Posts Tagged venture capital
Many times a person wanting to start a business has no idea what risks to focus on when founding a new business venture. Each small business is different and each business founder has different experiences about what is truly important. Experience in dealing with risk helps the small business founder because he or she has some idea of what to expect. Larger firms have similar difficulty dealing with risks.
Experience is the single biggest quality a person can have to deal with risk effectively. Small business founders deal with risk most effectively as needed when it comes up. Unlike larger firms engaging in extensive planning, experience helps the small business entrepreneur effectively work through risks envisaged as important at a particular time.
Small business entrepreneurs expose themselves to uncertain conditions for which risk does not surface until trying to face these conditions. Milliken (1987) defined uncertainty, ”… as an individual’s inability to predict something accurately” (p. 136). Miliken distinguished uncertainty from risk by stating, unlike risk, an entrepreneur cannot plan for uncertain conditions.
McKelvie, Haynie, and Gustavsson (2009) explained uncertain conditions play a major role in entrepreneurial decision-making. Experienced small business entrepreneurs address uncertain conditions through effectuation without any difference in the dislike of risk than any other person. Effectuation means taking small steps to try different approaches and limiting risk to each small trial. This technique allows the small business to focus on opportunities instead of extensive planning. This approach allows entrepreneurs to take action instead of letting uncertain conditions paralyze them (Read, Dew, Sarasvathy, Song, & Wiltbank, 2008).
Some general guidelines about dealing with different risks a small business entrepreneur might face include:
Gaining Market Acceptance. Gaining market acceptance is critical for survival. Successful small businesses deal with this sooner rather than later.
Attracting Key Management. Typically, a small business delays hiring key management until achieving a sustainable level. A firm can employ experts outside the firm until the time is right to find the right person.
Technological Changes. Again successful small businesses hold off in dealing with such changes until achieving a sustainable level. The firm can employ outside experts until achieving such levels.
Gaining Needed Licenses. Small business founders try to address needed licenses sooner rather than later. Licenses are necessary for the small business to make it to the next level.
Product Liability and Safety. Successful small business puts off dealing with such issues until they start to happen. Most small businesses do not expect facing such issues until they start to emerge (Harris, 2011).
If a small business entrepreneur has little experience he or she should have people with some experience in his or her corner to deal with uncertainty and risk management. Learn more.
Harris, J. P. (2011). Entrepreneurial success as determined by an evaluation of premarket entry risks. (D.B.A.University of Phoenix), University of Phoenix, United States — Arizona. Retrieved from http://search.proquest.com/docview/884183934?accountid=35812http://linksource.ebsco.com/linking.aspx?genre=article&issn=&volume=1&issue=&date=2011-01-01&spage=1&title=ProQuestDissertationsandTheses&atitle=Entrepreneurialsuccessasdeterminedbyanevaluationofpremarketentryrisks
McKelvie, A., Haynie, J. M., & Gustavsson, V. (2009). Unpacking the uncertainty construct: Implications for entrepreneurial action. Journal of Business Venturing, In Press, Corrected Proof, 1-20. doi: 10.1016/j.jbusvent.2009.10.004
Milliken, F. J. (1987). Three types of perceived uncertainty about the environment: State, effect, and response uncertainty. Academy of Management Review, 12(1), 133-143. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4306502&site=bsi-live
Read, S., Dew, N., Sarasvathy, S. D., Song, M., & Wiltbank, R. (2008). Marketing under uncertainty: The logic of an effectual approach Copenhagen Business School, 1-50. doi: 10.1016/j.jbusvent.2008.02.002
I theorize that innovation works best in a small firm because different goals exist than in the larger firm. Some justification exists in the literature supporting this theory. Large firms place improving shareholder value through stock price appreciation ahead of discovery of innovative solutions (Crochetiere, 2011). Corporate managers concern themselves with shareholder wealth enhancement and emphasize short-term profitability.
Founders of small innovative firms put products and services first ahead of profitability. Steve Jobs offers a good example with his obsession to create computers for students. Job’s passion put product ahead of profits (Deutschman, 2000). Jobs exited from Apple when the company put the focus on shareholder wealth instead of perfecting the product (Levy, 2011).
Small business owners starting a company should consider their goal. A founder should consider if the motivation is to cash out or extinguish a burning fire to solve a problem with a new product or innovative service. A firm that opts for the latter should avoid acquisition by larger firms and keep it simple.
Crochetiere (2011) found evidence suggesting large firms produce fewer patents and innovations than smaller firms. Larger firms not only produce fewer patents, but lose stakeholders and their acquisitions result in greater variability in stock prices.
What is the goal for innovation in your business? If you need help planning your strategy click here!
Crochetiere, B. (2011). Transcending technological innovation: The impact of acquisitions on entrepreneurial technical organizations. (D.B.A. 3482298), Walden University, United States — Minnesota. Retrieved from http://search.proquest.com/docview/909085620?accountid=35812 ProQuest Dissertations & Theses (PQDT) database.
Deutschman, A. (2000). The second coming of Steve Jobs. New York, NY: Random House.
Levy, S. (2011). The revolution according to Steve Jobs. Wired. Retrieved from http://www.wired.com/magazine/2011/11/ff_stevejobs/all/1
Often people who want to start a small business immediately think of going to the bank for a loan. Unfortunately, the bank is not the best place to start. A business founder should consider informal financing sources and trade credit first. Studies have shown that informal financing improves a firms efficiency and performance because it improves return on assets. Informal sources of finance and trade credit can relieve cash flow anxiety and improve a private firm’s ability to reinvest net income (Su & Sun, 2011).
Bank financing increases cash flow tensions and takes the focus off growth and achieving efficiency. New firms also find less access to more formal sources of financing such as angel investors and venture capitalists. Su and Sun (2011) explained “informal financing and trade credit are the life-blood of private firms” (p. 398). In countries like China interest rates on informal sources of finance are not subject to regulation, and financing is not rationed by imposing higher interest rates. More relaxed relationships with informal lenders promotes competitive advantage.
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Su, J., & Sun, Y. (2011). Informal finance, trade credit and private firm performance. Nankai Business Review International, 2(4), 383-400. doi: 10.1108/20408741111178816