Entrepreneurship Chapter 9: New-Venture Team

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Questions and Answers

What is one significant advantage of starting a venture with a team?

Guaranteed equal decision-making power among founders

Lower operational costs due to shared responsibilities

Reduced financial risk for each member

Access to a broader range of social and professional contacts (correct)

What is a potential disadvantage of starting a venture with a team rather than as a sole entrepreneur?

Increased likelihood of interpersonal conflicts (correct)

Less motivation among team members

Higher initial investment requirements

Limited access to diverse ideas

Which characteristic is preferred in effective founding teams?

Similar work habits among all members

A majority of members having prior business experience

Heterogeneous backgrounds and skills (correct)

Homogeneous expertise in the same field

Which issue can arise when multiple founders are equal partners in a new venture?

Overlapping decision-making responsibilities Signup and view all the answers

What is one of the key benefits of a founding team providing psychological support?

It can enhance the overall success of the venture. Signup and view all the answers

How does higher education influence entrepreneurial skills?

It helps enhance important entrepreneurial skills. Signup and view all the answers

What is one common reason team members may struggle to work effectively together?

Similar tolerances for risk Signup and view all the answers

Which of the following best describes a challenge posed by the 'liability of newness' for founding teams?

New ventures lack established operational structures. Signup and view all the answers

What advantage do founders with prior entrepreneurial experience have?

They avoid costly mistakes more effectively. Signup and view all the answers

Which characteristic is NOT associated with founders who have relevant industry experience?

Limited understanding of market trends. Signup and view all the answers

What is a significant advantage of having a broad social and professional network as a founder?

It provides access to know-how, capital, and referrals. Signup and view all the answers

What describes the term 'skills profile' in the context of new ventures?

A chart depicting important skills and existing gaps. Signup and view all the answers

Which statement best describes the role of freelancers in new ventures?

They are independent and work with multiple clients. Signup and view all the answers

In what situation might a founder decide to work alone before hiring employees?

When there is uncertainty about the venture's viability. Signup and view all the answers

What disadvantage might a new venture face due to the liability of newness?

Difficulty in securing funding. Signup and view all the answers

Which element is critical for a successful founding team?

Diverse skill sets and perspectives. Signup and view all the answers

What does the liability of newness primarily refer to?

The challenges new companies face due to lack of experience and track record Signup and view all the answers

What is a key advantage of having a diverse new-venture team?

It enhances problem-solving through a variety of perspectives Signup and view all the answers

What impact do the characteristics of a founder have on a new-venture team?

They significantly influence how the team is formed and its operations Signup and view all the answers

What is one common disadvantage associated with a new-venture team?

The potential for discord due to varying levels of experience Signup and view all the answers

Which of the following roles do professional advisers play in a new-venture team?

They provide valuable insights and guidance based on their expertise Signup and view all the answers

How can new-venture teams overcome liabilities of newness?

By assembling a talented and experienced management team Signup and view all the answers

What percentage of new ventures are typically started by more than one individual?

50% to 70% Signup and view all the answers

Why might a new-venture team choose to hire consultants?

Consultants can provide external expertise that complements the team's skills Signup and view all the answers

Study Notes

Chapter 9: Building a New-Venture Team

New ventures often face "liabilities of newness," meaning the high failure rate is partly due to challenges new companies experience adjusting to new roles and lacking a track record.
A new-venture team consists of founders, key employees, and advisors. This team develops from an idea to a functional firm.
Teams are often built incrementally, not all at once, as the new firm can afford to hire more personnel.
A new-venture team also encompasses more than paid employees, including boards of directors, advisors, and other professionals.

Chapter Objectives

Explain the concept of "liabilities of newness."
Describe a new-venture team and discuss its primary elements.
Identify professional advisors and their roles in a new-venture team.
Explain why new ventures use consultants.

New-Venture Team

The new-venture team is the group of founders, key employees, and advisors guiding the venture's transition.
New-venture teams do not usually form fully formed all at once, but grow incrementally as the business gains the resources to hire additional personnel.
Teams include more than just paid employees, encompassing boards of directors, advisors, and other professionals.

Liability of Newness

New ventures have a high failure rate.
Liabilities of newness refer to the challenges new companies face.
Problems arise when employees struggle to adapt to new roles and when the firm has no prior success track record.
Firms can overcome these issues by building a talented and experienced management team.

Separate Elements of a New-Venture Team

A diagram illustrates the various elements forming a new-venture team. Key elements include:
- Management team
- Key employees
- Founder(s) or founders of the venture
- Board of directors
- Board of advisors
- Lenders and investors
- Other professionals

The Founder or Founders

Early founders' decisions heavily impact the formation and structure of the new-venture team.
Many new ventures (50-70%) are started by multiple founders rather than a single individual.

Advantages and Disadvantages of Starting a Venture as a Team

Advantages:
- Teams bring together more talent, resources, and ideas than a solo founder.
- Teams benefit from a larger network of professional and social contacts.
- Cofounders provide valuable psychological support for each other.
Disadvantages:
- Team members might have conflicts or disagree on key issues like work habits, risk tolerance, or business decisions.
- Disagreements can arise if shared responsibilities or authority within the team aren't defined and agreed upon.
- If founders have similar skillsets, they might duplicate efforts rather than complement each other.

Key Elements of a Successful Founding Team

Heterogeneous teams (with diverse members) are more effective than homogenous ones.
The example provided displays a team initiating an educational software company, highlighting members' diverse backgrounds.

Preferred Attributes of Sole Entrepreneurs and Members of a New-Venture Team

Higher Education: Evidence suggests that higher education can enhance entrepreneurial skills.
Prior Entrepreneurial Experience: Experience in the entrepreneurial process allows founders to avoid costly mistakes.
Relevant Industry Experience: Experience in the relevant industry is useful for a founder to have in order to have a better understanding of the market and gain access to established networks.
Broad Social and Professional Networks: This access to additional expertise, funding and customers can greatly benefit the startup

Recruiting and Selecting Key Employees

Start-ups' need for employees varies.
Sometimes, founders work alone for a time and other times they hire employees immediately.
A skills profile chart is useful for identifying needed skills and skill gaps in a new firm.

Skills Profile for Fitness Drinks

A skills profile table shows gaps, or positions not yet filled, in a new fitness drinks venture. This example showcases positions for various skill sets.

Sources of Labor for New Ventures

Employ full or part-time employees working within the firm, tools, location and policies.
Employ interns as apprentices for practical experience.
Employ freelancers who work independently for many clients, using their own equipment.
Utilize virtual assistants providing remote assistance.

The Roles of the Board of Directors

Corporations legally require a board of directors for governance, oversight, election and decision-making.
This board is composed of both inside and outside directors.
Inside directors hold officer positions within the firm; outside directors are not employed by the firm.
Responsibilities include appointing firm officers, declaring dividends, and overseeing the corporation's affairs.
Typically, board meetings occur 3-4 times a year.
Cash is not always the primary compensation, for new ventures stocks may frequently be used instead.

What a Board of Directors Can Do to Help a Start-Up Get Off to a Good Start

Provide guidance and support to firm managers.
Lending legitimacy to the firm. Well-known board members add credibility.

Rounding out the Team: The Role of Professional Advisors

Advisors include:
- Boards of advisors
- Lenders and investors
- Other professionals

Board of Advisors

A board of advisors is a panel of experts consulted by firm managers.
Advisors provide counsel and advice on an ongoing basis.
Advisory boards lack the formal legal responsibilities of a board of directors, their advice is non-binding but still insightful.

Lenders and Investors

Lenders and investors have a strong interest in the companies they finance, and often get involved with in helping the firms they fund.
Like other non-employee team members, they provide guidance and advice.
They also manage financial oversight of the firm.

Ways Lenders and Investors Add Value to an Entrepreneurial Firm

Help identify and recruit key management personnel
Help the venture fine-tune its business model
Provide introductions to additional sources of capital
Provide insight into markets
Serve as a sounding board for new ideas
Serve on the board of directors or board of advisors
Recruit customers
Help to arrange business partnerships
Provide a sense of stability and calm

Other Professionals

Other professionals include attorneys, accountants, and business consultants.
Business consultants are individuals offering professional or expert advice.
Consultants can be categorized as paid or available for free/reduced rates through nonprofits or governmental agencies.

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Description

Explore the dynamics of building a new-venture team in this chapter focused on entrepreneurship. Understand the challenges of 'liabilities of newness' and the essential roles that founders, key employees, and advisors play in creating a successful team. Learn how these elements contribute to the transition from idea to operational firm.