Self-notes of ED

Joseph Schumpeter

Entrepreneur are the innovators who use the process of shattering the status quo of the existing
products and service to produce new products and services. He describes the entrepreneur as the
innovators.

Max Weber’s Theory of Social change

Max weber contended that the entrepreneurial growth is dependent on the ethical value system of
the society concerned. The centre of the Weber’s theory consists of his treatment of the ethics and
the spirit of the capitalism. This theory also provides analysis of religion and its impact on
entrepreneurial culture.

 According to the weber theory, the rapid industrial growth depends upon the rational use of
the technology, and money and its rational use for productivity and multiplication of money.
 Weber analyzed his theoretical formulation by the relationship that he found between
protestant ethic and the spirit of capitalism. He found his thesis true about other
communities also.
 He held that protestants progressed fast in bringing capitalism because their ethical value
system provided them with rational economic attitude, while the Jews and Jains failed to
develop industrial capitalism because of their value of ‘Paritha’ (the restriction on having any
contact with other communities).”

Weber’s theory suited the colonial rulers who wanted to encourage Entrepreneurship in India. But it
has been criticized by subsequent researchers on the ground that it was based on the following
assumptions which are invalid.

a) There is a single system of Hindu values, b) The Indian community internalized those values
and translated them to day-to-day behavior, and c) These values remained immune to and
insulated against external pressures and change.

Trait Theory of Entrepreneurship

According to F.A. Walker, an entrepreneur is one who is endowed with more than average capacities
in the task of organizing and coordinating the factors of production i.e. land, labor, capital and
enterprise. Hence, profit, the entrepreneur gets depends on his efficiency and superior talents.

In other words, to be successful, as an entrepreneur, an individual must possess certain traits or

characteristics of personality like creativity, self confidence, risk taking, imagination, perseverance,
etc.

 The trait theory holds that entrepreneurship developed because the individuals called
entrepreneur possessed certain specific traits or characteristics or competencies which made them
capable of generating new ideas and creating a new venture.

 The major traits responsible for the emergence of entrepreneurs include: creative and innovative
skills, propensity to take risks, ability of building an organization, perseverance and foreseeability.

 Different studies emphasized different traits. The critics of the trait approach ask a logical question
as to whether those among us who do not choose to be entrepreneur, have similar traits.
Economic Theory of Entrepreneurship

Some economic growth will take place in those cases particularly where economic conditions are
favorable. The chief advocates of this theory are G.F. Papanek (1962) and J.R. Haris (1970). They hold
the view that the economic incentives are the main drive for the entrepreneurial activities. In some
cases, inner drives of the individual have been associated with economic gains. Therefore, these
incentives and gains are regarded as sufficient conditions for the emergence of industrial
entrepreneurship

Economic factors include:

a) Market incentives;

b) Availability of sufficient capital; and

c) Institutional support (e.g. development banks)

 The economic theory holds that when favorable economic conditions are prevailing,
entrepreneurship develops at a faster rate and individuals come forward to establish new ventures
and bring resources, labor, materials and other assets and put them together to increase their
wealth.

Schumpeter’s Innovation

Theory Joseph Schumpeter, an eminent economist, described entrepreneur as “one who seeks to
reform or revolutionize the pattern of production by exploiting an innovation or more generally, an
untried technological possibility for producing a new commodity or producing an old one in a new
way, by opening up a new source of supply of material or a new outlet of products.” Thus,
Schumpeter’s theory proposed that an entrepreneur sees the potential profitable opportunities and
exploits them. He was of the view that an entrepreneur does not only desire to raise his
consumption standard by earning handsome profits but aspires to find a private dynasty also.

According to Schumpeter, innovation, leads to the following changes:

 Introduction of new goods, that is one with which consumers are not yet familiar or new quality of
goods;

 Introduction of a new method of production;

 Opening of a new market;

 Finding a new source of raw materials;

 Reorganization of process or enterprise. Schumpeter’s theory is based on the following

assumptions: i. Existence of sufficient availability of capital,

ii. Existence of developed banking system to avoid scarcity of capital;

iii. Existence of a high level developed technology, iv. Existence of private initiative and broad-based
entrepreneurial process.

McClelland’s Psychological Theory

According to the advocates of this theory, entrepreneurship is most likely to emerge when a society
has sufficient supply of individuals possessing particular psychological characteristics. David
McClelland developed his theory to explain the psychological roots of entrepreneurship. He argued
that certain needs are learnt and socially acquired as the individual interacts with the environment.
Such acquired needs or basic human motives drive individuals towards entrepreneurial activities. He
identified the following types of needs:

i. Need for achievement: a drive to excel, advance and grow.

ii. ii. Need for power: a drive to influence others and situations.
iii. . Need for affiliation: a drive for friendly and close inter personal relationships

Need for achievement

Some people have a compelling drive to succeed and they strive personal achievement rather than
the rewards of success that accompany it.  They have a desire to do something better or more
efficiently than it has been done before. This drive is the achievement need. They seek situations
where they can assume personal responsibility for finding solutions to problems,

The need for power

is a drive to have impact, to be influential and to control others.  Individuals high in need for power
enjoy being “in charge”, strive for influence over others, prefer to be placed into competitive and
status-oriented situations. Power-motivated people wish to create an impact on their organizations
and are willing to take risks to do so

Need for Affiliation

 The need for affiliation can be viewed as the desire to be liked and accepted by others.  It is the
need for human companionship.

Theory of Social Behavior

Kunkel presented a behavioral model of entrepreneurship. According to Kunkel, individuals perform
various activities of which some are accepted by the society while others are not. The accepted ones
are rewarded. The rewards act as reinforcing stimulus increasing the probability of repeating that
behavioral pattern. This pattern of social behavior is entrepreneurial behavior.

Limitation structure The society limits specific activities and this limitation structure affects all the
members (including entrepreneurs) of a society.

ii. Demand structure Material rewards are necessary to lay the foundation for future social gains.
Moreover, behavior of people can be made entrepreneurial by manipulating certain selected
components of the demand structure.

iii. Opportunity structure It consists of the availability of capital, management and technological
skills, information concerning production methods, labor and markets. This structure is required to
increase the probability of entrepreneurial activity.

iv. Labor structure It is concerned with the supply of competent and willing labor. The supply of
labor is governed by several factors such as available alternative means of livelihood, traditionalism,
expectations of life, etc

X-Efficiency Theory
Many firms face the problem of inefficient utilization of various inputs or resources. Innovative
entrepreneurs come forward to check inefficiencies in the utilization of various resources through
novel ways. According to Lieberstein, the most significant feature of entrepreneurship is gap filling. It
is the job of the entrepreneur to fill the gap or make up for the deficiencies which always exist in the
knowledge about the production function i.e. utilization of various resources. The gaps or
deficiencies in the production function arise because all the inputs in the production function cannot
be marketed. Some inputs like motivation and leadership are vague and their output is
indeterminate. An entrepreneur has to marshal all the inputs to achieve efficiency and economy.
Thus, entrepreneurship is a function of input completing and gap filling.

TYPES of ENTREPRENEURS

Based on Functional Characters

Innovative-

 Such entrepreneurs introduce new goods or new methods of production or discover new
markets or reorganize their enterprises.
 Such entrepreneurs can do well only when a certain level of development has already been
achieved; they look forward to improving upon the past.
 These entrepreneurs work smartly, rather than working hard. They find an easy method to
solve a problem.
 They are a perfectionist. This means they can solve a problem through innovation.
 They are creative in nature.
 Example, Walt Disney - Theme Parks - Disney Land

Imitative-

 Such entrepreneurs do not innovate themselves, but imitate techniques and technology
innovated by others.
 Entrepreneurs in this group are characterized by their readiness to adopt successful
innovations by successful entrepreneurs.
 Such entrepreneurs are particularly suitable for underdeveloped economies as adoption
saves costs of trial and error

Fabian-

 Fabian Entrepreneur is a second-generation entrepreneur from a business family. Instead of

taking initiative, they follow only successful methods.
 Such entrepreneurs display great caution and scepticism in experimenting with any change
in their enterprise
 They change only when there is an imminent threat to the very existence of their enterprise

Drone-

 Drone entrepreneurs are entrepreneurs who follow a traditional method of doing business.
They don’t adapt to any changes.
 They don’t implement any new ideas that are viable for business success.
 Such entrepreneurs are characterized by a die-hard conservatism and may even be prepared
to suffer the loss of business.

Based on 9 personality types of entrepreneurs

Improver-

 These types of entrepreneurs have a noble cause to start their business – to improve or better
the world in some way
 They wish to run a moral and high ethical business. Such entrepreneurs are very ethical.
 Personality Alert: Improvers have to be aware of their tendency to be a perfectionist and
over-critical of employees and customers.
 Entrepreneur example: Dr. Mahesh Gupta, Founder of Kent RO - Water Purifier.

The Advisor-

 Advisors will provide an extremely high level of assistance and advice to customers.
 The advisor’s motto is: the customer is right and we must do everything to please them.
Companies built by advisors become customer focused.
 Personality Alert: Advisors can become totally focused on the needs of their business and
customers that they may ignore their own needs and ultimately burn out.
 Entrepreneur example: John W. Nordstrom, Founder Nordstrom.

The superstar

 The business is cantered on the charisma and high energy of the superstar CEO.
 Such entrepreneurs often will build their business around their own personal brand.
 Personality Alert: Superstars can be too competitive and workaholics.
 Entrepreneur example: Donald Trump, CEO of Trump Hotels and Casino Resorts Steve Jobs,
cofounder of Apple

The Artist

 This business personality is the reserved but a highly creative type.

 Often found in businesses demanding creativity such as web design and ad agencies. As an
artist type, they will tend to build their business around the unique talents and creativities
that they have.
 Personality Alert: Artists may be overly sensitive to their customer’s responses even if the
feedback is constructive. Let go the negative self-image.\
 Entrepreneur example: Scott Adams, Creator of Dilbert

The Visionary

 A business built by a Visionary will often be based on the future vision and thoughts of the
founder
 They will have a high degree of curiosity to understand the world around them and will set-
up plan to avoid the landmines.
 Personality Alert: Visionaries can be too focused on the dream with little focus on reality.
Action must precede vision
 Entrepreneurial example: Bill Gates, Founder of Microsoft Inc.

The analyst
  And finally, the analyst, these are the problem solvers. They analyse the problem and
complication and find the most suitable and cheapest solution.
 They are critical thinkers and logical by nature.
 Also complicated business suits them because they are not much bothered about th
complications.
 Personality Alert: Be aware of analysis paralysis (a situation wherein over analysis leads to
no action being taken). Work on trusting others.
 Entrepreneurial example: Intel Founder, Gordon Moore.

The fireball

 A business owned and operated by a Fireball is full of life, energy and optimism.
 Such a business is life energizing and makes customers feel the company has a get it done
attitude in a fun playful manner.
 Personality Alert: You may over commit your teams and act impulsively. Balance your
impulsiveness with business planning
 Entrepreneurial example: Malcolm Forbes, Publisher of Forbes Magazine

The hero

 Such entrepreneurs have an incredible will and ability to lead the world and their business
through any challenge.
 They are the essence of entrepreneurship and can assemble great companies.
 Personality Alert: Over promising and using forceful tactics to get your way will not work
long term. To be successful, trust your leadership skills to help others find their way.
 Entrepreneurial example: Jack Welch, CEO of GE.

The healer

 Healer entrepreneurs provide nurturing and harmony to their business.

 They have an uncanny ability to survive and persist with an inner calm.
 Personality Alert: Because of their caring, healing attitude towards their business, they may
avoid outside realities and use wishful thinking. Use scenario planning to prepare for turmoil
 Entrepreneurial example: Ben Cohen, Co-Founder of Ben & Jerry’s Ice Cream.

Characteristics

Initiative - It is an inner urge in an individual to do or initiate something. It is the entrepreneur who

takes the first move towards setting up of an enterprise.

Persistence- An entrepreneur is never disheartened by failures. He tries again and again for
overcoming the obstacles that come in the way of achieving goals.

Innovation- The most important function of an entrepreneur, according to Joseph Schumpeter, is

innovation. It is the core attribute of an entrepreneur.

Problem solving- They try to find out the easiest and cheapest solution to any problem or
complications.

Self-confidence- Entrepreneurs have full faith on their knowledge, skill and competence and are not
worried about future uncertainties.

Entrepreneurship and Economic Development

Entrepreneurship is an essential requirement for the speedy economic growth of any economy as
stated below:

1. Increasing Production- It results in exploitation of economy’s resources such as labor, capital and
technology to the fullest extent for increasing national production. Entrepreneurs take up
production of goods and services for:

i. meeting the demand of consumers, ii. import substitution, and iii. exports to other countries

2. Challenging Career option- A person can seek a job with some organization or engage in self-
employment activities. Wage employment has a limited scope, but entrepreneurship offers huge
career opportunities. A young person who is innovative and creative can start on a small scale and
later expand it to create a large enterprise. This will ensure personal growth of the entrepreneur.

For example, Dhirubhai Ambani who started on a small scale succeeded in building a huge industrial
empire. Besides pursuing entrepreneurship as a career, Ambani created job opportunities for
thousands of people.

3. Decentralization of Economic Power Most of the entrepreneurs start business enterprises on a

small scale and then seek their growth through reinvestment of profits. By doing so, they break the
monopoly of existing large enterprises which might be resorting to exploitation of consumers. Rise of
small units leads to decentralization of economic power and thus creating a balance in the control of
economic resources in the economy.

4. Increasing Competition in the Market Entrepreneurs are innovators as they introduce new
products and substitutes and new techniques of production. Availability of new products and
improved substitutes increases the level of competition in the market resulting in lower prices and
the better quality for the consumers. In India, small entrepreneurs also contribute to the foreign
exchange earnings of the country. They produce goods for exports and thus increase India’s
international competitiveness.

5. Innovation Entrepreneurship results in innovation in a society. The entrepreneurs create new

technologies and products that displace older technologies and products.

6. Employment Generation - Entrepreneurship results in creation of new jobs in the economy. Small
business units create more jobs than large ones. During economic recession, when large companies
are on their way to retrenchment of their workforce, individuals whose jobs are eliminated find
employment with small business units. It has been found that small, young, high- technology
business units created new jobs at a much faster than did larger, older business firms.

7. Harnessing Youth Power- Youth power is available in abundance in India. But avenues of
wage/salary employment are limited. Due to lack of entrepreneurial opportunities in the society, the
available youth vigour is often channelled to self-destruction and non-productive areas. The nation,
thus, loses its most valuable resource- the youth vigour. Entrepreneurship can harness the youth
power. The entrepreneurial pursuits being challenging and creative, require extra vigour that is
abundantly available with the educated youth.

Conclusion - It can be said that entrepreneurship contributes to economic and social development to
a country. It influences a number of areas such as innovation, job creation, career alternatives, etc. It
also helps in bringing about change and development of the civilization through growth of trade,
commerce and industry.

External environment analysis

Environmental analysis is the process of monitoring the economic and non-economic environment
to determine the opportunities for and threats to an enterprise. Scanning of environment is the first
step in the process of sensing environmental opportunities.

Entrepreneurship environment consists of internal and external environment

Internal Environment: Survival of a business depends upon its strengths and adaptability to the
environment. The internal strengths represent its internal environment. Internal environment
consists of controllable factors that can be modified according to needs of the external environment.
It consists of financial, physical, human and technological resources.

 Financial resources represent financial strength of the company. Funds are allocated to
various activities so as to maximize output at minimum cost, that is, optimum allocation of
financial resources.
 Physical resources represent physical assets such as plant, machinery, building etc. that
convert inputs into outputs.
 Human resources represent the manpower with specialized knowledge that performs the
business activities. The operative and managerial decisions are taken by the human
resources.
 Technological resources represent the technical know-how used to manufacture goods and
services

External Environment: The external environment consists of micro and macro environment. These
are uncontrollable factors and firms adapt to this environment. They adjust internal environment
with the external environment to take advantage of the environmental opportunities and strive
against environmental threats. Business decisions are affected by both internal and external
environment.

Micro Environment: “The micro environment consists of factors in the company’s immediate
environment”. These factors affect the performance of a company and its ability to serve the
customers. Micro environment consists of customers, suppliers, competitors, public and market
intermediaries.

 Customers: Customers constitute important segment of the micro environment. Business

exists to serve its customers. Unless there are customers, business has no meaning. A
company can have different types of customers like, households, producers, retailers etc.
 Suppliers: They supply inputs (money, raw material, fuel, power and other factors of
production) and help in smooth conduct of the business. Firms should remain aware of the
policies of suppliers as increase in prices of inputs will affect their sales and profits. Shortage
of supplies also affects the production schedules.
 Competitors: Competitors form important part of the micro environment. Firms compete to
capture big share of the market. They constantly watch competitors’ policies and adjust their
policies to gain customer confidence.
 Public: “A public is any group that has an actual or potential interest in or impact on an
organization’s ability to achieve its interest”. Public can promote or demote company’s
efforts to serve the market. The term ‘public’ consists of financial public, media public,
government public, local public et.
 Market intermediaries: They are the links that help to promote, sell and distribute the
products to final consumers. They are the physical distribution firms, service agencies,
financial intermediaries, that help in producing, marketing and insuring the goods against
 loss of theft, fire etc. Firms maintain good relations with them to carry their activities
smoothly.

Macro environment- Macro Environment: The macro environment consists of the economic and
non- economic variables that provide opportunities and threats to firms. This is largely
uncontrollable and, therefore, firms adjust their operations to these environmental factors.

 Economic factors- The economic environment consists of factors that can affect consumer
purchasing power as well as the spending patterns. As an example, it is not advisable for a
company to start exporting its goods to a country before having examined the citizens
spending patterns. Important economic criteria include GDP, GNI, Import duty rate,
unemployment, inflation, spending patterns.
The economic system helps in answering questions like:  Is it the right time to set up the
business?  Can new products be added to the product line? Is the market size large enough
to provide desired rate of returns?
 Political and Legal Factors- The developments in the political environment strongly affect the
marketing decisions. This involves laws, government agencies, as well as the pressure groups
that can influence or give constrains to various individuals or organizations in a given society.
The political-legal system helps in answering questions like:  Is the political climate stable
in the country so that government policies do not change time and again?  Do the political
organizations promote business activities, that is, processing of paper work is done without
much delay because of bureaucracy and red tapism? Are the licensing procedures for
entering into a new business lenient or strict?
 Socio cultural environment- The cultural environment links to factors which affects the basic
values, preference, perceptions and behaviour of the society. Organizations needs to
understand the cultural beliefs and practices prevalent in society for decision making. Failure
of companies in understanding foreign cultures can lead to many cultural blunders. For
example, a symbol having a positive meaning in one culture can have a negative meaning in
some other culture. The socio-cultural system helps in answering questions like:  What are
the expectations of society from the business?  Can the business meet these expectations?
 Are social objectives a part of the overall objective framework of the company?  Do the
business operations meet the ethical and value system of the society and if not, is the
change possible etc.?
 Technological environment-Technology has a crucial influence in the macro environment. An
organization needs to perform a thorough research before the use of technology, before
investing in any of marketing activities. The company needs to have an understanding of the
technology which is about to be used in the enterprise and make plans accordingly for their
communication and campaigns. The technical environment helps in answering questions
like:  What type of technology is available in the environment and what type of technology
is needed by the firm?  If the technology available is not suitable for the firm’s operations,
does it need to import the technology or upgrade the indigenous technology? What is the
firm’s financial strength in keeping itself updated regarding technological changes? Etc.
 Natural environment- It refers to the natural resources or physical environment that are
required as inputs by marketers or which is affected by the marketing activities. The
ecological conditions have become a crucial factor to consider as the environmental
concerns have grown strongly in the recent years. Example, air and water pollution, floods,
droughts, etc. The natural environment helps in answering questions like:  Are business
activities conducive to natural environment?  If not, are suitable measures taken to protect
 the environment?  How far can the business follow the legislative measures in protecting
the natural environment, etc.?
 Demographic Environment- Demography can be defined as the study of human population
in context of size, density, age, location, gender, race, occupation and other statistics. The
marketers have special interest in the demographic environment because it consists of
people and people are the driving force for development of markets. The large and diverse
demographics offer both opportunities as well as challenges for businesses. The
demographic environment helps in answering questions like:  What is the gender and age
composition of the market?  What is the income and education level of the consumers? 
How strongly do consumers believe in brand loyalty?

Porter’s Five Forces

It is a simple yet powerful tool which helps enterprises determining their strength and weaknesses.
This is useful, because, when you understand the forces in your environment or industry that can
affect your profitability, you'll be able to adjust your strategy accordingly. For example, you could
take fair advantage of a strong position or improve a weak one, and avoid taking wrong steps in
future. The tool was created by Harvard Business School professor Michael Porter, to analyse an
industry's attractiveness and likely profitability. He identified five forces that make up the
competitive environment, and which can erode your profitability. These are:

 Competitive Rivalry: This looks at the number and strength of your competitors. How many
rivals do you have? Who are they, and how does the quality of their products and services
compare with yours? Where rivalry is intense, companies can attract customers with
aggressive price cuts and high-impact marketing campaigns. Also, in markets with lots of
rivals, your suppliers and buyers can go elsewhere if they feel that they're not getting a good
deal from you. On the other hand, where competitive rivalry is minimal, and no one else is
doing what you do, then you'll likely have tremendous strength and healthy profits.

 Supplier Power. This is determined by how easy it is for your suppliers to increase their
prices. How many potential suppliers do you have? How unique is the product or service
that they provide, and how expensive would it be to switch from one supplier to another?
The more you have to choose from, the easier it will be to switch to a cheaper alternative.
But the fewer suppliers there are, and the more you need their help, the stronger their
position and their ability to charge you more. That can impact your profit.

 Buyer Power: Here, you ask yourself how easy it is for buyers to drive your prices down. How
many buyers are there, and how big are their orders? How much would it cost them to
switch from your products and services to those of a rival. When you deal with only a few
savvy customers, they have more power, but your power increases if you have many
customers.

 Threat of substitute- Substitute goods or services that can be used in place of a company's
products or services pose a threat. Companies that produce goods or services for which
there are no close substitutes will have more power to increase prices and lock in favourable
terms. When close substitutes are available, customers will have the option to forgo buying
a company's product, and a company's power can be weakened.
  Threat of New Entry: Your position can be affected by people's ability to enter your market.
So, think about how easily this could be done. How easy is it to get a foothold in your
industry or market? How much would it cost, and how tightly is your sector regulated? If it
takes little money and effort to enter the market and compete effectively, or if you have
little protection for your key technologies, then rivals can quickly enter the market and
weaken your position. If you have strong and durable barriers to entry, then you can
preserve a favourable position and take fair advantage of it.

Forms of ownership

A key first step for any entrepreneur is setting up an organization that will be used to formally
embark on the business journey, but many new business owners struggle to identify the best way to
move forward. These are the most common ways to organize a business, from the simplest to the
most complex.

Sole Proprietorship is the most basic form of business ownership, where there is one sole owner
who is responsible for the business. It is not a legal entity that separates the owner from the
business, meaning that the owner is responsible for all the debts and obligations of the business on a
personal level. In exchange for that liability, the owner keeps all the profits gained from the
business. This form of business ownership is easy and inexpensive to create and has few government
regulations. In addition, profits are taxed once, and there are some tax breaks available if the
business is struggling. Sole proprietorships often are limited to the resources the owner can bring to
the business. For these reasons, sole proprietorships are often most appropriate during the early
stages of a business where the owner has little capital/resources to work with but also has few debts
to pay.

Partnership

Partnerships are a form of business ownership where two or more people act as co-owners. There
are two forms of partnerships, which are General Partnerships and Limited partnerships,
differentiated primarily by the liability coverage by the owners. In a general partnership, all owners
of the business have an unlimited liability in the business for a limited partnership, at least one of
the partners has a limited liability, meaning they are not personally responsible for the debts of the
business. Regardless of the type of partnership, they are relatively easy and cheap to create, have
few government regulations and are only taxed once, like a sole proprietorship. The added benefit of
a partnership is the combination of knowledge and resources that are brought to the table thanks to
the additional owners. Profits do have to be shared between owners. This type of ownership is often
useful in the early stages of the business where multiple people are involved. Due to the sharing of
profits and additional resources, this type of ownership is often expected to yield higher growth
rates then a sole proprietorship.

Corporations- e.g., Walmart

Unlike the previous two examples, Corporations are a form of ownership that is a legal entity
separate from its owners. This creates a limited liability for all owners, but results in a double
taxation on profits (first as a corporate income tax, then as a personal income tax when the owners
take their profits). Corporations tend to have an easier time raising capital than sole proprietors or
partners due to greater sources of funding made available to them, such as selling stock. However,
this results in greater government regulations for corporations, such as requirements for more
extensive record keeping. In addition, setting up a corporation is much more difficult, requiring more
resources and capital to cover expenses and create legal documentation. This ownership form is best
suited for fast growing or mature organizations that have owners looking for limited liability.

Limited Liability Company

A form of business ownership that is taxed like a partnership but enjoys the benefits of a limited
liability like a corporation is a “limited liability company”. In comparison to a corporation, it is
simpler to organize and does not receive double taxation. This form of ownership is usually adopted
by a group of professionals such as accountants, doctors and lawyers.

Franchising

Franchising is a form of ownership allows a franchisee to borrow the franchisor’s business model and
brand for a specified period. It comes with a list of advantages including training of how to handle
day to day operations, technologies, marketing and a network of franchise owners to share
experiences with. The main disadvantages to this ownership structure are franchising fees, royalties
on sales or profits, and tight restrictions to maintain ownership. Franchise owners also have limited
control over their suppliers they can purchase from. If a franchisee wants to sell their business, the
franchisor must approve the new buyer.

Co-operatives

Cooperatives are organizations that are owned and controlled by an association of members. This
form of ownership allows for a more democratic approach to control where each share is worth the
same amount of votes, it also offers limited liability to its owners and equal profit distribution based
on ownership percentage. But, the democratic approach to decision making results in delay in the
decision-making process as participation from all association members is required. Conflicts between
members can also arise that can have an adverse impact on the efficiency of the business. Co-
operatives are often used when individuals or businesses decide to pool resources to achieve a
common goal or satisfy a common need, such as employment needs or a delivery service.

VENTURE CAPITAL AND DOCUMENTS

Venture capital is an activity by which investors support entrepreneurial talent with finance and
business skills to exploit capital gain. The concept of venture capital was evolved to help those
persons who have good product ideas, but lack the necessary funds to convert these ideas into
production. It is a source of finance for the new and untried enterprises having new ideas and new
technologies with high risk, but with a potential for rapid growth. Venture capital is usually
structured in the form of equity and debt capital. It is provided by the wealthy investors, firms,
institutions and companies for all stages of financing the new venture. Some think that venture
capital is the early-stage financing of new start-up ventures. Others think that venture capital is the
financing of high and new technology-based enterprises. More accurately, venture capital is an
alternative form of equity and debt financing made available to new ventures who have technically
qualified entrepreneurs with inadequate funds, having high risk but good growth prospects.

1. Deal Orientation: At this stage, a letter of introduction is necessary from the referring
party sent to the Venture Capital Company. It should present details about the potential
venture, its technical viability and good image of the entrepreneur.
2. Screening: Screening of proposals is necessary to save the time and money cost. Only
proposals which clear screening test are considered for evaluation. At this stage the Venture
Capital Company may ask for technology and product profiles as well as venture or
investment profile depending on the criteria used in the screening process.

3. Evaluation or Due Diligence: Evaluation or due diligence means careful and proper
detailed analysis. The proposals that have successfully passed through the screening process
are then subjected to a detailed evaluation process called due diligence. Most of the
ventures coming to a venture capitalist are new ventures being set up by first-time
promoters, neither the ventures have any track record nor the entrepreneurs have any
operating experience. In such cases, the venture capital company uses a subjective but
comprehensive evaluation. At this stage the business plan is an important document upon
which the evaluation is based. Most venture capitalists ask for a business plan to make an
assessment of the possible risk and return on the venture. Well prepared plan is the best
introduction of the entrepreneur who is going to set up a new venture. A detailed and well-
organized business plan is the only way to gain the attention of the venture capitalist and to
obtain the needed funds.

4. Deal Structuring: If the proposed venture and its business plan are found viable, then
venture capitalist and the entrepreneur negotiate the terms of the deal, such as: the amount
of money to be invested, the form of investment (equity or debt), the price of investment,
exit period, etc. This process is termed as deal structuring. At this stage, a written agreement
is prepared between the entrepreneur and the venture capitalist. This contains all the terms
and conditions agreed between them. This agreement is written on a stamp paper, signed by
both and is registered with the government agency. It is treated as valid evidence before a
court of law in case of a dispute.