IN THE DESCRIPTION

Part 1

1. Many successful entrepreneurs and private investors say it is just as bad to start out with too much money as it is too little. Why is this so? Give some examples.

Raising capital for a new venture is one of the most tedious and most difficult process. It requires for an entrepreneur to devote a large portion of their working hours to network and look for people who would willingly fund this venture or idea.

Firstly, having too little capital is never a good thing for an entrepreneur trying to launch a brand new idea into the market. Making this new idea work requires cash for several reasons such as possibly building prototypes, hiring employees, leasing work space or even simple overhead expenses. Raised capital is the primary source to fund these expenses and with too little of it, an entrepreneur will not be able to grow the business as fast as they expected it to grow. A low flow of capital also discourages other investors from investing more funds into this venture thereby slowing down the process even more.

On the other hand, having a large pool of capital to begin with even before the idea could be open to the market can cause problems too. One primary problem that excess capital would cause is scaling the business to investor’s expectations. If a new venture has an excess amount of capital, the investors expect the entrepreneur to scale the business according to the business model that the entrepreneur has figured out. If the entrepreneur is unable to understand the business model and scale it accordingly, he will eventually burn through a lot of capital which could have been used for other purposes. Smaller scale problems such as hiring too many employees or paying for an expensive 10-year lease can also cause the entrepreneur to burn through a large amount of cash that could otherwise be used elsewhere. To be sitting on a pile of capital during the early stages also reduces one’s discipline and thus may cause problems in the later stages of the business. If a company has burned through all its money, and if investors think there has been non-judicious use of funds, it will be difficult to raise capital in the next round.

According to many investors and entrepreneurs, keeping the company small during the early stages as well as keeping the capital optimal, is very beneficial because the company will then get the time to figure and plan out a long-term plan or a long-term business after which raising a large amount of capital would fit in perfectly. If the company has not yet made a long-term plan, an excess amount of capital will just be burned as quickly as it came in. A prominent example that would assert this argument would be the co-founder of MobileSpan, Nils Bunger. He was able to keep the amount of capital inflow constant and at an optimal rate by selecting the correct investors rather than have many investors pitching in lots of money. Through his experience of starting his own venture, he explains that several start-ups start scaling their operations before they are ready to do so.

2. How would a banker look at a loan application different than an angel investor looking at a business plan? Explain

A loan involves providing the applicant with a sum of money that is to be returned with interest after a particular time period. Whereas, an angel investor would be providing an investment with an intention of receiving the investment back as well gain a small part of the equity of the firm that the investors chooses to invest in. The banker would also scrutinize the cash flows of this new venture to understand how and when the loan would be repaid. The banker would not care much about the business plan and will not even try to understand the business. The loan system of banks is solely based on repayment and the term of the repayment which is why banks usually ask the owners of the business for some collateral. Usually start-ups and new ventures do not have collateral at that point that they can provide to the bank and be assured that they would be able to repay their loan and get the collateral back. Start-ups may also have negligible cash flow during the first few years of the business which the banks would usually fail to understand or would not be willing to take the risk of providing a loan that they think would default.

Angel investors on the other hand would look at a business plan as an idea and assess its potential accordingly. The cash flows for the first few years are not as important to the angel investors as much as it is to bankers. By thoroughly understanding the idea and its potential, angel investors essentially take a large risk providing this kind of capital to new ventures. Angel investors look for a return in the long-run as well as a good rate of return on capital. Banks are thereby focused more on the short-run capacity of the firm to pay the load and its interest or at least part of the loan.

3. What is a company worth? Explain the theory and the reality

A company creates certain value to the economy or to the society when it is created. This can be quantifiable through the amount of profit it generates but that would not fully enclose the true value of the company. The valuation of the company in theory is usually measured through a discounted cash flow process that determines how much profit a company is making and how successful it is based on this sole variable. This theory does not necessarily encompass the true value of the company as mentioned earlier and this is because of several reasons. Some of the reasons include possibilities such as the firm being a social venture firm that does not necessarily focus all their efforts on profit. Another possibility is that the firm may be in its early stages and does not generate enough cash flow which may be possible due to long-term investments and growth models that may be put in place.

Therefore in reality only a venture capitalist or angel investor would be able to judge the true value of a company correctly because if they invest in the company they are essentially buying into the long-term plans of that venture. The long–term plans and the entire potential of the company as a whole would be the reality of what a company is worth rather than just what it worth on paper. The idea is much more valuable that the net worth of a firm which is the primary selling point of most companies.

4. Explain the pros and cons of using Debt vs Angel money vs Venture Capital

Starting off, debt capital is any capital that is borrowed and has to be returned with a certain amount of interest. This allows for the entrepreneur to retain their equity and thus not diluting their power and control over the firm. The con to this is that the entrepreneur will not be able to pay his debts if the company gets liquidated because the creditors would have the first rights to the assets.

Angel investing is usually a larger investment than a debt financed start-up but smaller than a venture capital. Angel investors tend to be friendlier and take a greater interest in the potential of the start-up rather than looking at just cash flows and short-term return on their investment like banks usually do. This tends to lead the start-ups in the right direction due to the positivity of the approach. The drawback to angel investing is that even though they are friendlier, they do not provide any strategic direction to the company in terms of long-term goals and planning. These “angels” are usually just a source of short-term money for the entrepreneurs and do not hold any long term relationships with the entrepreneurs.

Venture capital is usually for start-ups with a promising profit on their investment. The profits are not guaranteed but the return is fairly substantial. Venture capitalists usually invest large sums of money that are also larger than angel investors. The positive aspect to venture capital is that they have a vested interest in the success of the company and will be able to provide a strong management team or consultants to drive the business forward. The primary and most prominent drawback to venture capital is that they would most likely ask for equity in the company which will mean diluting control of the company. They thus has a say in what direction the company might go in.

5. In selecting outside investors, a board, consultants and the like, what are the most important criteria, and why?

A company needs certain systems in place to function correctly and grow successfully. Part of these systems include having the correct investors, consultants and a management team. These teams can be selected on several criteria but the most important ones would be to provide strategic direction to the company and its goals. The teams or people should also be able to assist the company in growing exponentially while also evolving with the time and situations. The investors and management team must also be experts in their field of business and must provide a wide range of skills to help the company grow. Another important thing that I learnt from this class is that the management team or the head of the company must have the power to say no to a wrong decisions when everyone is thinking outside the box or suggesting additional ideas for the company. Taking on too many ideas may dilute the original direction of the company which the teams must preserve in order for it to grow.

Part 2

Reflective paper - NO LONGER THAN 4 PAGES

It can be more difficult to write a succinct 4 page paper than a longer paper. So, outline, work and rework your paper before submitting it to the maximum length. Please use one inch margins all around, double space, 12 point font. Be sure to edit your paper before submitting as poor grammar and syntax detract from the value of the paper. You should use headings to clearly label the discrete parts of the paper. Since this is in lieu of an exam I am expecting you to put into this paper a similar amount of time you would have spent studying and taking the exam.

In this paper, you will be looking back and focusing on what you have learned overall and what you are taking away from this course. This could include things you have learned from the text, from class, our guest speakers, your project, outside readings, as well as fellow students. Was there an “AHA” moment or something that you heard/read that really resonated with you? You should also discuss how you anticipate using the learnings you gained about entrepreneurship and specifically about creating a new venture in the future. This might include future jobs, graduate school, or any other setting where you feel the learning applies.

As an international business major, my focus is always on diverse businesses across the world. Being a skilled entrepreneur helps understand these businesses and would help me grow my own business or skill in the field. This class aligned with my career goals and it was my opinion that listening to experienced entrepreneurs as well so many business ideas has definitely broadened my perspective even more.

Since each class started with a guest speaker telling us about their ventures and experiences, it is only logical that their experiences are spoken of first. Due to so many guest speakers having so many ventures of their own, we were able to benefit from many examples and thus to learn from these examples. During the course of this class, students were supposed to come up with a new venture of their own and provide a business plan at the end of the semester. This exercise was the practical aspect of providing the experience or knowledge of starting a new venture which would prepare us for any future endeavors. Even though in today’s world, selling the idea is more important than providing a business plan, the activity of actually writing a plan helps the entrepreneurs realize several problems and loopholes in the business that would otherwise be overlooked. To cover any remaining knowledge that we, as students, could have missed out, we had in class presentations on each chapter relevant to the course. These brief presentations educated us on topics that would otherwise have not been touched on during class or during any other project.

During one of the guest speaker’s talk, one principal aspect of this entire entrepreneurial process was highlighted, which is that if a person wants to create a new venture, they must first focus on acquiring all knowledge about running a business and this can be only done through working a large firm and moving up through the ranks. Getting a job and understanding how a large business functions was emphasized by most of the speakers. This was an “aha!” moment for me as I realized that the experience or knowledge of creating a new venture is actually more important than actually creating the venture because that would probably save the entrepreneur many years and time that he or she would put into growing the business. The knowledge is obviously not enough for a person to sustain a business which is why the entrepreneur must eventually create or run a business from the very beginning stages.

After completing my undergraduate degree in international business, I would be primarily focusing on consulting small businesses that have been created recently. I would help these businesses organize and expand to the point where it would be easy for them to expand into international markets or grow at a rapid rate domestically. Using the knowledge of creating a new venture, I would help these small businesses set-up their websites and create an online presence before they actually start to expand and grow their brand or service. As these ventures are fairly new, their founders are also going through the similar thought process that we were made to do as students in a class room setting. Therefore by working with these businesses I would not only use my knowledge in the real world but also gain experience of creating or running a new venture.

As a businessman, I have also planned what I would do in the future using the knowledge and experience that I received both, through this class as well as working with the small businesses. After working with these business I plan to take charge of a recently created export and trade company in India. It is a family business created a couple years ago that exports several products to the US, West Africa, Columbia and Mexico. This aligns with my undergraduate degree of international business while also allowing me to handle a recently created venture and thus an opportunity to expand and grow this business to its full potential. Several skills that I have learnt from this class and from the guests speakers would help me successfully drive this business and create a successful venture. These skills include activities like writing a business plan or networking and many such important components of running a business.