Chapter Six

Organizing and financing the new venture

6.1. Entrepreneurial team and business formation

The success of an enterprise is more often determined by the individuals who lead it forward
than by its products or services. The entrepreneurial team transforms creative ideas into
commercial realities through their hard work and determination.

Entrepreneur must provide inspiration and direction, and they must be able to create
organizations to sustain growth. For the independent small business, the owner must wear
several hats at once leading, managing, and administrating the new enterprise. For the corporate
venture, a company “champion” must assemble a team of like-minded people capable of
breathing life into an innovation. For the high-growth new venture, an entrepreneur must have
the foresight to find partners or hire people with complementary skills needed to guide the
enterprise toward success.

Matching human resource need and skills

New ventures succeed or fail on the performance of founding entrepreneur. An exceptional new
product positioned in the best possible market has no life of its own without a skilled founder.
It is the capability of a determined entrepreneur or the strength of an entrepreneurial team that
breathes life into an enterprise.

Three important criteria for establishing a successful entrepreneurial team are:

1- The founder must have the personal skill and commitment to head the venture.
2- The founder must either have a team or able to identify who is needed on a team to
launch the venture.
3- The team must be able to share in the success of the new venture.

The last point is crucial. If an entrepreneur intends only to “hire in” nine to five, success will
rest solely on the resilience of the founder; employee contribution may be limited to their
willingness to work for wages.

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The Founder’s Role

Founding entrepreneurs are responsible for defining their businesses and identify human
resource requirements. Consequently, founders must first understand their own skills and
limitations, and then have the ability to attract others to the venture. The inventor and marketer
may form a good team, but they will also need to demonstrate their conceptual ability to lead an
enterprise and to be financial responsible. Occasionally an individual comes along who has
capabilities in all these areas, but more often, entrepreneurs must face the reality of needing
help. Consequently, an entrepreneurial team is needed, and the lead entrepreneur must have the
human resource skills to organize this team and to focus its efforts on fulfilling the venture’s
objective.

In the pre-start up stage, entrepreneur should be able to define in the business plan the skills
needed and the roles of team members. When possible, these team members and partners
should be specially identified. Founding entrepreneur is expected to fulfill leadership roles,
but often they may be more effective in the background. For example, an inventor dentist might
be more valuable in the role of a technical adviser than in a management position. Instead of
trying to start his own venture, the dentist could therefore bring in an experience person with
marketing and leadership skills (preferably gained in the dental instrument industry).

When the new venture is entrepreneurial (developed through the innovation of corporate
employees), then the founder’s role is that of a champion who brings together a corporate
team. In this sense, the entrepreneur must provide the motivation to encourage team efforts that
succeed in convincing management that a new product or service deserves attention.

When the new venture is an independent small business, the founder may have to assume
responsibility for all roles.

Team Member Roles

Team members are partners in the emotional sense that have joined together to pursue a dream;
they are adventures bound together by a common purpose. In most instances, team members
have a stake in the venture as partners, stockholders, or employee who expects to share in
success through stock options or bonuses. In corporate environment, employee teams often
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gather through casual friendships, yet they become united through their mutual commitment to
see a project succeed.

All team members embrace their functional specialization, such as being responsible for
marketing, customer service, or product development, but they must also be part of the
“general manager” process of planning and problem solving. As noted earlier they can’t be
nine-to-fivers, but must be able to contribute to the venture with enthusiasm. They are
associates who, together, will create a business infrastructure and established a sense of
“culture” that gives the venture its unique image. They will also face crises together, and share
in the wealth of success or the agony of failure.

Once an enterprise is established and begins to grow, team member roles change. Their
individuality as founders is less important than their ability to build an organization. As
founders, all team members have to be entrepreneurs in the sense of accepting risk and team
innovative. As members of an expanding enterprise, they must be manger capable of building
and leading an efficient staff. They must transform themselves from mavericks that launched
the venture to professional managers who can make it grow.
Therefore, roles of entrepreneurs and their team members must be describe in terms of the
stage of venture development as well as their functional skills.

Composition of entrepreneurial teams

The board of directors

Law for incorporated companies requires a formal board of directors, but each state regulates
corporations and therefore has specific guidelines for director’s responsibilities. When a
corporation is publicly traded, the Securities and Exchange Commission (SEC) regulates board
activities and generally holds a company’s directors responsible for corporate conduct.
Privately held unincorporated companies to not have to have boards, yet in practice many do.

Board Composition

Smaller companies with boards usually limit the number of directors to between five and seven
persons. Entrepreneurs are very averse to share decision-making authority and the founder or
the founder’s family often dominates small boards.
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There is no ideal composition for a board of directors, but there are two important observations.
First, boards comprising mainly insiders (the founder, family members, friends, and active
investors) tend to focus on short –term budgets and operational problems. Second, board
comprising mainly outside directors tend to focus on external relations that can augment social
and professional networks to attract capital, clientele, and management talent. Consequently,
lopsided boards- either too internally or too externally focused- may be less effective than those
with members who can address operational problems and strengthen external relations.

Poorly Conceived Board Well- Conceived Board

Entrepreneur/ CEO Entrepreneur/ CEO

Directors: Directors:

Investor Family Friend Investor Attorney CPA Banker Investor Mentor

Members

Entrepreneur tend to add friends or Entrepreneur tend to add professional

family members, handling out advisers, investors, and leaders able
directorships to key investors to contribute as “active” directors

Director Roles

Directors are legally responsible for the general conduct of business. Ultimately board
members are accountable for the performance and professional behavior of board appointed
officers.

Although legal responsibilities are important, board level assistance is of greater interest to
entrepreneurs. Board members are supposed to assist in determining objectives, formulating
strategies, unraveling complex problems, arbitrating executive conflicts, monitoring budgets,
and providing expertise in legal, financial, and ethical decisions.

Directors fulfill important roles beyond their decision-making duties. These include roles as
mentors, professional advisers, and members of an expanded social network. Directors often

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provide important access to resources, investors, professionals, and industry groups that are
crucial to a venture’s success.

Legal forms of business in perspective

There are three general categories of legal formation of business that are;

1- Sole proprietorship
2- Partnership
3- Corporation

Selecting an appropriate form of business is one of the first decisions by founder, and each
form of business has its own special attributes.

Selecting a Legal Formation

Selecting a legal form of business involves a decision with at least three important criteria:

1- Preferences of the Entrepreneur

2- Profile of the Enterprise
3- Advantages and Disadvantages of the legal business entity

Entrepreneurs select a legal formation on the basis of emotional issues (personal preferences),
management issues (e.g., size of the enterprise), and rational issues (e.g., legal liability), but in
practical terms, new ventures need access to resources.

Sole proprietorship

A sole proprietorship is the business of one person, independently owned and without partners.
The person “is the business” with full accountability for taxes, finances, and legal liability.

Advantages:

1- Autonomy of control and decision-making.

2- Self-direction without sharing authority or requiring conditions with partners or
stockholders.
3- Direct taxation as an extension of the owner’s personal income tax return.
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 4- No double taxation
5- Many expenses and business losses can be deducted, thereby reducing personal income
tax liability.
6- Few regulations, little compliances reporting, and minimal administration for
proprietorship keep business administration simple.
7- Special benefits can be realized. Self-employed individuals often benefit from special
types of insurance and retirement funds not available to wages earners.

Disadvantages:

1- Unlimited legal liability for business.

2- Unlimited liability for financial debts.
3- Credit an extension of owner’s personal collated and financial strength.
4- Access to external resources limited.
5- Assistance and support limited to owner’s personal network.
6- Business ends with owner’s death.

Partnerships

A partnership is an association of two or more persons as co-owners to conduct a business

jointly. There is several type of partnership each with specific requirement for investment and
tax accountability; the purpose of any partnership is to combine sources to pursue a specific
business.

Types of Partnership
General Partnership

General Partnership is a formal or informal association in which the co-owners share unlimited
liability for the business. Each partner is fully responsible for operating the business regardless
of his/her percentage share of investment.

Advantages

1. Partners provide synergy of action, expertise and interest.

2. Business income reported as partner’s personal income.
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 3. Partners have strong profile for obtaining debt financing.
4. Fringe benefits supported by business.
5. Partners have expanded network of contacts for accessing resources.
6. Simple and inexpensive to start.

Disadvantages

1. Unlimited legal liability for business by all partners, jointly and individually.
2. Unlimited liability for financial debts by all partners jointly and individually.
3. Entrepreneur must share authority and cooperation in making decision.
4. Business end with death or withdrawal of any partner.
5. Infusion of equity difficult without adding more partners.
6. Partners accountable to one and another, often resulting in conflict.

Limited Partnership

A limited partnership requires one or more “general” partners who are responsible for
managing the venture with unlimited legal liability. Limited partnership must also have one or
more “limited” partners who cannot become involved in management, and subsequently their
liability is limited to their investments.

Advantages

1. The provision for limited liability.

2. Most investors also enjoy tax advantages from expenses that can reduce personal
income tax liability.
3. Limited partners can sell or assign their investment interest.

Disadvantages

1. Little flexibility for obtaining new equity or assuming debt.

2. Limited partnership can’t pursue business activities, obtain debt, or expand beyond the
tenets of the original agreement.

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R & D Limited Partnerships

Entrepreneurs with high-tech innovations or complicated research ideas can benefit from
research and development limited partnerships called an RDLP, this limited partnership
evolved from tax-incentive legislation and Economic Recovery.

An RDLP comprises a general partner and limited partners, much like the standard limited
partnership. The RDLP also have tax-shelter advantage that allows huge incentives for research
and development.

Corporations

A corporation is a legal business entity, crated by law and managed through a Board of
directors who are responsible to stockholders for appointing and directing operating officers.

Advantages

1. Limited liability for investors.

2. Access to external resources enhanced through broad networks.
3. Assistance and support enhanced through board of directors.
4. Unlimited life as legal entity assures succession and control.
5. Stock and other securities issues provide financial expansion.
6. Salaries, benefits, other expenses can be effective income allocations.

Disadvantages

1. Complicated form of administration.

2. Entrepreneur must share authority and decision making with board.
3. Double taxations corporate income is taxed and investors’ dividends are taxed and
personal incomes after distribution.
4. Regulated at federal and state levels and subject to substantial compliance.
5. Entrepreneur may lose control of venture he/she founded.

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6.2. Sources of financing
6.2.1. Asset management

Asset management, broadly defined, refers to any system that monitors and maintains things of
value to an entity or group. It may apply to both tangible assets such as buildings and to
intangible assets such as human capital, intellectual property, and goodwill and financial assets.
Asset management is a systematic process of deploying, operating, maintaining, upgrading, and
disposing of assets cost-effectively.

Financial asset management

The most common usage of the term "asset manager" refers to investment management, the
sector of the financial services industry that manages investment funds and segregated client
accounts. An asset management is a part of a financial company which comprises experts who
manage money and handle the investments of clients. From studying the client's assets to
planning and looking after the investments, all things are looked after by the asset managers.

Infrastructure asset management

Infrastructure asset management is the combination of management, financial, economic,

engineering, and other practices applied to physical assets with the objective of providing the
required level of service in the most cost-effective manner. It includes the management of the
entire lifecycle—including design, construction, commissioning, operating, maintaining,
repairing, modifying, replacing and decommissioning/disposal—of physical and infrastructure
assets. Operating and sustainment of assets in a constrained budget environment require a
prioritization scheme. As a way of illustration, the recent development of renewable energy has
seen the rise of effective asset managers involved in the management of solar systems (solar
park, rooftops and windmills. These teams are actually more and more teaming-up with
financial asset managers in order to offer turnkey solutions to investors. Infrastructure asset
management became very important in most of the developed countries in the 21 st century,
since their infrastructure network became almost complete in the 20 th century and they have to
manage to operate and maintain them cost effectively.

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Enterprise asset management

Enterprise asset management is the business processes and enabling information systems that
support management of an organization's assets, both physical assets, called "tangible", and
non-physical, "intangible" assets.

Physical asset management: the practice of managing the entire lifecycle (design,
construction, commissioning, operating, maintaining, repairing, modifying, replacing and
decommissioning/ disposal) of physical and infrastructure assets such as structures, production
and service plant, power, water and waste treatment facilities, distribution networks, transport
systems, buildings and other physical assets. It is related to asset health management.

Infrastructure asset management expands on this theme in relation primarily to public sector,
utilities, property, and transport systems. Additionally, Asset Management can refer to shaping
the future interfaces amongst the human, built, and natural environments through collaborative
and evidence-based decision processes

Fixed assets management: an accounting process that seeks to track fixed assets for the
purposes of financial accounting

IT asset management: the set of business practices that join financial, contractual and
inventory functions to support life cycle management and strategic decision making for the IT
environment. This is also one of the processes defined within IT service management

Digital asset management: a form of electronic media content management that includes
digital assets

6.2.2. Equity Financing

In accounting and finance, equity is the difference between the value of the assets/interest and
the cost of the liabilities of something owned. For example, if someone owns a car worth
$15,000 but owes $5,000 on that car, the car represents $10,000 equity. Equity can be negative
if liability exceeds assets.

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In an accounting context, shareholders' equity (or stockholders' equity, shareholders' funds,
shareholders' capital or similar terms) represents the equity of a company as divided among
individual shareholders of common or preferred stock. Accounting shareholders are the
cheapest risk bearers as they deal with the public. Negative shareholders' equity is often
referred to as a (positive) shareholders' deficit.

For the purposes of liquidation during bankruptcy, ownership equity is the portion of a
business's equity which remains for the owners after all liabilities have been paid and all other
creditors have been reimbursed.

6.2.3. Venture Capital

Venture capital (VC) is money provided to seed early-stage, emerging and emerging growth
companies. Venture capital funds invest in companies in exchange for equity in the companies
they invest in, which usually have a novel technology or business model in high technology
industries, such as biotechnology and IT. The typical venture capital investment occurs after a
seed funding round as the first round of institutional capital to fund growth (also referred to as
Series A round) in the interest of generating a return through an eventual exit event, such as an
IPO or trade sale of the company. Venture capital is a type of private equity.

In addition to angel investing, equity crowd funding and other seed funding options, venture
capital is attractive for new companies with limited operating history that are too small to raise
capital in the public markets and have not reached the point where they are able to secure a
bank loan or complete a debt offering. In exchange for the high risk that venture capitalists
assume by investing in smaller and less mature companies, venture capitalists usually get
significant control over company decisions, in addition to a significant portion of the
companies' ownership (and consequently value).

Venture capital is also a way in which the private and public sectors can construct an institution
that systematically creates networks for the new firms and industries, so that they can progress.
This institution helps identify and combine business functions such as finance, technical
expertise, marketing know-how, and business models. Once integrated, these enterprises
succeed by becoming nodes in the search networks for designing and building products in their

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domain. However, venture capitalists' decisions are often biased, exhibiting for instance
overconfidence and illusion of control, much like entrepreneurial decisions in general.

6.2.4. Debt financing

Debt financing is method of financing in which a company receives a loan and gives its
promise to repay the loan.

Debt financing includes both secured and unsecured loans. Security involves a form of
collateral as an assurance the loan will be repaid. If the debtor defaults on the loan, that
collateral is forfeited to satisfy payment of the debt. Most lenders will ask for some sort of
security on a loan. Few, if any, will lend you money based on your name or idea alone.

6.2.5. Government Programs

Within the legal realm of Government Programs, any laws, acts, ordinances, any and all
legislation latent within interaction(s) in which the Federal Government undergoes with regard
to its citizens may fall within the scope of Administrative Law and Federal Law. Government
Programs are offered in a variety of forms, which typically provide assistance and relief to
individuals in need; the nature of being in the state of ‘need’ can vary depending on the
expressed details of a given situation - Government Programs can include insurance, financial
assistance, housing assistance, and additional compensatory measures.

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