Entrepreneurship, 5th Edition Test Bank

Type:

Test Bank

Resource:

Entrepreneurship

Edition:

5th Edition

Author(s):

Andrew Zacharakis William D. Bygrave Andrew C. Corbett

Questions for Chapter 1 True/False 1. The 2018-2019 Global Entrepreneurship Monitor reports that across the 49 countries investigated 32.6 % of adults were in the process of working to start a new business or were running one they recently started. (pg. 1) (False) 2. New and emerging businesses (e.g., Airbnb or Uber) created half of the new private-sector jobs in the United States in 2018. (pg. 2) (True) 3. Moravian-born economist, Joseph Schumpeter defines an entrepreneur as someone who destroys the existing economic order as a result of his or her activities. (pg. 2) (True) 4. According to the United States Small Business Association (SBA), there are over 30 million small businesses in the United States today. (pg. 3) (True) 5. In general, businesses with fewer than 600 employees are considered “small-sized businesses”. (pg. 3) (False) 6. Approximately 66% of all businesses start in the owner’s home but fail to grow primarily because the entrepreneur hires too many full-time workers. (pg. 3) (False) 7. A majority of small business owners feel their companies have increased their overall standard of living. (pg. 4) (False) 8. The first two NASDAQ stocks to be included in the Dow Jones Industrial Average were Microsoft and Apple. (pg. 4) (False) 9. At the turn of the 20th century, about 4% of US workers worked in either the agricultural or the domestic service spheres. Approximately 100 years later that percentage has grown to about 50%. (pg. 6) (False) 10. In 1928, the DJIA comprised 50 companies. (pg. 6) (False) 11. Venture Capital is a source of growth funding exclusively for technology companies with the potential for rapid, scalable growth. (pg. 10) (False) .

12. The former dean of the Nomura School of Advanced Management in Japan, Jiro Tokuyama, once said that the venture capital firms in Japan comprise one of the chief advantages for Japanese, technology start-ups. (pg. 11) (False) 13. Historically, annual returns for venture capitalists have averaged 143% over the past several decades. (pg. 11) (False) 14. The period between 1996 through 2000 was considered the golden era for classic venture capitalists and the companies they invested in. (pg. 11) (True) 15. Yahoo! Inc.’s IPO set the all-time record, in terms of capital raised, for Silicon Valley companies. (pg. 11) (False) 16. Entrepreneurship did not grow very much after the Great Depression, until it began increasing in the 1970’s. (pg. 12) (True) 17. Baby boomers are not as concerned about job security as were their parents. (pg. 14) (True) 18. The Fortune 500 employed 15 percent of the workforce in 2005. (pg. 14) (False) 19. There was a burst of venture capital backed startups in the last half of the 1960s. (pg. 14) (True) 20. Each year, the Small Business Innovation Research (SBIR) program has set aside $2.2 billion to support the financing of cutting-edge technologies developed by small businesses. (pg. 15).

(True) 21. Today, approximately 700 universities have offices for technology transfer. (pg. 16) (False) 22. Virtual companies are so called because they outsource much of their work. (pg. 16) (True) 23. Today, the International Business Innovation Association (INBIA) estimates that there are over 10,000 incubators worldwide. (pg. 16) (False) 24. In 2018, the National Venture Capital Association reported that venture capital investment reached $150 billion, surpassing the all-time high in 2000. (pg. 17) (False) .

25. The professionalization of the entrepreneurial process, which has developed over the last 20 years, has almost eliminated the need for young entrepreneurs to write business plans themselves. (pg. 17) (False) 26. Five percent of American adults report they “invested” in someone else’s venture in the last three years. (pg. 18) (True) 27. Churning is a main component of a healthy economy. (pg. 18) (True) 28. The Global Entrepreneurship Monitor (GEM) is an organization created to gather information about the most successful start-ups for potential investors. (pg. 19) (False) 29. Baby business managers are owners-managers who are actively trying to start a new business but who have not yet done so. (pg. 19) (False) 30. The Total Entrepreneurial Activity (TEA) index tracks the percent of the adult population that is trying to start or has started an infant business because all other options for work are either absent or unsatisfactory. (pg. 20) (False) 31. Within the Middle East/Africa and Latin America/Caribbean, Angola and Guatemala have the highest TEA ranks and scores in their respective region. (pg. 20) (True) 32. Overall, entrepreneurial activity among employees in existing companies is seen to be highest in Europe. (pg. 20) (True)

Multiple Choice 1. The 2018-2019 Global Entrepreneurship Monitor reports that across the 49 countries investigated ____ % of adults were in the process of working to start a new business or were running one they recently started. (pg. 1) A. 12.6% B. 33.9% C. 25.7% D. 47.1% E. 66.3% .

2. New and emerging businesses (e.g., Airbnb or Uber) created _____ of the new private-sector jobs in the United States in 2018. (pg. 2) A. one-fourth B. one-third C. half D. two-third E. three-fourth 3. Small businesses in the United States represent what percent of all businesses in the country? (pg.

3) A. 99% B. 95% C. 85% D. 70% E. 60% 4. According to the United States Small Business Association (SBA), there are _____ million small businesses in the United States today. (pg. 3) A. 80 plus B. about 50 C. between 40 to 60 D. 75 E. over 30

5. What percentage of new business ventures typically survive their first 5 years of operation? (pg.

4) A. 100 B. 81 C. 65 D. 40 E. 25 6. What percentage of Americans dream of starting a business? (pg.4) A. 68% B. 39% C. 48% D. 58% E. 28% 7. Today, approximately what percent of U.S. jobs are in the goods-producing sector? (pg. 6) A. 7% B. 12% C. 22% D. 25% E. 31% .

8. At the turn of the 20th century, about 50% of US workers worked in either the agricultural or the domestic service spheres. Approximately 100 years later that percentage had decreased to which of the following figures? (pg. 6) A. 4% B. 10% C. 16% D. 22% E. 35% 9. Which of the following entrepreneurs was one of the pioneers of the biotechnology industry? (pg.

8) A. Robert Noyce B. Arthur Blank C. Tim Nerners-Lee D. George Gendron E. Robert Swanson 10. Which software application was the predecessor to the Lotus 1-2-3 spreadsheet? (pg. 8) A. Microsoft Excel B. MasterFile C. Financial Works D. FileMaker E. VisiCalc 11. Which of the trends below converged to spark the Internet revolution of the 1990’s? (pg. 10) A. Personal Computers, Cell Phones, and Laser Printing B. Digital Technology, Information Technology, and Entrepreneurship C. Personal Computers, Modems, and Floppy Disks D. Entrepreneurship, Venture Capital, and Computer Software E. Venture Capital, Biotechnology, and Telecommunications 12. Jim Clark, an IT entrepreneur, became the first Internet billionaire because of his investment in what company? (pg. 10) A. Yahoo! Inc. B. Netscape Communications C. Amazon.com Inc. D. Google Inc. E. Microsoft Corp.

13. In 2018, there were how many internet users globally? (pg. 10) A. 6 Billion B. 5 Billion C. 4 Billion D. 3 Billion E. 2 Billion

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14. Which of the following industries was the prime example of venture capital fueling the pace of commercial innovation? (pg. 10) A. Semi-Conductors B. Mini-Computers C. Biotechnology D. Personal Computers E. All of the Above 15. Dating back to the 1970’s till today, what percent of public companies can trace their roots back to venture capital? (pg. 11) A. 36% B. 40% C. 42% D. 49% E. 53% 16. What was the increase in Benchmark Capital’s investment of $5 million in eBay? (pg. 11) A. 30-fold in two years B. 300-fold in two years C. 700-fold in two years D. 1500-fold in two years E. 4000-fold in two years 17. The stock market collapse that led to the Great Depression occurred in what year? (pg. 12) A. 1928 B. 1929 C. 1930 D. 1931 E. 1932 18. Who reasoned that capitalism would be inevitably destroyed by elites? (pg. 13) A. Whyte B. Servan-Schreiber C. Schumpeter D. Lenin E. Marx 19. According to the GEM model, how many sets of activities create the basis for national economic growth? (pg. 13) A. 2 B. 3 C. 4 D. 5 E. 6 20. Which term is used to describe business churning? (pg. 14) A. Artificial evolution B. Evolving transition .

C. Making the butter D. Business expansion E. Creative destruction 21. What percent of the workforce did Fortune 500 companies employ in 1960’s? (pg. 14) A. 10 B. 15 C. 20 D. 25 E. 30 22. What percent of the executives downsized in the 1980’s and 1990’s started their own businesses? (pg. 14) A. 10 B. 15 C. 20 D. 25 E. 30 23. How much new VC money was committed in 1975? (pg. 14) A. $10 million B. $45 million C. $145 million D. $430 million E. $930 million 24. What does SBIR stand for? (pg. 15) A. Savings, Brokerage, and Investment Reserve B. Small Business Innovation Research C. Space Based Infra Red D. Speaker Boundary Interference Response E. Small Business Interest Rate 25. How much does the Bayh-Dole Act contribute annually to the US economy? (pg. 16) A. $300 million B. $950 million C. $12 billion D. $32 billion E. $40 billion 26. What was the primary objective of the Bayh-Dole Act? (pg. 15) A. Commercial development of intellectual property B. Investment of pension funds in venture capital companies C. Gender equality among entrepreneurs.

D. Support for young entrepreneurs E. All of the above 27. How many business incubators were in the US in 2006? (pg. 17) .

A. 240 B. 764 C. 850 D. 1115 E. 2076 28. What percent of American, four-year colleges have courses in entrepreneurship? (pg. 17) A. 13 B. 43 C. 55 D. 60 E. 78 29. How much do informal investors contribute to startup businesses annually? (pg. 18) A. $12 billion B. $50 billion C. $67 billion D. $86 billion E. $100 billion 30. Annually, informal investors invest how much money in startups and baby businesses? (pg. 18) A. $25 billion B. $50 billion C. $75 billion D. $100 billion E. $125 billion 31. What is the most successful US airline? (pg. 18) A. United Airlines B. Delta C. Continental D. Southwest Airlines E. Pan-Am 32. The highest average TEA rates are found in? (pg. 20) A. Middle East & North Africa B. European Union C. United States D. Asia Pacific/South Asia E. Middle East/Africa and Latin America/Caribbean 33. Overall, entrepreneurial activity among employees in existing companies is seen to be highest in which of the following? (pg. 20) A. Middle East B. Europe C. North America D. Asia E. Latin America/Caribbean .

Open ended 1. Why are small businesses an important consideration for state and federal politicians? (pg.

3) • In the U.S. there are 30 million or so small businesses, representing 99.9 percent of all businesses.

• Small businesses account for half of the private-sector workers and 47.5% of private payroll • Small businesses generate a third of the U.S.’s total exports • Small businesses create most of the jobs in the US. 2. Explain, in your own words, Schumpeter’s view of entrepreneurship’s role in an economy and society. (pg. 2) • Schumpeter argued that the innovation and technological change of a nation come from entrepreneurs.

• He believed that entrepreneurs are the ones who facilitate the functionality of an economy.

• He claimed that by destroying old businesses and creating new ones, entrepreneurs keep the economy healthy.

3. Describe how Intel and Microsoft became the two major entrepreneurial driving forces that transformed the U.S. economy in the last quarter of the 20th century. (pg. 5) • In 1971, Intel launched the first commercial microprocessor, heralding a new era in integrated electronics. In 1974, Intel launched the first general-purpose microprocessor, which was the brain of the first personal computer.

• Bill Gates and Paul Allen formed Microsoft where they began developing software for personal computers. In 1980-81, Microsoft introduced MS-DOS for IBM’s first PC, and fourteen years later, released Windows 95 in 1995.

4. What was the most critical step in Federal Express’ rapid growth? (pgs. 6 – 7) • In the mid-1970s, Federal Express had taken a leading role in lobbying for air cargo deregulation that finally passed in 1977.

• These changes allowed Federal Express to use larger aircraft and spurred the company's rapid growth. Today, FedEx ships 15 million packages a day on average and connects overs 99% of the world’s GDP by covering more than 220 countries and territories across the globe.

5. Give two examples of how companies strengthened their businesses through changes in regulations. (pgs. 6 – 7) • Federal Express had taken a leading role in lobbying for air cargo deregulation that finally passed in 1977. These changes allowed Federal Express to use larger aircraft and spurred the company's rapid growth • Herb Kelleher, the charismatic co-founder of Southwest Airlines, is often credited with triggering airline deregulation by persevering with his legal battle to get Southwest airborne, in the face of fierce legal opposition from Braniff, Trans-Texas, and Continental Airlines.

6. Why is the Internet one of the most revolutionary developments in the history of commercial innovation? (pg. 9 – 10, 16) .

• • •

The internet provided businesses with millions of flexible space in which to conduct commerce.

Small businesses gained a platform that allowed them to compete with multi-billion corporations.

The internet spurred the proliferation of information. Any entrepreneur now has access to virtually any information he or she needs.

7. Why was the Netscape’s IPO so popular and successful? (pgs. 10) • Netscape Navigator was an instant hit with users, gaining 75 percent of the browser market within four months of its introduction.

• Netscape was only 16 months old when it went public in August 1996.

• It made Jim Clark the first Internet billionaire.

• Venture capitalists saw huge potential in Netscape, accelerating the company’s commercialization.

8. How did the advent of the PC churn up the entire computer industry? (pg. 18) • It wiped out the typewriter industry.

• Changed the way office work is organized – secretaries had to learn computer skills

9. Which factors led to American entrepreneurial revolution? (pg. 12-18) • In the 1960s a generation of Americans who had no first-hand memory of the Great Depression and did not believe an economy should be built on corporations only came of age.

• In the 1970s, Washington, after bailing out Penn Central, Lockheed, and Chrysler, started to pay more attention to small businesses • Congress took steps in 1978 to stimulate the venture capital industry, which, in turn, led to more investments in start-ups • Bayh-Dole Act, implemented in 1980 fostered the growth of technology-based small businesses by allowing them to own the patents that arose from federally sponsored research 10. What was the effect of the Bayh-Dole Act? (pg. 15-16) • 10 years ago, The Economist estimated that Bayh-Dole had created 2,000 new companies and 260,000 new jobs and had contributed $40 billion annually to the U.S. economy. More progress has been made since then.

• More than 1,200 universities have offices for technology transfer.

11. Who, in your opinion, would benefit from the creative destruction process and why? (pgs.

13 – 14) • Economy – stays healthy and primed for growth.

• The customer – new ventures create better products.

• The companies themselves – the threat of creative destruction leads companies to constantly improve their operating and production processes and leads to faster learning curves.

12. Describe the three main measures of entrepreneurial activity. (pg. 19) .

• •

•

TEA (total entrepreneurial activity) is the percentage of the adult population that is either nascent entrepreneurs or baby businesses owner-managers or both. It measures the overall entrepreneurial activity of a nation.

TEA (opportunity) is the percentage of the adult population that is trying to start or has started a baby business to exploit a perceived opportunity. They are classified as improvement-driven opportunity motivated if they additionally seek to improve their income or independence through entrepreneurship.

TEA (necessity) is the percentage of the adult population that is trying to start or has started a baby business because all other options for work are either absent or unsatisfactory.

13. Explain what the Global Entrepreneurship Monitor (GEM) is. (PG. 19) • • •

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It was conceived in 1997 to study the economic impact and the determinants of nationallevel entrepreneurial activity.

It is the largest coordinated research effort ever undertaken to study population-level entrepreneurial activity.

GEM has become the world’s most influential and authoritative source of empirical data and expertise on the entrepreneurial potential of nations.

Questions for Chapter 2 True/False 1. A manager is someone who perceives an opportunity and creates an organization to pursue it. (pg. 41) (False) 2. The entrepreneurial process includes all the functions, activities, and actions that are part of perceiving opportunities and creating organizations to pursue them. (pg. 41) (True) 3. Locus of control is an organizational factor in the innovation stage of the entrepreneurial model. (pg. 43) (False) 4. Entrepreneurship is a process that can be learned. (pg. 42) (True) 5. Entrepreneurs possess highly specialized behavioral attributes that are distinct from those of non-entrepreneurs. (pg. 44) (False) 6. Access to entrepreneurial role models can be a significant factor in determining whether or not someone will become an entrepreneur. (pgs. 45 – 46) (True) 7. A majority of the businesses started each year will eventually go bankrupt. (pg. 48) (False) 8. To determine the amount of capital that your company needs, crucial resources must be assessed first. (pg. 52) (True) 9. It is usually more efficient to do everything in-house instead of subcontracting certain jobs to other companies. (pg. 53) (False) 10. Raising venture capital is a critical step for most successful ventures. (pg. 56) (False) 11. Whether a company is successful is largely a matter of luck. (pg. 49) (False) 12. To be successful, a company must possess a unique and novel idea. (pg. 49) (False) .

13. Secrecy about one’s idea is more likely to hurt the development of the business than help it. (pg. 49) (True) 14. Only the most skilled entrepreneurs should attempt to build a business around social or cultural fads. (pg. 50) (True) 15. Entrepreneurial companies should consider outsourcing responsibilities and functions that are not critical to the company’s success. (pg. 53) (True) 16. Marginal cost is a term that refers to expenses that are difficult to justify in an entrepreneurial environment. (pg. 53) (False) 17. Entrepreneurs should always seek to own the resources that they utilize while building a company. (pg. 54) (False) 18. The two types of startup capital are debt and equity. (pg. 54) (True) 19. The vast majority of entrepreneurs start their companies with their own personal savings. (pg. 54) (True) 20. A majority of companies require at least $100,000 to begin operations. (pg. 56) (False) 21. Investors in small, growing startups typically expect to earn the same rate of return as they would if they invested in a public company that is listed on the New York Stock Exchange. (pg. 56) (False) 22. It is possible for a company to have a negative cash flow and be profitable. (pg. 57) (True) 23. Startups that tend to focus on multiple markets are the most successful. (pg. 58) (False) 24. Having multiple layers of management is the best way to ensure that a startup is flexible and quick to react to changes. (pg. 58) (False)

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25. If companies A and B are in the same industry, and A has $200,000 in sales per employee while B has $325,000 in sales per employee, then B is the more productive company. (pg. 59) (True) 26. Generally speaking, entrepreneurs have a stronger need to be in control of their own fate. (pg. 44) (True) 27. The medium age for founding a company is 41.9 years old. (pg. 46) (True) 28. For a company that goes public, the founding entrepreneur typically owns a majority of the shares of the corporation. (pg. 57) (False) 29. For a successful new business, having a grade-A management team is more important than having a grade-A idea. (pg. 48) (True) 30. The most famous geographic region for high-tech entrepreneurship is in California and often referred to as, “Silicon Valley.” (pg. 44) (True) 31. Low-tech businesses, such as convenience stores, are not typically considered part of entrepreneurship because of their lack of innovation and intellectual property. (pg.46) (False) 32. The most costly expense that seed-stage biotechnology companies face in their early years is the initial expenditure on manufacturing equipment. (pg. 57) (False) 33. The majority of entrepreneurs’ business ideas come from area outside of their present line of employment or experience. (pg. 44) (False) 34. The Small Business Administration’s Service Core of Retired Executives provides paid assistance to entrepreneurs. (pg. 47) (False) 35. One difference between having an idea vs. an opportunity is the ability to list potential customers by name. (pg. 50) (True) 36. On average, US companies make about 11% net income. (pg. 56) (False) .

37. Two ingredients that determine an entrepreneur’s return on investment are (1) the amount invested and (2) the annual amount earned on that investment. (pg. 57) (True)

Multiple Choice 1. A(n) _______ is someone who perceives an opportunity and creates an organization to pursue it. (pg. 41) A) manager B) entrepreneur C) employee D) customer E) supplier 2. Which process includes all the functions, activities, and actions that are part of perceiving opportunities and creating organizations to pursue them? (pg. 41) A) Management process B) Entrepreneurial process C) Human resource management process D) Customer acquisition process E) Supply chain management process 3. Locus of control is part of which of the following category of factors in the innovation stage of the entrepreneurial model? (pg. 43) A) Personal B) Sociological C) Environmental D) Organizational E) Regulatory 4. Which of the following typically represent the first stage in the entrepreneurial process ? (pg.

43) A) Implementation B) Triggering event C) Innovation D) Growth E) Self-doubt 5. Which of the following typically represent the final stage in the entrepreneurial process ? (pg.

43) A) Implementation B) Triggering event C) Innovation D) Growth .

E) Self-doubt 6. Which of the following could be a “trigger” for the entrepreneurial process? (pgs. 42-44) A) Being fired by an employer B) Deep frustration with one’s career C) A conversation with a friend or peer D) An unexpected financial windfall E) All of the above 7. Where do most entrepreneurs get the idea for their businesses? (pg. 44) A) Through brainstorming B) From mentors C) From exposure to an industry D) By reading entrepreneurship books E) From venture capitalists 8. Which of the following is not cited by the chapter as a primary reason that entrepreneurs choose to go into business for themselves? (pgs. 43-44) A) Fame B) Innovation C) Financial success D) Independence E) Self-realization 9. Which of the following would be the best explanation for the lack of minority owned businesses in the United States? (pg. 46) A) Lack of entrepreneurial role models B) Small market potential for minority owned businesses C) Lack of business ideas in this population D) Legal roadblocks to minority ownership E) Satisfaction with one’s present job 10. Which of the following contacts can be critical to the startup phase of a new business? (pg. 47) A) Potential customers B) Lawyers C) Bankers D) Accountants E) All of the above 11. The 8-year survival rate for new businesses is: (pg. 48) A) 1% B) 12% C) 25% D) 41% E) 73% .

12. What percentage of venture backed companies survive to the five year mark? (pg. 48) A) 12% B) 20% C) 50% D) 67% E) 80% 13. Which of the following is not a critical component for a successful new business? (pgs. 4252) A) The opportunity B) The management team C) The age of the lead entrepreneur D) The resources available E) None of the above 14. A good example of entrepreneurial frugality is: (pg. 52) A) Providing cell phones for all employees B) Leasing more space than is immediately necessary C) Purchasing used office equipment and machinery D) Limiting employees to strict job responsibilities E) Renting top notch facilities 15. When determining how to allocate scarce resources, an entrepreneur should: (pg. 52) A) Focus on the company’s key success factors B) Spread resources around to gain experience C) Focus exclusively on marketing D) Focus exclusively on technology E) None of the above 16. For an entrepreneurial company, leasing is better than buying because: (pg. 54) A) Leasing can lead to more favorable terms B) Leasing preserves cash by spreading out payments C) Owning and maintaining property and equipment is rarely a company’s specialty D) All of the above E) None of the above 17. Which of the following is not a common stage in the financing of new businesses? (pgs. 5455) A) Investing personal savings B) Building sweat equity C) Private investment by ‘angels’ D) Bank debt E) Initial public offering

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18. When a venture capital firm invests in a company, they typically expect which of the following in return: (pg. 55) A) Cash B) Equity C) Debt D) A personal guarantee E) Intellectual property 19. What ratio best reflects the number of companies that begin with venture capital in hand? (pg. 56) A) 1 in 2 companies B) 1 in 20 companies C) 1 in 500 companies D) 1 in 2000 companies E) 1 in 10,000 companies 20. What is the average net profit margin for companies in the US? (pg. 56) A) 1% B) 5% C) 25% D) 50% E) 90% 21. Investors typically expect an annual rate of return of at least _______, from a growing startup: (pg. 56) A) 10% B) 20% C) 30% D) 40% E) 50% 22. The term ‘free cash flow’ generally refers to: (pg. 57) A) Money that is raised through grants and donations B) Debt that requires no initial interest payments C) Cash that is generated in excess of fund required to sustain operations and purchase assets D) Capital raised through an initial public offering or other equity financing E) None of the above 23. Which of the following is not one of the Nine Fs of Entrepreneurial Success? (pg. 58) A) Focused B) Frugal C) Flexible D) Frenetic E) Fun

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24. Which of the following is not one of the 10 Ds of Successful Entrepreneurs? (pg. 45) A) Driven B) Details C) Dedicated D) Distribute E) Dream 25. In entrepreneurship, luck is where ______________ and opportunity meet. (pg. 49) A) Intelligence B) Fortune C) Strategy D) Focus E) Preparation 26. Which of the following is not a characteristic of most entrepreneurial ideas? (pg. 49) A) They are unique B) They offer improved performance C) They offer lower pricing D) They offer higher quality E) They offer better service 27. The best would-be entrepreneur would have the following experience: (pgs. 51-52) A) Working consistently at one company B) Significant industry know-how C) Managing multiple employees D) Work in numerous industries E) Strong relationships with managers 28. Commonly outsourced responsibilities include all of the following except: (pg. 53) A) Payroll B) Accounting C) Legal work D) Customer service E) Janitorial Services 29. The situation that arises when an entrepreneur is reliant on his or her company for a salary and has most of his or her personal net worth tied up in the company is called: (pg. 56) A) Sweat equity B) Venture capital C) Double jeopardy D) Factoring E) Locus of control 30. A $150,000 dollar investment in a company that yielded a $30,000 dividend in the first year would have achieved which of the following returns on investment? (pg. 56) A) 2% .

B) 5% C) 15% D) 20% E) 30% 31. Which of the following is not one of the global conditions increasing the rate of change in business? (pg. 58) A) Managerial specialization and layering.

B) The industrial sector’s reliance on advanced knowledge.

C) Advancements in communications.

D) Changes in government regulations.

E) All of the above 32. Approximately 50% of Inc. 500 companies make a net profit margin of … (pg. 56) A) 16% or more B) 15% C) 5% or less D) 13% E) 10% or less 33. Often start-ups can reduce overhead by using outside firms for… (pg. 53) A) Payroll B) Accounting C) Advertising D) All of the above E) None of the above 34. To reduce the cost of office space you may be able to convince a landlord to… (pg. 54) A) Reduce rent B) Defer rent payments for a period of time C) Allow subletting of unused space D) B and C E) A and B 35. The factors that give birth to a new enterprise and influence its development can be categorized as (pg. 43) A) Innovation, Triggering, Environmental, Growth B) Sociological, Environmental, Innovation, Personal C) Personal, Sociological, Organizational, Environmental D) Innovation, Triggering Event, Implementation, Growth E) Personal, External, Internal, Sociological 36. Sixty-one percent of companies on the 2013 list of companies founded by CEOs included in the Inc. 500 were started with? (pg. 56) A) Less than $10,000 B) Less than $5,000 .

C) More than $15,000 D) More than $20,000 E) More than $50,000

Open Ended 1. Give several examples of triggering events that give birth to a new organization. (pg. 43) • Job dissatisfaction • Loss of job • Dissatisfaction with current level of income • Desire to be independent 2. What are the stages described in the model of the entrepreneurial process? What are the factors that give birth to a new enterprise and influence how it develops from an idea to a viable enterprise? (pg. 43) • Stages: innovation => triggering event => implementation => growth • Factors: personal, sociological, organizational, and environmental 3. What are some of the sociological reasons that starting a company becomes more risky or difficult as people grow older? (pgs. 46-47) • When one has been in an industry a long time, that person knows so many pitfalls that he or she may become pessimistic about the chance of success of any new venture.

• Young people, on the contrary, are usually optimistic about future and have the energy to implement their ideas, regardless of the current conditions.

• A beginner's mind looks at situations from a new perspective.

4. What contacts will you need as an entrepreneur? (pg. 47) • Customers • Suppliers • Investors • Bankers • Accountants • Lawyers 5. Explain the rationale behind the statement, “A first class team with a second class idea is better than a second class team with a first class idea.” (pgs. 48-49) • If you have identified an excellent opportunity but your team lacks the experience to implement it, you will not be able to fulfill the idea’s potential.

• The crucial ingredients for entrepreneurial success are: a superb entrepreneur with a firstrate management team and an excellent market opportunity.

• Entrepreneurship is not a matter of luck, but of an ability to combine one’s experience with one’s knowledge and to bring an idea to life.

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6. Why do you suppose the authors say that in entrepreneurship, “Ideas are a dime a dozen,”?

What does this statement imply about an idea’s importance to a successful business? (pg. 49) • Almost any idea that a would-be entrepreneur might have has also occurred to others.

• A good idea in itself is not guaranteed to become a profitable venture.

• Developing the idea, implementing it, and building a business are the important aspects of entrepreneurship.

7. Explain the benefits and drawbacks of debt and equity financing, respectively. (pgs. 54-56) • Debt does not require an entrepreneur to give up any ownership stake in the business.

However, debt does require the business to pay current interest and eventually repay the principal.

• Equity financing compels the founder to relinquish a portion of ownership in the business, but does not demand repayment or even a dividend.

8. Describe the likely progression of financing for a startup that achieves an IPO. (pgs. 54-55) • The entrepreneurs develop a prototype with personal savings, contributions from friends and family, and sweat equity.

• Then a wealthy investor invests some personal money in return for equity.

• After the company begins generating revenue, it may be able to secure a bank line of credit by leveraging its inventory and accounts receivable.

• If the company is growing quickly in a large market, it may be able to raise capital from a formal venture capital firm in return for equity.

• Further expansion capital may come from additional rounds of venture capital founding or from a public stock offering.

9. What is ‘free cash flow’ and why is it such a critical factor for a growing business? (pg. 57) • The ability to generate a positive free cash flow indicates that the business can sustain its operations and purchase the assets necessary to keep the company on its growth trajectory.

• If a venture does not generate enough cash to sustain its growth, it may self-destruct.

• The inability to generate free cash flow forces a firm to either dive more deeply into debt or dilute the owner’s share in the venture in order for the business to finance further growth.

10. The three crucial components of a successful venture are the opportunity, the entrepreneur/management team, and the resources needed to start the company. Explain the interrelation of these items. (pgs. 47-49) • The crucial driving force of any new venture is the lead entrepreneur and the founding management team.

• In entrepreneurship, success is a question of recognizing a good opportunity and having the skills to convert that opportunity into a thriving business.

• The ability to find the necessary resources and to use them efficiently is the metaphoric chain linking the entrepreneur and the opportunity.

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11. How do salary and return on investment, for the founding entrepreneur, factor into the regular operations of a startup? (pg. 56) • A wage expenses for the founder and any family members working for the business should be considered in profitability calculations, regardless of whether or not cash has actually been paid to them.

• Any salary earned but not paid out by the business should be recorded as deferred compensation to be paid at a later date.

• The entrepreneur’s investment in the business should earn a reasonable return to be paid as a dividend, or as capital gains, when the business is sold.

12. Discuss some issues around being secretive about your business idea (pg. 49) • It complicates evaluating the idea for lack of others input • It can prevent a poor idea from being abandoned before it absorbs too many resources • It can let an excellent idea die for the entrepreneurs lack of confidence • The idea itself is less critical than the ability to execute on it.

13. How can an entrepreneur’s location improve chances for success? (pgs. 44-45) • Locating in a hotbed of entrepreneurial activity can make role models more accessible, and lower barriers to starting.

• Places like Silicon Valley for tech start-ups have a high concentration of needed resources for high-potential start-ups, from money to talent.

• Institutions like MIT and Babson College generate many entrepreneurs. So many so that whereas other schools have entrepreneurship clubs, these schools effectively are giant entrepreneurship clubs.

14. Discuss the impact that greater family responsibilities may have on the decision to become an entrepreneur. (pg. 46) • Clearly the risk is higher in terms of the financial and personal costs • Such entrepreneurs may wish to spend more time preparing themselves financially to go without income for some time • Entrepreneurs may choose to start a venture on the side, confirm the existence of a market and initial viable business model, before putting more time and effort into the company.

• Entrepreneurs may choose to start companies with different business models, such as online companies, that enable them flexible work locations.

15. Describe the importance of identifying how much start-up capital you will need to reach a positive cash flow. (pgs. 54-56) • Without an understand of an initial figure, and the key drivers of the figure, an entrepreneur risks failure by running out of money, or by giving away too much equity to raise funds and thereby failing to achieve a sufficient return on investment.

• New ventures must have the resources need to growth fast enough to a position where it can sustain itself on its own cash flow from operations. Insufficient cash early on could do irreparable damage a venture likelihood of success.

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16. Discuss the importance of an entrepreneur calculating the sales revenue needed to ultimately generate an equivalent income level to their current job. (pg. 47) • Generally, the annual sales revenue of a new business must be quite significant if an entrepreneur expects to make an equivalent income level at their current job. For example, if an entrepreneur wishes to make $70,000 plus benefits then the annual sales revenue of a new business will need to be at least $750,000.

• In addition, an entrepreneur will often be working much longer hours and bear much more responsibility in self-employment.

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Questions for Chapter 3 True/False 1. Entrepreneurship is all about opportunity. (pg. 71) (True) 2. Entrepreneurs need to conduct a series of tests called family-first tests to identify interesting ideas and then see whether they are viable opportunities by testing them on family members. (pg. 71) (False) 3. Most successful ideas are driven by the entrepreneur’s personal experience. (pg. 71) (True) 4. Starting a company in a sphere of business that you really enjoy is not the best idea, in terms of the chance of success. (pg. 71) (False) 5. No one knows about your strengths better than you do. (pg. 72) (False) 6. You will likely fail if you start a business in an area you have no experience in. (pg. 72) (True) 7. For a successful idea multiplication and launching a venture, one should focus on becoming a “cocktail-party entrepreneur.” (pg. 73) (False) 8. Cocktail-party entrepreneurs can provide you with invaluable advice about how to run a venture (pg. 73) (False) 9. New, entrepreneurial ideas frequently sprout from an entrepreneur’s desire for a product that he or she cannot currently find in the market. (pg. 75) (True) 10. According to IDEO, the first step in the creation of a product is to make a set of assumptions. (pg. 75) (False) 11. Asking leading questions is the best method of discovering the appeal of a potential product or concept. (pg. 75) (False) 12. During the “gathering stimuli” phase, one should just observe. (pg. 75) (True) 13. The key to success in comedy improvisation is to always say, “Yes, but…” (pg. 75) .

(False) 14. Saying, “That will not work because…” is important at later stages of business development. (pg. 75) (True) 15. Playing the role of devil’s advocate is important at the “optimize practicality” stage of concept development. (pg. 76) (True) 16. Playing the role of devil’s advocate refers to building a simple mock-up of what the product will look like. (pg. 76) (False) 17. An entrepreneur should try to broaden his or her customer base definition at the early stages of developing an idea. (pg. 77) (False) 18. A company will make a better growth decision by identifying the most lucrative PTA. (pg. 77) (True) 19. The three categories of customers are PTA, STA, and FPA. (pg. 77) (False) 20. In aggregate, baby boomers create powerful trends for US businesses. (pg. 79) (True) 21. The first domain name on the Web was assigned in 1986. (pg. 80) (False) 22. To target goods and services specifically to Hispanic populations in the US is to focus one’s market too narrowly. (pg. 77) (False) 23. Customer and market trends change too rapidly to be of any predictive use for an entrepreneur. (pgs. 79-80) (False) 24. The S-curve is a forecasting tool designed to measure the power of competition. (pg. 82) (True) 25. The market enters a fast growth phase when customer awareness and demand exceed supply. (pg. 82) (True) 26. A penetration pricing strategy is one of the most simple and successful initial approaches for a new venture. (pg. 83) (False) .

27. A highly priced product will usually be perceived as better quality by the customer. (pg. 77) (True) 28. The cost-plus pricing technique is the most reliable one as it sets the price equal to the product’s value. (pg. 84) (False) 29. It is important to lower your gross margins early in the venture’s life (pg. 84) (False) 30. It typically takes 1-2 years for a firm to reach stability and for operating costs to stabilize. (pg. 85) (False) 31. It is important to evaluate the value chain you are competing in and the different options there are to distribute your product. (pg. 86) (True)

32. Customers can assist you to determine direct competitors, indirect competitors, and substitutes. (pg. 87) (True) 33. There is no need to worry about competitors in emerging markets, since they are recently emerging. (pgs. 87-88) (False) 34. A venture whose vendors are primarily commodity suppliers, will retain a large portion of the value chains gross margin. (pg. 90) (False) 35. Stringent government approval processes may not signal a poor opportunity if potential margins are still relatively high. (pg. 90) (True) 36. A startup will likely fail if the entrepreneur ignores feedback from his or her customers. (pg. 91) (True) 37. Pre-launch analysis will determine the required variables of your business model and should be assumed to be true in the absence of contrary facts. (pg. 91) (False) Multiple Choice 1. According to the chapter, into what type of opportunity should a business idea translate? (pg.71) a. Realistic .

b. c. d. e.

Easy to implement Attractive Unique Technologically advanced

2. What does moving a seed of an idea to a more concrete possibility require? (pg. 73) a. Practical thinking b. Market research c. Input from others d. A business plan e. Maturity 3. Which of the following most typifies a “cocktail entrepreneur?” (pg. 73) a. Fails to take action b. Popular c. Productive d. Decisive e. Possesses a predilection for cocktails 4. Which of the following is not a part of IDEO’s product design steps? (pg. 75) a. Optimize practicality b. Multiply stimuli c. Gather stimuli d. Create customer concepts e. Create stimuli 5. What is the only action that the “gather stimuli” stage requires of the entrepreneur? (pg. 75) a. Ask b. Think c. Do nothing d. Observe e. Research

6. An important technique in brainstorming is to say: (pg. 75) a. “Yes and…” b. “Yes, but…” c. “That won’t work because…” d. “We need to avoid…” e. “Nice!”

7. What is the name of the process that is the equivalent of brainstorming, but with a focus on writing rather than verbal communication? (pg. 75) a. Paper-writing b. Brain-writing c. Mute-storming d. Brain-exploding e. Paper-storming .

8. In which stage is it important to play devil’s advocate? (pg. 76) a. Optimize practicality b. Multiply stimuli c. Gather stimuli d. Create customer concepts e. Create stimuli 9. What are the three categories of customers? (pg. 77) a. STA, PTA, and TTA b. PTA, CTA, and ATA c. TTA, LTA, and OTA d. STA, PTA, and BTA e. ATA, BTA, and CTA 10. On what category of customers should a startup business focus most of its attention? (pg. 77) a. STA b. PTA c. TTA d. An even share of STA, PTA, and TTA e. None of the above 11. An understanding of your STA helps you to: (pg. 78) a. Train your employees b. Find better management c. Develop a penetration strategy d. Make better growth decisions e. Build your value chain 12. When analyzing an opportunity which trends should you focus on? (pg. 79) a. Historical micro trends b. Current Macro trends c. Present micro trends d. Future Macro trends e. A & B f. C & D g. None of the above 13. Which of the following is NOT one of the five areas you need to fully understand prior to your launch as enumerated in chapter 3? (pg. 76) a. The Government b. Customers c. Strategy d. Suppliers and Vendors e. Competitors 14. What is the approximate number of baby boomers in the US? (pg. 79) a. 55-60 million .

b. c. d. e.

60-65 million 65-70 million 70-75 million 75-80 million

15. According to the chapter, people of Hispanic descent will comprise 30% of the US population by what year? (pg. 80) a. 2020 b. 2030 c. 2035 d. 2040 e. 2050 16. To replace $70,000 of forgone salary and benefits, an entrepreneur will need the new venture to generate approximately how much in annual revenue? (pg. 80) a. $70,000 b. $200,000 c. $400,000 d. $750,000 e. $800,000 17. The graphical depiction that highlights the diffusion of product acceptance over time is: (pg. 82) a. S-Curve b. C-Curve c. U-Curve d. V-Curve e. J-Curve 18. When starting web business, which measure of effectiveness matters most? (pg. 84) a. The number of “eyeballs” looking at your site b. Profits c. Click thru rates d. Overhead expenses e. Revenue 19. What is an example of a relatively inelastic product? (pg. 83) a. Burgers b. Train tickets c. Gasoline d. DVD discs e. Notebooks 20. What is the short-sighted thinking behind the penetration-pricing strategy? (pg. 83) a. Pricing below competitors will lead to higher market share b. Gross margins should be very high for a new product. c. Loyal customers demand the lowest price. d. The simplest method of selective prices saves time. e. Prices should match the value of products. .

21. Research suggests that a gross margin of what percent is a good benchmark for distinguishing more attractive opportunities from less attractive ones? (pg. 84) a. 5% b. 15% c. 40% d. 70% e. None of the above.

22. Based on existing research, how long in the life of a startup do operating costs take to stabilize? (pg. 85) a. 1-2 years b. 3-5 years c. 4-6 years d. 6-7 years e. 8 years 23. The weak link in Gourmet Stew’s business model was? (pg. 86) a. Value proposition b. Customer segments c. Distribution channels d. Cost structure e. Marketing 24. When markets are emerging, which factor matters most long term? (pgs. 87-88) a. Gross margins b. Number of new entrants annually c. Determining and securing the dominate product design d. Attracting a diverse pool of investors e. Distributors 25. What markets are characterized by “stealth” competition? (pg. 88) a. Growing b. Primitive c. Developed d. Speculative e. Emerging 26. How does the US Government support entrepreneurship? (pg. 90) a. Registration of a new business is a relatively short process b. The level of regulations is generally low c. US taxes are lower than those in most nations d. All of the above e. None of the above 27. Which of the following is NOT related to competitive profiling? (pg. 89) a. Net income margins b. Revenues .

c. Tax rates d. Pricing e. Gross margins 28. Which of the following is an example of a perfect business? (pg. 91) a. Intel b. Wal-Mart c. Amazon.com d. McDonalds e. There is no such thing as a perfect business 29. Better Opportunities tend to exist when: (pg. 92) a. The core customer group is small b. There is existing and strong competition c. The net margins are greater than 10% d. There are mature market structures e. There are high tax rates 30. When pre-launch analysis predicts unfavorable outcomes you should: (pg. 91) a. Abandon the venture b. Go forward strongly in spite of negative forecasts c. Seek to confirm/deny the variable that underpin outcomes during execution d. Seek to confirm/deny all variable prior to starting the venture e. Raise more money Open ended 1. How does one turn a seed of idea into an actual idea? (pg. 73) • Ask for input from others • Brainstorm your idea • Avoid becoming a “cocktail-party entrepreneur” 2. Why is it important to be passionate about your venture? (pg. 71) • Passion gives you extra energy.

• Launching a venture is a demanding process that is made more difficult if the entrepreneur is apathetic about the business.

• Passionate entrepreneurs are the most successful ones.

• Your passion can influence your investors and partners.

3. Describe the process IDEO suggests an entrepreneur needs to go through to design a product. (pgs. 74 – 76) • Gather stimuli (Beware the leading question) • Multiply stimuli (Build upon the input of others) • Create customer concepts (Build prototypes) • Optimize practicality (Add/remove features) 4. What categories of customers exist? How do you prioritize and address them? (pg. 77-78) • Primary Target Audience (PTA) – Focus on this group • Secondary Target Audience (STA) – Use this segment to generate additional revenues. .

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Tertiary Target Audience (TTA) – Keep an eye on this one. Though TTA may seem merely auxiliary, this group might have more potential than expected.

5. Give examples of some of the biggest trends in the recent history that have shaped business in the US. How did they influence business in general? (pgs. 79 – 81) • Baby Boom Generation – shaped business for decades (Pampers, Rock & Roll, Television, Minivans, Real Estate, McMansions, etc.)

• Personal Computing - IT breakthrough (Internet, media on demand, electronic publishing, spreadsheets, electronic communication • Obesity - Drain on healthcare system, growth of diet industry, changes in food industry, health clubs, home gyms • Dual-Income households - Child care, Home services – landscaping, house cleaning, prepared foods 6. How can one best predict the acceptance of the product by the customer? (pg. 82) • Use the S-curve tool • Forecast, which stage your product is at (window of opportunity, new competitors enter, or obsolescence phase) and act accordingly 7. What are the ways of pricing a new product and what mistakes should entrepreneurs avoid? (pgs. 83 – 84) • Cost-plus pricing – price your product based on its cost • You may set a price based on what your competitors charge for the same/similar product • You should avoid penetration pricing strategy unless you have virtually unlimited access to financial recourses 8. Why is the statement, “My startup has no competition,” always wrong? How can you find out about your competitors? (pg. 87) • There is always competition, sometimes in the form of substitutes.

• One of the forms of competition is “stealth” competition • You can use suppliers, VCs, Angels, databases, etc. to track down “stealth” competitors 9. What can an entrepreneur do when there are no business opportunities at all? (pg. 91) • There are always opportunities.

• Don’t be all negative about an idea; try to find positive sides in it.

• Modify your business model to eliminate its weaknesses.

• Don’t be rigid with your idea, constantly adjust it.

10. Give a brief checklist of information that an entrepreneur should investigate. (pg. 92) • Customer, Market Size, Trends, Market growth Rate, Price/Frequency/Value, Distribution, Competition, Key Success Factors, Vendors.

11. Why can’t companies raise prices after using penetration pricing strategy? (pg. 83) • .

First, attractive ventures are often launched in emerging markets where demand exceeds supply.

• • • •

Second, many new products are designed to be better than existing alternatives.

Third, price sends a signal to the customer.

Fourth, even if customers flock to the low-priced product, this rapid increase in demand can sometimes cause serious problems for a startup.

Finally, these same customers may resist when companies try to recapture value by raising prices in the future.

12. Describe the importance of understanding the entire value chain for the industry you are competing in. (pgs. 85-86) • Laying out the distribution of your product from raw materials to the consumer allows you to identify opportunities where you could make a profit • Understanding the entire value chain gives you insight into the relative power of all stakeholder involved (e.g., distributors and vendors) 13. Give two examples showing vendor power, both strong and weak. (pg. 90) •

•

Referring back to the value chain we created for Gourmet Stew, we notice that suppliers are providing commodity goods such as beef, vegetables and other food products. These types of vendors usually have limited power, which means that more of the ultimate gross margin in the chain goes to Gourmet.

Microsoft, as the dominant operating system and core software provider, and Intel, as the dominant microprocessor supplier, have considerable power over PC manufacturers.

Microsoft has gross margins of 85% and Intel has gross margins of 70%, whereas average gross margins for PC manufacturers are between 8 and 25%. The fact that suppliers have so much power lessens the opportunity potential for entrepreneurs entering the PC market unless they find an innovation to supplant the Intel chip or the Microsoft operating system.

14. What other value chains, besides those of direct competitors, should be analyzed (pgs. 89-90) • Value chains of indirect competitors and substitutes need to be explored to determine the risk they may pose as entrants into your market.

• Value chains which share similar channels & production means, and have overlapping offering attributes to your own need to be explored to identify potential disruptors • Example: Some handheld video game consoles (i.e. Nintendo 3DS) appeal to the everyday non-sophisticated gamers, but so do tablets and smartphones. Few customers purchase the iPad as a substitute for a gaming console. However once they own one, free app games (i.e.

Angry Birds) can be viewed as a substitute. For many customers, the difference in the game experience is marginal, but the price difference is large, leading to the disruption of the handheld video game industry.

15. What is the function of the government in the process of enterprise creation? (pg. 90) • •

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For the most part, the U.S. government is supportive of entrepreneurship. Taxes are lower than in most nations in the world, the time required to registrar a new business is shorter, and the level of regulations is generally lower.

However, in certain industries, government regulation and involvement are significantly higher, such as in pharmaceuticals and medical devices.

16.

How can a business separate its target customers into categories of importance? (pgs. 77 – 78) • • • •

.

Starting with initial definition, people usually break customers down into three categories: 1) Primary Target Audience (PTA), 2) Secondary Target Audience (STA) and 3) Tertiary Target Audience (TTA).

Most of your attention should focus on the PTA. These are the customers you believe are most likely to buy at a price that preserves your margins, and with a frequency that reaches your target revenues.

While you should focus most of your attention to your PTA, the STA group also deserves attention. The PTA may be your most frequent, loyal customers, but to increase your revenues you’ll want to bring in some of your STA as well.

Finally, your TTA requires a little attention. During the investigation and launch stage, you shouldn’t spend much time on the TTA. However, once you begin operating, a TTA may emerge that has more potential then you originally realized.

Chapter 4 Questions True/False 1. Innovation is often at the heart of entrepreneurship. (pg. 102) (True) 2. Introducing a new product or service involves substantial risk and numerous innovations fail. (pg. 103) (True) 3. The entrepreneur’s perception of his/her product will be similar to that of the target customer. (pg. 103) (False) 4. An entrepreneur must possess special technical skills necessary to create the appropriate prototype, otherwise the testing of the product won’t be insightful. (pg. 103) (False) 5. When prototyping, the entrepreneur must make notes about any changes or alterations to the product or service that the customer may propose. (pg. 103) (True) 6. Prototyping can signal venture readiness to potential investors. (pg. 103) (True) 7. Prototyping will probably prolong the time-to-market, but is still worth it. (pg. 103) (False) 8. Prototyping is the process of putting together working models in order to present ideas, test aspects of design, and gather early customer feedback. The more time and care you take to build the prototype, the better. (pg. 103) (False) 9. The core purpose of prototyping is to get feedback which can be acted on. (pg. 103) (True) 10. Prototyping is helpful for testing products and services. (pg. 103) (True) 11. The prototyping process forces the entrepreneur to get out in the field and engage potential customers. (pg. 103) (True)

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12. The prototyping process focuses on the representation of the proposed product or service and testing assumptions about the product or service. (pg. 103) (True) 13. The prototyping process usually involves the creation of a maximum of two prototypes which is important if you want to control your expenses. (pg. 103) (False) 14. Products that fail in the marketplace are generally based on incorrect assumptions about what the target market values. (pg. 103) (True) 15. Feedback from many potential customers will only confuse the entrepreneur, so prototyping must be done discretely. The fewer people testing the prototype, the better. (pg. 104) (False) 16. Almost all new products require significant trial and error in developing the final version before they are ready for the market. (pg. 104) (True) 17. The most vital stage in the prototyping process is “Testing Assumptions” because it is where you get the most information. (pg. 104) (False) 18. The most challenging aspect about the prototyping process is to quickly learn and then develop additional prototypes based on customer feedback. (pg. 104) (True) 19. Low fidelity prototypes express the rough product concept. (pg. 104) (True) 20. The purpose of high fidelity prototyping is to get ideas out rapidly. (pg. 104) (False) 21. Generally, entrepreneurs move from one low fidelity prototype into several high fidelity prototypes because more testing has to happen to understand highly customized details. (pg.

104) (False) 22. Different prototypes may emphasize different product elements in order to confirm a final product design. (104) (True)

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23. “Looks-like” prototypes are valuable to test market acceptance of the functionality of the product. (pgs. 105-106) (False) 24. “Works-like” prototypes are valuable to test the market acceptance of the design of the product. (pg. 106) (False) 25. Presenting a “Looks-like” prototype to the customer is challenging because it demands the customer to imagine the functionality of the product. (pg. 106) (True) 26. It is foolish to jump from an idea or concept straight to a final product design. (pg. 106) (True) 27. A paper prototype can help an entrepreneur consider different design configurations and tradeoffs with the product, particularly before higher‐cost prototyping methods are used. (pg.

107) (True) 28. A paper prototype is a type of “additive manufacturing,” where a medium, such as plastic, ceramic, or even metal, is extruded through a computer‐controlled tool head, which lays down the medium in layers, thus building up a paper prototype. (pg. 107) (False) 29. 3D printing is a great way of making a prototype, the only problem is that you have to purchase the printer and it is expensive. (pg. 108) (False) 30. If you want to test an electronic product, you are going to have to build a version of the final product completely. (pg. 109) (False) 31. Prototyping demonstrated commitment and will contribute substantially to securing funding. (pg. 110) (True) 32. In rewards‐based crowdfunding, backers financially support a new product campaign often before the final product has been produced or sometimes even before a final product design has been chosen. (pg. 110) (True) 33. It is more useful to design a prototype alongside your target customers in order to leverage “cocreation.” (pg. 111)

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(True) 34. In “co-creation,” target customers are engaged with the objective of defining final specifications of the product or service being tested. (pg. 111) (False) 35. Simulations are a great way to prototype services. (pg. 112) (True) 36. A “minimum viable product” (MVP) is a version of a new product concept which allows a team to collect the maximum amount of feedback with the least effort. (pg. 113) (True) Multiple Choice 1. Introducing a new product or service involves substantial risk, and upwards of ___________ innovations fail, depending on industry. (pg. 103) a. 20 – 50% b. 40 – 70% c. 50 – 90% d. 60 – 90% e. 70 – 90% 2. What the entrepreneur believes to be the best attributes of his product and what the target customer believes are usually __________. (pg. 103) a. Very similar b. Very different c. Almost the same d. Somewhat different e. Similar but expressed differently 3. A prototype should answer vital questions about a product or service such as: (pg. 103) a. Does my target customer like my product? b. How may I alter my product to make it more attractive? c. How does my product compare to existing solutions? d. a and b e. All of the above 4. Some outcomes of prototyping are: (pg. 103) a. Gaining new insights about an entrepreneurial opportunity b. Demonstrate venture readiness to potential investors c. Shorter time-to-market d. a and c e. All of the above

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5. Prototyping is the process of quickly putting together ___________. (pg. 103) a. Working models b. Tangible inventions c. Product designs d. An idea of a service e. A paper prototype 6. ______ is the process of quickly putting together working models to represent ideas, test various aspects of a design, and gather early customer feedback. (pg. 103) a. Mental modeling b. Innovation c. Product designing d. Serviceability e. Prototyping 7. The core purpose of the prototyping process and developing a prototype is to get a response from a target customer. This is important mainly because ____________. (pg. 103) a. Customers have all the answers about product faults b. The entrepreneur may instantly act on the feedback given c. The entrepreneur can compare his perception to that of his customers d. The feedback can later on be filtered e. Target customers opinions are most illuminating 8. Which are the steps of the prototyping process? (pg. 103) a. Learning & iterating, Analyzing feedback, Representing assumptions, and Testing assumptions b. Learning & iterating, Analyzing feedback, and Testing assumptions c. Learning & iterating, Representing assumptions, Testing assumptions d. Analyzing feedback, Representing assumptions, and Testing assumptions e. Learning & analyzing, Representing assumptions, and testing feedback 9. An assumption to be tested with a prototype could be: (pg. 103) a. Price b. Product benefits c. Product use d. a and b e. All of the above 10. Usually, new products and services require ____________ to develop before they are ready for the target market. (pg. 104) a. 1 month b. 1 or 2 prototypes c. Significant trial and error

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d. The feedback of at least 100 customers e. a and d 11. The most vital stage in the prototyping process is __________. (pg. 104) a. Learning & iterating b. Testing assumptions c. Representing assumptions d. Analyzing feedback e. All the stages are equally important 12. What type of prototype expresses roughly the product concept? (pg. 104) a. Low fidelity prototype b. High fidelity prototype c. Looks-like prototype d. Works-like prototype e. All prototype models, it is the whole point.

13. What type of prototype model looks and functions like the final product concept? (pg. 104) a. Low fidelity prototype b. High fidelity prototype c. Looks-like prototype d. Works-like prototype e. All prototype models, it is the whole point.

14. What type of prototype model aims to simply test the design of the product? (pgs. 105-106) a. Low fidelity prototype b. High fidelity prototype c. Looks-like prototype d. Works-like prototype e. All prototype models; that is the whole point 15. What type of prototype model aims to test the functionality of the product? (pg. 106) a. Low fidelity prototype b. High fidelity prototype c. Looks-like prototype d. Works-like prototype e. All prototype models; that is the whole point 16. ____________ is the representation of a concept using paper or cardboard, markers and tape. (pgs. 106-107) a. Low fidelity prototyping b. High fidelity prototyping c. Looks-like prototyping d. Paper prototyping

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e. Works-like prototyping 17. In recent years, the cost and complexity of 3D printing have _________. (pg. 107) a. Risen dramatically b. Fallen dramatically c. More or less remained equal d. Increased and fallen respectively e. Have fallen and increased respectively 18. __________ is a type of ‘additive manufacturing’ where a medium, such as plastic, ceramic, or metal, is extruded through a computer-controlled tool head which lays down the medium in layers thus building up a real life product of three dimensions. (pg. 107) a. Paper prototyping by adding different material pieces b. 3D printing c. Plastic/ceramic/metal line manufacturing d. Wood prototyping by adding different material pieces e. Magic prototyping

19. Currently in the market you can purchase a 3D printer for between $________ and $_________ which could print in an array of plastic types and colors. (pg. 108) a. 10,000 and 50,0000 b. 3,0000 and 6,000 c. 1,000 and 5,000 d. 500 and 1,000 e. 200 and 700 20. While historically 3D printing has been for ____________ and ____________, increasingly 3D printing is becoming an ____________. (pg. 108) a. end manufacturing products, prototyping, model-making platform b. model-making, plastic prototyping, final prototyping platform c. paper prototyping, plastic prototyping, model-making platform d. prototyping, model-making, end manufacturing platform e. design prototyping, final products, functional prototyping platform

21. Chances are, that before you build a 3D printing prototype, it makes more sense to build a _____________, which can address many questions quickly and efficiently. (pg. 109) a. Wood and plastic prototype b. Functional prototype c. Paper prototype d. Electronic prototype e. None of the above

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22. The growth of online crowdfunding and pitch videos, which are central to crowdfunding campaigns, have highlighted the value of ___________. (pg. 110) a. Prototyping b. Raising money c. Final products d. 3D printing e. None of the above

23. To demonstrate a new product, creators of crowdfunding campaigns often must develop and feature ________ prototypes to convey not only their creative vision but their commitment. (pg.

110) a. Electronic b. Works-like c. Looks-like d. Paper e. None of the above 24. A well designed prototype conveys that the entrepreneur has thought through the __________ , going from ____________ to ____________. (pg. 110) a. Design plan, the idea, the final product b. Complete prototyping process, the idea, the final prototype c. Complete prototyping process, the idea, the final manufacture d. Production plan, the idea, the final manufacture e. None of the above

25. Production prototypes assist in the _______ planning of production. (pg. 111) a. Early b. Final c. Prototype d. Financial e. All of the above

26. Production prototypes consider if the product has been designed, for example, to ____________, ____________, and ___________. (pg. 111) a. Minimize the number of parts, chances of product failure, and production costs. b. Maximize the number of components, chances of product failure, and revenues. c. Minimize the number of components, success rate, and cost of capital. d. Minimize the number of parts, attractiveness of the product, and production costs. e. None of the above

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27. Often it is more useful to _____________ your prototype in order to discover unexpected opportunities. (pg. 111) a. Independently design b. Self-assess c. Co-create with the target audience d. Co-assess with the target audience e. a and d

28. In co-creation, target customers are engaged _______ and ________ in the process of idea generation and product development. (pg. 111) a. Late, conclusively b. Early, as observers c. Early, continuously d. As observers, listeners e. None of the above

29. When prototyping a service, a ____________ prototype might be offering a simulation of how a service is performed. (pg. 112) a. Wire frame b. Looks-like c. Works-like d. 3D e. b and c

30. Entrepreneurs should _____________ to develop a new product when exploring a venture idea. (pg. 112) a. Focus on raising money b. Resist the temptation c. Save all their strength d. Immediately try e. d and a

31. Developing fully-created products when exploring a new venture is usually __________, _____________ and ____________. (pg. 112) a. Productive, enlightening, costly b. Productive, enlightening, profitable c. Time-consuming, costly, more enlightening than prototyping d. Time-consuming, costly, extremely risky e. Productive, costly, extremely risky

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32. As an output of the prototyping process, many entrepreneurs aim to develop a ___________, one that drives early engagement and rapid learning with customers. (pg. 113) a. Minimum viable product b. Final complete product c. Paper prototype d. Look-like prototype e. None of the above

33. Developing and testing a Minimum Viable Product (MVP) focuses on ______________ first, and then in _________________. (pg. 113) a. Product development, customer engagement b. Customer engagement, product development c. Customer development, product design d. Product design, product functionality e. Product development, profitability

34. A Minimum Viable Product (MVP) can be viewed as the product with _____________ as it seeks to ______________ the information learned about the customer per dollar spent. (pg. 113) a. The highest risk, minimize b. The lowest ROI risk, maximize c. The highest ROI risk, maximize d. The highest ROI risk, minimize e. None of the above Open Ended 1. Name some advantages of prototyping instead of building a final product right away. (pg. 103) • Considering that 50 – 90% of new products fail, by prototyping you can reduce your risk.

• There is usually a large gap between what the entrepreneur believes is valuable and what the target customer perceives, therefore, prototyping is helpful to obtain feedback directly from the customer.

• Prototyping can lead to new insights of entrepreneurial opportunities • Prototyping can signal venture readiness to investors • Because almost all new products and services require significant trial and error to develop before they are ready for the target market.

• Prototyping is tremendously important in the move to commit to a final product design and to consider the costs and methods of manufacturing.

2. What are some of the questions that can be answered through prototyping? (pg. 103) • Does my target customer want the new product I propose creating? .

• •

How might I alter the product or service to make it more attractive to my target market?

And how does my proposed innovation compare against existing solutions in the marketplace?

3. What is prototyping and how does it help the entrepreneur? (pg. 103) • Prototyping is the process of quickly putting together working models in order to represent ideas, test various aspects of a design, and gather early customer feedback.

• Prototyping can help entrepreneurs develop, test and refine their entrepreneurial idea, ideally resulting in the confirmation of an entrepreneurial opportunity.

• The core purpose of the prototyping process and developing a prototype is to get a response from a target customer or user.

4. Why is it helpful for an entrepreneur to get direct responses from the target customer? (pg.

103) • Its feedback which can be acted on.

• Taken together, responses from many potential customers can help an entrepreneur decide what directions to pursue or not pursue with a new innovation or venture.

• The prototyping process forces the entrepreneur to get out in the field and engage potential customers, all with the intent of learning and iterating rapidly.

5. What are the three steps of the prototyping process? Explain them and give an example. (pgs.

103-104) • The prototyping process focuses on the representation and testing of assumptions, ultimately to drive deeper learning about an entrepreneurial opportunity.

• Representing assumptions, is embodying the product or simulating a service. The objective is to Test the assumptions directly with the target market with the prototype or service simulation, and consequently Learn about the real preferences of the customers and Iterate by creating an improved version of the prototype in order to test it again and obtain a better acceptance from customers. The process of representing and then testing assumptions is meant to be repeated many times (with the target market) to drive deeper learning and uncover unexpected insights.

• For example, an automobile manufacturer such as Ford, long before finalizing its design for a new minivan, will show its target customers (e.g., fathers and mothers who have children) prototypes to seek detailed feedback. The parents might be shown a tablesized model of the minivan to see if they appreciate its exterior styling. Similarly, they might be asked to try out a new design for a flip-down/flip-up seating system to make moving large items easier. They might be shown detailed images of a novel dashboard design and be asked to offer critiques.

6. What are some of the assumptions that an entrepreneur can test with a prototype? (pg. 104) • Variables to test can range from pricing assumptions to assumptions about product benefits and product use, as well as how a new product concept stacks up against existing competition.

• You can test the design and the functionality as well, together or separately. .

7. Explain what the Low-fidelity and high-fidelity prototypes are and their use. (pg. 104) • The prototyping process often involves the creation of not one but several prototypes to explore a potential entrepreneurial opportunity. Some models are referred to as low fidelity prototypes because the prototype expresses the rough product concept, either in two-dimensional or three-dimensional form, often in material as basic a paper. The purpose of low fidelity prototyping is for the entrepreneur to get ideas out rapidly and to see how potential customers and different stakeholders react. With a new product concept, even low fidelity, or rough prototypes can help confirm desirable, as well as undesirable product characteristics (e.g., forms, colors, benefits and features).

• High fidelity prototypes are designed to look like a final completed product concept.

Here, the aim is to represent final, detailed assumptions about the product (e.g., the final materials and production process) and even potentially use the prototype in promotion to customers, partners or investors.

8. Explain what the looks-like and works-like prototypes are and their use. (pgs. 105-106) • A looks-like prototype, as suggested by its name, appears similar or identical to a final product but does not function as the final product is expected to. For instance, a lookslike prototype of a new consumer electronic would have the outer appearance of the device but would not include the electronics and power source of the final, produced product. Looks-like prototypes are valuable to test market acceptance of a design before costly, detailed product development is started.

• Works-like prototype operates like the final intended product design – demonstrating product functionality or usability – but often does not appear at all like the end product.

• In developing and testing new product concepts, it is wise to seek feedback on both works-like and looks-like prototypes, which collectively suggest the desirability of the end product design.

9. Explain what are paper prototypes and 3D printing and their use. (pgs. 106-108) • Paper prototyping is the representation of a concept using simple materials such as paper or cardboard, markers and tape. Quick and directionally correct is the objective, not perfection! The goal is to get the basic idea out into the world to get a response from a target customer and to explore what is valuable to the target customer--and to see if there is a real willingness to pay.

• In 3D printing, a 3D object is printed, for example in plastic, from a digital file. Working independently or with support from a 3D designer, an entrepreneur can mock-up lookslike and even works-like prototypes to share with target customers. While historically 3D printing has been for prototyping and model-making, increasingly 3D printing is becoming an end manufacturing platform where entrepreneurs can produce (i.e., print) their own final products for sale.

10. Explain the relation between prototyping and funding. (pg. 110) • Prototyping can signal venture readiness to investors

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•

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The growth of online crowdfunding and pitch videos, which are central to crowdfunding campaigns, have highlighted the value of prototypes in securing funding for a project or venture.

In rewards-based crowdfunding, ‘backers’ financially support a new product campaign often before the final product has been produced or sometimes even before a final product design has been chosen.

To demonstrate a new product and its benefits, creators of crowdfunding campaigns often must develop and feature looks-like prototype to convey not only their creative vision but also to signal their professionalism and dedication to their project.

11. Explain the concept of Co-creation, its importance, and name some best practices. (pg. 111) • To design with, meaning alongside, your target audience to not only validate their needs but also to discover unexpected entrepreneurial opportunities. This idea of customer engagement is at the center of the product design process, where product concepts are ‘co-created’ with target customers.

• In co-creation, target customers are engaged early and continuously in the process of idea generation and product development.

• Best practices in co-creation are to involve target customers in problem/need clarification, idea generation, early prototyping, late prototyping and even market strategy/market planning.

12. How does an entrepreneur make prototypes of services? Give some examples. (pg. 112) • In fact, many ventures provide a mix of products and services, so there is much that can be prototyped to explore and shape an entrepreneurial opportunity. A works-like prototype might be offering a simulation of how a service is performed • A plumbing company wishing to experiment with a new 30-minute ‘arrival guarantee’ for plumbing emergencies can set aside a plumber for rapid response to test the desirability of this new service.

• An entrepreneur with a new pickup-and-delivery concept for a dry cleaner can first experiment with just the pickup-and-delivery aspect of the service without building and operating an entire cleaning operation. For example, an existing dry cleaner/cleaning operation can be used to do the cleaning itself.

13. Explain what is a Minimum Viable Product (MVP) and its purpose. (pg. 113) • Eric Reis defines a minimum viable product as that version of a new product concept which allows a team to collect the maximum amount of validated learning about customers with the least effort.

• The minimum viable product can be one that is developed ‘just enough’ to seek customers’ feedback.

• Some view the MVP as a more work-like prototype.

• The purpose of developing an MVP is for an entrepreneur to rapidly screen out – or reconfigure – a product or service concept. It is a market testing strategy that is used to evaluate product ideas very soon after their generation.

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Questions for Chapter 5 True/False 1) A company is most likely to successfully pivot during its customer discovery phase. (pg.

121) (True) 2) It is not necessary to focus on a target market when developing a business plan; having a general sense of the overall market is enough. (pg. 125) (False) 3) “Must-have” features and high switching costs are signs that a company’s product or service has achieved differentiation. (pg. 124) (True) 4) Developers encourage pivoting because they enjoy making new products. (pg. 121) (False) 5) A business model is a hypothesis that a company is trying to prove or disprove. (pg. 121) (True) 6) The order in which companies develop their customer value proposition, target market, and differentiation does not matter, but changing one will affect the others. (pg. 123) (True) 7) Most investors will prefer a proven business model to a well-researched business plan. (pg.

121) (True) 8) In the Air, Aspirin, or Addiction framework to explain product/service differentiation, addiction is a necessity. (pg. 124) (False) 9) Customer case studies and testimonials are two ways to substantiate claims that a company makes about its product or service. (pg. 124) (True) 10) The Cost of Customer Acquisition is a capital expense. (pg. 127) (False) 11) Nielsen Holdings switching to Google Docs instead of Microsoft Word is an example of how generational preferences can change the customer value proposition. (pg. 124) (True)

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12) The Serviceable Available Market (SAM) is a segment of the Total Addressable Market that a company targets for its product or service. (pg. 125) (True) 13) When outlining milestones, it is more important to calculate the total capital required to get to breakeven than how you plan to source that capital over time. (pg. 129) (False) 14) The Total Addressable Market is based on the geography of the target customer. (pg. 125) (False) 15) Having a single stream of revenue is preferred to having multiple streams of revenue because it means a company is more focused. (pg. 128) (False) 16) Human resources costs remain the same at all stages of company growth. (pg. 129) (False) 17) In the early stages of company development, partnerships with outside entities can reduce risk and uncertainty. (pgs. 129-130) (True) 18) Whether an asset is leased, rented or borrowed, the capital expense does not change. (pg.

129) (False) 19) A dashboard is primarily used for measuring the results of financial statements. (pg. 130) (False) 20) Measuring the most critical elements of your business model in real-time will help you understand patterns in your business before they appear on financial statements. (pg. 130) (True) 21) If a product or service has no direct competitors, then it does not have a competitive environment. (pg. 132) (False) 22) Most startups cease to exist because the product doesn’t work. (pg. 130) (False) 23) Strong online sales of a product is proof that it should be sold at a physical storefront. (pg.

129) (False) 24) Cost drivers are affected by economies of scale or scope. (pg. 130) (True)

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25) Every entrepreneur should understand how to calculate breakeven, cost to acquire a customer, and customer lifetime value. (pg. 103) (True) 26) Strong regulations make it easy for new entrants to compete in an industry. (pg. 132) (False) 27) A good financial strategy incorporates multiple scenarios of financial performance. (pg. 132) (True) (28) Having the customer remain with the status quo solution can be considered competition. (pg. 132) (True)

Multiple Choice 1) The most important depleting asset of any entrepreneur is (pg. 121) a) Intellectual Property b) Money c) Time d) Market Competitiveness e) Differentiation 2) At what phase is it most optimal to pivot? (pg. 121) a) Customer discovery b) Execution c) Production d) Scale e) None of the above 3) Which of the following represent the first step in development of the Business Model Wheel? (pg. 122) a) Cost Drivers b) Key Metrics c) The Value Proposition d) Financial Strategy e) Customer Segmentation

4) The core of the Business Model Wheel is (pg. 122) a) Cost Drivers and Revenue Streams b) Key Resources, Partners, and Key Metrics c) The Value Proposition, Differentiation, and Target Market d) Industry Attractiveness, Competitive Environment, and Financial Strategy

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e) Customer Segmentation, Marketing Channels, Distribution Channels 5) Which question does the customer value proposition not answer: (pg. 123) a) What is it? b) Who is it for? c) Why do they need it? d) How does it work? e) Where do you sell it?

6) A customer value proposition (pg. 123) a) does not have to be unique or different b) requires that the product or service’s benefits outweigh the costs c) focuses on all needs of the customer, not just the most important ones d) explains how to market to the customer e) focuses on the cost of a product rather than its value 7) Volkswagen’s “clean diesel” cars are an example of (pg. 125) a) mitigating cost b) substantiation of product claims c) puffery d) strong product-market fit e) business model exploration 8) The ______ is best defined as the total market demand for a product or service. (pg. 125) a) TAM b) SAM c) SOM d) CAC e) CLTV 9) The ______ is the segment, or segments, of the ______ that you plan to target your product or service for sale. (pg. 125) a) TAM; SAM b) SAM; TAM c) SOM; CAC d) CAC; SAM e) CLTV; CAC 10) Initially, the Serviceable Obtainable Market for startups will be composed of (pg. 125) a) early adopters b) innovators c) laggards d) early majority e) A & B

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11) Which of the following step in development of the Business Model Wheel considers the question: What is the Serviceable Obtainable Market?” (pg. 126) a) Cost Drivers b) Key Metrics c) The Value Proposition d) Financial Strategy e) Customer Segments 12) Marketing channels serve to (pg. 126) a) Communicate with the target customer(s) b) Build awareness, c) Encourage trial and purchase of products d) A & C e) A, B, & C 13) Which of the following step in development of the Business Model Wheel considers the questions on CAC and CLTV?” (pg. 126-127) a) Cost Drivers b) Key Metrics c) The Value Proposition d) Marketing Channels e) Customer Segments 14) Selling directly to the customer requires (pg. 127) a) a sales force b) a website c) channel partners d) mobile advertising e) None of the above 15) In order for a business to be successful, the lifetime value of a customer (CLTV) must be (pg. 127) a) equal to the cost to acquire that customer (CAC) b) more than three times the cost to acquire that Customer (CAC) c) equal to the customer churn d) equal to the average revenue per customer x average customer lifetime e) Both B & D 16) Uber’s “surge pricing” is an example of (pg, 128) a) cost-based pricing b) dynamic pricing c) customer targeting d) market testing e) fixed pricing

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17) Revenue streams refer to (pg. 128) a) the revenue per customer for a specific product b) the financial metrics used to identify the sources of revenue generation in a business c) the ways in which you make money by selling your product or service d) algorithms that set price proportionate to demand e) the frequency and volume of purchases 18) What revenue stream is most popular with mobile app companies? (pg. 128) a) Advertising Fees b) Subscription Fees c) Transaction Fees d) Professional Fees e) Utility Fees 19) When displayed graphically the revenue line resembles a(n) (pg. 128) a) parabola b) hockey stick c) diagonal line d) inverse curve e) zig-zag

20) Which of the following resource categories is not an important element of your business model? (pg. 129) a) Human resources b) Physical resources c) Natural resources d) Intellectual resources e) Financial resources 21) Underestimating the capital requirements for a business can lead to (pg. 129) a) dilution of founders’ shares b) more rounds of venture capital than expected c) bankruptcy d) increased costs e) All of the above 22) The go-to-market strategy depends upon (pgs. 120-130) a) the relationship between the cost of customer acquisition and the lifetime value of the customer b) identifying the market segments and customer profiles of target customers c) the cost-effectiveness of the distribution channel d) the customer value proposition e) All of the above

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23) Which of the following is not an example of a partnership that can enhance a customer value proposition? (pgs. 129-130) a) Creating alliance with a company that would otherwise be a direct competitor b) Entering into a joint venture with a company that has existing factory line that can be used to make your product c) Outsourcing UX design to a marketing firm that has created similar products d) Subletting space from another company that over-estimated their space needs e) Using a low-cost distributor whose existing customers are outside of the target geography for prospective customers 24) When it comes to costs, it is important to consider (pg. 130) a) What are the cost drivers? b) What is the unit cost structure? c) Where is there leverage in the cost model? d) Are there economies of scale or scope? e) All of the above

25) When considering industry attractiveness, investors will not look at (pg. 132) a) industry size b) business trends c) current regulations d) the relevant industry experience of the startup team e) potential for disruption

Open Ended Questions: 1. Explain the difference between Total Addressable Market, Serviceable Addressable Market, and Serviceable Obtainable Market. (pg. 125) Total addressable Market (TAM) is the total market demand for a product or service.

Serviceable Addressable Market (SAM) is the segment, or segments, of the TAM that you plan to target your product or service for sale Serviceable Obtainable Market is the portion of the SAM you can likely capture as customers.

2. What is a distribution channel? What is the difference between direct and indirect distribution? What are some factors to consider when choosing which distribution channel(s) to pursue? (pgs. 127-128)

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A distribution channel is the means by which a product reaches the end-consumer. Direct distribution is when a company’s salesforce sells directly to the customers. Indirect distribution is when a company partners with intermediaries that sell its products.

Considerations for choosing a distribution channel include: Revenue potential and cost efficiencies How customers are currently being reached by the company and/or its industry competitors What is most convenient for the customer How quickly the customer needs to receive the product/service

3. Name three types of revenue streams and how they work. (pg. 128) A revenue stream is how a company makes money by selling its product or service. Types of revenue streams include: • • • • • • • •

Unit Sales – Sell a product or service to customers on a per unit basis Advertising Fees – Sell opportunities to distribute messages Franchise Fees – Sell and support a replicable business for others to invest in, grow, and manage locally Utility Fees – Sell goods and services on a per-use or as-consumed basis Subscription Fees – Charge a fixed price for access to your services for a period of time or series of uses Transaction Fees – Charge a fee for referring, enabling, or executing a transaction between parties Professional Fees – Provide professional services on a time-and-materials contract License Fees – Sell the rights to use intellectual property

4. What are the characteristics of product differentiation? (pg. 124) Air – Air is a necessity. You need it to survive.

How the customer is solving the problem today and does your solution create enough of a benefit to convince them to switch?

Aspirin - Aspirin addresses a pain.

You are addressing an issue that has, or will have, dire consequences if not addressed?

Addiction. Addiction is neither a necessity, nor a pain reliever, but something that you feel a strong desire to use.

Addiction is difficult to predict but lucrative Differentiation must also resonate with the customer: product or service must have key features that the customer can’t live without or should have high switching costs.

5. Assume that a company is selling a subscription to a car cleaning service for $20.00 per month and the average customer lifetime is 30 months. Their marketing

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department has found that running online ads at $5000 per ad attracts 100 customer and purchasing a billboard for $3000 attracts 60 customers.

Using the principles of customer lifetime value (CLTV) and Cost of Customer Acquisition (CAC), explain whether these ads are worthwhile. Is one marketing channel better than the other? (pg. 127) CLTV = Average Revenue per Customer x Average Customer Lifetime $20 x 30 = $600 CAC = Total Sales and Marketing expense / Number of New Customers CAC for online ads = 5,000/100 = $50 CAC for billboard = $3000/60 = $50 Therefore, the CLTV/CAC ratio for both online ads and billboards is 12, making both marketing channels worthwhile as it is higher than 3. Since both channels have the same CAC, they are the same value – neither is better.

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6. What are some ways to reduce capital expenditures early on in the lifecycle of a company? (pgs. 129-130) Renting instead of purchasing property, plant equipment Having shorter lease terms (1-2 years versus 3-5 years) Creating partnerships with existing companies that have expertise and/or equipment that can help deliver the product or service Outsourcing production of goods

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7. What factors influence the competitiveness of a market? (pg. 132) Who are the existing market players and how many there are How existing players might react to the new market dynamics Strengths and weaknesses of each competitor Resources of each competitor Intensity of existing rivalry Threat of substitutes Potential new market entrants Ability/desire of customer to stay at status quo

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8. How does a company choose which key metrics need to be measured and monitored? (pg. 130) Define business model success in terms of metrics than can be measured Measure value delivery to the customer – how is the customer receiving value?

Define performance standards and measure performance Choose metrics that relate to revenues and costs

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Questions for Chapter 6 True/False 1) Marketing is at the heart of an organization because its role is to identify and serve customers’ needs. (pg. 141) (True) 2) The marketing of products and services are similar. (pg. 142) (False) 3) Customer acquisition and retention are the core processes of marketing. (pg. 142) (True) 4) The scope of marketing ranges only from advertising to promotion. (pg. 142) (False) 5) Many entrepreneurs rely heavily on their cash expenditures to achieve a compelling image in a noisy marketplace. (pg. 142) (False) 6) New ventures must differentiate their product or service to make its distinctiveness and value clear to customer. (pg. 142) (True) 7) New ventures cannot survive in competition with larger corporations, since the latter can spend intimidating sums on marketing research, testing their strategies, or designing marketing campaigns. (pg. 142) (False) 8) Entrepreneurs frequently stumble in their marketing, because of personal biases and beliefs. (pg. 143) (True) 9) Marketing helps entrepreneurs acquire resources by selling their ideas to potential investors and partners. (pg. 143) (True) 10) Intuition, personal expertise and passion are usually enough to fully assess opportunities in an entrepreneur’s marketplace. (pg. 143) (False) 11) Some types of primary data are very difficult to collect, for instance, with personal interviews or focus groups. (pg. 144) (False) .

12) A segment is a group of customers defined by certain commonalities or characteristics that may be demographic, psychographic, or behavioral. (pg. 145) (True) 13) Entrepreneurs should not initially consider their resources and capabilities when first developing their marketing strategies. (pg. 145) (False) 14) Two inexpensive ways to identify the appropriate target market are to pursue multiple markets or to wait for one to emerge. (pgs. 145-146) (False) 15) Customer value is the difference between total customer benefits and total customer costs, which are both monetary and nonmonetary. (pg. 148) (True) 16) Unfortunately, product differentiation is important for initial product success but not for longer-term brand building. (pg. 148) (False) 17) The stages of the product life cycle are introduction, growth, maturity, and introduction again. (pg. 149) (False) 18) During the introduction phase of the product life cycle, marketers must cultivate customer loyalty and build the brand. (pg. 149) (False) 19) The cost-based method of pricing is marking up a product based on its cost plus a desired profit margin. (pg. 151) (True) 20) Perhaps the most important product attribute for entrepreneurs is quality, which serves as a powerful differentiator and is needed to gain the recommendation of customers. (pg. 150) (True) 21) Price promotions are short term and use regular price levels as a base from which to discount. (pg. 151) (True) 22) Distribution is not as problematic for service-based ventures as it is for those that manufacture goods. (pg. 152) (False)

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23) Marketing communications convey messages to the market; messages about the company’s products and services, as well as about the company itself. (pg. 154) (True) 24) The three primary types of sales promotion are consumer promotions, trade promotions, and sales force promotions. (pg. 156) (True) 25) Channel partnerships and relationships have important implications for entrepreneurs.

In fact, the channel member with the most power will often prevail in a competitive market. (pg. 153) (True) 26) Guerrilla marketing consists of activities that are non-traditional, grassroots, and captivating, which gain consumers’ attention and build awareness of the company. (pg.

163) (True) 27) Effective guerrilla marketing tactics appeal to emotion and create drama. (pg. 164) (True) 28) People usually use guerrilla tactics in wide-spread advertising, rather than in personal selling. (pg. 164) (False) 29) Guerrilla tactics have become increasingly difficult to execute in recent years, because corporate marketing executives are now employing non-traditional tactics as well and have much larger budgets at their disposal. (pg. 164) (True)

30) Brand equity is the combined result of brand awareness and brand image. (pg. 166) (True) 31) Brand equity is always a positive influence for your company. (pg. 166) (False) 32) The customer’s actual experience with the brand has a strong effect on brand image. (pg. 166) (True) 33) Early stage companies often find it necessary to scale up or change focus. (pg. 166) (True)

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Multiple Choice 1) In addition to acquiring and retaining customers, marketing spans the boundaries between___. (pg. 141) A. Sales and service B. A company and its customers C. Products and services D. None of the above E. All of the above.

2) Four Ps of marketing includes all of these EXCEPT: (pg. 142) A. price B. product C. primary data D. place E. promotion 3) An important part of gaining the market’s acceptance is___. (pg. 142) A. Building brand awareness B. Reducing the product’s cost of goods sold C. Franchising the brand D. Building celebrity client network E. None of the above.

4) It is difficult for small companies to save money on “media buys” because ___. (pgs.

142-143) A. their range of advertising is limited.

B. their marketing is not creative enough to generate viral exposure.

C. their product mix is too diverse.

D. they are the first in a new market.

E. None of the above.

5) Entrepreneurs market to which of the following audiences? (pg. 143) A. Investors B. Business partners C. Customers D. Employees E. All of the above 6) Which of the following term describes the collection and analysis of any reliable information that improves managerial decisions? (pg. 143) A. The customer choice process B. Marketing research C. Segmentation D. Targeting E. The marketing mix

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7) Which of the following marketers gather from already published sources like an industry association study or census reports? (pg. 143) A. The customer choice process B. Focus groups opinion C. Primary data D. Secondary data E. The marketing mix 8) Which of the following marketers collect specifically for a particular purpose through focus groups, surveys, or experiments? (pg. 143) A. The customer choice process B. Focus groups opinion C. Primary data D. Secondary data E. The marketing mix 9) Studies show that accurate pre-venture market analysis can reduce the failure rates of new ventures by what percent? (pg. 143) A. 10% B. 30% C. 60% D. 80% E. 95% 10) ______ are key marketing dimensions that set the strategic framework. (pg. 145) A. Segmentation, targeting, and positioning B. Price, Promotion and Product C. Global Brand Awareness D. Price setting E. None of the choices above 11) Customer understanding enables the entrepreneur to ______. (pg. 145) A. create value.

B. capture value.

C. communicate value.

D. deliver value.

E. All of the above 12) The entrepreneur’s decision on how to segment a market is critical because___. (pg.

146) A. the entrepreneurs cannot go back to revise them in the future B. waiting for one to emerge is an expensive strategy.

C. the segmentation function will often be outsourced to a marketing firm who requires clear instructions.

D. None of the above

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13) Positioning describes a company’s offering relative to the product attributes that are most important to whom? (pg. 146) A. Investors B. Shareholders C. Competitors D. Customers E. Marketers 14) The core product is______, while the augmented product set of attributes is peripherally related to it. (pg. 146) A. The brand B. The technology C. The cost D. The essential good or service.

E. None of the above 15) The attractiveness of a market segment is related to its size, growth rate, and ___. (pg.

146) A. cost B. price C. competitive advantage D. potential profit E. none of the above 16) While segmentation profiles a company’s customers, what does positioning outline? (pg. 146) A. Customer perceptions B. Cost C. Operational advantage D. Revenue E. None of the above 17) A positioning statement has which of the following: (pg. 148) A. Target group and need B. Brand and concept C. Point of difference D. All of the above E. None of the above 18) Why must a company continue new product development even after launching a successful product into the market? (pg. 149) A. To gain an advertising advantage B. Competition C. To keep the firm profitable D. To ensure maturity in the market E. Both B & C .

19) Price discrimination happens when a company charges different prices to different ____ segments. (pg. 151) A. product B. customer C. risk D. A or B E. none of the above 20) Price discrimination is a pricing strategy that: (pg. 151) A. Limits sales to a specific demographic.

B. Charges different prices to different customer segments.

C. Prices below the prevailing market prices in order to gain market share.

D. Sets the price at a predetermined level above the per unit cost of production.

E. None of the above 21) Which of the following most directly affects revenue, profits, and how consumers perceive a product’s position in the market? (pgs. 150-151) A. Pricing B. Promotion C. Place D. Product E. None of the above 22) The selection of a company’s key communication tools is determined by: (pg. 154) A. Cost B. Target market C. Timing D. All of the above E. None of the above 23) The communications mix includes: (pg. 154) A. Advertising, cross selling, investor relations, personal selling, and direct marketing.

B. Advertising, sales promotion, public relations, personal selling, and direct marketing.

C. Sales promotion, advertising, consumer relations, multi-level reselling, personal selling.

D. A and C only.

E. A and B only.

24) What type of strategy aims to proactively move the volume of products through the channel using tools such as trade promotions, trade shows, and personal selling to distributors? (pg. 155) A. Pull strategy B. Push strategy C. Penetration pricing .

D. Product differentiation E. None of the above 25) Entrepreneurs discover the unique value they deliver by ___. (pg. 161) A. Examining the total benefits of the venture.

B. Differentiating their value from existing competitors.

C. Validating its value with its customers.

D. All of the above.

E. None of the above.

26) Which of the following is an approach to Guerrilla Marketing? (pgs. 163-164) A. Identifying challenges and developing creative solutions.

B. Using the “inherent drama” in your offerings to your benefit.

C. Capturing people’s attention by targeting the local news media with a public, promotional event.

D. Creating an entertaining digital video that can be viewed and shared online.

E. All of the above 27) Entrepreneurs must obtain information that will allow them to understand consumer buying behavior and customer expectations related to: (pg. 165) A. Product design, pricing, and distribution B. Product design, pricing, or distribution C. Product design or pricing D. Pricing and distribution E. Pricing or distribution 28) ______ is the customer's ability to recognize and recall the brand. (pg. 166) A. Technique awareness B. Brand awareness C. Value awareness D. All of the above E. None of the above 29) Brand awareness is created through a customer’s exposure to what? (pg. 166) A. Advertising or publicity B. Social media C. Education D. Promotion E. Price reductions 30) Some methods employed to develop a “listening system” include: (pg. 165) A. Transactional surveys B. Customer advisory panels C. Cookies planted in customers’ computers when they visit a ventures web page.

D. B and C only .

E. A and B only 31) If a company can cultivate brand equity, what type of price can it expect loyal customers to pay? (pg. 166) A. A fair price B. A minimum price C. A premium price D. A discounted price E. All of the above 32) All entrepreneurs face the need for brand building, which is ___. (pg. 166) A. the task of building brand awareness.

B. the task of building brand equity.

C. the dual task of building brand awareness and building brand equity.

D. building either brand awareness, or brand equity.

E. the task of building other issues.

Open Ended 1) In your own words, define “marketing”. (pg. 142) • An organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stake holders.

2) Why is marketing critical for entrepreneurs? (pg. 142) • Marketing is a vital process for entrepreneurs, because it builds awareness of your product and your company. Without brand awareness, even customers that would benefit from your service and would want to purchase your product will not.

• Marketing builds brand equity and imprints an image of your products in the minds of customers.

3) What are the “4 P’s” of marketing, and which activities define them? (pg. 142) • The “4 P’s” of marketing are: product, price, place, and promotion.

• The process of acquiring and retaining customers is at the core of marketing.

Entrepreneurs must create the offer (design the product and set the price), take the offer to the market (place and distribution), and, at the same time, tell the market about the offer (promotion).

4) Why is the marketing done by entrepreneurs different from marketing done by established companies? (pgs. 142-143) • Entrepreneurial marketing is different from marketing done by established companies for a number of reasons: o First, entrepreneurial companies typically have limited resources – both financial limitations and time constraints. o Entrepreneurs have little or no market share and a confined geographic market. As a result, they enjoy few economies of scale.

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o Not only is market information limited, but decision-making can be muddled by strong, personal biases and beliefs. Early-stage companies often stumble in their marketing because of a product focus that is excessively narrow. o Entrepreneurs market to multiple audiences: investors, customers, employees, and business partners. Because none of these bonds is well established for early stage companies, entrepreneurs must be both customeroriented and relationship-oriented.

5) What methods can an entrepreneur leverage to identify the most appropriate price for his or her product? (pgs. 150-151) • Cost-based pricing, competitive pricing, and perceived value pricing are three options. Perceived value pricing is especially viable for pricing a new or innovative product.

• If possible, approach perceived value pricing with pre-market price testing, estimating the number of units customers will purchase at different price points.

• Two well known pricing strategies, which represent opposite ends of the pricing spectrum, are price skimming and penetration pricing.

6) What is the difference between price skimming and penetration pricing, and when will a skimming strategy be best? Why? (pg. 151) • Price skimming sets high margins; entrepreneurs can expect to gain limited market share because their prices will be relatively high.

• Penetration pricing aims to gain high market share with lower margins and relatively lower prices. However, the lower price may signal lower quality, especially in regards to a new product.

• For entrepreneurs with a product that brings something new to the marketplace, a skimming strategy is usually best. Unless channels of distribution are very well established, a penetration strategy, generally reserved for mature products, is hard to use to your advantage.

7) Distribution channel strategy includes three types of channel coverage, please define them. (pg. 153) • Distribution channel strategy includes three types of channel coverage: intensive, selective, and exclusive. The appropriate strategy depends on the type of product or service that entrepreneurs will sell.

• Intensive coverage works for consumer goods and other fast-moving products. The carbonated soft drink category is one of the most intensively distributed: products are sold in supermarkets, drug stores, convenience stores, restaurants, vending machines, sporting event concessions, and fast food outlets.

• Selective distribution brings the product to specific distributors, often limiting selection geographically by establishing a dealer network. Kate Spade sells her handbags and other fashion accessories to high-end department stores but not to mainstream retailers or mass merchandisers. Selective distribution can protect dealers and retailers from competition, while helping manufacturers maintain prices by thwarting price competition. .

•

Exclusive distribution is often used for luxury products. For some time, NeimanMarcus had exclusive rights to distribute the Hermes line of very high-end leather goods and fashion accessories.

8) What is guerrilla marketing, and what are the main categories of guerilla marketing? (pg. 163) • Guerrilla marketing consists of activities that are non-traditional, grassroots, and captivating – that gain consumers’ attention and build awareness of the company.

• Types of Guerrilla Marketing: o Word-of-Mouth marketing: “Giving people a reason to talk about your products and services, and making it easier for that conversation to take place.” o Buzz marketing: “Using high-profile entertainment or news to get people to talk about your brand.” o Viral Marketing: “Creating entertaining or informative messages that are designed to be passed along in an exponential fashion, often electronically or by e-mail.”

9) Why is defining what guerrilla marketing does easier than defining what it is? (pg.

164) Guerrilla marketing is heard above the noise in the marketplace and makes a unique impact: • It makes people talk about the product and the company, in essence, relaying the brand message.

• It creates drama and interest and positive emotion.

• But, in fact, effective guerrilla marketing is as difficult – maybe more so – than good traditional marketing. Many companies are trying to do it, and because guerrilla marketing is nontraditional, tried and true marketing axioms seldom apply.

10) What are the key skills for managing growth and why? (pgs. 165-166) • Two key areas for entrepreneurs to focus on are understanding and listening to customers and building a visible, enduring brand.

• Understanding the customer: o Although intuition-based decision making can work well initially, it has limitations. o Entrepreneurs must obtain information that will allow them to understand consumer buying behavior and customer expectations related to product design, pricing, and distribution. o Entrepreneurs following a high growth strategy need to continuously find new customer segments to support that growth. o There are a number of ways to listen to customers; some require formal research, and others use informal systems for soliciting information and scanning the market environment.

• Building the Brand o All entrepreneurs face the need for brand building, which is the dual task of generating brand awareness and building brand equity.

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o Brand awareness is the customer's ability to recognize and recall the brand.

Marketing practices that create brand awareness also help shape customer perceptions. o Brand equity is the cumulative value that customers associate with a company or product. Any positive perceptions and customer recognition add to a company’s brand equity.

11) Describe how an entrepreneur may think about selected primary and secondary target audiences from a segmented market. (pgs. 145-146) • Consider how critical your value proposition is to the customer segment. Are you selling “oxygen or Tylenol?” How essential is your product or service to THIS segment?

• Can you access this segment NOW? Do you have the resources, knowledge, and capability etc. to link your value chain to this specific segment? If yes, how much of the segment?

• How quickly does this segment require a product or services again to fulfill its needs after value is delivered the first time? Once a year, weekly, or three times per day?

• How many competitors can serve this segment with an equal or greater value proposition?

• What will be the effect of your marketing effects on this segment? Can you create loyal customers? Raving fans? One-time customers?

• Can this segment be recognized clearly or does it require a lot of effort to actually know a member of a given segment is standing in front of you? Age, gender, and geographic locations are easily recognized. Ethnicity, religion, and language are recognized with a little more effort. However cultural proclivity, temperament, education level, and favorite color can take more effort to ascertain.

12) Explain how your marketing listening system and market segmentation are intertwined. (pgs. 146, 165) • A listening system is a portfolio of methods for use to scan the marketing environment.

• Segmentation is the process by which marketers select the “right” customers for its products and services; the tools in a listening system are used to implement that process.

• Listening systems measure customer satisfaction, get feedback and advice from customers, track and address customer complaints. At the same time, they work in assessing the total market – customers and noncustomers.

• A recent example of this is Maker’s Mark bourbon. Maker’s Mark’s CEO set aside intuition and studied the market to understand where he would find his new customers. Noting that the bourbon connoisseur market segment was nearing saturation. To grow, the company would have to reach drinkers of other types of alcohol.

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13) With all the discussion of the disadvantages an entrepreneur faces in marketing relative to large established companies, what would be some of the advantages? (pgs. 142-143) • Entrepreneurs are forced to be more resourceful and creative.

• Entrepreneurs take the opportunity to involve the customer in the product design process.

• Entrepreneurs leverage scarce resources through innovative business practices – from online surveys to free libraries.

• It is easier for entrepreneurs to engage in internal marketing, as their employees are more enthusiastic and proud of the company’s products.

14) . Describe the role of public relations (PR) in entrepreneurial marketing. (pgs.

156-158) • Savvy entrepreneurs with fledgling companies are good at managing their own PR. They send out press releases announcing new products, key executive hires, and other significant company events to newspapers, trade magazines, and online media outlets.

• PR is most effective when entrepreneurs recognize that the best PR is not necessarily free PR. Effective PR takes time, effort, sometimes money, and the ability to leverage connections to generate good PR. • Publicity and corporate communications are the two elements of PR. Publicity is key to building brand awareness, and communication, particularly with customers, is key to cultivating an entrepreneurial company’s brand image. Focusing on tactics before strategy. The principle job of the entrepreneur is to set strategy. Trial and error can modify and refine tactics, but this will only waster limited resources (including time) if not tied to a solid strategy. Military strategist Sun Tzu famously observed that “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”

• Placing too great an emphasis on detailed marketing planning using secondary information at the expense of creating a simple base plan designed for flexibility with multiple conceptual-level contingency plans that will enable the entrepreneur to rapidly adapt and pivot as primary market data is gained through initial operations.

• Failing to realize that the condition which the original marketing plan was based on have changed substantially, turning the present plan from a profitable to unprofitable course of action. Entrepreneurs can fall in love with their marketing objectives, but not with the tactics that achieve those objectives. They must remain flexible to change, because changing faster than the competition are one of the entrepreneurs few competitive advantages.

15) For a rapidly growing company seeking greater growth, a large established channel partner who wishes to place large orders at high prices would seem like a great opportunity. What factors could make this a terrible idea for a new venture that an entrepreneur must first look at? (pg. 153) • Will you need to incur fixed costs to serve this channel partner, and what share of your present, and near-term revenue is this partner representing? This is necessary to avoid entering into a situation where your channel partners bargaining power is .

•

•

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too great and where you will be unable to cover your fixed costs if they demand a lower price or volume in the future.

Does this channel partner compete with your other channel partners? There’s a reason many sports supplement companies only sell through certain outlets in certain regions. Channel conflict will result in price and promotion competition between channel partners in the same geographic (or virtual) marketplaces, and they will discount your product until their margin is too small for them to continue to be your partner, or until you refuse to lower your margin to preserve theirs.

Future efforts to raise your price again through a new channel partner could be futile once the customer’s price expectations have been set lower.

Will the new channel partner require you to create new marketing initiatives that have little to nothing in common with your present efforts in existing segments?

The impact of a new channel partner must be examined across your entire value chain to include advertising, productions, etc. A large customer could offer better gross margins, but force inefficiencies at scale that reduce your net margin.

Questions for Chapter 7 True/False 1. Ventures founded by teams tend to generate more revenue, be more profitable, create more jobs within growth industries than those founded by single individuals. (pg. 185) (True) 2. The size of your organization is inversely correlated to the amount of revenue your business can derive. (pg. 185) (False) 3. Hiring a salesperson is more attractive than increasing support staff in regards to revenue generated. (pgs. 185-186) (True) 4. In the early years, it is critical for firms to focus on revenue-generating employees, instead of support staff. (pg. 186) (True) 5. Your team members can help you to evaluate feedback from outside sources. (pg. 186) (True) 6. Over 95% of entrepreneurs in the US report that their co-founders are the main source of seed financing. (pg. 186) (False) 7. A business superstar is unlikely to possess all the business skills needed for long term success. (pg. 187) (True) 8. If the business is your idea, it is best if you are the CEO. (pg. 187) (False) 9. Analysis of your resume will help you decide what other team members your firm needs. (pg.

187) (True) 10. Entrepreneurs who are overly conscious of their own weaknesses are more likely to fail. (pg.

188) (True) 11. You can’t build a successful team unless you understand your own strengths and weaknesses and the best place for you at the company. (pg. 188) (True) 12. The Myers-Briggs personality type indicator can accurately predict an individual’s likelihood for success in an entrepreneurial endeavor. (pg. 189) (False)

13. Certain personalities are better suited for entrepreneurship than others. (pg. 189) (False) 14. Fast, dramatic growth can be a mistake for a business. (pg. 189) (True) 15. Early stage companies tend to be hierarchal. (pg. 189) (False) 16. Entrepreneurship is hard work but most entrepreneurs become millionaires in five years. (pg.

189) (False) 17. Co-founders of a start-up should work on every task and decision together. (pg. 190) (False) 18. It is more common for teams to self-destruct because of personal conflicts than for lack of funding. (pg. 192) (True) 19. If you decide to start a venture, you should notify your current employer as soon as possible. (pg. 193) (True) 20. After you have started a business, it is a bad idea to combine your new job with working fulltime elsewhere. (pg. 193) (False) 21. It often takes four months or more to identify and hire key employees. (pg. 194) (True) 22. If employees own equity in the company, their interests are aligned with those of the company. (pg. 194) (True) 23. In general, founder shares should be granted to at least 10 people. (pg. 195) (False) 24. Founder shares should be distributed equally between all founders. (pg. 195) (False) 25. It is a mistake to distribute the entire supply of options to existing employees. (pg. 196) (True) 26. Restricted stock is the option to buy shares that are vested over time. (pg. 197) (False) 27. One of the main reasons to award options or founder stock is to keep key employees with the firm. (pg. 197)

(True) 28. Phantom stock basically means that people earn their shares or options over time, usually over four or more years. (pg. 197) (False) 29. Startups should negotiate employee salaries below market levels. (pg. 199) (True) 30. You may find an angel investor who will guide you at the early stages of your venture. (pg. 200) (True) 31. Free resources are poor substitutes for a qualified lawyer. (pg. 201) (False) 32. Board members should be encouraged to act in the best interest of the principal owner exclusively. (pg. 202) (False) 33. Company culture is incredibly difficult to change after it has been established. (pg. 203) (True) Multiple Choice 1. If a restaurant expects $100,000 or more in net profits, what is the minimum sales revenue per year they would need? (pg. 185) A) $1.20M B) $1.64M C) $1.84M D) $2.20M E) $2.24M 2. It is important for growth-oriented companies to prioritize hiring; who should be prioritized first: (pg. 186) A) Administrative support staff B) In-house legal counsel C) Top management consulting talent D) Revenue generating salespeople E) None of the above 3. Which of the following is true about teams? (pgs. 185-187) A) Teams help you evaluate feedback from outsiders.

B) Teams increase your contact network exponentially.

C) Teams increase your revenue.

D) Teams provide you with moral support.

E) All of the above 4. Which of the following should the founder of the venture do first when deciding whether or not to be the CEO of his company? (pg. 187)

A) B) C) D) E)

Ask for his/her friends opinion Take at least three personality tests Review his/her resume Work as a hired manager for at least 4 years Consult with his/her team members

5. Individuals that possess which of the following traits are most likely to launch their own businesses? (pg. 188) A) Overly conscious of their own weaknesses B) An aptitude for benchmarking their competitors’ strengths C) Can objectively evaluate his strengths and weaknesses D) Emphasizes his or her strengths E) Oblivious to his or her own weaknesses 6. Which of the following personality traits best predicts entrepreneurial success? (pg. 189) A) Analytical B) Risk taker C) Expressive D) Amiable E) None of the above 7. A study by Inc. 500 found that many CEOs had what quality in common? (pg. 189) A) Patience B) An ability to work well under highly stressful conditions C) High risk tolerance D) A high IQ E) An ability to accept constructive criticism 8. According to Inc. 500, what percent of entrepreneurs start businesses with their friends or family members? (pg. 190) A) Less than 5% B) About 10% C) About 20% D) Approximately 40% E) More than 65% 9. What does the movie, Startup.com, demonstrate? (pg. 192) A) How outside financing contributes to equity B) How expensive lawyers can be C) How working together can affect the relationship of two lifelong friends D) How much the government is willing to help young entrepreneurs E) None of the above 10. What opportunities can a young company offer its potential team members? (pg. 192) A) Growth into higher management positions B) Above average market salaries C) More attractive social benefits packages D) Secure and stable jobs E) All of the above

11. Which of the following should an entrepreneur do when creating a venture? (pg. 193) A) Expropriate her current employer’s intellectual property B) Use her employer’s resources for the new venture C) Notify her current employer about the intention to create a new venture D) Spend all her time working for the new venture E) Live off her savings 12. According to the chapter, which of the following is not an acceptable means of maintaining an entrepreneurs’ personal cash flow? (pgs. 193-194) A) Working full-time and devoting time to the new venture B) Working part-time and devoting time to the new venture C) Living off personal savings D) Living for his/her spouses’ income E) All of the above are acceptable 13. Which of the following is not a reason for distributing equity among employees? (pg. 194) A) New companies often can’t pay market rates for salary and wages B) Including some equity in the compensation package aligns the employee with the company C) The sense of ownership boosts morale D) Distributing equity among employees reduces the risk of hostile takeover E) Having some equity, the team sticks together during the rough times in the early launch phase 14. None of the following tools are usually considered a reward for “sweat equity,” except: (pg. 195) A) Founder shares B) Option pool C) Restricted stock D) Stock appreciation rights E) Phantom stock 15. What are the disadvantages of distributing founder shares equally among all co-founders? (pg.

195) A) The lack of a primary shareholder slows down the decision making process B) CEO may be doing as much work as CEOs of comparable companies, but have less potential upside C) Such distribution makes unwanted acquisitions easy D) A and B E) A and C 16. Options give the holder the right to: (pg. 196) A) Increase the number of the company shares he is allowed to purchase B) Buy a share in the company at a below-market rate C) Secure a salary increase on a regular basis D) Sell his stocks on the open market for more than the prevailing market price E) Demand a refund on his contribution to company’s equity 17. How much equity is commonly set aside for employee options, particularly technology firms? (pg. 196)

A) B) C) D) E)

15-20% 20-25% 25-30% 35-40% 45-50%

18. What is the most commonly used form of equity compensation? (pg. 197) A) Restricted stock B) Phantom stock C) Options D) Stock appreciation rights E) None of the above 19. Which of these is actual shares, rather than the option to buy shares, that are vested over time? (pg. 197) A) Restricted stock B) Phantom stock C) Vesting D) Stock appreciation rights E) None of the above 20. What attribute characterizes “restricted stock”? (pg. 197) A) Does not grant voting rights B) Cost less per share C) Become vested over time D) Has a reduced interest rate E) Higher liquidation priority than unsecured debt 21. Which of these isn’t really issued equity but a cash bonus paid to employees if the stock price appreciates over a set period of time? (pg. 197) A) Restricted stock B) Phantom stock C) Vesting D) Stock appreciation rights E) None of the above 22. Stock appreciation rights of employees accrue only if: (pg. 197) A) The stock price decreases B) Combined with options C) The employees perform well D) The stock price increases E) None of the above 23. All of the following is true about phantom stocks except: (pg. 197) A) They are expensed over the vesting period B) They are not actually issued equity C) The company needs cash when phantom stocks are exercised D) They grant the holders additional voting power E) They lower the dilution effect

24. Which of these basically means that people earn their shares or options over time, usually over four or more years? (pg. 197) A) Restricted stock B) Phantom stock C) Vesting D) Stock appreciation rights E) None of the above 25. Which factor should you consider when choosing a lawyer: (pgs. 200-201) A) Size of the firm B) Billing rates C) A lawyer that has a deep knowledge of the industry D) If you get along E) All of the above 26. Inappropriate sources of members for Board of Advisors include: (pg. 202) A) Shareholders’ representatives B) Entrepreneurs C) Individual with insights about your target customer D) Your professors E) Venture capitalists 27. Why should you have one or two members of your Board of Directors who can be considered independent? (pg. 202) A) So they can act in the interest of the principal owner B) They are not susceptible to potential conflicts of interest C) They usually make the final decisions D) They have a long list of business and professional contacts E) They will answer the majority of the entrepreneur’s questions 28. Which of the following is true about a company’s culture? (pg. 203-204) A) A company’s culture is relatively easy to change B) As a company grows, it is common for the culture to evolve C) More team members will fit your company’s culture over time D) Problems with the team do not arise in companies with strong culture E) All elements of a company’s culture constantly change 29. Which of the following are not mentioned in the chapter as external team members? (pgs. 200203) A) Board of Directors B) Lawyers C) Accountants D) Angel investors E) Foreign partners 30. By making your team members work long hours, you put them at risk of: (pg. 204-205) A) Burnout B) Family pressure

C) D) E)

Stress Reduced efficiency All of the above

31. You are least likely to resolve an interpersonal conflict in your team by: (pg. 205) A) Firing one of the parties B) Hiring an outside expert who is perceived as a neutral party C) Explaining to the parties involved that their arguments reduce the team’s efficiency D) Mediating between the parties E) Transferring one of the parties to another team 32. What is the minimum expected level of lawyers’ fees? (pg. 213) A) $50/hour B) $100/hour C) $150/hour D) $200/hour E) $250/hour Open ended 1.

Explain why solo entrepreneurs are generally less successful than team players. (pgs.

185-187) a. A team is able to do more than the entrepreneur can on his or her own. b. Solo entrepreneurs suffer from a number of shortcomings, including a limited perspective, little moral support, and a small network c. Solo entrepreneurs often fail to get sufficient feedback on their ideas. d. If you build your team wisely you will gain access to a broader range of contacts. e. A team rounds out the skill set needed to launch a business

2.

What are some of the methods used to identify an entrepreneur’s strengths and weaknesses? (pgs. 188-189) a. Self-assessment b. Conducting feedback analysis c. Talk to people who know you well and whom you respect. d. Take a psychological or a personality test.

3.

Explain how entrepreneurs should use psychological or personality tests as one way to develop self-awareness. (pg. 189) a. The tests are designed to help individuals understand things like their underlying interests, motivations, and communication styles. b. However, they cannot accurately predict an individual’s likelihood for success in an entrepreneurial endeavor. Can only give you a deeper understanding of your strengths and weaknesses. c. Industry newsletter HRfocus recommends that you have a professional administer and interpret the test for you and that you take a test that has been statistically validated.

4.

What valuable contributions can your team members bring to your company? (pgs.185-187)

a. b. c. d.

Professional knowledge Money required to start a business Resources/contacts Managerial skills

5.

What are some indicators of the right co-founders and team members for your startup? (pg. 189) a. Everyone can contribute meaningful, complementary skills to the business. b. You can work together without personal issues standing in the way. c. You have clearly stated expectations, tasks and objectives. d. Your team members are excited about the venture and its future.

6.

Describe what a sample staffing plan might look like. (pg. 190) a. Early on, you likely need only one or two other team members. b. Roles should be complementary and each co-founder should also participate extensively in shaping the vision of the business. c. The lead entrepreneur may take on the role of product development while the other founder does market development. d. If the team needs a strong finance person with previous experience raising equity capital, may want to identify that person but delay bringing him or her onto the team until needed

7.

Describe the pros and cons of a dual job strategy at the early stages of the venture. (pgs.

193-194) a. Pros: you have a source of cash for you to live on while you are developing your idea; you can keep the job if you see that your new start-up is not progressing well. b. Cons: dual jobs mean that you have to work over nights and weekends; you cannot use your current company’s resources or compete with it until you quit; and, simply, your current job limits the time that you can dedicate to the venture.

8.

Give examples of compensations used to make your start-up attractive for valuable team members. (pgs. 194-197) a. Founder Shares b. Option pool c. Restricted stock d. Stock appreciation rights e. Phantom stock

9.

Explain the benefits, to the firm, of a vesting schedule for employee options and shares. (pg. 197) a. Vesting basically means that people earn their shares or options over time, usually over four or more years. b. Without a vesting schedule, employees can leave the company soon after being hired and retain 100% of their options or shares. c. A vesting schedule adds additional incentives for employees to remain with the company for the entire vesting period, usually four or more years.

10.

How can entrepreneurs ensure that options improve organizational performance? (pg.

196)

a. Employees need to fully understand the stock ownership program and how they will participate in it. b. Staff must know how to measure company success, know how company is doing, and how to achieve it through individual roles c. Entrepreneurs need to listen to their workforce for solutions or innovations. d. A stock ownership plan should offer employees a true opportunity to earn a financial reward.

11.

202)

Who should you invite to join the Board of Advisors of your firm and why? (pgs. 201a. Professors – for their fundamental knowledge b. Current and former entrepreneurs – for their practical knowledge and experience c. Professional investors such as venture capitalists and angels – for network extension and fund raising d. Suppliers for your firm – for insights about new customer and market trends

12.

Describe the balance between too much and too little communication with a board of advisors. (pg. 202) a. Don’t email or phone every time you have a question. Try to find alternative answers on your own and accumulate questions. b. Prepare – so you can can more productive conversations. c. Touching base too rarely or when you want help raising money suggests interest only in the advisor’s network. d. Produce a monthly newsletter with information about the company’s progress.

13.

Why are lawyers and accountants considered to be external members of your team? (pgs. 200-201) a. Your lawyer will most likely work very closely with you and will know everything about your company. Therefore, it is essential that he offers a highly customized service to you and his contributions are usually as important as those of your team members. b. An accountant is a trained business professional who can help you analyze the strengths and weaknesses of your company’s financial performance. He or she may be able to find ways to improve cash flow, strengthen margins, and identify tax benefits. c. Both lawyers and accountants represent another spoke in your network, as both groups frequently have a long list of business and professional contacts. This can include everything from potential partners, customers, angel investor networks, and venture capital firms.

14.

Explain why company culture is important. (pgs. 203-204) a. It is the key to building and growing a successful team. It evolves from the way the founders interact among themselves and with other employees. b. It reflects the values and skills of the CEO and other leaders. c. The most successful cultures are those rooted in core values and beliefs that are a part of the company’s mission, vision, and mantra.

15.

Three major problems your team may face are burnout, interpersonal conflicts and family pressure. Describe how you can prevent and overcome them. (pgs. 204-205)

a. Listen to each team member, not only about the progress of their assignments, but also about the stresses they may be feeling b. You can introduce stress-relieving activities, or bonding experiences such as the Friday happy hour, or the lunchtime basketball game c. Counsel your team members to set expectations for their families even before they join your team d. Resolve interpersonal conflicts as quickly as possible or they may escalate to the point where they are destructive – mediate, hire an outside expert, or fire one of the arguing parties

Questions for Chapter 8 True/False 1) The chapter takes the view that the self-examination required to develop a tight, well written business plan is more important than the plan itself. (pg. 219) (True) 2) An important end result of the business planning process is that it allows the entrepreneur to articulate the business opportunity to various stakeholders in the most effective manner. (pg. 219) (True) 3) The business plan must establish that there is an opportunity worth exploiting and must detail how to take advantage of it. (pg. 219) (True) 4) It’s a common misperception that a business plan is primarily used for raising capital. (pg. 219) (True) 5) Business planning, in a literal sense, begins when you start to look for external funds. (pg. 220) (False) 6) Your business plan should be designed to be flexible, to allow for rapid adjustments as more information becomes available. (pg. 221) (True) 7) The cover of the plan should include the following information: company name, tagline, contact person, address, phone, email, date, disclaimer, and copy number. (pg. 222) (True) 8) Interestingly, the executive summary is the least important part of the business plan. (pg. 223) (False) 9) Since the executive summary is the most important part of the finished plan, an entrepreneur should write that section first, in order to frame the rest of the plan. (pg.

224) (False) 10) New ventures will have better chances for success in an emerging market, on the verge of rapid growth. (pg. 224) (True) .

11) Market analysis looks at current underserved gaps in the market, but most importantly, trends that are shaping the future. (pgs. 224-225) (True) 12) Both positive and negative trends will help shape the businesses. (pg. 225) (True) 13) Competitive profile matrices can aid in identifying underserved or vulnerable parts of the market susceptible to a new entrant. (pg. 227) (True) 14) The best way for savvy entrepreneurs to gather competitive information is through talking to their family members. (pg. 228) (False) 15) As mentioned in earlier chapters and reiterated in this chapter, “cost plus” pricing is the best strategy, because it wastes the least amount of time. (pg. 230) (False) 16) Your distribution strategy can define your company’s fortune as much as the product itself. (pg. 230) (True) 17) Examining how customers currently acquire similar products is a poor use of time for an entrepreneur launching an innovative, new product. (pg. 231) (False) 18) It is appropriate to discuss the geographic location of production facilities and how this enhances your firm’s competitive advantage. (pg. 233) (True) 19) The Scope of Operations section should discuss partnerships with vendors, suppliers, and partners. (pg. 234) (True) 20) A development strategy includes a schedule that highlights major milestones for the venture. (pg. 235) (True) 21) An ‘A’ entrepreneur with a ‘B’ idea is better than a ‘B’ entrepreneur with an ‘A’ idea.” (pg. 235) (True) 22) A simple, flat organization chart is often useful to visualize what roles you have filled and what gaps remain. (pg. 235) .

(True) 23) The Board of Directors’ primary role is to oversee the company on behalf of the employees, and to that end the board has the power to replace top executives if it feels doing so would be in the best interests of the staff. (pg. 237) (False) 24) Strategic partners are required by law to be offered seats on your Board of Directors. (pg. 237) (False) 25) It is important to explain why the team’s compensation is appropriate. (pg. 237) (True) 26) The biggest risk any new venture faces is dilution of equity. (pg. 238) (False) 27) Entrepreneurs often enter markets and find, to their surprise, either that direct competition does not exist, or that it is complacent and slow to react. (pg. 238) (False) 28) All plans have risks, and a solid business plan should acknowledge critical assumptions made, the risk of those assumptions proving false, and a plan to confirm/deny those assumptions in a timely manner. (pgs. 237-238) (True) 29) The business plan should identify the factors that may hinder development and assure that you will be able to develop the product on time and on a budget. (pg. 238) (True) 30) The appendices of a business plan can include anything and everything that you think adds further validation to your concept but does not fit in the main parts of the plan. (pg. 239) (True) 31) The biggest difference between an internal operation plan and the one that you might present to a potential investor is the level of detail, which tends to be greater in the disclosure to the investor. (pg. 240) (False) 32) The key to creating a successful presentation is to use the most slides possible (pg.

241) (False)

.

Multiple Choice 1) Which of the following is the primary purpose of the business planning process? (pg.

219) A. The process allows an entrepreneur to secure investors B. It provides the validation needed to convince potential employees to leave their current jobs for the uncertain future of a new venture.

C. It can help secure a strategic partner D. It can help secure a key customer, or supplier.

E. It helps entrepreneurs gain a deeper understanding of the opportunity they are envisioning 2) Which of the following is NOT a goal of business planning? (pgs. 219-220) A. To attract various stakeholders B. To help entrepreneurs gain a deeper understanding of the opportunity C. To convince stakeholders of the business potential D. To inform competitors of your intentions E. To convince potential employees to join 3) The best way to develop a winning business plan is to: (pg. 221) A. Have an accountant develop your financials B. Hire your professor to write the plan C. Go through several iterations to refine the strategy and business model D. Don’t bother writing a plan, it is not an efficient use of time E. All of the above 4) Which of the following is the most important part of the business plan? (pg. 223) A. Executive Summary B. Operations C. Team D. Critical Risks E. Financial Plan 5) A proper organization is critical to making a business plan easy to read. Thus, it should include which of the following? (pg. 224) A. Major sections B. Sub-sections C. Exhibits D. Appendices E. All of the above 6) Which of the following subsections is traditionally NOT placed in the executive summary? (pgs. 223-224) A. Description of opportunity B. Industry overview C. Critical risks .

D. Competitive advantage E. Team and offering

7) Which of the following is NOT a standard subsection of a marketing plan? (pg. 224) A. Product strategy B. Market strategy of the competitors C. Pricing strategy D. Distribution strategy E. Sales strategy 8) Many of the big names in retail revolutionized and unified fragmented markets.

Which of the following should NOT be on such a list? (pg. 225) A. Microsoft B. Walmart C. Staples D. Home Depot E. All should be on the list 9) To truly understand your customers, you MUST ___ (pg. 226) A. tell them why they need your product B. hire the best marketing research firm available C. listen carefully and adapt based upon what they say D. advertise in multiple media forms, like the Internet E. All of the above 10) When an entrepreneur understands who his customers are, he can assess _____: (pg.

226) A. what compels them to make purchases.

B. how his company can sell to them.

C. the cost of sales.

D. how his company can retain customers.

E. All of the above.

11) A company’s sales channels can include all of the following except: (pg. 226) A. Internal sales stream B. Retail C. Internet D. Cost reduction E. Direct mail 12) Entrepreneurs should focus on the key success factors that often lead a customer to buy one product over another, such as___. (pg. 227) A. Price B. Quality C. Speed .

D. All of the above E. None of the above 13) Which of the following is not in the contents of marketing plan? (pgs. 229-233) A. Marketing communications B. Growth strategy C. Product mix D. Pricing E. Customer analysis 14) Advantages of a price skimming are; (pg. 230) A. You can gauge what price the customer is willing to pay B. You’ll gain increased market penetration C. It’s easier to lower prices than to raise them D. A and B E. A and C 15) If business planning predicts that your gross margins will be small, you would be best advised to: (pg. 230) A. redesign your concept or abandon your concept.

B. keep your business small so that you can manage costs.

C. focus on guerilla marketing to target a niche.

D. All of the above E. None of the above 16) Which of these identifies how your product will reach the customer? (pg. 230) A. Target market strategy B. Marketing communications strategy C. Product strategy D. Pricing strategy E. Distribution strategy 17) What are the two methods of forecasting future revenues, as stated in the chapter? (pg. 232) A. The comparable method and the build-up method B. The comparable method and the distributed method C. The distributed method and the precise method D. The random method and the precise method E. None of the above 18) The ______ models the sales forecast after what other companies have achieved and then adjusts these numbers for differences in things such as the age of the company and the variances in product attributes. (pg. 232) A. comparable method B. distributed method C. build-up method .

D. random method E. precise method 19) In the _______, the entrepreneur identifies all the possible revenue sources of the business and then estimates how much of each type of revenue the company can generate during a given period of time. (pg. 232) A. comparable method B. distributed method C. build-up method D. random method E. precise method 20) Which of the following is a common subsection of an Operations plan? (pgs. 233234) A. Operations strategy B. Scope of operations C. Ongoing operations D. All of the above E. None of the above 21) Which of the following is NOT in the operations plan? (pgs. 233-234) A. Locations B. Facilities and Equipment C. Employees D. Suppliers E. Customers 22) The Scope of Operations section should discuss partnerships with _____? (pg. 234) A. Vendors B. Suppliers C. Key partners D. All of the above E. None of the above 23) In the development plan, which issue should be the focus? (pgs. 234-235) A. Development strategy B. Development timeline C. Development segments D. Both A and B E. None of the above 24) Which of the following should NOT appear in the compensation section? (pg. 237) A. Salary previously earned from prior employment B. Salary due to employees C. A fixed schedule for increasing the entrepreneur’s salary D. None of the above .

E. Why the compensation for each employee is appropriate 25) How can entrepreneurs minimize risk? (pg. 238) A. Market research B. Focus groups C. Beta testing D. All of the above E. None of the above 26) Considering competitor actions and reactions, which of the following would be dangerous for entrepreneurs? (pg. 238) A. Assuming that competitors will be the same tomorrow as they are today B. Identifying future competitors that might enter the market C. Considering when and how your technology might become obsolete.

D. None of the above E. All of the above 27) Which of the following is NOT a common category in the critical risks section? (pg.

238) A. Market Interest and Growth Potential B. Competitor Actions and Retaliation C. Time and Cost of Development D. Operating Expenses E. Offering of Financing 28) Detailed information which expands upon main areas of your business plan should be included in which portion of the plan? (pg. 239) A. Operations B. Appendices C. Financial Plan D. Market Plan E. None of the Above 29) One of the most pressing challenges for entrepreneurs is to maintain adequate levels of cash. Which of the following is the best way to ensure that a lack of cash does not bankrupt your startup? (pg. 239) A. Raise initial capital B. Give your customers, both businesses and individuals, generous credit terms C. Carefully monitor your burn rate D. Avoid accepting too much early capital in exchange for diluting your equity E. Answers A and B 30) Considerations in your offering section should include (pg. 239) A. Asking for enough money to last 12-18 months B. Not asking for more money than you need C. Not detailing the sources and uses of funds over time .

D. None of the above E. A and B F. B and C 31) Which of the following is the key to creating visual catch-points in a business plan? (pg. 240) A. Write long, descriptive paragraphs B. Use clearly marked headers and sub-headers throughout the document.

C. Maintain 1-inch margins on the sides and top and ½ inch on bottom. Single spaced text.

D. None of the above.

E. All of the above 32) When writing a business plan it is best to: (pg. 240) A. Use a creative format to capture the investor’s attention.

B. Lead the plan with the TEAM section because investors often focus on the team members, rather than the idea.

C. Follow a common outline because it helps spot reading.

D. Avoid appendices because nobody reads them.

E. All of the above

Open Ended 1) Inexperienced entrepreneurs often believe the misconception that a business plan is solely designed as a brochure for investors. The financial benefits of using a business plan to raise capital are well known. What are some additional benefits? (pgs. 219-220) Although a good business plan assists in raising capital, the primary goal of the process is to help entrepreneurs gain a deeper understanding of their venture and their opportunity: a) Lacking a deep understanding of the business model, many would-be entrepreneurs doggedly pursue ideas that have no possibility of success. b) Given the enormous financial and emotional toll a failed startup can have, the weeks or months it will take to complete a thorough business plan is a relatively small investment. c) In comparison, the cost of launching a flawed business concept can quickly accelerate into millions in lost capital for the founders and investors.

So entrepreneurs should spend the time and money up front and go through the planning process.

2) Generally speaking, what is the greatest benefit of the business planning process? (pg. 219) The business planning process provides the entrepreneur with the deep understanding she needs to answer the critical questions various stakeholders will ask. Completing a wellfounded business plan gives the entrepreneur credibility in the eyes of each group. .

Subsequently, the entrepreneur understands the business and the opportunity more thoroughly and is able to better articulate both to various stakeholders. a) First, the plan provides background information that enables the entrepreneur to communicate the upside potential to investors. b) Second, it provides the validation needed to convince potential employees to leave their current jobs for the uncertain future of a new venture. c) Finally, it can also help secure a strategic partner, key customer, or supplier.

3) What would be a counter-argument to the critique that business plans are obsolete soon after they are finished? (pg. 221) Business planning, as with any planning, must be proportional to the amount and quality of available information. As start-ups often have more assumptions than facts in the early stages of a venture, an excessively detailed business plan will find most of its plans overcome by changing events. A good technique would be to develop a solid base plan, and then determine the assumption this plan depends upon, and determine how you’ll adjust your plan if those assumption prove false. Last, a deliberate plan to confirm/deny each critical assumption needs to be built into your base plan.

4) What factors should be kept in mind when we are preparing the cover of the business plan? (pgs. 222-223) a) First, the contact person for a new venture should be the president or some other founding team member. b) Second, business plans should have a disclaimer along these lines: “This business plan has been submitted on a confidential basis solely to selected, highly qualified investors. The recipient should not reproduce this plan, nor distribute it to others without permission. Please return this copy if you do not wish to invest in the company.” c) The cover should also have a line stating which number copy it is. d) Finally, the cover should be eye-catching.

5) What kind of information in the Executive Summary do entrepreneurs need to provide? (pg. 223) a) A hook to capture the reader’s attention b) Description of Opportunity c) Business Concept d) Industry Overview e) Target Market f) Competitive Advantage g) Business Model and Economics h) Team and Offering i) Financial Snapshot 6) What are the key issues in the Industry Section? (pgs. 224-225) a) The goal of the Industrial Section is to illustrate the opportunity and how entrepreneurs intend to capture it, thus:

.

• • • •

Entrepreneurs need to provide a context, including both the current market size and how much you expect it to grow in the future.

Entrepreneurs need to indicate what kind of market they’re facing.

Another key attribute to explore is industry economics.

Finally, entrepreneurs need to describe the overall industry in terms of revenues, growth and future trends that are pertinent.

7) Why should entrepreneurs go out and interview potential customers, especially in the early conceptualization stages? (pg. 226) The typical reason is too often entrepreneurs figure that if they love their product concept, so should everybody else. But even if their needs and wants are the best place to start, they must recognize that their tastes may not be the same as everyone else’s. So to truly understand customers, they need to talk and listen to them. This process also helps create a product that is more likely to gain customer acceptance. As they get closer to launching, entrepreneurs will likely have a beta customer use their product or service to further refine the concept. The key once again is that business planning is the process, not the output (written plan).

8) How should entrepreneurs introduce the basic details of their company, before moving on to a more detailed analysis of the marketing and operations plans? (pgs. 228-229) a) Provide a brief overview of the concept for the company, and then highlight what the company has achieved to date. b) Take some time to communicate the product and its differentiating features. c) Identify market entry and growth strategies. d) Finally, sell the entrepreneur’s vision for the company’s long term growth potential.

9) What are the critical risks entrepreneurs need to identify in the business plan? (pgs. 238-239) a) Market Interest and Growth Potential b) Competitor Actions and Retaliation c) Time and Cost to Development d) Operating Expenses e) Availability and Timing of Financing 10) What slides are useful in oral presentations of your business? (pg. 241) 1. Cover page showing product picture, company name, and contact information 2. Opportunity description, which emphasizes a customer need 3. Illustration of how the product or service solves the customer’s problem 4. Some details to better describe the product 5. Competition overview 6. Entry and growth strategy, which show how to gain access into the market and then how to grow 7. Overview of the business model .

8. Team description 9. Current status with timeline 10. Summary, including how much capital the venture needs and how that investment will be used 11) What are some of the critical outcomes of competitive profile and product attribute analysis in terms of your initial business plan. (pgs. 227-230) New entrants may not enjoy many (or any) direct competitive advantages against incumbent players, but no competitor can be strong everywhere. Analysis of competitors and products can reveal unexpected opportunities to deliver a superior value proposition to a portion of the market. This analysis can help confirm/deny the manner in which a new venture seeks to gain a foothold in the market but determining an approach that leverage your strength and while taking advantage of the competition’s relative weakness.

12) Explain the importance of finding an entry point in the market analysis that holds a substantial gross margin for a new venture. (pg. 229) As new ventures will burn through cash according to their business plan, many other things could happen that were not expected, and many of these events will undoubtedly require cash. Marketing expenses can be higher than expected, channel partners can have greater bargaining power than predicted, and input costs can rise unexpectedly. In order to have enough working capital to continue to meet growth milestones, high gross margins provide breathing room for the unexpected. High gross margins decrease the likelihood of running out of cash between finance rounds.

13) What are the primary components of marketing plan section in a business plan?

Describe them. (pg. 229-233) a) a description of the target market strategy b) the product/service strategy c) pricing strategy d) distribution strategy e) advertising or promotion strategy f) sales strategy g) sales and marketing forecasts 14) Describe the two different methods for sales forecasting. (pg. 232) Comparable Method • Models the sales forecast after what other companies have achieved • Adjusts sales forecast for differences between the comparable companies and the entrepreneur’s company (e.g., age of the company and the variances in product attributes) Build-up Method • The entrepreneur identifies all the possible revenue sources of the business .

• •

Sales are estimated from each revenue stream for a given period of time The build-up method is an imprecise way for a new startup to forecast sales given its limited operating history but it will help to assess the viability of the opportunity Often both the comparable method and build-up method are used together to forecast sales. It is essential, however, to minimize the degree of error in the estimation, so careful consideration must be taken in forecasting. Rigorous estimates are the single best tool for keeping a startup out of financial trouble.

15) Discuss the importance of critical risks management in your business plan. (pgs.

237-238) Every venture has risks. If a given return on investment is desired by an investor, then it is all too easy to adjust numbers and figure to yield a set of calculations that result in a high expected ROI. Investors are less concerned with your ability to conduct financial projections, but instead in your ability to connect the financial results to the underlying assumptions that will drive those results. The more critical assumptions that exist, the greater the perceived risk investing in your venture will be, for yourself, as well as an investor. A critical skill that can set an entrepreneur apart from others in not simply the ability to identify and assess the risks in a new venture, but to systematically confirm/deny those risks as early as possible in the life of a new venture.

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Questions for Chapter 9 True/False 1. It is better to let your accountant articulate the numbers of your business idea to potential investors. (pg. 276) (False) 2. Entrepreneurs who claim their estimates are “conservative” are usually overly optimistic about their ventures’ future. (pg. 276) (True) 3. When we graph costs over time, we see them decreasing exponentially. (pg. 276) (False) 4. An optimistic attitude about your business’s future helps achieve positive cash flow sooner. (pg. 276) (False) 5. Typically, a business begins to generate revenue within the first two months after it launches. (pg. 277) (False) 6. Investors often predict the market share of startups as 3% after Year 3, because of the ease with which 3% can be captured. (pg. 277) (False) 7. The income statement shows the standing of a company at any given point of time. (pg. 277) (False) 8. The expenses that a business incurred appear on a different financial document than the amount of cash that it spent. (pg. 278) (True) 9. Many noncash transactions are represented in the balance sheet. (pg. 278) (True) 10. It is possible to have positive earnings on the income statement and a negative statement of cash flows. (pg. 278) (True) 11. For an asset to appear on the balance sheet it must generate revenue. (pg. 278) (False) 12. In the build-up method, you look at the revenue you might generate and the cost you might incur in a typical day. (pg. 279) (True) .

13. Scientific findings suggest that people make better decisions by decomposing problems into smaller decisions. (pg. 279) (True) 14. The first step in Revenue Projections is to calculate the median revenue of your products in the product mix. (pg. 280) (False) 15. Revenue projections help you to understand the company’s revenue drivers. (pgs. 280–281) (True) 16. For a bookstore, COGS is the cost of employee wages that is incurred in that period. (pg. 281) (False) 17. Most pro-forma projections for new companies show monthly income figures for the first two years. (pg. 281) (True) 18. Gross profit margin can be calculated by dividing the Cost of Goods Sold by Total Revenues. (pg. 282) (False) 19. In addition to direct expenses, businesses incur operating expenses, such as marketing, salaries and general administration (SG&A), rent, interest expenses, and so forth. (pg. 282) (True) 20. You should attempt to calculate your operating costs before you start a business. (pg. 282) (True) 21. Financial analysis is simply the mathematical expression of an overall business strategy. (pg. 283) (True) 22. The process of examining and reexamining your assumptions over and over is a waste of time (pg. 283) (False) 23. In financial analysis, the step that follows forecasting revenues and expenses is formulating a cash flow statement from those forecasts. (pg. 284) (False) 24. In the comparable method, you look at how your company compares to industry averages and benchmark companies. (pg. 284) (True) 25. Different companies may calculate COGS differently, even if their actual costs are identical. (pg. 285) (True) .

26. Pro-forma financials often project sales occurring 5 years in the future. (pg. 287) (True) 27. Businesses should expect to build their sales and start operating efficiently within a five-year period. (pg. 287) (True) 28. Seldom are revenues in retail spread evenly across the calendar year. (pg. 288) (True) 29. It is critical to show the first two years of pro-forma projections on a monthly basis because this is when a company is most vulnerable to failure. (pg. 288) (True) 30. By closing your sales for credit, you can increase your company’s cash flow. (pg. 290) (False) 31. The expense of acquiring land should appear in full on your annual income statement. (pg. 290) (False) 32. If, after all calculations, your balance sheet does not balance, you should adjust retained earnings accordingly. (pg. 290) (False)

Multiple Choice 1. Which of the following represent the most common mistake(s) in an entrepreneur’s business proposal, according to the professional equity investors?” (pgs. 276-277) A) Not understanding the revenue drivers B) Underestimating costs C) Lack of comparables D) Underestimating time to secure financing E) All of the above 2. Which of these describes how well a company conducted its business over a recent period of time—typically, a quarter (three months) or a year? (pg. 277) A) Income statement B) Balance sheet C) Cash flow statement D) Liability statement E) Accounts payable 3. Which of these enumerates all the company’s assets, liabilities, and shareholder equity? (pg. 278) A) Income statement B) Balance sheet C) Cash flow statement .

D) E)

Liability statement Accounts payable

4. An income statement will never include a line for: (pg. 278) A) Depreciation B) COGS C) SG&A costs D) Taxes on profits E) Accounts payable 5. The bottom line of the income statement states the company’s _______. (pg. 278) A) net size B) net income C) revenue less expenses D) net assets value E) gross profit margin 6. The statement of cash flows starts with which of the following? (pg. 278) A) Net Income B) Costs C) Expenses D) Net Assets E) Net Liabilities 7. Which of the following equations is true about the Balance Sheet under GAAP? (pg. 278) A) Assets = Liabilities B) Shareholder Equity + Assets = Liabilities C) Assets = Liabilities + Shareholder Equity D) Liabilities + Assets = Shareholder Equity E) None of the above 8. Under the Build-Up Method, you should start with the: (pg. 279) A) Income statement B) Balance Sheet C) Statement of Cash Flows D) Industry averages E) None of the above 9. The build-up method drills down revenue projections to a typical ______. (pg. 279) A) hour B) day C) month D) quarter E) year 10. Which of the following columns is not included in the revenue worksheet? (pg. 280) A) Product/Service Description B) Price .

C) D) E)

Units Sold Units Ordered Total Revenue

11. Which of the following can be used to strengthen your assumptions? (pgs. 280 – 281) A) Industry research B) Competitor analysis C) Own observations D) Surveying customers E) All of the above 12. In the build-up method, after you identify all your revenue sources, what is the next step? (pgs. 280) A) Identify all your costs B) Think about how much revenue you can generate in a year C) Determine operating expenses by the most appropriate time frame D) Break down revenue into a typical day E) Write a two- to three- page description of financial statements 13. The chapter recommends that you should construct monthly income and cash flow statements for the first: (pg. 281) A) 1 year B) 2 years C) 3 years D) 4 years E) 5 years 14. Gross margin is calculated with the formula (pg. 282) A) Revenue plus COGS B) Gross Profit times COGS C) Price plus Gross Profit D) Revenue minus COGS E) Revenue times profit 15. The following are examples of operating expenses, except: (pg. 282) A) Property purchases B) Rent expenses C) Interest expenses D) Salaries E) Administrative expenses 16. A financial statement that displays each item as a percentage of a common-base figure is called: (pg. 284) A) A Keynesian statement B) A common-size statement C) A statement of residuals D) A comparable statement E) A matching statement .

17. What does the Comparable Method help an entrepreneur to do? (pg. 284) A) Estimate project cost B) Research the industry C) Benchmark competitors D) Calculate operating expenses E) Validate projections 18. Under the Comparable Method, you can see how the model changes overall when you: (pg. 285) A) Increase your revenues B) Leverage your drivers C) Tweak your inventories D) Change one of the assumptions E) Decrease your costs 19. What is the best way to validate costs? (pgs. 285-286) A) Validating costs is not necessary.

B) Adjust your business model.

C) Ask your customers.

D) Compare your balance sheet with your competitors’ balance sheets.

E) Compare your common-sized income statement with the industry averages or some benchmark companies.

20. An entrepreneur must be able to ___________, if his income statement does not match the industry average? (pg. 286) A) remove any information that deviates from the average B) adjust and refine your metrics accordingly C) understand and explain the differences D) change the metrics to more appropriate ones E) rewrite your projections from scratch 21. The standard term for most business plans is: (pg. 287) A) 2 years B) 4 years C) 5 years D) 8 years E) Until the break-even date 22. If a business is profitable and growing, which of the following is most likely to be a reason for failure? (pg. 287) A) High COGS B) Low clientele C) Strong competition D) Failure to estimate the size of the market E) Insufficient financing 23. According to the chapter, it takes time to: (pgs. 287-288) A) Build up your clientele .

B) C) D) E)

Learn to operate efficiently Develop track record Understand seasonality All of the above

24. It is critical to show the pro-forma projections on a monthly basis when a company is: (pg. 288) A) Experiencing negative cash flow B) Not earning any revenue C) Most vulnerable to failure D) Facing strong competition E) Managing an inventory-to-asset ratio of 10% or higher 25. Seasonality is important because it affects which of the following: (pg. 288) A) Product or service demand B) Financial decisions C) Key operations and decisions such as hiring D) A & C E) All of the above 26. What effect can selling on credit have on your business? (pg. 290) A) Reduce assets B) Decrease accounts payable C) Delay cash inflows D) Reduce liabilities E) Increase inventory 27. An accumulated depreciation line item on your balance sheet shows how much of the asset has been: (pg. 290) A) Used up B) Acquired C) Written-off D) None of the above E) All of the above 28. How long should the explanation of the financial statements be? (pg. 292) A) 1 page B) 2 - 3 pages C) 10 - 15 pages D) Approximately 20 pages E) 25 - 30 pages 29. Approximately how many subsections in the section of the planning process should your explanation of the financial statements have, if you follow the model in the chapter? (pg. 292) A) 1 B) 3 C) 4 D) 7 .

E)

8

Open ended 1.

Explain why it is important to construct pro forma financial statements for new ventures. (pgs. 276 – 277) a. Building pro forma statements helps a lead entrepreneur to understand the numbers. b. Financial statements serve to bridge the entrepreneur’s great idea and what that idea amounts to, in terms of dollars and cents. c. A startup does not have any past trends in revenue and costs. Therefore, you cannot use the past as a basis to project future revenues and costs; you need to forecast them.

2.

What is a “hockey stick” projection and what is so unrealistic about it? (pg. 276) a. A “hockey stick” graph is a projection of costs and revenues, when revenues skyrocket over time while costs slowly progress upward. b. This faulty projection means that the entrepreneur underestimates the infrastructure needed in terms of employees and physical assets to achieve the projected level of sales. c. Poor projections lead to cash shortages and, ultimately, to failure.

3.

What is the difference between the respective purposes of the balance sheet and the income statement? (pgs. 277 – 278) a. The balance sheet enumerates all the company’s assets, liabilities and shareholder equity. It reflects a company’s state of affairs at a given point of time. b. The income statement describes how well a company conducted its business over a period of time. c. Both of them form a basis that helps you to understand the company and how it is doing

4.

Briefly describe the principle of the build-up method and its advantages. (pgs. 279 – 280) a. Identify all your sources of revenues and determine your revenues for a “typical day” b. Understand your revenue drivers and validate driver assumptions, multiply the typical day by the number of days in a year c. Determine Cost of Goods Sold (COGS) for typical day, multiply COGS by number of days in a year d. Determine operating expenses by most appropriate time frame and refine operating costs e. Create preliminary income statement The build-up method gives you a better understanding of the business and how it functions every day, its cycles, etc. This method allows you to overcome the often intimidating task of building a pro-forma financial statement by reducing the task to small, easily understood pieces.

5. What are examples of revenue drivers? (pg. 280) a. How many customers you will serve b. How much product they will buy .

c. How much they will pay for each product d. How often they will buy 6.

When building a revenue worksheet, an entrepreneur has to begin with certain assumptions. What are three ways for an entrepreneur to later strengthen those initial assumptions? (pgs. 280 – 281) a. Observe the behavior of customers of similar businesses. b. Learn about customer needs through analytical and empirical research (surveys, market reports, articles, etc.). c. Benchmark your competitors.

7.

What is the purpose of creating a headcount table? (pg. 283) A headcount schedule is an important step in refining your labor projections. It allows you to break down a day into hours and predict peaks and lulls in intraday customer activity. The table also helps you to identify how many employees you will need, when you will need them, and thereby project salary expenses.

8.

Explain the comparable method. (pgs. 284 – 285) a. In the comparable method, you look at how your company compares to industry averages and benchmark companies. b. First, gauge whether your revenue projections and your cost structure are reasonable. c. Then run some scenario analysis. By going through scenario analysis and understanding your business model, you should be able to explain why your firm differs

9.

What is the importance of building integrated financial statements? (pgs. 287 – 288) a. The income statement, cash flow, and balance sheet are the core statements for managing any business. b. Integrated financial statements answer the questions of when you expect to start making revenue, run out of cash, and become profitable, and how you are going to grow your business through the most dangerous stages of any venture’s life. c. The integration among the statements helps you to find out how a change in one affects the others. d. Additionally, monthly statements open new perspectives, ones that you might have otherwise missed.

10. Explain what a “brief description of your financial spreadsheets” should include. (pg. 292) a. It should be a two to three page explanation of the financial spreadsheets. b. This section of the planning process should include a description of the key drivers that affect your revenues and costs. c. The first subsection should discuss the income statement. d. The next subsection should discuss the cash flow statement. e. The final subsection explains the balance sheet.

11. The chapter says financial statements are obsolete immediately after they come off the printer. Why? (pg. 292) a. Once the business is operating, the nature of your financial statements changes. .

b. Your operations will not match your predictions. c. There may be some factors you did not take into account or some that you were ultimately wrong about. d. Also, since business environment is very flexible, you will have to constantly adjust your financial statements accordingly. e. Financial statements cover specific periods of points in time. That relevant moment in time is over before the statements are read.

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Chapter 10 Questions True/False 1) It is very difficult for entrepreneurs to raise debt financing from conventional banks because they require as many as three years of actual—not projected—financial statements and assets that adequately cover the loan. (True) (pg. 302) 2) Self-funding by entrepreneurs, along with funding from informal investors, is the lifeblood of an entrepreneurial society. (True) (pg. 304) 3) The downside financial risk for an investor in the worst-case scenario is the same, whether they make a loan or an equity investment. (True) (pg. 304) 4) Valuation of a small, privately held corporation is difficult. (True) (pg. 304) 5) Angels invest in seed‐stage and very early‐stage companies that are not yet mature enough for formal venture. (True) (pg. 306) 6) The term, “business angels,” strictly refers to just former entrepreneurs who invest some of their wealth in seed and early stage businesses. (False) (pg. 307) 7) Corporate angels may be a headache for a small company. (True) (pg. 307) 8) Professional angels are a category of investors primarily comprised of retired entrepreneurs.

(False) (pg. 307) 9) Placing a value on your startup is the first thing you should do when raising a round of angel investment. (True) (pg. 308) 10) Business angels are generally satisfied with a lower return than venture capitalists. (True) (pg. 308) 11) Most angel investors prefer common stock that can later be converted into preferred stock.

(False) (pg. 308) 12) According to the GEM Report, generally speaking, the amount needed to start a business is lowest in the consumer-oriented sector. (True) (pg. 309) 13) The businesses that need the most startup capital are those created with the intent to grow and hire employees. (True) (pg. 309) 14) Usually, businesses started by men require less capital than those started by women because they are more service-oriented. (False) (pg. 309) 15) The majority of informal investors expect a negative or zero return. (True) (pg. 309) .

16) The median expected payback time of an investment is one year, and the median amount returned is two times the original investment. (False) (pg. 309) 17) The expected internal rate of return or IRR (compound annual return on investment) is calculated from the expected payback time and the times return for formal investors and entrepreneurs who reported both. (True) (pg. 310) 18) The SEC does not permit the offering and selling of securities through internet crowdfunding campaigns. (False) (pg. 311) 19) In general, venture capital is invested in companies that are already in business. (True) (pg.

312) 20) The formal venture capital industry was born in Massachusetts at the end of WWII when a group of investors were inspired by General Georges Doriot. (True) (pg. 312) 21) The limited partners of venture capital funds raise money from the general partners. (False) (pg. 312) 22) The general partners’ share of investment returns is called carried interest. (True) (pg. 313) 23) The highest return on a venture capital investment is produced when the company has a management buyout. (False) (pg. 314) 24) In general, trade sales produce nearly as big a capital gain as IPOs. When a company executes a trade sale, it almost always has the option of an IPO, as well. (False) (pg. 314) 25) The present value of a company is the present value of the past free cash flows, plus the residual (terminal) value of the firm. (False) (pg. 318) 26) Market-comparable valuation is based on the net income and the startup’s capitalization rate.

(False) (pg. 318) 27) A rapidly growing, high-potential firm will generate a lot of free cash flow in its first few years. (False) (pg. 318) 28) The modified-book value method of valuation’s main weakness is that it reflects the past rather than the future. (True) (pg. 319) 29) Modified-book value is applicable to small, fast-growing, firms. (False) (pg. 319) 30) The liquidation value of a company is a strict valuation placed on an insolvent company by the courts during a bankruptcy proceeding. (False) (pg. 319)

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31) The difference between a seed-stage company and a startup is that the latter, unlike the former, is already in business. (True) (pg. 320) 32) Venture capital investors expect a higher rate of return for mezzanine stage investments than for bridge financing. (True) (pg. 320) 33) A company’s growth rate vis-à-vis its industry is not considered when using the Asset-Based valuation method. (False) (pg. 321) 34) After the IPO, the company has to file a registration statement with the SEC. (False) (pg.

324) 35) The company planning a public offering must first select an investment bank. (True) (pg.

325) 36) Selling the company is the most common way of harvesting an investment. (True) (pg. 326)

Multiple Choice 1) Almost every new business raises its initial money from the founders themselves and what we call informal investors, including: (pg. 303) A. Venture capitalists.

B. Family members.

C. Private equity firms.

D. Institutional investors.

E. All of the above.

2) Who comprises the “4Fs”? (pg. 303) A. Founders, Family, Friends, and Financial advisors.

B. Founders, Family, Financial advisors, and Foolhardy investors.

C. Founders, Financial advisors, Friends, and Foolhardy investors.

D. Financial advisors, Family, Friends, and Foolhardy investors.

E. Founders, Family, Friends, and Foolhardy investors.

3) According to the GEM study, entrepreneurs contribute about ______ of the capital needed to launch their ventures. (pg. 304) A. one-third B. two-thirds C. one hundred percent D. half E. none of the initial capital needed 4) According to the GEM study, half of all informal investors are expecting their money to be returned within how many years? (pg. 304) A. 1 year .

B. 2 years C. 3 years D. 4 years E. 5 years 5) Approximately how many business angels are there in the US as of 2016? (pg. 306) A. 10 million B. 12 million C. 14 million D. 16 million E. 18 million 6) What subset of informal investor is relatively sophisticated and invests primarily in glamorous companies? (pg. 306) A. Friends B. Family C. Founders D. Financial advisors E. Business angels 7) Which of the following types of angels is usually a passive investor? (pg. 307) A. Professional B. Entrepreneurial C. Corporate D. Micromanagement E. Enthusiast 8) Which of the following types of angels have started their own businesses and are looking to invest in new businesses? (pg. 307) A. Professional B. Entrepreneurial C. Corporate D. Micromanagement E. Enthusiast 9) Which of the following types of angels are managers of larger corporations who invest from their savings and current income? (pg. 307) A. Professional B. Entrepreneurial C. Corporate D. Micromanagement E. Enthusiast 10) Which of the following types of angels are doctors, dentists, lawyers, accountants, consultants, and even professors who have substantial savings and incomes and invest some of their money in start‐ups? (pg. 307) .

A. Professional B. Entrepreneurial C. Corporate D. Micromanagement E. Enthusiast 11) Which of the following types of angels are retired or semiretired entrepreneurs and executives who are wealthy enough to invest in start‐ups as a hobby? (pg. 307) A. Professional B. Entrepreneurial C. Corporate D. Micromanagement E. Enthusiast 12) Which of the following types of angels are entrepreneurs who have been successful with their own companies and have strong views on how the companies they invest in should be run? (pg. 307) A. Professional B. Entrepreneurial C. Corporate D. Micromanagement E. Enthusiast 13) The amount of capital that entrepreneurs need to start their ventures depends mainly on______. (pg. 309) A. the type of business B. the ambitions of the entrepreneur C. the location of the business D. the country of origin E. all of the above 14) For informal investment, the amount invested by _______ is the highest, and the median return expected is ____ times the original investment. (pg. 309) A. Strangers; 1.5 B. Friends; 2.0 C. Venture Capitalists; 1.0 D. Relatives; 1.0 E. Work Colleagues; 1.5 15) Approximately what percent of informal investment is directed to businesses founded by the investor’s close family? (pg. 309) A. 25% B. 35% C. 40% D. 50% E. 65% .

16) Which of the following categories of informal investors expects the highest return on his or her investment, since it is made in a more detached manner? (pg. 309) A. Founders.

B. Family.

C. Friends.

D. Foolhardy investors.

E. All of the above expect the same returns.

17) The split of the percent of entrepreneurs who expect to profit from their ventures and the percent of those that do not is almost ________ of the split among informal investors. (pg. 310) A. the same B. the reverse C. positively correlative D. in-correlative E. None of the above.

18) The rarest source of capital for nascent entrepreneurs is______. (pg. 311) A. friends B. family C. venture capital D. financial advisors E. foolhardy investors 19) While classic venture capitalists finance very few companies, some of the ones that they do finance play a crucial role in the development of ______industries. (pg. 312) A. knowledge-based B. return-based C. risk-based D. core economy-based E. none of the above 20) The companies are often up and running before ____ is raised. (pg. 312) A. the first investment from venture capital B. the second investment from venture capital C. trade credit D. the investment from family and friends E. the investments from IPO 21) Venture capital funds are limited partnerships that typically begin with how long of a term? (pg. 312) A. Two years.

B. Four years.

C. Six years.

D. Eight years.

E. Ten years. .

22) The capital gain on the harvest is shared with ____% for the limited partners and ____% for the general partners, once the limited partners have received their entire original principal. (pg.

313) A. 80% - 20% B. 20%-80% C. 40%-60% D. 60%-40% E. 50%-50% 23) What category of venture capital participant employs gatekeepers to advise it on what projects to invest in and to monitor the investment afterwards? (pg. 313) A. General partners.

B. Limited partners.

C. Investment advisors.

D. All of the above.

E. None of the above.

24) If a venture capital fund is successful, as measured by the financial return to the limited partners, the general partners usually raise another fund ______ years later. (pg. 314) A. 1 - 3 years B. 4 - 6 years C. 7 - 9 years D. 10 - 12 years E. 13 - 16 years 25) In general, a venture capitalist should not sit on more than what number of portfolio company boards? (pg. 316) A. 2 B. 6 C. 8 D. 10 E. 12 26) What will a VC usually receive in exchange for the money invested? (pg. 316) A. Common stock B. Stock options C. Promissory notes D. Letter of deposit E. Convertible preferred stock 27) The equation for the value of a company with the earnings capitalization method is: (pg. 318) A. Company Value = Gross Revenue ÷ Book Value B. Company Value = Net Income ÷ Capitalization Rate C. Company Value = Net Income × Market price of stocks D. Company Value = Sum of Cash Flow for the past five years .

E. Company Value = Price of one share × number of shares

28) Which of the following must be added to Operating Income when calculating Free Cash Flow? (pg. 318) A. Depreciation B. Principal Payments C. Interest Payments D. Capital Expenditures E. Tax Payments 29) Replacement Value is a variation of: (pg. 319) A. Market-Comparable Valuation Method B. Earning Capitalization Method C. Present Value of Future Cash Flows Method D. Market Capitalization Method E. Asset-based Valuation Method 30) The least desirable way for venture capitalist to harvest an investment is: (pg. 322) A. IPO B. Acquisition C. Buyback D. Stock swap E. They are equally attractive 31) What is the term for the event by which the investor realizes his or her investments? (pg.

322) A. Crop B. Gain C. Exit D. Yield E. Cream 32) In recent years, approximately how many venture-backed companies went public? (pg. 323) A. 220 B. 340 C. 270 D. 100 E. 140 33) The period when the prior shareholders are not permitted to sell any of their stock is called: (pg. 323) A. Lockup period B. Blocking period C. Limited period D. Banning period .

E. None of the above 34) For the entrepreneur advancing through the IPO process, what is the step that immediately follows the SEC’s approval of the preliminary prospectus? (pg. 325) A. The “road-show” B. Filing the registration form with the SEC C. Agreeing upon the price of stocks D. Meeting with all key players E. Start seeking an underwriter for the IPO

Open Ended 1. What are other sources of funding besides Venture Capital? (pg. 303) • Services at reduced rates (some accounting and laws firms offer reduced fees to startup companies as a way of getting new clients) • Vendor financing (getting favorable payment terms from suppliers) • Customer financing (getting down payments in advance of delivering goods or services) • Reduced rent from a landlord • An incubator that offers rent and services below market rates • Government programs such as the Small Business Innovation Research awards for technology companies 2. Who are informal investors and what are the benefits of attracting investments from them? (pg. 304) • Informal investors are family and friends.

• You may not need a formal loan agreement when you’re dealing with your family and friends.

• They often treat this lending more as help to you than an investment and will not sue if the investment is not fully repaid.

• Informal investing is often much easier for a startup to access, than other sources of funding.

3. What are the key characteristics of the various types of angel investors? (pg. 307) a. Entrepreneurial angels have the experience and track record to be both business advisors and mentors. b. Corporate angels, with their experience in large organization, are looking to invest their money and experience in a startup. c. Professional angels such as doctors, lawyers and professors may each have their own deep expertise in a particular industry, but they are largely silent investors. d. Enthusiast angels are wealthy and retired (or semiretired) and are investing in startups as a hobby. e. Micromanagement angels are entrepreneurs with strong views on how to manage the companies they are investing in, and they want to be involved and informed.

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4. What is convertible debt? What stages of funding are convertible debt usually raised for? (pg. 308) • Convertible debt is a bridge loan that converts to equity at the next round of investment, assuming that it is an equity round. Convertible debt securities allow the next-round investors, who are usually venture capitalists, to set the value of the company and provide the first-round angel investors with a discount. Business angels would like to get a 30% discount, but actual discounts range from 10% to 30%. Convertible debt has the advantage over convertible preferred stock because it reduces or eliminates squabbling over the valuation between venture capitalists and the entrepreneur on behalf of the angels.

• Convertible debt is raised by seed-stage companies that expect to get venture capital investment in later rounds of financing 5. How much startup capital does an entrepreneur need to start a business? (pg. 309) • The amount of capital that entrepreneurs need to start their ventures depends, among other things, on the type of business, the ambitions of the entrepreneur, the location of the business, and the country where it is started.

• According to the GEM Report the median level of funding required to start a business is $17,500, with entrepreneurs providing 57% of the funding.

• The amount needed to start a business is highest in extractive industry at $347,000, because of the large investment in capital equipment necessary for extracting raw materials such as oil and gas. Meanwhile, startups in the business services sector required an average of $20,000 and the lowest amount of funding was required by consumer-oriented businesses which needed only $11,216. The businesses that need the most startup capital are those created with the intent to grow and hire employees. For example, nascent businesses that expect to create 6 or more jobs in five years require an average of $50,000 in startup money.

6. What is the expectation of return on investment for informal investors? How does it differ based on the relationship to the entrepreneur? (pg. 309) • The median expected payback time, as you can see in Figure 10.1, is two years, and the median amount returned is one times the original investment. In other words, there is a negative or zero return on investment for half the informal investments.

• It seems that altruism is involved to some extent in an informal investment in a relative’s or a friend’s new business. Put differently, investments in close family are often made more for love, not money.

• The amount invested by strangers is the highest. What’s more, the median return expected by strangers is 1.5 times the original investment, compared with just 1 for relatives and friends. The most likely reason is that investments by strangers are made in a more detached and businesslike manner than are investments by relatives and friends.

7. Describe venture capital investing from the perspective of the firm’s general partners. (pgs. 312-313) • At the center of the process are general partners of venture capital funds, which are limited partnerships with a ten-year life that is sometimes extended. The general partners of venture capital funds raise money from limited partners. In return for managing the

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• • •

partnership, the general partners receive an annual fee of 2% to 3% of the principal that has been paid into the fund.

The general partners then invest money in portfolio companies in exchange for equity. If all goes well, the investment in the portfolio companies grows and the equity is eventually harvested, usually with an initial public offering (IPO) or a trade sale to a bigger company.

The capital gain on the harvest is shared 80% - 20% between the limited partners and the general partners once the limited partners have received back all the principal they put into the limited partnership.

Sometimes gatekeepers are employed by limited partners to advise them on what venture capital funds they should invest in and to watch over an investment once it has been made.

The fee for gatekeepers is approximately 1% of the capital invested.

8. What are the advantages of having a venture capital backed company? (pgs. 315-316) • IPOs of such companies are generally very successful • VCs help with recruiting key members of management, strategic advice, industry contacts, and professional contacts • VCs have deep pockets and can in most cases raise new funds for additional venture financing • Being a VC-backed company adds to your credibility and reputation 9. Name the ways of valuing a business and explain why none of them can be called ideal. (pg. 317) • Earning-capitalization valuation • Present value of future cash flows • Market-comparable valuation • Asset-based valuation • No single method is ideal, because the value of a business also depends on opportunity, risk, purchaser’s financial resources, future strategies for the company, time horizon of the analysis, alternative investments, and future harvest. Also, while each method is appropriate for valuing some businesses, none fit for every business.

10. What are the three ways for an investor to exit an investment? Which is the most lucrative? (pgs. 322-323) • There are three ways to exit an investment: an initial public offering, an acquisition, and a buyback of the investor’s stock by the company itself. Most investors prefer an IPO because it produces the highest valuation in most cases— but not in every case. An acquisition is the second choice. And a buyback is a distant third because in almost every instance it produces a mediocre return.

• IPOs generally yield the biggest returns for the pre-IPO investors, but in the long run, they’re not always satisfactory for the entrepreneurs and the management team.

• Buybacks are rare because a successful and rapidly growing company needs all the cash it can get just to keep on its growth trajectory. It has no free cash to buy out its external investors. A firm doing a buyback is more likely to be one of the living dead for which an IPO or acquisition is not feasible, but somehow the company arranges a refinancing in which it buys back the stock owned by the original investors. .

11. Explain three positive reasons to go public and three negative reasons not to IPO: (pgs.

323-324) •

Positives: i) Financing. The principal reason for a public offering is to raise a substantial amount of money that does not have to be repaid. For example, the average amount of money raised by the 338 venture-capital-backed companies that floated IPOs during the period 2013 – 2017 was $111 million. In 2017, 1,624 companies went public globally, up 49% versus 2016. The total money raised was nearly $249 billion globally, resulting in average $200 million for each company. The year 2014 was atypical, as it included Alibaba’s blockbuster offering of almost $25 billion. ii) Follow-On Financing. A public company can raise more capital by issuing additional stock in a secondary offering. iii) Realizing Prior Investments. Once a company is public, shareholders prior to the IPO know the value of their investment. What’s more, their stock is liquid and can be sold on the stock market after the lockup period is over. The lockup period is a length of time after the IPO date (usually 180 days) when the prior shareholders are not permitted to sell any of their stock. iv) Prestige and Visibility. A public company is more visible and has more prestige. This sometimes helps the company with marketing and selling its products, outsourcing, hiring employees, and banking. v) Compensation for Employees. Stock options presently held by employees or granted in the future have a known value. vi) Acquiring Other Companies. A public company can use its shares to acquire other companies.

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Negatives: i) High Expenses. Expenses associated with going public are substantial. They include legal and accounting fees, printing costs, and registration fees. On average, companies spend anywhere from $7.3 million for IPOs less than $100 million to $27million for IPOs from $250 to $500 million. Those expenses are not recoverable if the company does not actually go public, which happens to about half the companies that embark on the IPO process and fail to complete it. If the company does go public, the underwriter’s commission takes between 4% and 7% of the money raised. ii) Public Fishbowl. When a company goes public, SEC regulations require that it disclose a great deal of information about itself that until then has been private and known only to insiders. That information includes compensation of officers and directors, employee stock option plans, significant contracts such as lease and consulting agreements, details about operations including business strategies, sales, cost of sales, gross profits, net income, debt, and future plans. The IPO prospectus and other documents that have to be filed with the SEC are in the public domain; they are a gold mine for competitors and others that want to pry into the company’s affairs.

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iii) Short-Term Time Horizon. After an IPO, shareholders and financial researchers expect ever-increasing performance quarter by quarter. This expectation forces management to focus on maximizing short-term performance rather than on achieving long-term goals. iv) Post-IPO Compliance Costs. To meet SEC regulations, a public company incurs accounting costs it never had when it was private. Those can amount to $100,000 or more annually. v) Management’s Time. After an IPO, the CEO and the CFO have to spend time on public relations with the research analysts, financial journalists, institutional investors, other stockholders, and market makers— so named because they make a market for the company’s stock. This is a distraction from their main job, which is running the company for optimal performance. vi) Takeover Target. A public company sometimes becomes the target of an unwelcome takeover by another company. vii) Employee Disenchantment. A rising stock price boosts the morale of employees with stock or stock options, but when it is sinking, it can be demoralizing— especially when an employee’s options go “underwater” (the stock price falls below the options price).

Underwater options can make it difficult to motivate and retain key employees.

12. Explain why the underwriter of an IPO often tries to lower the price of the stocks in the offering. (pg. 325) • The worst thing that can happen to an underwriter during an IPO that the underwriter cannot sell all of the stock.

• Following a simple demand/supply rule, the higher the price of a stock, the fewer shares investors are willing to buy.

• Therefore, if underwriters see that the market is not ready to buy all the stock at a set price before the IPO, they may try to lower the price.

13. Why would a company want to be acquired? (pgs. 326-327) • Managers can focus on building the company • Easy access to additional capital • Fast realization of investments • The entrepreneurs and employees get cash immediately • The expenses and investment banker’s commission are substantially lower for an acquisition than for an IPO. 14. What may be some drawback in getting acquired? (pgs. 326-327) • Management may prefer to move on to a new venture instead of working through an earn-out period.

• The culture of your venture may clash with, or be impacted adversely by, the acquirer.

• You company may be valued less in an acquisition than in an IPO • The strategic flexibility of your company may be impacted by its role in a parent companies portfolio.

• Your cash could be harvested by the acquirer to support other ventures. .

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Employees may have different views on how the venture should be harvested and an acquisition may cause turn-over.

Chapter 11 Questions True/False 1) Only a handful of very large firms have access to funding sources such as assetbacked debt securitizations, A-l commercial paper ratings, and below-prime lending rates. (pg. 339) (True) 2) Entrepreneurs requiring initial startup funding, generally seek capital from internal sources. (pg. 339) (True) 3) Home equity lines of credit are the only way in which entrepreneurs provide funding for their businesses. (pg. 339) (False) 4) The business operating cycle for a traditional manufacturer begins with the purchase of raw materials and ends with collections from the customer. (pg. 340) (True) 5) The vast majority of organizations experience a gap between the time when they have to pay suppliers and when they receive payment from customers. This gap is known as the cost cycle. (pg. 341) (False) 6) Companies with a negative cash conversion cycle will see their working capital requirements increase with growth. (pg. 341) (False) 7) Corporate insolvency usually results when the firm fails to service its debt obligations on time. (pg. 342) (True) 8) Net working capital is difficult to calculate; the method of taking the difference between current assets and current liabilities leaves the entrepreneur with ambiguous figures. (pg. 342) (False) 9) From an ongoing perspective, the company’s new ratio might be more indicative of liquidity than either the current ratio or the quick ratio. (pg. 342) (True) 10) Working capital requirements can fall short periodically as long as the company remains profitable. (pg. 342) (False) .

11) An entrepreneur may only cash in his accounts receivable by going to a finance company for a loan. (pgs. 342 - 343) (False) 12) Accounts receivable represents liquid working capital that can be obtained prematurely without cost. (pg. 342) (False) 13) Techniques for forecasting future sales are limited to methods that use external or economic information. (pg. 343) (False) 14) From a microeconomic perspective, a company operating below its optimal output should always offer generous credit terms in order to stimulate demand. (pg. 344) (True) 15) The credit terms of “10/15, net 30” mean that the payment is due within 15 days, but if paid within 10 days, there is a net 30% discount. (pg. 344) (False) 16) The two major determinants of the credit decision are the character of the creditor firm and the capacity of the debtor company to repay the loan. (pg. 347) (True) 17) Building up inventory typically reduces cash levels. (pg. 348) (True) 18) When paying for working capital shortfalls, entrepreneurs look for short-term cash at the lowest possible rates. (pg. 348) (True) 19) An entrepreneur only requires enough cash to cover needs under the most likely scenario he/she has forecasted. (pgs. 348 – 349) (False) 20) One way for entrepreneurs to stretch their payables (to take longer to pay bills) is to take discounts. (pg. 349) (False) 21) If an entrepreneur wants more credit and would like to stretch out her payables, she can negotiate with her suppliers for more generous credit terms. (pg. 349) (True) 22) By paying bills more slowly, an entrepreneur will hurt his or her business. (pg. 349) (False) .

23) Some suppliers use generous terms on trade credit as a form of sales promotion. This is always less effective than an intensive advertising campaign or a high-pressure sales team. (pg. 350) (False) 24) Pledging means using accounts payable as collateral for a loan from a finance company or bank. (pg. 351) (False) 25) When a borrower instructs its customers to pay their invoices directly to the lender, the arrangement is called, “Pledging with notification.” (pg. 351) (True) 26) A chattel mortgage is a loan secured by specific assets. (pg. 352) (True) 27) When using a public warehousing arrangement for a bank loan, the entrepreneur surrenders access to his/her inventory. (pg. 352) (False) 28) Factoring with recourse implies that if a company does not pay its bill, the factor must absorb the loss. (pg. 352) (False) 29) The term, factoring, refers to selling accounts receivable at a discount to a finance company known as the factor. (pg. 352) (True) 30) An entrepreneur's inventory is an asset that legally cannot serve as collateral for a loan. (pg. 352) (False) Multiple Choices 1) Which of these begins with the purchase of the raw materials, includes the work‐in‐ process period, and ends with the sale of the finished goods? (pg. 341) A. The accounts receivable cycle B. The accounts payable cycle C. The cash conversion cycle D. The deferred income tax cycle E. The inventory cycle 2) During which of these operating cycles, the business generally receives some credit from suppliers? (pg. 341) A. The accounts receivable cycle .

B. The accounts payable cycle C. The cash conversion cycle D. The deferred income tax cycle E. The inventory cycle 3) Which of these begins with the purchase of the raw materials or finished goods, but it ends with the payment to the supplier? (pg. 341) A. The accounts receivable cycle B. The accounts payable cycle C. The cash conversion cycle D. The deferred income tax cycle E. The inventory cycle 4) Which of these describes a gap between the time when they have to pay suppliers and the time when they receive payment from customers? (pg. 341) A. The accounts receivable cycle B. The accounts payable cycle C. The cash conversion cycle D. The deferred income tax cycle E. The inventory cycle 5) The ______ of receivables collection and payment of accounts payable are key determinants in whether a firm is cash rich or cash poor. (pg. 342) A. quantity B. cost C. difference D. interest E. timing 6) The basis of all receivables and collections is actual net sales, which is equal to ______. (pg. 343) A. sales minus any returns.

B. sales plus any returns.

C. sales minus returns only if they are 90 days late.

D. sales plus returns only if they are 90 days late.

E. None of the above 7) Methods of forecasting environmental change fall into two broad groups. One group is primarily concerned with forecasting the future performance of the economy as a whole; the other group is more concerned with forecasting ______ for individual industries and products. (pg. 343) A. sales B. cost C. inventory D. weather patterns E. None of above .

8) The relative proportions of cash sales and credit sales make an important difference to which of the following? (pg. 343) A. Expected sales.

B. Expected cost.

C. Expected inventory.

D. Expected cash flows.

E. Expected accounts receivable.

9) The magnitude of a company's accounts receivable obviously depends upon a number of factors, except _________. (pgs. 343-344) A. the level and the pattern of sales B. the breakdown between cash and credit sales C. the difference between current assets and current liabilities D. the nominal credit terms offered E. the enforcement of credit terms 10) What economic factor concerning the entrepreneur’s product is the most significant for the company’s credit policy? (pg. 344) A. Elasticity of demand B. Elasticity of supply C. Margin of profit D. Margin of utility E. None of above 11) Which of the following is a method of pursuing payment from a customer whom the entrepreneur believes able to pay? (pg. 346) A. Refusing any further supplies, or supplying only for cash B. Threatening legal action C. Actually undertaking legal proceedings, using a specialized collection agency D. All of the above E. None of the above 12) It’s safe to say that collection procedures are expensive and justifiable only when the expected results ______. (pg. 346) A. are lower than the cost.

B. exceed the cost.

C. are equal to the cost.

D. are at least 40% lower than the cost.

E. None of the above.

13) A method of reducing overdue accounts and limiting bad debts is setting limits to the credit allowed on______. (pg. 346) A. corporate buyers B. individual accounts C. high-cost goods .

D. low-cost goods E. none of the above 14) Which of the following is NOT one of the Five Cs of credit? (pg. 347) A. Character B. Capacity C. Capital D. Collateral E. Customers 15) Although the opportunity costs for accounts receivable may be quite large, the largest current asset balances are usually in______. (pg. 347) A. cash B. accounts receivable C. inventories D. property, plant, and equipment E. short-term investments 16) Which of the following assets represent the most important current asset of many manufacturing companies? (pg. 347) A. Cash B. Accounts receivable C. Inventories D. Property, plant, and equipment E. Short-term investments 17) What does a trade-credit effectively amount to? (pg. 349) A. Higher accounts payable.

B. Higher trust among companies in the same industry.

C. A loan to the entrepreneur’s working capital.

D. Debt swaps.

E. None of the above 18) Typically, a company can borrow what percent of its accounts receivable’s face value if it has a good credit rating and its customers have excellent credit ratings. (pg. 351) A. 15% to 25% B. 25% to 50% C. 50% to 75% D. 75% to 90% E. 90%to 100% 19) When factoring accounts receivables, a factor will charge the entrepreneur which of the following fee(s)? (pg. 352) A. An interest charge B. A collection fee C. A credit checking fee .

D. All of the above E. None of the above 20) Which of the following is NOT a way to use inventory as security for a loan? (pg. 352) A. A chattel mortgage B. A floating lien C. Field warehousing D. Public warehousing E. Outside project financing 21) Banks prefer 90-day maturities on short term loans in order to (pg. 354) A. Charge additional fees B. Gain more favor from the entrepreneur C. Hedge against changes in the LIBOR rate D. Have a chance to regularly check an entrepreneur’s financial statements E. None of the above 22) Which of the following is NOT a factor that influences the interest borrowers pay? (pg. 355) A. the dollar amount of the loan B. the length of time involved C. the nominal rate of interest D. the repayment location E. the method used to calculate the interest 23) The bank discount method is common in ______. (pg. 355) A. short-term business loans B. long-term business loans C. financing from customer prepayments D. collateral appraisal E. insurance 24) Bank term loans may include which of the following restrictive covenants? (pg. 356) A. General provisions B. Routine provisions C. Specific provisions D. All of the above E. None of the above 25) Which of the following requirements apply with an SBA loan (pg. 359) A. The loan must purchase items made in the USA B. The venture’s debt to equity ratio must be less than or equal to 4:1 post loan C. The loan cannot be used for leasehold improvements D. All of the above E. None of the above. .

26) 21) SBA‐guaranteed loans can be used for which of the following purposes? (pg. 359) A. Expand or renovate facilities B. Purchase machinery, equipment, fixtures, and leasehold improvements C. Finance receivables and augment working capital D. Provide seasonal lines of credit E. All of the above Open Ended 1) When choosing to use internal funds as means to support growth, discuss to what ends this growth must be ultimately focused on (in terms of financing considerations). (pgs. 339 – 340) • Entrepreneurs must constantly ensure a balance and alignment exist between their goals, their means to achieve said goals, and the ways in which theirs mean are applied to reach those goals. Misalignment between any parts of these three creates additional strategic risk. When entrepreneurs use internal funds they are pairing venture risk with at least some personal risk. Therefore the goal of using internal funds should be to obtain access to better sources of funds which entail less personal risk. Key metrics such as free cash flow and pre-tax undedicated cash flow vary in relative importance depending on whether the entrepreneurs’ goals include growth through debt financing or through acquisition, respectively.

Unless the entrepreneur’s personal internal funds are vast, he/she should ensure his/her internal means are sufficient to realistically allow the venture to set the conditions to receive external funding in a reasonable period of time, with reserves built in for the unexpected crisis and opportunities. The absence of sufficient internal means necessitates the revision of the entrepreneurs’ goals, risk tolerance, or a combination of all the above.

2) What actions towards the ventures’ cash collection cycle, should an entrepreneur take before seeking ways to prematurely extract short term cash from his/her operating assets? (pgs. 340 – 351) • “An ounce of prevention is worth a pound of cure”- Before investing too much time in planning how to harvest short term cash from your operating assets, ensure you have done all that you can to optimize your CCC. Consider how variation on your value proposition, or value chain, can improve your CCC. Without misaligning priorities, strive to build the lowest possible requirements for working capital possible from the beginning, while retaining the ability to grow in the future. Removing 15% of your working capital requirements upfront will save time, worry, and money in the future as your venture grows, and could make or break your ability to set the conditions necessary to obtain future external funds.

Attempting to mitigate the ill-effects of a bloated cash conversion system in the midst of growth would be far more difficult.

3) Discuss the importance of the cash conversion cycle. (pg. 341)

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•

• • •

It is clear now that working capital requirements will increase when a venture with a positive cash conversion cycle (CCC) grows. This increased need requires additional funds and must be aligned with fund sources or else growth can lead to insolvency. Working capital is but one of many requirements to support growth.

The vast majority of organizations, particularly manufacturing operations, experience a gap between the time when they have to pay suppliers and the time when they receive payment from customers.

One of the primary causes of bankruptcy is the inability to finance operations, shutting down potentially successful ventures.

The industry’s typical cash conversion cycle is one of the most important things an entrepreneur should find out in regards to determining his or hers financing scheme.

4) Net working capital is often thought of as the balance of completely liquid assets and liabilities. However, this is not completely true. Please explain why parts of working capital can become stagnant and hurt cash levels, even if a firm is growing and profitable. (pg. 342) • As a small firm grows, current operating assets will increase. Increased inventory requirements as company increases its number of stores is one example. Even as the actual products are being sold out of inventory, the number of products that must be held in inventory reserves remains the same. This obstructs liquidity and reduces the company’s available cash.

• If current operating liabilities do not increase at the same rate as the increase in current operating assets, then the entrepreneur will find that the firm's net liquid balance will decrease. More of the firm’s cash will become tied up in accounts receivable and inventory.

• If the increase in working capital requirements exceeds the increase in profits, then the firm will find its liquidity, and cash on hand, reducing.

5) Is it a mistake for a company to offer credit terms to its customers for early payment? (pgs. 344 – 345) • This depends on whether giving a cash discount speeds up collections, and whether the opportunity cost of the funds that would otherwise have been locked up in receivables justifies the reduction in net sales revenues.

6) What factors should an entrepreneur consider when appraising the creditworthiness of new customers (also known as the 5Cs)? (pg. 347) • Character - the customer’s integrity and willingness to repay the financial obligation.

• Capacity - addresses the borrower’s cash flow and ability to repay the debt from ongoing business operations.

• Capital - the borrower’s financial net worth; consequently, a wealthy borrower may be a desirable customer even if his or her annual cash flows are relatively low • Collateral - refers to the resale value of the product in the event repossession becomes necessary. .

•

Conditions - refer to national or international economic, industrial, and firm‐ specific prospects during the time period of the credit.

7) Why do entrepreneurs usually want to keep inventory levels as low as possible?

What are the challenges facing entrepreneurs who want to reduce their inventory levels? (pgs. 347- 348) To reduce the inventory expenses such as storage costs and insurance. To ensure that as little capital as possible is tied up in inventory.

The challenges to keeping inventory levels low include: • The costs of frequent reordering.

• Loss of quantity discounts.

• Loss of customer goodwill or plant efficiency due to items being unavailable when needed.

8) Discuss the importance of forecasting cash flow requirements as it pertains to working capital. (pg. 348) • It is commonly heard that many entrepreneurs find themselves up late at night sweating over their cash flow statements, trying to sort out if they can make payroll at the end of the week. This is a problem of being short on cash, but one which often comes prior to running so short that suppliers cannot be paid such that they continue to do business with you. Forecasting cash flow is critical because, like oxygen, it will utterly consume the entrepreneurs’ full attention the moment it becomes scarce.

Multiple factors can impact a venture need for cash, including the seasonality of demand, weather, stories in the press, or the occurrence of major cultural events. To the greatest practical extent possible, the entrepreneur must seek to forecast and source these needs for funds. That said, entrepreneurs must judiciously know when to stop allocating additional managerial time to further calculations, and adjust their forecasts to deal with the remaining uncertainties, and worst case contingencies, so that they can focus on execution successfully.

9) What are the advantages of trade credit over other sources of financing? (pg.

349) • The first advantage is convenience: trade credit is not negotiated; it requires no great expenditure of executive time, and no legal expenses.

• The second advantage is that the credit available from this source automatically grows as the company grows. Accounts payable are known as a spontaneous source of financing. As sales expand, production schedules increase, which in turn means that larger quantities of materials and supplies must be bought. In the absence of limits on credit, the additional credit becomes available automatically simply because the firm has placed orders for the extra material. Of course, if the manufacturing process is long and the company reaches the supplier's payment before selling the goods, it may need some additional source of credit. But the amount will be much less than if no trade credit had been available.

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10) Short of demanding payments, what sales terms could an entrepreneur choose in order to collect cash more quickly? (pgs. 350 – 351) • Introduce, increase, or eliminate discounts. A company can initiate a discount for prompt payment (for example, a 2% discount for payment within ten days).

Similarly, a company with an existing discount may increase the discount (for example, increase discount from 1% to 2%). Finally, a company can eliminate the discount altogether and simply demand cash immediately or upon delivery (COD). Companies will have difficulty instituting these measures if competitors offer significantly more, lenient credit terms.

• Emphasize cash sales. Some entrepreneurs, particularly those selling directly to consumers, may be able to increase their percentage of cash sales.

• Accept credit cards. Sales made on bank credit cards or on travel or entertainment cards are convertible into cash within a couple of days. The credit card companies charge 3% to 7% of the amount of the sale for this service.

11) What kind of information will the loan officer be interested in, when entrepreneurs are looking for a bank loan? (pg. 356) • How much money the company needs.

• How the company will use this money.

• How the company will repay the bank, including financial statements from the company.

• When the company will repay the bank.

12) What are the three categories of restrictive covenants mentioned in the chapter, in relation to loan agreements? (pg. 356) • General provisions, which force the borrower to preserve liquidity and limit cash outflows.

• Routine provisions, which are common and non-variable restrictions.

• Specific provisions, which vary according to the situation.

13) List two examples of Routine Provisions. (pgs. 357-358) • The borrower must furnish the bank with periodic financial statements and maintain adequate property insurance.

• The borrower agrees not to sell a significant portion of its assets. A provision forbidding the pledging of the borrower's assets is also included in most loan agreements. This provision is often termed a negative pledge clause.

• The borrower is restricted from entering into any new leasing agreements that might endanger the ability to pay the loan.

• The borrower is restricted from acquiring other firms unless prior approval has been obtained from the lender.

14) Give an example of a Specific Provision that an entrepreneur might encounter in a loan agreement. (pg. 358) • Key executives may be required to sign employment contracts or take out substantial life insurance. .

• •

The bank may require the right to be consulted before any changes are made in the company's top management.

Some covenants prevent increases in top management salaries or other compensation.

15) To qualify for assistance from the Small Business Administration, the proceeds of an SBA-guaranteed loan must be used for what purpose? (pg. 359) • Expand or renovate facilities • Purchase machinery, equipment, fixtures and leasehold improvements • Finance receivables and augment working capital • Refinance existing debt (for compelling credit reasons of benefit to the borrower) • Provide seasonal lines of credit • Construct commercial buildings • Purchase land or buildings.

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Questions for Chapter 12 True/False 1) The corporate opportunity doctrine basically claims that a director cannot use his position to decide which acquisition deals the company should enter to. (pg. 374) (False) 2) Every start-up should concentrate on hiring a litigation attorney from the very beginning. (pg. 374) (False) 3) Persuading your co-workers to leave your employer is not very risky, as long as their defections do not impact the company’s ability to function and the conversations are occurring after working hours. (pg. 375) (True) 4) The number of workers you draw from your former employer to your new company does not matter from the viewpoint of liability. (pg. 375) (False) 5) Legally, an employee may not compete with his or her employer. (pg. 375) (True) 6) You can use any information you gathered at your previous job as long as it is not patented or copyright protected. (pg. 376) (False) 7) Certain states do not enforce non-compete agreements. (pg. 376) (True) 8) Even when a patent application is successfully completed, protecting Intellectual Property is not the end game; a patent doesn’t generate revenue. (pg. 377) (True) 9) Although there are actually three different kinds of patents, the kind people usually obtain to protect an invention is a design patent. (pg. 377) (False) 10) Patents today cover non-engineering subject matter ranging from holders for floral bouquets to business methods. (pg. 377) (True) 11) Trademark law cannot be invoked in Internet search engines, pop-up ads, and websites. (pg. 377) (False) 12) Users of another company's products can be sued for patent infringement. (pg. 377) .

(True) 13) To qualify the invention for a patent, the applicant must describe all things novel about the invention. (pg. 378) (False) 14) The patent application must contain a complete and understandable explanation of the invention. (pg. 378) (True) 15) Once granted, a patent’s scope is limited to the content that companies disclose in the drawings and specification portion of the filing. (pg. 379) (False) 16) In the United States, the patent application must be filed within one year of the first public disclosure, public use, sale, or even offer for sale of the product, or the opportunity to obtain a patent will be lost forever. (pg. 378) (True) 17) The owner of the patent has the right to exclude others from making, using, selling, offering for sale or importing the patented invention during the term of the patent. (pg. 378) (True) 18) From the date the application is filed, there is a “patent pending;” and from the date of a “patent pending,” there are real legal rights associated with that designation. (pg. 378) (False) 19) Since each patent application is unique, the form of each individual patent does not necessarily contain the same sections. (pg. 379) (False) 20) A sale more than a year before the application will generally bar a patent even if the invention is embedded so deeply within a larger system that it could never be discovered. (pg. 379) (True) 21) People like provisional patents because of the future protection that they ensure. (pg. 382) (False) 22) Provisionals have found favor because they are typically less expensive than full patent applications and allow companies to advertise “patent pending.” (pg. 382) (True) 23) Because of the potential value of a patent, the cost of filing a patent is always worth it. (pgs.

382-383) (False) 24) One benefit of trade secrets is they can cover everything patents cover, and much more. .

(pg. 383) (True) 25) A trade secret is defined as knowledge, which is kept secret for the purpose of gaining an advantage in business. (pg. 383) (True) 26) Trade secrets cover proprietary information, but only if they are in the form of an engineering schematic. (pg. 383) (False) 27) A benefit of trade secrets is there is no standard of invention to meet, as there is with a patent. (pg. 383) (True) 28) The law protects companies from their employees disclosing trade secrets even if those employees did not sign confidentiality contracts. (pgs. 383-384) (True) 29) Since there is no formal protection procedure, the necessary steps for establishing a trade secret are often not taken seriously until a lawsuit is brought by the owner against someone who has misappropriated them. (pg. 384) (True) 30) Trademark protection cannot be obtained for just some word, symbol, or combination thereof that is used on goods to indicate their source. (pg. 385) (False) 31) Trademarks can be more valuable to some companies than patents and trade secrets combined. (pg. 385) (True) 32) Trademarks can differentiate a business's products and services from those of others businesses. (pgs. 385 – 386) (True) 33) Although formally there is only one owner in the sole proprietorship, two or more people control the company. (pg. 390) (False) 34) A board of directors makes all the long-term and significant policy decisions for the business as well as electing the officers of the corporation. (pg. 391) (True) 35) If a business is not able to pay its debts, under a general partnership, the debt is transferred to the owners. (pg. 391) (True) .

36) Business angels prefer to invest in sole proprietorships. (pg. 391) (False) 37) There are conditions under which a corporation can be taxed as a partnership. (pg. 393) (True) 38) Double taxation is not necessarily a problem for a company. (pg. 393) (True) 39) S corporations have the same restrictions as the LLCs, while allocating profit, loss and control more creatively. (pg. 393) (False) 40) Corporations do not necessarily operate in the same state where they were formed. (pg. 395) (True) 41) When choosing an official name, every company has to receive an approval from its respective state regulatory board. (pg. 395) (False) 42) The employer is responsible for any damage done by the employees occurring within the scope of their employment. (pg. 399) (True) 43) National statutes prohibit employment discrimination on the basis of sex, race, nationality, religion, sexual orientation, age, and disability. (pg. 399) (False)

Multiple Choice 1) What is the advantage of hiring a specialized attorney for a startup? (pg. 374) A. Usually good at suing multinationals B. Will gladly accept equity as the fee C. May agree upon installment payments D. May substitute expensive software at the early stage E. Good at representing your national interests 2) What concept requires that an employee does not knowingly take action designed to harm the employer's business? (pgs. 374-375) A. Reasonable protection B. Employee’s obligation C. Duty of loyalty D. Corporate tact .

E. Generally accepted protection principle 3) If you decided to leave your current employer and establish your own venture, what actions will decrease the likelihood of being sued for convincing other employees from the company to leave with you? (pg. 375) A. Working in the Human Resources department of the employer B. Talking to them after the business hours C. Talking to them over e-mail or/phone D. Offering them better working conditions in the new company E. None of the above

4) Under what condition will the law consider the company to have taken reasonable protection of its information? (pgs. 377-387) A. If the company made its employees sign non-disclosure agreements B. If the company successfully kept the information confidential C. If the company protected the information through copyright laws D. If the company protected the information by registering patents E. All of the above 5) What, if possible, must the employer do to make its employees not compete with the company for a year after they quit the job? (pgs. 375-376) A. Issue an internal order B. Does not have to do anything – the obligation is imposed on any employee by statutes C. Obtain a court order D. Have the employees sign a non-competition agreement E. It cannot be done 6) Which of the following is not referred to as intellectual property creations of the mind? (pg. 376) A. inventions B. literary and artistic works C. symbols, names, and images D. designs used in commerce E. budget for a certain project 7) Which one of the following is within the range of Intellectual Property protection? (pg. 376) A. patents B. trade secrets C. trademarks D. copyrights E. all of the above 8) _______ protect authors’ original creations, including literary, musical, artistic, software, and other intellectual works. (pg. 376) A. Patents B. Trade secrets .

C. Trademarks D. Copyrights E. All of the above 9) _______ cover proprietary information, whether it’s in the form of a recipe, a customer list, or a unique way of conducting business. (pg. 376) A. Patents B. Trade secrets C. Trademarks D. Copyrights E. All of the above 10) _______ are key in differentiating a business’s products and services from those of others as well as in franchising arrangements. (pg. 376) A. Patents B. Trade secrets C. Trademarks D. Copyrights E. All of the above 11) ______can be considered a public use of an invention, sufficient to activate the one-year period. (pg. 378) A. Market testing B. Exhibitions C. Use by the inventor himself D. All of the above E. None of the above 12) The basic requirement for a utility patent is that the ______ be different in some way from what came before. (pg. 378) A. idea B. appearance C. value D. design E. product branding 13) The form of all patents contains the same basic sections, including: ____________. (pg. 379) A. drawings showing an embodiment of the invention B. a written description of the invention referring to the drawings akin to an engineering specification C. one or more claims—hybrid legal and technical language that “captures” the invention in words D. all of the above E. none of the above 14) The design patent covers only______. (pg. 382) A. the appearance of the product B. the idea of the product .

C. the underlying concept of the product D. the functionality of the product E. the rarity of the product 15) Which of the following could NOT be protected as a common form of trademarks? (pg. 385) A. Geometric shapes B. Natural shapes C. Combinations of shapes and colors D. Words used descriptively E. Colors 16) Which of these represent a word or symbol or combination used in connection with the offering and provision of services? (pg. 385) A. Utility patent B. Technique patent C. Design patent D. Service mark E. Copyright 17) People can establish which of the following without any formal governmental procedure? (pg. 386) A. Utility patent B. Technique patent C. Design patent D. Trademark E. Copyright 18) Copyrights cover many forms of writing; however, they will not cover which of the following? (pg. 387) A. Brochures B. Photographs C. Video presentations D. Architectural designs E. Biological materials

19) After the U.S. Patent and Trademark Office examines the application and determines that the mark could be registered, the applicant must show actual use within how many months? (pg. 386) A. 1 month.

B. 3 months.

C. 6 months.

D. 12 months.

E. 24 months.

20) In the U.S., how much does a typical search and registration for a trademark cost per mark? (pg. 387) A. $1,500 - $3,500 B. $4,000 - $6,000 .

C. $7,000 - $9,000 D. $10,000 - $12,000 E. $13,000 - $15,000 21) The benefit of a copyright registration is _______. (pgs. 387 – 388) A. the registration is easy to obtain B. protection lasts a long time C. the cost is low D. all of the above E. none of the above 22) Different countries have different conditions that entrepreneurs must meet to obtain any patent protection; the first and most important restriction is______. (pg. 389) A. the time limit B. the cost limit C. the term of protection limit D. the subject matter limit E. the value limit 23) By filing a special PCT patent application in a specially designated PCT office within one year of U.S. filing, and by designating certain countries, companies can preserve their right to file in those countries without further expense for ___ after the U.S. filing date; that will provide ______for test marketing the product. (pg. 389) A. 1 or 10 months and an additional 8 or 18 months B. 20 or 30 months and an additional 8 or 18 months C. 24 or 36 months and an additional 8 or 18 months D. 40 or 50 months and an additional 28 or 38 months E. 50 or 60 months and an additional 48 or 58 months 24) An S corporation can be distinguished from other types of corporations in: (pg. 390) A. Tax status B. Number of employees C. Areas of expertise D. Geographic location E. Annual income 25) The minimum number of owners in a general partnership is equal to: (pg. 390) A. 1 B. 2 C. 4 D. 5 E. 6 26) Which of the following cannot be considered non-profit entities? (pg. 390) A. Social welfare organizations B. Educational institutions C. Churches D. Limited liability corporations .

E. Industry associations 27) In regards to determining the choice of legal form, the most relevant factor(s) one should consider is/are: (pg. 390) A. Control B. Exposure to personal liability C. Tax factors D. Administrative costs E. All of the above 28) The business is not recognized as a legal entity separate from its owners under which form? (pg. 391) A. Professional corporation B. Limited Liability Company C. Partnership D. S corporation E. Non-profit 29) How long does an organization have to file for and secure non-profit status? (pg. 394) A. 14 weeks B. 1 year C. 18 months D. 2 years E. 26 months 30) Which is NOT a condition in which the law allows creditors to “pierce the corporate veil” and go after the owners of a failed corporation or LLC. (pg. 392) A. Failing to use Inc., Corp, LLC, or a similar legal indicator when dealing with third parties B. Commingling business and personal assets in a personal bank account C. Failing to keep business and legal records and hold regular directors’, stockholders’, or members’ meetings D. Allowing unreimbursed personal use of corporate assets E. None of the above 31) Which state is famous for its management-friendly corporate laws? (pg. 395) A. Ohio B. Massachusetts C. New Mexico D. California E. Delaware 32) As can be learned from the chapter, a redemption agreement is the covenant, in which: (pg. 397) A. The business owns insurance policies on the owners and is obligated to use the proceeds to purchase each stockholder’s equity upon his or her death.

B. Each owner is required to take out insurance on the others and to buy a proportional amount of the deceased's equity.

C. Business assets, such as inventory or marketable securities, equal to the value of owner’s share of the equity in the company will be transferred to relatives upon his or her death. .

D. Internal Revenue Service allows installment tax payments to be received within 2 years after an owner’s death.

E. None of the above.

33) The doctrine of vicarious liability states that: (pg. 399) A. The employer’s liability for the employee’s actions is limited to a specific amount of money (the amount differs from state to state) B. The employer is responsible for any contract signed by the employee.

C. The employer is responsible for any actions of the employee occurring within the scope of his/her employment D. The employee always answers for the consequences of his/her criminal actions without transferring the responsibility to the employer E. Employees can be held criminally liable if they contribute to the unlawful actions of an employer and should have reasonably understood the consequences.

34) An employer may not discriminate against anyone for any of the following characteristics, except for: (pg. 399) A. Religion B. Age C. National origin D. Sexual orientation E. Disability 35) What is the main attraction of an employment agreement for the employee? (pg. 400) A. Social benefits B. Protection against firing without cause C. Guaranteed promotion on a regular basis D. Fewer responsibilities E. Higher wages 36) What is the maximum dollar amount of a securities offering for it to still qualify for private placement exemption? (pgs. 400-401) A. $100,000 B. $500,000 C. $1,000,000 D. $2,000,000 E. $5,000,000

Open ended 1) Briefly explain the ideas behind the “corporate opportunity” and the “duty of loyalty” doctrines. (pgs. 374 – 375) a) If you work in a company and identify an opportunity the company may use, you must first notify the company. b) If the company turned down the opportunity, you may use it yourself, either individually or in your own venture.

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c) The duty of loyalty limits this obligation – low-position employees must only inform the company about opportunities directly related to the scope of their job. In contrast to the more strict obligations of executives.

2) How can a company protect itself from its employees competing against the company after they leave? What problems may the company face when preventing this kind of competition? (pgs. 375 – 376) a) Require employees to sign a non-disclosure contract b) Require a non-compete agreement. c) Sometimes the contract will not be enforceable due to local legislation d) Non-compete agreements may be limited by geography or time periods.

3) Please point out different classes of inventions that utility patents can cover, and the differences between them. (pgs. 377-378) a) Utility patents cover these classes of inventions: b) Chemical inventions that include new compounds, new methods of making old or new compounds, new methods of using old or new compounds, and new combinations of old compounds. Assays, biological materials and methods, drugs, foodstuffs, drug therapy, plastics, petroleum derivatives, synthetic materials, adhesives, pesticides, fertilizers, and feeds are all protectable. c) General/mechanical inventions include everything from gears and engines to tweezers and propellers, from zippers to Jacque Cousteau's scuba regulator. For example, complex textileweaving machines, space capsule locks and seals, and diaper pins are all protectable. d) Electrical inventions include everything from lasers to light switches, from the smallest circuit details to overall system architectural concepts.

4) What are the benefits and the disadvantages of trade secrets? (pgs. 383 - 385) a) One benefit of trade secrets is they can cover everything patents cover, and much more.

Another benefit of trade secrets is there is no standard of invention to meet as there is with a patent. Finally, a trade secret can be protected eternally against disclosure by all those who have received it in confidence and from all who would obtain it by theft, for as long as the knowledge or information is kept secret. b) The key disadvantage of trade secrets is that, unlike the case with patents, there is no protection against discovery by fair means, such as accidental disclosure, independent inventions, and reverse engineering. Trade secret protection would not permit the first inventor to prevent the second and subsequent inventors from exploiting the invention as a patent would. c) Many companies use both approaches, filing a patent application and during the time it is pending, keeping the invention secret. When the patent is ready to issue, the company reevaluates its position. If the competition is close, they let the patent issue. If not, they abandon the patent application and rely on trade secret protection. But, following a change in law, patent applications are now published eighteen months after their earliest filing date, voiding trade secret protection unless the filer takes active steps to prevent publication.

5) Many people think that only technical information can be protected. Is there any other kinds of information that can be protectable? (pgs. 376-388) a) Ideas for new products or product lines b) A new advertising or marketing program c) A new trademark idea .

d) The identity of a critical supplier e) A refinancing plan 6) Secrecy is essential to establishing trade secret rights; without it there is no trade secret property. Please identify the primary steps for ensuring secrecy. (pg. 384) a) Negotiate confidentiality agreements with all employees, agents, consultants, suppliers, and anyone else that will be exposed to the secret information. The agreement should bind them not to use or disclose the information without permission. b) Take security precautions to keep third parties from entering the premises where the trade secrets are used. Sturdy locks, perimeter fences, guards, badges, visitor sign-in books, escorts, and designated off-limits areas are just some of the ways that a trade secret owner can exercise control over the area containing the secrets. c) Stamp specific documents containing the trade secrets with a confidentiality legend and keep them in a secure place with limited access, such as a safe or locked drawer or cabinet. d) Make sure all employees, consultants, and others who are concerned with, have access to, or have knowledge about the trade secrets understand that they are trade secrets, and make sure they recognize the value to the company of this information and the requirement for secrecy.

7) What are the pros and cons of patenting a product? (pg. 388) a) Pros: you get legal protection against the use of your idea by competitors; you get exclusive rights for distributing your product. b) Cons: after you have patented the product, your idea becomes commonly known, and your competitors can build around it to create a new product; filing for a patent is expensive.

8) List the common business entities and describe them. (pgs. 390 – 391) a) Sole Proprietorship - owned and operated by one owner who is in total control b) Partnership - two or more persons go into business for profit, as co-owners, sharing profits and losses c) Corporation - separate legal entity, with legal existence apart from its owners, the stockholders d) Limited Partnership - one or more general partners, who conduct the business and take on personal risk, and one or more limited partners, who act as passive investors e) Limited Liability Company - owned by “members,” who either manage the business themselves or appoint “managers” to run it for them 9) Give several reasons for choosing a C corporation entity for a start-up. (pgs. 390 - 392) a) Limited personal liability b) It is easier to attract an investor, who can receive a partial ownership as a stockholder 10) What are the possible negative consequences of a company co-owner’s death and how can a company prepare itself to minimize them? (pgs. 396 - 397) a) The company’s decision making may be blocked if, for example, the deceased’s equity is inherited by a spouse who has no knowledge of the business. b) The company may be contractually obligated to purchase the deceased’s equity. c) To make this process easier, the company may have sign one of two agreements: a redemption agreement or a cross-purchase agreement. d) Key person insurance helps buy out the deceased’s share.

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11) What legal issues can a company face when selling securities to investors? What are some of the misconceptions about stock and securities issuance? (pgs. 400-401) a) In general, the securities laws prohibit the offering of securities (including stock) to the public without prior (and very expensive) registration with an appropriate government authority such as SEC. b) These laws provide exceptions to the registration requirement in specific circumstances, but even these offerings are subject to the anti-fraud provisions of the laws. c) The Securities Act of 1933 necessarily exempts offerings that are purely local, however, the scope of this exemption is relatively narrow.

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Questions for Chapter 13 True/False 1. As the organization grows, managerial skills negate the importance of entrepreneurial skills. (pg.

412) (False) 2. Essentially customer needs do not change, therefore you need to identify them and maintain focus. (pg. 412) (False) 3. Entrepreneurs should constantly develop the firm’s entrepreneurial capability. (pg. 412) (True) 4. The opportunity domain is one of the four driving forces in the growth stages of any firm. (pg.

414) (True) 5. A typical acquisition gives the owner 50% in cash and 50% in the acquiring company’s stock. (pg. 413) (False) 6. It is always best to appoint a CEO from the employees who were with the company from the very beginning (pgs. 413-414) (False) 7. Stockholders have the largest impact on a firm’s growth potential (pg. 415) (True) 8. During the early growth, the entrepreneur needs to focus on the company’s strategy (pg. 415) (True) 9. At the core of the growth model lays execution. (pg. 416) (True) 10. Execution has the most direct link to profits (pg. 416) (True) 11. The most critical first task in transitioning a business beyond the startup stage is to sustain an entrepreneurial organization. (pg. 417) (False) 12. Managing cash is one of the key objectives of a control system (pg. 418) (True) 13. You should try to implement a complex system of control from the early stages of growth (pg.

417) .

(False) 14. Rapidly growing administrative and selling expenditures are often appropriate (pg. 418) (True) 15. Performance measures in an early-stage company are designed more for helping in entrepreneurial decision-making than for evaluating current performance (pg. 418) (True) 16. Tracking performance is necessary to support quality decision making. (pg. 418) (True) 17. The majority of your performance tracking efforts should be focused on your competition during your initial growth stages. (pgs. 418-419) (False) 18. Tracked items and metrics should be focused on supporting specifically anticipated decisions to the greatest extent possible. (pgs. 418-419) (True) 19. Performance measures for a growing firm should be simple and inexpensive to track (pg. 419) (True) 20. The Cash Cycle shows the relationship between three key metrics: days in payables, assets turnover, and days sales are outstanding (pg. 420) (False) 21. It is possible to have a negative cash conversion period (pg. 421) (True) 22. Diversifying opportunities in early stages of the company generates better results than crafting only one (pg. 424) (False) 23. Growing companies who choose to expand through acquisition do so by primarily looking beyond their opportunity domain. (pg. 424) (False) 24. The company should be driven only by opportunities that leverage current capabilities (pg. 424) (False) 25. Bootstrapping policy should not be discontinued once the company is successful (pg. 426) (True) 26. Financing for longer term investments that incur a higher degree of risk are often funded through equity rather than bank loans. (pg. 427) (True)

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27. It will often be acceptable for an entrepreneur to find him/herself routinely doing portions of other people’s jobs during growth. (pg. 430) (False) 28. The best management team consists of both internally promoted and externally hired people (pg.

431) (True) 29. Professional managers for companies in later growth stages are almost always internal candidates because of their unique experience with the company. (pg. 432) (False) 30. As the company grows, bureaucracy has to be increasingly instilled to help coordinate different departments (pg. 433) (False) Multiple Choice 1. What does entrepreneurship begin with? (pg. 411) A) Leadership B) A loan C) Venture capital D) Opportunity E) A management team 2. What is the least likely to lead to a failure in growth management? (pg. 412) A) Having limited time and resources to spend on organization building B) Spending too much time on day-to-day operations C) Chasing many opportunities D) Spending time on planning E) Not having a strong management team 3. What skills become increasingly important at later stages of development for a company? (pg.

412) A) Marketing B) Managerial C) Technical D) Entrepreneurial E) Opportunity identification 4. Which of the following is not a part of the driving forces in the growth stages? (pg. 412) A) Leadership B) The opportunity domain C) Resources and capabilities D) Execution E) Outside investors

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5. According to the chapter, 50% of businesses started today will not exist in how many years? (pg.

412) A) 2 B) 3 C) 5 D) 6 E) 8 6. What fraction of firms started today, according to the chapter, will still be growing and profitable in eight years? (pg. 412) A) 1/5 B) 1/6 C) 1/7 D) 1/8 E) 1/9 7. What is NOT an option an entrepreneur must consider beyond startup? (pg. 413) A) Leaving the venture B) Selling the venture C) Maintaining the venture D) Growing the venture E) All of them are options 8. In a typical acquisition deal, what portion of the selling price does the entrepreneur receive in cash? (pg. 413) A) 1/2 of the price.

B) 1/3 of the price.

C) 1/4 of the price.

D) 1/5 of the price.

E) 1/6 of the price.

9. What option does the entrepreneur have if he or she decides to maintain a business? (pg. 413) A) Continue to lead the organization B) Become a manager C) Seek other employment D) Take an alternative position in the firm E) None of the above 10. Who or what has the largest impact on a firm’s growth potential? (pg. 415) A) Stakeholders B) Uncertainty C) Environmental conditions D) Technology changes E) Competitors 11. What should an entrepreneur focus on during early growth? (pg. 415) A) Expansion B) Strategy .

C) D) E)

Operations Accounting Networking

12. What is the core of the growth model? (pg. 416) A) Leadership B) Resources and capabilities C) The opportunity domain D) The entrepreneur E) Execution 13. The chapter warns that which of the following can lead to poor coordination between different activities within the company? (pg. 417) A) Overdue collections B) Inventory outages C) Uncontrolled growth D) Diminishing cash flows E) None of the above 14. Which of the following is not mentioned in the chapter as a key objective for a control system? (pgs. 417-418) A) To create culture B) To institute control C) To manage cash D) To track performance E) All of the above are mentioned 15. An effective control system includes all of following except: (pg. 417-418) A) Account payables policies B) Accounts receivables and collections policies C) Assessment of performance and expenditures D) An inventory management system E) A risk-assessment ratios tracking 16. Which of the following is NOT characteristic of an effective performance tracking system? (pg.

418-419) A) Determines where, when, and how to measure a key item, and who is responsible for measuring it.

B) Metrics tied to a decision (should be nearly all metrics) are assigned the latest time before which the measure will be relevant to making the decision.

C) The system is exhaustive of all possible metrics for a given questions.

D) All of the above.

E) None of the above 17. After tracking key metrics in your company’s performance, what should alert you that it may be time to consider making adjustments in your policies? (pg. 419) A) If your metrics are below your expectations.

B) If the changes in your company are not the result of changes in your policies. .

C) D) E)

If the marketing expenditures are hard to predict.

If your metrics require in-depth analysis.

If receivables collection period is more than 30 days.

18. Which of the following are signs that your venture may be growing too fast? (pgs. 419-420) A) The percentage of your cash flows from operations is declining against your cash flows from financing.

B) Profit margins are shrinking as sales are rising.

C) Customer complaints are declining while sales are rising.

D) A & B only E) B & C only 19. What does the cash conversion period show? (pg. 420) A) Number of dollars available to pay your short-term liabilities.

B) How quickly you get your receivables paid.

C) Time between cash outlays and cash inflows during the company’s sales process D) How quickly you sell and replace your inventory over a period.

E) Degree to which a company is using borrowed money.

20. A positive cash conversion period means that: (pgs. 420-421) A) You have an inefficient receivables control system B) You are getting cash in before you deliver products/services C) You have a very efficient receivables control system D) You are receiving cash after you deliver products/services E) Customers pay you before you provide them products/services 21. A series of steps showing the activities and entities that we need to coordinate in order for the company to execute its product or service is called: (pg. 422) A) Customer value delivery B) Value chain C) STEP D) Customer value proposition E) Attributes model 22. What do customers usually want the company to do with its products? (pg. 423) A) To improve the products they know best.

B) To introduce new products.

C) To change brand names of existing products.

D) To produce products inside the country.

E) None of the above.

23. What could identification of your firm’s range of value chain activities help you to detect? (pgs.

422-423) A) New markets.

B) Legal liabilities.

C) Ways to shift your core business.

D) Resource draining side projects.

E) All of the above. .

24. Which of the following is not a source of financing for early growth? (pg. 427) A) Angel investors B) Founder loans C) Investment from key management D) Equipment leases E) All of them are sources 25. What best characterizes an entrepreneur? (pg. 429) A) Resource driven B) Maintains consistency and predictability C) Implements the business D) Opportunity driven E) Enhances efficiency of organization 26. Which of the following may be a common error when an entrepreneur tries to transition to an entrepreneurial leader (pick one). (pgs. 430-431) A) Leads the venture through changes in both the organization and the competitive environment.

B) Sets a vision and empowers others to carry it out.

C) Avoids hiring managers whose domain experience exceeds their own.

D) Leverages the core business to grow in-line with critical capabilities.

E) All of the above 27. Which of the following is a sign that an entrepreneur is delegating well. (pgs. 430-431) A) You are making more decisions, but accomplishing less B) People are working hard, but critical mistakes are increasing C) Action isn’t taken without the entrepreneurs’ involvement D) Problems are solved without the entrepreneur being involved in the underlying mechanics.

E) None of the above 28. What purpose should the board of directors serve as a company professionalizes? (pg. 432) A) Mentorship.

B) Strategic.

C) Operating.

D) Credit lending.

E) To represent suppliers.

29. According to the Driving Forces of Growth Model, opportunity domain interacts with which of the following? (pg. 432) A) Stakeholders B) Environmental conditions C) Profitability D) Coordination E) Organizational capabilities 30. Which of the following is NOT an important factor is recruiting a board of directors? (pg. 432) A) Willingness and ability to become key participants in the strategic planning process.

B) Whether or not the board member is a stakeholder with the ability to exert control over the firm. .

C) Finding alternative perspectives and depth and breadth of experience.

D) The board member’s likely willingness to join the company as a senior manager in the future.

E) None of the above

Open ended 1.

Describe some of the reasons that entrepreneurs fail to manage their companies’ growth. (pg. 412) • They have limited time and resources to spend on organization building • They’re constantly fighting fires in the business’s day-to-day operations • They’re chasing too many opportunities, leaving little time for planning • They neglect the planning and preparation required for long-term success

2.

Once a company has moved beyond the startup stage, what are the three main paths that the founder can choose? What are some of the subordinate options within each of those three paths? (pgs. 412-413) • Sell the company: ▪ stay with company; ▪ start another venture; ▪ seek other employment • Maintain the company: ▪ become a manager; ▪ exit day-to-day management • Grow the company: ▪ become an entrepreneurial leader; ▪ take alternative position in the company; ▪ exit day-to-day management

3.

What are the driving forces of growth? What is the core of the growth model? (pg. 414) • Leadership • The opportunity domain • Organizational resources and capabilities • Execution is the core and fourth driving force

4.

Why is a control system so important for a growing organization? What are the features of a well-functioning control system? (pgs. 417-418) • Without an adequate system of controls, the company can’t optimize its decision making or prevent the waste of resources • An effective control system includes the following: ▪ Accounts receivables and collections policies ▪ An inventory management system ▪ Account payables policies ▪ Assessment of performance and expenditures ▪ Metrics to track trends in cash, receivables, inventory, payables, expenditures and performance

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5.

Describe why performance measures must be linked to anticipated decisions. (pg. 418419) a. There should be fewer top-level decisions if delegation is combined with a clearly communicated strategy and operating plan. b. Those decisions that remain for the entrepreneur are the most significant and affect the entire organization. c. Uncertainty at the organizational level of decision making is drawn from assumptions about the market, the competition, and about the venture itself. d. An entrepreneur’s limited resources must be focused on answering key questions about their own assumptions in time to improve decision making. e. Resource limitations will restrict performance tracking to those items that are most important which, by its very nature, are those decisions which affect the entire organization. f. Performance tracking that results in no decision to act, or act differently, is a waste of resources.

6.

What are some indicators that a company is growing at an uncontrollable rate? (pgs.

419-420) a. The workforce is stretched too thin. b. The percentage of cash flows from operations is declining against the cash flows from financing, particularly debt. c. Profit margins are shrinking as sales are climbing. d. The entrepreneur is doing other peoples’ jobs. e. Customer complaints, in proportion to increases in sales, are increasing. f. The company’s accountant is nervous.

7.

What are the components of the cash cycle? How can the company improve its cash conversion period? (pgs. 420-421) • The three components are: days in payables, days in inventory, and days sales are outstanding.

• You can negotiate better period terms with suppliers.

• You can optimize your inventory management and reduce your inventory holdings.

• You can try to reduce your receivables period, thereby reducing the amount of time that your customers take to pay their invoices.

• Keep everything else level and increase your sales.

8.

What is the danger of chasing too many opportunities? Explain the significance of the opportunity domain. (pgs. 423-424) • By chasing too many opportunities the company cannot identify its own strength and differentiate itself as a provider of a specific product • Opportunity domain helps a company realize how to turn its seemingly slow growth into greater potential. It also identifies expansion opportunities which stretch your current capabilities

9.

Name some of the sources of financing. What features do creditors look for in growing organizations? (pg. 427)

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a. Sources of financing for early growth include: investment from key management, founder loans, family and friends, angel investors, loans on assets, equipment leases, trade credit, and credit cards b. Investors typically want: a viable growth model, a strong management team, clear opportunity 10.

How should entrepreneurs form their management team? What common problems might they face? (pgs. 431-432) a. In early growth, the first set of supervisors can come from within. b. Later, as your company grows, it may be necessary to hire outside managers. c. The main problem here is that your original team members may not have the necessary abilities and potential, and newcomers may not be accepted by other workers.

11.

Describe the process of transition from entrepreneur to entrepreneurial leader. (pgs.

430-431) a. Creates and implements vision for a new organization. b. Provides specific direction to employees. c. Relies on specialized expertise of others to implement details. d. Grants authority and responsibility to managers for achieving objectives. e. Sets vision and allows others to participate in setting objectives; empowers and guides, but oversees execution.

12.

What are the ways of nurturing entrepreneurs in an organization? (pg. 433) a. Identify those exhibiting passion for entrepreneurship and develop their ability to work under conditions of high ambiguity. b. Ensure that they have the inclination and credibility to convince others in the organization to contribute and commit to their projects. c. Facilitate, support and guide their efforts while also providing them with sufficient freedom and empowerment. d. Recognize their contribution to the company’s innovation and growth ambitions. e. View failure as a risk associated with entrepreneurship, and an opportunity for learning, therefore ensuring that well-intentioned failures are not punished.

13.

Discuss some of the signs that reveal an organization has outgrown the entrepreneur’s capacity. (pg. 430) a. The volume of decisions multiplies. The entrepreneur is working harder but accomplishing less. b. Decisions become more difficult to make: more complex and specialized. The entrepreneur increasingly wonders whether she has made the right decision. c. Everyone is still pitching in and doing everything, but more and more, something critical slips by or mistakes occur. d. If the entrepreneur is not directly involved in the task, no progress can happen.

14.

Discuss some options to support either the integration of outside managers into a venture, or to prepare existing employees for management roles. (pgs. 431-432) a. Consider having new managers spend time learning or performing some of the roles of existing employees if those roles are unique to your organization or central to its

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culture (e.g., Toyota executives work on the assembly line with front line factory workers) b. Identify employees with management potential, and invest in their development early enough that they are ready to assume more responsibility before more management is desperately needed. This could include formal schooling, or simply shadowing or apprentice programs, where employees are gradually handed additional responsibility as their capabilities grow.

15.

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Discuss some potential pitfalls of decentralization common to new leaders (pgs. 430431) a. Under a more centralized structure, a leader may tell people why they are doing something, what to do, and even how to do it. b. As delegation increases leaders must still communicate why, and often what, must occur. c. As organizations decentralize in order to be more responsive to changes in the environment, the leader may not be able to supply even what must be done, but must always communicate WHY. d. Trust is the critical glue that makes a decentralized organization work. Without trust, leaders will tell people what and why to do things, and once conditions change and the ‘what’ no longer accomplishes the ‘why,’ the organization will not be able to function in a decentralized manner. e. Learning to increase communication of purpose when reducing the communication of ‘what’ to do, is a common error for leader of newly decentralized organizations.

Questions for Chapter 14

True/False 1) The Global Entrepreneurship Monitor estimates that 5% of the population is either currently in the process of trying to start a social venture or is presently running one. (pg.

443) (False) 2) Wicked problems can be defined by those that require multiple stakeholders and complex solutions. (pg. 444) (True) 3) Social entrepreneurship is primarily concerned with profits. (pgs. 444-445) (False) 4) Social entrepreneurship creates social value and/or social change. (pg. 445) (True) 5) Process‐based definitions of social entrepreneurship focus on actions such as value creation, opportunity recognition, opportunity exploitation, and resource mobilization. (pg. 445) (True) 6) Many social ventures are nonprofit organizations. (pgs. 445-446) (True) 7) Corporate social responsibility most closely aligns with the Social Consequence Venture. (pg. 446) (True) 8) Enterprising nonprofit (quadrant 4) focus primarily on economic mission and economic impact. (pg. 446) (False) 9) Social purpose ventures (quadrant 3) are founded on the premise that a social problem will be solved, yet the venture is for‐profit and the impact on the market is typically perceived as economic. (pg. 446) (True) 10) Social purpose ventures are firms started with a specific social mission and do not care about making profits. (pg. 447) (False)

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11) Because social entrepreneurial ventures serve social ends they do not need to be financially viable. (pgs. 447 – 448) (False) 12) Nonprofit organizations cannot be financially evaluated, because they do not produce financial profits. (pg. 448) (False) 13) Hybrid ventures are those that pursue social and economic goals unequally. (pg. 449) (False) 14) Hybrid social ventures have a revenue-generating component. (pg. 449) (True) 15) Identifying an opportunity for a social venture always results from a deliberate process. (pg. 453) (False) 16) It is possible to position a venture in all four of the specific typologies of ventures. (pg. 453) (True) 17) The Timmons Model will be affected by the choice of Social venture type. (pg. 453) (True) 18) Sometimes reducing the consequences of a social problem may not actually solve the problem. (pg. 454) (True) 19) The ability to articulate a venture’s social values is helpful for evaluating its performance. (pgs. 454-455) (True)

Multiple Choice 1) Why did Tricia Compas-Markman first start the DayOne Response? (pg. 443) A. To earn an economic profit.

B. To make her invention commercially available.

C. To provide free water.

D. To complete a degree requirement.

E. Because she was incentivized by a government grant to do so.

2) What is driving the increase in social entrepreneurship? (pg. 443)

Zacharakis, A., Corbett, A. & Bygrave (2020) Entrepreneurship, 5th Edition. Hoboken, NJ: Wiley

A. Increased awareness of social issues B. Desire to avoid corporate taxes C. Stabilization of environmental issues D. Lack of opportunities for finding by traditional ventures E. None of the above 3) According to the Global Entrepreneurship Monitor (GEM), what percent of the population is either currently in the process of trying to start a social venture or is presently running one? (pg. 443) A. 4% B. 5% C. 6% D. 7% E. 8% 4) Which of the following is NOT one of the assumptions about creating new ventures that has recently changed? (pg. 443) A. Until the 1990s, energy was relatively expensive B. Labor was widely available and, in some countries, cheap.

C. Access to credit to start businesses was relatively easy.

D. The information needed to start a business was available with a computer, phone, and internet connection.

E. None of the above 5) In keeping with process-oriented definitions of social entrepreneurship; social wealth is defined broadly to include: (pg. 444) A. economic, societal, health, and climatic aspects of human welfare B. economic, societal, health, and environmental aspects of human welfare C. diplomatic, societal, dental, and environmental aspects of human welfare D. economic, spiritual, health, and environmental aspects of human welfare E. economic, societal, health, and diversity 6) According to entrepreneur-centric definitions, social entrepreneurs are: (pg. 444) A. The change agents for society, seizing overlooked opportunities by improving systems and inventing new approaches.

B. Create sustainable solutions to transform society for the better.

C. Constantly searching for superior ways to solve the problems that plague society.

D. Individuals with innovative solutions to society’s most pressing social problems.

E. All of the above.

7) Which of the following is essential in order to undertake a social venture? (pg. 445) A. An existing organizational model.

B. Receiving funding from a foundation.

C. Recognizing an opportunity.

D. Identifying a paying customer.

Zacharakis, A., Corbett, A. & Bygrave (2020) Entrepreneurship, 5th Edition. Hoboken, NJ: Wiley

E. All of the above.

8) What is the most social impact focused type of social venture? (pg. 446) A. Enterprising nonprofit B. Traditional venture C. Hybrid D. Social purpose E. Social consequence 9) ______ focus primarily on economic mission and economic impact. (pg. 446) A. Enterprising nonprofit ventures B. Traditional ventures C. Hybrid ventures D. Social purpose ventures E. Social consequence ventures 10) Financial performance is the primary metric for which of the following? (pg. 446) A. Enterprising nonprofit venture B. Traditional venture C. Hybrid venture D. Social purpose venture E. Social consequence venture 11) The popular term, corporate social responsibility, most closely aligns with the _____. (pg. 446) A. Enterprising nonprofit venture B. Traditional venture C. Hybrid venture D. Social purpose venture E. Social consequence venture 12) ______ are founded on the premise that a social problem will be solved, yet the venture is for‐profit and the impact on the market is typically perceived as economic. (pg.

446) A. Enterprising nonprofit ventures B. Traditional venture C. Hybrid ventures D. Social purpose ventures E. Social consequence venture 13) Which of the following companies would be considered a traditional venture? (pg.

446) A. Habitat for Humanity B. Save the Children C. Ben & Jerry’s

Zacharakis, A., Corbett, A. & Bygrave (2020) Entrepreneurship, 5th Edition. Hoboken, NJ: Wiley

D. Doctors without Borders E. None of the above 14) What experience best qualified Jim Poss to start Big Belly Solar? (pgs. 447-448) A. Preparing a business plan B. His knowledge of the trash industry C. His studies in social entrepreneurship D. All of the above E. None of the above 15) What aspect of many large companies’ social impact has garnered the largest amount of negative media attention in recent years? (pg. 449) A. Corporate social responsibility initiatives B. Supply chain operations C. Employee incentive plans D. Advertising campaigns E. None of the above 16) Why is a Hybrid a form of social entrepreneurship? (pg. 449) A. It creates both social and economic value.

B. It is able to make a profit.

C. It competes with for-profit companies.

D. Schumpeter created the first model.

E. It can be organized anywhere worldwide.

17) Tom’s shoes give away one pair of shoes to someone in a developing country for every pair of shoes sold for a profit in a developed country. Which typology is this? (pgs.

446 – 450) A. Hybrid B. Social Purpose C. Social Consequence D. Traditional Venture E. Enterprising Non-Profit 18) Which of the following is NOT a principle of the UN Global Compact? (pg. 450) A. Businesses should support and respect the protection of internationally proclaimed human rights.

B. Undertake initiatives to promote greater environmental responsibility.

C. Elimination of election financing practices that favor large donor contributions.

D. Elimination of discrimination in respect of employment and occupation.

E. None of the above 19) What would be the typology of a venture that is focused on increasing the supply of affordable housing that uses a business model designed to lowers the cost of producing

Zacharakis, A., Corbett, A. & Bygrave (2020) Entrepreneurship, 5th Edition. Hoboken, NJ: Wiley

housing so that it can sell homes at a price more lower income families can afford? (pgs.

446 – 450) A. Hybrid B. Social Purpose C. Social Consequence D. Traditional Venture E. Enterprising Non-Profit 20) One reason to become a Certified B Corporation is to; (pg. 451) A. Create a material positive impact on society and the environment B. Expand fiduciary duties of directors that requires consideration of non-financial interests C. Signal its commitment to economic and social impacts D. A & C only E. All of the above 21) Which of the following changes will impact all three portions of the Timmons Model? (pgs. 451 – 453) A. A change in the venture mission B. A change in the venture’s impact C. A change in both the venture’s mission and impact D. Only the shift from a traditional venture to another quadrant E. Any of the above 22) Why is it difficult to measure the impact of social ventures. (pgs. 453-454) A. Social problems are complex B. Social problems often have multiple stakeholders C. Different groups usually agree on the best approach D. B & C only E. A & B only 23) What are the three components of a Triple Bottom Line (TBL) objective statement? (pg. 454) A. Economic, Environmental, & Spiritual B. Political, Environmental, & Social C. Economic, Environmental, & Social D. Economic, Organizational, & Social E. Economic, Environmental, & Pragmatic

Open Ended 1) Why might different countries have different needs for social entrepreneurship? (pgs. 443 – 444) Governments can have very different mandates to meet the needs of their citizens.

Zacharakis, A., Corbett, A. & Bygrave (2020) Entrepreneurship, 5th Edition. Hoboken, NJ: Wiley

• •

•

Governments in very poor or highly corrupt countries can neglect serving some social needs entirely. Poor countries can present entrepreneurial opportunities to meet the most basic needs, such as food and shelter.

Some governments prefer that social needs be served by the market, and will only provide support for those proven to be unable to meet their own needs. Countries such as the U.S. provide opportunities to help those not already being served by either the government or the market.

Each of these cases can result in different levels and types of social entrepreneurship.

2) What would be some ways to identify social entrepreneurship opportunities? (pgs. 443-444) • Witnessing extreme social deprivation.

• Examining the consequences of economic disparity.

• Imagining how to improve delivery of social services.

• Determining how to organize a venture as a cooperative.

3) What are the four types of entrepreneurial ventures? (pg. 446) • Traditional • Social Purpose • Social Consequence • Enterprising nonprofits.

4) How might a social entrepreneur be different from a classical entrepreneur? (pgs.

446 - 450) • The social entrepreneur is dissatisfied with a social problem, not a business problem, and driven to change it.

• The social entrepreneur is primarily motivated by a social, rather than an economic, mission.

• The social entrepreneur typically meets the needs of those unable to pay for the certain goods or services.

• The social entrepreneur can face a more difficult task in evaluating his or her success than the classical entrepreneur.

5) Discuss some reasons why, given the choice, a social purpose venture may be able to have a larger impact than an enterprising non-profit. (pgs. 447 – 449) • Social purpose ventures can return profits to shareholders which may allow it to attract more capital than an enterprising non-profit.

• Additional capital may be needed to scale the business to the size needed to have a social impact.

• The ability to incentivize some workers with stock options and other types of performance incentives may matter more in certain instances, and would be difficult to do with solely salary and intrinsic motivations.

Zacharakis, A., Corbett, A. & Bygrave (2020) Entrepreneurship, 5th Edition. Hoboken, NJ: Wiley

•

You may be able to do more good by helping more people a little, than helping fewer people a lot. Scale might enable this, even at the expense of returning some portion of retained earnings to shareholders as capital gains or dividends.

6) Discuss the interplay between the typology of any given venture and the Timmons model (pgs. 446 – 451) • The relationship between the ventures mission and its impact will be a powerful driver of the types of people your venture will attract.

• Different people are motivated by different things, and it may be a challenge to attract people to a social or for profit venture is they are not currently predisposed to do so.

• An often cited example is Steve Jobs recruitment of John Sculley to join apple, in which Jobs asked Sculley (CEO of Pepsi) "Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world?"

Jobs successfully recruited Scully, but after some time it became clear that bottom-line considerations still motivated Scully greatly.

• In keeping with the Jobs-Scully analogy, some objectives are simply not suited to certain types of ventures. Solving a problem that is too small for a government solution, but not profitable enough for a for-profit company to undertake, is obviously the role many social enterprises play.

• The Gates Foundation exists, in part, because Bill Gates would not have been able to achieve his social goals through Microsoft, a for profit company.

• Resources play a large role in the type of venture chosen where, for example, part of the reason Habitat for Humanity is a volunteer service organization is that it lacks the sources of funds to increase the supply of affordable home by solely economic means, but is able to mobilize free labor and negotiate favorable financing support in order to not charge homeowners interest.

7) Given what is understood about the objectives of different typologies, discuss some likely differences between boards of traditional ventures and enterprising nonprofits. (pgs. 446 – 451) • In enterprising non-profits many of the board members will likely be economic stakeholders, although in a different sense.

• Many non-profit board members are serious donors, and make donation from their personal wealth, in addition to fund-raising for the venture.

• These board members can be expected to take a larger and more personal role, in the governance of the non-profit.

• Strategic playing will greatly involve, but often subordinate, the CEO. • CEO’s will often be responsible for the strategic execution, and operational level planning for the venture. One example of this would be the Girl Scouts or America, in which the organizations direction is firmly set by the board, with input from the CEO, but in which the CEO is far from the dominant figure that exists in other firms such as General Electric.

Zacharakis, A., Corbett, A. & Bygrave (2020) Entrepreneurship, 5th Edition. Hoboken, NJ: Wiley

8) What are the differences between measures of success for social ventures, as compared to for-profit companies? (pgs. 453 – 455) • Social ventures consider social and/or environmental impacts in addition to economic gains • Success measures for social ventures may a broader set of stakeholders, across a greater number of sectors in many cases.

• Some measures of success are interconnected as trade-offs, such as social purpose ventures that will trade-off some economic profits in order to sustain its social impact.

9) How might a social venture be more economically profitable than a for-profit company? (pgs. 449 – 451) • Customers may demand a heighted sense of social accountability and will not do business with a company that ignores this aspect in their operations.

• Creating environmental and social value may attract greater number of customers who are less sensitive to economic prices because of the sense of value they gain from doing business with a social venture (i.e., Tom’s shoes) • Social ventures may incur costs to implement efficiencies that avoid negative environmental externalities that may become severe liabilities to other firms if legislative changes come suddenly designed to reverse such externalities.

10) Why would shifting from one type of venture to another be challenging? (pgs.

451-453) • Strategy and resources must be aligned according to the type of venture chosen.

• Changing a venture type should be in response to a change in strategy, perhaps as a result of a shift in resources.

• Shifting venture types has legal, tax, personnel, and other implications.

• Shifting venture types should be directly tied to moving to a superior way accomplishing your objectives.

11) How might Triple Bottom Line be reflected in your venture’s objectives? (pg.

454) • Social, economic, and environmental results do not encompass all possible objectives, but they come close • Stating what you seek to accomplish in terms of these three categories can assist you in maintaining balance as time moves on.

• By measuring financial outcomes, you can better measure your financial capacity to achieve social outcomes.

• If your customers have high expectations as to your social outcomes, then setting and meeting appropriate goals here could mean that your customers continued (as customers and stakeholders) to support you financial (doing business with you).

Zacharakis, A., Corbett, A. & Bygrave (2020) Entrepreneurship, 5th Edition. Hoboken, NJ: Wiley

Printed: April 12, 2005

Arthur M. Blank Center for Entrepreneurship Babson Park, MA Phone: 781-239-4420 02457-0310 Fax: 781-239-4178 URL: http://www.babson.edu/entrep

Andres Galindo They say that if you can successfully negotiate rush hour traffic in Bogotá, Colombia, you can drive anywhere in the world. Andres Galindo, founder of an expanding retail business, tapped a number into his cell phone while speeding down the manic streets of his country's capital. It wasn’t that he was even in a hurry; life in Colombia was just very much about going with the flow.

“Manuel, my friend!” Andres shouted over the traffic noise, “When I gave you that huge deposit to reserve a prime spot in your Mall, you assured me that we’d be the only sportswear store on that wing. Now I see there’s an informal shop going in right across from us! ¿Qué pasa con eso?”

The 29-year-old listened to an earnest explanation about how competitive the mall business was becoming, about family ties, and about uniquely persuasive businessmen.

Andres knew it was useless to argue. Informal retailers from south Bogotá (aggressive purveyors of counterfeit and illegally imported products) had been moving north into the luxury-priced shopping areas for years, and there was no way to stop them. Money always seemed to get things done in this town, and these unfair competitors—some rumored to be very well connected—had lots of it. Andres clicked off as he lurched his KIA left to avoid a BMW that had swerved to avoid a mule-drawn cart.

It was January of 2005, and Andres had been working for ten years to maintain his firstmover leadership position as a premiere-brand retailer. That undertaking had recently become more difficult when his exclusive supplier suggested that he take on the complex task of importing the products directly.

His primary concern, however, would always be staying one step ahead of rivals who didn’t play by the rules. And since Bogotá was a place where bold tactics (such as seeking assistance from law enforcement or politicos) could get you kidnapped or worse, Andres had to be mindful about crafting quiet solutions to this, and a host of other challenges directly related to life in his chaotic and vibrant homeland.

This case was prepared by Carl Hedberg under the direction of Professor William Bygrave.

Copyright Babson College, 2005. Funding provided by the F. W. Olin Graduate School and a gift from the class of 2003. All rights reserved.

The Informal Market The tiny Colombian island of San Andres, located in the heart of the western Caribbean Sea, featured creamy white beaches, turquoise waters, an active nightlife, and duty-free shopping. Exempt from the country’s long-standing ban on imports, the quaint island had grown into a popular destination for Colombians in search of deals on a wide range of brand-name merchandise. What many of these shoppers didn’t realize was that these bargains were often counterfeit1.

In time, illicit merchants began smuggling these products from the island to warehouses located in the poorer neighborhoods on the south side of Bogotá. Locals learned of these ‘discount’ stores by word of mouth, and soon, the area became a bustling, rather seedy, retail center. As these enterprises branched out into manufacturing and distribution, they became a significant base of commerce and jobs in a city where much of the population lived in poverty. It wasn’t surprising, therefore, that officials in Bogotá had turned a blind eye to this thriving ‘informal’ marketplace known as San Andresito (Little San Andres). Sure, there were official ‘crackdowns’—with the rounding up of the usual suspects—but by the late 1980s, every major city in the country had a San Andresito district.

In early 1989, Colombian drug traffickers brutally murdered Senator Luis Carlos Galan— a reform-minded presidential candidate. Cesar Gaviria, the Senator’s campaign manager, stepped up as the new Liberal Party candidate. He was elected President of Colombia in May of 1990, and in addition to drafting a new, more democratic constitution, the progressive leader undertook economic reforms to modernize and enhance Colombia’s competitiveness in the world market. One initiative, lifting the ban on imports, was seen as a way of reducing the power of the entrenched black-market economy.

Since legally established businesses in Colombia were required to be licensed, audited, and pay import fees of 120 percent, the ‘formal’ marketplace developed very slowly. By the mid-1990s—with the growing popularity of high-end shopping malls and the reduction of import taxes to 40 percent—legitimate retailing operations had finally begun to take hold. Still, the high cost of doing business, along with what many regarded as unfavorable demographics in the country2, had prevented the establishment of any premium, single-brand retail stores.

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Sophisticated manufacturers and distributors of counterfeit products didn’t have to cover the costs of research and development, marketing, and advertising, and were therefore able to deliver near exact copies at huge discounts. The World Customs Organization estimated that counterfeiting accounted for five to seven percent of the global merchandise trade—equivalent to lost sales of as much as $512 billion—and affected virtually every industry on the planet, including pharmaceuticals, tobacco, automotive, house wares, electronics, apparel, and sporting goods.

2 The US Central Intelligence Agency’s World Factbook noted that in 2001, 55 percent of Colombia’s 42.3 million citizens lived below the poverty level. In 2003, unemployment was 14.2 percent, and the GDP per capita was estimated to be about $6,300 US [http://www.cia.gov/cia/publications/factbook/geos/co.html].

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Spotting a Legitimate Niche In 1995, Carlos Galindo flew to Honduras to meet with the Latin American distributor for Electra Sportswear, the American multinational with the famously understated lightning bolt for a logo. Carlos, then 26 years old, established himself as their exclusive marketing agent and importer for all of Colombia. He soon discovered, however, that legitimate retailers in Bogotá were heavily influenced by the prevailing market: The first three months were really difficult. I thought it would be easy to sell an upscale American brand like Electra. I knocked on every door of the formal markets trying to sell them the line of sneakers, but all of the doors were closed to me. They said, ‘You are offering me a sneaker at $70 wholesale, but this same sneaker is selling down in San Andresito for $70 retail.’ To make their margins, they would have to sell sneakers for $140; there was no interest at all.

His 19-year-old brother and closest confidant, Andres, was very intrigued. He was sure that a narrow slice of Colombians—wealthy, but not so wealthy that they were shopping in foreign cities—would be willing to pay a premium price for authentic, legally imported Electra products. He also felt that many people from affluent communities on Bogotá’s north side would welcome an alternative to the heavy traffic and colorful crowds that had always been part of the San Andresito shopping experience. Andres, a full-time undergraduate at a local university, was determined to prove his theory with a low-cost, labor-intensive method of sales and distribution: As a sales agent for my brother’s company, I filled my car with Electra merchandise and went to some of the most exclusive golf and tennis clubs in Bogotá. I convinced the managers to let me set up a small Electra display—as a service to members who may had forgotten to bring a tennis shirt that day, or maybe needed a new pair of sneakers. It was difficult, because my open-air showroom had to be set up and taken down every day.

Andres added that when professional tennis tournaments came to town that summer, sales were encouraging, but the hours were long: The first match of the day was usually at nine in the morning, so I had to be there by six. The matches didn’t end until nine at night, so by the time I did inventory, closed up the shop, and put everything back in my car, it was almost midnight. I was doing my homework early in the morning, and I was missing classes. Our Dad has always supported us with our ideas—and he could see what I was doing at the clubs was working—but he was worried I wouldn’t finish college.

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Bricks, Mortar, and Marketing By the fall of 1995, Andres was eager to take the business to the next level by setting up a north-side retail store. Electra’s Honduran-based Latin America distributor (impressed and a bit surprised by the volume of product that Andres had been selling through his country club kiosks) agreed to provide a full line of products on a 30-day credit if Andres could locate and build out an appropriate site.

Andres found availability in a luxury mall not far from his home. The landlord—who was very skeptical about the concept—required a significant ‘key money’ deposit to secure the space. Andres invested all the money he had made at the clubs, as well as $1,500 borrowed from his father. Andres, Carlos, and a few friends spent two months painting, installing fixtures, and thoughtfully displaying the merchandise that Carlos had imported from Central America. When he opened the store in early December, Andres worked alone since he had no money left to hire staff. The holiday season was in full swing, and the classy, flashy malls drew large crowds—most of whom could only afford to look. Andres recalled speaking with numerous shoppers who loved the Electra brand, but were unhappy with the price: Although it was a good season for us, we had a real problem with customers who were used to buying from shops in San Andresito. When they saw that our prices were double, they called me a thief, and said I was asking way too much for the product. They didn't understand that we were doing things right by paying the import duties and other fees levied by the government on legitimate businesses.

Despite the resistance, revenue that season covered expenses, and provided Andres with the proof-of-concept he’d been hoping for. As he began to hire sales people, he made sure that every new employee was clear on his concept: We had to show our customers that there was a different way of selling a product. When they go to San Andresito, they are buying a sneaker just by how it looks—from a clerk that has little or no product knowledge. At our store, we would ask them about what type of sport they played, and what type of exercise they did. Then we would show them sneakers and other gear that would work best for them. Unlike in San Andresito, our products always came with factory packaging—and our 30-day return/exchange warranty.

Meanwhile, brother Carlos was focused on streamlining the import process, and building the Electra brand in Colombia. That meant coordinating radio, newspaper and billboard advertising, sponsoring local sporting events, and perhaps most importantly, persuading visiting international sports figures to wear products that displayed the distinctive Electra logo. To enhance his skills, Carlos attended training sessions at the lavish Electra campus in Provo, Utah.

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Supported by his brother’s growing talent for marketing and promotion, Andres was able to expand his retail business to three stores in two years. When he graduated in 1997, Andres brought in an old friend, Jaime Ladrosi, to be his partner at Sportiendo, Inc., the parent company Andres had established to oversee operations3.

Harsh Realities Andres’s father, a former insurance executive, was uneasy about the risky career path he felt his son had embarked on. He convinced Andres to take a job with a multinational insurance company—just to experience the security and predictability of regular employment. Andres recalled that the view-in to the corporate lifestyle made a definite impression: I went to work for Universal Insurance, designing Powerpoints, and traveling with company executives to give presentations in the United States. They liked my work, but I was bored; my mind was always on building the retail business.

In early 1998, partner Jaime purchased a sleek new sports car. His manner of dress had become decidedly upscale as well. Andres, who had always been adept at working the numbers, noticed that in the last quarter of 1997, per-store income had declined, and overall margins had shrunk dramatically.

He and his brother soon discovered that Jaime had not only been stealing cash, he had been operating a secret retail store across town to sell merchandise he had siphoned from inventory. Despite the pressure exerted by the angry and deeply hurt Galindo brothers, Jaime paid back less than 20 percent of what he had stolen before disappearing from their lives. Soon after, Andres quit his insurance job in order to pull his retail venture back from the brink of financial collapse.

Family Support It took until late 1999 to stabilize the business—a recovery aided in part by negotiating better payment terms with the supplier in Honduras. Stung by the realization that even a trusted friend could turn bad, Andres instituted stringent cash and inventory controls and policies (see Exhibit 1).

Despite the setbacks and the challenges, Andres was loving the path he had chosen. He was concerned, however, that he lacked the business skills that would be required to build and manage the sort of organization he had in mind. When he was accepted into the oneyear MBA in Entrepreneurship program at Babson College in Wellesley, Massachusetts, he knew that he had to have an effective team in place to run Sportiendo in his absence.

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Sportiendo occupied a second-floor space above the third Electra Sports store—the first shop to be located on a street instead of in a shopping mall. The flat featured a four-seat conference room, Andres’ tiny office, and barely enough remaining space for a half-dozen desks.

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Having just opened his fourth store—and given his recent experience with Jaime— Andres decided to look close to home for support: Carlos and I make it a point to have lunch with our parents at least once a week—we are a very close family. Our mother was very interested in the business, but didn’t think she had much to offer. So one day after lunch I drove her to the Sportiendo office and said, ‘that desk is yours—I know you can do many things to help.’ She soon became the soul of the company. She was like a mother to all of our employees—making sure that they were happy and well-treated.

But most important, our mother began to act as my controller—checking all the incoming paperwork and making sure that all the money was accounted for. I told her she could make her own hours, and at first she was working two or three hours a day. But soon she was working all the time—and always thinking about how to improve the business.

When I got accepted by Babson, we all talked a lot about who could run the business while I was away. I hired my uncle Mario—a good business person—to oversee operations.

The family team proved so effective that Andres was able to expand the business during his year abroad. In early 2000, Sportiendo located an Electra store in a luxury mall in Cali, a city 155 miles southwest of Bogotá. Borrowing a concept that Andres had seen in the in his extensive travels, they also opened an Electra Factory Outlet to sell off excess seasonal merchandise4.

At Babson College, Andres completed a business plan that articulated his goal of growing to 15 stores by 2010. Back in Colombia following his graduation in late 2000, the entrepreneur was more confident than ever in his ability to build a solid retail enterprise.

He could not have guessed how much his talents and resolve would be tested in the coming months.

External Threats In January of 2001, a car bomb was detonated in an underground parking garage at a shopping mall in Cali—injuring more than 40 people and setting vehicles ablaze.

While no group immediately claimed responsibility for the huge blast that ripped a twostory hole in the center of the building, the attack was clearly related to the bloody 36year civil war between leftist rebels and a right-wing paramilitary group.

4

While the winter holiday season was an important time of year in retailing, in the sportswear business, collections were created on a five-month cycle for two major buying periods; spring and fall. When a new line arrived, product from the previous season was transferred to the outlet. Unlike the mall stores—which displayed product by sport, gender, and by color—Andres’ Electra outlets grouped products by percent of discount. Unsold items continued to be discounted until they were sold.

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Andres and Carlos were frantic; the newest Electra store was in that mall—and the phone lines were down. They immediately chartered a plane to the city. Although the entire front of the Electra shop had been blown away—and most of the inventory was destroyed—they were very thankful to find that none of the employees had been seriously injured. By pouring time, money, and hard work into the space, they were able to re-open in just over thirty days.

Random, unpredictable acts of terrorism like this had become part of the fabric of life in Colombia. Police armed with automatic rifles seemed to be everywhere. Some patrolled the streets with powerful attack dogs at their side, while others—stationed at the entrances of ‘at-risk’ parking garages—worked with bomb-sniffing Labradors. Since there was no way to know if and when an attack would occur, citizens adjusted their lifestyle to fit within the constraints posed by this external threat.

In a similar way, Andres confronted the ‘monster from the south’ with resolve, and an understanding of his limitations: 1999 was the first year that an informal shop opened up in a legitimate mall space. Now they are in every shopping area we are in—and working hard to copy the look and feel of our stores. As a group, they have 83 [shop-fronts] to our 15 (see Exhibit 2), and they are selling similar products to ours at half the price. The informal shops are quite skilled at mixing legitimate and counterfeit merchandise, so it is very difficult for authorities to take much action against them.

Given the informal market’s reputation for having unsavory connections throughout Colombia, Andres (whose wife Paola had recently given birth to their son, Sebastian) felt that he had no choice but to deal with these free-market insurgents as if they were legitimate competitors: It’s an ongoing battle, because people in the informal market will say anything to make a sale. Last year we discovered that they were telling their customers to come to us for Electra exchanges and refunds. We immediately had to institute a policy requiring a receipt from one of our stores for any warranty requests.

We are constantly working to adapt and differentiate our product offerings, our stores, and our service. For instance, it’s not always clear why, but sometimes a certain item will sell out in one location and not sell well in another. We watch for that, and we use a runner to move product between stores in order to satisfy those demands.

It is really important to stay fresh and on top of the trends. We update our displays every season, and we try to renovate each store about every two years. We work closely with the Electra Corporation to make sure we are

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stocking our shelves with the very latest designs and fabrics—products that counterfeiters would have less of a chance to copy.

Wherever he traveled, Andres kept a practiced eye out for the latest trends in premiere retailing. He discovered that some tactics common in cities like Paris, New York, and San Francisco, didn’t work in Colombia: When Paola and I go shopping when we’re on vacation, I never look at the products; I’m always checking out the floor, the fixtures, the ceiling construction, the wall graphics, the lights, and other things. I bring those ideas back with me, but sometimes we have to be careful.

For example, we stopped listing our store locations on our shopping bags because we didn’t want to people to know that all of the Electra stores are owned by the same company. We also tried to create a customer list for direct mailings, but for security reasons, people were unwilling to give out their information.

Once Andres had demonstrated the viability of single-brand retailing in Colombia, major international competitors like Adidas, Nike, and Puma began competing for the best spots in the high-end shopping malls around the country5. His response was to grow far more aggressively than he had envisioned in his business plan; by the fall of 2004, Sportiendo was buying product to support eleven retail stores (including one women-only shop) and four wholesale outlets in three major cities6; Bogotá, Cali, and in the Caribbean coastal town of Cartagena (see Exhibit 3).

Always on the look out for ways to move slightly down market into the ranks of Colombia’s larger ‘lower-upper-middle’ class, Andres had recently begun selling Electra products through Carrefour superstores. Exito—Carrefour’s top competitor in Bogotá— had called soon after to express interest in a similar display. Since he could only offer prices commensurate with his outlet stores, Andres was curious to see how much impact the superstores would have on Sportiendo’s financial picture (see Exhibit 4).

Staffing Operations As the business grew, Andres hired staff to perform duties that he had become too busy to do himself, or to fill jobs he felt were not his strengths. In January of 2005,

5

In addition to multinational competitors, a small but growing group of quality, private label manufacturers had appeared on the retail scene in recent years. Their stylish stores mirrored the look and feel of US firms like Abercrombie & Finch, and J. Crew. Some had begun to expand their lines to include sportswear. One challenge they faced was that San Andresito districts had conditioned Colombians to regard local goods with suspicion; items made in Latin American countries often did not sell as well as comparable products from the United States or China.

6 Uncle Mario had been appointed head buyer when Andres returned home from school. He had the task of purchasing lines for three distinct cities where the weather, and therefore the sportswear demands, varied widely—from tropical and humid on the Caribbean coast, to mild and dry in the mountains.

8

Sportiendo had an administrative staff of 107, and a retail employee base of nearly 100.

Unlike in America, where ‘just looking’ was a common refrain from mall shoppers, Colombian customers expected prompt service when they entered a store. For this reason, Electra shops typically had between four and six sales people on the floor, plus a manager.

When asked to describe the toughest part of running the business, Andres didn’t hesitate for a moment: The biggest headache is human resources—hiring, managing, and motivating people. It seems strange; business schools offer all sorts of classes on things like planning, marketing, and finance, but I never once saw a class on how to treat people, how to create incentives, design benefit packages, or how to know when someone needs to be let go.

Andres was committed to maintaining a low-profile in a country where successful local business owners—and their family members—were prime targets for kidnappers.

Employee recruitment, therefore, was conducted through friends, current staff, and through an employment agency that did not reveal the company name unless the applicants qualified for an interview. Andres explained that because of the cost to train and keep good people, Sportiendo had developed a rigorous selection process: Candidates have two interviews with a psychologist, then an interview with me. We then conduct a security review. We visit the person at their home to see how they live and who their family is. We also investigate to see if the applicant has had any legal problems, has been in jail, or whether they have connections with any criminal group or organization.

And no matter what we do, a very small percentage of our employees will try to beat the systems we have put in place. In this city, the average monthly wage is just $150 (US$). It is so surprising that someone would risk a good job to steal a shirt, or money from the register. But they do.

Import Duties Colombia had always been a particular challenge for the Electra’s Honduranbased distributor, primarily because brand marketing designed to support Andres’s stores invariably drove traffic to the informal merchants that were selling Electra products for 20 to 40 percent less. Andres recalled that four months earlier—late in the summer of 2004—the distributor had called a meeting: The Electra Corporation requires that their distributor in Honduras invest a percentage of sales in marketing initiatives for each Latin American 7

Andres’ core responsibilities included finance, site review and selection, and strategic planning. His support staff handled new product review and purchasing, hiring and human resources, store maintenance, store security and loss prevention, accounting, computer systems, and inventory management.

9

country they distribute to. They said that the business my brother is doing for them is a very important part of their marketing plan. However, because of the situation in our country, marketing costs are too high; they needed to raise my prices by ten percent in order to make it profitable for them. I told them we were already in a price war with the black market shops, and there was no way we could increase our prices. After some more discussion, they suggested another way we could work it out.

If Andres would agree to take the shipment FOB Honduras8, and import the product directly through Sportiendo—instead of through Carlos’s import agency—the distributor could offer a slight discount instead of a price increase. Carlos, whose business had been built around his brother’s retail operation, understood that he was going to have to make some changes: Right now, 90 percent of our sales come from Sportiendo. The distributor knows that Andres’s retail stores are the right channel of distribution for legitimate Electra products in Colombia. They also know that in order for those stores to be competitive, they need to maintain this Electra marketing office. Losing the money we make as an importer is going to make things hard for awhile, but I’m sure we’ll be able to find new channels for growth, such as providing importing and marketing services to other companies.

Since bringing the product into Colombia was a complex process—often taking over 30 days and always requiring lots of paperwork to clear customs (see Exhibit 5)—Andres was pleased when Hernan Jarvis, Carlos’ seasoned import manager, agreed to help Sportiendo establish an import department. Even with Hernan’s help, though, Andres was certain that it was going to be a tough transition: When we were working with my brother’s office, they would hold the product in a warehouse, and I would take only what I needed for the month. Now we have to buy the whole collection for an entire five-month season, assume the import risk, pay for that whole shipment in thirty days, and warehouse that inventory ourselves. This will give us better margins, but for awhile, it is going to be difficult in terms of logistics, planning, and cash flow (see Exhibit 6).

Sprinting Forward When Andres had announced an offsite meeting, his staff was pleased to get away from the confines of their stuffy little office—and even happier to learn that the gathering

8

Free on Board in Honduras meant that Sportiendo owned the product once the shipment was loaded onto the plane bound for Colombia. Colombian import taxes had come down to 20 percent by early 2005. This was not a guaranteed rate; the rules and the costs of doing business in Colombia were always subject to change.

10

would take place in the newest, most well-appointed office complex in town. The elevator doors swung open to reveal Andres’s surprise: Welcome to Our New Office!

As the catered celebration got underway, Andres took a moment to gaze out at the bustling metropolis below. With no shortage of brand new luxury malls in the city—or aggressive competitors vying for the best spots in each—he had to wonder how long he could expand his base of Electra shops before per-store revenue began to show signs of market saturation. While that might not happen for awhile, he was determined to devise an approach that would support long-term, profitable growth.

In the beginning, it had all been about selling product and making enough money to survive. Now, with a growing number of families critically dependent on Sportiendo wages, Andres had begun to feel a great social responsibility about what he was doing.

Sportiendo employees would surely benefit from an effective expansion strategy, and besides, he was having way too much fun fighting the good fight to think for a moment about slowing down.

11

QUESTIONS

1. Describe and evaluate Andres’s competitive strategy. How does he add value?

2. Discuss the growth strategy in light of the external challenges in Colombia. What market(s) would you recommend pursuing as Sportiendo moves ahead?

3. If Andres decides to move down-market in order to capture a larger customer base, what would be his best course of action?

12

Exhibit 1: Loss Prevention Measures

Sportiendo developed software to generate a range of detailed inventory and cash reports, such as the following.

Cash •

Cash Report: complete summary of the money received by the cashier.

•

Transaction Report: shows the type and the number of the transactions made by the cashier; i.e. Number of Returns, Amount of Sales, Discounts and Guarantees Given.

•

Credit Card Balance: Each day the cashier prints a credit card balance that must match the balance tallied by the cashier.

•

Internet Banking: Each day the company Treasurer checks the balance of all bank accounts to see that the money has been deposited.

Inventory •

Cross-Checks: The administrator of the store conducts a daily inventory that prints to the office. Those figures are checked against sales for the day, and if the numbers don’t add up, management drives to that store to determine the cause of the discrepancy.

•

Returns and Guarantees: The office follows up with every return or guarantee that is given by calling the customer to get feedback about the service, product selection, and the like. In addition to being an effective marketing tactic, this serves as a control mechanism to double-check the accuracy of the in-store reports.

•

Surprise Visits: At least once a month, management pays each store an unannounced visit to conduct on-the-spot inventories and cash register tallies.

13

Exhibit 2: Competitive Comparison

Sportiendo, Inc.

Informal Market

Number of Storefronts

15

83

Sales (est. 2004 in US$)

$4.5 million

$12.5 million

Market Share

20%

60%

Product Category Contributions

Apparel: 40% Footwear: 41% Equipment: 19%

Apparel: 5% Footwear: 93% Equipment: 2%

14

Exhibit 3: Locations

15 Electra Locations: Bogotá; 8 Retail Stores, 2 Factory Outlets Cali; 2 Retail Stores, 1 Factory Outlet Cartagena; 1 Retail Stores, 1 Factory Outlet

15

Exhibit 4: Sportiendo Financials

Income Statement: 2004 (US$s)

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

Total

Revenues Less Sales Tax

246,307 37,301

321,419 48,676

290,620 44,012

268,828 40,711

301,352 45,637

362,175 54,848

362,015 54,823

344,699 52,201

348,453 52,770

356,704 54,019

356,488 53,986

1,114,377 168,761

4,673,436 707,745

Rev. Net of Sales Tax

209,006

272,743

246,609

228,116

255,716

307,327

307,191

292,498

295,683

302,685

302,501

945,616

3,965,691

COGS

121,224

158,191

143,033

132,308

148,315

178,250

178,171

169,649

171,496

175,557

175,451

548,457

2,300,101

Gross Margin

87,783

114,552

103,576

95,809

107,401

129,077

129,020

122,849

124,187

127,128

127,050

397,159

1,665,590

Operational Expenses Leases Administration Other Direct Costs Total Direct Costs

26,535 3,311 2,142 31,989

27,371 3,311 2,796 33,478

26,849 3,311 2,528 32,688

26,849 3,262 2,338 32,449

26,849 3,399 2,621 32,869

28,643 3,650 3,150 35,443

29,086 3,650 3,149 35,885

29,773 3,636 2,998 36,406

29,855 3,647 3,031 36,532

33,840 3,771 3,102 40,714

32,905 3,771 3,101 39,776

37,883 4,386 9,692 51,962

356,437 43,106 40,648 440,192

SG & A

31,560

41,184

37,238

34,446

38,613

46,406

46,386

44,167

44,648

45,705

45,678

142,788

598,819

Total Op Expenses

63,549

74,662

69,926

66,894

71,482

81,849

82,271

80,574

81,180

86,419

85,454

194,750

1,039,011

Gross Profit

24,234

39,890

33,650

28,914

35,919

47,228

46,749

42,276

43,006

40,708

41,597

202,409

626,579

Direct Financial Costs Credit Cards Local Taxes Total Direct Fin. Costs

8,360 1,672 10,032

10,910 2,182 13,092

9,864 1,973 11,837

9,125 1,825 10,950

10,229 2,046 12,274

12,293 2,459 14,752

12,288 2,458 14,745

11,700 2,340 14,040

11,827 2,365 14,193

12,107 2,421 14,529

12,100 2,420 14,520

37,825 7,565 45,390

158,628 31,726 190,353

EBITDA

14,201

26,798

21,812

17,965

23,644

32,476

32,004

28,236

28,814

26,179

27,076

157,019

436,226

16

Exhibit 4: Sportiendo Financials, continued

Per Store Performance ($US 000s) Store:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

623.5 86.0

151.1 20.8

425.6 58.7

625.9 86.3

398.9 55.0

214.6 29.6

224.0 30.9

290.4 40.1

336.6 46.4

213.1 29.4

301.7 41.6

369.8 51.0

203.1 28.0

221.7 30.6

73.2 10.1

Net Income

537.5

130.2

366.9

539.6

343.9

185.0

193.1

250.3

290.2

183.7

260.1

318.8

175.1

191.1

63.1

COGS

311.8

75.5

212.8

313.0

199.5

107.3

112.0

145.2

168.3

106.6

150.9

184.9

101.6

110.9

36.6

Gross Margin

225.8

54.7

154.1

226.6

144.4

77.7

81.1

105.1

121.9

77.2

109.3

133.9

73.5

80.3

26.5

Direct Costs SG&A

62.3 39.9

12.3 39.9

49.1 39.9

65.8 39.9

40.8 39.9

33.5 39.9

11.7 39.9

47.3 39.9

12.6 39.9

13.1 39.9

32.9 39.9

27.0 39.9

15.9 39.9

9.9 39.9

4.7 39.9

Gross Profit

123.5

2.5

65.1

120.9

63.8

4.3

29.6

18.0

69.4

24.2

36.5

67.0

17.7

30.5

(18.0)

Financial Costs

27.0

5.9

20.1

25.7

16.6

7.1

7.7

11.9

14.6

7.4

12.2

15.0

8.2

9.0

3.0

EBITDA

96.5

(3.4)

45.0

95.2

47.2

(2.9)

21.9

6.0

54.8

16.7

24.3

52.0

9.5

21.5

(21.0)

Income with Tax Less Sales Tax

Notes:

The four Factory Outlets are stores 7, 9, 10 & 14 Partial Year figures: Store 13 opened in June 2004 Store 14 opened in September 2004 Store 15 opened in November 2004

17

Exhibit 5: Import Duties

18

Exhibit 6: Sportiendo Cash Flow Projections

Estimates for Jan 2005-Jan 2006 2005 JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

Beginning Cash

587,936

291,533

270,957

24,004

134,106

152,931

242,089

208,541

296,672

102,595

17,129

3,676

689,633

Projected Income

417,081

304,348

424,087

403,087

425,783

478,783

454,174

436,217

423,261

418,783

410,130

1,192,652

366,823

65,154 15,958 16,938

69,338 25,555 42,759

69,338 25,555 7,107

69,338 25,555 20,150

69,338 25,555 7,107

69,338 25,555 17,977

69,338 25,555 20,150

69,338 25,555 7,107

69,338 25,555 7,107

69,338 25,555 20,150

69,338 25,555 7,107

69,338 25,555 17,977

69,338 25,555 20,150

3,107 11,991 24,404 12,621 471 2,942

2,519 9,009 10,232 8,696 31,840

50,696 3,510 6,469 4,206 14,258 165,217 -

3,336 4,890 13,552 4,348 -

70,447 3,524 7,872 4,911 14,315 4,348 34,061

3,962 5,120 16,097 4,348 70,988

79,154 3,759 8,609 4,184 15,270 4,348 27,638

3,610 12,495 14,666 4,348 -

60,914 3,503 8,474 8,348 14,230 4,348 -

3,466 4,786 14,080 4,348 103,820

76,482 3,394 8,014 3,333 13,789 4,348 56,087

9,870 11,244 40,098 4,348 145,130

134,874 3,036 15,254 11,484 12,333 4,348 -

153,586

199,948

346,356

141,169

241,477

213,384

258,004

137,118

201,816

245,543

267,446

323,559

296,371

555,466

61,886 63,091

104,387 215,694 4,602

107,067 35,214 9,536

102,294 52,082 11,104

107,452 57,442 11,347

119,498 110,220 -

113,905 25,974 71,090

116,946 259,705 38,871

96,196 149,554 12,957

95,178 60,959 -

93,211 16,662 73,262

271,057 278,711 18,315

270,957

24,004

134,106

152,931

242,089

208,541

296,672

102,595

17,129

3,676

689,633

192,002

(US$s)

Expenses Fixed Costs Employees Variable Costs Taxes Sales Pre-Paid Local Other Credit Card Costs New Projects Accounts Payable Total Expenses Purchases, Duties National Buys Imported Goods Duty Taxes Ending Cash

295,964

DEC

2006 JAN

19

Bygrave c06.tex V3 - 12/30/2013

Case: Zeo, Inc.

Zeo, Inc. The more you know, the better you sleep.T

Newton, Massachusetts As students at Brown University in 2003, Eric Shashoua, Jason Donahue, and Ben Rubin shared a problem common to students of every generation: sleep deprivation. Each tried to pack as much as possible into every day with the least possible amount of sleep. The result was predictable: They had trouble getting up in the morning and staying alert in class.

One of the three had, through his coursework, become aware of a study commissioned

by NASA during the 1960s. That study focused on the human sleep cycle. It identified points in the cycle at which a person would be most alert if awakened. For the three friends, NASA’s findings seemed to have practical utility. If they could wake up at the right point in their sleep cycles, they would be less groggy and more effective in the classroom. They could continue cheating the gods of sleep, but with fewer negative consequences. Reasoning that an effective solution would benefit the millions of people who, like them, were burning their candles at both ends, the three set out to build a company around that solution. “We saw ourselves as the target market,” recalls Jason. “That market had to be large since companies were pushing caffeine products and special drinks, like Red Bull, to help people stay alert.”

Six years on, the college friends were still together, but now as founding executives of Zeo, a business dedicated to a somewhat larger mission: to help people get a better night’s sleep.

During those years they had raised $14 million, invented a way to track sleep comfortably, and developed and launched a consumer product that was gaining nationwide awareness. And although they were sleeping better than they had in college, they were now dealing with other issues. Zeo was no longer a three guys’ college project. It was now a fast-growing enterprise with an increasing number of employees with specialized skills, experiences, and reporting relationships. An older, seasoned CEO was at the helm, and the focus of the enterprise’s energy had shifted from developing and launching a product to expanding sales and satisfying customers.

Unsurprisingly, this evolution in the company’s life was affecting the founders and their roles in the company. To evolve with the company’s needs and contribute as leaders, they had to continue to grow professionally, learn new skills, and step up to new challenges. How would the founders evolve and grow to meet the different needs of the company?

The Sleep Problem/Opportunity Most people take sleep for granted. Yet 30–50% of the adult U.S. population reports difficulty in sleeping.47 In a 2005 poll of adult Americans, 24% of respondents reported getting “a good night’s sleep” only a few nights per week, and 13% reported getting that good night’s sleep This case was written by Professor Edward Marram and case writer Richard Luecke as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright by Babson College 2010.

No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner. To order copies or request permission to reproduce materials, contact European Case Clearing House (www.ecch.com/).

CASE

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only a few nights per month. Another 13% told pollsters that they rarely or never had a good night’s sleep.48 Sleep problems can have detrimental effects on a person’s attentiveness, work and academic performance, and even relationships. Even so, only 8% of people speak with their primary care physicians about their sleep problems. And few doctors bother to ask. By one estimate, less than 20% of doctors ask patients how well they are sleeping as part of their annual physical exams. This “don’t ask, don’t tell” situation results in millions of people living with their sleep problems for years and years without relief.

For a minority of sleep-deprivation sufferers, the underlying cause can be traced to one or another medical condition.49 The medical establishment has responded to these with various forms of clinical diagnoses and therapy. Its primary diagnostic tool is the sleep laboratory, a specially equipped room in which individual patients are observed and monitored by means of polysomnography (PSG)—the gold standard of sleep diagnosis. In the United States, a small number of board-certified sleep specialists (approximately 5,000) attend to the millions who suffer from medical conditions that interfere with normal sleep.

The majority of people with sleep problems, however, have no underlying medical issues.

Their difficulties often stem from work or lifestyle choices. These individuals include students, hospital physicians and nurses, shift-workers, people struggling to meet deadlines, longhaul truck drivers, hard-driving professionals, and heavy consumers of caffeinated products and alcohol. Sleep deprivation for them often results in drowsiness and reduced cognitive performance, and a greater susceptibility to accidents at work and on the highway.

It was this market, estimated at 70 million people in the United States alone, that Zeo aimed to serve. From the beginning, the company has made it clear that its product is not intended for the diagnosis or treatment of sleep disorders and warned customers that “If you suspect that you may have a sleep disorder, consult your physician.” Zeo did not intend to compete with medical devices, sleep laboratories, or medical practitioners.

Building the Company When they formed Zeo in December 2003, Eric, Jason, and Ben knew little about sleep science or sleep medicine. Eric, a senior, was studying computer science and French; Jason, then a junior, was majoring in business and Chinese. Ben, a junior majoring in computer engineering, was recruited later through a campus job posting. Brown University, however, was a leading center for the study of sleep and sleep medicine, so the team worked hard to build relationships with the University’s sleep experts and to learn from them and from other campus resources. In time they would expand their relationships and learning to a broader network.

Initially, the business opportunity was narrowly defined around the concept of SmartWakeT, a technology used to track sleep and identify the optimal times for awakening someone refreshed and alert. To accomplish this, they would have to build a device capable of accurately monitoring and recording a person’s sleep stages (wake, light sleep, REM, and deep sleep). They would do this by developing a comfortable, wireless sensing device that the customer would wear on his or her forehead during the night. The technical breakthrough that made this possible was a dry fabric sensor material developed by the team. The device itself would detect and transmit vital data to a bedside receiver/monitor, which would store and later array the information in a manner that a lay person could easily interpret. Ben initially estimated that he could develop a testable prototype over the school’s Christmas break. In fact, the job took over two-and-a-half years.

Bygrave c06.tex V3 - 12/30/2013

Case: Zeo, Inc.

Sleep Stages People typically pass through various stages of sleep during the night. These include wake, light sleep, rapid eye movement (REM) sleep, and deep sleep. A person normally experiences repeated cycles of these phases during the night.

Light Sleep: Takes place between the transitions to the other phases of sleep and wakefulness. Usually accounts for the longest phase of the sleep cycle.

REM: Necessary for consolidating memories, learning, creativity, problem solving, and emotional well-being. A time when dreams occur.

Deep Sleep: Restorative phase in which the body secretes a growth hormone needed for development and physical repair. People generally feel most groggy when awakened from deep sleep. According to cognitive tests, they may experience impaired mental performance for up to 4 hours when abruptly awakened from deep sleep.

Early Financing Many people responded affirmatively to the SmartWakeT concept. Eric recalls how he would talk about the project in the campus cafeteria. “Bystanders started to say, ‘That’s a great idea.

Can I invest in your company?’” And many of them did in small amounts. This in turn led Eric to seek out private investors in the community, who invested larger amounts. Ultimately this allowed the group to get more serious efforts underway with a small seed round. In the very beginning, other non-dilutive funds were also sought: ∙ ∙ ∙ ∙

A $9,000 grant from the Slater Center of Rhode Island An $18,000 grant from the National Intercollegiate Inventors and Innovators Alliance $10,000 in cash and $10,000 in services from the Brown Entrepreneurship Program Business Plan Competition $25,000 in cash and $35,000 in services from winning the State of Rhode Island Business Plan Competition

By mid-2005, all three founders had graduated from Brown and were working full-time in the company, which needed more money. Their fundraising efforts shifted exclusively to angel investors. Responsible for fundraising efforts, Eric pitched to angel groups and individual investors all over southern New England, as well as within the Rhode Island business community and Brown University alumni. “This was hard to do,” he says, “given our ages.” Each rejection, however, encouraged him to dig for reasons and to refine his presentation. By the end of this 10-month period, with a second oversubscribed round, the company had raised a total to date of over $1 million from several groups and individuals.

Among Zeo’s early investors was Sean Glass. Like the Zeo founding team, Glass had joined with other classmates (in his case, years earlier at Yale) to start a successful business while still an undergraduate. He learned of Zeo through a fellow angel investor, a Brown graduate who had already taken a small stake in new enterprise. Glass thought the company had a strong concept since there were few credible products in the consumer sleep market; as he put it, “People will go to great lengths to solve their sleep problems.” Glass also saw a bit of himself and his company’s co-founders in the Zeo team. And he liked what he saw. “Eric, Jason, and Ben had different personalities, but they clearly trusted each other in their roles.

All were very well organized and open to learning.”

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Glass invested in 2005 as a member of an angel group. Still, he perceived some difficult hurdles ahead. “They would have to convince people that their product was scientifically valid, and that it really worked. It would also need to be priced right.” And from the user’s perspective, the headband monitor they were working on had to be comfortable and look good.

Otherwise, “how many people will get into bed with their spouses wearing a weird-looking contraption on their heads?”

Advice and Credibility Sleep science is a relatively new field. Research on the subject only began in the 1950s. As a result, the community of sleep specialists is small, and communication and collaboration is commonplace.

From the outset, the venture team understood the importance of tapping into this scientific community, drawing on its expertise, and gaining credibility by allying with key members.

Most of the responsibility for this task fell to Ben Rubin, who, beginning at Brown University, cold-called key people, introduced himself and Zeo, and solicited their advice and support.

To his surprise and relief, these specialists did not automatically show him the door.

Most, in fact, expressed genuine interest in the goal Zeo was pursuing. They were intrigued by the potential benefits that an inexpensive, self-administered measuring and monitoring system would bring to the millions of people who suffered from nonmedical-related sleep difficulties.

Each contact produced leads to other notables in the U.S. sleep science community.

Before long, Ben and the team had assembled an informal group of sleep health advisers from several of the nation’s leading medical institutions. In addition to this group, a key consultant, John Shambroom, joined Ben’s development efforts. John brought a unique scientific and engineering background to the team, which included extensive experience in tracking brainwave patterns, critical to ongoing development. This initial group contributed invaluable technical guidance and gave the start-up venture much needed credibility in the eyes of potential investors. John would later join the company and expand this group into a formal board with semiannual meetings. Board members would represent the broad scope of sleep science: a psychologist, a specialist in circadian rhythms, a leading researcher, a clinical practitioner, and so forth (Exhibit 6.1).

E X H I B I T 6.1

Zeo Advisory Board

Chair: Kenneth P. Wright Jr., PhD Director, Sleep & Chronobiology Lab, University of Colorado, Boulder

Daniel Aeschbach, PhD Assistant Professor of Medicine, Harvard Medical School

Michael J. Breus, PhD “The Sleep Doctor,” author, WebMDR sleep expert and AOLR wellness coach

Charles A. Czeisler, MD, PhD Director, Division of Sleep Medicine, Harvard Medical School

Phyllis C. Zee, MD, PhD Professor of Neurology and Neurobiology and Physiology Director, Sleep Disorders Center Northwestern University Medical School

John W. Winkelman, MD, PhD Assistant Professor of Psychiatry, Harvard Medical School and Medical Director, Sleep Health Center of Brigham and Women’s Hospital

Bygrave c06.tex V3 - 12/30/2013

Case: Zeo, Inc.

The team also sought business advice. It made a list of pioneers in fields related to Zeo, then approached each in turn. “It usually took a few calls to get through,” says Eric, “but once we got past the gatekeepers, most of these people were very approachable.”

I’d tell them that we were students who had started a company, that we admired what they had accomplished, and that we would appreciate their advice. I’d then ask, ‘Could we meet with you for just a half hour or so?’ This is how we met Colin Angle, founder of iRobot, and Sherwin Greenblatt, former president of Bose. Colin had started his company while a graduate student at MIT. We maintained an advisory relationship with these business leaders for over two years, then asked them to join our board, which they did.

A Coach/CEO The three founders wanted to launch a consumer product company, first nationally and then internationally, and knew that they wouldn’t have the best chance of success doing this on their own. Recognizing that they had never done this before, they wanted to find an expert who could help them achieve greater success, and from whom they could learn. So, with the proceeds of the final angel round closed in the summer of 2006, they set out to find an experienced person who could guide them through the important stages of final product development, launch, and growth. An executive search firm with an affinity for start-ups was engaged and asked to find qualified candidates for the CEO position. That firm’s consultant met with the three founders and interviewed each extensively. What qualities and experiences were they looking for in a candidate? How would they describe their ideal candidate? How did they expect the person to work with them?

Eric, Jason, and Ben were of one mind. They wanted a CEO with an entrepreneurial outlook and a successful record in marketing consumer-health products. More than that, their ideal candidate would be a coach and mentor, helping each of them to develop his business and management skills. As they saw it, Zeo was growing from a small start-up into a real business; each founding member wanted to grow quickly into the new roles that operating such a business demanded.

Finding a person with the desired combination of experience and personal qualities was a tall order, but after several months of searching, the recruiter presented the team with several qualified candidates. The candidate they selected was Dave Dickinson, a man roughly twice their ages.

Dickinson’s life path had been much different than those of Zeo’s founders. As a teenager he had learned something of how entrepreneurial businesses work, and how they differ from bureaucratic organizations. His father had joined with former IBM veterans to develop a small company, and his work experiences were a frequent topic of conversation in the Dickinson household. Dave knew and admired the president of his father’s new company.

I remember playing basketball with him when I was a junior in high school. And I still recall how much I wanted to be like him—to know everyone who worked for the company, to know their families, and to enjoy the freedom to get things done without dealing with committees and layers of bureaucracy. How many big company presidents play basketball with their employees’ kids?

Despite his youthful attraction to small business life, Dickinson’s career path went in the opposite direction. Armed with an MBA in marketing from Northwestern University, he worked for several giant consumer-health product companies: Procter & Gamble, Johnson & Johnson, Arm & Hammer, and Mead Johnson. In 1995, however, his entrepreneurial instincts were given a chance to express themselves. Dickinson’s boss at Mead Johnson asked him to

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create a new product incubation unit, staffed by some 100 employees from marketing and R&D. “These were disciplines that never spoke to each other,” he recalls. “At our Evansville [Indiana] headquarters the marketing people were in a building on one side of a four-lane road, and the R&D people were on the other side. No one ever crossed that road, except to eat lunch.”

In accepting the assignment, Dickinson got permission to take over and renovate one floor of unused space in an old industrial building. He hired an architect to implement his vision of an open design in which communication and collaboration between marketing and R&D specialists would naturally occur. There would be no private offices, no cubicles. To further set the incubator apart from the rest of the company, he had the place painted in bright colors. Quotations by famous inventors adorned the walls. White boards and games were set out here and there to encourage interaction. A basketball hoop was mounted on a far wall. A phone booth was installed at the back of the space. “I told people that if they really needed to have a private conversation, they could use the phone booth.”

The success of this interdisciplinary product incubator changed Dickinson’s life in two important ways. First, it made him realize how much he enjoyed breaking free of corporate rules and routines, and building new things from scratch. Second, it led to an important new assignment. In 1998, he was asked to move to Boston and help initiate a novel kind of venture capital firm, jointly invested in by Bristol Myers Squibb (parent of Mead Johnson) and General Mills. Consumer health and wellness would be its investment focus. Dickinson recalls how that experience broadened his understanding of innovation, different business models, and the management challenges faced by young and inexperienced entrepreneurs. “I spent a lot of time helping the CEOs of these companies, particularly in the marketing area.” He enjoyed sharing his knowledge with these CEOs and helping them with market development.

“In many cases, I wished that I was them!” And, in 2001, he became the CEO of his first start-up, a biotechnology company initially incubated within Harvard Medical School.

Dickinson’s background brought him into the sights of Zeo’s headhunter in late 2006.

He offered two unique qualities that Zeo needed: experience in developing, launching, and marketing consumer health products, and an open, mentoring personality. For Dickinson’s part, Zeo represented an outlet for his entrepreneurial instincts.

Meetings between Dickinson, the founders, and Zeo’s key investors were encouraging.

The candidate met all of Zeo’s expectations, and Dickinson liked what he saw in the venture and its principals. “You could see that these guys were insatiable learners, hungry for experience and knowledge. They were eager to learn from everyone—from people like me, from investors, and from their advisory board. There was no youthful arrogance.”

It was a match. After doing due diligence on the venture and its technology, and in return for a reasonable salary and an equity stake vested over time, Dickinson joined the company as CEO in February 2007.

Beyond SmartWake By the time Dave Dickinson joined the company, the team had raised over $1 million dollars around its SmartWakeT concept. With Dave now wearing the CEO cap, Eric could turn his full attention to the job of prospecting for additional investment capital and expanding Zeo’s strategic connections for business development. Jason’s focus would remain on potential customers: Who were they? What were their needs in a sleep product? How would they connect with Zeo and its evolving technology?

Ben’s engineering training made him the logical person to handle product development.

This would be no small job. The technology had to be capable of accurately sensing and

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monitoring sleep without all the paraphernalia and personal assistance needed in conventional sleep laboratories. It had to be affordable to the average consumer, and so simple that an untrained customer could operate it correctly. And it had to provide a scientifically valid measure of an individual’s sleep. More than one sleep-specialist expert declared that meeting all of these requirements was impossible.

Undeterred, Eric, Jason, and Ben thought they had a solid venture concept in SmartWakeT. If people understood their sleep cycles and awakened themselves at an optimal point (outside of deep sleep), they would be more rested and alert. And they would be happy with Zeo. Ben’s work, bolstered by John Shambroom’s background and expertise, would soon give them the technology they needed to make that happen. By early 2007, he had a working prototype that Jason could test on focus group participants. Those participants, mostly college students and young professionals, responded favorably to the prototype and to the proposition of wakening refreshed and on the ball. They had little interest or curiosity about their sleep stages, as recorded by the prototype. However, test subjects who represented the broader population sent the team a disturbingly different message: They had sleep issues that SmartWakeT failed to address.

The product said it took me 43 minutes to fall asleep. What can I do to get to sleep faster?

I wake up at around 2 A.M. and cannot get back to sleep. How can I change that?

Your device says that I get about one hour of deep sleep at night. Is that good or bad? What does it mean for my performance at work?

People wanted answers to these and other questions, and they wanted solutions to their sleep problems. The crucial question was: What can I do to get a better night’s sleep?

Feedback from potential customers revealed the limited nature of Zeo’s initial value proposition. Sleep was a big issue for many people—it affected their relationships, health, and performance on the job, at school, and on the athletic field. Hundreds of companies, from pill makers to pillow and mattress manufacturers, were touting the importance of a good night’s rest. Knowing the optimal time to wake up—the SmartWakeT proposition—was merely a small part of a much bigger issue. “SmartWakeT was attractive to the 30-and-under crowd,” says Jason, “but that part of the total market was small compared to the people who were experiencing real pain because of their sleep patterns. Not waking up at the optimal time was nothing compared to the problems people experienced by not getting a good night’s sleep—problems with drowsiness, their relationships, job performance, health, and so on.”

The opportunity was clearly broader than initially conceived. But addressing it would require one big thing: practical and personalized solutions to common sleep difficulties. Recalls Jason, “We weren’t sure that we had the expertise to help people sleep better. We wondered if this was too high a mountain to climb.” Indeed, climbing that mountain would require at least another year of work—maybe two. As things stood, the company did not have enough cash to fund another year or more of development. Could more be raised? The initial product launch was scheduled for mid-2007. Would current investors agree to deferring that planned launch if it meant building a better product? Should they launch the product in its current state, and then develop an improved Zeo Version 2.0?

After much discussion, it was clear that the intelligent wake-up proposition would satisfy a market segment that was too small, given the expectations of the founders, their advisors, and investors. Quantitative testing with focus group participants (using product concept testing methodology introduced by Dave) confirmed the appeal of the product concept with sleep improvement capabilities. They also feared disappointment by customers. “We had no choice,” says Jason, “but to step up to the larger concept. We might not have a real business otherwise.” After seeing the market-testing numbers, Zeo’s investors agreed.

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Enter Venture Capital Recognizing that their expanded value proposition would require substantial new capital, the team went back to its angel investors, including those who, because of oversubscription on the previous round, had not been able to participate. “But we quickly learned,” says Eric, “that this approach would take too much time and was unlikely to produce the level of funding we needed.” They decided to go after larger pools of capital, namely, venture money. “This is where our board members really helped with advice and introductions.” iRobot founder Colin Angle introduced them to people at iD Ventures America, a quality venture firm that had financed his venture. iD Ventures led the company’s Series B round, closing in 2008, even as the world financial system poised on the verge of collapse. Many deals were canceled during this period, but Zeo’s went through. A later Series C round of financing, led by Trident Capital, closed in 2009, bringing total capital raised by Zeo to $14 million.

Zeo now had sufficient capital to exploit the large opportunity it had found and to hire the people it needed to scale up for commercial operations and launch.

The Go-to-Market Product To fulfill its larger aims, the company had to develop both a more sophisticated sleep phase tracking product and an online, personal “sleep coach.” Part educational tool, part motivational program, the go-to-market product Zeo would offer what potential customers had clearly asked for: a product package that revealed the user’s sleep patterns, and an online coach that would help each customer discover the habits and behaviors that interfered with his or her night’s rest. An interactive “7-Step Sleep Fitness Program”—which took a full year to develop—would teach users how to overcome sleep-robbing habits and behaviors. At launch, the final package (Exhibit 6.2) included the following: ∙

∙

∙

∙

A soft, lightweight headband containing Zeo’s SoftWaveT sensor technology. Worn during the night with the sensor against the forehead, this device accurately tracks the user’s sleep patterns and transmits the data wirelessly to a bedside receiver/display. Unlike traditional methods of tracking sleep patterns, the sensor connects to the skin without gels or adhesives thanks to a unique patent-pending material developed by the company.

(Tests-rated tracking results are comparable to the gold standard for assessing sleep.)

Bedside display unit. The size of a clock radio, the bedside unit receives data transmitted from the headband sensor. Algorithms and artificial intelligence software determine the user’s sleep phases throughout the night. A sleep graph summarizes each night’s sleep stages. A “ZQ” score gauges the quantity, quality, and depth of each night’s sleep. In addition, the user can see at a glance his or her total sleep time, how long it took to fall asleep, how often and how long he or she was awakened, and the total amounts of REM, light, and deep sleep.

Access to the personalized 7 Step Sleep FitnessT Program. This online coaching program analyzes the user’s unique sleep patterns and lifestyle, and then recommends techniques for addressing factors that may be negatively affecting sleep. The program also provides regular assessments of user’s sleep statistics to help track progress.

The SmartWakeT Alarm feature. The headband sensors search for a natural awakening point—the optimal time to get out of bed in the morning, when the user transitions into and out of REM sleep and the brain is more active. The bedside unit’s alarm will sound as early as a half hour before the user’s set wake-up time, but never later than that time.

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E X H I B I T 6.2

Product Hardware

The Zeo Headband, with dry fabric sensor materials shown.

Zeo Receiver/Display Unit Source: Zeo, with permission.

Using an SD (Secure Digital) memory card within the bedside display, the customer can use his or her personal computer to transfer accumulated sleep data to a personal online account, myZeo.com. The Web site (Exhibit 6.3) has interactive tools for understanding the data. It also provides cause-and-effect information on how and individual lifestyle choices—including exercise, diet, drinking, and stress—affected sleep.

Manufacturing of the physical product was outsourced to an Asian contract manufacturer.

The price was eventually set at $249 for the product alone, and $349 for the deluxe package, which included the product, a year’s supply of headband sensors, and unlimited access to the online 7Step coaching program. Sales would be made directly to customers via the Internet.

The Launch As mid-2009 approached, the Zeo crew prepared for the product’s official launch. Not having the public company financial resources common to consumer product launches, they needed a high ROI method to gain public exposure. So, working with a Boston-based PR firm, Schneider Associates, they devised an innovative plan to create media buzz. Dozens of reporters were invited to spend the night, courtesy of the company, at a brand-new five-star New York City hotel. Each was given a Zeo device that they would use during the night to record their sleep patterns.

The next morning, the overnight guests were treated to a breakfast in the hotel ballroom, where company personnel were on hand to help them understand their recorded sleep patterns from the previous night. After a brief presentation by Zeo, several scientific experts spoke on

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E X H I B I T 6.3

Sleep Tools and Coaching Program Information

Source: Zeo, with permission.

the relationship between sleep and human health. Reporters then moved to “break out” tables where specific sleep-related topics such as sleep and human performance, methods for sleeping better, and so forth, were discussed. At one table, the trainer of the Boston Celtics entertained reporters’ questions about sleep and athletic performance. “The idea,” says Dave, “was to give reporters opportunities to pick up on many different story lines.”

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This hotel PR gambit and other launch PR efforts paid huge dividends almost immediately.

The first big story about Zeo appeared within days in the Wall Street Journal. The Journal’s health columnist, Melinda Beck, described how Zeo had helped her discover and understand her own sleep problems. “Finding out what’s going on in your sleep generally requires spending the night in a professional sleep lab hooked up to lots of wires and monitors,” she told millions of readers. “But I’ve been testing a new home-sleep monitor called the Zeo Personal Sleep Coach that lets people track their sleep patterns nightly in their own bedrooms.”50 She went on to describe her dismal ZQ score, how it responded negatively to tensions surrounding her column deadlines, and how it improved once she switched to decaffeinated coffee and kicked her dog out of the bedroom. In the article, she interviewed members of the company’s advisory board and other Zeo users, who shared their positive experiences with the product, its coaching program, and how changes in daily habits affected their ZQ scores.

For the company, Beck’s article could not have been more timely or beneficial. Orders began pouring in. Other positive articles quickly followed in the New York Times, Forbes, USA Today, Popular Science, Woman’s Day, and other national periodicals. Ben and Jason soon found themselves interviewed on Fox TV, and America’s primo TV pitchman, Regis Philbin, had himself filmed in bed wearing his Zeo headband and talking about his own sleep problems. More orders came in—at a time when consumer product sales in the United States were in the basement!

Over the next six months, the young company continued to score PR coups. One of the most significant of these occurred on December 14, 2009, at the height of the holiday gift-buying season. The nation’s most popular morning TV program, The Today Show, watched by over six million Americans, ran four short story segments on Zeo’s founders and their new product, with testimonials from a user, a leading sleep medical authority, and the TV network’s own doctor/journalist. All praised the product. KaBoom! The sky began raining orders and Google identified Zeo as the most searched topic that day, even ahead of a Tiger Woods scandal story that was making headlines all over the media.

A Changing Company . . . Changing Roles The product launch and subsequent media buzz marked a watershed for Zeo. The onceobscure little company was now on the map and receiving enormously positive feedback from reviewers. And the cash register was ringing.

Rather than relax, however, employees kept up a punishing pace of work. Says Eric, “With working many nights and weekends, there hasn’t been a lot of time for friends and family, or—ironically—for sleep.” The only married member of the founding team, Eric consciously tried to optimize the limited time he had available to spend with his spouse by focusing on communication. Jason Donahue echoed his partner’s assessment of the work load. “We don’t have a problem with absenteeism around here. Our problem is presentee-ism—people not going home.”

Even before the June 2009 launch, however, Zeo had been changing. New people with deep and specialized experience had come onboard. Subsequent to Dickinson’s joining the company, John Shambroom was hired as the initial VP of research, engineering, and operations, but was later asked to focus on the company’s scientific and clinical platform as the VP of scientific affairs. Later, others were hired to head up e-commerce, finance and manufacturing, and engineering and product development. And as 2009 drew to a close, the team was searching for a specialist in direct-response TV advertising. “These people had technical skills we needed right away,” says Dave Dickinson. “We couldn’t wait months and

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years for our own people to develop them. And we’ll do more of this as we grow.” By late 2009, 19 people were on the payroll. Eight were on the management team, making the company strategically top-heavy in preparation for growth.

The launch and the addition of new people had an impact on the roles of the three founders. “We’re now wearing fewer hats,” said one. “Each of us is developing new skills and learning a lot from Dave.” As an obliging mentor, Dave Dickinson made an effort to learn what each founder did innately well and then directed each into areas where he could make the greatest contribution and develop more skills. “To do this I actually used the same profile test for Eric, Jason, and Ben that their recruiter had used on me.” Each person’s tests results were shared with his colleagues, and this helped each person to better understand his strengths and weaknesses and those of his peers. “That exercise really developed trust, which made the rest of the effort easier.”

For Jason Donahue, the post-launch period coincided with a major redirection of attention, from product development, sales, and customers to brand management and assuring high customer satisfaction. With Dave at the helm, Eric Shashoua shifted his primary attention to business development and to relationships that would help the company grow. He was now spending more time with Zeo’s directors (Exhibit 6.4), the advisory board, the sleephealth community, and potential channel and product partners. Ben Rubin had once been in charge of technology development, product development, engineering and manufacturing.

He was now focused on technology and its application to the company’s next generation of sleep-related products.

While all acknowledged the necessity of these changes, it came not without some nostalgia.

Ben commented that, “As the company has gotten bigger and our roles have become more specialized, we [the founders] have lost something. Each of us probably misses having a larger role.” He notes that decision making has also changed. “The three of us can no longer sit down together for five minutes and make a decision. The process is now more complicated. That’s good for the business but sometimes frustrating for us.” As the same time, Ben is accepting of changing roles, seeing them as direct outcomes of choices the three of them had made.

If we had decided to be a smaller niche company, our roles would not have had to change nearly as much. Our decision to address a large consumer market had important consequences: It dictated our need for an experienced CEO, for more outside capital, for more employees with specialized know-how, and so forth. We have to recognize and accept the impact of our own decisions.

E X H I B I T 6.4

Zeo Board of Directors

Colin Angle CEO, iRobot Corporation

Dave Dickinson CEO, Zeo Inc.

Ronald Chwang Chairman and President, iD Ventures America

Sherwin Greenblatt Former President, Bose Corporation

Peter Meekin Managing Director, Trident Capital

Eric Shashoua Co-Founder & VP, Zeo Inc.

W. Anthony Vernon Former Company Group Chairman, Johnson & Johnson

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Case: Zeo, Inc.

Any misgivings the founders had about their changing roles appeared to have taken a back seat to conscious efforts to grow into those new roles. Speaking for the group, Eric noted that they had surrounded themselves with experienced employees and routinely interacted with business advisors, investors, sleep-science specialists, and with other entrepreneurs. Jason pointed to books and blogs, and to events and seminars as important sources of learning and growth.51 For his part, Ben acknowledged the benefit of having experienced and knowledgeable mentors on the board and outside the company.

After six years of building a company from scratch, the three founders were not intimidated by the challenge of taking on new roles and learning new skills. “We have a just do it attitude around here,” said Jason. “Sometimes you have to learn under fire.” He cited how Eric had successfully negotiated a deal with a direct-mail catalog company even though he had no experience in that area. “Eric talked to experts who understood the catalog business, then did it.”

Case Questions 1.

2.

3.

4.

5.

What are the advantages/disadvantages of founding a company with your friends?

How did the founders identify and entice stakeholders to join their board of advisors?

Why did the founders seek a new CEO? Would you do that or would you want to run the business yourself? What was the process they used to select the CEO? How did the role of each founder change as the business grew?

How do you maintain the culture when the company is professionalizing with a large top management team?

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