Chapter 10

Getting Funding or
Financing
Bruce R. Barringer
R. Duane Ireland

Copyright © 2016 Pearson

10-1
Education Ltd.
Learning Objectives

1. Describe the importance of getting financing or Funding.

2. Explain why most entrepreneurial ventures need to raise money during their
early life.

3. Identify and describe the three sources of personal financing available to

entrepreneurs.

4. Explain the three most important sources of equity funding that are available to
the entrepreneurial firm.

6. Describe common sources of debt financing entrepreneurial firms use.

7. Describe several creative sources of financing entrepreneurial firms may choose

to use.

10-2
 The reasons of Financing or Funding

Definition of Funding

 Funding is the act of providing resources, usually in the form of money, to finance a program, or
project, or a whole new venture.

 Why Most New Ventures Need Funding

 There are three reasons most new ventures need to raise money during their early life.

10-3
Alternatives for Raising Money for a New Venture

Personal Funds Equity Capital

Debt Financing Creative Sources

10-4
 1) Sources of Personal Financing

 Personal Funds

 The vast majority of founders contribute personal funds, along with sweat equity, to
their ventures.

• Sweat equity represents the value of the time and effort that a founder puts into a
new venture.

 Friends and Family

 Friends and family are the second source of funds for many new ventures.

Bootstrapping

 Bootstrapping consists of finding ways to avoid the need for external financing or
funding through creativity, ingenuity, cost cutting, or any means necessary.
10-5
Examples of Bootstrapping Methods

Buy used instead of Coordinate purchases Lease equipment

new equipment. with other businesses. instead of buying.

Obtain payments in
Minimize personal Avoid unnecessary
advance from
expenses. expenses.
customers.

Buy items cheaply but Share office space or

prudently via options employees with other Hire interns.
such as eBay. businesses.

10-6
 2) Getting Raise Debt or Equity Financing

Two Most Common Alternatives

Equity Funding Debt Financing

Means exchanging It is getting a loan.

partial ownership in a
firm, usually in the
form of stock, for
funding.

10-7
Preparing an Elevator Speech

Purpose
 An elevator speech is a brief, carefully
constructed statement that outlines the
Elevator merits of a business opportunity.
Speech
 There are many occasions when a carefully
constructed elevator speech might come in
handy.

 Most elevator speeches are around 60

seconds long.

10-8
Preparing an Elevator Speech

Step 1 Describe the opportunity or problem 20 seconds

that needs to be solved.

Step 2 Describe how your product meets the 20 seconds

opportunity or solves the problem.

Step 3 Describe your qualifications. 10 seconds

Describe your market.

Step 4 10 seconds

Total 60 seconds

10-9
Sources of Equity Funding

Venture Capital Business Angels

Initial Public
Offerings

Video: Seed Funding for Startups & How it Works

https://www.youtube.com/watch?v=7vqN6dq7mKE

10-10
A) Business Angels

Business Angels:

 Are individuals who invest their personal capital directly in start-ups.

The prototypical business angel is about 50 years old, has high income and wealth, is well
educated, has succeeded as an entrepreneur, and is interested in the start-up process.

The number of angel investors in the U.S. has increased dramatically over the past decade.
(What about Kuwait?)

Business angels are valuable because of their willingness to make relatively small
investments.

 These investors generally invest between $10,000 and $500,000 in a single company.
 Are looking for companies that have the potential to grow.

10-11
 B) Venture Capital

Venture Capital:

 Is money that is invested by venture capital firms in start-ups and small businesses with
exceptional growth potential.

 There are about 875 venture capital firms in the U.S.

 The funds, or pool of money, are raised from wealthy individuals, pension plans, university
endowments, foreign investors, and other sources.

 Venture capital firms fund very few entrepreneurial firms in comparison to business angels.

 A distinct difference between angel investors and venture capital firms is that angels tend to
invest earlier in the life of a company, whereas venture capitalists come in later.

 An important part of obtaining venture capital funding is going through the due diligence
process.
10-12
C) Initial Public Offering

Initial Public Offering:

• An initial public offering (IPO) is a company’s first sale of stock to the public. When a
company goes public, its stock is traded on one of the major stock exchange markets
(e.g., NASDAQ, New York Stock Exchange, Shanghai Stock Exchange, Euronext Paris, Shanghai
Stock Exchange, Bursa Kuwait, etc.)

• Most entrepreneurial firms that go public trade on the NASDAQ, which is weighted
heavily toward technology, biotech, and small-company stocks.

• An IPO is an important milestone for a firm. Typically, a firm is not able to go public
until it has demonstrated that it is viable and has a bright future.

• Main reason to go public is: a way to raise equity capital to fund current and future
operations and then to grow the company.
10-13
3 - Sources of Debt Financing

Commercial
Banks

10-14
 Commercial Banks

Banks

Historically, commercial banks have not been viewed as a practical source of

financing for start-up firms.

This sentiment is not a knock against banks; it is just that banks are risk averse, and
financing start-ups is a risky business.

 Banks are interested in firms that have a strong cash flow, audited financials, good
management, and a healthy balance sheet.

 NBK: Business loans (https://www.nbk.com/kuwait/business/NBK-Business-Financing/NBK-

Business-Credit-Finance/NBK-Business-Loans.html)

10-15
 4 - Creative Sources of Financing or Funding

Leasing SBIR and

STTR Programs

Other Grant Strategic

Programs Partners

10-16
A) Leasing

Leasing
A lease is a written agreement in which the owner of a piece of property allows an
individual or business to use the property for a specified period of time in exchange for
payments.

The major advantage of leasing is that it enables a company to acquire the use of assets
with very little or no down payment.

Most leases involve a modest down payment and monthly payments during the duration
of the lease.

At the end of an equipment lease, the new venture typically has the option to stop using
the equipment, purchase it for fair market value, or renew the lease.

Leasing is almost always more expensive than paying cash for an item, so most
entrepreneurs think of leasing as an alternative to equity or debt financing.

10-17
B) SBIR and STTR Grants

SBIR and STTR Programs

 The Small Business Innovation Research (SBIR) and the Small Business Technology
Transfer (STTR) programs are two important sources of early-stage funding for new
startup firms.

 These programs provide cash grants to entrepreneurs who are working on projects in
specific areas.
 The main difference between the SBIR and the STTR programs is that the STTR
program requires the participation of researchers working at universities or other
research institutions.

 The SBIR Program is a competitive grant program that provides over $1 billion per year
to small businesses in early-stage and development projects.

 Each year, 11 federal departments and agencies are required by the SBIR to reserve a
portion of their R&D funds for awards to small businesses.

 The money is essentially free. It is a grant, meaning that it doesn’t have to be paid back
and no equity in the firm is at stake.
10-18
 C) Other Grant Programs

 Private Grants

• There are private companies providing financial and other types of support to
young people to start their new startups.

Example: Virgin Startup (UK)

Virgin Startup is a not-for-profit helping entrepreneurs in the UK start, fund and scale
their businesses, offering a number of services: Start up loans, mentoring and advice,
innovation programmes, etc.

 Government Grants

• Governments may have grant programs to support young people with great ideas
to start their new ventures.
10-19
D) Strategic Partners

Strategic Partners
 Strategic partners are another source of capital for new ventures.

 Many partnerships are formed to share the costs of product or service development, to
gain access to particular resources, or to facilitate speed to market.

 Older established firms benefit by partnering with young entrepreneurial firms by

gaining access to their creative ideas and entrepreneurial spirit.

 Biotech firms often partner with large

drug companies to conduct clinical
trials and bring new products to
market.

 The biotech firms benefit by

obtaining funding from their partners,
and the partners benefit by having
additional new products to sell.

10-20
END CHAPTER 10
 Chapter 6

Writing a Business Plan

Bruce R. Barringer
R. Duane Ireland

Copyright © 2016 Pearson Education

Ltd.
Chapter Objectives

1. Explain the purpose of a business plan.

2. Describe who reads a business plan and what they’re looking for.

3. Discuss the guidelines to follow to write an effective business plan.

4. Identify and describe a suggested outline of a business plan.

5. Explain how to effectively present a business plan to potential investors.

 What Is a Business Plan?

 Business Plan

A business plan is a written document describing what a new business intends to accomplish and
how it intends to accomplish it.

A business plan is a written document describing all details of the new venture.

 Writing a business plan gives you an opportunity to carefully think through every step of starting your
company so you can better prepare and handle any challenges.

 The business plan supports the business model by outlining the steps necessary to attain the organizational
goals. Video: What Is A Business Plan?
https://www.youtube.com/watch?v=mSMtJMLpBZc

 Reasons for writing a Business Plan:

Internal reason:
Forces the founding team to systematically think through every aspect of the new venture.
External reason:
Communicates the merits of a new venture to outsiders, such as investors.
Who Reads the Business Plan—And What Are They Looking For?

Business plan is a Dual-Use Document:

For most new ventures, the business plan is a dual-purpose document used both inside and
outside the firm.
There are two primary audiences for a firm’s business plan as shown in the Table below:

Audience What They are Looking For

The plan helps the company develop a “roadmap” to follow

A Firm’s to execute its strategies and achieve its goals.
Employees
A clearly written business plan helps the employees of a
firm operate in a consistent and purposeful manner.

Investors and other A firm’s business plan introduces potential investors and other
external stakeholders to the business opportunity the firm is pursuing
stakeholders and how it plans to pursue it.
 Benefits of developing a Business Plan?

Developing a business plan can:

 Help you discover any weaknesses in your business idea so you can address them
before investing on money and time to launch the venture

Analyze the market and competition to strengthen your idea

 Give you a chance to plan strategies for dealing with potential challenges so they don’t
derail your startup

 Convince potential partners, customers and key employees that you’re serious about
your idea and persuade them to work with you

 Force you to calculate when your business will make a profit and how much money
you need to reach that point, so you can be prepared with adequate startup capital

 Determine your target market and how to reach them

 Guidelines for Writing a Business Plan

 Content of the Business Plan

• The business plan should give clear and concise information on all the important
aspects of the proposed venture.

• It must be long enough to provide sufficient information yet short enough to

maintain reader interest.

• For most plans, 25 to 35 pages is sufficient.

 Types of Business Plans

• There are three types of business plans.

Guidelines for Writing a Business Plan

There are three types of business plan

Video: 10 Key Questions To Address: Business Plans - How To Start A Business

https://www.youtube.com/watch?v=O_L0BqPWBLo
Outline of Business Plan

 Outline of Business Plan

- A suggested outline of a business plan is shown on the next several
slides.

- Most business plans do not include all the elements introduced in the
sample plan; we include them here for the purpose of completeness.

- Each entrepreneur must decide which elements to include in his or her

plan.
Section 1: Executive Summary

• Executive Summary

• The executive summary is a short overview of the entire business plan.

• It provides a busy reader with everything that needs to be known about the
new venture’s distinctive nature.
• An executive summary shouldn’t exceed two single-spaced pages.
• Even though the executive summary appears at the beginning of the business
plan, it should be written last.

Key Insights
- In many instances an investor will ask for a copy of a firm’s executive summary and
will ask for a copy of the entire plan only if the executive summary is sufficiently
convincing.
- The executive summary, then, is arguably the most important section of a business
plan.
Section 2: Industry Analysis

 Industry Analysis

- This section should begin by describing the industry the business will enter in
terms of its size, growth rate, and sales projections.

- Items to include in this section:

• Industry size, growth rate, and sales projections.

• Industry structure

• Key success factors.

• Long-term prospects (potential customers).

Key Insights
- Before a business selects a target market it should have a good grasp of its industry—
including where its promising areas are and where its points of vulnerability are.
Section 3: Company Description
 Company Description
- This section begins with a general description of the company.
- Items to include in this section:
• Company description

• Mission statement

• Vision statement

• Products and services

• Legal status and ownership. (For-profit company, non-profit company, volunteer

organization, etc.)

• Key partnerships

Key Insights
- It demonstrates to your reader that you know how to translate an idea into a
business.
Section 4: Market Analysis

 Market Analysis
- The market analysis breaks the market into segments to which the firm will try to appeal.

- Items to include in this section:

• Market segmentation and target market selection.

• Consumer behavior.

• Competitor analysis (Focus on competitors by knowing their strategies, goals,

offerings, etc.)

Key Insights
- Most start-ups do not serve the entire market. Instead, they focus on serving a specific
(target) market within the large market.
- It’s important to include a section in the market analysis that deals with the behavior of
the consumers in the market. The more a start-up knows about the consumers in its
target market, the more it can tailor its products or services appropriately.
 Section 5: The Economics of the Business

 The Economics of the Business

- This section addresses the basic logic of how profits are earned and how many units of
a business’s profits must be sold for the business to “break even” and then start
earning a profit.
- The Break-Even Chart is a graphical representation between cost, volume and profits.

- Items to include in this section:

• Units to be sold
• Profit margins.
• Fixed and variable costs.
• Break-even chart and calculations.

Key Insights
- Two companies in the same industry may make profits in different ways. One may be a high-
margin, low-volume business, while the other may be a low-margin, high-volume business.
It’s important to check to make sure the approach you select is sound.
- Conducting a break-even analysis is an extremely useful exercise for any new or existing
business.
Section 5: The Economics of the Business

- The Break-Even Chart is a graphical representation between cost, volume and profits.

Sales and costs

(Units sold)
 Section 6: Marketing Plan

 Marketing Plan

• The marketing plan focuses on how the business will market and sell its product or
service.

• Items to include in this section:

• Overall marketing strategy.
• Product, price, promotions, and distribution.
• Sales channels.
• Sales tactics.

Key Insights
- The best way to describe a start-up’s marketing plan is to start by articulating its
marketing strategy, positioning, and points of differentiation, and then talk about
how these overall aspects of the plan will be supported by price, promotional mix, and
distribution strategy.
 Section 7: Design and Development Plan

 Design and Development Plan

• If you’re developing a completely new product or service, you need to include a
section in your business plan that focuses on the status of your development
efforts.

• Items to include in this section:

• Prototypes Development.

• Challenges and risks.

• Projected development costs.

• Proprietary issues (patents, copyrights, brand names).

Key Insights
- Many seemingly promising start-ups never get off the ground because their
product development efforts stall or the actual development of the product or
service turns out to be more difficult than thought.
 Section 8: Operations Plan

 Operations Plan
• Outlines how your business will be run and how your product or service will be
produced.

• Items to include in this section:

• General approach to operations (Product/service production description).

• Business location.

• Facilities and equipment.

Key Insights

- Your have to strike a careful balance between adequately describing this topic and
providing too much detail.
Section 9: Management Team and Company Structure

 Management Team and Company Structure

- The management team of a new venture typically consists of the founder or founders
and key management personnel.

- Items to include in this section:

• Management team
• Board of advisers
• Company structure (Simple or functional structure)

Key Insights

- Many investors and others who read the business plan look first at the executive
summary and then go directly to the management team section to assess the
strength of the people starting the firm.
Section 10: Overall Schedule

 Overall Schedule
• A schedule should be prepared that shows the major events required to launch the
business.

• Examples of milestones:
• Completion of prototypes.
• Rental of facilities.
• Obtaining critical financing.
• Starting production.
• Obtaining the first sale.

Key Insight
- An effectively prepared and presented schedule can be extremely helpful in
convincing potential investors that the management team is aware of what needs to
take place to launch the venture and has a plan in place to get there.
Section 11: Financial Projections

 Financial Projections

- The final section of a business plan presents a firm’s pro forma financial
projections. (Pro forma financial statements)

- Items to include in this section:

• Sources and uses of funds statement.

• Pro-forma income statement.

Key Insights
- Having completed the earlier sections of the plan, it’s easy to see why the financial
projections come last.
- They take the plans you’ve developed and express them in financial terms.
Presenting the Business Plan to Investors

 The Oral Presentation

- The first rule in making an oral presentation is to follow directions. If
you’re told you have 15 minutes, don’t talk for more than the allotted
time.
- The presentation should be smooth and well-rehearsed.
- The slides should be sharp and not cluttered.

 Questions and Feedback to Expect from Investors

- The smart entrepreneur has a good idea of the questions that will be
asked, and will be prepared for those queries.
Presenting the Business Plan to Investors

Twelve PowerPoint Slides to include in an Investor Presentation:

1. Title Slide 7. Marketing and sales

2. Problem 8. Management team
3. Solution 9. Financial projections
4. Opportunity and target market 10. Current status
5. Technology 11. Financing sought
6. Competition 12. Summary

Video: How to Write a One Page Business Plan

https://www.youtube.com/watch?v=hdGKAHvgBqo
END CHAPTER 6
 Chapter 4

Developing an Effective Business

Model
Bruce R. Barringer
R. Duane Ireland

Copyright © 2016 Pearson Education

Ltd.
Chapter Objectives

1. Describe business models and discuss their importance.

2. Identify and describe the two general types of business

models—standard and disruptive business models.

3. Explain the components of the Barringer/Ireland Business

Model Template that entrepreneurs can use to develop a
business model for their firms.
 Definitions

Business Model Definitions:

• A business model is a conceptual framework that describes how a company creates,

delivers, and captures value for its stakeholders.

• A firm’s business model is a plan for how it competes, uses its resources, structures its
relationships, interfaces with customers, and creates value to sustain itself on the basis of
the value it creates.

• “How a company creates value for itself while delivering products for customers”

 The proper time to develop a business model is following the feasibility analysis stage and
prior to fleshing out the operational details of the company.

Video: 10 Business Models for Every Entrepreneur

https://www.youtube.com/watch?v=6dKIOSe2A2o
General Categories of Business Models

Standard Business Disruptive Business

Models Models
Standard Business Models

Definition:
• Standard business models depict existing plans that
firms can use to determine how they will create, deliver,
and capture value.

• There are a number of standard or common business

models, which are shown on the next slide.
Standard Business Models
Disruptive Business Models

Definition:
• Disruptive business models, which are rare, are ones that do
not fit the profile of a standard business model.
• They are impactful enough that they disrupt or change the
way business is conducted in an industry or an important
niche within an industry.
• The next slide depicts four business models that were
disruptive when they were introduced.

Video: Uber Business Model Innovation: What makes Uber so disruptive?

https://www.youtube.com/watch?v=gvEU656kVCQ
Disruptive Business Models

Video: The 9 Most Successful Business Models Of Today

https://www.youtube.com/watch?v=DL6myRFdC_g
Barringer/Ireland Business Model Template

According to Prof. Paul Burns, business model can be best explained in terms of three interrelated
components:

1. Value creation; a proposition that addresses a specific customer segment’s needs and problems and
those of other stakeholders.

2. Value configuration of the resources and activities that produce this value.

3. Value capture, which explains revenue streams and cost structures that allow the organization to
gain a share of the total value generated.

- The Barringer/Ireland Business Model Template is shown in the next slide.

Video: Vimeo CEO on Business Model and Strategy

https://www.youtube.com/watch?v=u1jA9sfEgMw
Barringer/Ireland Business Model Template
 First component:
Core Strategy

• A core strategy describes how the firm plans to compete relative to its
competitors.

• The primary elements of core strategy are:

1) Business Mission

2) Basis of Differentiation
3) Target Market
4) Product/Market Scope
 Core Strategy

1) Business Mission
• A business’s mission or mission statement describes why the business exists and what its business
model is supposed to accomplish.

• It reflects the essential purpose of the organization, and describes why it is in existence.

• A one-sentence statement describing the reason your organization exists.

• A well-written mission statement is something that a business can continually refer back to as it
makes important decisions in other elements of its business model.

Company Mission

Linkedin “To connect the world’s professionals to make them more productive and
successful.”.
Facebook “To give people the power to share and make the world more open and
connected.”
Google “To organize the world’s information and make it universally accessible and
useful.”
 Core Strategy

2) Basis of Differentiation

• It’s important that a business clearly articulate the points that differentiate
its product or service from competitors.

• A company’s basis of differentiation is what causes consumers to pick one

company’s products over another’s.

• It is best to limit a company’s basis of differentiation to two to three key

points.
Core Strategy

3) Target Market

• The identification of the target market is extremely important.

• A target market refers to a group of potential customers to whom a

company wants to sell its products and services.

• A firm’s target market should be made explicit in the business model

template.
Core Strategy

4) Product/Market Scope

- A company’s product/market scope defines the products and markets

on which it will concentrate.

- Most firms start with a narrow (or limited) product/market scope,

and pursue adjacent product and market opportunities as the company
grows and becomes more financially secure.

- In completing the business model template, a company should be very

clear about its initial product/market scope and project 3-5 years in
the future in terms of anticipated expansion.
 Second component:
Resources

It includes:

1) Core Competencies

2) Key resources
 Second component:
Resources

1) Core Competencies

- A core competency is a specific factor or capability that supports a firm’s business

model and sets it apart from rivals.

- A core competency can take on various forms, such as technical know-how, an

efficient process, a trusting relationship with customers, expertise in product design,
and so forth.

- Most start-ups will list two to three core competencies in their business model
template.
 Resources

2) Key Assets

- Key assets are the assets that a firm owns that enable its business model to work. The
assets can be physical, financial, intellectual, or human.

• Physical assets include physical space, equipment, vehicles, and distribution

networks.

• Financial assets include cash, commitments from investors, etc.

• Human assets include a company’s founder or founders, its key employees, and its
advisors.

• Intellectual assets include resources such as patents, copyrights, and trade secrets,
along with a company’s brand and its reputation.
Videos: Business Model Canvas
https://www.youtube.com/watch?v=IP0cUBWTgpY
 Case study

Case study 1: Tanzeel urRehman, Cofounder and CEO, Virtual Force (VF)

 Describe in a few words the business model used by VF.

 Why do you think VF changed its business model?

Think about all VF stakeholders (employees, clients, and local communities). How is VF providing

value for these stakeholders?

Case study 2: Freelancers

 To help you launching and operating your new venture, which option would you opt for?

 Hiring part-time or full-time employees, or

 Hiring freelancers.
 Third component:
Financials

- This is the only section of a firm’s business model that describes how the
new venture earns money — thus, it is extremely important.

- For most businesses, the manner in which it makes money is one of the
most fundamental aspects of its business model.

- It includes:

1) Revenue streams

2) Cost structure

3) Financing/Funding
 Financials

1) Revenue Streams
- A firm’s revenue streams describe the ways in which it makes money.
- Some businesses have a single revenue stream while others have several.
- For example,

- Most restaurants have a single revenue stream. Their customers order a meal and pay
for it. Other restaurants may have several revenue streams—including:
 Meals

 Catering service

 Product sales (such as bottle barbeque sauce for a barbeque restaurant, Starbucks
coffee beans)

 Apparel products with the name of the restaurant on them.

- Amazon.com Inc.: Product Sales and Delivery service.

Financials
Table: Most Common Revenue Streams
 Financials

2) Cost Structure
- A business’s cost structure describes the most important costs incurred to support
its business model.

- It costs money to establish a basis of differentiation, develop core competencies,

acquire and develop key assets, and so forth.

- Generally, the goal for this section in a firm’s business model template is
threefold:

• Identify whether the business is a cost-driven or value-driven business.

• Identify the nature of a business’s costs (Fixed costs and variable costs).

• Identify the business’s major cost categories.

• Example: Facebook’s major categories of costs: Data center costs, marketing and sales,
research and development, and general and administrative.
Financials

3) Financing/Funding

- Many business models rely on a certain amount of financing or

funding to bring their business model to life.

- At the business model stage projections do not need to be

completed to determine the exact amount of money that is

needed. An approximation is sufficient.

 Fourth component:
Operations

- It includes:
1) Product (or Service) Production
2) Channels
3) Key Partners
 Operations

1) Product (or Service) Production

- This section focuses on how a firm’s products and/or services are

produced.

- For example, if a firm sells a physical product, the product can be

manufactured or produced in-house, by a contract manufacturer, or via an
outsource provider.

- If a firm is offering a service rather than a physical product, a brief

description of how the service will be produced should be provided.
Operations

2) Channels (Sales channels)

- A company’s channels describe how it delivers its product or service

to its customers.

- Businesses either sell direct, through intermediaries (such as

distributors/retailers and wholesalers), or via a combination of both.

Also, a business can integrate both offline and online channels.

 Operations

3) Key Partners (Partnerships)

- Start-ups, in particular, typically do not have sufficient resources (or

funding) to perform all the tasks necessary to make their business

models work, so they rely on key partners to perform important roles.

Video: Why Does An Entrepreneur Need Video: Do you partner with other business
A Business Partner? owners?
https://www.youtube.com/watch?v=Mjelh https://www.youtube.com/watch?v=dooX
qtL33Q NZ9oMJc

Video: The Ultimate Guide About Profit Video: How To Build Strategic
Distribution With Your Business Partner Partnerships and Grow Your Business: for
Entrepreneurs and Freelancers
https://www.youtube.com/watch?v=n2iOK
-YJ-Ys https://www.youtube.com/watch?v=4NqVr
n67k5k
Business Model Canvas

Video: Business Model Canvas

https://www.youtube.com/watch?v=G1lHCP3gTQc
 Case study

Case study: TOMS’s One-for-One Business Model: Is it sustainable for the future?

Task: Fill in the Business Model Template based on the TOMS case
END CHAPTER 4
 Chapter 3

Feasibility Analysis
Bruce R. Barringer
R. Duane Ireland

Copyright © 2016 Pearson

Education Ltd.
Chapter Objectives

1. Explain what a feasibility analysis is and why it’s important.

2. Describe a product/service feasibility analysis, explain its purpose, and discuss the two primary

issues that a proposed business should consider in this area.

3. Describe an industry/market feasibility analysis, explain its purpose, and discuss the two primary

issues to consider when completing this analysis.

4. Explain what an organizational feasibility analysis is and its purpose and discuss the two primary

issues to consider when completing this analysis.

5. Describe what a financial feasibility analysis is, explain its importance, and discuss the most

critical issues to consider when completing this analysis.

6. Describe a feasibility analysis template and explain when it is important for entrepreneurs to use

this template.
 What Is Feasibility Analysis?

Feasibility Analysis is:

• Feasibility analysis is the process of determining whether a business idea is viable.

• It is the preliminary evaluation of a business idea, conducted for the purpose of

determining whether the idea is worth pursuing.

• Bateman (2004) describes feasibility analysis as the process of determining the viability
of a business idea which involves preliminary evaluation of the idea itself to decide its
potential.

“Often the only sure way of knowing whether the idea will make a lucrative business is to
try it out - launch the business but minimize your risks in doing so” (Paul Burns, 2016).
When To Conduct a Feasibility Analysis

• Timing of Feasibility Analysis

- The proper time to conduct a feasibility analysis is early in thinking through the
prospects for a new business.

- The thought is to screen ideas before a lot of resources are spent on them.

• Small Business Failure Rate

- 20% of small businesses fail in their first year, Thinking point:
What are the reasons behind small-
- 30% of small businesses fail in their second year, and
sized businesses failure?
- 50% of small businesses fail after five years.

• Components of a Properly Conducted Feasibility Analysis

- A properly conducted feasibility analysis includes four separate components.

Video: Do you need a Feasibility Study or a Business Plan?

https://www.youtube.com/watch?v=QnvWbfosuV0
Feasibility Analysis

Figure: Role of feasibility analysis in developing successful business ideas.

Forms of Feasibility Analysis

Industry/Target Market
Product/Service Feasibility
Feasibility
- Product/Service Desirability - Industry Attractiveness
- Product/Service Demand - Target Market Attractiveness

Organizational Feasibility Financial Feasibility

- Management Prowess - Total Start-Up Cash Needed
- Resource Sufficiency - Financial Performance of Similar Businesses
- Overall Financial Attractiveness of the
Proposed Venture
1) Product/Service Feasibility Analysis
Product/Service Feasibility Analysis

Purpose

• Is an assessment of the overall

appeal of the product or service
being proposed.
Product/Service
Feasibility Analysis • Before a prospective firm rushes
a new product or service into
development, it should be sure
that the product or service is what
prospective customers want or
need.
Product/Service Feasibility Analysis

Components of product/service
feasibility analysis

Product/Service Product/Service
Desirability Demand
Product/Service Desirability

The product or service desirability feasibility is to check if the product or service is

desirable and serves a need in the marketplace.

You should ask yourself, and others the following questions to determine the basic
appeal of the product or service.

1. Does it make sense? Is it something consumers will get excited about?

2. Does it take advantage of an environmental trend, solve a problem, or take

advantage of a gap in the marketplace?

3. Is this a good time to introduce the product or service to the market?

 Product/Service Desirability

Consumer acceptance of a new product idea: Conducting a Concept Test.

• A concept statement should be developed.
• A concept statement is a one-page description of a business that will be
distributed to industry experts and prospective customers soliciting their
feedback on the potential of the business idea.

• The feedback will provide the entrepreneur:

- A sense of the viability of the product or service idea.

- Suggestions for how the idea can be strengthened or “tweaked” before
proceeding further.
 Product/Service Desirability

New Venture Fitness

Drink’s Concept
Statement
 Product/Service Demand

• Product/Service Demand

There are two steps to assessing product/service demand.

- Step 1: Talking Face-to-Face with Potential Customers.

- Step 2: Using Online Tools, such as Google AdWords and Landing Pages,
to assess demand.
Product/Service Demand

Step 1: Talking Face-to-Face with Potential Customers

- The only way to know if your product or service is what people want is by talking
to them.

- The idea is to gauge customer reaction to the general concept of what you want to
sell, and tweak, revise, and improve on the idea based on the feedback.

- In some cases, talking with potential customers will cause an entrepreneur to

abandon an idea.

• Entrepreneurs are often surprised to find that a product idea they think solves a
problem gets lukewarm reception when they talk to actual customers.
Product/Service Demand

Step 2: Utilizing Online Tools, such as Google AdWords and Landing Pages, to
assess demand

- The second way to assess demand is to utilize online tools to gauge reaction from
potential customers.

- Some entrepreneurs purchase text ads on search engines that show up when a
user is searching for a product that is close to their idea. If the searcher clicks on
the text ad, they are directed to a landing page that describes the idea. There may be a
link on the landing page that says “For future updates please enter your e-mail
address”. Demand for the idea can be assessed by how many people click on the text
ad and enter their e-mail address.
Product/Service Demand

- A variety of additional online tools are available to help assess the demand
for a new product or service.

- Examples include:
• Sites that provide feedback on business ideas (Foundersuite, Quirky).
• Market Research (CrowdPicker, Google Trends).

• Online Surveys (Survey Monkey, Google Consumer Surveys).

• Q&A Sites (Quora, Stack Overflow).

See the textbook, pages 103-104, for more details.

2) Industry/Target Market Feasibility Analysis
Industry/Target Market Feasibility Analysis

Purpose
• Is an assessment of the overall
appeal of the industry and the target
market for the proposed business.
Industry/Target
• An industry is a group of firms
Market Feasibility producing a similar product or service.
Analysis
• A firm’s target market refers to a
group of potential customers to whom a
firm wants to sell its products or
services.
Industry/Target Market Feasibility Analysis

Components of industry/target market

feasibility analysis

Target Market
Industry Attractiveness
Attractiveness
 Industry Attractiveness

1) Industry Attractiveness

• Industries vary in terms of their overall attractiveness.

• In general, the most attractive industries have the characteristics depicted below.

 Characteristics of Attractive Industries:

 Are early rather than late in their life cycle.

 Are fragmented rather than concentrated.
 Are growing rather than shrinking.
 Are selling products and services that customers “must have” rather than
“want to have.”
 Are not crowded.

Video: How to Scale Up Your Business - Feasibility Analysis

https://www.youtube.com/watch?v=Gt6ijbk23BI
Target Market Attractiveness

2) Target Market Attractiveness

• The challenge in identifying an attractive target market is to find a market that’s

large enough for the proposed business but is yet small enough to avoid attracting
larger competitors.

• An attractive target market contains a large enough number of

potential customers to sustain the business. If the size of your market segment is
too small, then you'll want to reevaluate your target market.

• Often, considerable ingenuity must be employed to find information to assess the

attractiveness of a specific target market.

Video: How To Identify Target Market

https://www.youtube.com/watch?v=LeIePgFDAQI
3) Organizational Feasibility Analysis
Organizational Feasibility Analysis

Purpose

• Is conducted to determine whether a

proposed business has sufficient
Organizational Feasibility
management expertise, organizational
Analysis
competence, and resources to
successfully launch a business.

• Focuses on non-financial resources.

Organizational Feasibility Analysis

Components of organizational
feasibility analysis

Management Prowess Resource Sufficiency

Management Prowess

1) Management Prowess

• A proposed business should candidly evaluate the prowess, or ability, of its

management team to satisfy itself that management has the requisite
passion and expertise to launch the venture.

• Two of the most important factors in this area are:

 The passion that the sole entrepreneur or the founding team has for the
business idea.

 The knowledge/expertise: The extent to which the sole entrepreneur or

the founding team understands the markets in which the firm will
participate.
Resource Sufficiency

2) Resource Sufficiency

• This topic pertains to an assessment of whether an entrepreneur has

sufficient resources to launch the proposed venture.

• To test resource sufficiency, a firm should list the 6 to 12 most critical

nonfinancial resources that will be needed to move the business idea
forward successfully.
Resource Sufficiency

Examples of nonfinancial resources that may be critical to the

successful launch of a new business

 Affordable office space.

 Lab space, manufacturing space, or space to launch a service business.
 Key management employees.
 Key support personnel.
 Key equipment needed to operate the business (computers, machinery,
delivery vehicles,…)
 Ability to form favorable business partnerships.
 Support of the government
4) Financial Feasibility Analysis
Financial Feasibility Analysis

Purpose

• Is the final component of a

comprehensive feasibility
Financial Feasibility analysis.
Analysis
• A preliminary financial
assessment is sufficient.
Financial Feasibility Analysis

Components of financial
feasibility analysis

Total Start-Up Cash Financial Performance of

Needed Similar Businesses

Overall Financial
Attractiveness of the
Proposed Venture

Video: Market Feasibility Study: More Important Than a Business Plan

https://www.youtube.com/watch?v=2Zwlb_lQ23I
Total Start-Up Cash Needed

1. Total Start-Up Cash Needed

• The first issue refers to the total cash needed to prepare the business to
make its first sale.

• An actual budget should be prepared that lists all the anticipated

capital purchases and operating expenses needed to generate the first
$1 in revenues.

• The point of this exercise is to determine if the proposed venture is

realistic given the total start-up cash needed.
Financial Performance of Similar Businesses

2. Financial Performance of Similar Businesses

- Estimate the proposed start-up’s financial performance by comparing it to similar, already

established businesses.

- There are several ways to doing this, all of which involve a little ethical detective work.

• First, there are many reports available, some for free and some that require a fee,
offering detailed industry trend analysis and reports on thousands of individual firms.

• Second, simple observational research may be needed. For example, the owners of
New Venture Fitness Drinks could estimate their sales by tracking the number of
people who patronize similar restaurants and estimating the average amount each
customer spends.
Overall Financial Attractiveness of the Proposed Venture

3. Overall Financial Attractiveness of the Proposed Investment

• A number of other financial factors are associated with promising business start-
ups.

• In the feasibility analysis stage, the extent to which a business opportunity is

positive relative to each factor is based on an estimate rather than actual
performance.

• The table on the next slide lists the factors that pertain to the overall
attractiveness of the financial feasibility of the business idea.
Overall Financial Attractiveness of the Proposed Venture

Financial Factors Associated With Promising Business

Opportunities

• Rapid growth in sales during the first 5 to 7 years in a clearly defined market segment.

• High percentage of recurring revenue—meaning that once a firm wins a client, the

client will provide recurring sources of revenue.

• Ability to forecast income with a reasonable degree of certainty.

• Internally generated funds to finance and sustain growth.

Pro forma Financial statements: that demonstrate the firm’s financial viability for the first
one to three years of its existence.
Video: You do not need funding to start, but to grow.
https://www.youtube.com/watch?v=dMSRBrLLlFY&t=12s
END CHAPTER 3
 Chapter 2

Recognizing Opportunities and

Generating Ideas

Copyright © 2016 Pearson Education Ltd.

 Chapter Objectives

1. Explain the difference between opportunities and ideas.

2. Describe the three general approaches entrepreneurs use to identify opportunities.

3. Discuss the personal characteristics of entrepreneurs that contribute to their ability

to recognize business opportunities.

4. Identify and describe techniques entrepreneurs use to generate ideas.

5. Discuss actions to take to encourage continuous development of new ideas in

entrepreneurial firms.
 What is an Opportunity?

Business idea Business opportunity

- An idea is thought, an
impression,
or a notion. An opportunity is a favorable set of
circumstances that creates a need for
- A concept which can be used for a new product, service, or business.
commercial purposes by offering
a product or service.

- Ideas are the pathway of how to get to opportunities.

- Potential business opportunities are built on good ideas, but not all ideas translate into
valuable opportunities.

Video: Business Ideas vs. Business Opportunity Video: Business Ideas vs. Opportunities
https://www.youtube.com/watch?v=kVijzY_qP8E https://www.youtube.com/watch?v=Yi1N_fd_N7k
 What is an Opportunity?

According to Paul Burns (2016):

1) Creating opportunity: Creation of a new business opportunity from developing a novel

business idea.
- Requires high degree of creativity and innovation
- Requires radical product or market innovation.
- Too much risky

2) Spotting opportunity: Spotting a business opportunity is easier as there are tools and
techniques that can help.
- PESTEL analysis
- SWOT analysis
- Five forces analysis
- …etc.
 Three Ways to Identify an Opportunity

Observing Solving a Finding gaps in

Trends Problem the Marketplace

Video: Be patient to start small while thinking big - Vusi Thembekwayo

https://www.youtube.com/watch?v=gNfCeDjE9xI&t=21s
First Approach: Observing Trends
 First Approach: Observing Trends

 What is a Trend?
 A trend is a general development or change in a situation or in the way that
people are behaving.

 A trend is a change or development towards something new or different.

 Trends create opportunities for entrepreneurs to pursue.

The most important trends can be in:

 Economic segment
 Social segment
 Technological advances
 Political and regulatory segment

• It’s important to be aware of changes in these segment or areas.

Trend 1: Economic Forces

Example of Economic Trend Creating a

Favorable Opportunity
Economic trends help • Wages increases
determine areas that are
• Low tax rates
ripe for new start-ups and
• Consumer spending patterns
areas that start-ups should
avoid. • State of the economy

Ex: Many people moving from low class to

middle class in China.
Trend 2: Social Forces

Examples of Social Trends:

Social trends alter how
people and businesses • Aging of the population.
behave and set their
• Increased participation in social
priorities. These trends
provide opportunities for networks.
new businesses to • An increasing focus on health and
accommodate the changes. wellness.
• Growth in the use of mobile devices.
Trend 3: Technological Advances

Examples of Entire Industries that Have

Been Created as the Result of
Technological Advances
Advances in technology • New and emerging technologies
frequently create business • Computer industry
• The rise of Internet and social media
opportunities.
• Digital photography

Ex: Easier to start a new venture using an

app. Get access to various people
everywhere.
Trend 4: Political Action and Regulatory Changes

General Example:

• New laws and regulations

Political action and  Laws to protect the environment have

regulatory changes also created opportunities for entrepreneurs to
provide the basis for start firms that help other firms comply
opportunities. with environmental laws and regulations.

Ex: the FAA permitted drones to be used for

personal use.
Second Approach: Solving a Problem
 Second Approach: Solving a Problem

• Solving a Problem

 Sometimes identifying opportunities simply involves noticing a problem and

finding a way to solve it.

 Many companies have been started by people who have experienced a

problem in their own lives, and then realized that the solution to the problem
represented a business opportunity.
Third Approach: Finding Gaps in the
Marketplace
 Third Approach: Finding Gaps in the Marketplace

Gaps in the Marketplace

 A third approach to identifying opportunities is to find a gap in the

marketplace.

 A gap in the marketplace is often created when a product or service is needed

by a specific group of people but doesn’t represent a large enough market to
be of interest to mainstream retailers or manufacturers.
 Third Approach: Finding Gaps in the Marketplace

Specific Example

Product gaps in the Tish Ciravolo realized there were

marketplace represent no guitars on the market made
potentially viable business specifically for females. To fill this
opportunities.
gap, she started Daisy Rock
Guitars, a company that makes
guitars just for women and girls.
 In-class Assignment

Assignment description:

1) Form a group of 3-4 students.

2) Using internet, find a list of three companies that were created through:

A) Observing a trend (economic, social, technological, etc.).

B) Solving a problem.

C) Filling a gap.

3) A short presentation to make in order to share the findings with the

classmates.
Video: How to Become an Entrepreneur
https://www.youtube.com/watch?v=3YV-tWENu9k&t=79s
 Personal Characteristics of the Entrepreneur

The recognition and development of new opportunities are at the heart of entrepreneurship.

To be successful entrepreneurs, we need to be continually innovating and looking for

opportunities to grow our startups.

Characteristics that tend to make some people better at recognizing opportunities than
others:

Prior Experience Cognitive Factors

Social Networks Creativity

Prior Experience

1. Prior Industry Experience

• Several studies have shown that prior experience in an industry helps an

entrepreneur recognize business opportunities.

- By working in an industry, an individual may spot a market niche that is

underserved.

- It is also possible that by working in an industry, an individual builds a

network of social contacts who provide insights that lead to recognizing new

opportunities.
 Cognitive Factors

2. Cognitive Factors

• Studies have shown that opportunity recognition may be an innate

skill or cognitive process.

• Some people believe that entrepreneurs have a “sixth sense” that

allows them to see opportunities that others miss.

• This “sixth sense” is called entrepreneurial alertness, which is

formally defined as the ability to notice things without engaging in

deliberate search.
 Social Networks

3. Social Networks

• The extent and depth of an individual’s social network affects opportunity recognition.

• People who build a substantial network of social and professional contacts will be exposed to
more opportunities and ideas than people with sparse networks.

• Research results suggest that between 40% and 50% of people who start a business got
their idea via a social contact.

• Research study:

• Solo Entrepreneurs: those who identify their business ideas on their own.

• Network Entrepreneurs: those who identify their business ideas through social contacts.

• The researchers found that Network entrepreneurs identified significantly more

opportunities than Solo entrepreneurs, but were less likely to describe themselves as
being alert or creative.
 Creativity

4. Creativity

• Creativity is the process of generating novel and useful ideas.

• Opportunity recognition may be, at least in part, a creative process.

“The key to opportunity recognition is to identify a product or service

that people need and are willing to buy, not one that an entrepreneur
wants to make and sell.”

Video: Entrepreneurship is about spotting opportunities

https://www.youtube.com/watch?v=LctfWCH5j0w
 Design Thinking

Design Thinking is a process and mindset for innovation that begins with empathy to
identify and understand problems and needs.

Within the class, students with a diversity of skills, experiences, cultures, and viewpoints
work in teams to generate new business ideas.

Video: Jack Ma's Advice to The Young people

https://www.youtube.com/watch?v=__Mz-oxsXAs
Case Study: If at first you don’t succeed, So what?
 Five questions you need to ask to find good business
ideas.

1) What do people want that they do not get?

2) What products and services are not out there in the world but could be?

3) What products and services already exist but YOU could do them better?

4) What are people’s biggest problems in life and can you find solutions for them?

5) Can you think of unique ways to save people’s time, money, or effort and to

make their life easier?

Video: How To Find A Good Business Idea

https://www.youtube.com/watch?v=lkhE72ElOc4
END CHAPTER 2