COURSE CODE: ENT 101

COURSE DESCRIPTION: THE ENTREPRENEURIAL MIND

COURSE INTENDED 1. Understand the basic principle of entrepreneurship

LEARNING OUTCOMES:
2. Examine and practice critical tools, functions, concepts and
skills that are required for an entrepreneur in a small scale
business.
3. Interpret the results of environmental scanning and conduct a
feasibility study.
4. Construct a comprehensive business plan in preparation for
entrepreneurial career.

LEARNING MATERIAL
FOR WEEK NUMBER:
8
I. TITLE: Pathways to Entrepreneurial Ventures
Sources of Capital for Entrepreneurs
II. OBJECTIVES: After this lesson, you are expected to:

1. To describe the major pathways and structures for

entrepreneurial ventures.
2. To discuss and define the benefits of franchise.
3. To examine and differentiate the sources of capital for
entrepreneurs.
III. INTRODUCTION: This lesson will gives an overview to the pathways and sources of
capital for entrepreneurs on how they will strategize and sustain their
businesses. It will also give an insights on how they can generate ideas
and get sources they will need to become a successful entrepreneurs.

IV. CONTENTS:

CREATING NEW VENTURES

The most effective way to start a new business is to create a new and unique the major
pathways and structures for entrepreneurial ventures. Every prospective entrepreneur wants to
know the best methods for getting a business started.

A New-New Approach to Creating New Ventures

New products or services frequently enter the market. Typical examples include
smartphones, MP3 players, plasma televisions, and global positioning systems (GPS). Objects that fall
out of your hand, household chores that are difficult to do, and items that are hard to store are
examples of everyday annoyances that have led to new venture creations.

Most business ideas tend to come from people's experiences. In general, the main sources for
most entrepreneurs are prior jobs, hobbies or interests, and personally identified problems. The
new-new approach indicates the importance of people's awareness of their daily lives (work and free
time) for developing new business ideas.

Facebook was founded by Harvard University student Mark Zuckerberg, who was frustrated
by the lack of networking facilities on campus-a simple annoyance that has led to: spectacularly
successful technological juggernaut. Now one of the most trafficked sites on the Internet, Facebook
has, in less than 20 years after its inception, over 2.2 billion monthl! users and revenues exceeding
 $47 billion.3 In addition, Facebook's initial public offering in 2012 rivaled the largest ever
accomplished.

NEW-OLD APPROACH TO CREATING NEW VENTURES

Most small ventures do not start with a totally unique idea. Instead, an individual “piggy
backs" on someone else's idea by either improving a product or offering a service in an area in which
it is not currently available-hence the term new-old approach. Some of the most common examples
are setting up restaurants, clothing stores, or similar outlets in sprawling suburban areas that do not
have an abundance of these stores. Of course, these kinds operations can be risky because
competitors can move in easily.

Potential owners considering this kind of enterprise should try to offer a product or service
that is difficult to copy. For example, a computerized billing and accounting service for medical
doctors can be successful if the business serves a sufficient number of doctors to cover the cost of
computer operations and administrative expenses in order to turn an adequate profit. Or perhaps
another type enterprise is likely to be overlooked by other would-be entrepreneurs.

NEWNESS FRAMEWORK FOR NEW VENTURES

Linking the different dimensions of innovation newness-technology newness and/or market

newness-with the level of innovation in the newness-incremental versus radical innovations-
provides a framework for broadly classifying the overall “newness” of an innovation within an
entrepreneurial venture.

The dimensions of newness (technological and market) and the levels of newness (radical
and incremental) provide a basis for understanding how a firm's market orientation is related to
successful breakthrough innovation. Thus, the dimensions and levels of newness can be useful in
understanding how new an entrepreneur's venture stands within the market and/or technology
domains. Regardless of whether the business is based on a new-new or a new-old idea, the
prospective owner cannot rely exclusively on gut feeling or intuition to get started.

ACQUIRING AN ESTABLIHED ENTREPRENEURIAL VENTURE

A prospective entrepreneur may seek to purchase a business venture rather than start n
enterprise. This can be a successful method of getting into business, but numerous factors need to be
analyzed. Purchasing a business venture is a complex transaction, and the advice of professionals
always should be sought.

PERSONAL PREFERENCES

Entrepreneurs need to recognize certain personal factors and to limit their choices of
ventures accordingly. An entrepreneur's background, skills, interests, and experience are all
important factors in selecting the type of business to buy.

EXAMINATION OF OPPORTUNITIES

Entrepreneurs in search of a possible venture to buy need to examine the available

opportunities through various sources:

 Business brokers. Professionals specializing in business opportunities often can

provide leads and assistance in finding a venture for sale.
  Newspaper ads. “Business Opportunity” classified ads are another source. Because
an ad often will appear in one paper and not another, it may be necessary to check
the classified sections of all the papers in the area.
 Trade sources. Suppliers, distributors, manufacturers, trade publications, trade
associations, and trade schools may have information about businesses for sale.
 Professional sources. Professionals such as management consultants, attorneys,
and accountants often know of businesses available for purchase.
 Online sources. There are many business marketplaces online; so many buyers
begin their searches on one of these sites.

ADVANTAGES OF ACQUIRING AN ONGOING VENTURE

Of the numerous advantages to buying an ongoing venture, three of the most important are
as follows:

1. Because the enterprise is already in operation, its successful future operation is likely.

2. The time and effort associated with starting a new enterprise are eliminated.

3. It sometimes is possible to buy an ongoing business at a bargain price.

EVALUATION OF THE SELECTED VENTURE

After the entrepreneur considers personal preferences and examines information sources,
the next step is to evaluate specific factors of the venture being offered for sale:

 The business environment. The local environment for business should be analysed to
establish the potential of the venture in its present location.
 Profits, sales, and operating ratios. The business's profit potential is a key factor in evaluating
the venture's attractiveness and in later determining a reasonable price for it.
 The business assets. The tangible (physical) and intangible (e.g., reputation) assets of the
business need to be assessed. The following assets should be examined:
 Inventory (age, quality, salability, condition)
 Furniture, equipment, fixtures (value, condition, leased or owned)
 Accounts receivable (age of outstanding debts, past collection periods, credit
standing of customers)
 Trademarks, patents, copyrights, business name (value, role in the business's
success, degree of competitive edge)
 Goodwill (reputation, established clientele, trusted name)

NEGOTIATING THE DEAL

The potential buyer must negotiate the final deal. This negotiation process, however, involves
a number of factors. Four critical elements should be recognized: information, time, pressure, and
alternatives.

Information may be the most critical element during negotiations. The performance of the
company, the nature of its competition, the condition of the market, and clear answers to all of the
key questions presented earlier are all vital components in the determination of the business's real
potential. Without reliable information, the buyer is at a costly disadvantage. The seller never should
be relied on as the sole information source.
 Finally, the alternatives available to each party become important factors. The party with no
other alternatives has a great deal of interest in concluding negotiations quickly. Additional
considerations that a person should keep in mind when purchasing a business include the following:

1. Request that the seller retain a minority interest in the business or establish the final
purchase price dependent on the performance of the business over a three-to-five-year span. To keep
the seller concerned about the immediate future performance of the business.

2. Buyers should be wary of any promises made without written corroboration.

3. Spending time with the seller's books, reconstructing financial statements to determine
how much cash is actually available, is an absolute.

4. And, it goes without saying, investigations should be thorough and wide-ranging,

encompassing interviews not only with the owner but with vendors, competitors, customers and
employees as well.

FRANCHSING: THE HYBRID

For the seller, alternatives include finding another buyer in the near future or not selling at
all. He may continue to run the business, hire a manager to do so, or sell off parts of the company.
Likewise, the buyer may choose not to purchase the business or may have alternative investment
opportunities available. In any event, the negotiating parties' alternatives should be recognized
because they impact the ability to reach an agreement.

HOW FRANCHISING WORKS

Business franchise systems for goods and services generally work the same way. The
franchisee, an independent businessperson, contracts for a complete business package. This usually
requires the individual to do one or more of the following:

1. Make a financial investment in the operation.

2. Obtain and maintain a standardized inventory and/or equipment package usually pur-chased from
the franchisor.

3. Maintain a specified quality of performance.

4. Follow a franchise fee as well as a percentage of the gross revenues.

5. Engage in a continuing business relationship.

In turn, the franchisor provides the following types of benefits and assistance:

1. The company name. For example, if someone bought a Burger King franchise, this would provide
the business with drawing power. A well-known name, such as Burger King, ensures higher sales
than an unknown name, such as Ralph's Big Burgers.

2. Identifying symbols, logos, designs, and facilities. For example, all McDonald's units have the same
identifying golden arches on the premises. Likewise, the facilities are similar inside.

3. Professional management training for each independent unit's staff.

4. Sale of specific merchandise necessary for the unit's operation at wholesale prices. Usually
provided is all of the equipment to run the operation and the food or materials needed for the final
product.
5. Financial assistance, if needed, to help the unit in any way possible.

6. Continuing aid and guidance to ensure that everything is done in accordance with the contract.

FRANCHISE LAW

The growth in franchise operations has outdistanced laws about franchising. A solid body of
appellate decisions under federal or state laws that relate to franchises has yet to be developed. In
the absence of case law that precisely addresses franchising, the courts tend to apply general
common-law principles and appropriate federal or state statutory definitions and rules.
Characteristics associated with a franchising relationship are similar in some respects to those of
principal/agent, employer/employee, and employer/independent contractor relationships, yet a
franchising relationship does not truly fit into any of these traditional classifications. So, the Federal
Trade Commission (FTC) enacted the Franchise Rule in an attempt to provide disclosure
requirements from franchisors.

SOURCES OF CAPITAL FOR ENTREPRENEURS

THE SEARCH FOR CAPITAL

Every entrepreneur planning a new venture confronts the same dilemma: where to find start-
up capital. But every entrepreneur may not be aware that numerous possibilities for funding exist,
nor that combination of financial packages, rather than a single source, may be appropriate.

Commercial loans, public offerings, private placements, convertible debentures, venture

capital, and informal risk capital are some of the major types of financing encountered in the search
for capital.

DEBT FINANCING

Many new ventures find that debt financing is not a choice but a necessity. Short-term
borrowing (I year or less) often is required to obtain working capital and is repaid out of proceeds
from sales. Long-term debt (term loans of 1-5 years or long-term loans maturing in more than 5
years) is used to finance the purchase of property or equipment, with the purchased asset serving as
collateral for the loans.

COMMERCIAL BANKS

It has been predicted that by 2025, only 4000 commercial banks will have survived the tough
times. Although some banks make unsecured short-term loans, most bank loans are secured by
receivables, inventories, or other assets. Commercial banks also make a large number of intermediate
term loans with maturities of 1-5 years. In about 90 percent of these cases, the banks require
collateral, which generally consists of stocks, machinery, equipment, and real estate, and systematic
repayment over the life of the loan is required. Apart from real estate mortgages and loans
guaranteed by the Small Business Administration (SBA) or a similar organization, commercial banks
make few loans with maturities greater than 5 years. Banks also may offer a number of services to a
new venture, including computerized payroll preparation, letters of credit, international services,
lease financing, and money market accounts.

To secure a bank loan, entrepreneurs typically have to answer a number of questions. Five of
the most common questions, together with descriptive commentaries, follow:

1. What do you plan to do with the money? Do not plan on using bank loans for high-risk
ventures. Banks typically lend only to the surest of all possible ventures.
 2. How much do you need? Some entrepreneurs go to their bank with no clear idea of how
much money they need. All they know is that they need cash. The more precisely an entrepreneur
can answer this question, the more likely the loan will be granted.

3. When do you need it? Never rush to a bank with immediate requests for money. Poor
planners never attract lenders.

4. How long will you need it? The shorter the period of time entrepreneurs need the money,
the more likely they are to get loans. The time at which the loan will be repaid should correspond to
some important milestone in the business plan.

5. How will you repay the loan? This is the most important question. What if plans go awry?
Can other income be diverted to pay off the loan? Does collateral exist? Even if a quantity of fixed
assets exists, the bank may be unimpressed. Experience dictates that assets sold at liquidation
command only a fraction-5 to 10 cents on the dollar-of their value.

Advantages of Debt Financing.

Not surprisingly, debt financing has both advantages and disadvantages. The advantages of
debt financing can be characterized as follows:

 No relinquishment of ownership is required.

 More borrowing, potentially, allows for greater return on equity.
 Low interest rates reduce the opportunity cost of borrowing.

Disadvantages of Debt Financing. Financing with debt has its downside:

 Regular (monthly) interest payments are required.

 Cash-flow problems can intensify because of payback responsibilities.
 Heavy use of debt can inhibit growth and development.

PEER-TO-PEER LENDING (P2P)

Peer-to-peer lending, commonly abbreviated as P2P lending, is the practice of lending money
to unrelated individuals, or “peers," without going through a bank or other traditional financial
institution. Also known as “debt-based crowdfunding” or “crowdlending,” this lending takes place
online on peer-to-peer lending companies' websites using various different lending platforms. This
form of financing is a twenty-first century phenomenon.

Peer-to-peer lenders are Internet-based sites that pool money from investors willing to lend
capital at agreed-upon rates. P2P lenders charge fees for brokering and servicing loans and collect
penalties for late payments as well.

OTHER DEBT-FINANCING SOURCES

In addition to commercial banks and social lenders, other debt-financing sources include
trade credit, accounts receivable factoring, finance companies, leasing companies, mutual savings
banks, savings and loan associations, and insurance companies. Table 8.1 provides a summary of
these sources, the business types they often finance, and their financing terms.

Trade credit is credit given by suppliers who sell goods on account. This credit is reflected
on the entrepreneur's balance sheet as accounts payable, and in most cases, it must be paid in 30-90
days. Many new small businesses obtain this credit when no other form of financing is available to
them. Suppliers typically offer this credit as a way to attract new customers.
 Accounts receivable financing is short-term financing that involves either the pledge of
receivables as collateral for a loan or the sale of receivables (factoring). Accounts receivable loans
are made by commercial banks, whereas factoring is done primarily by commercial finance
companies and factoring concerns.

Accounts receivable bank loans are made on a discounted value of the receivables pledged. A
bank may make receivable loans on a notification or non-notification plan. Under the notification
plan, purchasers of goods are informed that their accounts have been assigned to the bank.

EQUITY FINANCING

Equity financing is money invested in the venture with no legal obligation for entrepreneurs
to repay the principal amount or pay interest on it. The use of equity funding thus requires no
repayment in the form of debt. It does, however, require sharing the ownership and profits with the
funding source. Financial equity instruments, which give investors a share of the ownership, may
include the following:

 Loan with warrants provides the investor with the right to buy stock at a fixed price
at some future date. Terms on the warrants are negotiable. The warrant customarily
provides for the purchase of additional stock, such as up to 10 percent of the total
issue at 130 percent of the original offering price within a five-year period following
the offering date.
 Convertible debentures are unsecured loans that can be converted into stock. The
conversion price, interest rate, and provisions of the loan agreement are all areas for
negotiation.
 Preferred stock is equity that gives investors a preferred place among the creditors
in the event the venture is dissolved. The stock also pays a dividend and can increase
in price, thus giving investors an even greater return. Some preferred stock issues are
convertible to common stock, a feature that can make them even more attractive.
 Common stock is the most basic form of ownership. This stock usually carries the
right to vote for the board of directors. If a new venture does well, common-stock
investors often make a large return on their investment. These stock issues often are
sold through public or private offerings.

PUBLIC OFFERINGS

Going public is a term used to refer to a corporation's raising capital through the sale of
securities on the public markets. Following are some of the advantages to this approach.

 Size of capital amount. Selling securities is one of the fastest ways to raise large sums of
capital in a short period of time.
 Liquidity. The public market provides liquidity for owners since they can readily sell their
stock.
 Value. The marketplace puts a value on the company's stock, which in turn allows value to be
placed on the corporation.
 Image. The image of a publicly traded corporation often is stronger in the eyes of suppliers,
financiers, and customers.

These figures reflect the tremendous volatility that exists in the stock market, and thus
entrepreneurs should be aware of the concerns that confront them when they pursue the IPO
market. In addition, many new ventures have begun to recognize some other disadvantages of
going public:
  Costs. The expenses involved with a public offering are significantly higher than for other
sources of capital. Accounting fees, legal fees, and prospectus printing and distribution,
as well as the cost of underwriting the stock, can result in high costs.
 Disclosure. Detailed disclosures of the company's affairs must be made public. New-
venture firms often prefer to keep such information private.
 Requirements. The paperwork involved with SEC regulations, as well as continuing
performance information, drains large amounts of time, energy, and money from
management. Many new ventures consider these elements better invested in helping the
company grow.
 Shareholder pressure. Management decisions are sometimes short term in nature to
maintain a good performance record for earnings and dividends to the shareholders. This
pressure can lead to a failure to give adequate consideration to the company's long-term
growth and improvement.

CROWDFUNDING

A financial phenomenon of the twenty-first century is the creation of a funding vehicle

for ventures through the use of the general public. Known as crowdfunding, this practice seeks
funding for ventures by raising monetary contributions from a large number of people,
typically via the Internet. In the United States, legislation in the 2012 JOBS Act allowed for a
wide pool of small investors with few restrictions. The crowdfunding model has three
principal parts: the entrepreneur who proposes the idea or venture to be funded, individuals
or groups who support the idea, and a moderating organization (the “platform”) that brings
the parties together to launch the idea.

Therefore, it is wise for any entrepreneur to be aware of the potential concerns that
still exist with crowdfunding:

 Reputation. Reaching financial goals and successfully gathering substantial public

support but being unable to deliver on the venture could have a negative impact.
 IP protection. Concerns exist about idea theft and protecting intellectual property.
 Donor dilution. If the same network of supporters is reached out to multiple times,
they will eventually tire of the necessary support.
 Investor management. The entrepreneur must manage investors, which is time-
consuming.
 Public fear. Without a proper regulatory framework, the likelihood of a scam or abuse
of funds is high.

Crowdfunding campaigns provide entrepreneurs with a number of benefits:

 Funding: Access to smaller amounts of funding that major investors usually ignore
 Profile: Raises the new venture's reputation
 Marketing: Demonstrates there is an interested market for the venture
 Engagement: Creates a forum to engage with audiences
 Feedback: Offers an opportunity to beta-test with access to market feedback

THE VENTURE CAPITAL MARKET

Venture capitalists are professional investors who invest in business ventures, providing
capital for start-up, early stage, or expansion. Venture capitalists are looking for a higher rate of
return than would be given by more traditional investments. They are a valuable and powerful source
 of equity funding for new ventures. These experienced professionals provide a full range of
financial services for new or growing ventures, including the following.

 Capital for start-ups and expansion

 Market research and strategy for businesses that do not have their own marketing
departments
 Management-consulting functions and management audit and evaluation
 Contacts with prospective customers, suppliers, and other important businesspeople
 Assistance in negotiating technical agreements
 Help in establishing management and accounting controls
 Help in employee recruitment and development of employee agreements
 Help in risk management and the establishment of an effective insurance program
 Counselling and guidance in complying with a myriad of government regulations