Chapter9BuildingaNew-VentureTeam

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Unformatted text preview: CHAPTERNINE Building a New-Venture Team. OPENING PROFILE UN IGO Hitting the Ground Running www. unigo. com Jordan Goldman has a talent for drawing advice from others. After graduating from Wesleyan University in 2004, he spent two years in England and then returned to the United States . With no money or business contacts, he started investigating a business idea . The idea revolved around the challenge of choosing a college. When Goldman was 18, he created a series of student-written guidebooks called the Students' Guide to Colleges, published by Penguin Books. One thing that troubled Goldman about the books is that each college only got a small number of pages, and there were no photos, videos, or interactivity. What if a Web site could be created, Goldman reasoned, where vast amounts of information about colleges could be included? With the cost of obtaining a four-year degree at some colleges reaching $250,000, it seemed to Goldman that students and parents would want all the information they could get about the colleges they were considering. To get advice on how to proceed, Goldman accessed the Wesleyan alumni data­ base and looked for people who worked in finance and who graduated 1 0 or more years before he did. He e-mailed about 500 people and just said: "Look, I have this idea . What do I do now? What comes next?"1 About 50 Wesleyan alums answered his message. One of the replies was from Frank Sica, a former president of Soros Private Funds Management. Soros agreed to meet with Goldman at a diner where he had breakfast every morning. By the time breakfast was over that day, Sica was on the way to becoming Goldman's first investor. Goldman's company, named Unigo, was launched in late 2007, and the Web site went live in September 2008. The up-front work involved hiring an editorial team to write profiles for the initial colleges to be featured on the site, and recruiting students on each campus to provide content and encourage other students to join in. Unigo is a free platform that allows college students to share photos, videos, and reviews of their schools. Because it's online, it doesn't have the space limitations that traditional college guides, like the Princeton Review, have. Unigo's mission is to provide high school students and their parents a candid, behind-the-scenes look at a college-from a student's point of view. The only content provided by Unigo is the written profiles. For instance, at the time this book went to press, the University of Florida had 101 reviews, 15 photos, 22 videos, and 4 documents posted on Unigo's Web site. The review and videos covered a wide range of students talking about their experiences inside and outside the classroom at the University of Florida. The site also allows a user to sort by major. So a high school student, who is interested in political science, can look at all the reviews and videos posted by political science majors at the University of Florida. Goldman's knack for drawing advice from others is reflected in how he's built Unigo's new venture team. Unigo has 15 employees-5 of which are part of the top management team. In making hiring decisions, Goldman looks for passion and adaptability. He's also This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. 285 286 PART 3 • MOVING FROM AN IDEA TO AN ENTREP RENEURIAL FIRM Lea ..ning Objectives After studying this chapter you should be ready to: Identify the primary elements of a new-venture team. not reluctant to surround himself with people who have more experience in specific areas than he does. His top management team includes a chief finan­ cial officer (CFO) and chief technical officer (CTO), individuals who have deep amounts of experience in their expertise. In terms of getting outside advice, Goldman has a board of advisers and a board of directors. The five-person board of advisers includes Tom Rogers, the CEO of TiVo, Bob Chase, the president of the National Education Association, and Don Ross, the president of Bankrate, Inc. The board of directors consists of founders and investors. Goldman calls on individual members of his board Explain the term liability of advisers when he needs advice in specific areas. His board of directors of newness. meets once a month, either in person or via a conference call. Goldman also provides his board of directors biweekly updates on Unigo's key activities. Discuss the difference between heterogeneous and homogeneous founding teams. Identify the personal attributes that strengthen a founder's chances of successfully launching an When asked how he assembled such an impressive group of advisers, Goldman is quick to say that he simply cold-called the majority of them. Goldman feels that his youth is an advantage, and that experienced business­ people enjoy helping young people get started. The keys to a successful working relationship between a young entrepreneur and seasoned advisers, in Goldman's experience, is to act professionally, respect their time, and be prepared for meetings, so they are as substantive and productive as possible. Unigo is expected to quickly gain momentum as the number of colleges entrepreneurial venture. and universities featured on its Web site grows. One thing that can be Describe how to construct a expected from Goldman is a continued propensity to reach out to others for "skills profile" and explain how advice as Unigo grows and faces future challenges.2 it helps a start-up identify gaps in its new-venture team. Describe a board of directors I n this chapter, we'll focus on how the founders of an entrepreneurial venture build a new-venture team as well as the importance of the and explain the difference team to the firm's overall success. 3 A new-venture team is the group between inside directors and of founders, key employees, and advisers that move a new venture outside directors. from an idea to a fully functioning firm. Usually, the team doesn't Identify the two primary to hire additional personnel. The team also involves more than paid ways in which the nonemployee members of a start-up's new- venture team help the firm. come together all at once. Instead, it is built as the new firm can afford employees. Many firms have a board of directors, a board of advisers, and other professionals on whom they rely for direction and advice. In this chapter's first section, we discuss the role of an entrepre­ neurial venture's founder or founders and emphasize the substantial effect that founders have on their firm's future. We then turn our Describe the concept of signaling and explain its importance. attention to a discussion about how the founders build a new-venture team, including the recruitment and selection of key employees and the forming of a board of directors. The chapter's second section examines the important role of advisers and other professionals in Discuss the purpose of forming an advisory board. shaping and rounding out a new-venture team. As we note throughout this book, new ventures have a high propensity to fail. The high failure rate is due in part to what is known as the liability of newness, which refers to the fact that companies Explain why new ventures often falter because the people who start them aren't able to adjust use consultants for help quickly enough to their new roles and because the firm lacks a "track and advice. record" with outside buyers and suppliers.4 Assembling a talented and experienced new-venture team is one path firms can take to over­ come these limitations. Indeed, experienced management teams that get up to speed quickly are much less likely to make a novice's mistakes. In addition, firms able to persuade high-quality individuals to join them as directors or advisers quickly gain legitimacy with a This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. CHAPTER 9 • BUILDING A NEW-VENTURE TEAM variety of individuals, such as some of those working inside the venture as well as some people outside the venture (e.g., suppliers, customers, and investors). In turn, legitimacy opens doors that otherwise would be closed. Another way entrepreneurs overcome the liability of newness is by attending entrepreneurship-focused workshops, speaker series, boot camps, and similar events. These types of activities are often sponsored by local universities, small business development centers, and economic development commissions. CREATING A NEW-VENTURE TEAM Those who launch or found an entrepreneurial venture have an important role to I I Learning Objective Identify the primary elements of a new-venture team. Learning Objective Explain the term liability of newness. play in shaping the firm's business concept. Stated even more directly, it is widely known that a well-conceived business plan cannot get off the ground unless a firm has the leaders and personnel to carry it out. As one expert put it, "People are the one factor in production ... that animates all the others."5 Often, several start-ups develop what is essentially the same idea at the same time. When this happens, the key to success is not the idea but rather the ability of the initial founder or founders to assemble a team that can execute the idea better than anyone else. The way a founder builds a new-venture team sends an important signal to potential investors, partners, and employees. Some founders like the feeling of control and are reluctant to involve themselves with partners or hire managers who are more experienced than they are. In contrast, other founders are keenly aware of their own limitations and work hard to find the most experienced people available to bring on board. Similarly, some new firms never form an advisory board, whereas others persuade the most important (and influential) people they can find to provide them with counsel and advice. In general, the way to impress potential investors, partners, and employees is to put together as strong a team as possible. 6 Investors and others know that experienced personnel and access to good-quality advice contributes greatly to a new venture's success. The elements of a new-venture team are shown in Figure 9.1. It's important that each element, or group of people, that constitutes the team have a common vision for the new venture and that everyone's role is clearly spelled out. Breakdowns in these areas can lead to the failure of an otherwise promising new venture, as illustrated in the "What Went Wrong?" feature. Key employees FIGURE 9.1 Elements of a New-Venture Team Management team Board of advisers This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. 287 288 PART 3 • MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM What Went WRONG? MonitorllO: How a Lack of Consensus and a Clear Leader Can Damage a New-Venture Team Jeff Stewart and Roger Ehrenberg launched Monitor110 Number 2, "No separation between the technology in 2005. The idea was to help hedge fund managers organization and product organization," was also and professional investors make better investment problematic. Technology and product management decisions by identifying and tracking the most insightful were effectively bundled together with the same information being put out on the Internet every day. decision makers for both. Instead of having a staff of Because professional product managers as advocates for the customer, investors are busy and are always looking for an edge, technology was running the show. This structure hedge fund managers and the idea was that they' d pay someone to help them sort allowed the technology guys to build a full set of through the deluge of information posted on the Internet features into a product prior to a release (slowing the and identify, in real-time, the information most pertinent release date), rather than releasing products more to their investment priorities and strategies. quickly and allowing the product managers to interact Monitor11 O's idea was compelling and it attracted substantial investment capital. Unfortunately, however, with customers, listen to their feedback, and incorpo­ rate their feedback into the final product. in July 2008, it failed. One of Monitor11 O's cofounders, Finally, in regard to number 7, "Disagreement on Roger Ehrenberg, wrote a lengthy blog post reflecting strategy both within the company and with the board," on the company's failure. He believes that Monitor110 there were disagreements both within the management committed "Seven Deadly Sins" that contributed to its team and with the board of directors on a number of failure: important issues. For example, similar to number 2, 1. The lack of a single, "the buck stops here" leader until too late in the game. 2. No separation between the technology organization and the product organization. 3. Too much PR, too early (raising expectations to unrealistic levels). 4. Too much money (which allowed the company to repeat mistakes). there were people in the company advocating that the best possible technological solution should be found to mine data on the Web. By insisting on the best solu­ tion, enormous effort was dedicated to building the company's technological back-end. Ultimately, the back-end may have been too complex, and the data provided to the customers wasn't commensurate with the effort being made to collect it. The Monitor11 0 story illustrates the importance 5. Not close enough to the customer. of making sure that everyone on a new venture's 6. Slow to adapt to market realities. 7. Disagreement on strategy both within the company and with the board. management team (including the board of directors) is in agreement regarding the company's priorities and its direction. It also illustrates the importance of T hree of the seven reasons listed above deal with new-venture team issues. T his, is more than any other category of reasons, illustrates the importance of a firm's new-venture team and how well it functions to a making sure a decision-making structure is in place that doesn't result in a stalemate if the founders (or other key members of the new-venture team) disagree on important strategic decisions. new venture's success. In regard to number 1, "The lack of a single, 'the buck stops here' leader until too late in the game," as Monitor1 00 took shape, a problematic relationship developed between the company's cofounders. Jeff Stewart had technology experience and Roger Ehrenberg had experience on Wall Street, so Stewart Questions for Critical Thinking 1. If two or more people start a company together, how can they work out an arrangement for decision making that avoids the lack of a single "the buck stops here" leader that was problematic for Monitor110? focused on technology and product development and 2. According to the feature, Monitor110 saw itself as a Ehrenberg focused on fund-raising, HR, and client "technology" company. In what ways was this "self­ access. On paper, the arrangement made perfect sense. But when it came time to make tough decisions, there wasn't a clear decision maker or leader. Because Monitor1 00 was ultimately a technology company, technology tended to dominate the discussions and carried the most weight, resulting in products that the business side wasn't happy with and found difficult to sell. Neither Stewart nor Ehrenberg had the power to change things, and the board didn't intervene until it was too late. image" problematic? 3. How could Monitor11O's board of directors have played a more positive role in helping the company avoid the problems illustrated in the feature? 4. What lessons can start-ups learn from this feature to help them set up and manage their new-venture teams? Source: R. Ehrenberg, "Monitor110: A Post Mortem," www. informationarbitrage.com (accessed September 16, 2008). Used with permission of Roger Ehrenberg. This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. CHAPTER 9 • BUILDING A NEW-VENTURE TEAM 289 We'll look at each of these elements in the next section. While reading these descriptions, remember that entrepreneurial ventures vary in how they use the elements. The Founder or Founders A founder's or founders' characteristics and their early decisions have a signifi­ cant effect on the way an entrepreneurial venture is received and the manner in which the new-venture team takes shape. The size of the founding team and the qualities of the founder or founders are the two most important issues in this matter. Size of the Founding Team The first decision that most founders face is whether to start a firm on their own or whether to build an initial founding team. Studies show that more than one individual starts 50 to 70 percent of all new firms.7 It is generally believed that new ventures started by a team have an advantage over those started by an individual because a team brings more talent, resources, ideas, and professional contacts to a new venture than does a sole entrepreneur. 8 In addition, the psychological support that cofounders of a new business can offer one another is an important element in the firm's success.9 Several factors affect the value of a team that is starting a new firm. First, teams that have worked together before, as opposed to teams that are working together for the first time, have an edge. If people have worked together before and have decided to partner to start a firm together, it usually means that they get along personally and trust one another. 10 They also tend to communicate with one another more effectively than people who are new to one another. 11 Second, if the members of the team are heterogeneous, meaning that they are diverse in Learning Objective Discuss the difference between heterogeneous and homogeneous founding teams. terms of their abilities and experiences, rather than homogeneous, meaning that their areas of expertise are very similar to one another, they are likely to have different points of view about technology, hiring decisions, competitive tactics, and other important activities. Typically, these different points of view generate debate and constructive conflict among the founders, reducing the likelihood that decisions will be made in haste or without the airing of alternative points of view.12 A founding team can be too big, causing communication problems and an increased potential for conflict. A founding team larger than four people is typically too large to be practical.13 There are two potential pitfalls associated with starting a firm as a team rather than as a sole entrepreneur. First, the team members may not get along. This is the reason investors favor teams consisting of people who have worked together before. It is simply more likely that people who have gotten along with one another in the past will continue to get along in the future. Second, if two or more people start a firm as "equals," conflicts can arise when the firm needs to establish a formal structure and designate one person as the chief executive officer (CEO). If the firm has investors, the investors will usually weigh in on who should be appointed CEO. In these instances, it is easy for the founder that wasn't chosen as the CEO to feel slighted. This problem is exacerbated if multiple founders are involved and they all stay with the firm. At some point, a hierarchy will have to be developed, and the founders will have to decide who reports to whom. Some of these problems can be avoided through the develop­ Learning ment of a founders' agreement, which was described in Chapter 7. Objective Qualities of the Founders The second major issue pertaining to the founders of a firm is the qualities they bring to the table. The past several chapters have illus­ trated the importance that investors and others place on the strength of the firm's founders and initial management team. One reason the founders are so impor­ tant is that in the early days of a firm, their knowledge, skills, and experiences are This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. Identify the personal attributes that strengthen a founder's chances of successfully launching an entrepreneurial venture. 290 PART 3 • MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM the most valuable resource the firm has. Because of this, new firms are judged largely on their "potential" rather than their current assets or current perfor­ mance. In most cases, this results in people judging the future prospects of a firm by evaluating the strength of its founders and initial management team. Several features are thought to be significant to a founder's success. The level of a founder's education is important because it's believed that entrepreneurial abilities such as search skills, foresight, creativity, and computer skills are enhanced through obtaining a college degree. Similarly, some observers think that higher education equips a founder with important business-related skills, such as math and communications. In addition, specific forms of education, such as engineering, computer science, management information systems, physics, and biochemistry, provide the recipients of this education an advantage if they start a firm that is related to their area of expertise.14 Prior entrepreneurial experience, relevant industry experience, and net­ working are other attributes that strengthen the chances of a founder's success. Indeed, the results of research studies somewhat consistently suggest that prior entrepreneurial experience is one of the most consistent predictors of future entrepreneurial performance.15 Because launching a new venture is a complex task, entrepreneurs with prior start-up experience have a distinct advantage. The impact of relevant industry experience on an entrepreneur's ability to success­ fully launch and grow a firm has also been studied.16 Entrepreneurs with experi­ ence in the same industry as their current venture will have a more mature net­ work of industry contacts and will have a better understanding of the subtleties of their respective industries.17 The importance of this factor is particularly evident for entrepreneurs who start firms in technical industries such as biotechnology. The demands of biotechnology are sufficiently intense that it would be virtually impossible for someone to start a biotech firm while at the same time learning biotechnology. The person must have an understanding of biotechnology prior to launching a firm through either relevant industry experience or an academic background. Some entrepreneurs, who come from a nonbusiness background, fear that a lack of business experience will be their Achilles' heel. There are sev­ eral steps or techniques that entrepreneurs can utilize to overcome a lack of busi­ ness experience. These steps are highlighted in the "Savvy Entrepreneurial Firm" feature. A particularly important attribute for founders or founding teams is the presence of a mature network of social and professional contacts.18 Founders One quality that's particularly important for business founders is the ability to network, or to build relationships with people who might be helpful to a new firm. Here, a group of young business founders informally network with one another at an outdoor cafe. � 0 0 "" 0.. c: c: "' E "" u "' m iii This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. CHAPTER 9 • BUILDING A NEW-VENTURE TEAM 291 Savvy Entrepreneurial F I R M Overcoming a Lack of Business Experience Many people who start businesses do not have prior Once a group is formed, its members "meet up" on a business experience. This is often a worry to people regular basis off-line. Simply follow the directions on who fit this description. They know that people with Meetup's home page to discover if there is a small busi­ experience in accounting, finance, and management ness or entrepreneurship Meetup group in your area. generally have a leg up on those who are tackling The following is a sample of small business Meetup these challenges for the first time. groups that were meeting when this book went to press: There are three steps or techniques that people without prior business experience can take to com­ • Memphis Small Business and Entrepreneur Meetup Group pensate for a lack of experience. • New Iowa Entrepreneurs' Coalition • As explained in this chapter, taking on one or more partners is a step that many business founders take to Chicago Small Business Progress Report Group • Find a Partner Cleveland Small Business Meetup Group • Women in Business Meetup Group (Casselberry, FL) bolster the experience and expertise available to launch their venture. The ideal partnership brings together people with complementary skills. As a result, Participate in Online Forums a software engineer who has developed a new soft­ There are a growing number of online forums that ware product may want to seek a partner who has have been developed to provide business owners business experience to create a better-rounded team. support and advice. An example is StartupNation This scenario played out for Kabir Shahani and (www.startupnation.com), Chris Hahn, the cofounders of Appature, a software forums that cover topics such as selecting a busi­ which sponsors online company that targets the health care industry. In this ness for yourself, business planning, hiring, partnering instance, Hahn sought out Shahani to create a partner­ and mentoring, and accounting and financial man­ ship in which their respective skills complement each agement. It also features open-ended forums such other's. Shahani recalls: He (Hahn) had a lot of faith in my skills, and I feel really fortunate that he did. I'll never forget that conversation. We were sitting in a Thai restaurant in the International district (of Seattle), and he said, 'Look, I can build anything, and I think you can sell anything, so let's do it."' as "coffee talk," where small business owners can chat with one another about any topic that is on their minds. The general tone of the forums tends to be supportive and upbeat, which is exactly what business owners with limited experience need. A small business forum that is more specific is the Small Business Computing and E-Commerce Forum (www.smallbusinesscomputing.com). This forum is similar to the one just described but focuses strictly on technology issues. Get Help There are many places for business founders to get management advice and help. The Small Business Development Center (SBDC), for example, is a govern­ ment agency that provides free management assistance and coaching to business owners. You can find your local SBDC at www.sba.gov/sbdc. Another good choice is the Service Corps of Retired Executives (SCORE), which is a nonprofit organization that provides free consulting services to small businesses. You can find your local SCORE chapter at www.score.org. There are also organizations that provide coaching, advice, and support to specific groups of business owners and tailor their offerings to fit the groups. An example is Ladies Who Launch (www.ladieswholaunch.com), an organiza­ tion that sponsors workshops and provides materials that encourage and support female business owners. If you're looking for a support group in your area and can't find one, check the Meetup Web site. Meetup Questions for Critical Thinking 1. If you were thinking about starting a business and were looking for a business partner, what types of skills and experiences would you look for in the person you partnered with? 2. Identify three sources of business help or advice, particularly useful to someone who's starting a business without prior business experience, not mentioned in the feature. 3. How valuable do you believe that online forums, like those mentioned previously, can be to someone who's trying to learn the "business" aspect of starting a business? 4. What other techniques, not mentioned previously, can people who don' t have prior business experience utilize to compensate for their lack of experience? (www.meetup.com) is an online platform that allows Source: nPost homepage, www.npost.com (accessed September 25, individuals to organize local groups via the Internet. 2008). Used with permission of nPost.com. This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. 292 PART 3 • MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM Table 9.1 PREFERRED ATIRIBUTES OF THE FOUNDER OR FOUNDERS OF AN ENTREPRENEURIAL VENTURE Attribute Explanation New ventures that are started by a team can provide greater resources, a broader diversity of Firm started by a team viewpoints, and a broader array of other positive attributes than ventures started by individuals. Higher education Evidence suggests that important entrepreneurial skills are enhanced through higher education. Prior entrepreneurial Founders with prior entrepreneurial experience are familiar with the entrepreneurial process experience and are more likely to avoid costly mistakes than founders new to the rigors of the entrepreneurial process. Relevant industry Founders with experience in the same industry as their new venture will most likely have experience better-established professional networks and more applicable marketing and management expertise than founders without relevant industry experience. Broad social and Founders with broad social and professional networks have potential access to additional professional network know-how, capital, and customer referrals. must often "work" their social and personal networks to raise money or gain access to critical resources on behalf of their firms.19 Networking is building and maintaining relationships with people whose interests are similar or whose relationship could bring advantages to a firm. The way this might play out in practice is that a founder calls a business acquaintance or friend to ask for an introduction to a potential investor, business partner, or customer. For some founders, networking is easy and is an important part of their daily routine. For others, it is a learned skill. Table 9.1 shows the preferred attributes of the founder or founders of a firm. Start-ups that have founders or a team of founders with these attributes have the best chances of early success. Recruiting and Selecting Key Employees Once the decision to launch a new venture has been made, building a manage­ ment team and hiring key employees begins. Start-ups vary in terms of how quickly they need to add personnel. In some instances, the founders work alone for a period of time while the business plan is being written and the ven­ ture begins taking shape. In other instances, employees are hired immediately. One technique available to entrepreneurs to help prioritize their hiring Learning needs is to maintain a skills profile. A skills profile is a chart that depicts the Objective most important skills that are needed and where skills gaps exist. A skills Describe how to profile for New Venture Fitness Drinks, the fictitious company introduced in construct a "skills Chapter 3, is shown in Figure 9.2. Along with depicting where a firm's most profile" and explain how it helps a start-up identify gaps in its new-venture team. important skills gaps exist, a skills profile should explain how current skills gaps are being dealt with. For example, two of New Venture Fitness Drink's skills gaps are being covered (on a short-term basis) by members of the board of advisers and the third skills gap does not need to be filled until the firm ini­ tiates a franchising program, which is still three to five years in the future. Evidence suggests that finding good employees today is not an easy task. Consider the results of a recent survey by PricewaterhouseCoopers (PWC) as evi­ dence of this. In the PWC survey, the CEOs of 245 rapid-growth firms were asked if finding qualified workers was a concern. A total of 40 percent of the CEOs, in the first quarter of 2008, reported that a lack of qualified workers is a potential barrier to growth for their firms over the next 1 2 months.20 A study conducted by the This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. CHAPTER 9 • BUILDING A NEW-VENTURE TEAM Q. :E V\ (jj "0 "' <lJ --' <lJ .2: '5 u <lJ X LU V\ c: 0 ·.;:::; � <lJ Q. 0 <lJ 0 Vi c: <lJ E <lJ bO "' c: "' :2 c: 'iij ..c: u >0.. Q. :J Vl <lJ u c: "' c: V\ <lJ -;;; Vl "0 c: "' bO c: · � -"' :<; :2 u:: bO c: ·.;:::; ·:; u <lJ 0:: --.... 0:: :I: "0 c: "' bO c: .E :J 0 u u <( FIGURE 9.2 V\ c: 0 ·.;:::; "' Qj 0:: .?;- ·c: :J E E 0 u V\ E * >Vl c: 0 ·.;:::; "' § .2 c: V\ c: 0 ·.;:::; � <lJ Q. Skills Profile for New Venture Fitness Drinks 0 <lJ V\ :E u c: � u... X Jack Petty Peggy Wells X X X Jill Petersen Cameron lvey X 0 Gap 1 Gap 2 0 Gap 3 293 0 X position filled 0 = position vacant = Council for Entrepreneurial Development, which is an organization that supports entrepreneurship in the Research Triangle area of North Carolina, resulted in a similar finding. When asked to rank the key factors in growing an entrepreneurial company, entrepreneurs in the Research Triangle area selected "Availability of Qualified Technical and Non-Technical Workers" as the number one factor.21 Founders differ in their approach to the task of recruiting and selecting key employees. Some founders draw on their network of contacts to identify candi­ dates for key positions. Others ask their existing employees for referrals. Safilo USA, a luxury eyewear company, pays its employees for referrals. An employee who refers someone who joins the company gets $500 after the new hire has been with Safilo for six months and another $500 after a year.22 Many compa­ nies use interns to help fill personnel needs. TOMS, the socially conscious shoe company described in Case 7.2, has about 60 employees-half of which are interns. Other companies rely on job search Web sites like Monster.com or PartnerUp (www.partnerup.com), a site dedicated to helping entrepreneurs find partners and employees . Many founders worry about hiring the wrong person for a key role. Because most new firms are strapped for cash, every team member must make a valuable contribution, so it's not good enough to hire someone who is well intended but who doesn't precisely fit the job. Alisa Nessler, the founder of Lane15, a software start-up, emphasizes this point in the following remarks: One of the first things you learn in a start-up is that it's very expensive to make a bad hire. In a large company, people sometimes tend to think that when you have some­ body who fits into the bucket labeled "Heart's in the right place," or the one labeled "Good attitude but just not getting it done," you can work around it. Maybe it's because in an established organization, it's easier to lose sight of the contributions This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. 294 PART 3 • MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM each individual is making. In a start-up, you simply can't do that. Everyone is important. Every team member's work has to have a direct impact on value, or the person has to go.23 O n some occasions, key hires work out perfectly and fill the exact roles that the founders of the firm need. For example, Dave Olsen was one of the first hires made by Starbucks founder Howard Schultz. At the time of his hiring, Olsen was the owner of a popular coffeehouse in the university district of Seattle, the city where Starbucks was launched. In his autobiography, Schultz recalls the following about the hiring of Olsen: On the day of our meeting, Dave and I sat on my office floor and I started spreading the plans and blueprints out and talking about my idea. Dave got it right away. He had spent ten years in an apron, behind a counter, serving espresso drinks. He had experienced firsthand the excitement people can develop about espresso, both in his cafe and in Italy. I didn't have to convince him that this idea had big potential. He just knew it in his bones. The synergy was too good to be true. My strength was looking outward: communicating the vision, inspiring investors, raising money, finding real estate, designing the stores, building the brand, and planning for the future. Dave understood the inner workings: the nuts and bolts of operating a retail cafe, hiring and training baristas (coffee brewers), ensuring the best quality coffee.24 Dave Olsen went on to become a key member of the Starbucks new-venture team and remains with the company today, where he serves as the senior vice president for culture and leadership development. One attribute investors value in founders is a willingness to be flexible and assume the role that makes the most sense for them in their venture rather than insisting on being the CEO. This is a difficult task for some founders who become entrepreneurs to "be their own boss" or put their distinctive stamp on a firm. Founders who do remain flexible, however, often have an easier time obtaining financing or funding. The way many founders look at this issue is that it is better to be the vice president of a $100-million firm than the CEO of a $10-million firm. The Roles of the Board of Directors Learning Objective I f a new venture organizes as a corporation, it is legally required to have a Describe a board of board of directors-a panel of individuals who are elected by a corporation's the difference between made up of both inside and outside directors. An inside director is a person directors and explain inside directors and outside directors. shareholders to oversee the management of the firm. 25 A board is typically who is also an officer of the firm. An outside director is someone who is not employed by the firm. A board of directors has three formal responsibilities: (1) appoint the firm's officers (the key managers), (2) declare dividends, and (3) oversee the affairs of the corporation. In the wake of corporate scandals such as Enron and WorldCom and others, the emphasis on the board's role in making sure the firm is operating in an ethical manner continues to become stronger. One outcome of this movement is a trend toward putting more outsiders on boards of directors, because people who do not work for the firm are usually more willing to scrutinize the behavior of management than insid­ ers who work for the company. Most boards meet formally three or four times a year. Large firms pay their directors for their service. New ventures are more likely to pay their directors in company stock or ask them to serve without direct compensation-at least until the company is profitable. The boards for publicly traded companies are required by law to have audit and compensation committees. Many boards also have nominating committees to select stock­ holders to run for vacant board positions. This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. CHAPTER 9 • BUILDING A NEW-VENTURE TEAM I f handled properly, a company's board of directors can be an important Learning part of its new-venture team. Providing expert guidance and legitimacy in the Objective eyes of others (e.g., customers, investors, and even competitors) are two ways a Identify the two primary board of directors can help a new firm get off to a good start and develop what, ways in which the it is hoped, will become a sustainable competitive advantage. Provide Guidance 295 nonemployee members of a start-up's new-venture Although a board of directors has formal governance team help the firm. responsibilities, its most useful role is to provide guidance and support to the firm's managers.26 Many CEOs interact with their board members frequently and obtain important input. The key to making this happen is to pick board members with needed skills and useful experiences who are willing to give advice and ask insightful and probing questions. The extent to which an effec­ tive board can help shape a firm and provide it a competitive advantage in the marketplace is expressed by Ram Charan, an expert on the role of boards of directors in corporations: They (effective boards) listen, probe, debate, and become engaged in the company's most pressing issues. Directors share their expertise and wisdom as a matter of course. As they do, management and the board learn together, a collective wisdom emerges, and managerial judgment improves. The on-site coaching and consulting expand the mental capacity of the CEO and the top management team and give the company a competitive edge out there in the marketplace.27 Because managers rely on board members for counsel and advice, the search for outside directors should be purposeful, with the objective of filling gaps in the experience and background of the venture's executives and the other directors. For example, if two computer programmers started a software firm and neither one of them had any marketing experience, it would make sense to place a marketing executive on the board of directors. Indeed, a board of directors has the foundation to effectively serve its organization when its members represent many important organizational skills (e.g., manufacturing, human resource man­ agement, and financing) involved with running a company. Lend Legitimacy Providing legitimacy for the entrepreneurial venture is another important function of a board of directors. Well-known and respected board members bring instant credibility to t h e firm. For example, just imagine the positive buzz a firm could generate if it could say that Eric Schmidt of Google or Steven Jobs of Apple had agreed to serve on its board of directors. This phenomenon is referred to as signaling. Without a credible signal, it is difficult for potential customers, investors, or employees to identify high­ quality start-ups. Presumably, high-quality individuals would be reluctant to I Learning Objective Describe the concept of signaling and explain its importance. serve on the board of a low-quality firm because that would put their reputa­ tion at risk. So when a high-quality individual does agree to serve on a board of a firm, the individual is in essence "signaling" that the company has potential to be successful.28 Achieving legitimacy through high-quality board members can result in other positive outcomes. Investors like to see new-venture teams, including the board of directors, that have people with enough clout to get their foot in the door with potential suppliers and customers. Board members are also often instrumental in helping young firms arrange financing or funding. As we will discuss in Chapter 10, it's almost impossible for an entrepreneurial venture's founders to get the attention of an investor without a personal introduction. One way firms deal with this challenge is by placing individuals on their boards who are acquainted with people in the investment community. A list of the most desirable qualities in a board of directors and the most desirable qualities in individual board members is provided in Table 9.2. This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. 296 PART 3 • MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM Table 9.2 ATIRIBUTES OF EFFECTIVE BOARDS OF DIRECTORS AND EFFECTIVE BOARD MEMBERS Attributes of Effective Boards of Directors • Strong communication with the CEO • Customer-focused point of view • Complementary mix of talents • Decisiveness • Mutual respect and regard for each other and the management team of the firm • Ability and willingness to stand up to the CEO and top managers of the firm • Strong ethics Attributes of Strong Board Members • Strong personal and professional networks • Respected in their field • Willingness to make personal introductions on behalf of the firm • Strong interpersonal communication skills • Pattern recognition skills • Investment and/or operating experience • Ability and willingness to mentor the CEO and the top managers of the firm ROUNDING OUT THE TEAM: THE ROLE OF PROFESSIONAL ADVISERS Along with the new-venture team members we've already identified, founders often rely on professionals with whom they interact for important counsel and advice. In many cases, these professionals become an important part of the new-venture team and fill what some entrepreneurs call "talent holes." Next, we discuss the roles that boards of advisers, lenders, investors, and other professionals play in rounding out new-venture teams. Entrepreneurs often meet with a member of their advisory board on a personal basis to obtain valuable business advice. With a carefully selected advisory board, entrepreneurs can tap into a wide range of experience and expertise. This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. CHAPTER 9 • BUILDING A NEW-VENTURE TEAM 297 Board of Advisers Some start-up firms are forming advisory boards to provide them direction and advice. 29 An advisory board is a panel of experts who are asked by a firm's managers to provide counsel and advice on an ongoing basis. Unlike a board of directors, an advisory board possesses no legal responsibility for the firm and gives nonbinding advice.30 As a result, more people are willing to serve on a company's board of advisers than on its board of directors because it requires less time and no legal liability is involved. A board of advisers can be estab­ I lished for general purposes or can be set up to address a specific issue or need. For example, some start-ups set up customer advisory boards shortly after they are founded to help them fine-tune their initial offerings. Similar to a board of directors, the main purpose of a board of advisers is to provide guid­ ance and lend legitimacy to a firm. Both of these attributes are seen in the advisory board set up by Laura Udall, the entrepreneur who started ZUCA, a company mentioned previously in this book. When asked about the type of advice she gets from her board of directors and board of advisers, Udall said: The company (ZUCA) has a board of directors, but I also have created a board of volunteer advisors that has been very helpful with tactical and strategic decisions. The advisory board has evolved over the years as a result of my network. I asked each of the members to join as a result of their specific expertise. It now includes a CFO/COO of a prominent corporation, an executive in the luggage industry, a mom inventor who has founded several successful companies, a product designer, and a manufacturing expert.31 Imagine the type of advice and support Udall gleans from this group of advisers. An example of a firm that set up a customer advisory board for a different reason, to help develop its initial product, is highlighted in the "Partnering for Success" feature. Most boards of advisers have between 5 and 15 members. Companies typi­ cally pay the members of their board of advisers a small honorarium for their service either annually or on a per-meeting basis. Boards of advisers interact with each other and with a firm's managers in several ways. Some advisory boards meet three or four times a year at the company's headquarters or in another location. Other advisory boards meet in an online environment. In some cases, a firm's board of advisers will be scattered across the country, making it more cost-effective for a firm's managers to interact with the members of the board on the telephone or via e-mail rather than to bring them physically together. In these situations, board members don't interact with each other at all on a face-to-face basis yet still provide high levels of counsel and advice. The fact that a start-up has a board of directors does not preclude it from having one or more board of advisers. For example, Coolibar, a maker of sun protective clothing, has a board of directors and a medical advisory board. According to Coolibar, its medical advisory board "provides advice to the company regarding UV radiation, sunburn, and the science of detecting, preventing, and treating skin cancer and other UV-related medical disorders, such as lupus.32 The board currently consists of six medical doctors, all with impressive credentials. Similarly, Intouch Technologies, a medical robotics company, has a board of directors along with a business and strategy advisory board, an applications and clinical advisory board, and a scientific and tech­ nical advisory board. A total of 1 5 individuals serve on these respective boards.33 VisualCV, the subject of the "You Be the VC 9.1" feature in this chapter, is a start-up that is attempting to replace the traditional paper resume with a This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. Learning Objective Discuss the purpose of forming an advisory board. PART 3 • MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM 298 Partnering for SUCCESS Need Help with Product Development? Consider Setting Up a Customer Advisory Board A lthough most firms that have a customer advisory their perspective. This got them on board much, board set them up after their firm is started, primarily much earlier with us which was pretty instrumen­ to assess customer satisfaction and brainstorm new tal because we identified real requirements which product ideas, customer advisory boards can be use­ enabled us to build the right product." ful before a firm has customers as well. An example of a firm that did this is iConclude, an IT solutions company that was recently acquired by Opsware Ultimately, iConclude built a successful product and was acquired shortly after by a much larger firm. (www.opsware.com). iConclude was founded to help other companies troubleshoot mission critical soft­ ware and hardware problems, but when it came to producing an actual product, the company wasn't exactly sure what its product should look like. To make sure it didn't stumble and produce a product that wasn't what its clients needed, the company decided to form a customer advisory board to dig deep into its future customers' problems and discern the exact features its product should include. Reflecting on the nature of the customer advisory board that was set up, and what the effort accom­ plished, Sunny Gupta, iConclude's founder, recalls: We were very upfront with all of the companies we spoke with. We realized we needed real customer input in order for us to really get the right product into the market. That led us to form a customer advisory board of 7 to 8 of these (firms with large IT departments) companies mostly out of Seattle. They met with us every second week and really tried to hone down on exactly what their problems were and what would be the ideal solution from Questions for Critical Thinking 1. Why do you think iConclude was able to persuade other companies to serve on its customer advisory board? 2. What insight or insights do you believe that iConclude gained by assembling a customer advi­ sory board before rather than after its product was fully developed? What benefits, other than getting good quality advice, did iConclude glean from putting together a customer advisory board? 3. How do you think iConclude utilized its customer advisory board after its product was launched? 4. Look at Fitbit (www.fitbit.com), the focus of the "You Be the VC 9.2" feature. What type of advisory board or advisory boards would make the most sense for Fitbit? Source: nPost, "Sunny Gupta, CEO of iConclude," www. npost.com (accessed June 22, 2007). Used with permission of nPost.com. virtual resume that resides on the Web, and allows a job seeker to include all the items in a standard resume along with a video introduction, visuals depicting accomplishments, links to letters of recommendation, and similar material. VisualCV has a 13-member board of advisers. Each of the company's board members has a VisualCV on the company's Web site. The following is a short list, including credentials, of some of the members of VisualCV's board of advisers: • James Collins-Recruiting Manager for VeriSign Inc. Collins has more than 10 years of experience in progressive full-life-cycle recruiting and the man­ agement of recruiting teams. He has success working with start-ups and publicly held companies in the technology, bio-tech, and health care sectors. • Brad Phillips-Cofounder and Partner of the Heiden Group. Phillips has played a crucial role in building the Heiden Group (which is a recruiting service for venture-backed companies) from no revenue to just under $3 million in revenue in less than three years. Prior to cofounding the Heiden Group, Phillips spent 14 years in consulting. • Guy Kawasaki-Founding Partner of Garage Technology Ventures and Cofounder of Nononina (the owner of Alltop.com and Truemors.com). This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. CHAPTER 9 • BUILDING A NEW-VENTURE TEAM Kawasaki is the author of eight books including The Art of the Start. Previously, he was an Apple Fellow at Apple Computer. • Catherine King-President and CEO of HRPLUS, an international provider of background screening and drug testing services. King is a recruitment, staffing, HRO, and professional services expert. King is driving the future direction of HRPLUS, including the development of new products and technology. • Dr. Terrence LaPier-Cofounder and Senior Partner at Pierpont Group. The Pierpont Group is a strategic advisory and private equity firm. Dr. LaPier is also an adjunct faculty member at the University of Pennsylvania's Wharton School of Business where he teaches courses in entrepreneurship leader­ ship, venture initiation, and international business. 34 This example provides an illustration of the breadth of talent and expertise that a firm can have available when it creates a board of advisers. Imagine the combined network of friends and business acquaintances that VisualCV's board of advisers has and the number of referrals they can make to people who are in a position to help VisualCV become successful. There are several guidelines to organizing a board of advisers. First, a board of advisers should not be organized just so a company can boast of it. Advisers will become quickly disillusioned if they don't play a meaningful role in the firm's development and growth. Second, a firm should look for board members who are compatible and complement one another in terms of experience and expertise. Unless the board is being set up for a specific purpose, a board that includes members with varying backgrounds is preferable to a board of people with similar backgrounds. Third, when inviting a person to serve on its board of advisers, a company should carefully spell out to the individual the rules in terms of access to confidential information.35 Some firms ask the members of their advisory board to sign nondisclosure agreements, which are described in Chapter 7. Finally, firms should caution their advisers to disclose that they have a relationship with the venture before posting positive comments about it or its products on blogs or in Internet chat rooms. A potential conflict of inter­ est surfaces when a person says positive things about a company without disclosing an affiliation with the firm, particularly if there is a financial stake in the company. This issue has become more important as participation in Internet blogging has skyrocketed.36 Although having a board of advisers is widely recommended in start-up circles, most start-ups do not have one. As a result, one way a start-up can make itself stand out is to have one or more boards of advisers. Lenders and Investors As emphasized throughout this book, lenders and investors have a vested interest in the companies they finance, often causing them to become very involved in helping the firms they fund. It is rare that a lender or investor will put money into a new venture and then simply step back and wait to see what happens. In fact, the institutional rules governing banks and investment firms typically require that they monitor new ventures fairly closely, at least during the initial years of a loan or an investment.37 The amount of time and energy a lender or investor dedicates to a new firm depends on the amount of money involved and how much help the new firm needs. For example, a lender with a well-secured loan may spend very little time with a client, whereas a venture capitalist may spend an enormous amount of time helping a new venture refine its business model, recruit management personnel, and meet with current and prospective customers and suppliers. In This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. 299 300 PART 3 • MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM fact, evidence suggests that an average venture capitalist is likely to visit each company in a portfolio multiple times a year.38 This number denotes a high level of involvement and support. As with the other nonemployee members of a firm's new-venture team, lenders and investors help new firms by providing guidance and lending legiti­ macy and assume the natural role of providing financial oversight.39 In some instances, lenders and investors also work hard to help new firms fill out their management teams. Sometimes this issue is so important that a new venture will try to obtain investment capital not only to get access to money but also to obtain help hiring key employees. For example, during its beginning stages, eBay's partners, Pierre Omidyar and Jeff Skoll, decided to recruit a CEO. They wanted someone who was not only experienced but also had the types of credentials that Wall Street investors value. They soon discovered that every experienced manager they tried to recruit asked if they had venture capital backing-which at that time they did not. For a new firm trying to recruit a seasoned executive, venture capital back­ ing is a sort of seal of legitimacy. To get this valuable seal, Omidyar and Skoll obtained funding from Benchmark Venture Capital, even though eBay didn't really need the money. Writer Randall Stross recalls this event as follows: eBay was an anomaly: a profitable company that was able to self-fund its growth and that turned to venture capital solely for contacts and counsel. No larger lesson can be drawn. When Benchmark wired the first millions to eBay's bank account, the figurative check was tossed into the vault-and there it would sit, unneeded and undisturbed. 40 This strategy worked for eBay. Soon after affiliating with Benchmark, Bob Kagle, one of Benchmark's general partners, led eBay to Meg Whitman, an executive who had experience working for several top firms, including Procter & Gamble, Disney, and Hasbro. In March eBay's president and CEO 2008, Whitman stepped down as (John Donahoe replaced her in these roles). However, Whitman continues serving as a member of the firm's board of directors. Experienced investors can also assist new ventures in the hiring process by helping them structure compensation packages that are fair to both the firm and the new hires. An illustration of this advantage is provided by Alisa Nessler, CEO of Lanel5, a firm backed by venture capital: If you're looking to recruit that all-important CEO, investors can be a particular boon. They know how much a CEO should earn, cash- and stock-wise. They can help you negotiate a package that fits your capital and equity structures, while also motivating the CEO t o build a world-class company.41 Bankers also play a role in establishing the legitimacy of new ventures and their initial management teams. Research evidence rather consistently suggests that the presence of bank loans is a favorable signal to other capital providers. 42 Investors often take a seat on the boards of directors of the firms they fund to provide oversight and advice. For example, Fitbit, the subject of the "You Be the VC 9.2" feature, received 2008. $2 m illion in funding in October At the same time, Doug Levin, the company's angel investor, joined Fitbit's board of directors. It is less common for a banker to take a seat on the board of directors of an entrepreneurial venture, primarily because bankers provide operating capital rather than large amounts of investment capital to new firms. There are additional ways that lenders and investors add value to a new firm beyond financing and funding. These roles are highlighted in Table 9.3. This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. CHAPTER 9 • BUILDING A NEW-VENTURE TEAM Table 9.3 301 BEYOND FINANCING AND FUNDING: WAYS LENDERS AND INVESTORS ADD VALUE TO AN ENTREPRENEURIAL V ENTURE • • Help identify and recruit key management personnel Provide insight into the industry and markets in which the venture intends to participate • Help the venture fine-tune its business model • Serve as a sounding board for new ideas • Provide introductions to additional sources of capital • Recruit customers • Help to arrange business partnerships • Serve on the venture's board of directors or board of advisers • Provide a sense of calm in the midst of the emotional roller-coaster ride that many new-venture teams experience Other Professiona Is At times, other professionals assume important roles in a new venture's success. Attorneys, accountants, and business consultants are often good sources of counsel and advice. The role of lawyers in helping firms get off to a good start is discussed in Chapter 7, and the role of accountants is discussed in Chapter 8. So here, let's take a look at the role a consultant may play. Consultants A consultant i s an individual who gives professional or expert advice. New ventures vary in terms of how much they rely on business consul­ tants for direction. In some ways, the role of the general business consultant has diminished in importance as businesses seek specialists to get advice on complex issues such as patents, tax planning, and security laws. In other ways, the role of general business consultant is as important as ever; it is the general business consultant who conducts in-depth analyses on behalf of a I firm, such as preparing a feasibility study or an industry analysis. Because of the time it would take, it would be inappropriate to ask a member of a board of directors or board of advisers to take on one of these tasks on behalf of a firm. These more time-intensive tasks must be performed by the firm itself or by a paid consultant. Those leading an entrepreneurial venture often turn to consultants for help and advice because while large firms can afford to employ experts in many areas, new firms typically can't. If a new firm needs help in a specialized area, such as building a product prototype, it may need to hire an engineering consulting firm to do the work. The fees that consultants charge are typically negotiable. If a new venture has good potential and offers a consulting firm the possibility of repeat business, the firm will often be willing to reduce its fee or work out favorable payment arrangements. Consultants fall into two categories: paid consultants and consultants who are made available for free or at a reduced rate through a nonprofit or government agency. The first category includes large international consulting firms, such as Bearing Point (formerly KPMG), Accenture, IBM Global Services, and Bain & Company. These firms provide a wide array of services but are beyond the reach of most start-ups because of budget limitations. But there are many smaller, localized firms. The best way to find them is to ask around for a referral. Consultants are also available through nonprofit or government agencies. SCORE, for example, is a nonprofit organization that provides free consulting services to small businesses. SCORE currently has over 10,500 volunteers with about 1,300 of these individuals serving as e-counselors-people who answer This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. Learning Objective Explain why new ventures use consultants for help and advice. 302 PART 3 • MOVING FROM AN IDEA TO AN ENTREPRENEURIAL FIRM Many entrepreneurs establish relationships with SBDC or SCORE advisers and rely on these individuals to plug gaps in their new-venture teams until they can afford to hire additional personnel. In this photo, a SCORE adviser, who is a retired CPA, is helping an entrepreneur set up an accounting system for her business. questions via the Internet. Commonly, SCORE volunteers are retired business owners who counsel in areas as diverse as finance, operations, and sales.43 And the Small Business Administration, a government agency, provides a variety of consulting services to small businesses and entrepreneurs, primarily through its network of Small Business Development Centers (SBDC), which are spread throughout the United States. There is evidence that these centers are effective in providing advice and helping entrepreneurial ventures get off to a good start. For example, one study found that the rates of survival, growth, and innova­ tion of SBDC-counseled firms are higher than the population of start-ups in general.44 In summary, putting together a new-venture team is one of the most critical activities that a founder or founders of a firm undertake. Many entre­ preneurs suffer by not thinking broadly enough or carefully enough about this process. Ultimately, people must make any new venture work. New ventures benefit by surrounding themselves with high-quality employees and advisers to tackle the challenges involved with launching and growing an entrepre­ neurial firm. Chapter Summary 1. A new-venture team is the group of people who move a new venture from an idea to a fully functioning firm. The primary elements of a new­ venture team are the company founders, key employees, the board of directors, the board of advisers, lenders and investors, and other profes­ sionals. 2. The liability of newness refers to the fact that entrepreneurial ventures often falter or even fail because the people who start them can't adjust quickly enough to their new roles and because the firm lacks a "track record" with customers and suppliers. These limitations can be overcome by assembling a talented and experienced new-venture team. 3. A heterogeneous founding team has members with diverse abilities and experiences. A homogeneous founding team has members who are very similar to one another. This document is authorized for use by Chetna mehra, from 12/19/2011 to 5/19/2012, in the course: MGMT 472: Entrepreneurship and Small Business - Turner (Spring 2012), University of South Carolina. Any unauthorized use or reproduction of this document is strictly prohibited. ...
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