September 2001 Chapter 12: Human and Financial Capital1 Chapter 12: Early-Stage Business...
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Chapter 12: Human and Financial Capital 1 September 2001 Chapter 12: Early-Stage Business Development: Human and Financial Capital Questions answered in this chapter: • What are the key considerations in the business planning process? • What are the different sources of human capital that can play a role in a startup business? • What are the typical sources of funding for an early-stage startup business? • What elements are needed for a successful pitch to investors?
September 2001 Chapter 12: Human and Financial Capital1 Chapter 12: Early-Stage Business Development: Human and Financial Capital Questions answered
September 2001 Chapter 12: Human and Financial Capital1 Chapter
12: Early-Stage Business Development: Human and Financial Capital
Questions answered in this chapter: What are the key considerations
in the business planning process? What are the different sources of
human capital that can play a role in a startup business? What are
the typical sources of funding for an early- stage startup
business? What elements are needed for a successful pitch to
investors?
Slide 2
September 2001 Chapter 12: Human and Financial Capital2 What is
a Startup? A startup is a business that is in the process of
developing the underlying infrastructure needed to support future
growth A startup is a business engaging in the the following three
basic processes: Developing and refining the offering and strategy
to go to market Obtaining initial funding to begin operations
Building a capable management team to handle operations
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September 2001 Chapter 12: Human and Financial Capital3
Relationship between Human and Financial Capital Human and
financial capital resources can influence the business planning
process and, in turn, be influenced by the business plan Human
capital resources may include entrepreneurs, management team,
strategic advisors and partners, and logistical advisors and
partners Sources for financial capital include debt financing and
equity financing
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September 2001 Chapter 12: Human and Financial Capital4
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September 2001 Chapter 12: Human and Financial Capital7
Elements of a solid business planning process The major elements of
a business planning process include the following: Defining the
value proposition Framing the market opportunity Detailing how to
reach customers Developing an implementation plan Evaluating
potential external influences Articulating the revenue model
Calculating preliminary financial projections Establishing critical
milestones Summarizing the advantage
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September 2001 Chapter 12: Human and Financial Capital8 Human
Capital The role of human capital in a startup business is
especially critical because, for a time, it is the only resource
available When investors consider funding an early-stage company,
they assess its human capital Who is the entrepreneur? Does she
have the drive to see this business through? Who is on the
management team? Will they be able to execute? The human capital
attracts the financial capital
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September 2001 Chapter 12: Human and Financial Capital9 The
Trials and Tribulations of the Entrepreneur From the outset, the
entrepreneur is faced with reconciling several difficult paradoxes:
Being visionary vs. being realistic. The entrepreneur is faced with
the challenge of coming up with unique ideas that are grounded in
reality Generating quick returns vs. investing in the future. The
entrepreneur is challenged with staying the course to build the
organization while meeting the demands of the investors who are
needed to build the organization in the first place Optimism vs.
pragmatism. While optimism is an essential motivating force, it
must be balanced with the pragmatism to evaluate potential
weaknesses of the business
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September 2001 Chapter 12: Human and Financial Capital10
Characteristics of Successful Entrepreneurs Key characteristics
common to successful entrepreneurs include the following: Natural
problem solvers. Entrepreneurs are those who are able to make
observations about the needs of industries, markets, and everyday
life and find the best way to meet these needs Willingness to take
risks. Entrepreneurs are willing to leave stable jobs and
guaranteed salaries for their enterprises Drive. The entrepreneurs
personal drive is especially important in the early stages, when
his enthusiasm spurs the drive of other employees Flexibility. The
ability to adapt and react quickly are especially important in the
fast-changing Internet environment Vision. The most successful
entrepreneurs are not driven by money, but by a vision or a passion
consistently pursued
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September 2001 Chapter 12: Human and Financial Capital11 The
Entrepreneur and the Idea Some of the most common types of business
ideas include the following: Introduce a new product (new
softwareMP3) Introduce a new service (overnight deliveryFedEx)
Improve an existing model of business (selling books on the
InternetAmazon.com) Create demand (free one hour delivery service
Kozmo.com) Build a brandthe first-mover advantage (eToys.com,
Pets.com, eParty.com)
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September 2001 Chapter 12: Human and Financial Capital12 The
Management Team The core team consists of individuals essential to
the early formative days of the startup who will fill the following
three roles: Technology specialist: is the person who understands
the specific mechanics of how the product works, how it is
manufactured, and how it can be utilized Sales and marketing
specialist: is the person with an in- depth understanding of the
startups customer Execution specialist: is the person who keeps
everything in perspective in the startups development making the
vision for the business a reality
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September 2001 Chapter 12: Human and Financial Capital13 The
Management Team (contd) Extended management team can be created on
an as-needed basis, depending on how quickly the startup is growing
Chief operating officer Chief financial officer VP of marketing VP
of sales VP of business development Chief people officer General
counsel
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Strategic Advisors and Partners Strategic advisors and partners
provide the startup with strategic direction, advice, and in many
instances credibility for the organization as a whole Advisory
board members serve as an outsourced resource to fill a particular
need and may receive stock options in exchange for their expertise
The board of directors consists of individuals who will be
responsible for the well-being of the company, as well as holding
the management team accountable for its actions when the business
formalizes operations A strategic association is the agreement of
two entities to work together and exchange expertise in areas where
they lack core competencies A strategic alliance is a legally
binding contractual agreement to share resources on a project for a
particular timeframe
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Logistical Advisors and Partners Logistical advisors and partners
differ from the strategic advisors and partners in that they are
more involved in the day-to-day operations of the business
Necessary logistical advisors and partners include certified public
accountants (CPA) and legal counsel Supporting logistical advisors
and partners serve as outsourced, human-capital leverage for the
startup and may include intermediaries, consultants, and
incubators
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Financial Capital Sources of debt financing (commercial banks,
trade credit) Sources of equity financing (owners equity, angels,
venture-capital) Strategic investors are concerned how a certain
business compliments their current activities (exposure to cutting-
edge technology or business model, collaboration in research and
development for a product, etc.) Financial investors are concerned
with return on investment (ROI), internal rate of return, cost of
capital, and return on equity
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September 2001 Chapter 12: Human and Financial Capital18 Debt
Financing Trade credit is credit extended to a business by its
suppliers. It is an interest-free loan covering the time period
from when supplies are delivered to when the invoice is due
Suppliers typically offer trade credit to buyers with an
established track record of making prompt payments Hidden interest
rate cost Commercial bank loan is, typically, an installment loan
in which the business borrows a certain amount of money for a
specified period with either a fixed or variable interest rate
Commercial banks evaluate a business loan application by assessing
the likelihood of loan repayment Bank loans can be relatively
difficult to obtain, especially for early- stage businesses with
little collateral and no positive cash flow
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September 2001 Chapter 12: Human and Financial Capital19 Equity
Financing: Bootstrapping Bootstrapping is the art of using personal
resources to finance the early stages of a startup Bootstrapping
may include taking a personal loan, mortgaging a home, using credit
cards or savings accounts Bootstrapping provides the most viable
option for the entrepreneur when the startup is in the earliest
stages of business, especially during the stages that involve
proving the business concept Bootstrapping allows the entrepreneur
to control the company and refine his business strategy without
pressure from outside investors The disadvantage of bootstrapping
is that it is unlikely to provide sufficient cash for a good
business concept to grow quickly beyond the earliest stages
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September 2001 Chapter 12: Human and Financial Capital20 Equity
Financing: Angels Angels are wealthy individuals who invest
personal capital in startups in exchange for equity or sometimes a
seat on the board of directors Its critical for the entrepreneur to
develop a network of individuals within the industry to gain
introductions to potential financiers because angels seldom look at
unsolicited business plans Business plans are evaluated based on
the quality of the management team, market potential for the
business idea, and the track record of the entrepreneur Typically,
angels are more flexible in accepting changes in the original
business plan if it is necessary Angels tend to be more involved in
the day-to-day operations of startups
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September 2001 Chapter 12: Human and Financial Capital21 Equity
Financing: Venture Capital Venture-capital firms are usually
private partnerships or closely held corporations that raise money
from a group of private investors A venture-capital firm typically
invests $250,000 to $10 million in a business in exchange for a 30
to 40 percent equity stake and a seat on the board of directors In
addition to receiving cash, the entrepreneur receives guidance for
building the startup Venture capitalists, typically, charge
management fees on the order of 1 to 5 percent of the capital
investment in a startup A venture-capital firm seeks opportunities
that will return 10 times the original investment within five
years, but realizes that each investment is a gamble and that only
10 percent are likely to succeed The biggest disadvantage of
venture capital funding is the sources concern with the bottom
line
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September 2001 Chapter 12: Human and Financial Capital24 Equity
Financing: Corporate Ventures Large corporations sometimes set up
venture funds as a subsidiary that can make investments on behalf
of the parent company, referred to as either corporate venture or
direct investors Corporate-venture funds invest in complimentary
business for primarily strategic reasons In exchange for cash,
capital ventures seek an equity stake in the company and access to
the companys technology or product Established corporations can
offer the operational expertise as well as the credibility and
visibility that come from associating with an established
high-profile parent Because the investments are strategic rather
than financial, the pricing of deals with corporations tends to
favor the entrepreneur more than deals with venture-capital
firms
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September 2001 Chapter 12: Human and Financial Capital27 The
Business Plan A business plan should provide the following
information to a potential investor Description of the product or
service that will be offered and the value proposition for the
customer Summary of the size and nature of the market opportunity
Explanation of the revenue model Profiles of the management team,
advisory board, and board of director members describing specific
relevant skills and expertise Clear articulation of the startups
core competencies and sustainable competitive advantage Summary of
financials and financing needs