The Venture Capital Market 187

The Entrepreneurial Process

The Discovery of Search Funds by MBAs
There are lwo breeds of entrepreneurs. Some love the challenge
of build ing a business from scratch and are passionate
about bringing their idea or product to life Others are less
concerned about the kind of product or service; instead, they
love the idea of growing a small business to its full potential.
If you are in the second group, entrepreneurship can sti ll be
a viable path for you. The search-fund model has been gaining
momentum as an alternative way to becoming a business
owner. This trend is spreading primarily w ithin the MBA programs
at schools of business w ith student entrepreneurs skipping
the traditional start-up path and pitching themselves as
the investment. These MBAs are known as "searchers" who,
lacking in personal capital, start a search fund and use that
money to acqu ire a privately held, under-the-radar business.
The MBA graduate then runs the company as the new CEO
and gains a share of ownership in the business. ~ the business
grows successfully, investors and the MBA graduate can enjoy
attractive returns. While this model has been a part of the business
school scheme for decades, ii has taken off only in the
last couple of years during the pandemic, as cash-rich investors
have been on the lookout for promising opportunities to invest
their capital. Fifty-one new search funds were started in 2019,
while in 2020, that number rose lo at least 70.
The excitement behind these search funds has not been
unwarranted. A Stanford study performed on 400 search funds
through 2019 found that 7 5 percent of search-funded businesses
yielded a positive return for investors, of which 69 percent
del ivered at least double returns. From the point of view
of a student entrepreneur, they have a 75 percent chance of
finding and acquiring a business w ithin lwo years, followed by
a 67 percent chance of successfully growing the business and
making ii financially profitable for themselves and their investors.
Considering this, you have a greater than 50 percent
chance of becoming a successful CEO, w ith meaningful expe·
rience and financial outcome. Comparing this to a more tra ditional
"boom and bust" slar~up path, the search-fund model
may be an attractive alternative.
Nevertheless, the search-fund model is not without its challenges.
Searching requires numerous calls lo potential sellers
and many rejections: about one-third of searchers do end up
the number of venture capital firms is not increasing. In
addition, the trend to\.vard concentration of venture capital
under the control of a fe"v firms is increasing.48
Nevertheless, the entrepreneur should not be deterred
from evaluating prospective venture capitalists.
There are a number of important questions that entrepreneurs
should ask of venture capitalists. Follo\.ving are
seven of the most important, along \.Vith their rationales.
without an acquisition. It is your job to find, acquire, and then
grow the business. MBA searchers forgo their opportunity of
recruiting with the high-profile names of Silicon Valley, Wall
Street, or the Fortune 500. They must forget about the prestige
of consulting, investment, or private equity industries. The
companies that searchers target are not flashy start-ups or wellknown
brands. They could be anything from a family-owned
printing business w ithout a succession plan to a small wireless
service provider. However, search funds are not about exciting
products and innovative ideas. Instead, they provide an opportunity
lo become an early leader, grow a company, and create
a significant financial upside.
It is important to consider the upsides and downsides
when deciding whether search funds are right for you. Do you
I ike to go from O to l O or from l 00 lo l , 0002 Are you wi II ing
to forgo a lucrative consul ting job at a large firm2 Are you willing
to accept the uncertainty of not knowing the type of business
that you will have to run2 Are you w ill ing to move across
the country to grow the acquired business2 Is this something
that you would like lo do for the next 7 to l O years2 Despite
all the benefits, search-funded companies require a large
commitment, hard work, and a tenacious character who can
accept their inexperience and is w ill ing to grow and listen. A
typical search fund CEO is 32 years old, which is a noticeably
young CEO. They tend to be motivated and talented individuals,
surrounded by experienced investors and former operators
who help the MBA graduate avoid a lot of bosic mistakes and
improve the odds of success. An average holding period from
the time of acquisition is seven years, though highly successful
cases can last much longer.
If, after considering the downsides, you sti ll bel ieve that
becoming a young CEO at a start-up firm sounds like a great
idea and you are w ill ing to put in the lime and effort that it
takes lo build a company, then a search-fund method can be a
viable option for you.
Source: Adopted from Llndsoy Ellis, 'M.B.A.s' latest Pitch lo Investors: Skip
the Startup, Invest in Me,• Woll S!reel}ourno/, Morch 20, 2022; Kim Girard,
' How Secrch Funds Turn MBA 'Searchers' into Young CEOs,' Berkeley Hoos
News,June I 0, 202 1; ond Theresa Johnston, What It Tokes lo Be a Search
Fund Entrepreneur,• S!onford Business News, September 25, 2015 .
Key Questions for Evaluating a Venture Capital Firm
1. Does the venture capital firm in fact invest in your
ind us try? Ho"v many deals has the firm actually
done in your field?
2. What is it like to \.York \.Vith this venture capital
firm? Get references. (An unscreened list of referrals,
including CEOs of companies that the firm has been
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188 Chapter 8 Sources of Capital for Entrepreneurs

successful "vith- as "veil as those it has not-can be
very he! pf ul.)
3. What experience does the partner doing your deal
have, and "vhat is their clout "vithin the firm? Check
out the experiences of other entrepreneurs.
4. Ho"v much time will the partner spend "vith your
company if you run into trouble? A seed-stage company
should ask, "You guys are a big fund, and you
say you can seed me a quarter of a million dollars.
Ho"v often "vill you be able to see me?" The ans"ver
should be at least once a "veek.
5. Ho"v healthy is the venture capital fund, and ho"v
much has been invested? A venture firm "vith a lot
of troubled investments "vill not have much time
to spare. If most of the fund is invested, there may
not be much money available for your follo"v-on
rounds.
6. Are the investment goals of the venture capitalists
consistent "vith your own?
7. Have the venture finn and the partner championing
your deal been through any economic do"vnturns?
A good venture capitalist won't panic "vhen things
get bad.49
Evaluating and even negotiating "vith the venture capitalist
are critical to establishing the best equity funding.
You may "vorry that if you rock the boat by demanding
too much, the venture capital firm "vill lose interest.
That 's an understandable attitude; venture capital is
hard to get, and if you've gotten as far as the negotiating
process, you're already among the lucky fe"v.
But that doesn't mean you have to roll over and play
dead. A venture capital investment is a business deal that
you rnay have to live "vith for a long time. Although you'll
have to give ground on many issues "vhen you come to
the bargaining table, there is ahvays a point beyond "vhich
the deal no longer makes sense for you. You must dra"v a
line and fight for the points that really count.50
8-9 Informal Risk Capital:
Angel Financing
LOS. 11 Describe the existing informal risk-cap ital market
(" angel capital")
Not all venture capital is raised through formal sources
such as public and private placements. Many "vealthy
people in the United States are looking for investment
opportunities; they are referred to as business angels or
informal risk capitalists. These individuals constitute a
huge potential investment pool, as the follo"ving calculations
sho"v. Using the recent Forbes "Richest 400"
list,51 a fe"v interesting and creative assumptions could
be made to demonstrate the power of individuals' ability
to finance ne"v vent ures:
• The aggregate net worth of the Forbes "Richest
400" Americans "vas $4.5 trillion ($11.25 billion
per person).
• Forty-four ne"v members made the list in 2021.
• Thirteen of the top 18 are entrepreneurs, including
Elon Musk (Tesla, SpaceX), Mark Zuckerberg
(Facebook), Bill Gates (Microsoft), Larry Page and
Sergey Brin (Google), Warren Buffett (Berkshire
Hatha"vay), Larry Ellison (Oracle), Charles Ballmer
(Microsoft), Phil Knight (Nike), Charles Koch (Koch
Industries), Michael Bloomberg (Bloomberg), Jeff
Bezos (Amazon), and Michael Dell (Dell Computers).
Their total "vorth is $1.25 trillion.
• If 1 percent of those entrepreneurs' "vealth "vere
available for venture financing, the pool of funds
would amount to over $10 billion.
• Ninety-five billionaires did not even make the list. If
1 percent of their funds "vere available for venture
financing, the pool of funds "vould be at least $1 billion
• If both amounts could be available for venture deals,
there "vould be a total of $15 billion.
• If the average vent ure deal took $500,000, there
would be the potential of 30,000 deals!
William E. Wetzel Jr., considered to be the pioneer
researcher in the field of informal risk capital, defined this
type of investor as someone "vho has already made their
money and no"v seeks out promising young ventures to
support financially. "Angels are typically entrepreneurs,
retired corporate executives, or professionals "vho have a
net "vorth of more than $1 rnillion and an income of more
than $100,000 a year. They're self-starters. And they're
trying to perpet uate the system that made them successful."
52 If entrepreneurs are looking for such an angel, Wetzel
"vould advise, "Don't look very far a"vay- "vithin 50
miles or "vithin a day's drive at most. And that's because
this is not a full-time profession for them."53
Why "vould individuals be interested in investing in a
ne"v venture from "vhich professional venture capitalists
see no po"verful payoff? It may be, of course, that the
reduced investment amount reduces the total risk involved
in the investment. Ho"vever, informal investors seek other,
nonfinancial ret urns- among them the creation of jobs in
areas of high unernployment, development of technology
for social needs (e.g., medical or energy), urban revitalization,
minority or disadvantaged assistance, and personal
satisfaction from assisting entrepreneurs. 54
Ho"v do informal investors find projects? Research
studies indicate that they use a net"vork of friends. Additionally,
many states are formula ting vent ure ca pita!
net"vorks, "vhich attempt to link inforrnal investors "vith
entrepreneurs and their ne"v or growing vent ures.
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8-9a Types of Angel Investors

Angel investors can be classified into five basic groups:
• Corporate angels. Typically, so-called corporate angels
are senior managers at Fortune 1000 corporations
"vho have been laid off "vith generous severances or
have taken early retirement. In addition to receiving
the cash, an entrepreneur may persuade the corporate
angel to occupy a senior management position.
• Entrepreneurial angels. The most prevalent type of
investors, most of these individuals o"vn and operate
highly successful businesses. Because these investors
have other sources of income and perhaps significant
"vealth frorn IPOs or partial buyouts, they "vill
take bigger risks and invest more capital. Therefore,
the best "vay to market your deal to these angels is
as a synergistic opportunity. Reflecting this orientation,
entrepreneurial angels seldom look at cornpanies
outside of their own area of expertise and "vill
participate in no more than a handful of investments
at any one time. These investors almost ahvays take
a seat on the board of directors but rarely assume
management dut ies. They "vill make fair-sized
investments-typically $200,000 to $500,000- and
invest more as the cornpany progresses.
• Enthusiast angels. Whereas entrepreneurial angels
tend to be sorne"vhat calculating, enthusiasts simply
like to be involved in deals. Most enthusiast angels
are age 65 or older, are independently "vealthy from
success in a business they started, and have abbreviated
"vork schedules. For them, investing is a hobby.
As a result, they typically play no role in management
and rarely seek to be placed on a board.
Because they spread themselves across so many
companies, the size of their investments tends to be
small- ranging from as little as $10,000 to perhaps
a fe"v hundred thousand dollars.
• Micromanagement angels. Micromanagers are very
serious investors. Some of them "vere born "vealthy,
but the vast majority attained "vealth through their
o"vn efforts. Unfort unately, this heritage makes
them dangerous. Because most have successfully
built a company, micromanagers attempt to impose
the tactics that "vorked for them on their portfolio
cornpanies. Although they do not seek an active
management role, micromanagers usually demand
a seat on the board of directors. If business is not
going "veil, they "vill try to bring in ne"v managers.
• Professional angels. The term professional in this
context refers to the investor's occupation, such
as doctor, la"vyer, and, in some very rare instances,
accountant. Professional angels like to invest in
companies that offer a product or service "vith "vhich
they have some experience. They rarely seek a board
Informal Risk Capital: Angel Financing 189
seat, but they can be unpleasant to deal "vith "vhen
the going gets rough and may believe that a company
is in trouble before it act ually is. Professional
angels "vill invest in several companies at one time,
and their capital contributions range from $25,000
to $250,000.55
The importance of understanding the role of informal
risk capital is illustrated by the fact that the pool
of today's angel capital is five times the amount in the
institutional venture capital market, providing money to
20 to 30 times as many companies. Angels invest more
than $25 billion a year in 60,000 to 70,000 companies
nationwide, t"vice the amount of money and t"vice the
number of companies as 10 years ago.56
Recent research by Jeffrey Sohl, who "vorked "vith
William E. Wetzel Jr. on angel capital and "vho is no"v
the director of the Center for Venture Research at the
University of Ne"v Hampshire, shov.rs a marked increase
in angel investing activity over the past fe"v years. In
2020, a total of $25.3 billion was invested in 64,480
entrepreneurial vent ures. This accounted for 334,680
active angel investors "vith an average of $392,025
per investment. Health care services/medical devices
and equipment held the top sector position "vith 30
percent of total angel investments, follo"ved by soft"
vare (23 percent ), energy/cleantech (9 percent ), financial
services (9 percent ), retail (8 percent ), and biotech
( 6 percent ). Angels provided their investments in the
seed and start-up stage at 3 9 percent, "vhile early-stage
investing "vas at 32 percent. Angel investments continue
to be a significant contributor to job gro"vth "vith the
creation of 3.9 jobs per angel investment. Also, in 2020,
women angels represented 29 .5 percent of the angel
market, unchanged frorn 2019 (29.0 percent ). In 2020,
"vomen-owned ventures accounted for 33.6 percent of
the entrepreneurs "vho were seeking angel capital (27.6
percent in 2019), and 28.1 percent of these "vomen
entrepreneurs received an angel investment in 2020
(21.4 percent in 2019).57
Another important consideration for angel ca pita!
is that a larger percentage of informal investment is
devoted to seed a start-up business as opposed to venture
capital. The median size of an informal investment
is $350,000, "vhich indicates the importance of informal
risk capital to entrepreneurs seeking smaller amounts
of start-up financing. 58 (See Table 8 .6 for some "angel
stats.") Obviously, informal net"vorks are a major potential
capital source for entrepreneurs. Ho"vever, every
entrepreneur should be careful and thorough in their
approach to business angels-there are advantages and
disadvantages associated "vith angel financing. Table 8.7
outlines some of the critical pros and cons of dealing
"vith business angels. Only through recognition of these
issues "vill entrepreneurs be able to establish the best
relationship with a business angel.
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190 Chapter 8 Sources of Capital for Entrepreneurs

Table 8 .6 "Angel Stats"
Typical deal size $250,000 to $600,000
Typical recip ient Start-up firms
Cash-out time frame 5 to 7 years
Expected return 35% to 50% a year
Ownersh ip stake Less than 50%
Sour ce: Jeffrey Sohl, University of New Hampshire's Center
for Venntre Research, 2011; Angel Resource Institute, Halo
Report, 2011, https://angelresourceinstirute.org/research/report.
php?report=75&name=2011 %20Annual%20Halo%20Report.
Table 8.7 Pros and Cons of Dealing with Angel Investors
Pros:
1. Angels engage in smaller financial deals.
2 . Angels prefer seed stage or start-up stage.
3 . Angels invest in various industry sectors.
4 . Angels are located in local geographic areas.
5 . Angels are genuinely interested in the entrepreneur.
Cons:
1. Angels offer no additional investment money.
2 . Angels cannot offer any national image.
3 .Angels lack important contacts for future leverage.
4. Angels may want some decision making with the entrepreneur.
5 . Angels are getting more sophisticated in their investment
decisions.
Improving Gender Diversity in Venture Capital
The gender imbalance in venture capital (VC) is no longer a surprising
fact. Yet, despite an increased awareness of the issue,
the numbers remain grim. While the amount of capital invested
in start-ups continues to reach new records, female founders in
the United States received only 1. 9 percent of VC, down from
2. 2 percent in 2020. In Europe, the amount received was only
0 7 percent of the total funding, also down from 2 . 2 percent in
2020. A number of new reports have shown that a major barrier
to such funding disparity is a lack of female representation
in decision-making positions in VC firms. Seeing the majority of
funding go to all -male founding teams and watching them be
featured in media coverage about initial publ ic offerings and
unicorn status creates a subconscious bias toward assuming
that male entrepreneurs are more likely to reap success and
higher returns. W ith more female investors, such biases would
be less likely to happen. However, in 2021, only 3.4 percent
of assets under management were held by women-founded VC
firms in the United States. In Europe, only 10 percent of VC
firms had a gender-mixed general portnership team.
W ith an increased emphasis on d iversity and inclusion in
the corporate world, why have VC firms not made any progress2
Research by Atomico shows that 36 percent of VCs and
70 percent of corporate VCs have not introduced quantifiable
targets on diversity. While diversity is considered to be important,
without concrete targets, we cannot hope to create meaningful
progress. In fact, the conversations around improving
diversity in VC firms revolve mostly around generic steps that
any firm could take, such as adopting standardized interview
questionnaires, scorecards, and metrics. Removing biases in the
recruitment process is definitely important; however, that is not
where decision making and cash allocation happen. In order
to attack the issue of d iversity at the core - at the point of the
investment decision - we need more robust data. A 202 l report
by European Women in VC recommends an implementation of
a diversity index to show the gender composition of investment
teams, a tracking pla~orm on gender composition in the upper
ranks of start-up teams, and data showing the types of government
funding that supports female-led VC firms and start-ups.
With the right data, we can then invest in the right
solutions and monitor the impact of our actions. To combat
unconscious bias, research finds that firms should create
environments, initiatives, metrics, and gu idelines that limit the
potential of such biases to manifest themselves. This includes
two main ways by investing in the solutions that limit biases
and by equipping decision makers with tools to notice and
act on biases and to understand the contexts and processes
that are more prone to them . A project based on Harvard's
Kennedy School research on advancing gender equality in VC
identified three focus areas where VC firms can take actions to
close the gender opportunity gap:
• Career opportunities. Foster interest in becoming a port of
VC investment team by offering internships, venture scouts,
or rotation programs.
• Career experience. Improve the experience of women in
existing VC investment teams by offering mentorship and
networking opportunities.
• Leadership opportunities. Facilitate leadership opportunities
for women in investment teams with executive sponsorship,
transparency on roles and opportunities, and
training.
By targeting key stages of the corporate world - entry, experience,
and leadership - VC firms will have better chances of
recruiting, reta ining, and promoting women. There has been
plenty of research pointing to the benefits of diverse leadership
teams in both start-ups and VC firms It is time for VC firms to
start taking proactive actions that can effect meaningful change.
Source: Adopted from Leah Hodgson, ' Senior Female VCs Coll Out Major
Funding Disparity in Europe,• PitchBook, July 27, 2021, and Rom Jombunothon
and Joanna Moryewsko, ' Two Ways Corporates Con Support
Women Entrepreneurs,• World Economic Forum, January 20, 2022 .
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Summary
This chapter examined the various forms of capital formation
for entrepreneurs. Initial consideration ,vas given
to bootstrapping, debt and equity financing in the form
of commercial banks, trade credit, accounts receivable
financing, factoring and finance companies, and various
forms of equity instruments.
IPOs have advantages and disadvantages as a source
of equity capital. Although large amounts of money can
be raised in short periods of time, the entrepreneur must
sacrifice a degree of control and o,vnership. In addition,
the SEC has myriad requirements and regulations that
must be follo,ved.
Private placements are an alternative means of raising
equity capital for ne,v vent ures. This source is often
available to entrepreneurs ,vho seek venture capital in
amounts of less than $500,000, although it is possible
that up to $5 million could be raised with no more
than 35 nonaccredited purchasers. The SEC's Regulation
D clearly outlines the exemptions and requirements
involved in a private placement. This placement's greatest
advantage to the entrepreneur is limited company
disclosure and only a sn1all number of shareholders.
In recent years, the venture capital market has gro,vn
dramatically. Billions of dollars are no,v invested a1u1ually
to seed ne,v ventures or help fledgling enterprises gro,v.
The individuals ,vho invest these funds are known as venture
capitalists. A number of myths that have sprung up
about these capitalists ,vere discussed and refuted.
Venture capitalists use a number of different criteria
,vhen evaluating ne,v-venture proposals. In the main,
these criteria focus on n,vo areas: the entrepreneur and
the investment potential of the venture. The evaluation
process typically involves four stages: initial screening,
business plan evaluation, oral presenta tion, and final
evaluation.
A financial phenomenon of the t,venty-first century
has been the creation of a funding vehicle for vent ures
through the use of the general public. Kno,vn as crowdfunding,
this practice seeks funding for a vent ure by
raising monetary contributions from a large number of
people, typically via the Internet. In the United Sta tes,
legislation that is mentioned in the 2012 JOBS Act
allo,ved for a wider pool of small investors ,vith fewer
restrictions following the implementation of the act.
Over the years, informal risk capital (angel financ ing)
has begun to play an important role in ne,v-venture
financing. Everyone ,vith 1noney to invest in ne,v ventures
can be considered a source for this type of capital.
Some estimates put the informal risk ca pita! pool
at more than $25 billion. Entrepreneurs ,vho are unable
to secure financing through banks or through public or
private stock offerings typically ,vill turn to the informal
risk ca pita! market by seeking out friends, associates,
and other contacts ,vho may have (or know of someone
,vho has) money to invest in a new venture.
Review and Discussion Q uestions 191
' Key Terms
accounts receivable
financing
accredited purchaser
angel capital
bootstrapping
business angel
cro,vdf unding
debt financing
direct public offering
(DPO)
equity financing
factoring
finance companies
informal risk capitalist
initial public offering
(IPO)
peer-to-peer (P2P) lending
private placement
Regulation D
sophisticated investor
special purpose acquisition
companies (SPACs)
trade credit
venture capitalist
Review and Discussion
Questions
1. Using Figure 8.1, describe some of the sources of capital
available to entrepreneurs and discuss how they
correlate to the varying levels of risk involved with
each stage of the venture.
2. Explain bootstrapping with its advantages and
disadvantages.
3. What are the benefits and drawbacks of equity and of
debt financing? Briefly discuss both.
4. If a new vent ure has its choice between long-term debt
and equity financing, which would you recommend?
Why?
5. Why would a venture capitalist be more interested
in buying a convertible debenture for $500,000 than
in lending the new business $500,000 at a 4 percent
interest rate?
6. What are some of the advantages of going public?
What are some of the disadvantages?
7. What is the objective of Regulation D?
8. If a person inherited $100,000 and decided to buy
stock in a new venture through a private placement,
how would Regulation D affect this investor?
9. How has crowdfunding changed the landscape of
new-venture financing?
10. Is it easier or more difficult to get new-vent ure financing
today? Why?
11. Some entrepreneurs do not like to seek new-venture
financing because they feel that vent ure capitalists are
greedy. In your opinion, is this true? Do these ca pi ta lists
want too much?
12. Identify and describe three objectives of venture
capitalists.
13. How would a vent ure capitalist use Figure 8.2 to
evaluate an investment? Use an ill ustration in your
answer.
14. Identify and describe four of the most common criteria
that venture capitalists use to evaluate a proposal.
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192 Chapter 8 Sources of Capital for Entrepreneurs

15. In a new-venture evaluation, what are the four stages
through which a proposal typically goes? Describe
each in detail.
16. An entrepreneur is in the process of contacting three
different venture capitalists and asking each to evaluate
her new business proposal. What questions should
she be able to answer about each of the three?
17. An entrepreneur of a new venture has had no success
in getting financing from formal venture capitalists.
He now has decided to turn to the informal risk
capital market. Who is in this market? How would
you recommend that the entrepreneur contact these
individuals?
Notes
1. Gavin Cassar, "The Financing of Business Start-Ups,"
Journal of Business Venturing 19, no. 2 (2004): 261- 83;
Brian T. Gregory, Matthew W. Rutherford, Sharon Oswald,
and Lorraine Gardiner, "An Empirical Investigation of
the Growth Cycle Theory of Small Firm Financing,"
Journal of Small Business Management 43, no. 4 (2005):
382- 92; Jay Ebben and Alec Johnson, "Bootstrapping
in Small Firms: An Empirical Analysis of Change over
Time," Journal of Business Venturing 21, no. 6 (2006):
851- 65; Armin Schweinbacher, "A Theoretical Analysis
of Optimal Financing Strategies for Different Types of
Capital Constrained Entrepreneurs," Journal of Business
Venturing 22, no. 6 (2007): 753- 81; Arnout Seghers,
Sophie Manigart, and Tom Vanacker, "The Impact of
Human and Social Capital on Entrepreneurs' Knowledge
of Finance Alternatives," Journal of Small Business
Management 50, no. 1 (2012): 63- 86; Sara Jonsson and
Jessica Lindbergh, "The Development of Social Capital
and Financing of EntrepreneLtrial Firms: From Financial
Bootstrapping to Bank Funding," Entrepreneurship
Theory and Practice 37, no. 4 (2013): 661- 86; Joern H.
Block, Massimo G. Colombo, Douglas J. Cumming, and
Silvio Vismara, "New Players in Entrepreneurial Finance
and Why They Are There," Small Business Economics
50, no. 2 (2018): 239- 50; Regan Stevenson, Sean R.
McMahon, Chaim Letwin, and Michael P. Ciuchta,
"Entrepreneur Fund-Seeking: Toward a Theory of
Funding Fit in the Era of Equity Crowdfunding," Small
Business Economics 58, no. 4 (2021): 2061- 86.
2. Joakim Winborg and Hans Landstrom, "Financial
Bootstrapping in Small Businesses: Examining Small
Business Managers' Resource Acquisition Behaviors,"
Journal of Business Venturing 16 (2000): 235- 54.
3. Chao Miao, Matthew W. Rutherford, and Jeffrey M.
Pollack, "A Review and Meta-Analysis of the Nomological
Networking of Bootstrapping in SMEs," Journal of
Business Venturing Insights 8 (2017): 1-8.
4. Ian Harvey and Katherine Beer, "Companies That
Succeeded with Bootstrapping," Investopedia, June 8,
2021, https://www.investopedia.com/articles/in vesting
/082814/companies-succeededbootstra pping.asp; Neal
Taparia, "Key Lessons Learned from Bootstrapping
to Millions in Revenue," Forbes, May 2021; Matthew
Rutherford and Duygu Phillips, "Bootstrapping:
Complementary Lines of Inquiry in Entrepreneurship,"
in Oxford Research Encyclopedia of Business and
Management \Vorld Encyclopedia, ed. Michael A. Hitt
(Oxford: Oxford University Press, 2021).
5. Jean-Etienne de Bettignies and James A. Brander,
"Financing Entrepreneurship: Bank Finance versus
Venture Capital," Journal of Business Venturing 22, no. 6
(2007): 808- 32; see also Small Business Administration,
2022, http://www.sba.gov, and Susan Coleman, Carmen
Cotei, and Joseph Farhat, "The Debt-Equity Financing
Decisions of U.S. Start-Up Firms," Journal of Economics
and Finance 40 (2016): 105- 26.
6. Monica O' Reilly, Susan Klink, Liliana Robu, and John
Rieger, "The Future of Financial Services in the United
States," Deloitte Financial Services, 2021, https://www2
.de! oi rte.co m/us/en/pages/financia I-services/articles
/future-of-financial-services.html.
7. A complete explanation can be found in Ralph Alterowitz
and Jon Zonderman, Financing Your NettJ or GrottJing
Business (Irvine, CA: Entrepreneur Press, 2002); see also
Elijah Brewer ill, "On Lending to Small Firms," Journal
of Small Business Management 45, no. 1 (2007): 42- 46,
and Jess H. Chua, James J. Chrisman, Franz Kellermanns,
and Zhenyu Wu, "Family Involvement and New Venture
Debt Financing," Journal of Business Venturing 26, no. 4
(2011 }: 4 72- 88.
8. Angus Loren, "Peer-to-Peer Loans Grow," \'(/al/ Street
Journal, June 17, 2011, http://online.wsj.com/article
/SB10001424052748703421204576331141779953526
.html, accessed February 21, 2012; Garry Bruton, Susanna
Khavul, Donald Siegel, and Mike Wright, "New Financial
Alternatives in Seeding Entrepreneurship: Microfinance,
Crowdfunding, and Peer-to -Peer Innovations,"
Entrepreneurship Theory and Practice 39, no. 1 (2015):
9-26; Emanuele Brancati, "Innovation Financing and the
Role of Relationship Lending for SMEs," Small Business
Economics 44, no. 2 (2015): 449- 73.
9. Truls Erikson, "Entrepreneurial Capital: The Emerging
Venture's Most Important Asset and Competitive
Advantage," Journal of Business Venturing 17, no. 3
(2002): 275- 90; see also Larry D. Wall, "On Investing
in the Equity of Small Firms," Journal of Small Business
Management 45, no. 1 (2007): 89- 93, and Nuno
Fernandes Crespo, Carla Curado, Mirian Oliveira,
and Lucia Munoz-Pascual, "Entrepreneurial Capital
Leveraging Innovation in Micro Firms: A Mixed-Methods
Perspective," Journal of Business Research 123 (2021 }:
333-42.
10. Benjamin Robertson and Beata Wijeratne, "Private
Equity Is Smashing Records with Multi-Billion M&A
Deals," Bloomberg, September 17, 2021, https://www
. bloomberg.com/news/articles/2021-09-17/private-equi ty
-is-smashing-records-with-mu! ti -billion -m -a-deals; see
also McKinsey & Company, "McKinsey's Private Markets
Annual Review," April 21, 2021, https://www.mckinsey
.com/industries/pr iva te -eq ui ty-a nd-pr inci pa I-investors
/our-insights/mckinseys-private-markets-annual-review.
Copyrig?n 2024 Ccngsgc Leaming. All Rights Reserved. May ooi be oopicd. 91.' no..ncd. ot duplict11M. in wbolcot in Jl(lll. Due 10 d,xwoo.ic
tight.. some 1hitd pat1ycoo1cn1 maybe supptesscd from 1hc cBool: 81\(J/or <:Chtiplcr(s).
F.di1otial tcvicw Msdremcd lha1 anysupptesscdcoo1cn1 docs OOI 01.acrially affro 1hcovcrn ll lctWningcxpcticncc. Ccngagc Lcamingtc.ctv<S
Ille tigh11o tcmovc addi1icwll coocm m nny lime if sub$cqucm tight. tc su~1ioos t,._--quitc ii.
11. See "Going Public," NASDAQ Stock Market, 2005, http://
www.nasdaq.com/about/GP2005_cover_toc.pdf, accessed
April 11, 2008.
12. Jean-Sebastien Michel, "Return on Recent VC Llvestment
and Long-Run IPO Returns," Entrepreneurship Theory
and Practice 38, no. 3 (2014): 527-49; J. J. McGrath ,
"2014 Biggest Year for US IPO Market since 2000, with
Alibaba Leading the Way," International Business Times,
January 5, 2015.
13. Mark Hendricks, "Number of U.S. IPOs Swelled 109%
in 2020 to Highest since 2000," Yahoo!, February 8,
2021, https ://www.yahoo.com/now/num ber-u-i pos
-swelled-109-190217580.html.
14. Max H.Bazerman and Paresh Patel, "SPACs: What You Need
to Know," Harvard Business Review, July-August 2021,
https://hbr.org/2021/07/spacs-what-you-need-to-know.
15. See "Going Public."
16. A summary can be found in business law texts such as
Jane P. Mallor, A. James Barnes, Thomas Bowers, and
Arlen W. Langvardt, Business Law: The Ethical, Global,
and £-Commerce Environment, 15th ed. (New York:
McGraw-Hill Irwin, 2013), 1150- 55.
17. For more on private placements, see T. B. Folta and J. J.
Janney, "Strategic Benefits to Firms Issuing Private Equity
Placements," Strategic Management Journal 25, no. 3
(March 2004): 223-42, and Thomas J. Morgan, "Raising
Capital- What You Don't Know Could Hurt You," The
National Law Review, March 6, 2013.
18. Paul Be lleflamme, Thomas Lambert, and Armin
Schwienbacher, "Crowdfunding: Tapping the Right
Crowd," Journal of Business Venturing 29, no. 5
(2014): 585- 609; Ethan Mollick, "The Dynamics
of Crowd funding: An Exploratory Study," Journal
of Business Venturing 29, no. 1 (2014): 1-16; John
Pr pie, Prashant P. Shukla, Jan H. Kietzmann, and Ian P.
McCarthy, "How to Work a Crowd: Developing Crowd
Capital through Crowdsourcing," Business Horizons 58,
no. 1 (2015): 77-85.
19. Carol Tice, "The Myth of Magical CrowdfundingAnd
What Actually Works," Forbes, October 10, 2014;
Massimo G. Colombo, Chiara Franzoni, and Cristina
Rossi-Lamastra, "Internal Socia l Capita l and the
Attraction of Early Contributions in Crowdfunding,"
Entrepreneurship Theory and Practice 39, no. 1 (2015):
7 5- 100; Magdalena Chola kova and Bart Clarysse,
"Does the Possibility to Make Equity Investments in
Crowdfunding Projects Crowd Out Reward-Based
Investments?," Entrepreneurship Theory and Practice
39, no. 1 (2015): 145- 72; Regan Stevenson, Sean R.
McMahon, Chaim Letwin, and Michael P. Ciuchta,
"Entrepreneur Fund-Seeking: Toward a Theory of
Funding Fit in the Era of Equity Crowdfunding," Small
Business Economics 58, no. 4 (2022): 2061- 86; Douglas
Cumming, Michele Meoli, and Silvio Vismara, "Does
Equity Crowdfunding Democratize Entrepreneurial
Finance?," Small Business Economics 56, no. 2 (2021):
533- 52; Anton Miglo, "Crowdfunding and Bank
Financing: Substitutes or Complements?," Small Business
Economics 59, no. 3 (2022): 1115-42; Thomas H. Allison,
Notes 193
Benjamin J. Warnick, Blakley C. Davis, and Melissa S.
Cardon, "Can You Hear Me Now? Engendering Passion
and Preparedness Perceptions with Vocal Expressions in
Crowdfunding Pitches," Journal of Business Venturing 37,
no. 3 (2022): 106193.
20. Maddie Shepherd, "Crowdfunding Statistics (2021):
Market Size and Growth," Fundera, December 16,
2020, https://www.fundera.com/resources/crowdfunding
-statistics.
21. Jim Saksa, "Equity Crowd funding Is a Disaster Waiting
to Happen," Slate, June 23, 2014, https://slate.com
/6usiness/2014/06/sec-a nd-eq u i ty-crowd f uncling-its-a
-disaster-waiting-to-happen.html, accessed January 6,
2015; see also Daniel Blaseg, Douglas Cumming, and
Michael Koetter, "Equity Crowdfunding: High-Quality
or Low-Quality Entrepreneurs?," Entrepreneurship
Theory and Practice 45, no. 3 (2021): 505- 30, and
Regan Stevenson, Jared Allen, and Tang Wang, "Failed
but validated? The Effect of Market Validation on
Persistence and Performance after a Crowdfunding
Fa ilure," Journal of Business Venturing 37, no. 2
(2022): 106175.
22. Daniel Isenberg, "The Road to Crowdfunding Hell,"
Harvard Business Review, April 23, 2012.
23. Regan M. Stevenson, Donald F. Kuratko, and Jared Eutsler,
"Crowdfunding and the Democratization of New Venture
In vestments: Unleashing Main street Entrepreneurship,"
Small Business Economics 52, no. 2 (2019): 375- 93.
24. Donald F. Kuratko, "The Third Wave: An Interview
with Steve Case, Founder & Former CEO of AOL.com,"
Business Horizons 61, no. 1 (2018): 7- 12.
25. Massolution, The Crowdfunding Industry Report (Los
Angeles: Massolution Crowdsourcing LLC, 2015), https://
www. sm v.gob. pe/Bi blioteca/temp/ca ta loga cion/C 8 78 9.
pdf; see also Venkat Kuppuswamy and Barry L. Bayus,
"Does My Contribution to Your Crowdfunding Project
Matter?," Journal of Business Venturing 32, no. 1 (2017):
72- 89; Blakley C. Davis, Keith M. Hmieleski, Justin
W. Webb, and Joseph E. Coombs, "Funders' Positive
Affective Reactions to Entrepreneurs' Crowdfunding
Pitches: The Influence of Perceived Product Creativity and
Entrepreneurial Passion," Journal of Business Venturing
32, no. 1 (2017): 90- 106; Jorn Block, Lars Hornuf, and
Alexandra Moritz, "Which Updates during an Equity
Crowdfunding Campaign Llcrease Crowd Participation?,"
Small Business Economics 50, no. 1 (2018): 3- 27;
Jeremy C. Short, David J. Ketchen Jr., Aaron R McKenny,
Thomas H. Allison, and R. Duane Ireland, "Research on
Crowdfunding: Reviewing the (Very Recent) Past and
Ce lebrating the Present," Entrepreneurship Theory and
Practice 41, no. 2 (2017): 149-60; and Francesco Cappa,
Michele Pinelli, Riccardo Maiolini, and Maria Isabella
Leone, "Pledge" Me Your Ears! The Role of Narratives
and Narrator Experience in Explaining Crowdfunding
Success," Small Business Economics 57, no. 2 (2021):
953-73.
26. Kendall Almerico, "SEC: Startups Can Now Raise $50
Million in "Mini IPO," Entrepreneur, March 25, 2015,
https://www.entrepreneur.com/article/244278.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d~wooic
tight.. some 1hitd p,3t1y coo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1 1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i
lhc tigh11o tcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

194 Chapter 8 Sources of Capital for Entrepreneurs

27. Pricewater houseCoopers/Nationa I Venture Capi tal
Association, MoneyTreeT:1,t Report, 2015, https://nvca
.org/pressre leases/ 5 8-8-bill ion-in-v en ture-c a pi ta 1-i n vested
-across-u-s-in-2015-accord ing-to-the-moneytree-report-2.
28. National Venture Capital Association, "Total Venture
Capital Dollars Invested in 2017 on Track to Reach
Decade High," https://nvca.org/pressreleases/total-venture
-capita 1-d ollars-invested-201 7-tra ck-reach-decade-high;
see also Dow Jones VentureSource Venture Capital
Report, 2017, and Amy Huffman, "More Venture
Capital Reports Add Context to 2017 Venture Capital
Industry Analysis," Tech \Vire, January 2018, https://www
. wral techwire.com/2018/01/12/more-venture-reports-a dd
-con text-to-201 7-venture-ca pi tal-ind ustry-anal ysis.
29. National Venture Capital Association, "Record Year
for U.S. Venture Capital Industry despite Pandemic and
Economic Downturn," March 25, 2021, https://nvca.org
/press releases/record-year-f or-u-s-vent ure-ca pi tal-ind us try
-despite-pandemic-and-economic-downturn.
30. Sabrina Fang, "U.S. Venture Capital Activity Soars to
New Highs in 2021 as Deal Value Exceeds $300 Billion
and Fundraising Tops $100 Billion," National Venture
Capital Association, 2022, https://nvca.org/pressreleases
/u-s-venture-ca pi tal-soars-to-new-highs-in-2021.
31. David Blumberg, "The Ascent of Early-Stage Venture
Capital," Tech Crunch, June 7, 2014, https://techcrunch
.com/2014/06/07 /the-ascent-of-ear I y-stage-ven tu re-capital,
accessed January 5, 2015; see also Regan M. Stevenson,
Donald F. Kuratko, and Jared Eutsler, "Crowdfunding
and the Democratization of New Venture Investments:
Unleashing Mainstreet Entrepreneurship," Small Business
Economics 52, no. 2 (2019): 375- 93.
32. Douglas Cumming, Daniel Schmidt, and Uwe Walz,
"Legality and Venture Capital Governance around the
World," Journal of Business Venturing 25, no. 1 (2010):
54-72; Joseph A. LiPuma and Sarah Park, "Venture
Capitalists' Risk Mitigation of Portfolio Company
Internationalization," Entrepreneurship Theory and
Practice 38, no. 5 (201 4}: 1183- 205; Axel Buchner,
Abd ulkad ir Mohamed, and Armin Sch wienbacher,
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33. Edgar Norton and Bernard H. Tenenbaum, "Specialization
versus Diversification as a Venture Capital Investment
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Kamuriwo, and Carolina Billitteri, "Venture Capital
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34. Dirk De Clercq, Vance H. Fried, Oskari Lehtonen, and
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Venture Capital Galaxy," Academy of Management
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Hana M.ilanov, "The Interplay of Need and Opportunity
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35. Douglas Cumming and Sofia Johan, "Venture Capital
In ves tm ent Duration," Journal of Small Business
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Corey Phelps, and Suresh Kotha, "Towards Understanding
Who Makes Corporate Venture Capital Investments and
Why," Journal of Business Venturing 26, no. 2 (2011 }:
153-71; Jeffrey S. Petty and Marc Gruber, '"In Pursuit
of the Real Deal': A Longitudinal Study of VC Decision
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172- 88; Violetta Bacon-Gerasymenko, Jonathan D.
Arthurs, and Sam Y. Cho, "How and When Investment
Horizons Determine Venture Capital Firms' Attention
Breadth to Portfolio Companies," Entrepreneurship
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36. Interview with Sanjay Subhedar, founding partner of
Storm Ventures, Menlo Park, California, November 2017;
Haemen Dennis Park and H. Kevin Steensma, "When Does
Corporate Venture Capital Add Value for New Ventures,"
Strategic Management Journal 33, no . 1 (2012}: 1- 22;
Vio letta Gerasymenko and Jona than D. Arthurs, "New
Insights into Venture Capitalists' Activity: IPO and Timeto-
Exit Forecast as Antecedents of Their Post-Investment
Involvement," Journal of Business Venturing 29, no. 3
(2014}: 405-20.
37. Richard Harroch, "Startups Seeking Funding Should
Consider Corporate Venture Capital," Forbes, February
25, 2017; see a lso Global Corporate Venturing, The
\Vorld of Corporate Venturing: The Definitive Guide to
the Industry London: Global Corporate Venturing, 2017),
and Rene Belderbos, Jojo Jacob, and Boris Lokshin,
"Corporate Venture Capita l (CVC) Investments and
Technological Performance: Geographic Diversity and the
Interplay with Technology Alliances," Journal of Business
Venturing 33, no. 1 (2018}: 20- 34.
38. Gh isl ai ne Bo uil le t-Cord on nie r, "Legal Aspects of
Start-Up Evaluation and Adjustment Methods,"
Journal of Business Venturing 7, no. 2 (1992): 91- 102;
PriceWaterhouseCoopers, MoneyTreeTM Report, 2011;
Cumming et al., "Legality and Venture Capital Governance
around the World"; "2020 Global CVC Report," CB
Insights, March 16, 2021, https://www.cbinsights.com
/research/report/corporate-venture-capital-trends-2020.
39. Sharon Gifford, "Limited Attention and the Role of the
Venture Capitalist," Journal of Business Venturing 12,
no. 6 (1997}: 459-82; Dimo Dimov, Dean A. Shepherd,
and Kathleen M. Sutcliffe, "Requisite Expertise, Firm
Reputation, and Status in Venture Capital Investment
Allocation Decisions," Journal of Business Venturing
22, no. 4 (2007}: 48 1- 502; Will Drover, Matthew S.
Wood, and G. Tyge Payne, "The Effects of Perceived
Control on Venture Capitalist Investment Decisions: A
Configurational Perspective," Entrepreneurship Theory
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40. Jonathan D. Arthurs and Lowell W. Busenitz, "Dynamic
Capabilities and Venture Performance: The Effects of
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no. 2 (2006}: 195- 216; Dirk De Lercq and Harry J.
Sapienza, "Effects of Relational Capital and Commitment
on Venture Capitalists' Perception of Portfolio Company
Performance," Journal of Business Venturing 21, no. 3
. ~yri~1 '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic tight.. some
1hitd p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.d11ot1al tcv,N · h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1 1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc
tigh11o tcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos t,._--q~itc ii.
(2006}: 326-4 7. See also Charles Baden-Fuller, Alison
Dean, Peter McNamara, and Bill Hilliard , "Raising
the Returns to Venture Finance," Journal of Business
Venturing 21, no. 3 (2006}: 265- 85, and Yixi Ning, Wei
Wang, and Bo Yu, "The Driving Forces of Venture Capital
Investments," Small Business Economics 44, no. 2 (2015}:
315-44.
41. Howard E. Van Auken, "Financing Small TechnologyBased
Companies: The Relationship between Familiarity
with Capita l and Ability to Pr ice and Negotia te
Investment," Journal of Small Business Management 39,
no. 3 (2001}: 240- 58; Joris J. Ebbers and Nachoem M.
Wijnberg, "Nascent Ventures Competing for Start -Up
Capital: Matching Reputa tions and Investors," Journal
of Business Venturing 27, no. 3 (2012}: 372- 84; Andrew
L. Maxwell and Moren Levesque, "Tr ustworthiness: A
Critical Ingredient for Entrepreneurs Seeking Investors,"
Entrepreneurship Theory and Practice 38, no. 5 (2014}:
1057- 80.
42. Andrew J . Sherman , Raising Capital, 3rd ed . (New
York: AMACOM Books, 2012); Yong Li and Joseph T.
Mahoney, "When Are Venture Capital Projects Initiated ?,"
Journal of Business Venturing 26, no. 2 (2011}: 239- 54;
Spyros Arvanitis and Tobias Stucki , "The Impact of
Venture Capital on the Persistence of Innovation Activities
of Start-Ups," Small Business Economics 42, no. 4 (2014):
849- 70; Kimberly A. Edd les ton, Jamie J. Ladge, Cheryl
Mitteness, and Lakshmi Balachandra, "Do You See What I
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on Financing Entrepreneurial Ventures," Entrepreneurship
Theory and Practice 40, no. 3 (2016}: 489- 514.
43. Dean A. Shepherd, "Venture Capitalists' Introspection :
A Comparison of 'In Use' and 'Espo used' Decision
Policies," Journal of Small Business Management 37, no.
2 (1999}: 76- 87; Dean A. Shepherd, "Venture Capitalists'
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44. Ian C. MacMillan , Robin Siegel, and P. N. Subba
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Venturing 1, no. 1 (Winter 1985}: 119- 28.
45. John Hall and Cha rles W. Hofer, "Venture Capitalist's
Decision Criteria in New Venture Evaluation," Journal
of Business Venturing 8, no. 1 (1993}: 25- 42; see also
Nikolaus Franke, Marc Gruber, Dietmar Harhoff, and
Joachim Henkel, "What You Are Is What You LikeSimilarity
Biases in Venture Capitalists' Evaluations of
Start-Up Teams," Journal of Business Venturing 21, no. 6
(2006}: 802- 26.
46. Ronald J. Hustedde and Glen C. Pulver, "Factors Affecting
Equity Capital Acquisition: The Demand Side," Journal
of Business Venturing 7, no. 5 (1992}: 363- 74; Petty and
Gr uber, "In Pursuit of the 'Real Deal."': A Longitudinal
Study of VC Decision Making," Journal of Business
Venturing 26, no. 2 (2011}: 172- 88.
47. Harry J. Sapienza, "When Do Venture Capitalists Add
Value?," Journal of Business Venturing 7, no. 1 (1992):
9- 28; see also J uan Florin, "Is Venture Capital Worth
It? Effects on Firm Performance and Fo under Retur ns,"
Journal of Business Venturing 20, no. 1 (2005}: 113- 35,
Notes 195
and Lowell W. Busenitz, James 0. Fiet, and Douglas D.
Moesel, "Reconsidering the Venture Capitalists' 'Value
Added' Proposition : An lnterorganizationa l Learning
Perspective," Journal of Business Venturing 19, no. 6
(2004}: 787- 807.
48. B. Elango, Vance H . Fried, Robert D. Hisrich, and Amy
Polonchek, "How Venture Capital Firms Differ," Journal
of Business Venturing 10, no. 2 (1995}: 157- 79; Dean A.
Shepherd and Andrew L. Zacharakis, "Venture Capitalists'
Expertise: A Call for Research into Decision Aids and
Cognitive Feed back," Journal of Business Venturing
17, no. 1 (2002}: 1- 20; Dick De Clercq and Harry J .
Sapienza, "When Do Venture Capitalists Learn from
Their Portfolio Companies?," Entrepreneurship Theory
and Practice 29, no. 4 (2005}: 517- 35; Richard Fairchild,
"An Entrepreneur's Choice of Venture Capitalist or AngelFinancing:
A Behavioral Game-Theoretic Approach,"
Journal of Business Venturing 26, no. 3 (2011}: 359- 74.
49. Marie-Jeanne J uilland, "What Do You Want from a
Venture Capitalist?," August 1987 issue of Venture, For
Entrepreneurial Business Owners & Investors, by special
permission. Copyright © 1987 Venture Magazine, Inc.,
521 Fifth Ave., New York, NY 10175-0028; Will Drover,
Matthew S. Wood, and Yves Fassin, "Take the Money or
Run? Inves tors' Ethical Reputation and Entrepreneurs'
Willingness to Partner," Journal of Business Venturing 29,
no. 6 (2014}: 723-40.
50. Harold M. Hoffman and James Blak ey, "You Can
Negotiate with Venture Capitalists," Harvard Business
Review 65, no. 2 (March/April 1987}: 16; Andrew L.
Zacharakis and Dean A. Shepherd , "The Nature of
Worma tion and Overconfi dence on Venture Capitalist's
Decision Making," Journal of Business Venturing 16, no. 4
Uuly 2001}: 311- 32; Lowell W. Busenitz, James 0. Fiet,
and Douglas D. Moesel, "Signaling in Venture CapitalistNew
Venture Team Funding Decisions: Does It Indicate
Long-Term Venture Outcomes?," Entrepreneurship
Theory and Practice 29, no. 1 (2005): 1- 12; Ebbers and
Wijnberg, "Nascent Ventures Competing for Start -Up
Capital."
51. "The Richest People in America, 2021," Forbes 400,
https://www.forbes.com/forbes-400, accessed January 7,
2022.
52. William E. Wetzel Jr., as quoted by Dale D. Buss, "Heaven
Help Us," Nation's Business, November 1993, 29; see
also John R. Becker-Blease and Jeffrey E. Sohl, "The
Effect of Gender Diversity on Angel Group Investment,"
Entrepreneurship Theory and Practice 35, no. 4 (2011}:
709- 33.
53. William E. Wetzel J r., "Angel Money," In Business,
November/December 1989, 44.
54. William E. Wetzel J r., "Angels and Informal Risk
Capital," Sloan Management Review 24, no. 4 (Summer
1983}: 23- 34; see also John Freear, Jeffrey E. Sohl, and
William E. Wetzel Jr., "Angels and Non-Angels: Are There
Differe nces?," Journal of Business Venturing 19, no. 2
(1994}: 109- 23; Andrew L. Maxwell, Scott A. Jeffrey, and
Moren Levesque, "B usiness Angel Early Stage Decision
Making," Journal of Business Venturing 26, no. 2 (2011}:
212- 25; Cheryl Mitteness, Richard Sudek , and Melissa
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic
tight.. some 1hitd p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1 1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc
t igh11otcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

196 Chapter 8 Sources of Capital for Entrepreneurs

S. Cardon, "Angel Investor Characteristics That Determine
whether Perceived Passion Leads to Higher Evaluations
of Funding Potential," Journal of Business Venturing
27, no. 5 (2012}: 592- 606; Annaleena Parhankangas
and Michael Ehrlich, "How Entrepreneurs Seduce
Business Angels: An Impression Management Approach,"
Journal of Business Venturing 29, no. 4 (2014}: 543- 64;
Veroniek Collewaert and Harry J. Sapienza, "How Does
Angel Investor- Entrepreneur Conflict Affect Venture
Innovation? It Depends," Entrepreneurship Theory and
Practice 40, no. 3 (2016}: 573- 97; Will Drover, Matthew
S. Wood, and Andrew Zacharakis, "Attributes of Angel
and Crowdfunded Investments as Determinants of VC
Screening Decisions," Entrepreneurship Theory and
Practice 41, no. 3 (2017}: 323- 47; Sharon Poczter and
Melanie Shapsis, "Gender Disparity in Angel Financing,"
Small Business Economics 51, no. 1 (2018}: 31- 55; and
Annalisa Croce, Massimiliano Guerini, and Elisa Ughetto,
"Angel Financing and the Performance of High-Tech
Start-Ups," Journal of Small Business Management 56, no.
2 (2018}: 208- 28.
55. Mark Van Osnabrugge and Robert J. Robinson,
Angel Investing: Matching Startup Funds with Startup
Companies (San Francisco: Jossey-Bass, 2000); Douglas
J. Cumming, J. Ari Pandes, and Michael J. Robinson,
"The Role of Agents in Private Entrepreneurial Finance,"
Entrepreneurship Theory and Practice 39, no. 2 (2015):
345- 74; John R. Becker-Blease and Jeffrey E. Sohl, "New
Venture Legitimacy: The Conditions for Angel Investors,"
Small Business Economics 45, no. 4 (2015): 735- 49;
Cheryl R. Mitteness, Rich DeJordy, Manju K. Ahuj a,
and Richard Sudek, "Extending the Role of Similarity
Attraction in Friendship and Advice Networks in Angel
Groups," Entrepreneurship Theory and Practice 40, no. 3
(2016}: 627- 55.
56. Angel Resource Institute, 2017 Halo Report: Annual
Report on Angel Investments (Wilmington, NC: Angel
Resource Institute, 2018); Devin Miller, "Record Year
for U.S. Venture Capital Industry despite Pandemic
and Economic Downturn," National Venture Capital
Association, March 25, 2021, http s://nvca.org
/pressreleases/record-year-f or-u-s-vent ure-ca pi ta 1-ind us try
-despite-pandemic-and-economic-down turn; Gil Press,
"Angel Investors Are the Unsung Catalysts of U.S.
Innovation and Growth," Forbes, October 5, 2021.
57. Jeffrey Sohl, "Angel Investors: The Impact of Regret from
Missed Opportunities," Small Business Economics 58,
no. 4 (2022}: 2281- 96; Jeffrey Sohl, "The Angel Market
in 2020: Return of the Seed and Startup Stage Market
for Angels," Center for Vent ure Research, May 5, 2021,
https://pa ulcollege. unh.ed u/sites/defa ult/files/resource
/files/2020-anal ysis-report. pdf.
58. Wetzel, "Angel Money," 42-44; Colin M. Mason and
Richard T. Harrison, "Is It Worth It? The Rates of Return
from Informal Venture Capital Investments," Journal of
Business Venturing 17, no. 3 (2002}: 211- 36; Croce et
al. , "Angel Financing and the Performance of High-Tech
Start-Ups"; Torben Antretter, Charlotta Siren, Dietmat
Grichnik, and Joakim Wincent, "Should Business Angels
Di versify Their Investment Portfolios to Achieve Higher
Performance? The Role of Knowledge Access through
Co-Investment Networks," Journal of Business Venturing
35, no. 5 (2020}: 106043.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d
~wooic tight.. some 1hitd p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1 1hcovcrnll lc:wningcxpcticncc. Ccngagc
Lcamingt(SCtv<':i lhc tigh11o tcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

Chapter 9
Legal Challenges for Entrepreneurial
Ventures 198
Chapter 10
Marketing Challenges for Entrepreneurial
Ventures 221
YA lex/Sh utter stock .com

Chapter 11
Financial Preparation for Entrepreneurial
Ventures 245
Chapter 12
Developing an Effective Business Plan 274
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tight.. some 1hitd p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1 1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc
t igh11otcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Legal Challenges for
Entrepreneurial
Ventures
Learning Objectives
9.1. Explain the importance of legal issues for entrepreneurs
9.2. Identify patent protection, including definitions and preparation
9.3. Discuss copyrights and their relevance to entrepreneurs
9.4. Explain trademarks and their impact on new ventures
9.5. Identify the legal forms of organization: sole proprietorship,
partnership, and corporation
9.6. List the advantages and disadvantages of each of these three
legal forms
9.7. Explain the nature of the limited partnership and limited liability
partnerships
9.8. Discuss how an S corporation works
9.9. Define the additional classifications of corporations, including
limited liability companies ILLCs),
B corporations, and low-profit, limited liability companies IL3Cs)
9.10. Identify the major segments of the bankruptcy law that apply to
entrepreneurs
Entrepreneurial Thought
A major difficulty for the inexperienced entrepreneur is the host of
strange terms and phrases which are
scattered throughout most legal documents. The novice in this kind
of reading should have some understanding
not only of what is contained in such documents, but also why these
provisions have been
included. If an entrepreneur cannot find the time or take the interest
to read and understand the major contracts
into which his company will enter, he should be very cautious about
being an entrepreneur at all.
- Patrick R. Liles, Harvard Business School
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tight.. some 1hitd p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1 1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc
t igh11otcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

Importance of Legal Issues

L09.1 Exp la in the importa nce of legal issues for entrepreneurs
Entrepreneurs cannot hope to have the legal expertise or
background of an attorney, of course, but they should be
sufficiently kno\>vledgeable about certain legal concepts
that have implications for the business venture.1
Table 9.1 sets forth sorne of the major legal concepts
that can affect entrepreneurial ventures. These concepts
can be divided into three groups: (1) those that relate to
the inception of the venture, (2) those that relate to the
ongoing venture, and (3) those that relate to the growth
and continuity of the venture. The focus of this chapter is
on the legal concepts related to the first and third groups.
Table 9.1 Major Legal Concepts and Entrepreneurial
, Ventures
I. Inception of an Entrepreneurial Venture
A. Laws govern ing intellectual property
1 . Patents
2. Copyrights
3. Trademarks
B. Forms of business organization
1. Sole proprietorsh ip
2. Partnership
3. Corporation
4. Franchise
C. Tax considerations
D. Capital formation
E. Liabil ity questions
II. An Ongoing Venture: Business Development and
Transactions
A. Personnel law
1. Hiring and firing policies
2. Equal Employment Opportunity Commission
3. Collective barga ining
B. Contract law
1 . Legal contracts
2. Sales contracts
3. Leases
Ill. Growth and Continu ity of a Successful Entrepreneurial
Venture
A. Tax cons iderations
1 . Federal, state, local
2. Payroll
3. Incentives
B. Governmental regulations
1. Zon ing (property)
2. Administrative agencies (regulatory)
3. Consumer law
C. Continuity of ownership rights
1. Property laws and ownersh ip
2. Wills, trusts, estates
3. Bankruptcy
Intellectual Property Protection: Patents 199
Specifically, \>Ve examine intellectual property protection
(patents, copyrights, trademarks), the legal forms of
organization, and bankruptcy la\>v.
9-1 Intellectual Property
Protection: Patents
L09.2 Identify pa tent protection, includi ng definitions a nd
prepa ration
A patent provides the O\>vner \>Vith exclusive rights to
hold, transfer, and license the production and sale of the
patented product or process. Design patents last for 15
years (before May 2015, it was 14 years), while all others
last for 20 years. The objective of a patent is to provide
the holder with a temporary monopoly on their innovation
and thus to encourage the creation and disclosure of
new ideas and innovations in the marketplace. Securing a
patent, however, is not ahvays an easy process.
A patent is an intellectual property right. It is the
result of a unique discovery, and patent holders are
provided protection against infringement by others. In
general, a number of items can qualify for patent protection,
arnong them processes, machines, products, plants,
compositions of elements (chemical compounds), and
improvements on already existing items. 2
9- la Securing a Patent: Basic Rules
Because quite often the patent process is complex (see
Figure 9.1 ), careful planning is required. For pursuing
a pa tent, the follo\>ving basic rules are recommended by
the experts:
Rule 1: Pursue pa tents that are broad, are commercially
significant, and offer a strong position. This
rneans that relevant patent la"v rnust be researched
to obtain the \>videst coverage possible on the idea
or concept. In addition, there must be something
significantly novel or proprietary about the innovation.
Record all steps or processes in a notebook and
have them \>Vitnessed so that documentation secures a
strong proprietary position.
Rule 2: Prepare a patent plan in detail. This plan
should outline the costs to develop and market the
innovation as \>vell as analyze the competition and
technological similarities to your idea. Attempt to
detail the precise value of the innovation.
Rule 3: Have your actions relate to your original
pa tent plan. This does not mean that a plan ca1u1ot
be changed. Ho\>vever, it is \>Vise to remain close to the
plan during the early stages of establishing the patent.
Later, the path that is prepared may change- for
example, licensing out the patent versus keeping it for
yourself.
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1 1hcovcrnll l c:wningcxpc ticncc. Ccngagc Lcamingt(SCtv<':i
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200 Chapter 9 Legal Challenges for Entrepreneurial Ventures

Figure 9.1 Process for Obtaining a Patent
Step Who?
1. _______.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
App licant
App licant
App licant
Applicant
Applicant - r
Applicant
Applicant
USPTO
Applicant
USPTO
Applicant
Applicant
-
Activity
Has your invention already been patented?
S€arch, httpdipatft.uspto.gov
Yes
1--;•--
Design Patent Plant Patent
(ornamental
characteristics)

No +
hat ty
licati
u fili
(new variety of asexually
produced plant)
Utility Patent (most common)
(useful process, machine, article of
manufacture, composition of matter)
Determine Filing Strategy

Yes Need ~ > - -+ international protection? '-------------~ Yes

Yes
Which type of Utility Patent Application to file?
Provisional or Nonprovisional
Consider expedited examination
Prioritized Examination
Accelerated Examination Program
First Action Interview
Patents Prosecution Highway
Who Should File?
File yourself (Pro Se)
Use a Registered Attorney or Agent (Recommended)
Prepare for electronic filing
Determine Application Processing Fees
Apply for a Customer Number and Digital Certificate
Apply for Patent using Electronic Filing System as a
Registered eFiler (Recommended)
About EFS-Web
USPTO examines application
Check application status
Yes

~
No

l
Applicant files replies, requests for reconsideration, and
appeals as necessary
J..
If objections and rejection of the examiner are overcome,
USPTO sends Notice of Allowance and Fee(s) due

,. ...
Applicant pays the issue fee and the publication fee f-.
Maintenance fees due 3 ½, 7 ½, and 11 ½ years after patent grant +---
No
>-+--
~ EfS.Web

USPTO • GRANTS ' PATENT

Download Utility Patent Application Guide

Source: U.S. Patent Office, 2015.
Rule 4: Establish an infringement budget. Patent
rights are effective only if potential infri ngers fear
legal damages. Thus, it is important to prepare a realistic
budget for prosecuting violations of the patent.
Rule 5: Evaluate the patent plan strategically. The
typical patent process takes three years. This sho uld
be compared to the actual life cycle of the proposed
innovation or technology. Will the patent be ,vorth
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tight.. some 1hitd p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1 1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc
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defending in three years, or \.vill enforcement cost

more than the damages collected?3
These rules about proper definition, preparation,
planning, and evaluation can help entrepreneurs esta blish
effective patent protection. In addition, they can
help the patent attorney conduct the search process.
9-1 b Securing a Patent: The Application
Patent applications must include detailed specifications
of the innovation that any skilled person in the specific
area can understand. A patent application has t\.vo parts:
1. The specification is the text of a patent and may
include any accompanying illustrations. Because its
purpose is to teach those "vho are fluent in this area
of technology all they need to understand, duplicate,
and use the invention, it may be quite long. The
specification typically includes the follo\.ving:
a. An introduction explaining \.vhy the invention
"vill be useful.
b. A description of all prior art that you are a\.vare
of and that could be considered similar to the
invention. The specification usually lists other
patents by number- \.vith a brief description of
each- but you can cite and describe unpatented
technology as "vell.
c. A sun11nary of the invention that describes the
essence of the ne\.v technology and emphasizes its
difference from prior art "vhile including all its
requisite features, \.vhether novel or not.
d. A detailed description of the invention, including
anything that could be rernotely relevant, reference
to all reasonable variations, and number
bounds. Take as much space as you like. Use as
many numbers as necessary, including close or
tight limits based on experience as well as loose
ones based on "vhat might be possible. This section
should be detailed enough to really teach a
skilled practitioner.
e. Exarnples and/or experimental results, in full
detail.
The specification is inherently broad because its
intent is to teach and also, as a practical matter,
to allo"v some flexibility in the claims that are
based on it.
2. Claims are a series of short paragraphs, each of
\.vhich identifies a particular feature or cornbination
of features that is protected by the patent. The entire
claims section, at the end of the patent, is typically
about one page long or less.
Claims define and lirnit the patented invention. The
invention can be broad (e.g., a process requiring an
"inorganic, nonmetal solid" \.Vould cover a lot of possibilities)
but sharply limited not to cover anything in prior
art (other existing processes that use organics or metals).4
Intellectual Property Protection: Copyrights 201
Once the application is filed with the Patent and
Trademark Office of the Department of Commerce, an
examiner \.vill determine \.vhether the innovation q ualifies
for patentability. The examiner will do this by
researching technical data in journals as \.Yell as previously
issued patents. Based on the individual's findings,
the application \.vill be rejected or accepted.
Only a small percentage of issued patents are commercially
valuable. Consequently, the entrepreneur must
\.Veigh the value of the i1u1ova tion against the time and
money spent to obtain the patent. Also, it is important to
remember that rnany patents granted by the Patent and
Trademark Office have been declared invalid after being
challenged in court. This occurs for several reasons. One
is that the patent holder \.vaited an unreasonable length
of tirne before asserting their rights. A second is that
those bringing suit against the patent holder are able to
prove that the individual misused the patent rights- for
example, by requiring certain purchases of other goods
or services as part of the patent-use arrangement. A third
is that other parties are able to prove that the patent
itself fails to meet tests of patentability and is therefore
invalid.5
If, after careful revie"v, an entrepreneur concludes that
the innovation \.vill withstand any legal challenge and is
commercially \.Vorthwhile, a patent should be pursued.
If a challenge is rnounted, legal fees may be sizable, but
a successful defense can result in darnages sufficient to
compensate for the infringement plus court costs and
interest. In fact, the court may a\.vard darnages of up
to three times the actual amount. In addition, a pa tent
infringer can be liable for all profits resulting from the
infringement as well as for legal fees. 6
9-2 Intellectual Property
Protection: Copyrights
L09.3 Discuss copyrights and their relevance to entrepreneurs
A copyright provides exclusive rights to creative individuals
for the protection of their literary or artistic productions.
It is not possible to copyright an idea, but the
particular rnode for expression of that idea often can
be copyrighted. This expression can take many forms,
including books, periodicals, drama tic or musical compositions,
art, motion pictures, lect ures, sound recordings,
and computer prograrns.
Any works created after January 1, 1978, and receiving
a copyright are protected for the life of the author plus 70
years. The o\.vner of this copyright may (1) reproduce the
\.York, (2) prepare derivative \.Yorks based on it (e.g., a condensation
or movie version of a novel), (3) distribute copies
of the \.York by sale or othenvise, (4) perforrn the work
publicly, and (5) display the work publicly. Each of these
rights (or a portion of each) also may be transferred.7
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202 Chapter 9 Legal Challenges for Entrepreneurial Ventures

9-2a Understanding Copyright
Protection
For the author of creative material to obtain copyright
protection, the material must be in a tangible form so it
can be comrnunicated or reproduced. It also rnust be the
author's o\>vn \>York and thus the product of their skill
or judgment. Concepts, principles, processes, systems, or
discoveries are not valid for copyright protection until
they are put in tangible form- \>vritten or recorded.
Formal registration of a copyright "vith the Copyright
Office of the Library of Congress is a requirement
before an author can begin a la\>vsuit for infringement. In
addition, an author can find their copyright invalidated
if proper notice isn't provided.
Anyone \>vho violates an author's exclusive rights
under a copyright is liable for infringement. However,
because of the fair use doctrine, it is sometirnes difficult
to establish infringement. Fair use is described as the
reproduction of a copyrighted \>York for purposes such
as criticism, comment, ne\>vs reporting, teaching (including
rnultiple copies for classroom use), scholarship, or
research. These uses rnay be good candidates for the fair
use defense, as they rnay be deemed not an infringernent
of copyright. In determining "vhether the use made of a
\>York in any particular case is a fair use, the factors to be
considered include ( 1) the purpose and character of the
use, including \>vhether such use is of a cornrnercial nature
or is for nonprofit educational purposes; (2) the nature of
the copyrighted \>York; ( 3) the amount and substantiality
of the portion used in relation to the copyrighted \>York
as a "vhole; and ( 4) the effect of the use on the potential
market for a value of the copyrighted \>York. 8
If, ho\>vever, an author substantiates a copyright
infringement, the normal remedy is recovery of actual
damages plus any profits the viola tor receives. Keep in
mind that there is absolutely no cost or risk involved in
protecting rnaterial that you generate by copyright. Therefore,
as a matter of course, any \>vriting that you prepare
and spend a lot of tirne on should be copyrighted by putting
the copyright notice (©) on it. Also, it is not necessary
to register copyrights "vith the Copyright Office unless and
until you \>Vant to sue somebody for infringement. In the
ovenvhelming majority of cases- assuming you are not in
the publishing business-you can simply use the copyright
notice and do not need to spend the time and effort necessary
to register copyrights "vith the Copyright Office.
9-2b Protecting Ideas?
The Copyright Act specifically excludes copyright
protection for any "idea, procedure, process, system,
method of operation, concept, principle, or discovery,
regardless of the forrn in which it is described, explained,
illustrated, or embodied." Note that it is not possible to
copyright an idea- the underlying ideas embodied in a
\>York may be used freely by others. What is copyrightable
is the particular \>vay an idea is expressed. Whenever
an idea and an expression are inseparable, the expression
cannot be copyrighted.
Generally, anything that is not an original expression
"vill not qualify for copyright protection. Facts
\>videly known to the public are not copyrightable. Page
nwnbers are not copyrightable because they follo"v a
sequence kno\>vn to everyone. Mathematical calculations
are not copyrightable. Compilations of facts, ho\>vever,
are copyrightable. The Copyright Act defines a compilation
as "a \>York formed by the collection and assembling
of preexisting materials of data that are selected, coordinated,
or arranged in such a \>vay that the resulting \>York
as a \>vhole constitutes an original \>York of authorship."9
9-3 Intellectual Property
Protection: Trademarks
L09A Expla in trademarks and their impact on new ventures
A trademark is a distinctive name, mark, symbol, or
motto identified "vith a company's product(s) and registered
at the Patent and Trademark Office. Thanks to
trademark la"v, no confusion should result from one
venture's using the symbol or narne of another.
Specific legal terms differentiate the exact types of
marks. For example, trademarks identify and distinguish
goods. Service marks identify and distinguish services.
Certification marks denote the quality, materials,
or other aspects of goods and services and are used by
someone other than the mark's O\>vner. Collective marks
are trademarks or service marks that members of groups
or organizations use to identify themselves as the source
of goods or services. 10
Usually, personal names or \>vords that are considered
generic or descriptive are not trademarked unless
the \>Vords are in some \>vay suggestive or fanciful or the
personal name is accornpanied by a specific design. For
example, "English Leather" may not be trademarked to
describe a leather processed in England; ho\>vever, English
Leather is trademarked as a name for aftershave lotion
because this constitutes a fanciful use of the words. Consider
also that even the comrnon name of an individual
may be trademarked if that name is accompanied by a
picture or some fanciful design that allo\>vs easy identification
of the product, such as Smith Brothers Cough Drops.
In most cases, the Patent and Trademark Office "vill
reject an application for marks, symbols, or names that are
flags or insignias of goverrunents, portraits or signatures
of living persons, immoral or deceptive, or items likely to
cause problems because of resemblance to a previously
registered mark. Once issued, the trademark is listed in
the Principal Register of the Patent and Trademark Office.
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This listing offers several advantages: ( 1) nation,vide constructive

notice of the o,vner's right to use the 1nark (thus
eliminating the need to show that the defendant in an
infringement suit had notice of the mark), (2) Bureau of
Customs protection against importers using the mark, and
(3) incontestability of the mark after five years. 11
In 1995, Congress amended the Trademark Act by
passing the Federal Trademark Dilut ion Act, ,vhich
extended the protection available to trade1nark owners
by creating a federal cause of action for trademark
dilution. Until the passage of this amendment, federal
trademark la,v prohibited only the unauthorized use of
the same mark on competing- or on noncompeting but
"related"- goods or services ,vhen such use ,vould likely
confuse consumers as to the origin of those goods and
services. In 2006, Congress enacted a further amendment
kno,vn as the Trade1nark Dilution Revision Act
to protect "distinctive" or "famous" trademarks (such
as McDonald's, Google, Nike, and Apple) from certain
unauthorized uses of the marks regardless of a sho,ving
of competition or a likelihood of confusion. 12
Historically, a trademark registration lasted 20 years;
ho,vever, the current registrations are good for only 10
years, ,vith the possibility for continuous renewal every
10 years. It is most important to understand that a trademark
may be invalidated in four specific ,vays:
1. Cancellation proceedings. Cancellation proceedings
constitute a third party's challenge to the mark's distinctiveness
,vi thin five years of its issuance.
2. Cleaning-out procedure. The cleaning-out procedure
is the failure of a trademark owner to file an affidavit
stating it is in use or justifying its lack of use
,vithin six years of registration.
3. Abandonment. The nonuse of a trademark for t,vo
consecutive years without justification or a statement
regarding the trademark's abandonment.
4. Generic meaning. Generic meaning refers to the allowance
of a trademark to represent a general grouping
of products or services. For example, cellophane has
come to represent plastic wrap, and Scotch tape has
come to represent adhesive tape. Xerox is currently
seeking, through national advertising, to avoid having
its na1ne used to represent copier machines.
If a trademark is properly registered, used, and protected,
the owner can obtain an injunction against any
uses of the mark that are likely to cause confusion. Moreover,
if infringement and damages can be proven in court,
a monetary a,vard may be given to the trademark holder.
9-3a Avoiding Trademark Pitfalls
Trademark registration and search can be costly, sometimes
ranging into the thousands of dollars. Trademark
infringement can be even more expensive. To avoid these
Intellectual Property Protection: Trademarks 203
pitfalls, one author has noted five basic rules that entrepreneurs
should follo,v ,vhen selecting trademarks for
their ne,v ventures:
• Never select a corporate name or a mark ,vithout
first doing a trademark search.
• If your attorney says you have a potential problem
with a mark, trust their judgment.
• Seek a coined or fanciful name or mark before you
settle for a descriptive or highly suggestive one.
• Whenever 1narketing or other considerations dictate
the use of a name or mark that is highly suggestive
of the product, select a distinctive logotype for the
descriptive or suggestive ,vords.
• Avoid abbreviations and acrony1ns ,vherever possible,
and when no alternative is acceptable, select
a distinctive logotype in ,vhich the abbreviation or
acronym appears.13
9-3b Trade Secrets
Certain business processes and information cannot be
patented, copyrighted, or trademarked. Yet they may be
protected as trade secrets. Customer lists, plans, research
and development, pricing information, marketing techniques,
and production techniques are examples of
potential trade secrets. Generally, anything that 1nakes
an individual company unique and has value to a competitor
could be a trade secret.14
Protection of trade secrets extends both to ideas
and to their expression. For this reason and because a
trade secret involves no registration or filing requirernents,
trade-secret protection is ideal for sofnvare. Of
course, the secret forinula, 1nethod, or other information
must be disclosed to key employees. Businesses
generally attempt to protect their trade secrets by having
all employees ,vho use the process or information
agree in their contracts never to divulge it. Theft of
confidential business data by indust rial espionagesuch
as stealing a compet itor's documents- is a theft
of trade secrets ,vithout any contractual violation and
is actionable in itself.
The la,v clearly outlines the area of trade secret s:
Information is a trade secret if (1) it is not kno,vn by the
competition, (2) the business would lose its advantage if
the competition ,vere to obtain it, and (3) the o,vner has
taken reasonable steps to protect the secret from disclosure.
15 Keep in 1nind that prosecution is still difficult in
many of these cases.
9-3c Trademark Protection on
the Internet
Because of the unique nature of the Internet, its use creates
unique legal questions and issues-particularly ,vith respect
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~ wooic
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204 Chapter 9 Legal Challenges for Entrepreneurial Ventures
'
The Entrepreneurial Process
Parody or Trademark Infringement?
Parody is sometimes used as a defense against trademark
infringement. A parody must convey two simultaneous and contradictory
messages: not only that it is the original but also that ii
is not the orig inal and is instead a parody. According to the Patent
and Trademark Office, a true parody actually decreases !he
likel ihood of confusion because !he effect of !he parody is to create
a distinction in the viewer's mind between !he aclual product
and !he joke. The customer must be amused, not confused.
Haute Diggily Dog is a company !hat sells pet toys. They have
made a number of parody products, including Chewnel No. 5,
Jimmy Chew, and Dog Perignon. However, !heir parody pet toy
called Chewy Vuiton enraged the Louis Vuitton company and their
brand w ith a stylized LV monogram !hat represented to consumers
an image of quality and exclusivity w ith products reta iling from
$995 to $4,500. Chewy Vuiton d id mimic the shape, design,
and color of Louis Vuillon's handbags, but instead of Lv'. the toy's
pattern included a CV with a flower, cross, and d iamond pattern
that resembled but was not identical to !he Vuitton pattern. The
chew toy sold for less than $20 in pet stores.
The court ruled this lo be a parody. The Chewy \tuiton toy
was found to be similar, indicating that the toy is an imitation,
but also was found to be d ifferent from the original handbags,
being a small dog toy, not an expensive, luxury handbag. After
finding that the Chewy Vuiton toy was a parody, the court sti ll
had to examine for infringement (i e., whether the use created
a likel ihood of confusion)
To assess whether a trademark infringement has occurred, !he
courts consider seven factors: (I ) the degree of similarity between
lhe trademarks, (2) the similarity of the products for which lhe name
is used, (3) !he area and manner of concurrent use, (4) the degree
of care likely to be exercised by consumers, (5) !he strength of
!he complainant's trademark, (6) whether aclual product confusion
exists among buyers, and (7) an intent on !he part of the alleged
infringer to palm off their products as those of another.
The Chewy Vuiton parody was suffic iently similar lo
invoke the famous trademark in !he minds of consumers yet still
d istinguish the products. The dissimilarity of !he products was in
Houle Diggity Dog's favor, as one product is a chew toy and
the other a designer purse. Haute Diggity Dog's products generally
were sold at pet stores w ith other pet products, including
other parody products, while Louis Vuitton handbags generally
are sold in Louis Vuillon boutiques or department stores.
Having found no trademark infringement, the court !urned to
the issue of dilution (Trademark Dilu tion Revision Act of 2006):
whether Haute Diggity Dog's use of Chewy Vuiton was likely to
impair the distinctiveness or harm !he reputation of the Louis Vuillon
marks. In doing this, courts examine a number of factors, including
( I ) !he degree of similarity between the mark or trade name and
the famous mark, (2) the degree of inherent or acquired d istinctiveness
of the famous mark, (3) the extent to which the owner
of !he famous mark is engaging in substantially exclusive use of
the mark, (4) the degree of recognition of the famous mark, (5)
whether the user of !he mark or trade name intended to create an
association with the famous mark, and (6) any aclual association
between the mark or trade name and !he famous mark. Because
!he product was a parody, !he court supported Haute Diggity Dog
and found no violation against Louis Vuilton.
The Chewy Vuiton case brings to mind several questions
that every entrepreneurial company should consider whenever
attempting parody:
ls the parody humorous? If it doesn't make you laugh,
be concerned. In order to be an effective parody, ii must
communicate the necessary element of satire, ridicule, joking,
or amusement.
ls the proposed trademark similar enough and different
enough from the mark being parodied? Haute Diggity Dog
escaped liability as a trademark parody because each element
of its mark and design were similar but not identical to
!he Louis Vuillon marks and design.
ls the proposed parody mark in a product line that is too
close to those offered by the target? In Chewy Vuiton, the
products were d issimilar, and the court found it unl ikely
that Louis Vuilton would sell pet chew toys. Beware that
courts have been very strict where the mark is used on a
competing product.
Are you prepared for legal action? Despite the fact that
it was ul timately successful, Haute Diggity Dog spent several
hundred thousands of dollars defending itself, lost
d istributors, and had merchandise sent back as a result
of the lawsuit. Is ii worth a legal battle w ith companies
like Microsoft, Hard Rock Cafe, McDonald's, Coca-Cola,
or Nike? Companies are getting more aggressive about
protecting their trademarks, and an infringement suit filed
by a well.funded company can mean years of legal issues
and huge legal bills.
Examples of other court rul ings include the following:
• Hard Rain Cafe was likely to confuse consumers regarding
the Hard Rock Cafe
• En joy Cocaine was not a val id parody of Enjoy CocaCola,
where bath used the familiar red-and-white logo.
• Lardash was considered a valid parody of Jordache.
• Mutant of Omaha and the subtitle Nuclear Holocaust
Insurance were not valid parodies of Mutual of Omaha.
• Bagzilla was a permissible pun of Godzilla and would
not confuse consumers.
• Spy Notes was a valid parody of CliffsNotes.
Source: Adopted from Maxine S. Lons, ' Parody as a Marketing Strategy,'
Marketing News,Jonuory 3, 1994, 20; Dione E. Burke, "Trademark Parody:
Toking a Bite Out of Owner's Rights,' 2009, http:/ /www.steptoejohnson
.com/ publicotions/publicotionstory/TrodemorkPoroclyTokingoBiteOutof,249
.ospx, accessed January 15, 2012; and Jone P. Mollor, A. Jomes Barnes,
Thomas Bowers, and Arlen W . longvordt, Business low: The Elhico/, Global,
and £-Commerce Environmenl, 15th ed. [New York: McGrowHill Irwin,
2013 ), 288-92.
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to intellectual property righ ts. The emerging body of la\.v
governing cyberspace is often referred to as cyberlaw.
One of the initial trademark issues involving intellectual
property in cyberspace has been \.vhe ther domain
names (Internet addresses) should be treated as trademarks
or simply as a 1neans of a ccess, similar to street
addresses in the physical world. Increasingly, the courts
are holding that the principles of t rademark la\.v should
apply to domain names. One problem in applying t rademark
la\.v to Internet domain names, however, is that
trademark la\.v allows multiple parties to use the same
mark- as long as the mark is used for different goods or
services and \.vill not cause customer confusion. On the
Internet as it is currently struct ured, only one party can
use a particular domain name regardless of the type of
goods or services offered. In other \.Vords, although t\.vo
or 1nore businesses can own the trademark Entrevision,
only one business can operate on the Internet \.Vith the
domain name Entrevision.com. Because of this restrictive
feature of domain names, a question has arisen as
to \.vhether domain names should func tion as trademarks.
To date, the courts that have considered this
question have held that the unauthorized use of another's
mark in a domain name 1nay constitute trademark
infringement. 16
Legal Forms for Entrepreneurial Ventures 205
Table 9.2 provides a comprehensive outline of the
forms of intellectual property protection.
9-4 Legal Forms for
Entrepreneurial Ventures
L09.5 Identify the legal forms of organization: sole
proprietorship, partnership, and corporation
Prospective entrepreneurs need to identify the legal form
or structure that \.vill best suit the de1nands of the venture.
The necessity for this derives from changing tax
la\.vs, liability situations, the availability of capital, and
the co1nplexity of business fo n n ation. 17 When exa1nining
these legal forms of organizations, entrepreneurs
need to consider a few important factors:
• Ho\.v easily the fonn of business organization can be
implemented
• The amount of capital required to i1nplement the
form of business organization
• Legal considerations that might limit the options
available to the entrepreneur
The Entrepreneurial Process
I

Internet Intellectual Property Information

Sources
http:/ /www.uspto.gov
The Patent and Trademark Office website provides a wealth
of valuable informa tion for entrepreneurs. Users can locate
patent and trademark information, such as registration forms,
international patents, legal issues, and frequently asked ques·
lions. Users can also check the status of a trademark or patent
appl ication on this site.
http:/ /www.copyright.gov
The Copyright Office at the Library of Congress website pro·
vides information on copyright protecting works, licensing, and
legal issues. Users also can search copyright records on the site.
http:/ /www.law.cornell.edu
The website for the Legal Information Institute a t the Cornell
School of Law provides legal documentation a nd a history of
copyright law. It also offers information on international copy·
rights and links to other copyright information resources.
http:/ /www.findlaw.com
This site allows the user to search for any topic and yield
returns of the actual written law, court precedents, and
current cases and interpretations. The site also provides top·
ical searches that a id the user in getting started as well as
a business section to help put the laws into more practical
applications.
https:/ /www.cengage.com/
s?q:business%20law&searchbtn:Search
Cengage Learning offers numerous business law textbooks.
This website offers an overview of each book with updates that
allow surfers to check contents before purchasing.
https:/ /patentscope.wipo.int
Patentscope is the World Intellectual Property Organization's
major international databose where users can search through
l O l million patent documents and ga in access to patent
statistics.
https://patents.google.com
Google Patents indexes granted and publ ished patents from
the Patent and Trademark Office, European Patent Office, and
World Intellectual Property Organization databoses.
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Table 9.2 Forms of Intellectual Property
Definition
Requirements
Types or
categories
How acquired
A grant from the
government that
gives an inventor
exclus ive rights to
an invention.
An invention must
be:
1. Novel.
2. Not obvious.
3. Useful.
1 . Utility (general).
2. Design.
3. Pia nt (flowers,
vegetables, and
so on).
By filing a patent
application with
the U.S. Patent and
Trademark Office
and receiving that
office's approval.
An intang ible property r ight granted to
authors and originators of a literary work
or artistic production that falls within
specified categories.
Literary or artistic works must be:
1 . Original.
2. Fixed in a durable medium that
can be perceived, reproduced, or
communicated.
3. Within a copyrightable category.
1. Literary works (includ ing computer
programs).
2. Musical works.
3. Dramatic works .
4. Pantomime and choreographic works.
5. Pictorial, graphic, and sculptural
works.
6. Films and audiovisual works.
7. Sound recordings.
Automatic (once in tang ible form); to
recover for infringement·, the copyright
must be registered with the U.S.
Copyright Office.
Any distinctive word, name, symbol,
or device (image or appearance), or
combination thereof, that an entity uses
to identify and distinguish its goods or
services from those of others.
Trademarks, service marks, and trade
dresses must be sufficiently distinctive
(or must have acquired a secondary
meaning) to enable consumers and
others to distingu ish the manufacturer's,
seller's, or business user's products or
services from those of competitors.
1. Strong, distinctive marks (such as
fanciful, arbitrary, or suggestive
marks).
2. Marks that have acqu ired a
secondary meaning by use.
3. Other types of marks, including
certification marks and collective
marks.
4. Trade dress (such as a distinctive
decor, menu, style, or type of service).
1. At common law, ownersh ip is created
by use of mark.
2. Reg istration (either with the U.S.
Patent and Trademark Office or with
the appropriate state office) gives
constructive notice of date of use.
3. Federal reg istration is permitted
if the mark is currently in use or if
the applicant intends use within six
months (period can be extended to
three years).
4. Federal reg istration can be renewed
between the fifth and sixth years and,
thereafter, every ten years.
Any information (including formulas,
patterns, programs, devices,
techniques, and processes) that a
business possesses and that gives
the business an advantage over
competitors who do not know the
information or process.
Information and processes that
have commercial value, that are not
known or easily ascerta inable by the
general public or others, and that are
reasonably protected from disclosure.
1 . Customer lists.
2. Research and development.
3. Plans and programs.
4. Pricing information.
5. Production techniques.
6. Marketing techniques.
7. Formulas.
8. Compilations.
Through the originality and
development of information and
processes that are unique to a
business, that are unknown by
others, and that would be valuable
to competitors if they knew of the
information and processes.
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Rights An inventor has The author or originator has the exclusive The owner
has the right to use the mark The owner has the right to sole and
the right to make, right to reproduce, dis tribute, display, or trade dress and to
exclude others exclus ive use of the trade secrets and
use, sell, ass ign, license, or transfer a copyrighted work. from using it. The right
of use can be the right to use legal means to protect
or license the licensed or sold (assigned) to another against misappropriation of
the trade
invention during secrets by others. The owner can
the duration of the license or assign a trade secret.
patent's term. The
first to invent has
patent rights.
Duration 20 years from 1 . For authors: the life of the author, plus Unlimited, as
long as it is in use. To Unlimited, as long as not revealed to
the date of 70 years. continue notice by reg istration, the others.
application; for 2. For publ ishers: 95 years after the registration must be
renewed by filing.
design patents, 14 date of publication or 120 years after
years. creation.
Civil Monetary Actual damages, plus profits received 1. In junction prohibiting
future use of Monetary damages for
remedies for damages, which by the infringer; or statutory damages of mark.
misappropriation (the Uniform Trade
infringement include reasonable not less than $500 and not more than 2. Actual
damages, plus profits received Secrets Act permits punitive damages
royalties and $20,000 ($100,000, if infringement is by the infringer (can be
increased to up to twice the amount of actual
lost profits, plus willful); plus costs and a Homeys' fees. three times the actual
damages under damages for willful and malicious
attorneys' fees. the Lanham Act) . misappropriation); plus costs and
(Treble damages 3. lmpoundment and destruction of attorneys' fees.
are available infringing articles.
for intent ion al 4. Plus costs and attorneys' fees.
infringement.)
Source: Frank B. Cross and Roger LeRoy l\'1iller, West 's Legal Environment of
Business, 4th ed.© 2001 Cengage Learning; see also Roger LeRoy ~,tiller, The Legal
Environment Today, 10th ed.
(Mason, OH: Cengage, 2022). r(
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208 Chapter 9 Legal Challenges for Entrepreneurial Ventures
• The tax effects of the forrn of organization selected
• The potential liability to the o,vner of the form of
organization selected
Three primary legal forms of organization are the sole
proprietorship, the partnership, and the corporation.
Because each form has specific advantages and disadvantages,
it is impossible to recommend one form over
the other. The entrepreneur's specific situation, concerns,
and desires ,vill dictate this choice. 18
9-4a Sole Proprietorships
A sole proprietorship is a business that is o,vned and
operated by one person. The enterprise has no existence
apart from its o,vner. This individual has a right to all
of the profits and bears all of the liability for the debts
and obligations of the business. The individual also has
unlimited liability, which means that their business and
personal assets stand behind the operation. If the company
cannot meet its financial obligations, the owner
rnay be forced to sell the farnily car, house, and whatever
assets ,vould satisfy the creditors.
To establish a sole proprietorship, a person merely
needs to obtain ,vhatever local and state licenses are necessary
to begin operations. If the proprietor chooses a
fictitious or assumed name, they also must file a certificate
of assumed business name ,vith the cotmty. Because
of its ease of formation, the sole proprietorship is the
rnost ,videly used legal form of organization. 19
Advantages of Sole Proprietorships
L09.6 List the advantages and disadvantages of each of these
three legal forms
Some of the advantages associated ,vith sole proprietorships
are as follo,vs:
• Ease of formation. Less formality and fe,ver restrictions
are associated ,vith establishing a sole proprietorship
than ,vith any other legal form. The
proprietorship needs little or no governmental
approval, and it usually is less expensive than a partnership
or corporation.
• Sole ownership of profits. The proprietor is not
required to share profits ,vith anyone.
• Decision making and control vested in one owner.
No co-o,vners or partners must be consulted in the
running of the operation.
• Flexibility. Managernent is able to respond quickly
to business needs in the form of day-to-day management
decisions as governed by various la,vs and
good sense.
• Relative fre edom from governmental control.
Except for requiring the necessary licenses, very
little governmen ta! in terference occurs in the
operation.
• Freedom from corporate business taxes. Proprietors
are taxed as individual taxpayers and not as
businesses.
Disadvantages of Sole Proprietorships
Sole proprietorships also have disadvantages. Some of
these are as follo,vs:
• Unlimited liability. The individual proprietor is personally
responsible for all business debts. This liability
extends to all of the proprietor's assets.
• Lack of continuity. The enterprise may be crippled
or terminated if the o,vner becomes ill or dies.
• Less available capital. Ordinarily, proprietorships
have less available capital than other types of
business organizations, such as partnerships and
corporations.
• Relative difficulty obtaining long-term financing.
Because the enterprise rests exclusively on one person,
it often has difficulty raising long-term capital.
• Relatively limited viewpoint and experience. The
operation depends on one person, and this individual's
ability, training, and expertise ,vill limit its direction
and scope.
9-4b Partnerships
A partnership, as defined by the Revised Uniform
Partnership Act (RUPA), is an association of c-vo or more
persons ,vho act as co-o,vners of a business for profit.
Each partner contributes money, property, labor, or skills,
and each shares in the profits (as ,vell as the losses) of
the business. 20 Although not specifically required, ,vritten
articles of partnership are usually executed and
are ahvays recommended. This is because, unless otherwise
agreed to in ,vriting, the courts assume equal
partnership-that is, equal sharing of profits, losses,
assets, management, and other aspects of the business.
The articles of partnership clearly outline d1e financial
and managerial contributions of the partners and carefully
delineate the roles in the partnership relationship,
including such items as duration of agreernent, character
of partners (general or limited, active or silent ), division
of profits and losses, salaries, death of a partner ( dissolution
and ,vindup), authority (individual partner's authority
on business conduct ), settlement of disputes, and
additions, alterations, or modifications of partnership.
In addition to the ,vritten ar t icles, ent repreneurs
must consider a number of different types of
partnership arrangements. Depending on the needs
of the enterprise, one or rnore of these may be used.
Examples include the percentage of financial investrnent
of each partner, the amount of rnanagerial control
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tight.. some 1hitd p,3 t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
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lhc tigh1 1o tcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

of each partner, and the actual duties assigned to each

partner. It is important to remember that in a typical
partnership arrangement, at least one partner must be a
general partner who is responsible for the debts of the
enterprise and "vho has unlimited liability.21
Advantages of Partnerships
The advantages associated \>Vith the partnership form of
organization are as follows:
• Ease of formation. Legal formalities and expenses
are fe"v compared \>Vith those for creating a more
complex enterprise, such as a corporation.
• Direct rewards. Partners are 1notivated to put forth
their best efforts by direct sharing of the profits.
• Growth and performance facilitated. It often is possible
to obtain more capital and a better range of
skills in a partnership than in a sole proprietorship.
• Flexibility. A partnership often is able to respond
quickly to business needs in the form of day-to-day
decisions.
• Relative freedom from governmental control and
regulation. Very little governmental interference
occurs in the operat ion of a partnership.
• Possible tax advantage. Most partnerships pay taxes
as individuals, thus escaping the higher rate assessed
against corporations.
Disadvantages of Partnerships
Partnerships also have disadvantages. Some of these are
as follows:
• Unlimited liability of at least one partner. Although
some partners can have limited liability, at least one
must be a general partner who assumes unlimited
liability.
• Lack of continuity. If any partner dies, is adjudged
insane, or simply \>Vithdra\>vs from the business, the
partnership arrangement ceases. Ho\>vever, operation
of the business can continue based on the right
of survivorship and the possible creation of a new
partnership by the remaining members or by the
addition of ne\>v members.
• Relative difficulty obtaining large sums of capital.
Most partnerships have so1ne problems raising a
great deal of capital, especially "vhen long-term
financing is involved. Usually, the collective \>Vealth
of the partners dictates the amount of total capital
the partnership can raise, especially when first starting
out.
• Bound by the acts of just one partner. A general partner
can co1nmit the enterprise to contracts and obligations
that may prove disastrous to the enterprise in
general and to the other partners in particular.
Legal Forms for Entrepreneurial Ventures 209
• Difficulty of disposing of partnership interest. The
buyout of a partner may be difficult unless specifically
arranged for in the \>vritten agreement.
9-4c Corporations
According to Supreme Court Justice John Marshall
(1819), a corporation is "an artificial being, invisible,
intangible, and existing only in contemplation of the
law." As such, a corporation is a separate legal entity
apart from the individuals who O\>Vn it. A corporation
is created by the authority of sta te la\>vs and usually is
formed \>vhen a transfer of money or property by prospective
shareholders (o\>vners) takes place in exchange
for capital stock (o\>vnership certificates) in the corporation.
22 The procedures ordinarily required to form a
corporation are (1) that subscriptions for capital stock
1nust be taken and a tentative organization created and
(2) that approval 1nust be obtained from the secretary
of state in the st ate in "vhich the corporation is to be
formed. This approval is in the form of a charter for the
corporation that st ates the po\>vers and limitations of
the particular enterprise. Corporations that do business
in more than one sta te must comply \>Vith federal la\>vs
regarding intersta te commerce and with the varying
state la\>vs that cover foreign (out-of-state) corporations.
Advantages of Corporations
Some of the advantages associated with corporations are
as follo\>vs:
• Limited liability. The stockholder's liability is limited
to the individual's investment. This is the 1nost
money the person can lose.
• Transfer of ownership. O\>vnership can be transferred
through the sale of stock to interested buyers.
• Unlimited life. The company has a life separate and
distinct from that of its o\>vners and can continue for
an indefinite period of time.
• Relative ease of securing capital in large amounts.
Ca pita! can be acquired through the issuance of
bonds and shares of stock and through short-term
loans made against the assets of the business or personal
guarantees of the major stockholders.
• Increased ability and expertise. The corporation is
able to dra\>v on the expertise and skills of a number
of individuals, ranging from the 1najor stockholders to
the professional managers "vho are brought on board.
Corporations also have disadvantages. Some of these are
as follo\>vs:
• Activity restrictions. Corporate activities are limited
by the charter and by various la\>vs.
• Lack of representation. Stockholders \>Vith a
minority share of stock are sometimes outvoted by
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tight.. some 1hitd p,3 t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
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lhc tigh1 1o tcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

210 Chapter 9 Legal Challenges for Entrepreneurial Ventures

The Entrepreneurial Process
''
Incorporating on the Web
Today, forming a corporation is easier than ever. Individuals
who wish to form a corporation can simply access the services
of one of the many companies that provide onl ine incorporation
services. Although one has always been able to incorporate
in states outside of their residence, online incorporation
service providers have made this process much more simple.
Delaware has been the favorite of many our.of-state incorporations
over the post several years. This is due, in large port, to
the state's limited restrictions on the formation and operation of
corporations.
Web Incorporation Firms
Hundreds of firms offer onl ine incorporation services, and most
of these firms offer a very simple process for incorporation in
any state. Most of these sites also offer valuable information,
such as the various forms of corporation and the positives and
negatives of the different options, frequen~y asked questions on
incorporation, the cost of incorporation and maintenance of a
corporation, and advantages and disadvantages of incorporation.
Harvard Business Services (http/ /www.delawareinc
.com), The Compony Corporation (http://www.incorporate
com), and American lncorporatorsltd (http:/ /www.ailcorp.com)
those \.Vith a majority of the stock and force their
\.vill on the others.
• Regulation. Extensive governmental regulations and
reports required by local, state, and federal agencies
often result in a great deal of paper\.vork and red
tape.
• O rganizing expenses. A mult itude of expenses are
involved in forming a corporation.
• D ouble taxation. Income taxes are levied both on corporate
profits and on individual salaries and dividends.
Table 9 .3 co1npares the characteristics of sole proprietorships,
partnerships, and corporations.
9-5 Partnerships and
Corporations: Specific
Forms
A number of specific fonns of par tner ships and corporations
\.Varrant special attention. The follo\.ving sections
examine these.
are a few examples of these online incorporation firms. Entrepreneurs
also can simply search using a search engine by
typing in the word "incorporation" to locate other onl ine incorporation
firms.
Considerations for the Entrepreneur
The entrepreneur must consider the fulure of the business that they
wish to incorporate. In most cases, online incorporation is fine for
individuals who are interested in starting smaller businesses with
limited growth potential, but other avenues are recommended for
entrepreneurs who plan to start a business with higher growth
potential. ~ high growth is possible and a large amount of funding
is likely necessary, then entrepreneurs are recommended to
seek legal counsel through the process of incorporation.
How to Incorporate on the Web
In most cases, filing for incorporation on the Web is as simple
as fill ing out an onl ine incorporation form on one of these firms'
websites. The firms then take this information and file the necessary
forms at the state office in which the entrepreneur w ishes
to incorporate. The given state w ill then issue a certificate of
incorporation.
9-Sa Lim ited Partnerships
L09.7 Expla in the nature of the limited partnersh ip and
limited liability partnersh ips
Limited partnerships are used in si tuations where a form
of organization is needed that permits capital investment
\.Vithout responsibility for management and without liability
for losses beyond the ini t ial investment . Such an
organi zation allows the r ight to sh are in the profits \.Vith
limited liability for the l osses.
Limited partnerships are governed by the Revised
Uniform Limited Partnership Act.23 The act cont ains
11 articles and 64 sections of guidelines covering areas
such as (1) general provisions, (2) formation, (3) limited
partners, (4) general partners, (5) finance, (6) distributions
and withdra\.vals, (7) assignment of partnership
interest, (8) dissolution, (9) foreign li1nited partnerships,
(10) derivative actions, and (11) miscellaneous. If a limi
ted partnership appears to be the desired legal form of
organization, the prospective partners must examine this
act's guidelines.
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Table 9.3 General Characteristics of Forms of Bus iness
Formation
Duration
Management
Owner liability
Transferability of
owners' interest
Federal income
taxation
Sole
Proprietorship
I When one person

owns a business
without form ing
a corporation or
LLC
I Terminates
on death or
withdrawal of
sole proprietor
I

Partnership
By agreement
of owners or by
default when two
or more owners
conduct bus iness
together without
form ing a limited
partnersh ip, an LLC,
or a corporation
Usually unaffected
by death or
withdrawal of
partner
I By sole proprietor By partners
I

I Unl imited I Unl imited

None None
I
Only sole Only partners taxed
proprietor taxed
I

Limited
Liability
Partnership
By agreement
of owners;
must comply
with limited
liability
partnersh ip
stat·ute
Unaffected
by death or
withdrawal of
partner
I By partners
I Mostly limited
to capital
contribution
None
Usually only
partners taxed;
may elect to
be taxed like a
corporation
Limited
Partnership
By agreement
of owners;
must comply
with lim ited
partnership
statute
Unaffected
by death or
withdrawal
of partner,
unless sole
general partner
, dissociates
I By general

partners
Unl imited
for general
partners; limited
to capital
contribution for
limited partners
None, unless
agreed
otherwise
Usually only
partners taxed;
may elect to
be taxed like a
corporation
Limited
Liability
Limited
Partnership
By agreement
of owners;
must comply
with limited
liability l imited
partnersh ip
statute
Unaffected
by death or
withdrawal of
partner, unless
sole general
partner
di ssoc ia tes
By general
partners
Limited
to capital
contribution
None, unless
agreed
otherwise
Usually only
partners taxed;
may elect to
be taxed like a
corporation
Corporation
By agreement
of owners;
must
comply with
corporation
statute
Unaffected
by death or
withdrawal of
shareholder
By board of
directors
Limited
to capital
contribution
Freely
transferable,
although
shareholders
may agree
otherwise
Corporation
taxed;
shareholders
taxed on
dividends
(double tax)
S Corporation
By agreement
of owners; must
comply with
corporation state;
must elect S
Corporation status
under Subchapter
S of Internal
Revenue Code
Unaffected
by death or
withdrawal of
shareholder
By board of
directors
Limited to capital
contribution
Freely
transferable,
although
shareholders
usually agree
otherwise
Only shareholders
taxed
Limited
Liability
Company
By agreement
of owners;
must comply
with limited
liability
company
statute
Usually
unaffected
by death or
withdrawal of
member
By managers
or members
Limited
to capital
contribution
None, unless
agreed
otherwise
Usually only
members
taxed; may
elect to be
taxed l ike a
corporation
Source: Jamie D. Prenkert, A. James Barnes,Joshua E. Perry, Todd Haugh, and Abbey
Stemler, Business Law: Tin Ethical, Global, and Digital Environment, 18th ed. (New York:
McGraw-Hill,
2022), 37-B. © 1l1e McGraw-Hill Companies, Inc.
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212 Chapter 9 Legal Challenges for Entrepreneurial Ventures
9-5b Limited Liability Partnerships
The limited liability partnership (LLP) is a relatively new
form of partnership that allo"vs professionals the tax
benefits of a partnership "vhile avoiding personal liability
for the malpractice of other partners. If a professional
group organizes as an LLP, innocent partners are not personally
liable for the "vrongdoing of the other partners.
The LLP is similar to the limited liability company
discussed later. The difference is that LLPs are designed
more for professionals "vho normally do business as a
partnership. As \.Vith lirnited liability companies, LLPs
must be formed and operated in compliance "vith state
statutes.
One of the reasons "vhy LLPs are becoming so popular
among professionals is that most sta cutes make it
relatively easy to establish an LLP. This is particularly
true for an already formal partnership.
Converting frorn a partnership to an LLP also is easy
because the firm's basic organizational structure rernains
the sarne. Additionally, all of the statutory and commonla"
v rules governing partnerships still apply (a part from
those modified by the LLP statute). Normally, LLP statutes
are simply arnendments to a state's already existing
partnership la\.v.24
The limited liability limited partnership (LLLP) is
a relatively ne"v variant of the limited partnership. An
LLLP has elected limited liability status for all of its
partners, including general partners. Except for this liability
status of general partners, limited partnerships and
LLLPs are identical ( see Table 9 .4 for characteristics of
limited partnerships and LLLPs).
9-5c S Corporations
L09.8 Discuss how an S corporation works
Fonner! y terrned a Subcha pter S corporation, the
S corporation takes its name from Subchapter S of the
Internal Revenue Code, under "vhich a business can seek
to avoid the imposition of income taxes at the corporate
level yet retain some of the benefits of a corporate form
(especially the limited liability).
Comrnonly known as a "tax option corporation," an
S corporation is taxed similarly to a partnership. Only
an information form is filed \.Vith the Internal Revenue
Service to indicate the shareholders' income. In this
rnanner, the double-taxation problem of corporations
is avoided. Corporate incorne is not taxed but instead
flo"vs to the personal income of shareholders of businesses
and is taxable at that point.
Although this is very useful for small businesses, strict
guidelines rnust be follo\.ved:
1. The corporation must be a domestic corporation.
2. The corporation must not be a member of an affiliated
group of corporations.
3. The shareholders of the corporation must be individuals,
estates, or certain trusts. Corporations,
Table 9.4 Principal Characteristics of Limited Partnerships and LLPs
1 . A limited partnersh ip or LLLP may be created only in accordance with a
statute.
2. A limited partnersh ip or LLLP has two types of partners: general partners and
limited partners. It must have one or more of
each type.
3. All partners, l imited and general, share the profits of the business.
4. Each limited partner has liability limited to their capital contribution lo the
business. Each general partner of a limited
partnersh ip has unlimited liability for the obligations of the business. A general
partner in an LLLP, however, has liability
limited to their capital contribution.
5. Each general partner has a right to manage the business, and they are agents
of the limited partnership or LLLP. A limited
partner has no right to manage the bus iness or to act as its agent, but they do
have the right to vote on fundamental matters.
A limited partner may manage the business yet reta in limited liability for
partnership obligations.
6. General partners, as agents, are fiduciaries of the bus iness. Limited partners
are not fiduciaries.
7. A partner's rights in a l imited partnership or LLLP are not freely transferable. A
transferee of a general or limited partnersh ip
interest in not a partner but is entitled only to the transferring partner's share of
capital and profits.
8. The death or other withdrawal of a partner does not dissolve a limited
partnership or LLLP, unless there is no surviving
general partner.
9. Usually, a limited partnership or LLLP is taxed like a partnersh ip.
Source: Adapted from Jamie D. Prenkert, A. James Barnes, Joshua E. Perry, Todd Haugh,
and Abbey Stemler, Business Law: The Ethical, Global,
and Digital Environment, 18th ed. (New York: l'vkGraw-Hill, 2022), 40-10.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d~wooic
tight.. some 1hitd p,3 t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh.<. lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1 1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i
lhc tigh1 1o tcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

partnerships, and nonq ualifying trusts cannot be

shareholders.
4. The corporation must have 100 or fewer shareholders.
5. The corporation must have only one class of stock,
although not all shareholders need have the same
voting rights.
6. No shareholder of the corporation may be a nonresident
alien.
The S corporation offers a number of benefits. For
example, when the corporation has losses, Subchapter
S allo\>vs the shareholders to use these losses to offset
taxable income. Also, when the stockholders are in a tax
bracket lo\>ver than that of the corporation, Subchapter
S causes the company's entire income to be taxed in the
shareholders' bracket "vhether or not it is distributed.
This is particularly attractive \>vhen the corporation wants
to accumulate earnings for future business purposes.
The taxable income of an S corporation is taxable
only to those "vho are shareholders at the end of the
corporate year "vhen that income is distributed. The S
corporation can choose a fiscal year that \>vill permit it
to defer some of its shareholders' taxes. This is important
because undistributed earnings are not taxed to the
shareholders until after the corporation's (not the shareholders')
fiscal year. In addition, the shareholder in an S
corporation can give some of their stock to other members
of the family \>vho are in a lower tax bracket. Additionally,
up to six generations of one fa1nily 1nay elect to
be treated as one shareholder. Finally, an S corporation
can offer some tax-free corporate benefits. These benefits
typically mean federal tax savings to the shareholders.
9-Sd Limited Liability Companies
Since 1977, an increasing number of states have authorized
a ne\>v form of business organization called the limited
liability company (LLC). The LLC is a hybrid form
of business enterprise that offers the limited liability of a
corporation but the tax advantages of a partnership.
L09.9 Define the additional classifications of corporations,
including limited liability companies (LLCs),
B corporations, and low-profit, l imited liability
companies (L3Cs)
A major advantage of the LLC is that it does not pay
taxes on an entity; rather, profits are "passed through" the
LLC and paid personally by company members. Another
advantage is that the liability of 1nembers is li1nited to
the a1nount of their investments. In an LLC, 1nembers
are allo\>ved to participate fully in management activities,
and-under at least one state's statute-the firm's
managers need not even be LLC 1nembers. Yet another
advantage is that corporations and partnerships, as \>vell
Partnerships and Corporations: Specific Forms 213
as foreign investors, can be LLC members. Also, no limit
exists on the number of LLC shareholder members.
The disadvantages of the LLC are relatively fe\>v. Perhaps
the greatest disadvantage is that LLC statutes differ
from state to state, and thus any firm engaged in multistate
operations may face difficulties. In an attempt to
promote some uniformity among the states in respect to
LLC statutes, the National Conference of Commissioners
on Uniform State La\>vs adopted the Revised Uniform Li1nited
Liability Co1npany Act in 2006. Ho\>vever, as of 2023,
only 20 states had adopted it. Until all of the states have
adopted the uniform la"v, an LLC in one state will have to
check the rules in the other states in which the firm does
business to ensure that it retains its limited liability. 25
9-5e B Corporations
As discussed in Chapter 4, there is a new legal form of a
socially responsible corporation being introduced across
the United States-the B corporation. Certified B corporations
are a ne\>v way for businesses to solve social
and environmental problems. B Lab, a nonprofit organization,
certifies B corporations. B corporations address
nvo critical problems:
1. Corporate la\>vs make it difficult for businesses to
consider employee, community, and environmental
interests in their decision 1naking.
2. The lack of transparent standards makes it difficult
to tell the difference bet\>veen a socially proactive
company and just good 1narketing.
To address these issues, B corporations' legal structure
expands corporate accountability so that they are required
to make decisions that are good for society, not just their
shareholders. B corporations' performance standards
enable consumers to support businesses that align \>Vith
their values, investors to drive ca pita! to higher-i1npact
investtnents, and governments and multinational corporations
to i1nplement sustainable procurement policies.
B corporations have specific requirements, including
the f ollo\>ving:
1. Comprehensive and transparent social and environmental
performance standards
2. Higher legal accountability standards
3. Expected relations \>Vith constituencies established
for public policies that support sustainable business
There are over 4,000 certified B corporations across 150
different industries (from food and apparel to attorneys
and office supplies). B corporations may be quite diverse,
but they share one unifying goal: to redefine success in
business. Through a company's public B Impact Report,
anyone can access performance data about the social and
environmental practices that stand behind their products.26
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F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1 1hcovcrn ll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i
lhc tigh1 1o tcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

214 Chapter 9 Legal Challenges for Entrepreneurial Ventures

9-5f L3C
A lo,v-profit, lirnited liability company, known as the
L3C, can provide a structure that facilitates investments
in socially beneficial, for-profit vent ures. In 2008, Vermont
became the first state to recognize the L3 C as a
legal corporate struct ure; ho,vever, similar legislation
has been introduced in Georgia, Michigan, Montana,
and North Carolina. Currently, the L3C is legal for
activity all across the United States because it is designed
to attract private investments and philanthropic ca pita!
in ventures designed to provide a social benefit. Unlike
a standard LLC, the L3C has an explicit primary charitable
mission and only a secondary profit concern. But
unlike a charity, the L3C is free to distribute the profits,
after taxes, to o,vners or investors. A principal advantage
of the L3 C is its qualification as a "program-related
investment" (PRI). That rneans it is an investrnent ,vith a
socially beneficial purpose that is consistent ,vith a foundation's
mission. Because foundations can directly invest
only in for-profit ventures qualified as PRis, the L3C's
opera ting agreement specifically outlines its respective
FRI-qualified purpose in being formed, making it easier
for foundations to identify social-purpose businesses
as ,vell as helping to ensure that their tax exemptions
remain secure. L3Cs could attract a greater arnount of
private ca pita! from various sources in order to serve
their charitable or education goals. As of 2020, there
,vere 1,700 L3Cs operating in the United States.
Similar to the standard LLC, the L3C is able to form
flexible partnerships ,vhere o,vnership rights are set to
meet the requirernents of each partner. This flexibility
permits a tiered o,vnership struct ure. Because a foundation
can invest through PRis at less than the market
rate ,vhile embracing higher risk levels, this lowers the
risk to other investors and increases their potential rate
of return. So the remaining L3C mernberships can then
be marketed at risk/return profiles necessary to attract
market-driven investors. The end result: the L3C is able
to leverage PRis to access a ,vide range of investment
dollars. Like the standard LLC, profits and losses flow
through the L3C to its members and are taxed according
to each investor's particular tax situation.27
9-6 Final Thoughts on
Legal Forms
As rnentioned earlier, an entrepreneur ahvays should
seek professional legal advice to avoid rnisunderstandings,
rnistakes, and, of course, added expenses. The average
entrepreneur encounters many diverse problems and
stumbling blocks in venture formation. Because rnany
entrepreneurs do not have a thorough kt10,vledge of la,v,
accounting, real estate, taxes, and governmental regulations,
.a n. unders.t anding of certain basic concepts in these
areas 1s lillperatJve.
The material in this chapter is a good start to,vard
understanding the legal forms of organizations. It can
provide entrepreneurs ,vith guidelines for seeking further
and rnore specific advice on the legal form that appears
most applicable to their situation.
9-7 Bankruptcy
LO9.10 Identify the major segments of the bankruptcy law that
apply to entrepreneurs
Bankruptcy occurs ,vhen a venture's financial obligations
are greater than its assets. No entrepreneur intentionally
seeks bankruptcy. Although problerns occasionally
can arise out of the blue, follo,ving are several ways to
foresee irnpending failure: (1 ) new competition enters
the market, (2) other firms seem to be selling products
that are a generation ahead, (3 ) the research and development
budget is proportionately less than the competition's,
and (4) retailers ahvays seem to be overstocked.28
9-7a The Bankruptcy Act
The Bankruptcy Act is a federal la,v that provides for
specific procedures to handle insolvent debtors-those
,vho are unable to pay debts as they become due. The
initial act of 1912 ,vas completely revised in 1978; significant
amendments ,vere added in 1984, 1986, and
1994 and the most substantial revision in 2005. The
purposes of the Bankruptcy Act are (1) to ensure that the
property of the debtor is distributed fairly to the creditors,
(2) to protect creditors from having debtors unreasonably
diminish their assets, and (3) to protect debtors
from extreme demands by creditors. The la,v ,vas set up
to provide assistance to both debtors and creditors.
Each of the various types of bankruptcy proceedings
has its o,vn particular provisions. For purposes of business
ventures, the three major sections are called straight
bankruptcy (Chapter 7), reorganization (Chapter 11 ),
and adjustment of debts (Chapter 13). Table 9.5 provides
a comparison of these three types of bankruptcies.
The follo,ving sections examine each type.
9-7b Chapter 7: Straight Bankruptcy
Chapter 7 bankruptcy, sometirnes referred to as
liquidation, requires the debtor to surrender all property
to a trustee appointed by the court. The trustee
then sells the assets and turns the proceeds over to the
creditors. The rernaining debts (,vith certain exceptions)
are then discharged, and the debtor is relieved of their
obligations.
A liquidation proceeding may be voluntary or involuntary.
In a voluntary bankruptcy, the debtor files a petition
,vith a bankruptcy court that provides a list of all creditors,
a statement of financial affairs, a list of all o,vned
property, and a list of current income and expenses. In
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Bankruptcy 215
Table 9.5 Bankruptcy: A Comparison of Chapters 7, 11, and 13
'

Chapter 7 Chapter 11 Chapter 13

Purpose Liqu idation Reorganization Ad justment
Who can Debtor (voluntary) or creditors Debtor (voluntary) or creditors Debtor
(voluntary) only
petition (involuntary) (involuntary)
Who can be a Any "person" (including Any debtor eligible for Chapter 7 Any ind
ividual (not partnersh ips
debtor partnerships and corporations) relief. or corporations) with regular
except railroads, insurance income who owes fixed
companies, banks, savings unsecured debt of less than
and loan institutions, and credit $360,475 or secured debt of
unions. Farmers and charitable less than $1,081,400.
institutions cannot be involuntarily
pet it ion ed.
Basic procedure Nonexempt property is sold A plan is subm itted and, if it is A
plan is subm itted in which
with proceeds to be distributed approved and followed, debts unsecured creditors
must receive
(in order) to priority groups. are discharged. at least liquidation value. If ii is
Dischargeable debts are approved and followed, debts
terminated. are discharged.
Advantages On liqu idation and distribution, The debtor continues in The debtor
continues in business
most debts are discharged, and business. The plan allows for a or keeps
possession of assets. If
the debtor has an opportun ity for reorganization and liquidation of the plan is
approved, most debts
a fresh start. debts over the plan period. are discharged after a three-to
five-year period.
Source: Adapted from Jamie D. Prenkerr, A. James Barnes, Joshua E. Perry, Todd Haugh, and
Abbey Stemler, Business Law: The Ethical, Global,
and Digital Environment, 18th ed. (New York: McGraw-Hill, 2022), 30- 32; see also
Kenneth W. Clarkson and Roger LeRoy l\-liller, Business
Law, 15th ed. (]Vlason, OH: Cengage, 2021).
an involuntary bankruptcy, the creditors force the debtor
into bankruptcy. For this to occur, 12 or rnore creditors
( of ,vhich at least three have a total of $16,750 of claims)
must exist; if fe'vver than 12 exist, one or more creditors
must have a claim of $16,750 against the debtor.29
9-7c Chapter 11 : Reorganization
Reorganization is the most common form of bankruptcy.
Under this format, a debtor attempts to formulate a plan
to pay a portion of the debts, have the remaining sum
discharged, and continue to stay in operation. The plan
is essentially a contract betvveen the debtor and creditors.
In addition to being viewed as "fair and equitable,"
the plan must (1) divide the creditors into classes, (2) set
forth ho,v each creditor ,vill be satisfied, (3) state ,vhich
claims or classes of claims are impaired or adversely
affected by the plan, and (4) provide the same treatrnent
to each creditor in a particular class.
The same basic principles that govern Chapter 7
bankruptcy petitions also govern the Chapter 11 petitions.
The proceedings may be either voluntary or involuntary,
and the provisions for protection and discharge
are similar to the Chapter 7 regulations.
Once an order for relief (the petition) is filed, the
debtor in a Chapter 11 proceeding continues to operate
the business as a debtor-in-possession, which
means that the court appoints a trustee to oversee the
1nanage1nent of the business. The plan is then submitted
to the creditors for approval. Approval generally
requires chat ere di tors holding nvo-thirds of
the amount and one-half of the number of each class
of claims impaired by the plan must accept it. Once
approved, the plan goes before the court for confirmation.
If the plan is confirmed, the debtor is responsible
for carrying it out. 30
Once the plan is confirmed by the creditors, it is binding
for the debtor. This type of bankruptcy provides an
alternative to liquidating the entire business and thus
extends to the creditors and debtor the benefits of keeping
the enterprise in operation.
9-7d Chapter 13: Adjustment of Debts
Under this arrangernent, individuals are allo,ved to (1)
avoid a declaration of bankruptcy, (2) pay their debts in
installments, and (3) be protected by the federal court.
Individuals or sole proprietors ,vith unsecured debts
of less than $465,275 and secured debts of less than
$1,395,875 are eligible to file under a Chapter 13 procedure.
This petition must be voluntary only; creditors are
not allo,ved to file a Chapter 13 proceeding. In the petition,
the debtor declares an inability to pay their debts
and requests some form of extension through future
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216 Chapter 9 Legal Challenges for Entrepreneurial Ventures

I
'

Diversity Entrepreneurship
Remote Work's Impact on Diversity, Equity, and
Inclusion
The COVID-19 pandemic has shaken many parts of our lives,
includ ing work. The number of remote jobs has exploded,
and so has the desire to work remotely. According to one survey,
fewer than 20 percent of employees who currently work
remotely report wanting to return to daily commuting. The shift
to remote work may have had a positive effect on productivity
for many employees; however, we need to acknowledge
that this shift has also had important implications on d iversity,
equity, and inclusion initiatives.
Remote work has the potential lo open the company
doors to a d iverse pool of candidates and enable more inclusive
environments. This is especially true for those employees
who might otherwise be excluded from many job opportunities
due lo d isabilities, lack of daily commuting options, or caregiving
responsibilities. For example, a person w ith chronic
health issues no longer needs to navigate workplace accommodations
and is able to perform the duties from home, where
the person feels most comfortable. However, the company
needs to be careful about how it treats in-person, hybrid, and
remote workers. As much as remote work enables many equityenhancing
opportunities, ii also possesses equ ity-reducing
threats. It is easy to imagine how a mixture of an in-person and
remote workforce could enable people w ith a wider variety of
backgrounds and abilities to work for the company yet how
those who work remotely all or most of the time could potentially
be disadvantaged when it comes to career advancement
opportunities and promotions.
One of the key aspects that leaders should consider when
creating an inclusive workplace is the use of collaborative technology
that connects remote or hybrid employees with those
working in person. While having the same access to the same
tools and benefits across the board is paramount, so is the way
that the technology is used. Leaders have the potential to use
collaboration tools and onl ine skills training initiatives to encourage
participation of the voices that might otherwise not have
been heard in a traditional office selling. Many of us have
experienced the disconnect in conversations between those
who were attending a meeting in person and those who connected
onl ine. The remote employees would try to contribute to
the conversation, while in-person employees would have d ifficulties
hearing them speak and might misinterpret their inputs.
These conversations would end with d iscussions among in-person
employees, while remote employees were often forgotten.
It is important not only that these tools are accessible but
also that they are used to promote inclusion, education, and
a sense of open community to foster a culture of equal ity. A
recent survey found that employees of color, caregivers, and
women are most likely to prefer remote or hybrid work, which
makes it that much more important to create a workplace of
inclusivity and equal opportunity so as to not risk marginal izing
specific demographic groups, which would counteract any
positive efforts in hiring a d iverse workforce
While remote work can connect a more d iverse group
of people, it can also cause some candidates to feel disconnected
and unproductive. Many people do enjoy connecting
with other employees during lunch or stopping by each other's
desk in between tasks. Because an individual has chosen a
remote type of work does not mean that the person does not
care for casual office conversations or forming connections
w ith coworkers . This is especially true for those individuals
who consider remote work nol an option but a necessity. Companies
should offer employees tools and resources to build
spaces where they can feel supported and connected to others,
such as w ith Employee Resource Groups (ERGs) Google,
for example, has created ERGs that bring together employees
with shared interests, experiences, or backgrounds to provide
them with a sense of community and belonging that supports
them while they try to navigate the changing work landscape.
Google's ERGs build a community by hosting virtual yoga sessions,
career development sessions, globol summits, or dedicated
"office hours" for employees to sign up to talk to a peer
about anything that is on their mind. Another popular tool for
mainta ining a virtual company culture is Slack. In Slack, work
happens in channels - dedicated spaces for all the right people
to have focused discussions on a specific topic. In lieu of
working in the same location together, channels allow everyone
to see the same conversations and stay up to date with the
latest files and decisions, keeping your team naturally al igned
from anywhere.
Even as the COVID- 19 pandemic becomes a thing of the
past, remote and hybrid work is likely lo be a key part of how
we conduct business globally. The pandemic has thrown many
businesses into the uncharted world of fully remote work, surfacing
both good and bad aspects. As businesses transition
into a new normal, taking thoughtful actions and learnings from
these experiences can create more inclusive cultures that can
real ize the full potential of its employees whether they are in
person or remote.
Source: Adopted from Steven T. Hunt, ' How Hybrid Remote Work
Improves Diversity and Inclusion' Forbes, Moy 202 1; Melonie Porker
' Google's Chief Diversity Officer Reflects on Being Inclusive in Year 3 of
Remote Work,• fast Company, March 2022; Diano Ellsworth, Ruth lmose,
Stephanie Madner, and Rens van den Broek, ' Sustaining and Strengthening
Inclusion in Our New Remote Environment,' McKinsey & Company,
July 2020; and • An Introduction lo the Slack Platform,' https/ / opi.slack
.com/start/ overview.
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earnings (longer period of time to pay) or a composition

of debt (reduction in the amount owed).
The individual debtor then files a plan providing the
details for treatment of the debts. A Chapter 13 plan
must provide for (1) the turnover of such future earnings
or income of the debtor to the trustee as is necessary for
execution of the plan, (2) full payment in deferred cash
payments of all clai1ns entitled to priority, and (3) the
same treattnent of each claim \>Vithin a particular class.31
The plan must provide for payment within three years
unless the court specifically grants an extension to
five years.
Once the debtor has completed all scheduled payments,
the court \>vill issue a discharge of all other debts provided
for in the plan. As always, some exceptions to the discharge
exist, such as child support and certain long-term debts.
In addition, the debtor can be discharged even when they
do not complete the pay1nents \>Vi thin the three years if the
court is satisfied that the failure is due to circumstances for
\>vhich the debtor cannot justly be held accountable. During
a Chapter 13 proceeding, no other bankruptcy petition
(Chapter 7 or 11) may be filed against the debtor. Thus,
an individual has an opportunity to relieve a debt situation
\>Vithout liquidation or the stigma of bankruptcy. In addition,
the creditors may benefit by recovering a larger percentage
than they \>vould through a liquidation.
9-8 Minimizing Legal
Expenses
Throughout any legal proceedings, the entrepreneur can
run up large legal bills. Follo\>ving are some suggestions
for 1ni11i1nizi11g these expenses:
• Establish a clear fee structure \>Vith an attorney
before any legal matters are handled. This structure
Summary
A patent is an intellectual property right that is a result
of a unique discovery. Patent holders are provided protection
against infringement by others. This protection
lasts for 14 years in the case of design patents and for
20 years in all other cases.
Securing a patent can be a complex process, and careful
planning is required. Some of the useful rules to follo"
v in acquiring a patent \>Vere set forth in this chapter.
A patent may be declared invalid for several reasons:
failure to assert the property right for an unreasonable
length of ti1ne, misuse of the pa tent, and inability to
Minimizing Legal Expenses 217
may be based on an hourly charge, a flat fee (straight
cont ract fee), or a contingent fee (percentage of
negotiated settlement).
• Attorneys also operate in a compet itive environment;
thus, fee structures are negotiable.
• Establish clear \>vritten agreements on all critical
1na tters that affect business operations, including
agree1nents benveen principals, e1nployment agreements,
confidentiality agreements, and noncompete
agreements.
• Always attempt to settle any dispute rather than
litigate.
• Have your attorney share forms in electronic format
that you can use in routine transactions.
• Use a less expensive a ttorney for smaller
transactions.
• Suggest cost-saving methods to your attorney for
ordinary business matters.
• Ahvays check \>Vith your attorney during normal
business hours.
• Client inefficiency re\>vards attorneys: consult \>Vith
your attorney on several matters at one time.
• Keep abreast of legal developments in your field.
• Handle matters \>Vithin your "comfort zone"
yourself.
• Involve attorneys early on \>vhen it is feasible: an
ounce of prevention is \>Vorth a pound of cure.
• Shop around but don't attorney-hop. Once you find
a good attorney, stick \>Vith that person. An attorney
who is familiar \>Vith your business can handle your
affairs much more efficiently than a succession of
attorneys, each of \>vhom must research your case
from scratch.32
prove that the patent meets patentability tests. On the
other hand, if a patent is valid, the O\>vner can prevent
others from infringing on it; if they do infringe on it, the
owner can bring legal action to prevent the infringement
and, in some cases, obtain financial damages.
A copyright provides exclusive rights to creative
individuals for the protection of their literary or artistic
productions. This protection lasts for the life of the
author plus 70 years. In case of infringement, the author
(or \>vhoever holds the copyright) can initiate a la\>vsuit
for infringement. This action can result in an end to the
infringement and, in some cases, the awarding of financial
damages.
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218 Chapter 9 Legal Challenges for Entrepreneurial Ventures

A trademark is a distinctive name, 111ark, sy111bol, or
motto identified ,vith a company's product (s). When an
organization registers a trademark, it has the exclusive
right to use that mark. Registration acquired before
1989 lasts for 20 years. Ho,vever, after 1989, registration
lasts for 10 years and is rene,vable every 10 years
thereafter. In case of infringement, the trademark holder
can seek legal action and da111ages.
This chapter examined the three major forms of legal
organization: sole proprietorship, partnership, and corporation.
The advantages and disadvantages of each
form ,vere highlighted and compared. In addition, the
characteristics and tax considerations of partnerships
,vere compared ,vith those of corporations.
The specific forms of partnerships and corporations
,vere examined. In particular, the requirements and
benefits of limited partnerships, LLLPs, S corporations,
LLCs, B corporations, and L3Cs ,vere presented.
During the past t,vo decades, numerous business
failures have occurred. Three major sections of the
Bankruptcy Act are of importance to entrepreneurs.
Chapter 7 deals ,vith straight bankruptcy and calls for
a liquidation of all assets to satisfy outstanding debts.
Chapter 11 deals ,vith reorganization, a fon11at wherein
a business continues operating and attempts to formulate
a plan to pay a portion of the debts, to have the
re111aining sum discharged, and to continue to pay the
debt in installments. Cha pter 13 deals with individual
debtors ,vho file a plan for adjustment of their debts.
This would apply to sole proprietorships because they
are individually o,vned. More business bankruptcies are
handled under Chapter 11 than under the other nvo
sections.
Key Terms
abandonment
bankruptcy
Bankruptcy Act
B corporation
cancellation proceedings
claims
cleaning-out procedure
copyright
corporation
debtor-in-possession
fair us. e doctr.in e
genenc meaning
infringement budget
insolvent debtor
intellectual property right
L3C
limited liability co111pan y
(LLC)
limited liability limited
partnership (LLLP)
limited liability partnership
(LLP)
limited partnership
liquidation
partnership
patent
Patent and Trademark
Office
Revised Uniform Limited
Partnership Act
Revised Uniform Partnership
Act (RUPA)
S corporation
sole proprietorship
specification
trademark
trade secrets
unlit11i ted liability
Review and Discussion
Questions
1. In your own words, what is a patent? Of what value
is a pa tent to an entrepreneur? What benefits does it
provide?
2. What are four basic rules entrepreneurs should
remember about securing a patent?
3. When can a patent be declared invalid? Cite two
examples.
4. In your own words, what is a copyright? What benefi
ts does a copyright provide?
5. How much protection does a copyright afford the
owner? Can any of the individual's work be copied
without paying a fee? Explain in detail. If an infringement
of the copyright occurs, what legal recourse does
the owner have?
6. In your own words, what is a trademark? Why are
generic or descriptive names or words not given
trademarks?
7. When may a trademark be invalidated? Explain.
8. What are three of the pitfalls individuals should avoid
when seeking a trademark?
9. Identify the lega l forms available for entrepreneurs
structuring their ventures: sole proprietorship, partnership,
and corporation.
10. What are the specific advantages and disadvantages
associated with each primary legal form of
organization?
11. What is the Revised Uniform Limited Partnership Act?
Describe it.
12. Explain the limited liability partnership.
13. What is the nature of an S corporation? List five
requirements for such a corporation.
14. What is a limited liability company?
15. Explain the value of the B corporation and the L3C as
new legal forms.
16. What type of protection does Chapter 7 offer to a
bankrupt entrepreneur?
17. What type of protection does Chapter 11 offer to a
bankrupt entrepreneur? Why do many people prefer
Chapter 11 to Chapter 7?
18. What type of protection does Chapter 13 offer to a
bankrupt entrepreneur? How does Chapter 13 differ
from Chapter 7 or Chapter 11?
Notes
1. Roger LeRoy Miller, The Legal Environment Today, 10th ed.
(Mason, OH: Cengage, 2022); see also Constance E. Bagley,
Managers and the Legal Environment, 9th ed. (Mason, OH:
Cengage/South-Western, 2019), and Marianne M. Jennings,
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lhc tigh1 1o tcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

Notes 219
Business: Its Legal, Ethical, and Global Environment, 11th 17. Sandra Malach,
Peter Robinson, and Tannis Radcliffe,
ed. (Mason, OH: Thomson/So uth-Western, 2018). "Differentiating Legal Issues by
Business Type," Journal
2. Gerald R. Ferrera, Margo E. K. Reder, Robert C. Bird, of Small Business
Management 44, no. 4 (2006}: 563- 76;
Jonathan J. Darrow, Jeffrey M. Aresty, Jacqueline Klosek, Mina Baliamoune-Lutz
and Pierre Garello, "Tax Structure
and Stephen D. Lichtenstein, Cyberlaw, 3rd ed. (Mason, and Entrepreneurship,"
Small Business Economics 42,
OH : South-Western/Cengage, 2012); see also Constance no. 1 (2014}: 165- 90.
E. Bagley and Craig E. Da uchy, The Entrepreneur's 18. For a detailed discussion of
each form, see Clarkson et al.,
Guide to Business Law, 5th ed . (Mason, OH: So uth- Business Law, 706- 854.
Western/Cengage, 2018), and Reinhilde Veugelers and 19. For fur ther disc ussion on
the legal aspects of propri-
Cedr ic Schneider, "Which IP Strategies Do Young Highly etorships, see Clarkson et
al., Business Law, 706- 8;
Innovative Firms Choose?," Small Business Economics 50, see also Stephan F.
Gohmann and Jose M. Fernandez,
no. l (2018}: 113- 29. " Proprietorship and Un employment in the United
3. Reprinted by permission of the Harvard Business Review. An States," Journal of
Business Venturing 29, no. 2 (201 4}:
excerpt from "Making Patents Work for Small Companies," 289- 309.
by Ronald D. Rothchild, July/August 1987, 24-30. Copyright 20. For a good analys is
of partnerships, see Clarkson et al. ,
© 1987 by the President and Fellows of Harvard College; all Business Law, 719- 36.
rights reserved. See also David Pressman, Patent It Yourself
21. For the complete Revised Uniform Partners hip Act and
Your Step-by-Step Guide to Filing at the U.S. Patent Office, the Revised Uniform
Limited Partnership Act, see Prenkert
15th ed. (Berkeley, CA: Nolo Press, 2011). et al., Business Law, 37-13- 37-20 and
38-1- 38-15.
4. See Rothchild, "Making Pa tents Work for Sma ll 22. For a detailed disc ussion of
corporate laws and regula-
Companies," 28, and Pressman, Patent It Yourself, 14. tions, see Prenkert et al.,
Business Law, 42-1-44-29.
5. Kenneth W. Clarkson, Roger Miller, and Frank B. Cross, 23. For a good o utline of
the Revised Uniform Pa rtnership
Business Law, 14th ed . (Mason, OH: Cengage/So uth- Act and the Revised Uniform
Limited Partnership Act, see
Western , 2018), 158- 62; see also H. Kev in Steensma, Clarkson et al., Business
Law, 732.
Mukund Chari, and Ra lph Heidi , "The Quest for 24. For more detail Expansive
Intellectual Property Rights and the Fail ure on limited par tnerships, see Prenker t
to Disclose Known Re leva nt Pr ior Art ," Strategic et al., Business Law, 40-9-40-17.
Management Journal 36, no. 8 (2015): 1186- 1204. 25. See Bagley and Dauchy, The
Entrepreneur's Guide to
6. See Jamie D. Prenkert, A. James Barnes, Joshua E. Perry,
Business Law. See also "Limited Liability Company,"
U.S. Small Business Administration, 2015, https://
Todd Haugh, and Abbey Stemler, Business Law: The Ethical, www.sba.gov/co
ntent/limi ted -lia bility-co m pany-llc,
Global, and Digital Environment, 18th ed . (New York: accessed January 9, 2015,
and "The Revised Uni form
McGraw-Hill, 2022), 8-2- 8-10, and M Kato, K. Onishi, and Limited Liability
Company Act," National Conference
Y. Honjo, "Does Patenting Always Help New Firm Survival? of Commissioners on
Uniform State Laws, 2006, http ://
Understanding Heterogeneity among Exit Routes," Small
www.uniformlaws.org/shared/docs/limited %20liability%
Business Economics 59, no. 2 (2021}: 449- 75. 20company/ullca_final_06rev. pdf,
accessed Janua ry 9,
7. Prenkert et al., Business Law, 8-11. 2015. For further discussion on the legal
aspects of LLPs,
8. Prenkert et al., Business Law, 8-14- 8-15. see Prenkert et al., Business Law, 40-9-
40-17.
9. Prenkert et al., Business Law, 8-16. 26. "Certi fied B Corporation ,"
http://www.bcorporation
10. "Trademark Basics," United Sta tes Patent and Trademark
.net, accessed January 9, 2015; Jamie Raskin, "The Rise
of Benefit Corporations," The Nation, June 27, 2011;
Office, 2018, http://www.uspto.gov/trademarks/basics/
James Surowiecki, "Companies with Benefi ts" The New
index.jsp#, accessed January 8, 2018. Yorker, August 4 , 201 4 ,
http://www.newyorker.com
11. " Tra demark Por tfo lio Man agement Strategies," /magazine/201 4/08/04/com
panies-benefits, accessed
Interna ti onal Trademark Associa tion, 2015, http:// January 9, 2015.
www.i nta. or g/Tra de mark Ba sics/F ac tSh ee ts/Pages/ 27. Gene Takagi, "L3C-
Low Profit Limited Liability Company,"
TrademarkPortfolioManagementStrategies.aspx, accessed N on Profit Law Blog,
http://www.nonprofitlawblog
January 8, 2015. .com/home/2008/07/13c.html, accessed January 9, 2015.
12. Prenkert et al., Business Law, 8-29- 8-30. 28. Ha rlan D. Pla tt, \Vhy Companies
Fail (Lexington, MA:
13. Michael Finn, "Everything You Need to Know about Lex ington Book s, 1985),
83; Howard Van Auken ,
Trademarks and Publishing," Publishers \Veekly, January Jeffrey Ka ufmann, and Pol
Herrmann, "An Empir ical
6, 1992, 4 1-44; Joern H . Block, Geertjan De Vries, Jan Analysis of the Relationship
between Capital Acquisition
H . Schumann, and Philipp Sandner, "Trademarks and and Bankr uptcy Laws,"
Journal of Small Business
Venture Capital Valuation, Journal of Business Venturing Management 47, no. 1
(2009}: 23- 37; Mike W. Peng,
29, no. 4 (2014}: 525-42. Yasuhiro Yamakawa, and Seung-Hyun Lee, "Bankruptcy
14. See Prenkert et al., Business Law, 8-35- 8-38.
Laws and Entrepreneur-Friendliness," Entrepreneurship
Theory and Practice 34, no. 3 (2010}: 517- 30.
15. Prenkert et al., Business Law, 8-38. 29. For a detailed disc ussion of Chapter 7
bankruptcy, see
16. Ferrera et al., Cyberlaw, 103- 29; see also Prenkert et al., Prenkert et al., Business
Law, 30-3- 30-19; see also
Business Law, 296. Clarkson et al., Business Law, 581- 94.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic
tight.. some 1hitd p,3 t1ycoo1cn1 maybe suppte sscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1 1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i
lhc t igh1 1o tcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

220 Chapter 9 Legal Challenges for Entrepreneurial Ventures

30. For a detailed discussion of Chapter 11 bankruptcy,
see Prenkert et al., Business Law, 30-22-30-28; see also
Clarkson et al., Business Law, 595- 96.
31. For a detailed discussion of Chapter 13 bankruptcy, see
Prenkert et al. , Business Law, 30-29-30-33; see also
Clarkson et al. , Business Law, 596- 99, and Matthias
Sc hulz, Chris tian Sc hwens, and C hristian Fisc h,
"Bankruptcy Regulation and Self-Employment Entry:
The Moderating Roles of Income Share, Parenthood, and
Hybrid Entrepreneurship," Entrepreneurship Theory and
Practice 45, no. 6 (2021}: 1522-49.
32. Interview with Tim Lemper, clinical professor of business
law and director of the Entrepreneurship Legal Forum,
Indiana University, January 2018.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d
~wooic tight.. some 1hitd p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1 1hcovcrnll lc:wningcxpcticncc. Ccngagc
Lcamingt(SCtv<':i lhc tigh11otcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

Marketing Challenges
for
Entrepreneurial
Ventures
Learning Objectives
10.1. Explain the new marketing concept for entrepreneurs
10.2. Discuss the importance of marketing research for new
ventures
10.3. Identify the key elements of an effective market survey
10.4. List the factors that inhibit the use of marketing
10.s. Explain the emerging use of social media marketing and
mobile marketing
10.6. Identify the components of effective marketing
10.7. Summarize the marketing concept: philosophy, segmentation,
and consumer orientation
10.a. Identify the areas vital to a marketing plan
10.9. List the key features of a pricing strategy
10.10. Discuss pricing in the social media age
Entrepreneurial Thought
Master the topic, the message, and the delivery.
-Steve Jobs, Founder, Apple
Brand is just a perception, and perception will match reality over
time.
-Elon Musk, Founder, SpoceX
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tight.. some 1hitd p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1 1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc
t igh11otcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

222 Chapter 10 Marketing Challenges for Entrepreneurial Ventures

10-1 The New Marketing
Concept for Entrepreneurs
LO10.1 Explain the new marketing co ncept for entrepreneurs
Marketing has been and ahvays ,vill be a major eletnent
of any entrepreneurial venture. The challenge today is to
understand the fundamental shifts that have taken place
in our ,vorld.
Researchers Minet Schindehutte, Michael H. Morris,
and Leyland F. Pitt describe ho,v the new 1narketing
logic requires a fundamental rethinking of the old rules
that applied in a ,vorld of stability and control. The
speed of transactions is higher, dynamic, and happening
in real ti1ne. In a demand-based economy, entrepreneurs
must realize that the customer is in control and therefore
drives decisions. This fact requires a reconceptualization
of the marketing mix from customer-centric to customermade.
To illustrate this major rethinking in marketing,
,ve must shift from the 4 Ps to the 4 Cs:
From Product ... to Cocreated
From Promotion ... to Communities
From Price ... to Customizable
From Place ... to Choice
This is the era of Generation C, ,vhere the C stands
for content. This generation is connected, creative, collaborative,
and contextual. Entrepreneurs must realize
that the customer is no,v at the center of all effective
marketing activity.1
The new marketing concept for entrepreneurs includes
kno,ving ,vhat a market consists of, the understanding
of marketing research, the develop1nent of a 1narketing
plan, the proper understanding and application of social
media marketing, and the proper approach to a pricing
strategy. In this chapter, ,ve examine each of these key
components.
A market is a group of consumers (potential customers)
,vho have purchasing power and unsatisfied needs.2
A new venture ,viii survive only if a 1narket exists for
its product or service. 3 This is so obvious that it ,vould
seem that every entrepreneur ,vould prepare thoroughly
the market analysis needed to establish a target market.
Ho,vever, 1nany entrepreneurs kno,v very little about
their market, and some even attempt to launch ne,v ventures
,vithout identifying any market. (See Table 10.1
concerning the marketing skills of great entrepreneurs.)
A number of techniques and strategies can assist entrepreneurs
to effectively analyze a potential n1arket. By
using them, entrepreneurs can gain in-depth kno,vledge
about the specific market and can translate this kno,vledge
into a ,veil-formulated business plan. Effective marketing
analysis also can help a ne,v venture position itself
and 1nake changes that ,viii result in increased sales.4 The
key to this process is 1narketing research.
Table 10.1 Common Elements in the Marketing Skills
of Great Entrepreneurs
1. They possess unique environmental ins ight, wh ich they
use to spot opportun ities that others overlook or view
as problems.
2. They develop new marketing strateg ies that draw on
their un ique ins ights. They view the status quo and
conventional wisdom as something to be challenged.
3. They take risks that others, lacking the ir vision, consider
fool ish.
4. They live in fear of being preempted in the market.
5. They are fiercely competitive.
6. They th ink through the implications of any proposed
strategy, screening it against their knowledge of how
the marketplace functions. They identify and solve
problems that others do not even recognize.
7. They are meticulous about details and are always in
search of new competitive advantages in quality and
cost reduction, however small.
8. They lead from the front, executing their management
strateg ies enthusiastically and autocratically. They
ma inta in close information control when they delegate.
9. They drive themselves and their subordinates.
10. They are prepared to adapt their strategies qu ickly and
to keep adapting them until they work. They persevere
long after others have given up.
11. They have clear visions of what they want to achieve
next. They can see further down the road than the
average manager can see.
Source: Peter R. Dickson, Marketing Management, 1st ed.© 1994
Cengage Learning; see also Barry J. Babin and William G. Zikmund,
Essentials of Marketing Research, 6th ed. (Mason, OH: Cengage/
South-Western, 2016) .

10-2 Marketing Research

LO10.2 Discuss the importa nce of ma rketing research for new
ventures
Marketing research involves the gathering of infonnation
about a particular market, followed by analysis of
that information.5 A knowledge and understanding of
the procedures involved in marketing research can be
very helpful to the entrepreneur in gathering, processing,
and interpreting market information.
10-2a Defining the Research Purpose
and Objectives
The first step in marketing research is to define precisely
the informational require1nents of the decision to be
made. Although this may seem too obvious to mention,
the fact is that needs are too often identified ,vithout
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F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1 1hcovcrn ll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i
lhc tigh1 1o tcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
sufficient probing. If the problem is not defined clearly,
the information gathered will be useless.
In addition, specific objectives should be established.
For example, one study has suggested the following set
of questions to establish objectives for general marketing
research:
• Where do potential custorners go to purchase the
good or service in question?
• Why do they choose to go there?
• What is the size of the market? How much of it can
the business capt ure?
• Hovv does the business compare vvith competitors?
• What impact does the business's promotion have on
customers?
• What types of products or services are desired by
potential customers?6
10-2b Gathering Secondary Data
Information that has already been compiled is knovvn
as secondary data. Generally speaking, secondary data
are less expensive to gather than are nevv, or primary,
data. The entrepreneur should exhaust all the available
sources of secondary data before going further into the
research process. Marketing decisions often can be made
entirely with secondary data.
Secondary data may be internal or external. Internal
secondary data consist of information that exists within
the vent ure. The records of the business, for example,
may contain useful infonnation. External secondary
data are available in numerous periodicals, trade association
literat ure, and government publications.
Unfortunately, several problems accornpany the use
of secondary data. One is that such data may be outdated
and, therefore, less useful. Another is that the units
of measure in the secondary data may not fit the current
problem. Finally, the question of validity is always present.
Some sources of secondary data are less valid than
others.
10-2c Gathering Primary Data
If secondary data are insufficient, a search for nevv information,
or primary data, is the next step. Several techniques
can be used to accumulate primary data; these
are often classified as observational rnethods or questioning
rnethods. Observational rnethods avoid contact
vvith respondents, vvhereas questioning methods involve
respondents in varying degrees. Observation is probably
the oldest fonn of research in existence. Observational
methods can be used very economically, and they
avoid a potential bias that can result from a respondent's
avvareness of their participation in questioning methods.
A rnajor disadvantage of observational methods, hovvever,
is that they are limited to descriptive studies.
Marketing Research 223
Surveys and experimentation are tvvo questioning
methods that involve contact vvith respondents. Surveys
include contact by mail, contact by telephone, and
personal intervievvs. Mail surveys are often used vvhen
respondents are vvidely dispersed; hovvever, these are
characterized by lovv response rates. Telephone surveys
and personal intervievv surveys involve verbal communication
vvith respondents and provide higher response
rates. Personal intervievv surveys, hovvever, are more
expensive than mail and telephone surveys. Moreover,
individuals often are reluctant to grant personal intervievvs
because they feel that a sales pitch is forthcorning.
(Table 10.2 describes the major survey research
techniques.)
Experimentation is a form of research that concentrates
on investigating cause-and-effect relationships.
The goal is to establish the effect that an experimental
variable has on a dependent variable. For example, what
effect vvill a price change have on sales? Here, the price
is the experimental variable, and sales volume is the
dependent variable. Measuring the relationship betvveen
these tvvo variables vvould not be difficult vvere it not for
the many other variables involved.7
Developing an Information-Gathering
Instrument
LO10.3 Identify the key elements of an effective market survey
The questionnaire is the basic instrument for guiding the
researcher and the respondent through a survey. The questionnaire
should be developed carefully before it is used.
Several major considerations for designing a questionnaire
are as follovvs:
• Make sure each question pertains to a specific
objective that is in line vvith the purpose of the study.
• Place simple questions first and difficult-to-ansvver
questions later in the questionnaire.
• Avoid leading and biased questions.
• Ask yourself, "Hovv could this question be misinterpreted?"
Revvord questions to reduce or eliminate
the possibility that they will be misunderstood.
• Give concise but cornplete directions in the questionnaire.
Succinctly explain the infonnation desired
and route respondents around questions that may
not relate to them.
• When possible, use scaled questions rather than
simple yes/no questions to measure intensity of an
attitude or frequency of an experience. For example,
instead of asking, "Do vve have friendly sales
clerks?" (yes/no), ask, "Hovv vvould you evaluate the
friendliness of our sales clerks?" Have respondents
choose a response on a five-point scale ranging from
"very unfriendly" ( 1) to "very friendly" (5). 8
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Table 10.2 Comparison of Major Survey Research Techniques

g?
~f
~~ Speed of data collection Moderate to fast Fast Very fast Slow; researcher has
I Instantaneous; 24/7
~· ~
• ,o no control over return of
[~
,,_ n questionnaire
P, B 3 ,,
I High (worldwide) 8. • 'll Geographic flexibility Limited to moderate Confined; poss
ible High High
1 fi urban b ias ] e.
~~

i ~ Respondent cooperation Excellent Moderate to low Good Moderate; poorly

Varies depending on

.. designed questionna ire webs ite; high from g

~ ~ ~ ~ - '?? will have low
response consumer panels
~
§~ rate ~ ?-
2 ::
Versatility of questioning Quite versatile Extremely versatile Moderate Not

versatile; requires I Extremely versatile . ~

~ ~ E· t highly standard ized

~ . .@ format a- · - P-
Questionnaire length Long Moderate to long Moderate
~

Varies depending on Moderate; length i< [

•0~ incentive customized based on .. :1, ~

i .g answers
~. ~
;,. Item nonresponse rate Low Medaum Medium High Software can assure
J; • ~
none
~ ;·
~.$ ~ 5 Possibility for respondent Low Low Average High; no interviewer High
f') n

nil misunderstanding present for clarification ,B, . -·

~] Degree of interviewer High High Moderate None; interviewer absent I None fi

~
s ~ influence on answer ;;· Q
,, 0

-~ ii Supervision of interviewers Moderate Moderate to high High; especially I

Not applicable I Not applicable . a ~. ~ ,i;· with central location
~· 1' interviewing "S 3~
a ~ Anonymity of respondent Low Low Moderate High Respondent can be either 3

~ ... ~ 1l anonymous or known

I~ ••• Ease of callback or follow-up Difficult Difficult Easy Easy, but takes time
:::.· f')

Difficult, unless e-mail -g "B address is known g 3

0-

r; ~ : ~ Cost Highest Moderate to high Low to moderate Lowest Low g~

-;j
~~ Special features Visual materials may be Taste tests, viewing Fieldwork and

Respondent may answer Streaming media software -· .. i f

shown or
demonstrated; of TV commercials supervision of questions at own allows use of
graphics and .g i< extended probing poss ible possible data collection are conven
ience: has time to animation
-
B o , . 8 simplified;" quite reflect on answers
'!> w
• ! adaptable to computer ; i technology ~ ?,
~.[
2 .g. Source: Adapted from Peter R. Dickson, Marketing Management, 1st ed.,© 1994
Cengage Learning; see also Barry J. Babin and William G. Zikmund, Essentials of
Marketing Research, 6th ed. ~· . (Mason, OH: Cengage/South-Western, 2016) . ..
C . ._,

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~
()
::r
Q-u
@..,
~

0
~
.Q.,
~
:::,-.
:::,
CQ
()
::r
Q
(1)
:::,
CQ
(1)
V>
.o., '
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-
: .:.:,,
(1) -.u.,
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:::,
(1)

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~

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:
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.. ,
::, C

V>

10-2d Quantitative versus Qualitative

Marketing Research
Quantitative research involves empirical assessments
that \>York from numerical measurements and analytical
approaches to compare the results in sorne \>vay. The
researcher is an uninvolved observer so that the results
are "objective." Ho\>vever, larger san1ples are needed to
be able to perform the statistical analyses effectively.
Qualitative research needs far less of a sample size, as it
involves the researcher in the process and is able to delve
deeper into the questions "vith the respondents. Since
it relies less on analytical testing and the researcher is
engaged in the process, the results are thus considered
"subjective. "9
10-2e Interpreting and Reporting
Information
After the necessary data have been accurnulated, they
should be developed into usable information. Large
quantities of data are rnerely facts. To be useful, they
must be organized and molded into meaningful inforrnation.
The methods of summarizing and sirnplifying
information for users include tables, charts, and other
graphic methods. Descriptive statist ics- such as the
mean, mode, and median- are most helpful in this step
of the research procedure.
10-2f Marketing Research Questions
The need for marketing research before and during a
venture \>vill depend on the type of venture. Ho\>vever,
typical research questions might include the follo"ving,
"vhich are divided by subject:
Sales
1. Do you kno"v all you need to kno"v about your
competitors' sales performance by type of product
and territory?
2. Do you kno"v "vhich accounts are profitable and
how to recognize a potentially profitable one?
3. Is your sales po\>ver deployed "vhere it can do the
most good and maximize your investment in selling
costs?
Distribution
1. If you are considering introducing a ne"v product or
line of products, do you kno"v all you should about
distributors' and dealers' attitudes to\>vard it?
2. Are your distributors' and dealers' salespeople saying
the right things about your products or services?
3. Has your distribution pattern changed along with
the geographic shifts of your n1arkets?
Inhibito rs to Marketing Research 225
Markets
1. Do you know all that \>Vould be useful about the differences
in buying habits and tastes by territory and
kind of product?
2. Do you have as much information as you need on
brand or manufacturer loyalty and repeat purchasing
in your product category?
3. Can you no"v plot, from period to period, your market
share of sales by products?
Advertising
1. Is your advertising reaching the right people?
2. Do you know how effective your advertising is cornpared
to that of your cornpetitors?
3. Is your budget allocated appropriately for greater
profit-according to products, territories, and market
potentials?
Products
1. Do you have a reliable quantitative rnethod for testing
the market acceptability of ne"v products and
product changes?
2. Do you have a reliable method for testing the effect
on sales of ne"v or changed packaging?
3. Do you kno\>v "vhether adding higher or lo\>ver quality
levels \>Vould make ne\>v profitable markets for
your products?
10-3 Inhibitors to
Marketing Research
LOl0.4 List the factors that inhib it the use of marketing
Despite the fact that rnost entrepreneurs \>Vould benefit
from marketing research, many fail to do it. A number
of reasons exist for this ornission, among them cost,
complexity, level of need for strategic decisions, and
irrelevancy. Several articles have dealt \>Vith the lack of
rnarketing research by entrepreneurs in the face of its
obvious advantages and vital irnportance to the success
of entrepreneurial businesses.10
10-Ja Cost
Marketing research can be expensive, and some entrepreneurs
believe that only major organizations can
afford it. Indeed, some high-level marketing research
is expensive, but smaller companies can also use very
affordable marketing techniques.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~ wooic
tight.. some 1hitd p,3 t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
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lhc tigh1 1o tcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

226 Chapter 10 Marketing Challenges for Entrepreneuria l Ventures

The Entrepreneurial Process
Omnichannel Marketing versus Multichannel
Marketing
W ith people spending on average of over lwo hours a day on
social media, it is no wonder that entrepreneurs have worked
to create social media strategies to tap into this potential market.
However, going about reaching this market must be done
though~ully to build brand awareness and familiari ty.
Previously, componies used multichannel strategies, but w ith
the growth in social media, omnichannel strategies have become
much more successful, achieving 9 1 percent year-on-year
customer retention. What is the d ifference2 Multichannel
strategies were those where the brand was the center of the
marketing strategy. The product or service was placed in front
of the consumer and wasn't necessarily personalized to suit the
customers' needs. The various pla~orms used to advertise the
product were operated independently and didn't relate to one
another. For example, the strategy may have been only to show
the product and encourage one to buy ii or to provide a coupon
for buying the product at a d iscount. It didn't seek input from the
customer to see if the product was what the customer wanted.
Omnichannel strategies use both social media pla~orms
and non-technological pla~orms (like media , catalogs, and
storefronts) working together to provide a more personal ized
journey for the customer. From the start, the customer is the
center of the marketing strategy, build ing a long-lerm rela tionship
with the customer. And from the first message to the last,
each channel provides a unified message. The result is loyalty,
higher engagement and higher purchase rate using an omnichannel
strategy versus a multichannel strategy. An omnichannel
strategy would look like this:
Understand your customer. Where does your customer
shop, and what social media sites do they like2 Or do
they also look through catalogs, listen to the radio, and
read the newspaper, and how can all the different marketing
methodologies be integrated2 Are they best reached
on TikTok, Twitter, lnstagram, SMS, e-mail, or Facebook
and by what combination of social media siles2 Are they
motivated by influencers2 Visuals? Additionally, the entire
team must understand the customer and what they seek.
Gathering feedback d irectly from the customers will help
map out the customer journey to understand how they
locate your brand and your site. Google Research slates
that 90 percent of multiple-device owners switch between
an average of three per day to complete a task. The rule of
seven has never meant more than it does today, meaning
that one must see a brand's message seven times before
purchasing. W ith our receiving over 5,000 messages in
a day, social media is a great tool to help with this awareness.
But find ing the correct channels is the very reason
why understanding your customer and their patterns is key.
Find your brand voice. This would be the personality of your
company. Is your product serious, relatable, friendly, upscale,
and eco-friendly2 Whatever brand voice you determine,
your company should be consistent across all advertising
pla~orms. How do you talk about the business's products or
services with a friend2 This should help you find that voice.
Now that you know your voice, the various ways you
w ish to convey the message, and the pla~orms your audience
frequents, does this combination make sense2
Be authentic and tell a story Consumers like to know the
people behind the business. This provides the opportunity
to showcase the people who work in the business,
creating an emotional connection to your customer. Dive
into the past and use nostalgia, stories, problems solved
using the product or service, and memories that resonate
w ith consumers. Curate content like the sharing of recipes
or articles relevant to your product. This is more likely to
increase purchasing behavior than the giving of a coupon.
Be infenfiona/ about your social media posts. Every post
should have intention so that they appear authentic. Find a
mix of social media posts that benefit the customer where
some aren't even an ask to buy of all. These posts support
your brand, benefit the customer, and remind them that
you are there when they are ready to spend next. It also
shows that you take the business seriously. This lwo-way
conversation is important for creating brand loyalty. If you
grow too large, hire someone to do this work because
many of the social posts may require daily posts, such
as lnstagram and Facebook. Twitter may require multiple
posts per day, and Linkedln may requ ire several posts a
week. How often you post depends on the pla~orms you
use and the message you wish to share.
Measure and pivot if you need lo. Measure your marketing
goals across all marketing channels. Are they resulting in
the sales you anticipated2 If not, are you able to ascertain
why2 An experiment may include trying d ifferent strategies
with different audiences and then measuring the results. This
will help you understand what content or what channels you
need to try next. W ith hundreds or thousands of customers,
even a small percent increase can affect your revenue.
Source: Adopted from Wendy Dessler, '13 Social Media Strateg ies to
Boost Your Small Business Online,' November 12 , 2020, https://blog
.sociolmedioslrotegiessummit.com/ sociol·medio-slrolegies-for·locol·smoll
-business; Ella Goldfeld, ' Omnichonnel Marketing: Strategy, Examples,
Definition and Benefits; February 16, 2022, https://www.moyple.com
/blog/omnichonnel·morketing; Martha Kendall, ' How lo Creole a Social
Media Strategy for Small Businesses,• February 16, 202 I, https:/ / later
.com; Megan Mahoney, ' The Impact of Social Media on Business in 2022,'
2022, https://www.singlegroin .com/blog·posts/impoct-of-sociol-medio
-in-todays-business-world; Tracy Puckett, 'What Is Omnichonnel Marketing?
Examples and Tips for Ecommerce, • November 22, 202 I, https:/ /
www.omnisend.com; Nancy Rothman, 'Social Media for Small Business
Owners-9 Top Strategies Social Media for Small Business Owners;
Moy 16, 202 1, https:/ /meetedgor.com; and Ted Vroulos, ' How to Creole
the Perfect Omnichonnel Marketing,• July I, 2020, https:// secretsile .co.
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10-Jb Complexity
A number of marketing research techniques rely on
sampling, surveying, and stat istical analysis. This
complexity- especially the q uantita ti ve aspect s- is
frightening to many entrepreneurs, and they shun it. The
important point to remember is that the key concern is
interpretation of the data, and an entrepreneur always
can obtain the advice and counsel of those skilled in statistical
design and evaluation by calling on the services
of marketing research specialists or university professors
trained in this area.
10-Jc Strategic Decisions
Some entrepreneurs feel that only major strategic decisions
need to be supported through marketing research.
This idea is tied to the cost and complexity issues
already mentioned. The contention is that, because
of the cost and stat istical complexity of marketing
research, it should be conducted only "vhen the decisions
to be made are major. The problem lies not only
in the misunderstanding of cost and complexity but also
in the belief that marketing research's value is restricted
to major decisions. Much of the entrepreneur's sales
efforts could be enhanced through the results of such
research. 11
10-3d Irrelevancy
Many entrepreneurs believe that marketing research
data "vill contain either information that merely supports
"vhat they already know or irrelevant information.
Although it is true that rnarketing research does produce
a variety of data, some of "vhich may be irrelevant, it
is also a fact that much of the information is useful. In
addition, even if certain data merely confirm "vhat the
entrepreneur already knows, it is kno"vledge that has
been tested and thus allo"vs the individual to act on it
"vith more confidence.
As indicated by these inhibitors, rnost of the reasons
that entrepreneurs do not use marketing research center
either on a misunderstanding of its value or on a fear of
its cost. However, the approach to marketing does not
have to be expensive and can prove extremely valuable.
10-4 Social Media
Marketing
LO10.5 Explain the emerging use of social media marketing
and mobile market ing
"Mobile apps, social media, advertising nenvorks,
video streaming, broadband, Fla sh, optimization!
These are only a few of the Internet-related terms
that have entered the marketing vocabulary in recent
Social Media Marketing 227
years ... suggesting ho"v complex the marketing job
has become in the Internet age." 12
Today, our "vorld is dorninated by social net"vorks,
online communities, biogs, "vikis, and other online collaborative
rnedia. Social media marketing describes the
use of t hese tools for marketing purposes. The most
common social media marketing tools include T"vitter,
biogs, Linkedin, Facebook, Pinterest, Instagrarn, and
YouTube. There are three important aspects to consider
"vith social media marketing:
1. Create sornething of value with an event, a video,
a t"veet, or a blog entry that attracts attention and
becomes viral in nature. This viral replication of a
message through user-to-user contact is what rnakes
social media marketing "vork.
2. Enable custorners to promote a message themselves
with multiple online social media venues. Fan pages
in T"vitter and Facebook are exarnples of this.
3. Encourage user participation and dialogue. A successful
social media marketing program must fully
engage and respect the customers with online conversations.
Social rnedia marketing is not controlled
by the organization.13
As you can see in these three elements, the real goal
of social media marketing is to create a conversation
among customers in your market space- a type of
"vord-of-mouth marketing that reaches a critical mass.
And why is this so critical for entrepreneurs and their
start-up vent ures? Researchers focused on social media
marketing have pointed to the follo"ving facts:
• Facebook no"v has over 1 billion users (larger than
the populations of the United States, Canada, and
Mexico combined).
• According to a social media study, three-quarters
of the online population is comprised of frequent
social media users.
• Google processes over 3 .5 billion online searches
every day (or 1.2 trillion per year).
• Forrester Research estimates that online U.S. retail
spending "vill reach $414 billion by 2018, or 11 percent
of the entire retail rnarket. 14
10-4a Key Distinctions of Social
Media Marketing
As we pointed out earlier in the chapter, it is a cornplete
rnisconception to think that social media marketing is
just using online social media sites to do t raditional
rnarketing. The traditional marketing approach, emphasizing
the 4 Ps (product, price, place, and promotion),
still has some important lessons for marketing, but in
the ne"v terrain of social media, it has to be adapted
or in some areas changed completely.That is "vhy "ve
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228 Chapter 10 Marketing Challenges for Entrepreneurial Ventures

presented the 4 Cs based on the customer focused concept
in this ne,v age of marketing.
In addition, there are several other aspects that distinguish
social media marketing from traditional marketing.
One distinction is referred to as control versus
contributions. Traditional marketing seeks to control the
content seen by the audience and attempts to dominate
the territory by excluding their competitors' message.
Social media marketing emphasizes audience contribution
and relinquishes control over large parts of the
content. Effective social 1nedia marketing can son1etimes
influence ,vhat participants say and think about a brand,
but rarely can they control the conversation.
A second important distinction is trust building. Firms
cannot fully control the content that users ,vill create, so
a venture must develop trusting relationships ,vith the
customer audience. Unlike traditional advertisements in
,vhich consumers have gro,vn to expect some exaggeration
to be applied to a product, on social media, it is
important to be completely honest. Any firm that bends
Table 10.3 Traditional versus Entrepreneurial Marketing
Conventional Marketing
the truth ,vill be held accountable and have to explain
those actions.
A third distinction is in how social media messages
are consumed. Traditional 1narketing was "one-,va y"
from the firm to the customers. Social media involves
two-way communication to an audience that is interested
in responding. If the message being delivered is
boring, inaccurate, or irrelevant, the customer ,vill look
else,vhere. Social 1nedia creates an ongoing conversation
bet,veen the ne,v venture and the customer. 15 Table 10.3
provides an excellent outline of the differences in traditional
marketing versus entrepreneurial marketing.
10-4b Developing a Social Media
Marketing Plan
A social 1nedia marketing plan details an organization's
social media goals and the actions necessary to achieve
the1n. Key among these actions is the creation of solid
marketing strategies, without ,vhich there is little chance
Entrepreneurial Marketing
Basic prem ise Facilitation of transactions and market Sustainable competitive
advantage through valuecontrol
creating innovation
Orientation Marketing as objective, dispassionate Central role of passion, zeal,
persistence, and
science creativity in marketing
Context Established, relatively stable markets Envisioned, emerging, and
fragmented markets with
high levels of turbulence
Marketer's role Coord inator of marketing mix; builder of Internal and external
change agent; creator of the
the brand category
Market approach Reactive and adaptive approach to Proactive approach, lead
ing the customer with
current market situation with incremental dynamic innovation
innovation
Customer needs Articulated, assumed, expressed by Unarticulated, discovered,
identified through lead
customers through survey research users
Risk perspective Risk minimization in marketing actions Marketing as vehicle for
calculated risk taking;
emphasis on finding ways to mitigate, stage, or
share risks
Resource management Efficient use of existing resources, scarcity Leverag ing,
creative use of the resources of others;
mental ity doing more with less; actions are not constra ined by
resources currently controlled
New product/ service Marketing supports new product/ Marketing is the home of
innovation; customer is
development service development activities of research coactive producer
and development and other technical
departments
Customer's role External source of intelligence and Active participant in firm's
marketing decision
feedback process, defining product, price, distribution, and
communications approaches.
Source: Adapted from lv1inet Schindehutte, lv1ichael H. Morris, and Leyland F. Pitt,
Rethinking Marketing (Upper Saddle River, NJ: Pearson
Prentice Hall, 2009), 30.
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of successfully executing the plan. Here are some critical

steps to keep in mind:
Lis ten What people are saying about a company
enables the organization to determine its current
social rnedia presence, "vhich in turn guides the setting
of social media goals and strategies to achieve them.
Identify Identify the target market (ni che) so that
marketing strategies can be organized to efficiently
reach those most receptive customers and eventually
advocates.
Categorize Categorize social media platforms by
target market relevancy. In other "vords, a company
should focus its efforts on the social media sites
where its target audience resides in the greatest numbers,
resulting in a higher return on investment.
Appraise The location, behavior, tastes, and needs
of the target audience, as "vell as the competition,
need to be appraised to determine an organization's
strengths and "veaknesses and the opportunities and
threats (SWOT analysis covered in Chapter 13) in the
environment.
Implement Choosing the right tools is accomplished
by finding the social media sites where the target
audience resides and then focusing the cornpany's
social media efforts on those platforms.
Collaborate Collaboration with platform members is
a means of establishing a mutually beneficial relationship
"vith the platform participants. Social media is
a key "vay to build relationships. People "vho feel a
personal connection "vith a company are apt to like
and trust the associated brand or product. A faceless
corporation is unlikely to inspire confidence, but see
0

ing the people behind the brand can build customer

loyalty and support.
Contribute Contribute content to build reputation
and become a valued mernber, helping to improve the
cornmunity. A brand or cornpany can be positioned
as thought leaders or experts in an industry by showcasing
their unique kno"vledge. This positioning can
develop positive equity for that brand or company; if
a firrn kno"vs more about the subject area than anyone
else, it signals that its product "vill rnost likely be
of higher quality.
Convert Convert strategy execution into desired outcornes,
such as brand building, increasing customer
satisfaction, driving word-of-mouth recornmendat
ions, producing ne"v product ideas, generating leads,
handling crisis reputation management, integrating
social rnedia marketing "vith public relations and
advertising, and increasing search engine ranking and
site traffic.
Monitor Evaluate the organization's social media
marketing initiatives.16
Social Media Marketing 229
These key steps for a social media marketing plan
are just a beginning. It is most important to develop an
approach that links the specific goals of the entrepreneur
"vith the rnarketing strategies. The specifics "vill depend
on information from listening to and observing the target
rnarket.
10-4c Mobile Marketing
Mobile computing is the use of portable "vireless devices
to connect to the Internet. It enables people to access
data and to interact on the social "veb while on the move
as long as they are in range of a cellular or WiFi ("vireless
fidelity) network. Common mobile computing devices
include cell phones, smartphones, tablet PCs, and netbooks.
Cell phones provide "vireless voice comm unications
and Short Message Service ( SMS) for sending
and receiving text messages. Smartphones combine the
po"ver of cell phones and laptop computers; using mini
keyboards for either mechanical or touchscreen input,
they can receive and store text messages and e-rnail,
act as web bro"vsers, run mobile applications to perform
a gro"ving variety of tasks, and take pictures "vith
increasingly high-quality miniaturized digital cameras.
Tablet PCs are sirnilar to laptop cornputers, but they
use touch screens to replace bulky key "vords, offering
a more compact form "vith maximum screen size. Netbooks
are basically laptop computers but on a smaller
scale; they are more light"veight and about the size of a
hardback book.
Mobile devices are no"v "vithin everyone's reach, and
thus people are connected "vith their social nenvorks
constantly. This means that participants in social net\>
Vorks are always on and ahva ys connected. As a result,
people tend to post and share content on social nenvorks
more often. Authors Melissa S. Barker, Donald I. Barker,
Nicholas F Bormann, and Krista E. Neher reported that
nearly one-third of Facebook's 1 billion active users
are currently accessing Facebook through their mobile
devices. T"vitter sho"vs similar statist ics, "vith reports
that 95 percent of T"vitter users o"vn a mobile phone and
that half of the users access T"vitter through their mobile
device. It is the "vay of the fut ure.17
Mobile social media marketing is a fast-paced and
high-impact marketing tool that many companies have
started to use very successfully as part of their overall
rnarketing st rategy. Many companies are no"v using
rnobile social media applications as their standard comrnunication
strategy to coru1ect with consumers. It can
be defined as a group of mobile marketing applications
that allo"v the creation and exchange of user-generated
content. Mobile computing provides a plethora of marketing
opportunities, such as text messaging, mobile
applications, and mobile advertising.
Companies using mobile social media often obtain
personal data about their consurners, such as current
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230 Chapter 10 Marketing Challenges for Entrepreneurial Ventures

geographical position in time or space. Mobile social
media applications can be differentiated based on location
sensitivity (does the message take account of the specific
location of the user?) as ,vell as on time sensitivity
(is the message received and processed by the user instantaneously
or ,vith a ti1ne delay?). The most sophisticated
forms of mobile social media applications are those that
account for both time and location simultaneously.
The overall mobile social media strategy can be complicated,
but researcher Andreas Kaplan recommends
the follo,ving 4 Is to help grasp the overall strategy: integrate,
individualize, involve, and initiate. 18
1. Integrate. The best ,vay to integrate the application
into the daily life of the user is to offer incentives,
prizes, or discounts to the user of the application.
2. Individualize. Mobile marketing allo,vs for an even
higher level of individualized company-to-consumer
communication by directing custo1nized messages to
different users based on location, taste preferences,
and shopping habits.
3. Involve. Effective mobile campaigns involve the user
interact ively with a type of a story or game. Mobile
social media games often involve prizes for the
,vinners, often in the form of discounts, coupons,
or gift cards. Even ,vithout prizes, users are still
motivated to ,vin one of these int eractive games
because their soc ial media network "friends" ,vill
see if they have ,von.
4. Initiate. Companies someti1nes need to initiate the
creation of user-generated content in order to start
a meaningful dialogue bet,veen different consumers
as they com1nunicate online. This initiation of consumer
dialogue is not straightfonvard, and many
companies may not achieve this no matter ho,v
much effort they put into it.
Overall, the future of mobile social 1nedia 1narketing is
very promising, and firms should try to capitalize on this
type of marketing as soon as possible. The future ,vill bring
continued technology enhancements, and the integration
of virtual life and real life is inevitable. Mobile marketing
using social media will be revolutionary and potentially
more important than almost any other type of marketing.
10-5 Entrepreneurial
Tactics in Market Research
LO10.6 Identify the components of effective market ing
Since new start-up ventures are many times resource
constrained, entrepreneurs need to so1netimes become
innovative ,vith their market research. Researchers
Minet Schindehutte, Michael H. Morris, and Leyland F
Pitt recommend a number of possible avenues for entrepreneurs
to pursue in their marketing research process. 19
These tactics include the follo,ving:
Guerrilla Marketing The use of nonconventional tactics
and unorthodox practices applied to marketing
research. Realizing that there are an unlimited number
of ,vays in ,vhich to collect information regarding
a given question, the entrepreneur must thrive on tapping
into unutilized sources of information and collecting
information in very creative ways.
Insights in Ordinary Patterns The entrepreneur needs
to understand that patterns emerge over time, so
identifying and tracking them is invaluable. Here are
a fe,v of the identifiable trends:
Potential customers buying at certain times of the
year
Questions that customers ask employees at similar
stores
Information sources that customers rely on for
different types of purchases
Patterns in the characteristics of repeat users of
similar products
Methods that potential custo1ners rely on to
reduce risk ,vhen they are purchasing
Technological Tools Today, technology can be
extremely valuable to entrepreneurs and their research
efforts. Tracking soft,vare to see exactly ho,v a visitor
to the firm's ,vebsite behaves, ,vhat features are exa1nined,
and ho,v long they remain on the site may be a
viable tool. Technology that facilitates surveys, such as
Survey Monkey, could prove helpful. The e1nergence of
smartphones that allo,v customers to take pictures of
things that interest them represents another research
tool ,vith rich potential. Tools to track response rates
to advertisements or promotions placed in certain
media, especially the Internet, are also valuable.
Customer Observation Insights can be gained from
observing situations as they occur. Observational
approaches can take many creative forms. They can be
obtrusive, ,vhere the subject is a,vare that they are being
observed, or unobtrusive, ,vhere they are not a,vare. An
example of the obtrusive approach ,vould be having
potential customers use their smartphones to identify
preferences and questions as they peruse their choices.
An unobtrusive example ,vould be ,vhen the entrepreneur
counts cars or people that pass a given location at
certain times of the day. Either method can be a systema
tic 1neans of capturing market information.
Web-based Surveys As mentioned, Survey Monkey is
an example of the easy-to-use tools for creating online
surveys. These services help an entrepreneur design a
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Entrepreneurial Tactics in Market Research 231

The Entrepreneurial Process

Artificial Intelligence Solutions for the Entrepreneurial
Firm
Artificial intelligence (Al) solutions are being applied to entrepreneurial
firms in a variety of ways because Al solutions are
suited to every step of the entrepreneurial process. Here are
some of the most common:
Marketing, Sales, and Data Gathering
W ith SEO (search engine optimization), a type of Al intervention,
potential customers can be reached, engaged, and even
retained with a lower expense. This support mechanism can
enhance the online experience, directing customers to what
they are seeking and even making a sale. If the condition(s)
become too compl icated, the Al (chatbot) can d irect the customer
to a live person for more assistance or a final sale; this is
d ifferentiating users into segments.
Understanding customers' unique needs to plan future
product rollout can be another application of Al. Being able
to implement social algorithms to identify potterns in customer
purchase behavior and predict and anticipate trends has limitless
options. Using Al creates an increase in sales that people
cannot do as quickly.
Social Media
Al tools can be used to understand what competitors are
actively pursuing on their social media pla~orms, allowing
entrepreneurs to reevaluate their business plans accordingly.
They can understand how the competition engages with their
customers, what is viewed, and what is purchased. The target
audience of their competition will be their target audience as
well, and Al tools and algorithms will be key to access this
group of individuals.
Also, Al tools are even sophisticated enough to create
social media posts for companies, being able to draft and target
ads. Al can monitor trends based on its ability to gather
and sort large amounts of data for decision making. Machine
learning can improve predictions over time, knowing who will
take action and purchase more, with the ability lo target those
customers specifically. Al can even predict which social media
will best be suited for certain ads.
Relationship Management
Done right, Al tools can enhance a company's relationship
w ith the end customer by del ivering a personalized experience
to each user. The ability of Al tools to collect and store customers'
preferences to deliver a personalized experience gives the
user a feel ing of having a special one-on-one relationship with
the firm . Many of these types of Al tools are easy to implement
and customer sati sfying . An example would be sending
a text reminder, such as "Your product delivery has scheduled
for tomorrow at 9 30 a .m. Please call our office if you have
any questions or need to reschedule." These are easy to implement
on the entrepreneur's end and create satisfaction on the
customer end.
Process/Supply Automation
Entrepreneurs who have businesses that depend on supply
orders can use Al tools for supply ordering and monitoring .
There are tools that can keep track of inventory patterns for
automatic reordering . This allows the entrepreneur more time
for other efforts rather than keeping track of inventory levels
and delivery times. This same Al can keep track of returns or
issues with products for later analysis.
Hiring Employees/Fewer Employees
Some firms have tried using Al tools to hire employees using
an algorithm where ii screens cand idates via tests to see if they
match the hiring firm's behavior and culture. This may speed up
the hiring process when an entrepreneur has a limited time to
get a team pulled together. Also, there is some thought that Al
bots can do some of the work that employees can do (such as
menial tasks), resulting in hiring fewer employees. Some examples
include data collection, data analysis, and, as mentioned
above, initial sales screening. This Al investment saves energy
for creativity and human interaction, which isn't Al applicable.
Each entrepreneur has to decide how they will use Al for
their particular firm. However, keep in mind that not using this
innovative technology may only leave the entrepreneur behind
the competition. Most Al is scalable and with careful implementation
can be an asset to any entrepreneurial firm.
Source: Adopted from Luis Jorge Rios, ' 3 Entrepreneurial Uses of Artificial
Intelligence That Will Change Your Business,' January 13 , 2022; Mike
Kaput, 'What ls Artificial Intelligence for Social Media?,• April 18, 2022,
https:/ /www.morketingoiinstitule.com; Alon Morontz, Why Al Is the Entrepreneur's
New Best Friend; August 2, 202 1, Geek Culture I Medium,
https:/ /medium .com/ geekculture/why-oi-is-the-entrepreneurs-new-best·
friend-69bbddo47f6c; Julian Jewel Jeyoroj, 'How lo leverage on Artificial
Intelligence lo Transform the Woy En lrepreneurs Do Business; August
19, 2020, https:/ /www.enlrepreneur.com/ en-in/technology/how-toleveroge-
on-ortificiol-intelligence-lo-lronsform-lhe/354973; Keton Chovdo,
'8 Ways Artificial Intelligence Helps Entrepreneurs Grow Their Businesses,'
Prismetric, November 6, 2020, https:/ /www.prismelric.com/ ortificiolintelligence-
opportunities-for-entrepreneurs; Jomes Grills, ' Best 4 Ways How
Al Con Help My Business Entrepreneurs,• 2020, https:/ /www.the-nexHech
.com; Founder's Guide, '5 Artificial Intelligence Uses for Entrepreneurs in
2020, • September 12, 2019, https:/ /foundersguide.com; and Zeeshon
Khalid, "Three Ways Entrepreneurs Con Use Al lo Boost Their Business,•
December 14, 2018, https://www.enlrepreneur.com/ en-cu/technology/
how-en trepreneurs-con-use-oi-to-boosHhei r-busin ess/ 32 458 6 .
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d
~wooic tight.. some 1hitd p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1 1hcovcrnll lc:wningcxpcticncc. Ccngagc
Lcamingt(SCtv<':i lhc tigh11otcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

232 Chapter 10 Marketing Challenges for Entrepreneurial Ventures

survey, drop it into an established on line questionnaire
format, and post it on a secure website. These
"veb-based services will format the data and provide
the statistical analysis as "vell. Web-based surveys are
inexpensive and can reach very large numbers of people
in a short period of time.
Focus Groups Gathering s1nall groups of potential customers
(usually 6 to 10) for an in-depth discussion about
the ne"v venture the entrepreneur is proposing may be
a valuable source of insights. Participants elaborate on
their feelings, beliefs, perceptions, and experiences "vi th
this ne"v vent ure. Because they are small and less representative
of entire market segments, focus groups are
valuable "vays for getting preliminary insights that are
relevant to a particular venture decision.
Lead User Research Find lead users in the marketplace
or in particular industries- people "vho have
needs for "vhich no solution exists and who often
have ideas for effective products that have not yet
been developed. They sometimes are experimenting
"vith prototype solutions that, "vith modification,
have the potential for addressing the lead user's
needs. Lead users are often experienced in a particular
field of endeavor and are driven to seek a solution
to a problem they recognize. These prototype experiments
do not produce satisfactory solutions, which
creates the opportunity for innovation. The lead user
approach would allow the entrepreneur to take pieces
of information from these experts a bout the fut ure
and combine them in novel ways.
Blog Monitoring Blog sites have produced a ne"v
source of market research insights. A blog is a "vebsite
that includes user-generated content, typically on
some focused topic "vhere anyone can post opinions
or infonna tion, allo"ving for interactive discussions.
Photos, videos, audio inputs, and links to other "vebsites
can also be posted. Through blog monitoring,
Simple content analysis can be applied to identify
prominent terms or themes that appear in blog discussions.
Today, there are technologies that foster linguistic
observation and social net\.vork analysis as "vell.
Archival Research Archives are a collection of records
that have been created or accumulated over time.
These records might be written documents, magazines,
videos, computer files, online databases, pa tent
records, and so on. Access to most archives is free,
and the information is objective. They are a type of
secondary infonnation that can reveal important
insights to the creative researcher. For example, the
historical records of Country Business Patterns from
the Bureau of the Census can reveal gro"vth patterns
for certain industries in different regions of the
country. As "ve discussed in the section on secondary
research, there are numerous files and data available
if the entrepreneur is "villing to search.
10-6 The Components of
Effective Marketing
LO10.7 Summarize the marketing concept: ph ilosophy,
segmentation, and consumer orientation
Effective marketing is based on four key elements: marketing
philosophy, market segmentation, consumer
behavior, and channels of distribution. A new venture
must integrate all four elements when developing its
marketing concept and its approach to the market. This
approach helps set the stage for how the firm "vill seek
to market its goods and services.
10-6a Marketing Phi losophy
Three distinct types of marketing philosophies exist
among ne"v vent ures: production driven, sales driven,
and consumer driven.
The production-driven philosophy is based on the
belief you 1nust "produce efficiently and "vorry about
sales later." Production is the 1nain e1nphasis; sales follow
in the "vake of production. Ne"v ventures that produce
high-tech, state-of-the-art output so1netimes use a
production-driven philosophy. A sales-driven philosophy
focuses on personal selling and advertising to persuade
customers to buy the company's output. This philosophy
often surfaces "vhen an overabundance of supply occurs
in the market. Ne"v auto dealers, for example, rely heavily
on a sales-driven philosophy. A consumer-driven
philosophy relies on research to discover consumer preferences,
desires, and needs before production actually
begins. This philosophy stresses the need for marketing
research to better understand "vhere or "vho a market is
and to develop a strategy targeted to"vard that group.
Of the three philosophies, a consumer-driven orientation
is often 1nost effective, although many ventures do not
adopt it.
Three 1najor factors influence the choice of a marketing
philosophy:
1. Competitive pressure. The intensity of the competition
"vill many times dictate a new vent ure's philosophy.
For example, strong competition "vill force
many entrepreneurs to develop a consumer orientation
in order to gain an edge over competitors. If, on
the other hand, little competition exists, the entrepreneur
may remain "vith a production orientation
in the belief that "vhat is produced "vill be sold.
2. Entrepreneur's background. The range of skills
and abilities entrepreneurs possess varies great! y.
Whereas some have a sales and marketing background,
others possess production and operations
experience. The entrepreneur's strengths "vill influence
the choice of a market philosophy.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~ wooic
tight.. some 1hitd p,3 t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1 1hcovcrn ll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i
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3. Short-term focus. Sometimes a sales-driven philosophy

may be preferred due to a short-term focus
on "moving the merchandise" and genera ting sales.
Although this focus appears to increase sales (,vhich
is ,vhy many entrepreneurs pursue this philosophy),
it also can develop into a hard-selling approach that
soon ignores custo1ner preferences and contributes
to long-range dissatisfaction.
Any one of the three marketing philosophies can
be successful for an entrepreneur's ne,v vent ure. It is
i1nportant to note, however, that over the long run, the
consumer-driven philosophy is the most successful. This
approach focuses on the needs, preferences, and satisfactions
of the consumer and ,vorks to serve the end user of
the product or service.
10-6b Market Segmentation
Market segmentation is the process of identifying a specific
set of characteristics that differentiates one group of
consumers from the rest. For example, although many
people eat ice cream, the market for ice cream can be seg-
1nented based on taste and price. Some individuals prefer
high-quality ice crea1n made with rea l sugar and cream
because of its taste; n1any others cannot tell the difference
bec-veen high-quality and average-quality ingredients and,
based solely on taste, are indifferent bet,veen the nvo
types. The price is higher for high-quality ice crea1n such
as Haagen-Dazs or Ben & Jerry's, so the market niche is
smaller for these offerings than it is for lo,ver-priced competitors.
This process of segmenting the market can be
critical for ne,v ventures ,vith very limited resources.
To identify specific market seg1nents, entrepreneurs
need to analyze a nwnber of variables. As an exatnple,
t,vo major variables that can be focused on are demographic
and benefit variables. Demographic variables
include age, marital status, sex and gender identity,
occupation, income, location, and the like. These characteristics
are used to detennine a geographic and demographic
profile of the consu1ners and their purchasing
potential. The benefit variables help to identify unsatisfied
needs that exist within this market. Exa1nples may
include convenience, cost, style, trends, and the like,
depending on the nature of the particular ne,v vent ure.
Whatever the product or service, it is extremely valuable
to ascertain the benefits that a market segment is seeking
in order to further differentiate a particular target group.
10-6c Consumer Behavior
Consumer behavior is defined by the many types and
patterns of consumer characteristics. However, entrepreneurs
can focus their attention on only nvo considerations:
personal characteristics and psychological
charact eristics. Traditionally, some marketing experts
have tied these charact eristics to the five types of
The Components of Effective Marketing 233
consumers: (1) innovators, (2) early adopters, (3) early
majority, (4) late majority, and (5) laggards.
The differences in social class, income, occupation,
education, housing, family influence, and time orientation
are all possible personal characteristics, while the
psychological characteristics are needs, perceptions,
self-concept, aspiration groups, and reference groups.
This type of breakdo,vn can provide an entrepreneur
,vith a visual picture of the type of consumer to target
for the sales effort.
The next step is to link the characteristic makeup
of potential consumers with buying trends in the marketplace.
Table 10.4 sho,vs the keys to understanding
consumer behavior that could shape buying decisions.
Each of these elements relates to conswner attitudes and
behaviors based on education, the economy, the environment,
and/or societal changes. By using some of the
common consumer characterist ics and combining them
,vith Table 10.4, the entrepreneur can begin to examine
consumer behavior more closely.
10-6d Channels of Distribution
Distribution channels are a key element in all the marketing
strategies tha t revolve around the product.
A distribution channel is a path or route decided by
the entrepreneur to deliver its good or service to the
customers. The route can be as short as a direct interaction
benveen the venture and the custo1ner or can
include several interconnected intermediaries, such as
,vholesalers, distributors, retailers, and so on. The main
goal of these channels is to make goods available to final
consumers in sales outlets as soon as possible. Distribution
channels directly impact a venture's sales, so you
want to 1nake them as efficient as possible.
Types of Distribution Channels
Direct Channels The venture is fully responsible for
delivering products to consumers. Goods do not go
through intermediaries before reaching their final destination.
This model gives manufact urers total control
over the distribution channel.
Indirect Channels Products are delivered by intermediaries,
not by the sellers. Wholesalers, retailers, distributors,
or brokers are exa1nples. In this case, manufact urers
do not have total control over distribution channels. The
benefit is that this makes it possible to sell larger volumes
and sell to a range of customers.
Hybrid Channels Hybrid channels are a mix of direct
and indirect channels. The manufacturer has a partnership
,vith intermediaries, but it still takes control ,vhen it
co1nes to contact ,vith custo1ners. An example ,vould be
brands that pro1note products on line but don't deliver
them directly to custo1ners.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~ wooic
tight.. some 1hitd p,3 t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1 1hcovcrn ll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i
lhc tigh1 1o tcmovc addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.

234 Chapter 10 Marketing Challenges for Entrepreneurial Ventures

Table 10.4 Keys to Understanding Consumer Behavior
Contemporary consumers are:
Informed about your company, industry, and events
Eager for solutions
Social with other customers
Connected to various devices and channels
Opinionated and vocal
Willing to be self-sufficient
Critical of competitive customer experiences
Expecting bus inesses to be proactive
Contemporary consumers want:
Solutions on the Internet
To avoid excessive ads
To compare different brands
The best value for the money
To make purchases with no bureaucracy
To feel part of a community
Other people's opinion of a product
New market trends
To be influenced by people they admire
Eco-friendly products and avoid waste
Contemporary consumers' Spheres of influence:
Reciprocity. The need to return a favor or reciprocate
kind gestures (free samples and discounts)
Commitment. Cultivating brand loyalty (return customers)
Consensus. Popularity across a wide customer base
(increases customers)
Authority. Relevant experts on the effectiveness of a
brand (convert new consumers)
Liking. Similar demographics - whether in terms of
ethnicity, socioeconomic class, rel igious inclination, or
even shared interests (persuade customers)
Scarcity. Exclusivity or short supply (increases the
likelihood of purchase)
Source: Adapted from Sean Peek, "1l1e Science of Persuasion: How
to Influence Consmner Choice," Business News Daily, December 2,
2021, hrrps://v,ww.busi nessnewsdail )',com/10151-how-ro-i nfl uenceconsumer-
decisions.html; Clint Fontanella," 8 Customer Characteristics
Ever)' Service Rep Should Know," Hub Spot, April 7, 2020, hrrps://blog.
hubspot.com/service/cusromer-characteristics; and "What ls Constuner
Beha,~orToda)' Like?," Hotmarr blog, April 8, 2018, hrrps://blog.
hotmart.com/en/consumer-behavior.
Types of lntennecliaries in Distribution Channels
Retailers are intermediaries used frequently by companies.
Examples include supermarkets, pharrnacies,
restaurants, and bars. \Vholesalers are intermediaries
that buy and resell products to retailers. Distributors
sell, store, and offer technical support to retailers and
,vholesalers usually focused on specific regions. Agents
are legal entities hired to sell a company's goods to final
consumers and are paid a commission for their sales
,vith a long-term relationship. Brokers are also hired to
sell and receive a commission ,vith a short-term relationship.
For tech and soft,vare, the Internet itself ,vorks as
the intermediary of the distribution channel. A company
can also have its o,vn sales team ,vho are responsible
for selling goods or services. Resellers are companies or
people ,vho buy from manufacturers or retailers to later
sell to consumers in retail. A salesperson is connected
to a company and sells its products using a magazine or
catalog.
Selecting a Distribution Channel
Essentially, there are several questions to consider ,vhen
determining a distribution channel:
• Ho,v long is the products shelf life?
• Ho,v large is the market for this product?
• How large is the company and ,vhat is its product
mix?
• What is the cost of a specific channel of distribution?
• Are you in the right channels for your target
customers?
• Are they stocking sufficient inventory?
• Are they giving your product proper location(s)?
• Are they supporting you ,vith kno,vledgeable salespeople
if point-of-purchase "selling" is needed?
When selecting a distribution channel, always keep in mind
your venture's brand, profitability, and the scale of operations
for your product. Choosing the right distribution
channel is paramount to your venture's success and should
be carefully considered. You should first understand that
a distribution channel represents the relationship ber-veen
the manufacturer and the user. Additionally, you need to
understand your target audience and what their preferences
are. Will you be selling to an audience that is technologically
savvy, or is your target audience older and more
traditional? Again, think of the cost of the different types
of distribution channels. Consider your profit margin and
desired volume ,vhen choosing a channel.
Another important aspect of selecting a distribution
channel is the brand of your venture. Don't forget to
think about the audience's perception of your product
and if it needs to be sold in high-end designer stores or
if department stores will do. Finally, opening strategic
channels of distribution in local markets may or may not
enhance the profitability of your products and should
be considered. Before choosing a distribution channel,
know that there are three things a distribution strategy
influences: pricing strategy, product branding, and buyer
and producer relationships.20
Copyrig,ln '2024 CCllgagc U!llming. All Rights Reserved. May OOI be oopicd. 91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic
tight.. some 1hitd p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1 1hcovcrnll lc:wningcxpcticocc. Ccngsgc Lcsmingt(SCtv<':i
k tigh11o tcmovc sddi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ions R--quitc ii.

The Components of Effective Marketing 235

The Entrepreneurial Process

Competitive Information
Following is a list of potential techniques to use to assess your
competition and avoid paying a high-priced market research
firm to collect information for you.
1. Networking. Speaking w ith people in the field w ill
help you get a feel for what's going on in your industry.
Vendors, customers, and anyone who does business w ith
componies in your field may have information on emerging
competition. Venture capitalists can be a great source
of information because of the due d iligence they must
perform with pending venture loans. Much like what happens
during the start-up phase of a business, a person can
become so immersed in a project that they develop tunnel
vision. Social networking also can provide a fresh view of
the industry.
2. Related products. This market is the obvious place
to look. Componies that can provide anything that complements
your product or service are primed to become
competition because they also know what the customers'
needs are and how to fulfill them. Large companies
whose customers are businesses will assess this issue very
differently compored to a small business with the average
person as its primary consumer. A good example of a
complementary relationship is the one that exists among
cameras, film, photo d isks, and so on. The number and
type of photographic products available have increased
substantially in recent years, and different fields have capital
ized on this trend .
3. Value chain. Whereas related products fall on the
horizontal axis of an industry, exploring the value chain
forces a vertical assessment of potential entrants into your
competitive pool. The value chain for a given product or
service offers many opportunities for exponsion both for
you and for the potential competition. In this situation, the
potential competition is fully aware of and understands the
business environment in which you operate. They already
have easy access to suppliers, buyers, and services that
you deal with on a daily bosis.
4. Companies with related competencies. One of
the more ignored avenues involves componies that can
take their expertise and apply ii to an ind irectly related
field Competencies can be both technological and
non-technological. Just because one compony has unporalleled
customer service and sales in the cellular industry
doesn't mean the company couldn't use the same spectacular
service in the cable business. The perfect example
of expanding on technological similarities is Motorola,
whose orig inal intent was lo focus on the defense
industry. Surely that was not an area that cellular providers
were examining when trying to anticipate potential
competition!
S. Internet. It goes without saying that the Internet is one
of the premiere sources of information available to anyone
who knows how to use it. Using search engines to
access millions of web pages allows a business to easily
scope out anyone that offers similar products or services.
Searches can be both broad and defined. Most important,
they can be done cheaply and as often as desired.
It is best to use words that customers might use and to
avoid technological or industry jargon when surfing, but
try to brainstorm all poss ible rela tions to ensure a thorough
and effective search. Queries to search engines,
such as Bing, Google, and Yahoo!, are logged by those
search engines along w ith bosic connectiv ity information,
such as IP address and browser version. In the post,
analysts had lo rely on external componies to provide
search behavior data, but increasingly, search engines
are provid ing tools to d irectly mine their data. You can
use search engine data w ith a greater degree of confidence
because it comes d irectly from the search eng ine.
In Google AdWords, you can use Keyword Tool, the
search-bosed Keyword Tool, and Insights for Search.
6. Benchmarks from web analytics vendors.
Web analytics vendors have many customers and thus a
great deal of data. Many vendors now aggregate these
real customer data and present them in the form of benchmarks
that you can use to index your own performance.
Benchmarking data are currently available from Fireclick,
Coremetrics, and Google Analytics. Often, as is the case
w ith Google Analytics, customers have to expl ici~y opt in
their data into this benchmarking service.
Once the sufficient information has been gathered, a plan
to beat the current and emerging competition should be prepored.
The plan created will be analogous to the business's
strengths and resources. Issues such as losing sales to another
company could be addressed, a SWOT (strengths, weaknesses,
opportunities, threats) analysis could be executed, or
the plan to offer a new product or change price points could
be outlined.
Source: Adopted from Mork Henricks, ' Friendly Competition?; Enlrepreneur,
December 1999, 11 4-17; ' The Definitive Guide lo Competitive
Intelligence Doto Sources; February 22, 2010, http://www.koushik
.net/ ovinosh/ compeliliveintelligence-doto-sources·best·proctices, accessed
April 30, 2012; and ' Gathering Competitive Information; United
Technologies Corporation, http://ulc.com/StoticFiles/UTC/StoticFiles
/info_englishlonguoge.pdf, accessed April 30, 2012.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc t igh11otcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
236 Chapter 10 Marketing Challenges for Entrepreneurial Ventures
Drivers of Channel Support for Retail
If the venture resides in the retail space, then it's important
to think of the selected channel as your customer in order
to gain support from that channel. One key element to
remember is the gross margin return on inventory investment
(GMROI). This is "vhat the channel "vill be examining
to decide ho"v "vell to support your particular product
on the shelves. As sho\.vn in Figure 10.1, the GMROI
equals the retail unit margin times the volume divided by
the average inventory investment. With this equation, your
particular retail margin versus "vhat other competitors'
margin may be "vill determine ho"v much is available to
discount the channel to carry your product over others.
The entrepreneur "vill also use their marketing strategy to
create greater end-user demand so that there is greater volwne
being sold by the channel. Thus, helping the channel
\.Vith their inventory management results in greater support
and sales for the entrepreneur's specific product.
The lo"v price point provides lo"v rnargins. Therefore,
from an entrepreneurial standpoint, it's compelling to
offer a competitive product to consumers for a much
lo\.ver price than the competition. Ho\.vever, that strategy
usually fails not because of the idea/product concept but
because the entrepreneur cannot get distribution support.
This is often overlooked.21
An analysis of the \.vay consumers vie"v the vent ure's
product or service provides additional data. Entrepreneurs
should be a\.vare of five n1ajor consumer classifications:
1. Convenience goods. Whether staple goods (foods),
impulse goods (checkout counter items), or emergency
goods and services, consumers "vill \.Vant these
goods and services but "vill not be "villing to spend
time shopping for them.
2. Shopping goods. These are products that consumers
will take time to examine carefully and compare for
quality and price.
3. Specialty goods. These are products or services
that consurners make a special effort to find and
purchase.
4. Unsought goods. These are items that consumers
do not currently need or seek. Common
examples are life insurance, encyclopedias, and cemetery
plots. These products require explanation or
dernonstra tion.
5. New products. These are items that are unkno\.vn
due to a lack of advertising or are ne"v products that
take time to be understood. When microcomp uters
were first introduced, for example, they fell into this
category.
10-7 Developing a
Marketing Plan
LO10.8 Identify the areas vital to a marketing plan
A marketing plan is the process of determining a clear,
comprehensive approach to the creation of customers.
The follo"ving elements are critical for developing this
plan:
• Current marketing research. Determining who the
customers are, "vhat they \.Vant, and how they buy
• Current sales analysis. Promoting and distributing
products according to marketing research findings
Figure 10.1 Causes of Performance: The Role of the Channel
Causes of Performance: The Role of the Channel
What to look for with your channels: getting to the root cause
What motivates the channel to support you?
Your retailer margin vs. What do you do to create
Gross Margin Return
on Inventory Investment
competitors "end-user demand"? \ I
Retail Unit Margin x Volume
Average Inventory Investment
1
What do you do to help the
channel manage its inventory?
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t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
• Marketing inform ation system. Collecting, screening,
analyzing, storing, retrieving, and disseminating
marketing information on ,vhich to base plans, decisions,
and actions
• Sales forecasting. Coordinating personal judgment
,vith reliable 1narket information
• Evaluation. Identifying and assessing deviations
from marketing plans11
10-7a Current Marketing Research
The purpose of current 1narketing research is to identify
customers-target markets- and to fulfill their
desires. For current marketing research to be effective
for the gro,ving vent ure, the following areas ,varrant
consideration:
• The company's major strengths and weaknesses.
These factors offer insights into profitable opportunities
and potential problems and provide the basis
for effective decision making.
• Market profile. A market profile helps a company
identify its current market and service needs: Ho,v
profitable are existing company services? Which of
these services offer the most potential? Which (if
any) are inappropriate? Which ,vill customers cease
to need in the fut ure?
• Current and best customers. Identifying the co1npany's
current clients allo,vs manage1nent to determine
,vhere to allocate resources. Defining the best customers
enables 1nanagement to seg1nent this market
niche more directly.
• Potential customers. By identifying poten tial
customers- either geographically or ,vith an
industry-,vide analysis of its marketing area- a company
increases its ability to target this group, thus
turning potential customers into current customers.
• Competition. By identifying the competition, a company
can determine ,vhich firms are 1nost ,villing to
pursue the same basic market niche.
• Outside factors. This analysis focuses on changing
trends in demographics, econo1nics, technology, cultural
attitudes, and governmental policy. These factors
may have substantial i1npact on customer needs
and, conseq uendy, expected services.
• Legal changes. Marketing research performs the
important task of keeping management abreast of
significant changes in governmental rates, standards,
and tax la,vs.23
10-7b Current Sales Analysis
An entrepreneur needs to continually revie,v the methods
employed for sales and distribution in relation to the
market research that has been conducted. Matching the
Developing a Marketing Plan 237
correct customer profile with sales priorities is a major
goal in sales analysis. Follo,ving is a list of potential
questions to be ans,vered by this analysis:
• Do salespeople call on their most qualified prospects
on a proper priority and time-allocation basis?
• Does the sales force contact decision makers?
• Are territories aligned according to sales potential
and salespeople's abilities?
• Are sales calls coordinated ,vith other selling efforts,
such as trade publication advertising, trade sho,vs,
and direct 1nail?
• Do salespeople ask the right questions on sales
calls? Do sales reports contain appropr iate information?
Does the sales force understand potential
customers' needs?
• How does the gro,vth or decline of a customer's
or a prospect's business affect the co1npany's o,vn
sales?
10-7c Marketing Information System
A marketing information system compiles and organizes
data relating to cost, revenue, and profit from the customer
base. This information can be useful for monitoring
the strategies, decisions, and programs concerned
,vith marketing. As ,vith all information systems designs,
the key factors that affect the value of such a system are
(1) data reliability, (2) data usefulness or understandability,
(3) reporting syste1n timeliness, ( 4) data relevancy,
and (5) system cost.
10-7d Sales Forecasting
Sales forecasting is the process of projecting future sales
through historical sales figures and the application of
statistical techniques. The process is limited in value due
to its reliance on historical data, ,vhich many times fail
to reflect current market conditions. As a seg1nent of the
comprehensive marketing-planning process, ho,vever,
sales forecasting can be very valuable.
10-7e Evaluation
The final critical factor in the 1narketing-planning process
is evaluation. Because a number of variables can
affect the outcome of 1narketing planning, it is important
to evaluate performance. Most important, reports
should be generated fro1n a customer analysis: attraction
or loss of customers, ,vith reasons for the gain or loss, as
,vell as established customer preferences and reactions.
This analysis can be measured against perfonnance
in sales volume, gross sales dollars, or market share.
It is only through this type of evaluation that flexibility
and adjustment can be incorporated into marketing
planning.
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238 Chapter 10 Marketing Challenges for Entrepreneuria l Ventures
The Entrepreneurial Process
The Guerrilla Marketing Plan
A business plan is essential for any entrepreneur planning to
start an initiative; however, by the time you include your market
research results, pro forma statements, and critical risks, your
business plan will become a dense packet of information to be
used when guiding your entire business - a document that few
will read in its entirety. Given this fact, entrepreneurs should
be able to quickly articulate the key aspects of their venture in
a matter of a few minutes. One tool that can be used for this
purpose is what is known as a guerrilla marketing plan.
A guerrilla marketing plan forces an entrepreneur to specify
the seven most important marketing issues that face their
company. Of course, there w ill most certainly be more than
seven key areas to address; however, by going through the
exercise of consol idating the marketing topics that require the
most focus, an entrepreneur will be better prepared to get to
the heart of their concept both when presenting to potential
investors and when managing the business.
The key is to address each area using no more than a
sentence. Guerrilla marketing plans give people a quick understanding
of exactly what is of the utmost concern to your business
by eliminating much of the detail provided in your full
business plan. Large companies make use of such plans by
developing d ifferent ones for different products. For example,
Procter & Gamble developed a guerrilla marketing plan for
each of its products.
Although some companies choose to attach several
pages of documentation to their plans, the key is to get the
seven sentences right. Following are guidel ines for developing
a guerrilla marketing plan;
• You should begin your guerrilla marketing plan with a sentence
that describes the purpose of your marketing. This
sentence should be very specific and should address what
impact your marketing initiative should have on a potential
customer. Goals such as "to be more successful than
my competitors" or "to be more profitable" are not useful
This sentence should quantify your overarching goal so
that ii is measurable. The point is to envision exactly what
you want your customer lo ideally do and then lo establish
a goal for ensuring that customers will act in that way.
• The next sentence is meant for you to address the competitive
advantages of the enterprise; in other words, what
are the characteristics of the business that make it uniquely
positioned to offer value to the public2 The objective with
this sentence is to outline your business's strengths that are
the most unique so that you can emphasize them in your
marketing materials.
• You will address your target audience in the third sentence.
By spec ifying exactly who will be exposed lo
a marketing campaign, you will find the process of
engineering an effective plan to be much more straightforward.
Companies often have more than one target
audience, so guerrilla marketing plans should be written
to address all potential customers in order to avoid losing
sales to competitors.
• For the fourth point, a list is most appropriate. This topic
addresses the marketing weapons that you will use. The
important idea of this section is to include only those tools
that the company can understand, afford, and use properly.
Countless tools are now readily available to entrepreneurs,
so filtering out those that do not meet these
three criteria will help you avoid making poorly directed
investments.
• You should discuss the company's market niche in the fifth
sentence. Now that you have addressed the purpose,
benefits, and target market, understanding your marketing
niche is the next logical step. The market niche should
capture what customers most readily associate with your
company. It could be speed, value, variety, or any number
of other characteristics. You will not be able to please
everyone, so defining what your company is and what it
is not w ill help to narrow your focus when promoting ii to
potential customers.
• The sixth sentence is where you will establish the identity
of your company Entrepreneurs should ensure that the
marketing image they broadcast to the world is supported
by the identity of their companies, which means that the
companies' operating procedures need to reinforce whatever
identity they establ ish,
• The final sentence in your guerrilla marketing plan needs
lo explicitly slate what percentage of projected gross sales
you are willing to earmark as your marketing budget. The
qual ity of your marketing materials will clearly reflect on
your business, so this step requires a significant amount of
research lo ensure that the amount you have allotted will
be sufficient for supporting all previous steps.
When developing your guerrilla marketing plan, all subsequent
steps should be framed by the first sentence you write, which is
meant to define the purpose of your plan. Entrepreneurs should
theoretically be able to write a plan of this nature within five
minutes given its brevity. The more practice you get at articulating
your business objectives, the easier you w ill find using
tools - such as the guerrilla marketing plan - to communicate
your business goals.
Source: Adopted from Joy Conrod Levinson ond Jeannie Levinson, ' Here's
the Pion,• Enlrepreneur, February 2008, hllp:/ /www.entrepreneur.com/
magazine/ entrepreneur /2008/februory/ 188842 . html, accessed
Morch 20, 2008.
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10-7f Final Considerations for
Entrepreneurs
Marketing plans are part of a venture's overall strategic
effort.24 To be effective, these plans must be based on
the venture's specific goals. Follo\>ving is an example of a
five-step prograrn designed to help entrepreneurs create
a structured approach to developing a market plan:
Step 1: Appraise marketing strengths and \>Veaknesses,
emphasizing factors that "vill contribute to the firm's
"competitive edge." Consider product design, reliability,
durability, price/quality ratios, production capacities and
lirnitations, resources, and need for specialized expertise.
Step 2: Develop marketing objectives, along \>Vith
the short- and intermediate-range sales goals necessary
to meet those objectives. Next, develop specific sales
plans for the current fiscal period. These goals should
be clearly stated, measurable, and \>Vithin the company's
capabilities. To be realistic, these goals should require
only reasonable efforts and affordable expenditures.
Step 3: Develop product/service strategies. The
product strategy begins \>Vith identifying the end users,
"vholesalers, and retailers as \>vell as their needs and specifications.
The product's design, features, performance,
cost, and price then should be rnatched to these needs.
Step 4: Develop marketing strategies. Strategies are
needed to achieve the company's intermediate- and longrange
sales goals and long-term rnarketing objectives.
These strategies should include advertising, sales promotion
campaigns, trade sho\>vs, direct mail, and telemarketing.
Strategies also may be necessary to increase the
size of the sales force or market ne\>v products. Contingency
plans \>vill be needed in the event of technological
changes, geographic 1narket shifts, or inflation.
Step 5: Determine a pricing structure. A firm's pricing
structure dictates "vhich customers "vill be attracted as \>vell
as the type or quality of products/services that "vill be provided.
Many firms believe that the market dictates a "competitive"
pricing structure. However, this is not ahvays the
case- many companies \>Vith a high price structure are
very successful. Regardless of the strategies, customers
must believe that the product's price is appropriate. The
price of a product or service, therefore, should not be set
until marketing strategies have been developed.25
10-8 Pricing Strategies
LO10.9 List the key features of a pricing strategy
One final marketing issue that needs to be addressed is
that of pricing strategies. Many entrepreneurs are unsure
of ho\>v to price their product or service, even after marketing
research is conducted. A number of factors affect
this decision: the degree of competitive pressure, the availability
of sufficient supply, seasonal or cyclical changes in
Pricing Strategies 239
demand, distribution costs, the product's life cycle stage,
changes in production costs, prevailing economic conditions,
customer services provided by the seller, the amount
of promotion done, and the market's buying po\>ver. Obviously,
the ultimate price decision will balance many of
these factors and, usually, \>vill not satisfy all conditions.
However, a\>vareness of the various factors is important.
Other considerations, sometimes overlooked, are psychological
in nature:
• In sorne situations, the quality of a product is interpreted
by custorners according to the level of the
item's price.
• Some customer groups shy a\>vay from purchasing a
product \>vhen no printed price schedule is available.
• An emphasis on the monthly cost of purchasing an
expensive item often results in greater sales than an
emphasis on total selling price.
• Most buyers expect to pay even-numbered prices for
prestigious items and odd-numbered prices for commonly
available goods.
• The greater the number of meaningful customer
benefits the seller can convey about a given product,
the less the price resistance (generally).26
10-Sa Views of Pricing
Pricing can be vie\>ved as value, variable, variety, visible,
and virtual. When seen as value, the arnount a customer
is \>villing to pay is, in the final analysis, a statement of
the amount of value they perceive in the product or service.
Pricing can be variable, such as varying the components
of payment, \>vhat is actually being paid for, the
time of payment, the form of payment, the terrns of payrnent,
and the person doing some or all of the paying.
There is a variety of pricing because firms typically sell
rnultiple products and services, and they may use the
price of sorne items to influence the sales of others or
price in a manner that pushes items \>Vith higher versus
lower profit margins. The visible nature of pricing rneans
that custorners see and are a\>vare of the prices of most
things that they buy, "vhich signals to the customer ideas
about value, image, product availability, demand conditions,
and exclusivity. Finally, pricing is virtual because it
is the easiest and quickest to change in response to market
conditions, especially in today's technological age.27
10-Sb Product Life Cycle Pricing
Pricing procedures differ depending on the nature of
the venture: retail, manufacturing, or service. Pricing for
the product life cycle as presented in Table 10.5, ho\>vever,
rnight be applied to any type of business. The table
demonstrates the basic steps of developing a pricing system
and indicates ho\>v that systern should relate to the
desired pricing goals.
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240 Chapter 10 Marketing Challenges for Entrepreneurial Ventures
Table 10.5 Pricing for the Product Life Cycle
Customer demand and sales volume will vary with the development of a product.
Thus, pricing for products needs to be
adjusted at each stage of their life cycle. The following outline provides some
suggested pricing methods that relate to the
different stages in the product life cycle. With this general outline in mind, potential
entrepreneurs can formulate the most
appropriate pricing strategy.
Product Life Cycle
Stage Pricing Strategy Reasons /Effects
Introductory Stage
Unique product Skimming- deliberately setting a high price to Initial price set high to
establish a quality image,
maximize short-term profits to provide capital to offset development costs,
and to allow for future price reductions to handle
competition
Nonunique product Penetration-setting prices at such a low level Allows quick gains
in market share by setting a
that products are sold at a loss price below competitors' prices
Growth stage Consumer pricing- combining penetration Depends on the number of
potential competitors,
and competitive pricing to gain market share; size of total market, and distribution of
that market
depends on consumer's perceived value of
product
Maturity stage Demand-oriented pricing- a flexible strategy Sales growth declines;
customers are very price
that bases pricing decisions on the demand sensitive
level for the product
Decline stage Loss leader pricing-pricing the product below Product possesses little
or no attraction to customers;
cost in an attempt to attract customers to other the idea is to have low prices bring
customers to
products newer product lines
Source: Adapted from Colleen Green, "Strategic Pricing," Small Business Reports,
August 1989, 27- 33; updated for accuracy February 2015.
10-Sc Pricing in the Social Media Age
LOl 0. 10 Discuss pricing in the social media age
Today's social media start-ups are finding unique ways
of generating revenue from the very beginning. There are
numerous variations of revenue models, including freemium,
affiliate, subscription, virtual goods, and advertising.
Let's briefly examine these.
Freemium Model The freemium model offers a basic
service for free ,vhile charging for a premium service
,vith advanced features to paying members. Examples
of companies that have used this method include
Flickr and Linkedin. The biggest challenge for businesses
using the freemiurn model is figuring ho,v
much to give a,vay for free so that users ,vill still need
and ,vant to upgrade to a paying plan. If most users
can get by ,vith the basic free plan, they won't have a
need to upgrade.
Affiliate Model In the affiliate model, the business
makes money by driving traffic, leads, or sales to
another, affiliated company's ,vebsite. Businesses that
sell a product, mean,vhile, rely on affiliated sites to
send thern the traffic or leads they need to make sales.
Like businesses that rely on advertising, high-traffic
sites have an easier time making money using affiliate
links than sites that are just starting out. The biggest
challenge may be reader trust and proper targeting.
It's ,vorth the time researching those in your market
niche and initiate conversations with them.
Subscription Model The subscription model requires
users to pay a fee (generally monthly or yearly) to
access a product or service. If you are creating a longterm
relationship ,vith custorners, then this model
,vould be better in the long run. Ho,vever, you need
content and features every month that will be ne,v
and exciting. You should also recognize that monthly
membership sites have a high attrition rate-after the
first time they log in, they forget about it and never
come back.
Virtual Goods Model In the virtual goods model,
users pay for virtual goods, such as upgrades, points,
or gifts, on a website or in a game. Virtual goods
corne in all shapes and sizes. The attraction of virtual
goods is that margins are high since goods essentially
cost only as rnuch as the bandwidth required to serve
thern, ,vhich is generally almost zero.
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Summary 241
Diversity Entrepreneurship
I
Disabilities and Diversity
Today, more and more companies are investing in workplace
divers ity, equity, and inclusion (DEi) efforts Far too often,
though, these efforts focus only on limited demographic factors
such as race, age, ethnicily, gender, and sexual orientation.
As such, they overlook one of the largest groups in
the United States- people with disabilities, who, according
to the Centers for Disease Control and Prevention, account
for roughly 26 percent of the U S population. Disability is
an integral part of diversity that intersects all o ther identifies
and should thus be a critical perspective to consider at the
decision-making table.
In order to understand just how much impact people w ith
disabilities have on our daily lives, let us look at a couple of
examples. We might be used to thinking about products as
designed for the masses and then adapted to people w ith
disabilities. Smartphones are an example of that. Nevertheless,
several technologies that we use today exist because of
people with d isabilities. Many such technologies have even
become an integral feature of smartphones. A Silicon Valley
inventor, Ray Kurzweil, developed multiple technologies with
lhe National Federation of the Bl ind. One such technology that
we all recognize is the text-to-speech software that we have
come to know as Siri or Alexa. Similarly, hearing a ids were
one of the earliest proven applications of computers chips that
can now be found in everything from fighter jets to your home
fridge. Even curb cuts in sidewalks were developed for people
in wheelchairs, but they proved to be useful for many other
Advertising Model In the advertising model, advertise-
1nen ts are sold again st the traffic of the sit e. Simply
p ut, the more traffic you have on your site, the more
you can charge for ads (addi t ional demographics
about your site's visitors, such as age, gender, location,
or interests, also affects the amount you can charge
Summary
The n e\>v mark et i ng logic requires a f undamental
rethinking of the old rules and realizes that today's mark
et ing is d ynamic and happening in real time \>vhere the
customer is in control. This new marketing for entrepreneurs
in cludes kno\>ving w hat a mark et consists of, the
understanding of mark eting research, the development
of a mark et ing plan, the effect ive und erstanding and
application of social 1nedia mark et ing, and the proper
approach to a pricing strategy.
people, such as parents with strollers, small children, or teenagers
with rollerblades.
For working-age individuals, having a disabilily can prove
to be a significant challenge when pursuing traditional employment.
There are w idespread attitudinal barriers and lack of
understanding of the impact of disabilities on an individual's
day-to-day work. Because a particular disability may be outside
the boundaries of what managers tradilionally understand,
they simply cannot comprehend what the disabled person is
going through. This lack of understanding makes individuals
and businesses reluctant to gel involved and proaclively provide
support.
People with disabilities do not want to be - and should
not be- excluded from the workforce As many feel unwelcome
in the traditional avenues, it is not surprising to see U.S.
census numbers that show workers with disabilities opting for
self-employment at a rate twice that of their nondisabled peers.
Disability should not make individuals contemplate whether
they should apply for certain positions. As with other diversily
attributes, businesses need to do more to understand people
w ith disability and include them into their DEi efforts
Source: Adopted from Shiro Ovide, ' Disabili ty Drives Innovation,' New
York Times, October 14, 202 1; Gus Alexiou, ' Disabled Entrepreneurs
Speak Out on the Choice lo Go It Alone and Be Your Own Boss,• Forbes,
November 28, 202 1; and Gus Alexiou, 'New Report Unveils Shocking
Attiludes amongst Employers towards Di sabi lity Hiring,' Forbes, November
15 , 2021.
I
ad vertisers to place ads on your sit e). H owever, i t is
never easy to monet i ze something that sits on top of
a free service. M aintain ing and in creasing the value
proposition is a daily challenge. Free trials may be the
k ey, as they de1nonstrate respect for the users as \>veil
as confidence in the value that the service provides. 28
Mark et ing research involves the ga thering of in formation
about a particular mark et, follo\>ved by an alysis
of that information. The mark et ing research process has
five steps: (1) d efine the p urpose and objectives of the
research, (2) gather secondary data, (3) gather pri1nary
data, ( 4) develop an information-gathering instrument (if
necessary), and (5) interpret and report the in fonnation.
Four 1najor reasons that en trepreneurs may no t carry
o ut mark et ing research are (1) cost, (2) complexity of
the undertak ing, (3) belief that only 1najor strategic decisions
need to be supported through mark et ing research,
and (4) belief that the data \>viii be irrelevant to company
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242 Chapter 10 Marketing Challenges for Entrepreneurial Ventures
operations. Usually, they misunderstand the value of
marketing research or fear its cost.
Social media marketing describes the use of social
net\>vorks, online co1nmunities, biogs, \>vikis, and other
online collaborative media for marketing purposes. The
most common social 1nedia marketing tools include
T\>vitter, biogs, Linkedin, Facebook, Flickr, and YouTube.
A social media marketing plan should be developed
that details the venture's social media goals and the
actions necessary to achieve them. Mobile devices are
no\>v within everyone's reach, and thus people are connected
\>Vith their social net\>vorks constantly. Mobile
social media marketing is a fast-paced and high-impact
marketing tool that many companies have started to use
very successfully as part of their overall marketing strategy.
Many companies are now using mobile social media
applications as their standard communication strategy
to connect \>Vith consumers.
Because ne\>v st art-up ventures are resource constrained,
the chapter covered some innovative methods
for entrepreneurs to conduct market research. From
there, \>Ve examined the development of a 1narketing
concept that has three important parts. The first part
is the formulation of a marketing philosophy. Some
entrepreneurs are product ion driven, others are sales
driven, and still others are consun1er driven. The entrepreneur's
values and the market conditions will help
determine this philosophy. The second part is market
segmenta tion, \>vhich is the process of identifying
a specific set of characteristics that differentiates one
group of consumers from the rest. Demographic and
benefit variables often are used in this process. The
third part is an understanding of consumer behavior.
Because many types and patterns of consumer behavior
exist, entrepreneurs need to focus on the personal
and psychological characteristics of their customers. In
this \>vay, they can determine a tailor-made, consumeroriented
strategy. This customer analysis focuses on such
important factors as general buying trends in the marketplace,
specific buying trends of targeted consumers,
and the types of goods and services being sold.
A marketing plan is the process of detennining a clear,
comprehensive approach to the creation of customers.
The follo\>ving elements are critical for developing this
plan: current marketing research, current sales analysis,
a 1narketing information system, sales forecasting, and
evaluation.
Pricing strategies are a reflection of marketing
research and must consider such factors as marketing
compet itiveness, consumer demand, life cycle of the
goods or services being sold, costs, and prevailing economic
conditions. Today's social media start-ups are
finding uniq ue \>vays of generating revenue from the
very beginning. In the chapter, \>Ve presented five revenue
models, including freemium, affiliate, subscription, virtual
goods, and advertising.
Key Terms
advertising 1nodel
affiliate model
blog monitoring
consumer-driven
philosophy
consumer pnc1ng
de1nand-oriented pricing
freemium model
guerrilla marketing plan
individualize
initiate
integrate
involve
loss leader pricing
1nobile marketing
market
marketing research
market segmentation
penetration
primary data
production -driven
philosophy
qualitative research
quantitative research
sales-driven philosophy
secondary data
skim1ning
social media marketing
subscription model
virtual goods model
Review and Discussion
Questions
1. Describe the "new" marketing concept for entrepreneurs
with the 4 Cs.
2. In your own words, what is a market? How can
marketing research help an entrepreneur identify a
market?
3. What are the five steps in the marketing research process?
Brief! y describe each.
4. Which is of greater value to the entrepreneur, primary
or secondary data? Why?
5. Identify and describe three of the primary obstacles to
undertaking marketing research.
6. Describe social media marketing and mobile marketing.
Be specific in your answer.
7. Discuss some of the entrepreneurial tactics in market
research that are accomplished with limited resources.
8. How would an entrepreneur's new-venture strategy
differ under each of the following marketing philosophies:
production driven, sales driven, and consumer
driven? Be complete in your answer.
9. In your own words, what is market segmentation?
What role do demographic and benefit variables play
in the segmentation process?
10. Identify and discuss three of the psychological characteristics
that help an entrepreneur identify and
describe customers. Also, explain how the product
li fe cycle will affect the purchasing behavior of these
customers.
11. Identify three channels of distribution that can be used
by an entrepreneur.
12. What are the five steps that are particularly helpful for
developing a marketing plan? Identify and describe each.
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91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~ wooic tight.. some 1hitd p,3
t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
13. What are some of the major environmental factors
that affect pricing strategies? What are some of the
major psychological factors that affect pricing? Identify
and discuss three of each.
14. Explain how pricing is viewed in different ways. Be
specific.
15. How do pricing strategies differ based on the product
life cycle?
16. Identify the five revenue models for social media
start-ups.
Notes
1. Miner Schindehutte, Michael H. Morris, and Leyland
F. Pitt, Rethinking Marketing (Upper Saddle River, NJ:
Pearson Prentice Hall, 2009).
2. For a discussion of markets, see Louis E. Boone and David
L. Kurtz, Contemporary Marketing, 17th ed. (Mason,
OH: Cengage/South-Western, 2016); Philip Kotler and
Gary Armstrong, Principles of Marketing, 16th ed. (Upper
Saddle River, NJ: Pearson/Prentice Hall, 2016); and
William M. Pride and 0. C. Ferrell, Marketing, 18th ed.
(Mason, OH: Cengage/South-Western, 2016).
3. Miner Schindehutte, Michael H. Morris, and Akin
Kocak, "Understanding Market-Driven Behavior: The
Role of Entrepreneurship," Journal of Small Business
Management 46, no. 1 (2008): 4-26; Jonas Dahlqvist and
Johan Wiklund, "Measuring the Market Newness of New
Ventures," Journal of Business Venturing 27, no. 2 (2012):
185- 96.
4. Bret Golan, "Achieving Growth and Responsiveness:
Process Management and Market Orientation in Small
Firms," Journal of Small Business Management 44, no. 3
(2006): 369- 85; Michael Song, Tang Wang, and Mark E.
Parry, "Do Market Information Processes Improve New
Venture Performance?," Journal of Business Venturing 25,
no. 6 (2010}: 556- 68.
5. For a thorough presentation, see R. Ganeshasundaram
and N. Henley, "The Prevalence and Usefulness of Market
Research: An Empirical Llvestigation into 'Background'
versus ' Decision' Research," International Journal of
Market Research 48, no. 5 {2006}: 525- 50; Maire Brettel,
Andreas Engelen, Thomas Miiller, and Oliver Schilke,
"Distribution Channel Choice of New Entrepreneurial
Ventures," Entrepreneurship Theory and Practice 35,
no. 4 (2011): 683 - 708; and Barry J. Babin and William
G. Zikmund, Essentials of Marketing Research, 6th ed.
(Mason, OH: Cengage/South-Western, 2016).
6. Timothy M. Baye, "Relationship Marketing: A Six-Step
Guide for the Business Start-Up," Small Business Forum,
Spring 1995, 26-41; William G. Zikmund and Barry J.
Ba bin, Exploring Marketing Research, 11th ed. (Mason,
OH: Cengage/South-Western, 2016).
7. Thomas J. Callahan and Michael D. Cassar, "Small
Business Owners' Assessments of Their Abilities to
Perform and Llterpret Formal Market Studies," Journal of
Small Business Management 33, no. 4 (1995): 1- 9.
Notes 243
8. Stephen W. McDaniel and A. Parasuraman, "Practical
Guidelines for Small Business Marketing Research,"
Journal of Small Business Management 24, no. 1 {1986): 5.
9. Babin and Zikmund, Essentials of Marketing Research.
10. As an example, see Schindehutte et al., "Understanding
Market-Driving Behavior," and Frank Hoy, "Organizational
Learning at the Marketing/Entrepreneurship Interface,"
Journal of Small Business Management 46, no. 1 (2008):
152-58.
11. John A. Pearce II and Steven C. Michael, "Marketing
Strategies That Make Entrepreneurial Firms RecessionResistant,"
Journal of Business Venturing 12, no. 4 (1997):
301- 14; Matthew Bumgardner, Urs Buehlmann, Albert
Schuler, and Jeff Crissey, "Competitive Actions of Small
Firms in a Declining Market," Journal of Small Business
Management 49, no. 4 (2011): 578- 98.
12. Melissa S. Barker, Donald I. Barker, Nicholas F. Borman,
and Krista E. Neher, Social Media Marketing: A Strategic
Approach (Mason, OH: South-Western/Cengage, 2013).
13. For a thorough review of social media and mobile marketing,
see Barker et al., Social Media Marketing, and
Mary Lou Roberts and Debra Zahay, Internet Marketing:
Integrating Online and Offline Strategies (Mason, OH:
South-Western/Cengage 2013); see also Maria Teresa
Pinheiro Melo Borges Tiago, and Jose Manuel Crist6vao
Verfssimo, "Digital Marketing and Social Media: Why
Bother?," Business Horizons 57, no. 6 (2014}: 703 - 8;
Ana Margarida Gamboa and Helena Martins Gonc,:alves,
"Customer Loyalty through Social Networks: Lessons
from Zara on Facebook," Business Horizons 57, no. 6
(2014 }: 709- 17; and Paola Barbara Floredd u, Francesca
Cabiddu, and Roberto Evaristo, "Inside Your Social Media
Ring: How to Optimize Online Corporate Reputation,"
Business Horizons 57, no. 6 (2014}: 737-45.
14. Barker et al., Social Media Marketing; Allison Enright,
"U.S. Online Retail Sales Will Grow 57% by 2018," May
12, 2014, http://ciqem.centerblog.net/86-U-S-online-retail
-sales-will-grow-57-by-2018, accessed January 9, 2015.
15. Schindehutte et al., Rethinking Marketing; see also Helia
Gonc,:a lves Pereira, Maria de Fatima Salgueiro, and Ines
Mateus, "Say Yes to Facebook and Get Your Customers
Llvolved! Relationships in a World of Social Networks,"
Business Horizons 57, no. 6 (2014): 695- 702, and Joanna
Phillips Melancon and Vassilis Dalakas, "Consumer
Social Voice in the Age of Social Media: Segmentation
Profiles and Relationship Marketing Strategies," Business
Horizons 61, no. 1 (2018): 157- 67.
16. Roberts and Zahay, Internet Marketing; Barker et al.,
Social Media Marketing; see also Jordi Paniagua and Juan
Sapena, "Business Performance and Social Media: Love or
Hate?," Business Horizons 57, no. 6 (2014): 719- 28, and
Claudia Smith, J. Brock Smith, Eleanor Shaw, "Embracing
Digital Networks: Entrepreneurs' Social Capital Online,"
Journal of Business Venturing 32, no. 1 (2017}: 18- 34.
17. Barker et al. , Social Media Marketing; see also Eileen
Fischer and A. Rebecca Reuber, "Online Entrepreneurial
Communication: Mitigating Uncertainty and Increasing
Differentiation via Twitter," Journal of Business Venturing
29, no. 4 (2014): 565- 83.
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91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic tight.. some 1hitd
p,3t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11o tcmovc
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244 Chapter 10 Marketing Challenges for Entrepreneurial Ventures
18. Andreas Kaplan, "If You Love Something, Let It Go
Mobile: Mobile .Nlarketing and Mobile Social Media
4x4," Business Horizons 55, no. 2 (2012): 129- 39.
19. Schindehutte et al., Rethinking Marketing; see also Gerald
E. Hills, Claes M. Hultman, and Morgan P. Miles, "The
Evolution and Development of Entrepreneurial Marketing,"
Journal of Small Business Management 46, no. 1 (2008):
99- 112; Rex Yuxing Du, Ye Hu, and Sina Damangir,
"Leveraging Trends in Online Searches for Product Feanues
in Market Response Modeling," Journal of Marketing 79
no. 1 (2015): 29-43; and William C. Moncrief, Greg
W. Marsha ll, and John M. Rudd, "Social Media and
Related Technology: Drivers of Change in Managing the
Contemporary Sales Force," Business Horizons 58, no. 1
(2015): 45-55.
20. Adapted from Neil Patel, "Distribution Channels: What
They Are, Types, and Examples," 2022, https://neilpatel.com/
blog/distribution-channels; Jason Fernando and Amy Dnuy,
"Distribution Channel," Investopedia, February 7, 2022,
https://www.investopedia.com/terms/d/distribution-channel.
asp; Aashish Pahwa, "Distribution Channels-Definition,
Types, and Functions," Feedough.com, March 30, 2022,
https://www.feedough.com/distribution-channels-definitiontypes-
functions; and "Product Distribution Strategy,"
September 19, 2019, https://productdistributionstrategy
.com/types-of-distributionchannels/#:-:text= There%20
are %20four% 20types% 20of ,and %20physical % 20
exchange%20of%20products.
21. Special thanks to Dr. Dan Smith, the Clair W. Barker
Chair in marketing and professor of marketing at the
Kelley School of Business, Indiana University, April 2022.
22. "Marketing Planning," Small Business Reports, April
1986, 68- 72; Philip Kotler and Kevin Lane Keller,
Marketing Management, 15th ed. (Upper Saddle, NJ:
Pearson Prentice Hall, 2016).
23. "Marketing Planning," 70; Kotler and Keller, Marketing
Management.
24. Boyd Cohen and Monika I. Winn, "Market Imperfections,
Opportunity, and Sustainable Entreprenetirship," Journal
of Business Venturing 22, no. 1 (January 2007): 29-49;
Bumgardner et al., "Competitive Actions of Small Firms in
a Declining Market."
25. "Marketing Planning," 71; see also Timothy Matanovich,
Gary L. Lilien, and Arvind Rangaswamy, "Engineering
the Price-Value Relationship," Marketing Management,
Spring 1999, 48-53.
26. Ba bin and Zikmund, Essentials of Marketing Research;
Kotler and Keller, Marketing Management.
27. Schindehutte et al., Rethinking Marketing; see also Tessa
Christina Flatten, Andreas Engelen, Timo Moller, and
Maire Brettel, "How Entrepreneurial Firms Profit from
Pricing Capabilities: An Examination of TechnologyBased
Ventures," Entrepreneurship Theory and Practice
39, no. 5 (2015): 1111- 36.
28. Jun Loayza, "5 Business Models for Social Media
Start-Ups," Mashable Business, July 14, 2009, http ://
mas ha ble.com/2 009/07/14/social-med ia business-models,
accessed May 1, 2012; Aylin Aydinli , Marco Bertini,
and Anja Lambrecht, "Price Promotion for Emotional
Impact," Journal of Marketing 78 no. 4 (2014): 80- 96.
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11otcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Financial Preparation for
Entrepreneurial Ventures
Learning Objectives
11.1. Explain the principal financia l statements needed for any entrepreneurial
venture
11.2. Outline the process of preparing an operating budget
11.3. Explain how to draw up a cash-flow statement
11.4. Describe how pro forma statements are prepared
11.s. Explain how capital budgeting can be used in the decision-making process
11.6. Illustrate how to use break-even analysis
11.7. Describe ratio analysis
11.a. Illustrate the use of some of the important ratio measures and their meanings
Entrepreneurial Thought
Small company managers are too inclined to delegate to outside accountants every
decision about their
companies' financial statements. Indeed, it is most unfair to suppose that
accountants can producewithout
management's advice and counsel-the perfect statement for a company. Instead, I
contend,
top managers of growing small companies must work with their independent
accountants in preparing
company financia l statements to ensure that the right message is being conveyed.
-James Mcneill Stancill, Growing Concerns
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc t igh11otcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
246 Chapter 11 Financial Preparation for Entrepreneuria l Ventures
11-1 The Importance of
Financial Information for
Entrepreneurs
Today's entrepreneur operates in a competitive environment
characterized by the constraining forces of governmental
regulation, competition, and resources. In regard
to the latter, no firm has access to an unlimited arnount
of resources. So, in order to compete effectively, the
entrepreneur must allocate resources efficiently. Three
kinds of resources are available to the entrepreneur:
human, material, and financial. This chapter focuses on
financial resources in the entrepreneurial environment,
beginning ,vith a discussion of financial statements as a
managerial planning tool. Ho,v the budgeting process
translates into the preparation of proforma statements
is presented, and attention is also given to break-even
analysis and ratio analysis as profit-planning tools.
Table 11 .1 A Financial Glossary for the Entrepreneur
Financial information pulls together all of the
infonnation presented in the other segrnents of the
business: rnarketing, distribution, manufacturing, and
management. It also quantifies all of the assumptions
and historical information concerning business
operations.1
It should be remembered that entrepreneurs make
assumptions to explain ho,v numbers are derived, and
they correlate these assumptions ,vith information
presented in other parts of the business operations.
The set of assumptions on ,vhich projections are based
should be clearly and precisely presented; ,vithout these
assumptions, numbers ,vill have little meaning. It is
only after carefully considering such assumptions that
the entrepreneur can assess the validity of financial
projections. Because the rest of the financial plan is
an outgro,vth of these assumptions, they are the most
integral part of any financial segment. (See Table 11.1
for a financial glossary for entrepreneurs.)
Accrual system of accounting A method of recording and allocating income and
costs for the period in which each is involved
regardless of the date of payment or collection. For example, if you were paid $100
in April for goods you sold in March,
the $100 would be income for March under an accrual system. (Accrual is the
opposite of the cash system of accounting.)
Asset Anything of value that is owned by you or your business.
Balance sheet An itemized statement listing the total assets and liabilities of your
business at a given moment. It is also called
a statement of condition.
Capital ( 1) The amount invested in a bus iness by the proprietor(s) or stockholders.
(2) The money ava ilable for investment or
money invested.
Cash flow The schedule of your cash receipts and disbursements.
Cash system of accounting A method of accounting whereby revenue and expenses
are recorded when received and paid,
respectively, without regard for the period to wh ich they apply.
Collateral Property you own that you pledge to the lender as security on a loan until
the loan is repaid. Collateral can be a
car, home, stocks, bonds, or equipment.
Cost of goods sold Th is is determined by subtracting the value of the ending
inventory from the sum of the beg inning
inventory and purchases made during the period. Gross sales less cost of goods
sold gives you gross profit.
Current assets Cash and assets that can be easily converted to cash, such as
accounts receivable and inventory. Current
assets should exceed current liabilities.
Current liabilities Debts you must pay with in a year (also called short-term
liabilities).
Depreciation Lost usefulness; expired utility; the diminution of service yield from a
fixed asset or fixed asset group that
cannot or will not be restored by repairs or by replacement of parts.
Equity An interest in property or in a business, subject to prior cred itors. An owner's
equ ity in their business is the difference
between the value of the company's assets and the debt owed by the company. For
example, if you borrow $30,000 to
purchase assets for which you pay a total of $50,000, your equity is $20,000.
Expense An expired cost; any item or class of cost of (or loss from) carrying on an
activity; a present or past expenditure
defraying a present operating cost or representing an irrecoverable cost or loss; an
item of capital expenditures written
down or off; a term often used with some qualifying expression denoting function,
organ ization, or time, such as a selling
expense, factory expense, or monthly expense.
(Continued)
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1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
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Understanding the Key Financial Statements 247
Table 11.1 A Financial Glossary for the Entrepreneur (Continued)
Financial statement A report summariz ing the financial condition of a business. It
normally includes a balance sheet and an
income statement.
Gross profit Sales less the cost of goods sold. For example, if you sell $100,000
worth of merchandise for wh ich you paid
$80,000, your gross profit would be $20,000. To get net profit, however, you would
have to deduct other expenses
incurred during the period in wh ich the sales were made, such as rent, insurance,
and sales staff salaries.
Income statement Also called profit and loss statement. A statement summarizing
the income of a business during a specific
period.
Interest The cost of borrowing money. It is paid to the lender and is usually
expressed as an annual percentage of the
loan. That is, if you borrow $100 at 12 percent, you pay 1 percent (0.01 x 100 x 1)
interest per month. Interest is an
expense of doing business.
Liability Money you owe to your creditors. Liabilities can be in the form of a bank
loan, accounts payable, and so on. They
represent a claim against your assets.
Loss When a business's total expenses for the period are greater than the income.
Net profit Total income for the period less total expenses for the period. (See Gross
profit.)
Net worth The same as equity.
Personal financial statement A report summariz ing your personal financial
condition. Normally it includes a listing of your
assets, liabil ities, large monthly expenses, and sources of income.
Profit (See Net profit and Gross profit.) "Profit" usually refers to net profit.
Profit and loss statement Same as income statement.
Variable cost Costs that vary with the level of production on sales, such as direct
labor, material, and sales commissions.
Working capital The excess of current assets over current liabilities.
In order for entrepreneurs to develop the key components
of a financial segment, they should follo"v a clear
process, described in the next section.
11-2 Understanding the
Key Financial Statements
Financial statements are powerful tools that entrepreneurs
can use to manage their ventures.2 The basic financial
statements an entrepreneur needs to be fa1niliar "vith are
the balance sheet, the income state1nent, and the cash-flo"v
sta cement. The follo"ving sections examine each of these
in depth, providing a foundation for understanding the
books of record all ventures need.
11-2a The Balance Sheet
LOl 1.1 Expla in the principal financial statements needed for
any entrepreneurial venture
A balance sheet is a financial statement that reports a
business's financial position at a specific ti1ne. Many
accountants like to think of it as a picture taken at the
close of business on a particular day, such as December
31. The closing date is usually the one that marks
the end of the business year for the organization.
The balance sheet is divided into t\.VO parts: the financial
resources o\.vned by the firm and the claitns against these
resources. Traditionally, these claims against the resources
come fro1n t\.VO groups: creditors "vho have a claim to the
finn's assets and can sue the co1npany if these obligations
are not paid and O\.Vners who have rights to anything left
over after the creditors' claitns have been paid.
The financial resources the firm o"vns are called assets.
The claitns that creditors have against the company are
called liabilities. The residual interest of the firm's owners
is kno\.vn as owner's equity. When all three are placed on
the balance sheet, the assets are listed on the left, and the
liabilities and owner's equity are listed on the right.
An asset is something of value the business owns. To
detennine the value of an asset, the owner/manager must
do the follo"ving:
1. Identify the resource.
2. Provide a monetary measurement of that resource's
value.
3. Establish the degree of o\.vnership in the resource.
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248 Chapter 11 Fina ncial Preparation for Entrepreneurial Ventures
Most assets can be identified easily. They are tangible,
such as cash, land, and equipment. Ho,vever, intangible
assets also exist. These are assets that ca1u1ot be seen;
examples include copyrights and patents.
Liabilities are the debts of the business. These may be
incurred either through normal operations or through
the process of obtaining funds to finance operations.
A common liability is a short-term account payable in
,vhich the business orders some merchandise, receives it,
and has not yet paid for it. This often occurs when a
company receives merchandise during the third ,veek of
the 1nonth and does not pay for it until it pays all of its
bills on the first day of the next month. If the balance
sheet ,vas constructed as of the end of the month, the
account still would be payable at that time.
Liabilities are divided into t,vo categories: short term
and long term. Short-term liabilities (also called current
liabilities) are those that must be paid during the coming
12 months. Long-term liabilities are those that are not
due and payable ,vi thin the next 12 months, such as a
mortgage on a building or a five-year bank loan.
Owner's equity is ,vhat remains after the firm's
liabilities are subtracted from its assets- it is the claim
the owners have against the firm's assets. If the business
loses money, its owner's equity will decline. This concept
,viii become clearer when we explain ,vhy a balance
sheet ahvays balances.3
Understanding the Balance Sheet
To fully explain the balance sheet, it is necessary to
examine a typical one and determine ,vhat each entry
means. Table 11.2 provides an illustration. Note that it
has three sections: assets, liabilities, and o,vner's equity.
Within each of these classifications are various types of
accounts. The follo,ving sections exa1nine each type of
account presented in the table.
Current Assets Current assets consist of cash and other
assets that are reasonably expected to be t urned into
cash, sold, or used up during a normal operating cycle.
The most common types of current assets are those
sho,vn in Table 11.2.
Cash refers to coins, currency, and checks on hand. It
also includes money that the business has in its checking
and savings accounts.
Accounts receivable are claims of the business
against its customers for unpaid balances from the sale
of merchandise or the performance of services. For
example, many firms sell on credit and expect their
customers to pay by the end of the month. Or, in many
of these cases, they send customers a bill at the end of
the month and ask for payment ,vithin 10 days.
The allowance for uncollectible accounts refers to
accounts receivable judged to be uncollectible. Ho,v does
a business kno,v when receivables are not collectible?
This question can be difficult to ans,ver, and a definitive
ans,ver is not known. However, assume that the business
asks all of its customers to pay ,vithin the first 10 days
of the month follo,ving the purchase. Furthermore, an
aging of the accounts receivable shows that the follo,ving
amounts are due the firm:
Number of Days Outstanding • •
1- 1 1 $325,000
11 -20 25,000
21 -30 20,000
31 -60 5,000
61 -90 7,500
91+ 17,500
In this case, the firm might believe that anything more
than 60 days old ,vill not be paid and will ,vrite it off as
uncollectible. Note that, in Table 11.2, the allo,vance for
uncollectible accounts is $25,000, the amount that has
been outstanding for more than 60 days.
Inventory is merchandise held by the company for
resale to customers. Current inventory in our example
is $150,000, but this is not all of the inventory the firm
had on hand all year. Nat urally, the company started the
year with some inventory and purchased more as sales
,vere made. This balance sheet figure is ,vhat was left at
the end of the fiscal year.
Prepaid expenses are expenses that the firm already
has paid but that have not yet been used. For example,
insurance paid on the company car every six months is a
prepaid-expense entry because it will be six months before
all of the premium has been used. As a result, the accountant
,vould reduce this prepaid amount by one-sixth each
month. Sometimes supplies, services, and rent are also
prepaid, in ,vhich case the same approach is follo,ved.
Fixed assets consist of land, building, equipn1ent,
and other assets expected to remain ,vith the firm for
an extended period. They are not totally used up in the
production of the firm's goods and services. Some of the
most common types are shown in Table 11.2.
Land is property used in the operation of the firm.
This is not land that has been purchased for expansion
or speculation; that would be listed as an invest1nent
rather than a fixed asset. Land is listed on the balance
sheet at cost, and its value usually is changed only
periodically. For example, every five years, the value of
the land might be recalculated so that its value on the
balance sheet and its resale value are the same.
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addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Understanding the Key Financial Statements 249
Table 11.2 Kendon Corporation Balance Sheet for the Year Ended December 31,
2025
Assets
Current Assets
Cash $200,000
Accounts receivable $375,000
Less: allowance for uncollectible accounts $25,000 350,000
Inventory 150,000
Prepa id expenses 35,000
Total current assets $735,000
Fixed Assets
Land $330,000
Building $315,000
Less: accumulated depreciation of building 80,000
Equipment 410,000
Less: accumulated depreciation of equipment 60,000
Total fixed assets 915,000
Total assets $1 ,650,000
Liabilities
Current Liabilities
Accounts payable $150,000
Notes payable 25,000
Taxes payable 75,000
Loan payable 50,000
Total current liabilities $300,000
Bank loan 200,000
Total liabilities $500,000
Owner's Equity
Contributed Capital
Common stock, $10 par, 40,000 shares $400,000
Preferred stock, $100 par, 500 shares
Authorized, none sold
Retained Earnings 750,000
Total owner's equity 1,150,000
Total liabilities and owner's equity $1,650,000
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc t igh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
250 Chapter 11 Fina ncial Preparation for Entrepreneurial Ventures
Building consists of the structures that house the
business. If the firrn has more than one building, the
total cost of all the structures is listed.
Accumulated depreciation of building refers to the
amount of the building that has been \>vritten off the
books due to \>Vear and tear. For example, referring
to Table 11.2, the original cost of the building \>Vas
$315,000, but accumulated depreciation is $80,000,
leaving a net value of $235,000. The amount of
depreciation charged each year is determined by the
company accountant after checking \>Vith the Internal
Revenue Service rules. A standard depreciation is
5 percent per year for ne\>v buildings, although an
accelerated method sometimes is used. In any event, the
amount \>vritten off is a tax-deductible expense. Depreciation
therefore reduces the amount of taxable income
to the firm and helps lower the tax liability. In this \>Vay,
the business gets the opportunity to recover part of its
investment.
Equipment is the machinery the business uses to
produce goods. This is placed on the books at cost
and then depreciated and listed as the accumulated
depreciation of equipment. In our example, it is
$60,000. The logic behind equipment depreciation and
its effect on the firm's incorne taxes is the same as that
for accumulated depreciation on the building.
Current Liabilities Current liabilities are obligations
that \>vill become due and payable during the next year
or \>Vithin the operating cycle. The most common current
liabilities are listed in Table 11.2.
Accounts payable are liabilities incurred \>vhen goods
or supplies are purchased on credit. For example, if the
business buys on a basis of net 30 days, during that
30 days, the bill for the goods will constitute an account
payable.
A note payable is a prornissory note given as tangible
recognition of a supplier's claim or a note given in
connection \>Vith an acquisition of funds, such as for a
bank loan. Some suppliers require that a note be given
"vhen a company buys merchandise and is unable to pay
for it immediately.
Taxes payable are liabilities owed to the governmentfederal,
state, and local. Most businesses pay their
federal and state income taxes on a quarterly basis.
Typically, payments are made on April 15,June 15, and
September 15 of the current year and January 15 of
the following year. Then the business closes its books,
detennines \>vhether it still o\>ves any taxes, and makes
the required payments by April 15. Other taxes payable
are sales taxes. For exam pie, most states ( and sorne
cities) levy a sales tax. Each rnerchant must collect the
taxes and remit them to the appropriate agency.
A loan payable is the current installment on a longtenn
debt that must be pa id this year. As a result, it
becomes a part of the current liabilities. The remainder
is carried as a long-term debt. Note that, in Table 11.2,
$50,000 of this debt \>Vas paid in 2025 by the Kendon
Corporation.
Long-Term Liabilities As \>Ve have said, long-term
liabilities consist of obligations that \>vill not become due
or payable for at least one year or not \>Vi thin the current
operating cycle. The rnost common are bank loans.
A bank loan is a long-tenn liability due to a loan
from a lending institution. Although it is unclear from
the balance sheet in Table 11.2 how large the bank
loan originally \>Vas, it is being paid do\>vn at the rate of
$50,000 annually. Thus, it \>vill take four more years to
pay off the loan.
Contributed Capital The Kendon Corporation is
O\>vned by individuals who have purchased stock in the
business. Various kinds of stock can be sold by a corporation,
the most typical being common stock and preferred
stock. Only corrunon stock has been sold by this
company.
Comrnon stock is the most basic form of corporate
O\>vnership. This O\>vnership gives the individual the right
to vote for the board of directors. Usually, for every
share of common stock held, the individual is entitled
to one vote. As shown in Table 11.2, the corporation
has issued 40,000 shares of $10 par comrnon stock,
raising $400,000. Although the term par value may
have little meaning to rnost stockholders, it has legal
implications: it deterrnines the legal capital of the
corporation. This legal capital constitutes an amount
that total stockholders' equity cannot be reduced belo"v
except under certain circumstances (the most common
is a series of net losses). For legal reasons, the total
par value of the stock is maintained in the accounting
records. Ho\>vever, it has no effect on the market value
of the stock.
Preferred stock differs from comrnon stock in that
its holders have preference to the assets of the firm in
case of dissolution. This rneans that, after the creditors
are paid, preferred stockholders have the next claim
on \>vhatever assets are left. The comrnon stockholders'
claims come last. Table 11.2 sho\>vs that 500 shares of
preferred stock were issued, each worth a par value of
$100, but none has been sold. Therefore, it is not sho\>vn
as a number on the balance sheet.
Retained Earnings Retained earnings are the accumulated
net incorne over the life of the business to date. In
Table 11.2, the retained earnings are sho\>vn as $750,000.
Every year, this amount increases by the profit the firm
makes and keeps within the company. If dividends are
declared on the stock, they, of course, are paid from the
total net earnings. Retained earnings are \>vhat remain
after that.
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Understanding the Key Financial Sta tements 251
The Entrepreneurial Process
Watching Your Accounts Receivables
One of the primary issues that plagues start-up companies is
poor cash flow, and one of the largest contributors to this problem
is uncollected or extremely delayed accounts receivables.
When the economy is in decline, the first tactic that most
businesses will employ is to stretch out the payments on their
accounts payables as long as they can, which presents an
issue for their vendors. Most entrepreneurs offer credit to their
customers to encourage business, but when those customers
choose not to pay off thot credit in a timely manner, businesses
servicing them can face a cash defic it, making payments to
their own vendors problematic. In some cases, entrepreneurs
are left with no choice but to take on credit cards that charge
excessive interest rates just to keep their business afloat.
Avoid ing this situation takes sign ificant forethought on
the part of the management team . A good rule of thumb is lo
always secure funding before your company needs ii. You will
usually find cash when in dire straits, but the cost of that capital
can be sign ificant. Securing an operating line of credit and
keeping tabs on your accounts receivable will help prevent
expensive mistakes when the going gets tough.
Following are seven tips for making sure that you are paid
whot is coming to you
Track your accounts receivable with software.
Given the abundance of free and inexpensive invoice creating
and tracking software, the only reason not to use one is if you
do not have a computer or a smartphone. One example is
QuickBooks, which is cost effective and user friendly. However,
there are a plethora of other choices as well.
Develop a process. Customers w ill stretch out their
payments to you if they think they can get away with it; do not
let them. Being consistent when deal ing with your customers
w ill let them know that you take collecting your receivables
seriously. Establ ish a payment due date and enforce ii. If you
let your customers slide, you will be sending them the message
that they can pay when they want to, which might work fine
when your company is flush with cash but will be a significant
burden if your business hits a lull.
Make some noise. Once you have provided a
product or service, you are entitled to get paid . You should
not feel gu ilty about contacting your customers about a
del inquent payment. After all , you have upheld your end of
the deal. Your customers are going lo pay the vendors who
are the most committed to getting paid. If you choose to sit
idle, you may never gel your money.
Why the Balance Sheet Always Balances
By definition, the balance sheet ahva ys balances. 4 If
something ha pp ens on one side of the balance sheet,
it is offset by something on the other side. Hence, the
Get paid up front. When in doubt, there is no better
way to ensure payment than by mandating that your customers
pay up front; this is especially useful when working with
new cl ients. You can always charge a percentage so that you
and your customers are sharing the burden of responsibility.
In the event that you choose to issue credit to a customer,
make sure lo perform a cred it check first
Find an advocate. The person paying your company
is most likely not the entrepreneur. Find out who is responsible
for issuing payments in each of your respective customers'
businesses so that you get to know them. The order in which
payments are submitted w ill usually be at the discretion of this
individual, so you stand a greater chance of being at the top
of thot list if they know you.
Discounts for early payment. lncentivize customers
to pay as soon as possible by offering discounts. One of the
more popular credit terms is 2%/ l 0, net 30 days. This means
that a customer receives a 2 percent d iscount if they pay within
l O days and that the total balance is due within 30 days of
the date of the invo ice.
Know when to walk away. Despite what traditional
thinking suggests, customers are not always right, and
they are not always profitable. The time spent collecting fees
from a customer and the cost of carrying the credit for that customer
might outweigh the margins that customer's business is
generating. If thot turns out to be the case, do not be afraid to
d iscontinue the relationship. Often, the costs far outweigh what
appears on your financial statements given that time spent on
troublesome customers could be spent acquiring new business,
To prevent such issues from burdening your company, conduct
annual audits of your customers and consider eliminating those
that cost you money.
Cash-flow management is a process that never ends
for an entrepreneur. liquidity is an important metric when
considering the health of your business; if you are allowing
your customers to postpone their payments, you risk their
pulling your company's life in jeopardy.
Source: Adopted from C. J. Prince, "Time Bomb,• Entrepreneur, January
2008, http://www.enlrepreneur.com/ mogozi ne/ en lrepreneur /2008 /
jonuory/ 187658 .html, accessed Moy 12, 2012 , and Roniko Khanna,
"Tips on Managing Your Accounts Receivable,• Toolbox.com, November
23, 2010, http:/ /finance.toolbox.com/biogs/ montreol-finonciol/tipson-
monogi ng-your-occoun ls-receive ble-4 27 17 , accessed Moy 12 , 20 l 2 .
balance sheet remains in balance. Before examining
some illustrations, let us restate the balance sheet
equation:
Assets = Liabilities + O\.vner's Equity
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11otcmovc
addi1ioo:ll coocm m :my time if sub$cqucm tight. tc~tk1ioos R--quitc ii.
252 Chapter 11 Financial Preparation for Entrepreneurial Ventures
With this in mind, let us look at some typical
examples of business transactions and their effect on the
balance sheet.
A Credit Transaction The Kendon Corporation calls
one of its suppliers and asks for delivery of $11,000
in materials. The materials arrive the next day, and the
company takes possession of them.
The bill is to be paid within 30 days . Ho,v is the
balance sheet affected? Inventory goes up by $11,000,
and accounts payable rise by $11,000. The increase
in current assets is offset by an increase in current
liabilities.
Continuing this illustration, ,vhat happens ,vhen the
bill is paid? The company issues a check for $11,000, and
cash declines by this amount. At the same time, accounts
payable decrease by $11,000. Again, these are offsetting
transactions, and the balance sheet remains in balance.
A Bank Loan Table 11.2 shows that the Kendon
Corporation had an outstanding bank loan of $200,000
in 2025. Assume that the company increases this loan by
$110,000 in 2026. Ho,v is the balance sheet affected?
Cash goes up by $110,000, and bank loan increases by the
same amount; again, balance is achieved. However, ,vhat
if the firm uses this $110,000 to buy ne,v machinery?
In this case, cash decreases by $110,000 and equipment
increases by a like amount. Aga in, a balance exists.
Finally, ,vhat if Kendon decides to pay off its bank loan?
In this case, the first situation is reversed; cash and bank
loan (long-term liabilities) decrease in equal amounts.
A Stock Sale Suppose that the company issues and sells
another 40,000 shares of $10 par common stock. Ho,v
does this action affect the balance sheet? (This ans,ver
is rather simple.) Common stock increases by $400,000,
and so does cash. Once rnore, a balance exists.
With these examples in rnind, it should be obvious
,vhy the balance sheet ahvays balances. Every entry
has an equal and offsetting entry to maintain this
equation:
Assets = Liabilities + O,vner's Equity
Keep in mind that, in accounting language, the terrns
debit and credit denote increases and decreases in assets,
liabilities, and o,vner's equity. The follo,ving chart relates
debits and credits to increases and decreases:
Category
Asset
Liabil ity
Owner's equity
A Transaction
Increasing
the Amount
Debit
Cred it
Cred it
A Transaction
Decreasing
the Amount
Cred it
Debit
Debit
Applying this idea to the preceding examples results
in the f ollo,ving:
Debit Credit
Credit Transaction
Inventory $11,000
Accounts payable $11,000
Bank Loan
Cash 110,000
Bank loan 110,000
Stock Sale
Cash 400,000
Common stock 400,000
$511,000 $511,000
11-2b The Income Statement
The income statement is a financial statement that
sho,vs the change that has occurred in a firm's position
as a result of its operations over a specific period. This
is in contrast to the balance sheet, which reflects the
company's position at a particular point in time.
The income statement, sometimes referred to as
a "profit and loss statement" or "P&L," reports the
success ( or failure) of the business during the period. In
essence, it shows \>vhether revenues were greater than or
less than expenses. These revenues are the monies the
small business has received from the sale of its goods
and services. The expenses are the costs of the resources
used to obtain the revenues. These costs range from the
cost of materials used in the products the firrn makes to
the salaries it pays its employees.
Most income statements cover a one-year interval, but
it is not uncomrnon to find monthly, quarterly, or semiannual
income statements. All of the revenues and expenses
accumulated during this time are determined, and the net
income for the period is identified. Many firms prepare
quarterly income staternents but construct a balance sheet
only once a year. This is because they are interested far
more in their profits and losses than in examining their
asset, liability, and o,vner's equity positions. Ho,vever, it
should be noted that the income statement dra,vn up at
the end of the year ,viii coincide ,vith the firm's fiscal year,
just as the balance sheet does. As a result, at the end of
the business year, the organization ,viii have both a balance
sheet and an income statement. In this way, they can
be considered together, and the interrelationship bet,veen
them can be studied. A number of different types of
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcxpc ticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
income and expenses are reported on the income statement.
However, for purposes of simplicity, the income
sta tement can be reduced to three primary categories:
(1) revenues, (2) expenses, and (3) net income.
Revenues are the gross sales the business 1nade during
the particular period under review. Revenue often consists
of the money actually received from sales, but this
need not be the case. For example, sales n1ade on account
still are recognized as revenue, as when a furniture store
sells $500 of furniture to a customer today, delivers it
tomorro,v, and ,viii receive payment t,vo ,veeks from
no,v. From the moment the goods are delivered, the
company can claim an increase in revenue.
Expenses are the costs associated ,vith producing
goods or services. For the furniture store in the preceding
paragraph, the expenses associated ,vith the sale ,vould
include the costs of acquiring, selling, and delivering the
merchandise. Sometimes these are expenses that ,viii be
paid later. For example, the people ,vho deliver the furnit
ure may be paid every t,vo ,veeks, so the actual out flo,v
of expense money in the form of salaries ,viii not occur at
the same time the ,vork is performed. Nevertheless, it is
treated as an expense.
Net income is the excess of reven ue over expenses
during the particular period under discussion. If
revenues exceed expenses, the result is a net profit. If the
reverse is true, the firm suffers a net loss. At the end of
the accounting period, all of the revenues and expenses
associated with all of the sales of goods and services are
added together, and then the expenses are subtracted
from the revenues. In this way, the firm kno,vs ,vhether
it made an overall profit or suffered an overall loss.5
Understanding the Income Statement
To explain the income sta tement fully, it is necessary
to examine one and determine ,vha t each account is.
Table 11.3 illustrates a typical inco1ne statement. It has
five 1najor sections: (1) sales revenue, (2) cost of goods
sold, (3) operating expenses, (4) financial expense, and
(5) income taxes estimated.
Revenue Every time a business sells a product or performs
a service, it obtains revenue. This often is referred
to as gross revenue or sales revenue. Ho,vever, it is usually
an overstated figure because the co1npany finds that
some of its goods are returned or some customers take
advantage of pro1npt-payment discounts.
In Table 11.3, sales revenue is $1,750,000. Ho,vever,
the firin also has returns and allo,vances of $50,000.
These returns are common for companies that operate
on a "satisfaction or your money back" policy. In any
event, a small business should keep tabs on these returns
and allo,vances to see if the total is high in relation to
the total sales revenue. If so, the firm ,viii know that
something is wrong ,vith ,vhat it is selling, and it can
take action to correct the situation.
Understanding the Key Financial Statements 2 53
Table 11.3 Kendon Corporation Income Statement for
the Year Ended December 31, 2025
Sales Revenue $1,750,000
Less: sales returns and
50,000
a llowances
Net sales $1,700,000
Cost of Goods Sold
Inventory, January 2000 $150,000
Purchases 1,050,000
Goods available for sale $1,200,000
Less: inventory,
December 2000 200,000
Cost of goods sold 1,000,000
Gross margin $700,000
Operating Expenses
Selling expenses $150,000
Administrative expenses 100,000
Total operating expenses 250,000
Operating income $450,000
Financial Expenses $20,000
Income before income taxes $430,000
Estimated income taxes 172,000
Net profit $258,000
Deducting the sales returns and allo,vances from
the sales revenue, the company finds its net sales. This
amount must be great enough to offset the accompanying
expenses in order to ensure a profit.
Cost of Goods Sold As the name implies, the cost of
goods sold section reports the cost of merchandise sold
during the accounting period. Si1nply put, the cost of
goods for a given period equals the beginning inventory
plus any purchases the firm makes minus the inventory
on hand at the end of the period. Note tha t, in Table
11.3, the beginning inventory ,vas $150,000, and the
purchases totaled $1,050,000. This gave Kendon goods
available for sale of $1,200,000. The ending inventory
for the period ,vas $200,000, so the cost of goods sold
,vas $1,000,000. This is what it cost the co1npany to
buy the inventory it sold. When this cost of goods
sold is subtracted from net sales, the result is the gross
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t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
254 Chapter 11 Financial Preparation for Entrepreneurial Ventures
margin. The gross margin is the atnount available to
meet expenses and to provide some net income for the
firm's o\>vners.
Operating Expenses The major expenses, exclusive of
costs of goods sold, are classified as operating expenses.
These represent the resources expended, except for
inventory purchases, to generate the revenue for the
period. Expenses often are divided into nvo broad
subclassifications: selling expenses and administrative
expenses.
Selling expenses result from activities such as
displaying, selling, delivering, and installing a product or
performing a service. Expenses for displaying a product
include rent for storage space, depreciation on fixtures
and furniture, property insurance, and utility and tax
expenses. Sales expenses, salaries, comrnissions, and
advertising also fall into this category. Costs associated
"vith getting the product from the store to the customer
also are considered selling expenses. Finally, if the firm
installs the product for the customer, all costs- including
the parts used in the job- are considered in this total.
Taken as a "vhole, these are the selling expenses.
Administrative expenses is a catchall term for operating
expenses not directly related to selling or borro\>ving. In
broad terms, these expenses include the costs associated
"vith running the firm. They include salaries of the
managers, expenses associated "vith operating the office,
general expenses that cannot be related directly to
buying or selling activities, and expenses that arise from
delinquent or uncollectible accounts.
When these selling and administrative expenses are
added together, the result is total operating expenses.
Subtracting them from gross margin gives the firm its
operating income. Note that, in Table 11.3, selling
expenses are $150,000, administrative expenses are
$100,000, and total operating expenses are $250,000.
When subtracted frorn the gross margin of $700,000,
the operating income is $450,000.
Financial Expense The financial expense is the interest
expense on long-term loans. As seen in Table 11.3,
this expense is $20,000. Additionally, many companies
include their interest expense on short-term
obligations as part of their financial expense.
Estimated Income Taxes As noted earlier, corporations
pay estirnated income taxes; then, at sorne predetermined
time (e.g., December 31), the books are closed, actual
taxes are determined, and any additional payments
are made (or refunds clairned). When these taxes are
subtracted frorn the income before incotne taxes, the
result is the net profit. In our example, the Kendon
Corporation made $258,000.
11-2c The Cash-Flow Statement
The cash-flow statement (also kno\>vn as statement of
cash flows) sho\>vs the effects of a company's operating,
investing, and financing activities on its cash balance.
The principal purpose of the statement of cash flo\>vs
is to provide relevant information about a company's
cash receipts and cash payments during a particular
accounting period. It is useful for ans\>vering such
questions as the following:
• Ho"v much cash did the firm generate from
operations? Ho"v did the firm finance fixed capital
expenditures?
• Ho"v much ne"v debt did the firm add?
• Was the cash from operations sufficient to finance
fixed asset purchases?
The statement of cash flo\>vs is a supplement to
the balance sheet and income statements. One of the
limitations of the income and balance sheet sta cements
is that they are based on accrual accounting. In accrual
accounting, revenues and expenses are recorded when
incurred- not "vhen cash changes hands. For example,
if a sale is made for credit, under accrual accounting,
the sale is recognized, but cash has not been received.
Similarly, a tax expense may be sho\>vn in the income
statement, but it may not be paid until later. The
statement of cash flo\>vs reconciles the accrual-based
figures in the incorne and balance sheet statements to the
actual cash balance reported in the balance sheet.
The statement of cash flo\>vs is broken down into
operating, investing, and financing activities. Table
11.4 provides an outline of a statement of cash flo\>vs.
Operating cash flows refer to cash generated from or
used in the course of business operations of the finn.
The net opera ting cash flo\>vs \>vill be positive for most
firms because their opera ting inflo\>vs (primarily from
revenue collections) \>vill exceed operating cash outflo\>vs
(e.g., payment for raw materials and \>vages).
Investing activities refer to cash-flo"v effects from
long-tenn investing activities, such as purchase or sale of
plant and equipment. The net cash flo"v from investing
activities can be either positive or negative. A firm chat
is still in the gro\>vth phase \>Vould be building up fixed
assets (installing ne"v equipment or building ne"v plants)
and therefore \>Vould show negative cash flo\>vs from
investing activities. On the other hand, a finn that is
divesting unprofitable divisions may realize cash inflo\>vs
from the sale of assets and therefore \>vould sho"v a
positive cash flow from investing activities.
Financing activities refer to cash-flow effects of
financing decisions of the firm, including sale of new
securities (such as stocks and bonds), repurchase of
securities, and payment of dividends. Note that payment
of interest to lenders is not included under financing
activities. Accounting convention in determining the
statement of cash flows assumes that interest payments
are part of operating cash flows. Once the cash flows
from the three different sources- operating, investing,
and financing- are identified, the beginning and ending
cash balances are reconciled.
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
' Table 11.4 Format of Statement of Cash Flows
Cash flows from operating activities $50,000
Cash flows from investing activities ($10,000)
Cash flows from financing activities $5,000
Net increase (decrease) in cash $45,000
Cash at beginning of period $400,000
Cash at end of period $445,000
Because this statement is most frequently used by those
analyzing the firm, the use of a cash budget may be the
best approach for an entrepreneur starting up a venture.
The cash budget procedure is covered in the next section.
11-3 Preparing Financial
Budgets
One of the most po,verful tools the entrepreneur can use
in planning financial operations is a budget.6 The operating
budget is a statement of estimated income and expenses
during a specified period of tirne. Another common type
of budget is the cash-fiow budget, ,vhich is a statement of
estimated cash receipts and expenditures during a specified
period of time. It is typical for a firm to prepare both types
of budgets by first cornputing an operating budget and
then constructing a cash budget based on the operating
budget. A third comrnon type of budget is the capital
budget, ,vhich is used to plan expenditures on assets ,vhose
returns are expected to last beyond one year. This section
examines all three of these budgets: operating, cash flo,v,
and capital. Then the preparation of pro forma financial
statements from these budgets is discussed.
11-Ja The Operating Budget
LOl 1.2 Outline the process of preparing an operating budget
Typically, the first step in creating an operating budget
is the preparation of the sales forecast. 7 An entrepreneur
can prepare the sales forecast in several ,vays. One ,vay
is to implement a statistical forecasting technique such
as simple linear regression. Sim pie linear regression
is a technique in which a linear equation states the
relationship among three variables:
Y =a+ bx
where Y is a dependent variable (it is dependent on the
values of a, b, and x), x is an independent variable (it is
not dependent on any of the other variables), a is a constant
(in regression analysis, Y is dependent on the variable
x, all other things held constant), and b is the slope
of the line (the change in Y divided by the change in x ).
Preparing Financial Budgets 255
For estimating sales, Y is the variable used to represent the
expected sales, and xis the variable used to represent the
factor on ,vhich sales are dependent. Some retail stores may
believe that their sales are dependent on their advertising
expenditures, ,vhereas other stores may believe that their
sales are dependent on some other variable, such as the
an10UI1t of foot traffic past the store.
When using regression analysis, the entrepreneur
,vill dra,v conclusions about the relationship bet,veen,
for example, product sales and advertising expenditures.
Presented next is an example of how Mary Tindle,
owner of a clothing store, used regression analysis:
Mary began with nvo initial assumptions: (1) If no
money is spent on advertising, total sales will be
$200,000, and (2) for every dollar spent on advertising,
sales ,vill be increased by t,vo times that amount.
Relating these t\>vo observations yields the following
simple linear regression forrnula:
S = $200,000 + 2A
S = projected sales
A = advertising expenditures
(Note that it is often easier to substitute more meaningful
letters into an equation. In this case, the letter S was
substituted for the letter Y simply because the word sales
starts ,vith that letter. The same is true for the letter A, ,vhich
,vas substituted for the letter x.) In order to determine the
expected sales level, Mary must insert different advertising
expenditures and complete the simple linear regression
formula for each different expenditure. The following data
and Figure 11.1 demonstrate the results.
Another commonly used technique for the
preparation of a sales forecast is the estimation chat
current sales will increase a certain percentage over
the prior period's sales. This percentage is based on a
trend line analysis that covers the five preceding sales
periods and assurnes that the seasonal variations ,vill
continue to run in the sarne pattern. Obviously, because
Figure 11.1 Regression Analysis
Simple Linear Regression ($000}
A 2A S = $200 X 2A
$50 $100 $300
100 200 400
150 300 500
200 400 600
250 500 700
300 600 800
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
256 Chapter 11 Financial Preparation for Entrepreneurial Ventures
it needs five preceding sales periods, trend line analysis
is used for more established ventures. It is nevertheless
an important tool that entrepreneurs should be a\>vare
of as the venture gro\>vs and becomes more established.
Follo\>ving is an example of how John Wheatman, owner
of North Central Scientific, used trend line analysis to
forecast sales for his computer retail store:
After considerable analysis of his store's sales history,
John Wheatrnan decided to use trend line analysis and
estimated that sales \>vould increase 5 percent during
the next year, \>Vith the seasonal variations follo\>ving
roughly the same pattern. Because he has a personal
computer \>Vith an electronic spreadsheet program,
John chose to use the input of last year's sales figures
in the spreadsheet and then to increase each month by
5 percent. The results are sho\>vn in Table 11.5.
After a firm has forecast its sales for the budget period,
expenses must be estimated. The first type of expenses that
should be estimated is the cost of goods sold, \>vhich follo\>vs
sales on the income staternent. For retail firms, this is a matter
of projecting purchases and the corresponding desired
beginning and ending inventories. Many firms prefer to
have a certain percentage of the next month's sales on hand
in inventory. Here is ho\>v John Wheatrnan determines his
store's expected purchases and inventory requirements:
For determining his purchase requirements, John
Wheatrnan believes that his gross profit \>vill represent
20 percent of his sales dollar. This is based on analysis
of the past five years' income statement. Consequently,
cost of goods sold \>vill represent 80 percent of the sales
for the current month. In addition, John wants to have
approxirnately one week's inventory on hand. Thus, the
ending inventory is estimated to be 25 percent of next
month's sales. The results are shown in Table 11.6.
A manufacturing firrn, on the other hand, will need
to establish its production budget, a material purchases
budget based on the production budget, and the
corresponding direct labor budget. The production budget
is management's estimate of the number of units that need
to be produced in order to rneet the sales forecast. This
budget is prepared by \>Vorking back\>vard through the
Table 11.5 North Central Scientific: Sales Forecast for 2025
January February March
Sales $300 $350 $400
x l .05 315 368 420
I July I August I September
Sales $475 $480 $440
x l .05 499 504 462
cost of goods sold section. First, the predicted number of
units that \>vill be sold during that month is determined.
Then the desired ending-inventory-level balance is added
to this figure. The swn of these t\>vo figures is the number of
units that \>vill be needed in inventory. Once the inventory
requirements have been determined, the entrepreneur must
deterrnine ho"v many of these units \>Vil! be accounted for by
the beginning inventory (\>vhich is the prior rnonth's ending
inventory) and ho\>v many units \>vill have to be produced.
The production requirement is calculated by subtracting
the period's begiru1ing inventory from the inventory needed
for that period. An example follo\>vs:
Tom B. Good, president and founder of Dynamic
Manufacturing, has decided to implement a budget
to help plan for his company's gro\>vth. After Tom
received the unit sales forecast frorn his sales manager,
he exarnined last year's product movement reports
and determined that he \>Vould like to have 11 percent
of the next month's sales on hand as a buffer against
possible fluctuations in demand. He also has received
a report from his production manager that his ending
inventory this year is expected to be 12,000 \>vidgets,
\>vhich also \>vill be the beginning inventory for the
budget period. Table 11.7 sho\>vs the results.
After the production budget has been calculated, the
materials required for producing the specified number
of units can be determined from an analysis of the
bill of materials for the product being manufactured.
In addition, by examining the amount of direct labor
needed to produce each unit, management can determine
the amount of direct labor that \>vill be needed during the
forthcoming budget period.
The last step in preparing the operating budget is to
estimate the operating expenses for the period. Three
of the key concepts in developing an expense budget
are fixed, variable, and mixed costs. A fixed cost is one
that does not change in response to changes in activity
for a given period of time; rent, depreciation, and certain
salaries are examples. A variable cost is one that changes
in the same direction as and in direct proportion to
changes in operating activity; direct labor, direct materials,
and sales commissions are examples. Mixed costs are
April May June
$375 $500 $450
394 525 473
I October I November I December
$490 $510 $550
515 536 578
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p,3t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Preparing Financial Budgets 257
' Table 11.6 North Central Scientific: Purchase Requirements Budget for 2025
Sales revenue $315 $368 $420 $394 $525 $473 $499 $504 $462 $515 $536 $578
Cost of
goods sold
Beg inning $63 $74 $84 $79 $105 $95 $100 $101 $92 $103 $107 $116 inventory
Purchases 263 305 331 341 410 383 400 395 380 416 437 413
Cost of
goods $326 $379 $415 $420 $515 $478 $500 $496 $472 $519 $544 $529
ava ilable
Ending 74 85 79 105 95 100 101 92 102 107 ill 66 inventory
Cost of $252 $294 $336 $315 $420 $378 $399 $403 $370 $412 $428 $462
goods sold
Gross profit $63 $74 $84 $79 $105 $95 $100 $101 $92 $103 $108 $116
Cost of goods sold = Current period sales x .80
Ending inventory= Next month's sales x (0.80)(0.25) (since inventory is carried at
cost)
Cost of goods available = Cost of goods sold - Ending inventory
Beginning inventory= Prior month's ending inventory or current month's sales x
(0.80)(0 .25)
Purchases = Cost of goods available - Beg inning inventory
Gross profit = Sales - Cost of goods sold
Table 11.7 Dynamic Manufacturing: Production Budget Worksheet for 2025
Pro jected sales
(units) 125 136 123 143 154
Desired end ing
inventory .!.A 12 .!.A 15. 23
Available
for sale 139 148 137 158 177
Less: Beginn ing
inventory 12 l.4 12 l.4 u
Total production
requirements 127 134 125 144 162
a blend of fixed and variable costs. An example is utilities
because part of this expense would be responsive to
change in activity, and the rest ,vould be a fixed expense,
remaining relatively stable during the budget period.
Mixed costs can present a problem for management in
that it is so1neti1nes difficult to determine ho,v much of
the expense is variable and how much is fixed.
234 212 267 236 345 367 498
21 27 24 35 37 50 26
255 239 291 271 382 417 524
23 21 27 24 35 37 50
232 218 264 247 347 380 474
After the expenses have been budgeted, the sales, cost
of goods, and expense budget are combined to form the
opera ting budget. Table 11. 8 outlines North Central
Scientific's anticipated expenses for the budget year and
the co1npleted operating budget for the period. Each
month represents the pro forma, or projected, income
and expenses for that period.
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc t igh11otcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
258 Chapter 11 Financial Preparation for Entrepreneurial Ventures
Table 11.8 North Central Scientific: Expense and Operating Budgets
In order to identify the behavior of the different expense accounts, John Wheatman
decided to analyze the past five years'
income statements. Following are the results of his analysis:
• Rent is a constant expense and is expected to remain the same during the next
year.
• Payroll expense changes in proportion to sales because the more sales the store
has, the more people it must hire to
meet increased consumer demands.
• Utilities are expected to rema in relat ively constant during the budget period.
• Taxes are based primarily on sales and payroll and are therefore considered a
variable expense.
• Supplies will vary in proportion to sales. This is because most of the supplies will
be used to support sales.
• Repairs are relatively stable and are a fixed expense. John has maintenance
contracts on the equipment in the store,
and the cost is not scheduled to rise during the budget period.
North Central Scientific: Expense Budget for 2025
Jan. Feb. Mar. Apr. May Jun. Jul. Aug . Sep. Oct. Nov. Dec.
Anticipated operating expenses
Rent $2 $2 $2 $2 $2 $2 $2 $2 $2 $2 $2 $2
Payroll 32 37 42 39 53 47 50 50 46 51 54 58
Utilities 5 5 5 5 5 5 5 5 5 5 5 5
Taxes 3 4 4 4 5 5 5 5 5 5 5 6
Supplies 16 18 21 20 26 24 25 25 23 26 27 29
Repairs 2 2 2 2 2 2 2 2 2 2 2 2
Total expenses $60 $68 $76 $72 $93 $85 $89 $89 $83 $91 $95 $102
Sales revenue $3 15 $368 $420 $394 $525 $473 $499 $504 $462 $515 $536 $578
Cost of goods sold
Beginning $63 $74 $84 $79 $105 $95 $100 $101 $92 $103 $107 $116
inventory
Purchases 263 305 331 341 410 383 400 395 380 416 437 413
Cost of goods $326 $379 $415 $420 $515 $478 $500 $496 $472 $519 $544 $529
ava ilable
Ending inventory 74 85 79 105 95 100 .lQl 92 102 107 ill 66
Cost of goods $252 $294 $336 $315 $420 $378 $399 $403 $370 $412 $428 $462
sold
Gross profit $63 $74 $84 $79 $105 $95 $100 $101 $92 $103 $108 $116
Operating expenses
Rent $2 $2 $2 $2 $2 $2 $2 $2 $2 $2 $2 $2
Payroll 32 37 42 39 53 47 50 50 46 51 54 58
Utilities 5 5 5 5 5 5 5 5 5 5 5 5
Taxes 3 4 4 4 5 5 5 5 5 5 5 6
Supplies 16 18 21 20 26 24 25 25 23 26 27 29
Repairs 2 2 2 2 2 2 2 2 2 2 2 2
Total expenses $60 $68 $76 $72 $93 $85 $89 $89 $83 $91 $95 $102
Net profit $3 $6 $8 $7 $12 $10 $11 $12 $9 $12 $12 $14
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcxpc ticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
11-Jb The Cash-Flow Budget
LOl 1.3 Explain how to draw up a cash-flow statement
After the operating budget has been prepared, the
entrepreneur can proceed to the next phase of the budget
process: the cash-flow budget. This budget, which often is
prepared ,vith the assistance of an accountant, provides an
overview of the cash inflows and outflo,vs during the period.
By pinpointing cash problems in advance, 1nanagement can
make the necessary financing arrangements.8
The first step in the preparation of the cash-flo,v
budget is the identification and timing of cash inflo,vs.
For the typical business, cash inflows ,vill come from
three sources: (1) cash sales, (2) cash payments received
Table 11.9 North Central Scientific: Cash-Flow Budget
Preparing Financial Budgets 259
on account, and (3) loan proceeds. Not all of a firm's
sales revenues are cash. In an effort to increase sales, most
businesses ,vill allo,v some customers to purchase goods
on account. Consequently, part of the funds will arrive
in later periods and will be identified as cash payments
received on account. Loan proceeds represent another
form of cash inflo,v that is not directly tied to the sales
revenues. A firm may receive loan proceeds for several
reasons- for example, the planned expansion of the
firm (new building and equipment) or meeting cash-flo,v
problems stemming from an inability to pay current bills.
Some businesses have a desired minimum balance of
cash indicated on the cash-flow budget, highlighting the
point at ,vhich it ,vill be necessary to seek additional
financing. Table 11.9 provides an example of ho,v North
Central Scientific prepared its cash-flow budget.
John Wheatman has successfully completed his operating budget and is now ready
to prepare his cash-flow worksheet.
After analyzing the sales figures and the cash receipts, John has determ ined that
80 percent of monthly sales are in cash.
Of the rema ining 20 percent, 15 percent is collected in the next month, and the final
5 percent is collected in the month
following (see the cash receipts worksheet below). Wheatman's purchases are
typically paid during the week following the
purchase. Therefore, approximately one-fourth of the purchases are paid for in the
following month. Rent expense is paid
a month in advance. However, because ii is not expected to go up during the budget
period, the monthly cash outlay for
rent rema ins the same. All the other expenses are paid in the month of consumption
(see the cash disbursements worksheet
below). Finally, the cash-flow worksheet is constructed by taking the beginn ing cash
balance, adding the cash receipts for
that month, and deducting the cash disbursements for the same month.
North Central Scientific: Cash Receipts Worksheet for 2025
Sales $315 $388 $420 $394 $525 $473 $499 $504 $462 $515 $536 $578
Current month $252 $294 $336 $315 $420 $378 $399 $403 $370 $412 $428 $462
Prior month 82 47 55 63 59 79 71 75 76 69 77 80
Two months back 26 28 16 18 21 19 26 24 24 25 24 26
Cash receipts $360 $369 $407 $396 $500 $476 $496 $502 $470 $506 $529 $568
North Central Scientific: Cash Disbursements Worksheet for 2025
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Purchases $263 $305 $331 $341 $410 $383 $400 $395 $380 $416 $437 $413
Current month $197 $228 $248 $256 $307 $287 $300 $296 $285 $312 $328 $309
Prior month 98 66 76 83 85 102 96 100 99 95 104 109
Purchase $295 $294 $324 $339 $392 $396 $396 $396 $384 $407 $432 $419
payments
Operating $60 $68 $76 $72 $93 $85 $89 $89 $83 $91 $95 $102
expenses
Cash payments $355 $362 $400 $412 $485 $481 $485 $485 $467 $498 $527 $521
(Continued)
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t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
260 Chapter 11 Financial Preparation for Entrepreneurial Ventures
Table 11.9 North Central Scientific: Cash-Flow Budget (Continued)
North Central Scientific: Cash-Flow Worksheet for 2025
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Beg inning cash $122 $127 $134 $141 $127 $141 $1 43 $154 $170 $173 $ 181
$184
Add: receipts 360 369 407 396 500 476 496 502 470 506 529 568
Cash available $482 $496 $541 $537 $627 $6 17 $639 $656 $640 $679 $710 $752
Less: payments 355 362 400 411 485 481 485 485 467 498 527 521
Ending cash $127 $134 $141 $126 $142 $136 $154 $171 $173 $181 $ 183 $23 1
The Entrepreneurial Process
Characteristics of Credible Financials
Although every section of a business plan has its purpose,
the financial section bears the most scrutiny. A business's
financial statements are deserving of this attention for two
reasons: ( 11 the management team has significant d iscretion
in how the financi als are constructed and (21 potential
investors reviewing a business plan will be interested in the
financial viability of the company's strategy. Following are
characteristics that convincing financ ial statements have in
common:
• Holistic, An income statement tells only part of your
business's financial story; lhe balance sheet and cash-flow
statement are necessary to fill in the remaining details.
Investors and lenders are interested in every detail of your
company's financial health, so never exclude relevant
information, such as the amount of and the time line for
the cash you will need.
• Precise. Although investors will carefully analyze your
financial statements, helping them to pinpoint the important
details will ensure that they do not lose patience searching
through your plan. To aid the readers of your plan,
focus your sales and cost of goods sold numbers on major
product lines. In addition, pay attention to how you label
your line items to ensure that your readers will understand
what you are trying to communicate. For example,
"costs" are what you pay for what you are sell ing, while
"expenses," like payroll and rent, are overhead charges
you would have without sales.
• Realistic. When you ta ilor your figures to achieve
a predetermined revenue goal, you will have trouble
justi fying your numbers when questioned. Instead, build
your financials by starting with your costs and sales
in your local market to anchor your figures in real ity. In
addition, your projections beyond lhe first year should be
annual or quarterly.
• Simple. Significant volatility in your industry should
be noted, such as your business being impacted by
seasonal ity; however, bogging down your plan w ith
lengthy explanations regarding the probability of your
projections will serve only to confuse the reader. Including
clarifying statements, such as "most likely," and supporting
addendums, such as your break-even analysis, will be
sufficient
• Accurate. Investors know that your plan will change
repeatedly as you build your business; however, overlooking
simple expenses, such as interest payments, can cast
doubt on your attention to detail. Once you have your
financial statements completed, verifying the finer points,
such as the accuracy of the interest and tax rates, will
show that you are able to take your business from plan to
implementation.
Source: Adapted from Tim Berry, "The Facts about Financial Projections,•
Entepreneur, !W:::,y 2007, https :/ / www.entrepreneur.com/ sta rtinga business/
businessplans/businessplancoachtimberry/ article 1782 JO.html, accessed
June 2 1, 2008; Jim Casporie, "Realistic Projections That Attract Investors,"
Entrepreneur, April 2006, http:/ /www.entrepreneur.com/ money/
finoncing/raisingmoneycoochjimcasporie/ article 159516.html, accessed
June 2 1, 2008; and "5 Tips for Coming Up with Financial Projections for Your
Business Pion, Notional Federation of Independent Business, http://www.nfib
.com/business-resources/business·resourcesitem?cmsid = 55 331 ,accessed
Nc,y 29, 2012 .
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
•
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
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addi1ioo:ll coocm m :my time if sub$cqucm tight. tc~tk1ioos R--quitc ii.
11-4 Pro Forma Statements
LOl 1.4 Describe how proforma statements are prepared
The final step in the budget process is the preparation of
pro forma statements, which are projections of a firm's
financial position during a future period (pro form a income
statement) or on a future date (pro fonna balance sheet ).
In the normal accounting cycle, the income statement is
prepared first, follo,ved by the balance sheet. Similarly, in
the preparation of pro forma statements, the pro forma
income statement is follo,ved by the pro forma balance
sheet.
In the process of preparing the operating budget, the firm
already will have prepared the pro fonna income statements
for each month in the budget period. Each month presents
the anticipated income and expense for that particular
Table 11 .10 North Central Scientific: Pro Forma Statements
Pro Forma Statements 261
period, ,vhich is ,vhat the monthly proforma income statements
do. To prepare an annual pro forma income statement,
the firm combines all months of the year.
The process for preparing a pro forma balance sheet
is more complex: the last balance sheet prepared before
the budget period began, the opera ting budget, and
the cash-flo,v budget are needed to prepare it. Starting
,vith the begi1u1ing balance sheet balances, the projected
changes as depicted on the budgets are added to create
the projected balance sheet totals.
After preparing the pro forma balance sheet, the entrepreneur
should verify the accuracy of their ,vork ,vith the
application of the traditional accounting equation:
Assets = Liabilities + O,vner's Equity
If the equation is not in balance, the work should be
rechecked. Table 11.10 provides a brief account of the
process of preparing pro forma financial statements for
North Central Scientific.
At this point in the budget process, John Wheatman has the information necessary
to prepare pro forma financial
statements. The first set he has decided to prepare is the proforma income
statements. To do th is, John simply copies the
information from the operating budget (see the following comparative income
statements and compare with the operating
budget). The next set of proforma statements is the proforma balance sheets. In
order to compile these, John uses the
following information along with the operating budget and the cash-flow worksheet
he has prepared:
Cash. The ending cash balance for each month from the cash-flow worksheet.
Accounts receivable. 20 percent of the current month's sales plus 5 percent of the
preceding month's sales.
Inventory. The current month's ending inventory on the proforma income statements.
Prepaid rent. The $2,000 is expected to remain constant throughout the budget
period and is always paid one month in advance.
Building and equipment. No new acquisitions are expected in this area, so the
amount will remain constant.
Accumulated depreciation. Because no new acquisitions are anticipated, th is w ill
stay the same; all buildings and equipment
are fully depreciated.
Accounts payable. 25 percent of current purchases.
Capital. Prior month's capital balance plus current month's net income.
Cost of goods sold
Beginn ing $63 $74 $84 $79 $105 $95 $100 $101 $92 $103 $107 $116
inventory
Purchases 263 305 331 341 410 383 400 395 380 416 437 413
Cost of goods $326 $379 $415 $420 $515 $478 $500 $496 $472 $519 $544 $529
available
Ending 74 85 79 105 95 100 lQl 92 102 107 ill 66
inventory
Cost of goods $252 $294 $336 $315 $420 $378 $399 $403 $370 $412 $428 $462
sold
Gross profit $63 $74 $84 $79 $105 $95 $100 $101 $92 $103 $108 $116
(Continued)
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262 Chapter 11 Financial Preparation for Entrepreneurial Ventures
Table 11 .10 North Central Scientific: Pro Forma Statements (Continued)
Operating expenses
Rent $2 $2 $2 $2 $2 $2 $2 $2 $2 $2 $2 $2
Payroll 32 37 42 39 53 47 50 50 46 51 54 58
Utilities 5 5 5 5 5 5 5 5 5 5 5 5
Taxes 3 4 4 4 5 5 5 5 5 5 5 6
Supplies 16 18 21 20 26 24 25 25 23 26 27 29
Repairs 2 2 2 2 2 2 2 2 2 2 2 2
Total expenses $60 $68 $76 $72 $93 $85 $89 $89 $83 $91 $95 $102
Net profit $3 $6 $8 $7 $12 $10 $11 $12 $9 $12 $12 $14
North Central Scientific: Comparative Pro Forma Balance Sheet
Jan. Feb. Mar. Apr.
Assets
Cash $127 $134 $141 $126
Accounts 91 89 102 100
receivable
Inventory 74 84 79 105
Prepaid rent 2 2 2 2
Building and 350 350 350 350
equipment
Less: -350 -350 -350 -350
accumulated
depreciation
Total assets $294 $309 $324 $333
Liabilities
Accounts $66 $76 $83 $85
payable
Capital 228 234 242 249
Total liabilities $294 $310 $325 $334
and equ ity
11 -5 Capital Budgeting
LOl 1.5 Explain how capital budgeting can be used in the
decision-making process
May
$142
125
95
2
350
-350
$364
$102
261
$363
Entrepreneurs may be required to tnake several investtnent
decisions in the process of managing their firms. The
impact of some of these decisions \>vill be felt primarily
\>Vithin one year. Returns on other investments, ho\>vever,
Jun. Jul. Aug. Sep. Oct. Nov. Dec.
$136 $154 $171 $173 $181 $183 $231
121 123 126 117 126 133 142
100 101 92 103 107 116 66
2222222
350 350 350 350 350 350 350
- 350 -350 -350 - 350 -350 -350 -350
$359 $380 $391 $395 $416 $434 $441
$96 $100 $99 $95 $104 $109 $103
270 280 292 300 312 326 339
$366 $380 $391 $395 $416 $435 $442
are expected to extend beyond one year. Investments that
fit into this second category are conunonly referred to as
capital investments or capital expenditures. A technique
the entrepreneur can use to help plan for capital expenditures
is capital budgeting.9
The first step in capital budgeting is to identify the
cash flo\>vs and their timing. The inflows-or returns as
they are commonly called- are equal to net operating
income before deduction of payments to the financing
sources but after the deduction of applicable taxes and
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\.Vith depreciation added back, as represented by the
follo\.ving formula:
Expected Returns = X(l - 2T)l Depreciation
where Xis equal to the net operating income and T
is defined as the appropriate tax rate. An illustration
follo\.vs:
John Whea tman is faced with a dilemma. He has
nvo mutually exclusive projects, both of \.vhich
require an outlay of $1,000. The problem is that he
can afford only one of the projects. After discussing
the problem \.Vith his accountant, John discovers
that the first step he needs to take is to determine the
expected return on each project. In order to gather
this information, he has studied the probable effect
on the store's operations and has developed the data
sho\.vn in Table 11.11.
Table 11.11 provides a good illustration of the
expected returns for John Wheatman's t\.vo projects.
At this point, ho\.vever, the cash inflo\.vs of each year
are shown \.Vithout consideration of the time value of
money. The cash outflo"v is used to refer to the initial
cash outlay that must be made in the beginning (the purchase
price). When gathering data to estimate the cash
flo\.vs over the life of a project, it is imperative to obtain
Capital Budgeting 263
reliable estimates of the savings and expenses associated
\.Vith the project.
The principal objective of capital budgeting is to
maximize the value of the firm. It is designed to ans\.ver
t\.vo basic questions:
1. Which of several mutually exclusive projects
should be selected? (Mutually exclusive projects
are alternative methods of doing the same job. If
one rnethod is chosen, the other methods \.vill not
be required.)
2. Ho"v many projects, in total, should be selected ?10
The three most comrnon methods used in capital budgeting
are the payback method, the net present value
(NPV) method, and the internal rate of return (IRR)
rnethod. Each has certain ad van cages and disadvantages.
In this section, the same proposal is used with each
rnethod to more clearly illustrate these three techniques.
11-Sa Payback Method
One of the easiest capital-budgeting techniques to
understand is the payback method or, as it is sometimes
called, the payback period. In this method, the length of
time required to "pay back" the original investment is
the determining criterion. The entrepreneur "vill select
Table 11.11 North Central Scientific: Expected Return Worksheet
Proposal A
$500 $0.60 $300 $200 $500
2 333 0.60 200 200 400
3 167 0.60 100 200 300
4 -300 0.60 -180 200 20
5 -317 0.60 -190 200 10
Proposal B
Year ( 1 .=. T)(T = .40) X(l - T) Depreciation X(l - T) + Depreciation
-$167 $0.60 -$100 $200 $100
2 0 0.60 100 200 200
3 167 0.60 100 200 300
4 333 0.60 200 200 400
5 500 0.60 300 200 500
X = Anticipated change in net income
T = Applicable tax rate (0.40)
Depreciation = Depreciation (computed on a stra ight~ ine bas is) Cost/Life 1,000/5
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264 Chapter 11 Fina ncial Preparation for Entrepreneurial Ventures
a maximum time frame for the payback period. Any
project that requires a longer period ,vill be rejected, and
projects that fall ,vithin the time frame will be accepted.
Follo,ving is an example of the payback method used by
North Central Scientific:
John Wheatman has a decision to make. He would
like to purchase a ne,v cash register for his store but is
unsure about which of c-vo proposals to accept. Each
machine costs $1,000. An analysis of the projected
returns reveals the follo,ving information:
Year Proposal A Proposal B
1 $500 $100
2 400 200
3 300 300
4 20 400
5 1 1 500
After careful consideration, John decides to use
the payback method with a cutoff period of three
years. In this case, he discovers that Proposal A would
pay back his investment in 28 rnonths; $900 of the
original investment will be paid back in the first c-vo
years and the last $100 in the third year. Proposal
B, on the other hand, ,vill require four years for its
payback. Using this criterion, John chooses Proposal
A and rejects Proposal B.
One of the problems \>Vith the payback method is
that it ignores cash flows beyond the payback period.
Thus, it is possible for the \>Vrong decision to be made.
Nevertheless, many companies, particularly entrepreneurial
firrns, continue to use this method for several
reasons: ( 1) it is very simple to use in comparison to
other methods, (2) projects \>Vith a faster payback period
normally have more favorable short-terrn effects on
earnings, and (3) if a firm is short on cash, it rnay prefer
to use the payback method because it provides a faster
return of funds.
11-Sb Net Present Value
The net present value (NPV) method is a technique
that helps to minimize some of the shortcomings of the
payback rnethod by recognizing the fu ture cash flo,vs
beyond the payback period. The concept ,vorks on the
premise that a dollar today is worth rnore than a dollar
in the future-how much more depends on the applicable
cost of capital for the firm. The cost of capital is
the rate used to adjust future cash flows to determine
their value in present period terms. This procedure is
referred to as discounting the future cash flows, and the
discounted cash value is determined by the present value
of the cash flow.
To use this approach, the entrepreneur must find
the present value of the expected net cash flo\>vs of
the investment, discounted at the appropriate cost of
capital, and subtract from it the initial cost outlay of the
project. The result is the NPV of the proposed project.
Many financial accounting and finance textbooks
include tables (called present value tables) that list the
appropriate discount factors to multiply by the future
cash flo\>v to determine the present value. In addition,
financial calculators are available that \>vill compute
the present value given the cost of capital, future cash
flo"v, and the year of the cash flo,v. Finally, given the
appropriate data, electronic spreadsheet programs can
be programmed to determine the present value. After
the NPV has been calculated for all of the proposals,
the entrepreneur can select the project ,vith the highest
NPV. Follo,ving is an example of the NPV method used
by North Central Scientific:
John Wheatman is not very satisfied \>Vith the
results he has obtained from the payback method,
so he has decided to use the NPV method to see
,vhat result it would produce. After conferring with
his accountant, John learns that the cost of capital
for his firm is 11 percent. He then prepares the
follo,ving tables:
Because Proposal B has the higher NPV, John selects
Proposal B and rejects Proposal A.
11-Sc Internal Rate of Return
The internal rate of return (IRR) method is similar
to the NPV method in that the fu ture cash flo\>vs are
discounted. Ho,vever, they are discounted at a rate that
makes the NPV of the project equal to zero. This rate is
referred to as the internal rate of return of the project.
The project \>Vith the highest IRR is then selected. Thus,
a project that \>Vould be selected under the NPV rnethod
also ,vould be selected under the IRR method.
One of the major dra\>vbacks to the use of the IRR
method is the difficulty that can be encountered ,vhen
using the technique. Using the NPV rnethod, it is quite
simple to look up the appropriate discount fac tors in
the present value tables. When using the IRR concept,
ho\>vever, the entrepreneur must begin ,vith a NPV of
zero and \>York back\>vard through the tables. What this
means, essentially, is that the entrepreneur must estimate
the approximate rate and eventually try to track the
actual IRR for the project. Although this may not seem
too difficult for projects ,vith even cash flo,vs (i.e., cash
flo\>vs that are fairly equal over the business periods),
projects ,vith uneven cash flo\>vs (fluctuating periods
of cash inflo,v and cash outflo\>v) can be a nightmare.
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
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addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Capital Budgeting 265
Proposal A
1 $500 0.9091 $454.55
2 400 0.8264 330.56
3 300 0.7513 225.39
4 20 0.6830 13.66
5 1 1 0.6209 6.21
$1,030.37
Less: initial outlay -1 ,000.00
Net present value $30.37
Proposal B
1 $100
2 200
3 300
4 400
5 500
Less: initial outlay
Net present value
Unfortunately, reality dictates that most projects will
probably have uneven cash flo\>vs. Fortunately, electronic
calculators and spreadsheet programs are availa ble
that can determine the actual IRR given the cash flo\>vs,
initial cash outlays, and appropriate cash-flo"v periods.
Follo\>ving is an example of the IRR method used by
North Central Scientific:
Having obtained different results from the payback
period and the NPV method, John Wheatman is confused
about \>vhich alternative to select. To alleviate
this confusion, he has chosen to use the IRR to evaluate
the t\>vo proposals, and he has decided that the
project \>Vith the higher IRR will be selected (after all,
it \>vould \>Vin t\>vo out of three times). Accordingly, he
has prepared the follo\>ving tables with the help of his
calculator:
Proposal B is selected because it has the higher
IRR. This conclusion supports the statement that
the project \>Vith the higher NPV \>Vill also have the
higher IRR.
0.9091 $90.91
0.8264 165.28
0.7513 225.39
0.6830 273.20
0.6209 311.45
$1,065.23
-1 ,000.00
$65.23
The North Central Scientific examples illustrate the
use of a tl three capital-budgeting methods. Al though
Proposal A \>Vas chosen by the first method (payback),
Proposal B surfaced as the better proposal \>vhen
the other t\>vo methods (NPV and IRR) \>Vere used.
It is important for entrepreneurs to understand all
three methods and to use the one that best fits their
needs. If payback had been John Wheatman's only
consideration, then Proposal A \>Vould have been
selected. When future cash flo\>vs beyond payback
are to be considered, the NPV and IRR 1nethods \>vill
determine the best proposal.
The budgeting concepts discussed so far are
extremely po\>verful planning tools. But ho\>v can entrepreneurs
monitor their progress during the budget
period? Ho"v can they use the information accumulated
during the course of the business to help plan
for future periods? Can this information be used for
pricing decisions? The ans\>ver to the third question
is "yes," and the other questions are ans\>vered in the
following sections.
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266 Chapter 11 Fina ncial Preparation for Entrepreneurial Ventures
Proposal A (11.83% IRR)
Year Cash Flow Discount Factor Present Value
$500 0.8942 $447.11
2 400 0.7996 319 .84
3 300 0.7151 214.53
4 20 0.6394 12.80
5 1 1 0.5718 5.73
$1,000.00
Less: initial outlay - 1,000.00
Net present value $0.00
Proposal B (12.01% IRR)
Year Cash Flow
$100
2 200
3 300
4 400
5 500
Less: initial outlay
Net present value
11-6 Break-Even Analysis
LO 11.6 Illustrate how to use break-even analysis
In today's competitive marketplace, entrepreneurs
need relevant, timely, and accurate information that
\.vill enable them to price their products and services
competitively and still be able to earn a fair profit.
Break-even analysis supplies this information.
11-6a Break-Even Point Computation
Break-even analysis is a technique commonly used to
assess expected product profitability. It helps determine
ho\.v many uni ts must be sold to break even at a
particular selling price.
Contribution Margin Approach
A common approach to break-even analysis is
the contribution margin approach. Contribution
Discount Factor Present Value
0.8928 $89.27
0.7971 159 .42
0.7117 213 .51
0.6354 254.15
0.5673 283.65
$1,000.00
- 1,000.00
$0.00
margin is the difference benveen the selling price
and the variable cost per unit. It is the amount per
unit that is contributed to covering all other costs. 11
Because the break-even point occurs \.vhere income
equals expenses, the contribution margin approach
formula is
0 = (SP - VC) S - FC or FC = (SP - VC)S
"vhere
SP = unit selling price
VC = variable costs per unit
S = sales in units
FC = fixed cost
This 1nodel also can be used for profit planning by
including the desired profit as part of the fixed cost.
Graphic Approach
Another approach to break-even analysis taken by entrepreneurial
firms is the graphic approach. To use this
approach, the entrepreneur needs to graph at least t\.vo
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numbers: total revenue and total costs. The intersection
of these n.vo lines (i.e., \.vhere total revenues are equal to
the total costs) is the firm's break-even point. T\.vo additional
costs- variable costs and fixed costs- also 1nay
be plotted. Doing so enables the entrepreneur to visualize
the various relationships in the firm's cost structure.
Handling Questionable Costs
Although the first t\.vo approaches are adequate for situations
in "vhich costs can be broken down into fixed
and variable components, so1ne firtns have expenses
that are difficult to assign. For example, are repairs
and maintenance expenses fixed or variable expenses?
Can firms that face this type of problem use break-even
analysis for profit planning? The ans\.ver is "yes" thanks
to a new technique designed specifically for entrepreneurial
firms. This technique calculates break-even
points under alternative assumptions of fixed or variable
costs to see if a product's profitability is sensitive to
cost behavior. The decision rules for this concept are as
follo\.VS: if expected sales exceed the higher break-even
point, then the product should be profitable regardless
of the other break-even point; if expected sales do not
exceed the lo\.ver break-even point, then the product
should be unprofitable. Only if expected sales are
between the nvo break-even points is further investigation
of the questionable cost's behavior needed.12
The concept \.Yorks by substituting the cost in
question (QC) first as a fixed cost and then as a
variable cost. The break-even formulas presented
earlier \.Vould have to be modified to detertnine the
break-even levels under the two assu1nptions. For
the fixed-cost assumption, the entrepreneur \.vould use
the follo\.ving equation:
0 = (SP - VC) S - FC - QC
To calculate the break-even point assuming that QC is
variable, the follo\.ving equation \.Vould be used:
0 = [SP - VC - (QC/U)] S - FC
U is the number of units for \.vhich the questionable cost
normally \.vould be appropriate. What the entrepreneur
is determining is the appropriate unit cost that should be
used if the cost is a variable cost. Follo\.ving is an example
of ho\.v an entrepreneur could use the technique:
Tim Goodman, president of Dynamic Manufacturinga
small manufacturer of round \.vidgets- has decided
to use break-even analysis as a profit-planning tool
for his company. He believes that using this technique
\.viii enable his firm to compete more effectively in
the marketplace. From an analysis of the opera ting
costs, Tim has determined that the variable cost
per unit is $9, \.vhile fixed costs are estimated to be
$1,200 per month. The anticipated selling price per
unit is $15. He also has discovered that he is unable
to classify one cost as either variable or fixed. It is
a $200 repair and maintenance expense allocation.
Ratio Analysis 267
This $200 is appropriate for an activity level of 400
units; therefore, if the cost were variable, it \.Vould be
$.50 per unit ($200/400). Finally, sales are projected
to be 400 units during the next budget period.
The first step in this process is to determine the
break-even point assuming that the cost in question
is fixed. Consequently, Ti1n \.Vould use the follo\.ving
equation:
0 = (SC - VC)S - FC - QC
= (15 - 9)S - 1,200 - 200
= 6S - 1,400
1,400 = 6S
234 = S
Figure 11.2 provides a graphic illustration of the results.
The final quantity was rounded up to the next unit
because a business nonnally will not sell part of a unit.
The next step in the process is to calculate the
break-even point assuming that the cost in question is a
variable cost. Tim would use the follo\.ving equation to
ascertain the second break-even point:
0 = [SC - VC - (QC/U)]S - FC
= [15 - 9 - (200/400)]S - 1,200
= (6 - .50)S - 1,200
1,200 = 5.50S
219 = S
Figure 11.3 presents a graphic illustration of the
results.
No\.v that the t\.VO possible break-even points have
been established, Tim must compare them to his projected
sales. The variable-cost sales of 400 units are greater than
the larger break-even point of 234 units. Therefore, the
product is assumed to be profitable regardless of the cost
behavior of the repair and maintenance expense. It does
not matter \.vhether the cost is variable or fixed; the firm
still \.viii be profitable.
11-7 Ratio Analysis
LOl 1.7 Describe ratio analysis
Financial statements report on both a firm's position at a
point in time and its operations during some past period.
Ho\.vever, the real value of financial sta cements lies in
the fact that they can be used to help predict the finn's
earnings and dividends. From an investor's standpoint,
predicting the future is what financial state1nent analysis
is all about; from an entrepreneur's standpoint, financial
statement analysis is useful both as a \.vay to anticipate
conditions and, more important, as a starting point for
planning actions that will influence the course of events.
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268 Chapter 11 Financial Preparation for Entrepreneurial Ventures
Figure 11.2 Dynamic Manufacturing: Fixed-Cost Assumption
Projected
Costs/Profits
($000}
8
7
6
5
4
3 --- 2
1
0
-
-------- --
----
-- ---
Fixed
100 200 300
Unit Sales
400
Figure 11.3 Dynamic Manufacturing: Variable-Cost Assumption
Projected
Costs/Profits
($000}
8
7
6
-------
500
Total Cost ___ _ - · -- 5
4
3 ------- -- 2
1
0
100 200
----
300
Unit Sales
----
-- ----
Fixed
400 500
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addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Ratio Analysis 269
An analysis of the firm's ratios is generally the key
step in a financial analysis. The ratios are designed to
sho\.v relationships among financial statement accounts.
For example, Firm A might have a debt of $6,250,000
and interest charges of $520,000, \.vhereas Firm B
might have a debt of $62,800,000 and interest charges
of $5,840,000. Which company is stronger? The true
burden of these debts and the companies' ability to
repay them can be ascertained (1) by comparing each
firm's debt to its assets and (2) by comparing the interest
each must pay to the income it has available for interest
payment. Such comparisons are made by ratio analysis. 13
statements. The formulas for calculating each ratio are
given along \.Vith explanations of \.vhat each ratio 1neans
for business decision making using a dollars-and-cents
approach. Different ratios are important to owners,
managers, and creditors for different reasons. As the
table demonstrates, entrepreneurs can use ratios to
gauge the advisability of various business decisions
so that they kno\.v, for example, when it makes sense to
borrow and if they have the capacity to meet short-term
debt obligations. Ratios can be focused on the balance
sheet, \.vhere issues of liquidity (e.g., current, quick, or
cash ratios) as \.vell as issues of stability (e.g., debt to
\.Vorth) can be measured, or on the income statement,
\.vhere margins for profitability can be examined. There
are also efficiency ratios that compute general returns
on assets and on investments in addition to specific
points, such as inventory or accounts receivable
turnover. These ratios provide the 1nost effective tools
LOl 1.8 Illustrate the use of some of the important ratio
measures and their meanings
Table 11.12 displays a series of financial ratios useful
for understanding the relationships among financial
Ratio Name How to Calculate What It Means in Dollars and Cents
Balance Sheet Ratios
Current Current Assets Measures solvency: the number of dollars in current assets
for every
Current Liabilities $1 in current liabilities
Example: A current ratio of 1.76 means that for every $1 of current
liabilities, the firm has $1.76 in current assets with which to pay it.
Quick Cash + Accounts Receivable Measures liquidity: the number of dollars in cash
and accounts
Current Liabilities receivable for each $1 in current liabilities
Example: A quick ratio of 1. 14 means that for every $1 of current
liabilities, the firm has $1. 14 in cash and accounts receivable
with which to pay it.
Cash Cash Measures liquidity more strictly: the number of dollars in cash for
Current Liabilities every $1 in current liabilities.
Example: A cash ratio of 0.17 means that for every $1 of current
liabilities, the firm has $0.17 in cash with which to pay ii.
Debt-to-worth Total Liabilities Measures financial risk: the number of dollars of debt
owed for
Net Worth every $1 in net worth
Example: A debt-to-worth ratio of 1.05 means that for every $1 of
net worth the owners have invested, the firm owes $ 1 .05 of debt
to its creditors.
Income Statement Ratios
Gross margin Gross Marg in Measures profitability at the gross profit level: the
number of dollars
Sales of gross margin produced for every $1 of sales
Example: A gross margin ratio of 34.4% means that for every $1 of
sales, the firm produces 34.4¢ of gross margin.
Net margin Net Profit before Tax Measures profitability at the net profit level: the
number of dollars of
Sales net profit produced for every $1 of sales
Example: A net margin ratio of 2.9% means that for every $1 of
sales, the firm produces 2. 9¢ of net margin.
(Continued)
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270 Chapter 11 Fina ncial Preparation for Entrepreneurial Ventures
Table 11.12 Financial Ratios (Continued)
Overall Efficiency Ratios
Sales-lo-assets Sales Measures the efficiency of total assets in generating sales:
the
Total Assets number of dollars in sales produced for every $1 invested in total
assets
Example: A sales-lo-assets rat io of 2.35 means that for every $1
invested in total assets, the firm generates $2.35 in sales.
Return on assets Net Profit before Tax Measures the efficiency of total assets in
generating net profit: the
Total Assets number of dollars in net profit produced for every $1 invested in
Iota I assets
Example: A return on assets rat io of 7.1 % means that for every $1
invested in assets, the firm is generating 7.1 ¢ in net profit
before tax.
Return on investment Net Profit before Tax Measures the efficiency of net worth in
generating net profit: the
Net Worth number of dollars in net profit produced for every $1 invested in
net worth
Example: A return on investment ratio of 16. l % means that for
every $1 invested in net worth, the firm is generating 16. 1 ¢ in
net profit before tax.
Specific Efficiency Ratios
Inventory turnover Cost of Goods Sold Measures the rate at wh ich inventory is
being used on an annual
Inventory basis
Example: An inventory turnover ratio of 9 .81 means that the
average dollar volume of inventory is used up almost 10 times
during the fiscal year.
Inventory turn-days 360 Converts the inventory turnover rat io into an average "days
Inventory Turnover inventory on hand" figure
Example: An inventory turn-days ratio of 37 means that the firm
keeps an average of 37 days of inventory on hand throughout
the year.
Accounts receivable Sales Measures the rate at wh ich accounts receivable are
being collected
turnover Accounts Receivable on an annual basis
Example: An accounts receivable turnover ratio of 8.00 means that
the average dollar volume of accounts receivable is collected
eight times during the year.
Average collection 360 Converts the accounts receivable turnover ratio into the
average
period Accounts Receivable Turnover number of days the firm must wait for its
accounts receivable to
be paid
Example: An average collection period ratio of 45 means that it
takes the firm 45 days on average to collect its receivables.
Accounts payable Cost of Goods Sold Measures the rate at wh ich accounts
payable are being paid on an
turnover Accounts Payable annual basis
Example: An accounts payable turnover ratio of 12.04 means that
the average dollar volume of accounts payable is paid about
12 times during the year.
Average payment 360 Converts the accounts payable turnover ratio into the average
period Accounts Payable Turnover number of days a firm takes to pay its accounts
payable
Example: An accounts payable turnover ratio of 30 means that ii
takes the firm 30 days on average to pay its bills.
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I
I
Ratio Analysis 271
Diversity Entrepreneurship
Systemic Barriers to Minority Entrepreneurship Funding
For minority entrepreneurs across racial, ethnic, and gender
dimensions, the entrepreneurship career path is certainly not an
easy one. While every entrepreneur faces great challenges,
numbers show significant disparities in ownership, funding, and
representation of minorities in the entrepreneurship space. W ith
regard to ownership, people of color, who represent 32 percent
of the U S. population, represent only 18 percent of business
owners. These numbers worsened during the COVID-19
pandemic, when, from February to April 2020, the number
of Black-owned small businesses fell 4 1 percent, Latinx ownership
by 32 percent, and Asian ownership by 26 percent,
whereas White-owned businesses slid by just 17 percent. The
numbers do not look much better when ii comes to funding.
Less than 2 percent of total venture capital fund ing went lo
womerrfounded start-ups in 2018 (only O 2 percent to women
of color) Women overall lack equal control and access to
funding power from venture capital funds to private equity and
other funding. In fact, only l . 3 percent of funding is controlled
by women-owned firms. These numbers are similar across other
underrepresented groups.
This begs the question as to what causes such great disparities
in ownership, funding, and representation. It is not
that minority ind ividuals lack the desire lo enter an entrepreneurial
path. Nor is ii that they do not work as hard or that
they otherwise lack some important trail or skill. We must recognize
that minority entrepreneurs often face great system ic
barriers that prevent them from pursuing an entrepreneurial
venture. These systemic barriers are practices, procedures, or
pol icies that have developed throughout the years and result
in minority entrepreneurs receiving unequal access to an entrepreneurial
career path. To have a better understanding of the
challenges experienced by minority entrepreneurs, we need to
have a look at some of the most significant systemic barriers
they face.
It is not surprising that the most prominent barrier is
access to funding. Adequate financing is essential for starling
and running a business, making it one of the key determinants
as to whether a venture w ill succeed or fail. Besides
being largely excluded from the venture capital and private
equity world, minority entrepreneurs tend to have weaker
banking relationships and exper ience worse outcomes
on cred it applications, which makes them much more rel iant
on personal funds. A McKinsey & Company report
found that just 29 percent of Black small-business owners
are approved for bank loans in comparison to 60 percent
of White entrepreneurs. Additionally, the M inority Business
Development Agency (MBDA) found tha t, over the past 20
years, minority-owned businesses received an average of
$3,379 in new equity investments, less than half the $7,858
of White-owned businesses. The MBDA, the only federal
agency designed to promote growth and competitiveness
of minority-owned businesses, acknowledges that there
has been no progress in the legislation impacting minorityowned
businesses since the 1960s, all while the business as
a segment has evolved tremendously around the world.
While funding is an important barrier, the socioeconomic
status of an entrepreneur plays a significant role as well. One
study in Israel found that the number one factor for success
of an entrepreneur was the wealth of the founder's parents
that enabled the entrepreneur to receive a better education,
develop a better network, have better access to mentors, and
have more opportunities for a prestigious career. On the other
hand, minority entrepreneurs might have to prioritize paying off
student loans or supporting other members of the family rather
than pursuing entrepreneurial dreams. We have all heard great
success stories of Amazon, Facebook, or M icrosoft. However,
what these stories do not tell us is the amount of privilege that
these entrepreneurs had in starting their businesses. Jeff Bezos
received a substantial amount of money from his parents; Mark
Zuckerberg reportedly took a loan from his father Relying on
family for capital is often not an option reserved for minority
groups.
Entrepreneursh ip is a d ifficult career path on its own.
W ith systemic barriers, entrepreneurship becomes an unthinkable
struggle, one that underrepresented groups should not
have to endure. II is important to understand the challenges
that marginalized entrepreneurs face and hear from some
who overcame those challenges. We need to talk about systemic
barriers to increase our understanding, to build all ies,
and to build an ecosystem necessary to break these barriers.
The burden should not lie solely w ith those who unfairly
struggle with this issue; everybody needs to be a part of the
solution.
Source: Adopted from Jeff Koroub, ' Overcoming Systemic Barriers to
Minority Entrepreneurship Requires Brood Effort,' Michigan News, Morch
2021, https:// news.umich .edu/ overcoming-systemic-borriers·to-minority·
entrepreneurship-requires-brood-effort; Leslie Hunter-Gadsden, ' The State
of Minority Entrepreneurship in America,' Next Avenue, November 202 1,
https :/ /www.nextovenue.org/ mi nority-entrepreneursh ip-i n-omerico; o nd
Tom Ouoodmon, Evon Williams, Rick Wade, Thomas M . Sullivan, and
Latricia Boone, ' 4 Ways to Improve Access to Capitol for MinorityOwned
Businesses,' U. 5. Chamber of Commerce, December 2021 ,
https :/ /www.uschomber.com/ on-demo nd/ diversity-and-inclusion/
how-to-improve-occess➔o-copito I-for-minority-owned-businesses.
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272 Chapter 11 Fina ncial Preparation for Entrepreneurial Ventures
for monitoring a venture's performance over time;
ho\>vever, it should be kept in mind that effective ratio
analysis must be done in comparison \>Vith firms within
the same industry in order to gain the broadest possible
insights.
Ratio analysis can be applied from t\>vo directions.
Vertical analysis is the application of ratio analysis to
Summary
Three principal financial statements are important to
entrepreneurs: the balance sheet, the income statement,
and the cash-flow statement. The budgeting process
facili tates financial sta tement preparation. Some key
budgets that entrepreneurs should prepare are the
opera ting budget, the cash-flo"v budget, and the capital
budget. The operating budget typically begins \>Vith a sales
forecast, followed by an estimation of operating expenses.
A cash-flo\>v budget provides an overvie\>v of the inflo\>vs
and outflo\>vs of cash during a specific period. Pro forma
financial statements then are prepared as projections of
the firm's financial position over a future period (pro
forma income statement) or on a fu ture date (proforma
balance sheet). The operating and cash-flo"v budgets
often are used to prepare these proforma statements.
The capital budget is used to help entrepreneurs make
investment decisions. The three most common methods
of capital budgeting are the payback period, the NPV
method, and the IRR method.
Another cornmonly used decision-making tool is
break-even analysis, \>vhich tells ho\>v many units must
be sold to break even at a particular selling price. It is
possible to use this analysis even \>vhen fixed or variable
costs can only be estimated. The last part of the chapter
examined ratio analysis, "vhich can be a helpful analytical
tool for entrepreneurs. Ratios are designed to sho"v
relationships bet\>veen financial statement accounts.
Key Terms
accounts payable
accounts receivable
adrninistrative
expenses
balance sheet
break-even analysis
budget
capital budgeting
cash
cash-flow budget
cash-flow statement
contribution margin
approach
expenses
financial expense
fixed assets
fixed cost
horizontal analysis
income statement
internal rate of return
(IRR) method
inventory
one set of financial sta tements; an analysis "up and
do\>vn" the statements is done to find signs of strengths
and \>veaknesses. Horizontal analysis looks at financial
statements and ratios over time. In horizontal analysis,
the trends are critical: Are the numbers increasing or
decreasing? Are particular components of the company's
financial position getting better or worse? 14
liabilities
loan payable
long-tenn liabilities
mixed costs
net income
net present value (NPV)
method
note payable
operating budget
operating expenses
o\>vner's equity
payback method
prepaid expenses
pro fonna staternents
ratios
retained earnings
revenues
sales forecast
short-term liabilities
(current liabilities)
sirnple linear regression
taxes payable
variable cost
vertical analysis
Review and Discussion
Questions
1. What is the importance of financial information for
entrepreneurs? Briefly describe the key components.
2. What are the benefits of the budgeting process?
3. How is the statistical forecasting technique of simple
linear regression used in making a sales forecast?
4. Describe how an operating budget is constructed.
5. Describe how a cash-flow budget is constructed.
6. What are pro forma statements? How are they
constructed? Be complete in your answer.
7. Describe how a capital budget is constructed.
8. One of the most popular capital-budgeting techniques
is the payback method. How does this method work?
Give an example.
9. Describe the NPV method. When would an
entrepreneur use this method? Why?
10. Describe the IRR method. When would an
entrepreneur use this method? Why?
11. When would an entrepreneur be interested in
break-even analysis?
12. If an entrepreneur wants to use break-even analysis
but has trouble assigning some costs as either fixed
or variable, can break-even analysis still be used?
Explain.
13. What is ra tio analysis? How is horizontal analysis
different from vertical analysis?
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Notes
1. See Richard G. P. McMahon and Leslie G. Davies,
"Financial Reporting and Analysis Practices in Small
Enterprises: Their Association with Growth Rate and
Financial Performance," Journal of Small Business
Management 32, no. 1 (January 1994}: 9-17, and
Jan Brinckmann, Soeren Salomo, and Hans Georg
Gemuenden, "Financial Management Competence of
Founding Teams and Growth of New Technology-Based
Firms," Entrepreneurship Theory and Practice 35, no. 2
(2011): 217-43.
2. Kenneth M. Macur and Lyal Gustafson, "Financial
Statements as a Management Tool," Small Business
Forum, Fall 1992, 23- 34; see also Robert Dove, "Financial
Statements," Accountancy, January 2000, 7, and James
M. Whalen, Stephen P. Baginski, and Mark Bradshaw,
Financial Reporting, Financial Statement Analysis, and
Valuation, 9th ed. (Mason, OH: South-Western/Cengage,
2018).
3. See Carl S. Warren, James M. Reeve, and Jonathan
Duchac, Accounting, 27th ed. (Mason, OH:
South-Western/Cengage, 2018).
4. See Jacqueline Emigh, "Balance Sheet," Computer\Y/orld,
November 15, 1999, 86, and Estefanfa Palazuelos, Angel
Herrero Crespo, and Javier Montoya de! Corte, "Accounting
Information Quality and Trust as Determinants of Credit
Granting to SMEs: The Role of External Audit," Small
Business Economics 51, no. 4 (2018}: 861-77.
5. See John Capel, "Balancing the Books," Supply
Management, November 1999, 94; Eugene F. Brigham and
Joel E Houston, Fundamentals of Financial Management,
15th ed. (Mason, OH: South-Western/Cengage, 2019);
and Ricardo Malagueno, Ernesto Lopez-Valeiras, and
Jacobo Gomez-Conde, "Balanced Scorecard in SMEs:
Effects on Innovation and Financial Performance," Small
Business Economics 51, no. 1 (2018): 221-44.
6. Neil C. Churchill, "Budget Choice: Planning vs. Control,"
Harvard Business Review, July/August 1984, 151; James
M. Whalen, Jefferson P. Jones, and Donald P. Pagach,
Intermediate Accounting: Reporting and Analysis, 2nd ed.
(Mason, OH: South-Western/Cengage, 2017).
Notes 273
7. Whalen et al., Financial Reporting, Financial Statement
Analysis, and Valuation.
8. Fred Waedt, "Understanding Cash Flow Statements, or
What You Need to Know before You Ask for a Loan,"
Small Business Forum, Spring 1995, 42-51; see also
Ram Mudambi and Monica Zimmerman Treichel,
"Cash Crisis in Newly Public Internet-Based Firms:
An Empirical Analysis," Journal of Business Venturing
20, no. 4 (July 2005): 543- 71; Claire Bough , "How to
Conduct a Business Financial Health Check This Year,"
Rising Tide, February 4, 2022, https://www.honeybook
.com/risingtide/financial-health-check; and "Analyze
Cash Flow the Easy Way," Forbes, November 28, 2012.
https://www.forbes.com/si tes/investoped ia/2012/11/2 8
/analyze-cash-flow-the-easy-way/?sh =3517c301 le62.
9. See J. Chris Leach and Ronald W. Melich er, Entrepreneurial
Finance, 4th ed. (Mason, OH: South-Western/Cengage,
2012), and Brigham and Houston, Fundamentals of
Financial Management.
10. See Leach and Melicher, Entrepreneurial Finance, and
Brigham and Houston, Fundamentals of Financial
Management.
11. Warren et al., Accounting.
12. Kenneth P. Sinclair and James A. Talbott Jr., "Using
Break-Even Analys is When Cost Behavior Is Unknown,"
Management Accounting, July 1986, 53; see also Wha len
et al., Financial Reporting, Financial Statement Analysis,
and Valuation.
13. See Brigham and Houston, Fundamentals of Financial
Management.
14. Macur and Gustafson, "Financial St a tements as a
Management Tool"; see also Robert Hitchings, "Ratio
Analysis as a Tool in Credit Assessment," Commercial
Lending Review, Summer 1999, 45-49. For an interesting
discussion, see Patricia Lee Huff, "Should You Consider
Company Size When Making Ratio Comparisons?,"
National Public Accountant, February/March 2000,
8- 12, and Janet Berry-Johnson, "10 Financial Ratios
Every Small Business Owner Should Know, Bench,
July 15, 2022, https://bench .co/blog/accounting/most
-importan t-financia l-ratios; see also Whalen et al.,
Financial Reporting, Financial Statement Analysis, and
Valuation.
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Developing an Effective Business Plan
Learning Objectives
12.1. List the planning pitfalls that plague many new ventures
12.2. Explain the business model canvas as an initial step in the planning process
12.J. Describe a business plan and its value
12A. Describe the benefits of a business plan
12.s. Explain the different viewpoints of those who read a business plan
12.6. Outline the importance of coordinating the business plan segments
12.7. Describe the key recommendations by venture capital experts regarding a plan
12.a. Highlight a complete outline of an effective business plan
12.9. Describe some helpful hints for writing an effective business plan
12.10. Explain the key points in the presentation of a business plan-the pitch
Entrepreneurial Thought
It is well established that you can't raise money without a business plan ... a
business plan is a work of
art in its own right. It's the document that personifies and expresses your company.
Each plan, like every
snowflake, must be different. Each is a separate piece of art. Each must be
reflective of the individuality
of the entrepreneur. Just as you wouldn't copy someone else's romancing
techniques, so should you seek
to distinguish your plan for its differences.
-Joseph R. Mancuso, How to Write a Winning Business Plan
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1 2-1 Pitfalls to Avoid in the
Venture Planning Process
L0 12.1 List the planning pitfalls that plague many new
ventures
A nwnber of pitfalls in the business plan process should
be avoided. The five pitfalls presented in this section
represent the most common errors comn1itted by entrepreneurs.
To make these danger areas more easily
recognizable, certain indicators or \.Yarning signs are
presented. We also include a possible solution to each
pitfall that \.vill help entrepreneurs avoid the particular
trap that limits a new venture's opportunity to succeed.
12-la Pitfall 1: No Realistic Goals
Although this pitfall may sound self-explanatory, the follo\.
ving indicators demonstrate ho"v cornmon and \.vell
disguised it can be: lack of any attainable goals, lack of
a time frame to accomplish things, lack of priorities, and
lack of action steps.
One \.vay to avoid this pitfall is to set up a timetable of
specific steps to be accomplished during a specific period.
12-1 b Pitfall 2: Failure to Anticipate
Roadblocks
One of the most common pitfalls occurs "vhen the entrepreneur
is so irnmersed in their idea that objectivity goes
out the "vindo\.v. In other \.vords, the person does not recognize
the possible problems that may arise. Indicators
are no recognition of future problems, no admission of
possible fla"vs or \.veaknesses in the plan, and no contingency
or alternative plans.
The best \.vay to avoid this pitfall is to list (1) the possible
obstacles that may arise and (2) the alternatives
that state \.vhat might have to be done to overcorne the
obstacles.
12-lc Pitfall 3: No Commitment
or Dedication
Too rnany entrepreneurs appear to lack real com1nit1nent
to their ventures. Although ventures may have started
from a hobby or part-time endeavor, entrepreneurs must
be careful to avoid the impression that they do not take
their ventures seriously. Indicators are copying the latest
social rnedia craze, no interest in researching the idea, no
desire to invest personal money, and the appearance of
making a "fast buck" fron1 an "app" or a "whim."
The easiest "vay to avoid this pitfall is to act quickly
and to be sure to follo"v up all professional appointments.
Pitfalls to Avoid in the Venture Plann ing Process 275
Also, be ready and "villing to demonstrate a financial
commitment to the venture.
12-ld Pitfall 4: Lack of Demonstrated
Experience (Business or Technical)
Many investors \.Veigh very heavily the entrepreneur's
actual experience in a venture, so it is important that
entrepreneurs demonstrate "vhat background they possess.
Because too many beginners attempt to promote
ideas they really have no true kno\.vledge of, they are
doorned to fail simply because they are perceived as
ignorant of the specifics in the proposed business. Indicators
are no experience in business, no experience in
the specific area of the venture, lack of understanding
of the industry in \.vhich the venture fits, and failure to
convey a clear picture of ho"v and \.vhy the venture \.vill
work and \.vho \.vill accept it.
To avoid this pitfall, entrepreneurs need to give evidence
of personal experience and background for the
venture. If they lack specific kno\.vledge or skills, they
should obtain assistance from those "vho possess this
knowledge or these skills. Demonstrating a tearn concept
about those "vho help out also may be useful.
12-1 e Pitfall 5: No Market
Niche (Segment)
Many entrepreneurs propose an idea without establishing
\.vho the potential custorners will be.Just because the
entrepreneur likes the product or service does not mean
that others \.vill buy it. Nwnerous inventions at the U.S.
Patent Office never reached the marketplace because no
customers \.Vere targeted to buy them- no market was
ever established. Indicators are uncertainty about \.vho
will buy the basic idea(s) behind the venture, no proof of
a need or desire for the good or product proposed, and
an assurnption that customers or clients \.vill purchase
just because the entrepreneur thinks so.
The best possible way to avoid this pitfall is to have a
rnarket segment specifically targeted and to dernonstrate
\.vhy and ho"v the specific product or service will meet
the needs or desires of this target group. (See Chapter 10
for specific information on rnarket research.)
The five pitfalls detailed here represent the most
common points of failure entrepreneurs experience
before their business plans ever gets revie\.ved. In other
\.vords, these critical areas must be carefully addressed
before a business plan is developed. If these pitfalls
can be avoided, the entire business plan \.vill be written
rnore carefully and thus will be reviewed rnore thoroughly.
This preparation helps entrepreneurs establish
a solid foundation on \.vhich to develop an effective
business plan.
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276 Chapter 12 Developing an Effective Business Plan
12-2 Business Model
Canvas: Initiating the
Venture Formation Process
L012.2 Expla in the business model ca nvas as an initial step
in the plann ing process
The Business Model Canvas is a structured brainstorming
tool for entrepreneurs to use to define and understand
the strategic focus and the questions that need to be
ans,vered for each of the nine business building blocks.
The complete business plan provides a more specific and
detailed exploration of the vent ure's goals and operations
,vith a clear path on ho,v the venture ,viii succeed. Let's
examine the business model canvas as a starting point.
A business model is a description of ho,v a venture
,viii create and deliver value. Since it is a strategic tool
that was introduced decades ago, the sophistication levels
have raised through the years. However, the Business
Model Canvas was introduced as a ,vay to simplify the
process.1 This entrepreneurial tool allo,vs you to visually
describe, design, challenge, invent, and pivot your business
model. As sho,vn in this design te1nplate helps the
entrepreneur to systematically understand, design, and
imple1nent a game-changing business model. Along the
,vay, an entrepreneur can gain a deeper understanding of
their customers, distribution channels, partners, revenue
streams, costs, and core value proposition.
There are nine essential components:2
1. Value proposition. The products and services that create
value for a specific customer segment. A new vent
ure's value proposition is what distinguishes it fro1n
potential competition. Value can be provided through
various elements, such as newness, performance, customization,
design, brand, sta tus, price, risk red uction,
accessibility, and convenience or usability.
2. Customer segments. The different groups of people
or entities that the venture ai1ns to reach and serve.
As discussed in Chapter 10 on marketing, customers
can be segmented (niche) based on the different
needs and attributes to ensure that appropriate
implementa tion of corporate strategy meets the
characteristics of a selected group of clients.
3. Channels. Ways the venture communicates ,vith
and reaches its customer seg1nents. A ne,v venture
can deliver its value proposition to its targeted custo1ners
through different channels, such as opening
a store, using major distributors, or a combination
of both. Effective channels ,viii distribute a venture's
value proposition in ways that are fast, efficient, and
cost effective.
4. Customer relationships. The types of relationships a
venture establishes ,vith specific customer segments.
To ensure the survival and success of any businesses,
entrepreneurs must identify the type of relationship
they ,vant to create ,vith their customer segments.
Customer relationships can include personal assistance,
self-service, automated services, or community
platforms.
5. Revenue streams. The cash a ne,v venture proposes
to generate from the particular customer niche. Several
,va ys to generate a revenue strea1n include selling
an item, service fees, subscription fees, lease or
rental income, licensing fees, or advertising income.
6. Key activities. The most important ele1nents that a
venture must do to make its business model ,vork.
For example, if lo,ver prices are the unique value
proposition, then creating an efficient supply chain
to drive down costs would be a key activity.
7. Key resources. The most i1nportant assets required
to make the business model ,vork and create value
for the customer. They are needed in order to sustain
and support the business and could be human,
financial, physical, or intellectual.
8. Key partners. The net,vork of suppliers and partners
that optimize operations and reduce risks to make
the business model ,vork. Co1nplementary alliances
also can be considered through joint ventures or
strategic alliances ,vith other firms.
9. Cost structure. The most significant costs incurred
to operate the business model. Characteristics of
cost struct ures include the following:
• Fixed costs. Costs are unchanged across different
applications (e.g., salary and rent ).
• Variable costs. These costs vary depending on the
amount of production of goods or services (e.g.,
music festivals).
• Economies of scale. Costs go down as the amount
of good are ordered or produced.
• Economies of scope. Costs go do,vn due to incorporating
other businesses that have a direct relation
to the original product.
Once the nine elements of the business plan canvas are
completed, the entrepreneur has a much greater understanding
of the feasible value inherent in the proposed
venture. If assessed as positive, then the next step is to
develop the complete business plan that ,viii serve as the
major descriptive document for the venture.
12-3 What Is a
Business Plan?
L012.3 Describe a business plan and its value
A business plan is the ,vritten document that details
the proposed venture. It must describe current status,
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expected needs, and projected results of the ne,v business.
Every aspect of the venture needs to be covered:
the venture concept, value proposition, marketing, operations,
management, critical risks, financial projections,
exit strategy, and milestones or a timetable. A description
of all of these facets of the proposed venture is necessary
to demonstrate a clear picture of what that venture is,
,vhere it is projected to go, and ho,v the entrepreneur
proposes it will get there. The business plan is the entrepreneur's
road map for a successful enterprise. 3
In some professional areas, the business plan is referred
to as a venture plan, a loan proposal, or an investment
prospectus. Whatever the name, the business plan is the
minimum docu1nent required by any financial source.
The business plan allo,vs the entrepreneur entrance into
the investment process. Although it should be used as a
,vorking document once the venture is established, the
major thrust of the business plan is to encapsulate the
strategic development of the project in a comprehensive
document for outside investors to read and understand.
The business plan describes to investors and financial
sources all of the events that may affect the proposed venture.
Details are needed for various projected actions of
the venture, ,vith associated revenues and costs outlined.
It is vital to explicitly state the assumptions on ,vhich
the plan is based. For example, increases/decreases in the
market or ups,vings/do,vns,vings in the economy during
the start-up period of the new venture should be stated.
The emphasis of the business plan ahvays should
be the final i1nplementation of the venture. In other
,vords, it's not just the writing of an effective plan that
is i1nportant but also the translation of that plan into a
successful enterprise. 4
The comprehensive business plan, \>vhich should be the
result of meetings and reflections on the direction of the
ne\>v venture, is the major tool for detennining the essential
operation of a venture. It also is the primary doctm1ent for
managing the venture. One of the major benefits of this
plan is that it helps the enterprise avoid common pitfalls
that \>Vere mentioned that often undo all previous efforts.
1 2-4 Benefits of a
Business Plan
L0 12.4 Describe the benefits of a business plan
The entire business-planning process forces the entrepreneur
to analyze all aspects of the venture and to prepare
an effective strategy to deal \>Vith the uncertainties that
arise. Thus, a business plan may help an entrepreneur
avoid a project doo1ned to failure. As one researcher
states, "If your proposed venture is marginal at best,
the business plan \>vill sho\>v you \>vhy and may help you
avoid paying the high tuition of business failure. It is far
Benefits of a Business Plan 277
cheaper not to begin an ill-fated business than to learn
by experience \>vhat your business plan could have taught
you at a cost of several hours of concentrated ,vork."5
It is important that entrepreneurs prepare their o\>vn
business plan. If an entrepreneurial team is involved,
then all of the key members should be part of ,vriting
the plan; in this case, it is important that the lead entrepreneur
understand the contribution of each tea1n member.
If consultants are sought to help prepare a business
plan, the entrepreneur must remain the driving force
behind the plan. Seeking the advice and assistance of
outside professionals is always \>Vise, but entrepreneurs
need to understand every aspect of the business plan
because they are the ones "vho come under the scrutiny
of financial sources. Thus, the business plan stands as
the entrepreneur's description and prediction for their
venture, and it 1nust be defended by the entrepreneursimply
put, it is the entrepreneur's responsibility.6
Other benefits are derived from a business plan for
both the entrepreneur and the financial sources that read
it and evaluate the venture. For the entrepreneur, the following
benefits are gained:
• The time, effort, research, and discipline needed to
put together a formal business plan force the entrepreneur
to vie,v the venture critically and objectively.
• The competitive, economic, and financial analyses
included in the business plan subject the entrepreneur
to close scrutiny of their assumptions about the
venture's success.
• Because all aspects of the business venture must be
addressed in the plan, the entrepreneur develops and
examines operating strategies and expected results
for outside evaluators.
• The business plan quantifies objectives, providing
measurable benchmarks for comparing forecasts
with actual results.
• The completed business plan provides the entrepreneur
with a communication tool for outside
financial sources as \>vell as an operational tool for
guiding the venture to\>vard success. 7
The financial sources that read the plan derive the follo\>
ving benefits from the business plan:
• The business plan provides the details of the market
potential and plans for securing a share of that
market.
• Through prospective financial state1nents, the business
plan illustrates the venture's ability to service
debt or provide an adequate return on equity.
• The plan identifies critical risks and crucial events
with a discussion of contingency plans that provide
opportunity for the venture's success.
• By providing a co1nprehensive overvie,v of the entire
operation, the business plan gives financial sources a
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278 Chapter 12 Developing an Effective Business Plan
clear, concise document that contains the necessary
information for a thorough business and financial
evaluation.
• For a financial source with no prior kno\.vledge of
the entrepreneur or the venture, the business plan
provides a useful guide for assessing the individual
entrepreneur's planning and 1nanagerial ability. 8
12-5 Developing a
Well-Conceived
Business Plan
Most investors agree that only a \.Yell-conceived and
\.Yell-developed business plan can gather the necessary
support that \.vill eventually lead to financing. The business
plan must describe the ne\.v venture \.Vith excite1nent
and yet \.Vith complete accuracy.
12-Sa Who Reads the Plan?
L0 12.5 Explain the different viewpoints of those who read a
business plan
It is in1portant to understand the audience for whom
the business plan is written. Although numerous professionals
may be involved \.Vith reading the business
plan- such as venture capitalists, bankers, angel investors,
potential large customers, la\.vyers, consultants,
and suppliers- entrepreneurs need to clearly understand
three main vie\.vpoints \.vhen preparing the plan.9
The first vie\.vpoint is, of course, the entrepreneur's
because they are the ones developing the venture and
clearly have the most in-depth kno\.vledge of the technology
or creativity involved. This is the most common
viewpoint in business plans, and it is essential. However,
too many plans emphasize this vie\.vpoint and neglect
the vie\.vpoints of potential customers and investors.
More important than high technology or creative
flair is the marketability of a ne\.v venture. This type of
enterprise, referred to as "market driven," convincingly
demonstrates the benefits to users (the particular group of
customers it is aiming for) and the existence of a substantial
market. This viewpoint- that of the marketplace- is
the second critical emphasis that an entrepreneur must
incorporate into a business plan. Yet, although the actual
value of this information is considered high, too many
entrepreneurs tend to deemphasize in-depth marketing
information in their business plans. 10 Establishing an
actual market (determining who \.vill buy the product
or use the service) and documenting that the anticipated
percentage of this market is appropriate for the venture's
success are valuable criteria for the business plan.
The third vie\.vpoint is related to the marketing
emphasis just discussed. The investor's point of vie\.v is
concentrated on the financial forecast. Sound financial
projections are necessary if investors are to evaluate the
\.Vorth of their investment. This is not to say that an entrepreneur
should fill the business plan \.Vith spreadsheets
of figures. In fact, many venture capital firms employ a
"projection discount factor," \.vhich merely represents the
belief of venture capitalists that successful ne\.v ventures
usually reach approxi1nately 50 percent of their projected
financial goals.11 However, a three- to five-year financial
projection is essential for investors to use in making their
judgment of a venture's future success.
These three vie\.vpoints have been presented in order
of decreasing significance to point out the emphasis
needed in a \.Yell-conceived business plan. If they are
addressed carefully in the plan, then the entrepreneur
has prepared for what experts term the five-minute reading.
The following six steps represent the typical business
plan reading process that 1nany venture capitalists
use (less than one minute is devoted to each step):
Step 1: Determine the characteristics of the venture
and its industry.
Step 2: Determine the financial structure of the plan
(amount of debt or equity investment required).
Step 3: Read the la test balance sheet ( to determine
liquidity, net \.vorth, and debt/equity).
Step 4: Determine the quality of entrepreneurs in the
venture (sometimes the 1nost important step).
Step 5: Establish the unique feature in this venture
(find out \.vhat is different).
Step 6: Read over the entire plan lightly (this is \.vhen
the entire package is paged through for a casual look at
graphs, charts, exhibits, and other plan components).12
These steps provide insight into ho\.v the average business
plan is read. It may see1n some\.vhat unjust that so
1nuch of the entrepreneur's effort is put into a plan that
is given only a five-minute reading. Ho\.vever, that's the
nature of the process for many venture capitalists. Other
financial or professional sources 1nay devote more time to
analyzing the plan. But keep in mind that venture capitalists
read through numerous business plans; thus, kno\.ving
the steps in their reading process is valuable for developing
any plan. Related to the process of venture capitalists is this
updated version of an old quote that links entrepreneurs
and venture capitalists: "The people \.vho manage people
1nanage people \.vho manage things, but the people \.vho
manage money manage the people \.vho manage people." 13
12-Sb Putting the Package Together
L0 12.6 Outline the importance of coordinating the business
plan segments
When presenting a business plan to potential investors,
the entrepreneur must realize that the entire package is
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important. Presented next is a summary of key issues that
the entrepreneur needs to "vatch for if their plan is going
to be vie"ved successfully. A business plan gives financiers
their first impressions of a company and its principals.
Potential investors expect the plan to look good but
not too good, to be the right length, to clearly and concisely
explain (early on) all aspects of the company's
business, and not to contain bad gra1n1nar and typographical
or spelling errors.
Investors are looking for evidence that the principals
treat their own property "vith care- and "vill like"vise
treat the investment carefully. In other "vords, form as
"vell as content are important; investors know that good
form reflects good content and vice versa.
Among the format issues "ve think most important
are the f ollo"ving:
Appearance-The binding and printing must not be
sloppy; neither should the presentation be too lavish. A
stapled compilation of photocopied pages usually looks
amateurish, "vhereas bookbinding with typeset pages
may arouse concern about excessive and inappropriate
spending. A plastic spiral binding, holding together
a pair of cover sheets of a single color, provides both
a neat appearance and sufficient strength to "vithstand
handling by a number of people "vithout damage.
Length-A business plan should be no more than
20-25 pages long. The first draft "vill likely exceed
that, but editing should produce a final version that
fits "vi thin the 20-page ideal. Adherence to this length
forces entrepreneurs to sharpen their ideas and results
in a docu1nent that is likely to hold investors' attention.
Background details can be included in an additional
volume. Entrepreneurs can make this material
available to investors during the investigative period,
after the initial expression of interest.
The Cover and Title Page-The cover should bear the
na1ne of the co1npany, its address and phone number,
and the month and year in "vhich the plan is issued.
Surprisingly, a large number of business plans are submitted
to potential investors "vithout return addresses
or phone numbers. An interested investor "van ts to be
able to contact a company easily to request further
inf or ma tion or express an interest, either in the company
or in so1ne aspect of the plan.
Inside the front cover should be a "vell-designed
title page on "vhich the cover information is repeated
and, in an upper or a lo"ver corner, the "copy number"
provided. Besides helping entrepreneurs keep track
of plans in circulation, holding do"vn the nu1nber of
copies outstanding- usually to no 1nore than 10- has
a psychological advantage. After all, no investor likes
to think that the prospective investment is shop"vorn.
The Executive Summary-The t\.vo to three pages irnmedia
tely following the tide page should concisely explain
the co1npany's current status, its products or services,
Developing a Well-Conceived Business Plan 279
the benefits to customers, the financial forecasts, the
venture's objectives in three to seven years, the a1nount
of financing needed, and ho"v investors "vill benefit.
This is a tall order for a t"vo-page summary, but
it "vill either sell investors on reading the rest of the
plan or convince them to forget the "vhole thing.
The Table of Contents-After the executive summary,
include a well-designed table of contents. List each of
the business plan's sections and mark the pages for
each section.
An attractive appearance, an effective length, an executive
summary, a table of contents, proper grammar, correct
typing, and a cover page-all are important factors
"vhen putting together a co1nplete package. These points
often separate successful plans from unacceptable ones.
12-Sc Guidelines to Remember
L0 12.7 Describe the key recommendations by venture capital
experts regarding a plan
The follo"ving points are a collection of recom1nendations
by experts in venture capital and ne"v-venture
development.14 These guidelines are presented as tips
for successful business plan development. Entrepreneurs
need to adhere to them to understand the importance
of the various segments of the business plan they create,
"vhich will be discussed in the next section.
Keep the Plan Respectably Short
Readers of business plans are important people "vho
refuse to waste time. Therefore, entrepreneurs should
explain the venture not only carefully and clearly but
also concisely. (Ideally, the plan should be no more than
20 to 25 pages long, excluding the appendix.)
Organize and Package the Plan Appropriately
A table of contents, an executive summary, an appendix,
exhibits, graphs, proper gram1nar, a logical arrange1nent
of segments, and overall neatness are elements critical to
the effective presentation of a business plan.
Orient the Plan toward the Future
Entrepreneurs should attempt to create an air of excitement
in the plan by developing trends and forecasts that
describe "vha t the venture intends to do and "vha t the
opportunities are for the use of the product or service.
Avoid Exaggeration
Sales potentials, revenue estimates, and the venture's
potential growth should not be inflated. Many times, a
best-case, "vorst-case, and probable-case scenario should
be developed for the plan. Documentation and research
are vital to the plan's credibility. (See Table 12.1 for business
plan phrases.)
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280 Chapter 12 Developing an Effective Business Plan
Table 12.1 Common Business Plan Phrases: Statement versus Reality
Statement Reality
We conservatively project ... We read a book that sa id we had to be a $50 million
company in five years,
and we reverse-engineered the numbers.
We took our best guess and divided by 2. We accidentally divided by 0.5.
We project a 10 percent margin. We did not modify any of the assumptions in the
business plan template that
we downloaded from the Internet.
The project is 98 percent complete. To complete the remaining 2 percent will take as
long as ii took to create the
initial 98 percent but will cost twice as much .
Our bus iness model is proven ... . . . if you take the evidence from the past week for
the best of our
50 locations and extrapolate it for all the others.
We have a six-month lead. We tried not to find out how many other people have a
six-month lead.
We need only a 1 0 percent market share. So do the other 50 entrants getting
funded.
Customers are clamoring for our product. We have not yet asked them to pay for it.
Also, all of our current customers
are relatives.
We are the low-cost producer. We have not produced anything yet, but we are
confident that we will
be able to.
We have no competition. Only IBM, M icrosoft, Netscape, and Sun have announced
plans to enter the
business.
Our management team has a great deal ... consum ing the product or service.
of experience ...
A select group of investors is considering We mailed a copy of the plan to everyone
in Pratt's Guide.
the plan.
We seek a value-added investor. We are looking for a passive, duml::ras-rocks
investor.
If you invest on our terms, you will earn a If everything that could ever conceivably
go right does go right, you might gel
68 percent internal rate of return. your money back.
Source: Adapted from William A. Sahlman, "How to Write a Great Business Plan,"
Harvard Business Review, July/August 1997, 106.
Copyright© 1997 by the Harvard Business School Publishing. All rights reserved.
Highlight Critical Risks
The critical-risks seg1nent of the business plan is important
in that it demonstrates the entrepreneur's ability
to analyze potential problems and develop alternative
courses of action.
Give Evidence of an Effective
Entrepreneurial Team
The manage1nent segment of the business plan should
clearly identify the skills of each key person as \>vell as
demonstrate how all such people can effectively \>York
together as a team to manage the venture.
Do Not Over-Diversify
Focus the attention of the plan on one main opportunity
for the venture. A ne\>v business should not attempt
to create multiple 1narkets or pursue multiple ventures
until it has successfully developed one main strength.
Identify the Target Market
Substantiate the marketability of the venture's product
or service by identifying the particular customer niche
being sought. This segment of the business plan is pivotal
to the success of the other parts. Market research
must be included to demonstrate how this 1narket segment
has been identified.
Keep the Plan Written in the Third Person
Rather than continually stating "I," ""ve," or "us," the
entrepreneur should phrase everything as "he," "she,"
"they," or "the1n." In other \>Vords, avoid personalizing
the plan and keep the writing objective.
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Capture the Reader's Interest
Because of the numerous business plans submitted to
investors and the small percentage of business plans
funded, entrepreneurs need to capture the reader's interest
right a\>vay by highlighting the unique value proposition
of the venture. Use the title page and executive
swnmary as key tools to capture the reader's attention
and create a desire to read more.
12-Sd Questions to Be Answered
A well-\>vri tten business plan is like a work of art: It's
visually pleasing and makes a statement \>Vithout saying
a \>vord. Unfortunately, the t\>vo are also alike in that
they are \>Vorth money only if they're good. Researchers
Donald F. Kuratko and Jeffrey S. Hornsby recommend
the following key questions to consider \>vhen \>Vriting an
effective business plan:
• Is your plan organized so that key facts leap out at
the reader? Appearances do count. Your plan is a
representation of yourself, so don't expect an unorganized,
less-than-acceptable plan to be your vehicle
for obtaining funds.
• Is your product/service and business mission clear
and simple? Your mission should state very simply
the value that you \>vill provide to your customers. It
shouldn't take more than a paragraph.
• Are you focused on the right things? Determine \>vhat
phase of the business you are really in, focus on the
right tasks, and use your resources appropriately.
• Who is your customer? Does the plan describe the
business's ideal customers and how you will reach
them? Is your projected share of the market identified,
reasonable, and supported?
• Why will customers buy? How much better is your
product/service? Define the need for your product
and provide references and testirnonial support to
enhance it. Try to be detailed in explaining ho"v the
customer \>vill benefit from buying your product.
• Do you have a competitive advantage? Focus on differences
and any w1ique qualities. Proprietary processes/
technology and patentable items/ideals are
good things to highlight as competitive strengths.
• Do you have a favorable cost structure? Proper
gross margins are key. Does the break-even analysis
take into consideration the dynamics of price and
variable costs? Identify, if possible, any economics of
scale that \>Vould be advantageous to the business.
• Can the management team build a business? Take a
second look at the management team to see whether
they have relevant experience in srnall business and
in the industry. Acknowledge the fact that the tearn
may need to evolve \>Vith the business.
• How much money do you need? Financial statementsincluding
the income staternent, cash-flo"v statement,
Elements of a Business Plan 281
and balance sheet-should be provided on a rnonthly
basis for the first year and on a quarterly basis for the
following t\>vo or three years.
• How does your investor get a cash return? Whether
it's through a buyout or an initial public offering,
make sure your plan clearly outlines this irnportant
question regarding a harvest strategy. 15
These guidelines and questions have been presented
to help entrepreneurs who are preparing to \>vrite a business
plan. The follo\>ving section analyzes the 10 major
segrnents of a business plan.
12-6 Elements
of a Business Plan
L0 12.8 Highlight a complete outline of an effective
business plan
A detailed business plan usually includes anY"vhere from
6 to 10 sections (depending on the idea, the industry,
and the technical details). The ideal length of a plan is
25 pages, although- depending on the need for detailthe
overall plan can range from 20 to more than
30 pages if an appendix is included. 16 Table 12.2 provides
an outline of a typical plan. The rernainder of this
section describes the specific parts of the plan. A complete
business plan for Hydraulic Wind Power appears
in Appendix 12A at the end of this chapter.
12-6a Executive Summary
Many people \>vho read business plans (bankers, venture
capitalists, and investors) like to see a summary
of the plan tha t f ea cures its most importan t parts.
Such a summary gives a brief overvie\>v of \>vhat is to
follo"v, helps put all of the information into perspective,
and should be no longer than t\>VO to three pages.
The summary should be \>vritten only after the entire
business plan has been completed. In this way, particular
phrases or descriptions from each segrnent can be
identified for inclusion in the summary. Because the
summary is the first-and sometimes the only- part of
a plan that is read, it must present the quality of the
entire report. The sun1mary must be a clever snapshot
of the complete plan.
The statements selected for a summary segment
should briefly touch on the venture itself, the value
proposition, the market opportunit ies, the financial
needs and projections, and any special research or technology
associated \>Vith the vent ure. This should be done
in such a way that the evaluator or investor will choose
to read on. If this inforrnation is not presented in a concise,
competent manner, the reader may put aside the
plan or simply conclude that the project does not warrant
funding.
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
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282 Chapter 12 Developing an Effective Business Plan
Table 12.2 Complete Outline of a Business Plan
Section I: Executive Summary
Section II: Venture Concept and Value Proposition
A. General description of the business
B. Value proposition
C. Goals and potential of the business and milestones
(if any)
D. Uniqueness of product or service
Section Ill: Marketing
A. Research and analysis
1. Target market (customers) identified
2. Market size and trends
3. Competition
4. Estimated market share
B. Marketing plan
1. Market strategy- go-to-market concepts
2. Customer pain points
3. Reachable market
4. Pricing
5. Advertising and promotions
Section IV: Operations
A. Identify channels of distribution
B. Facilities and logistics
C. Specific operational procedures
D. Personnel needs and uses
E. Proxim ity to supplies
Section V: Management
A. Management team-key personnel
B. Legal structure- stock agreements, employment
agreements, ownersh ip
C. Board of directors, advisers, consultants
Section VI: Financial
A. Financial forecast
1. Profit and loss
2. Cash flow
3. Break-even analysis
4. Cost controls
5. Budgeting plans
Section VII: Critical Risks
A. Potential problems
B. Obstacles and risks
C. Alternative courses of action
Section VIII: Harvest (Exit) Strategy
A. Liqu id ity event (IPO or sale)
B. Continuity of business strategy
C. Identify successor
Section IX: Milestone Schedule
A. Timing and objectives
B. Deadlines and milestones
C. Relationship of events
Section X: Appendix or Bibliography
Source: Donald E Kuratko, The Complete Entrepreneurial Planning
Guide (Bloomington: Kelley Sd10ol of Business, Indiana University, 2022).
12-6b Venture Concept
and Value Proposition
First, the name of the venture should be identified, along
\.Vith any special significance (e.g., family name or technical
narne). Second, the specific value proposition of
the venture should be clearly identified, and the industry
background should be presented in terms of current status
and future trends. It is important to note any special
industry developments that may affect the plan. If the
company has an existing business or franchise, this is the
appropriate place to discuss it. Third, the ne\.v venture
should be thoroughly described, along \.vith its proposed
potential. All key terms should be defined and made
comprehensible. Functional specifications or descriptions
should be provided. Drawings and photographs
also may be included. Fourth, the potential advantages
the ne\.v venture possesses over the cornpetition should
be discussed at length. This discussion may include patents,
copyrights, and trademarks as \.vell as special technological
or market advantages.
12-6c Marketing Segment
In the marketing segment of the plan, the entrepreneur
must convince investors that a market exists, that sales
projections can be achieved, and that the cornpetition
can be beaten.
This part of the plan is often one of the most difficult
to prepare. It is also one of the most critical because
almost all subsequent sections of the plan depend on
the sales estimates developed here. The projected sales
levels- \.vhich are based on the market research and
analysis-directly influence the size of the manufacturing
operation, the marketing plan, and the amount of
debt and equity capital required.
Most entrepreneurs have difficulty preparing and presenting
market research and analyses that \.vill convince
investors that the venture's sales estimates are accurate
and a trainable. The follo\.ving are aspects of marketing
that should be addressed \.vhen developing a comprehensive
exposition of the market.
12-6d Market Niche and Market Share
A market niche is a homogeneous group \.Vith common
characteristics-that is, all the people who have a
need for the ne\.vly proposed product or service. When
describing this niche, the writer should address the bases
of customer purchase decisions: price, quality, service,
personal contacts, or sorne combination of these factors.
Next, a list of potential customers \.vho have expressed
interest in the product or service- together \.Vith an
explanation for their interest- should be included. If it
is an existing business, the current principal custorners
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addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
should be identified and the sales trend discussed. It is
important to describe the overall potential of the market.
Sales projections should be made for at least three
years, and the major factors affecting market gro,vth
(industry trends, socioecono1nic trends, governmental
policy, and population shifts) should be discussed.
A revie,v of previous market trends should be included,
and any differences bet,veen past and projected annua 1
gro,vth rates should be explained. The sources of all
data and methods used to make projections should be
indicated. Then, if any major customers are ,villing to
make purchase commitments, they should be identified,
and the extent of those commitments should be indicated.
Finally, the "go-to-market" concepts should be
discussed. These include customer pain points, estimated
market share, the actual reachable market, the market
size and trends, the customers, and the projected sales
in units and dollars for each of the next three years. The
growth of the company's sales and its estimated market
share should be related to the growth of the industry
and the customer base.
Competitive Analysis
The entrepreneur should make an attempt to assess the
strengths and ,veaknesses of the competing products
or services. Any sources used to evaluate the competition
should be cited. This discussion should compare
competing products or services on the basis of price,
performance, service, warranties, and other pertinent
feat ures. It should include a short discussion of the current
advantages and disadvantages of competing products
and services and ,vhy they are not meeting customer
needs. Any kno,vledge of competitors' actions that could
lead to new or improved products and an advantageous
position also should be presented.
Finally, a revie,v of competing companies should be
included. Each competitor's share of the market, sales,
and distribution and production capabilities should be
discussed. Attention should be focused on profitability
and the profit trend of each competitor. Who is the pricing
leader? Who is the quality leader? Who is gaining?
Who is losing? Have any companies entered or dropped
out of the market in recent years?
Marketing Strategy
The general marketing philosophy and approach of the
company should be outlined in the marketing strategy.
A marketing strategy should be developed from market
research and evaluation data and should include
a discussion of (1) the kinds of customer groups to be
targeted by the initial intensive selling effort, (2) the
custo1ner groups to be targeted for later selling efforts,
(3) methods of identifying and contacting potential
Elements of a Business Plan 283
customers in these groups, ( 4) the features of the product
or service ( quality, price, delivery, ,varranty, and so
on) to be emphasized to generate sales, and (5) any innovative
or unusual marketing concepts that ,vill enhance
customer acceptance (e.g., leasing ,vhere only sales were
previously atte1npted).
This section also should indicate whether the product
or service initially ,vill be introduced nationally or
regionally. Consideration also should be given to any
seasonal trends and what can be done to promote contraseasonal
sales.
Pricing Policy
The price must be" right" to penetrate the market, maintain
a market position, and produce profits. A number
of pricing strategies should be examined, and then one
should be convincingly presented. This pricing policy
should be compared with the policies of the major
compet itors. The gross profit margin benveen manufacturing
and final sales costs should be discussed, and
consideration should be given to ,vhether this margin is
large enough to allo,v for distribution, sales, ,varranty,
and service expenses; for amortization of development
and equipment cost s; and for profit. Attention also
should be given to justifying any price increases over
competitive items on the basis of ne,vness, quality, warranty,
or service.
Advertising Plan
For manufactured products, the preparation of product
sheets and promotional literature; the plans for trade
sho,v participation, trade magazine advertisements,
and direct 1nailings; and the use of advertising agencies
should be presented. For products and services in general,
a discussion of the advertising and promotional
campaign contemplated to introduce the product and
the kinds of sales aids to be provided to dealers should
be included. Additionally, the schedule and cost of promotion
and advertising should be presented; if advertising
,vill be a significant part of the expenses, an exhibit
that shows ho,v and when these costs ,vill be incurred
should be included.
These five subsets of the marketing segment are
needed to detail the overall 1narketing plan, ,vhich
should describe what is to be done, how it ,vill be done,
and who ,vill do it.
12-6e Research, Design,
and Development Segment
The extent of any research, design, and development
in regard to cost, time, and special testing should be
covered in this segment. Investors need to kno,v the
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F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
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284 Chapter 12 Developing an Effective Business Plan
status of the project in terms of prototypes, lab tests, and
scheduling delays. Note that this segment is applicable
only if research and development is involved in the business
plan.
To achieve a comprehensive section, the entrepreneur
should have ( or seek out) technical assistance in preparing
a detailed discussion. Blueprints, sketches, dra\>vings,
and models often are important.
It is equally important to identify the design or development
\>vork that still needs to be done and to discuss
possible difficulties or risks that may delay or alter the
project. In this regard, a developmental budget that
sho\>vs the costs associated \>vith labor, materials consulting,
research, design, and the like should be constructed
and presented.
12-6f Operations Segment
This segment ahvays should begin by describing the
facilities and logistics of the ne\>v venture. Important
elements include labor availability, \>vage rate, proximity
to suppliers and customers, channels of distribution,
and key partnerships. In addition, local taxes and zoning
requirements should be sorted out, and the support of
area banks for ne\>v vent ures should be touched on.
Specific needs should be discussed in terms of ho"v the
enterprise actually operates and the facilities required
to handle the ne\>v venture (plant, \>Varehouse storage,
and offices), as \>vell as any equipment that needs to be
acquired (special tooling, machinery, computers, and
vehicles).
The Entrepreneurial Process
Common Business Planning Mistakes
Entrepreneurs endure uncertainty in most everything they do.
From hiring the right employees to finding rel iable suppl iers,
building a business requires an entrepreneur to handle significant
pressure on a daily basis. Given the variability inherent
in any new venture, a business plan is crucial for effective
management. In spite of the importance of business planning,
few activities are more daunting for entrepreneurs than formal izing
their thoughts on poper. In order for entrepreneurs lo stay
driven to succeed, they have to remain optimistic, so the fear
of discovering some insurmountable obstacle while plann ing
leads some management teams to avoid the process altogether.
Whether the business is a start-up or a well-establ ished
corporation, a business plan, when done correctly, serves as
the compony's blueprint to ensure thot all parties involved are
in agreement regarding the business's overarching purpose. In
the business plan sections listed below, we present some of the
common mistakes that entrepreneurs make when developing
their plan.
Overall Mistakes
• Entrepreneurs are unable to clearly articulate their vision
in the plan.
• Entrepreneurs use acronyms and technical jargon without
clearly explaining them early in the business plan.
• Entrepreneurs fail to provide sufficient deta ils regarding
the implementation of their strategy.
• Entrepreneurs ineffectively present the goals and objectives
that are most important to the business's success.
• Entrepreneurs do not convincingly present the basis for
their strategy.
• Entrepreneurs do not improve their plan based on the
feedback from investors.
Executive Summary
• Entrepreneurs are not prec ise about their needs and
capobil ities.
• Entrepreneurs waste words with fillers and superfluous
information.
Management
• Entrepreneurs forget to include their previous successes
and/ or failures.
• Entrepreneurs d ism iss the importance investors place on
an experienced management team.
Marketing
• Entrepreneurs rely heavily on secondary market research
rather than sol iciting the opinions of their potential
customers.
• Entrepreneurs claim the percent of the market their compony
will own without research support.
Financials
• Entrepreneurs overlook and, in turn, underestimate their
cash-flow requirements.
• Entrepreneurs inflate or understate their margins in order to
arrive at their ideal profitability.
Source: Adopted from Mork Henricks, "Build a Better Business Pion,• Enlrepreneur,
February 2007, hllps: / /www.entrepreneur.com/ stortingo business
/businessplans/ article 17 4002.html, accessed June 2 1, 2008; Andrew
J. Sherman, Grow Fas!, Grow Righi: 12 Slrategies lo Achieve Breaklhrough
Business Growth [Chicago: Kaplan Publishing, 2007), 2~26; andJaySnider,
"Don't Make These 5 Business Plan Mistakes,• Up and Running Blog, http//
upandrunning.bplans.com/2012/04/20/ dont-make-these-5-business-plan
-mistakes, accessed May 29, 20 I 2 .
•
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F.d11ot1al tcv,N· h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcti cncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos t,.-_-q~itc ii.
Other factors that might be considered are the suppliers
(number and proxi1nity) and the transportation costs
involved in shipping materials. The labor supply and
needed skilled positions also should be presented. Finally,
the cost data associated with any of the operation factors
should be presented. The financial information used here
can be applied later to the financial projections.
12-69 Management Segment
This seg1nent identifies the key personnel, their positions
and responsibilities, and the career experiences that qualify
them for those particular roles. Complete resumes
should be provided for each me1nber of the management
team. In this section, the entrepreneur's role in the
venture should be clearly outlined. Finally, any advisers,
consultants, or members of the board should be identified
and discussed.
The structure of payment and o\>vnership (stock agreements,
consulting fees, and so on) should be described
clearly in this section. In summary, the discussion should
be sufficient so that investors can understand each of
the follo\>ving critical fac tors that have been presented:
(1) organizational structure, (2) 1nanagement tea1n and
critical personnel, (3) experience and technical capabilities
of the personnel, ( 4) O\>Vnership structure and compensation
agree1nents, and (5) board of directors and
outside consultants and advisers.
12-6h Financial Segment
The financial segment of a business plan must demonstrate
the potential viability of the undertaking. Three
basic financial statements must be presented in this part
of the plan: the pro forma balance sheet, the income
statement, and the cash-flo"v state1nent.
The Pro Forma Balance Sheet
Proforma means "projected" as opposed to "actual."
The pro fonna balance sheet projects what the financial
condition of the venture will be at a particular point in
ti1ne. Pro fonna balance sheets should be prepared at
start-up, semiannually for the first years, and at the end
of each of the first three years. The balance sheet details
the assets required to support the projected level of operations
and sho\>vs ho"v these assets are to be financed
(liabilities and equity). Investors will \>Vant to look at
the projected balance sheets to determine if debt/equity
ratios, \>Vorking capital, current ratios, inventory turnover,
and so on are \>Vithin the acceptable limits required
to justify the future financings projected for the venture.
The Income Statement
The income statement illustrates the projected operating
results based on profit and loss. The sales forecast, \>vhich
\>Vas developed in the marketing segment, is essential to
Elements of a Business Plan 285
this document. Once the sales forecast (earnings projection)
is in place, production costs must be budgeted based
on the level of activity needed to support the projected
earnings. The materials, labor, service, and manufacturing
overhead (fixed and variable) must be considered in addition
to such expenses as distribution, storage, advertising,
discounts, and administrative and general expenses (salaries,
legal and accounting, rent, utilities, and telephone).
The Cash-Flow Statement
The cash-flo"v statement may be the 1nost important
document in ne\>v-venture creation because it sets forth
the amount and timing of expected cash inflo\>vs and
outflo\>vs. This section of the business plan should be
carefully constructed.
Given a level of projected sales and capital expenditures
for a specific period, the cash-flo"v forecast \>vill
highlight the need for and the timing of additional financing
and \>vill indicate peak requirements for \>vorking
capital. Management must decide ho"v this additional
financing is to be obtained, on what terms, and how it is
to be repaid. The total amount of needed financing may
be supplied from several sources: part by equity financing,
part by bank loans, and the balance by short-term lines
of credit from banks. This information becomes part of
the final cash-flo"v forecast. A detailed cash flo"v, if understood
properly, can direct the entrepreneur's attention to
operating problems before serious cash crises arise.
In the financial segment, it is important to mention
any assumptions used to prepare the figures. Nothing
should be taken for granted. This segment also should
include ho"v the sta cements \>Vere prepared (by a profe
ssional certified public accountant or by the entrepreneur)
and "vho "vill be in charge of managing the
business's finances.
The final document chat should be included in the
financial segment is a break-even chart, \>vhich sho\>vs
the level of sales (and production) needed to cover all
costs. This includes costs that vary \>Vith the production
level (manufacturing labor, materials, and sales) and
costs that do not change \>Vith production (rent, interest
charges, and executive salaries).
12-6i Critical-Risks Segment
In this segment, potential risks such as the follo\>ving
should be identified: effect of unfavorable trends in the
industry, design or manufacturing costs that have gone
over estimates, difficulties of long lead times encountered
\>vhen purchasing parts or materials, and unplanned-for
ne\>v competition.
In addition to these risks, it is \>Vise to cover the \>vhatifs.
For exa1nple, "vhat if the competition cuts prices, the
industry slumps, the market projections are \>vrong, the
sales projections are not achieved, the patents do not
come through, or the manage1nent team breaks up?
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286 Chapter 12 Developing an Effective Business Plan
Finally, suggestions for alternative courses of action
should be included. Certainly, delays, inaccurate projections,
and industry slwnps all can happen, and people
reading the business plan \.vill \.Vant to kno\.v that the
entrepreneur recognizes these risks and has prepared for
such critical events.
12-6j Harvest (Exit) Strategy Segment
Every business plan should provide insights into the
future harvest strategy, sometimes referred to as an exit
strategy. It is important for the entrepreneur to plan for
a liquidity event as an exit strategy or for the orderly
The Entrepreneurial Process
Straying from Your Business Plan?
A well-written, thoughtful business plan is an important tool for
any entrepreneur; however, even the most conservative strategy
can fa il to address some obstacles that are encountered
between the inception of a concept and the eventual harvest of
the business. One example of such a hurdle is when a business
encounters an economic downturn. What is the appropriate
strategy when the general economy has begun to falter, leading
consumers to tuck away dollars that they would have otherw
ise spent at your business?
The answer is that there is not one solution for deal ing
with an a iling economy. Despite the need for a business plan,
entrepreneurs often find that slricl adherence lo their plan is as
dangerous as not having one af all. The key is to know when
fo stray from your plan. Following are steps to fake when your
plan does not effectively address the environment in which you
find your business:
Partner together. Partnering w ith componies that offer
compl imentary products to your own is an effective way fo
share the responsibility of building the market. Not only can
advertising expenses be split, but you can also introduce consumer
incentives that encourage crossover purchasing from
customers who otherwise would not have bought from your
compony. A common strategy is to determine what purchases
your customers are currently making at other establ ishmenfs that
are closely associated with their purchases at your business.
For example, if you own a coffee shop and your customers are
regularly walking in with pastry purchases from a local bakery,
a portnership with the bakery could be a logical fit. The key
is to take advantage of the existing behavior of your customers
rather than try fo change ii.
Communicate with customers. When times are
lean, your existing customers are your lifeblood, so keeping
them happy becomes increasingly important. If your marketing
budget w ill not allow for extravagant advertising, shift your
focus to working closely with your current customers. Often you
will find that your customers are more than will ing to share
their perspective on your business, which could lead to easy
and cheap modifications that will build loyalty. By keeping
track of prospective customers, you will be in a better position
to follow up with them when times are slow. For example, if
your business involves providing quotes to potential customers,
make note of those who chose not to make a purchase. When
speaking with them, you will get insight about why they went
elsewhere, and your efforts might convince them to rethink
doing business w ith you .
Remain flexible. When the economy slackens, consumers
become more conservative with their purchases and
are more incl ined to base their shopping on price alone.
The problem with cutting prices during an economic downturn
is that consumers w ill expect them to remain low when
the economy improves. One way to avoid having to resort
to cost-cutting measures is by offering more for the same
price. For example, extend ing your business's hours to better
accommodate your customers' schedules and offering free
in-home estimates for service-related bus inesses are quick
measure lo take that could help set your business apart from
the competition.
Build networks. As an entrepreneur, the ability to
network is an important skill, especially when your business
begins lo wane. One important forum for many new ventures is
the local chamber of commerce. By interacting w ith local businesses,
entrepreneurs can keep close tabs on what the local
economic trends are as well as gain access to potential commercial
customers. In addition, working w ith other businesses
can help you locate resources in your community, such as local
talent and sources of funding ; moreover, having a group of
fellow entrepreneurs can be useful for vetting ideas as well as
for moral support.
This list is not meant to be exhaustive. The underlying
theme is that entrepreneurs need to mainta in the versatility
that they had when first starling their businesses. Developing
a stra tegy is important for entrepreneurs to effectively manage
their business, and formally documenting that strategy
is important for ensuring the continuity of their business ;
however, entrepreneurs who depend solely on their business
plan to d irect their business decisions run the risk of locking
themselves into a strategy that could quickly become obsolete
due to a shift in the environment. Planning is crucial for your
business, but knowing when lo change your plan is equally
important.
Source: Adopted from Rich Sloon, ' Bod Economy? Time to Get Aggressive,'
Fortune Smo/1 Business, Morch 3, 2008, http:/ /money.cnn
.com/2008 /03/03/ smbusi ness/ sta rtup_notion. fsb/i ndex .h Im, accessed
Moy 12, 2012 .
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc t igh11o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
transition of the venture if the plan is to grow and develop
it. This section needs to deal \.Vith such issues as management
succession and investor exit strategies. In addition,
some thought should be given to change managementthat
is, the orderly transfer of the company assets if ownership
of the business changes, continuity of the business
strategy during the transition, and designation of key
individuals to run the business if the current 1nanagement
team changes. With foresight, entrepreneurs can keep
their dreams alive, ensure the security of their investors,
and usually strengthen their businesses in the process.
For this reason, a harvest strategy is essential.
12-6k Milestone Schedule Segment
The milestone schedule segment provides investors \.Vith
a timetable for the various activities to be accomplished.
It is important to sho\.v that realistic time fra1nes have
been planned and that the interrelationship of events
\.Vithin these time boundaries is understood. Milestone
scheduling is a step-by-step approach to illustrating
accomplishtnents in a piecemeal fashion. These milestones
can be established \.Vithin any appropriate time
frame, such as quarterly, monthly, or weekly. It is important,
however, to coordinate the time frame not only \.Vith
such early activities as product design and develop1nent,
sales projections, establishment of the management
team, production and operations scheduling, and market
planning but with other activities as well:
• Incorporation of the venture
• Completion of design and development and completion
of prototypes
• Hiring of sales representatives and product display
at trade sho\.vs
• Signing up distributors and dealers
• Ordering production quantities of materials and
receipt of first orders
• First sales and first deliveries ( dates of maximum
interest because they relate directly to the vent ure's
credibility and need for capital)
• Payment of first accounts receivable (cash in)
These items are the types of activities that should be
included in the 1nilestone schedule segment. The more
detailed the schedule, the more likely the entrepreneur
\.vill persuade potential investors that they have thought
things out and are therefore a good risk.
12-61 Appendix and
Bibliography Segment
The final segment is not mandatory, but it allo\.vs for
additional documentation that is not appropriate in the
main parts of the plan. Diagrams, blueprints, financial
data, vitae of management tea1n members, and any bibliographical
infonnation that supports the other segments
Updating the Business Plan 287
of the plan are examples of material that can be included.
It is up to the entrepreneur to decide \.vhich, if any, items
to put into this segment. Ho\.vever, the material should be
limited to relevant and supporting information.
Table 12.3 provides an important recap of the major
segments of a business plan, using helpful hints as practical
reminders for entrepreneurs. By reviewing this, entrepreneurs
can gain a macro view of the planning process.
Table 12.4 is a personal checklist that gives ent repreneurs
the opportunity to evaluate their business plan
for each segment. The step-by-step evaluation is based
on coverage of the particular segment, clarity of its presentation,
and completeness. While it is understood chat
business plans \.vill vary in the titles and headings that
are used (see Appendix 12A), it is still valuable to assess
each of the complete segments to see if and ho\.v they are
presented in the final business plan.
12-7 Updating the
Business Plan
L012.9 Describe some helpful hints for writing an effective
business plan
The business plan should serve as a planning tool to help
guide the start-up and execution of a ne\.v vent ure. Once
the venture is started, the business plan is still a vital
tool for planning continued gro\.vth and/or profitability.
There are several reasons to update the business plan,
including the follo"ving:
• Financial changes. Update your plan on at least a
yearly basis to project financials and plan for fiscal
needs.
• Additional financing. If continued capital is needed,
an updated business plan needs to reflect the current
numbers and not the ones projected before the venture
was started.
• Changes in the market. Changes in the customer
base and competition should be tracked and stra tegized
\.Vith regard to ho"v they might affect your
vent ure.
• Launch of a new product or service. Updating the
business plan is an essential method to assess the
feasibility of any proposed ne\.v product or service
and determine its viability.
• New management team. Any ne\.v members of the
management team should develop their O\.Vn plan to
initiate strategies for gro\.vth.
• Reflect the new reality. Business plans are \.Vritten
based on estimated numbers and projections that
1nay not be accurate after the venture has started.
Business plans should be updated to reflect the new
reality that the entrepreneur experiences.17
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F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
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288 Chapter 12 Developing an Effective Business Plan
Table 12.3 Helpful Hints for Developing the Business Plan
I. Executive Summary
• No more than three pages. This is the most crucial part of your plan because you
must capture the reader's interest.
• What, how, why, where, and so on must be summarized.
• Complete this part after you have a finished business plan.
II. Venture Concept and Value Proposition
• The name of your venture.
• A background of the industry with history of your company (if any) should be
covered here.
• Value proposition of the new venture should be described clearly.
• Any un iqueness or distinctive features of this venture should be described clearly.
Ill. Marketing Segment
• Convince investors that sales projections and competition can be met.
• Use and disclose market stud ies.
• Identify target market, market position, and market share.
• Evaluate all competition and specifically cover why and how you will be better than
your competitors. Identify all
market sources and assistance used for th is segment.
• Demonstrate pricing strategy. Your price must penetrate and maintain a market
share to produce profits; thus, the
lowest price is not necessarily the best price.
• Identify your advertising plans with cost estimates to validate proposed strategy.
IV. Operations Segment
• Describe the channels of distribution.
• List the production needs in terms of facilities (plant, storage, office space) and
equipment (mach inery, furn ish ings,
supplies).
• Describe the specific operations of the venture.
• Ind icate proximity to your suppliers.
• Describe the access to transportation for sh ipping and receiving.
• Provide estimates of operation costs-but be careful: too many entrepreneurs
underestimate their costs.
V. Management Segment
• Supply resumes of all key people in the management of your venture.
• Carefully describe the legal structure of your venture (sole proprietorsh ip,
partnersh ip, or corporation).
• Cover the added ass is lance (if any) of advisers, consultants, and directors.
• Give information on how and how much everyone is to be compensated.
VI. Financial Segment
• Give actual estimated statements.
• Describe the needed sources for your funds and the uses you intend for the
money.
• Develop and present a budget.
• Create stages of financing for purposes of allowing evaluation by investors at
various points.
VII. Critical-Risks Segment
• Discuss potential risks before investors point them out, for example,
• Price-cutting by competitors
• Any potentially unfavorable industry-wide trends
• Design or manufacturing costs in excess of estimates
• Sales projections not ach ieved
• Product development schedule not met
• Difficulties or long lead times encountered in the procurement of parts or raw
materials
• Greater-than-expected innovation and development costs to stay competitive
• Some alternative courses of action.
VIII. Harvest (Exit) Strategy Segment
• Outline a plan for a liquid ity event- lPO or sale.
• Describe the plan for transition of leadership.
• Mention the preparations (insurance, trusts, and so on) needed for continuity of the
business.
IX. Milestone Schedule Segment
• Develop a timetable or chart to demonstrate when each phase of the venture is to
be completed. This shows the
relationsh ip of events and provides a deadline for accompl ishment.
X. Appendix or Bibliography
Source: Donald F. Kuratko, The Complete Entrepreneurial Planning Guide
(Bloomington: Kelley School of Business, Indiana University, 2022).
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc t igh11otcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Updating the Business Plan 289
Table 12.4 Business Plan Assessment: A Complete Evaluation Tool
The Components
Presented here are 10 components of a business plan. As you develop your
business plan, you should assess each
component. Be honest in your assessment because the main purpose is to improve
your business plan and increase your
chances of success. For example, if your goal is to obtain external financing, you will
be asked to subm it a complete
business plan for your venture. The business plan will help a fund ing source to
more adequately evaluate your bus iness idea.
Assessment
Directions. The brief description of each component will help you write that section
of your plan. After completing your plan,
use the scale provided to assess each component.
54321
IIIII
IIIII
Outstand ing Very Good Good Fair Poor
thorough and most areas some areas a few areas no written
complete in covered but covered in covered but parts
all areas cou ld use detail but very little
improvement other areas detail
in detail missing
The 10 Components of a Business Plan
1. Executive summary. This is the most important section because ii has to convince
the reader that the business will succeed.
In no more than three pages, you should summarize the highlights of the rest of the
plan. This means that the key elements
of the following components should be mentioned.
The executive summary must be able to stand on its own. It is not simply an
introduction to the rest of the business plan
but rather discusses who will purchase your product or service, what makes your
business un ique, and how you plan to
grow in the future. Because th is section summarizes the plan, it is often best to
write it last.
Rate this component:
5
I
I
Outstanding
4
I
I
Very Good
3
I
I
Good
2
I
I
Fair
1
I
I
Poor
2. Description of the business. This section should provide background information
about your industry, a history of your
company, a general description of your product or service, and your specific mission
that you are trying to ach ieve. Your
product or service should be described in terms of its un ique qualities and value to
the customer. Specific shorHerm and
long-term objectives must be defined. You should clearly state what sales, market
share, and profitability objectives you
want your bus iness to achieve.
Key Elements
a. What type of business will you have?
b. What products or services will you sell?
c. Why does ii promise to be successful?
d. What is the growth potential?
e. How is it un ique?
5
I Rate this component: I
Outstanding
4
I
I
Very Good
Have you
covered this
in the plan?
3
I
I
Good
Is the answer
clear?
2
I
(yes or no)
I
Fair
1
I
Is the answer
complete?
(yes or no)
I
Poor
3. Marketing. There are two major parts to the marketing section. The first part is
research and analysis. Here, you should
expla in who buys the product or service - in other words, identify your target market.
Measure your market size and
trends and estimate the market share you expect. Be sure to include support for
your sales projections. For example, if
your figures are based on published marketing research data, be sure to cite the
source. Do your best to make realistic
and credible projections. Describe your competitors in cons iderable detail,
identifying their strengths and weaknesses.
Finally, expla in how you will be better than your competitors.
(Continued)
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
290 Chapter 12 Developing an Effective Business Plan
Table 12.4 Business Plan Assessment: A Complete Evaluation Tool (Continued)
The second part is your marketing plan. This critical section should include your
market strategy, sales and distribution,
pricing, advertising, promotion, and public awareness efforts. Demonstrate how your
pricing strategy will result in a
profit. Identify your advertising plans and include cost estimates to validate your
proposed strategy.
Have you Is the answer Is the answer
covered this clear? complete?
Key Elements in the plan? (yes or no) (yes or no)
a. Who will be your customers? (target market)
b. How big is the market? (number of customers)
C. Who will be your competitors?
d. How are their businesses prospering?
e. How will you promote sales?
f. What market share will you want?
g. Do you have a pricing strategy?
h. What advertising and promotional strategy will you use?
54321
Rate this component:
IIIII
IIIII
Outstanding Very Good Good Fair Poor
4. Operations. In this segment, you describe the actual operations and outline their
advantages. Specific operational
procedures, proximity to supplies, and personnel needs and uses should all be
considered in th is section.
Have you Is the answer Is the answer
covered this clear? complete?
Key Elements in the plan? (yes or no) (yes or no}
a. Have you identified a specific location?
b. Have you outl ined the advantages of this location?
C. Any specific operational procedures to be considered?
d. What personnel needs are there?
e. W ill your suppliers be accessible?
54321
Rate this component: I I I I I
IIIII
Outstanding Very Good Good Fair Poor
5. Management. Start by describ ing the management team, their unique qual
ifications, and your plans to compensate
them (includ ing salaries, employment agreements, stock purchase plans, levels of
ownership, and other considerations).
Discuss how your organization is structured; cons ider including a diagram
illustrating who reports to whom. Also include
a discussion of the potential contribution of the board of directors, advisers, or
consultants. Finally, carefully describe the
legal structure of your venture (sole proprietorsh ip, partnership, or corporation).
Key Elements
a. Who will manage the business?
b. What qualifications do you have?
c. How many employees will you have?
Have you
covered this
in the plan?
Is the answer
clear?
(yes or no)
Is the answer
complete?
(yes or no)
(Continued)
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcxpc ticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Updating the Business Plan 291
Table 12.4 Business Plan Assessment: A Complete Evaluation Tool (Continued)
Have you Is the answer Is the answer
covered this clear? complete?
Key Elements in the plan? (yes or no) (yes or no)
d. What will they do?
e. How much will you pay your employees, and what type of benefits
will you offer them?
f. What consultants or specialists will you use?
g. What legal form of ownership will you have?
h. What regulations will affect your business?
54321
Rate this component: I I I I I
IIIII
Outstanding Very Good Good Fair Poor
6. Financial. Three key financial statements must be presented: a balance sheet, an
income statement, and a cash-flow
statement. These statements typically cover a one-year period. Be sure you state
any assumptions and projections made
when calculating the figures.
Determine the stages at which your business will require external financing and
identify the expected financing sources
(both debt and equity sources). Also, clearly show what return on investment these
sources will achieve by investing in
your business. The final item to include is a break-even analysis. This analysis
should show what level of sales will be
required to cover all costs.
If the work is done well, the financial statements should represent the actual
financial achievements expected from your
business plan. They also provide a standard by which to measure the actual results
of operating your bus iness. They are a
very valuable tool to help you manage and control your business.
Have you Is the answer Is the answer
covered this clear? complete?
Key Elements in the plan? (yes or no) (yes or no)
a. What is your total expected business income for the first year?
Quarterly for the next two years? (forecast)
b. What is your expected monthly cash flow during the first year?
C. Have you included a method of paying yourself?
d. What sales volume will you need to make a profit during the three
years?
e. What will be the break-even point?
f. What are your projected assets, liab ilities, and net worth?
g. What are your total financial needs?
h. What are your fund ing sources?
54321
Rate this component: I I I I I
IIIII
Outstand ing Very Good Good Fair Poor
7. Critical risks. Discuss potential risks before they happen. Examples include price-
cutting by competitors, potentially
unfavorable industry-wide trends, design or manufacturing costs that could exceed
estimates, and sales projections that
are not achieved. The idea is to recogn ize risks and identify alternative courses of
action. Your main objective is to show
that you can anticipate and control (lo a reasonable degree) your risks.
(Continued)
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcxpc ticncc. Ccngagc Lcamingt(SCtv<':i lhc t igh11o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~t k1ioos R--quitc ii.
292 Chapter 12 Developing an Effective Business Plan
Table 12.4 Business Plan Assessment: A Complete Evaluation Tool (Continued)
Key Elements
a. What potential problems have you identified?
b. Have you calculated the risks?
c. What alternative courses of action exist?
54
Rate this component: I I
II
Outstanding Very Good
3
I
I
Good
Have you
covered this
in the plan?
2
I
I
Fair
Is the answer
clear?
(yes or no)
1
I
I
Poor
Is the answer
complete?
(yes or no)
8. Harvest strategy. Establish ing an exit out of a venture is hard work. A founder's
protective feel ings for an idea built from
scratch make it tough to grapple with issues such as management succession and
harvest strategies. With foresight,
however, an entrepreneur can either keep the dream alive and ensure the security
of their venture or establish a plan for a
I iquidity event such as an IPO or the sale of the venture. Thus, a written plan for
succession of your business is essential.
Have you Is the answer Is the answer
covered this clear? complete?
Key Elements in the plan? (yes or no) (yes or no)
a. Have you planned for the orderly transfer of the venture assets if a
liquidity event is establ ished, such as an IPO or a sale?
b. Is there a continuity of business strategy for an orderly transition if
the venture is not looking for an exit?
Rate this component:
5
I
I
Outstanding
4
I
I
Very Good
3
I
I
Good
2
I
I
Fair
1
I
I
Poor
9. Milestone schedule. Th is section is an important segment of the business plan
because ii requires you to determine what
tasks you need to accomplish to ach ieve your objectives. Milestones and deadlines
should be established and monitored
on an ongoing basis. Each milestone is related to all others, and together all of them
provide a timely representation of
how your objective is to be accomplished.
Key Elements
a. How have you set your objectives?
b. Have you set deadlines for each stage of your growth?
Rate this component:
5
I
I
Outstanding
4
I
I
Very Good
3
I
I
Good
Have you
covered this
in the plan?
2
I
I
Fair
Is the answer
clear?
(yes or no)
1
I
I
Poor
Is the answer
complete?
(yes or no)
10. Appendix. Th is section includes important background information that was not
included in the other sections. It is where
you would put such items as resumes of the management team, names of
references and advisers, drawings, documents,
licenses, agreements, and any materials that support the plan. You may also wish to
add a b ibliography of the sources
from which you drew information.
~
Key Elements
a. Have you included any documents, drawings, agreements, or other
materials needed to support the plan?
b. Are there any names of references, advisers, or techn ical sources
you should include?
c. Are there any other supporting documents?
Have you
covered this
in the plan?
Is the answer
clear?
(yes or no)
Is the answer
complete?
(yes or no)
---------------------------- ----------- • -
(Continued)
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc t igh11otcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Presentation of the Business Plan: The " Pitch" 293
Table 12.4 Business Plan Assessment: A Complete Evaluation Tool (Continued)
54321
Rate this component:
Outstanding Very Good Good Fair Poor
Summary: Your Plan
Directions. For each of the business plan sections that you assessed earlier, circle
the ass ig ned points on this review sheet
and then total the circled points.
Components Points
1 . Executive summary 5 4 3 2
2. Description of the business 5 4 3 2
3. Marketing 5 4 3 2
4. Operations 5 4 3 2
5. Management 5 4 3 2
6. Financial 5 4 3 2
7. Critical risks 5 4 3 2
8. Harvest strategy 5 4 3 2
9. Milestone schedule 5 4 3 2
10. Appendix 5 4 3 2
Total Po ints:
Scoring: 50 pts. - Outstanding! The ideal business pla n. Solid!
45-49 pts. - Very Good.
40-44 pts. -Good. The plan is sound, with a few areas that need to be polished.
35-39 pts. -Above Average. The plan has some good areas but needs improvement
before
pre sen ta ti on.
30-34 pts. -Average. Some areas are covered in detail, yet other areas show
weakness.
20-29 pts. -Below Average. Most areas need greater detail and improvement.
Below 20 pts. - Poor. Plan needs to be researched and documented much better.
Source: Donald F. Kuratko, The Complete Entrepreneurial Planning Guide
(Bloomington: Kelley School of Business, Indiana University, 2022).
12-7a A Practical Example
of a Business Plan
As we have stressed in this chapter, every new venture
should have a business plan; ho\>vever, many entrepreneurs
have no idea about the details required for a complete
business plan. An exarnple of an actual business plan
prepared for potential and business plan funding cornpetitions
is included at the end of this chapter as \>vell as in
Appendix 12A at the end of this chapter. The first plan at
the end of the chapter- titled "Circle City Food"- was
prepared for and presented to Silicon Valley venture capitalists
and angel investors. The plan in Appendix 12Atided
"Hydraulic Wind Po\>ver"- \>vas prepared for actual
financial support and also \>Vas presented at national business
plan competitions. Specific parts of a business plan
discussed earlier in the chapter are illustrated in these
detailed examples. By carefully reviewing these business
plans, you will gain a much better perspective of the final
appearance that an entrepreneur's plan must have.
1 2-8 Presentation of the
Business Plan: The 11Pitch''
LO12.10 Explain the key points in the presentation of a
business plan- the pitch
Once a business plan is prepared, the next major challenge
is presenting the plan to either a single financial
person or, in some parts of the country, a forum at \>vhich
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F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
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294 Chapter 12 Developing an Effective Business Plan
numerous financial investors have gathered. 18 The oral
presentation- commonly kno\>vn as an elevator pitch
(because of the analogy of riding an elevator and having
only t\>vo minutes to get your story told to another
person in the elevator)- provides the chance to sell the
business plan to potential investors.
The presentation should be organized, \>vell prepared,
interesting, and flexible. Entrepreneurs should
develop an outline of the significant highlights that will
capture the audience's interest. Although the outline
should be follo\>ved, they also must feel free to add or
remove certain bits of information as the pre sen ta tion
progresses- a memorized presentation lacks excitement,
energy, and interest.
An entrepreneur should use the following steps to
prepare an oral presentation:
• Kno\>v the outline thoroughly.
• Use key words in the outline that help recall examples,
visual aids, or other details.
• Rehearse the presentation to get a feel for its length.
• Be familiar \>Vith any equipment to be used in the
presentation- use your own laptop.
• The day before, practice the complete presentation
by moving through each slide.
12-Sa Suggestions for Presentation
Entrepreneurs are naturally anxious to tell ( and sell)
their story. Ho\>vever, most venture capitalists agree that
the content should be focused and the delivery should be
sharp. In the content of the presentation, it is important
to be brief and to the point, to summarize the critical
factor or unique "hook" of your venture up front, and to
use no more than 12 to 15 Po\>verPoint slides. Follo\>ving
are some key suggestions about the actual delivery of the
pitch to prospective investors:
• Focus on the "pain" for \>vhich your venture \>vill be
the solution. Investors \>Vant to kno\>v exactly \>vhat
problem is being solved by your venture. Pinpoint
the target of your solution.
• Demonstrate the reachable market. Instead of a dramatic
potential market, outline the immediate reachable
group of customers that \>vill be targeted.
• Explain the business model. Ho\>v this venture is
designed to make 1noney is critical to investors.
Demonstrating a clear method of getting to the market
for sales \>vill indicate a successful beginning to
the ne\>v venture.
• Tout the management team. Every investor \>Vants to
kno\>v the skills and ability of the venture's tea1n to
deliver and operationalize the concept. Emphasize
the experienced people on your tea1n as \>vell as any
technical advisers \>vho are on board.
• Explain your metrics. Rather than using generic
assumptions such as the famous "l percent rule"
(\>vhen someone claims that he or she \>vill simply get
1 percent of a huge 1narket \>Vith no research to back
the claim up), highlight the metrics that \>Vere used to
calculate any revenue projections.
• Motivate the audience. The entire purpose of a venture
pitch is to 1nove the audience to the next step:
another meeting to discuss everything in detail.
Therefore, you must re1nember that enthusiasm is
very important. The investors 1nust believe that you
are excited before they can be excited.
• Recent research has shown that entrepreneurs may
benefit fro1n being a\>vare of their nonverbal expressions
during a funding pitch, including their facial
expressions, such as happiness, anger, and fear, \>vhich
can prove beneficial but of course not to the extre1ne.
Certain types of rhetoric that emphasize a sense of
charisma can also be effective in venture pitches.19
• Emphasize your character and trustworthiness by
highlighting examples of commitment to others
and the manner in \>vhich you vie\>v the venture as a
higher calling for everyone. Investors ahvays believe
that an honest and straightfonvard founder is critical
for \>vorking through the challenges of a start-up.
• Listen clearly and intently to any suggestions or
questions that are provided by the investors. This
demonstrates your willingness to accept advice
and be guided through unseen \>Vaters. Investors
seek to be hands-on mentors, so they \>vill judge the
coachability of the founder.
• Why you, and \>vhy now? The final point must
answer the daunting questions in the minds of the
investors: Why are you the right venture, and why
is this the right ti1ne for it to be launched? Be confident
in yourself and your team. Ahvays de1nonstrate
a time line to sho\>v the speed \>Vith which your venture
plans to capture a significant inarket.20
12-Sb What to Expect
Entrepreneurs should realize that the audience revie\>ving
their business plan and listening to their pitch is usually
cynical and so1netimes antagonistic. Venture capital
sources often pressure entrepreneurs to test their venture
as \>vell as their mettle. Thus, entrepreneurs must
expect and prepare for a critical (and sometimes skeptical)
audience of financial sources. When you make your
pitch and submit your business plan, the venture capitalist
\>vill listen and then glance at the plan briefly before
beginning any initial comments. No matter ho"v good
you think your venture plan is, an investor is not going
to look at it and say, "This is the greatest business plan
I've ever seen!" Do not expect enthusiastic acceptance or
even polite praise. It's highly likely that the remarks \>vill
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Presentation of the Business Plan: The "Pitch" 295
' Table 12.5 What to Do When a Venture Capitalist Turns You Down: 10 Questions
1. Confirm the decision: "That means you do not wish to participate at this time?"
2. Sell for the future: "Can we count you in for a second round of financing, after
we've completed the first?"
3. Find out why you were rejected: "Why do you choose not to participate in th is
deal?" (Timing? Fit? All filled up?)
4. Ask for advice: "If you were in my position, how would you proceed?"
5. Ask for suggestions: "Can you suggest a source who invests in this kind of deal?"
6. Get the name: "Whom should I speak to when I'm there?"
7. Find out why: "Why do you suggest th is firm, and why do you think this is the best
person lo speak to there?"
8. Work on an introduction: "Who would be the best person lo introduce me?"
9. Develop a reasonable excuse: "Can I tell him that your decision lo turn us down
was based on ?"
10. Know your referral: "What will you tell him when he or she calls?"
Source: Joseph R. Mancuso, How to Write a \Vinning BHsiness Plan (Englewood
Cliffs, NJ: Prentice Hall, 1985), 37. Reprinted with the perinission
of Simon & Schuster Adult Publishing Group. Copyright© 1985 by Prentice Hall, Inc.
be critical, and even if they aren't, they'll seem that \.vay.
Don't panic. Even if it seems like an avalanche of objections,
bear in mind that so1ne of the best venture capital
deals of all time faced the same opposition. Never expect
results in 20 minutes. Each pitch \.vill be a learning experience
that will build your confidence for the next one.
Entrepreneurs 1nust be prepared to handle questions
from the evaluators and to learn from their criticism.
They should never feel defeated but rather should make
a cormnitment to in1proving the business plan for future
revie\.v. Table 12.5 outlines some of the key questions
that an entrepreneur might ask when their business plan
is turned do\.vn. Entrepreneurs should use the ans\.vers
to these questions to revise, re\.vork, and i1nprove their
business plan. Re1nember that you are starting out on a
journey more si1nilar to a marathon than a sprint. The
goal is not so much to succeed the first ti1ne as it is to
succeed.21
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Sample New Venture and Business Plan
CIRCLE
CITY FOOD
Circle City Food
Nancy Tseng
[email protected]
Winter 2021
........._.....
Permission granted by the author
Table of Contents
Executive Su1nmary
The Problem
The Solution
The Competition
Management Team
Finance and Implementation
The Business Concept and Value Proposition
The Offering
Revenue Streams and Product Pricing
Product Validation
Primary Market Research
Industry and Market Analysis
The Matter of Food \'{Taste
Industry Overview and Trends
Competitive Landscape
Go-to-Market Plan
Food Generator and Customer Pains
Target Markets
Distribution
Marketing Plan
Sales Structure, Process, and Terms
Operational Plan
Operational Overview
Key Activities, Resources, and Partnerships
296
296
296
297
297
297
297
297
298
298
298
299
299
299
300
301
301
302
302
302
303
303
303
304
Manage1nent Team 304
Management Structure 304
Advisers 304
Product Development, Gro\.vth, and Exit Strategy 305
Growth Plan, Milestones, and Time Line 305
Future Product Extensions 305
Risk Mitigation
Exit Strategy
Finance
Summary of Financial Projections
and Financing Plan
Explanation of Assumptions
Terminal Value
Works Cited
Appendix Business Model Canvas
Too Good to Go Locations
Indy Local Foodies Survey Results
SOM Calculation
Information Architecture
Wireframe
Gantt Chart
Balance Statement Summary
Cash-Flow Statement Summary
Yearly Income Statements
Executive Summary
The Problem
306
307
307
307
309
309
309
311
311
312
313
314
315
316
317
317
318
According to the Food and Agricultural Organization
of the United Nations, one-third of all food produced
around the \.vorld is \.Vasted. The United States discards
more food than any other country, and food takes up
more space in landfills than anything else. Despite this,
50 million people suffer from food insecurity (The Problem
of Food Waste). In Indiana alone, a study conducted
by Feeding America reveals that 15 percent of the population
is food insecure, which amounts to over a million
people, including 335,000 children (The State of Food
Security and Nutrition in the World).
The Solution
Circle City Food is an online 1narketplace that sources
meals fast approaching their sell-by date from food generators
such as restaurants and finds customers for this
food, "vhich is marked do"vn at least 50 percent fro1n its
original price. In addition, every meal transaction made
results in a meal donated to Feeding America. A 1neal
donation costs only $0.10.
Food generators will be incentivized to use this system
by the ability to sell food that may othenvise have been
thro\.vn a\.vay and to distribute this food in a convenient
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manner. For a monthly subscription, they can also post
full-price food for sale. This provides an economic benefit
for small-business O\>vners \>vho may not currently have
an online presence. On the other hand, customers will
be incentivized by the ability to support local businesses,
access a marketplace of available discounted food, and
save money. If the corresponding restaurants have the ability
to support delivery, customers can also enable this convenience
for a small extra charge. All parties using Circle
City Food \>vill create opportunities to help the corrununity
and environment, leading to a \>vin-\>vin-\>vin situation.
The Competition
The competitors of Circle City Food fall into three main
classes: those that sell excess food from food generators (usually
for-profit \>Vith a sustainability focus), those that create
a marketplace for food generators (usually for-profit \>Vith
an economic focus), and those that serve the food-insecure
corrununity (usually not-for-profit). Circle City Food enables
all purposes, thus being a more holistic solution.
Management Team
Currently, Circle City Food currently has only its founder,
Nancy Tseng, driving it fonvard. Ho\>vever, during the
course of concept development and problem validation,
she consulted rnany local community leaders regarding
food waste management. Nancy \>vill be recruiting them
and others to be part of her team or Board of Advisers.
She is also actively looking for additional tearn members
and resources \>vho are kno\>vledgeable in sustainability
initiatives in Indianapolis and e-commerce marketplace
development.
Finance and Implementation
It is free for customers to access Circle City Food and
peruse the discounted food that is availa ble for sale.
There is a $60 annual fee for restaurants to sign into the
sys tern. A transaction fee of $1.00 to $1. 79 is charged
\>Vith each meal purchase. An extra charge of $0.50 is
also applied if delivery is enabled on a particular order.
Circle City Food anticipates earnings before int erest,
taxes, depreciation, and amortization (EBITDA) of
$5,337,889 by the end of 2026. Currently, Nancy is seeking
$500,000 in seed funding in return for 10 percent
equity to support the next phase of development.
The Business Concept
and Value Proposition
The Offering
In the United States, 30 to 40 percent of the entire food
supply is \>vasted. Most of this estimated 108 billion
pounds of food \>vaste is perfectly edible and nutritious
Sample New Venture and Business Plan 297
(Food Waste in America in 2021 ). Forty-three percent of
this food waste comes from homes and restaurants and
40 percent from grocery stores and food service companies
(The Problem of Food Waste). The rnain intent of
Circle City Food is to rescue potential food waste from
these sources by incentivizing their sale and distribution
starting in the state of Indiana.
The focus on Indiana is intentional. Indiana is
ranked second in the nation in terms of being the most
\>Vasteful state, and the situation is only getting worse as
Indiana's landfills are growing the fastest in the nation
(American Wasteland). Indianapolis is also the most
\>vasteful big city in America. Compared to other cities
such as San Francisco and Seattle, \>vhere over 60 percent
of \>Vaste is recycled, only 7 percent of waste is recycled
in Indianapolis (Bo\>vman and Hopkins). Circle City is
Indianapolis's nickname, so Circle City Food was born
as a solution to engage more people in the city in the circular
economy. Even after scaling this solution to include
other states and municipalities, the founder wanted to
honor the locale that inspired the initial idea.
In terms of how it \>Yorks, Circle City Food creates an
online marketplace for food generators, such as restaurants,
to market meals that are close to their sell-by date
and sell them to customers at a discount. Customers can
purchase this food after filtering based on their location,
available pickup times, and dietary needs, such as
lactose-free, gluten-free, vegan, or vegetarian. After placing
an order, custorners pick up their food, and a meal is
donated to Feeding America. The business model canvas
for Circle City Food is in the Appendix.
Circle City Food differentiates itself from other food
\>Vaste reduction platforms based on the ability for customers
to filter for specific dietary restrictions and automatically
donate a meal \>Vith each transaction despite
having comparable pricing to its most prevalent competitor,
Too Good to Go. In addition, the availability
of competing platforms is heavily location dependent,
and none currently operates in Indiana. T\>vo other \>vays
that Circle City Food differentiates itself are based on
its enhanced ability to provide economic support to
small businesses and the ability for custorners to add in
convenience/sustainability features as desired:
• In terms of econornic support, srnall food generators,
such as restaurants that are just starting up and currently
do not have an online presence, can use Circle
City Food to market full-price items. This can be
especially helpful for small, local business owners \>vho
need a marketplace to advertise their prod ucts. The
ease of use of the system allo\>vs businesses to quickly
post their available offerings for customers to see.
• In terms of feature customization, customers can
"favorite" certain food generators and receive notifications
\>vhen food is available from these specific
businesses. In addition, custorners who \>Vant food
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298 Chapter 12 Developing an Effective Business Plan
delivery can select this option as long as restaurants
have the ability to support it. This in turn gives
restaurants the ability to deliver food ,vithout relying
on traditional delivery 1nodels that charge a high
commission. Customers who are more sustainability
minded can also take part in an initiative to bring
their o,vn take-out containers to the restaurants. In
future extensions of this marketplace, these customers
can be fur ther targeted to help ,vith other sustainability
1novements.
Revenue Streams and Product Pricing
Circle City Food ,vill charge restaurants an annual fee
of $60 to join the marketplace. Customers can join the
platform for free. Restaurants that enter a meal into the
system ,vill post the full price of the meal, and the app ,viii
automatically apply a 50 percent discount. Restaurants
can adjust this discount to be higher if desired. For a
monthly subscription price of $15, restaurants can opt out
of this auto1natic discount feature and post the full price
of the meal. When a purchase of more than $10 is made,
a transaction fee of $1.79 is charged, ,vhich is the same as
the main co1npetitor, Too Good to Go (Sheppard).
Ho,vever, if a purchase of less than $10 is made,
a transaction fee of $1.00 is charged. Too Good to Go
charges the $1.79 regardless of the size of the transaction.
Independent contractors ,vill also be e1nployed for sales
and customer support. When they sign on to be part of
Circle City Food, they 1nust pay $30 to enroll themselves
to receive a training package and other instructions.
The final source of revenue is the extra charge of
$0.50 that is applied if the delivery option is enabled
bet,veen food generators and customers. Ho,vever, this
service is not linked to traditional delivery models such as
Grubhub, DoorDash, and UberEats, so restaurants need
to manage the delivery themselves. However, this is meant
to give restaurants the freedom to choose their o,vn delivery
mechanism given that traditional models charge high
commissions (20 to 30 percent) for every order. Legislators
in cities such as Ne,v York and Los Angeles have had
to cap fees at 15 percent per order due to the burden they
placed on small businesses (Sharma). With Circle City
Food, restaurants can set their o,vn delivery fees in the
app, all of ,vhich go back to their o,vn ,vorkers.
Product Validation
Other food ,vaste reduction platforms have proven the
concept that customers ,vill sign onto a food marketplace
that incentivizes food ,vaste reduction ,vith discounts,
although all have slightly different models. Summaries
of the top six food waste apps follo,v (Wolken):
• FoodforAll charges a 10 percent transaction fee
,vhen restaurants sell food th at is about to be
thro,vn out. Customers 1nust pick up the food one
hour before closing time. The food is 1narked do,vn
at least 50 percent. Restaurants can also sign up
for a premi wn plan chat costs $14 per month for
increased staff and customer support.
• Flashfood charges a transaction fee ,vhen grocers
sell food close to its "best-before date." Each transaction
made outside of Canada is also charged with
a foreign transaction fee. The food is marked do,vn
up to 50 percent.
• Your Local charges a transaction fee ,vhen resta urants
or stores sell food that is about to be thro,vn
out. Customers pick up the food at specific times.
Each transaction made outside of Den1nark is also
charged with a foreign transaction fee. The food is
marked do,vn 50 to 70 percent.
• Too Good to Go charges $1. 79 per transaction
when restaurants or stores sell food that is about to
be thrown out. This food is placed in "Magic Bags,"
which is a random grouping of food rather than a
set meal. Customers do not choose ,vhat they are
getting ,vhen they pick up the food at specific times.
• Food Rescue US is a not-for-profit that organizes
community volunteers to deliver food surpluses
from businesses to organizations that serve the food
msecure.
• Olio charges a transaction fee when individuals
share food ,vith one another on their platform. This
concept is similar to Facebook marketplace but for
food.
Circle City Food's model is most similar to FoodforAll,
Your Local, and Too Good to Go. Currently, these
competitors operate only in certain regions. FoodforAll
is based in Boston and Ne,v York City, ,vhile YourLocal
is based Denmark and Ne,v York City. Too Good to
Go is the most prevalent co1npetitor, as it has a strong
base in Europe and has already spread to several states.
A map sho,ving the locations and nu1nber of businesses
that it has partnered with is in the Appendix. It currently
has no presence in the state of Indiana.
Primary Market Research
To gauge the readiness of the Indianapolis 1narket in
particular, a survey ,vas sent out to the Facebook group
Indy Local Foodies, an active co1nmunity that ,vrites
revie,vs and gives recommendations on the food scene
in Indianapolis. Eighty-seven people responded over the
course of a ,veek. The full results are in the Appendix,
but the main insights are swnmarized belo,v:
• Several survey respondents have seen this business
model in other locations and ,vant to have it in
Indianapolis.
• All respondents ,vere ,villing to pick up food close
to its sell-by date from restaurants at a discount.
Most customers eat out multiple times per month,
spending $15 to $30 on average.
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• Cost and convenience rather than the focus of sustainability
drive customer behavior. In the survey,
customers prioritized the amount of money saved
above all other decision factors \.Vith the second and
third priorities being distance to the restaurant and
the food being ready to eat at pickup, respectively.
Kno\.ving that they are helping the environment
ranked last in terms of customer priorities.
Industry and Market Analysis
The Matter of Food Waste
The United States is taking increased action against food
\.vaste. On Septe1nber 16, 2015, the U.S. Departtnent of
Agriculture and the Envirorunental Protection Agency
(EPA) announced the domestic goal to cut food loss
and \.vaste in half by 2030. In 2010, the baseline year
\.vhen the EPA announced its goal, food loss was 31 percent
of the food supply, \.vhich a1nounted to 133 billion
potmds and an estimated value of $161.6 billion. Thus,
the 2030 goal ai1ns to cut the amount of food loss to
66 billion pounds (United States 2030 Food Loss and
Waste Reduction Goal).
Several states across the country have taken action
to curb food \.Vaste and i1nprove food recovery. Legislators
in California, Connecticut, Massachusetts, Ne"v
York, Rhode Island, and Vermont have passed la\.vs that
restrict the amount of food \.vaste going to landfills. This
has been accomplished by increasing the amount of food
donations, funding coin posting and organic collection
programs, creating composting educational programs,
reducing waste in schools, and starting to require that
businesses separate organic \.vas te. Thus, the concern
around food \.Vas te is continuing to grow, and more
states \.Vil! likely take increased action over time (Food
Waste in America in 2021 ).
In fact, Indianapolis has already started to become
focused on this issue \.Vith Thrive Indianapolis, which is
the first-ever actionable plan created to bring together
city agencies, community partners, and residents to
make the city equitable, healthier, and prepared for the
challenges of the nventy-first cent ury. One of the 1nain
pillars of the plan is to reduce food insecurity in Indianapolis
by 20 percent by 2025 \.vhile also reducing food
\.Vas te (Thrive). Thus, Circle City Food provides solutions
for the city's existing concerns.
Industry Overview and Trends
In 2020, consumers in the United States spent $769
billion ordering food from restaurants, and take-out
orders accounted for $486 billion, or 63 percent of those
sales (Guszko\.vski). This constitutes the total addressable
market (TA!vl) . The vast 1najority of take-out
orders \.Vere placed using a digital channel, out of \.vhich
15 percent \.Vere initiated via a mobile app (Lock). Thus,
Sample New Venture and Business Plan 299
the serviceable addressable market (SAM) is $73 billion.
Even as dine-in restrictions due to the COVID-19
pande1nic have started to loosen around the country,
drive-through and pickup behaviors have continued
to increase. In fac t, one in three people surveyed by
Bluedot, a provider of mobile app geolocation technology,
said they \.vill never return to pre-pandemic dining
habits (Guszkowski).
TAM:
$486B
SAM:
$73B
SOM:
$3.7M
As mentioned before, the initial focus of Circle City
Food is the state of Indiana. Thus, the serviceable and
obtainable market (SOM) is based on the consumers in
the state \.vho use an a pp to order food. Just taking the
members of the Indy Local Foodies Facebook group \.vho
\.Vere surveyed in Product Validation into account leads to
a very conservative estimate of the SOM of $3.7 million.
These consumers are an ideal customer group, as they
are technology literate, being engaged in an online co1nmunity
that regularly discusses food choices in the Indianapolis
area. In addition, these members typically eat out
several times per month. Ho\.vever, the true SOM is likely
benveen the values for the SAM and SOM. According to
the National Restaurant Association, Indiana's restaurants
were estimated to make $12.8 billion in sales in
2018. Discounting this number by the expected portion
of orders made digitally via an app leads to an SOM of
$216 million. Thus, the different estimates of SOM are
based on the calculation approach of either going bottom
up ($3.7 million) or top do\.vn ($216 million). Both calculations
are sho\.vn in the Appendix.
Social
Bearable Equitable
Economic
Viable
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300 Chapter 12 Developing an Effective Business Plan
Sustainable food trends are on the rise ,vith 60 percent
of conswners buying products and services from companies
that are sustainable (Fromm). Sustainable development
requires the alignment of three pillars: environment,
social, and economic. Circle City Food addresses each of
these components as it creates econo1nic advantages for
restaurants to market discounted food to customers, providing
environmental benefits from reducing food waste
and also social benefits to the food insecure.
Circle City Food also provides economic benefits to
restaurants by providing the ability to market other fullprice
offerings on the a pp 1narketplace. For restaurants
currently ,vithout an online platform, this translates
into a heavy financial benefit, as 45 percent of consumers
surveyed by PYMNTS/Paytronix said the ability to
order online encourages them to spend more on food
(Guszko,vski). In addition, Circle City Food provides a
system to organize delivery orders outside of using thirdparty
delivery services.
Consumers have even started the trend of boycotting
third-party delivery services in order to support
small businesses, often using a restaurant's o,vn app for
ordering. In fact, 50 percent of consumers surveyed by
Bluedot used restaurant apps once or t,vice a 1nonth
compared to only 32 percent who used third-party
Too Good to Go
delivery services. Thirty-six percent said they ,vould
never use third-party apps (Guszko,vski).
Competitive Landscape
Competitors Dealing in Food Waste
As 1nentioned in the Product Validation section, the
competitors for Circle City Food that similarly enable a
system for minimizing food ,vaste are highly dispersed,
and none besides Flashfood have a presence in Indiana.
Ho,vever, Flashfood focuses more on the sale of groceries,
,vhereas Circle City Food focuses on the sale of prepared
meals.
Too Good to Go is the competitor that presents the
most threat due to its scale. On October 5, 2021, on its
,vebsite, Too Good to Go announced that it had already
signed on 114,758 cafes, restaurants, bakeries, hotels,
and other businesses as ,vell as 45 .6 1nillion customers.
In 2021 alone, it has launched into Chicago, Los Angeles,
and Atlanta. However, even though its app has a rating of
4.9 out of 5 stars, customers ,vho left a negative revie,v
shared several co1runon issues. The table belo,v sho,vs the
points of parity and differentiation ber-veen Too Good to
Go and Circle City Food, the differentiating factors being
based on Too Good to Go's negative reviews.
Circle City Food
Ease of Use of App Parity: the mapping funct ion to locate food and set favorites will
be similar.
Presence in Indiana Customers have noted there are not many The business w ill
focus first on the
offerings in an area after launch. It is also Ind ianapolis area before scaling to other
not available in Indiana. Indiana cities and states.
Cost of App Restaurant annual fee is $59. Transaction Restaurant annual fee is $60.
cost is always $1.79. Transaction cost is $1.79 or $1.00 if an
order is less than $10.
Setting Customer Dietary Customers are not able to filter by dietary Customers w ill
be able to filter by the common
Preferences restrictions and must contact the restaurants dietary restrictions.
themselves.
Customer Pickup Customers have issues with food running Restaurants will be able
to easily update their
Experience out prior to pickup without any notification. offerings. Orders made must
be honored by
the restaurants.
Quality of Food Customers have issues with food quality. Customers can choose
what they pick up
Reviews have labeled the "Magic Bags" as rather than getting a randomized bag of
"Rubbish Bags." food.
Solution for Small Small restaurants more than likely already The app creates a way
for small restaurants
Restaurants take steps to reduce food waste due to tight to get online and reach a
larger aud ience
margins. without applying a discount to meals.
Competitors Creating an Online Marketplace
Restaurants currently use various means in order to
set up an online presence. Restaurants can create their
o,vn business account on Facebook or design their
o,vn ,vebsite. It is free to create a landing page on
Facebook, but there is no automated ,vay to order food
in this method. On the other hand, restaurants can build
their own ,vebsite ,vith an online menu and integrated
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F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
payment options. This allo,vs restaurants to direct
orders from customers to their point of sales (POS) in
real-time, ,vhich then engages restaurant staff to complete
the order. This then also allows restaurants to keep
more of their profits since they pay $0 in commission
fees (Krook). However, the average cost of setting up a
restaurant ,vebsite is $90 per hour, and the final receipt
can be anr-vhere from $0 to $15,000 (Boiko). The lo,ver
end of the cost spectrum typically results in very limited
online functionality and a clunky user experience.
Alternatively, restaurants can use a third-party takeout
and delivery app such as UberEats, DoorDash, or
Grubhub. These systems house an extensive list of
restaurants that customers can choose from.
However, this system is not integrated ,vith a restaurant's
POS unless the restaurant pays for a separate system,
such as Deliverect. From Deliverect's website, the
cost to integrate a third-party system for a 1nedium-size
restaurant having 600 orders per 1nonth is $99 per month
for 12 months and a one-time setup fee of about $150.
Without this integration, staff 1nembers must constantly
monitor orders that come in and transmit the information
to the restaurant's POS. As mentioned before, using
these third-party syste1ns also usually results in high commissions
being paid, cutting into a restaurant's profits.
Circle City Food allo,vs restaurants to quickly set up
their o,vn online presence. Although the focus is on providing
discounts on meals that are close to their sell-by
date, the monthly subscription cost of $15 paid to market
full-price items from a restaurant is much cheaper
(even taking the $60 a1u1ual fee into account) and can be
done much faster than setting up a new ,vebsite. Restaurants
that are just starting out or are developing their
Food Generator
Difficulty setting up an online presence
without high cost or specific knowledge
Desire to market to more customers and
help the food insecure
Desire to set up a system to reduce food
Sample New Venture and Business Plan 301
o,vn system can take advantage of Circle City Food's
marketplace to reach more customers and keep more of
their beginning profits.
Competitors Donating to the Food Insecure
Certain apps, such as Food Rescue US, or local organizations,
such as the Gleaners and Second Helpings, focus
on supporting the food insecure. These are typically nonprofits
that pick up food from different establishments
and then distribute it to food pantries, soup kitchens,
shelters, and other organizations that combat hunger.
Some customers using Too Good to Go have noted that
they are concerned that using a food ,vaste app focusing
on sales to customers cannibalizes the amount of
food that is donated to those in need. Ho,vever, food
banks do not accept food that has a limited shelf life or
that needs refrigeration. Thus, prepared meals that are
close to their sell-by date, ,vhich is the pri1ne product
marketed by Circle City Food, ,vill not cannibalize food
donations. The focus on supporting the food insecure
is further emphasized by the automatic meal matching
program to Feeding America ,vith every purchase.
Go-to-Market Plan
Food Generator and Customer Pains
Because Circle City Food is a platform that brings
together food generators and customers, both sides need
a specific strategy ,vhen going to market. Belo,v is a summary
of the primary characteristics from each side of the
equation. These characteristics are in order of preference
from top to bottom.
Customer
Want to receive discounts on food
Desire to see an online food marketplace
that is easy to order from
Desire to support small businesses and
help the food insecure
waste, if applicable -----\_)' '" to help the envirnnment
It will likely be more difficult setting up the initial
relationship ,vith food genera tors than it ,vill be with
customers. Erin McGeoy is a social entrepreneur ,vho
started Last Call for Food, ,vhich is a similar platform
set up to fight food waste in the Washington, D.C., area
that provided discounts to college students in the area.
After three years of operating ,vhere she saved more
than 5,000 pounds of food ,vaste from going to landfill,
she shut Last Call do,vn to join Too Good to Go. In
a personal intervie,v with her, she noted that her main
difficulty ,vas in signing up restaurants due to lack of
interest and lack of resources. She had tried relying on a
volunteer model using students and creating an ambassador
program. In the end, she had only eight restaurants
in her program despite having over 1,200 customers
,vith little to no marketing.
This is ,vhy Circle City Food provides more of a
solution to restaurants by enabling the creation of an
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F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
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302 Chapter 12 Developing an Effective Business Plan
online marketplace and allowing them to post full price
items if desired. This creates an incentive for them
to join if they already engage in their own solutions to
reduce food ,vaste. Ho,vever, further market research
,vill be done with restaurant owners once a minimum
viable product (MVP) is created. With a tool in hand,
concrete discussions to focus on restaurant pain points
can be held to determine ho,v Circle City Food ,vill
solve these pains.
As noted in the Indy Local Foodies survey results,
customer also need more of an incentive beyond having
a positive enviro1unental impact via reducing food waste
to engage in the app. Customers are driven more by the
ability to receive discounts on food while still being able
to enjoy a quality meal. In this ,vay, Circle City Food
truly differentiates itself from Too Good to Go, ,vhich
provides a random grab bag of food that customers have
no choice over. In conclusion, Circle City Food addresses
more economic pain points for restaurants ,vhile providing
delicious, discounted meals for customers ,vho can
choose ,vhat they are purchasing.
Target Markets
For food generators, casual dining restaurants make up
the target market. Typical prices for these restaurants are
$10 to $20, ,vhich is higher than the fast-food and fast
casual markets. Ho,vever, these latter markets are typically
chains, which likely have their o,vn online ordering
solution in place and whose menus are already familiar
to customers. The ideal casual dining restaurant for
Circle City Food is locally o,vned and may or may not
already have an on line presence, depending on its maturity,
the o,vners' technical kno,vledge, and the amount
of resources it has to fund this system. These restaurant
o,vners 1nay be frustrated by the use and cost of thirdparty
delivery syste1ns and are looking for an alternative
solution. Also, being locals, these o,vners are engaged in
the community and ,vould be more invested in giving
back to it and the food insecure.
Reducing food ,vaste and supporting the environment
would be an ancillary concern, as these target
restaurant o,vners are likely highly cognizant of their
margins and may already take alternative measures
to reduce food waste. Six different restaurant o,vners
that fit this profile ,vere asked how they handle food
,vaste (Federal Fine Foods, Circa 1906, and the four
,vho responded to the survey). Most of them made
only enough to satisfy orders or ran until they sold out.
One o,vner, Kris Kraut at Federal Fine Foods, even has
his o,vn composting system, so any leftovers are still
diverted fro1n the land fill.
For customers, the target markets are Indy foodies
,vho enjoy eating out and university students. The foodies
are city locals ,vho are adventurous and enjoy eating
out at least three ti1nes a month, typically paying $15 to
$30 for their meals. They are ,villing to give food recommendations
to others based on their expert knowledge
of the Indianapolis food ecosystem and to receive
recommendations of ne,v places to try. They highly prioritize
food quality and a high quantity-to-price ratio.
On the other hand, university students are more opportunistic
eaters who prioritize lo,v cost. They also tend
to be more technically literate and would appreciate an
app that helps them locate good meal deals. University
students also tend to be more environmentally conscious
and ,vould respond well to the message around reducing
food ,vaste.
Distribution
Distribution ,vill occur primarily over the App Store.
This ,vill allo,v food generators and customers to do,vnload
and access the platform easily on par ,vith Circle
City Food's competition. Since the pandemic started, a
survey from Global Webindex sho,ved that people ,vere
spending more time engaging in various apps. After
an app is developed enough to pass Apple's App Store
guidelines and has been tested against bugs and crashes,
an Apple Developer Program account needs to be created
,vith a $299 annual fee. Then an icon, screenshots/
previe,vs, and metadata need to be prepared before publishing
the app. Finally, the app can be submitted for
revie,v, ,vhich can take one to three days, to be released
aftenvard (Oragui).
Sensor To,ver predicts that by 2024, total annual
app do,vnloads ,vill gro,v to 184 billion per year at a
compounded annual gro,vth rate (CAGR) of 9.8 percent
(App Download and Usage Statistics [20201). In the
short term, iOS app do,vnload gro,vth is expected to rise
at a faster rate than Google Play do,vnloads. Ho,vever,
in the long term, Google Play do,vnloads ,vill gro,v at a
greater rate with a CAGR of 10.5 percent (App Download
and Usage Statistics [20201). Thus, the intent is to
establish the a pp in Google Play later on after Circle
City Food has established a foothold in Indiana.
Marketing Plan
Social media ,vill be central to marketing Circle City
Food. Facebook in particular will be a primary focus,
as initial customer relationships ,vere already formed
here from the survey distributed in Product Validation.
Another advantage is that 1nany target restaurants also
have their own landing page on Facebook and thus can
be reached here. When it co1nes to social media, restaurants
are most likely to use Facebook (91 percent) and
Instagram (78 percent) (Boyarsky).
The final target market, university students, have
ahvays tended to be active in social media, and this has
only increased since the onset of the pandemic. Facebook
is currently the 1nost popular online nenvork a1nong
both 1nillennials and college students, ,vith 8 8 percent
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having an account that they regularly use (How Millennials
Use Social Media). Instagra1n is the second most
frequently logged into platform for teens and young
adults. An initial ,vebsite is also going to be developed
to assist ,vith marketing and ,vill contain information on
the 1nission of the company and the impact it is making
in terms of customer savings, food ,vaste reduction, and
meals donated to Feeding America.
As Circle City Food is meant to first gro,v a strong
base in Indianapolis, different channels specific to the
city, such as the Indianapolis Star and the Indianapolis
Business Journal, ,vill also be used in 1narketing. In addition,
there are various food halls around the city, such
as the Indianapolis City Market, Garage Food Hall, and
the AMP Artisan Marketplace at 16 Tech, that receive
heavy foot t raffic during lunch periods and on ,veekends.
Here, physical flyers can be posted notifying customers
that potential food savings are possible if they
do,vnload the Circle City Food app.
Sales Structure, Process, and Terms
When focusing only on the Indianapolis market, the
sales team will be restricted to the founder and the initial
team that she builds. After building traction in the city
and preparing to expand to other locations, the intent
is to have others join the Circle City Food team as independent
contractors. These contractors who are part of
the gig economy ,vill be responsible for onboarding new
restaurants into the app as ,vell as 1naintaining customer
relationships ,vith the1n, including ans,vering requests
for information, responding to restaurant and customer
feed back, and valid a ting the refund process should
problems arise.
Using gig workers to build the relationships in the
areas chat they are fa1niliar ,vith is beneficial in chat
they likely have deeper kno,vledge of the target n1arket
than a tea1n centrally located in Indianapolis. Doing this
also helps to continue the message that Circle City Food
is a system chat helps the local economy, as it depends
on locals to engage and support it. The gig economy
is expected to reach a ,vorth of $455.2 billion in the
United States by 2023. This gro,vth has not slo,ved ,vith
the onset of the pandemic. In fact, 78 percent of the gig
,vorkforce report chat they expect to do the same or
more gig ,vork afterward (Djurovic).
People ,vho want to participate in the gig workforce
,vill first need to enroll to receive an initial training
package that covers the 1nission and values of Circle
City Food, ho,v to help set up restaurants on the
app, different marketing tools necessary to reach the
target audience, and how to support food generators
and customers alike. This training package ,vill cost
$30. Afterward, each ,vorker ,vill receive $50 for each
food generator that they sign on ,vi th a verified purchase
aftenvard and 1 percent of each meal transaction.
Sample New Venture and Business Plan 303
This incentivizes the gig ,vorkers to continue maintaining
good relationships ,vith both food generators and
customers.
At Too Good to Go, Erin McGeoy stated that the
monthly sales quota ,vas 15 to 20 food generators per
month, which equates to signing on about one ne,v
restaurant per day. Assuming that a gig worker can
do only one-quarter of this ,vork and ,vill sign on five
restaurants per month, an average of 224 online orders
per month, and an average transaction cost of $10,
a typical beginning gig worker should make $362 per
month. Around 85 percent of all gig ,vorkers reportedly
earn less than $500 a month (Djurovic), so Circle City
Food's opportunity should be appealing given the fact
that the expected pay can g.ro,v to $922 per month after
a six-month period as new restaurants are continuously
signed on.
Operational Plan
Operational Overview
The key operation of Circle City Food ,vill be to create
its app e-com1nerce platform. This ,vill begin ,vith
developing a ,vireframe, ,vhich ,vill save time and money
,vhen ,vorking ,vith an established application developer.
Preli1ninary information flo,v architecture and a
,vireframe adapted from a food ,vaste study in India are
sho,vn in the Appendix (Kalia). After ,vireframe development,
an application developer ,vill be hired to start
developing a clickable prototype that ,vill serve as the
MVP. Further market testing th.rough intervie,vs ,vith
restaurant owners ,vill be conducted using this MVP to
gauge problem-solution fit and pricing. Some key features
in this app to keep in mind based on gaps in existing
solutions are listed belo,v:
• Ease of use. This applies to the regist ration and
sign-in process for both food generators and customers
as ,vell as app navigability. Restaurant o,vners
should easily be able to post pictures and descriptions
of their food offerings. Customers should be
able to filter by food availability, food type, dietary
restrictions, and restaurant location. In the future,
a food recormn endation system may also be set up
based on machine learning and algorithms.
• Push notifications on a customer's favorite food generators
when new discounts are available. Customers
should also be able to turn off this feature if desired.
• Capability to give feedback. This applies to feedback
on the purchase process as well as on the restaurant/
food generator.
• Clear order summary, status, and tracking options
as well as communication of impact in terms of
customer savings, food waste saved, and number of
meals donated.
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304 Chapter 12 Developing an Effective Business Plan
Key Activities, Resources,
and Partnerships
In the early stages, key activities for Circle City Food
include launching its app and \.vebsite along \.Vith custorner
acquisition. Another vital activity is custorner support,
\.vhich is especially important when beginning to
gain traction in the Indianapolis marketplace and building
trust in the brand. Key resources include the technology
powering the app and a good reputation \.Vith the local
economy. This reputation \.vill allo"v Circle City Food
to create partnerships \.Vith local universities, local food
banks and other organizations feeding the food insecure,
and sustainability groups that can help market the app
and potentially become more involved in future product
extensions. Facebook, Instagram, and other local advertisers
\.vill also be partners to help market Circle City Food.
Another key partner \.vill be RocketBuild, \.vhich is
an onshore soft\.vare development company kno\.vn to
partner \.Vith entrepreneurs to build mobile apps, \.veb
applications, \.vebsites, and complex integrations. After
signing a detailed mobile app development agreernent
\.Vith a focus on the protection of intellectual property,
\.vhich \.vill be drafted \.Vith a la\.vyer, they \.vill build the
technology to po\.ver the app and \.vebsite. Rose-Hulman
Ventures \.Vas also consulted to be a potential app developer
since they had comparable pricing to RocketBuild
and are experts in rapid prototyping, product design,
and development. Ho\.vever, their project teams normally
sunset after an app is developed, so they \.Vould
not perform any maintenance on the product after it is
built. RocketBuild, on the other hand, has the capability
to continue maintaining the app after development and
can help troubleshoot technical issues that arise, add
more fea tures to the a pp in the future, and update the
system as necessary. Thus, RocketBuild is the cornpany
Circle City Food has chosen to partner \.Vith.
Circle City Food \.vill apply for trademarks on the
company name and logo (the one shown on the first
page is not finalized). Additionally, the company \.vill file
for a copyright for the developed application soft\.vare
systern. Later, a la\.vyer \.vill also be consulted to draft
contractual agreements to start signing on independent
contractors/gig \.Yorkers to help spread Circle City Food
to other locations.
These contracts \.viii last for a six-month period and can
turn into a longer \.Vorking relationship given the success of
the contractor in signing on ne\.v restaurants and maintaining
relationships between food generators and customers.
Management Team
Management Structure
The current team is n1ade up of only the founder, Nancy
Tseng. Nancy has a background in chemical engineering,
achieving her BSE frorn the University of Michigan
in 2011. Since then, she has held various manufact uring
leadership roles within the Dow Chemical Company,
SABIC, and the Hydrite Chemical Company. In October
2021, she joined Elanco as the Clinton site's director of
manufacturing engineering. She has ahvays had an interest
in food and sustainability, so this idea evolved naturally
out of her passions. To help get her grounded on
the issue of food \.Vaste in the local comrnunity, she has
involved the follo\.ving advisers.
Advisers
Dr. Shikha Bhattacharyya is the founder and executive
director of ReTHink, Inc., \.vhich is a local nonprofit
established in 2015 that educates the local community
in the Wabash Valley on sustainabilit y. It runs several
prograrns, such as plastic upcycling, cornposting, community
gardens, and a zero-\.vaste shop (About). Shikha
is a kno\.vledgeable resource on different grant programs
that can be used to fund sustainability initiatives.
John Etling is the agency director at Catholic Charities
in Terre Haute, Indiana. This organization runs the
Terre Haute Catholic Charities Food Bank, \.vhich collects
food frorn local restaurants, grocery stores, and
other businesses and redistributes them to a net\.vork of
food pantries to support the food insecure (Food Assistance
and Nutrition Programs).
Allison Finzel is the community \.vellness coordinator
at Purdue University overseeing Vigo County as \.vell
as the president of the Wabash Valley Food Rescue. She
works with local schools to implement educational prograins
to reduce food \.vaste in cafeterias (Modesitt).
Mo McReynolds is the community engagement manager
'tvith the City of Indianapolis Office of Sustainability
and is a key stakeholder in the previously mentioned
Thrive Indianapolis program. The Office of Sustainability
can help spread the word on Circle City Food as it
aligns \.Vith many of Thrive's major objectives. Like Shikha,
Mo is a kno\.vledgeable resource on different grant
programs that can be used to fund sustainability initiatives,
especially \.Vithin Indianapolis.
Joe Cudby and Tom Kilcoyne are t\.vo managing
entrepreneurs at NEXT Studios, a B corporation venture
studio based in Indianapolis. Nancy had previously
attended Next Stud io's Discovery Week, an intensive
one-\.veek program that allo\.ved her to pressure test her
venture idea using the lean canvas model. She is considering
participating in the NEXT Up program, \.vhich would
allo\.v further development of her venture idea by focusing
on risk reduction and market development. She is
also thinking about applying for the NEXT Comrnunity
Impact Fund. This fund supports companies led by entrepreneurs
\.vho are part of underappreciated comrnunities,
such as \.vomen, people of color, and LGBTQ founders.
Once the idea gains more traction, Nancy \.vill invite
these advisers to join either her team or her Board of
Advisers. This initial nenvork rnay also help recommend
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others who may be interested in becoming team members
,vho can help further develop and market Circle
City Food in its beginning stages.
Product Development, Growth,
and Exit Strategy
Growth Plan, Milestones, and Time Line
By the end of 2021, the plan is to complete a preliminary
,vireframe of the app. While doing this, Nancy ,vill be
building her tearn and vetting different funding sources,
Sample New Venture and Business Plan 305
such as the NEXT Community Impact Fund and potential
sustainability grants ,vith ReTHink and the City of
Indianapolis Office of Sustainability. Of particular interest
is the Sustainlndy Community Grant Prograrn, ,vhich
a,vards up to $10,000 to support local initiatives to further
economic development, ensure environmental integrity,
and promote social and cultural vibrancy.
If venture capital is not secured, these various grants
,vill fund the initial discovery, planning, and strategy
sessions ,vith RocketBuild in order to build the ,vebsite
and clickable prototype/MVP. The development of
the MVP ,vill cost approximately $25,000 as discussed
D Without this D Th is doesn't happen ..
Modeling/
Research
Problem/
Solution
Fit
Solution/
Customer
Fit
Product/
Market
Fit
Scale
,vith Nathan Zarse, senior director of marketing at
RocketBuild.
After the clickable prototype is developed, Nancy
and her team will conduct intervie,vs ,vith at least 30
restaurant o\ovners to establish problem-solution fit and
pricing. During these tests, Circle City Food will be
established as an LLC. Conducting these interviews will
also help to create contacts to kick-start a cro,vdfunding
campaign that ,vill provide the initial funds necessary
to start the full development of the app, ,vhich is currently
expected to cost $150,000. After cro,vdfunding,
the intent is to sign on at least 50 restaurants prior to
launching the a pp via the App Store. These restaurants
,vill have a special prornotion that ,vaives their fee for
the first year. The app ,vill then launch, and marketing
,vill begin via social media and other platforms to
engage customers and other restaurants.
After Circle City Food reaches its break-even point,
the team will start planning expansion into other cities
and states by preparing the six-month contracts for
potential gig ,vorkers. The intent is to spread to nearby
cities of significant size, such as Carmel, Fishers, and
Bloomington, ,vith eventual expansion to larger Indiana
cities that are more distantly located, such as Fort
Wayne, Evansville, and South Bend.
Many of these larger cities contain a high populations
of university students, ,vhich is one of the target
customer markets. The Appendix has a Gantt chart
summarizing the above key milestones and their place in
the time line up to the end of year 5, ,vhich ,vill be either
the exit point for Circle City Food or its continuation to
scale to other locations.
Future Product Extensions
Future product extensions of Circle City Food ,vould
include additional ,vays for sustainably minded customers
and restaurants to contribute to the circular economy.
One of the previously mentioned features in Circle
City Food ,vas the ability for restaurants to coordinate
,vith customers to bring their o,vn take-out containers.
No incentive is provided frorn Circle City Food to support
this initiative, so restaurants and customers ,vho do
this are personally mot ivated to be sustainable. Using
past order history, Circle City Food can thus pinpoint
this specific subset of food generators and customers
and use them in the follo,ving nvo ne,v programs to further
support the circular econorny:
1. Deliver unsold food from food generators to organizations
supporting the food insecure (as long as
the food meets the organizations' quality standards)
or to composting facilities. This ,vould be similar
to ho,v a subset of Circle City Food's competitors
who tend to be nonprofits, such as Food Rescue
US, Food Rescue Hero, and Food Co,vboy, manage
the logistics of delivering potential food waste
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~ wooic tight.. some 1hitd p,3
t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
306 Chapter 12 Developing an Effective Business Plan
from one point to another. In this ·way, Circle City
Food \>vould truly eli1ninate the food going to landfill.
Circle City Food \>vould be uniquely positioned
to support this initiative due to its reliance on gig
\>Yorkers. As the gig economy supports transportation
companies such as Uber and Lyft, either similar
contracts can be dra\>vn to employ ne\>v workers to
divert food going to landfill or a partnership can be
created \>Vith existing transportation companies to
support this initiative.
2. Sell sustainable food packaging to restaurants that
is compostable or biodegradable. These packaging
containers would also provide a \>vay for Circle City
Food to market itself, as they can be branded \>Vith
the logo of the company.
Risk Mitigation
The mitigation strategies outlined belo"v \>vill help reduce
the underlined risks associated \>Vith Circle City Food.
Industry Risk: Too Good to Go's Prominence
As a competitor, Too Good to Go has many more resources
and much more financial backing than Circle City Food.
Ho\>vever, instead of being a threat, its presence can be seen
as a positive, as it is educating the 1narketplace that food
\>Vaste is an issue and building a story of sustainability that
Circle City Food can leverage. Rather than just focusing on
food \>vaste, based on the target market, Circle City Food
can advertise itself as an environmental solution (reducing
food \>vaste) or an economic one (saving money on meals
and creating a marketplace for restaurants to launch on),
thus appealing to more customers. In addition, painting
the picture that Circle City Food is meant to help the local
economy (hence its name) should inspire customer loyalty
and help the company establish a foothold in Indianapolis
if not the rest of Indiana. After establishing this foothold,
if Too Good to Go has scaled to the point that Circle City
Food has no\>vhere to go, being bought by Too Good to
Go is a viable exit strategy.
Market Risk: Failure to Get Restaurants
On Board the App
As mentioned before, getting restaurants to sign onto the
system and pay the annual fee to join Circle City Food
\>vill likely be more difficult than getting custo1ners to
sign on for free. This is \>vhy so much attention \>Vas paid
to establishing ho"v the platform can help restaurants
in terms of setting up an online presence and reducing
the reliance on third-party delivery syste1ns. A key
development milestone is conducting intervie\>vs \>Vith at
least 30 restaurant owners \>Vith the clickable prototype/
MVP to get their feedback on problem-solution and
customer-solution fit. These intervie\>vs can help O\>vners
not only become more exposed to the idea but also help
fine-tune the app offering before it is fully developed and
ready for launch. In addition, an incentive \>vill be given
"vhen launching the app "vhere the first 50 restaurants
that sign on will have their first year's $60 fee \>Vaived.
Operations Risk: Technical Issues with the App
Many revie\>vers have noted the ease of use and
easy-to-understand concept of Too Good to Go. Thus,
technical issues with Circle City Food's offering \>vill be
a clear detractor. This is \>vhy RocketBuild, an experienced
app develop1nent company, \>vill be used for both
the development and the long-term maintenance of the
app and \>vebsite. They have the experience necessary to
create an engaging custo1ner experience and can provide
technology maintenance after launch.
Operations Risk: Failure of Gig Worker
Model to Scale
There are t\>VO major operational risks involving the use
of gig \>Yorkers. First, Circle City Food may not even be
able to hire them due to lack of interest. Establishing a
base and positive reputation in Indianapolis is crucial in
order to generate buzz around joining Circle City Food.
Second, different platforms, such as Up\>vork, that are typically
used by gig workers to find new job opportunities
can be used in order to reach this market. If all else fails,
it is still possible to depend on a traditional sales model
in order to launch in other locations and hire employees.
Another risk of using gig \>Yorkers is inadequate quality
in terms of signing on ne\>v food generators into the
platform or maintaining customer relationships. When
hiring these workers, specific intervie\>v questions gauging
a \>Yorker's experience in marketing and/or customer
support, kno\>vledge of the local food ecosystem, and
sustainability initiatives \>vill need to be asked. Limiting
the contract length to six months also offsets the risk
of ongoing poor \>vork quality since the relationship
\>Vith underperforming \>Yorkers can expire at the end
of the contract. Work quality in terms of successfully
signing on food generators can be quantitatively esta blished
through the a pp, but it \>vill be more difficult to
gauge ho"v \>Yorkers are main raining existing customer
relationships. However, this may still be possible using
automated surveys after a customer- gig \>Yorker interaction.
If all else fails and if using gig \>Yorkers to provide
custo1ner support is not sustainable, a more traditional
customer support model centralized in Indianapolis can
ahvays be established.
Financial Risk: High Cost of the App
According to Nathan Zarse at RocketBuild, full development
of the app is likely to cost $175,000 to $200,000.
Thus, app development \>vill progress side by side \>Vith
customer intervie\>vs to verify that problem-solution and
solution-market fit are solid prior to the bulk of the cost
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic tight.. some 1hitd
p,3t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
being incurred. Before launch, at least 50 restaurants
"viii be interviewed in the Indiana polis area to determine
their "villingness to pay for this product as "veil as
their interest in crowdfunding the app develop1nent. If
customers and restaurant owners are u1nvilling to pay
for the app, then Circle City Foods can either pivot in
another direction or sunset without too 1nuch additional
cost being incurred.
Key Partners Risk: Lack of a Team
As there is no current founding team, there is a high risk
of having the founder manage everything herself, "vhich
can lead to burnout and then venture failure. Thus, one
of the immediate actions going fonvard is talking with
her current advisers to determine if any are "villing to
join her team or her board. This group can also help to
reco1mnend others "vho may be interested in joining Circle
City Food.
Exit Strategy
There are three potential exit strategies for Circle City
Food. First, it can sell its concept and marketplace participants
to a third-party delivery platforin, such as
UberEats, DoorDash, or Grubhub. These platforms
already have their o"vn marketplace, and it may be possible
for the1n to incorporate the discount fea ture for
meals that are close to their sell-by date. Ho"vever, this
exit strategy may risk the reputation of the Circle City
Food brand since one of its hallmarks is ho"v it supports
restaurants and small businesses so that they do not rely
on these platforms. Thus, any potential offer will need to
be carefully vetted.
Second; in a more ideal solution, Circle City Food can
sell its concept and 1narketplace participants to Facebook.
Facebook already reaches many of the target customers,
and 1nany restaurants also have a landing page
on the platfonn. Facebook even features its o"vn marketplace
for users to buy and sell ite1ns. Ho"vever, not 1nuch
food is currently sold in this marketplace due to legal
concerns. Although anyone can post food for sale, system
administrators currently do not check for or mandate
business licenses and health departtnent- inspected
kitchens for food preparation. Thus, Facebook would
need to update its process to better qualify ho"v people
post food on its marketplace before it can operate ho"v
Circle City Food is intended to operate.
Finally, Circle City Food can be bought out by one
of its competitors. Too Good to Go is the most likely
option here due to the size of its operation. This "vould
be the most ideal solution since the sustainability mission
and values between Circle City Food and its competitors
match. In addition, employees "vho desire to
continue "vorking for a concept such as Circle City Food
may have the option to continue their work "vith the
other company.
Sample New Venture and Business Plan 307
Finance
Summary of Financial Projections
and Financing Plan
In the first half of 2022, the different costs of Circle City
Food "viii be funded through the founder and her friends
and family (F&F). This includes the money already
spent in 2021, such as the $360 used to incentivize people
to respond to survey and in tervie"v requests and $99
for financial statement templates. F&F "viii also fund the
rest of the initial app develop1nent up to the completion
of a clickable prototype/MVP, "vhich is estimated to cost
$20,000 according to RocketBuild plus $299 annually
to participate in Apple's App Developer Program. F&F
"viii also fund the use of a coworking space.
Although there are free coworking spaces, the Novel
location in do"v11to"vn Indianapolis is ideal due to its
central location and the ability to do longer-term leases
lasting beyond 24 months. A cost of $399 per month
"viii provide long-term access for 1 to 20 people and
eliminate the need to purchase utilities and furniture to
start and run Circle City Food ("Lock It In with LongTerm
Leasing"). Finally, a cost of $600 will be incurred
in the first year of operations for legal concerns. It "viii
cost $95 to establish Circle City Food as an LLC in Indiana
("How Much Does an LLC Cost in Indiana?"), and
the remaining $505 "viii be spent establishing a "vorking
relationship with a la"vyer going fonvard (Small).
An initial cro"vdf unding campaign "viii be set at
$50,000 in order to start the developing the app, "vhich is
the same amount that FoodforAII raised via Kickstarter
in the Boston/Ne"v York area. The additional funding
necessary to complete app development can be raised via
additional crowdfunding, F&F, grants, or small-business
loans. Alternatively, Circle City Food is asking for
$500,000 of capital investment to cover the majority of
first- and-second-year costs for 10 percent equity. Injecting
capital investment into the venture would speed up
develop1nent, allo"ving one or more of the cofounding
team to "vork full-ti1ne on the venture. Currently,
the plan is for a cofounding team of three to be established,
each initially receiving a salary of $150,000 and a
5 percent annual raise. However, none "viii receive a salary
until funding is established via capital investment or
revenue generation.
Without capital investment, app development will be
completed by the start of 2024. Three months before
launch, advertising on different Facebook groups, such
as Indylicious and Indy Local Foodies, "viii com1nence to
start creating a"vareness. These sites have an average of
2,868 posts each month. While it is free to post "vi thin
these groups, $500 "viii be spent to create targeted ads
in Facebook and ne"vspapers; $323 of the $500 "viii be
spent creating a column inch of black-and-"vhite advertising
space in the Indianapolis Star, "vhich has a daily
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~ wooic tight.. some 1hitd
p,3t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
308 Chapter 12 Developing an Effective Business Plan
circulation of approximately 261,000 (Indianapolis).
The remainder "vill be spent on Facebook, which has a
cost per click of $1.27 for ads relating to ne"v technologies
("Ho"v Much Does Facebook Advertising Cost in
2021?"). Before launch, the goal is to have 50 restaurants
signed onto the system. The first-year fee for these
initial restaurants will be "vaived.
Once Circle City Foods launches in January 2024,
advertising expenses will rise to $800 per month to
take customers through the customer acquisition funnel.
Facebook ads cost $5.47 per app do"vnload "vith an
additional $0.80 to post ads on Instagram ("Ho"v Much
Does Facebook Advertising Cost in 2021 ?"). Additional
regular expenses include $1,000 per month for accounting
("The Cost of E-Com1nerce Accounting"), $1,000
per month for "vebsite maintenance, $500 per quarter
for legal consultation ("S1nall Business La"vyer Cost "),
$750 per year for general liability insurance ("Business
Insurance for App Developers"), and the continued cost
of the coworking space. The five-year income statement
summary belo"v shows all of these various costs. Based
on the financial projections, Circle City Food is expected
to break even in April 2024, merely three months after
launch. The Appendix contains the five-year summaries
of the balance statement and cash-flo"v statement as "vell
as a yearly breakdo"vn of the income statement.
•
Circle City Food lnoome Statement
For the Year Ended Dece·mber 31,
Sales
Food Trransaction Revenue
New R.est al!lr,ant Revenue
New City IExparnsiorn Revernue
Food Delivery Reve111l!le
I otal Sales
Oost ,of ,Good.s Sold
Technology Dev elopment
Technology Mainternance
lfotal Cost of Goods Sold
•Gross M argin
P,errce rnt
Operating Expenses
AdverUsing
A,ccountrng
Leg.al
Credit_Qlrd Fe~s
lns,urance
Cow,orking Spac,e
._2020 Expenses
lndependent -Oontractor Pr,ogram
Meal-Matching Progr.am
.s.~laries:
Total Operating·"Expen-ses
Net Profit
1111c0m·e Tax
N:~tlncome
EBITDA
2022 2'023
$
78,632 911,'966
1,000
$ 78,632 $ '9'2,'966
$ (78,632) $ ('9'2,'966)
,, #DIV./0! ,.. #DIV/0!
1,50-0
3,00;()
600 500
1,88
4 I 7. .88. 4 , 7,88.
45,9
$ S.,847 $ 9,976
$ (84,47'9) $ (102,941)
$ (8:4,47~) $ (102,941)
$ (84,479) $ (101.,Ml)
2024!
1, 195,240
7,200
100,160
$1, 302,6'00
12,000
$ 12,DDO
.$1,290,600
'9,9%,
9,,6Q,O
l :8,5.40
2,,060
40,2.5(}
773
4,932
66.,773
472i~5'0
$ 614,'9178
,s 675.,1622!
141,881
$ 533 7·41 , I
s 675,622
2025
3 457 43'9• J I
7,200
5-0,830
28·9,730
$ 3 ,:8-05, 19 91
12,00D
$ 12,0DD
$ 3,793,1991
10D%
9,&88
2. 7I& 10.
2,,· 12.2
;t'2Ll(!:8:
796
5,080
7,500
1'9•3~153
49-5 ,653
$, 8-63;109<
$ 2,936,oot!"
615, 31'9·
$,::2:,3.1~,1'71
$1,930,090
2026
5,968,:8-35,
7,200
500, 182
$6,476, 217
12,00D
$ 12,0DD
$6,464,'217
100%
104J .S.5
4t715
2,185
212,30.2:
,8:20
5,232
3~3,454
52P,435
·$ 1, 126~328
$ .S,,337 ,:8891
1,120,'357
:$.4,?16,,3:2
~ 5", 331,ssg
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
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F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Explanation of Assumptions
At launch, the estimated number of customers ,vho
do,vnload the app is 2,628. Of these, 2,500 are customers
from the Facebook groups, assuming that the 2,868
posts per month spread bet,veen Indy Local Foodies and
Indylicious correlate to unique Facebook users and that
most of them do,vnload the app. One hundred and t,ventyeight
custorners come from people ,vho do,vnload the
app from the Facebook ads. This customer count is estimated
to gro,v organically at a rate of 130 percent over
the course of the year, ,vhich is the estimated gro,vth rate
of online take-out orders per Statista (Lock).
Taking the number of customers into account, the
total revenue calculation for food transactions assumes
that all these customers spend over $10 per month on
their order and use the a pp three times per month. This
can be expected per the survey results from the primary
market research. Thirty percent of these orders are estimated
to be delivery given that 31 percent of Americans
are reported to order online delivery at least t,vice per
,veek ("20 Food Delivery and Online Ordering Statistics
for 2021 "). This leads into the revenue calculation for
food delivery.
Finally, the ne,v restaurant revenue calculation
assumes that 10 food genera tors join Circle City Food
each month. This assumption ,vas made given that Erin
McGeoy's team at Too Good to Go has a sales goal to
sign on 15 to 20 restaurants per month and have three
to five salespeople per location. Thus, it is assumed that
Circle City Food ,vill be able to accomplish about half
of this given its smaller sales team composed of its initial
founding team of three.
For expenses, an annual inflation rate of 3 percent
is used for all operating expenses besides three exceptions.
Accounting costs ,vill have an additional 50
percent year-over-year increase due to the increasing
complexity of operations after launch. In addition, the
monthly ,vebsite maintenance fee of $1,000 ,vill stay
constant. According to RocketBuild, a maintenance cost
of $12,000 per year is already the high end of the cost
spectrum, so no further increase is currently accounted
for. The last assumption on expenses is that the cost of
the meal-rnatching program of $0.10 per meal ,vill not
increase over tirne.
Finally, for ne,v city expansion revenue, five independent
cont ractors ,vill be hired to sign on ne,v restaurants
in another city in Indiana starting in June 2025.
The assumptions are that these contractors ,vill be able
to each sign on five ne,v restaurants per month and that
these restaurants ,vill support 224 orders per month
,vith each order cost ing greater than $10. The average
number of online orders an independent restaurant
receives per month is $10 (Kath leen). As the cont ract
period is expected to be only six months, these assumptions
and the effectiveness of using contract ,vorkers can
be trialed and verified in a fixed time period. If the trial
Sample New Venture and Business Plan 309
is successful, then additional contracts can be ,vritten
and/or extended. In the meantirne, however, the financial
statements currently account for only six months of contractual
,vork. In addition, no revenue is currently taken
into account for restaurants that want to upload their
full-price menu on Circle City Food. Thus, additional
revenue may be possible that is currently not sho,vn in
the financial projections.
Terminal Value
If instead of continuing to expand to new locations
Circle City Food employs an exit strategy, a tenninal
value is estimated using an exit rn ultiple of 6 on the
EBITDA at the end of year 5. The resulting value at
that point in tirne is $32 million. This means that investors
,vould receive a return on investment rnore than
six times the initial capital investment of the $500,000
being requested.
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\VebFX. https://www.webfx.com/social-media/how-much
- does-facebook-advertising-cost.html.
"Indianapolis Star in Newspaper Advertising Costs." Gaebler.
com Resources for Entrepreneurs. https://www.gaebler.com
/Indianapolis+Star-IN-Newspaper-Advertising-Costs++5636.
Kalia, Ritesh. "Solving the Problem of Restaurant Food Waste
Case Study." Medium, Muzii-Design Inspiration. October 3,
2021. h ttps:/ /medi u m.m uz. li/sol ving-t he-problem-of
-restaurant-food-waste-case-stud y-eaea 6 8c 1 d3 a3.
Kathleen, L. "On Average, How Many Online Orders Does
an Independent Restaurant Receive per Day or per Week
or per Month , in the US?" \Vonder. https://askwonder
.com/ research/ a verage-onl ine-ord ers-d oes-i ndependen t
-resta tuant-recei ve-per-da y-week-month-us-4 bmq bgf 1 p.
Krook, D. The Complete Guide to Preparing Your Restaurant for
an Online Ordering System. TouchBistro. September 9, 2021.
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blog/preparing-yotu- restatuant-for-an-online-ordering-system.
"Lock It In with Long-Term Leasing." Expansive. https://
expansive.com/products/long-term-leasing.
Lock, S. Food Service Purchases from an App US 2020.
Statista. June 4, 2021. Retrieved October 5, 2021,
from h ttp s:/ /www.s t a ti sta.com/sta ti stics/123 9724
/share-of-food-service-transactions-initiated-via-an-a pp-us/.
Modesitt, A. "Students Take a Bite Out of Hunger with Food
Rescue Program." Tribune-Star. May 30, 2018. Retrieved
October 3, 2021, from https://www.tribstar.com/news
/local_n ews/s tude nts-take-a -bite-out- of-hunger-with
-food-rescue-program/a rticle_9 f4 f Saa 0-b62f-5 5 8 a -8 9fl
-288651 b012ac.html.
Olito, Frank. "Here's What the Average Person Spends on
Dining Out in Every State." Business Insider. August 12,
2019. https://www.businessinsider.com/what-people-spend
-on -dining-out-2019-8#people-in-indiana-s pend-2241-per
-year-on-average-on-dining-out-14.
Oragui, D. How to Publish Your App on Apple's App
Store in 2018. July 3, 2018. Retrieved October 7, 2021,
from http s://t he manifest. com/a pp-dev elopm ent/b log
/publish-app-apple-store.
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Retrieved October 3, 2021, from https://foodprint.org
/issues/the-problem-of-food-waste.
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/sofi/2 022/en.
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-resta tuants-u ber-eats-doordash-postma tes.
Sheppard, C. "Too Good to Go App Aims to Creatively Reduce
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/northwest/too-good-to-go-a pp-a ims-to-crea ti vel y-red uce
-food-waste/#:-: text=B us inesses% 20 receive %2 0t he %2 0
majority %20of,1.79%24 %20 transactional%20fee%20
per%20purchase.
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/small-business-lawyer-cost.
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/uni ted-sta tes-203 0-food-loss-and-waste-red uction- goa I.
Wolken, R. These Food \Vaste Apps \Vil/ Save Money and
the Planet. HappySprout. September 27, 2021. Retrieved
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/inspiration/food-waste-a pps-sol u tions.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
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addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Appendix
Business Model Canvas
Key Partners Key Activities Value Preposition Customer Customer Segments
Restaurant owners Provide platform for Marketplace for Relationships Local foodies
(people
Advertising the sale of discounted surplus food from Feedback/reviews who en joy
eating out
agencies/social meals with customer restaurants that are from below with an
average bill
media support. sold at a discount to channels of $15 to $30)
customers
Local un iversities, Key Resources Channels Un ivers ity students
food banks, and Website/opp Too Good to Go Website/opp, social
and other foodsusta
i nab ii ity groups supported by + local economic media, un iversities,
insecure communities
RocketBu ild support+ food banks, and
custom ization" sustainability
Gig workers in new
locations
groups
Cost Structure Revenue Streams
Website/opp development and maintenance $1 to $1.79 fee per transaction
Meal-match ing program with Feed America $0.50 additional charge, allowing for del
ivery
Contract to employ gig workers $30 tra ining package for gig workers
Too Good to Go Locations
■ , _ • .,, _ Thu SOp 30 ♦
ChooM o locadon to -what'& ovall mble
0"
-
••
oc-..,,
ID
o'
UI
0 ........
Source: Too Good to Go
.. ,
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NI
UIIITIO Starts
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o" • ..
Q. Search f o, • dty
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CHOOSE TMIS LOCATION
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addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
312 Chapter 12 Developing an Effective Business Plan
Indy Local Foodies Survey Results
How often do you eat out
(includes take-out and delivery)?
40%
20%
0%
0%
Multiple
times per
week (2- 5)
$0-15
Multiple
times per
month (2- 5)
About
once
a week
What is the average amount
you spend on an order?
$ 15-30 $30- 50
Rarely
$50+
Would you be willing to pick up surplus food from
restaurants at other times in the day that is more
convenient for you at less of a discount (20-40%)?
100% ~-----------------~
Yes No Other
cons i ct erat ions
(please specify)
30%
20%
10%
0%
0%
Do you have any specific food restrictions/allergies
you would want restaurants to advertise?
What is the average amount you
spend on an order?
$0-15 $15-30 $30- 50 $50+
Would you be willing to pick up surplus food from
restaurants at a major discount (50- 75%) in the
evening when the restaurant is about to close?
Yes No Other
considerations
(please specify)
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic tight.. some 1hitd
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addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
What times would you be willing to pick up food?
0%
Appendix 313
Ho\.v much more \.villing would you be to take part in
this program if the restaurant had a delivery option for
the food order? 63.2%
Ho\.v much more \.villing \.vould you be to take part
in this program if it included a meal-matching program
\.Vith a local food bank? 63.2 %
Ho\.v much more \.villing \.vould you be to take part
in this program if the materials used in the food take-out
containers \.Vere sustainably sourced? 57.8%
Please rank the following elements on how important they are to you if you were
taking part of this program.
Food being ready to
eat at the time of
pick-up (vs needing
to be heated up)
Amount of money
you save on a
food purchase
Distance to the
restaurant for
pickup
Being able to
pick up the food
at a certain time
in the day
Knowing that you are
helping to reduce food
waste and support a
local eatery in Indy
SOM Calculation
Bottom-Up Calculation
Approximately 58,000 members in Indy Local Foodies
Facebook group X average 3 meals per month per
member X $1.79 transaction cost per meal X 12 months
per year = $3.7 million
Top-Down Calculation
$12.8 billion restaurant sales in Indiana/$10 average
price per meal (Olito) x 1.79 transaction cost per meal
X 63 percent of restaurant sales are take-out orders
X 15 percent of take-out orders are rnade via an app
= $216 million
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~ wooic tight.. some 1hitd
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314 Chapter 12 Developing an Effective Business Plan
Information Architecture
Home
Location
Nearby r estaurants
Map
Filters b y diet
Filters b
Food av
y food type
ailable sale
Drawer Closed
I
Greetings
LoglN
Input zip code
Send OTP button L Enter OTP
Privacy Policy
Continue Button
Favorite Profile
1--- Money saved
1--- Food waste saved
1--- Meals donated
1--- Active Order Status
1--- Account Information
,___ Payment methods
,___ Past Orders
..__ Notifications
Name
Change Name
Order Status '-----------------------------------log Out
Drawer Open
location
Filters
Go to bag I
Restauran t Cards
Map
Back b
Restau
Address
Rating
Distanc
utton
rant name
s
e
Produ ct listin g
- . Pro duct Page
Back button
mage
.
-
-I
--
Product name
Quantity increase/decrease buttons
Add to bag button
I
Bag Page
Add items
Remove items
.-----.--Map
Directions
Payment methods
Checkout _________ _,
Order Successful
Pickup time
Feedback
Close ·-------'
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
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Wireframe
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315
316 Chapter 12 Developing an Effective Business Plan
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Appendix 317
Balance Statement Summary
Orde Clly FGod lllllanc,e Sheet
For the Year Ended December 31, 2022 2023 2024 2025 2026
Assets
Current Assets
Cash {84,280) (186,356) 375,659 2,701,469 6,929,637
Total Current Assets $ {84,280) $ (186,356) $ 375,659 $ 2,701,469 $ 6,929,637
Total Fixed Assets Net $ $ $ $ $
Total Assets $ (84,280) $ (186,356) $ 375,659 $ 2,701,469 $ 6,929,637
Liabilities and Equity
Current Liabilities
Accounts Payable 200 1,064 29,338 40,377 51,613
Total Current Liabilities $ 200 $ 1,064 $ 29,338 $ 40,377 $ 51,613
Total Long-Term Liabilities $ $ $ $ $
Total Liabilities $ 200 $ 1,064 $ 29,338 $ 40,377 $ 51,613
Shareholders' Equity
Paid in Capital
Additional Equity Funding
Retained Earnings (84,479) (187,421) 346,321 2,661,092 6,878,024
Total Equity $ {84,479) , $ {187,421) $ 346,321 $ 2,661,092 $ 6,878,024
Total Liabilities and Equity $ {84,280) $ (186,356) $ 375,659 $ 2,701,469 $
6,929,637
Cash-Flow Statement Summary
Clrc:leelly Riod'S1atenientof c:ash Flaws
For the Year Ended December 31, 2022 2023 2024 2025 2026
cash at Beginning of Period $0 ($84,280) ($186,356) $375,659 $2,701,469
cash Receipts from Operating Activities
Cash From Sales 1,302,600 3,805,199 6,476,217
cash Payments for Operating Activities
Cash paid for technology development (78,632} (92,966} (12,000} (12,000) (U,000)
Cash paid for salaries (452,381} (494,669) (519,403)
Cash paid for taxes (141,881} (615,319) (1,120,957)
Advertising (1,250) (9,450) (9,876) (10,172)
Accounting (2,500} (18,268} (27,424) (41,136)
Legal (600) (417) (2,058) (2,ll9) (2,183)
Credit Card Fees (37,181) (117,607) (208,206)
Insurance l156) (772) (795) (819)
Coworking Space (4,589) (4,788) (4,926) (5,073} (5,226)
2020 Expenses (459)
Independent Contractor Program {6,875) (625)
Meal-Matching Program (61,669) {187,632) (327,324}
Net cash from Operating Activities $ (84,280) $ (102,077) $562,015 $2,325,810 $
4,228,168
cash from Financing and Investing
Cash from New Investments
Net cash from Financing and Investing $ $ $ $ $
Net Cash Inflow {Outflow) $ {84,280) S (102,onJ $562,015 $2,325,810 $4,228,168
Cash at End of Period $ (84,280) $ (186,356) $375,659 $2,701,469 $6,929,637
Copyrig,ln '2024 CCllgagc U!llming. All Rights Reserved. May OOI be oopicd.
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~~Q
~·~ "'-O • ,o (I)
[~ ..,
,,_ n ~ P, B
3 ,, N 8. •
'll
1 fi
Yearly Income Statements ] e. 0 (I)
~ ~ < i ~ I ardeaty Food
,I
~
.~. ~ 0 g ~ )~ '"'Fonna Income statement "'O ~
- '?? ,, ::,
~
§ ~ ;,: - Yeer1 .. CQ
~ ?- For the Q
.2 :: ::, ~ Month 1 2 3 4 5 6 7 8 9 10 11 12 Year Ended m
~ ~ .......
E· t For the Month Ended 01/31/22 02/28/22 03/31/22 04/30/22 05/31/22 06/ 30/ 22
07/ 31/ 22 08/31/22 09/30/ 22 10/31/22 11/30/22 12/31/22 12/31/22 co'
~ .@ 0
. Sales - a- · <. - P- Total Sales $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - (I) ~
i< [ CP
• 0 C ~ .. :1, ~ V>
Cost of Goods Sold - ·
i .g ::,
Technology Development 10,000 2,500 2,500 2,500 2,500 8,632 8,333 8,333 8,333
8,333 8,333 8,333 78,632 (I)
~. ~ V>
J; • V>
~ ;,. Te chnology Mainte nance - - - - - - - - --0 ~ ; ·
~ . $ Total Cost of Goods Sold $ 10,000 $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 8,632 $
8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 78,632 0
~ 5 ::,
f') n
n il
B -·
Gross Margin (10,000) (2,500) (2,500} !2,500} (2,500} (8,632} (8,333) (8,333)
(8,333) (8,333} (8,333} (8,333} !78,632) ,, .
~]
fi ~ Percent 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
0.00% 0.00% 0.00%
s~
;;· Q
,, 0
-~ ii Operating Expenses . a ~. Legal . - 600 - - - - - - - - - 600
~,i;·
~· 1' Coworking Space 399 399 399 399 399 399 399 399 399 399 399 399 4,788
"S 3~ 2020 Expenses 459 - - - - - - 459
a~
3 ~ Total Operating Expenses $ 858 $ 399 $ 999 $ 399 $ 399 $ 399 $ 399 $ 399 $
399 $ 399 $ 399 $ 399 $ 5,847 ... ~ 1l
I ~ :::.· f')
•• • Net Profit $ (10,858) $ (2,899} $ (3,499} $ (2,899} $ (2,899} $ (9,031} $ (8,732) $
(8,732) $ (8,732) $ (8,732) $ (8,732} $ (8,732) $ (84,479)
-g "B r g0 - Income Tax 3
r; ~
: ~ Net Income $ (10,858) $ (2,899} $ (3,499) $ (2,899) $ (2,899} $ (9,031) $ (8,732)
$ (8,732) $ (8,732) $ (8,732) $ (8,732) $ (8,732) $ (84,479)
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- ~ - Cln:le.dty Food
~
§ ~ ~ ~ Pro~ •nm.me statement
~ ?- .2 :: ~-~I I veer2 ~ ~ ~ Forthe
E· t Month 13 14 15 16 17 18 19 20 21 22 23 24 Year Ended ~. .@ a- · For the
Month Ended 01/31/23 02/28/23 03/31/23 04/ 30/ 23 05/ 31/ 23 06/30/ 23 07/31/23
08/31/23 09/30/23 10/31/23 11/ 30/23 12/31/ 23 12/31/23 - P- ~ Sales i< [
• 0 ~ $ $ $ $ $ $ $ $ $ $ $ $ $ .. Total Sales - - - - - - - - - - - - :1, ~
i .g
~. ~ J; • Cost of Goods Sold
~ !l-
~ ;· Technology Development 8,632 8,333 8,333 8,333 8,333 8, 333 8,333 8,333
8,333 8,333 8,333 91,966
~.$
~ 5 Technology Maintenance - - - - - - 1,000 1,000 f') n
nil ·Total Cost of Goods Sold $ 8,632 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $
8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 1,000 $ 92,966 ,B, .- ·
~]
fi ~ Gross Margin (8,632) (8,333) (8,333) (8,333) (8,333) (8,333) (8,333) (8,333)
(8,333) (8,333) (8,333) (1,000) (92,966) s ~
;;· Q
,, 0 - ii Percent 0.00% 0.00% 0.00% 0.00% 0.00%. 0.00% 0.00% 0.00% 0.00%
0.00% 0.00% 0.00% 0.00% ~ . a ~.
~,i;· Operating Expenses
~· 1' " ~ Advertising - - - - - - - - 500 500 500 1,500
..
S 3 a ~ Accounting - - - - - - - - 1,000 1,000 1,000 3,000
3 ~ ... ~ 1l Legal - - - - - - - - - 167 167 167 500
I:::.·~ f') Insurance - - - - - - 63 63 63 188 •••
-g "B Coworking Space 399 399 399 399 399 399 399 399 399 399 399 399 4,788 0
- g 3 r; ~ Total Operating Expenses $ 399 $ 399 $ 399 $ 399 $ 399 $ 399 $ 399 $
399 $ 399 $ 2,128 $ 2,128 $ 2,128 $ 9,976 : ~
g~
-;j Net Profit $ (9,031) $ (8,732) $ (8,732) $ (8,732) $ (8,732) $ (8,732) $ (8,732) $
(8,732) $ (8,732) $ (10,462) $ (10,462) $ (3,U8) $ (102,941)
~ ~ , -· .. Income Tax if Net Income $ (9,031) $ (8,732) $ (8,732) $ (8,732) $ (8,732)
$ (8,732) $ (8,732) $ (8,732) $ (8,732) $ (10,462) $ (10,.462) $ {3,U8) $ (102,941)
-g i<
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'll
1 fi For the
] e. 0 Month 25 26 27 28 29 30 31 32 33 34 35 36 Year Ended (I)
~ ~ < i ~ For the Month Ended 01/31/ 24 02/29/ 24 03/31/24 04/30/24 05/31/24
06/30/24 07/31/24 08/31/24 09/30/24 10/ 31/24 11/ 30/24 12/31/ 24 12/31/24 ~
.~. ~ Sales 0 g ~ "'O ~
- '?? Food Transaction Revenue 18,814 33,085 47,480 61,998 76,641 91,410
106,306 Ul,331 136,485 151,769 167,186 182,735 1,195,240 ::,
~
§ ~ CQ
New Restaurant Revenue 600 600 600 600 600 600 600 600 600 600 600 600
7,200 Q ~ ?- ::, .2 :: New Crty Expansion Revenue - - - - - - ~ m
~ ~ Food Delivery Revenue 1,577 2,773 3,979 5,195 6,422 7,660 8,908 10,167
U,437 U ,718 14,010 15,313 100,160 .......
E· t co'
~. .@ Total Sales $ 20,990 $ 36,458 $ 52,058 $ 67,793 $ 83,663 $ 99,670 $
115,815, $ 132,098 $ 148,522 $ 165,087 $ 181,796 $ 198,648 $ 1,302,600 -0 a- · <"
- P- (I) ~
i< [ Cost of Goods Sold CP
• 0 C ~ .. :1, ~ Technology Development - - - - - - . - . . . - . V>
i .g Technology Maintenance 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
1,000 1,000 1,000 1,000 12,000
::,
(I)
~. ~ V>
J; • Total Cost of Goods Sold $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $
1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 12,000 V>
~ ;,. -0 ~ ;· ~. $ 0
~ 5 Gross Margin 19,990 35,458 51,058 66,793 82,663 98,670 114,815 131,098
147,522 164,087 180,796 197,648 1,290,600 ::,
f') n
nil
,B, .- · Percent 95.24% 97.26% 98.08% 98.52% 98.80% 99.00% 99.14% 99.24%
99.33% 99.39% 99.45% 99.50% 99.08%
~]
fi ~
s ~ Operating Expenses
;;· Q
,, 0 - ii Advertising 800 800 800 800 800 800 800 800 800 800 800 800 9,600 ~ . a
~. Accounting 1,545 1,545 1,545 1,545 1,545 1,545 1,545 1,545 1,545 1,545 1,545
1,545 18,540
~,i;· Legal 172 172 172 172 172 172 172 172 172 172 172 172 2,060 ~· 1' " ~ Credit
card Fees 649 1,U7 1,609 2,095 2,585 3,080 3,579 4,082 4,589 5,101 5,617 6,138
40,250 S 3
a ~ Insurance 64 64 64 64 64 64 64 64 64 64 64 64 773 3 ~ ... ~ 1l Coworking
Space 411 411 411 411 411 411 411 411 411 411 411 411 4,932
I~ •:::.•· •f') Meal-Matching Program 1,051 1,848 2,652 3,464 4,282 5,107 5,939
6,778 7,625 8,479 9,340 10,209 66,773 -g B" Salaries 39,338 39,338 39,338 39,338
39,338 39,338 39,338 39,338 39,338 39,338 39,338 39,338 472,050 0 - g 3
:r; ~ Total Operating Expenses $ 44,029 $ 45,304 $ 46,591 $ 47,888 $ 49,196 $
50,516 $ 51,847 $ 53,190 $ 54,544 $ 55,909 $ 57,287 $ 58,676 $ 614,978 ~
g~
-;j Net Profit $ !24,039) $ !9,847) $ 4,468 $ 18,905 $ 33,467 $ 48,154 $ 62,968 $
n,909 $ 92,978 $ 108,178 $ 123,509 $ 138,972 $ 675,622 ~ ~
- · 0. Income Tax 11,823 11,823.38 11,823 11,823 11,823 11,823 11,823 11,823
11,823 11,823 11,823 11,823 ' 141,881 if -g i< Net Income $ (35,862) $ (21,670) $
(7,356) $ 7,082 $ 21,644 $ 36,331 $ 51,144 $ 66,085 $ 81,155 $ 96,355 $ 111,685 $
127,148 $ 533,741
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'll 1 fi L~.~~ Cln:leCltyfeod
] e. ',_ fGffllll IIIC'illffl.:: Stabe111.eat
~~ i ~ Yeer4.
.~. ~ Fortbe ~ g ~ - '?? Month 37 38 39 40 41 42 43 44 45 46 47 48 Year Ended
~
§ ~ For the Month Ended 01/31/25 02/28/25 03/31/25 04/30/25 05/31/25 06/30/25
07/31/25 08/31/25 09/30/25 10/31/25 11/30/25 12/31/25 12/31/25
~ ?-
.2 :: Sales ~
~ ~ Food Transaction Revenue 198,446 214,286 230,262 246,376 262,629 279, 022
295,557 312,235 329,058 346,025 363,140 380,.403 3,457,439
E· t New Restaurant Revenue 600 600 600 600 600 600 600 600 600 600 600 600
7,200 ~. .@ a- · New City Expansion Revenue 3,635 5,470 7,454 9,439 11,424
13,409 50,830 P- - -
i-< [~ Food Delivery Revenue 16,630' 17,957 19,296 20,646 22,008 23,382 24,767
26,165 27,575 28,997 30,431 31,877 289,730
•0
~ .. :1, ~ Total Sales $ 215,676 $ 232,843 $ 250,157 $ 267,622 $ 285,237 $ 306,639
$ 326,394 $ 346,4SS $ 366,671 $ 387,046 $ 407,579 $ 412,880 $ 3,805,199
i .g
~. ~ J; • Cost of Goods Sold
~ ;,.
~ ;· Technology Development
~.$
~ 5 Technology Maintenance 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
1,000 1,000 1,000 1,000 12,000 f') n
nil Total Cost of Goods Sold $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $
1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 12,000 ,B, .- ·
~]
fi ~ Gross Margin 214,676 231,843 249,157 266,622 284,237 305,639 325,394
345,455 365,671 386,046 406,579 411,880 3,79·3,199 s ~
;;· Q
99.54% 99.57% 99.60% 99.63% 99.65% 99.67% 99.69% 99.71% 99.73% 99.74%
99.75% 99.76% ,, 0 - ii Percent 99.68% ~ . a ~.
~,i;· Operating Expenses
~· 1' " ~ Advertising 824 824 824 824 824 824 824 824 824 824 824 824 9,888 S 3
a ~ Accounting 2,318 2,318 2,318 2,318 2,318 2,318 2,318 2,318 2,318 2,318 2,318
2,318 27,810
3 ~ ... ~ 1l Legal 177 177 177 177 177 177 1.77 177 177 177 177 177 2,122
I~ Credit Card Fees 6,864 7,411 7,962 8,518 9,078 9,759 10,388 11,027 11,670
12,31.9 12,972 13,141 121,108 :::.· f') ••• -g B" Insurance 66 66 66 66 66 66 66 66
66 66 66 66 796
0 - g 3 r; ~ Coworking Space 423 423 423 423 423 423 423 423 423 423 423 423
5,080 :g ~ Independent Contractor Program - . - - . 1,250 1,250 1,250 1,250 1,250
1,250 7,500 ~
-;j Meal-Matching Program 11,086 11,971 12,864 13,764 14,672 15,588 16,512
17,443 18,383 19,331 20,287 21,252 193,153
-~· .~. Salaries 41,304 41,304 41,304 41,304 41,304 41,304 41,304 .41,304 41,304
41,304 41,304 41,304 495,653 if Total Operating Expenses $ 63,063 $ 64,494 $
65,938 $ 67,394 $ 68,863 $ 70,460 $ 73,262 $ 74,832 $ 76,41.5 $ 78,012 $ 79,621
$ 80,755 $ 863,109
.g i<
B o ., . "8
'•! ,W! Net Profit $ 151,613 $ 167,348 $ 183,220 $ 199,228 $ 215,374 $ 235,179 $
252,132 $ 270,623 $ 289,256 $ 308,034 $ 326,958 $ 331,125 $ 2,.930,090 ; i )>
Income Tax 51,277 51,277 51,277 51,277 51,277 51,277 51,277 51,277 s1,2n
51,277 51,277 51,277 615,319 "'O
~ ?,
Net Income $ 100,336 $ 116,on $ 131,943 $ 147,951 $ 164,098 $ 1&3,903 $
200,856 $ 219,346 $ 237,979 $ 256,757 $ 275,681 $ 279,849 $ 2,.314, 771 "'O
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..,
,,_ n 'l ~ P, B 3 ,, Years N 8. 'l•l ' - - - - - - - - -
1 fi For the
] e. 0 Month 49 50 51 52 53 54 55 56 57 58 59 60 Year Ended (I)
~~ < i ~ For the Month Ended 01/31/26 02/28/26 03/31/26 04/ 30/26 05/31/26
06/30/26 07/31/26 08/31/26 0'3/30/26 10/31/26 11/30/26 12/31/26 12/31/26 ~
.~. ~ Sales 0 g ~ "'O ~
- '?? Food Transaction Revenue 397,843 415,427 433,163 451,053 469,098
487,299 505,658 524,176 542,855 561,695 580,700 599,869 5,968,835 ::,
~
§ ~ CQ
New Restaurant Revenue 600 600 600 600 600 600 600 600 600 600 600 600
7,200 Q ~ ?- ::, .2 :: New Ci ty Expansion Revenue - - - - - - - ~ m
~ ~ Food Delivery Revenue 33,339 34,812 36,299 37,798 39,310 40,835 42,374
43,925 45,491 47,069 48,662 50,268 500,182 .......
E· t co'
~. .@ Total Sales $ 431,782 $ 450,839 $ 470,062 $ 489,451 $ 509,008 $ 528,734 $
548,631 $ 568,701 $ 588,945 $ 609,365 $ 629,962 $ 650,737 $ 6,476,217 -0 a- · <"
- P- (I) ~
i< [ Cost of Goods Sold CP
• 0 C ~ .. :1,~ Technology Development - - - - V>
i .g Technology Maintenance 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
1,000 1,000 1,000 1,000 12,000
::,
(I)
~. ~
$$$$$$$$
V>
J; • Total Cost of Goods Sold $ 1,000 1,000 $ 1,000 1,000 1,000 1,000 $ 1,000 $
1,000 $ 1,000 1,000 1,000 1,000 12,000 V>
~ ;,. -0 ~ ;· ~ . $ 0
~ 5 Gross Margin 430,782 449,839 469,062 488,451 508,008 527,734 547,631
567,701 S87,945 608,365 628,962 649,737 6,464,217 ::,
f') n
nil
,B, .- · Percent 99.77% 99.78% 99.79% 99.80% 99.80% 99.81% 99.82% 99.82%
99.83% 99.84% 99.84% 99.85% 99:81%
~]
fi ~ s ~ Operating E1<penses
;;· Q
,, 0 - ii Advertising 849 849 849 849 849 849 849 849 849 849 849 849 10,185 ~ . a
~. Accounting 3,476 3,476 3,476 3,476 3,476 3,476 3,476 3,476 3,476 3,476 3,476
3,476 41,715
~,i;· Legal 182 182 182 182 182 i82 182 182 182 182 182 182 2,185 ~· 1' " ~ Credit
card Fees 14,155 14,779 15,409 16,045 16,686 17,333 17,985 18,643 19,307
19,976 20,651 21,332 212,302
S3
a ~ Insurance 68 68 68 68 68 68 68 68 68 68 68 68 820 3 ~ ... ~ 1l Coworking
Space 436 436 436 436 436 436 436 436 436 436 436 436 5,232
I~ :::.· f') Meal-Matching Program 22,226 23,208 24,19!! 25,1!!8 26,207 27,223
28,24!! 29,284 30,327 31,380 32,441 33,512 333,454
•••
-g B" Salaries 43,370 43,370 43,370 43,370 43,370 43,370 43,370 43,370 43,370
43,370 43,370 43,370 520,435
0-g3
:r; ~ Total Operating EKpenses $ 84,761 $ 86,369 $ 87,990 $ 89,625 $ 91,274 $
92,937 $ 94,615 $ 96,308 $ 98,015 $ 99,737 $ 101,474 $ 103,226 $ 1,126,328 ~
g~
-;j Net Profit $ 346,020 $ 363,471 $ 3s1,on $ 3918,826 $ 416,734 $ 434,797 $
453,016 $ 471,394 $ 439,930 $ 508,628 $ 527,488 $ 546,512 $ 5,337,889
~~
- · 0. Income Tax 93,413 93,413 93,413 93,413 93,413 93,413 93,413 93,413
93,413 93,413 93,413 93,413 1,.120,957 if -g i< Net Income $ 252,607 $ 270,058 $
287,659 $ 305,413 $ 323,321 $ 341,384 $ 359,603 $ J n ,981 $ 396,517 $ 415,215
$ 434,075 $ 453,099 $ 4,216,932.
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Summary 323
Diversity Entrepreneurship
I
Necessity Entrepreneurship
For the first time after a 40-year entrepreneurship slump, !he
number of start-ups is on the rise. While d ips and spikes are
not an unusual occurrence, what is unusual about this growth
in start-ups is that ii is happening during a recession. Usually
start-ups have declined in recessions, but w ith the adverse
effects of the COVID-19 pandemic and federal stimulus monies
distributed, there has been a surge in new start-ups, especially
in Black communities.
A study was performed on state-level registra tions in eight
states that gave researchers information on start-up activity by
week and ZIP code. The researchers estimate that, at the start
of the pandemic, the average ZIP code had an average of
three or fewer businesses registered a week than is typical.
However, after the CARES Act was signed in March 2020,
the pace of weekly registrations more than doubled. Similarly,
around the period when a supplementary aid package was
signed in December, business registrations rose by 60 percent.
Finally, after the third wave of stimulus in March, weekly business
registrations rose by 20 percent, although the data around
that time are less complete. The researchers caution that there
might be other factors affecting the rise in start-ups, but the timing
and the spikes are so stark that it is hard to think that it is
merely a coincidence. Mapping the data by ZIP codes shows
that business reg istra tions in Black areas, particularly higher
median-income Black neighborhoods, experienced the greatest
increases even after controll ing for other variables. Although the
data do not d irectly inform us about the race of the entrepreneur,
small-business owners tend to do the registration at their
home address, which gives us an indication of their race.
While this influx of start-ups may be a positive sign, it may
also be a sign of struggle. Indeed, Black communities have
been d isproportionately impacted by the pandemic when it
Summary
This chapter provided a thorough definition and examination
of an effective business plan. The critical factors
in planning and the pitfalls to be avoided ,vere discussed.
Indicators of these pitfalls and ,va ys to avoid them also
,vere presented.
Next, the benefits for both entrepreneurs and financial
sources ,vere revie,ved. Developing a well-conceived
plan was presented frorn the point of vie,v of the audience
for ,vhom the plan is ,vritten. The typical sixstep
reading process of a business plan ,vas presented
to help entrepreneurs better understand how to put
the business plan together. Ten guidelines in developing
a business plan ,vere provided, collated from the
comes to employment. The data suggest that Black individuals
might have started their businesses because they had no other
option. These are what Robert Fairl ie, an economist at the University
of California, Santa Cruz, calls "necessity businesses."
According to research performed by Fairl ie, the share of necessity
businesses has increased substantially, from 13 percent in
20 I 9 to 3 0 percent in 2020.
Whether these new registra tions w ill transla te into longterm
businesses remains to be seen. The question is whether
any of the new businesses will become disruptive enough to
make a positive difference on economic growth and job creation.
There are optimists who believe that the d isruptive nature
of the pandemic has presented entrepreneurs with new opportunities
that d id not exist before. W ith new business models,
borriers to running a small business have changed. Instead of
opening a storefront, entrepreneurs can now run ghost kitchens,
pop-up restaurants, or online stores.
The challenges of becoming a successful entrepreneur are
certa inly sti ll there, and probabilities of success rema in low.
Necessity has motivated many individuals to roll the d ice and
take advantage of the opportunities presented in the shifting
economy. These were formed largely in Black communities that
were disproportionately affected by the pandemic. Successful
entrepreneurs w ill still have to overcome many barriers, and
only time will tell whether the new influx in businesses is here
to stay.
Source: Adopted from Ouoclrung Bui, ' Small Businesses Hove Surg ed in
Block Communities: Was It the Stimulus?,' New York Times, M oy 202 1;
Ben Cosselman ' Start-Up Boom in the Pand emic Is Growing Stronger,'
New York Times, August 202 1; and Gwynn Guilford and Charity L Scott,
' Is It In sane to Start a Business during Coronovirus? Millions of Americans
Don't Think So,' Woll S!reel}ournol, September 2020.
I
advice of experts in venture capital and ne,v-business
development.
The next section illustrated some of the major q uestions
that must be ans,vered in a complete and thorough
business plan. The business plan ,vas outlined, and every
major segment ,vas addressed and explained.
The chapter then presented some helpful hints for
preparing a business plan, along ,vith a self-analysis
checklist for doing a careful critique of the plan before it
is presented to investors.
Finally, the chapter closed ,vith a revie,v of ho,v to
present a business plan to an audience of venture capital
sources. Some basic presentation tips ,vere listed,
together ,vith a discussion of ,vhat to expect frorn the
plan evaluators.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic tight.. some 1hitd p,3
t1ycoo1cn1 maybe suppte sscd ftom 1hc cBool: and/ot cCh.<. lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
324 Chapter 12 Developing an Effective Business Plan
Key Terms
business model
business model canvas
business plan
coacha bili ty
elevator pitch
five-minute reading
management team
market niche
marketing segment
marketing strategy
metrics
milestone schedule
seg1nent
pain
potent ial 1narket
reachable market
Review and Discussion
Questions
1. What is a business plan?
2. Describe each of the five planning pitfalls entrepreneurs
often encounter.
3. Identify an indicator of each pitfall named in question 2.
What would you do about each?
4. Identify the benefits of a business plan {a) for an entrepreneur
and (b) for financial sources.
5. What are the three major viewpoints to be considered
when developing a business plan?
6. Describe the six-step process venture capitalists follow
when reading a business plan.
7. What are some components to consider in the proper
packaging of a plan?
8. Identify 5 of the 10 guidelines to be used for preparing
a business plan.
9. Briefly describe each of the major segments to be covered
in a business plan.
10. Why is the summary segment of a business plan written
last? Why not first?
11. What are five elements included in the marketing segment
of a business plan?
12. What is the meaning of the term critical risks?
13. Describe each of the three financial statements that are
mandatory for the financial segment of a business plan.
14. \XThy should a business plan be updated?
15. Outline some of the critical points to capture in an elevator
pitch.
Notes
1. Alexander Osterwalder and Yves Pigneur, Business Model
Generation: A Handbook for Visionaries, Game Changers,
and Challengers (Hoboken, NJ: \Xfiley, 2010).
2. Adapted from Osterwalder and Pigneur, Business Model
Generation.
3. See Jeffrey A. Timmons, Andrew Zacharakis, and
Stephen Spinelli , Business Plans That \Vork (New
York: McGraw-Hill , 2004); Jan Brinckmann, Dietmar
Grichnik , and Diana Kapsa, "Should Entrepreneurs Plan
or Just Storm the Castle? A Meta-Analysis on Contextual
Factors Impacting the Business Planning- Performance
Relationship in Small Firms," Journal of Business
Venturing 25, no. 1 (2010): 24-40; and Anne Chwolka
and Matthias G. Raith, "The Value of Business Planning
before Start-up-A Decision-Theoretical Perspective,"
Journal of Business Venturing 27, no. 3 (2012): 385- 99.
4. James W. Henderson, Obtaining Venture Financing
(Lexington, MA: Lexington Books, 1988), 13- 14 ; see
also Stephen C. Perry, "The Relationship between Written
Business Plans and the Failure of Small Businesses in the
U.S.," Journal of Small Business Management 39, no. 3
(2001): 201- 8; Gavin Cassar, "Are Individuals Entering
Self-Employment Overly Optimistic? An Empirical
Test of Plans and Projections on Nascent Entrepreneur
Expectations," Strategic Management Journal 31, no. 8
(2010}: 822-40; and Gerard George and Adam J. Bock,
"The Business Model in Practice and Its Implications for
Entrepreneurship Research ," Entrepreneurship Theory
and Practice 35, no. 1 (2011}: 83- 111.
5. Joseph R. Mancuso, How to \'(!rite a \Vinning Business
Plan (Englewood Cliffs, NJ: Prentice Hall, 1985), 44.
6. See Donald F. Kuratko, "Demystifying the Business Plan
Process: An Introductory Guide," Small Business Forum,
Winter 1990/1991, 33-40.
7. Adapted from Henderson, Obtaining Venture Financing,
14-15, and Mancuso, How to \'(!rite a \Vinning Business
Plan, 43.
8. Henderson, Obtaining Venture Financing, 15.
9. Stanley R. Rich and David E. Gumpert, "How to Write
a Winning Business Plan," Harvard Business Review 63,
no. 2 (May/June 1985}: 156- 66; see also Colin Mason
and Matthew Stark, "What Do Investors Look for in a
Business Plan?," International Small Business Journal 22,
no. 3 (2004}: 227-48.
10. Gerald E. Hills, "Market Analysis in the Business
Plan: Venture Capita lists' Perceptions," Journal of
Small Business Management 23, no. 1 Uanuary 1985}:
38-46; see also Gerald E. Hills, Claes M. Hultman, and
Morgan P. Miles, "The Evolution and Development of
Entrepreneurial Marketing," Journal of Small Business
Management 46, no. 1 (2008}: 99- 112.
11. Rich and Gumpert, "How to Write a Winning Business
Plan," 159.
12. Mancuso, How to \'(!rite a \Vinning Business Plan, 52;
see also Bruce R. Barringer, Preparing Effective Business
Plans: An Entrepreneurial Approach, 2nd ed. (Upper
Saddle River, NJ: Pearson/Prentice Hall, 2015}.
13. Mancuso, How to \'(/rite a \Vinning Business Plan, 65.
14. These guidelines are adapted from Jeffrey A. Timmons, "A
Business Plan Is More Than a Financing Device," Harvard
Business Review 58, no. 2 (March/April 1980): 25- 35; W.
Keith Schilit, "How to Write a Winning Business Plan,"
Business Horizons 30, no. 5 (September/October 1987}:
13- 22; William A. Sahlman, "How to Write a Great Business
Plan," Harvard Business Review Uuly/August 1997): 98- 108;
and Donald F. Kuratko, The Complete Entrepreneurial
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91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic tight.. some 1hitd
p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11otcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Planning Guide (Bloomington: Kelley School of Business,
Indiana University, 2017).
15. Donald F. Kuratko and Jeffrey S. Hornsby, New Venture
Management: The Entrepreneur's Roadmap, 2nd ed.
(New York: Routledge, 2018).
16. See Donald F. Kuratko, "Cutting through the Business
Plan Jungle," Executive Female, July/August 1993, 17- 27;
Andrew Burke, Stuart Fraser, and Francis J. Greene, "The
Multiple Effects of Business Planning on New Venture
Performance," Journal of Management Studies 47, no. 3
(2010): 391-415; Donald E Kuratko, "The Business Plan," in
\Viley Encyclopedia of Entrepreneurship, vol. 3 (West Sussex:
Wiley, 2014); and Kuratko, The Complete Entrepreneurial
Planning Guide.
17. Kuratko and Hornsby, New Venture Management.
18. For example, the Massachusetts Institute of Technology
sponsors a business plan forum in Boston, and the Plug
and Play Tech Center in Silicon Valley provides numerous
forums where new ideas are "pitched."
19. See Benjamin J. Warnick, Blakley C. Davis, Thomas H.
Allison, and Aaron H. Anglin, "Express Yourself: Facial
Notes 325
Expression of Happiness, Anger, Fear, and Sadness in
Funding Pitches," Journal of Business Venturing 36,
no. 4 (2021): 106109; Paul Sanchez-Ruiz, Matthew
S. Wood, and Anna Long-Ruboyianes, "Persuasive or
Polarizing? The Influence of Entrepreneurs' Use of
Ingratiation Rhetoric on Investor Funding Decisions,
Journal of Business Venturing 36, no. 4 (2021): 106120;
and Jordan J. Mc Sweeney, Kevin T. Mc Sweeney, Justin
W. Webb, and Cynthia E. Devers, "The Right Touch of
Pitch Assertiveness: Examining Entrepreneurs' Gender
and Project Category Fit in Crowdfunding," Journal of
Business Venturing 37, no. 4 (2022): 106223.
20. For more on venture "pitch" presentations, see Andrew
J. Sherman, Start Fast and Start Right (New York: Kaplan
Publishing, 2007), and Michael P. Ciuchta, Chaim Letwin,
Regan Stevenson, Sean McMahon, and M. Nesij Huvaj,
"Betting on the Coacha ble Entrepreneur: Signaling and Social
Exchange in Entrepreneurial Pitches." Entrepreneurship
Theory and Practice 42, no. 6 (2018): 860-85.
21. For excellent resources on business plan preparation and
presentations, see Garage Technology Ventures at http://
www.garage.com/resources.
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11otcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Appendix 12A: Hydraulic Wind Power LLC
12A-1 Executive Summary
12A-1 a Overview
Hydraulic Wind Po"ver LLC (HWP) is a rene"vable
energy company "vith a patent-pending technology that
can make the production of "vind energy rnore economically
viable. Our highly efficient hydraulic drivetrain significantly
reduces overall costs and increases total energy
production. These benefits will allo"v turbines utilizing
our technology to produce a cost of energy (COE) that
is directly competitive with other energy sources (such as
coal, nuclear, and hydroelectric, which have a COE of 3
to 5 cents per kWh).
Our goal is to be the ind us try expert in hydraulic
drivetrains for land-based wind farrn applications and
provide alternative designs to current large wind turbines
that irnprove the reliability, durability, and profi
ta bili ty of "vind po"ver. The company "vas formed
on August 17, 2010, as an Indiana Limited Liability
Company (LLC). The company also executed its exclusive
licensing agreement "vith the Indiana University
Research and Technology Corporation on the same
date. The company is located at the Hoosier Hatchery in
Bloomington, Indiana.
Contact information:
Hydraulic Wind Po"ver LLC
c/o Hoosier Hatchery
2719 E. 10th St.
Bloomington, IN 4 7408
info@h ydra ulic"vind power. com
Management:
Adam Johnson- CEO
Justin Otani-COO
Director of research and development:
Dr. Afshin Izadian
Business advisers:
Dr. Donald F. Kuratko
Mark Long
Mark Need
Matt Rubin
Capital received to date:
$112,000
Capital seeking:
Series A of $1.8 million
Investors to date:
Founders
Indiana University
12A-2 Market
In 2008, the U.S. gearbox market "vas over $4.5 billion,
"vhich is part of the larger $151.3 billion "vind energy
rnarket.1 Wind energy currently generates around 2 percent
of U.S. electricity needs, but future gro"vth is projected
to substantially increase.2 The U.S. Departrnent of
Energy released, in 2008, a plan to provide 20 percent of
U.S. electricity through "vind po"ver by 2030.3 A more
recent analysis of "vind integration in the eastern region
of the United States dre"v similar conclusions.4
Despite the significant drop in demand for "vind
energy in 2010, U.S. "vind energy seems to again be
rarnping up. Figures for the first quarter of 2011 indicate
that the industry seerns poised for a renaissance. The
under-construction figure is nearly C'-'vice the mega"vatts
that the industry reported at this time in both 2009 and
2010; moreover, t"vo-thirds of those mega"vatts are already
locked in under long-term po"ver purchase agreements
"vith electric utilities, indicating an enduring industry that
can endure a range of econornic and policy conditions.5
Ho"vever, '-'Vind energy still faces a number of key
challenges that make improving the econornic viability
of "vind critical to its future success. These challenges
include the follo"ving:
The Low Price of Natural Gas At $35 a mega"vatthour,
"vind looked like a good deal back in 2007, "vhen
"vholesale electric prices ranged benveen $45 and $85
per rnega"vatt-hour. But the natural gas boom, plus
the 2008 recession, drove prices under $30 by 2009,
eliminating "vind's financial edge. The price of natural
gas has fallen by 77 percent since 2008, and the
cost of producing electricity in gas plants is do"vn
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40 percent, due in part by advances in horizontal
drilling and the effective (though highly controversial)
technique of hydraulic fract uring, or fracking.6
The Instability of Production Tax Credits The rene\.vable
energy production tax credit (PTC), a credit of
2.1 cents per kilo\.vatt-hour, is the primary federal
incentive for \.Vind energy and has been essential to
the industry's gro\.vth. The \.Vind energy industry faces
nvo troubles regarding the PTC. First, the credit is
continually extended for only one- and t\.Vo- year
terms, discouraging companies from making longterm,
sizable investments in \.Vind power manufact uring
and development. Second, in the current adverse
financial climate, "vhere demand for tax credits is limited,
the PTC is providing little incentive to spur \.Vind
energy development. Also, NIMBY (Not In My Backyard)
protests have made getting approval for a \.Vind
farm in the United States as difficult as getting it for a
coal-fired plant. 7
The Increasing Competition from Chinese Suppliers
Chinese \.Vind turbine producers have seen their market
share rise drarnatically in the past fe"v years. T\.vo
of the top Chinese wind turbine producers no\.v rank
among the global top three rnanufacturers by mega\.
Va tts of capacity sold. The rise has been fueled by
domestic demand for \.Vind po"ver, supported by the
government target, and a requirement for 70 percent
of \.Vind turbine cornponents to be manufactured
locally. With their domestic market saturated and
clear signs of overcapacity and up corning consolidation,
the biggest Chinese producers have announced
plans for international expansion.
12A-3 Problem
Our alternative approach to capturing and transferring
energy from the rotor to the genera tor is able to solve
one of the largest and most expensive problems \.Vith current
\.Vind t urbines. Most wind turbines currently utilize
a gearbox-based design. These gearboxes are expensive
and heavy and fail often. Gearboxes need to be replaced
on average about every five to seven years and cost over
$500,000 per replacement.8 Our company's solution
utilizes a hydraulic system in a unique configuration to
eliminate gearboxes and significantly improves the reliability,
durability, and profitability of wind t urbines.
Gearbox failures account for the largest amounts
of downtime, maintenance, and lost po\.ver production.
These costly failures can total 15 to 20 percent of the
price of the t urbine.9The frequent rnaintenance requirements
and multiple (costly) gearbox replacernents have
proven especially problematic for developers of large
\.Vind power production facilit ies. Most \.Vind farm
developments today have maintenance teams in place
to maintain and replace gearboxes. Many economic
Appendix 12A: Hydraulic Wind Power LLC 327
models fac tor in total gearbox replacements every five
to seven years on each t urbine. 10 The financial risk
gearboxes represent is only some\.vhat mitigated by
the large nurnber of turbines in a major \.Vind po\.ver
production facility and developers' ability to amortize
personnel, equiprnent, and consumables costs across a
fleet of turbines.
Gearboxes are problematic by the very nature of
the numerous moving parts and subsystems that are
required for their operation and the demanding nature
of the \.Vind turbine application it self. It is generally
accepted that the complexity and multiple moving parts
involved in gearbox-driven designs are creating more
opportunities for failure, more maintenance requirements,
and costlier fixes. 11
It is also not that surprising gearboxes have so many
failures, especially if you compare them to car transmissions.
A car transmission is functionally similar to a wind
t urbine's gearbox. Expecting a \.Vind t urbine's gearbox to
last for 20 years of continuous operation \.Vould be like
expecting a car's transmission to last for 4 million miles,
"vhich most \.vould agree is an unreasonable expectation.12
The industry has attempted to solve these problems
over the past t\.VO decades with \.Vind turbine manufacturers,
gear designers, bearing manufact urers, consultants,
and lubrication engineers all \.vorking together to
improve load prediction, design, fabrication, and operation.
This collaboration has resulted in internationally
recognized gearbox \.Vind turbine design standards.
Ho\.vever, despite reasonable adherence to these accepted
design practices, \.Vind turbine gearboxes have yet to
achieve their design life goals of 20 years, \.Vith most systen1s
requiring significant repair or overhaul \.vell before
the intended life is reached. The wind industry has
reached a point where design practices for gearboxes do
not result in sufficient life, and institutional barriers are
hindering forward progress.13
12A-4 Technology
12A-4a Background
Since the acceptance of the gearbox-based configuration
("vhich essentially won out during the 1990s as the dorninant
configuration and is used in most of today's modern
\.Vind turbines), despite their high costs and the high
failure rates, U.S. \.Vind turbine designers and manufact urers
have proceeded only incrementally toward improvements
in \.Vind t urbine design. These design and efficiency
improvements are being achieved rnostly by enlarging
turbine size. The focus on incremental design changes has
lessened design risk; ho\.vever, as blades get longer, they
challenge the ability of current designs and materials to
support their O\.Vn \.veight and \.Vithstand \.Vind loads.14
One attempt by the industry to address these issues
\.Vas the development of the direct drive system. The direct
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328 Chapter 12 Developing an Effective Business Plan
drive syste1n \>Vas specifically designed to avoid the use of
a gearbox. The system instead attaches the rotor directly
to the generator and uses a costly variable-speed electronic
system to convert the erratic generation of electricity into
a steady flow that can be fed into the po\>ver grid. These
systems, in order to \>vork, require the use of rare specialized
permanent magnets. The specialized generator and variablespeed
electronic system make the direct drive system ahnost
t\>vice as expensive as the traditional gearbox design.
The required use of rare-earth metals also serves
as a significant barrier to the \>videspread adoption of
these systems. Rare earths are elements needed in many
high-technology industries, including the manufacturing
of \>Vind t urbines. China currently fulfills more than 90
percent of global demand for these elements, and last
year, Beijing started to severely restrict its exports. 15
The cost and availability of these ele1nents has limited
the direct drive system's use to mostly offshore applications
since these t urbines' location makes the1n harder to
repair and the larger units are able to generate enough
po\>ver to justify the added costs.
12A-4b Opportunity
So1ne attempts at creating a hydraulic-based drivetrain
comprising a pump and motor for main po\>ver transmission
\>Vere atte1npted unsuccessfully in the early 1980s.
Key problems that \>Vere identified were its inadequate
capacity, efficiency, reliability, and life span of then existing
commercial hydraulic components. The lack of components
specifically designed for the needs of efficient
\>Vind po\>ver generation ulti1nately led to the determination
that these systems \>Vere not as commercially viable as the
gearbox-based drivetrains. Ho\>vever, the advances over
the past 30 years in pump manufacturing for the oil and
gas industry and in fields such as materials science, fluid
dynamics, and computa tional design tools have solved
many of these issues and have reopened the door of opportunity
for these past innovative drivetrain concepts.16
Traditional Gearbox Design
Brake System
Generator --~
Nacelle
Electron ic
Control System Yawing System
Evolution of Wind Turbine Designs over the Past 25 Years
10 MW WIND IN PERSPECTIVE 10.0 MW
140
-~E 120 .c.u. 100
- 00 cu 80 E
.!!! 60
".C.. 30 40 -0 so 0 20 0::: 0 '--_,.,____,__._...._...L.-.&....,<L-L-_________ __
~ ~~ P>'v P>~ R)'v R)~ ~'v
'\,Oj ~ '\,Oj '\,Oj '),,<:s '),,<:s '),,'v
Year
It is easier to appreciate the size of new 10-MW turbines with comparisons to
previous generations. The Clipper Wind power Britannia turbines, for example.
will have towers about as high as 50-story buildings.
Direct Drive Design
Pitch
System
Bearings
12A-5 Our Solution
Power and System
Controllers
Our company has created a unique solution to the problem
of transferring energy by combining a novel hydraulic
transmission system \>Vith a specialized closed-loop
control system. Hydraulic transmission systems (HTS)
are \>vell kt10\>vn as an exceptional means of po\>ver transmission
for energy applications in manufacturing, automation,
and heavy-duty vehicles. 17 The HTS developed
by HWP allows the rotor to operate at variable speeds,
enables the use of efficient hydraulic components, and
enables the use of synchronous generators (\>vithout
requiring costly variable-speed electronic system).
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F.di1otial tcvicw h3sdremcd IM1 anysuppte sscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11o tcmovc
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System Components
Hydrau lic Pump
Accumulator
\
Controller
Hydrau I ic Motor
i
Generator
Operating at variable speeds increases the amount
of energy captured, rotary hydraulics are extremely
durable and highly efficient, and synchronous generators
do not require a reactive magnetizing current and
System Layout Overview
Rotor
Accumulator
Check
Valve
Appendix 12A: Hydraulic Wind Power LLC 329
a reactive po,ver compensation system (unlike induction
genera tors, ,vhich are found in most current wind t urbines),
,vhich reduce the efficiency of the system.
Utilizing our specialized closed-loop control system,
our drivetrain is able to maintain a constant frequency
at the generator while it transfers energy captured by the
rotor to a generator on the ground and allo,vs manufacturers
to incorporate several turbines into a single centralized
po,ver generation unit (an ideal feature for wind
farm applications).
HWP's Multi-Tower Integrated Approach
i--Hydrau lic Pump
Hydrau I ic
Motor
Generator
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcxpc ticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
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330 Chapter 12 Developing an Effective Business Plan
Central Generation Unit
L
-~ (J)p
-~ Dp QP - QP
Qv
Fluid
Compressibility
,.........,► i p
P --'-~ P
,____ Pb 7
Pressure
Relieve Valve
12A-5a Outside Validation
The company has received sorne initial feedback frorn
the U.S. Departrnent of Energy (DOE) on our technology.
This feedback is highly encouraging and attests to
the potential of the technology. The DOE did identify
some areas of concern. Ho\.vever, the cornpany has since
\.vorked hard to address these concerns and made substantial
progress in the development of the technology.
Dr. Izadian also has nvo peer-revie\.ved papers on the
technology that have been accepted for publication (and
are available on request).
12A-5b Competitive Advantage
Rather than attempting to crea te a solu tion using
abstract or untested technologies, our innovative control
and energy conversion system leverages current industrial
technologies and expertise to create a practical and effective
solution. This also gives HWP a unique advantage
because the manufacturing and distribution infrastructure
already exists that \.vould enable the rapid deployment
of our system into ne"v "vind farm projects once the
full-scale system is completed, tested, and proven.
Our system has a nwnber of additional advantages
"vhen compared to traditional gearbox designs, direct
drive designs, and alternative hydraulic designs. The
combination of these advantages is expected to significantly
reduce a t urbine's COE. These advantages can be
broken down into nvo key areas: efficiency advantages
and cost advantages. These advantages are listed below:
Efficiency Advantages:
• Variable-speed rotor
• Increased nominal speed; increased cut-out speed
Motor A
Load A
Motor B
Load B
• Reduced nacelle weight (also reduces costs)
• Improved genera tor efficiency and grid compatibility
(also reduces costs)
• Elimination of large po\.ver electronics (also reduces
costs)
• Enabled energy storage
Cost Advantages:
• Reduced downtime and repair costs
• Reduced investor risk
• Currently existing manufacturing infrastructure
Our system will enable manufacturers to provide
developers a more reliable and durable turbine "vhile
also increasing overall profitability. Acquiring a license
in an existing and proven technology \.vill also allo"v
licensees to avoid the delays, risks, and costs inherent
\.Vith in-house development. It reduces the lead time
needed to design and build ne\.v turbines and provides
them access to an established component supply chain
and supplier net"vork.
12A-6 Development Plan
12A-6a Development Strategy
HWP has moved aggressively through the design and
development of our hydraulic drivetrain system and
its associated technologies. The company has begun
to establish industry partnerships "vith one "vind farm
developrnent company and one large energy company.
The company has also developed contacts \.Vith several
other cornpanies and organizations in \.Vind energy. We
have identified four key phases for the development of
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the system and son1e alternative development options.
These phases are as follows:
• Small-scale model and simulation
• Mediwn-scale simulation; large-scale simulation
• Full-scale build
• Mediu1n build (alternative option)
Small-Scale Model and Simulation (Completed)
The initial phase of development included the development
of a mathematical model, a computer simulation,
and a small-scale prototype of the system. The si1nultaneous
development of these three different approaches
has ensured the accuracy of the results and created a
strong and reliable foundation for scaling up the syste1n
to a commercial size.
The result of this phase \>Vas the successful implementation
of model-based control strategies for hydraulic
wind energy harvesting systems that maintain a
constant frequency at the generator. An energy t ransmission
system for a \>Vind turbine was ma the1natically
modeled with one fixed-displacement pump and t\>V0
hydraulic motors. The obtained mathemat ical model
\>Vas compared to the designed computer model using the
SimHydraulic toolbox in MATLAB/Simulink and the
experitnental results obtained from the small-scale prototype
of the hydraulic system. The result \>Vas that the
experimental data from the small-scale prototype \>Vere
equivalent to the simulated models, and it illustrated
that the gearless hydraulic po\>ver transfer syste1n is an
efficient and effect ive 1neans of transferring energy.
Medium-Scale Simulation (in Progress)
The co1npany is currently in the process of scaling up
the system into to a mediu1n-size three-to\>ver syste1n
(approxitnately 100 kW per to\>ver). Scaling the systetn
to a 1nedium-size system prior to a full-scale system is
critical to ensuring that the results of the small-scale
designs are accurately t ranslated into the system. This
medium-size system can also be used as the basis for
a fast and cost-effective development project with an
industry partner to de1nonstrate the viability of the technology.
The goals of this phase are to accurately determine
the effects of to\>ver height on the system and the
effect of distance of the system to detennine 1nore accurate
co1nponent specifications and to further refine the
COE calculations.
Errol Dogar, HWP's adviser and cofounder of
American Tool and Machining, Inc., currently has an
underutilized 4,000-square-foot facility on a one-acre
lot in north\>vest Indianapolis that includes all necessary
machine tools and three-phase 480-volt po\>ver. With
minor 1nodifications, this building and lot is expected to
be the base of operation for the prototype. This facility
is fully capable of housing all needed equipment
Appendix 12A: Hydraulic Wind Power LLC 331
and personnel as \>vell as being able to do any needed
machining, welding, assembly, and testing to successfully
complete the medium-scale prototype phase of development.
HWP's access to this facility is expected to reduce
the cost of the medium-scale prototype by roughly
60 percent.
The results of this actual-size prototype \>vill demonstrate
the superior cost and maintenance aspects of our
hydraulic system. In addition, it \>vill also provide valuable
information in identifying problem areas and ways
to i1nprove the system. Once the concept is proven at
realistic po\>ver levels, it \>vill open up ne\>v sources of
future funding as \>vell as internal funding through retrofit
sales and installations of mediu1n-size t urbines.
Large-Scale Simulations
After the developn1ent of the 1nediu1n-size system, the
company \>vill continue to scale up the system into a fullsize
system (1.5 MW per to\>ver). This phase will include
identifying ne\>v co1nponents, determining key technical
and performance 1netrics, updating the COE analysis,
identifying and quantifying expected itnprovements by
area co1npared to existing technologies, updating the
schedule and cost estitnates, and co1npleting a manufacturing
cost analysis on ne\>v components. This phase \>vill
also include the exact designs for t\>vo-to\>ver system that
\>vill be used for a full-scale build.
Full-Scale Build
HWP has identified t\>V0 potential avenues for building a
full-scale prototype based on the large-scale simulations
and the medium prototype results. The company plans
to develop a partnership \.Vith an industry partner that
\>vould allo"v the company to retrofit t\>vo larger to\>vers
\>Vith our system. The preconstruction needs for this
initial system are projected to take about four months.
The construction itself is expected to take an additional
six months. During this period, HWP is expected to
optimize the product and address any unanticipated
challenges that may arise. HWP \>vill then use the next
six months to test the system under different wind conditions
and use the data collected to complete our design
of HWP's commercial six-tower integrated system.
12A-7 Commercialization Plan
12A-7 a Business Model
HWP is positioning itself to be the industry expert on
hydraulic drivetrain systems for land-based \>Vind farm
applications. The company plans to emerge as an engineering
design firm that \>vill eventually expand on its
core competency of designing hydraulic syste1ns for \>Vind
turbines to also include construction, operations and
maintenance, and supply chain expertise and assistance
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91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~ wooic tight.. some 1hitd
p,3t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
332 Chapter 12 Developing an Effective Business Plan
for the systems ·we design . This ,viii allow customers to
quickly and seamlessly integrate our system into their
products or development projects.
The company plans to commercialize our technology
by securing licensing agree1nents for the use of our
system. In exchange for an up-front licensing fee and a
fixed royalty rate determined by gross sales on a perto,
ver basis, HWP ,viii provide 1nanufacturers a complete
product package. This package will include the right to
build and sell turbines using our HTS and closed-loop
control system, component dra,vings and specifications,
a bill of materials (parts list ), supply chain development
assistance, assembly and testing documentation, transportation
and logistics documentation, field installation
and commissioning procedures, operation and maintenance
manuals, engineering consulting services, and a
training program for manufacturing and service.
Customers ,viii benefit by acquiring a license to an
existing and proven technology. This allo,vs licensees to
avoid the delays, risks, and costs inherent ,vith in-house
development. HWP allows manufact urers to incorporate
an innovative technology into their turbines, break even
faster, and 1nake larger profits more quickly. It reduces
the lead ti1ne needed to design and build new turbines,
and it ,viii provide them access to an established component
supply chain and supplier net,vork. Licensees
,vill also have access to professional high-quality training
and support from the developtnent stage to full-scale
implementation of the system.
As the premier experts on understanding and developing
hydraulic drivetrains and related components (as
opposed to expanding into blades or tower designs), the
company expects to eventually expand our potent ial
revenue streams (as our solution becomes rnore \>videly
adopted) to also include operation and maintenance services
and additional consulting services.
12A-7b Entry Strategy
The company plans to pursue multiple strategies for marketing
the company and bringing our technology to the
market. These include establishing industry partnerships
and building a number of relationships in the industry.
Once the technology development phase nears completion,
the co1npany plans to leverage these relation ships
to establish a pilot program \>Vith either a t urbine manufacturer
or a \>Vind fann developer. This pilot progra1n is
expected to involve the i1nplementation of our system into
a smaller \>Vind fann development project or as a smaller
part of a larger project. This initial project \>vill help establish
the acceptance of the technology \>Vithin the market
\>vhile minimizing the risk to the company's partners.
12A-7c Target Customers
HWP anticipates three different types of potential customers:
current \>Vind turbine manufacturers, wind farm
developers, and hydraulic component manufact urers.
The company \>viii initially target current turbine manufacturers
for its first licensees. Licensing directly to wind
t urbine manufact urers increases the company's influence
in the value chain and its ability to enter the market
quickly. These manufacturers have an expertise in \>Vind
turbine 1nanufacturing and have already existing relationships
with \>Vind farm developers.
Alternatively, HWP \>viii also seek to secure licensing
agreements \>Vith \>Vind farm developers and hydraulic
co1nponent manufacturers. Wind farm development
projects have high init ial capital requirements, and this
has pushed \>Vind farm developers to become increasingly
vertically integrated in order to reduce these costs.
Wind farm developers \>vho manufacture their O\>Vn t urbines
are also likely candidates to license our designs.
Our solution also represents a great opportunity for
hydraulic component manufacturers to enter a ne\>v highgro\>
vth market. There are current! y dozens of major
hydraulics companies (including Caterpillar, Flo\>vserve,
Sulzer, and Eaton) that \>vould possibly be interested in
licensing HWP's technology. While the system is proprietary,
the components that it uses are well kno\>vn by
these companies. Licensing our system to these manufact
urers allo\>vs them access to a ne\>v market \>Vithout their
needing to look beyond their existing core competencies.
12A-7d Exit Strategy
The \>Vind energy industry is characterized by a large number
of strategic acquisitions. In 2010, there \>Vere 35 deals
\>Vi thin North America, totaling $3.98 billion. Larger manufacturers
have been quick to acquire smaller companies
\>Vith improved technologies. For example, GE recently
purchased Wind lower Syste1ns LLC to gain access to a
technology for building tall towers more cheaply. HWP
believes our alternative drivetrain system \>vill 1nake HWP
a strong acquisition target for a larger manufact urer
because of our technology's strong value proposition and
ability to diversify a larger company's product portfolio.
12A-8 Executive Team
12A-8a Start-Up Management
Interim Chief Executive Officer (CEO) Adam Johnson
(MBA) recently completed his MBA in entrepreneurship
at the Indiana University Kelley School of Business. He
has experience in the rene\>vable energy sector \>Vorking
for a start-up, Microbial Energy Systems, and a background
in finance, including \>vorking at Smith Barney
Financial.
Chief Operating Officer (COO) Justin Otani (]DI
MBA) is currently completing his JD in business la\>v
and in tellectual property at the Indiana University
Maurer School of La\>v and his MBA in entrepreneurship
and corporate finance at the Indiana University Kelley
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11o tcmovc
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School of Business. He has experience \.vorking in the
technology transfer office at Indiana University.
Director of Research and Development Dr. Afshin
lzadian is the inventor of HWP's technology and is providing
technical advice and development assistance to
HWP. Dr. Izadian is an electrical engineering professor
at Indiana University-Purdue University Indiana polis
(IUPUI). He is also a research member at the Energy
Center, Discovery Park-Purdue University, and a
research faculty member at the Richard Lugar Center
for Renewable Energy.
12A-8b Advisory Board
The Advisory Board has a strong background in
entrepreneurship, intellectual property, and bringing
ne\.v technologies to the market. The board provides
assistance \.Vith our business plan and investor presentation,
legal services, and general guidance on business
development. The Advisory Board currently includes
Dr. Donald F. Kuratko ("Dr. K"), Professor Mark Need,
and Mr. Matt Rubin. "Dr. K" is the executive director
of the Johnson Center for Entrepreneurship and Innovation
at Indiana University. Mark Need is the director
of the Elmore Entrepreneurship La"v Clinic at Indiana
University. Matt Rubin is a business development manager
for the Indiana University Research and Technology
Corporation.
12A-9 Risks
12A-9a Industry Risk
The rene\.vable energy PTC, a credit of 2.1 cents per
kilo\.vatt-hour; is the primary federal incentive for \.Vind
energy and has been essential to the industry's gro\.vth.
The \.Vind energy ind us try faces nvo troubles regarding
the PTC. First, the credit is continually extended for only
one- and nvo-year terms, discouraging companies from
making long-term, sizable investrnents in \.Vind po\.ver
manufacturing and development. Second, in the current
adverse financial cli1na te, \.vhere demand for tax credits
is limited, the PTC is providing little incentive to spur
\.Vind energy development.
Our system has the potential to make \.Vind energy
cost competitive \.Vithout these government subsidies.
This serves as a strong competitive advantage for our
system. Ho\.vever, there is a risk that these PT Cs may
not be rene\.ved prior to development and acceptance of
HWP's system. If this occurs, it could result in a substantial
decrease in demand for \.Vind projects or investment
in \.Vind energy technologies, which could significantly
slo"v the company's entry into the market. This risk is
a lso mitigated because the wind turbine 1narket is a
global 1narket, and even if th is event occurs, the co1npany
will still be capable of com1nercializing our technology
elsewhere.
Appendix 12A: Hydraulic Wind Power LLC 333
12A-9b Alternative Technology Risks
Major turbine manufact urers have been \.Vorking hard to
make gearboxes more reliable. HWP recognizes the possibility
that these companies may develop a more competitive
solution to the gearbox problem. HWP feels that this
risk is currently minimal considering the ti1ne and effort
t hese companies have already incurred trying to improve
current gearboxes. HWP strongly believes that our technology
will be successful even if the lifetime of gearboxes
is dra1natically extended because of the decreases in initial
capital costs, the decreases in turbine \.veight, and the
decreases in costs of repairs when repairs are necessary.
12A-9c Hydraulic Fluid
Environmental concerns surrounding the use of hydraulic
fluid is an area of potential concern. The co1npany
has already identified several environmentally friendly
hydraulic fluids availa ble in the market. Once the fullscale
system is designed and analyzed, the optimal properties
of a potential hydraulic fluid \.vill be better known
(viscosity, static pressure, vapor pressure, density, and so
on). We anticipate that there \.vill be an existing environmentally
friendly fluid with these ideal properties. Ho\.vever,
if there is not a fluid \.Vith the exact properties that
\.vould optimize the efficiency of the energy transferred,
then it may require additional research into the development
of fluid with the desired chemical properties.
12A-10 Financial Summary
12A-1 Oa Financials
The financial proformas presented here are projections
based in part on Windtec's success using a similar licensing
model. HWP is confident in our ability to hit these
revenue nu1nbers when considering the advantages of
the company's system over Windtec's gearbox-based systems.
The company expects to sign their first licensing
agreement \.Vithin nvo years but possibly earlier. HWP's
goal is to close a Series A round of $1.8 million to fund
technology development and prepare the company to
build a full-scale prototype.
The funding \.viii also allow the company to hire key
personnel. After receiving the Series A round of funding,
the company hopes to hire a chief technology officer (CTO)
and a chief executive officer (CEO). The CTO will lead the
charge in the development of our engineering team, and the
CEO will be responsible for overseeing the management of
the business and securing additional capital.
HWP believes that bringing the technology develop-
1nent "in house" \.vill be critical to the company's success.
The company also anticipates needing to hire a senior
electrical engineer and a senior control syste1ns engineer
in the first year. HWP also expects to hire a 1nechanical
engineer and an electrical engineer in the second year.
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F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
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334 Chapter 12 Developing an Effective Business Plan
These engineers ,vill be important as the company begins
to prepare for the full-scale prototype build.
The company also anticipates closing a Series B
round of $4 million to build a full-scale prototype. The
financial projections are consistent ,vith HWP's partnering
,vith a ,vind farm developer to retrofit t,vo existing
to,vers. However, this partnership could take on many
different forms that could reduce the cost of this fullscale
build significantly. The costs of parts include a contingency
fund of $500,000 in year 3 and $250,000 in
year 4 in case the company has any complications with
the build. In addition to this spare parts contingency
fund, the company never drops belo,v $380,000 in cash.
The extra cash ,vill make sure the company ,vill be able
to survive even if unexpected complications or expenses
occur.
HWP ,vill not need to invest heavily in capital
expenditures beyond the full-scale prototype because of
the company's licensing strategy. This approach allo,vs
the company to be a long-term self-sustaining company
and ,vill eliminate the need for a third round of funding.
The company expects to be cash-flo,v positive within
three years. Most of the expenses beyond the full-scale
prototype ,vill be focused on continued research and
development as well as expanding and improving the
engineering and sales teams.
Income Statement Year 1 Year 2 Year 3 Year4 Year 5
Licensing Fees $ $ 500,000 $ 1,000,000 $ 3,000,000
Interest Revenue $ 26,591 $ 112,886 $ 120,586 $ 91,472 $ 65,095
Royalties $ 2,250,000 $ 10,500,000 $ 30,000,000
Other Revenue
Total Revenue $ 26,591 $ 112,886 $ 2,870,586 $ 11,591,472 $ 33,065,095
Pass-Through Royalties $ $ $ 1,125,000 $ 5,250,000 $ 15,000,000
Total Salaries $ 450,000 $ 796,167 $ 1,061,050 $ 1,495,595 $ 2,724,341
Total IUPUI Expenses $ 140,394 $ 140,394
Outside Contractors $ 100,000 $ 115,000 $ 132,250 $ 152,088 $ 174,901
Total Suppl ies for In itial Build $ 1,310,122 $ 1,560,122 $ 375,000 $ 125,000
Construction Expenses for In itial $ 500,000 $ 500,000
Build
Operating Expenses
Total Operating Costs $ 214,100 $ 161,385 $ 202,698 $ 300,805 $ 378,512
Total Costs $ 904,494 $ 3,023,067 $ 4,581,119 $ 7,573,487 $ 18,402,753
EBT $ (877,903) $ (2,910,181) $ (1,710,533) $ 4,017,984 $ 14,662,342
Taxes (35%) $ $ $ $ (1,406,295) $ (5,131,820)
Net Income $ (877,903) $ {2,910,181) $ (1,710,533) $ 2,611,690 $ 9,530,522
*Please refer to exhibits for more detailed financial information.
12A-1 Ob Exit
While our licensing rnodel positions HWP to be a
self-sustaining company, there is a strong likelihood
the company ,vill be acquired by a wind turbine manufacturer,
hydraulic pump rnanufacturer, or ,vind
farm developer. The ref ore, based on an exit through
Balance Sheet
Assets
Current Assets
Cash
Accounts Receivable
Total Assets
Year 1
$ 943,075
$ 943,075
Year 2
$ 2, 131,570
$
$ 2, 131,570
acquisition in year 5, the company has a projected value of
$162.8 rnillion. This is based on a current industry
standard of 11 times earnings before int erest, taxes,
depreciation, and amortization. Major companies have
been quick to acquire smaller cornpanies. This is evidenced
by Mitsubishi Heavy Industries' (MHI) acquisition
of Artemis IP and American.
Year3
$ 386,284
$
$ 386,284
Year4
$ 4,861,830
$
$ 4,861,830
Year 5
$19,851,153
$
$19,851,153
(Continued)
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t1ycoo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Appendix 12A: Hydraulic W ind Power LLC 335
Balance Sheet Year 1 Year 2
Liabilities
Current Liabilities
Accounts Payable $ 20,978 $ 119,653
Total Liabilities $ 20,978 $ 119,653
Equity
Capital Stock $ 1,800,000 $ 5,800,000
Reta ined Earn ings $ (877,903) $ (3,788,083)
Total Equity $ 922,097 $ 2,01 1,917
Total Liabilities and Equity $ 943,075 $ 2, 131 ,570
Cash-Flow Statement Year 1 Year 2
Net Income (Loss) $ (877,903) $ (2,910, 181)
Working Capital Changes
Accounts Receivable (Increase) $ $
Accounts Payable (Increase) $ 20,978 $ 98,676
Cash Used for Operations $ (856,925) $ (2,811 ,505)
Cash Used for Investments
Cash from Financing Activities
Capital Stock
Change in Cash for Period $ (856,925) $ (2,811 ,505)
Cash: Beginning of Period $ 1,800,000 $ 943,075
Cash: End of Period $ 943,075 $ 2, 13 1,570
•Please refer to exhibits for more detailed financial information.
Series A Expected Financial Return
Year 5 EBITA
Multiple
Term inal Value
Series B
PV
Investment
14.8 (mill ions)
11
$ 162.8
TV
$ 163
$4
IRR
0.94
Retention Ratio 75%
Series A
PV
Investment
TV
$ 163
$ 1.8
IRR
0.94
Periods
3.5
Periods
5
Year3 Year4 Year 5
$ 84,900 $ 242,462 $ 569,444
$ 84,900 $ 242,462 $ 569,444
$ 5,800,000 $ 5,800,000 $ 5,800,000
$ (5,498,616) $ ( 1,480,632) $13, 181 ,710
$ 301 ,384 $ 4,3 19,368 $18,981 ,710
$ 386,284 $ 4,561 ,830 $ 19,55 1, 153
Year 3 Year4 Year5
$ (1,7 10,533) $ 4,017,984 $ 14,662,342
$ $ 300,000 $
($ 34,753) $ 157,562 $ 326,982
$ (1 ,745,286) $ 4,475,547 $ 14,989,323
$ (1 ,745,286) $ 4,475,547 $ 14,989,323
$ 2, 131 ,570 $ 386,284 $ 4,861 ,830
$ 386,284 $ 4,861 ,830 $19,851 , 153
DTV
$ 16. 15
25% Series B Final Ownership
DTV
$ 6.00
30% Series A Final Ownership
40% Series A Current Ownership
(Continued)
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc t igh11o tcmovc
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336 Chapter 12 Developing an Effective Business Plan
Series A Expected Financial Return
Ownersh ip Post A Post B Series A Valuation
Founders 45% 28% Premoney
ICP 5% 10% Series A
Option Pool 10% 8% Postmoney
Series A 40% 30%
Series B 25%
Total 100% 100%
For the s uperconductor (AMSC) acqu1s1t1on of
Windtec, d et ails of the Artemis IP deal were n o t d isclosed,
but MHI committed over $160 million in a larger
deal that included the acquisition. In the Windtec deal,
$ 2.72 Series A
$ 1.80
Cash-on-ca sh Return
27
$ 4.52 Exit Return
$48.83
AMSC acquired Windtec for $12.4 1nillion in AMSC
stock. Windtec also had a tremendous backlog of orders
that it could not fill at the time.
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91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic tight.. some 1hitd p,3
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc t igh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Appendix for Hydraulic Wind Power LLC
Use of Funds
Growth Rate Year 1 Year 2 Year 3 Year4 Year 5
Salary Expense
Chief Executive Officer 10% $ 125,000 $ 137,500 $ 151,250 $ 166,375 $ 183,013
Adam Johnson, Chief Financial 10% $ 60,000 $ 80,000 $ 88,000 $ 96,800 $
106,480
Officer (CFO)
Justin Otani, Chief Operating 10% $ 40,000 $ 80,000 $ 88,000 $ 96,800 $ 106,480
Officer (COO)
Chief Technology Officer 10% $ 100,000 $ 110,000 $ 121,000 $ 133,100 $ 133,100
Sen ior Electrical Engineer 10% $ 75,000 $ 100,000 $ 110,000 $ 121,000 $ 121,000
Sen ior Control Systems Eng ineer 10% $ 50,000 $ 100,000 $ 110,000 $ 121,000 $
121,000
Junior Mechanical Engineer 10% $ 50,000 $ 55,000 $ 60,500 $ 66,550
Junior Electrical Engineer 10% $ 50,000 $ 55,000 $ 60,500 $ 66,550
Sales Manager 10% $ 23,333 $ 70,000 $ 77,000 $ 84,700
Sales Manager 10% $ 23,333 $ 70,000 $ 77,000 $ 84,700
Other Salaries 240% $ 42,000 $ 142,800 $ 485,520 $1,650,768
Total Salaries $450,000 $ 796,167 $1,061,050 $ 1, 167, 155 $1,283,871
IUPUI
Principal Investigator $ 6,590 $ 6,590
Co- Principal Investigator $ 4,000 $ 4,000
Two Postdoctoral Fellows $ 36,000 $ 36,000
Two Graduate Research $ 14,400 $ 14,400
Assistants
IUPUI Salaries $ 60,990 $ 60,990
$0$0
Fringe Benefits/ Payroll Benefits 0 0
Principal Investigator/ $ 2,783 $ 2,783
Co- Principal Investigator
Two Graduate Research $ 2,278 $ 2,278
Assistants
Postdoctoral Fellows $ 15, 120 $ 15, 120
Total IUPUI Benefits $ 20, 181 $ 20,181
$0$0
(Continued)
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
338 Chapter 12 Developing an Effective Business Plan
Use of Funds (Continued)
Growth Rate Year 1 Year 2 Year 3 Year4 Year5
Graduate Student Fee Remission $ 11 ,000 $ 11 ,000
$0$0
Supplies/Materials 0 0
One Synchronous Motor 0 0
Computing Systems 0 0
Replacement Parts 0 0
Total IUPUI Supplies/Materials $ 2,500 $ 2,501
$0$
IUPUI Indirect Costs $ 45,723 $ 45,723
Total IUPUI $ 140,394 $ 140,394
Outside Contractors
Eng ineer Consulting 15% $ 100,000 $ 115,000 $ 132,250 $ 152,088 $ 174,901
Supplies for Initial Build
Low-Speed Shafts $ 195,000
CV Joints $ 12,000
Bearings $ 70,200
Brake $ 17,550
Yaw Drive and Bearing $ 75,000
Control/Safety System $ 204,750
Mainframe $ 420,000
Electrical Connection $ 274,743
Large Hydraulic Pump $ 180,000
Generator $ 300,000
Hydraulic Tank $ 21,000
Bypass Valves $ 60,000
Electric Control Shutoff Valve $ 45,000
Check Valves $ 30,000
Pressure Relief Valves $ 30,000
Reduced Size Power Converter $ 90,000
Flow Control Valve $ 30,000
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91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic tight.. some 1hitd p,3t1y
coo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Appendix for Hydraulic W ind Power LLC 339
Use of Funds ( Continued)
Growth Rate Year 1 Year 2 Year 3 Year4 Year5
Pressure Booster Pump $ 24,000
Piping $ 36,000
Secondary Generator $ 225,000
Hydraulic Pump $ 120,000
Accumulator $ 60,000
Spare Parts $ 100,000 $ 500,000 $ 250,000
Total Supplies for Initial Build $ 2,620,243 $ 500,000 $ 250,000
Construction Costs for $ 1,000,000
Initial Build
Operating Costs
Payroll Processing Fees 8% $ 2,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000
Office Rent 5% $ 15,000 $ 15,750 $ 15,750 $ 15,750
Fringe Benefits 35% $ 6,000 $ 12,000 $ 16,200 $ 21,870 $ 29,525
Travel-Related Expenses 15% $ 30,000 $ 34,500 $ 39,675 $ 45,626 $ 52,470
Trade Shows 15% $ 4,000 $ 4,600 $ 5,290 $ 6,084 $ 6,996
Brochures and Publications 15% $ 2,000 $ 2,300 $ 2,645 $ 3,042 $ 3,498
Market Research 15% $ 5,000 $ 5,750 $ 6,613 $ 7,604 $ 8,745
Postage 15% $ 500 $ 575 $ 661 $ 760 $ 875
Cell Phones 15% $ 1,500 $ 1,725 $ 1,984 $ 2,281 $ 2,624
Legal Fees 15% $ 10,000 $ 11,500 $ 13,225 $ 15,209 $ 17,490
Other Professional Fees 15% $ 10,000 $ 11,500 $ 13,225 $ 15,209 $ 17,490
Website Development and $ 20,000 $ 1,500 $ 1,500 $ 1,500 $ 1,500
Upkeep
Dues a nd Subscriptions 15% $ 900 $ 1,035 $ 1,190 $ 1,369 $ 1,574
Patent Costs $ 80,000 $ 15,000 $ 30,000 $ 100,000 $ 150,000
Computers and Software 18,200 13,800 20,000 25,000 25,000
(SimHydraulics)
Office Equipment and Supplies 15% $ 7,000 $ 8,050 $ 9,258 $ 10,646 $ 12,243
Telephone and Utility Expenses 15% $ 3,000 $ 3,450 $ 3,968 $ 4,563 $ 5,247
Accounting Services 15% $ 4,000 $ 4,600 $ 5,290 $ 6,084 $ 6,996
Miscella neous 15% $ 10,000 $ 11,500 $ 13,225 $ 15,209 $ 17,490
Total Operating Costs s 214,100 s 161,385 s 202,698 s 300,805 $ 378,512
Total Cost S 904,494 $ 4,833,188 $1,895,998 $1,870,047 S 1,837,283
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic tight.. some 1hitd p,3t1y
coo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
"~' Income Statement (Year 1 ) :
0
Income Statement 1 2 3 4 5 6 7 8 9 10 11 12 Year 1
g?
~f Licensing Revenue
~~ ~·~ Interest Revenue $ 3, 159 $ 2,819 $ 2,698 $ 2,575 $ 2,453 $ 2,330 $ 2,207 $
1,961 $ 1,784 $ 1,660 $ 1,535 $ 1,410 $ 26,591
• ,o
[~ Royalties ,,_ n
P, B
3 ,, 8. • Other Revenue
'll
1 fi
] e. Total Revenue $ 3 I 159 $ 2,819 $ 2,698 $ 2,575 $ 2,453 $ 2,330 $ 2,207 $
1,961 $ 1,784 $ 1,660 $ 1,535 $ 1,410 $ 26,591
~~
i ~ licensing Expense
.~. ~ ~ g ~ Labor and Related
- '??
~
§ ~ Costs
~ ?-
.2: : Chief Executive $ 10,417 $ 10 ,417 $ 10 ,4 17 $ 10 ,417 $ 10 ,417 $ 10 ,417 $
10 ,417 $ 10 ,41 7 $ 10 ,41 7 $ 10 ,4 17 $ 10 ,4 17 $ 10 ,4 17 $ 125,000 ~
~ ~ Officer
E· t
~. .@ Adam Johnson, CFO $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
$ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 60,000 a- · P- i-< [~ Justin Otani, COO $
3,333 $ 3,333 $ 3,333 $ 3,333 $ 3,333 $ 3,333 $ 3,333 $ 3,333 $ 3,333 $ 3,333 $
3,333 $ 3,333 $ 40,000
•0
~ ..
:1, ~ Chief Technology $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $
8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 100,000
i .g Officer ~. ~
J; •
~ ;,. Senior Electrical $ 0 $ 0 $ 0 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $
8,333 $ 8,333 $ 8,333 $ 75,000 ~ ;·
~. $ ~ 5 Engineer
f') n
n il
,B, .- · Senior Control $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $
8,333 $ 8,333 $ 50,000
~] fi ~ Systems Engineer
s ~ ;;· Q Junior Mechanical $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $
,, 0
- ii ~ Engineer . a ~.
~,i;· Junior Electrical $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $
~· 1'
"S 3~ Engineer
a~
3 ~ Sales Manager $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ ... ~ 1l
I~ Sales Manager $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ :::.· f') •• • g " -0 B-
Other Salaries 0 0 0 0 0 0 0 0 0 0 0 0 $ g 3
r; ~ : ~ Total Salaries $ 27,083 $27,083 $ 27,083 $ 35,417 $ 35,417 $ 35,417 $
43,750 $ 43,750 $ 43,750 $ 43,750 $ 43,750 $ 43,750 $450,000
g~
-;j Total IUPUI Expenses $ 140,394 -~· .~.
if Outside Contractors $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $
8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 100,000
.g i<
B o Total Supplies for ,-. "8
'!>w Initial Build • ! ; i Construction Costs ~ ?,
~.[ for Initial Build
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~f Income Statement (Year 1 ) : (Continued)
~~
~·~
• ,o Income Statement 1 2 3 4 5 6 7 8 9 10 11 12 Year 1
[~
,,_ n
P, B Operating Expenses
3 ,, 8. •
'll
1 fi Payroll Processing $ 167 $ 167 $ 167 $ 167 $ 167 $ 167 $ 167 $ 167 $ 167 $
167 $ 167 $ 167 $ 2,000
] e. Fees ~ ~
i ~ Office Rent $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ .~. ~ ~ g ~ - '?? Fringe
Benefits $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500
$ 6,000
~
§~
~ ?- Travel-Related $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500 $
2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 30,000
.2 :: Expenses ~
~~
E· t Trade Shows $ 333 $ 333 $ 333 $ 333 $ 333 $ 333 $ 333 $ 333 $ 333 $ 333 $
333 $ 333 $ 4,000 ~.a .@- · - P- Brochures and $ 167 $ 167 $ 167 $ 167 $ 167 $
167 $ 167 $ 167 $ 167 $ 167 $ 167 $ 167 $ 2,000 ~
i< [ Pub I icati ons • 0
~ .. :1, ~ Market Research $ 417 $ 417 $ 417 $ 417 $ 417 $ 417 $ 417 $ 417 $ 417 $
417 $ 417 $ 417 $ 5,000 i .g
~. ~ J; • Postage $ 42 $ 42 $ 42 $ 42 $ 42 $ 42 $ 42 $ 42 $ 42 $ 42 $ 42 $ 42 $ 500
~ ;,.
~ ;·
~ . $ Cell Phones $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $
125 $ 125 $ 1,500
~5
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$ 833 $ 10,000 ,B, .- ·
~] fi ~ Olher Professional $ 833 $ 833 $ 833 $ 833 $ 833 $ 833 $ 833 $ 833 $ 833 $
833 $ 833 $ 833 $ 10,000
s ~ Fees ;;· Q
,, 0
- ii ~ Website $ 1,667 $ 1,667 $ 1,667 $ 1,667 $ 1,667 $ 1,667 $ 1,667 $ 1,667 $
1,667 $ 1,667 $ 1,667 $ 1,667 $ 20,000 . a ~.
~,i;· Development
~· 1'
"S 3~ Dues and $ 75 $ 75 $ 75 $ 75 $ 75 $ 75 $ 75 $ 75 $ 75 $ 75 $ 75 $ 75 $ 900
a ~ Subscriptions 3 ~ ... ~ 1l
I~ Patent Costs $ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 6,667 $
6,667 $ 6,667 $ 6,667 $ 6,667 $ 80,000 :::.· f') •• • -g B" Computers $ 1, 5 17 $ 1, 5
17 $ 1,517 $ 1,517 $ 1,517 $ 1,517 $ 1,517 $ 1,517 $ 1,517 $ 1,517 $ 1,517 $
1,517$ 18,200
0 - g 3 r; ~ and Software :g ~ (SimH ydraulics) ~
-;j
-~· .~. Office Equipment $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $
583 $ 583 $ 583 $ 7,000
if and Supplies
.g i< B o Telephone and Utility $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $
250 $ 250 $ 250 $ 250 $ 3,000 ,-. "8 '!>w Expenses
• ! ; i Accounting Services $ 333 $ 333 $ 333 $ 333 $ 333 $ 333 $ 333 $ 333 $ 333 $
333 $ 333 $ 333 $ 4,000 ~ ?,
~.[ Miscellaneous $ 833 $ 833 $ 833 $ 833 $ 833 $ 833 $ 833 $ 833 $ 833 $ 833 $
833 $ 833 $ 10,000 2 .g. C . ._, ~·.
.. Total Operating Costs $ 17,842 $17,842 $ 17,842 $ 17,842 $ 17,842 $ 17,842 $
17,842 $ 17,842 $ 17,842 $ 17,842 $ 17,842 $ 17,842 $ 214, 100
Total Costs $ 193,652 $ $ 53,258 $ 61,592 $ 61,592 $ 61,592 $ 69,925 $ 69,925 $
69,925 $ 69,925 $ 69,925 $ 69,925 $904,494
c.,
-~ Net Income (EBTI $ (190,493) $ $(50,561) $(59,016) $(59,139) $(59,261)
$(67,718) $(67,964) $(68,141) $(68,265) $(68,390) $(68,515) $(877,903)
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Balance Sheet (Year 1):
Balance Sheet 1 2 3 4 5 6 7 8 9 10 11 12 Year 1
Assets
Current Assets
Cash $ I ,667,603 $ 1,575,046 $ I ,524,485 $ I ,467, 969 $ 1,408,830 $ I ,349,569 $ I
,284,35 I $ I ,216,387 $ I, 148,246 $ I ,079, 980 $ 1,0 I I ,590 $ 943,075 $ 943,075
Accounts
Receivable
Total Assets $1,667,603 $1,575,046 $1,524,485 $1,467,969 $1,408,830 $1,349,569
$ 1,284,35 I $1,216,387 $ I, 148,246 $1,079,980 $I,0II ,590 $ 943,075 $ 943,075
Liabilities
Current
Liabilities
Accounts
Payable
$ 58,096 $ 15,978 $ 15,978 $ 18,478 $ 18,478 $ 18,478 $ 20,978 $ 20,978 $ 20,978
$ 20,978 $ 20,978 $ 20,978 $ 20,978
Total Liabilities $ 58,096 $ 15,978 $ 15,978 $ 18,478 $ 18,478 $ 18,478 $ 20,978 $
20,978 $ 20,978 $ 20,978 $ 20,978 $ 20,978 $ 20,978
Equity
Capital Stock $ 1,800,000 $ 1,800,000 $ 1,800,000 $ 1,800,000 $ 1,800,000 $
1,800,000 $ 1,800,000 $ 1,800,000 $ 1,800,000 $ 1,800,000 $ 1,800,000 $
1,800,000 $ 1,800,000
Retained $ {1 90,4931 $ (240,9321 $ {291 ,4921 $ (350,5091 $ (409,6471 $
{468,9091 $ {536,6271 $ {604,59 11 $ {672,7321 $ (740,9971 $ {809,3871 $
{877,9031 $ {877,9031
Earnings
Total Equity $ I ,609,507 $ I ,559,068 $ I ,508,508 $ 1,449,49 I $ 1,390,353 $ 1,33
I ,09 I $ I ,263,373 $ I, I 95,409 $ I , 127,268 $ I ,059,003 $ 990,613 $ 922,097 $
922,097
Total Liabilities $1,667,603 $1,575,046 $1,524,485 $1,467,969 $1,408,830
$1,349,569 $1,284,351 $1,216,387 $ I, 148,246 $1,079,980 $I,0II,590 $ 943,075 $
943,075
and Equity
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Cash Flow (Year 1 ) :
Cash-Flow
Statement 1 2 3 4 S 6 7 8 9 10 11 12 Year 1
Net Income (Lossl $ (190,4931 $ (50,4391 $ (50,5611 $ (59,0161 $ (59, 1391 $
(59,2611 $ (67,7181 $ (67,9641 $ (68, 1411 $ (68,2651 $ (68,3901 $ (68,5151 $
(877,9031
Working Capital
Oianges
Accounts
Receivable
(lncreasel
$-$-$-$-$-$-$-$-$-$-$-$-$
Accounts Payable $ 58,096 $ (42, 1181 $ 0 $ 2,500 $ 0 $ 0 $ 2,500 $ 0 $ 0 $ 0 $ 0 $
0 $ 20,978
{lncreasel
Cash Used for $ (132,3971 $ (92,5571 $ (50,56 11 $ (56,5 161 $ (59,1391 $ (59,26
11 $ (65,2 181 $ (67,9641 $ (68, 1411 $ (68,2651 $ (68,3901 $ (68,5 151 $
(856,9251
Operations
Cash Used for
Investments
Cash from
Financing
Activities
Capital Stock $1,800,000
Change in Cash $1,667,603 $ (92,5571 $ {50,56 1) $ (56,5 161 $ (59, 1391 $ {59,26
1) $ (65,2181 $ (67,9641 $ (68, 141) $ (68,2651 $ (68,3901 $ {68,5 15) $ (856,9251
for Period
Cash: Beginning $1,800,000 $1,667,603 $1,575,046 $1,524,485 $1,467,969
$1,408,830 $1,349,569 $1,284,351 $1,216,387 $1,1 48,246 $1,079,980 $1,011,590
$1,800,000
of Period
Cash: End of $1,667,603 $1,575,046 $1,524,485 $1,467,969 $1,408,830
$1,349,569 $1,284,351 $1,216,387 $1,1 48,246 $1,079,980 $1,011,590 $ 943,075 $
943,075
Period
"~'
~
g? Income Statement (Year 2) :
~f
~~ Income Statement 13 14 lS 16 17 18 19 20 21 22 23 24 Year 2
~·~
• ,o
[~ $ ,,_ n
P, B Licensing Revenue 3 ,, 8. •
1 'lfli Interest Revenue $ 1,210 $ 978 $ 745 $ 13,030 $ 12,815 $ 12,599 $ 12,400 $
12,208 $ 12,01 6 $ 11,822 $ 11,629 $ 11,434 $ 112,886
] e. ~ ~ Royalties
i ~ Other Revenue
.~. ~ ~
g ~ Tota I Revenue $ 1,210 $ 978 $ 745 $ 13,030 $ 12,815 $ 12,599 $ 12,400 $
12,208 $ 12,016 $ 11,822 $ 11,629 $ 11,434 $ 112,886 - '??
~
§ ~ Licen sing Expense
~ ?-
.2: : Labor and Related Casts ~
~~
E· t Chief Executive Officer $ 11,458 $ 11,458 $ 11,458 $ 11,458 $ 11,458 $ 11,458
$ 11,458 $ 11,458 $ 11,458 $ 11,458 $ 11,458 $ 11,458 $ 137,500
~. .@ -·
a- P - Adam Johnson, CFO $ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 6,667
$ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 80,000 ~
i< [ Justin Otani, COO $ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 6,667 $
6,667 $ 6,667 $ 6,667 $ 6,667 $ 6,667 $ 80,000 • 0
~ .. :1, ~ Chief Technology $ 9,167 $ 9,167 $ 9,167 $ 9,167 $ 9,167 $ 9,167 $ 9,167
$ 9,167 $ 9,167 $ 9,167 $ 9,167 $ 9,167 $ 110,000 i .g
~. ~ Officer
J; •
~ !l-
~ ;· Senior Electrical $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $
8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 100,000
~. $
~ 5 Engineer f') n
nil
,B, .- · Senior Control Systems $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $
8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 100,000
~] Engineer fi ~
s ~ ;;· Q Junior Mechanical $ 4,167 $ 4,167 $ 4,167 $ 4,167 $ 4,167 $ 4,167 $ 4,167
$ 4,167 $ 4,1 67 $ 4,167 $ 4,167 $ 4,167 $ 50,000
,, 0
-~ ii Engineer . a ~.
~,i;· Junior Electrical $ 4,167 $ 4,167 $ 4,167 $ 4,1 67 $ 4,167 $ 4,167 $ 4,167 $
4,167 $ 4,167 $ 4,167 $ 4,167 $ 4,167 $ 50,000
~"· 1' Engineer S 3~
a ~ Sales Manager $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 5,833 $ 5,833 $ 5,833 $ 5,833 $
23,333 .3 .~.
~ 1l
I~ Sales Manager $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 5,833 $ 5,833 $ 5,833 $ 5,833 $
23,333 :::.· f') •g• "• Other Salaries $ 3,500 $ 3,500 $ 3,500 $ 3,500 $ 3,500 $ 3,500
$ 3,500 $ 3,500 $ 3,500 $ 3,500 $ 3,500 $ 3,500 $ 42,000 - B 0 - g 3 r; ~ Total
Salaries $ 62,458 $ 62,458 $ 62,458 $ 62,458 $ 62,458 $ 62,458 $ 62,458 $ 62,458
$ 74,125 $ 74,125 $ 74,125 $ 74,125 $ 796, 167 : ~
g ~ Total IUPUI Expenses $ 140,394 $ 140,394 -;j
-~· .~. Outside Contractors $ 9,583 $ 9,583 $ 9,583 $ 9,583 $ 9,583 $ 9,583 $ 9,583
$ 9,583 $ 9,583 $ 9,583 $ 9,583 $ 9,583 $ 115,000
if Total Supplies for $ 218,354 $ 218,354 $ 218,354 $ 218,354 $ 218,354 $ 218,354
$ 1,310,122
.g i<
B o Initial Build ,-. "8
'!>w • ! Construction Costs for $ 83,333 $ 83,333 $ 83,333 $ 83,333 $ 83,333 $
83,333 $ 500,000 ; i Initial Build
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Income Statement (Year 2) : (Continued)
Income Statement 13 14 15 16 17 18 19 20 21 22 23 24
Operating Expenses
Payroll Processing Fees $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $
250 $ 250 $ 250 $
Office Rent $ 1,250 $ 1,250 $ 1,250 $ 1,250 $ 1,250 $ 1,250 $ 1,250 $ 1,250 $
1,250 $ 1,250 $ 1,250 $ 1,250 $
Fringe Benefits $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $
1,000 $ 1,000 $ 1,000 $ 1,000 $
Travel-Related Expenses $
Trade Shows $
Brochures and $
Publications
Market Research
Postage
Cell Phones
Legal Fees
$
$
$
$
Other Professional Fees $
Website Development $
Dues and Subscriptions $
Patent Costs $
2,875 $ 2,875 $ 2,875 $ 2,875 $ 2,875 $ 2,875 $
383 $ 383 $ 383 $ 383 $ 383 $ 383 $
192 $ 192 $ 192 $ 192 $ 192 $ 192 $
479 $ 479 $ 479 $ 479 $ 479 $ 479 $
48 $ 48 $ 48 $ 48 $ 48 $ 48 $
144 $ 144 $ 144 $ 144 $ 144 $ 144 $
9 58 $ 9 58 $ 9 58 $ 9 58 $ 9 58 $ 9 58 $
9 58 $ 9 58 $ 9 58 $ 9 58 $ 9 58 $ 9 58 $
1 25 $ 1 25 $ 1 25 $ 1 25 $ 1 25 $ 1 25 $
86 $ 86 $ 86 $ 86 $ 86 $ 86 $
1,250 $ 1,250 $ 1,250 $ 1,250 $ 1,250 $ 1,250 $
2,875 $
383 $
192 $
479 $
48 $
144 $
958 $
958 $
125 $
86 $
1,250 $
2,875 $
383 $
192 $
479 $
48 $
144 $
958 $
958 $
125 $
86 $
1,250 $
2,875 $
383 $
192 $
479 $
48 $
144 $
958 $
958 $
125 $
86 $
1,250 $
2,875 $
383 $
192 $
479 $
48 $
144 $
958 $
958 $
125 $
86 $
1,250 $
2,875 $
383 $
192 $
479 $
48 $
144 $
958 $
958 $
125 $
86 $
1,250 $
2,875 $
383 $
192 $
479 $
48 $
144 $
958 $
958 $
125 $
86 $
1,250 $
Computers $ 1, 1 50 $ 1, 150 $ 1, 150 $ 1, 150 $ 1, 150 $ 1, 150 $ 1, 150 $ 1, 150 $
1, 150 $ 1, 150 $ 1, 15 0 $ 1, 15 0 $
and Software
(SimHydraulicsl
Office Equipment and $
Supplies
Telephone and Utility $
Expenses
Accounting Services
Miscellaneous
$
$
671 $ 671 $ 671 $ 671 $ 671 $ 671 $
288 $ 288 $ 288 $ 288 $ 288 $ 288 $
383 $ 383 $ 383 $ 383 $ 383 $ 383 $
958 $ 958 $ 958 $ 958 $ 958 $ 958 $
671 $
288 $
383 $
958 $
671 $
288 $
383 $
958 $
671 $
288 $
383 $
958 $
671 $
288 $
383 $
958 $
671 $
288 $
383 $
958 $
671 $
288 $
383 $
958 $
Year 2
3,000
15,000
12,000
34,500
4,600
2,300
5,750
575
1,725
11,500
11,500
1,500
1,035
15,000
13,800
8,050
3,450
4,600
11,500
Total Operating Costs $ 13,449 $ 13,449 $ 13,449 $ 13,449 $ 13,449 $ 13,449 $
13,449 $ 13,449 $ 13,449 $ 13,449 $ 13,449 $ 13,449 $ 161,385
Total Costs $ 225,884 $ 85,490 $ 85,490 $ 85,490 $ 85,490 $ 85,490 $ 387,177 $
387,177 $ 398,844 $ 398,844 $ 398,844 $ 398,844 $ 3,023,067
Net Income (EBTI $(224,67 41 $(84,5131 $(84,7 46) $(72,4601 ${72,6751
$(72,8911 $ {37 4,7771 $ (37 4, 9691 $ {386,8281 $ {387,0221 $ {387,2151 $
(387,4101 $(2, 910, 1811
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Balance Sheet (Year 2):
Balance Sheet
Assets
Current
Assets
13 14 1S 16 17 18 19 20 21 22 23 24 Year2
Cash $ 765, 188$ 638,557$ 553,812 $ 4,481,351 $4,408,676$ 4,335,785$
4,051,514 $ 3,676,545 $3,293,216$ 2,906,195$ 2,5 18,979 $2,131,570$ 2, 131,570
Accounts $ - $ - $ - $ - $ - $ - $
Receivable
1:>talAssets $ 765,188 $ 638,557$ 553,812$ 4,481,351 $ 4,408,676 $ 4,335,785$
4,051,51 4 $ 3,676,545 $ 3,293,216 $2,906,195$ 2,518,979$ 2, 131,570$ 2,
131,570
Liabilities
Current
Liabilities
Accounts
Payable
Total
Liabilities
Equity
$ 67,765 $ 25,647 $ 25,647 $ 25,647 $ 25,647 $ 25,647 $ 11 6,153 $ 11 6,153 $
119,653 $ 119,653 $ 119,653 $ 119,653 $ 119,653
$ 67,765 $ 25,647 $ 25,647 $ 25,647 $ 25,647 $ 25,647 $ 11 6,153 $ 11 6,153 $
119,653 $ 119,653 $ 119,653 $ 119,653 $ 119,653
Capital Stock $ 1,800,000 $ 1,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $
5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $
5,800,000 $ 5,800,000
Retained $(1,102,5771 $(1,187,0901 $(1,271,8351 $(1,344,2961 $(1,416,971)
$(1,489,8621 $(1,864,6401 $(2,239,6091 $(2,626,4371 $(3,013,4591 $(3,400,674)
$(3,788,0831 $(3,788,0831
Earnings
Total Equity $ 697,423$ 612,910$ 4,528,165$ 4,455,704 $ 4,383,029$ 4,310,138
$3,935,360$ 3,560,391 $ 3,1 73,563$ 2,786,541 $2,399,326$ 2,011,917$ 2,011,917
Total $ 765,188$ 638,557 $ 4,553,812 $ 4,481,351 $ 4,408,676$ 4,335,785 $
4,051,51 4 $ 3,676,545 $ 3,293,216$ 2,906,195 $ 2,5 18,979 $2,131,570$ 2,
131,570
Liabilities and
Equity
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Cash Flow (Year 2):
Cash-Flow Stotement 13 14 15 16 17 18 19 20 21 22 23 24 Yeor2
Net Income {Lossl
Working Capitol
Changes
$(224,67 41 $ (84,5131 $ (84,746) $ (72,4601 $ (72,6751 $ (72,89 1) $ (374,777) $
(374,969) $ (386,8281 $ (387,0221 $ (387,2 151 $ (387,4101 $ (2, 91 0, 1811
Accounts Receivable $
(lncreosel
-$
Accounts Payable
{lncreosel
$ 46,788 ($42, 1181 $
-$
0$
-$
0$
-$
0$
-$-$
0 $ 90,506 $
-$
0$
-$
3,500 $
-$
0$
-$
0$
-$
0 $ 98,676
Cash Used for
Operations
$(177,8861 $(126,6311 $(84,7461 $ (72,4601 $ (72,6751 $ {72,8911 $ (284,2711 $
(374,9691 $ (383,3281 $ (387,0221 $ {387,21 5) $ (387,4101 $(2,811,5051
Cash Used for
Investments
Cash from Financing
Activities
Capital Stock $4,000,000
Change in Cash for $(177,8861 $(126,6311 $(84,7461 $3,927,540 $ (72,6751 $
(72,8911 $ (284,2711 $ (374,9691 $ {383,328) $ (387,0221 $ (387,2 151 $ (387,4
101 $(2,811,5051
Period
Cash: Beginning of $ 943,075 $ 765,188 $638,557 $ 553,8 12 $4,481,351
$4,408,676 $ 4,335,785 $ 4,051,514 $3,676,545 $3,293,216 $2,906,195 $2,518,979
$ 943,075
Period
Cash: End of Period $765,188$ 638,557 $553,812 $ 4,481,351 $4,408,676
$4,335,785 $ 4,051,514 $3,676,545 $3,293,216 $2,906,195 $2,518,979
$2,131,570$ 2, 131,570
"' ~
00
g? Income Statement (Year 3):
~f
~~
~·~ Income Statement 25 26 27 28 'l9 30 31 32 33 34 35 36 Year 3
• ,o
[~ ,,_ n Licensing Revenue $ 500,000 $ 500,000
P, B
3 ,,
8. • Interest Revenue $ 11,228 $ 11,016 $ 10,803 $ 10,590 $ 10,375 $ 10, 161 $
9,945 $ 9,729 $ 9,512 $ 9,294 $ 9,076 $ 8,857 $ 120,586
'll
1 fi ] e. Royal ties $ 125,000 $ 125,000 $ 125,000 $ 125,000 $ 125,000 $ 125,000 $
250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 2,250,000
~~
i ~ Other Revenue
.~. ~ Total Revenue $636,228 $ 136,016 $ 135,803 $ 135,590$ 135,375 $ 135,161
$259,945 $259,729 $259,512 $259,294 $259,076 $258,857 $ 2,870,586 ~ g ~
- '??
Licensing Expense $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500 $ 62,500
$125,000 $125,000 $125,000 $125,000 $125,000 $125,000 $ 1,125,000
~
§~
~ ?- .2 :: Labor and Related Costs ~
~ ~ Chief Executive Officer $ 12,604 $ 12,604 $ 12,604 $ 12,604 $ 12,604 $ 12,604
$ 12,604 $ 12,604 $ 12,604 $ 12,604 $ 12,604 $ 12,604 $ 151,250
E· t
~..@ A dam Johnson, CFO $ 7,333 $ 7,333 $ 7,333 $ 7,333 $ 7,333 $ 7,333 $ 7,333
$ 7,333 $ 7,333 $ 7,333 $ 7,333 $ 7,333 $ 88,000 a- · P-
~ Justin Otani, COO $ 7,333 $ 7,333 $ 7,333 $ 7,333 $ 7,333 $ 7,333 $ 7,333 $
7,333 $ 7,333 $ 7,333 $ 7,333 $ 7,333 $ 88,000
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~ .. :1,~ Chief Technology $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $
10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 121,000
i .g Officer
~. ~
J; •
~ !l- Senior Electrical $ 9,167 $ 9,167 $ 9,167 $ 9,167 $ 9,167 $ 9,167 $ 9,167 $
9,167 $ 9,167 $ 9,167 $ 9,167 $ 9,167 $ 110,000
~ ;·
~ . $ Engineer
~5
f') n
nil Senior Control Systems $ 9, 167 $ 9, 167 $ 9, 167 $ 9,167 $ 9, 167 $ 9, 167 $ 9,
167 $ 9,167 $ 9,167 $ 9,167 $ 9,167 $ 9,167 $ 110,000
,B, .- · ~] Engineer
fi ~ s ~ Junior Mechanical $ 4,583 $ 4,583 $ 4,583 $ 4,583 $ 4,583 $ 4,583 $ 4,583
$ 4,583 $ 4,583 $ 4,583 $ 4,583 $ 4,583 $ 55,000
;;· Q
Engineer ,, 0
-~ ii . a ~. Junior Electrical $ 4,583 $ 4,583 $ 4,583 $ 4,583 $ 4,583 $ 4,583 $ 4,583
$ 4,583 $ 4,583 $ 4,583 $ 4,583 $ 4,583 $ 55,000
~,i;·
~· 1' Engineer "S 3~ Sales Manager $ 5,833 $ 5,833 $ 5,833 $ 5,833 $ 5,833 $
5,833 $ 5,833 $ 5,833 $ 5,833 $ 5,833 $ 5,833 $ 5,833 $ 70,000
a~
3~
$ 5,833 $ 5,833 $ 5,833 $ 5,833 $ 5,833 $ 5,833 $ 5,833 $ 5,833 $ 5,833 $ 5,833 $
5,833 $ 5,833 $ ... ~ 1l Sales Manager 70,000
I~
:::.· f') Other Salaries $ 11,900 $ 11,900 $ 11,900 $ 11,900 $ 11,900 $ 11,900 $
11,900 $ 11,900 $ 11,900 $ 11,900 $ 11,900 $ 11,900 $ 142,800
•• •
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0 - Total Salaries $ 88,42 1 $ 88,421 $ 88,421 $ 88,421 $ 88,421 $ 88,421 $ 88,421
$ 88,421 $ 88,421 $ 88,421 $ 88,421 $ 88,421 $ 1,061,050 g 3
r; ~ : ~ Total IUPUI Expenses g ~
-;j Outside Contractors $ 11,021 $ 11,021 $ 11,021 $ 11,021 $ 11,021 $ 11,021 $
11,021 $ 11,021 $ 11,021 $ 11,021 $ 11,021 $ 11,021 $ 132,250 -~· .~.
if Total Supplies for Initial $218,354 $218,354$ 218,354 $218,354 $ 218,354 $
218,354 $ 41,667 $ 41,667 $ 41,667 $ 41,667 $ 41,667 $ 41,667 $ 1,560, 124
.g i< Build
B o ,-. "8 Construction Costs for $ 83,333 $ 83,333 $ 83,333 $ 83,333 $ 83,333 $
83,333 $ 500,000 '!>w
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; i Initial Build
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] e. Income Statement 25 26 27 28 'l9 30 31 32 33 34 35 36 Year 3
~~
i ~ Operating Expenses
.~. ~ ~ g ~ Payroll Processing Fees $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $
250 $ 250 $ 250 $ 250 $ 250 $ 3,000
- '??
~
§ ~ Office Rent $ 1,313 $ 1,313 $ 1,313 $ 1,313 $ 1,313 $ 1,313 $ 1,313 $ 1,313 $
1,313 $ 1,313 $ 1,313 $ 1,313 $ 15,750
~ ?-
.2 :: Fringe Benefits $ 1,350 $ 1,350 $ 1,350 $ 1,350 $ 1,350 $ 1,350 $ 1,350 $
1,350 $ 1,350 $ 1,350 $ 1,350 $ 1,350 $ 16,200 ~
~ ~ Travel-Related Expenses $ 3,306 $ 3,306 $ 3,306 $ 3,306 $ 3,306 $ 3,306 $
3,306 $ 3,306 $ 3,306 $ 3,306 $ 3,306 $ 3,306 $ 39,675 E· t
~ .@
Trade Shows $ 441 $ 441 $ 441 $ 441 $ 441 $ 441 $ 44 1 $ 441 $ 441 $ 441 $ 441
$ 441 $ 5,290 . a- · - P- ~ i< [ Brochures and $ 220 $ 220 $ 220 $ 220 $ 220 $ 220 $
220 $ 220 $ 220 $ 220 $ 220 $ 220 $ 2,645
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~. ~ Market Research $ 551 $ 551 $ 551 $ 551 $ 551 $ 551 $ 551 $ 551 $ 551 $ 551
$ 551 $ 551 $ 6,613
J; •
~ !l- Postage $ 55 $ 55 $ 55 $ 55 $ 55 $ 55 $ 55 $ 55 $ 55 $ 55 $ 55 $ 55 $ 661 ~ ;·
~. $
~ 5 Cell Phones $ 165 $ 165 $ 165 $ 165 $ 165 $ 165 $ 165 $ 165 $ 165 $ 165 $
165 $ 165 $ 1,984 f') n
nil
,B, .- · Legal Fees $ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 1,102
$ 1,102 $ 1,102 $ 1,102 $ 1, 10 2 $ 13,225
~]
fi ~ Other Professional Fees $ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 1,102 $
1,102 $ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 13,225
s~
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,, 0 Website Development $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $
125 $ 125 $ 125 $ 1,500
-~ ii . a ~. Dues and Subscriptions $ 99 $ 99 $ 99 $ 99 $ 99 $ 99 $ 99 $ 99 $ 99 $ 99
$ 99 $ 99 $ 1,190
~,i;·
~· 1' Patent Costs $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500
$ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 30,000 "S 3~ Computers $ 1,667 $ 1,667 $ 1,667
$ 1,667 $ 1,667 $ 1,667 $ 1,667 $ 1,667 $ 1,667 $ 1,667 $ 1,667 $ 1,667 $ 20,000 a
~
3~
and Software ... ~ 1l
I~ {SimHydraul icsl :::.· f') ••• -g "B Office Equipment and $ 77 1 $ 771 $ 771 $ 771 $
771 $ 771 $ 771 $ 771 $ 771 $ 771 $ 771 $ 771 $ 9,258 0 - g 3
r; ~ Supplies : ~
g ~ Telephone and Uni ity $ 331 $ 331 $ 331 $ 331 $ 331 $ 331 $ 331 $ 331 $ 331 $
331 $ 331 $ 331 $ 3,968 -;j
~ ~ Expenses
-· ..
if Accounting Services $ 441 $ 441 $ 441 $ 441 $ 441 $ 441 $ 441 $ 44 1 $ 441 $
441 $ 44 1 $ 441 $ 5,290
.g i<
B o Miscellaneous $ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 1,102
$ 1,102 $ 1,102 $ 1,102 $ 1,102 $ 13,225 -, . "8
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• ! Total Operating Costs $ 16,89 1 $ 16,89 1 $ 16,89 1 $ 16,89 1 $ 16,89 1 $ 16,89
1 $ 16,89 1 $ 16,89 1 $ 16,891 $ 16,89 1 $ 16,89 1 $ 16,89 1 $ 202,698 ; i
~ ?, Total Costs $ 480,520 $ 480,520 $ 480,520 $ 480,520 $ 480,520 $ 480,520 $
283,000 $ 283,000 $ 283,000 $ 283,000 $ 283,000 $ 283,000 $ 4,581,121
~.[
2.g. Net Income {EBTI $ 155,708 $ {344,5041 $ (344,7171 $ {344,930) $ {345, 1451
$ (345,3591 $ (23,0551 $ {23,2711 $ {23,4881 $ (23,7061 $ (23, 9241 $ {24, 1431 $
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Balance Sheet (Year 3):
Balance Sheet 25 26 27 28 'l9 30 31 32 33 34 35 36 Year3
Assets
Current Assets
Cash $2,461,780$ 1,967,276$ 1,622,559$ 1,277,629 $ 932,484$ 587, 125 $ 504,81
4 $ 481,543$ 458,054 $ 434,349 $ 410,425$ 386,282$ 386,282
Accounts $ 150,000 $
Receivable
TotalAssets $2,611,780$ 1,967,276$ 1,622,559$ 1,277,629$ 932,484$ 587, 125$
504,814 $ 481,543$ 458,054$ 434,349 $ 410,425$ 386,282$ 386,282
Liabil~ies
Current
Liabil~ies
Accounts
Payable
$ 144,156$ 144,156$ 144,156$ 144,156$ 144,156$ 144,156$ 84,900$ 84,900$
84,900$ 84,900$ 84,900$ 84,900$ 84,900
Total Liabilities $ 144, 156 $ 144, 156 $ 144, 156 $ 144, 156 $ 144, 156 $ 144, 156
$ 84,900 $ 84,900 $ 84,900 $ 84,900 $ 84,900 $ 84,900 $ 84,900
Equity
Capital Stock $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $
5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $
5,800,000 $ 5,800,000
Retained ${3,632,3761 $(3,976,8801 ${4,321,5971 $(4,666,5271 ${5,011,6721
${5,357,0311 ${5,380,0861 $(5,403,3581 ${5,426,8461 ${5,450,5511 $(5,474,4751
$(5,498,6181 ${5,498,6181
Earnings
TotalEquity $ 2,167,624 $ 1,823,120 $ 1,478,403 $ 1,133,473 $ 788,328 $ 442,969
$ 419,914 $ 396,642 $ 373,154 $ 349,449 $ 325,525 $ 301,382 $ 301,382
Total Liabilities $ 2,3 11,780 $ 1,967,276 $ 1,622,559 $ 1,277,629 $ 932,484 $ 587,
125 $ 504,814 $ 481,543 $ 458,054 $ 434,349 $ 410,425 $ 386,282 $ 386,282
and Equity
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Cash Flow (Year 3): (Continued)
Cash-Flow Statement 25 26 27 28 29 30 31 32 33 34 35 36 Year 3
Net Income (Loss) $
Working Capital
155,708 $ (344,504) $ (344,717) $ (344,930) $ (345,145) $ (345,359) $ (23,055) $
(23,271) $ (23,488) $ (23,706) $ (23,924) $ (24,143) $ (1,710,535)
Changes
Accounts Receivoble $ 150,000 $ (150,000) $
(Increase)
Accounts Payable
(Increase)
$ 24,503 $ 0 $
-$
0$
-$
0$
-$
0$
-$-$
0 $ (59,256) $
-$
0$
-$
0$
-$
0$
-$
0$
-$
0 $ (34,753)
Cash Used for
Operations
$ 330,211 $ (494,504) $ (344,717) $ (344,930) $ (345,145) $ (345,359) $ (82,311) $
(23,271) $ (23,488) $ (23,706) $ (23,924) $ (24,143) $ (1,745,288)
Cash Used for
Investments
Cash from Financing
Activities
Cap ital Stock
Change in Cash for $ 330,211 $ (494,504) $ (344,717) $ (344,930) $ (345,145) $
(345,359) $ (82,311) $ (2 3,271) $ (23,488) $ (23,706) $ (23,924) $ (24,143) $
(1,745,288)
Period
Cash: Beginning of $ 2, 131,570 $ 2,461,780 $ 1,967,276 $ 1,622,559 $ 1,277,629 $
932,484 $ 587, 125 $ 504,814 $ 481,543 $ 458,054 $ 434,349 $ 410,425 $ 2,
131,570
Period
Cash: End of Period $ 2,461,780 $ 1,967,276 $ 1,622,559 $ 1,277,629 $ 932,484 $
587, 125 $ 504,814 $ 48 1,543 $ 458,054 $ 434,349 $ 410,425 $ 386,282 $ 386,282
".U..',I
g? Income Statement (Year 4) :
~f
~~ Income Statement 37 38 39 40 41 42 43 44 45 46 47 48 Year4
~·~
• ,o [~ Licensing Revenue $ 1,000,000 $ 1,000,000
,,_ n
P, B Interest Revenue $ 8,661.32 $ 8,474.94 $ 8,287.78 $ 8,099.83 $ 7,911.08 $
7,721.55 $ 7,531.22 $ 7,340.10 $ 7,1 48.46 $ 6,956.82 $ 6,765.19 $ 6,573.55 $
91,471.83 3 ,, 8. •
'll
1 fi Royalties $ 500,000 $ 500,000$ 500,000 $ 750,000 $ 750,000 $ 750,000
$1,000,000 $1,000,000 $1,000,000 $1,250,000 $1,250,000 $1,250,000 $10,500,000
] e.
~ ~ Other Revenue
i~
.~. ~ Total Revenue $ 1,508,661 $ 508,475 $ 508,288 $ 758, 10 0 $ 757,911 $
757,722 $ 1,007,531 $ 1,007,340 $ 1,007, 148 $ 1,256,957 $ 1,256,765 $ 1,256,574
$ 11,591,472 ~ g ~
- 'fr Licensing Expense $ 250,000 $ 250,000 $ 250,000 $ 375,000 $ 375,000 $
375,000 $ 500,000 $ 500,000 $ 500,000 $ 625,000 $ 625,000 $ 625,000 $
5,250,000
~
§~
~ ?- Labor and Related
.2: : Costs ~
~ ~ Chief Executive $ 13,865 $ 13,865 $ 13,865 $ 13,865 $ 13,865 $ 13,865 $
13,865 $ 13,865 $ 13,865 $ 13,865 $ 13,865 $ 13,865 $ 166,375 E· t
~. .@ Officer a- · P-
~ Adam Johnson, CFO $ 8,067 $ 8,067 $ 8,067 $ 8,067 $ 8,067 $ 8,067 $ 8,067 $
8,067 $ 8,067 $ 8,067 $ 8,067 $ 8,067 $ 96,800
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~ .. :1, ~ Justin Otani, COO $ 8,067 $ 8,067 $ 8,067 $ 8,067 $ 8,067 $ 8,067 $ 8,067
$ 8,067 $ 8,067 $ 8,067 $ 8,067 $ 8,067 $ 96,800
i .g
~. ~ Chief Technology $ 11,092 $ 11,092 $ 11,092 $ 11,092 $ 11,092 $ 11,092 $
11,092 $ 11,092 $ 11,092 $ 11,092 $ 11,092 $ 11,092 $ 133,100
J; •
~ !l- Officer
~ ;·
~. $ Senior Electrical $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $
10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 121,000
~5
f') n Engineer nil
,B, .- · ~] Senior Control $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $
10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 121,000
fi ~ Systems Engineer
s~
;;· Q ,, 0 Junior Mechanical $ 5,042 $ 5,042 $ 5,042 $ 5,042 $ 5,042 $ 5,042 $ 5,042
$ 5,042 $ 5,042 $ 5,042 $ 5,042 $ 5,042 $ 60,500
-~ ii . a~ . Engineer
~,i;· Junior Electrical $ 5,042 $ 5,042 $ 5,042 $ 5,042 $ 5,042 $ 5,042 $ 5,042 $
5,042 $ 5,042 $ 5,042 $ 5,042 $ 5,042 $ 60,500
~"· 1' Engineer S 3~
a ~ Sales Manager $ 6,417 $ 6,417 $ 6,417 $ 6,417 $ 6,417 $ 6,417 $ 6,417 $ 6,417
$ 6,417 $ 6,417 $ 6,417 $ 6,417 $ 77,000 3 ~ ... ~ 1l I~ Sales Manager $ 6,417 $
6,417 $ 6,417 $ 6,417 $ 6,417 $ 6,417 $ 6,417 $ 6,417 $ 6,417 $ 6,4 17 $ 6,417 $
6,417 $ 77,000 :::.· f') •g •"• Other Salaries $ 40,460 $ 40,460 $ 40,460 $ 40,460 $
40,460 $ 40,460 $ 40,460 $ 40,460 $ 40,460 $ 40,460 $ 40,460 $ 40,460 $ 485,520
-B
0 - g 3 r; ~ Total Salaries $ 124,633 $ 124,633 $ 124,633 $ 124,633 $ 124,633 $
124,633 $ 124,633 $ 124,633 $ 124,633 $ 124,633 $ 124,633 $ 124,633 $
1,495,595 : ~
g ~ Total IUPUI Expenses -;j
-~· .~. Outside Contractors $ 12,674 $ 12,674 $ 12,674 $ 12,674 $ 12,674 $ 12,674
$ 12,674 $ 12,674 $ 12,674 $ 12,674 $ 12,674 $ 12,674 $ 152,088
if Total Supplies for $ 41,667 $ 41,667 $ 41,667 $ 4 1,667 $ 41,667 $ 41,667 $
20,833 $ 20,833 $ 20,833 $ 20,833 $ 20,833 $ 20,833 $ 375,000
.g i< B o Initial Build ,-. "8
'!>w Construction Costs • ! ; i for Initial Build
~ ?,
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~~ ~·~ Income Statement (Year 4) : (Continued)
• ,o
[~
,,_ n Income Statement 37 38 39 40 41 42 43 44 45 46 47 48 Year4 P, B
3 ,, 8. •
'll Operating Expenses
1 fi
] e. Payroll Processing $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $
250 $ 250 $ 250 $ 3,000 ~ ~
i ~ Fees
~~ Office Rent $ 1,313 $ 1,313 $ 1,313 $ 1,313 $ 1,313 $ 1,313 $ 1,313 $ 1,313 $
1,313 $ 1,313 $ 1,313 $ 1,313 $ 15,750 .. ~ g ~
- '?? Fringe Benefits $ 1,823 $ 1,823 $ 1,823 $ 1,823 $ 1,823 $ 1,823 $ 1,823 $
1,823 $ 1,823 $ 1,823 $ 1,823 $ 1,823 $
~
§ ~ 21,870
~ ?- .2: : Travel-Related $ 3,802 $ 3,802 $ 3,802 $ 3,802 $ 3,802 $ 3,802 $ 3,802 $
3,802 $ 3,802 $ 3,802 $ 3,802 $ 3,802 $ 45,626 ~ Expenses ~ ~
E· t ~. .@ Trade Shows $ 507 $ 507 $ 507 $ 507 $ 507 $ 507 $ 507 $ 507 $ 507 $
507 $ 507 $ 507 $ 6,084 a- · - P- Brochures and $ 253 $ 253 $ 253 $ 253 $ 253 $
253 $ 253 $ 253 $ 253 $ 253 $ 253 $ 253 $ 3,042 ~
i< [ Publications • 0
~ .. :1, ~ Market Research $ 634 $ 634 $ 634 $ 634 $ 634 $ 634 $ 634 $ 634 $ 634 $
634 $ 634 $ 634 $ 7,604 i .g
~. ~ Postage $ 63 $ 63 $ 63 $ 63 $ 63 $ 63 $ 63 $ 63 $ 63 $ 63 $ 63 $ 63 $ 760 J; •
~ ;,.
~ ;· Cell Phones $ 190 $ 190 $ 190 $ 190 $ 190 $ 190 $ 190 $ 190 $ 190 $ 190 $
190 $ 190 $ 2,281 ~. $
~5
nf') inl Legal Fees $ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 1,267
$ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 15,209
,B, .- · ~] Other Professional $ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 1,267 $
1,267 $ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 15,209
fi ~ Fees
s~
;;· Q ,, 0 Website $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $
125 $ 125 $ 1,500
-~ ii . a~ . Development
~,i;· Dues and $ 114 $ 114 $ 1 14 $ 114 $ 114 $ 114 $ 114 $ 114 $ 114 $ 1 14 $ 114
$ 114 $ 1,369
~"· 1' Subscriptions S 3~
a ~ Patent Costs $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $ 8,333 $
8,333 $ 8,333 $ 8,333 $ 8,333 $ 100,000 3 ~ ... ~ 1l I~ Computers $ 2,083 $ 2,083 $
2,083 $ 2,083 $ 2,083 $ 2,083 $ 2,083 $ 2,083 $ 2,083 $ 2,083 $ 2,083 $ 2,083 $
25,000 :::.· f') ••• and Software -g B" (SimHydraul icsl 0 - g 3
r; ~
: ~ Office Equipment $ 887 $ 887 $ 887 $ 887 $ 887 $ 887 $ 887 $ 887 $ 887 $ 887
$ 887 $ 887 $ 10,646
g ~ and Supplies -;j
-~· .~. Telephone and Utility $ 380 $ 380 $ 380 $ 380 $ 380 $ 380 $ 380 $ 380 $ 380
$ 380 $ 380 $ 380 $ 4,563
if Expenses
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B o Accounting Services $ 507 $ 507 $ 507 $ 507 $ 507 $ 507 $ 507 $ 507 $ 507 $
507 $ 507 $ 507 $ 6,084 ,-. "8
'!>w • ! Miscellaneous $ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 1,267 $
1,267 $ 1,267 $ 1,267 $ 1,267 $ 1,267 $ 15,209 ; i
~ ?, Total Operating Costs $ 25,067 $ 25,067 $ 25,067 $ 25,067 $ 25,067 $ 25,067
$ 25,067 $ 25,067 $ 25,067 $ 25,067 $ 25,067 $ 25,067 $ 300,805
~.[
2.g. Total Costs $ 454,041 $ 454,041 $ 454,041 $ 579,041 $ 579,04 1 $ 579,041 $
683,207 $ 683,207 $ 683,207 $ 808,207 $ 808,207 $ 808,207 $ 7,573,487 C ._, ~· .
.. Net Income (EBTI $ 1,054,620 $ 54,434 $ 54,247 $ 179,059 $ 178,870$ 178,68 1
$ 324,324 $ 324,133 $ 323,942 $ 448,750 $ 448,558 $ 448,367 $ 4,017,984
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Balance Sheet (Year 4):
Balance Sheet
Assets
Current Assets
Cash
Accounts
Receivable
Total Assets
Liabilities
Current
Liabilities
Accounts
Payable
Total Liabilities
Equity
Capital Stock
Retained
Earnings
Total Equity
Total Liabilities
and Equity
37 38 39 40 41 42 43 44 45 46 47 48 Year4
$ 1,792,2 14$ 1,546,648 $ 1,600,895 $ 1,8 17,454$ 1,996,324$ 2,175,005 $
2,530,579$ 2,854,712$ 3, 178,653 $ 3,664,903$ 4, 11 3,461 $ 4,56 1,828$ 4,56
1,828
$ 300,000 $
$ 2,092,2 14 $ 1,546,648 $ 1,600,895 $ 1,8 17,454 $ 1,996,324 $ 2,175,005 $
2,530,579 $ 2,854,712 $ 3, 178,653 $ 3,664,903 $ 4, 11 3,461 $ 4,56 1,828 $ 4,56
1,828
$ 136,2 12 $ 136,2 12 $ 136,2 12 $ 173,7 12 $ 173,712 $ 173,712 $ 204,962 $
204,962 $ 204,962 $ 242,462 $ 242,462 $ 242,462 $ 242,462
$ 136,2 12 $ 136,2 12 $ 136,2 12 $ 173,7 12 $ 173,712 $ 173,712 $ 204,962 $
204,962 $ 204,962 $ 242,462 $ 242,462 $ 242,462 $ 242,462
$ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $
5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $
5,800,000
$ (4,443,998) $ (4,389,564) $ (4,335,3 17) $ (4, 156,258) $ (3,977,388) $
(3,798,708) $ (3,474,383) $ (3, 150,250) $ (2,826,309) $ (2,377,559) $ (1,929,00 1)
$ (1,480,634) $ (1,480,634)
$ 1,356,002 $ 1,4 10,436 $ 1,464,683 $ 1,643,742 $ 1,822,612 $ 2,00 1,292 $
2,325,617 $ 2,649,750 $ 2,973,691 $ 3,422,441 $ 3,870,999 $ 4,3 19,366 $ 4,3
19,366
$ 1,492,2 14 $ 1,546,648 $ 1,600,895 $ 1,817,454 $ 1,996,324 $ 2,175,005 $
2,530,579 $ 2,854,712 $ 3, 178,653 $ 3,664,903 $ 4, 11 3,461 $ 4,56 1,828 $ 4,56
1,828
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Cash Flow (Year 4):
Cash-Flow
Statement
Net Income (Loss)
Working Capitol
Changes
37 38
$ 1,054,620 $ 54,434 $
Accounts Receivable $ 300,000 $ {300,000) $
{Increase)
Accounts Payable
(Increase)
Cash Used for
Operations
Cash Used for
Investments
Cash from Financing
Activities
Capital Stock
$ 51,312 $ - $
$ 1,405,933 $ (245,566) $
39 40 41 42 43 44 45 46 47 48 Year 4
54,247 $ 179,059 $ 178,870 $ 178,681 $ 324,324 $ 324, 133 $ 323,942 $ 448,750 $
448,558 $ 448,367 $ 4,017,984
-$-$-$-$-$-$-$-$-$-$
- $ 37,500 $ - $ - $ 31,250$ - $ - $ 37,500 $ - $ - $ 157,562
54,247 $ 216,559 $ 178,870 $ 178,681 $ 355,574 $ 324, 133 $ 323,942 $ 486,250 $
448,558 $ 448,367 $ 4, 175,546
Change inCashfor $1,405,933$ (245,566) $ 54,247$ 216,559 $ 178,870 $ 178,681 $
355,574 $ 324, 133$ 323,942 $ 486,250$ 448,558$ 448,367$ 4,175,546
Period
Cash: Beginning of $ 386,282 $ 1,792,214 $ 1,546,648 $ 1,600,895 $ 1,817,454 $
1,996,324 $2,175,005 $ 2,530,579 $ 2,854,712 $3,178,653 $ 3,664,903 $ 4,113,461
$ 386,282
Period
Cash: End of Period $ 1,792,214 $ 1,546,648 $ 1,600,895 $ 1,817,454 $ 1,996,324
$ 2, 175,005 $ 2,530,579 $ 2,854,712 $ 3, 178,653 $ 3,664,903 $ 4, 113,461 $
4,561,828 $ 4,561,828
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g? Income Statement (Year 5) :
~f
~~ Income Statement 49 50 51 52 53 54 55 56 57 58 59 60 Year 5
~·~
• ,o
[~ Licensing Revenue $ 3,000,000 $ 3,000,000
,,_ n
P, B Interest Revenue $ 6,393 $ 6,2 17 $ 6,041 $ 5,865 $ 5,689 $ 5,5 13 $ 5,337 $
5, 161 $ 4,984 $ 4,808 $ 4,632 $ 4,456 $ 65,095 3 ,, 8. •
'll
1 fi Royalties $ 1,750,000 $ 1,750,000 $ 1,750,000 $ 2,250,000 $ 2,250,000 $
2,250,000 $ 2,750,000 $ 2,750,000 $ 2,750,000 $ 3,250,000 $ 3,250,000 $
3,250,000 $ 30,000,000
] e.
~~ Other Revenue
i ~ Total Revenue $ 4,756,393 $ 1,756,2 17 $ 1,756,041 $ 2,255,865 $ 2,255,689 $
2,255,5 13 $ 2,755,337 $ 2,755, 161 $ 2,754,984 $ 3,254,808 $ 3,254,632 $
3,254,456 $ 33,065,095 .~. ~ ~ g ~ - '?? Licensing Expense $ 875,000 $ 875,000 $
875,000 $ 1,125,000 $ 1,125,000 $ 1,125,000 $ 1,375,000 $ 1,375,000 $ 1,375,000
$ 1,625,000 $ 1,625,000 $ 1,625,000 $ 15,000,000
~
§ ~ Labor and Related
~ ?-
.2: : Costs ~
~ ~ Chief Executive $ 15,25 1 $ 15,25 1 $ 15,251 $ 15,251 $ 15,251 $ 15,25 1 $
15,25 1 $ 15,25 1 $ 15,25 1 $ 15,251 $ 15,251 $ 15,251 $ 183,0 13
E· t
~. .@ Officer a- · - P- Adam Johnson, CFO $ 8,873 $ 8,873 $ 8,873 $ 8,873 $ 8,873
$ 8,873 $ 8,873 $ 8,873 $ 8,873 $ 8,873 $ 8,873 $ 8,873 $ 106,480 ~
i< [
• 0 Justin Otani, COO $ 8,873 $ 8,873 $ 8,873 $ 8,873 $ 8,873 $ 8,873 $ 8,873 $
8,873 $ 8,873 $ 8,873 $ 8,873 $ 8,873 $ 106,480
~ .. :1,~
i .g Chief Technology $ 11 ,092 $ 11 ,092 $ 11 ,092 $ 11 ,092 $ 11 ,092 $ 11 ,092 $
11 ,092 $ 11 ,092 $ 11 ,092 $ 11 ,092 $ 11 ,092 $ 11 ,092 $ 133, 100
~. ~ Officer
J; •
~ !l-
~ ; · Senior Electrical $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $
10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 12 1,000
~. $
~ 5 Engineer
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,B, .- · Senior Control $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $
10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 10,083 $ 12 1,000
~] Systems Engineer
fi ~ s ~ Junior Meehan ical $ 5,546 $ 5,546 $ 5,546 $ 5,546 $ 5,546 $ 5,546 $ 5,546
$ 5,546 $ 5,546 $ 5,546 $ 5,546 $ 5,546 $ 66,550
;;· Q
,, 0 Engineer
-~ ii . a ~. Junior Electrical $ 5,546 $ 5,546 $ 5,546 $ 5,546 $ 5,546 $ 5,546 $ 5,546
$ 5,546 $ 5,546 $ 5,546 $ 5,546 $ 5,546 $ 66,550
~,i;· Engineer ~· 1' " ~ Sales Manager $ 7,058 $ 7,058 $ 7,058 $ 7,058 $ 7,058 $
7,058 $ 7,058 $ 7,058 $ 7,058 $ 7,058 $ 7,058 $ 7,058 $ 84,700 S 3
a~
3 ~ Sales Manager $ 7,058 $ 7,058 $ 7,058 $ 7,058 $ 7,058 $ 7,058 $ 7,058 $ 7,058
$ 7,058 $ 7,058 $ 7,058 $ 7,058 $ 84,700 ... ~ 1l
I~ Other Salaries $ 137,564 $ 137,564 $ 137,564 $ 137,564 $ 137,564 $ 137,564 $
137,564 $ 137,564 $ 137,564 $ 137,564 $ 137,564 $ 137,564 $ 1,650,768 :::.· f') •••
-g B" Total Salaries $ 227,028 $ 227,028 $ 227,028 $ 227,028 $ 227,028 $ 227,028
$ 227,028 $ 227,028 $ 227,028 $ 227,028 $ 227,028 $ 227,028 $ 2,724,34 1
0-g3
:r; ~ Total IUPUI Expenses ~
g ~ -;j Outside Contractors $ 14,575 $ 14,575 $ 14,575 $ 14,575 $ 14,575 $ 14,575
$ 14,575 $ 14,575 $ 14,575 $ 14,575 $ 14,575 $ 14,575 $ 174,901
-~· .~. Total Supplies for $ 20,833 $ 20,833 $ 20,833 $ 20,833 $ 20,833 $ 20,833 $
124,998
if Initial Build
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B o Construction Costs ,-. "8 for Initial Build '!>w
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[~ ,,_ n Income Statement (Year 5) : (Continued)
P, B
3 ,, 8. •
'll Income Statement 49 50 51 52 53 54 55 56 57 58 59 60 Year 5 1 fi
] e. Operating Expenses
~~
i ~ Payroll Processing $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $ 250 $
250 $ 250 $ 250 $ 3,000
~ ~ Fees .. ~ g ~
- '?? Office Rent $ 1,3 13 $ 1,3 13 $ 1,3 13 $ 1,3 13 $ 1,3 13 $ 1,313 $ 1,3 13 $ 1,3
13 $ 1,3 13 $ 1,3 13 $ 1,3 13 $ 1,3 13 $ 15,750
~
§~
~ ?- Fringe Benefi ts $ 2,460 $ 2,460 $ 2,460 $ 2,460 $ 2,460 $ 2,460 $ 2,460 $
2,460 $ 2,460 $ 2,460 $ 2,460 $ 2,460 $ 29,525 .2: : ~
~ ~ Travel-Related $ 4,373 $ 4,373 $ 4,373 $ 4,373 $ 4,373 $ 4,373 $ 4,373 $ 4,373
$ 4,373 $ 4,373 $ 4,373 $ 4,373 $ 52,470
E· t Expenses
~. .@ -·
a- P - Trade Shows $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $
583 $ 583 $ 6,996 ~
i< [ Brochures and $ 292 $ 292 $ 292 $ 292 $ 292 $ 292 $ 292 $ 292 $ 292 $ 292 $
292 $ 292 $ 3,498 • 0
~ .. :1, ~ Publications
i .g
~. ~ Market Research $ 729 $ 729 $ 729 $ 729 $ 729 $ 729 $ 729 $ 729 $ 729 $ 729
$ 729 $ 729 $ 8,745
J; •
~ !l- Postage $ 73 $ 73 $ 73 $ 73 $ 73 $ 73 $ 73 $ 73 $ 73 $ 73 $ 73 $ 73 $ 875
~ ;·
~. $
~ 5 Cell Phones $ 2 19 $ 2 19 $ 219 $ 219 $ 219 $ 2 19 $ 2 19 $ 2 19 $ 2 19 $ 219 $
219 $ 219 $ 2,624
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1,458 $ 1,458 $ 1,458 $ 1,458 $ 1,458 $ 17,490
~]
fi ~ Other Professional $ 1,458 $ 1,458 $ 1,458 $ 1,458 $ 1,458 $ 1,458 $ 1,458 $
1,458 $ 1,458 $ 1,458 $ 1,458 $ 1,458 $ 17,490
s ~ Fees ;;· Q
,, 0
-~ ii Webs~e $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $
125 $ 1,500 . a ~. Development
~,i;·
~· 1' Dues and $ 131 $ 131 $ 131 $ 131 $ 131 $ 131 $ 131 $ 131 $ 131 $ 131 $ 131
$ 131 $ 1,574 "S 3~ Subscriptions
a~
3 ~ Patent Costs $ 12,500 $ 12,500 $ 12,500 $ 12,500 $ 12,500 $ 12,500 $ 12,500
$ 12,500 $ 12,500 $ 12,500 $ 12,500 $ 12,500 $ 150,000 ... ~ 1l
I~ Computers $ 2,083 $ 2,083 $ 2,083 $ 2,083 $ 2,083 $ 2,083 $ 2,083 $ 2,083 $
2,083 $ 2,083 $ 2,083 $ 2,083 $ 25,000 :::.· f') ••• -g B" and Software
0 - g 3 (SimHydraulics)
r; ~ : ~ Office Equipment $ 1,020 $ 1,020 $ 1,020 $ 1,020 $ 1,020 $ 1,020 $ 1,020 $
1,020 $ 1,020 $ 1,020 $ 1,020 $ 1,020 $ 12,243
g~
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~~
-· .. Telephone and Utili ty $ 437 $ 437 $ 437 $ 437 $ 437 $ 437 $ 437 $ 437 $ 437 $
437 $ 437 $ 437 $ 5,247
if Expenses
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B- "o Accounting Services $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $ 583 $
583 $ 583 $ 583 $ 6,996 , . 8
'!>w
• ! Miscellaneous $ 1,458 $ 1,458 $ 1,458 $ 1,458 $ 1,458 $ 1,458 $ 1,458 $ 1,458 $
1,458 $ 1,458 $ 1,458 $ 1,458 $ 17,490 ; i
~ ?, Total Operating $ 3 1,543 $ 3 1,543 $ 3 1,543 $ 3 1,543 $ 31,543 $ 31,543 $ 3
1,543 $ 3 1,543 $ 3 1,543 $ 3 1,543 $ 3 1,543 $ 31,543 $ 378,5 12
~.[ Costs
2.g. C ._, ~· . Total Costs $ 1,168,979 $ 1, 168,979 $ 1, 168,979 $ 1,418,979 $ 1,4
18,979 $ 1,4 18,979 $ 1,648, 146 $ 1,648, 146 $ 1,648, 146 $ 1,898, 146 $ 1,898,
146 $ 1,898, 146 $ 18,402,75 1 ..
Net Income (EBTI $ 3,587,414 $ 587,238 $ 587,062 $ 836,886 $ 836,7 10 $ 836,533
$ 1,107, 190 $ 1,107,0 14 $ 1,106,838 $ 1,356,662 $ 1,356,486 $ 1,356,3 10 $
14,662,344
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Balance Sheet (Year 5):
Balance Sheet 49 50 51 52 53 54 55 56 57 58 59 60 Year 5
Assets
Current Assets
Cash $ 9, 157,473 $8,844,711 $9,43 1,773 $ 10,343,658 $ 11 , 180,368 $
12,016,901 $ 13, 192,842 $ 14,299,856 $ 15,406,695 $ 16,838,357 $18, 194,843 $
19,55 1,153 $ 19,55 1,153
Accounts Receivable $ 900,000 $
Total Assets $ 10,057,473 $8,844,711 $9,43 1,773 $ 10,343,658 $1 1, 180,368 $
12,016,901 $ 13, 192,842 $ 14,299,856 $ 15,406,695 $ 16,838,357 $ 18, 194,843 $
19,551, 153 $ 19,55 1,153
Liabilities
Current Liabilities
Accounts Payable $ 350,694 $ 350,694 $ 350,694 $ 425,694 $ 425,694 $ 425,694 $
494,444 $ 494,444 $ 494,444 $ 569,444 $ 569,444 $ 569,444 $ 569,444
Total Liabilities $ 350,694 $ 350,694 $ 350,694 $ 425,694 $ 425,694 $ 425,694 $
494,444 $ 494,444 $ 494,444 $ 569,444 $ 569,444 $ 569,444 $ 569,444
Equity
Capital Stock $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $
5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $ 5,800,000 $
5,800,000 $ 5,800,000
Retained Earn ings $ 2, 106,780$ 2,694,017$ 3,281,079$ 4, 117,965$ 4,954,674$
5,79 1,208$ 6,898,398$ 8,005,4 12$ 9, 112,251 $ 10,468,9 13 $1 1,825,399 $
13,181,7 10 $ 13, 18 1,7 10
Total Equity $ 7,906,780 $8,494,0 17 $9,081,079 $ 9,917,965 $ 10,754,674 $ 11 ,59
1,208 $ 12,698,398 $ 13,805,4 12 $ 14,912,251 $ 16,268,9 13 $17,625,399 $ 18,98
1,7 10 $ 18,98 1,7 10
Total Liabilities $ 8,257,473 $8,844,7 11 $9,43 1,773 $ 10,343,658 $ 11 , 180,368 $
12,016,901 $ 13, 192,842 $ 14,299,856 $ 15,406,695 $ 16,838,357 $ 18, 194,843
$19,551, 153 $ 19,55 1,153
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Cash Flow (Year 5):
Cash-Flow Statement 49 50
Net Income (Loss) $ 3,587,4 14 $ 587,238 $
Working Capital
Changes
Accounts Receivable $ 900,000 $ (900,000) $
(Increase)
Accounts Payable
(Increase)
Cash Used for
Operations
Cash Used for
Investments
Cash from Financing
Activities
Capital Stock
$ 108,232 $ - $
$4,595,645 $ (3 12,762) $
51 52 53
587,062 $ 836,886 $ 836,710 $
-$-$-$
- $ 75,000$ - $
587,062 $ 9 11 ,886 $ 836,710 $
54 55 56 57 58 59 60 Year 5
836,533 $ 1,107, 190$ 1,107,014$ 1, 106,838$ 1,356,662 $ 1,356,486 $ 1,356,3 10
$ 14,662,344
-$-$-$-$-$-$-$
- $ 68,750 $ - $ - $ 75,000 $ - $ - $ 326,982
836,533 $ 1,175,941 $ 1, 107,014$ 1, 106,838$ 1,43 1,662 $ 1,356,486 $
1,356,310$ 14,989,325
Change inCashfor $4,595,645$ (3 12,762) $ 587,062$ 9 11,886 $ 836,7 10$
836,533$ 1,175,94 1 $ 1, 107,014$ 1,106,838$ 1,43 1,662$ 1,356,486 $ 1,356,3
10$ 14,989,325
Period
Cash: Beginning of $ 4,561,828 $ 9,157,473 $ 8,844,7 11 $ 9,43 1,773 $ l 0,343,658
$ l 1,180,368 $ 12,0 16,901 $ 13, 192,842 $ 14,299,856 $ 15,406,695 $ 16,838,357
$ 18, 194,843 $ 4,561,828
Period
Cash: End of Period $ 9, 157,473 $ 8,844,7 11 $ 9,43 1,773 $ 10,343,658 $
11 ,180,368 $ 12,0 16,901 $ 13, 192,842 $ 14,299,856 $ 15,406,695 $ 16,838,357 $
18, 194,843 $ 19,55 1,153 $ 19,55 1,153
360 Chapter 12 Developing an Effective Business Plan
Notes
1. "SBI-Wind Power Market : Turbine Components &
Subcomponents and Demand in the U.S. and the World,"
https://www.sbireports.com.
2. Global Wind Energy Council, http://www.gwec.net/index
.php?id=121.
3. www.20percentwind.org
4. "NREL 2010: Eastern Wind Integration and Transmission
Study," http ://www.nrel.gov/wind/systemsintegration
/ewits.html.
5. Center for Environmental Innovation and Leadership,
http :/ /www.ceilea d ershi p. org/ind ex. ph pf energy
-efficiency-and-renewa ble-energy/269 3-uswind-ind ustry
-reports-end uring-growth-in-first-q uarter-of-2011.
6. Juliet Eilperin, "Why the Clean Tech Boom Went Bust,"
\Vired, January 1, 2012, https://www.wired.com/2012/01
/ff_solyndra.
7. Eilperin, "Why the Clean Tech Boom Went Bust."
8. h ttp://www.allbusiness.com/energy-u ti! ities/u ti !itiesind ustry
-electric-power-power/11716155-1.html; http ://www.nrel
.gov/features/20090417 _wind.html.
9. Renewable Energy \Vorld, September 2008, https://www
.renewa bleenergywor Id .com/#gref.
10. "The Gearbox Problem," July 2009, http ://getmore
.northernpower.com/downloads/the-gearbox-problem.pdf.
11. "The Gearbox Problem."
12. "The Gearbox Problem."
13. "Improving Wind Turbine Gearbox Reliability," 2007,
http://www.nrel.gov/wind/pdfs/41548. pd f.
14. "SBI- Wind Power Market."
15. Bridges Trade BioRes 11, no. 14 (Ju ly 25, 2011),
International Centre for Trade and Bio safety Sustainable
Development (ICTSD) Switzerland.
16. U.S. Department of Energy, Advanced \Vind Turbine
Drivetrain Concepts (Washington, DC: U.S. Department
of Energy, 2010).
17. K. Dasgupta, "Analysis of a Hydrostatic Transmission
System Using a Low Speed High Torque Mot or,"
Mechanism and Machine Theory 35 (2000): 1481- 99.
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91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic tight.. some 1hitd
p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11otcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Olga Salr/Shurrersrock.com
Chapter 13 Chapter 15
Strategic Entrepreneurial Growth: Harvesting the Entrepreneurial Venture 416
Scaling 362
Chapter 14
Valuation of Entrepreneurial Ventures 388
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc t igh11otcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Strategic Entrepreneurial
Growth: Scaling
Learning Objectives
13.1. Discuss the importance of strategic planning with emerging firms
13.2. Describe the nature of strategic planning
13.3. Outline the challenges of managing entrepreneurial growth
13.4. Explain the transition from an entrepreneurial to managerial approach
13.5. Identify the key factors that play a major role during the growth stage
13.6. Discuss the complex management of paradox and contradiction
13.7. List the steps useful for breaking through the growth wall
13.8. Explain the factors involved in growth hacking
13.9. Identify the challenges involved with "blitzscaling"
13. 10. Explore the elements of building an entrepreneurial company
13. 11. Identify the unique managerial concerns with growth businesses
Entrepreneurial Thought
Without continual growth and progress, such words as improvement, achievement,
and success have no
meaning.
-Benjamin Franklin, founding father of the United Stales
There are no great limits to growth because there are no limits of human
intelligence, imagination, and wonder.
-Ronald W. Reagan, 40th president of the United Stales
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc t igh11otcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
13-1 Strategic Planning
and Emerging Firms
L013.1 Discuss the importance of strategic planning with
emerging firms
Although most entrepreneurs do sotne form of planning,
it often tends to be informal and unsystematic.1
The actual need for systematic planning varies \.Vith the
nature, size, and structure of the business. In other \.vords,
a small t\.vo-person operation may successfully use informal
planning because little cotnplexity is involved. But
an emerging venture that is rapidly expanding \.Vith constant
increases in personnel and market operations "vill
need to formalize its planning because a great deal of
complexity exists.
An entrepreneur's planning "vill need to shift from an
informal to a formal systematic style for other reasons.
First is the degree of uncertainty with \.vhich the venture
is attempting to become established and to gro\.v. With
greater levels of uncertainty, entrepreneurs have a stronger
need to deal with the challenges that face their vent
ure, and a more formal planning effort can help them
to do this. Second, the strength of the competition (in
both numbers and quality of competitors) "vill add to
the i1nportance of more systematic planning in order for
a ne\.v venture to monitor its operations and objectives
more closely.2 Finally, the amount and type of experience
the entrepreneur has may be a factor in deciding
the extent of formal planning. A lack of adequate experience,
either technological or business, may constrain
the entrepreneur's understanding and thus necessitate
fonnal planning to help determine future pa ths for the
organization. It is only through this type of planning
that entrepreneurs can manage entrepreneurial growth.
13-2 The Nature of
Strategic Planning
L013.2 Describe the nature of strategic plann ing
Strategic planning is the formulation of long-range plans
for the effective management of environmental opportunities
and threats in light of a vent ure's strengths and
\.Veaknesses. It includes defining the venture's mission,
specifying achievable objectives, developing strategies, and
setting policy guidelines. Dynamic in nature, the strategic
management process (see Figure 13 .1) is the full set of
com1nit1nents, decisions, and actions required for a firm to
achieve strategic competitiveness and earn above-average
ret urns. Relevant strategic inputs derived from analyses
of the internal and external environments are necessary
The Nature of Strategic Planning 363
for effective strategy formulation and imple1nentation.
In turn, effective strategic actions are a prerequisite to
achieving the desired outcomes of strategic competitiveness
and above-average ret urns. Thus, the strategic management
process is used to match the conditions of an
ever-changing market and competitive structure \.Vith a
firm's continuously evolving resources, capabilities, and
core competencies (the sources of strategic inputs). Effective
strategic actions that take place in the context of carefully
integrated strategy formulation and implementation
actions result in desired strategic outcomes.3 Thus, strategic
planning is the primary step in determining the future
direction of a business. The "best" strategic plan will be
influenced by many factors, among them the abilities of
the entrepreneur, the complexity of the venture, and the
nature of the industry. Yet, \.Vhatever the specific situation,
five basic steps must be followed in strategic planning:
1. Examine the internal and external environments of
the venture (strengths, weaknesses, opportunities,
and threats).
2. Formulate the venture's long-range and shortrange
strategies (mission, object ives, strategies, and
policies).
3. Imple1nent the strategic plan (programs, budgets,
and procedures).
4. Evaluate the performance of the strategy.
5. Take follo\.v-up action through continuous feedback.
Figure 13.1 illustrates these basic steps in a flo"v diagram.
The first step- examining the environment-can
be one of the most critical for an emerging venture.
Analyses of its external and internal environments
provide a firm with the information required to
develop its strategic intent and strategic mission. As
sho\.vn in Figure 13.1, strategic intent and strategic
mission influence strategy formulation and implementation
actions. A clear revie\.v of a venture's internal
and external factors is needed, and both sets of factors
must be considered \.vhen performing an environmental
analysis. This analysis is often called a SWOT analysis;
SWOT is an acronym for a venture's internal strengths
and weaknesses and its external opportunities and
threats. The analysis should include not only the external
fac tors most likely to occur and to have a serious
impact on the company but also the internal factors
most likely to affect the implementation of present and
future strategic decisions. By focusing on this analysis,
an emerging venture can proceed through the other
steps of formulation, implementation, evaluation, and
feedback. 4
The greatest value of the strategic planning process
is the "strategic thinking" it promotes among business
owners. Although strategic thinking is not ahvays articulated
formally, it synthesizes the intuition and creativity
of an entrepreneur into a vision for the fut ure. 5
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll l c:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
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364 Chapter 13 Strateg ic Entrepreneurial Growth: Scal ing
Figure 13.1 The Strategic Management Process
Strategic
Inputs
The External
Environment
The Internal
Environment
Competitive
.. Strategic Intent
Strategic Mission
Business-Level Organizational Rivalry and Corporate- Corporate Structure and
Strategy Competitive Level Strategy Governance
Controls
Strategic Dynamics
Actions .. ..
Acquisition and International Cooperative Strategic Strategic
Restructuring
Strategies Strategy Strategy Leadership Entrepreneurship
Strategic
Outcomes
Feedback
Strategic
Competitiveness
Above-Average
Returns
Source: lvli chael A. Hirr, R. Duane Ireland, and Robert E. Hoskisson, Strategic
Management, 11th ed.,© 2015 Cengage Learning.
13-2a The Lack of Strategic Planning
The importance of ne\.v ventures to the economy is
substantial in terms of innovation, employ1nent, and
sales, and effective planning can help these ne\.v firms
survive and gro\.v. Unfortunately, research has sho\.vn a
distinct lack of planning on the part of ne\.v ventures.
Five reasons for the lack of strategic planning have
been found:
1. Time scarcity. Entrepreneurs report that their time
is scarce and difficult to allocate to planning in the
face of day-to-day operating schedules.
2. Lack of knowledge. Entrepreneurs have minimal
exposure to and kno\.vledge of the planning process.
They are uncertain of the components of the process
and the sequence of those components. The entrepreneurs
also are unfamiliar with 1nany planning
infonnation sources and ho"v they can be used.
3. Lack of expertise/skills. Entrepreneurs typically
are generalists, and they often lack the specialized
expertise necessary for the planning process.
4. Lack of trust and openness. Entrepreneurs are highly
sensitive and guarded about their businesses and the
decisions that affect them. Consequently, they are
hesitant to formulate a strategic plan that requires
participation by employees or outside consultants.
5. Perception of high cost. Entrepreneurs perceive
the cost associated with planning to be very high.
This fear of expensive planning causes many business
O\.vners to avoid or ignore planning as a viable
process.6
In addition to these reasons, other factors have been
reported as difficulties of the planning process. For
example, both high-performing and lo\.v-performing
small ventures have proble1ns with long-range planning.
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addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Both time and expense are major obstacles. Additionally,
low-performing firms report that a poor planning
climate, inexperienced managers, and unfavorable economic
conditions are problems. Quite obviously, strategic
planning is no easy chore for new vent ures. On
the other hand, many benefits can be gained from such
planning.
13-2b The Value of Strategic Planning
Does strategic planning pay off? Research sho,vs it
does. A number of studies have focused on the irnpact
of pla1u1ing on entrepreneurial firms.7 These studies support
the contention that strategic planning is of value
to a venture. Most of the studies imply- if they do not
directly state-that planning influences a venture's survival.
In one study of 70,000 failed firms, lack of planning
,vas identified as a major cause of failure,8 and still
another investigation demonstrated that firms engaged
in strategic planning outperformed those that did not
use such planning.9 A study of 220 small firms further
established the irnportance of selecting an appropriate
strategy (niche strategy) for a venture to build distinctive
competence and a sustainable competitive advantage. 10
Another research st udy exarnined the dynamic effects
of strategies on company performance in the sofnvare
industry and found that, ,vhen focus or differentiation
strategies ,vere established, performance by those firms
,vas enhanced.11 Finally, there ,vas a study that examined
25 3 smaller firrns to deterrnine the relationship
benveen performance and planning sophistication. The
study classified companies into the follo,ving categories:
Category I: No ,vritten plan (101 firrns, or 39.9
percent)
Category II: Mod era tel y sop his ti ca ted planning,
including a ,vritten plan and/or sorne quantified objectives,
some specific plans and budgets, identification of
some factors in the external environment, and procedures
for anticipating or detecting differences be t,veen
the plan and actual performance (89 firms, or 35.2
percent).
Category III: Sophisticated planning, including a
,vritten plan ,vith all of the follo,ving: some quantified
objectives, some specific plans and budgets, identification
of sorne factors in the external environment, and
procedures for ant icipating or detecting differences
bet,veen the plan and actual performance ( 63 firms, or
24.9 percent ).
The results demonstrated that more than 88 percent
of firms ,vith Category II or Category III planning performed
at or above the industry average compared
,vith only 40 percent of those firms ,vith Category I
planning.12
In summary, all of the research indicates that emerging
firms that engage in strategic planning are more
effective than those that do not. Most important, the
The Nature of Strategic Planning 365
stud ies emphasize the significance of the planning process,
rather than merely the plans, as a key to successful
performance.13
13-2c Fatal Visions in Strategic
Planning
The actual execution of a strategy is almost as important
as the strategy itself. Many entrepreneurs make unintentional
errors ,vhen they apply a specific strategy to their
o,vn specific vent ure. Competitive situations differ, and
the particular application of kno,vn strategies rnust be
tailored to those unique situations.
Researcher Michael E. Porter has noted five fatal
rnistakes entrepreneurs continually fall prey to in their
atternpt to implernent a strategy. 14 Outlined next are
these flaws and their explanations.
• Fatal Vision # 1: Misunderstanding industry attractiveness.
Too many entrepreneurs associate attractive
ind us tries ,vith those that are gro,ving the
fastest, appear to be glamorous, or use the fanciest
technology. This is ,vrong because attractive industries
have high barriers to entry and the fewest substitutes.
The more high-tech or popular a business is,
the more likely a lot of new competitors will enter
and make it unprofitable.
• Fatal Vision #2: No real competitive advantage.
Some entrepreneurs merely copy or imitate the strategy
of their competitors. That may be an easy tactic,
and it is certainly less risky, but it means that
an entrepreneur has no competitive advantage. To
succeed, ne,v ventures must develop unique ,vays to
cornpete.
• Fatal Vision #3: Pursuing an unattainable competitive
position. Many aggressive entrepreneurs pursue
a position of dominance in a fast-gro,ving industry.
Ho,vever, they are so busy getting off the ground
and finding people to buy their products that they
forget ,vhat ,vill happen if the venture succeeds. For
example, a successful software program ,vill be irnitated
quickly; therefore, the advantage it alone gives
cannot be sustained. Real competitive advantage in
soft,vare comes frorn servicing and supporting buyers,
providing regular upgrades, and getting a company
online ,vith customers so that their computer
departrnents depend on the organization. That creates
barriers to entry. Sometirnes small companies
simply cannot sustain an advantage.
• Fatal Vision #4: Compromising strategy for growth.
A careful balance must exist bet,veen growth and
the competitive strategy that makes a ne,v venture
successful. If an entrepreneur sacrifices their vent
ure's UI1ique strategy in order to have fast gro,vth,
then the venture may grow out of business. Although
fast gro,vth can be tempting in certain industries, it
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F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
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366 Chapter 13 Strateg ic Entrepreneurial Growth: Scal ing
is imperative that entrepreneurs also maintain and
gro\>v their strategic advantage.
• Fatal Vision #5: Failure to explicitly communicate
the venture's strategy to employees. It is essential for
every entrepreneur to clearly co1nmunicate the company's
strategy to every employee. Never assume
that employees already kno\>v the strategy. Always
be explicit.
According to Porter, "One of the fundamental benefits
of developing a strategy is that it creates unity, or
consistency of action, throughout a company. Every
department in the organization \>Yorks to\>vard the same
objectives. But if people do not kno\>v \>vhat the objectives
are, how can they work to\>vard them? If they do
not have a clear sense that lo\>v cost, say, is your ultimate
aim, then all their day-to-day actions are not going to
be reinforcing that goal. In any company, e1nployees are
making critical choices every minute. An explicit strategy
\>vill help the1n make the right ones." 15
13-2d Entrepreneurial and Strategic
Actions
Both entrepreneurship and strategic manage1nent are
dynamic processes concerned with firm performance.
Strategic management calls for firms to establish and
exploit competitive ad vantages \>Vi thin a particular
environmental context. Entrepreneurship promotes the
search for competitive advantages through product,
process, and market innovations. A ne\>v venture typically
is created to pursue the marketplace promise from
innovations.
Researchers R. Duane Ireland, Michael A. Hitt,
S. Michael Camp, and Donald L. Sexton argue that
entrepreneurial and strategic actions often are intended
to find ne\>v market or competitive space for a firm to
create \>Vealth. Firms try to find fundamentally ne\>v ways
of doing business that \>vill disrupt an industry's existing
competitive rules, leading to the development of new
business models that create new competitive life forms.
The degree to \>vhich a firm acts entrepreneurially in
terms of innovativeness, risk taking, and proactivity is
related to dimensions of strategic management. Within
these commonalities bet\>veen entrepreneurship and strategic
management are specific domains of innovation,
net\>vorks, internationalization, organizational learning,
top management tea1ns and governance, and gro\>vth (see
Figure 13.2). Understanding the critical intersections of
these specific domains allows entrepreneurs to increase
their kno\>vledge, which in turn leads to higher-quality
entrepreneurial and strategic actions. 16
Figure 13.2 The Integration of Entrepreneurial and Strategic Actions
Entrepreneurial
Actions
D Innovation
D Networks
D Internationalization
D Organizational
learning
D Top management
teams and
governance
D Growth
Wealth Creation
Strategic
Actions
Source: R. Duane Ireland, t-.'1ichael A. Hitt, S. lvlichael Camp, and Donald L.
Sexton, "Integrating Entrepreneurship
and Strategic t-.fanagement Actions ro Create Firm Wealth," Academy of
Management Executive 15, no. 1
(February 2001): 51.
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addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
13-2e Strategic Positioning:
The Entrepreneurial Edge
Strategic competition can be thought of as the process
of perceiving ne\>v positions that attract customers from
established positions or dra\>v ne\>v customers into the
market. In principle, incumbents and entrepreneurs face
the sarne challenges in finding ne\>V strategic positions. In
practice, entrepreneurs often have the edge.
Strategic positionings are often not obvious, and finding
them requires creativity and insight. Entrepreneurs
frequently discover unique positions that have been
available but simply overlooked by established competitors.
In addition, entrepreneurial ventures can prosper
by occupying a position that a competitor once held but
has ceded through years of imitation and straddling.
Fundamental approaches to strategic positioning
include establishing and defending a defensible position,
leveraging resources to dominate a market, and pursuing
opportunities to establish ne\>v markets (see Table 13.1).
Entrepreneurs must understand that the pursuit of opportunities
provides the best choice for capitalizing on change.
Most cornmonly, ne\>v positions open up because of
change: ne\>v custorner groups or purchase occasions
arise, ne\>v needs en1erge as societies evolve, ne\>v distribution
channels appear, ne\>v technologies develop, and
ne\>v machinery or information systems become available.
When such changes happen, entrepreneurial ventures
unencumbered by long histories in the industry can often
The Nature of Strategic Plann ing 367
more easily perceive the potential for a ne\>v way of competing.
Unlike incumbents, these organizations can be
more flexible because they face no trade-offs \>Vith their
existing activities.17
13-2f An Entrepreneurial Strategy
Matrix Model
Based on the structure of traditional strategy matrices
(such as the Boston Consulting Group matrix) that have
been used for portfolio analysis, researchers Ma tthe"v
C. Sonfield and Robert N. Lussier developed an entrepreneurial
strategy matrix that rneasures risk and innova
tion. 18 For the purpose of this matrix, innovation is
defined as the creation of something new and different.
In terms of measurement, the ne\>ver and more different
the proposed product or service is, the higher it \>Vould
be scored on a measurement scale.
Risk is defined as the probability of major financial
loss. What are the chances of the entrepreneurial venture
failing? Ho\>v serious would be the resulting financial
loss? Whereas many \>Va ys exist to increase innovation,
reducing risk focuses largely on financial factors, \>Vith a
secondary consideration of self-image and ego.
The model allo\>vs even the most inexperienced
entrepreneurs to characterize their ne\>v or existing venture
situations and identify appropriate strategies. The
rnodel places innovation on the vertical axis and risk
on the horizontal axis. It denotes the levels of these t\>VO
Table 13.1 Strategic Approaches: Position, Leverage, Opportun ities
Position Leverage Opportunities
Strategic log ic Establish position Leverage resources Pursue opportun ities
Strategic steps Identify an attractive market Establish a vision Jump into the
confusion
Locate a defensible pos ition Build resources Keep moving
Fortify and defend Leverage across markets Seize opportunities
Finish strong
Strategic question Where should we be? What should we be? How should we
proceed?
Source of advantage Unique, valuable position with Unique, valuable, inimitable Key
processes and un ique
tightly integrated activity system resources simple rules
Works best in Slowly changing, Moderately changing, Rapidly changing, ambiguous
well-structured markets well-structured markets markets
Duration of advantage Sustained Sustained Un pred ictable
Risk It will be too difficult to alter Company will be too slow Managers will be too
tentative
position as conditions change to build new resources as in executing on prom ising
conditions change opportunities
Profitability Long-term dominance Growth
Source: From "Strategy as Simple Rules," by Kathleen M. Eisenhardt and Donald N.
Sull (January 2001): 109. Copyright© 2001 by the Harvard
Business School Publishing. All rights reserved.
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1 ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
368 Chapter 13 Strategic Entrepreneu rial Growth: Scal ing
Figure 13.3 The Entrepreneurial Strategy Matrix:
Independent Variables
High
Innovation
(Creating a un ique
and different
product/service) - Low Innovation
Low Risk
Low ~------Low
Risk
- High Innovation
High Risk
High
(Probability of major financial loss)
Source: Matthew C. Sonfield and Robert N. Lussier, "The Entrepreneurial
Strategic Matrix: A Model for New and Ongoing Ventures." Reprinted
with permission from Business Horizons 40, no. 3 (1997), by the trustees at
Indiana University, Kelley School of Business.
variables by using I and R for high levels and i and r
for lo,,v levels (see Figure 13.3).
The value of the entrepreneurial strategy matrix
is that it suggests appropriate avenues for different
entrepreneurs. When the entrepreneur identifies the
cell that best describes the ne,v or existing venture
being contemplated, then certain strategies are indicated
as more likely to be effective (see Figure 13.4).
It should be obvious that certain cells are more
advantageo us than others. A high-innovat ion/
low-risk venture is certainly preferable to a lo,vinnovat
ion/high-risk one. Yet, for every venture
fo und in I- r, large numbers of ventures can be
found in i-R. Risk is more common than innovativeness
in the business world.
The strategic implications of the matrix are t\vofold.
First, entrepreneurs will find certain cells preferable
to others, and one set of appropriate strategies
involves moving from one cell to another. Second,
such movement is not ahvays possible for an entrepreneur,
so the appropriate strategies involve reducing
risk and increasing innovation ,vithin a cell.
Figure 13.4 The Entrepreneurial Strategy Matrix: Appropriate Strategies
C
0;
~
0
C
C
3
0
• Defend present position
• Accept limited payback
• Accept limited growth
potential
_J ..._ ___________ _
Low
- • Reduce risk by lowering
investment and operating
costs
• Maintain innovation
• Outsource high-investment
operations
• Joint venture options
Risk
High
Source: l'vlatthew C. Sonfield and Robert N. Lussier, "The Entrepreneurial
Strategic !Vlatrix:
A l'vlodel for New and Ongoing Ventures." Reprinted with permission from
B1Jsiness
Horizons 40, no. 3 (1997), by the trustees at Indiana University, Kelley School of
Business.
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addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
13-3 Managing
Entrepreneurial Growth
L013.3 Outline the challenges of managing entrepreneurial
growth
Managing entrepreneurial gro"vth rnay be the most
critical tactic for the fu ture success of business
enterprises. After init iation of a ne"v venture, the
entrepreneur needs to develop an understanding of
management change. This is a great challenge because
it often encompasses the art of balancing mobile and
dynamic factors. 19
Thus, the survival and gro"vth of a new venture
require that the entrepreneur possess both strategic and
tactical skills and abilities. Which specific skills and abilities
are needed depend in part on the vent ure's current
development; Figure 13.5 illustrates the typical venture
life cycle. Managing growth can be a formidable challenge
to the successful developrnent of any vent ure.
13-Ja Venture Development Stages
As noted, Figure 13.5 represents the traditional life cycle
stages of an enterprise. These stages include ne\,v-venture
development, start-up activities, growth, stabilization,
and innovation or decline. Other authors describe these
stages in different terms. For example, Alfred Chandler
identifies the follo"ving stages in a firrn's evolution:
1. Initial expansion and accumulation of resources
Managing Entrepreneurial Growth 369
2. Rationalization of the use of resources
3. Expansion into ne"v markets to ensure the continued
use of resources
4. Development of ne"v structures to ensure continuing
mobilization of resources20
These four p hases are, in effect, the same major
stages illustrated in Figure 13 .5, "vith the exception of
stabilization. In short, authors generally agree regarding
a venture's life cycle. Presented next are the five
major stages.
New-Venture Development
The first stage, new-venture development, consists of
activities associated "vith the initial formulation of the
vent ure. This initial phase is the foundation of the entrepreneurial
process and requires creativity and assessment.
In addition to the accwnulation and expansion of
resources, this is a creativity, assessment, and nenvorking
stage for initial entrepreneurial strategy formulation.
The enterprise's general philosophy, mission, scope, and
direction are determined during this stage.
Start-Up Activities
The second stage, start-up activities, encornpasses the
foundation "vork needed to create a formal business
plan, search for capital, carry out marketing activities,
and develop an effective entrepreneurial team. These
activities typically demand an aggressive entrepreneurial
strategy "vith maximum efforts devoted to launching the
Figure 13.5 A Venture's Typical Life Cycle
Profit,
Productivity,
Revenues
New-Venture
Development
Start-Up
Activities
Failure
Venture
Growth
Business
Sta bi I ization
Stages {Number of Years}
Innovation
or Decline
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370 Chapter 13 Strategic Entrepreneurial Growth: Scaling
vent ure. This stage is similar to Chandler's description of
the rationalization of the use of resources. It is typified
by strategic and operational planning steps designed to
identify the firm's competitive advantage and uncover
funding sources. Marketing and financial considerations
tend to be paramount during this stage.21
Growth
The growth stage often requires 1najor changes in
entrepreneurial strategy. Compet ition and other market
forces call for the reformulation of strategies. For
example, some firms find themselves "gro,ving out"
of business because they are unable to cope ,vith the
gro,vth of their vent ures. Highly creative entrepreneurs
sometimes are unable or u1nvilling to meet the administrative
challenges that accompany this gro,vth stage. As
a result, they leave the enterprise and move on to other
ventures.
This gro,vth stage presents newer and more substantial
problems than those the entrepreneur faced during
the start-up stage.22 These newer challenges force the
entrepreneur into developing a different set of skills
,vhile maintaining an "entrepreneurial perspective" for
the organization. 23 The gro,vth stage is a transition from
entrepreneurial one-person leadership to 1nanagerial
team-oriented leadership.
Business Stabilization
The stabilization stage is a result of both market conditions
and the entrepreneur's efforts. During this stage, a number
of developments commonly occur, including increased
competition, consumer indifference to the entrepreneur's
good(s) or service(s), and sat uration of the market ,vith a
host of "1ne too" look-alikes. Sales often begin to stabilize,
and the entrepreneur must start to think about ,vhere the
enterprise ,vill go during the next three to five years. This
stage is often a "s,ving" stage in that it precedes the period
,vhen the firm either s,vings into higher gear and greater
profitability or S\.vings to,vard decline and failure. During
this stage, innovation is often critical to future success.
Innovation or Decline
Firms that fail to innovate will die. Financially successful
enterprises often ,vill try to acquire other innovative
firms, thereby ensuring their o,vn gro,vth. Also, many
firms ,vill ,vork on ne,v product/service development to
complement current offerings.
All of a vent ure's life cycle stages are important strategic
points, and each requires a different set of strategies.
Ho,vever, this chapter concentrates specifically on the
growth stage because entrepreneurs often ignore it. This
happens not because of incompetence but rather because
of the almost hypnotic effect a successful gro,vth stage
can cause. We shall no,v exa1nine the key fac tors that
affect the ability to 1nanage this stage.
13-Jb Transitioning from
Entrepreneurial to Managerial
LO 13.4 Explain the trans it ion from an entrepreneurial to
ma nagerial approach
The transitions bet\.veen stages of a venture are complemented
(or in so1ne cases inhibited) by the entrepreneur's
ability to 1nake a transition in style. A key transition
occurs during the growth stage of a venture ,vhen the
entrepreneur shifts into a managerial style. This is not
easy to do. As researchers Charles W. Hofer and Ram
Charan have noted, "Among the different transitions
that are possible, probably the most difficult to achieve
and also perhaps the most i1nportant for organizational
development is that of moving from a one-person, entrepreneurially
managed firm to one run by a functionally
organized, professional management teain."24
A nu1nber of proble1ns can occur during this
transition, especially if the enterprise is characterized by
factors such as (1) a highly centralized decision-making
system, (2) an overdependence on one or t,vo key individuals,
( 3) an inadequate repertoire of managerial
skills and training, and (4) a paternalistic attnosphere.25
Although these characteristics often are effective for the
ne,v vent ure's start-up and initial survival, they pose a
threat to the firm's develop1nent during the gro,vth stage.
Quite often, these characteristics inhibit development by
detracting from the entrepreneur's ability to manage the
gro,vth stage successfully.
Balancing the Focus: Entrepreneurial
versus Managerial
When managing the gro,vth stage, entrepreneurs must
re1nember t,vo important points. First, an adaptive firm
needs to retain certain entrepreneurial characteristics to
encourage innovation and creativity. Second, the entrepreneur
needs to translate this spirit of innovation and
creat ivity to their personnel ,vhile personally making
a transition toward a more managerial style.26 This critical
entrepreneur/manager balance is extremely difficult to
achieve. Although every firm ,van ts to be as innovative,
flexible, and creative as Apple, Google, and Face book, there
are thousands of ne,v restaurants, Internet businesses,
retail stores, and high-tech ventures that presumably
have tried to be innovative and gro,v but have failed.
Remaining entrepreneurial ,vhile making the transition
to some of the more administrative traits is vital
to the successful gro,vth of a vent ure. Table 13.2 provides
a frame,vork for comparing the entrepreneurial
and administrative characteristics and pressures relative
to five major factors: strategic orientation, commitment
to seize opportunities, com1nittnent of resources, control
of resources, and management struct ure. Each of these
five areas is critical to the balance needed to manage
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Managing Entrepreneuria l Growth 371
The Entrepreneurial Process
I•
From Entrepreneur to Manager
For many entrepreneurs, one of the most difficult tasks is to make
the successful transition from a creative, task-juggling entrepreneur
to a business-skill-applying manager. A number of top entrepreneurs
have been successful in this challenging transition, while
others have faltered Most of the time, the success always relates
to the entrepreneur's ability to grow and develop their workforce.
Today, there are key management strategies that entrepreneurs
should keep in mind when confronting the chollenge of enhancing
the abilities of their employees while growing their ventures.
There are effective human resource management practices
that entrepreneurs need to develop and improve as they
expand and grow their ventures. In many firms, the owner must
personally handle all human resource practices, and thus inefficiencies
may occur due to the amount of other activities the
owner performs. This situation creates the danger that small
entrepreneurs might fail to recognize or understand critical
issues regarding human resources.
Researchers Jeffrey S Hornsby and Donald F. Kuratko point
out that dealing with the human resource issue may be the most
critical challenge confronting entrepreneurs in the twenty-first century.
In a number of studies they conducted on entrepreneurs'
views of the human resource chollenge, they found a number
of critical issues thot remain constant no matter how fast the bu siness
grows. Issues such as the availability and retention of quality
workers, technology in the workplace, motivation of the workforce,
and employee morale are considered to be foremost in the
minds of most entrepreneurs seeking to manage a growing firm.
In trying to constantly improve employee performance,
two control-related areas warrant the entrepreneur's attention.
The first is the link between pay and performance. The second
is the spirit of teamwork.
The Pay-Performance Link: One of the most common
causes of poor morale can be tied to the pay/performance
link. Do those who do the best work receive the highest
salaries? In many growing ventures, all salaries are kept secret.
Only the owner and the respective employee know how much
the employee makes. Over time, however, ra ises usually are
given lo those who stay, and they are not uniform; some people
get more money than others . This can create a morale
problem when employees feel thot raises are arbitrary and are
not tied to performance. When this is the case, two things can
happen. First, those who can make more money by going elsewhere
will take advantage of such employment opportunities.
Second, those who stay w ill do less work, reasoning that "I
may not be paid what I'm worth, but I'm not putting forth as
much effort as I used to, either." So ii is imperative that the
entrepreneur-manager try to tie ra ises to performance whenever
possible. Not everyone's job is quanti fiable. It may be
easy to evaluate a salesperson's performance simply by looking
at how much the person has sold, but a software developer's
performance may call for a highly subjective evaluation.
This is why some kind of evaluation system should be used.
In addition, the entrepreneur-manager needs to remain alert
to locally competitive salaries. Some businesses are unable
to match the salaries of other employers, but they must come
close or risk losing key personnel. Overall, however, few peer
pie leave their jobs just because of d issatisfaction with their
pay. In many cases, that is just one of the reasons. Another is
d issati sfaction with the work environment, as when ii has no
feel ing of teamwork, so personnel simply do not like ii there.
Develop Teamwork: Although some entrepreneurmanagers
believe they encourage teamwork, they actually
promote competition . For example, the owner who goes
overboard in praising and reward ing the best salesperson
soon will find the other salespeople working to undermine that
individual. The result is infighting among the personnel. The
best way is to ensure that real teamwork is developing is to
reward those who are team players and, most important of
all, to reprimand (and, in some cases, fire! those who refuse to
cooperate for the overall good.
Remember the work cl imate is most important among
younger employees today. People want to find fulfillment in
their jobs. Research shows that attending to the psychological
side of the work environment, includ ing aspects such as
a feel ing of importance, creating an opportunity to do meaningful
work, and the bel ief that workers are contributing to the
business, is often more important to employees than salary and
working cond itions . When these good feel ings are present,
morale tends to be high and performance good.
As one shining example of those issues, author Carmine
Gallo, in his book The Innovation Secrets of Steve Jobs, outlines
a number of sign ificant managing principles that emanated
from Apple founder and CEO Steve Jobs. Here are a
few that apply to the challenge of employee motivation:
• Help people find what they love in their work. If people
do what they love, motivation and performance are never
questioned.
• Put a dent in the universe. Inspire your workforce to
develop a sense of meaning in their performance as it
relates to what the firm is trying to accompl ish. Develop a
sense of purpose in everyone's job.
• Sell dreams not products. Everyone wants to work at
something significant in this world. Create a dream that is
bigger than the entire workforce
• Say no to 1,000 things. Remain focused on the simpl icity
of what can be done. Avoid the temptation to "add on"
constantly and keep everyone a imed on the few areas of
excellence.
• Master the message. Communicate w ith your employees
continuously. Use stories and examples to make them
understand the true message you intend for the atmosphere
of the venture.
As you peruse the list, you can see how they relate to creating a
unique and significant experience for the employees of a growing
firm. Once an entrepreneur can understand and execute
effectively on the challenge of human resources, the transition
from entrepreneur to manager becomes a more successful one.
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372 Chapter 13 Strateg ic Entrepreneurial Growth: Scal ing
entrepreneurially. At the t'vvo ends of the continuum
(fro1n entrepreneurial focus to administrative focus) are
specific points of vie'vv. One study characterized these
using a question format.
The Administrative Point of View
• What resources do I control?
• What structure determines our organization's relaThe
Entrepreneur's Point of View tionship to its market?
• Where is the opportunity?
• Ho'vv do I capitalize on it?
• What resources do I need?
• Ho'vv do I gain control over the1n?
• What structure is best?
• Ho'vv can I minimize the impact of others on my
ability to perform?
• What opportunity is appropriate?27
The logic behind the variance in the direction of
these questions can be presented in a number of different
'vvays. For example, the commitment of resources in
Table 13.2 The Entrepreneurial Culture versus the Administrative Culture
Entrepreneurial Focus Administrative Focus
Characteristics Pressures Characteristics Pressures
Strategic Driven by Diminishing opportun ities Driven by Social contracts
Performance
orientation perception of Rapidly changing controlled measurement criteria
opportun ity technology, consumer resources Plann ing systems and cycles
economics, social values,
and political rules
Commitment to Revolutionary, Action orientation Evolutionary, with
Acknowledgment of multiple
seize opportunities with short Narrow decision windows long duration constituencies
duration Acceptance of reasonable Negotiation about strateg ic
risks course
Few decision constituencies Risk reduction Coordination
with existing resource base
Commitment of Many stages, with Lack of predictable resource A single stage, Need
to reduce risk
resources minimal exposure needs with complete Incentive compensation
at each stage Lack of control over the commitment out Turnover in managers
environment of decision
Capital budgeting systems
Social demands for Formal plann ing systems
appropriate use of resources
Foreign competition
Demands for more efficient
use
Control of Episod ic use or Increased resource Ownership or Power, status, and
financial
resources rent of requ ired specialization employment of rewards
resources Long resource life compared required resources Coordination of activity
with need Efficiency measures
Risk of obsolescence Inertia and cost of change
Risk inherent in the identified Industry structures
opportunity
Inflexibility of permanent
commitment to resources
Management Flat, with multiple Coordination of key Hierarchy Need for clearly
defined
structure informal networks noncontrolled resources authority and responsibility
Challenge to hierarchy Organizational culture
Employees' desire for Reward systems
independence Management theory
Source: An exhibit from "The Heart of Entrepreneurship," by Howard H. Stevenson
and David E. Gumpert, l\'1arch/April 1985, 89. Copyright
© 1985 by the President and Fellows of Harvard College. All rights reserved.
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the entrepreneurial frame of 1nind responds to changing
environmental needs, ,vhereas the managerial point of
view is focused on the reduction of risk. In the control of
resources, entrepreneurs ,vill avoid o,vnership because
of the risk of obsolescence and the need for more flexibility,
whereas managers ,vill view ownership as a means
to accomplish efficiency and stability. In terms of str ucture,
the entrepreneurial emphasis is placed on a need
for flexibility and independence, ,vhereas the administrative
focus is placed on ensuring integration ,vith a
complexity of tasks, a desire for order, and controlled
re,vard systems.
These examples of differences in focus help establish
the important issues involved at both ends of the managerial
spectrum. Each point of vie,v- entrepreneurial and
administrative--has i1nportant considerations that need
to be balanced if effective growth is going to take place.
13-Jc Understanding the Growth Stage
L0 13.5 Identify the key factors that play a major role during
the growth stage
The growth stage often signals the beginning of a 1netamorphosis
from a personal venture to a group-structured
operation. Domination by the lead entrepreneur gives
,vay to a tea1n approach based heavily on coordination
and flexibility.
Key Factors during the Growth Stage
Entrepreneurs must understand four key factors about
the specific managerial actions that are necessary during
the gro,vth stage. These factors are control, responsibility,
tolerance of failure, and change.
Control Gro,vth creates problems in command and control.
When dealing ,vith these proble1ns, entrepreneurs
need to ans,ver three critical questions: (1) Does the control
system imply trust? (2) Does the resource allocation
system imply trust? (3) Is it easier to ask permission than to
ask forgiveness? These questions reveal a great deal about
the control of a venture. If they are ans,vered ,vith "yes,"
the venture is moving to,vard a good blend of control and
participation. If they are ans,vered ,vith "no," the reasons
for each negative response should be closely exa1nined.
Responsibility As the company gro,vs, the distinction
benveen authority and responsibility becomes more
apparent. This is because authority ahvays can be delegated,
but it is most i1nportant to create a sense of
responsibility. This action establishes flexibility, innovation,
and a supportive environment. People tend to look
beyond the job alone if a sense of responsibility is developed,
so the gro,vth stage is better served by the innovative
activity and shared responsibility of all of the firm's
members.
Managing Entrepreneurial Growth 373
Tolerance of Failure Even if a venture has avoided
the initial start-up pitfalls and has expanded to the
gro,vth stage, it is still important to maintain a tolerance
of failure. The level of failure the entrepreneur
experienced and learned from at the start of the venture
should be the same level expected, tolerated, and
learned from in the gro,vth stage. Al though no firm
should seek failure, to continually innovate and gro,v,
it should tolerate a certain degree of failure as opposed
to punishing it.
Three distinct fonns of failure should be distinguished:
• Moral failure. This form of failure is a violation of
internal trust. Because the firm is based on mutual
expectations and trust, this violation is a serious
failure that can result in negative consequences.
• Personal failure. This fonn of failure is brought
about by a lack of skill or application. Usually,
responsibility for this fonn of failure is shared by
the firm and the individual. Normally, therefore, an
attempt is made to re1nedy the situation in a mutually
beneficial ,va y.
• Uncontrollable failure. This form of failure is caused
by external factors and is the most difficult to prepare
for or deal ,vith. Resource limitations, strategic
direction, and market changes are examples of
forces outside the control of employees. Top management
must carefully analyze the context of this
form of failure and ,vork to prevent its recurrence.
Change Planning, operations, and implementation are
all subject to continual changes as the venture moves
through the gro,vth stage and beyond. Retaining an
innovative and opportunistic posture during gro,vth
requires a sense of change and variation from the
norm. Entrepreneurs must realize, ho,vever, that change
holds many implications for the enterprise in terms of
resources, people, and structure. It is therefore important
during growth that the flexibility regarding change
be preserved. This allo,vs for faster managerial response
to envirorunental conditions.
13-Jd Managing Paradox and
Contradiction
L0 13.6 Discuss the complex management of paradox and
contradiction
When a venture experiences surges in growth, a number
of structural factors begin to present 1nultiple challenges.
Entrepreneurs constantly struggle over ,vhether
to organize these factors- such as cul rural elements,
staffing and development of personnel, and appraisal
and re,vards- in a rigid, bureaucratic design or a flexible,
organic design.
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374 Chapter 13 Strategic Entrepreneurial Growth: Scaling
Research has sho"vn that ne"v-venture managers
experiencing gro"vth, particularly in emerging industries,
need to adopt flexible, organic struct ures. 28 Rigid,
bureaucratic structures are best suited for mat ure, stabilized
companies. Thus, the cultural ele1nents need to
follo"v a flexible design of autonomy, risk taking, and
entrepreneurship. This type of culture is a rene"val of the
entrepreneur's original force that created the venture.
Although the entrepreneur's focus makes a transition
to"vard a more administrative style, as mentioned earlier,
the culture of the organization must be permeated
"vith a constant rene"val of the virtues of innovation and
entrepreneurship.
When entrepreneurs design a flexible structure for
high gro"vth, they must realize that a number of contradictory
forces are at "vork in certain other structural factors.
Consider the follo"ving.
Bureaucratization versus Decentralization
Increased hiring stimulates bureaucracy. Firms formalize
procedures as staffing doubles and triples. E1nployee
participation and autono1ny decline, and internal labor
markets develop. Tied to growth, ho"vever, is also an
increased diversity in product offering that favors less
formalized decision processes, greater decentralization,
and the recognition that the firrn's existing human
resources lack the necessary skills to manage the broadening
portfolio.
Environment versus Strategy
High environmental turbulence and competitive conditions
favor company cultures that support risk taking,
autonomy, and employee participation in decision making.
Firms confront competitors, ho"vever, th.rough strategies
"vhose implementation depends on the design of
forrnal systems that inhibit risk taking and autono1ny.
Strategic Emphases: Quality versus Cost
versus Innovation
Rapidly gro"ving firms strive to simultaneously control
costs, enhance product quality, and improve product
offerings. Mini1nizing costs and undercutting co1npetitors'
product prices, ho"vever, are best achieved by traditional
hierarchical syste1ns of decision making and
evaluations Yet, these strategies conflict with the kinds
of autonomous processes most likely to encourage the
pursuit of product quality and innovation.29
These factors emphasize the importance of managing
paradox and contradiction. Growth involves the multiple
challenges of ( 1) the stresses and strains induced by
atte1npts to control costs "vhile simultaneously enhancing
quality and creating ne"v products to maintain competitive
parity and (2) centralizing to retain control "vhile
si1nultaneously decentralizing to encourage the contributions
of autonomous, self-1nanaged professionals to
the embryonic corporate culture. Rapidly gro"ving firms
are challenged to strike a balance among these multiple
pulls "vhen designing their 1nanagerial systems.
13-3e Confronting the Growth Wall
LO 13.7 list the steps useful for breaking through the
growth wall
In atte1npting to develop a managerial ability to deal
with venture gro"vth, many entrepreneurial o"vners confront
a growth wall that seems too gigantic to overcome.
Thus, they are unable to begin the process of handling
the challenges that growth brings about.
Researchers have identified a number of fundamental
changes that confront rapid-gro"vth finns, including instant
size increases, a sense of infallibility, internal turmoil, and
extraordinary resource needs. In addressing these changes
that can build a gro"vth wall, successful gro"vth-oriented
firms have exhibited a few consistent themes:
• The entrepreneur is able to envision and anticipate
the firrn as a larger entity.
• The team needed for tomorro"v is hired and developed
today.
• The original core vision of the firm is constantly and
zealously reinforced.
• Ne"v "big-company" processes are introduced gradually
as supplements to rather than replacements for
existing approaches.
• Hierarchy is 1ninimized.
• Employees hold a financial stake in the firm.30
These themes are i1nportant for entrepreneurs to keep
in mind as they develop their abilities to manage gro"vth.
One researcher found that internal constraints such
as lack of gro"vth capital, limited spans of control, and
loss of entrepreneurial vitality occur in gro"vth firrns that
struggle to survive versus those that successfully achieve
high gro"vth. In addition, funda1nental differences exist
in the firms' approach to environmental changes and
trends.31 Thus, a fe"v key steps are recom1nended for
breaking through the inability to handle environmental
changes or trends. These include creating a growth task
force to organize and interpret the environmental data,
to identify the venture's strengths and "veaknesses, to
brainstorm ne"v ideas that leverage the firm's strengths,
and to recom1nend key ideas that should be developed
fur ther; planning for growth "vith strategies to resolve
the stagnation, a set of potential results, and identification
of the necessary resources; maintaining a growth
culture that encourages and re"vards a gro"vth-orien ted
attitude; and developing an outside board of advisers
to become an integral part of the venture's gro"vth. This
board should help determine, design, and implement
an organizational structure to enhance the desire for
gro"vth.32
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F.di1otial tcvicw h3sdremcd IM1 anysuppte sscd cootcm docs OOI mactially sffo..'1
1hcovcrnll l c:wningcx pcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
13-3f The Rise of Growth Hacking
L0 13.8 Explain the factors involved in growth hacking
As companies have become increasingly digital, growth
hacking has emerged as a ne\>v \>vay of scaling businesses.
Originally identified by author and entrepreneur Sean
Ellis, gro\>vth hacking is described as a cornbination of
creative marketing, data analysis, and coding \>Vith the
focus being on growth. Enabled by digital transformation,
growth hacking relies on rapid experimentation following
the Lean Startup philosophy. As \>Ve outlined in Chapter 6,
the Lean Startup philosophy is about agility, frequent
step-by-step experimentation, and testing in an iterative
process. There are three key elements to gro\>vth hacking:
1. Marketing. Gro\>vth hacking is involved in all stages
of the customer journey in order to achieve longterm
sustainable gro\>vth, \>vhich is in line \>Vith the
traditional marketing concept including the famous
4 Ps: product, price, promotion, and place.
2. Data analysis. Big data is a tool that helps collect
customer information regarding behavior and preferences.
It can directly translate this information
into enhanced decision making and superior gro\>vth.
3. Coding and artificial intelligence. Artificial intelligence
is on the rise, and it "vill interpret customer
data, learn from it, and use the learnings to reach an
objective by adapting to specific needs and circumstances
"vithout being explicitly programmed. Relying
on machine learning rnechanisms, artificial intelligence
utilizes external information obtained through big data
sources to identify underlying structures and patterns.33
While still relatively ne"v, gro\>vth hacking presents a number
of opportunities and challenges for start-up ventures.
Researchers Rene Bohnsack and Meike Malena Liesner
clearly articulated some of these. For example, opportunities
include irnproved communication by setting up a
gro\>vth hacking team \>Vith representatives from the different
areas of the venture. Like \>Ve described in Chapter
6 about design thinking, utilizing customer feedback and
the iterative process, ventures can create better products at
lo\>ver development costs. Challenges include the quality
of data that are gathered, the proper training of personnel,
and the recognition of ho"v fast the online landscape
continues to change "vith trends and preferences. 34 Table
13.3 outlines these opportw1ities and challenges.
13-39 The Challenges of Blitzscaling
L013.9 Identify the challenges involved with "blitzscaling"
In the pursuit of market dominance, ne\>v ventures scale
up to expand their markets and obtain ne\>v customers.
While traditional scaling strategies move along based on
Managing Entrepreneurial Growth 375
Table 13-3 Growth Hacking: Opportun ities and
Challenges
Opportunities Challenges
Greater Data Quality
Communication
c:> Needs departmental c:> Establish quality
coll a bora ti on control measures
Enhanced Products Training of Personnel
c:> Using a holistic view c:> Provide training for
with the customer proper procedures
Improved Perishability with
Development Costs Trends
c:> Experimentation c:> Monitor trends on
reduces costs social media
Satisfied Customers
c:> Personalized marketing
and better pricing
Source: Adapted from Rene Bohnsack and lv1eike lv1alena Liesner,
"What the Hack? A Growth Hacking Taxonomy and Practical
Applications for Firms," Business Horizons 62, no. 6 (2019): 805.
the actual gro\>vth of the venture, blitzscaling tries to push
the gro\>vth faster by prioritizing speed over efficiency in
an environment of uncertainty. Not only are ne\>v ventures
in competition for a first-rnover advantage, but
they must also achieve a certain level of gro\>vth before
they run out of capital. As \>Ve discussed in Cha peer 6
\>Vith the Lean Startup method, it is important to validate
the value of the proposed idea and estimate the potential
gro\>vth in the rnarket before the venture can drastically
scale. In order to do so, the venture will release a
minimum viable product. Keep in mind that blitzscaling
is not appropriate for all industries, as a minimum viable
product rnay not be feasible in certain areas, such
as phannaceuticals or hospitals. (See the Entrepreneurial
Process on "vhether blitzscaling is the right approach
for gro\>vdi.) Thus, intangible products such as soft\>vare
may be better suited for blitzscaling because they can be
launched quickly and updated \>Vith relative ease.
For most technology start-ups, the general appeal of
blitzscaling is that it leads to rapid growth on a global
scale. This type of gro\>vth enables new technology startups
to achieve a first-rnover advantage in ne\>v global
markets. Nonnally, the start-up is blitzscaling toward the
launch of an original or revolutionary product. In some
cases, this concept or product may not be fully developed,
or the business rnay not have experience in the target
market. As a result, the process of blitzscaling is riddled
"vith uncertainty, the only certainty being that a mistake
\>vill be made along the way. Immediately integrating
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngsgc Lcamingt(SCtv<':i lhc t igh11otcmovc
sddi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
376 Chapter 13 Strateg ic Entrepreneurial Growth: Scal ing
The Entrepreneurial Process
Is Blitzscaling the Right Approach to Growth?
Accelerated growth, where speed is prioritized over efficiency,
is the definition of bli!zsca/ing. It originates from the word lightning,
"Blitzen " The speed of bl itzscaling has to do w ith the
velocity of growing a product life cycle, measured in months
instead of years. It requires the investment of venture capitalists
so that a company can grow through various stages and valuations.
There is a family stage, which is one to nine employees,
all the way to the nation stage, which is over I 0,000 employees.
Often during the bl itzscaling stages, the company is not
profitable. It may take the company several years to expand
and reach efficiencies.
Is ii the right decision for every company in the early
years2 Is the risk of errors and inefficient inveslment worth market
dominance and at what cost2 Entrepreneurs should consider
the following thoughts:
I . Certain products and markets lend themselves better to
bl itzscal ing, such as software and technology. Hardware
products require launching a perfectly made product, not
one that can be tweaked after launch. Bringing a faulty
product to market too quickly could be the death of that
product or company. And beauty and food items (consumer
package goods [CPG]), crowded with competitors,
often grow slowly due to the iterative nalure of finding their
niche market. And there is also the initial diff iculty of measuring
growth versus repeat sales w ith the CPG market.
2. Bl itzscal ing requires raising enough funds to manage
unforeseen expenses and growth. Both funding targets
need to be managed carefully along with growth targets
for employees. There should be no pressure to overspend
or over-deliver. Overspending can result in not investing
wisely or entering markets too soon. The pressure to
over-del iver means promising customers to deliver resul ts
that they are not ready to deliver. When this happens, the
integrity of the company is at stake.
blitzscaling ,vith a venture results in managerial inefficiencies,
increased capital expenditures, and instability in the
company's culture. A venture incurs a massive amount of
risk ,vhen blitzscaling its business or product. If successful
,vith this strategy, the venture may experience numerous
strikeouts, but if eventually successful, the outcome of the
contest is sometirnes changed dramatically.
Silicon Valley created a culture of "fake it till you
make it," which means deceptively claiming that a ne,v
venture exhibits characteristics of successful entrepreneurial
vennires to gain support from others when in fact
that is not the truth. This can becorne a slippery slope in
,vhich deception escalates to the point ,vhere stakeholders
accuse entrepreneurs of comrnitting fraud. Indeed,
"fake it till you make it" underpins the phenomenon
3. A healthy culture of communication up and down the
organization will be key during a time of rapid growth.
Problem solving by all employees will be key as the company
expands. Embrace chaos.
4. The success of blitzscal ing can result in market domination
and great earning potential, the ability to branch into
other products before competi tors because of early name
recognition, or the opporlunity of sell ing your company to
another for a large profit.
There is also no reason why entrepreneurs should not consider
self-funded growth instead. It has been possible for many
start-up companies to have been profitable from day one. Selffunded
businesses allow entrepreneurs to build businesses they
love and help them operate them for many years. When they
leave the business, they own more of the proceeds.
The decision to grow swiftly, dominate the market, and
give up something in return, a share of the company for the
support, must be weighed carefully. One critic suggests that
blitzscaling isn't truly success but rather survivorship d isguised
as a strategy. And blitzscaling is not a guarantee for success,
but under the right conditions and for the right company, ii may
be very lucrative.
Source: Adopted from Donald F. Kurotko, Harrison L. Holt, and Emily Neubert,
' Blitzscoling The Good, the Bod, and the Ugly,' Business Horizons 63,
no. l [2020) 109-19;Jomes Richardson, Why Exponential Growth Works
Better Thon Blitzscoling for New Consumer Brands,• https:/ /foodinstitute.com
/focus/ why·exponentiol·growth·works-better·thon·blitzscoling·for·new
-consumer·bronds, accessed January 28, 2022; Tim O'Reilly, 'The
Fundamental Problem with Silicon Valley'.s Favorite Growth Strategy,•
https:/ / www.yohoo.com/ entertainment/fundomental·problem·silicon-valley
-fovori te· l 3005 52 51 . html?guce_referrer=o HR0cHM6Ly9 3d 3cuZ29v Z2
xllmNvbS8&guce_referrer_sig=AOMADHeu TJ NGgfNz6 W2 UcUW4eHr
QW3IN-mJBAf6unhms2wYqPTijNluJqy8NpiKkY-iResOfly5S8a0276nE
Mly5p3qyCjCtBz8PiHXx-3sDO0f2cKiYU3VxnmtERVIQEXH4KKe2QUW
_UUehfVzRnEmOwxRAzEflDLZjlTFwaN2uZpZ, accessed Ocbber 27, 2022.
of blitzscaling, ,vhere entrepreneurs strive to bring ne,v
offerings to the market as quickly as possible and then
rapidly scale to attract and satisfy investors. 35 (See the
Entrepreneurial Process story of Theranos.)
As blitzscaling requires companies to prioritize speed
over efficiency, cornpanies that grow rapidly are often
pressured to cut corners and sacrifice culture and ethics
in pursuit of growth. Researchers Donald F. Kuratko,
Harrison Holt, and Emily Neubert identified a set of
principles to assist ne,v ventures considering blitzscaling:
Principle #1: Seek environments that enable healthy
blitzscaling. Ne,v ventures pursuing blitzscaling should
look for access to venture capital funding, talented
employees, and adaptable customers.
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p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially affo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc t igh11otcmovc
addi1ioo:ll coocm m any lime if subscqucn1 tight. tc~tk1ions R--quitc ii.
Principle #2: Raise enough funding to mitigate errors,
but not overfu nding. Ventures must raise enough funding
to overcome unforeseen i ssues ,vhile blitzscaling to
avoid potential failure. Ho,vever, firms must be cautious
of overfunding because excessive financing rounds can
result in unnecessary spending and premat ure expansion.
Principle #3: Se t realistic expectations with reasonable
targets. Set high expectat ions ,vith challenging tar gets,
but those targets should st ill be achievable. If targets
appear to be impossible, employees may feel pressured
to cut corners to deliver results.
Managing Entrepreneurial Growth 377
Principle #4: Maintain a healthy ethical culture. Unhealthy
cult ures foster dishonesty and unethical behavior. Firms
pursuing blitzscaling should promote open communication
throughout the organization and seek to re,vard
good behavior ,vhile punishing un,varranted behavior so
that everyone understands the ethical expectations.
Principle #5: Structure to support growth. Rapid gro,vth
without proper management and control can result in
chaos. As firms gro,v in number of employees and customers,
i t is vital to make sure other functions and support
departments are able to support the expansion.
The Entrepreneurial Process
I lf_ J.\ I ~ I""'\•-.. T'l-iJ •
The Ugly Side of Blitzscaling
Silicon Valley is synonymous with technological innovation and
the launching point for many of today's groundbreaking technology
compon ies, such as Facebook, Alphabet, Tesla, and
Apple. Over the years, Silicon Valley has created the ideal
ecosystem for technological innovation through their trademark
"start-up culture." However, the start-up culture fostered by
Silicon Valley can present numerous compl ications, especially
when blitzscaling new ventures for aggressive growth.
Elizabeth Holmes dropped out of Stanford in 2003 to start
a clinical laboratory company that would revolu tionize the health
care industry through a disruptive technology in blood-testing
technology. The compony was named Theranos. Holmes
claimed that the technology could perform hundreds of tests on
only a few drops of blood. Holmes attracted over $800 million
in invesfment from the likes of Rupert Murdoch, Betsy DeVos,
Carlos Slim, the Waltons, and the Cox Family, none of whom
have any health care background. By 2014 and after six rounds
of fund ing, Theranos achieved a valuation of over $9 billion.
Holmes and her compony looked unstoppoble. She graced
the cover of Fortune, Forbes, and The New Yorker in 20 14,
often being compored to the brilliant Steve Jobs. Theranos'
board of directors was seen as one of the most notable in
U S corporate history. Theranos President Sunny Balawani
(El izabeth Holmes's portnerJ told investors that Theranos had
generated over $ I 00 mill ion in revenues and was on track
for $ I b illion in revenues in 2015. The company had barely
generated over $ 100,000 in revenue. Meanwhile, Holmes
raved about the revolu tionary minilab technology that Theronos
utilized to complete blood tests on single pricks of blood.
In real ity, Theranos never used the minilab for potients testing
in its cl inical laboratory but conducted the tests on regular
unmodified devices bought from other componies or sent out to
third-porly laboratories. Theranos opened 40 wellness centers
in a variely of Walgreens stores using nonfunctional machines,
resulting in 7.5 mill ion voidable blood test results. By introducing
their nonfunctional minilab devices into the consumer market,
Theranos took on an unsuitable level of risk. Behind the
curtain of it all, Holmes created a culture of secrecy where she
and Balwani regarded anyone who ra ised a concern or an
objection as a cynic or a naysayer.
However, problems were brewing as employees ra ised
issues with the viability and accuracy of Theranos' technology.
The New York State Deportment of Health received a
formal compla int from a Theranos employee in April 2014.
In October 2015, the Wal/ Street Journal shined a light on
Theranos' issues with its technology, prompting other investigations
into Theranos by the U S Food and Drug Administration
and the Centers for Medicare and Medicaid Services. The
investigations and rumors came to a dramatic head in March
2018 when the U.S Securities and Exchange Commission
charged Theranos, as well as Holmes and COO Sunny Balwani,
with massive fraud Later that year, the Department of
Justice charged Holmes and Balwani with wire fraud, Holmes
stepped down as CEO, and Theranos offic ially closed its
doors in September 2018. In January 2022, a jury found El izabeth
Holmes guilty of defrauding investors out of hundreds of
millions of dollars. After more than 50 hours of del iberations
over seven days, the jury convicted Holmes of three counts of
w ire fraud and one count of conspiracy to commit wire fraud
for lying to investors about devices developed by Theranos.
In the spon of only four years, Theranos went from one of
the top start-ups, valued at $9 billion, to an illegal and unethical
venture that had to shut down. Silicon Valley culture and
blitzscaling techniques fueled their prompt growth and expansion
but also induced many of the fraudulent and uneth ical
behaviors that lead to their ultimate demise.
Source: Mapted from John Correyrou, Bod Blood: Secrets ond lies in o
Silicon Volley Stortup [New York Knopf, 20 18); R. Perloff, • A Singular
Boord al Theronos,' Fortune, 2014, hllp/ /fortune.com/2014/06/12
/theronos·boord-directors; L. Ramsey, ' The Rise and Foll of Theronos, the
Blood-Testing Startup Thal Went from Silicon Valley Darling to Facing Fraud
Charges,' Business Insider, 2019, https:/ /www.businessinsider.com
/ the-hi story-of-si licon-vo lley-un icorn-t hero nos·o nd-ceo-eli zo beth
-holmes-2018-5; and U.S. Securities and Exchange Commission, ' Theronos,
CEO Holmes, and Former President Balwoni Charged with /1/'ossive Fraud,•
2018, https://www.sec.gov/news/ press-releose/20 18-41 .
Copyrig,ln '2024 CCllgagc U!llming. All Rights Reserved. May OOI be oopicd.
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F.di1oti:1I tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially affo..'1
1hcovcrnll lc:wningcxpcti cocc. Ccngagc Lcamingt(SCtv<':i k tigh11o tc01ovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ions R--quitc ii.
378 Chapter 13 Strategic Entrepreneurial Growth: Scaling
Principle #6: Understand customer expectations. Not all
products are suitable for blitzscaling. The expectations for
a minimum viable product can vary by product type or
industry, so it is important to understand target customers'
values and expectations regarding the degree of refinement
in product releases before pursuing blitzscaling.
Adhering to these principles will not guarantee that a
venture will find blitzscaling a most successful strategy
but it will certainly enhance the odds of avoiding rnany
of the pitfalls suffered by cornpanies in the past.36
13-4 Building an
Entrepreneurial Company
in the Twenty-First Century
LO13.10 Explore the elements of building an entrepreneurial
company
The pace and rnagnitude of change continues to accelerate
in the second decade of the n.venty-first century; having
the evolution and transformation of entrepreneurial
firms match this pace is critical. How to build dynamic
capabilities that are differentiated from those of the
emerging competitors is the major challenge for growing
firms that seek to adapt to the changing landscape. T"vo
\>vays of building dynamic capabilities are internal (utilization
of the creativity and knowledge from employees)
and external37 (the search for external competencies to
complement the firm's existing capabilities).38 The trend
to\>vard globalization, the advent of ne\>v technology, and
the information movement are all examples of forces in
this ne\>v millennium that are ca using firn1s to examine
their cultures, structures, and systems for flexibility and
adaptability. Innovation and entrepreneurial thinking are
essential elements in the strategies of gro\>ving ventures.
It has been noted that entrepreneurs (1) perceive an
opportunity, (2) pursue this opportunity, and (3) believe
that success of the vent ure is possible.39 This belief is
often due to the uniqueness of the idea, the strength of
the product, or some special kno\>vledge or skill the entrepreneur
possesses. These same factors must be translated
into the organization itself as the venture grows.
13-4a The Entrepreneurial Mindset
It is important for the vent ure's manager to maintain an
entrepreneurial frame of mind. Figure 13.6 illustrates the
danger of entrepreneurs evolving into bureaucrats who
in t urn stifle innovation. Table 13.4 provides a delineation
of the differences bet\>veen a managerial rnindset
versus an entrepreneurial mindset from the perspective
of decision-making assumptions, values, beliefs, and
approaches to problems.
In some cases, success "vill affect an entrepreneur's "villingness
to change and iru1ovate. This is particularly true
Figure 13.6 The Entrepreneurial Mindset
<I)
·~- :e = (e/n) .c 0
nJ a...
c..
nJ
(.)
"'C
-~ <l) -0
~~
lg
Cl'.)
Future Goals
Change Status Quo
Entrepreneur Satisfied manager
Frustrated manager Classic bureaucrat
when the enterprise has developed a sense of complacency
and the entrepreneur likes this environment: the person
does not want to change. In fact, some entrepreneurs \>vill
create a bureaucratic environment in which orders are
issued from the top do\>vn and change initiated at the lo\>ver
levels is not tolerated.40 As a result, no one in the venture is
willing (or encouraged) to become innovative or entrepreneurial
because the O\>vner/founder stifles such activity.
One study found that the entrepreneur directly affects
the firm's gro\>vth orientation as measured by profitability
goals, product/market goals, human resource goals,
and flexibility goals.41 If the entrepreneur hopes to rnaintain
the creative climate that helped launch the venture in
the first place, specific steps or measures rnust be taken.
13-4b Key Elements for an
Entrepreneurial Fi rm
It is important for entrepreneurs to establish a business
that remains flexible beyond start-up. An entrepreneurial
firm increases opportunity for its employees, initiates
change, and instills a desire to be innovative. Entrepreneurs
can build this type of firm in several \>Vays.42 The
follo\>ving are not inflexible rules, but they do enhance a
vent ure's chance of remaining adaptive and innovative
both through and beyond the gro\>vth stage.
Share the Entrepreneur's Vision
The entrepreneur's vision must be permeated throughout
the organization for employees to understand the
company's direction and share in the responsibility for
its gro\>vth. The entrepreneur can comrnunicate the vision
directly to the ernployees through meetings, conversations,
or seminars. It also can be shared through symbolic
events or activities, such as social gatherings, recognition
events, and displays. Whatever the format, having shared
vision allo\>vs the venture's persoru1el to catch the dream
and become an integral part of creating the fut ure.43
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1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Unique Managerial Concerns of Growing Ventures 379
Table 13.4 The Managerial versus the Entrepreneurial Mindset
Managerial Mindset Entrepreneurial Mindset
Dec is ion-making The past is the best predictor of the future. A new idea or an ins
ight from a unique experience is
assumptions Most bus iness decisions can be quantified. likely to provide the best
estimate of emerg ing trends.
Values The best decisions are those based on New insights and real-world
experiences are more
quantitative analyses. highly valued than results based on historical data.
Rigorous analyses are highly valued for
making critical decisions.
Beliefs Law of large numbers: Chaos and Law of small numbers: A single incident or
several
uncertainty can be resolved by isolated incidents quickly become pivotal for making
systematically analyzing the right data. decisions regard ing future trends.
Approach to problems Problems represent an unfortunate turn of Problems
represent an opportunity to detect emerg ing
events that threaten financial pro jections. changes and possibly new business
opportun ities.
Problems must be resolved with
substantiated analyses.
Source: lvlike Wright, Robert E. Hoskisson, and Lowell W. Busenitz, "Firm Rebi rth:
Buyouts as Facilitators of Strategic Growth and Entrepreneurship,"
Academy of Management Executive 15, no. 1 (2001): 114.
Increase the Perception of Opportunity
This can be accomplished ,vith careful job design. The
work should have defined objectives for ,vhich people will
be responsible. Each level of the hierarchy should be kept
inforrned of its role in producing the final output of the
product or service. This often is kno,vn as "staying close to
the customer." Another ,vay to increase the perception of
opportunity is through a careful coordination and integration
of the functional areas. This allo,vs employees in different
functional areas to ,vork together as a cohesive ,vhole.
Institutionalize Change as the Venture's Goal
This entails a preference for innovation and change rather
than preservation of the status quo. If opportunity is to
be perceived, the environment of the enterprise must not
only encourage it but also establish it as a goal. Within
this context, a desire for opportunity can exist if resources
are made available and departmental barriers are reduced.
Instill the Desire to Be Innovative
The desire of personnel to pursue opportunity must be
carefully nurtured. Words alone ,vill not create the innovative
climate. 44 Specific steps, such as the follo,ving,
should be taken.
A Reward System Explicit forrns of recognition should
be given to individuals ,vho pursue innovative opportunities.
For example, bonuses, a,vards, salary advances,
and promotions should be tied directly to the innovative
attempts of personnel.
An Environment That Allows for Failure The fear of
failure must be rninimized by the general recognition
that often many attempts are needed before a success
is achieved. This does not imply that failure is sought
or desired. Ho,vever, learning frorn failure, as opposed
to expecting punishment for it, is prornoted. When
this type of environment exists, people becorne ,villing
to accept the challenge of change and innovation.
Flexible Operations Flexibility creates the possibility
of change taking place and having a positive effect. If
a venture remains too rigidly tied to plans or strategies,
it ,vill not be responsive to ne,v technologies, customer
changes, or environmental shifts. Innovation ,vill not
take place beca use it ,vill not "fit in."
The Development of Venture Teams In order for the
environment to foster innovation, venture tearns and
team performance goals need to be established. These
rnust not be just work groups but visionary, committed
teams that have the authority to create ne,v directions,
set ne,v standards, and challenge the status
quo.4s
13-5 Unique Managerial
Concerns of Growing
Ventures
L0 13. 11 Identify the un ique ma nagerial concerns with growth
businesses
Emerging businesses differ in many ,vays from larger,
more structured businesses. Several unique managerial
concerns involve gro,ving businesses in particular.
These concerns may seem insignificant to the operation
of a large business, but often they become important to
emerging entrepreneurs.
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F.di1otial tcvicw h3sdremcd IM1 anysupptesscd cootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpc ticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh1 1o tcmovc
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380 Chapter 13 Strategic Entrepreneurial Growth: Scaling
13-Sa The Distinctiveness of Size
The distinction of smallness gives emerging businesses
certain disadvantages. The limited market, for example,
restric ts a small firm. Because a small size limits a
company's ability to geographically extend throughout
a region or sta te, the firm must recognize and service
its available market. Another disadvantage is the higher
ordering costs that burden many small firms. Because
they do not order large lots of inventory from suppliers,
small businesses usually do not receive quantity
discounts and must pay higher prices. Finally, a smaller
staff forces small firms to accept less specialization of
labor. Thus, employees and managers are expected to
perform numerous functions.
However, the distinction of small size is not all bad,
and the advantages to smallness should be recognized
and capitalized on. One advantage is greater flexibility.
In smaller ventures, decisions can be made and implemented
immediately, \>Vithout the input of committees
and the delay of bureaucratic layers. Production, marketing,
and service are all areas that can be adjusted
quickly for a competitive advantage over larger businesses
in the same field. A second advantage is constant
communication \>Vith the comrnunity.46 An entrepreneur
lives in the community and is personally involved in its
affairs. The special insight of this involvement allo\>vs
the entrepreneur to adjust products or services to suit
the specific needs or desires of the particular comrnunity.
This leads to the third and probably rnost important
advantage of closeness to the customer: the ability
to offer personal service. The personal service that an
entrepreneur can provide is one of the key elements of
success today. Major corporations \>York feverishly to
duplicate or imitate the idea of personal service. Because
the opportunity to provide personal service is an advantage
that emerging firms possess by nature of their size,
it must be capitalized on.
13-Sb The One-Person-Band Syndrome
Most entrepreneurs start their businesses alone or \>Vith
a fe"v family members or close associates. In effect, the
business is the entrepreneur, and the entrepreneur is the
business.47 Ho\>vever, a danger arises if the entrepreneur
refuses to relinquish any authority as the emerging
business gro\>vs. The one-person-band syndrome exists
\>vhen an entrepreneur fails to delegate responsibility
to employees, thereby retaining all decision-making
authorit y. One study revealed that most planning in
ent repreneurial firrns is done by the o\>vner alone, as
are other operational activities.48 This syndrome often
is derived from the same pattern of independence that
helped start the business in the first place. Ho\>vever,
the O\>vner \>vho continues to perform as a one-person
band can restrict the gro\>vth of the firm because the
owner's ability is limited. Ho\>v can proper planning for
the business be accomplished if the o\>vner is immersed
in daily operations? Thus, the entrepreneur must recognize
the importance of delegation. If the o\>vner can
break a\>vay frorn the natural tendency to do everything,
then the business \>vill benefit from a \>vider array
of that person's abilities.
13-Sc Time Management
Effective time management is not exclusively a challenge
to entrepreneurs. Ho\>vever, limited size and staff force
the entrepreneur to face this challenge most diligently.
It has been said a person never \>vill find time to do anything
but must, in fact, make tirne. In other \>Vords, entrepreneurs
should learn to use tirne as a resource and not
allow time to use them.49 To perforrn daily managerial
activities in the most time-efficient rnanner, owner/managers
should follow four critical steps:
l. Assessment. The business o\>vner should analyze their
daily activities and rank them in order of im portance.
(A \>vritten list on a notepad is recommended.)
2. Prioritization. The O\>vner should divide and categorize
the day's act ivities based on their ability to
devote the necessary time to the task that day. In
other \>Vords, the O\>vner should avoid a procrastination
of duties.
3. Creation of procedures. Repetitive daily activities
can be handled easily by an employee if instructions
are provided. This organizing of tasks can be
a major tirne-saver for the O\>vner that \>Vould allo\>V
the fourth and last step to be put into effect.
4. Delegation. Delegation can be accomplished after
the owner creates procedures for various jobs. As
1nentioned in the description of the one-person-band
syndrome, delegation is a critical skill that entrepreneurs
need to develop.
All of these steps in effective time management
require self-discipline on the part of entrepreneurs.
13-Sd Community Pressu res
Proxirnity to the community \>Vas mentioned ea rlier as
a size advantage for small emerging vent ures. Ho\>vever,
unlike major corporations with public relations departments,
the entrepreneur is involved \>Vith community
activities directly. The comrnunity presents unique pressure
to emerging entrepreneurs in three ways: participation,
leadership, and donations.
Each of these expect a tions from the community
requires entrepreneurs to plan and budget carefully.
Many community rnembers believe that the entrepreneur
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has "excess" time because they own the business. They
also believe that the O\.vner has leadership abilities
needed for various community activities. Although the
latter 1na y be true, the O\.vner usually does not have
excess time. Therefore, entrepreneurs need to plan
carefully the activities they believe would be most beneficial.
One consideration is the amount of advertising
or recognition the business will receive for the O\.vner's
participation. When the o\.vner can justify their co1rununity
involvement, both the business and the com1nunity
benefit.
Financial donations also require careful analysis and
budgeting. Again, because consumers have access to the
entrepreneur (as opposed to the chief executive officer
of a major corporation), they may be inundated with
requests for donations to charitable and comm unity
organizations. Although each organization may have a
\.Vorthy cause, the entrepreneur cannot support every
request and remain financially healthy. Thus, the o\.vner
needs to decide \.vhich of the organizations to assist and
to budget a predetermined amount of money for annual
donations. Any other solicitations for money must be
placed in writing and submitted to the entrepreneur for
consideration. This is the only \.vay entrepreneurs can
avoid giving constant cash donations \.Vithout careful
budget consideration.
The critical fact to re1nember is that time and money
are extre1nely valuable resources for an entrepreneur.
They should be budgeted in a meaningful way. Therefore,
entrepreneurs need to analyze their community
involvement and continuously reassess the costs versus
the benefits.50
13-5e Continuous Learning
A final unique concern for the entrepreneur is continuous
learning. All of the previously 1nentioned concerns
leave very little time for O\.vners to 1naintain or i1nprove
their managerial and entrepreneurial knowledge. Ho\.vever,
the environment of the t\.venty-first century has produced
dramatic changes that can affect the procedures,
processes, programs, philosophy, or even the product
of a gro\.ving business. The ancient Greek philosopher
Epictetus once said, "It is impossible for a man to learn
\.vhat he thinks he already kno\.vs." This quote illustrates
the need for entrepreneurs to dedicate time to learning
ne\.v techniques and principles for their businesses.
Trade associations, seminars, conferences, publications,
and college courses all provide opportunities for entrepreneurs
to continue their entrepreneurial education.
Staying abreast of industry changes is another \.vay that
entrepreneurs can maintain a co1npetitive edge.
Achieving Entrepreneurial Leadership for the Future 381
13-6 Achieving
Entrepreneurial Leadership
for the Future
Entrepreneurial leadership may be the most critical
element in the management of high-gro\.vth ventures.
Terms such as visionary and strategic have been used
when describing different types of leaders. Table 13.5
provides a comprehensive description of strategic leaders,
visionary leaders, and managerial leaders. Research
has demonstrated that the concept behind strategic leadership
is the most effective in gro\.ving organizations. 51
Researchers R. Duane Ireland and Michael A. Hitt identified
some of the most important concepts in effective
strategic leadership.52 This type of leadership can be
classified as entrepreneurial leadership, \.vhich arises
\.vhen an entrepreneur attempts to manage a fast-paced,
growth-oriented company.53
Entrepreneurial leadership can be defined as the
entrepreneur's ability to anticipate, envision, maintain
flexibility, think strategically, and \.vork \.Vith others to
initiate changes that will create a viable future for the
organization. If these leadership processes are difficult
for co1npetitors to understand- and, hence, to i1nitatethe
firm \.vill create a competitive advantage.
Today's fast-paced economy has created a ne\.v
competitive landscape- one in \.vhich events change
constantly and unpredictably. These changes are revolutionary
in nature- that is, they happen S\.viftly and
are relentless in their frequency, affecting virtually all
parts of an organization simultaneously. The ambiguity
that results fro1n revolutionary changes challenges firms
and their strategic abilities to increase the speed of the
decision-making processes through \.vhich strategies are
formulated and imple1nented. 54
Gro\.vth-oriented firms need to adopt a ne\.v competitive
mindset- one in \.vhich flexibility, speed, innovation,
and strategic leadership are valued highly.
With this mindset, firms can identify and completely
exploit opportunities that emerge in the ne\.v competitive
landscape. These opportunities surface primarily
because of the disequilibritun that is created by continuous
changes (especially technological changes). More
specifically, although uncertainty and disequilibrium
often result in seemingly hostile and intensely rivalrous
conditions, these conditions may simultaneously
yield significant product-driven gro\.vth opportunities.
Through effective entrepreneurial leadership, gro\.vth
firms can adapt their behaviors and exploit such
opportunities.55
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382 Chapter 13 Strateg ic Entrepreneurial Growth: Scal ing
Table 13.5 Strategic, Visionary, and Manageria l Leadersh ip
'
Strategic Leaders
• synergistic combination of managerial and visionary leadership
• emphasis on ethical behavior and value-based decisions
• oversee operating (day-lo-day) and strateg ic (long-term) responsibilities
• formulate and implement strategies for immediate impact and preservation of long-
term goals to enhance
organizational survival, growth, and long-term viability
• have strong, positive expectations of the performance they expect from their
superiors, peers, subord inates, and
themselves
• use strategic controls and financial controls, with emphasis on strateg ic controls
• use, and interchange, tacit and expl icit knowledge on individual and organ
izational levels
• use linear and nonlinear th inking patterns
• bel ieve in strateg ic choice, that is, their choices make a difference in their
organizations and environment
Visionary Leaders Managerial Leaders
• are proactive, shape ideas, change the way peo- • are reactive; adopt passive
attitudes toward goals;
pie th ink about what is desirable, possible, and goals arise out of necessities, not
des ires and
necessary dreams; goals based on past
• work to develop choices, fresh approaches to • view work as an enabling process
involving some
long-standing problems; work from high-risk positions combination of ideas and
people interacting to
establish strateg ies
• are concerned with ideas; relate to people in intu i- • relate to people according to
their roles in the
live and empathetic ways decision-making process
• feel separate from their environment; work in, but do • see themselves as
conservators and regulators of
not belong to, organizations; sense of who they are existing order; sense of who
they are depends on
does not depend on work their role in organ ization
• influence attitudes and opinions of others with in the • influence actions and
decisions of those with whom
organ i za ti on they work
• concerned with insuring future of organ ization, • involved in situations and
contexts characteristic of
especially through development and management of day-lo-day activities
people
• more embedded in complexity, ambiguity, and infer- • concerned with, and more
comfortable in, funct ional
motion overload; engage in multifunctional, integra- areas of responsibilities
live tasks
• know less than their funct ional area experts • expert in their functional area
• more l ikely to make decisions based on values • less likely to make value-based
decisions
• more w illing to invest in innovation, human capital, • engage in, and support, short-
term, least-cost behavand
creating and maintaining an effective culture to ior to enhance financial performance
figures
ensure long-term viability
• focus on tacit knowledge and develop strategies as • focus on managing the
exchange and combination
communal forms of tacit knowledge that promote of explicit knowledge and ensuring
compliance to
enactment of a vision standard operating procedures
• utilize nonlinear thinking • utilize linear th inking
• believe in strategic choice, that is, their choices make • believe in determ inism,
that is, the choices they
a difference in their organizations and environment make are determ ined by their
internal and external
environments
Source: W. Gle,m Rowe, "Creating Wealth in Organizations: The Role of Srraregic
Leadership," Academy of Management Executive 15,
no. 1 (2001): 82.
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Achieving Entrepreneurial Leadersh ip for the Future 383
Diversity Entrepreneurship
II
Real Business Diversity: Beyond the Numbers
The rallying cries for more d iversity in companies have made
one thing clear: good intentions do not necessarily create good
outcomes. We have all heard the narratives that companies
with a d iverse workforce outperform the rest. When women are
at the decision-making table, they say, the decision-making process
is better and the organization stronger. The business case
for hiring more women and people of color has been extensively
d iscussed . However, even with such strong evidence
in support of workplace diversity, organizations have largely
failed to reap its benefits The problem is that these claims misconstrue
or simply ignore the key findings that research on d iversity
has made clear: simply "adding diversity" in your workforce
by hiring more underrepresented workers will not automatically
make your team more efficient or financially better off
Let us consider the stud ies claiming that putting more
women on corporate boards leads to better financial performance.
What those studies show are correlations, not causality.
In real ity, there may be other factors affecting the company's
performance, such as an increase in firm size that led to more
women hires and to subsequent improvements in the firm's
performance. We cannot say for sure whether the increase
in the overall firm size-and therefore its operations, borgaining
power, or economies of scale- was the defining factor or
whether ii was the addition of female board members. Overall,
board decisions are typically too far removed from a firm's
financial performance to warrant a d irect and absolute effect.
Another flaw in the business case for diversity is the claim
that d iverse teams have richer d iscussions that lead to better
decision making. As many of us have probably experienced,
having diverse people in a team does not guarantee better
teamwork. In fact, while ii can present opportunities, ii can
also present challenges. Research has shown that increasing
d iversity can often lead to increased tensions and conflict,
which actually decreases a team's performance.
Additionally, diversity advocates who justify its benefits
in the financial realm (!he core idea behind the business
case) may actually be doing more harm than good. Research
Summary
Although many ways of strategically planning a venture
exist, all have one common element: each is an extension
of the entrepreneur's vision- each takes the O\>vner's
concept of the business and puts it into action. Entrepreneurs
may not use strategic planning for rnany reasons,
among them scarcity of time, lack of kno\>vledge about
ho"v to plan, lack of expertise in the planning process,
and lack of trust in others.
A number of benefits to strategic planning exist. In
particular, studies have sho\>vn that small firms that use
suggests that company d iversify statements that emphasize
the financial gains can d iscourage underrepresented individuals
from applying as they start questioning their place in the
organization. At the same time, if a diversity initiative does not
deliver on financial promises, people may start to question its
benefits and are likely to withdraw their support for it.
If we go bock to the decades of research on the impact of
d iversity on organizations and take a deeper look at it, we can
actually find more complex conclusions
• "Introducing diversity to formerly homogeneous teams lowers
cohesiveness and increases confl ict."
• "Organizational context and culture better explain organizational
success than race or gender diversity do."
• "Only mature teams, not young or immature teams, benefit
from d iversity."
These findings show the complex nature of d iversity
and that reaping benefits from d iversity is not as simple as
increasing the number of employees from underrepresented
bockgrounds. This is not to suggest that there is no business
case for diversity; rather, the purpose of d iversity and the way
we approach it may need to evolve. Organizations need to
learn how to harness diversity and be w illing to reshape their
power structure in order to do so. They need to start listening
to empirically bosed conclusions rather than w ishful statements.
And they need to move beyond financial performance as their
sole reason for existence by embracing a w ider definition of
success that includes not only financial indicators but also less
tangible factors, such as learning, equity, and human dignity.
The true business case for d iversity appears only after hard
work-the question is, which companies are w illing to go the
extra mile2
Source: Adopted from Lily Zheng, "The Business Cose for Diversity is
a Sinking Ship; Medium, July 2019, and Rabin J Ely and David A
Thomas, "Getting Serious about Diversity: Enough Already wi th the
Business Cose; Harvard Business Review, December 2020.
this process tend to have better financial performance
than those that do not. Other benefits include rnore efficient
resource allocation, irnproved competitive position,
higher employee morale, and more rapid decision making.
The challenges of managing entrepreneurial gro\>vth
\>Vere then examined. A typical life cycle of a venture has
five stages: developrnent, start-up, gro\>vth, stabilization,
and innovation or decline. This chapter focused on \>vays
to maintain an entrepreneurial frame of mind "vhile making
the necessary adjustments to deal \>Vith the gro\>vth
phase. The balance of entrepreneurial and managerial
approaches \>Vas revie\>ved in this section. This balance \>Vas
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384 Chapter 13 Strategic Entrepreneurial Growth: Scaling
demonstrated by considering five major factors: strategic
orientation, commitment to seize opportunities, corrunitment
of resources, control of resources, and management
struct ure. This differentiation of 1najor factors is important
for analyzing aspects of the venture that need either
more administrative or more entrepreneurial emphasis.
The chapter then examined the importance of a vent
ure's growth stage. Underscoring the metamorphosis a
venture goes through, four factors ,vere discussed: control,
responsibility, tolerance of failure, and change. In
addition, the challenge of managing paradox and contradiction
,vas presented.
The ne,vest strategies of gro,vth hacking and blitzscaling
,vere described as means of achieving faster gro,vth
,vith a new vent ure. The opportunities and challenges
associated with each were outlined.
The elements involved in building an entrepreneurial
firm ,vere then discussed. When building the desired
entrepreneurial firm, entrepreneurs need to be concerned
,vith three important responsibilities: (1) increasing the
perception of opportunity, (2) institutionalizing change
as the vent ure's goals, and (3) instilling the desire to be
innovative. In addition, the unique managerial concerns
of growing vent ures ,vere outlined for entrepreneurs.
Finally, the concept of entrepreneurial leadership was
introduced as a ,vay for entrepreneurs to anticipate,
envision, maintain flexibilit y, think strategically, and
,vork with others to initiate changes that ,vill create a
viable future for the gro,vth-oriented vent ure.
Key Terms
blitzscaling
entrepreneurial firm
entrepreneurial leadership
entrepreneurial strategy
matrix
gro,vth hacking
gro,vth stage
gro,vth wall
innovation
lack of expertise/skills
lack of kno,vledge
lack of trust and openness
life cycle stages
moral failure
ne,v-venture develop1nen t
one-person-band
syndrome
perception of high cost
personal failure
stabilization stage
start-up activities
strategic planning
strategic positioning
SWOT analysis
ti1ne scarcity
uncontrollable failure
Review and Discussion
Questions
1. In what way does an entrepreneur's vision affect the
company's strategic plan?
2. How is the strategic plan of an engineer/scientist
entrepreneur likely to be different from that of an
entrepreneur whose primary strength is in the manufacturing
area? Be complete in your answer.
3. Give three reasons why many entrepreneurs do not
like to formulate strategic plans.
4. Does strategic planning really pay off for entrepreneurial
ventures?
5. Describe the entrepreneurial strategy matrix and
explain why it is effective for entrepreneurs.
6. Briefly identify and describe the stages of development
for a new venture.
7. Firms that fail to innovate will die. What does this
statement mean in the context of new ventures?
8. How can entrepreneurs build an entrepreneurial firm?
Be complete in your answer.
9. Successful ventures balance entrepreneurial characteristics
with managerial style. What does this statement
mean?
10. Identify and describe the four key factors that need to
be considered during the growth stage.
11 . What is meant by managing paradox and
contradiction?
12. Identify the key factors in growth scaling
13. Define blitzscaling and identify its challenges.
14. Identify five unique managerial concerns of growing
businesses.
15. Define the one-person-band syndrome.
16. Explain the concept of entrepreneurial leadership.
Notes
1. Amar Bhide, "How Entrepreneurs Craft Strategies That
Work," Harvard Business Review 72, no. 2 (March/ April
1994}: 150- 61; Marc Gruber, "Uncovering the Value
of Planning in New Venture Creation: A Process and
Contingency Perspective," Journal of Business Venturing
22, no. 6 (2007}: 782- 807.
2. Scott Shane and Frederic Delmar, "Planning for the
Market: Business Planning before Marketing and the
Continuation of Organizing Efforts," Journal of Business
Venturing 19, no. 6 (November 2004}: 767- 85.
3. Michae l A. Hitt, R. Duane Ireland, and Robert
E. Hoskisson, Strategic Management: Competitiveness and
Globalization, 11th ed. (Mason, OH : Cengage Learning,
2015).
4. See James R. Lang, Roger J. Calantone, and Donald
Gudmundson, "Small Firm Informa tion Seeking as a
Response to Environmental Threats and Opportunities,"
Journal of Small Business Management 35, no. 1 (1997}:
11- 23; Reginald M. Beal, "Competing Effectively:
Environmental Scanning, Competitive Strategy, and
Organizational Performance in Small Manufacturing
Firms," Journal of Small Business Management 38, no. 1
(2000}: 27-47; and Andreea N. Kiss and Pamela
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addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
S. Barr, "New Venture Strategic Adaptation: The Interplay
of Belief Structures and Industry Context," Strategic
Management Journal 36, no. 8 (2015}: 1245- 63.
5. Henry Mintz berg, "The Fall and Rise of Strategic
Planning," Harvard Business Review 72, no. 1 Uanuary/
February 1994}: 107- 14.
6. Charles H. Matthews and Susanne G. Scott, "Uncertainty
and Planning in Small and Entrepreneurial Firms:
An Empirical Assessment," Journal of Small Business
Management 33, no. 4 (1995}: 34- 52; Sigal Haber
and Arie Reichel, "The Cumulative Nature of the
Entrepreneurial Process: The Contribution of Human
Capital, Planning, and Environmental Resources to Small
Venture Performance," Journal of Business Venturing 22,
no. 1 (2007): 119-45.
7. John W. Mullins and David Forlani, "Missing the Boat
or Sinking the Boat: A Study of New Venture Decision
Making," Journal of Business Venturing 20, no. 1
(January 2005}: 47- 69; Michael D. Ensley, Craig L.
Pearce, and Keith M. Hmieleski, "The Moderating Effect
of Environmental Dynamism on the Relationship between
Entrepreneur Leadership Behavior and New Venture
Performance," Journal of Business Venturing 21, no. 2
(2006}: 243- 63.
8. "The Business Failure Record," Dun & Bradstreet,
1995; see also "Global Business Failure Report," Dun &
Bradstreet Special Report, June 2012.
9. Richard B. Robinson, "The Importance of Outsiders in
Small Firm Strategic Planning," Academy of Management
Journal 25, no. 2 (March 1982}: 80- 93.
10. A. Bakr Ibrahim, "Strategy Types and Small Firm's
Performance: An Empirical Investigation," Journal of
Small Business Strategy 4, no. 1 (Spring 1991}: 13- 22.
11. Elaine Mosakowski, "A Resource-Based Perspective on
the Dynamic Strategy- Performance Relationship: An
Empirical Examination of the Focus and Differentiation
Strategies in Entrepreneuria l Firms," Journal of
Management 19, no. 4 (1993}: 819- 39.
12. Leslie W. Rue and Nabil A. Ibrahim, "The Relationship
between Planning Sophistication and Performance in
Small Business," Journal of Small Business Management
36, no. 4 (1998}: 24- 32.
13. Charles R. Schwenk and Charles B. Shrader, "Effects of
Formal Strategic Planning on Financial Performance in
Small Firms: A Meta Analysis," Entrepreneurship Theory
and Practice 17, no. 3 (Spring 1993): 53- 64; see also
Philip D. Olson and Donald W. Bokor, "Strategy ProcessContent
Interaction: Effects on Growth Performance
in Small , Startup Firms," Journal of Small Business
Management 33, no. 1 (1995): 34- 44, and Patrice
Perry-Rivers, "Stratification, Economic Adversity, and
Entrepreneurial Launch: The Effect of Resource Position
on Entrepreneurial Strategy," Entrepreneurship Theory
and Practice 40, no. 3 (2016}: 685- 712.
14. Michael E. Porter, "Knowing Your Place- How to Assess
the Attractiveness of Your Industry and Your Company's
Position in It," Inc., September 1991, 90- 94.
15. Porter, "Knowing Your Place," 93.
Notes 385
16. R. Duane Ireland, Michael A. Hitt, S. Michael Camp, and
Donald L. Sexton, "Integrating Entrepreneurship and
Strategic Management Actions to Create Firm Wealth,"
Academy of Management Executive 15, no. 1 (February
2001}: 49- 63.
17. Michael E. Porter, "What Is Strategy?," Harvard Business
Review 74, no. 5 (November/December 1996): 61- 78.
18. Matthew C. Sonfield and Robert N. Lussier, "The
Entrepreneurial Strategy Matrix: A Model for New and
Ongoing Ventures," Business Horizons 40, no. 3 (May/
June 1997}: 73- 77.
19. Hyung Rok Yim, "Quality Shock vs. Market Shock:
Lessons from Recently Established Rapidly Growing
U.S. Startups," Journal of Business Venturing 23, no. 2
(2008}: 141- 64; Alexander McKelvie and Johan Wiklund,
"Advancing Firm Growth Research: A Focus on Growth
Mode Instead of Growth Rate," Entrepreneurship Theory
and Practice 34, no. 2 (2010): 261- 88; Lorraine M.
Uhlaner, Andre van Ste!, Valerie Duplat, and Haibo Zhou,
"Disentangling the Effects of Organizational Capabilities,
Innovation and Firm Size on SME Sales Growth," Small
Business Economics 41, no. 3 (2013}: 581- 607.
20. Alfred Chandler, Strategy and Structure (Cambridge,
MA: MIT Press, 1962); see also Enno Masure! and
Kees van Montfort, "Life Cycle Characteristics of Small
Professional Service Firms," Journal of Small Business
Management 44, no. 3 (2006): 461- 73.
21. Jeffrey G. Covin, Dennis P. Slevin, and Michael B.
Heeley, "Pioneers and Followers: Competitive Tactics,
Environment, and Firm Growth," Journal of Business
Venturing 15, no. 2 (2000}: 175- 210; Brandon A. Mueller,
Varkey K. Titus Jr., Jeffrey G. Covin, and Dennis P. Slevin,
"Pioneering Orientation and Firm Growth : Knowing
When and to What Degree Pioneering Makes Sense,"
Journal of Management 38, no. 5 (2012): 1517-49.
22. David E. Terpstra and Philip D. Olson, "Entrepreneurial
Start-Up and Growth: A Classification of Problems,"
Entrepreneurship Theory and Practice 17, no. 3 (1993}:
5- 20; Bret Golan, "Achieving Growth and Responsiveness:
Process Management and Market Orientation in Small
Firms," Journal of Small Business Management 44, no. 3
(2006}: 369- 85.
23. See Michae l H. Morris, Nola N. Miyasaki, Craig
R. Watters, and Susan M. Coombes, "The Dilemma of
Growth: Understanding Venture Size Choices of Women
Entrepreneurs," Journal of Small Business Management
44, no. 2 (2006): 221-44, and Donald F. Kuratko and
Michael H. Morris, Entrepreneurship and Leadership
(Cheltenham: Edward Elgar, 2013).
24. Charles W. Hofer and Ram Charan, "The Transition to
Professional Management: Mission Impossible?," American
Journal of Small Business 9, no. 1 (Summer 1984): 1- 11;
Morten T. Hansen, Nitin Nohria, and Thomas Tierney,
"What's Your Strategy for Managing Knowledge?,"
Harvard Business Review 77, no. 2 (1999}: 106- 16.
25. Shaker A. Zahra, "The Changing Rules of Global
Competitiveness in the 21st Century," Academy of
Management Executive 13, no. 1 (1999}: 36-42.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d~wooic tight.. some 1hitd p,3t1y
coo1cn1 maybe supptesscd f tom 1hc cBool: and/ot cCh..<lpl{!t(S).
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1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
386 Chapter 13 Strategic Entrepreneurial Growth: Scaling
26. Howard H. Stevenson and Jose Carlos Jarillo-Mossi,
"Preserving Entrepreneurship as Companies Grow,"
Journal of Business Strategy 7, no. 1 {Summer 1986):
1 O; Jonathan Rowe, "Turning Darkness into Light:
Strategic Thinking for Entrepreneurial Managers,"
Engineering Management 16, no. 4 (2006): 42-45; Steven
W. Bradley, Johan Wiklund, and Dean A. Shepherd,
"Swinging a Double-Edged Sword: The Effect of Slack
on Entrepreneurial Management and Growth," Journal of
Business Venturing 26, no. 6 (2011): 537- 54.
27. Jill Kickul and Lisa K. Gundry, "Prospecting for Strategic
Advantage: The Proactive Entrepreneurial Personality
and Small Firm Innovation," Journal of Small Business
Management 40, no. 2 (2002): 85- 97.
28. Lanny Herron and Richard B. Robinson Jr., "A Structural
Model of the Effects of Entrepreneurial Characteristics
on Venture Performance," Journal of Business Venturing
8, no. 3 (May 1993): 281 - 94; S. A. Alvarez and J.B.
Barney, "How Do Entrepreneurs Organize Firms under
Conditions of Uncertainty?," Journal of Management
31, no. 5 (2005): 776- 93; Daniel V. Holland and Dean
A. Shepherd, "Deciding to Persist: Adversity, Values, and
Entrepreneurs' Decision Policies," Entrepreneurship
Theory and Practice 37, no. 2 (2013): 331- 58.
29. Donald F. Kuratko, Jeffrey S. Hornsby, and Laura
M. Corso, "Building an Adaptive Firm," Small Business
Forum 14 , no. 1 (Spring 1996): 41 - 48; Jonathan
T. Eckhardt and Scott A. Shane, "Industry Changes in
Technology and Complementary Assets and the Creation
of High-Growth Firms," Journal of Business Venturing 26,
no. 4 (2011): 412- 30.
30. Steven H. Hanks and L. R. McCarrey, "Beyond Survival:
Reshaping Entrepreneurial Vision in Successful Growing
Ventures," Journal of Small Business Strategy 4, no. 1
(Spring 1993): 1- 12;Joern H. Block, Karsten Kohn, Danny
Miller, and Katrin Ullrich, "Necessity Entrepreneurship
and Competitive Strategy," Small Business Economics 44,
no. 1 (2015): 37- 54.
31. See Massimo G. Colombo and Luca Grilli, "On Growth
Drivers of High-Tech Start-Ups: Exploring the Role of
Founders' Human Capital and Venture Capital," Journal
of Business Venturing 25, no. 6 (2010): 610- 26, and Alex
Coad, Sven-Olov Daunfeldt, Daniel Halvarsson, "Bursting
into Life: Firm Growth and Growth Persistence by Age,"
Small Business Economics 50, no. 1 (2018): 55- 75.
32. Jon R. Katzenbach and Douglas K. Smith, "The Discipline
of Teams," Harvard Business Review 70, no. 2 (March/
April 1993): 111- 20; Alexander L. M. Dingee, Brian
Haslett, and Leonard E. Smollen, "Characteristics of a
Successful Entrepreneurial Management Team," in Annual
Editions 00/01 (Guilford, CT: Dushkin/McGraw-Hill,
2000/2001), 71- 75; G. Page West III, "Collective
Cognitions: When Entrepreneurial Teams, Not
Individuals, Make Decisions," Entrepreneurship Theory
and Practice 31, no. 1 (2007): 77- 102.
33. Sean Ellis and Morgan Brown, Hacking Growth: How
Today's Fastest Growing Companies Drive Breakout
Success (New York: Crown Books, 2017).
34. Rene Bohnsack and Meike Malena Liesner, "What the
Hack? A Growth Hacking Taxonomy and Practical
Applications for Firms," Business Horizons 62, no. 6
(2019): 799- 818.
35. V. Theoharakis, S. Voliotis, and J.M. Pollack, "Going
Down the Slippery Slope of Legitimacy Lies in Early-Stage
Ventures: The Role of Moral Disengagement," Journal
of Business Ethics 172 (2021 }: 673- 90; Matthew
S. Wood, David J. Scheaf, and Sean M. Dwyer, "Fake
It till You Make It: Hazards of a Cultural Norm in
Entrepreneurship," Business Horizons 65, no. 5 (2022):
681- 96.
36. Donald F. Kuratko, Harrison H. Holt, and Emily Neubert,
"Blitzscaling: The Good, the Bad, and the Ugly," Business
Horizons 63, no. 1 (2020): 109- 19.
37. Hofer and Charan, "The Transition to Professional
Management," 3; see also William Lowell, "An
Entrepreneur's Journey to the Next Level," Small Business
Forum 14, no. 1 (Spring 1996): 68- 74.
38. Hofer and Charan, "The Transition to Professional
Management," 4.
39. John B. Miner, "Entrepreneurs, High Growth Entrepreneurs,
and Managers: Contrasting and Overlapping Motivational
Patterns," Journal of Business Venturing 5, no. 4 (July
1990): 221- 34; Michael J. Roberts, "Managing Growth,"
in New Business Ventures and the Entrepreneur (New
York: Irwin/McGraw-Hill, 1999), 460- 64.
40. Howard H. Stevenson and David E. Gumpert, "The
Heart of Entrepreneurship," Harvard Business Review
63, no. 2 (March/April 1985): 86- 87; Jesper B. Sorensen,
"Bureaucracy and Entrepreneurship : Workplace Effects on
Entrepreneurial Entry," Administrative Science Quarterly
52, no. 3 (2007): 387-412.
41. Jeffrey G. Covin and Dennis P. Slevin, "New Venture
Strategic Posture, Structure, and Performance: An Industry
Life Cycle Ana lysis," Journal of Business Venturing 5,
no. 4 (March 1990}: 123- 33; see also Jeffrey G. Covin,
Kimberly M. Green, and Dennis P. Slevin, "Strategic
Process Effects on the Entrepreneurial Orientation-Sales
Growth Rate Relationships," Entrepreneurship Theory
and Practice 30, no. 1 (2006): 57- 82.
42. Charles J. Fombrun and Stefan Wally, "Structuring Small
Firms for Rapid Growth," Journal of Business Venturing
4, no. 2 (March 1989): 107- 22; Donna J. Kelley and
Mark P. Rice, "Advantage beyond Founding: The Strategic
Use of Technologies," Journal of Business Venturing 17,
no. 1 (2002): 41-58; see also Andrew J. Sherman, Grow
Fast Grow Right (Chicago: Kaplan, 2007).
43. Donald C. Hambrick and Lynn NL Crozier, "Stumblers
and Stars in the Management of Rapid Growth," Journal
of Business Venturing l, no. 1 (January 1985): 31-45.
44. Richard L. Osborne, "Second Phase Entrepreneurship :
Breaking through the Growth Wall," Business Horizons
37, no. 1 (January/February 1994): 80- 86.
45. Osborne, "Second Phase Entrepreneurship," 82- 85.
46. See Jerry R. Cornwell, "The Entrepreneur as a Building
Block for Comm unity," Journal of Devel opmen ta/
Entrepreneurship 3, no. 2 (Fall/Winter 1998): 141-48,
and Ana Marfa Peredo and James J. Chrisman, "Toward
a Theory of Community-Based Enterprise," Academy of
Management Review 31, no. 2 (2006): 309- 28.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d~wooic tight.. some 1hitd
p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
F.di1otial tcvicw h3sdremcd IM1 anysupptesscdcootcm docs OOI mactially sffo..'1
1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc tigh11otcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
47. David E. Gumpert and David P. Boyd, "The Loneliness of
the Small Business Owner," Harvard Business Review 62,
no. 5 (November/December 1984}: 19- 24.
48. Do uglas W. Naffziger and Don a ld F. Kuratko, "An
Investigation into the Prevalence of Planning in Small
Business," Journal of Business and Entrepreneurship 3, no. 2
(Octo ber 1991}: 99- 110; see also Marjorie A. Ly les, Inga
S. Baird, J. Burdeane Orris, and Donald F. Kuratko,
"Formalized Planning in Small Business: Increasing
Strategic Choices," Journal of Small Business Management
31, no. 1 (1993}: 38- 50.
49. Charles R. Hobbs, "Time Power," Small Business Reports,
January 1990, 46- 55; Jack Falvey, "New and Improved
Time Management," Small Business Reports, July 1990,
14- 17; Julie Morgenstern, Time Management from the
Inside Out: The Foolproof System for Taking Control of
Your Schedule- and Your Life, 2nd ed. {New York: Henry
Holt/Owl Books, 2004).
50. Terry L. Besser, "Community Involvement and the
Perception of Success among Small Business Operators
in Small Towns," Journal of Small Business Management
37, no. 4 (October 1999}: 16- 29; Rhonda Walker Mack,
"Event Sponsorship : An Exploratory Study of Small
Business Objectives, Practices, and Perceptions," Journal
of Small Business Management 37, no . 3 Uuly 1999):
25- 30.
51. W. Glenn Rowe, "Creat ing Wealth in Organizations: The
Role of Strategic Leadership," Academy of Management
Executive 15, no. 1 (2001): 81- 94.
52. R. Duane Ir eland and Michael A. Hitt, "Achieving
and Maintaining Strategic Competitiveness in the 21st
Notes 387
Century: The Role of Strategic Leadership," Academy of
Management Executive 13, no. 1 (1999}: 43- 57.
53. Michael A. Hitt, R. Duane Ireland, S. Michael Camp,
and Donald L. Sexton, "Strategic Entrepreneurship:
Entrep re neur ial Str a t egies for Wealth Creation ,"
Strategic i\1anagement Journal 22, n o. 6 (2001 }:
479- 92; see also John L. Thompson , "A Strategic
Perspective of Entrepreneurship," International Journal of
Entrepreneurial Behavior and Research 5, no. 6 (1999}:
279- 96; Catherine M. Daily, Pa t r icia P. McDo ugall,
Jeffrey G. Covin and Dan R. Dalton, "Governance and
Strategic Leadership in Entrepreneur ial Firms," Journal of
Management 28, no. 3 (2002}: 387-412; and Kuratko and
Morris, Entrepreneurship and Leadership.
54. E. H . Kessler and A. K. Chakrabar ti , " Innova tion
Speed : A Conceptual Model of Context , Antecedents,
and Outcomes," Academy of Management Review 21
(1996}: 1143- 91; Kathleen M. Eisenhardt, Nathan
R. Furr, and Christopher B. Bingham," Microfoundations
of Performance: Balancing Efficiency and Flexibility
in Dynamic Environments," Organization Science
21, no. 6 (2005}: 1263- 73; Donald F. Kuratko, "The
Entrepreneurial Imperative of the 21st Century," Business
Horizons 52, no. 5 (2009): 421- 28.
55. Dona ld F. Kuratko, R. Duane Ireland, and Jeffrey
S. Hornsby, " Improving Firm Performance thro ugh
Entrep r en e ur ia l Acti o n s: Acordi a 's Co rp ora te
Entrepreneurship Strategy," Academy of Management
Executive 15, no. 4 (2001}: 60- 71; V. Gupta, Ian
C. MacMillan, and G. Surie, "Entrepreneurial Leadership:
Developing and Measuring a Cross-Cultural Construct,"
Journal of Business Venturing 19, no. 2 (2004}: 241- 60.
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic tight.. some 1hitd p,3
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1hcovcrn ll lc:wningcxpcticncc. Ccngagc Lcamingt(SCtv<':i lhc t igh1 1o tcmovc
addi1ioo:ll coocm m :my lime if sub$cqucm tight. tc~tk1ioos R--quitc ii.
Valuation of Entrepreneurial Ventures
Learning Objectives
14.1. Explain the importance of valuation
14.2. Outline the underlying issues involved in the acquisition process
14.3. Describe the basic elements of due diligence
14.4. Outline the various aspects of analyzing a business
14.5. List the major points to consider when establishing a firm 's value
14.6. Highlight the available methods of valuing a venture
14.7. Discuss the three principal methods currently used in business valuations
14.8. Explain the additional factors that affect a venture's valuation
Entrepreneurial Thought
Not everything that can be counted counts, and not everything that counts can be
counted
-Albert Einstein
Copyrig,ln '2024 Ccngagc U!llming. All Rights Reserved. May OOI be oopicd.
91.'nMCd. ot duplicmcd. in wholcot in pan. Due 10 d ~wooic tight.. some 1hitd
p,3t1ycoo1cn1 maybe supptesscd ftom 1hc cBool: and/ot cCh..<lpl{!t(S).
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1hcovcrnll lc:wningcxpcticncc. Ccngagc Lcami ngt(SCtv<':i lhc t igh11otcmovc
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