Section 2 From Idea to Opportunity PDF

Section 2 From Idea to Opportunity Chapter 6 Protecting the Idea and Other Legal Issues for the Entrepreneur ©McGraw-Hill Education. All...

Section 2 From Idea to Opportunity Chapter 6 Protecting the Idea and Other Legal Issues for the Entrepreneur ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.  Intellectual Property Intellectual property includes patents, trademarks, copyrights, and trade secrets – important assets of the entrepreneur. All business is regulated by law. Be aware of regulations affecting new ventures. Different stages of company growth require different legal advice. Evaluate needs carefully before hiring a lawyer. ©McGraw-Hill Education. 6-2  Choosing a Lawyer The entrepreneur does not have the experience to handle the possible risks associated with difficult laws and regulations. The lawyer may work on a retainer or for a one-time fee. Legal advice is necessary to ensure appropriate decisions are made at each step of establishing a new venture. ©McGraw-Hill Education. 6-3  Patents A patent is a contract between the government and an inventor. The patent gives the owners a negative right. Types of patents include: Utility patents grants owner’s protection from anyone making, using, and / or selling the invention. Design patents cover new, original, ornamental, and unobvious designs for articles of manufacture. Plant patents are issued under the same provisions as utility patents and covers new plant varieties. Patents are issued by the Patent and Trademark Office (PTO). This is a first-to-file system that rewards firms that file quickly. ©McGraw-Hill Education. 6-4  International Patents Concerns over international imitations and knock-offs resulted in International Patenting being a strategy for many startups. The USPTO established the Office of International Patent Cooperation to establish a harmonized patent system. Joint efforts between the USPTO and the European Patent Office established a common classification system. The Global Dossier allows a patent application be applied to five of the largest patent offices in the world. ©McGraw-Hill Education. 6-5  Patent Application Process First, file a provisional patent application to establish a date of invention conception. The actual filing of the patent must occur within 12 months. The patent application is divided into sections. The Introduction Section – background and invention advantages. Description of Invention Section – engineering specifications, materials, and components. The Claims Section – establishes the criteria by which infringements will be determined. Applications should contain a declaration signed by the inventor. When application is sent, invention becomes “patent pending.” ©McGraw-Hill Education. 6-6  Patent Infringement The entrepreneur cannot infringe on someone else’s patent. Yet, many inventions are improvements on existing products. Copying and improving a product may be legal and a good strategy. If copying is impossible, licensing may be an option. Use the Internet and USPTO website to check on existing patents. If in doubt, hire a patent attorney. ©McGraw-Hill Education. 6-7  Business Method Patents With the Internet has emerged business method patents. Amazon owns such a patent on its single click buying feature. Priceline claims a patent on a service where a buyer can submit a price bid for a particular service. Many firms use these patents against competitors. The PTO reviews these patents through the Patent Trial and Appeal Board. Not all startups have a patentable product but a unique marketing plan may provide competitive advantage. ©McGraw-Hill Education. 6-8  Trademarks A trademark may be a word, symbol, or design combination that identifies the source of certain goods. A trademark can last indefinitely, as long as it continues to perform its indicated function, on renewable terms of every ten years. Filing of a trademark request to the PTO has four requirements. Completion of a written application form. A drawing of the mark. Five specimens showing actual use of the mark. The appropriate fee. Unopposed marks are registered, the process takes 13 months. ©McGraw-Hill Education. 6-9  Copyrights A copyright protects original works of authorship. It does not protect the idea which can be used in another manner. Copyright law is relevant due to the Internet and file sharing. Streaming content and social media postings are of concern. Copyrights are registered with the Library of Congress and the process does not require an attorney. Requirements are two copies of the original work and appropriate fees. Copyright terms are life of the author plus 70 years. ©McGraw-Hill Education. 6-10  Trade Secrets and Noncompetition Agreements An entrepreneur may prefer to maintain an idea or process as confidential and to sell or license it as a trade secret. Noncompete agreements protect valuable assets such as product information, clients, marketing ideas, and unique strategies. Common laws in each state cover trade secrets. Employees signing a confidential information agreement may be sued if they breach the agreement. The entrepreneur may restrict confidential information. Today’s tendency is to share more information with employees. Proper protections help avoid serious future problems. ©McGraw-Hill Education. 6-11  To Maintain Secrecy Use locked file cabinets, Funnel sensitive questions passwords, and shredders. through one person. Have employees sign non- Provide escorts for all visitors. disclosure agreements. Avoid discussing business in Debrief departing employees public places. on confidential information. Keep travel plans secret. Avoid faxing sensitive Control information presented information. to employees at conferences Mark documents “confidential” or in journals. when needed. ©McGraw-Hill Education. 6-12  Preparing a Noncompetition Agreement Protection against leaking of trade secrets is difficult to enforce. Legal action is possible only after the secret is revealed. Consider the following points when preparing a noncompetition agreement. Determine if the employee can harm the company if they left. Hire a competent labor law attorney to make sure the agreement is fair and enforceable. Provide incentives for signing a noncompete agreement at hiring. Specify what is included in the noncompete information. Consider other options such as nonpiracy or nondisclosure agreements. ©McGraw-Hill Education. 6-13  Licensing Information or technology protected by a patent, copyright, or trademark may be licensed to another party for a royalty fee. Licensing has significant value as a marketing strategy. A patent license agreement specifies access to the patent. Licensing a trademark generally involves a franchising agreement. Copyrights are also popular licensed property. Celebrities license their name and image. Licensing has benefits. Can increase revenues without the risk and cost of a startup. Could be a way to start a new venture even when the idea may infringe on someone else’s patent. ©McGraw-Hill Education. 6-14  Product Safety and Liability The Consumer Product Safety Act created a commission with the power to prescribe safety standards for products. The Act was passed in 1972, and amended in 1990 and 2008. Large fines and recalls are typical for products deemed unsafe. McDonald’s had to recall Happy Meal toys. IKEA had to recall children’s dressers. Entrepreneurs must be aware of the treats of recalls, especially with high-risk products such as food and toys. ©McGraw-Hill Education. 6-15  Insurance The entrepreneur should purchase insurance in the event that problems do occur. Most firms consider coverage in specific areas as a way of managing risk in the business. Some insurance is require by law and cannot be avoided. Consider all the changes to the Affordable Care Act of 2010 before deciding on an insurance plan or program. Advice and information on insurance is available through the Small Business Administration. ©McGraw-Hill Education. 6-16  Sarbanes-Oxley Act Congress passed the Sarbanes-Oxley Act in 2002, amended 2010. Congress exempted small businesses from section 404. The law has many provisions but an overview includes: CEOs are required to vouch for financial statements. Directors must meet responsibilities of internal auditing and control. Any attempt to influence the auditor may be seen as a criminal act. The Act may discourage qualified persons from sitting on important boards. The entrepreneur may wish to set up a board of advisors rather than an extended board of directors. ©McGraw-Hill Education. 6-17  Contracts A contract is a legally enforceable agreement between two parties as long as certain conditions are met. Some business deals are informal, concluded with a handshake. If a deal cannot be completed in one year, do not rely on a handshake. The courts insist a written contract exist for transactions over $500. Any deal involving real estate must be in writing to be valid. Before signing a contract, do the following: Understand the terms and conditions of the contract. Cross out anything you do not agree to. Do not sign if there are blank spaces, cross them out. Make a copy for your files after signing. ©McGraw-Hill Education. 6-18  Section 3 From the Opportunity to the Business Plan Chapter 7 The Business Plan: Creating and Starting the Venture ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.  Planning as Part of the Business Operation Planning is a process that never ends. A preliminary business plan which finalizes over time. There are many different types of plans which all contribute to the business operation. Financial plans, marketing plans, human resource plans, production plans and sales plans. Plans may be short-term or long-term and they be strategic or operational. All plans have one purpose: to provide guidance and structure to management in a rapidly changing market environment. ©McGraw-Hill Education. 7-20  What is the Business Plan? A business plan is a written document describing all relevant external and internal elements in starting a new venture. Often an integration of the functional plans. For startups, it addresses short- and long-term decisions for the first three years of operation. The plan is like a road map of business development. External factors are uncontrollable. There is some control over manufacturing, marketing, and personnel. When preparing the plan, the entrepreneur can determine how much money is needed to achieve the plan. ©McGraw-Hill Education. 7-21  Who Should Write the Plan? The entrepreneur should write the business plan, but they may consult many sources. Lawyers, accountants, marketing consultants, and engineers are useful. The SBA, SCORE, SBDCs, universities, friends, and relatives are sources. The entrepreneur could hire or offer equity to others with expertise. The entrepreneur should assess their own skills to help determine if they need to hire a consultant. An assessment identifies what skills are needed and how to obtain them. ©McGraw-Hill Education. 7-22  Scope and Value of the Business Plan Before preparing the business plan, a quick feasibility study determines any possible barriers to success. Clearly define the venture’s goals and objectives. If goals and objectives are too general or not feasible, the business plan will be difficult to control and implement. Well defined goals and objectives are important given the impact of technology on the venture. Once this foundation is in place, establish strategy decisions. ©McGraw-Hill Education. 7-23  Market Information Needs The first step is to define the market, making it easier to project market size and subsequent market goals. Evaluate general environmental and demographic trends, then assess trends in the industry from a national perspective. Next, look at local environmental and demographic trends, then specifically local industry trends. Finally, assess strengths and weaknesses of local competitors. Cumulatively, this assessment leads to market positioning and market objectives. ©McGraw-Hill Education. 7-24  Operations Information Needs Location and accessibility. Basic machinery. The total amount of space needed, leased or owned. Raw materials, suppliers, and costs. Overhead. Equipment, its cost, and Technology needed. whether leased or owned. Each item may require some Labor skills and personnel research. needed. ©McGraw-Hill Education. 7-25  Financial Information Needs The entrepreneur should prepare a budget for the first year before completing the financial section of the business plan. Include capital expenditures, operating expense, and cash expenditures. Forecast revenues from sales using market data. Identify industry benchmarks to prepare pro forma statements. Use the Internet as a resource tool at very little cost. The Internet also provides opportunity for e-sales. Access competitors websites and social media feeds. ©McGraw-Hill Education. 7-26  Writing the Business Plan The plan should be comprehensive enough that an investor has a complete understanding of the venture. A business plan may take hundreds of hours to prepare. The title or cover page provides a brief summary and should include: The company’s name and address. Name of entrepreneur(s), phone and fax numbers, e-mail and website. A paragraph describing the company and nature of the business. The amount of financing needed. A statement of confidentiality. ©McGraw-Hill Education. 7-27  Executive Summary This section should be prepared after the total plan is written. It should be two to three pages in length and highlight key points. Address questions which include: What is the business concept or model? How is the business concept or model unique? Who are the individuals starting this business? How will they make money and how much? If an IPO is expected, include an exit strategy. This section should provide motivation to read the entire plan. ©McGraw-Hill Education. 7-28  Environmental and Industry Analysis An environmental analysis identifies national and international trends. Environmental factors include the economy, culture, technology, and legal concerns – all generally uncontrollable. An industry analysis focuses on specific industry trends such as industry demand and competition. The last part of this section should focus on the specific market. Include who the customer is and what the business environment is like. This information is significant to the preparation of the marketing plan. ©McGraw-Hill Education. 7-29  Description of the Venture and Production Plan The description of the venture should begin with the mission statement and should include key elements of the venture. Location is a function of the type of business and maps may be helpful. If a new venture is a manufacturer, a production plan is necessary. It should describe the entire manufacturing process and whether there is any subcontracting. Describe the physical layout of the plant, machinery and equipment needed, raw materials and suppliers’ names, cost of manufacturing, and any future capital equipment needs. Eliminate this section if there is no manufacturing. ©McGraw-Hill Education. 7-30  Operations Plan and Marketing Plan All businesses should include an operations plan. It describes the flow of goods and services from production to the customer – including the steps in completing a business transaction. The marketing plan describes how the products will be distributed, priced, and promoted. Describe marketing research evidence to support critical marketing decision strategies. Potential investors regard the marketing plan as critical to success. This is an annual requirement for short-term decision making. ©McGraw-Hill Education. 7-31  Organizational Plan and Assessment of Risk The organizational plan describes the venture’s form of ownership. A partnership should include terms of the partnership. A corporation should include the number of shares authorized, share options, and names and addresses of directors and officers. Provide an organizational chart which shows investors who controls the organization and how members interact. It is important the entrepreneur make an assessment of risk. Indicate the potential risks to the new venture. Discuss what might happen if these risks become a reality. Discuss the strategy to prevent, minimize, or respond to these risks. ©McGraw-Hill Education. 7-32  Financial Plan and Appendix The financial plan determines investment needed and indicated feasibility. Three financial areas are discussed: Summarize forecasted sales and expenses for first three years. Cash flow figures for three years are needed, monthly for the first year. A projected balance sheet shows financial condition at a specific time. The appendix contains any backup material not included in the document but referenced in the document. Possibilities include: letters from customers, distributors, or subcontractors; secondary or primary research data; leases, contracts, and other agreements; price lists from suppliers and competitors. ©McGraw-Hill Education. 7-33  Who Reads the Plan? The business plan may be read by employees, investors, bankers, venture capitalists, suppliers, customers, advisors, and consultants. Each group reads the plan for different purposes and who is expected to read the plan affects actual content and focus. Consider the perspective of the entrepreneur, the customer and the investor. The business plan is valuable to the entrepreneur and investors. It helps determine market viability of a new venture. It guides the entrepreneur is planning activities. It is an important tool for obtaining financing. It provides a self-assessment of the entrepreneur. ©McGraw-Hill Education. 7-34  How do Lenders and Investors Evaluate the Plan? Potential suppliers of capital will vary in their needs and requirements for the business plan. Lenders are interested in ability to pay back debt and interest. Bankers want an objective analysis and all risks involved. Lenders focus on the four C’s of credit: credit history, cash flow, collateral, and equity contribution. Investors place more emphasis on the entrepreneur’s character. Venture capitalists want compliant entrepreneurs. Investors focus on the market and financial projections. ©McGraw-Hill Education. 7-35  Presenting the Plan Often universities or locally sponsored business meetings offer an opportunity for entrepreneurs to present their plan. The entrepreneur is expected to “sell” their business concept. An elevator pitch is prepared to illicit interest from potential investors. Audiences include investors who may ask questions regarding the strategies conveyed in the presentation. ©McGraw-Hill Education. 7-36  Using and Implementing the Business Plan The plan is designed to guide the business through the first year and should contain control points to ascertain progress. When measuring plan progress: Check plan projections in key areas frequently. Control inventory to ensure maximum service to the customer. Production controls compare cost figures against operating costs. Quality control depends on the production system used. Sales controls is information on units, dollars and products sold. Control disbursements as well as website and social media control. Update the plan when environmental factors change the direction of the plan. ©McGraw-Hill Education. 7-37  Contingency Planning Be prepared for sudden changes or disasters. The process will vary by the nature of the business, but include: Any factors that can affect the venture. Identify roles and duties of personnel, use trainings and walkthroughs. Understand the goals of the contingency plan, use a step-by-step plan, not generalized – be clear on weaknesses. Detail who should be contacted and how in the event of a disaster. Backup databases using the cloud or some other system. Identify who is to contact the media in the event of a crisis. ©McGraw-Hill Education. 7-38  Why Some Business Plans Fail A poorly prepared business plan may have the following factors: Goals were unreasonable. Objectives are not measurable. The entrepreneur is not fully committed or has no experience. The entrepreneur has no sense of potential threats or weaknesses. No customer need was established for the product. Objectives should be specific, measurable, and monitored. The entrepreneur and their family should be committed. Gain needed knowledge or team up with someone who has it. Document customer needs before preparing the plan. ©McGraw-Hill Education. 7-39  Section 3 From the Opportunity to the Business Plan Chapter 8 The Marketing Plan ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.  Industry Analysis This section is completed prior to preparing the marketing plan. The primary focus of industry analysis is to provide knowledge of the environment that can affect marketing strategy decisions. The upside down pyramid approach to industry analysis allows the entrepreneur to understand competitor’s strengths and weaknesses. Competitor analysis begins with documenting the current strategy of each primary competitor. Use search engines, library databases, and competitor’s social media. Once the strategy is summarized, identify the strengths and weaknesses of each competitor. All of this information is used to formulate the market positioning strategy of the new venture. ©McGraw-Hill Education. 8-41  Marketing Research for the New Venture Marketing research gathers data to answer the following: Who will buy the product? What size is the potential market? What is the most appropriate distribution strategy? What price should be charged? What is the most effective promotion strategy? The entrepreneur may conduct the research or hire someone. ©McGraw-Hill Education. 8-42  Defining the Purpose or Objectives The most effective way to begin the marketing plan is to make a list of the information needed to prepare the marketing plan. Possible objectives include: Determine what people think of the product or service and if they would buy it. Determine how much customers would be willing to pay for the product or service. Determine where the customer would prefer to purchase the product or service. Determine where the customer would expect to hear about such a product or service. ©McGraw-Hill Education. 8-43  Gathering Data From Secondary Sources From Primary Sources Industry and competitor New information is primary data. information. Observation is the simplest Trade magazines, newspapers, form. the Internet, libraries, and government agencies. Interviewing or surveying. Social media posts and The Internet allows formal and competitor’s websites are informal information gathering. informal primary data. Questionnaires. Commercial data may be costly. Focus groups. Free secondary data exist. ©McGraw-Hill Education. 8-44  Analyzing and Interpreting Results The entrepreneur can enter the results on a computer or hand- tabulate the results. Summarizing the answers to questions may give preliminary insights. Data can be cross-tabulated to provide more focused results. Web-based survey tools can provide data analysis support. Continued fine-tuning can provide insights, particularly on segmentation of the market. ©McGraw-Hill Education. 8-45  Plan Differences Marketing Plan Business Plan Focuses on marketing activities A road map for the entire for one year or more. organization over time. Varies by industry, target Focuses on marketing but also market, firm’s size and scope. other facets. Integral to the business plan but Should be regularly updated to also stands alone. help management stay focused. Needs short-term management. ©McGraw-Hill Education. 8-46  Understanding the Marketing Plan The marketing plan establishes how the entrepreneur will compete and operate in the marketplace. After establishing the marketing strategies, costs will be assigned to each strategy. The marketing plan should answer three basic questions: Where have we been? Where do we want to go (in the short-term)? How do we get there? The marketing plan should be a guide for implementing marketing decisions, not a generalized, superficial document. ©McGraw-Hill Education. 8-47  Characteristics of a Marketing Plan An effective marketing plan: Provides a strategy to The marketing system must accomplish the mission. first be understood. Is based on facts and valid assumptions. Be aware of external and internal variables that may Describes an organization to affect marketing decisions. implement the plan. Provides for continuity. The marketing mix includes product, price, distribution, Is simple and short. and promotion. Is flexible. Specifies performance criteria After implementation, the plan that can be monitored and should provide feedback on controlled. plan effectiveness. ©McGraw-Hill Education. 8-48  Preparing the Marketing Plan Defining the business situation. Situation analysis reviews where the company has been and considers factors defined in the environmental and industrial analyses. Defining the target market: opportunities and threats. There should be a good idea of who the target market will be. Market segmentation divides the market into homogeneous groups. To segment and target customers: Decide what general market or industry you wish to pursue. Divide market based on customer characteristics or buying situations. Select segment or segments to target. Develop a marketing plan integrating the parts of the marketing mix. ©McGraw-Hill Education. 8-49  Considering Strengths and Weaknesses The entrepreneur must consider strengths and weaknesses in the target market. In the shuttle example, the primary strengths are: There is no existing competition. The company has the support of local schools. Its usage base is an excellent match for the projected target market. The primary weaknesses are: The inability to gain complete credibility in the town. Success depends heavily on the reliability of its drivers. Strengths and weaknesses will vary with an international market. ©McGraw-Hill Education. 8-50  Establishing Goals and Objectives The entrepreneur must establish realistic and specific marketing goals and objectives. These answer the question “Where do we want to go?” Goals should specify such things as market share, profits, sales, etc. Not all goals and objectives are quantifiable, such as researching customer attitudes, or improving packaging. Limit the number of goals to between six and eight. Too many goals make control and monitoring difficult. ©McGraw-Hill Education. 8-51  Defining Marketing Strategy and Action Programs Marketing strategy and action decisions answer the question “How do we get there?” and reflect variables in the marketing mix. Product or service – describe tangible and intangible characteristics. Pricing – a combination of total cost and profit margins – considers three important elements: costs, markups, and competition. Per unit costs include actual costs and overhead. Some industries use a standard markup, or use desired profit margin. Unique benefits allow higher prices than competitors. Distribution – provides utility. Market concentration and product attributes affect the channel decision. Middlemen and manufacturer’s representatives are an option. Promotion - informs customers about the product. ©McGraw-Hill Education. 8-52  Marketing Strategy: Consumer versus B2B Markets Marketing strategy decisions for a consumer product vary from the decisions for a business-to-business product. Consumer products involve sales to households for personal consumption. B2B marketing involves a more direct channel of distribution. Promotion is more in trade magazines, direct sales, and trade shows. The marketing mix for both markets is the same but the techniques and strategies vary significantly. ©McGraw-Hill Education. 8-53  Budgeting the Marketing Strategy Planning decisions must consider the costs involved in implementing those decisions. First, consider a reasonable budget as a percentage of forecasted sales. For a startup – budget between 12 and 20%. Next, provide a breakdown of marketing costs. Finally, review each cost for effectiveness and allocate portions of the marketing budget to each cost. This budgeting will be useful in preparing the financial plan. ©McGraw-Hill Education. 8-54  Implementing and Monitoring the Market Plan The plan is meant to be a commitment to a specific strategy. A commitment to make needed adjustments is also valuable. Someone should be assigned the responsibility of coordinating and implementing the plan. Monitoring of the plan involves tracking specific results. What is monitored depends on specific goals and objectives. The entrepreneur must be prepared for contingencies. ©McGraw-Hill Education. 8-55  Appendix 8A: The Social Media Plan Any strategy involving the use of social media should be planned and considered part of any promotional efforts. Step 1 – identify the target market and determine what social media platform they prefer. Step 2 – identify the social networks relevant to your audience. Step 3 – effective social media plans start with the company website. Step 4 – post information on a regular basis and address negative posts immediately. Step 5 – assess and analyze the effectiveness of the plan – most platforms have reporting tools. ©McGraw-Hill Education. 8-56  Pitfalls of Social Media Social media requires the cultivation of relationships, which takes time. Allocate time each day for reviewing, responding, and updating. Avoid using all posts for promoting your brand. About one in seven should promote the brand. It is easy to avoid setting goals for the social media plan. State short- and long-term goals to help assess the plan’s effectiveness. ©McGraw-Hill Education. 8-57  Section 3 From the Opportunity to the Business Plan Chapter 9 The Organizational Plan ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.  Developing the Management Team Potential investors are interested in the management team, its ability and their commitment to the new venture. Investors usually look for teams that operate the business full time. Investors perceive an entrepreneur taking a large salary as a lack of commitment to the business. The entrepreneur should consider the role of the board in supporting management of the new venture. ©McGraw-Hill Education. 9-59  Legal Forms of Business Three basic forms are: Proprietorship. Partnership – a variation is the Limited Liability Partnership (LLP). C corporation - a variation is the S corporation. C corporation - owners, or shareholders are taxed separately from the entity S corporation - type of corporation that meets specific Internal Revenue Code requirements. S corporations do not pay any income taxes One additional form is the Limited Liability Company (LLC). The entrepreneur should evaluate the pros and cons of the legal forms prior to submitting a business plan. The entrepreneur should determine the priority of several factors, including tax factors. ©McGraw-Hill Education. 9-60  Ownership and Owner Liability A proprietor and a general In a proprietorship, the owner partner are liable for all aspects has full responsibility. of the business. In a partnership, owners may Corporation owners are liable be general partners and/or only for their investment. limited partners. The partnership is a legal Creditors may seize personal entity in a limited liability assets of proprietors and general partnership (LLP). partners. In the corporation, ownership Limited partners are liable only for their contributions. hinges on shares of stock owned. LLP is a form of LLC, both protect personal assets. ©McGraw-Hill Education. 9-61  Startup Costs and Continuity of the Business For a proprietorship, startup The death of a sole proprietor costs are minimal. terminates the business. A partnership agreement Death of a general partner requires legal advice, and fees. terminates the partnership. A Limited Liability Partnership Buy out or take over of the (LLP) may be more complex. share may be allowed. Death of a limited partner has The corporation is created only no effect on continuity. by statute. They can be replaced – same Register and meet statutory with an LLP. requirements. Filing fees, taxes and legal The corporation has the most fees. continuity. ©McGraw-Hill Education. 9-62  Transferability and Capital Requirements Sole proprietors may sell or Proprietors must take out loans transfer any assets. or add personal capital. Limited partners in a general Borrowing may require relinquishing equity. partnership can sell anytime. General partners have to give Partnership agreements change: first refusal, then may sell. If the partnership get a loan. LLPs do not allow transfers. If partners add funds. Shareholders in a corporation New capital for a corporation may sell at any time. can be raised: Shareholders agreements may limit some sales. By selling stocks or bonds. The S corporation only allows By borrowing money in the transfer to an individual. name of the corporation. ©McGraw-Hill Education. 9-63  Management Control and Distribution of Profits The sole proprietor has the most control over decisions. In partnerships, majority rules. Proprietors receive all profits but also receive all losses. Limited partners have no control over business The partnership agreement decisions. outlines distribution of profits Management controls daily and losses. business in a corporation. Corporations distribute profits Long-term decisions may through stockholder dividends. require a stockholder vote. Stockholders affect operations through the board. ©McGraw-Hill Education. 9-64  Attractiveness for Raising Capital In both the proprietorship and the partnership, the ability to raise capital depends on: The success of the business. The capability of the entrepreneur. Due to the personal liability advantages, the corporation is the most attractive form of business for raising capital. Selling shares of stock, bonds, and/or compiling debt are all ways to raise capital with limited liability. ©McGraw-Hill Education. 9-65  Tax Rates for Various Forms of Business A few major tax changes are noted but many unmentioned minor differences can also be important to an entrepreneur. All C corporations receive a permanent tax cut from 35% to 21%. Pass through businesses receive a 20% reduction in taxable income which expires in 2025. Exceptions include the 20% reduction for service-based pass through businesses is only applicable to income after salary. Attorneys, doctors, realtors, engineers, and accountants. For other employee driven pass through organizations, the tax deduction of 20% is limited to 50% of the company payroll. Restaurants and manufacturers. ©McGraw-Hill Education. 9-66  The LLC versus the S Corporation Venture capitalists desire the LLC or Limited Liability Company. Regulation changes made the LLC more attractive. The LLC is automatically taxed as a partnership unless the entrepreneur actively chooses to be taxed as a corporation. The S corporation was once the most popular organizational structure by new ventures. Growth has declined due to LLC acceptance in all 50 states. ©McGraw-Hill Education. 9-67  The S Corporation The S corporation combines the tax advantages of the partnership and corporation. Income is shared equally and taxed as personal income and shareholders may use deductions of the business. Passing of the 1996 Small Business Protection Act loosened the rules governing the S corporation, revised in 2004. The intent was to make the S corporation as advantageous as the LLC. The S corporation status must be monitored and maintained. Requires an affirmation of shareholders and if lost, cannot be reelected for five years and some costs. The difference between it and the LLC are minimal. ©McGraw-Hill Education. 9-68  Advantages of an S Corporation Over a C Corporation Capital gains or losses are taxed as personal income and shared equally by the shareholders – the S corporation is not taxed. Shareholders retain the same limited liability as C corporations. S corporations are not subject to a minimum tax, unlike the C corporation. Stock is transferable to family members. Stock may be voting or nonvoting. The S corporation may use the cash method of accounting. Corporate capital gains or losses are deductible directly by the shareholders to offset other personal capital gains or losses. ©McGraw-Hill Education. 9-69  Disadvantages of an S Corporation Depending on the amount of net income, there may be a tax advantage using the new 21% C corporation tax rate. The S corporation cannot deduct most shareholder fringe benefits. The S corporation must adopt a calendar year for tax purposes. Only one class of stock, common stock, is permitted. The net loss of the S corporation is limited to the shareholder’s stock plus loans to the business. S corporations cannot have more than 100 shareholders. ©McGraw-Hill Education. 9-70  The Limited Liability Company Characteristics of the LLC, a partnership-corporation hybrid. Corporations have shareholders, partnerships have partners, the LLC has members. No shares are issues, each member owns an interest in the business. Liability does not extend beyond the member’s capital contribution. Members may transfer their interest only with the unanimous written consent of the remaining members. The IRS automatically taxes the LLC as a partnership. The standard term of an LLC is 30 years but dissolution is likely when: one member dies, the business is bankrupt, or all members choose to dissolve the business. Laws governing the LLC differ from state to state. ©McGraw-Hill Education. 9-71  Advantages of an LLC An LLC has advantages over an S corporation. An LLC offers a distinct advantage in a highly leveraged enterprise. The LLC may have tax advantages in some states. One or more individuals, corporations, partnerships, trusts, or other entities can join to form an LLC. Members share income, profit, expense, deductions, loss and credit, and equity of the LLC among themselves. A major concern is using an LLC in international business. The LLC offers all the advantages of the C corporation but with a pass through tax to members. Venture capitalists like the LLC for its flexibility. ©McGraw-Hill Education. 9-72  Designing the Organization The design of the initial organization will be simple as the entrepreneur may perform all of the functions alone. A common problem and a significant reason for failure is when the entrepreneur is unwilling to give up responsibility or include others. If so, the entrepreneur may have difficulty transitioning from a startup to a growing business that maintains success over time. As the work increases, the organizational structure will expand. Effective interviewing and hiring must be in place. All design decisions involving personnel reflect the formal structure. An organization also has an informal structure, organizational culture, which evolves over time and needs addressed by the entrepreneur. The organization must identify the major activities required to operate effectively. ©McGraw-Hill Education. 9-73  Member’s Expectations in Design The design of the organization is a formal and explicit indication of what is expected of each member. Expectations are grouped into five areas. Organizational structure – the organizational chart. Planning, measurement, and evaluation schemes – the goals and objectives of the venture. Rewards – bonuses, promotion, and praise. Selection criteria – guidelines for hiring of each position. Training – on or off the job formal education or learning skills. The organization’s design may be simple or complex. ©McGraw-Hill Education. 9-74  Changing Roles in an Evolving Organization As the organization evolves, the entrepreneur’s decision roles become more critical for an effective organization. The primary concern is to adapt to changes and seek new ideas. When a new idea is found, the entrepreneur must initiate development or delegate the responsibility. There will be a need to respond to pressure by “putting out fires.” The entrepreneur will become an allocator of resources, delegating budgets and responsibilities. The entrepreneur becomes a negotiator as the only person with the appropriate authority. ©McGraw-Hill Education. 9-75  Building the Management Team and a Culture The entrepreneur needs the right mix of people to assume the responsibilities outlined in the organization structure. The team must be able to accomplish three functions: Execute the business plan. Identify fundamental changes in the business as they occur. Adjust the plan based on changes that will maintain profitability. First, the entrepreneur must define the skills and abilities needed to meet the goals of the business plan. Consider the personality and character of each individual. The culture will be unique to each business. The entrepreneur must delegate to create a vibrant culture. ©McGraw-Hill Education. 9-76  Strategies to Recruit an Effective Team A desired culture must match the business strategy. The workplace must motivate and reward good work. There must be flexibility to try different things. Spend extra time in the hiring process. People are more than their skills, character is important. Understand the significance of leadership in the organization. Leadership should establish core values and provide tools so employees can effectively complete their jobs, such as a reward system. Finding an effective team and creating a positive culture is as critical as having an innovative, marketable product. ©McGraw-Hill Education. 9-77  The Role of the Board of Directors The board of directors may serve a number of functions. Reviewing the operating and capital budgets. Developing long-term strategic plans for growth and expansion. Supporting day-to-day activities. Resolving conflicts among owners. Ensuring the proper use of assets. Developing a network of information sources. ©McGraw-Hill Education. 9-78  Choosing a Board and the Sarbanes-Oxley Act The intent was an independent functioning board of directors. Board members must “blowing the whistle” on any discrepancies. Many startups do not plan to have a formal board of directors. Equity investors may insist on formation of a board and one board seat. Choose board members carefully to meet the following criteria: Those with skills, industry experience, and commitment to the mission. Those who will be informed and assist in important decisions. Those willing to exchange ideas and use their experience. There should be an odd number of board members and they should be regularly evaluated. Compensation can be shares of stock, stock options, or cash. ©McGraw-Hill Education. 9-79  The Board of Advisors A board of advisors serves only in an advisory capacity and is not subject to regulations of the Sarbanes-Oxley Act. Meetings are less frequent and discuss important decisions. A board of advisors is very useful in a family business. The selection process is similar to selecting a board of directors. Compensate on a per meeting basis or with stock or stock options. Evaluate members as to their contribution to meeting the mission. Board of advisors can provide important reality checks. Flexibility makes these boards a desirable alternative to the more formal boards of directors. ©McGraw-Hill Education. 9-80  The Organization and Use of Advisors The entrepreneur may need outside advisors, such as accountants, bankers, lawyers, and market researchers. Seek out the best advisors and involve them thoroughly. Hiring and managing outside experts can be viewed as hiring advice suppliers. Even after the advisors are hired, the entrepreneur should question their advice. ©McGraw-Hill Education. 9-81  Section 3 From the Opportunity to the Business Plan Chapter 10 The Financial Plan ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.  The Financial Plan The financial plan provides a complete picture of: How much and when funds enter the organization. Where the funds are going. How much cash is available. The projected financial position of the firm. The financial plan provides the short-term basis for budgeting and prevents a common problem – lack of cash. The plan explains how the entrepreneur will meet obligations and maintain liquidity. In general, the plan will need three years of projected financial data for outside investors. ©McGraw-Hill Education. 10-83  Budgeting Before developing the pro forma income statement, prepare the operating and capital budgets. Sole proprietors are responsible for all budgeting decisions. A partner or an employee may initiate the budgeting process. A sales budget must be developed – expected sales by month. The entrepreneur determines the cost of these sales. Include an ending inventory to buffer against demand fluctuations. A production budget allows projected cash flows for the cost of good produced, including inventory. This provides actual production needed each month to meet demand. It determines how much is spent and for what purpose. ©McGraw-Hill Education. 10-84  Operating Budget and Capital Budget For operating costs, list fixed expenses and calculate variable expenses which vary with sales or marketing strategy. This budget and the manufacturing budget are the basis for the pro forma statements. Capital budgets are used for evaluating expenditures that may impact the business for more than one year. New equipment, vehicles, computers, or new facilities. Decisions may include evaluations of the make or buy decisions in manufacturing, or a comparison of leasing and buying new equipment. Enlist accountant assistance for large projects. ©McGraw-Hill Education. 10-85  Forecasting Sales There are many methods for projecting sales and most startups rely on more qualitative methods. To project sales simply and reasonably using qualitative methods: Startups in the same industry can provide expectations for early sales. Local chambers of commerce or business organizations may provide information on expected first year sales. Sales estimates may be wrong no matter what approach is used. Estimate sales at several levels reflecting contingency estimates. The pro forma income statement requires monthly projections. Seasonality should be reflected in the sales figures. ©McGraw-Hill Education. 10-86  Pro Forma Income Statements First, calculate sales by month when preparing the pro forma income statement. Costs of sales can be disproportionately higher in some months. Sales revenues for an Internet startup may be difficult to project. The pro forma income statement provides projections for operating expenses for each month of the first year. Selling expenses as a percentage of sales may be initially higher. Cost of goods sold can be an industry standard or computed per unit. Investors prefer projections for years two and three. Some expenses remain stable, otherwise use year one as a guide. Be conservative when projecting operating expense. ©McGraw-Hill Education. 10-87  Pro Forma Cash Flow Cash flow is not the same as profit, it is the difference of cash receipts and cash payments. Depreciation is an expense, reducing profit, not a cash outlay. Two standard methods of projection– direct and indirect. The indirect method adjusts net income for cash not yet in or out. The direct method is a simple determination of cash in less cash out. A monthly projection of cash is a pro forma cash flow. When outflow is greater than inflow, funds need to be secured. Invest large short-term sources of positive cash flow. Negative cash flows are likely for a new venture so estimate conservatively to cover negative cash months. Revise projections and provide scenarios based on different sales levels. ©McGraw-Hill Education. 10-88  Pro Forma Balance Sheet The pro forma balance sheet reflects the company’s position at the end of year one. Assets represent everything of value owned by the business. Current assets include cash and anything convertible to cash within a year. Fixed assets are tangible and used over a long period of time. Liabilities represent everything owned to creditors. Current liabilities are owed within a year, unlike long-term liabilities. Owner’s equity is the excess of all assets over all liabilities. Owner equity represents the net worth of the business. Any profit is included in the net worth as retained earnings. ©McGraw-Hill Education. 10-89  Break-Even Analysis This is a technique to determine how many units need to sell to break-even – sales must cover fixed cost obligations. Break-even is that volume of sales at which the business will neither make a profit nor incur a loss, covering fixed and variable expenses. The break-even formula is: B/E(Q)  TFC SP  VC/unit A weakness is determining whether a cost is fixed or variable. If a firm produces more than one product, allocate fixed costs to each product, then calculate a break-even point. Adjust variables such as price to see the impact on break-even and profit. ©McGraw-Hill Education. 10-90  Pro Forma Sources and Applications of Funds The pro forma sources and application of funds statement shows the disposition of earnings from operations and other financing. Its purpose is to show how net income and financing were used to increase assets and pay off debts. It is often difficult to understand how the net income of the year was disposed of. Typical sources of funds are from operations, new investments, long- term borrowing, and sales of assets. Major uses or applications of funds are to increase assets, retire long- term liabilities, reduce owner equity, and pay dividends. This statement emphasizes the interrelationship of these items to working capital. ©McGraw-Hill Education. 10-91  Software Packages There are several financial software packages that can track financial data and generate important financial statements. Spreadsheets are the easiest and Microsoft Excel is widely used. Using spreadsheets in the startup phase helps present different scenarios and assess their impact on pro forma statements. In the startup stage, when the venture is small and resources are limited, software should be simple and easy to use. Most allow check writing, payroll, invoicing, inventory management, bill paying, credit management, and taxes. One of the simplest and easiest to use is Intuit’s Quickbooks. ©McGraw-Hill Education. 10-92  Section 4 From the Business Plan to Funding the Venture Chapter 11 Sources of Capital ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.  Debt or Equity Financing Evaluate financing from perspective of debt versus equity, and then whether to use internal or external funds. Debt financing involves an interest-bearing loan, with payment indirectly related to sales and profits – requires collateral. Short-term financing provides working capital and long-term debt may be used to purchase an asset, using the asset as collateral. Called leveraging the firm – more leverage equals more risk. Equity financing requires no collateral and offers investors some form of ownership – the investor shares in the profits. Key factors in choosing include availability of funds, assets of the venture, and interest rates. Usually a combination of financing is used. ©McGraw-Hill Education. 11-94  Internal or External Funds Internally generated funds are the most frequently used. In the startup years, profits are plowed back into the venture. Assets, whenever possible, should be rented, not owned. Extended payments from suppliers is one short-term source of funds. Another is collecting accounts receivable quicker. Evaluate external fund sources by: The length of time the funds are available. Costs involved. The terms of the contract. ©McGraw-Hill Education. 11-95  Self (Personal Funds) Few new ventures begin without personal funds. Least expensive in terms of cost and control. They are essential in attracting outside funding. Often referred to as blood equity, sources include savings, life insurance, or mortgage on a house or car. Outside investors want financial commitment. The percentage of available total assets committed to the venture demonstrates commitment level. Outside investors want all available assets committed. ©McGraw-Hill Education. 11-96  Family and Friends Family and friends provide a small amount of equity funding. The amount may be small but it is relatively easy to obtain. It is a form of equity funding and there is now an ownership position. To avoid problems, present the positive and negative aspects and nature of the risks of the investment. Keep arrangements strictly business – put it in writing. Any loan should specify interest rate and payment schedule. Family members and friends investing in the venture should receive regular financial statements. Carefully consider the impact before accepting funds. ©McGraw-Hill Education. 11-97  Commercial Banks When collateral is available, banks can provide short-term funds. Collateral can be business assets, personal assets or cosigner’s assets. The asset base for loans is usually accounts receivable, inventory, equipment, or real estate. A bank can finance up to 80% of the value of accounts receivable or use a factoring agreement. Finished goods inventory can be financed up to 50% of its value and some retailers, such as auto dealers, use trust receipts. Equipment loans are for 3-5 years for the purchase of new or used equipment, sale-leaseback financing, or lease financing. Real estate loans are easily obtained for up to 75% of its value. ©McGraw-Hill Education. 11-98  Cash Flow Financing Cash flow financing, or conventional bank loans, include: Lines of credit are popular and ventures pay a commitment fee to ensure the bank will make the loan when requested. Installment loans are possible with previous sales and profits. Straight commercial loans are advanced for 30-90 days – used for seasonal financing. Long-term loans (up to 10 years) are for strong, mature companies. Where there are no business assets, a character loan is an option. ©McGraw-Hill Education. 11-99  Bank Lending Decisions Banks are very cautious in lending money to new ventures. Loan officers and loan committees review the borrower and the venture. Decisions are both quantifiable and subjective. Lending decisions are made according to the five C’s of lending. Character, capacity, capital, collateral, and conditions. The loan application format is generally a “mini” business plan. This provides information on how the venture will repay the loan. With satisfactory interest rates and terms, borrow the maximum that can be repaid. Evaluate several banks to find the most favorable terms. ©McGraw-Hill Education. 11-100  Role of the SBA in Small Business Financing When unable to secure a commercial bank loan, an alternative is a guaranty loan from the Small Business Administration (SBA). The Basic 7(a) Loan Guaranty is the SBA’s primary program. Repayment ability from cash flow is essential to obtain this loan. The SBA guarantees 85% of loans up to$150,000, and 75% of loans above that. SBA Express loans have a maximum guarantee of 50% and export working capital loans guarantee 90%. The 504 loan program provides funds to buy machinery, equipment, or real estate. The SBA Microloan provides short-term loans up to $50,000. Other loan types are available through the SBA. ©McGraw-Hill Education. 11-101  R&D Limited Partnerships A typical R&D partnership is between a company developing the technology and funded by a limited partnership of investors. Research and development limited partnerships are good when the project involves a high degree of risk and significant expense. Three major components are the contract, the sponsoring company, and the limited partnership. The contract specifies the agreement. The limited partners have limited liability and any tax benefits of losses in the early stages are passed on to the partners. The sponsoring company acts as the general partner. ©McGraw-Hill Education. 11-102  R&D Limited Partnership Procedure In the funding stage, a contract is established and money invested. The actual research is performed in the development stage. If the technology is successfully developed, the exit stage begins. In a typical equity partnership, the sponsoring company and limited partners form a new jointly owned corporation. An alternative is to incorporate the R&D partnership itself and either merge it into the sponsoring company or continue as a new entity. A third exit strategy is a royalty partnership where a royalty based on the sale of the products is paid by the company to the limited partners. The company and limited partners may form a joint venture to manufacture and market the product. ©McGraw-Hill Education. 11-103 Benefits and Costs of a R&D Limited Partnership Benefits. Provides needed funds, minimum equity dilution and reduced risks. Strengthens financial statements of sponsoring company through attraction of outside capital. Costs. Requires considerable time and money – a minimum of six months and $50,000 in professional fees. Most R&D limited partnerships are unsuccessful. Restrictions placed on the technology may be substantial. Exit from the partnership may be too complex and involve too much fiduciary responsibility. ©McGraw-Hill Education. 11-104  Government Grants The Small Business Innovation Research (SBIR) grants program is funded by the twelve federal agencies with a R&D budget. Each agency solicits for a topic and small businesses make proposals. The SBIR grant program has three phases. Phase 1 awards up to $10,000 for 6-months of theoretical research. Phase 2 awards up to $750,000 for 24 months of further R&D. Phase 3 provides funds from the private sector or government contracts to commercialize the developed technology. Any patent rights or research data is owned by the company. ©McGraw-Hill Education. 11-105  The Small Business Technology Transfer Program The STTR program was established by the Small Business Technology Transfer Act of 1992. Five federal agencies with budgets of $1 billion set aside 0.3% for small businesses – DOD, DOE, DHHS, NASA, NSF. The SBIR and the STTR programs differ in regulations. In the SBIR, the principal investigator must be employed by the company, the STTR program has no such stipulation. The SBIR has a maximum of 33% in Phase 1 and 50% in Phase 2 in consulting costs. There are many other grants available at the federal, state, and local levels across the country. ©McGraw-Hill Education. 11-106  Private Financing Private investors, also called angels, may be family and friends or wealthy individuals. Investors usually take an equity position and their degree of involvement is an important consideration. Public offerings involve time and expense, but a private offering is faster and less costly with a limited number of investors. These sophisticated investors still need access to material information about the company. ©McGraw-Hill Education. 11-107  Regulation D Regulation D contains: Rule 504 –sell up to $500,000 to Provisions simplifying private unlimited investors in one year. offerings. Definitions of what Rule 505 – sell $5 million of constitutes a private offering. unregistered securities in a year. Specific operating rules. May sell to 35 investors and unlimited accredited investors. Rule 504, 505, and 506. No public media advertising Five copies of Form D must be allowed and no disclosure. filed with the SEC. Rule 506 – sell unlimited The entrepreneur must prove securities to 35 investors and they met requirements. unlimited accredited investors. ©McGraw-Hill Education. 11-108  Bootstrap Financing - Bootstrap financing involves using any possible method for conserving cash. - take advantage of any supplier discounts available; - entrepreneurs with restricted cash flow need to take as long as possible to pay without incurring interest or late payment fees or being cut off from any future items from the supplier. - The entrepreneur should always ask about discounts for volume, frequent customer discounts, promotional discounts for featuring the vendor’s product ©McGraw-Hill Education. 11-109  Bootstrap Financing Outside capital has many costs. It takes time when a company can least afford it. It decreases the drive for profit and increases impulse to spend. It can decrease the company’s flexibility and hamper creativity. Emphasis on short-term can be at the expense of long-term success. Bootstrap financing involves using any possible method for obtaining and conserving cash. Can involve: delayed supplier payments; volume, promotional, or customer discounts; “obsolescence money,” and bulk packaging. The only possible limitation of bootstrap financing is the imagination of the entrepreneur. ©McGraw-Hill Education. 11-110  Section 4 From the Business Plan to Funding the Venture Chapter 12 Informal Risk Capital, Venture Capital, and Going Public ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.  Financing the Business The sources of funding develops through stages. Early-stage financing is the most difficult and costly to obtain. Seed capital is usually a small amount for proof of concept and market feasibility studies. Startup financing pays for developing and selling initial products to determine feasibility of commercial sales. Development financing as working capital supports initial growth. In the third stage, the company has positive cash flow and uses funds for sales expansion. Fourth stage funds are used before going public or being purchased. Acquisition financing is used for acquisitions, LBOs, or going public. ©McGraw-Hill Education. 12-112  Risk-Capital Markets There are three risk-capital markets that finance growth. The public-equity market is available for high-potential ventures. The venture-capital market provides some first-stage funding for larger ventures. The best source for first-stage funds is the informal risk-capital market. The private equity market provides capital for private ventures. The market consists of individuals (angel investors), venture capital firms, and private equity funds. ©McGraw-Hill Education. 12-113  Informal Risk-Capital Market This market is a group of wealthy investors – “business angels” – who are looking for equity investment opportunities. Angels provide funds for all stages but particularly startup funds. This is the largest pool of risk capital in the U.S. and the size and number of investors has increased. Angel money available for investment each year is about $20 billion. Informal investors tend to be well educated. They tend to invest in firms geographically close to them. They make one or two deals a year, averaging $340,000. They may join with other angels to finance larger deals. ©McGraw-Hill Education. 12-114  Where Do Angel Investors Find Their Deals? Deals are found through business associates, friends, personal searches, investment bankers, and business brokers. Angel networks are a group of angels organized into networks or funds – a growing, and common, way to find a deal. Organized angel investor groups are spreading in the U.S. The network or fund meets about 6-10 times a year where select entrepreneurs may present their business idea. Investment is made individually or with other interested angels. ©McGraw-Hill Education. 12-115  Crowdfunding Crowdfunding is also an individual investment and can be used to pre-test a product or service. This brings together various individuals who commit money to projects and companies they support. Reward-based crowdfunding is when individuals pledge money to a company developing a new technology, a new cultural art project, or a new musical album. Lending crowdfunding allows borrowing companies to occur debt funds without going to traditional providers. Equity crowdfunding allows individuals to invest in private companies for a percentage share of the company. Other crowdfunding sites focus on real estate and human capital. ©McGraw-Hill Education. 12-116  Crowdfunding Campaigns Successful crowdfunding campaigns take time and planning to develop a marketing campaign, execute the campaign, and provide excellent service. Determine the crowdfunding site you will use to raise the capital. Create a video explaining what you are doing with an emotional appeal. Establish a budget showing short-term costs. Indicate the specific tasks to be funded. Structure some appropriate rewards. Establish a deadline for the campaign. ©McGraw-Hill Education. 12-117  Venture Capital Broadly, venture capital is a professionally managed pool of equity capital. The equity pool is fueled by wealthy limited partners. Other investors are pension funds, endowments, and other institutions including foreign investors. The pool is managed by a general partner – the venture capital firm – in exchange for a percentage of the gain realized and a fee. Venture capital is a long-term investment. The venture capitalist takes an equity participation and is actively involved – monitoring the company and bringing needed business skills to the firm. ©McGraw-Hill Education. 12-118  Overview of the Venture-Capital Industry The role of venture capital became an industry after WW II with the American Research and Development Corporation (ARD). The Small Business Investment Company Act formed the Small Business Investment Companies (SBIC firms). SBICs were the start of the formal venture-capital industry. During the 1960s, small private venture-capital firms emerged. Usually formed as partnerships with the venture-capital firm acting as general partner and the limited partners supplied the funding. Also, venture-capital divisions of major corporations were formed. The geographically oriented venture-capital fund was created for economic development – varies on a state basis. ©McGraw-Hill Education. 12-119  The Venture-Capital Industry Continued University-sponsored venture capital funds and philanthropic venture funds are usually managed as separate entities. The venture-capital industry has not returned to the highest level invested in 1999-2000 of $104.7 billion over 7,809 deals. In 2017, the three primary industries invested in were the Internet, healthcare, and business products. The largest amount raised was for later-stage financing in 2017 but traditionally, expansion-stage is the largest category. The New York Metro areas received the largest amount of venture capital geographically. ©McGraw-Hill Education. 12-120  The Venture-Capital Objectives and Criteria The objective of a venture-capital firm is to ge