07-09-2022
Outline
An Overview of Entrepreneurship
Dr. M.K. Nandakumar
Indian Institute of Management Kozhikode
Conceptualization of Entrepreneurship
• In the early years, entrepreneurship was referred to as a study of
small businesses and new firms, rather than a unique conceptual
domain.
• Although a conceptual framework to explain and predict relative
performance between firms is useful to strategic management, it is
not sufficient for entrepreneurship.
• Entrepreneurship is concerned with the discovery and exploitation of
profitable opportunities.
• A framework for describing new venture creation
• Entrepreneurial Mindset
• Entrepreneurial Passion
• Fear of Failure
Definition of Entrepreneurship
• Entrepreneurship involves the interplay between two phenomena:
the presence of lucrative opportunities and the presence of
enterprising individuals.
• The definition of entrepreneurship becomes incomplete, if it is
defined in terms of the individual alone.
• Entrepreneurship is defined as the scholarly examination of how, by
whom, and with what effects, opportunities to create future goods
and services are discovered, evaluated, and exploited.
• Entrepreneurship involves the study of sources of opportunities; the
processes of discovery, evaluation, and exploitation of opportunities;
and the set of individuals who discover, evaluate, and exploit them.
 07-09-2022

Entrepreneurship Research Why study entrepreneurship?

Entrepreneurship research primarily examines three types of research • As Baumol eloquently remarks, the study of business without an
questions: understanding of entrepreneurship is like the study of Shakespeare in
• (1) why, when, and how opportunities for the creation of goods which "the Prince of Denmark has been expunged from the
and services come into existence; discussion of Hamlet“.
• (2) why, when, and how some people and not others discover and
exploit these opportunities; and
• (3) why, when, and how different modes of action are used to
exploit entrepreneurial opportunities.

A framework for describing new venture creation Individuals

• Need for achievement
• Extent of control on the life events
INDIVIDUALS • Risk taking propensity
• Job satisfaction
• Previous work experience
ENVIRONMENT
• Entrepreneurial parents
ORGANIZATION
• Age
• Education
PROCESS • Openness to innovation
• Bureaucratic or entrepreneurial style
• Stylistic orientation - craftsman or opportunistic
• Psychological attributes

Gartner, W.B. (1985) A Conceptual Framework for Describing the Phenomenon of New Venture Creation
 07-09-2022

Differences in the Characteristics of Entrepreneurs Organization

• There are significant differences among entrepreneurs and their
ventures. This diversity may be larger than the differences between • Organizational characteristics like:
entrepreneurs and non- entrepreneurs and between entrepreneurial • Type of firm: manufacturing, service, retail, wholesale
firms and non entrepreneurial firms.
• Competitive strategy
• Type of product or service
• The entrepreneurship literature suggests that different types of
• Franchising/Licensing
entrepreneurs exist and entrepreneurs in certain industries are very
different from those in other industries.

Process Environment
Venture capital availability
• The entrepreneur: Presence of experienced entrepreneurs
• locates a business opportunity Technically skilled labour force
Accessibility of suppliers
• accumulates resources
Accessibility of customers or new markets
• makes products and services Governmental influence
• produces the product Proximity of universities
• builds an organization Availability of land or facilities
• responds to government and society Accessibility of transportation
Availability of supporting services
Living conditions
 07-09-2022

Environment (cont’d) Relevance of the four-dimensional Framework

• High percentage of immigrants in the population
• Large industrial base It is necessary to investigate the four dimensions and understand how
they interact with variables from other dimensions to describe the new
• Larger size urban areas venture creation process.
• Availability of financial resources
• Barriers to entry
• Rivalry among existing competitors
• Pressure from substitute products
• Bargaining power of suppliers
• Bargaining power of buyers

New Venture Creation Process Entrepreneurial Mindset

• New venture creation is the organizing of new organizations. • Entrepreneurial mindset provides a framework to formulate how to
think and then actually think about an opportunity

• Multiple dimensions interplay in the new venture creation process. • A mindset is goal directed emphasizing prior experiences.

• Individuals with expertise are a key element of the new venture. • Entrepreneurial mindset is the “ability to rapidly sense, act, and
mobilize in response to a judgmental decision under uncertainty
about a possible opportunity for gain.” (McMullen and Shepherd,
• New venture is not instantaneously produced, but evolves over time. 2006).

• It is forced to seek out resources, and it competes in the market • It is the “ability to identify and exploit opportunities without regard to
the resources currently under their control”. (McMullen and Kier,
place. 2016)
 07-09-2022

Three distinct aspects of Entrepreneurial Mindset The Triad of the Entrepreneurial Mindset
The Cognitive Aspect
(Thinking)
• The entrepreneurial cognitive aspect—how entrepreneurs use mental
models to think.

• The entrepreneurial behavioral aspect—how entrepreneurs engage or

act for opportunities.

• The entrepreneurial emotional aspects—what entrepreneurs feel in

entrepreneurship. The Emotional Aspect The Behavioral Aspect
(Feeling) (Acting)

The cognitive aspect The behavioural aspect

• Cognition refers to mental processes. These processes include
attention, remembering, producing and understanding language,
solving problems, and making decisions.
• Entrepreneurial cognition explains how entrepreneurs use mental
models to combine together previously unconnected information that
helps them to identify and invent new products or services, and to
assemble the necessary resources to start and grow businesses.
• Entrepreneurial mindset is linked to cognitive adaptability.
• Cognitive adaptability refers to the ability to be dynamic, flexible, and
self-regulating in one’s cognitions in dynamic and uncertain
environments.
• The end of all the cognition and motivation of entrepreneurs is to
take some action resulting in a venture.
• Thoughts, intentions, motivations, learning, and intelligence without
action does not create economic value.
• Economic value results from the actions of individuals as they buy,
sell, gather and deploy resources, work, etc.
• Entrepreneurs do not pre exist.
• They emerge as a function of the novel, distinctive, and experiential
nature of the venture creation process.

The behavioural aspect (cont’d)
• Venture creation process results in creating an entrepreneur.
• The creation of an enterprise involves three parallel, interactive
phenomena: emergence of the opportunity, emergence of the
venture, and emergence of the entrepreneur.
• None of these three are predetermined or fixed—they define and are
defined by one another.
The Role of Emotion Regulation in Entrepreneurship
• If the entrepreneurs are able to regulate their emotions they should
be able to navigate the ups and downs of the entrepreneurial
landscape more effectively and increase their chances of success.
• Emotion regulation is the process by which people try to control
which emotions they experience, and when and how they experience
and express them.
• Emotions can have positive effects on entrepreneurial outcomes.
• However, extreme or poorly-timed emotions, and severe fluctuations
in emotions harm entrepreneurial outcomes.
07-09-2022
The emotional aspect
• The emotions experienced by the entrepreneur interplay while
making entrepreneurial decisions.
• Positive and negative emotions have different types of impacts on
entrepreneurial decision making.
• The emotional side must be considered a crucial element of the
entrepreneurial mindset.
• All potential entrepreneurs should realise that negative and positive
sides of entrepreneurial mindset exist.
The Role of Emotion Regulation in Entrepreneurship
(cont’d)
• Too high levels of positive emotions have been linked with declining
performance.
• Negative emotions could give a warning that the entrepreneur and
the venture are not doing well, and the entrepreneur could take
corrective actions.
• However, high levels of negative emotions may lead to negativity bias
– a tendency to overestimate the importance of negative information
regarding an action or event.
• Emotion regulation refers to any process that influences the
emotional intensity over time and thereby habitually modifies the
‘spontaneous flow’ of emotions (Koole, 2009; Koval et al., 2015).

The interacting elements of the entrepreneurial
mindset
• The three aspects - the cognitive aspect, the behavioural aspect, and
the emotional aspect—do not operate independently of one another;
rather they interact and reinforce each another.
• A breakdown in any one aspect of the mindset—the cognitive aspect,
the behavioural aspect, and the emotional aspect—will make it
difficult for an entrepreneur to operate optimally in the other areas.
• In some instances the manager of an individual will discourage any
kind of entrepreneurial behavior, and hence the s/he avoids acting on
their entrepreneurial impulses. Over time his/her passion for
entrepreneurial endeavours and their cognitions toward
entrepreneurial opportunities will disappear.
The interacting elements of the entrepreneurial
mindset (cont’d)
• Research findings indicate that entrepreneurial activity is not evenly
distributed across geographic space.
• Certain communities, cities, regions, states and countries have a large
proportion of individuals with entrepreneurial mindset.
• Such communities, cities, regions, states, and countries will generate
new innovations, ideas, and business models than others allowing
them to flourish in the long term.
• Any attempt to understand the entrepreneurial mindset from only
one of the three perspectives might result in misrepresenting and
inaccurately characterizing this important phenomenon.
07-09-2022
The interacting elements of the entrepreneurial
mindset (cont’d)
• Similarly, someone who is not allowed to explore and express their
passions and other emotions related to entrepreneurship will stop
thinking and acting in entrepreneurial ways.
• Someone who takes a cautious approach towards opportunity
pursuit, risk taking, and exploration, will find it very difficult to sustain
any kind of emotion or action to support an entrepreneurial mindset.
• A firm consisting of individuals with an entrepreneurial mindset can
be characterized as entrepreneurial. This entrepreneurial orientation
allows it to adapt to technological changes and industry dynamics.
• It seizes new opportunities enabling it to be competitive.
Entrepreneurial Passion
• Passion can promote creativity and the recognition of new
information patterns resulting in the identification of promising
opportunities.
• Passion helps entrepreneurs to raise funds from investors and to hire
and motivate key employees.
• Due to passion, entrepreneurs develop intense positive feelings for
activities that are central and meaningful to his/her self identity.
• It consists of deeply experienced positive feelings for something
important to the entrepreneur. It is more prominent than the
experience of emotions associated with external stimuli.
• Passion is not a personality trait.

Entrepreneurial Passion (cont’d)
• It is an affective phenomenon that one may experience when
engaging in or thinking about certain activities.
• Self-identity comprises of many individual identities.
• An individual's identities are organized hierarchically.
• The identities placed higher in the hierarchy are more salient and
central to one's self-identity than identities placed lower.
• The intense positive feelings are experienced for activities that are
central to the self-identity of the individual.
• The feelings and identity centrality are focused on three specific
entrepreneurial domains.
The Domains of Entrepreneurial Passion (cont’d)
• Some of the entrepreneurs are very passionate about launching new
ventures.
• They soon entrust the management of their ventures to trusted aides or
sell the business altogether.
• Subsequently they begin working on their next venture and this
phenomenon known as sequential entrepreneurship.
• Habitual entrepreneurs will tend to experience high levels of passion for
founding.
• Some entrepreneurs are motivated to grow and expand a venture.
• Such entrepreneurs may enjoy activities such as increasing sales, hiring
new employees, or finding external investors to fund such developments.
07-09-2022
The Domains of Entrepreneurial Passion
• Three Domains of Entrepreneurial Passion
1) inventing new products or services.
2) founding new organizations.
3) developing these organizations beyond their initial survival and
successes.
• Passion for inventing refers to activities associated with scanning the
environment for new market opportunities, developing new products
or services, and working with new prototypes.
• Passion for founding relates to assembling the necessary financial,
human, and social resources needed to create a new venture.
Outcomes of Entrepreneurial Passion
Obsessive passion:
• The entrepreneur becomes obsessed with his or her passion.
• The activity overpowers the person.
• S/he loses a sense of self-control and becomes unable to cease
an activity that causes harm, feelings of guilt, shame, or
burnout.
• The activity controls the entrepreneur.

Outcomes of Entrepreneurial Passion (cont’d)
Harmonious Passion:
• The entrepreneur highly values an activity and s/he integrates it
into the authentic self.
• The entrepreneur is not be overpowered by passion.
• Rather than controlling others, the entrepreneur focuses on
improving his/her skills.
• Multiple facets function together harmoniously that uplifts the
whole being.
Fear of Failure in Entrepreneurship (cont’d)
• Fear of failure is an understudied construct within the
entrepreneurship literature.
• There is a lack of clarity regarding its role in the entrepreneurial
process.
• Key research findings on fear of failure:
• It can obstruct early stage entrepreneurial activities,
• It can help shape the opportunity identification process,
• It prevents individuals from becoming entrepreneurs, and
• It can help distinguish between individuals with and without
entrepreneurial traits.
07-09-2022
Fear of Failure in Entrepreneurship
• Fear of failure has positive and negative impacts on entrepreneurial
behaviour.
• By studying fear of failure, we are able to gain good insights into
entrepreneurial motivation.
• In entrepreneurship research, fear of failure is primarily considered as a
psychological factor that impedes entrepreneurial behaviour and acts as a
barrier to entrepreneurship.
• However some empirical evidence suggests that it has a positive effect as
well.
• Fear of failure emerges as a combination of cognition, affect and action.
Fear of Failure in Entrepreneurship (cont’d)
• Fear of failure have been investigated based on some conflicting
perspectives, leading to multiple definitions of this construct.
• The actual conceptual meaning of fear of failure in entrepreneurship
research remains underspecified.
 07-09-2022

Three Views on Fear of failure in Entrepreneurship Sources of Fear of Failure

• The economics-based view of fear of failure in entrepreneurship is
that fear of failure prevents individuals from becoming entrepreneurs.
• The social psychological view of fear of failure visualises it as a socio-
cultural trait that influences attention to rewards in the social
environment.
• People's attitude toward failure is influenced by the presence of
social norms that see failing as a shameful experience.
• Fear of failure prevents individuals from exposing themselves to
situations where the risk of failure is high.
• The psychological view of fear of failure is that it is a negative feeling
that results from thinking about the possibility of failure.
• Financial Security – Afraid of investing too much of their own money
into the venture because some entrepreneurs may not be sure about
their ability to pay back the debt and lose their house.
• Personal Ability – Not sure about the level of competence to execute
specific tasks.
• Ability to Finance the Venture - When entrepreneurs are unsure
about their ability to generate or attract needed financial capital.
• Potential of the Idea – Worried about the validity, potential or future
market of the venture’s core idea.
• Social Esteem - Worried about the ability to satisfy others including
investors, business partners, customers, family and employees.

Sources of Fear of Failure (cont’d)

• Venture's ability to Execute – Concerns about the capacity of the

venture to execute different entrepreneurial tasks.

• Opportunity Costs – Afraid about the inability to spend time on other

income producing activities, losing work-life balance, and having
insufficient time to spend with family, friends, and loved ones.

Entrepreneurial Opportunity
Recognition and Evaluation
Dr. M.K. Nandakumar
Indian Institute of Management Kozhikode
Entrepreneurial Opportunities
• Entrepreneurial opportunities are those situations in which new goods,
services, raw materials, and organizing methods can be introduced and
sold at greater than their cost of production.
• Entrepreneurial opportunities differ from the larger set of all
opportunities for profit like the opportunities to enhance the efficiency
of existing goods, services, raw materials, and organizing methods.
• Discovery of new means-ends relationships result in entrepreneurial
opportunities.
• Other opportunities to generate profit involve optimization within
existing means-ends frameworks
07-09-2022
Outline
• Identifying Entrepreneurial Opportunities
• Opportunity Identification through Pattern Recognition
• Training Individuals to Recognize Opportunities
• Genetics, Creative Personality, and Entrepreneurship
• Opportunity Exploitation
Entrepreneurial Opportunities(cont’d)
• There are three different categories of opportunities:
(1) the creation of new information that happens when new
technologies get invented (e.g. digital technologies leading to the
development of many new products and services)
(2) due to information asymmetry, new markets for products and
services can be identified across geographies (e.g. developed country
firms identify new markets in less developed countries); and
(3) political, regulatory, or demographic changes could lead to
variations in the relative costs and benefits of alternative uses for
resources (e.g. restrictions on sand mining has led to the
development and commercialization of different types of M Sand)

Entrepreneurial Opportunities (cont’d)
• Different members of society have different beliefs about the relative
value of resources, considering the potential to transform them into a
different state.
• Because of these different beliefs, their assumptions about the price
of accessing markets or about what possible new markets could be
created in the future could be different.
• An entrepreneurial discovery occurs when someone assumes that a
set of resources is not put to its best use currently.
• An entrepreneur might believe that using a combination of low priced
resources, a high value product or service could be created and sold
in another location, at another time, or in another form.
Different beliefs about the Value of Resources
Entrepreneurship requires that people hold different beliefs about the value
of resources for two reasons.
•First, entrepreneurship involves joint production, where several different
resources have to be brought together to create the new product or
service.
•For the entrepreneur to obtain control over these resources in a way
that makes the opportunity profitable, his or her assumptions about the
accuracy of resource prices must differ from those of resource owners
and other potential entrepreneurs.
•If resource owners had the same assumptions as the entrepreneur, they
would seek to appropriate the profit from the opportunity by pricing the
resources high so that the entrepreneur's profit became zero.
07-09-2022
Entrepreneurial Opportunities (cont’d)
• For example Subhash Koroth, founder of Artocarpus Foods in Kerala
state in India, has developed a range of ready to cook and industrial
products made from jackfruit, a low priced resource.
• Home | Jackfruit Processing Factory in India (artocarpus.in)
• An entrepreneur creates a business based on his/her assumption
regarding the potential value of the product or service.
• If it happens to be correct, s/he will earn an entrepreneurial profit. If
not, s/he will incur an entrepreneurial loss.
Different beliefs about the Value of Resources
(cont’d)
•Therefore, for entrepreneurship to occur, the resource owners
must not share completely the entrepreneur's assumptions.
•Second, if all potential entrepreneurs possessed the same
entrepreneurial assumptions, they would compete to capture the
same entrepreneurial profit, dividing it to the point that the
incentive to pursue the opportunity was eliminated. Hence
entrepreneurs should hold different beliefs about the value of
resources.

Opportunities and Information Asymmetry
• The exploitation of opportunity provides information to resource
providers about the value of the resources that they possess and leads
them to raise resource prices over time, in order to capture some of the
entrepreneur's profit for themselves
• The diffusion of information and learning about the accuracy of decisions
over time, combined with the desire of profit, will reduce the incentive for
people to pursue any given opportunity.
• The duration of any given opportunity depends on many factors. Patent
protection or an exclusive contract, increases the duration.
• The slowness of information diffusion or the time lags with which others
recognize information also increase the duration.
• If others are unable to imitate, substitute, trade for or acquire the rare
resources the duration increases.
The Discovery of Entrepreneurial
Opportunities (cont’d)
• Information create mental outlines, which provide a framework for
recognizing new information. To recognize an opportunity, an
entrepreneur has to have prior information that is complementary with
the new information.
• Research in the field of cognitive science has shown that people vary in
their abilities to combine existing concepts and information into new ideas
• Successful entrepreneurs see opportunities in situations in which other
people tend to see risks.
• Entrepreneurs may be more likely than other persons to discover
opportunities because they are less likely to engage in counterfactual
thinking (thinking about what did not happen but could have happened, or
relating to this kind of thinking), less likely to experience regret over
missed opportunities, and are less susceptible to inaction inertia.
07-09-2022
The Discovery of Entrepreneurial
Opportunities
• Although an opportunity for entrepreneurial profit might exist, an
individual can earn this profit only if he or she recognizes that the
opportunity exists and has value.
• Why do some people and not others discover particular entrepreneurial
opportunities?
• Research has suggested two broad categories of factors that influence
the probability that particular people will discover particular
opportunities:
• (1) the possession of the prior information necessary to identify an
opportunity; and
• (2) the cognitive properties necessary to value it.
How do Entrepreneurs Identity New Business
Opportunities
• Entrepreneurs "connect the dots" between changes in technology,
demographics, markets, government policies, and other factors .
• The resulting patterns could suggest ideas for new products or services for
creating new ventures.
• Many different factors play a role in the recognition of opportunities for
new business ventures.

How do Entrepreneurs Identity New Business
Opportunities (cont’d)
• Among these, three have been identified as important:
1. Engaging in an active search for opportunities
2. Alertness to opportunities (the capacity to recognize them when
they emerge)
3. Prior knowledge of a market, industry, or customers as a basis for
recognizing new opportunities in these areas.
• Research findings indicate that entrepreneurs are more likely than
managers to engage in active search for opportunities
How do Entrepreneurs Identity New Business
Opportunities (cont’d)
• Prior knowledge gathered through rich and varied life experience
(business and work experience) can help in recognizing potentially
profitable opportunities.
• Prior knowledge of customer needs and ways to meet them greatly
enhances entrepreneurs' ability to provide innovative solutions to
these problems and identify potentially valuable business
opportunities.
• In essence, pattern recognition involves recognition of links between
apparently unrelated trends, changes, and events links suggestive of
patterns connecting them together.
07-09-2022
How do Entrepreneurs Identity New Business
Opportunities (cont’d)
• Kirner, who first introduced the term “alertness” into the entrepreneurship
literature, defined it as "alertness to changed conditions or to overlooked
possibilities."
• This definition suggests that opportunities can be noticed even by persons
who are not actively seeking them, i.e. "passive search," a state in which
they are receptive to opportunities, but do not engage in a formal,
systematic search for them.
• Alertness largely depends on cognitive capacities of individuals like high
intelligence and creativity.
• Other personal characteristics like optimism and perceptions of risk are also
linked to opportunity recognition.
Understanding the Opportunity Recognition
Process
• Opportunity is defined as a perceived means of generating economic
value (i.e., profit) that previously has not been exploited and is not
currently being exploited by others
• Opportunity recognition can be defined as the cognitive process (or
processes) through which individuals conclude that they have identified
an opportunity.
 07-09-2022

Models of pattern recognition: How Models of pattern recognition: How

individuals connect the dots into meaningful individuals connect the dots into meaningful
patterns patterns (cont’d)
• Prototype Models: Prototypes are idealized representations of the
• For example I have developed an idea of creating a business in the
most typical member of a category. It is abstract average of the
technology domain. Prototypes are some well known firms or start-ups
members of a category. Newly encountered events or trends are
that can be considered as a representative member of the businesses in
compared with existing prototypes to determine whether they belong
to specific categories or can be seen as being connected in some the technology domain. Exemplars cannot be considered as representative
members of the domain. They are specific firms operating in the domain.
manner.
• Exemplar Models: Exemplar is an actual member of a category. • Research in cognitive science suggests that both prototype and exemplar
Exemplar models suggest that as individuals encounter new events or models may be necessary to fully understand how individuals notice
emergent patterns in diverse and apparently unrelated events or changes
stimuli, they compare them with specific examples (exemplars) of
relevant concepts already stored in memory.

Models of pattern recognition: How individuals

connect the dots into meaningful patterns Opportunity recognition as a repeated search
(cont’d) for patterns
• Research suggest that initially, before they gain expertise in a specific area, • The process of opportunity recognition is not very simple.
individuals may rely on prototypes to compare newly encountered stimuli and Entrepreneurs do not perceive all links between relevant variables at
events with them. As they gain expertise in a given domain, they may shift to once and start with a fully-formed idea.
greater reliance on exemplars, which allows them to perform the process of
identifying complex patterns in a less effortful, more automatic manner.
• During early stages, (and perhaps later ones, too), opportunity
• For example I will tend to compare my idea with prototype firms in the
recognition involves repeated steps in which entrepreneurs perceive
technology domain first. After gaining a good understanding of the domain
the opportunities they develop with increasing clarity, and adjust
and strength of my business idea, I will start comparing my idea with specific
their business models and goals to reflect these changes.
exemplar firms in the domain.
• Prototypes appear to be stored and processed in the left cerebral hemisphere
while exemplars are stored and processed in the right cerebral hemisphere.
Opportunity recognition may involve both prototypes and exemplars.

Models of pattern recognition
• Search for opportunities, alertness, and prior knowledge may be
interrelated.
• When alertness is very high, active searches for opportunities may not be
necessary. Entrepreneurs are so sensitive to them that they do not have
to engage in formal, systematic search processes.
• Similarly, high levels of prior knowledge may reduce the necessity for
active searches
• Pattern recognition perspective can help explain interrelationships
between search, alertness, and prior knowledge, thus clarifying the
effects of these three important factors.
• In addition to search, alertness, and prior knowledge, the breadth of
entrepreneurs' social networks is also important. It plays a significant role
in opportunity recognition
Training Individuals to Recognize Opportunities
• A pattern recognition perspective suggests that it is possible to train
individuals to become more proficient in opportunity recognition.
• Connect the dots perspective suggests that individuals can be trained to be
more proficient at recognizing opportunities by teaching them not merely
to be alert to opportunities or to search actively for them, but rather, to
search in the best places and in the best ways.
• They should focus their efforts on identifying changes in technology,
demographics, markets, and other pertinent factors that play an important
role in the success of almost any business.
• While engaging in such searches, they should also focus on actively seeking
to identify ways in which these trends and changes are linked or connected
to identify emergent patterns.
07-09-2022
Models of pattern recognition (cont’d)
• Research suggests that the broader the entrepreneurs' social networks (the
more people they know and with whom they have relationships), the more
opportunities they identify.
• All patterns connecting diverse events, changes, or trends perceived by
entrepreneurs serve as the basis for founding new ventures.
• Such patterns lead to new ventures only when they suggest new products or
services that are feasible.
• If emergent patterns do not point to products or services that appear to be
feasible, they will often be discarded by the entrepreneurs.
• A pattern recognition perspective suggests several reasons why specific
persons recognize opportunities that others overlook
• More over, this framework suggests that in recognizing opportunities, active
searches, alertness, and prior knowledge operate together. They may
provide an advantage to specific persons with respect to identifying new
business opportunities
Training Individuals to Recognize Opportunities(cont’d)
• Recognizing such patterns is often a key initial step in the process of
identifying new business opportunities
• Pattern recognition perspective also suggests that opportunity recognition
can be enhanced by providing potential entrepreneurs with a very broad
range of experience.
• The broader this experience (e.g., the wider the range of positions held, the
greater the number of different industries) the richer will be the prototypes
and the number of exemplars at their disposal. Hence the entrepreneurs are
likely to perceive connections between seemingly unrelated events or trends
- especially connections that are not immediately apparent to any casual
observer.
• For example identification of opportunities to launch Uber and Airbnb.
Naukri.com is another example.

Creative personality, Opportunity Recognition and
New Venture Creation
• People with creative personalities are more likely than others to
identify business opportunities and start businesses.
• Genetic factors account for part of the correlation between creative
personality and entrepreneurial behaviour.
• People with a creative personality are significantly more likely than
others to both identify entrepreneurial opportunities and start new
businesses.
• Some research studies show that genetic factors account for 66% of
the correlation between creative personality and opportunity
recognition and 82% of the correlation between creative personality
and the tendency to start businesses.
Genetics, Creative Personality, and
Entrepreneurship
• The development of creative personalities that increase the probability
that people become entrepreneurs could be the result of both genetic
and environmental influences.
• Wernerfelt et al.(2012) showed that people with a particular version of
the AVPR1a gene were more likely to be serial entrepreneurs than
others.
• A study by Nicolaou et al. (2011) showed that a version of the DRD3 is
associated with the tendency to start businesses.
• Studies also have shown that genetically influenced hormone levels
increase the likelihood that people engage in entrepreneurial activity.
07-09-2022
Creative personality, Opportunity Recognition
and New Venture Creation (Cont’d)
• Some people have a natural tendency to both develop creative
personalities and to become entrepreneurs.
• People can be creative without having a creative personality.
• An association between creativity and entrepreneurship may result
from situational, contextual and cognitive factors, rather than
individual factors related to personality.
Genetics Creative Personality and
Entrepreneurship (cont’d)
• White et al. (2006) found that testosterone levels were higher among people
with start-up experience than among people with no start-up experience
• Research provides evidence of genetic predisposition to having a creative
personality
Genetic variation might affect organizational behaviour in four interwoven
ways.
• Genetic differences might lead to variation in physiological attributes, such
as brain structure, neurotransmitter system function, hormone levels,
physical strength, physical attractiveness etc. in ways that influence
behaviour.

Genetics Creative Personality and
Entrepreneurship (cont’d)
• Genetic variation might influence the tendency of people to
develop psychological characteristics that affect the probability of
engaging in certain behaviours.
• Genetic factors might interact with environmental stimuli to
influence behaviour, a concept referred to as gene–environment
interaction.
• Genetic variation might affect the probability that people select
environments that favour their genetic tendencies, a concept
referred to as gene–environment correlation.
• Genes impact behaviour by influencing the probability that people develop
the psychological characteristics associated with that behaviour.
• Genetic factors impact entrepreneurship is by influencing people's
attributes and personality characteristics
Understanding Opportunity Recognition and
Opportunity Exploitation (Cont’d)
• The six activities defining opportunity recognition in general are:
being alert, searching, gathering information, communicating,
problem solving, and evaluating.
• Being alert refers to creative and strategic thinking, which allows
opportunity recognition or having an open mind in terms of business
opportunities.
• Searching is defined through the regular scanning of the environment
and a systematic search for business opportunities, or by doing
market research to identify business opportunities.
• Gathering information activities relate to acquiring knowledge and
information on business opportunities or to look for new ideas on
products or services.
07-09-2022
Understanding Opportunity Recognition and
Opportunity Exploitation
• Opportunity recognition and opportunity exploitation are two central
concepts in the entrepreneurial process.
• Although the discovery of an opportunity is a necessary condition for
entrepreneurship, it is not sufficient.
• Subsequent to the discovery of an opportunity, a potential
entrepreneur must decide to exploit the opportunity.
• There is a lack of consensus over defining and measuring opportunity
recognition and opportunity exploitation.
Understanding Opportunity Recognition and
Opportunity Exploitation (Cont’d)
• Communicating refers to talking to friends, colleagues, potential
customers, mentors, entrepreneurs, or experts about business
opportunities.
• Addressing customer needs refers to the generation of a business
opportunity based on a perceived customer problem.
• Evaluating involves assessing the feasibility of business ideas or
whether proposed opportunities fit individual experience, skills,
capabilities, and knowledge.

Understanding Opportunity Recognition and
Opportunity Exploitation (Cont’d)
• Opportunity recognition: Opportunity recognition is characterized by
being alert to potential business opportunities, actively searching for
them, and gathering information about new ideas on products or
services.
• Opportunity exploitation: Opportunity exploitation is characterized
by developing a product or service based on a perceived
entrepreneurial opportunity, acquiring appropriate human resources,
gathering financial resources, and setting up the organization.
• Alertness is an ability central to the entrepreneurial process because
it makes individuals aware of changes, shifts, and opportunities
overlooked by others.
The Decision to Exploit Entrepreneurial
Opportunities
• Although the discovery of an opportunity is a necessary condition for
entrepreneurship, it is not sufficient.
• A cure for a serious illness like Cancer has greater expected value than
does a solution to a simple problem. (e.g. Dostarlimab developed by
GlaxoSmithKline which has shown promising results during an initial
trial conducted on people with locally advanced rectal cancer).
• All potential entrepreneurs may not exploit opportunities with the
same expected value. The decision to exploit an opportunity involves
weighing the value of the opportunity against the costs to generate
that value and the costs to generate value in other ways.
• The decision to exploit an entrepreneurial opportunity is also
influenced by individual differences in perceptions.
07-09-2022
Understanding Opportunity Recognition and
Opportunity Exploitation (Cont’d)
• Entrepreneurial alertness consists of three dimensions: scanning and
searching for information, connecting previously disparate
information, and evaluating the existence of profitable business
opportunities.
• Entrepreneurial alertness involves not only gathering, associating, and
evaluating information on business opportunities, but is also linked to
action i.e. the willingness to act on the business opportunity.
The Decision to Exploit Entrepreneurial
Opportunities (Cont’d)
• The attributes that increase the probability of opportunity
exploitation do not necessarily increase the probability of success.
• Overoptimistic individuals exploit many opportunities, because their
overoptimism limits information and motivates rosy forecasts of the
future.
• However, cognitive biases like overoptimism could be helpful in some
situations
 07-09-2022

Modes of exploitation
• Opportunities can be exploited through the creation of new firms and
the sale of opportunities to existing firms.

• Entrepreneurship is more likely:

• when the opportunity requires the effort of individuals who lack
incentives to do so in large organizations.
• when scale economies, first mover advantages, and learning curves
do not provide advantages to existing firms; and
• when industries have low barriers to entry
 07-09-2022

• Feasibility analysis is the

process of determining whether
a business idea is viable.
• It is the preliminary evaluation
Feasibility Analysis of a business idea, conducted
for the purpose of determining
whether the idea is worth
pursuing.

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

3-2
1-1

 Timing of Feasibility Analysis Role of feasibility analysis in developing

◦ The proper time to conduct a feasibility analysis is early in thinking through the business ideas.
prospects for a new business.
◦ The thought is to screen ideas before a lot of resources are spent on them
 Components of a Properly Conducted Feasibility Analysis
◦ A properly conducted feasibility analysis includes four separate components, as
discussed in the following slides.

3-3 3-4
 07-09-2022

Industry/Target Market
Product/Service Feasibility
Feasibility

Organizational Feasibility Financial Feasibility

3-5 3-6

Purpose Components of product/service

feasibility analysis
• Is an assessment of the overall
Product/Service appeal of the product or service
Feasibility Analysis being proposed. Product/Service Product/Service
• Before a prospective firm rushes Desirability Demand
a new product or service into
development, it should be sure
that the product or service is what
prospective customers want.

3-7 3-8

First, ask the following questions to determine
the basic appeal of the product or service.
• Does it make sense? Is it reasonable? Is it something consumers
will get excited about?
• Does it take advantage of an environmental trend, solve a
problem, or take advantage of a gap in the marketplace?
• Is this a good time to introduce the product or service to the
market?
• Are there any fatal flaws in the product or service’s basic design
or concept?
15-9
 The concept statement normally includes the following:
- A description of the product or service;
- The intended target market. This section lists the consumers or
businesses who are expected to buy the product or service;
- The benefits of the product or service;
- A description of how the product or service will be positioned relative
to competitors; and
- A brief description of the company’s management team.
3-11
07-09-2022
 Second, Administer a Concept Test
◦ A concept statement should be developed.
◦ A concept statement is a one page description of a business,
that is distributed to people who are asked to provide
feedback on the potential of the business idea.
◦ The feedback will hopefully provide the entrepreneur
 A sense of the viability or the product or service idea.
 Suggestions for how the idea can be strengthened or “tweaked” before
proceeding further.
3-10
1. List three things you like about the product or service idea
described in this statement
2. Provide three suggestions for making the idea better
3. Do you think the idea is feasible?
4. Provide any additional comments or suggestions you think
might be helpful
3-12
 07-09-2022

 Product/Service Demand
New Venture ◦ Their are two steps to assessing product/service demand.
◦ Step 1: Administer a Buying Intentions Survey
Fitness Drink’s
◦ Step 2: Conduct library, Internet, and Gumshoe research
Concept
Statement

3-13 3-14

 Buying Intentions Survey

◦ Is an instrument that is used to gauge customer interest in a
product or service.
◦ It consists of a concept statement or a similar description of
a product or survey with a short survey attached to gauge
customer interest.
◦ Internet sites like SurveyMonkey make administering a
buying intentions survey easy and affordable.

3-15 3-16
 07-09-2022

 Library, Internet, and Gumshoe Research Explanation

◦ The second way to assess the demand for a product or service is by conducting
• A gumshoe is a detective or an
library, Internet, and gumshoe research. investigator that scrounges around for
◦ Reference librarians can often point you towards resources to help you investigate Gumshoe Research information or clues wherever
a business idea, such as industry-specific trade journal and industry reports. they can be found.
◦ Internet searches can often yield important information about the potentially • Be a gumshoe. Ask people
what they think about your product
viability of a product or service idea. or service idea. If your idea is to
sell educational toys, spend a week
volunteering at a day care center
and watch how children interact
with toys.

3-17 3-18

Purpose Components of industry/target market

feasibility analysis
• Is an assessment of the overall
Industry/Target appeal of the industry and the
target market for the proposed Target Market
Market Feasibility Industry Attractiveness
business. Attractiveness
Analysis • An industry is a group of firms
producing a similar product or
service.
• A firm’s target market is the
limited portion of the industry it
plans to go after.

3-19 3-20
 07-09-2022

 Industry Attractiveness
◦ Industries vary in terms of their overall attractiveness.
◦ In general, the most attractive industries have the characteristics depicted on the
next slide.
◦ Particularly important—the degree to which environmental and business trends are
moving in favor rather than against the industry .

3-21 3-22

 Target Market Attractiveness Purpose

◦ The challenge in identifying an attractive target market is to find a market that’s • Is conducted to determine
large enough for the proposed business but is yet small enough to avoid attracting whether a proposed business has
larger competitors. Organizational
sufficient management expertise,
◦ Assessing the attractiveness of a target market is tougher than an entire industry. Feasibility Analysis
organizational competence, and
◦ Often, considerably ingenuity must be employed to finding information to assess resources to successfully launch
the attractiveness of a specific target market. a business.
• Focuses on non-financial resources.

3-23 3-24
 07-09-2022

Components of organizational  Management Prowess

feasibility analysis ◦ A firm should candidly evaluate the prowess, or ability, of its management team to
satisfy itself that management has the requisite passion and expertise to launch the
venture.
◦ Two of the most important factors in this area are:
Management Prowess Resource Sufficiency  The passion that the solo entrepreneur or the founding team has for the business idea.
 The extent to which sole entrepreneur or the founding team understands the markets in which the
firm will participate.

3-25 3-26

Examples of nonfinancial resources that may

 Resource Sufficiency
◦ This topic pertains to an assessment of whether an
entrepreneur has sufficient resources to launch the proposed
venture.
◦ To test resource sufficiency, a firm should list the 6 to 12
most critical nonfinancial resources that will be needed to
move the business idea forward successfully.
 If critical resources are not available in certain areas, it may be
impractical to proceed with the business idea.
3-27
be critical to the successful launch of a new
business
• Availability of affordable office or lab space.
• Likelihood of local and state government support of the
business.
• Quality of the labor pool available.
• Proximity to key suppliers and customers.
• Willingness of high quality employees to join the firm.
• Likelihood of establishing favorable strategic partnerships.
• Proximity to similar firms for the purpose of sharing knowledge.
• Possibility of obtaining intellectual property protection in key
areas. 3-28
 07-09-2022

Purpose Components of financial

feasibility analysis
• Is the final component of a
Financial Feasibility comprehensive feasibility
Analysis analysis. Total Start-Up Cash Financial Performance of
• A preliminary financial Needed Similar Businesses
assessment
is sufficient.
Overall Financial
Attractiveness of the
Proposed Venture

3-29 3-30

 Total Start-Up Cash Needed  Financial Performance of Similar Businesses

◦ The first issues refers to the the total cash needed to prepare the business to make
its first sale.
◦ An actual budget should be prepared that lists all the anticipated capital purchases
and operating expenses needed to generate the first $1 in revenues.
◦ The point of this exercise is to determine if the proposed venture is realistic given
the total start-up cash needed.
◦ Estimate the proposed start-up’s financial performance by
comparing it to similar, already established businesses.
◦ There are several ways to doing this, all of which involve a
little ethical detective work.
 First, there are many reports available, some for free and some that
require a fee, offering detailed industry trend analysis and reports on
thousands of individual firms.
 Second, simple observational research may be needed. For example,
the owners of New Venture Fitness Drinks could estimate their sales
by tracking the number of people who patronize similar restaurants
and estimating the average amount each customer spends.

3-31 3-32
 07-09-2022

 Overall Financial Attractiveness of the Proposed Investment
◦ A number of other financial factors are associated with promising business
startups.
◦ In the feasibility analysis stage, the extent to which a business opportunity is
positive relative to each factor is based on an estimate rather than actual
performance.
◦ The table on the next slide lists the factors that pertain to the overall attractiveness
of the financial feasibility of the business idea.
Financial Factors Associated With Promising Business
Opportunities
• Steady and rapid growth in sales during the first 5 to 7 years in a clearly
defined market niche.
• High percentage of recurring revenue—meaning that once a firm wins a
client, the client will provide recurring sources of revenue.
• Ability to forecast income and expenses with a reasonable degree of
certainty.
• Internally generated funds to finance and sustain growth.
• Availability of an exit opportunity for investors to convert equity to cash.

3-33 3-34

 First Screen FEASIBILITY VALUE

◦ It is a template for completing a feasibility analysis.

◦ It’s called “First Screen” because it’s a tool that can be used in the initial pass at Is it doable?
determining the feasibility of a business idea. Technical Feasibility Is it worth doing?
MARKET Market feasibility
◦ If a business idea cuts muster at this stage, the next step is to complete a business Financial Feasibility
Economic Feasibility
plan. Timing

Can I do it? Do I want to do it?

YOU
What will it take to do it?
Who else do I need?
What turns me on about
it?
Why do I want to do it?

3-35
 07-09-2022

 Market feasibility
 Product
 Technological feasibility  What exactly are u selling?
 Is the technology for your product already available, or is it still in  Is it a technology looking for a market or vice versa?
development?  How do you define your niche?
 If the latter, what stage of development is it in and what can go wrong?  How is the need being filled now?
 If the former, is anyone else using it to develop the same product/service  Who/what is the competition?
as you?
 Advantages/disadvantages of the product/service?
 If not, why has no one done so yet?
 Why your product? (differentiation/uniqueness/proprietary)
If so, who are they and how does that affect your prospects?

 Customer
 What kind of entry barriers for the future does your technology provide?
 Who is your customer (a typical profile)
 How long would those entry barriers last should your idea prove to be a
 Will the customer pay enough? Can you charge enough?
high potential opportunity?
 What critical factors will lead you most quickly to your customer base?
 What are your technological risks? List reasons why the end user might
not want to use your technology even though your product/service might  Market
be technologically superior.  How large is the market?
 What other nascent technologies might become competition in the future  What is its structure?
– one year from now, five years from now, a few decades from now?  How fast is it growing?
 Where could future competition come from?

 Economic feasibility
 Are there any obvious roadblocks from the government – both local and
national?
 Financial feasibility
 Is the international situation likely to change?
 What are the initial outlays of funds required?
 What is your exit strategy?
 What would convince an investor to contribute those funds?
 Timing
If you personally owned those funds, would you invest them in this
Timing


idea?
 Are you in the path of a paradigm shift?  How is the financing connected to the timing issue? (breakeven, burn
 Are you too far ahead of the times? rate)
 What is the shape and duration of the “window” for this opportunity?  Develop a set of financial forecasts.
 State the primary financial assumptions for your projections.
 How sensitive are your projections to changes in price, technology,
competition and your own growth?
 Develop best-case and worst-case financial scenarios.
 07-09-2022

 What is it going to take?

 Long and often unpredictable work hours  Does it turn you on?
 Setbacks and disappointments along the way including the possibility of  Why do you want to do this – really?
major failures  What are your exit strategies?
 An arduous and sometimes awkward learning process with regard to dealing
with people – including hiring and firing
 Negotiating tough contracts
 Dealing with rejections of various types
 Sustaining the best stakeholders through bad times such as cash crunches
 Why you?
 What special strengths do you bring to this enterprise
 What are your relevant weaknesses and how will you overcome or
compensate for them?
 07-09-2022

Overview
• The Processes of Causation and Effectuation
Causation, Effectuation and Bricolage • Distinguishing Features of Effectuation
• Causal and Effectual Decision Making Processes
• Contrasting Causation and Effectuation
• Four Aspects of Effectuation
Dr. M.K. Nandakumar
• Effectual Decision Making
IIM Kozhikode
• Key Principles of the Effectual Logic
• Entrepreneurial Bricolage

The Processes of Causation and Effectuation The Processes of Causation ……… (cont’d)
• In the first, the host picks out a menu in advance. All the chef needs to do is
• Causation processes take a particular effect as given and focus on
list the ingredients needed, shop for them, and then cook the meal. This is a
selecting between means to create that effect. Effectuation processes
process of causation. It begins with a given menu and focuses on selecting
take a set of means as given and focus on selecting between possible
between effective ways to prepare the meal.
effects that can be created with that set of means.

• In the second case, the host asks the chef to look through the cupboards in
• A simple example should help clarify and distinguish between the two
the kitchen for possible ingredients and utensils and then cook a meal. Here,
types of processes. Imagine a chef assigned the task of cooking
the chef has to imagine possible menus based on the given ingredients and
dinner. There are two ways the task can be organized.
utensils, select the menu, and then prepare the meal. This is a process of
effectuation. It begins with given ingredients and utensils and focuses on
preparing one of many possible desirable meals with them.
 07-09-2022

The Processes of Causation ……… (cont’d) Distinguishing Features of Effectuation

• The distinguishing characteristic between causation and effectuation is in
• Other examples: A carpenter who is asked to build a desk, versus one the set of choices: choosing between means to create a particular effect,
who is given a toolbox and some wood and asked to build whatever versus choosing between many possible effects using a particular set of
he or she chooses; an artist who is asked to paint a portrait of a means.
particular person, versus one who is given a blank canvas and some
• Causation models consist of many-to-one mappings, effectuation models
paints and required to paint anything he or she chooses.
involve one-to-many mappings.
• Characteristics of decision makers, such as who they are, what they
• The generalized end goal or aspiration remains the same both in
know, and whom they know, are the primary set of means that have to
causation and effectuation- that is, to cook a meal, to build some
be considered in situations where it is necessary to create an effect that
wooden artefact, or to create a painting.
is not preselected but that gets constructed as an integral part of the
effectuation process.

Distinguishing Features of Effectuation (cont’d)
• The effectuator merely pursues an aspiration and visualizes a set of
actions for transforming the original idea into a firm - not into the
particular predetermined or optimal firm, but a very generalized
aspiration of a firm.
• The commitment to such a tentative set of actions do not involve
guarantees of success.
• The effectuator often proceeds without any certainties about the
existence of a market or demand for his or her product.
Causal and Effectual Decision Making Processes
The anatomy of causal decision process involves
• A given goal to be achieved or a decision to be made
• A set of alternative means or causes generated through the decision
process
• Constraints on possible means imposed by the environment
• Criteria for selecting between the means which is usually the
maximization of expected returns in terms of the predetermined goal
 07-09-2022

Causal and Effectual Decision ……….. (cont’d)
A decision involving effectuation, however, consists of
• A given set of means
• A set of effects or possible operationalization of generalized
aspirations
• Constraints on possible effects usually imposed by the limited means
as well as by the environment and its contingencies
• Criteria for selecting between the effects (usually a predetermined
level of affordable loss or acceptable risk related to the given means).
Causal and Effectual Decision ……….. (cont’d)
• Entrepreneurs begin with three categories of means: they know who they
are, what they know, and whom they know - their own traits, tastes, and
abilities; the knowledge corridors they are in; and the social networks they
are a part of.
• At the level of the firm, the corresponding means are its physical resources,
human resources, and organizational resources.
• At the level of the economy, these means become demographics, current
technology regimes, and socio political institutions.
• Causation processes are effect dependent. Effectuation processes are actor
dependent. Causation processes are excellent at exploiting knowledge.
Effectuation processes are excellent at exploiting contingencies.

Categories of Causation Processes Effectuation Processes

Differentiation
Givens Effect is given Only some means or tools are
given
Decision-making Help choose between means to Help choose between possible
selection criteria achieve the given effect effects that can be created with
Contrasting Causation and Effectuation expected
Selection criteria based on
given means
Selection criteria based on
expected return affordable loss or acceptable
risk
Effect dependent: Choice of Actor dependent: Given specific
means is driven by means, choice of effect is driven
characteristics of the effect the by characteristics of the actor
decision maker wants to create and his her ability to discover
and his or her knowledge of and use contingencies
possible means
 07-09-2022

Categories of Causation Processes Effectuation Processes

Differentiation Four Aspects of Effectuation
Competencies Excellent at exploiting Excellent at exploiting contingencies 1. Affordable loss rather than expected returns: Causation models focus
employed knowledge on maximizing the potential returns for a decision by selecting optimal
strategies. Effectuation predetermines how much loss is affordable and
Context of More common in nature More common in human action
focuses on experimenting with as many strategies as possible with the
relevance More useful in static, linear, & Explicit assumption of dynamic,
given limited means. The effectuator prefers options that create more
independent environments nonlinear, & ecological environments
options in the future over those that maximize returns in the present.
Nature of Focus on predictable aspects Focus on controllable aspects of an
unknowns of an uncertain future unpredictable future
1. Strategic alliances rather than competitive analyses: Causation models,
Underlying To the extent we can predict To the extent we can control future, like the Porter’s generic strategies model, emphasize detailed
logic future, we can control it we do not need to predict it competitive analyses. Effectuation emphasizes strategic alliances and
Outcomes Market share in existent New markets created through pre- commitments from stakeholders as a way to reduce and/or
markets through competitive alliances and other cooperative eliminate uncertainty and to erect entry barriers.
strategies strategies

Four Aspects of Effectuation (cont’d) Effectual Decision Making

3. Exploitation of contingencies rather than exploitation of pre existing Who I am
knowledge: When pre existing knowledge, such as expertise in a particular Individual level: traits, tastes, & abilities
Firm level: Physical resources Effect 1
new technology, forms the source of competitive advantage, causation Effect 2
Level of economy: Demographics
models might be preferable. Effectuation, however, would be better for Effect 3
What I know

Imagination
exploiting contingencies that arose unexpectedly over time. Effect ..
Individual level: Knowledge corridors Effect..
4. Controlling an unpredictable future rather than predicting an uncertain Firm level: Human resources Effect k
one: Causation processes focus on the predictable aspects of an uncertain Level of economy: Technology regimes Effect ..
future. The logic for using causation processes is: To the extent that we can Whom I know Effect ..
Effect ..
predict the future, we can control it. Effectuation, however, focuses on the Individual level: Social Networks
Effect ..
controllable aspects of an unpredictable future. The logic for using Firm level: Organizational resources Effect n
Level of economy: Sociopolitical
effectuation processes is: To the extent that we can control the future, we
Institutions
do not need to predict it.

Key Principles of the Effectual Logic
1. Bird-in-hand principle –
Who I am, What I know, Who I know.
2. The affordable loss principle –
Driven by the what one might lose if they take action rather than what
they might earn.
3. The lemonade principle –
To turn surprises or unexpected information, meetings or events, no
matter whether these are positive or negative, into new opportunities.
Key Principles of the Effectual Logic (cont’d)
5. The pilot-in-the-plane principle –
Personal control is the desire for control over one’s own life decisions.
Being the pilot-in-the-plane is an entrepreneur’s mindset, and is linked
to the notion of individualism, self-esteem, self-belief, autonomy, and
freedom. Entrepreneurs recognize the importance of personal control
and choose entrepreneurship as a career because they want to be the
pilot-in-the-plane.
07-09-2022
Key Principles of the Effectual Logic (cont’d)
4. The crazy quilt principle –
Many entrepreneurs tend to build partnerships with their customers in
during the venture creation process and these customers contribute to
the new venture by giving their time, money and other resources. The
network of early partnerships determines what markets their product
(or even firm) might eventually end up entering or creating. Thus,
entering into new partnerships can bring the venture new funds and
new directions
Entrepreneurial Bricolage
• Create something from nothing by:
• Making do with what is at hand
• Combining resources for new purposes
• Using resources at hand
• Entrepreneurial bricolage could be a key driver for frugal innovation.
• Frugal innovation is a flexible approach that does not see resource
constraints as challenges, but as a growth opportunity. The emphasis
is on reducing the use of scarce resources
 07-09-2022

Entrepreneurial Bricolage (cont’d)

• Goonj, a social enterprise headquartered in New Delhi, considers
used clothes as a key resource.
• Cloth for Work Program: Villagers are recruited to work on
infrastructural improvement projects like digging wells, cleaning
ponds, repairing roads and building schools. They are compensated
by giving clothes, utensils, furniture and foodgrains.
• Mypads: Provides 10% biodegradable sanitary napkins made from
used clothes.

Social Entrepreneurship
Dr. M.K. Nandakumar
Indian Institute of Management Kozhikode
The Characteristics of Social Enterprises
• Social entrepreneurship is a process of creating value by combining
resources in new ways.
• These resource combinations are intended primarily to explore and exploit
opportunities to create social value by stimulating social change or
meeting social needs.
• In general, social enterprises combine resources they themselves do not
possess to address a social problem and thereby alter existing social
structures.
07-09-2022
Social entrepreneurship – Three Views
• One group of researchers refers to social entrepreneurship as not-for-profit
initiatives in search of alternative funding strategies, or management
schemes to create social value.
• A second group of researchers understands it as the socially responsible
practice of commercial businesses engaged in cross sector partnerships.
• And a third group views social entrepreneurship as a means to alleviate
social problems and cause social transformation.
• Social entrepreneurship can be broadly viewed as a process involving the
innovative use and combination of resources to pursue opportunities to
catalyze social change and/or address social needs.
Distinctive features of social entrepreneurship
• A number of authors have emphasized the not-for profit nature of social
entrepreneurial activities as a distinctive feature of social entrepreneurship.
• Both the Grameen Bank (Found in Bangladesh in 1983 by Nobel Laureate
Professor Muhammad Yunus) and Sekem (Founded in Egypt in 1977 by Dr.
Ibrahim Abouleish) use profits generated by their main activities to engage in
new social ventures: Grameen has launched ventures such as Grameen
Telecom or Grameen Shakti, while Sekem has launched several social
ventures, including a university and a hospital.
• In commercial entrepreneurship, social wealth is a by-product of the
economic value created; in social entrepreneurship, the main focus is on
social value creation.

Distinctive features of social entrepreneurship
(cont’d)
• In social entrepreneurship, social wealth creation is the primary objective, while
economic value creation, in the form of earned income, is necessary to ensure
the sustainability of the initiative and financial self-sufficiency.
• An additional distinctive feature of social entrepreneurship lies in the limited
potential to capture the value created.
• Social entrepreneurs who address basic social needs, such as food, shelter or
education, very often find it difficult to capture economic value.
• Although the customers (primary beneficiaries) are willing, often they are unable
to pay even a small part of the price of the products and services provided
• Social entrepreneurship cannot be understood in a purely economic sense but
needs to be examined in light of the social context, and the local environment.
Some Relevant Definitions of Social
Entrepreneurship (cont’d)
• Social purpose business ventures are hybrid enterprises straddling the
boundary between the for-profit business world and social mission driven
public and non-profit organizations. Thus they do not fit completely in
either sphere (Hockerts, 2006).
• Social entrepreneurship means non profit organizations that apply
entrepreneurial strategies to sustain themselves financially while having a
greater impact on their social mission (i.e., the "double bottom line")
(Lasprogata & Cotton, 2003).
07-09-2022
Some Relevant Definitions of Social Entrepreneurship
• A social entrepreneur is any person, in any sector, who uses earned income
strategies to pursue a social objective, and a social entrepreneur differs from a
traditional entrepreneur in two important ways: Traditional entrepreneurs
frequently act in a socially responsible manner.... Secondly, traditional
entrepreneurs are ultimately measured by financial results (Boschee &
McClurg, 2003).
• Entrepreneurs whose work is aimed at progressive social transformation.... A
business to drive the transformational change. While profits are generated, the
main aim is not to maximize financial returns for shareholders but to grow the
social venture and reach more people in need effectively. Wealth accumulation
is not a priority-revenues beyond costs are reinvested in the enterprise in order
to fund expansion (Hartigon, 2006).
Some Relevant Definitions of Social
Entrepreneurship (cont’d)
• We define social entrepreneurship as a dynamic process created and
managed by an individual or team (the innovative social entrepreneur),
which strives to exploit social innovation with an entrepreneurial mindset
and a strong need for achievement, in order to create new social value in
the market and community at large (Perrini & Vurro, 2006).
• I define social entrepreneurship as a process that includes: the
identification of a specific social problem and a specific solution... to
address it; the evaluation of the social impact, the business model and the
sustainability of the venture; and the creation of a social mission-oriented
for-profit or a business-oriented non profit entity that pursues the double
(or triple) bottom line (Robinson, 2006).
 07-09-2022

Social entrepreneurship as an essentially contested

concept Social entrepreneurship as an essentially contested
concept (cont’d)
• Essentially contested concepts are, concepts whose users disagree about • For some researchers social entrepreneurship refers to not-for-profit
their proper uses. organizations in the search for new funding strategies through business
• Leading foundations in the field like Ashoka, the Skoll Foundation, and the activities
Schwab Foundation actively promote social entrepreneurship by highlighting • Others views of social entrepreneurship are: (a) the creation of businesses
the achievements of individual social entrepreneurs. to serve the poor, (b) the use of social innovations to solve social problems
• Scholars and practitioners are far from reaching a consensus as to what social and to bring about social change, irrespective of whether commercial
entrepreneurship actually means. Many scholars have acknowledged that the activities are involved or not.
term ‘social entrepreneurship’ is inconsistently used and that it lacks a unified
definition

A conceptual framework for value creation in the

context of SE Five Components of Social Entrepreneurship
Value Capture

 Performance-SROI
- Financial R
- Non- financial e The concept of social entrepreneurship consists of five major components
Organisation

v
Value Generation e
n
which contribute to the internal complexity of the concept.
 Social Entrepreneurs u
Social Value Proposition
⁻ Values & Pro social e
motivation ⁻ A convincing promise, a distinct S
⁻ Types offer. t
⁻
⁻
Personality traits
Education
⁻ The role of the social mission r
e
1. Social value creation:
a
⁻ Rhetorical strategy,
advocacy
m
s
• A highly valued aspect of social entrepreneurship, which is considered to
 Social Organization
⁻ Modes of governance
Value Sharing be its prerequisite, is the creation of social value.
⁻ Management systems  Ecosystem
• The concept of social value itself is a complex and ambiguous one.
Society

⁻ Social innovation  Value exchanges with

⁻ Legal forms stakeholders
⁻ Beneficiaries, customers, Therefore it is one of the factors contributing to the internally complex
⁻
donators
Commercial stakeholders character of social entrepreneurship.
⁻ Institutions
⁻ Internal stakeholders
Returns to society

Adapted from Hlady-Rispal, M. and Servantie (2018), V. Deconstructing the Way in Which Value is Created in the Context of Social Entrepreneurship. International
Journal of Management Reviews 20(1), 62-80

Five Components of Social Entrepreneurship
(cont’d)
2. The social entrepreneur:
• Another integral aspect of social entrepreneurship is the individual social
entrepreneur.
• The social entrepreneur has been viewed as central in social entrepreneurship
by many authors
• The concept of the social entrepreneur is not free from ambiguity.
• Some people view the social entrepreneur simply as someone who initiates
and operates a social purpose organization.
• Others, however, view the social entrepreneur as a visionary, innovative, and
risk-taking change-maker.
• It is still not clear how visionary, risk-taking, innovative or even successful one
has to be to be counted as a social entrepreneur.
Five Components of Social Entrepreneurship
(cont’d)
4. Market orientation:
• The market orientation aspect of social entrepreneurship is linked to the
efficiency and effectiveness through commercial activities, and the financial
sustainability and self-sufficiency of the SE organization.
5. Social innovation:
• It is the non-traditional, disruptive approach of social entrepreneurship which
sets it apart from traditional social service provision.
• Social entrepreneurship is an innovative, social value creating activity. It
creates new models, and an innovative approach to achieve the mission.
07-09-2022
Five Components of Social Entrepreneurship
(cont’d)
3. The social entrepreneurship organization:
• Social entrepreneurial activities are organized over time within an
organizational framework.
• Social entrepreneurship occurs in this organizational context. This context
sets it apart from other more loosely structured initiatives aimed at social
change, such as activist movements.
• The SE organization can also adopt diverse organizational forms such as
non-profit, for-profit, and hybrid organizational forms. Different legal forms
have been established in different countries to support social
entrepreneurial initiatives.
Conceptualizing social entrepreneurship as a cluster
concept
• Social entrepreneurship, can be conceptualized as a cluster concept
based on the five components explained earlier.
• A cluster concept is a conglomerate of certain concepts, which can be
called as sub-concepts. They represent the defining properties of the
cluster concept. They can occur in varying degrees and various
combinations.
 07-09-2022

Social entrepreneurship as a cluster concept Social entrepreneurship as a cluster concept

• Four small circles (the social entrepreneur, the SE organization, market

Social value creation
orientation, social innovation) and one large circle (social value creation) depict
the five sub-concepts which together constitute the concept of social
Social innovation entrepreneurship.
• Since the creation of social value is considered to be a prerequisite of social
entrepreneurship, it can be regarded as a necessary condition of social
Social entrepreneur
entrepreneurship and is, therefore, represented by the large circle
SE Organization
encompassing the other four sub-concepts.
• The creation of social value, is not a sufficient condition for social
Market orientation entrepreneurship. Social entrepreneurship emerges as a result of the
combination of social value creation and the other four properties.

Social value creation

Schools of Social Entrepreneurship

Social entrepreneurship as a cluster concept (cont’d)
• The sub-concepts of the social entrepreneur, the SE organization, market
orientation, and social innovation are not necessary conditions of social
entrepreneurship. Therefore, they can exist in greater or lesser degrees
and even in different combinations.
• Something can be regarded as social entrepreneurship even if it exhibits
less than the five sub-concepts, provided there is creation of social value.
Dees and Anderson (2006) identified two major schools of social
entrepreneurship:
1. The social enterprise school: The social enterprise school views social
entrepreneurship as the commercial activity of not-for-profit organizations
in order to earn income to support the organization's social mission.
2. The social innovation school: The social innovation school views social
entrepreneurship as the implementation of innovative, systems changing
solutions to social problems which can, but must not necessarily, entail
commercial activities.
 07-09-2022

Schools of Social Entrepreneurship (cont’d) Schools of Social Entrepreneurship (cont’d)

Defourny and Nyssens (2010) suggested a third school of social
entrepreneurship in addition to the two schools suggested by Dees and
Anderson (2006):
• The Emergence of Social Enterprise in Europe (EMES) approach:
• The EMES is a European research network, funded by the European
Union to advance knowledge about social enterprise and the third sector in
general.
• According to the EMES approach, social enterprises are initiated by
groups of citizens in order to produce goods and services for the benefit of
the community.
• The EMES approach focuses on the provision of goods and services for
the public by social enterprises, which are located in the third sector. The
EMES approach does not emphasize innovation or earned-income as
critical aspects of social entrepreneurship.
• Hoogendoorn et al. (2010) suggested the existence of four schools of
social entrepreneurship.
• Of these, the first three schools are similar to the schools suggested by
Dees and Anderson (2006) and Defourny and Nyssens (2010). The fourth
school, is based on the approach to social entrepreneurship which
emerged in the UK.
• Despite certain similarities with the social enterprise school and the EMES
approach, the authors view the UK approach as a distinct approach to
social entrepreneurship.
• The UK approach took root when the Labour Party came into power in the
late 1990s in the UK.

Schools of Social Entrepreneurship (cont’d)

• Following the Third Way ideology, it tried to stimulate partnerships between

the private, public and third sector.
• A new legal form for social enterprise was created in 2004 with the setting
up of the Community Interest Company.
• In contrast to the EMES approach, the goods and services provided can
be related, unrelated, or central to
the venture’s mission. In addition, the social enterprises in the UK are
trading within the
market.
 07-09-2022

Outline
Explain the purpose of a business plan.
Describe who reads a business plan and what they are
looking for.
Writing a Business Plan
Discuss the guidelines to follow to write an effective
Dr. M.K. Nandakumar business plan.
Indian Institute of Management Kozhikode
Identify and describe a suggested outline of a business
plan.
Explain how to effectively present a business plan to
potential investors.

1 2

Who Reads the Business Plan—and What

What Is a Business Plan? Are They Looking For?
There are two primary audiences for a firm’s business plan
• Business Plan
‒ A business plan is a written narrative, typically 25 to 35 Audience What They are Looking For
pages long, that describes what a new business A Firm’s Employees A clearly written business plan helps the
intends to accomplish and how it intends to accomplish employees of a firm operate in sync and
it. move forward in a consistent and
purposeful manner.
• Dual-Use Document
Investors and other A firm’s business plan must make the case
‒ For most new ventures, the business plan is a dual- external stakeholders that the firm is a good use of an investor’s
purpose document that is used both inside and outside funds or the attention of others.
the firm.

3 4

Guidelines for Writing a Business
Plan (1 of 5)
• Structure of the Business Plan
– To make the best impression, a business plan should
follow a conventional structure.
– Although some entrepreneurs want to demonstrate
creativity, departing from the basic structure of the
conventional business plan is usually a mistake.
– Typically, investors are busy people and want a plan
where they can easily find critical information.
5 6
Guidelines for Writing a Business
Plan (3 of 5)
• Content of the Business Plan
– The business plan should give clear and concise
information on all the important aspects of the
proposed venture.
– It must be long enough to provide sufficient information
yet short enough to maintain reader interest.
– For most plans, 25 to 35 pages is sufficient.
• Types of Business Plans
– There are three types of business plans, which are
shown on the next slide.
7 8
07-09-2022
Guidelines for Writing a Business
Plan (2 of 5)
• Software Packages
‒ There are many software packages available that
employ an interactive, menu-driven approach to assist
in the writing of a business plan.
‒ Some of these programs are very helpful. However,
entrepreneurs should avoid a boilerplate plan that
looks as though it came from a “canned” source.
• Sense of Excitement
‒ Along with facts and figures, a business plan needs to
project a sense of anticipation and excitement about
the possibilities that surround a new venture.
Guidelines for Writing a Business
Plan (4 of 5)
Types of Business Plans

Guidelines for Writing a Business
Plan (5 of 5)
• Recognizing the Elements of the Plan May Change
– It’s important to recognize that the plan will usually
change while written.
– New insights invariably emerge when an entrepreneur
or a team of entrepreneurs immerse themselves in
writing the plan and start getting feedback from others.
9 10
Section 1: Executive Summary (1 of 2)
• Executive Summary
– The executive summary is a short overview of the entire
business plan.
– It provides a busy reader with everything that needs to be
known about the new venture’s distinctive nature.
– An executive summary shouldn’t exceed two single-spaced
pages.
– Even though the executive summary appears at the
beginning of the business plan, it should be written last.
 The plan itself will evolve as it’s written, so not
everything is known at the outset.
11
07-09-2022
Outline of Business Plan
• A suggested outline of a business plan is shown on the
next several slides.
• Most business plans do not include all the elements
introduced in the sample plan. However most of them are
included here for the purpose of completeness.
• Each entrepreneur must decide which elements to include
in his or her plan.
Section 1: Executive Summary (2 of 2)
Key Insights
• In many instances an investor will first ask for a copy of
the firm’s PowerPoint deck or executive summary and will
request of a copy of the full business plan only if the
PowerPoint deck or executive summary is sufficiently
convincing.
• The executive summary, then, is arguably the most
important section of a business plan.
12
 07-09-2022

Section 2: Industry Analysis (1 of 2) Section 2: Industry Analysis (2 of 2)

• Industry Analysis Key Insights
– This section should begin by describing the industry • Before a business selects a target market it should have a
the business will enter in terms of its size, growth rate, good grasp of its industry—including where its promising
and sales projections. areas are and where its points of vulnerability are.
– Items to include in this section:
• The industry that a company participates in largely defines
 Industry size, growth rate, and sales projections. the playing field that a firm will participate in.
 Industry structure.
 Nature of participants.
 Key success factors.
 Industry trends.
 Long-term prospects.
13 14

Section 3: Company Description (1 of 2) Section 3: Company Description (2 of 2)

• Company Description Key Insights
– This section begins with a general description of the • While at first glance this section may seem less important
company. than the others, it is extremely important.
– Items to include in this section:
• It demonstrates to your reader that you know how to
 Company description.
translate an idea into a business.
 Company history.
 Mission statement.
 Products and services.
 Current status.
 Legal status and ownership.
 Key partnerships (if any).
15 16

Section 4: Market Analysis (1 of 2)
• Market Analysis
– The market analysis breaks the industry into segments
and zeroes in on the specific segment (or target
market) to which the firm will try to appeal.
– Items to include in this section:
 Market segmentation and target market selection.
 Buyer behavior.
 Competitor analysis.
 Estimate of the firm’s annual sales and market
share.
17
Section 5: The Economics of the
Business (1 of 2)
• The Economics of the Business
– This section addresses the basic logic of how profits
are earned in the business and how many units of a
business’s profits must be sold for the business to
“break even” and then start earning a profit.
– Items to include in this section:
 Revenue drivers and profit margins.
 Fixed and variable costs.
 Operating leverage and its implications.
 Start-up costs.
 Break-even chart and calculations.
19
07-09-2022
Section 4: Market Analysis (2 of 2)
Key Insights
• Most start-ups do not service their entire industry. Instead,
they focus on servicing a specific (target) market within the
industry.
• It’s important to include a section in the market analysis
that deals with the behavior of the consumers in the
market. The more a start-up knows about the consumers
in its target market, the more it can tailor its products or
services appropriately.
18
Section 5: The Economics of the
Business (2 of 2)
Key Insights
• Two companies in the same industry may make profits in
different ways. One may be a high-margin, low-volume
business, while the other may be a low-margin, high-volume
business. It’s important to check to make sure the approach
you select is sound.
• Computing a break-even analysis is an extremely useful
exercise for any proposed or existing business.
20
 07-09-2022

Section 6: Marketing Plan (1 of 2) Section 6: Marketing Plan (2 of 2)

• Marketing Plan
‒ The marketing plan focuses on how the business will
market and sell its product or service.
‒ Items to include in this section:
 Overall marketing strategy.
 Product, price, promotions, and distribution.
 Sales process (or cycle).
 Sales tactics.
Key Insights
• The best way to describe a start-up’s marketing plan is to
start by articulating its marketing strategy, positioning, and
points of differentiation, and then talk about how these
overall aspects of the plan will be supported by price,
promotional mix, and distribution strategy.
• It’s also important to discuss the company sales process.

21 22

Section 7: Product (or Service) Design Section 7: Product (or Service) Design
and Development Plan (1 of 2) and Development Plan (2 of 2)
• Design and Development Plan Key Insights
‒ If you’re developing a completely new product or • Many seemingly promising start-ups never get off the
service, you need to include a section in your business ground because their product development efforts stall or
plan that focuses on the status of your development the actual development of the product or service turns out
efforts. to be more difficult than thought.
‒ Items to include in this section:
• As a result, this is a very important section for businesses
 Development status and tasks.
developing a completely new product or service.
 Challenges and risks.
 Projected development costs.
 Proprietary issues (patents, trademarks, copyrights,
licenses, brand names).
23 24
 07-09-2022

Section 8: Operations Plan (1 of 2) Section 8: Operations Plan (2 of 2)

• Operations Plan Key Insights
‒ Outlines how your business will be run and how your • Your have to strike a careful balance between adequately
product or service will be produced. describing this topic and providing too much detail.
‒ A useful way to illustrate how your business will be run
is to describe it in terms of “back stage” (unseen to the • As a result, it is best to keep this section short and crisp.
customer) and “front stage” (seen by the customer)
activities.
‒ Items to include in this section:
 General approach to operations.
 Business location.
 Facilities and equipment.
25 26

Section 9: Management Team and Section 9: Management Team and

Company Structure (1 of 2)
• Management Team and Company Structure
‒ The management team of a new venture typically
consists of the founder or founders and a handful of
key management personnel.
‒ Items to include in this section:
 Management team.
 Board of directors (if you have one).
 Board of advisors (if you have one).
 Company structure.
Company Structure (2 of 2)
Key Insights
• This is a critical section of a business plan.
• Many investors and others who read the business plan
look first at the executive summary and then go directly to
the management team section to assess the strength of
the people starting the firm.

27 28
 07-09-2022

Section 10: Overall Schedule (1 of 2) Section 10: Overall Schedule (2 of 2)

• Overall Schedule Key Insight
‒ A schedule should be prepared that shows the major events
• An effectively prepared and presented schedule can be
required to launch the business.
extremely helpful in convincing potential investors that the
‒ The schedule should be in the format of milestones critical
management team is aware of what needs to take place
to the business’s success.
to launch the venture and has a plan in place to get there.
‒ Examples of milestones:
 Incorporating the venture.
 Completion of prototypes.
 Rental of facilities.
 Obtaining critical financing.
 Starting production.
 Obtaining the first sale.
29 30

Section 11: Financial Projections (1 of 2) Section 11: Financial Projections (2 of 2)

• Financial Projections Key Insights
– The final section of a business plan presents a firm’s • Having completed the earlier sections of the plan, it’s easy
pro forma (or projected) financial projections. to see why the financial projections come last.
– Items to include in this section:
• They take the plans you’ve developed and express them
 Sources and uses of funds statement.
in financial terms.
 Assumptions sheet.
 Pro forma income statements.
 Pro forma balance sheets.
 Pro forma cash flows.
 Ratio analysis.

31 32
 07-09-2022

Presenting the Business Plan to Presenting the Business Plan to

Investors (1 of 2) Investors (2 of 2)
• The Oral Presentation Twelve PowerPoint Slides to Include in an Investor Presentation
‒ The first rule in making an oral presentation is to follow
1. Title Slide 7. Marketing and sales
directions. If you’re told you have 20 minutes, don’t talk
for more than the allotted time. 2. Problem 8. Management team
‒ The presentation should be smooth and well-rehearsed. 3. Solution 9. Financial projections
‒ The slides should be sharp and not cluttered.
4. Opportunity and target market 10. Current status
• Questions and Feedback to Expect from Investors 5. Technology 11. Financing sought
– The smart entrepreneur has a good idea of the
6. Competition 12. Summary
questions that will be asked, and will be prepared for
those queries.

33 34

The Pitch (1 of 4)
Some Tips for Effective Presentations
An entrepreneur should: A business plan presentation should cover five basic areas:
• Make sure the plan has an attractive cover 1. Your company and its product or services
• Rid your plan of all spelling and grammatical errors 2. The problem to be solved – use a compelling story
• Make the plan visually appealing 3. A description of your solution to the problem
• Include a table of contents to allow readers to navigate 4. Your company’s business model
the plan easily 5. Your company’s competitive edge
• Make it interesting!
• Use spreadsheets to generate financial forecasts
• Always include cash flow projections
• Keep your plan “crisp” – long enough, but not too long
• Tell the truth – always

35 36
 07-09-2022

The Pitch (2 of 4) The Pitch (3 of 4)

When making the presentation: 6. Use visual aids

1. Prepare
2. Practice your delivery and then practice some more
3. Demonstrate enthusiasm about the business but don’t be
overemotional
4. Focus on communicating the dynamic opportunity your idea
offers and how you plan to capitalize on it
5. Hook investors quickly with an up-front explanation of the new
venture, its opportunities, and the anticipated benefits to them
7. Follow Guy Kawasaki’s 10/20/30 rule for PowerPoint presentations
8. Explain how your company’s products or services solve some
problem and emphasize the factors that make your company unique
9. Offer proof
10. Hit the highlights
11. Keep the presentation “crisp” just like your
business plan

37 38

The Pitch (4 of 4)

12. Avoid the use of technical terms

13. Remember to answer the question “What’s in it for me?”
14. Close by reinforcing the potential of the opportunity
15. Be prepared for questions
16. Anticipate the questions the audience is most likely to ask
and prepare for them in advance
17. Be sensitive to the issues that are most important to
lenders and investors by reading the pattern of their
questions
18. Follow up with each potential investor

39
 07-09-2022

Definitions of Business Models

• A business model is a description of an organization and how that organization
functions in achieving its goals.
• There are varying definitions including:
An Overview of Business Models • Stories that explain how enterprises work (Magretta, 2002).
• A system of interdependent activities that transcends the focal firm and spans
its boundaries (Zott & Amit, 2010).
Dr. M.K. Nandakumar
• A business model articulates the logic, the data and other evidence that
IIM Kozhikode
support a value proposition for the customer, and a viable structure of
revenues and costs for the enterprise delivering that value (Teece, 2010).

The Significance of Business Models

Criticisms Against Business Models
• There have been some criticisms of the business model as a concept by
some scholars.
• The definition of a business model is ambiguous.
• It refers to a loose conception of how a company does business and
generates revenue.
• An invitation for faulty thinking and self delusion.
There are several arguments scholars and practitioners have given to defend the
business model as a concept.
• Business models are important for competitiveness.
• Business models represent a new dimension of innovation that complements
traditional ones such as product, process, and organizational innovation.

The Significance of Business Models (cont’d)
• Factors relating to the general environment like technological changes and
globalization, are redefining the industry boundaries. These changes impact
the industry forces and hence organisations feel the need to rethink and
redesign how they could achieve their goals.
• The business model concept is also useful to scholars and managers who
are interested in social and environmental value creation.
The business model concept challenges some of the assumptions of the
traditional theories of value creation and value capture.
Value Creation and Business Models (cont’d)
• According to the business model concept value creation can take place
Business models can be interpreted in the following three ways:
both at the supply- and demand-side. Value is created not only by
producers, but also by the customers and other stakeholders.
• Based on the business model perspective, competitive advantage can be
resource based and activities based, in the supply side and/or demand
side.
• The business model can be conceptualized as a new unit of analysis,
centred on activities, emphasizing value creation, and offering a systemic
view on organizations.
07-09-2022
Value Creation and Business Models
• Traditional theories did not acknowledge value creation in the demand side
of , focusing on the supply side and limiting competitive advantage to a
single source.
• According to traditional theories of strategy, such as the resource based
view or the positioning view, value creation is a supply-side phenomenon
in which value is created exclusively by producers, not by customers. An
organisation develops a competitive advantage based on the resources
they control and the activities they perform.
Interpretations of Business Models
(1) Business models as attributes of real firms having a direct real impact on
business operations
This interpretation explains how firms do business.
(2) Business models as cognitive/linguistic
This interpretation explains how the organisational members interpret the way
the organisation carries out its business transactions.
 07-09-2022

Definitions of Business Models as Attributes of Real

Interpretations of Business Models (cont’d) Firms

(3) Business models as formal conceptual representations/descriptions of Authors (Year) Definition

how an organization functions. Birkinshaw and Explains how a company makes money
This interpretation is useful for the managers and entrepreneurs. Goddard (2009)
According to this interpretation, the business model of an organisation Bocken, Rana, and The framework of a business model might provide a
can be conceptualised symbolically, mathematically or graphically. Short (2015) structured way for sustainable business thinking by mapping
the purpose, opportunities for value creation across the
network, and value capture (how to generate revenue) in
companies

Definitions of Business Models as Attributes of Real

Firms (cont’d) Explanation of Business Models as Attributes of
Real Firms
Authors (Year) Definition
Gambardella and A business model is an organization’s approach to • Some scholars have suggested that there are two major parts to each
McGahan (2010) generating revenue at business model - The set of activities that the firm performs and the
a reasonable cost, and incorporates assumptions about how outcomes of performing these.
it will both create and capture value. • Some other scholars have interpreted business models as the set of
activities that a firm chooses to perform, when it performs them, how it
Hienerth, Keinz, and A business model describes the logic of how a business performs them, who performs them, and the resources/ capabilities that it
Lettl (2011) creates and delivers value to users and converts payments chooses to use determine the outcome.
received into Profits.

Explanation of Business Models as Attributes of Real
Firms (cont’d)
• However, there is little agreement on which activities are important in
business models and therefore should be performed, who performs the
activities, how they are performed, when they are performed, where (at
what level), and what resources are needed to perform them.
• The business model is considered to be an attribute of the firm itself.
Definition of Business Models as Cognitive/Linguistic
Schemas
Authors (Year) Definition
Aspara, Lamberg, We view the business unit-level business model as
Laukia, the business unit managers’ perceived logic of how
and Tikkanen (2013) the unit in question functions and creates value, in
connection with both its market environment, and
within the corporation (i.e., with its other business
units).
07-09-2022
Explanation of Business Models as Attributes of Real
Firms (cont’d)
• There is general agreement that business models as attributes of real
firms involve performing value-adding activities to create and/or capture
value.
• While some scholars see the outcome of performing business model
activities as being value created and captured, others see it as value
creation only or value captured only.
Explanation of Business Models as Cognitive/Linguistic
Schemas
• The idea behind the interpretation of business models as cognitive/linguistic
schemas is that managers hold images of their firms’ business models that are
shaped by their own cognitive frames.
• Research examining business models as a cognitive/linguistic schemas is
concerned with how business models are interpreted and manifested by
organizational members. It also examines the cognitive antecedents of business
model design and innovation.
• According to this interpretation, the business model can be considered as a
current thinking pattern or established belief or cognitive schema held by
managers in organizations.

Definitions of Business Models as Formal Conceptual
Representations
Authors (Year) Definition
Baden-Fuller and We define the business model as a system that solves
Haefliger (2013) the problem of identifying who is (or are) the customer(s),
engaging with their needs, delivering satisfaction, and
monetizing the value. The framework depicts the
business model system as a model containing cause and
effect relationships, and it provides a basis for
classification.
Definitions of Business Models as Formal Conceptual
Representations (cont’d)
Authors (Year) Definition
Osterwalder et al. A business model is a conceptual tool that contains a set of
(2005) elements and their relationships and allows expressing the
business logic of a specific firm. It is a description of the value
a company offers to one or several segments of customers
and of the architecture of the firm and its network of partners
for creating, marketing, and delivering this value and
relationship capital,
in order to generate profitable and sustainable revenue
streams.
07-09-2022
Definitions of Business Models as Formal Conceptual
Representations (cont’d)
Authors (Year) Definition
Casadesus-Masanell Business Model refers to the logic of the firm, the way it
and Ricart (2010) operates and how it creates value for its stakeholders. A
firm’s business model is a reflection of its realized
strategy.
Explanation of Business Models as Formal
Conceptual
Representations/Descriptions
• This interpretation views business model as a blueprint of how a company
does business.
• According to this conceptualisation, strategic issues facing a firm like
strategic positioning and strategic goals get translated into a conceptual
model that explicitly states how the business functions.
• This interpretation explains the descriptive nature of business model,
presenting it as a formal conceptual representation of how the firm is
proposing to achieve its goals.
 07-09-2022

Explanation of Business Models as Formal

Conceptual
Representations/Descriptions (cont’d)

• The business model canvas (Osterwalder, 2004; Osterwalder & Pigneur,

2010) is an example of this interpretation.
• Another example of this interpretation is the “choices – consequences“
model proposed by Casadesus – Masanell R. and Ricart, J.E. (2009).

Constructing the Choices – Consequences

Choices – Consequences Model Model
A causal loop diagram linking choices and consequences by arrows
representing causality 1. Prepare a list of choices made by the management
2. Look for direct consequences of every choice based on theories
It is impractical to analyze and evaluate every choice and consequence 3. See whether the consequences identified in step 2 have significant
consequences themselves
This representation of business models consist of 4. Repeat step 3 until exhaustion
• a subset of all choices; 5. Identify the consequences that are rigid and draw boxes around them. The
• a subset of all consequences; and distinction between flexible and rigid consequences has significant implications
• theories that explain how choices and consequences are related. 6. Beginning in step 3, check whether the identified consequences enable some of
the choices. In such cases draw arrows from such consequences to choices.
7. Identify virtuous cycles resulting in a continuous process of improvement and
assess the strength of such cycles
23 24
 07-09-2022

Ryanair’s Business Model Ryanair’s Business Model with Theories

Ryanair has
bargaining
Low commissions Low variable Reinvest Low commissions Reinvest
power Low variable
to travel agencies cost to travel agencies cost Profit=Volume*
Ryanair less dependent Markup-FC
Absence of
on Travel agents meals lowers
No Addition Low cost Short flights No cost per Additiona Profit=Volume*
Meals al High profit allows low allow no meals. Meals High profit
passenger Travelers l Markup-FC
revenue prices No meals detract
Short – haul Nothing less from WTP Buy additional revenue
is free when Nothing products Profit=Volume* Markup- FC
flights Short – haul flights are short
Reciprocity is free
Reputation for Low fixed Reputation for flights Reciprocity
Profit=Volume* Economies Low fixed
‘fair’ fares cost ‘fair’ fares of scale in cost
All passengers Markup-FC Low cost
Low quality Created Low quality
allows low
All passengers dealing with
equally prices Young passengers Commission
Service expected Service expected Created equally
Passengers care rates are
Young& Europeans Low need
Young& about fares Spartan HQ effective
Customers willing prefer for paid ads
Leisure Leisure travelers less costly than Profit=Volume
equal
travelers To put up with traditional HQ *Markup-FC
Spartan Raynair Segment with treatment Experience and
Supplier prices Lower fees Spartan
Word-of low ability to pay can s EOS in Presence of EOS
Secondary headquarter headquarters
mouth Word-of mouth be reduced
Standardized airports s Excitemen maintenance
Low fares Advertisin High aircraft Advertising Standardized
through Secondary
Fleet of 737s Low fares t
g utilization Fleet of 737s
tough bargaining Specially airports
High – powered about low High – powered
Commitment to one High aircraft valuable Individuals
Bargaining power Ancillary incentives Reputation for fair fares Bargaining prices
power model implies large Individuals
self-select
incentives
Business utilization in secondary willing to work
with suppliers results in larger volume with suppliers volume Better utilization based on
Supplier prices can airports
(bus (for insurance, of fleets in frugal environment incentives
Demand be reduced through Absence of union increases likelihood that
service…) traveler’s check tough bargaining
Non-unionized downward Combative individuals Ancillary variable pay will be accepted or individuals
Raynair fares fast Business
Work force slope Volume relative to are likely to act as who like strong incentives do not favor unions
Attracts competition is ‘hard nose” negotiators (bus service…)
combative large enough Attracts Non-unionized
Sufficient volume Combative
team combative Individuals Work force
for viability
High High team do not like
volume volume unions

Source : Casadesus – Masanell R. and Ricart, J.E. (2009), Competing through Business Model (A) : Business Model Essentials, Source : Casadesus – Masanell R. and Ricart, J.E. (2009), Competing through Business Model (A) : Business Model Essentials,
Harvard Business School Publishing Harvard Business School Publishing

Relationship between Business Models and Strategy Relationship between Business Models and Strategy
(cont’d)
• Debates about the relationship between business models and strategy has
resulted in two main arguments. • They suggest that many interesting research questions can be explored in
the context of business models.
• On the one hand, skeptics suggest that business model research is just
“old wine in a new bottle,”. • The activity system view suggests that in the same way in which activities
can be configured to achieve cost leadership or differentiation, a business
• On the other hand, many scholars argue that business model is a separate
model can be designed around efficiency or novelty design themes.
field but has an overlap with strategy. They suggest that business models
and strategy are distinct constructs, requiring attention both in isolation as • These considerations highlight the possibility of a strong conceptual
well as jointly. overlap between cost leadership and efficiency on one hand, and
differentiation and novelty on the other.

So, how are Business Models a Separate field from
Strategy?
Business models and strategy are different in the following fundamental
ways:
• First, in the context of business models, value creation comes first. The
business model starts by creating value for the customer or user, or even
multiple exchange partners or stakeholders, and constructs the model
around delivering that value. Value capture is explained based on the
revenues and profits earned by the firm.
• Second difference is based on the centrality of value created for the
customer/user versus creation of value for shareholders. Customers can
create value themselves and this is often ignored in supply-side-oriented
strategy theories.
Business Model Innovation
• BMI can be defined as “designed, novel, nontrivial changes to the key
elements of a firm’s business model and/or the architecture linking these
elements.”
• BMI is a key source of sustained value creation
• BMI positively influences the performance of firms, even under varying
environmental conditions.
• Established firms that innovate their BMs experience positive performance
effects.
07-09-2022
Cause of Disagreements between Business Models &
Strategy
• Business models challenge the assumptions of traditional theories of value
creation and value capture.
• These theories do not recognize value creation on the demand side. They
argue that value creation is a supply-side phenomenon in which value is
created solely by producers.
• The business model perspective suggests that value can be created on
the demand side by customers and other members of their ecosystems.
Some Definitions of Business Model Innovation
Authors Definitions
Aspara et al. (2010) Initiatives to create novel value by challenging
existing industry specific business models, roles
and relations in certain geographical
market areas.
Yunus et al. (2010) “Business model innovation is about generating
new sources of profit by finding novel value
proposition/value constellation combinations.”
Abdelkafi et al. (2013) “A business model innovation happens when the
company modifies or improves at least one of the
value dimensions.”
 07-09-2022

Dimensionalizing BMI. Dimensionalizing BMI. (Cont’d)

• BMIs may differ based on two dimensions namely Degree of Novelty and
Scope.
• The degree of novelty of the BMI could be interpreted either based on BMIs
that are new to a firm or BMIs that are new to an industry.
• Scope of the BMI suggests how much of a BM is affected by a BMI.
• At one extreme, the BMI may affect only a single component of the BM,
such as the value proposition. At the other extreme, it may involve all
components of the BM and the architecture that links those components.
• There is a lack of consensus among the scholars regarding
the number of BM components that must change for BMI to
happen.
• Some suggest that BMI can happen with a change in a
single component and others suggest that more than one
component should change.
• However, some others require complete revamping of the
BM components and the architecture linking them.
• There are considerable differences in the definition and
conceptualization of BMI.

34

Business Model Innovation (BMI) Four Types of BMI

Typology
1. Evolutionary BMI: A fine-tuning process involving voluntary and emergent
Scope changes in individual components of the BM, occurring naturally over
Modular Architectural time.
Novelty
2. Adaptive BMI: Involves changes in the overall BM that are new to the
New to firm Evolutionary BMI Adaptive BMI firm but not necessarily new to the industry. These are cases where the firm
New to industry Focused BMI Complex BMI adapts the architecture of its BM in response to changes in the external
environment, as in the face of competition from a new BM in its industry.

This simple typology dimensionalizes BMI in terms of novelty and scope.

 07-09-2022

Four Types of BMI (Cont’d)

3&4. Focused BMI and Complex BMI: Can be defined as the

processes by which management actively engages in modular or
architectural changes in the BMI to disrupt market conditions (i.e., new
to the industry).
• In the case of focused BMI, the firm innovates within one area of
the BM, such as targeting a new market segment that has been
ignored by its competition.
• The firm creates a new market while keeping its value proposition,
value delivery, and value capture mechanisms intact. Thus, the
innovation is limited to a modular change in the firm’s BM. In
contrast, complex BMI affects the BM in its entirety.
37

Entrepreneurial Failure
Dr. M.K. Nandakumar
Indian Institute of Management Kozhikode
Entrepreneurial Failure and Cultural Perceptions (cont’d)
• There are several key factors that are likely to be influenced by cultural
views of failure including stigmas about individuals and the career path of
self-employment, access to capital and other resources, and legitimacy of
entrepreneurial firms as employers.
• There is evidence that all of these have profound effects on
entrepreneurial activity in a given geographic area.
• If society views failure as bad, individuals or firms might allocate all the
penalties for failure to those judged to be responsible, which may
ultimately reduce the incentive to engage in entrepreneurial efforts and
may cause loss of organizational and social memory.
07-09-2022
Entrepreneurial Failure and Cultural Perceptions
• Failure is an important phenomenon in entrepreneurship, including both its
causes and consequences for individuals, Organizations, and society.
• Cultural perceptions of venture failure may profoundly influence the
allocation of resources towards risky ventures.
• If failure such as business loss or personal bankruptcy is acceptable or
“normal,” then individuals may find it easier access to capital and may be
more inclined to pursue ventures even with unproven or ill-prepared
business models.
• If failure is viewed as intolerable, and the associated stigma carries over
into personal and social stigmas, potential entrepreneurs would be less
likely to pursue entrepreneurial opportunities or be more conscientious in
doing so.
Internal and External Factors causing Failure
• Both individual (internal) and environmental (external) factors may
contribute to venture failure.
• Founders who have over confidence (hubris) make resource allocation
decisions that ultimately deplete the venture's chances of success and
increase the likelihood of venture failure
• Business owners fail by pursuing a reactive, rather than detailed, long-
term, planning strategy.
• Some of the failed entrepreneurs set less specific and less challenging
goals, and have a lower degree of human capital than successful
entrepreneurs.
 07-09-2022

Internal and External Factors causing Cultural Perceptions of Failure and their Impact.
Failure(Cont’d) Misfortune Attributions
Market Forces
Funding(External)
Financial(Internal)
• Ventures can also fail when governments do not create the appropriate Timing
financial, legal and regulatory, political and economic environment in a way Unrealistic
Expectations(External)
Impact of Failure
that supports enterprise development. Stigma of failure
Legitimacy of working in
• To summarize: Business Failure entrepreneurial venture
Access to capital
1. Venture failure can be caused either by individual mistakes made by Mistake Attributions
Business Model/Plan
the entrepreneur or by external problems outside of the entrepreneur's Mis-management
Individuals view of failure
Financial problems or the
control that caused their venture's misfortune Unrealistic Expectations individual
(Internal)
2. Whether failure leads to productive or destructive outcomes varies Hubris
Financial(Internal)
Innovation
3. There are differences in how individuals and communities across
geographic regions experience failure and its consequences.
Misfortune Attributions: Failure caused by circumstances the entrepreneur could not control (external attribution)
Mistake Attributions: Failure resulted from avoidable errors on the part of the entrepreneur (internal attribution)

The Positive Side of Entrepreneurial Failure

• The dominant view is that firm failure should be avoided, because it can be
“painful and costly, can generate vicious cycles of discouragement and
decline, and can obviously be mismanaged”.
• However, failure could also provide an opportunity for the entrepreneur to
learn and improve their entrepreneurial competence.
• Individual experience in overcoming obstacles such as failure leads to
resiliency and a sense of self-efficacy.
• Negative feedback from failure is often more motivating than positive,
because it highlights the discrepancy between what we desire for our
ventures (or ourselves) and what we have actually accomplished, and
motivates us towards action to achieve our desires.
The Positive Side of Entrepreneurial Failure(Cont’d)
• Research suggests that entrepreneurs who had experienced significant
venture failures were not less confident or likely to shy away from
entrepreneurial opportunities.
• Instead they exhibited similar or greater amounts of overconfidence and
venture keenness than their successful counterparts. The “failed”
entrepreneurs viewed failure as an “entrance fee for entrepreneurship”.
• Failure provides an important learning opportunity and acts as a catalyst
for further economic and business development.

Individual and Firm Level Failure
• Failure is a crucial yet understudied aspect of the entrepreneurship
process.
• Firm-level failure and individual level failure are synonymous.
• Very few studies differentiate between these two levels of analysis.
• An entrepreneur can fail, yet his or her business can be successfully taken
over by another individual.
• Alternatively, a firm may fail, but the entrepreneur may go on and create
successful firms in the future.
• Failure of the firm does not necessarily imply failure for the entrepreneur.
• Failure is not a single all-encompassing phenomenon. It includes a
broader range of situations at different levels of analysis.
Entrepreneurial Failure and its Relationship to
exit(Cont’d)
• Hence, the exit of the entrepreneur from a firm is not a sufficient
criterion for the entrepreneur to have experienced failure.
• At the firm level of analysis, there is slightly more clarity regarding
the relationship between firm exit and failure.
• A distinction can be made between firms which are forced to close
because they are financially unviable businesses (insolvency) and
firms which are shut down by choice as the firm does not provide
sufficient return on investment, or where the assets of the firm are
not worth further harvesting.
07-09-2022
Entrepreneurial Failure and its Relationship to exit
• Historically, exit was treated synonymously with failure of the firm or failure
of the entrepreneur.
• Many entrepreneurs exit their firms to harvest their investment, retire, or
pursue alternative employment opportunities. Such exits are often viewed
as positive exits rather than failures.
• Some entrepreneurs are forced to exit their firms due to poor financial
performance, such as insolvency. Such exits are often classified as
failures.
Conceptualizing Entrepreneurial Failure – Firm
Level Criteria
Objective firm-level criteria:
• Failure occurs when a fall in revenues and/or a rise in expenses is of such
a magnitude that the firm becomes insolvent and is unable to attract new
funding. Consequently, the firm cannot continue to operate under the
current ownership and management.
• The very nature of insolvency means that the firm cannot continue under
current operations and management.
 07-09-2022

Conceptualizing Entrepreneurial Failure – Firm Conceptualizing Entrepreneurial Failure – Individual

Level Criteria (cont’d) Level Criteria
Objective individual-level criteria:
• Objective individual-level conceptualizations of failure rely on assessment of
Subjective firm-level criteria:
returns to human capital in alternative employment options.
• Subjective firm-level conceptualizations of entrepreneurial failure rely on
• An entrepreneur ceases involvement in the firm if it fails to meet expectations
the entrepreneur’s assessment of firm performance at the time of exit.
relative to this benchmark.
• If performance falls below the minimum level, the entrepreneur exits the
• This conceptualization has been used to estimate the failure rates of firms venture.
as it can differentiate firms that were shut down due to poor performance
• Entrepreneurs with high levels of human capital are likely to have higher
from firms that were shut down due to other reasons.
threshold levels given more attractive alternative uses for their skills and abilities.

Conceptualizing Entrepreneurial Failure – Individual

Conceptualizing Entrepreneurial Failure –
Individual Level Criteria (Cont’d) Level Criteria (cont’d)
Subjective individual-level criteria:
• This implies that, given the same level of performance, one entrepreneur
• Research has focused on the personal hardships that failure can have on
may view the firm as being successful while another may view the same
entrepreneurs and hence, conceptualize failure based on its impact.
firm as unsuccessful depending on the alternative uses of their human
capital.
• Failure is the termination of an initiative that has fallen short of its goals. • Thus, they use the personal impact of failure as the key benchmark for
conceptualizing failure.
• Business failure is explicitly defined as ‘the cessation of involvement in a
venture because it has not met a minimum threshold for economic viability
as stipulated by the (founding) entrepreneur’.
 07-09-2022

Implications of definitions of failure A Classification Scheme for Entrepreneurial Failure

• A 2 × 2 classification scheme can be created using the four

• These four conceptualizations make important contributions to the categorizations.
understanding of entrepreneurial failure.

• These categorizations are based on two factors: the level of analysis (firm
• It is important to note that the conceptualizations are not mutually or individual) and whether the definition is objective or subjective in nature.
exclusive and that there are likely to be some overlaps.

A Classification Scheme for Entrepreneurial Failure

(cont’d)

Objective Subjective

Bankruptcy/ Poor Firm Performance

Firm
Level of analysis

Insolvency

Return to Human Capital Personal Failure

Individual

Entrepreneurial Exit
Dr. M.K. Nandakumar
Indian Institute of Management Kozhikode
An Overview of Entrepreneurial Exit (cont’d)
• Although there are significant similarities between entrepreneurial exit and
CEO succession in publicly traded firms, they are essentially different.
• CEOs in most large, incumbent organizations have very small equity
ownership positions and a much higher degree of control imposed by a
board of directors.
07-09-2022
An Overview of Entrepreneurial Exit
• Entrepreneurial exit: The process by which the founders of privately held
firms leave the firm they helped to create; thereby removing themselves, in
varying degree, from the primary ownership and decision-making structure of
the firm.
• It is an important part of the entrepreneurial process.
• The value created by a new venture gets reflected on its ability to harvest the
value at some point(s) in the future
• Entrepreneurial process is more than just the creation of a new venture and
does not end with creation, but rather with the entrepreneurial exit.
• Not only is entrepreneurial exit an important process for entrepreneurs, it also
has a significant effect on firms, industries, and the economy.
• For the entrepreneur the exit is a liquidity event that allows him or her to take
advantage of and engage in other opportunities; however, the implications of
entrepreneurial exit go well beyond the individual.
Importance of Exit
• Entrepreneurial exit is, an important event for the founder. It is also important to
the entrepreneurial process because it has implications for the firm, the
industry, and the economy.
• It could be possible to compare the exit process to an investor’s purchase of
publicly traded stock .
• Investors purchase a company’s stock and watch the value increase over time
thereby increasing the value of their own personal portfolio. It isn’t until the
stock is sold that gains (or losses) are actually recognized.
• Although a venture may create wealth for the entrepreneur during its lifetime,
its ability to harvest value at some point(s) in the future is also critical.
 07-09-2022

Importance of exit to the firm

Importance of Exit (cont’d)
Implications of founders exit
Positive outcomes Negative outcomes
• The sale of equity (one form of exit) allows the entrepreneur to realize
• An exit (such as an acquisition or an IPO) may • Diminishes organizational performance,
some portion of the firm's wealth creation . infuse the firm with cash, new resources, and disrupts work routines, interrupts command,
• However, the exit is not only a liquidity event, but may also have renewed energy. and increases employee insecurity.
• The firm may also realize additional benefit if • The nature of entrepreneurial firms, including a
psychological implications for the founder. the entrepreneur is replaced by a professional highly centralized decision making system and
• The founder identifies an opportunity, sacrifices time, money, and energy, management team including an infusion of an over-dependence on one or two key
and makes commitments in order to get the firm off the ground. specific management skills, the ability to raise individuals, makes the transition to professional
more cash, expand into other product areas, management difficult.
• Entrepreneurs often refer to the venture as their “baby” indicating that exit and to increase legitimacy. • Increased organization mortality.
is more than the relinquishment of equity ownership, but also has
psychological implications as well.
The exit of the founder has a significant effect on the firm and is a key milestone to the organization. It
might have either a positive or a negative outcome.

Importance of exit to the economy

Importance of exit to the industry
• During the acquisition of a privately held firm rival firms experience
significantly positive valuation effects.
• Thus, entrepreneurial exit may impact the industry as it changes the
competitive balance in the industry and provides value to rivals.
• Entrepreneurial exit triggers a process of ‘entrepreneurial recycling’. The
entrepreneurial team might invest a portion of their newly acquired wealth
and time as well as their accumulated experience into one or more
entrepreneurial activities to derive economic benefits.
• The economic benefits may include:
1. Reinvestment of financial resources into other young companies,
2. Reinvestment of knowledge resources into other companies,
3. New venture creation,
4. Strengthening local infrastructure,
5. Philanthropy, and
6. Endowment of community activities.
 07-09-2022

The Entrepreneurial Process The Entrepreneurial Process (Cont’d)

• The entrepreneurial process consists of four distinct phases
1.Conception • According to this perspective, the entrepreneurial process is a series of
actions or operations resulting in a new venture.
2.Gestation (nascent entrepreneurs)
• Thus, it suggests that the entrepreneurial process is only concerned with
3.Infancy (fledgling new firms)
the activities that lead to new venture creation and the end of the process
4.Adolescence (established new firms). is the creation of a new venture.
• Others refer to the entrepreneurial process as one that begins with the nascent • Other perspectives suggest that entrepreneurship and the entrepreneurial
entrepreneur and ends with the creation of the new venture or as one that process involves more than new venture creation.
involves “all the functions, activities, and actions associated with the perceiving
of opportunities and the creation of organizations to pursue them”.

The Entrepreneurial Process (cont’d) Entrepreneurial exit and the entrepreneurial process
• Entrepreneurial process contend that the process includes everything from • The entrepreneurial process can be compared to parenting which includes
discovering opportunities to solving unexpected problems while running a phases of conception, gestation, infancy, toddlerhood, childhood, growth, and
new venture. maturity.
• The entrepreneurial process may include any of the following • The entrepreneurial process is more than just the creation of a new venture and
• Idea generation that process does not end with creation, but rather with the entrepreneurial exit.
Thus, it is the exit, rather than the creation of a venture, that concludes the
• Idea screening process.
• Procuring necessary resources • The entrepreneurship literature compares entrepreneurial exit with adoption and
• Proving the business model foster care.
• Rollout • They suggest that, similar to biological parents, founders may find themselves
• Maturity with a venture that they are unable or willing to nurture; therefore, they may
hand over a new venture (or lose it) to individuals or firms who are better
• Renewal and growth geared to manage it.
• Decline

Entrepreneurial exit and the entrepreneurial process
(Cont’d)
• Entrepreneurial exit may occur at any time during the entrepreneurial
process.
• An entrepreneur could make a decision to pursue another opportunity (e.g.
job opportunity, education, other new venture) and therefore his or her exit
could occur before the firm is ever founded.
• Conversely, the entrepreneur might not consider exit until late in his or her
life.
Ownership (Cont’d)
• Founders often have a strong psychological tie to the venture in which they
have created even if they retain only a small equity ownership.
• There are three major influences on the degree of psychological
ownership:
1.control of the organization
2.Intimate knowledge of the organization
3.Self-investment (energy, time, effort, and attention).
07-09-2022
Ownership
• In scholarly research we most often consider ownership to be an equity-
based notion .
• Ownership, however, may also include psychological ownership .
• Psychological ownership refers to a state of mind in which individuals feel
as though they possess a particular object that then becomes an extension
of their self or their identity .
• The core of psychological ownership is the feeling of possessiveness and
of being psychologically tied to an object .
Ownership (cont’d)
• Previous research has shown that increased control over an object leads
to feelings of ownership toward that object.
• Founders have a high degree of control over the activities and initial
design of the firm due to their centralized decision-making process .
• In addition, the founders have a deep intimate knowledge of the
organization.
• In most firms where the founder is still in the leadership role, it would be
difficult to find an individual who has more knowledge of the firm .
• The more information and the better the quality of that information that an
individual has about an object, the stronger the relationship will be
between the object and feelings of ownership .

Ownership and Exit
• The more of oneself that an individual has invested into an organization
the higher degree of ownership the individual will feel toward the
organization. Thus the psychological ownership of the firm is a compelling
and increasing force for firm founders.
• In each of the phases of entrepreneurial exit both equity ownership and
psychological ownership are important.
• The degree of both equity and psychological ownership in the firm is likely
to change over time with equity ownership the highest at new venture
creation and declining over time while psychological ownership is likely to
be lower in the beginning and increasing over time.
Entrepreneurial Exit at different Phases
The exist strategy, reasons for exit, and the options for exit would vary at the
following phases of the entrepreneurial process:
• Conception and Gestation
• Infancy
• Adolescence
• Maturity
07-09-2022
Ownership and Exit (Cont’d)
• In the beginning phases of the firm the amount of self-investment (energy,
time, effort, and attention) and intimate knowledge is less than it is as the
firm grows.
• Individuals may become emotionally involved in their venture in such a
way that their identity becomes the venture .
• The varying degrees of ownership have an impact on both the
development of an exit strategy and the options for exit.
Conception and Gestation – Exit Strategy
• Approximately half of entrepreneurs start their companies with an exit
strategy in mind.
• Small business founders tend to focus upon providing family income and
entrepreneurial founders focus upon growth and profit.
• While small business founders “view the venture as an extension of their
personalities”, entrepreneurial founders are more likely to engage in
systematic processes such as strategic planning
• Therefore, it follows that founders with a growth or profit motivation are more
likely to develop an exit strategy.

Conception and Gestation – Reasons for Exit
• During both conception and gestation an entrepreneur could make the
decision not to pursue the venture thus terminating the process.
• Termination of the new venture creation process in the nascency phase
may be due to at least three forces.
1.Alternative: Alternative forces refer to those “alternative opportunities”
that are available to an individual to leave their current endeavour. E.g.
job opportunity, educational opportunity, or the identification of another
new venture opportunity.
Conception and Gestation – Options for Exit
• In the conception and gestation phase individuals may decide to terminate
or abandon their idea and end the entrepreneurial process.
• Many individuals toy with the idea of starting their own venture and the
decision to terminate the idea doesn’t prevent individuals from moving
forward at some future point with a similar or completely unique idea.
07-09-2022
Conception and Gestation – Reasons for Exit
(Cont’d)
1.Calculative: Calculative forces refer to the chance that individuals will
be able to achieve their “goals and values in the future at their current
organization”. For the nascent entrepreneur these could include the
realization that a product or service already exists, market demand is
low, or a strong competitive environment which would make it more
likely that the nascent entrepreneur would terminate the process.
2.Normative: Normative forces refer to the individual’s perception of
family or friends’ expectations regarding the venture.
Therefore, if the nascent entrepreneur has discussed and sought
insights from friends and family s/he may be less likely to terminate the
process.
Infancy - Exit Strategy
• There are many conditions early in the life of the firm that may impact its
ability to exit.
• The founder’s previous experience impacts his or her intention to exit.
• Development of an exit strategy will impact not only the ability to exit but
the exit routes available.
• If the entrepreneur develops an exit strategy in the infancy stage, she or
he will be more likely to be able to exit and to achieve the desired exit.
• Founders with a growth strategy are more likely to develop an exit strategy
than lifestyle or income replacement founders.

Infancy - Exit Strategy (Cont’d)
• In the infancy phase equity ownership is high as the founders own most of
the equity in the firm and psychological ownership is low as founders have
yet established a strong psychological bond with the firm.
• When the founder’s equity ownership is high there is little pressure from
other constituents (e.g. venture capitalists or other investors) to see a
return on their investment. Hence the need to consider an exit strategy is
minimized.
• Entrepreneurs who develop an exit strategy early in the life of the firm
imprint the firm in such away that they are more likely to be able to achieve
their exit goals.
Infancy – Reasons for Exit: Calculative Forces
• Calculative forces (the chance that individuals will be able to achieve
their goals) also figure into the reasons for exit as the initial steps the
entrepreneur has taken give them additional information to evaluate the
venture’s viability.
• The realization of a provisional patent or first round equity financing is a
signal that the likelihood of achieving their goals is higher; thus decreasing
the likelihood of exit in this phase.
• Conversely, the realization that a similar product exists or that the
technology is unachievable is a negative signal.
• These negative signals that result in entrepreneurial exit are varied and
many in the infancy phase as the entrepreneur begins to explore the
feasibility of his/her idea.
07-09-2022
Infancy – Reasons for Exit: Alternative Forces
• Alternative forces (those other opportunities that entice an individual to
leave their current endeavour) are still strong in the infancy phase as
individuals have not made a strong psychological commitment to the firm.
• In addition, it is at this point in the entrepreneurial process the
entrepreneur may recognize that a career in entrepreneurship is
demanding and perhaps not the romantic adventure often glamorized in
the media.
• Because individuals may not have a strong psychological commitment nor
have they invested a significant amount of resources (time, money, or
energy) into the venture, the decision to exit for an alternative opportunity
is a primary reason for exit.
Infancy – Reasons for Exit: Normative Forces
• Normative forces (the individual’s perception of family or friends’
expectations regarding the venture) are stronger in the infancy phase than
in conception and gestation.
• As the entrepreneur takes positive steps toward new venture creation,
more of his networks, friends, family, and colleagues will be aware of the
new venture.
• In addition, it is during the infancy phase that entrepreneurs seek
partnerships and develop working relationships, all of which make it more
difficult to terminate or abandon the new venture.
 07-09-2022

Infancy – Options for Exit

• There are primarily two types of entrepreneurial exit in the infancy phase.
1. Failure
2. Voluntary disbanding
• Failure is the highest in the infancy phase.
• Despite the initial honeymoon phase enjoyed by many firms, the liabilities
in the infancy phase result in a high exit rate.
• On the other hand exit may be voluntary and due to personal or other
reasons.
• One study found that only twenty-five percent of exits were due to poor
financial performance. The literature suggests that voluntary exits seem to
comprise much of the exits.
Infancy – Options for Exit
• The bulk of exits were the result of moves, parent firm strategy decisions,
mergers, and personal choices by the founders.
• Researchers found that at least 20 percent of exits are due to personal,
family, environmental, venture-related reasons, or other nonfinancial
reasons such as other job opportunities or unwillingness to accept limited
success.
• The firm is vulnerable in the infancy phase and subject to the pace of
learning by the founder.

Adolescence - Exit Strategy Adolescence - Exit Strategy (Cont’d)

• Growth entrepreneurs are more likely to develop an exit strategy early in
the life of the firm due primarily to the influence of other stakeholders.
• They may become emotionally involved in their venture to the point that it
• As the firm grows we would expect there to be increasing pressure on the becomes part of their identity making it much more difficult for them to ‘let
growth entrepreneur to develop an exit strategy. go’.
• As the firm grows, the founder increasingly develops a psychological • Thus, not only are they less likely to develop an exit strategy early in the
attachment. life of the firm, they are less likely to consider one over time.
• Although this is true for both growth and lifestyle or income-replacement
founders there is some evidence that psychological attachment is stronger
for lifestyle or income-replacement entrepreneurs as they view the venture
as an extension of their personalities.

Adolescence - Reasons for Exit
• In growth ventures entrepreneurs often relinquish a portion of equity
ownership in order to acquire needed resources.
• As the founder’s equity in the firm becomes diluted, he or she has less
control over decisions and may be in a position where other stakeholders
could force an exit to bring in a professional management team.
• Conversely, the founder may desire an exit rather than serving a
managerial role.
• In growth firms reasons for entrepreneurial exit may include forced exit or
a desire by the entrepreneur not to assume a managerial role.
Adolescence - Options for Exit (Cont’d)
• In lifestyle or income-replacement firms the increasing psychological
attachment has an impact not only on the development of an exit strategy
but also on the type of exit that they may be willing to consider.
• The lifestyle founder may be concerned about how the firm will be
managed if they leave.
07-09-2022
Adolescence - Options for Exit
• Private-equity buyouts
• Acquisitions by a managed pool of funds comprised of qualified investors.
• Although private-equity transactions are growing at a rapid rate, strategic
buy-outs are still a popular exit route for entrepreneurs.
• Strategic buyers continue to look for firms that are a strategic fit (cost
saving advantages and/or operational synergies) with the existing firm.
• A public offering is also a potential exit strategy for entrepreneurs.
Although an IPO is often considered to be more of a growth strategy rather
than a liquidity strategy, the offering does allow for the entrepreneur to
extract the accumulated wealth.
Maturity - Exit Strategy
• Only a small percentage of growth firms reach maturity with the founder in
place .
• Founders with a growth motivation are less likely to be highly involved in the
organization.
• Due to the high psychological attachment, early phase learning, and little
outside pressure to develop an exit strategy, the lifestyle or income
replacement founder may find himself with a mature firm, no exit strategy, and
few options available for exit.

Maturity - Reasons for exit
• Despite not developing an exit strategy the lifestyle founder will, in one
manner or another, exit the firm.
• These reasons may include, among other things, a desire to harvest their
investment, a need for liquidity, retirement, or even death.
• In the maturity phase the likelihood of bankruptcy is lower than at any
other phase in the entrepreneurial process; thus, reducing the likelihood
that entrepreneurs will exit due to failure.
Implications
• In the phases of the entrepreneurial process there are unique factors that
affect a founder’s exit strategy, reasons for exit, and the varying exit
options.
• As the firm grows, there are more options available for exit.
• In the conception and gestation phase entrepreneurial exit consists
primarily of the nascent entrepreneur making a decision to abort the
process due to alternative, calculative, and normative forces.
• In the infancy phase the firm is vulnerable and subject to the deep learning
acquired by the founder — particularly the development of an exit strategy.
• In addition, both equity and psychological issues impact the development
of an exit strategy.
• In this phase entrepreneurial exit is high and consists primarily of failure
and voluntary disbanding.
• As the firm grows and its legitimacy increases (adolescence), there are
more options available for exit.
07-09-2022
Maturity - Options for Exit
1. A large number of the lifestyle and income-replacement founders expect
to transfer their company to a key employee or a family member, but the
reality is that this scenario plays out only about 20% of the time .
2. Another option for lifestyle of income replacement founders is to sell their
firm to another individual. This may involve the use of a local business
broker. Although a viable option, this strategy is most often for firms at the
lower end of firm valuation .
3. Another option is to sell the firm to a strategic buyer. This option may take
several years if the founder needs to make significant changes (e.g.
groom a middle management team, restructure the accounting systems)
to increase its marketability to strategic buyers .
4. A final, although not very desirable, exit option is to liquidate the assets of
the firm.
Implications (cont’d)
• However the disparity in the goals of firm founders impact the options
available such that founders with growth goals may be more likely to have
developed an exit strategy and may be more likely to exit.
• Founders with lifestyle goals may be more psychologically connected to the
firm and may be less likely to have an exit strategy or will have an exit
strategy that allows them to either remain involved with the firm or ascertain
that key stakeholders are taken care of.
• In the maturity phase a large percentage of growth motivated firm founders
would have left the firm.
• For those founders of lifestyle of income replacement firms the options for
exit are limited.
 07-09-2022

Implications (cont’d)

• All entrepreneurs, whether they create lifestyle or growth ventures will

ultimately make an exit.
• This exit may be voluntary or involuntary; it may be early or late in the life
of the firm and it may take many forms. However, one thing is certain —
they will exit.
• The amount of equity and psychological ownership vary over time and with
different types of ventures.
 07-09-2022

Entrepreneurial Teams

Entrepreneurial Teams • An entrepreneurial team rather than a single entrepreneur is more capable
to deal with the uncertainties and volatilities associated with new ventures
that require flexibility and complexity of decision making.
• Research on entrepreneurial start-ups suggests that firms founded by
Dr. M.K. Nandakumar entrepreneurial teams generally outperformed those founded by individual
entrepreneurs.
Indian Institute of Management Kozhikode
• However, popular opinion generally characterized entrepreneurship as an
economic battle of a lonely hero.
• Traditional entrepreneurship literature that examined entrepreneurship
characteristics often focused on individual characteristics as opposed to
team-level variables.

Entrepreneurial Teams (cont’d) Team Diversity and Team Effectiveness

• Teams of entrepreneurs involved in venture creation is common in

entrepreneurship. Team
Commitment
External Social Ties
• The presence of entrepreneurial teams is more common in high-tech Team
of Team Members

industry. Comprehension

• The founders of a vast majority of firms in the high-tech industry consisted Diverse New Venture
of entrepreneurial teams (e.g. Apple, Google, Microsoft, Infosys). Team-level Team
Competency
Team
Effectiveness Performance
Cognitive
• Heterogeneous teams, can result in improved creativity and Capability

innovativeness.
Deftness
• Heterogeneity might also produce conflicts and emotions among members
of the entrepreneurial team resulting in poor performance. Team Cognitive
Comprehensiveness

Team Diversity
• Heterogeneous teams are regarded as more effective in solving complex,
non-routine problems, which are common to entrepreneurial firms.
• This is because the diversity in perceptions, skills, abilities and knowledge
that exists in a heterogeneous team is important for solving complex and
ambiguous problems.
• While many scholars suggest that increased diversity provides a variety of
benefits, others indicate that homogeneity may lead to better outcomes
when considering satisfaction, communication, conflict and turnover.
• The literature appears to be divided into two contradictory schools of
thoughts on this issue: one suggests diversity in team members would
lead to team-level diversity of perspectives and, thereby, team
effectiveness. The other suggests diverse teams are less cohesive and,
therefore, ineffective.
Team Diversity (cont’d)
• Many researchers have suggested that diversity in a team improves team
effectiveness because diversity enhances team decision-making by
bringing broader perspectives and a greater pool of alternative solutions
and innovative ideas together.
• Hence it is important to develop team-level diverse cognitive
capabilities.
• Team-level diverse cognitive capability refers to the team’s ability to
understand and utilize a variety of perspectives, ideas and alternatives in
solving complex problems and executing plans.
• Diversity of personality traits within a team is also likely to contribute to the
variety of perspectives and ideas available to the team just as people with
different personality characteristics differ in their styles and abilities to do
different things.
• Each member in a team with high personality diversity can bring unique
cognitive attributes.
07-09-2022
Team Diversity (cont’d)
• Accordingly, it is unclear whether diversity in team composition always
improves complex and/or non-routine problem- solving ability.
• Diversity in a team merely brings together people with different
perspectives, cognitive styles, skills and abilities.
• A team can achieve diversity without having different demographic
characteristics among its members.
• Differences in personality traits and thinking styles can also create
diversity of cognitive attributes within a team.
• Thus, a demographically homogeneous team can achieve diverse
cognitive attributes important to making novel and creative entrepreneurial
decisions.
The Negative Side of Demographic Diversity
• Demographic diversity may also create dissonance that makes the team
interaction process difficult.
• Demographic diversity is not the only source of diverse cognitive attributes
and neither does it guarantee a high team-level cognitive
comprehensiveness.
• Although an entrepreneurial team with high demographic diversity brings
entrepreneurs with a variety of cognitive attributes together as members, it
may also produce distrust, acrimony and emotional conflict among team
members, which may result in a lack of innovation, creativity, team
effectiveness and overall performance.
• Innovation, creativity and overall performance are essential elements of
success for an entrepreneurial team.

The Negative Side of Demographic Diversity
(cont’d)
• Demographic diversity has the ability to enrich a team with diverse
cognitive skills as well as to weaken a team with emotional conflicts. Such
diversity has the potential to both aid and impair innovation, creativity and
overall performance.
• Entrepreneurship research on personality suggests that demographic
diversity may not positively influence entrepreneurial team effectiveness.
Team Commitment and Team-level Cognitive
Comprehensiveness
• Whenever a group of people works on a challenging project, emotional
conflict is possible.
• This is particularly true for entrepreneurial teams, whose tasks are
challenging, novel and innovative, and involve a high level of risk and
potential return.
• Therefore, entrepreneurs must pay serious attention when forming a team,
as the possibility of emotional conflict in such a team is very high.
• A team process variable that minimizes emotional conflict and enhances
cooperation among team members should play an important role in
improving team effectiveness.
07-09-2022
Team Comprehension and Deftness
• Team-level diverse cognitive capabilities could help a team to develop
team comprehension and deftness.
• Entrepreneurship research has found that team comprehension and
deftness are important contributors to team competency and new venture
performance .
• Team comprehension is defined as a team’s collective understanding of
the important drivers of the venture.
• Deftness is defined as the emergence of a collective mind that creates
effective relationships among teammates and that allows effective
execution of interrelated activities.
• Team comprehension = Developing a good understanding
• Deftness = Developing an integrated mindset
Team Commitment and Team-level Cognitive
Comprehensiveness (cont’d)
• Team commitment is such an important team process variable.
• Team commitment is suggested to enhance cohesion, loyalty and synergy,
and minimize emotional conflicts between team members. Hence it
increases entrepreneurial team effectiveness.
• Team commitment is a process in which team members feel loyalty and
trust towards one another.
• In contrast, team cognitive comprehensiveness is a process in which
team members consider multiple decision criteria, multiple courses of
action and multiple perceptions in making decisions.

Team Commitment and Team-level Cognitive
Comprehensiveness (cont’d)
• A high level of trust and loyalty within a team may cause members to
reduce debate and not weigh ideas of different members against one
another.
• Similarly, it is possible to have cognitive comprehensiveness without team
commitment.
• Teams may have a well-established system that requires members to
brainstorm and systematically weigh pros and cons of one another’s ideas.
• Team-level cognitive comprehensiveness and team commitment
produce significant positive influence on entrepreneurial team
effectiveness.
• However, demographic heterogeneity do not significantly influence team
effectiveness.
The Importance of Skills Profiling
07-09-2022
Team Commitment and Team-level Cognitive
Comprehensiveness (cont’d)
• Entrepreneurs should collectively formulate an agreed-upon system of
team interaction that not only would ensure that each member proposed
different approaches, points of views, alternatives etc., but would also
encourage members to compare the diverse alternatives and approaches
and weigh them against each other.
• This would ensure an entrepreneurial team process in which members will
evaluate an issue with a wider lens resulting in cognitive
comprehensiveness and ultimately entrepreneurial team effectiveness.
Peer Effects on Start-up Team Performance
Findings from a Boot Camp Study Conducted in Delhi
• Teams whose members lack prior ties to others at the boot camp
experienced peer effects that influenced the quality of their product
prototypes.
• In contrast, teams whose members have many prior ties interact less
frequently with proximate peers, and thus their performance is unaffected
by nearby teams.
• Entrepreneurs with many prior ties to others at the boot camp made fewer
new connections, especially to neighbouring peers, and thus did not
experience significant spill overs.
• Those without prior connections interacted frequently with people on
nearby teams.
• Teams whose members had few or no prior ties knew more of their peers
on proximate teams and also sought advice and help from them more
frequently.
 07-09-2022

Social Ties and Team Performance Social Ties and Team Performance (cont’d)
• The network of prior ties of a person can impact his/her new connections.
• Having many prior ties may limit how much an individual invests in forming • Entrepreneurial Teams whose members have few or no prior ties, enhance
new connections, even with knowledgeable and accessible peers. their performance by interacting with individuals external to the
• Connecting with someone new involves many uncertainties and social organisation.
challenges that resolve only after repeated interaction. • However, teams whose members have many prior ties are less likely to
• Thus, if a person already has advisers and friends in her network, s/he interact with people outside their social circle. Hence the possibilities of
may prefer to interact with existing connections over building new ones. enhancing their performance through such interactions become very
• For those with few connections, proximate peers are a readily available limited.
reservoir of knowledge, social support, and reference points.
• External social ties of team members affect not only their own performance
but also the outcomes of their team as a whole.
• Thus, the network connections of individual team members are likely to
affect where a team gets outside information, and subsequently how it
performs.
 07-09-2022

Sole Proprietorship Company

Advantages Disadvantages

Forms of Ownership Easy to form and wind up Limited resources

Quick decision and prompt action Lack of continuity

Direct motivation Unlimited liability

Dr. M.K. Nandakumar
Indian Institute of Management Kozhikode
Flexibility in operation Not suitable for large scale operation

Maintenance of business secrets Limited managerial expertise

Personal touch

1-1

Different forms of Organisation One Person Company

• Sole Proprietorship Company Advantages Disadvantages

• One Person Company Organized for
Suitable only for small business
proprietorship
• Limited Liability Partnership With compliance Can not carry NBFC activities
• Private Limited Company Limited liability Can not be converted into a company under Section 8 of
protection to owner the Act.
• Public Limited Company The basic income tax rate is 30% which may result in a
Legal status and social
• Non-banking Financial Corporation higher tax as compared to the income tax slab rates for an
recognitiom
individual
• Joint Hindu Family Business Easy to get loan from
Higher incorporation cost compared to proprietorships
banks
• Co-operative Organisation
Easy to manage Higher compliance cost
• Section 8 Company
• Trust

16-2
 07-09-2022

Limited Liability Partnership Limited Liability Partnership

• LLP is an alternative corporate business form that gives the benefits of
Advantages Disadvantages
limited liability of a company and the flexibility of a partnership.
• The LLP can continue its existence irrespective of changes in partners. It
As many owners as needed is capable of entering into contracts and holding property in its own name.
• The LLP is a separate legal entity, is liable to the full extent of its assets
but liability of the partners is limited to their agreed contribution in the LLP.
Much less liability in partnership Additional taxes
• Further, no partner is liable on account of the independent or un-
authorized actions of other partners, thus individual partners are shielded
from joint liability created by another partner’s wrongful business decisions
Tax benifits Less business credibility or misconduct.

Great flexibility

Private Limited Company

Limited Liability Partnership (Cont’d)
Advantages Disadvantages
• Mutual rights and duties of the partners within a LLP are governed by an
Limited liability Shares cannot be sold or transferred agreement between the partners or between the partners and the LLP as
the case may be. The LLP, however, is not relieved of the liability for its
other obligations as a separate entity.
Continuity of existance Not allowed to invite public to subscribe to its shares
• Since LLP contains elements of both ‘a corporate structure’ as well as ‘a
partnership firm structure’ LLP is called a hybrid between a company and a
Minimum number of share holders
partnership.
More capital • LLP shall be a body corporate and a legal entity separate from its
partners. It will have perpetual succession.
Easy to expand

Brand value

Advantages of LLP
LLP form is a form of business model which:
• (i) is organized and operates on the basis of an agreement.
• (ii) provides flexibility without imposing detailed legal and procedural
requirements
• (iii) enables professional/technical expertise and initiative to combine with
financial risk taking capacity in an innovative and efficient manner
Difference between LLP and Partnerships
• Under “traditional partnership firm”, every partner is liable, jointly with all
the other partners and also severally for all acts of the firm done while he is
a partner.
• Under LLP structure, liability of the partner is limited to his agreed
contribution. Further, no partner is liable on account of the independent or
un-authorized acts of other partners, thus allowing individual partners to be
shielded from joint liability created by another partner’s wrongful acts or
misconduct.
07-09-2022
Difference between LLP and a Company
• A basic difference between an LLP and a joint stock company lies in that
the internal governance structure of a company is regulated by statute
(i.e. Companies Act, 2013) whereas for an LLP it would be by a contractual
agreement between partners.
• The management-ownership divide inherent in a company is not there in
a limited liability partnership.
• LLP will have more flexibility as compared to a company.
• LLP will have lesser compliance requirements as compared to a company.
Choice of LLP vs Private Limited Company
LLP is mainly ideal for small businesses that have and will continue to have
for a reasonable amount of time, an annual sales turnover of fewer than
Rs.40 lakhs and a capital contribution of fewer than Rs.25 lakhs. LLPs that
satisfy the above condition do not require an audit each year, whereas a
private limited company irrespective of turnover and capital requires an audit
of financial statements – additional cost and compliance. However, if an LLP
crosses an annual turnover of Rs.40 lakhs or a capital contribution of more
than Rs.25 lakhs, the compliance requirements for LLP and Private Limited
Company become almost similar, making the private limited company a
better choice.
 07-09-2022

Pvt Ltd Company Vs LLP Reasons for LLP Registration

BASIS COMPANY LLP
The following are reasons some small businesses opt for an LLP
Registered under Companies Act 2013
(https://taxguru.in/company- law/presidents-
Limited Liability partnership Act 2008
registration:
assent-companies- act-2013.html) • The awareness about Limited Liability Partnership (LLP) introduced in
Directors required Minimum -2 Maximum-15 Minimum designated partner-2 Maximum 2010 has steadily increased among Entrepreneurs over the year and
designated partner – notapplicable many small businesses are opting to start an LLP now instead of a Private
Limited Company.
Members required Minimum -2 Maximum-200 Minimum -2 Maximum-no limit
• An audit is not required for an LLP annual sales turnover is less than
Rs.40 lakhs and the LLP has a capital contribution of fewer than Rs.25
Minimum capital required No minimum share capital required. No minimum share capital required. lakhs. Whereas, for a Private Limited Company, an audit is mandatory
irrespective of sales turnover or capital.
Meetings Minimum 4 board No requirement of partners meeting in LLP. • LLP there is no concept of dividend distribution tax. Whereas, for a Private
Meetings required during financial year having Limited Company, dividends are taxed at 15%.
120 days gap between 2 meetings.
General meeting of shareholders to be conducted • In LLP, there is no concept of Board Meetings or Annual General Meetings.
once in a year mandatorily. So annual compliance is comparatively lesser.
Abiding Abiding by the AOA / MOA of company. Abiding by the LLP agreement.
• The process for incorporation of LLP also involves fewer documents and is
less cumbersome.
Statutory audit Mandatory Not required unless partners contribution • The above reasons have led to strong growth in the number of LLPs
exceeds 25 lakhs and annual turnover exceeds registered in India.
40 lakhs.

Compliances

Tax structure
High legal compliances

More complicated
Less legal compliances

much easier (no dividend distribution

Reliability
investment
Liability
Transferability of shares
Foreign Direct Investment
Suitable to which type
(dividend distribution tax has to be paid by
company)
more confidential
Companies has to go through with sections
73 and any other provisions and rules made
their under.
Limited
Can be transferred easily. It can only be
restricted by the Article of association.
Eligible via automatic and government
route
Businesses have turnover,
entrepreneurs who need external
funding.
Reason for Private Limited Company Registration
tax)
Less reliable
However, LLP still lacks a few significant advantages over a Private Limited
There is no cap or criteria for theinvestment Company as follows:
by any third party.
• LLPs do not have the concept of shareholders. Hence, all the owners
Limited
of an LLP would be a Partner in the LLP. This structure is not suitable
for Venture Capitalists and Private Equity Investors – who do not wish
Can be transferred by executing agreement
before a notary public
to actively participate in the management of the Company. Hence,
equity investors will only invest in a Private Limited Company.
Eligible via automatic route Therefore, if the startup or promoters have plans for expanding the
business by raising equity capital, then the entity must be registered as
a private limited company.
Start ups, Businesses, trade,
manufacturers, etc.

Company Name Should end with Pvt. Ltd. Should end with LLP.
 07-09-2022

How to convert an LLP into a Private Limited Joint Hindu Family Business
Company in India?

Advantages Disadvantages

• https://cleartax.in/s/convert-llp-private-limited-company-india Assured share in profits Limited resources

Quick decision Lack of motivation

Limited liability of members Scope of misuse of power

Tax benifits Instability

Co-operative Organisation
Public Limited Company
Advantages Disadvantages
Advantages Disadvantages

Easy to form Limited capital

Continuity of existance Scope for promotional frauds

Limited liability Lack of managerial expertise

Larger amount of capital Undemocratic controls

Open membership Lack of motivation

Unity of direction Scope for directors for personal profit

State assistance Lack of interest

Efficient management Tax concession Corruption

Limited liability
Democratic management
 07-09-2022

Private Limited Company

• Company Limited by Shares

• Company limited by shares is the most common type of Private Limited
Company. A company limited by shares means a company having the
liability of its
members limited by the memorandum to the amount, if any, unpaid on the
shares respectively held by them.
• Company Limited by Guarantee
• Company limited by guarantee means a company having the liability of
its members limited by the memorandum to such amount as the members
may respectively undertake to contribute to the assets of the company in
the event of its being wound-up.
• Unlimited Company
• Unlimited company means a company not having any limit on the liability of
its members.

Private Company Vs Public Company

Distinction Private Company Public Company

Minimum Paid-up Capital Nil Nil

Minimum Number of Members 2 7

Maximum Number of Members 200 No restriction

Transerferability of shares Complete Restriction No Restriction

Issue of Prospectus Prohibited Free

At least 2, No need for independent Directors. One person

Number of Directors At least 3
cannot become a Director in more than 20 companies.

Commencement of Business Immediately after incorporation Only after commencement of business certificate is obtained

Statutory meeting No Obligation Obligatory

Quorum 2 members 5 members

Managerial remuneration No restriction Can not exceed more than 11% of Net Profits

Equity Financing
Dr. M.K. Nandakumar
Indian Institute of Management Kozhikode
Venture Capital
Venture Capital: VC tends to be the most widely recognized form of equity
financing, despite funding only a small fraction of start-ups.
• Venture capitalists raise funds from a set of limited partners (university
endowments, pension funds, etc.) and seek to provide a return to these.
• VC firms are typically small, geographically clustered entities, often
working closely with the ventures in which they invest to provide guidance
and value beyond capital.
• Venture capitalists mainly participate in deals mid stage to late stage.
• Because venture capitalists provide returns to their limited partners within
10 or so years, there is often a focus on realizing timely exits via an
acquisition or initial public offering (IPO).
07-09-2022
Equity Financing
Equity financing in entrepreneurship primarily includes
1.Venture capital
2.Corporate venture capital
3.Angel investment
4.Crowd funding
5.Accelerators
The types of equity funding are based on the stage of investment focus,
amounts invested, strategic objectives, geographic concentration, and the
nature of involvement beyond the provision of capital.
Venture Capital ( Cont’d)
Corporate venture capital: CVC denotes the systematic practice by
established corporations of making equity investments in entrepreneurial
ventures.
• CVC is distinct from traditional VC in that funds are invested by arms of
corporations as extensions of their primary focus.
• Corporate investors are usually looking to bring long-term value to their
firms and focus more on early stage to mid stage ventures.
• https://www.forbes.com/sites/allbusiness/2017/02/25/startups-seeking-
funding-should-consider-corporate-venture-capital-
arms/?sh=45228f28759f

Stages in VC Deals
1. Deal origination
2. Deal screening
3. Deal evaluation
4. Deal structuring, And
5. Post investment activities.
Angel Investors
Angel investment: Angel investors are accredited individuals who invest
their own personal capital into young ventures.
• Angels are often former entrepreneurs who seek to fund and add
value/guidance to investee firms in their area of expertise.
• Such individuals tend to take a less formal approach to investing,
particularly with regard to the level of due diligence conducted and the
formality of contracts and control involved.
• Most recently, angels have heightened their impact by forming angel
investor groups and by providing platforms, both online and in person, for
individual angels to evaluate and invest in high potential deal flow
collectively .
• While historically a highly independent and fragmented market, the angel
investing landscape is trending toward more centralized angel networks
and groups across the globe.
• They often invest at the earliest stages of the venture life cycle.
07-09-2022
Stages or Rounds of VC Funding
Stage or Round Purpose of the Funding
Seed Funding Investment made very early in a venture’s life to fund the
development of a prototype and feasibility analysis
Start-up funding Investment made to firms exhibiting few if any commercial sales but
in which product development and market research are reasonably
complete. Management is in place, and the firm has its business
model. Funding is needed to start production.
First-stage funding Funding that occurs when the firm has started commercial
production.
Second-stage funding Funding that occurs when a firm is successfully selling a product
Mezzanine Financing Investment made in a firm to provide for further expansion or to
bridge its financing needs before launching an IPO or before a
buyout.
Buyout funding Funding provided to help one company acquire another
Crowd Funding and Accelerators
Crowd funding and accelerators: Crowd funding and accelerators are two
emerging forms of equity funding mechanisms.
• Equity crowd funding is where a large volume of online investors contribute
smaller amounts for fractions of company ownership.
• Equity crowd funding initially faced significant legal challenges. It is
experiencing rapid growth as legal barriers are being relaxed in many countries.
• Accelerators are cohort-based programs that trade a configuration of
mentorship, work space, and/or funding, often in exchange for equity.
• In the US the capital provided typically runs from $25,000 to $150,000 and is
offered at the very earliest stages.
 07-09-2022

Crowd Funding and Accelerators (Cont’d) Incubators Vs Accelerators

• At its core, entrepreneurs apply for an opportunity to develop (or

“accelerate”) their concepts on site during a fixed time period (3–6
months).
https://masschallenge.org/article/accelerators-vs-incubators
• Those accepted are provided with an immersive experience that equips
entrepreneurs with many of the essential tools required to succeed.
• Cohorts conclude with a “demo day,” where concepts are pitched to
potential investors and stakeholders.

Research on Venture Capital, Corporate Venture Research on Venture Capital, Corporate Venture
Capital, and Angel Investments Capital, and Angel Investments (Cont’d)
This component of the financing landscape has drawn more research
attention than any other form of equity financing; a robust body of research VC-Organizational Level
has examined topics across the individual, organizational, and market
levels, with the greatest attention being paid to the organizational level. • VC research at the organizational level is a central area of inquiry in the
entrepreneurial finance literature.
VC-Individual Level
• A significant portion of this focuses on venture capitalists’ mitigation of risk,
• From the venture capitalist’s perspective, individual-level research largely the effects of VC firm intermediation on portfolio companies, and the
focuses on the ways investors evaluate prospective deals. certification role venture capitalists provide.
• Related research takes the perspective of the entrepreneur and focuses
on why some ventures are funded while others are not.
• A third stream of research focuses on the venture capitalist–entrepreneur
dyad and how both parties interrelate.

Research on Venture Capital, Corporate Venture
Capital, and Angel Investments (cont’d)
VC-Market Level
• VC market-level research falls broadly into two categories. One group
focuses on exogenous (market) factors that shape VC organizational-level
decisions and outcomes, and so is related to the themes raised in the prior
section.
• Another examines country-level outcomes associated with VC.
• The impact of CVC investing—where existing corporations seek minority
equity stakes in Young ventures—has triggered a growing body of
research.
CVC-Individual Level
• Only very few studies focused on CVC at the individual level
Research on Venture Capital, Corporate Venture
Capital, and Angel Investments (cont’d)
Angel investors—individuals investing their own capital independently or
through angel groups—are playing an increasingly important role in funding
young, high-growth-potential ventures offering some of the earliest stages of
funding.
Angel – Individual Level
• Angel research has taken an interest in individual investor decisions, in
particular the internal processes and approaches of angel investment
decision making.
07-09-2022
Research on Venture Capital, Corporate Venture
Capital, and Angel Investments (cont’d)
CVC-Organizational Level
• Research at the organizational level falls into four main categories: studies
examining antecedents to CVC decisions, those that examine the structure
of the CVC unit itself, those that look at CVC outcomes, and, finally,
studies that examine CVC from the perspective of the firm receiving the
investment.
CVC-Market Level
• CVC research at the market level focuses on the trends and broader
outcomes of CVC investment activity.
Research on Venture Capital, Corporate Venture
Capital, and Angel Investments (cont’d)
Angel – Organizational Level
• Angel research at the organizational level examines angel investment
organizations (i.e., angel groups) as well as the entrepreneurial
organizations that receive angel funding.
Angel – Market Level
• Angel research at the market level compares and contrasts angel markets
with other mechanisms, such as VC markets, in an effort to understand
how these markets differ as well as interact with one another.
 07-09-2022

Summary of Venture Capital, Corporate Venture VC

Primary Contributions

Capital, and Angel Research Market How macro level factors shape actions and outcomes (e.g., market
entry, screening processes, syndication patterns, financial
performance)
The role of government incentives, formal institutions, and informal
Primary Contributions institutions in shaping country-level differences in VC markets

VC

Individual Investors’ evaluation of prospective deals and the subjective judgment in CVC
VC decision-making processes
The entrepreneur’s decision to seek VC Individual CVC personnel and mind-set
Relationship between venture capitalists and the entrepreneurs (i.e., Individual compensation of CVC decision makers
entrepreneur–venture capitalist dyad)
Organizational Economic and behavioural antecedents of CVC
Organizational Alleviating problems with asymmetric information in financial markets The CVC unit within a given firm
The value added by VC and performance outcomes for entrepreneurial CVC performance outcomes
firms Considerations and performance outcomes from the entrepreneurial
Mitigating risk and contact mechanisms (e.g., multistage investment firm’s perspective
vehicle mechanisms, stock options, covenants, types of securities)

Primary Contributions

Market Trends in CVC investment activity

CVC as part of broader changes in R&D strategies

Angel Investment

Individual Individual angel investor’s decisions to invest

Motivations for entrepreneurs to pursue angel capital

Organizational Decision making within angel groups

Value added and performance of entrepreneurial firms receiving
angel capita

Market Comparing and contrasting angel markets with other

mechanisms
(e.g., VC)

Hybrid Entrepreneurship
Dr. M.K. Nandakumar
IIM Kozhikode
The Benefits of Hybrid Entrepreneurship
• By launching a business while retaining their "day job," hybrid
entrepreneurs implicitly reduce (or eliminate) the opportunity cost (i.e.,
earnings from paid employment) associated with starting the venture.
• Starting a business via hybrid entrepreneurship is inherently less risky
than doing so full time.
• Hybrid entrepreneurs represent significant and growing component of total
entrepreneurship activity.
• Research shows that many hybrid entrepreneurs ultimately decide to
commit to their ventures full time.
07-09-2022
The Relevance of Hybrid Entrepreneurship
• Hybrid entrepreneurship the process of starting a business while retaining
a "day job" in an existing organization influences entrepreneurial entry and
survival.
• Individuals who are risk averse and have low core self-evaluation are more
likely to enter hybrid entrepreneurship relative to full-time self-employment.
• Hybrid entrepreneurs who subsequently enter full-time self-employment
(i.e., quit their day job) have much higher rates of survival relative to
individuals who enter full-time self-employment directly from paid
employment.
• The decrease in exit hazard is stronger for individuals with prior
entrepreneurial experience.
• Individual characteristics may play a greater role in determining the
process of how (rather than if) entrepreneurial entry occurs, and that the
process of how entrepreneurial entry transpires has important implications
for new business survival.
The Benefits of Hybrid Entrepreneurship (cont’d)
• Some of the world's most innovative and successful entrepreneurs started
their companies as hybrid entrepreneurs.
• Once an individual enters hybrid entrepreneurship, the uncertainty
surrounding the future returns and viability of the business lessens.
• As a result, hybrids that opt to enter full-time self-employment do so under
conditions of greater certainty (relative to those who enter directly from
paid employment).

Risk Reduction through Hybrid Entrepreneurship
• Scholars have yet to consider how staged entry into full-time self-
employment via the pathway of hybrid entrepreneurship influences venture
survival.
• Hybrid entrepreneurs benefit from the ability to learn about the quality,
potential, and feasibility of their business idea.
• Prior to the introduction of a new product (or service), it is difficult to know
with certainty if one will be able to physically produce the product or if the
product will meet the characteristics of market demand.
• Hybrid entrepreneurs benefit from the ability to learn about their
entrepreneurial skills, capabilities, and fit within the entrepreneurial
context.
07-09-2022
Risk Reduction through Hybrid Entrepreneurship
(cont’d)
• Given that hybrid entrepreneurs have no obligation to enter full-time self-
employment, that the cost of abandoning the venture has less sunk cost,
and that hybrid entrepreneurs learn about the merits of their venture idea,
skills, and entrepreneurial fit prior to committing to the business full time.
• Risk-averse and less confident individuals are more likely to enter hybrid
entrepreneurship (as it entails less downside risk) relative to full-time self
employment.