MGMT383 Final Revision - Financing & Funding Strategies PDF

**MGMT383 -- Final Revision** **Chapter (10) -- Getting Financing or Funding** **Why most new ventures need financing or funding? (Reasons for needing funding)** **Sources of personal funding:** 1. **Personal funds:** The vast majority of founders contribute personal funds, along with...

**MGMT383 -- Final Revision** **Chapter (10) -- Getting Financing or Funding** **Why most new ventures need financing or funding? (Reasons for needing funding)** **Sources of personal funding:** 1. **Personal funds:** The vast majority of founders contribute personal funds, along with sweat equity, to their ventures. **Sweat equity:** represents the value of the time and effort that a founder puts into a new venture 2. **Friends and family:** The second source of funds for many new ventures. 3. **Bootstrapping:** Finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost cutting, or any means necessary. **Preparing to raise debt or equity financing:** **Sources of equity funding:** 1. **Business angels:** Individuals who invest their personal capital directly in start-ups. - They generally invest between \$10,000 and \$500,000 in a single company and are looking for companies that have the potential to grow 30 to 40 percent per year before they are acquired or go public. - Many angels are motivated by more than financial returns: they enjoy the process of mentoring a new start-up. - Most angel investors remain fairly anonymous and are matched up with entrepreneurs via referrals. 2. **Venture capital:** The money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential. - A distinct difference between angel investors and venture capital firms is that angels tend to invest earlier in the life of a company, whereas venture capitalists come in later. - The majority of venture capital money goes to follow-on funding for businesses that were originally funding by angel investors, government programs, or by some other means. - Venture capitalists are extremely well-connected in the business world and can offer firm considerable assistance beyond funding. 3. **Initial public offerings (IPO):** A company's first sale of stock to the public. When a company goes public, its stock is traded on one of the major stock exchanges. - Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future. - **Reasons that motivate firms to go public:** 1. Is a way to raise equity capital to fund current and future operations. 2. Raises a firm's public profile, making it easier to attract high-quality customers and business partners. **Creative sources of financing or funding:** 1. **Crowdfunding:** The practice of funding a project or new venture by raising monetary contributions from a large number of people (the "crowd") typically via the Internet. Types of crowdfunding programs: - **Reward-based crowdfunding:** allows entrepreneurs to raise money in exchange for some type of service or reward. **Example:** Kickstarter and Indiegogo. - **Equity-based crowdfunding:** helps businesses raise money by tapping individuals and investors who provide funding in exchange for equity in the business. **Example:** Fundable and Crowdfunder. 2. **Leasing:** A written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments. - The major advantage of leasing is that it enables a company to acquire the use of assets with very little or no down payment. - Leases for facilities and leases for equipment are the two most common types of leases that entrepreneurial ventures undertake. 3. **Grant programs** 4. **Strategic partners** **Chapter (11) -- Unique Marketing Issues** **Selecting a market and establishing a position:** **Branding:** **Establishing a brand:** **A brand:** the set of attributes---positive or negative---that people associate with a company. - These attributes can be positive, such as trustworthy, innovative, dependable, or easy to deal with. - Or they can be negative, such as cheap, unreliable, arrogant, or difficult to deal with. The customer loyalty a company creates through its brand is one of its most valuable assets. **Brand management:** Some companies monitor the integrity of their brands through a program. **Methods for setting the price of a product:** 1. **Cost-based pricing:** The list price is determined by adding a markup percentage to a product's cost. 2. **Value-based pricing:** The list price is determined by estimating what consumers are willing to pay for a product. **Promotion:** 1. **Promotion:** The activities the firm takes to communicate the merits of its product to its target market. 2. **Advertising:** Is making people aware of a product or service in hopes of persuading them to buy it. **Advantages of advertising:** - Raise customer awareness of a product. - Explain a product's comparative features and benefits. - Create associations between a product and a certain lifestyle. **Disadvantages of advertising:** - Low credibility. - The possibility that a high percentage of people who see the ad will not be interested. - Message clutter (meaning that after hearing or reading so many ads, people simply tune out). - Relative costliness compared to other forms of promotions. - The perception that advertising is intrusive. **Public relations:** The efforts to establish and maintain a company's image with the public. - One of the most cost-effective ways to increase the awareness of the products of a company. - The major difference between public relations and advertising is that public relations is not paid for---directly. **Selling direct vs Selling through an intermediary:** **Chapter (13) -- Preparing for and evaluating the challenges of growth** **Things a business can do to prepare for growth:** 1. **Appreciate the Nature of Business Growth:** - Not all businesses have the potential to be aggressive growth firms. - A business can grow too fast. - Business success doesn't always scale. 2. **Stay Committed to a Core Strategy:** - It is important that a business not lose sight of its core strategy as it prepares to grow. - If a business becomes distracted or starts pursuing every opportunity for growth that it's presented, it can easily stray into areas where it's at a disadvantage. 3. **Planning for Growth:** - A firm should establish growth-related plans. - Writing a business plan greatly assists in preparing growth plans. - It's also important for a firm to determine, as soon as possible, what its growth strategies will be. **Reasons for growth:** **Stages of growth:** 1. **Introduction stage:** - Start-up phase where a business determines what its core strengths and capabilities are. - The main challenge is to make sure the initial product or service is right. - It's important to document what works and what doesn't work during this stage. 2. **Early growth stage:** - Generally characterized by increasing sales and heightened complexity. - Two important things must happen for a business to be successful in this stage: - The founder must start working "on the business" rather than "in the business." - Increased formalization must take place, and the business has to start developing policies and procedures. 3. **Continuous growth stage:** - The need for structure and formalization increases. - Often the business will start developing related products and services. - The toughest decisions take place in this stage. - One tough decision is whether the owner of the business and the current management team have the experience and the ability to take the business further. 4. **Maturity stage:** - A business enters the maturity stage when its growth stalls. - At this point, a firm is typically more intently focused on managing efficiently than developing new products. - Well-managed firms often look for partnering opportunities or opportunities for acquisitions or licensing deals to breathe new life into the firm. - If new growth cannot be achieved through a firm's existing product mix, the "next generation" of products should be developed. 5. **Decline stage:** - It is not inevitable that a business enter the decline stage. - Many American businesses have long histories and have adapted and survived over time. - A business's ability to avoid decline hinges on the strength of its leadership and its ability to adapt over time. **Managerial capacity problem:** 1. **Expensive:** it is expensive to hire new employees. 2. **Time + socialization:** it takes time for new hires to be socialized into the culture of a firm, and it takes time for new employees to acquire firm-specific skills and establish trusting relationships with other members of the firm. 3. **Adverse selection:** means that as the number of employees a firm needs increases, it becomes increasingly difficult for the firm to find the right employees, place them in appropriate positions, and provide adequate supervision. 4. **Moral hazard:** means that as a firm grows and adds staff, the new employees typically do not have the same ownership incentives as the original founders, so the new hires may not be as motivated as the founders to put in long hours and may even try to avoid hard work. **Day-to-day challenges of growing a firm:** **Chapter (14) -- Strategies for firm growth** **Internal and external growth strategies:** **New product development:** - Involves the creation and sale of new products (or services) as a means of increasing firm revenues. - In many fast-paced industries, new product development is a competitive necessity. **Keys to effective new product and service development:** - Find a need and fill it. - Develop products that add value. - Get quality and pricing right. - Focus on a specific target market. - Conduct ongoing feasibility analysis. **The top 5 reasons new prodcuts fail:** 1. The potential market was overestimated. 2. Customers saw the product as too expensive. 3. The product was poorly designed. 4. The product was no different than the competition's ("me too" products). 5. The costs of developing the product line were too high. **Additional internal product-related strategies:** **Merger and acquisitions:** **Merger:** the pooling of interests to combine two or more firms into one. **Acquisition:** the outright purchase of one firm by another. **Purpose of acquisition:** 1. Expanding its product line. 2. Gaining access to distribution channels. 3. Achieving competitive economies of scale. **Licensing:** **Strategic alliance and joint ventures:** - **Strategic alliance:** a partnership between two or more firms developed to achieve a specific goal. Strategic alliances do not involve the creation of a new entity. Setting up an alliance and making it work can be tricky. - **Joint venture:** an entity created when two or more firms pool a portion of their resources to create a separate, jointly owned organization. A common reason to form a joint venture is to gain access to a foreign market.