CREATION OF

VENTURE

Chapter 3
Entrepreneurship(BBA) Year 2 Semester 3
Lesson Topic

A. Start of Issues and Feasibility Studies

B. Researching the Financing Options
C. Identifying Attributes of Strategic Resources
D. Valuable Resources-Rare resources-Hard to
copy
E. Resources-No-substituable resources
F. Resources Types
Start of Issues and Feasibility Studies

New Venture Creation as the organizing of new organizations , to organize is

to assemble ongoing interdependent actions into sensible sequences that
generate sensible outcomes.
The individual(s) which finds, manages and drives the creation of the new
firm is commonly referred to as the nascent entrepreneur. Endemic to the
process of business start up, the backgrounds and character traits of
nascent entrepreneurs have been a common theme of research in
understanding the start-up process.
It is identified that the principles of networking, resource mobilization, and
entrepreneurial enactment should be inherent to the process of creating
new business.
 Framework or Models for New venture creation

 A Framework for describing New Venture Creation (Gartner 1985: 698)

and some examples of variables in new venture creation.

INDIVIDUALS Need for

achievement Locus of
control Risk-taking
propensity Work
experience/education
ENVIRONMENT ORGANISATION
Financial availability/supplier Strategy – Cost
access/customer demand/entry leadership/Niche/differentiation
barriers / competition/access Franchise entry/joint
skilled workers / availability ventures/alliances/new product/
premises/ availability of
support
PROCESS
Entrepreneur locates business
opportunity Accumulates resources
Markets & sells products Produces
products Builds organization
Responds to government
 Veciana, J.M. (1988): The Entrepreneur and the Process of Enterprise Formation,

1 to 2 Years 2 to 5 Years

GESTATION CREATION LUNCHING CONSOLIADIATIO

N

Childhood Search for & identify Team Building Getting through the
Antecedents opportunity knothole
Incubators Critical Purchase &
Event/Role Elaboration & organization of the Getting rid of
Determination configuration of the production factors . partners
Decision to create entrepreneurial project .
a firm Product/Service At last “everything
Network creation development under control”
Opportunity Evaluation
Preparation of a Search for finance .
Business Plan Launching of
product/service
A final and a most recent paradigm developed by Deakins and Whittam
(2000) .The authors suggest that the business start-up process can be broken
down into a number of stages: ·

 Formation of the idea

 Opportunity recognition
 Pre-start planning and preparation including pilot testing
 Entry into entrepreneurship launch
 Post Entry development

Each of these stages will consist of a number of positive and negative

factors that impact the process of starting up. The authors also point out
that the number of factors affecting each stage is not exhaustive, a host
of other influences exist including the cognitive behavior of the
individual entrepreneur, such as tenacity and ability to over come
obstacles to creating a new business
  Business Creation And The Start-Up Process:
Post Entry Development
·Developing networks
·Achieving credibility

Entry & Launch

·Intellectual Property Rights Process (IPR)
·Timing
·Role of serendipity

Pre-start planning & preparation

·Finding partners
·Market research
·Access to finance

Opportunity recognition
·Influence of role models
·Cultural attitudes to risk & failure
·Changing socio-economic & technical
environments

Idea Formulation
·Influence family/friends
·Past experience,work, training,education
·Creative abilities
Start up issues or Problems
 In the third world countries, still striving to develop conditions favorable for a fast and smooth entrepreneurial growth, every
entrepreneur has to face various types of problems.
 For entrepreneurs who are just starting out it would imply that the major obstacles which the entrepreneurs face are simply due to
inadequate infra-structural facilities, insufficient guidance, gloomy state of the economy, ineffective government support and non-
cooperative attitudes of the administration.

Infra-structural Facilities
Availability of industrial site
Securing of licenses
Availability of technology
Electricity and water connection
Availability of raw materials
Transport and communication facilities
Economic Climate
Availability of finance
Condition of the economy
Competition
Training and Guidance Facilities
Access to entrepreneurial training programs
Availability of consultancy facilities
State Regulation
Import/export policies
Availability of foreign exchange
Governmental economic restrictions
Bureaucratic delay and non-cooperation
Lack of knowledge and experiences
Feasibility Studies / Analysis
 Feasibility Analysis is the process of determining if a business idea is viable or not.
The most effective business emerge from a process that includes.
1. recognizing a business idea,
2. testing the feasibility of the idea,
3. writing a business plan, and
4. lunching the business.

 If a business idea falls short on one or more of the four components of feasibility
analysis, it should be dropped or rethought.
 A mental transition needs to be made when completing a feasibility analysis from
thinking of a business idea as just an idea to thinking of it as a business. A
feasibility analysis is an assessment of a potential business rather than strictly a
product or service idea.
 Feasibility analysis is investigative in nature and is designed to critique the merits
of a proposed business.
 Product/ Proceed
Service Yes in all with
Feasibility four areas business
plan
Industry
Spending the
time and Service
Proposed resources Feasibility
Business necessary to
Venture move forward
with the business
idea depends on. Organization Drop or
al Feasibility No in one rethink
or all four business
areas idea
Financial
Feasibility
Four Area of Feasibility Analysis
 Product/Service Feasibility
- Product/Service desirability
- Product/ Service demand
 Industry/Target Market Feasibility
- Industry attractiveness
- Target market attractiveness
 Organizational Feasibility
- Management prowess
- Resource sufficiency
 Financial Feasibility
- Total start-up cash needed
- Financial performance of similar business
- Overall financial attractiveness of the proposed venture
 Researching the Financing Options
 While start-ups new venture, its difficult to raise money. So in this chapter
we focus on the process of getting financing or funding.
 Financing or fund is most important for venture creation and operation of
enterprise. The reason behind why most new venture need funding ?
- Cash flow challenges :
- Capital Investment:
- Lengthy Product Development Cycles :
Lengthy Product
Capital Investment
Cash Flow Challenges Development Cycles
1. The cost of buying real
1. Inventory most be Some product are under
state, building
purchased. development for years.
facilities and
2. Employees must be Before they generate
purchasing equipments
trained and paid, and earnings.
2. typically exceeds the
advertisement must be The upfront cost often
firms ability to provide
paid for before cash is exceed a firms ability to
funds for these needs
generated from sales. fund these activities on its
for its own.
own.
Preparation to raise financing
 Determining that how much money the company
needs.
 Determining the most appropriate type of financing
or funding.
 Developing a strategy for attracting potential
investor or bankers.
Types of financing ( Based on Source)

 Equity financing :
- Equity financing is obtaining funds for the business in exchange of
ownership.
- It is the most common source of funding to a business.
- Equity is an important component of capital structure of a business.
- The equity investors get return on their investment in the form of
dividend and by selling their stock or shares.
Equity financing has several benefits, the money received from the equity
investors should not be pay back. There is no obligation of interest
payment as well . Another notable benefits of equity financing is lower
risk. It is beacause the equity investors, unlike creditors cannot force the
business bankruptcy.
Equity financing have some disadvantages that it reduces the ownership stake
of the owner. In other words it reduce control of the owner.
Source of Equity financing :
- Angel Investors , - Venture Capital , - Initial Public Offeriings
Angel Investors
 Business angels are individuals who invest their personal capital directly in start-ups.
 Angel investors are also called informal investors, angel funders, private investors, seed

investors or business angels. These are affluent individuals who inject capital for
startups in exchange for ownership equity or convertible debt. Some angel investors
invest through crowd funding platforms online or build angel investor networks to pool
in capital.
 They are the people with high wealth and incomes, educated and have succeeded as

entrepreneurs.
 They normally invest small amount in the business with a high growth potentiality.

(The term "angel" came from the Broadway theater, when wealthy individuals gave
money to propel theatrical productions. The term "angel investor" was first used by the
University of New Hampshire's William Wetzel, founder of the Center for Venture
Research. Wetzel completed a study on how entrepreneurs gathered capital.)

Source of finding angel investors ( Friends and family , Individuals angel investors,
and angel investor networks.
Venture Capital
 Venture capital is money that is invested by venture capital firms in small
business with a high growth potentiality.
 It is different to angel investor as the venture capitalist invest in the later
part of the business whereas angels invest in start-ups.
 Venture capital firms collect money from high net worth individuals,
pension plan, university endowments, foreign investors and other sources.
An entrepreneur should ask the following question and scrutinize the answers
to them before accepting funding from venture capital firms.
- Do the venture capitalists have experience in our industry ?
- Do they take a highly active or passive management role ?
- Are the personalities on both sides of the table compatible ?
- Does the firm have deep enough pockets of sufficient contracts with the
venture capital industry to provide follow-on rounds of financing?
- Is the firm negotiating in good faith in regard to the percentage of our
firm they want to exchange for their investment ?
Initial Public Offering
 The important source of equity financing is initial public offering(IPO).
 It is the first sale of stock or shares by a company to the public.
 A company goes public if evidenced that it is viable and had good future.
Advantages that encourages a company to go for IPO:
- It is way of raising capital for present as well as future requirements.
- it raises a company’s public profile making it easier to attract investors,
customers, and suppliers.
- It provides a mechanism for the stockholders to cash out their investment
and get their investment back.
- A company creates another form of currency that can be used for
company growth.
Disadvantages of IPO sourcing equity :
- An IPO is time taking and needs huge money to prepare.
- Going public is an expensive and time-consuming process.
Going public demands increased regulatory requirement.
Debt Financing
 It is obtaining borrowed funds for the business.
 It involves getting loan or issuing debenture or bond. For a new venture,
issuing debenture or bond is not possible.
 There are two types of loan. In the single purpose loan, specific amount of
loan is taken and repaid in a fixed amount of time with interest. In the line
of credit, a borrowing cap is fixed and the borrowers can use the credit on
their requirements. It requires periodic interest payment.
Source of Debt financing :
Commercial Banks
Private Sources
Micro Credit
Source of Short term loans for ventures :
Bank Overdraft , Trade Credit , Public Deposits, Factoring ( Account
receivable financing ) , Discounting Bills of Exchange, Advances from
customers , Accrual Accounts, Bank Loans .
Identifying Attributes of Strategic Resources

 Definition
 Types of resources
 Combination of resources
 Resource- Base View Theory of firm
 Attributes of Strategic Resources
What are resources ?
 Any thing that is useful, tangible or intangible.
 Another characteristic -semi permanent or sticky; it adheres to
the venture and the entrepreneur.
 Resources can be property based or knowledge based.
 Property-based resources give the entrepreneur “rights” and
enable a firm to control its environment.
 Knowledge-based resources are more intangible, like talent or
skill. Knowledge-based resources enable the firm to adapt to a
changing environment.
Resources are divided into three types.

 Financial resources
- Resources which take the form of, or can be readily converted to cash
(monetary form)
- Cash- most liquid and flexible, readily to buy other resources.
Eg: Cash in hand, overdraft facilities, loans, outstanding debtors, investment capital,
investment in other businesses.
 Human resources
People and the efforts, knowledge, skill and insights they contribute to the
success of the venture
Eg: Productive labour, technical expertise, provision of business services,
communication skills, strategic and leadership skills
 Operating resources
- The facilities which allow people to do their jobs and used by business to
deliver its outputs to the marketplace.
Eg: Premises, motor vehicles, production machinery, raw materials, storage
facilities, office equipment.
Combination of resources

Financial

Innovative New Value Delivered

Human Combination

Operating
Resource- Base View Theory of firm

 This Analysis formulates the firm to be a bundle of resources.

 The resources are divided into two categories: Tangible (Capital, Technology) and Intangible
(Capability, Decision making, Management etc.)
 These resources and the way that they are combined, make firms different from one another.
 As per RBV analysis, organisation should look inside the company to find out the
Competitive advantage instead of looking at competitive environment.
 Jay Barney has proposed this view.
 Two Critical assumption of this view is that these resources should be Heterogeneous and
Immovable.
 Resource-based theory holds that sustainable competitive advantage which is created when
firms posses and employ resources and capabilities that are:
1.Valuable because they exploit some environmental opportunity
2. Rare in that there are not enough for all competitors
3. Hard to copy, so that competitors cannot merely duplicate them
4. Non-substitutable with other resources
Attributes of Strategic Resources
 Valuable Resources
 Rare Resources
 Imperfectly Imitable (Hard to Copy) Resources
 Non-Substitutable Resources

Valuable Resources :
Resources are valuable when they help the organization implement its
strategy effectively and efficiently, which means that in a “strengths,
weaknesses, opportunities, and threats in the firm’s environment.

A valuable resources is useful for the venture’s operation. E.g. property,

equipment, people, and skills such as marketing, finance, and accounting
Rare Resources
A unique and valuable resource clearly gives a firm source of
competitive advantage.
A resource may be considered rare when it is not widely
available to all competitors.
If supply and demand are in equilibrium, and the price of the
resource is generally affordable, the resource will cease to be
rare.
E.g. a good location, managers who are also considered good
leaders, or the control of natural resources like oil reserves.
Imperfectly Imitable (Hard to Copy) Resources

Uniqueness is at the heart of value creation because it limits

competition. If you have a resource that can’t be copied or can’t
easily copied, then it’s going to give you an advantage over your
competitors. This advantage is sustainable until your competitors
can copy it, if ever. That’s what makes it a strategic resource.

Think of everything Apple has accomplished over the last 10 years

or so, iPhones, iPads, Macbook Pros, etc. There are plenty of
touchscreen phones and tablets, still, none have the responsiveness
and intuitiveness that Apple has managed to engineer. From another
point of view, processes and programs can be copied but people
can’t. If you manage to get great people on your team, or make
those people great, it can be impossible to copy and ends up being a
strategic resource.
Non-Substitutable Resources

We don’t have Coke, will Pepsi do? For most people, sure. Some
things are easily substituted, some are not. Pizza is easily
substituted. Pizzahut style pizza is not. These are strategic
resources that can’t be easily substituted.
It goes further than that. Your organization’s facilities, your staff,
your leadership, none of it is easily substituted. Most
employees won’t leave your organization on a whim, they
leave because they find something they believe is better for
them or they leave because they believe something is wrong.
Quesations


 1. What are the challenges when starting a business?

 2. what are the three most common reason most
entrepreneurial ventures need to raise money in their early
life?
 3. What are the financing options. Describe the three most
common forms of equity funding and why equity financing is
important.
 4. What are the Attributes of Strategic Resources, why it is
important for entrepreneur while creating new venture?