ENTREPRENEURIAL DEVELOPMENT

UNIT – V: Startup and Venture Capital

Date: 30.03.2020

Topic: Opportunity, Ideation, Customer discovery & Market Analysis

1. Opportunity:

The concept of an ‘entrepreneurial opportunity’ is central for the study and theory of
entrepreneurship.
Entrepreneurs are individuals who pursue entrepreneurial opportunities. Without
entrepreneurial opportunities, there will be no ‘entrepreneurship’.

An ‘entrepreneurial opportunity’, thus, is a situation where entrepreneurs can take action

to make a profit. In its current form, the theory of entrepreneurial opportunity informs us
that if we want to become entrepreneurs, we should go find an opportunity. 

Types of entrepreneurial opportunities:

 Buy a Franchise

This involves having an opportunity to start your business from already set-up business. It is
expected that such entrepreneurs buy a franchise opportunity. A franchise is an existing
business with a solid business plan and process already in place. An entrepreneur can operate a
new business under a recognized business name and receive support from the franchise
headquarters with marketing, promotional materials, new business products or services, etc.
Good examples of popular franchises are McDonalds and Subway restaurants, home cleaning
businesses, Dollar Store, or fitness centers.

 Distributorship or Dealership

An important business opportunity is with distributorships and dealerships. A distributor is a

person or business agent that has an agreement to sell products or services produced by
another company. A dealer is much like a distributor, but gives more focus to a single/specific
product or service. As an Auto dealership, he may sell only Toyotas or as an insurance agent, he
might consider only life insurance.
 Network Marketing

In addition to distributing the product or services offered by the parent company, a network
marketer also endeavors to recruits other distributors, hence creating a network of distributors
and earning considerable income through residual commission. This approach is also called
Multilevel Marketing.

 Licensing

Licensing is another business opportunity. Opportunity through licensing offers an

entrepreneur the right to be creative and invent product or service, but retaining the name
brand, icon or trademark of the widely recognized business.

 Finding and Filling a Niche

Another area where opportunities find attraction to the entrepreneur is in finding or filling a
small niche. A niche is small area where a business opportunity is likely to bring profit. The
superior idea does not always win. A well-timed product or service has a greater likelihood of
success. Marketing the right idea into the right niche at the right time is an awesome
combination.

2. Ideation:
Ideation refers to the process of developing and conveying prescriptive ideas to others, typically
in a business setting. It describes the sequence of thoughts—from the original concept to
implementation. Ideations can spring forth from past or present knowledge, external
influences, opinions, convictions, or principles. Ideation can be expressed in graphical, written,
or verbal terms.

Ideation is a key component of any successful business. For example, Google encourages
employees to spend as much as 20% of their work hours meditating on new ideas that
personally intrigue them and potentially solve real problems. This focus on ideation allows
companies to become innovative or remain competitive, by increasing the likelihood of new
product rollouts, increased customer acquisition, and superior financial performance.

Ideation can be applied both internally and externally.

• When ideation is used internally, businesses seek to gather ideas from their employees,
who work on and develop the products and services. Internal ideation often consists of group
activities such as brainstorming sessions and prototyping (depending on the industry).

• When ideation is used externally, businesses usually target their pool of existing
customer since who knows their product better than those who actually use it!? Customers
have the knowledge to provide businesses with ideas on product/service improvements, so
most external ideation efforts are directed this way.

IDEATION

Ideation is the process where you generate ideas and solutions through sessions such as
Sketching, Prototyping, Brainstorming, Brainwriting, Worst Possible Idea, and a wealth of other
ideation techniques.

A 4 steps approach

Step 1: Scope

• What will you like to do?

• What’s the problem you have identified?

• Define problem statement

Step 2: Generate

• Look for various solutions for your problem.

• Generate multiple scenarios – ideas

Step 3: Analyze

• So through each scenario/idea and analyze

Step 4: Optimize

• Fine tune the idea

Relook at all ideas & analyze

• Get rid of the ideas that are less likely to solve the problem

• Continue until you have found the 10 best ideas

• Look at each idea and understand its pros and cons

• Choose only one idea

• Conceptualize the solution by summing up the different components of the idea

Styles of ideation include the following:

 Problem solution: This straightforward method is where an individual identifies a problem

that he or she subsequently solves.
 Derivative idea: This involves making improvements to an existing idea.
 Symbiotic ideas: This is a collision of several incomplete ideas that combine to create a
fully-baked, holistic idea.

3. Customer Discovery:
The process of getting to know your customer and how your proposed solution can help solve a
problem is most commonly known as customer discovery. 

Steps involved in customer discovery:

Step 1: Craft your value proposition hypothesis. Before you start having conversations with
potential customers, you need to have an idea of the problem you believe you are solving with
your product. Once you have a basic outline of the problem and your solution, you’re ready to
test your hypothesis.

 Target audience - The primary audience is lawmakers and chamber members/investors

 Urgent need - Chambers need to publish data to support important policymaking  decisions
and track progress against strategic plans

 Ease of setup  - To turn the website on, it requires minimal effort from chamber staff

Step 2: Set up phone calls and in-person meetings to test your value proposition and demo your
product. You should set up meetings with potential customers in your market and with
organizations affiliated with your potential customers.

Step 3: Compile feedback and re-asses product-market fit. Now it’s time to pull together all of
your findings and figure out if your original hypothesis about the problem and your solution
were correct.
After completing these three steps, you’ll often find that you didn’t completely understand the
problem and/or that your proposed solution is really only a partial solution.

4. Market analysis:
A market analysis is a quantitative and qualitative assessment of a market. It looks into the size
of the market both in volume and in value, the various customer segments and buying patterns,
the competition, and the economic environment in terms of barriers to entry and regulation.

Plan for market analysis:

1. Demographics and Segmentation

When assessing the size of the market, your approach will depend on the type of business you
are selling to investors. If your business plan is for a small shop or a restaurant then you need to
take a local approach and try to assess the market around your shop. If you are writing a
business plan for a restaurant chain then you need to assess the market a national level.

Depending on your market you might also want to slice it into different segments. This is
especially relevant if you or your competitors focus only on certain segments.

2. Target Market
The target market is the type of customers you target within the market. Now it is time to focus
on the more qualitative side of the market analysis by looking at what drives the demand.

3. Market Need
This section is very important as it is where you show your potential investor that you have an
intimate knowledge of your market. You know why they buy! Here you need to get into the
details of the drivers of demand for your product or services.

4. Competition
The aim of this section is to give a fair view of who you are competing against. You need to
explain your competitors' positioning and describe their strengths and weaknesses. You should
write this part in parallel with the Competitive Edge part of the Strategy section. The idea here
is to analyze your competitor’s angle to the market in order to find a weakness that your
company will be able to use in its own market positioning. One way to carry the analysis is to
benchmark your competitor against each of the key drivers of demand for your market (price,
quality, add-on services, etc.) and present the results in a table.

5. Barriers to Entry
This section is all about answering two questions from your investors:
1. What prevents someone from opening a shop in front of yours and take 50% of your
business?

2. Having answered the previous question what makes you think you will be successful in
trying to enter this market? (start-up only)

Here are a few examples of barriers to entry:

 Investment
 Technology
 Brand
 Regulation
 Access to resources
 Access to distribution channels
 Location

6. Regulation
If regulation is a barrier at entry in your sector then it is advised to merge this section with the
previous one. Otherwise this section should be just a tick the box exercise where you explain
the main regulations applicable to your business and which steps you are going to take to
remain compliant.

5. Business Incubation centers:

A business incubator is a workspace created to offer startups and new ventures access to the
resources they need, all under one roof. In addition to a desk or office, incubators often provide
resident companies with access to expert advisors, mentors, administrative support, office
equipment, training, and/or potential investors.

The National Business Incubation Association (NBIA) defines business incubators as a catalyst
tool for either regional or national economic development.

Most common incubator services:

They help with business basics

 They provide Networking activities

 They provide Marketing assistance
 Incubators help in Market Research
 They provide High-speed Internet access
 Incubators Help with accounting/financial management
 They help in providing Access to bank loans, loan funds and guarantee programs
 Incubators help with presentation skills
 They link to higher education resources etc.

6. Venture capital financing:

Venture capital is a long term capital invested in companies which involves high risk. The
financing involves high risk but is compensated by high return. The financial activity for making
available finances, capital or funds on the beginning of new business enterprise or industry for
the entrepreneur for pre-decided objectives is known as venture capital.

Features:
 New Concept

Venture capital is a new concept because it has been formed for fulfilling the financial needs of
entrepreneurs taking high risks for technical developments and processing.

 Risk and Adventure

The provision and use of venture capital are possible only where the entrepreneur establishes
risk involving industry for the first time.

 Important Tools and Method

Venture capital is called as an important tool or method because through it is not only the
innovators are encouraged to establish Industries, but small and medium entrepreneurs are
also encouraged.

 Various Forms

Various forms of venture capital are visible, like – in the project, venture capitalist functions as
an entrepreneur, as co-promoters and in form of equity participation in various stages of
projects.

 Investment of Venture Capital

One important feature of the capital venture is that an individual, Institutions, and government
invest the venture capital only in High-risk projects because only they have wide possibilities.

 Distribution of Profits and Risks of Enterprise

We know that in entrepreneurship, an individual (entrepreneur) or group of individuals take the

risk and for that, they get the return. Under some projects, venture capitalists work as co-
promoters with the entrepreneur, then they distribute the profits and risks combined,
according to the agreed ratio.

 Investment in Small and Medium Enterprises

Investment of venture capital is made for the establishment of small and medium enterprises
only, and not for the establishment of large Industries.

 New Enterprises

Venture capital is often invested in new enterprise only, because new techniques and
methods are used for the production of new commodities, with the hope that it will enable the
earning of maximum profits.

 An Important Input

Venture capital is an important and needed input, without which neither new enterprise can be
established nor marketing strategy is possible and management and organizing are Virtually
Impossible. Thus, venture capital is also an input along with other inputs (raw materials and
Labor), etc.

 Availability of Venture Capital

Venture capital is available only for commercialization of new ideas and new technology..

 Limit of Investment

Venture capitalists make investments in venture capital development of established enterprise

to the highest stage or up to full potential. Thereafter, they start disinvestments of their shares
to the promoters or other persons in the market.

 Not Payable on Demand

Venture capital is not payable on demand, like paying off loans, whereas General capital is
payable on demand and in accordance with the provisions of the act.

 Financial Process for Making Funds Available from the Beginning

Venture capital is a financial process for making the funds available from the beginning or starts
a new business enterprise.

 Representation of Funds

The industry or institution forms various types of sources of funds to meet its financial
requirements and uses them according to need, so that financial adjustments may not have to
be made in an emergency.

 Venture Capital is Different than Other Investment Vehicles

The investors make the investment of capital in the institution, by taking various objectives in
view, like, development, expansion, research, investigations, innovations, etc. for existing
project.

7. Structure and regulatory framework of venture capital in India:

Venture capital is a type of private equity capital typically provided to early stage, high-
potential, and growth companies in the interest of generating a return through an eventual
realization event such as IPO or trade sale of the company. Venture capital investments are
generally made as cash in exchange for shares in the invested company.

Structure of venture capital firms:

Venture capital firms are typically structured as partnerships, the general partners of which
serve as the managers of the firm and will serve as investment advisors to the venture capital
firms raised. Typical career backgrounds vary, but broadly speaking venture capitalists come
from either an operational or a finance background.
 Venture partners:

Venture partners are expected to source potential investment opportunities and typically are
compensated only for those deals with which they are involved.

 Entrepreneur-in-residence (EIR):

EIRs are experts in a particular domain and perform due diligence on potential deals. EIRs are
engaged by venture capital firms temporarily (6 to 18 months) and are expected to develop and
pitch startup ideas to their host firm.

 Principal:

This is a mid-level investment professional position and often considered a partner-track

position. Principals are either promoted from a senior associate position or have commensurate
experience in fields such as investment banking or consulting.

 Associate:

This is typically the most junior apprentice position within a venture capital firm. After a few
successful years, an associate may move up to the senior associate position and potentially
principal and beyond. Associates will often have worked for 1-2 years in another field such as
investment banking or management consulting.

Structure of venture capital fund:

 Generally a partnership firm.

 Pooled funds in the form of commitment for a common objective.
 Generally for 10 years with a clause of extension.
 Average exposure 3-7 years.
 Beyond 5 years Venture capitalist looks for change in portfolio to cut exposure to
management and marketing risk of individual/product.
 Investors have a fixed commitment in the fund which is called down by Venture capitalist
over time as the fund makes the investment.
 Substantial penalties to limited partners for not honoring a capital call.

Framework:

The venture capital fund is now defined as a find established in the form of a trust, a company
including a body corporate and registered with SEBI which:
  Has a dedicated pool of capital
 Raised in the manner specified under the regulations and
 To invest in venture capital undertakings in accordance with the regulations.

8. Investment process and evaluation:

Investment process:

1. Investment Policy:
The first stage determines and involves personal financial affairs and objectives before making
investments. It may also be called preparation of the investment policy stage. The investor has
to see that he should be able to create an emergency fund, an element of liquidity and quick
convertibility of securities into cash. This stage may, therefore; be considered appropriate for
identifying investment assets and considering the various features of investments.

2. Investment Analysis:
When an individual has arranged a logical order of the types of investments that he requires on
his portfolio, the next step is to analyze the securities available for investment. He must make a
comparative analysis of the type of industry, kind of security and fixed vs. variable securities.
The primary concerns at this stage would be to form beliefs regarding future behavior or prices
and stocks, the expected returns and associated risk.

3. Valuation of securities:

The third step is perhaps the most important consideration of the valuation of investments.
Investment value, in general, is taken to be the present worth to the owners of future benefits
from investments. The investor has to bear in mind the value of these investments. An
appropriate set of weights have to be applied with the use of forecasted benefits to estimate
the value of the investment assets. Comparison of the value with the current market price of
the asset allows a determination of the relative attractiveness of the asset. Each asset must be
valued on its individual merit. Finally, the portfolio should be constructed.

4. Portfolio construction:
 Under features of an investment programme, portfolio construction requires knowledge of
the different aspects of securities. These are briefly recapitulated here, consisting of safety
and growth of principal, liquidity of assets after taking into account the stage involving
investment timing, selection of investment, and allocation of savings to different
investments and feedback of portfolio.

Evaluation process:

Investment Evaluation is the two-fold task of balancing investment risk against anticipated
return. When evaluating an investment emphasis should be laid on the question “Will the
expected return justify the risk?” rather than on “What is the rate of return?”we can project the
clients’ sources and applications of funds for the upcoming time periods.

 Widely used methods of investment analysis are payback period, internal rate of return
and net present value. Each provides some measure of the estimated return on an
investment based on various assumptions and investment horizons.
 When a future investment is examined we compare its cost vs its revenue. Cost is the
cash outflow needed for the investment and revenue includes the future income stream
and / or the proceeds from the sale of the investment at the end of a period of time
(because money has a time value, the investment’s cash flows must be recorded as they are
expected to occur).

9. Structuring venture capital financing:

Venture capital is equity financing, where an investment partner sits alongside the entrepreneur
and assists in strategically managing risk associated with building high potential, fast growth and
capital efficient companies.

Venture Fund is the main investment vehicle used for venture investing. Each is structured as a
limited partnership governed by partnership agreement covenants, of finite life (usually 7–10
years). It pays out profit sharing through carried interest (about 20% of the fund’s returns).

Management Company is the business of the fund. The management company receives the
management fee from the fund (about 2%) and uses it to pay the overhead related to operating
the venture firm, such as rent, salaries of employees, etc. It makes carried interest only after the
Limited Partners have been repaid.
Limited Partners (LPs) is someone who commits capital to the venture fund. LPs are mostly
institutional investors, such as pension funds, insurance companies, endowments, foundations,
family offices, and high net worth individuals.

General Partner (GP) is the venture capital partner of the management company. GPs raise and
manage venture funds, set and make investment decisions, and help their portfolio companies
exit, because they have a fiduciary responsibility to their Limited Partners.

Portfolio Companies (Startups) receive financing from the venture fund in exchange for shares
of preferred equity. The fund can only realize gains if there is a liquidity event (such as mergers
and acquisitions or IPOs) and these shares can be converted to cash.

10. Exit strategies of venture capitalists:

Exit strategies are plans executed by business owners, investors, traders, or venture
capitalists to liquidate their position in a financial asset upon meeting certain criteria.  An exit
plan is how an investor plans to get out of an investment.

When are Exit Strategies Used?

An exit plan may be used to:

 Close down a non-profitable business

 Execute an investment or business venture when profit objectives are met
 Close down a business in the event of a significant change in market conditions
 Sell an investment or a company
 Sell an unsuccessful company to limit losses
 Reduce ownership in a company or give up control.

Importance of exit plan:

It may seem counter intuitive for a business owner to develop exit strategies.

 Personal health issues or a family crisis: You may be affected by personal health issues
or experience a family crisis. These issues can take away your focus on effectively
running the company. An exit plan would help ensure the company will be run
smoothly.
 An economic recession: Economic recessions can have a significant effect on your
company and you may want your company to avoid assuming the impact of a recession.
 Unexpected offers: Large players may look to acquire your company. Even if you do not
have any intentions of immediately selling the company, you would be able to have an
insightful conversation if you have thought of an exit plan.
 A clearly defined goal: By having a well-defined exit plan, you will also have a clear goal.
An exit plan has a significant influence on your strategic decisions.