Formation and development

2
of new ventures
 Ideas Versus Opportunities
 Assessing feasibility of new business
 Developing the Entrepreneurial Plan

1
 Business
A business is any activity that provides goods or services
to consumers for the purpose of making a profit. When
Steve Jobs and Steve Wozniak created Apple Computer in
Jobs’s family garage, they started a business (product was
the Apple I, and the company’s founders were successful
make a profit).
 Hotels, banks, airlines, law firms, movie theaters, and hospitals are
service companies.
 Many companies provide both goods and services. For example,
your local car dealership sells goods (cars) and also provides
services (automobile repairs).
 Some organizations are not set up to make profits. Many are
established to provide social or educational services. Such not-for
profit (or nonprofit) organizations like red cross society

2
 Business
 The main participants in a business are its owners,
employees, and customers.
 Businesses are influenced by such external factors as the
economy, government, consumer trends, and public
pressure to act as good corporate citizens.
The activities needed to run a business can be divided into
five functional areas:
1. Management involves planning, organizing, staffing, directing,
and controlling resources to achieve organizational goals.
2. Operations transforms resources (labor, materials, money,
and so on) into products.
3. Marketing works to identify and satisfy customers’ needs.
4. Finance involves planning for, obtaining, and managing
company funds.
5. Accounting entails measuring, summarizing, and
communicating financial and managerial information.
3
 Questions to Ask Before You Start a Business
If you’re interested in starting a business, you need to make decisions even before
you bring your talent, determination, hard work, and persistence to bear on your
project.

Here are the basic questions you’ll need to address:

 What, exactly, is my business idea? Is it feasible?

 What type of business is right for me? What industry do I want to get into? Do I want to be a
manufacturer, a retailer, or a wholesaler? Do I want to provide professional or personal services?

 Do I want to run a business that’s similar to many existing businesses? Do I want to innovate—to
create a new product or a new approach to doing business?

 Do I want to start a new business, buy an existing one, or buy a franchise?

 Do I want to start the business by myself or with others?

 What form of business organization do I want?

4
 Business idea
In coming up with a business idea, don’t ask, ―What do we want to sell?‖ but
rather, ―What does the customer want to purchase?‖
 Prior experience accounts for the bulk of new business ideas. Many people generate ideas for
industries they’re already working in. Past experience in an industry also increases your chances of
success. Take Sam Walton, the late founder of Wal-Mart. He began his retailing career at JC Penney
and then became a successful franchiser of a Ben Franklin five-and-dime store.

 Industry experience also gave Howard Schultz, a New York executive for a housewares company, his
breakthrough idea (coffee bar through out the Europe). His meeting with the owner-operators of
the original Starbucks Coffee Co. resulted in his becoming part-owner of the company, and changed
his life and the life of coffee lovers forever.

 Other people come up with business ideas because of hobbies or personal interests. This was the
case with Nike founder Phil Knight, who was a devoted runner and late founder of NIKE Shoes.

 Michael Dell also turned a personal interest into a business he spent his time assembling
computers and, eventually, founded Dell, Inc.

5
 Desirability of New Venture or
business Formation
 The perception of starting new company is desirable results
from an individual’s culture, subculture, family, teachers and peers.
 American culture places a high value on being your own boss,
being a success and making money therefore, it is not surprising
to find a high rate of company formation in USA.
 On the other hand in our country making money is not as
valued and failure may be a disgrace so the rate of business
formation is low
 Studies indicate that a high percentage of founders of companies
had fathers and/or mothers who valued independence.
 Encouragement to form company is also gained from influential Instructor
 An area having a strong educational base is also a requirement.
 Peers are important, also, as is an area with an entrepreneurial
pool and peer-meeting place.

6
 Enabling factors to create a new venture
What makes it possible to form a new company?”
 Formal education and previous business experience give a
potential entrepreneur the skills needed to form and
manage a new enterprise.
 knowledge, individual will tend to be more successful in
forming in fields in which they have worked.
 The government contribution by providing the
infrastructure needed
 Marketing know-how to put together the entire package.
 Finally, availability of financial resources. Although most
start-up money comes from personal savings, credit, and
friends, but there is often a need for additional capital.
Risk-capital availability plays an essential role in the
development and growth of entrepreneurial activity. But, its
not critical factor, creativeness/innovation matters most.
7
 Skills Required By Entrepreneurs
It can be classified in to three main areas:
1. Technical skills involve such things as writing, listening, oral
presentations, coaching, and technical know-how.
2. Business management skills include those areas involved in
starting, developing and managing any enterprise.
3. Personal entrepreneurial skills differentiate an entrepreneur
from a manager and include inner control (discipline), risk
taking, innovativeness, perseverance, visionary
leadership, and being change oriented.
 Entrepreneurs are known for their strong work values, their
long workdays, and their dominant management style.
 They tend to fall in love with the organization and will
sacrifice almost anything in order for it to survive.

8
Business commercialization process

Creativity Business Plan

Feasibility
Analysis

9
 Creation of new venture –
Entrepreneurial process
The entrepreneurial process consists of four steps:
Step 1-Deciding to become an entrepreneur
Step 2- Developing successful business idea
Step 3- Moving from idea to an entrepreneurial firm (structuring)
Step 4-Managing and growing the entrepreneurial firm
Step 5- Risk and insurance management
Note: Step 1 & 2 are considered as business commercialization process

10
STEP1: THE ENTREPRENEURIAL DECISION PROCESS
The decision process entails a movement from a present life style
to forming a new enterprise.
(Plan or answer questions: where are we now?, where we want
to go?, how we go there?)
1. To create something new comes from a negative force -
disruption like;
 Retirement, movement from home, or being fired from work
 completing an educational degree but unemployed
2.To create something new comes from a Pull force - Like
 Financial reward
 Satisfaction
 Need for independence and financial freedom
11
 Step 2- Developing successful business idea

Developing a successful business idea includes:

I. Opportunity recognition

II. Feasibility analysis

III. Writing a business plan

IV. Industry and competitor analysis

V. Developing an effective business model

12
Ideas versus opportunities (Opportunity recognition)
 An opportunity is a favourable set of circumstances that creates a need
for a new product, service, or business. It’s a proven concept that generates
on-going income and have the following characteristics;
 Must have high gross margins,
 Potential to reach break-even cash flow within 12 – 36 months,
 The startup capital investment must be realistic & affordable,
 Low level of liability to risk & keep on improving with time.
 An opportunity has four essential qualities:
 Attractive, timely, durable and add value to user

Colonel Sanders tried for many years to sell his chicken recipe idea but no one listened to him
until he repackaged it and KFC (Kentucky Fried Chicken) was born. Investors attracted to
purchase license (franchising) after he successfully realized it beyond idea.

13
 Identifying opportunities
 Three ways to identify opportunities

1. Observing Trends: to observe trends and study how they create

opportunities for entrepreneurs to pursue.

14
2. Solving a Problem
 Sometimes identifying opportunities simply involves
noticing a problem and finding a way to solve it.
 These problems can be pinpointed through observing
trends and through more simple means, such as
intuition, luck, or chance.
 Some business ideas are clearly gleaned from the
recognition of problems in emerging trends.

15
3. Finding Gaps in the Marketplace
 To recognize a need that consumers have that is not being satisfied—by either
large, established firms or entrepreneurial ventures.
 Large retailers compete primarily on price by serving large groups of
customers with similar needs. They do this by offering the most popular
items targeted toward mainstream consumers. While this approach
allows the large retailers to achieve economies of scale, it leaves gaps in
the marketplace.
 There are also gaps in the marketplace that represent
consumer needs that aren’t being met by anyone

16
17
Techniques for opportunity recognition
Brainstorming
Focus group
Survey
Library and internet search

18
 II. Feasibility Analysis
 Feasibility analysis is the process of determining
whether a business idea is viable.
 It is the preliminary evaluation of a business idea,
conducted for the purpose of determining whether
the idea is worth pursuing.
When one does a Feasibility Analysis?
 The proper time to conduct a feasibility analysis is early
in thinking through the prospects for a new business.
 The thought is to screen ideas before a lot of resources
are spent on them
 Failure to conduct a feasibility analysis can result in
disappointing outcomes.

19
20
Technical Feasibility Market Feasibility Financial Organizational
Analysis Analysis Feasibility Capabilities
Analysis Analysis
 Crucial technical  Market potential  Required financial  Personnel
specifications • Identification of potential resources requirements
• Design customers and their • Fixed assets • Required skill levels and
• Durability dominant characteristics • Current assets other personal
• Reliability (e.g., age, income level, • Necessary working characteristics of
buying habits) capital potential employees
• Product or service safety
• Potential market share (as  Available financial • Managerial requirements
• Standardization affected by competitive
 Engineering resources • Determination of
situation) individual responsibilities
requirements • Required borrowing
• Machines • Potential sales volume • Determination of
• Potential sources for
• Tools • Sales price projections funds required organizational
• Instruments  Market testing relationships
• Costs of borrowing
• Work flow • Selection of test • Potential organizational
 Product development • Repayment conditions development
• Actual market test • Operation cost analysis
• Blueprints • Competitive analysis
• Models • Analysis of market • Fixed costs
• Prototypes  Marketing planning • Variable costs
• Product testing issues
• Projected profitability
• Lab testing • Preferred channels of
• Field testing distribution, impact of
 Plant location promotional efforts,
• Desirable characteristics of required distribution
plant site (proximity to points (warehouses),
suppliers, customers), packaging considerations, 21
 III. Writing a business plan
• A business plan is a written narrative, typically 25 to 35 pages
long, that describes what a new business intends to accomplish and how it
intends to accomplish it.

• A feasibility study, or business opportunity analysis, is a planning tool similar

to a business plan. The feasibility study is done to flesh out the possibilities in
an initial business idea. The business plan then fully describes the business
and its financial projections.
 A business plan is a comprehensive set of guidelines for a new
venture.
 A business plan would present your basic business idea and all
related operating, marketing, financial and managerial
considerations.
 The business plan may present a proposal for launching an entirely
new business.
 It may present a plan for a major explanation of a firm that has
already started operation.
22
 IV. Industry and competitor analysis
Industry analysis
 When studying an industry, an entrepreneur must answer three
questions before pursuing the idea of starting a firm.
1. Is the industry accessible - in other words, is it a realistic place to enter?
2. Does the industry contain markets that are suitable for innovation?
3. Are there positions in the industry that will avoid some of the
negative attributes of the industry as a whole? think about its position at
both the company level and the product level.
 Competitive forces that determine industry’s profitability:
1. Threat of substitutes
2. Threat of new entrants
3. Bargaining power of suppliers
4. Bargaining power of customers
5. Rivalry among existing firm
 cont’d

Competitor analysis
 A competitor analysis is a detailed analysis of a firm’s
competition.
 It helps a firm to understand the positions of its major
competitors and the opportunities that are available to
obtain a competitive advantage in one or more areas.
 Identifying Competitors
 V. Developing an effective business model
 A business model is a firm’s plan or diagram for how it competes, uses its
resources, structures its relationships, interfaces with customers and creates
value to sustain itself.
 There is no standard business model, no hard-and-fast rules that dictate how a
firm in a particular industry should compete. In fact, it’s dangerous for the
entrepreneur launching a new venture by simply copying the business model
of another firm.
Having a clearly articulated business model is important because it does:
1. Serves as an ongoing extension of feasibility analysis (a business model
continually asks the question, Does the business make sense?)
2. Focuses attention on how all the elements of a business fit together and
how they constitute a working whole.
3. Describes why the network of participants needed to make a business
idea viable is willing to work together.
4. Articulates a company’s core logic to all stakeholders, including the
firm’s employees.
Components of an effective business model

Business model consisting of the following components:

 Core strategy (how a firm competes)
 Strategic resources (how a firm acquires and uses its resources)
 Partnership network (how a firm structures and nurtures its partnerships)
 Customer interface (how a firm interfaces with its customers)
 Assessing the Feasibility of a New Venture

4
 Assessment Entrepreneurial Opportunities,
 Structuring new business venture
 Financing business venture

29
 Creation of new venture –
Entrepreneurial process
The entrepreneurial process consists of four steps:
Step 1-Deciding to become an entrepreneur
Step 2- Developing successful business idea
Step 3- Moving from idea to an entrepreneurial firm (structuring)
Step 4-Managing and growing the entrepreneurial firm
Step 5- Risk and insurance management
Note: Step 1 & 2 are considered as business commercialization process

30
Assessing feasibility of opportunities

31
Technical Feasibility Market Feasibility Financial Organizational
Analysis Analysis Feasibility Capabilities
Analysis Analysis
 Crucial technical  Market potential  Required financial  Personnel
specifications • Identification of potential resources requirements
• Design customers and their • Fixed assets • Required skill levels and
• Durability dominant characteristics • Current assets other personal
• Reliability (e.g., age, income level, • Necessary working characteristics of
buying habits) capital potential employees
• Product or service safety
• Potential market share (as  Available financial • Managerial requirements
• Standardization affected by competitive
 Engineering resources • Determination of
situation) individual responsibilities
requirements • Required borrowing
• Machines • Potential sales volume • Determination of
• Potential sources for
• Tools • Sales price projections funds required organizational
• Instruments  Market testing relationships
• Costs of borrowing
• Work flow • Selection of test • Potential organizational
 Product development • Repayment conditions development
• Actual market test • Operation cost analysis
• Blueprints • Competitive analysis
• Models • Analysis of market • Fixed costs
• Prototypes  Marketing planning • Variable costs
• Product testing issues
• Projected profitability
• Lab testing • Preferred channels of
• Field testing distribution, impact of
 Plant location promotional efforts,
• Desirable characteristics of required distribution
plant site (proximity to points (warehouses),
suppliers, customers), packaging considerations, 32
STEP3: MOVING FROM IDEA TO ENTREPRENEURIAL FIRM
OWNERSHIP OPTIONS
 You can become a business owner in one of three ways:
Each has its advantages and disadvantages.
1. Starting a new business,

2. Buying an existing business, or

3. Obtaining a franchise.

What are advantages and limitations to the options?

33
 1. Starting New business (from Scratch)
 The most common and the approach lets you to start with a
clean slate and allows you to build the business the way you
want. You select the goods or services to be offered, the
location, and all your employees, and it’s up to you to develop a
customer base and build a reputation.

 Limitation; it’s riskier—option.

34
 2. Buying an Existing Business
 If you decide to buy an existing business, some things will be easier. You will
already have a proven product, customers, suppliers, a known location, and
trained employees. It will also be much easier to predict the future success of
the business.
 But this route, of course, comes with its own disadvantages. First, it’s hard to
determine how much you should pay for a business. You can easily determine
how much things like buildings and equipment are worth, but how much
should you pay for the fact that the business has steady customers? In
addition, a business, like a used car, might have problems of which you are not
aware. Perhaps the current owners have disappointed customers; may be the
location isn’t as good as it used to be. You might inherit employees that you
wouldn’t have hired yourself. Finally, what if the previous owners set up a
competing business that draws away their former—and your current—
customers?
35
 3. Getting a Franchise
 Lastly, you can buy a franchise. Under this set up, a franchiser(the company
that sells the franchise) grants the franchisee(the buyer) the right to use a brand
name and to sell its goods or services. Franchises are used to market products
in a variety of industries, including food, retail, hotels, travel, real estate,
business services, cleaning services, and even weight-loss centers and wedding
services. There are thou-sands of franchises, many of which are quite familiar—
McDonald’s, Budget Rent-A-Car, Radio Shack, and Jiffy Lube. In addition to the
right to use a company’s brand name and sell its products, the franchisee gets
help in picking a location, starting and operating the business, and advertising.
In effect, you’ve bought a prepackaged, ready-to-go business that’s proven
successful elsewhere. You also get ongoing support from the franchiser, which
has a vested interest in your success.

36
 Cont’d
 All these advantages don’t come cheaply. Franchises can be very expensive,
usually depending on the amount of business that a location is expected to do.
For example, some McDonald’s franchises require an initial investment of
$500,000 to $1.6 million. This fee includes the cost of the property, equipment,
training, start-up costs, and the franchise fee—a one-time charge for the right to
operate as a McDonald’s. In addition to your initial investment, you’ll have to
pay two other fees on a monthly basis—a royalty fee(typically from 3 to 12 per-
cent of sales) for continued support from the franchiser and the right to keep
using the company’s trade name and an advertising feet cover your share of
national and regional advertising. You’ll also be expected to buy your products
from the franchiser.

 In general; The cost of obtaining and running a franchise can be high, and you
have to play by the franchiser’s rules, even when you disagree with them.
Finally, franchisers don’t always keep their promises. 37
Structuring the New Venture (Starting new business)
 Of all the choices you make when starting a business, one of the most
important is the type of legal structure you select for your company.
 Not only will this decision have an impact on how much you pay in taxes, it
will affect the amount of paperwork your business is required to do, the
personal liability you face and your ability to raise money.
 Business structures can vary as widely as the types of businesses that use them.

 When setting up a business, choosing the right structure can be critical to the
success and life of the company.
 Consideration should be given to choosing a suitable company structure to
provide the maximum legal and tax protections for your operations.
 Each company structure has its own unique positive and negative attributes.

38
 Legal Forms of
Entrepreneurship/Organizations
 Proprietorship – business owned by an individual

 Partnership – association of two or more persons acting as

co-owners of a business

Corporation – legal entity separate from the individuals who

own it

How is the formation and characteristics?

What are advantages and limitations of each legal forms?

39
 Choosing the Legal Structure of Your Business
Select the legal structure based on;

 How easy is it to set up and operate?

 Raising Money -What are the tax advantages & disadvantages?
 Regulations - What are the potential legal liabilities?
 Continuity - What happens to the business if the owner die?
 Flexibility - How easy will it be to liquidate the business?
 How much control do you want?
 What are your financing needs?
 Do you want to share profits with others?
40
 Sole Proprietorship
A sole proprietorship is a business owned and operated by one
person for profit.
 Characteristics
 Easiest form of business to set up and operate.
 Profits are taxed only once.
 Unlimited legal Liabilities.
 Business ends with death of owner.
 Easy to liquidate.
 Formation of Sole Proprietorship
 Easiest Form of Business to Set Up and Operate
 No formal process.
 Obtain all necessary federal, state, and local licenses &
permits.
 Register Assumed Name Certificate (if necessary).
 Obtain Employer Identification Number (if necessary).

41
 Proprietorship

Advantages
Disadvantages
 Easy to create
 Unlimited liability
 Owner keeps all profits
 Harder to obtain credit
 Owner makes all and capital
decisions

42
 Partnership
Types of Partnerships
 General Partnership
 Limited Partnership
1. A General Partnership
Partnership is any two or more individuals who contribute
money, labor, and skill to a business, and who share in its
profits, losses, and management.
2. Limited Partnership
A limited partnership has one or more partners who have
limited liability and no rights of management.

43
 cont’d
Characteristics of Partnerships
 Easy to set up and operate.

 Profits are taxed once.

 Legal liability

• Unlimited for general partners.

• Limited for limited partners

 Partnership terminates upon death or withdrawal of

partner, unless there is a partnership agreement to the
contrary.

 Easy to liquidate.

44
 Formation of Partnership
1. Formation of General Partnership
 Easy to Set Up and Operate
 Obtain Employer Identification Number.
 Obtain all necessary federal, state, and local licenses and permits.
 Register Assumed Name Certificate, if necessary.
 Partnership Agreement (optional, but highly
recommended).
2. Formation of Limited Partnership
 File Certificate of Limited Partnership with Secretary of State
or other appropriate agency.
 Name must contain the words ―Limited Partnership.‖
 A written partnership agreement is required.
 Maintain certain records as required by state law.

45
 Partnership

Advantages
• Ease of formation Disadvantages
• Direct share of profits  Unlimited liability for firm’s debt
• Division of labor and  Limited continuity of life of
management responsibility enterprise
• More capital available than in  Difficulty in obtaining capital
a sole proprietorship  Partners share responsibility for
• Less governmental control other partners’ actions.
and regulation

46
 Corporation (C-Corp.)
Formed under state or federal law. Legally treated as an artificial
person, distinct from the individuals who own it.
Organization of Corporation
Corporate Structure
 Shareholders own the corporation through stock ownership.
 Shareholders elect the Board of Directors
• Board sets corporate policy.
• Board elects corporate officers who run the day-to-day
operation.
Characteristics of Corporation
 The most complex form of business to set up and operate.
 Profits may be subject to double taxation.
 Limited legal liability.
 Business continues after death of owner(s).
 Difficult and expensive to liquidate.
C stands for the subchapter of IRS(International revenue service) code which governs federal taxation, USA
47
 Formation of Corporation (C-Corp.)
Most Complex Form of Business to Set Up and Operate
 File Articles of Incorporation with the secretary of State.

 Pay filing and license fees.

 Prepare and adopt by laws.

 Obtain corporate minute book, corporate seal, stock

certificates, and other desired supplies.

 Follow corporate formalities.

48
 Corporation (C-Corp.)
Advantages Disadvantages
• Limited liability-Owners are not • The goals of corporate
responsible for the obligations of managers, who don’t
the corporation and can lose no necessarily own stock, and
more than the amount that they shareholders, who don’t
have personally invested in the necessarily work for the
company. company, can differ.
• Financial – it’s easier to access • It’s costly to set up and subject
financing (by selling stock & to burdensome regulations and
loan). government oversight.
• Continuity-Because the • It’s subject to ―double
corporation is a separate legal taxation.‖ Corporations are
entity, it exists beyond the lives of taxed on their earnings. When
its owners. these earnings are distributed
• Specialized management-Corporations as dividends, the shareholders
are generally able to attract skilled and pay taxes on these dividends.
talented employees. 49
 Other legal form of business
 The Hybrid like S-corporation gives small business owners limited liability
protection, but taxes company profits only once, when they are paid out as
dividends. It can’t have more than one hundred stockholders.

 A limited-liability company (LLC) is similar to an S-corporation: its members are

not personally liable for company debts and its earnings are taxed only once,
when they’re paid out as dividends. But it has fewer rules and restrictions than
does an S-corporation. For example, an LLC can have any number of members.

 A cooperative is a business owned and controlled by those who use its services.
Individuals and firms who belong to the cooperative join together to market
products, purchase supplies, and provide services for its members.

 A not-for-profit corporation is an organization formed to serve some public

purpose rather than for financial gain. It enjoys favorable tax treatment.
50
 Types and Sources of Capital
Need to financing
 Few people deal with the process of raising investment
capital until they need to raise capital for their own firm
 As a result, many entrepreneurs go about the task of raising
capital haphazardly because they lack experience in this area.
Why Most New Ventures Need Funding?
There are three reasons most new ventures need to raise money
during their early life.

51
 Source of finance /Raising Money for new firm/
Equity Capital Debt Financing 1. Personal FundsOther (Creative) Sources

1. Personal Funds
• The vast majority of founders contribute personal funds,
along with sweat equity, to their ventures.
 Sweat equity represents the value of the time and effort that a
founder puts into a new venture.
◦ Friends and Family
• Friends and family are the second source of funds for many
new ventures.
 This type of contribution often comes in the form of loans or
investments but can also involve outright gifts, delayed
compensation, or reduced or free rent.
52
 2. Equity Capital 3. Debt Financing

Alternatives Explanation

Equity funding means exchanging partial ownership in a firm,

2. Equity usually in the form of stock, for funding. Equity funding is not a
funding loan—the money that is received is not paid back. Instead,
equity investors become partial owners of a firm.

Debt financing is getting a loan. The most common sources of

3. Debt
financing debt financing are commercial banks and the Small Business
Administration (through its guaranteed loan program).

53
 4. Other (Creative) Sources

4. Bootstrapping
• Bootstrapping is finding ways to avoid the need for external financing or funding
through creativity or ingenuity, thriftiness/careful and wise with money/, cost - cutting,
or by any means necessary.
• Because it is hard for new firms to get financing or funding early on, many
entrepreneurs bootstrap out of necessity.

54
 Examples of Bootstrapping Methods

Buying used instead of Coordinating purchases

new equipment with other businesses

Leasing equipment Obtaining payments in

instead of buying advance from customers

Minimizing personal Avoiding unnecessary

expenses expenses

Sharing office space Applying for and

with other businesses obtaining grants

55
End of step 3 in entrepreneurial process

Quiz 1
Step 4: Managing & growing

56