNC's investment in shares of an enterprise in a

foreign country. An equity capital stake of 10 per cent or more is normally considered as a threshold for

the control of assets.

2) Reinvested Earnings: This consists of the sum of direct investor's share (in proportion to direct equity

participation) of earnings not distributed as dividends by subsidiaries or associates, and earnings of

branches not remitted to the direct investor.

3) Other Direct Investment Capital or Intercompany Debt Transactions: This cover the borrowing and

lending of funds including debt securities and supplier's credits between direct investors and

subsidiaries, branches and associates.

Q. What is the Need of Foreign Investment (2 marks)

1) Domestic saving or internal financing is not sufficient to finance any project gap but domestic saving,

finance is filled by foreign investment

2) FDI can be source of employment.

3) It strengthens the development of economic infrastructure of country.

4) It fills the gap of technology development.

5) Foreign exchange is also earned by exporting products which one 6f better quality.



Q. Explain the Types of Foreign Direct Investment (8 marks)

Foreign Direct Investment is classified on the following basis:

1) On the Basis of Restrictions Imposed:

FDIs can be broadly classified into two types:

i) Outward-Bound FDI: An outward-bound FDI is backed by the government against all types of

associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms.

Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the

way of outward FDIs, which are also known as "direct investments abroad."

ii) Inward FDIs: Different economic factors encourage inward FDIs. These include interest, loans, tax

breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the

growth of FDIs include necessities of differential performance and limitations related with ownership

patterns.

2) On the Basis of Operation

i) Vertical FDIs: It takes place when a multinational corporation owns some shares of a foreign

enterprise, which supplies input for it or uses the output produced by the MNC.

ii) Horizontal FDIs: It happens when a multinational company carries out a similar business operation in

different nations.

On the Basis of Motives: Foreign Direct Investment is guided by different motives:

i) Market-Seeking Fins: FDIs that are undertaken to strengthen the existing market structure or explore

the opportunities of new markets can be called "market-seeking FDIs".

ii) Resource-Seeking FDIs: These are aimed at factors of production which have more operational

efficiency than those available in the home country of the investor.

iii) Efficiency-Seeking FDIs: Some foreign direct investments involve the transfer of strategic assets. FDI

activities may also be carried out to ensure optimization of available opportunities and economies of

scale. In this case, the foreign direct investment is termed as "efficiency-seeking."

Q. What is India's Policy towards FDI (8 marks)

Before 1991, India followed a very restrictive policy towards foreign capital and technology. Foreign

collaboration was allowed only in fields of high priority and in areas where the import of foreign

technology was considered necessary.

Under FERI, the. Reserve Bank of India was empowered to exercise direct control over the activities of

foreign companies. Since July 1991, India has gradually liberalized its policy towards foreign investment

and technology.



The highlights of the new policy are as follows:

I) The new policy has allowed majority foreign equity worth automatic approval in most of the

industries. In February 2000, the government of India placed all items under the automatic approval

route except the following:

i) Items which require an industrial license under the Industries (Development and Regulation) Act,

1951;

ii) More than 24 percent foreign investment in units manufacturing items reserved for small scale units;

iii) All items requiring industrial license in terms of the vocational policy notified under the industrial

policy;

iv) Proposals having precious venture tie up in India with foreign collaborator;

v) Proposals relating to acquisition of shares in existing Indian company by foreign/NRI investor.

Thus, the number of products of industries in which foreign investment is freely permitted has been

increased significantly.

2) The foreign investors are now free to compete with domestic producers in the Indian market.

3) The foreign investor is free to own a majority share in equity.

4) India has opened two routes for FDI inflows — the RBI route and the FIPB route. Detailed guidelines

and simplified procedures have been prescribed.

5) NRI investments in foreign exchange have been made fully repatriable.

6) International financial institutions have been allowed to invest in Indian companies through

automatic route subject to SEBI RBI guidelines.

7) To provide access to foreign market, majority foreign equity holding up to 51% equity would be

allowed for trading companies, primarily engaged in export activities.

8) Automatic permission would be given to foreign technology agreements in high priority industries

subject to prescribed conditions.

9) Foreign companies can now use their trade marks on domestic sales.

10) India has signed Multilateral Investment Guarantee Agency Protocol of the protection of foreign

investors. The new policy towards foreign capital and technology is definitely more open and permissive

than the old policy. But for foreign investors, business environment in India is still not as attractive as in

China and many other countries. Approval procedures are still complex and time consuming.

Infrastructure and mindset of people are major constraints to FDI inflows. Foreign investors want a



more investment friendly environment in the form of simplified procedures, labor reforms, operational

efficiency, better competitiveness, efficient local vendors, effective intellectual property regime, better

infrastructure, transparent regulatory system and lower cost of doing business.



MODULE 8



MBA SEMESTER III

MANAGING AND GROWING THE NEW VENTURE

Introduction

Entrepreneurial strategy represents the set of decisions, actions, and reactions that first generate, and

then exploit over time, a new entry in a way that maximizes the benefits of business and its costs. Just as

entrepreneurship requires entrepreneurial management, i.e., practices and policies within the

enterprise, so it requires practices and policies outside i.e., in the marketplace, it requires

entrepreneurial strategies

Q. State entrepreneurial strategies (2 marks)

An entrepreneurial strategy has three key stages:

I) The generation of a new entry opportunity,

2) The exploitation of a new entry opportunity, and

3) A feedback loop of resources.

The generation of a new entry is the result of a combination of knowledge and other resources into a

bundle that its creators hope will be valuable, rare, and difficult for others. If the situation is that the

new entry is sufficiently attractive that it warrants exploitation, then it is dependent upon the entry

strategy; team, and the firm the risk reduction strategy; the way the firm is organized

Q. Explain the concept of generation of new entry opportunity.

New entry refers to:

1) Offering a new product to an established or new market,

2) Offering an established product to a new market, or

3) Creating a new organization (regardless of whether the product or the market is new to competitors

or customers).

Whether associated with a new product, a new market, or a new organization, "newness" is like a

double-edged sword. On the one hand, newness represents something rare, which can help to



differentiate a firm from its competitors. On the other hand, newness creates a number of challenges

for entrepreneurs. Understanding where a sustainable competitive advantage generates new entries

that are likely of time. Resources are the basic resources are simply the inputs into employees. These

resources can be combined in different ways and it is this bundle of resources that provides a firm its

capacity to achieve superior performance.

For example, a highly skilled workforce represents an important resource. but the impact of this

resource on performance is magnified when it is combined with an organizational culture that enhances

communication, teamwork, and innovativeness.

Q. Explain the impact of resources? (12 marks)

1) To truly understand ' the impact of a resource, we need to consider the bundle rather than just the

resources that make-up the bundle. In order for a bundle of resources to be the basis of a firm's superior

performance over competitors for an extended period of time, the resources must be valuable, rare,

and inimitable (including non-substitutable).

A bundle of resources is:

i) Valuable when it enables the firm to pursue opportunities, neutralize threats, and offer products and

services that is valued by customers.

ii) Rare when it is possessed by few, if any, (potential) competitors.

iii) Inimitable when replication of this combination of resources would be difficult and/or costly for

(potential) competitors.

2) Creating a Resource Bundle that is Valuable, Rare, and Inimitable: The ability to obtain, and then

recombine, resources into a bundle that is valuable, rare, and inimitable represents an important

entrepreneurial resource.

Knowledge is the basis of this entrepreneurial resource, which in itself is valuable. This type of

knowledge is built-up over time through experience, and it resides in the mind of the entrepreneur and

in the collective mind of management and employees.

To a large extent such an experience is idiosyncratic; unique to the life of the individual and therefore

can be considered rare. Furthermore, it is typically difficult to communicate this knowledge to others,

which makes it all the more difficult for (potential) competitors to replicate such knowledge. Therefore,

knowledge is important for generating a bundle of resources that will lead to the creation of a new

venture with a long and prosperous life.

Does this mean that only highly experienced managers and/or firms will typically generate these

opportunities for new entry? On the contrary, the evidence suggests that it is the outsiders that come-

up with the most radical innovations. For example, the pioneers of mountain bikes were biking

enthusiasts, and it was quite a considerable time before the industry giants, such as Schwinn and Huffy,



reacted to the trend. It appears that the existing manufacturers of bikes had difficulty "thinking outside

the box" or they had little incentive to do so. Notice that those who did invent the mountain bike were

bike enthusiasts. They had knowledge about current technology and the problems that customers

(themselves included) had with the current technology under certain circumstances. This knowledge

was unique and based upon personal experiences. It was this knowledge that provided the basis for

their innovation. Those wishing to generate an innovation need to look to the unique experiences and

knowledge within themselves and their team. This sort of knowledge is unlikely to be learned in a

textbook or in class, because then everyone would have it and what would be unique about that?

Knowledge that is particularly relevant to the generation of new entries is that which is related to the

market and technology.

3) Market Knowledge: Market knowledge refers to the entrepreneur's possession of information,

technology, know-how, and skills that provide insight into a market and its customers. Being

knowledgeable about the market and customers enables the entrepreneur to gain a deeper

understanding of the problems that customers have with the market's existing products. In essence, the

entrepreneur shares some of the same knowledge that customers have about the use and performance

of products. From this shared knowledge, entrepreneurs are able to bring together resources in a way

that provides a solution to customers' dissatisfaction.

In this case, the entrepreneur's market knowledge is deeper than the knowledge that could be gained

through market research. Market research, such as surveys, has limited effectiveness because it is often

difficult for customers to articulate the underlying problems they have with a product or service.

Entrepreneurs, who lack this intimate knowledge of the market, and of customers' attitudes and

behaviors, are less likely to recognize or create attractive opportunities for new products and/or new

markets. The importance of this knowledge to the generation of a new entry is best illustrated by

returning to the example of the invention of the mountain bike.

These guys were bike enthusiasts and therefore were aware of the problems that they personally

encountered, as well as the problems their friends encountered, in using bikes relying on the current

technology. It could be that these individuals were using their bikes in a way terrain that was not

anticipated by the bike manufacturers, such as taking them off-road and exploring rough Market

research would not likely have revealed this information about deficiencies in the current technology. It

is difficult for people to articulate the need for something that does not exist. Besides, the

manufacturers may have dismissed any information that they received.

4) Technological Knowledge: It is also a basis for generating new entry opportunities. Technological

knowledge refers to the entrepreneur's possession of information, technology, know-how, and skills

that provide insight into ways to create new knowledge.

This technological knowledge might lead to a technology that is the basis for a new entry, even though

its market applicability is unobvious. For example, the laser was invented over thirty years ago and has

led to many new entry opportunities. Those with expertise in laser technology are more able to adapt

and improve the technology and in doing so open-up a potentially attractive market. Laser technology



has been adapted to navigation, precision measurement, music recording, and fiber optics. In surgery,

the laser technology has been used to repair detached retinas and reverse blindness. These new entries

were derived from the knowledge of laser technology, and market applicability was often of only

secondary consideration.

Assessing the Attractiveness of a New Entry Opportunity

Having created a new resource combination, the entrepreneur needs to determine whether it is in fact

valuable, rare, and inimitable by assessing whether the new product and/or the new market are

sufficiently attractive to be worth exploiting and developing, i.e., building a business ready for full-scale

operation.

This depends on the information. level of information on a new entry and on the entrepreneur's

willingness to make a decision without perfect

1) Information on a New Entry

i) Prior Knowledge and Information Search:

The prior market and technological knowledge used to create the potential new entry can also be of

benefit in assessing the attractiveness of a particular opportunity. More prior knowledge means that the

entrepreneur starts from a position of less ignorance about the assessment task at hand. That is, less

information needs to be collected in order to reach a threshold where the entrepreneur feels

comfortable making a decision to exploit or not to exploit. Knowledge can be increased by searching for

information that will shed some light on the attractiveness of this new entry opportunity. Interestingly,

the more knowledge the entrepreneur has, the more efficient the search process.

For example, entrepreneurs who have a large knowledge base in a particular area will know where to

look for information and will be able to quickly process this information into knowledge useful for the

assessment. The search process itself represents a dilemma for an entrepreneur. On one hand, a longer

search period allows the entrepreneur time to gain more information about whether this new entry

does represent a re-source bundle that is valuable, rare, and difficult for others to imitate. The more

information the entrepreneur has, the more accurately they can assess whether sufficient demand for

the product can be generated and whether the product can be, protected from imitation by

competitors.

Window of Opportunities: The dynamic nature of the viability of a particular new entry can be described

in term of window opportunities. It is a short period of time during which an opportunity must be acted

on or Missed. When the window is open the environment is favorable for entrepreneurs to exploit new

entry.

2) Decision to Exploit or not to Exploit the New Entry: The decision on whether to exploit or not to

exploit the new entry opportunity on whether the entrepreneur has what they believes to be sufficient

information to make a decision, and on whether the window is still open for this new entry opportunity.



A determination by an entrepreneur that they have sufficient information depends on the stock of

information and on the level of comfort that this entrepreneur has with making the decision.

It is important to realize that the assessment of a new entry's attractiveness is less about whether this

opportunity "really" exists or not, more about whether the entrepreneur believes they can make it work

i.e., create the market demand, efficiently Produce the product, build a reputation, and develop

customer loyalty and other switching costs. Making it work depends, in part, on entrepreneurial

strategies.

Q. Explain the Decision under Uncertainty (8 marks)

The trade-off between more information and the likelihood of the window of opportunity's closing

provides a dilemma for entrepreneurs. The dilemma involves choice of which error they prefer to

commit:

1) Error of Commission: An error of commission occurs from the decision to pursue this new entry

opportunity only to find-out later that the entrepreneur had overestimated their ability to create

customer demand and/or to protect the technology from imitation by competitors. The costs to the

entrepreneur were derived from acting on the perceived opportunity.

2) Error of Omission: An error of Omission occurs from the decision not to act on the new entry

opportunity, only to find out later that the entrepreneur had underestimated their ability to create

customer demand and/or to protect the technology from imitation by competitors. In this case, the

entrepreneur must live with the knowledge that they let an attractive opportunity slip through their

fingers.

Q. What do you mean by Exploitation of a New Entry Opportunity? (12 marks)

After generating the new entry opportunities and analyzing its attractiveness, if it is found that the new

entry is attractive they go to exploiting that new entry. Exploitation of new entry is based on entry

strategy, the risk reduction strategy, firm organization structure, competence of entrepreneur and firm,

etc.

Entry Strategies One of the most challenging aspects of launching a new venture is finding a way to

begin doing business that generates cash flow, builds credibility, attracts, good employees, and

overcomes the liability of newness. One aspect of that effort is the initial decision about how to get a

foothold in the market. The idea of an entry strategy or "entry wedge" describes several approaches

that firms may take. Several factors will affect this decision.

New-entry strategies are as follows:

1) Pioneering New Entry:

The first personal computer was a pioneering product; there had never been anything quite like it and it

revolutionized computing. The first Internet browser provided a type of pioneering service. These



breakthroughs created whole new industries and changed the competitive landscape. But breakthrough

innovations continue to inspire pioneering entrepreneurial efforts. For example, Sky Tower

Telecommunications started in 2000, hoping to take wireless communications to new heights. Wireless

communications systems have only three ways to get to our cell phone or computer; radio towers that

are often not tall enough, satellites that cost 500 lakh to 4000 lakh to launch, and short-range Wi-Fi

transmitters. Sky Tower proposes a fourth alternative: unmanned, solar-powered airplanes that look like

flying wings and send-out Internet, mobile phone, and high-definition TV signals. The planes have

already been successfully tested over Hawaii. They are able to fly at an altitude of 12 miles in a tight

2,000 foot-wide circle for six months at a time without landing.

Designed as private communication systems for both businesses and consumers, they are able to deliver

Internet service for about a third of the cost of DSL or cable. Sky Tower has already received the backing

of NASA and Z 809 lakh in investment capital. Its target customers are major Internet Service Providers

(ISPs). The plan is not without problems, however. For one - thing, the Federal Aviation Administration

(FAA) currently prohibits the launch of unpiloted planes.

Even so, Sky Tower's flying wing satellite is a breakthrough technology that addresses the increasing

demand for cost-effective wireless communications: Tire pitfalls associated with a pioneering new entry

are numerous. For one thing, there is a strong risk that the product or service will not be accepted by

consumers. The history of entrepreneurship is littered with new ideas that never got off the launching

pad.

For example, Smell-O-Vision, an invention designed to pump odors into movie theatres from the

projection room at pre-established moments in a film. It was tried only once (for the film Scent of a

Mystery) before it was declared a major flop. This is an Innovative idea but failed at that time.

2) Imitative New Entry:

In many respects, an imitative new-entry strategy is the opposite of entering by way of pioneering.

Whereas pioneers are often inventors or thinkers with new technology, imitators usually have a strong

marketing orientation. They look for opportunities to capitalize on proven market successes.

An imitation strategy is used by entrepreneurs who see products or business concepts that have been

successful in one market niche or physical locale and introduce the same basic product or service in

another segment of the market. Sometimes the key to success with an imitative- strategy is to fill a

market space where the need had previously been filled inadequately.

This was the approach used by Fixx Services, Inc., a restaurant and retail store maintenance service.

Maintenance and repairs is hardly a new business concept.

But Mark Bucher found that restaurants and retail stores were poorly served. They provide a facility

management service designed to alleviate the headaches associated with keeping everything running.

According to Bucher, "Customers want one number to call if their oven breaks or if someone throws a

brick through their front window". Founded in 1999, home-based and self-funded for the first three



years. Fixx Services now has 12 employees and annual sales of nearly 100 lakh. Entrepreneurs are also

prompted to be imitators when they realize that they have the resources or skills to do a job better than

an existing competitor. This can actually be a serious problem for entrepreneurial start-ups if the

imitator is an established company.

For example, Hugger Mugger Yoga Products, a Salt Lake City producer of yoga apparel and equipment

such as yoga mats for practitioners of the ancient exercise art, with sales of 75 lakh annually.

When founder Sara Chambers started the business in the mid-1980s, there was little competition. But

once yoga went into mainstream and became the subject of celebrity cover stories, other competitors

saw an opportunity to imitate.

Then Nike and Reebok jumped into the business with their own mats, clothes, and 232 props. Hugger

Mugger was a leading provider and had enjoyed 50 per cent annual growth. But even after introducing a

mass market line for stores such as Linens 'n' Things and hiring 50 independent sales representatives, its

growth rate has leveled-off.

3) Adaptive New Entry: Most new entrants use a strategy somewhere between "pure" imitation and

"pure" pioneering. That is, they offer a product or service that is somewhat new and sufficiently

different to create new value for customers and capture market share. Such firms are adaptive in the

sense that they are aware of marketplace conditions and conceive entry-strategies to capitalize on

current trends.

According to business creativity coach Tom Monahan, "Every new idea is merely a spin of an old idea.

Knowing that takes the pressure-off from thinking you have to be totally creative. You do not.

Sometimes it is one slight twist to an old idea that makes all the difference". Thus, an adaptive approach

does not involve "re-inventing the wheel", nor is it merely imitative either. It involves taking an existing

idea and adapting it to a particular situation. There are several pitfalls that might limit the success of an

adaptive new entrant:

These are:

i) The value proposition set forth by the new entrant firm must be perceived as unique. Unless potential

customers believe a new product or service does a superior job of meeting their needs, they will have

little motivation to try them out.

ii) There is nothing to prevent a close competitor from mimicking the new firm's adaptation as a way to

hold on to its customers.

iii) Once an adaptive entrant achieves initial success, the challenge is to keep the idea fresh. If the

attractive features of the new business wear-off or are copied, the entrepreneurial firm must find ways

to adapt and improve the product or service offering.



4) Combination Strategies: Strategic positioning has different implications for small firms and

entrepreneurial start-ups. For small firms, the issues they face in terms of their marketplace are often

confined to a geographical locale or a small class of products. For start-ups, a key issue is the scope of

their strategic efforts relative to those of their competitors. In determining a strategic position, both

types of firms must address fundamental issues of how to achieve a distinct competitive advantage that

will earn above average profits as well as how to create value for their customers in the marketplace.

One of the best ways for new ventures and small businesses to achieve success is by pursuing

combination strategies.

By combining the best features of low cost, differentiation, and focus strategies, young and small firms

can often achieve something that is truly distinctive. Entrepreneurial firms are often in a strong position

to offer a combination strategy, because they have the flexibility to approach situations uniquely. For

example, holding down expenses can be difficult for big firms because each layer of bureaucracy adds to

the cost of communicating and doing business. For nearly all small firms, one of the major dangers is

that a large firm with more resources will copy what they are doing. That is, well-established larger

competitors that observe the success of a new entrant's product or service will copy it and use their

market power to overwhelm the smaller firm. Although this happens often, the threat may be lessened

for firms that use combination strategies. Because of the flexibility and quick decision-making ability of

entrepreneurial firms, they can often enact their combination strategies in ways that the large firms

cannot copy. This makes the strategies much more sustainable. Perhaps more threatening than large

competitors for many entrepreneurial firms are other small firms that are close competitors. Because

they have similar structural features that help them to adjust quickly and be flexible in decision-making,

close competitors are often dangers to young and small firms. Here again, a carefully crafted and

executed combination strategy may be the best way for an entrepreneurial firm to thrive in a

competitive environment.

Q. Who are First Movers? (2 marks)

A first mover is a firm that takes an initial competitive action in order to build or defend—its competitive

advantages or to improve its market position. The first-mover concept has been influenced by the work

of the

Q. Explain the benefits of concentric diversification (8 marks)

Benefits of Concentric Diversification Several reasons may underlie a company's preference for

concentric diversification:

a) To Counteract Cyclical Trend: If the company in one industry is subject to cyclical fluctuations, it may

be necessary to diversify its business to smoothen its earnings flow.

b) Excess Cash Flow: Where the existing product line has produced a high degree of liquidity through

positive cash flows and opportunities exist with favorable rates of return, a company may consider

concentric diversification very attractive.



c) Saturation of Product Market: Another compelling reason for concentric diversification may be

saturation of demand in the industry or product market.

d) Managerial Expertise: Concentric diversification may also be prompted by the top management's

inclination to gain managerial expertise in a new field, or new technology, or entry into new markets, or

new products.

e) Combining the Value Chains: Firms can significantly lower costs and increase efficiencies by combining

the value chains of multiple businesses (such as manufacturing multiple products in the same

manufacturing plant; using the same logistics, warehousing and transportation, across multiple

products; and marketing and selling multiple products and services through the same sales force and

channels.

f) Leveraging Strong Brand Names: Firms could leverage their existing strong brand names across

multiple businesses to help achieve significant market share and customer loyalty. For example, the

Indian telecom major Bharti Televentures Ltd. new leverages their leading brand name "AirTel" (that

was originally there brand name for mobile services) across all its other telecom businesses, that include

fixed-line services, broadband and internet services and enterprise voice and data solutions.

g) Creating Stronger Capabilities: Firms can create stronger competitive capabilities by combining the

relative strengths of multiple businesses. For example, Hindustan Lever Limited leverages its strong

distribution network that was built for FMCG products to distribute their ice-cream brand "Kwality

Wall's". This combines the brand strength of Kwality Wall's with the distribution muscle of Hindustan

Lever Limited (HLL) to create a competitive capability difficult for competitors to imitate.

2) Unrelated Diversification (Conglomerate Diversification): When an organization adopts a strategy

which require taking up those activities which are unrelated to the existing business definition of one or

more of its businesses, either in terms of their respective customer groups, customer functions or

alternative technologies, it is called conglomerate diversification. There are several examples of Indian

companies, which have adopted a path of growth and expansion through conglomerate diversification.

The classic examples are of ITC, a cigarette company diversifying into the hotel industry.

Some other examples are those of the Essar Group (shipping, marine construction, oil support services,

and iron and steel); Shriram Fibers Ltd. (nylon industrial yarn, synthetic industrial fabrics, nylon tyre

cords, fluorochemicals, fluorocarbon refrigerant gases, ball and needle bearings, auto-electrical, hire-

purchase and leasing, and financial services); the Polar group (fans, marbles, and granite), and the UK

group (pressure cooker, chemicals, pharmaceuticals, hosiery, contraceptives, publishing etc.).

Features of Unrelated /Conglomerate Diversification: Unrelated diversification includes:

i) Merger or Acquisitions over Internal Development: The unrelated diversification strategies of

conglomerates are designed to acquire, hold and sell businesses in various industries without the

benefit or guide of an underlying distinctive competence. Unrelated, or conglomerate-based,

diversification is based entirely on acquiring and selling different parts of the firm to maximize corporate



profitability. When compared with related diversified firms, unrelated firms grow and contract primarily

through acquisitions and divestitures. These firms often rely on a series of acquisitions and divestitures

to keep corporate-level profitability high. Unrelated diversification presents little opportunity to grow by

developing new businesses internally. Senior management is not focused on identifying and extending a

distinctive competence that can be leveraged across businesses.

Attempting to Beat the Market:

These examples also point out some of the problems in pursuing an unrelated diversification strategy.

All of these companies thought they could make informed bets that they could purchase fast-growing,

highly profitable businesses for the long-term. However, senior management cannot always accurately

predict how each individual business is likely to perform in the future.

Also, senior management cannot effectively formulate the specific competitive strategies required for

each business and market. The economic motive of unrelated diversification is that the corporation

creates value to the extent that it is able to identify attractive acquisition or new business opportunities

faster than the market can. Trying to even out the business cycle swings across different industries

requires precise resource allocation and timing to ensure that the value acquired from new businesses

justifies their acquisition costs. This task is difficult to accomplish at best.

Q. What is Modernization Strategy? (8 marks)

An existing business unit may plan to grow through modernization of operations. Modernization

basically involves up gradation of technology to increase productivity, efficiency and product quality and

to reduce wastages and cost of production in the long-run. The worn-out and obsolete machines and

equipment are replaced by the modern machines and equipment to reap the benefits of latest

technology. Modernization will lead to increase in efficiency and reduction of wastages.

It will also increase the production capacity of the firm. Modernization plans can have the following

implications:

I) A firm may resort to modernization to maintain its position in the market. Thus, the purpose of

modernization would be stability in operations in the coming years.

2) Modernization may be pursued with full vigor to stimulate internal growth. Thus, it is used as an

internal growth strategy.

Advantages of Modernization

Benefits of modernization are as under:

I) Modernization increases the productivity and efficiency of the firm.

2) It makes available better products to the customers



3) Because of increased efficiency and reduced Wastages, the profitability of the firm goes up. Thus, the

owners of the business are also benefited.

4) The workers acquire advanced skills because of which their wages go up.

5) The competitive position of the firm in the long-run improves because of modernization.

Q Explain the Implications of Growth for the Firm (8 marks)

Because growth makes a firm bigger it begins to benefit from the advantages of size. The higher volume

increases production efficiency, makes the firm more attractive to suppliers, and therefore increases its

bargaining power. Size also enhances the legitimacy of the firm, firms that are larger are often perceived

by customers, financiers, and other stakeholders, as more stable aid prestigious.

Therefore the growing of a business can teach the entrepreneur more power to influence in terms of

performance. But as the firm grows, it changes. These changes introduce a number of managerial

challenges. These challenges arise from the following pressures:

I) Pressures on Existing Financial Resources: Growth has a large appetite for cash. Investing in growth

means that the firm's resources can become stretched. With financial resources highly stretched, the

firm is more vulnerable to unexpected expenses that could push the firm over the edge and into

bankruptcy. Resource slack is required to ensure against most environmental shocks and to foster

further innovation.

2) Pressure on Human Resources: Growth is also fueled by the work of employees. If employees are

spread too thin, by the pursuit of growth, then the firm will face problems of employee morale,

employee burn-out, and any increase in employee turnover.

These employee issues could also have a negative impact on the firm's corporate culture. For example,

an influx of a large number of new employees (necessitated by an increase in the number of tasks and to

replace those that leave) will likely dilute the corporate-culture, which is a concern, especially if the firm

relies on its corporate culture as a source of competitive advantage.

3) Management of Employees: Many entrepreneurs find that as the venture grows, they MOO to change

their management style, i.e., change the way the entrepreneur deals with employees. Management

decision-making that is the exclusive domain of the entrepreneur can be dangerous to the success of k

growing venture. This is sometimes difficult for the entrepreneur to realize since they have been so

involved in all important decisions since business was created. Growth is demanding of the

entrepreneur's time, but as the entrepreneur allocates time to growth it must be diverted from other

activities and this can cause problems.

The word "turnaround" has been gaining significance in the world of business in the context of

increasing phenomenon of business failure. Turnaround means a substantial and sustainable positive

change in the performance of a unit through determined efforts. To put it in simple words, it implies



producing a noticeable improvement in performance from down to up, from not good enough to better,

from unsatisfactory performance to acceptable, and from losing to achieving.

Q. Comment on the Causes or Conditions for Turnaround (12 marks)

1) Economy Recession

It negatively affects all the sections of economy. It leads to decrease in demand resulting in decrease in

sales and profitability.

2) Natural Calamity: Acts of God like flood, drought, earthquake, tsunami, etc., bring disasters. The

business units affected by natural calamity need special measures for revival.

3) Entry of Strong Competitor: When a strong competitor enters the market, it takes over big market

share thereby negatively affecting the existing business units. Sometimes entry of MNCs having reputed

foreign brands leads to even closure of some domestic business units, as MNCs have better technology,

more financial resources, better managerial expertise and have low cost of production.

4) Sudden Unfavorable Change in Government Policy: Sudden change in government policy may push

serious threats to business units. For example, ban on a particular product, liberal import policy,

imposition of heavy duty, tax on some products by government, etc., can lead a business unit to crisis.

5) Shortage of Raw Material: In a number of cases, the units are not able to achieve optimum capacity

due to shortage of raw materials. This results in disturbing the production schedule, causing losses to

the unit. This often happens in the case of units depending upon the supply of imported inputs.

Insufficient availability of transport facilities can also upset the timely availability of inputs.

6) Credit Squeeze: At present, most of the industrial units depend on the banks for their borrowings.

Once a unit starts making losses, then no bank is ready to give loan to such unit. It leads to shortage of

working capital and liquidity problems. According to Tiwari Committee, 24 per cent of the large sick

units were affected by shortage of working capital/liquidity constraints.

7) Poor Business Strategy: Business firms formulate strategies at four levels, i.e., corporate level,

business level, functional level, and operational level. If strategy formulation or implementation at any

level is ineffective then it leads the business to crisis.

8) Lack of Expertise in Management: Faulty managerial decisions can ruin a business. Poor vision, poor '

decision-making, wrong environmental analysis, ineffective control, etc., lead the business to failure.

9) Over-Optimistic Sales Projection: In case sales projection for future period are over-estimated then it

tends to over-production, accumulation of unsold stock, shortage of working capital, stoppage of

business cycle, blockage of funds, etc.

10) Frauds and Scams: Frauds and scams by employees or management ruin the business. These not

only negatively affect the profitability and solvency of the business but also shatter the faith of

shareholders, consumers, and public at large.



11) Excessive Debt Borden: Excessive dependence on borrowings rather than own funds increases the

fixed interest burden. In case a slow-down, the business unit finds it very difficult to pay interest. It

further leads to liquidity crisis.

12) High Operating Cost: Under-utilization of production capacity, over-investment in unproductive

assets, wasteful expenses on foreign tours and other luxuries of high officials, etc. increases operating

costs of business. High operating costs decrease the profit margin and also make it difficult for the

business unit to sell its product.

13) Over-Capitalization: Over-capitalization is one of the causes leading to sickness. Over-capitalization

means capital invested in the business owned or borrowed is more than the required capital. It

unnecessarily puts bidden in the forth of interest and dividend. It increases cost of production, affects

profitability, and leads to sickness.

14) Labor Problem: In some cases, acute labor problems have resulted in strikes, lock-out, and even

closure of industrial unit. These problems start with management over the issue of wages, bonus,

working conditions, etc. If these problems are not tackled in time, these problems can cause sickness.

15) Diversion of Resources: Diversion of resources to start new units or to acquire interest in other units,

without c4nsiderig the surplus funds and managerial capacities may land the unit in trouble

Q. Explain the Components of Turnaround Strategy (2 marks)

1) Managing the Turnaround: The enabling components to manage the turnaround's stabilization,

funding, re-capitalization, and fixing are turnaround leadership, stakeholder management, and

turnaround project management.

2) Stabilizing the Business: The momentum of an under-performing or distressed business is down. Such

a business needs to be stabilized to ensure the short-term future of the business through cash

management. cash generation and cash conservation, demonstrating control, re-introducing

predictability, and ensuring legal and fiduciary compliance.

3) Funding and Re-Capitalization: An under-performing or distressed business invariable needs to be

funded and re-capitalized to ensure that it can be fixed.

4) Fixing the Distressed Business: Finally, the under-performing or distressed business needs to be fixed

in strategic, organizational and operational terms.

Q. Explain the Methods of Turnaround (12 marks)

Thompson suggests that the following methods of turnaround might be considered:

1) Changing Prices: The first of these, changing prices, can involve either raising or lowering. A price rise

will be difficult unless the customers can be convinced that they are getting more for their money,

particularly difficult for the organization to justify if it was in crisis due to intense competition. Lowering

prices will, of course, reduce revenue which, potentially, may make the short-term situation even worse



than it already was. However, this may attract new customers who are tempted to swap. It might also

make the situation of competitors more precarious. The danger is that a 'price war' could be started in

which only those who can sustain losses over a long period survive.

2) Re-Focusing: A better way to create turnaround is to engage in re-focusing. This will involve

concentrating on those customers who have the greatest willingness to consume and will be likely to

remain loyal if, the price was raised in the longer-term to pay for improvement or increasing the

features of the product and/or service. This approach is similar to developing new products. Care would

be needed to ensure that, in managing this process, loyal customers continue to purchase and that the

new product, as well as attracting new business, maintains the existing base.

3) New Product Development: New Product Development (NPD) is the term used to describe the

complete process of bringing a new product or service to market. Rationalizing the Product Line: It

would be carried-out in a situation where there is a wide variety of customers and, it is believed, the

complexity of attempting to serve all there is a wide variety of customers and, it is believed, the

complexity of attempting to serve all of them is counterproductive (and too costly).

4) Greater Concentration on Selling and Advertising: The fifth on the list is something that all

organizations will do as a master of course. The real difficulty is in knowing how much to spend in order

to attract additional custom. Advertising can be extremely effective if is ensures that more products

and/or services are sold or consumed. However, knowing how to make this connection is notoriously

fraught and any expenditure might have been better targeted on a promotion to specific customers

(marketing). Rejuvenating Mature Business: Finally, in considering how to deal with a mature business

(one that is believed to be at a stage where improvement and greater success are almost impossible),

managers may need to be willing to consider radical steps.

Q Explain the Stages in Turnaround (8 marks)

Turnaround has the following stages:

Management Change: Consultants may be called-in to manage the turnaround of the firm.

Situation Analysis: A situation analysis is performed to evaluate the prospects of survival.

Assuming the firm is worth turning around, depending on the root causes of the distress one or more of

the following turnaround strategies may be selected and presented to the board:

i) Change of top management,

ii) Divestment of certain assets,

iii) Reformulation of strategy,

iv) Revenue increase,

v) Cost reduction, and



vi) Strategic acquisitions.

3) Emergency Action Plan: Achieve positive cash flow as soon as possible by eliminating equipment,

reducing staff, etc.

4) Business Re-Structuring: Once positive cash flow is achieved, the strategic plan is implemented

improving continuing operations, adjusting the product mix, and repositioning products. The

management team begins to focus on achieving sustained profitability.

5) Return to Normalcy: The company becomes profitable and the changes are internalized. Employees i*

gain confidence in the firm and emphasis is placed on growing the re-structured business while

Maintaining'. a strong balance sheet.

Q How to Manage a Turnaround? (8 marks)

1) Changing the Leadership: A change in leadership ensures that those techniques, which resulted in

company's failure, are not used The new leader has to motivate employees, listen to their views, and

delegate powers.

2) Re-Defining Strategic Focus: This involves re-evaluating the company's business ones to change and

which to retain.

3) Selling or Divesting Unnecessary Assets: Sometimes, although the assets are profitable, they must be

liquidated to contribute to the strategic focus.

4) Improving Profitability: To do this, the company has to take drastic steps like:

i) Assigning profit responsibility to individual divisions.

ii) Tightening finance controls and reducing unnecessary overheads.

iii) Laying-off workers wherever necessary.

iv) Investing in labor saving equipment.

v) Building a new inventory management system and manage debt efficiently through negotiating loti

term loans.

5) Making Careful Acquisitions: The Company must be careful while making acquisitions. It should be in

an area related to its core business enabling the company to quickly re-build or replace its weak arm of

business.



MODULE 9



MBA SEM III

CORPORATE VENTURING

Introduction

The term corporate venturing' covers a range of mutually beneficial relationships between companies.

The relationships range from those between companies within the same group, through those between

unrelated companies, to collective investment by companies in other companies through a fund. The

companies involved may be of any size, but such relationships are commonly formed between a larger

company and a smaller independent one, usually in a related line of business. The larger company may

invest in the smaller company, and so provide an alternative or supplementary source of finance. It may,

instead or as well as:

1) Make available particular skills or knowledge, perhaps in technical or management areas, which a

smaller company would otherwise not have access to, and

2) Provide access to established marketing and distribution channels, or complementary technologies.

Corporate venturing is a practice of a large company, taking a minority equity position in a smaller

company in a related field.

Q Explain corporate venturing (8 marks)

Corporate venturing is the undertaking of an investment initiative by a commercial organization to gain

experience of a new technology or an unfamiliar market. It is an alternative to traditional venture-

capital, or even to angel capital, is to accept funding from a large corporate.

Many businesses have large corporate venturing arms, the aim of which is two-fold:

1) These companies invest in promising new ventures in order to exploit their ideas, to obtain the

benefit of their new technologies and gain an edge on the market.

2) Corporate venturing can prove profitable for these companies, in the same way that it provides a

good return for professional venture capitalists. According to Von Hippel, "Corporate venturing is an

activity which seeks to generate new business for the corporation in which it resides through the

establishment of external or internal corporate venture".

According to Zahra, "Corporate venturing means that the firm will enter new business by expanding

operations in existing or new market". According to Block and MacMillan, "Corporate venturing is an



entrepreneurial activity within an existing company that involves an activity new to the organization and

will be managed separately at some time during its life". According to Ellis and Taylor, "Corporate

venturing was postulated to pursue a strategy of unrelatedness to present activities, to adopt the

structure of an independent unit and to involve a process of assembling and configuring novel

resources".

Accepting investment from a corporate venturer can provide useful financial support, and give access to

a wide range of useful business contacts. If the venturer has a portfolio of investments, there might also

be synergies between the different businesses. If it is in a related industry, there can be a lot of spin-off

benefits. And, as with high profile venture capital investors, having a significant investor can add to a

company's profile in the business and investment communities.

Q. Explain the types of Venturing (8 marks)

1) Independent Entrepreneurship (Entrepreneurship): Independent entrepreneurship is the process

whereby an individual or group of individuals, acting independently of any association with an existing

organization, creates a new organization.

2) Corporate Entrepreneurship (Intrapreneurship): Corporate entrepreneurship is the process whereby

an individual or a group of individuals, in association with an existing organization, create a new

organization or instigate renewal or innovation within that organization.

Within the realm of existing organizations, entrepreneurship encompasses three types of phenomenon

that may or may not be interrelated:

i) The birth of new businesses within

ii) The transformation of existing or which they are built; and

iii) Innovation.

While the first has been referred to as internal corporate venturing, corporate new venture division,

internal venturing, and so on, the second has been called strategic renewal, strategic change, revival,

transformation, strategic departure, re-organization, re-definition, organizational renewal and so on the

third is new product development, R&D firm etc.

i) Strategic Renewal: Strategic renewal refers to the corporate entrepreneurial efforts that result in

significant changes to an organization's business or corporate level strategy or structure. These changes

alter pre-existing relationships within the organization or between the organization and its external

environment and in most cases will involve some sort of innovation. Renewal activities reside within an

existing organization and are not treated as new businesses by the organization.

ii) Innovation: Innovation refers to the corporate entrepreneurial effort that leads to the development

of new product or introducing some innovation. They have a well-developed research and development

department to carry out the innovation. The earn money through the innovation.



iii) Corporate Venturing: Corporate venturing refers to corporate entrepreneurial efforts that lead to the

creation of new business organizations within the corporate organization. They may follow from or lead

to innovations that exploit new markets, or new product offerings, or both. These venturing efforts may

or may not lead to the formation of new organizational units that are distinct from existing

organizational units in a structural sense (for example, a new division). Thus, both strategic renewal and

corporate venturing suggest changes in either the strategy or structure of an existing corporation, which

may involve innovation. The principle difference between the two is that corporate venturing involves

the creation of new businesses whereas strategic renewal leads to the re-configuration of existing

businesses within a corporate setting.

a) External Corporate Venturing: It refers to corporate venturing activities that result in the creation of

semi-autonomous or autonomous organizational entities that reside outside the existing organizational

domain.

Some examples of external corporate ventures are those formed as a result of joint ventures, spin-offs,

and venture capital initiatives. Although these may vary in their degree of separateness from the parent

company, their common feature is that they reside outside the domain or boundaries of the existing

organization.

According to Sharma and Chrisman, "External corporate venturing refers to corporate venturing

activities that result in the creation of semi-autonomous or autonomous organizational units that reside

outside the organizational domain". According to Keil, "External corporate venturing as a new business

creation activity of established organizations, in which the corporation leverages external partners in the

process of creating a venture or developing an internal venture". They argue that external venturing

enables the development of new capabilities and the adaptation and recombination of existing

capabilities. By sponsoring and investing in start-up companies, either with financial assets or other

resources, the main aim of the organization is to gain knowledge, intellectual property, and access to

innovation for future sustainable growth. For example, joint ventures, investments in start-up

companies, spin-outs, and venture capital activities.

b) Internal Corporate Venturing: In contrast to external venturing, internal corporate venturing aims to

create teams or units internally. Most developer says that internal corporate venturing is actually

corporate venturing. So both terms are used interchangeably. According to Sharma and Chrisman,

"Internal corporate venturing activities result in the creation of organizational entities that reside within

an existing organizational domain". Internal venturing activities require the commitment of

organizational resources and the commitment of the management. The management enables internal

and external communication to take place and stimulates interaction between resources, technologies,

and entrepreneurially motivated employees.

Q. Explain the Necessity of Corporate Venturing (8 marks)

Corporate venturing is a new concept. The necessity of corporate venturing arises due to following

reasons:



1) To Exploit Under-Utilized Resources: Build a new business around internal capabilities that remain

idle for prolonged periods; the new business becomes the vehicle for outsourcing those capabilities to

others.

2) To Extract Further Value from Existing Resources: Build a new business around corporate knowledge,

capabilities, or other resources that have value in product-market arenas not currently being served by

the firm.

3) To Introduce Competitive Pressure onto Internal Suppliers: Build a new business that becomes an

alternative supplier to existing internal supply sources.

4) To Integrate Different Innovation Approaches: Ideally, the corporate venture office manages a

portfolio of activities that includes both incubation of new businesses and investments in existing but

still maturing start-up enterprises. Corporate venture offices pursue both, depending on opportunities

and the parent company's strategic needs.

5) To Spread the Risk and Cost of Product Development: Build a new business whose target market

promises to be larger than that for which the core product to be offered by the business was initially

developed.

6) To Divest Non-Core Activities: Build a new business to pursue business opportunities that the firm is

in a favorable position to exploit.

7) To Learn about the Process of Venturing: Build a new business as a laboratory in which the innovation

process can be studied.

8) To Develop New Competencies: Build a new business as a basis for acquiring new knowledge and

skills pertaining to technologies, products, or markets of potential strategic importance. 9) To Develop

Managers: Build a new business as a training ground for the development of individuals with general

management potential.

10) To Seize Technology Opportunities: Build a new business to seize or experience the new technology.

The successful corporate venture will exploit new technology so that it becomes an important force for

companies whose core business used technology only peripherally.

Q. Explain the Benefits of Corporate Venturing (8 marks)

Corporate venturing has the following benefits:

1) Discovery of unmet customer needs and unserved emerging markets,

2) Potentially high return on investment,

3) Supplements to internal research and product/service development investments,

4) Improved efficiency of the value chain management, in particular supply chain and customer

relationships,



5) Development of new business relationships,

6) Preparing potential candidates for strategic alliance or acquisition,

7) Reducing the risk of missing a new turn in technological development,

8) Preventing competitors from acquiring a breakthrough technology,

9) Motivating internal talents to outperform outside ventures.

Q. Explain the Various Misconceptions about Corporate ventures. (12 marks)

Corporate venturing is a strategic necessity in a technology driven economy but many company are

misinformed about what corporate venturing is.

Hence they never seriously address this issue. The various misconceptions regarding corporate

venturing can be broadly divided into 3 categories:

1) Many Believe Venturing is Irrelevant to their Business: It is something strictly for technology

companies, or only for companies introducing disruptive technologies. Its strategic benefits are small;

and the risks are large, as demonstrated by the Internet bubble.

The most common fears are:

i) Ventures are only Applicable to Disruptive Technologies: In the minds of many corporate managers,

the words "corporate venturing" conjure-up the notion of edge of the envelope technologies and

businesses that will take their company out of the box they are in and into a brave new world. But a

company that restricts its venturing efforts to disruptive businesses of innovations is actually setting its

venture program up to carry a heavy burden with reduced prospects for success. Disruptive businesses

and innovations represent a break from a company's ordinary way of doing business.

They are disruptive because they are:

a) Drawing the company well away from its established customer base, skills, or methods of operation;

b) Requiring unique skills to create, produce or sell;

c) Frequently being characterized by the potential to cannibalize a company's own revenue base; and

d) Addressing smaller or less profitable markets. A company that has a portfolio full of discontinuous

projects may suddenly find itself with nothing to show for it other than considerable foregone

investment and reduced commitment to venture development. A balanced corporate venture

investment program, encompassing both discontinuous and sustaining businesses and technologies, will

be far more likely to provide a constant renewal process that is able to span downturns as well as

upturns.

ii) Venturing is not for Mature or Brick and Mortar Companies: The reasoning goes that technology

companies have lower barriers to entry and rapid product cycles so therefore they must innovate.



Whereas mature brick and mortar companies have higher barriers to entry and longer product cycles

and therefore do not need to innovate, at least as fast as there technology counterparts. These

corporate executives have no end of excuses not to launch any kind of venture i.e. sustaining or

disruptive. The key to renewing the lifecycle of a company is willingness, an enthusiasm for adapting to

the realities of a new economic era. That applies whether the company is brick-and-mortar,

manufacturing, or low-tech. It applies whether the company is pursuing new markets or existing ones.

2) Many Believe Venturing is too Expensive: R&D, Corporate Development, and Business Development

can achieve the same results with less expense and risk. New ventures can only capture value through

IPOs which themselves depend upon bull markets.

The most common fears are:

i) Value is Difficult to Measure and Tough to Capture: Most analysts on Wall Street do not place any

value on corporate venturing programs. Instead, they treat it like a poorly run R&D department

essentially a cost center that produces some immeasurable option-value through unknown innovation.

Of course this perspective then becomes the perspective of management. This perspective stems from

their need to estimate future cash flows accurately and by fully discounting any expected value, they run

no risk of a negative surprise. Positive surprises are okay, especially when it can be rationalized as a one-

time event. In addition, it is often difficult for the corporate venture group to unwind their investment

to maximize return since often they hold large stakes. This misses the rationale for corporate venturing

i.e. creating strategic value.

iii) Venturing is Only Affordable in a Bull Market: The list of argument against venturing gathers steam

during an economic downturn. But the strategy cannot be made to fit that neatly into the business

cycle. For example, One cannot just do it venture funds are typically set-up with minimum investment

periods of five years.

3) Many Believe Venturing is too Risky: They tried it once and it did not work and new Ventures as a

category simply fail too often.

Q. Which are the ingredients of New Venture Creation Process (2 marks)

Corporate venturing is the approach of creating the new venture within an existing organization to seize

the new opportunities or to utilize the existing resource or to expand the business. Creating a new

venture require some sequential stages which is followed over the time.

1) Alpha Stage/Offering

2) Beta Stage/Launch

3) Venture Business Organization

4) Market Offering



Q: Elaborate Venture Vision (8 marks)

Formalizing the Vision for The Venture This is the first stage in creating the new venture. It deal with

how raw ideas are shaped to become the foundation of a new venture, how a corporation makes its

influence felt on a new venture.

A corporate vision is the design of everything needed for the business to work, combined with the

experience to know it can really work that way in the real world. It is about the whole business, not just

the product, or sales or marketing but all strategies.

A vision statement is a picture of the company in the future but it's so much more than that. The vision

statement is the inspiration, the framework for all strategic planning. So a vision is actually a very

complex model that can be run in someone's head, which takes into account all the major business

disciplines, and thousands of real world practical factors that are only available through experience. The

objectives of this stage are simple, put a plan together that outlines the product and why it is different,

the market and why it is attractive, the team and why they are qualified, and a high-level business

model and how much money is needed.

The key capabilities at this stage include:

1) The ability to define the value proposition from the customer's perspective. This means having

intimate relationships with potential customers to get the inside view not "guesstimating" from the

outside.

2) The ability to differentiate the product from the competition's, current and future. Taking a

customer's perspective is, once again, important. Venture teams may assume they do not really have

competition because they have a superior technology in their product. However, a customer is typically

more interested in solving a problem at the lowest cost. Technological elegance is meaningless.

3) The ability to define a realistic business model. This requires the understanding of: the cost of

developing and building a product; the cost of selling the product, and the price for which the product

can be sold.

4) The ability to simultaneously think big, but start small. This requires visionary thinking to get the long

view, but micro thinking to get the starting point.

5) The ability to know customers objections to adopting the offering. Again, it means having intimate

relationships with potential customers to get the inside view.

Q. State the Challenges in Venture Vision (2 marks)

1) Quantifying the market problem and the corresponding value proposition,

2) Differentiating the offering,

3) Defending against the competition,



4) Defining a realistic business model,

5) Thinking big and starting small, and

6) Knowing adoption barriers.

Q. Explain Validating the Venture Concept (8 marks)

Venture vision is a creative idea for establishing the new venture within existing organization which runs

in some one mind. So there is a need to validate the concept For this purpose considers the following

points:

1) Gets good experience managing people in small companies and some in larger Ones? Venturer needs

market knowledge and experience, project management experience, people and management

experience and ideally some sales and marketing experience too. They cannot do it all and will need to

hire or bring in partners to complement their skills but the better rounded their skills the better the

chance of success.

2) Decide on a core idea, technology or need as a starting point to iterate from that solves a big problem

today. It must be 3 to 10 times better or cheaper than alternative solutions if one needs to attract

capital investment early on.

3) Develop Market Research (probably using a consultant) which answers the questions such as how big

is the potential market? Who specifically will buy the product in great detail which includes the exact

person (decision maker), company type or list, vertical market(s) etc.? Who is solving this problem a

today and find everything one can about how they do it?

4) Develop Marketing and Messaging Communications Pyramid and the documents it specifies in the top

down order until one get to "business plan" which at this stage should not be written any detail until

they have a complete management team and some market validation information.

5) Develop a Competitive Landscape Map.

6) Do a risk assessment landscape map of your market entry or launch strategy.

7) Complete a business plan and vision to develop a financing strategy that plans all needed financings

to reach the target or more in revenue (as appropriate). At this point venture may want to being

recruiting a virtual team that is not on a full-time salary but passionate about "the venture and willing to

join if and when financing comes together and risk is down some. Entrepreneur will also likely need to

pay some consultants who make their living doing this and can't eat stock options in small amounts.

Q. Explain the Important Decisions (Stages) in Venture Vision (12 marks)

In this stage the venturer need to take a decision regarding the various aspect which validated the

venture vision. Some of them are as follows:



1) Business Plan: The first important decision in venture vision is to prepare a business plan. It is

believed that from the earliest stages of a venture, managers must commit themselves to a written

business plan. The definition of a business plan is different in a new venture setting from normal

business plan. Yet in many ways it becomes more crucial to a fledgling venture than to a traditional

corporate initiative. The business plan constantly subject to revision becomes the organizing tool of the

entire venture team; the place where objectives are listed and shifts in strategy are noted and

announced.

The following questions must be asked by the venture team about business plan at this stage include:

i) Do there has business plan that summarizes (in ten pages) the vision, mission, and unique platform,

the first product or service, and a relative timeframe for delivery?

ii) Do there has a polished "elevator pitch" and "power presentation" that the entire senior team has

mastered? Venture business plans differ from a traditional corporate business plan in many important

the dimensions. The business plan venture needs at this first stage is much more flexible more like the

"plan for the plan". At later stages, as the team gathers more information, a more detailed and

structured plan will emerge. But during the first weeks of the venture, the venture team needs, as a

rallying point, a unifying, written document that outlines the venture and its possibilities. It should be

brief and to the point as it will be continually refined, even during this stage. It is really a kind of

"missionary" sales doctrine, describing a compelling, initial vision and competitive differentiation for the

venture that is a starting point for attracting "believers" and winning support. It should crisply

communicate the "big idea". And it should focus on the logic of the path to implementation and launch,

often within the next twelve months. At this stage business plan have eight essential elements:

Q. What are the "Must-Haves" of Vision Stage (8 marks)

Essential Elements of Vision Stage

1) Simple definition of the venture based on its initial platform, spelling-out what makes it unique;

essential elements that will have to be created, purchased, or partnered for; and a map demonstrating

how the venture links to the parent in terms of strategic advantages and synergies.

2) Initial one-on-one interviews with prospective customers to determine market segmentation.

3) Outline of service/product possibilities, with prospective customers and potential value propositions.

4) First draft of a platform/service delivery approach, based on customer analysis.

5) Outline of development plan, listing requirements, schedules, and incremental milestones.

6) First venture business plan (approximately ten-page placeholder, to be refined and expanded)

delineating prospective requirements and benefits to be delivered to the parent.

7) Draft of how the product or service will look and feel to the customer. For a web-based business this

might include the basic transaction flow and examples of how the customer interface might look.



8) Initial team: venture manager/leader; business development and web development heads (virtual

team members, sub-contractors or otherwise); venture executive officer or highly placed corporate

sponsor; beginnings of Board of Directors and/or Advisory Board.

9) "Anger" funding from parent, based on itemization of resources required (especially enough

resources to get through the next stage i.e. the alpha offering).

10) Governance in place to guide venture portfolio in general and this venture in particular.

Q. Which are the "Red Flags" of Vision Stage? (8 marks)

Factors that Demand Immediate Action

1) Point product, product extension, or feature set masquerading as a platform, or enabling technology

masquerading as an application.

2) No in-depth discussions with representative customers to determine whole context, needs, wants,

tendencies, buying motivations (such as senior-level segment-of-one interviewing).

3) A venture manager with project leader skills rather than venture CEO skills.

4) A venture team that is incomplete and inexperienced (especially in marketing, partnering, web

development; and new venturing in general).

5) A project description masquerading as a venture plan (marked by a view limited to product/service

definition rather than the integrated, cross-functional perspectives required to run a full business).

6) No "mapping" to the parent (i.e., no case made for strategic importance to the parent, no view to

downstream value contributed, no understanding of immediate resources from the parent that could

provide "unfair advantage" to the developing venture; no organized view of dependencies).

7) No commitment from the parent (no financial commitment, no sponsorship or ownership, ad hoc and

unpredictable governance, no commitment to future initiatives pending results of first and only

venture).

Q. What is alpha stage? (12 marks)

The Alpha Stage:

This stage deal how a corporate venture moves from the venture vision stage to the creation of an alpha

version of the platform and first product or service. In effect, the venture uses this stage to create an

alpha version of the whole business.

This alpha version should typify how the venture will deliver the customer solution from end-to-end.

Throughout this stage, the venture's marketing team has one overriding purpose i.e. To better

understand the Market and the customers who will pay for this product or service. Understanding the

customer also helps to refine the selection of alliances critical to product delivery.



As implementation moves forward in this "build" phase, the team constructs the first real business plan

and refines it incrementally, as they learn more.

If in the vision stage the venture team learned whether the targeted customers actually needed

something, in this second stage they learn how customers will want to use that something. The second

stage of building a venture requires detailed research on potential customers and segments,

establishing performance standards that the product or service will try to meet, and selecting the

features that distinguish it In addition, the venture team must now move to complete the partnering

strategy and aggressively begin filling in the core team.

Objectives of Alpha Stage

The objectives of this stage are reasonably straightforward:

1) Build the alpha version of the platform and product/service.

2) See how it works.

3) Factor in changes and refinements to the basic specifications.

4) Understand and resolve implications for the venture's positioning, business model, value

propositions, as well as the effects on functional strategies and plans of the rest of the venture's

departments.

Key Capabilities of Alpha Stage

The process, by which the venture team achieves these goals, is complex, however. They need to

demonstrate five key capabilities at this stage include:

1) The marketing team's ability to gather and correctly interpret the nuances of customer behavior for

strategic market planning.

2) The development team's ability to build-out the first alpha and establish a process for testing and

incrementally refining its specifications.

3) The ability to integrate the marketing team's increasing understanding of target customers and

segments with the development team's platform and product specification process and build-out.

4) The ability to quickly understand the implications of the specific alpha product performance to the

venture's business plan and path forward; the ability to use this output as the basis for strategic

refinements and contingency planning as needed across the venture.

Challenges in Alpha Stage

1) Convergence of planning and building,

2) First "real" implementation of platform and product/service,



3) First customer set validation and prioritization of next segments for expansion,

4) Schedule and funding pressure, and

5) Corporate antibodies.

Q. How to Build the Prototype of the Business (2 marks)

One of the essential early steps in the inventing process is creating a prototype which is a three-

dimensional version of the vision. Prototypes are working models of entrepreneurial ideas for new

products.

A prototype is defined as an original model on which something is patterned. An entrepreneur armed

with a good prototype able to show their vision to potential investors and licensees how the proposed

product will work without having to rely exclusively on diagrams and their powers of description.

Creating a prototype can also be one of the most funs and rewarding steps because developing a

prototype gives the opportunity to really tap the creativity, using those skills that inspired the invention

idea in the first place. Through prototyping the idea is transformed into something tangible and real.

Making a prototype is one of the most crucial steps in creating and marketing an invention. A prototype

allows testing how an invention works and marketing it to potential investors. It will also help to work-

out any glitches in the design. So, what exactly should a prototype look like?

First, it depends on the idea. Second, it depends on the budget and goals. If possible, it is great to start

with a handmade prototype, no matter how rudimentary.

Q. Explain Types of Prototypes (8 marks)

There are three major types of prototype creation, each of which can be used by the enterprising

entrepreneur in securing financing and/or a license.

These are as follows:

1) Breadboard: This is basically a working model of the idea, intended to serve the basic function of

showing how the product will work, with less concern for aesthetics. "The breadboard does not have to

look good or even work well", it simply proves the idea can be reduced to practice. "A breadboard" is

used in the early stages of product development to demonstrate functionality and communicate the

idea to potential model makers or manufacturers so they can create a finished product for sale.

2) Presentation Prototype: This type of prototype is a representation of the product, as it will be

manufactured. Often used for promotional purposes, it should be able to demonstrate what the product

can do, but it is not necessarily an exact copy of the final product. In building the model considers these

issues: the item's sale price, materials, manufacturing costs, marketing details, safety factors, how it will

be sold and distributed, and the profit margin.



3) Pre-Production Prototype: This type of prototype is for all practical purposes the final version of the

product. It should be just like the finished product in every way, from how it is manufactured to its

appearance, packaging, and instructions. This prototype is typically expensive to produce and far more

expensive to make than the actual unit cost once the product is in full production but the added cost is

often well-worth it. It is most valuable because it enables inventors and producers to go over every

aspect of the product in fine detail, which can head-off potential trouble spots prior to product launch.

Q. What things are to be considered in Creating a Prototype? (8 marks)

Prospective entrepreneurs with a new idea should make sure that they consider the following when

putting together a prototype:

1) Adequately research the requirements of the product prototype.

Ed mark recommended that entrepreneurs follow these basic steps:

i) Write down all the materials, supplies, and tools that might be needed in creating the prototype;

ii) Identify and order the various steps necessary to assemble the prototype;

iii) Identify which parts can be easily purchased and/or found around the home, and which parts will

need to be custom made.

2) Make sure the prototype is well-constructed. Prototypes must be well-made because often they take

quite a beating at the hands of executives.

3) Do not shirk on presentation, even at the prototype stage.

4) Recognize that complex product ideas may require outside assistance from professional prototype

makers. Universities, engineering schools, local inventor organizations, and invention marketing

companies are all potential sources of information on finding a good person to help to make the

prototype. But before hiring a prototype maker, entrepreneurs should make certain that they can meet

the expectations.

5) Consider making multiple submissions to potential licensees. Some inventors send prototypes to

several manufacturers at the same time.

Q. How to make Prototype? (8 marks)

Developing a prototype is not an easy work. Following steps can be used for developing the prototype:

1) Make detailed drawings of the invention. They should be as detailed as possible and show all the

working parts of the invention. One can use paper and pencil, but Computer-Aided Design (CAD)

program get a more precise drawing.



2) Build a simple model using whatever materials are available. One can use cheap materials that are

easy to work with, such as Styrofoam, balsa wood, cardboard, glue, pins, and string. The model should

show the basic shape and major parts of the prototype in approximate scale.

3) Look at the model. Does it look workable? Is there any obvious problems one need to work-out

before making it into a working prototype?

4) Research the various options for building the prototype. The cheapest option is to build it yourself.

Uncomplicated models can be built-out of wood or other materials. For many inventors, however, rapid

prototyping is the best option. Rapid prototyping companies can build any shape out of polymers (a type

of plastic) in a matter of hours.

5) Make or build the prototype. If you opt to do it yourself, you will want to build it out of durable,

inexpensive, and easy-to-work-with materials. Wood is an extremely popular choice, because it fulfills all

of these requirements.

6) Make it look nice. Sand and paint the prototype and make sure that any joints or gears turn smoothly.

The prototype used for marketing to the companies, so appearance is as important as functionality.

Q: Explain the Advantages of Prototyping (8 marks)

1) May provide the proof of concept necessary to attract funding.

2) Early visibility of the prototype gives users an idea of what the final system looks like.

3) Encourages active participation among users and producer.

4) Enables a higher output for user.

5) It enables to test and refine the functionality of the design.

6) It will encourage others to take you more seriously.

7) Cost-effective (Development costs reduced).

8) Increases system development speed.

9) It will help the inventor to describe their product more effectively.

10) Assists to identify any problems with the efficacy of earlier design, requirements analysis, and coding

activities.

11) Helps to refine the potential risks associated with the delivery of the system being developed.

12) Various aspects can be tested and quicker feedback can be got from the user.

13) Helps to deliver the product in quality easily.



14) User interaction available during development cycle of prototype.

Q. Disadvantages of Prototyping (2 marks)

1) Producer might produce a system inadequate for overall organization needs.

2) User can get too involved whereas the program cannot be to a high standard.

3) Structure of system can be damaged since many changes could be made.

4) Producer might get too attached to it (might cause legal involvement).

5) Not suitable for large applications.

6) Over long periods, can cause loss in consumer interest and subsequent cancellation due to a lack of a

market (for commercial products).

Q Explain The Beta Launch (8 marks)

Testing the Waters

The alpha prototype stands as the first real version of the product while the beta is the full working

version an entrepreneur intend to eventually put on the market. While an alpha prototype may be fully

functional, the beta has to represent the product in its final state. The beta often goes into some kind of

limited distribution, either by showing it out to a focus group, handing it out to random consumers,

giving it to the friends, or actually selling it on the Web or at a select store. Entrepreneur wants the beta

to generate feedback. They want feedback on how useful it is, how easy it is to use, and how breakable

it is. They want to know everything that's wrong with the product and, even more importantly,

everything people do not like about the product. It is easier to fix problems at this stage than when they

have thousands of items sitting on store shelves. There are no rules for beta testing. A beta test could

last a couple weeks, or could go on for almost a year. It depends on how complex the product is. In fact,

some products seem never to leave the beta stage. And it is very common for one beta test to be

followed by second or even third after the first sets of problems have been fixed. While there are really

no rules, beta testing usually follows a standard process:

1) Formulating the beta test plan designed for only those features that are actually present in the beta

product.

2) Recruiting testers and having them sign various agreements.

3) Distributing the beta product to the testers.

4) Following-up with the testers on a regular basis to ensure they are using the product. 5) Generating

regular feedback from the testers.

6) Having testers fill out a final survey at the end.



7) Analyzing the results and improving the product based on those results. Entrepreneur can find beta

testers in many ways. They can solicit beta testers through direct approach, or online survey site or

classifieds or other ways. They can ask their friends.

Or they can give the product a way for free on the website.

No matter how they get beta testers, they should follow two rules:

1) They should be very similar to the consumers who are eventually going to buy the product. If they

have a great dish washing product, makes sure it gets into the hands of people who wash dishes.

2) They should sign some sort of agreement with them. This agreement should include non-disclosure,

limited liability and feedback requirements.

What kind of feedback do they need from their testers?

What should be the regular feedback instrument (Web, telephone interview, e-mail) be soliciting? What

should the final survey focus on?

They consider the following issues:

1) Function: Does the product actually function as it should?

2) Use: What uses do the testers put the product to? How often do they use it?

3) Quality: Does the product break? Where are the bugs or problems?

4) Usability: How easy is the product to use?

5) Aesthetics: Do the users like the product? Do they like the way it looks? Does the product "please"

the customers?

Objectives of Beta Stage

1) To test and refine the product/service.

2) To test rest of the venture's programs.

3) To gain early market acceptance.

4) To gain customers testimonials from a beta product.

5) To use beta stage results to secure funding to do a full market launch.

Q. Explain Selecting the Beta Testing Group (8 marks)

In an ideal world, the population of the beta group would be an exact (much smaller) reflection of the

marker into which the product will be launched. Each segment identified in the initial stages of research



would exist in the same proportion it exists in the overall marketplace, with the smallest segment large

enough to provide statistically significant results.

Method to Reduce the Risk of Failure Before launching the new venture or product, entrepreneur uses

following method to reduce the risk of failure:

1) Market Acceptance: Sometimes the best products flop. Beta testing and surveys tell that how

interested the consumer public is-in the product. The more feedback they get, the less risky the venture

becomes.

2) Surveys: Entrepreneur should do surveys before they launch (concept testing, beta testing) and after

that they tell what's missing or wrong about the product.

3) Capital: they need enough money to stay in business. Period, do not count on money flooding in after

they launch the product.

4) Personal Salary: They still have to pay themselves so they can pay the rent and buy food. Many

entrepreneurs pour too much money into capitalizing their business and go out of business because

they cannot feed themselves.

5) Financial Planning: Develop a financial plan regarding the product. 6) Leadership: Entrepreneur has to

be everything at the beginning. As the product succeeds, they need to develop a great team. That is

hard to do when they are used to doing everything.

Q. Explain the Methodology for Testing (8 marks)

Methodologies for testing new product acceptance also deserve special attention because they have

special merit for testing new venture ideas. It consists of following:

1) Concept Testing: Concept testing may occur early in the new product or venture planning process

before the feature concept has been completely developed. Potential customers are asked to evaluate a

product or venture concept description rather than the actual product or venture. In an interview,

respondents are given a pictorial and verbal description of the product (venture) and asked to visualize

their actual use and indicate their likelihood of purchase.

2) Product Use Testing: Product use testing involves having respondents actually use a new product

(venture) prior to being interviewed. Depending on the nature of the product, the respondents may use

it for a few minutes, or, more likely, over several days in their homes. Product use tests are less abstract

than concept tests and contribute to higher test reliability. Product use testing is not possible, however,

if product or venture prototypes are too expensive' or too time-consuming to produce in advance of full-

scale marketing. The use of this approach for new ventures requires that the venture be structured

around a site—product or service (or a small number) rather than a wide assortment of merchandise.

3) Market Testing: Market testing, is the most expensive and complex approach, but also the most

realistic for potential customers, Market testing involves presuming the full marketing strategy to



customers (Products, prices, advertising, distribution, etc.) and duplicates the actual market situation on

a small scale, often in a limited geographic area. Because new business ventures are often oriented to a

small geographic area by definition, market testing could in effect require that the full venture be

launched. The practical usefulness of market testing for new ventures is therefore limited, although

small manufacturing ventures seeking widespread geographic distribution provide an important

exception. Conceptually, it may be advanced that new, but potentially multi-unit retail ventures often

begin by "market-testing" at one location. The disadvantages of market testing include the possibility of

alerting competition to future plans and the related prospect of competitors sabotaging test market

results by making immediate competitive responses.

Q. Explain Steps in Product Launch (8 marks)

Follow these five steps to ensure successful launch:

1) Remember the Five Ps (Product, Packaging, Place, Price, and Promotion)

i) Product: Determine the product brand strategy (name, positioning, messaging). Focus on the

differentiating features. Product messaging is crucial to a successful launch. Do not rush through it. Hint

to the entire service provider; treat the service like a product. Make it tangible. Give it a name.

ii) Packaging: Whether entrepreneur sells a product or a service, the packaging matters. Consider what

their packaging must do. Some packaging has the job of continuing to "sell from the shelf', while other

packaging efforts are meant to continue to validate the value of the purchase after the transaction has

been made. Either way, it cannot be emphasized enough how Important product packaging is to a new

product launch.

iii) Place: Of course they will want to look to new channels and distribution options. There is no better

time to do that then when they have something new to talk about. But, do not forget to launch to the

existing customer base first. That is the most receptive audience.

iv) Price: Entrepreneur has arrived at the pricing strategy early on, but has one thought about the

introductory pricing. Consider having a price to entice some early adopters to try the new product. This

will get you some buzz out of the gate. Be sure though that the customers understand the deal they are

getting (add the discount to the receipt/invoice and name it "introductory price").

v) Promotion: The first thing they must do is to determine

a) The most appropriate launch vehicles to use (advertising, direct mail, e-mail, events, PR,

telemarketing, other online options), and

b) The most compelling offer for the prospect pool at each stage in the buying cycle (a newsletter, white

paper, webinar, discount, add-on, trial version, demand, etc. Remember, the marketing campaigns must

have variety, frequency, and consistency.



2) Build a Promotional Schedule: The next step is to build the promotional schedule. This not only gives

visibility into the up-front work required from the organization and/or an outside agency, it also

demonstrates the activity levels they can expect during each week of the promotion and validates that

they always have something going on during the launch period. It is just like a "reality check" to

determine if all they have planned is realistic, given the resources.

3) Itemize the Budget: The budget should include all fees for programs in the plan. Providing this level of

detail will not only help to manage more closely to the budget, one will be better equipped to evaluate

the trade-offs that should be target.

4) Evaluate ROI: Document the reach, frequency, and projected response rate for each vehicle they

have identified to arrive at a potential ROI. Because response rates can vary significantly and rely on

various factors they offer, the targeted nature and quality of the list, the creativity of the &skit and

message, and the timing of the campaign. It is recommended to provide both conservative and

aggressive projections for consideration.

5) Secure Management and Team Buy-Off: Once entrepreneur has completed the launch plan i.e.

complete with product positioning, recommended programs, ROI projections, schedule, and budget; it is

time to present the strategy to the internal teams. Acquiring buy-off from all levels of the organization

prior to executing the plan will ensure a successful launch. It is important to take the time during this

step to make sure that any concerns or questions are sufficiently addressed.

Q. What is market offering? (8 marks)

Market Offering (Market Calibration and Expansion):

From Corporate Venture to Business

This is the last stage in new venture creation process. At this stage corporate venture is ready to launch

the new venture formally as a business. The market offering (development) stage is where all of the

planning performed during stages 1 to 3 is tested and tried-out in the marketplace. After the product is

introduced to the market, the product, marketing, pricing, and sales plans are modified as needed until

a refined plan for profitability is decided on. The market development stage is where the Ultimate fate

of a company becomes apparent; the product decisions and marketing plans from early stages are

tested. The goal is for the company to eventually reach as steady-state operation, where an organization

can operate at a profitable steady-state. Market development focuses company activities on producing

revenue and adjusting the fixed and variable costs associated with engineering, marketing,

manufacturing, and administration. At this stage it is figure-out how to actually get a whole bunch of

products out there for people to buy. If they are outsourcing the manufacture or licensing the product

to a manufacturer, they do not have much to worry about. The outsourcing entrepreneur has to find a

manufacturer, a marketing firms, and retailers. If one license the product, we only concern is periodic

audits of the books. This stage involves several interlinked areas:



1) Channels: The first and foremost challenge is determining where the product or service will be

available. Channels are types of selling outlets, for example, selling through catalogs is a channel that

sells the product through the Website. That, however, may not result in the best exposure or highest

sales. Channels include bricks-and-mortar stores, print catalogs, online e-commerce sites, second-party

bundlers (says, offering the product along with someone else's services).

2) Distributors: If entrepreneur have one or more retailers selling the product, they will need some way

to distribute the product to their stores, whether online or virtual, and managing the inventory.

3) Promotions: They need to build awareness, interest, and intent among the potential consumers

through promotions, including in-store promotions.

4) Logistics: How will they get product made and shipped to the distributors? How will they manage

inventory? Returns? Warranties? Liability?

5) Packaging: Packaging is both a practical and a marketing concern. From a practical point-of-view,

packaging has to protect the product, give information to the buyer (some of which is legally required),

present any certifications or approvals and do so as inexpensively as possible. From a marketing point-

of-view, one want to attract attention from the target audience, display the product in as flattering a

light as possible, and draw attention to critical features and benefits.

6) Point-Of-Sale (POS) Materials: There may be more to pushing the product than just having it plopped

on a retail shelf somewhere. To gain awareness, interest, and intent, they may require brochures,

special signage, or even off-shelf displays made of cardboard or some other material.

7) Self-Space and Plano grams: Retailers (and catalogers) treat retail space as if it were gold, because it

is. Unless one are talking about mom-and-pop stores, retailers use sophisticated planning programs that

calculate exactly how much revenue and profit is coming from each square inch of shelf-space (and

catalogers do the same for catalog space). Optimal shelving space is either a separate POS display or

right in the middle of the shelf. For many retailers, they have to pay to get an optimal position (this is

part of promotions) or, in some cases, to get any shelf-space whatsoever. If they have more than one

product, they must produce a Plano gram, which is a graphical and numerical representation of how the

product should be shelved and displayed. Arming oneself with a Plano gram will open many doors with

retailers.

Q. How to Launch a New Business (8 marks)

For launching a new business following steps must be followed:

1) Identify the Target Market: The first step in developing the strategy is to isolate the best target

market for the product or service. The sales efforts will be most effective if they focus on a group of

prospects with common characteristics and similar problems. Start by defining on paper, the ideal

customer or client. List all of the characteristics you expect to find in good customers or clients. Be sure

to include characteristics that make the product or service valuable to them. Then, use this list to

identify a target market. Define the target market in writing.



2) Find Most Appealing Customer Benefit: Exactly what is the most compelling problem one can solve

for prospects in the target market? Why the product or service is the best solution to the customer

problem? The answers to these two questions reveal the customer benefit(s) to stress in the sales

approach.

3) Develop a Few Motivating Offers: Develop 4 to 5 offers that motivate prospects to take buying action

immediately. For example, can one use a special discounted price offer with a deadline? Are there

bonuses one can add if prospects order or sign-up before the deadline? Can one combine both into a

"special price plus bonus" offer?

4) Decide How to publicize the Business: How will one introduce themselves to prospects in this market?

Will one use classified or display ads in print publications or on the Internet? Will one use direct mail? Is

broadcast media such as radio or TV appropriate and cost-effective? What networking can one

participate in locally or on the Internet to draw attention to the business? What other methods of

promotion can one use? Prioritize each method on the list and develop an action plan with deadlines for

implementing them.

5) Establish a Plan to Promote Customer Loyalty: Decide what one will do to cultivate customers so that

they continue to do business with us and give the referrals. For example, write or call the customers or

clients immediately after a transaction and thank them for their business. Ask them if they are pleased

with what they received. Most will express their satisfaction. Do not be afraid to uncover an unhappy

customer. When one do, take whatever action it might to leave them feeling good about ones, even if

the only recourse is issuing a prompt refund. Most dissatisfied customers would not take the trouble to

contact about their problem. They will just take their business elsewhere and tell other people about

their negative experience with you. That will cost a lot of future business.

Q. Explain the Future of Corporate Venturing (8 marks)

The analysis of nearly 100 venturing units identified five main objectives that drive the decision to set-up

a venturing unit. Although one common objective is the creation of substantial new businesses and

growth by incubating a portfolio of promising new ventures was found to have no successful business

model, the other four objectives and their associated business models demonstrated reasonable to high

degrees of success.

The future of corporate venturing lies in four models which are describe below: constitute the future of

corporate venturing:

I) Ecosystem Venturing: Ecosystem venturing supports and encourages a company's network of

customers, suppliers and complementary businesses. Some companies depend on the vibrancy of a

community of connected businesses for their success. The community may comprise suppliers, agents,

distributors, franchisees, technology entrepreneurs or makers of complementary products. Often this

community does not need support from the company other than through normal trading relationships.

Ecosystem venturing clearly falls into the strategic benefits category and due to their suggestions of

"giving existing business units a significant level of influence over the unit" the control over the venture



should be high. Consequently, the framework also suggests direct-internal or direct-external venturing.

Although Campbell suggests not doing new leg venturing at all, they would recommend a direct external

form of corporate venturing which is one of the options of the framework for real option development.

2) Innovation Venturing: Innovation venturing improves the effectiveness of some of a company's

existing 'activity. It is similar to the organizational development category. They suggest that the ventures

are governed by the function of which its business idea is part of the R&D department in most of the

times. Depending of the needed control over the venture the framework commends direct-internal or

direct-external venturing.

3) Private Equity Venturing: Private equity venturing diversifies a company's business into the venture

capital industry. It is identical to quick financial return. Campbell suggest not to do this kind of venturing

at all because it is very likely to fail in competing with the experienced venture capitalists. If one feels

the need to do it, they suggest a restriction to an external venturing unit that is operated as a separate

unit and behaves like other private equity companies. Miles agrees with the external view but also offers

indirect-external as an option contrary to Campbell's strict direct-external approach.

4) Harvest Venturing: The last form is harvest venturing it tries to generate cash from harvesting spare

resources (intellectual property and technology) and has no long-term strategic goals whatsoever.

Although the primary goal is to generate cash, i.e., Miles' "quick financial return" category, the ideas

obviously come from inside of the corporation, which contradicts the framework's suggestion to use

external venturing.

Ent Notes Module 7 8 9

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